CorpLaw Digest Set 2 Complete Revised PDF

Corp Law Case Digests | Atty.
Hofilena | 2014
CORPLAW CASE DIGEST SET 2 1. General Credit Corp. vs. Alsons

G.R. No. 154975, January 27, 2009
1. General Credit Corp. v. Alsons – Ayson
2. Concept Builders v. NLRC – Dela Cruz Case:
3. Lipat v. Pacific Banking Corp. – Gervacio Alsons owned several shares of GCC. For the consideration of the
4. Telephone Engineering v. WCC – Hourani php 2M, Alsons sold their shareholdings to Equity. Equity on the
5. Emilio Cano Enterprises v. CIR – Lapuz other hand issued a promissory not for the 2M, with 18% interst per
6. McConnel v. CA – Ledesma annum. Thereafter, Equity was unable to pay the promissory note
7. Halley v. Printwell – Lim which led Alsons filing a civil case against Equity for the collection of
8. Yutivo v. CTA – Molaer the amount. Impleaded as a party-defendant was GCC for whatever
9. Ramirez Telephone v. Bank of America – Miranda amount Alsons may collect from Equity. Alsons invokes the Doctrine
10. LBP v. CA – Pacamarra of Piercing the Veil of Corporate Fiction for the inclusion of and
11. Padilla v. CA – Rivera collection against GCC. Alsons argues that Equity is a mere conduit
12. Jacinto v. CA – Rubinos or instrumentality of GCC. The RTC ruled in favor of Alsons, the CA
13. Cagayan Fishing v. Teodoro – Rubio affirmed.
14. Rizal Light v. Public Service – San Juan
15. Caram, Jr. v. CA – Santos, F. The SC affirmed the decisions of the lower courts stating that Equity
16. Arnold Hall v. Piccio – Santos, R. is mere instrumentality of GCC due to the present circumstances
17. Salvatierra v. Garlitos – So Chan such as: the commonality of directors, officers and stockholders and
18. Albert v. University Publishing – Sorongon even sharing of office between petitioner GCC and respondent
19. Asia Banking v. Standard Products – Tamondong EQUITY; certain financing and management arrangements between
20. Pioneer Insurance v. CA – Torcuator the two, allowing the petitioner to handle the funds of the latter; the
21. Lim Tong Lim v. Philippine Fishing – Velena virtual domination if not control wielded by the petitioner over the
22. Halley v. Printwell – Yogue finances, business policies and practices of respondent EQUITY;
23. Ong Yong v. Tiu – Zerrudo and the establishment of respondent EQUITY by the petitioner to
circumvent CB rules*.
Facts:
• Shortly after its incorporation in 1957 as a finance and investment
company, petitioner General Credit Corporation (GCC, for short),
then known as Commercial Credit Corporation (CCC), established
CCC franchise companies in different urban centers of the country.
In furtherance of its business, GCC had, as early as 1974, applied
for and was able to secure license from the then Central Bank (CB)
of the Philippines and the Securities and Exchange Commission
(SEC) to engage also in quasi-banking activities.
• On the other hand, respondent CCC Equity Corporation (EQUITY,
for brevity) was organized in November 1994 by GCC for the
purpose of, among other things, taking over the operations and
management of the various franchise companies. At a time
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
Corp Law Case Digests | Atty. Hofilena | 2014
material hereto, respondent Alsons Development and Investment court will often look at the corporation as a mere collection of
Corporation (ALSONS, hereinafter) and Conrado, Nicasio, Editha individuals or an aggregation of persons undertaking business as a
and Ladislawa, all surnamed Alcantara, and Alfredo de Borja group, disregarding the separate juridical personality of the
(hereinafter the Alcantara family, for convenience), each owned, corporation unifying the group.
just like GCC, shares in the aforesaid GCC franchise companies, • Another formulation of this doctrine is that when two (2)
e.g., CCC Davao and CCC Cebu. business enterprises are owned, conducted and controlled by
• In December 1980, ALSONS and the Alcantara family, for a the same parties, both law and equity will, when necessary to
consideration of Two Million (P2,000,000.00) Pesos, sold their protect the rights of third parties, disregard the legal fiction
shareholdings – a total of 101,953 shares, more or less – in the that two corporations are distinct entities and treat them as
identical or one and the same.
CCC franchise companies to EQUITY. On January 2, 1981,
• Whether the separate personality of the corporation should be
EQUITY issued ALSONS et al., a “bearer” promissory note for pierced hinges on obtaining facts, appropriately pleaded or proved.
P2,000,000.00 with a one-year maturity date, at 18% interest per • Authorities are agreed on at least three (3) basic areas where
annum, with provisions for damages and litigation costs in case of piercing the veil, with which the law covers and isolates the
default. corporation from any other legal entity to which it may be related, is
• Some four years later, the Alcantara family assigned its rights and allowed. These are:
interests over the bearer note to ALSONS which thenceforth 1. defeat of public convenience, as when the corporate
became the holder thereof. But even before the execution of the fiction is used as vehicle for the evasion of an existing
assignment deal aforestated, letters of demand for interest obligation;
payment were already sent to EQUITY, through its President, 2. fraud cases or when the corporate entity is used to
Wilfredo Labayen, who pleaded inability to pay the stipulated justify a wrong, protect fraud, or defend a crime; or
interest, EQUITY no longer then having assets or property to settle 3. alter ego cases, where a corporation is merely a farce
its obligation nor being extended financial support by GCC. since it is a mere alter ego or business conduit of a
• ALSONS filed a civil case in the RTC of Makati for the collection of person, or where the corporation is so organized and
money against EQUITY. ALSONS impleaded GCC as party- controlled and its affairs are so conducted as to make it
defendant for any judgment ALSONS might secure against merely an instrumentality, agency, conduit or adjunct of
EQUITY and, under the doctrine of piercing the veil of corporate another corporation.
fiction, against GCC, EQUITY having been organized as a tool • The CA found valid grounds to pierce the corporate veil of
and mere conduit of GCC. petitioner GCC, there being justifiable basis for such action. When
• The RTC ruled in favor of ALSONS, the CA affirmed. Hence the the appellate court spoke of a justifying factor, the reference was to
present case. what the trial court said in its decision, namely: the existence of
Issues: “certain circumstances [which], taken together, gave rise to the
• Whether or not the Doctrine of Piercing the Veil of Corporate
Fiction will apply against EQUITY. ineluctable conclusion that … [respondent] EQUITY is but an
instrumentality or adjunct of [petitioner] GCC.”
Held:
• The Court agrees with the disposition of the appellate court on the
• Yes, EQUITY is a mere conduit of GCC, hence the application application of the piercing doctrine to the transaction subject of this
of the doctrine is proper.
• The notion of separate personality may be disregarded under the case. Per the Court’s count, the trial court enumerated no less than
doctrine – “piercing the veil of corporate fiction” – as in fact the 20 documented circumstances and transactions, which, taken as a
package, indeed strongly supported the conclusion that respondent 2. Concept Builders Inc. vs. National Labor Relations
EQUITY was but an adjunct, an instrumentality or business conduit Commission
of petitioner GCC. This relation, in turn, provides a justifying GR 108734, 29 May 1996
ground to pierce petitioner’s corporate existence as to ALSONS’ Summary of Probative Factors
claim in question.
Petitioner: Concept Builders, Inc.
• Foremost of what the trial court referred to as “certain Respondent: NLRC and 22 private respondent-laborers
circumstances” are the commonality of directors, officers and
CASE:
stockholders and even sharing of office between petitioner
The Labor Arbiter rendered a judgment in favor of private
GCC and respondent EQUITY; certain financing and
respondents, ordering petitioner to reinstate private respondents and
management arrangements between the two, allowing the
to pay them back wages equivalent to one year or three hundred
petitioner to handle the funds of the latter; the virtual
working days. Consequently, a writ of execution was issued. The
domination if not control wielded by the petitioner over the
said writ was served twice but the sheriff was not able to enforce it
finances, business policies and practices of respondent
because the principal place of business of Concept Builders is now
EQUITY; and the establishment of respondent EQUITY by the
being occupied by Hydro Pipes Philippines, Inc. (HPPI).. Hence, The
petitioner to circumvent CB rules*.
special sheriff recommended that a “break-open order‖ and such
order was granted by the Labor Arbiter, and affirmed by NLRC, when
* Additional info (just in case this will be asked): The evidence has
the issue was raised on appeal. The SC held that the break-open
also indubitably established that … EQUITY was organized by … order is valid. It is valid because HPPI is a mere alter ego of the
GCC for the purpose of circumventing [CB] rules and regulations and petitioner. The doctrine of piercing the veil of corporate fiction is
the Anti-Usury Law. Thus, as disclosed by the Advance Report … on justified.)
the result of Central Bank’s Operations Examination conducted on … FACTS:

GCC as of March 31, 1977 (EXHIBITS “FFF” etc.), the latter violated Concept Builders, Inc., a domestic corporation, is engaged in the
construction business.
[CB] rules and regulations by : (a) using as a conduit its non-quasi
Private respondents were employed by said company as
bank affiliates …. (b) issuing without recourse facilities to laborers, carpenters and riggers.
enable GCC to extend credit to affiliates like … EQUITY which In 1981, the private respondents were served individual written
notices of termination of employment by petitioner, effective
go beyond the single borrower’s limit without the need of at the end of the month. It was stated that their contracts of
showing outstanding balance in the book of accounts. employment had expired and the project in which they were
hired had been completed. But actually, the project had not yet
been finished and completed.
The laborers filed a complaint for illegal dismissal, unfair labor
practice and non-payment of their legal holiday pay, overtime
pay and thirteenth-month pay against petitioner.
The Labor Arbiter rendered a judgment in their favor, ordering
petitioner to reinstate private respondents and to pay them back
wages equivalent to one year or three hundred working days.
The Labor Arbiter also issued a writ of execution directing the 1. Stock ownership by one or common ownership of
sheriff to execute the Decision. both corporations.
The said writ was served, twice, but the sheriff was not able to 2. Identity of directors and officers.
enforce it because the principal place of business of Concept 3. The manner of keeping corporate books and
Builders is now being occupied by Hydro Pipes Philippines, Inc. records.
(HPPI). 4. Methods of conducting the business.
The special sheriff recommended that a “break-open order‖ The test in determining the applicability of the doctrine of
and such order was granted by the Labor Arbiter, and affirmed piercing the veil of corporate fiction is as follows:
by NLRC, when the issue was raised on appeal. 1. Control, not mere majority or complete stock control,
but complete domination, not only of finances but of
ISSUE: WON the NLRC committed grave abuse of discretion when it policy and business practice in respect to the
issued a ―break-open order‖ to the sheriff to be enforced against transaction attacked so that the corporate entity as to
personal property found in the premises of petitioner‘s sister this transaction had at the time no separate mind, will or
company, HPPI. existence of its own;
2. Such control must have been used by the defendant to
HELD & RATIO: commit fraud or wrong, to perpetuate the violation of a
NO, the NLRC did not commit any grave abuse of discretion when it statutory or other positive legal duty, or dishonest and
affirmed the break-open order issued by the Labor Arbiter. (The unjust act in contravention of plaintiff’s legal rights; and
break-open order is valid. It is valid because HPPI is a mere alter 3. The aforesaid control and breach of duty must
ego of the petitioner. The doctrine of piercing the veil of corporate proximately cause the injury or unjust loss complained
fiction is justified.) of.
* The absence of any one of these elements prevents
Petitioner’s Contention: Petitioner contends that the doctrine of ‘piercing the corporate veil. ‘ in applying the
piercing the corporate veil should not have been applied, in the ‘instrumentality’ or ‘alter ego’ doctrine, the courts are
absence of any showing that it created HPPI in order to evade its concerned with reality and not form, with how the
liability to private respondents. It also contends that HPPI is corporation operated and the individual defendant’s
engaged in the manufacture and sale of steel, concrete and iron relationship to that operation.
pipes, a business which is distinct and separate from petitioner‘s The question of whether a corporation is a mere alter ego is
construction business. Hence, it is of no consequence that purely one of fact.
petitioner and HPPI shared the same premises, the same o In this case, the NLRC noted that, while petitioner
President and the same set of officers and subscribers. claimed that it ceased its business operations on April
Probative Factors --. (Doctrine provided on pages 94-95 of 29, 1986, it filed an Information Sheet with the Securities
CLV’s book) and Exchange Commission on May 15, 1987, stating
o The conditions under which the juridical entity may that its office address is at 355 Maysan Road,
be disregarded vary according to the peculiar facts Valenzuela, Metro Manila. On the other hand, HPPI, the
and circumstances of each case. No hard and fast third-party claimant, submitted on the same day, a
rule can be accurately laid down, but certainly, there similar information sheet stating that its office address is
are some probative factors of identity that will justify at 355 Maysan Road, Valenzuela, Metro Manila.
the application of the doctrine of piercing the o The NLRC also observed that both information sheets
corporate veil, to wit: were filed by the same Virgilio O. Casino as the
corporate secretary of both corporations. It would also 3. ESTELITA BURGOS LIPAT and ALFREDO LIPAT, vs.
not be amiss to note that both corporations had the PACIFIC BANKING CORPORATION, REGISTER OF DEEDS,
same president, the same board of directors, the same RTC EX-OFFICIO SHERIFF OF QUEZON CITY and the Heirs
corporate officers, and substantially the same of EUGENIO D. TRINIDAD
subscribers. Distinction Between Fraud Piercing and Alter-ego Piercing
o 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 CASE:
positions. HPPI is obviously a business conduit of Ps owned a business (BET) in which they incorporated into a
petitioner corporation and its emergence was skillfully family corporation (BEC). As Estelita (mom) was managing the
orchestrated to avoid the financial liability that already business in the US, she executed a SPA appointing her daughter
attached to petitioner corporation. (who‘s in the PI) to get loans from Pacific Bank. The obligations
matured, they failed to pay. They filed for annulment of the
FINAL VERDICT: Petition is DISMISSED and the assailed foreclosure and the subsequent sale of the secured property,
resolutions of the NLRC, dated April 23, 1992 and December 3, claiming BEC had a separate personality from them. The Court held
1992, are AFFIRMED. that they cannot use the doctrine of piercing the veil of corporate
fiction since BEC is a family corporation thus it is one and the same
with the Ps. Also because there was fraud thus they cannot hide
behind the corporate personality to evade their liabilities.
FACTS:
• Sps. Lipat owned Bela‘s Export Trading (BET) a single
proprietorship, engaged in the manufacture of garments for
dometic and foreign consumption, principal office at Cubao, QC.
• They also owned Mystical Fashions (MF) in the US, selling goods
imported from the Philippines through BET
• Their daughter (Teresita) was designated to manage BET in the PI
while the mom (Estelita) was managing MF in the US
• Estelita executed a SPA appointing Teresita as her atty-in-fact to
obtain loans and other credit accommodations fro respondent
bank (Pacific Bank), and to execute mortgage contracts on
properties owned and co-owned by her as security for the
obligations to be extended by Pacific Bank
• 1979 - Teresita was able to secure a loan, in behalf of her mother
= P583, 854 to buy fabrics to be manufactured by BET and
exported to MF
• Sps executed a real estate mortgage (REM) over their principal
office
• BET was incorporated into a family corporation — Bela‘s Export ISSUES:

Corporation (BEC), thus the load was restructured in the name of 1. Whether or not the doctrine of piercing the veil of
BEC corporate fiction is applicable in this case
• Transactions were secured by the REM over the property — letter
of credit and export bills
• BEC defaulted in their payments, Estelita was granted an HELD & RATIO:
extension, but still failed to pay • NO. Based on the RTC and CA decision, the courts relied upon
the ALTER EGO doctrine or INSTRUMENTALITY rule rather than
• REM was foreclosed, was sold at a public auction, and a
Certificate of Sale was issued to respondent Eugenio Trinidad as FRAUS in PIERCING THE VEIL OF CORPORATE FICTION
the highest bidder • When the corporation is the mere alter ego or business conduit of
a person, the separate personality of the corporation may be
• Sps Lipat filed at RTC QC a complaint for ANNULMENT of the
REM, extrajudicial foreclosure and the Certificate of Sale disregarded. This is commonly referred to as the ―instrumentality
rule‖ or the alter ego doctrine, which the courts have applied in
• alleging that it was from an ULTRA VIRES acts of Teresita, disregarding the separate juridical personality of corporations.
having been done without the consent of BEC‘s Board of
Directors • BET and BEC are one and the same and the latter is a conduit of
and merely succeeded the former. Petitioners‘ attempt to isolate
• that BEC has a personality distinct and separate from them themselves from and hide behind the corporate personality of BEC
• that the SPA was only limited to the P583,854 loan only so as to evade their liabilities to Pacific Bank is precisely what the
• Rs contend that they and BEC are one and the same since the classical doctrine of piercing the veil of corporate entity seeks to
latter is a family corporation, Trinidad claiming that he was a buyer prevent and remedy.
in good faith and for value, that Ps were estopped from denying • BEC is a mere continuation and successor of BET, and petitioners
BEC‘s existence as a corporation cannot evade their obligations in the mortgage contract secured
• RTC - DISMISSED, gave Ps 5 months, 17 days to exercised their under the name of BEC on the pretext that it was signed for the
right of redemption benefit and under the name of BET. We are thus constrained to
• As BEC is a family corporation, the corporation was an rule that the Court of Appeals did not err when it applied the
extension of them, as alter ego or a business conduit, THEY instrumentality doctrine in piercing the corporate veil of BEC.
CANT USE IT AS A SHIELD TO FURTHER AN END
SUBVERSIVE OF JUSTICE.
• Piercing the veil of corporate fiction — BEC and the Lipats FINAL VERDICT: Petition is DENIED. CA Resolution affirmed.
are one and the same
• Pacific Bank transacted knowing that they were one and the
same
• CA - AFFIRMED, ample evidence to support the application of the
piercing the veil of corporate fiction doctrine
• Estelita had full control over the activities of BEC
• Ps contend that the doctrine should apply absent any clear
showing of FRAUD on their part
• Rs claim there is fraud as BEC was organised as a business
conduit for the benefit of the Ps
4. Telephone Engineering and Service Company v. Workman’s appealed but only after the Sheriff in QC had attached the
Compensation Commission & Leonila Santos for herself and properties of TESCO.
on behalf of her Children ISSUES:
1. W/N the tribunal had jurisdiction to rule against TESCO
considering that there was no Employee-Employer
CASE: relationship between them.
The PET in this case was the employer of one Pacifica Gaitus who HELD & RATIO:
died while working of liver disease. His spouse, Private Res, claimed 1. The arguments of the PET were documentary UMACOR
damages. The Res won in the Workman‘s compensation section. was the only company that actually contracted with the
(Lower Tribunal) This was appealed by PET who alleged that deceased. RES Claimed estoppel. The SC ruled not to
TESCO was not the deceased‘s employer but a sister company. disturb the factual findings of the lower tribunal because it
UMACOR. It was then ruled by the SC that this is one of the was that tribunal that had competence to rule on such
exceptions where a corporate veil may be pierced and also that this matters. This is the first time the issue was being raised on
was the first time the issue was being raised on appeal and must appeal and also the PETs in this case had even admitted to
necessarily must fail. the two companies bein sister companies. The SC ruled that
FACTS: this was a ligitmate exception to when the corporate veil
This is a Petition for Certiorari on the Award rendered could be pierced. Also there were modes of appeal that Pet
against the PETs in the lower court and in favor of the RES did not exhaust and the general rule is that resort to the SC
in the instant case. The PET is a domestic corporation may only be had after all speedier remedies have been
engaged in the business of manufacturing Telephone exhausted.
Equipment. The EVP is a Jose Luis Santiago. It has a sister FINAL VERDICT:
company Utilities Management Corp. (UMACOR) Both of the PET Dismissed
above companies kept the same location and management.
UMACOR employed one Pacifica L. Gatus as a purchasing
agent. He started working in 1965 but halted in 1967 due to
health concerns and died the very same year due to liver
sirrhosis. The RES then filed a case for a ―Notice and Claim
for Compensation‖ with the Workmen‘s Compensation
Section.
She alleged that her husband was an employee of TESCO
and he died of liver sirrhosis. It was presented to Jose Luis
Santiago who signed it. It‘s important to note here that he
worked for UMACOR but it was the EVP of TESCO that
signed his stuff. (The Employee‘s Report of Accident or
Sickness.)
The ―Referee‖ of the workman‘s compensation section
adjudicated 5K of compensation in the favor of RES .
TESCO requested some time to refute the claim of PETs.
They were alleging that the sickness had nothing to do with
his compensation. This was denied. This decision was
capacity as president and proprietor, field supervisor and

5. EMILIO CANO ENTERPRISES, INC. v. COURT OF manager, respectively, of Emilio Cano Enterprises, Inc.
INDUSTRIAL RELATIONS, ET. AL. - Presiding Judge Jose S. Bautista rendered decision finding
Corporations have separate juridical entity Emilio Cano and Rodolfo Cano guilty of the unfair labor practice
charge the two were ordered, jointly and severally, to reinstate
CASE: Honorata Cruz, to her former position with payment of back
In this case, Honorata Cruz was terminated by Emilio Cano wages from the time of her dismissal up to her reinstatement.
Enterprises, Inc. (ECEI) which prompted her to file a complaint for - November 14, 1958, during the pendency of the case, Emilio
unfair labor practice against Emilio Cano, in his capacity as president Cano died
and proprietor, and Rodolfo Cano, in his capacity as manager. Cruz - The order of execution having been directed against the
won and the Court of Industrial Relations (CIR) ordered the Canos to
properties of Emilio Cano Enterprises, Inc. instead of those of the
reinstate Cruz plus pay her backwages with interest. The Canos
respondents named in the decision, said corporation filed an ex
appealed to the CIR en banc but while on appeal Emilio died. The
parte motion to quash the writ on the ground that the judgment
Canos lost on appeal and an order of execution was levied against
sought to be enforced was not rendered against it which is a
ECEI‘s property. ECEI filed an ex parte motion to quash the writ as
juridical entity separate and distinct from its officials, but the
ECEI avers that it is a corporation with a separate and distinct
motion was denied.
personality from the Canos. Their motion was denied and ECEI filed
- Petitioners then filed this present petition for certiorari
a petition for certiorari with the Supreme Court. So the issue here is
whether or not the judgment of the Court of Industrial Relations is
correct.
ISSUES:
Yes. This is an instance where the corporation and its
members can be considered as one. The Canos were sued in their 1. Can the judgment rendered against Emilio and Rodolfo Cano in
capacity as officers of ECEI not in their private capacity. Having been their capacity as officials of the corporation Emilio Cano
sued officially their connection with the case must be deemed to be Enterprises, Inc. be made effective against the property of the
impressed with the representation of the corporation. The judgment latter which was not a party to the case?
against the Canos has a direct bearing to ECEI since in effect, it is
directed against the corporation. Even if this technicality be strictly
observed, what will simply happen is for this case to be remanded, HELD & RATIO:
change the name of the party, but the judgment will still be the same. 1. YES. While it is an undisputed rule that a corporation has a
To hold ECEI liable is not to ignore the legal fiction but merely to give personality separate and distinct from its members or
meaning to the principle that such fiction cannot be invoked if its stockholders because of a fiction of the law, here we should
purpose is to delay justice. not lose sight of the fact that the Emilio Cano Enterprises,
Inc. is a closed family corporation where the incorporators
and directors belong to one single family.
FACTS:
• Here is an instance where the corporation and its members
can be considered as one. And to hold such entity liable for
- on June 6, 1956 a complaint for unfair labor practice filed before
the acts of its members is not to ignore the legal fiction but
the Court of Industrial Relations against the respondents in their merely to give meaning to the principle that such fiction
cannot be invoked if its purpose is to use it as a shield to 6. M. MC CONNEL, W.P. COCHRANE, RICARDO RODRIGUEZ
further an end subversive of justice. So it has been held that vs. THE COURT OF APPEALS
while a corporation is a legal entity existing separate and Piercing the Corporate Veil
apart from the persons composing it, that concept cannot be
extended to a point beyond its reason and policy, and when CASE:
invoked in support of an end subversive of this policy it Park Rite Co, Inc. leased a vacant lot from Rafael Samanillo
should be disregarded by the courts (12 Am. Jur. 160-161 on Juan Luna St. Manila, which it used for parking motor vehicles for
a consideration. While operating its parking business it turned out
that they were also occupying an adjacent lot that was owned by
FINAL VERDICT: Petition is denied, with costs. Appellee Padilla without his knowledge and consent. Padilla filed a
suit demanding payment for the use and occupation of his lot. A
judgment was rendered against Park Rite Co, Inc. However, it failed
to pay, when the decision was executed it was found that the
corporation had no other assets than the P550.00 it deposited in
Court. Padilla is suing to recover from the past and present
stockholders for the deficit balance.
The Court Pierced the Veil of Corporate fiction in this case
since it was proven that the corporation was a mere alter ego or
business conduit of the defendants M. McConnel, W.P. Cochrane,
Cirilo Paredes (noti incorporator bought shares later), and Ricardo
Rodriguez, the stockholders and incorporators of said Corporation.
That the evidence showed that these three persons completely
dominated and controlled the corporation and that the functions of
the corporation were solely for their benefits. Among the evidence
shown were (1) the other ―stockholders‖ only held 1 stock and were
bought out later on, thus they were just there for purposes of
incorporation (2) the office of Cirilo Paredes and Park Rite Co. were
in the same building, same floor and same room (3) the funds of the
corporation were kept by Paredes in his own name and (4) and that
the Corporation had no other visible assets except toll house, wire
fence and signs.
FACTS:
The Court of Appeals found that the Park Rite Co., Inc., a
Philippine corporation, was originally organized on or about
April 15, 1947, with a capital stock of 1,500 shares at P1.00
a share. The corporation leased from Rafael Perez Rosales
y Samanillo a vacant lot on Juan Luna street (Manila) which There is no question that a wrong has been
it used for parking motor vehicles for a consideration. committed by the so-called Park Rite Co., Inc., upon
It turned out that in operating its parking business, the the plaintiffs when it occupied the lot of the latter
corporation occupied and used not only the Samanillo lot it without its prior knowledge and consent and without
had leased but also an adjacent lot belonging to the paying the reasonable rentals for the occupation of
respondents-appellees Padilla, without the owners' said lot. There is also no doubt in our mind that the
knowledge and consent. When the latter discovered the truth corporation was a mere alter ego or business
around October of 1947, they demanded payment for the conduit of the defendants Cirilo Paredes and Ursula
use and occupation of the lot. Tolentino, and before them — the defendants M.
The corporation (then controlled by petitioners Cirilo Parades McConnel, W. P. Cochrane, and Ricardo Rodriguez.
and Ursula Tolentino, who had purchased and held 1,496 of The evidence clearly shows that these persons
its 1,500 shares) disclaimed liability, blaming the original completely dominated and controlled the corporation
incorporators, McConnel, Rodriguez and Cochrane. When it was originally organized on or about April
Judgment was rendered in due course on 13 November 15, 1947, the original incorporators were M.
1947, ordering the Park Rite Co., Inc. to pay P7,410.00 plus McConnel, W. P. Cochrane, Ricardo Rodriguez,
legal interest as damages from April 15, 1947 until return of Benedicto M. Dario and Aurea Ordrecio with a
the lot. Restitution not having been made until 31 January capital stock of P1,500.00 divided into 1,500 shares
1948, the entire judgment amounted to P11,732.50. Upon at P1.00 a share. McConnel and Cochrane each
execution, the corporation was found without any assets owned 500 shares, Ricardo Rodriguez 408 shares,
other than P550.00 deposited in Court. After their application and Dario and Ordrecio 1 share each. It is obvious
to the judgment credit, there remained a balance of that the shares of the last two named persons were
P11,182.50 outstanding and unsatisfied. merely qualifying shares. Then or about August 22,
The Court of Appeals reversed, finding that the corporation 1947 the defendants Cirilo Paredes and Ursula
was a mere alter ego or business conduit of the principal Tolentino purchased 1,496 of the 1,500 shares of
stockholders that controlled it for their own benefit, and the said corporation and the remaining 4/1500
adjudged them responsible for the amounts demanded by shares remaining were acquired by Bienvenido J.
the lot owner. Claudio, Quintin C. Paredes, Segundo Tarictican,
and Paulino Marquez at one share each. It is
ISSUES: obvious that the last four shares bought by these
1. Whether the individual stockholders maybe held liable four persons were merely qualifying shares and that
for obligations contracted by the corporation? to all intents and purposes the spouses Cirilo
Paredes and Ursula Tolentino composed the so-
HELD & RATIO: called Park Rite Co., Inc.
1. YES, the Court has already answered the question in the That the corporation was a mere extension of their
affirmative wherever circumstances have shown that the personality is shown by the fact that the office of
corporate entity is being used as an alter ego or business Cirilo Paredes and that of Park Rite Co., Inc. were
conduit for the sole benefit of the stockholders located in the same building, in the same floor and in
Petitioner‘s contention: CA resolved her MR only the same room — at 507 Wilson Building. This is
after 3 years from its filing. Such inaction violates her further shown by the fact that the funds of the
right to a speedy disposition of her case. corporation were kept by Cirilo Paredes in his own
name. The corporation itself had no visible assets, 7. DONNINA C. HALLEY v. PRINTWELL, INC.
as correctly found by the trial court, except perhaps G.R. No. 157549 May 30, 2011
the toll house, the wire fence around the lot and the Defeat of Public Convenience (Equity Piercing); The Case for
signs thereon. It was for this reason that the Thinly-Capitalized Corporations
judgment against it could not be fully satisfied.
The facts thus found can not be varied by us, and CASE:
conclusively show that the corporation is a mere Petitioner was an incorporator and original director of
instrumentality of the individual stockholder's, hence Business Media Philippines, Inc. (BMPI). She, together with other
the latter must individually answer for the corporate stockholders, initially subscribed to the shares of BMPI. However,
obligations. they were not able to fully pay for said subscriptions. BMPI entered
into credit transactions with Printwell for the printing of the magazine
Philippines, Inc. However, BMPI was not able to pay for the
FINAL VERDICT: Finding no error in the judgment appealed from, remaining balance of the credit prompting Printwell to sue for
the same is hereby affirmed, with costs against petitioners-appellants collection. Printwell impleaded as defendants all the original
Cirilo Paredes and Ursula Tolentino. stockholders and incorporators to recover on their unpaid
subscriptions. RTC ruled in favor of Printwell and ordered the
stockholders to pay for the balance of the credit, pro rata. CA
affirmed RTC. Only petitioner Halley appealed.
SC ruled that although a corporation has a personality
separate and distinct from those of its stockholders, the
corporate personality may be disregarded, and the individuals
composing the corporation will be treated as individuals, if the
corporate entity is being used as a cloak or cover for fraud or
illegality or merely a business conduit for the sole benefit of the
stockholders. Although nowhere in Printwell‘s amended complaint
or in the testimonies Printwell offered can it be read or inferred from
that the petitioner was instrumental in persuading BMPI to renege on
its obligation to pay; or that she induced Printwell to extend the
credit accommodation by misrepresenting the solvency of BMPI to
Printwell, her personal liability, together with that of her co-
defendants, remained because the CA found her and the other
defendant stockholders to be in charge of the operations of
BMPI at the time the unpaid obligation was transacted and
incurred. Despite the fact that they were not able to pay their
unpaid subscriptions to BMPI, they greatly benefited from said
transactions. The court also applied the Trust Fund Doctrine that
subscriptions to the capital of a corporation constitute a fund to which
creditors have a right to look for satisfaction of their claims. However,
SC said that Halley is not liable pro rata but only to the extent of her
unpaid subscriptions.
ISSUES:
FACTS: 2. Whether or not CA erred in allowing the piercing of the
The petitioner was an incorporator and original director of veil of BMPI’s corporate fiction
Business Media Philippines, Inc. (BMPI), which had an 3. Whether or not CA erred in applying the trust fund
authorized capital stock of P3,000,000.00 divided into doctrine
300,000 shares of which 75,000 were initially subscribed by
Petitioner Halley together with other stockholders. HELD & RATIO:
Printwell engaged in commercial and industrial printing.
BMPI commissioned Printwell for the printing of the 1. PIERCING OF VEIL
magazine Philippines, Inc. that BMPI published and sold.
BMPI placed with Printwell several orders on credit, totaling NO. BMPI’s corporate personality is being invoked to evade
P316,342.76. Considering that BMPI paid only P25,000.00, payment and create injustice hence should be disregarded.
Printwell sued BMPI for the collection of the unpaid balance
of P291,342.76 in the RTC. Petitioner: Petitioner submits that she had no participation in the
Printwell amended the complaint in order to implead as transaction between BMPI and Printwell; that BMPI acted on its own;
defendants all the original stockholders and incorporators to and that she had no hand in persuading BMPI to renege on its
recover on their unpaid subscriptions. obligation to pay. Hence, she should not be personally liable.
Defendants filed a consolidated answer, averring that they
all had paid their subscriptions in full; that BMPI had a Although a corporation has a personality separate and
separate personality from those of its stockholders; and that distinct from those of its stockholders, directors, or officers,
the directors and stockholders of BMPI had resolved to such separate and distinct personality is merely a fiction
dissolve BMPI. created by law for the sake of convenience and to promote
RTC rendered a decision in favor of Printwell, rejecting the the ends of justice. The corporate personality may be
allegation of payment in full of the subscriptions in view of an disregarded, and the individuals composing the corporation
irregularity in the issuance of the ORs and observing that the will be treated as individuals, if the corporate entity is being
defendants had used BMPI‘s corporate personality to used as a cloak or cover for fraud or illegality;as a
evade payment and create injustice. justification for a wrong; as an alter ego, an adjunct, or a
o Assuming arguendo that the individual defendants business conduit for the sole benefit of the stockholders.
have paid their unpaid subscriptions, still, it is very Although nowhere in Printwell‘s amended complaint or in the
apparent that individual defendants merely used the testimonies Printwell offered can it be read or inferred from
corporate fiction as a cloak or cover to create an that the petitioner was instrumental in persuading BMPI to
injustice; hence, the alleged separate personality of renege on its obligation to pay; or that she induced Printwell
defendant corporation should be disregarded. to extend the credit accommodation by misrepresenting the
o Applying the trust fund doctrine, the RTC declared solvency of BMPI to Printwell, her personal liability, together
the defendant stockholders liable to Printwell pro with that of her co-defendants, remained because the CA
rata. found her and the other defendant stockholders to be in
CA affirmed the RTC. Of the several defendants, only Halley charge of the operations of BMPI at the time the unpaid
appealed to the SC. obligation was transacted and incurred.
o It was also during this time that appellants
stockholders were in charge of the operation of
BMPI despite the fact that they were not able to pay scope of the doctrine when the corporation is
their unpaid subscriptions to BMPI yet greatly insolvent encompasses not only the capital stock,
benefited from said transactions. In view of the but also other property and assets generally
unpaid subscriptions, BMPI failed to pay regarded in equity as a trust fund for the payment of
appellee of its liability, hence appellee in order to corporate debts. All assets and property belonging
protect its right can collect from the appellants to the corporation held in trust for the benefit of
stockholders regarding their unpaid creditors that were distributed or in the possession
subscriptions. To deny appellee from recovering of the stockholders, regardless of full payment of
from appellants would place appellee in a limbo on their subscriptions, may be reached by the creditor
where to assert their right to collect from BMPI since in satisfaction of its claim.
the stockholders who are appellants herein are o Also, under the trust fund doctrine, a corporation has
availing the defense of corporate fiction to evade no legal capacity to release an original subscriber to
payment of its obligations. its capital stock from the obligation of paying for his
Whether or not the petitioner persuaded BMPI to renege on shares, in whole or in part, without a valuable
its obligations to pay, and whether or not she induced consideration, or fraudulently, to the prejudice of
Printwell to transact with BMPI were not good defenses in creditors. The creditor is allowed to maintain an
the suit. action upon any unpaid subscriptions and thereby
steps into the shoes of the corporation for the
2. TRUST FUND DOCTRINE satisfaction of its debt.
To make out a prima facie case in a suit against
NO. Petitioner was liable pursuant to the trust fund doctrine for stockholders of an insolvent corporation to compel them to
the corporate obligation of BMPI by virtue of her subscription contribute to the payment of its debts by making good
being still unpaid. Printwell, as BMPI’s creditor had a right to unpaid balances upon their subscriptions, it is only
reach her unpaid subscription in satisfaction of its claim. necessary to establish that the stockholders have not in
good faith paid the par value of the stocks of the corporation.
Petitioner: The petitioner argues that the trust fund doctrine was o In civil cases, the party who pleads payment has
inapplicable because she had already fully paid her subscriptions to the burden of proving it. Petitioner failed to
the capital stock of BMPI. She thus insists that both lower courts discharge her burden.
erred in disregarding the evidence on the complete payment of the o Although a receipt is the best evidence of the fact of
subscription, like receipts, income tax returns, and relevant financial payment, it is not conclusive, but merely
statements. presumptive; nor is it exclusive evidence,
considering that parole evidence may also establish
The Trust Fund Doctrine enunciates that subscriptions to the the fact of payment.
capital of a corporation constitute a fund to which creditors o The petitioner‘s mere submission of the receipt
have a right to look for satisfaction of their claims and that issued in exchange of the check did not satisfactorily
the assignee in insolvency can maintain an action upon any establish her allegation of full payment of her
unpaid stock subscription in order to realize assets for the subscription. Indeed, she could not even inform the
payment of its debts. trial court about the identity of her drawee bank, and
o We clarify that the trust fund doctrine is not limited to about whether the check was cleared and its amount
reaching the stockholder‘s unpaid subscriptions. The
paid to BMPI. In fact, she did not present the check 8. YUTIVO SONS HARDWARE COMPANY v. COURT OF
itself. TAX APPEALS and COLLECTOR OF INTERNAL
o Theincome tax return (ITR) and statement of assets REVENUE
and liabilities of BMPI, albeit presented, had no Avoidance or Minimization of Taxes
bearing on the issue of payment of the subscription
because they did not by themselves prove payment. CASE:
o Nor did the petitioner present any certificate of stock
issued by BMPI to her. Such a certificate covering Yutivo Sons Hardware Co. bought a number of cars and trucks from
her subscription might have been a reliable evidence General Motors Overseas Corporation (GM). As importer, GM paid
of full payment of the subscriptions, considering that sales tax prescribed by sections 184, 185 and 186 of the Tax Code
under Section 65 of the Corporation Code a on the basis of its selling price to Yutivo. Said tax being collected
certificate of stock issues only to a subscriber who only once on original sales, Yutivo paid no further sales tax on its
has fully paid his subscription. sales to the public. Southern Motors, Inc. (SM) was organized to
The RTC lacked the legal and factual support for its engage in the business of selling cars, trucks and spare parts. After
prorating the liability. Hence, we need to modify the the incorporation of SM and until the withdrawal of GM from the
extent of the petitioner’s personal liability to Printwell. Philippines in the middle of 1947, the cars and trucks purchased by
The prevailing rule is that a stockholder is personally Yutivo from GM were sold by Yutivo to SM which, in turn, sold them
liable for the financial obligations of the corporation to to the public in the Visayas and Mindanao. The issue in this case is
the extent of his unpaid subscription. In view of the whether or not Southern Motors, Inc. was organized as a tax evasion
petitioner’s unpaid subscription being worth device. The Court held that Southern Motors, Inc. was not
P262,500.00, she was liable up to that amount. organized as a tax evasion device. SM was organized in June,
1946 when it could not have caused Yutivo any tax savings. From
FINAL VERDICT: We deny the petition for review on certiorari; and that date up to June 30, 1947, or a period of more than one year, GM
affirm with modification the decision promulgated on August 14, 2002 was the importer of the cars and trucks sold to Yutivo, which, in turn
by ordering the petitioner to pay to Printwell, Inc. the sum of resold them to SM. During that period, it is not disputed that GM as
P262,500.00, plus interest of 12% per annum to be computed from importer, was the one solely liable for sales taxes. Neither Yutivo or
February 8, 1990 until full payment. SM was subject to the sales taxes on their sales of cars and trucks.
The sales tax liability of Yutivo did not arise until July 1, 1947 when it
became the importer and simply continued its practice of selling to
SM. The decision, therefore, of the Tax Court that SM was organized
purposely as a tax evasion device runs counter to the fact that there
was no tax to evade.
FACTS:
Petitioner Yutivo is a domestic corporation, organized under the

laws of the Philippines
Incorporated in 1916, it was engaged in the importation and sale
of hardware supplies and equipment
It bought a number of cars and trucks from General Motors sales tax due from petitioner for the four quarters of 1950; the
Overseas Corporation (GM), an American corporation licensed respondents' last demand was in the total sum of P2,215,809.27
to do business in the Philippines This second assessment was contested by the petitioner
As importer, GM paid sales tax on the basis of its selling price to Yutivo before the Court of Tax Appeals, alleging that (1)
Yutivo there is no valid ground to disregard the corporate
Said tax being collected only once on original sales, Yutivo paid personality of SM and to hold that it is an adjunct of
no further sales tax on its sales to the public. petitioner Yutivo; (2) that assuming the separate personality
Southern Motors, Inc. (SM) was organized to engage in the of SM may be disregarded, the sales tax already paid by
business of selling cars, trucks and spare parts. Yutivo should first be deducted from the selling price of SM
After the incorporation of SM and until the withdrawal of GM from in computing the sales tax due on each vehicle; and (3) that
the Philippines in the middle of 1947, the cars and tracks the surcharge has been erroneously imposed by
purchased by Yutivo from GM were sold by Yutivo to SM which, respondent.
in turn, sold them to the public in the Visayas and Mindanao Finding against Yutivo and sustaining the respondent Collector's
When GM decided to withdraw from the Philippines in the middle theory that there was no legitimate or bona fide purpose in the
of 1947, the U.S. manufacturer of GM cars and trucks appointed organization of SM — the apparent objective of its organization
Yutivo as importer for the Visayas and Mindanao, and Yutivo being to evade the payment of taxes — and that it was owned
continued its previous arrangement of selling exclusively to SM (or the majority of the stocks thereof are owned) and controlled
In the same way that GM used to pay sales taxes based on its by Yutivo and is a mere subsidiary, branch, adjunct, conduit,
sales to Yutivo, the latter, as importer, paid sales tax prescribed instrumentality or alter ego of the latter, the Court of Tax
on the basis of its selling price to SM, and since such sales tax, Appeals disregarded its separate corporate existence
as already stated, is collected only once on original sales, SM Reconsideration of this decision having been denied, Yutivo
paid no sales tax on its sales to the public. brought the case to this Court thru the present petition for review.
Collector of Internal Revenue made an assessment upon Yutivo A corporation is an entity separate and distinct from its
and demanded from the latter P1,804,769.85 as deficiency sales stockholders and from other corporation petitions to which it may
tax plus surcharge, claiming that the taxable sales were the retail be connected. However, "when the notion of legal entity is used
sales by SM to the public and not the sales at wholesale made to defeat public convenience, justify wrong, protect fraud, or
by, Yutivo to the latter inasmuch as SM and Yutivo were one and defend crime," the law will regard the corporation as an
the same corporation, the former being the subsidiary of the association of persons, or in the case of two corporations merge
latter. them into one.
The assessment was disputed by the petitioner, and a Another rule is that, when the corporation is the "mere alter ego
reinvestigation of the case having been made by the agents of or business conduit of a person, it may be disregarded."
the BIR, the respondent Collector countermanded his demand
for sales tax deficiency on the ground that "after several ISSUES: Whether or not Southern Motors, Inc. was organized as a
investigations conducted into the matter no sufficient evidence tax evasion device.
could be gathered to sustain the assessment of this Office based
on the theory that Southern Motors is a mere instrumentality or HELD & RATIO:
subsidiary of Yutivo."
After another investigation, the respondent Collector NO. The Court of Tax Appeals was not justified in finding that SM
redetermined that the aforementioned tax assessment was was organized for no other purpose than to defraud the Government
lawfully due the government and in addition assessed deficiency of its lawful revenues.
1. This corporation was organized in June 1946 when it could immaterial to the amount of the sales tax. And yet after the
not have caused Yutivo any tax savings. passage of that Act, SM continued to exist up to the present
o From that date up to June 30, 1947, or a period of more than one and operates as it did many years past in the promotion and
year, GM was the importer of the cars and trucks sold to Yutivo, pursuit of the business purposes for which it was organized.
which, in turn resold them to SM. 3. Sections 184 to 186 of the said Code provides that the sales
o During that period, it is not disputed that GM as importer, tax shall be collected "once only on every original sale,
was the one solely liable for sales taxes. barter, exchange . . , to be paid by the manufacturer,
o Neither Yutivo or SM was subject to the sales taxes on their producer or importer."
sales of cars and trucks. The sales tax liability of Yutivo did not o The use of the word "original" and the express provision that the
arise until July 1, 1947 when it became the importer and simply tax was collectible "once only" evidently has made the provisions
continued its practice of selling to SM. susceptible of different interpretations.
o The decision, therefore, of the Tax Court that SM was organized o It should be stated that a taxpayer has the legal right to decrease
purposely as a tax evasion device runs counter to the fact that the amount of what otherwise would be his taxes or altogether
there was no tax to evade. avoid them by means which the law permits
o The intention to minimize taxes, when used in the context of o A man may, therefore, perform an act that he honestly believes
fraud, must be proved to exist by clear and convincing evidence to be sufficient to exempt him from taxes. He does not incur
amounting to more than mere preponderance, and cannot be fraud thereby even if the act is thereafter found to be insufficient.
justified by a mere speculation. This is because fraud is never o Court Holding Co. vs. Commr: though an incorrect position in law
lightly to be presumed. Fraud is never imputed and the courts had been taken by the corporation there was no suppression of
never sustain findings of fraud upon circumstances which, at the the facts, and a fraud penalty was not justified
most, create only suspicion. o The evidence for the Collector, in our opinion, falls short of the
2. SM was organized and it operated, under circumstance that standard of clear and convincing proof of fraud.
belied any intention to evade sales taxes. o The allegation of fraud, however, cannot be sustained
o "Tax evasion" – connotes fraud thru the use of pretenses and without the showing that Yutivo, in filing said returns, did so
forbidden devices to lessen or defeat taxes fully knowing that the taxes called for therein called for
o The transactions between Yutivo and SM have always been in therein were less than what were legally due.
the open, embodied in private and public documents, constantly
subject to inspection by the tax authorities. SM was actually owned and controlled by petitioner as to make it
o After Yutivo became the importer of GM cars and trucks for a mere subsidiary or branch of the latter created for the purpose
Visayas and Mindanao, it merely continued the method of of selling the vehicles at retail and maintaining stores for spare
distribution that it had initiated long before GM withdrew from parts as well as service repair shops.
the Philippines. Southern Motors being but a mere instrumentality, or adjunct of
o If tax saving was the only justification for the organization of SM, Yutivo, the Court of Tax Appeals correctly disregarded the
such justification certainly ceased with the passage of Republic technical defense of separate corporate entity in order to arrive
Act No. 594 governing payment of advance sales tax by the at the true tax liability of Yutivo.
importer based on the landed cost of the imported article, When GM was the importer and Yutivo, the wholesaler, of the
increased by mark-ups of 25%, 50%, and 100%, depending on cars and trucks, the sales tax was paid only once and on the
whether the imported article is taxed under sections 186, 185 original sales by the former and neither the latter nor SM paid
and 184, respectively, of the Tax Code. taxes on their subsequent sales.
o Under R.A. No. 594, the amount at which the article is sold is Yutivo might have, therefore, honestly believed that the payment
by it, as importer, of the sales tax was enough as in the case of 9. RAMIREZ TELEPHONE CORPORATION vs. BANK OF
GM Consequently, in filing its return on the basis of its sales to AMERICA
SM and not on those by the latter to the public, it cannot be said Mixing up operations; Piercing the Veil of Corporate Fiction
that Yutivo deliberately made a false return for the purpose of
defrauding the government of its revenues which will justify the CASE:
imposition of the surcharge penalty. Defendant E.F. Herbosa is the owner of a building in Sta.
Mesa. He leased the same to Ruben Ramirez, president of Ramirez
FINAL VERDICT: IN VIEW OF THE FOREGOING, the decision of Telephone Corporation. When Ruben continuously failed to pay rent,
the Court of Tax Appeals under review is hereby modified in that Herbosa filed an ejectment suit against him. When Herbosa was able
petitioner shall be ordered to pay to respondent the sum of to get a favorable decision, the Sheriff sent a letter to Bank of
P820,549.91, plus 25% surcharge thereon for late payment. America notifying said bank of the levy of the credits and all debs by
the bank to the defendant (i.e. bank deposits). Bank of America
wrote back saying that there held no account in the name of Ruben
Ramirez however, there existed an account in the name of Ramirez
Telephone Corporation. Subsequently, Ruben withdrew the sum of
P1500 from the corporation‘s account, leaving only about P800
pesos. The controversy arose when Ramirez Telephone, through its
president Ruben, issued a check in favor of Ray Electronics for
payment of certain equipment. The bank dishonored such check thus
prompting the lawyer of the Ramirez Telephone Corporation to file
an action against the bank. The lower court ruled in favor of the
Ramirezs. CA reversed the decision hence this petition. So the issue
is whether or not the funds of the corporation may be garnished to
satisfy the personal debts of the major stockholders. The Court ruled
in the affirmative. While respect for the corporate personality as such
is the general rule, there are exceptions. In appropriate cases, the
veil of corporate fiction may be pierced. Mixing of personal accounts
with corporate bank deposit accounts would authorize piercing to
protect the judgment claim of a creditor.
FACTS:
Defendant E.F. Herbosa is the owner of a building in Sta.
Mesa, which he leased to Ruben R. Ramirez, president of
Ramirez Telephone Corporation.
Due to Ramirez‘s failure to pay rent, Herbosa filed a suit for
eviction against Ramirez in the Municipal Court of Manila
and subsequently elevated the case to the Court of First
Instance.
Herbosa was able to get a favorable decision, and on the Ramirez and his wife, was not to be disregarded even if they
eve of the promulgation of the judgment in his favor, the did own 75% of the stock of the corporation. Its funds as a
Sheriff of Manila sent a letter notifying Bank of America that corporation cannot be garnished to satisfy the debts of a
levy is made upon all the goods, effects, interests, credits, principal stockholder.
money, stocks, shares, any interests in stocks and shares
and all debts owing by the bank to the defendant, Ruben R. ISSUES:
Ramirez. 4. Whether or not the funds of the corporation may be
On the same day, the bank replied saying that it does not garnished to satisfy the personal debts of Ruben
hold any fund in the name of the defendant, Ruben R. Ramirez and his wife (major stockholders)
Ramirez. Instead, it informed the Sheriff that it is holding the
amount of P2,400.00 in the name of the Ramirez Telephone, HELD & RATIO:
Inc. 2. YES, the corporation‘s funds may be garnished to satisfy the
But the following day, Ramirez Telephone withdrew the sum debts of Ruben Ramirez and his wife.
of P1,500.00, the balance therefore is nothing more than While respect for the corporate personality as such
P889.00. is the general rule, there are exceptions. In
The case arose when the Ramirez Telephone through its appropriate cases, the veil of corporate fiction may
president, defendant Ruben Ramirez, issued another check be pierced.
in the amount of P2,320.00 in favor of Ray Electronics, in "Even with regard to corporations duly organized
payment of certain equipment sold by the latter. Such check and existing under the law, we have in many a case
was to be presented to Bank of America. (I‘m guessing Bank pierced the veil of corporate fiction to administer the
of America dishonored the check) ends of justice."
The lawyer of the Ramirez Telephone sent a letter of formal (from CLV outline) Mixing of personal accounts with
notice to the Bank of America Saying that his client had corporate bank deposit accounts would authorize
suffered "substantial damage and embarrassment" and piercing to protect the judgment claim of a creditor.
warned that they will file a complaint against the bank.
The bank responded and said that Ramirez Telephone FINAL VERDICT: Petition is denied. The CA‘s decision is affirmed.
should first obtain a release from the Civil Case against
Ruben Ramirez.
In accordance with his warning, the lawyer of Ramirez Notes:
Telephone instituted this action.
The lower court ruled that ―Ruben N. Ramirez the defendant I apologize if the facts are not clear. The facts are in Spanish and I
in said Civil Case and whose property or fund was ordered just used an online translator to figure out what the case is all about.
attached has no personal deposit in that bank and that the I assumed some points BECAUSE. . . Spanish. Huhu! No entiendo
Ramirez Telephone Corporation is entirely a distinct and Espanol.
separate entity regardless of the fact that Ruben R. Ramirez
happens to be its President and General Manager.‖ (Again, And yes, that‘s it for the Ratio. -_____-‗
I‘m guessing CA reversed the decision because Ramirez,
while he won in the lower court, now appeals to the SC)
Petitioner maintains that the personality as an entity
separate and distinct from its major stockholders, Ruben R.
10. LBP vs. CA would participate in the scheme through the conversion of
Mixing-up operations; Disregard to the corporate entity P9,000,000.00 which was part of the total loan, into equity.
CASE: LBP informed ECO that they may proceed with the Plan of
Payment provided Land Bank shall not participate in the
LBP extended a loan to ECO, where Emmanuel C. Onate is the undertaking in any manner whatsoever. LBP advised to
majority shareholder. When unable to pay the loan, several plans of make necessary revision in the proposed Plan of Payment
payment were proposed by ECO but LBP did not accede to the and submit the same to us as soon as possible.
proposal. LBP filed this collection case against ECO. LBP argued
that the corporate legal fiction should be pierced since Onate, being
the majority shareholder, personally paid part of the loans and hence ECO submitted to LBP a ―Revised Plan of Payment‖ deleting
the separate corporate personality of the corporation is not present. the latter‘s participation in the proposed financing company.
The Supreme Court held that Onate is not solidarily liable. Based on The Trust Committee deliberated on the ―Revised Plan of
the wordings of the Court, it is understandable that a shareholder Payment‖ and resolved to reject it. LBP then sent a letter to
would want to help his corporation and in the process, assure the PVTA for the latter‘s comments. The letter stated that if
that his stakes in the said corporation are secured. In this case, LBP did not hear from PVTA within five (5) days from the
it was established that the P1 Million did not come solely from latter‘s receipt of the letter, such silence would be construed
Oñate. to be an approval of LBP‘s intention to file suit against ECO
and its corporate officers. PVTA did not respond to the
letter.
FACTS:
Landbank filed a complaint for Collection of Sum of Money
On various dates, Land Bank of the Philippines (LBP) against ECO and Emmanuel C. Oñate.
extended a series of credit accommodations to appellee
ECO, using the trust funds of the Philippine Virginia Tobacco
Administration (PVTA) in the aggregate amount of ISSUE:
P26,109,000.00. The proceeds of the credit
accommodations were received on behalf of ECO by 1. Whether or not the corporate veil of ECO Management
appellee Oñate. Corporation should be pierced?
On the respective maturity dates of the loans, ECO failed to Sub-issue: whether or not Emmanuel C. Oñate should
pay the same. Oral and written demands were made, but be held jointly and severally liable with ECO
ECO was unable to pay. ECO claims that the company was Management Corporation for the loans incurred from
in financial difficulty for it was unable to collect its Land Bank.
investments with companies which were affected by the
financial crisis brought about by the Dewey Dee scandal. HELD & RATIO:
3. NO.
ECO proposed and submitted to LBP a ―Plan of Payment‖
whereby the former would set up a financing company which On petitioner‘s contention, among others, that respondent
would absorb the loan obligations. It was proposed that LBP Oñate personally paid P1 Million taken from trust accounts in
his name, the Supreme Court held that therespondent 11. Luisito Padilla and Phoenix Omega Development and
corporation in this case was being used as a mere alter ego Management Corporation v. CA
of Oñate to obtain the loans had not been shown. G.R. No. 123893 November 22, 2001
Bad faith or fraud on the part of ECO and Oñate was not Disrespect to the corporate entity; When corporate officers are sued
also shown. As the Court of Appeals observed, if in their official capacity
shareholders of ECO meant to defraud petitioner, then they
could have just easily absconded instead of going out of CASE: (This case falls under two topics as provided in the outline.)
their way to propose ―Plans of Payment.‖ RTC declared the rescission and termination of the Contract
Likewise, Oñate volunteered to pay a portion of the of Lease between PKA and SRI, and ordered the former to surrender
corporation‘s debt. This offer demonstrated good faith on his possession of the leased premises to the latter. Possession of the
part to ease the debt of the corporation of which he was a subject properties was subsequently restored to SRI, but the
part. It is understandable that a shareholder would want to monetary award was left unsatisfied. SRI filed a motion for issuance
help his corporation and in the process, assure that his of an alias writ against herein petitioners (Padilla and Phoenix),
stakes in the said corporation are secured. In this case, it based on the trial court's observation that PKA and Phoenix are one
was established that the P1 Million did not come solely from and the same entity. This was granted by the RTC and ordered that
Oñate. It was taken from a trust account which was owned an alias writ of execution be issued against the properties, both real
by Oñate and other investors. It was likewise proved that the and personal, of PKA, of Phoenix, and of Padilla. Petitioners assailed
P1 Million was a loan granted by Oñate and his co- these orders as confiscatory, since they were never parties to the
depositors to alleviate the plight of ECO. This circumstance case filed by PKA against SRI, and they were unable to present
should not be construed as an admission that he was really evidence on their behalf. CA agreed with RTC's finding that there is
the debtor and not ECO. evidence on record to support the RTC's conclusion that PKA and
Phoenix are one and the same, or that the former is a mere conduit
FINAL VERDICT: Petition is denied. of the latter. It pointed out that petitioner Padilla is both president and
general manager of PKA and at the same time chairman of the board
of directors and controlling stockholder of Phoenix. PKA and Phoenix
also shared officers, laborers, and offices.
(1) W/N RTC had jurisdiction over petitioners to justify the
issuance of an alias writ of execution against their properties.
NO, RTC never acquired jurisdiction over petitioners. Neither
of the petitioners was impleaded as a party to the case. "Generally
accepted is the principle that no man shall be affected by any
proceeding to which he is a stranger, and strangers to a case
are not bound by judgment rendered by the court. xxx"
(2) W/N RTC had properly pierced the veil of corporate
fiction protecting petitioners, and thus justifies execution against their
properties.
No, the veil of corporate fiction may only be disregarded
in cases where the corporate vehicle is being used to defeat
public convenience, justify wrong, protect fraud, or defend
crime. PKA and Phoenix-Omega are admittedly sister companies,
and may be sharing personnel and resources, but no allegation in As SRI's approval of PKA's amended plans in the
the present case, much less positive proof, that their separate construction was required, PKA transmitted the same to SRI
corporate personalities are being used to defeat public convenience, which withheld approval thereof pending PKA's correction of
justify wrong, protect fraud, or defend crime. the defects in the construction.
Repeated requests for approval of its amended plans not
having been heeded by SRI, PKA filed an action for
FACTS: rescission of contract of lease against SRI, alleging that
Susana Realty, Inc. (SRI) sold to Light Rail Transit Authority SRI's refusal to approve the plans without any justifiable
(LRTA) several parcels of land in Taft Avenue, Pasay City. reason deprived it of the use of the commercial stalls,
Subsequently, LRTA and Phoenix Omega Development and thereby incurring losses.
Management Corporation (Phoenix) entered into a SRI countered that it was PKA which violated the terms of
Commercial Stall Concession Contract authorizing the latter their contract, alleging that PKA failed to complete within six
to construct and develop commercial stalls on a portion of months the construction of the commercial stalls during
the property bought from SRI. which period it was not paying any rentals and that PKA
A tripartite agreement was later concluded by the parties undertook the construction without first having its plans
whereby SRI agreed to honor the terms of the concession approved.
contract and to lease to Phoenix its remaining property RTC declared the rescission and termination of the Contract
adjacent to the portion subject of the concession contract of Lease and ordered PKA to surrender possession of the
A contract was entered into on July 28, 1988 between leased premises to SRI.
Phoenix and SRI with LRTA whereby Phoenix undertook to Possession of the subject properties was subsequently
construct commercial stalls on the property in accordance restored to SRI, but the monetary award was left unsatisfied.
with plans and specifications prepared by the latter, the SRI filed a motion for issuance of an alias writ against herein
construction to begin, however, only upon SRI's approval of petitioners, based on the trial court's observation that PKA
such plans and specifications. and Phoenix-Omega are one and the same entity.
Also on the same date, Phoenix assigned its right and This was granted by the RTC and ordered that, as prayed for
interests over the remaining property unto its sister by SRI, an alias writ of execution be issued against the
company, PKA Development and Management Corporation properties, both real and personal, of PKA, of Phoenix, and
(PKA). of Luisito B. Padilla.
o Signatories to the deed of assignment were Eduardo Alleging that the writ of execution cannot be enforced
Gatchalian in his capacity as President of Phoenix, against them, herein petitioners (Padila and Phoenix) filed
and Luisito B. Padilla (Padilla) in his capacity as with the RTC an omnibus motion for reconsideration and for
President and General Manager (GM) of PKA. The annulment of the alias writ and cancellation of the notice of
development of the remaining property having been levy and sale. Petitioners assailed these orders as
assigned to PKA, it entered into a contract of lease confiscatory, since they were never parties to the case filed
with SRI likewise on July 28, 1988. by PKA against SRI, and they were unable to present
PKA's building permit was later revoked due to certain evidence on their behalf. Their motion was denied.
violations of the National Building Code (BP 344). CA agreed with the RTC's finding that there is evidence on
Later on, DPWH allowed PKA to resume construction on the record to support the RTC's conclusion that PKA and
leased premises subject to PKA's correction of the defects in Phoenix are one and the same, or that the former is a mere
the construction to conform to BP 344. conduit of the latter. It pointed out that petitioner Padilla is
both president and general manager of PKA and at the same had his day in court. Padilla and Phoenix-Omega, of
time chairman of the board of directors and controlling which Padilla is chairman of the board, could not
stockholder of Phoenix. PKA and Phoenix also shared argue that they did not have the opportunity to
officers, laborers, and offices. present their case in court.
o The Supreme Court, however, ruled that
Padilla participated in the proceedings as
ISSUES: GM of PKA and not in any other capacity.
5. Whether or not the trial court had jurisdiction over The fact that at the same time he was the
petitioners to justify the issuance of an alias writ of chairman of the board of Phoenix cannot
execution against their properties. (When corporate equate to participation by Phoenix in the
officers are sued in their official capacity) same proceedings.
6. Whether or not the trial court had properly pierced the o It was stressed that Phoenix was not a party
veil of corporate fiction protecting petitioners, and thus to the case and so could not have taken part
justifies execution against their properties. (Disrespect to therein.
the Corporate Entity) 5. No, the veil of corporate fiction may only be disregarded
in cases where the corporate vehicle is being used to
HELD & RATIO: defeat public convenience, justify wrong, protect fraud,
4. NO, the trial court never acquired jurisdiction over or defend crime.
petitioners. Neither of the petitioners was impleaded as PKA and Phoenix-Omega are admittedly sister
a party to the case. companies, and may be sharing personnel and
A court acquires jurisdiction over a person through resources, but no allegation in the present case,
either a valid service of summons or the person's much less positive proof, that their separate
voluntary appearance in court. A court must corporate personalities are being used to defeat
necessarily have jurisdiction over a party for the public convenience, justify wrong, protect fraud, or
latter to be bound by a court decision. defend crime.
"Generally accepted is the principle that no man o "For the separate juridical personality of
shall be affected by any proceeding to which he a corporation to be disregarded, the
is a stranger, and strangers to a case are not wrongdoing must be clearly and
bound by judgment rendered by the court. xxx" convincingly established. It cannot be
Without the trial court having acquired jurisdiction presumed."
over petitioners, the latter could not be bound by the o There is no reason to justify piercing the
decision of the court. Execution can only be issued corporate veil in this instance.
against a party and not against one who was not Given the circumstances of this case, public
accorded his day in court. To levy upon their respondent cannot order the seizure of petitioners'
properties to satisfy a judgment in a case in which properties without violating their constitutionally
they were not even parties is not only inappropriate; enshrined right to due process, merely to
it most certainly is deprivation of property without compensate private respondent.
due process of law.
CA ruled that Padilla, as GM of PKA, he actively FINAL VERDICT: The instant petition is GRANTED. The assailed
participated in the case in the trial court, and thus decision and resolution of the CA are SET ASIDE, and the order of
the trial court and the alias writ of execution are declared NULL and 12. JACINTO v. CA
VOID. Piercing Doctrine and Due Process Clause;
CASE:
Petitioner: Jacinto (President, General Manager, and substantial
stockholder of Inland Industries, Inc.)
Respondents: CA and Metropolitan Bank and Trust Co. (Metrobank)
A complaint was instituted by Metrobank against Jacinto and Inland

Industries. The Trial Court ruled in favor of Metrobank and ordered
Jacinto and Inland Industries to pay Metrobank jointly and severally.
Jacinto tried to escape liability and shift the entire blame on Inland
Industries invoking the separate juridical personality principle.
Inland Industries, on the other hand, alleges that Jacinto should be
liable because Inland Industries is just a mere alter ego of Jacinto.
The issue here is whether or not courts can validly pierce the fiction
of corporate identity of Inland Industries even if there is no allegation
in the complaint regarding the same.
The Court held that it may pierce the fiction of corporate identity of
Inland Industries despite absence of allegation in the complaint,
provided that evidential basis has been adduced during trial to apply
the piercing doctrine.
FACTS:
There was a civil case wherein trial court ordered petitioner
Jacinto and Inland Industries Inc. to pay jointly and severally
Metrobank the principal obligation with interest.
o ―…defendant Roberto A. Jacinto is in fact, the
corporation itself known as Inland Industries, Inc.
Aside from the fact that he is admittedly the
President and General Manager of the corporation
and a substantial stockholder thereof, it was
defendant Roberto A. Jacinto who dealt entirely with
the plaintiff (Metrobank) in those transactions. In the
Trust Receipts that he signed supposedly in behalf
of Inland Industries, Inc., it is not even mentioned
that he did so in this official capacity.
o ―Roberto A. Jacinto was practically the corporation
itself, the Inland industries, Inc.‖
Jacinto, tried to escape liability and shift the entire blame While on the face of the complaint there is no specific
under the trust receipts solely and exclusively on Inland. He allegation that the corporation is a mere alter ego of
asserted that he cannot be held solidarily liable with Inland petitioner, subsequent developments, from the stipulation of
because he just signed said instruments in his official facts up to the presentation of evidence and the examination
capacity as president of Inland and the latter has a juridical of witnesses, unequivocally show that respondent Metrobank
personality distinct and separate from its officers and sought to prove that petitioner and the corporation are one or
stockholders. that he is the corporation. No serious objection was heard
Upon the other hand, Inland reiterated its allegation that it is from petitioner.
just a mere alter ego of Jacinto who is its President and Section 5 of Rule 10 of the Rules of Court provides:
General Manager, while the wife of the latter owns a majority ―Sec. 5. Amendment to conform to or
of its shares of stock. authorize presentation of evidence. –– When issues
CA not raised by the pleadings are tried by express
o Jacinto‘s assertion is plainly without legal basis. This or implied consent of the parties, they shall be
is shown by the undisputed fact that he even treated in all respects, as if they had been raised
admitted that he and his wife own 52% of the in the pleadings. Such amendment of the pleadings
stocks of the corporation. as may be necessary to cause them to conform to
o We cannot accept as true the assertion of defendant the evidence and to raise these issues may be made
Jacinto that he only acted in his official capacity as upon motion of any party at any time, even after
President and General Manager of Inland Industries, judgment; but failure so to amend does not affect the
Inc. when he signed the aforesaid trust receipts. To trial of these issues. If the evidence is objected to at
Our mind the same is just a clever ruse and a the time of trial on the ground that it is not within the
convenient ploy to thwart his personal liability issues made by the pleadings, the court may allow
therefor by taking refuge under the protective mantle the pleadings to be amended and shall do so freely
of the separate corporate personality of defendant when the presentation of the merits of the action will
corporation. be subserved thereby and the objecting party fails to
o Thus it held that "when the veil of corporate fiction is satisfy the court that the admission of such evidence
made as a shield to perpetuate fraud and/or confuse would prejudice him in maintaining his action or
legitimate issues, the same should be pierced." defense upon the merits. The court may grant
Only Jacinto appeals. continuance to enable the objecting party to meet
such evidence.‖
ISSUES: Pursuant thereto, "when evidence is presented by one party,
1. Whether or not CA can validly pierce the fiction of corporate with the express or implied consent of the adverse party, as
identity of the corporation Inland Industries even if there is to issues not alleged in the pleadings, judgment may be
no allegation in the complaint regarding the same, nor is rendered validly as regards those issues, which shall be
there anything in the prayer demanding the piercing of the considered as if they have been raised in the pleadings.
corporate veil of the corporation Inland Industries Therefore, there is implied consent to the evidence
presented when the adverse party fails to object thereto.
HELD & RATIO:
1. YES, CA CAN VALIDLY PIERCE THE FICTION OF FINAL VERDICT: Petition is dismissed.
CORPORATE IDENTITY OF INLAND INDUSTRIES.
13. Cagayan Fishing vs. Teodoro Sandiko shall not be transferred to the name of the plaintiff company
Theories on Liabilities of Promoter's Contract until the latter has fully and completely paid Tabora's
indebtedness to the Philippine National Bank.
CASE:
The plaintiff company filed its article incorporation with
Tabora sold four parcels of land to Cagayan Fishing – 5
the Bureau of Commerce and Industry on October 22,
months before the incorporation of the latter. The land was later on
1930.
sold by Cagayan Fishing to Teodoro Sandiko. The issue is whether
or not the sale is to Sandiko is valid. It was held by the court that it is A year later, on October 28, 1931, the board of directors of
not a valid sale. said company adopted a resolution (Exhibit G) authorizing its
Before incorporation, a corporation has no juridical president, Jose Ventura, to sell the four parcels of lands in
personality and it cannot enter into a contract validly. At that point it question to Teodoro Sandiko for P42,000. Exhibits B, C and
cannot also be considered a de facto corporation. When Cagayan D were thereafter made and executed.
entered a contract with Tabora, the former is not yet incorporated.
Hence, it also follows that the sale of Cagayan to Sandiko is also o Exhibit B is a deed of sale executed before a notary
void. public by the terms of which the plaintiff sold ceded
and transferred to the defendant all its right, titles,
Recit-ready and interest in and to the four parcels of land
described in transfer certificate in turn obligated
himself to shoulder the three mortgages herein
before referred to.
FACTS:
After trial, the court below, on December 18, 1934, rendered
Manuel Tabora is the registered owner of four parcels of judgment absolving the defendant, with costs against the
land situated in the barrio of Linao, town of Aparri, Province plaintiff.
of Cagayan
ISSUES:
To guarantee the payment of a loan in the sum of P8,000, 1. Whether or nor the Exhibit B, the deed of sale executed
Manuel Tabora, on August 14, 1929, executed in favor of the in favor of Teodoro Sandiko is valid?
Philippine National Bank a three different mortgage on the
four parcels of land above-mentioned. HELD & RATIO:
1. No. It can not be denied that the Cagayan Fishing was not
These mortgages were registered and annotations thereof yet incorporated when it entered into a contract of sale with
appear at the back of transfer certificate of title No. 217. Tabora.
On May 31, 1930, Tabora executed a public document 2. The transfer made by Tabora to the
entitled "Escritura de Transpaso de Propiedad Cagayan fishing Development Co., Inc., plaintiff herein,
Inmueble" by virtue of which the four parcels of land was affected on May 31, 1930 and the actual
owned by him was sold to the plaintiff company incorporation of said company was affected later on
(Cagayan), said to under process of incorporation, in October 22, 1930 . In other words, the transfer was made
consideration of one peso (P1) subject to the mortgages in almost five months before the incorporation of the
favor of the Philippine National Bank and Severina Buzon company.
and, to the condition that the certificate of title to said lands
3. The contract itself referred to the plaintiff as "una sociedad 9. If the plaintiff corporation could not and did not acquire
en vias de incorporacion." It was not even a de the four parcels of land here involved, it follows that it
facto corporation at the time. Not being in legal existence did not possess any resultant right to dispose of them
then, it did not possess juridical capacity to enter into the by sale to the defendant, Teodoro Sandiko.
contract.
10. Some of the members of this court are also of the opinion
4. Corporations are creatures of the law, and can only come that the transfer from Manuel Tabora to the Cagayan Fishing
into existence in the manner prescribed by law. As has Development Company, Inc., which transfer is evidenced by
already been stated, general law authorizing the formation of Exhibit A, was subject to a condition precedent (condicion
corporations are general offers to any persons who may suspensiva), namely, the payment of the mortgage debt of
bring themselves within their provisions; and if conditions said Tabora to the Philippine National Bank, and that this
precedent are prescribed in the statute, or certain acts are condition not having been complied with by the Cagayan
required to be done, they are terms of the offer, and must be Fishing Development Company, Inc., the transfer was
complied with substantially before legal corporate existence ineffective. However, having arrived at the conclusion that
can be acquired. the transfer by Manuel Tabora to the Cagayan Fishing
Development Company, Inc. was null because at the time it
5. That a corporation should have a full and complete
was affected the corporation was non-existent, we deem it
organization and existence as an entity before it can enter
unnecessary to discuss this point
into any kind of a contract or transact any business, would
seem to be self evident.
6. A corporation, until organized, has no being, franchises or
faculties. Nor do those engaged in bringing it into being have
any power to bind it by contract, unless so authorized by the
charter there is not a corporation nor does it possess
franchise or faculties for it or others to exercise, until it
acquires a complete existence.
7. The contract here (Exhibit A) was entered into not between
Manuel Tabora and a non-existent corporation but between
the Manuel Tabora as owner of the four parcels of lands on
the one hand and the same Manuel Tabora, his wife and
others, as mere promoters of a corporations on the other
hand. For reasons that are self-evident, these promoters
could not have acted as agent for a projected corporation
since that which no legal existence could have no agent.
8. A corporation, until organized, has no life and therefore no
faculties. It is, as it were, a child in ventre sa mere. This is
not saying that under no circumstances may the acts of
promoters of a corporation be ratified by the corporation if
and when subsequently organized.
14. RIZAL LIGHT & ICE CO., INC VS THE MUNICIPALITY 2. Another petition from Rizal Light & Co to review and set
OF MORONG RIZAL AND THE PUBLIC SERVICE aside the decision of the PSC in granting a certificate of
COMMISSION public convenience and necessity to respondent Morong
Electric Co., Inc to operate an electric light, heat and
CASE: power service in the municipality of Morong Rizal.
Rizal Light & Ice Co was granted by the Public Service (NOTE: I will focus on the second case since this is
Commission a certificate of public convenience and what‘s relevant under our current topic)
necessity for the installation, operation and maintenance of Petitioner Rizal Light & Ice Co is a domestic corporation
an electric light, heat and power service in the municipality of based at Morong, Rizal which was granted by the
Morong, Rizal. But because of some violations of its Commission a certificate of public convenience and
franchise, the Municipality of Morong Rizal filed a motion necessity for the installation, operation and maintenance of
with the PSC that its franchise be revoked. PSC revoked its an electric light, heat and power service in the municipality of
franchise after conducting inspection. Rizal Light filed an MR Morong, Rizal
but before it could do so, it learned that another corporation, Respondent Municipality of Morong Rizal asked the
Morong Electric was already granted a municipal franchise Commission to revoke Rizal Light & Ice Co‘s on the ground
by the Municipality of Morong Rizal under which it would also that it failed to comply with the conditions of said certificate
engage in the installation, operation and maintenance of an and franchise. Upon inspection, the Commission concluded
electric light, heat and power service in Morong, Rizal. Rizal that Rizal Light cannot render the efficient, adequate and
Light opposed Morong Electric‘s application for a certificate satisfactory electric service required by its ceritificate so it
of public convenience and necessity in the PSC alleging that ordered the cancellation of its certificate of public
it cannot be granted such certificate since it did not have a convenience.
corporate personality at the time it was granted a franchise Rizal Light moved for reconsideration of the decision. But 8
by the municipality and at the time it applied for said days before the MR was filed, Morong Electric, having been
certificate from PSC. The Court ruled that although it is true granted a municipal franchise by the Municipality of Morong
that Morong Electric was granted a franchise by the Rizal to install, operation and maintain an electric heat, light
municipality before it had a legal personality, the fact that and power service in the municipality, filed with the
Morong Electric had no corporate existence on the day the Commission an application for a certificate of public
franchise was granted does NOT render the franchise invalid convenience and necessity for said services.
because later, Morong Electric obtained its certificate of Rizal Light opposed the application of Morong Electric on the
incorporation and then accepted the franchise in accordance grounds that:
with the terms and conditions thereof. o It did not have a corporate personality at the time it
was granted a franchise and when it applied for said
certificate
FACTS: o It is not financially capable of undertaking an electric
There are two interrelated cases which were decided service
together by the court: o Petitioner was rendering efficient service before its
1. A petition of the Rizal Light & Ice Co to review and set electric plant was burned hence, being a prior
aside the order of Public Service Commission which had operator, Rizal Ice‘s investment should be protected
Rizal Light & Ice Co, Inc‘s certificate of public and no new party should be granted a franchise and
convenience revoked and its franchise forfeited
certificate of public convenience and necessity to

operate an electric service in the same locality And Thompson gives the reason for the rule:
― In the matter of the secondary franchise the authorities are
ISSUES: numerous in support of the proposition that an ordinance
Whether or not the franchise granted to Morong Electric granting a privilege to a corporation is not void because the
is valid---Yes beneficiary of the ordinance is not fully organized at the time
of the introduction of the ordinance. It is enough that
HELD & RATIO: organization is complete prior to the passage and
Yes. The conclusion here reached regarding the validity of the acceptance of the ordinance. The reason is that a privilege
franchise granted to Morong Electric is not incompatible with the of this character is a mere license to the corporation until it
holding of this Court in Cagayan Fishing Development Co., Inc vs accepts the grant and complies with its terms and
Teodoro Sandiko where it was ruled that: conditions.‖
As a general rule: A corporation should have a full and
complete organization and existence as an entity before it The incorporation of Morong Electric on October 17,
can enter into any kind of contract or transact any business. 1962 and its acceptance of the franchise as shown by its
Exception: HOWEVER, this rule is NOT absolute since there action in prosecuting the application filed with the
are circumstances under which the acts or promoters of a Commission for the approval of said franchise, not only
corporation be ratified or accepted by the corporation if and perfected a contract between the respondent
when subsequently organized. There are exceptions. In municipality and Morong Electric but also cured the
American courts, it is held there that a contract made by the deficiency pointed out by the petitioner in the
promoters of a corporation on its behalf may be adopted, application of Morong EIectric. Thus, the Commission did
accepted or ratified by the corporation when organized. not err in denying petitioner's motion to dismiss said
application and in proceeding to hear the same. The efficacy
Although it is true that Morong Electric was granted a franchise by of the franchise, however, arose only upon its approval by
the municipality before it was given a certificate of incorporation by the Commission on March 13, 1963.
the SEC and thus before it had a legal personality, the fact that
Morong Electric had no corporate existence on the day the franchise
was granted in its name does not make it a de facto corporation.
BUT NOTE that it does NOT render the franchise invalid because
later, Morong Electric obtained its certificate of incorporation and
then accepted the franchise in accordance with the terms and
conditions thereof. This view is sustained in by American authorities:
― While a franchise cannot take effect until the grantee

corporation is organized, the franchise may, nevertheless, be
applied for before the company is fully organized.‖
― A grant of a street franchise is valid although the corporation is

not created until afterwards. (Fletcher, Cyclopedia Corp.
Permanent Edition, Rev. Vol. 6-A, Sec. 2881)
15. CARAM, JR. v. COURT OF APPEALS HELD & RATIO:
CASE: PET cannot be held personally liable for the compensation claimed
by the private respondent for the services performed by him in the
Petitioners in this case were held to be liable in the lower court as organization of the corporation.
the promoters of the proposed corporation that are responsible for
the expenses incurred in connection with such organization. PET did not contract such services. It was only the results of such
However, the Court held here that the petitioners are not personally services that Barretto and Garcia (co-defendants) presented to them
liable for such expenses for the services performed. It was Barretto and which persuaded them to invest in the proposed airline. There is
and Garcia (co-defendants) that presented to them and persuaded no justification to hold them personally liable therefor
them to invest in the proposed airline. As a bona fide corporation, the
Filipinas Orient Airways should alone be liable for tis corporate acts PET were not really involved in the initial steps that finally led to the
as duly authorized by its officers and directors. incorporation of the Filipinas Orient Airways.
Barretto was described as "the moving spirit." The finding of the

FACTS: respondent court is that the project study was undertaken by the
private respondent at the request of Barretto and Garcia who, upon
This case is questions of the solidary liability of the petitioners with its completion, presented it to the petitioners to induce them to invest
their co-defendants in the lower court in the proposed airline. The study could have been presented to
other prospective investors. At any rate, the airline was eventually
PET were mere subsequent investors in the corporation that was organized on the basis of the project study with the petitioners as
later created, they should not be held solidarily liable with the major stockholders and, together with Barretto and Garcia, as
Filipinas Orient Airways, a separate juridical entity, and with Barretto principal officers.
and Garcia, their co-defendants in the lower court
Defendant Barretto was the moving spirit in the pre-organization
PET claim that this order has no support in fact and law because work of defendant corporation based on his experience and
they had no contract whatsoever with the private respondent expertise, hence he was logically compensated in the amount of
regarding the services. P200,000.00 shares of stock not as industrial partner but more for
his technical services that brought to fruition the defendant
Lower Court: not necessary to determine whether it is the promoters corporation
of the proposed corporation, or the corporation itself after its
organization, that shall be responsible for the expenses incurred in PET were not involved in the initial stages of the organization of the
connection with such organization. airline, which were being directed by Barretto as the main promoter.
It was he who was putting all the pieces together, so to speak. The
ISSUES: petitioners were merely among the financiers whose interest was to
Whether or not the petitioners themselves be invited and who were in fact persuaded, on the strength of the
are also and personally liable for such expenses and, if so, to what project study, to invest in the proposed airline.
extent.
As a bona fide corporation, the Filipinas Orient Airways should alone 16. C. ARNOLD HALL and BRADLEY P. HALL v.
be liable for its corporate acts as duly authorized by its officers and EDMUNDO S. PICCIO, Judge of CFI of Leyte, FRED
directors BROWN, EMMA BROWN, HIPOLITA CAPUCIONG
De Facto Corporation
FINAL VERDICT: WHEREFORE, the petition is granted. The CASE:

petitioners are declared not liable under the challenged decision, Petitioners Hall and respondents Brown signed articles of
which is hereby modified accordingly. It is so ordered. incorporation of the Far Eastern Lumber and Commercial, Co., Inc.
Immediately after such execution, and months before filing the same
with the SEC, the corporation proceeded to doing business with the
Notes: adoption of by-laws and the election of its officers. During the
pendency of their action with the SEC, respondents Brown filed a
The PET also had a small part in organizing the company. The Court civil case, alleging that the corporation was actually an unregistered
explains: partnership, and they wished to have it dissolved. Petitioners Hall
motioned to dismiss the case on the ground that the court had no
We find no reason why the plaintiff should not be similarly jurisdiction, because the company was a de facto corporation,
compensated not only for having actively participated in the dissolution thereof may only be ordered in a quo warranto
preparation of the project study for several months and its proceeding.
subsequent revision but also in his having been involved in The Court dismissed the petition. Far Eastern was not
the pre-organization of the defendant corporation, in the considered a de facto corporation, because the element of good faith
preparation of the franchise, in inviting the interest of the is lacking. All the parties involved were informed that the SEC had
financiers and in the training and screening of personnel. not yet issued the corresponding certificate of incorporation. That
said, they ought to know that the personality of their corporation had
We agree that for these special services of the plaintiff the not begun to exist, and yet, the parties immediately proceeded to
amount of P50,000.00 as compensation is reasonable. doing business. The claim to be a corporation cannot be made in
good faith, unless there is an evident attempt to comply with the law.
FACTS:
On 28 May 1947, petitioners Hall and private respondents
Brown signed and acknowledged articles of incorporation of
the Far Eastern Lumber and Commercial, Co., Inc.,
organized to engage in a general lumber business.
Immediately after the execution of the articles, corporation
proceeded to do business with the adoption of by-laws and
the election of its officers.
Only on 2 December 1947 did the parties file the articles of
incorporation with the Securities and Exchange Commission.
On 22 March 1948, pending action on the articles of
incorporation, respondents Brown filed before the CFI of
Leyte a civil case, alleging that Far Eastern was an incorporation, Far Eastern, and even its stockholders, may
unregistered partnership, and they wished to have it not probably claim in good faith to be a corporation.
dissolved because of bitter dissension among the members, o All the parties involved were informed that the
mismanagement and fraud by the managers, and heavy SEC had not yet issued the corresponding
financial losses. certificate of incorporation. That said, they ought
Petitioners Hall motioned to dismiss the suit, contesting that to know that the personality of their corporation
the court had no jurisdiction to decree the dissolution of the had not begun to exist, and yet, the parties
company, because it being a de facto corporation, immediately proceeded to doing business.
dissolution thereof may only be ordered in a quo warranto • Second reason is this is not a suit in which the corporation is
proceeding instituted in accordance with Section 19 of the a party. This is a litigation between stockholders of the
Corporation Law (Sec. 20 in the present Corporation Code); alleged corporation, for the purpose of obtaining its
and that the respondents, in signing the articles of dissolution.
incorporation, were estopped from claiming that Far Eastern
was not a corporation. FINAL VERDICT: Petition dismissed.
ISSUES: W/N Far Eastern Lumber and Commercial, Co., Inc. is a

corporation in accordance with the Corporation Law
HELD & RATIO: No, Far Eastern is a not de facto corporation.

• Sec. 19 of the Corporation Law provides that
o ―due incorporation of any corporation claiming in
good faith to be a corporation under this Act
and its right to exercise corporate powers shall
not be inquired into collaterally in any private suit
to which the corporation may be a party, but
such inquiry may be had at the suit of the Insular
Government on information of the Attoryney-
General.‖ [Corporation Code dictates the same
provision: the due incorporation and right to
exercise corporate powers may be inquired into
through a quo warranto proceeding instituted by
the Solicitor General.]
o The immunity of collateral attack is granted to
corporations ―claiming in good faith to be a
corporation.‖ Unless there is an evident attempt
to comply with the law, the claim to be a
corporation could not be made in good faith.
• There are two reasons as to why this section does not
govern the case. Not having obtained the certificate of
17. SALVATIERRA v. GARLITOS not actually registered with the Securities and Exchange
Corporation by Estoppel Commission (SEC) hence Refuerzo should be personally liable.
CASE: ISSUES:
Salvatierra leased his land to the corporation. He filed a suit for 11. Whether or not Refuerzo in his capacity as president
accounting, rescission and damages against the corporation and its of the corporation shall be personally liable for the contract of
president for his share of the produce. Judgment against both was lease entered into.
obtained. President complains for being held personally liable.
HELD & RATIO:
He is liable. An agent who acts for a non-existent principal is himself YES, While as a general rule a person who has
the principal. In acting on behalf of a corporation which he knew to contracted or dealt with an association in such a way as to
be unregistered, he assumed the risk arising from the transaction. recognize its existence as a corporate body is estopped from
denying the same in an action arising out of such transaction or
FACTS: dealing, yet this doctrine may not be held to be applicable
2. This is a petition for certiorari filed by Manuela T. where fraud takes a part in the said transaction.
Vda. de Salvatierra seeking to nullify the order of the Court of In the instant case, on plaintiff's charge that she was unaware of
First Instance of Leyte in Civil Case No. 1912, dated March 21, the fact that the Philippine Fibers Producers Co., Inc., had no
1956, relieving Segundino Refuerzo of liability for the contract juridical personality, defendant Refuerzo gave no confirmation or
entered into between the former and the Philippine Fibers denial and the circumstances surrounding the execution of the
Producers Co., Inc., of which Refuerzo is the president. contract lead to the inescapable conclusion that plaintiff Manuela
3. Manuela T. Vda. de Salvatierra (Salvatierra) entered T. Vda. de Salvatierra was really made to believe that such
into a lease contract with Philippine Fibers Producers Co., Inc. corporation was duly organized in accordance with law.
(PFPC). PFPC was represented by its president Segundino There can be no question that a corporation with registered has a
Refuerzo. juridical personality separate and distinct from its component
4. It was agreed that Manuela shall lease her land to members or stockholders and officers such that a corporation
PFPC in exchange of rental payments plus shares from the sales cannot be held liable for the personal indebtedness of a
of crops. However, PFPC failed to comply with its obligations stockholder even if he should be its president and conversely, a
and so in 1955, Manuela sued PFPC and she won. stockholder or member cannot be held personally liable for any
5. An order was issued by Judge Lorenzo Garlitos of financial obligation be, the corporation in excess of his unpaid
CFI Leyte ordering the execution of the judgment against subscription.
Segundino Q. Refuerzo‘s property (there being no property But this rule is understood to refer merely to registered
under PFPC). corporations and cannot be made applicable to the liability of
6. Refuerzo moved for reconsideration on the members of an unincorporated association. The reason behind
ground that he should not be held personally liable because he this doctrine is obvious-since an organization which before the law
merely signed the lease contract in his official capacity as is non-existent has no personality and would be incompetent to act
president of PFPC. Garlitos granted Refuerzo‘s motion. and appropriate for itself the powers and attribute of a corporation
7. Manuela assailed the decision of the judge on the as provided by law; it cannot create agents or confer authority on
ground that she sued PFPC without impleading Refuerzo another to act in its behalf; thus, those who act or purport to act as
because she initially believed that PFPC was a legitimate its representatives or agents do so without authority and at their
corporation. However, during trial, she found out that PFPC was own risk. And as it is an elementary principle of law that a person
who acts as an agent without authority or without a principal is 18. ALBERT v. UNIVERSITY PUBLISHING CO.
himself regarded as the principal, possessed of all the rights and G.R. No. L-19118
subject to all the liabilities of a principal, a person acting or Corporation by Estoppel Doctrine
purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and obligations and comes CASE:
personally liable for contracts entered into or for other acts Albert and University Publishing Co. (through its president
performed as such, agent. Aruego) entered into a contract. The contract is that University
Considering that defendant Refuerzo, as president of the Publishing has the exclusive right to publish the revised
unregistered corporation Philippine Fibers Producers Co., Inc., was commentaries on Revised Penal Code of Albert.
the moving spirit behind the consummation of the lease agreement University Publishing failed to pay the second installment
by acting as its representative, his liability cannot be limited or share of Albert for the sales of the book‘s first edition. Hence, an
restricted that imposed upon corporate shareholders. In acting on action was commenced to collect from University Publishing the
behalf of a corporation which he knew to be unregistered, he amount due to Albert. The CFI Manila rendered judgment in favor of
assumed the risk of reaping the consequential damages or Albert and ordered the University Publishing to pay.
resultant rights, if any, arising out of such transaction. However, plaintiff petitioned for a writ of execution
against Jose M. Aruego, as the real defendant, stating,
FINAL VERDICT: Lower Court Judgment is set aside and Nullified. "plaintiff's counsel and the Sheriff of Manila discovered
that there is no such entity as University Publishing Co., Inc.,"
registered in the Securities and Exchange Commission.
Can Aruego invoke the doctrine of corporation by estoppel
against the plaintiff making the University Publishing liable and not
him personally?
NO. The corporation-by-estoppel doctrine has not been
invoked. At any rate, the same is inapplicable here. One who has
induced another to act upon his willful misrepresentation that a
corporation was duly organized and existing under the law,
cannot thereafter set up against his victim the principle of
corporation by estoppel.
FACTS:
Mariano A. Albert sued University Publishing Co., Inc.
University Publishing (defendant), through Jose M. Aruego,
its President, entered into a contract with Mariano Albert
(plaintiff).
University Publishing had thereby agreed to pay Albert
P30,000.00 for the exclusive right to publish his revised
Commentaries on the Revised Penal Code and for his share
in previous sales of the book's first edition.
University Publishing had undertaken to pay in eight HELD & RATIO:

quarterly installments of P3,750.00. 18. NO.
It was stipulated in the contract that upon failure to pay one The corporation-by-estoppel doctrine has not been
installment would render the rest due. Defendant failed to invoked. At any rate, the same is inapplicable here.
pay the second installment.
Hence, this present action. Aruego represented a non-existent entity and
induced not only the plaintiff but even the court
Facts related to the topic Corporation by Estoppel to believe in such representation. He signed the
Doctrine: contract as "President" of "University Publishing
CFI Manila renders judgment in favor of the plaintiff and Co., Inc.," stating that this was "a corporation
against the defendant the University Publishing Co., Inc., duly organized and existing under the laws of
ordering the defendant to pay the administrator Justo R. the Philippines," and obviously misled plaintiff
Albert (since Albert while case was on trial), the sum of (Mariano A. Albert) into believing the same.
P23,000.00 with legal rate of interest.
CFI Manila ordered issuance of an execution writ against One who has induced another to act upon his
University Publishing Co., Inc. willful misrepresentation that a corporation was
However, plaintiff petitioned for a writ of execution duly organized and existing under the law,
against Jose M. Aruego, as the real defendant, stating, cannot thereafter set up against his victim the
"plaintiff's counsel and the Sheriff of Manila discovered principle of corporation by estoppel.
that there is no such entity as University Publishing Co.,
Inc.," registered in the Securities and Exchange 19. YES.
Commission. A person acting or purporting to act on behalf of a
Now, plaintiff countered by filing a petition to dismiss corporation which has no valid existence assumes
because Jose M. Aruego is not a party to this case. And not such privileges and obligations and becomes
being a party to the case, he was not therefore given his day personally liable for contracts entered into or for
on court or due process. other acts performed as such agent."
ISSUES: FINAL VERDICT: PREMISES CONSIDERED, the order appealed

7. Whether or not defendant can invoke the doctrine of from is hereby set aside and the case remanded ordering the lower
corporation by estoppel against the plaintiff. court to hold supplementary proceedings for the purpose of carrying
(note that if the defendant can invoke the doctrine of the judgment into effect against University Publishing Co., Inc. and/or
corporation by estoppel against the plaintiff herein, the latter Jose M. Aruego. So ordered.
cannot proceed against Aruego since it is the University
Publishing which must be held liable as a separate juridical
personality.)
8. Whether or not Aruego can be held personally liable.
19. ASIA BANKING CORPORATION v. STANDARD HELD & RATIO:

PRODUCTS, CO., INC. 20. NO, defendant Standard Products‘ contention is
Corporation by Estoppel without merit.
a. Defendant‘s Contention: At trial, plaintiff Asia
CASE: Banking failed to prove affirmatively the
Asia Banking sued Standard Products for the balance on a corporate existence of the parties and that
promissory note made by SP. On the note, SP addressed it to Asia the court erred in finding that the parties
Banking and signed as SP. SP appealed the case and contended were corporations with juridical personality.
that during the trial, AB failed to prove affirmatively the corporate b. General Rule: In the absence of fraud a
existence of the parties so the lower court erred in finding that the person who has contracted or otherwise
parties were corporations with juridical personality. The SC ruled that dealt with an association in such a way as to
in the absence of fraud or if its existence is not attacked, the general recognize and in effect admit its legal
rule is that a corporate body is estopped to deny its corporate existence as a corporate body is thereby
existence in any action dealing with contracts. SP is further estopped estopped to deny its corporate existence in
by having recognized the corporate existence of both parties through any action leading out of or involving such
the making of the PN in AB‘s favor and having already made partial contract or dealing, unless its existence is
payments. Under the circumstances, it was unnecessary for AB to attacked for cause which have arisen since
present other evidence of the corporate existence of both parties and making the contract or other dealing relied
there is no reason to make an exception out of the general rule. on as an estoppel and this applies to foreign
as well as to domestic corporations.
c. The defendant having recognized the
FACTS: corporate existence of the plaintiff by making
This action is brought to recover the sum of P24,736.47, the a promissory note in its favor and making
balance due on a promissory note. partial payments on the same is therefore
Main contents of the promissory note: estopped to deny said plaintiff's corporate
o ―On demand, after date we promise to pay to the existence.
Asia Banking Corporation, or order, the sum of thirty- d. Consequently, it is also estopped from
seven thousand seven hundred fifty-seven and denying its own corporate existence. Under
22/100 pesos…‖ these circumstances it was unnecessary for
o Signature: THE STANDARD PRODUCTS CO., INC. the plaintiff to present other evidence of the
by (Sgd.) GEORGE H. SEAVER by President corporate existence of either of the parties. It
The lower court rendered judgment in favor of Asia Banking may be noted that there is no evidence
for the sum demanded in the complaint. This is an appeal by showing circumstances taking the case out
Standard Products. of the rules stated.
ISSUES: FINAL VERDICT: The judgment appealed from is affirmed.

9. Whether or not the lower court erred in finding that the
parties were corporations with juridical personality.
20. G.R. No. 84197 July 28, 1989 (implying that he was acting on his own name and merely induced
PIONEER INSURANCE & SURETY CORPORATION, petitioner, respondents to contribute money), it was clear that even Lim himself
vs. never intended to become partners despite his representations. No
THE HON. COURT OF APPEALS, BORDER MACHINERY & partnership was formed after the failure to incorporate the proposed
HEAVY EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M. SAL Corp..
MAGLANA and JACOB S. LIM, respondents.
FACTS:
(petition most relevant to the topic) G.R. No. 84157 July 28, 1989 In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was
JACOB S. LIM, petitioner, engaged in the airline business as owner-operator of
vs. Southern Air Lines (SAL) a single proprietorship.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY
CORPORATION, BORDER MACHINERY and HEAVY EQUIPMENT On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines
CO., INC,, FRANCISCO and MODESTO CERVANTES and (JDA) and Lim entered into and executed a sales contract
CONSTANCIO MAGLANA, respondents. (Exhibit A) for the sale and purchase of two (2) DC-3A
SUMMARY: Type aircrafts and one (1) set of necessary spare parts
Lim induced Border Machinery and Heavy Equipment Company, Inc. for the total agreed price of US $109,000.00 to be paid in
(Bormaheco), Francisco and Modesto Cervantes (Cervanteses) and installments.
Constancio Maglana (respondents in both petitions) to contribute
money into the purchase of aircrafts and for the formation of a On May 22, 1965, Pioneer Insurance and Surety Corporation
corporation on the representation that he was expanding his airline (Pioneer, petitioner in G.R. No. 84197) as surety executed
business. The corporation was never set-up by Lim. After purchasing and issued its Surety Bond No. 6639 (Exhibit C) in favor of
the aircrafts from a Japanese corporation on instalment, secured by JDA, in behalf of its principal, Lim, for the balance price of
surety agreements with Pioneer, Lim executed a chattel mortgage in the aircrafts and spare parts.
favour of Pioneer (acting on his own name). When Lim failed to pay,
Pioneer foreclosed on the aircrafts, prompting Bormaheco, It appears that Border Machinery and Heavy Equipment
Cervanteses, and Maglana to file counterclaims for the recovery of Company, Inc. (Bormaheco), Francisco and Modesto
the money they contributed to the purchase the aircrafts. Lim Cervantes (Cervanteses) and Constancio Maglana
claimed that even though no corporation was set up, a (respondents in both petitions) contributed some funds
PARTNERSHIP inter se was formed between them, thus the money used in the purchase of the above aircrafts and spare
contributed formed part of the partnership‘s assets and therefore parts. The funds were supposed to be their
could not be reimbursed. contributions to a new corporation proposed by Lim to
expand his airline business. [they were lured and enticed
The SC affirmed the decision of the appellate court ordering Lim to by Lim to be supposed incorporators in this new corporation,
reimburse the money contributed by Bormaheco, Maglana, and the SAL]
Cervanteses, finding against Lim‘s contention because Bormaheco, o They executed two (2) separate indemnity
Maglana and Cervantes never intended to contribute in order to be agreements (Exhibits D-1 and D-2) in favor of
partners, but rather were only induced by the idea of becoming Pioneer, one signed by Maglana and the other jointly
incorporators for a new corp. (which failed to materialize); added to signed by Lim for SAL, Bormaheco and the
the fact that petitioner Lim himself claimed to never have received Cervanteses.
funds from the respondents when it was in fact proven that he did
o The indemnity agreements stipulated that the In their Answers, Maglana, Bormaheco and the Cervanteses
indemnitors principally agree and bind themselves filed cross-claims against Lim alleging that they were not
jointly and severally to indemnify and hold and save privies to the contracts signed by Lim and, by way of
harmless Pioneer from and against any/all damages, counterclaim, sought for damages for being exposed to
losses, costs, damages, taxes, penalties, charges litigation and for recovery of the sums of money they
and expenses of whatever kind and nature which advanced to Lim for the purchase of the aircrafts in question.
Pioneer may incur in consequence of having
become surety upon the bond/note and to pay, RTC: After trial on the merits, a decision was rendered
reimburse and make good to Pioneer, its successors holding Lim liable to pay Pioneer but dismissed Pioneer's
and assigns, all sums and amounts of money which complaint against all other defendants.
it or its representatives should or may pay or cause
to be paid or become liable to pay on them of CA: the appellate court modified the trial court's decision in
whatever kind and nature. that the plaintiffs (Pioneer) complaint against all the
defendants was dismissed. In all other respects the trial
On June 10, 1965, Lim doing business under the name court's decision was affirmed.
and style of SAL executed in favor of Pioneer as deed of
chattel mortgage as security for the latter's suretyship in o the appellate court's findings resulted to ordering
favor of the former. It was stipulated therein that Lim Lim to reimburse certain amounts given by the
transfer and convey to the surety the two aircrafts. The respondents to the petitioner as their contributions to
deed (Exhibit D) was duly registered with the Office of the the intended corporation.
Register of Deeds of the City of Manila and with the Civil o Lim countered that even though the corporation
Aeronautics Administration pursuant to the Chattel Mortgage (SAL) he proposed to Maglana and the Cervanteses
Law and the Civil Aeronautics Law (Republic Act No. 776), was not set-up, a partnership inter se was formed,
respectively. hence, he is not liable to reimburse them as the
money they gave to Lim are contributions to the
Lim defaulted on his subsequent installment payments partnership.
prompting JDA to request payments from the surety. ISSUE: Whether or not the failure to set-up the corporation Lim
Pioneer paid a total sum of P298,626.12. proposed still had the effect of creating a partnership inter se?
--Generally yes, but considering the circumstance that
Pioneer then filed a petition for the extrajudicial Bormaheco, Maglana and Cervantes never intended to contribute in
foreclosure of the said chattel mortgage before the order to be partners, but rather were only induced by the idea of
Sheriff of Davao City. The Cervanteses and Maglana, becoming incorporators for a new corp.; added to the fact that
however, filed a third party claim alleging that they are co- petitioner Lim himself claimed to never have received funds from the
owners of the aircrafts, respondents when it was in fact proven that he did (implying that he
was acting on his own name and merely induced respondents to
On July 19, 1966, Pioneer filed an action for judicial contribute money), NO PARTNERSHIP WAS FORMED.
foreclosure with an application for a writ of preliminary
attachment against Lim and respondents, the Cervanteses,
Bormaheco and Maglana.
RULING: between the parties; thus, one who takes no part except to
A.General Principle: subscribe for stock in a proposed corporation which is never
While it has been held that as between themselves the rights legally formed does not become a partner with other
of the stockholders in a defectively incorporated association subscribers who engage in business under the name of the
should be governed by the supposed charter and the laws of pretended corporation, so as to be liable as such in an action
the state relating thereto and not by the rules governing for settlement of the alleged partnership and contribution
partners (Cannon v. Brush Electric Co., 54 A. 121, 96 Md. (Ward v. Brigham, 127 Mass. 24).
446, 94 Am. S.R. 584), it is ordinarily held that persons who A partnership relation between certain stockholders and
attempt, but fail, to form a corporation and who carry on other stockholders, who were also directors, will not be
business under the corporate name occupy the position of implied in the absence of an agreement, so as to make the
partners inter se (Lynch v. Perryman, 119 P. 229, 29 Okl. former liable to contribute for payment of debts illegally
615, Ann. Cas. 1913A 1065). contracted by the latter (Heald v. Owen, 44 N.W. 210, 79
Thus, where persons associate themselves together under Iowa 23). (Corpus Juris Secundum, Vol. 68, p. 464).
articles to purchase property to carry on a business, and
their organization is so defective as to come short of creating C.No partnership was formed between Lim, Maglana, and the
a corporation within the statute, they become in legal effect Cervanteses
partners inter se, and their rights as members of the In his answer, the petitioner denied having received any
company to the property acquired by the company will be amount from respondents Bormaheco, the Cervanteses
recognized (Smith v. Schoodoc Pond Packing Co., 84 A. and Maglana. The trial court and the appellate court,
268,109 Me. 555; Whipple v. Parker, 29 Mich. 369). however, found through Exhibit 58, that the petitioner
received the amount of P151,000.00 representing the
Example: Where certain persons associated themselves as participation of Bormaheco and Atty. Constancio B. Maglana
a corporation for the development of land for irrigation in the ownership of the subject airplanes and spare parts.
purposes, and each conveyed land to the corporation, and The record shows that defendant Maglana gave P75,000.00
two of them contracted to pay a third the difference in the to petitioner Jacob Lim thru the Cervanteses.
proportionate value of the land conveyed by him, and no
stock was ever issued in the corporation, it was treated as a It is therefore clear that the petitioner never had the intention
trustee for the associates in an action between them for an to form a corporation with the respondents despite his
accounting, and its capital stock was treated as partnership representations to them. This gives credence to the cross-
assets, sold, and the proceeds distributed among them in claims of the respondents to the effect that they were
proportion to the value of the property contributed by each induced and lured by the petitioner to make contributions to
(Shorb v. Beaudry, 56 Cal. 446). a proposed corporation which was never formed because
the petitioner reneged on their agreement.
B.Exception:
However, such a relation does not necessarily exist, for No de facto partnership was created among the parties
ordinarily persons cannot be made to assume the relation of which would entitle the petitioner to a reimbursement of the
partners, as between themselves, when their purpose is that supposed losses of the proposed corporation. The record
no partnership shall exist (London Assur. Corp. v. Drennen, shows that the petitioner was acting on his own and not in
Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed. 688), and it behalf of his other would-be incorporators in transacting the
should be implied only when necessary to do justice sale of the airplanes and spare parts.
21. LIM TONG LIM, vs. PHILIPPINE FISHING GEAR

FINAL VERDICT: INDUSTRIES, INC.
WHEREFORE, the instant petitions are DISMISSED. The Corporation by Estoppel, liability becomes that of general partners
questioned decision of the Court of Appeals is AFFIRMED.
CASE:
Antonio Chua and Peter Yao had a contract with Philippine
Fishing Gear regarding sale of fishing nets under the name of
―Ocean Quest Fishing Corp‖, and representing that they are in a
business with petitioner Lim. Chua and Yao did not pay the fishing
nets, and were thus sued and issued a Writ of Preliminary
attachment (Lim was also sued and issued the writ along with Chua
and Yao). Lim denied his own liability stating that only Chua and Yao
should be liable, since they are the only ones represented in ―Ocean
Quest Fishing Corp‖ in the contract regarding the fishing nets. Ocean
Quest, however, is not a corporation as it did not comply with SEC
requirements. The court ruled that there is Corporation by estoppel.
Although there is no corporation, Chua, Lim and Yao are liable to a
third person as general partners. Lim is also liable, since there is a
partnership between the three (they agreed to bind themselves to
contribute money and share in proceeds, as evidenced by a
compromise agreement between them), and even though he is not
represented in the contract with Philippine Fishing, he nevertheless
benefited in that transaction.
FACTS:
Acting on behalf of "Ocean Quest Fishing Corporation,"
Antonio Chua and Peter Yao entered into a Contract dated
February 7, 1990, for the purchase of fishing nets of various
sizes from the Philippine Fishing Gear Industries, Inc.. They
claimed that they were engaged in a business venture with
Petitioner Lim Tong Lim, who however was not a signatory
to the agreement.
The total price of the nets amounted to P532,045. Four
hundred pieces of floats worth P68,000 were also sold to the
Corporation.
The buyers, however, failed to pay for the fishing nets and
the floats; hence, respondent filed a collection suit against
Chua, Yao and Petitioner Lim Tong Lim with a prayer for a
writ of preliminary attachment. (Note: Ocean Quest Fishing
is not a corporation since the requirements to SEC to form a any such ostensible corporation is sued on any transaction entered
corp were not complied) by it as a corporation or on any tort committed by it as such, it shall
Lower court issued a Writ of Preliminary Attachment, which not be allowed to use as a defense its lack of corporate personality.
the sheriff enforced by attaching the fishing nets on board
F/B Lourdes which was then docked at the Fisheries Port, Even if the ostensible corporate entity is proven to be legally
Navotas, Metro Manila. Trial court maintained the Writ, nonexistent, a party may be estopped from denying its
andordered the sale of the fishing nets at a public auction. corporate existence.
Philippine Fishing Gear Industries won the bidding and And as it is an elementary principle of law that a person who
deposited with the said court the sales proceeds of
acts as an agent without authority or without a principal is
P900,000. It also held Chua, Yao, and Lim as general
himself regarded as the principal, possessed of all the right
partners and jointly liable to pay Philippine Fishing.
and subject to all the liabilities of a principal
Trial court based their decision on a Compromise agreement
a person acting or purporting to act on behalf of a
between Chua, Yao and Lim. In said compromise
corporation which has no valid existence assumes such
agreement, parties agreed on sale of vessels and nets, as
privileges and obligations and becomes personally liable for
well as division of proceeds between the three. (compromise
contracts entered into or for other acts performed as such
agreement happened before transaction with Philippine
agent.
Fishing, such is an evidence that there is a partnership since
The doctrine of corporation by estoppel may apply to the
the beginning, as resolved in one issue of the case)
alleged corporation and to a third party. In the first instance,
Note partnership: By a contract of partnership, two or more
an unincorporated association, which represented itself to be
persons bind themselves to contribute money, property or a corporation, will be estopped from denying its corporate
industry to a common fund with the intention of dividing the
capacity in a suit against it by a third person who relied in
profits among themselves (Article 1767, New Civil Code).” good faith on such representation. It cannot allege lack of
CA concurred that petitioner Lim was a partner of Chua and Yao in a
personality to be sued to evade its responsibility for a
fishing business and may thus be held liable as a such for the fishing
contract it entered into and by virtue of which it received
nets and floats purchased by and for the use of the partnership.
advantages and benefits. (Estoppel on the corporation)
On the other hand, a third party who, knowing an association
ISSUES:
to be unincorporated, nonetheless treated it as a corporation
Whether or not under the doctrine of corporation by estoppel,
and received benefits from it, may be barred from denying its
liability may be imputed to Lim
corporate existence in a suit brought against the alleged
corporation. In such case, all those who benefited from the
HELD & RATIO:
transaction made by the ostensible corporation, despite
knowledge of its legal defects, may be held liable for
YES. Under the doctrine of estoppel, Lim, Yao and Chua are all
contracts they impliedly assented to or took advantage of.
liable to Philippine Fisheries, according to Section 21 of the
(Estoppel on third person)
Corporation Code
In the case at bar, Petitioner contests such his, insisting that
“Sec. 21. Corporation by estoppel. - All persons who assume to act only those who dealt in the name of the ostensible
as a corporation knowing it to be without authority to do so shall be corporation should be held liable. Since his name does not
liable as general partners for all debts, liabilities and damages appear on any of the contracts and since he never directly
incurred or arising as a result thereof: Provided however, That when transacted with the respondent corporation, ergo, he cannot
be held liable. However, petitioner benefited from the use 22. Halley v. Printwell, Inc
of the nets found inside F/B Lourdes, the boat which has G.R. No. 157549; May 30, 2011
earlier been proven to be an asset of the partnership. Trust Fund Doctrine
Clearly, under the law on estoppel, those acting on behalf of
a corporation and those benefited by it, knowing it to be CASE:
without valid existence, are held liable as general partners. Halley was an incorporator and original director of Business
Media Philippines, Inc. (BMPI). BMPI commissioned Printwell for the
printing of the magazine Philippines Inc. that BMPI published and
sold. BMPI placed with Printwell several orders on credit, evidenced
by invoices and delivery receipts. Since BMPI was unable to pay still
the remaining balance of their transaction, Printwell sued BMPI for
the collection of the unpaid balance. Printwell imp leaded as
defendants the original stockholders and incorporators, including
Halley, to recover on their unpaid subscriptions. Both RTC and CA
ruled in favour of Printwell. Halley contends that the trust fund
doctrine was inapplicable in this case because she had already fully
paid her subscriptions to the capital stock of BMPI. She thus insists
that both lower courts erred in disregarding the evidence on the
complete payment of the subscription, like receipts, income tax
returns, and relevant financial statements.
The relevant issues in this case are a) whether or not
Halley should be held personally liable to Printwell, Inc; and b)
whether or not CA erred in applying the Trust Fund Doctrine in
the case at bar. Regarding the first issue, SC ruled that Halley is
personally liable to Printwell. The court held that corporate
personality is not to be used to foster injustice. Halley’s personal
liability, together with that of her codefendants, remained because
the CA found her and the other defendant stockholders to be in
charge of the operations of BMPI at the time the unpaid obligation
was transacted and incurred.
On the second issue, SC held that CA correctly applied
the Trust Fund Doctrine. The Trust Fund Doctrine enunciates that
subscriptions to the capital of a corporation constitute a fund to which
creditors have a right to look for satisfaction of their claims and that
the assignee in insolvency can maintain an action upon any unpaid
stock subscription in order to realize assets for the payment of its
debts. SC clarified that the trust fund doctrine is not limited to
reaching the stockholder’s unpaid subscriptions. The scope of
the doctrine when the corporation is insolvent encompasses
not only the capital stock, but also other property and assets
generally regarded in equity as a trust fund for the payment of irregularity in the issuance of the Official Receipts and observing
corporate debts. All assets and property belonging to the that the defendants had used BMPI‘s corporate personality to
corporation held in trust for the benefit of creditors that were evade payment and create injustice.
distributed or in the possession of the stockholders, regardless - Applying the trust fund doctrine, the lower courts declared
of full payment of their subscriptions, may be reached by the the defendant stockholders, including Halley liable to
creditor in satisfaction of its claim. SC further stated that to make Printwell pro rata.
out a prima facie case in a suit against stockholders of an insolvent
corporation to compel them to contribute to the payment of its debts ISSUES:
by making good unpaid balances upon their subscriptions, it is only 1. whether or not Halley should be held personally liable to
necessary to establish that the stockholders have not in good Printwell, Inc
faith paid the par value of the stocks of the corporation. In civil 2. Whether or not CA erred in applying the trust fund doctrine
cases, the party who pleads payment has the burden of proving it. In 3. whether or not the stockholders are only pro rata liable for the
other words, the debtor bears the burden of showing with legal debt (based on the proportion to their shares in the capital stock
certainty that the obligation has been discharged by payment. In the of BMPI) and therefor, Halley is personally liable only in the
case at bar, Halley failed to discharge her burden. Hence, applying amount of P149,955.65.
the Trust Fund Doctrine in the case at bar, Halley was liable for
the corporate obligation of BMPI by virtue of her subscription being
still unpaid. Printwell, as BMPI’s creditor had a right to reach her
unpaid subscription in satisfaction of its claim. RATIO:
1. Yes, Halley should be held personally liable to Printwell, Inc.
FACTS: SC ruled that corporate personality is not to be used to
• The Parties: foster injustice.
- Halley was an incorporator and original director of Business • Printwell impleaded the petitioner and the other stockholders of
Media Philippines, Inc. (BMPI). BMPI for two reasons, namely: (a) to reach the unpaid
- Printwell, Inc. is engaged in commercial and industrial printing. subscriptions because it appeared that such subscriptions were
• BMPI commissioned Printwell for the printing of the magazine the remaining visible assets of BMPI; and (b) to avoid
Philippines, Inc. (together with wrappers and subscription cards) multiplicity of suits.
that BMPI published and sold. - In view of the unpaid subscriptions, BMPI failed to pay
- In the period from October 11, 1988 until July 12, 1989, BMPI appellee of its liability, hence appellee in order to protect its
placed with Printwell several orders on credit, evidenced by right can collect from the appellants stockholders regarding
invoices and delivery receipts totalling P316,342.76. their unpaid subscriptions. To deny Printwell from recovering
from Halley and the other BMPI stockholders would place
• Considering that BMPI paid onlyP25,000.00,Printwell sued BMPI Printwell in a limbo on where to assert their right to collect
for the collection of the unpaid balance of P291,342.76 in the
from BMPI since the stockholders who are appellant herein
RTC.
are availing the defense of corporate fiction to evade
• Printwell amended the complaint in order to implead as
payment of its obligations
defendants all the original stockholders and incorporators,
including Halley, to recover on their unpaid subscriptions. • Although a corporation has a personality separate and distinct
from those of its stockholders, directors, or officers, such
• Both RTC and CA ruled in favor of Printwell. Both rejected the separate and distinct personality is merely a fiction created by
allegation of payment in full of the subscriptions in view of an
law for the sake of convenience and to promote the ends of
justice. The corporate personality may be disregarded, and the • SC Ruling:

individuals composing the corporation will be treated as - The Trust Fund Doctrine enunciates that subscriptions to
individuals, if the corporate entity is being used as a cloak or the capital of a corporation constitute a fund to which
cover for fraud or illegality; as a justification for a wrong; as an
creditors have a right to look for satisfaction of their claims
alter ego, an adjunct, or a business conduit for the sole benefit and that the assignee in insolvency can maintain an action
of the stockholders. upon any unpaid stock subscription in order to realize assets
• Even though nowhere in Printwell‘s amended complaint or in for the payment of its debts.
the testimonies Printwell offered can it be read or inferred from o SC clarified that the trust fund doctrine is not limited
that Halley was instrumental in persuading BMPI to renege on to reaching the stockholder‘s unpaid subscriptions.
its obligation to pay; or that she induced Printwell to extend the The scope of the doctrine when the corporation
credit accommodation by misrepresenting the solvency of BMPI is insolvent encompasses not only the capital
to Printwell, Halley‘s personal liability, together with that of her stock, but also other property and assets
codefendants, remained because the CA found her and the generally regarded in equity as a trust fund for
other defendant stockholders to be in charge of the operations the payment of corporate debts. All assets and
of BMPI at the time the unpaid obligation was transacted and property belonging to the corporation held in trust
incurred. for the benefit of creditors that were distributed or in
• Where the corporation was under the control of its stockholders the possession of the stockholders, regardless of
who ran-up quite a high obligation with the printing company full payment of their subscriptions, may be reached
knowing fully well that their corporation was not in a position to by the creditor in satisfaction of its claim.
pay for the accounts, and where in fact they personally o Also, under the trust fund doctrine, a corporation
benefited from the operations of the company to which they has no legal capacity to release an original
never paid their subscription in full, would constitute piercing of subscriber to its capital stock from the obligation of
the veil to allow the creditor to be able to collect what otherwise paying for his shares, in whole or in part, without a
were debts owed by the company which has no visible assets valuable consideration, or fraudulently, to the
and has ceased all operations. prejudice of creditors. The creditor is allowed to
maintain an action upon any unpaid subscriptions
2. CA correctly applied the Trust Fund Doctrine. Halley was and thereby steps into the shoes of the corporation
liable pursuant to the trust fund doctrine for the corporate for the satisfaction of its debt.
obligation of BMPI by virtue of her subscription being still unpaid. - To make out a prima facie case in a suit against stockholders
Printwell, as BMPI‘s creditor had a right to reach her unpaid
of an insolvent corporation to compel them to contribute to
subscription in satisfaction of its claim.
the payment of its debts by making good unpaid balances
• Petitioner’s Contention:
upon their subscriptions, it is only necessary to establish
- Halley argues that the trust fund doctrine was inapplicable that the stockholders have not in good faith paid the par
because she had already fully paid her subscriptions to the value of the stocks of the corporation.
capital stock of BMPI. o In civil cases, the party who pleads payment has
- She thus insists that both lower courts erred in disregarding the burden of proving it. In other words, the
the evidence on the complete payment of the subscription, debtor bears the burden of showing with legal
like receipts, income tax returns, and relevant financial certainty that the obligation has been
statements. discharged by payment.
o In the case at bar, Halley failed to discharge her 23.ONG YONG, et al. vs.
burden. DAVID TIU,…,RD of Pasay, SEC, Masagana Telamart, Inc. (2003)
o Although a receipt is the best evidence of the Violation of terms in Subscription agreement as not a legal ground
fact of payment, it is not conclusive, but merely for rescission (Trust Fund Doctrine)
presumptive; nor is it exclusive evidence,
considering that parole evidence may also CASE:
establish the fact of payment.
o The petitioner‘s mere submission of the receipt The Tiu Group (original owners of FLADC which was putting up
issued in exchange of the check did not Masagana Citimall) was having trouble continuing the mall project
satisfactorily establish her allegation of full payment due to a P190M loan from PNB. The Tius asked the Ongs to join
of her subscription. Indeed, she could not even FLADC to continue the construction of the mall in 1994. Contribution
inform the trial court about the identity of her drawee of Ong was mainly in cash which amounted to around P170M in total
bank, and about whether the check was cleared and plus P20M loan extended to Tiu to pay-off the P190M loan of FLADC
its amount paid to BMPI. In fact, she did not present from PNB. However, in 1996, Tiu unilaterally rescinded the contract
the check itself. because they alleged that Ong was preventing them from performing
o The income tax return (ITR) and statement of assets their obligations as officers (2 of the Tius were VP and Treasurer of
and liabilities of BMPI, albeit presented, had no the Board) and that Ong was refusing to give the FLADC shares to
bearing on the issue of payment of the subscription the other companies of Tiu (Masagana Telamart) which they used to
because they did not by themselves prove payment. buy other shares in FLADC to match the 100M shares of Ong in the
company. Tiu went to the SEC to seek confirmation of the rescission
o Nor did the petitioner present any certificate of stock
of the Pre-Subscription Agreement (PSA) which was granted but
issued by BMPI to her. Such a certificate covering
assailed by Ong. It went to the CA and CA said rescission was the
her subscription might have been a reliable
proper remedy since both were in pari delicto (Ong was refusing to
evidence of full payment of the subscriptions,
give office to the Tius while Tius didn‘t turn over original FLADC
considering that under Section 65 of the Corporation
funds to the new management – Ong). CA ordered for the liquidation
Code a certificate of stock issues only to a
of the company so that the contributions can be returned and debts
subscriber who has fully paid his subscription.
can be paid off. The issue is w/n the unilateral rescission was
proper? SC, in its initial decision in 2002, said it was proper affirming
3. No, the liability of stockholders for corporate debts is up to
the CA decision. But in the present decision (2003), SC held it was
the extent of their unpaid subscription.
not proper since Tiu was not the proper party to seek for rescission
as the PSA was between Ong and FLADC (as a separate
• The prevailing rule is that a stockholder is personally liable for personality) and that rescission is not a ground for distribution of
the financial obligations of the corporation to the extent of his assets. And ordering such rescission would violate the Trust Fund
unpaid subscription. In view of the petitioner‘s unpaid Doctrine (explained in ratio).
subscription being worth P262,500.00, she was liable up to that
amount.
FINAL VERDICT: the petition for review on certiorari is DENIED.

FACTS:
The Ong Group was invited by Tiu Group to invest in First
Landlink Asia Development Corp. (FLADC) to help continue
the putting up of Masagana Citimall (Taft Ave.). It was at risk Ong group and Tiu group appealed to SEC En Banc which
of being unfinished because the FLADC (originally owned by reversed the order and reinstated the previous order of SEC
Tiu Group) had financial debts to PNB. (the first one). So Ong appealed to CA.
They formally entered into a Pre-Subscription Agreement CA affirmed but modified the decision by saying:
where they both agreed to maintain equal shareholdings with o Ong and Tiu groups have to liquidate FLADC (Ong
Ongs investing cash (subscribe to 1M shares at P100 per - for the 100M cash contribution; Tiu – 45M original
share=P100M) while Tius to invest property (also had to cash contribution, properties; Whatever remains to
acquire more shares to match the 1M of Ong). Also, they transfer to Tiu Group; FLADC to pay Ong group
agreed that 6 directors were to be nominated from Ong; 5 P70M and interest if there‘s delay; Tiu to pay 20M to
from Tiu. President and Sec. from Ong group while VP and Ong group)
Treas. from Tiu group. o They cannot anymore work harmoniously as both
The plan was to for FLADC‘s P190M debt with PNB to be have violated the Pre-Subscription Agreement
paid by the P100M cash brought in by Ong group plus other  Ongs prevented Tius to perform their
funds of FLADC. However, in lieu of the funds from FLADC, functions
the Ong group had to pay P70M more and even loaned  Tius also were at fault by not turning over
P20M to Tiu for them to pay the remaining. entire amount of FLADC‘s funds to Ongs,
The Tius, however, unilaterally rescinded the Pre- etc.
Subscription agreement due to a controversy with the Ongs There was a first SC case in 2002 which ruled:
such as: o Specific performance and rescission was the proper
o Ongs refusal to credit the shares of Masagana remedy
Telamart, Inc. in FLADC (which the Tius owned and  Ongs argued that breach was slight (not
had used that company to buy their contribution in providing offices for Tius; principal objective
shares) (Ongs defense: Deed of Assignments were of entering into the Pre-Subscription
incomplete) agreement was to raise the P190M that Tius
o Ongs refusal to credit the shares of Tiu group needed to pay for FLADC‘s loan with PNB;
o The Tius who were elected VP and Treasurer were they were in pari delicto with Tius so
prohibited from performing their duties rescission cannot apply; and cash and
Tius brought the matter to SEC which confirmed the contributions were already possessed by
rescission (cancelled the 1M shares of Ongs; FLADC to FLADC, an innocent third party)
return 170M to the Ongs; submit amended articles of Motion for reconsideration was filed by Ong
incorporation; Ong to return the properties to FLADC; Court took cognizance since no ruling was made on Ongs
Register of deeds to issue new certificates of title and cancel other arguments in previous case and there were other
annotation about Pre-Subscription agreement; David Tiu to matters not clearly ruled upon.
pay Ongs 20M representing his loan from them)
Upon motion of the Ongs, SEC Hearing Officer released an ISSUES:
order saying that the P70M is a liability of FLADC 10. W/N Tius can validly unilaterally rescind the Pre-
(advancements made by defendants) and not a premium on Subscription Agreement?
capital stock so the interest paid is legal and valid.
NOTE: SC previously ruled that rescission was proper iii. Distribution cannot be made ―to prevent
(affirming CA decision) in 2002 but was overturned in this 2003 further squabbles‖(as ruled by the CA) since
decision. this would disturb ―corporate peace‖.
iv. The effect of rescission in this case would
HELD & RATIO: be an unauthorized distribution of capital
24. NO. assets and property (since rescission is not
a. It was FLADC that contracted with the Ongs for the a ground for distribution).
agreement (Tius in their official capacity). Thus, a v. Tius are claiming that their petition is for a
civil case filed by Tiu (in personal capacity) will not decrease of capital stock (and therefore
prosper. valid as a ground for distribution, as per Art.
i. Tiu argued that the Pre-Subscription 122 of Corp. Code). But SC said they didn‘t
agreement (PSA) included a shareholder‘s comply with the requirements for decreasing
agreement between them and Ong which capital stock (such as majority vote of Board
became the consideration for the PSA but of Directors).
SC said it cannot be interpreted as c. SC also ruled that they were not in pari delicto and
suggesting interdependence and this is a Ongs acts were relatively tame compared to those of
new argument of Tiu. Tius acts of not surrendering FLADC funds and the
ii. SC said Tiu again had no legal personality Ongs were right in refusing to credit shares to Tius
to ask for rescission. other companies that bought shares.
iii. Ruling otherwise would allow any d. And the Masagana Mall would not have prospered
stockholder to just ask for rescission and were it not for the timely infusion of the P190M by
distribute assets of the company. the Ongs in 1994.
b. Rescission would violate the Trust Fund Doctrine e.
and the procedures for valid distribution of assets FINAL VERDICT: Petition for Confirmation of Rescission of
and property under the Corporation Code. Agreement is DISMISSED. SC 2002 decision is REVERSED.
i. Trust Fund Doctrine = subscriptions to
capital stock of a corporation constitute a
fund which creditors have a right to look for
the satisfaction of their claims.
ii. Distribution of corporate capital is allowed
only in 3 instances:
1. Amendment of Articles of
Incorporation to reduce authorized
capital stock
2. Purchase of redeemable shares by
the corporation, regardless of
existence of unrestricted retained
earnings
3. Dissolution and liquidation of the
corporation

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Corp Law Case Digests | Atty.

CORPLAW CASE DIGEST SET 2 1. General Credit Corp. vs. Alsons

the result of Central Bank’s Operations Examination conducted on … FACTS:

• BET was incorporated into a family corporation — Bela‘s Export ISSUES:

capacity as president and proprietor, field supervisor and

Petitioner Yutivo is a domestic corporation, organized under the

Respondents: CA and Metropolitan Bank and Trust Co. (Metrobank)

A complaint was instituted by Metrobank against Jacinto and Inland

certificate of public convenience and necessity to

― While a franchise cannot take effect until the grantee

― A grant of a street franchise is valid although the corporation is

15. CARAM, JR. v. COURT OF APPEALS HELD & RATIO:

Barretto was described as "the moving spirit." The finding of the

FINAL VERDICT: WHEREFORE, the petition is granted. The CASE:

ISSUES: W/N Far Eastern Lumber and Commercial, Co., Inc. is a

HELD & RATIO: No, Far Eastern is a not de facto corporation.

University Publishing had undertaken to pay in eight HELD & RATIO:

ISSUES: FINAL VERDICT: PREMISES CONSIDERED, the order appealed

8. Whether or not Aruego can be held personally liable.

19. ASIA BANKING CORPORATION v. STANDARD HELD & RATIO:

ISSUES: FINAL VERDICT: The judgment appealed from is affirmed.

21. LIM TONG LIM, vs. PHILIPPINE FISHING GEAR

justice. The corporate personality may be disregarded, and the • SC Ruling:

FINAL VERDICT: the petition for review on certiorari is DENIED.

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