1
Separate personality
1. Pioneer Insurance Surety Corp. v. Morning
Star Travel & Tours, Inc
Facts: Morning Star is a travel and tours agency with
Benny Wong et al as shareholders and members of the
board of directors. International Air Transport
Association is a Canadian corporation licensed to do
business in the Philippines. IATA appointed Morning
Star as its accredited travel agent.
IATA appointed Morning Star as its accredited travel
agent. The latter availed of the privilege of getting
airline tickets on credit from various airlines to be sold
to passengers.
Morning Star and IATA entered into a Passenger Sales
Ag ency Agreement such that Morning Star must
report all air transport ticket sales to International Air
Transport Association and account all payments
received through the centralized system called Billing
and Settlement Plan. Morning Star only holds in trust
all monies collected as these belong to the airline
companies.
IATA obtained a Credit Insurance Policy from Pioneer
to assure itself of payments by accredited travel agents
for ticket sales and monies due to the airline
companies under the Billing and Settlement Plan.
The policy was made known to the accredited travel
agents. Morning Star, through its President, Benny
Wong, was among those that declared itself liable to
indemnify Pioneer for any and all claims under the
policy. He executed a registration form under the
Credit Insurance Program for BSP-Philippines Agents.
Thereafter, Morning star failed to remit the amounts
through the Plan which prompted IATA to send a letter
of the overdue remittance. Then, it held Morning star
in default through a letter.
IATA demanded from Pioneer the amounts
representing Morning Star’s overdue account. Pioneer
paid after inspection and validation.
Consequently, Pioneer demanded these amounts from
Morning Star through a letter.
Pioneer filed a Complaint for Collection of Sum of
Money and Damages against Morning Star and its
shareholders and directors. Morning Star and its
shareholders were issued summons.
Trial court held Morning Star in default for failure to
answer within the period. Morning Star filed a Motion
for Leave of Court to File Attached Answer explaining
that it only received a copy of the complaint late and
that the counsel stated that he was only retained later
on. Trial court denied the motion.
RTC rendered a decision in favor of Pioneer and
required respondents to pay jointly and severally.
CA affirmed but modified that only Morning Star
shall be liable. CA denied petitioner’s motion for
partial reconsideration.
Pioneer argues that "the individual respondents were,
at the very least, grossly negligent in running the
affairs of respondent Morning Star by knowingly
allowing it to amass huge debts to [International Air
Transport Association] despite its financial distress,
thus, giving sufficient ground for the court to pierce
the corporate veil and hold said individual respondents
personally liable." It cites Section 31 of the
Corporation Code on the liability of directors "guilty
of gross negligence or bad faith in directing the affairs
of the corporation[.]
Pioneer also cites jurisprudence on the requisites for
the doctrine of piercing the corporate veil to apply. It
submits that all requisites are present, thus, the
individual respondents should be held solidarity liable
with Morning Star. Pioneer contends that the
abnormally large indebtedness to International Air
Transport Association was incurred in fraud and bad
faith, with Morning Star having no intention to pay its
debt. It cites Oria v. McMicking on the badges of
fraud. Pioneer then enumerates "the unmistakable
badges of fraud and deceit committed by individual
respondents"47 such as the fact that a new travel agency
called Morning Star Tour Planners, Inc. now operates
at the Morning Star's former principal place of
business in Pedro Gil, Manila, with the children of
individual respondents as its stockholders, directors,
and officers.
ISSUE/S:
1. Whether the doctrine of piercing the corporate veil
applies to hold the individual respondents solidarily
liable with respondent Morning Star Travel and Tours,
Inc. (NO)
HELD: The law vests corporations with a separate and
distinct personality from those that represent these
 2
corporations.
The corporate legal structure draws its "economic
superiority" from key features such as a separate
corporate personality. Unlike other business
associations such as partnerships, the corporate
framework encourages investment by allowing even
small capital contributors to be part of a big business
endeavor made possible by the aggregation of their
capital funds.The consequent limited liability feature,
since corporate assets will answer for corporate debts,
also proves attractive for investors. However, this legal
structure should not be abused.
A separate corporate personality shields corporate
officers acting in good faith and within their scope of
authority from personal liability except for situations
enumerated by law and jurisprudence.
Personal liability of a corporate director, trustee or
officer along (although not necessarily) with the
corporation may so validly attach, as a rule, only when
1. He assents (a) to a patently unlawful act of the
corporation, or (b) for bad faith or gross
negligence in directing its affairs, or (c) for
conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;
2. 2. He consents to the issuance of watered
stocks or who, having knowledge thereof, does
not forthwith file with the corporate secretary
his written objection thereto;
3. He agrees to hold himself personally and
solidarity liable with the corporation; or
4. He is made, by a specific provision of law, to
personally answer for his corporate action.
The first exception comes from Section 31 of the
Corporation Code
SECTION 31. Liability of Directors, Trustees or
Officers. — Directors or trustees who wilfully and
knowingly vote for or assent to patently unlawful acts
of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the
corporation or acquire any personal or pecuniary
interest in conflict with their duty as such directors or
trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the
corporation, its stockholders or members and other
persons.
Petitioner imputes gross negligence and bad faith on
the part of the individual respondents for incurring the
huge indebtedness to International Air Transport
Association.
Bad faith "imports a dishonest purpose or some moral
obliquity and conscious doing of a wrong, not simply
bad judgment or negligence." "[I]t means breach of a
known duty through some motive or interest or ill will;
it partakes of the nature of fraud."
The trial court gave weight to its finding that
respondent Morning Star still availed itself of loans
and/or obligations with International Air Transport
Association despite its financial standing of operating
at a loss
Further investigation by the plaintiff shows that it
could not find any assets or properties in the name of
defendant Morning Star because even the land and the
building where it held office was registered in the
name of "Morning Star Management Ventures
Corporation". Plaintiff contends that in such a case,
defendant Morning Star has used the separate and
distinct corporate personality accorded to it under the
Corporation Code to commit said fraudulent
transaction of incurring corporate debts and allow
the herein individual defendants to escape personal
liability and placing the assets beyond the reach of
the creditors.
On the other hand, the Court of Appeals ruled that the
general rule on separate corporate personality and
against personal liability by corporate officers applies
since petitioner failed to prove bad faith amounting to
fraud by the corporate officers.
The mere fact that Morning Star has been incurring
huge losses and that it has no assets at the time it
contracted large financial obligations to IATA, cannot
be considered that its officers acted in bad faith or such
circumstance would amount to fraud, warranting
personal and solidary liability of its corporate officers.
The same is also true with the fact that Morning Star
Management Ventures Corporation and Pic 'N Pac
Mart, Inc., corporations having the same set of officers
as Morning Star, were doing relatively well during the
time that the former incurred huge losses. Thus, only
Morning Star should be held personally liable to
Plaintiff-Appellee, and not its corporate officers.
Piercing the corporate veil in order to hold corporate
officers personally liable for the corporation's debts
requires that "the bad faith or wrongdoing of the
director must be established clearly and
convincingly [as] [b]ad faith is never presumed."
 3

Oria v. McMicking enumerates several badges of fraud. the time that respondent Morning Star was
Petitioner argues the existence of the fourth to sixth incurring huge losses
badges:
This court finds that petitioner was not able to clearly
1. The fact that the consideration of the and convincingly establish bad faith by the individual
conveyance is fictitious or is inadequate. respondents, nor substantiate the alleged badges of
2. A transfer made by a debtor after suit has been fraud.
begun and while it is pending against him.
1. Petitioner failed to substantiate the fourth
3. A sale upon credit by an insolvent debtor.
badge of fraud on "[e]evidence of large
4. Evidence of large indebtedness or complete
indebtedness or complete insolvency."
insolvency.
5. The transfer of all or nearly all of his
None of the parties made allegations on the
property by a debtor, especially when he is
financial status or business standing of
insolvent or greatly embarrassed financially.
respondent Morning Star during the first five
6. The fact that the transfer is made between
years from its accreditation in 1993. Petitioner
father and son, when there are present other
relies on Atty. Taggueg's testimony regarding
of the above circumstances.
respondent Morning Star's financial statements
7. The failure of the vendee to take exclusive
with the Securities and Exchange
possession of all the property.
Commission.
Attention is drawn to the following badges of fraud by
individual respondents to use the corporate fiction of Petitioner did not present Securities and
respondent Morning Star as a veil or cloak to insulate Exchange Commission documents on
themselves from any liability to pay its indebtedness to respondent Morning Star's total assets as of
wit: December 2002. It did not present respondent
Morning Star's financial statements for
a. individual respondents are likewise in direct
December 2002, the year it incurred
control of the management of two other
obligations from International Air Transport
corporations, Morning Star Management
Association.
Ventures Corp. and Pic 'N Pac Mart Inc.,
b. Respondent Morning Star has no assets or
Petitioner's reliance on Atty. Taggueg's
property in its name that may be levied upon
testimony on respondent Morning Star's
for attachment and execution to secure and to
financial statements for previous years fails to
satisfy any judgment debt, as in fact the land
clearly and convincingly establish bad faith by
and building where its offices can be found are
the individual respondents.
registered in the name of another corporation
"Morning Star Management Ventures
2. Petitioner failed to substantiate the fifth badge
Corporation" which is similarly owned and
of fraud on the "transfer of all or nearly all of
controlled by the individual respondents
his property by a debtor, especially when he is
c. As early as 1998, respondent Morning Star
insolvent or greatly embarrassed financially."
had already been incurring huge losses which
clearly show the inability to pay its obligations
Mere allegations that Morning Star
to IATA but the individual respondents
Management Ventures Corporation and Pic 'N
contracted its huge financial obligations from
Pac Mart, Inc. "were doing relatively well
IATA knowing fully well that respondent
during the time that respondent Morning Star
Morning Star will be unable to pay such
was incurring huge losses" do not establish
obligations;
bad faith or fraud by the individual
d. Strangely, on the other hand, Pic 'N Pac Mart,
respondents. Such allegations alone do not
Inc. and Morning Star Management Ventures
prove that the individual respondents were
Corp., the other two (2) corporations similarly
transferring respondent Morning Star's
controlled and managed by the individual
properties in fraud of its creditors. Neither
respondents, were doing relatively well during
does the allegation that Morning Star
 4
Management Ventures Corporation has title
over the land and building where the offices
can be found establish bad faith or fraud.
This court has held that the "existence of
interlocking directors, corporate officers and
shareholders is not enough justification to
pierce the veil of corporate fiction in the
absence of fraud or other public policy
considerations.
3. Petitioner also failed to substantiate the sixth
badge of fraud that "the transfer is made
between father and son, when there are present
other of the above circumstances."
This court has held that "compliance with the
recognized modes of acquisition of jurisdiction
cannot be dispensed with even in piercing the
veil of corporate fiction" Morning Star Tour
Planners, Inc. is not a party in this case. It
would offend due process rights if what
petitioner ultimately seeks in its allegation is
to hold Morning Star Tour Planners, Inc.
responsible for respondent Morning Star's
liability.
In any event, petitioner failed to plead and
prove the circumstances that would pass the
following control test for the operation of the
alter ego doctrine.
a. Control, not mere majority or complete
stock control, but complete domination,
not only of finances but of policy and
business practice in respect to the
transaction attacked so that the corporate
entity as to this transaction had at the time
no separate mind, will or existence of its
own;
b. Such control must have been used by the
defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or
other positive legal duty, or dishonest and
unjust act in contravention of plaintiff's
legal right; and
c. The aforesaid control and breach of duty
must [have] proximately caused the injury
or unjust loss complained of.
The records do not show that the individual
respondents controlled Morning Star Tour Planners,
Inc. and that such control was used to commit fraud
against petitioner. Neither does this suspicion support
petitioner's position that the individual respondents
were in bad faith or gross negligence in directing the
affairs of respondent Morning Star.
Finally, pursuant to this court's pronouncement
in Nacar v. Gallery Frames,the interest rate should be
6% per annum on the amount owing to petitioner
representing respondent Morning Star's unpaid air
transport tickets availed on credit.
CORPORATE TORT
2. Professional Services Inc. vs Court of Appeals
Facts: Natividad Agana was rushed to the Medical
City General Hospital (Medical City Hospital) because
of difficulty of bowel movement and bloody anal
discharge. After a series of medical examinations, Dr.
Miguel Ampil, diagnosed her to be suffering from
"cancer of the sigmoid." Dr Ampil performed a
surgery but found that the malignancy spread to her
left ovary necessitating the removal of certain portions
of it. Thus, Dr. Ampil obtained the consent of
Natividad’s husband, Enrique Agana, to permit Dr.
Juan Fuentes to perform hysterectomy on her. After
Dr. Fuentes had completed the hysterectomy, Dr.
Ampil took over, completed the operation and closed
the incision.
However, the operation appeared to be flawed. The
attending nurses noted that 2 sponges were missing
and search was done but to no avail. The surgeon
proceeded to continue for closure. Natividad was
released from the hospital.
After a couple of days, Natividad complained of
excruciating pain in her anal region. She consulted
both Dr. Ampil and Dr. Fuentes about it. They told her
that the pain was the natural consequence of the
surgery.
Natividad, accompanied by her husband, went to the
United States to seek further treatment. After four
months of consultations and laboratory examinations,
Natividad was told she was free of cancer.
Hence, she was advised to return to the Philippines.
Natividad flew back to the Philippines, still suffering
from pains. Her daughter found a gauze in her vagina.
It was removed by Dr. Ampil but the pains intensified,
 5
prompting Natividad to seek treatment at the
Polymedic General Hospital. While confined there, Dr.
Ramon Gutierrez detected the presence of another
gauze which badly infected her vaginal vault. Another
surgical operation was needed to remedy the damage.
Natividad underwent another surgery.
Natividad and her husband filed a complaint for
damages against the Professional Services, Inc. (PSI),
owner of the Medical City Hospital, Dr. Ampil, and
Dr. Fuentes. They alleged that the latter are liable for
negligence for leaving two pieces of gauze inside
Natividad’s body and malpractice for concealing their
acts of negligence.
Pending the outcome of the above cases, Natividad
died and was duly substituted by her above-named
children (the Aganas).
RTC: found PSI, Dr. Ampil and Dr. Fuentes liable for
negligence and malpractice and ordered them to pay
the plaintiffs jointly and severally, except in respect of
the award for exemplary damages and the interest
thereon which are the liabilities of defendants Dr.
Ampil and Dr. Fuentes only.
They appealed to CA. Aganas filed a motion for partial
execution and the sheriff levied certain properties of
Dr. Ampil.
Later on, the Aganas also filed a motion for an alias
writ of execution against the properties of PSI and Dr.
Fuentes. RTC granted the motion and issued the
corresponding writ, prompting Dr. Fuentes to file with
the Court of Appeals a petition for certiorari and
prohibition, with prayer for preliminary injunction. CA
approved the prayers for injunctive relief.
Meanwhile, the PRC Board of Medicine rendered its
Decisionin Administrative case dismissing the case
against Dr. Fuentes.
CA: absolved Dr. Fuentes from liability and order Dr.
Ampil to reimburse PSI for whatever amount the latter
will pay.
ISSUE: Won PSI is liable for corporate tort
HELD: YES.
We now proceed to the doctrine of corporate
negligence or corporate responsibility.
One allegation in the complaint in the civil case for
negligence and malpractice is that PSI as owner,
operator and manager of Medical City Hospital, "did
not perform the necessary supervision nor exercise
diligent efforts in the supervision of Drs. Ampil and
Fuentes and its nursing staff, resident doctors, and
medical interns who assisted Drs. Ampil and Fuentes
in the performance of their duties as surgeons."
Premised on the doctrine of corporate negligence,
the trial court held that PSI is directly liable for
such breach of duty. We agree with the trial court.
Recent years have seen the doctrine of corporate
negligence as the judicial answer to the problem of
allocating hospital’s liability for the negligent acts
of health practitioners, absent facts to support the
application of respondeat superior or apparent
authority. Its formulation proceeds from the
judiciary’s acknowledgment that in these modern
times, the duty of providing quality medical service
is no longer the sole prerogative and responsibility
of the physician. The modern hospitals have
changed structure. Hospitals now tend to organize
a highly professional medical staff whose
competence and performance need to be monitored
by the hospitals commensurate with their inherent
responsibility to provide quality medical care.
The doctrine has its genesis in Darling v.
Charleston Community Hospital. There, the
Supreme Court of Illinois held that "the jury could
have found a hospital negligent, inter alia, in failing to
have a sufficient number of trained nurses attending
the patient; failing to require a consultation with or
examination by members of the hospital staff; and
failing to review the treatment rendered to the patient."
On the basis of Darling, other jurisdictions held
that a hospital’s corporate negligence extends to
permitting a physician known to be incompetent to
practice at the hospital. With the passage of time,
more duties were expected from hospitals, among
them: (1) the use of reasonable care in the maintenance
of safe and adequate facilities and equipment; (2) the
selection and retention of competent physicians; (3)
the overseeing or supervision of all persons who
practice medicine within its walls; and (4) the
formulation, adoption and enforcement of adequate
rules and policies that ensure quality care for its
patients. Thus, in Tucson Medical Center, Inc. v.
Misevich, it was held that a hospital, following the
doctrine of corporate responsibility, has the duty to see
that it meets the standards of responsibilities for the
 6
care of patients. Such duty includes the proper
supervision of the members of its medical staff. The
hospital accordingly has the duty to make a
reasonable effort to monitor and oversee the
treatment prescribed and administered by the
physicians practicing in its premises.
In the present case, it was duly established that PSI
operates the Medical City Hospital for the purpose
and under the concept of providing comprehensive
medical services to the public. Accordingly, it has
the duty to exercise reasonable care to protect from
harm all patients admitted into its facility for
medical treatment. Unfortunately, PSI failed to
perform such duty.
As held by the RTC, PSI’s liability is traceable to
its failure to conduct an investigation of the matter
reported in the nota bene of the count nurse. Such
failure established PSI’s part in the dark
conspiracy of silence and concealment about the
gauzes. Ethical considerations, if not also legal,
dictated the holding of an immediate inquiry into
the events, if not for the benefit of the patient to
whom the duty is primarily owed, then in the
interest of arriving at the truth.
It is worthy to note that Dr. Ampil and Dr. Fuentes
operated on Natividad with the assistance of the
Medical City Hospital’s staff, composed of resident
doctors, nurses, and interns. As such, it is reasonable to
conclude that PSI, as the operator of the hospital, has
actual or constructive knowledge of the procedures
carried out, particularly the report of the attending
nurses that the two pieces of gauze were missing. In
Fridena v. Evans, it was held that a corporation is
bound by the knowledge acquired by or notice
given to its agents or officers within the scope of
their authority and in reference to a matter to
which their authority extends. This means that the
knowledge of any of the staff of Medical City Hospital
constitutes knowledge of PSI. Now, the failure of PSI,
despite the attending nurses’ report, to investigate and
inform Natividad regarding the missing gauzes
amounts to callous negligence. Not only did PSI
breach its duties to oversee or supervise all persons
who practice medicine within its walls, it also failed to
take an active step in fixing the negligence committed.
This renders PSI, not only vicariously liable for the
negligence of Dr. Ampil under Article 2180 of the
Civil Code, but also directly liable for its own
negligence under Article 2176.
Anent the corollary issue of whether PSI is
solidarily liable with Dr. Ampil for damages, let it
be emphasized that PSI, apart from a general
denial of its responsibility, failed to adduce
evidence showing that it exercised the diligence of a
good father of a family in the accreditation and
supervision of the latter. In neglecting to offer such
proof, PSI failed to discharge its burden under the
last paragraph of Article 2180 cited earlier, and,
therefore, must be adjudged solidarily liable with
Dr. Ampil. Moreover, as we have discussed, PSI is
also directly liable to the Aganas.
As to Dr. Ampil’s liability
The glaring truth is that all the major circumstances,
taken together, as specified by the Court of Appeals,
directly point to Dr. Ampil as the negligent party.
First, it is not disputed that the surgeons used gauzes as
sponges to control the bleeding of the patient during
the surgical operation. Second, immediately after the
operation, the nurses who assisted in the surgery noted
in their report that the ‘sponge count (was) lacking 2’;
that such anomaly was ‘announced to surgeon’ and
that a ‘search was done but to no avail’ prompting Dr.
Ampil to ‘continue for closure’ Third, after the
operation, two (2) gauzes were extracted from the
same spot of the body of Mrs. Agana where the
surgery was performed.
It is settled that the leaving of sponges or other foreign
substances in the wound after the incision has been
closed is at least prima facie negligence by the
operating surgeon. To put it simply, such act is
considered so inconsistent with due care as to raise an
inference of negligence.
Of course, the Court is not blind to the reality that
there are times when danger to a patient’s life
precludes a surgeon from further searching missing
sponges or foreign objects left in the body. But this
does not leave him free from any obligation. Even if it
has been shown that a surgeon was required by the
urgent necessities of the case to leave a sponge in his
patient’s abdomen, because of the dangers attendant
upon delay, still, it is his legal duty to so inform his
patient within a reasonable time thereafter by
advising her of what he had been compelled to do.
This is in order that she might seek relief from the
effects of the foreign object left in her body as her
condition might permit.
 7
This is a clear case of medical malpractice or more
appropriately, medical negligence. To successfully
pursue this kind of case, a patient must only prove that
a health care provider either failed to do something
which a reasonably prudent health care provider would
have done, or that he did something that a reasonably
prudent provider would not have done; and that failure
or action caused injury to the patient. 
It was duly established that Dr. Ampil was the lead
surgeon during the operation of Natividad. He
requested the assistance of Dr. Fuentes only to perform
hysterectomy when he (Dr. Ampil) found that the
malignancy in her sigmoid area had spread to her left
ovary. Dr. Fuentes performed the surgery and
thereafter reported and showed his work to Dr. Ampil.
Under the "Captain of the Ship" rule, the operating
surgeon is the person in complete charge of the surgery
room and all personnel connected with the operation.
Their duty is to obey his orders.
PSI’s LIABILITY
The modern health care industry continues to
distance itself from its charitable past and has
experienced a significant conversion from a not-for-
profit health care to for-profit hospital businesses.
Consequently, significant changes in health law have
accompanied the business-related changes in the
hospital industry. One important legal change is an
increase in hospital liability for medical
malpractice. Many courts now allow claims for
hospital vicarious liability under the theories of
respondeat superior, apparent authority, ostensible
authority, or agency by estoppel. 
In this jurisdiction, the statute governing liability for
negligent acts is Article 2176 of the Civil Code, which
reads:
Art. 2176. Whoever by act or omission causes damage
to another, there being fault or negligence, is obliged
to pay for the damage done. Such fault or negligence,
if there is no pre-existing contractual relation between
the parties, is called a quasi-delict and is governed by
the provisions of this Chapter.
A derivative of this provision is Article 2180, the rule
governing vicarious liability under the doctrine of
respondeat superior, thus:
ART. 2180. The obligation imposed by Article 2176 is
demandable not only for one’s own acts or omissions,
but also for those of persons for whom one is
responsible.
The owners and managers of an establishment or
enterprise are likewise responsible for damages
caused by their employees in the service of the
branches in which the latter are employed or on the
occasion of their functions.
Employers shall be liable for the damages caused by
their employees and household helpers acting within
the scope of their assigned tasks even though the
former are not engaged in any business or industry.
The responsibility treated of in this article shall cease
when the persons herein mentioned prove that they
observed all the diligence of a good father of a family
to prevent damage.
The case of Schloendorff v. Society of New York
Hospital was then considered an authority for this
view. The "Schloendorff doctrine" regards a
physician, even if employed by a hospital, as an
independent contractor because of the skill he
exercises and the lack of control exerted over his
work. Under this doctrine, hospitals are exempt
from the application of the respondeat superior
principle for fault or negligence committed by
physicians in the discharge of their profession.
However, the efficacy of the foregoing doctrine has
weakened with the significant developments in
medical care. Courts came to realize that modern
hospitals are increasingly taking active role in
supplying and regulating medical care to patients.
No longer were a hospital’s functions limited to
furnishing room, food, facilities for treatment and
operation, and attendants for its patients.
Rather, they regularly employ, on a salaried basis,
a large staff of physicians, interns, nurses,
administrative and manual workers. They charge
patients for medical care and treatment, even
collecting for such services through legal action, if
necessary. The court then concluded that there is
no reason to exempt hospitals from the universal
rule of respondeat superior.
In our shores, the nature of the relationship between
the hospital and the physicians is rendered
inconsequential in view of our categorical
pronouncement in Ramos v. Court of Appeals that for
purposes of apportioning responsibility in medical
negligence cases, an employer-employee
 8
relationship in effect exists between hospitals and
their attending and visiting physicians. This Court
held:
In the first place, hospitals exercise significant
control in the hiring and firing of consultants and
in the conduct of their work within the hospital
premises. Doctors who apply for ‘consultant’ slots,
visiting or attending, are required to submit proof of
completion of residency, their educational
qualifications, generally, evidence of accreditation by
the appropriate board (diplomate), evidence of
fellowship in most cases, and references.
In other words, private hospitals, hire, fire and
exercise real control over their attending and
visiting ‘consultant’ staff. While ‘consultants’ are
not, technically employee, the control exercised, the
hiring, and the right to terminate consultants all
fulfill the important hallmarks of an employer-
employee relationship, with the exception of the
payment of wages. In assessing whether such a
relationship in fact exists, the control test is
determining. Accordingly, on the basis of the
foregoing, we rule that for the purpose of allocating
responsibility in medical negligence cases, an
employer-employee relationship in effect exists
between hospitals and their attending and visiting
physicians. "
But the Ramos pronouncement is not our only basis in
sustaining PSI’s liability. Its liability is also anchored
upon the agency principle of apparent authority or
agency by estoppel and the doctrine of corporate
negligence which have gained acceptance in the
determination of a hospital’s liability for negligent
acts of health professionals. The present case serves
as a perfect platform to test the applicability of these
doctrines, thus, enriching our jurisprudence.
Apparent authority, or what is sometimes referred to as
the "holding out" theory, or doctrine of ostensible
agency or agency by estoppel imposes liability, not as
the result of the reality of a contractual relationship,
but rather because of the actions of a principal or an
employer in somehow misleading the public into
believing that the relationship or the authority exists.
In this case, PSI publicly displays in the lobby of the
Medical City Hospital the names and specializations of
the physicians associated or accredited by it, including
those of Dr. Ampil and Dr. Fuentes. We concur with
the Court of Appeals’ conclusion that it "is now
estopped from passing all the blame to the physicians
whose names it proudly paraded in the public directory
leading the public to believe that it vouched for their
skill and competence."
The wisdom of the foregoing ratiocination is easy to
discern. Corporate entities, like PSI, are capable of
acting only through other individuals, such as
physicians. If these accredited physicians do their job
well, the hospital succeeds in its mission of offering
quality medical services and thus profits financially.
Logically, where negligence mars the quality of its
services, the hospital should not be allowed to escape
liability for the acts of its ostensible agents.
PIERCING THE VEIL
Dutch Movers vs Lee
Facts: Lequin filed an illegal dismissal case against
Dutch Movers Inc. and Cesar Lee (Onwer) and
Yolanda Lee (Manager). It was alleged that he was
employed as a truck driver by DMI and the other
respondents as helpers. Later on, their supervisor,
Furio, informed them that DMI would cease its
operations for no reason. Upon their request, DOLE
issued a certification revealing that DMI did not file
any notice of business closure. Thus, respondents
argued that they were illegally dismissed as their
termination was without cause.
LA dismissed the case for lack of cause of action.
NLRC reversed. It ruled that respondents were
illegally dismissed because DMI simply placed them
on standby, and no longer provide them with work.
The NLRC Decision became final and executory.
Consequently, respondents filed a Motion for Writ of
Execution.
Later, they submitted a Reiterating Motion for Writ of
Execution with Updated Computation of Full
Backwages. Pending resolution of these motions,
respondents filed a Manifestation and Motion to
Implead stating that upon investigation, they
discovered that DMI no longer operates. They,
nonetheless, insisted that petitioners - who managed
and operated DMI, and consistently represented to
respondents that they were the owners of DMI
continue to work at Toyota Alabang, which they
(petitioners) also own and operate.
They further averred that the Articles of Incorporation
(AOI) of DMI ironically did not include petitioners as
 9
its directors or officers; and those named directors and
officers were persons unknown to them.
They likewise claimed that per inquiry with the SEC
and the DOLE, they learned that DMI did not file any
notice of business closure; and the creation and
operation of DMI was attended with fraud making it
convenient for petitioners to evade their legal
obligations to them.
Given these developments, respondents prayed that
petitioners, and the officers named in DMI's AOI,
which included Edgar N. Smith and Millicent C. Smith
(spouses Smith), be impleaded, and be held solidarity
liable with DMI.
Spouses Smith alleged that as part of their services as
lawyers, they lent their names to petitioners to assist
them in incorporating DMI. Allegedly, after such
undertaking, spouses Smith promptly transferred their
supposed rights in DMI in favor of petitioners.
Spouses Smith stressed that they never participated in
the management and operations of DMI.
LA: Held petitioners liable. LA Savari decreed that
petitioners represented themselves to respondents as
the owners of DMI; and were the ones who managed
the same.
Thereafter, LA Salvari issued a Writ of Execution.
NLRC: quashed the Writ of execution insofar as it
held petitioners liable to pay the judgment awards.
The NLRC ruled that the Writ of Execution should
only pertain to DMI since petitioners were not held
liable to pay the awards under the final and executory
NLRC Decision. It added that petitioners could not be
sued personally for the acts of DMI because the latter
had a separate and distinct personality from the
persons comprising it; and, there was no showing that
petitioners were stockholders or officers of DMI; or
even granting that they were, they were not shown to
have acted in bad faith against respondents.
CA: reversed the ruling of the NLRC.
The CA ratiocinated that as a rule, once a judgment
becomes final and executory, it cannot anymore be
altered or modified; however, an exception to this rule
is when there is a supervening event, which renders the
execution of judgment unjust or impossible. It added
that petitioners were afforded due process as they were
impleaded from the beginning of the case; and,
respondents identified petitioners as the persons who
hired them, and were the ones behind DMI as
confirmed by SPS Smith who said that they
relinquished all rights to petitioners.
Petitioners main argument is that the corporation has a
separate and distinct personality and they cannot be
held solidarily liable absent showing of bad faith on
their part.
ISSUE: WN it is proper to pierce the corporate veil
of DMI and hold petitioners solidarily liable with
the company.
HELD:
Contrary to petitioners' claim, Valderrama v. National
Labor Relations Commission,and David v. Court of
Appeals are applicable here. In said cases, the Court
held that the principle of immutability of judgment, or
the rule that once a judgment has become final and
executory, the same can no longer be altered or
modified and the court's duty is only to order its
execution, is not absolute. One of its exceptions is
when there is a supervening event occurring after the
judgment becomes final and executory, which renders
the decision unenforceable.
Similarly, supervening events transpired in this case
after the NLRC Decision became final and executory,
which rendered its execution impossible and unjust.
DMI ceased its operation, and the same did not file any
formal notice regarding it. Added to this, in their
Opposition to the Motion to Implead, spouses Smith
revealed that they only lent their names to petitioners,
and they were included as incorporators just to assist
the latter in forming DMI; after such undertaking,
spouses Smith immediately transferred their rights in
DMI to petitioners, which proved that petitioners were
the ones in control of DMI.
In considering the foregoing events, the Court is not
unmindful of the basic tenet that a corporation has
a separate and distinct personality from its
stockholders, and from other corporations it may
be connected with. However, such personality may
be disregarded, or the veil of corporate fiction may
be pierced attaching personal liability against
responsible person if the corporation's personality
"is used to defeat public convenience, justify wrong,
protect fraud or defend crime, or is used as a device
to defeat the labor laws ."By responsible person, we
refer to an individual or entity responsible for, and
who acted in bad faith in committing illegal
 10
dismissal or in violation of the Labor Code; or one
who actively participated in the management of the
corporation. Also, piercing the veil of corporate
fiction is allowed where a corporation is a mere
alter ego or a conduit of a person, or another
corporation.
Here, the veil of corporate fiction must be pierced
and accordingly, petitioners should be held
personally liable for judgment awards because the
peculiarity of the situation shows that they
controlled DMI; they actively participated in its
operation such that DMI existed not as a separate
entity but only as business conduit of petitioners. As
will be shown be shown below, petitioners controlled
DMI by making it appear to have no mind of its
own,and used DMI as shield in evading legal
liabilities, including payment of the judgment
awards in favor of respondents.
First, petitioners denied having any participation in the
management and operation of DMI; however, they
were aware of and disclosed the circumstances
surrounding respondents' employment, and
propounded arguments refuting that respondents were
illegally dismissed.
To note, petitioners revealed the annual compensation
of respondents and their length of service; they also set
up the defense that respondents were merely project
employees, and were not terminated but that DMI's
contract with its client was discontinued resulting in
the absence of hauling projects for respondents.
Second, the declarations made by spouses Smith
further bolster that petitioners and no other controlled
DMI. Spouses Smith categorically identified
petitioners as the owners and managers of DMI.
Third, piercing the veil of corporate fiction is
allowed, and responsible persons may be
impleaded, and be held solidarily liable even after
final judgment and on execution, provided that
such persons deliberately used the corporate
vehicle to unjustly evade the judgment obligation,
or resorted to fraud, bad faith, or malice in evading
their obligation.
While it is true that one's control does not by itself
result in the disregard of corporate fiction; however,
considering the irregularity in the incorporation of
DMI, then there is sufficient basis to hold that such
corporation was used for an illegal purpose, including
evasion of legal duties to its employees, and as such,
the piercing of the corporate veil is warranted. The act
of hiding behind the cloak of corporate fiction will
not be allowed in such situation where it is used to
evade one's obligations, which "equitable piercing
doctrine was formulated to address and prevent."
Clearly, petitioners should be held liable for the
judgment awards as they resorted to such scheme to
countermand labor laws by causing the incorporation
of DMI but without any indication that they were part
thereof. While such device to defeat labor laws may be
deemed ingenious and imaginative, the Court will not
hesitate to draw the line, and protect the right of
workers to security of tenure, including ensuring that
they will receive the benefits they deserve when they
fall victims of illegal dismissal.
ALTER EGO PIERCING
Facts: Union Refinery Corporation (URC) was
established under the Corporation Code of the
Philippines. In the course of its business undertakings,
particularly in the period from 1991 to 1994, URC
imported oil products into the country.
In 1996, Oilink was incorporated for the primary
purpose of manufacturing, importing, exporting,
buying, selling or dealing in oil and gas, and their
refinements and by-products at wholesale and retail of
petroleum. URC and Oilink had interlocking
directors when Oilink started its business.
In applying for and in expediting the transfer of the
operator’s name for the Customs Bonded Warehouse
then operated by URC, Esther Magleo, the Vice-
President and General Manager of URC, sent a letter
to manifest that URC and Oilink had the same Board
of Directors and that Oilink was 100% owned by
URC.
Oscar Brillo, the District Collector of the Port of
Manila, formally demanded that URC pay the taxes
and duties on its oil imports. Brillo made another
demand letter to URC for the payment of the reduced
sum for the Value-Added Taxes (VAT), special duties
and excise taxes.
URC, through its counsel, challenged the
inconsistencies of the demands.
Customs Commissioner Pedro C. Mendoza formally
directed that URC pay the amount representing URC’s
special duties, VAT, and Excise Taxes that it had
failed to pay.
 11
Upon assumption to office, Customs Commissioner
Nelson Tan transmitted another demand letter to URC
affirming the assessment of 99M.
VP Magleo, in behalf of URC, replied by letter to
Commissioner Tan’s affirmance by denying liability,
insisting instead that only ₱28,933,079.20 should be
paid by way of compromise.
Commissioner Tan responded by rejecting Magleo’s
proposal, and directed URC to pay ₱99,216,580.10.
Manuel Co, URC’s President, conveyed to
Commissioner Tan URC’s willingness to pay only
₱94,216,580.10, of which the initial amount of
₱28,264,974.00 would be taken from the collectibles
of Oilink from the National Power Corporation, and
the balance to be paid in monthly installments over a
period of three years to be secured with corresponding
post-dated checks and its future available tax credits.
Commissioner Tan made a final demand for the total
liability of ₱138,060,200.49 upon URC and Oilink.
Oilink formally protested the assessment on the
ground that it was not the party liable for the
assessed deficiency taxes.
Commissioner Tan communicated in writing the
detailed computation of the tax liability, stressing that
the Bureau of Customs (BoC) would not issue any
clearance to Oilink unless the amount of demanded as
Oilink’s tax liability be first paid.
Oilink appealed to the CTA, seeking the nullification
of the assessment for having been issued without
authority and with grave abuse of discretion
tantamount to lack of jurisdiction because the
Government was thereby shifting the imposition from
URC to Oilink.
CTA: declared the assessments as null and void the
assessment of the Commissioner of Customs.
Aggrieved, the Commissioner of Customs brought a
petition for review in the CA upon the following
issues, namely: (a) the CTA gravely erred in holding
that it had jurisdiction over the subject matter; (b) the
CTA gravely erred in holding that Oilink had a cause
of action; and (c) the CTA gravely erred in holding
that the Commissioner of Customs could not pierce the
veil of corporate fiction.
CA: concurred with the CTA that Commissioner
could not pierce the veil of corporate fiction because
the said wrongdoing was not clearly and convincingly
established by Respondent. He did not submit any
evidence to support his allegations. Stated otherwise,
should the Respondent sufficiently prove that OILINK
was merely set up in order to avoid the payment of
taxes or for some other purpose which will defeat
public convenience, justify wrong, protect fraud or
defend crime, this Court will not hesitate to pierce the
veil of corporate fiction by URC and OILINK.
Issues: WN the veil of corporate fiction of URC and
Oilink may be pierced.
HELD:
A corporation, upon coming into existence, is invested
by law with a personality separate and distinct from
those of the persons composing it as well as from any
other legal entity to which it may be related. For this
reason, a stockholder is generally not made to answer
for the acts or liabilities of the corporation, and vice
versa. The separate and distinct personality of the
corporation is, however, a mere fiction established by
law for convenience and to promote the ends of
justice. It may not be used or invoked for ends that
subvert the policy and purpose behind its
establishment, or intended by law to which the
corporation owes its being. This is true particularly
when the fiction is used to defeat public convenience,
to justify wrong, to protect fraud, to defend crime, to
confuse legitimate legal or judicial issues, to perpetrate
deception or otherwise to circumvent the law. This is
likewise true where the corporate entity is being
used as an alter ego, adjunct, or business conduit
for the sole benefit of the stockholders or of another
corporate entity. In such instances, the veil of
corporate entity will be pierced or disregarded with
reference to the particular transaction involved.
In Philippine National Bank v. Ritratto Group, Inc., the
Court has outlined the following circumstances that are
useful in the determination of whether a subsidiary is a
mere instrumentality of the parent-corporation, viz:
1. Control, not mere majority or complete control, but
complete domination, not only of finances butof policy
and business practice in respect to the transaction
attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or
existence of its own;
2. Such control must have been used by the defendant
to commit fraud or wrong, to perpetrate the violation
of a statutory or other positive legal duty, or dishonest
 12
and, unjust act incontravention of plaintiff's legal
rights; and
3. The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained
of.
In applying the "instrumentality" or"alter ego"
doctrine, the courts are concerned with reality, not
form, and with how the corporation operated and
the individual defendant's relationship to the
operation. Consequently, the absence of any one of
the foregoing elements disauthorizes the piercing of
the corporate veil.
Indeed, the doctrine of piercing the corporate veil
has no application here because the Commissioner
of Customs did not establish that Oilink had been
set up to avoid the payment of taxes or duties, or
for purposes that would defeat public convenience,
justify wrong, protect fraud, defend crime, confuse
legitimate legal or judicial issues, perpetrate
deception or otherwise circumvent the law. It is also
noteworthy that from the outset the Commissioner of
Customs sought to collect the deficiency taxes and
duties from URC, and that it was only on July 2, 1999
when the Commissioner of Customs sent the demand
letter to both URC and Oilink. That was revealing,
because the failure of the Commissioner of Customs to
pursue the remedies against Oilink from the outset
manifested that its belated pursuit of Oilink was only
an afterthought.
REVERSE PIERCING
International Academy of Management vs Litton
Company Inc.
Facts: Atty. Emmanuel T. Santos (Santos), a lessee to
two (2) buildings owned by Litton, owed the latter
rental arrears as well as his share of the payment of
realty taxes. Consequently, Litton filed a complaint for
unlawful detainer against Santos. The MeTC ruled in
Litton’s favor and ordered Santos to vacate A.I.D.
Building and Litton Apartments and to pay various
sums of money representing unpaid arrears, realty
taxes, penalty, andattorney’s fees.
It appears however that the judgment was not
executed.
Litton subsequently filed an action for revival of
judgment, which was granted by the RTC. Santos then
appealed the RTC decision to the CA, which
nevertheless affirmed the RTC. The said CA decision
became final and executory.
The sheriff of the MeTC of Manila levied on a piece of
real property registered in the name of International
Academy of Management and Economics Incorporated
(I/AME), in order to execute the judgment against
Santos. The annotations on TCT No. 187565 indicated
that such was "only up to the extent of the share of
Emmanuel T. Santos."
I/AME filed with Me TC a "Motion to Lift or Remove
Annotations. I/AME claimed that it has a separate and
distinct personality from Santos; hence, its properties
should not be made to answer for the latter's liabilities.
The motion was denied.
Upon motion for reconsideration of I/AME, the
MeTC reversed its earlier ruling and ordered the
cancellation of the annotations of levy as well as the
writ of execution. Litton then elevated the case to the
RTC, which in turn reversed the Order granting
I/AME’s motion for reconsideration and reinstated
the original Order.
CA: Upheld RTC Order and held that no grave abuse
of discretion was committed when the trial court
pierced the corporate veil of I/AME. It took note of
how Santos had utilized I/ AME to insulate the Makati
real property from the execution of the judgment
rendered against him, for the following reasons:
First, the Deed of Absolute Sale indicated that Santos,
being the President, was representing I/AME as the
vendee. However, records show that it was only in
1985 that I/AME was organized as a juridical
entity. Obviously, Santos could not have been
President of a non-existent corporation at that time.
Second, the CA noted that the subject real property
was transferred to I/AME during the pendency of the
appeal for the revival of the judgment in the ejectment
case in the CA.
Finally, the CA observed that the Register of Deeds of
Makati City issued TCT No. 187565 only on 17
November 1993, fourteen (14) years after the
execution of the Deed of Absolute Sale and more than
eight (8) years after I/AME was incorporated.
 13

ISSUE: WN the court erred in piercing the separate and distinct personality of the corporation
corporate veil of IAME and for having it answer was purposefully employed to evade a legitimate
for the personal liability of Santos. and binding commitment and perpetuate a fraud or
like wrongdoings. "
HELD: NO.
The resistance of the Court to offend the right to due
Although compliance with the recognized modes of
process of a corporation that is a nonparty in a main
acquisition of jurisdiction cannot be dispensed with
case, may disintegrate not only when its director,
even in piercing the veil of corporation, IAME was not
officer, shareholder, trustee or member is a party to the
denied of due process.
main case, but when it finds facts which show that
In general, corporations, whether stock or non-stock, piercing of the corporate veil is merited.
are treated as separate and distinct legal entities from
Thus, as the Court has already ruled, a party whose
the natural persons composing them. The privilege of
corporation is vulnerable to piercing of its corporate
being considered a distinct and separate entity is
veil cannot argue violation of due process.
confined to legitimate uses, and is subject to
equitable limitations to prevent its being exercised In this case, the Court confirms the lower courts'
for fraudulent, unfair or illegal purposes. However, findings that Santos had an existing obligation based
once equitable limitations are breached using the on a court judgment that he owed monthly rentals and
coverture of the corporate veil, courts may step in unpaid realty taxes under a lease contract he entered
to pierce the same. into as lessee with the Litton’s as lessor. He was not
able to comply with this particular obligation, and in
As we held in Lanuza, Jr. v. BF Corporation:
fact, refused to comply therewith.
Piercing the corporate veil is warranted when "[the
This Court agrees with the CA that Santos used
separate personality of a corporation] is used as a
I/AME as a means to defeat judicial processes and
means to perpetrate fraud or an illegal act, or as a
to evade his obligation to Litton.  Thus, even while
vehicle for the evasion of an existing obligation, the
I/AME was not impleaded in the main case and yet
circumvention of statutes, or to confuse legitimate
was so named in a writ of execution to satisfy a
issues." It is also warranted in alter ego cases "where a
court judgment against Santos, it is vulnerable to
corporation is merely a farce since it is a mere alter
the piercing of its corporate veil. We will further
ego or business conduit of a person, or where the
expound on this matter.
corporation is so organized and controlled and its
affairs are so conducted as to make it merely an Petitioner I/AME argues that the doctrine of piercing
instrumentality, agency, conduit or adjunct of another the corporate veil applies only to stock corporations,
corporation." and not to non-stock, nonprofit corporations such as
I/AME since there are no stockholders to hold liable in
When [the] corporate veil is pierced, the
such a situation but instead only members. Hence, they
corporation and persons who are normally treated
do not have investments or shares of stock or assets to
as distinct from the corporation are treated as one
answer for possible liabilities.
person, such that when the corporation is adjudged
liable, these persons, too, become liable as if they The CA disagreed. It ruled that since the law does not
were the corporation. make a distinction between a stock and non-stock
corporation, neither should there be a distinction in
The piercing of the corporate veil is premised on
case the doctrine of piercing the veil of corporate
the fact that the corporation concerned must have
fiction has to be applied. While I/AME is an
been properly served with summons or properly
educational institution, the CA further ruled, it still is a
subjected to the jurisdiction of the court a quo.
registered corporation conducting its affairs as such.
Corollary thereto, it cannot be subjected to a writ
of execution meant for another in violation of its This Court agrees with the CA.
right to due process.
As held in Barineau v. Barineau:
There exists, however, an exception to this rule: if it
[t]he mere fact that the corporation involved is a
is shown "by clear and convincing proof that the
nonprofit corporation does not by itself preclude a
 14
court from applying the equitable remedy of
piercing the corporate veil. The equitable character
of the remedy permits a court to look to the substance
of the organization, and its decision is not controlled
by the statutory framework under which the
corporation was formed and operated. While it may
appear to be impossible for a person to exercise
ownership control over a non-stock, not-for-profit
corporation, a person can be held personally liable
under the alter ego theory if the evidence shows that
the person controlling the corporation did in fact
exercise control, even though there was no stock
ownership.
The concept of equitable ownership, for stock or non-
stock corporations, in piercing of the corporate veil
scenarios, may also be considered. An equitable owner
is an individual who is a non-shareholder defendant,
who exercises sufficient control or considerable
authority over the corporation to the point of
completely disregarding the corporate form and acting
as though its assets are his or her alone to manage and
distribute.
As to Natural Persons
The petitioner also insists that the piercing of the
corporate veil cannot be applied to a natural person - in
this case, Santos - simply because as a human being,
he has no corporate veil shrouding or covering his
person.
a) When the Corporation is the Alter Ego of a
Natural Person
As cited in Sula ng Bayan, Inc. v. Araneta, Inc. , "[t]he
doctrine of alter ego is based upon the misuse of a
corporation by an individual for wrongful or
inequitable purposes, and in such case the court merely
disregards the corporate entity and holds the individual
responsible for acts knowingly and intentionally done
in the name of the corporation." This, Santos has done
in this case. Santos formed I/AME, using the non-
stock corporation, to evade paying his judgment
creditor, Litton.
The piercing of the corporate veil may apply to
corporations as well as natural persons involved
with corporations. This Court has held that the
"corporate mask may be lifted and the corporate
veil may be pierced when a corporation is just but
the alter ego of a person or of another corporation."
We have considered a deceased natural person as one
and the same with his corpocratic to protect the
succession rights of his legal heirs to his estate.
In Cease v. Court of Appeals,  the predecessor-in-
interest organized a close corporation which acquired
properties during its existence. When he died intestate,
trouble ensued amongst his children on whether or not
to consider his company one and the same with his
person. The Court agreed with the trial court when it
pierced the corporate veil of the decedent's
corporation. It found that said corporation was his
business conduit and alter ego. Thus, the acquired
properties were actually properties of the decedent and
as such, should be divided among the decedent's
legitimate children in the partition of his estate.
This Court agrees with the CA that I/AME is the
alter ego of Santos and Santos - the natural person -
is the alter ego of I/AME. Santos falsely represented
himself as President of I/AME in the Deed of
Absolute Sale when he bought the Makati real
property, at a time when I/ AME had not yet
existed. Uncontroverted facts in this case also reveal
the findings of Me TC showing Santos and I/ AME as
being one and the same person:
(1) Santos is the conceptualizer and implementor of
I/AME;
(2) Santos’ contribution is ₱1,200,000.00 (One Million
Two Hundred Thousand Pesos) out of the
₱1,500,000.00 (One Million Five Hundred Thousand
Pesos), making him the majority contributor of
I/AME; and,
(3) The building being occupied by I/AME is named
after Santos using his known nickname (to date it is
called, the "Noli Santos Inte1national Tower").
This Court deems I/AME and Santos as alter egos
of each other based on the former’s own admission
in its pleadings before the trial court.
Hence, I/AME is the alter ego of the natural person,
Santos, which the latter used to evade the execution
on the Makati property, thus frustrating the
satisfaction of the judgment won by Litton.
b) Reverse Piercing of the Corporate Veil
This Court in Arcilla pierced the corporate veil of
CSAR Marine Resources to satisfy a money judgment
against its erstwhile President, Arcilla.
 15
We borrow from American parlance what is called
reverse piercing or reverse corporate piercing or
piercing the corporate veil "in reverse."
As held in the U.S. Case, C.F. Trust, Inc., v. First
Flight Limited Partnership,  "in a traditional veil-
piercing action, a court disregards the existence of
the corporate entity so a claimant can reach the
assets of a corporate insider. In a reverse piercing
action, however, the plaintiff seeks to reach the
assets of a corporation to satisfy claims against a
corporate insider."
"Reverse-piercing flows in the opposite direction
(of traditional corporate veil-piercing) and makes
the corporation liable for the debt of the
shareholders."
It has two (2) types: outsider reverse piercing and
insider reverse piercing. Outsider reverse piercing
occurs when a party with a claim against an individual
or corporation attempts to be repaid with assets of a
corporation owned or substantially controlled by the
defendant. In contrast, in insider reverse piercing, the
controlling members will attempt to ignore the
corporate fiction in order to take advantage of a benefit
available to the corporation, such as an interest in a
lawsuit or protection of personal assets.
Outsider reverse veil-piercing is applicable in the
instant case. Litton, as judgment creditor, seeks the
Court's intervention to pierce the corporate veil of
I/AME in order to make its Makati real property
answer for a judgment against Santos, who formerly
owned and still substantially controls I/AME.
The Court has pierced the corporate veil in a
reverse manner in the instances when the scheme
was to avoid corporate assets to be included in the
estate of a decedent as in the Cease case and when
the corporation was used to escape a judgment to
pay a debt as in the Arcilla case.
This notwithstanding, the equitable remedy of reverse
corporate piercing or reverse piercing was not meant to
encourage a creditor’s failure to undertake such
remedies that could have otherwise been available, to
the detriment of other creditors.
Reverse corporate piercing is an equitable remedy
which if utilized cavalierly, may lead to disastrous
consequences for both stock and non-stock
corporations. We are aware that ordinary judgment
collection procedures or other legal remedies are
preferred over that which would risk damage to third
parties (for instance, innocent stockholders or
voluntary creditors) with unprotected interests in the
assets of the beleaguered corporation.
Thus, the reverse piercing of the corporate veil of
I/AME to enforce the levy on execution of the Makati
real property where the school now stands is applied.
PROBATIVE FACTORS IN ALTER EGO CASES
Concept Builders Inc. vs NLRC
Facts: Petitioner Concept Builders, Inc., a domestic
corporation is engaged in the construction business.
Private respondents were employed by said company
as laborers, carpenters and riggers.
Private respondents were served individual written
notices of termination of employment by petitioner. It
was stated in the individual notices that their contracts
of employment had expired and the project in which
they were hired had been completed.
Public respondent found it to be, the fact, however,
that at the time of the termination of private
respondent’s employment, the project in which they
were hired had not yet been finished and completed.
Petitioner had to engage the services of sub-contractors
whose workers performed the functions of private
respondents.
Aggrieved, private respondents filed a complaint for
illegal dismissal, unfair labor practice and non-
payment of their legal holiday pay, overtime pay and
thirteenth-month pay against petitioner.
LA: ordered petitioner to reinstate private respondents
and pay them back wages.
NLRC: dismissed the motion for reconsideration on
the ground that said decision has become final and
executory.
A writ of execution was issued and it was partially
satisfied through garnishment of sums from
petitioner’s debtor, the Metropolitan Waterworks and
Sewerage Authority.
Alias Writ of Execution was issued by the Labor
Arbiter directing the sheriff to collect the balance of
the judgement award. The sheriff issued a report
stating that he tried to serve the alias writ of execution
on petitioner through the security guard on duty but the
service was refused on the ground that petitioner no
longer occupied the premises.
 16
A second writ was issued but the sheriff failed to
execute because he was told that all the employees
inside petitioner’s premises claimed that they were
employees of Hydro Pipes Philippines, Inc. (HPPI) and
not by respondent; Levy was made upon personal
properties he found in the premises;
Security guards with high-powered guns prevented
him from removing the properties he had levied upon.
The said special sheriff recommended that a, "break-
open order" be issued to enable him to enter
petitioner’s premises so that he could proceed with the
public auction sale of the aforesaid personal properties.
Later on, a certain Dennis Cuyegkeng filed a third-
party claim with the Labor Arbiter alleging that the
properties sought to be levied upon by the sheriff were
owned by Hydro (Phils.), Inc. (HPPI) of which he is
the Vice-President.
Private respondents filed a "Motion for Issuance of a
Break-Open Order," alleging that HPPI and petitioner
corporation were owned by the same
incorporator/stockholders. They also alleged that
petitioner temporarily suspended its business
operations in order to evade its legal obligations to
them and that private respondents were willing to post
an indemnity bond to answer for any damages which
petitioner and HPPI may suffer because of the issuance
of the break-open order.
In support of their claim against HPPI, private
respondents presented duly certified copies of the
General Information Sheet.
HPPI filed an Opposition to private respondents’
motion for issuance of a break-open order, contending
that HPPI is a corporation which is separate and
distinct from petitioner. HPPI also alleged that the two
corporations are engaged in two different kinds of
businesses, i.e., HPPI is a manufacturing firm while
petitioner was then engaged in construction.
LA: denied the respondent’s break open request.
NLRC set aside the order of the Labor Arbiter, issued
a break-open order and directed private respondents to
file a bond. Thereafter, it directed the sheriff to
proceed with the auction sale of the properties already
levied upon. It dismissed the third-party claim for lack
of merit.
ISSUE: Won it was proper for the NLRC to have
the sheriff levy the properties despite third party
claim and resort to the piercing of corporate veil
against HPPI
HELD: YES.
It is a fundamental principle of corporation law that a
corporation is an entity separate and distinct from its
stockholders and from other corporations to which it
may be connected. But, this separate and distinct
personality of a corporation is merely a fiction created
by law for convenience and to promote justice. So,
when the notion of separate juridical personality is
used to defeat public convenience, justify wrong,
protect fraud or defend crime, or is used as a device to
defeat the labor laws, this separate personality of the
corporation may be disregarded or the veil of corporate
fiction pierced. This is true likewise when the
corporation is merely an adjunct, a business conduit or
an alter ego of another corporation.
The conditions under which the juridical entity
may be disregarded vary according to the peculiar
facts and circumstances of each case. No hard and
fast rule can be accurately laid down, but certainly,
there are some probative factors of identity that
will justify the application of the doctrine of
piercing the corporate veil, to wit:
1. Stock ownership by one or common ownership of
both corporations.
2. Identity of directors and officers.
3. The manner of keeping corporate books and records.
4. Methods of conducting the business."
The SEC en banc explained the "instrumentality
rule" which the courts have applied in disregarding
the separate juridical personality of corporations as
follows:
"Where one corporation is so organized and
controlled and its affairs are conducted so that it is,
in fact, a mere instrumentality or adjunct of the
other, the fiction of the corporate entity of the
‘instrumentality’ may be disregarded. The control
necessary to invoke the rule is not majority or even
complete stock control but such domination of
finances, policies and practices that the controlled
corporation has, so to speak, no separate mind, will
or existence of its own, and is but a conduit for its
principal. It must be kept in mind that the control
must be shown to have been exercised at the time
the acts complained of took place. Moreover, the
 17
control and breach of duty must proximately cause
the injury or unjust loss for which the complaint is
made."cralaw virtua1aw library
The test in determining the applicability of the
doctrine of piercing the veil of corporate fiction is
as follows:
"1. Control, not mere majority or complete stock
control, but complete domination, not only of finances
but of policy and business practice in respect to the
transaction attacked so that the corporate entity as to
this transaction had at the time no separate mind, will
or existence of its own;
2. Such control must have been used by the defendant
to commit fraud or wrong, to perpetuate the violation
of a statutory or other positive legal duty, or dishonest
and unjust act in contravention of plaintiff’s legal
rights; and
3. The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained
of.
The absence of any one of these elements prevents
‘piercing the corporate veil’. In applying the
‘instrumentality’ or ‘alter ego’ doctrine, the courts are
concerned with reality and not form, with how the
corporation operated and the individual defendant’s
relationship to that operation."
Thus, the question of whether a corporation is a mere
alter ego, a mere sheet or paper corporation, a sham or
a subterfuge is purely one of fact.
In this case, the NLRC noted that, while petitioner
claimed that it ceased its business operations on April
29, 1986, it filed an Information Sheet with the
Securities and Exchange Commission on May 15,
1987, stating that its office address is at 355 Maysan
Road, Valenzuela, Metro Manila. On the other hand,
HPPI, the third-party claimant, submitted on the same
day, a similar information sheet stating that its office
address is at 355 Maysan Road, Valenzuela, Metro
Manila.
From the foregoing, it appears that, among other
things, the respondent (herein petitioner) and the third-
party claimant shared the same address and/or
premises. Under these circumstances, it cannot be said
that the property levied upon by the sheriff were not of
respondents.
Clearly, petitioner ceased its business operations in
order to evade the payment to private respondents of
back wages and to bar their reinstatement to their
former positions. HPPI is obviously a business
conduit of petitioner corporation and its emergence
was skillfully orchestrated to avoid the financial
liability that already attached to petitioner
corporation.
It is very obvious that the second corporation seeks the
protective shield of a corporate fiction whose veil in
the present case could, and should, be pierced as it was
deliberately and maliciously designed to evade its
financial obligation to its employees.
In view of the failure of the sheriff, in the case at bar,
to effect a levy upon the property subject of the
execution, private respondents had no other recourse
but to apply for a break-open order after the third-party
claim of HPPI was dismissed for lack of merit by the
NLRC. Hence, the NLRC did not commit any grave
abuse of discretion when it affirmed the break-open
order issued by the Labor Arbiter.
STOCK OR NON-STOCK
REPUBLIC VS CITY OF PARANAQUE
Facts: The Public Estates Authority (PEA) is a
government corporation created by virtue of
Presidential Decree (P.D.) No. 1084 which took effect
on February 4, 1977 to provide a coordinated,
economical and efficient reclamation of lands, and the
administration and operation of lands belonging to,
managed and/or operated by, the government with the
object of maximizing their utilization and hastening
their development consistent with public interest.
By virtue of Executive Order (E.O.) issued by then
President Ferdinand Marcos, PEA was designated as
the agency primarily responsible for integrating,
directing and coordinating all reclamation projects for
and on behalf of the National Government.
On October 26, 2004, then President Gloria
Macapagal-Arroyo issued E.O. transforming PEA into
PRA, which shall perform all the powers and functions
of the PEA relating to reclamation activities.
 18
By virtue of its mandate, PRA reclaimed several
portions of the foreshore and offshore areas of Manila
Bay, including those located in Parañaque City, and
was issued Original Certificates of Title over the
reclaimed lands.
Then Parañaque City Treasurer Carabeo issued
Warrants of Levy on PRA’s reclaimed properties
(Central Business Park and Barangay San Dionisio)
located in Parañaque City based on the assessment for
delinquent real property taxes made by then Parañaque
City Assessor Soledad Medina Cue for tax years 2001
and 2002.
PRA filed a petition for prohibition with prayer for
temporary restraining order (TRO) and/or writ of
preliminary injunction against Carabeo before the
RTC.
RTC issued an order denying PRA’s petition for the
issuance of a temporary restraining order.
PRA sent a letter to Carabeo requesting the latter not
to proceed with the public auction of the subject
reclaimed properties. In response, Carabeo sent a letter
stating that the public auction could not be deferred
because the RTC had already denied PRA’s TRO
application.
PRA filed a Motion for Leave to File and Admit
Attached Supplemental Petition which sought to
declare as null and void the assessment for real
property taxes, the levy based on the said assessment,
the public auction sale conducted on April 7, 2003, and
the Certificates of Sale issued pursuant to the auction
sale.
RTC: dismissed the petition and held that PRA was
not exempt from paying real property taxes. It
reasoned out that it was a GOCC under Section 3
of P.D. No. 1084. It was organized as a stock
corporation because it had an authorized capital
stock divided into no par value shares. In fact, PRA
admitted its corporate personality and that said
properties were registered in its name as shown by the
certificates of title. Therefore, as a GOCC, local tax
exemption is withdrawn by virtue of Section 193 of
Republic Act (R.A.) No. 7160 Local Government
Code (LGC) which was the prevailing law in 2001
and 2002 with respect to real property taxation. The
RTC also ruled that the tax exemption claimed by PRA
under E.O. No. 654 had already been expressly
repealed by R.A. No. 7160 and that PRA failed to
comply with the procedural requirements in Section
206 thereof.
PRA Arguments:
- PRA asserts that it is not a GOCC under Section
2(13) of the Introductory Provisions of the
Administrative Code. Neither is it a GOCC under
Section 16, Article XII of the 1987 Constitution
because it is not required to meet the test of economic
viability. Instead, PRA is a government instrumentality
vested with corporate powers and performing an
essential public service pursuant to Section 2(10) of
the Introductory Provisions of the Administrative
Code.
- Although it has a capital stock divided into shares,
it is not authorized to distribute dividends and
allotment of surplus and profits to its stockholders.
Therefore, it may not be classified as a stock
corporation because it lacks the second requisite of
a stock corporation which is the distribution of
dividends and allotment of surplus and profits to
the stockholders.
- It insists that it may not be classified as a non-
stock corporation because it has no members and it
is not organized for charitable, religious,
educational, professional, cultural, recreational,
fraternal, literary, scientific, social, civil service, or
similar purposes, like trade, industry, agriculture
and like chambers as provided in Section 88 of the
Corporation Code.
- Also, while PRA is vested with corporate powers
under P.D. No. 1084, such circumstance does not
make it a corporation but merely an incorporated
instrumentality and that the mere fact that an
incorporated instrumentality of the National
Government holds title to real property does not make
said instrumentality a GOCC. Section 48, Chapter 12,
Book I of the Administrative Code of 1987 recognizes
a scenario where a piece of land owned by the
Republic is titled in the name of a department, agency
or instrumentality.
City of Paranaque Arguments
Respondent further argues that PRA is a stock
corporation with an authorized capital stock
divided into 3 million no par value shares, out of
which 2 million shares have been subscribed and
 19
fully paid up. Section 193 of the LGC of 1991 has
withdrawn tax exemption privileges granted to or
presently enjoyed by all persons, whether natural
or juridical, including GOCCs.
Hence, since PRA is a GOCC, it is not exempt from
the payment of real property tax.
ISSUE: WN PRA is a stock corporation
HELD: NO.
The Administrative Code of 1987 defines a GOCC as
follows:
Government-owned or controlled corporation refers
to any agency organized as a stock or non-stock
corporation, vested with functions relating to public
needs whether governmental or proprietary in nature,
and owned by the Government directly or through its
instrumentalities either wholly, or, where applicable as
in the case of stock corporations, to the extent of at
least fifty-one (51) percent of its capital stock:
On the other hand, Section 2(10) of the Introductory
Provisions of the Administrative Code defines a
government "instrumentality" as follows:
SEC. 2. General Terms Defined. –– x x x x
Instrumentality refers to any agency of the National
Government, not integrated within the department
framework, vested with special functions or
jurisdiction by law, endowed with some if not all
corporate powers, administering special funds, and
enjoying operational autonomy, usually through a
charter. x x x
From the above definitions, it is clear that a GOCC
must be "organized as a stock or non-stock
corporation" while an instrumentality is vested by
law with corporate powers. Likewise, when the law
makes a government instrumentality operationally
autonomous, the instrumentality remains part of the
National Government machinery although not
integrated with the department framework.
When the law vests in a government
instrumentality corporate powers, the
instrumentality does not necessarily become a
corporation. Unless the government instrumentality
is organized as a stock or non-stock corporation, it
remains a government instrumentality exercising
not only governmental but also corporate powers.
Many government instrumentalities are vested with
corporate powers but they do not become stock or non-
stock corporations, which is a necessary condition
before an agency or instrumentality is deemed a
GOCC. Examples are the Mactan International Airport
Authority, the Philippine Ports Authority, the
University of the Philippines, and Bangko Sentral ng
Pilipinas. All these government instrumentalities
exercise corporate powers but they are not organized
as stock or non-stock corporations as required by
Section 2(13) of the Introductory Provisions of the
Administrative Code. These government
instrumentalities are sometimes loosely called
government corporate entities. They are not, however,
GOCCs in the strict sense as understood under the
Administrative Code, which is the governing law
defining the legal relationship and status of
government entities.
Correlatively, Section 3 of the Corporation Code
defines a stock corporation as one whose "capital stock
is divided into shares and x x x authorized to distribute
to the holders of such shares dividends x x x." Section
87 thereof defines a non-stock corporation as "one
where no part of its income is distributable as
dividends to its members, trustees or officers." Further,
Section 88 provides that non-stock corporations are
"organized for charitable, religious, educational,
professional, cultural, recreational, fraternal, literary,
scientific, social, civil service, or similar purposes, like
trade, industry, agriculture and like chambers."
Two requisites must concur before one may be
classified as a stock corporation, namely:
(1) that it has capital stock divided into shares; and
(2) that it is authorized to distribute dividends and
allotments of surplus and profits to its stockholders.
If only one requisite is present, it cannot be
properly classified as a stock corporation. As for
non-stock corporations, they must have members
and must not distribute any part of their income to
said members.
In the case at bench, PRA is not a GOCC because it is
neither a stock nor a non-stock corporation. It cannot
be considered as a stock corporation because although
it has a capital stock divided into no par value shares
as provided in Section 7 of P.D. No. 1084, it is not
authorized to distribute dividends, surplus
allotments or profits to stockholders.
PRA cannot be considered a non-stock corporation
either because it does not have members. A non-stock
corporation must have members. Moreover, it was not
 20
organized for any of the purposes mentioned in
Section 88 of the Corporation Code. Specifically, it
was created to manage all government reclamation
projects.
Furthermore, there is another reason why the PRA
cannot be classified as a GOCC. Section 16, Article
XII of the 1987 Constitution provides as follows:
Section 16. The Congress shall not, except by
general law, provide for the formation,
organization, or regulation of private corporations.
Government-owned or controlled corporations may
be created or established by special charters in the
interest of the common good and subject to the test
of economic viability.
The fundamental provision above authorizes
Congress to create GOCCs through special
charters on two conditions: 1) the GOCC must be
established for the common good; and 2) the
GOCC must meet the test of economic viability. In
this case, PRA may have passed the first condition
of common good but failed the second one -
economic viability. Undoubtedly, the purpose behind
the creation of PRA was not for economic or
commercial activities. Neither was it created to
compete in the market place considering that there
were no other competing reclamation companies being
operated by the private sector. As mentioned earlier,
PRA was created essentially to perform a public
service considering that it was primarily responsible
for a coordinated, economical and efficient
reclamation, administration and operation of lands
belonging to the government with the object of
maximizing their utilization and hastening their
development consistent with the public interest.
Hence, it is exempt from real property taxes.
SPECIAL CORPORATION
LIBAN VS GORDON
Facts: In the Decision, the Court held that respondent
(Gordon) did not forfeit his seat in the Senate when he
accepted the chairmanship of the Philippine National
Red Cross PNRC Board of Governors, as "the office of
the PNRC Chairman is not a government office or an
office in a government-owned or controlled
corporation for purposes of the prohibition in Section
13, Article VI of the 1987 Constitution."
The Decision, however, further declared void the
PNRC Charter "insofar as it creates the PNRC as a
private corporation" and consequently ruled that "the
PNRC should incorporate under the Corporation Code
and register with the Securities and Exchange
Commission if it wants to be a private corporation
In his Motion for Clarification and/or for
Reconsideration, respondent raises the following
grounds:
PNRC argues that
1. THE CURRENT CHARTER OF PNRC IS
PRESIDENTIAL DECREE NO. 1264 AND NOT
REPUBLIC ACT NO. 95. PRESIDENTIAL DECREE
NO. 1264 WAS NOT A CREATION OF
CONGRESS.
2. PNRC’S STRUCTURE IS SUI GENERIS; IT IS A
CLASS OF ITS OWN. WHILE IT IS PERFORMING
HUMANITARIAN FUNCTIONS AS AN
AUXILIARY TO GOVERNMENT, IT IS A
NEUTRAL ENTITY SEPARATE AND
INDEPENDENT OF GOVERNMENT CONTROL,
YET IT DOES NOT QUALIFY AS STRICTLY
PRIVATE IN CHARACTER.
ISSUE: WON PNRC IS A CREATION OF
CONGRESS AND THEREFORE,
UNCONSTITUTIONAL
HELD: NO
Since the issue of constitutionality was not raised by
the parties and was not the lis mota of the case. It is a
well-established rule that a court should not pass upon
a constitutional question and decide a law to be
unconstitutional or invalid, unless such question is
raised by the parties and that when it is raised, if the
record also presents some other ground upon which the
court may [rest] its judgment, that course will be
adopted and the constitutional question will be left for
consideration until such question will be unavoidable.
Under the rule quoted above, therefore, this
Court should not have declared void certain sections of
R.A. No. 95, as amended by Presidential Decree (P.D.)
Nos. 1264 and 1643, the PNRC Charter.
Furthermore, the PNRC, the entity most adversely
affected by this declaration of unconstitutionality,
which was not even originally a party to this case, was
 21
being compelled, as a consequence of the Decision, to
suddenly reorganize and incorporate under the
Corporation Code, after more than sixty (60) years of
existence in this country.
Its existence as a chartered corporation remained
unchallenged on ground of unconstitutionality
notwithstanding that R.A. No. 95 was enacted on
March 22, 1947 during the effectivity of the 1935
Constitution, which provided for a proscription against
the creation of private corporations by special law, to
wit:
SEC. 7. The Congress shall not, except by general law,
provide for the formation, organization, or regulation
of private corporations, unless such corporations are
owned and controlled by the Government or any
subdivision or instrumentality thereof. (Art. XIV, 1935
Constitution.)
Similar provisions are found in Article XIV, Section 4
of the 1973 Constitution and Article XII, Section 16 of
the 1987 Constitution. The latter reads:
SECTION 16. The Congress shall not, except by
general law, provide for the formation, organization, or
regulation of private corporations. Government-owned
or controlled corporations may be created or
established by special charters in the interest of the
common good and subject to the test of economic
viability.
The passage of several laws relating to the PNRC’s
corporate existence notwithstanding the effectivity
of the constitutional proscription on the creation of
private corporations by law, is a recognition that
the PNRC is not strictly in the nature of a private
corporation contemplated by the aforesaid
constitutional ban.
A closer look at the nature of the PNRC would
show that there is none like it not just in terms of
structure, but also in terms of history, public
service and official status accorded to it by the State
and the international community. There is merit in
PNRC’s contention that its structure is sui generis.
The PNRC succeeded the chapter of the American Red
Cross which was in existence in the Philippines since
1917. It was created by an Act of Congress after the
Republic of the Philippines became an independent
nation. By that action the Philippines indicated its
desire to participate with the nations of the world in
mitigating the suffering caused by war and to establish
in the Philippines a voluntary organization for that
purpose and like other volunteer organizations
established in other countries which have ratified the
Geneva Conventions, to promote the health and
welfare of the people in peace and in war.
The provisions of R.A. No. 95, as amended by R.A.
Nos. 855 and 6373, and further amended by P.D. Nos.
1264 and 1643, show the historical background and
legal basis of the creation of the PNRC by legislative
fiat, as a voluntary organization impressed with public
interest.
In the Decision, the Court, citing Feliciano v.
Commission on Audit, explained that the purpose
of the constitutional provision prohibiting Congress
from creating private corporations was to prevent
the granting of special privileges to certain
individuals, families, or groups, which were denied
to other groups. Based on the above discussion, it
can be seen that the PNRC Charter does not come
within the spirit of this constitutional provision, as
it does not grant special privileges to a particular
individual, family, or group, but creates an entity
that strives to serve the common good.
Furthermore, a strict and mechanical interpretation of
Article XII, Section 16 of the 1987 Constitution will
hinder the State in adopting measures that will serve
the public good or national interest. It should be noted
that a special law, R.A. No. 9520, the Philippine
Cooperative Code of 2008, and not the general
corporation code, vests corporate power and capacities
upon cooperatives which are private corporations, in
order to implement the State’s avowed policy.
In the Decision of July 15, 2009, the Court recognized
the public service rendered by the PNRC as the
government’s partner in the observance of its
international commitments, to wit:
The PNRC is a non-profit, donor-funded, voluntary,
humanitarian organization, whose mission is to bring
timely, effective, and compassionate humanitarian
assistance for the most vulnerable without
consideration of nationality, race, religion, gender,
social status, or political affiliation. The PNRC
provides six major services: Blood Services, Disaster
 22
Management, Safety Services, Community Health and
Nursing, Social Services and Voluntary Service.
The Republic of the Philippines, adhering to the
Geneva Conventions, established the PNRC as a
voluntary organization for the purpose contemplated in
the Geneva Convention. So must this Court recognize
too the country’s adherence to the Geneva Convention
and respect the unique status of the PNRC in
consonance with its treaty obligations. The Geneva
Convention has the force and effect of law.  No. 2719, and prayed for a refund of around 12,000
Based on the above, the sui generis status of the
PNRC is now sufficiently established. Although it is
neither a subdivision, agency, or instrumentality of
the government, nor a government-owned or
-controlled corporation or a subsidiary thereof, as
succinctly explained in the Decision of July 15,
2009, so much so that respondent, under the
Decision, was correctly allowed to hold his position
as Chairman thereof concurrently while he served
as a Senator, such a conclusion does not ipso facto
imply that the PNRC is a "private corporation"
within the contemplation of the provision of the
Constitution, that must be organized under the
Corporation Code. As correctly mentioned by
Justice Roberto A. Abad, the sui generis character
of PNRC requires us to approach controversies
involving the PNRC on a case-to-case basis.
In sum, the PNRC enjoys a special status as an
important ally and auxiliary of the government in
the humanitarian field in accordance with its
commitments under international law. This Court
cannot all of a sudden refuse to recognize its
existence, especially since the issue of the
constitutionality of the PNRC Charter was never
raised by the parties.
Hence, the structure of the PNRC is sui generis¸ being
neither strictly private nor public in nature. R.A. No.
95 remains valid and constitutional in its entirety.
The court declare that the office of the Chairman of the
Philippine National Red Cross is not a government
office or an office in a government-owned or
controlled corporation for purposes of the prohibition
in Section 13, Article VI of the 1987 Constitution.
GOVERNMENT AS A CORPORATOR
National Coal Co. vs CIR
Facts: The petitioner is a corporation created by Act
2705 of the Philippine Legislature for the purpose of
developing the coal industry in the Philippines and is
actually engaged in coal mining on reserved lands
belonging to the government. It is seeking to recover
the paid amounts that it had allegedly paid under
protest to the defendant. It claimed exemption from
taxes under the provisions of sections 14 and 15 of Act
pesos with legal interest from the date of the
presentation of the complaint, and costs against the
defendant.
The defendant answered denying generally and
specifically all the material allegations of the
complaint, except the legal existence and personality
of the plaintiff.
TRIAL COURT: The judge held that the coal lands
possessed by the plaintiff, belonging to the
Government, fell within the provisions of section 15 of
Act No. 2719; and that a tax of P0.04 per ton of 1,016
kilos on each ton of coal extracted therefrom, as
provided in said section, was the only tax which
should be collected from the plaintiff; and sentenced
defendant to refunds the plaintiff.
The plaintiff corporation was created on the 10th day
of March, 1917, by Act no. 2705, for the purpose of
developing the coal industry in the Philippine Islands.
By said Act, the company was granted the general
powers of a corporation "and such other powers as
may be necessary to enable it to prosecute the business
of developing coal deposits in the Philippine Islands,
and of mining, extracting, transporting and selling the
coal contained in said deposits." (Sec. 2, Act No.
2705.)
By the same law (Act No. 2705) the Government of
the Philippine Islands is made the majority
stockholder, evidently in order to insure proper
governmental supervision and control, and thus to
place the Government in a position to render all
possible encouragement, assistance and help in the
prosecution and furtherance of the company’s
business.
Two months after the passage of Act No. 2705,
creating the National Coal Company, the Philippine
 23
Legislature passed Act No. 2719 "to provide for the
leasing and development of coal lands in the
Philippine Islands." On October 18, 1917, upon
petition of the National Coal Company, the Governor-
General, withdrew "from settlement, entry, sale or
other disposition, all coal-bearing public lands within
the Province of Zamboanga, Department of Mindanao
and Sulu, and the Island of Polillo, Province of
Tayabas." Almost immediately after the issuance of
said proclamation the National Coal Company took
possession of the coal lands within the said reservation
without any further formality, contract or lease. Of the
30,000 shares of stock issued by the company, the
Government of the Philippine Islands is the owner
of 29,809 shares, that is, of 99 1/2 per centum of the
whole capital stock.
ISSUE: Won the plaintiff is a public corporation
because its majority stock holder was is the
government.
If we understand the theory of the plaintiff-appellee, it
is, that it claims to be the owner of the land from
which it has mined the coal in question and is therefore
subject to the provisions of section 15 of Act No. 2719
and not to the provisions of section 1496 of the
Administrative Code.
The only witness presented by the plaintiff upon the
question of the ownership of the land in question was
Mr. Dalmacio Costas, who stated that he was a
member of the board of directors of the plaintiff
corporation; that the plaintiff corporation took
possession of the land in question by virtue of the
proclamation of the Governor-General, known as
Proclamation No. 39 of the year 1917.
It will be noted that said proclamation only provided
that all coal-bearing public lands within said province
and island should be withdrawn from settlement, entry,
sale, or other disposition. There is nothing is said
proclamation which authorizes the plaintiff or any
other person to enter upon said reservations and to
mine coal, and no provision of law has been called to
our attention, by virtue of which the plaintiff was
entitled to enter upon any of the lands so reserved by
said proclamation without first obtaining permission
therefor.
The plaintiff is a private corporation. The mere fact
that the Government happens to be a majority
stockholder does not make it a public corporation.
Act No. 2705, as amended by Act No. 2822, makes it
subject to all of the provisions of the Corporation
Law, in so far as they are not inconsistent with said
Act (No. 2705). No provisions of Act No. 2705 are
found to be inconsistent with the provisions of the
Corporation Law. As a private corporation, it has
no greater rights, powers or privileges than any
other corporation which might be organized for the
same purpose under the Corporation Law, and
certainly it was not the intention of the Legislature
to give it a preference or right or privilege over
other legitimate private corporations in the mining
of coal. While it is true that said proclamation No.
39 withdrew "from settlement, entry, sale, or other
disposition of coal-bearing public lands within the
Province of Zamboanga . . . and the Island of
Polillo," it made no provision for the occupation
and operation by the plaintiff, to the exclusion of
other persons or corporations who might, under
proper permission, enter upon and operate coal
mines.
From all of the foregoing facts we find that the issue is
well defined between the plaintiff and the defendant.
The plaintiff contends that it was liable only to pay the
internal revenue and other fees and taxes provided for
under section 15 of Act No. 2719; while the defendant
contends, under the facts of record, that the plaintiff if
obliged to pay the internal revenue duty provided for
in section 1496 of the Administrative Code. That being
the issue, an examination of the provisions of Act No.
2719 becomes necessary.
To repeat, it will be noted, first, that Act No. 2719
provides an internal revenue duty and tax upon
unreserved, unappropriated coal-bearing public lands
which may be leased by the Secretary of Agriculture
and Natural Resources; and, second, that said Act (No.
2719) provides an internal revenue duty and tax
imposed upon any person, firm, association or
corporation, who may be the owner of "coal-bearing
lands." A reading of said Act clearly shows that the tax
imposed thereby is imposed upon two classes of
persons only — lessees and owners.
While there is some ground for confusion in the use of
the language in Spanish and English, we are
persuaded, considering all the provisions of said Act,
that said section 15 has reference only to persons,
firms, associations or corporations which had
 24
already, prior to the existence of said Act, become
the owners of coal lands. Section 15 cannot
certainly refer to "holders or lessees of coal lands"
for the reason that practically all of the other
provisions of said Act has reference to lessees or
holders. If section 15 means that the persons, firms,
associations, or corporations mentioned therein are
holders or lessees of coal lands only, it is difficult to
understand why the internal revenue duty and tax in
said section was made different from the obligations
mentioned in section 3 of said Act, imposed upon
lessees or holders.
From all of the foregoing, it seems to be made plain
that the plaintiff is neither a lessee nor an owner of
coal-bearing lands, and is, therefore, not subject to any
other provisions of Act No. 2719. But, is the plaintiff
subject to the provisions of sections 1496 of the
Administrative Code?
Section 1496 of the Administrative Code provides that
"on all coal and coke here there shall be collected, per
metric ton, fifty centavos." Said section (1496) is a
part of article 6, which provides for specific tax upon
all things manufactured or produced in the Philippine
Islands for domestic sale or consumption, and upon the
things imported from the United States or foreign
countries. It having been demonstrated that the
plaintiff has produced coal in the Philippine Islands
and is not a lessee or owner of the land from which
the coal was produced, we are clearly of the
opinion, and so hold, that it subject to pay the
internal revenue tax under the provisions of section
1496 of the Administrative Code, and is not subject
to the payment of the internal revenue tax under
section 15 of Act No. 2719, nor to any other
provisions of said Act.
PUBLIC CORPORATION – CREATED FOR
PUBLIC INTEREST
Boy Scouts of the Philippines vs COA
Facts: This case arose when the COA
issued Resolution No. 99-011 on August 19, 1999 (the
COA Resolution), with the subject Defining the
Commissions policy with respect to the audit of the
Boy Scouts of the Philippines. In its whereas clauses,
the COA Resolution stated that the BSP was created as
a public corporation under Commonwealth Act No.
111, as amended by Presidential Decree No. 460 and
Republic Act No. 7278; that in Boy Scouts of the
Philippines v. National Labor Relations Commission,
the Supreme Court ruled that the BSP, as constituted
under its charter, was a government-controlled
corporation within the meaning of Article IX(B)(2)(1)
of the Constitution; and that the BSP is appropriately
regarded as a government instrumentality under the
1987 Administrative Code
BSP argued that it is not a government-controlled
corporation. The 1987 Administrative Code itself, of
which the BSP vs. NLRC relied on for some terms,
defines government-owned and controlled
corporations as agencies organized as stock or non-
stock corporations which the BSP, under its present
charter, is not.
Also, the Government, like in other GOCCs, does not
have funds invested in the BSP. What RA 7278 only
provides is that the Government or any of its
subdivisions, branches, offices, agencies and
instrumentalities can from time to time donate and
contribute funds to the BSP.
Also the BSP respectfully believes that the BSP is not
appropriately regarded as a government
instrumentality under the 1987 Administrative Code as
stated in the COA resolution. As defined by Section
2(10) of the said code, instrumentality refers to any
agency of the National Government, not integrated
within the department framework, vested with special
functions or jurisdiction by law, endowed with some if
not all corporate powers, administering special funds,
and enjoying operational autonomy, usually through a
charter.
The BSP is not an entity administering special funds. It
is not even included in the DECS National Budget. x x
x
It may be argued also that the BSP is not an agency of
the Government. The 1987 Administrative Code
merely referred the BSP as an attached agency of the
DECS as distinguished from an actual line agency of
departments that are included in the National Budget.
The BSP believes that an attached agency is different
from an agency. Agency, as defined in Section 2(4) of
the Administrative Code, is defined as any of the
various units of the Government including a
department, bureau, office, instrumentality,
government-owned or controlled corporation or local
government or distinct unit therein.
 25
Under the above definition, the BSP is neither a unit of
the Government; a department which refers to an
executive department as created by law (Section 2[7]
of the Administrative Code); nor a bureau which refers
to any principal subdivision or unit of any department
(Section 2[8], Administrative Code).
Issue: Whether or not the BSP is a public corporation
created under Commonwealth Act No. 111
HELD: Yes
BSP is a public corporation and its funds are subject to
the COAs audit jurisdiction.
The BSP Charter created the BSP as a “public
corporation” to serve the following public interest or
purpose: xxx to promote through organization and
cooperation with other agencies, the ability of boys to
do useful things for themselves and others, to train
them in scout craft, and to inculcate in them patriotism,
civic consciousness and responsibility, courage, self-
reliance, discipline and kindred virtues, and moral
values, using the method which are in common use by
boy scouts.
The purpose of the BSP as stated in its amended
charter shows that it was created in order to implement
a State policy declared in Art. II, Sec. 13 of the
Constitution. Evidently, the BSP, which was created
by a special law to serve a public purpose in pursuit of
a constitutional mandate, comes within the class of
“public corporations” defined by Par. 2, Art. 44 of the
Civil Code and governed by the law which creates it,
pursuant to Art. 45 of the same Code.
The BSP as a Public Corporation under Par. 2, Art. 2
of the Civil Code. There are three classes of juridical
persons under Article 44 of the Civil Code and the
BSP, as presently constituted under Republic Act No.
7278, falls under the second classification. Article 44
reads:
Art. 44. The following are juridical persons:
(1) The State and its political subdivisions;
(2) Other corporations, institutions and entities for
public interest or purpose created by law; their
personality begins as soon as they have been
constituted according to law;
(3) Corporations, partnerships and associations for
private interest or purpose to which the law grants a
juridical personality, separate and distinct from that of
each shareholder, partner or member. (Emphases
supplied.)
The BSP, which is a corporation created for a public
interest or purpose, is subject to the law creating it
under Article 45 of the Civil Code, which provides:
Art. 45. Juridical persons mentioned in Nos. 1 and 2 of
the preceding article are governed by the laws creating
or recognizing them.
Private corporations are regulated by laws of general
application on the subject.
Partnerships and associations for private interest or
purpose are governed by the provisions of this Code
concerning partnerships. (Emphasis and underscoring
supplied.)
The Constitution empathically prohibits the creation of
private corporations except by a general law applicable
to all citizens. The purpose of this constitutional
provision is to ban private corporations created by
special charters, which historically gave certain
individuals, families or groups special privileges
denied to other citizens.
The BSP is a public corporation or a government
agency or instrumentality with juridical personality,
which does not fall within the constitutional
prohibition in Art. XII, Sec 16 notwithstanding the
amendments to its charter. Not all corporation, which
are not government owned or controlled, are ipso facto
to be considered private corporations as there exist
another distinct class of corporations or chartered
institutions which are otherwise known as “public
corporations.” These corporations are treated by law as
agencies or instrumentalities of the government which
are not subject to the test of ownership or control and
economic viability but to different criteria relating to
their public purposes/ interests or constitutional
policies and objectives and their administrative
relationship to the government or any of its
Department or Offices.
o The BSPs Classification Under the
Administrative Code of 1987.
The public, rather than private, character of the BSP is
recognized by the fact that, along with the Girl Scouts
of the Philippines, it is classified as an attached agency
of the DECS under Executive Order No. 292, or the
Administrative Code of 1987.
The term attached agencies, as defined in the
Administrative Code of 1987, refers to the lateral
relationship between the department or its equivalent
and the attached agency or corporation for purposes of
policy and program coordination. The coordination
 26
may be accomplished by having the department
represented in the governing board of the attached
agency or corporation, either as chairman or as a
member, with or without voting rights, if this is
permitted by the charter; having the attached
corporation or agency comply with a system of
periodic reporting which shall reflect the progress of
programs and projects; and having the department or
its equivalent provide general policies through its
representative in the board, which shall serve as the
framework for the internal policies of the attached
corporation or agency.
As an attached agency, the BSP enjoys operational
autonomy, as long as policy and program coordination
is achieved by having at least one representative of
government in its governing board, which in the case
of the BSP is the DECS Secretary. In this sense, the
BSP is not under government control or supervision
and control. Still this characteristic does not make the
attached chartered agency a private corporation
covered by the constitutional proscription in question.
o Art. XII, Sec. 16 of the Constitution refers to
private corporations created by government for
proprietary or economic/business purposes
Section 16, Article XII deals with the formation,
organization, or regulation of private corporations,[52]
which should be done through a general law enacted
by Congress, provides for an exception, that is: if the
corporation is government owned or controlled; its
creation is in the interest of the common good; and it
meets the test of economic viability. The rationale
behind Article XII, Section 16 of the 1987 Constitution
was explained in Feliciano v. Commission on Audit, in
the following manner:
The Constitution emphatically prohibits the creation of
private corporations except by a general law applicable
to all citizens. The purpose of this constitutional
provision is to ban private corporations created by
special charters, which historically gave certain
individuals, families or groups special privileges
denied to other citizens (Emphasis added.)
It may be gleaned from the above discussion that
Article XII, Section 16 bans the creation of private
corporations by special law. The said constitutional
provision should not be construed so as to prohibit the
creation of public corporations or a corporate agency
or instrumentality of the government intended to serve
a public interest or purpose, which should not be
measured on the basis of economic viability, but
according to the public interest or purpose it serves as
envisioned by paragraph (2), of Article 44 of the Civil
Code and the pertinent provisions of the
Administrative Code of 1987.
Since BSP, under its amended charter, continues to be
a public corporation or a government instrumentality,
the Court concludes that it is subject to the exercise by
the COA of its audits jurisdiction in the manner
consistent with the provisions of the BSP Charter.
REDEEMABLE SHARES
Republic Planters vs Agana and Robes Francisco
Realty
Facts:
1. Private respondent corporation secured a loan from
petitioner in the amount of P120,000.00. Instead of
giving the full legal tender totaling to the said amount,
the petitioner lent such amount partially in the form of
money and partially in the form of stocks certificates
each for 400 shares with a par value of 10 Pesos per
share or 4000 each for a total of 8000. There were
issued to respondent Corporation, through its officers
then, private respondent Adalia F. Robes and one
Carlos F. Robes.
2. Said stock certificates were in the name of private
respondent Adalia F. Robes and Carlos F. Robes, who
subsequently, however, endorsed his shares in favor of
Adalia F. Robes.
3.The Preferred Stock shall have the following rights,
preferences, qualifications and limitations, to wit:
a. Of the right to receive a quarterly dividend of
One Per Centum (1%), cumulative and participating.
b. That such preferred shares may be redeemed, by the
system of drawing lots, at any time after two (2) years
from the date of issue at the option of the Corporation.
4. Private respondents later on filed a complaint
against petitioners anchored on their right to collect
dividends and to have petitioner redeem the same
under the terms and conditions of the stock certificates.
5. Petitioner filed a motion to dismiss on the ff
grounds: 1. Trial Court’s lack of jurisdiction over the
subject matter; 2. that the action was unenforceable
under substantive law; 3. that the action was barred by
the statute of limitations and/or laches.
6. Trial Court denied the motion to dismiss. After the
time given for the submission of their respective
memoranda, the trial court rendered a decision in favor
of private respondents and ordered petitioner to pay
private respondents the face value of the stock
certificates as redemption price, plus 1% quarterly
interest thereon until full payment.
7. The trial court said that it appears in the provision
clearly and unequivocally that those are "interest
 27
bearing stocks" which are stocks issued by a
corporation under an agreement to pay a certain rate of
interest thereon. As such, plaintiffs become entitled to
the payment thereof as a matter of right without
necessity of a prior declaration of dividend. On the
question of the redemption by the defendant of said
preferred shares of stock, the very wordings of the
terms and conditions in said stock certificates clearly
allows the same. Hence, to refuse it will be tantamount
to an impairment of the contract.
8. Petitioner’s elevated the case to SC based on pure
questions of law.
ISSUE:
1. WN the petitioners can be compelled to redeem
the shares they issued
HELD: NO. What respondent judge failed to
recognize was that while the stock certificate does
allow redemption, the option to do so was clearly
vested in the petitioner. The redemption therefore is
clearly the type known as "optional". Thus, except as
otherwise provided in the stock certificate, the
redemption rests entirely with the corporation and the
stockholder is without right to either compel or refuse
the redemption of its stock. Furthermore, the terms and
conditions set forth therein use the word "may". It is a
settled doctrine in statutory construction that the word
"may" denotes discretion, and cannot be construed as
having a mandatory effect.
The redemption of said shares cannot be allowed. As
pointed out by the petitioner, the Central Bank made a
finding that said petitioner has been suffering from
chronic reserve deficiency,  and that such finding
resulted in a directive issued by then Gov. G.S. Licaros
of the Central Bank, to the President and Acting
Chairman of the Board of the petitioner bank
prohibiting the latter from redeeming any preferred
share, on the ground that said redemption would
reduce the assets of the Bank to the prejudice of its
depositors and creditors.  The claim of private respondent is already barred by
Redemption of preferred shares was prohibited for a
just and valid reason which is to preserve the status
quo, and to prevent the financial ruin of a banking
institution that would have resulted in adverse
repercussions, not only to its depositors and creditors,
but also to the banking industry as a whole.
The directive, in limiting the exercise of a right
granted by law to a corporate entity, may thus be
considered as an exercise of police power.
DISCUSSION ON REDEEMABLE SHARES
(given by Supreme Court as background to the
decision)
Redeemable shares are shares usually preferred which
are redeemable at a fixed date or at the option of the
issuing corporation or both at a certain price.
As a general rule, the present code allows redemption
even if there are no unrestricted retained earnings on
the books of the corporation. But, as a condition, the
corporation must have assets in its book to cover its
debts and liabilities inclusive of capital stock after
redemption. Meaning, no redemption is allowed if the
corporation is insolvent or if will make the corporation
insolvent.
AS TO THE ARGUMENT THAT IT IS AN
IMPAIRMENT OF THE OBLIGATIONS OF
CONTRACTS IF THEY DO NOT REDEEM THE
SHARES
The respondent judge insists that the directive
constitutes an impairment of the obligation of
contracts. It has, however, been settled that the
Constitutional guaranty of non-impairment of
obligations of contract is limited by the exercise of the
police power of the state, the reason being that public
welfare is superior to private rights. 
AS TO THE PAYMENT OF DIVIDENDS
Both Sec. 16 of the Corporation Law and Sec. 43 of
the present Corporation Code prohibit the issuance of
any stock dividend without the approval of
stockholders, representing not less than two-thirds
(2/3) of the outstanding capital stock at a regular or
special meeting duly called for the purpose. These
provisions underscore the fact that payment of
dividends to a stockholder is not a matter of right but a
matter of consensus.
Furthermore, "interest bearing stocks", on which the
corporation agrees absolutely to pay interest before
dividends are paid to common stockholders, is legal
only when construed as requiring payment of interest
as dividends from net earnings or surplus only.  
AS TO PRESCRIPTION
prescription and laches. Art. 1144 of the New Civil
Code provides that a right of action that is founded
upon a written contract prescribes in ten (10) years.
The letter-demand made by the private respondents to
the petitioner was made only after eighteen years after
receipt of the written contract in the form of the stock
certificate.
The same clearly indicates that the right of the private
respondents to any relief under the law has already
prescribed. Moreover, the claim of the private
respondents is also barred by laches.
 28
Considering that the terms and conditions set forth in
the stock certificate clearly indicate that redemption of
the preferred shares may be made at any time after the
lapse of two years from the date of issue, private
respondents should have taken it upon themselves,
after the lapse of the said period, to inquire from the
petitioner the reason why the said shares have not been
redeemed.
The petitioner, at the time it issued said preferred
shares to the private respondents in 1961, could not
have known that it would be suffering from chronic
reserve deficiency twelve years later. Had the private
respondents been vigilant in asserting their rights, the
redemption could have been affected at a time when
the petitioner bank was not suffering from any
financial crisis.
Trust Fund Doctrine
Ong Yong vs Tiu et Al
Facts: Tius are the owner of First landlink Asia
Development Corporation which was heavily indebted
to PNB for 190M. Because of this, the construction of
their Citimall is threatened with incompletion. Hence,
to avoid foreclosure of the property, they invite the
Ongs to invest in their company.
Under the Pre-Subscription Agreement they entered
into, the Ongs and the Tius agreed to maintain equal
shareholdings in FLADC: the Ongs were to subscribe
to 1,000,000 shares at a par value of P100.00 each
while the Tius were to subscribe to an additional
549,800 shares at P100.00 each in addition to their
already existing subscription of 450,200 shares.
Furthermore, they agreed that the Tius were entitled to
nominate the Vice-President and the Treasurer plus
five directors while the Ongs were entitled to nominate
the President, the Secretary and six directors
(including the chairman) to the board of directors of
FLADC. Moreover, the Ongs were given the right to
manage and operate the mall.
Accordingly, the Ongs paid P100 million in cash for
their subscription to 1,000,000 shares of stock while
the Tius committed to contribute to FLADC a four-
storey building and two parcels of land respectively
valued at P20 million (for 200,000 shares), P30 million
(for 300,000 shares) and P49.8 million (for 49,800
shares) to cover their additional 549,800 stock
subscription therein. The Ongs paid a total of 190M
which was used to settle the P190 million mortgage
indebtedness of FLADC to PNB.
However, the Tius rescinded the contract. They alleged
that the Ongs refused to credit to them the FLADC
shares covering their real property contributions; (2)
preventing David S. Tiu and Cely Y. Tiu from
assuming the positions of and performing their duties
as Vice-President and Treasurer, respectively, and (3)
refusing to give them the office spaces agreed upon.
In their defense, the Ongs said that David S. Tiu and
Cely Y. Tiu had in fact assumed the positions of Vice-
President and Treasurer of FLADC but that it was they
who refused to comply with the corporate duties
assigned to them. On the most important issue of their
alleged failure to credit the Tius with the FLADC
shares commensurate to the Tius' property
contributions, the Ongs asserted that, although the Tius
executed a deed of assignment for the 1,902.30 square-
meter lot in favor of FLADC, they (the Tius) refused
to pay P 570,690 for capital gains tax and documentary
stamp tax. Without the payment thereof, the SEC
would not approve the valuation of the Tius' property
contribution (as opposed to cash contribution). This, in
turn, would make it impossible to secure a new
Transfer Certificate of Title (TCT) over the property in
FLADC's name.
In any event, it was easy for the Tius to simply pay the
said transfer taxes and, after the new TCT was issued
in FLADC's name, they could then be given the
corresponding shares of stocks. On the 151 square-
meter property, the Tius never executed a deed of
assignment in favor of FLADC.
The Tius initially claimed that they could not as yet
surrender the TCT because it was "still being
reconstituted" by the Lichaucos from whom the Tius
bought it. The Ongs later on discovered that FLADC
had in reality owned the property all along, even
before their Pre-Subscription Agreement was executed
in 1994. This meant that the 151 square-meter property
was at that time already the corporate property of
FLADC for which the Tius were not entitled to the
issuance of new shares of stock.
The Tius filed a case at the SEC seeking confirmation
of their rescission of the Pre-Subscription Agreement.
SEC Decision: After hearing, the SEC issued a
decision confirming the rescission. It ordered among
others that the defendants return to FLADC any
 29
payments on the principal loan of 70M and legal
interest until full paid.
On motion of both parties, the above decision was
partially reconsidered but only insofar as the Ongs'
P70 million was declared not as a premium on capital
stock but an advance (loan) by the Ongs to FLADC
and that the imposition of interest on it was correct.
SEC EN BANC: confirmed the rescission of the Pre-
Subscription Agreement but reverted to classifying the
P70 million paid by the Ong’s as premium on capital
and not as a loan or advance to FLADC, hence, not
entitled to earn interest.
CA: confirming the rescission of the Pre-Subscription
Agreement. First Landlink Asia Development
Corporation is hereby ordered to pay the amount of
P70,000,000.00 that was advanced to it by the Ong and
legal interest.
ISSUE: WN the Ongs can rescind the contract
HELD:
The court reversed itself and granted Ong’s
motion.
1. Tius could not unilaterally rescind.
FLADC was originally incorporated with an
authorized capital stock of 500,000 shares with the
Tius owning 450,200 shares representing the paid-up
capital. When the Tius invited the Ongs to invest in
FLADC as stockholders, an increase of the authorized
capital stock became necessary to give each group
equal (50-50) shareholdings as agreed upon in the Pre-
Subscription Agreement. The authorized capital stock
was thus increased from 500,000 shares to 2,000,000
shares with a par value of P100 each, with the Ongs
subscribing to 1,000,000 shares and the Tius to
549,800 more shares in addition to their 450,200
shares to complete 1,000,000 shares. Thus, the subject
matter of the contract was the
1,000,000 unissued shares of FLADC stock allocated
to the Ongs. Since these were unissued shares, the
parties' Pre-Subscription Agreement was in fact a
subscription contract as defined under Section 60, Title
VII of the Corporation Code
Any contract for the acquisition of unissued stock in
an existing corporation or a corporation still to be
formed shall be deemed a subscription within the
meaning of this Title, notwithstanding the fact that
the parties refer to it as a purchase or some other
contract (Italics supplied).
A subscription contract necessarily involves the
corporation as one of the contracting parties since the
subject matter of the transaction is property owned by
the corporation – its shares of stock. Thus, the
subscription contract (denominated by the parties as a
Pre-Subscription Agreement) whereby the Ongs
invested P100 million for 1,000,000 shares of stock
was, from the viewpoint of the law, one between the
Ongs and FLADC, not between the Ongs and the Tius.
Otherwise stated, the Tius did not contract in their
personal capacities with the Ongs since they were not
selling any of their own shares to them. It was FLADC
that did.
Considering therefore that the real contracting parties
to the subscription agreement were FLADC and the
Ongs alone, a civil case for rescission on the ground of
breach of contract filed by the Tius in their personal
capacities will not prosper.
All this notwithstanding, granting but not
conceding that the Tius possess the legal standing to
sue for rescission based on breach of contract, said
action will nevertheless still not prosper since
rescission will violate the Trust Fund Doctrine and
the procedures for the valid distribution of assets
and property under the Corporation Code.
The Trust Fund Doctrine, first enunciated by this
Court in the 1923 case of Philippine Trust Co. vs.
Rivera,provides that subscriptions to the capital
stock of a corporation constitute a fund to which
the creditors have a right to look for the satisfaction
of their claims. This doctrine is the underlying
principle in the procedure for the distribution of
capital assets, embodied in the Corporation Code,
which allows the distribution of corporate capital
only in three instances:
(1) amendment of the Articles of Incorporation to
reduce the authorized capital stock
(2) purchase of redeemable shares by the corporation,
regardless of the existence of unrestricted retained
earnings
and (3) dissolution and eventual liquidation of the
corporation.
Furthermore, the doctrine is articulated in Section 41
on the power of a corporation to acquire its own
shares and in Section 122 on the prohibition against
the distribution of corporate assets and property unless
the stringent requirements therefor are complied with.
 30
The distribution of corporate assets and property
cannot be made to depend on the whims and caprices
of the stockholders, officers or directors of the
corporation, or even, for that matter, on the earnest
desire of the court a quo "to prevent further squabbles
and future litigations" unless the indispensable
conditions and procedures for the protection of
corporate creditors are followed. Otherwise, the
"corporate peace" laudably hoped for by the court will
remain nothing but a dream because this time, it will
be the creditors' turn to engage in "squabbles and
litigations" should the court order an unlawful
distribution in blatant disregard of the Trust Fund
Doctrine.
In the instant case, the rescission of the Pre-
Subscription Agreement will effectively result in the
unauthorized distribution of the capital assets and
property of the corporation, thereby violating the Trust
Fund Doctrine and the Corporation Code, since
rescission of a subscription agreement is not one of the
instances when distribution of capital assets and
property of the corporation is allowed.
Contrary to the Tius' allegation, rescission will, in the
final analysis, result in the premature liquidation of the
corporation without the benefit of prior dissolution in
accordance with Sections 117, 118, 119 and 120 of the
Corporation Code.The Tius maintain that rescinding
the subscription contract is not synonymous to
corporate liquidation because all rescission will entail
would be the simple restoration of the status quo
ante and a return to the two groups of their cash and
property contributions. We wish it were that simple.
Very noticeable is the fact that the Tius do not explain
why rescission in the instant case will not effectively
result in liquidation. The Tius merely refer in cavalier
fashion to the end-result of rescission (which
incidentally is 100% favorable to them) but turn a
blind eye to its unfair, inequitable and disastrous effect
on the corporation, its creditors and the Ongs.
The Tius claim that their case for rescission, being a
petition to decrease capital stock, does not violate the
liquidation procedures under our laws. The Tius' case
for rescission cannot validly be deemed a petition to
decrease capital stock because such action never
complied with the formal requirements for decrease of
capital stock under Section 33 of the Corporation
Code. No majority vote of the board of directors was
ever taken. Neither was there any stockholders
meeting at which the approval of stockholders owning
at least two-thirds of the outstanding capital stock was
secured. There was no revised treasurer's affidavit and
no proof that said decrease will not prejudice the
creditors' rights.
Trust Fund Doctrine
Halley vs Printwell Inc.
Facts: The petitioner (Halley) was an incorporator and
original director of Business Media Philippines, Inc.
(BMPI), which, at its incorporation on November 12,
1987, had an authorized capital stock of ₱3,000,000.00
divided into 300,000 shares each with a par value of
₱10.00, of which 75,000 were initially subscribed.
Halley owned 35000 shares.
Printwell was engaged in commercial and industrial
printing. BMPI commissioned Printwell for the
printing of the magazine Philippines, Inc. (together
with wrappers and subscription cards) that BMPI
published and sold. For that purpose, Printwell
extended 30-day credit accommodations to BMPI.
BMPI placed with Printwell several orders on credit.
Considering that BMPI paid only ₱25,000.00,
Printwell sued BMPI for the collection of the unpaid
balance of ₱291,342.76 in the RTC.
Printwell amended the complaint in order to implead
as defendants all the original stockholders and
incorporators to recover on their unpaid subscriptions.
The defendants filed a consolidated answer averring
that they all had paid their subscriptions in full; that
BMPI had a separate personality from those of its
stockholders; and that the directors and stockholders of
BMPI had resolved to dissolve BMPI during the
annual meeting.
To prove payment of their subscriptions, the defendant
stockholders submitted in evidence BMPI official
receipt (OR). In addition, the stockholders submitted
other documents.
RTC: Held in favor of Printwell, rejecting the
allegation of payment in full of the subscriptions in
view of an irregularity in the issuance of the ORs and
observing that the defendants had used BMPI’s
corporate personality to evade payment and create
injustice.
a) in the case of defendants-spouses Albert and
Zenaida Yu, it will be noted that the alleged payment
made on May 13, 1988 amounting to ₱135,000.00, is
covered by Official Receipt No. 218 (Exh. "2"),
whereas the alleged payment made earlier on
 31
November 5, 1987, amounting to ₱5,000.00, is
covered by Official Receipt No. 222 (Exh. "3"). This is
cogent proof that said receipts were belatedly
issued just to suit their theory since in the ordinary
course of business, a receipt issued earlier must have
serial numbers lower than those issued on a later date.
But in the case at bar, the receipt issued on November
5, 1987 has serial numbers (222) higher than those
issued on a later date (May 13, 1988).
b) The claim that since there was no call by the Board
of Directors of defendant corporation for the payment
of unpaid subscriptions will not be a valid excuse to
free individual defendants from liability. Since the
individual defendants are members of the Board of
Directors of defendant corporation, it was within their
exclusive power to prevent the fulfillment of the
condition, by simply not making a call for the payment
of the unpaid subscriptions. Their inaction should not
work to their benefit and unjust enrichment at the
expense of plaintiff.
Assuming arguendo that the individual defendants
have paid their unpaid subscriptions, still, it is very
apparent that individual defendants merely used the
corporate fiction as a cloak or cover to create an
injustice; hence, the alleged separate personality of
defendant corporation should be disregarded.
Applying the trust fund doctrine, the RTC declared the
defendant stockholders liable to Printwell pro rata,
thusly:
Defendant Business Media, Inc. is a registered
corporation and, as appearing from the Articles of
Incorporation, individual defendants have the
following unpaid subscriptions:
Names Unpaid Subscription
Donnina C. Halley ₱262,500.00
Roberto V. Cabrera, 135.000.00
Jr.
Albert T. Yu 135,000.00
Zenaida V. Yu 15,000.00
Rizalino V. Vineza 15,000.00
--------------------------------
Total ₱562,500.00
and it is an established doctrine that subscriptions to
the capital stock of a corporation constitute a fund to
which creditors have a right to look for satisfaction of
their claims and, in fact, a corporation has no legal
capacity to release a subscriber to its capital stock from
the obligation to pay for his shares, and any agreement
to this effect is invalid (Velasco vs. Poizat, 37 Phil.
802).
The liability of the individual stockholders in the
instant case shall be pro-rated based on their shares.
CA: affirmed the RTC, holding that the defendants’
resort to the corporate personality would create an
injustice because Printwell would thereby be at a loss
against whom it would assert the right to collect,
CA concurred with the RTC on the applicability of the
trust fund doctrine, under which corporate debtors
might look to the unpaid subscriptions for the
satisfaction of unpaid corporate debts, stating thus:
It is an established doctrine that subscription to the
capital stock of a corporation constitute a fund to
which creditors have a right to look up to for
satisfaction of their claims, and that the assignee in
insolvency can maintain an action upon any unpaid
stock subscription in order to realize assets for the
payment of its debts (PNB vs. Bitulok Sawmill, 23
SCRA 1366).
Premised on the above-doctrine, an inference could be
made that the funds, which consists of the payment of
subscriptions of the stockholders, is where the
creditors can claim monetary considerations for the
satisfaction of their claims. If these funds which ought
to be fully subscribed by the stockholders were not
paid or remain an unpaid subscription of the
corporation then the creditors have no other recourse
to collect from the corporation of its liability.
Such occurrence was evident in the case at bar wherein
the appellants as stockholders failed to fully pay their
unpaid subscriptions, which left the creditors helpless
in collecting their claim due to insufficiency of funds
of the corporation. Likewise, the claim of appellants
that they already paid the unpaid subscriptions could
not be given weight because said payment did not
reflect in the Articles of Incorporations of BMPI that
the unpaid subscriptions were fully paid by the
appellants’ stockholders. For it is a rule that a
stockholder may be sued directly by creditors to the
extent of their unpaid subscriptions to the corporation
(Keller vs. COB Marketing, 141 SCRA 86).
Moreover, a corporation has no power to release a
subscription or its capital stock, without valuable
consideration for such releases, and as against
 32
creditors, a reduction of the capital stock can take
place only in the manner and under the conditions
prescribed by the statute or the charter or the Articles
of Incorporation. (PNB vs. Bitulok Sawmill, 23 SCRA
1366).
Issues: WN the trust fund doctrine should be
applied in this case
HELD: YES
Both the RTC and the CA applied the trust fund
doctrine against the defendant stockholders, including
the petitioner.
The petitioner argues, however, that the trust fund
doctrine was inapplicable because she had already
fully paid her subscriptions to the capital stock of
BMPI. She thus insists that both lower courts erred in
disregarding the evidence on the complete payment of
the subscription, like receipts, income tax returns, and
relevant financial statements.
The trust fund doctrine enunciates a –
xxx rule that the property of a corporation is a
trust fund for the payment of creditors, but such
property can be called a trust fund ‘only by way of
analogy or metaphor.’ As between the corporation
itself and its creditors it is a simple debtor, and as
between its creditors and stockholders its assets are
in equity a fund for the payment of its debts.
The trust fund doctrine, first enunciated in the
American case of Wood v. Dummer,was adopted in
our jurisdiction in Philippine Trust Co. v. Rivera,
where this Court declared that:
It is established doctrine that subscriptions to the
capital of a corporation constitute a fund to which
creditors have a right to look for satisfaction of their
claims and that the assignee in insolvency can
maintain an action upon any unpaid stock subscription
in order to realize assets for the payment of its debts.
(Velasco vs. Poizat, 37 Phil., 802)
We clarify that the trust fund doctrines not limited
to reaching the stockholder’s unpaid subscriptions.
The scope of the doctrine when the corporation is
insolvent encompasses not only the capital stock,
but also other property and assets generally
regarded in equity as a trust fund for the payment
of corporate debts. All assets and property
belonging to the corporation held in trust for the
benefit of creditors that were distributed or in the
possession of the stockholders, regardless of full
payment of their subscriptions, may be reached by
the creditor in satisfaction of its claim.
Also, under the trust fund doctrine, a corporation
has no legal capacity to release an original
subscriber to its capital stock from the obligation of
paying for his shares, in whole or in part, without a
valuable consideration, or fraudulently, to the
prejudice of creditors. The creditor is allowed to
maintain an action upon any unpaid subscriptions
and thereby steps into the shoes of the corporation
for the satisfaction of its debt. To make out a prima
facie case in a suit against stockholders of an
insolvent corporation to compel them to contribute
to the payment of its debts by making good unpaid
balances upon their subscriptions, it is only
necessary to establish that the stockholders have
not in good faith paid the par value of the stocks of
the corporation.
However, the court modified the liability.
We need to modify the extent of the petitioner’s
personal liability to Printwell. The prevailing rule is
that a stockholder is personally liable for the financial
obligations of the corporation to the extent of his
unpaid subscription. In view of the petitioner’s unpaid
subscription being worth ₱262,500.00, she was liable
up to that amount.
Interest is also imposable on the unpaid obligation.
Absent any stipulation, interest is fixed at 12% per
annum from the date the amended complaint was filed
on February 8, 1990 until the obligation (i.e., to the
extent of the petitioner’s personal liability of
₱262,500.00) is fully paid.
USE OF LEGAL NAMES IN INCORPORATION
Care Best International Inc. Vs SEC
ARTICLES OF INCORPORATION
Lanuza vs CA
Presented in the case at bar is the apparently straight-
forward but complicated question: What should be the
basis of quorum for a stockholders’ meeting—the
outstanding capital stock as indicated in the articles of
incorporation or that contained in the company’s stock
and transfer book?
 33
Philippine Merchant Marine School, Inc. (PMMSI)
was incorporated, with seven hundred (700) founders’
shares and seventy-six (76) common shares as its
initial capital stock subscription reflected in the articles
of incorporation.
However, private respondents and their predecessors
who were in control of PMMSI registered the
company’s stock and transfer book for the first time in
1978, recording thirty-three (33) common shares as the
only issued and outstanding shares of PMMSI.
Sometime in 1979, a special stockholders’ meeting
was called and held on the basis of what was
considered as a quorum of twenty-seven (27) common
shares, representing more than two-thirds (2/3) of the
common shares issued and outstanding.
Heirs of one of the original incorporators, Juan
Acayan, filed a petition with the Securities and
Exchange Commission (SEC) for the registration of
their property rights over one hundred (120) founders’
shares and twelve (12) common shares owned by their
father. The SEC hearing officer held that the heirs of
Acayan were entitled to the claimed shares and called
for a special stockholders’ meeting to elect a new set
of officers.3 The SEC En Banc affirmed the decision.
As a result, the shares of Acayan were recorded in the
stock and transfer book.
On 06 May 1992, a special stockholders’ meeting was
held to elect a new set of directors. Private respondents
thereafter filed a petition with the SEC questioning the
validity of the 06 May 1992 stockholders’ meeting,
alleging that the quorum for the said meeting should
not be based on the 165 issued and outstanding shares
as per the stock and transfer book, but on the initial
subscribed capital stock of seven hundred seventy-six
(776) shares, as reflected in the 1952 Articles of
Incorporation. The petition was dismissed.4 Appeal
was made to the SEC En Banc, which granted said
appeal, holding that the shares of the deceased
incorporators should be duly represented by their
respective administrators or heirs concerned. The SEC
directed the parties to call for a stockholders meeting
on the basis of the stockholdings reflected in the
articles of incorporation for the purpose of electing a
new set of officers for the corporation. 5
Petitioners, who are PMMSI stockholders, filed a
petition for review with the Court of
Appeals.6 Rebecca Acayan, Jayne O. Abuid, Willie O.
Abuid and Renato Cervantes, stockholders and
directors of PMMSI, earlier filed another petition for
review of the same SEC En Banc’s orders. The
petitions were thereafter consolidated. 7 The
consolidated petitions essentially raised the following
issues, viz: (a) whether the basis the outstanding capital
stock and accordingly also for determining the quorum
at stockholders’ meetings it should be the 1978 stock
and transfer book or if it should be the 1952 articles of
incorporation; and (b) whether the Court of Appeals
"gravely erred in applying the Espejo Decision to the
benefit of respondents."8 The "Espejo Decision" is the
decision of the SEC en banc in SEC Case No. 2289
which ordered the recording of the shares of Jose
Acayan in the stock and transfer book.
The Court of Appeals held that for purposes of
transacting business, the quorum should be based on
the outstanding capital stock as found in the articles of
incorporation.9 As to the second issue, the Court of
Appeals held that the ruling in the Acayan case
would ipso facto benefit the private respondents, since
to require a separate judicial declaration to recognize
the shares of the original incorporators would entail
unnecessary delay and expense. Besides, the Court of
Appeals added, the incorporators have already proved
their stockholdings through the provisions of the
articles of incorporation.10
In the instant petition, petitioners claim that the 1992
stockholders’ meeting was valid and legal. They
submit that reliance on the 1952 articles of
incorporation for determining the quorum negates the
existence and validity of the stock and transfer book
which private respondents themselves prepared. In
addition, they posit that private respondents cannot
avail of the benefits secured by the heirs of Acayan, as
private respondents must show and prove entitlement
to the founders and common shares in a separate and
independent action/proceeding.
In private respondents’ Memorandum11 dated 08
March 2000, they point out that the instant petition
raises the same facts and issues as those raised in G.R.
No. 13131512, which was denied by the First Division
of this Court on 18 January 1999 for failure to show
that the Court of Appeals committed any reversible
error. They add that as a logical consequence, the
instant petition should be dismissed on the ground
of res judicata. Furthermore, private respondents claim
 34
that in view of the applicability of the rule
on res judicata, petitioners’ counsel should be cited for
contempt for violating the rule against forum-
shopping.13
For their part, petitioners claim that the principle of res
judicata does not apply to the instant case. They argue
that the instant petition is separate and distinct from
G.R. No. 131315, there being no identity of parties,
and more importantly, the parties in the two petitions
have their own distinct rights and interests in relation
to the subject matter in litigation. For the same
reasons, they claim that counsel for petitioners cannot
be found guilty of forum-shopping.14
In their Manifestation and Motion15 dated 22
September 2004, private respondents moved for the
dismissal of the instant petition in view of the
dismissal of G.R. No. 131315. Attached to the said
manifestation is a copy of the Entry of
Judgment16 issued by the First Division dated 01
December 1999.
The petition must be denied, not on res judicata, but
on the ground that like the petition in G.R. No. 131315
it fails to impute reversible error to the challenged
Court of Appeals’ Decision.
Res judicata does not apply in
the case at bar.
Res judicata means a matter adjudged, a thing
judicially acted upon or decided; a thing or matter
settled by judgment.17 The doctrine
of res judicata provides that a final judgment, on the
merits rendered by a court of competent jurisdiction is
conclusive as to the rights of the parties and their
privies and constitutes an absolute bar to subsequent
actions involving the same claim, demand, or cause of
action.18 The elements of res judicata are (a) identity
of parties or at least such as representing the same
interest in both actions; (b) identity of rights asserted
and relief prayed for, the relief being founded on the
same facts; and (c) the identity in the two (2)
particulars is such that any judgment which may be
rendered in the other action will, regardless of which
party is successful, amount to res judicata in the action
under consideration.19
There is no dispute as to the identity of subject matter
since the crucial point in both cases is the propriety of
including the still unproven shares of respondents for
purposes of determining the quorum. Petitioners,
however, deny that there is identity of parties and
causes of actions between the two petitions.
The test often used in determining whether causes of
action are identical is to ascertain whether the same
facts or evidence would support and establish the
former and present causes of action. 20 More
significantly, there is identity of causes of action when
the judgment sought will be inconsistent with the prior
judgment.21 In both petitions, petitioners assert that the
Court of Appeals’ Decision effectively negates the
existence and validity of the stock and transfer book,
as well as automatically grants private respondents’
shares of stocks which they do not own, or the
ownership of which remains to be unproved.
Petitioners in the two petitions rely on the entries in
the stock and transfer book as the proper basis for
computing the quorum, and consequently determine
the degree of control one has over the company.
Essentially, the affirmance of the SEC Order had the
effect of diminishing their control and interests in the
company, as it allowed the participation of the
individual private respondents in the election of
officers of the corporation.
Absolute identity of parties is not a
condition sine qua non for res judicata to apply—a
shared identity of interest is sufficient to invoke the
coverage of the principle.22 However, there is no
identity of parties between the two cases. The parties
in the two petitions have their own rights and interests
in relation to the subject matter in litigation. As stated
by petitioners in their Reply to Respondents’
Memorandum,23 there are no two separate actions filed,
but rather, two separate petitions for review
on certiorari filed by two distinct parties with the
Court and represented by their own counsels, arising
from an adverse consolidated decision promulgated by
the Court of Appeals in one action or proceeding. 24 As
such, res judicata is not present in the instant case.
Likewise, there is no basis for declaring petitioners or
their counsel guilty of violating the rules against
forum-shopping. In
the Verification/Certification25 portion of the petition,
petitioners clearly stated that there was then a pending
motion for reconsideration of the 18 August
1997 Decision of the Court of Appeals in the
consolidated cases (CA-G.R. SP No. 41473 and CA-
G.R. SP No. 41403) filed by the Abuids, as well as a
motion for clarification. Moreover, the records indicate
 35
that petitioners filed their Manifestation26 dated 20
January 1998, informing the Court of their receipt of
the petition in G.R. No. 131315 in compliance with
their duty to inform the Court of the pendency of
another similar petition. The Court finds that
petitioners substantially complied with the rules
against forum-shopping.
The Decision of the Court of
Appeals must be upheld.
The petition in this case involves the same facts and
substantially the same issues and arguments as those in
G.R. No. 131315 which the First Division has long
denied with finality. The First Division found the
petition before it inadequate in failing to raise any
reversible error on the part of the Court of Appeals.
We reach a similar conclusion as regards the present
petition.
The crucial issue in this case is whether it is the
company’s stock and transfer book, or its 1952
Articles of Incorporation, which determines
stockholders’ shareholdings, and provides the basis for
computing the quorum.
We agree with the Court of Appeals.
The articles of incorporation has been described as one
that defines the charter of the corporation and the
contractual relationships between the State and the
corporation, the stockholders and the State, and
between the corporation and its stockholders. 27 When
PMMSI was incorporated, the prevailing law was Act
No. 1459, otherwise known as "The Corporation Law."
Section 6 thereof states:
Sec. 6. Five or more persons, not exceeding fifteen, a
majority of whom are residents of the Philippines, may
form a private corporation for any lawful purpose or
purposes by filing with the Securities and Exchange
Commission articles of incorporation duly executed
and acknowledged before a notary public, setting
forth:
....
(7) If it be a stock corporation, the amount of its
capital stock, in lawful money of the Philippines, and
the number of shares into which it is divided, and if
such stock be in whole or in part without par value
then such fact shall be stated; Provided, however, That
as to stock without par value the articles of
incorporation need only state the number of shares into
which said capital stock is divided.
(8) If it be a stock corporation, the amount of capital
stock or number of shares of no-par stock actually
subscribed, the amount or number of shares of no-par
stock subscribed by each and the sum paid by each on
his subscription. . . .28
A review of PMMSI’s articles of
incorporation29 shows that the corporation complied
with the requirements laid down by Act No. 1459. It
provides in part:
7. That the capital stock of the said corporation is
NINETY THOUSAND PESOS (P90,000.00) divided
into two classes, namely:
FOUNDERS’ STOCK - 1,000 shares at P20 par
value- P 20,000.00
COMMON STOCK- 700 shares at P 100 par value
– P 70,000.00
TOTAL ---------------------1,700
shares----------------------------P 90,000.00
....
8. That the amount of the entire capital stock
which has been actually subscribed is
TWENTY ONE THOUSAND SIX
HUNDRED PESOS (P21,600.00) and the
following persons have subscribed for the
number of shares and amount of capital stock
set out after their respective names:
There is no gainsaying that the contents of the articles
of incorporation are binding, not only on the
corporation, but also on its shareholders. In the instant
case, the articles of incorporation indicate that at the
time of incorporation, the incorporators
were bona fide stockholders of seven hundred (700)
founders’ shares and seventy-six (76) common shares.
Hence, at that time, the corporation had 776 issued and
outstanding shares.
On the other hand, a stock and transfer book is the
book which records the names and addresses of all
stockholders arranged alphabetically, the installments
paid and unpaid on all stock for which subscription has
been made, and the date of payment thereof; a
statement of every alienation, sale or transfer of stock
made, the date thereof and by and to whom made; and
such other entries as may be prescribed by law. 31 A
stock and transfer book is necessary as a measure of
precaution, expediency and convenience since it
provides the only certain and accurate method of
establishing the various corporate acts and transactions
and of showing the ownership of stock and like
 36
matters.32 However, a stock and transfer book, like
other corporate books and records, is not in any sense a
public record, and thus is not exclusive evidence of the
matters and things which ordinarily are or should be
written therein.33 In fact, it is generally held that the
records and minutes of a corporation are not
conclusive even against the corporation but are prima
facie evidence only,34 and may be impeached or even
contradicted by other competent evidence. 35 Thus,
parol evidence may be admitted to supply omissions in
the records or explain ambiguities, or to contradict
such records.36
In 1980, Batas Pambansa Blg. 68, otherwise known as
"The Corporation Code of the Philippines" supplanted
Act No. 1459. BP Blg. 68 provides:
Sec. 24. Election of directors or trustees.—At all
elections of directors or trustees, there must be present,
either in person or by representative authorized to act
by written proxy, the owners of a majority of the
outstanding capital stock, or if there be no capital
stock, a majority of the members entitled to vote. . . .
Sec. 52. Quorum in meetings.- Unless otherwise
provided for in this Code or in the by-laws, a quorum
shall consist of the stockholders representing a
majority of the outstanding capital stock or majority of
the members in the case of non-stock corporation.
Outstanding capital stock, on the other hand, is defined
by the Code as:
Sec. 137. Outstanding capital stock defined.— The
term "outstanding capital stock" as used in this code,
means the total shares of stock issued to subscribers or
stockholders whether or not fully or partially paid (as
long as there is binding subscription agreement) except
treasury shares.
Thus, quorum is based on the totality of the shares
which have been subscribed and issued, whether it be
founders’ shares or common shares. 37 In the instant
case, two figures are being pitted against each other—
those contained in the articles of incorporation, and
those listed in the stock and transfer book.
To base the computation of quorum solely on the
obviously deficient, if not inaccurate stock and transfer
book, and completely disregarding the issued and
outstanding shares as indicated in the articles of
incorporation would work injustice to the owners
and/or successors in interest of the said shares. This
case is one instance where resort to documents other
than the stock and transfer books is necessary. The
stock and transfer book of PMMSI cannot be used as
the sole basis for determining the quorum as it does
not reflect the totality of shares which have been
subscribed, more so when the articles of incorporation
show a significantly larger amount of shares issued
and outstanding as compared to that listed in the stock
and transfer book. As aptly stated by the SEC in
its Order dated 15 July 1996:38
It is to be explained, that if at the onset of
incorporation a corporation has 771 shares subscribed,
the Stock and Transfer Book should likewise reflect
771 shares. Any sale, disposition or even reacquisition
of the company of its own shares, in which it becomes
treasury shares, would not affect the total number of
shares in the Stock and Transfer Book. All that will
change are the entries as to the owners of the shares
but not as to the amount of shares already subscribed.
This is precisely the reason why the Stock and
Transfer Book was not given probative value. Did the
shares, which were not recorded in the Stock and
Transfer Book, but were recorded in the Articles of
Iincorporation just vanish into thin air? . . . .
As shown above, at the time the corporation was set-
up, there were already seven hundred seventy-six
(776) issued and outstanding shares as reflected in the
articles of incorporation. No proof was adduced as to
any transaction effected on these shares from the time
PMMSI was incorporated up to the time the instant
petition was filed, except for the thirty-three (33)
shares which were recorded in the stock and transfer
book in 1978, and the additional one hundred thirty-
two (132) in 1982. But obviously, the shares so
ordered recorded in the stock and transfer book are
among the shares reflected in the articles of
incorporation as the shares subscribed to by the
incorporators named therein.
One who is actually a stockholder cannot be denied his
right to vote by the corporation merely because the
corporate officers failed to keep its records
accurately.40 A corporation’s records are not the only
evidence of the ownership of stock in a
corporation.41 In an American case, 42 persons claiming
shareholders status in a professional corporation were
listed as stockholders in the amendment to the articles
of incorporation. On that basis, they were in all
respects treated as shareholders. In fact, the acts and
conduct of the parties may even constitute sufficient
 37

evidence of one’s status as a shareholder or

member.43 In the instant case, no less than the articles
of incorporation declare the incorporators to have in
their name the founders and several common shares.
Thus, to disregard the contents of the articles of
incorporation would be to pretend that the basic
document which legally triggered the creation of the
corporation does not exist and accordingly to allow
great injustice to be caused to the incorporators and
their heirs.

Petitioners argue that the Court of Appeals "gravely

erred in applying the Espejo decision to the benefit of
respondents." The Court believes that the more precise
statement of the issue is whether in its
assailed Decision, the Court of Appeals can declare
private respondents as the heirs of the incorporators,
and consequently register the founders shares in their
name. However, this issue as recast is not actually
determinative of the present controversy as explained
below.
Petitioners claim that the Decision of the Court of
Appeals unilaterally divested them of their shares in
PMMSI as recorded in the stock and transfer book and
instantly created inexistent shares in favor of private
respondents. We do not agree.

The assailed Decision merely declared that a separate

judicial declaration to recognize the shares of the
original incorporators would entail unnecessary delay
and expense on the part of the litigants, considering
that the incorporators had already proved ownership of
such shares as shown in the articles of
incorporation.44 There was no declaration of who the
individual owners of these shares were on the date of
the promulgation of the Decision. As properly stated
by the SEC in its Order dated 20 June 1996, to which
the appellate court’s Decision should be related, "if at
all, the ownership of these shares should only be
subjected to the proper judicial (probate) or
extrajudicial proceedings in order to determine the
respective shares of the legal heirs of the deceased
incorporators."45