FELICIANO vs.

COMMISSION ON AUDIT

FACTS: A petition for certiorari to annul the Commission’s resolution denying

petitioner’s request for COA to cease all auditing services and to stop charging auditing
fee to Leyte Metropolitan Water District was filed before the court. Petitioner also ask for
the refund of all the auditing fees the said water district paid to COA. Petitioner argues
that Local Water Districts are private corporations and not government-owned and
controlled corporations with original charters. Petitioner claims that Local Water Districts
are created pursuant to and not created directly by PD. 198 thus, PD 198 is not an
original charter that would place LWDs within the audit jurisdiction of COA.

ISSUE: Whether of not LWD created under PD 198, as amended is a

government-owned and controlled corporation subject to the audit jurisdiction of COA?

RULING: YES. LWD is a GOCC with original charter. LWD exist by virtue of PD 198,
which constitute a special charter. Since under the Constitution, only GOCC
corporations may have special charter, LWD can validly exist only if they are a GOCC.

LWD are not private corporations because they are not created under the Corporation
Code. Lwds are not registered with the Securities and Exchange Commission. Section
14 of the Corporation code provides that “All corporations organized under this code
shall file with the SEC articles of incorporation”. LWD have no articles of incorporation,
no incorporators and no stockholders or members to elect board of directors. A petition
for certiorari to annul the Commission’s resolution denying petitioner’s request for COA
to cease all auditing services and to stop charging auditing fee to Leyte Metropolitan
Water District was filed before the court. Petitioner also ask for the refund of all the
auditing fees the said water district paid to COA. Petitioner argues that Local Water
Districts are private corporations and not government-owned and controlled
corporations with original charters. Petitioner claims that Local Water Districts are
created pursuant to and not created directly by PD. 198 thus, PD 198 is not an original
charter that would place LWDs within the audit jurisdiction of COA.

MANILA INTERNATIONAL AIRPORT AUTHORITY VS. COURT OF APPEALS

FACTS: As operator of the international airport, MIAA administers the land,
improvements and equipment within the NAIA Complex. The MIAA Charter transferred
to MIAA approximately 600 hectares of land. The MIAA Charter further provides that no
portion of the land transferred to MIAA shall be disposed of through sale or any other
mode unless specifically approved by the President of the Philippines. The OGCC
opined that the Local Government Code of 1991 withdrew the exemption from real
estate tax granted to MIAA under Section 21 of the MIAA Charter. Thus, MIAA
negotiated with respondent City of Parañaque to pay the real estate tax imposed by the
City. MIAA then paid some of the real estate tax already due. MIAA received Final
Notices of Real Estate Tax Delinquency from the City of Parañaque and the Mayor of
the City threatened to sell at public auction the Airport Lands and Buildings should MIAA
fail to pay the real estate tax delinquency. MIAA filed with the Court of Appeals an
original petition for prohibition and injunction. The petition sought to restrain the City of
Parañaque from imposing real estate tax on, levying... against, and auctioning for public
sale the Airport Lands and Buildings. MIAA insists that it is exempt from real estate tax
under Section 234 of the Local Government Code because the Airport Lands and
Buildings are owned by the Republic. To justify the exemption, MIAA invokes the
principle that the government cannot tax itself. Respondents invoke Section 193 of the
Local Government Code, which expressly withdrew the tax exemption privileges of
"government owned and controlled corporations" upon the effectivity of the Local
Government Code.

ISSUE: Whether the Airport Lands and Buildings of MIAA are exempt from real estate
tax under existing laws.

RULING: We rule that MIAA's Airport Lands and Buildings are exempt from real estate
tax imposed by local governments. First, MIAA is not a government-owned or controlled
corporation but an instrumentality of the National Government and thus exempt from
local taxation. Second, the real properties of MIAA are owned by the Republic of the
Philippines and thus exempt from real estate tax. There is no dispute that a
government-owned or controlled corporation is not exempt from real estate tax.
However, MIAA is not a government-owned or controlled corporation. Since MIAA is
neither a stock nor a non-stock corporation, MIAA does not qualify as a
government-owned or controlled corporation. MIAA is a government instrumentality
vested with corporate powers to perform efficiently its governmental functions. MIAA is
like any other government instrumentality, the only difference is that MIAA is vested with
corporate powers.

When the law vests in a government instrumentality corporate powers, the

instrumentality does not become a corporation. Unless the government instrumentality
is organized as a stock or non-stock corporation, it remains a government
instrumentality exercising not only governmental but also corporate powers. Thus, MIAA
exercises the governmental powers of eminent domain, police authority and the levying
of fees and charges. At the same time, MIAA exercises "all the powers of a corporation
under the Corporation Law, insofar as these powers are not inconsistent with the
provisions of this Executive Order." When local governments invoke the power to tax on
national government instrumentalities, such power is construed strictly against local
governments. The rule is that a tax is never presumed and there must be clear
language in the law imposing the tax. Any doubt whether a person, article or activity is
taxable is resolved against taxation. This rule applies with greater force when local
governments seek to tax national government instrumentalities. Another rule is that a
tax exemption is strictly construed against the taxpayer claiming the exemption.
However, when Congress grants an exemption to a national government instrumentality
from local taxation, such exemption is construed liberally in favor of the national
government instrumentality. There must be express language in the law empowering
local governments to tax national government instrumentalities. Any doubt whether such
power exists is resolved against local government.

MAGSAYSAY-LABRADOR vs. COURT OF APPEALS

FACTS: Adelaida Rodriguez-Magsaysay brought before the court an action against

Artemio Panganiban, Subic Land Corporatio, Filipinas Manufacturers Bank
(FILMANBANK) and Register of Deeds of Zambales. She alleged that she and her late
husband, Senator Genaro Magsaysay bought a property thru their conjugal funds.
However, after the death of her husband, she discovered the following: an annotation at
the back of the certificate of title of the property that the land was acquired by her
husband from his separate capital; registration of a deed of assignment in favor of Subic
Land Corporation; and a registration of a deed of mortgage executed by Subic in favor
of Filmanbank. Adelaida contends that the foregoing acts were void and done in an
attempt to defraud the conjugal partnership.

Petitioners, the sister of the late Senator Magsaysay filed a motion for intervention on
the ground that their brother conveyed to them one and a half of his shareholdings to
Subic and that they have a substantial and legal interest in the success of the suit. The
court denied the motion for intervention, and ruled that petitioners have no legal interest
in the case, being alleged assignees or transferees of certain shares in SUBIC cannot
legally entitle them to intervene because SUBIC has a personality separate and distinct
from its shareholder.

ISSUE: Whether or not the court correctly denied their motion for intervention?

RULING: YES. A share of stock represents a proportionate or aliquot interest in the

property of the corporation, it does not vest the owner thereof with any legal right or title
to any of the property, his interest in the corporate property is purely inchoate or in
sheer expectancy of the right in the management of the corporation and share in the
profits and in the properties and assets on dissolution after the payment of the corporate
debts and obligations. Shareholders are in no legal sense the owner of the corporate
properties, which is owned by the corporation as a distinct legal person. Furthermore,
the petitioners cannot claim the right to intervene on the strength of the transfer of
shares allegedly executed by the late senator. Under the Corporation Code, the transfer
must be registered in the books of the corporation to affect third person.

SULO NG BAYAN INC. vs. ARANETA INC.

FACTS: Plaintiff Sulo ng Bayan filed on behalf of its members an action against
defendant to recover the ownership and possession of a large tract of land in San Jose
del Monte, Bulacan. Plaintiff prayed before the court that the original certificate of title as
well as all transfer certificates issued and derived from defendant be cancelled, that
plaintiff’s members be declared as the absolute owners in common of the subject
property and that a corresponding certificate of title be issued to plaintiff, and that
defendant be ordered to pay to the plaintiff damages. The trial court dismissed the
complaint on the ground of lack of cause of action and prescription.

ISSUE: Whether or not plaintiff corporation may institute an action in behalf of its
individual members for the recovery of a parcel of land allegedly owned by said
members?

RULING: NO. The people whose rights were alleged to have been violated by being
deprived of their land are the members of the corporation and not the corporation itself.
The corporation is a distinct legal entity to be considered as separate and apart from the
individuals who compose it, and is not affected by the personal rights, obligations and
transactions of its stockholders or members. Hence, there is only one party plaintiff,
and the plaintiff corporation does not even have an interest in the subject matter of the
controversy, and cannot, therefore, represent its members or stockholders who claim to
own in their individual capacities.

Bataan Shipyard Engineering Co., Inc. vs. PCGG

FACTS: Challenged in this special civil action of certiorari and prohibition by a private
corporation known as the Bataan Shipyard and Engineering Co., Inc. are:
(1) Executive Orders Numbered 1 and 2, promulgated by President Corazon C.
Aquino on February 28, 1986 and March 12, 1986, respectively, and;
(2) the sequestration, takeover, and other orders issued, and acts done, in
accordance with said executive orders by the Presidential Commission on Good
Government and/or its Commissioners and agents,affecting said corporation.

The sequestration order issued on April 14, 1986 was addressed to three of the
agents of the Commission, ordering them to sequester several companies among which
is Bataan Shipyard and Engineering Co., Inc. On the strength of the above
sequestration order, several letters were sent to BASECO among which is that from
Mr.Jose M. Balde, acting for the PCGG, addressed a letter dated April 18,1986 to the
President and other officers of petitioner firm, reiterating an earlier request for the
production of certain documents. The letter closed with the warning that if the
documents were not submitted within five days, the officers would be cited for "contempt
in pursuance with Presidential Executive Order Nos. 1 and 2."

BASECO contends that its right against self-incrimination and unreasonable

searches and seizures had been transgressed by the Order of April 18, 1986 which
required it "to produce corporate records from 1973 to 1986 under pain of contempt of
the Commission if it fails to do so."BASECO prays that the Court:
1) declare unconstitutional and void Executive Orders Numbered 1 and 2;
2) annul the sequestration order dated April- 14, 1986, and all other orders
subsequently issued and acts done on the basis thereof, inclusive of the takeover order
of July 14, 1986 and the termination of the services of the BASECO executives.

ISSUE: Whether or not BASECO’s right against self-incrimination and unreasonable

searches and seizures was violated.

RULING: No. The order to produce documents was issued upon the authority of
Section 3 (e) of Executive Order No. 1, treating of the PCGG's power to "issue
subpoenas requiring * *the production of such books, papers, contracts, records,
statements of accounts and other documents as may be material to the investigation
conducted by the Commission. It is elementary that the right against self-incrimination
has no application to juridical persons.While an individual may lawfully refuse to answer
incriminating questions unless protected by an immunity statute, it does not follow that a
corporation, vested with special privileges and franchises, may refuse to show its hand
when charged with an abuse of such privileges. Corporations are not entitled to all of
the constitutional protections, which private individuals have.They are not at all within
the privilege against self-incrimination, although this court more than once has said that
the privilege runs very closely with the 4th Amendment Search and Seizure provisions.
It is also settled that an officer of the company cannot refuse to produce its records in its
possession upon the plea that they will either incriminate him or may incriminate it."The
corporation is a creature of the state. It is presumed to be incorporated for the benefit of
the public. It received certain special privileges and franchises, and holds them subject
to the laws of the state and the limitations of its charter. It’s powers are limited by law. It
can make no contract not authorized by its charter. Its rights to act as a corporation are
only preserved to it so long as it obeys the laws of its creation.

There is a reserve right in the legislature to investigate its contracts and find out
whether it has exceeded its powers. It would be a strange anomaly to hold that a state,
having chartered a corporation to make use of certain franchises, could not, in the
exercise of sovereignty, inquire how these franchises had been employed, and whether
they had been abused, and demand the production of the corporate books and papers
for that purpose.The defense amounts to this, that an officer of the corporation which is
charged with a criminal violation of the statute may plead the criminality of such
corporation as a refusal to produce its books. To state this proposition is to answer it.
While an individual may lawfully refuse to answer incriminating questions unless
protected by an immunity statute, it does not follow that a corporation, vested with
special privileges and franchises may refuse to show its hand when charged with an
abuse of such privileges. (Wilson v. United States, 55 Law Ed., 771, 780 [emphasis, the
Solicitor General's]).The constitutional safeguard against unreasonable searches and
seizures finds no application to the case at bar either. There has been no search
undertaken by any agent or representative of the PCGG, and of course no seizure on
the occasion thereof.

LUXURIA HOMES, INC. vs. COURT OF APPEALS

FACTS: Petitioner Posadas and her two minor children co-owned a 1.6 hectare of
property in Sucat, Muntinlupa which was occupied by squatters. Petitioner entered into
a negotiation with private respondent Bravo regarding the development of the said
property into a residential subdivision. With written authorization, respondent buckled
down to work and started negotiations with the squatters. Seven months later, Petitioner
and her two children through Deed of Assignment, assigned the said property to Luxuria
Homes, Inc. purportedly for organizational and tax avoidance purposes. Respondent
signed as one of the witnesses to the execution of the Deed of assignment and Articles
of Incorporation of Luxuria Homes.

Years later, the relationship of petitioner and respondent turned sour. Respondent
demanded payment for services rendered in connection with the development of the
land, such as: relocation of squatters, preparation of the architectural design and site
development plan. Petitioner refuses to pay the amount demanded. Private respondent
James Builder Construction and Jaime Bravo instituted an action against petitioner for
specific performance. Respondent alleged that Posadas surreptitiously formed Luxuria
Homes and transferred the subject land to it to evade payment and defraud creditors,
including respondent. The trial Court declared petitioner in default. It ordered petitioner
Posadas jointly and in solidum with Luxuria Homes to pay private respondent.

ISSUE: Whether or not Luxuria Homes can be held liable to private respondents for
transaction entered between petitioner Posadas and private respondent?

RULING: NO. The transfer was made at the time the relationship between petitioner
and respondents was supposedly very pleasant. Ic cannot be said that the incorporation
of Luxuria Homes and eventual transfer of the property to it were in fraud of private
respondents as such were done with his full knowledge. To disregard the separate
juridical personality of corporation, the wrongdoing must be clearly and convincingly
established. It cannot be presumed.

Since respondent failed to show that Luxuria Homes was a party to any of the
supposed transactions, it cannot be held liable jointly and in solidum to pay respondent.
In this case, it was petitioner Posadas who contracted respondent to render the services
mentioned, only she is liable to pay the amounts adjudged therein.

CONCEPT BUILDERS, INC. vs. NLRC

FACTS: Petitioner is a domestic corporation engaged in construction business. Private

respondents were employed by the said company as laborers, carpenters and riggers.
Private respondents were served individual written notices of termination of employment
stating that their contracts of employment has expired and the projects in which they
were hired had been completed. Respondent however found out that at the time of
termination, the project in which they were hired had not yet finished and completed.
Private respondent filed a complaint for illegal dismissal. Labor Arbiter rendered a
decision against the petitioner which was affirmed by the NLRC. Labor Arbiter issued a
writ of execution which was partially satisfied. The special sheriff recommended that a
break open order be issued to enable him to enter petitioner’s property.

Dennis Cuyegkeng filed a third-party claim with the Labor Arbiter alleging that the
properties sought to be levied by the sheriff were owned Hydro Pipes Philippines, Inc.
(HPPI) of which he is the vice president. Private respondent alleged that HPPI and
petitioner were owned by the same incorporators/stockholders. HPPI filed an opposition
to private respondents motion contending that HPPI is a corporation separate and
distinct from petitioner; that the doctrine of piercing the veil should not be applied in the
absence of any showing that HPPI was created in order to evade petitioner’s liability to
private respondent.

ISSUE: Whether or not veil of corporate fiction should be pierced?

RULING: YES. Under the law a corporation the separate and distinct personality of a
corporation is merely a fiction created by law for convenience and to promote justice.
So, when the notion of separate juridical personality is used to defeat convenience and
justify a wrong, protect fraud or defend a crime, this separate personality may be
disregarded. This is likewise true when the corporation is merely an adjunct business
conduit or an alter ego of another corporation. In the given case, petitioner claimed that
it ceased its business operation on April 29, 1986, the same day when HPPI submitted
an information sheet containing the same office address as that of the petitioner.
Clearly, petitioner ceased its operation business in order to evade the payment to
respondent backwages and to bar their reinstatement. HPPI is obviously a business
conduit of petitioner orchestrated to avoid the financial liability that is already attached to
the petitioner.

VILLAREY TRANSIT vs. FERRER

FACTS: Jose Villarama was an operator of a bus transportation pursuant to two

certificates of public convenience. Later, he sold the certificates to Pangasinan
Transportation Company, Inc.(PANTRANCO) with the condition that the seller shall not
for a period of 10 years, apply for any TPU service indentical or competing with the
buyer. Barely three months thereafter, a corporation called Villarey Transit, Inc. was
organized. Natividad villarama, wife of jose Villarama was one of the incorporators. In
less than a month after its registration with SEC, the corporation bought five certificate
of public convenience and 49 buses.The sheriff later on levied 2 of the 5 certificates, in
favor of Eusebio Ferrer, judgment creditor, against Fernando, judgment debtor. A public
sale was conducted, Ferrer was the highest bidder. Ferrer sold the two certificates to
Pantranco.

The corporation filed a complaint against Ferrer, Pantranco and the Philippine
service Commission for the annulment of the sheriff’s sale. Pantranco on its part, filed a
third party complaint against Villarama, alleging that Villarama and/or the Corporation
was disqualified from operating the two certificates by virtue of the previous agreement.
The trial court declared the sheriff’s sale null and void and declaring Villarey transit to be
the lawful owner of the said certificates. Pantranco disputes the correctness of the
decision insofar as it holds that Villarey is a distinct and separate entity from Villarama.
Ferrer, for his part, challenges the decision insofar as it holds that the sheriff’s sale is
null and void.

ISSUE: Whether or not stipulation between Pantranco and Villarama binds Villarey?

RULING: YES. The restrictive clause in the contract entered into by the Villarama and
Pantranco is also enforceable and binding against the said Corporation. The rule is that
a seller or promisor may not make use of a corporate entity as a means of evading the
obligation of his covenant. The evidence has disclosed that Villarama, albeit was not an
incorporator or stockholder of the Corporation, his wife, however, was an incorporator
and was elected treasurer of the Corporation. The evidence further shows that the initial
cash capitalization of the corporation was mostly financed by Villarama; he supplied the
organization expenses and the assets of the Corporation, such as trucks and
equipment; Villarama made use of the money of the Corporation and deposited them to
his private accounts; and the Corporation paid his personal accounts. The foregoing
circumstances are strong evidence showing that Villarama has been too much involved
in the affairs of the Corporation to altogether negate the claim that he was only a
part-time general manager. They show beyond doubt that the Corporation is his alter
ego. When the fiction is urged as a means of perpetrating a fraud or an illegal act or as
a vehicle for the evasion of an existing obligation, the circumvention of statutes, the
achievement or perfection of a monopoly or generally the perpetration of knavery or
crime, the veil with which the law covers and isolates the corporation from the members
or stockholders who compose it will be lifted to allow for its consideration merely as an
aggregation of individuals.
FRANCISCO MOTORS CORPORATION vs. COURT OF APPEALS

FACTS: Petitioner filed a complaint against private respondent to recover the balance
of the jeep body purchased by the private respondent, the balance of the cost of the
repair and cost of suit and attorney’s fees. In their answer, private respondent
interposed a counterclaim for the unpaid legal services by Gregorio Manuel which was
not paid by the incorporators, directors and officers of the petitioner corporation.
Gregorio alleged that while he was petitioner’s assistant legal officer, he represented
members of the Francisco family in the intestate estate proceedings of the late Benita
Trinidad. However, even after the termination of the proceedings, his services were not
paid. The trial court rendered a judgment in favor of petitioner but also allowed the
private respondent’s counterclaim. The Court of Appeals sustained the trial court’s
decision.

ISSUE: Whether or not the petitioner corporation not being a real party in the alleged
permissive counterclaim should be held liable to the claim of the defendant?

RULING: NO. The doctrine of piercing the corporate veil has no relevant application in
the case. In Instead of holding certain individuals responsible in the alleged corporate
act, the situation has been reversed. It is the petitioner as a corporation which is being
ordered to answer for the personal liability of certain individual directors, officers and
incorporators concerned. Whatever obligation said individuals had incurred, it was
incurred in their personal capacity. The personality of the corporation and those of its
incorporators, directors or officers in their personal capacities must be kept separate in
this case.
LIPAT vs. PACIFIC BANKING CORPORATION

FACTS: Spouses Alfredo and Estelita Lipat owned Bela’s Export Trading(BET) a single
proprietorship engaged in the manufacture of garments for domestic and foreign
consumption. Estelita designated her daughter, Teresita Lipat to manage BET in the
Philippines while she was managing Mystic Fashion, which sells goods imported from
the Philippines through BET. Estelita executed a special power of attorney appointing
Teresita as her attorney-in-fact to obtain loans and other credit accomodations from
respondent. She likewise authorized Teresita to execute mortgage contracts on
properties owned or co-owned by her as security for the obligations to be extended to
respondent.

Teresita y virtue of the special power of attorney was able to obtain a loan for and
in behalf of her mother. Months later, BET was incorporated into a family corporation
named Bela’s Export Corporation. Estelita was named as the president while Teresita
became the vice-president and general manager. The loan was eventually restructured
in the name of BEC and subsequent loans were obtained with the corresponding
promissory notes duly executed by Teresita. BEC defaulted in its payment.
Consequently, the real estate mortgage was foreclosed and the property was sold at
public auction.

Spouses Lipat filed a complaint for the annulment of the real estate mortgage,
extrajudicial foreclosure and certificate of sale alleging that the promissory notes, trust
receipts and exposrt bills were all ultra vires acts of Teresita as they were executed
without a board resolution. They also averred that assuming the acts were valid and
binding on BEC, the same were the corporation’s sole obligation, it having a personality
separate and distinct from the Lipats.

ISSUE: Whether or not the doctrine of piercing the veil of corporate fiction is applicable?

RULING: YES. BEC is a mere continuation and successor of BET, and petitioners
cannot evade their obligations in the mortgage contract secured under the name of BEC
on the pretext that it was signed for the benefit and under the name of BET.
Furthermore, the principle of estoppel precludes petitioners from denying the validity of
the transactions entered into by Teresita with Pacific Bank, who in good faith relied on
the authority of the former as manager to act on behalf of petitioner, Estelita and both
BET and BEC. It is a familiar doctrine that if a corporation knowingly permits one of its
officers or any legal agent to act within a scope of an apparent authority, it holds him
out to the public as possessing the power to do those acts; thus the corporation will, as
against anyone who has in good faith dealt with it through such agent, be estopped
from denying the agent’s authority.
TIMES TRANSPORTATION COMPANY, INC. vs. SOTELO

FACTS: Petitioner is a corporation engaged in the business of land transportation.

Times Employees Union(TEU) held a strike on the ground of unfair labor practices.. For
the alleged participation in what is deemed as an illegal strike, petitioner terminated all
the striking employees. December 1997, Mencorp Transport System, Inc (Mencorp) had
acquired ownership over petitioner’s certificate of public convenience and a number of
its bus units by virtue of several deeds of sale. Mencorp is operated by Virginia
Mendoza, daughter of the majority stockholder of petitioner. After the closure of Times,
the retrenched employees filed cases for illegal dismissal, money claims and unfair
labor practices against petitioner before Regional Arbitration Branch in San Fernando,
La Union. The employees withdrew their complaint with leave of court and filed a new
set of cases before the National Capital Region Arbitration Branch, impleading Mencorp
and Spouses Mendoza. The Labor Arbiter rule that the dismissal by petitioner constitute
the prohibited act of unfair labor practice, hence illegal and that the sale of the company
to Mencorp and/or Spouses Mendoza was simulated and/or effected in bad faith.

ISSUE: Whether of not the piercing of the corporate veil is proper?

RULING: YES. Piercing the veil is warranted only in cases when the separate legal
entity is used to defeat public convenience, justify wrong, protect fraud or defend a
crime, such that in two corporations, the law will regard the corporations as merged into
one. It may be allowed only if the following elements concur: (1) control -not mere stock
control, but complete domination, not only of finances, but of policy and business
practice in respect to the transaction attached: (2) such control must have been used to
commit a fraud or a wrong to perpetuate the violation of a statutory or other positive
legal duty, or a dishonest and an unjust act in contravention of a legal right; and (3) the
said control and breach of duty must have proximately caused the injury or unjust loss
complained of.

In this case, the sale was transferred to a corporation controlled by Mendoza, the
daughter of Rondaris of Times where she is-was also a director. All of the
stockholders-incorporators of Mencorp are all relatives of Rondaris. The timing of the
sale evidently was to negate the employees-complainants-members’ right to
organization as it was affected when their union (TEU) was just organized-requesting
Times to bargain. Mencorp never obtained a franchise since its supposed incorporation
but at present, all the buses of Times are already being run-operated by Mencorp,the
franchise of Times having been transferred to it. The sale of Times’ franchise as well as
most of its bus units to a company owned by Rondaris’ daughter and family members,
right in the middle of a labor dispute, is highly suspicious. It is evident that the
transaction was made in order to remove Times" remaining assets from the reach of
any judgment that may be rendered in the unfair labor practice cases.
YAO, SR. vs. PEOPLE

FACTS: Petitioners are the incorporators and officers of Masagana Gas Corporation, an
entity engaged in the refiling, sale and distribution of LPG products. Private
Respondents Petron Corporation and Pilipinas Shell Petroleum Corporation are two of
the largest bulk suppliers and producers of LPG in the Philippines. Their LPG products
are sold under the marks GASUL and SHELLANE, respectively.

In 2003, acting on reports that petitioners unlawfully and in violation of the

intellectual property rights of Petron and Shell, produce, sell, distribute LPG products
using LPG cylinders owned by Petron and Shell, and by virtue of a search warrants,
raided the premises of Masagana and confiscated, among other things, the motor
compressor and refilling machine owned by Masagana. Masagana intervened in the
case and asked for the return of the equipment seized. It argued that even if the same
was being used by petitioners in their unlawful activity, the equipment cannot be
confiscated because having a personality separate and apart from its incorporators,
directors and officers, said properties are owned by the corporation and not by the
petitioners. The court denied Masagana’s motion.

ISSUE: Whether or not the doctrine of piercing the veil of corporate entity is applicable?

RULING: YES. The Court reiterated that a corporation has a personality separate and
distinct from its stockholders, director and officers. However, when the notion of legal
entity is used to defeat public convenience, justify a wrong, protect fraud or defend a
crime, the law will regard the corporation as an association of person or in the case of
two corporations merge them into one that is, liability will attach personally or directly to
the officers. Furthermore, even if the court sustain the separate personality of
MASAGANA from that of the petitioners, the effect will be the same. The law does not
require that the property to be seized should be owned by the person against whom the
search warrant is directed. Ownership, therefore, is of no consequence, and it is
sufficient that the person against whom the warrant is directed has control or
possession of the property sought to be seized. Hence, even if, as petitioners claimed,
the properties seized belong to MASAGANA as a separate entity, their seizure pursuant
to the search warrants is still valid.
ARNOLD HALL and BRADLEY HALL vs. HON. EDMUNDO S. PICCIO

FACTS: C. Arnold Hall and Bradley P. Hall, and Fred Brown, Emma Brown, Hipolita D.
Chapman and Ceferino S. Abella, signed and acknowledged in Leyte, the article of
incorporation of the Far Eastern Lumber and Commercial Co., Inc., organized to engage
in a general lumber business to carry on as general contractors, operators and
managers, etc. Attached to the article was an affidavit of the treasurer stating that
23,428 shares of stock had been subscribed and fully paid with certain properties
transferred to the corporation described in a list appended thereto. Immediately after the
execution of said articles of incorporation, the corporation proceeded to do business
with the adoption of by-laws and the election of its officers. The said articles of
incorporation were filed in the office of the Securities and Exchange Commissioner, for
the issuance of the corresponding certificate of incorporation. On 22 March 1948,
pending action on the articles of incorporation by the aforesaid governmental office,
Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella filed before the
Court of First Instance of Leyte the civil case, alleging among other things that the Far
Eastern Lumber and Commercial Co. was an unregistered partnership; that they wished
to have it dissolved because of bitter dissension among the members, mismanagement
and fraud by the managers and heavy financial losses. C. Arnold Hall and Bradley P.
Hall, filed a motion to dismiss, contesting the court's jurisdiction and the sufficiently of
the cause of action. After hearing the parties, the Hon. Edmund S. Piccio ordered the
dissolution of the company; and at the request of Brown, et. al., appointed Pedro A.
Capuciong as the receiver of the properties thereof, upon the filing of a P20,000 bond.
Hall and Hall offered to file a counter-bond for the discharge of the receiver, but Judge
Piccio refused to accept the offer and to discharge the receiver. Whereupon, Hall and
Hall instituted the present special civil action with the Supreme Court.

ISSUE: Whether Brown, et. al. may file an action to cause the dissolution of the Far
Eastern Lumber and Commercial Co., without State intervention.

RULING: The SEC has not issued the corresponding certificate of incorporation. The
personality of a corporation begins to exist only from the moment such certificate is
issued not before. Not having obtained the certificate of incorporation, the Far Eastern
Lumber and Commercial Co. even its stockholders may not probably claim "in good
faith" to be a corporation. Under the statue it is to be noted that it is the issuance of a
certificate of incorporation by the Director of the Bureau of Commerce and Industry
which calls a corporation into being. The immunity from collateral attack is granted to
corporations "claiming in good faith to be a corporation under this act." Such a claim is
compatible with the existence of errors and irregularities; but not with a total or
substantial disregard of the law. Unless there has been an evident attempt to comply
with the law the claim to be a corporation "under this act" could not be made "in good
faith." This is not a suit in which the corporation is a party. This is a litigation between
stockholders of the alleged corporation, for the purpose of obtaining its dissolution.
Even the existence of a de jure corporation may be terminated in a private suit for its
dissolution between stockholders, without the intervention of the state.
SEVENTH DAY ADVENTIST vs. NORTH MINDANAO MISSION

FACTS: This case involves two supposed transfers of the lot previously owned by the
spouses Cosio. The first transfer was a donation to petitioners’ alleged
predecessors-in-interest in 1959 while the second transfer was through a contract of
sale to respondents in 1980. A TCT was later issued in the name of respondents.
Claiming to be the alleged donee’s successors-in-interest, petitioners filed a case for
cancellation of title, quieting of ownership and possession, declaratory relief and
reconveyance with prayer for preliminary injunction and damages against respondents.

Respondents, on the other hand,argued that at the time of the donation,

petitioners’ predecessors-in-interest has no juridical personality to accept the donation
because it was not yet incorporated. Moreover, petitioners were not members of the
local church then. The RTC upheld the sale in favor of respondents, which was affirmed
by the Court of Appeals, on the ground that all the essential requisites of a contract
were present and it also applied the indefeasibility of title.

ISSUE: Whether or not the donation was void.

RULING: Yes, the donation was void because the local church had neither juridical
personality nor capacity to accept such gift since it was inexistent at the time it was
made.The Court denied petitioners’ contention that there exists a de facto corporation.

Declaring themselves a de facto corporation, petitioners al-lege that they should

benefit from the donation. But there are stringent requirements before one can qualify
as a de facto corporation:

1. The existence of a valid law under which it may be incorporated;

2. an attempt in good faith to incorporate; and

3. assumption of corporate powers.

While there existed the old Corporation Law (Act 1459), a law under which the
local church could have been organized, petitioners admitted that they did not even
attempt to incorporate at that time nor the organization was registered at the Securities
and Exchange Commission.

Hence, petitioners obviously could not have claimed succession to an entity that
never came to exist. Also, since some of the representatives of petitioner Seventh Day
Adventist Conference Church of Southern Philippines, Inc. were not even members of
the local church then, it necessarily follows that they could not even claim that the
donation was particularly for them.
LIM TONG LIM vs. CA and PFGI Inc.

FACTS: In this case, Ling Tong Lim, herein petitioner, requested Peter Yao and Antonio
Chua to engage in commercial fishing with him. They agreed to purchase two fishing
boats; but since they do not have the money, they borrowed from Lim Tong Lim’s
brother, Jesus Lim.

Peter Yao and Antonio Chua then represented themselves in behalf of a so-called
corporation called “Ocean Quest Fishing Corporation” (Ocean Quest) and contracted
with respondent Philippine Fishing Gear Industries, Inc. (PFGI) for the purchase of
fishing nets and other fishing equipment amounting to more than P500,000.00. Unable
to pay PFGI, respondent PFGI sued Antonio Chua, Peter Yao and Lim Tong Lim in their
own names because as confirmed by the Securities and Exchange Commission, it
turned out that Ocean Quest is a non-existent corporation. Petitioner Lim alleged that he
is not liable for the debts because he was not even aware that Chua and Yao
represented themselves as a corporation, and the two acted without his knowledge and
consent.

ISSUE: Is Lim Tong Lim liable for the debts incurred against respondent PFGI? Is the
Ocean Quest Fishing Corporation considered corporation by estoppel?

RULING: YES. The Court ruled that even if the ostensible corporate entity is proven to
be legally non-existent, a party may be estopped from denying its corporate
existence.An unincorporated association, which represented itself to be a corporation,
will be estopped from denying its corporate capacity in a suit against it by a third person
who relied in good faith on such representation. It cannot allege lack of personality to be
sued to evade its responsibility for a contract it entered into and by virtue of which it
received advantages and benefit. Conversely, a third party who, knowing an association
to be unincorporated, nonetheless treated it as a corporation and received benefits from
it, may be barred from denying its corporate existence in a suit brought against the
alleged corporation.In such case, all those who benefit from the transaction made by the
ostensible corporation, despite knowledge of its legal defects, may be held liable for
contracts they impliedly assented toor took advantage of. Clearly, under the law on
estoppel, those acting on behalf of a corporation and those benefited by it, knowing it
tobe without valid existence, are still held liable as general partners.
International Express Travel & Tour Services vs CA

FACTS: On 30 June 1989, the International Express Travel and Tour Services, Inc.
(IETTSI), through its managing director, wrote a letter to the Philippine Football
Federation (Federation), through its president, Henri Kahn, wherein the former offered
its services as a travel agency to the latter. The offer was accepted. IETTSI secured the
airline tickets for the trips of the athletes and officials of the Federation to the South East
Asian Games in Kuala Lumpur as well as various other trips to the People's Republic of
China and Brisbane. The total cost of the tickets amounted to P449,654.83.

For the tickets received, the Federation made two partial payments, both in
September of 1989, in the total amount of P176,467.50. On 4 October 1989, IETTSI
wrote the Federation, through Kahn a demand letter requesting for the amount of
P265,894.33. On 30 October 1989, the Federation, through the Project Gintong Alay,
paid the amount of P31,603.00. On 27 December 1989, Henri Kahn issued a personal
check in the amount of P50,000 as partial payment for the outstanding balance of the
Federation. Thereafter, no further payments were made despite repeated demands.
This prompted IETTSI to file a civil case before the Regional Trial Court of Manila.
IETTSI sued Henri Kahn in his personal capacity and as President of the Federation
and impleaded the Federation as an alternative defendant. IETTSI sought to hold Henri
Kahn liable for the unpaid balance for the tickets purchased by the Federation on the
ground that Henri Kahn allegedly guaranteed the said obligation.

The trial court rendered judgment and ruled in favor of IETTSI and declared
Henri Kahn personally liable for the unpaid obligation of the Federation. The complaint
of IETTSI against the Philippine Football Federation and the counterclaims of Henri
Kahn were dismissed, with costs against Kahn. Only Henri Kahn elevated the decision
to the Court of Appeals. On 21 December 1994, the appellate court rendered a decision
reversing the trial court. IETTSI filed a motion for reconsideration and as an alternative
prayer pleaded that the Federation be held liable for the unpaid obligation. The same
was denied by the appellate court in its resolution of 8 February 1995. IETTSI filed the
petition with the Supreme Court.

ISSUES:
1. Whether the Philippine Football Federation has a corporate existence of its own.
2. Whether Kahn should be made personally liable for the unpaid obligations of the
Philippine Football Federation.
3. Whether the appellate court properly applied the doctrine of corporation by estoppel.

Ruling:
1. Both RA 3135 (the Revised Charter of the Philippine Amateur Athletic Federation)
and PD 604 recognized the juridical existence of national sports associations. This may
be gleaned from the powers and functions granted to these associations (See Section
14 of RA 3135 and Section 8 of PD 604). The powers and functions granted to national
sports associations indicate that these entities may acquire a juridical personality. The
power to purchase, sell, lease and encumber property are acts which may only be done
by persons, whether natural or artificial, with juridical capacity. However, while national
sports associations may be accorded corporate status, such does not automatically take
place by the mere passage of these laws. It is a basic postulate that before a
corporation may acquire juridical personality, the State must give its consent either in
the form of a special law or a general enabling act. The Philippine Football Federation
did not come into existence upon the passage of these laws. Nowhere can it be found in
RA 3135 or PD 604 any provision creating the Philippine Football Federation. These
laws merely recognized the existence of national sports associations and provided the
manner by which these entities may acquire juridical personality. Section 11 of RA 3135
and Section 8 of PD 604 require that before an entity may be considered as a national
sports association, such entity must be recognized by the accrediting organization, the
Philippine, Amateur Athletic Federation under RA 3135, and the Department of Youth
and Sports Development under PD 604. This fact of recognition, however, Henri Kahn
failed to substantiate. A copy of the constitution and by-laws of the Philippine Football
Federation does not prove that said Federation has indeed been recognized and
accredited by either the Philippine Amateur Athletic Federation or the Department of
Youth and Sports Development. Accordingly, the Philippine Football Federation is not a
national sports association within the purview of the aforementioned laws and does not
have corporate existence of its own.

2. Henry Kahn should be held liable for the unpaid obligations of the unincorporated
Philippine Football Federation. It is a settled principal in corporation law that any person
acting or purporting to act on behalf of a corporation which has no valid existence
assumes such privileges and becomes personally liable for contract entered into or for
other acts performed as such agent. As president of the Federation, Henri Kahn is
presumed to have known about the corporate existence or non-existence of the
Federation.

3. The Court cannot subscribe to the position taken by the appellate court that even
assuming that the Federation was defectively incorporated, IETTSI cannot deny the
corporate existence of the Federation because it had contracted and dealt with the
Federation in such a manner as to recognize and in effect admit its existence. The
doctrine of corporation by estoppel is mistakenly applied by the appellate court to
IETTSI. The application of the doctrine applies to a third party only when he tries to
escape liabilities on a contract from which he has benefited on the irrelevant ground of
defective incorporation. Herein, IETTSI is not trying to escape liability from the contract
but rather is the one claiming from the contract.
FILIPINAS BROADCASTING NETWORK INC. vs. AMEC-BCCM

FACTS: Rima & Alegre were host of FBNI radio program “Expose”. Respondent Ago
was the owner of the Medical & Educational center, subject of the radio program
“Expose”. AMEC claimed that the broadcasts were defamatory and owner Ago and
school AMEC claimed for damages. The complaint further alleged that AMEC is a
reputable learning institution. With the supposed expose, FBNI, Rima and Alegre
“transmitted malicious imputations and as such, destroyed plaintiff’s reputation. FBNI
was included as defendant for allegedly failing to exercise due diligence in the selection
and supervision of its employees. The trial court found Rima’s statements to be within
the bounds of freedom of speech and ruled that the broadcast was libelous. It ordered
the defendants Alegre and FBNI to pay AMEC 500k for moral damages.”

ISSUE: Whether or not AMEC is entitled to moral damages.

RULING: A juridical person is generally not entitled to moral damages because, unlike
a natural person, it cannot experience physical suffering or such sentiments as
wounded feelings, serious anxiety, mental anguish or moral shock. Nevertheless,
AMEC’s claim, or moral damages fall under item 7 of Art – 2219 of the NCC.
This provision expressly authorizes the recovery of moral damages in cases of
libel, slander or any other form of defamation. Art 2219 (7) does not qualify whether the
plaintiff is a natural or juridical person. Therefore, a juridical person such as a
corporation can validly complain for libel or any other form of defamation and claim for
moral damages. Moreover, where the broadcast is libelous per se, the law implied
damages. In such a case, evidence of an honest mistake or the want of character or
reputation of the party libeled goes only in mitigation of damages. In this case, the
broadcasts are libelous per se. thus, AMEC is entitled to moral damages. However, we
find the award P500,000 moral damages unreasonable. The record shows that even
though the broadcasts were libelous, per se, AMEC has not suffered any substantial or
material damage to its reputation. Therefore, we reduce the award of moral damages to
P150k.
COASTAL PACIFIC TRADING, INC. vs. SOUTHERN ROLLING MILLS CO.

FACTS: Respondent was renamed into Visayan Integrated Steel Corporation (VISCO)
engaged in steel processing business. VISCO obtained a loan from Development Bank
of the Philippines (DBP) which was secured by a real estate mortgage covering
VISCO’s three parcels of land including the machinery and equipments therein. VISCO
entered into a second loan with respondent banks (Consortium) to finance its
importation for various raw materials. VISCO executed a second mortgage over the
previous properties mentioned, however they were unrecorded. VISCO was unable to
pay its second mortgage with the consortium, which resulted in the latter acquiring 90%
of the equity of VISCO, giving them the control and management of VISCO. Despite the
acquisition, VISCO remained indebted to Consortium. VISCO entered into a processing
agreement with petitioner wherein petitioner delivered 3,000 metric tons of hot rolled
steel coils which VISCO would process into block iron sheet. VISCO was only able to
return 1,600 metric tons. To pay for its mortgage with DBP, VISCO sold 2 of its
generators to FILMAG. DBP executed a deed of assignment of mortgage in favor of
consortium. Consortium foreclosed the mortgage and was the highest bidder.
Consortium later sold the properties to National Steel Corporation. Petitioner filed civil
action for annulment of sale, damage with preliminary injunction. Petitioner imputes bad
faith on the action of the Consortium, the latter being able to sell the properties of
VISCO despite attachment of the properties, placing them beyond the reach of VISCO’s
other creditors.

ISSUE: Whether or not petitioner is entitled to moral damages?

RULING: No. As a rule, a corporation is not entitled to moral damages because, not
being a natural person, it cannot experience physical suffering or sentiments like
wounded feelings, serious anxiety, mental anguish and moral shock. The only exception
to this rule is when the corporation has a good reputation that is debased, resulting in its
humiliation in the business realm. In the present case, the records do not show any
evidence that the name or reputation of petitioner has been sullied as a result of the
Consortium's fraudulent acts. Accordingly, moral damages are not warranted.
Petitioner was able to recover exemplary damages.
LYCEUM OF PHILIPPINES v. CA

FACTS: Petitioner is an educational institution duly registered with the Securities and
Exchange Commission ("SEC"). When it first registered with the SEC on 21 September
1950, it used the corporate name Lyceum of the Philippines, Inc. and has used that
name ever since. Petitioner had sometime before commenced in the SEC a proceeding
against the Lyceum of Baguio, Inc. to require it to change its corporate name and to
adopt another name not "similar or identical" with that of petitioner. SEC held that the
corporate name of petitioner and that of the Lyceum of Baguio, Inc. were substantially
identical because of the presence of a "dominant" word, i.e., "Lyceum," the name of the
geographical location of the campus being the only word which distinguished one from
the other corporate name. The SEC also noted that petitioner had registered as a
corporation ahead of the Lyceum of Baguio, Inc. in point of time, and ordered the latter
to change its name to another name "not similar or identical with" the names of
previously registered entities. Lyceum of Baguio filed petition for certiorari but was
denied for lack of merit. Armed with the resolution of the Court, petitioner instituted
before the SEC to compel private respondents, which are also educational institutions,
to delete word “Lyceum” from their corporate names and permanently to enjoin them
from using such as part of their respective names. Hearing officer sustained the claim of
petitioner and held that the word “Lyceum” was capable of appropriation and that
petitioner had acquired an enforceable right to the use of that word. On appeal by
private respondents to the SEC En Banc, the decision of the hearing officer was
reversed and set aside. The SEC En Banc did not consider the word "Lyceum" to have
become so identified with petitioner as to render use thereof by other institutions as
productive of confusion about the identity of the schools concerned in the mind of the
general public. Unlike its hearing officer, the SEC En Banc held that the attaching of
geographical names to the word "Lyceum" served sufficiently to distinguish the schools
from one another, especially in view of the fact that the campuses of petitioner and
those of the private respondents were physically quite remote from each other.
Petitioner then went on appeal to the CA. However, the Court of Appeals affirmed the
decision of the SEC En Banc.

ISSUES:
1. WON the corporate names of the parties are identical with or deceptively similar to
that of the petitioner

1. WON the use by the Lyceum of the Philippines of the word Lyceum in its corporate
name has been for such length of time and with such exclusivity as to have
become associated or identified with the petitioner institution in the mind of the
general public (Doctrine of Secondary meaning).

RULING:

1. No. The Articles of Incorporation of a corporation must, among other things, set out
the name of the corporation.[6] Section 18 of the Corporation Code establishes a
restrictive rule insofar as corporate names are concerned:

 "Section 18. Corporate name. -- No corporate name may be allowed by the
Securities and Exchange Commission if the proposed name is identical or
deceptively or confusingly similar to that of any existing corporation or to any other
name already protected by law or is patently deceptive, confusing or contrary to
existing laws. When a change in the corporate name is approved, the Commission
shall issue an amended certificate of incorporation under the amended name."

The policy underlying the prohibition in Section 18 against the registration of a

corporate name which is "identical or deceptively or confusingly similar" to that of
any existing corporation or which is "patently deceptive" or "patently confusing" or
"contrary to existing laws," is the avoidance of fraud upon the public which would
have occasion to deal with the entity concerned, the evasion of legal obligations and
duties, and the reduction of difficulties of administration and supervision over
corporations. We do not consider that the corporate names of private respondent
institutions are "identical with, or deceptively or confusingly similar" to that of the
petitioner institution. True enough, the corporate names of private respondent
entities all carry the word "Lyceum" but confusion and deception are effectively
precluded by the appending of geographic names to the word "Lyceum." Thus, we
do not believe that the "Lyceum of Aparri" can be mistaken by the general public for
the Lyceum of the Philippines, or that the "Lyceum of Camalaniugan" would be
confused with the Lyceum of the Philippines.

1. No. The doctrine of secondary meaning is a principle used in trademark law but
has been extended to corporate names since the right to use a corporate name
to the exclusion of others is based upon the same principle, which underlies the
right to use a particular trademark or tradename. Under this doctrine, a word or
phrase originally incapable of exclusive appropriation with reference to an article
in the market, because geographical or otherwise descriptive might nevertheless
have been used for so long and so exclusively by one producer with reference to
this article that, in that trade and to that group of purchasing public, the word or
phrase has come to mean that the article was his produce. The doctrine cannot
be made to apply where the evidence did not prove that the business has
continued for so long a time that it has become of consequence and acquired
good will of considerable value such that its articles and produce have acquired a
well-known reputation, and confusion will result by the use of the disputed name.
Petitioner did not present evidence, which provided that the word “Lyceum”
acquired secondary meaning. The petitioner failed to adduce evidence that it had
exclusive use of the word. Even if petitioner used the word for a long period of
time, it had not acquired any secondary meaning in its favor because the
appellant failed to prove that it had been using the same word all by itself to the
exclusion of others.
ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS, HSK SA
BANSANG PILPINAS, INC. VS. IGLESIA NG DIOS KAY CRISTO JESUS, HALIGI AT
SUHAY NG KATOTOHANAN

FACTS: Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan,
is a non-stock religious corporation. Soriano and several other members of respondent
corporation disassociated themselves from the latter and succeeded in registering a
new non-stock religious corporation named Iglesia ng Dios Kay Kristo Hesus, Haligi at
Saligan ng Katotohanan. Respondent corporation filed with the SEC a petition to
compel the Iglesia ng Dios kay Kristo Hesus, Haligi at Saligan ng Katotohanan to
change its corporate name. SEC rendered judgment in favour of the respondent,
ordering the Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan to
change its corporate name to another name that is not similar or identical to any name
already used by a corporation, partnership or association registered with the
Commission. No appeal was taken from said decision. During the pendency of the case
with the SEC, Soriano et al, caused the registration of petitioner corporation, Ang Mga
Kaanib sa Iglesia ng Dios Kay Kristo Hesus, HSK sa Bansang Pilipinas. Respondent
corporation filed before the SEC a petition, praying that petitioner be compelled to
change its corporate name and be barred from using the same or similar name on the
ground that the same causes confusion among their members as well as the public.
Petitioner filed a motion to dismiss but was denied. SEC rendered a decision ordering
petitioner to change its corporate name. Petitioner appealed to the SEC En Banc, but
the latter affirmed the above-decision, upon a finding that petitioner’s corporate name
was identical or confusingly or deceptively similar to that of the respondent’s corporate
name. CA affirmed the decision of the SEC En Banc. Motion for reconsideration of the
petitioner was also denied by CA.

ISSUE: Whether or not CA failed to consider and properly apply the exceptions
established by jurisprudence in the application of Section 18 of the Corporation Code.

RULING: No. Section 18 of the Corporation Code provides that no corporate name may
be allowed by the Securities and Exchange Commission if the proposed name is
identical or deceptively of confusingly similar to that of any existing corporation of to any
other name already protected by law or is patently deceptive, confusing or is contrary to
existing laws. When a change in the corporate name is approved, the Commission shall
issue an amended certificate of incorporation under the amended name. Corollary
thereto, the pertinent portion of the SEC Guidelines on Corporate Name states that if
the proposed name contains a word similar to a word already used as part of the firm
name or style of a registered company, the proposed name must contain two other
words different from the name of the company already registered. Parties organizing a
corporation must choose a name at their peril and the use of a name similar to one
adopted by another corporation, whether a business of a non-profit organization, if
misleading or likely to injure in the exercise of its corporate functions, regardless of
intent, may be prevented by the corporation having a prior right, by a suit for injunction
against the new corporation to prevent the use of the name.
Petitioner highlights the dominant words IGLESIA NG DIOS KAY KRISTO
HESUS, HALIGI AT SALIGAN NG KATOTOHANAN, which is strikingly similar to
respondent’s corporate name, thus making it even more evident that the additional
words of Ang Mga Kaanib and Sa Bansang Pilipinas Inc., are merely deceptive of and
pertaining to the members of the respondent corporation. Also the words SALIGAN and
SUHAY are synonymous, both mean ground, foundation or support.
Petition denied. CA decision affirmed.
INDUSTRIAL REFRACTORIES CORPORATION OF THE PHILIPPINES vs. COURT
OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and REFRACTORIES
CORPORATION OF THE PHILIPPINES, respondents.

FACTS: Respondent Refractories Corporation of the Philippines (RCP) is a corporation

duly organized on October 13, 1976 for the purpose of engaging in the business of
manufacturing, producing, selling, exporting and otherwise dealing in any and all
refractory bricks, its by-products and derivatives. On June 22, 1977, it registered its
corporate and business name with the Bureau of Domestic Trade. Petitioner IRCP on
the other hand, was incorporated on August 23, 1979 originally under the name
"Synclaire Manufacturing Corporation". It amended its Articles of Incorporation on
August 23, 1985 to change its corporate name to "Industrial Refractories Corp. of the
Philippines". It is engaged in the business of manufacturing all kinds of ceramics and
other products, except paints and zincs. Respondent corporation filed on 14 April 1988
with the SEC a petition to compel petitioner to change its corporate name on the ground
that its corporate name is confusingly similar with that of the petitioner which the SEC
affirmed. The CA likewise affirmed the SEC decision.
ISSUE: Whether or not the name of the entities are confusingly and deceptively similar
which the SEC may order the later corporation to change its name.
RULING: Yes, SEC. 18 of the Corporation Code states that “No corporate name may
be allowed by the Securities and Exchange Commission if the proposed name is
identical or deceptively or confusingly similar to that of any existing corporation or to any
other name already protected by law or is patently deceptive, confusing or contrary to
existing laws. When a change in the corporate name is approved, the Commission shall
issue an amended certificate of incorporation under the amended name."
It is the SEC’s duty to prevent confusion in the use of corporate names not only for
the protection of the corporations involved but more so for the protection of the public,
and it has authority to de-register at all times and under all circumstances corporate
names which in its estimation are likely to generate confusion. 22 Clearly therefore, the
present case falls within the ambit of the SEC’s regulatory powers.
Revised Guidelines in the Approval of Corporate and Partnership Names
specifically requires that: (1) a corporate name shall not be identical, misleading or
confusingly similar to one already registered by another corporation with the
Commission; and (2) if the proposed name is similar to the name of a registered firm,
the proposed name must contain at least one distinctive word different from the name of
the company already registered.
As held in Philips Export B.V. vs. Court of Appeals, to fall within the prohibition of
the law, two requisites must be proven, to wit:
(1) that the complainant corporation acquired a prior right over the use of such
corporate name; and
(2) the proposed name is either: (a) identical, or (b) deceptively or confusingly similar to
that of any existing corporation or to any other name already protected by law; or (c)
patently deceptive, confusing or contrary to existing law.
As regards the first requisite, it has been held that the right to the exclusive use
of a corporate name with freedom from infringement by similarity is determined by
priority of adoption. In this case, respondent RCP was incorporated on October 13,
1976 and since then has been using the corporate name "Refractories Corp. of the
Philippines". Meanwhile, petitioner was incorporated on August 23, 1979 originally
under the name "Synclaire Manufacturing Corporation". It only started using the name
"Industrial Refractories Corp. of the Philippines" when it amended its Articles of
Incorporation on August 23, 1985, or nine (9) years after respondent RCP started using
its name. Thus, being the prior registrant, respondent RCP has acquired the right to use
the word "Refractories" as part of its corporate name.
Anent the second requisite, in determining the existence of confusing similarity in
corporate names, the test is whether the similarity is such as to mislead a person using
ordinary care and discrimination and the Court must look to the record as well as the
names themselves. Petitioner’s corporate name is "Industrial Refractories Corp. of the
Phils.", while respondent’s is "Refractories Corp. of the Phils." Obviously, both names
contain the identical words "Refractories", "Corporation" and "Philippines". The only
word that distinguishes petitioner from respondent RCP is the word "Industrial" which
merely identifies a corporation’s general field of activities or operations. We need not
linger on these two corporate names to conclude that they are patently similar that even
with reasonable care and observation, confusion might arise. The word "refractories" is
a generic term, its usage is not widespread and is limited merely to the industry/trade in
which it is used, and its continuous use by respondent RCP for a considerable period
has made the term so closely identified with it.
JG Summit Holdings, Inc. vs Court of Appeals

FACTS: A joint venture (JVA) was entered by a government corporation, National

Investment and Development Corporation (NIDC) with a Japanese corporation,
Kawasaki Heavy Industries, Ltd. for a shipyard business, Philippine Shipyard and
Engineering Corporation (PHILSECO), with an agreement of a shareholding proportion
of 60%-40 respectively and a right of first refusal to Kawasaki. Thereafter, NIDC
transferred all its rights, title and interest to the Philippine National Bank (PNB). After
several months, by virtue of Administrative Order 14, PNB's interest in PHILSECO was
transferred to the National Government. Then President Aquino’s Proclamation No. 50
was issued establishing the Committee on Privatization (COP) and the Asset
Privatization Trust (APT) to take title to and possession of, conserve, manage and
dispose of non-performing assets of the National Government. A trust agreement was
entered into between the National Government and the APT by virtue of which the latter
was named the trustee of the National Government's share in PHILSECO. As a result of
a quasi-reorganization of PHILSECO to settle its huge obligations to PNB, the National
Government's shareholdings in PHILSECO increased to 97.41% thereby reducing
Kawasaki's shareholdings to 2.59%.
After negotiations, it was agreed that Kawasaki’s right of first refusal under the
JVA be “exchanged” for the right to top by 5% the highest bid for said shares. Kawasaki
informed that Philyards Holdings, Inc. (PHI), in which it was a stockholder, would
exercise this right in its stead. Petitioner JG Summit Holdings was declared highest
bidder. Even so, because of the right to top by 5% percent the highest bid,
Kawasaki/PHI’s was able to top the winning bid. JG Summit protested, contending that
PHILSECO, as a shipyard is a public utility and, hence, must observe the 60%-40%
Filipino-foreign capitalization. By buying 87.67% of PHILSECO’s capital stock at
bidding, Kawasaki/PHI in effect now owns more than 40% of the stock, thus violative of
the laws.

ISSUE: Whether or not PHILSECO, a shipyard, is a public utility and hence Kawasaki, a
foreign corporation, can acquire only a maximum of 40% of its capital.

RULING: No, a shipyard such as PHILSECO is not considered a public utility.

First, because a shipyard which is a place or enclosure where ships are built or
repaired is in its nature serves a limited clientele and not legally obliged to render its
services indiscriminately to the public. While the business may be regulated for public
good, it does not justify the qualifications for public utility which implies public use and
service to the public hence it must be engaged in regularly supplying the public with
some commodity or service of public consequence.
Second, it is not declared as public utility by law. Based on its legislative history,
since the enactment of Act No. 2307 which created the Public Utility Commision (PUC)
until repealed by Commonwealth Act No. 146 establishing Public Service Commission,
a shipyard was a public utility and should abide by the Filipino citizenship requirement of
60-40 capital of a corporation. Thereafter, Pres. Marcos issued PD No. 666 which
removed the shipbuilding and ship repair industry from the list of public utilities thereby
freeing it from the 60-40 citizenship requirement. Batas Pambansa Blg. 391 repealed
the PD No. 666 and reverted shipyards as public utilities. Then Pres. Aquino’s
Executive Order No. 226 repealed the previous laws with no revival of the principle that
shipyards are public utilities. Thus absent of such legislation declaring the same, a
shipyard reverts back to its status as a non-public utility.
With this, there was nothing preventing Kawasaki from acquiring more than 40%
of PHILSECO’s total capitalization. The JVA should also be interpreted as the phrase
“maintaining a proportion of 60%-40%” refers to their respective share of the burden
each time the Board of Directors decides to increase the subscription to reach the target
paid-up capital of P312 million. It does not bind the parties to maintain the sharing
scheme all throughout the existence of their partnership.

Dispositive Portion: IN VIEW OF THE FOREGOING, the Motion for Reconsideration

is hereby GRANTED. The impugned Decision and Resolution of the Court of Appeals
are AFFIRMED.
Young Auto Supply vs. Court of Appeals

FACTS: On 28 October 1987, Young Auto Supply Co. Inc. (YASCO) represented by
Nemesio Garcia, its president, Nelson Garcia and Vicente Sy, sold all of their shares of
stock in Consolidated Marketing & Development Corporation (CMDC) to George C.
Roxas. The purchase price was P8,000,000.00 payable as follows: a down payment of
P4,000,000.00 and the balance of P4,000,000.00 in four postdated checks of
P1,000,000.00 each. Immediately after the execution of the agreement, Roxas took full
control of the four markets of CMDC. However, the vendors held on to the stock
certificates of CMDC as security pending full payment of the balance of the purchase
price. The first check of P4,000,000.00, representing the down payment, was honored
by the drawee bank but the four other checks representing the balance of
P4,000,000.00 were dishonored. In the meantime, Roxas sold one of the markets to a
third party. Out of the proceeds of the sale, YASCO received P600,000.00, leaving a
balance of P3,400,000.00.

Subsequently, Nelson Garcia and Vicente Sy assigned all their rights and title to
the proceeds of the sale of the CMDC shares to Nemesio Garcia. On 10 June 1988,
YASCO and Garcia filed a complaint against Roxas in the Regional Trial Court, Branch
11, Cebu City, praying that Roxas be ordered to pay them the sum of P3,400,000.00 or
that full control of the three markets be turned over to YASCO and Garcia. The
complaint also prayed for the forfeiture of the partial payment of P4,600,000.00 and the
payment of attorney's fees and costs. Failing to submit his answer, and on 19 August
1988, the trial court declared Roxas in default. The order of default was, however, lifted
upon motion of Roxas. On 22 August 1988, Roxas filed a motion to dismiss. After a
hearing, wherein testimonial and documentary evidence were presented by both
parties, the trial court in an Order dated 8 February 1991 denied Roxas' motion to
dismiss. After receiving said order, Roxas filed another motion for extension of time to
submit his answer. He also filed a motion for reconsideration, which the trial court
denied in its Order dated 10 April 1991 for being pro-forma. Roxas was again declared
in default, on the ground that his motion for reconsideration did not toll the running of
the period to file his answer. On 3 May 1991, Roxas filed an unverified Motion to Lift the
Order of Default which was not accompanied with the required affidavit of merit. But
without waiting for the resolution of the motion, he filed a petition for certiorari with the
Court of Appeals. The Court of Appeals dismissal of the complaint on the ground of
improper venue. A subsequent motion for reconsideration by YASCO was to no avail.
YASCO and Garcia filed the petition.

ISSUE: Whether the venue for the case against YASCO and Garcia in Cebu City was
improperly laid.

RULING: A corporation has no residence in the same sense in which this term is
applied to a natural person. But for practical purposes, a corporation is in a
metaphysical sense a resident of the place where its principal office is located as stated
in the articles of incorporation. The Corporation Code precisely requires each
corporation to specify in its articles of incorporation the "place where the principal office
of the corporation is to be located which must be within the Philippines." The purpose of
this requirement is to fix the residence of a corporation in a definite place, instead of
allowing it to be ambulatory. Actions cannot be filed against a corporation in any place
where the corporation maintains its branch offices. The Court ruled that to allow an
action to be instituted in any place where the corporation has branch offices, would
create confusion and work untold inconvenience to said entity. By the same token, a
corporation cannot be allowed to file personal actions in a place other than its principal
place of business unless such a place is also the residence of a co-plaintiff or a
defendant. With the finding that the residence of YASCO for purposes of venue is in
Cebu City, where its principal place of business is located, it becomes unnecessary to
decide whether Garcia is also a resident of Cebu City and whether Roxas was in
estoppel from questioning the choice of Cebu City as the venue. The decision of the
Court of Appeals was set aside.

Note.—Venue stipulations in a contract do not as a rule supersede the general rule

set out in Rule 4 of the Rules of Court, they should be construed merely as agreement
on an additional forum, not as limiting venue to the specified place (Nasser vs. Court of
Appeals, 191 SCRA 783)
Republic Planters Bank vs. Agana, Sr.
FACTS: On September 18, 1961, private respondent secured a loan from petitioner in
the amount of P120,000.00. As part of the proceeds of the loan, preferred shares of
stocks were issued to private respondent Corporation, through its officers then, private
respondent Adalia F. Robes and one Carlos F. Robes. Instead of giving the legal tender
totaling to the full amount of the loan, which is P120,000.00, petitioner lent such amount
partially in the form of money and partially in the form of stock certificates numbered
3204 and 3205, each for 400 shares with a par value of P10.00 per 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, who subsequently, however,
endorsed his shares in favor of Adalia F. Robes.

Said certificates of stock bear the following terms and conditions: "The Preferred Stock
shall have the following rights, preferences, qualifications and limitations, to wit:
1. Of the right to receive a quarterly dividend of One Per Centum (1%), cumulative and
participating.
2. That such preferred shares may be redeemed, by the system of drawing lots, at any
time after two (2) years from the date of issue at the option of the Corporation."

On January 31, 1979, private respondents proceeded against petitioner and filed a
Complaint alleging its rights to collect dividends under the preferred shares in question
and to have petitioner redeem the same under the terms and conditions of the stock
certificates. Petitioner filed a Motion to Dismiss on the following grounds: (1) that the
trial court had no jurisdiction over the subject-matter of the action; (2) that the action
was unenforceable under substantive law; and (3) that the action was barred by the
statute of limitations and/or laches.

The trial court denied the Motion to Dismiss and assailed decision in favour of private
respondents. In ordering petitioner to pay private respondents the face value of the
stock certificates as redemption price, plus 1% quarterly interest thereon until full
payment. Hence, this petition.

ISSUES:
1. Whether or not the respondent judge committed a grave abuse of discretion in
disregarding the order of the Central Bank to petitioner to desist from redeeming
its preferred shares and from paying dividends.
2. Whether or not the respondent judge committed a grave abuse of discretion in
ordering petitioner to pay respondent Adalia F. Robes interests on her preferred
shares.

RULING:
1. YES, the respondent judge committed a grave abuse of discretion in
disregarding the order of the Central Bank to petitioner to desist from redeeming its
preferred shares and from paying dividends.

What respondent judge failed to recognize was that while the stock certificate does
allow redemption, the option to do was clearly vested in the petitioner bank. The
redemption therefore is clearly the type known as “optional.” Thus, except as otherwise
provided in the stock certificate, the redemption rests entirely with the corporation and
the stockholder is without right to either compel or refuse the redemption of its stock.
Furthermore, the terms and conditions set forth therein use the word “may.” It is a
settled doctrine in statutory construction that the word “may” denotes discretion, and
cannot be construed as having mandatory effect. We fail to see how respondent judge
can ignore what, in his words, are the “very wordings of the terms and conditions in said
stock certificates” and construe what is clearly a mere option to be his legal basis for
compelling the petitioner to redeem the shares in question.

The redemption of said shares cannot be allowed. As pointed out by the petitioner, the
Central Bank made a finding that said petitioner has been suffering from chronic reserve
deficiency, and that such finding resulted in a directive on the ground that said
redemption would reduce the assets of the bank to the prejudice of its depositors and
creditors. Redemption of preferred shares was prohibited for a just and valid reason.

1. YES, the respondent judge committed a grave abuse of discretion in ordering

petitioner to pay respondent Adalia F. Robes interests on her preferred shares.

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,
representing not less than 2/3 of the outstanding capital stock at a regular or special
meeting duly called for the purpose. These provisions 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 which the corporation agrees absolutely to
pay interest before dividends are paid to common stockholders, is legal only when
construed as requiring payment of interest as dividends from net earnings or surplus
only. Clearly, the respondent judge, in compelling the petitioner to redeem the shares in
question and to pay the corresponding dividends, committed grave abuse of discretion
amounting to lack or excess of jurisdiction in ignoring both the terms and conditions
specified in the stock certificate, as well as the clear mandate of law.
CASTILLO vs. BALINGHASAY

FACTS: Petitioners and the respondents are stockholders of MCPI, with the former
holdingClass "B" shares and the latter owning Class "A" shares. MCPI is a domestic
corporation. It was organized sometime in September 1977. At the time of its
incorporation, Act No. 1459, the old Corporation Law was still in force and effect. On
September 9, 1992, Article VII was again amended. It states that “Except when
otherwise provided by law, only holders of Class "A" shares have the right to vote and
the right to be elected as directors or as corporate officers.” The SEC approved the
foregoing amendment on September 22, 1993. On February 9, 2001, the shareholders
of MCPI held their annual stockholders’ meeting and election for directors. During the
course of the proceedings, respondent Rustico Jimenez, citing Article VII, as amended,
and notwithstanding MCPI’s history, declared over the objections of herein petitioners,
that no Class "B" shareholder was qualified to run or be voted upon as a director. In the
past, MCPI had seen holders of Class "B" shares voted for and serve as members of
the corporate board and some Class "B" share owners were in fact nominated for
election as board members. Nonetheless, Jimenez went on to announce that the
candidates holding Class "A" shares were the winners of all seats in the corporate
board. The petitioners protested, claiming that Article VII was null and void for depriving
them, as Class "B" shareholders, of their right to vote and to be voted upon, in violation
of the Corporation Code (Batas Pambansa Blg. 68), as amended. On March 22, 2001,
after their protest was given short shrift, herein petitioners filed a Complaint for
Injunction, Accounting and Damages before the RTC of Parañaque City, Branch 258. In
finding for the respondents, the trial court ruled that corporations had the power to
classify their shares of stocks, such as "voting and non-voting" shares, conformably with
Section 67 of the Corporation Code of the Philippines. It pointed out that Article VII of
both the original and amended Articles of Incorporation clearly provided that only Class
"A" shareholders could vote and be voted for to the exclusion of Class "B" shareholders,
the exception being in instances provided by law, such as those enumerated in Section
6, paragraph 6 of the Corporation Code. The RTC found merit in the respondents’
theory that the Articles of Incorporation, which defines the rights and limitations of all its
shareholders, is a contract between MCPI and its shareholders. It is thus the law
between the parties and should be strictly enforced as to them. Hence this petition.

ISSUE: Whether or not holders of Class "B" shares of the MCPI may be deprived of
the right to vote and be voted for as directors in MCPI.

RULING: NO. The law referred to in the amendment to Article VII refers to the
Corporation Code and no other law. At the time of the incorporation of MCPI in 1977,
the right of a corporation to classify its shares of stock was sanctioned by Section 5 of
Act No. 1459. The law repealing Act No. 1459, B.P. Blg. 68, retained the same grant of
right of classification of stock shares to corporations, but with a significant change.
Under Section 6 of B.P. Blg. 68, the requirements and restrictions on voting rights were
explicitly provided for, such that "no share may be deprived of voting rights except those
classified and issued as "preferred" or "redeemable" shares, unless otherwise provided
in this Code" and that "there shall always be a class or series of shares which have
complete voting rights." Section 6 of the Corporation Code being deemed written into
Article VII of the Articles of Incorporation of MCPI, it necessarily follows that unless
Class "B" shares of MCPI stocks are clearly categorized to be "preferred" or
"redeemable" shares, the holders of said Class "B" shares may not be deprived of their
voting rights. Note that there is nothing in the Articles of Incorporation nor an iota of
evidence on record to show that Class "B" shares were categorized as either "preferred"
or "redeemable" shares. The only possible conclusion is that Class "B" shares fall under
neither category and thus, under the law, are allowed to exercise voting rights.

There is no merit in respondents’ position that Section 6 of the Corporation Code cannot
apply to MCPI without running afoul of the non-impairment clause of the Bill of Rights.
Section 148 of the Corporation Code expressly provides that it shall apply to
corporations in existence at the time of the effectivity of the Code.
GRACE CHRISTIAN HIGH SCHOOL, petitioner, vs. THE COURT OF APPEALS,
GRACE VILLAGE ASSOCIATION, INC., ALEJANDRO G. BELTRAN, and ERNESTO
L. GO

FACTS: Grace Village Association, Inc. (GVAI) has an existing by-laws which was
already in effect since 1968. But in 1975, the board of directors made a draft amending
the by-laws whereby the representative of petitioner shall have a permanent seat in the
15-seat board. The draft however was never presented to the general membership for
approval. But nevertheless, the representative of GCHS held a seat in the board for 15
years. Thereafter, an election was scheduled for the 15 seat in the board. GCHS
opposed the election as it insists that the election should only be for 14 directors
because it has a permanent seat. GVAI argued that GCHS claim has no basis because
the 1975 proposed amendment was never ratified. GCHS averred that it was ratified
when it was allowed to take the seat for 15 years and as such its right has already
vested.

ISSUE: Whether or not the representative from Grace Christian High School should be
allowed to have a permanent seat in the board of directors.

HELD: No. The Corporation Code is clear when it provides that members of the board
of a corporation must be elected by the stockholders (stock corporation) or the
members (non-stock corporation). No provision of the by-laws can be adopted if it is
contrary to law. Tolerance cannot be considered a ratification.
Gokongwei vs. Securities and Exchange Commission

FACTS:Petitioner as stockholder of San Miguel Corporation (SMC), filed with the

Securities and Exchange Commission (SEC) a petition for the declaration of nullity of
amended by-laws, cancellation of certificate of filing of amended by-laws, injunction and
damages with prayer for a preliminary injunction against the majority members of the
Board of Directors and SMC. Petitioner alleged that the Board amended the by-laws,
prescribing additional qualifications for its directors which provides that, “no person shall
be qualify or eligible for nomination if he is engaged in any business which competes
with that of the corporation” . The Board of Directors based their authority to do so on a
resolution of the stockholders. It was contended that according to the law, the power to
amend, modify, repeal or adopt new by-laws may be delegated to the Board of Directors
only by affirmative vote of the stockholders representing not less than ⅔ of the
subscribed and paid up capital stock. Gokongwei contended that the Board acted
without authority and in usurpation of the power of the stockholders.
Gokongwei further contended that prior to the amendment, he possessed all the
qualification to be a director of the corporation. That as a stockholder, he had acquired
rights inherent in stock ownership, such as the right to vote and be voted in the election
of directors, and that in amending the by-laws, private respondents purposely provided
for petitioner’s disqualification and deprived him of his vested right, hence the amended
by-laws is null and void. As additional cause of action, petitioner alleged that
corporations have no inherent power to disqualify a stockholder from being elected as a
director; therefore, the questioned act is ultra vires and void.

ISSUE: Whether or not the corporation has the power to provide for additional
qualifications of its directors?

RULING: YES. Every corporation has the inherent power to adopt by-laws for its
internal government, and to regulate the conduct and prescribe the rights and duties of
its members towards itself and among themselves in reference to the management of
its affairs. Under section 21 of the Corporation Law, a corporation may prescribe in its
by-laws "the qualifications, duties and compensation of directors, officers and
employees." This must necessarily refer to a qualification in addition to that specified by
section 30 of the Corporation Law, which provides that "every director must own in his
right at least one share of the capital stock of the stock corporation of which he is a
director." Any person "who buys stock in a corporation does so with the knowledge that
its affairs are dominated by a majority of the stockholders and that he impliedly
contracts that the will of the majority shall govern in all matters within the limits of the act
of incorporation and lawfully enacted by-laws and not forbidden by law." To this extent,
therefore, the stockholder may be considered to have "parted with his personal right or
privilege to regulate the disposition of his property which he has invested in the capital
stock of the corporation, and surrendered it to the will of the majority of his fellow
incorporators. It cannot therefore be justly said that the contract, express or implied,
between the corporation and the stockholders is infringed by any act of the former which
is authorized by a majority."
Pursuant to section 18 of the Corporation Law, any corporation may amend its articles
of incorporation by a vote or written assent of the stockholders representing at least
two-thirds of the subscribed capital stock of the corporation. If the amendment changes,
diminishes or restricts the rights of the existing shareholders, then the dissenting
minority has only one right, "to object thereto in writing and demand payment for his
share." Under section 22 of the same law, the owners of the majority of the subscribed
capital stock may amend or repeal any by-law or adopt new by-laws. It cannot be said,
therefore, that Gokongwei has a vested right to be elected director, in the face of the
fact that the law at the time such right as stockholder was acquired contained the
prescription that the corporate charter and the by-law shall be subject to amendment,
alteration and modification.
Western Institute of Technology Inc. vs. Salas (Compensation)

Facts: Salas et al., are the majority and controlling members of the Board of Trustees of
petitioner. Prior to a Special Board Meeting, copies of notice thereof, were distributed to
all Board Members.The notice allegedly indicated that the meeting to be held included
Item 6 which states that "Possible implementation of Art. III, Sec. 6 of the Amended
By-Laws of Western Institute of Technology, Inc. on compensation of all officers of the
corporation." In said meeting, the Board of Trustees passed a resolution, granting
monthly compensation to Salas, et. al.

Issue: Whether the grant of compensation to Salas, et. al. is proscribed under Section
30 of the Corporation Code.

Held: NO. Directors or trustees, as the case may be, are not entitled to salary or other
compensation when they perform nothing more than the usual and ordinary duties of
their office. Under Section 30 of the CC, there are only two (2) ways by which members
of the board can be granted compensation apart from reasonable per diems: (1) when
there is a provision in the by-laws fixing their compensation; and (2) when the
stockholders representing a majority of the outstanding capital stock at a regular or
special stockholders' meeting agree to give it to them. Also, the proscription, however,
against granting compensation to director/trustees of a corporation is not a sweeping
rule. Worthy of note is the clear phraseology of Section 30 which state: "[T]he directors
shall not receive any compensation, as such directors." The phrase as such directors is
not without significance for it delimits the scope of the prohibition to compensation given
to them for services performed purely in their capacity as directors or trustees. The
unambiguous implication is that members of the board may receive compensation, in
addition to reasonable per diems, when they render services to the corporation in a
capacity other than as directors/trustees. Herein, resolution 48, s. 1986 granted monthly
compensation to Salas, et. al. not in their capacity as members of the board, but rather
as officers of the corporation, more particularly as Chairman, Vice-Chairman, Treasurer
and Secretary of Western Institute of Technology.
Nacpil vs. International Broadcasting Corporation (Other officer; jurisdiction of
SEC)

Facts: Petitioner states that he was Assistant General Manager for

Finance/Administration and Comptroller of private respondent. Upon his assumption of
the IBC presidency, Templo allegedly harassed, insulted, humiliated and pressured
petitioner into resigning until the latter was forced to retire. However, Templo refused to
pay him his retirement benefits. Furthermore, Templo allegedly refused to recognize
petitioner’s employment, claiming that petitioner was not the Assistant General
Manager/Comptroller of IBC but merely usurped the powers of the Comptroller. Hence,
petitioner filed with the Labor Arbiter a complaint for illegal dismissal and non-payment
of benefits. IBC filed a motion to dismiss alleging that the Labor Arbiter had no
jurisdiction over the case. IBC contended that petitioner was a corporate officer who
was duly elected by the Board of Directors of IBC; hence, the case qualifies as an
intra-corporate dispute falling within the jurisdiction of the Securities and Exchange
Commission (SEC). However, it was denied and the Labor Arbiter rendered a Decision
stating that petitioner had been illegally dismissed.
NLRC: dismissed.
CA: GRANTED; complaint is DISMISSED without prejudice.

ISSUE: Whether the Labor Arbiter had jurisdiction over the case for illegal dismissal and
non-payment of benefits filed by petitioner.

RULING: NONE. That the position of Comptroller is not expressly mentioned among the
officers of the IBC in the By-Laws is of no moment, because the IBC’s Board of
Directors is empowered under Section 25 of the Corporation Code and under the
corporation’s By-Laws to appoint such other officers as it may deem necessary. The
Court has held that in most cases the “by-laws may and usually do provide for such
other officers,”and that where a corporate office is not specifically indicated in the roster
of corporate offices in the by-laws of a corporation, the board of directors may also be
empowered under the by-laws to create additional officers as may be necessary.

Since complainant’s appointment was approved unanimously by the Board of Directors

of the corporation, he is therefore considered a corporate officer and his claim of illegal
dismissal is a controversy that falls under the jurisdiction of the SEC as contemplated by
Section 5 of P.D. 902-A. The rule is that dismissal or non-appointment of a corporate
officer is clearly an intra-corporate matter and jurisdiction over the case properly
belongs to the SEC, not to the NLRC.
DISMISSED and the Decision of the Court of Appeals is AFFIRMED.
People's Aircargo and Warehousing Co. Inc. vs. Court of Appeals

Facts: To obtain a license for the corporation from the Bureau of

Customs, Punsalan, the petitioner’s president, solicited a proposal from Saño for the
preparation of a feasibility study. Saño submitted a letter proposal ("First Contract") to
Punsalan. PAWCI, through Punsalan, sent Saño a letter confirming their agreement.
Saño sent PAWCI another letter proposal ("Second Contract") formalizing its
proposal for consultancy services. Villaceren, vice president of PAWCI, received the
operations manual prepared by Saño. PAWCI submitted said operations manual to the
Bureau of Customs in connection with the former's application to operate a bonded
warehouse; thereafter, the Bureau issued to it a license to operate, enabling it to
become one of the three public customs bonded warehouses at the
international airport. Meanwhile, Punsalan sold his shares in PAWCI and resigned
as its president. Saño filed a collection suit against PAWCI. He alleged that he
had prepared an operations manual for PAWCI, conducted a seminar
workshop for its employees and delivered to it a computer program; but that,
despite demand, PAWCI refused to pay him for his services. PAWCI, in its answer,
alleged that the letter agreement was signed by Punsalan without authority. The RTC
rendered a Decision declaring the Second Contract unenforceable or
simulated. On appeal, the CA modified the decision of the trial court, and declared the
Second Contract valid and binding on PAWCI, which was held liable to
Saño. MR denied. Hence, this Petition for Review.

Issue: Whether a single instance where the corporation had previously allowed its
president to enter into a contract with another without a board resolution
expressly authorizing him, has clothed its president with apparent authority to
execute the subject contract.

Held: YES. Apparent authority is derived not merely from practice. Its
existence may be ascertained through (1) the general manner in which the
corporation holds out an officer or agent as having the power to act or, in other words,
the apparent authority to act in general, with which it clothes him; or (2) the
acquiescence in his acts of a particular nature, with actual or constructive knowledge
thereof, whether within or beyond the scope of his ordinary powers. It is
not the quantity of similar acts which establishes apparent authority, but
the vesting of a corporate officer with the power to bind the corporation.
Herein, PAWCI, through its president Antonio Punsalan Jr., entered into
the First Contract without first securing board approval. Despite such lack of board
approval, PAWCI did not object to or repudiate said contract, thus "clothing"
its president with the power to bind the corporation. The grant of
apparent authority to Punsalan is evident in the testimony of Yong senior
vice president, treasurer and major stockholder of PAWCI. The
First Contract was consummated, implemented and paid without a hitch.
Hence, Sano should not be faulted for believing that Punsalan's conformity
to the contract in dispute was also binding on petitioner. It is familiar
doctrine that if a corporation knowingly permits one of its officers, or any other agent, to
act within the scope of an apparent authority, it holds him out to the public as
possessing the power to do those acts; and thus, the corporation will, as
against anyone who has in good faith dealt with it through such agent, be
estopped from denying the agent's authority. Furthermore, Saño prepared an operations
manual and conducted a seminar for the employees of PAWCI in accordance
with their contract. PAWCI accepted the operations manual, submitted it to
the Bureau of Customs and allowed the seminar for its employees. As a result of
its aforementioned actions, PAWCI was given by the Bureau of Customs a
license to operate a bonded warehouse. Granting arguendo then that the
Second Contract was outside the usual powers of the president, PAWCI's
ratification of said contract and acceptance of benefits have made it
binding, nonetheless. The enforceability of contracts under Article 1403(2) is
ratified "by the acceptance of benefits under them" under Article 1405.
PRIME WHITE CEMENT CORPORATION vs. IAC and ALEJANDRO TE

FACTS: Falcon and Trazo entered into an agreement with Te whereby it was agreed
that from 1970 to 1976, Te shall be the sole dealer of 20,000 bags Prime White cement
in Mindanao. Falcon was the president of Prime White Cement Corporation (PWCC)
and Trazo was a board member thereof. Te was likewise a board member of PWCC. It
was agreed that the selling price for a bag of cement shall be P9.70. Before the bags of
cement can be delivered, Te already made known to the public that he is the sole dealer
of cements in Mindanao. Various hardwares then approached him to be his
sub-dealers, hence, Te entered into various contracts with them. But then apparently,
Falcon and Trazo were not authorized by the Board of PWCC to enter into such
contract. Nevertheless, the Board wished to retain the contract but they wanted some
amendments. Te refused the counter-offer. PWCC then awarded the contract to
someone else. Te then sued PWCC for damages. PWCC filed a counterclaim and in
said counterclaim, it is claiming for moral damages the basis of which is the claim that
Te’s filing of a civil case against PWCC destroyed the company’s goodwill. The lower
court ruled in favor Te.

ISSUE: Whether or not the "dealership agreement" referred by the President and
Chairman of the Board of petitioner corporation is a valid and enforceable contract.

HELD: No. SEC. 32 provides, "A contract of the corporation with one or more of its
directors or trustees or officers is voidable, at the option of such corporation, unless all
the following conditions are present:
1. That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such
meeting;
2. That the vote of such director or trustee was not necessary for the approval of the
contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in the case of an officer, the contract with the officer has been previously
authorized by the Board of Directors."
In this particular case, the Supreme Court focused on the fact that the contract between
PWCC and Te through Falcon and Trazo was not reasonable. Hence, PWCC has all
the rights to void the contract and look for someone else, which it did. The contract is
unreasonable because of the very low selling price. The Price at that time was at least
P13.00 per bag and the original contract only stipulates P9.70. Also, the original
contract was for 6 years and there’s no clause in the contract which protects PWCC
from inflation. As a director, Te in this transaction should protect the corporation’s
interest more than his personal interest. His failure to do so is disloyalty to the
corporation. Anent the issue of moral damages, there is no question that PWCC’s
goodwill and reputation had been prejudiced due to the filing of this case. However,
there can be no award for moral damages under Article 2217.
BENJAMIN A. SANTOS, petitioner, vs. NATIONAL LABOR RELATIONS
COMMISSION, HON. LABOR ARBITER FRUCTUOSO T. AURELLANO and MELVIN
D. MILLENA

FACTS: Abaño, the treasurer of Mana Mining and Development Corporation (MMDC),
sent a letter to Melvin Millena, a project accountant of MMDC, advising the latter that he
is being laid-off due to the fact that the rainy season is on; that there is deteriorating
peace and order in the area, and that there will be little paperwork to do. As a result,
Millena filed an illegal dismissal case against MMDC before the labor arbiter. Millena
won and a writ of execution was issued against MMDC. However, since MMDC’s office
closed down, the writ was served to Santos, the former president of MMDC.

ISSUE: Whether or not Santos shall be held liable

HELD: NO. In Tramat Mercantile, Inc. vs. Court of Appeals,the Court has collated the
settled instances when, without necessarily piercing the veil of corporate fiction,
personal civil liability can also be said to lawfully attach to a corporate director, trustee
or officer; to wit: When—
1. “(1)He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith
or gross negligence in directing its affairs, or (c) for conflict of interest, resulting
in damages to the corporation, its stockholders or other persons;
2. “(2)He consents to the issuance of watered stocks or who, having knowledge
thereof, does not forthwith file with the corporate secretary his written objection
thereto;
3. “(3)He agrees to hold himself personally and solidarily liable with the corporation; or
4. “(4)He is made, by a specific provision of law, to personally answer for his
corporate action.”
The case of petitioner is way off these exceptional instances. It is not even shown that
petitioner has had a direct hand in the dismissal of private respondent enough to
attribute to him (petitioner) a patently unlawful act while acting for the corporation.
SPOUSES DAVID and COORDINATED GROUP, INC. vs. CONSTRUCTION
INDUSTRY AND ARBITRATION COMMISSION and SPS. NARCISO & AIDA
QUIAMBAO

FACTS : Respondent-spouses QUIAMBAO engaged the services of petitioner CGI, with

petitioner-spouses ROBERTO and EVELYN DAVID as its President and Treasurer,
respectively, to design and construct an office/residential building. Petitioners failed to
follow the specifications and plans as previously agreed upon. Respondents demanded
the correction of the errors but petitioners failed to act on their complaint. Consequently,
respondents rescinded the contract. It was found that petitioners revised and deviated
from the structural plan of the building without notice to or approval by the respondents.
Respondents filed a case for breach of contract against petitioners. After the parties
agreed to submit the case for arbitration to CIAC, the latter rendered judgment against
petitioners. Petitioners appealed to the Court of Appeals which affirmed the arbitrator’s
Decision but deleted the award for lost rentals.

ISSUE : Whether or not petitioner-spouses David can be held jointly and severally liable
with petitioner

HELD: YES. As a general rule, the officers of a corporation are not personally liable for
their official acts unless it is shown that they have exceeded their authority.
However, the personal liability of a corporate director, trustee or officer, along
with corporation, may so validly attach when he assents to a patently unlawful act
of the corporation or for bad faith or gross negligence in directing its affairs. In
the at bar, when asked whether the building was underdesigned considering the poor
quality of the soil, Engr. Villasenor defended his structural design as adequate. He
admitted that the revision of the plans which resulted in the construction of
additional columns was in pursuance of the request of Engr. David to revise the
structural plans to provide for a significant reduction of the cost of construction.
When Engr. David was asked for the justification for the revision of the plans, he
confirmed that he wanted to reduce the cost of construction.x x x” DISMISSED.
MALAYANG SAMAHAN NG MGA MANGGAGAWA VS RAMOS

FACTS: M. Greenfield, Inc. (MGI), through its officers Tawil, Javelosa, and Puangco
began terminating employees. The corporation closed down one of their plants and so
they said they have to retrench the number of employees. Consequently, the Malayang
Samahan ng mga Manggagawa sa M. Greenfield (MSMG-UWP) filed an illegal
dismissal case against MGI. The National Labor Relations Commission ruled against
the union. But on appeal, the decision of the NLRC was reversed and the corporation
was ordered, among others, to pay the employees’ backwages. The union further
appealed as they contend that the officers of the corporation should be held solidarily
liable.

ISSUE: Whether or not the officers of the corporation should be held solidarily liable.

HELD: No. A corporation is a juridical entity with legal personality separate and distinct
from those acting for and in its behalf and, in general from the people comprising it. The
rule is that obligations incurred by the corporation, acting through its directors, officers
and employees are its sole liabilities. There is no question that MGI is guilty of illegal
dismissal but the officers cannot be held solidarily liable.
It’s true that there’s a plethora of illegal dismissal cases where the SC made corporate
officers personally liable but these cases usually involve corporate officers who acted in
bad faith in illegally dismissing employees. Corporate directors and officers may be
solidarily liable with the corporation for the termination of employment of corporate
employees if the same is done with malice or in bad faith.
INTER-ASIA INVESTMENTS INDUSTRIES, INC., petitioner, vs. COURT OF
APPEALS and ASIA INDUSTRIES, INC.

FACTS: Petitioner, by a Stock Purchase Agreement, sold to private respondent for and
in consideration of the sum of P19,500,000.00 all its right, title and interest in and to all
the outstanding shares of stock of FARMA-COR. The Agreement was signed by
Gonzales and Vergara, presidents of petitioner and private respondent, respectively.
Respondent paid petitioner a total amount of P12,000,000.00. However, From the
STATEMENT OF INCOME AND DEFICIT attached to the financial report, it appears
that FARMACOR had a deficit. The contract price was then adjusted to P6,225,775.00.
Private respondent having already paid petitioner P12,000,000.00, it was entitled to a
refund of P5,744,225.00. Petitioner thereafter proposed, by letter signed by its
president, that private respondent’s claim for refund be reduced to P4,093,993.00, it
promising to pay the cost of the NOCOSII superstructures in the amount of
P759,570.00. To the proposal respondent agreed. Petitioner, however, welched on its
promise. Petitioner’s total liability thus stood at P4,853,503.00 exclusive of interest.
Private respondent filed a complaint against petitioner, one of two causes of action of
which was for the recovery of above-said amount plus interest.The trial court ruled in
favor of private respondent. On appeal to the Court of Appeals, affirmed the trial court's
decision. Hence, this petition for review on certiorari.

ISSUE: WHETHER OR NOT THE LETTER OF THE PRESIDENT OF THE

PETITIONER IS BINDING ON THE PETITIONER BEING INTRA VIRES.

RULING: YES.
A corporate officer or agent may represent and bind the corporation in transactions with
third persons to the extent that the authority to do so has been conferred upon him, and
this includes powers as, in the usual course of the particular business, are incidental to,
or may be implied from, the powers intentionally conferred, powers added by custom
and usage, as usually pertaining to the particular officer or agent, and such apparent
powers as the corporation has caused person dealing with the officer or agent to believe
that it has conferred.

As correctly argued by private respondent, an officer of a corporation who is authorized

to purchase the stock of another corporation has the implied power to perform all other
obligations arising therefrom, such as payment of the shares of stock. By allowing its
president to sign the Agreement on its behalf, petitioner clothed him with apparent
capacity to perform all acts which are expressly, impliedly and inherently stated therein.

PARTLY GRANTED. The assailed decision of the Court of Appeals affirming that of the
trial court is modified in that the award of attorney’s fees in favor of private respondent is
deleted.
Lapu-Lapu Foundation vs. Court of Appeals (Estoppel)

Facts: Tan, then President of Lapulapu Foundation, Inc., obtained four loans from Allied
Banking Corporation covered by four promissory notes. Despite demands made on
them by the Bank, Tan and the foundation failed to pay the same. The Bank was
constrained to file a complaint seeking payment by Tan and the foundation, jointly and
solidarily of a sum of money. After due trial, the court held Tan and the Foundation
jointly and solidarily liable to the Bank. Tan and the foundation filed the petition for
review on certiorari.

Issue: Whether Tan and the foundation should be held jointly and solidarily liable.

Held: YES. It is a familiar doctrine that if a corporation knowingly permits one of its
officers, or any other agent, to act within the scope of an apparent authority, it holds him
out to the public as possessing the power to do those acts; and thus, the corporation
will, as against anyone who has in good faith dealt with it through such agent, be
estopped from denying the agent’s authority. Per its Secretary’s Certificate, the
Foundation had given its President, Tan, ostensible and apparent authority to inter alia
deal with the Bank. Accordingly, the Foundation is estopped from questioning Tan’s
authority to obtain the subject loans from the respondent Bank.
Hydro Resources Contractors vs National Irrigation Administration

Facts: A contract was entered into between Hydro and NIA for the project of the latter.
The contract price is to be payable partly in Philippine peso and US dollars. Upon
execution of the contract however, there was depreciation in value of Peso resulting to
price differential. To resolve the issue, the administrator of NIA, Mr Tek, and Hydro
made a joint computation of the amount corresponding to the foreign currency
differential. The computation showed that NIA owed Hydro for the differential. When a
demand was made by Hydro against NIA, NIA refused to pay contending that Mr Tek
has no authority to participate into a joint computation of the foreign currency differential
and that Mr Tek has no authority to bind NIA.

Issue: Whether or not Mr Tek has the
authority to bind NIA in the joint computation of the foreign currency
differential.

Held: YES.
Even assuming for the sake of argument that the
Administrator had no authority to bind NIA, the latter is already estopped after
repeatedly representing to Hydro that the Administrator had such authority. A
corporation may be held in estoppel from denying as against third persons the authority
of its officers or agents who have been clothed by it with ostensible or apparent
authority. The rule is of course settled that although an officer or agent acts without, or
in excess of, his actual authority if he acts within the scope of an apparent authority with
which the corporation has clothed him by holding him out or permitting him to appear as
having such authority, the corporation is bound thereby in favor of a person who deals
with him in good faith in reliance on such apparent authority, as where an officer is
allowed to exercise a particular authority with respect to the business, or a particular
branch of it, continuously and publicly, for a considerable time.
MONFORT HERMANOS AGRICULTURAL DEVELOPMENT CORPORATION vs
MONFORT III

Facts: Monfort Hermanos Agricultural Development Corporation is a domestic private

corporation. The same allowed Ramon H. Monfort, its Executive Vice President, to
breed and maintain fighting cocks in his personal capacity at Hacienda San Antonio.
The group of Antonio Monfort III, through force and intimidation, allegedly took
possession of the 4 Haciendas, the produce thereon and the motor vehicle and tractors,
as well as the fighting cocks of Ramon H. Monfort. The Corporation, represented by its
President, Ma. Antonia M. Salvatierra, and Ramon H. Monfort, in his personal capacity,
filed against the group of Antonio Monfort III, a complaint. The group of Antonio Monfort
III filed a motion to dismiss contending, inter alia, that Ma. Antonia M. Salvatierra has no
capacity to sue on behalf of the Corporation because the March 31, 1997 Board
Resolution[7] authorizing Ma. Antonia M. Salvatierra and/or Ramon H. Monfort to
represent the Corporation is void as the purported Members of the Board who passed
the same were not validly elected officers of the Corporation. The trial court denied the
motion to dismiss.[8] The group of Antonio Monfort III filed a petition for certiorari with
the Court of Appeals but the same was dismissed on June 7, 2002. The motion for
reconsideration filed by the group of Antonio Monfort III was denied. The group of
Antonio Monfort III claims that the March 31, 1997 Board Resolution authorizing Ma.
Antonia M. Salvatierra and/or Ramon H. Monfort to represent the Corporation is void
because the purported Members of the Board who passed the same were not validly
elected officers of the Corporation.

Issues: Whether or not Ma. Antonia M. Salvatierra has the legal capacity to sue on
behalf of the Corporation.

Ruling: NONE. A corporation has no power except those expressly conferred on it by

the Corporation Code and those that are implied or incidental to its existence. In turn, a
corporation exercises said powers through its board of directors and/or its duly
authorized officers and agents. Thus, it has been observed that the power of a
corporation to sue and be sued in any court is lodged with the board of directors that
exercises its corporate powers. The names of the last four (4) signatories to the said
Board Resolution do not appear in the 1996 General Information Sheet submitted by the
Corporation with the SEC. There is thus a doubt as to whether Paul M. Monfort, Yvete
M. Benedicto, Jaqueline M. Yusay and Ester S. Monfort, were indeed duly elected
Members of the Board legally constituted to bring suit in behalf of the Corporation. Ma.
Antonia M. Salvatierra failed to prove that four of those who authorized her to represent
the Corporation were the lawfully elected Members of the Board of the Corporation. As
such, they cannot confer valid authority for her to sue on behalf of the corporation.
JOHN F. McLEOD, vs. NLRC, FILIPINAS SYNTHETIC FIBER CORPORATION
(FILSYN), FAR EASTERN TEXTILE MILLS, INC., STA. ROSA TEXTILES, INC.,
(PEGGY MILLS, INC.), PATRICIO L. LIM, and ERIC HU

FACTS: McLeod filed a complaint for retirement and other benefits against private
respondents. Complainant was the former VP and Plant Manager of Peggy Mills, Inc.;he
was hired in 1980 and Peggy Mills closed operations due to irreversible losses but its
assets were acquired by Sta. Rosa Textile Corp. Complainant was hired by Sta. Rosa
Textile but he resigned and that while complainant was Vice President and Plant
Manager of Peggy Mills, the union staged a strike up resulting in closure of operations
due to irreversible losses as per Notice .The complainant was relied upon to settle the
labor problem but due to his lack of attention and absence the strike continued resulting
in closure of the company. He contends that the corporations are solidarily liable. The
LA rendered his decision in favor of Mcleod. The NLRC – Reversed decision. CA-
Modified the NLRC’s decision. Lim was solidarily liable.

Issue: Whether or not Patricio Lim must be solidarily liable with PMI

Held: NO. It is settled that in the absence of malice, bad faith, or specific provision of
law, a stockholder or an officer of a corporation cannot be made personally liable for
corporate liabilities. To reiterate, a corporation is a juridical entity with legal personality
separate and distinct from those acting for and in its behalf and, in general, from the
people comprising it. The rule is that obligations incurred by the corporation, acting
through its directors, officers, and employees, are its sole liabilities. 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.
ANTONIO CARAG VS NLRC ET. AL.

FACTS: National Federation of Labor Unions (NAFLU) and Mariveles Apparel

Corporation Labor Union (MACLU), 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. They included in their complaint Mariveles Apparel Corporation’s Chairman of
the Board Antonio Carag in order to be solidarily liable for the illegal dismissal and
illegal closure of business. According to the Labor Union of MAC, the Corporation
suddenly closed its business without following the notice as laid down in the Labor Law
of the Philippines. The Labor Arbiter decided in favor of the Labor Union and held that
Antonio Carag being the owner of the corporation be solidarily liable for the
payment of separation pay and back wages of the rank and file employees. Antonio
Carag questioned the decision of the Labor Arbiter and alleged that the Corporation and
its officers have separate and distinct personality and the latter cannot be held liable
solidarily in cases of payment of damages.

Issue:Whether or not Antonio Carag be held solidarily liable for the payment of the
illegally dismissed employees.

Held: NO. 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 of the
Corporation Code makes a director personally liable for corporate debts if he willfully
and knowingly votes for or assents to patently unlawful acts of the corporation, or if he is
guilty of gross negligence or bad faith in directing the affairs of the corporation.
Complainants did not allege in their complaint that Carag willfully and knowingly voted
for or assented to any patently unlawful act of MAC. Complainants did not present any
evidence showing that Carag willfully and knowingly voted for or assented to any
patently unlawful act of MAC. Neither did Arbiter Ortiguerra make any finding to this
effect in her Decision. Complainants did not also allege that Carag is guilty of gross
negligence or bad faith in directing the affairs of MAC. Complainants did not present any
evidence showing that Carag is guilty of gross negligence or bad faith in directing the
affairs of MAC. Neither did Arbiter Ortiguerra make any finding to this effect in her
Decision.
Nielson & Company, Inc. vs. Lepanto Consolidated Mining Company

Consideration for which shares of stock may be issued- A share of stock coming from
stock dividends declared cannot be issued to one who is not a stockholder of a
corporation. ; “Stock dividend"; "Dividend"

1966 case- The suit involves an operating agreement executed before world war 2
between the plaintiff (nielson) and the defendant (lepanto) whereby the former operated
and managed the mining properties owned by the latter for a management fee of
p2,500.00 a month and a 10% participation in the net profits resulting from the operation
of the mining properties. The contract was made on january 30, 1937 for a period of
(5) years, and the parties agreed to renew for another period of (5) years, but the pacific
war broke out in december 1941. During the outbreak of war, the japanese forces
occupied the mining properties, operated the mines, and were ousted from the mining in
august 1945. Lepanto then took possession of the mining and embarked in rebuilding
and reconstructing the mines and mill. The rehabilitation and reconstruction of the mine
and mill was not completed until 1948. On june 26, 1948 the mines resumed operation
under the exclusive management of Lepanto.
After the mines were liberated from the japanese invaders in 1945, a disagreement
arose between nielson and lepanto over the status of the operating contract in question
which as renewed expired in 1947. Under the terms thereof, the management contract
shall remain in suspense in case fortuitous event or force majeure, such as war or civil
commotion, adversely affects the work of mining and milling. Nielson held the view that,
on account of the war, the contract was suspended during the war; hence the life of the
contract should be considered extended for such time of the period of suspension. On
the other hand, lepanto contended that the contract should expire in 1947 as originally
agreed upon because the period of suspension accorded by virtue of the war did not
operate to extend further the life of the contract.
Hence, plaintiff brought this action against defendant before the Court of First
Instance of Manila to recover certain sums of money representing damages allegedly
suffered by the former in view of the refusal of the latter to comply with the terms of a
management contract entered into between them on January 30, 1937, including
attorney's fees and costs.
After trial, the court a quo rendered a decision dismissing the complaint with costs
on the ground that it is already barred by statute of limitations. Hence, an appeal.
Plaintiff now, questioned whether they are entitled to the claims which refers to (1) cash
dividends; (2) stock dividends; (3) depletion reserves; and (4) amount expended on
capital investment. The Supreme court reverse the decision of the court.

1968 Resolution case- Lepanto seeks the reconsideration of the decision rendered on
December 17, 1966. Lepanto contends that the payment to Nielson of stock dividends
as compensation for its services under the management contract is a violation of the
Corporation Law,

ISSUE: Whether or not the payment to Nielson of Stock dividends as compensation for
its services under the management contract is a violation of the corporation law
HELD: This court arrived at the conclusion that there is merit in the contention of
Lepanto. Generally, "No corporation shall make or declare any dividend except from the
surplus profits arising from its business, or divide or distribute its capital stock or
property other than actual profits among its members or stockholders until after the
payment of its debts and the termination of its existence by limitation or lawful
dissolution: Provided, That banking, savings and loan, and trust corporations may
receive deposits and issue certificates of deposit, checks, drafts, and bills of exchange,
and the like in the transaction of the ordinary business of banking, savings and loan,
and trust corporations." Therefore, that under Section 16 of the Corporation Law stock
dividends can not be issued to a person who is not a stockholder in payment of services
rendered. And so, in the case at bar Nielson can not be paid in shares of stock which
form part of the stock dividends of Lepanto for services it rendered under the
management contract. We sustain the contention of Lepanto that the understanding
between Lepanto and Nielson was simply to make the cash value of the stock dividends
declared as the basis for determining the amount of compensation that should be paid
to Nielson, in the proportion of 10% of the cash value of the stock dividends declared.
And this conclusion of Ours finds support in the-record.

However, In the minutes of the meeting of the Board of Directors of Lepanto on August
21. 1940, the president hereby autorized to into an agreement with Nielson & Company,
Inc., modifying Paragraph V of management contract of January 30, 1937, effective
January 1, 1940, in such a way that Nielson & Company, Inc. shall receive 10% of any
dividends declared and paid, when and as paid during the period of the contract and at
the end of each year, 10% of any depletion reserve that may be set up and 10% of any
amount expended during the year out of surplus earnings for capital account."
Therefore, reconsider that part of Our decision which declares that Nielson is entitled to
shares of stock worth P300,000.00 based on the stock dividends declared on November
28, 1949 and on August 20, 1950, together with all the fruits accruing thereto. Instead,
We declare that Nielson is entitled to payment by Lepanto of P300,000.00 in cash,
which is equivalent to 10% of the money value of the stock dividends worth
P3,000,000.00 which were declared on November 28, 1949 and on August 20, 1950,
with interest thereon at the rate of 6% from February 6, 1958. (-1966 case po ito, ni
breakdown ni Lepanto ung record of cash dividends)
Accordingly, We resolve to modify the decision that we rendered on December 17,
1966, in the sense that instead of awarding Nielson shares of stock worth P300,000.00
at the par value of ten centavos (P0.10) per share based on the stock dividends
declared by Lepanto on November 28, 1949 and August 20, 1950, together with their
fruits, Nielson should be awarded the sum of P300,000.00 which is an amount
equivalent to 10% of the cash value of the stock dividends thus declared, as part of the
compensation due Nielson under the management contract.
MOR by Lepanto questioning the “payment of stock dividends to Nielson” was denied.
Hence, the decision of 1966 was modified.
ISLAMIC DIRECTORATE OF THE PHILIPPINES, MANUEL F. PEREA and
SECURITIES & EXCHANGE COMMISSION, petitioners, vs.COURT OF
APPEALS and IGLESIA NI CRISTO, respondents.

FACTS: In 1971, the ISLAMIC
DIRECTORATE OF THE PHILIPPINES ("IDP") was incorporated with the primary
purpose of establishing a mosque, school, and other religious infrastructures in Quezon
City. IDP purchased a 49,652-square meter lot in Tandang Sora, QC, which was
covered by TCT Nos. RT-26520 (176616) and RT-26521 (170567). When President
Marcos declared martial law in 1972, most of the members of the 1971 Board of
Trustees ("Tamano Group")flew to the Middle East to escape political persecution.
Thereafter, two contending groups claiming to be the IDP Board of Trustees sprung: the
Carpizo group and Abbas group. In a suit between the two groups, SEC rendered a
decision in 1986 declaring both groups to be null and void. SEC recommeded that the a
new by-laws be approved and a new election be conducted upon the approval of the
by-laws. However, the SEC recommendation was not heeded. In 1989, the Carpizo
group passed a Board Resolution authorizing the sale of the land to Iglesia Ni Cristo
("INC"), and a Deed of Sale was eventually executed. In 1991, the Tamano Group filed
a petition before the SEC questioning the sale. Meanwhile, INC filed a suit for specific
performance before RTC Branch 81 against the Carpizo group. INC also moved to
compel a certain Leticia Ligon (who is apparently the mortgagee of the lot) to surrender
the title. The Tamano group sought to intervene, but the intervention was denied
despite being informed of the pending SEC case. In 1992, the Court subsequently ruled
that the INC as the rightful owner of the land, and ordered Ligon to surrender the titles
for annotation. Ligon appealed to CA and SC, but her appeals were denied. In 1993, the
SEC ruled that the sale was null and void . On appeal CA reversed the SEC ruling.

ISSUE: W/N the sale between the Carpizo group and INC is null and
void.

RULING: YES.
Since the SEC has declared the Carpizo group as a void
Board of Trustees, the sale it entered into with INC is likewise void. Without a valid
consent of a contracting party, there can be no valid contract. In this case, the IDP,
never gave its consent, through a legitimate Board of Trustees, to the disputed Deed of
Absolute Sale executed in favor of INC. Therefore, this is a case not only of vitiated
consent, but one where consent on the part of one of the supposed contracting parties
is totally wanting. Ineluctably, the subject sale is void and produces no effect
whatsoever. Further, the Carpizo group failed to comply with Section 40 of the
Corporation Code, which provides that: " ... a corporation may, by a majority vote of its
board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise
dispose of all or substantially all of its property and assets... when authorized by the
vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital
stock; or in case of non-stock corporation, by the vote of at least two-thirds (2/3) of the
members, in a stockholders' or members' meeting duly called for the purpose...."


The subject lot constitutes the only property of IDP. Hence, its sale to a third-party is a
sale or disposition of all the corporate property and assets of IDP. For the sale to be
valid, the majority vote of the legitimate Board of Trustees, concurred in by the vote of at
least 2/3 of the bona fide members of the corporation should have been obtained.
These twin requirements were not met in the case at bar. 


PEDRO LOPEZ DEE vs. SECURITIES AND EXCHANGE COMMISSION, HEARING
OFFICER EMMANUEL SISON, NAGA TELEPHONE CO., INC., COMMUNICATION
SERVICES, INC., LUCIANO MAGGAY, AUGUSTO FEDERIS, NILDA RAMOS,
FELIPA JAVALERA, DESIDERIO SAAVEDRA

Facts: In 1954, Naga Telephone Company, Inc. (Natelco) was organized, the
authorized capital was P100,000.00. Natelco decided to increase its authorized capital
to P3,000,000.00 in 1974. As required by the Public Service Act, Natelco filed an
application for the approval of the increased authorized capital with the then Board of
Communications under BOC Case 74-84. On 8 January 1975, a decision was rendered
in said case, approving the said application subject to certain conditions, among which
was "That the issuance of the shares of stocks will be for a period of one year from the
date hereof, 'after which no further issues will be made without previous authority from
this Board." Pursuant to the approval given by the then Board of Communications,
Natelco filed its Amended Articles of Incorporation with the Securities and Exchange
Commission (SEC). When the amended articles were filed with the SEC, the original
authorized capital of P100,000.00 was already paid. Of the increased capital of
P2,900,000.00 the subscribers subscribed to P580,000.00 of which P145,000 was fully
paid.

The capital stock of Natelco was divided into 213,000 common shares and 87,000
preferred shares, both at a par value of P10.00 per shares. On 12 April 1977, Natelco
entered into a contract with Communication Services, Inc. (CSI) for the "manufacture,
supply, delivery and installation" of telephone equipment. In accordance with this
contract, Natelco issued 24,000 shares of common stocks to CSI on the same date as
part of the downpayment. On 5 May 1979, another 12,000 shares of common stocks
were issued to CSI. In both instances, no prior authorization from the Board of
Communications, now the National Telecommunications Commission, was secured
pursuant to the conditions imposed by the decision in BOC Case 74-84. On 19 May
1979, the stockholders of the Natelco held their annual stockholders' meeting to elect
their seven directors to their Board of Directors, for the year 1979-1980. In this election
Pedro Lopez Dee was unseated as Chairman of the Board and President of the
Corporation, but was elected as one of the directors, together with his wife, Amelia
Lopez Dee. In the election CSI was able to gain control of Natelco when the latter's
legal counsel, Atty. Luciano Maggay won a seat in the Board with the help of CSI. In the
reorganization Atty. Maggay became president. Dee having been unseated in the
election, filed a petition in the SEC (SEC Case 1748), questioning the validity of the
elections of 19 May 1979 upon the main ground that there was no valid list of
stockholders through which the right to vote could be determined.

As prayed for in the petition, a restraining order was issued by the SEC placing Dee and
the other officers of the 1978-1979 Natelco Board in hold-over capacity. The SEC
restraining order was elevated to the Supreme Court in GR 50885 where the
enforcement of the SEC restraining order was restrained. Maggay, et. al. replaced the
hold-over officers. During the tenure of the Maggay Board, from 22 June 1979 to 10
March 1980, it did not reform the contract of 12 April 1977, and entered into another
contract with CSI for the supply and installation of additional equipment but also issued
to CSI 113,800 shares of common stock. Subsequently, the Supreme Court dismissed
the petition in GR 50885 upon the ground that the same was premature and the
Commission should be allowed to conduct its hearing on the controversy. The dismissal
of the petition resulted in the unseating of the Maggay group from the board of directors
of Natelco in a "hold-over" capacity. In the course of the proceedings in SEC Case
1748, SEC Hearing officer Emmanuel Sison issued an order on 23 June 1981,
declaring: (1) that CSI is a stockholder of Natelco and, therefore, entitled to vote; (2)
that unexplained 16,858 shares of Natelco appear to have been issued in excess to CSI
which should not be allowed to vote; (3) that 82 shareholders with their corresponding
number of shares shall be allowed to vote; and (4) consequently, ordering the holding of
special stockholder' meeting to elect the new members of the Board of Directors for
Natelco based on the findings made in the order as to who are entitled to vote. From the
foregoing order dated 23 June 1981, Dee filed a petition for certiorari/appeal with the
SEC en banc (SEC-AC 036). Thereafter, the Commission en banc rendered a decision
on 5 April 1982, sustaining the order of the Hearing Officer; dismissing the
petition/appeal for lack of merit; and ordering new elections as the Hearing Officer shall
set after consultations with Natelco officers, among others. On 21 April 1982, Dee and
Natelco filed their respective motions for reconsideration. Pending resolution of the
motions for reconsideration, on 4 May 1982, the hearing officer without waiting for the
decision of the commission en banc, to become final and executory rendered an order
stating that the election for directors would be held on 22 May 1982. On 20 May 1982,
the SEC en banc denied the motions for reconsideration.

Meanwhile on 20 May 1982 (GR 63922), Antonio Villasenor filed Civil Case 1507 with
the Court of First Instance of Camarines Sur, Naga City, against Luciano Maggay, Nildo
I. Ramos, Desirerio Saavedra, Augusto Federis, Ernesto Miguel, Justino de Jesus St.,
Vicente Tordilla, Pedro Lopez Dee and Julio Lopez Dee, which was raffled to Branch I,
presided over by Judge Delfin Vir. Sunga. Villasenor claimed that he was an assignee
of an option to repurchase 36,000 shares of common stocks of Natelco under a Deed of
Assignment executed in his favor. The Maggay group allegedly refused to allow the
repurchase of said stocks when Villasenor offered to CSI the repurchase of said stocks
by tendering payment of its price. The complaint therefore, prayed for the allowance to
repurchase the aforesaid stocks and that the holding of the 22 May 1982 election of
directors and officers of Natelco be enjoined. A restraining order dated 21 May 1982
was issued by the lower court commanding desistance from the scheduled election until
further orders. Nevertheless, on 22 May 1982, as scheduled, the controlling majority of
the stockholders of the Natelco defied the restraining order, and proceeded with the
elections, under the supervision of the SEC representatives. On 25 May 1982, the SEC
recognized the fact that elections were duly held, and proclaimed that the following are
the "duly elected directors" of the Natelco for the term 1982-1983: Felipa T. Javalera,
Nilda I. Ramos, Luciano Maggay, Augusto Federis, Daniel J. Ilano, Nelin J. Ilano, Sr.,
and Ernesto A. Miguel. The following are the recognized officers to wit: Luciano Maggay
(President), Nilda I. Ramos (Vice-President), Desiderio Saavedra (Secretary), Felipa
Javalera (Treasurer), and Daniel Ilano (Auditor). Despite service of the order of 25 May
1982, the Lopez Dee group headed by Messrs. Justino De Jesus and Julio Lopez Dee
kept insisting no elections were held and refused to vacate their position. On 28 May
1982, the SEC issued another order directing the hold-over directors and officers to turn
over their respective posts to the newly elected directors and officers and directing the
Sheriff of Naga City, with the assistance of PC and INP of Naga City, and other law
enforcement agencies of the City or of the Province of Camarines Sur, to enforce the
aforesaid order. On 29 May 1982, the Sheriff of Naga City, assisted by law enforcement
agencies, installed the newly elected directors and officers of the Natelco, and the
hold-over officers peacefully vacated their respective offices and turned-over their
functions to the new officers. On 2 June 1982, a charge for contempt was filed by
Villasenor alleging that Maggay, et. al. have been claiming in press conferences and
over the radio airlanes that they actually held and conducted elections on 22 May 1982
in the City of Naga and that they have a new set of officers, and that such acts of
Maggay, et. al. constitute contempt of court. On 7 September 1982, the lower court
rendered judgment on the contempt charge, declaring CSI, Nilda Ramos, Luciano
Maggay, Desiderio Saavedra, Augusto Federis and Ernesto Miguel, guilty of contempt
of court, and accordingly punished with imprisonment of 6 months and to pay fine of
P1,000.00 each: and ordering rNilda Ramos, Luciano Maggay, Desiderio Saavedra,
Augusto Federis and Ernesto Miguel, and those now occupying the positions of
directors and officers of NATELCO to vacate their respective positions therein, and
ordering them to reinstate the hold-over directors and officers of NATELCO, such as
Pedro Lopez Dee as President, Justino de Jesus, Sr., as Vice President, Julio Lopez
Dee as Treasurer and Vicente Tordilla, Jr. as Secretary, and others referred to as
hold-over directors and officers of NATELCO in the order dated 28 May 1982 of SEC
Hearing Officer Emmanuel Sison, in SEC Case 1748, by way of RESTITUTION, and
consequently, ordering said respondents to turn over all records, property and assets of
NATELCO to said hold-over directors and officers.

The trial judge issued an order dated 10 September 1982 directing the respondents in
the contempt charge to "comply strictly, under pain of being subjected to imprisonment
until they do so." Maggay, et. al. filed on 17 September 1982, a petition for certiorari and
prohibition with preliminary injunction or restraining order against the CFI Judge of
Camarines Sur, Naga City and de Jesus, Sr., et.a al., with the then Intermediate
Appellate Court which issued a resolution ordering de Jesus, Sr., et. al. to comment on
the petition, which was complied with, and at the same time temporarily refrained from
implementing and or enforcing the questioned judgment and order of the lower court.
On 14 April 1983, the then Intermediate Appellate Court, rendered a decision, annuling
the judgment dated 7 September 1982 rendered by the trial judge on the contempt
charge, and his order dated 10 September 1982, implementing said judgment; ordering
the 'hold-over' directors and officers of NATELCO to vacate their respective offices;
directing respondents to restore or re-establish Maggay, et. al. who were ejected on 22
May 1982 to their respective offices in the NATELCO; and prohibiting whoever may be
the successor of the Judge from interfering with the proceedings of the Securities and
Exchange Commission in SEC-AC 036. The order of re-implementation was issued,
and, finally, the Maggay group has been restored as the officers of the Natelco.
Lopez Dee, et. al. filed the petitions for certiorari with preliminary injunction and/or
restraining order. In the resolution of the Court En Banc dated 23 August 1983, GR
63922 was consolidated with GR 60502.

Issue: (1) Whether the issuance of 113,800 shares of Natelco to CSI, made during the
pendency of SEC Case 1748 in the Securities and Exchange Commission was valid.
(2) Whether Natelco stockholders have a right of preemption to the 113,800
shares in question; else, whether the Maggay Board, in issuing said shares without
notifying Natelco stockholders, violated their right of pre-emption to the unissued shares
.

Ruling: (1) The issuance of 113,800 shares of Natelco stock to CSI made during the
pendency of SEC Case 1748 in the Securities and Exchange Commission was valid.
The findings of the SEC En Banc as to the issuance of the 113,800 shares of stock was
stated as follows: "But the issuance of 113,800 shares was pursuant to a Board
Resolution and stockholders' approval prior to 19 May 1979 when CSI was not yet in
control of the Board or of the voting shares. There is distinction between an order to
issue shares on or before 19 May 1979 and actual issuance of the shares after 19 May
1979. The actual issuance, it is true, came during the period when CSI was in control of
voting shares and the Board (if they were in fact in control) - but only pursuant to the
original Board and stockholders' orders, not on the initiative to the new Board, elected
19 May 1979, which petitioners are questioning. The Commission en banc finds it
difficult to see how the one who gave the orders can turn around and impugn the
implementation of the orders he had previously given. The reformation of the contract is
understandable for Natelco lacked the corporate funds to purchase the CSI
equipment.... Appellant had raise the issue whether the issuance of 113,800 shares of
stock during the incumbency of the Maggay Board which was allegedly CSI controlled,
and while the case was sub judice, amounted to unfair and undue advantage. This does
not merit consideration in the absence of additional evidence to support the
proposition." In effect, therefore, the stockholders of Natelco approved the issuance of
stock to CSI.
(2) The issuance of the 113,800 stocks is not invalid even assuming that it was
made without notice to the stockholders as claimed by Dee, et. al.. The power to issue
shares of stocks in a corporation is lodged in the board of directors and no stockholders
meeting is required to consider it because additional issuance of shares of stocks does
not need approval of the stockholders. Consequently, no pre-emptive right of Natelco
stockholders was violated by the issuance of the 113,800 shares to CSI.
Philippine National Bank vs. Andrada Electric & Engineering Co.

FACTS: On 26 August 1975, the Philippine national Bank (PNB) acquired the assets of
the Pampanga Sugar Mills (PASUMIL) that were earlier foreclosed by the Development
Bank of the Philippines (DBP) under LOI 311. The PNB organized the ational Sugar
Development Corporation (NASUDECO) in September 1975, to take ownership and
possession of the assets and ultimately to nationalize and consolidate its interest in
other PNB controlled sugar mills. Prior to 29 October 1971, PASUMIL engaged the
services of the Andrada Electric & Engineering Company (AEEC) for electrical
rewinding and repair, most of which were partially paid by PASUMIL, leaving several
unpaid accounts with AEEC. On 29 October 1971, AEEC and PASUMIL entered into a
contract for AEEC to perform the (a) Construction of a power house building; 3
reinforced concrete foundation for 3 units 350 KW diesel engine generating sets, 3
reinforced concrete foundation for the 5,000 KW and 1,250 KW turbo generator sets,
among others. Aside from the work contract, PASUMIL required AEEC to perform extra
work, and provide electrical equipment and spare parts. Out of the total obligation of
P777,263.80, PASUMIL had paid only P250,000.00, leaving an unpaid balance, as of
27 June 1973, amounting to P527,263.80. Out of said unpaid balance of P527,263.80,
PASUMIL made a partial payment to AEEC of P14,000.00, in broken amounts, covering
the period from 5 January 1974 up to 23 May 1974, leaving an unpaid balance of
P513,263.80. PASUMIL and PNB, and now NASUDECO, allegedly failed and refused
to pay AEEC their just, valid and demandable obligation (The President of the
NASUDECO is also the Vice-President of the PNB. AEEC besought said official to pay
the outstanding obligation of PASUMIL, inasmuch as PNB and NASUDECO now owned
and possessed the assets of PASUMIL, and these defendants all benefited from the
works, and the electrical, as well as the engineering and repairs, performed by AEEC).

Because of the failure and refusal of PNB, PASUMIL and/or NASUDECO to pay their
obligations, AEEC allegedly suffered actual damages in the total amount of
P513,263.80; and that in order to recover these sums, AEEC was compelled to engage
the professional services of counsel, to whom AEEC agreed to pay a sum equivalent to
25% of the amount of the obligation due by way of attorney's fees. PNB and
NASUDECO filed a joint motion to dismiss on the ground that the complaint failed to
state sufficient allegations to establish a cause of action against PNB and NASUDECO,
inasmuch as there is lack or want of privity of contract between the them and AEEC.
Said motion was denied by the trial court in its 27 November order, and ordered PNB
nad NASUDECO to file their answers within 15 days. After due proceedings, the Trial
Court rendered judgment in favor of AEEC and against PNB, NASUDECO and
PASUMIL; the latter being ordered to pay jointly and severally the former (1) the sum of
P513,623.80 plus interest thereon at the rate of 14% per annum as claimed from 25
September 1980 until fully paid; (2) the sum of P102,724.76 as attorney's fees; and, (3)
Costs. PNB and NASUDECO appealed. The Court of Appeals affirmed the decision of
the trial court in its decision of 17 April 2000 (CA-GR CV 57610. PNB and NASUDECO
filed the petition for review.

Issue: Whether PNB and NASUDECO may be held liable for PASUMIL’s liability to
AEEC.

Held: Basic is the rule that a corporation has a legal personality distinct and separate
from the persons and entities owning it. The corporate veil may be lifted only if it has
been used to shield fraud, defend crime, justify a wrong, defeat public convenience,
insulate bad faith or perpetuate injustice. Thus, the mere fact that the Philippine
National Bank (PNB) acquired ownership or management of some assets of the
Pampanga Sugar Mill (PASUMIL), which had earlier been foreclosed and purchased at
the resulting public auction by the Development Bank of the Philippines (DBP), will not
make PNB liable for the PASUMIL's contractual debts to Andrada Electric &
Engineering Company (AEEC). Piercing the veil of corporate fiction may be allowed
only if the following elements concur: (1) control — not mere stock control, but complete
domination — not only of finances, but of policy and business practice in respect to the
transaction attacked, must have been such that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own; (2) such
control must have been used by the defendant to commit a fraud or a wrong to
perpetuate the violation of a statutory or other positive legal duty, or a dishonest and an
unjust act in contravention of plaintiff's legal right; and (3) the said control and breach of
duty must have proximately caused the injury or unjust loss complained of. The
absence of the foregoing elements in the present case precludes the piercing of the
corporate veil. First, other than the fact that PNB and NASUDECO acquired the assets
of PASUMIL, there is no showing that their control over it warrants the disregard of
corporate personalities. Second, there is no evidence that their juridical personality was
used to commit a fraud or to do a wrong; or that the separate corporate entity was
farcically used as a mere alter ego, business conduit or instrumentality of another entity
or person. Third, AEEC was not defrauded or injured when PNB and NASUDECO
acquired the assets of PASUMIL. Hence, although the assets of NASUDECO can be
easily traced to PASUMIL, the transfer of the latter's assets to PNB and NASUDECO
was not fraudulently entered into in order to escape liability for its debt to AEEC. Neither
was there any merger or consolidation with respect to PASUMIL and PNB. The
procedure prescribed under Title IX of the Corporation Code 59 was not followed. In
fact, PASUMIL's corporate existence had not been legally extinguished or terminated.
Further, prior to PNB's acquisition of the foreclosed assets, PASUMIL had previously
made partial payments to AEEC for the former's obligation in the amount of
P777,263.80. As of 27 June 1973, PASUMIL had paid P250,000 to AEEC and, from 5
January 1974 to 23 May 1974, another P14,000. Neither did PNB expressly or impliedly
agree to assume the debt of PASUMIL to AEEC. LOI 11 explicitly provides that PNB
shall study and submit recommendations on the claims of PASUMIL's creditors. Clearly,
the corporate separateness between PASUMIL and PNB remains, despite AEEC's
insistence to the contrary.
Loyola Grand Villas Homeowners (South) Association, Inc. vs. Court of Appeals

Facts: The Loyola Grand Villas Association, Inc. (LGVAI) was incorporated by the
homeowners of the Loyola Grand Villas (LGV), a subdivision, on February 8, 1983. The
Securities and Exchange Commission (SEC) issued a certificate of incorporation under
its official seal to LGVAI in the same year. LGVAI was likewise recognized by the Home
Insurance and Guaranty Corporation (HIGC), a government-owned-and-controlled
corporation whose mandate is to oversee associations like LGVAI.

In 1988, the officers of LGVAI tried to register its by-laws but to no avail. To their
consternation, LGVAI found out that there are two homeowners associations within
LGV, namely: Loyola Grand Villas Homeowners (South) Association, Inc.
(LGVAI-South) and Loyola Grand Villas Homeowners (North) Association, Inc.
(LGVAI-North). The two associations asserted that they have to be formed because
LGVAI is inactive. When LGVAI inquired about its status with HIGC, HIGC advised that
LGVAI was already terminated; that it was automatically dissolved when it failed to
submit it By-Laws after it was issued a certificate of incorporation by the SEC.

Issue: WON a corporation’s failure to submit its by-laws results to its automatic
dissolution.

Ruling: No. A private corporation like LGVAI commences to have corporate existence
and juridical personality from the date the Securities and Exchange Commission (SEC)
issues a certificate of incorporation under its official seal. The submission of its by-laws
is a condition subsequent but although it is merely such, it is a MUST that it be
submitted by the corporation. Failure to submit however does not warrant automatic
dissolution because such a consequence was never the intention of the law. The failure
is merely a ground for dissolution which may be raised in a quo warranto proceeding. It
is also worthwhile to note that failure to submit cannot result to automatic dissolution
because there are some instances when a corporation does not require by-laws.
There can be no automatic corporate dissolution simply because the incorporators
failed to abide by the required filing of by-laws embodied in Section 46 of the
Corporation Code. There is no outright demise of corporate existence. Proper notice
and hearing are cardinal components of due process in any democratic institution,
agency or society. In other words, the incorporators must be given the chance to explain
their neglect or omission and remedy the same.
China Banking Corporation vs. Court of Appeals

FACTS: On 21 August 1974, Galicano Calapatia, Jr., a stockholder of Valley Golf &
Country Club, Inc. (VGCCI), pledged his Stock Certificate 1219 to China Banking
Corporation (CBC). On 16 September 1974, CBC wrote VGCCI requesting that the
pledge agreement be recorded in its books. In a letter dated 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 was secured by the pledge agreement still
existing between Calapatia and CBC. Due to Calapatia's failure to pay his obligation,
CBC, on 12 April 1985, filed a petition for extrajudicial foreclosure before Notary Public
Antonio T. de Vera of Manila, requesting the latter to conduct a public auction sale of
the pledged stock. On 14 May 1985, CBC informed VGCCI of the foreclosure
proceedings and requested that the pledged stock be transferred to its name and the
same be recorded in the corporate books. However, on 15 July 1985, VGCCI wrote
CBC expressing its inability to accede to CBC's request in view of Calapatia's unsettled
accounts with the club. Despite the foregoing, Notary Public de Vera held a public
auction on 17 September 1985 and CBC emerged as the highest bidder at P20,000.00
for the pledged stock. Consequently, CBC was issued the corresponding certificate of
sale.

On 21 November 1985, VGCCI sent Calapatia a notice demanding full payment of his
overdue account in the amount of P18,783.24. Said notice was followed by a demand
letter dated 12 December 1985 for the same amount and another notice dated 22
November 1986 for P23,483.24. On 4 December 1986, VGCCI caused to be published
in the newspaper Daily Express a notice of auction sale of a number of its stock
certificates, to be held on 10 December 1986 at 10:00 a.m. Included therein was
Calapatia's own share of stock (Stock Certificate 1219). Through a letter dated 15
December 1986, VGCCI informed Calapatia of the termination of his membership due
to the sale of his share of stock in the 10 December 1986 auction. On 5 May 1989, CBC
advised VGCCI that it is the new owner of Calapatia's Stock Certificate 1219 by virtue of
being the highest 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
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 Regional Trial Court of
Makati for the nullification of the 10 December 1986 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 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 Securities and
Exchange Commission (SEC) for the nullification of the sale of Calapatia's stock by
VGCCI; the cancellation of any new stock certificate issued pursuant thereto; for the
issuance of a new certificate in petitioner's name; and for damages, attorney's fees and
costs of litigation.
On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision in favor
of VGCCI, stating in the main that considering that the said share is delinquent, VGCCI
had valid reason not to transfer the share in the name of CBC in the books of VGCCI
until liquidation of delinquency. Consequently, the case was dismissed. On 14 April
1992, Hearing Officer Perea denied CBC's motion for reconsideration. CBC appealed to
the SEC en banc and on 4 June 1993, the Commission issued an order reversing the
decision of its hearing officer; holding that CBC has a prior right over the pledged share
and because of pledgor's failure to pay the principal debt upon maturity, CBC can
proceed with the foreclosure of the pledged share; declaring that the auction sale
conducted by VGCCI on 10 December 1986 is declared NULL and VOID; and ordering
VGCCI to issue another membership certificate in the name of CBC. 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 Appeals rendered its decision
nullifying and setting aside the orders of the SEC and its hearing officer on ground of
lack of jurisdiction over the subject matter and, consequently, dismissed CBC's original
complaint. The Court of Appeals declared that the controversy between CBC and
VGCCI is not intra-corporate; nullifying the SEC orders and dismissing CBC’s
complaint. CBC moved for reconsideration but the same was denied by the Court of
Appeals in its resolution dated 5 October 1994. CBC filed the petition for review on
certiorari.

Issue: Whether CBC is bound by VGCCI's by-laws.

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 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 by-laws when it sent notice
formally recognizing CBC as pledgee of one of its shares registered in Calapatia's
name. CBC's belated notice of said by-laws at the time of foreclosure will not suffice.
By-laws signifies the rules and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and its stockholders
or members 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 continuing
rules of action adopted by the corporation for its own government and that of the
individuals composing it and having the direction, management and control of its affairs,
in whole or in part, in the management and control of its affairs and activities. The
purpose of a by-law is to regulate the conduct and define the duties of the members
towards the corporation and among themselves. They are self-imposed and, although
adopted pursuant to 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
have knowledge of the provisions either actually or constructively. For the exception to
the general accepted rule that third persons are not bound by by-laws to be applicable
and binding upon the pledgee, knowledge of the provisions of the VGCCI By-laws must
be acquired at the time the pledge agreement was contracted. Knowledge of said
provisions, either actual or 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 essence of these contracts that when the principal obligation becomes due,
the things in which the pledge or mortgage consists maybe alienated for the payment to
the creditor. Further, VGCCI's contention that CBC is duty-bound to know its by-laws
because of Article 2099 of the Civil Code which stipulates that the creditor must take
care of the thing pledged with the diligence of a good father of a family, fails to
convince. CBC was never informed of Calapatia's unpaid accounts and the restrictive
provisions in VGCCI's by-laws. Furthermore, Section 63 of the Corporation Code which
provides that "no shares of stock against which the corporation holds any unpaid claim
shall be transferable in the books of the corporation" cannot be utilized by VGCCI. The
term "unpaid claim" refers to "any unpaid claim arising from unpaid subscription, and not
to any indebtedness which a subscriber or stockholder may owe the corporation arising
from any other transaction." Herein, the subscription for the share in question has been
fully paid as evidenced by the issuance of Membership Certificate 1219. What Calapatia
owed the corporation were merely the monthly dues. Hence, Section 63 does not apply.
ASSOCIATED BANK vs. COURT OF APPEALS and LORENZO SARMIENTO, JR.

FACTS: Associated Banking Corporation and Citizens Bank and Trust Company
(CBTC) merged to form just one banking corporation known as Associated Citizens
Bank (later renamed Associated Bank), the surviving bank. After the merger agreement
had been signed, but before a certificate of merger was issued, respondent Lorenzo
Sarmiento, Jr. executed in favor of Associated Bank a promissory note, promising to
pay the bank P2.5 million on or before due date at 14% interest per annum, among
other accessory dues. For failure to pay the amount due, Sarmiento was sued by
Associated Bank.

Respondent argued that the plaintiff is not the proper party in
interest because the promissory note was executed in favor of CBTC. Also, while
respondent executed the promissory note in favor of CBTC, said note was a contract
pour autrui, one in favor of a third person who may demand its fulfillment. Also,
respondent claimed that he received no consideration for the promissory note and, in
support thereof, cites petitioner's failure to submit any proof of his loan application and
of his actual receipt of the amount loaned.

ISSUE:

1.) Whether or not
Associated Bank, the surviving corporation, may enforce the promissory note
made by private respondent in favor of CBTC, the absorbed company, after the
merger agreement had been signed, but before a certificate of merger was
issued?

2.) Whether or not the promissory note was a contract pour autrui
and was issued without consideration?

HELD:

The petition is impressed with
merit.

Associated Bank assumed all the rights of CBTC. Although absorbed
corporations are dissolved, there is no winding up of their affairs or liquidation of their
assets, because the surviving corporation automatically acquires all their rights,
privileges and powers, as well as their liabilities. The merger, however, does not
become effective upon the mere agreement of the constituent corporations. The
Securities and Exchange Commission (SEC) and majority of the respective
stockholders of the constituent corporations must have approved the merger. (Section
79, Corporation Code) It will be effective only upon the issuance by the SEC of a
certificate of merger. Records do not show when the SEC approved the merger.

But
assuming that the effectivity date of the merger was the date of its execution, we still
cannot agree that petitioner no longer has any interest in the promissory note. The
agreement itself clearly provides that all contracts — irrespective of the date of
execution — entered into in the name of CBTC shall be understood as pertaining to the
surviving bank, herein petitioner. Such must have been deliberately included in the
agreement in order to avoid giving the merger agreement a farcical interpretation aimed
at evading fulfillment of a due obligation. Thus, although the subject promissory note
names CBTC as the payee, the reference to CBTC in the note shall be construed,
under the very provisions of the merger agreement, as a reference to petitioner
bank.

On the issue that the promissory note was a contract pour autrui and was
issued without consideration, the Supreme Court held it was not. In a contract pour
autrui, an incidental benefit or interest, which another person gains, is not sufficient. The
contracting parties must have clearly and deliberately conferred a favor upon a third
person. The "fairest test" in determining whether the third person's interest in a contract
is a stipulation pour autrui or merely an incidental interest is to examine the intention of
the parties as disclosed by their contract. It did not indicate that a benefit or interest was
created in favor of a third person. The instrument itself says nothing on the purpose of
the loan, only the terms of payment and the penalties in case of failure to
pay.

Private respondent also claims that he received no consideration for the
promissory note, citing petitioner's failure to submit any proof of his loan application and
of his actual receipt of the amount loaned. These arguments deserve no merit. Res ipsa
loquitur. The instrument, bearing the signature of private respondent, speaks for itself.
Respondent Sarmiento has not questioned the genuineness and due execution thereof.
That he partially paid his obligation is itself an express acknowledgment of his
obligation.

WHEREFORE, the petition is GRANTED
CHESTER BABST vs. COURT OF APPEALS, BANK OF THE PHILIPPINE ISLANDS,
ELIZALDE STEEL CONSOLIDATED, INC., and PACIFIC MULTI-COMMERCIAL
CORPORATION 

FACTS: The complaint was commenced principally to enforce payment of a promissory
note and three domestic letters of credit which Elizalde Steel Consolidated, Inc
(ELISCON) executed and opened with Commercial Bank and Trust Company (CBTC).
ELISCON obtained from CBTC a loan in the amount of PhP8,015,900.84 with interest
rate of 14% per annum,evidenced by a promissory note. Consequently, ELISCON
defaulted in its payment leaving an outstanding indebtedness amounting to
PhP2,795,240.67 as of 31 October 1982. Subsequently, Antonio Roxas Chua and
Chester Babst executed continuing suretyship whereby they bound themselves jointly
and severally liable to pay any existing indebtedness of MULTI to CBTC to extent of
P-8M each. On 22 December 1980 BPI and CBTC entered into a merger wherein BPI
as the surviving corporation, acquired all the assets and assumed all the liabilities of
CBTC. ELISCON encountered financial difficulties and became heavily indebted to
DBP. In order to settle its obligations, ELISCON proposed to convey to DBP by way of
dacion en pago all its fixed assets mortgaged with DBP, as payment for its total
indebtedness in the amount of PhP201,181,833.16. ELISCON and DBP executed a
deed of cession of property in payment of debt. DBP took over the assets of ELISCON
including the indebtedness to BPI. Thereafter, DBP proposed formulas for the
settlement of all of Eliscon’s obligations to its creditors, but BPI expressly rejected the
formula submitted to it for not being acceptable. BPI as successor in interest of CBTC
instituted with RTC a complaint for sum of money against Eliscon, MULTIand Babst
RTC favored BPI while CA affirmed with modification the decision of RTC. Hence the
petition to SC.

ISSUES:
1.Whether or not BPI is not entitled to recover from petitioner ELISCON the latter’s
obligation with CBTC
2. Whether or not there is a valid novation of obligation

RULING:

1.No, BPI can collect from Eliscon. It is settled that in the merger of two existing
corporations, one of the corporation survives and continues the business, while the
other is dissolved and all its rights, properties and liabilities are acquired by the
surviving corporation. The surviving corporation therefore has a right to institute a
collection suit on accounts of one of one of the constituent corporations.

2.BPI's conduct evinced a clear and unmistakable consent to the substitution of DBP for
ELISCON as debtor. Hence, there was a valid novation which resulted in the release of
ELISCON from its obligation to BPI, whose cause of action should be directed against
DBP as the new debtor.
Mindanao Savings and Loan Association, Inc. (MSLAI) vs Willkom

FACTS: The First Iligan Savings and Loan Association, Inc. (FISLAI) and the Davao
Savings and Loan Association, Inc. (DSLAI) are entities duly registered with the
Securities and Exchange Commission, primarily engaged in the business of granting
loans and receiving deposits from the general public, and treated as banks.
1985, FISLAI and DSLAI entered into a merger, DSLAI being the surviving corporation.
The articles of merger were not registered with the SEC due to incomplete
documentation. DSLAI changed its corporate name to MSLAI. May 26, 1986, The Board
of Directors of FSLAI approved the assignment of assets in favor of DSLAI, which
assumed FISLAI's liabilities (the novation in question). MSLAI’s business failed and the
Monetary Board of the Central Bank of the Philippines ordered its closure. The
Monetary Board found that MSLAI was insolvent and to continue business would
involve probable loss to its depositors and creditors. The Monetary Board ordered
the liquidation of MSLAI with PDIC as its liquidator. Prior to MSLAI's closure, Uy filed an
action for collection of sum of money against FISLAI. RTC rendered a decision in favor
of Uy and ordered defendants (including FISLAI) to pay the sum of P136,801.70 plus
interest, 25% attorney's fees and the costs of suit. CA modified the decision by ordering
the third party defendant to reimburse the payments that would be made by defendants.
April 28, 1993, sheriff Bantuas levied on 6 parcels of land of FSLAI in Cagayan de Oro,
and during the public auction, Willkom was the highest bidder. A certificate of sale was
issued, and was registered with the Register of Deeds. September 20, 1994, Willkom
sold one of the parcels of land to Go. June 14, 1995, MSLAI, represented by PDIC, filed
a complaint for the Annulment of the Sale, Cancellation of Title and Reconveyance of
the properties, stating that the sale was conducted without notice given to them and
PDIC. PDIC came to know about the sale, almost two years after, while liquidating
MSLAI's assets. MSLAI stated that the sale was illegal not only due to lack of notice, but
also because the assets under liquidation should be deemed in custodia legis and
exempt from garnishment, levy, attachment or execution. Respondents stated
that MSLAI had no cause of action; MSLAI is a separate entity from FSLAI, further
stating that the merger was unofficial and did not comply with formalities and procedure.
RTC: dismissed the case for a supposed lack of jurisdiction.
CA: affirmed the dismissal but stated that according to Associated Bank vs CA, there
was no merger between FISLAI and MSLAI for failure to follow procedure for a valid
merger, but even if there was a de facto merger, Willkom was an innocent purchaser
and had a superior right. The assignment of assets and liabilities was not binding on
third parties because it wasn't registered. The validity of the auction sale could not be
invalidated by the fact that the sheriff had no authority to conduct the sale.

Issues:
1. Whether the merger between FISLAI and DSLAI valid and effective
2. Whether there was novation of the obligation by substituting the person of the debtor

Held:
1. No. A merger does not become effective upon the mere agreement of the
corporations. There must be an express provision of law authorizing them. There is a
procedure to be followed as stated in the Corporation Code. The board of each
corporation draws up a plan of merger and is submitted to stockholders or members for
approval. The formal agreement is executed (the articles of merger) and is submitted to
the SEC for approval. If approved, the SEC issues a certificate of merger. The merger
shall only be effective upon the issuance of the certificate. (An exception would be if a
party to a merger is a special corporation governed by its own charter, then a favorable
recommendation of the appropriate government agency should first be obtained.)
In this case, no certificate was issued and such merger is incomplete without it. The
certificate is important because it bears the approval of the SEC and it marks the
moment when the consequences of a merger take place. Since there is no valid merger,
FISLAI and MSLAI are still considered as two separate corporations. ASs far as third
parties are concerned, FISLAI's assets still belongs to them, not MSLAI.
2. No. The assumption by MSLAI of FISLAI's liabilities did not result in novation.
"Novation is the extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which extinguishes or modifies the first, either by
changing the object or principal conditions, by substituting another in place of the
debtor, or by subrogating a third person in the rights of the creditor."
Novation must always be done with the consent of the creditor as stated in Article 1293
of the Civil Code. In this case, it was not shown that Uy consented to the agreement
between FISLAI and MSLAI. MSLAI cannot question the levy, and subsequent sale of
the properties of FISLAI.
Since novation implies a waiver of right which the creditor had before novation, such
waiver must be express.
*CA ruling affirmed.
Lim Tay vs. Court of Appeals

Facts: On 8 January 1980, Sy Guiok secured a loan from Lim Tay in the amount of
P40,000 payable within 6 months. To secure the payment of the aforesaid loan and
interest thereon, Guiok executed a Contract of Pledge in favor of Lim Tay whereby he
pledged his 300 shares of stock in the Go Fay & Company Inc. Guiok obliged himself to
pay interest on said loan at the rate of 10% per annum from the date of said contract of
pledge. On the same date, Alfonso Sy Lim secured a loan, from Lim Tay in the amount
of P40,000 payable in 6 months. To secure the payment of his loan, Sy Lim executed a
"Contract of Pledge" covering his 300 shares of stock in Go Fay & Co. Under said
contract, Sy Lim obliged himself to pay interest on his loan at the rate of 10% per
annum from the date of the execution of said contract. The contractual stipulation in the
pledge showed that Lim Tay was merely authorized to foreclose the pledge upon
maturity of the loans, not to own them. Such foreclosure is not automatic, for it must be
done in a public or private sale. Guiok and Sy Lim endorsed their respective shares of
stock in blank and delivered the same to Lim Tay. However, Guiok and Sy Lim failed to
pay their respective loans and the accrued interests thereon to Lim Tay. In October
1990, Lim Tay filed a "Petition for Mandamus" against Go Fay & Co., with the SEC
(SEC Case 03894), praying that an order be issued directing the corporate secretary of
Go Fay & Co. to register the stock transfers and issue new certificates in favor of Lim
Tay; and ordering Go Fay & Co. to pay all dividends due and unclaimed on the said
certificates to Lim Tay. In the interim, Sy Lim died. Guiok and the Intestate Estate of
Alfonso Sy Lim, represented by Conchita Lim, filed their Answer-In-Intervention with the
SEC.

After due proceedings, the SEC hearing officer promulgated a Decision dismissing Lim
Tay's Complaint on the ground that although the SEC had jurisdiction over the action,
pursuant to the Decision of the Supreme Court in the case of "Rural Bank of Salinas et.
al. versus Court of Appeals, et al., 210 SCRA 510," he failed to prove the legal basis for
the secretary of the Corporation to be compelled to register stock transfers in favor of
Lim Tay and to issue new certificates of stock under his name. Lim Tay appealed the
Decision of the hearing officer to the SEC, but, on 7 March 1996, the SEC promulgated
a Decision, dismissing Lim Tay's appeal. On appeal to the Court of Appeals, the
appellate court debunked Lim Tay's claim that he had acquired ownership over the
shares by virtue of novation, holding that Guiok's and Sy Lim's indorsement and delivery
of the shares were pursuant to Articles 2093 and 2095 of the Civil Code and that Lim
Tay's receipt of dividends was in compliance with Article 2102 of the same Code. Lim
Tay's claim that he had acquired ownership of the shares by virtue of prescription was
likewise dismissed by the appellate court. Lim Tay brought before the Supreme Court a
Petition for Review on Certiorari in accordance with Rule 45 of the Rules of Court.

Issue: Whether Lim Tay is the owner of the shares previously subjected to pledge, for
him to cause the registration of said shares in his own name.
Held: Lim Tay's ownership over the shares was not yet perfected when the Complaint
was filed. The contract of pledge certainly does not make him the owner of the shares
pledged. Further, whether prescription effectively transferred ownership of the shares,
whether there was a novation of the contracts of pledge, and whether laches had set in
were difficult legal issues, which were unpleaded and unresolved when Lim Tay asked
the corporate secretary of Go Fay to effect the transfer, in his favor, of the shares
pledged to him. Lim Tay has failed to establish a clear legal right. Lim Tay's contention
that he is the owner of the said shares is completely without merit. Lim Tay does not
have any ownership rights at all. At the time Lim Tay instituted his suit at the SEC, his
ownership claim had no prima facie leg to stand on. At best, his contention was
disputable and uncertain. Lim Tay cannot claim to have acquired ownership over the
certificates of stock through extraordinary prescription, as provided for in Article 1132 of
the Civil Code. What is required by Article 1132 is possession in the concept of an
owner. Herein, Lim Tay's possession of the stock certificates came about because they
were delivered to him pursuant to the contracts of pledge. His possession as a pledgee
cannot ripen into ownership by prescription. Lim Tay expressly repudiated the pledge,
only when he filed his Complaint and claimed that he was not a mere pledgee, but that
he was already the owner of the shares. Based on the foregoing, Lim Tay has not
acquired the certificates of stock through extraordinary prescription. Neither did Lim Tay
acquire the shares by virtue of a novation of the contract of pledge. Novation cannot be
presumed by Guiok's and Sy Lim's indorsement and delivery of the certificates of stock
covering the 600 shares, nor Lim Tay's receipt of dividends from 1980 to 1983, nor the
fact that Guiok and Sy Lim have not instituted any action to recover the shares since
1980. Novation is never presumed inferred.
RIGHTS OF SHAREHOLDERS

REPUBLIC OF THE PHILIPPINES v. SANDIGANBAYAN

The PCGG cannot vote sequestered shares to elect the ETPI Board of Directors or
to amend the Articles of Incorporation for the purpose of increasing the authorized
capital stock unless there is a prima facie evidence showing that said shares are
ill-gotten and there is an imminent danger of dissipation.

FACTS: Two sets of board and officers of Eastern Telecommunications, Philippines,

Inc. (ETPI) were elected, one by the Presidential Commission on Good Government
(PCGG) and the other by the registered ETPI stockholders. Victor Africa, a stockholder
of ETPI filed a petition for Certiorari before the Sandiganbayan alleging that the PCGG
had been “illegally exercising the rights of stockholders of ETPI,” in the election of the
members of the board of directors. The Sandiganbayan ruled that only
the registered owners, their duly authorized representatives or their proxies may vote
their corresponding shares.
The PCGG filed a petition for certiorari, mandamus and prohibition before the
Court which was granted. The Court referred the PCGG’s petition to hold the special
stockholders’ meeting to the Sandiganbayan for reception of evidence and resolution.
The Sandiganbayan granted the PCGG “authority to cause the holding of a special
stockholders’ meeting of ETPI and held that there was an urgent necessity to increase
ETPI’s authorized capital stock; there existed a prima facie factual foundation for the
issuance of the writ of sequestration covering the Class “A” shares of stock; and the
PCGG was entitled to vote the sequestered shares of stock. The PCGG-controlled ETPI
board of directors held a meeting and the increase in ETPI’s authorized capital stock
from P250 Million to P2.6 Billion was “unanimously approved”.
Africa filed a motion to nullify the stockholders meeting, contending that only the
Court, and not the Sandiganbayan, has the power to authorize the PCGG to call a
stockholders meeting and vote the sequestered shares. The Sandiganbayan denied the
motions for reconsideration of prompting Africa to file before the Court a second
petition, challenging the Sandiganbayan Resolutions authorizing the holding of a
stockholders meeting and the one denying the motion for reconsideration.

ISSUE: Whether the PCGG can vote the sequestered ETPI Class “A” shares in the
stockholders meeting for the election of the board of directors.

RULING: The Court developed a “two-tiered” test in determining whether the PCGG
may vote sequestered shares. The issue of whether PCGG may vote the sequestered
shares necessitates a determination of at least two factual matters: a.) whether there is
prima facie evidence showing that the said shares are ill-gotten and thus belong to the
state; and b.) whether there is an immediate danger of dissipation thus necessitating
their continued sequestration and voting by the PCGG while the main issue pends with
the Sandiganbayan.
The two-tiered test, however, does not apply in cases involving funds of “public
character.” In such cases, the government is granted the authority to vote said shares,
namely: (1) Where government shares are taken over by private persons or entities
who/which registered them in their own names, and (2) Where the capitalization or
shares that were acquired with public funds somehow landed in private hands. In short,
when sequestered shares registered in the names of private individuals or entities are
alleged to have been acquired with ill-gotten wealth, then the two-tiered test is applied.
However, when the sequestered shares in the name of private individuals or entities are
shown, prima facie, to have been (1) originally government shares, or (2) purchased
with public funds or those affected with public interest, then the two-tiered test does not
apply.
The rule in the jurisdiction is, therefore, clear. The PCGG cannot perform acts of
strict ownership of sequestered property. It is a mere conservator. It may not vote the
shares in a corporation and elect members of the board of directors. The only
conceivable exception is in a case of a takeover of a business belonging to the
government or whose capitalization comes from public funds, but which landed in
private hands as in BASECO. In short, the Sandiganbayan held that the public
character exception does not apply, in which case it should have proceeded to apply the
two-tiered test. This it failed to do. The questions thus remain if there is prima facie
evidence showing that the subject shares are ill- gotten and if there is
imminent danger of dissipation. The Court is not, however, a trier of facts, hence, it is
not in a position to rule on the correctness of the PCGG’s contention. Consequently, the
issue must be remanded to the Sandiganbayan for resolution.
Republic of the Philippines vs. Cocofed

FACTS: Immediately after the 1986 EDSA Revolution, then President Corazon C.
Aquino issued Executive Orders 1, 5 2 6 and 14. On the explicit premise that vast
resources of the government have been amassed by former President Ferdinand E.
Marcos, his immediate family, relatives, and close associates both here and abroad, the
Presidential Commission on Good Government (PCGG) was created by Executive
Order 1 to assist the President in the recovery of the ill-gotten wealth thus accumulated
whether located in the Philippines or abroad. Among the properties sequestered by the
Commission were shares of stock in the United Coconut Planters Bank (UCPB)
registered in the names of the alleged “one million coconut farmers,” the so-called
Coconut Industry Investment Fund companies (CIIF companies) and Eduardo
Cojuangco Jr. In connection with the sequestration of the said UCPB shares, the PCGG
instituted an action for reconveyance, reversion, accounting, restitution and damages
in the Sandiganbayan. Upon Motion of COCOFED, the Sandiganbayan issued a
Resolution lifting the sequestration of the subject UCPB shares on the ground that
COCOFED and the so-called CIIF companies had not been impleaded by the PCGG as
parties-defendants in its Complaint for reconveyance, reversion, accounting, restitution
and damages. The Sandiganbayan Resolution was challenged by the PCGG in a
Petition for Certiorari in the Supreme Court. Meanwhile, upon motion of Cojuangco, the
anti-graft court ordered the holding of elections for the Board of Directors of UCPB.
However, the PCGG applied for and was granted by this Court a Restraining Order
enjoining the holding of the election. Subsequently, the Court lifted the Restraining
Order and ordered the UCPB to proceed with the election of its board of directors.
Furthermore, it allowed the sequestered shares to be voted by their registered owners.
The victory of the registered shareholders was fleeting because the Court, acting on the
solicitor general’s Motion for Clarification/Manifestation, declaring that “the right of
COCOFED, et. al. to vote stock in their names at the meetings of the UCPB cannot be
conceded at this time. That right still has to be established by them before the
Sandiganbayan. Until that is done, they cannot be deemed legitimate owners of UCPB
stock and cannot be accorded the right to vote them.” The Court rendered its final
Decision nullifying and setting aside the Resolution of the Sandiganbayan which lifted
the sequestration of the subject UCPB shares. A month thereafter, the PCGG —
pursuant to an Order of the Sandiganbayan — subdivided Case 0033 into eight
Complaints. Six years later, the Board of Directors of UCPB received from the ACCRA
Law Office a letter written on behalf of the COCOFED and the alleged nameless one
million coconut farmers, demanding the holding of a stockholders’ meeting for the
purpose of, among others, electing the board of directors. In response, the board
approved a Resolution calling for a stockholders’ meeting on 6 March 2001 at 3 p.m. On
23 February 2001, “COCOFED, et al. and Ballares, et al.” filed the “Class Action
Omnibus Motion” in Sandiganbayan Civil Cases, asking the Sandiganbayan to enjoin
the PCGG from voting the UCPB shares of stock registered in the respective names of
the more than one million coconut farmers; and to enjoin the PCGG from voting the
SMC shares registered in the names of the 14 CIIF holding companies including those
registered in the name of the PCGG. The Sandiganbayan, after hearing the parties on
oral argument, issued the Order, authorizing COCOFED, et. al. and Ballares, et. al. as
well as Cojuangco, as are all other registered stockholders of the United Coconut
Planters Bank, until further orders from the Court, to exercise their rights to vote their
shares of stock and themselves to be voted upon in the United Coconut Planters Bank
(UCPB) at the scheduled Stockholders’ Meeting on 6 March 2001 or on any subsequent
continuation or resetting thereof, and to perform such acts as will normally follow in the
exercise of these rights as registered stockholders. The Republic of the Philippines
represented by the PCGG filed the petition for certiorari.

ISSUE: Whether the PCGG can vote the sequestered UCPB shares.

RULING: The registered owner of the shares of a corporation exercises the right and
the privilege of voting. This principle applies even to shares that are sequestered by the
government, over which the PCGG as a mere conservator cannot, as a general rule,
exercise acts of dominion. On the other hand, it is authorized to vote these sequestered
shares registered in the names of private persons and acquired with allegedly ill-gotten
wealth, if it is able to satisfy the two-tiered test devised by the Court in Cojuangco v.
Calpo and PCGG v. Cojuangco Jr. Two clear “public character” exceptions under which
the government is granted the authority to vote the shares exist (1) Where government
shares are taken over by private persons or entities who/which registered them in their
own names, and (2) Where the capitalization or shares that were acquired with public
funds somehow landed in private hands. The exceptions are based on the
common-sense principle that legal fiction must yield to truth; that public property
registered in the names of non-owners is affected with trust relations; and that the prima
facie beneficial owner should be given the privilege of enjoying the rights flowing from
the prima facie fact of ownership. In short, when sequestered shares registered in the
names of private individuals or entities are alleged to have been acquired with ill-gotten
wealth, then the two-tiered test is applied. However, when the sequestered shares in
the name of private individuals or entities are shown, prima facie, to have been (1)
originally government shares, or (2) purchased with public funds or those affected with
public interest, then the two-tiered test does not apply. Rather, the public character
exceptions in Baseco v. PCGG and Cojuangco Jr. v. Roxas prevail; that is, the
government shall vote the shares. Herein, the money used to purchase the sequestered
UCPB shares came from the Coconut Consumer Stabilization Fund (CCSF), otherwise
known as the coconut levy funds. The sequestered UCPB shares are confirmed to have
been acquired with coco levies, not with alleged ill-gotten wealth. As the coconut levy
funds are not only affected with public interest, but are in fact prima facie public funds,
the Court believes that the government should be allowed to vote the questioned
shares, because they belong to it as the prima facie beneficial and true owner. The
Sandiganbayan committed grave abuse of discretion in grossly contradicting and
effectively reversing existing jurisprudence, and in depriving the government of its right
to vote the sequestered UCPB shares which are prima facie public in character.
JUAN D. EVANGELISTA ET AL vs. RAFAEL SANTOS

FACTS: Vitali Lumber Company, Inc. is a corporation whose majority shareholder is the
defendant who is at the same time, the President, Manager, and Treasurer. The
company was completely ruined because of the defendant’s fault, neglect, and
abandonment. The plaintiffs are minority stockholders who filed for a complaint against
the defendant to: 1. render an account of his administration of the corporate affairs and
assets; 2. pay the value of their respective participation in the company assets on the
basis of the value of the stocks held by each of them; and 3. pay for the costs of the
suit.

ISSUE: Whether or not the plaintiffs have the right to bring an action for damages for
their own benefit.

RULING: No, the plaintiffs have no right to bring an action for damages for their own
benefit. The real party in interest is the corporation. Thus, it is the corporation that has
the right of action for damages. The officers of the corporation are the ones called to
protect the rights of the stockholders, however, in case where such officer refused to
sue or where the demand upon them to file the necessary suit would be futile because
they are the very ones to be sued or because they hold the controlling interest in the
corporation, any of the stockholders is allowed to bring suit for the corporation, thus, the
damages that may be recovered pertains to the corporation and the same is called a
derivative suit. In this case, the plaintiffs-stockholders filed an action for their own
benefit. However, the same cannot be done until all corporate debts, if there is any, are
paid and that the corporation is dissolved.
Francis Chua vs Court of Appeals and Lydia Hao

Not every suit filed in behalf of the corporation is a derivative suit. For a derivative suit to
prosper, it is required that the minority stockholder suing for and on behalf of the
corporation must allege in his complaint that he is suing on a derivative cause of action
on behalf of the corporation and all other stockholders similarly situated who may wish
to join him in the suit.

FACTS: Respondent Lydia Hao, treasurer of Siena Realty Corporation, filed a

complaint charging Francis Chua of four counts of falsification of public documents for
falsifying the Minutes of the Annual Stockholders meeting of the Board of Directors by
causing it to appear in said Minutes that Lydia Hao was present and has participated in
said proceedings, when in fact, as the said accused fully well knew that said Lydia Hao
was never present during the meeting. Hao filed a petition allegedly in her own behalf
and for the benefit of Siena Realty Corporation against Francis Chua. Chua then
alleged among others that the court acted with grave abuse of discretion for allowing
Siena Realty Corporation to be impleaded as co-petitioner although it was not party to
the criminal complaint and respondent had no authority to bring suit in behalf of the
Corporation since there was no Board Resolution authorizing her to file the suit.
Respondent, Hao, countered that the suit was brought under the concept of a
derivative suit.

ISSUE: Whether or not the criminal complaint was in the nature of a derivative
suit.

HELD: No, it was not in the nature of a derivative suit. The case is merely an appeal
on the civil aspect of the criminal cases filed with the RTC of Iloilo for estafa and
falsification of public document. A derivative action is a suit by a shareholder to enforce
a corporate cause of action. The corporation is a necessary party to the suit. And the
relief which is granted is a judgment against a third person in favor of the corporation.
Among the basic requirements for a derivative suit to prosper is that the minority
shareholder who is suing for and on behalf of the corporation must allege in his
complaint that he is suing on a derivative cause of action on behalf of the corporation
and all other shareholders similarly situated who wish to join. In the criminal complaint
filed by herein respondent, nowhere is it stated that she is filing the same in behalf and
for the benefit of the corporation. Thus, the criminal complaint including the civil aspect
thereof could not be deemed in the nature of a derivative suit.
Expert Travel & Tours vs. Court of Appeals

FACTS: Korean Airlines (KAL) is a corporation established and registered in the

Republic of South Korea and licensed to do business in the Philippines. Its general
manager in the Philippines is Suk Kyoo Kim, while its appointed counsel was Atty. Mario
Aguinaldo and his law firm. KAL, through appointed counsel, filed a complaint against
Expert Travel with the RTC for the collection of sum of money. The verification and
certification against forum shopping was signed by the same appointed counsel, who
indicated therein that he was the resident agent and legal counsel of KAL and had
caused the preparation of the complaint. Expert Travel filed a motion to dismiss the
complaint on the ground that the appointed counsel was not authorized to execute the
verification and certificate of non-forum shopping as required by the Rules of Court. KAL
opposed the motion, contending that he is a resident agent and was registered as such
with the SEC as required by the Corporation Code. He also claimed that he had been
authorized to file the complaint through a resolution of the KAL Board of Directors
approved during a special meeting, wherein the board of directors conducted a special
teleconference which he attended. It was also averred that in the same teleconference,
the board of directors approved a resolution authorizing him to execute the certificate of
non-forum shopping and to file the complaint. Suk Kyoo Kim alleged, however, that the
corporation had no written copy of the aforesaid resolution. Trial Court denied motion to
dismiss. Court of Appeals affirms.

ISSUE: Whether or not a special teleconference can be recognized as legitimate means

to approved a board resolution and authorize an agent to execute an act in favor of the
corporation

RULING: YES. In this age of modern technology, the courts may take judicial notice
that business transactions may be made by individuals through teleconferencing.
Teleconferencing and videoconferencing of members of board of directors of private
corporations is a reality, in light of Republic Act No. 8792. The Securities and Exchange
Commission issued SEC Memorandum Circular No. 15, on November 30, 2001,
providing the guidelines to be complied with related to such conferences.
However, in the case at bar, even given the possibility that Atty. Aguinaldo and
Suk Kyoo Kim participated in a teleconference along with the respondent’s Board of
Directors, the Court 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 authorizing Atty. Aguinaldo to file the complaint and execute the required
certification against forum shopping. Facts and circumstances show that there was
gross failure on the part of company to prove that there was indeed a special
teleconference such as failure to produce a written copy of the board resolution via
teleconference.
RAMON A. GONZALES vs. THE PHILIPPINE NATIONAL BANK

FACTS: Petitioner Gonzales instituted a suit, as a taxpayer, against Secretary of Public

Works and Communications, the Commissioner of Public Highways, and PNB for
alleged anomalies committed regarding the bank’s extension of credit to import public
works equipment intended for the massive development program. The petitioner’s
standing was questioned because he did not owned any share in PNB. Consequently,
Petitioner bought one share of PNB stocks in order to gain standing as a stockholder.
Petitioner thereafter sought to inquire and ordered PNB to produce its books and
records which the Bank refused, invoking the provisions from its charter created by
Congress. The petitioner filed petition for mandamus to compel PNB to produce its
books and records. The RTC dismissed the petition and it ruled that the right to examine
and inspect corporate books is not absolute, but is limited to purposes reasonably
related to the interest of the stockholder, must be asked for in good faith for a specific
and honest purpose and not gratify curiosity or for speculative or vicious purposes; that
such examination would violate the confidentiality of the records of the respondent bank
as provided in Section 16 of its charter, Republic Act No. 1300, as amended; and that
the petitioner has not exhausted his administrative remedies.

ISSUE: Whether or not Petitioner may compel PNB to produce its books and records.

RULING: No. As may be noted from the Sec 74 of BP Blg. 68, among the changes
introduced in the new Code with respect to the right of inspection granted to a
stockholder are the following: the records must be kept at the principal office of the
corporation; the inspection must be made on business days; the stockholder may
demand a copy of the excerpts of the records or minutes; and the refusal to allow such
inspection shall subject the erring officer or agent of the corporation to civil and criminal
liabilities. However, while seemingly enlarging the right of inspection, the new Code has
prescribed limitations to the same. It is now expressly required as a condition for such
examination that the one requesting it must not have been guilty of using improperly any
information through a prior examination, and that the person asking for such
examination must be "acting in good faith and for a legitimate purpose in making his
demand." Although the petitioner has claimed that he has justifiable motives in seeking
the inspection of the books of the respondent bank, he has not set forth the reasons and
the purposes for which he desires such inspection, except to satisfy himself as to the
truth of published reports regarding certain transactions entered into by the respondent
bank and to inquire into their validity. The circumstances under which he acquired one
share of stock in the respondent bank purposely to exercise the right of inspection do
not argue in favor of his good faith and proper motivation. Admittedly he sought to be a
stockholder in order to pry into transactions entered into by the respondent bank even
before he became a stockholder. His obvious purpose was to arm himself with materials
which he can use against the respondent bank for acts done by the latter when the
petitioner was a total stranger to the same. He could have been impelled by a laudable
sense of civic consciousness, but it could not be said that his purpose is germane to his
interest as a stockholder. The inspection sought to be exercised by the petitioner
would be violative of the provisions of its charter of PNB. The Philippine National Bank
is not an ordinary corporation. Having a charter of its own, it is not governed, as a rule,
by the Corporation Code of the Philippines. Section 4 of the said Code provides:

SEC. 4. Corporations created by special laws or charters. — Corporations created by

special laws or charters shall be governed primarily by the provisions of the special law
or charter creating them or applicable to them, supplemented by the provisions of this
Code, insofar as they are applicable. The provision of Section 74 of Batas Pambansa
Blg. 68 of the new Corporation Code with respect to the right of a stockholder to
demand an inspection or examination of the books of the corporation may not be
reconciled with the abovequoted provisions of the charter of the respondent bank. It is
not correct to claim, therefore, that the right of inspection under Section 74 of the new
Corporation Code may apply in a supplementary capacity to the charter of the
respondent bank.

WHEREFORE, the petition is hereby DISMISSED, without costs.

CLOSE CORPORATIONS

1. Manuel R. Dulay Enterprises vs. Court of Appeals

FACTS: Manuel R. Dulay Enterprises, Inc., a domestic corporation with the following as
members of its Board of Directors: Manuel R. Dulay with 19,960 shares and designated
as president, treasurer and general manager; Atty. Virgilio E. Dulay with 10 shares and
designated as vice-president; Linda E. Dulay with 10 shares; Celia Dulay-Mendoza with
10 shares; and Atty. Plaridel C. Jose with 10 shares and designated as secretary,
owned a property covered by TCT 17880 4 and known as Dulay Apartment consisting
of 16 apartment units on a 689 square meter lot, more or less, located at Seventh Street
(now Buendia Extension) and F.B. Harrison Street, Pasay City. The corporation through
its president, Manuel Dulay, obtained various loans for the construction of its hotel
project, Dulay Continental Hotel (now Frederick Hotel). It even had to borrow money
from Virgilio Dulay to be able to continue the hotel project. As a result of said loan,
Virgilio Dulay occupied one of the unit apartments of the subject property since 1973
while at the same time managing the Dulay Apartment as his shareholdings in the
corporation that was subsequently increased by his father.
On 23 December 1976, Manuel Dulay by virtue of Board Resolution 18 of the
corporation sold the subject property to spouses Maria Theresa and Castrense Veloso
in the amount of P300,000.00 as evidenced by the Deed of Absolute Sale. Thereafter,
TCT 17880 was cancelled and TCT 23225 was issued to Maria Theresa Veloso.
Subsequently, Manuel Dulay and the spouses Veloso executed a Memorandum to the
Deed of Absolute Sale giving Manuel Dulay within two (2) years to repurchase the
subject property for P200,000.00 which was, however, not annotated either in TCT
17880 or TCT 23225. Maria Veloso, without the knowledge of Manuel Dulay, mortgaged
the subject property to Manuel A. Torres for a loan of P250,000.00 which was duly
annotated as Entry 68139 in TCT 23225. Upon the failure of Maria Veloso to pay
Torres, the subject property was sold to Torres as the highest bidder in an extrajudicial
foreclosure sale as evidenced by the Certificate of Sheriff's Sale issued on 20 April
1978.
Maria Veloso executed a Deed of Absolute Assignment of the Right to Redeem in
favor of Manuel Dulay assigning her right to repurchase the subject property from
Torres as a result of the extrajudicial sale. As neither Maria Veloso nor her assignee
Manuel Dulay was able to redeem the subject property within the one year statutory
period for redemption, Torres filed an Affidavit of Consolidation of Ownership with the
Registry of Deeds of Pasay City and TCT 24799 was subsequently issued to Torres.
Later, Torres filed a petition for the issuance of a writ of possession against spouses
Veloso and Manuel Dulay in LRC Case. However, when Virgilio Dulay appeared in court
to intervene in said case alleging that Manuel Dulay was never authorized by the
corporation to sell or mortgage the subject property, the trial court ordered Torres to
implead the corporation as an indispensable party but the latter moved for the dismissal
of his petition which was granted in an Order. Torres and Edgardo Pabalan, real estate
administrator of Torres, filed an action against the corporation, Virgilio Dulay and
Nepomuceno Redovan, a tenant of Dulay Apartment Unit No. 8-A for the recovery of
possession, sum of money and damages with preliminary injunction.
 The corporation filed an action against spouses Veloso and Torres for the
cancellation of the Certificate of Sheriff's Sale and TCT 24799 with the then Court of
First Instance of Rizal. On 29 January 1981, Pabalan and Torres filed an action against
spouses Florentino and Elvira Manalastas, a tenant of Dulay Apartment Unit No. 7-B,
with the corporation as intervenor for ejectment in Civil Case 38-81 with the
Metropolitan Trial Court of Pasay City which rendered a decision on 25 April 1985, in
favor of Pabalan, et al., ordering the spouses Manalastas and all persons claiming
possession under them to vacate the premises; and to pay the rents in the sum of
P500.00 a month from May 1979 until they shall have vacated the premises with
interest at the legal rate; and to pay attorney's fees in the sum of P2,000.00 and
P1,000.00 as other expenses of litigation and for them to pay the costs of the suit.
Thereafter or on 17 May 1985, the corporation and Virgilio Dulay filed an action
against the presiding judge of the Metropolitan Trial Court of Pasay City, Pabalan and
Torres for the annulment of said decision with the Regional Trial Court of Pasay in Civil
Case 2880-P. Thereafter, the 3 cases were jointly tried and the trial court rendered a
decision in favor of Pabalan and Torres. Not satisfied with said decision, the
corporation, et al. appealed to the Court of Appeals which rendered a decision on 23
October 1989, affirming the trial court decision. On 8 November 1989, the corporation,
et al. filed a Motion for Reconsideration which was denied on 26 January 1990. The
corporation, et al. filed the petition for review on certiorari. During the pendency of the
petition, Torres died on 3 April 1991 as shown in his death certificate and named
Torres-Pabalan Realty & Development Corporation as his heir in his holographic will
dated 31 October 1986.

Issue: Whether or not the sale of the subject property between spouses Veloso and
Manuel Dulay has no binding effect on the corporation as Board Resolution 18 which
authorized the sale of the subject property was resolved without the approval of all the
members of the board of directors and said Board Resolution was prepared by a person
not designated by the corporation to be its secretary.

RULING: No, the sale is binding and valid, Section 101 of the Corporation Code of
the Philippines provides that "When board meeting is unnecessary or improperly held.
Unless the by-laws provide otherwise, any action by the directors of a close corporation
without a meeting shall nevertheless be deemed valid if: (1) Before or after such action
is taken, written consent thereto is signed by all the directors; or (2) All the stockholders
have actual or implied knowledge of the action and make no prompt objection thereto in
writing; or (3) The directors are accustomed to take informal action with the express or
implied acquiesce of all the stockholders; or (4) All the directors have express or implied
knowledge of the action in question and none of them makes prompt objection thereto
in writing. If a directors' meeting is held without proper call or notice, an action taken
therein within the corporate powers is deemed ratified by a director who failed to attend,
unless he promptly files his written objection with the secretary of the corporation after
having knowledge thereof."
Herein, the corporation is classified as a close corporation and consequently, a
board resolution authorizing the sale or mortgage of the subject property is not
necessary to bind the corporation for the action of its president. At any rate, a corporate
action taken at a board meeting without proper call or notice in a close corporation is
deemed ratified by the absent director unless the latter promptly files his written
objection with the secretary of the corporation after having knowledge of the meeting
which, in this case, Virgilio Dulay failed to do. The corporation's claim that the sale of
the subject property by its president, Manuel Dulay, to spouses Veloso is null and void
as the alleged Board Resolution 18 was passed without the knowledge and consent of
the other members of the board of directors cannot be sustained. Virgilio E. Dulay's
protestations of complete innocence to the effect that he never participated nor was
even aware of any meeting or resolution authorizing the mortgage or sale of the subject
premises is difficult to believe. On the contrary, he is very much privy to the transactions
involved. To begin with, he is an incorporator and one of the board of directors
designated at the time of the organization of Manuel R. Dulay Enterprises, Inc. In
ordinary parlance, the said entity is loosely referred to as a "family corporation." The
nomenclature, if imprecise, however, fairly reflects the cohesiveness of a group and the
parochial instincts of the individual members of such an aggrupation of which Manuel R.
Dulay Enterprises, Inc. is typical: four-fifths of its incorporators being close relatives
namely, 3 children and their father whose name identifies their corporation. Besides, the
fact that Virgilio Dulay on 24 June 1975 executed an affidavit that he was a signatory
witness to the execution of the post-dated Deed of Absolute Sale of the subject property
in favor of Torres indicates that he was aware of the transaction executed between his
father and Torres and had, therefore, adequate knowledge about the sale of the subject
property to Torres. Consequently, the corporation is liable for the act of Manuel Dulay
and the sale of the subject property to Torres by Manuel Dulay is valid and binding.
2. San Juan Structural and Steel Fabricators, Inc. vs Court of Appeals

FACTS: In 1989, San Juan Structural and Steel Fabricators, Inc. (San Juan) alleged
that it entered into a contract of sale with Motorich Sales Corporation (Motorich) through
the latter’s treasurer, Nenita Gruenberg. The subject of the sale was a parcel of land
owned by Motorich. San Juan advanced P100k to Nenita as earnest money. On the day
agreed upon on which Nenita was supposed to deliver the title of the land, Nenita did
not show up. Nenita and Motorich did not heed the subsequent demand of San Juan to
comply with the contract. Hence, San Juan sued Motorich. Motorich, in its defense,
argued that it is not bound by the acts of its treasurer, Nenita, since her act in
contracting with San Juan was not authorized by the corporate board. San Juan raised
the issue that Nenita was actually the wife of the President of Motorich; that Nenita and
her husband owns 98% of the corporation’s capital stocks; that as such, it is a close
corporation and that makes Nenita and the President as principal stockholders who do
not need any authorization from the corporate board; that in this case, the corporate veil
may be properly pierced.

ISSUE: Whether or not San Juan is correct

HELD: No. Section 96 of the Corporation Code defines a close corporation as follows:
SEC. 96. Definition and Applicability of Title. -- A close corporation, within the meaning
of this Code, is one whose articles of incorporation provide that: (1) All of the
corporations issued stock of all classes, exclusive of treasury shares, shall be held of
record by not more than a specified number of persons, not exceeding twenty (20); (2)
All of the issued stock of all classes shall be subject to one or more specified restrictions
on transfer permitted by this Title; and (3) The corporation shall not list in any stock
exchange or make any public offering of any of its stock of any class. Notwithstanding
the foregoing, a corporation shall be deemed not a close corporation when at least
two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another
corporation which is not a close corporation within the meaning of this Code. xxx.

The articles of incorporation of Motorich Sales Corporation does not contain any
provision stating that (1) the number of stockholders shall not exceed 20, or (2) a
preemption of shares is restricted in favor of any stockholder or of the corporation, or (3)
listing its stocks in any stock exchange or making a public offering of such stocks is
prohibited. From its articles, it is clear that Respondent Motorich is not a close
corporation. Motorich does not become one either, just because Spouses Reynaldo and
Nenita Gruenberg owned 99.866% of its subscribed capital stock. The mere ownership
by a single stockholder or by another corporation of all or nearly all of the capital stock
of a corporation is not of itself sufficient ground for disregarding the separate corporate
personalities. So too, a narrow distribution of ownership does not, by itself, make a
close corporation.
RELIGIOUS CORPORATIONS

IGLESIA EVANGELICA METODISTA EN LAS ISLAS FILIPINAS (IEMELIF), INC. ET

AL. vs. BISHOP NATHANAEL LAZARO

FACTS: Thirty-nine years after the IEMELIF was established, it enacted and registered
by-laws that established a Consistory of Elders, made up of church ministers, who were
to serve for a period of four years. The by-laws empowered the consistory to elect
officers who would manage the affairs of the organization. The Consistory served as the
IEMELIF’s board of directors. Apparently, although the corporation remained a
corporation sole on paper, it had always acted like a corporation aggregate. During
corporation’s general conference, the general membership voted to change the
organizational structure of the corporation from corporation sole to corporation
aggregate which was approved by the Securities and Exchange Commission. However,
the corporate papers remained unaltered as a corporation sole. The issue reemerged
twenty-eight years after. The SEC maintained that, although the SEC Commissioner did
not object to the conversion, the conversion was not properly carried out and
documented. The SEC said that corporation needed to amend its articles of
incorporation for that purpose. The Consistory resolved for the conversion of the
corporation into a corporation aggregate. After the approval of the general membership
of the corporation, it filed an amended articles of incorporation with the SEC. Petitioners
Reverend Pineda, et al., filed a civil case. Petitioners claimed that a complete shift from
a corporation sole to corporation aggregate required, not just an amendment, but a
complete dissolution of the existing corporation followed by a re-incorporation.

ISSUE: Whether or not a corporation sole may be converted into a corporation

aggregate by mere amendment of its articles of incorporation?

RULING: YES. A corporation may change its character as a corporation sole into a
corporation aggregate by mere amendment of its articles of incorporation. As correctly
held by the trial court, Section 109 of the Corporation Code allows the application to
religious corporations of the general provisions governing non-stock corporations. For
non-stock corporation, the power to amend lies in its members. Evidence shows that the
Corporation’s General Superintendent, respondent Bishop Lazaro, who embodied the
corporation sole, had obtained, not only the approval of the consistory, but also that of
the required two-thirds vote of its members. Furthermore, the corporation worked out
the amendment upon the initiative and advice of the SEC. The Court recognized SEC’s
interpretation and application of the Code. Considering its experience and specialized
capabilities in the area of corporation law, the SEC’s prior action on the corporation
issue should be accorded great weight.
DISSOLUTION

GELANO vs COURT OF APPEALS

FACTS: Insular Sawmill, Inc. (ISI) is a corporation organized in 1945 with a corporate
life of 50 years, with the primary purpose of carrying on a general lumber and sawmill
business. To carry on this business, ISI leased the paraphernal property of Carlos
Gelano's wife Guillermina Mendoza-Gelano for P1,200.00 a month. Carlos Gelano
obtained from ISI cash advances of P25,950.00. The said sum was taken and received
by Carlos Gelano on the agreement that ISI could deduct the same from the monthly
rentals of the leased premises until said cash advances are fully paid. Out of the
aforementioned cash advances in the total sum of P25,950.00, Carlos Gelano was able
to pay only P5,950.00 thereby leaving an unpaid balance of P20,000.00 which he
refused to pay despite repeated demands by ISI. Guillermina M. Gelano refused to pay
on the ground that said amount was for the personal account of her husband asked for
by, and given to him, without her knowledge and consent and did not benefit the family.

ISI, thru Atty. German Lee, filed a complaint for collection against the spouses. Trial
was held and when the case was at the stage of submitting memorandum, Atty. Lee
retired from active law practice and Atty. Eduardo F. Elizalde took over and prepared
memorandum. In the meantime, ISI amended its Articles of Incorporation to shorten its
term of existence up to 1960 only. The amended Articles of Incorporation was filed with,
and approved by the Securities and Exchange Commission, but the trial court was not
notified of the amendment shortening the corporate existence and no substitution of
party was ever made. Almost 4 years after the dissolution of the corporation, the trial
court rendered a decision in favor of ISI. The court dismissed the counterclaims of the
spouses. Both parties appealed to the Court of Appeals, with ISI appealing because it
insisted that both Carlos Gelano and Guillermina Gelano should be held liable for the
substantial portion of the claim. The Court of Appeals rendered a decision modifying the
judgment of the trial court by holding the spouses jointly and severally liable on ISI's
claim and increasing the award. After the spouses received a copy of the decision in
1973, they came to know that the ISI was dissolved way back on 31 December 1960.
Hence, the spouses filed a motion to dismiss the case and or reconsideration of the
decision of the Court of Appeals on grounds that the case was prosecuted even after
dissolution of ISI as a corporation and that a defunct corporation cannot maintain any
suit for or against it without first complying with the requirements of the winding up of
the affairs of the corporation and the assignment of its property rights within the required
period.

Issue: Whether or not a corporation, whose corporate life had ceased by the
expiration of its terms of existence, could still continue prosecuting and
defending suits after its dissolution and beyond the period of 3 years to wind up
its affairs, without having undertaken any step to transfer its assets to a trustee
or assignee

Ruling: YES. When ISI was dissolved on 31 December 1960, under Section 77 of the
Corporation Law, it still has the right until 31 December 1963 to prosecute in its name
the present case. After the expiration of said period, the corporation ceased to exist for
all purposes and it can no longer sue or be sued. However, a corporation that has a
pending action and which cannot be terminated within the 3-year period after its
dissolution is authorized under Section 78 to convey all its property to trustees to enable
it to prosecute and defend suits by or against the corporation beyond the 3-year period.
Although ISI did not appoint any trustee, yet the counsel who prosecuted and defended
the interest of the corporation in the present case and who in fact appeared in behalf of
the corporation may be considered a trustee of the corporation at least with respect to
the matter in litigation only. Said counsel had been handling the case when the same
was pending before the trial court until it was appealed before the Court of Appeals and
finally to the Supreme Court. Therefore, there was a substantial compliance with
Section 78 of the Corporation Law and as such, ISI could still continue prosecuting the
present case even beyond the period of 3 years from the time of its dissolution. Further,
the case was instituted on 29 May 1959, during the time when the corporation was still
very much alive. Any litigation filed by or against it instituted within the period, but which
could not be terminated, must necessarily prolong that period until the final termination
of said litigation as otherwise corporations in liquidation would lose what should justly
belong to them or would be exempt from the payment of just obligations through a mere
technicality, something that courts should prevent.
VESAGAS VS. CA

FACTS: The respondent spouses Delfino and Helenda Raniel are members in good
standing of the Luz Villaga Tennis Club, Inc. (club). They alleged that Teodoro Vesagas
and Wilfredo Asis as the President and Vice President of the club respectively,
summarily stripped them of their lawful membership, without due process of law.
Thereafter, respondent spouses filed a Complaint with the Securities and Exchange
Commission (SEC) against the petitioners. In this case, respondents asked the
Commission to declare as illegal their expulsion from the club as it was allegedly done
in utter disregard of the provisions of its by-laws as well as the requirements of due
process. Before the hearing officer could start proceeding with the case, petitioners filed
a motion to dismiss on the ground that SEC lacks jurisdiction over the subject matter of
the case. They claim that while the club may be have been considered a corporation, at
the time of the institution of this case with the SEC, the club was already dissolved by
virtue of a Board resolution. Hence, this petition.

ISSUE: Whether or not the corporation was validly dissolved

RULING: No. Section 118 of the Corporation Code establishes the procedure and other
formal requirements a corporation needs to follow in case it elects to dissolve and
terminate its structure voluntarily and where no rights of creditors may possibly be
prejudiced.
The Court note that to substantiate their claim of dissolution, petitioners submitted
only two relevant documents: the Minutes of the First Board Meeting and the board
resolution which declared "to continue to consider the club as a non-registered or a
non-corporate entity and just a social association of respectable and respecting
individual members who have associated themselves, since the 1970's, for the purpose
of playing the sports of tennis x x x." Obviously, these two documents will not suffice.
The requirements mandated by the Corporation Code should have been strictly
complied with by the members of the club. The records reveal that no proof was offered
by the petitioners with regard to the notice and publication requirements. Similarly
wanting is the proof of the board members' certification. Lastly, and most important of
all, the SEC Order of Dissolution was never submitted as evidence.

DISPOSITIVE PORTION: IN VIEW WHEREOF, finding no cogent reason to disturb the

assailed Decision, the petition is DENIED.
PHILIPPINE VETERANS BANK EMPLOYEES UNION-N.U.B.E. and PERFECTO V.
FERNANDEZ vs. HONORABLE BENJAMIN VEGA

FACTS: The Central Bank of the Philippines filed with Branch 39 of the RTC of Manila a
Petition for Assistance in the Liquidation of the Philippine Veterans Bank. Thereafter,
the Philippine Veterans Bank Employees Union-N.U.B.E. (PVBEU-NUBE), represented
by Perfecto V. Fernandez, filed claims for accrued and unpaid employee wages and
benefits with said court. After lengthy proceedings, partial payment of the sums due to
the employees were made. However, due to the piecemeal hearings on the benefits,
many remain unpaid. PVBEU-NUBE Fernandez moved to disqualify the Judge
Benjamin Vega from hearing the above case on grounds of bias and hostility towards
petitioners. In 1992, the Congress enacted Republic Act 7169 providing for the
rehabilitation of the Philippine Veterans Bank. The law likewise provides for the creation
of a rehabilitation committee in order to facilitate the implementation of the provisions of
the same. Pursuant to this, the Rehabilitation Committee submitted the proposed
Rehabilitation Plan of the PVB to the Monetary Board for its approval. Thereafter,
PVBEU-NUBE and Fernandez filed with the labor tribunals their residual claims for
benefits and for reinstatement upon reopening of the bank. Meanwhile, PVB filed a
Motion to Terminate Liquidation of Philippine Veterans Bank with Judge Vega praying
that the liquidation proceedings be immediately terminated in view of the passage of RA
7169. The Monetary Board issued a resolution which approved the Rehabilitation Plan
submitted by the Rehabilitation Committee. Thereafter, the Monetary Board issued a
Certificate of Authority allowing PVB to reopen. Despite the legislative mandate for
rehabilitation and reopening of PVB, Judge Vega continued with the liquidation
proceedings of the bank. Thereafter, the liquidator filed A Motion for the Termination of
the Liquidation Proceedings of the Philippine Veterans Bank with Judge Vega.

ISSUE: Whether a liquidation court can continue with liquidation proceedings of

the Philippine Veterans Bank (PVB) when Congress had mandated its
rehabilitation and reopening.

RULING: NO. The enactment of Republic Act 7169, as well as the subsequent
developments has rendered the liquidation court functus officio. Consequently, Judge
Vega has been stripped of the authority to issue orders involving acts of liquidation.
Liquidation, in corporation law, connotes a winding up or settling with creditors and
debtors. It is the winding up of a corporation so that assets are distributed to those
entitled to receive them. It is the process of reducing assets to cash, discharging
liabilities and dividing surplus or loss. On the opposite end of the spectrum is
rehabilitation which connotes a reopening or reorganization. Rehabilitation
contemplates a continuance of corporate life and activities in an effort to restore and
reinstate the corporation to its former position of successful operation and solvency. It is
crystal clear that the concept of liquidation is diametrically opposed or contrary to the
concept of rehabilitation, such that both cannot be undertaken at the same time. To
allow the liquidation proceedings to continue would seriously hinder the rehabilitation of
the subject bank.
TAN TIONG BIO, ET AL. vs. COMMISSIONER OF INTERNAL REVENUE (CIR)
FACTS: Petitioners were the incorporators and directors of Central Syndicate, a
corporation organized under the laws of the Philippines. Thru its General Manager, the
corporation sent a letter to the CIR advising the latter that it purchased from Dee Hong
Lue the entire stock of surplus properties which the said Dee Hong Lue had bought from
the Foreign Liquidation Commission and that as it assumed Dee Hong Lue's obligation
to pay the 3-1/2% sales tax on said surplus goods, it was remitting the sum of
P43,750.00 as deposit to answer for the payment of said sales tax with the
understanding that it would later be adjusted after the determination of the exact
consideration of the sale. The syndicate again wrote the Collector requesting the refund
of P1,103.28 representing alleged excess payment of sales tax due to the adjustment
and reduction of the purchase price in the amount of P31,522.18. The letter was
referred to an agent for verification and report, and it found out: (1) that Dee Hong Lue
purchased the surplus goods as trustee for the Central Syndicate which was in the
process of organization at the time of the bidding; (2) that the syndicate must have
realized a gross profit of 18.8% from its sales thereof; and (3) that if the sales tax were
to be assessed on its gross sales it would still be liable for the amount of P33,797.88 as
deficiency sales tax and surcharge in addition to the amount of P43,750.00 which the
corporation had deposited in the name of Dee Hong Lue as estimated sales tax due
from the latter. Later, the Collector decided that the Central Syndicate was the importer
and original seller of the surplus goods in question and, therefore, the one liable to pay
the sales tax. The Central Syndicate elevated the case before the CTA questioning the
ruling of the Collector which denies its claim for refund as well as the assessment made
against it of the sum of P33,797.88, plus the sum of P300.00 as compromise penalty.
The CTA rendered decision affirming the decision of the Collector of Internal Revenue.
Hence, this petition.

ISSUE: Whether or not the sales tax in question be enforced against the petitioners
(incorporators), notwithstanding the fact that the Central Syndicate was already
dissolved due to the expiration of its corporate existence.

RULING: Yes. The creditor of a dissolved corporation may follow its assets once they
passed into the hands of the stockholders. The hands of the government cannot, of
course, collect taxes from a defunct corporation, it loses thereby none of its rights to
assess taxes which had been due from the corporation, and to collect them from
persons who, by reason of transactions with the corporation, hold property against
which the tax can be enforced and that the legal death of the corporation no more
prevents such action than would the physical death of an individual prevent the
government from assessing taxes against him and collecting them, from his
administrator who holds the property which the decedent had formerly possessed.

The net profit remained intact and was distributed among the stockholders when
the corporation liquidated and distributed its assets, immediately after the sale of the
said surplus goods. Petitioners are therefore the beneficiaries of the defunct corporation
and as such should be held liable to pay the taxes in question. However, there being no
express provision requiring the stockholders of the corporation to be solidarily liable for
its debts which liability must be express and cannot be presumed, petitioners should be
held to be liable for the tax in question only in proportion to their shares in the
distribution of the assets of the defunct corporation.
CRISOSTOMO REBOLLIDO, FERNANDO VALENCIA and EDWIN REBOLLIDO vs.
HONORABLE COURT OF APPEALS and PEPSICO, INC.

FACTS: Petitioners filed Civil Case No. 8113 for damages against Pepsi Cola Bottling
Company of the Philippines, Inc. (hereinafter referred to as Pepsi Cola) and Alberto
Alva before the Regional Trial Court of Makati. The case arose out of a vehicular
accident involving a Mazda Minibus used as a school bus owned and driven by
petitioners Crisostomo Rebollido and Fernando Valencia, respectively and a truck trailer
owned at that time by Pepsi Cola and driven by Alberto Alva. The sheriff of the lower
court served the summons addressed to the defendants. It was received by one
Nanette Sison who represented herself to be the authorized person receiving court
processes as she was the secretary of the legal department of Pepsi Cola. Pepsi Cola
failed to file an answer and was later declared in default. The lower court heard the case
ex-parte and adjudged the defendants jointly and severally liable for damages. When
the default judgment became final and executory, the petitioners filed a motion for
execution, a copy of which was received no longer by the defendant Pepsi Cola,
because in the meantime Pepsi Cola was dissolved, but by private respondent
PEPSICO, Inc. PEPSICO, a foreign corporation organized under the laws of the State
of Delaware, USA, held offices here for the purpose, among others, of settling Pepsi
Cola's debts, liabilities and obligations which it assumed in a written undertaking
executed, preparatory to the expected dissolution of Pepsi Cola. PEPSICO in its motion
to vacate judgement, alleged among others that there was improper service of
summons, because it was served upon a mere clerk of the corporation and hence, the
court had no jurisdiction.
RTC denied.
CA reversed and set aside the ruling of the RTC that any judgment rendered against
Pepsi Cola after its dissolution is a "liability" of the private respondent PEPSICO within
the contemplation of the undertaking, but service of summons should be made upon the
private respondent itself in accordance with Section 14, Rule 14 of the Rules of Court.

ISSUES:
1. Whether or not Pepsi Cola, the dissolved corporation, is the real party in interest to
whom summons should be served in the civil case for damages; and
2. Whether or not there was valid service of summons through Nanette Sison, allegedly
the secretary of the legal department of Pepsi Cola. If there was valid service of
summons upon Pepsi Cola, the issue arises as to whether or not such service validly
vested jurisdiction on the lower court over the person of the respondent corporation.

RULING:
1. YES.
The real party-in-interest is the party who stands to be benefited or injured by the
judgment or the party entitled to the avails of the suit. A real party in interest-plaintiff is
one who has a legal right while a real party in interest-defendant is one who has a
correlative legal obligation whose act or omission violates the legal rights of the former.
For purposes of valid summons, the dissolved Pepsi Cola was the real party in
interest-defendant in the civil case filed by the petitioners not only because it is the
registered owner of the truck involved but also because, when the cause of action
accrued, Pepsi Cola still existed as a corporation and was the party involved in the acts
violative of the legal right of another.

2. YES.
Since our law recognizes the liability of a dissolved corporation to an aggrieved creditor,
it is but logical for the law to allow service of process upon a dissolved corporation.
Section 13, Rule 14 mandates:
Service upon private domestic corporation or partnership. - If the
defendant is a corporation organized under the laws of the Philippines or a
partnership duly registered, service may be made on the president,
manager, secretary , cashier, agent or any of its directors.
The case of Castle's Administrator v. Acrogen Coal Co. (supra), is illustrative of the
manner by which service can nevertheless be made despite the death of the entity:
[W]hen an action that might have been instituted against a foreign or
domestic corporation while it was a going concern is instituted after its
dissolution, process in the action may be served upon the same person
upon whom the process could be served before the dissolution.
Whomsoever Miss Sison was acting for in receiving the summons there is no question
that the notice of the action was promptly delivered either to Pepsi Cola or PEPSICO
with whom she is admittedly connected. We rule, as in G & G Trading Corporation v.
Court of Appeals (supra), that there was substantial compliance with Section 13, Rule
14 because the purpose of notice was satisfied. Contrary to the decision of the Court of
Appeals, we therefore, hold that there was proper service of summons to bind Pepsi
Cola and that the decision of the lower court against Pepsi Cola rendered on June 24,
1985 is valid and enforceable against the private respondent.
CLARION PRINTING HOUSE, INC., and EULOGIO YUTINGCO vs. THE
HONORABLE NATIONAL LABOR RELATIONS COMMISSION (Third Division) and
MICHELLE MICLAT

Facts: On 1997, Michelle Miclat was employed on a probationary basis as marketing

assistant with a monthly salary of P6,500.00 by Clarion Printing House (CLARION)
owned by its Eulogio Yutingco. At the time of her employment, she was not informed of
the standards that would qualify her as a regular employee.
On September 16, 1997, the EYCO Group of Companies of which CLARION
formed part filed with the Securities and Exchange Commission (SEC) a Petition for the
Declaration of Suspension of Payment, Formation and Appointment of Rehabilitation
Receiver/ Committee, Approval of Rehabilitation Plan with Alternative Prayer for
Liquidation and Dissolution of Corporation which was granted by the latter.
Thereafter, EYCO Group of Companies issued to its employees the a
Memorandum which formally announce the entry of the Interim Receiver
Group represented by SGV.
On October 22, 1997, the Assistant Personnel Manager of CLARION informed
Miclat by telephone that her employment contract had been terminated. No reason was
given for the termination.
The following day, on reporting for work, Miclat was informed by the General Sales
Manager that her termination was part of CLARIONs cost-cutting measures.
Hence, Miclat filed a complaint for illegal dismissal against CLARION and Yutingco
before the National Labor Relations Commission (NLRC).
In the meantime, the EYCO Group of Companies issued a Memorandum addressed
to company managers advising them of a temporary partial shutdown of some
operations of the Company.
NLRC rendered decision in favor of Miclat. Clarion contended that it was placed
under receivership thereby evidencing the fact that it sustained business losses to
warrant the termination of Miclat from her employment. Hence, this petition.
Issue:
Whether or not Clarion was placed under the receivership thereby evidencing the
fact that it sustained business losses to warrant the termination of Miclat from her
employment.
Held:
According to P.D. No. 902-A, as amended, the appointment of a receiver or
management committee by the SEC presupposes a finding that, inter alia, a company
possesses sufficient property to cover all its debts but “foresees the impossibility of
meeting them when they respectively fall due” and “there is imminent danger of
dissipation, loss, wastage or destruction of assets of other properties or paralization of
business operations.”

However, ART. 283 of the Labor Code states:

CLOSURE OF ESTABLISHMENT AND REDUCTION OF PERSONNEL. – The

employer may also terminate the employment of any employee due to the installation of
labor saving devices, redundancy,retrenchment to prevent losses or the closing or
cessation of operation of the establishment or undertaking unless the closing is for the
purpose of circumventing the provisions of this Title, by serving a written notice on the
worker and the Ministry of Labor and Employment at least one (1) month before the
intended date thereof. x x x (Emphasis and underscoring supplied)

CLARION [however] failed to comply with the notice requirement provided for in Article
283 of the Labor Code.

Stated differently, Miclat’s termination is justified, because of financial difficulties of the

company, but failure to give the required notice by Clarion is sufficient to entitle her to
payment of 13th month pay, separation pay and others.

**

With the appointment of a management receiver, all claims and proceedings against
CLARION, including labor claims, were deemed suspended during the existence of the
receivership. The labor arbiter, the NLRC, as well as the CA should not have proceeded
to resolve respondent’s complaint for illegal dismissal and should instead have directed
respondent to lodge her claim before the then duly-appointed receiver of CLARION. To
still require respondent, however, at this time to refile her labor claim against CLARION
under the peculiar circumstances of the case — that 8 years have lapsed since her
termination and that all the arguments and defenses of both parties were already
ventilated before the labor arbiter, NLRC and the CA; and that CLARION is already in
the course of liquidation — this Court deems it most expedient and advantageous for
both parties that CLARION’s liability be determined with finality, instead of still requiring
respondent to lodge her claim at this time before the liquidators of CLARION which
would just entail a mere reiteration of what has been already argued and pleaded.
Furthermore, it would be in the best interest of the other creditors of CLARION that
claims against the company be finally settled and determined so as to further expedite
the liquidation proceedings. For the lesser number of claims to be proved, the sooner
the claims of all creditors of CLARION are processed and settled.
LINGKOD MANGGAGAWA SA RUBBERWORLD, ADIDAS-ANGLO, its officers and
members as represented by SONIA ESPERANZA vs. RUBBERWORLD (PHILS.)
INC. and ANTONIO YANG, LAYA MANANGHAYA SALGADO & CO., CPA’s (In its
capacity as liquidator of Rubberworld (Phils., Inc.)

FACTS: On August 26, 1994, Rubberworld filed with the DOLE a Notice of Temporary
Partial Shutdown due to severe financial crisis. They announced the formal actual
company shutdown and serve a copy of which on the recognized labor union of
Rubberworld, the Bisig Pagkakaisa-NAFLU, the union with which the corporation had a
collective bargaining agreement. Subsequently, the said union staged a strike, set up a
picket line in front of the premises of Rubberworld and even welded its gate. As a result,
Rubberworld's premises were closed prematurely even before the date set for the start
of its temporary partial shutdown. On September 9, 1994, herein petitioner union, the
Lingkod Manggagawa Sa Rubberworld, AdidasAnglo (Lingkod, for brevity), represented
by its President, Sonia Esperanza, filed a complaint against Rubberworld and its Vice
Chairperson, Mr. Antonio Yang, for unfair labor practice (ULP), illegal shutdown, and
non-payment of salaries and separation pay. The said complaint was referred to Labor
Arbiter Ernesto Dinopol for appropriate action. While the aforementioned complaint was
pending, Rubberworld filed with the SEC a Petition for Declaration of a State of
Suspension of Payments with Proposed Rehabilitation Plan, which was granted by the
SEC. However, LA Dinopol went ahead with the ULP case and rendered his decision
denying respondents motion to suspend proceedings and declaring respondent
Rubberworld Phils., Inc. to have committed unfair labor practice. The SEC declared as
DISSOLVED the Rubberworld under Section 6(d) of P.D. 902-A. Accordingly, the
suspension Order is LIFTED. Eventually, in the herein assailed Decision dated January
18, 2002, the CA granted Rubberworld’s petition in CA–G.R. SP. No. 53356 on the
finding that the Labor Arbiter had indeed committed grave abuse of discretion when it
proceeded with the ULP case despite the SEC’s suspension order of December 28,
1994, and accordingly declared the proceedings before it, including the subsequent
orders by the NLRC dismissing Rubberworld’s appeal and the writ of execution, null and
void. Hence, the petition was filed. ISSUES: 1) Whether the CA had committed grave
abuse of discretion amounting to lack of jurisdiction or an excess in the exercise thereof
when it gave due course to the petition filed by Rubberworld (Phils.), Inc. and annulled
and set aside the decisions rendered by the labor arbiter a quo and the NLRC, when the
said decisions had become final and executory warranting the outright dismissal of the
aforesaid petition; 2) Whether the CA had committed grave abuse of discretion and
reversible error when it applied Section 5(d) and Section 6 (c) of P.D. No. 902-A, as
amended, to the case at bar; RULING: 1. NO.. CA did not commit grave abuse of
discretion. The decision of the Labor Arbiter, or the decision/dismissal order and writ of
execution issued by the NLRC, could never attain final and executory status. The Labor
Arbiter completely disregarded and violated Section 6(c) of Presidential Decree 902-A,
as amended, which categorically mandates the suspension of all actions for claims
against a corporation placed under a management committee by the SEC. Thus, the
proceedings before the Labor Arbiter and the order and writ subsequently issued by the
NLRC are all null and void for having been undertaken or issued in violation of the SEC
suspension Order dated December 28, 1994. As such, the Labor Arbiter’s decision,
including the dismissal by the NLRC of Rubberworld’s appeal, could not have achieved
a final and executory status. It should be noted that the Labor Arbiter's decision in this
case is void ab initio, and therefore, non-existent. A void judgment is in effect no
judgment at all. No rights are divested by it nor obtained from it. Being worthless in
itself, all proceedings upon which the judgment is founded are equally worthless. It
neither binds nor bars anyone. All acts performed under it and all claims flowing out of it
are void. In other words, a void judgment is regarded as a nullity, and the situation is the
same as it would be if there were no judgment. It accordingly leaves the party-litigants in
the same position they were in before the trial. 2. NO. The CA did not commit grave
abuse of discretion. The Court addressed the more substantial issue in this case,
namely, the applicability of the provisions of Section 5 (d) and Section 6 (c) of P.D. No.
902-A, as amended, reorganizing the SEC, vesting it with additional powers and placing
it under the Office of the President. The law is clear: upon the creation of a
management committee or the appointment of a rehabilitation receiver, all claims for
actions "shall be suspended accordingly." No exception in favor of labor claims is
mentioned in the law. Since the law makes no distinction or exemptions, neither should
this Court. Ubi lex non distinguit nec nos distinguere debemos. Allowing labor cases to
proceed clearly defeats the purpose of the automatic stay and severely encumbers the
management committee's time and resources. The said committee would need to
defend against these suits, to the detriment of its primary and urgent duty to work
towards rehabilitating the corporation and making it viable again. To rule otherwise
would open the floodgates to other similarly situated claimants and forestall if not defeat
the rescue efforts. Besides, even if the NLRC awards the claims of private respondents,
its ruling could not be enforced as long as the petitioner is under the management
committee.

DISPOSITIVE PORTION: WHEREFORE, the instant petition is DENIED and the

assailed decision and resolution of the CA are AFFIRMED. Costs against the petitioner.
JUANITO A. GARCIA and ALBERTO J. DUMAGO vs. PHILIPPINE AIRLINES, INC

FACTS: In an action for illegal dismissal filed by petitioners against respondent, the
Labor Arbiter ruled in favor of petitioners, thus ordering PAL to, inter alia, immediately
comply with the reinstatement aspect of the decision. Prior to the promulgation of the
Labor Arbiter’s decision, the Securities and Exchange Commission (SEC) placed PAL,
which was suffering from severe financial losses, under an Interim Rehabilitation
Receiver, who was subsequently replaced by a Permanent Rehabilitation Receiver.
From the Labor Arbiter’s decision, respondent appealed to the NLRC which reversed
said decision and dismissed petitioners’ complaint for lack of merit. Petitioners’ Motion
for Reconsideration was denied. Subsequently, the Labor Arbiter issued a Writ of
Execution respecting the reinstatement aspect of his Decision, and issued a Notice of
Garnishment. Respondent thereupon moved to quash the Writ and to lift the Notice
while petitioners moved to release the garnished amount. In a related move, respondent
filed an Urgent Petition for Injunction with the NLRC which affirmed the validity of the
Writ and the Notice issued by the Labor Arbiter but suspended and referred the action
to the Rehabilitation Receiver for appropriate action. Respondent elevated the matter to
the appellate court which issued the herein challenged Decision and Resolution
nullifying the NLRC Resolutions on two grounds, on of which is the impossibility to
comply with the reinstatement order due to corporate rehabilitation which provides a
reasonable justification for the failure to exercise the options under Article 223 of the
Labor Code.

ISSUE: Whether or not the corporate rehabilitation rendered impossible for respondent
to exercise its option under the circumstances.

Ruling: YES.
It is settled that upon appointment by the SEC of a rehabilitation receiver, all actions for
claims before any court, tribunal or board against the corporation shall ipso jure be
suspended. As stated early on, during the pendency of petitioners’ complaint before the
Labor Arbiter, the SEC placed respondent under an Interim Rehabilitation Receiver.
After the Labor Arbiter rendered his decision, the SEC replaced the Interim
Rehabilitation Receiver with a Permanent Rehabilitation Receiver.

Case law recognizes that unless there is a restraining order, the implementation of the
order of reinstatement is ministerial and mandatory. This injunction or suspension of
claims by legislative fiat partakes of the nature of a restraining order that constitutes a
legal justification for respondent’s non-compliance with the reinstatement order.
Respondent’s failure to exercise the alternative options of actual reinstatement and
payroll reinstatement was thus justified. Such being the case, respondent’s obligation to
pay the salaries pending appeal, as the normal effect of the non-exercise of the options,
did not attach.

PARTIALLY DENIED.
SPOUSES EDUARDO SOBREJUANITE and FIDELA SOBREJUANITE vs. ASB
DEVELOPMENT CORPORATION

FACTS: Spouses Eduardo and Fidela Sobrejuanite (Sobrejuanite) filed a Complaint for
rescission of contract, refund of payments and damages, against ASB Development
Corporation (ASBDC) before the Housing and Land Use Regulatory Board (HLURB).
Sobrejuanite alleged that they entered into a Contract to Sell with ASBDC over a
condominium unit and a parking space in the BSA Twin Tower-B Condominum located
at Bank Drive, Ortigas Center, Mandaluyong City. They averred that despite full
payment and demands, ASBDC failed to deliver the property on or before December
1999 as agreed. They prayed for the rescission of the contract; refund of payments
amounting to P2,674,637.10; payment of moral and exemplary damages, attorney’s
fees, litigation expenses, appearance fee and costs of the suit.
ASBDC filed a motion to dismiss or suspend proceedings in view of the approval
by the Securities and Exchange Commission (SEC) of the rehabilitation plan of ASB
Group of Companies, which includes ASBDC, and the appointment of a rehabilitation
receiver. The HLURB arbiter however denied the motion and ordered the continuation
of the proceedings.
The arbiter found that under the Contract to Sell, ASBDC should have delivered
the property to Sobrejuanite; that the latter had fully paid their obligations except the
P50,000.00 which should be paid upon completion of the construction; and that
rescission of the contract with damages is proper.
The HLURB Board of Commissioners affirmed the ruling of the arbiter that the
approval of the rehabilitation plan and the appointment of a rehabilitation receiver by the
SEC did not have the effect of suspending the proceedings before the HLURB. The
board held that the HLURB could properly take cognizance of the case since whatever
monetary award that may be granted by it will be ultimately filed as a claim before the
rehabilitation receiver. The board also found that ASBDC failed to deliver the property to
Sobrejuanite within the prescribed period. ASBDC filed an appeal before the Office of
the President which was dismissed for lack of merit. Hence, ASBDC filed a
petition under Section 1, Rule 43 of the Rules of Court before the Court of Appeals.
The Couut of Appeals granted the petition. The impugned decision of the Office of the
President was reversed and set aside. The Court of Appeals held that the approval by
the SEC of the rehabilitation plan and the appointment of the receiver caused the
suspension of the HLURB proceedings. The appellate court noted that Sobrejuanite’s
complaint for rescission and damages is a claim under the contemplation of Presidential
Decree (PD) No. 902-A or the SEC Reorganization Act and A.M. No. 00-8-10-SC or
the Interim Rules of Procedure on Corporate Rehabilitation, because it sought to
enforce a pecuniary demand. Therefore, jurisdiction lies with the SEC and not HLURB.
It also ruled that ASBDC was obliged to deliver the property but its financial reverses
warranted the extension of the period. Sobrejuanite’s motion for reconsideration was
denied. Hence ,the instant petition .

ISSUES ;
1. WHETHER OR NOT THE COURT OF APPEALS COMMITTED REVERSIBLE
ERROR AND GRAVELY ABUSED ITS DISCRETION IN RULING THAT THE SEC,
NOT THE HLURB, HAS JURISDICTION OVER PETITIONER’S COMPLAINT, IN
CONTRAVENTION TO LAW AND THE RULING OF THIS HONORABLE COURT IN
THE ARRANZA CASE.

2. WHETHER OR NOT THE COURT OF APPEALS COMMITTED REVERSIBLE

ERROR AND GRAVELY ABUSED ITS DISCRETION WHEN IT RULED THAT THE
APPROVAL OF THE CORPORATE REHABILITATION PLAN AND THE
APPOINTMENT OF A RECEIVER HAD THE EFFECT OF SUSPENDING THE
PROCEEDING IN THE HLURB, AND THAT THE MONETARY AWARD GIVEN BY
THE HLURB COULD NOT [BE] FILED IN THE SEC FOR PROPER DISPOSITION,
NOT BEING IN ACCORDANCE WITH LAW AND JURISPRUDENCE.

3. WHETHER OR NOT THE COURT OF APPEALS COMMITTED REVERSIBLE

ERROR AND GRAVELY ABUSED ITS DISCRETION IN RULING THAT
RESPONDENT “IS JUSTIFIED IN EXTENDING THE AGREED DATE OF DELIVERY
BY INVOKING AS GROUND THE FINANCIAL CONSTRAINTS IT EXPERIENCED,”
BEING CONTRARY TO LAW AND IN EEFECT AN UNLAWFUL NOVATION OF THE
AGREEMENT OF THE DATE OF DELIVERY ENTERED INTO BY PETITIONERS
AND RESPONDENT.

RULING: The petition lacks merit.

Section 6(c) of PD No. 902-A empowers the SEC:
c) To appoint one or more receivers of the property, real and personal, which is the
subject of the action pending before the Commission … whenever necessary in order to
preserve the rights of the parties-litigants and/or protect the interest of the investing
public and creditors: … Provided, finally, That upon appointment of a management
committee, rehabilitation receiver, board or body, pursuant to this Decree, all actions
for claims against corporations, partnerships or associations under management or
receivership pending before any court, tribunal, board or body shall be suspended
accordingly The purpose for the suspension of the proceedings is to prevent a creditor
from obtaining an advantage or preference over another and to protect and preserve the
rights of party litigants as well as the interest of the investing public or creditors. Such
suspension is intended to give enough breathing space for the management committee
or rehabilitation receiver to make the business viable again, without having to divert
attention and resources to litigations in various fora. The suspension would enable the
management committee or rehabilitation receiver to effectively exercise its/his powers
free from any judicial or extrajudicial interference that might unduly hinder or prevent the
“rescue” of the debtor company. To allow such other action to continue would only add
to the burden of the management committee or rehabilitation receiver, whose time,
effort and resources would be wasted in defending claims against the corporation
instead of being directed toward its restructuring and rehabilitation.
Thus, in order to resolve whether the proceedings before the HLURB should be
suspended, it is necessary to determine whether the complaint for rescission of contract
with damages is a claim within the contemplation of PD No. 902-A.
[T]he word ‘claim’ as used in Sec. 6(c) of P.D. 902-A refers to debts or demands of a
pecuniary nature. It means “the assertion of a right to have money paid. It is used in
special proceedings like those before administrative court, on insolvency.”
The word “claim” is also defined as:
Right to payment, whether or not such right is reduced to judgment, liquidated,
unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal,
equitable, secured, or unsecured; or right to an equitable remedy for breach of
performance if such breach gives rise to a right to payment, whether or not such right to
an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured,
disputed, undisputed, secured, unsecured.
In conflicts of law, a receiver may be appointed in any state which has jurisdiction
over the defendant who owes a claim.
As used in statutes requiring the presentation of claims against a decedent’s estate,
“claim” is generally construed to mean debts or demands of a pecuniary nature which
could have been enforced against the deceased in his lifetime and could have been
reduced to simple money judgments; and among these are those founded upon
contract.
In this case, under the complaint for specific performance before the HLURB,
petitioners do not aim to enforce a pecuniary demand. Their claim for reimbursement
should be viewed in the light of respondent’s alleged failure to observe its statutory and
contractual obligations to provide petitioners a “decent human settlement” and “ample
opportunities for improving their quality of life.” The HLURB, not the SEC, is equipped
with the expertise to deal with that matter.
Finally, we agree with the Court of Appeals that under the Contract to Sell, ASBDC was
obliged to deliver the property to Sobrejuanite on or before December 1999.
Nonetheless, the same was deemed extended due to the financial reverses
experienced by the company. Section 7 of the Contract to Sell allows the developer to
extend the period of delivery on account of causes beyond its control, such as financial
reverses.
RIZAL COMMERCIAL BANKING CORP. vs INTERMEDIATE APPELLATE COURT

FACTS: Petitioner RCBC is a mortgagor-creditor of the party respondent BF Homes.

BF Homes, being a distressed firm, filed before the Securities and Exchange
Commission a Petition for Rehabilitation and for Declaration of Suspension of
Payments. RCBC, one of the creditors listed in BF Homes’ inventory of creditors and
liabilities, on October 26, 1984, requested the Provincial Sheriff of Rizal to
extra-judicially foreclose its real estate mortgage on some properties of BF Homes. BF
Homes opposed the auction sale and the SEC ordered the issuance of a writ of
preliminary injunction upon petitioners filing of a bond. Presumably unaware of the filing
of the bond on the very day of the auction sale, the sheriff proceeded with the public
auction sale in which RCBC was the highest bidder for the properties auctioned. But
because of the proceedings in the SEC, the sheriff withheld the delivery to RCBC of the
certificate of sale covering the auctioned properties. On March 13, 1985, despite the
SEC case, RCBC filed with RTC an action for mandamus against the provincial sheriff
of Rizal to compel him to execute in its favor a certificate of sale of
the auctioned properties. On March 18, 1985, the SEC appointed a Management
Committee for BF Homes. Consequently, the trial court granted RCBC’s “motion for
judgment on the pleading” ordering respondents to execute and deliver to petitioner the
Certificate of Auction Sale. On appeal, the SC affirmed CA’s decision (setting aside
RTC’s decision dismissing the mandamus case and suspending issuance to RCBC of
new land titles until the resolution of the SEC case) ruling that “whenever a distressed
corporation asks the SEC for rehabilitation and suspension of payments,
preferred creditors may no longer assert such preference but stand on equal footing
with other creditors.” Hence, this Motion for Reconsideration.

ISSUE: Whether or not preferred creditors of distressed corporations stand on

equal footing with all other creditors.

RULING: It gains relevance and materiality only upon the appointment of a

management committee, rehabilitation receiver, board or body. Upon cursory reading of
Section 6, par (c) of PD 902-A, it is adequately clear that suspension of claims against a
corporation under rehabilitation is counted or figured up only upon the appointment of a
management committee or a rehabilitation takes effect as soon as the application or a
petition for rehabilitation is filed with the SEC may to some, be more logical and wise
but unfortunately, such is incongruent with the clear language of the law. To insist on
such ruling, no matter how practical and noble would be to encroach upon legislative
prerogative to define the wisdom of the law - plainly judicial legislation.

 Once
a management committee, rehabilitation receiver, board or body is appointed pursuant
to PD 902-A, all actions for claims against a distressed corporation pending before any
court, tribunal, board or body shall be suspended accordingly; Suspension shall not
prejudice or render ineffective the status of a secured creditor as compared to a totally
unsecured creditor. What it merely provides is that all actions for claims against the
corporation, partnership or association shall be suspended. This should give the
receiver a chance to rehabilitate the corporation if there should still be a possibility for
doing so. In the event that rehabilitation is no longer feasible and claims against the
distressed corporation would eventually have to be settled, the secured creditors shall
enjoy preference over the unsecured creditors subject only to the provisions of the Civil
Code on Concurrence and Preferences of Credit.
FACILITIES MANAGEMENT CORPORATION, J.S. DREYER and J.V. CATUIRA vs
LEONARDO DE LA OSA

FACTS: Facilities Management Corporation and J. S. Dreyer are domiciled in Wake

Island while J. V. Catuira is an employee of FMC stationed in Manila. Leonardo De la
Osa was employed by FMC in Manila, but rendered work in Wake Island, with the
approval of the Department of Labor of the Philippines. He was employed as a painter,
cashier and houseboy. He alleged that he rendered overtime services daily, and that
this entire period was divided into swing and graveyard shifts to which he was assigned,
but he was not paid both overtime and night shift premiums despite his repeated
demands from FMC, et al. In a petition filed on 1 July 1967, De la Osa sought his
reinstatement with full backwages, as well as the recovery of his overtime
compensation, swing shift and graveyard shift differentials.
Subsequently on 3 May 1968, FMC, et al. filed a motion to dismiss the subject
petition on the ground that the Court has no jurisdiction over the case, because FMC is
domiciled in Wake Island which is beyond the jurisdiction of the Philippine Courts and
that J.V. Catuira the one who received the summons had no authority for legal
representation in behalf of FMC. Said motion was denied by the Court in its Order
issued on 12 July 1968. Subsequently, after trial, the Court of Industrial Relations, in a
decision dated 14 February 1972, ordered FMC, et al. to pay de la Osa his overtime
compensation, as well as his swing shift and graveyard shift premiums at the rate of
50% per cent of his basic salary. FMC, et al. filed the petition for review on certiorari.

ISSUE: Whether or not FMC has been "doing business in the Philippines" so
that the service of summons upon its agent in the Philippines vested the Court of
First Instance of Manila with jurisdiction.

RULING: YES. FMC may be considered as "doing business in the Philippines" within
the scope of Section 14 (Service upon private foreign corporations), Rule 14 of the
Rules of Court which provides that "If the defendant is a foreign corporation, or a
non-resident joint stock company or association, doing business in the Philippines,
service may be made on its resident agent designated in accordance with law for that
purpose or, if there be no such agent, on the government official designated by law to
that effect, or on any of its officers or agents within the Philippines." Indeed, FMC, in
compliance with Act 2486 as implemented by Department of Labor Order IV dated 20
May 1968 had to appoint Jaime V. Catuira, 1322 A. Mabini, Ermita, Manila "as agent for
FMC with authority to execute Employment Contracts and receive, in behalf of that
corporation, legal services from and be bound by processes of the Philippine Courts of
Justice, for as long as he remains an employee of FMC." It is a fact that when the
summons for FMC was served on Catuira he was still in the employ of the FMC.
Hence, if a foreign corporation, not engaged in business in the Philippines, is not
barred from seeking redress from courts in the Philippines (such as in earlier cases of
Aetna Casualty & Surety Company, vs. Pacific Star Line, etc. [GR L-26809], In
Mentholatum vs. Mangaliman, and Eastboard Navigation vs. Juan Ysmael & Co.), a
fortiori, that same corporation cannot claim exemption from being sued in Philippine
courts for acts done against a person or persons in the Philippines.
The Petition was denied with costs against petitioners.
THE MENTHOLATUM CO., INC., ET AL., vs ANACLETO MANGALIMAN, ET AL.

FACTS: The petitioners instituted an action against respondents for infringement of

trade mark and unfair competition. Plaintiffs prayed for the issuance of an order
restraining Anacleto and Florencio Mangaliman from selling their product
"Mentholiman,". The complaint stated that the Mentholatum Co., Inc., is a Kansas
corporation which manufactures Mentholatum," a medicament for the treatment of colds
and nasal irritations,; that the Philippine-American Drug co., Inc., is its exclusive
distributing agent in the Philippines; and that the Mentholatum Co., Inc., registered with
the Bureau of Commerce and Industry the word, "Mentholatum," as trade mark for its
products; that the Mangaliman brothers prepared a medicament and salve named
"Mentholiman" which they sold to the public packed in a container of the same size,
color and shape as "Mentholatum". The Court of First Instance of Manilarendered
judgment in favor of the complainants. On appeal, the Court of Appeals reversed the
decision and held that the activities of the Mentholatum Co., Inc., were business
transactions in the Philippines, and that, by section 69 of the Corporation Law, it may
not maintain the present suit. Hence, this petition for certiorari.

ISSUE: Whether or not the petitioners could prosecute the instant action without having
secured the license required in section 69 of the Corporation Law

RULING: No. The Supreme Court ruled that the petitioners have not acquired the
license required by section 68 of the Corporation Law, and hence could prosecute the
present action.No general rule or governing principle can be laid down as to what
constitutes "doing" or "engaging in" or "transacting" business. The true test, however,
seems to be whether the foreign corporation is continuing the body or substance of the
business or enterprise for which it was organized or whether it has substantially retired
from it and turned it over to another. In the case, the Mentholatum Co., Inc., being a
foreign corporation doing business in the Philippines without the license required by
section 68 of the Corporation Law, may not prosecute this action for violation of trade
mark and unfair competition. The Supreme Court denied the petition.
ERIKS PTE. LTD. VS. COURT OF APPEALS

Foreign Corporations; “Doing Business” in the Philippines

A foreign corporation without license is not ipso facto incapacitated from bringing an
action—a license is necessary only if it is “transacting or doing business” in the country.

FACTS: The petitioner, Eriks Pte. Ltd. is a non-resident foreign corporation engaged in
the manufacture and sale of elements used in sealing pumps, valves and pipes for
industrial purposes, valves and control equipment used for industrial fluid control and
PVC pipes and fittings for industrial uses. On various dates covering the period January
17 to August 16, 1989, the respondent, Delfin Enriquez, Jr., doing business under the
name and style of Delrene EB Controls Center and/or EB Karmine Commercial, ordered
and received from Eriks Pte. Ltd. various elements used in sealing pumps, valves, pipes
and control equipment, PVC pipes and fittings. The transfers of goods were perfected in
Singapore, for Enriquez's account, F.O.B. Singapore, with a 90-day credit term.
Subsequently, demands were made by Eriks upon Enriquez to settle his account, but
the latter failed/refused to do so. Eriks filed an action for the recovery of S$41,939.63
(singaporean dollar) or its equivalent in Philippine currency, plus interest thereon and
damages. Enriquez responded with a Motion to Dismiss, contending that Eriks had no
legal capacity to sue.
The trial court dismissed the action on the ground that Eriks is a foreign corporation
doing business in the Philippines without a license. On appeal, the appellate court
affirmed said order as it deemed the series of transactions between Eriks and Enriquez
not to be an "isolated or casual transaction." Thus, the appellate court likewise found
Eriks to be without legal capacity to sue. Eriks filed the petition for review.

ISSUE: Whether a foreign corporation which sold its products to the same
Filipino buyer (16times) without first obtaining a license to do business in the
Philippines, is prohibited from maintaining an action to collect payment therefor
in Philippine courts.

RULING: The petition has no merit. Section 133 of the Corporation Code provides that
"No foreign corporation transacting business in the Philippines without a license, or its
successors or assigns, shall be permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized under Philippine laws."
The provision prohibits, not merely absence of the prescribed license, but it also
bars a foreign corporation "doing business" in the Philippines without such license
access to Philippine courts. A foreign corporation without such license is not ipso facto
incapacitated from bringing an action. A license is necessary only if it is "transacting or
doing business" in the country. However, there is no definitive rule on what constitutes
"doing," "engaging in," or "transacting" business.
WHEREFORE, premises considered, the instant petition is hereby DENIED and the
assailed Decision is AFFIRMED.
MR Holdings vs. Sherrif Carlos Bajar
Facts: Marcopper Mining Corporation was unable to pay its loans from the Asian
Development Bank (ADB). Later, ADB transferred all its rights to collect from Marcopper
to MR Holdings, Ltd. In order to pay MR Holdings, Marcopper assigned all its assets to
MR Holdings and executed therefor a Deed of Assignment in MR Holdings favor.
Meanwhile, another creditor of Marcopper, Solidbank Corporation, won a case against
Marcopper. The court then issued a writ of execution directing Sheriff Carlos Bajar to
levy Marcopper’s assets. MR Holdings then filed an opposition asserting that it is now
the owner of Marcopper’s assets hence, Bajar cannot levy them. The lower court denied
MR Holdings on the ground that the Deed of Assignment was made in bad faith and that
MR Holdings was a foreign corporation doing business without a license in the
Philippines (by virtue of the Deed of Assignment) and as such cannot sue in the
Philippines.
ISSUES: 
1.) Whether or not MR Holdings is doing business in the Philippines.
2.)
Whether or not MR Holdings may sue on this particular transaction.
RULING:
1. No. MR Holdings is not a corporation doing business in the Philippines.
The Supreme Court emphasized the following rules when it comes to foreign
corporations doing business here in the Philippines:
If a foreign corporation does business in the Philippines without a license, it
cannot sue before the Philippine courts; if a foreign corporation is not doing business in
the Philippines, it needs no license to sue before Philippine courts on an isolated
transaction or on a cause of action entirely independent of any business transaction; if a
foreign corporation does business in the Philippines with the required license, it can sue
before Philippine courts on any transaction.
Being a mere assignee does not constitute “doing business” in the Philippines.
MR Holdings, a foreign corporation, cannot be said to be doing business simply
because it became an assignee of Marcopper. MR Holdings was not doing anything
else other than being a mere assignee. The only time that MR Holdings is considered to
be doing business here is that if it continues the business of Marcopper – which it did
not.
2. Yes. MR Holdings can sue on this particular transaction, since it is not doing
business here, pursuant to the rules above, it can sue without any license before
Philippine courts on an isolated transaction or on a cause of action entirely independent
of any business transaction.Anent the issue of bad faith, the same was not proven. It
appears that the deed of assignment was an earlier agreement incidental to the loan
agreement between ADB and Marcopper which precedes the action brought by
Solidbank against Marcopper.
Dispositive Portion.
WHEREFORE, the petition is GRANTED. The assailed Decision dated January
8, 1999 and the Resolution dated March 29, 1999 of the Court of Appeals in CA G.R.
No. 49226 are set aside. Upon filing of a bond of P1,000,000.00, respondent sheriffs
are restrained from further implementing the writ of execution issued in Civil Case No.
96-80083 by the RTC, Branch 26, Manila, until further orders from this Court. The RTC,
Branch 94, Boac, Marinduque, is directed to dispose of Civil Case No. 98-13 with
dispatch. SO ORDERED.
HUTCHISON PORTS PHILIPPINES LIMITED vs. SUBIC BAY METROPOLITAN
AUTHORITY, INTERNATIONAL CONTAINER TERMINAL SERVICES INC., ROYAL
PORT SERVICES INC. and the EXECUTIVE SECRETARY

FACTS: On 12 February 1996, the Subic Bay Metropolitan Authority (SBMA) advertised
in leading national daily newspapers and in one international publication, an invitation
offering to the private sector the opportunity to develop and operate a modern marine
container terminal within the Subic Bay Freeport Zone. Out of 7 bidders who responded
to the published invitation, 3 were declared by the SBMA as qualified bidders after
passing the pre-qualification evaluation conducted by the SBMA's Technical Evaluation
Committee (SBMA-TEC) These are: (1) International Container Terminal Services, Inc.
(ICTSI); (2) a consortium consisting of Royal Port Services, Inc. and HPC Hamburg Port
Consulting GMBH (RPSI); and (3) Hutchison Ports Philippines Limited (HPPL),
representing a consortium composed of HPPL, Guoco Holdings (Phils.), Inc. and Unicol
Management Services, Inc. All 3 qualified bidders were required to submit their
respective formal bid package on or before 1 July 1996 by the SBMA's Pre-qualification,
Bids and Awards Committee (SBMA-PBAC). Thereafter, the services of 3 international
consultants recommended by the World Bank for their expertise were hired by SBMA to
evaluate the business plans submitted by each of the bidders, and to ensure that there
would be a transparent and comprehensive review of the submitted bids.
The SBMA also hired the firm of Davis, Langdon and Seah Philippines, Inc. to
assist in the evaluation of the bids and in the negotiation process after the winning
bidder is chosen. All the consultants, after such review and evaluation unanimously
concluded that HPPL's Business Plan was "far superior to that of the two other bidders."
However, even before the sealed envelopes containing the bidders' proposed royalty
fees could be opened at the appointed time and place, RPSI formally protested that
ICTSI is legally barred from operating a second port in the Philippines based on
Executive Order 212 and Department of Transportation and Communication (DOTC)
Order 95-863. RPSI thus requested that the financial bid of ICTSI should be set aside.
Nevertheless, the opening of the sealed financial bids proceeded "under advisement"
relative to the protest signified by RPSI. The financial bids, more particularly the
proposed royalty fee of each bidder, was as follows: (1) ICTSI, US$57.80 TEU; (2)
HPPL, US$20.50 TEU; and (3) RPSI, US$15.08 TEU. The SBMA-PBAC decided to
suspend the announcement of the winning bid, however, and instead gave ICTSI 7 days
within which to respond to the letter-protest lodged by RPSI. The HPPL joined in RPSI's
protest, stating that ICTSI should be disqualified because it was already operating the
Manila International Container Port (MICP), which would give rise to inevitable conflict
of interest between the MICP and the Subic Bay Container Terminal facility. On 15
August 1996, the SBMA-PBAC issued a resolution rejecting the bid of ICTSI because
"said bid does not comply with the requirements of the tender documents and the laws
of the Philippines."
The following day, ICTSI filed a letter-appeal with SBMA's Board of Directors
requesting the nullification and reversal of the resolution rejecting ICTSI's bid while
awarding the same to HPPL. But even before the SBMA Board could act on the appeal,
ICTSI filed a similar appeal before the Office of the President. On 30 August 1996, then
Chief Presidential Legal Counsel (CPLC) Renato L. Cayetano submitted a
memorandum to then President Fidel V. Ramos, recommending that the President
direct SBMA Chairman Gordon to consider re-evaluating the financial bids submitted by
the parties, taking into consideration all the following factors: (1) Reinstate ICTSI's bid;
(2) Disregard all arguments relating to "monopoly"; (3) The re-evaluation must be limited
to the parties' financial bids. Considering that the parties' business have been accepted
(passed), strictly follow the criteria for bid evaluation provided for in pars. (c) and (d),
Part B (1) of the Tender Document; (4) In the re-evaluation, the COA should actively
participate to determine which of the financial bids is more advantageous; (5) In
addition, all the parties should be given ample opportunity to elucidate or clarify the
components/justification for their respective financial bids in order to ensure fair play
and transparency in the proceedings; and (6) The President's authority to review the
final award shall remain." The recommendation of CPLC Cayetano was approved by
President Ramos. A copy of President Ramos' handwritten approval was sent to the
SBMA Board of Directors. Accordingly, the SBMA Board, with the concurrence of
representatives of the Commission on Audit, agreed to focus the reevaluation of the
bids in accordance with the evaluation criteria and the detailed components contained in
the Tender Document, including all relevant information gleaned from the bidding
documents, as well as the reports of the three international experts and the consultancy
firm hired by the SBMA.
On 19 September 1996, the SBMA Board issued a Resolution, declaring that the
best possible offer and the most advantageous to the government is that of HPPL,
which was awarded the concession for the operation and development of the Subic Bay
Container Terminal. In a letter dated 24 September 1996, the SBMA Board of Directors
submitted to the Office of the President the results of the re-evaluation of the bid
proposals. Notwithstanding the SBMA Board's recommendations and action awarding
the project to HPPL, then Executive Secretary Ruben Torres submitted a memorandum
to the Office of the President recommending that another rebidding be conducted.
Consequently, the Office of the President issued a Memorandum directing the SBMA
Board of Directors to refrain from signing the Concession Contract with HPPL and to
conduct a rebidding of the project. In the meantime, the Resident Ombudsman for the
DOTC filed a complaint against members of the SBMA-PBAC before the Office of the
Ombudsman for alleged violation of Section 3(e) of Republic Act 3019 for awarding the
contract to HPPL. On 16 April 1997, the Evaluation and Preliminary Investigation
Bureau of the Office of the Ombudsman issued a Resolution absolving the members of
the SBMA-PBAC of any liability and dismissing the complaint against them.
On 7 July 1997, the HPPL, feeling aggrieved by the SBMA's failure and refusal to
commence negotiations and to execute the Concession Agreement despite its earlier
pronouncements that HPPL was the winning bidder, filed a complaint against SBMA
before the Regional Trial Court (RTC) of Olongapo City, Branch 75, for specific
performance, mandatory injunction and damages. In due time, ICTSI, RPSI and the
Office of the President filed separate Answers-in-Intervention to the complaint opposing
the reliefs sought by complainant HPPL. While the case before the trial court was
pending litigation, on 4 August 1997, the SBMA sent notices to HPPL, ICTSI and RPSI
requesting them to declare their interest in participating in a rebidding of the proposed
project. On 20 October 1997, HPPL received a copy of the minutes of the pre-bid
conference which stated that the winning bidder would be announced on 5 December
1997. Then on 4 November 1997, HPPL learned that the SBMA had accepted the bids
of ICTSI and RPSI who were the only bidders who qualified. In order to enjoin the
rebidding while the case was still pending, HPPL filed a motion for maintenance of the
status quo on 28 October 1997. The said motion was denied by the court a quo in an
Order dated 3 November 1997. HPPL filed the petition against SBMA, ICTSI, RPSI and
the Executive Secretary seeking to obtain a prohibitory injunction.

ISSUE: Whether HPPL has the legal capacity to even seek redress from the Court.

RULING: HPPL is a foreign corporation, organized and existing under the laws of the
British Virgin Islands. While the actual bidder was a consortium composed of HPPL, and
two other corporations, namely, Guoco Holdings (Phils.) Inc. and Unicol Management
Services, Inc., it is only HPPL that has brought the controversy before the Court,
arguing that it is suing only on an isolated transaction to evade the legal requirement
that foreign corporations must be licensed to do business in the Philippines to be able to
file and prosecute an action before Philippines courts. There is no general rule or
governing principle laid down as to what constitutes "doing" or "engaging in" or
"transacting" business in the Philippines. Each case must be judged in the light of its
peculiar circumstances. Thus, it has often been held that a single act or transaction may
be considered as "doing business" when a corporation performs acts for which it was
created or exercises some of the functions for which it was organized. The amount or
volume of the business is of no moment, for even a singular act cannot be merely
incidental or casual if it indicates the foreign corporation's intention to do business.
Participating in the bidding process constitutes "doing business" because it shows the
foreign corporation's intention to engage in business here. The bidding for the
concession contract is but an exercise of the corporation's reason for creation or
existence. Thus, it has been held that "a foreign company invited to bid for IBRD and
ADB international projects in the Philippines will be considered as doing business in the
Philippines for which a license is required." In this regard, it is the performance by a
foreign corporation of the acts for which it was created, regardless of volume of
business, that determines whether a foreign corporation needs a license or not. The
primary purpose of the license requirement is to compel a foreign corporation desiring to
do business within the Philippines to submit itself to the jurisdiction of the courts of the
state and to enable the government to exercise jurisdiction over them for the regulation
of their activities in this country. If a foreign corporation operates a business in the
Philippines without a license, and thus does not submit itself to Philippine laws, it is only
just that said foreign corporation be not allowed to invoke them in our courts when the
need arises. "While foreign investors are always welcome in this land to collaborate with
us for our mutual benefit, they must be prepared as an indispensable condition to
respect and be bound by Philippine law in proper cases." The requirement of a license
is not intended to put foreign corporations at a disadvantage, for the doctrine of lack of
capacity to sue is based on considerations of sound public policy. Accordingly, HPPL
must be held to be incapacitated to bring the petition for injunction before the Supreme
Court for it is a foreign corporation doing business in the Philippines without the
requisite license.
ANTAM CONSOLIDATED, INC., TAMBUNTING TRADING CORPORATION AND
AURORA CONSOLIDATED SECURITIES AND INVESTMENT CORPORATION vs
THE COURT OF APPEALS

FACTS: Stokely Van Camp, INC. (Stokely) filed a case before the trial court against
Banahaw Milling Corporation (Banahaw), Antam Consolidated, INC. (Antam),
Tambuting Trading Corporation (Tambunting), Aurora Consolidated Securities and
Investment Corporation (Aurora), and United Coconut Oil Mills, INC.(Unicom) for
collection of sum of money based on transactions for the sale of crude coconut oil that
were never consummated due to the fault of Coconut Oil Manufacturing (Phil.) Inc.
(Comphil).
Petitioners filed a motion to dismiss the complaint on the ground that the
respondent, being a foreign corporation not licensed to do business in the Philippines,
has no personality to maintain the instant suit. However, the trial court denied the
motion to dismiss on the ground that the reason cited therein does not appear to be
indubitable. Subsequently, the Court of Appeals dismissed the petition for certiorari filed
by petitioners stating that the trial court did not commit any grave abuse of discretion.
Before the Supreme Court, petitioners challenge the affirmation made by the CA on the
decision made by the trial court and argue that to maintain the suit filed with the trial
court, the respondent should have secured the requisite license to do business in the
Philippines because, in fact, it is doing business here.

ISSUE: Whether or not Stokely Van Camp, INC. is doing business in the Philippines,
and that it needed to obtain a license to do business in order to have the capacity to
sue.

RULING: Yes. Stokely is not doing business in the Philippines and it need not obtain a
license to do business in order to have the capacity to sue. The Supreme Court ruled
that the transactions entered into by the respondent with the petitioners are not a series
of commercial dealings which signify an intent on the part of the respondent to do
business in the Philippines but constitute an isolated one which does not fall under the
category of "doing business." The records show that the only reason why the
respondent entered into the second and third transactions with the petitioners was
because it wanted to recover the loss it sustained from the failure of the petitioners to
deliver the crude coconut oil under the first transaction and in order to give the latter a
chance to make good on their obligation. Instead of making an outright demand on the
petitioners, the respondent opted to try to push through with the transaction to recover
the amount of US$103,600.00 it lost. This explains why in the second transaction, the
petitioners were supposed to buy back the crude coconut oil they should have delivered
to the respondent in an amount which will earn the latter a profit of US$103,600.00.
When this failed the third transaction was entered into by the parties whereby the
petitioners were supposed to sell crude coconut oil to the respondent at a discounted
rate, the total amount of such discount being US$103,600.00. Unfortunately, the
petitioners failed to deliver again, prompting the respondent to file the suit below.
From these facts alone, it can be deduced that in reality, there was only one
agreement between the petitioners and the respondent and that was the delivery by the
former of 500 long tons of crude coconut oil to the latter, who in turn, must pay the
corresponding price for the same. The three seemingly different transactions were
entered into by the parties only in an effort to fulfill the basic agreement and in no way
indicate an intent on the part of the respondent to engage in a continuity of transactions
with petitioners which will categorize it as a foreign corporation doing business in the
Philippines. Thus, the trial court, and the appellate court did not err in denying the
petitioners' motion to dismiss not only because the ground thereof does not appear to
be indubitable but because the respondent, being a foreign corporation not doing
business in the Philippines, does not need to obtain a license to do business in order to
have the capacity to sue.
MERRILL LYNCH FUTURES, INC. vs COURT OF APPEALS
A foreign corporation doing business in the Philippines may sue in Philippine courts
although not authorized to do business here against a Philippine citizen who had
contracted with and been benefited by said corporation
FACTS: ML FUTURES, operating in the United States, had indeed done business with
the Lara Spouses in the Philippines over several years, had done so at all times through
Merrill Lynch Philippines, Inc. (MLPI), a corporation organized in this country, and had
executed all these transactions without ML FUTURES being licensed to transact
business here, and without MLPI being authorized to operate as a commodity futures
trading advisor.
Spouses Lara did transact business with ML FUTURES through its agent corporation
organized in the Philippines, it being unnecessary to determine whether this domestic
firm was MLPI (Merrill Lynch Philippines, Inc.) or Merrill Lynch Pierce Fenner & Smith
(MLPI's alleged predecessor). The fact is that ML FUTURES did deal with futures
contracts in exchanges in the United States in behalf and for the account of the Lara
Spouses, and that on several occasions the latter received account documents and
money in connection with those transactions.
Meanwhile, the last transaction executed by ML FUTURES in the Laras's behalf had
resulted in a loss amounting to US $160,749.69; that in relation to this loss, ML
FUTURES had credited the Laras with the amount of US$75,913.42 — which it (ML
FUTURES) then admittedly owed the spouses and thereafter sought to collect the
balance, US$84,836.27, but the Laras had refused to pay.
ML FUTURES sued the Laras. The Laras filed its motion to dismiss on the ground that
(a) that the plaintiff has no legal capacity to sue, and (b) that the complaint states no
cause of action (Sec. 1 [d], and [g], Rule 16, Rules of Court).
ISSUES:
1. Whether or not the plaintiff has no legal capacity to sue because they are not allowed
to do business in the PHILIPPINES since they do not have a license to do so
2. Whether or not the Laras are estopped to impugn ML FUTURES’ capacity to sue in
the courts of forum
RULING: The law is clear that no foreign corporation transacting business in the
Philippines without a license, or its successors or assigns, shall be permitted to maintain
or intervene in any action, suit or proceeding in any court or administrative agency in the
Philippines; but such corporation may be sued or proceeded against before Philippine
courts or administrative tribunals on any valid cause of action recognized under
Philippine laws (Sec. 133 of the Corporation Code).
However, the factual findings of the court proves that the Laras did transact business
with ML FUTURES through its agent corporation organized in the Philippines. In light of
the undeniable fact that it had transacted business in this country without being licensed
to do so, they were transacting with ML FUTURES, the Laras were fully aware of its
lack of license to do business in the Philippines, and in relation to those transactions
had made payments to, and received money from it for several years, hence, is now
estopped to challenge its personality or existence,
The doctrine of estoppel was adopted by the Supreme Court as early as 1924 in Asia
Banking Corporation v. Standard Products Co.—“The general rule that in the absence
of fraud of person who has contracted or otherwise dealt with an association in such a
way as to recognize and in effect admit its legal existence as a corporate body is
thereby estopped to deny its corporate existence in any action leading out of or
involving such contract or dealing, unless its existence is attacked for causes which
have arisen since making the contract or other dealing relied on as an estoppel and this
applies to foreign as well as domestic corporations. (14 C.J .7; Chinese Chamber of
Commerce vs. Pua Te Ching, 14 Phil. 222).”
In this case, there would seem to be no question that the Laras received benefits
generated by their business relations with ML FUTURES, it would appear quite
inequitable for the Laras to evade payment of an otherwise legitimate indebtedness due
and owing to ML FUTURES upon the plea that it should not have done business in this
country in the first place, or that its agent in this country, MLPI, had no license either to
operate as a "commodity and/or financial futures broker."
AGILENT TECHNOLOGIES SINGAPORE (PTE) LTD., vs. INTEGRATED SILICON
TECHNOLOGY PHILIPPINES CORP et al

FACTS: AGILENT TECHNOLOGIES SINGAPORE (PTE) LTD is a foreign corporation,
which, by its own admission, is not licensed to do business in the
Philippines. Respondent INTEGRATED SILICON TECHNOLOGY PHILIPPINES CORP.
is a private domestic corporation, 100% foreign owned, which is engaged in the
business of manufacturing and assembling electronics components.The juridical relation
among the various parties in this case can be traced to a 5-year Value Added Assembly
Services Agreement (VAASA), between Integrated Silicon and HP-Singapore. Under
the terms of the VAASA, Integrated Silicon was to locally manufacture and assemble
fiber optics for export to HP-Singapore. HP-Singapore, for its part, was to consign raw
materials to Integrated Silicon. The VAASA had a five-year term with a provision for
annual renewal by mutual written consent. Later, with the consent of Integrated
Silicon, HP-Singapore assigned all its rights and obligations in the VAASA to Agilent.
Integrated Silicon filed a complaint for “Specific Performance and Damages”
against Agilent and its officers. It alleged that Agilent breached the parties’ oral
agreement to extend the VAASA. Agilent filed a separate complaint against Integrated
Silicon for “Specific Performance, Recovery of Possession, and Sum of Money with
Replevin, Preliminary Mandatory Injunction, and Damages”.Respondents filed a Motion
to dismiss in the 2nd case, on the grounds of lack of Agilent’s legal capacity to sue, litis
pendentia, forum shopping, and failure to state a cause of action.
The trial court denied the Motion to Dismiss and granted petitioner Agilent’s
application for a writ of replevin. Without filing a Motion for Reconsideration,
respondents filed a petition for certiorari with the Court of Appeals. The CA granted
respondents’ petition for certiorari, set aside the assailed Order of the trial court
(denying the Motion to Dismiis) and ordered the dismissal of the 2nd case. Hence, the
instant petition.

ISSUE: Whether or not an unlicensed foreign corporation not doing business in the
Philippines lacks the legal capacity to file suit

RULING: NO. A foreign corporation without a license is not ipso facto incapacitated
from bringing an action in Philippine courts. A license is necessary only if a foreign
corporation is “transacting” or “doing business” in the country.
The Corporation Code provides: Sec. 133. Doing business without a license. —
No foreign corporation transacting business in the Philippines without a license, or its
successors or assigns, shall be permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized under Philippine
laws.The aforementioned provision prevents an unlicensed foreign corporation “doing
business” in the Philippines from accessing our courts.
In a number of cases, however, The Supreme court held that an unlicensed
foreign corporation doing business in the Philippines may bring suit in Philippine courts
against a Philippine citizen or entity who had contracted with and benefited from said
corporation. Such a suit is premised on the doctrine of estoppel. A party is estopped
from challenging the personality of a corporation after having acknowledged the same
by entering into a contract with it. This doctrine of estoppel to deny corporate existence
and capacity applies to foreign as well as domestic corporations. The application of this
principle prevents a person contracting with a foreign corporation from later taking
advantage of its noncompliance with the statutes chiefly in cases where such person
has received the benefits of the contract. The principles regarding the right of a foreign
corporation to bring suit in Philippine courts may thus be condensed in four statements:
If a foreign corporation does business in the Philippines without a license, it cannot sue
before the Philippine courts;
If a foreign corporation is not doing business in the Philippines, it needs no
license to sue before Philippine courts on an isolated transaction or on a cause of
action entirely independent of any business transaction;
If a foreign corporation does business in the Philippines without a license, a
Philippine citizen or entity which has contracted with said corporation may be
estopped from challenging the foreign corporation’s corporate personality in a
suit brought before Philippine courts; and
If a foreign corporation does business in the Philippines with the required license,
it can sue before Philippine courts on any transaction.
The challenge to Agilent’s legal capacity to file suit hinges on whether or not it is
doing business in the Philippines. However, there is no definitive rule on what
constitutes “doing”, “engaging in”, or “transacting” business in the Philippines. The
Corporation Code itself is silent as to what acts constitute doing or transacting business
in the Philippines.
Jurisprudence has it, however, that 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 or in progressive
prosecution of the purpose and subject of its organization.”
In the Mentholatum case this Court discoursed on the two general tests to
determine whether or not a foreign corporation can be considered as “doing business”
in the Philippines. The first of these is the substance test, thus:
The true test [for doing business], however, seems to be whether the foreign
corporation is continuing the body of the business or enterprise for which it was
organized or whether it has substantially retired from it and turned it over to another.
The second test is the continuity test, expressed thus:
The term [doing business] 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 the progressive
prosecution of, the purpose and object of its organization.]
The Foreign Investments Act of 1991 (the “FIA”; Republic Act No. 7042, as
amended), defines “doing business” as follows:
Sec. 3, par. (d). The phrase “doing business” shall include soliciting orders,
service contracts, opening offices, whether called “liaison” offices or branches;
appointing representatives or distributors domiciled in the Philippines or who in any
calendar year stay in the country for a period or periods totaling one hundred eighty
(180) days or more; participating in the management, supervision or control of any
domestic business, firm, entity, or corporation in the Philippines; and any other act or
acts that imply a continuity of commercial dealings or arrangements, and contemplate to
that extent the performance of acts or works, or the exercise of some of the functions
normally incident to, and in the progressive prosecution of, commercial gain or of the
purpose and object of the business organization.
An analysis of the relevant case law, in conjunction with Sec 1 of the IRR of the
FIA (as amended by RA 8179), would demonstrate that the acts enumerated in the
VAASA do not constitute “doing business” in the Philippines. The said provision
provides that the following shall not be deemed “doing business”:
(1) Mere investment as a shareholder by a foreign entity in domestic corporations
duly registered to do business, and/or the exercise of rights as such investor;(2) Having
a nominee director or officer to represent its interest in such corporation;(3) Appointing a
representative or distributor domiciled in the Philippines which transacts business in the
representative’s or distributor’s own name and account;(4) The publication of a general
advertisement through any print or broadcast media;(5) Maintaining a stock of goods in
the Philippines solely for the purpose of having the same processed by another entity in
the Philippines;(6) Consignment by a foreign entity of equipment with a local company
to be used in the processing of products for export;(7) Collecting information in the
Philippines; and(8) Performing services auxiliary to an existing isolated contract of sale
which are not on a continuing basis, such as installing in the Philippines machinery it
has manufactured or exported to the Philippines, servicing the same, training domestic
workers to operate it, and similar incidental services.
By and large, to constitute “doing business”, the activity to be undertaken in the
Philippines is one that is for profit-making. By the clear terms of the VAASA, Agilent’s
activities in the Philippines were confined to (1) maintaining a stock of goods in the
Philippines solely for the purpose of having the same processed by Integrated Silicon;
and (2) consignment of equipment with Integrated Silicon to be used in the processing
of products for export. As such, we hold that, based on the evidence presented thus far,
Agilent cannot be deemed to be “doing business” in the Philippines. Respondents’
contention that Agilent lacks the legal capacity to file suit is therefore devoid of merit. As
a foreign corporation not doing business in the Philippines, it needed no license before it
can sue before our courts.
The petition is GRANTED. The Decision of the CA which dismissed the 2nd case
is REVERSED and SET ASIDE. The Order denying the Motion to Dismiss
is REINSTATED. Agilent’s application for a Writ of Replevin is GRANTED.
EXPERTRAVEL & TOURS, INC., vs. COURT OF APPEALS and
KOREAN AIRLINES

FACTS: Korean Airlines (KAL) is a corporation established and

registered in the Republic of South Korea and licensed to do business in
the Philippines. Its general manager in the Philippines is Suk Kyoo Kim,
while its appointed counsel was Atty. Mario Aguinaldo and his law firm.
KAL, through Atty. Aguinaldo, filed a Complaint against ETI with the
Regional Trial Court (RTC) of Manila, for the collection of the principal
amount of P260,150.00, plus attorney’s fees and exemplary damages. The
verification and certification against forum shopping was signed by Atty.
Aguinaldo, who indicated therein that he was the resident agent and legal
counsel of KAL and had caused the preparation of the complaint. ETI filed
a motion to dismiss citing that KAL's lawyer, Atty. Aguinaldo, who signed
the verification and certification of non-forum shopping was not authorized
by its Board of Directors.

On April 12, 2000, the trial court issued an Order denying the
motion to dismiss, giving credence to the claims of Atty. Aguinaldo and Suk
Kyoo Kim that the KAL Board of Directors indeed conducted a
teleconference on June 25, 1999, during which it approved a resolution as
quoted in the submitted affidavit. It was reversed by SC.

VI. ISSUE: Whether or not the resident agent/counsel may signed the
certification against forum shopping in behalf of its principal corporation

HELD: No. A resident agent is not per se authorized to execute

certification against forum shopping —— while a resident agent may be
aware of actions filed against his principal ( a foreign corporation doing
business in the Philippines), he may be aware of actions initiated by its
principal, whether in the Philippines against a domestic corporation or
private individual, or in the home country, against a Philippine registered
corporation or a Filipino citizen.

Whenever such service of summons or other process is made

upon SEC, it must transmit within 10days thereafter by mail a copy thereof
to the corporation at its home or principal office. Sending of such copy is a
necessary part of and shall complete such service. All expenses incurred
for such service shall be paidin advance by the party at whose instance the
service is made.

Dispositive Portion: IN LIGHT OF ALL THE FOREGOING, the petition is

GRANTED. The Decision of the Court of Appeals in CA-G.R. SP No. 61000
is REVERSED and SET ASIDE. The Regional Trial Court of Manila is
hereby ORDERED to dismiss, without prejudice, the complaint of the
respondent.
SO ORDERED.
VAN ZUIDEN BROS., LTD. vs. GTVL MANUFACTURING INDUSTRIES, INC.

FACTS: B. VAN ZUIDEN BROS., LTD (ZUIDEN) filed a complaint for sum of money
against GTVL MANUFACTURING INDUSTRIES, INC (GTVL). Plaintiff ZUIDEN is a
corporation, incorporated under the laws of Hong Kong. ZUIDEN is not engaged in
business in the Philippines, but is suing before the Philippine Courts, for the reasons
hereinafter stated. It is engaged in the importation and exportation of several products,
including lace products. On several occasions, GTVL purchased lace products from
ZUIDEN. The procedure for these purchases, as per the instructions of GTVL, was that
ZUIDEN delivers the products purchased by GTVL, to a certain Hong Kong corporation,
known as Kenzar Ltd. (KENZAR), and the products are then considered as sold, upon
receipt by KENZAR of the goods purchased by GTVL. KENZAR had the obligation to
deliver the products to the Philippines and/or to follow whatever instructions GTVL had
on the matter.

Insofar as ZUIDEN is concerned, upon delivery of the goods to KENZAR in Hong Kong,
the transaction is concluded; and GTVL became obligated to pay the agreed purchase
price. However, GTVL has failed and refused to pay the agreed purchase price for
several deliveries ordered by it and delivered by ZUIDEN, as above-mentioned. In spite
of said demands and in spite of promises to pay and/or admissions of liability, GTVL
has failed and refused, and continues to fail and refuse, to pay the overdue amount of
U.S.$32,088.02 inclusive of interest.

GTVL filed a Motion to Dismiss instead on the ground that petitioner has no legal
capacity to sue. GTVL alleged that ZUIDEN is doing business in the Philippines without
securing the required license. Accordingly, ZUIDEN cannot sue before Philippine courts.

RTC: dismissed the complaint

CA: It sustained the trial courts dismissal of the complaint. CA found that the parties
entered into a contract of sale whereby ZUIDEN sold lace products to GTVL in a series
of transactions. While ZUIDEN delivered the goods in Hong Kong to Kenzar, Ltd.
(Kenzar), another Hong Kong company, the party with whom ZUIDEN transacted was
actually GTVL, a Philippine corporation, and not Kenzar. It believed Kenzar is merely a
shipping company and concluded that the delivery of the goods in Hong Kong did not
exempt petitioner from being considered as doing business in the Philippines. Hence,
this petition.

ISSUE: WON petitioner ZUIDEN, an unlicensed foreign corporation, has legal capacity
to sue before Philippine courts. (The resolution of this issue depends on whether
petitioner is doing business in the Philippines.)

RULING: The petition is meritorious. ZUIDEN is not doing business in the

Philippines, it does not need a license in order to initiate and maintain a collection suit
against respondent for the unpaid balance of GTVL’s purchases.
Section 133 of the Corporation Code provides:
Doing business without license. No foreign corporation transacting business
in the Philippines without a license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit or proceeding in any
court or administrative agency of the Philippines; but such corporation may be
sued or proceeded against before Philippine courts or administrative tribunals
on any valid cause of action recognized under Philippine laws.
The law is clear. An unlicensed foreign corporation doing business in the Philippines
cannot sue before Philippine courts. On the other hand, an unlicensed foreign
corporation not doing business in the Philippines can sue before Philippine courts.

In the present controversy, ZUIDEN is a foreign corporation which claims that it is not
doing business in the Philippines. As such, it needs no license to institute a collection
suit against respondent before Philippine courts.

GTVL argues otherwise. It insists that ZUIDEN is doing business in the Philippines
without the required license. Hence, ZUIDEN has no legal capacity to sue before
Philippine courts.

Under Section 3(d) of Republic Act No. 7042 (RA 7042) or The Foreign Investments
Act of 1991, the phrase doing business includes:

x x x soliciting orders, service contracts, opening offices, whether called

liaison offices or branches; appointing representatives or distributors
domiciled in the Philippines or who in any calendar year stay in the country for
a period or periods totalling one hundred eighty (180) days or more;
participating in the management, supervision or control of any domestic
business, firm, entity or corporation in the Philippines; and any other act or
acts that imply a continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or works, or the exercise
of some of the functions normally incident to, and in progressive prosecution
of, commercial gain or of the purpose and object of the business organization:
Provided, however, That the phrase doing business shall not be deemed to
include mere investment as a shareholder by a foreign entity in domestic
corporations duly registered to do business, and/or the exercise of rights as
such investor; nor having a nominee director or officer to represent its
interests in such corporation; nor appointing a representative or distributor
domiciled in the Philippines which transacts business in its own name and for
its own account.

The series of transactions between ZUIDEN and GTVL cannot be classified as doing
business in the Philippines under Section 3(d) of RA 7042. An essential condition to be
considered as doing business in the Philippines is the actual performance of specific
commercial acts within the territory of the Philippines for the plain reason that the
Philippines has no jurisdiction over commercial acts performed in foreign territories.
Here, there is no showing that ZUIDEN performed within the Philippine territory the
specific acts of doing business mentioned in Section 3(d) of RA 7042. ZUIDEN did not
also open an office here in the Philippines, appoint a representative or distributor, or
manage, supervise or control a local business. While ZUIDEN and GTVL entered into a
series of transactions implying a continuity of commercial dealings, the perfection and
consummation of these transactions were done outside the Philippines.

In its complaint, ZUIDEN alleged that it is engaged in the importation and exportation of
several products, including lace products. ZUIDEN asserted that on several occasions,
GTVL purchased lace products from it. ZUIDEN also claimed that respondent instructed
it to deliver the purchased goods to Kenzar, which is a Hong Kong company based in
Hong Kong. Upon Kenzars receipt of the goods, the products were considered
sold.Kenzar, in turn, had the obligation to deliver the lace products to the Philippines. In
other words, the sale of lace products was consummated in Hong Kong.

As earlier stated, the series of transactions between ZUIDEN and GTVL transpired and
were consummated in Hong Kong. We also find no single activity which petitioner
performed here in the Philippines pursuant to its purpose and object as a business
organization. Moreover, petitioners desire to do business within the Philippines is not
discernible from the allegations of the complaint or from its attachments. Therefore,
there is no basis for ruling that petitioner is doing business in the Philippines.

SC disagrees with the CA’s ruling that the proponents to the transaction determine
whether a foreign corporation is doing business in the Philippines, regardless of the
place of delivery or place where the transaction took place. To accede to such theory
makes it possible to classify, for instance, a series of transactions between a Filipino in
the United States and an American company based in the United States as doing
business in the Philippines, even when these transactions are negotiated and
consummated only within the United States.

An exporter in one country may export its products to many foreign importing countries
without performing in the importing countries specific commercial acts that would
constitute doing business in the importing countries. The mere act of exporting from
ones own country, without doing any specific commercial act within the territory of the
importing country, cannot be deemed as doing business in the importing country. The
importing country does not acquire jurisdiction over the foreign exporter who has not
performed any specific commercial act within the territory of the importing country.
Without jurisdiction over the foreign exporter, the importing country cannot compel the
foreign exporter to secure a license to do business in the importing country.

To be doing or transacting business in the Philippines for purposes of Section 133 of the
Corporation Code, the foreign corporation must actually transact business in the
Philippines, that is, perform specific business transactions within the Philippine territory
on a continuing basis in its own name and for its own account. Actual transaction of
business within the Philippine territory is an essential requisite for the Philippines to
acquire jurisdiction over a foreign corporation and thus require the foreign corporation to
secure a Philippine business license. If a foreign corporation does not transact such
kind of business in the Philippines, even if it exports its products to the Philippines, the
Philippines has no jurisdiction to require such foreign corporation to secure a Philippine
business license.
YUJUICO vs. QUIAMBAO

FACTS: On July 27, 1998, the Securities and Exchange Commission (SEC) approved
the amendment of STRADEC’s Articles of Incorporation authorizing the change of its
principal office from Pasig City to Bayambang, Pangasinan. On March 1, 2004,
STRADEC held its annual stockholders’ meeting in its Pasig City office as indicated in
the notices sent to the stockholders. At the said meeting, herein petitioners and
respondents were elected members of the Board of Directors. After five (5) months, or
on August 16, 2004, respondents filed with the Regional Trial Court (RTC), San Carlos
City, Pangasinan a Complaint against STRADEC (represented by herein petitioners as
members of its Board of Directors) praying that: (1) the March 1, 2004 election be
nullified on the ground of improper venue, pursuant to Section 51 of the Corporation
Code; (2) all ensuing transactions conducted by the elected directors be likewise
nullified; and (3) a special stockholders’ meeting be held anew.
On November 25, 2004, RTC Judge Meliton G. Emuslan acting as pairing judge,
issued an Order granting respondents’ application for preliminary injunction ordering the
holding of a special stockholders’ meeting of STRADEC on December 10, 2004 "in the
principal office of the corporation in Bayambang, Pangasinan
A Petition for Certiorari was filed with the Court of Appeals assailing Judge
Emuslan’s Order contending that only the SEC, not the RTC, has jurisdiction to order
the holding of a special stockholders’ meeting involving an intra-corporate controversy.
The CA dismissed the Petition for Certiorari. Petitioners’ motion for reconsideration was
likewise denied. Hence, the instant Petition for Review on Certiorari.

ISSUE: WON the RTC has jurisdiction to order the holding of a special
stockholders’ meeting involving an intra-corporate controversy.

RULING: Yes. Upon the enactment of R.A. No. 8799, otherwise known as "The
Securities Regulation Code" which took effect on August 8, 2000, the jurisdiction of the
SEC over intra-corporate controversies and other cases enumerated in Section 5 of
P.D. No. 902-A has been transferred to the courts of general jurisdiction, or the
appropriate RTC. Section 5.2 of R.A. No. 8799 provides:
5.2. The Commission’s jurisdiction over all cases enumerated in Section 5 of
Presidential Decree No. 902-A is hereby transferred to the Courts of general jurisdiction
or the appropriate Regional Trial Court, Provided, That the Supreme Court in the
exercise of its authority may designate the Regional Trial Court branches that shall
exercise jurisdiction over these cases. The Commission shall retain jurisdiction over
pending cases involving intra-corporate disputes submitted for final resolution which
should be resolved within one (1) year from the enactment of this Code. The
Commission shall retain jurisdiction over pending suspension of payments/rehabilitation
cases filed as of 30 June 2000 until finally disposed.
Clearly, the RTC has the power to hear and decide the intra-corporate controversy of
the parties herein. Concomitant to said power is the authority to issue orders necessary
or incidental to the carrying out of the powers expressly granted to it. Thus, the RTC
may, in appropriate cases, order the holding of a special meeting of stockholders or
members of a corporation involving an intra-corporate dispute under its supervision.
BAVIERA vs PAGLINAWAN

FACTS: SCB acted as a stock broker, soliciting from local residents foreign securities
called GTPMF. These securities were not registered with the SEC and were then
remitted outwardly to SCB-Hongkong and SCB-Singapore. The Investment Capital
Association of the Philippines (ICAP) filed with the SEC a complaint alleging that SCB
violated the Revised Securities Act, particularly the provision prohibiting the selling of
securities without prior registration with the SEC and that its actions are potentially
damaging to the local mutual fund industry. Notwithstanding the BSP directive, SCB
continued to offer and sell GTPMF securities in this country. Petitioner learned that the
SCB had been prohibited by the BSP to sell GPTMF securities. Petitioner filed with the
DOJ complaint for violation of Section 8.1 of the Securities Regulation Code against
private respondent but was denied holding that it should have been filed with the SEC.
ISSUE: Whether or not there is fatal procedural lapse when the petitioner filed his
criminal complaint directly with the DOJ instead to SEC
RULING: A criminal charge for violation of the Securities Regulation Code is a
specialized dispute. Hence, it must first be referred to an administrative agency of
special competence, i.e., the SEC. Under the doctrine of primary jurisdiction, courts will
not determine a controversy involving a question within the jurisdiction of the
administrative tribunal, where the question demands the exercise of sound
administrative discretion requiring the specialized knowledge and expertise of said
administrative tribunal to determine technical and intricate matters of fact. The
Securities Regulation Code is a special law. Its enforcement is particularly vested in the
SEC.
Hence, all complaints for any violation of the Code and its implementing rules and
regulations should be filed with the SEC. Where the complaint is criminal in nature, the
SEC shall indorse the complaint to the DOJ for preliminary investigation and
prosecution as provided in Section 53.1 earlier quoted. We thus agree with the Court of
Appeals that petitioner committed a fatal procedural lapse when he filed his criminal
complaint directly with the DOJ. Verily, no grave abuse of discretion can be ascribed to
the DOJ in dismissing petitioner’s complaint.
SEC vs PERFORMANCE FOREIGN EXCHANGE CORPORATION
FACTS: Performance Foreign Exchange Corporation,a domestic corporation duly
registered with SEC and engaged as its primary purpose to operate as a broker/agent
between market participants in transactions involving, but not limited to, foreign
exchange, deposits, interest rate instruments, and similar or derivative products, other
than acting as a broker for the trading of securities pursuant to the Revised Securities
Act of the Philippines. The respondent secondary purpose is to engage in money
changer or exchanging foreign currencies.
The respondent received a letter from SEC requiring it to appear before the Compliance
and Enforcement Department (CED) for a clarificatory conference regarding its
business operations. The Director of CED issued a Cease and Desist Order for possible
violation of R.A.No. 8799 (otherwise known as The Securities Regulation Code) and
that the outcome of the inquiry shows that respondent is engaged in the trading of
foreign currency futures contracts in behalf of its clients without the necessary license;
that such transaction can be deemed as a direct violation of Section 11 of R.A. No.
8799. The respondent filed a motion to SEC to lift the said order.
SEC Chairman Bautista, in her desire to know with certainty the nature of respondent’s
business, sent a letter to the BSP, requesting a definitive statement that respondent’s
business transactions are a form of financial derivatives and, therefore, can only be
undertaken by banks or non-bank financial intermediaries performing quasi-banking
functions. However, SEC issued an Order denying respondent’s motion for the lifting of
the Cease and Desist Order without waiting for BSP’s determination of the matter.
Thereafter, SEC issued an order making the Cease and Desist Order permanent.
Respondent filed with the Court of Appeals a Petition for Certiorari. It alleged that SEC
grave abuse of discretion when it issued the Cease and Desist Order and its
subsequent Order making the same permanent without waiting for the BSP’s
determination of the real nature of its business operations; and that petitioner’s Orders,
issued without any factual basis, violated its (respondent’s) fundamental right to due
process.
BSP, in answer to SEC Chairman letter-request stated that respondent’s business
activity "does not fall under the category of futures trading"and"can not be classified as
financial derivatives transactions,"
CA ruled that SEC acted with grave abuse of discretion when it issued its challenged
Orders without a positive factual finding that respondent violated the Securities
Regulation Code. Hence, this petition.
ISSUE: Whether or not SEC acted with grave abuse of discretion in issuing the
Cease and Desist Order and its subsequent Order making it permanent.
RULING: YES. Section 64 of R.A. No. 8799, provides:
Sec. 64. Cease and Desist Order. – 64.1. The Commission, after proper
investigation or verification, motu proprio, or upon verified complaint by
any aggrieved party, may issue a cease and desist order without the
necessity of a prior hearing if in its judgment the act or practice, unless
restrained, will operate as a fraud on investors or is otherwise likely to
cause grave or irreparable injury or prejudice to the investing public.
x x x. (Underscoring supplied)
Under the above provision, there are two essential requirements that must be complied
with by the SEC before it may issue a cease and desist order: First, it must conduct
proper investigation or verification; and Second, there must be a finding that the act or
practice, unless restrained, will operate as a fraud on investors or is otherwise likely to
cause grave or irreparable injury or prejudice to the investing public.
Here, the first requirement is not present. Petitioner did not conduct proper investigation
or verification before it issued the challenged orders. The clarificatory conference
undertaken by petitioner regarding respondent’s business operations cannot be
considered a proper investigation or verification process to justify the issuance of the
Cease and Desist Order. It was merely an initial stage of such process, considering that
after it issued the said order following the clarificatory conference, petitioner still sought
verification from the BSP on the nature of respondent’s business activity
Petitioner’s act of referring the matter to the BSP is an essential part of the investigation
and verification process. In fact, such referral indicates that petitioner concedes to the
BSP’s expertise in determining the nature of respondent’s business. It bears stressing,
however, that such investigation and verification, to be proper, must be conducted by
petitioner before, not after, issuing the Cease and Desist Order in question. This,
petitioner utterly failed to do. The issuance of such order even before it could finish its
investigation and verification on respondent’s business activity obviously contravenes
Section 64 of R.A. No. 8799 earlier quoted.
And worst, without waiting for BSP’s action, petitioner proceeded to issue its Order
dated April 23, 2001 making the Cease and Desist Order permanent. In the same
Order, petitioner further directed respondent "to show cause x x x why its certificate of
registration should not be revoked for alleged violation of the Securities Regulation
Code and/or Presidential Decree No. 902-A, specifically on the ground of serious
misrepresentation as to what the corporation can do or is doing to the great prejudice or
damage to the general public." Obviously, without BSP’s determination of the nature of
respondent’s business, there was no factual and legal basis to justify the issuance of
such order.
Which brings us to the second requirement. Before a cease and desist order may be
issued by the SEC, there must be a showing that the act or practice sought to be
restrained will operate as a fraud on investors or is likely to cause grave, irreparable
injury or prejudice to the investing public. Such requirement implies that the act to be
restrained has been determined after conducting the proper investigation/verification. In
this case, the nature of the act to be restrained can only be determined after the BSP
shall have submitted its findings to petitioner. However, there is nothing in the
questioned Orders that shows how the public is greatly prejudiced or damaged by
respondent’s business operation.