1. Corporate Law Case Digest: Tayag V.

Benguet

Lessons Applicable: Theory of Concession (Corporate Law)

FACTS:
1 March 27, 1960: Idonah Slade Perkins died in New York City
2 August 12, 1960: Prospero Sanidad instituted ancillary administration
proceedings appointing ancillary administrator Lazaro A. Marquez later on
substituted by Renato D. Tayag
3 On January 27, 1964: CFI ordered domiciliary administrator County Trust
Company of New York to surrender to the ancillary administrator in the
Philippines 33,002 shares of stock certificates owned by her in a Philippine
corporation, Benguet Consolidated, Inc., to satisfy the legitimate claims of
local creditors
4 When County Trust Company of New York refused the court ordered
Benguet Consolidated, Inc. to declare the stocks lost and required it to issue
new certificates in lieu thereof
5 Appeal was taken by Benguet Consolidated, Inc. alleging the failure to
comply with its by-laws setting forth the procedure to be followed in case of a
lost, stolen or destroyed so it cannot issue new stock certs.

ISSUE: W/N Benguet Consolidated, Inc. can ignore a court order because of its
by-laws

HELD: NO. CFI Affirmed

6 Fear of contigent liability - obedience to a lawful order = valid defense
7 Benguet Consolidated, Inc. is a Philippine corporation owing full
allegiance and subject to the unrestricted jurisdiction of local courts
8 Assuming that a contrariety exists between the above by-law and the
command of a court decree, the latter is to be followed.
9 corporation is an artificial being created by operation of law...."It owes its
life to the state, its birth being purely dependent on its will. Cannot ignore
the source of its very existence

2. Torres vs. CA - GR 120138, Sept. 5, 1997;

Judge Manuel Torres, Jr. owns about 81% of the capital stocks of Tormil Realty
& Development Corporation (TRDC). TRDC is a small family owned corporation
and other stockholders thereof include Judge Torres’ nieces and nephews.
However, even though Judge Torres owns the majority of TRDC and was also
the president thereof, he is only entitled to one vote among the 9-seat Board of
Directors, hence, his vote can be easily overridden by minority stockholders. So
in 1987, before the regular election of TRDC officers, Judge Torres assigned one
share (qualifying share) each to 5 “outsiders” for the purpose of qualifying them
to be elected as directors in the board and thereby strengthen Judge Torres’
power over other family members.
However, the said assignment of shares were not recorded by the corporate
secretary, Ma. Christina Carlos (niece) in the stock and transfer book of TRDC.
When the validity of said assignments were questioned, Judge Torres
ratiocinated that it is impractical for him to order Carlos to make the entries
because Carlos is one of his opposition. So what Judge Torres did was to make
the entries himself because he was keeping the stock and transfer book. He
further ratiocinated that he can do what a mere secretary can do because in the
first place, he is the president.
Since the other family members were against the inclusion of the five outsiders,
they refused to take part in the election. Judge Torres and his five assignees
then decided to conduct the election among themselves considering that the 6 of
them constitute a quorum.

ISSUE: Whether or not the inclusion of the five outsiders are valid. Whether or
not the subsequent election is valid.

HELD: No. The assignment of the shares of stocks did not comply with
procedural requirements. It did not comply with the by laws of TRDC nor did it
comply with Section 74 of the Corporation Code. Section 74 provides that the
stock and transfer book should be kept at the principal office of the corporation.
Here, it was Judge Torres who was keeping it and was bringing it with him.
Further, his excuse of not ordering the secretary to make the entries is flimsy.
The proper procedure is to order the secretary to make the entry of said
assignment in the book, and if she refuses, Judge Torres can come to court and
compel her to make the entry. There are judicial remedies for this. Needless to
say, the subsequent election is invalid because the assignment of shares is
invalid by reason of procedural infirmity. The Supreme Court also emphasized: all
corporations, big or small, must abide by the provisions of the Corporation Code.
Being a simple family corporation is not an exemption. Such corporations cannot
have rules and practices other than those established by law.

3. Phil. Stock Exchange vs. CA 287 SCRA 232 – Business Organization –

Corporation Law – Extent of Power of the Securities and Exchange Commission
Puerto Azul Land, Inc. (PALI) is a corporation engaged in the real estate
business. PALI was granted permission by the Securities and Exchange
Commission (SEC) to sell its shares to the public in order for PALI to develop its
properties.
 PALI then asked the Philippine Stock Exchange (PSE) to list PALI’s stocks/shares
to facilitate exchange. The PSE Board of Governors denied PALI’s application on
the ground that there were multiple claims on the assets of PALI. Apparently, the
Marcoses, Rebecco Panlilio (trustee of the Marcoses), and some other
corporations were claiming assets if not ownership over PALI.
PALI then wrote a letter to the SEC asking the latter to review PSE’s decision.
The SEC reversed PSE’s decisions and ordered the latter to cause the listing of
PALI shares in the Exchange.

ISSUE: Whether or not it is within the power of the SEC to reverse actions done
by the PSE.

HELD: Yes. The SEC has both jurisdiction and authority to look into the decision
of PSE pursuant to the Revised Securities Act and for the purpose of ensuring fair
administration of the exchange. PSE, as a corporation itself and as a stock
exchange is subject to SEC’s jurisdiction, regulation, and control. In order to
insure fair dealing of securities and a fair administration of exchanges in the PSE,
the SEC has the authority to look into the rulings issued by the PSE. The SEC is
the entity with the primary say as to whether or not securities, including shares
of stock of a corporation, may be traded or not in the stock exchange.
HOWEVER, in the case at bar, the Supreme Court emphasized that the SEC may
only reverse decisions issued by the PSE if such are tainted with bad faith. In this
case, there was no showing that PSE acted with bad faith when it denied the
application of PALI. Based on the multiple adverse claims against the assets of
PALI, PSE deemed that granting PALI’s application will only be contrary to the
best interest of the general public. It was reasonable for the PSE to exercise its
judgment in the manner it deems appropriate for its business identity, as long as
no rights are trampled upon, and public welfare is safeguarded.
4. Feliciano vs. Commission on Audit
[GR 147402, 14 January 2004]

Facts: A Special Audit Team from Commission on Audit (COA) Regional Office
No. VIII audited the
accounts of the Leyte Metropolitan Water District (LMWD). Subsequently, LMWD
received a letter
from COA dated 19 July 1999 requesting payment of auditing fees. As General
Manager of LMWD,
Engr. Ranulfo C. Feliciano sent a reply dated 12 October 1999 informing COA’s
Regional Director
that the water district could not pay the auditing fees. Feliciano cited as basis for
his action Sections
6 and 20 of PD 198, as well as Section 18 of RA 6758. The Regional Director
referred Feliciano’s
reply to the COA Chairman on 18 October 1999. On 19 October 1999, Feliciano
wrote COA through
the Regional Director asking for refund of all auditing fees LMWD previously paid
to COA. On 16
March 2000, Feliciano received COA Chairman Celso D. Gangan’s Resolution
dated 3 January
2000 denying Feliciano’s request for COA to cease all audit services, and to stop
charging auditing
fees, to LMWD. The COA also denied Feliciano’s request for COA to
refund all auditing fees
previously paid by LMWD. Feliciano filed a motion for reconsideration on 31
March 2000, which
COA denied on 30 January 2001. On 13 March 2001, Felicaino filed the petition
for certiorari.

Issue: Whether a Local Water District (“LWD”) is a government-owned or

controlled corporation.

Held: The Constitution recognizes two classes of corporations. The first refers to
private
corporations created under a general law. The second refers to government-
owned or controlled
corporations created by special charters. The Constitution emphatically prohibits
the creation of
private corporations except by a general law applicable to all citizens. The
purpose of this
constitutional provision is to ban private corporations created by special charters,
which historically
gave certain individuals, families or groups special privileges denied to other
citizens. In short,
Congress cannot enact a law creating a private corporation with a special
charter. Such legislation
would be unconstitutional. Private corporations may exist only under a general
law. If the corporation
is private, it must necessarily exist under a general law. Stated differently, only
corporations created
under a general law can qualify as private corporations. Under existing laws, that
general law is the
Corporation Code, except that the Cooperative Code governs the incorporation of
cooperatives. The
Constitution authorizes Congress to create government-owned or controlled
corporations through
special charters. Since private corporations cannot have special charters, it
follows that Congress
can create corporations with special charters only if such corporations are
government-owned or
controlled. Obviously, LWDs 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 states that “[A]ll corporations organized under this
code shall file with the
Securities and Exchange Commission articles of incorporation x x x.” LWDs have
no articles of
incorporation, no incorporators and no stockholders or members. There are no
stockholders or
members to elect the board directors of LWDs as in the case of all corporations
registered with the
Securities and Exchange Commission. The local mayor or the provincial governor
appoints the
directors of LWDs for a fixed term of office. LWDs exist by virtue of PD 198,
which constitutes their
special charter. Since under the Constitution only government-owned or
controlled corporations may
have special charters, LWDs can validly exist only if they are government-owned
or controlled. To
claim that LWDs are private corporations with a special charter is to admit that
their existence is
constitutionally infirm. Unlike private corporations, which derive their legal
existence and power from
the Corporation Code, LWDs derive their legal existence and power from PD 198.
 5. National Coal Co. v. CIR
Facts: The National Coal Co.(NCC) was created by a special law and was enacted
by virtue of Act 2705 in order to develop a coal industry. It was engaged in coal
mining on reserved lands belonging to the government. The National Coal Co.
(NCC) filed a case against the CIR for the recovery of sum of money it paid on
protest as specific tax on 24,089 tons of coals claiming exemption to tax
pursuant to Sec. 14 and 15 of Act 2719.

Issue: WON NCC is a private corporation?

Held: Plaintiff is a private corporation. The mere fact that the government is a
majority stockholder of the corporation does not make the corporation. Act 2705
as amended by Act 2822 makes it subject to all the provision of the corporation
law. As a private corporation, it has no greater rights, powers or privileges than
any other corporation which may be organized for the same purpose under the
corporation law and certainly it was not the intention of the legislature to give
preference or right or privilege over other legitimate private corporation in the
mining of coal. NCC is required to pay taxes pursuant to Section 1496 of the
Administrative Code. Moreover, Act 2719 is applicable only to lessee or owner of
coal bearing lands which NCC is not.

6. MaRILAO WATER vs, IAC no digest

7. Sappari K. Sawadjaan was among the first employees of the Philippine

Amanah Bank (PAB) when it was created. He rose through the ranks, working his
way up from his initial designation as security guard.

In February 1988, while still designated as appraiser/investigator, Sawadjaan

was assigned to inspect the properties offered as collaterals by Compressed Air
Machineries and Equipment Corporation (CAMEC) for a credit line of Five Million
Pesos secure by REM over the latter’s poperties. On the basis of his Inspection
and Appraisal Report, the PAB granted the loan application.
In the meantime, Sawadjaan was promoted to Loans Analyst I.
In January 1990, Congress passed Republic Act 6848 creating the AIIBP and
repealing P.D. No. 264 (which created the PAB). By virtue of which all assets,
liabilities and capital accounts of the PAB were transferred to the AIIBP, and the
existing personnel of the PAB were to continue to discharge their functions
unless discharged. In the ensuing reorganization, Sawadjaan was among the
personnel retained by the AIIBP.
When CAMEC failed to pay despite the given extension, the bank, now referred
to as the AIIBP, discovered that TCT No. N-130671 was spurious, the property
described therein non-existent, and that the property covered by TCT No. C-
52576 had a prior existing mortgage in favor of one Divina Pablico.
The Board of Directors of the AIIBP created an Investigating Committee to look
into the CAMEC transaction. They found petitioner guilty of conduct prejudicial to
the best interest of the service. The board suspended the petitioner, prompting
the latter to appeal the decision citing AIIBP’s lack of legal standing to sue since
it was not able to file its by-laws within the prescribed period.

Issue:
Whether a corporation which failed to file its by-laws within the prescribed period
ipso facto lose its power as such

Held:
NO. At the very least, by its failure to submit its by-laws on time, the AIIBP may
be considered a de facto corporation whose right to exercise corporate powers
may not be inquired into collaterally in any private suit to which such
corporations may be a party. Moreover, a corporation which has failed to file its
by-laws within the prescribed period does not ipso facto lose its powers as such.
The SEC Rules on Suspension/Revocation of the Certificate of Registration of
Corporations, details the procedures and remedies that may be availed of before
an order of revocation can be issued. There is no showing that such a procedure
has been initiated in this case.

8.
Wilson P. Gamboa v. Finance Secretary Margarito Teves, et al., G.R.No.
176579, June 28, 2011

THE FACTS
This is a petition to nullify the sale of shares of stock of Philippine
TelecommunicationsInvestment Corporation (PTIC) by the government of the Republic of
the Philippines, acting throughthe Inter-Agency Privatization Council (IPC), to Metro Pacific
Assets Holdings, Inc. (MPAH), anaffiliate of First Pacific Company Limited (First Pacific), a Hong
Kong-based investmentmanagement and holding company and a shareholder of the
Philippine Long Distance TelephoneCompany (PLDT).The petitioner questioned the sale on
the ground that it also involved an indirect sale of 12million shares (or about 6.3 percent of the
outstanding common shares) of PLDT owned by PTIC toFirst Pacific.
With the this sale, First Pacific’s common shareholdings in PLDT increased from 30.7
percent to 37 percent, thereby increasing the total common shareholdings of foreigners in
PLDT toabout 81.47%. This, according to the petitioner, violates Section 11, Article XII of the
1987 PhilippineConstitution which limits foreign ownership of the capital of a public utility to
not more than 40%,thus:
Section 11.
No franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or associations organized under the laws
of the Philippines, at least sixty per centum of whosecapital is owned
by such citizens
; nor shall such franchise, certificate, or authorization be exclusive incharacter or
for a longer period than fifty years. Neither shall any such franchise or right be
grantedexcept under the condition that it shall be subject to amendment,
alteration, or repeal by the Congresswhen the common good so requires. The
State shall encourage equity participation in public utilities bythe general public.
The participation of foreign investors in the governing body of any public
utilityenterprise shall be limited to their proportionate share in its capital, and all
the executive and managingofficers of such corporation or association must be
citizens of the Philippines. (Emphasis supplied)

II.

THE ISSUE

Does the term “capital” in Section

11, Article XII of the Constitution refer to the total commonshares only, or to the total
outstanding capital stock (combined total of common and non-votingpreferred shares) of
PLDT, a public utility?
III.

THE RULING

[The Court partly granted the petition and

held that the term “capital” in Section 11, Article XII
of the Constitution refers only to shares of stock entitled to vote in the election
of directors of a public utility, i.e., to the total common shares in PLDT.]
Considering that common shares have voting rights which translate to control, as opposed
topreferred shares which usually have no voting rights,
the term “capital” in Section 11, Article XII of
the Constitution refers only to common shares. However, if the preferred shares also have the
right
to vote in the election of directors, then the term “capital” shall include such preferred
shares because the right to participate in the control or management of the corporation is
exercised through the right to vote in the election of directors. In short,
the term “capital” in Section 11, Article XII of the Constitution refers only to
shares of stock that can vote in the election of directors.
 To construe broadly the term “capital” as the total outstanding capital stock, including both
common and non-voting preferred shares, grossly contravenes the intent and letter of the
Constitution that the “State shall develop a self -reliant and independent national economy
effectively controlled by Filipinos.” A broad definition unjustifiably disregards who
owns the all-important votingstock, which necessarily equates to control of the public
utility.Holders of PLDT preferred shares are explicitly denied of the right to vote in the election
of directors. PLDT’s Articles of Incorporation expressly state that “ the holders of Serial
PreferredStock shall not be entitled to vote at any meeting of the stockholders
for the election of directors or for any other purpose or otherwise participate in any
action taken by the corporationor its stockholder s, or to receive notice of any
meeting of stockholders.” On the other hand, holders of common shares are granted the
exclusive right to vote in the election of directors. PLDT’s Articles of Incorporation state that
“each holder of Common Capital Stock shall have one vote in respect of each share of such
stock held by him on all matters voted upon by the stockholders, and theholders of
Common Capital Stock shall have the exclusive right to vote for the election of
directors and for all other purposes.” It must be stressed, and respondents do not
dispute, that foreigners hold a majority of thecommon shares of PLDT. In fact, based on
PLDT’s 2010 General Information Sheet (GIS), which isa document required to be submitted
annually to the Securities and ExchangeCommission, foreigners hold 120,046,690 common
shares of PLDT whereas Filipinos hold only 66,750,622 common shares. In other words,
foreigners hold 64.27% of the total number of PLDT’s common shares, while Filipinos hold
only 35.73%. Since holding a majority of the common sharesequates to control, it is clear that
foreigners exercise control over PLDT. Such amount of controlunmistakably exceeds the
allowable 40 percent limit on foreign ownership of public utilities expresslymandated in Section
11, Article XII of the Constitution. As shown in PLDT’s 2010 GIS, as submitted to the
SEC, the par value of PLDT commonshares is P5.00 per share, whereas the par value of
preferred shares is P10.00 per share. In other words, preferred shares have twice the par
value of common shares but cannot elect directors andhave only 1/70 of the dividends of
common shares. Moreover, 99.44% of the preferred shares areowned by Filipinos while
foreigners own only a minuscule 0.56% of the preferred shares. Worse,preferred shares
constitute 77.85% of the authorized capital stock of PLDT while common sharesconstitute
only 22.15%. This undeniably shows that beneficial interest in PLDT is not with the non-voting
preferred shares but with the common shares, blatantly violating the
constitutionalrequirement of 60 percent Filipino control and Filipino beneficial ownership in a
public utility.In short, Filipinos hold less than 60 percent of the voting stock, and earn less than
60 percentof the dividends, of PLDT. This directly contravenes the express command in
Section 11, Article XII of the Constitution that “[n]o franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted except to x x x corporations x
x x organized under the laws of thePhilippines, at least sixty per centum of whose capital is
owned by such citizens x x x.” To repeat, (1) foreigners own 64.27% of the common shares
of PLDT, which class of sharesexercises the sole right to vote in the election of
directors, and thus exercise control over PLDT; (2) Filipinos own only 35.73% of
PLDT’s common shares, constituting a minority of the voting stock, and thus do not exercise
control over PLDT; (3) preferred shares, 99.44% owned by Filipinos, have novoting rights; (4)
preferred shares earn only 1/70 of the dividends that common shares earn; (5)preferred
shares have twice the par value of common shares; and (6) preferred shares constitute
77.85% of the authorized capital stock of PLDT and common shares only 22.15%. This kind
of ownership and control of a public utility is a mockery of the Constitution.[Thus, the
Respondent Chairperson of the Securities and Exchange Commission was DIRECTED by
the Court to apply the foregoing definition of the term “capital” in determining theextent of
allowable foreign ownership in respondent Philippine Long Distance Telephone Company,and
if there is a violation of Section 11, Article XII of the Constitution, to impose the
appropriatesanctions under the law.]

9. CEASE VS CA

FACTS:

Forrest Cease and five (5) other American citizens formed Tiaong Milling and Plantation
Company.Eventually, the shares of the other original incorporators were bought out by Cease
with his children. The company’s charter lapsed in June 1958. Forrest Cease died in
August 1959.There was nomention whether there were steps to liquidate the
company. Some of his children wanted an actualdivision while others wanted a
reincorporation. Two of his children, Benjamin and Florence, initiatedSpecial
Proceeding No. 3893 with CFI Tayabas asking that the Tiaong Milling and
PlantationCorporation be declared identical to Forrest Cease and that its
properties be divided among hischildren as intestate heirs. Defendants opposed
the same but the CFI ruled in favor of the plaintiffs.Defendants filed a notice of
appeal from the CFI’s decision but the same was dismissed for beingpremature. The
case was elevated to the SC which remanded it to the Court of Appeals. The CA
dismissed the petition.

ISSUE: Whether or not the Court of Appeals erred in affirming the lower court’s
decision that thesubject properties owned by the corporation are also properties of the
estate of Forrest Cease

HELD: NO. The trial court indeed found strong support, one that is based on a
well-entrenchedprinciple of law which is the theory of "merger of Forrest L.
Cease and The Tiaong Milling as onepersonality", or that "the company is only
the business conduit and alter ego of the deceased ForrestL. Cease and the
registered properties of Tiaong Milling are actually properties of Forrest L. Cease
andshould be divided equally, share and share alike among his six children, ... ",
the trial court aptly applied the familiar exception to the general rule by
disregarding the legal fiction of distinct andseparate corporate personality and
regarding the corporation and the individual member one and thesame. In
shredding the fictitious corporate veil, the trial judge narrated the undisputed
factualpremise, thus: While the records showed that originally its incorporators
were aliens, friends or third-parties inrelation to another, in the course of its
existence, it developed into a close family corporation. TheBoard of Directors and
stockholders belong to one family the head of which Forrest L. Cease
alwaysretained the majority stocks and hence the control and management of its
affairs. It must be notedthat as his children increase or become of age, he
continued distributing his shares among themadding Florence, Teresa and Marion until
at the time of his death only 190 were left to his name.Definitely, only the members of his
family benefited from the Corporation. The corporation 'never' had any account with any
banking institution or if any account was carried ina bank on its behalf, it was in the
name of Mr. Forrest L. Cease. There is truth in plaintiff's allegationthat the
corporation is only a business conduit of his father and an extension of his
personality, they are one and the same thing. Thus, the assets of the corporation are also
the estate of Forrest L. Cease,the father of the parties herein who are all legitimate
children of full blood. A rich store of jurisprudence has established the rule
known as the doctrine of disregarding orpiercing the veil of corporate
fiction.GENERAL RULE: a corporation is vested by law with a personality separate and
distinct from thepersons composing it as well as any other legal entity to which it
may be related. By virtue of thisattribute, a corporation may not, generally, be
made to answer for acts or liabilities of its stockholdersor those of the legal
entities to which it may be connected, and vice versa. This separate and
distinctpersonality is, however, merely a fiction created by law for convenience
and to promote the ends of justice

EXCEPTIONS: Such rule may not be used or invoked for ends subversive of the
policy and purpose behind its creation or which could not have been intended by
law to which it owes its being. This isparticularly true where the fiction is used to
defeat public convenience, justify wrong, protect fraud,defend crime, confuse
legitimate legal or judicial issues, perpetrate deception or otherwise
circumventthe law This is likewise true where the corporate entity is being used
as an alter ego, adjunct, or businessconduit for the sole benefit of the
stockholders or of another corporate. In any of these cases, thenotion of
corporate entity will be pierced or disregarded, and the corporation will be
treated merely as an association of persons or, where there are two
corporations, they will be merged as one, the one being merely regarded as part
or the instrumentality of the other. An indubitable deduction from the findings of
the trial court cannot but lead to the conclusion thatthe business of the corporation is
largely, if not wholly, the personal venture of Forrest L. Cease. Thereis not even a shadow of a
showing that his children were subscribers or purchasers of the stocks they own. Their
participation as nominal shareholders emanated solely from Forrest L. Cease's
gratuitousdole out of his own shares to the benefit of his children and ultimately
his family.If the Court sustained the theory of petitioners that the trial court
acted in excess of jurisdiction orabuse of discretion amounting to lack of jurisdiction in
deciding the civil case as a case for partition,Tiaong Milling and Plantation Company
would have been able to extend its corporate existence beyond the period of its
charter which lapsed in June, 1958 under the guise and cover of F. L,
CeasePlantation Company, Inc. as Trustee which would be against the law, and
as Trustee shall have beenable to use the assets and properties for the benefit of
the petitioners, to the great prejudice anddefraudation. of private respondents.
Hence, it becomes necessary and imperative to pierce thatcorporate veil.The
judgment appealed from is AFFIRMED.

11. CIR v. Norton & Harrison Company, G.R. No. L-17618, Aug. 31,
1964)

Plaintiffs filed a collection action against X Corporation. Upon execution of the

court's decision, X Corporation was found to be without assets. Thereafter,
plaintiffs filed an action against its present and past stockholder Y Corporation
which owned substantially all of the stocks of X corporation. The two
corporations have the same board of directors and Y Corporation financed the
operations of X corporation. May Y Corporation be held liable for the debts of X
Corporation? Why?

A: Yes, Y Corporation may be held liable for the debts of X Corporation. The
doctrine of piercing the veil of corporation fiction applies to this case. The two
corporations have the same board of directors and Y Corporation owned
substantially all of the stocks of X Corporation, which facts justify the conclusion
that the latter is merely an extension of the personality of the former, and that
the former controls the policies of the latter. Added to this is the fact that Y
Corporation controls the finances of X Corporation which is merely an adjunct,
business conduit or alter ego of Y Corporation.

12.
JOHN F. MCLEOD vs. NATIONAL LABOR RELATIONS COMMISSION (FIRST
DIVISION),FILIPINAS SYNTHETIC FIBER CORPORATION (FILSYN), FAR
EASTERN TEXTILE MILLS,INC., STA. ROSA TEXTILES, INC., (PEGGY MILLS,
INC.), PATRICIO L. LIM, AND ERIC HUG.R. NO. 146667 January 23,
2007Ponente: CARPIO,
J.

FACTS:
On February 2, 1995, John F. McLeod filed a complaint for:1. retirement benefits2. vacation
and sick leave benefits3. non-payment of unused airline tickets4. holiday pay5. underpayment
of salary6. 13th month pay7. moral and exemplary damages8.
attorney’s fees plus interest, against Filipinas Synthetic Corporation (FILSYN), Far
Eastern Textile Mills, Inc., Sta. RosaTextiles, Inc. (SRTI), Patricio Lim (President of PMI)
and Eric Hu.Complainant was the Vice President and Plant Manager of the plant of Peggy
Mills, Inc. (PMI) atSta. Rosa, Laguna. Filsyn sold Peggy Mills, Inc. to Far Eastern Textile Mills,
Inc. and this wasrenamed as Sta. Rosa Textile (SRTI) with Patricio Lim as
Chairman and President. The ownersof Far Eastern Textiles decided for cessation of
operations of Sta. Rosa Textiles. On twooccasions, complainant wrote letters to Patricio Lim
requesting for his retirement and otherbenefits. In the last quarter of 1994 respondents
offered complainant compromise settlement ofonly P300,000.00 which complainant rejected.

The Labor Arbiter held all respondents as jointly and solidarily liable for complainant’s money
claims.The NLRC reversed and set aside the ruling of the Labor Arbiter and a new one was
enteredordering only respondent Peggy Mills, Inc. (PMI) to pay the money claims. All other
claims weredismissed for lack of merit.The Court of Appeals affirmed the decision of the
NLRC with modification. It held Patricio Lim as jointly and solidarily liable with Peggy
Mills, Inc. (PMI) to pay the money claims to McLeod.

ISSUE:
Whether or not Patricio Lim, as President of PMI, could be held jointly and solidarily liable with
PMI.

HELD:
No, Patricio Lim is absolved from personal liability. A corporation is a juridical entity with
legal personality separate and distinct from those actingfor and in its behalf and, in
general, from the people comprising it. The rule is that obligationsincurred by the corporation,
acting through its directors, officers, and employees, are its soleliabilities.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 faithor gross negligence in
directing its affairs, or when there is a conflict of interest resulting indamages to the
corporation, its stockholders or other persons;(2) they consent to the issuance of watered
down stocks or when, having knowledge of suchissuance, 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.Considering that McLeod failed to prove any
of the foregoing exceptions in the present case,McLeod cannot hold Patricio solidarily liable
with PMI.The records are bereft of any evidence that Patricio acted with malice or bad faith.
Bad faith is aquestion of fact and is evidentiary. Bad faith does not connote bad judgment or
negligence. Itimports a dishonest purpose or some moral obliquity and conscious wrongdoing.
It meansbreach of a known duty through some ill motive or interest. It partakes of the nature
of fraud.In the present case, there is nothing substantial on record to show that Patricio acted
in bad faith in terminating McLeod’s services to warrant Patricio’s personal liability. PMI had no
other choice but to stop plant operations. The work stoppage therefore was by necessity.
Thecompany could no longer continue with its plant operations because of the serious
businesslosses that it had suffered. The mere fact that Patricio was president and director of
PMI is not aground to conclude that
he should be held solidarily liable with PMI for McLeod’s money claims.

13. DE ASIS VS CA NO DIGEST