REPUBLIC v. COCOFED, G.R. No.

147062-64, December 14, 2001 (Coconut levy funds

are prima facie public funds which should be subjected to COA audit)

Facts:

The PCGG issued and implemented numerous sequestrations, freeze orders and provisional
takeovers of allegedly ill-gotten companies, assets and properties, real or personal. Among
the properties sequestered by the Commission were shares of stock in the United Coconut
Planters Bank (UCPB) registered in the names of the alleged “one million coconut farmers,”
the so-called Coconut Industry Investment Fund companies (CIIF companies) and Private
Respondent Eduardo Cojuangco Jr. In connection with the sequestration of the said UCPB
shares, the PCGG, on July 31, 1987, instituted an action for reconveyance, reversion,
accounting, restitution and damages docketed as Case No. 0033 in the Sandiganbayan.

On November 15, 1990, upon Motion of Private Respondent COCOFED, the Sandiganbayan
issued a Resolution lifting the sequestration of the subject UCPB shares on the ground that
herein private respondents – in particular, COCOFED and the so-called CIIF companies –
had not been impleaded by the PCGG as parties-defendants in its July 31, 1987 Complaint for
reconveyance, reversion, accounting, restitution and damages.

This Sandiganbayan Resolution was challenged by the PCGG in a Petition for Certiorari
docketed as GR No. 96073 in this Court. Meanwhile, upon motion of Cojuangco, the anti-
graft court ordered the holding of elections for the Board of Directors of UCPB. However,
the PCGG applied for and was granted by this Court a Restraining Order enjoining the
holding of the election. Subsequently, the Court lifted the Restraining Order and ordered the
UCPB to proceed with the election of its board of directors. Furthermore, it allowed the
sequestered shares to be voted by their registered owners.

On February 23, 2001, “COCOFED, et al. and Ballares, et al.” filed the “Class Action
Omnibus Motion” referred to earlier in Sandiganbayan Civil Case Nos. 0033-A, 0033-B and
0033-F, asking the court a quo:

“1. To enjoin the PCGG from voting the UCPB shares of stock registered in the respective
names of the more than one million coconut farmers; and
“2. To enjoin the PCGG from voting the SMC shares registered in the names of the 14 CIIF
holding companies including those registered in the name of the PCGG.”

Issue:

Who may vote the sequestered UCPB shares while the main case for their reversion to the
State is pending in the Sandiganbayan?

Ruling:

This Court holds that the government should be allowed to continue voting those shares
inasmuch as they were purchased with coconut levy funds – funds that are prima facie public
in character or, at the very least, are “clearly affected with public interest.”
General Rule: Sequestered Shares Are Voted by the Registered Holder

At the outset, it is necessary to restate the general rule that the registered owner of the shares
of a corporation exercises the right and the privilege of voting. (Sec. 24, BP 68) This
principle applies even to shares that are sequestered by the government, over which the
PCGG as a mere conservator cannot, as a general rule, exercise acts of dominion. On the
other hand, it is authorized to vote these sequestered shares registered in the names of private
persons and acquired with allegedly ill-gotten wealth, if it is able to satisfy the two-tiered
test devised by the Court in Cojuangco v. Calpo (G.R. No. 115352, June 10, 1993) and
PCGG v. Cojuangco Jr., (133197, Jan. 27, 1999) as follows:

(1) Is there prima facie evidence showing that the said shares are ill-gotten and thus belong to
the State?

(2) Is there an imminent danger of dissipation, thus necessitating their continued

sequestration and voting by the PCGG, while the main issue is pending with the
Sandiganbayan?

Sequestered Shares Acquired with Public Funds Are an Exception

From the foregoing general principle, the Court in Baseco v. PCGG (“Baseco”) and
Cojuangco Jr. v. Roxas, G.R. No. 91925, April 16, 1991) (“Cojuangco-Roxas”) has provided
two clear “public character” exceptions under which the government is granted the authority
to vote the shares:

(1) Where government shares are taken over by private persons or entities who/which
registered them in their own names, and

(2) Where the capitalization or shares that were acquired with public funds somehow landed
in private hands.

The exceptions are based on the common-sense principle that legal fiction must yield to truth;
that public property registered in the names of non-owners is affected with trust relations; and
that the prima facie beneficial owner should be given the privilege of enjoying the rights
flowing from the prima facie fact of ownership.

The “public character” test was reiterated in many subsequent cases; most recently, in
Antiporda v. Sandiganbayan. (G.R. No. 116941, May 31, 2001) Expressly citing Cojuangco-
Roxas, this Court said that in determining the issue of whether the PCGG should be allowed
to vote sequestered shares, it was crucial to find out first whether these were purchased with
public funds, as follows:

“It is thus important to determine first if the sequestered corporate shares came from public
funds that landed in private hands.” In short, when sequestered shares registered in the names
of private individuals or entities are alleged to have been acquired with ill-gotten wealth, then
the two-tiered test is applied. However, when the sequestered shares in the name of private
individuals or entities are shown, prima facie, to have been (1) originally government shares,
or (2) purchased with public funds or those affected with public interest, then the two-tiered
test does not apply. Rather, the public character exceptions in Baseco v. PCGG and
Cojuangco Jr. v. Roxas prevail; that is, the government shall vote the shares.

UCPB Shares Were Acquired With Coconut Levy Funds

In the present case before the Court, it is not disputed that the money used to purchase the
sequestered UCPB shares came from the Coconut Consumer Stabilization Fund (CCSF),
otherwise known as the coconut levy funds. This fact was plainly admitted by private
respondent’s counsel, Atty. Teresita J. Herbosa, during the Oral Arguments held on April 17,
2001 in Baguio City. Indeed in Cocofed v. PCGG, this Court categorically declared that the
UCPB was acquired “with the use of the Coconut Consumers Stabilization Fund in virtue of
Presidential Decree No. 755, promulgated on July 29, 1975.”

Coconut Levy Funds Are Affected With Public Interest

Having conclusively shown that the sequestered UCPB shares were purchased with coconut
levies, we hold that these funds and shares are, at the very least, “affected with public
interest.” The Resolution issued by the Court on February 16, 1993 in Republic v.
Sandiganbayan (G.R. No. 96073, stated that coconut levy funds were “clearly affected with
public interest”; thus, herein private respondents – even if they are the registered shareholders
– cannot be accorded the right to vote them. We quote the said Resolution in part, as follows:

“The coconut levy funds being ‘clearly affected with public interest, it follows that the
corporations formed and organized from those funds, and all assets acquired therefrom
should also be regarded as ‘clearly affected with public interest.’”

“The utilization and proper management of the coconut levy funds, raised as they were by the
State’s police and taxing powers, are certainly the concern of the Government. It cannot be
denied that it was the welfare of the entire nation that provided the prime moving factor for
the imposition of the levy. It cannot be denied that the coconut industry is one of the major
industries supporting the national economy. It is, therefore, the State’s concern to make it a
strong and secure source not only of the livelihood of a significant segment of the population
but also of export earnings the sustained growth of which is one of the imperatives of
economic stability. The coconut levy funds are clearly affected with public interest. Until it is
demonstrated satisfactorily that they have legitimately become private funds, they must prima
facie and by reason of the circumstances in which they were raised and accumulated be
accounted subject to the measures prescribed in E.O. Nos. 1, 2, and 14 to prevent their
concealment, dissipation, etc., which measures include the sequestration and other orders of
the PCGG complained of.” (Italics supplied)

To repeat, the foregoing juridical situation has not changed. It is still the truth today: “the
coconut levy funds are clearly affected with public interest.”

To stress, the two-tiered test is applied only when the sequestered asset in the hands of a
private person is alleged to have been acquired with ill-gotten wealth. Hence, in PCGG v.
Cojuangco, we allowed Eduardo Cojuangco Jr. to vote the sequestered shares of the San
Miguel Corporation (SMC) registered in his name but alleged to have been acquired with ill-
gotten wealth. We did so on his representation that he had acquired them with borrowed
funds and upon failure of the PCGG to satisfy the “two-tiered” test. This test was, however,
not applied to sequestered SMC shares that were purchased with coco levy funds.

In the present case, the sequestered UCPB shares are confirmed to have been acquired with
coco levies, not with alleged ill-gotten wealth. Hence, by parity of reasoning, the right to vote
them is not subject to the “two-tiered test” but to the public character of their acquisition,
which per Antiporda v. Sandiganbayan cited earlier, must first be determined.

Coconut Levy Funds Are Prima Facie Public Funds

To avoid misunderstanding and confusion, this Court will even be more categorical and
positive than its earlier pronouncements: the coconut levy funds are not only affected with
public interest; they are, in fact, prima facie public funds. Public funds are those moneys
belonging to the State or to any political subdivision of the State; more specifically, taxes,
customs duties and moneys raised by operation of law for the support of the government or
for the discharge of its obligations. (Beckner v. Commonwealth, 5 SE2d 525, Nov. 20, 1939)
Undeniably, coconut levy funds satisfy this general definition of public funds, because of the
following reasons:

1. Coconut levy funds are raised with the use of the police and taxing powers of the State.
2. They are levies imposed by the State for the benefit of the coconut industry and its farmers.
3. Respondents have judicially admitted that the sequestered shares were purchased with
public funds.
4. The Commission on Audit (COA) reviews the use of coconut levy funds.
5. The Bureau of Internal Revenue (BIR), with the acquiescence of private respondents, has
treated them as public funds.
6. The very laws governing coconut levies recognize their public character.
We shall now discuss each of the foregoing reasons (among others), any one of which is
enough to show their public character.

xxx

3. Respondents Judicially Admit That the Levies Are Government Funds.

Equally important as the fact that the coconut levy funds were raised through the taxing and
police powers of the State is respondents’ effective judicial admission that these levies are
government funds. As shown by the attachments to their pleadings, respondents concede that
the Coconut Consumers Stabilization Fund (CCSF) and the Coconut Investment
Development Fund “constitute government funds x x x for the benefit of coconut farmers.”

4. The COA Audit Shows the Public Nature of the Funds.

Under COA Office Order No. 86-9470 dated April 15, 1986, the COA reviewed the
expenditure and use of the coconut levies allocated for the acquisition of the UCPB. The
audit was aimed at ascertaining whether these were utilized for the purpose for which they
had been intended. Because these funds have been subjected to COA audit, there can be no
other conclusion than that they are prima facie public in character.

Having shown that the coconut levy funds are not only affected with public interest, but are
in fact prima facie public funds, this Court believes that the government should be allowed to
vote the questioned shares, because they belong to it as the prima facie beneficial and true
owner.

In sum, we hold that the Sandiganbayan committed grave abuse of discretion in grossly
contradicting and effectively reversing existing jurisprudence, and in depriving the
government of its right to vote the sequestered UCPB shares which are prima facie public in
character.

The Petition is hereby GRANTED and the assailed Order SET ASIDE. The PCGG shall
continue voting the sequestered shares until Sandiganbayan Civil Case Nos. 0033-A, 0033-B
and 0033-F are finally and completely resolved.

Francis Chua vs. CA and Hao G.R. No. 150793 November 19, 2004

Facts: PR Lydia Hao, treasurer of Siena Realty Corporation, filed a complaint-affidavit

against petitioner for committing acts of falsification by falsifying the Minutes of the Annual
Stockholders meeting of the Board of Directors by causing it to appear in said Minutes that
LYDIA HAO CHUA was present and has participated in said proceedings, when in truth and
in fact, as the said accused fully well knew that said Lydia Hao was never present during the
meeting.

Petitioner alleges that respondent Lydia Hao has no the authority to bring a suit in behalf of
the Corporation since there was no Board Resolution authorizing her to file the suit. For her
part, respondent Hao claimed that the suit was brought under the concept of a derivative suit.

Issue: (1) Is the criminal complaint in the nature of a derivative suit? (2) Is Siena Realty
Corporation a proper petitioner in SCA No. 99-94846?

Held: Under Section 36 of the Corporation Code, read in relation to Section 23, where a
corporation is an injured party, its power to sue is lodged with its board of directors or
trustees. An individual stockholder is permitted to institute a derivative suit on behalf of the
corporation wherein he holds stocks in order to protect or vindicate corporate rights,
whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold the
control of the corporation. In such actions, the suing stockholder is regarded as a nominal
party, with the corporation as the real party in interest.

A derivative action is a suit by a shareholder to enforce a corporate cause of action. The

corporation is a necessary party to the suit. And the relief which is granted is a judgment
against a third person in favor of the corporation. Similarly, if a corporation has a defense to
an action against it and is not asserting it, a stockholder may intervene and defend on behalf
of the corporation.

In the Criminal Case, the complaint was instituted by respondent against petitioner for
falsifying corporate documents whose subject concerns corporate projects of Siena Realty
Corporation. Clearly, SRC is an offended party. Hence, SRC has a cause of action. And the
civil case for the corporate cause of action is deemed instituted in the criminal action.

However, the board of directors of the corporation in this case did not institute the action
against petitioner. Private respondent was the one who instituted the action. Private
respondent asserts that she filed a derivative suit in behalf of the corporation. This assertion is
inaccurate. Not every suit filed in behalf of the corporation is a derivative suit. For a
derivative suit to prosper, it is required that the minority stockholder suing for and on behalf
of the corporation must allege in his complaint that he is suing on a derivative cause of action
on behalf of the corporation and all other stockholders similarly situated who may wish to
join him in the suit. It is a condition sine qua non that the corporation be impleaded as a party
because not only is the corporation an indispensable party, but it is also the present rule that it
must be served with process. The judgment must be made binding upon the corporation in
order that the corporation may get the benefit of the suit and may not bring subsequent suit
against the same defendants for the same cause of action. In other words, the corporation
must be joined as party because it is its cause of action that is being litigated and because
judgment must be a res adjudicata against it.

In the criminal complaint filed by herein respondent, nowhere is it stated that she is filing the
same in behalf and for the benefit of the corporation. Thus, the criminal complaint including
the civil aspect thereof could not be deemed in the nature of a derivative suit.

EXPERTRAVEL & TOURS, INC., petitioner, vs.

COURT OF APPEALS and KOREAN AIRLINES, respondent.

G.R. No. 152392; May 26, 2005

Facts:

Korean Airlines (KAL) is a corporation established and registered in the Republic of South
Korea and licensed to do business in the Philippines. Its general manager in the Philippines is
Suk Kyoo Kim, while its appointed counsel was Atty. Mario Aguinaldo and his law firm.

KAL, through Atty. Aguinaldo, filed a Complaint against ETI with the Regional Trial Court
(RTC) of Manila, for the collection of a sum of money. The verification and certification
against forum shopping was signed by Atty. Aguinaldo, who indicated therein that he was the
resident agent and legal counsel of KAL and had caused the preparation of the complaint.
ETI filed a motion to dismiss the complaint on the ground that Atty. Aguinaldo was not
authorized to execute the verification and certificate of non-forum shopping as required by
Section 5, Rule 7 of the Rules of Court. KAL later submitted an Affidavit executed by its
general manager Suk Kyoo Kim, alleging that the board of directors conducted a special
teleconference, which he and Atty. Aguinaldo attended. It was also averred that in that same
teleconference, the board of directors approved a resolution authorizing Atty. Aguinaldo to
execute the certificate of non-forum shopping and to file the complaint. Suk Kyoo Kim also
alleged, however, that the corporation had no written copy of the aforesaid resolution. The
trial court issued an Order denying the motion to dismiss, giving credence to the claims of
Atty. Aguinaldo and Suk Kyoo Kim that the KAL Board of Directors indeed conducted a
teleconference during which it approved a resolution as quoted in the submitted affidavit. ETI
filed a motion for the reconsideration of the Order, contending that it was inappropriate for
the court to take judicial notice of the said teleconference without any prior hearing.
However, the trial court denied the motion in its Order dated August 8, 2000. ETI then filed a
petition for certiorari and mandamus, assailing the orders of the RTC. CA afterwards
rendered judgment dismissing the petition, ruling that the verification and certificate of non-
forum shopping executed by Atty. Aguinaldo was sufficient compliance with the Rules of
Court. According to the appellate court, Atty. Aguinaldo had been duly authorized by the
approved board resolution, and was the resident agent of KAL. As such, the RTC could not
be faulted for taking judicial notice of the said teleconference of the KAL Board of Directors.
ETI filed a motion for reconsideration of the said decision, which the CA denied.

Issue:

Whether or not the courts can take judicial notice of said teleconference?

Held:

Yes. In this age of modern technology, the courts may take judicial notice that business
transactions may be made by individuals through teleconferencing. Teleconferencing is
interactive group communication (three or more people in two or more locations) through an
electronic medium. It represents a unique alternative to face-to-face (FTF) meetings. In
general terms, teleconferencing can bring people together under one roof even though they
are separated by hundreds of miles. This type of group communication may be used in a
number of ways, and have three basic types: (1) video conferencing – television-like
communication augmented with sound; (2) computer conferencing – printed communication
through keyboard terminals, and (3) audio-conferencing-verbal communication via the
telephone with optional capacity for telewriting or telecopying.

Teleconferencing and videoconferencing of members of board of directors of private

corporations is a reality, in light of Republic Act No. 8792. The Securities and Exchange
Commission issued SEC Memorandum Circular No. 15, on November 30, 2001, providing
the guidelines to be complied with related to such conferences. Thus, the Court agrees with
the RTC that persons in the Philippines may have a teleconference with a group of persons in
South Korea relating to business transactions or corporate governance.
RAMON C. LEE and ANTONIO DM. LACDAO vs.

THE HON. COURT OF APPEALS, SACOBA MANUFACTURING

CORP., PABLO GONZALES, JR. and THOMAS GONZALES

LEE vs. CA

(Case Digest)

G.R. No. 93695, February 4, 1992

FACTS: A complaint for a sum of money was filed by the International Corporate Bank, Inc.
against the private respondents who, in turn, filed a third party complaint against ALFA and
the petitioners. The trial court issued an order requiring the issuance of an alias summons
upon ALFA through the DBP as a consequence of the petitioner's letter informing the court
that the summons for ALFA was erroneously served upon them considering that the
management of ALFA had been transferred to the DBP. The DBP claimed that it was not
authorized to receive summons on behalf of ALFA since the DBP had not taken over the
company which has a separate and distinct corporate personality and existence. Subsequently,
the trial court issued an order advising the private respondents to take the appropriate steps to
serve the summons to ALFA. The petitioners filed a motion for reconsideration submitting
that Rule 14, section 13 of the Revised Rules of Court is not applicable since they were no
longer officers of ALFA and that the private respondents should have availed of another
mode of service under Rule 14, Section 16 of the said Rules, i.e., through publication to
effect proper service upon ALFA. The private respondents argued that the voting trust
agreement dated March 11, 1981 did not divest the petitioners of their positions as president
and executive vice-president of ALFA so that service of summons upon ALFA through the
petitioners as corporate officers was proper. The trial court upheld the validity of the service
of summons on ALFA through the petitioners. A second motion for reconsideration was filed
by the petitioners reiterating their stand that by virtue of the voting trust agreement they
ceased to be officers and directors of ALFA, hence, they could no longer receive summons or
any court processes for or on behalf of ALFA and in support thereof, they attached a copy of
the voting trust agreement between all the stockholders of ALFA and the DBP whereby the
management and control of ALFA became vested upon the DBP. The trial court then
reversed itself and declared that service upon the petitioners cannot be considered as proper
service of summons on ALFA. The case was elevated to the CA which reversed the above-
mentioned Orders holding that there was proper service of summons on ALFA through the
petitioners.
ISSUES:

(1) Whether or not the execution of the voting trust agreement by a stockholder whereby all
his shares to the corporation have been transferred to the trustee deprives the stockholder of
his position as director of the corporation;

(2) Whether or not the service of summons on ALFA effected through the petitioners, as
president and vice-president, of the subject corporation after the execution of the voting trust
agreement valid and effective;

RULING:

1. Yes. By its very nature, a voting trust agreement results in the separation of the voting
rights of a stockholder from his other rights. The execution of a voting trust agreement,
therefore, may create a dichotomy between the equitable or beneficial ownership of the
corporate shares of stockholders, on the one hand, and the legal title thereto on the other
hand. In the instant case, the petitioners maintain that with the execution of the voting trust
agreement between them and the other stockholders of ALFA, as one party, and the DBP, as
the other party, the former assigned and transferred all their shares in ALFA to DBP, as
trustee and thus, they can no longer be considered directors of ALFA. Under the old
Corporation Code, the eligibility of a director, strictly speaking, cannot be adversely affected
by the simple act of such director being a party to a voting trust agreement inasmuch as he
remains owner (although beneficial or equitable only) of the shares subject of the voting trust
agreement pursuant to which a transfer of the stockholder's shares in favor of the trustee is
required. No disqualification arises by virtue of the phrase "in his own right" provided under
the old Corporation Code. With the omission of the phrase "in his own right" the election of
trustees and other persons who in fact are not beneficial owners of the shares registered in
their names on the books of the corporation becomes formally legalized. Hence, this is a clear
indication that in order to be eligible as a director, what is material is the legal title to, not
beneficial ownership of, the stock as appearing on the books of the corporation. The facts of
this case show that the petitioners, by virtue of the voting trust agreement executed in 1981
disposed of all their shares through assignment and delivery in favor of the DBP, as trustee.
Consequently, the petitioners ceased to own at least one share standing in their names on the
books of ALFA as required under Section 23 of the new Corporation Code. They also ceased
to have anything to do with the management of the enterprise. The petitioners ceased to be
directors. Hence, the transfer of the petitioners' shares to the DBP created vacancies in their
respective positions as directors of ALFA. Considering that the voting trust agreement
between ALFA and the DBP transferred legal ownership of the stock covered by the
agreement to the DBP as trustee, the latter became the stockholder of record with respect to
the said shares of stocks. Both parties, ALFA and the DBP, were aware at the time of the
execution of the agreement that by virtue of the transfer of shares of ALFA to the DBP, all
the directors of ALFA were stripped of their positions as such. There can be no reliance on
the inference that the five-year period of the voting trust agreement in question had lapsed in
1986 so that the legal title to the stocks covered by the said voting trust agreement ipso
facto reverted to the petitioners as beneficial owners pursuant to the 6th paragraph of section
59 of the new Corporation Code which reads:

"Unless expressly renewed, all rights granted in a voting trust agreement shall automatically
expire at the end of the agreed period, and the voting trust certificate as well as the
certificates of stock in the name of the trustee or trustees shall thereby be deemed cancelled
and new certificates of stock shall be reissued in the name of the transferors."

On the contrary, it is manifestly clear from the terms of the voting trust agreement between
ALFA and the DBP that the duration of the agreement is contingent upon the fulfillment of
certain obligations of ALFA with the DBP. There is evidence on record that at the time of the
service of summons on ALFA through the petitioners on August 21, 1987, the voting trust
agreement in question was not yet terminated so that the legal title to the stocks of ALFA,
then, still belonged to the DBP.

2. No. Under section 13, Rule 14 of the Revised Rules of Court, it is provided that:

"Sec. 13. Service upon private domestic corporation or partnership. — If the defendant is a
corporation organized under the laws of the Philippines or a partnership duly registered,
service may be made on the president, manager, secretary, cashier, agent or any of its
directors."

It is a basic principle in Corporation Law that a corporation has a personality separate and
distinct from the officers or members who compose it. Thus, the above rule on service of
processes of a corporation enumerates the representatives of a corporation who can validly
receive court processes on its behalf. Not every stockholder or officer can bind the
corporation considering the existence of a corporate entity separate from those who compose
it. The petitioners in this case do not fall under any of the enumerated officers. The service of
summons upon ALFA, through the petitioners, therefore, is not valid. To rule otherwise, as
correctly argued by the petitioners, will contravene the general principle that a corporation
can only be bound by such acts which are within the scope of the officer's or agent's
authority. WHEREFORE, the petition is hereby GRANTED.

Ong Yong v. Tiu

G.R. No. 1444476, 8 April 2003

FACTS:

In 1994, the construction of the Masagana Citimall in Pasay City was threatened with
stoppage and incompletion when its owner, the First Landlink Asia Development Corporation
(FLADC. It was heavily indebted to the Philippine National Bank (PNB).

To stave off foreclosure of the mortgage on the two lots where the mall was being built, the
Tius invited the Ongs to invest in FLADC. 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 each in addition to their already existing
subscription of 450,200 shares. 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 Tius accused the Ongs of (1) refusing 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. The controversy
finally came to a head when the case was commenced by the Tius at the Securities and
Exchange Commission (SEC), seeking confirmation of their rescission of the Pre-
Subscription Agreement.

After hearing issued a decision confirming the rescission sought by the Tius. 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. Both parties appealed to the SEC en banc. The SEC
en banc confirmed the rescission of the Pre-Subscription Agreement but reverted to
classifying the P70 million paid by the Ongs as premium on capital and not as a loan or
advance to FLADC, hence, not entitled to earn interest.

ISSUE:

Whether the rescission of Pre-Subscription Agreement would result in unauthorized

liquidation.

RULING:

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. 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.