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Lim Tong Lim vs. Phil. Fishing Gear Industries, Inc.

, 317 SCRA 728


It was established that Lim Tong Lim requested Peter Yao to engage in commercial fishing with him and one Antonio Chua. The three agreed
to purchase two fishing boats but since they do not have the money they borrowed from one Jesus Lim (brother of Lim Tong Lim). They
again borrowed money and they agreed to purchase fishing nets and other fishing equipments. Now, Yao and Chua represented themselves
as acting in behalf of “Ocean Quest Fishing Corporation” (OQFC) they contracted with Philippine Fishing Gear Industries (PFGI) for the
purchase of fishing nets amounting to more than P500k.
They were however unable to pay PFGI and so they were sued in their own names because apparently OQFC is a non-existent corporation.
Chua admitted liability and asked for some time to pay. Yao waived his rights. Lim Tong Lim however argued that he’s not liable because he
was not aware that Chua and Yao represented themselves as a corporation; that the two acted without his knowledge and consent.
ISSUE: Whether or not Lim Tong Lim is liable.
HELD: Yes. From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided to engage in a fishing business,
which they started by buying boats worth P3.35 million, financed by a loan secured from Jesus Lim. In their Compromise Agreement, they
subsequently revealed their intention to pay the loan with the proceeds of the sale of the boats, and to divide equally among them the excess
or loss. These boats, the purchase and the repair of which were financed with borrowed money, fell under the term “common fund” under
Article 1767. The contribution to such fund need not be cash or fixed assets; it could be an intangible like credit or industry. That the parties
agreed that any loss or profit from the sale and operation of the boats would be divided equally among them also shows that they had indeed
formed a partnership.
Lim Tong Lim cannot argue that the principle of corporation by estoppels can only be imputed to Yao and Chua. Unquestionably, Lim Tong
Lim benefited from the use of the nets found in his boats, the boat which has earlier been proven to be an asset of the partnership. Lim,
Chua and Yao decided to form a corporation. Although it was never legally formed for unknown reasons, this fact alone does not preclude
the liabilities of the three as contracting parties in representation of it. Clearly, under the law on estoppel, those acting on behalf of a
corporation and those benefited by it, knowing it to be without valid existence, are held liable as general partners.

Intl Express Travel v. CA 343 SCRA 674


In 1989, International Express Travel & Tour Services, Inc. (IETTI), offered to the Philippine Football Federation (PFF) its travel services for
the South East Asian Games. PFF, through Henri Kahn, its president, agreed. IETTI then delivered the plane tickets to PFF, PFF in turn
made a down payment. However, PFF was not able to complete the full payment in subsequent installments despite repeated demands from
IETTI. IETTI then sued PFF and Kahn was impleaded as a co-defendant.
Kahn averred that he should not be impleaded because he merely acted as an agent of PFF which he averred is a corporation with separate
and distinct personality from him. The trial court ruled against Kahn and held him personally liable for the said obligation (PFF was declared
in default for failing to file an answer). The trial court ruled that Kahn failed to prove that PFF is a corporation. The Court of Appeals however
reversed the decision of the trial court. The Court of Appeals took judicial notice of the existence of PFF as a national sports association; that
as such, PFF is empowered to enter into contracts through its agents; that PFF is therefore liable for the contract entered into by its agent
Kahn. The CA further ruled that IETTI is in estoppel; that it cannot now deny the corporate existence of PFF because it had contracted and
dealt with PFF in such a manner as to recognize and in effect admit its existence.
ISSUE: Whether or not the Court of Appeals is correct.
HELD: No. PFF, upon its creation, is not automatically considered a national sports association. It must first be recognized and accredited by
the Philippine Amateur Athletic Federation and the Department of Youth and Sports Development. This fact was never substantiated by
Kahn. As such, PFF is considered as an unincorporated sports association. And under the law, any person acting or purporting to act on
behalf of a corporation which has no valid existence assumes such privileges and becomes personally liable for contract entered into or for
other acts performed as such agent. Kahn is therefore personally liable for the contract entered into by PFF with IETTI.
There is also no merit on the finding of the CA that IETTI is in estoppel. The application of the doctrine of corporation by estoppel applies to
a third party only when he tries to escape liability on a contract from which he has benefited on the irrelevant ground of defective
incorporation. In the case at bar, IETTI is not trying to escape liability from the contract but rather is the one claiming from the contract.

Loyola Grand Villas Homeowners vs. CA, 276 SCRA 681


In 1983, the Loyola Grand Villas Association, Inc. (LGVAI) was incorporated by the homeowners of the Loyola Grand Villas (LGV), a
subdivision. The Securities and Exchange Commission (SEC) issued a certificate of incorporation under its official seal to LGVAI in the same
year. LGVAI was likewise recognized by the Home Insurance and Guaranty Corporation (HIGC), a government-owned-and-controlled
corporation whose mandate is to oversee associations like LGVAI.
Later, LGVAI later found out that there are two homeowners associations within LGV, namely: Loyola Grand Villas Homeowners (South)
Association, Inc. (LGVAI-South) and Loyola Grand Villas Homeowners (North) Association, Inc. (LGVAI-North). The two associations
asserted that they have to be formed because LGVAI is inactive. When LGVAI inquired about its status with HIGC, HIGC advised that LGVAI
was already terminated; that it was automatically dissolved when it failed to submit it By-Laws after it was issued a certificate of incorporation
by the SEC.
ISSUE: Whether or not a corporation’s failure to submit its by-laws results to its automatic dissolution.
HELD: No. A private corporation like LGVAI commences to have corporate existence and juridical personality from the date the Securities
and Exchange Commission (SEC) issues a certificate of incorporation under its official seal. The submission of its by-laws is a condition
subsequent but although it is merely such, it is a MUST that it be submitted by the corporation. Failure to submit however does not warrant
automatic dissolution because such a consequence was never the intention of the law. The failure is merely a ground for dissolution which
may be raised in a quo warranto proceeding. It is also worthwhile to note that failure to submit can’t result to automatic dissolution because
there are some instances when a corporation does not require a by-law

Fleischer vs. Botica Nolasco, 47 Phil 583


FACTS: This action was commenced in the CFI against the board of directors of the Botica Nolasco, Inc., a corporation duly organized and
existing under the laws of the Philippine Islands. The plaintiff prayed that said board of directors be ordered to register in the books of the
corporation five shares of its stock in the name of Henry Fleischer, the plaintiff, and to pay him the sum of P500 for damages sustained by
him resulting from the refusal of said body to register the shares of stock in question. (Basta na amend ung complaint)
defendant answered the amended complaint denying generally and specifically each and every one of the material allegations thereof, and,
as a special defense, alleged that the defendant, pursuant to article 12 of its by-laws, had preferential right to buy from the plaintiff said
shares at the par value of P100 a share, plus P90 as dividends corresponding to the year 1922, and that said offer was refused by the
plaintiff.
Trial Court held that, in his opinion, article 12 of the by-laws of the corporation which gives it preferential right to buy its shares from retiring
stockholders, is in conflict with Act No. 1459 (Corporation Law), especially with section 35 thereof; and rendered a judgment in favor of
plaintiff.
Hence, this appeal.
ISSUE: whether or not article 12 of the by-laws of the corporation is in conflict with the provisions of the Corporation Law (Act No. 1459).
Questioned article 12 creates in favor of the Botica Nolasco, Inc., a preferential right to buy, under the same conditions, the share or shares
of stock of a retiring shareholder. Has said corporation any power, under the Corporation Law (Act. No. 1459), to adopt such by-law?
HELD:
The particular provisions of the Corporation Law referring to transfer of shares of stock are as follows:
SEC. 13. Every corporation has the power:
xxx xxx xxx
(7) To make by-laws, not inconsistent with any existing law, for the fixing or changing of the number of its officers and directors within the
limits prescribed by law, and for the transferring of its stock, the administration of its corporate affairs, etc.
xxx xxx xxx
SEC. 35. The capital stock of stock corporations shall de divided into shares for which certificates signed by the president or the vice-
president, countersigned by the secretary or clerk and sealed with the seal of the corporation, shall be issued in accordance with the by-
laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate indorsed by the owner or his
attorney in fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties,
until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, that date
of the transfer, the number of the certificate, and the number of shares transferred.
No share of stock against which the corporation holds any unpaid claim shall be transferable on the books of the corporation.
The holder of shares, as owner of personal property, is at liberty, under said section (Sec. 35), to dispose of them in favor of whomsoever he
pleases, without any other limitation in this respect, than the general provisions of law. Therefore, a stock corporation in adopting a by-law
governing transfer of shares of stock should take into consideration the specific provisions of section 35 of Act No. 1459, and said by-law
should be made to harmonize with said provisions. It should not be inconsistent therewith.
The by-law now in question was adopted under the power conferred upon the corporation by section 13, paragraph 7, above quoted; but in
adopting said by-law the corporation has transcended the limits fixed by law in the same section, and has not taken into consideration the
provisions of section 35 of Act No. 1459.
As a general rule, the by-laws of a corporation are valid if they are reasonable and calculated to carry into effect the objects of the
corporation, and are not contradictory to the general policy of the laws of the land.
On the other hand, it is equally well settled that by-laws of a corporation must be reasonable and for a corporate purpose, and always within
the charter limits. They must always be strictly subordinate to the constitution and the general laws of the land. They must not infringe the
policy of the state, nor be hostile to public welfare. They must not disturb vested rights or impair the obligation of a contract, take away or
abridge the substantial rights of stockholder or member, affect rights of property or create obligations unknown to the law.
The validity of the by-law of a corporation is purely a question of law. (South Florida Railroad Co. vs. Rhodes, 25 Fla., 40.)
The power to enact by-laws restraining the sale and transfer of stock must be found in the governing statute or the charter. Restrictions upon
the traffic in stock must have their source in legislative enactment, as the corporation itself cannot create such impediments. By-law are
intended merely for the protection of the corporation, and prescribe regulation and not restriction; they are always subject to the charter of
the corporation. The corporation, in the absence of such a power, cannot ordinarily inquire into or pass upon the legality of the transaction by
which its stock passes from one person to another, nor can it question the consideration upon which a sale is based. A by-law cannot take
away or abridge the substantial rights of stockholder. Under a statute authorizing by- laws for the transfer of stock, a corporation can do no
more than prescribe a general mode of transfer on the corporate books and cannot justify an unreasonable restriction upon the right of sale.
xxx
that a corporation has no power to prevent or to restrain transfers of its shares, unless such power is expressly conferred in its charter or
governing statute. This conclusion follows from the further consideration that by-laws or other regulations restraining such transfers, unless
derived from authority expressly granted by the legislature, would be regarded as impositions in restraint of trade.
The only restraint imposed by the Corporation Law upon transfer of shares is found in section 35 of Act No. 1459, quoted above, as follows:
“No transfer, however, shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation
xxx This restriction is necessary in order that the officers of the corporation may know who are the stockholders, which is essential in
conducting elections of officers, in calling meeting of stockholders, and for other purposes. But any restriction of the nature of that imposed in
the by-law now in question, is ultra vires, violative of the property rights of shareholders, and in restraint of trade.
And moreover, the by-laws now in question cannot have any effect on the appellee. He had no knowledge of such by-law when the shares
were assigned to him. He obtained them in good faith and for a valuable consideration. He was not a privy to the contract created by said by-
law between the shareholder Manuel Gonzalez and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his rights as a purchaser.
A by-law of a corporation which provides that transfers of stock shall not be valid unless approved by the board of directors, while it may be
enforced as a reasonable regulation for the protection of the corporation against worthless stockholders, cannot be made available to defeat
the rights of third persons. (Farmers’ and Merchants’ Bank of Lineville vs. Wasson, 48 Iowa, 336.)
Whenever a corporation refuses to transfer and register stock in cases like the present, mandamus will lie to compel the officers of the
corporation to transfer said stock upon the books of the corporation.
Petition denied. Decision of trial court affirmed.

Government of the Philippines vs. El Hogar, 50 Phil 399


This is a quo warranto proceeding instituted originally in this court by the Government of the Philippine Islands on the relation of the Attorney-
General against the building and loan association known as El Hogar Filipino, for the purpose of depriving it of its corporate franchise,
excluding it from all corporate rights and privileges, and effecting its final dissolution, due to alleged violations committed by said corporation.

ISSUE: WON the corporation must be dissolved on the grounds enumerated by the Government.

First cause of action: alleged illegal holding by the respondent of the title to real property for a period in excess of five years after the
property had been bought in by the respondent at one of its own foreclosure sales. In 1920, respondent El Hogar Filipino was the holder of a
recorded mortgage upon a tract of land in the San Clemente, Tarlac, as security for a loan to its shareholders who were the owners of said
property. The borrowers having defaulted in their payments, respondent foreclosed the mortgage and purchased the land at the foreclosure
sale on November 18, 1920, and the deed conveying the property to respondent was executed and delivered December 22, 1920.
Respondent sent the deed to the register of deeds of the Province of Tarlac, with the request that the certificate of title then standing in the
name of the former owners be cancelled and that a new certificate of title be issued in its name. The certificate of title to the land was issued
on May 7, 1921. In 1921, El Hogar Filipino authorized agents to find a buyer of the said land but since they did not succeed in finding one,
the land was advertised for sale. The first offer was made by one Alcantara and the board accepted the offer in 1926. Upon Alcantara’s
failure to pay, however, respondent treated the contract with him rescinded. It was only on July 30, 1926, when the property was finally sold
to Felipa Alberto.

HELD: The Attorney-General points out that the respondent acquired title on December 22, 1920, when the deed was executed and
delivered, by which the property was conveyed to it as purchaser at its foreclosure sale, and this title remained in it until July 30, 1926, when
the property was finally sold to Felipa Alberto. The interval between these two conveyances is thus more than five years. It has been held by
this court that a purchaser of land registered under the Torrens system cannot acquire the status of an innocent purchaser for value unless
his vendor is able to place in his hands an owner's duplicate showing the title of such land to be in the vendor. It results that prior to May 7,
1921, El Hogar Filipino was not really in a position to pass an indefeasible title to any purchaser. In this connection it will be noted that
section 75 of the Act of Congress of July 1, 1902, and the similar provision in section 13 of the Corporation Law, allow the corporation "five
years after receiving the title," within which to dispose of the property. A fair interpretation of these provisions would seem to indicate that the
date of the receiving of the title in this case was the date when the respondent received the owner's certificate, or May 7, 1921, for it was
only after that date that the respondent had an unequivocal and unquestionable power to pass a complete title. The failure of the respondent
to receive the certificate sooner was not due in any wise to its fault, but to unexplained delay on the part of the register of deeds. For this
delay the respondent cannot be held accountable. It is urged for the respondent that the period between March 25, 1926, and April 30, 1926,
should not be counted as part of the five-year period. This was the period during which the respondent was under obligation to sell the
property to Alcantara, prior to the rescission of the contract by reason of Alcantara's failure to make the stipulated first payment. Upon this
point the contention of the respondent is, in our opinion, well founded. The acceptance by it of Alcantara's offer obligated the respondent to
Alcantara; and if it had not been for the default of Alcantara, the effective sale of the property would have resulted. The evident purpose
behind the law restricting the rights of corporations with respect to the tenure of land was to prevent the revival of the entail (mayorazgo) or
other similar institution by which land could be fettered and its alienation hampered over long periods of time. In the case before us the
respondent corporation has in good faith disposed of the piece of property which appears to have been in its hands at the expiration of the
period fixed by law, and a fair explanation is given of its failure to dispose of it sooner. Under these circumstances the destruction of the
corporation would bring irreparable loss upon the thousands of innocent shareholders of the corporation without any corresponding benefit to
the public. The discretion permitted to this court in the application of the remedy of quo warranto forbids so radical a use of the remedy.
Second cause of action: the respondent owns and holds a business lot, with the structure thereon, in the financial district of Manila in excess
of its reasonable requirements and in contravention of subsection 5 of section 13 of the corporation Law. (Contention: that the construction of
the new office building and the subsequent renting of the same in great part to third persons are ultra vires acts on the part of the
corporation) The respondent purchased 1,413 sq. m. of land at the corner of Juan Luna St. and the Muelle de la Industria, in Manila. At the
time the respondent acquired this lot there stood upon it a building, then nearly 50 yrs old, made of Guadalupe stone and hewn timber. The
directors of the El Hogar caused the old building to be demolished and erected thereon a modern reinforced concrete office building. As at
first constructed the new building was three stories high, but in 1920, to obtain greater advantage from the use of the land, an additional
story was added to the building, making a structure of four stories except in one corner where an additional story was placed, making it five
stories high. Since the new building was completed the respondent has used about 324 sq m of floor space for its own offices and has rented
the remainder of the office space in said building, consisting of about 3,175 sq m, to other persons and entities.

HELD: Under subsection 5 of section 13 of the Corporation Law, every corporation has the power to purchase, hold and lease such real
property as the transaction of the lawful business of the corporation may reasonably and necessarily require. When this property was
acquired in 1916, the business of El Hogar Filipino had developed to such an extent, and its prospects for the future were such as to justify
its directors in acquiring a lot in the financial district of Manila and in constructing thereon a suitable building as the site of its offices; and it
cannot be fairly said that the area of the lot — 1,413 sq m — was in excess of its reasonable requirements. The law expressly declares that
corporations may acquire such real estate as is reasonably necessary to enable them to carry out the purposes for which they were created;
and we are of the opinion that the owning of a business lot upon which to construct and maintain its offices is reasonably necessary to a
building and loan association such as the respondent was at the time this property was acquired. A different ruling on this point would compel
important enterprises to conduct their business exclusively in leased offices — a result which could serve no useful end but would retard
industrial growth and be inimical to the best interests of society. We are furthermore of the opinion that, inasmuch as the lot referred to was
lawfully acquired by the respondent, it is entitled to the full beneficial use thereof. No legitimate principle can discovered which would deny to
one owner the right to enjoy his (or its) property to the same extent that is conceded to any other owner; and an intention to discriminate
between owners in this respect is not lightly to be imputed to the Legislature. Third cause of action: respondent is charged with engaging in
activities foreign to the purposes for which the corporation was created and not reasonable necessary to its legitimate ends. The
specifications under this cause of action relate to three different sorts of activities: The first consist of the administration of the offices in the El
Hogar building not used by the respondent itself and the renting of such offices to the public. As stated in the discussion connected with the
second cause of action, the respondent uses only about ten per cent of the office space in the El Hogar building for its own purposes, and it
leases the remainder to strangers. In the years 1924 and 1925 the respondent received as rent for the leased portions of the building the
sums of P75,395.06 and P58,259.27, respectively. The activities here criticized clearly fall within the legitimate powers of the respondent, as
shown in what we have said above relative to the second cause of action. This matter will therefore no longer detain us. If the respondent
had the power to acquire the lot, construct the edifice and hold it beneficially, as there decided, the beneficial administration by it of such
parts of the building as are let to others must necessarily be lawful. The second specification has reference to the administration and
management of properties belonging to delinquent shareholders of the association. It appears that in case of delinquency on the part of its
shareholders in the payment of interest, premium, and dues, the association has been accustomed (pursuant to clause 8 of its standard
mortgage) to take over and manage the mortgaged property for the purpose of applying the income to the obligations of the debtor party. For
these services the respondent charges a commission at the rate of 2½ per centum on sums collected. The case for the government
supposes that the only remedy which the respondent has in case of default on the part of its shareholders is to proceed to enforce collection
of the whole loan in the manner contemplated in section 185 of the Corporation Law. It will be noted, however, that, according to said
section, the association may treat the whole indebtedness as due, "at the option of the board of directors," and this remedy is not made
exclusive. We see no reason to doubt the validity of the clause giving the association the right to take over the property which constitutes the
security for the delinquent debt and to manage it with a view to the satisfaction of the obligations due to the debtor than the immediate
enforcement of the entire obligation, and the validity of the clause allowing this course to be taken appears to us to be not open to doubt. The
third specification under this cause of action relates to certain activities, such that: El Hogar Filipino has undertaken the management of
some parcels of improved real estate situated in Manila not under mortgage to it, but owned by shareholders. This service is limited to
shareholders; but some of the persons whose properties are so managed for them became shareholders only to enable them to take
advantage thereof. The services rendered in the management of such improved real estate by El Hogar Filipino consist in the renting of the
same, the payment of real estate taxes and insurance for the account of the owner, causing the necessary repairs for upkeep to be made,
and collecting rents due from tenants. For its services, El Hogar Filipino receives compensation in the form of commissions upon the gross
receipts from such properties. This practice is in our opinion unauthorized by law. The administration of property in the manner described is
more befitting to the business of a real estate agent or trust company than to the business of a building and loan association. The practice to
which this criticism is directed relates of course solely to the management and administration of properties which are not mortgaged to the
association. The circumstance that the owner of the property may have been required to subscribe to one or more shares of the association
with a view to qualifying him to receive this service is of no significance. It is a general rule of law that corporations possess only such
express powers. The management and administration of the property of the shareholders of the corporation is not expressly authorized by
law, and we are unable to see that, upon any fair construction of the law, these activities are necessary to the exercise of any of the granted
powers. The corporation, upon the point now under the criticism, has clearly extended itself beyond the legitimate range of its powers. But it
does not result that the dissolution of the corporation is in order, and it will merely be enjoined from further activities of this sort. Fourth cause
of action: Article 10 of its by-laws empowers the board of directors by majority vote to cancel shares and to return to the owner thereof the
balance resulting from the liquidation thereof whenever, by reason of their conduct, or for any other motive, the continuation as members of
the owners of such shares is not desirable. The provision is a patent nullity, since it is in direct conflict with the latter part of section 187 of the
Corporation Law, which expressly declares that the board of directors shall not have the power to force the surrender and withdrawal of
unmatured stock except in case of liquidation of the corporation or of forfeiture of the stock for delinquency. However, there is no provision of
law making it a misdemeanor to incorporate an invalid provision in the by-laws of a corporation; and if there were such, the hazards incident
to corporate effort would certainly be largely increased. Fifth cause of action: the failure of the corporation to hold annual meetings for
election of directors in the manner prescribed by law Owing to the failure of a quorum at most of the general meetings since the respondent
has been in existence, it has been the practice of the directors to fill vacancies in the directorate by choosing suitable persons from among
the stockholders. This custom finds its sanction in article 71 of the by- laws. The person thus chosen to fill vacancies in the directorate have,
it is admitted, uniformly been experienced and successful business and professional men of means, belonging to prominent Filipino families,
and more or less related to each other by blood or marriage. In this connection it is charged that the board of directors of the respondent has
become a permanent and self-perpetuating body composed of wealthy men instead of wage earners and persons of moderate means. No
fault can be imputed to the corporation on account of the failure of the shareholders to attend the annual meetings; and their non-attendance
at such meetings is doubtless to be interpreted in part as expressing their satisfaction of the way in which things have been conducted. Upon
failure of a quorum at any annual meeting the directorate naturally holds over and continues to function until another directorate is chosen
and qualified. Sixth cause of action: the directors of El Hogar Filipino, instead of serving without pay, or receiving nominal pay or a fixed
salary, have been receiving large compensation, varying in amount from time to time, out of the profits of the respondent. Under section 92 of
the by-laws of El Hogar Filipino 5 per centum of the net profit shown by the annual balance sheet is distributed to the directors in proportion
to their attendance at meetings of the board. The Corporation Law does not undertake to prescribe the rate of compensation for the directors
of corporations. The power to fix the compensation they shall receive, if any, is left to the corporation, to be determined in its by-laws (Act No.
1459, sec. 21). Pursuant to this authority the compensation for the directors of El Hogar Filipino has been fixed in section 92 of its by-laws,
as already stated. The justice and property of this provision was a proper matter for the shareholders when the by-laws were framed; and the
circumstance that, with the growth of the corporation, the amount paid as compensation to the directors has increased beyond what would
probably be necessary to secure adequate service from them is matter that cannot be corrected in this action; nor can it properly be made a
basis for depriving the respondent of its franchise, or even for enjoining it from compliance with the provisions of its own by-laws. If a mistake
has been made, or the rule adopted in the by-laws meeting to change the rule. Seventh cause of action: the written agreement of the
corporation with Mr. Antonio Melian, the corporation’s the promoter and organizer, which grants him five per centum (5%) of the net profits to
be earned by it in each year during the period fixed for the duration of the association by its articles of incorporation, transmissible to his
heirs upon his death, as compensation of the studies made, services rendered and expenses incurred by him, and the loan he extended to
the corporation (inserted in Art. 92 of the by-laws). No possible doubt exists as to the power of a corporation to contract for services rendered
and to be rendered by a promoter in connection with organizing and maintaining the corporation. xxx If the Melian contract had been clearly
ultra vires — which is not charged and is certainly untrue — its continued performance might conceivably be enjoined in such a proceeding
as this; but if the defect from which it suffers is mere matter for an action because Melian is not a party. It is rudimentary in law that an action
to annul a contract cannot be maintained without joining both the contracting parties as defendants. Moreover, the proper party to bring such
an action is either the corporation itself, or some shareholder who has an interest to protect. The mere fact that the compensation paid under
this contract is in excess of what, in the full light of history, may be considered appropriate is not a proper consideration for this court, and
supplies no ground for interfering with its performance. Eighth cause of action: Article 70 of the by-laws in effect requires that persons elected
to the board of directors must be holders of shares of the paid up value of P5,000 which shall be held as security may be put up in the behalf
of any director by some other holder of shares in the amount stated. Article 76 of the by-laws declares that the directors waive their right as
shareholders to receive loans from the association. It is asserted that article 70 is objectionable in that, under the requirement for security, a
poor member, or wage-earner, cannot serve as director, irrespective of other qualifications and that as a matter of fact only men of means
actually sit on the board. Article 76 is criticized on the ground that the provision requiring directors to renounce their right to loans
unreasonably limits their rights and privileges as members. There is nothing of value in either of these suggestions. Section 21 of the
Corporation Law expressly gives the power to the corporation to provide in its by-laws for the qualifications of directors; and the requirement
of security from them for the proper discharge of the duties of their office, in the manner prescribed in article 70, is highly prudent and in
conformity with good practice. Article 76, prohibiting directors from making loans to themselves, is of course designed to prevent the
possibility of the looting of the corporation by unscrupulous directors. Ninth cause of action: the respondent has abused its franchise in
issuing "special" shares. Upon examination of the nature of the special shares in the light of American usage, it will be found that said shares
are precisely the same kind of shares that, in some American jurisdictions, are generally known as advance payment shares; and if close
attention be paid to the language used in the last sentence of section 178 of the Corporation Law, it will be found that special shares where
evidently created for the purpose of meeting the condition caused by the prepayment of dues that is there permitted. The language of this
provision is as follow "payment of dues or interest may be made in advance, but the corporation shall not allow interest on such advance
payment at a greater rate than six per centum per annum nor for a longer period than one year." Tenth cause of action: that the defendant is
pursuing a policy of depreciating, at the rate of 10 per centum per annum, the value of the real properties acquired by it at its sales; and it is
alleged that this rate is excessive. There is no positive provision of law prohibiting the association from writing off a reasonable amount for
depreciation on its assets for the purpose of determining its real profits; and article 74 of its by-laws expressly authorizes the board of
directors to determine each year the amount to be written down upon the expenses of installation and the property of the corporation. There
can be no question that the power to adopt such a by-law is embraced within the power to make by-laws for the administration of the
corporate affairs of the association and for the management of its business, as well as the care, control and disposition of its property (Act
No. 1459, sec. 13 [7]). The Attorney-General questions the exercise of the direction confided to the board; and it is insisted that the
excessive depreciation of the property of the association is objectionable in several respects, but mainly because it tends to increase unduly
the reserves of the association, thereby frustrating the right of the shareholders to participate annually and equally in the earnings of the
association. If the criticism contained in the brief of the Attorney-General upon the practice of the respondent association with respect to
depreciation be well founded, the Legislature should supply the remedy by defining the extent to which depreciation may be allowed by
building and loan associations. Certainly this court cannot undertake to control the discretion of the board of directors of the association
about an administrative matter as to which they have legitimate power of action. Eleventh and twelfth causes of action: The specification in
the eleventh cause of action is that the respondent maintains excessive reserve funds (5% of the net profits each year), and in the twelfth
cause of action that the board of directors has settled upon the unlawful policy of paying a straight annual dividend of 10 per centum,
regardless of losses suffered and profits made by the corporation and in contravention of the requirements of section 188 of the Corporation
Law. It is true that the corporation law does not expressly grant this power, but we think it is to be implied. It is a fact of common observation
that all commercial enterprises encounter periods when earnings fall below the average, and the prudent manager makes provision for such
contingencies. To regard all surplus as profit is to neglect one of the primary canons of good business practice. Building and loan
associations, though among the most solid of financial institutions, are nevertheless subject to vicissitudes. Fluctuations in the dividend rate
are highly detrimental to any fiscal institutions, while uniformity in the payments of dividends, continued over long periods, supplies the surest
foundations of public confidence. xxx Our conclusion is that the respondent has the power to maintain the reserves criticized in the eleventh
and twelfth counts of the complaint; and at any rate, if it be supposed that the reserves referred to have become excessive, the remedy is in
the hands of the Legislature. It is no proper function of the court to arrogate to itself the control of administrative matters which have been
confided to the discretion of the board of directors. Thirteenth cause of action: that the respondent association has made loans which, to the
knowledge of the associations officers were intended to be used by the borrowers for other purposes than the building of homes. There is no
statute here expressly declaring that loans may be made by these associations solely for the purpose of building homes. On the contrary, the
building of homes is mentioned in section 171 of the Corporation Law as only one among several ends which building and loan associations
are designed to promote. Furthermore, section 181 of the Corporation Law expressly authorities the Board of directors of the association
from time to time to fix the premium to be charged. Fourteenth cause of action: that the loans made by the defendant for purposes other than
building or acquiring homes have been extended in extremely large amounts and to wealthy persons and large companies. The law states
no limit with respect to the size of the loans to be made by the association. That matter is confided to the discretion of the board of directors;
and this court cannot arrogate to itself a control over the discretion of the chosen officials of the company. If it should be thought wise in the
future to put a limit upon the amount of loans to be made to a single person or entity, resort should be had to the Legislature; it is not a matter
amenable to judicial control. Fifteenth cause of action: that upon the expiration of the franchise of the association through the effluxion of
time, or earlier liquidation of its business, the accumulated reserves and other properties will accrue to the founder, or his heirs, and the then
directors of the corporation and to those persons who may at that time to be holders of the ordinary and special shares of the corporation.
This cause of action is not directed to any positive misdemeanor supposed to have been committed by the association. It has exclusive
relation to what may happen some thirty-five years hence when the franchise expires, supposing of course that the corporation should not be
reorganized and continued after that date. It seems to us that this is matter that may be left to the prevision of the directors or to legislative
action if it should be deemed expedient to require the gradual suppression of the reserve funds as the time for dissolution approaches. It is
no matter for judicial interference, and much less could the resumption of the franchise on this ground be justified. Sixteenth cause of action:
that various loans now outstanding have been made by the respondent to corporations and partnerships, and that these entities have in
some instances subscribed to shares in the respondent for the sole purpose of obtaining such loans. In section 173 of the Corporation Law it
is declared that "any person" may become a stockholder in building and loan associations. The word "person" appears to be here used in its
general sense, and there is nothing in the context to indicate that the expression is used in the restricted sense of both natural and artificial
persons, as indicated in section 2 of the Administrative Code. We would not say that the word "person" or persons," is to be taken in this
broad sense in every part of the Corporation Law. Seventeenth cause of action: that in disposing of real estates purchased by it in the
collection of its loans, the defendant has in various occasions sold some of the said real estate on credit, transferring the title thereto to the
purchaser; that the properties sold are then mortgaged to the defendant to secure the payment of the purchase price, said amount being
considered as a loan, and carried as such in the books of the defendant, and that several such obligations are still outstanding. It is further
charged that the persons and entities to which said properties are sold under the condition charged are not members or shareholders nor are
they made members or shareholders of the defendant. This part of the complaint is based upon a mere technicality of bookkeeping. The
central idea involved in the discussion is the provision of the Corporation Law requiring loans to be stockholders only and on the security of
real estate and shares in the corporation, or of shares alone. It seems to be supposed that, when the respondent sells property acquired at
its own foreclosure sales and takes a mortgage to secure the deferred payments, the obligation of the purchaser is a true loan, and hence
prohibited. But in requiring the respondent to sell real estate which it acquires in connection with the collection of its loans within five years
after receiving title to the same, the law does not prescribe that the property must be sold for cash or that the purchaser shall be a
shareholder in the corporation. In conclusion, the respondent is enjoined in the future from administering real property not owned by itself,
except as may be permitted to it by contract when a borrowing shareholder defaults in his obligation. In all other respects the complaint is
dismissed

RP vs. Acoje Mining, 7 SCRA 361


On May 17, 1948, the Acoje Mining Company, Inc. wrote the Director of Posts requesting the opening of a post, telegraph and money order
offices at its mining camp at Sta. Cruz, Zambales, to service its employees and their families that were living in said camp. Acting on the
request, the Director of Posts wrote in reply stating that if aside from free quarters the company would provide for all essential equipment
and assign a responsible employee to perform the duties of a postmaster without compensation from his office until such time as funds
therefor may be available he would agree to put up the offices requested. The company in turn replied signifying its willingness to comply
with all the requirements outlined in the letter of the Director of Posts requesting at the same time that it be furnished with the necessary
forms for the early establishment of a post office branch.
On April 11, 1949, the Director of Posts again wrote a letter to the company stating among other things that "In cases where a post office will
be opened under circumstances similar to the present, it is the policy of this office to have the company assume direct responsibility for
whatever pecuniary loss may be suffered by the Bureau of Posts by reason of any act of dishonesty, carelessness or negligence on the part
of the employee of the company who is assigned to take charge of the post office," thereby suggesting that a resolution be adopted by the
board of directors of the company expressing conformity to the above condition relative to the responsibility to be assumed buy it in the event
a post office branch is opened as requested. On September 2, 1949, the company informed the Director of Posts of the passage by its board
of directors of a resolution of the following tenor: "That the requirement of the Bureau of Posts that the Company should accept full
responsibility for all cash received by the Postmaster be complied with, and that a copy of this resolution be forwarded to the Bureau of
Posts." The letter further states that the company feels that that resolution fulfills the last condition imposed by the Director of Posts and that,
therefore, it would request that an inspector be sent to the camp for the purpose of acquainting the postmaster with the details of the
operation of the branch office.
The post office branch was opened at the camp on October 13, 1949 with one Hilario M. Sanchez as postmaster. He is an employee of the
company. On May 11, 1954, the postmaster went on a three-day leave but never returned. The company immediately informed the officials of
the Manila Post Office and the provincial auditor of Zambales of Sanchez' disappearance with the result that the accounts of the postmaster
were checked and a shortage was found in the amount of P13,867.24.
The several demands made upon the company for the payment of the shortage in line with the liability it has assumed having failed, the
government commenced the present action on September 10, 1954 before the Court of First Instance of Manila seeking to recover the
amount of Pl3,867.24. The company in its answer denied liability for said amount contending that the resolution of the board of directors
wherein it assumed responsibility for the act of the postmaster is ultra vires, and in any event its liability under said resolution is only that of a
guarantor who answers only after the exhaustion of the properties of the principal, aside from the fact that the loss claimed by the plaintiff is
not supported by the office record.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved by this Honorable Court, without
prejudice to the parties adducing other evidence to prove their case not covered by this stipulation of facts. 1äwphï1.ñët
After trial, the court a quo found that, of the amount claimed by plaintiff totalling P13,867.24, only the sum of P9,515.25 was supported by the
evidence, and so it rendered judgment for the plaintiff only for the amount last mentioned. The court rejected the contention that the
resolution adopted by the company is ultra vires and that the obligation it has assumed is merely that of a guarantor.
Defendant took the present appeal.
The contention that the resolution adopted by the company dated August 31, 1949 is ultra vires in the sense that it has no authority to act on
a matter which may render the company liable as a guarantor has no factual or legal basis. In the first place, it should be noted that the
opening of a post office branch at the mining camp of appellant corporation was undertaken because of a request submitted by it to promote
the convenience and benefit of its employees. The idea did not come from the government, and the Director of Posts was prevailed upon to
agree to the request only after studying the necessity for its establishment and after imposing upon the company certain requirements
intended to safeguard and protect the interest of the government. Thus, after the company had signified its willingness to comply with the
requirement of the government that it furnish free quarters and all the essential equipment that may be necessary for the operation of the
office including the assignment of an employee who will perform the duties of a postmaster, the Director of Posts agreed to the opening of
the post office stating that "In cases where a post office will be opened under circumstances similar to the present, it is the policy of this office
to have the company assume direct responsibility for whatever pecuniary loss may be suffered by the Bureau of Posts by reason of any act
of dishonesty, carelessness or negligence on the part of the employee of the company who is assigned to take charge of the post office," and
accepting this condition, the company, thru its board of directors, adopted forthwith a resolution of the following tenor: "That the requirement
of the Bureau of Posts that the company should accept full responsibility for all cash received by the Postmaster, be complied with, and that
a copy of this resolution be forwarded to the Bureau of Posts." On the basis of the foregoing facts, it is evident that the company cannot now
be heard to complain that it is not liable for the irregularity committed by its employee upon the technical plea that the resolution approved by
its board of directors is ultra vires. The least that can be said is that it cannot now go back on its plighted word on the ground of estoppel.
The claim that the resolution adopted by the board of directors of appellant company is an ultra vires act cannot also be entertained it
appearing that the same covers a subject which concerns the benefit, convenience and welfare of its employees and their families. While as
a rule an ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its organization and
therefore beyond the powers conferred upon it by law (19 C.J.S., Section 965, p. 419), there are however certain corporate acts that may be
performed outside of the scope of the powers expressly conferred if they are necessary to promote the interest or welfare of the corporation.
Thus, it has been held that "although not expressly authorized to do so a corporation may become a surety where the particular transaction
is reasonably necessary or proper to the conduct of its business,"1 and here it is undisputed that the establishment of the local post office is a
reasonable and proper adjunct to the conduct of the business of appellant company. Indeed, such post office is a vital improvement in the
living condition of its employees and laborers who came to settle in its mining camp which is far removed from the postal facilities or means
of communication accorded to people living in a city or municipality..
Even assuming arguendo that the resolution in question constitutes an ultra vires act, the same however is not void for it was approved not
in contravention of law, customs, public order or public policy. The term ultra vires should be distinguished from an illegal act for the former is
merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated. 2 It being
merely voidable, an ultra vires act can be enforced or validated if there are equitable grounds for taking such action. Here it is fair that the
resolution be upheld at least on the ground of estoppel. On this point, the authorities are overwhelming:
The weight of authority in the state courts is to the effect that a transaction which is merely ultra vires and not malum in
se or malum prohibitum, is, if performed by one party, not void as between the parties to all intents and purposes, and that an
action may be brought directly on the transaction and relief had according to its terms. (19 C.J.S., Section 976, p.
432, citing Nettles v. Rhett, C.C.A.S.C., 94 F. 2d, reversing, D.C., 20 F. Supp. 48)
This rule is based on the consideration that as between private corporations, one party cannot receive the benefits which are
embraced in total performance of a contract made with it by another party and then set up the invalidity of the transaction as a
defense." (London & Lancashire Indemnity Co. of America v. Fairbanks Steam Shovel Co., 147 N.E. 329, 332, 112 Ohio St. 136.)
The defense of ultra vires rests on violation of trust or duty toward stockholders, and should not be entertained where its allowance
will do greater wrong to innocent parties dealing with corporation..
The acceptance of benefits arising from the performance by the other party may give rise to an estoppel precluding repudiation of
the transaction. (19 C.J.S., Section 976, p. 433.)
The current of modern authorities favors the rule that where the ultra vires transaction has been executed by the other party and
the corporation has received the benefit of it, the law interposes an estoppel, and will not permit the validity of the transaction or
contract to be questioned, and this is especially true where there is nothing in the circumstances to put the other party to the
transaction on notice that the corporation has exceeded its powers in entering into it and has in so doing overstepped the line of
corporate privileges. (19 C.J.S., Section 977, pp. 435-437, citing Williams v. Peoples Building & Loan Ass'n, 97 S.W. 2d 930, 193
Ark. 118; Hays v. Galion Gas Light Co., 29 Ohio St. 330)
Neither can we entertain the claim of appellant that its liability is only that of a guarantor. On this point, we agree with the following comment
of the court a quo: "A mere reading of the resolution of the Board of Directors dated August 31, 1949, upon which the plaintiff based its claim
would show that the responsibility of the defendant company is not just that of a guarantor. Notice that the phraseology and the terms
employed are so clear and sweeping and that the defendant assumed 'full responsibility for all cash received by the Postmaster.' Here the
responsibility of the defendant is not just that of a guarantor. It is clearly that of a principal."
WHEREFORE, the decision appealed from is affirmed. No costs.

Carlos vs. Mindoro Sugar Co, 57 Phil 343


Facts: This is an action to recover from the defendants the value of four bonds with due and unpaid interest thereon, issued by the Mindoro
Sugar Company and placed in trust with the Philippine Trust Company. Mindoro Sugar Company is a corporation constituted in accordance
with the laws of the country. According to its articles of incorporation one of its principal purposes was to acquire and exercise the franchise
granted by Act No. 2720 to George H. Fairchild, to substitute the organized corporation. Philippine Trust Company is another domestic
corporation its principal purpose, then, as its name indicates, is to engage in the trust business. The board of directors of the Philippine Trust
Company, adopted a resolution authorizing its president, among other things, to purchase the bonds in the Mindoro Sugar Company that
was about to issue, and to resell them, with or without the guarantee of said trust corporation, at a price not less than par, and to guarantee
to the Philippine National Bank the payment of the indebtedness to said bank by the Mindoro Sugar Company. Pursuance of this resolution,
the Mindoro Sugar Company executed in favor of the Philippine Trust Company the deed of trust transferring all of its property to it in
consideration of the bonds it had issued. Philippine Trust Company sold thirteen bonds, to Ramon Diaz. The Philippine Trust Company paid
the appellant, upon presentation of the coupons, the stipulated interest from the date of their maturity then it stopped payments; and
thenceforth it alleged that it did not deem itself bound to pay such interest or to redeem the obligation because the guarantee given for the
bonds was illegal and void.
Issue: WON PTC has the power to guarantee and does this act constitute an ultra vires act?
Held: No. It is not ultra vires for a corporation to enter into contracts of guaranty or suretyship where it does so in the legitimate furtherance
of its purposes and business. And it is well settled that where a corporation acquires commercial paper or bonds in the legitimate transaction
of its business it may sell them, and in furtherance of such a sale it may, in order to make them the more readily marketable, indorse or
guarantee their payment.
Whenever a corporation has the power to take and dispose of the securities of another corporation, of whatsoever kind, it may, for the
purpose of giving them a marketable quality, guarantee their payment, even though the amount involved in the guaranty may subject the
corporation to liabilities in excess of the limit of indebtedness which it is authorized to incur. A corporation which has power by its charter to
issue its own bonds has power to guarantee the bonds of another corporation, which has been taken in payment of a debt due to it, and
which it sells or transfers in payment of its own debt, the guaranty being given to enable it to dispose of the bond to better advantage. And so
guaranties of payment of bonds taken by a loan and trust company in the ordinary course of its business, made in connection with their sale,
are not ultra vires, and are binding.
When a contract is not on its face necessarily beyond the scope of the power of the corporation by which it was made, it will, in the absence
of proof to the contrary, be presumed to be valid.

Nat’l Power Corp. vs. Vera, 170 SCRA 721


FACTS: The instant petition arose from a complaint for prohibition and mandamus with damages filed by private respondent against NPC
and Philippine Ports Authority (PPA), wherein private respondent alleged that NPC had acted in bad faith and with grave abuse of discretion
in not renewing its Contract for Stevedoring Services for Coal-Handling Operations at NPC's plant, and in taking over its stevedoring
services. Soon after the filing of private respondent's complaint, respondent judge issued a restraining order against NPC enjoining the latter
from undertaking stevedoring services at its pier. Consequently, NPC filed an "Urgent Motion" to dissolve the restraining order, asserting,
inter alia: (1) that by virtue of Presidential Decree No. 1818, respondent judge had no jurisdiction to issue the order; and (2) that private
respondent, whose contract with NPC had expired prior to the commencement of the suit, failed to establish a cause of action for a writ of
preliminary injunction. Respondent judge issued the assailed Order denying NPC's motion and issuing a writ of preliminary injunction, after
finding that NPC was not empowered by its Charter, Republic Act No. 6395, as amended, to engage in stevedoring and arrastre services.
Hence, the instant petition.
ISSUE: Whether or not NPC was empowered by its Charter to engage in stevedoring and arrastre services?

Ruling: Yes. Moreover, respondent judge's finding that NPC is not empowered by its Charter to undertake stevedoring services in its pier is
erroneous. To carry out the national policy of total electrification of the country, specifically the development of hydroelectric generation of
power and the production of electricity from nuclear, geothermal and other sources to meet the needs of industrial development and
dispersal and the needs of rural electrification [Secs. 1 and 2, Rep. Act No. 6395, as amended], the NPC was created and empowered not
only to construct, operate and maintain power plants, reservoirs, transmission lines, and other works, but also: xxx xxx xxx ... To exercise
such powers and do such things as may be reasonably necessary to carry out the business and purposes for which it was organized, or
which, from time to time, may be declared by the Board to be necessary, useful, incidental or auxiliary to accomplish said purpose, . . . [Sec.
3 (1) of Rep. Act No. 6395, as amended.] In determining whether or not an NPC act falls within the purview of the above provision, the Court
must decide whether or not a logical and necessary relation exists between the act questioned and the corporate purpose expressed in the
NPC charter. For if that act is one which is lawful in itself and not otherwise prohibited, and is done for the purpose of serving corporate ends,
and reasonably contributes to the promotion of those ends in a substantial and not in a remote and fanciful sense, it may be fairly considered
within the corporation's charter powers [Montelibano v. Bacolod-Murcia Milling Co., Inc., G.R. No. L-15092, May 18, 1962, 5 SCRA 36.] In the
instant case, it is an undisputed fact that the pier located at Calaca, Batangas, which is owned by NPC, receives the various shipments of
coal which is used exclusively to fuel the Batangas Coal-Fired Thermal Power Plant of the NPC for the generation of electric power. The
stevedoring services which involve the unloading of the coal shipments into the NPC pier for its eventual conveyance to the power plant are
incidental and indispensable to the operation of the plant The Court holds that NPC is empowered under its Charter to undertake such
services, it being reasonably necessary to the operation and maintenance of the power plant.

Madrigal & Co. vs. Zamora, 151 SCRA 355


Madrigal & Company, Inc. (MCI) manages the business of another corporation, Rizal Cement Co., Inc. (RCC). In 1973, a labor union in MCI
sought the renewal of the collective bargaining agreement (CBA). The union proposes a P200.00 monthly wage increase and an additional
P100 monthly allowance. MCI refused to negotiate. Later, MCI reduced its authorized capital stocks. It then wrote a letter to the Department
of Labor averring that it is incurring losses and so it will enforce a retrenchment program. The letter is however unsupported by documents
and so the Department of Labor ignored it. However, MCI went on to dismiss several employees which led the labor union to sue MCI for
unfair labor practices and illegal dismissal. The labor arbiter ruled in favor of the labor union. The issue reached the Office of the President.
The then Presidential Assistant For Legal Affairs, Ronaldo Zamora, denied MCI’s appeal.
On appeal, MCI insists that it is incurring losses; that as such, it has to reduce its capitalization; that the profits it is earning are cash
dividends from RCC; that under the law, dividends are the absolute property of a stockholder like MCI and cannot be compelled to share it
with creditors (like the employees).
ISSUE: Whether or not the dividends in this case, as understood by MCI, cannot be made available to meet its employees economic
demands.
HELD: No. As found by the labor arbiter, MCI is in fact making significant profits. MCI’s reduction of its capitalization is simply a scheme to
avoid negotiations with the labor union. It is therefore correct for the arbiter to order MCI to comply with the union’s demands.
It is true that cash dividends are the absolute property of the stockholders and cannot be made available for disposition to a corporation’s
creditors. However, this should be viewed in context. This is only true in the case of corporation distributing dividends to its stockholders. If
this is the case (if the dividends are still with the corporation, in this case RCC), then creditors cannot touch such dividends. But if the
stockholder already receives the dividends, then it becomes a profit on the part of the stockholder hence its creditors (like the employees)
can make some demands out of it. In this case, MCI is a stockholder of RCC. While RCC still has not distributed the dividends, creditors
cannot demand it because such dividends are owned by stockholders like MCI. But when MCI already receives the dividends, then MCI’s
creditors can already demand share from the dividends because such dividends are already the profits of the stockholder/MCI. So in this
case, the employees can demand their share from said profits (not strictly viewed as dividends now) by way of salary increase.