UNION GLASS & CONTAINER CORPORATION
vs. THE S.E.C
DOCTRINE:
Section 3 of PD No. 902-‐-A confers upon the SEC
"absolute jurisdiction, supervision, and control over
all corporations, partnerships or associations, who
are grantees of primary franchise and/or license or
permit issued by the government to operate in the
Philippines ... "
Thus the law explicitly specified and delimited its
jurisdiction to matters intrinsically connected with
the regulation of corporations, partnerships and
associations and those dealing with the internal
affairs of such corporations, partnerships or
associations.
The fact that the controversy at bar involves the
rights of petitioner Union Glass who has no intra-‐-
corporate relation either with complainant or the
DBP, places the suit beyond the jurisdiction of the
respondent SEC.
FACTS
Private respondent Carolina Hofileña, complainant
in SEC Case No. 2035, is a stockholder of Pioneer
Glass Manufacturing Corporation, a domestic
corporation engaged in the operation of silica mines
and the manufacture of glass and glassware.
Pioneer Glass had obtained various loan
accommodations from the [DBP], and also from
other local and foreign sources which DBP
guaranteed.; As security, Pioneer Glass mortgaged
and/or assigned its assets, real and personal, to the
DBP.
DBP was able to gain control of the outstanding
shares of common stocks of Pioneer Glass, and to
get two, later three, regular seats in the
corporation's board of directors.
When Pioneer Glass suffered serious liquidity
problems such that it could no longer meet its
financial obligations with DBP, it entered into a
dacion en pago agreement with the latter, whereby
all its assets mortgaged to DBP were ceded to the
latter in full satisfaction of the corporation's
obligations in the total amount of P59M. ; Part of the
assets transferred to the DBP was the glass plant
in Rosario, Cavite, which DBP leased and
subsequently sold to herein petitioner Union Glass.
Carolina Hofileña filed a complaint before the
respondent SEC against the DBP, Union Glass and
Pioneer Glass, based on the alleged illegality of the
aforesaid dacion en pago resulting from: [1] the
self-‐-dealing indulged in by DBP, having acted
both as stockholder/director and secured creditor of
Pioneer Glass; and [2] the wrongful inclusion by
DBP in its statement of account of P26M as due
from Pioneer Glass when the same had already
been converted into equity.
Hofileña asked that DBP be sentenced to pay
Pioneer Glass actual, consequential, moral and
exemplary damages, for its alleged illegal acts and
gross bad faith;
Petitioners moved for dismissal of the case on the
ground that the SEC had no jurisdiction over the
subject matter or nature of the suit.
SEC: granted the motion to dismiss for lack of
jurisdiction. ; MR filed by respondent. Hearing
Officer: reversed and upheld the SEC's jurisdiction.
; The present action is in the form of a derivative
suit instituted by a stockholder for the benefit of the
corporation, respondent Pioneer Glass against
another stockholder, respondent DBP, for alleged
illegal acts and gross bad faith which resulted in the
dacion en pago arrangement now being questioned
by complainant.
Petitioners filed the instant petition for certiorari and
to prevent respondent SEC from taking cognizance
of SEC Case No. 2035.
ISSUE
Is it the regular court or the SEC that has jurisdiction
over the case?
RULING
Petitioner Union Glass, as transferee and
possessor of the glass plant covered by the dacion
en pago agreement, should be joined as party-‐-
defendant under the general rule which requires the
joinder of every party who has an interest in or lien
on the property subject matter of the dispute. . -‐-
But since petitioner Union Glass has no intra-‐-
corporate relation with either the complainant or the
DBP, its joinder as party-‐-defendant in SEC Case
No. 2035 brings the cause of action asserted
against it outside the jurisdiction of the respondent
SEC.
The jurisdiction of the SEC is delineated by PD No.
902-‐-A , sec.5
-‐- This grant of jurisdiction must be viewed in the
light of the nature and function of the SEC under the
law. Section 3 of PD No. 902-‐-A confers upon the
latter "absolute jurisdiction, supervision, and control
over all corporations, partnerships or associations,
who are grantees of primary franchise and/or
license or permit issued by the government to
operate in the Philippines ... "
-‐- The principal function of the SEC is the
supervision and control over corporations,
partnerships and associations with the end in view
that investment in these entities may be
encouraged and protected, and their activities
pursued for the promotion of economic
development.
-‐- Thus the law explicitly specified and delimited its
jurisdiction to matters intrinsically connected with
the regulation of corporations, partnerships and
associations and those dealing with the internal
affairs of such corporations, partnerships or
associations.
Otherwise stated, in order that the SEC can take
cognizance of a case, the controversy must pertain
to any of the following relationships: [a] between the
corporation, partnership or association and the
public; [b] between the corporation, partnership or
association and its stockholders, partners,
members, or officers; [c] between the corporation,
partnership or association and the state in so far as
its franchise, permit or license to operate is
concerned; and [d] among the stockholders,
partners or associates themselves.
The fact that the controversy at bar involves the
rights of petitioner Union Glass who has no intra-‐-
corporate relation either with complainant or the
DBP, places the suit beyond the jurisdiction of the
respondent SEC.
-‐- The case should be tried and decided by the
court of general jurisdiction, the Regional Trial
Court. This view is in accord with the rudimentary
principle that administrative agencies, like the SEC,
are tribunals of limited jurisdiction 6 and, as such,
could wield only such powers as are specifically
granted to them by their enabling statutes.
-‐- Since petitioner has no intra-‐-corporate
relationship with the complainant, it cannot be
joined as party-‐- defendant in said case as to do so
would violate the rule or jurisdiction.
‐‐‐ Hofileñas complaint against petitioner for
cancellation of the sale of the glass plant should
therefore be brought separately before the regular
court ; But such action, if instituted, shall be
suspended to await the final outcome of SEC Case
No. 2035, for the issue of the validity of the dacion
en pago posed in the last mentioned case is a
prejudicial question, the resolution of which is a
logical antecedent of the issue involved in the
action against petitioner Union Glass.
Abejo vs. Dela Cruz, 149 SCRA 654 (1987)
DOCTRINE:
As the SEC maintains, “There is no requirement
that a stockholder of a corporation must be a
registered one in order that the Securities and
Exchange Commission may take Cognizance of a
suit seeking to enforce his rights as such
stockholder.” This is because the SEC by express
mandate has “absolute jurisdiction, supervision and
control over all corporations” and is called upon to
enforce the provisions of the Corporation Code,
among which is the stock purchaser’s right to
secure the corresponding certificate in his name
under the provisions of Sec 65 of the Code.
FACTS
These two cases, jointly heard, are jointly herein
decided. They involve the question of who, between
the Regional Trial Court and the Securities and
Exchange Commission (SEC), has original and
exclusive jurisdiction over the dispute between the
principal stockholders of the corporation Pocket
Bell Philippines, Inc. (Pocket Bell), a "tone and
voice paging corporation," namely, the spouses
Jose Abejo and Aurora Abejo (hereinafter referred
to as the Abejos) and the purchaser, Telectronic
Systems, Inc. (hereinafter referred to as
Telectronics) of their 133,000 minority
shareholdings (for P5 million) and of 63,000 shares
registered in the name of Virginia Braga and
covered by five stock certificates endorsed in blank
by her (for P1,674,450.00), and the spouses
Agapito Braga and Virginia Braga (hereinafter
referred to as the Bragas), erstwhile majority
stockholders. With the said purchases, Telectronics
would become the majority stockholder, holding
56% of the outstanding stock and voting power of
the corporation Pocket Bell.
With the said purchases in 1982, Telectronics
requested the corporate secretary of the
corporation, Norberto Braga, to register and
transfer to its name, and those of its nominees the
total 196,000 Pocket Bell shares in the
corporation's transfer book, cancel the surrendered
certificates of stock and issue the corresponding
new certificates of stock in its name and those of its
nominees.
Norberto Braga, the corporate secretary and son of
the Bragas, refused to register the aforesaid
transfer of shares in t e corporate oo s, asserting
that the Bragas claim preemptive rights over the
133,000 Abejo shares and that Virginia Braga never
transferred her 63,000 shares to Telectronics but
had lost the five stock certificates representing
those shares.
This triggered off the series of intertwined actions
between the protagonists, all centered on the
question of jurisdiction over the dispute, which were
to culminate in the filing of the two cases at bar.
ISSUE
Whether or Not the corporate secretary may refuse
to register the transfer of shares in the corporate
books?
RULING
No. As pointed out by the Abejos, Pocket Bell is not
a close corporation, and no restriction over the free
transferability of the shares appears in the Articles
of Incorporation, as well as in the by-laws and the
certificate of stock themselves, as required by law
for the enforcement of such restriction. As the SEC
maintains, “There is no requirement that a
stockholder of a corporation must be a registered
one in order that the Securities and Exchange
Commission may take Cognizance of a suit seeking
to enforce his rights as such stockholder.” This is
because the SEC by express mandate has
“absolute jurisdiction, supervision and control over
all corporations” and is called upon to enforce the
provisions of the Corporation Code, among which
is the stock purchaser’s right to secure the
corresponding certificate in his name under the
provisions of Sec 65 of the Code.
ALMA MAGALAD, vs. PREMIERE FINANCING
CORP
Facts;
This is an appeal from the decision of the Regional
Trial Court ordering appellant Premiere Financing to
pay appellee Magalad P50,000.00, the principal
obligation, plus interest and damages.
Premiere is engaged in soliciting and accepting
money market placements or deposits.
On September 1983 with expired permit to issue
commercial papers and with intention to defraud its
creditors, Premiere misled Magalad into making a
money market placement of P50,000.00 at 22%
interest per annum. Aside from the receipt, Premier
likewise issued two PDCs in the total sum of
P51,079.00 and assigned to Magalad its receivable
from a certain Saman for the same amount.
When the said checks were presented for payment,
the drawee bank dishonored the checks for lack of
sufficient funds. Premiere, for no valid reason, failed
and refused to honor such Magalad’s demands. On
January 1984, Magalad filed a complaint for
damages.
Premiere filed a motion for reconsideration alleging
that the Securities and Exchange Commission
(SEC) has exclusive and original jurisdiction over a
corporation under a state of suspension of
payments.
Issue;
WON SEC has jurisdiction
Held / ratio;
Yes, reversed
Magalad's complaint alleges acts amounting to fraud
committed by Premiere, the SEC must be held to
retain its original and exclusive jurisdiction over the
case, despite the fact that the suit involves collection
of sums of money paid to said corporation, the
recovery of which would ordinarily fall within the
jurisdiction of regular courts. The fraud committed is
detrimental to the interest of the public and,
therefore, encompasses a category of relationship
within the SEC jurisdiction.
Otherwise stated, in order that the SEC can take
cognizance of a case, the controversy must pertain
to any of the following relationships: (a) between the
corporation, partnership or association and the
public; (b) between the corporation, partnership or
association and its stockholders, partners, members
or officers; (c) between the corporation, partnership
or association and the state so far as its franchise,
permit or license to operate is concerned; and (d)
among the stockholders, partners or associates
themselves.
The devices or schemes amounting to fraud and
misrepresentation detrimental to the interest of the
public have been resorted to by Premiere
Corporation. It can not but be conceded, therefore,
that the SEC may exercise its adjudicative powers
pursuant to Sec. 5(a) of Pres. Decree No. 902-A
(Supra).
The fact that Premiere's authority to engage in
financing already expired will not have the effect of
divesting the SEC of its original and exclusive
jurisdiction. The expanded jurisdiction of the SEC
was conceived primarily to protect the
interest of the investing public. That Magalad's
money placements were in the nature of
investments in Premiere cannot be gainsaid.
Magalad had reasonably expected to receive returns
from moneys she had paid to Premiere.
Reliance by Magalad on the cases of DMRC v. Este
del Sol, (132 SCRA 293) and Union Glass &
Container Corp. v. SEC (126 SCRA 31), is
misplaced for nowhere in the complaints therein is
found any averment of fraud or misrepresentation.
Further bolstering the jurisdiction of the SEC is the
fact that said agency had already appointed a
Rehabilitation Receiver for Premiere and has
directed all proceedings or claims against it be
suspended. This, pursuant to Sec. 6(c) of Pres.
Decree No. 902-A providing that "upon appointment
of a . . . rehabilitation receiver . . . all actions for
claims against corporations . . . under receivership
pending before any court, tribunal, board or body
shall be suspended accordingly."
By so doing, SEC has exercised its original and
exclusive jurisdiction to hear and decide cases
involving:
a) Petitions of corporations, partnerships or
associations to be declared in the state of
suspension of payments
… (Section 5(d) of Pres. Decree No. 902-A as added
by Pres. Decree 1758).
CIR, vs. THE CLUB FILIPINO, INC. DE CEBU
Facts;
This is a petition to review the decision of the Court
of Tax Appeals, reversing the decision of the
Collector of Internal Revenue, assessing against
"Club Filipino, Inc. de Cebu", the sum of P12,068.84
as fixed and percentage taxes, surcharge and
compromise penalty, allegedly due from it as a
keeper of bar and restaurant.
"Club Filipino, Inc. de Cebu," (Club, for short), is a
civic corporation with an original authorized capital
stock of P22,000.00, which was subsequently
increased to P200,000.00. Neither in the articles or
by-laws is there a provision relative to dividends
although it is covenanted that upon its dissolution,
the Club's remaining assets, after paying debts, shall
be donated to a charitable Philippine Institution in
Cebu.
The Club owns and operates a club house, a bowling
alley, a golf course (on a lot leased from the
government), and a bar-restaurant. The bar-
restaurant was a necessary incident to the operation
of the club and its golf-course. The club is operated
mainly with funds derived from membership fees
and dues. Whatever profits it had, were used to
defray its overhead expenses and to improve its golf-
course. In 1951. as a result of a capital surplus,
arising from the re-valuation of its real properties, the
value or price of which increased, the Club declared
stock dividends; but no actual cash dividends were
distributed to the stockholders. In 1952, a BIR agent
discovered that the Club has never paid percentage
tax on the gross receipts of its bar and restaurant,
although it secured B-4, B-9(a) and B-7 licenses.
In December 1952, the Collector of Internal Revenue
assessed against the Club, As percentage tax on its
gross receipts during the tax years 1946 to 1951
~12,000
Issues;
WON liable for percentage taxes prescribed in
sections 182, 183 and 191 of the Tax Code
Held / ratio;
No, reversed
It has been held that the liability for fixed and
percentage taxes, as provided by these sections,
does not ipso facto attach by mere reason of the
operation of a bar and restaurant. For the liability to
attach, the operator thereof must be engaged in the
business as a barkeeper and restaurateur. The plain
and ordinary meaning of business is restricted to
activities or affairs where profit is the purpose or
livelihood is the motive, and the term business when
used without qualification, should be construed in its
plain and ordinary meaning, restricted to activities
for profit or livelihood.
The Club was organized to develop and cultivate
sports of all class and denomination, for the healthful
recreation and entertainment of its stockholders and
members; …it is operated mainly with funds derived
from membership fees and dues; the Club's bar and
restaurant catered only to its members and their
guests; …it stands to reason that the Club is not
engaged in the business of an operator of bar and
restaurant.
The Club derived profit from the operation of its bar
and restaurant, but such fact does not necessarily
convert it into a profit-making enterprise. The bar
and restaurant are necessary adjuncts of the Club to
foster its purposes and the profits derived therefrom
are necessarily incidental to the primary object. That
a Club makes some profit, does not make it a profit-
making Club. As has been remarked a club should
always strive, whenever possible, to have surplus
It is claimed that unlike the two cases just cited
(supra), which are non-stock, the appellee Club is a
stock corporation. This is unmeritorious. The facts
that the capital stock of the respondent Club is
divided into shares, does not detract from the finding
of the trial court that it is not engaged in the business
of operator of bar and restaurant. What is
determinative of whether or not the Club is engaged
in such business is its object or purpose, as stated
in its articles and by-laws. The actual purpose is not
controlled by the corporate form or by the
commercial aspect of the business prosecuted, but
may be shown by extrinsic evidence, including the
by-laws and the method of operation.
Moreover, for a stock corporation to exist, two
requisites must be complied with, to wit: (1) a capital
stock divided into shares and (2) an authority to
distribute to the holders of such shares, dividends or
allotments of the surplus profits on the basis of the
shares held (sec. 3, Act No. 1459). In the case at
bar, nowhere in its articles of incorporation or by-
laws could be found an authority for the distribution
of its dividends or surplus profits. Strictly speaking, it
cannot, therefore, be considered a stock
corporation.
MANUEL R. DULAY ENTERPRISES, INC., v.
CA
DOCTRINE:
Unless the by-laws provide otherwise, any action by
the directors of a close corporation without a
meeting shall nevertheless be deemed valid if: (1)
Before or after such action is taken, written consent
thereto is signed by all the directors; or (2) All the
stockholders have actual or implied knowledge of
the action and make no prompt objection thereto in
writing; or (3) The directors are accustomed to take
informal action with the express or implied
acquiesce of all the stockholders; or (4) All the
directors have express or implied knowledge of the
action in question and none of them makes prompt
objection thereto in writing. If a directors' meeting is
held without proper call or notice, an action taken
therein within the corporate powers is deemed
ratified by a director who failed to attend, unless he
promptly files his written objection with the
secretary of the corporation after having knowledge
thereof.
FACTS
Petitioner Manuel R. Dulay Enterprises, Inc, a
domestic corporation with the following as
members of its Board of Directors: Manuel R. Dulay
with 19,960 shares and designated as president,
treasurer and general manager, Atty. Virgilio E.
Dulay with 10 shares and designated as vice-
president; Linda E. Dulay with 10 shares; Celia
Dulay-Mendoza with 10 shares; and Atty. Plaridel
C. Jose with 10 shares and designated as
secretary, owned a property covered by TCT No.
17880 4and known as Dulay Apartment consisting
of sixteen (16) apartment units on a six hundred
eighty-nine (689) square meters lot, more or less.
Petitioner corporation through its president, Manuel
Dulay, obtained various loans for the construction
of its hotel project, Dulay Continental Hotel (now
Frederick Hotel). It even had to borrow money from
petitioner Virgilio Dulay to be able to continue the
hotel project. As a result of said loan, petitioner
Virgilio Dulay occupied one of the unit apartments
of the subject property since property since 1973
while at the same time managing the Dulay
Apartment at his shareholdings in the corporation
was subsequently increased by his father. On
December 23, 1976, Manuel Dulay by virtue of
Board Resolution No 18 6of petitioner corporation
sold the subject property to private respondents
spouses Maria Theresa and Castrense Veloso in
the amount of P300,000.00 as evidenced by the
Deed of Absolute Sale. 7Thereafter, TCT No.
17880 was cancelled and TCT No. 23225 was
issued to private respondent Maria Theresa Veloso.
8 Subsequently, Manuel Dulay and private
respondents spouses Veloso executed a
Memorandum to the Deed of Absolute Sale of
December 23, 1976 giving Manuel Dulay within (2)
years or until December 9, 1979 to repurchase the
subject property for P200,000.00 which was,
however, not annotated. On December 24, 1976,
private respondent Maria Veloso, without the
knowledge of Manuel Dulay, mortgaged the subject
property to private respondent Manuel A. Torres for
a loan of P250,000.00 which was duly annotated as
Entry No. 68139 in TCT No. 23225. Upon the failure
of private respondent Maria Veloso to pay private
respondent Torres, the subject property was sold
on April 5, 1978 to private respondent Torres as the
highest bidder in an extrajudicial foreclosure sale as
evidenced by the Certificate of Sheriff's Sale
11issued on April 20, 1978. On July 20, 1978,
private respondent Maria Veloso executed a Deed
of Absolute Assignment of the Right to Redeem
12in favor of Manuel Dulay assigning her right to
repurchase the subject property from private
respondent Torres as a result of the extra sale held
on April 25, 1978. As neither private respondent
Maria Veloso nor her assignee Manuel Dulay was
able to redeem the subject property within the one
year statutory period for redemption, private
respondent Torres filed an Affidavit of
Consolidation of Ownership with the Registry of
Deeds of Pasay City. Title was subsequently issued
to private respondent Manuel Torres on April 23,
1979.
On October 1, 1979, private respondent Torres filed
a petition for the issuance of a writ of possession
against private respondents spouses Veloso and
Manuel Dulay in LRC Case No. 1742- P. However,
when petitioner Virgilio Dulay was never authorized
by the petitioner corporation to sell or mortgage the
subject property, the trial court ordered private
respondent Torres to implead petitioner corporation
as an indispensable party but the latter moved for
the dismissal of his petition which was granted in an
Order dated April 8, 1980. On June 20, 1980,
private respondent Torres and Edgardo Pabalan,
real estate administrator of Torres, filed an action
against petitioner corporation, Virgilio Dulay and
Nepomuceno Redovan, a tenant of Dulay
Apartment Unit No. 8-A for the recovery of
possession, sum of money and damages with
preliminary injunction in Civil Case, No. 8198-P with
the then Court of First Instance of Rizal. On July 21,
1980, petitioner corporation filed an action against
private respondents spouses Veloso and Torres for
the cancellation of the Certificate of Sheriff's Sale
and TCT No. 24799 in Civil Case No. 8278-P with
the then Court of First Instance of Rizal. On January
29, 1981, private respondents Pabalan and Torres
filed an action against spouses Florentino and
Elvira Manalastas, a tenant of Dulay Apartment Unit
No. 7-B, with petitioner corporation as intervenor for
ejectment in Civil Case No. 38-81 with the
Metropolitan Trial Court of Pasay City. Thereafter
or on May 17, 1985, petitioner corporation and
Virgilio Dulay filed an action against the presiding
judge of the Metropolitan Trial Court of Pasay City,
private respondents Pabalan and Torres for the
annulment of said decision with the Regional Trial
Court of Pasay in Civil Case No. 2880-P.
Thereafter, the three (3) cases were jointly tried and
the trial court rendered a decision in favor of private
respondents. Not satisfied with said decision,
petitioners appealed to the Court of Appeals.
During the pendency of this petition, private
respondent Torres died on April 3, 1991 as shown
in his death certificate and named Torres-Pabalan
Realty & Development Corporation as his heir in his
holographic will dated October 31, 1986.
Issue;
WON sale binding against the corporation Dulay Inc
RULING:
Yes.
The sale binds the corporation. Section 101 of the
Corporation Code of the Philippines provides that
"When board meeting is unnecessary or improperly
held. Unless the by-laws provide otherwise, any
action by the directors of a close corporation
without a meeting shall nevertheless be deemed
valid if: (1) Before or after such action is taken,
written consent thereto is signed by all the directors;
or (2) All the stockholders have actual or implied
knowledge of the action and make no prompt
objection thereto in writing; or (3) The directors are
accustomed to take informal action with the express
or implied acquiesce of all the stockholders; or (4)
All the directors have express or implied knowledge
of the action in question and none of them makes
prompt objection thereto in writing. If a directors'
meeting is held without proper call or notice, an
action taken therein within the corporate powers is
deemed ratified by a director who failed to attend,
unless he promptly files his written objection with
the secretary of the corporation after having
knowledge thereof." Herein, the corporation is
classified as a close corporation and consequently
a board resolution authorizing the sale or mortgage
of the subject property is not necessary to bind the
corporation for the action of its president. At any
rate, a corporate action taken at a board meeting
without proper call or notice in a close corporation
is deemed ratified by the absent director unless the
latter promptly files his written objection with the
secretary of the corporation after having knowledge
of the meeting which, in this case, Virgilio Dulay
failed to do. The corporation's claim that the sale of
the subject property by its president, Manuel Dulay,
to spouses Veloso is null and void as the alleged
Board Resolution 18 was passed without the
knowledge and consent of the other members of
the board of directors cannot be sustained. Virgilio
E. Dulay's protestations of complete innocence to
the effect that he never participated nor was even
aware of any meeting or resolution authorizing the
mortgage or sale of the subject premises is difficult
to believe. On the contrary, he is very much privy to
the transactions involved. To begin with, he is an
incorporator and one of the board of directors
designated at the time of the organization of Manuel
R. Dulay Enterprises, Inc. In ordinary parlance, the
said entity is loosely referred to as a "family
corporation." The nomenclature, if imprecise,
however, fairly reflects the cohesiveness of a group
and the parochial instincts of the individual
members of such an aggrupation of which Manuel
R. Dulay Enterprises, Inc. is typical: four-fifths of its
incorporators being close relatives namely, 3
children and their father whose name identifies their
corporation. Besides, the fact that Virgilio Dulay on
24 June 1975 executed an affidavit that he was a this was done in 1980, when President Marcos was
signatory witness to the execution of the post-dated the absolute ruler of this country. Any judicial
Deed of Absolute Sale of the subject property in challenge to them would have been futile.
favor of Torres indicates that he was aware of the
transaction executed between his father and Torres This case must be distinguished from Mendoza,
and had, therefore, adequate knowledge about the where the petitioners, received in settlement thereof
sale of the subject property to Torres. shares of stock valued at P40,000.00 without
Consequently, the corporation is liable for the act of protest. The private respondent has not been paid a
Manuel Dulay and the sale of the subject property single centavo on its claim.
to Torres by Manuel Dulay is valid and binding.
The Court is especially disturbed by Section 4(1) of
the decree. It also notes, with equal concern, the
NDC v. PHILIPPINE VETERANS BANK
restriction in Subsection (ii) thereof that all
"unsecured obligations shall not bear interest" and in
Facts;
Subsection (iii) that "all accrued
This case involves the constitutionality of Pres.
Decree No. 1717, which ordered the rehabilitation of
interests, penalties or charges as of date hereof
the Agrix Group of Companies to be administered
mainly by the National Development Company. The pertaining to the obligations, whether secured or
unsecured, shall not be recognized."
law outlined the procedure for filing claims against
the Agrix companies and created a Claims
In defending the decree, the petitioners argue that
Committee. Especially relevant to this case is Sec.
property rights, are subject to regulation under the
4(1) thereof providing that "all mortgages and other
police power.
liens presently attaching to any of the assets of the
dissolved corporations are hereby extinguished."
The police power is not a panacea for all
constitutional maladies. Neither does its mere
The Agrix Marketing, Inc. (AGRIX) had executed in
invocation conjure an instant and automatic
favor of Philippine Veterans Bank a real estate
justification for every act of the government
mortgage dated July 7, 1978, over three (3) parcels
depriving a person of his life, liberty or property.
of land situated in Laguna. During the existence of
the mortgage, AGRIX went bankrupt. It was for the
A legislative act based on the police power requires
expressed purpose of salvaging this and the other
the concurrence of a lawful subject and a lawful
Agrix companies that the aforementioned decree
method. In more familiar words, a) the interests of
was issued by Marcos.
the public generally, as distinguished from those of
a particular class, should justify the interference of
The private respondent filed a claim with the AGRIX
the state; and b) the means employed are
Claims Committee. The New Agrix, Inc. and the
reasonably necessary for the accomplishment of the
National Development Company, invoking Sec. 4 (1)
purpose and not unduly oppressive upon individuals.
of the decree, filed a petition with the Regional Trial
2
Court for the cancellation of the mortgage lien.
Private respondent took steps to extrajudicially
The Court finds first of all that the interests of the
foreclose the mortgage.
public are not sufficiently involved to warrant the
interference of the government with the private
The trial court annulled not only the challenged
contracts of AGRIX. The decree speaks vaguely of
provision, viz., Sec. 4 (1), but the entire Pres. Decree
the "public, particularly the small investors," who
No. 1717 on the grounds that: (1) the presidential
would be prejudiced if the corporation were not to be
exercise of legislative power was a violation of the
assisted. However, the record does not state how
principle of separation of powers;
(2) the law impaired the obligation of contracts; many there are of such investors, and who they are,
and why they are being preferred to the private
and (3) the decree violated the equal protection
respondent and other creditors of AGRIX with
clause.
vested property rights.
The petitioners contend that the private respondent
is now estopped. In support of this contention, it cites The indispensable link to the welfare of the greater
number has not been established. On the contrary,
the recent case of Mendoza v. Agrix Marketing, Inc..
it would appear that the decree was issued only to
The Court, after noting that the petitioners had
favor a special group of investors who, for reasons
already filed their claims with the AGRIX Claims
not given, have been preferred to the legitimate
Committee had simply dismissed the petition on the
creditors of AGRIX.
ground of estoppel.
Assuming there is a valid public interest involved, the
Issue;
Court still finds that the means employed to
WON PD 1717 is constitutional
rehabilitate AGRIX fall far short of the requirement
Held / ratio; that they shall not be unduly oppressive. The right to
property owing to the creditors of AGRIX is arbitrarily
Unconstitutional, affirmed.
destroyed.
The Court does not agree that the principle of
A mortgage lien is a property right derived from
estoppel is applicable.
contract and so comes under the protection of the
Bill of Rights. So do interests on loans, as well as
Private respondent did file a claim with the AGRIX
penalties and charges, which are also vested rights
Claims Committee. It must be noted, however, that
once they accrue.

There is discrimination as well. In extinguishing the
mortgage and other liens, the decree lumps the
secured creditors with the unsecured creditors and
places them on the same level in the prosecution of
their respective claims. In this respect, all of them
are considered unsecured creditors. The only
concession given to the secured creditors is that
their loans are allowed to earn interest from the date
of the decree, but that still does not justify the
cancellation of the interests earned before that date.
Under the equal protection clause, all persons or
things similarly situated must be treated alike, both
in the privileges conferred and the obligations
imposed. Conversely, all persons or things
differently situated should be treated differently.
On top of all this, New Agrix, Inc. was created by
special decree notwithstanding the provision of
Article XIV, Section 4 of the 1973 Constitution, then
in force, that:
SEC. 4. The Batasang Pambansa shall not, except
by general law, provide for the formation,
organization, or regulation of private corporations,
unless such corporations are owned or controlled by
the Government or any subdivision or
instrumentality thereof. 4
The new corporation is neither owned nor controlled
by the government.
The National Development Corporation was merely
required to extend a loan of not more than
P10,000,000.00 to New Agrix, Inc. New Agrix, Inc. is
entirely private and so should have been organized
under the Corporation Law in accordance with the
above-cited constitutional provision.
The Court also feels that the decree impairs the
obligation of the contract between AGRIX and the
private respondent without justification. While it is
true that the police power is superior to the
impairment clause, the principle will apply only
where the contract is so related to the public welfare
that it will be considered congenitally susceptible to
change by the legislature in the interest of the
greater number. 5 Most present-day contracts are of
that nature. But as already observed, the contracts
of loan and mortgage executed by AGRIX are purely
private transactions and have not been shown to be
affected with public interest.
Our finding, in sum, is that Pres. Decree No. 1717 is
an invalid exercise of the police power, not being in
conformity with the traditional requirements of a
lawful subject and a lawful method. The extinction of
the mortgage and other liens and of the interest and
other charges pertaining to the legitimate creditors
of AGRIX constitutes taking without due process of
law, and this is compounded by the reduction of the
secured creditors to the category of unsecured
creditors in violation of the equal protection clause.
Moreover, the new corporation, being neither owned
nor controlled by the Government, should have been
created only by general and not special law. And
insofar as the decree also interferes with purely
private agreements without any demonstrated
connection with the public interest, there is likewise
an impairment of the obligation of the contract.
PIONEER INSURANCE & SURETY
CORPORATION v. CA
DOCTRINE:
While it has been held that as between themselves the
rights of the stockholders in a defectively incorporated
association should be governed by the supposed charter
and the laws of the state relating thereto and not by the
rules governing partners, it is ordinarily held that persons
who attempt, but fail, to form a corporation and who carry
on business under the corporate name occupy the
position of partners inter se. Thus, where persons
associate themselves together under articles to purchase
property to carry on a business, and their organization is
so defective as to come short of creating a corporation
within the statute, they become in legal effect partners
inter se, and their rights as members of the company to
the property acquired by the company will be recognized.
So, where certain persons associated themselves as a
corporation for the development of land for irrigation
purposes, and each conveyed land to the corporation,
and two of them contracted to pay a third the difference in
the proportionate value of the land conveyed by him, and
no stock was ever issued in the corporation, it was treated
as a trustee for the associates in an action between them
for an accounting, and its capital stock was treated as
partnership assets, sold, and the proceeds distributed
among them in proportion to the value of the property
contributed by each. However, such a relation does not
necessarily exist, for ordinarily persons cannot be made
to assume the relation of partners, as between
themselves, when their purpose is that no partnership
shall exist, and it should be implied only when necessary
to do justice between the parties; thus, one who takes no
part except to subscribe for stock in a proposed
corporation which is never legally formed does not
become a partner with other subscribers who engage in
business under the name of the pretended corporation, so
as to be liable as such in an action for settlement of the
alleged partnership and contribution. A partnership
relation between certain stockholders and other
stockholders, who were also directors, will not be implied
in the absence of an agreement, so as to make the former
liable to contribute for payment of debts illegally
contracted by the latter.
In the instant case, it is to be noted that the petitioner was
declared non-suited for his failure to appear during the
pretrial despite notification. In his answer, the petitioner
denied having received any amount from respondents
Bormaheco, the Cervanteses and Maglana. The trial court
and the appellate court, however, found through Exhibit
58, that the petitioner received the amount of
P151,000.00 representing the participation of Bormaheco
and Atty. Constancio B. Maglana in the ownership of the
subject airplanes and spare parts. The record shows that
defendant Maglana gave P75,000.00 to petitioner Jacob
Lim thru the Cervanteses.
It is therefore clear that the petitioner never had the
intention to form a corporation with the respondents
despite his representations to them. This gives credence
to the cross-claims of the respondents to the effect that
they were induced and lured by the petitioner to make
contributions. Applying therefore the principles of law
earlier cited to the facts of the case, necessarily, no de
facto partnership was created among the parties which
would entitle the petitioner to a reimbursement of the
supposed losses of the proposed corporation. The record
shows that the petitioner was acting on his own and not in
behalf of his other would-be incorporators in transacting
the sale of the airplanes and spare parts.
FACTS:
In 1965, Jacob S. Lim was engaged in the airline
business as owner-operator of Southern Air Lines
(SAL) a single proprietorship.
Then, Japan Domestic Airlines (JDA) and Lim in
Tokyo, Japan entered into and executed a sales
contract for the sale and purchase of 2 aircrafts and
1 set of necessary spare parts for the total agreed
price of US $109,000.00 to be paid in installments.
The 2 aircrafts arrived in Manila. Pioneer Insurance
and Surety Corporation as surety executed and
issued its surety bond in favor of JDA, in behalf of its
principal, Lim, for the balance price of the aircrafts
and spare parts.
It appears that Border Machinery and Heavy
Equipment Company, Inc. (Bormaheco), Francisco
and Modesto Cervantes (Cervanteses) and
Constancio Maglana contributed some funds used in
the purchase of the above aircrafts and spare parts.
The funds were supposed to be their contributions to
a new corporation proposed by Lim to expand his
airline business. They executed 2 separate
indemnity agreements in favor of Pioneer, one
signed by Maglana and the other jointly signed by
Lim for SAL, Bormaheco and the Cervanteses. The
indemnity agreements stipulated that the
indemnitors principally agree and bind themselves
jointly and severally in favor of Pioneer.
Thereafter, Lim doing business under the name and
style of SAL executed in favor of Pioneer as deed of
chattel mortgage as security for the latter's
suretyship in favor of the former. It was stipulated
therein that Lim transfer and convey to the surety the
two aircrafts. Lim defaulted on his subsequent
installment payments prompting JDA to request
payments from the surety. Pioneer paid a total sum
of P298,626.12.
Pioneer filed a petition for the extrajudicial
foreclosure of the chattel mortgage before the
Sheriff of Davao City. The Cervanteses and
Maglana, however, filed a third party claim alleging
that they are coowners of the aircrafts, Then,
Pioneer filed an action for judicial foreclosure with an
application for a writ of preliminary attachment
against Lim and respondents, the Cervanteses,
Bormaheco and Maglana.
In their Answers, Maglana, Bormaheco and the
Cervanteses filed cross-claims against Lim alleging
that they were not privies to the contracts signed by
Lim and, by way of counterclaim, sought for
damages for being exposed to litigation and for
recovery of the sums of money they advanced to Lim
for the purchase of the aircrafts in question.
After trial on the merits, a decision was rendered
holding Lim liable to pay Pioneer but dismissed
Pioneer's complaint against all other defendants.
The appellate court modified the trial court's decision
in that the plaintiffs complaint against all the
defendants was dismissed. In all other respects the
trial court's decision was affirmed. Hence the petition
which was consolidated by the Court.
ISSUE:
Whether a de facto Corporation exists. (NO)
RULING:
Petitioner Jacob S. Lim poses the following issues:
l. What legal rules govern the relationship among co-
investors whose agreement was to do business
through the corporate vehicle but who failed to
incorporate the entity in which they had chosen to
invest? How are the losses to be treated in situations
where their contributions to the intended
'corporation' were invested not through the
corporate form? This Petition presents these
fundamental questions which we believe were
resolved erroneously by the Court of Appeals.
These questions are premised on the petitioner's
theory that as a result of the failure of respondents
Bormaheco, Spouses Cervantes, Constancio
Maglana and petitioner Lim to incorporate, a de facto
partnership among them was created, and that as a
consequence of such relationship all must share in
the losses and/or gains of the venture in proportion
to their contribution. The petitioner, therefore,
questions the appellate court's findings ordering him
to reimburse certain amounts given by the
respondents to the petitioner as their contributions to
the intended corporation, to wit:
However, defendant Lim should be held liable to pay
his co-defendants' cross-claims in the total amount
of P184,878.74 as correctly found by the trial court,
with interest from the filing of the cross-complaints
until the amount is fully paid. Defendant Lim should
pay one-half of the said amount to Bormaheco and
the Cervanteses and the other one-half to defendant
Maglana. It is established in the records that
defendant Lim had duly received the amount of
Pl51,000.00 from defendants Bormaheco and
Maglana representing the latter's participation in the
ownership of the subject airplanes and spare parts.
In addition, the cross-party plaintiffs incurred
additional expenses, hence, the total sum of P
184,878.74.
We first state the principles.
While it has been held that as between themselves
the rights of the stockholders in a defectively
incorporated association should be governed by the
supposed charter and the laws of the state relating
thereto and not by the rules governing partners, it is
ordinarily held that persons who attempt, but fail, to
form a corporation and who carry on business under
the corporate name occupy the position of partners
inter se. Thus, where persons associate themselves
together under articles to purchase property to carry
on a business, and their organization is so defective
as to come short of creating a corporation within the
statute, they become in legal effect partners inter se,
and their rights as members of the company to the
property acquired by the company will be
recognized. So, where certain persons associated
themselves as a corporation for the development of
land for irrigation purposes, and each conveyed land
to the corporation, and two of them contracted to pay
a third the difference in the proportionate value of the
land conveyed by him, and no stock was ever issued
in the corporation, it was treated as a trustee for the
associates in an action between them for an
accounting, and its capital stock was treated as
partnership assets, sold, and the proceeds
distributed among them in proportion to the value of
the property contributed by each. However, such a
relation does not necessarily exist, for ordinarily
persons cannot be made to assume the relation of
partners, as between themselves, when their
purpose is that no partnership shall exist, and it
should be implied only when necessary to do justice
between the parties; thus, one who takes no part
except to subscribe for stock in a proposed
corporation which is never legally formed does not
become a partner with other subscribers who
engage in business under the name of the pretended
corporation, so as to be liable as such in an action
for settlement of the alleged partnership and
contribution. A partnership relation between certain
stockholders and other stockholders, who were also
directors, will not be implied in the absence of an
agreement, so as to make the former liable to
contribute for payment of debts illegally contracted
by the latter.
In the instant case, it is to be noted that the petitioner
was declared non-suited for his failure to appear
during the pretrial despite notification. In his answer,
the petitioner denied having received any amount
from respondents Bormaheco, the Cervanteses and
Maglana. The trial court and the appellate court,
however, found through Exhibit 58, that the
petitioner received the amount of P151,000.00
representing the participation of Bormaheco and
Atty. Constancio B. Maglana in the ownership of the
subject airplanes and spare parts. The record shows
that defendant Maglana gave P75,000.00 to
petitioner Jacob Lim thru the Cervanteses.
It is therefore clear that the petitioner never had the
intention to form a corporation with the respondents
despite his representations to them. This gives
credence to the cross-claims of the respondents to
the effect that they were induced and lured by the
petitioner to make contributions to a proposed
corporation which was never formed because the
petitioner reneged on their agreement. Maglana
alleged in his cross-claim:
Sometime in April 1965, defendant Lim lured and
induced the answering defendants to purchase two
airplanes and spare parts from Japan which the
latter considered as their lawful contribution and
participation in the proposed corporation to be
known as SAL. Arrangements and negotiations were
undertaken by defendant Lim. Down payments were
advanced by defendants Bormaheco and the
Cervanteses and Constancio Maglana (Exh. E- 1).
Contrary to the agreement among the defendants,
defendant Lim in connivance with the plaintiff,
signed and executed the alleged chattel mortgage
and surety bond agreement in his personal capacity
as the alleged proprietor of the SAL. The answering
defendants learned for the first time of this trickery
and misrepresentation of the other, Jacob Lim, when
the herein plaintiff chattel mortgage (sic) allegedly
executed by defendant Lim, thereby forcing them to
file an adverse claim in the form of third-party claim.
Notwithstanding repeated oral demands made by
defendants Bormaheco and Cervanteses, to
defendant Lim, to surrender the possession of the
two planes and their accessories and or return the
amount advanced by the former amounting to an
aggregate sum of P 178,997.14 as evidenced by a
statement of accounts, the latter ignored, omitted
and refused to comply with them. (Record on
Appeal, pp. 341-342).
Applying therefore the principles of law earlier cited
to the facts of the case, necessarily, no de facto
partnership was created among the parties which
would entitle the petitioner to a reimbursement of the
supposed losses of the proposed corporation. The
record shows that the petitioner was acting on his
own and not in behalf of his other would-be
incorporators in transacting the sale of the airplanes
and spare parts.

... that sometime in early 1965, Jacob Lim proposed

to Francisco Cervantes and Maglana to expand his
airline business. Lim was to procure two DC-3's from
Japan and secure the necessary certificates of
public convenience and necessity as well as the
required permits for the operation thereof. Maglana
sometime in May 1965, gave Cervantes his share of
P75,000.00 for delivery to Lim which Cervantes did
and Lim acknowledged receipt thereof. Cervantes,
likewise, delivered his share of the undertaking. Lim
in an undertaking sometime on or about August
9,1965, promised to incorporate his airline in
accordance with their agreement and proceeded to
acquire the planes on his own account. Since then
up to the filing of this answer, Lim has refused, failed
and still refuses to set up the corporation or return
the money of Maglana. (Record on Appeal, pp. 337-
338).

while respondents Bormaheco and the Cervanteses

alleged in their answer, counterclaim, crossclaim
and third-party complaint: