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G.R. No.

76801 August 11, 1995

LOPEZ REALTY, INC., AND ASUNCION LOPEZ GONZALES, petitioners,

vs. Asuncion Lopez Gonzales

FLORENTINA FONTECHA, ET AL., AND THE NATIONAL LABOR


RELATIONS COMMISSION, respondents.
7831

shares
PUNO, J.:

2
The controversy at bench arose from a complaint filed by private
respondents,1 namely, Florentina Fontecha, Mila Refuerzo, Marcial
Mamaril, Perfecto Bautista, Edward Mamaril, Marissa Pascual and Teresita Lopez Marquez
Allan Pimentel, against their employer Lopez Realty Incorporated
(petitioner) and its majority stockholder, Asuncion Lopez Gonzales,
for alleged non-payment of their gratuity pay and other benefits.2
7830
The case was docketed as NLRC-NCR Case No. 2-2176-82.

shares
Lopez Realty, Inc., is a corporation engaged in real estate business,
while petitioner Asuncion Lopez Gonzales is one of its majority
shareholders. Her interest in the company vis-a-vis the other
shareholders is as follows: 3
Arturo F. Lopez 1

7830 share

shares 6

4 Leo Rivera

Rosendo de Leon 1

4 share

shares Except for Arturo F. Lopez, the rest of the shareholders also sit as
members of the Board of Directors.

5
As found by the Labor arbiter.3 sometime in 1978, Arturo Lopez
submitted a proposal relative to the distribution of certain assets of
Benjamin Bernardino petitioner corporation among its three (3) main shareholders. The
proposal had three (3) aspects, viz: (1) the sale of assets of the
company to pay for its obligations; (2) the transfer of certain assets Resolved, as it is hereby resolved that the gratuity (pay) of the
of the company to its three (3) main shareholders, while some other employees be given as follows:
assets shall remain with the company; and (3) the reduction of
employees with provision for their gratuity pay. The proposal was
deliberated upon and approved in a special meeting of the board of (a) Those who will be laid off be given the full amount of
directors held on April 17, 1978. gratuity;

It appears that petitioner corporation approved two (2) resolutions (b) Those who will be retained will receive 25% of their gratuity
providing for the gratuity pay of its employees, viz: (a) Resolution (pay) due on September 1, 1981, and another 25% on January 1,
No. 6, Series of 1980, passed by the stockholders in a special 1982, and 50% to be retained by the office in the meantime.
meeting held on September 8, 1980, resolving to set aside, twice a (emphasis supplied)
year, a certain sum of money for the gratuity pay of its retiring
employees and to create a Gratuity Fund for the said contingency;
and (b) Resolution No. 10, Series of 1980, setting aside the amount
Private respondents were the retained employees of petitioner
of P157,750.00 as Gratuity Fund covering the period from 1950 up
corporation. In a letter, dated August 31, 1981, private respondents
to 1980.
requested for the full payment of their gratuity pay. Their request
was granted in a special meeting held on September 1, 1981. The
relevant, portion of the minutes of the said board meeting reads:
Meanwhile, on July 28, 1981, board member and majority
stockholder Teresita Lopez Marquez died.

In view of the request of the employees contained in the letter


dated August 31, 1981, it was also decided that, all those remaining
On August 17, 1981, except for Asuncion Lopez Gonzales who was employees will receive another 25% (of their gratuity) on or before
then abroad, the remaining members of the Board of Directors, October 15, 1981 and another 25% on or before the end of
namely: Rosendo de Leon, Benjamin Bernardino, and Leo Rivera, November, 1981 of their respective gratuity.
convened a special meeting and passed a resolution which reads:
At that, time, however, petitioner Asuncion Lopez Gonzales was still
abroad. Allegedly, while she was still out of the country, she sent a
cablegram to the corporation, objecting to certain matters taken up On July 23, 1984, Labor Arbiter Raymundo R. Valenzuela rendered
by the board in her absence, such as the sale of some of the assets judgment in favor of private respondents.5
of the corporation. Upon her return, she flied a derivative suit with
the Securities and Exchange Commission (SEC) against majority
shareholder Arturo F. Lopez. Petitioners appealed the adverse ruling of the Labor arbiter to
public respondent National Labor Relations Commission. The appeal
focused on the alleged non-ratification and non-approval of the
Notwithstanding the "corporate squabble" between petitioner assailed August 17, 1981 and September 1, 1981 Board Resolutions
during the Annual Stockholders' Meeting held on March 1, 1982.
Asuncion Lopez Gonzales and Arturo Lopez, the first two (2)
installments of the gratuity pay of private respondents Florentina Petitioners further insisted that the payment of the gratuity to some
Fontecha, Mila Refuerzo, Marcial Mamaril and Perfecto Bautista of the private respondents was a mere "mistake" on the part of
were paid by petitioner corporation. petitioner corporation since, pursuant to Resolution No. 6, dated
September 8, 1980, and Resolution No. 10, dated October 6, 1980,
said gratuity pay should be given only upon the employees'
retirement.
Also, petitioner corporation had prepared the cash vouchers and
checks for the third installments of gratuity pay of said private
respondents (Florentina Fontecha, Mila Refuerzo, Marcial Mamaril
and Perfecto Bautista). For some reason, said vouchers were On November 20, 1985, public respondent, through its Second
Division, dismissed the appeal for lack of merit, the pertinent
cancelled by petitioner Asuncion Lopez Gonzales.
portion of which states:6

Likewise, the first, second and third installments of gratuity pay of


the rest of private respondents, particularly, Edward Mamaril, We cannot agree with the contention of respondents (petitioners')
Marissa Pascual and Allan Pimentel, were prepared but cancelled by that the Labor Arbiter a quo committed abuse of discretion in his
petitioner Asuncion Lopez Gonzales. Despite private respondents' decision.
repeated demands for their gratuity pay, corporation refused to pay
the same.4
Respondents' (petitioners') contention that, the two (2) resolutions was evident between Arturo Lopez and Asuncion Gonzales.
dated 17 August 1981 and 1 September 1981 . . . which were not
approved in the annual stockholders meeting had no force and
effect, deserves scant consideration. The records show that the
stockholders did not revoke nor nullify these resolutions granting The respondents' (petitioners') contention of a mistake to have
gratuities to complainants. been committed in granting the first two (2) installments of
gratuities to complainants Perfecto Bautista, Florentina Fontecha,
Marcial Mamaril and Mila Refuerzo, (has) no legal leg to stand on.
On record, it appears that the said resolutions arose from the The record is bereft of any evidence that the Board of Directors had
legitimate creation of the Board of Directors who steered the passed a resolution nor is there any minutes of whatever nature
corporate affairs of the corporation. . . . proving mistakes in the award of damages (sic).

Respondents' (petitioners') allegation that the three (3) With regard to the award of service incentive leave and others, the
complainants, Mila E. Refuerzo, Marissa S. Pascual and Edward Commission finds no cogent reason to disturb the appealed
Mamaril, who had resigned after filing the complaint on February 8, decision.
1982, were precluded to (sic) receive gratuity because the said
resolutions referred to only retiring employee could not be given
credence. A reading of Resolutions dated 17 August 1981 and 1 We affirm.
September 1981 disclosed that there were periods mentioned for
the payment of complainants' gratuities. This disproves
respondents' argument allowing gratuities upon retirement of
WHEREFORE, let the appealed decision be, as it is hereby,
employees. Additionally, the proposed distribution of assets (Exh. C-
AFFIRMED and let the instant appeal (be) dismissed for lack of
1) filed by Mr. Arturo F. Lopez also made mention of gratuity pay, " .
merit.
. . (wherein) an employee who desires to resign from the LRI will be
given the gratuity pay he or she earned." (Emphasis supplied) Let us
be reminded, too, that the complainants' resignation was not
voluntary but it was pressurized (sic) due to "power struggle" which SO ORDERED.
Petitioners reconsidered.7 In their motion for reconsideration, Lopez Gonzales was not duly notified of the said special meetings.
petitioners assailed the validity of the board resolutions passed on They aver, further, that said board resolutions were not ratified by
August 17, 1981 and September 1, 1981, respectively, and claimed, the stockholders of the corporation pursuant to Section 28 1/2 of
for the first time, that petitioner Asuncion Lopez Gonzales was not the Corporation Law (Section 40 of the Corporation Code). They also
notified of the special board meetings held on said dates. The insist that the gratuity pay must be given only to the retiring
motion for reconsideration was denied by the Second Division on employees, to the exclusion of the retained employees or those
July 24, 1986. who voluntarily resigned from their posts.

On September 4, 1986, petitioners filed another motion for At the outset, we note that petitioners allegation on lack of notice
reconsideration. Again, the motion was denied by public to petitioner Asuncion Lopez Gonzales was raised for the first time
respondent in a Minute Resolution dated November 19, 1986.8 in the in their motion for reconsideration filed before public
respondent National Labor Relations Commission, or after said
public respondent had affirmed the decision of the labor arbiter. To
Hence, the petition. As prayed for, we issued a Temporary stress, in their appeal before the NLRC, petitioners never raised the
Restraining Order,9 enjoining public respondent from enforcing or issue of lack of notice to Asuncion Lopez Gonzales. The appeal dealt
executing the Resolution, dated November 20, 1986 (sic), in NLRC- with (a) the failure of the stockholders to ratify the assailed
NCR-2-2176-82. 10 resolutions and (b) the alleged "mistake" committed by petitioner
corporation in giving the gratuity pay to some of its employees who
are yet to retire from employment.

The sole issue is whether or not public respondent acted with grave
abuse of discretion in holding that private respondents are entitled
to receive their gratuity pay under the assailed board resolutions In their comment, 11 private respondents maintain that the new
dated August 17, 1951 and September 1, 1981. ground of lack of notice was not raised before the labor arbiter,
hence, petitioners are barred from raising the same on appeal.
Private respondents claim, further, that such failure on the part of
petitioners, had deprived them the opportunity to present evidence
Petitioners contend that the board resolutions passed on August 17,
that, in a subsequent special board meeting held on September 29,
1981 and September 1, 1981, granting gratuity pay to their retained
1981, the subject resolution dated September 1, 1981, was
employees, are ultra vires on the ground that petitioner Asuncion
unanimously approved by the board of directors of petitioner directors in subsequent legal meeting, or impliedly, by the
corporation, including petitioner Asuncion Lopez Gonzales. 12 corporation's subsequent course of conduct. Thus, in one case, 17 it
was held:

Indeed, it would be offensive to the basic rules of fair play and


justice to allow petitioners to raise questions which have not been . . . In 2 Fletcher, Cyclopedia of the Law of Private Corporations
passed upon by the labor arbiter and the public respondent NLRC. It (Perm. Ed.) sec. 429, at page 290, it is stated:
is well settled that questions not raised in the lower courts cannot,
be raised for the first time on appeal.13 Hence, petitioners may not
invoke any other ground, other than those it specified at the labor Thus, acts of directors at a meeting which was illegal because of
arbiter level, to impugn the validity of the subject resolutions. want of notice may be ratified by the directors at a subsequent legal
meeting, or by the corporations course of conduct

We now come to petitioners' argument that the resolutions passed ...


by the board of directors during the special meetings on August 1,
1981, and September 1, 1981, were ultra vires for lack of notice.
Fletcher, supra, further states in sec. 762, at page 1073-1074:

The general rule is that a corporation, through its board of directors,


should act in the manner and within the formalities, if any, Ratification by directors may be by an express resolution or vote to
prescribed by its charter or by the general law. 14 Thus, directors that effect, or it may be implied from adoption of the act,
must act as a body in a meeting called pursuant to the law or the acceptance or acquiescence. Ratification may be effected by a
corporation's by-laws, otherwise, any action taken therein may be resolution or vote of the board of directors expressly ratifying
questioned by any objecting director or shareholder. 15 previous acts either of corporate officers or agents; but it is not
necessary, ordinarily, to show a meeting and formal action by the
board of directors in order to establish a ratification.
Be that as it may, jurisprudence 16 tells us that an action of the
board of directors during a meeting, which was illegal for lack of
notice, may be ratified either expressly, by the action of the
In American Casualty Co., v. Dakota Tractor and Equipment Co., 234 We hold, therefore, that the conduct of petitioners after the
F. Supp. 606, 611 (D.N.D. 1964), the court stated: passage of resolutions dated August, 17, 1951 and September 1,
1981, had estopped them from assailing the validity of said board
resolutions.
Moreover, the unauthorized acts of an officer of a corporation may
be ratified by the corporation by conduct implying approval and
adoption of the act in question. Such ratification may be express or Assuming, arguendo, that there was no notice given to Asuncion
may be inferred from silence and inaction. Lopez Gonzalez during the special meetings held on August 17, 1981
and September 1, 1981, it is erroneous to state that the resolutions
passed by the board during the said meetings were ultra vires. In
In the case at bench, it was established that petitioner corporation legal parlance, "ultra vires" act refers to one which is not within the
did not issue any resolution revoking nor nullifying the board corporate powers conferred by the Corporation Code or articles of
resolutions granting gratuity pay to private respondents. Instead, incorporation or not necessary or incidental in the exercise of the
they paid the gratuity pay, particularly, the first two (2) installments powers so conferred. 19
thereof, of private respondents Florentina Fontecha, Mila Refuerzo,
Marcial Mamaril and Perfecto Bautista.
The assailed resolutions before us cover a subject which concerns
the benefit and welfare of the company's employees. To stress,
Despite the alleged lack of notice to petitioner Asuncion Lopez providing gratuity pay for its employees is one of the express
Gonzales at that time the assailed resolutions were passed, we can powers of the corporation under the Corporation Code, hence,
glean from the records that she was aware of the corporation's petitioners cannot invoke the doctrine of ultra vires to avoid any
obligation under the said resolutions. More importantly, she liability arising from the issuance the subject resolutions. 20
acquiesced thereto. As pointed out by private respondents,
petitioner Asuncion Lopez Gonzales affixed her signature on Cash
Voucher Nos. 81-10-510 and 81-10-506, both dated October 15, We reject petitioners' allegation that private respondents, namely,
1981, evidencing the 2nd installment of the gratuity pay of private Mila Refuerzo, Marissa Pascual and Edward Mamaril who resigned
respondents Mila Refuerzo and Florentina Fontecha. 18 from petitioner corporation after the filing of the case, are
precluded from receiving their gratuity pay. Pursuant to board
resolutions dated August 17, 1981 and September 1, 1981,
respectively, petitioner corporation obliged itself to give the G.R. No. L-4935 May 28, 1954
gratuity pay of its retained employees in four (4) installments: on
September 1, 1981; October 15, 1981; November, 1981; and
January 1, 1982. Hence, at the time the aforenamed private J. M. TUASON & CO., INC., represented by it Managing PARTNER,
respondents tendered their resignation, the aforementioned private GREGORIA ARANETA, INC., plaintiff-appellee,
respondents were already entitled to receive their gratuity pay.
vs.

QUIRINO BOLAÑOS, defendant-appellant.


Petitioners try to convince us that the subject resolutions had no
force and effect in view of the non-approval thereof during the
Annual Stockholders' Meeting held on March 1, 1982. To strengthen
Araneta and Araneta for appellee.
their position, petitioners cite section 28 1/2 of the Corporation Law
(Section 40 of the Corporation Code). We are not persuaded. Jose A. Buendia for appellant.

The cited provision is not applicable to the case at bench as it refers REYES, J.:
to the sale, lease, exchange or disposition of all or substantially all
of the corporation's assets, including its goodwill. In such a case, the
action taken by the board of directors requires the authorization of
This is an action originally brought in the Court of First Instance of
the stockholders on record.
Rizal, Quezon City Branch, to recover possesion of registered land
situated in barrio Tatalon, Quezon City.

It will be observed that, except far Arturo Lopez, the stockholders of


petitioner corporation also sit as members of the board of directors.
Plaintiff's complaint was amended three times with respect to the
Under the circumstances in field, it will be illogical and superfluous
extent and description of the land sought to be recovered. The
to require the stockholders' approval of the subject resolutions.
original complaint described the land as a portion of a lot registered
Thus, even without the stockholders' approval of the subject
in plaintiff's name under Transfer Certificate of Title No. 37686 of
resolutions, petitioners are still liable to pay private respondents'
the land record of Rizal Province and as containing an area of 13
gratuity pay.
hectares more or less. But the complaint was amended by reducing
the area of 6 hectares, more or less, after the defendant had the latter a monthly rent of P132.62 from January, 1940, until he
indicated the plaintiff's surveyors the portion of land claimed and vacates the land, and also to pay the costs.
occupied by him. The second amendment became necessary and
was allowed following the testimony of plaintiff's surveyors that a
portion of the area was embraced in another certificate of title, Appealing directly to this court because of the value of the property
which was plaintiff's Transfer Certificate of Title No. 37677. And still involved, defendant makes the following assignment or errors:
later, in the course of trial, after defendant's surveyor and witness,
Quirino Feria, had testified that the area occupied and claimed by
defendant was about 13 hectares, as shown in his Exhibit 1, plaintiff
I. The trial court erred in not dismissing the case on the ground that
again, with the leave of court, amended its complaint to make its
the case was not brought by the real property in interest.
allegations conform to the evidence.

II. The trial court erred in admitting the third amended complaint.
Defendant, in his answer, sets up prescription and title in himself
thru "open, continuous, exclusive and public and notorious
possession (of land in dispute) under claim of ownership, adverse to
the entire world by defendant and his predecessor in interest" from III. The trial court erred in denying defendant's motion to strike.
"time in-memorial". The answer further alleges that registration of
the land in dispute was obtained by plaintiff or its predecessors in
interest thru "fraud or error and without knowledge (of) or interest IV. The trial court erred in including in its decision land not involved
either personal or thru publication to defendant and/or in the litigation.
predecessors in interest." The answer therefore prays that the
complaint be dismissed with costs and plaintiff required to reconvey
the land to defendant or pay its value.
V. The trial court erred in holding that the land in dispute is covered
by transfer certificates of Title Nos. 37686 and 37677.

After trial, the lower court rendered judgment for plaintiff, declaring
defendant to be without any right to the land in question and
Vl. The trial court erred in not finding that the defendant is the true
ordering him to restore possession thereof to plaintiff and to pay
and lawful owner of the land.
joint venture with another where the nature of that venture is in
line with the business authorized by its charter." (Wyoming-Indiana
VII. The trial court erred in finding that the defendant is liable to pay Oil Gas Co. vs. Weston, 80 A. L. R., 1043, citing 2 Fletcher Cyc. of
the plaintiff the amount of P132.62 monthly from January, 1940, Corp., 1082.) There is nothing in the record to indicate that the
until he vacates the premises. venture in which plaintiff is represented by Gregorio Araneta, Inc. as
"its managing partner" is not in line with the corporate business of
either of them.
VIII. The trial court erred in not ordering the plaintiff to reconvey
the land in litigation to the defendant.
Errors II, III, and IV, referring to the admission of the third amended
complaint, may be answered by mere reference to section 4 of Rule
As to the first assigned error, there is nothing to the contention that 17, Rules of Court, which sanctions such amendment. It reads:
the present action is not brought by the real party in interest, that
is, by J. M. Tuason and Co., Inc. What the Rules of Court require is
that an action be brought in the name of, but not necessarily by, the Sec. 4. Amendment to conform to evidence. — When issues not
real party in interest. (Section 2, Rule 2.) In fact the practice is for an raised by the pleadings are tried by express or implied consent of
attorney-at-law to bring the action, that is to file the complaint, in the parties, they shall be treated in all respects, as if they had been
the name of the plaintiff. That practice appears to have been
raised in the pleadings. Such amendment of the pleadings as may be
followed in this case, since the complaint is signed by the law firm of necessary to cause them to conform to the evidence and to raise
Araneta and Araneta, "counsel for plaintiff" and commences with these issues may be made upon motion of any party at my time,
the statement "comes now plaintiff, through its undersigned even of the trial of these issues. If evidence is objected to at the trial
counsel." It is true that the complaint also states that the plaintiff is on the ground that it is not within the issues made by the pleadings,
"represented herein by its Managing Partner Gregorio Araneta, the court may allow the pleadings to be amended and shall be so
Inc.", another corporation, but there is nothing against one
freely when the presentation of the merits of the action will be
corporation being represented by another person, natural or subserved thereby and the objecting party fails to satisfy the court
juridical, in a suit in court. The contention that Gregorio Araneta, that the admission of such evidence would prejudice him in
Inc. can not act as managing partner for plaintiff on the theory that
maintaining his action or defense upon the merits. The court may
it is illegal for two corporations to enter into a partnership is grant a continuance to enable the objecting party to meet such
without merit, for the true rule is that "though a corporation has no evidence.
power to enter into a partnership, it may nevertheless enter into a
that plaintiff is the registered owner of lot No. 4-B-3-C, situate in
barrio Tatalon, Quezon City, with an area of 5,297,429.3 square
Under this provision amendment is not even necessary for the meters, more or less, covered by transfer certificate of title No.
purpose of rendering judgment on issues proved though not 37686 of the land records of Rizal province, and of lot No. 4-B-4,
alleged. Thus, commenting on the provision, Chief Justice Moran situated in the same barrio, having an area of 74,789 square meters,
says in this Rules of Court: more or less, covered by transfer certificate of title No. 37677 of the
land records of the same province, both lots having been originally
registered on July 8, 1914 under original certificate of title No. 735.
Under this section, American courts have, under the New Federal The identity of the lots was established by the testimony of Antonio
Rules of Civil Procedure, ruled that where the facts shown entitled Manahan and Magno Faustino, witnesses for plaintiff, and the
plaintiff to relief other than that asked for, no amendment to the identity of the portion thereof claimed by defendant was
complaint is necessary, especially where defendant has himself established by the testimony of his own witness, Quirico Feria. The
raised the point on which recovery is based, and that the appellate combined testimony of these three witnesses clearly shows that the
court treat the pleadings as amended to conform to the evidence, portion claimed by defendant is made up of a part of lot 4-B-3-C and
although the pleadings were not actually amended. (I Moran, Rules major on portion of lot 4-B-4, and is well within the area covered by
of Court, 1952 ed., 389-390.) the two transfer certificates of title already mentioned. This fact
also appears admitted in defendant's answer to the third amended
complaint.
Our conclusion therefore is that specification of error II, III, and IV
are without merit..
As the land in dispute is covered by plaintiff's Torrens certificate of
title and was registered in 1914, the decree of registration can no
Let us now pass on the errors V and VI. Admitting, though his longer be impugned on the ground of fraud, error or lack of notice
attorney, at the early stage of the trial, that the land in dispute "is to defendant, as more than one year has already elapsed from the
that described or represented in Exhibit A and in Exhibit B enclosed issuance and entry of the decree. Neither court the decree be
in red pencil with the name Quirino Bolaños," defendant later collaterally attacked by any person claiming title to, or interest in,
changed his lawyer and also his theory and tried to prove that the the land prior to the registration proceedings. (Soroñgon vs.
land in dispute was not covered by plaintiff's certificate of title. The Makalintal,1 45 Off. Gaz., 3819.) Nor could title to that land in
evidence, however, is against defendant, for it clearly establishes derogation of that of plaintiff, the registered owner, be acquired by
prescription or adverse possession. (Section 46, Act No. 496.)
Adverse, notorious and continuous possession under claim of Error No. VIII is but a consequence of the other errors alleged and
ownership for the period fixed by law is ineffective against a Torrens needs for further consideration.
title. (Valiente vs. Judge of CFI of Tarlac,2 etc., 45 Off. Gaz., Supp. 9,
p. 43.) And it is likewise settled that the right to secure possession
under a decree of registration does not prescribed. (Francisco vs. During the pendency of this case in this Court appellant, thru other
Cruz, 43 Off. Gaz., 5105, 5109-5110.) A recent decision of this Court counsel, has filed a motion to dismiss alleging that there is pending
on this point is that rendered in the case of Jose Alcantara et al., vs. before the Court of First Instance of Rizal another action between
Mariano et al., 92 Phil., 796. This disposes of the alleged errors V the same parties and for the same cause and seeking to sustain that
and VI. allegation with a copy of the complaint filed in said action. But an
examination of that complaint reveals that appellant's allegation is
not correct, for the pretended identity of parties and cause of action
As to error VII, it is claimed that `there was no evidence to sustain in the two suits does not appear. That other case is one for recovery
the finding that defendant should be sentenced to pay plaintiff of ownership, while the present one is for recovery of possession.
P132.62 monthly from January, 1940, until he vacates the premises.' And while appellant claims that he is also involved in that order
But it appears from the record that that reasonable compensation action because it is a class suit, the complaint does not show that
for the use and occupation of the premises, as stipulated at the such is really the case. On the contrary, it appears that the action
hearing was P10 a month for each hectare and that the area seeks relief for each individual plaintiff and not relief for and on
occupied by defendant was 13.2619 hectares. The total rent to be behalf of others. The motion for dismissal is clearly without merit.
paid for the area occupied should therefore be P132.62 a month. It
is appears from the testimony of J. A. Araneta and witness Emigdio G.R. No. L-15092 May 18, 1962
Tanjuatco that as early as 1939 an action of ejectment had already
been filed against defendant. And it cannot be supposed that
defendant has been paying rents, for he has been asserting all along ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,
that the premises in question 'have always been since time
vs.
immemorial in open, continuous, exclusive and public and notorious
possession and under claim of ownership adverse to the entire BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.
world by defendant and his predecessors in interest.' This
assignment of error is thus clearly without merit.

Tañada, Teehankee and Carreon for plaintiffs-appellants.


Hilado and Hilado for defendant-appellee. No. 11, Acuerdo No. 1) granting further concessions to the planters
over and above those contained in the printed Amended Milling
Contract. The bone of contention is paragraph 9 of this resolution,
REYES, J.B.L., J.: that reads as follows:

Appeal on points of law from a judgment of the Court of First ACTA No. 11
Instance of Occidental Negros, in its Civil Case No. 2603, dismissing SESSION DE LA JUNTA DIRECTIVA
plaintiff's complaint that sought to compel the defendant Milling
Company to increase plaintiff's share in the sugar produced from AGOSTO 20, 1936
their cane, from 60% to 62.33%, starting from the 1951-1952 crop
year.1äwphï1.ñët
xxx xxx xxx

It is undisputed that plaintiffs-appellants, Alfredo Montelibano,


Alejandro Montelibano, and the Limited co-partnership Gonzaga Acuerdo No. 1. — Previa mocion debidamente secundada, la Junta
and Company, had been and are sugar planters adhered to the en consideracion a una peticion de los plantadores hecha por un
defendant-appellee's sugar central mill under identical milling comite nombrado por los mismos, acuerda enmendar el contrato de
contracts. Originally executed in 1919, said contracts were molienda enmendado medientelas siguentes:
stipulated to be in force for 30 years starting with the 1920-21 crop,
and provided that the resulting product should be divided in the
ratio of 45% for the mill and 55% for the planters. Sometime in
xxx xxx xxx
1936, it was proposed to execute amended milling contracts,
increasing the planters' share to 60% of the manufactured sugar
and resulting molasses, besides other concessions, but extending
the operation of the milling contract from the original 30 years to 45 9.a Que si durante la vigencia de este contrato de Molienda
years. To this effect, a printed Amended Milling Contract form was Enmendado, lascentrales azucareras, de Negros Occidental, cuya
drawn up. On August 20, 1936, the Board of Directors of the produccion anual de azucar centrifugado sea mas de una tercera
appellee Bacolod-Murcia Milling Co., Inc., adopted a resolution (Acts parte de la produccion total de todas lascentrales azucareras de
Negros Occidental, concedieren a sus plantadores mejores were made without consideration; that the resolution in question
condiciones que la estipuladas en el presente contrato, entonces was, therefore, null and void ab initio, being in effect a donation
esas mejores condiciones se concederan y por el presente se that was ultra vires and beyond the powers of the corporate
entenderan concedidas a los platadores que hayan otorgado este directors to adopt.
Contrato de Molienda Enmendado.

After trial, the court below rendered judgment upholding the stand
Appellants signed and executed the printed Amended Milling of the defendant Milling company, and dismissed the complaint.
Contract on September 10, 1936, but a copy of the resolution of Thereupon, plaintiffs duly appealed to this Court.
August 10, 1936, signed by the Central's General Manager, was not
attached to the printed contract until April 17, 1937; with the
notation — We agree with appellants that the appealed decisions can not stand.
It must be remembered that the controverted resolution was
adopted by appellee corporation as a supplement to, or further
Las enmiendas arriba transcritas forman parte del contrato de amendment of, the proposed milling contract, and that it was
molienda enmendado, otorgado por — y la Bacolod-Murcia Milling approved on August 20, 1936, twenty-one days prior to the signing
Co., Inc. by appellants on September 10, of the Amended Milling Contract
itself; so that when the Milling Contract was executed, the
concessions granted by the disputed resolution had been already
In 1953, the appellants initiated the present action, contending that incorporated into its terms. No reason appears of record why, in the
three Negros sugar centrals (La Carlota, Binalbagan-Isabela and San face of such concessions, the appellants should reject them or
Carlos), with a total annual production exceeding one-third of the consider them as separate and apart from the main amended
production of all the sugar central mills in the province, had already milling contract, specially taking into account that appellant Alfredo
granted increased participation (of 62.5%) to their planters, and Montelibano was, at the time, the President of the Planters
that under paragraph 9 of the resolution of August 20, 1936, Association (Exhibit 4, p. 11) that had agitated for the concessions
heretofore quoted, the appellee had become obligated to grant embodied in the resolution of August 20, 1936. That the resolution
similar concessions to the plaintiffs (appellants herein). The formed an integral part of the amended milling contract, signed on
appellee Bacolod-Murcia Milling Co., inc., resisted the claim, and September 10, and not a separate bargain, is further shown by the
defended by urging that the stipulations contained in the resolution fact that a copy of the resolution was simply attached to the printed
contract without special negotiations or agreement between the save as modified by its resolution of August 20, 1936; and we are
parties. satisfied that such was also the understanding of appellants herein,
and that the minds of the parties met upon that basis. Otherwise
there would have been no consent or "meeting of the minds", and
It follows from the foregoing that the terms embodied in the no binding contract at all. But the conduct of the parties indicates
resolution of August 20, 1936 were supported by the same causa or that they assumed, and they do not now deny, that the signing of
consideration underlying the main amended milling contract; i.e., the contract on September 10, 1936, did give rise to a binding
the promises and obligations undertaken thereunder by the agreement. That agreement had to exist on the basis of the printed
planters, and, particularly, the extension of its operative period for terms as modified by the resolution of August 20, 1936, or not at all.
an additional 15 years over and beyond the 30 years stipulated in Since there is no rational explanation for the company's assenting to
the original contract. Hence, the conclusion of the court below that the further concessions asked by the planters before the contracts
the resolution constituted gratuitous concessions not supported by were signed, except as further inducement for the planters to agree
any consideration is legally untenable. to the extension of the contract period, to allow the company now
to retract such concessions would be to sanction a fraud upon the
planters who relied on such additional stipulations.

All disquisition concerning donations and the lack of power of the


directors of the respondent sugar milling company to make a gift to
the planters would be relevant if the resolution in question had The same considerations apply to the "void innovation" theory of
embodied a separate agreement after the appellants had already appellees. There can be no novation unless two distinct and
bound themselves to the terms of the printed milling contract. But successive binding contracts take place, with the later designed to
this was not the case. When the resolution was adopted and the replace the preceding convention. Modifications introduced before
additional concessions were made by the company, the appellants a bargain becomes obligatory can in no sense constitute novation in
were not yet obligated by the terms of the printed contract, since law.
they admittedly did not sign it until twenty-one days later, on
September 10, 1936. Before that date, the printed form was no
more than a proposal that either party could modify at its pleasure, Stress is placed on the fact that the text of the Resolution of August
and the appellee actually modified it by adopting the resolution in 20, 1936 was not attached to the printed contract until April 17,
question. So that by September 10, 1936 defendant corporation 1937. But, except in the case of statutory forms or solemn
already understood that the printed terms were not controlling, agreements (and it is not claimed that this is one), it is the assent
and concurrence (the "meeting of the minds") of the parties, and There can be no doubt that the directors of the appellee company
not the setting down of its terms, that constitutes a binding had authority to modify the proposed terms of the Amended Milling
contract. And the fact that the addendum is only signed by the Contract for the purpose of making its terms more acceptable to the
General Manager of the milling company emphasizes that the other contracting parties. The rule is that —
addition was made solely in order that the memorial of the terms of
the agreement should be full and complete.
It is a question, therefore, in each case of the logical relation of the
act to the corporate purpose expressed in the charter. If that act is
Much is made of the circumstance that the report submitted by the one which is lawful in itself, and not otherwise prohibited, is done
Board of Directors of the appellee company in November 19, 1936 for the purpose of serving corporate ends, and is reasonably
(Exhibit 4) only made mention of 90%, the planters having agreed to tributary to the promotion of those ends, in a substantial, and not in
the 60-40 sharing of the sugar set forth in the printed "amended a remote and fanciful sense, it may fairly be considered within
milling contracts", and did not make any reference at all to the charter powers. The test to be applied is whether the act in
terms of the resolution of August 20, 1936. But a reading of this question is in direct and immediate furtherance of the corporation's
report shows that it was not intended to inventory all the details of business, fairly incident to the express powers and reasonably
the amended contract; numerous provisions of the printed terms necessary to their exercise. If so, the corporation has the power to
are alao glossed over. The Directors of the appellee Milling do it; otherwise, not. (Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950, pp.
Company had no reason at the time to call attention to the 266-268)
provisions of the resolution in question, since it contained mostly
modifications in detail of the printed terms, and the only major
change was paragraph 9 heretofore quoted; but when the report As the resolution in question was passed in good faith by the board
was made, that paragraph was not yet in effect, since it was of directors, it is valid and binding, and whether or not it will cause
conditioned on other centrals granting better concessions to their losses or decrease the profits of the central, the court has no
planters, and that did not happen until after 1950. There was no authority to review them.
reason in 1936 to emphasize a concession that was not yet, and
might never be, in effective operation.

They hold such office charged with the duty to act for the
corporation according to their best judgment, and in so doing they
cannot be controlled in the reasonable exercise and performance of
such duty. Whether the business of a corporation should be the appellee Bacolod-Murcia Milling Company is, under the terms of
operated at a loss during depression, or close down at a smaller its Resolution of August 20, 1936, duty bound to grant similar
loss, is a purely business and economic problem to be determined increases to plaintiffs-appellants herein.
by the directors of the corporation and not by the court. It is a well-
known rule of law that questions of policy or of management are
left solely to the honest decision of officers and directors of a WHEREFORE, the decision under appeal is reversed and set aside;
corporation, and the court is without authority to substitute its and judgment is decreed sentencing the defendant-appellee to pay
judgment of the board of directors; the board is the business plaintiffs-appellants the differential or increase of participation in
manager of the corporation, and so long as it acts in good faith its the milled sugar in accordance with paragraph 9 of the appellee
orders are not reviewable by the courts. (Fletcher on Corporations, Resolution of August 20, 1936, over and in addition to the 60%
Vol. 2, p. 390). expressed in the printed Amended Milling Contract, or the value
thereof when due, as follows:

And it appearing undisputed in this appeal that sugar centrals of La


Carlota, Hawaiian Philippines, San Carlos and Binalbagan (which 0,333% to appellants Montelibano for the 1951-1952 crop year, said
produce over one-third of the entire annual sugar production in appellants having received an additional 2% corresponding to said
Occidental Negros) have granted progressively increasing year in October, 1953;
participations to their adhered planter at an average rate of

2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year;
62.333% for the 1951-52 crop year; and to all appellants thereafter —
64.2% for 1952-53; 4.2% for the 1952-1953 crop year;
64.3% for 1953-54; 4.3% for the 1953-1954 crop year;
64.5% for 1954-55; and 4.5% for the 1954-1955 crop year;
63.5% for 1955-56, 3.5% for the 1955-1956 crop year;
with interest at the legal rate on the value of such differential P583,813.59, with interest thereon at the rate of per cent from the
during the time they were withheld; and the right is reserved to date of filing of the complaint, plus an additional amount equivalent
plaintiffs-appellants to sue for such additional increases as they may to 20 per cent of said sum of P538,813.59 as damages by way of
be entitled to for the crop years subsequent to those herein attorney's fees and the costs of action.
adjudged.

G.R. No. L-5377 December 29, 1954


Plaintiffs herein are the minor children of the late Enrico Pirovano
represented by their mother and judicial guardian Estefania R.
Pirovano. They seek to enforce certain resolutions adopted by the
MARIA CLARA PIROVANA ET AL., plaintiffs-appellees, Board of Directors and stockholders of the defendant company
vs. giving to said minor children of the proceeds of the insurance
policies taken on the life of their deceased father Enrico Pirovano
THE DE LA RAMA STEAMSHIP CO., defendant-appellant. with the company as beneficiary. Defendant's main defense is: that
said resolutions and the contract executed pursuant thereto are
ultra vires, and, if valid, the obligation to pay the amount given is
Del Rosario and Garcia for appellant. not yet due and demandable.

Vicente J. Francisco for appellees.


The trial court resolved all the issues raised by the parties in favor of
the plaintiffs and, after considering the evidence, both oral and
documentary, arrived at the following conclusions:

BAUTISTA ANGELO, J.:

First. — That the contract executed between the plaintiffs and the
defendant is a renumerative donation.
This is an appeal from a decision of the Court of First Instance of
Rizal declaring the donation made by the defendant in favor of the
minor children of the late Enrico Pirovano of the proceeds of the
insurance policies taken on his life valid and binding, and ordering Second. — That said contract or donation is not ultra vires, but an
said defendant to pay to said minor children the sum of act executed within the powers of the defendant corporation in
accordance with its articles of incorporation and by laws, sanctioned Seventh. — That due demands were made by the plaintiffs and their
and approved by its Board of Directors and stockholders; and attorneys and these demands were rejected for no justifiable or
subsequently ratified by other subsequent acts of the defendant legal grounds.
company.

The important facts which need to be considered for purposes of


Third. — That the said donation is in accordance with the trend of this appeal may be briefly stated as follows: Defendant is a
modern and more enlightened legislation in its treatment of corporation duly organized in accordance with law with an
questions between labor and capital. authorized capital of P500,000, divided into 5,000 shares, with a par
value of P100 each share. The stockholders were: Esteban de la
Rama, 1,800 shares, Leonor de la Rama, 100 shares, Estefania de la
Fourth. — That the condition mentioned in the donation is null and Rama, 100 shares, and Eliseo Hervas, Tomas Concepcion, Antonio G.
void because it depends on the provisions of Article 1115 of the old Juanco, and Gaudencio Volasote with 5 shares each. Leonor and
Civil Code. Estefania are daughters of Don Esteban, while the rest his
employees. Estefania de la Rama was married to the late Enrico
Pirovano and to them four children were born who are the plaintiffs
in this case.
Fifth. — That if the condition is valid, its non-fulfillment is due to the
desistance of the defendant company from obeying and doing the
wishes and mandates of the majority of the stockholders.
Enrico Pirovano became the president of the defendant company
and under his management the company grew and progressed until
it became a multi-million corporation by the time Pirovano was
Sixth. — That the non-payment of the debt in favor of the National
executed by the Japanese during the occupation. On May 13, 1941,
Development Company is not due to the lack of funds, nor to lack of
the capital stock of the corporation was increased to P2,000,000,
authority, but the desire of the President of the corporation to
after which a 100 per cent stock dividend was declared.
preserve and continue the Government participation in the
Subsequently, or before the outbreak of the war , new stock
company.
dividends of 200 per cent and 33 1/3 per cent were again declared.
On December 4, 1941, the capital stock was once more increased to
P5,000,000. Under Pirovano's management, the assets of the
company grew and increased from an original paid up capital of annum. To secure said bonded indebtedness, all the assets of the
around P240,000 to P15,538,024.37 by September 30, 1941 (Exhibit De la Rama Steamship Co., Inc., and properties of Don Esteban de la
HH). Rama, as well as those of the Hijos de I. de la Rama and Co., Inc., a
sister corporation owned by Don Esteban and his family, were
mortgaged to the National Development Company (Annexes A, B, C,
In the meantime, Don Esteban de la Rama, who practically owned D of Exhibit 3, Deed of Trust). Payments made by the corporation
and controlled the stock of the defendant corporation, distributed under the management of Pirovano reduced this bonded
his shareholding among his five daughters, namely, Leonor, indebtedness to P3,260,855.77.
Estefania, Lourdes, Lolita and Conchita and his wife Natividad
Aguilar so that, at that time, or on July 10, 1946, the stockholding of
the corporation stood as follows: Esteban de la Rama, 869 shares, Upon arrangement made with the National Development Company,
Leonor de la Rama, 3,375 shares, Estefania de la Rama, 3,368 the outstanding bonded indebtedness was converted into non-
shares, Lourdes de la Rama, 3,368 shares, Lolita de la Rama, 3,368 voting preferred shares of stock of the De la Rama company under
shares, Conchita de la Rama, 3,376 shares, and Natividad Aguilar, the express condition that they would bear affixed cumulative
2,136 shares. The other stockholders , namely, Eliseo Hervas, Tomas dividend of 6 per cent per annum and would be redeemable within
Concepcion, Antonio Juanco, and Jose Aguilar, who were merely 15 years (Exhibits 5 and 7). This conversion was carried out on
employees of Don Esteban, were given 40 shares each, while Pio September 23, 1949, when the National Development Company
Pedrosa, Marcial P. Lichauco and Rafael Roces, one share each, executed a "Deed of Termination of Trust and Release of Mortgage"
because they merely represented the National Development in favor of the De la Rama company (Exhibit 6.) The immediate
Company. This Company was given representation in the Board Of effect of this conversion was the released from incumbrance of all
Directors of the corporation because at that time the latter had an the properties Of Don Esteban and of the Hijos de I. de la Rama and
outstanding bonded indebtedness to the National Development Co., Inc., which was apparently favorable to the interests of the De
Company. la Rama company, but, on the other hand, it resulted in the
inconvenience that, as holder of the preferred stock, the National
Development Company, was given to the right to 40 per cent of the
This bonded indebtedness was incurred on February 26, 1940 and membership of the Board of Directors of the De la Rama company,
was in the amount of P7,500.00. The bond held by the National which meant an increase in the representation of the National
Development Company was redeemable within a period of 20 years Development Company from 2 to 4 of the 9 members of said Board
from March 1, 1940,. bearing interest at the rate of 5 per cent per of Directors.
payment of the premiums from year to year. The payments made
on account of these premiums, however, are very small compared
The first resolution granting to the Pirovano children the proceeds to the amount which the Company will now receive as a result of
of the insurance policies taken on his life by the defendant company Mr. Pirovano's death. The President proposed therefore that out of
was adopted by the Board of Directors at a meeting held on July 10, the proceeds of these policies the sum of P400,000 be set aside for
1946, (Exhibit B). This grant was called in the resolution as "Special the minor children of the deceased, said sum of money to be
Payment to Minor Heirs of the late Enrico Pirovano". Because of its convertible into 4,000 shares of the stock of the Company, at par, or
direct hearing on the issues involved in this case, said resolution is
1,000 shares for each child. This proposal, explained the President
hereunder reproduced in toto: as being made by him upon suggestion of President Roxas, but, he
added, that he himself was very much in favor of it also. On motion
of Miss Leonor de la Rama duly seconded by Mrs. Lourdes de la
SPECIAL PAYMENT TO MINORS HEIRS OF THE LATE ENRICO Rama de Osmeña, the following resolution was, thereupon,
PIROVANO unanimously approved:

The President stated that the principal purpose for which the Whereas, the late Enrico Pirovano, President and General Manager
meeting had been called was to discuss the advisability of making of the De la Rama Steamship Company, died in Manila sometime in
some form of compensation to the minor heirs of the late Enrico November, 1944:
Pirovano, former President and General Manager of the Company.
As every member of the Board knows, said the President, the late
Enrico Pirovano who was largely responsible for the very successful Whereas, the said Enrico Pirovano was largely responsible for the
development of the activities of the Company prior to war was rapid and very successful development of the activities of thus
killed by the Japanese in Manila sometime in 1944 leaving as his company;
only heirs four minor children, Maria Carla, Esteban, Enrico and
John Albert. Early in 1941, explained the President, the Company
had insured the life of Mr. Pirovano for a million pesos. Following
the occupation of the Philippines by Japanese forces the Company Whereas, early in 1941 this company insured the life of said Enrico
was unable to pay the premiums on those policies issued by Filipino Pirovano in various Philippine and American Life Insurance
companies and these policies had lapsed. But with regards to the companies for the total sum of P1,000,000;
York Office of the De la Rama Steamship Co., Inc. had kept up
deceased, to wit: Esteban, Maria Carla, Enrico and John Albert, all
surnamed Pirovano, to obtain 1,000 shares at par;
Whereas, the said Enrico Pirovano is survived by his widow,
Estefania Pirovano and four minor children, to wit: Esteban, Maria
Carla, Enrico and John Albert, all surnamed Pirovano;lawphil.net
Resolved, further, that in view of the fact that under the provisions
of the indenture with the National Development Company, it is
necessary that action herein proposed to be confirmed by the Board
Whereas, said Enrico Pirovano left practically nothing to his heirs
of Directors of that company, the Secretary is hereby instructed to
and it is but fit proper that this company which owes so much to the send a copy of this resolution to the proper officers of the National
deceased should make some provision for his children; Development Company for appropriate action. (Exhibit B)

Whereas, this company paid premium on Mr. Pirovano's life The above resolution, which was adopted on July 10, 1946, was
insurance policies for a period of only 4 years so that it will receive submitted to the stockholders of the De la Rama company at a
from the insurance companies sums of money greatly in excess of meeting properly convened, and on that same date, July 10, 1946,
the premiums paid by this company. the same was duly approved.

Be it resolved, That out of the proceeds to be collected from the life It appears that, although Don Esteban and the Members of his
insurance policies on the life of the late Enrico Pirovano, the sum of family were agreeable to giving to the Pirovano children the amount
P400,000 be set aside for equal division among the 4 minor children of P400,000 out of the proceeds of the insurance policies taken on
of the deceased, to wit: Esteban, Maria Carla, Enrico and John the life of Enrico Pirovano, they did not realize that when they
Albert, all surnamed Pirovano, which sum of money shall be provided in the above referred two resolutions that said Amount
convertible into shares of stock of the De la Rama Steamship
should be paid in the form of shares of stock, they would be actually
Company, at par and, for that purpose, that the present registered giving to the Pirovano children more than what they intended to
stockholders of the corporation be requested to waive their give. This came about when Lourdes de la Rama, wife of Sergio
preemptive right to 4,000 shares of the unissued stock of the Osmeña, Jr., showed to the latter copies of said resolutions and
company in order to enable each of the 4 minor heirs of the asked him to explain their import and meaning, and it was value
then that Osmeña explained that because the value then of the
shares of stock was actually 3.6 times their par value, the donation Esteban, adopted a resolution changing the form of the donation to
their value, the donation, although purporting to be only P400,00, the Pirovano children from a donation of 4,000 shares of stock as
would actually amount to a total of P1,440,000. He further originally planned into a renunciation in favor of the children of all
explained that if the Pirovano children would given shares of stock the company's "right, title, and interest as beneficiary in and to the
in lieu of the amount to be donated, the voting strength of the five proceeds of the abovementioned life insurance policies", subject to
daughters of Don Esteban in the company would be adversely the express condition that said proceeds should be retained by the
affected in the sense that Mrs. Pirovano would be adversely company as a loan drawing interest at the rate of 5 per cent per
affected in the sense that Mrs. Pirovano would have a voting power annum and payable to the Pirovano children after the company
twice as much as that of her sisters. This caused Lourdes de la Rama "shall have first settled in full the balance of its present remaining
to write to the secretary of the corporation, Atty. Marcial Lichauco, bonded indebtedness in the sum of approximately P5,000,000"
asking him to cancel the waiver she supposedly gave of her pre- (Exhibit C). This resolution was concurred in by the representatives
emptive rights. Osmeña elaborated on this matter at the annual of the National Development Company. The pertinent portion of the
meeting of the stockholders held on December 12, 1946 but at said resolution reads as follows:
meeting it was decided to leave the matter in abeyance pending
further action on the part of the members of the De la Rama family.
Be resolved, that out of gratitude to the late Enrico Pirovano this
Company renounce as it hereby renounces, all of his right, title, and
Osmeña, in the meantime, took up the matter with Don Esteban interest as beneficiary in and to the proceeds of the
and, as consequence, the latter, on December 30, 1946, addressed abovementioned life insurance policies in favor of Esteban, Maria
to Marcial Lichauco a letter stating, among other things, that "in Carla, Enrico and John Albert, all surnamed Pirovano, subject to the
view of the total lack of understanding by me and my daughters of terms and conditions herein after provided;
the two Resolutions abovementioned, namely, Directors' and
Stockholders' dated July 10, 1946, as finally resolved by the majority
of the Stockholders and Directors present yesterday, that you That the proceeds of said insurance policies shall be retained by the
consider the abovementioned resolutions nullified." (Exhibit CC). Company in the nature of a loan drawing interest at the rate of 5
per cent annum from the date of receipt of payment by the
Company from the various insurance companies above-mentioned
On January 6, 1947, the Board of Directors of the De la Rama until the time the time the same amounts are paid to the minor
company, as a consequence of the change of attitude of Don heirs of Enrico Pirovano previously mentioned;
have first settled in full its bonded indebtedness, said interest may
be paid to the Pirovano children "whenever the company is in a
That all amounts received from the above-mentioned policies shall position to met said obligation" (Exhibit D), and on February 26,
be divided equally among the minors heirs of said Enrico Pirovano; 1948, Mrs. Pirovano executed a public document in which she
formally accepted the donation (Exhibit H). The Dela Rama company
took "official notice" of this formal acceptance at a meeting held by
That the company shall proceed to pay the proceeds of said its Board of Directors on February 26, 1948.
insurance policies plus interests that may have accrued to each of
the heirs of the said Enrico Pirovano or their duly appointed
representatives after the Company shall have first settled in full the In connection with the above negotiations, the Board of Directors
balance of its present remaining bonded indebtedness in the sum of
took up at its meeting on July 25, 1949, the proposition of Mrs.
the approximately P5,000,000. Pirovano to buy the house at New Rochelle, New York, owned by
the Demwood Realty, a subsidiary of the De la Rama company at its
original costs of $75,000, which would be paid from the funds held
The above resolution was carried out by the company and Mrs. in trust belonging to her minor children. After a brief discussion
Estefania R. Pirovano, the latter acting as guardian of her children, relative to the matter, the proposition was approved in a resolution
by executing a Memorandum Agreement on January 10, 1947 and adopted on the same date.
June 17, 1947, respectively, stating therein that the De la Rama
Steamship Co., Inc., shall enter in its books as a loan the proceeds of
the life insurance policies taken on the life of Pirovano totalling The formal transfer was made in an agreement signed on
S321,500, which loan would earn interest at the rate of 5 per cent September 5, 1949 by Mrs. Pirovano, as guardian of her children,
per annum. Mrs. Pirovano, in executing the agreement, acted with and by the De la Rama company, represented by its new General
the express authority granted to her by the court in an order dated Manager, Sergio Osmeña, Jr. The transfer of this property was
March 26, 1947. approved by the court in its order of September 20,
1949.lawphil.net

On June 24, 1947, the Board of Directors approved a resolution


providing therein that instead of the interest on the loan being On September 13, 1949, or two years and 3 months after the
payable, together with the principal, only after the company shall donation had been approved in the various resolutions herein
above mentioned, the stockholders of the De la Rama company Directors at its meting on July 12, 1950, on which occasion the
formally ratified the donation (Exhibit E), with certain clarifying president recommend that other legal ways be studied whereby the
modifications, including the resolution approving the transfer of the donation could be carried out. On September 14, 1950, another
Demwood property to the Pirovano children. The clarifying meeting was held to discuss the propriety of the donation. At this
modifications are quoted hereunder: meeting the president expressed the view that, since the
corporation was not authorized by its charter to make the donation
to the Pirovano children and the majority of the stockholders was in
1. That the payment of the above-mentioned donation shall favor of making provision for said children, the manner he believed
not be affected until such time as the Company shall have first duly this could be done would be to declare a cash dividend in favor of
liquidated its present bonded indebtedness in the amount of the stockholders in the exact amount of the insurance proceeds and
P3,260,855.77 with The National Development Company, or fully thereafter have the stockholders make the donation to the children
redeemed the preferred shares of stock in the amount which shall in their individual capacity. Notwithstanding this proposal of the
be issued to the National Development Company in lieu thereof; president, the board took no action on the matter, and on March 8,
1951, at a stockholders' meeting convened on that date the
majority of the stockholders' voted to revoke the resolution
approving the donation to the Pirovano children. The pertinent
2. That any and all taxes, legal fees, and expenses in any way
portion of the resolution reads as follows:
connected with the above transaction shall be chargeable and
deducted from the proceeds of the life insurance policies
mentioned in the resolutions of the Board of Directors. (Exhibit E)
Be it resolved, as it is hereby resolved, that in view of the failure of
compliance with the above conditions to which the above donation
was made subject, and in view of the opinion of the Securities and
Sometime in March 1950, the President of the corporation, Sergio
Exchange Commissioner, the stockholders revoke, rescind and
Osmeña, Jr., addressed an inquiry to the Securities and Exchange
annul, as they do thereby revoke, rescind and annul, its ratification
Commission asking for opinion regarding the validity of the
and approval on September 13, 1949 of the aforementioned
donation of the proceeds of the insurance policies to the Pirovano
resolution of the Board of Directors of January 6, 1947, as amended
children. On June 20, 1950 that office rendered its opinion that the
on June 24, 1947. (Exhibit T)
donation was void because the corporation could not dispose of its
assets by gift and therefore the corporation acted beyond the scope
of its corporate powers. This opinion was submitted to the Board of
In view of the resolution declaring that the corporation failed to court?; (2) IN the affirmative case, has that donation been perfected
comply with the condition set for the effectivity of the donation and before its rescission or nullification by the stockholders of the
revoking at the same time the approval given to it by the corporation on March 8, 1951?; (3) Can defendant corporation give
corporation, and considering that the corporation can no longer set by way of donation the proceeds of said insurance policies to the
aside said donation because it had no longer set aside said donation minor children of the late Enrico Pirovano under the law or its
because it had long been perfected and consummated, the minor articles of corporation, or is that donation an ultra vires act?; and
children of the late Enrico Pirovano, represented by their mother (4) has the defendant corporation, by the acts it performed
and guardian, Estefania R. de Pirovano, demanded the payment of subsequent to the granting of the donation, deliberately prevented
the credit due them as of December 31, 1951, amounting to the fulfillment of the condition precedent to the payment of said
P564,980.89, and this payment having been refused, they instituted donation such that it can be said it has forfeited its right to demand
the present action in the Court of First Instance of Rizal wherein its fulfillment and has made the donation entirely due and
they prayed that the be granted an alternative relief of the demandable?
following tenor: (1) sentencing defendant to pay to the plaintiff the
sum of P564,980.89 as of December 31, 1951, with the
corresponding interest thereon; (2) as an alternative relief, We will discuss these issues separately.
sentencing defendant to pay to the plaintiffs the interests on said
sum of P564,980.89 at the rate of 5 per cent per annum, and the
sum of P564,980.89 after the redemption of the preferred shares of
1. To determine the nature of the grant made by the
the corporation held by the National Development Company; and
defendant corporation to the minor children of the late Enrico
(3) in any event, sentencing defendant to pay the plaintiffs damages
Pirovano, we do not need to go far nor dig into the voluminous
in the amount of not less than 20 per cent of the sum that may be
record that lies at the bottom of this case. We do not even need to
adjudged to the plaintiffs, and the costs of action.
inquire into the interest which has allegedly been shown by
President Roxas in the welfare of the children of his good friend
Enrico Pirovano. Whether President Roxas has taken the initiative in
The only issues which in the opinion of the court need to be the move to give something to said children which later culminated
determined in order to reach a decision in this appeal are: (1) Is the in the donation now in dispute, is of no moment for the fact is that,
grant of the proceeds of the insurance policies taken on the life of from the mass of evidence on hand, such a donation has been given
the late Enrico Pirovano as embodied in the resolution of the Board the full indorsement and encouraging support by Don Esteban de la
of Directors of defendant corporation adopted on January 6, 1947 Rama who was practically the owner of the corporation. We only
and June 24, 1947 a remunerative donation as found by the lower
need to fall back to accomplish this purpose on the several Whereas, the said Enrico Pirovano was largely responsible for the
resolutions of the Board of Directors of the corporations containing rapid and very successful development of the activities of this
said grant for they clearly state the reasons and purposes why the company;
donation has been given.

Whereas, early in 1941 this company insured the life of said Enrico
Before we proceed further, it is convenient to state here in passing Pirovano in various Philippine and American Life Insurance
that, before the Board of Directors had approved its resolution of companies for the total sum of P1,000,000;
January 6, 1947, as later amended by another resolution adopted
on June 24, 1947, the corporation had already decided to give to
the minor children of the late Enrico Pirovano the sum of P400,000 Whereas, the said Enrico Pirovano is survived by his widow,
out of the proceeds of the insurance policies taken on his life in the Estefania Pirovano and 4 minor children, to wit: Esteban, Maria
form of shares, and that when this form was considered Carla, Enrico and John Albert, all surnamed Pirovano;
objectionable because its result and effect would be to give to said
children a much greater amount considering the value then of the
stock of the corporation, the Board of Directors decided to amend
Whereas, the said Enrico Pirovano left practically nothing to his
the donation in the form and under the terms stated in the
heirs and it is but fit and proper that this company which owes so
aforesaid resolutions. Thus, in the original resolution approved by
much to the deceased should make some provisions for his children;
the Board of Directors on July 10, 1946, wherein the reasons for
granting the donation to the minor children of the late Enrico
Pirovano were clearly, we find out the following revealing
statements: Whereas, this company paid premiums on Mr. Pirovano's life
insurance policies for a period of only 4 years so that it will receive
from the insurance companies sums of money greatly in excess of
the premiums paid by the company,
Whereas, the late Enrico Pirovano President and General Manager
of the De la Rama Steamship Company, died in Manila sometime in
November, 1944;
Again, in the resolution approved by the Board of Directors on
January 6, 1947, we also find the following expressive statements
which are but a reiteration of those already expressed in the Be it resolved, that out of gratitude to the late Enrico Pirovano this
original resolution: Company renounce as it hereby renounces, . . . .

Whereas, the late Enrico Pirovano, President and General Manager From the above it clearly appears that the corporation thought of
of the De la Rama Steamship Co., Inc., died in Manila sometime giving the donation to the children of the late Enrico Pirovano
during the latter part of the year 1944; because he "was to a large extent responsible for the rapid and very
successful development and expansion of the activities of this
company"; and also because he "left practically nothing to his heirs
Whereas, the said Enrico Pirovano was to a large extent responsible and it is but fit and proper that this company which owes so much
for the rapid and very successful development and expansion of the to the deceased should make some provision to his children", and
activities of this company; so, the donation was given "out of gratitude to the late Enrico
Pirovano." We do not need to stretch our imagination to see that a
grant or donation given under these circumstances is remunerative
in nature in contemplation of law.
Whereas, early in 1941, the life of the said Enrico Pirovano was
insured in various life companies, to wit:

That which is made to a person in consideration of his merits or for


services rendered to the donor, provided they do not constitute
Whereas, the said Enrico Pirovano is survived by 4 minor children,
recoverable debts, or that in which a burden less than the value of
to wit: Esteban, Maria Carla, Enrico and John Albert, all surnamed
the thing given is imposed upon the donee, is also a donation." (Art.
Pirovano; and
619, old Civil Code.)

Whereas, the said Enrico Pirovano left practically nothing to his


In donations made to a person for services rendered to the donor,
heirs and it is but fit and proper that this Company which owes so
the donor's will is moved by acts which directly benefit him. The
much to the deceased should make some provision for his children;
motivating cause is gratitude, acknowledgment of a favor, a desire
to compensate. A donation made to one who saved the donor's life,
or a lawyer who renounced his fees for services rendered to the
donor, would fall under this class of donations. These donations are 24, 1947 did not modify the substance of the former resolution for
called remunerative donations . (Sinco and Capistrano, The Civil it merely provided that instead of the interest on the loan being
Code, Vol. 1, p. 676; Manresa, 5th ed., pp. 72-73.) payable, together with the principal, only after the corporation had
first settled in full its bonded indebtedness, said interest would be
paid "whenever the company is in a position to meet said
2. The next question to be determined is whether the obligation."
donation has been perfected such that the corporation can no
longer rescind it even if it wanted to. The answer to this question
cannot but be in the affirmative considering that the same has not (b) The resolution of January 6, 1947 was actually carried out
only been granted in several resolutions duly adopted by the Board when the company and Mrs. Estefania R. Pirovano, executed a
of Directors of the defendant corporation, and in all these corporate memorandum agreement stating therein hat the proceeds of the
acts the concurrence of the representatives of the National insurance policies would be entered in the books of the corporation
Development Company, the only creditor whose interest may be as a loan which would bear an interest at the rate of 5 per cent per
affected by the donation, has been expressly given. The corporation annum, and said agreement was signed by Mrs. Pirovano as judicial
has even gone further. It actually transferred the ownership of the guardian of her children after she had been expressly authorized by
credit subject of donation to the Pirovano children with the express the court to accept the donation in behalf of her children.
understanding that the money would be retained by the
corporation subject to the condition that the latter would pay
interest thereon at the rate of 5 per cent per annum payable (c) While the donation can be considered as duly executed by
whenever said corporation may be in a financial position to do so. the execution of the document stated in the preceding paragraph,
Thus, the following acts of the corporation as reflected from the and by the entry in the books of the corporation of the donation as
evidence bear this out: a loan, a further record of said execution was made when Mrs.
Pirovano executed a public document on February 26, 1948 making
similar acceptance of the donation. And this acceptance was
(a) The donation was embodied in a resolution duly approved officially recorded by the corporation when on the same date its
by the Board of Directors on January 6, 19437. In this resolution, the Board of Directors approved a resolution taking "official notice" of
representatives of the National Development Company, have given said acceptance.
their concurrence. This is the only creditor which can be considered
as being adversely affected by the donation. The resolution of June
(d) On July 25, 1949, the Board of Directors approved the Commission said donation is ultra vires, are not, in our opinion, valid
proposal of Mrs. Pirovano to buy the house at New Rochelle, New and legal as to justify the rescission of a perfected donation. These
York, owned by a subsidiary of the corporation at the costs of reasons, as we will discuss in the latter part of this decision, cannot
S75,000 which would be paid from the sum held in trust belonging be invoked by the corporation to rescind or set at naught the
to her minor children. And this agreement was actually carried out donation, and the only way by which this can be done is to show
in a document signed by the general manager of the corporation that the donee has been in default, or that the donation has not
and by Mrs. Pirovano, who acted on the matter with the express been validly executed, or is illegal or ultra vires, and such is not the
authority of the court. case as we will see hereafter. We therefore declare that the
resolution approved by the stockholders of the defendant
corporation on March 8, 1951 did not and cannot have the effect of
(e) And on September 30, 1949, or two years and 3 months nullifying the donation in question.
after the donation had been executed, the stockholders of the
defendant corporation formally ratified and gave approval to the
donation as embodied in the resolutions above referred to, subject 3. The third question to be determined is: Can defendant
to certain modifications which did not materially affect the nature corporation give by way of donation the proceeds of said insurance
of the donation. policies to the minor children of the late Enrico Pirovano under the
law or its articles of corporation, or is that donation an ultra vires
act? To answer this question it is important for us to examine the
There can be no doubt from the foregoing relation of facts the articles of incorporation of the De la Rama company to see this
donation was a corporate act carried out by the corporation not question it is important for us to examine the articles of
only with the sanction of its Board of Directors but also of its incorporation of the De la Rama company to see if the act or
stockholders. It is evident that the donation has reached the stage donation is outside of their scope. Paragraph second of said articles
of perfection which is valid and binding upon the corporation and as provides:
such cannot be rescinded unless there is exists legal grounds for
doing so. In this case, we see none. The two reasons given for the
rescission of said donation in the resolution of the corporation Second.— The purposes for which said corporation is formed are:
adopted on March 8, 1951, to wit: that the corporation failed to
comply with the conditions to which the above donation was made
subject, and that in the opinion of the Securities and Exchange
(a) To purchase, charter, hire, build, or otherwise acquire
steam or other ships or vessels, together with equipments and
furniture therefor, and to employ the same in conveyance and (g) To invest and deal with the moneys of the company and
carriage of goods, wares and merchandise of every description, and immediately required, in such manner as from time to time may be
of passengers upon the high seas. determined.

(h) To borrow, or raise, or secure the payment of money in


(b) To sell, let, charter, or otherwise dispose of the said vessels
or other property of the company. such manner as the company shall think fit.

(i) Generally, to do all such other thing and to transact all


(c) To carry on the business of carriers by water.
business as may be directly or indirectly incidental or conducive to
the attainment of the above object, or any of them respectively.

(d) To carry on the business of shipowners in all of its branches.

(j) Without in any particular limiting or restricting any of the


objects and powers of the corporation, it is hereby expressly
(e) To purchase or take on lease, lands, wharves, stores, declared and provided that the corporation shall have power to
lighters, barges and other things which the company may deem
issue bonds and provided that the corporation shall have power to
necessary or advisable to be purchased or leased for the necessary issue bonds and other obligations, to mortgage or pledge any
and proper purposes of the business of the company, and from time stocks, bonds or other obligations or any property which may be
to time to sell the dispose of the same. required by said corporations; to secure any bonds, guarantees or
other obligations by it issued or incurred; to lend money or credit to
and to aid in any other manner any person, association, or
(f) To promote any company or companies for the purposes of corporation of which any obligation or in which any interest is held
acquiring all or any of the property or liabilities of this company, or by this corporation or in the affairs or prosperity of which this
both, or for any other purpose which may seem directly or indirectly corporation or in the affairs or prosperity of which this corporation
calculated to benefit the company. has a lawful interest, and to do such acts and things as may be
necessary to protect, preserve, improve, or enhance the value of fact appearing in the evidence that the insurance proceeds were not
any such obligation or interest; and, in general, to do such other immediately required when they were given away. In fact, the
acts in connection with the purposes for which this corporation has evidence shows that the corporation declared a 100 per cent cash
been formed which is calculated to promote the interest of the dividend, or P2,000,000, and later on another 30 per cent cash
corporation or to enhance the value of its property and to exercise dividend. This is clear proof of the solvency of the corporation. It
all the rights, powers and privileges which are now or may hereafter may be that, as insinuated, Don Esteban wanted to make use of the
be conferred by the laws of the Philippines upon corporations insurance money to rehabilitate the central owned by a sister
formed under the Philippine Corporation Act; to execute from time corporation, known as Hijos de I. de la Rama and Co., Inc., situated
to time general or special powers of attorney to persons, firms, in Bago, Negros Occidental, but this, far from reflecting against the
associations or corporations either in the Philippines, in the United solvency of the De la Rama company, only shows that the funds
States, or in any other country and to revoke the same as and when were not needed by the corporation.
the Directors may determine and to do any and or all of the things
hereinafter set forth and to the same extent as natural persons
might or could do. Under the second broad power we have the above stated, that is, to
aid in any other manner any person in the affairs and prosperity of
whom the corporation has a lawful interest, the record of this case
After a careful perusal of the provisions above quoted we find that is replete with instances which clearly show that the corporation
the corporation was given broad and almost unlimited powers to knew well its scope and meaning so much so that, with the
carry out the purposes for which it was organized among them, (1) exception of the instant case, no one has lifted a finger to dispute
"To invest and deal with the moneys of the company not their validity. Thus, under this broad grant of power, this
immediately required, in such manner as from time to time may be corporation paid to the heirs of one Florentino Nonato, an engineer
determined" and, (2) "to aid in any other manner any person, of one of the ships of the company who died in Japan, a gratuity of
association, or corporation of which any obligation or in which any P7,000, equivalent to one month salary for each year of service. It
interest is held by this corporation or in the affairs or prosperity of also gave to Ramon Pons, a captain of one of its ships , a retirement
which this corporation has a lawful interest." The world deal is gratuity equivalent to one month salary for every year of service,
broad enough to include any manner of disposition, and refers to the same to be based upon his highest salary. And it contributed
moneys not immediately required by the corporation, and such P2,000 to the fund raised by the Associated Steamship Lines for the
disposition may be made in such manner as from time to time may widow of the late Francis Gispert, secretary of said Association, of
be determined by the corporations. The donation in question which the De la Rama Steamship Co., Inc., was a member along with
undoubtedly comes within the scope of this broad power for it is a about 30 other steamship companies. In this instance, Gispert was
not even an employee of the corporation. And invoking this vast because the company was so indebted to him that it saw fit and
power, the corporation even went to the extent of contributing proper to make provisions for his children, but it did so out of a
P100,000 to the Liberal Party campaign funds, apparently in the sense of gratitude. Another factor that we should bear in mind is
hope that by conserving its cordial relations with that party it might that Enrico Pirovano was not only a high official of the company but
continue to retain the patronage of the administration. All these was at the same time a member of the De la Rama family, and the
acts executed before and after the donation in question have never recipient of the donation are the grandchildren of Don Esteban de la
been questioned and were willingly and actually carried out. Rama. This we, may say, is the motivating root cause behind the
grant of this bounty.

We don't see much distinction between these acts of generosity or


benevolence extended to some employees of the corporation, and It may be contended that a donation is different from a gratuity.
even to some in whom the corporation was merely interested While technically this may be so in substance they are the same.
because of certain moral or political considerations, and the They are even similar to a pension. Thus, it was granted for services
donation which the corporation has seen fit to give to the children previously rendered, and which at the time they were rendered
of the late Enrico Pirovano from the point of view of the power of gave rise to no legal obligation. " (Words and Phrases, Permanent
the corporation as expressed in its articles of incorporation. And if Edition, p. 675; O'Dea vs. Cook,, 169 Pac., 306, 176 Cal., 659.) Or
the former had been sanctioned and had been considered valid and stated in another way, a "Gratuity is mere bounty given by the
intra vires, we see no plausible reasons why the latter should now Government in consideration or recognition or meritorious services
be deemed ultra vires. It may perhaps be argued that the donation and springs from the appreciation an d graciousness of the
given to the children of the late Enrico Pirovano is so large and Government", (Ilagan vs. Ilaya, G.R. No. 33507, Dec. 20 1930) or "A
disproportionate that it can hardly be considered a pension of gratuity is something given freely, or without recompense, a gift,
gratuity that can be placed on a par with the instances above something voluntarily given in return for a favor or services; a
mentioned, but this argument overlooks one consideration: the bounty; a tip." Wood Mercantile Co. vs. Cole, 209 S.W. 2d. 290;
gratuity here given was not merely motivated by pure liberality or Mendoza vs. Dizon, 77 Phil., 533, 43 Off. Gaz. p. 4633. We do not
act of generosity, but by a deep sense of recognition of the valuable see much difference between this definition of gratuity and a
services rendered by the late Enrico Pirovano which had immensely remunerative donation contemplated in the Civil Code. In essence
contributed to the growth of the corporation to the extent that they are the same. Such being the case, it may be said that this
from its humble capitalization it blossomed into a multi-million donation is gratuity in a large sense for it was given for valuable
corporation that it is today. In other words of the very resolutions services rendered an ultra vires act in the light of the following
granting the donation or gratuity, said donation was given not only authorities:
Indeed, some cases seem to hold that the giving of a pure gratuity Payment of Gratitude out of Capital.— There seems on principle no
to directors is ultra vires of corporation, so that it could not be reason to doubt that gifts or gratuities wherever they are lawful
legalized even if the approval of the shareholders; but this position may be paid out of capital as well as out of profits. (Modern Law of
has no sound reason to support it, and is opposed to the weight of corporations, Machen, Vol. 1 p. 83.).
authority (Suffaker vs. Kierger's Assignee, 53 S.W. Rep. 288; !07 Ky.
200; 46 L.R.A. 384).
Whether desirable to supplement implied powers of this kind by
express provisions.— Enough has been said to show that the
But although business corporations cannot contribute to charity or implied powers of a corporation to give gratuities to its servants and
benevolence, yet they are not required always to insist on the full officers, as well as to strangers, are ample, so that there is therefore
extent of their legal rights. They are not forbidden for the no need to supplement them by express provisions." (modern Law
recognizing moral obligation of which strict law takes no of Corporations, Machen, Vol. 1, p. 83.) 1
cognizance. They are not prohibited from establishing a reputation
for board, liberal, equitable dealing which may stand them in good
stead in competition with less fair rivals. Thus, an incorporated fire Granting arguendo that the donation given by Pirovano children is
insurance company which policies except losses from explosions outside the scope of the powers of the defendant corporation, or
may nevertheless pay a loss from that cause when other companies the scope of the powers that it may exercise under the law, or it is
are accustomed to do so, such liberal dealing being deemed an ultra vires act, still it may said that the same can not be
conducive to the prosperity of the corporation." (Modern Law of invalidated, or declared legally ineffective for the reason alone, it
Corporations, Machen, Vol. 1, p. 81). appearing that the donation represents not only the act of the
Board of Directors but of the stockholders themselves as shown by
the fact that the same has been expressly ratified in a resolution
So, a bank may grant a five years pension to the family at one of its duly approved by the latter. By this ratification, the infirmity of the
officers. In all cases in this sorts, the amount of the gratuity rests corporate act, it may has been obliterated thereby making the cat
entirely within the discretion of the company, unless indeed it be all perfectly valid and enforceable. This is specially so if the donation is
together out of the reason and fitness. But where the company has not merely executory but executed and consummated and no
ceased to be going concerned, this power to make gifts or present it creditors are prejudice, or if there are creditors affected, the latter
at the end. (Modern Law of Corporations, Machen, Vol. 1, p. 82.). has expressly given their confirmity.
unauthorized manner, or acts within corporate powers but outside
the authority of particular officers or agents (19 C. J. S. 419).
In making this pronouncement, advertence should made of the
nature of the ultra vires act that is in question. A little digression
needs be made on this matter to show the different legal effect that
may result consequent upon the performance of a particular ultra Corporate transactions which are illegal because prohibited by
statute or against public policy are ordinarily void and
vires act on the part of the corporation. may authorities may be
cited interpreting or defining, extent, and scope of an ultra vires act, unenforceable regardless of the part performance, ratification, or
but all of them are uniform and unanimous that the same may be estoppel; but general prohibitions against exceeding corporate
either an act performed merely outside the scope of the powers powers and prohibitions intended to protect a particular class or
granted to it by it articles of incorporation, or one which is contrary specifying the consequences of violation may not preclude
to law or violative of any principle which will void any contract enforcement of the transaction and an action may be had for the
whether done individually or collectively. In other words, a part unaffected by the illegality or for equitable restitution. (19
distinction should be made between corporate acts or contracts C.J.S. 421.)
which are illegal and those which are merely ultra vires. The former
contemplates the doing of an act which is contrary to law, morals,
or public policy or public duty, and are, like similar transactions Generally, a transaction within corporate powers but executed in an
between the individuals void. They cannot serve as basis of a court irregular or unauthorized manner is voidable only, and may become
action, nor require validity ultra vires acts on the other hand, or enforceable by reason of ratification or express or implied assent by
those which are not illegal and void ab initio, but are merely within the stockholders or by reason of estoppel of the corporation or the
are not illegal and void ab initio, but are not merely within the scope other party to the transaction to raise the objection, particularly
of the articles of incorporation, are merely voidable and may where the benefits are retained
become binding and enforceable when ratified by the stockholders.

As appears in paragraphs 960-964 supra, the general rule is that a


Strictly speaking, an ultra vires act is one outside the scope of the corporation must act in the manner and with the formalities, if any,
power conferred by the legislature, and although the term has been prescribed by its character or by the general law. However, a
used indiscriminately, it is properly distinguishable from acts which corporation transaction or contract which is within the corporation
are illegal, in excess or abuse of power, or executed in an powers, which is neither wrong in itself nor against public policy,
but which is defective from a failure to observe in its execution a
requirement of law enacted for the benefit or protection of a stockholders consent thereto; but inasmuch as the stockholders in
certain class, is voidable and is valid until avoided, not void until reality constitute the corporation, it should , it would seem, be
validated; the parties for whose benefit the requirement was estopped to allege ultra vires, and it is generally so held where
enacted may ratify it or be estoppel to assert its invalidity, and third there are no creditors, or the creditors are not injured thereby, and
persons acting in good faith are not usually affected by an where the rights of the state or the public are not involved, unless
irregularity on the part of the corporation in the exercise of its the act is not only ultra vires but in addition illegal and void. of
granted powers. (19 C.J.S., 423-24.) course, such consent of all the stockholders cannot adversely affect
creditors of the corporation nor preclude a proper attack by the
state because of such ultra vires act. (7 Fletcher Corp., Sec. 3432, p.
It is true that there are authorities which told that ultra vires acts, or 585)
those performed beyond the powers conferred upon the
corporation either by law or by its articles of incorporation, are not
only voidable, but wholly void and of no legal effect, and that such Since it is not contended that the donation under consideration is
acts cannot be validated by ratification or be the basis of any action illegal, or contrary to any of the express provision of the articles of
in court; but such ruling does not constitute the weight of authority, incorporation, nor prejudicial to the creditors of the defendant
the reason being that they fail to make the important distinction we corporation, we cannot but logically conclude, on the strength of
have above adverted to. Because rule has been rejected by most of the authorities we have quoted above, that said donation, even if
the state courts and even by the modern treaties or corporations (7 ultra vires in the supposition we have adverted to, is not void, and if
Flethcer, Cyc. Corps., 563-564). And now it can be said that the voidable its infirmity has been cured by ratification and subsequent
majority of the cases hold that acts which are merely ultra vires, or acts of the defendant corporation. The defendant corporation,
acts which are not illegal, may be ratified by the stockholders of a therefore, is now prevented or estopped from contesting the
corporation (Brooklyn Heights R. Co. vs. Brooklyn City R. Co., 135 validity of the donation. This is specially so in this case when the
N.Y. Supp. 1001). very directors who conceived the idea of granting said donation are
practically the stockholders themselves, with few nominal
exception. This applies to the new stockholder Jose Cojuangco who
Strictly speaking, an act of a corporation outside of its character acquired his interest after the donation has been made because of
powers is just as such ultra vires where all the stockholders consent the rule that a "purchaser of shares of stock cannot avoid ultra vires
thereto as in a case where none of the stockholders expressly or acts of the corporation authorized by its vendor, except those done
cannot be ratified so as to make it valid, even though all the after the purchase" (7 Fletcher, Cyc. Corps. section 3456, p. 603;
Pascual vs. Del Saz Orozco, 19 Phil., 82.) Indeed, how can the
stockholders now pretend to revoke the donation which has been resolution whereby they formally ratified said donation but subject
partly consummated? How can the corporation now set at naught to the following clarifications: (1) that the amount of the donation
the transfer made to Mrs. Pirovano of the property in New York, shall not be effected until such time as the company shall have first
U.S.A., the price of which was paid by her but of the proceeds of the duly liquidated its present bonded indebtedness in the amount of
insurance policies given as donation. To allow the corporation to P3,260,855.77 to the National Development Company, or shall have
undo what it has done would only be most unfair but would first fully redeemed the preferred shares of stock in the amount to
contravene the well-settled doctrine that the defense of ultra vires be issued to said company in lieu thereof, and (2) that any and all
cannot be set up or availed of in completed transactions (7 Fletcher, taxes, legal fees, and expenses connected with the transaction shall
Cyc. Corps. Section 3497, p. 652; 19 C.J.S., 431). be chargeable from the proceeds of said insurance policies.

4. We now come to the fourth and last question that the The trial court, in considering these conditions in the light of the
defendant corporation, by the acts it has performed subsequent to acts subsequently performed by the corporation in connection with
the granting of the donation, deliberately prevented the fulfillment the proceeds of the insurance policies, considered said conditions
of the condition precedent to the payment of said donation such null and void, or at most not written because in its pinion their non-
that it can be said it has forfeited entirely due and demandable. fulfillment was due to a deliberate desistance of the corporation
and not to lack of funds to redeem the preferred shares of the
National Development Company. The conclusions arrived at by the
It should be recalled that the original resolution of the Board of trial court on this point are as follows:
Directors adopted on July 10, 1946 which provided for the donation
of P400,000 out of the proceeds which the De la Rama company
would collect on the insurance policies taken on the life of the late Fourth. — that the condition mentioned in the donation is null and
Enrico Pirovano was, as already stated above, amended on January void because it depends on the exclusive will of the donor, in
6, 1947 to include, among the conditions therein provided, that the accordance with the provisions of Article 1115 of the Old Civil Code.
corporation shall proceed to pay said amount, as well as the interest
due thereon, after it shall have settled in full balance of its bonded
indebtedness in the sum of P5,000,000. It should be recalled that on Fifth. — That if the condition is valid, its non-fulfillment is due to the
September 13, 1949, or more than 2 years after the last desistance of the defendant company from obeying and doing the
amendment referred too above, the stockholders adopted another wishes and mandate of the majority of the stockholders.
event of liquidation or dissolution of said company but shall be non-
participating.
Sixth. — That the non-payment of the debt in favor of the National
Development Company is due to the lack of funds, nor to lack of
authority, but to the desire of the President of the corporation to
preserve and continue the Government participation in the It is plain from the text of the above resolution that the defendant
corporation had 15 years from February 18, 1949, or until 1964,
company.
within which to effect the redemption of the preferred shares
issued to the National Development Company. This condition
cannot but be binding and obligatory upon the donees, if they
To this views of the trial court, we fail to agree. There are many desire to maintain the validity of the donation, for it is not only the
factors we can consider why the failure to immediately redeem the
basis upon which the stockholders of the defendant corporation
preferred shares issued to the National Development Company as expressed their willingness to ratify the donation, but it is also by
desired by the minor children of the late Enrico Pirovano cannot or way which its creditor, the National Development Company, would
should not be attributed to a mere desire on the part of the want it to be. If the defendant corporation is given 15 years within
corporation to delay the redemption, or to prejudice the interest of
which to redeem the preferred shares, and that period would expire
the minors, but rather to protect the interest of the corporation in 1964, one cannot blame the corporation for availing itself of this
itself. One of them is the text of the very resolution approved by the period if in its opinion it would redound to its best interest. It
National Development Company on February 18, 1949 which
cannot therefore be said that the fulfillment of the condition for the
prescribed the terms and conditions under which it expressed its payment of the donation is one that wholly depends on the
conformity to the conversion of the bonded indebtedness into exclusive will of the donor, as the lower court has concluded, simply
preferred shares of stock. The text of the resolution above
because it failed to meet the redemption of said shares in her
mentioned reads: manner desired by the donees. While it may be admitted that
because of the disposition of the assets of the corporation upon the
suggestion of its general manager more than enough funds had
Resolved: That the outstanding bonded indebtedness of the Dela been raised to effect the immediate redemption of the above
Rama Steamship Co., Inc., in the approximate amount of shares, it is not correct to say that the management has completely
P3,260,855.77 be converted into non-voting preferred shares of failed in its duty to pay its obligations for, according to the evidence,
stock of said company, said shares to bear a fixed dividend of 6 a substantial portion of the indebtedness has been paid and only a
percent per annum which shall be cumulative and redeemable balance of about P1,805,169.98 was outstanding when the
within 15 years. Said shares shall be preferred as to assets in the
stockholders of the corporation decided to revoke or cancel the maintained by the corporation to preserve its cordial and smooth
donation. (Exhibit P.) relation with the government. At any rate, whether such attitude be
considered as a mere excuse to justify the delay in effecting the
redemption of the shares, or a mere desire on the part of the
But there are other good reasons why all the available funds have corporation to retain in its possession more funds available to
not been actually applied to the redemption of the preferred attend to other pressing need as demanded by the interest of the
shares, one of them being the "desire of the president of the corporation, we fail to see in such an attitude an improper motive
corporation to preserve and continue the government participation to circumvent the early realization of the desire of the minors to
in the company" which even the lower court found it to be obtain the immediate payment of the donation which was made
meritorious, which is one way by which it could continue receiving dependent upon the redemption of said shares there being no clear
the patronage and protection of the government. Another reason is evidence that may justify such design. Anyway, a great portion of
that the redemption of the shares does not depend on the will of the funds went to the stockholders themselves by way of dividends
the corporation alone but to a great extent on the will of a third to offset, so it appears, the huge advances that the corporation had
party, the National Development Company. In fact, as the evidence made to them which were entered in the books of the corporation
shows, this Company had pledged these shares to the Philippine as loans and, therefore, they were invested for their own benefit. As
National Bank and the Rehabilitation Finance Corporation as a General Manager Osmeña said, "we were first confronted with the
security to obtain certain loans to finance the purchase of certain problem of the withdrawals of the family which had to be repaid
ships to be built for the use of the company under management back to the National Development Company and one of the most
contract entered into between the corporation and the National practical solutions to that was to declare dividends and reduce the
Development Company, and this was what prevented the amounts of their withdrawals", which then totalled about
corporation from carrying out its offer to pay the sum P3,000,000.
P1,956,513.07 on April 5, 1951. Had this offer been accepted, or
favorably acted upon by the National Development Company, the
indebtedness would have been practically liquidated, leaving All things considered, we are of the opinion that the finding of the
outstanding only one certificate worth P217,390.45. Of course, the lower court that the failure of the defendant corporation to comply
corporation could have insisted in redeeming the shares if it wanted with the condition of the donation is merely due to its desistance
to even to the extent of taking a court action if necessary to force its from obeying the mandate of the majority of the stockholders and
creditor to relinquish the shares that may be necessary to not to lack of funds, or to lack of authority, has no foundation in law
accomplish the redemption, but such would be a drastic step which or in fact, and, therefore, its conclusion that because of such
would have not been advisable considering the policy right along desistance that condition should be deemed as fulfilled and the
payment of the donation due and demandable, is not justified. In
this respect, the decision of the lower court should be reversed.