G .R. No. L-2598 June 29, 1950 (5) The defendants in the suit, namely, C.
) The defendants in the suit, namely, C. Arnold Hall and . . . The due incorporation of any corporations claiming in good
C. A RNOLD HALL and BRADLEY P. HALL, petitioners,
vs. EDMUNDO S. PICCIO, Judge of the Court of First Instance of
Leyte, FRED BROWN, EMMA BROWN, HIPOLITA CAPUCIONG, in
hi s capacity as receiver of the Far Eastern Lumber and
Com mercial Co., Inc., respondents.
BEN GZON, J.:
This is petition to set aside all the proceedings had in civil case
No. 381 of the Court of First Instance of Leyte and to enjoin the
respondent judge from further acting upon the same.
Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and
Bradley P. Hall, and the respondents Fred Brown, Emma Brown,
Hipolita D. Chapman and Ceferino S. Abella, signed and
acknowledged in Leyte, the article of incorporation of the Far
Eastern Lumber and Commercial Co., Inc., organized to engage
in a general lumber business to carry on as general contractors,
operators and managers, etc. Attached to the article was an
affidavit of the treasurer stating that 23,428 shares of stock had
been subscribed and fully paid with certain properties
transferred to the corporation described in a list appended
thereto.
(2) Immediately after the execution of said articles of
incorporation, the corporation proceeded to do business with
the adoption of by-laws and the election of its officers.
(3) On December 2, 1947, the said articles of incorporation were
filed in the office of the Securities and Exchange Commissioner,
for the issuance of the corresponding certificate of
incorporation.
(4) On March 22, 1948, pending action on the articles of
incorporation by the aforesaid governmental office, the
respondents Fred Brown, Emma Brown, Hipolita D. Chapman
and Ceferino S. Abella filed before the Court of First Instance of
Leyte the civil case numbered 381, entitled "Fred Brown et
al. vs. Arnold C. Hall et al.", alleging among other things that the
Far Eastern Lumber and Commercial Co. was an unregistered
partnership; that they wished to have it dissolved because of
bitter dissension among the members, mismanagement and
fraud by the managers and heavy financial losses.
Bradley P. Hall, filed a motion to dismiss, contesting the court's
jurisdiction and the sufficiently of the cause of action.
(6) After hearing the parties, the Hon. Edmund S. Piccio ordered
the dissolution of the company; and at the request of plaintiffs,
appointed of the properties thereof, upon the filing of a P20,000
bond.
(7) The defendants therein (petitioners herein) offered to file a
counter-bond for the discharge of the receiver, but the
respondent judge refused to accept the offer and to discharge
the receiver. Whereupon, the present special civil action was
instituted in this court. It is based upon two main propositions,
to wit:
(a) The court had no jurisdiction in civil case No. 381 to decree
the dissolution of the company, because it being a de
facto corporation, dissolution thereof may only be ordered in
a quo warranto proceeding instituted in accordance with section
19 of the Corporation Law.
(b) Inasmuch as respondents Fred Brown and Emma Brown had
signed the article of incorporation but only a partnership.
Discussion: The second proposition may at once be dismissed.
All the parties are informed that the Securities and Exchange
Commission has not, so far, issued the corresponding certificate
of incorporation. All of them know, or sought to know, that the
personality of a corporation begins to exist only from the
moment such certificate is issued — not before (sec. 11,
Corporation Law). The complaining associates have not
represented to the others that they were incorporated any
more than the latter had made similar representations to them.
And as nobody was led to believe anything to his prejudice and
damage, the principle of estoppel does not apply. Obviously this
is not an instance requiring the enforcement of contracts with
the corporation through the rule of estoppel.
The first proposition above stated is premised on the theory
that, inasmuch as the Far Eastern Lumber and Commercial Co.,
is a de facto corporation, section 19 of the Corporation Law
applies, and therefore the court had not jurisdiction to take
cognizance of said civil case number 381. Section 19 reads as
follows:
faith to be a corporation under this Act and its right to exercise
corporate powers shall not be inquired into collaterally in any
private suit to which the corporation may be a party, but such
inquiry may be had at the suit of the Insular Government on
information of the Attorney-General.
There are least two reasons why this section does not govern
the situation. Not having obtained the certificate of
incorporation, the Far Eastern Lumber and Commercial Co. —
even its stockholders — may not probably claim "in good faith"
to be a corporation.
Under our statue it is to be noted (Corporation Law, sec. 11)
that it is the issuance of a certificate of incorporation by the
Director of the Bureau of Commerce and Industry which calls a
corporation into being. The immunity if collateral attack is
granted to corporations "claiming in good faith to be a
corporation under this act." Such a claim is compatible with the
existence of errors and irregularities; but not with a total or
substantial disregard of the law. Unless there has been an
evident attempt to comply with the law the claim to be a
corporation "under this act" could not be made "in good faith."
(Fisher on the Philippine Law of Stock Corporations, p. 75. See
also Humphreys vs. Drew, 59 Fla., 295; 52 So., 362.)
Second, this is not a suit in which the corporation is a party. This
is a litigation between stockholders of the alleged corporation,
for the purpose of obtaining its dissolution. Even the existence
of a de jure corporation may be terminated in a private suit for
its dissolution between stockholders, without the intervention
of the state.
There might be room for argument on the right of minority
stockholders to sue for dissolution;1 but that question does not
affect the court's jurisdiction, and is a matter for decision by the
judge, subject to review on appeal. Whkch brings us to one
principal reason why this petition may not prosper, namely: the
petitioners have their remedy by appealing the order of
dissolution at the proper time.
There is a secondary issue in connection with the appointment
of a receiver. But it must be admitted that receivership is proper
in proceedings for dissolution of a company or corporation, and
it was no error to reject the counter-bond, the court having
declared the dissolution. As to the amount of the bond to be
demanded of the receiver, much depends upon the discretion of
the trial court, which in this instance we do not believe has been
clearly abused.
Judgment: The petition will, therefore, be dismissed, with costs.
The preliminary injunction heretofore issued will be dissolved.
[ G .R. No. 119002. October 19, 2000.]
IN TERNATIONAL EXPRESS TRAVEL & TOUR SERVICES,
IN C., Petitioner, v. HON. COURT OF APPEALS, HENRI KAHN,
PHILIPPINES FOOTBALL FEDERATION, Respondents.
D E C IS IO N
KA PUNAN, J.:
On June 30 1989, petitioner International Express Travel and
Tour Services, Inc., through its managing director, wrote a letter
to the Philippine Football Federation (Federation), through its
president private respondent Henri Kahn, wherein the former
offered its services as a travel agency to the latter. 1
The offer was accepted
Petitioner secured the airline tickets for the trips of the athletes
and officials of the Federation to the South East Asian Games in
Kuala Lumpur as well as various other trips to the People’s
Republic of China and Brisbane. The total cost of the tickets
amounted to P449,654.83. For the tickets received, the
Federation made two partial payments, both in September of
1989, in the total amount of P176,467.50. 2
On 4 October 1989, petitioner wrote the Federation, through
the private respondent a demand letter requesting for the
amount of P265,894.33. 3 On 30 October 1989, the Federation,
through the Project Gintong Alay, paid the amount of
P31,603.00. 4
On 27 December 1989, Henri Kahn issued a personal check in
the amount of P50,000 as partial payment for the outstanding
balance of the Federation. 5 Thereafter, no further payments
were made despite repeated demands
This prompted petitioner to file a civil case before the Regional
Trial Court of Manila. Petitioner sued Henri Kahn in his personal
capacity and as President of the Federation and impleaded the
Federation as an alternative defendant. Petitioner sought to
hold Henri Kahn liable for the unpaid balance for the tickets
purchased by the Federation on the ground that Henri Kahn
allegedly guaranteed the said obligation. 6
Henri Kahn filed his answer with counterclaim. While not
denying the allegation that the Federation owed the amount
P207,524.20, representing the unpaid balance for the plane
tickets, he averred that the petitioner has no cause of action
against him either in his personal capacity or in his official
capacity as president of the Federation. He maintained that he;
did not guarantee payment but merely acted as an agent of the
Federation which has a separate and distinct juridical
personality. 7
On the other hand, the Federation failed to file its answer,
hence, was declared in default by the trial court. 8
In due course, the trial court rendered judgment and ruled in
favor of the petitioner and declared Henri Kahn personally liable
for the unpaid obligation of the Federation. In arriving at the
said ruling, the trial court rationalized:
Defendant Henri Kahn would have been correct in his
contentions had it been duly established that defendant
Federation is a corporation The trouble, however, is that neither
the plaintiff nor the defendant Henri Kahn has adduced any
evidence proving the corporate existence of the defendant
Federation. In paragraph 2 of its complaint, plaintiff asserted
that "defendant Philippine Football Federation is a sports
association . . ." This has not been denied by defendant Henri
Kahn in his Answer. Being the President of defendant
Federation, its corporate existence is within the personal
knowledge of defendant Henri Kahn. He could have easily
denied specifically the assertion of the plaintiff that it is a mere
sports association if it were a domestic corporation. But he did
not.
x x x Hence, the Philippine Football Federation is not a party to this
A voluntary unincorporated association, like defendant
Federation has no power to enter into, or to ratify, a contract.
The contract entered into by its officers or agents on behalf of
such association is not binding on, or enforceable against it. The
officers or agents are themselves personally liable.
x x x9
The dispositive portion of the trial court’s decision reads:
WHEREFORE, judgment is rendered ordering defendant Henri
Kahn to pay the plaintiff the principal sum of P207,524.20, plus
the interest thereon at the legal rate computed from July 5,
1990, the date the complaint was filed, until the principal
obligation is fully liquidated; and another sum of P15,000.00 for
attorney’s fees
The complaint of the plaintiff against the Philippine Football
Federation and the counterclaims of the defendant Henri Kahn
are hereby dismissed.
With the costs against defendant Henri Kahn. 10
Only Henri Kahn elevated the above decision to the Court of
Appeals. On 21 December 1994, the respondent court rendered
a decision reversing the trial court, the decretal portion of said
decision reads:
WHEREFORE, premises considered, the judgment appealed from
is hereby REVERSED and SET ASIDE and another one is rendered
dismissing the complaint against defendant Henri S. Kahn. 11
In finding for Henri Kahn, the Court of Appeals recognized the
juridical existence of the Federation. It rationalized that since
petitioner failed to prove that Henri Kahn guaranteed the
obligation of the Federation, he should not be held liable for the
same as said entity has a separate and distinct personality from
its officers.
Petitioner filed a motion for reconsideration and as an
alternative prayer pleaded that the Federation be held liable for
the unpaid obligation. The same was denied by the appellate
court in its resolution of 8 February 1995, where it stated that:
As to the alternative prayer for the Modification of the Decision
by expressly declaring in the dispositive portion thereof the
Philippine Football Federation (PFF) as liable for the unpaid
obligation, it should be remembered that the trial court
dismissed the complaint against the Philippine Football
Federation, and the plaintiff did not appeal from this decision.
appeal and consequently, no judgment may be pronounced by
this Court against the PFF without violating the due process
clause, let alone the fact that the judgment dismissing the
complaint against it, had already become final by virtue of the
plaintiff’s failure to appeal therefrom. The alternative prayer is
therefore similarly DENIED. 12
Petitioner now seeks recourse to this Court and alleges that the
respondent court committed the following assigned errors: 13
A. THE, HONORABLE COURT OF APPEALS ERRED IN HOLDING
THAT PETITIONER HAD DEALT WITH THE PHILIPPINE FOOTBALL
FEDERATION (PFF) AS A CORPORATE ENTITY AND IN NOT
HOLDING THAT PRIVATE RESPONDENT HENRI KAHN WAS THE
ONE, WHO REPRESENTED THE PFF AS HAVING CORPORATE
PERSONALITY.
B. THE HONORABLE COURT OF APPEALS ERRED IN NOT
HOLDING PRIVATE RESPONDENT HENRI KAHN PERSONALLY
LIABLE FOR THE OBLIGATION OF THE UNINCORPORATED PFF,
HAVING NEGOTIATED WITH PETITIONER AND CONTRACTED THE
OBLIGATION IN BEHALF OF THE PFF, MADE A PARTIAL PAYMENT
AN ASSURED PETITIONER OF FULLY SETTLING THE OBLIGATION.
C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS
NOT PERSONALLY LIABLE, THE HONORABLE COURT OF APPEALS
ERRED IN NOT EXPRESSLY DECLARING IN ITS DECISION THAT THE
PFF IS SOLELY LIABLE FOR THE OBLIGATION
The resolution of the case at bar hinges on the determination of
the existence of the Philippine Football Federation as a juridical
person. In the assailed decision, the appellate court recognized
the existence of the Federation. In support of this, the CA cited
Republic Act 3135, otherwise known as the Revised Charter of
the Philippine Amateur Athletic Federation, and Presidential
Decree No. 604 as the laws from which said Federation derives
its existence
As correctly observed by the appellate court, both R.A. 3135 and
P.D. No. 604 recognized the juridical existence of national sports
associations. This may be gleaned from the powers and
functions granted to these associations. Section 14 of R.A. 3135
provides:
SECTION 14. Functions, powers and duties of Associations. —
The National Sports’ Association shall have the following
functions, powers and duties:
1. To adopt a constitution and by-laws for their internal
organization and government.
2. To raise funds by donations benefits, and other means for
their purposes.
3. To purchase, sell, lease or otherwise encumber property both
real and personal, for the accomplishment of their purpose;
4. To affiliate with international or regional sports’ Associations
after due consultation with the executive committee;x x
13. To perform such other acts as may be necessary for the
proper accomplishment of their purposes and not inconsistent
with this Act.
Section 8 of P.D. 604, grants similar functions to these sports
associations:
SECTION. 8. Functions, Powers, and Duties of National Sports
Association. — The National sports associations shall have the
following functions, powers, and duties:
1. Adopt a Constitution and By-Laws for their internal
organization and government which shall be submitted to the
Department and any amendment hereto shall take effect upon
approval by the Department: Provided, however, That no team,
school, club, organization or entity shall be admitted as a voting
member of an association unless 60 per cent of the athletes
composing said team, school, club, organization or entity are
Filipino citizens.
2. Raise funds by donations, benefits, and other means for their
purpose subject to the approval of the Department;
3. Purchase, sell, lease, or otherwise encumber property, both
real and personal, for the accomplishment of their purpose;
4. Conduct local, interport, and international competitions,
other than the Olympic and Asian Games, for the promotion of
their sport;
5. Affiliate with international or regional sports associations
after due consultation with the Department;x x x
13. Perform such other functions as may be provided by law.
The above powers and functions granted to national sports
associations clearly indicate that these entities may acquire a
juridical personality. The power to purchase, sell, lease and
encumber property are acts which may only be done by
persons, whether natural or artificial, with juridical capacity.
However, while we agree with the appellate court that national
sports associations may be accorded corporate status, such
does not automatically take place by the mere passage of these
laws
It is a basic postulate that before a corporation may acquire
juridical personality, the State must give its consent either in the
form of a special law or a general enabling act. We cannot agree
with the view of the appellate court; and the private respondent
that the Philippine Football Federation came into existence
upon the passage of these laws. Nowhere can it be found in R.A.
3135 or P.D. 604 any provision creating the Philippine Football
x Federation. These laws merely recognized the existence of
national sports associations and provided the manner by which
these entities may acquire juridical personality. Section 11 of
R.A. 3135 provides:
SECTION 11. National Sports’ Association; organization and
recognition. — A National Association shall be organized for
each individual sports in the Philippines in the manner
hereinafter provided to constitute the Philippine Amateur
Athletic Federation. Applications for recognition as a National
Sports’ Association shall be filed with the executive committee
together with, among others, a copy of the constitution and by-
laws and a list of the members of the proposed association, and
a filing fee of ten pesos.
The Executive Committee shall give the recognition applied for if
it is satisfied that said association will promote the purposes of
this Act and particularly section three thereof. No application
shall be held pending for more than three months after the filing
thereof without any action having been taken thereon by the
executive committee. Should the application be rejected, the
reasons for such rejection shall be clearly stated in a written
communication to the applicant. Failure to specify the reasons
for the rejection shall not affect the application which shall be
considered as unacted upon: Provided however, That until the
executive committee herein provided shall have been formed,
applications for recognition shall be passed upon by the duly
elected members of the present executive committee of the
Philippine Amateur Athletic Federation. The said executive
committee shall be dissolved upon the organization of the
executive committee herein provided: Provided, further, That
the functioning executive committee is charged with the
responsibility of seeing to it that the National Sports’
Associations are formed and organized within six months from
and after the passage of this Act
Section 7 of P.D. 604, similarly provides:
SECTION 7. National Sports Associations: — Application for
accreditation or recognition as a national sports association for
each individual sport in the Philippines shall be filed with the
Department together with, among others, a copy of the
Constitution and By-Laws and a list of the members of the
proposed association.
The Department shall give the recognition applied for if it is
satisfied that the national sports association to be organized will
promote the objectives of this Decree and has substantially
complied with the rules and regulations of the Department:
Provided, That the Department may withdraw accreditation or
recognition for violation of this Decree and such rules and
regulations formulated by it.
The Department shall supervise the national sports association:
Provided, That the latter shall have exclusive technical control
over the development and promotion of the particular sport for
which they are organized.
Clearly the above cited provisions require that before an entity
may be considered as a national sports association, such entity
must be recognized by the accrediting organization, the
Philippine, Amateur Athletic Federation under R.A. 3135, and
the Department of Youth and Sports Development under P.D.
604.
This fact of recognition, however, Henri Kahn failed to
substantiate. In attempting to prove the juridical existence of
the Federation, Henri Kahn attached to his motion for
reconsideration before the trial court a copy of the constitution
and by-laws of the Philippine, Football Federation.
Unfortunately, the same does not prove that said Federation
has indeed been recognized and accredited by either the
Philippine Amateur Athletic Federation or the Department of
Youth and Sports Development. Accordingly, we rule that the
Philippine Football Federation is not a national sports
association within the purview of the aforementioned laws and
does not have corporate existence of its own
Thus being said, it follows that private respondent Henry Kahn
should be held liable for the unpaid obligations of the
unincorporated Philippine Football Federation. It is a settled
principal in corporation law that any person acting or purporting
to act on behalf of a corporation which has no valid existence
assumes such privileges and becomes personally liable for
contract entered into or for other acts performed as such agent.
14 As president of the Federation, Henri Kahn is presumed to
have known about the corporate existence or non-existence of
the Federation. We cannot subscribe to the position taken by
the appellate court that even assuming that the Federation was
defectively incorporated, the petitioner cannot deny the
corporate existence of the Federation because it had contracted
and dealt with the Federation in such a manner as to recognize
and in effect admit its existence. 15 The doctrine of corporation
by estoppel is mistakenly applied by the respondent court to the
petitioner. The application of the doctrine applies to a third
party only when he tries to escape liabilities on a contract from
which he has benefited on the irrelevant ground of defective
incorporation. 16 In the case at bar, the petitioner is not trying
to escape liability from the contract but rather is the one
claiming from the contract.
WHEREFORE, the decision appealed from is REVERSED and SET
ASIDE. The decision of the Regional Trial Court of Manila, Branch
35, in Civil Case No. 90-53595 is hereby REINSTATED.
SO ORDERED.
[ G .R. No. 136448. November 3, 1999.]
LIM TONG LIM, Petitioner, v. PHILIPPINE FISHING GEAR
IN DUSTRIES, INC, Respondent.
D E C IS IO N
PA NGANIBAN, J.:
A partnership may be deemed to exist among parties who agree
to borrow money to pursue a business and to divide the profits
or losses that may arise therefrom, even if it is shown that they
have not contributed any capital of their own to a "common
fund." Their contribution may be in the form of credit or
industry, not necessarily cash or fixed assets. Being partners,
they are all liable for debts incurred by or on behalf of the
partnership. The liability for a contract entered into on behalf of
an unincorporated association or ostensible corporation may lie
in a person who may not have directly transacted on its behalf,
but reaped benefits from that contract.
The CaseIn the Petition for Review on Certiorari before us, Lim
Tong Lim assails the November 26, 1998 Decision of the Court of
Appeals in CA-GR CV 41477, 1 which disposed as follows:
"WHEREFORE, [there being] no reversible error in the appealed
decision, the same is hereby affirmed." 2
The decretal portion of the Quezon City Regional Trial Court
(RTC) ruling, which was affirmed by the CA, reads as follows:
"WHEREFORE, the Court rules:
1. That plaintiff is entitled to the writ of preliminary attachment
issued by this Court on September 20, 1990
2. That defendants are jointly liable to plaintiff for the following
amounts, subject to the modifications as hereinafter made by
reason of the special and unique facts and circumstances and
the proceedings that transpired during the trial of this case;
a. P532,045.00 representing [the] unpaid purchase price of the
fishing nets covered by the Agreement plus P68,000.00
representing the unpaid price of the floats not covered by said
Agreement;
b. 12% interest per annum counted from date of plaintiff’s
invoices and computed on their respective amounts as follows:
i. Accrued interest of P73,221.00 on Invoice No. 14407 for
P385,377.80 dated February 9, 1990;
ii. Accrued interest of P27,904.02 on Invoice No. 14413 for
P146,868.00 dated February 13, 1990;
iii. Accrued interest of P12,920.00 on Invoice No. 14426 for
P68,000.00 dated February 19, 1990;
c. P50,000.00 as and for attorney’s fees, plus P8,500.00
representing P500.00 per appearance in court;
d. P65,000.00 representing P5,000.00 monthly rental for storage
charges on the nets counted from September 20, 1990 (date of
attachment) to September 12, 1991 (date of auction sale);
e. Cost of suit.
"With respect to the joint liability of defendants for the principal
obligation or for the unpaid price of nets and floats in the
amount of P532,045.00 and P68,000.00, respectively, or for the
total amount of P600,045.00, this Court noted that these items
were attached to guarantee any judgment that may be rendered
in favor of the plaintiff but, upon agreement of the parties, and,
to avoid further deterioration of the nets during the pendency
of this case, it was ordered sold at public auction for not less
than P900,000.00 for which the plaintiff was the sole and
winning bidder. The proceeds of the sale paid for by plaintiff was
deposited in court. In effect, the amount of P900,000.00
replaced the attached property as a guaranty for any judgment
that plaintiff may be able to secure in this case with the
ownership and possession of the nets and floats awarded and
delivered by the sheriff to plaintiff as the highest bidder in the
public auction sale. It has also been noted that ownership of the
nets [was] retained by the plaintiff until full payment [was] made
as stipulated in the invoices; hence, in effect, the plaintiff
attached its own properties. It [was] for this reason also that this
Court earlier ordered the attachment bond filed by plaintiff to
guaranty damages to defendants to be cancelled and for the
P900,000.00 cash bidded and paid for by plaintiff to serve as its
bond in favor of defendants.
"From the foregoing, it would appear therefore that whatever
judgment the plaintiff may be entitled to in this case will have to
be satisfied from the amount of P900,000.00 as this amount
replaced the attached nets and floats. Considering, however,
that the total judgment obligation as computed above would
amount to only P840,216.92, it would be inequitable, unfair and
unjust to award the excess to the defendants who are not
entitled to damages and who did not put up a single centavo to
raise the amount of P900,000.00 aside from the fact that they
are not the owners of the nets and floats. For this reason, the
defendants are hereby relieved from any and all liabilities arising
from the monetary judgment obligation enumerated above and
for plaintiff to retain possession and ownership of the nets and
floats and for the reimbursement of the P900,000.00 deposited
by it with the Clerk of Court.
SO ORDERED." 3
The Facts
On behalf of "Ocean Quest Fishing Corporation," Antonio Chua
and Peter Yao entered into a Contract dated February 7, 1990,
for the purchase of fishing nets of various sizes from the
Philippine Fishing Gear Industries, Inc. (herein respondent). They
claimed that they were engaged in a business venture with
Petitioner Lim Tong Lim, who however was not a signatory to
the agreement. The total price of the nets amounted to
P532,045. Four hundred pieces of floats worth P68,000 were
also sold to the Corporation. 4
The buyers, however, failed to pay for the fishing nets and the
floats; hence, private respondent filed a collection suit against
Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of
preliminary attachment. The suit was brought against the three
in their capacities as general partners, on the allegation that
"Ocean Quest Fishing Corporation" was a nonexistent
corporation as shown by a Certification from the Securities and
Exchange Commission. 5 On September 20, 1990, the lower
court issued a Writ of Preliminary Attachment, which the sheriff
enforced by attaching the fishing nets on board F/B Lourdes
which was then docked at the Fisheries Port, Navotas, Metro
Manila.
Instead of answering the Complaint, Chua filed a Manifestation
admitting his liability and requesting a reasonable time within
which to pay. He also turned over to respondent some of the
nets which were in his possession. Peter Yao filed an Answer,
after which he was deemed to have waived his right to cross-
examine witnesses and to present evidence on his behalf,
because of his failure to appear in subsequent hearings. Lim
Tong Lim, on the other hand, filed an Answer with Counterclaim
and Crossclaim and moved for the lifting of the Writ of
Attachment. 6 The trial court maintained the Writ, and upon
motion of private respondent, ordered the sale of the fishing
nets at a public auction. Philippine Fishing Gear Industries won
the bidding and deposited with the said court the sales proceeds
of P900,000. 7
On November 18, 1992, the trial court rendered its Decision,
ruling that Philippine Fishing Gear Industries was entitled to the
Writ of Attachment and that Chua, Yao and Lim, as general
partners, were jointly liable to pay Respondent. 8
The trial court ruled that a partnership among Lim, Chua and
Yao existed based (1) on the testimonies of the witnesses
presented and (2) on a Compromise Agreement executed by the
three 9 in Civil Case No. 1492-MN which Chua and Yao had
brought against Lim in the RTC of Malabon, Branch 72, for (a) a
declaration of nullity of commercial documents; (b) a
reformation of contracts; (c) a declaration of ownership of
fishing boats; (d) an injunction and (e) damages. 10 The
Compromise Agreement provided
"a) That the parties plaintiffs & Lim Tong Lim agree to have the
four (4) vessels sold in the amount of P5,750,000.00 including
the fishing net. This P5,750,000.00 shall be applied as full
payment for P3,250,000.00 in favor of JL Holdings Corporation
and/or Lim Tong Lim;
"b) If the four (4) vessel[s] and the fishing net will be sold at a
higher price than P5,750,000.00 whatever will be the excess will
be divided into 3: 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter
Yao;
"c) If the proceeds of the sale the vessels will be less than
P5,750,000.00 whatever the deficiency shall be shouldered and
paid to JL Holding Corporation by 1/3 Lim Tong Lim; 1/3 Antonio
Chua; 1/3 Peter Yao." 11
The trial court noted that the Compromise Agreement was silent
as to the nature of their obligations, but that joint liability could
be presumed from the equal distribution of the profit and loss.
12
Lim appealed to the Court of Appeals (CA) which, as already
stated, affirmed the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that petitioner was a
partner of Chua and Yao in a fishing business and may thus be
held liable as such for the fishing nets and floats purchased by
and for the use of the partnership. The appellate court ruled:
"The evidence establishes that all the defendants including
herein appellant Lim Tong Lim undertook a partnership for a
specific undertaking, that is for commercial fishing . . . .
Obviously, the ultimate undertaking of the defendants was to
divide the profits among themselves which is what a partnership
essentially is . . . . By a contract of partnership, two or more
persons bind themselves to contribute money, property or
industry to a common fund with the intention of dividing the
profits among themselves (Article 1767, New Civil Code)." 13
Hence, petitioner brought this recourse before this Court. 14
The Issues
In his Petition and Memorandum, Lim asks this Court to reverse
the assailed Decision on the following grounds:
"I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A
COMPROMISE AGREEMENT THAT CHUA, YAO AND PETITIONER
LIM ENTERED INTO IN A SEPARATE CASE, THAT A PARTNERSHIP
AGREEMENT EXISTED AMONG THEM.
"II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS
ACTING FOR OCEAN QUEST FISHING CORPORATION WHEN HE
BOUGHT THE NETS FROM PHILIPPINE FISHING, THE COURT OF
APPEALS WAS UNJUSTIFIED IN IMPUTING LIABILITY TO
PETITIONER LIM AS WELL.
"III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND
ATTACHMENT OF PETITIONER LIM’S GOODS."
In determining whether petitioner may be held liable for the
fishing nets and floats purchased from respondent, the Court
must resolve this key issue: whether by their acts, Lim, Chua and
Yao could be deemed to have entered into a partnership.
This Court’s Ruling
The Petition is devoid of merit.
First and Second Issues:
Existence of a Partnership and Petitioner’s Liability
In arguing that he should not be held liable for the equipment
purchased from respondent, petitioner controverts the CA
finding that a partnership existed between him, Peter Yao and
Antonio Chua. He asserts that the CA based its finding on the
Compromise Agreement alone. Furthermore, he disclaims any
direct participation in the purchase of the nets, alleging that the
negotiations were conducted by Chua and Yao only, and that he
has not even met the representatives of the respondent
company. Petitioner further argues that he was a lessor, not a
partner, of Chua and Yao, for the "Contract of Lease" dated
February 1, 1990, showed that he had merely leased to the two
the main asset of the purported partnership — the fishing boat
F/B Lourdes. The lease was for six months, with a monthly rental
of P37,500 plus 25 percent of the gross catch of the boat.
We are not persuaded by the arguments of petitioner. The facts
as found by the two lower courts clearly showed that there
existed a partnership among Chua, Yao and him, pursuant to
Article 1767 of the Civil Code which provides:
"ARTICLE 1767. By the contract of partnership, two or more
persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the
profits among themselves."
Specifically, both lower courts ruled that a partnership among
the three existed based on the following factual findings: 15
(1) That Petitioner Lim Tong Lim requested Peter Yao who was
engaged in commercial fishing to join him, while Antonio Chua
was already Yao’s partner;
(2) That after convening for a few times, Lim Chua, and Yao
verbally agreed to acquire two fishing boats, the FB Lourdes and
the FB Nelson for the sum of P3.35 million;
(3) That they borrowed P3.25 million from Jesus Lim, brother of
Petitioner Lim Tong Lim, to finance the venture.
(4) That they bought the boats from CMF Fishing Corporation,
which executed a Deed of Sale over these two (2) boats in favor
of Petitioner Lim Tong Lim only to serve as security for the loan
extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing , re-
equipping, repairing, dry docking and other expenses for the
boats would be shouldered by Chua and Yao;
(6) That because of the "unavailability of funds," Jesus Lim again
extended a loan to the partnership in the amount of P1 million
secured by a check, because of which, Yao and Chua entrusted
the ownership papers of two other boats, Chua’s FB Lady Anne
Mel and Yao’s FB Tracy to Lim Tong Lim.
(7) That in pursuance of the business agreement, Peter Yao and
Antonio Chua bought nets from Respondent Philippine Fishing
Gear, in behalf of "Ocean Quest Fishing Corporation," their
purported business name.
(8) That subsequently, Civil Case No. 1492-MN was filed in the
Malabon RTC, Branch 72 by Antonio Chua and Peter Yao against
Lim Tong Lim for (a) declaration of nullity of commercial
documents; (b) reformation of contracts; (c) declaration of
ownership of fishing boats; (4) injunction; and (e) damages.
(9) That the case was amicably settled through a Compromise
Agreement executed between the parties-litigants the terms of
which are already enumerated above.
From the factual findings of both lower courts, it is clear that
Chua, Yao and Lim had decided to engage in a fishing business,
which they started by buying boats worth P3.35 million,
financed by a loan secured from Jesus Lim who was petitioner’s
brother. In their Compromise Agreement, they subsequently
revealed their intention to pay the loan with the proceeds of the
sale of the boats, and to divide equally among them the excess
or loss. These boats, the purchase and the repair of which were
financed with borrowed money, fell under the term "common
fund" under Article 1767. The contribution to such fund need
not be cash or fixed assets; it could be an intangible like credit or
industry. That the parties agreed that any loss or profit from the
sale and operation of the boats would be divided equally among
them also shows that they had indeed formed a partnership.
Moreover, it is clear that the partnership extended not only to
the purchase of the boat, but also to that of the nets and the
floats. The fishing nets and the floats, both essential to fishing,
were obviously acquired in furtherance of their business. It
would have been inconceivable for Lim to involve himself so
much in buying the boat but not in the acquisition of the
aforesaid equipment, without which the business could not have
proceeded.
Given the preceding facts, it is clear that there was, among
petitioner, Chua and Yao, a partnership engaged in the fishing
business. They purchased the boats, which constituted the main
assets of the partnership, and they agreed that the proceeds
from the sales and operations thereof would be divided among
them.
We stress that under Rule 45, a petition for review like the
present case should involve only questions of law. Thus, the
foregoing factual findings of the RTC and the CA are binding on
this Court, absent any cogent proof that the present action is
embraced by one of the exceptions to the rule. 16 In assailing
the factual findings of the two lower courts, petitioner
effectively goes beyond the bounds of a petition for review
under Rule 45.
Compromise Agreement Not the Sole Basis of Partnership
Petitioner argues that the appellate court’s sole basis for
assuming the existence of a partnership was the Compromise
Agreement. He also claims that the settlement was entered into
only to end the dispute among them, but not to adjudicate their
preexisting rights and obligations. His arguments are baseless.
The Agreement was but an embodiment of the relationship
extant among the parties prior to its execution.
A proper adjudication of claimants’ rights mandates that courts
must review and thoroughly appraise all relevant facts. Both
lower courts have done so and have found, correctly, a
preexisting partnership among the parties. In implying that the
lower courts have decided on the basis of one piece of
document alone, petitioner fails to appreciate that the CA and
the RTC delved into the history of the document and explored all
the possible consequential combinations in harmony with law,
logic and fairness. Verily, the two lower courts’ factual findings
mentioned above nullified petitioner’s argument that the
existence of a partnership was based only on the Compromise
Agreement.
Petitioner Was a Partner, Not a Lessor
We are not convinced by petitioner’s argument that he was
merely the lessor of the boats to Chua and Yao, not a partner in
the fishing venture. His argument allegedly finds support in the
Contract of Lease and the registration papers showing that he
was the owner of the boats, including F/B Lourdes where the
nets were found.
His allegation defies logic. In effect, he would like this Court to
believe that he consented to the sale of his own boats to pay a
debt of Chua and Yao, with the excess of the proceeds to be
divided among the three of them. No lessor would do what
petitioner did. Indeed, his consent to the sale proved that there
was a preexisting partnership among all three.
Verily, as found by the lower courts, petitioner entered into a
business agreement with Chua and Yao, in which debts were
undertaken in order to finance the acquisition and the
upgrading of the vessels which would be used in their fishing
business. The sale of the boats, as well as the division among the
three of the balance remaining after the payment of their loans,
proves beyond cavil that F/B Lourdes, though registered in his
name, was not his own property but an asset of the partnership.
It is not uncommon to register the properties acquired from a
loan in the name of the person the lender trusts, who in this
case is the petitioner himself. After all, he is the brother of the
creditor, Jesus Lim.
We stress that it is unreasonable — indeed, it is absurd — for
petitioner to sell his property to pay a debt he did not incur, if
the relationship among the three of them was merely that of
lessor-lessee, instead of partners.
Corporation by Estoppel
Petitioner argues that under the doctrine of corporation by
estoppel, liability can be imputed only to Chua and Yao, and not
to him. Again, we disagree.
Section 21 of the Corporation Code of the Philippines provides:
"SECTION 21. Corporation by estoppel. — All persons who
assume to act as a corporation knowing it to be without
authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising as a result
thereof: Provided however, That when any such ostensible
corporation is sued on any transaction entered by it as a
corporation or on any tort committed by it as such, it shall not
be allowed to use as a defense its lack of corporate personality.
"One who assumes an obligation to an ostensible corporation as
such, cannot resist performance thereof on the ground that
there was in fact no corporation."
Thus, even if the ostensible corporate entity is proven to be
legally nonexistent, a party may be estopped from denying its
corporate existence. "The reason behind this doctrine is obvious
— an unincorporated association has no personality and would
be incompetent to act and appropriate for itself the power and
attributes of a corporation as provided by law; it cannot create
agents or confer authority on another to act in its behalf; thus,
those who act or purport to act as its representatives or agents
do so without authority and at their own risk. And as it is an
elementary principle of law that a person who acts as an agent
without authority or without a principal is himself regarded as
the principal, possessed of all the right and subject to all the
liabilities of a principal, a person acting or purporting to act on
behalf of a corporation which has no valid existence assumes
such privileges and obligations and becomes personally liable for
contracts entered into or for other acts performed as such
agent." 17
The doctrine of corporation by estoppel may apply to the
alleged corporation and to a third party. In the first instance, an
unincorporated association, which represented itself to be a
corporation, will be estopped from denying its corporate
capacity in a suit against it by a third person who relied in good
faith on such representation. It cannot allege lack of personality
to be sued to evade its responsibility for a contract it entered
into and by virtue of which it received advantages and benefits.
On the other hand, a third party who, knowing an association to
be unincorporated, nonetheless treated it as a corporation and
received benefits from it, may be barred from denying its
corporate existence in a suit brought against the alleged
corporation. In such case, all those who benefited from the
transaction made by the ostensible corporation, despite
knowledge of its legal defects, may be held liable for contracts
they impliedly assented to or took advantage of.
There is no dispute that the respondent, Philippine Fishing Gear
Industries, is entitled to be paid for the nets it sold. The only
question here is whether petitioner should be held jointly 18
liable with Chua and Yao. Petitioner contests such liability,
insisting that only those who dealt in the name of the ostensible
corporation should be held liable. Since his name does not
appear on any of the contracts and since he never directly
transacted with the respondent corporation, ergo, he cannot be
held liable.
Unquestionably, petitioner benefited from the use of the nets
found inside F/B Lourdes, the boat which has earlier been
proven to be an asset of the partnership. He in fact questions
the attachment of the nets, because the Writ has effectively
stopped his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that Lim, Chua
and Yao decided to form a corporation. Although it was never
legally formed for unknown reasons, this fact alone does not
preclude the liabilities of the three as contracting parties in
representation of it. Clearly, under the law on estoppel, those
acting on behalf of a corporation and those benefited by it,
knowing it to be without valid existence, are held liable as
general partners.
Technically, it is true that petitioner did not directly act on
behalf of the corporation. However, having reaped the benefits
of the contract entered into by persons with whom he
previously had an existing relationship, he is deemed to be part
of said association and is covered by the scope of the doctrine of
corporation by estoppel. We reiterate the ruling of the Court in
Alonso v. Villamor: 19
"A litigation is not a game of technicalities in which one, more
deeply schooled and skilled in the subtle art of movement and
position, entraps and destroys the other. It is, rather, a contest
in which each contending party fully and fairly lays before the
court the facts in issue and then, brushing aside as wholly trivial
and indecisive all imperfections of form and technicalities of
procedure, asks that justice be done upon the merits. Lawsuits,
unlike duels, are not to be won by a rapier’s thrust. Technicality,
when it deserts its proper office as an aid to justice and
becomes its great hindrance and chief enemy, deserves scant
consideration from courts. There should be no vested rights in
technicalities."
Third Issue:
Validity of Attachment
Finally, petitioner claims that the Writ of Attachment was
improperly issued against the nets. We agree with the Court of
Appeals that this issue is now moot and academic. As previously
discussed, F/B Lourdes was an asset of the partnership and that
it was placed in the name of petitioner, only to assure payment
of the debt he and his partners owed. The nets and the floats
were specifically manufactured and tailor-made according to
their own design, and were bought and used in the fishing
venture they agreed upon. Hence, the issuance of the Writ to
assure the payment of the price stipulated in the invoices is
proper. Besides, by specific agreement, ownership of the nets
remained with Respondent Philippine Fishing Gear, until full
payment thereof.
WHEREFORE, the Petition is DENIED and the assailed Decision
AFFIRMED. Costs against petitioner.
SO ORDERED.
G .R. No. L-19118 January 30, 1965
MA RIANO A. ALBERT, plaintiff-appellant,
vs. U N IVERSITY PUBLISHING CO., INC., defendant-appellee.
BEN GZON, J.P., J.:
No less than three times have the parties here appealed to this
Court.In Albert vs. University Publishing Co., Inc., L-9300, April
18, 1958, we found plaintiff entitled to damages (for breach of
contract) but reduced the amount from P23,000.00 to
P15,000.00.
Then in Albert vs. University Publishing Co., Inc., L-15275,
October 24, 1960, we held that the judgment for P15,000.00
which had become final and executory, should be executed to
its full amount, since in fixing it, payment already made had
been considered.
Now we are asked whether the judgment may be executed
against Jose M. Aruego, supposed President of University
Publishing Co., Inc., as the real defendant.
Fifteen years ago, on September 24, 1949, Mariano A. Albert
sued University Publishing Co., Inc. Plaintiff alleged inter
alia that defendant was a corporation duly organized and
existing under the laws of the Philippines; that on July 19, 1948,
defendant, through Jose M. Aruego, its President, entered into a
contract with plaintifif; that defendant had thereby agreed to
pay plaintiff P30,000.00 for the exclusive right to publish his
revised Commentaries on the Revised Penal Code and for his
share in previous sales of the book's first edition; that defendant
had undertaken to pay in eight quarterly installments of
P3,750.00 starting July 15, 1948; that per contract failure to pay
one installment would render the rest due; and that defendant
had failed to pay the second installment.
Defendant admitted plaintiff's allegation of defendant's
corporate existence; admitted the execution and terms of the
contract dated July 19, 1948; but alleged that it was plaintiff
who breached their contract by failing to deliver his manuscript.
Furthermore, defendant counterclaimed for
damages.1äwphï1.ñët
Plaintiff died before trial and Justo R. Albert, his estate's
administrator, was substituted for him.
The Court of First Instance of Manila, after trial, rendered
decision on April 26, 1954, stating in the dispositive portion —
IN VIEW OF ALL THE FOREGOING, the Court renders judgment in
favor of the plaintiff and against the defendant the University
Publishing Co., Inc., ordering the defendant to pay the
administrator Justo R. Albert, the sum of P23,000.00 with legal
[rate] of interest from the date of the filing of this complaint
until the whole amount shall have been fully paid. The
defendant shall also pay the costs. The counterclaim of the
defendant is hereby dismissed for lack of evidence.
As aforesaid, we reduced the amount of damages to
P15,000.00, to be executed in full. Thereafter, on July 22, 1961,
the court a quo ordered issuance of an execution writ against
University Publishing Co., Inc. Plaintiff, however, on August 10,
1961, petitioned for a writ of execution against Jose M. Aruego,
as the real defendant, stating, "plaintiff's counsel and the Sheriff
of Manila discovered that there is no such entity as University
Publishing Co., Inc." Plaintiff annexed to his petition a
certification from the securities and Exchange Commission
dated July 31, 1961, attesting: "The records of this Commission
do not show the registration of UNIVERSITY PUBLISHING CO.,
INC., either as a corporation or partnership." "University
Publishing Co., Inc." countered by filing, through counsel (Jose
M. Aruego's own law firm), a "manifestation" stating that "Jose
M. Aruego is not a party to this case," and that, therefore,
plaintiff's petition should be denied.
Parenthetically, it is not hard to decipher why "University
Publishing Co., Inc.," through counsel, would not want Jose M.
Aruego to be considered a party to the present case: should a
separate action be now instituted against Jose M. Aruego, the
plaintiff will have to reckon with the statute of limitations.
The court a quo denied the petition by order of September 9,
1961, and from this, plaintiff has appealed.
The fact of non-registration of University Publishing Co., Inc. in
the Securities and Exchange Commission has not been disputed.
Defendant would only raise the point that "University Publishing
Co., Inc.," and not Jose M. Aruego, is the party defendant;
thereby assuming that "University Publishing Co., Inc." is an
existing corporation with an independent juridical personality.
Precisely, however, on account of the non-registration it cannot
be considered a corporation, not even a corporation de
facto (Hall vs. Piccio, 86 Phil. 603). It has therefore no
personality separate from Jose M. Aruego; it cannot be sued
independently.
The corporation-by-estoppel doctrine has not been invoked. At
any rate, the same is inapplicable here. Aruego represented a
non-existent entity and induced not only the plaintiff but even
the court to believe in such representation. He signed the
contract as "President" of "University Publishing Co., Inc.,"
stating that this was "a corporation duly organized and existing
under the laws of the Philippines," and obviously misled plaintiff
(Mariano A. Albert) into believing the same. One who has
induced another to act upon his wilful misrepresentation that a
corporation was duly organized and existing under the law,
cannot thereafter set up against his victim the principle of
corporation by estoppel (Salvatiera vs. Garlitos, 56 O.G. 3069).
"University Publishing Co., Inc." purported to come to court,
answering the complaint and litigating upon the merits. But as
stated, "University Publishing Co., Inc." has no independent
personality; it is just a name. Jose M. Aruego was, in reality, the
one who answered and litigated, through his own law firm as
counsel. He was in fact, if not, in name, the defendant.
Even with regard to corporations duly organized and existing
under the law, we have in many a case pierced the veil of
corporate fiction to administer the ends of justice. * And
in Salvatiera vs. Garlitos, supra, p. 3073, we ruled: "A person
acting or purporting to act on behalf of a corporation which has
no valid existence assumes such privileges and obligations and
becomes personally liable for contracts entered into or for other
acts performed as such agent." Had Jose M. Aruego been named
as party defendant instead of, or together with, "University
Publishing Co., Inc.," there would be no room for debate as to
his personal liability. Since he was not so named, the matters of
"day in court" and "due process" have arisen.
In this connection, it must be realized that parties to a suit are
"persons who have a right to control the proceedings, to make
defense, to adduce and cross-examine witnesses, and to appeal
from a decision" (67 C.J.S. 887) — and Aruego was, in reality, the
person who had and exercised these rights. Clearly, then,
Aruego had his day in court as the real defendant; and due
process of law has been substantially observed.
By "due process of law" we mean " "a law which hears before it
condemns; which proceeds upon inquiry, and renders judgment
only after trial. ... ." (4 Wheaton, U.S. 518, 581.)"; or, as this
Court has said, " "Due process of law" contemplates notice and
opportunity to be heard before judgment is rendered, affecting
one's person or property" (Lopez vs. Director of Lands, 47 Phil.
23, 32)." (Sicat vs. Reyes, L-11023, Dec. 14, 1956.) And it may
not be amiss to mention here also that the "due process" clause
of the Constitution is designed to secure justice as a living
reality; not to sacrifice it by paying undue homage to formality.
For substance must prevail over form. It may now be trite, but
none the less apt, to quote what long ago we said in Alonso vs.
Villamor, 16 Phil. 315, 321-322:
A litigation is not a game of technicalities in which one, more
deeply schooled and skilled in the subtle art of movement and
position, entraps and destroys the other. It is, rather, a contest
in which each contending party fully and fairly lays before the
court the facts in issue and then, brushing side as wholly trivial
and indecisive all imperfections of form and technicalities of
procedure, asks that Justice be done upon the merits. Lawsuits,
unlike duels, are not to be won by a rapier's thrust. Technicality,
when it deserts its proper office as an aid to justice and
becomes its great hindrance and chief enemy, deserves scant
consideration from courts. There should be no vested rights in
technicalities.
The evidence is patently clear that Jose M. Aruego, acting as
representative of a non-existent principal, was the real party to
the contract sued upon; that he was the one who reaped the
benefits resulting from it, so much so that partial payments of
the consideration were made by him; that he violated its terms,
thereby precipitating the suit in question; and that in the
litigation he was the real defendant. Perforce, in line with the
ends of justice, responsibility under the judgment falls on him.
We need hardly state that should there be persons who under
the law are liable to Aruego for reimbursement or contribution
with respect to the payment he makes under the judgment in
question, he may, of course, proceed against them through
proper remedial measures.
PREMISES CONSIDERED, the order appealed from is hereby set
aside and the case remanded ordering the lower court to hold
supplementary proceedings for the purpose of carrying the
judgment into effect against University Publishing Co., Inc.
and/or Jose M. Aruego. So ordered.
G .R. No. 117188 August 7, 1997
LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION,
IN C., petitioner,
vs. HON. COURT OF APPEALS, HOME INSURANCE AND
G U ARANTY CORPORATION, EMDEN ENCARNACION and
HORATIO AYCARDO, respondents.
ROMERO, J.:
May the failure of a corporation to file its by-laws within one
month from the date of its incorporation, as mandated by
Section 46 of the Corporation Code, result in its automatic
dissolution?
This is the issue raised in this petition for review on certiorari of
the Decision1 of the Court of Appeals affirming the decision of
the Home Insurance and Guaranty Corporation (HIGC). This
quasi-judicial body recognized Loyola Grand Villas Homeowners
Association (LGVHA) as the sole homeowners' association in
Loyola Grand Villas, a duly registered subdivision in Quezon City
and Marikina City that was owned and developed by Solid
Homes, Inc. It revoked the certificates of registration issued to
Loyola Grand Villas homeowners (North) Association
Incorporated (the North Association for brevity) and Loyola
Grand Villas Homeowners (South) Association Incorporated (the
South Association).
LGVHAI was organized on February 8, 1983 as the association of
homeowners and residents of the Loyola Grand Villas. It was
registered with the Home Financing Corporation, the
predecessor of herein respondent HIGC, as the sole
homeowners' organization in the said subdivision under
Certificate of Registration No. 04-197. It was organized by the
developer of the subdivision and its first president was Victorio
V. Soliven, himself the owner of the developer. For unknown
reasons, however, LGVHAI did not file its corporate by-laws.
Sometime in 1988, the officers of the LGVHAI tried to register its
by-laws. They failed to do so. 2 To the officers' consternation,
they discovered that there were two other organizations within
the subdivision — the North Association and the South
Association. According to private respondents, a non-resident
and Soliven himself, respectively headed these associations.
They also discovered that these associations had five (5)
registered homeowners each who were also the incorporators,
directors and officers thereof. None of the members of the
LGVHAI was listed as member of the North Association while
three (3) members of LGVHAI were listed as members of the
South Association.3 The North Association was registered with
the HIGC on February 13, 1989 under Certificate of Registration
No. 04-1160 covering Phases West II, East III, West III and East
IV. It submitted its by-laws on December 20, 1988.
In July, 1989, when Soliven inquired about the status of LGVHAI,
Atty. Joaquin A. Bautista, the head of the legal department of
the HIGC, informed him that LGVHAI had been automatically
dissolved for two reasons. First, it did not submit its by-laws
within the period required by the Corporation Code and,
second, there was non-user of corporate charter because HIGC
had not received any report on the association's activities.
Apparently, this information resulted in the registration of the
South Association with the HIGC on July 27, 1989 covering
Phases West I, East I and East II. It filed its by-laws on July 26,
1989.
These developments prompted the officers of the LGVHAI to
lodge a complaint with the HIGC. They questioned the
revocation of LGVHAI's certificate of registration without due
notice and hearing and concomitantly prayed for the
cancellation of the certificates of registration of the North and
South Associations by reason of the earlier issuance of a
certificate of registration in favor of LGVHAI.
On January 26, 1993, after due notice and hearing, private
respondents obtained a favorable ruling from HIGC Hearing
Officer Danilo C. Javier who disposed of HIGC Case No. RRM-5-
89 as follows:
WHEREFORE, judgment is hereby rendered recognizing the
Loyola Grand Villas Homeowners Association, Inc., under
Certificate of Registration No. 04-197 as the duly registered and
existing homeowners association for Loyola Grand Villas
homeowners, and declaring the Certificates of Registration of
Loyola Grand Villas Homeowners (North) Association, Inc. and
Loyola Grand Villas Homeowners (South) Association, Inc. as
hereby revoked or cancelled; that the receivership be
terminated and the Receiver is hereby ordered to render an
accounting and turn-over to Loyola Grand Villas Homeowners
Association, Inc., all assets and records of the Association now
under his custody and possession.
The South Association appealed to the Appeals Board of the
HIGC. In its Resolution of September 8, 1993, the
Board 4 dismissed the appeal for lack of merit.
Rebuffed, the South Association in turn appealed to the Court of
Appeals, raising two issues. First, whether or not LGVHAI's
failure to file its by-laws within the period prescribed by Section
46 of the Corporation Code resulted in the automatic dissolution
of LGVHAI. Second, whether or not two homeowners'
associations may be authorized by the HIGC in one "sprawling
subdivision." However, in the Decision of August 23, 1994 being
assailed here, the Court of Appeals affirmed the Resolution of
the HIGC Appeals Board.
In resolving the first issue, the Court of Appeals held that under
the Corporation Code, a private corporation commences to have
corporate existence and juridical personality from the date the
Securities and Exchange Commission (SEC) issues a certificate of
incorporation under its official seal. The requirement for the
filing of by-laws under Section 46 of the Corporation Code
within one month from official notice of the issuance of the
certificate of incorporation presupposes that it is already
incorporated, although it may file its by-laws with its articles of
incorporation. Elucidating on the effect of a delayed filing of by-
laws, the Court of Appeals said:
We also find nothing in the provisions cited by the
petitioner, i.e., Section 46 and 22, Corporation Code, or in any
other provision of the Code and other laws which provide or at
least imply that failure to file the by-laws results in an automatic
dissolution of the corporation. While Section 46, in prescribing
that by-laws must be adopted within the period prescribed
therein, may be interpreted as a mandatory provision,
particularly because of the use of the word "must," its meaning
cannot be stretched to support the argument that automatic
dissolution results from non-compliance.
We realize that Section 46 or other provisions of the
Corporation Code are silent on the result of the failure to adopt
and file the by-laws within the required period. Thus, Section 46
and other related provisions of the Corporation Code are to be
construed with Section 6 (1) of P.D. 902-A. This section
empowers the SEC to suspend or revoke certificates of
registration on the grounds listed therein. Among the grounds
stated is the failure to file by-laws (see also II Campos: The
Corporation Code, 1990 ed., pp. 124-125). Such suspension or
revocation, the same section provides, should be made upon
proper notice and hearing. Although P.D. 902-A refers to the
SEC, the same principles and procedures apply to the public
respondent HIGC as it exercises its power to revoke or suspend
the certificates of registration or homeowners association.
(Section 2 [a], E.O. 535, series 1979, transferred the powers and
authorities of the SEC over homeowners associations to the
HIGC.)
We also do not agree with the petitioner's interpretation that
Section 46, Corporation Code prevails over Section 6, P.D. 902-A
and that the latter is invalid because it contravenes the former.
There is no basis for such interpretation considering that these
two provisions are not inconsistent with each other. They are, in
fact, complementary to each other so that one cannot be
considered as invalidating the other.
The Court of Appeals added that, as there was no showing that
the registration of LGVHAI had been validly revoked, it
continued to be the duly registered homeowners' association in
the Loyola Grand Villas. More importantly, the South Association
did not dispute the fact that LGVHAI had been organized and
that, thereafter, it transacted business within the period
prescribed by law.
On the second issue, the Court of Appeals reiterated its previous
ruling 5 that the HIGC has the authority to order the holding of a
referendum to determine which of two contending associations
should represent the entire community, village or subdivision.
Undaunted, the South Association filed the instant petition for
review on certiorari. It elevates as sole issue for resolution the
first issue it had raised before the Court of Appeals, i.e., whether
or not the LGVHAI's failure to file its by-laws within the period
prescribed by Section 46 of the Corporation Code had the effect
of automatically dissolving the said corporation.
Petitioner contends that, since Section 46 uses the word "must"
with respect to the filing of by-laws, noncompliance therewith
would result in "self-extinction" either due to non-occurrence of
a suspensive condition or the occurrence of a resolutory
condition "under the hypothesis that (by) the issuance of the
certificate of registration alone the corporate personality is
deemed already formed." It asserts that the Corporation Code
provides for a "gradation of violations of requirements." Hence,
Section 22 mandates that the corporation must be formally
organized and should commence transaction within two years
from date of incorporation. Otherwise, the corporation would
be deemed dissolved. On the other hand, if the corporation
commences operations but becomes continuously inoperative
for five years, then it may be suspended or its corporate
franchise revoked.
Petitioner concedes that Section 46 and the other provisions of
the Corporation Code do not provide for sanctions for non-filing
of the by-laws. However, it insists that no sanction need be
provided "because the mandatory nature of the provision is so
clear that there can be no doubt about its being an essential
attribute of corporate birth." To petitioner, its submission is
buttressed by the facts that the period for compliance is
"spelled out distinctly;" that the certification of the SEC/HIGC
must show that the by-laws are not inconsistent with the Code,
and that a copy of the by-laws "has to be attached to the articles
of incorporation." Moreover, no sanction is provided for
because "in the first place, no corporate identity has been
completed." Petitioner asserts that "non-provision for remedy
or sanction is itself the tacit proclamation that non-compliance
is fatal and no corporate existence had yet evolved," and
therefore, there was "no need to proclaim its demise." 6 In a bid
to convince the Court of its arguments, petitioner stresses that:
. . . the word MUST is used in Sec. 46 in its universal literal
meaning and corollary human implication — its compulsion is
integrated in its very essence — MUST is always enforceable by
the inevitable consequence — that is, "OR ELSE". The use of the
word MUST in Sec. 46 is no exception — it means file the by-
laws within one month after notice of issuance of certificate of
registration OR ELSE. The OR ELSE, though not specified, is
inextricably a part of MUST . Do this or if you do not you are
"Kaput". The importance of the by-laws to corporate existence
compels such meaning for as decreed the by-laws is "the
government" of the corporation. Indeed, how can the
corporation do any lawful act as such without by-laws. Surely,
no law is indeed to create chaos. 7
Petitioner asserts that P.D. No. 902-A cannot exceed the scope
and power of the Corporation Code which itself does not
provide sanctions for non-filing of by-laws. For the petitioner, it
is "not proper to assess the true meaning of Sec. 46 . . . on an
unauthorized provision on such matter contained in the said
decree."
In their comment on the petition, private respondents counter
that the requirement of adoption of by-laws is not mandatory.
They point to P.D. No. 902-A as having resolved the issue of
whether said requirement is mandatory or merely directory.
Citing Chung Ka Bio v. Intermediate Appellate Court, 8 private
respondents contend that Section 6(I) of that decree provides
that non-filing of by-laws is only a ground for suspension or
revocation of the certificate of registration of corporations and,
therefore, it may not result in automatic dissolution of the
corporation. Moreover, the adoption and filing of by-laws is a
condition subsequent which does not affect the corporate
personality of a corporation like the LGVHAI. This is so because
Section 9 of the Corporation Code provides that the corporate
existence and juridical personality of a corporation begins from
the date the SEC issues a certificate of incorporation under its
official seal. Consequently, even if the by-laws have not yet been
filed, a corporation may be considered a de facto corporation.
To emphasize the fact the LGVHAI was registered as the sole
homeowners' association in the Loyola Grand Villas, private
respondents point out that membership in the LGVHAI was an
"unconditional restriction in the deeds of sale signed by lot
buyers."
In its reply to private respondents' comment on the petition,
petitioner reiterates its argument that the word " must" in
Section 46 of the Corporation Code is mandatory. It adds that,
before the ruling in Chung Ka Bio v. Intermediate Appellate
Court could be applied to this case, this Court must first resolve
the issue of whether or not the provisions of P.D. No. 902-A
prescribing the rules and regulations to implement the
Corporation Code can "rise above and change" the substantive
provisions of the Code.
The pertinent provision of the Corporation Code that is the focal
point of controversy in this case states:
Sec. 46. Adoption of by-laws. — Every corporation formed under
this Code, must within one (1) month after receipt of official
notice of the issuance of its certificate of incorporation by the
Securities and Exchange Commission, adopt a code of by-laws
for its government not inconsistent with this Code. For the
adoption of by-laws by the corporation, the affirmative vote of
the stockholders representing at least a majority of the
outstanding capital stock, or of at least a majority of the
members, in the case of non-stock corporations, shall be
necessary. The by-laws shall be signed by the stockholders or
members voting for them and shall be kept in the principal
office of the corporation, subject to the stockholders or
members voting for them and shall be kept in the principal
office of the corporation, subject to inspection of the
stockholders or members during office hours; and a copy
thereof, shall be filed with the Securities and Exchange
Commission which shall be attached to the original articles of
incorporation.
Notwithstanding the provisions of the preceding paragraph, by-
laws may be adopted and filed prior to incorporation; in such
case, such by-laws shall be approved and signed by all the
incorporators and submitted to the Securities and Exchange
Commission, together with the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by
the Securities and Exchange Commission of a certification that
the by-laws are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for
filing the by-laws or any amendment thereto of any bank,
banking institution, building and loan association, trust
company, insurance company, public utility, educational
institution or other special corporations governed by special
laws, unless accompanied by a certificate of the appropriate
government agency to the effect that such by-laws or
amendments are in accordance with law.
As correctly postulated by the petitioner, interpretation of this
provision of law begins with the determination of the meaning
and import of the word "must" in this section Ordinarily, the
word "must" connotes an imperative act or operates to impose
a duty which may be enforced. 9 It is synonymous with "ought"
which connotes compulsion or mandatoriness. 10 However, the
word "must" in a statute, like "shall," is not always imperative. It
may be consistent with an exercise of discretion. In this
jurisdiction, the tendency has been to interpret "shall" as the
context or a reasonable construction of the statute in which it is
used demands or requires. 11 This is equally true as regards the
word "must." Thus, if the languages of a statute considered as a
whole and with due regard to its nature and object reveals that
the legislature intended to use the words "shall" and "must" to
be directory, they should be given that meaning. 12
In this respect, the following portions of the deliberations of the
Batasang Pambansa No. 68 are illuminating:
MR. FUENTEBELLA. Thank you, Mr. Speaker.
On page 34, referring to the adoption of by-laws, are we made
to understand here, Mr. Speaker, that by-laws must immediately
be filed within one month after the issuance? In other words,
would this be mandatory or directory in character?
MR. MENDOZA. This is mandatory.
MR. FUENTEBELLA. It being mandatory, Mr. Speaker, what
would be the effect of the failure of the corporation to file these
by-laws within one month?
MR. MENDOZA. There is a provision in the latter part of the
Code which identifies and describes the consequences of
violations of any provision of this Code. One such consequences
is the dissolution of the corporation for its inability, or perhaps,
incurring certain penalties.
MR. FUENTEBELLA. But it will not automatically amount to a
dissolution of the corporation by merely failing to file the by-
laws within one month. Supposing the corporation was late, say,
five days, what would be the mandatory penalty?
MR. MENDOZA. I do not think it will necessarily result in the
automatic or ipso facto dissolution of the corporation. Perhaps,
as in the case, as you suggested, in the case of El Hogar Filipino
where a quo warranto action is brought, one takes into account
the gravity of the violation committed. If the by-laws were late
— the filing of the by-laws were late by, perhaps, a day or two, I
would suppose that might be a tolerable delay, but if they are
delayed over a period of months — as is happening now —
because of the absence of a clear requirement that by-laws
must be completed within a specified period of time, the
corporation must suffer certain consequences. 13
This exchange of views demonstrates clearly that automatic
corporate dissolution for failure to file the by-laws on time was
never the intention of the legislature. Moreover, even without
resorting to the records of deliberations of the Batasang
Pambansa, the law itself provides the answer to the issue
propounded by petitioner.
Taken as a whole and under the principle that the best
interpreter of a statute is the statute itself (optima statuli
interpretatix est ipsum statutum), 14 Section 46 aforequoted
reveals the legislative intent to attach a directory, and not
mandatory, meaning for the word "must" in the first sentence
thereof. Note should be taken of the second paragraph of the
law which allows the filing of the by-laws even prior to
incorporation. This provision in the same section of the Code
rules out mandatory compliance with the requirement of filing
the by-laws "within one (1) month after receipt of official notice
of the issuance of its certificate of incorporation by the
Securities and Exchange Commission." It necessarily follows that
failure to file the by-laws within that period does not imply the
"demise" of the corporation. By-laws may be necessary for the
"government" of the corporation but these are subordinate to
the articles of incorporation as well as to the Corporation Code
and related statutes.15 There are in fact cases where by-laws are
unnecessary to corporate existence or to the valid exercise of
corporate powers, thus:
In the absence of charter or statutory provisions to the contrary,
by-laws are not necessary either to the existence of a
corporation or to the valid exercise of the powers conferred
upon it, certainly in all cases where the charter sufficiently
provides for the government of the body; and even where the
governing statute in express terms confers upon the corporation
the power to adopt by-laws, the failure to exercise the power will
be ascribed to mere nonaction which will not render void any
acts of the corporation which would otherwise be
valid. 16 (Emphasis supplied.)
As Fletcher aptly puts it:
It has been said that the by-laws of a corporation are the rule of
its life, and that until by-laws have been adopted the
corporation may not be able to act for the purposes of its
creation, and that the first and most important duty of the
members is to adopt them. This would seem to follow as a
matter of principle from the office and functions of by-laws.
Viewed in this light, the adoption of by-laws is a matter of
practical, if not one of legal, necessity. Moreover, the peculiar
circumstances attending the formation of a corporation may
impose the obligation to adopt certain by-laws, as in the case of
a close corporation organized for specific purposes. And the
statute or general laws from which the corporation derives its
corporate existence may expressly require it to make and adopt
by-laws and specify to some extent what they shall contain and
the manner of their adoption. The mere fact, however, of the
existence of power in the corporation to adopt by-laws does not
ordinarily and of necessity make the exercise of such power
essential to its corporate life, or to the validity of any of its
acts. 17
Although the Corporation Code requires the filing of by-laws, it
does not expressly provide for the consequences of the non-
filing of the same within the period provided for in Section 46.
However, such omission has been rectified by Presidential
Decree No. 902-A, the pertinent provisions on the jurisdiction of
the SEC of which state:
Sec. 6. In order to effectively exercise such jurisdiction, the
Commission shall possess the following powers:
xxx xxx xxx
(1) To suspend, or revoke, after proper notice and hearing, the
franchise or certificate of registration of
corporations, partnerships or associations, upon any of the
grounds provided by law, including the following:
xxx xxx xxx
5. Failure to file by-laws within the required period;
xxx xxx xxx
In the exercise of the foregoing authority and jurisdiction of the
Commission or by a Commissioner or by such other bodies,
boards, committees and/or any officer as may be created or
designated by the Commission for the purpose. The decision,
ruling or order of any such Commissioner, bodies, boards,
committees and/or officer may be appealed to the Commission
sitting en banc within thirty (30) days after receipt by the
appellant of notice of such decision, ruling or order. The
Commission shall promulgate rules of procedures to govern the
proceedings, hearings and appeals of cases falling with its
jurisdiction.
The aggrieved party may appeal the order, decision or ruling of
the Commission sitting en banc to the Supreme Court by
petition for review in accordance with the pertinent provisions
of the Rules of Court.
Even under the foregoing express grant of power and authority,
there can be no automatic corporate dissolution simply because
the incorporators failed to abide by the required filing of by-laws
embodied in Section 46 of the Corporation Code. There is no
outright "demise" of corporate existence. Proper notice and
hearing are cardinal components of due process in any
democratic institution, agency or society. In other words, the
incorporators must be given the chance to explain their neglect
or omission and remedy the same.
That the failure to file by-laws is not provided for by the
Corporation Code but in another law is of no moment. P.D. No.
902-A, which took effect immediately after its promulgation on
March 11, 1976, is very much apposite to the Code. Accordingly,
the provisions abovequoted supply the law governing the
situation in the case at bar, inasmuch as the Corporation Code
and P.D. No. 902-A are statutes in pari materia. Interpretare et
concordare legibus est optimus interpretandi. Every statute must
be so construed and harmonized with other statutes as to form
a uniform system of jurisprudence. 18
As the "rules and regulations or private laws enacted by the
corporation to regulate, govern and control its own actions,
affairs and concerns and its stockholders or members and
directors and officers with relation thereto and among
themselves in their relation to it," 19 by-laws are indispensable to
corporations in this jurisdiction. These may not be essential to
corporate birth but certainly, these are required by law for an
orderly governance and management of corporations.
Nonetheless, failure to file them within the period required by
law by no means tolls the automatic dissolution of a
corporation.
In this regard, private respondents are correct in relying on the
pronouncements of this Court in Chung Ka Bio v. Intermediate
Appellate Court, 20 as follows:
. . . . Moreover, failure to file the by-laws does not automatically
operate to dissolve a corporation but is now considered only a
ground for such dissolution.
Section 19 of the Corporation Law, part of which is now Section
22 of the Corporation Code, provided that the powers of the
corporation would cease if it did not formally organize and
commence the transaction of its business or the continuation of taken over the specialized functions of the former Home
its works within two years from date of its incorporation. Section Financing Corporation by virtue of Executive Order No. 90 dated
20, which has been reproduced with some modifications in December 17, 1989. 22 With respect to homeowners
Section 46 of the Corporation Code, expressly declared that associations, the HIGC shall "exercise all the powers, authorities
"every corporation formed under this Act, must within one and responsibilities that are vested on the Securities and
month after the filing of the articles of incorporation with the Exchange Commission . . . , the provision of Act 1459, as
Securities and Exchange Commission, adopt a code of by-laws." amended by P.D. 902-A, to the contrary notwithstanding." 23
Whether this provision should be given mandatory or only
directory effect remained a controversial question until it WHEREFORE, the instant petition for review on certiorari is
became academic with the adoption of PD 902-A. Under this hereby DENIED and the questioned Decision of the Court of
decree, it is now clear that the failure to file by-laws within the Appeals AFFIRMED. This Decision is immediately executory.
Costs against petitioner.
required period is only a ground for suspension or revocation of
the certificate of registration of corporations. SO ORDERED.
Non-filing of the by-laws will not result in automatic dissolution
of the corporation. Under Section 6(I) of PD 902-A, the SEC is
empowered to "suspend or revoke, after proper notice and
hearing, the franchise or certificate of registration of a
corporation" on the ground inter alia of "failure to file by-laws
within the required period." It is clear from this provision that
there must first of all be a hearing to determine the existence of
the ground, and secondly, assuming such finding, the penalty is
not necessarily revocation but may be only suspension of the
charter. In fact, under the rules and regulations of the SEC,
failure to file the by-laws on time may be penalized merely with
the imposition of an administrative fine without affecting the
corporate existence of the erring firm.

It should be stressed in this connection that substantial

compliance with conditions subsequent will suffice to perfect
corporate personality. Organization and commencement of
transaction of corporate business are but conditions subsequent
and not prerequisites for acquisition of corporate personality.
The adoption and filing of by-laws is also a condition
subsequent. Under Section 19 of the Corporation Code, a
Corporation commences its corporate existence and juridical
personality and is deemed incorporated from the date the
Securities and Exchange Commission issues certificate of
incorporation under its official seal. This may be done even
before the filing of the by-laws, which under Section 46 of the
Corporation Code, must be adopted "within one month after
receipt of official notice of the issuance of its certificate of
incorporation." 21

That the corporation involved herein is under the supervision of

the HIGC does not alter the result of this case. The HIGC has