G.R. No.
164182 February 26, 2008 The following day or on December 14, 2000, petitioner submitted to public
POWER HOMES UNLIMITED CORPORATION, petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION AND NOEL
MANERO, respondents.
DECISION
PUNO, C.J.:
This petition for review seeks the reversal and setting aside of the July 31,
2003 Decision1 of the Court of Appeals that affirmed the January 26, 2001
Cease and Desist Order (CDO)2 of public respondent Securities and
Exchange Commission (SEC) enjoining petitioner Power Homes Unlimited
Corporation’s (petitioner) officers, directors, agents, representatives and any
and all persons claiming and acting under their authority, from further
engaging in the sale, offer for sale or distribution of securities; and its June
18, 2004 Resolution3 which denied petitioner’s motion for reconsideration.
The facts: Petitioner is a domestic corporation duly registered with public
respondent SEC on October 13, 2000 under SEC Reg. No. A200016113. Its
primary purpose is:
To engage in the transaction of promoting, acquiring, managing,
leasing, obtaining options on, development, and improvement of real
estate properties for subdivision and allied purposes, and in the
purchase, sale and/or exchange of said subdivision and properties
through network marketing.4
On October 27, 2000, respondent Noel Manero requested public respondent
SEC to investigate petitioner’s business. He claimed that he attended a
seminar conducted by petitioner where the latter claimed to sell properties
that were inexistent and without any broker’s license.
On November 21, 2000, one Romulo E. Munsayac, Jr. inquired from public
respondent SEC whether petitioner’s business involves "legitimate network
marketing."
On the bases of the letters of respondent Manero and Munsayac, public
respondent SEC held a conference on December 13, 2000 that was attended
by petitioner’s incorporators John Lim, Paul Nicolas and Leonito Nicolas. The
attendees were requested to submit copies of petitioner’s marketing scheme
and list of its members with addresses.
respondent SEC copies of its marketing course module and letters of
accreditation/authority or confirmation from Crown Asia, Fil-Estate Network
and Pioneer 29 Realty Corporation.
On January 26, 2001, public respondent SEC visited the business premises
of petitioner wherein it gathered documents such as certificates of
accreditation to several real estate companies, list of members with web sites,
sample of member mail box, webpages of two (2) members, and lists of
Business Center Owners who are qualified to acquire real estate properties
and materials on computer tutorials.
On the same day, after finding petitioner to be engaged in the sale or offer for
sale or distribution of investment contracts, which are considered securities
under Sec. 3.1 (b) of Republic Act (R.A.) No. 8799 (The Securities Regulation
Code),5 but failed to register them in violation of Sec. 8.1 of the same
Act,6 public respondent SEC issued a CDO that reads:
WHEREFORE, pursuant to the authority vested in the Commission,
POWER HOMES UNLIMITED, CORP., its officers, directors, agents,
representatives and any and all persons claiming and acting under
their authority, are hereby ordered to immediately CEASE AND
DESIST from further engaging in the sale, offer or distribution of the
securities upon the receipt of this order.
In accordance with the provisions of Section 64.3 of Republic Act No.
8799, otherwise known as the Securities Regulation Code, the
parties subject of this Cease and Desist Order may file a request for
the lifting thereof within five (5) days from receipt.7
On February 5, 2001, petitioner moved for the lifting of the CDO, which public
respondent SEC denied for lack of merit on February 22, 2001.
Aggrieved, petitioner went to the Court of Appeals imputing grave abuse of
discretion amounting to lack or excess of jurisdiction on public respondent
SEC for issuing the order. It also applied for a temporary restraining order,
which the appellate court granted.
On May 23, 2001, the Court of Appeals consolidated petitioner’s case with
CA-G.R. [SP] No. 62890 entitled Prosperity.Com, Incorporated v.
Securities and Exchange Commission (Compliance and Enforcement
Department), Cristina T. De La Cruz, et al.
On June 19, 2001, petitioner filed in the Court of Appeals a Motion for the
Issuance of a Writ of Preliminary Injunction. On July 6, 2001, the motion was
heard. On July 12, 2001, public respondent SEC filed its opposition. On July
13, 2001, the appellate court granted petitioner’s motion, thus:
Considering that the Temporary Restraining Order will expire
tomorrow or on July 14, 2001, and it appearing that this Court cannot
resolve the petition immediately because of the issues involved
which require a further study on the matter, and considering further
that with the continuous implementation of the CDO by the SEC
would eventually result to the sudden demise of the petitioner’s
business to their prejudice and an irreparable damage that may
possibly arise, we hereby resolve to grant the preliminary injunction.
WHEREFORE, let a writ of preliminary injunction be issued in favor
of petitioner, after posting a bond in the amount of P500,000.00 to
answer whatever damages the respondents may suffer should
petitioner be adjudged not entitled to the injunctive relief herein
granted.8
On August 8, 2001, public respondent SEC moved for reconsideration, which
was not resolved by the Court of Appeals.
On July 31, 2003, the Court of Appeals issued its Consolidated Decision. The
disposition pertinent to petitioner reads:9
WHEREFORE, x x x x the petition for certiorari and prohibition filed
by the other petitioner Powerhomes Unlimited Corporation is hereby
DENIED for lack of merit and the questioned Cease and Desist Order
issued by public respondent against it is accordingly AFFIRMED IN
TOTO.
On June 18, 2004, the Court of Appeals denied petitioner’s motion for
reconsideration;10 hence, this petition for review.
The issues for determination are: (1) whether public respondent SEC followed
due process in the issuance of the assailed CDO; and (2) whether petitioner’s
business constitutes an investment contract which should be registered with
public respondent SEC before its sale or offer for sale or distribution to the
public.
On the first issue, Sec. 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.
We hold that petitioner was not denied due process. The records reveal that
public respondent SEC properly examined petitioner’s business operations
when it (1) called into conference three of petitioner’s incorporators, (2)
requested information from the incorporators regarding the nature of
petitioner’s business operations, (3) asked them to submit documents
pertinent thereto, and (4) visited petitioner’s business premises and gathered
information thereat. All these were done before the CDO was issued by the
public respondent SEC. Trite to state, a formal trial or hearing is not
necessary to comply with the requirements of due process. Its essence is
simply the opportunity to explain one’s position. Public respondent SEC
abundantly allowed petitioner to prove its side.
The second issue is whether the business of petitioner involves an investment
contract that is considered security11 and thus, must be registered prior to
sale or offer for sale or distribution to the public pursuant to Section 8.1 of
R.A. No. 8799, viz:
Section 8. Requirement of Registration of Securities. – 8.1. Securities
shall not be sold or offered for sale or distribution within the
Philippines, without a registration statement duly filed with and
approved by the Commission. Prior to such sale, information on the
securities, in such form and with such substance as the Commission
may prescribe, shall be made available to each prospective
purchaser.
Public respondent SEC found the petitioner "as a marketing company that
promotes and facilitates sales of real properties and other related products of
real estate developers through effective leverage marketing." It also described
the conduct of petitioner’s business as follows:
The scheme of the [petitioner] corporation requires an investor to
become a Business Center Owner (BCO) who must fill-up and sign
its application form. The Terms and Conditions printed at the back of
the application form indicate that the BCO shall mean an
independent representative of Power Homes, who is enrolled in the
company’s referral program and who will ultimately purchase real
property from any accredited real estate developers and as such he
 is entitled to a referral bonus/commission. Paragraph 5 of the same
indicates that there exists no employer/employee relationship
between the BCO and the Power Homes Unlimited, Corp.
The BCO is required to pay US$234 as his enrollment fee. His
enrollment entitles him to recruit two investors who should pay
US$234 each and out of which amount he shall receive US$92. In
case the two referrals/enrollees would recruit a minimum of four (4)
persons each recruiting two (2) persons who become his/her own
down lines, the BCO will receive a total amount of US$147.20 after
deducting the amount of US$36.80 as property fund from the gross
amount of US$184. After recruiting 128 persons in a period of eight
(8) months for each Left and Right business groups or a total of 256
enrollees whether directly referred by the BCO or through his down
lines, the BCO who receives a total amount of US$11,412.80 after
deducting the amount of US$363.20 as property fund from the gross
amount of US$11,776, has now an accumulated amount of
US$2,700 constituting as his Property Fund placed in a Property
Fund account with the Chinabank. This accumulated amount of
US$2,700 is used as partial/full down payment for the real property
chosen by the BCO from any of [petitioner’s] accredited real estate
developers.12
An investment contract is defined in the Amended Implementing Rules and
Regulations of R.A. No. 8799 as a "contract, transaction or scheme
(collectively ‘contract’) whereby a person invests his money in a common
enterprise and is led to expect profits primarily from the efforts of others."13
It behooves us to trace the history of the concept of an investment contract
under R.A. No. 8799. Our definition of an investment contract traces its roots
from the 1946 United States (US) case of SEC v. W.J. Howey Co.14 In this
case, the US Supreme Court was confronted with the issue of whether
the Howey transaction constituted an "investment contract" under the
Securities Act’s definition of "security."15 The US Supreme Court, recognizing
that the term "investment contract" was not defined by the Act or illumined by
any legislative report,16 held that "Congress was using a term whose meaning
had been crystallized"17 under the state’s "blue sky" laws18 in existence prior
to the adoption of the Securities Act.19 Thus, it ruled that the use of the catch-
all term "investment contract" indicated a congressional intent to cover a wide
range of investment transactions.20 It established a test to determine whether
a transaction falls within the scope of an "investment contract."21 Known as
the Howey Test, it requires a transaction, contract, or scheme whereby a
person (1) makes an investment of money, (2) in a common enterprise, (3)
with the expectation of profits, (4) to be derived solely from the efforts of
others.22 Although the proponents must establish all four elements, the US
Supreme Court stressed that the Howey Test "embodies a flexible rather than
a static principle, one that is capable of adaptation to meet the countless and
variable schemes devised by those who seek the use of the money of others
on the promise of profits."23 Needless to state, any investment contract
covered by the Howey Test must be registered under the Securities Act,
regardless of whether its issuer was engaged in fraudulent practices.
After Howey came the 1973 US case of SEC v. Glenn W. Turner Enterprises,
Inc. et al.24 In this case, the 9th Circuit of the US Court of Appeals ruled that
the element that profits must come "solely" from the efforts of others should
not be given a strict interpretation. It held that a literal reading of the
requirement "solely" would lead to unrealistic results. It reasoned out that its
flexible reading is in accord with the statutory policy of affording broad
protection to the public. Our R.A. No. 8799 appears to follow this flexible
concept for it defines an investment contract as a contract, transaction or
scheme (collectively "contract") whereby a person invests his money in a
common enterprise and is led to expect profits not solely but primarily
from the efforts of others. Thus, to be a security subject to regulation by the
SEC, an investment contract in our jurisdiction must be proved to be: (1) an
investment of money, (2) in a common enterprise, (3) with expectation of
profits, (4) primarily from efforts of others.
Prescinding from these premises, we affirm the ruling of the public
respondent SEC and the Court of Appeals that the petitioner was engaged in
the sale or distribution of an investment contract. Interestingly, the facts
of SEC v. Turner25 are similar to the case at bar. In Turner, the SEC brought a
suit to enjoin the violation of federal securities laws by a company offering to
sell to the public contracts characterized as self-improvement courses. On
appeal from a grant of preliminary injunction, the US Court of Appeals of the
9th Circuit held that self-improvement contracts which primarily offered the
buyer the opportunity of earning commissions on the sale of contracts to
others were "investment contracts" and thus were "securities" within the
meaning of the federal securities laws. This is regardless of the fact that
buyers, in addition to investing money needed to purchase the contract, were
obliged to contribute their own efforts in finding prospects and bringing them
to sales meetings. The appellate court held:
It is apparent from the record that what is sold is not of the usual
"business motivation" type of courses. Rather, the purchaser is
really buying the possibility of deriving money from the sale of
the plans by Dare to individuals whom the purchaser has brought to
Dare. The promotional aspects of the plan, such as seminars, films,
and records, are aimed at interesting others in the Plans. Their value
for any other purpose is, to put it mildly, minimal.
 Once an individual has purchased a Plan, he turns his efforts
toward bringing others into the organization, for which he will
receive a part of what they pay. His task is to bring prospective
purchasers to "Adventure Meetings."

The business scheme of petitioner in the case at bar is essentially similar. An

investor enrolls in petitioner’s program by paying US$234. This entitles him to
recruit two (2) investors who pay US$234 each and out of which amount he
receives US$92. A minimum recruitment of four (4) investors by these two (2)
recruits, who then recruit at least two (2) each, entitles the principal investor
to US$184 and the pyramid goes on.

We reject petitioner’s claim that the payment of US$234 is for the seminars
on leverage marketing and not for any product. Clearly, the trainings or
seminars are merely designed to enhance petitioner’s business of teaching its
investors the know-how of its multi-level marketing business. An investor
enrolls under the scheme of petitioner to be entitled to recruit other investors
and to receive commissions from the investments of those directly recruited
by him. Under the scheme, the accumulated amount received by the investor
comes primarily from the efforts of his recruits.

We therefore rule that the business operation or the scheme of petitioner

constitutes an investment contract that is a security under R.A. No. 8799.
Thus, it must be registered with public respondent SEC before its sale or offer
for sale or distribution to the public. As petitioner failed to register the same,
its offering to the public was rightfully enjoined by public respondent SEC.
The CDO was proper even without a finding of fraud. As an investment
contract that is security under R.A. No. 8799, it must be registered with public
respondent SEC, otherwise the SEC cannot protect the investing public from
fraudulent securities. The strict regulation of securities is founded on the
premise that the capital markets depend on the investing public’s level of
confidence in the system.

IN VIEW WHEREOF, the petition is DENIED. The July 31, 2003 Decision of
the Court of Appeals, affirming the January 26, 2001 Cease and Desist Order
issued by public respondent Securities and Exchange Commission against
petitioner Power Homes Unlimited Corporation, and its June 18, 2004
Resolution denying petitioner’s Motion for Reconsideration
are AFFIRMED. No costs.

SO ORDERED.
G.R. No. 164197 January 25, 2012
SECURITIES AND EXCHANGE COMMISSION, Petitioner,
vs.
PROSPERITY.COM, INC., Respondent.
DECISION
ABAD, J.:
This case involves the application of the Howey test in order to determine if a
particular transaction is an investment contract.
The Facts and the Case
Prosperity.Com, Inc. (PCI) sold computer software and hosted websites
without providing internet service. To make a profit, PCI devised a scheme in
which, for the price of US$234.00 (subsequently increased to US$294), a
buyer could acquire from it an internet website of a 15-Mega Byte (MB)
capacity. At the same time, by referring to PCI his own down-line buyers, a
first-time buyer could earn commissions, interest in real estate in the
Philippines and in the United States, and insurance coverage worth
₱50,000.00.
To benefit from this scheme, a PCI buyer must enlist and sponsor at least two
other buyers as his own down-lines. These second tier of buyers could in turn
build up their own down-lines. For each pair of down-lines, the buyer-sponsor
received a US$92.00 commission. But referrals in a day by the buyer-sponsor
should not exceed 16 since the commissions due from excess referrals inure
to PCI, not to the buyer-sponsor.
Apparently, PCI patterned its scheme from that of Golconda Ventures, Inc.
(GVI), which company stopped operations after the Securities and Exchange
Commission (SEC) issued a cease and desist order (CDO) against it. As it
later on turned out, the same persons who ran the affairs of GVI directed
PCI’s actual operations.
In 2001, disgruntled elements of GVI filed a complaint with the SEC against
PCI, alleging that the latter had taken over GVI’s operations. After
hearing,1 the SEC, through its Compliance and Enforcement unit, issued a
CDO against PCI. The SEC ruled that PCI’s scheme constitutes an
Investment contract and, following the Securities Regulations Code,2 it should
have first registered such contract or securities with the SEC.
Instead of asking the SEC to lift its CDO in accordance with Section 64.3 of
Republic Act (R.A.) 8799, PCI filed with the Court of Appeals (CA) a petition
for certiorari against the SEC with an application for a temporary restraining
order (TRO) and preliminary injunction in CA-G.R. SP 62890. Because the
CA did not act promptly on this application for TRO, on January 31, 2001 PCI
returned to the SEC and filed with it before the lapse of the five-day period a
request to lift the CDO. On the following day, February 1, 2001, PCI moved to
withdraw its petition before the CA to avoid possible forum shopping violation.
During the pendency of PCI’s action before the SEC, however, the CA issued
a TRO, enjoining the enforcement of the CDO.3 In response, the SEC filed
with the CA a motion to dismiss the petition on ground of forum shopping. In a
Resolution,4 the CA initially dismissed the petition, finding PCI guilty of forum
shopping. But on PCI’s motion, the CA reversed itself and reinstated the
petition.5
In a joint resolution,6 CA-G.R. SP 62890 was consolidated with CA-G.R. SP
64487 that raised the same issues. On July 31, 2003 the CA rendered a
decision, granting PCI’s petition and setting aside the SEC-issued CDO.7 The
CA ruled that, following the Howey test, PCI’s scheme did not constitute an
investment contract that needs registration pursuant to R.A. 8799, hence, this
petition.
The Issue Presented
The sole issue presented before the Court is whether or not PCI’s scheme
constitutes an investment contract that requires registration under R.A. 8799.
The Ruling of the Court
The Securities Regulation Code treats investment contracts as "securities"
that have to be registered with the SEC before they can be distributed and
sold. An investment contract is a contract, transaction, or scheme where a
person invests his money in a common enterprise and is led to expect profits
primarily from the efforts of others.8
Apart from the definition, which the Implementing Rules and Regulations
provide, Philippine jurisprudence has so far not done more to add to the
same. Of course, the United States Supreme Court, grappling with the
problem, has on several occasions discussed the nature of investment
contracts. That court’s rulings, while not binding in the Philippines, enjoy
some degree of persuasiveness insofar as they are logical and consistent
with the country’s best interests.9
The United States Supreme Court held in Securities and Exchange WHEREFORE, the Court DENIES the petition and AFFIRMS the decision
Commission v. W.J. Howey Co.10 that, for an investment contract to exist, the dated July 31, 2003 and the resolution dated June 18, 2004 of the Court of
following elements, referred to as the Howey test must concur: (1) a contract, Appeals in CA-G.R. SP 62890.
transaction, or scheme; (2) an investment of money; (3) investment is made in
a common enterprise; (4) expectation of profits; and (5) profits arising SO ORDERED.
primarily from the efforts of others. 11 Thus, to sustain the SEC position in this
case, PCI’s scheme or contract with its buyers must have all these elements.

An example that comes to mind would be the long-term commercial papers

that large companies, like San Miguel Corporation (SMC), offer to the public
for raising funds that it needs for expansion. When an investor buys these
papers or securities, he invests his money, together with others, in SMC with
an expectation of profits arising from the efforts of those who manage and
operate that company. SMC has to register these commercial papers with the
SEC before offering them to investors.1âwphi1

Here, PCI’s clients do not make such investments. They buy a product of
some value to them: an Internet website of a 15-MB capacity. The client can
use this website to enable people to have internet access to what he has to
offer to them, say, some skin cream. The buyers of the website do not invest
money in PCI that it could use for running some business that would generate
profits for the investors. The price of US$234.00 is what the buyer pays for
the use of the website, a tangible asset that PCI creates, using its computer
facilities and technical skills.

Actually, PCI appears to be engaged in network marketing, a scheme

adopted by companies for getting people to buy their products outside the
usual retail system where products are bought from the store’s shelf. Under
this scheme, adopted by most health product distributors, the buyer can
become a down-line seller. The latter earns commissions from purchases
made by new buyers whom he refers to the person who sold the product to
him. The network goes down the line where the orders to buy come.

The commissions, interest in real estate, and insurance coverage worth

₱50,000.00 are incentives to down-line sellers to bring in other customers.
These can hardly be regarded as profits from investment of money under the
Howey test.

The CA is right in ruling that the last requisite in the Howey test is lacking in
the marketing scheme that PCI has adopted. Evidently, it is PCI that expects
profit from the network marketing of its products. PCI is correct in saying that
the US$234 it gets from its clients is merely a consideration for the sale of the
websites that it provides.
G.R. No. 166786 May 3, 2006
MICHEL J. LHUILLER Pawnshop, Inc. Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
YNARES-SANTIAGO, J.:
Assailed in this petition for review on certiorari is the June 29, 2004
Decision1 of the Court of Appeals in CA-G.R. SP No. 67667, which reversed
the October 24, 2001 Decision2 of the Court Tax Appeals and ordered
petitioner Michel J. Lhuillier Pawnshop, Inc., to pay (1) P19,961,636.09 as
deficiency Value Added Tax (VAT); and (2) P3,142,986.02 as deficiency
Documentary Stamp Tax (DST), for the year 1997.
The facts show that petitioner, a corporation engaged in the pawnshop
business, received Assessment Notice Nos. 81-VAT-13-97-99-12-118 and
81-DST-13-97-99-12-119, issued by the Chief Assessment Division, Revenue
Region No. 13, Cebu City, for deficiency VAT in the amount of
P19,961,636.09 and deficiency DST in the amount of P13,142,986.02, for the
year 1997. Petitioner filed a motion for reconsideration of said assessment
notices but was denied by respondent Commissioner of Internal Revenue
(CIR).
On petition for review with the Court of Tax Appeals, the latter rendered
decision in favor of petitioner setting aside the assessment notices issued by
the CIR. It ruled, inter alia, that the subject of a DST under Section 195 of the
National Internal Revenue Code (NIRC) is the document evidencing the
covered transaction. Holding that a pawn ticket is neither a security nor a
printed evidence of indebtedness, the tax court concluded that such pawn
ticket cannot be the subject of a DST. The dispositive portion thereof, states:
WHEREFORE, in view of all the foregoing, the instant Petition for Review is
hereby GRANTED. Accordingly, Assessment Notices Nos. 81-VAT-13-97-99-
12-118 and 81-DST-13-97-99-11-119 are hereby CANCELLED and SET
ASIDE.
SO ORDERED.3
Respondent filed a petition for review with the Court of Appeals which
reversed the CTA decision and sustained the assessments against petitioner.
It ratiocinated, among others, that a pawn ticket, per se, is not subject to DST;
rather, it is the transaction involved, which in this case is pledge, that is being
taxed. Hence, petitioner was properly assessed to pay DST. The decretal
portion thereof, provides:
WHEREFORE, the instant petition is hereby GRANTED. The decision of the
Court of Tax Appeals dated October 24, 2001 is REVERSED and SET
ASIDE. In lieu thereof, respondent Michel J. Lhuillier Pawnshop, Inc., is
ORDERED TO PAY: (1) P19,961636.09, as deficiency Value-Added Tax,
inclusive of surcharge and interest; and (2) P3,142,986.02, as deficiency
Documentary Stamp Tax, inclusive of surcharge and interest, for the year
1997. No pronouncement as to cost.
SO ORDERED.4
Respondent filed a motion for partial reconsideration praying that petitioner be
ordered to pay deficiency interest of 20% per annum for failure to pay the
same on January 2, 2000, as indicated in the notices. On December 29,
2004, the Court of Appeals granted the motion and modified the June 29,
2004 decision as follows:
WHEREFORE, the instant petition is hereby GRANTED. The decision of the
Court of Tax Appeals dated October 24, 2001 is REVERSED and SET
ASIDE. In lieu thereof, respondent Michel J. Lhuillier Pawnshop, Inc., is
ORDERED TO PAY: (1) 19,961,636.09, as deficiency Value-Added Tax,
inclusive of surcharge and interest; (2) P3,142,986.02, as deficiency
Documentary Stamp Tax, inclusive of surcharge and interest, for the year
1997; and (3) Delinquency Interest at the rate of 20% per annum from
January 2, 2000, until the deficiency assessment are fully paid, pursuant to
Section 249 of the National Internal Revenue Code. No pronouncement as to
costs.
SO ORDERED.5
On January 25, 2005, petitioner elevated the case to this Court.
Subsequently, it filed a motion to withdraw the petition with respect to the
issue of VAT.6 Petitioner manifested that the Chamber of Pawnbrokers of the
Philippines, where it is a member, entered into a Memorandum of
Agreement7 with the Bureau of Internal Revenue (BIR) allowing the pawnshop
industry to compromise the issue of VAT on pawnshops. Considering that
petitioner already paid the agreed amount of settlement, it prayed that the
case be decided solely on the issue of DST.
On September 28, 2005, the Court granted petitioner’s partial withdrawal of
the petition.8 Hence, the lone question to be resolved in the present petition is
whether petitioner’s pawnshop transactions are subject to DST.
The Court rules in the affirmative.
Sections 173 and 195 of the NIRC, state:
SEC. 173. Stamp Taxes Upon Documents, Loan Agreements, Instruments,
and Papers. – Upon documents, instruments, loan agreements and
papers, and upon acceptances, assignments, sales and transfers of the
obligation, right or property incident thereto, there shall be levied,
collected and paid for, and in respect of the transaction so had or
accomplished, the corresponding documentary stamp taxes x x x. (Emphasis
supplied)
SEC. 195. Stamp Tax on Mortgages, Pledges, and Deeds of Trust. – On
every mortgage or pledge of lands, estate, or property, real or personal,
heritable or movable, whatsoever, where the same shall be made as security
for the payment of any definite and certain sum of money lent at the time or
previously due and owing or forborne to be paid, being payable and on any
conveyance of land, estate, or property whatsoever, in trust or to be sold, or
otherwise converted into money which shall be and intended only as security,
either by express stipulation or otherwise, there shall be collected a
documentary stamp tax at the following rates:
"(a) When the amount secured does not exceed Five thousand pesos
(P5,000), Twenty pesos (P20).1avvphil.net
(b) On each Five thousand pesos (P5,000), or fractional part thereof in
excess of Five thousand pesos (P5,000), an additional tax of Ten pesos
(10.00).
x x x x. (Emphasis supplied)
It is clear from the foregoing provisions that the subject of a DST is not limited
to the document embodying the enumerated transactions. A DST is an excise
tax on the exercise of a right or privilege to transfer obligations, rights or
properties incident thereto. In Philippine Home Assurance Corporation v.
Court of Appeals,9 it was held that:
In general, documentary stamp taxes are levied on the exercise by persons of
certain privileges conferred by law for the creation, revision, or termination of
specific legal relationships through the execution of specific instruments.
Examples of such privileges, the exercise of which, as effected through the
issuance of particular documents, are subject to the payment of documentary
stamp taxes are leases of lands, mortgages, pledges and trusts, and
conveyances of real property. (Emphasis added)
Pledge is among the privileges, the exercise of which is subject to DST. A
pledge may be defined as an accessory, real and unilateral contract by virtue
of which the debtor or a third person delivers to the creditor or to a third
person movable property as security for the performance of the principal
obligation, upon the fulfillment of which the thing pledged, with all its
accessions and accessories, shall be returned to the debtor or to the third
person.10 This is essentially the business of pawnshops which are defined
under Section 3 of Presidential Decree No. 114, or the Pawnshop Regulation
Act, as persons or entities engaged in lending money on personal property
delivered as security for loans.
Section 12 of the Pawnshop Regulation Act and Section 21 of the Rules and
Regulations For Pawnshops11 issued by the Central Bank12 to implement the
Act, require every pawnshop or pawnbroker to issue, at the time of every
such loan or pledge, a memorandum or ticket signed by the pawnbroker and
containing the following details: (1) name and residence of the pawner; (2)
date the loan is granted; (3) amount of principal loan; (4) interest rate in
percent; (5) period of maturity; (6) description of pawn; (7) signature of
pawnbroker or his authorized agent; (8) signature or thumb mark of pawner or
his authorized agent; and (9) such other terms and conditions as may be
agreed upon between the pawnbroker and the pawner. In addition, Central
Bank Circular No. 445,13 prescribed a standard form of pawn tickets with
entries for the required details on its face and the mandated terms and
conditions of the pledge at the dorsal portion thereof.
Section 3 of the Pawnshop Regulation Act defines a pawn ticket as follows:
"Pawn ticket" is the pawnbrokers’ receipt for a pawn. It is neither a security
nor a printed evidence of indebtedness."
True, the law does not consider said ticket as an evidence of security or
indebtedness. However, for purposes of taxation, the same pawn ticket is
proof of an exercise of a taxable privilege of concluding a contract of pledge.
At any rate, it is not said ticket that creates the pawnshop’s obligation to pay
DST but the exercise of the privilege to enter into a contract of pledge. There
is therefore no basis in petitioner’s assertion that a DST is literally a tax on a
document and that no tax may be imposed on a pawn ticket.
The settled rule is that tax laws must be construed in favor of the taxpayer
and strictly against the government; and that a tax cannot be imposed without
clear and express words for that purpose.14 Taking our bearing from the
foregoing doctrines, we scrutinized Section 195 of the NIRC, but there is no
way that said provision may be interpreted in favor of petitioner. Section
195 unqualifiedly subjects all pledges to DST. It states that "[o]n every x x
x pledge x x x there shall be collected a documentary stamp tax x x x." It is
clear, categorical, and needs no further interpretation or construction. The
explicit tenor thereof requires hardly anything than a simple application.15
never an issue in Commissioner of Internal Revenue v. Michel J. Lhuillier
Pawnshop, Inc., because nowhere was it mentioned therein that the
pawnshop involved was directed to pay DST. Otherwise stated, the
declaration of nullity of RMC No. 43-91 was the Court’s finding, among
others, that pawnshops cannot be classified as lending investors; and
certainly not because pawnshops are not subject to DST. The invocation of
said ruling is therefore misplaced.

The onus of proving that pawnshops are not subject to DST is thus shifted to WHEREFORE, the petition is DENIED and the June 29, 2004 Decision of the
petitioner. In establishing tax exemptions, it should be borne in mind that Court of Appeals, as modified on December 29, 2004, in CA-G.R. SP No.
taxation is the rule, exemption is the exception. Accordingly, statutes granting 67667, is AFFIRMED.
tax exemptions must be construed in strictissimi juris against the taxpayer and
liberally in favor of the taxing authority. One who claims an exemption from SO ORDERED.
tax payments rests the burden of justifying the exemption by words too plain
to be mistaken and too categorical to be misinterpreted.16

In the instant case, there is no law specifically and expressly exempting

pledges entered into by pawnshops from the payment of DST. Section
19917 of the NIRC enumerated certain documents which are not subject to
stamp tax; but a pawnshop ticket is not one of them. Hence, petitioner’s
nebulous claim that it is not subject to DST is without merit. It cannot be over-
emphasized that tax exemption represents a loss of revenue to the
government and must, therefore, not rest on vague inference.18 Exemption
from taxation is never presumed. For tax exemption to be recognized, the
grant must be clear and express; it cannot be made to rest on doubtful
implications.19

The Court notes that BIR Ruling No. 305-87,20 and BIR Ruling No. 018-
88,21 which held that a pawn ticket is subject to DST because it is an evidence
of a pledge transaction, had been revoked by BIR Ruling No. 325-88.22 In the
latter ruling, the BIR held that DST is a tax on the document; and since a
pawn ticket is not an evidence of indebtedness, it cannot be subject to DST.
Nevertheless, this interpretation is not consistent with the provisions of
Section 195 of the NIRC which categorically taxes the privilege to enter into a
contract of pledge. Indeed, administrative issuances must not override,
supplant or modify the law but must be consistent with the law they intend to
carry out.23

Finally, petitioner invokes the declaration of nullity of Revenue Memorandum

Circular (RMC) No. 43-91 in Commissioner of Internal Revenue v. Michel J.
Lhuillier Pawnshop, Inc.24 Said case, however, is not applicable to the present
controversy. RMC No. 43-91 is actually a clarification of Revenue
Memorandum Order No. 15-91 which classified pawnshops as "lending
investors" and imposed upon them a 5% lending investor’s tax. While RMC
No. 43-91 declared in addition that pawnshops are subject to DST, such was
G.R. No. 154131 July 20, 2006
SECURITIES AND EXCHANGE COMMISSION, petitioner,
vs.
PERFORMANCE FOREIGN EXCHANGE CORPORATION, respondent.
DECISION
SANDOVAL-GUTIERREZ, J.:
For our resolution is the Petition for Review on Certiorari1 assailing the
Decision2 dated February 11, 2002 and Resolution dated July 3, 2002 of the
Court of Appeals in CA-G.R. SP No. 65217, entitled "Performance Foreign
Exchange Corporation, petitioner, versus Securities and Exchange
Commission, respondent."
The pertinent facts as found by the Court of Appeals are:
Performance Foreign Exchange Corporation, herein respondent, is a
domestic corporation duly registered on June 23, 1998 under Securities and
Exchange Commission (SEC) Registration No. A199808910, with the
following purposes:
Primary Purpose
To operate as a broker/agent between market participants in
transactions involving, but not limited to, foreign exchange, deposits,
interest rate instruments, fixed income securities, bonds/bills,
repurchased agreements of fixed income securities, certificate of
deposits, bankers acceptances, bills of exchange, over-the-counter
option of the aforementioned instruments, Lesser Developed
Country’s (L.D.C.) debt, energy and stock indexes and all related,
similar or derivative products, other than acting as a broker for the
trading of securities pursuant to the Revised Securities Act of the
Philippines.
Secondary Purpose
To engage in money changer or exchanging foreign currencies into
domestic currency, Philippine currency or other foreign currencies
into another currencies.
After two years of operation, respondent received a letter dated November
28, 2000 from the SEC, herein petitioner, requiring it to appear before the
Compliance and Enforcement Department (CED) on December 14, 2000 for a
clarificatory conference regarding its business operations. Respondent’s
officers complied and explained before the CED the nature of their business.
On January 16, 2001, Emilio B. Aquino, Director of CED, issued a Cease and
Desist Order,3 in CED Case No. 99-2297, stating that his department
conducted an inquiry on respondent’s business operations for possible
violation of Republic Act (R.A.) No. 8799 (otherwise known as The Securities
Regulation Code); 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. 87994 and the related provisions of
its Implementing Rules and Regulations; and that it is imperative to enjoin
respondent from further operating as such to protect the interest of the public.
The dispositive portion of the said Order reads:
WHEREFORE, pursuant to the authority vested in the Commission,
PERFORMANCE FOREIGN EXCHANGE CORPORATION, its
officers, directors, agents, representatives, and any and all persons
claiming and acting under their authority, are hereby ordered to
immediately CEASE AND DESIST from further engaging in the
solicitation of funds for foreign currency trading and operating
as a foreign currency futures merchant/broker, upon receipt of
this Order.
In accordance with the provisions of Section 64.35 of Republic Act
8799, otherwise known as the Securities Regulation Code, the
parties subject of this Cease and Desist Order may file a request for
the lifting thereof within five (5) days from receipt hereof.
SO ORDERED.
On January 25, 2001, respondent filed with petitioner SEC a motion6 praying
for the lifting of the Cease and Desist Order, alleging that: (a) it has not
violated any law or regulation in the conduct of its business; (b) it has been
operating in accordance with the purposes for which it was organized, which
purposes were duly approved by petitioner; (c) it has not engaged
in currency futures contracts trading; and (d) its business involves "spot
currency trading which is not a form of currency futures transaction."
On February 8, 2001, then SEC Chairman Lilia R. Bautista, in her desire to
know with certainty the nature of respondent’s business, sent a letter7 to
the Bangko Sentral ng Pilipinas (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.
Without waiting for BSP’s determination of the matter, petitioner, the
following day (February 9, 2001), issued an Order8 denying respondent’s
motion for the lifting of the Cease and Desist Order and directing that the
same stays until respondent shall have submitted the appropriate
"endorsement" from the BSP that it can engage in financial derivative
transactions. The Order states that the contracts entered into, offered and
sold by respondent are in the nature of commodity futures contracts;9 and that
such contracts may be considered a form of financial derivatives instruments,
the trading of which is regulated by BSP.
On February 16, 2001, respondent filed a Manifestation With Urgent
Motion10 praying that, pending determination by the BSP of the real nature of
its business, the implementation of the February 9, 2001 Order be temporarily
suspended to allow it to continue its operations.
On March 15, 2001, respondent, in compliance with petitioner’s February 9,
2001 Order requiring it to submit the appropriate BSP "endorsement,"
presented before the BSP panel of officers a summary of its operations and
its foreign exchange spot product.
On April 23, 2001, petitioner issued an Order11 making the Cease and Desist
Order permanent, thus:
WHEREAS, on February 19, 2001, PFEC filed with the Commission
its "Manifestation with Urgent Motion to Temporarily Suspend
Implementation of Order dated 09 February 2001," which
Manifestation was denied by the Commission en banc during its
meeting on February 22, 2001, and the said denial was
conveyed verbally to the corporation;
WHEREFORE, premises considered, and pursuant to the authority
vested in the Commission, the Cease and Desist Order is now
made permanent, and Performance Foreign Exchange Corporation
is hereby directed to show cause within thirty (30) days from receipt
of this Order why its certificate of registration should not be
revoked for violation of the Securities Regulation Code, and/or
PD 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.
(Underscoring supplied)
On May 4, 2001, respondent filed a motion12 praying that the said Order be
set aside. Petitioner, however, did not act on the motion. This prompted
respondent to file with petitioner a notice13 dated June 14, 2001 that it is
withdrawing its motion in order to seek a more appropriate and speedy
remedy.
Feeling the injurious effects of petitioner’s acts to its business operations,
respondent, on June 20, 2001, filed with the Court of Appeals a Petition for
Certiorari14 with prayer for a temporary restraining order and preliminary
injunction, docketed as CA-G.R. SP No. 65217. Respondent alleged, among
others, that petitioner SEC acted without or in excess of its jurisdiction or with
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.
Meanwhile, on August 13, 2001, Amado M. Tetangco, Jr., then Officer-in-
Charge, Office of the Governor, BSP, in answer to SEC Chairman Lilia
Bautista’s letter-request of February 8, 2001, stated that respondent’s
business activity "does not fall under the category of futures
trading"and"can not be classified as financial derivatives transactions,"
thus:
Dear Ms. Bautista,
This refers to your letter dated February 8, 2001 requesting for a
definitive statement that the foreign currency leverage trading
engage in by private corporations, particularly, Performance Foreign
Exchange Corporation (PFEC), is a financial derivatives transaction
and that it can only be undertaken by banks or non-bank financial
intermediaries performing quasi-banking functions and/or its
subsidiaries/affiliates.
As indicated in your description of the transactions and the
documents submitted, the foreign currency leverage trading,
subject of your query, is essentially similar in mechanics to
currency future trading, particularly with respect to the margin
requirements, standard contract size, and daily market-to-market of
open position. However, it does not fall under the category of
futures trading because it is not exchange-traded. Further, we can
not classify it as being financial derivatives transactions as we
consider the transaction as plain currency margin trading, which by
its mechanics, involve the set-up of margin and non-delivery of the
currencies involved.
 In view of the foregoing facts, the activities of the aforesaid
corporation are not covered by BSP guidelines on derivative
licensing.
We hope we have satisfactorily clarified your concerns.
Very truly yours,
(Sgd.)
AMANDO M. TETANGCO, JR.15
On February 11, 2002, the Court of Appeals rendered a Decision16 in favor of
respondent, thus:
WHEREFORE, premises considered, the instant petition
is GRANTED and accordingly, the assailed Orders dated January
16, 2001, February 9, 2001, February 22, 2001 and April 23,
2001 of the Securities and Exchange Commission are SET ASIDE.
SO ORDERED.
The Court of Appeals ruled that petitioner acted with grave abuse of
discretion when it issued its challenged Orders without a positive factual
finding that respondent violated the Securities Regulation Code.
Petitioner filed a motion for reconsideration but it was denied by the appellate
court in a Resolution17 dated July 3, 2002.
Hence, the instant Petition for Review on Certiorari.
Petitioner, through the Solicitor General, contends that the Court of Appeals
erred in not applying the rule that factual findings of quasi-judicial bodies, like
the SEC, which have acquired expertise because their jurisdiction is confined
to specific matters, are generally accorded not only respect but even finality if
such findings are supported by substantial evidence.18
In its Comment,19 respondent counters that the instant petition utterly lacks
merit and should be dismissed.
The issue for our resolution is whether petitioner SEC acted with grave abuse
of discretion in issuing the Cease and Desist Order and its subsequent Order
making it permanent.
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. Its letter to the BSP dated February 8, 2001 states in part:
The Securities and Exchange Commission has been
investigating corporations which engage in foreign currency trading
abroad. The following illustrates their operations:
xxx
Enclosed are pertinent documents which were submitted by a
corporation showing how its transactions operate. It is claimed by the
corporation in question that theirs are all spot transactions and are
not covered by the Bangko Sentral ng Pilipinas. We understand,
however, that in other jurisdiction, this type of activity can only be
done by banks.
Previous inquiries from the Bangko Sentral ng Pilipinas, specifically
Department of Commercial Banks II, and your department,
 Commercial Banks I, lead to conclude that this kind of trading in
foreign currencies may be a form of financial derivatives.
May we, therefore, request a definitive statement that the above-
described transactions, and as illustrated in the attached
documents, are a form of financial derivatives and, therefore,
can only be undertaken by banks, or non-bank financial
intermediaries performing quasi-banking functions and/or its
subsidiaries/affiliates.20 (Underscoring supplied)
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.
Worse, when respondent filed a motion praying that the same order be lifted
for being premature, petitioner, in its Order dated February 9, 2001, even
denied the motion despite its admission therein that it cannot
determine certain material facts involving respondent’s transactions and, as
such, the matter must be referred to the BSP for determination, thus:
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.
In sum, we find no reversible error committed by the Court of Appeals in
rendering its assailed Decision and Resolution.
WHEREFORE, we DENY the petition. The challenged Decision and
Resolution of the Court of Appeals in CA-G.R. SP No. 65217 are AFFIRMED.
SO ORDERED.

In the light of the above circumstances, and the fact that the
Commission cannot determine whether such transactions are
actually executed in Singapore or Hongkong as alleged, and
whether the foreign currency rates used in the transactions are
verifiable, it is our position that the same be endorsed to the
BSP.

In view of the foregoing, the cease and desist order stays against the
corporation until the latter shall be able to submit the appropriate
endorsement from the Bangko Sentral ng Pilipinas that it can engage
in financial derivative transactions.

SO ORDERED.21 (Underscoring supplied)

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
G.R. No. 170770 January 9, 2013
Directors Subscribers

VITALIANO N. AGUIRRES II and FIDEL N. AGUIRRE, Petitioners, 1. Francisco Q. Bocobo 1. Francisco Q. Bocobo
vs.
FQB+7, INC., NATHANIEL D. BOCOBO, PRISCILA BOCOBO and 2. Fidel N. Aguirre 2. Fidel N. Aguirre
ANTONIO DE VILLA, Respondents.
3. Alfredo Torres 3. Alfredo Torres
DECISION 4. Victoriano Santos 4. Victoriano Santos

DEL CASTILLO, J.: 5. Victorino Santos5 5. Victorino Santos

6. Vitaliano N. Aguirre II
Pursuant to Section 145 of the Corporation Code, an existing intra-corporate
dispute, which does not constitute a continuation of corporate business, is not 7. Alberto Galang
affected by the subsequent dissolution of the corporation.
8. Rolando B. Bechayda6
Before the Court is a Petition for Review on Certiorari of the June 29, 2005
Decision1 of the Court of Appeals (CA) in CA-G.R. SP No. 87293, which To Vitaliano’s knowledge, except for the death of Francisco Q. Bocobo and
nullified the trial court’s writ of preliminary injunction and dismissed petitioner Alfredo Torres, there has been no other change in the above listings.
Vitaliano N. Aguirre’s (Vitaliano) Complaint before the Regional Trial Court
(RTC) for lack of jurisdiction. The dispositive portion of the assailed Decision
reads: The Complaint further alleged that, sometime in April 2004, Vitaliano
discovered a General Information Sheet (GIS) of FQB+7, dated September 6,
2002, in the Securities and Exchange Commission (SEC) records. This GIS
WHEREFORE, the assailed October 15, 2004 Order, as well as the October was filed by Francisco Q. Bocobo’s heirs, Nathaniel and Priscila, as FQB+7’s
27, 2004 Writ of Preliminary Injunction, are SET ASIDE. With FQB+7, Inc.’s president and secretary/treasurer, respectively. It also stated FQB+7’s
dissolution on September 29, 2003 and Case No. 04111077’s ceasing to directors and subscribers, as follows:
become an intra-corporate dispute said case is hereby ordered DISMISSED
for want of jurisdiction.
Directors Subscribers
SO ORDERED.2
1. Nathaniel D. Bocobo 1. Nathaniel D. Bocobo
Likewise assailed in this Petition is the appellate court’s December 16, 2005 2. Priscila D. Bocobo 2. Priscila D. Bocobo
Resolution,3 which denied a reconsideration of the assailed Decision.
3. Fidel N. Aguirre 3. Fidel N. Aguirre
Factual Antecedents
4. Victoriano Santos 4. Victorino7 Santos
On October 5, 2004, Vitaliano filed, in his individual capacity and on behalf of 5. Victorino Santos 5. Victorino Santos
FQB+7, Inc. (FQB+7), a Complaint4 for intra-corporate dispute, injunction,
inspection of corporate books and records, and damages, against 6. Consolacion Santos8 6. Consolacion Santos9
respondents Nathaniel D. Bocobo (Nathaniel), Priscila D. Bocobo (Priscila),
and Antonio De Villa (Antonio). The Complaint alleged that FQB+7 was
established in 1985 with the following directors and subscribers, as reflected Further, the GIS reported that FQB+7’s stockholders held their annual
in its Articles of Incorporation: meeting on September 3, 2002.10
The substantive changes found in the GIS, respecting the composition of
directors and subscribers of FQB+7, prompted Vitaliano to write to the "real"
Board of Directors (the directors reflected in the Articles of Incorporation),
represented by Fidel N. Aguirre (Fidel). In this letter11 dated April 29, 2004,
Vitaliano questioned the validity and truthfulness of the alleged stockholders
meeting held on September 3, 2002. He asked the "real" Board to rectify what
he perceived as erroneous entries in the GIS, and to allow him to inspect the
corporate books and records. The "real" Board allegedly ignored Vitaliano’s
request.
On September 27, 2004, Nathaniel, in the exercise of his power as FQB+7’s
president, appointed Antonio as the corporation’s attorney-in-fact, with power
of administration over the corporation’s farm in Quezon Province.12 Pursuant
thereto, Antonio attempted to take over the farm, but was allegedly prevented
by Fidel and his men.13
Characterizing Nathaniel’s, Priscila’s, and Antonio’s continuous
representation of the corporation as a usurpation of the management powers
and prerogatives of the "real" Board of Directors, the Complaint asked for an
injunction against them and for the nullification of all their previous actions as
purported directors, including the GIS they had filed with the SEC. The
Complaint also sought damages for the plaintiffs and a declaration of
Vitaliano’s right to inspect the corporate records.
The case, docketed as SEC Case No. 04-111077, was assigned to Branch 24
of the RTC of Manila (Manila RTC), which was a designated special
commercial court, pursuant to A.M. No. 03-03-03-SC.14
The respondents failed, despite notice, to attend the hearing on Vitaliano’s
application for preliminary injunction.15 Thus, in an Order16 dated October 15,
2004, the trial court granted the application based only on Vitaliano’s
testimonial and documentary evidence, consisting of the corporation’s articles
of incorporation, by-laws, the GIS, demand letter on the "real" Board of
Directors, and police blotter of the incident between Fidel’s and Antonio’s
groups. On October 27, 2004, the trial court issued the writ of preliminary
injunction17 after Vitaliano filed an injunction bond.
The respondents filed a motion for an extension of 10 days to file the
"pleadings warranted in response to the complaint," which they received on
October 6, 2004.18 The trial court denied this motion for being a prohibited
pleading under Section 8, Rule 1 of the Interim Rules of Procedure Governing
Intra-corporate Controversies under Republic Act (R.A.) No. 8799.19
The respondents filed a Petition for Certiorari and Prohibition,20 docketed as
CA-G.R. SP No. 87293, before the CA. They later amended their Petition by
impleading Fidel, who allegedly shares Vitaliano’s interest in keeping them
out of the corporation, as a private respondent therein.21
The respondents sought, in their certiorari petition, the annulment of all the
proceedings and issuances in SEC Case No. 04-11107722 on the ground that
Branch 24 of the Manila RTC has no jurisdiction over the subject matter,
which they defined as being an agrarian dispute.23 They theorized that
Vitaliano’s real goal in filing the Complaint was to maintain custody of the
corporate farm in Quezon Province. Since this land is agricultural in nature,
they claimed that jurisdiction belongs to the Department of Agrarian Reform
(DAR), not to the Manila RTC.24 They also raised the grounds of improper
venue (alleging that the real corporate address is different from that stated in
the Articles of Incorporation)25 and forum-shopping26 (there being a pending
case between the parties before the DAR regarding the inclusion of the
corporate property in the agrarian reform program).27 Respondents also
raised their defenses to Vitaliano’s suit, particularly the alleged disloyalty and
fraud committed by the "real" Board of Directors,28 and respondents’
"preferential right to possess the corporate property" as the heirs of the
majority stockholder Francisco Q. Bocobo.29
The respondents further informed the CA that the SEC had already revoked
FQB+7’s Certificate of Registration on September 29, 2003 for its failure to
comply with the SEC reportorial requirements.30 The CA determined that the
corporation’s dissolution was a conclusive fact after petitioners Vitaliano and
Fidel failed to dispute this factual assertion.31
Ruling of the Court of Appeals
The CA determined that the issues of the case are the following: (1) whether
the trial court’s issuance of the writ of preliminary injunction, in its October 15,
2004 Order, was attended by grave abuse of discretion amounting to lack of
jurisdiction; and (2) whether the corporation’s dissolution affected the trial
court’s jurisdiction to hear the intra corporate dispute in SEC Case No. 04-
111077.32
On the first issue, the CA determined that the trial court committed a grave
abuse of discretion when it issued the writ of preliminary injunction to remove
the respondents from their positions in the Board of Directors based only on
Vitaliano’s self-serving and empty assertions. Such assertions cannot
outweigh the entries in the GIS, which are documented facts on record, which
state that respondents are stockholders and were duly elected corporate
directors and officers of FQB+7, Inc. The CA held that Vitaliano only proved a
future right in case he wins the suit. Since an injunction is not a remedy to
protect future, contingent or abstract rights, then Vitaliano is not entitled to a
writ.33
Further, the CA disapproved the discrepancy between the trial court’s
October 15, 2004 Order, which granted the application for preliminary
injunction, and its writ dated October 27, 2004. The Order enjoined all the
respondents "from entering, occupying, or taking over possession of the farm
owned by Atty. Vitaliano Aguirre II," while the writ states that the subject farm
is "owned by plaintiff corporation located in Mulanay, Quezon Province." The
CA held that this discrepancy imbued the October 15, 2004 Order with
jurisdictional infirmity.34
On the second issue, the CA postulated that Section 122 of the Corporation
Code allows a dissolved corporation to continue as a body corporate for the
limited purpose of liquidating the corporate assets and distributing them to its
creditors, stockholders, and others in interest. It does not allow the dissolved
corporation to continue its business. That being the state of the law, the CA
determined that Vitaliano’s Complaint, being geared towards the continuation
of FQB+7, Inc.’s business, should be dismissed because the corporation has
lost its juridical personality.35 Moreover, the CA held that the trial court does
not have jurisdiction to entertain an intra-corporate dispute when the
corporation is already dissolved.36
After dismissing the Complaint, the CA reminded the parties that they should
proceed with the liquidation of the dissolved corporation based on the existing
GIS, thus:
With SEC’s revocation of its certificate of registration on September 29, 2004
[sic], FQB+7, Inc. will be obligated to wind up its affairs. The Corporation will
have to be liquidated within the 3-year period mandated by Sec. 122 of the
Corporation Code.
Regardless of the method it will opt to liquidate itself, the Corporation will
have to reckon with the members of the board as duly listed in the General
Information Sheet last filed with SEC. Necessarily, and as admitted in the
complaint below, the following as listed in the Corporation’s General
Information Sheet dated September 6, 2002, will have to continue acting as
Members of the Board of FQB+7, Inc. viz:
x x x x37
Herein petitioners filed a Motion for Reconsideration.38 They argued that the
CA erred in ruling that the October 15, 2004 Order was inconsistent with the
writ. They explained that pages 2 and 3 of the said Order were interchanged
in the CA’s records, which then misled the CA to its erroneous conclusion.
They also posited that the original sentence in the correct Order reads: "All
defendants are further enjoined from entering, occupying or taking over
possession of the farm owned by plaintiff corporation located in Mulanay,
Quezon." This sentence is in accord with what is ordered in the writ, hence
the CA erred in nullifying the Order.
On the second issue, herein petitioners maintained that the CA erred in
characterizing the reliefs they sought as a continuance of the dissolved
corporation’s business, which is prohibited under Section 122 of the
Corporation Code. Instead, they argued, the relief they seek is only to
determine the real Board of Directors that can represent the dissolved
corporation.
The CA denied the Motion for Reconsideration in its December 16, 2005
Resolution.39 It determined that the crucial issue is the trial court’s jurisdiction
over an intra-corporate dispute involving a dissolved corporation.40 Based on
the prayers in the Complaint, petitioners seek a determination of the real
Board that can take over the management of the corporation’s farm, not to sit
as a liquidation Board. Thus, contrary to petitioners’ claims, their Complaint is
not geared towards liquidation but a continuance of the corporation’s
business.
Issues
1. Whether the CA erred in annulling the October 15, 2004 Order
based on interchanged pages.
2. Whether the Complaint seeks to continue the dissolved
corporation’s business.
3. Whether the RTC has jurisdiction over an intra-corporate dispute
involving a dissolved corporation.
Our Ruling
The Petition is partly meritorious.
On the nullification of the Order of preliminary injunction.
Petitioners reiterate their argument that the CA was misled by the
interchanged pages in the October 15, 2004 Order. They posit that had the
CA read the Order in its correct sequence, it would not have nullified the
Order on the ground that it was issued with grave abuse of discretion
amounting to lack of jurisdiction.41
Petitioners’ argument fails to impress. The CA did not nullify the October 15,
2004 Order merely because of the interchanged pages. Instead, the CA
determined that the applicant, Vitaliano, was not able to show that he had an
actual and existing right that had to be protected by a preliminary injunction.
The most that Vitaliano was able to prove was a future right based on his
victory in the suit. Contrasting this future right of Vitaliano with respondents’
existing right under the GIS, the CA determined that the trial court should not
have disturbed the status quo. The CA’s discussion regarding the
interchanged pages was made only in addition to its above ratiocination.
Thus, whether the pages were interchanged or not will not affect the CA’s
main finding that the trial court issued the Order despite the absence of a
clear and existing right in favor of the applicant, which is tantamount to grave
abuse of discretion. We cannot disturb the CA’s finding on this score without
any showing by petitioners of strong basis to warrant the reversal.
Is the Complaint a continuation of business?
Section 122 of the Corporation Code prohibits a dissolved corporation from
continuing its business, but allows it to continue with a limited personality in
order to settle and close its affairs, including its complete liquidation, thus:
Sec. 122. Corporate liquidation. – Every corporation whose charter expires by
its own limitation or is annulled by forfeiture or otherwise, or whose corporate
existence for other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three (3) years after the
time when it would have been so dissolved, for the purpose of prosecuting
and defending suits by or against it and enabling it to settle and close its
affairs, to dispose of and convey its property and to distribute its assets, but
not for the purpose of continuing the business for which it was established.
xxxx
Upon learning of the corporation’s dissolution by revocation of its corporate
franchise, the CA held that the intra-corporate Complaint, which aims to
continue the corporation’s business, must now be dismissed under Section
122.
Petitioners concede that a dissolved corporation can no longer continue its
business. They argue, however, that Section 122 allows a dissolved
corporation to wind up its affairs within 3 years from its dissolution. Petitioners
then maintain that the Complaint, which seeks only a declaration that
respondents are strangers to the corporation and have no right to sit in the
board or act as officers thereof, and a return of Vitaliano’s stockholdings,
intends only to resolve remaining corporate issues. The resolution of these
issues is allegedly part of corporate winding up.
Does the Complaint seek a continuation of business or is it a settlement of
corporate affairs? The answer lies in the prayers of the Complaint, which
state:
PRAYER
WHEREFORE, it is most respectfully prayed of this Honorable Court that
judgment be rendered in favor of the plaintiffs and against the defendants, in
the following wise:
I. ON THE PRAYER OF TRO/STATUS QUO ORDER AND WRIT OF
PRELIMINARY INJUNCTION:
1. Forthwith and pending the resolution of plaintiffs’ prayer
for issuance of writ of preliminary injunction, in order to
maintain the status quo, a status quo order or temporary
restraining order (TRO) be issued enjoining the defendants,
their officers, employees, and agents from exercising the
powers and authority as members of the Board of Directors
of plaintiff FQB as well as officers thereof and from
misrepresenting and conducting themselves as such, and
enjoining defendant Antonio de Villa from taking over the
farm of the plaintiff FQB and from exercising any power and
authority by reason of his appointment emanating from his
co-defendant Bocobos.
2. After due notice and hearing and during the pendency of
this action, to issue writ of preliminary injunction prohibiting
the defendants from committing the acts complained of
herein, more particularly those enumerated in the
immediately preceeding paragraph, and making the
injunction permanent after trial on the merits.
II. ON THE MERITS
After trial, judgment be rendered in favor of the plaintiffs and against
the defendants, as follows:
1. Declaring defendant Bocobos as without any power and
authority to represent or conduct themselves as members of
the Board of Directors of plaintiff FQB, or as officers thereof.
2. Declaring that Vitaliano N. Aguirre II is a stockholder of
plaintiff FQB owning fifty (50) shares of stock thereof.
 3. Allowing Vitaliano N. Aguirre II to inspect books and
records of the company.
4. Annulling the GIS, Annex "C" of the Complaint as
fraudulent and illegally executed and filed.
5. Ordering the defendants to pay jointly and solidarily the
sum of at least ₱200,000.00 as moral damages; at least
₱100,000.00 as exemplary damages; and at least
₱100,000.00 as and for attorney’s fees and other litigation
expenses.
Plaintiffs further pray for costs and such other relief just and equitable under
the premises.42
The Court fails to find in the prayers above any intention to continue the
corporate business of FQB+7. The Complaint does not seek to enter into
contracts, issue new stocks, acquire properties, execute business
transactions, etc. Its aim is not to continue the corporate business, but to
determine and vindicate an alleged stockholder’s right to the return of his
stockholdings and to participate in the election of directors, and a
corporation’s right to remove usurpers and strangers from its affairs. The
Court fails to see how the resolution of these issues can be said to continue
the business of FQB+7.
Neither are these issues mooted by the dissolution of the corporation. A
corporation’s board of directors is not rendered functus officio by its
dissolution. Since Section 122 allows a corporation to continue its existence
for a limited purpose, necessarily there must be a board that will continue
acting for and on behalf of the dissolved corporation for that purpose. In fact,
Section 122 authorizes the dissolved corporation’s board of directors to
conduct its liquidation within three years from its dissolution. Jurisprudence
has even recognized the board’s authority to act as trustee for persons in
interest beyond the said three-year period.43 Thus, the determination of which
group is the bona fide or rightful board of the dissolved corporation will still
provide practical relief to the parties involved.
The same is true with regard to Vitaliano’s shareholdings in the dissolved
corporation. A party’s stockholdings in a corporation, whether existing or
dissolved, is a property right44 which he may vindicate against another party
who has deprived him thereof. The corporation’s dissolution does not
extinguish such property right. Section 145 of the Corporation Code ensures
the protection of this right, thus:
Sec. 145. Amendment or repeal. – No right or remedy in favor of or against
any corporation, its stockholders, members, directors, trustees, or officers, nor
any liability incurred by any such corporation, stockholders, members,
directors, trustees, or officers, shall be removed or impaired either by the
subsequent dissolution of said corporation or by any subsequent amendment
or repeal of this Code or of any part thereof. (Emphases supplied.)
On the dismissal of the Complaint for
lack of jurisdiction.
The CA held that the trial court does not have jurisdiction over an intra-
corporate dispute involving a dissolved corporation. It further held that due to
the corporation’s dissolution, the qualifications of the respondents can no
longer be questioned and that the dissolved corporation must now commence
liquidation proceedings with the respondents as its directors and officers.
The CA’s ruling is founded on the assumptions that intra-corporate
controversies continue only in existing corporations; that when the corporation
is dissolved, these controversies cease to be intra-corporate and need no
longer be resolved; and that the status quo in the corporation at the time of its
dissolution must be maintained. The Court finds no basis for the said
assumptions.
Intra-corporate disputes remain even
when the corporation is dissolved.
Jurisdiction over the subject matter is conferred by law. R.A. No.
879945 conferred jurisdiction over intra-corporate controversies on courts of
general jurisdiction or RTCs,46 to be designated by the Supreme Court. Thus,
as long as the nature of the controversy is intra-corporate, the designated
RTCs have the authority to exercise jurisdiction over such cases.
So what are intra-corporate controversies? R.A. No. 8799 refers to Section 5
of Presidential Decree (P.D.) No. 902-A (or The SEC Reorganization Act) for
a description of such controversies:
a) Devices or schemes employed by or any acts, of the board of
directors, business associates, its officers or partners, amounting to
fraud and misrepresentation which may be detrimental to the interest
of the public and/or of the stockholder, partners, members of
associations or organizations registered with the Commission;
b) Controversies arising out of intra-corporate or partnership
relations, between and among stockholders, members, or
 associates; between any or all of them and the corporation,
partnership or association of which they are stockholders, members
or associates, respectively; and between such corporation,
partnership or association and the state insofar as it concerns their
individual franchise or right to exist as such entity;
c) Controversies in the election or appointments of directors,
trustees, officers or managers of such corporations, partnerships or
associations.
The Court reproduced the above jurisdiction in Rule 1 of the Interim Rules of
Procedure Governing Intra-corporate Controversies under R.A. No. 8799:
SECTION 1. (a) Cases Covered – These Rules shall govern the procedure to
be observed in civil cases involving the following:
(1) Devices or schemes employed by, or any act of, the
board of directors, business associates, officers or partners,
amounting to fraud or misrepresentation which may be
detrimental to the interest of the public and/or of the
stockholders, partners, or members of any corporation,
partnership, or association;
(2) Controversies arising out of intra-corporate, partnership,
or association relations, between and among stockholders,
members, or associates; and between, any or all of them
and the corporation, partnership, or association of which
they are stockholders, members, or associates, respectively;
(3) Controversies in the election or appointment of directors,
trustees, officers, or managers of corporations, partnerships,
or associations;
(4) Derivative suits; and
(5) Inspection of corporate books.
Meanwhile, jurisprudence has elaborated on the above definitions by
providing tests in determining whether a controversy is intra-corporate. Reyes
v. Regional Trial Court of Makati, Br. 14247 contains a comprehensive
discussion of these two tests, thus:
A review of relevant jurisprudence shows a development in the Court's
approach in classifying what constitutes an intra-corporate controversy.
Initially, the main consideration in determining whether a dispute constitutes
an intra-corporate controversy was limited to a consideration of the intra-
corporate relationship existing between or among the parties. The types of
relationships embraced under Section 5(b) x x x were as follows:
a) between the corporation, partnership, or association and the
public;
b) between the corporation, partnership, or association and its
stockholders, partners, members, or officers;
c) between the corporation, partnership, or association and the State
as far as its franchise, permit or license to operate is concerned; and
d) among the stockholders, partners or associates themselves. xxx
The existence of any of the above intra-corporate relations was sufficient to
confer jurisdiction to the SEC now the RTC, regardless of the subject matter
of the dispute. This came to be known as the relationship test.
However, in the 1984 case of DMRC Enterprises v. Esta del Sol Mountain
Reserve, Inc., the Court introduced the nature of the controversy test. We
declared in this case that it is not the mere existence of an intra-corporate
relationship that gives rise to an intra-corporate controversy; to rely on the
relationship test alone will divest the regular courts of their jurisdiction for the
sole reason that the dispute involves a corporation, its directors, officers, or
stockholders. We saw that there is no legal sense in disregarding or
minimizing the value of the nature of the transactions which gives rise to the
dispute.
Under the nature of the controversy test, the incidents of that relationship
must also be considered for the purpose of ascertaining whether the
controversy itself is intra-corporate. The controversy must not only be rooted
in the existence of an intra-corporate relationship, but must as well pertain to
the enforcement of the parties' correlative rights and obligations under the
Corporation Code and the internal and intra-corporate regulatory rules of the
corporation. If the relationship and its incidents are merely incidental to the
controversy or if there will still be conflict even if the relationship does not
exist, then no intra-corporate controversy exists.
The Court then combined the two tests and declared that jurisdiction should
be determined by considering not only the status or relationship of the parties,
but also the nature of the question under controversy. This two-tier test was
adopted in the recent case of Speed Distribution, Inc. v. Court of Appeals:
'To determine whether a case involves an intra-corporate controversy, and is
to be heard and decided by the branches of the RTC specifically designated
by the Court to try and decide such cases, two elements must concur: (a) the
status or relationship of the parties, and [b] the nature of the question that is
the subject of their controversy.1âwphi1
The first element requires that the controversy must arise out of intra-
corporate or partnership relations between any or all of the parties and the
corporation, partnership, or association of which they are stockholders,
members or associates, between any or all of them and the corporation,
partnership or association of which they are stockholders, members or
associates, respectively; and between such corporation, partnership, or
association and the State insofar as it concerns the individual franchises. The
second element requires that the dispute among the parties be intrinsically
connected with the regulation of the corporation. If the nature of the
controversy involves matters that are purely civil in character, necessarily, the
case does not involve an intra-corporate controversy.' (Citations and some
emphases omitted; emphases supplied.)
Thus, to be considered as an intra-corporate dispute, the case: (a) must arise
out of intra-corporate or partnership relations, and (b) the nature of the
question subject of the controversy must be such that it is intrinsically
connected with the regulation of the corporation or the enforcement of the
parties’ rights and obligations under the Corporation Code and the internal
regulatory rules of the corporation. So long as these two criteria are satisfied,
the dispute is intra-corporate and the RTC, acting as a special commercial
court, has jurisdiction over it.
against another corporate actor. In so doing, Section 145 also preserves the
nature of the controversy between the parties as an intra-corporate dispute.
The dissolution of the corporation simply prohibits it from continuing its
business. However, despite such dissolution, the parties involved in the
litigation are still corporate actors. The dissolution does not automatically
convert the parties into total strangers or change their intra-corporate
relationships. Neither does it change or terminate existing causes of action,
which arose because of the corporate ties between the parties. Thus, a cause
of action involving an intra-corporate controversy remains and must be filed
as an intra-corporate dispute despite the subsequent dissolution of the
corporation.
WHEREFORE, premises considered, the Petition for Review on Certiorari is
PARTIALLY GRANTED. The assailed June 29, 2005 Decision of the Court of
Appeals in CA-G.R. SP No. 87293, as well as its December 16, 2005
Resolution, are ANNULLED with respect to their dismissal of SEC Case No.
04-111077 on the ground of lack of jurisdiction. The said case is ordered
REINSTATED before Branch 24 of the Regional Trial Court of Manila. The
rest of the assailed issuances are AFFIRMED.
SO ORDERED.

Examining the case before us in relation to these two criteria, the Court finds
and so holds that the case is essentially an intra-corporate dispute. It
obviously arose from the intra-corporate relations between the parties, and
the questions involved pertain to their rights and obligations under the
Corporation Code and matters relating to the regulation of the corporation.
We further hold that the nature of the case as an intra-corporate dispute was
not affected by the subsequent dissolution of the corporation.

It bears reiterating that Section 145 of the Corporation Code protects, among
others, the rights and remedies of corporate actors against other corporate
actors. The statutory provision assures an aggrieved party that the
corporation’s dissolution will not impair, much less remove, his/her rights or
remedies against the corporation, its stockholders, directors or officers. It also
states that corporate dissolution will not extinguish any liability already
incurred by the corporation, its stockholders, directors, or officers. In short,
Section 145 preserves a corporate actor’s cause of action and remedy