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G.R. No. 153468 August 17, 2006

Petitioners,vs.PAUL SYCIP and MERRITTO LIM, Respondents.

DOCTRINE: For stock corporations, the quorum referred to in Section 52 of the

Corporation Code is based on the number of outstanding voting stocks. For
nonstock corporations, only those who are actual, living members with voting rights
shall be counted in determining the existence of a quorum during members
meetings. Dead members shall not be counted.

FACTS: Grace Christian High School (GCHS) is a nonstock, non-profit educational

corporation with 15 regular members, who also constitute the board of trustees.
During the annual members’ meeting, there were only 11 living member-trustees, as
4 have already died. Out of the 11, 7 attended the meeting through their respective
proxies. The meeting was convened and chaired by Atty. Sabino Padilla Jr. over the
objection of Atty. Antonio C. Pacis, who argued that there was no quorum. In the
meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were
voted to replace the four deceased member-trustees. The controversy reached SEC
and the petitioners maintained that the deceased member-trustees should not be
counted in the computation of the quorum because, upon their death, members
automatically lost all their rights (including the right to vote) and interests in the
corporation. SEC declared the meeting null and void and ruled that the phrase
“entitled to vote” under Sec 24 should be read with Sec 89 of Corpo Code.

ISSUE: In a non-stock corporation, should dead members still be counted in

determination of quorum for purposed of conducting the Annual Members’

HELD: For stock corporations, the "quorum" referred to in Section 52 of the

Corporation Code is based on the number of outstanding voting stocks. For
nonstock corporations, only those who are actual, living members with voting rights
shall be counted in determining the existence of a quorum during members’
meetings. Dead members shall not be counted. (Dead members will no longer be
counted in the quorum).

One of the most important rights of a qualified shareholder or member is the right
to vote -- either personally or by proxy -- for the directors or trustees who are to
manage the corporate affairs. The right to vote is inherent in and incidental to the
ownership of corporate stocks. In nonstock corporations, the voting rights attach to
membership. The principle for determining the quorum for stock corporations is
applied by analogy to nonstock corporations, only those who are actual members
with voting rights should be counted. Under Section 52, the majority of the members
representing the actual number of voting rights, not the number or numerical
constant that may originally be specified in the articles of incorporation, constitutes
the quorum.

Having thus determined that the quorum in a members’ meeting is to be reckoned

as the actual number of members of the corporation, the next question to resolve is
what happens in the event of the death of one of them. In stock corporations, the
executor or administrator duly appointed by the Court is vested with the legal title
to the stock and entitled to vote it. Until a settlement and division of the estate is
effected, the stocks of the decedent are held by the administrator or executor. On the
other hand, membership in and all rights arising from a nonstock corporation are
personal and non-transferable, unless the articles of incorporation or the bylaws of
the corporation provide otherwise. In other words, the determination of whether or
not "dead members" are entitled to exercise their voting rights (through their
executor or administrator), depends on those articles of incorporation or bylaws.

Under the By-Laws of GCHS, membership in the corporation shall, among others, be
terminated by the death of the member. Applying Section 91, dead members who
are dropped from the membership roster in the manner and for the cause provided
for in the By-Laws of GCHS are not to be counted in determining the requisite vote
in corporate matters or the requisite quorum for the annual members’ meeting.
With 11 remaining members, the quorum in the present case should be 6. Therefore,
there being a quorum, the annual members’ meeting was valid.

29. Lopez Realty Inc. vs. Sps. Tanjanco

By virtue of ratification, the acts of the board of directors become the acts of the
stockholders themselves, even if those acts were, at the outset, unauthorized.

Lopez Realty, Inc. (LRI) and Asuncion Lopez-Gonzalez initiated a “Complaint for
annulment of sale, cancellation of title, reconveyance and damages with prayer for
the issuance of temporary restraining order (TRO) and/or writ of preliminary
injunction against the spouses Tanjangco, Arturo and the Registrar of Deeds of
Manila.” Previously, LRI and Dr. Jose Tanjangco (Jose) “were the registered co-
owners of three parcels of land and the building erected thereon known as the
‘Trade Center Building’… Jose’s one-half share in the subject properties were later
transferred and registered in the name of his son Reynaldo Tanjangco and daughter-
in-law, Maria Luisa Arguelles (spouses Tanjangco).”

These were the stockholders of record of LRI at the time material to this case:
1. Asuncion Lopez-Gonzalez (Asuncion, Director & Corporate Secretary) – 7,831
2. Arturo F. Lopez (Arturo) – 7,830 shares;
3. Teresita Lopez-Marquez (Teresita) – 7,830 shares;
4. Rosendo de Leon (Rosendo, Director) – 5 shares
5. Benjamin Bernardino (Benjamin, Director) – 1 share;
6. Augusto de Leon (Augusto, Director) – 1 share; and
7. Leo Rivera (Leo, Director) – 1 share

During a special stockholders’ meeting held on 27 July 1981, the sale of 1/2 share of
LRI in the Trade Center Building was taken up. While the selling price was at P4 M,
the Tanjancos offered P3.8 M. To this, Asuncion countered with P5 M which was not
accepted by the Tanjancos. Thus, the board agreed to give Asuncion the priority to
equal the Tanjanco offer and the same to be exercised within ten (10) days.
Otherwise, the Tanjanco offer will be deemed accepted. Just a day after, Teresita
died (her estate’s executor Juanito L. Santos represented her afterwards). As
Asuncion failed to exercise her option to purchase the subject properties, and while
she was abroad, “the remaining directors: Rosendo, Benjamin and Leo convened in a
special meeting” passing and approving the 17 August 1981 Resolution authorizing
Arturo to negotiate and “carry out the complete termination of the sale terms and
conditions as embodied in the resolution of July 27, 1981, among others.
Subsequently, the sale was perfected with payments subsequently made.

Whether or not the sale is valid.

YES. The 17 August 1981 Board Resolution did not give Arturo the authority to act
as LRI’s representative in the sale. This is because the meeting of the board of
directors were such was passed was conducted without giving any notice to
Asuncion. This is in violation of Sec. 53 of the Corporation Code which requires
sending of notices for regular or special meetings to every director. As a result, a
meeting of the board of directors is legally infirm if there is failure to comply with
the requirements or formalities of the law or the corporation’s by-laws and any
action taken on such meeting may be challenged as a consequence. However, the
actions taken in such a meeting by the directors or trustees may be ratified
expressly or impliedly. Here, the ratification was expressed through the July 30,
1982 Board Resolution. In sum, whatever defect there was on the sale to the
spouses Tanjangco pursuant to the August 17, 1981 Board Resolution, the same was
cured through its ratification in the July 30, 1982 Board Resolution. It is of no
moment whether Arturo was authorized to merely negotiate or to enter into a
contract of sale on behalf of LRI as all his actions in connection to the sale were
expressly ratified by the stockholders holding 67% of the outstanding capital stock.
30. Legaspi Towers 300, Inc. vs. Murer

Facts: Legaspi Towers set the annual meeting of the condominium corporation
and the election of the new Board of Directors for the years 2004-2005 on April 2,
2004 at 5:00 p.m. at the lobby of Legaspi Towers. Out of a total number of 5,723
members who were entitled to vote, 1,358 were supposed to vote through their
respective proxies and their votes were critical in determining the existence of a
quorum, which was at least 2,863. The Committee on Elections of Legaspi
Towers 300, Inc., however, found most of the proxy votes, at its face value,
irregular, thus, questionable; and for lack of time to authenticate the same,
petitioners adjourned the meeting for lack of quorum.
Respondents, however, challenged the adjournment and pushed through with
the scheduled election and were elected as the new Board of Directors and
officers. Subsequently, they submitted a General Information Sheet to the
Securities and Exchange Commission (SEC) with the new set of officers.
Petitioners filed a complaint for the Declaration of Nullity of Elections before the
RTC of Manila. (Note that complaint was amended and an ex parte TRO was

Respondents, in their Answer, argued that the elections was lawfully conducted
and cited the report of SEC Counsel Nicanor Patricio. In said report, Patricio
stated that when the Board adjourned the meeting despite the objections of the
unit owners, the unit owners who objected to the adjournment gathered
themselves at the same place of the meeting and proceeded with the meeting.
The attendance was checked from among the members who stayed at the
meeting. Proxies were counted and recorded, and there was a declaration of a
quorum out of a total of 5,721 votes, 2,938 were present either in person or

Respondents filed a comment on the motion to amend complaint praying that the
name of Legaspi Towers as party-plaintiff be deleted as the said inclusion by
petitioners was made without the authority of the current Board of Directors.
RTC denied said motion. CA held that as the right to vote is a personal right of a
stockholder of a corporation, such right can only be enforced through a direct
action; hence, Legaspi Towers 300, Inc. cannot be impleaded as plaintiff in this

Issue: WON CA erred in not finding that RTC committed grave abuse of
discretion amounting to lack or excess of jurisdiction in denying the admission of
the Second Amended Complaint.

Held: Petitioners contention is unmeritorious. It is clear that in the Orders dated

July 21, 2004, the trial court did not admit the Second Amended Complaint
wherein petitioners made the condominium corporation, Legaspi Towers 300,
Inc., the party-plaintiff.
Petitioners contend that Legaspi Towers 300, Inc. is a real party-in- interest. That
the condominium corporation has the right to be managed and run by the duly-
elected Board of Directors, and to seek redress against those who wrongfully
occupy positions of the corporation and who may mismanage the corporation.
The Court agrees with the Court of Appeals that the Second Amended Complaint
is meant to be a derivative suit filed by petitioners in behalf of the corporation.
The Court of Appeals stated in its Decision that petitioners justified the inclusion
of Legaspi Towers 300 by invoking the doctrine of derivative suit.

Suits by stockholders or members of a corporation based on wrongful or

fraudulent acts of directors or other persons may be classified into individual
suits, class suits, and derivative suits. Where a stockholder or member is denied
the right of inspection, his suit would be individual because the wrong is done to
him personally and not to the other stockholders or the corporation. Where the
wrong is done to a group of stockholders, as where preferred stockholders' rights
are violated, a class or representative suit will be proper for the protection of all
stockholders belonging to the same group. But where the acts complained of
constitute a wrong to the corporation itself, the cause of action belongs to the
corporation and not to the individual stockholder or member.

However, in cases of mismanagement where the wrongful acts are committed by

the directors or trustees themselves, a stockholder or member may find that he
has no redress because the former are vested by law with the right to decide
whether or not the corporation should sue, and they will never be willing to sue
themselves. The corporation would thus be helpless to seek remedy. Because of
the frequent occurrence of such a situation, the common law gradually
recognized the right of a stockholder to sue on behalf of a corporation in what
eventually became known as a "derivative suit." It has been proven to be an
effective remedy of the minority against the abuses of management. Thus, an
individual stockholder is permitted to institute a derivative suit on behalf of the
corporation wherein he holds stock in order to protect or vindicate corporate
rights, whenever officials of the corporation refuse to sue or are the ones to be
sued or hold the control of the corporation. In such actions, the suing stockholder
is regarded as the nominal party, with the corporation as the party-in- interest.
Since it is the corporation that is the real party-in-interest in a derivative suit, then
the reliefs prayed for must be for the benefit or interest of the corporation.
The requisites for a derivative suit are as follows:
a) the party bringing suit should be a shareholder as of the time of the act or
transaction complained of, the number of his shares not being material;
b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on
the board of directors for the appropriate relief but the latter has failed or refused
to heed his plea; and
c) the cause of action actually devolves on the corporation, the wrongdoing or
harm having been, or being caused to the corporation and not to the particular
stockholder bringing the suit
Petitioners complaint seek to nullify the said election, and to protect and enforce
their individual right to vote.
The cause of action devolves on petitioners, not the condominium corporation,
which did not have the right to vote. Hence, the complaint for nullification of the
election is a direct action by petitioners, who were the members of the Board of
Directors of the corporation before the election, against respondents, who are the
newly-elected Board of Directors. Under the circumstances, the derivative suit
filed by petitioners in behalf of the condominium corporation in the Second
Amended Complaint is improper.
The stockholders right to file a derivative suit is not based on any express
provision of The Corporation Code, but is impliedly recognized when the law
makes corporate directors or officers liable for damages suffered by the
corporation and its stockholders for violation of their fiduciary duties, which is not
the issue in this case.

31. Trans Middle East (Phils.) vs. Sandiganbayan

DOCTRINE: It is a well-settled rule that registered owners of the shares of a

corporation, even if they are sequestered by the government through the PCGG,
exercises the right and the privilege of voting on them. PCGG (as conservator)
cannot, as a rule, exercise acts of dominion by voting these shares.

Trans Middle East (TMEE), the registered owners of sequestered shares in
Equitable-PCI Bank (EPCIB) assails Sandiganbayan’s Resolution which declared
that a TRO “issued 14 years ago by this Court in cases that were closed and
terminated ten years ago, remained in effect, thus disqualifying TMEE from
voting on its shares. The annual stockholders meeting of EPCIB was scheduled
on 23 May 2006, or the day after the Resolution was promulgated, leaving
questions as to the timing of the promulgation. In any event, the Resolution is
rooted in dubious and erroneous legal premises.”

TMEE is the registered owner of 6,119,067 common shares of stock in EPCIB.

PCGG sequestered such shares on a theory that those shares actually belong to
a Benjamin Romualdez who acquired such from illegal wealth. Sandiganbayan
filed a case to recover such shares which was countered by a motion of TMEE to
enjoin the PCGG from voting the shares of TMEE.

SC then issued a TRO enjoining the implementation of the Sandiganbayan


Whether or not PCGG exercises acts of dominion on the voting shares over the
registered owner of the shares in TMEE.
NO. It is a well-settled rule that registered owners of the shares of a corporation,
even if they are sequestered by the government through the PCGG, exercises
the right and the privilege of voting on them. PCGG (as conservator) cannot, as a
rule, exercise acts of dominion by voting these shares. Registered owner of
sequestered shares may only be deprived of these voting rights, and the PCGG
authorized to exercise the same, only if it is able to establish that:

(1) there is prima facie evidence showing that the said shares are ill-gotten and
thus belong to the State; and
(2) there is an imminent danger of dissipation, thus necessitating the continued
sequestration of the shares and authority to vote thereupon by the PCGG while
the main issue is pending before the Sandiganbayan.

The writ of sequestration would not legally bar TMEE from voting its shares. It
would only be possible if there is prima facie evidence that such shares are ill-
gotten and where there is an imminent danger of dissipation. Given that
Sandiganbayan has yet to release such findings, this is not applicable. In fact, in
a Resolution of Sandiganbayan, it declared that TMEE has the prima facie right
as owner of the registered owner of the sequestered shares. Petition granted.

GLORIA V. GOMEZ, Petitioner,

CORPORATION [FDMC]), Respondent.



This case is about what distinguishes a regular company manager performing important
executive tasks from a corporate officer whose election and functions are governed by the
company’s by-laws.

The Facts and the Case

Petitioner Gloria V. Gomez used to work as Manager of the Legal Department of Petron
Corporation, then a government-owned corporation. With Petron’s privatization, she
availed of the company’s early retirement program and left that organization on April 30,
1994. On the following day, May 1, 1994, however, Filoil Refinery Corporation (Filoil),
also a government-owned corporation, appointed her its corporate secretary and legal
counsel,1 with the same managerial rank, compensation, and benefits that she used to
enjoy at Petron.
But Filoil was later on also identified for privatization. To facilitate its conversion, the
Filoil board of directors created a five-member task force headed by petitioner Gomez
who had been designated administrator.2 While documenting Filoil’s assets, she found
several properties which were not in the books of the corporation. Consequently, she
advised the board to suspend the privatization until all assets have been accounted for.

With the privatization temporarily shelved, Filoil underwent reorganization and was
renamed Filoil Development Management Corporation (FDMC), which later became the
respondent PNOC Development Management Corporation (PDMC). When this
happened, Gomez’s task force was abolished and its members, including Gomez, were
given termination notices on March 5, 1996.3 The matter was then reported to the
Department of Labor and Employment on March 7, 1996.4

Meantime, petitioner Gomez continued to serve as corporate secretary of respondent

PDMC. On September 23, 1996 its president re-hired her as administrator and legal
counsel of the company.5 In accordance with company guidelines, it credited her the
years she served with the Filoil task force. On May 24, 1998, the next president of PDMC
extended her term as administrator beyond her retirement age,6 pursuant to his authority
under the PDMC Approvals Manual.7 She was supposed to serve beyond retirement from
August 11, 1998 to August 11, 2004. Meantime, a new board of directors for PDMC took
over the company.

On March 29, 1999 the new board of directors of respondent PDMC removed petitioner
Gomez as corporate secretary. Further, at the board’s meeting on October 21, 1999 the
board questioned her continued employment as administrator. In answer, she presented
the former president’s May 24, 1998 letter that extended her term. Dissatisfied with this,
the board sought the advice of its legal department, which expressed the view that
Gomez’s term extension was an ultra vires act of the former president. It reasoned that,
since her position was functionally that of a vice-president or general manager, her term
could be extended under the company’s by-laws only with the approval of the board. The
legal department held that her "de facto" tenure could be legally put to an end.8

Sought for comment, the Office of the Government Corporate Counsel (OGCC) held the
view that while respondent PDMC’s board did not approve the creation of the position of
administrator that Gomez held, such action should be deemed ratified since the board had
been aware of it since 1994. But the OGCC ventured that the extension of her term
beyond retirement age should have been made with the board’s approval.9

Petitioner Gomez for her part conceded that as corporate secretary, she served only as a
corporate officer. But, when they named her administrator, she became a regular
managerial employee. Consequently, the respondent PDMC’s board did not have to
approve either her appointment as such or the extension of her term in 1998.

Pending resolution of the issue, the respondent PDMC’s board withheld petitioner
Gomez’s wages from November 16 to 30, 1999, prompting her to file a complaint for
non-payment of wages, damages, and attorney’s fees with the Labor Arbiter on
December 8, 1999.10 She later amended her complaint to include other money claims.11

In a special meeting held on December 29, 1999 the respondent PDMC’s board resolved
to terminate petitioner Gomez’s services retroactive on August 11, 1998, her retirement
date.12 On January 5, 2000 the board informed petitioner of its decision.13 Thus, she
further amended her complaint to include illegal dismissal.14

Respondent PDMC moved to have petitioner Gomez’s complaint dismissed on ground of

lack of jurisdiction. The Labor Arbiter granted the motion15 upon a finding that Gomez
was a corporate officer and that her case involved an intra-corporate dispute that fell
under the jurisdiction of the Securities and Exchange Commission (SEC) pursuant to
Presidential Decree (P.D.) 902-A.16 On motion for reconsideration, the National Labor
Relations Commission (NLRC) Third Division set aside the Labor Arbiter’s order and
remanded the case to the arbitration branch for further proceedings.17 The Third Division
held that Gomez was a regular employee, not a corporate officer; hence, her complaint
came under the jurisdiction of the Labor Arbiter.

Upon elevation of the matter to the Court of Appeals (CA) in CA-G.R. SP 88819,
however, the latter rendered a decision on May 19, 2006,18 reversing the NLRC decision.
The CA held that since Gomez’s appointment as administrator required the approval of
the board of directors, she was clearly a corporate officer. Thus, her complaint is within
the jurisdiction of the Regional Trial Court (RTC) under P.D. 902-A, as amended by
Republic Act (R.A.) 8799.19 With the denial of her motion for reconsideration,20 Gomez
filed this petition for review on certiorari under Rule 45.

The Issue Presented

The key issue in this case is whether or not petitioner Gomez was, in her capacity as
administrator of respondent PDMC, an ordinary employee whose complaint for illegal
dismissal and non-payment of wages and benefits is within the jurisdiction of the NLRC.

The Court’s Ruling

Ordinary company employees are generally employed not by action of the directors and
stockholders but by that of the managing officer of the corporation who also determines
the compensation to be paid such employees.21 Corporate officers, on the other hand, are
elected or appointed22 by the directors or stockholders, and are those who are given that
character either by the Corporation Code or by the corporation’s by-laws.23

Here, it was the PDMC president who appointed petitioner Gomez administrator, not its
board of directors or the stockholders. The president alone also determined her
compensation package. Moreover, the administrator was not among the corporate officers
mentioned in the PDMC by-laws. The corporate officers proper were the chairman,
president, executive vice-president, vice-president, general manager, treasurer, and
Respondent PDMC claims, however, that since its board had under its by-laws the power
to create additional corporate offices, it may be deemed to have simply ratified its
president’s creation of the corporate position of administrator.25 But creating an
additional corporate office was definitely not respondent PDMC’s intent based on its
several actions concerning the position of administrator.1avvphi1

Respondent PDMC never told Gomez that she was a corporate officer until the tail-end of
her service after the board found legal justification for getting rid of her by consulting its
legal department and the OGCC which supplied an answer that the board obviously
wanted. Indeed, the PDMC president first hired her as administrator in May 1994 and
then as "administrator/legal counsel" in September 1996 without a board approval. The
president even extended her term in May 1998 also without such approval. The
company’s mindset from the beginning, therefore, was that she was not a corporate

Respondent PDMC of course claims that as administrator petitioner Gomez performed

functions that were similar to those of its vice-president or its general manager, corporate
positions that were mentioned in the company’s by-laws. It points out that Gomez was
third in the line of command, next only to the chairman and president,26 and had been
empowered to make major decisions and manage the affairs of the company.

But the relationship of a person to a corporation, whether as officer or agent or employee,

is not determined by the nature of the services he performs but by the incidents of his
relationship with the corporation as they actually exist.27 Here, respondent PDMC hired
petitioner Gomez as an ordinary employee without board approval as was proper for a
corporate officer. When the company got her the first time, it agreed to have her retain
the managerial rank that she held with Petron. Her appointment paper said that she would
be entitled to all the rights, privileges, and benefits that regular PDMC employees
enjoyed.28 This is in sharp contrast to what the former PDMC president’s appointment
paper stated: he was elected to the position and his compensation depended on the will of
the board of directors.29

What is more, respondent PDMC enrolled petitioner Gomez with the Social Security
System, the Medicare, and the Pag-Ibig Fund. It even issued certifications dated October
10, 2008,30 stating that Gomez was a permanent employee and that the company had
remitted combined contributions during her tenure. The company also made her a
member of the PDMC’s savings and provident plan31 and its retirement plan.32 It grouped
her with the managers covered by the company’s group hospitalization insurance. 33
Likewise, she underwent regular employee performance appraisals,34 purchased stocks
through the employee stock option plan,35 and was entitled to vacation and emergency
leaves.36 PDMC even withheld taxes on her salary and declared her as an employee in the
official Bureau of Internal Revenue forms.37 These are all indicia of an employer-
employee relationship which respondent PDMC failed to refute.

Estoppel, an equitable principle rooted on natural justice, prevents a person from

rejecting his previous acts and representations to the prejudice of others who have relied
on them.38 This principle of law applies to corporations as well. The PDMC in this case is
estopped from claiming that despite all the appearances of regular employment that it
weaved around petitioner Gomez’s position it must have technically hired her only as a
corporate officer. The board and its officers made her stay on and work with the company
for years under the belief that she held a regular managerial position.

That petitioner Gomez served concurrently as corporate secretary for a time is

immaterial. A corporation is not prohibited from hiring a corporate officer to perform
services under circumstances which will make him an employee.39 Indeed, it is possible
for one to have a dual role of officer and employee. In Elleccion Vda. De Lecciones v.
National Labor Relations Commission,40 the Court upheld NLRC jurisdiction over a
complaint filed by one who served both as corporate secretary and administrator, finding
that the money claims were made as an employee and not as a corporate officer.

WHEREFORE, the Court GRANTS the petition, REVERSES and SETS ASIDE the
decision dated May 19, 2006 and the resolution dated August 15, 2006 of the Court of
Appeals in CA-G.R. SP 88819, and REINSTATES the resolution dated November 22,
2002 of the National Labor Relations Commission’s Third Division in NLRC NCR 30-
12-00856-99. Let the records of this case be REMANDED to the arbitration branch of
origin for the conduct of further proceedings.

34. Easycall Communications Philippines, Inc. vs. King

Doctrine: Corporate officers in the context of PD 902-A are those officers of a

corporation who are given that character either by the Corporation Code or by
the corporations by-laws. Under Section 25 of the Corporation Code, the
corporate officers are the president, secretary, treasurer and such other officers
as may be provided for in the by-laws.

Facts: Petitioner Easycall was a domestic corporation engaged in the business

of message handling. Petitioner hired the services of respondent as assistant to
the general manager. In an August 1992, respondent’s immediate superior
recommended his promotion to assistant vice president and was subsequently
appointed to the even higher position of vice president for nationwide expansion.
Respondent’s promotion was based on his performance during the six months
preceding his appointment. Sometime in March 1993, Malonzo reviewed the
sales performance of respondent. He found that respondent’s actual sales for the
period was 78% of his sales commitment and 70% of his sales target. He
discovered that the latter spent around 40% of the total number of working days
for that period in the field. So, the management confronted respondent
On April 1993, Gohu, petitioner’s deputy general manager, talked to respondent
to discuss his performance. Gohu informed respondent that Malonzo wanted his
resignation. On April 1993, respondent received a notice of termination signed
by Malonzo. Aggrieved, the respondent filed a complaint for illegal dismissal with
the NLRC. Labor arbiter found that the termination of respondent on the ground
of loss of confidence was valid. NLRC affirmed the decision of the labor arbiter,
however denied the motion for reconsideration for lack of jurisdiction. CA ruled
that the NLRC erred in holding that it lacked jurisdiction over the case. The CA
also ruled that the dismissal of respondent was illegal for having been done
without cause. Hence, this petition.

Issue: Whether the NLRC has jurisdiction over the subject matter

Held: Yes. Under Section 5 of PD 902-A, the law applicable at the time this
controversy arose, the SEC, not the NLRC, had original and exclusive jurisdiction
over cases involving the removal of corporate officers. Section 5(c) of PD 902-A
applied to a corporate officers dismissal for his dismissal was a corporate act
and/or an intra-corporate controversy.
However, it had to be first established that the person removed or dismissed was
a corporate officer. Corporate officers in the context of PD 902-A are those
officers of a corporation who are given that character either by the Corporation
Code or by the corporations by-laws. Under Section 25 of the Corporation Code,
the corporate officers are the president, secretary, treasurer and such other
officers as may be provided for in the by-laws.
Here, petitioner merely alleged that respondent was a corporate officer.
However, it failed to prove that its by-laws provided for the office of vice president
for nationwide expansion. An office is created by the charter of the corporation
and the officer is elected by the directors or stockholders. On the other hand, an
employee occupies no office and generally is employed not by the action of the
directors or stockholders but by the managing officer of the corporation.
In this case, respondent was appointed vice president for nationwide expansion
by Malonzo, petitioners general manager, not by the board of directors of
petitioner. It was also Malonzo who determined the compensation package of
respondent. Thus, respondent was an employee, not a corporate officer. The CA
was therefore correct in ruling that jurisdiction over the case was properly with
the NLRC, not the SEC.


35. Carag vs. NLRC

National Federation of Labor Unions (NAFLU) and Mariveles Apparel
Corporation Labor Union (MACLU) (collectively, complainants), on behalf of all of
MAC’s rank and file employees, filed a complaint against MAC for illegal
dismissal brought about by its illegal closure of business. Alleged in their
complaint was that MAC without notice of any kind filed in accordance with
pertinent provisions of the Labor Code, ceased operations with the intention of
completely closing its shop or factory; that at the time of closure, there were
several employees who had not received their corresponding
wages/salaries/benefits; among others.

Complainant moved to implead Carag (in his official capacity as Chairman of the
Board) along with David (as President) arguing that the inclusion of individual
respondents as party respondents in the present case is to guarantee the
satisfaction of any judgment award on the basis of Article 212(c) of the Phil.
Labor Code, as amended, which provides “Employer includes any person acting
in the interest of an employer, directly or indirectly. .[..]”

Atty. Pastores, as counsel for respondents, argued that complainants should not
have impleaded Carag and David because MAC is actually owned by a
consortium of banks. Carag and David own shares in MAC only to qualify them to
serve as MAC’s officers.

Arbiter Ortiguerra rendered her Decision granting the motion to implead and
subsequently declared Carag and David solidarily liable with MAC to

Atty. Pastores filed their Memorandum before the NLRC. Carag, through a
separate counsel, filed an appeal. They alleged that Carag and David, being
such officers, are not the owners of MAC; that MAC is owned by a consortium of
banks, as stockholders; piercing the corporate veil to hold the stockholders liable
for corporate liabilities is only true [for] close corporations (family corporation),
which is not the prevailing situation in MAC. Respondents also filed separate
motions to reduce bond.

NLRC denied the motions to reduce bond and stated that to grant such reduction
on the ground that the appeal is meritorious would be tantamount to ruling on the
merits of the appeal.

Respondents filed separate petitions for certiorari before the Supreme Court. An
issuance of a temporary restraining order to enjoin NLRC from enforcing Arbiter
Ortiguerra’s Decision was granted by the SC. SC referred the case to the CA.

CA held that Carag and David, as the most ranking officers of MAC, had a direct
hand at the time in the illegal dismissal of MAC’s employees; that the failure of
Carag and David to observe the notice requirement in closing the company
shows malice and bad faith, which justifies their solidary liability with MAC.

Hence, this petition for review on certiorari.

When is a director personally liable for the debts of the corporation?
The rule is that a director is not personally liable for the debts of the corporation,
which has a separate legal personality of its own. Section 31 (as the exception to
the rule) makes a director personally liable for corporate debts if he wilfully and
knowingly votes for or assents to patently unlawful acts of the corporation. It also
makes a director personally liable if he is guilty of gross negligence or bad faith in
directing the affairs of the corporation.

To hold a director personally liable for debts of the corporation, and thus pierce
the veil of corporate fiction, the bad faith or wrongdoing of the director must be
established clearly and convincingly.
For a wrongdoing to make a director personally liable for debts of the
corporation, the wrongdoing approved or assented to by the director must be a
patently unlawful act. Mere failure to comply with the notice requirement of labor
laws on company closure or dismissal of employees does not amount to a
patently unlawful act. Patently unlawful acts are those declared unlawful by law
which imposes penalties for commission of such unlawful acts.

In this case, Article 283 of the Labor Code, requiring a one-month prior notice to
employees and the DOLE before any permanent closure of a company, does not
state that non-compliance with the notice is an unlawful act punishable under the
Code. There is no provision in any other Article of the Labor Code declaring
failure to give such notice an unlawful act and providing for its penalty.

Complainants did not allege or prove, and Arbiter Ortiguerra did not make any
finding, that Carag approved or assented to any patently unlawful act to which
the law attaches a penalty for its commission. On this score alone, Carag cannot
be held personally liable for the separation pay of complainants.
Complainants claim that Carag is personally liable for MAC’s debts to
complainants “on the basis of Article 212(e) of the Labor Code, as amended.”
The Court has already ruled in several cases that Article 212(e) of the Labor
Code, by itself, does not make a corporate officer personally liable for the debts
of the corporation. The governing law on personal liability of directors for debts of
the corporation is still Section 31 of the Corporation Code.

In McLeod v. NLRC, personal liability of corporate directors, trustees or officers

attaches only when:
1. They assent to a patently unlawful act of the corporation, or when they are
guilty of bad faith or gross negligence in directing its affairs, or when there
is a conflict of interest resulting in damages to the corporation, its
stockholders or other persons;
2. They consent to the issuance of watered down stocks or when having
knowledge of such issuance, do not forthwith file with the corporate
secretary their written objection;
3. They agree to hold themselves personally and solidarily liable with the
corporation; or
4. They are made by specific provision of law personally answerable for their
corporate action.

The rule is still that the doctrine of piercing the corporate veil applies only when
the corporate fiction is used to defeat public convenience, justify wrong, protect
fraud, or defend crime. In the absence of malice, bad faith, or a specific provision
of law making a corporate officer liable, such corporate officer cannot be made
personally liable for corporate liabilities. Neither Article 212(e) nor Article 273
(now 272) of the Labor Code expressly makes any corporate officer personally
liable for the debts of the corporation.

Thus, it was error for Arbiter Ortiguerra, the NLRC, and the CA to hold Carag
personally liable for separation pay owed by MAC to complainants based alone
on Article 212(e) of the Labor Code. The liability of corporate officers for
corporate debts remains governed by Section 31 of the Corporation Code.

36. Sanchez vs. Republic of the Philippines

Doctrine: In the piercing case, the test is complete control or domination, not
only of finances, but of policy and business practice in respect of the transaction
attacked. This is not the case here. Section 31, under which this case was
brought, makes a corporate director who may or may not even be a stockholder
or member accountable for his management of the affairs of the corporation.

Facts: University of Life Complex (Complex) was built during the regime of
President Marcos. In July 1980, First Lady Imelda R. Marcos and others
organized the University of Life Foundation, Inc. (ULFI). The government gave
the management and operation of the Complex to ULFI. After the fall of the
Marcos regime, the government transferred the ownership of ULFIs properties to
the Department of Education, Culture and Sports (DECS). Later, Republic Act
6847 transferred full control and management of the Complex to DECS.

On January 1991 DECS and ULFI entered into a Management Agreement,

granting ULFI the authority to manage and operate the Complex until the end of
that year. At the end of 1991, the DECS gave ULFI notice to immediately vacate
the Complex. But ULFI declined, prompting the DECS to file an action for
unlawful detainer where ULFI was ordered to vacate the Complex and pay such
reasonable rentals.

DECS succeeded in ejecting ULFI but the latter did not pay the amounts due
from it. DECS filed a complaint for collection and damages against Henri Kahn,
ULFIs President, and petitioner Manuel Luis S. Sanchez, its Executive Vice-
President, based on their personal liability under Section 31 of the Corporation
Code. The latter two were Managing Director and Finance Director, respectively,
of the corporation.
Sanchez alleged that, being a mere officer of ULFI, he cannot be made
personally liable for its adjudged corporate liability. He took exception to the
complaint, characterizing it as an attempt to pierce the corporate veil that cloaked

Issue: Whether petitioner Sanchez, a director and chief executive officer of ULFI,
can be held liable in damages under Section 31 of the Corporation Code for
gross neglect or bad faith in directing the corporations affair

Held: Yes. Petitioner Sanchez claims that there is no ground for the courts to
pierce the veil and hold him and Kahn personally liable for ULFIs obligations to
the DECS. But this is not a case of piercing the veil of corporate fiction. The
DECS brought its action under Section 31 of the Corporation Code, which should
not be confused with actions intended to pierce the corporate fiction. Section 31
of the Corporation Code makes directors-officers of corporations jointly and
severally liable even to third parties for their gross negligence or bad faith in
directing the affairs of their corporations.
In the piercing case, the test is complete control or domination, not only of
finances, but of policy and business practice in respect of the transaction
attacked. This is not the case here. Section 31, under which this case was
brought, makes a corporate director who may or may not even be a stockholder
or member accountable for his management of the affairs of the corporation.
The DECS does not have to invoke the doctrine of piercing the veil of corporate
fiction. Section 31 above expressly lays down petitioner Sanchez and Kahn’s
liability for damages arising from their gross negligence or bad faith in directing
corporate affairs.
Court DENIES the petition and AFFIRMS the decision of the CA ordering Kahn
and petitioner Sanchez to pay the DECS, jointly and severally P 22,559,215.14
with legal interest from April 1, 1996 until they shall have fully paid the same,
P500,000.00 in exemplary damages, and P200,000.00 in attorneys fees, plus