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Madrigal & Company v. Zamora (G.R. No.

Moreover, it is incorrect to say that such profits — in the form of dividends —

are beyond the reach of the petitioner’s creditors since the petitioner had
received them as compensation for its management services in favor of the

companies it managed as a shareholder thereof. As such shareholder, the

Respondent Madrigal Central Office Employees Union sought for the renewal
dividends paid to it were its own money, which may then be available for wage
of their CBA with petitioner as well as an increase in their wage, allowance and
increments. It is not a case of a corporation distributing dividends in favor of
other benefits. Petitioner however requested deferment in the negotiations
its stockholders, in which case, such dividends would be the absolute property
and later on reduced its authorized capitalization on two occasions.
of the stockholders and hence, out of reach by creditors of the corporation.
Respondent Union commenced a complaint for unfair labor practice and
Here, the petitioner was acting as stockholder itself, and in that case, the right
illegal lockout against petitioner. Petitioner alleges it sustained operational
to a share in such dividends, by way of salary increases, may not be denied its
losses and further, that whatever profits it earned is in the nature of dividends
which cannot be disposed to meet employees’ economic demands. Petitioner

motions for reconsideration and appeal proved futile.

[G.R. No. 51765. March 3, 1997]



Whether or not the dividends earned by petitioners can be used to satisfy the AGANA, SR., as Presiding Judge, Court of First Instance of
Rizal, Branch XXVIII, Pasay City, ROBES-FRANCISCO
ROBES, respondents.

Ruling: YES.

We agree with the National Labor Relations Commission that “[t]he dividends This is a petition for certiorari seeking the annulment of the Decision[1] of the
then Court of First Instance of Rizal[2] for having been rendered in grave
received by the company are corporate earnings arising from corporate abuse of discretion. Private respondents Robes-Francisco Realty and
Development Corporation (hereafter, "the Corporation") and Adalia F. Robes
investment.” Indeed, as found by the Commission, the petitioner had entered filed in the court a quo, an action for specific performance to compel
petitioner to redeem 800 preferred shares of stock with a face value
such earnings in its financial statements as profits, which it would not have of P8,000.00 and to pay 1% quarterly interest thereon as quarterly dividend
owing them under the terms and conditions of the certificates of stock.
done if they were not in fact profits.
The court a quo rendered judgment in favor of private respondents; Petitioner's Motion to Dismiss was denied by the trial court in an Order
hence, this instant petition. dated March 16, 1979.[4] Petitioner then filed its Answer on May 2,
1979.[5] Thereafter, the trial court gave the parties ten (10) days from July 30,
Herein parties debate only legal issues, no issues of fact having been 1979 to submit their respective memoranda after the submission of which the
raised by them in the court a quo. For ready reference, however, the following case would be deemed submitted for resolution.[6]
narration of pertinent transactions and events is in order:
On September 7, 1979, the trial court rendered the herein assailed
On September 18, 1961, private respondent Corporation secured a loan from decision in favor of private respondents. In ordering petitioner to pay private
petitioner in the amount of P120,000.00. As part of the proceeds of the loan, respondents the face value of the stock certificates as redemption price, plus
preferred shares of stocks were issued to private respondent Corporation, 1% quarterly interest thereon until full payment, the trial court ruled:
through its officers then, private respondent Adalia F. Robes and one Carlos
F. Robes. In other words, instead of giving the legal tender totaling to the full "There being no issue of fact raised by either of the parties who filed their
amount of the loan, which is P120,000.00, petitioner lent such amount respective memoranda delineating their respective contentions, a judgment
partially in the form of money and partially in the form of stock certificates on the pleadings, conformably with an earlier order of the Court, appears to
numbered 3204 and 3205, each for 400 shares with a par value of P10.00 per be in order.
share, or for P4,000.00 each, for a total of P8,000.00. Said stock certificates
were in the name of private respondent Adalia F. Robes and Carlos F. Robes, From a further perusal of the pleadings, it appears that the provision of the
who subsequently, however, endorsed his shares in favor of Adalia F. Robes. stock certificates in question to the effect that the plaintiffs shall have the
right to receive a quarterly dividend of One Per Centum (1%), cumulative and
Said certificates of stock bear the following terms and conditions: participating, clearly and unequivocably [sic] indicates that the same are
'interest bearing stocks' which are stocks issued by a corporation under an
"The Preferred Stock shall have the following rights, preferences, agreement to pay a certain rate of interest thereon (5 Thompson, Sec. 3439).
qualifications and limitations, to wit: As such, plaintiffs become entitled to the payment thereof as a matter of right
without necessity of a prior declaration of dividend.
1. Of the right to receive a quarterly dividend of
One Per Centum (1%), cumulative and On the question of the redemption by the defendant of said preferred shares
participating. of stock, the very wordings of the terms and conditions in said stock
xxx certificates clearly allows the same.
2. That such preferred shares may be
redeemed, by the system of drawing lots, at To allow the herein defendant not to redeem said preferred shares of stock
any time after two (2) years from the date and/or pay the interest due thereon despite the clear import of said
of issue at the option of the Corporation. x provisions by the mere invocation of alleged Central Bank Circulars
x x." prohibiting the same is tantamount to an impairment of the obligation of
contracts enshrined in no less than the fundamental law itself.
On January 31, 1979, private respondents proceeded against petitioner and
filed a Complaint anchored on private respondents' alleged rights to collect Moreover, the herein defendant is considered in estoppel from taking shelter
dividends under the preferred shares in question and to have petitioner behind a General Banking Act provision to the effect that it cannot buy its
redeem the same under the terms and conditions of the stock certificates. own shares of stocks considering that the very terms and conditions in said
Private respondents attached to their complaint, a letter-demand dated stock certificates allowing their redemption are its own handiwork.
January 5, 1979 which, significantly, was not formally offered in evidence.
As to the claim by the defendant that plaintiffs' cause of action is barred by
Petitioner filed a Motion to Dismiss[3] private respondents' Complaint on prescription, suffice it to state that the running of the prescriptive period was
the following grounds: (1) that the trial court had no jurisdiction over the considered interrupted by the written extrajudicial demands made by the
subject-matter of the action; (2) that the action was unenforceable under plaintiffs from the defendant."[7]
substantive law; and (3) that the action was barred by the statute of limitations
and/or laches.
Aggrieved by the decision of the trial court, petitioner elevated the case dividends on said share to the extent agreed upon before any dividends at all
before us essentially on pure questions of law. Petitioner's statement of the are paid to the holders of common stock.[11] There is no guaranty, however, that
issues that it submits for us to adjudicate upon, is as follows: the share will receive any dividends. Under the old Corporation Law in force
at the time the contract between the petitioner and the private respondents
"A. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF was entered into, it was provided that "no corporation shall make or declare
DISCRETION AMOUNTING TO LACK OR EXCESS OF any dividend except from the surplus profits arising from its business, or
JURISDICTION IN ORDERING PETITIONER TO PAY distribute its capital stock or property other than actual profits among its
RESPONDENT ADALIA F. ROBES THE AMOUNT members or stockholders until after the payment of its debts and the
OF P8,213.69 AS INTERESTS FROM 1961 To 1979 ON HER termination of its existence by limitation or lawful dissolution." [12] Similarly,
PREFERRED SHARES. the present Corporation Code[13] provides that the board of directors of a stock
corporation may declare dividends only out of unrestricted retained
earnings.[14] The Code, in Section 43, adopting the change made in accounting
terminology, substituted the phrase unrestricted retained earnings," which
may be a more precise term, in place of "surplus profits arising from its
business" in the former law. Thus, the declaration of dividends is dependent
upon the availability of surplus profit or unrestricted retained earnings, as the
FOR P8,000.00
case may be. Preferences granted to preferred stockholders, moreover, do not
give them a lien upon the property of the corporation nor make them creditors
C. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE of the corporation, the right of the former being always subordinate to the
OF DISCRETION AMOUNTING TO LACK OR EXCESS OF latter. Dividends are thus payable only when there are profits earned by the
JURISDICTION IN DISREGARDING THE ORDER OF THE corporation and as a general rule, even if there are existing profits, the board
CENTRAL BANK TO PETITIONER TO DESIST FROM of directors has the discretion to determine whether or not dividends are to be
REDEEMING ITS PREFERRED SHARES AND FROM declared.[15] Shareholders, both common and preferred, are considered risk
PAYING DIVIDENDS THEREON x x x. takers who invest capital in the business and who can look only to what is left
after corporate debts and liabilities are fully paid.[16]
THE COMPLAINT DOES NOT STATE A CAUSE OF Redeemable shares, on the other hand, are shares usually preferred,
ACTION. which by their terms are redeemable at a fixed date, or at the option of either
issuing corporation, or the stockholder, or both at a certain redemption
price.[17] A redemption by the corporation of its stock is, in a sense, a
repurchase of it for cancellation.[18] The present Code allows redemption of
shares even if there are no unrestricted retained earnings on the books of the
corporation. This is a new provision which in effect qualifies the general rule
that the corporation cannot purchase its own shares except out of current
The petition is meritorious. retained earnings.[19] However, while redeemable shares may be redeemed
Before passing upon the merits of this petition, it may be pertinent to regardless of the existence of unrestricted retained earnings, this is subject to
provide an overview on the nature of preferred shares and the redemption the condition that the corporation has, after such redemption, assets in its
thereof, considering that these issues lie at the heart of the dispute. books to cover debts and liabilities inclusive of capital stock. Redemption,
therefore, may not be made where the corporation is insolvent or if such
A preferred share of stock, on one hand, is one which entitles the holder redemption will cause insolvency or inability of the corporation to meet its
thereof to certain preferences over the holders of common stock. The debts as they mature.[20]
preferences are designed to induce persons to subscribe for shares of a
corporation.[9] Preferred shares take a multiplicity of forms. The most common We come now to the merits of the case. The petitioner argues that it
forms may be classified into two: (1) preferred shares as to assets; and (2) cannot be compelled to redeem the preferred shares issued to the private
preferred shares as to dividends. The former is a share which gives the holder respondent. We agree. Respondent judge, in ruling that petitioner must
thereof preference in the distribution of the assets of the corporation in case of redeem the shares in question, stated that:
liquidation;[10] the latter is a share the holder of which is entitled to receive
"On the question of the redemption by the defendant of said preferred shares representing not less than two-thirds (2/3) of the outstanding capital stock at
of stock, the very wordings of the terms and conditions in said stock a regular or special meeting duly called for the purpose. These provisions
certificates clearly allows the same."[21] underscore the fact that payment of dividends to a stockholder is not a matter
of right but a matter of consensus. Furthermore, "interest bearing stocks", on
What respondent Judge failed to recognize was that while the stock certificate which the corporation agrees absolutely to pay interest before dividends are
does allow redemption, the option to do so was clearly vested in the petitioner paid to common stockholders, is legal only when construed as requiring
bank. The redemption therefore is clearly the type known as "optional". Thus, payment of interest as dividends from net earnings or surplus only.[27] Clearly,
except as otherwise provided in the stock certificate, the redemption rests the respondent judge, in compelling the petitioner to redeem the shares in
entirely with the corporation and the stockholder is without right to either question and to pay the corresponding dividends, committed grave abuse of
compel or refuse the redemption of its stock. [22] Furthermore, the terms and discretion amounting to lack or excess of jurisdiction in ignoring both the
conditions set forth therein use the word "may". It is a settled doctrine in terms and conditions specified in the stock certificate, as well as the clear
statutory construction that the word "may" denotes discretion, and cannot be mandate of the law.
construed as having a mandatory effect. We fail to see how respondent judge Anent the issue of prescription, this Court so holds that the claim of
can ignore what, in his words, are the "very wordings of the terms and private respondent is already barred by prescription as well as laches. Art. 1144
conditions in said stock certificates" and construe what is clearly a mere option of the New Civil Code provides that a right of action that is founded upon a
to be his legal basis for compelling the petitioner to redeem the shares in written contract prescribes in ten (10) years. The letter-demand made by the
question. private respondents to the petitioner was made only on January 5, 1979, or
The redemption of said shares cannot be allowed. As pointed out by the almost eighteen years after receipt of the written contract in the form of the
petitioner, the Central Bank made a finding that said petitioner has been stock certificate. As noted earlier, this letter-demand, significantly, was not
suffering from chronic reserve deficiency,[23] and that such finding resulted in formally offered in evidence, nor were any other evidence of demand
a directive, issued on January 31, 1973 by then Gov. G. S. Licaros of the Central presented. Therefore, we conclude that the only time the private respondents
Bank, to the President and Acting Chairman of the Board of the petitioner bank saw it fit to assert their rights, if any, to the preferred shares of stock, was after
prohibiting the latter from redeeming any preferred share, on the ground that the lapse of almost eighteen years. The same clearly indicates that the right of
said redemption would reduce the assets of the Bank to the prejudice of its the private respondents to any relief under the law has already prescribed.
depositors and creditors.[24] Redemption of preferred shares was prohibited Moreover, the claim of the private respondents is also barred by laches. Laches
for a just and valid reason. The directive issued by the Central Bank Governor has been defined as the failure or neglect, for an unreasonable length of time,
was obviously meant to preserve the status quo, and to prevent the financial to do that which by exercising due diligence could or should have been done
ruin of a banking institution that would have resulted in adverse earlier; it is negligence or omission to assert a right within a reasonable time,
repercussions, not only to its depositors and creditors, but also to the banking warranting a presumption that the party entitled to assert it either has
industry as a whole. The directive, in limiting the exercise of a right granted by abandoned it or declined to assert it.[28]
law to a corporate entity, may thus be considered as an exercise of police Considering that the terms and conditions set forth in the stock certificate
power. The respondent judge insists that the directive constitutes an clearly indicate that redemption of the preferred shares may be made at any
impairment of the obligation of contracts. It has, however, been settled that time after the lapse of two years from the date of issue, private respondents
the Constitutional guaranty of non-impairment of obligations of contract is should have taken it upon themselves, after the lapse of the said period, to
limited by the exercise of the police power of the state, the reason being that inquire from the petitioner the reason why the said shares have not been
public welfare is superior to private rights.[25] redeemed. As it is, not only two years had lapsed, as agreed upon, but an
The respondent judge also stated that since the stock certificate granted additional sixteen years passed before the private respondents saw it fit to
the private respondents the right to receive a quarterly dividend of one Per demand their right. The petitioner, at the time it issued said preferred shares
Centum (1%), cumulative and participating, it "clearly and unequivocably (sic) to the private respondents in 1961, could not have known that it would be
indicates that the same are 'interest bearing stocks' or stocks issued by a suffering from chronic reserve deficiency twelve years later. Had the private
corporation under an agreement to pay a certain rate of interest thereon. As respondents been vigilant in asserting their rights, the redemption could have
such, plaintiffs (private respondents herein) become entitled to the payment been effected at a time when the petitioner bank was not suffering from any
thereof as a matter of right without necessity of a prior declaration of financial crisis.
dividend."[26] There is no legal basis for this observation. Both Sec. 16 of the
Corporation Law and Sec. 43 of the present Corporation Code prohibit the
issuance of any stock dividend without the approval of stockholders,
WHEREFORE, the instant petition, being impressed with merit, is the termination of his membership due to the sale of his share of stock in the
hereby GRANTED. The challenged decision of respondent judge is set aside 10 December 1986 auction. On 5 May 1989, CBC advised VGCCI that it is the
and the complaint against the petitioner is dismissed. new owner of Calapatia's Stock Certificate 1219 by virtue of being the highest
Costs against the private respondents. bidder in the 17 September 1985 auction and requested that a new certificate
of stock be issued in its name. On 2 March 1990, VGCCI replied that "for
SO ORDERED. reason of delinquency" Calapatia's stock was sold at the public auction held on
10 December 1986 for P25,000.00. On 9 March 1990, CBC protested the sale
by VGCCI of the subject share of stock and thereafter filed a case with the
China Banking Corporation vs CA Case Digest Regional Trial Court of Makati for the nullification of the 10 December 1986
China Banking Corporation vs. Court of Appeals auction and for the issuance of a new stock certificate in its name. On 18 June
1990, the Regional Trial Court of Makati dismissed the complaint for lack of
[GR 117604, 26 March 1997] jurisdiction over the subject matter on the theory that it involves an intra-
corporate dispute and on 27 August 1990 denied CBC's motion for
reconsideration. On 20 September 1990, CBC filed a complaint with the
Facts: On 21 August 1974, Galicano Calapatia, Jr., a stockholder of Valley Golf Securities and Exchange Commission (SEC) for the nullification of the sale of
& Country Club, Inc. (VGCCI), pledged his Stock Certificate 1219 to China Calapatia's stock by VGCCI; the cancellation of any new stock certificate issued
Banking Corporation (CBC). On 16 September 1974, CBC wrote VGCCI pursuant thereto; for the issuance of a new certificate in petitioner's name; and
requesting that the pledge agreement be recorded in its books. In a letter dated for damages, attorney's fees and costs of litigation.
27 September 1974, VGCCI replied that the deed of pledge executed by
Calapatia in CBC's favor was duly noted in its corporate books. On 3 August
1983, Calapatia obtained a loan of P20,000.00 from CBC, payment of which On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision
was secured by the pledge agreement still existing between Calapatia and CBC. in favor of VGCCI, stating in the main that considering that the said share is
Due to Calapatia's failure to pay his obligation, CBC, on 12 April 1985, filed a delinquent, VGCCI had valid reason not to transfer the share in the name of
petition for extrajudicial foreclosure before Notary Public Antonio T. de Vera CBC in the books of VGCCI until liquidation of delinquency. Consequently, the
of Manila, requesting the latter to conduct a public auction sale of the pledged case was dismissed. On 14 April 1992, Hearing Officer Perea denied CBC's
stock. On 14 May 1985, CBC informed VGCCI of the foreclosure proceedings motion for reconsideration. CBC appealed to the SEC en banc and on 4 June
and requested that the pledged stock be transferred to its name and the same 1993, the Commission issued an order reversing the decision of its hearing
be recorded in the corporate books. However, on 15 July 1985, VGCCI wrote officer; holding that CBC has a prior right over the pledged share and because
CBC expressing its inability to accede to CBC's request in view of Calapatia's of pledgor's failure to pay the principal debt upon maturity, CBC can proceed
unsettled accounts with the club. Despite the foregoing, Notary Public de Vera with the foreclosure of the pledged share; declaring that the auction sale
held a public auction on 17 September 1985 and CBC emerged as the highest conducted by VGCCI on 10 December 1986 is declared NULL and VOID; and
bidder at P20,000.00 for the pledged stock. Consequently, CBC was issued the ordering VGCCI to issue another membership certificate in the name of CBC.
corresponding certificate of sale. VGCCI sought reconsideration of the order. However, the SEC denied the same
in its resolution dated 7 December 1993. The sudden turn of events sent VGCCI
to seek redress from the Court of Appeals. On 15 August 1994, the Court of
On 21 November 1985, VGCCI sent Calapatia a notice demanding full payment Appeals rendered its decision nullifying and setting aside the orders of the SEC
of his overdue account in the amount of P18,783.24. Said notice was followed and its hearing officer on ground of lack of jurisdiction over the subject matter
by a demand letter dated 12 December 1985 for the same amount and another and, consequently, dismissed CBC's original complaint. The Court of Appeals
notice dated 22 November 1986 for P23,483.24. On 4 December 1986, VGCCI declared that the controversy between CBC and VGCCI is not intra-corporate;
caused to be published in the newspaper Daily Express a notice of auction sale nullifying the SEC orders and dismissing CBC’s complaint. CBC moved for
of a number of its stock certificates, to be held on 10 December 1986 at 10:00 reconsideration but the same was denied by the Court of Appeals in its
a.m. Included therein was Calapatia's own share of stock (Stock Certificate resolution dated 5 October 1994. CBC filed the petition for review on
1219). Through a letter dated 15 December 1986, VGCCI informed Calapatia of certiorari.
subscription for the share in question has been fully paid as evidenced by the
issuance of Membership Certificate 1219. What Calapatia owed the
Issue: Whether CBC is bound by VGCCI's by-laws. corporation were merely the monthly dues. Hence, Section 63 does not apply.

Held: In order to be bound, the third party must have acquired knowledge of
the pertinent by-laws at the time the transaction or agreement between said G.R. No.148004 January 22, 2007
third party and the shareholder was entered into. Herein, at the time the
pledge agreement was executed. VGCCI could have easily informed CBC of its VINCENT E. OMICTIN, Petitioner,
by-laws when it sent notice formally recognizing CBC as pledgee of one of its vs.
shares registered in Calapatia's name. CBC's belated notice of said by-laws at HON. COURT OF APPEALS (Special Twelfth Division) and
the time of foreclosure will not suffice. By-laws signifies the rules and GEORGE I. LAGOS, Respondents.
regulations or private laws enacted by the corporation to regulate, govern and
control its own actions, affairs and concerns and its stockholders or members DECISION
and directors and officers with relation thereto and among themselves in their
relation to it. In other words, by-laws are the relatively permanent and AZCUNA, J.:
continuing rules of action adopted by the corporation for its own government
and that of the individuals composing it and having the direction, management This is a petition for certiorari1 with prayer for a writ of preliminary
and control of its affairs, in whole or in part, in the management and control injunction seeking the nullification of the decision rendered by the Court of
of its affairs and activities. The purpose of a by-law is to regulate the conduct Appeals (CA) on June 30, 2000, and its resolution, dated March 5, 2001 in
and define the duties of the members towards the corporation and among CA-G.R. SP No. 55834 entitled "George I. Lagos v. Hon. Reinato G. Quilala,
Presiding Judge of RTC, Br. 57, Makati, Hon. Elizabeth Tayo Chua, Asst. City
themselves. They are self-imposed and, although adopted pursuant to
Prosecutor, Makati City, and Vincent E. Omictin."
statutory authority, have no status as public law. Therefore, it is the generally
accepted rule that third persons are not bound by by-laws, except when they
In its assailed decision, the CA declared the existence of a prejudicial
have knowledge of the provisions either actually or constructively. For the
question and ordered the suspension of the criminal proceedings initiated by
exception to the general accepted rule that third persons are not bound by by-
petitioner Vincent E. Omictin on behalf of Saag Phils., Inc. against private
laws to be applicable and binding upon the pledgee, knowledge of the respondent George I. Lagos, in view of a pending case before the Securities
provisions of the VGCCI By-laws must be acquired at the time the pledge and Exchange Commission (SEC) filed by the latter against the former, Saag
agreement was contracted. Knowledge of said provisions, either actual or Pte. (S) Ltd., Nicholas Ng, Janifer Yeo and Alex Y. Tan.
constructive, at the time of foreclosure will not affect pledgee's right over the
pledged share. Article 2087 of the Civil Code provides that it is also of the The facts are as follows:
essence of these contracts that when the principal obligation becomes due, the
things in which the pledge or mortgage consists maybe alienated for the Petitioner Vincent E. Omictin, Operations Manager Ad Interim of Saag Phils.,
payment to the creditor. Further, VGCCI's contention that CBC is duty-bound Inc., filed a complaint for two counts of estafa with the Office of the City
to know its by-laws because of Article 2099 of the Civil Code which stipulates Prosecutor of Makati against private respondent George I. Lagos. He alleged
that the creditor must take care of the thing pledged with the diligence of a that private respondent, despite repeated demands, refused to return the two
good father of a family, fails to convince. CBC was never informed of company vehicles entrusted to him when he was still the president of Saag
Calapatia's unpaid accounts and the restrictive provisions in VGCCI's by-laws. Phils., Inc..
Furthermore, Section 63 of the Corporation Code which provides that "no
shares of stock against which the corporation holds any unpaid claim shall be On February 26, 1999, public prosecutor Alex G. Bagaoisan recommended
transferable in the books of the corporation" cannot be utilized by VGCCI. The the indictment of private respondent, and on the same day, respondent was
term "unpaid claim" refers to "any unpaid claim arising from unpaid charged with the crime of estafa under Article 315, par. 1(b) of the Revised
subscription, and not to any indebtedness which a subscriber or stockholder Penal Code before the Regional Trial Court (RTC), Branch 57 of Makati City.
may owe the corporation arising from any other transaction." Herein, the
The case was docketed as Criminal Case No. 99-633, entitled "People of the Later, due to intra-corporate disputes, Gan and Thiang resigned and divested
Philippines v. George I. Lagos." their shares in Saag Corporation (Bhd), thereby resulting in a change in the
controlling interest in Saag (S) Pte. Ltd.
On June 4, 1999, private respondent filed a motion to recuse praying that
Presiding Judge Reinato G. Quilala inhibit himself from hearing the case Barely three months after, or on June 23, 1998, private respondent resigned
based on the following grounds: his post as president of Saag Phils., Inc. while still retaining his position as a
director of the company.4 According to private respondent, the joint venture
a) In an order, dated May 28, 1999, the presiding judge summarily agreement (JVA) between him or Saag Phils., Inc. and Saag (S) Pte. Ltd.
denied respondent’s motion: 1) to defer issuance of the warrant of provided that should the controlling interest in the latter company, or its
arrest; and 2) to order reinvestigation. parent company Saag Corp. (Bhd), be acquired by any other person or entity
without his prior consent, he has the option either to require the other
stockholders to purchase his shares or to terminate the JVA and dissolve
b) Immediately before the issuance of the above-mentioned order,
Saag Phils., Inc. altogether. Thus, pursuant to this provision, since private
the presiding judge and Atty. Alex Y. Tan, SAAG Philippines, Inc.’s
respondent did not give his consent as regards the transfer of shares made by
Ad Interim President, were seen together.2
Gan and Thiang, he made several requests to Nicholas Ng, who replaced Gan
as director, and Janifer Yeo, Executive Director of Saag (S) Pte. Ltd., to call
On June 24, 1999, private respondent filed a motion to suspend proceedings for a board meeting in order to discuss the following: a) implementation of
on the basis of a prejudicial question because of a pending petition with the the board resolution declaring dividends; b) acquisition of private
Securities and Exchange Commission (SEC) involving the same parties. respondent’s shares by Saag (S) Pte. Ltd.; c) dissolution of Saag Phils., Inc.;
and d) the termination of the JVA.
It appears that on January 7, 1999, private respondent filed SEC Case No. 01-
99-6185 for the declaration of nullity of the respective appointments of Alex Ng and Yeo failed to appear, however, in the scheduled board meetings.
Y. Tan and petitioner as President Ad Interim and Operations Manager Ad Instead, on September 30, 1998 they issued a letter appointing Alex Y. Tan as
Interim of Saag Phils., Inc., declaration of dividends, recovery of share in the President Ad Interim of Saag Phils., Inc. Tan, in turn, appointed petitioner
profits, involuntary dissolution and the appointment of a receiver, recovery of Omictin as the company’s Operations Manager Ad Interim.
damages and an application for a temporary restraining order (TRO) and
injunction against Saag (S) Pte. Ltd., Nicholas Ng, Janifer Yeo, Tan and
Citing as a reason the absence of a board resolution authorizing the
petitioner. 3
continued operations of Saag Phils., Inc., private respondent retained his
possession of the office equipment of the company in a fiduciary capacity as
In the action before the SEC, private respondent averred that Saag (S) Pte. director of the corporation pending its dissolution and/or the resolution of
Ltd. is a foreign corporation organized and existing under the laws of the intra-corporate dispute. He likewise changed the locks of the offices of
Singapore, and is fully owned by Saag Corporation (Bhd). On July 1, 1994, he the company allegedly to prevent Tan and petitioner from seizing company
was appointed as Area Sales Manager in the Philippines by Thiang Shiang property.
Hiang, Manager of Saag (S) Pte. Ltd. Pursuant to his appointment,
respondent was authorized to organize a local joint venture corporation to be
Private respondent stressed that Tan’s appointment was invalid because it
known as Saag Philippines, Inc. for the wholesale trade and service of
was in derogation of the company by-laws requiring that the president must
industrial products for oil, gas and power industries in the Philippines.
be chosen from among the directors, and elected by the affirmative vote of a
majority of all the members of the board of directors.5 As Tan’s appointment
On September 9, 1994, Saag Philippines, Inc. was incorporated with Saag (S) did not have the acquiescence of the board of directors, petitioner’s
Pte. Ltd. as the majority stockholder. Private respondent was appointed to appointment by the former is likewise allegedly invalid. Thus, neither has the
the board of directors, along with Rommel I. Lagos, Jose E. Geronimo, Gan power or the authority to represent or act for Saag Phils., Inc. in any
Ching Lai and Thiang Shiang Hiang, and was elected president of the transaction or action before the SEC or any court of justice.
domestic corporation.
The trial court, in an order dated September 8, 1999, denied respondent’s
motion to suspend proceedings and motion to recuse.
His motion for reconsideration having been denied by the trial court in its Supreme Court has already TERMINATED on November 20, 2000 and a
order issued on October 29, 1999, respondent filed with the CA the petition corresponding entry of judgment has already been issued by the High Court,
for certiorari[6] assailing the aforesaid orders. that the same is final and executory, the private respondent’s motion for
reconsideration of the decision 30 June 2000 before this Court is NOTED for
On June 30, 2000, the CA rendered its challenged decision. The pertinent being moot and academic.
portion reads:
In a case for estafa, a valid demand made by an offended party is one of the
essential elements. It appears from the records that the delay of delivery of Hence, this petition raises the following issues:
the motor vehicles by petitioner to Saag Corporation is by reason of
petitioner’s contention that the demand made by Omictin and Atty. Tan to I
him to return the subject vehicles is not a valid demand. As earlier
mentioned, petitioner filed a case with the SEC questioning therein private
respondents’ appointment.

If the SEC should rule that the dissolution of Saag Phils. is proper, or that the
appointments of private respondents are invalid, the criminal case will
eventually be dismissed due to the absence of one of the essential elements of
the crime of estafa.
Based on the foregoing, it is clear that a prejudicial question exists which SAAG PHILIPPINES, INC. A DOMESTIC CORPORATION WITH A
calls for the suspension of the criminal proceedings before the lower court. SEPARATE JURIDICAL PERSONALITY OF ITS OWN AND WHICH IS NOT
WHEREFORE, in view of the foregoing, the assailed Order of September 8,
1999 and October 29, 1999, are hereby MODIFIED. The motion to suspend B) WHEN IT ORDERED THE SUSPENSION OF THE PROCEEDINGS IN
proceedings is hereby GRANTED and respondent court is hereby enjoined CRIMINAL CASE NO. 99-633 AGAINST PRIVATE RESPONDENT.
from hearing Criminal Case No. 99-633, entitled "People of the Philippines v.
George I. Lagos," until the termination of the case with the Securities and
Exchange Commission. The denial of the motion to recuse is hereby
In support of the above, petitioner argues, as follows:
Incidentally, on January 18, 2001, the SEC case8 was transferred to the
Regional Trial Court (RTC) of Mandaluyong City, Branch 214, pursuant to
A.M. No. 00-11-03-SC9 implementing the Securities and Regulation Code 1. The action before the SEC and the criminal case before the trial
(Republic Act No. 8799)10 enacted on July 19, 2000, vesting in the RTCs court do not involve any prejudicial question.13 SEC Case No. 01-99-
jurisdiction over intra-corporate disputes.11 6185 mainly involves the dissolution of Saag (S) Pte. Ltd., the
appointment of a receiver, the distribution of profits, and the
authority of petitioner and Tan to represent Saag Phils., Inc. The
Meanwhile, on March 5, 2001, the CA, addressing petitioner’s motion for
entity which is being sued is Saag (S) Pte. Ltd., a foreign corporation
reconsideration of the aforementioned decision, issued its assailed
over which the SEC has yet to acquire jurisdiction. Hence, any
decision that may be rendered in the SEC case will neither be
determinative of the innocence or guilt of the accused nor bind Saag
Considering that the petition for review on certiorari of the 30 June 2000 Phils., Inc. because the same was not made a party to the action even
decision of this Court, filed by the Office of the Solicitor General before the if the former is its holding corporation;
2. Saag Phils., Inc. has a separate corporate existence and is to be 1. That money, goods, or other personal property be received by the
treated as a separate entity from its holding or parent company, Saag offender in trust, or on commission, or for administration, or under
(S) Pte. Ltd. The mere fact that one or more corporations are owned any other obligation involving the duty to make delivery of, or to
or controlled by the same or single stockholder is not a sufficient return the same;
ground for disregarding separate corporate personalities;
2. That there be misrepresentation or conversion of such money or
3. Private respondent’s petition with the SEC seeks affirmative relief property by the offender, or denial on his part of such receipt;
against Saag (S) Pte. Ltd. for the enforcement or application of the
alleged terms of the joint venture agreement (JVA) that he 3. That such misappropriation or conversion or denial is to the
purportedly entered into with the foreign corporation while he was prejudice of another; and
still its Area Sales Manager in the Philippines. The foreign
corporation is not licensed to do business in the Philippines, thus, a
4. That there is a demand made by the offended party to the
party to a contract with a foreign corporation doing business in the
Philippines without a license is not entitled to relief from the latter;
Logically, under the circumstances, since the alleged offended party is Saag
Phils., Inc., the validity of the demand for the delivery of the subject vehicles
4. There is no pending civil or administrative case in SEC against
rests upon the authority of the person making such a demand on the
Saag Phils., Inc. that warrants the application of a prejudicial
company’s behalf. Private respondent is challenging petitioner’s authority to
question and the consequent suspension of the criminal action it has
act for Saag Phils., Inc. in the corporate case pending before the RTC of
instituted against private respondent. If any, the action before the
Mandaluyong, Branch 214. Taken in this light, if the supposed authority of
SEC was merely a ploy to delay the resolution of the criminal case
petitioner is found to be defective, it is as if no demand was ever made,
and eventually frustrate the outcome of the estafa case.
hence, the prosecution for estafa cannot prosper. Moreover, the mere failure
to return the thing received for safekeeping or on commission, or for
In sum, the main issue is whether or not a prejudicial question exists to administration, or under any other obligation involving the duty to deliver or
warrant the suspension of the criminal proceedings pending the resolution of to return the same or deliver the value thereof to the owner could only give
the intra-corporate controversy that was originally filed with the SEC. rise to a civil action and does not constitute the crime of estafa. This is
because the crime is committed by misappropriating or converting money or
A prejudicial question is defined as that which arises in a case, the resolution goods received by the offender under a lawful transaction. As stated in the
of which is a logical antecedent of the issue involved therein and the case of United States v. Bleibel:16
cognizance of which pertains to another tribunal.14 Here, the case which was
lodged originally before the SEC and which is now pending before the RTC of The crime of estafa is not committed by the failure to return the things
Mandaluyong City by virtue of Republic Act No. 8799 involves facts that are received for sale on commission, or to deliver their value, but, as this class of
intimately related to those upon which the criminal prosecution is based. crime is defined by law, by misappropriating or converting the money or
goods received on commission. Delay in the fulfillment of a commission or in
Ultimately, the resolution of the issues raised in the intra-corporate dispute the delivery of the sum on such account received only involves civil liability.
will determine the guilt or innocence of private respondent in the crime of So long as the money that a person is under obligation to deliver is not
estafa filed against him by petitioner before the RTC of Makati. As correctly demanded of him, and he fails to deliver it for having wrongfully disposed of
stated by the CA, one of the elements of the crime of estafa with abuse of it, there is no estafa, whatever be the cause of the debt.
confidence under Article 315, par. 1(b) of the Revised Penal Code is a demand
made by the offended party to the offender: Likewise, by analogy, the doctrine of primary jurisdiction may be applied in
this case. The issues raised by petitioner particularly the status of Saag Phils.,
The elements of estafa with abuse of confidence under subdivision No. 1, par. Inc. vis-à-vis Saag (S) Pte. Ltd., as well as the question regarding the
(b) of Art. 315 are as follows: supposed authority of the latter to make a demand on behalf of the company,
are proper subjects for the determination of the tribunal hearing the intra-
corporate case which in this case is the RTC of Mandaluyong, Branch 214.
These issues would have been referred to the expertise of the SEC in
accordance with the doctrine of primary jurisdiction had the case not been This is a petition to review the decision of the Court of Appeals now
transferred to the RTC of Mandaluyong. Intermediate Appellate Court annulling portions of the orders issued by
Judge Gregorio Pineda of the Court of First Instance of Rizal.
Strictly speaking, the objective of the doctrine of primary jurisdiction is to
guide a court in determining whether it should refrain from exercising its Petitioner Top-weld Manufacturing, Inc. (Top-weld) is a Philippine
jurisdiction until after an administrative agency has determined some corporation engaged in the business of manufacturing and selling welding
question or some aspect of some question arising in the proceeding before supplies and equipment.
the court.17 The court cannot or will not determine a controversy involving a
question which is within the jurisdiction of the administrative tribunal prior In pursuance of its business, the petitioner entered into separate contracts
to resolving the same, where the question demands the exercise of sound with two different foreign entities. One contract, entitled a "LICENSE AND
administrative discretion requiring special knowledge, experience and TECHNICAL ASSISTANCE AGREEMENT" and dated January 2, 1972 was
services in determining technical and intricate matters of fact.18 entered into with IRTI, S.A., (IRTI), a corporation organized and existing
under the laws of Switzerland with principal office at Fribourg,
Switzerland. By virtue of this agreement, the petitioner was constituted a
While the above doctrine refers specifically to an administrative tribunal, the
licensee of IRTI to manufacture welding products under certain
Court believes that the circumstances in the instant case do not proscribe the
specifications, with raw materials to be purchased by the former from
application of the doctrine, as the role of an administrative tribunal such as
suppliers designated by IRTI, for a period of three (3) years or up to January
the SEC in determining technical and intricate matters of special competence
1, 1975. This contract was later extended up to December 31, 1975 in a
has been taken on by specially designated RTCs by virtue of Republic Act No.
subsequent agreement.
8799.19 Hence, the RTC of Mandaluyong where the intra-corporate case is
pending has the primary jurisdiction to determine the issues under
The other contract was a "DISTRIBUTOR AGREEMENT" dated January 1,
contention relating to the status of the domestic corporation, Saag Phils.,
1975 entered into with ECED, S.A., (ECED), a company organized and
Inc., vis-à-vis Saag Pte. Ltd.; and the authority of petitioner to act on behalf
existing under the laws of Panama with principal office at Apartado 1903,
of the domestic corporation, the determination of which will have a direct
Panama I, City of Panama. Under this agreement, the petitioner was
bearing on the criminal case. The law recognizes that, in place of the SEC, the
designated as ECED's distributor in the Philippines of certain welding
regular courts now have the legal competence to decide intra-corporate
products and equipment. By its terms, the contract was to remain effective
until terminated by either party upon giving six (6) months or 180 days
written notice to the other.
In view of the foregoing, the Court finds no substantial basis in petitioner’s
contention that the CA committed grave abuse of discretion amounting to Upon learning that the two foreign entities were negotiating with another
lack or excess of jurisdiction. Absent a showing of a despotic, whimsical and group to replace the petitioner as their licensee and distributor, the latter
arbitrary exercise of power by the CA, the petition must fail. instituted on June 16, 1975, Civil Case No. 21409 against IRTI, ECED another
corporation named EUTECTIC Corporation, organized under the laws of the
WHEREFORE, the petition is DISMISSED. The decision and resolution of State of New York, U.S.A., and an individual named Victor C. Gaerlan, a
the Court of Appeals in CA-G.R. SP No. 55834, dated June 30, 2000 and Filipino citizen alleged to be the representative and employee of these three
March 5, 2001, respectively, are AFFIRMED. corporations.

No costs. In its complaint, the petitioner sought the issuance of a writ of preliminary
injunction to restrain the corporations from negotiating with third persons or
SO ORDERED. from actually carrying out the transfer of its distributorship and franchising
rights. It also asked the court to prohibit the defendants from terminating
their contracts with the petitioner, and if said termination had already been
222 Phil. 424 accomplished, from putting into effect and carrying out the terms and the
consequences of said termination until after good faith negotiations on
existing contracts between them had been carried out and completed.
On June 17, 1975, the lower court issued a restraining order against the
corporation pending the hearing on the issuance of a writ of preliminary The respondent corporation further alleged that Section 4 (9) of R.A. No.
injunction. 5455 cannot possibly apply to the instant case because:

On July 25, 1975, IRTI and ECED wrote Top-weld separate notices about the With the violations of the contracts by the plaintiff and "other just
termination of their respective contracts. causes" earlier mentioned, the defendants IRTI and ECED are fully
a) justified in terminating them without being obliged to pay any
On September 3, 1975, Top-weld filed an amended complaint together with a compensation nor to reimburse plaintiff of investment or other
supplemental complaint which embodied a new application for a preliminary expenses;
mandatory injunction to compel ECED to ship and deliver various items
covered by the distributorship contract, and to prohibit the corporations In fact, the defendants have sent written notices dated July 25, 1975 of
from importing into the Philippines directly or indirectly any EUTECTIC the termination of their respective agreements with plaintiffs; and
materials, supplies or equipment except to and/or through the petitioner.
Since no written certificate was applied for nor obtained by defendant
Among others, the petitioner invoked the provisions of No. 9, Section 4 of c) entities from the Board of Investments, the latter cannot legally require
Republic Act 5455 on alien firms doing business in the Philippines. of them compliance with No. 9, Section 4, R. A. No. 5455.
On October 9, 1975, the trial court issued an order granting the petitioner's
The corporations filed their answers setting up as affirmative defenses application for preliminary injunction embodied in the amended complaint
violations of the contracts allegedly committed by the petitioner consisting of and its application for a writ of mandatory preliminary injunction embodied
the following: in the supplemental complaint.

a) Failure to pay respondent IRTI the stipulated 3% royalties; The corporations filed with the trial court a motion for reconsideration.

The use of other wrong materials in the manufacture of welding On December 18, 1975, the trial court issued another order denying the said
products bearing the Eutectic label; motion for reconsideration with respect to the lifting of the writ of
preliminary injunction but granting the prayer for the lifting of the writ of
c) The use of the wrong core wire in the manufacture of Eutectic 680; preliminary mandatory injunction.

d) The use of obsolete and antiquated equipment; The case was elevated to the Court of Appeals on a petition for certiorari with
preliminary injunction filed by the corporations. In setting aside the
Rebranding of other manufactured welding products or non-Eutectic questioned orders, the appellate court held that:
products with the Eutectic label;
"The determinative question defined by the contentions of the parties in this
The manufacture and sale of inferior and sub-standard quality products case is, whether or not TOP-WELD may rightfully invoke the provisions of
f) bearing the Eutectic label resulting in numerous complaints from Sec. 4, Republic Act No. 5455 to enjoin petitioner corporations from
customers such as Saulog Transit and Manila Mining Corporation; terminating the subject licensing and distributorship contracts they have
with TOP-WELD. The pertinent portion of the provision reads:
The falsification of ECED pro-forma invoices in order to procure
Eutectic goods at lower prices; "'Section 4. Licenses to do business. No alien, and no firm, association,
partnership, corporation, or any other form of business organization formed,
The illegal channeling of sales of Eutectic products through the Que Pe organized, chartered or existing under any laws other than those of the
Hardware Store; and Philippines, or which is not a Philippine National, or more than thirty
percent of the outstanding capital of which is owned or controlled by aliens
The sale of welding products bearing brands other than Eutectic, such as shall do business or engage in any economic activity in the Philippines, or be
Fujiweld, and even Eutectic products not included in its authority and registered, licensed, or permitted by the Securities and Exchange
for which it has never been supplied by respondent EUTECTIC with the Commission, or by any other bureau, office, agency, political subdivision, or
raw materials for its manufacture nor with finished products thereof. instrumentality of the government, to do business, or engage in an economic
activity in the Philippines without first securing a written certificate from the incumbent upon TOPWELD to know whether or not IRTI and ECED were
Board of Investments to the effect x x x.' properly authorized to engage into the licensing and distributorship
agreements. At the very least TOPWELD has not come to court with clean
"Upon granting said certificate, the Board shall impose the following hands, and cannot be heard to invoke the equitable remedy of injunction to
requirements on the alien or the firm, association, partnership, corporation, perpetuate an illegal situation it voluntarily helped bring about.
or other form of business organization that is not organized or existing under
the laws of the Philippines. x x x. "If only for the foregoing considerations, there appears a grave abuse of
discretion on the part of respondent Judge in issuing the orders complained
(9) Not to terminate any franchise, licensing or other agreement that of."
applicant may have with a resident of the Philippines, authorizing the latter
to assemble, manufacture or sell within the Philippines the products of the Petitioner, TOP-WELD filed this present petition putting in issue the
applicant, except for violation thereof or other just cause and upon payment following assignments of errors:
of compensation and reimbursement and other expenses incurred by the
licensee in developing a market for the said products; Provided, however, I
That in case of disagreement, the amount of compensation or reimbursement
shall be determined by the court where the licensee is domiciled or has its Respondent Court of Appeals committed a grave error when it held that a
principal office who shall require the applicant to file a bond in such amount foreign corporation, which is admittedly 'doing business in the Philippines'
as, in its opinion, is sufficient for this purpose.' but which has failed to secure the required certificate and license to do
business in the Philippines, is not subject to the stricture imposed by Sec.
"By the licensing and distributorship arrangements had with TOPWELD, 4(9) of Republic Act No. 5455.
there is no doubt that IRTI and ECED were doing business and engaging in
economic activity in the Philippines (see Sections 1 and 4, R.A. No. 5455), as
a prerequisite to which they should have first secured a written certificate II
from the Board of Investments. It is not disputed, however, that IRTI and
ECED have not secured such written certificate in consequence of which Respondent Court of Appeals committed a grave error when it held that the
there was no occasion for the Board of Investments to impose the failure of petitioner to know at the outset whether or not respondents were
requirements prescribed in the aforequoted provisions of Sec. 4, R.A. No. properly authorized to engage in business in the Philippines estops petitioner
5455, among which is that the grantee of the certificate shall not terminate to invoke the protection of Sec. 4(9) of Republic Act No. 5455.
any franchise, licensing or other agreement it may have with a resident of the
Philippines for the assembly, manufacture or sale within the country of the
products of said grantee, except for violation thereof or other just cause and III
upon payment of compensation and reimbursement and other expenses
incurred by the resident licensee in developing a market for said products. In Respondent Court of Appeals committed a grave error when it held that
this case, while the parties are in dispute as to the existence of a violation of petitioner cannot invoke the remedy of injunction against respondents.
the contracts involved or of other just cause, there is no quarrel over the fact
that IRTI and ECED have not paid, and do not intend to pay, such At the vortex of the controversy is the issue whether or not respondent
compensation or reimbursement contemplated in the law, maintaining that corporations can be considered as "doing business" in the Philippines and,
TOPWELD is not entitled to the same. therefore, subject to the provisions of R.A. No. 5455. There is no dispute that
respondents are foreign corporations not licensed to do business in the
"Under the particular situation obtaining in this case, this Court is of the Philippines. More important, however, there is no serious objection
opinion that petitioner corporations are not bound by the requirement on interposed by the respondents as to their amenability to the jurisdiction of
termination, and TOPWELD cannot invoke the same against the former. The our courts.
reason is not simply because IRTI and ECED, by failing to get the required
certificate from the Board of Investment, were not made subject by the said There is no general rule or governing principle laid down as to what
Board to the requirement on termination, as maintained by petitioners. To constitutes "doing" or "engaging in" or "transacting" business in the
impose such requirement on petitioners would be to perpetuate, and force Philippines. Each case must be judged in the light of its peculiar
them to remain in, an unlawful business operation. Moreover, it was circumstances. (Mentholatum Co. v. Mangaliman, 72 Phil. 524). Thus, a
foreign corporation with a settling agent in the Philippines which issued
twelve marine policies covering different shipments to the Philippines The respondents contend that they should be exempted from the
(General Corporation of the Philippines v. Union Insurance Society of requirements of R. A. 5455 because the petitioner maintained an
Canton, Ltd., 87 Phil. 313) and a foreign corporation which had been independent status during the existence of the disputed contracts.
collecting premiums on outstanding policies (Manufacturing Life Insurance
Co. v. Meer, 89 Phil. 351) were regarded as doing business here. The acts of This may be true if the petitioner is an independent entity which buys and
these corporations should be distinguished from a single or isolated business distributes products not only of the petitioner but also of other
transaction or occasional, incidental and casual transactions which do not manufacturers or transacts business in its name and for its account and not
come within the meaning of the law. Where a single act or transaction, in the name or for the account of the foreign principal.
however, is not merely incidental or casual but indicates the foreign
corporation's intention to do other business in the Philippines, said single act A perusal of the agreements between the petitioner and the respondents
or transaction constitutes "doing" or "engaging in" or "transacting" business shows that they are highly restrictive in nature. The agreements provide in
in the Philippines. (Far East International Import and Export Corporation part the following terms:
v. Nankai Kogyo, Co., 6 SCRA 725).
xxx xxx xxx
In the Mentholatum Co. v. Mangaliman case earlier cited, this Court held:
"10. No Sales in Territory by IRTI
xxx xxx xxx
IRTI shall not solicit or cause or permit its employees, licensees or agents to
"x x x The true test, however, seems to be whether the foreign corporation is solicit or make any sales, directly or indirectly, of WELDING PRODUCTS
continuing the body or substance of the business or enterprise for which it within or to the Philippines. IRTI agrees to refer to LICENSEE all product
was organized or whether it has substantially retired from it and turned it inquiries received by IRTI for WELDING PRODUCTS destined for
over to another. (Traction Cos. v. Collectors of Int. Revenue [C. C. A. Ohio], Philippines.
223 F. 984, 987.) The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or
works or the exercise of some of the functions normally incident to, and in xxx xxx xxx
progressive prosecution of, the purpose and object of its
organization. (Griffin v. Implement Dealers' Mut. Fire Ins. Co., 241 N.W. 75, "16. x x x xxx xxx
77; Pauline Oil & Gas Co. v. Mutual Tank Line Co., 246 P. 851, 852, 118 Okl.
111; Automotive Material Co. v. American Standard Metal Products Restrictive Covenant
Corp., 158 N.E. 698, 703, 327 Ill. 367.)"
LICENSEE will not, directly or, indirectly, without the written consent of
Judged by the foregoing standards, we agree with the Court of Appeals in IRTI at any time during the continuance of this Agreement and for a period
considering the respondents as "doing business" in the Philippines. When of two years after the date of the termination of this Agreement, engage either
the respondents entered into the disputed contracts with the petitioner, they directly or indirectly in the business of selling products similar to said
were carrying out the purposes for which they were created, i.e. to WELDING PRODUCTS, either as principal, agent, employee or through stock
manufacture and market welding products and equipment. The terms and or proprietary interests in a third part entity."
conditions of the contracts as well as the respondents' conduct indicate that
they established within our country a continuous business, and not merely
one of a temporary character. This fact is even more strengthened by the xxx xxx xxx
admission of the respondents that they are negotiating with another group
for the transfer of the distributorship and franchising rights from the "RESTRICTIVE COVENANT
"6. DISTRIBUTOR shall not during the continuance of this agreement
Respondents' acts enabled them to enter into the mainstream of our distribute products of any other manufacturer or supplier in the Territory
economic life in competition with our local business interests. This assigned to him, which are similar to the Products.
necessarily brings them under the provisions of R. A. No. 5455.
"Upon the termination of this agreement by either party, DISTRIBUTOR
agrees not to engage, directly or indirectly, in the commercialization, v. Rosner, 245 SW 2d 107; Hall v. Bucher, 227 SW.2d 98). Moreover, a
distribution and/or manufacture of products competing with any person is presumed to be more knowledgeable about his own state law than
EUTECTIC+CASTOLIN products covered by this agreement, or of products his alien or foreign contemporary. In this case, the record shows that, at
likely to affect the sale of any EUTECTIC+CASTOLIN products, either as least, petitioner had actual knowledge of the applicability of R. A. No. 5455 at
principal, agent or employee in the Territory, this prohibition to extend for a the time the contract was executed and at all times thereafter. This
period of two (2) years from the date of termination, except for the explicit conclusion is compelled by the fact that the same statute is now being
purpose of selling any remaining Products still in DISTRIBUTOR's propounded by the petitioner to bolster its claim. We, therefore, sustain the
possession on the date of termination of this agreement which sales shall not appellate court's view that "it was incumbent upon TOP-WELD to know
be below the DISTRIBUTOR'S pretermination selling price for such Products whether or not IRTI and ECED were properly authorized to engage in
unless such sale is to ECED or its nominee in which case Clause 19 hereof business in the Philippines when they entered into the licensing and
shall govern." distributorship agreements." The very purpose of the law was circumvented
and evaded when the petitioner entered into said agreements despite the
prohibition of R. A. No. 5455. The parties in this case being equally guilty of
xxx xxx xxx violating R. A. No. 5455, they are in pari delicto, in which case it follows as a
consequence that petitioner is not entitled to the relief played for in this case.
We can conclude that assuming the petitioner maintains an independent
status, in essence it merely extends to the Philippines the business of the In Bough v. Cantiveros (40 Phil. 210), the principle is laid down in these
foreign corporations. words: "The rule of pari delicto is expressed in the maxims "ex dolo malo
non eritur actio" and "in pari delicto potior est conditio defendentis." The
On the basis of the foregoing, we uphold the appellate court's finding that law will not aid either party to an illegal agreement. It leaves the parties
"IRTI and ECED were doing business and engaging in economic activity in where it finds them."
the Philippines x x x as a prerequisite to which they should have first secured
a written certificate from the Board of Investments." No remedy could be afforded to the parties because of their presumptive
knowledge that the transaction was tainted with illegality. (Soriano v. Ong
The respondent court, however, erred in holding that "IRTI and ECED have Hoo, 103 Phil. 829). Equity cannot lend its aid to the enforcement of an
not secured such written certificate in consequence of which there is no alleged right claimed by virtue of an agreement entered into in contravention
occasion for the Board of Investments to impose the requirements prescribed of law.
in the aforequoted provisions of Sec. 4, R.A. No. 5455 x x x." To accept this
view would open the way for an interpretation that by doing business in the Lastly, we come to the issue of "just cause" for the termination of the
country without first securing the required written certificate from the Board contracts or the alleged violations of the contracts made by
of Investments, a foreign corporation may violate or disregard the safeguards petitioner. Though properly ventilated below, this factual issue was not
which the law, by its provisions, seeks to establish. determined by both the trial court and the appellate court.
We agree, however, that there is a more compelling reason behind the finding The record shows that respondents, in opposing the injunction suit and
that the "corporations are not bound by the requirement on termination, and alleging the violations of the contracts, submitted and relied on their
TOP-WELD cannot invoke the same against the former." affidavits. The petitioner, however, to refute these charges, submitted a
"Reply to Opposition" which is neither verified nor supported by counter-
As between the parties themselves, R. A. No. 5455 does not declare as void or affidavits. There is no showing in the records before us whether oral
invalid the contracts entered into without first securing a license or certificate testimony was presented by any of the parties or whether the affiants were
to do business in the Philippines. Neither does it appear to intend to prevent subjected to the test of cross-examination and if any, what was stated during
the courts from enforcing contracts made in contravention of its licensing the oral testimony.
provisions. There is no denying, though, that an "illegal situation", as the
appellate court has put it, was created when the parties voluntarily The burden of overcoming the responsive effect of the answer is upon the
contracted without such license. petitioner. He who alleges a fact has the burden of proving it and a mere
allegation is not evidence. (Legasca v. De Vera, 79 Phil. 376) Hearsay
The parties are charged with knowledge of the existing law at the time they evidence alone may be insufficient to establish a fact in an injunction suit
enter into the contract and at the time it is to become operative. (Twiehaus (Parker v. Furlong, 62 P 490) but, when no objection is made thereto, it is,
like any other evidence, to be considered and given the importance it Korean Airlines through its general manager Suk Kyoo Kim and through their
deserves. (Smith v. Delaware & Atlantic Telegraph & Telephone Co., 51 A appointed counsel Atty. Aguinaldo filed a complaint against Expertravel and
464) Although we should warn of the undesirability of issuing judgments tours (ETI) for a collection of sum of money. In the course of the proceeding a
solely on the basis of the affidavits submitted, where as here, said affidavits special teleconference occurred and it is alleged that the general manager and
are overwhelming, uncontroverted by competent evidence and not inherently counsel attended such meeting and it is further alleged the board of directors
improbable, we are constrained to uphold the allegations of the respondents approved a resolution authorizing Atty. Aguinaldo to execute the certificate of
regarding the multifarious violations of the contracts made by the non-forum shopping and to file the complaint. Suk Kyoo Kim also alleged,
petitioner. Accordingly, we rule that there exists a just cause for respondents however, that the corporation had no written copy of the aforesaid resolution.
to move for the termination of their contracts with the petitioner. ETI now challenge the authority of the appointed counsel to sign for the
certification against non forum shopping.
Moreover, the facts on record show that the "License and Technical
Assistance Agreement" between petitioner and respondent IRTI was Issue: Whether or not a special teleconference would authorize Atty.
extended only for a period of one year or to be precise, from January 1, 1975 Aguinaldo to certify a certification against non forum shopping
to December 31, 1975. The original injunction suit was brought in the court a Ruling: Petition GRANTED.
quo in June 1975, the purpose being to stop the respondent from terminating
the contract. This purpose was realized when the court granted the In this age of modern technology, the courts may take judicial notice that
injunction. By the time respondents' appeal was decided by the Court of business transactions may be made by individuals through teleconferencing.
Appeals, it was already past the extended period. The dispute between the Teleconferencing is interactive group communication (three or more people in
parties had been rendered moot and academic. It should be stated that the two or more locations) through an electronic medium. In general terms,
courts be it the original trial court or the appellate court have no power to teleconferencing can bring people together under one roof even though they
make contracts for the parties. No court would be justified in extending the are separated by hundreds of miles.18 This type of group communication may
life of the contracts, subject of this controversy, since that would do violence be used in a number of ways, and have three basic types: (1) video conferencing
to the basic principle that contracts must be the voluntary agreements of - television-like communication augmented with sound; (2) computer
parties. conferencing - printed communication through keyboard terminals, and (3)
audio-conferencing-verbal communication via the telephone with optional
Parties can not be coerced to enter into a contract where no agreement is had capacity for telewriting or telecopying.19
between them as to the principal terms and condition of the contract
(Republic v. Philippine Long Distance Telephone Co., 26 SCRA 620). A teleconference represents a unique alternative to face-to-face (FTF)
meetings. It was first introduced in the 1960’s with American Telephone and
With the above observations, there is nothing more for this Court to do Telegraph’s Picturephone. At that time, however, no demand existed for the
except to dismiss the petition. new technology. Travel costs were reasonable and consumers were unwilling
to pay the monthly service charge for using the picturephone, which was
ACCORDINGLY, the petition is hereby dismissed. The appealed decision regarded as more of a novelty than as an actual means for everyday
of the Court of Appeals is AFFIRMED. communication.20 In time, people found it advantageous to hold
teleconferencing in the course of business and corporate governance, because
SO ORDERED. of the money saved, among other advantages include:
1. People (including outside guest speakers) who wouldn’t normally attend a
COURT OF APPEALS and distant FTF meeting can participate.
KOREAN AIRLINES, G.R. No. 152392, May 26, 2005, Callejo, Sr., J. 2. Follow-up to earlier meetings can be done with relative ease and little
3. Socializing is minimal compared to an FTF meeting; therefore, meetings are
COURT OF APPEALS and shorter and more oriented to the primary purpose of the meeting.
KOREAN AIRLINES, G.R. No. 152392, May 26, 2005, Callejo, Sr., J.
4. Some routine meetings are more effective since one can audio-conference
Facts: from any location equipped with a telephone.
5. Communication between the home office and field staffs is maximized. is not convinced that one was conducted; even if there had been one, the Court
is not inclined to believe that a board resolution was duly passed specifically
6. Severe climate and/or unreliable transportation may necessitate authorizing Atty. Aguinaldo to file the complaint and execute the required
teleconferencing. certification against forum shopping.
7. Participants are generally better prepared than for FTF meetings.
8. It is particularly satisfactory for simple problem-solving, information
exchange, and procedural tasks.
9. Group members participate more equally in well-moderated teleconferences [G.R. No. 119877. March 31, 1997]
than an FTF meeting.21
On the other hand, other private corporations opt not to hold teleconferences
because of the following disadvantages:
1. Technical failures with equipment, including connections that aren’t made. MAGALLANES CONDOMINIUM ASSOCIATION,
2. Unsatisfactory for complex interpersonal communication, such as COMMISSION and FEDERICO B. GUILAS, respondents.
negotiation or bargaining.
3. Impersonal, less easy to create an atmosphere of group rapport. DECISION

4. Lack of participant familiarity with the equipment, the medium itself, and KAPUNAN, J.:
meeting skills.
At fore, once again, is the jurisdictional tug of war between the National
5. Acoustical problems within the teleconferencing rooms. Labor Relations Commission (NLRC) and the Securities & Exchange
Commission (SEC) in this special civil action for certiorari under Rule 65 of
6. Difficulty in determining participant speaking order; frequently one person
the Revised Rules of Court. It seeks to set aside the Resolutions of the NLRC
monopolizes the meeting.
in NLRC NCR Case No. 00-05-02780-92 (NLRC CA No. 004329-93) dated 9
7. Greater participant preparation time needed. March 1995 and 4 April 1995 which reversed the decision of Labor Arbiter
Oswald Lorenzo and denied petitioners' motion for reconsideration,
8. Informal, one-to-one, social interaction not possible.22 respectively.
Indeed, teleconferencing can only facilitate the linking of people; it does not Petitioner Galeria de Magallanes Condominium Association, Inc. (Galeria
alter the complexity of group communication. Although it may be easier to for brevity) is a non-stock, non-profit corporation formed in accordance with
communicate via teleconferencing, it may also be easier to miscommunicate. R.A. No. 4726, otherwise known as the Condominium Act. "Its primary
Teleconferencing cannot satisfy the individual needs of every type of purpose is to hold title to the common areas of the Galeria de Magallanes
meeting.23 Condominium Project and to manage and administer the same for the use and
convenience of the residents and/or owners."[1] Petitioner Bienvenido
In the Philippines, teleconferencing and videoconferencing of members of Ongkingco was the president of Galeria at the time private respondent filed his
board of directors of private corporations is a reality, in light of Republic Act complaint.
No. 8792. The Securities and Exchange Commission issued SEC Memorandum
Circular No. 15, on November 30, 2001, providing the guidelines to be On 1 September 1990, Galeria's Board of Directors appointed private
complied with related to such conferences.24 Thus, the Court agrees with the respondent Federico B. Guilas as Administrator/Superintendent. He was
RTC that persons in the Philippines may have a teleconference with a group of given a "monthly salary of P10,000 subject to review after five (5) months and
persons in South Korea relating to business transactions or corporate subsequently thereafter as Galeria's finances improved."[2]
As Administrator, private respondent was tasked with the maintenance
Even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim participated of the "performance and elegance of the common areas of the condominium
in a teleconference along with the respondent’s Board of Directors, the Court and external appearance of the compound thereof for the convenience and
comfort of the residents as well as to keep up the quality image, and hence the The complainant, if he is mindful should file this case with the Securities and
value of the investment for the owners thereof."[3] Exchange Commission.
However, on 17 March 1992, through a resolution passed by the Board of
Directors of Galeria, private respondent was not re-appointed as SO ORDERED.[4]
The NLRC, however, reversed the Labor Arbiter's order in its resolution
As a result, on 15 May 1992, private respondent instituted a complaint dated 9 March 1995. It ruled in this wise:
against petitioners for illegal dismissal and non-payment of salaries with the
NLRC. We find merit in the appeal. It cannot be gainsaid that the complainant's
In response, on 22 July 1992, petitioners filed a motion to dismiss alleging cause of action in his complaint is illegal dismissal which issue falls four
that it is the SEC, and not the labor arbiter, which has jurisdiction over the square within the jurisdiction of the NLRC. This is so, because while it may
subject matter of the complaint. be true that the termination of the complainant was effected allegedly by a
resolution of the Board of Directors of the respondent association, this did
Labor Arbiter Lorenzo granted the aforestated motion to dismiss in his not make the dispute intracorporate in nature. Moreover, We have taken note
order dated 29 December 1992. He ruled, thus: of the fact that the complainant is neither a member of the association nor an
officer thereof. Hence, We are more convinced that he is an employee of the
A judicious calibration of the position taken by the contending parties respondent association occupying the position of administrator who is in
preponderate clearly in favor of respondents, that this case is within the (sic) charged with the function of managing and administering the building
jurisdiction of the Securities and Exchange Commission and not this Office or condominium owned by the members. Indeed, there is a whale of
(Labor Arbiter). difference between a member of the association who is a part owner of the
building and a mere employee performing managerial and administrative
Our reasons are as follows: functions which are necessary in the usual undertaking of the respondent
Association. The complainant falls under the second category.
ONE. The Position of Administrator or Superintendent is a corporate
position, whose appointment depended on the Board of Directors. As such, And, to the point of being repetitious, it needs to be stressed that the fact that
the position of the administrator is a corporate creation. the complainant was removed by the Board of Directors did not change the
issue from an illegal dismissal case to an intracorporate one. For, what
remains to be resolved here is whether or not the complainant's removal
TWO. Clearly from the respondent corporation's Articles of Incorporation,
from his position as Administrator was for a just and valid cause and in
Art. V, Sec. 6 thereof, the appointment and removal of the administrator is a
compliance with due process. And, as the facts now stand, the issue is within
prerogative that belongs to the Board, and thereby involves the exercise of
the scope of authority of the National Labor Relations Commission to resolve.
deliberate choice and faculty of discriminative selection.
We simply could not agree with the conclusions of law made by the
THIRD. Thus, we find lacking of merit the argument of complainant that
Arbiter a quo on the applicability of the provisions of P.D. 902. Our view
since he is not a member of the condominium association where he was
finds basis in the case of Gregorio Araneta University Foundation vs. Antonio
formerly administrator, or is not a unit holder thereof, since a person's
J. Teodoro and NLRC (167 SCRA 79) wherein the Supreme Court had the
relationship to a corporation is not determinative of the services performed
occasion to clarify the jurisdiction of the Securities and Exchange
but by the incidents of the relationship as they exist. (PSBA vs. LEANO, 127
Commission and that of the NLRC. It (Supreme Court) held, thus
SCRA 778.)
"x x x Relying on Philippine School of Business Administration, et al., (127
The resolution, therefore, of the other pending incident, which is the
SCRA 778) and Dy, et al., vs. National Labor Relations Commission, et al.,
MOTION FOR SUBSTITUTION OF PARTIES is hereby deferred for action by
(145 SCRA 211), Petitioner theorizes that since private respondent was a
the SEC.
corporate officer, the present controversy is within the jurisdiction of the
Securities and Exchange Commission, pursuant to P.D. 902-A, and not in the
WHEREFORE, in view of all the foregoing considerations, this Office hereby public respondent.
orders the dismissal of the instant action for reason of lack of jurisdiction.
Without need of applying the rule on estoppel by laches against petitioner, its misrepresentation which may be detrimental to the interest of the public
contention must fail on the ground of misplaced reliance. As explained in Dy, and/or of the stockholders, partners, members of associations or
the same is true with Philippine Business Administration, the controversies organizations registered with the Commission.
therein were intra corporate in nature and squarely within the purview of
Section 5(c), PD. 902-A since the real question was the invalidity of the board b) Controversies arising out of intra-corporate or partnership relations,
of director's meeting wherein corporate officers involved were not re-elected, between and among stockholders, members, or associates; between any or all
resulting in the termination of their services." (Underscoring ours.) of them and the corporation, partnership or association of which they are
stockholders, members or associates, respectively; and between such
As obtaining in this case, no intracorporate controversy exists, hence, the corporation, partnership or association and the State insofar as it concerns
jurisdiction of the NLRC should be sustained. their individual franchise or right to exist as such entity;

WHEREFORE, finding merit on the appeal, the same is hereby, given due c) Controversies in the election or appointment of directors, trustees, officers,
course. Accordingly, the Order appealed from is declared Null and Void and or managers of such corporations, partnerships or associations.
is hereby, VACATED and SET ASIDE. Accordingly, let the records of the case
be remanded to the Arbitration Branch of origin for further proceedings. d) Petitions of corporations, partnerships or associations to be declared in
With the directive that the instant case be given priority in the calendar of the the state of suspension of payments in cases where the corporation,
Labor Arbiter for the speedy disposition hereon. Concomitant hereto, the partnership or association possesses property to cover all of its debts but
respondents are hereby directed to submit their position paper within ten foresees the impossibility of meeting them when they respectively fall due or
(10) days from receipt hereof. in cases where the corporation, partnership or association has no sufficient
assets to cover its liabilities, but is under the Management Committee created
SO ORDERED.[5] pursuant to this Decree. (Underscoring ours.)

Petitioners filed a motion for reconsideration but the same was denied in The Solicitor General contends that the case at bar falls outside the
the NLRC's resolution dated 4 April 1995.[6] Hence, the present recourse. purview of the aforequoted provision. He insists that private respondent was a
mere employee of petitioner corporation being tasked mainly, as
The petitioners raised a single issue: administrator/superintendent, with the upkeep of the condominium's
common areas. He, thus, maintains that private respondent cannot be deemed
THE PRIVATE RESPONDENT ACTED WITHOUT OR IN EXCESS OF a corporate officer because "it is the nature of one's functions and not the
ITS JURISDICTION OR COMMITTED GRAVE ABUSE OF nomenclature or title given to one's job which determines one's status in a
JURISDICTION OF THE SEC. The contentions of public respondent lack merit. That private respondent
is an officer of petitioner corporation and not its mere employee cannot be
questioned. The by-laws of the Galeria de Magallanes Condominium
The petition is granted.
Association specifically includes the Superintendent/Administrator in its
Specifically delineated in P.D. 902-A are the cases over which the SEC roster of corporate officers:
exercises exclusive jurisdiction:
SECTION 5. In addition to the regulatory and adjudicative functions of the
Securities and Exchange Commission over corporations, partnerships and OFFICERS
other forms of associations registered with it as expressly granted under
existing laws and decrees, it shall have original and exclusive jurisdiction to Section 1. Executive Officers The Executive officers of the corporation shall
hear and decide cases involving: be a President, a Vice President, a Treasurer, all of whom shall be elected by
the Board of Directors. They may be removed with or without cause at any
a) Devices or schemes employed by or any acts of the board of directors, meeting by the concurrence of four directors. The Board of Directors may
business associates, its officers or partners, amounting to fraud and appoint a Superintendent or Administrator and such other officers and
employees and delineate their powers and duties as the Board shall find its memorandum of October 30, 1990, she is deemed an officer of the
necessary to manage the affairs of the corporation.[8] (Underscoring ours.) corporation. Perforce, Section 5(c) of Presidential Decree No. 902-A, which
provides that the SEC exercises exclusive jurisdiction over controversies in
xxx. the election or appointment of directors, trustees, officers or managers of
corporations, partnerships or associations, applies in the present dispute.
Accordingly, jurisdiction over the same is vested in the SEC, and not in the
Section 6. The Superintendent or Administrator The Board of Directors may
Labor Arbiter or the NLRC.
appoint a Superintendent or Administrator for the condominium project if
the activities and financial condition of the Association so warrant. If one is
so appointed, he shall be the principal administrative officer of the Supplementing the afore-quoted ruling, in Lozon v. NLRC[11] and
Association. He shall attend to routinary and day-to-day business and Espino v. NLRC,[12] citing Fortune Cement Corp. v. NLRC,[13] we declared
activities of the Association and shall keep regular officer hours for the that:
purpose. He shall have such other duties and powers as may be conferred
upon him by the Board of Directors or delegated by the President of the A corporate officer's dismissal is always a corporate act and/or an intra-
Association. corporate controversy and that nature is not altered by the reason or wisdom
which the Board of Directors may have in taking such action.
At the discretion of the Board of Directors, the work and duties of
Superintendent or Administrator may be entrusted to a juridical entity which Based on the foregoing, we must rule that private respondent was indeed
is qualified and competent to perform such work.[9] a corporate officer. He was appointed directly by the Board of Directors not by
any managing officer of the corporation and his salary was, likewise, set by the
Closely approximating the dispute at bar is the recent case of Tabang v. same Board. Having thus determined, his dismissal or non-appointment is
NLRC.[10] This Court, through Justice Florenz D. Regalado, ruled that: clearly an intra-corporate matter and jurisdiction, therefore, properly belongs
to the SEC and not the NLRC.
Contrary to the contention of petitioner, a medical director and a hospital The respondents also attack the SEC's jurisdiction over the instant case
administrator are considered as corporate officers under the by-laws of on grounds that Guilas was not elected by the Board of Directors but was
respondent corporation. Section 2(i), Article I thereof states that one of the merely appointed.
powers of the Board of Trustees is "(t)o appoint a Medical Director,
Comptroller/Administrator, Chiefs of Services and such other officers as it This particular argument baffles us. P.D. 902-A cannot be any clearer.
may deem necessary and prescribe their powers and duties." Sec. 5(c) of said law expressly covers both election and appointment of
corporate directors, trustees, officers and managers.[14]
The president, vice-president, secretary and treasurer are commonly It is of no consequence, likewise, that the complaint of private respondent
regarded as the principal or executive officers of a corporation, and modern for illegal dismissal includes money claims, jurisdiction remains with the SEC
corporation statutes usually designate them as the officers of the corporation. as ruled in the case of Cagayan de Oro Coliseum, Inc. v. Office of the MOLE:[15]
However, other offices are sometimes created by the charter or by-laws of a
corporation, or the board of directors may be empowered under the by-laws Although the reliefs sought by Chaves appear to fall under the jurisdiction of
of a corporation to create additional offices as may be necessary.
the labor arbiter as they are claims for unpaid salaries and other
remunerations for services rendered, a close scrutiny thereof shows that said
It has been held that an "office" is created by the charter of the corporation claims are actually part of the perquisites of his position in, and therefore
and the officer is elected by the directors or stockholders. On the other hand, interlinked with his relations with the corporation. In Dy vs. NLRC, the Court
an "employee" usually occupies no office and generally is employed not by said: "(t)he question of remuneration involving as it does, a person who is not
action of the directors or stockholders but by the managing officer of the a mere employee but a stockholder and officer, an integral part, it might be
corporation who also determines the compensation to be paid to such said, of the corporation, is not a simple labor problem but a matter that
employee. comes within the area of corporate affairs and, management, and is in fact a
corporate controversy in contemplation of the Corporation Code."
In the case at bar, considering that herein petitioner, unlike an ordinary
employee, was appointed by respondent corporation's Board of Trustees in
WHEREFORE, the petition for certiorari is given DUE COURSE, the the merger, each share of Oceanic was exchanged for a share of Interport.[4]
assailed resolutions of the NLRC are hereby REVERSED and the Order of the
Labor Arbiter dated 29 December 1992 REINSTATED. On April 16, 1979 and April 18, 1979, SSI, a domestic corporation registered
SO ORDERED. as a dealer in securities, received in the ordinary course of business Oceanic
Subscription Agreements Nos. 1805, 1808 to 1811, all outstanding in the
name of R.C. Lee, and Oceanic official receipts showing that 25% of the
subscriptions had been paid.[5] The Oceanic subscription agreements were
[ GR No. 154069, Jun 06, 2016 ] duly delivered to SSI through stock assignments indorsed in blank by R.C.
Later on, R.C. Lee requested Interport for a list of subscription agreements
and stock certificates issued in the name of R.C. Lee and other individuals
named in the request. In response, Atty. Rhodora B. Morales, Interport1 s
DECISION Corporate Secretary, provided the requested list of all subscription
agreements of Interport and Oceanic, as well as the requested stock
certificates of Interport.[7] Upon finding no record showing any transfer or
assignment of the Oceanic subscription agreements and stock certificates of
BERSAMIN, J.: Interport as contained in the list, R.C. Lee paid its unpaid subscriptions and
was accordingly issued stock certificates corresponding thereto. [8]
This appeal assails the decision promulgated on February 11,
2002,[1] whereby the Court of Appeals (CA), in C.A.-G.R. SP No. 66600, On February 8, 1989, Interport issued a call for the full payment of
affirmed the decision the Securities and Exchange Commission (SEC) subscription receivables, setting March 15, 1989 as the deadline. SSI tendered
rendered in SEC AC No. 501-502[2] ordering Interport Resources Corporation payment prior to the deadline through two stockbrokers of the Manila Stock
(Interport) to deliver 25% of the shares of stocks under Subscription Exchange. However, the stockbrokers reported to SSI that Interport refused
Agreements Nos. 1805 and 1808-1811, or the value thereof, and to pay to to honor the Oceanic subscriptions.[9]
respondent Securities Specialist, Inc. (SSI), jointly and severally with R.C.
Lee Securities, Inc. (R.C. Lee), exemplary damages and litigation expenses. Still on the date of the deadline, SSI directly tendered payment to Interport
for the balance of the 5,000,000 shares covered by the Oceanic subscription
agreements, some of which were in the name of R.C. Lee and indorsed in
blank. Interport originally rejected the tender of payment for all unpaid
Antecedents subscriptions on the ground that the Oceanic subscription agreements should
have been previously converted to shares in Interport.[10]
In January 1977, Oceanic Oil & Mineral Resources, Inc. (Oceanic) entered
into a subscription agreement with R.C. Lee, a domestic corporation engaged SSI then required Interport to furnish it with a copy of any notice requiring
in the trading of stocks and other securities, covering 5,000,000 of its shares the conversion of Oceanic shares to Interport shares. However, Interport
with par value of P0.01 per share, for a total of P50,000.00. Thereupon, R.C. failed to show any proof of the notice. Thus, through a letter dated March 30,
Lee paid 25% of the subscription, leaving 75% unpaid. Consequently, Oceanic 1989, SSI asked the SEC for a copy of Interport's board resolution requiring
issued Subscription Agreements Nos. 1805, 1808, 1809, 1810, and 1811 to said conversion. The SEC, through Atty. Fe Eloisa C. Gloria, Director of
R.C. Lee.[3] Brokers and Exchange Department, informed SSI that the SEC had no record
of any such resolution.[11]
On July 28, 1978, Oceanic merged with Interport, with the latter as the
surviving corporation. Interport was a publicly-listed domestic corporation Having confirmed the non-existence of the resolution, Francisco Villaroman,
whose shares of stocks were traded in the stock exchange. Under the terms of President of SSI, met with Pablo Roman, President and Chairman of the
Board of Interport, and Atty. Pineda, Interport's Corporate Secretary, at
which meeting Villaroman formally requested a copy of the resolution. complainant's litigation expenses, including attorney's fees, reasonably in the
However, Interport did not produce a copy of the resolution.[12] sum of THREE HUNDRED THOUSAND pesos (P300,000.00) and to pay
the costs of suit.[19]
Despite that meeting, Interport still rejected SSI's tender of payment for the
5,000,000 shares covered by the Oceanic Subscription Agreements Nos. Both Interport and R.C. Lee appealed to the SEC En Banc, which ultimately
1805, and 1808 to 1811.[13] ruled as follows:

On March 31, 1989, or 16 days after its tender of payment, SSI learned that After a careful review of the records of this case, we find basis in partially
Interport had issued the 5,000,000 shares to R.C. Lee, relying on the latter's reversing the decision dated October 25, 1994.
registration as the owner of the subscription agreements in the books of the
former, and on the affidavit executed by the President of R.C. Lee stating that It is undisputed from the facts presented and evidence adduced that the
no transfers or encumbrances of the shares had ever been made.[14] subject matter of this case pertains to the subscription agreements for which
complainant paid only twenty five percent and the remaining balance of
Thus, on April 27, 1989, SSI wrote R.C. Lee demanding the delivery of the seventy five percent paid for by respondent RCL. Accordingly, to order the
5,000,000 Interport shares on the basis of a purported assignment of the return of the five million shares or the payment of the entire value thereof to
subscription agreements covering the shares made in 1979. R.C. Lee failed to the complainant, without requiring the latter to pay the balance of seventy
return the subject shares inasmuch as it had already sold the same to other five percent will be inequitable. Accordingly, the pertinent portion of the
parties. SSI thus demanded that R.C. Lee pay not only the equivalent of the decision is hereby revised to reflect this.
25% it had paid on the subscription but the whole 5,000,000 shares at
current market value.[15] As regards the portion awarding temperate damages, the same may not be
awarded. All evidence presented by Securities Specialist, Inc. pertaining to its
SSI also made demands upon Interport and R.C. Lee for the cancellation of "lost opportunity" seeking for damages for its supposed failure to sell
the shares issued to R.C. Lee and for the delivery of the shares to SSI. [16] Interport's shares, when the market was allegedly good, is merely speculative.
Moreover, even if the alleged pecuniary loss of SSI would be considered, the
On October 6, 1989, after its demands were not met, SSI commenced this same is again purely speculative and deserves scant consideration by the
case in the SEC to compel the respondents to deliver the 5,000,000 shares Commission. Hence, temperate damages may not be justly awarded along
and to pay damages.[17] It alleged fraud and collusion between Interport and with the other damages prayed for.
R.C. Lee in rejecting the tendered payment and the transfer of the shares
covered by the subscription agreements. WHEREFORE, premises considered, judgment is hereby rendered, ordering
respondent Interport to deliver the corresponding shares previously covered
On October 25, 1994, after due hearing, the Hearing Officer of the SEC's by Oceanic Oil Mineral Resources Inc. subscription agreements Nos. 1805-
Securities Investigation and Clearing Department (SICD) rendered a 1811 to petitioner SSI, to the extent only of 25% thereof, as duly paid by
decision,[18] disposing thusly: petitioner SSI; and if the same will not be possible, to deliver the value
thereof at the market price as of the date of this judgment and ordering both
WHEREFORE, judgment is hereby rendered ordering respondent Interport respondents jointly and severally, to indemnify the complainant in the sum of
to deliver the five (5) million shares covered by Oceanic Oil and Mineral five hundred thousand pesos (P500,000.00) by way of exemplary damages,
Resources, Inc. subscription agreement TNos. 1805, 1808-1811 to petitioner to pay for complainant's litigation expenses, including attorney's fees,
SSI; and if the same not be possible to deliver the value thereof, at the market reasonably in the sum of three hundred thousand pesos (P300,000.00) and
price as of the date of this judgment; and ordering both respondents, jointly to pay the costs of the suit.[20]
and severally, to indemnify the complainant in the sum of FIVE HUNDRED Interport appealed to the CA,[21] which on February 11, 2002 affirmed the
THOUSAND PESOS (P500,000.00) by way of temperate or moderate SEC's decision,[22] viz.:
damages, to indemnify complainant in the sum of FIVE HUNDRED
THOUSAND PESOS (P500,000.00) by way of exemplary damages; to pay for
WHEREFORE, premises considered the Petition is hereby DENIED DUE The issues are: (a) whether or not Interport was liable to deliver to SSI the
COURSE and ordered DISMISSED and the challenged decision of the Oceanic shares of stock, or the value thereof, under Subscriptions Agreement
Securities and Exchange Commission AFFIRMED, with costs to Petitioner. No. 1805, and Nos. 1808 to 1811 to SSI; and (b) whether or not SSI was
entitled to exemplary damages and attorney's fees.

On June 25, 2002, the CA denied Interport's motion for reconsideration. [23]

Issues The appeal is partly meritorious.

Interport assigns the following errors to the CA, namely:


I Interport was liable to deliver the Oceanic shares of stock, or the

value thereof, under Subscription Agreements Nos. 1805, and
PETITIONER LIABLE TO DELIVER THE 25% OF THE SUBJECT 5 Interport argues that R.C. Lee should be held liable for the delivery of 25% of
MILLION SHARES OR IF THE SAME NOT BE POSSIBLE TO DELIVER the shares under the subject subscription agreements inasmuch as R.C. Lee
THE VALUE THEREOF DESPITE THE EVIDENCE TO THE CONTRARY. had already received all the 5,000,000 shares upon its payment of the 75%
balance on the subscription price to Interport; that it was only proper for R.C.
Lee to deliver 25% of the shares under the Oceanic subscription agreements
II because it had already received the corresponding payment therefor from SSI
for the assignment of the shares; that R.C. Lee would be unjustly enriched if
it retained the 5,000,000 shares and the 25% payment of the subscription
THE COURT OF APPEALS ERRED IN RULING THAT PETITIONER IS price made by SSI in favor of R.C. Lee as a result of the assignment; and that
LIABLE FOR EXEMPLARY DAMAGES IN THE AMOUNT OF P500 000.00 it merely relied on its records, in accordance with Section 74 of
WITHOUT LEGAL BASIS, WHICH IS NOT IN ACCORD WITH LAW AND the Corporation Code, when it issued the stock certificates to R.C. Lee upon
APPLICABLE DECISIONS OF THE SUPREME COURT. its full payment of the subscription price.

Interport's arguments must fail.

III In holding Interport liable for the delivery of the Oceanic shares, the SEC
LIABLE FOR ATTORNEY'S FEES IN THE AMOUNT OF P300.000.00 AND x x x [T]he Oceanic subscriptions agreements were duly delivered to the
COSTS THERE BEING NO FACTUAL AND LEGAL BASIS, WHICH IS NOT Complainant SSI supported by stock assignments of respondent R.C. Lee
IN ACCORD WITH LAW AND APPLICABLE DECISIONS OF THE (Exhibits "B" to "B-4" of the petitioner) and by official receipts of Oceanic
SUPREME COURT.[24] showing that twenty five percent of the subscription had been paid (Exhibits
"C" to "C-4"). To this date, respondent R.C. Lee does not deny having
subscribed and delivered such stock assignments to the Oceanic name of respondent R.C. Lee, respondent Interport was then
subscription agreements. Therefore, having negotiated them by bound to recognize the stock assignment also tendered duly
allowing to be in street certificates, respondent R.C. Lee, as a executed by respondent R.C. Lee in favor of complainant
broker, cannot now legally and morally claim any further interests SSI.[25] (bold emphasis supplied.)
over such subscriptions or the shares of stock they represent.
The SEC correctly categorized the assignment of the subscription agreements
xxxx as a form of novation by substitution of a new debtor and which required the
consent of or notice to the creditor. We agree. Under the Civil Code,
Both respondents seek to be absolved of liability for their machinations by obligations may be modified by: (1) changing their object or principal
invoking both the rule on novation of the debtor without the creditor's conditions; or (2) substituting the person of the debtor; or (3) subrogating a
consent; as well as the Corporation Code rule of nonregistration of transfers third person in the rights of the creditor.[26] Novation, which consists in
in the corporation's stock and transfer book. Neither will avail in the case at substituting a new debtor in the place of the original one, may be made even
bar. Art. 1293 of the New Civil Code states: without the knowledge or against the will of the latter, but not without the
consent of the creditor.[27] In this case, the change of debtor took place when
"Art. 1293. Novation which consists in substituting a new debtor in the place R.C. Lee assigned the Oceanic shares under Subscription Agreement Nos.
of the original one may be made even without the knowledge or against the 1805, and 1808 to 1811 to SSI so that the latter became obliged to settle the
will of the latter but not without the consent of the creditor" x x x. 75% unpaid balance on the subscription.

More importantly, the allusion by the respondents likening the subscription The SEC likewise did not err in appreciating the fact that Interport was duly
contracts to the situation of debtor-creditor finds no basis in law. Indeed, as notified of the assignment when SSI tendered its payment for the 75% unpaid
held by the Supreme Court, shareholders are not creditors of the corporation balance, and that it could not anymore refuse to recognize the transfer of the
with respect to the shareholdings (Garcia vs. Lim Chu Sing, 59 Phil. 562). subscription that SSI sufficiently established by documentary evidence.

The Memorandum of R.C. Lee, likewise cites the Opinion of the SEC dated Yet, Interport claims that SSI waived its rights over the 5,000,000 shares due
November 12, 1976, which states "that since an assignment will involve a to its failure to register the assignment in the books of Interport; and that SSI
substitution of debtor or novation of contract, as such the consent of the was estopped from claiming the assigned shares, inasmuch as the assignor,
creditor must be obtained" has the same effect. The opinion, however, merely R.C. Lee, had already transferred the same to third parties.
restated the general rule already embodied in the Codal provision quoted
above; it does not preclude previously authorized transfers. According to Interport's claim cannot be upheld. It should be stressed that novation
Tolentino - extinguished an obligation between two parties.[28] We have stated in that
respect that:

"When the original contract authorizes the debtor to transfer his obligations
to a third person, the novation by substitution of debtor is effected when the x x x Novation may:
creditor is notified that such transfer has been made" (IV Tolentino 392, 1991
ed, emphasis supplied) [E]ither be extinctive or modificatory, much being dependent on the nature
of the change and the intention of the parties. Extinctive novation is never
But even following the argument of the respondents, when presumed; there must be an express intention to novate; in cases where it is
complainant SSI tendered the balance of the unpaid subscription implied, the acts of the parties must clearly demonstrate their intent to
on the subject five (5) million shares on the basis of the existing dissolve the old obligation as the moving consideration for the emergence of
subscription agreements covering the same, respondents the new one. Implied novation necessitates that the incompatibility between
Interport was bound to accept payment even as the same were the old and new obligation be total on every point such that the old obligation
being tendered in the name of the registered subscriber, is completely superseded by the new one. The test of incompatibility is
respondent R.C. Lee and once the payment is fully accepted in the whether they can stand together, each one having an independent existence;
if they cannot and are irreconcilable, the subsequent obligation would also This statutory rule cannot be strictly applied herein, however, because
extinguish the first. Interport had unduly refused to recognize the assignment of the shares
between R.C. Lee and SSI. Accordingly, we adopt with approval the SEC's
An extinctive novation would thus have the twin effects of, first, following conclusion that -
extinguishing an existing obligation and, second, creating a new one in its
stead. This kind of novation presupposes a confluence of four essential
requisites: (1) a previous valid obligation, (2) an agreement of all parties x x x To say that the ten years since the assignment had been made are a
concerned to a new contract, (3) the extinguishment of the old obligation, sufficient lapse of time in order for respondent SSI to be considered to have
and (4) the birth of a valid new obligation. Novation is merely modificatory abandoned its rights under the subscription agreements, is to ignore the rule
where the change brought about by any subsequent agreement is merely -
incidental to the main obligation (e.g., a change in interest rates or an
extension of time to pay; in this instance, the new agreement will not have "The right to have the transfer registered exists from the time of the transfers
the effect of extinguishing the first but would merely supplement it or and it is to the transferee's benefit that the right be exercised early. However,
supplant some but not all of its provisions.[29] since the law does not prescribed (sic) any period within which
Clearly, the effect of the assignment of the subscription agreements to SSI the registration should be effected the action to be enforced the right does not
was to extinguish the obligation of R.C. Lee to Oceanic, now Interport, to accrue until here has been a demand and a refusal to record the transfer." (11
settle the unpaid balance on the subscription. As a result of the assignment, Campus 310, 1990 ed., citing Won v. Wack Wack Golf, 104 Phil. 466,
Interport was no longer obliged to accept any payment from R.C. Lee because Emphasis Supplied).
the latter had ceased to be privy to Subscription Agreements Nos. 1805, and Petitioner SSI was denied recognition of its subscription agreement on March
1808 to 1811 for having been extinguished insofar as it was concerned. On the 15, 1989; the complaint against the respondents was filed before the SEC on
other hand, Interport was legally bound to accept SSI's tender of payment for October 6 of that same year. This is the period of time that is to be taken into
the 75% balance on the subscription price because SSI had become the new account, not the period between 1979 and 1989. The Commission thus finds
debtor under Subscription Agreements Nos. 1805, and 1808 to 1811. As such, that petitioner acted with sufficient dispatch in seeking to enforce its rights
the issuance of the stock certificates in the name of R.C. Lee had no legal under the subscription agreements, and sought the intervention of this
basis in the absence of a contractual agreement between R.C. Lee and Commission within a reasonable period.
In the affidavit of respondent R.C. Lee's president, Ramon C. Lee, dated
Under Section 63 of the Corporation Code, no transfer of shares of stock February 22, 1989, there are several averments that need to be examined, in
shall be valid, except as between the parties, until the transfer is recorded in the light of respondent R.C. Lee's claim of having acted in good faith.
the books of the corporation so as to show the names of the parties to the
transaction, the date of the transfer, the number of the certificate or The first is the statement made in paragraph 3 thereof:
certificates and the number of shares transferred. Hence:

"That R.C. Lee Securities, Inc. has delivered to Interport its subscription
[A] transfer of shares of stock not recorded in the stock and transfer book of Agreements for Twenty Five Million (25,000,000) shares of Oceanic for
the corporation is non-existent as far as the corporation is concerned. As conversion into Interport shares however, as of date, only twenty million
between the corporation on the one hand, and its shareholders and third (20,000,000) shares have been duly covered by Interport Subscription
persons on the other, the corporation looks only to its books for the purpose Agreements and the Five million (5,000,000) shares still remains without
of determining who its shareholders are. It is only when the transfer has been Subscription Agreements".
recorded in the stock and transfer book that a corporation may rightfully
regard the transferee as one of its stockholders. From this time, the No explanation is given for the failure of respondent Interport to convert the
consequent obligation on the part of the corporation to recognize such rights five (5) million shares. As can be seen from the letter of Interport to counsel
as it is mandated by law to recognize arises.[30] of R.C. Lee, dated January 27, 1989, already mentioned above, these five (5)
million shares purportedly belonging to respondent R.C. Lee do not seem to malevolent manner.[34]
be covered by any properly identified subscription agreements. Yet
respondent Interport issued the shares without respondent R.C. Lee having In this case, the Court finds that Interport's act of refusing to accept SSI's
anything to show for the same. On the other hand, respondent Interport tender of payment for the 75% balance of the subscription price was not
refused to recognize complainant SSI's claim to five (5) millions (sic) shares performed in a wanton, fraudulent, oppressive or malevolent manner. In
inspite of the fact that its claim was fully supported by duly issued doing so, Interport merely relied on its records which did not show that an
subscription agreements, stock assignment and receipts of payment of the assignment of the shares had already been made between R.C. Lee and SSI as
initial subscription. x x x[31] early as 1979. R.C. Lee, on the other hand, persisted in paying the 75%
balance on the subscription price simply on the basis of Interport's
Subscription Agreements Nos. 1805, and 1808 to 1811 were now binding representation that no transfer has yet been made in connection with
between Interport and SSI only, and only such parties were expected to Subscription Agreement Nos. 1805, and 1808 to 1811. Although Interport and
comply with the terms thereof. Hence, the CA did not err in relying on the R.C. Lee might have acted in bad faith[35] in refusing to recognize the
findings of the SEC, which was in a better position to pass judgment on assignment of the subscription agreements in favor of SSI, their acts certainly
whether or not Interport was liable to deliver to SSI the Oceanic shares under did not fall within the ambit of being performed in a wanton, fraudulent,
Subscription Agreements Nos. 1805, and 1808 to 1811. oppressive or malevolent manner as to entitle SSI to an award for exemplary
We delete the attorney's fees for lack of legal basis.[36]
Interport and R.C. Lee were not liable to pay exemplary damages
and attorney's fees WHEREFORE, the Court PARTIALLY GRANTS the petition for review
on certiorari; and AFFIRMS the decision promulgated on February 11,
2002 subject to the following MODIFICATIONS, namely:
Article 2229 of the Civil Code provides that exemplary damages may be
imposed by way of example or correction for the public good. While 1. ORDERING Interport Resources Corporation: (a) To accept the tender of
exemplary damages cannot be recovered as a matter of right, they need not payment of Securities Specialist, Inc. corresponding to the 75% unpaid
be proved, although the plaintiff must show that he is entitled to moral, balance of the total subscription price under Subscription Agreements Nos.
temperate, or compensatory damages before the court may consider the 1805, 1808, 1809, 1810 and 1811; (b) To deliver 5,000,000 shares of stock
question of whether or not exemplary damages should be awarded. and to issue the corresponding stock certificates to Securities Specialist, Inc.
Exemplary damages are imposed not to enrich one party or impoverish upon receipt of the payment of the latter under Item No. (a); (c) To cancel the
another, but to serve as a deterrent against or as a negative incentive to curb stock certificates issued to R.C. Lee Securities, Inc. corresponding to the
socially deleterious actions.[32] 5,000,000 shares of stock covered by Subscription Agreements Nos. 1805,
1808, 1809, 1810 and 1811; (d) To reimburse R.C. Lee Securities, Inc. the
SSI was not able to show that it was entitled to moral, temperate, or amounts it paid representing the 75% unpaid balance of the total
compensatory damages. In fact, the SEC pointed out that the award of subscription price of Subscription Agreements Nos. 1805, 1808, 1809, 1810
temperate damages was not proper because SSI's alleged pecuniary loss was and 1811; and (e) In the alternative, if the foregoing is no longer possible,
merely speculative in nature. Neither could SSI recover exemplary damages Interport Resources Corporation shall pay Securities Specialist, Inc. the
considering that there was no award of moral damages. Indeed, exemplary market value of the 5,000,000 shares of stock covered by Subscription
damages are to be allowed only in addition to moral damages, and should not Agreements Nos. 1805, 1808, 1809, 1810 and 1811 at the time of the
be awarded unless the claimant first establishes a clear right to moral promulgation of this decision; and
2. DELETING the award for exemplary damages and attorney's fees for lack
Nonetheless, the Court observes that exemplary damages were awarded in of merit.
the past despite the award of moral damages being deleted because the
defendant party to a contract acted in a wanton, fraudulent, oppressive or No pronouncement on costs of suit.