G.R. No.

221813

MARICALUM MINING CORPORATION, Petitioner

vs.
ELY G. FLORENTINO, GLENN BUENVIAJE, RUDY J. GOMEZ, represented by his heir THELMA
GOMEZ, ALEJANDRO H. SITCHON, NENET ARITA, FERNANDO SIGUAN, DENNIS ABELIDA, NOEL
S. ACCOLADOR,WILFREDO TAGANILE, SR., MARTIR S. AGSOY, SR., MELCHOR APUCA Y,
DOMINGO LA VIDA, JESUS MOSQUEDA, RUELITO A. VILLARMIA, SOFRONIO M. A YON, EFREN T.
GENISE, ALQUIN A. FRANCO, PABLO L. ALEMAN, PEPITO G. HEPRIANA, ELIAS S. TRESPECES,
EDGAR SOBRINO, Respondents

x-----------------------x

G.R. No. 222723

ELY FLORENTINO, GLENN BUENVIAJE, RUDY J. GOMEZ, represented by his heir THELMA
GOMEZ, FERNANDO SIGUAN, DENNIS ABELIDA, NOEL S. ACCOLADOR,WILFREDO TAGANILE,
SR., MARTIR S. AGSOY, SR., MELCHOR APUCA Y, DOMINGO LA VIDA, JESUS MOSQUEDA,
RUELITO A. VILLARMIA, SOFRONIO M. A YON, EFREN T. GENISE, ALQUIN A. FRANCO, PABLO L.
ALEMAN, PEPITO G. HEPRIANA, ELIAS S. TRESPECES, EDGAR SOBRINO, ALEJANDRO H.
SITCHON, NENET ARITA, WELILMO T. NERI, ERLINDA FERNANDEZ, and EDGARDO
PENAFLORIDA, Petitioners
vs.
NATIONAL LABOR RELATIONS COMMISSION – 7th DIVISION, CEBU CITY, "G" HOLDINGS, INC.,
and TEODORO G. BERNARDINO, ROLANDO DEGOJAS, MARICALUM MINING
CORPORATION. Respondents

DECISION

GESMUNDO, J.:

A subsidiary company's separate corporate personality may be disregarded only when the evidence
shows that such separate personality was being used by its parent or holding corporation to perpetrate a
fraud or evade an existing obligation. Concomitantly, employees of a corporation have no cause of action
for labor-related claims against another unaffiliated corporation, which does not exercise control over
them.

The subjects of the instant consolidated cases are two (2) petitions for appeal by certiorari filed by the
following petitioners:

1) Maricalum Mining Corporation (Maricalum Mining) m G.R. No. 221813; and

2) Ely Florentino, Glenn Buenviaje, Rudy J. Gomez,   Fernando Siguan, Dennis Abelida, Noel S.
1

Acollador, Wilfredo C. Taganile, Sr., Martir S. Agsoy, Sr., Melchor B. Apucay, Domingo Lavida, Jesus
Mosqueda, Ruelito A. Villarmia, Sofronio M. Ayon, Efren T. Genise, Alquin A. Franco, Pabio L. Aleman,
Pepito G. Hepriana, Elias S. Trespeces, Edgar M. Sobrino, Alejandro H. Sitchon, Nenet Arita, Dr. Welilmo
T. Neri, Erlinda L. Fernandez, and Edgardo S. Pefiaflorida (complainants) in G.R. No. 222723.

Both of these petitions are assailing the propriety of the October 29, 2014 Decision  of the Court of
2

Appeals (CA) in CA-G.R. SP No. 06835. The CA upheld the November 29, 2011 Decision  and January
3

31, 2012 Resolution  of the National Labor Relations Commission (NLRC) in NLRC Case No. VAC-05-
4

000412-11. In the present petitions, complainants seek to reinstate the April 20, 2011 Decision   of the
5

Labor Arbiter (LA) in consolidated cases NLRC RAB VI CASE No. 09-10755-10, NLRC RAB VI CASE No.
12-10915-10, NLRC RAB VI CASE No. 12-10916-10 and NLRC RAB VI CASE No. 12-10917-10, which
granted their joint complaints for monetary claims against G Holdings, Inc. (G Holdings); while Maricalum
Mining seeks to have the case remanded to the LA for proper computation of its total monetary liability to
the complainants.

The Antecedents

The dispute traces its roots back to when the Philippine National Bank (PNB, a former government-
owned-and-controlled corporation) and the Development Bank of the Philippines (DBP) transferred its
ownership of Maricalum Mining to the National Government for disposition or privatization because it had
become a non-performing asset. 6

On October 2, 1992, the National Government thru the Asset Privatization Trust (APT) executed a
Purchase and Sale Agreement (PSA) with G Holdings, a domestic corporation primarily engaged in the
business of owning and holding shares of stock of different companies. G Holding bought 90% of
Maricalum Mining's shares and financial claims in the form of company notes. In exchange, the PSA
obliged G Holdings to pay APT the amount of ₱673,161,280.00, with a down payment of ₱98,704,000.00
and with the balance divided into four tranches payable in installment over a period of ten
years.  Concomitantly, G Holdings also assumed Maricalum Mining's liabilities in the form of company
7

notes. The said financial liabilities were converted into three (3) Promissory Notes (PNs) totaling
₱550,000,000.00 (₱114,715,360.00, ₱186,550,560.00 and ₱248,734,080.00), which were secured by
mortgages over some of Maricalum Mining's properties.  These PNs obliged Maricalum Mining to pay G
8

Holdings the stipulated amount of ₱550,000,000.00.

Upon the signing of the PSA and paying the stipulated down payment, G Holdings immediately took
physical possession of Maricalum Mining's Sipalay Mining Complex, as well as its facilities, and took full
control of the latter's management and operations. 9

On January 26, 1999, the Sipalay General Hospital, Inc. (Sipalay Hospital) was duly incorporated to
provide medical services and facilities to the general public. 
10

Afterwards, some of Maricalum Mining's employees retired and formed several manpower
cooperatives,   as follow:
11

COOPERATIVE DATE OF REGISTRATION

San Jose Multi-Purpose December 8, 1998

Cooperative (SJMPC)

Centennial Multi-Purpose April 5, 1999

Cooperative (CeMPC)

Sipalay Integrated Multi-Purpose April 5, 1999

Cooperative (SIMPC)

Allied Services Multi-Purpose July 23, 1999

Cooperative (ASMPC)

Cansibit Multi-Purpose September 16, 1999

Cooperative (CaMPC)

In 2000, each of the said cooperatives executed identical sets of Memorandum of Agreement   with
12

Maricalum Mining wherein they undertook, among others, to provide the latter with a steady supply of
workers, machinery and equipment for a monthly fee.

On June 1, 2001, Maricalum Mining's Vice President and Resident Manager Jesus H. Bermejo wrote a
Memorandum   to the cooperatives informing them that Maricalum Mining has decided to stop its mining
13

and milling operations effective July 1, 2001 in order to avert continuing losses brought about by the low
metal prices and high cost of production.

In July 2001, the properties of Maricalum Mining, which had been mortgaged to secure the PNs, were
extrajudicially foreclosed and eventually sold to G Holdings as the highest bidder on December 3, 2001.  14

On September 23, 2010, some of Maricalum Mining's workers, including complainants, and some of
Sipalay General Hospital's employees jointly filed a Complaint  with the LA against G Holdings, its
15

president, and officer-in-charge, and the cooperatives and its officers for illegal dismissal, underpayment
and nonpayment of salaries, underpayment of overtime pay, underpayment of premium pay for holiday,
nonpayment of separation pay, underpayment of holiday pay, nonpayment of service incentive leave pay,
nonpayment of vacation and sick leave, nonpayment of 13th month pay, moral and exemplary damages,
and attorneys fees.

On December 2, 2010, complainants and CeMPC Chairman Alejandro H. Sitchon surprisingly filed his
complaint for illegal dismissal and corresponding monetary claims with the LA against G Holdings, its
officer-in-charge and CeMPC.  16

Thereafter, the complaints were consolidated by the LA.

During the hearings, complainants presented the affidavits of Alejandro H. Sitchon and Dennis Abelida
which attested that, prior to the formation of the manpower cooperatives, their services were terminated
by Maricalum Mining as part of its retrenchment program.   They claimed that, in 1999, they were called
17

by the top executives of Maricalum Mining and G Holdings and informed that they will have to form a
cooperative for the purpose of providing manpower services in view of the retrenchment program. Thus,
they were "rehired" only after their respective manpower cooperative services were formed. Moreover,
they also submitted the following documents: (a) Cash Vouchers   representing payments to the
18

manpower cooperatives; (b) a Payment Schedule  representing G Holdings' payment of social security
19

contributions in favor of some Sipalay Hospital employees (c) Termination Letters   written by20

representatives of G Holdings, which were addressed to complainants including those employed by

Sipalay Hospital; and (d) Caretaker Schedules  prepared by G Holdings to prove the existence of
21

employment relations.

After the hearings were concluded, complainants presented their Position Paper  claiming that: they have
22

not received any increase in wages since they were allegedly rehired; except for Sipalay Hospital's
employees, they worked as an augmentation force to the security guards charged with securing
Maricalum Mining's assets which were acquired by G Holdings; Maricalum Mining's assets have been
exposed to pilferage by some of its rank-and-file employees whose claims for collective bargaining
benefits were undergoing litigation; the Sipalay Hospital is purportedly "among the assets" of Maricalum
Mining acquired by G Holdings; the payrolls for their wages were supposedly prepared by G Holdings'
accounting department; since the second half of April 2007, they have not been paid their salary; and
some of their services were dismissed without any due process.

Based on these factual claims, complainants posited that: the manpower cooperatives were mere alter
egos of G Holdings organized to subvert the "tenurial rights" of the complainants; G Holdings implemented
a retrenchment scheme to dismiss the caretakers it hired before the foreclosure of Maricalum Mining's
assets; and G Holdings was their employer because it allegedly had the power to hire, pay wages, control
working methods and dismiss them.

Correspondingly, G Holdings filed its Position Paper  maintaining that: it was Maricalum Mining who
23

entered into an agreement with the manpower corporations for the employment of complainants' services
for auxiliary or seasonal mining activities; the manpower cooperatives were the ones who paid the wages,
deducted social security contributions, withheld taxes, provided medical benefits and had control over the
working means and methods of complainants; despite Maricalum Mining's decision to stop its mining and
milling operations, complainants still continued to render their services for the orderly winding down of the
mines' operations; Maricalum Mining should have been impleaded because it is supposed to be the
indispensable party in the present suit; (e) Marical um Mining, as well as the manpower cooperatives,
each have distinct legal personalities and that their individual corporate liabilities cannot be imposed upon
each other; and there was no employer-employee relationship between G Holdings and complainants.

Likewise, the manpower cooperatives jointly filed their Position Paper  arguing that: complainants had
24

exhibited a favorable response when they were properly briefed of the nature and benefits of working
under a cooperative setup; complainants received their fair share of benefits; complainants were entitled
to cast their respective votes in deciding the affairs of their respective cooperatives; complainants, as
member of the cooperatives, are also co-owners of the said cooperative and they cannot bargain for
higher labor benefits with other co-owners; and the LA has no jurisdiction over the case because there is
no employer-employee relationship between a cooperative and its members.

The LA Ruling

In its decision dated April 28, 2011, the LA ruled in favor of complainants.  It held that G Holdings is guilty
1awp++i1

of labor-only contracting with the manpower cooperatives thereby making all of them solidarily and directly
liable to complainants. The LA reasoned that: G Holdings connived with Marcalum Mining in orchestrating
the formation of manpower cooperatives to circumvent complainants' labor standards rights; it is highly
unlikely that complainants (except Sipalay Hospital's employees) would spontaneously form manpower
cooperatives on their own and in unison without the guidance of G Holdings and Maricalum Mining; and
complainants effectively became the employees of G Holdings because their work had changed from
assisting in the mining operations to safeguarding the properties in the Sipalay Mining Complex, which
had already been acquired by G Holding. On the other hand, the LA denied the claims of complainants
Nenet Arita and Domingo Lavida for lack of factual basis. The fallo of the LA decision reads:

WHEREFORE, premises considered, judgment is hereby rendered DIRECTING respondent "G"

HOLDINGS, INC. to pay complainants as follows:

    Unpaid Salaries/ Wages 13th Month Pay

(1) Salvador Arceo ₱81,418.08 ₱6,784.84

(2) Sofronio Ayon 79,158.50 6,596.54

(3) Glenn Buenviaje 105,558.40 8,796.53

(4) Ely Florentino 102,325.28 8,527.11

(5) Rogelio Fulo 99,352.23 8,279.35

(6) Efren Genise 161,149.18 13,429.10

(7) Rudy Gomez 72,133.41 6,011.12

(8) Jessie Magallanes 239,251.94 19,937.66

(9) Freddie Masicampo 143,415.85 11,951.32

(10) Edgardo Penaflorida 146,483.60 12,206.97

(11) Noel Acollador 89,163.46 7,430.29

(12) Gorgonio Baladhay 220,956.10 18,413.01

(13) Jesus Mosqueda 48,303.22 4,025.27

(14) Alquin Franco 180,281.25 15,023.44

(15) Fabio Aleman 30,000.00 2,500.00

(16) Elias Trespeces 180,000.00 15,000.00

(17) Pepito Hedriana 18,000.00 1,500.00

(18) Dennis Abelida 149,941.00 12,945.08

(19) Melchor Apucay 371,587.01 30,965.58

(20) Martin Agsoy 128,945.08 10,745.42

(21) Ruelito Villarmia 224,486.95 18,707.25

(22) Fernando Siguan 417,039.32 34,753.28

 (23) Alejandro Sitchon 380,423.16 31,701.93

(24) Welilmo Neri 456,502.36 38,041.86

(25) Erlinda Fernandez 125,553.88 10,462.82

(26) Edgardo Sobrino 112,521.40 9,376.78

(27) Wildredo Taganile 52,386.82 4,365.57

(28) Bartholomew Jamboy 68,000.00 5,666.67

    ₱4,484,337.48 ₱373,694.79

and the amount of ₱485,803.23 as attorney's fees, or the total amount of FIVE MILLION THREE
HUNDRED FORTY-THREE THOUSAND EIGHT HUNDRED THIRTY-FIVE and 50/100 PESOS
(₱5,343,835.50).

The other claims are DISMISSED for lack of merit.

Further, the complaints against respondents SIP ALA Y INTEGRATED MULTI-PURPOSE

COOPERATIVE, ALLIED SERVICES MULTI-COOPERATIVE, SAN JOSE MULTI-PURPOSE
COOPERATIVE, CANSIBIT MULTI-PURPOSE COOPERATIVE, and CENTENNIAL MULTI-PURPOSE
COOPERATIVE, being mere agents of respondent "G" HOLDINGS, INC., are hereby DISMISSED.

SO ORDERED. 25

The parties filed their respective appeals to the NLRC.

On July 18, 2011, Marical um Mining filed its Appeal-in-Intervention   seeking to: (a) reverse and set aside
26

the Labor Arbiter's Decision; (b) declare Mari cal um Mining as the true and proper party-in-interest; (c)
remand the case back to the Labor Arbiter for proper computation of the money claims of the
complainants; and (d) give Maricalum Mining the opportunity to settle with the complainants.

The NLRC Ruling

In its decision dated November 29, 2011, the NLRC modified the LA ruling. It held that Dr. Welilmo T.
Neri, Erlinda L. Fernandez and Edgar M. Sobrino are not entitled to the monetary awards because they
were not able to establish the fact of their employment relationship with G Holdings or Maricalum Mining
because Sipalay Hospital has a separate and distinct corporate personality. As to the remaining
complainants, it found that no evidence was adduced to prove that the salaries/wages and the 13th month
pay had been paid.

However, the NLRC imposed the liability of paying the monetary awards imposed by the LA against
Maricalum Mining, instead of G Holdings, based on the following observations that: it was Maricalum
Mining-not G Holdings-who entered into service contracts by way of a Memorandum of Agreement with
each of the manpower cooperatives; complainants continued rendering their services at the insistence of
Maricalum Mining through their cooperatives; Maricalum Mining never relinquished possession over the
Sipalay Mining Complex; Maricalum Mining continuously availed of the services of complainants through
their respective manpower cooperatives; in G Holdings, Inc. v. National Mines and Allied Workers Union
Local 103 (NAMAWU), et al.   (NAMA WU Case), the Court already held that G Holdings and Maricalum
27

Mining have separate and distinct corporate personalities. The dispositive portion of the NLRC ruling
states:

WHEREFORE, premises considered, the Decision rendered by the Labor Arbiter on 20 April 2011 is
hereby MODIFIED, to wit:

1) the monetary award adjudged to complainants Jessie Magallanes, Rogelio E. Fulo, Salvador J.
Arceo, Freddie Masicampo, Welilmo Neri, Erlinda Fernandez and Edgar Sobrino are CANCELLED;
 2) the award of ten percent (10%) attorney's fees is ADJUSTED commensurate to the award of
unpaid salaries/wages and 13th month pay of the remaining complainants;

3) the directive for respondent "G" Holdings, Inc. to pay complainants the monetary awards
adjudged by the Labor Arbiter is CANCELLED;

4) it is intervenor that is, accordingly, directed to pay the remaining complainants their respective
monetary awards. 1âwphi1

In all other respects the Decision STANDS.

SO ORDERED. 28

Complainants and Maricalum Mining filed their respective motions for reconsideration before the NLRC.
On January 31, 2012, it issued a resolution modifying its previous decision. The dispositive portion of the
NLRC resolution state:

WHEREFORE, premises considered, intervenor's Motion for Reconsideration is only PARTIALLY

GRANTED. The Decision promulgated by the Commission on 29 November 2011 modifying the Labor
Arbiter's decision as stated therein, is further MODIFIED to the effect that the monetary awards adjudged
in favor of complainants Wilfredo Taganile and Bartholomew T. Jamboy are CANCELLED.

SO ORDERED. 29

Undaunted, the parties filed their respective petitions for certiorari before the CA.

The CA Ruling

In its decision dated October 29, 2014, the CA denied the petitions and affirmed the decision of the NLRC.
It ratiocinated that factual issues are not fit subjects for review via the extraordinary remedy
of certiorari. The CA emphasized that the NLRC's factual findings are conclusive and binding on the
appellate courts when they are supported by substantial evidence. Thus, it maintained that it cannot
review and re-evaluate the evidence all over again because there was no showing that the NLRC's
findings of facts were reached arbitrarily. The decretal portion of the CA decision states:

WHEREFORE, premises considered, the instant petition for certiorari is DENIED, and the assailed
Decision dated 29 December 2011 and two Resolutions both dated 31 January 2012 of the National Labor
Relations Commission are hereby AFFIRMED in all respects.

Costs against petitioners.

SO ORDERED. 30

Hence, these consolidated petitions essentially raising the following issues:

WHETHER THE COURT OF APPEALS ERRED IN REFUSING TO RE-EVALUATE THE FACTS AND IN
FINDING NO GRAVE ABUSE OF DISCRETION ON THE PART OF THE NLRC;

II

WHETHER THE COURT OF APPEALS ERRED IN AFFIRMING THE NLRC'S FINDING OF

SUBSTANTIAL EVIDENCE IN GRANTING THE COMPLAINANTS' MONETARY AWARD AS WELL AS
ITS REFUSAL TO REMAND THE CASE BACK TO THE LABOR ARBITER FOR RE-COMPUTATION OF
SUCH AWARD;

III

WHETHER THE COURT OF APPEALS ERRED IN DISREGARDING THAT THE NLRC ALLOWED
MARICALUM MINING TO INTERVENE IN THE CASE ONLY ON APPEAL;

IV
WHETHER THE COURT OF APPEALS ERRED IN AFFIRMING THE NLRC'S RULING WHICH
ALLOWED THE PIERCING OF THE CORPORA TE VEIL AGAINST MARICALUM MINING BUT NOT
AGAINST SIPALAY HOSPITAL.

Complainants argue that the CA committed several reversible errors because: (a) it refused to re-evaluate
the facts of the case even if the factual findings of the NLRC and the LA were conflicting; (b) it failed to
consider that G Holdings had already acquired all of Maricalum Mining's assets and that Teodoro G.
Bernardino (Bernardino) was now the president and controlling stockholder of both corporations; (c) it
failed to take into account that Maricalum Mining was allowed to intervene only on appeal even though it
was not a real party-in-interest; (d) it failed to appreciate the LA' s findings that Maricalum Mining could
not have hired complainants because G Holdings had already acquired in an auction sale all the assets in
the Sipalay Mining Complex; (e) it failed to consider that all resident managers of the Sipalay Mining
Complex were employed by G Holdings; (f) the foreclosure of the assets in the Sipalay Mining Complex
was intended to bring the said properties outside the reach of complainants; (g) the Sipalay Hospital had
been existing as a hospital for Maricalum Mining's employees long before G Holdings arrived; (h) Dr.
Welilmo T. Neri, Erlinda L. Fernandez, Edgar M. Sobrino and Wilfredo C. Taganile, Sr. were all hired by
Maricalum Mining but were dismissed by G Holdings; (i) Sipalay Hospital existed without a board of
directors and its employees were receiving orders from Maricalum Mining and, later on, replaced by G
Holdings' officer-in-charge; and (j) Maricalum Mining and G Holdings controlled the affairs of Sipalay
Hospital.

Maricalum Mining contends that the CA committed grave abuse of discretion because the monetary
awards were improperly computed. It claims that complainants had stopped rendering their services since
September 23, 2010, hence, their monetary claims covering the second half of April 2007 up to July 2007
have already prescribed as provided pursuant to Article 291 of the Labor Code. Moreover, it also stressed
that the NLRC should have remanded the case to the LA for the determination of the manpower
cooperatives' net surpluses and how these amounts were distributed to their members to aid the proper
determination of the total amount of the monetary award. Finally, Maricalum Mining avers that the awards
in favor of some of the complainants are "improbable" and completely unfounded.

On the other hand, G Holdings argues that piercing the corporate veil of Maricalum Mining is not proper
because: (a) it did not acquire all of Maricalum Mining's assets; (b) it is primarily engaged in the business
of owning and holding shares of stocks of different companies-not participating in the operations of its
subsidiaries; (c) Maricalum Mining, the actual employers of complainants, had already manifested its
willingness to settle the correct money claims; (d) Bernardino is not a controlling stockholder of Maricalum
Mining because the latter's corporate records show that almost all of its shares of stock are owned by the
APT; ( e) Joost Pekelharing-not Bernardino-is G Holdings' president; (f) in the NAMA WU Case, it was
already held that control over Maricalum Mining was exercised by the APT and not G Holdings; (g) the
NLRC did not commit any grave abuse of discretion when it allowed Maricalum Mining to intervene after
the LA's decision was promulgated; (h) the cash vouchers, payment schedule, termination letters and
caretaker schedules presented by complainants do not prove the employment relationship with G
Holdings because the signatories thereto were either from Maricalum Mining or the manpower
cooperatives; (i) this Court's pronouncements in the NAMA WU Case and in Republic v. G Holdings,
Inc.   prove that Maricalum Mining never relinquished possession of the Sipalay Mining Complex in favor
31

of G Holdings; and (j) Dr. Welilmo T. Neri, Erlinda L. Fernandez, Edgar M. Sobrino and Wilfredo C.
Taganile, Sr. were employees of the Sipalay Hospital, which is a separate business entity, and were not
members in any of the manpower cooperatives, which entered into a labor-only arrangement with
Maricalum Mining.

The Court's Ruling

It is basic that only pure questions of law should be raised in petitions for review on certiorari under Rule
45 of the Rules of Court.  It will not entertain questions of fact as the factual findings of appellate courts
32

are final, binding or conclusive on the parties and upon this court when supported by substantial
evidence.  In labor cases, however, the Court has to examine the CA' s Decision from the prism of
33

whether the latter had correctly determined the presence or absence of grave abuse of discretion in the
NLRC's Decision. 34

In this case, the principle that this Court is not a trier of facts applies with greater force in labor
cases.   Grave abuse must have attended the evaluation of the facts and evidence presented by the
35

parties.  This Court is keenly aware that the CA undertook a Rule 65 review-not a review on appeal-of the
36

NLRC decision challenged before it.   It follows that this Court will not re-examine conflicting evidence,
37

reevaluate the credibility of witnesses, or substitute the findings of fact of the NLRC, an administrative
body that has expertise in its specialized field.   It may only examine the facts only for the purpose of
38

resolving allegations and determining the existence of grave abuse of discretion.   Accordingly, with these
39
procedural guidelines, the Court will now proceed to determine whether or not the CA had committed any
reversible error in affirming the NLRC's Decision.

Propriety of the Monetary Awards

Ordinarily, when there is sufficient evidence before the Court to enable it to resolve fundamental issues, it
will dispense with the regular procedure of remanding the case to the lower court or appropriate tribunal in
order to avoid a further delay in the resolution of the case.  A remand is only necessary when the
40

proceedings below are grossly inadequate to settle factual issues.  This is in line with the Court's power to
41

issue a process in order to enforce its own decrees and thus avoid circuitous actions and vexatious
litigation.
42

In the case at bench, Maricalum Mining is seeking to have the case remanded because the LA allegedly
miscomputed the amount of the monetary awards. However, it failed to offer any reasonable argument
or explanation why the proceedings conducted before the NLRC or LA were "grossly inadequate
to settle factual issues," especially as regards the computation of monetary awards. Its bare allegations
- that the monetary awards were improperly computed because prescribed claims have been granted, that
the net surpluses of the manpower cooperative were not properly distributed, and that the awards in favor
of some of the complainants were improbable - do not warrant the invocation of this Court's power to have
the case remanded back to the LA. Bare and unsubstantiated allegations do not constitute substantial
evidence and have no probative value. 43

Besides, it is not imperative for the Court to remand the case to the LA for the determination of the
amounts of net surpluses that each of the manpower cooperatives had received from Maricalum Mining.
The records show that Maricalum Mining was guilty of entering into a labor-only contracting arrangement
with the manpower cooperatives, thus, all of them are solidarily liable to the complainants by virtue of
Article 106  of the Labor Code. In DOLE Philippines, Inc. v. Esteva, et al.   it was ruled that a cooperative,
44 45

despite having a personality separate from its members,   is engaged in a labor-only contracting
46

arrangement based on the following indicators:

1) The cooperative had a measly paid-up capital of ₱6,600.00 and had only managed to increase the
same by continually engaging in labor-only contracting with its client;

2) The cooperative did not carry out an independent business from its client and its own office and
equipment were mainly used for administrative purposes;

3) The cooperative's members had to undergo instructions and pass the training provided by the client's
personnel before they could start working alongside regular employees;

4) The cooperative was not engaged to perform a specific and special job or service; and

5) The cooperative's members performed activities directly related and vital to the principal business of its
client.

Here, the virtually identical sets of memorandum of agreement with the manpower cooperatives state
among others that: (a) the services covered shall consist of operating loading, drilling and various auxiliary
equipments; and (b) the cooperative members shall abide by the norms and standards of the Maricalum
Mining. These services and guidelines are essential to the operations of Maricalum Mining. Thus, since
the cooperative members perform the work vital to the operation of the Sipalay Mining Complex, the they
were being contracted in a labor-only arrangement. Moreover, the burden of proving the supposed status
of the contractor rests on the principal  and Maricalum Mining, being the principal, also failed to present
47

any evidence before the NLRC that each of the manpower cooperatives had an independent viable
business.

Propriety of Maricalum Mining's Intervention

Intervention is a remedy by which a third party, who is not originally imp leaded in a proceeding, becomes
a litigant for purposes of protecting his or her right or interest that may be affected by the
proceedings.  The factors that should be reckoned in determining whether or not to allow intervention are
48

whether intervention will unduly delay or prejudice the adjudication of the rights of the original parties and
whether the intervenors rights may be fully protected in a separate proceeding.   A motion to intervene
49

may be entertained or allowed even if filed after judgment was rendered by the trial court, especially in
cases where the intervenors are indispensable parties.  Parties may be added by order of the court on
50

motion of the party or on its own initiative at any stage of the action and/or at such times as are just.
51
In this case, it was never contested by complainants that it was Maricalum Mining-not G Holdings-who
executed several sets of memorandum of agreement with the manpower cooperatives. The contractual
connection between Maricalum Mining and the manpower cooperatives is crucial to the determination of
labor-related liabilities especially when it involves a labor-only contracting arrangement. Accordingly,
Maricalum Mining will eventually be held solidarily liable with the manpower cooperatives. In other words,
it stands to be injured by the incontrovertible fact that it entered into a labor-only arrangement with the
manpower cooperatives. Thus, Maricalum Mining is an indispensable party and worthy of being allowed to
intervene in this case.52

In order to properly analyze G Holdings's role in the instant dispute, the Court must discuss its peculiar
relationship (or lack thereof) with Maricalum Mining and Sipalay Hospital.

G Holdings and Maricalum Mining

The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: (a) defeat of
public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing
obligation; (b) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend
a crime; or (c) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or
business conduit of a person, or where the corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation.   This principle is basically applied only to determine established liability.   However, piercing
53 54

of the veil of corporate fiction is frowned upon and must be done with caution.   This is because a
55

corporation is invested by law with a personality separate and distinct from those of the persons
composing it as well as from that of any other legal entity to which it may be related.  56

A parent  or holding company  is a corporation which owns or is organized to own a substantial portion of
57 58

another company's voting  shares of stock enough to control  or influence the latter's management,
59 60

policies or affairs thru election of the latter's board of directors or otherwise. However, the term "holding
company" is customarily used interchangeably with the term "investment company" which, in turn, is
defined by Section 4 (a) of Republic Act (R.A.) No. 2629  as "any issuer (corporation) which is or holds
61

itself out as being engaged primarily, or proposes to engage primarily, in the business of investing,
reinvesting, or trading in securities."

In other words, a "holding company" is organized and is basically conducting its business by investing
substantially in the equity securities  of another company for the purposes of controlling their policies (as
62

opposed to directly engaging in operating activities) and "holding" them in a conglomerate or umbrella
structure along with other subsidiaries. Significantly, the holding company itself-being a separate entity-
does not own the assets of and does not answer for the liabilities of the subsidiary  or affiliate.   The
63 64

management of the subsidiary or affiliate still rests in the hands of its own board of directors and corporate
officers. It is in keeping with the basic rule a corporation is a juridical entity which is vested with a legal
personality separate and distinct from those acting for and in its behalf and, in general, from the people
comprising it.  The corporate form was created to allow shareholders to invest without incurring personal
65

liability for the acts of the corporation. 66

While the veil of corporate fiction may be pierced under certain instances, mere ownership of a subsidiary
does not justify the imposition of liability on the parent company.   It must further appear that to
67

recognize a parent and a subsidiary as separate entities would aid in the consummation of a
wrong.  Thus, a holding corporation has a separate corporate existence and is to be treated as a
68

separate entity; unless the facts show that such separate corporate existence is a mere sham, or
has been used as an instrument for concealing the truth. 69

In the case at bench, complainants mainly harp their cause on the alter ego theory. Under this theory,
piercing the veil of corporate fiction may be allowed only if the following elements concur:

1) Control-not mere stock control, but complete domination-not only of finances, but of policy and
business practice in respect to the transaction attacked, must have been such 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 a fraud or a wrong, to perpetuate the
violation of a statutory or other positive legal duty, or a dishonest and an unjust act in contravention of
plaintiffs legal right; and

3) The said control and breach of duty must have proximately caused the injury or unjust loss complained
of.
70
The elements of the alter ego theory were discussed in Philippine National Bank v. Hydro Resources
Contractors Corporation,   to wit:
71

The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary be
completely under the control and domination of the parent. It examines the parent corporation's
relationship with the subsidiary. It inquires whether a subsidiary corporation is so organized and controlled
and its affairs are so conducted as to make it a mere instrumentality or agent of the parent corporation
such that its separate existence as a distinct corporate entity will be ignored. It seeks to establish whether
the subsidiary corporation has no autonomy and the parent corporation, though acting through the
subsidiary in form and appearance, "is operating the business directly for itself."

The second prong is the "fraud" test. This test requires that the parent corporation's conduct in using the
subsidiary corporation be unjust, fraudulent or wrongful. It examines the relationship of the plaintiff to the
corporation. It recognizes that piercing is appropriate only if the parent corporation uses the subsidiary in a
way that harms the plaintiff creditor. As such, it requires a showing of "an element of injustice or
fundamental unfairness."

The third prong is the "harm" test. This test requires the plaintiff to show that the defendant's control,
exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered. A causal
connection between the fraudulent conduct committed through the instrumentality of the subsidiary and
the injury suffered or the damage incurred by the plaintiff should be established. The plaintiff must prove
that, unless the corporate veil is pierced, it will have been treated unjustly by the defendant's exercise of
control and improper use of the corporate form and, thereby, suffer damages.

To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence of
three elements: control of the corporation by the stockholder or parent corporation, fraud or fundamental
unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by the fraudulent or unfair
act of the corporation. The absence of any of these elements prevents piercing the corporate
veil. (emphases and underscoring supplied)

Again, all these three elements must concur before the corporate veil may be pierced under the alter ego
theory. Keeping in mind the parameters, guidelines and indicators for proper piercing of the corporate veil,
the Court now proceeds to determine whether Maricalum Mining's corporate veil may be pierced in order
to allow complainants to enforce their monetary awards against G Holdings.

I. Control or Instrumentality Test

In Concept Builders, Inc. v. National Labor Relations Commission, et al.,   the Court first laid down the
72

first set of probative factors of identity that will justify the application of the doctrine of piercing the
corporate veil, viz:

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.

Later, in Philippine National Bank v. Ritratto Group Inc., et al.,  the Court expanded the aforementioned
73

probative factors and enumerated a combination of any of the following common circumstances that may
also render a subsidiary an instrumentality, to wit:

1) The parent corporation owns all or most of the capital stock of the subsidiary;

2) The parent and subsidiary corporations have common directors or officers;

3) The parent corporation finances the subsidiary;

4) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its
incorporation;

5) The subsidiary has grossly inadequate capital;

6) The parent corporation pays the salaries and other expenses or losses of the subsidiary;

7) The subsidiary has substantially no business except with the parent corporation or no assets except
those conveyed to or by the parent corporation;

8) In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as
a department or division of the parent corporation, or its business or financial responsibility is referred to
as the parent corporation's own;

9) The parent corporation uses the property of the subsidiary as its own;

10) The directors or executives of the subsidiary do not act independently in the interest of the subsidiary
but take their orders from the parent corporation; and

11) The formal legal requirements of the subsidiary are not observed.

In the instant case, there is no doubt that G Holdings-being the majority and controlling stockholder-had
been exercising significant control over Maricalum Mining. This is because this Court had already upheld
the validity and enforceability of the PSA between the APT and G Holdings. It was stipulated in the PSA
that APT shall transfer 90% of Mari cal um Mining's equity securities to G Holdings and it establishes the
presence of absolute control of a subsidiary's corporate affairs. Moreover, the Court evinces its
observation that Maricalum Mining's corporate name appearing on the heading of the cash vouchers
issued in payment of the services rendered by the manpower cooperatives is being superimposed with G
Holding's corporate name. Due to this observation, it can be reasonably inferred that G Holdings is paying
for Mari cal um Mining's salary expenses. Hence, the presence of both circumstances of dominant equity
ownership and provision for salary expenses may adequately establish that Maricalum Mining is an
instrumentality of G Holdings.

However, mere presence of control and full ownership of a parent over a subsidiary is not enough to
pierce the veil of corporate fiction. It has been reiterated by this Court time and again that mere
ownership by a single stockholder or by another corporation of all or nearly all of the capital stock
of a corporation is not of itself sufficient ground for disregarding the separate corporate
personality. 74

II. Fraud Test

The corporate veil may be lifted only if it has been used to shield fraud, defend crime, justify a wrong,
defeat public convenience, insulate bad faith or perpetuate injustice.  To aid in the determination of the
75

presence or absence of fraud, the following factors in the "Totality of Circumstances Test"  may be
76

considered, viz:

1) Commingling of funds and other assets of the corporation with those of the individual
shareholders;

2) Diversion of the corporation's funds or assets to non-corporate uses (to the personal uses of the
corporation's shareholders);

3) Failure to maintain the corporate formalities necessary for the issuance of or subscription to the
corporation's stock, such as formal approval of the stock issue by the board of directors;

4) An individual shareholder representing to persons outside the corporation that he or she is personally
liable for the debts or other obligations of the corporation;

5) Failure to maintain corporate minutes or adequate corporate records;

6) Identical equitable ownership in two entities;

7) Identity of the directors and officers of two entities who are responsible for supervision and
management (a partnership or sole proprietorship and a corporation owned and managed by the same
parties);

8) Failure to adequately capitalize a corporation for the reasonable risks of the corporate undertaking;

9) Absence of separately held corporate assets;

10) Use of a corporation as a mere shell or conduit to operate a single venture or some particular aspect
of the business of an individual or another corporation;

11) Sole ownership of all the stock by one individual or members of a single family;

12) Use of the same office or business location by the corporation and its individual
shareholder(s);

13) Employment of the same employees or attorney by the corporation and its shareholder(s);

14) Concealment or misrepresentation of the identity of the ownership, management or financial interests
in the corporation, and concealment of personal business activities of the shareholders (sole shareholders
do not reveal the association with a corporation, which makes loans to them without adequate security);

15) Disregard of legal formalities and failure to maintain proper arm's length relationships among related
entities;

16) Use of a corporate entity as a conduit to procure labor, services or merchandise for another person or
entity;

17) Diversion of corporate assets from the corporation by or to a stockholder or other person or
entity to the detriment of creditors, or the manipulation of assets and liabilities between entities to
concentrate the assets in one and the liabilities in another;

18) Contracting by the corporation with another person with the intent to avoid the risk of
nonperformance by use of the corporate entity; or the use of a corporation as a subterfuge for
illegal transactions; and

19) The formation and use of the corporation to assume the existing liabilities of another person or entity.

Aside from the aforementioned circumstances, it must be determined whether the transfer of assets from
Maricalum Mining to G Holdings is enough to invoke the equitable remedy of piercing the corporate veil.
The same issue was resolved in Y-1 Leisure Phils., Inc., et al. v. Yu  where this Court applied the "Nell
77

Doctrine"  regarding the transfer of all the assets of one corporation to another. It was discussed in
78

that case that as a general rule that where one corporation sells or otherwise transfers all of its assets to
another corporation, the latter is not liable for the debts and liabilities of the transferor, except:

1) Where the purchaser expressly or impliedly agrees to assume such debts;

2) Where the transaction amounts to a consolidation or merger of the corporations;

3) Where the purchasing corporation is merely a continuation of the selling corporation; and

4) Where the transaction is entered into fraudulently in order to escape liability for such debts.

If any of the above-cited exceptions are present, then the transferee corporation shall assume the
liabilities of the transferor. 
79

In this case, G Holdings cannot be held liable for the satisfaction of labor-related claims against Maricalum
Mining under the fraud test for the following reasons:

First, the transfer of some Maricalum Mining's assets in favor G Holdings was by virtue of the PSA as part
of an official measure to dispose of the government's non-performing assets-not to evade its monetary
obligations to the complainants. Even before complainants' monetary claims supposedly existed in 2007,
some of Maricalum Mining's assets had already been validly extrajudicially foreclosed and eventually sold
to G Holdings in 2001. Thus, G Holdings could not have devised a scheme to avoid a non-existent
obligation. No fraud could be attributed to G Holdings because the transfer of assets was pursuant to a
previously perfected valid contract.

Settled is the rule that where one corporation sells or otherwise transfers all its assets to another
corporation for value, the latter is not, by that fact alone, liable for the debts and liabilities of the
transferor.   In other words, control or ownership of substantially all of a subsidiary's assets is not by itself
80

an indication of a holding company's fraudulent intent to alienate these assets in evading labor-related
claims or liabilities. As discussed earlier, the PSA was not designed to evade the monetary claims of the
complainants. Although there was proof that G Holdings has an office in Maricalum Mining's premises and
that that some of their assets have been commingled due to the PSA's unavoidable consequences, there
was no fraudulent diversion of corporate assets to another corporation for the sole purpose of evading
complainants' claim.

Besides, it is evident that the alleged continuing depletion of Maricalum Mining's assets is due to its
disgruntled employees' own acts of pilferage, which was beyond the control of G Holdings. More so,
complainants also failed to present any clear and convincing evidence that G Holdings was grossly
negligent and failed to exercise the required degree of diligence in ensuring that Maricalum Mining's
assets would be protected from pilferage.   Hence, no fraud can be imputed against G Holdings
81

considering that there is no evidence in the records that establishes it systematically tried to alienate
Maricalum Mining's assets to escape the liabilities to complainants.

Second, it was not proven that all of Maricalum Mining's assets were transferred to G Holdings or were
totally depleted. Complainants never offered any evidence to establish that Maricalum Mining had
absolutely no substantial assets to cover for their monetary claims. Their allegation that their claims will be
reduced to a mere "paper victory" has not confirmed with concrete proof. At the very least, substantial
evidence should be adduced that the subsidiary company's "net realizable value"  of "current
82

assets"   and "fair value"   of "non-current assets"   are collectively insufficient to cover the whole amount
83 84 85

of its liability subject in the instant litigation.

Third, G Holdings purchased Mari cal um Mining's shares from the APT not for the purpose of continuing
the latter's existence and operations but for the purpose of investing in the mining industry without having
to directly engage in the management and operation of mining. As discussed earlier, a holding company's
primary business is merely to invest in the equity of another corporation for the purpose of earning from
the latter's endeavors. It generally does not undertake to engage in the daily operating activities of its
subsidiaries that, in turn, have their own separate sets of directors and officers. Thus, there should be
proof that a holding company had indeed fraudulently used the separate corporate personality of its
subsidiary to evade an obligation before it can be held liable. Since G Holdings is a holding company, the
corporate veil of its subsidiaries may only be pierced based on fraud or gross negligence amounting to
bad faith.

Lastly, no clear and convincing evidence was presented by the complainants to conclusively prove the
presence of fraud on the part of G Holdings. Although the quantum of evidence needed to establish a
claim for illegal dismissal in labor cases is substantial evidence,  the quantum need to establish the
86

presence of fraud is clear and convincing evidence.  Thus, to disregard the separate juridical personality
87

of a corporation, the wrongdoing must be established clearly and convincingly-it cannot be presumed. 88

Here, the complainants did not satisfy the requisite quantum of evidence to prove fraud on the part of G
Holdings. They merely offered allegations and suppositions that, since Maricalum Mining's assets appear
to be continuously depleting and that the same corporation is a subsidiary, G Holdings could have been
guilty of fraud. As emphasized earlier, bare allegations do not prove anything. There must be proof that
fraud-not the inevitable effects of a previously executed and valid contract such as the PSA-was the cause
of the latter's total asset depletion. To be clear, the presence of control per se is not enough to justify the
piercing of the corporate veil.

III. Harm or Casual Connection Test

In WPM International Trading, Inc., et al. v. Labayen,  the Court laid down the criteria for the harm or
89

casual connection test, to wit:

In this connection, we stress that the control necessary to invoke the instrumentality or alter ego 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. The control must be shown to have been exercised at the time the acts complained of
took place. Moreover, the control and breach of duty must proximately cause the injury or unjust
loss for which the complaint is made. (emphases and underscoring supplied)

Proximate cause is defined as that cause, which, in natural and continuous sequence, unbroken by any
efficient intervening cause, produces the injury, and without which the result would not have
occurred.  More comprehensively, the proximate legal cause is that "acting first and producing the injury,
90

either immediately or by setting other events in motion, all constituting a natural and continuous chain of
events, each having a close causal connection with its immediate predecessor, the final event in the chain
immediately effecting the injury as a natural and probable result of the cause which first acted, under such
circumstances that the person responsible for the first event should, as an ordinary prudent and intelligent
person, have reasonable ground to expect at the moment of his act or default that an injury to some
person might probably result therefrom."  Hence, for an act or event to be considered as proximate legal
91

cause, it should be shown that such act or event had indeed caused injury to another.

In the case at bench, complainants have not yet even suffered any monetary injury. They have yet to
enforce their claims against Maricalum Mining. It is apparent that complainants are merely anxious
that their monetary awards will not be satisfied because the assets of Maricalum Mining were allegedly
transferred surreptitiously to G Holdings. However, as discussed earlier, since complainants failed to show
that G Holdings's mere exercise of control had a clear hand in the depletion of Maricalum Mining's assets,
no proximate cause was successfully established. The transfer of assets was pursuant to a valid and legal
PSA between G Holdings and APT.

Accordingly, complainants failed to satisfy the second and third tests to justify the application of the alter
ego theory. This inevitably shows that the CA committed no reversible error in upholding the NLRC's
Decision declaring Maricalum Mining as the proper party liable to pay the monetary awards in favor of
complainants.

G Holdings and Sipalay Hospital

Sipalay Hospital was incorporated by Romulo G. Zafra, Eleanore B. Gutierrez, Helen Grace B. Fernandez,
Evelyn B. Badajos and Helen Grace L. Arbolario.   However, there is absence of indication that G
92

Holdings subsequently acquired the controlling interests of Sipalay Hospital. There is also no evidence
that G Holdings entered into a contract with Sipalay Hospital to provide medical services for its officers
and employees. This lack of stockholding or contractual connection signifies that Sipalay Hospital is not
affiliated  with G Holdings. Thus, due to this absence of affiliation, the Court must apply the tests used to
93

determine the existence of an employee-employer relationship; rather than piercing the corporate veil.

Under the four-fold test, the employer-employee relationship is determined if the following are present: a)
the selection and engagement of the employee; b) the payment of wages; c) the power of dismissal; and
d) the power to control the employee's conduct, or the so-called "control test."  Here, the "control test" is
94

the most important and crucial among the four tests.   However, in cases where there is no written
95

agreement to base the relationship on and where the various tasks performed by the worker bring
complexity to the relationship with the employer, the better approach would therefore be to adopt a two-
tiered test involving: a) the putative employer's power to control the employee with respect to the means
and methods by which the work is to be accomplished; and b) the underlying economic realities of the
activity or relationship.
96

In applying the second tier, the determination of the relationship between employer and employee
depends upon the circumstances of the whole economic activity (economic reality or multi-factor test),
such as: a) the extent to which the services performed are an integral part of the employer's business; b)
the extent of the worker's investment in equipment and facilities; c) the nature and degree of control
exercised by the employer; d) the worker's opportunity for profit and loss; e) the amount of initiative, skill,
judgment or foresight required for the success of the claimed independent enterprise; f) the permanency
and duration of the relationship between the worker and the employer; and g) the degree of dependency
of the worker upon the employer for his continued employment in that line of business.   Under all of these
97

tests, the burden to prove by substantial evidence all of the elements or factors is incumbent on the
employee for he or she is the one claiming the existence of an employment relationship. 98

In light of the present circumstances, the Court must apply the four-fold test for lack of relevant data in
the case records relating to the underlying economic realities of the activity or relationship of Sipalay
Hospital's employees.

To prove the existence of their employment relationship with G Holdings, complainants Dr. Welilmo T.
Neri, Erlinda L. Fernandez, Edgar M. Sobrino and Wilfredo C. Taganile, Sr. presented the following
documents:

1) Affidavit  of Dr. Welilmo T. Neri attesting among others that he was the Medical Director of Sipalay
99

Hospital which is allegedly owned and operated by G Holdings/Maricalum Mining;

2) Several cash vouchers   issued by G Holdings!Maricalum Mining representing Dr. Welilmo T. Neri's
100

payment for services rendered to "various" personnel;

3) Schedules of social security premium payments  in favor of Dr. Welilmo T. Neri, Edgar M. Sobrino and
101

Wilfredo C. Taganile, Sr. stamped paid by G Holdings;

4) Notice of termination  dated July 3, 2010 issued by Rolando G. Degojas (OIC of G-Holdings Inc.)
102

issued to Dr. Welilmo T. Neri and some of his companions who are not complainants in this case;

5) Notice of termination  addressed to Dr. Welilmo T. Neri, Erlinda L. Fernandez, Edgar M. Sobrino and
103

some of their co-employees who are not complainants in this case with a collatilla stating that the services
of Dr. Welilmo T. Neri and nurse Erlinda L. Fernandez will be engaged on per call basis; and

6) A "Statement of Unpaid Salaries of Employees of G Holdings, Inc. Assigned to the Sipalay General
Hospital"   prepared by Dr. Welilmo T. Neri which included his own along with complainants Erlinda L.
104

Fernandez, Wilfredo C. Taganile, [Sr.] and Edgar M. [Sobrino].

A perusal of the aforementioned documents fails to show that the services of complainants Dr. Welilmo T.
Neri, Erlinda L. Fernandez, Edgar M. Sobrino and Wilfredo C. Taganile, Sr. were indeed selected and
engaged by either Maricalum Mining or G Holdings. This gap in evidence clearly shows that the first
factor of the four-fold test, or the selection and engagement of the employee, was not satisfied and
not supported by substantial evidence.

However, the same cannot be said as to the second and third factors of the four-fold test (the payment of
wages and the power of dismissal). Since substantial evidence is defined as that amount of relevant
evidence which a reasonable mind might accept as adequate to justify a conclusion,   the cash vouchers,
105

social security payments and notices of termination are reasonable enough to draw an inference that G
Holdings and Maricalum Mining may have had a hand in the complainants' payment of salaries and
dismissal.

Notwithstanding the absence of the first factor and the presence of the second and third factors of the
four-fold test, the Court still deems it best to examine the fourth factor-the presence of control-in order to
determine the employment connection of complainants Dr. Welilmo T. Neri, Erlinda L. Fernandez, Edgar
M. Sobrino and Wilfredo C. Taganile, Sr. with G Holdings.

Under the control test, an employer-employee relationship exists where the person for whom the services
are performed reserves the right to control not only the end achieved, but also the manner and means to
be used in reaching that end.   As applied in the healthcare industry, an employment relationship exists
106

between a physician and a hospital if the hospital controls both the means and the details of the process
by which the physician is to accomplish his task.   But where a person who works for another performs
107

his job more or less at his own pleasure, in the manner he sees fit, not subject to definite hours or
conditions of work, and is compensated according to the result of his efforts and not the amount thereof,
no employer-employee relationship exists.  108

A corporation may only exercise its powers within the definitions provided by law and its articles of
incorporation.   Accordingly, in order to determine the presence or absence of an employment
109

relationship between G Holdings and the employees of Sipalay Hospital by using the control test, the
Court deems it essential to examine the salient portion of Sipalay Hospital's Articles of Incorporation
imparting its 'primary purpose,'   to wit:
110

To own, manage, lease or operate hospitals or clinics offering and providing medical services and facilities
to the general public, provided that purely professional, medical or surgical services shall be performed by
duly qualified physicians or surgeons who may or may not be connected with the corporation and who
shall be freely and individually contracted by patients. (emphasis supplied)

It is immediately apparent that Sipalay Hospital, even if its facilities are located inside the Sipalay Mining
Complex, does not limit its medical services only to the employees and officers of Maricalum Mining
and/or G Holdings. Its act of holding out services to the public reinforces the fact of its independence from
either Maricalum Mining or G Holdings because it is free to deal with any client without any legal or
contractual restriction. Moreover, G Holdings is a holding company primarily engaged in investing
substantially in the stocks of another company-not in directing and managing the latter's daily business
operations. Because of this corporate attribute, the Court can reasonably draw an inference that G
Holdings does not have a considerable ability to control means and methods of work of Sipalay
Hospital employees. Markedly, the records are simply bereft of any evidence that G Holdings had, in
fact, used its ownership to control the daily operations of Sipalay Hospital as well as the working methods
of the latter's employees. There is no evidence showing any subsequent transfer of shares from the
original incorporators of Sipalay Hospital to G Holdings. Worse, it appears that complainants Dr. Welilmo
T. Neri, Erlinda L. Fernandez, Wilfredo C. Taganile, Sr. and Edgar M. Sobrino are trying to derive their
employment connection with G Holdings merely on an assumed premise that the latter owns the
controlling stocks of Maricalum Mining.
On this score, the CA committed no reversible error in allowing the NLRC to delete the monetary awards
of Dr. Welilmo T. Neri, Erlinda L. Fernandez, Wilfredo C. Taganile, Sr. and Edgar M. Sobrino imposed by
the Labor Arbiter against G Holdings.

Conclusion

A holding company may be held liable for the acts of its subsidiary only when it is adequately proven that:
a) there was control over the subsidiary; (b) such control was used to protect a fraud (or gross negligence
amounting to bad faith) or evade an obligation; and c) fraud was the proximate cause of another's existing
injury. Further, an employee is duly-burdened to prove the crucial test or factor of control thru substantial
evidence in order to establish the existence of an employment relationship-especially as against an
unaffiliated corporation alleged to be exercising control.

In this case, complainants have not successfully proven that G Holdings fraudulently exercised its control
over Maricalum Mining to fraudulently evade any obligation. They also fell short of proving that G Holdings
had exercised operational control over the employees of Sipalay Hospital. Due to these findings, the Court
sees no reversible error on the part of the CA, which found no grave abuse of discretion and affirmed in
toto the factual findings and legal conclusions of the NLRC.

WHEREFORE, the Court AFFIRMS in toto the October 29, 2014 Decision of the Court of Appeals in CA-
G.R. SP No. 06835.

No pronouncement as to costs.

SO ORDERED.
 [ G.R. No. 205925, June 20, 2018 ]
BASES CONVERSION AND DEVELOPMENT AUTHORITY, PETITIONER, V.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

DECISION
REYES, JR., J:
This petition for review on certiorari[1] under Rule 45 of the Rules of Court seeks to reverse and set aside the
Decision[2] dated August 29, 2012 and Resolution[3] dated February 12, 2013 of the Court of Tax Appeals (CTA) En
Banc in CTA EB Case No. 797, which affirmed the CTA First Division's dismissal of the case filed by herein petitioner
Bases Conversion and Development Authority (BCDA) on the ground that the latter failed to pay docket fees as required
under Rule 141 of the Rules of Court.
The Facts
The facts, as summarized by the CTA En Banc, read as follows:
On October 8, 2010, BCDA filed a petition for review with the CTA in order to preserve its right to pursue its claim for
refund of the Creditable Withholding Tax (CWT) in the amount of Php122,079,442.53, which was paid under protest from
March 19, 2008 to October 8, 2008. The CWT which BCDA paid under protest was in connection with its sale of the
BCDA-allocated units as its share in the Serendra Project pursuant to the Joint Development Agreement with Ayala Land,
Inc.[4]
The petition for review was filed with a Request for Exemption from the Payment of Filing Fees in the amount of
Php1,209,457.90.[5]
On October 20, 2010, the CTA First Division denied BCDA's Request for Exemption and ordered it to pay the filing fees
within five days from notice.[6]
BCDA moved for reconsideration which was denied by the CTA First Division on February 8, 2011. BCDA was once again
ordered to pay the filing fees within five days from notice, otherwise, the petition for review will be dismissed.[7]
BCDA filed a petition for review with the CTA En Banc on February 25, 2011, which petition was returned and not deemed
filed without the payment of the correct legal fees. BCDA once again emphasized its position that it is exempt from the
payment of such fees.[8]
On March 28, 2011, the petition before the CTA First Division was dismissed. BCDA attempted to tile its Motion for
Reconsideration, however, the Officer-In-Charge of the First Division refused to receive the checks for the payment of the
filing fees, and the Motion for Reconsideration. BCDA then filed its Motion for Reconsideration by registered mail.[9]
Subsequently, BCDA filed a manifestation stating the incidents relating to the tiling of its Motion for Reconsideration. The
CTA First Division, on April 26, 2011, issued its Resolution,[10] the dispositive portion of which states:
WHEREFORE, finding no reason to deny receipt of the supposed Motion for Reconsideration of the [BCDA] on the
dismissal of its Petition for Review, the Executive Clerk of Court III of this Division, Atty. Margarette Y. Guzman, is hereby
DIRECTED to allow petitioner BCDA to file the same, or to accept said pleading which was allegedly mailed through
registered mail, upon receipt thereof, and to commence the procedure in paying the prescribed docket fees, subject to the
caveat herein stated, should petitioner BCDA decide to pursue its case.

SO ORDERED.[11]
On May 17, 2011, BCDA moved for reconsideration of the Resolution dated April 26, 2011 and prayed that it be allowed
to pay the prescribed docket fees of Php1,209,457.90 without qualification. On June 9, 2011, the CTA First Division
denied both motions for reconsideration.[12]
On June 28, 2011, BCDA filed a petition for review with the CTA En Banc but the same was dismissed. In its assailed
Decision[13] dated August 29, 2012, it adopted and affirmed the findings of the First Division, to wit:
BCDA fails to raise any new and substantial arguments, and no cogent reason exists to warrant a consideration of the
Court's Resolution dated March 28, 2011 dismissing its Petition for Review.

It must be emphasized that payment in full of docket fees within the prescribed period is mandatory. It is an essential
requirement without which the decision appealed from would become final and executory as if no appeal had been filed.
To repeat, in both original and appellate cases, the court acquires jurisdiction over the case only upon the payment of the
prescribed docket fees.

In this case, due to BCDA's non-payment of the prescribed legal fees within the prescribed period, this Court has not
acquired jurisdiction over the case. Consequently, it is as if no appeal was ever filed with this Court.[14]
Undeterred, BCDA filed a Motion[15] for Reconsideration but was likewise denied by the CTA En Banc in the assailed
Resolution[16] dated February 12, 2013.
Hence, this petition.

The Issues
I.

THE CTA EN BANC ERRED IN AFFIRMING THE CTA FIRST DIVISION'S RULING THAT BCDA IS NOT A
GOVERNMENT INSTRUMENTALITY, HENCE, NOT EXEMPT FROM PAYMENT OF LEGAL FEES.
II.

THE CTA EN BANC ERRED IN AFFIRMING CTA FIRST DIVISION'S RESOLUTION DISMISSING BCDA'S PETITION
FOR REVIEW FOR NON-PAYMENT OF THE PRESCRIBED LEGAL FEES WITHIN THE REGLEMENTARY PERIOD.
Ruling of the Court
The petition is impressed with merit.
BCDA is a government instrumentality vested with
corporate powers. As such, it is exempt from the
payment of docket fees.
At the crux of the present pet1t1on is the issue of whether or not BCDA is a government instrumentality or a government-
owned and – controlled corporation (GOCC). [fit is an instrumentality, it is exempt from the payment of docket fees. lf it is
a GOCC, it is not exempt and as such non-payment thereof would mean that the tax court did not acquire jurisdiction over
the case and properly dismissed it for BCDA's failure to settle the fees on time.

BCDA is a government instrumentality vested with corporate powers. As such, it is exempt from the payment of docket
fees required under Section 21, Rule 141 of the Rules or Court, to wit:

RULE 141
LEGAL FEES
SEC. 1. Payment of fees. – Upon the filing of the pleading or other application which initiates an action or proceeding, the
fees prescribed therefor shall be paid in full.
xxxx

SEC. 21. Government exempt. – The Republic of the Philippines, its agencies and instrumentalities, are exempt
from paying the legal fees provided in this rule. Local governments and government-owned or controlled corporations
with or without independent charters are not exempt from paying such fees. (Emphasis Ours)
Section 2(10) and (13) of the Introductory Provisions of the Administrative Code of 1987 provides for the definition of a
government "instrumentality" and a "GOCC", to wit:

SEC. 2. General Terms Defined. x x x x

(10) 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.
xxxx

(13) 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: x x x. (Emphasis Ours)
The grant of these corporate powers is likewise stated in Section 3 of Republic Act (R.A.) No. 7227; also known as The
Bases Conversion and Development Act of 1992 which provides for BCDA's manner of creation, to wit:

Sec. 3. Creation of the Bases Conversion and Development Authority. - There is hereby created a body corporate to be
known as the Bases Conversion and Development Authority, which shall have the attribute of perpetual succession
and shall be vested with the powers of a corporation. (Emphasis Ours)
From the foregoing, it is clear that a government instrumentality may be endowed with corporate powers and at the same
time retain its classification as a government "instrumentality" for all other purposes.

In the 2006 case of Manila International Airport Authority v. CA,[17] the Court, speaking through Associate Justice Antonio
T. Carpio, explained in this wise:
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 arc sometimes loosely called government corporate entities. However, they are not
[GOCCs] in the strict sense as understood under the Administrative Code, which is the governing law defining the legal
relationship or status of government entities.[18]
Moreover, in the 2007 case of Philippine Fisheries Development Authority v. CA,[19] the Court reiterated that a government
instrumentality retains its classification as such albeit having been endowed with some if not all corporate powers. The
relevant portion of said decision reads as follows:
Indeed, the Authority is not a GOCC but an instrumentality of the government. The Authority has a capital stock but it is
not divided into shares of stocks. Also, it has no stockholders or voting shares. Hence, it is not a stock corporation.
Neither is it a non-stock corporation because it has no members.

The Authority is actually a national government instrumentality which is define as an 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. When
the law vests in a government instrumentality corporate powers, the instrumentality does not 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.[20]
As previously mentioned, in order to qualify as a GOCC, one must be organized either as a stock or non-stock
corporation. Section 3[21] 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 6 of R.A. No. 7227 provides for BCDA's capitalization, to wit:
Sec. 6. Capitalization. – The Conversion Authority shall have an authorized capital of One hundred billion pesos
(P100,000,000,000.00) which may be fully subscribed by the Republic of the Philippines and shall either be paid up from
the proceeds of the sales of its land assets as provided for in Section 8 of this Act or by transferring to the Conversion
Authority properties valued in such amount.
An initial operating capital in the amount of seventy million pesos (P70,000,000.00) is hereby authorized to be
appropriated out of any funds in the National Treasury not otherwise appropriated which shall be covered by preferred
shares of the Conversion Authority retireable within two (2) years.

Based on the foregoing, it is clear that BCDA has an authorized capital of Php100 Billion, however, it is not divided into
shares of stock. BCDA has no voting shares. There is likewise no provision which authorizes the distribution of dividends
and allotments of surplus and profits to BCDA's stockholders. Hence, BCDA is not a stock corporation.

Section 8 of R.A. No. 7227 provides an enumeration of BCDA's purposes and their corresponding percentage shares in
the sales proceeds of BCDA. Section 8 likewise states that after distribution of the proceeds acquired from BCDA's
activities, the balance, if any, shall accrue and be remitted to the National Treasury, to wit:

Sec. 8. Funding Scheme.—The capital of the Conversion Authority shall come from the sales proceeds and/or transfers of
certain Metro Manila military camps, including all lands covered by Proclamation No. 423, series of 1957, commonly
known as Fort Bonifacio and Villamor (Nicholas) Air Base x x x.
xxxx

The President is hereby authorized to sell the above lands, in whole or in part, which are hereby declared alienable and
disposable pursuant to the provisions of existing laws and regulations governing sales of government properties:
provided, that no sale or disposition of such lands will be undertaken until a development plan embodying projects for
conversion shall be approved by the President in accordance with paragraph (b), Sec. 4, of this Act. However, six (6)
months after approval of this Act, the President shall authorize the Conversion Authority to dispose of certain areas in Fort
Bonifacio and Villamor as the latter so determines. The Conversion Authority shall provide the President a report on any
such disposition or plan for disposition within one (1) month from such disposition or preparation of such plan. The
proceeds from any sale, after deducting all expenses related to the sale, of portions of Metro Manila military camps as
authorized under this Act, shall be used for the following purposes with their corresponding percent shares of
proceeds:
(1) Thirty-two and five-tenths percent (35.5%) — To finance the transfer of the AFP military camps and the construction of
new camps, the self-reliance and modernization program of the AFP, the concessional and long-term housing loan
assistance and livelihood assistance to AFP officers and enlisted men and their families, and the rehabilitation and
expansion of the AFP's medical facilities;

(2) Fifty percent (50%) — To finance the conversion and the commercial uses of the Clark and subic military reservations
and their extentions;

(3) Five Percent (5%) — To finance the concessional and long-term housing loan assistance for the homeless of Metro
Manila, Olongapo City, Angeles City and other affected municipalities contiguous to the base areas as mandated herein:
and

(4) The balance shall accrue and be remitted to the National Treasury to be appropriated thereafter by Congress for
the sole purpose of financing programs and projects vital for the economic upliftment of the Filipino people. (Emphasis
Ours)
The remaining balance, if any, from the proceeds of BCDA's activities shall be remitted to the National Treasury. The
National Treasury is not a stockholder of BCDA Hence, none of the proceeds from BCDA's activities will be allotted to its
stockholders.

BCDA also does not qualify as a non-stock corporation because it is not organized for any of the purposes mentioned
under Section 88 of the Corporation Code, to wit:

Sec. 88. Purposes. – Non-stock corporations may be formed or organized tor charitable, religious, educational,
professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade industry, agricultural
and like chambers, or any combination thereof: subject to the special provisions of this Title governing particular classes
of non-stock corporations.
A cursory reading of Section 4 of R.A. No. 7227 shows that BCDA is organized for a specific purpose - to own, hold
and/or administer the military reservations in the country and implement its conversion to other productive uses, to wit:

Sec. 4. Purposes of the Conversion Authority. — The Conversion Authority shall have the following purposes:
(a) To own, hold and/or administer the military reservations of John Hay Air Station, Wallace Air Station, O'Donnell
Transmitter Station, San Miguel Naval Communications Station. Mt. Sta. Rita Station (Hermosa, Bataan) and those
portions of Metro Manila military camps which may be transferred to it by the President:
(b) To adopt, prepare and implement a comprehensive and detailed development plan embodying a list of projects
including but not limited to those provided in the Legislative-Executive Bases Council (LEBC) framework plan for the
sound and balanced conversion of the Clark and Subic military reservations and their extensions consistent with
ecological and environmental standards, into other productive uses to promote the economic and social development of
Central Luzon in particular and the country in general;
(c) To encourage the active participation of the private sector in transforming the Clark and Subic military
reservations and their extensions into other productive uses;
(d) To serve as the holding company of subsidiary companies created pursuant to Section 16 of this Act and to invest
in Special Economic Zones declared under Sections 12 and 15 of this Act;
(e) To manage and operate through private sector companies developmental projects outside the jurisdiction of subsidiary
companies and Special Economic Zones declared by presidential proclamations and established under this Act;

(f) To establish a mechanism in coordination with the appropriate local government units to effect meaningful
consultation regarding the plans, programs and projects within the regions where such plans, programs and/or
project development are part of the conversion of the Clark and Subic military reservations and their extensions and the
surrounding communities as envisioned in this Act; and
(g) To plan, program and undertake the readjustment, relocation, or resettlement of population within the Clark
and Subic military reservations and their extensions as may be deemed necessary and beneficial by the Conversion
Authority, in coordination with the appropriate government agencies and local government units. (Emphases Ours)
From the foregoing, it is clear that BCDA is neither a stock nor a non-stock corporation. BCDA is a government
instrumentality vested with corporate powers. Under Section 21,[22] Rule 141 of the Rules of Court, agencies and
instrumentalities of the Republic of the Philippines are exempt from paying legal or docket fees. Hence, BCDA is exempt
from the payment of docket fees.
WHEREFORE, premises considered, the present petition is GRANTED. The Decision dated August 29, 2012 and
Resolution dated February 12, 2013 of the CTA En Banc are hereby REVERSED and SET ASIDE.
Let this case be remanded to the Court of Tax Appeals for further proceedings regarding Bases conversion and
Development Authority's claim for refund of the Creditable Withholding Tax (CWT) in the amount of P122,079,442.53
which the latter paid under protest from March 19, 2008 to October 8, 2008.

SO ORDERED.
G.R. No. 147402             January 14, 2004

ENGR. RANULFO C. FELICIANO, in his capacity as General Manager of the Leyte Metropolitan
Water District (LMWD), Tacloban City, petitioner,
vs.
COMMISSION ON AUDIT, Chairman CELSO D. GANGAN, Commissioners RAUL C. FLORES and
EMMANUEL M. DALMAN, and Regional Director of COA Region VIII, respondents.

DECISION

CARPIO, J.:

The Case

This is a petition for certiorari to annul the Commission on Audit’s ("COA") Resolution dated 3 January
1 

2000 and the Decision dated 30 January 2001 denying the Motion for Reconsideration. The COA denied
petitioner Ranulfo C. Feliciano’s request for COA to cease all audit services, and to stop charging auditing
fees, to Leyte Metropolitan Water District ("LMWD"). The COA also denied petitioner’s request for COA to
refund all auditing fees previously paid by LMWD.

Antecedent Facts

A Special Audit Team from COA Regional Office No. VIII audited the accounts of LMWD. Subsequently,
LMWD received a letter from COA dated 19 July 1999 requesting payment of auditing fees. As General
Manager of LMWD, petitioner sent a reply dated 12 October 1999 informing COA’s Regional Director that
the water district could not pay the auditing fees. Petitioner cited as basis for his action Sections 6 and 20
of Presidential Decree 198 ("PD 198") , as well as Section 18 of Republic Act No. 6758 ("RA 6758"). The
2 

Regional Director referred petitioner’s reply to the COA Chairman on 18 October 1999.

On 19 October 1999, petitioner wrote COA through the Regional Director asking for refund of all auditing
fees LMWD previously paid to COA.

On 16 March 2000, petitioner received COA Chairman Celso D. Gangan’s Resolution dated 3 January
2000 denying his requests. Petitioner filed a motion for reconsideration on 31 March 2000, which COA
denied on 30 January 2001.

On 13 March 2001, petitioner filed this instant petition. Attached to the petition were resolutions of the
Visayas Association of Water Districts (VAWD) and the Philippine Association of Water Districts (PAWD)
supporting the petition.

The Ruling of the Commission on Audit

The COA ruled that this Court has already settled COA’s audit jurisdiction over local water districts
in Davao City Water District v. Civil Service Commission and Commission on Audit, as follows:3 

The above-quoted provision [referring to Section 3(b) PD 198] definitely sets to naught petitioner’s
contention that they are private corporations. It is clear therefrom that the power to appoint the
members who will comprise the members of the Board of Directors belong to the local executives
of the local subdivision unit where such districts are located. In contrast, the members of the Board
of Directors or the trustees of a private corporation are elected from among members or
stockholders thereof. It would not be amiss at this point to emphasize that a private corporation is
created for the private purpose, benefit, aim and end of its members or stockholders. Necessarily,
said members or stockholders should be given a free hand to choose who will compose the
governing body of their corporation. But this is not the case here and this clearly indicates that
petitioners are not private corporations.

The COA also denied petitioner’s request for COA to stop charging auditing fees as well as petitioner’s
request for COA to refund all auditing fees already paid.
 The Issues

Petitioner contends that COA committed grave abuse of discretion amounting to lack or excess of
jurisdiction by auditing LMWD and requiring it to pay auditing fees. Petitioner raises the following issues
for resolution:

1. Whether a Local Water District ("LWD") created under PD 198, as amended, is a government-
owned or controlled corporation subject to the audit jurisdiction of COA;

2. Whether Section 20 of PD 198, as amended, prohibits COA’s certified public accountants from
auditing local water districts; and

3. Whether Section 18 of RA 6758 prohibits the COA from charging government-owned and
controlled corporations auditing fees.

The Ruling of the Court

The petition lacks merit.

The Constitution and existing laws mandate COA to audit all government agencies, including government-
4 

owned and controlled corporations ("GOCCs") with original charters. An LWD is a GOCC with an original
charter. Section 2(1), Article IX-D of the Constitution provides for COA’s audit jurisdiction, as follows:

SECTION 2. (1) The Commission on Audit shall have the power, authority and duty to examine,
audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of
funds and property, owned or held in trust by, or pertaining to, the Government, or any of its
subdivisions, agencies, or instrumentalities, including government-owned and controlled
corporations with original charters, and on a post-audit basis: (a) constitutional bodies,
commissions and offices that have been granted fiscal autonomy under this Constitution; (b)
autonomous state colleges and universities; (c) other government-owned or controlled corporations
and their subsidiaries; and (d) such non-governmental entities receiving subsidy or equity, directly
or indirectly, from or through the government, which are required by law or the granting institution
to submit to such audit as a condition of subsidy or equity. However, where the internal control
system of the audited agencies is inadequate, the Commission may adopt such measures,
including temporary or special pre-audit, as are necessary and appropriate to correct the
deficiencies. It shall keep the general accounts of the Government and, for such period as may be
provided by law, preserve the vouchers and other supporting papers pertaining thereto. (Emphasis
supplied)

The COA’s audit jurisdiction extends not only to government "agencies or instrumentalities," but also to
"government-owned and controlled corporations with original charters" as well as "other government-
owned or controlled corporations" without original charters.

Whether LWDs are Private or Government-Owned

and Controlled Corporations with Original Charters

Petitioner seeks to revive a well-settled issue. Petitioner asks for a re-examination of a doctrine backed by
a long line of cases culminating in Davao City Water District v. Civil Service Commission and just
5 

recently reiterated in De Jesus v. Commission on Audit. Petitioner maintains that LWDs are not
6 

government-owned and controlled corporations with original charters. Petitioner even argues that LWDs
are private corporations. Petitioner asks the Court to consider certain interpretations of the applicable
laws, which would give a "new perspective to the issue of the true character of water districts." 7

Petitioner theorizes that what PD 198 created was the Local Waters Utilities Administration ("LWUA") and
not the LWDs. Petitioner claims that LWDs are created "pursuant to" and not created directly by PD 198.
Thus, petitioner concludes that PD 198 is not an "original charter" that would place LWDs within the audit
jurisdiction of COA as defined in Section 2(1), Article IX-D of the Constitution. Petitioner elaborates that
PD 198 does not create LWDs since it does not expressly direct the creation of such entities, but only
provides for their formation on an optional or voluntary basis. Petitioner adds that the operative act that
8 

creates an LWD is the approval of the Sanggunian Resolution as specified in PD 198.

Petitioner’s contention deserves scant consideration.

We begin by explaining the general framework under the fundamental law. The Constitution recognizes
two classes of corporations. The first refers to private corporations created under a general law. The
second refers to government-owned or controlled corporations created by special charters. Section 16,
Article XII of the Constitution provides:

Sec. 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 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
9 

by special charters, which historically gave certain individuals, families or groups special privileges denied
to other citizens.10

In short, Congress cannot enact a law creating a private corporation with a special charter. Such
legislation would be unconstitutional. Private corporations may exist only under a general law. If the
corporation is private, it must necessarily exist under a general law. Stated differently, only corporations
created under a general law can qualify as private corporations. Under existing laws, that general law is
the Corporation Code, except that the Cooperative Code governs the incorporation of cooperatives.
11  12

The Constitution authorizes Congress to create government-owned or controlled corporations through

special charters. Since private corporations cannot have special charters, it follows that Congress can
create corporations with special charters only if such corporations are government-owned or controlled.

Obviously, LWDs are not private corporations because they are not created under the Corporation Code.
LWDs are not registered with the Securities and Exchange Commission. Section 14 of the Corporation
Code states that "[A]ll corporations organized under this code shall file with the Securities and Exchange
Commission articles of incorporation x x x." LWDs have no articles of incorporation, no incorporators and
no stockholders or members. There are no stockholders or members to elect the board directors of LWDs
as in the case of all corporations registered with the Securities and Exchange Commission. The local
mayor or the provincial governor appoints the directors of LWDs for a fixed term of office. This Court has
ruled that LWDs are not created under the Corporation Code, thus:

From the foregoing pronouncement, it is clear that what has been excluded from the coverage of
the CSC are those corporations created pursuant to the Corporation Code. Significantly,
petitioners are not created under the said code, but on the contrary, they were created
pursuant to a special law and are governed primarily by its provision. (Emphasis supplied)
13 

LWDs exist by virtue of PD 198, which constitutes their special charter. Since under the Constitution only
government-owned or controlled corporations may have special charters, LWDs can validly exist only if
they are government-owned or controlled. To claim that LWDs are private corporations with a special
charter is to admit that their existence is constitutionally infirm.

Unlike private corporations, which derive their legal existence and power from the Corporation Code,
LWDs derive their legal existence and power from PD 198. Sections 6 and 25 of PD 198 provide:
14 

Section 6. Formation of District. — This Act is the source of authorization and power to form
and maintain a district. For purposes of this Act, a district shall be considered as a quasi-
public corporation performing public service and supplying public wants. As such, a
district shall exercise the powers, rights and privileges given to private corporations under
existing laws, in addition to the powers granted in, and subject to such restrictions
imposed, under this Act.

(a) The name of the local water district, which shall include the name of the city, municipality, or
province, or region thereof, served by said system, followed by the words "Water District".

(b) A description of the boundary of the district. In the case of a city or municipality, such boundary
may include all lands within the city or municipality. A district may include one or more
municipalities, cities or provinces, or portions thereof.

(c) A statement completely transferring any and all waterworks and/or sewerage facilities
managed, operated by or under the control of such city, municipality or province to such district
upon the filing of resolution forming the district.
 (d) A statement identifying the purpose for which the district is formed, which shall include those
purposes outlined in Section 5 above.

(e) The names of the initial directors of the district with the date of expiration of term of office for
each.

(f) A statement that the district may only be dissolved on the grounds and under the conditions set
forth in Section 44 of this Title.

(g) A statement acknowledging the powers, rights and obligations as set forth in Section 36 of this
Title.

Nothing in the resolution of formation shall state or infer that the local legislative body has the
power to dissolve, alter or affect the district beyond that specifically provided for in this Act.

If two or more cities, municipalities or provinces, or any combination thereof, desire to form a single
district, a similar resolution shall be adopted in each city, municipality and province.

xxx

Sec. 25. Authorization. — The district may exercise all the powers which are expressly
granted by this Title or which are necessarily implied from or incidental to the powers and
purposes herein stated. For the purpose of carrying out the objectives of this Act, a district is
hereby granted the power of eminent domain, the exercise thereof shall, however, be subject to
review by the Administration. (Emphasis supplied)

Clearly, LWDs exist as corporations only by virtue of PD 198, which expressly confers on LWDs
corporate powers. Section 6 of PD 198 provides that LWDs "shall exercise the powers, rights and
privileges given to private corporations under existing laws." Without PD 198, LWDs would have no
corporate powers. Thus, PD 198 constitutes the special enabling charter of LWDs. The ineluctable
conclusion is that LWDs are government-owned and controlled corporations with a special charter.

The phrase "government-owned and controlled corporations with original charters" means GOCCs
created under special laws and not under the general incorporation law. There is no difference between
the term "original charters" and "special charters." The Court clarified this in National Service
Corporation v. NLRC by citing the deliberations in the Constitutional Commission, as follows:
15 

THE PRESIDING OFFICER (Mr. Trenas). The session is resumed.

Commissioner Romulo is recognized.

MR. ROMULO. Mr. Presiding Officer, I am amending my original proposed amendment to now

read as follows: "including government-owned or controlled corporations WITH ORIGINAL
CHARTERS." The purpose of this amendment is to indicate that government corporations such as
the GSIS and SSS, which have original charters, fall within the ambit of the civil service. However,
corporations which are subsidiaries of these chartered agencies such as the Philippine Airlines,
Manila Hotel and Hyatt are excluded from the coverage of the civil service.

THE PRESIDING OFFICER (Mr. Trenas). What does the Committee say?

MR. FOZ. Just one question, Mr. Presiding Officer. By the term "original charters," what
exactly do we mean?

MR. ROMULO. We mean that they were created by law, by an act of Congress, or by special
law.

MR. FOZ. And not under the general corporation law.

MR. ROMULO. That is correct. Mr. Presiding Officer.

MR. FOZ. With that understanding and clarification, the Committee accepts the amendment.

MR. NATIVIDAD. Mr. Presiding Officer, so those created by the general corporation law are out.
 MR. ROMULO. That is correct. (Emphasis supplied)

Again, in Davao City Water District v. Civil Service Commission, the Court reiterated the meaning of
16 

the phrase "government-owned and controlled corporations with original charters" in this wise:

By "government-owned or controlled corporation with original charter," We mean

government owned or controlled corporation created by a special law and not under the
Corporation Code of the Philippines. Thus, in the case of Lumanta v. NLRC (G.R. No. 82819,
February 8, 1989, 170 SCRA 79, 82), We held:

"The Court, in National Service Corporation (NASECO) v. National Labor Relations

Commission, G.R. No. 69870, promulgated on 29 November 1988, quoting extensively
from the deliberations of the 1986 Constitutional Commission in respect of the intent
and meaning of the new phrase ‘with original charter,’ in effect held that government-
owned and controlled corporations with original charter refer to corporations
chartered by special law as distinguished from corporations organized under our
general incorporation statute — the Corporation Code. In NASECO, the company
involved had been organized under the general incorporation statute and was a subsidiary
of the National Investment Development Corporation (NIDC) which in turn was a subsidiary
of the Philippine National Bank, a bank chartered by a special statute. Thus, government-
owned or controlled corporations like NASECO are effectively, excluded from the scope of
the Civil Service." (Emphasis supplied)

Petitioner’s contention that the Sangguniang Bayan resolution creates the LWDs assumes that the
Sangguniang Bayan has the power to create corporations. This is a patently baseless assumption. The
Local Government Code does not vest in the Sangguniang Bayan the power to create
17 

corporations. What the Local Government Code empowers the Sangguniang Bayan to do is to provide for
18 

the establishment of a waterworks system "subject to existing laws." Thus, Section 447(5)(vii) of the Local
Government Code provides:

SECTION 447. Powers, Duties, Functions and Compensation. — (a) The sangguniang bayan, as
the legislative body of the municipality, shall enact ordinances, approve resolutions and
appropriate funds for the general welfare of the municipality and its inhabitants pursuant to Section
16 of this Code and in the proper exercise of the corporate powers of the municipality as provided
for under Section 22 of this Code, and shall:

xxx

(vii) Subject to existing laws, provide for the establishment, operation, maintenance, and

repair of an efficient waterworks system to supply water for the inhabitants; regulate the
construction, maintenance, repair and use of hydrants, pumps, cisterns and reservoirs;
protect the purity and quantity of the water supply of the municipality and, for this purpose,
extend the coverage of appropriate ordinances over all territory within the drainage area of
said water supply and within one hundred (100) meters of the reservoir, conduit, canal,
aqueduct, pumping station, or watershed used in connection with the water service; and
regulate the consumption, use or wastage of water;

x x x. (Emphasis supplied)

The Sangguniang Bayan may establish a waterworks system only in accordance with the provisions of PD
198. The Sangguniang Bayan has no power to create a corporate entity that will operate its waterworks
system. However, the Sangguniang Bayan may avail of existing enabling laws, like PD 198, to form and
incorporate a water district. Besides, even assuming for the sake of argument that the Sangguniang
Bayan has the power to create corporations, the LWDs would remain government-owned or controlled
corporations subject to COA’s audit jurisdiction. The resolution of the Sangguniang Bayan would
constitute an LWD’s special charter, making the LWD a government-owned and controlled corporation
with an original charter. In any event, the Court has already ruled in Baguio Water District v.
Trajano that the Sangguniang Bayan resolution is not the special charter of LWDs, thus:
19 

While it is true that a resolution of a local sanggunian is still necessary for the final creation of a
district, this Court is of the opinion that said resolution cannot be considered as its charter, the
same being intended only to implement the provisions of said decree.
Petitioner further contends that a law must create directly and explicitly a GOCC in order that it may have
an original charter. In short, petitioner argues that one special law cannot serve as enabling law for
several GOCCs but only for one GOCC. Section 16, Article XII of the Constitution mandates that
"Congress shall not, except by general law," provide for the creation of private corporations. Thus, the
20 

Constitution prohibits one special law to create one private corporation, requiring instead a "general law"
to create private corporations. In contrast, the same Section 16 states that "Government-owned or
controlled corporations may be created or established by special charters." Thus, the
Constitution permits Congress to create a GOCC with a special charter. There is, however, no prohibition
on Congress to create several GOCCs of the same class under one special enabling charter.

The rationale behind the prohibition on private corporations having special charters does not apply to
GOCCs. There is no danger of creating special privileges to certain individuals, families or groups if there
is one special law creating each GOCC. Certainly, such danger will not exist whether one special law
creates one GOCC, or one special enabling law creates several GOCCs. Thus, Congress may create
GOCCs either by special charters specific to each GOCC, or by one special enabling charter applicable to
a class of GOCCs, like PD 198 which applies only to LWDs.

Petitioner also contends that LWDs are private corporations because Section 6 of PD 198 declares that
21 

LWDs "shall be considered quasi-public" in nature. Petitioner’s rationale is that only private corporations
may be deemed "quasi-public" and not public corporations. Put differently, petitioner rationalizes that a
public corporation cannot be deemed "quasi-public" because such corporation is already public. Petitioner
concludes that the term "quasi-public" can only apply to private corporations. Petitioner’s argument is
inconsequential.

Petitioner forgets that the constitutional criterion on the exercise of COA’s audit jurisdiction depends on
the government’s ownership or control of a corporation. The nature of the corporation, whether it is
private, quasi-public, or public is immaterial.

The Constitution vests in the COA audit jurisdiction over "government-owned and controlled corporations
with original charters," as well as "government-owned or controlled corporations" without original charters.
GOCCs with original charters are subject to COA pre-audit, while GOCCs without original charters are
subject to COA post-audit. GOCCs without original charters refer to corporations created under the
Corporation Code but are owned or controlled by the government. The nature or purpose of the
corporation is not material in determining COA’s audit jurisdiction. Neither is the manner of creation of a
corporation, whether under a general or special law.

The determining factor of COA’s audit jurisdiction is government ownership or control of the
corporation. In Philippine Veterans Bank Employees Union-NUBE v. Philippine Veterans Bank, the 22 

Court even ruled that the criterion of ownership and control is more important than the issue of original
charter, thus:

This point is important because the Constitution provides in its Article IX-B, Section 2(1) that "the
Civil Service embraces all branches, subdivisions, instrumentalities, and agencies of the
Government, including government-owned or controlled corporations with original charters." As the
Bank is not owned or controlled by the Government although it does have an original
charter in the form of R.A. No. 3518, it clearly does not fall under the Civil Service and
23 

should be regarded as an ordinary commercial corporation. Section 28 of the said law so

provides. The consequence is that the relations of the Bank with its employees should be governed
by the labor laws, under which in fact they have already been paid some of their claims. (Emphasis
supplied)

Certainly, the government owns and controls LWDs. The government organizes LWDs in accordance with
a specific law, PD 198. There is no private party involved as co-owner in the creation of an LWD. Just
prior to the creation of LWDs, the national or local government owns and controls all their assets. The
government controls LWDs because under PD 198 the municipal or city mayor, or the provincial governor,
appoints all the board directors of an LWD for a fixed term of six years. The board directors of LWDs are
24 

not co-owners of the LWDs. LWDs have no private stockholders or members. The board directors and
other personnel of LWDs are government employees subject to civil service laws and anti-graft laws.
25  26

While Section 8 of PD 198 states that "[N]o public official shall serve as director" of an LWD, it only means
that the appointees to the board of directors of LWDs shall come from the private sector. Once such
private sector representatives assume office as directors, they become public officials governed by the
civil service law and anti-graft laws. Otherwise, Section 8 of PD 198 would contravene Section 2(1), Article
IX-B of the Constitution declaring that the civil service includes "government-owned or controlled
corporations with original charters."
If LWDs are neither GOCCs with original charters nor GOCCs without original charters, then they would
fall under the term "agencies or instrumentalities" of the government and thus still subject to COA’s audit
jurisdiction. However, the stark and undeniable fact is that the government owns LWDs. Section 45 of PD 27 

198 recognizes government ownership of LWDs when Section 45 states that the board of directors may
dissolve an LWD only on the condition that "another public entity has acquired the assets of the district
and has assumed all obligations and liabilities attached thereto." The implication is clear that an LWD is a
public and not a private entity.

Petitioner does not allege that some entity other than the government owns or controls LWDs. Instead,
petitioner advances the theory that the "Water District’s owner is the District itself." Assuming for the sake
28 

of argument that an LWD is "self-owned," as petitioner describes an LWD, the government in any event
29 

controls all LWDs. First, government officials appoint all LWD directors to a fixed term of office. Second,
any per diem of LWD directors in excess of P50 is subject to the approval of the Local Water Utilities
Administration, and directors can receive no other compensation for their services to the LWD. Third, the
30 

Local Water Utilities Administration can require LWDs to merge or consolidate their facilities or
operations. This element of government control subjects LWDs to COA’s audit jurisdiction.
31 

Petitioner argues that upon the enactment of PD 198, LWDs became private entities through the transfer
of ownership of water facilities from local government units to their respective water districts as mandated
by PD 198. Petitioner is grasping at straws. Privatization involves the transfer of government assets to a
private entity. Petitioner concedes that the owner of the assets transferred under Section 6 (c) of PD 198
is no other than the LWD itself. The transfer of assets mandated by PD 198 is a transfer of the water
32 

systems facilities "managed, operated by or under the control of such city, municipality or province to such
(water) district." In short, the transfer is from one government entity to another government entity. PD 198
33 

is bereft of any indication that the transfer is to privatize the operation and control of water systems.

Finally, petitioner claims that even on the assumption that the government owns and controls LWDs,
Section 20 of PD 198 prevents COA from auditing LWDs.  Section 20 of PD 198 provides:
34 

Sec. 20. System of Business Administration. — The Board shall, as soon as practicable, prescribe
and define by resolution a system of business administration and accounting for the district, which
shall be patterned upon and conform to the standards established by the Administration. Auditing
shall be performed by a certified public accountant not in the government service. The
Administration may, however, conduct annual audits of the fiscal operations of the district to be
performed by an auditor retained by the Administration. Expenses incurred in connection therewith
shall be borne equally by the water district concerned and the Administration. (Emphasis supplied)
35 

Petitioner argues that PD 198 expressly prohibits COA auditors, or any government auditor for that matter,
from auditing LWDs. Petitioner asserts that this is the import of the second sentence of Section 20 of PD
198 when it states that "[A]uditing shall be performed by a certified public accountant not in the
government service." 36

PD 198 cannot prevail over the Constitution. No amount of clever legislation can exclude GOCCs like
LWDs from COA’s audit jurisdiction. Section 3, Article IX-C of the Constitution outlaws any scheme or
devise to escape COA’s audit jurisdiction, thus:

Sec. 3. No law shall be passed exempting any entity of the Government or its subsidiary in any
guise whatever, or any investment of public funds, from the jurisdiction of the Commission on
Audit. (Emphasis supplied)

The framers of the Constitution added Section 3, Article IX-D of the Constitution precisely to annul
provisions of Presidential Decrees, like that of Section 20 of PD 198, that exempt GOCCs from COA audit.
The following exchange in the deliberations of the Constitutional Commission elucidates this intent of the
framers:

MR. OPLE: I propose to add a new section on line 9, page 2 of the amended committee report
which reads: NO LAW SHALL BE PASSED EXEMPTING ANY ENTITY OF THE GOVERNMENT
OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY INVESTMENTS OF PUBLIC
FUNDS, FROM THE JURISDICTION OF THE COMMISSION ON AUDIT.

May I explain my reasons on record.

We know that a number of entities of the government took advantage of the absence of a
legislature in the past to obtain presidential decrees exempting themselves from the
 jurisdiction of the Commission on Audit, one notable example of which is the Philippine
National Oil Company which is really an empty shell. It is a holding corporation by itself, and strictly
on its own account. Its funds were not very impressive in quantity but underneath that shell there
were billions of pesos in a multiplicity of companies. The PNOC — the empty shell — under a
presidential decree was covered by the jurisdiction of the Commission on Audit, but the billions of
pesos invested in different corporations underneath it were exempted from the coverage of the
Commission on Audit.

Another example is the United Coconut Planters Bank. The Commission on Audit has determined
that the coconut levy is a form of taxation; and that, therefore, these funds attributed to the shares
of 1,400,000 coconut farmers are, in effect, public funds. And that was, I think, the basis of the
PCGG in undertaking that last major sequestration of up to 94 percent of all the shares in the
United Coconut Planters Bank. The charter of the UCPB, through a presidential decree, exempted
it from the jurisdiction of the Commission on Audit, it being a private organization.

So these are the fetuses of future abuse that we are slaying right here with this additional section.

May I repeat the amendment, Madam President: NO LAW SHALL BE PASSED EXEMPTING ANY
ENTITY OF THE GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY
INVESTMENTS OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE COMMISSION ON
AUDIT.

THE PRESIDENT: May we know the position of the Committee on the proposed amendment of
Commissioner Ople?

MR. JAMIR: If the honorable Commissioner will change the number of the section to 4, we will
accept the amendment.

MR. OPLE: Gladly, Madam President. Thank you.

MR. DE CASTRO: Madam President, point of inquiry on the new amendment.

THE PRESIDENT: Commissioner de Castro is recognized.

MR. DE CASTRO: Thank you. May I just ask a few questions of Commissioner Ople.

Is that not included in Section 2 (1) where it states: "(c) government-owned or controlled
corporations and their subsidiaries"? So that if these government-owned and controlled
corporations and their subsidiaries are subjected to the audit of the COA, any law exempting
certain government corporations or subsidiaries will be already unconstitutional.

So I believe, Madam President, that the proposed amendment is unnecessary.

MR. MONSOD: Madam President, since this has been accepted, we would like to reply to the point
raised by Commissioner de Castro.

THE PRESIDENT: Commissioner Monsod will please proceed.

MR. MONSOD: I think the Commissioner is trying to avoid the situation that happened in the past,
because the same provision was in the 1973 Constitution and yet somehow a law or a decree was
passed where certain institutions were exempted from audit. We are just reaffirming, emphasizing,
the role of the Commission on Audit so that this problem will never arise in the future. 37

There is an irreconcilable conflict between the second sentence of Section 20 of PD 198 prohibiting COA
auditors from auditing LWDs and Sections 2(1) and 3, Article IX-D of the Constitution vesting in COA the
power to audit all GOCCs. We rule that the second sentence of Section 20 of PD 198 is unconstitutional
since it violates Sections 2(1) and 3, Article IX-D of the Constitution.

On the Legality of COA’s

Practice of Charging Auditing Fees

Petitioner claims that the auditing fees COA charges LWDs for audit services violate the prohibition in
Section 18 of RA 6758, which states:
38 
 Sec. 18. Additional Compensation of Commission on Audit Personnel and of other Agencies. – In
order to preserve the independence and integrity of the Commission on Audit (COA), its officials
and employees are prohibited from receiving salaries, honoraria, bonuses, allowances or other
emoluments from any government entity, local government unit, government-owned or controlled
corporations, and government financial institutions, except those compensation paid directly by
COA out of its appropriations and contributions.

Government entities, including government-owned or controlled corporations including financial

institutions and local government units are hereby prohibited from assessing or billing other
government entities, including government-owned or controlled corporations including financial
institutions or local government units for services rendered by its officials and employees as part of
their regular functions for purposes of paying additional compensation to said officials and
employees. (Emphasis supplied)

Claiming that Section 18 is "absolute and leaves no doubt," petitioner asks COA to discontinue its
39 

practice of charging auditing fees to LWDs since such practice allegedly violates the law.

Petitioner’s claim has no basis.

Section 18 of RA 6758 prohibits COA personnel from receiving any kind of compensation from any
government entity except "compensation paid directly by COA out of its appropriations and
contributions." Thus, RA 6758 itself recognizes an exception to the statutory ban on COA personnel
receiving compensation from GOCCs. In Tejada v. Domingo, the Court declared:
40 

There can be no question that Section 18 of Republic Act No. 6758 is designed to strengthen
further the policy x x x to preserve the independence and integrity of the COA, by explicitly
PROHIBITING: (1) COA officials and employees from receiving salaries, honoraria, bonuses,
allowances or other emoluments from any government entity, local government unit, GOCCs and
government financial institutions, except such compensation paid directly by the COA out of
its appropriations and contributions, and (2) government entities, including GOCCs,
government financial institutions and local government units from assessing or billing other
government entities, GOCCs, government financial institutions or local government units for
services rendered by the latter’s officials and employees as part of their regular functions for
purposes of paying additional compensation to said officials and employees.

xxx

The first aspect of the strategy is directed to the COA itself, while the second aspect is addressed
directly against the GOCCs and government financial institutions. Under the first, COA personnel
assigned to auditing units of GOCCs or government financial institutions can receive only
such salaries, allowances or fringe benefits paid directly by the COA out of its
appropriations and contributions. The contributions referred to are the cost of audit
services earlier mentioned which cannot include the extra emoluments or benefits now
claimed by petitioners. The COA is further barred from assessing or billing GOCCs and
government financial institutions for services rendered by its personnel as part of their regular audit
functions for purposes of paying additional compensation to such personnel. x x x. (Emphasis
supplied)

In Tejada, the Court explained the meaning of the word "contributions" in Section 18 of RA 6758, which
allows COA to charge GOCCs the cost of its audit services:

x x x the contributions from the GOCCs are limited to the cost of audit services which are based on
the actual cost of the audit function in the corporation concerned plus a reasonable rate to cover
overhead expenses. The actual audit cost shall include personnel services, maintenance and other
operating expenses, depreciation on capital and equipment and out-of-pocket expenses. In respect
to the allowances and fringe benefits granted by the GOCCs to the COA personnel assigned to the
former’s auditing units, the same shall be directly defrayed by COA from its own appropriations x x
x. 
41

COA may charge GOCCs "actual audit cost" but GOCCs must pay the same directly to COA and not to
COA auditors. Petitioner has not alleged that COA charges LWDs auditing fees in excess of COA’s
"actual audit cost." Neither has petitioner alleged that the auditing fees are paid by LWDs directly to
individual COA auditors. Thus, petitioner’s contention must fail.
WHEREFORE, the Resolution of the Commission on Audit dated 3 January 2000 and the Decision dated
30 January 2001 denying petitioner’s Motion for Reconsideration are AFFIRMED. The second sentence of
Section 20 of Presidential Decree No. 198 is declared VOID for being inconsistent with Sections 2 (1) and
3, Article IX-D of the Constitution. No costs.

SO ORDERED.
 G.R. No. 224307, August 06, 2018

THE MISSIONARY SISTERS OF OUR LADY OF FATIMA (PEACH SISTERS OF

LAGUNA), REPRESENTED BY REV. MOTHER MA. CONCEPCION R. REALON, ET
AL., Petitioners, v. AMANDO V. ALZONA, ET AL., Respondents.

DECISION

REYES, JR., J.:

Before this Court is a petition for review on certiorari1 under Rule 45 of the Rules of Court
seeking to annul and set aside the Decision2 dated January 7, 2016 of the Court of Appeals
(CA) in CA-G.R. CV No. 101944, and its Resolution3 dated April 19, 2016, denying the
motion for reconsideration thereof. The assailed decision partly granted the respondents'
appeal and set aside the Decision4 dated August 14, 2013 of the Regional Trial Court (RTC)
of Calamba City, Branch 92 in Civil Case No. 3250-02-C.

The Antecedent Facts

The Missionary Sisters of Our Lady of Fatima (petitioner), otherwise known as the Peach
Sisters of Laguna, is a religious and charitable group established under the patronage of the
Roman Catholic Bishop of San Pablo on May 30, 1989. Its primary mission is to take care of
the abandoned and neglected elderly persons. The petitioner came into being as a
corporation by virtue of a Certificate issued by the Securities and Exchange Commission
(SEC) on August 31, 2001.5 Mother Ma. Concepcion R. Realon (Mother Concepcion) is the
petitioner's Superior General.

The respondents, on the other hand, are the legal heirs of the late Purificacion Y. Alzona
(Purificacion).

The facts giving rise to the instant controversy follow:

Purificacion, a spinster, is the registered owner of parcels of land covered by Transfer

Certificate of Title (TCT) Nos. T-57820* and T-162375; and a co-owner of another property
covered by TCT No. T-162380, all of which are located in Calamba City, Laguna.6

In 1996, Purificacion, impelled by her unmaterialized desire to be nun, decided to devote the
rest of her life in helping others. In the same year, she then became a benefactor of the
petitioner by giving support to the community and its works.7

In 1997, during a doctor's appointment, Purificacion then accompanied by Mother

Concepcion, discovered that she has been suffering from lung cancer. Considering the
restrictions in her movement, Purificacion requested Mother Concepcion to take care of her
in her house, to which the latter agreed.8

In October 1999, Purificacion called Mother Concepcion and handed her a handwritten letter
dated October 1999. Therein, Purificacion stated that she is donating her house and lot at F.
Mercado Street and Riceland at Banlic, both at Calamba, Laguna, to the petitioner through
Mother Concepcion. On the same occasion, Purificacion introduced Mother Concepcion to her
nephew, Francisco Del Mundo (Francisco), and niece, Ma. Lourdes Alzona Aguto-Africa
(Lourdes). Purificacion, instructed Francisco to give a share of the harvest to Mother
Concepcion, and informed Lourdes that she had given her house to Mother Concepcion.9

Sometime in August 2001, at the request of Purificacion, Mother Concepcion went to see
Atty. Nonato Arcillas (Atty. Arcillas) in Los Baños, Laguna. During their meeting, Atty.
Arcillas asked Mother Concepcion whether their group is registered with the SEC, to which
the latter replied in the negative. Acting on the advice given by Atty. Arcillas, Mother
Concepcion went to SEC and filed the corresponding registration application on August 28,
2001.10

On August 29, 2001, Purificacion executed a Deed of Donation Inter Vivos (Deed) in favor of

the petitioner, conveying her properties covered by TCT Nos. T-67820 and T-162375, and
her undivided share in the property covered by TCT No. T-162380. The Deed was notarized
by Atty. Arcillas and witnessed by Purificacion's nephews Francisco and Diosdado Alzona,
and grandnephew, Atty. Fernando M. Alonzo. The donation was accepted on even date by
Mother Concepcion for and in behalf of the petitioner.11

Thereafter, Mother Concepcion filed an application before the Bureau of Internal Revenue
(BIR) that the petitioner be exempted from donor's tax as a religious organization. The
application was granted by the BIR through a letter dated January 14, 2002 of Acting
Assistant Commissioner, Legal Service, Milagros Regalado.12

Subsequently, the Deed, together with the owner's duplicate copies of TCT Nos. T-57820, T-
162375, and T-162380, and the exemption letter from the BIR was presented for
registration. The Register of Deeds, however, denied the registration on account of the
Affidavit of Adverse Claim dated September 26, 2001 filed by the brother of Purificacion,
respondent Amando Y. Alzona (Amando).13

On October 30, 2001, Purificacion died without any issue, and survived only by her brother
of full blood, Amando, who nonetheless died during the pendency of this case and is now
represented and substituted by his legal heirs, joined as herein respondents.14

On April 9, 2002, Amando filed a Complaint before the RTC, seeking to annul the Deed
executed between Purificacion and the petitioner, on the ground that at the time the
donation was made, the latter was not registered with the SEC and therefore has no juridical
personality and cannot legally accept the donation.15

After trial, on August 14, 2013, the RTC rendered its Decision16 finding no merit in the
complaint, thus ruling:

WHEREFORE, the instant case is hereby DISMISSED with costs against the [respondents].
The Compulsory counterclaim of the [petitioner] is likewise dismissed for lack of evidence.

SO ORDERED.17

In its decision, the RTC held that all the essential elements of a donation are present. The
RTC set aside the allegation by the respondents relating to the incapacity of the parties to
enter into a donation.18

In the case of Purificacion, the RTC held that apart from the self-serving allegations by the
respondents, the records are bereft of evidence to prove that she did not possess the proper
mental faculty in making the donation; as such the presumption that every person is of
sound mind stands.19

On the capacity of the donee, the RTC held that at the time of the execution of the Deed,
the petitioner was a de facto corporation and as such has the personality to be a beneficiary
and has the power to acquire and possess property. Further then, the petitioner's incapacity
cannot be questioned or assailed in the instant case as it constitutes a collateral attack
which is prohibited by the Corporation Code of the Philippines.20 In this regard, the RTC
found that the recognition by the petitioner of Mother Concepcion's authority is sufficient to
vest the latter of the capacity to accept the donation.21

Acting on the appeal filed by the respondents, the CA rendered the herein assailed
Decision22 on January 7, 2016, the dispositive portion of which reads:

WHEREFORE, the appeal is PARTLY GRANTED. The assailed August 14, 2013 Decision of the
RTC, Branch 92, Calamba City in Civil Case No. 3250-02 is SET ASIDE by declaring as VOID
the deed of Donation dated August 14, 2013. [The respondents'] prayer for the award of
moral and exemplary damages as well as attorney's fees is nevertheless DENIED.

SO ORDERED.23
In so ruling, the CA, citing the case of Seventh Day Adventist Conference Church of
Southern Phils., Inc. v. Northeastern Mindanao Mission of Seventh Day Adventist,
Inc.,24 held that the petitioner cannot be considered as a de facto corporation considering
that at the time of the donation, there was no bona fide attempt on its part to
incorporate.25 As an unregistered corporation, the CA concluded that the petitioner cannot
exercise the powers, rights, and privileges expressly granted by the Corporation Code.
Ultimately, bereft of juridical personality, the CA ruled that the petitioner cannot enter into a
contract of Donation with Purificacion.26

Finally, the CA denied the respondents' claim for actual damages and attorney's fees for
failure to substantiate the same.27

The petitioner sought a reconsideration of the Decision dated January 7, 2016, but the CA
denied it in its Resolution28 dated April 19, 2016.

In the instant petition, the petitioner submits the following arguments in support of its
position:

a. The Donation Inter Vivos is valid and binding against the parties therein [Purificacion]
and the [petitioner] and their respective successors in interest:

1.) The [petitioner] has the requisite legal personality to accept donations as a religious institution under
the Roman Catholic Bishop of San Pablo authorized to receive donations;
2.) The [petitioner] has the requisite legal capacity to accept the donation as it may be considered a de
facto corporation.
3.) Regardless of the absence of the Certificate of Registration of [petitioner] at the time of the
execution of the Deed of Donation, the same is still valid and binding having been accepted by a
representative of the [petitioner] while the latter was still waiting for the issuance of the Certificate
of Registration and which acceptance of the donation was duly ratified by the corporation.
4.) The intestate estate of Purificacion is estopped from questioning the legal personality of [the
petitioner].

b.
c. The Respondents lack the requisite legal capacity to question the legality of the deed
of donation.29

In sum, the issue to be resolved by this Court in the instant case is whether or not the Deed
executed by Purificacion in favor of the petitioner is valid and binding. In relation to this, the
Court is called upon to determine the legal capacity of the petitioner, as donee, to accept
the donation, and the authority Mother Concepcion to act on behalf of the petitioner in
accepting the donation.

Ruling of the Court

The petition is meritorious.

The petitioner argues that it has the requisite legal personality to accept the donation as a
religious institution organized under the Roman Catholic Bishop of San Pablo, a corporation
sole.30

Regardless, the petitioner contends that it is a de facto corporation and therefore possessed
of the requisite personality to enter into a contract of donation.

Assuming further that it cannot be considered as a de facto corporation, the petitioner

submits that the acceptance by Mother Concepcion while the religious organization is still in
the process of incorporation is valid as it then takes the form of a pre-incorporation contract
governed by the rules on agency. The petitioner argues that their subsequent incorporation
and acceptance perfected the subject contract of donation.31

Ultimately, the petitioner argues that the intestate estate of Purificacion is estopped from
questioning its legal personality considering the record is replete of evidence to prove that
Purificacion at the time of the donation is fully aware of its status and yet was still resolved
into giving her property.32

In response, the respondents submit that juridical personality to enter into a contract of
donation is vested only upon the issuance of a Certificate of Incorporation from
SEC.33 Further, the respondents posit that the petitioner cannot even be considered as a de
facto corporation considering that for more than 20 years, there was never any attempt on
its part to incorporate, which decision came only after Atty. Arcillas, suggestion.34

In order that a donation of an immovable property be valid, the following elements must be
present: (a) the essential reduction of the patrimony of the donor; (b) the increase in the
patrimony of the donee; (c) the intent to do an act of liberality or animus donandi; (d) the
donation must be contained in a public document; and e) that the acceptance thereof be
made in the same deed or in a separate public instrument; if acceptance is made in a
separate instrument, the donor must be notified thereof in an authentic form, to be noted in
both instruments.35

There is no question that the true intent of Purificacion, the donor and the owner of the
properties in question, was to give, out of liberality the subject house and lot, which she
owned, to the petitioner. This act, was then contained in a public document, the deed having
been acknowledged before Atty. Arcillas, a Notary Public.36 The acceptance of the donation is
made on the same date that the donation was made and contained in the same instrument
as manifested by Mother Concepcion's signature.37 In fine, the remaining issue to be
resolved is the capacity of the petitioner as donee to accept the donation, and the authority
of Mother Concepcion to act on its behalf for this purpose.

Under Article 737 of the Civil Code, "[t]he donor's capacity shall be determined as of the
time of the making of the donation." By analogy, the legal capacity or the personality of the
donee, or the authority of the latter's representative, in certain cases, is determined at the
time of acceptance of the donation.

Article 738, in relation to Article 745, of the Civil Code provides that all those who are not
specifically disqualified by law may accept donations either personally or through an
authorized representative with a special power of attorney for the purpose or with a general
and sufficient power.

The Court finds that for the purpose of accepting the donation, the petitioner is deemed
vested with personality to accept, and Mother Concepcion is clothed with authority to act on
the latter's behalf.

At the outset, it must be stated that as correctly pointed out by the CA, the RTC erred in
holding that the petitioner is a de facto corporation.

Jurisprudence settled that "[t]he filing of articles of incorporation and the issuance of the

certificate of incorporation are essential for the existence of a de facto corporation."38 In
fine, it is the act of registration with SEC through the issuance of a certificate of
incorporation that marks the beginning of an entity's corporate existence.39

Petitioner filed its Articles of Incorporation and by-laws on August 28, 2001. However, the
SEC issued the corresponding Certificate of Incorporation only on August 31, 2001, two (2)
days after Purificacion executed a Deed of Donation on August 29, 2001. Clearly, at the time
the donation was made, the Petitioner cannot be considered a corporation de facto. 40

Rather, a review of the attendant circumstances reveals that it calls for the application of
the doctrine of corporation by estoppel as provided for under Section 21 of the Corporation
Code, viz.:
Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing
it to be without authority to do so shall be liable as general partners for all debts, liabilities
and damages incurred or arising as a result thereof: Provided, however, That when any such
ostensible corporation is sued on any transaction entered by it as a corporation or on any
tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate
personality.

One who assumes an obligation to an ostensible corporation as such, cannot resist

performance thereof on the ground that there was in fact no corporation. (Emphasis
Ours)

The doctrine of corporation by estoppel is founded on principles of equity and is designed to

prevent injustice and unfairness. It applies when a non-existent corporation enters into
contracts or dealings with third persons.41 In which case, the person who has contracted or
otherwise dealt with the non-existent corporation is estopped to deny the latter's legal
existence in any action leading out of or involving such contract or dealing. While the
doctrine is generally applied to protect the sanctity of dealings with the public,42 nothing
prevents its application in the reverse, in fact the very wording of the law which sets forth
the doctrine of corporation by estoppel permits such interpretation. Such that a person who
has assumed an obligation in favor of a non-existent corporation, having transacted with the
latter as if it was duly incorporated, is prevented from denying the existence of the latter to
avoid the enforcement of the contract.

Jurisprudence dictates that the doctrine of corporation by estoppel applies for as long as
there is no fraud and when the existence of the association is attacked for causes attendant
at the time the contract or dealing sought to be enforced was entered into, and not
thereafter.43

In this controversy, Purificacion dealt with the petitioner as if it were a corporation. This is
evident from the fact that Purificacion executed two (2) documents conveying her properties
in favor of the petitioner – first, on October 11, 1999 via handwritten letter, and second, on
August 29, 2001 through a Deed; the latter having been executed the day after the
petitioner filed its application for registration with the SEC.44

The doctrine of corporation by estoppel rests on the idea that if the Court were to disregard
the existence of an entity which entered into a transaction with a third party, unjust
enrichment would result as some form of benefit have already accrued on the part of one of
the parties. Thus, in that instance, the Court affords upon the unorganized entity corporate
fiction and juridical personality for the sole purpose of upholding the contract or transaction.

In this case, while the underlying contract which is sought to be enforced is that of a
donation, and thus rooted on liberality, it cannot be said that Purificacion, as the donor
failed to acquire any benefit therefrom so as to prevent the application of the doctrine of
corporation by estoppel.45 To recall, the subject properties were given by Purificacion, as a
token of appreciation for the services rendered to her during her illness.46 In fine, the
subject deed partakes of the nature of a remuneratory or compensatory donation, having
been made "for the purpose of rewarding the donee for past services, which services do not
amount to a demandable debt."47

As elucidated by the Court in Pirovano, et al. v. De La Rama Steamship Co.:48

In donations made to a person for services rendered to the donor, the donor's will is moved
by acts which directly benefit him. The motivating cause is gratitude, acknowledgment of a
favor, a desire to compensate. A donation made to one who saved the donor's life, or a
lawyer who renounced his fees for services rendered to the donor, would fall under this class
of donations.49

Therefore, under the premises, past services constitutes consideration, which in tum can be
regarded as "benefit" on the part of the donor, consequently, there exists no obstacle to the
application of the doctrine of corporation by estoppel; although strictly speaking, the
petitioner did not perform these services on the expectation of something in return.

Precisely, the existence of the petitioner as a corporate entity is upheld in this case for the
purpose of validating the Deed to ensure that the primary objective for which the donation
was intended is achieved, that is, to convey the property for the purpose of aiding the
petitioner in the pursuit of its charitable objectives.

Further, apart from the foregoing, the subsequent act by Purificacion of re-conveying the
property in favor of the petitioner is a ratification by conduct of the otherwise defective
donation.50

Express or implied ratification is recognized by law as a means to validate a defective

contract.51 Ratification cleanses or purges the contract from its defects from constitution or
establishment, retroactive to the day of its creation. By ratification, the infirmity of the act is
obliterated thereby making it perfectly valid and enforceable.52

The principle and essence of implied ratification require that the principal has full knowledge
at the time of ratification of all the material facts and circumstances relating to the act
sought to be ratified or validated.53 Also, it is important that the act constituting the
ratification is unequivocal in that it is performed without the slightest hint of objection or
protest from the donor or the donee, thus producing the inevitable conclusion that the
donation and its acceptance were in fact confirmed and ratified by the donor and the
donee.54

In this controversy, while the initial conveyance is defective, the genuine intent of
Purificacion to donate the subject properties in favor of the petitioner is indubitable. Also,
while the petitioner is yet to be incorporated, it cannot be said that the initial conveyance
was tainted with fraud or misrepresentation. Contrarily, Purificacion acted with full
knowledge of circumstances of the Petitioner. This is evident from Purificacion's act of
referring Mother Concepcion to Atty. Arcillas, who, in turn, advised the petitioner to apply
for registration. Further, with the execution of two (2) documents of conveyance in favor of
the petitioner, it is clear that what Purificacion intended was for the sisters comprising the
petitioner to have ownership of her properties to aid them in the pursuit of their charitable
activities, as a token of appreciation for the services they rendered to her during her
illness.55 To put it differently, the reference to the petitioner was merely a descriptive term
used to refer to the sisters comprising the congregation collectively. Accordingly, the
acceptance of Mother Concepcion for the sisters comprising the congregation is sufficient to
perfect the donation and transfer title to the property to the petitioner. Ultimately, the
subsequent incorporation of the petitioner and its affirmation of Mother Concepcion's
authority to accept on its behalf cured whatever defect that may have attended the
acceptance of the donation.

The Deed sought to be enforced having been validly entered into by Purificacion, the
respondents' predecessor-in-interest, binds the respondents who succeed the latter as
heirs.56 Simply, as they claim interest in their capacity as Purificacion's heirs, the
respondents are considered as "privies" to the subject Deed; or are "those between whom
an action is binding although they are not literally parties to the said action."57 As discussed
in Constantino, et al. v. Heirs of Pedro Constantino, Jr.:58

[p]rivity in estate denotes the privity between assignor and assignee, donor and donee,
grantor and grantee, joint tenant for life and remainderman or reversioner and their
respective assignees, vendor by deed of warranty and a remote vendee or assignee. A privy
in estate is one, it has been said, who derives his title to the property in question by
purchase; one who takes by conveyance. In fine, respondents, as successors-in-interest,
derive their right from and are in the same position as their predecessor in whose shoes
they now stand.59 (Citation omitted)

Anent the authority of Mother Concepcion to act as representative for and in behalf of the
petitioner, the Court similarly upholds the same. Foremost, the authority of Mother
Concepcion was never questioned by the petitioner. In fact, the latter affirms and supports
the authority of Mother Concepcion to accept the donation on their behalf; as she is, after all
the congregation's Superior General.60 Furthermore, the petitioner's avowal of Mother
Concepcion's authority after their SEC registration is a ratification of the latter's authority to
accept the subject donation as the petitioner's representative.61

In closing, it must be emphasized that the Court is both of law and of justice. Thus, the
Court's mission and purpose is to apply the law with justice.62

Donation is an expression of our social conscience, an act rooted purely on the goodness of
one's heart and intent to contribute.

Purificacion, the donor is worthy of praise for her works of charity. Likewise, the petitioner is
worthy of admiration for with or without the promise of reward or consideration, the Court is
certain that it is impelled by sincere desire to help the petitioner in overcoming her illness.

It is unfortunate that the will of a person moved by the desire to reciprocate the goodness
shown to her during the lowest and culminating points of her life is questioned and herein
sought to be nullified on strict legality, when the intent of the donor to give is beyond
question.

The promotion of charitable works is a laudable objective. While not mentioned in the
Constitution, the Court recognizes benevolent giving as an important social fabric that
eliminates inequality. As such, charitable giving must be encouraged through support from
society and the Court.

WHEREFORE, in consideration of the foregoing disquisitions, the instant petition for review
on certiorari is GRANTED. Accordingly, the Decision dated January 7, 2016 and Resolution
dated April 19, 2016 of the Court of Appeals in CA-G.R. CV No. 101944, are
hereby REVERSED and SET ASIDE.

SO ORDERED.

.R. No. 117010 April 18, 1997

PEOPLE OF THE PHILIPPINES, plaintiff-appellee,
vs.
ENGR. CARLOS GARCIA y PINEDA, PATRICIO BOTERO y VALES, LUISA MIRAPLES (at large),
accused,

PATRICIO BOTERO y VALES, accused-appellant.

PUNO, J.:

Before us is an appeal from the decision of the Regional Trial Court in Criminal Case No. 93871
convicting accused-appellant Patricio Botero of illegal recruitment in large scale and sentencing him to
suffer the penalty of life imprisonment.1

In an Information dated July 21, 1992, accused-appellant Patricio Botero together with Carlos P. Garcia
and Luisa Miraples were charged with the crime of illegal recruitment in large scale defined by Article 38
(b) and penalized under Article 39 (a) of the Labor Code, as amended by Presidential Decree Nos. 1920
and 2018, committed as follows:

That on or before March 2, 1992, and subsequently thereafter, in the Municipality of

Mandaluyong, Metro Manila, Philippines, a place within the jurisdiction of this Honorable
Court, the above-named accused, conspiring and confederating together and mutually
helping and aiding each other, representing themselves to have authority, license and/or
permit to contract, enlist and recruit workers for overseas employment, did then and there
willfully, unlawfully and feloniously for a fee, recruit and promise job placement/employment
abroad to the following individuals, to wit:

1. Gloria Silaras y Barbero

2. Rolando Consigna y Ogana

3. Ma. Carmen Daluaidao

4. Zosimo La Puebla, Jr.

5. Mario Espada y Melodia

6. Arnel Santilla y Villalos

7. Elsa Delubio

8. Abener Siriban y Abatuan

9. Franklin Cabingan y Casalla

10. Jose Erwin Estinoso

11. Edgardo Belen y Juanillo

12. Ariel Rivada y Pascual

13. Sunny Pinco y Pascua

14. Rolando Santiago y Magno

15. Alfredo Estinoso y Estrada

16. Luisito Vargas y Quizon

without first securing the required license or authority from the Department of Labor and
Employment.
 Contrary to law.  (Emphasis supplied.)
2

Accused Garcia and Botero pleaded not guilty upon arraignment on January 19, 1993 and March 31,
1993, respectively. Miraples remained at large as the warrant of arrest against her was returned unserved.
A joint trial was conducted against the two (2) accused considering that their cases involve the same
parties and issues. 3

Six (6) out of the sixteen (16) complainants testified as prosecution witnesses.  These complainants were
4

Edgardo Belen, Gloria Silaras, Alfredo Estinoso, Jose Erwin Esclada, Elsa Delubio and Ariel Rivada. They
testified that on various dates in March 1992, they went to Ricorn Philippine International Shipping Lines,
Inc. (hereinafter Ricorn), an entity which recruits workers for overseas employment, with office at Rm. 410,
Jovan Building, 600 Shaw Blvd., Mandaluyong, Metro Manila. They applied as seamen, cook, waiter,
chambermaid or laundrywoman overseas.  Esclada applied to accused Botero. All the other complainants
5

coursed their application to accused Garcia who represented himself as president of

Ricorn.  Complainants were required to submit their NBI and police clearance, birth certificate, passport,
6

seaman's book and Survival of Life at Sea (SOLAS).  As they did not have the last three (3) documents,
7

they were asked to pay five thousand pesos (P5,000.00) as processing fee. They paid to Ricorn's
treasurer, Luisa Miraples.  They were issued receipts signed by Miraples. The receipts were under
8

Ricorn's heading. 9

Garcia and Botero assured complainants of employment after the May 11, 1992 election. Accused Botero,
as the vice-president of Ricorn, followed-up their passports, seaman's book and SOLAS. He told some
applicants to wait for their papers and informed the others that their papers were in order.

After the election, complainants went back to Ricorn to check on their applications. They discovered that
Ricorn had abandoned its office at Jovan Building for non-payment of rentals.   Hoping against hope, they
10

went back to the building several times to recover their money. Their persistence was to no avail for
Garcia and Botero were nowhere to be found. They then went to the Mandaluyong Police Station and filed
their complaints.   They also checked with the Securities and Exchange Commission (SEC) and
11

discovered that Ricorn was not yet incorporated. They also found that Ricorn was not licensed by the
Department of Labor and Employment (DOLE) to engage in recruitment activities.  12

Accused Garcia testified that he is an electrical engineer by profession. According to him, the group of
Teresita Celso, Patricio Botero, Alice Mayonte, Luisa Miraples and Edna Hemolaga approached him at a
baptismal party to join Ricorn. He was asked to contribute one hundred thousand pesos (P100,000.00).
He told them he would borrow the money from his brother in the United States.

In February 1992, accused Garcia saw the group again in a small apartment in San Juan which they
utilized as their office. He met them once more at Ricorn's office at Jovan Bldg. where there were many
applicants for overseas jobs. This time, they asked him to become Ricorn's president and to contribute
only twenty thousand pesos (P20,000.00). He declined the offer. Allegedly, he already knew that Ricorn
was not licensed by the Philippine Overseas Employment Agency (POEA) or registered as a corporation
with the Securities and Exchange Commission (SEC). He denied he issued receipts to complainants in
this case. 13

Accused-appellant Botero is a marine engineer by profession but was working as a barber when the trial
took place. He testified that he became acquainted with Ricorn when he applied for overseas employment
as a machinist. He dealt with accused Garcia who claimed to be the President of Ricorn. Eventually, he
gained the trust of Garcia and became an employee of Ricorn. Three (3) times a week, he reported for
work at Jovan Building.   As a former seaman, he was familiar with the processing of passport, seaman's
14

book and SOLAS. His job consisted in following-up these documents. He left Ricorn when he discovered it
was not licensed by the POEA nor was it registered with the SEC.   He denied he recruited the
15

complainants and received any money from them.   However, on cross-examination, he admitted that in
16

February 1992, he met Garcia in TADE recruitment agency. Garcia convinced him to become one of the
incorporators of Ricorn. He gave money to Garcia for Ricorn's registration with the SEC. They held office
at Jovan Building from March 2, 1992 to April 20, 1992.  17

After trial, accused Garcia and Botero were convicted in a decision dated April 19, 1995, to wit:

WHEREFORE, in view of the foregoing, accused CARLOS P. GARCIA and PATRICIO

BOTERO are found guilty beyond reasonable doubt of the offense of illegal recruitment on
(sic) a large scale constituting economic sabotage under Article 38 (b) and punishable
under Article 39 (a) of the Labor Code as amended and are sentenced to suffer the penalty
of life imprisonment and to pay a fine of P100,000.00 each. They are also ordered to
 indemnify and pay jointly and severally each of the six (6) complainants the amount of
P5,000.00. Both accused are also ordered to pay the cost of suit.

SO ORDERED.  18

The case against accused Miraples was archived by the court.   She has remained at large.
19

Only accused Botero, thru counsel, filed a Notice of Appeal. In his Brief, he raises the following
assignments of error, to wit: 
20

THE LOWER COURT ERRED IN HOLDING THAT THE EVIDENCE PRESENTED BY THE
PROSECUTION AGAINST ACCUSED-APPELLANT PATRICIO BOTERO IS SUFFICIENT
FOR CONVICTION.

II

THE LOWER COURT ERRED IN NOT HOLDING THAT IN TRUTH AND IN FACT THE
ACCUSED-APPELLANT PATRICIO BOTERO DID NOT CONSPIRE WITH CO-ACCUSED
CARLOS P. GARCIA.

III

THE LOWER COURT ERRED IN NOT HOLDING THAT ACCUSED-APPELLANT

PATRICIO BOTERO IS NOT RESPONSIBLE FOR ILLEGAL RECRUITMENT ACTIVITIES
OF CO-ACCUSED CARLOS P. GARCIA.

IV

THE LOWER COURT ERRED IN GIVING CREDENCE TO THE TESTIMONY OF JOSE

ERWIN ESCLADA WHICH IS NOT ADMISSIBLE FOR BEING INCONSISTENT , HIGHLY
IMPROBABLE AND EXAGGERATED AND IN NOT GIVING WEIGHT TO THE ACCUSED-
APPELLANT PATRICIO BOTERO'S EVIDENCE.

We sustain appellant's conviction.

Appellant Botero predicates his appeal on the alleged insufficiency of evidence to support his conviction.
More particularly, he assails the credibility of witness Esclada.

Esclada initially testified that he dealt with accused Garcia when he filed his application with Ricorn as a
seaman. On cross-examination, however, he admitted it was really accused Botero with whom he
transacted, viz:

Q: But I thought you stated earlier on the third time, you talked to a certain
Edna because Carlos Garcia is not around (sic) on the same time, it was
Carlos Garcia who instructed you to give P5,000.00.

A I have told a lie, sir. My conscience could not take it.

COURT TO THE WITNESS

Q. So, what is the truth now because I will put you in jail?

A. When I applied at Ricorn (Phil.) with Mr. Botero, Mr. Garcia

was not around but it was Botero who said that my papers were alright.  21

In effect, accused-appellant Botero wants this court to apply the doctrine of falsus in uno, falsus in
omnibus (false in one part, false in everything) and to disregard the entire testimony of Esclada.

Under present jurisprudence, this maxim of law is rarely adhered to by the courts.   It is possible to admit
22

and lend credence to the testimony of a witness whom the Court has earlier found to have willfully
perjured himself. ". . . (T)he testimony of a witness may be believed in part and disbelieved in part,
depending upon the corroborative evidence and the probabilities and improbabilities of the case."   In the
23
case at bar, we hold that the trial court did not err in giving credence to the testimony of Esclada against
appellant Botero since it was corroborated on its material points by the testimony of other witnesses. In
fact, Esclada's testimony against Botero is trustworthy as he gave it after his conscience bothered him for
not telling the truth.

We reject appellant Botero's pretense that he is also a victim rather than a culprit in this case. He insist he
was a mere applicant of Ricorn and not a conspirator of the other accused who defrauded the
complainants. He claims that even as a Ricorn employee, he merely performed "minimal activities" like
following-up applicants' passports, seaman's book and SOLAS, and conducting simple interviews. He
denies he had a hand in the selection of workers to be employed abroad.   These submissions are at war
24

with the evidence on record. His co-accused Garcia introduced him to the complainants as the vice-
president of Ricorn. He used a table with a nameplate confirming he was the vice-president of
Ricorn.   He procured the passports, seaman's books and SOLAS for the applicants. It was from him that
25

the complainants inquired about the status of their applications.   He also admitted he gave money to
26

accused Garcia for Ricorn's incorporation.

Beyond any reasonable doubt, appellant Botero engaged in recruitment and placement activities in that
he, through Ricorn, promised the complainants employment abroad. Under the Labor Code, recruitment
and placement refers to "any act of canvassing, enlisting, contracting, transporting, utilizing, hiring or
procuring workers, and includes referrals, contract services, promising or advertising for employment,
locally or abroad whether for profit or not: Provided, That any person or entity which in any manner, offers
or promises for a fee employment to two or more persons shall be deemed engaged in recruitment, and
placement."  27

All the essential elements of the crime of illegal recruitment in large scale are present in this case, to wit:

(1) the accused engages in the recruitment and placement of workers, as defined under
Article 13 (b) or in any prohibited activities under Article 34 of the Labor Code;

(2) accused has not complied with the guidelines issued by the Secretary of Labor and
Employment, particularly with respect to the securing of a license or an authority to recruit
and deploy workers, either locally or overseas; and

(3) accused commits the same against three (3) or more persons, individually or as a
group. 28

It is a fact that Ricorn had no license to recruit from DOLE. In the office of Ricorn, a notice was posted
informing job applicants that its recruitment license is still being processed. Yet, Ricorn already
entertained applicants and collected fees for processing their travel documents.  29

For engaging in recruitment of workers without obtaining the necessary license from the POEA, Boteros
should suffer the consequences of Ricorn's illegal act for "(i)f the offender is a corporation, partnership,
association or entity, the penalty shall be imposed upon the officer or officers of the corporation,
partnership, association or entity responsible for violation; . . . "   The evidence shows that appellant
30

Botero was one of the incorporators of Ricorn. For reasons that cannot be discerned from the records,
Ricorn's incorporation was not consummated. Even then, appellant cannot avoid his liabilities to the public
as an incorporator of Ricorn. He and his co-accused Garcia held themselves out to the public as officers
of Ricorn. They received money from applicants who availed of their services. They are thus estopped
from claiming that they are not liable as corporate officials of Ricorn.   Section 25 of the Corporation Code
31

provides that "(a)ll persons who assume to act as a corporation knowing it to be without authority to do so
shall be liable as general partners for all the debts, liabilities and damages incurred or arising as a result
thereof: Provided, however, That when any such ostensible corporation is sued on any transaction
entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a
defense its lack of corporate personality."

Appellant Botero is guilty of the crime of illegal recruitment in a large scale considering it was proven that
he, together with his cohorts, were able to defraud the six complainant-witnesses in this case. Under
Article 38 (b) of the Labor Code, illegal recruitment in large scale is perpetrated if committed against three
(3) or more persons individually or as a group. And under Article 39 (a) of the same Code, accused-
appellant's crime is punishable by life imprisonment and a fine of one hundred thousand pesos
(P100,000.00).

Finally, it is fruitless for appellant to deny he conspired with his co-accused to commit the crime at bar.
The fact that all the accused were co-conspirators in defrauding the complainants could be inferred from
their acts. They played different roles in defrauding complainants: accused Garcia was the president,
appellant Botero was the vice-president and accused-at-large Miraples was the treasurer of
Ricorn.   Each one played a part in the recruitment of complainants. They were indispensable to each
32

other.

IN VIEW WHEREOF, the decision of the Regional Trial Court convicting accused-appellant Patricio
Botero of the crime of illegal recruitment in large scale is affirmed in all respects. Costs against accused-
appellant.

SO ORDERED.
G.R. No. 84197 July 28, 1989

PIONEER INSURANCE & SURETY CORPORATION, petitioner,

vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC.,
(BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents.

G.R. No. 84157 July 28, 1989

JACOB S. LIM, petitioner,
vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION, BORDER
MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and MODESTO CERVANTES and
CONSTANCIO MAGLANA, respondents.

Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.

Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.

Renato J. Robles for BORMAHECO, Inc. and Cervanteses.

Leonardo B. Lucena for Constancio Maglana.

GUTIERREZ, JR., J.:

The subject matter of these consolidated petitions is the decision of the Court of Appeals in CA-G.R. CV
No. 66195 which modified the decision of the then Court of First Instance of Manila in Civil Case No.
66135. The plaintiffs complaint (petitioner in G.R. No. 84197) against all defendants (respondents in G.R.
No. 84197) was dismissed but in all other respects the trial court's decision was affirmed.

The dispositive portion of the trial court's decision reads as follows:

WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim to pay
plaintiff the amount of P311,056.02, with interest at the rate of 12% per annum compounded
monthly; plus 15% of the amount awarded to plaintiff as attorney's fees from July 2,1966,
until full payment is made; plus P70,000.00 moral and exemplary damages.

It is found in the records that the cross party plaintiffs incurred additional miscellaneous
expenses aside from Pl51,000.00,,making a total of P184,878.74. Defendant Jacob S. Lim
is further required to pay cross party plaintiff, Bormaheco, the Cervanteses one-half and
Maglana the other half, the amount of Pl84,878.74 with interest from the filing of the cross-
complaints until the amount is fully paid; plus moral and exemplary damages in the amount
of P184,878.84 with interest from the filing of the cross-complaints until the amount is fully
paid; plus moral and exemplary damages in the amount of P50,000.00 for each of the two
Cervanteses.

Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses, and

another P20,000.00 to Constancio B. Maglana as attorney's fees.

xxx xxx xxx

WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against defendants
Bormaheco, the Cervanteses and Constancio B. Maglana, is dismissed. Instead, plaintiff is
required to indemnify the defendants Bormaheco and the Cervanteses the amount of
P20,000.00 as attorney's fees and the amount of P4,379.21, per year from 1966 with legal
rate of interest up to the time it is paid.

Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of

P20,000.00 as attorney's fees and costs.
 No moral or exemplary damages is awarded against plaintiff for this action was filed in good
faith. The fact that the properties of the Bormaheco and the Cervanteses were attached and
that they were required to file a counterbond in order to dissolve the attachment, is not an
act of bad faith. When a man tries to protect his rights, he should not be saddled with moral
or exemplary damages. Furthermore, the rights exercised were provided for in the Rules of
Court, and it was the court that ordered it, in the exercise of its discretion.

No damage is decided against Malayan Insurance Company, Inc., the third-party defendant,
for it only secured the attachment prayed for by the plaintiff Pioneer. If an insurance
company would be liable for damages in performing an act which is clearly within its power
and which is the reason for its being, then nobody would engage in the insurance business.
No further claim or counter-claim for or against anybody is declared by this Court. (Rollo -
G.R. No. 24197, pp. 15-16)

In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as owner-
operator of Southern Air Lines (SAL) a single proprietorship.

On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and executed a
sales contract (Exhibit A) for the sale and purchase of two (2) DC-3A Type aircrafts and one (1) set of
necessary spare parts for the total agreed price of US $109,000.00 to be paid in installments. One DC-3
Aircraft with Registry No. PIC-718, arrived in Manila on June 7,1965 while the other aircraft, arrived in
Manila on July 18,1965.

On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No. 84197) as
surety executed and issued its Surety Bond No. 6639 (Exhibit C) 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 (respondents in both petitions) 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
two (2) separate indemnity agreements (Exhibits D-1 and D-2) 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 to indemnify and
hold and save harmless Pioneer from and against any/all damages, losses, costs, damages, taxes,
penalties, charges and expenses of whatever kind and nature which Pioneer may incur in consequence of
having become surety upon the bond/note and to pay, reimburse and make good to Pioneer, its
successors and assigns, all sums and amounts of money which it or its representatives should or may pay
or cause to be paid or become liable to pay on them of whatever kind and nature.

On June 10, 1965, 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. The deed (Exhibit D) was duly
registered with the Office of the Register of Deeds of the City of Manila and with the Civil Aeronautics
Administration pursuant to the Chattel Mortgage Law and the Civil Aeronautics Law (Republic Act No.
776), respectively.

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 then filed a petition for the extrajudicial foreclosure of the said chattel mortgage before the Sheriff
of Davao City. The Cervanteses and Maglana, however, filed a third party claim alleging that they are co-
owners of the aircrafts,

On July 19, 1966, 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.
As stated earlier, 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.

We first resolve G.R. No. 84197.

Petitioner Pioneer Insurance and Surety Corporation avers that:

RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DISMISSED THE

APPEAL OF PETITIONER ON THE SOLE GROUND THAT PETITIONER HAD ALREADY
COLLECTED THE PROCEEDS OF THE REINSURANCE ON ITS BOND IN FAVOR OF
THE JDA AND THAT IT CANNOT REPRESENT A REINSURER TO RECOVER THE
AMOUNT FROM HEREIN PRIVATE RESPONDENTS AS DEFENDANTS IN THE TRIAL
COURT. (Rollo - G. R. No. 84197, p. 10)

The petitioner questions the following findings of the appellate court:

We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had reinsured its
risk of liability under the surety bond in favor of JDA and subsequently collected the
proceeds of such reinsurance in the sum of P295,000.00. Defendants' alleged obligation to
Pioneer amounts to P295,000.00, hence, plaintiffs instant action for the recovery of the
amount of P298,666.28 from defendants will no longer prosper. Plaintiff Pioneer is not the
real party in interest to institute the instant action as it does not stand to be benefited or
injured by the judgment.

Plaintiff Pioneer's contention that it is representing the reinsurer to recover the amount from
defendants, hence, it instituted the action is utterly devoid of merit. Plaintiff did not even
present any evidence that it is the attorney-in-fact of the reinsurance company, authorized
to institute an action for and in behalf of the latter. To qualify a person to be a real party in
interest in whose name an action must be prosecuted, he must appear to be the present
real owner of the right sought to be enforced (Moran, Vol. I, Comments on the Rules of
Court, 1979 ed., p. 155). It has been held that the real party in interest is the party who
would be benefited or injured by the judgment or the party entitled to the avails of the suit
(Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in interest is meant
a present substantial interest as distinguished from a mere expectancy or a future,
contingent, subordinate or consequential interest (Garcia v. David, 67 Phil. 27; Oglleaby v.
Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v. Germans, 1 NW 2d 424;
Weber v. City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).

Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real party in
interest as it has already been paid by the reinsurer the sum of P295,000.00 — the bulk of
defendants' alleged obligation to Pioneer.

In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from its
reinsurer, the former was able to foreclose extra-judicially one of the subject airplanes and
its spare engine, realizing the total amount of P37,050.00 from the sale of the mortgaged
chattels. Adding the sum of P37,050.00, to the proceeds of the reinsurance amounting to
P295,000.00, it is patent that plaintiff has been overpaid in the amount of P33,383.72
considering that the total amount it had paid to JDA totals to only P298,666.28. To allow
plaintiff Pioneer to recover from defendants the amount in excess of P298,666.28 would be
tantamount to unjust enrichment as it has already been paid by the reinsurance company of
the amount plaintiff has paid to JDA as surety of defendant Lim vis-a-vis defendant Lim's
liability to JDA. Well settled is the rule that no person should unjustly enrich himself at the
expense of another (Article 22, New Civil Code). (Rollo-84197, pp. 24-25).

The petitioner contends that-(1) it is at a loss where respondent court based its finding that petitioner was
paid by its reinsurer in the aforesaid amount, as this matter has never been raised by any of the parties
herein both in their answers in the court below and in their respective briefs with respondent court; (Rollo,
p. 11) (2) even assuming hypothetically that it was paid by its reinsurer, still none of the respondents had
any interest in the matter since the reinsurance is strictly between the petitioner and the re-insurer
pursuant to section 91 of the Insurance Code; (3) pursuant to the indemnity agreements, the petitioner is
entitled to recover from respondents Bormaheco and Maglana; and (4) the principle of unjust enrichment
is not applicable considering that whatever amount he would recover from the co-indemnitor will be paid to
the reinsurer.
The records belie the petitioner's contention that the issue on the reinsurance money was never raised by
the parties.

A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out were:

xxx xxx xxx

1. Has Pioneer a cause of action against defendants with respect to so much of its
obligations to JDA as has been paid with reinsurance money?

2. If the answer to the preceding question is in the negative, has Pioneer still any claim
against defendants, considering the amount it has realized from the sale of the mortgaged
properties? (Record on Appeal, p. 359, Annex B of G.R. No. 84157).

In resolving these issues, the trial court made the following findings:

It appearing that Pioneer reinsured its risk of liability under the surety bond it had executed
in favor of JDA, collected the proceeds of such reinsurance in the sum of P295,000, and
paid with the said amount the bulk of its alleged liability to JDA under the said surety bond,
it is plain that on this score it no longer has any right to collect to the extent of the said
amount.

On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing
defendants for the amount paid to it by the reinsurers, notwithstanding that the cause of
action pertains to the latter, Pioneer says: The reinsurers opted instead that the Pioneer
Insurance & Surety Corporation shall pursue alone the case.. . . . Pioneer Insurance &
Surety Corporation is representing the reinsurers to recover the amount.' In other words,
insofar as the amount paid to it by the reinsurers Pioneer is suing defendants as their
attorney-in-fact.

But in the first place, there is not the slightest indication in the complaint that Pioneer is
suing as attorney-in- fact of the reinsurers for any amount. Lastly, and most important of all,
Pioneer has no right to institute and maintain in its own name an action for the benefit of the
reinsurers. It is well-settled that an action brought by an attorney-in-fact in his own name
instead of that of the principal will not prosper, and this is so even where the name of the
principal is disclosed in the complaint.

Section 2 of Rule 3 of the Old Rules of Court provides that 'Every action must
be prosecuted in the name of the real party in interest.' This provision is
mandatory. The real party in interest is the party who would be benefitted or
injured by the judgment or is the party entitled to the avails of the suit.

This Court has held in various cases that an attorney-in-fact is not a real party
in interest, that there is no law permitting an action to be brought by an
attorney-in-fact. Arroyo v. Granada and Gentero, 18 Phil. Rep. 484; Luchauco
v. Limjuco and Gonzalo, 19 Phil. Rep. 12; Filipinos Industrial Corporation v.
San Diego G.R. No. L- 22347,1968, 23 SCRA 706, 710-714.

The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has collected
P295,000.00 from the reinsurers, the uninsured portion of what it paid to JDA is the
difference between the two amounts, or P3,666.28. This is the amount for which Pioneer
may sue defendants, assuming that the indemnity agreement is still valid and effective. But
since the amount realized from the sale of the mortgaged chattels are P35,000.00 for one of
the airplanes and P2,050.00 for a spare engine, or a total of P37,050.00, Pioneer is still
overpaid by P33,383.72. Therefore, Pioneer has no more claim against defendants.
(Record on Appeal, pp. 360-363).

The payment to the petitioner made by the reinsurers was not disputed in the appellate court. Considering
this admitted payment, the only issue that cropped up was the effect of payment made by the reinsurers to
the petitioner. Therefore, the petitioner's argument that the respondents had no interest in the reinsurance
contract as this is strictly between the petitioner as insured and the reinsuring company pursuant to
Section 91 (should be Section 98) of the Insurance Code has no basis.
 In general a reinsurer, on payment of a loss acquires the same rights by subrogation as are
acquired in similar cases where the original insurer pays a loss (Universal Ins. Co. v. Old
Time Molasses Co. C.C.A. La., 46 F 2nd 925).

The rules of practice in actions on original insurance policies are in general applicable to
actions or contracts of reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55
S.E. 330,126 GA. 380, 7 Ann. Con. 1134).

Hence the applicable law is Article 2207 of the new Civil Code, to wit:

Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from
the insurance company for the injury or loss arising out of the wrong or breach of contract
complained of, the insurance company shall be subrogated to the rights of the insured
against the wrongdoer or the person who has violated the contract. If the amount paid by
the insurance company does not fully cover the injury or loss, the aggrieved party shall be
entitled to recover the deficiency from the person causing the loss or injury.

Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber Co. (101
Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany Manufacturing Corporation v.
Court of Appeals (154 SCRA 650 [1987]):

Note that if a property is insured and the owner receives the indemnity from the insurer, it is
provided in said article that the insurer is deemed subrogated to the rights of the insured
against the wrongdoer and if the amount paid by the insurer does not fully cover the loss,
then the aggrieved party is the one entitled to recover the deficiency. Evidently, under this
legal provision, the real party in interest with regard to the portion of the indemnity paid is
the insurer and not the insured. (Emphasis supplied).

It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the
reinsurer.

Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's complaint
as against the respondents for the reason that the petitioner was not the real party in interest in the
complaint and, therefore, has no cause of action against the respondents.

Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors should not have
been dismissed on the premise that the evidence on record shows that it is entitled to recover from the
counter indemnitors. It does not, however, cite any grounds except its allegation that respondent
"Maglanas defense and evidence are certainly incredible" (p. 12, Rollo) to back up its contention.

On the other hand, we find the trial court's findings on the matter replete with evidence to substantiate its
finding that the counter-indemnitors are not liable to the petitioner. The trial court stated:

Apart from the foregoing proposition, the indemnity agreement ceased to be valid and
effective after the execution of the chattel mortgage.

Testimonies of defendants Francisco Cervantes and Modesto Cervantes.

Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved, agreed
to issue the bond provided that the same would be mortgaged to it, but this was not
possible because the planes were still in Japan and could not be mortgaged here in the
Philippines. As soon as the aircrafts were brought to the Philippines, they would be
mortgaged to Pioneer Insurance to cover the bond, and this indemnity agreement would be
cancelled.

The following is averred under oath by Pioneer in the original complaint:

The various conflicting claims over the mortgaged properties have impaired
and rendered insufficient the security under the chattel mortgage and there is
thus no other sufficient security for the claim sought to be enforced by this
action.

This is judicial admission and aside from the chattel mortgage there is no other security for
the claim sought to be enforced by this action, which necessarily means that the indemnity
agreement had ceased to have any force and effect at the time this action was instituted.
Sec 2, Rule 129, Revised Rules of Court.

Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on the
planes and spare parts, no longer has any further action against the defendants as
indemnitors to recover any unpaid balance of the price. The indemnity agreement was ipso
jure extinguished upon the foreclosure of the chattel mortgage. These defendants, as
indemnitors, would be entitled to be subrogated to the right of Pioneer should they make
payments to the latter. Articles 2067 and 2080 of the New Civil Code of the Philippines.

Independently of the preceding proposition Pioneer's election of the remedy of foreclosure

precludes any further action to recover any unpaid balance of the price.

SAL or Lim, having failed to pay the second to the eight and last installments to JDA and
Pioneer as surety having made of the payments to JDA, the alternative remedies open to
Pioneer were as provided in Article 1484 of the New Civil Code, known as the Recto Law.

Pioneer exercised the remedy of foreclosure of the chattel mortgage both by extrajudicial
foreclosure and the instant suit. Such being the case, as provided by the aforementioned
provisions, Pioneer shall have no further action against the purchaser to recover any unpaid
balance and any agreement to the contrary is void.' Cruz, et al. v. Filipinas Investment &
Finance Corp. No. L- 24772, May 27,1968, 23 SCRA 791, 795-6.

The operation of the foregoing provision cannot be escaped from through the contention
that Pioneer is not the vendor but JDA. The reason is that Pioneer is actually exercising the
rights of JDA as vendor, having subrogated it in such rights. Nor may the application of the
provision be validly opposed on the ground that these defendants and defendant Maglana
are not the vendee but indemnitors. Pascual, et al. v. Universal Motors Corporation, G.R.
No. L- 27862, Nov. 20,1974, 61 SCRA 124.

The restructuring of the obligations of SAL or Lim, thru the change of their maturity dates
discharged these defendants from any liability as alleged indemnitors. The change of the
maturity dates of the obligations of Lim, or SAL extinguish the original obligations thru
novations thus discharging the indemnitors.

The principal hereof shall be paid in eight equal successive three months
interval installments, the first of which shall be due and payable 25 August
1965, the remainder of which ... shall be due and payable on the 26th day x x
x of each succeeding three months and the last of which shall be due and
payable 26th May 1967.

However, at the trial of this case, Pioneer produced a memorandum executed by SAL or
Lim and JDA, modifying the maturity dates of the obligations, as follows:

The principal hereof shall be paid in eight equal successive three month
interval installments the first of which shall be due and payable 4 September
1965, the remainder of which ... shall be due and payable on the 4th day ... of
each succeeding months and the last of which shall be due and payable 4th
June 1967.

Not only that, Pioneer also produced eight purported promissory notes bearing maturity
dates different from that fixed in the aforesaid memorandum; the due date of the first
installment appears as October 15, 1965, and those of the rest of the installments, the 15th
of each succeeding three months, that of the last installment being July 15, 1967.

These restructuring of the obligations with regard to their maturity dates, effected twice,
were done without the knowledge, much less, would have it believed that these defendants
Maglana (sic). Pioneer's official Numeriano Carbonel would have it believed that these
defendants and defendant Maglana knew of and consented to the modification of the
obligations. But if that were so, there would have been the corresponding documents in the
form of a written notice to as well as written conformity of these defendants, and there are
no such document. The consequence of this was the extinguishment of the obligations and
of the surety bond secured by the indemnity agreement which was thereby also
extinguished. Applicable by analogy are the rulings of the Supreme Court in the case of
 Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the case of Asiatic Petroleum Co.
v. Hizon David, 45 Phil. 532, 538.

Art. 2079. An extension granted to the debtor by the creditor without the
consent of the guarantor extinguishes the guaranty The mere failure on the
part of the creditor to demand payment after the debt has become due does
not of itself constitute any extension time referred to herein, (New Civil
Code).'

Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co., Ltd., v.
Climacom et al. (C.A.) 36 O.G. 1571.

Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the same.
Consequently, Pioneer has no more cause of action to recover from these defendants, as
supposed indemnitors, what it has paid to JDA. By virtue of an express stipulation in the
surety bond, the failure of JDA to present its claim to Pioneer within ten days from default of
Lim or SAL on every installment, released Pioneer from liability from the claim.

Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru the
indemnity.

Art. 1318. Payment by a solidary debtor shall not entitle him to

reimbursement from his co-debtors if such payment is made after the
obligation has prescribed or became illegal.

These defendants are entitled to recover damages and attorney's fees from Pioneer and its
surety by reason of the filing of the instant case against them and the attachment and
garnishment of their properties. The instant action is clearly unfounded insofar as plaintiff
drags these defendants and defendant Maglana.' (Record on Appeal, pp. 363-369, Rollo of
G.R. No. 84157).

We find no cogent reason to reverse or modify these findings.

Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.

We now discuss the merits of G.R. No. 84157.

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 ('CA'). (Rollo, p. 6).

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 (Exhibit 58). 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 (Cannon v. Brush
Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), 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 (Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann.
Cas. 1913A 1065). 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 (Smith v. Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555; Whipple
v. Parker, 29 Mich. 369). 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 (Shorb v. Beaudry, 56
Cal. 446). 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 (London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116
U.S. 461, 472, 29 L.Ed. 688), 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 (Ward v. Brigham, 127 Mass. 24). 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 (Heald v. Owen, 44 N.W. 210, 79 Iowa 23). (Corpus
Juris Secundum, Vol. 68, p. 464). (Italics supplied).

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:

... 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, cross-claim
and third party complaint:

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.

WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of Appeals is
AFFIRMED.

SO ORDERED.
G.R. No. 136448 November 3, 1999

LIM TONG LIM, petitioner,

vs.
PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.

PANGANIBAN, J.:

A partnership may be deemed to exist among parties who agree to borrow money to pursue a business
and to divide the profits or losses that may arise therefrom, even if it is shown that they have not
contributed any capital of their own to a "common fund." Their contribution may be in the form of credit or
industry, not necessarily cash or fixed assets. Being partner, they are all liable for debts incurred by or on
behalf of the partnership. The liability for a contract entered into on behalf of an unincorporated
association or ostensible corporation may lie in a person who may not have directly transacted on its
behalf, but reaped benefits from that contract.

The Case

In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998 Decision
of the Court of Appeals in CA-GR CV
41477,   which disposed as follows:
1

WHEREFORE, [there being] no reversible error in the appealed decision, the same is
hereby affirmed.  2

The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was affirmed by the CA,
reads as follows:

WHEREFORE, the Court rules:

1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court on
September 20, 1990;

2. That defendants are jointly liable to plaintiff for the following amounts, subject to the
modifications as hereinafter made by reason of the special and unique facts and
circumstances and the proceedings that transpired during the trial of this case;

a. P532,045.00 representing [the] unpaid purchase price of the fishing nets

covered by the Agreement plus P68,000.00 representing the unpaid price of
the floats not covered by said Agreement;

b. 12% interest per annum counted from date of plaintiff's invoices and

computed on their respective amounts as follows:

i. Accrued interest of P73,221.00 on Invoice No. 14407 for

P385,377.80 dated February 9, 1990;

ii. Accrued interest for P27,904.02 on Invoice No. 14413 for

P146,868.00 dated February 13, 1990;

iii. Accrued interest of P12,920.00 on Invoice No. 14426 for

P68,000.00 dated February 19, 1990;

c. P50,000.00 as and for attorney's fees, plus P8,500.00 representing

P500.00 per appearance in court;

d. P65,000.00 representing P5,000.00 monthly rental for storage charges on

the nets counted from September 20, 1990 (date of attachment) to
September 12, 1991 (date of auction sale);

e. Cost of suit.
 With respect to the joint liability of defendants for the principal obligation or for the
unpaid price of nets and floats in the amount of P532,045.00 and P68,000.00,
respectively, or for the total amount P600,045.00, this Court noted that these items
were attached to guarantee any judgment that may be rendered in favor of the
plaintiff but, upon agreement of the parties, and, to avoid further deterioration of the
nets during the pendency of this case, it was ordered sold at public auction for not
less than P900,000.00 for which the plaintiff was the sole and winning bidder. The
proceeds of the sale paid for by plaintiff was deposited in court. In effect, the amount
of P900,000.00 replaced the attached property as a guaranty for any judgment that
plaintiff may be able to secure in this case with the ownership and possession of the
nets and floats awarded and delivered by the sheriff to plaintiff as the highest bidder
in the public auction sale. It has also been noted that ownership of the nets [was]
retained by the plaintiff until full payment [was] made as stipulated in the invoices;
hence, in effect, the plaintiff attached its own properties. It [was] for this reason also
that this Court earlier ordered the attachment bond filed by plaintiff to guaranty
damages to defendants to be cancelled and for the P900,000.00 cash bidded and
paid for by plaintiff to serve as its bond in favor of defendants.

From the foregoing, it would appear therefore that whatever judgment the plaintiff
may be entitled to in this case will have to be satisfied from the amount of
P900,000.00 as this amount replaced the attached nets and floats. Considering,
however, that the total judgment obligation as computed above would amount to only
P840,216.92, it would be inequitable, unfair and unjust to award the excess to the
defendants who are not entitled to damages and who did not put up a single centavo
to raise the amount of P900,000.00 aside from the fact that they are not the owners
of the nets and floats. For this reason, the defendants are hereby relieved from any
and all liabilities arising from the monetary judgment obligation enumerated above
and for plaintiff to retain possession and ownership of the nets and floats and for the
reimbursement of the P900,000.00 deposited by it with the Clerk of Court.

SO ORDERED.  3

The Facts

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a Contract
dated February 7, 1990, for the purchase of fishing nets of various sizes from the Philippine Fishing Gear
Industries, Inc. (herein respondent). They claimed that they were engaged in a business venture with
Petitioner Lim Tong Lim, who however was not a signatory to the agreement. The total price of the nets
amounted to P532,045. Four hundred pieces of floats worth P68,000 were also sold to the Corporation.  4

The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondents filed a
collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of preliminary
attachment. The suit was brought against the three in their capacities as general partners, on the
allegation that "Ocean Quest Fishing Corporation" was a nonexistent corporation as shown by a
Certification from the Securities and Exchange Commission.   On September 20, 1990, the lower court
5

issued a Writ of Preliminary Attachment, which the sheriff enforced by attaching the fishing nets on board
F/B Lourdes which was then docked at the Fisheries Port, Navotas, Metro Manila.

Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and requesting a
reasonable time within which to pay. He also turned over to respondent some of the nets which were in
his possession. Peter Yao filed an Answer, after which he was deemed to have waived his right to cross-
examine witnesses and to present evidence on his behalf, because of his failure to appear in subsequent
hearings. Lim Tong Lim, on the other hand, filed an Answer with Counterclaim and Crossclaim and moved
for the lifting of the Writ of Attachment.   The trial court maintained the Writ, and upon motion of private
6

respondent, ordered the sale of the fishing nets at a public auction. Philippine Fishing Gear Industries won
the bidding and deposited with the said court the sales proceeds of P900,000.  7

On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing Gear Industries
was entitled to the Writ of Attachment and that Chua, Yao and Lim, as general partners, were jointly liable
to pay respondent. 8

The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the testimonies of
the witnesses presented and (2) on a Compromise Agreement executed by the three   in Civil Case No.
9

1492-MN which Chua and Yao had brought against Lim in the RTC of Malabon, Branch 72, for (a) a
declaration of nullity of commercial documents; (b) a reformation of contracts; (c) a declaration of
ownership of fishing boats; (d) an injunction and (e) damages.   The Compromise Agreement provided:
10

a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4)
vessels sold in the amount of P5,750,000.00 including the fishing net. This
P5,750,000.00 shall be applied as full payment for P3,250,000.00 in favor of
JL Holdings Corporation and/or Lim Tong Lim;

b) If the four (4) vessel[s] and the fishing net will be sold at a higher price than
P5,750,000.00 whatever will be the excess will be divided into 3: 1/3 Lim
Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao;

c) If the proceeds of the sale the vessels will be less than P5,750,000.00
whatever the deficiency shall be shouldered and paid to JL Holding
Corporation by 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao.  11

The trial court noted that the Compromise Agreement was silent as to the nature of their obligations, but
that joint liability could be presumed from the equal distribution of the profit and loss. 
21

Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.

Ruling of the Court of Appeals

In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in a fishing business
and may thus be held liable as a such for the fishing nets and floats purchased by and for the use of the
partnership. The appellate court ruled:

The evidence establishes that all the defendants including herein appellant Lim Tong Lim
undertook a partnership for a specific undertaking, that is for commercial fishing . . . .
Oviously, the ultimate undertaking of the defendants was to divide the profits among
themselves which is what a partnership essentially is . . . . By a contract of partnership, two
or more persons bind themselves to contribute money, property or industry to a common
fund with the intention of dividing the profits among themselves (Article 1767, New Civil
Code).  13

Hence, petitioner brought this recourse before this Court.  14

The Issues

In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision on the following
grounds:

I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE

AGREEMENT THAT CHUA, YAO AND PETITIONER LIM ENTERED INTO IN A
SEPARATE CASE, THAT A PARTNERSHIP AGREEMENT EXISTED AMONG THEM.

II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR
OCEAN QUEST FISHING CORPORATION WHEN HE BOUGHT THE NETS FROM
PHILIPPINE FISHING, THE COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING
LIABILITY TO PETITIONER LIM AS WELL.

III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT OF
PETITIONER LIM'S GOODS.

In determining whether petitioner may be held liable for the fishing nets and floats from respondent, the
Court must resolve this key issue: whether by their acts, Lim, Chua and Yao could be deemed to have
entered into a partnership.

This Court's Ruling

The Petition is devoid of merit.

First and Second Issues:

 Existence of a Partnership

and Petitioner's Liability

In arguing that he should not be held liable for the equipment purchased from respondent, petitioner
controverts the CA finding that a partnership existed between him, Peter Yao and Antonio Chua. He
asserts that the CA based its finding on the Compromise Agreement alone. Furthermore, he disclaims any
direct participation in the purchase of the nets, alleging that the negotiations were conducted by Chua and
Yao only, and that he has not even met the representatives of the respondent company. Petitioner further
argues that he was a lessor, not a partner, of Chua and Yao, for the "Contract of Lease " dated February
1, 1990, showed that he had merely leased to the two the main asset of the purported partnership — the
fishing boat F/B Lourdes. The lease was for six months, with a monthly rental of P37,500 plus 25 percent
of the gross catch of the boat.

We are not persuaded by the arguments of petitioner. The facts as found by the two lower courts clearly
showed that there existed a partnership among Chua, Yao and him, pursuant to Article 1767 of the Civil
Code which provides:

Art. 1767 — By the contract of partnership, two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of dividing the
profits among themselves.

Specifically, both lower courts ruled that a partnership among the three existed based on the following
factual findings: 
15

(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in commercial
fishing to join him, while Antonio Chua was already Yao's partner;

(2) That after convening for a few times, Lim, Chua, and Yao verbally agreed to acquire two
fishing boats, the FB Lourdes and the FB Nelson for the sum of P3.35 million;

(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong Lim, to
finance the venture.

(4) That they bought the boats from CMF Fishing Corporation, which executed a Deed of
Sale over these two (2) boats in favor of Petitioner Lim Tong Lim only to serve as security
for the loan extended by Jesus Lim;

(5) That Lim, Chua and Yao agreed that the refurbishing, re-equipping, repairing, dry
docking and other expenses for the boats would be shouldered by Chua and Yao;

(6) That because of the "unavailability of funds," Jesus Lim again extended a loan to the
partnership in the amount of P1 million secured by a check, because of which, Yao and
Chua entrusted the ownership papers of two other boats, Chua's FB Lady Anne
Mel and Yao's FB Tracy to Lim Tong Lim.

(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua bought nets
from Respondent Philippine Fishing Gear, in behalf of "Ocean Quest Fishing Corporation,"
their purported business name.

(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC, Branch 72
by Antonio Chua and Peter Yao against Lim Tong Lim for (a) declaration of nullity of
commercial documents; (b) reformation of contracts; (c) declaration of ownership of fishing
boats; (4) injunction; and (e) damages.

(9) That the case was amicably settled through a Compromise Agreement executed
between the parties-litigants the terms of which are already enumerated above.

From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided to engage in
a fishing business, which they started by buying boats worth P3.35 million, financed by a loan secured
from Jesus Lim who was petitioner's brother. In their Compromise Agreement, they subsequently revealed
their intention to pay the loan with the proceeds of the sale of the boats, and to divide equally among them
the excess or loss. These boats, the purchase and the repair of which were financed with borrowed
money, fell under the term "common fund" under Article 1767. The contribution to such fund need not be
cash or fixed assets; it could be an intangible like credit or industry. That the parties agreed that any loss
or profit from the sale and operation of the boats would be divided equally among them also shows that
they had indeed formed a partnership.

Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also to that of
the nets and the floats. The fishing nets and the floats, both essential to fishing, were obviously acquired
in furtherance of their business. It would have been inconceivable for Lim to involve himself so much in
buying the boat but not in the acquisition of the aforesaid equipment, without which the business could not
have proceeded.

Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a partnership
engaged in the fishing business. They purchased the boats, which constituted the main assets of the
partnership, and they agreed that the proceeds from the sales and operations thereof would be divided
among them.

We stress that under Rule 45, a petition for review like the present case should involve only questions of
law. Thus, the foregoing factual findings of the RTC and the CA are binding on this Court, absent any
cogent proof that the present action is embraced by one of the exceptions to the rule.   In assailing the
16

factual findings of the two lower courts, petitioner effectively goes beyond the bounds of a petition for
review under Rule 45.

Compromise Agreement

Not the Sole Basis of Partnership

Petitioner argues that the appellate court's sole basis for assuming the existence of a partnership was the
Compromise Agreement. He also claims that the settlement was entered into only to end the dispute
among them, but not to adjudicate their preexisting rights and obligations. His arguments are baseless.
The Agreement was but an embodiment of the relationship extant among the parties prior to its execution.

A proper adjudication of claimants' rights mandates that courts must review and thoroughly appraise all
relevant facts. Both lower courts have done so and have found, correctly, a preexisting partnership among
the parties. In implying that the lower courts have decided on the basis of one piece of document alone,
petitioner fails to appreciate that the CA and the RTC delved into the history of the document and explored
all the possible consequential combinations in harmony with law, logic and fairness. Verily, the two lower
courts' factual findings mentioned above nullified petitioner's argument that the existence of a partnership
was based only on the Compromise Agreement.

Petitioner Was a Partner,

Not a Lessor

We are not convinced by petitioner's argument that he was merely the lessor of the boats to Chua and
Yao, not a partner in the fishing venture. His argument allegedly finds support in the Contract of Lease
and the registration papers showing that he was the owner of the boats, including F/B Lourdes where the
nets were found.

His allegation defies logic. In effect, he would like this Court to believe that he consented to the sale of his
own boats to pay a debt of Chua and Yao, with the excess of the proceeds to be divided among the three
of them. No lessor would do what petitioner did. Indeed, his consent to the sale proved that there was a
preexisting partnership among all three.

Verily, as found by the lower courts, petitioner entered into a business agreement with Chua and Yao, in
which debts were undertaken in order to finance the acquisition and the upgrading of the vessels which
would be used in their fishing business. The sale of the boats, as well as the division among the three of
the balance remaining after the payment of their loans, proves beyond cavil that F/B Lourdes, though
registered in his name, was not his own property but an asset of the partnership. It is not uncommon to
register the properties acquired from a loan in the name of the person the lender trusts, who in this case is
the petitioner himself. After all, he is the brother of the creditor, Jesus Lim.

We stress that it is unreasonable — indeed, it is absurd — for petitioner to sell his property to pay a debt
he did not incur, if the relationship among the three of them was merely that of lessor-lessee, instead of
partners.
 Corporation by Estoppel

Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed only to Chua
and Yao, and not to him. Again, we disagree.

Sec. 21 of the Corporation Code of the Philippines provides:

Sec. 21. Corporation by estoppel. — All persons who assume to act as a corporation

knowing it to be without authority to do so shall be liable as general partners for all debts,
liabilities and damages incurred or arising as a result thereof: Provided however, That when
any such ostensible corporation is sued on any transaction entered by it as a corporation or
on any tort committed by it as such, it shall not be allowed to use as a defense its lack of
corporate personality.

One who assumes an obligation to an ostensible corporation as such, cannot resist

performance thereof on the ground that there was in fact no corporation.

Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be estopped
from denying its corporate existence. "The reason behind this doctrine is obvious — an unincorporated
association has no personality and would be incompetent to act and appropriate for itself the power and
attributes of a corporation as provided by law; it cannot create agents or confer authority on another to act
in its behalf; thus, those who act or purport to act as its representatives or agents do so without authority
and at their own risk. And as it is an elementary principle of law that a person who acts as an agent
without authority or without a principal is himself regarded as the principal, possessed of all the right and
subject to all the liabilities of a principal, a person acting or purporting to act on behalf of a corporation
which has no valid existence assumes such privileges and obligations and becomes personally liable for
contracts entered into or for other acts performed as such agent.  17

The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. In the
first instance, an unincorporated association, which represented itself to be a corporation, will be estopped
from denying its corporate capacity in a suit against it by a third person who relied in good faith on such
representation. It cannot allege lack of personality to be sued to evade its responsibility for a contract it
entered into and by virtue of which it received advantages and benefits.

On the other hand, a third party who, knowing an association to be unincorporated, nonetheless treated it
as a corporation and received benefits from it, may be barred from denying its corporate existence in a
suit brought against the alleged corporation. In such case, all those who benefited from the transaction
made by the ostensible corporation, despite knowledge of its legal defects, may be held liable for
contracts they impliedly assented to or took advantage of.

There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be paid for the
nets it sold. The only question here is whether petitioner should be held jointly   liable with Chua and Yao.
18

Petitioner contests such liability, insisting that only those who dealt in the name of the ostensible
corporation should be held liable. Since his name does not appear on any of the contracts and since he
never directly transacted with the respondent corporation, ergo, he cannot be held liable.

Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat which
has earlier been proven to be an asset of the partnership. He in fact questions the attachment of the nets,
because the Writ has effectively stopped his use of the fishing vessel.

It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a corporation.
Although it was never legally formed for unknown reasons, this fact alone does not preclude the liabilities
of the three as contracting parties in representation of it. Clearly, under the law on estoppel, those acting
on behalf of a corporation and those benefited by it, knowing it to be without valid existence, are held
liable as general partners.

Technically, it is true that petitioner did not directly act on behalf of the corporation. However, having
reaped the benefits of the contract entered into by persons with whom he previously had an existing
relationship, he is deemed to be part of said association and is covered by the scope of the doctrine of
corporation by estoppel. We reiterate the ruling of the Court in Alonso v. Villamor:  19

A litigation is not a game of technicalities in which one, more deeply schooled and skilled in
the subtle art of movement and position, entraps and destroys the other. It is, rather, a
contest in which each contending party fully and fairly lays before the court the facts in issue
 and then, brushing aside as wholly trivial and indecisive all imperfections of form and
technicalities of procedure, asks that justice be done upon the merits. Lawsuits, unlike
duels, are not to be won by a rapier's thrust. Technicality, when it deserts its proper office as
an aid to justice and becomes its great hindrance and chief enemy, deserves scant
consideration from courts. There should be no vested rights in technicalities.

Third Issue:

Validity of Attachment

Finally, petitioner claims that the Writ of Attachment was improperly issued against the nets. We agree
with the Court of Appeals that this issue is now moot and academic. As previously discussed, F/B
Lourdes was an asset of the partnership and that it was placed in the name of petitioner, only to assure
payment of the debt he and his partners owed. The nets and the floats were specifically manufactured and
tailor-made according to their own design, and were bought and used in the fishing venture they agreed
upon. Hence, the issuance of the Writ to assure the payment of the price stipulated in the invoices is
proper. Besides, by specific agreement, ownership of the nets remained with Respondent Philippine
Fishing Gear, until full payment thereof.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.

SO ORDERED.
G.R. No. 156759               June 5, 2013

ALLEN A. MACASAET, NICOLAS V. QUIJANO, JR., ISAIAS ALBANO, LILY REYES, JANET BAY,
JESUS R. GALANG, AND RANDY HAGOS, Petitioners,
vs.
FRANCISCO R. CO, JR., Respondent.

DECISION

BERSAMIN, J.:

To warrant the substituted service of the summons and copy of the complaint, the serving officer must first
attempt to effect the same upon the defendant in person. Only after the attempt at personal service has
become futile or impossible within a reasonable time may the officer resort to substituted service.

The Case

Petitioners – defendants in a suit for libel brought by respondent – appeal the decision promulgated on
March 8, 20021 and the resolution promulgated on January 13, 2003,2 whereby the Court of Appeals (CA)
respectively dismissed their petition for certiorari, prohibition and mandamus and denied their motion for
reconsideration. Thereby, the CA upheld the order the Regional Trial Court (RTC), Branch 51, in Manila
had issued on March 12, 2001 denying their motion to dismiss because the substituted service of the
summons and copies of the complaint on each of them had been valid and effective.3

Antecedents

On July 3, 2000, respondent, a retired police officer assigned at the Western Police District in Manila,
sued Abante Tonite, a daily tabloid of general circulation; its Publisher Allen A. Macasaet; its Managing
Director Nicolas V. Quijano; its Circulation Manager Isaias Albano; its Editors Janet Bay, Jesus R. Galang
and Randy Hagos; and its Columnist/Reporter Lily Reyes (petitioners), claiming damages because of an
allegedly libelous article petitioners published in the June 6, 2000 issue of Abante Tonite. The suit,
docketed as Civil Case No. 00-97907, was raffled to Branch 51 of the RTC, which in due course issued
summons to be served on each defendant, including Abante Tonite, at their business address at Monica
Publishing Corporation, 301-305 3rd Floor, BF Condominium Building, Solana Street corner A. Soriano
Street, Intramuros, Manila.4

In the morning of September 18, 2000, RTC Sheriff Raul Medina proceeded to the stated address to effect
the personal service of the summons on the defendants. But his efforts to personally serve each
defendant in the address were futile because the defendants were then out of the office and unavailable.
He returned in the afternoon of that day to make a second attempt at serving the summons, but he was
informed that petitioners were still out of the office. He decided to resort to substituted service of the
summons, and explained why in his sheriff’s return dated September 22, 2005,5 to wit:

SHERIFF’S RETURN

This is to certify that on September 18, 2000, I caused the service of summons together with copies of
complaint and its annexes attached thereto, upon the following:

1. Defendant Allen A. Macasaet, President/Publisher of defendant AbanteTonite, at Monica

Publishing Corporation, Rooms 301-305 3rd Floor, BF Condominium Building, Solana corner A.
Soriano Streets, Intramuros, Manila, thru his secretary Lu-Ann Quijano, a person of sufficient age
and discretion working therein, who signed to acknowledge receipt thereof. That effort (sic) to
serve the said summons personally upon said defendant were made, but the same were
ineffectual and unavailing on the ground that per information of Ms. Quijano said defendant is
always out and not available, thus, substituted service was applied;

2. Defendant Nicolas V. Quijano, at the same address, thru his wife Lu-Ann Quijano, who signed to
acknowledge receipt thereof. That effort (sic) to serve the said summons personally upon said
defendant were made, but the same were ineffectual and unavailing on the ground that per
information of (sic) his wife said defendant is always out and not available, thus, substituted service
was applied;

3. Defendants Isaias Albano, Janet Bay, Jesus R. Galang, Randy Hagos and Lily Reyes, at the
same address, thru Rene Esleta, Editorial Assistant of defendant AbanteTonite, a person of
 sufficient age and discretion working therein who signed to acknowledge receipt thereof. That effort
(sic) to serve the said summons personally upon said defendants were made, but the same were
ineffectual and unavailing on the ground that per information of (sic) Mr. Esleta said defendants is
(sic) always roving outside and gathering news, thus, substituted service was applied.

Original copy of summons is therefore, respectfully returned duly served.

Manila, September 22, 2000.

On October 3, 2000, petitioners moved for the dismissal of the complaint through counsel’s special
appearance in their behalf, alleging lack of jurisdiction over their persons because of the invalid and
ineffectual substituted service of summons. They contended that the sheriff had made no prior attempt to
serve the summons personally on each of them in accordance with Section 6 and Section 7, Rule 14 of
the Rules of Court. They further moved to drop Abante Tonite as a defendant by virtue of its being neither
a natural nor a juridical person that could be impleaded as a party in a civil action.

At the hearing of petitioners’ motion to dismiss, Medina testified that he had gone to the office address of
petitioners in the morning of September 18, 2000 to personally serve the summons on each defendant;
that petitioners were out of the office at the time; that he had returned in the afternoon of the same day to
again attempt to serve on each defendant personally but his attempt had still proved futile because all of
petitioners were still out of the office; that some competent persons working in petitioners’ office had
informed him that Macasaet and Quijano were always out and unavailable, and that Albano, Bay, Galang,
Hagos and Reyes were always out roving to gather news; and that he had then resorted to substituted
service upon realizing the impossibility of his finding petitioners in person within a reasonable time.

On March 12, 2001, the RTC denied the motion to dismiss, and directed petitioners to file their answers to
the complaint within the remaining period allowed by the Rules of Court,6 relevantly stating:

Records show that the summonses were served upon Allen A. Macasaet, President/Publisher of
defendant AbanteTonite, through LuAnn Quijano; upon defendants Isaias Albano, Janet Bay, Jesus R.
Galang, Randy Hagos and Lily Reyes, through Rene Esleta, Editorial Assistant of defendant Abante
Tonite (p. 12, records). It is apparent in the Sheriff’s Return that on several occasions, efforts to served
(sic) the summons personally upon all the defendants were ineffectual as they were always out and
unavailable, so the Sheriff served the summons by substituted service.

Considering that summonses cannot be served within a reasonable time to the persons of all the
defendants, hence substituted service of summonses was validly applied. Secretary of the President who
is duly authorized to receive such document, the wife of the defendant and the Editorial Assistant of the
defendant, were considered competent persons with sufficient discretion to realize the importance of the
legal papers served upon them and to relay the same to the defendants named therein (Sec. 7, Rule 14,
1997 Rules of Civil Procedure).

WHEREFORE, in view of the foregoing, the Motion to Dismiss is hereby DENIED for lack of merit..

Accordingly, defendants are directed to file their Answers to the complaint within the period still open to
them, pursuant to the rules.

SO ORDERED.

Petitioners filed a motion for reconsideration, asserting that the sheriff had immediately resorted to
substituted service of the summons upon being informed that they were not around to personally receive
the summons, and that Abante Tonite, being neither a natural nor a juridical person, could not be made a
party in the action.

On June 29, 2001, the RTC denied petitioners’ motion for reconsideration.7 It stated in respect of the
service of summons, as follows:

The allegations of the defendants that the Sheriff immediately resorted to substituted service of summons
upon them when he was informed that they were not around to personally receive the same is untenable.
During the hearing of the herein motion, Sheriff Raul Medina of this Branch of the Court testified that on
September 18, 2000 in the morning, he went to the office address of the defendants to personally serve
summons upon them but they were out. So he went back to serve said summons upon the defendants in
the afternoon of the same day, but then again he was informed that the defendants were out and
unavailable, and that they were always out because they were roving around to gather news. Because of
that information and because of the nature of the work of the defendants that they are always on field, so
the sheriff resorted to substituted service of summons. There was substantial compliance with the rules,
considering the difficulty to serve the summons personally to them because of the nature of their job which
compels them to be always out and unavailable. Additional matters regarding the service of summons
upon defendants were sufficiently discussed in the Order of this Court dated March 12, 2001.

Regarding the impleading of Abante Tonite as defendant, the RTC held, viz:

"Abante Tonite" is a daily tabloid of general circulation. People all over the country could buy a copy of
"Abante Tonite" and read it, hence, it is for public consumption. The persons who organized said
publication obviously derived profit from it. The information written on the said newspaper will affect the
person, natural as well as juridical, who was stated or implicated in the news. All of these facts imply that
"Abante Tonite" falls within the provision of Art. 44 (2 or 3), New Civil Code. Assuming arguendo that
"Abante Tonite" is not registered with the Securities and Exchange Commission, it is deemed a
corporation by estoppels considering that it possesses attributes of a juridical person, otherwise it cannot
be held liable for damages and injuries it may inflict to other persons.

Undaunted, petitioners brought a petition for certiorari, prohibition, mandamusin the CA to nullify the
orders of the RTC dated March 12, 2001 and June 29, 2001.

Ruling of the CA

On March 8, 2002, the CA promulgated its questioned decision,8 dismissing the petition for certiorari,
prohibition, mandamus, to wit:

We find petitioners’ argument without merit. The rule is that certiorari will prosper only if there is a showing
of grave abuse of discretion or an act without or in excess of jurisdiction committed by the respondent
Judge. A judicious reading of the questioned orders of respondent Judge would show that the same were
not issued in a capricious or whimsical exercise of judgment. There are factual bases and legal
justification for the assailed orders. From the Return, the sheriff certified that "effort to serve the summons
personally xxx were made, but the same were ineffectual and unavailing xxx.

and upholding the trial court’s finding that there was a substantial compliance with the rules that allowed
the substituted service.

Furthermore, the CA ruled:

Anent the issue raised by petitioners that "Abante Tonite is neither a natural or juridical person who may
be a party in a civil case," and therefore the case against it must be dismissed and/or dropped, is
untenable.

The respondent Judge, in denying petitioners’ motion for reconsideration, held that:

xxxx

Abante Tonite’s newspapers are circulated nationwide, showing ostensibly its being a corporate entity,
thus the doctrine of corporation by estoppel may appropriately apply.

An unincorporated association, which represents itself to be a corporation, will be estopped from denying
its corporate capacity in a suit against it by a third person who relies in good faith on such representation.

There being no grave abuse of discretion committed by the respondent Judge in the exercise of his
jurisdiction, the relief of prohibition is also unavailable.

WHEREFORE, the instant petition is DENIED. The assailed Orders of respondent Judge are AFFIRMED.

SO ORDERED.9

On January 13, 2003, the CA denied petitioners’ motion for reconsideration.10

Issues

Petitioners hereby submit that:

 1. THE COURT OF APPEALS COMMITTED AN ERROR OF LAW IN HOLDING THAT THE
TRIAL COURT ACQUIRED JURISDICTION OVER HEREIN PETITIONERS.

2. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR BY SUSTAINING THE

INCLUSION OF ABANTE TONITE AS PARTY IN THE INSTANT CASE.11

Ruling

The petition for review lacks merit.

Jurisdiction over the person, or jurisdiction in personam –the power of the court to render a personal
judgment or to subject the parties in a particular action to the judgment and other rulings rendered in the
action – is an element of due process that is essential in all actions, civil as well as criminal, except in
actions in rem or quasi in rem. Jurisdiction over the defendantin an action in rem or quasi in rem is not
required, and the court acquires jurisdiction over an actionas long as it acquires jurisdiction over the
resthat is thesubject matter of the action. The purpose of summons in such action is not the acquisition of
jurisdiction over the defendant but mainly to satisfy the constitutional requirement of due process.12

The distinctions that need to be perceived between an action in personam, on the one hand, and an
action inrem or quasi in rem, on the other hand, are aptly delineated in Domagas v. Jensen,13 thusly:

The settled rule is that the aim and object of an action determine its character. Whether a proceeding is in
rem, or in personam, or quasi in rem for that matter, is determined by its nature and purpose, and by
these only. A proceeding in personam is a proceeding to enforce personal rights and obligations brought
against the person and is based on the jurisdiction of the person, although it may involve his right to, or
the exercise of ownership of, specific property, or seek to compel him to control or dispose of it in
accordance with the mandate of the court. The purpose of a proceeding in personam is to impose,
through the judgment of a court, some responsibility or liability directly upon the person of the defendant.
Of this character are suits to compel a defendant to specifically perform some act or actions to fasten a
pecuniary liability on him. An action in personam is said to be one which has for its object a judgment
against the person, as distinguished from a judgment against the property to determine its state. It has
been held that an action in personam is a proceeding to enforce personal rights or obligations; such action
is brought against the person. As far as suits for injunctive relief are concerned, it is well-settled that it is
an injunctive act in personam. In Combs v. Combs, the appellate court held that proceedings to enforce
personal rights and obligations and in which personal judgments are rendered adjusting the rights and
obligations between the affected parties is in personam. Actions for recovery of real property are in
personam.

On the other hand, a proceeding quasi in rem is one brought against persons seeking to subject the
property of such persons to the discharge of the claims assailed. In an action quasi in rem, an individual is
named as defendant and the purpose of the proceeding is to subject his interests therein to the obligation
or loan burdening the property. Actions quasi in rem deal with the status, ownership or liability of a
particular property but which are intended to operate on these questions only as between the particular
parties to the proceedings and not to ascertain or cut off the rights or interests of all possible claimants.
The judgments therein are binding only upon the parties who joined in the action.

As a rule, Philippine courts cannot try any case against a defendant who does not reside and is not found
in the Philippines because of the impossibility of acquiring jurisdiction over his person unless he voluntarily
appears in court; but when the case is an action in rem or quasi in rem enumerated in Section 15, Rule 14
of the Rules of Court, Philippine courts have jurisdiction to hear and decide the case because they have
jurisdiction over the res, and jurisdiction over the person of the non-resident defendant is not essential. In
the latter instance, extraterritorial service of summons can be made upon the defendant, and such
extraterritorial service of summons is not for the purpose of vesting the court with jurisdiction, but for the
purpose of complying with the requirements of fair play or due process, so that the defendant will be
informed of the pendency of the action against him and the possibility that property in the Philippines
belonging to him or in which he has an interest may be subjected to a judgment in favor of the plaintiff,
and he can thereby take steps to protect his interest if he is so minded. On the other hand, when the
defendant in an action in personam does not reside and is not found in the Philippines, our courts cannot
try the case against him because of the impossibility of acquiring jurisdiction over his person unless he
voluntarily appears in court.14

As the initiating party, the plaintiff in a civil action voluntarily submits himself to the jurisdiction of the court
by the act of filing the initiatory pleading. As to the defendant, the court acquires jurisdiction over his
person either by the proper service of the summons, or by a voluntary appearance in the action.15
Upon the filing of the complaint and the payment of the requisite legal fees, the clerk of court forthwith
issues the corresponding summons to the defendant.16 The summons is directed to the defendant and
signed by the clerk of court under seal. It contains the name of the court and the names of the parties to
the action; a direction that the defendant answers within the time fixed by the Rules of Court; and a notice
that unless the defendant so answers, the plaintiff will take judgment by default and may be granted the
relief applied for.17 To be attached to the original copy of the summons and all copies thereof is a copy of
the complaint (and its attachments, if any) and the order, if any, for the appointment of a guardian ad
litem.18

The significance of the proper service of the summons on the defendant in an action in personam cannot
be overemphasized. The service of the summons fulfills two fundamental objectives, namely: (a) to vest in
the court jurisdiction over the person of the defendant; and (b) to afford to the defendant the opportunity to
be heard on the claim brought against him.19 As to the former, when jurisdiction in personam is not
acquired in a civil action through the proper service of the summons or upon a valid waiver of such proper
service, the ensuing trial and judgment are void.20 If the defendant knowingly does an act inconsistent with
the right to object to the lack of personal jurisdiction as to him, like voluntarily appearing in the action, he is
deemed to have submitted himself to the jurisdiction of the court.21 As to the latter, the essence of due
process lies in the reasonable opportunity to be heard and to submit any evidence the defendant may
have in support of his defense. With the proper service of the summons being intended to afford to him
the opportunity to be heard on the claim against him, he may also waive the process.21 In other words,
compliance with the rules regarding the service of the summons is as much an issue of due process as it
is of jurisdiction.23

Under the Rules of Court, the service of the summons should firstly be effected on the defendant himself
whenever practicable. Such personal service consists either in handing a copy of the summons to the
defendant in person, or, if the defendant refuses to receive and sign for it, in tendering it to him.24 The rule
on personal service is to be rigidly enforced in order to ensure the realization of the two fundamental
objectives earlier mentioned. If, for justifiable reasons, the defendant cannot be served in person within a
reasonable time, the service of the summons may then be effected either (a) by leaving a copy of the
summons at his residence with some person of suitable age and discretion then residing therein, or (b) by
leaving the copy at his office or regular place of business with some competent person in charge
thereof.25 The latter mode of service is known as substituted service because the service of the summons
on the defendant is made through his substitute.

It is no longer debatable that the statutory requirements of substituted service must be followed strictly,
faithfully and fully, and any substituted service other than that authorized by statute is considered
ineffective.26 This is because substituted service, being in derogation of the usual method of service, is
extraordinary in character and may be used only as prescribed and in the circumstances authorized by
statute.27 Only when the defendant cannot be served personally within a reasonable time may substituted
service be resorted to. Hence, the impossibility of prompt personal service should be shown by stating the
efforts made to find the defendant himself and the fact that such efforts failed, which statement should be
found in the proof of service or sheriff’s return.28 Nonetheless, the requisite showing of the impossibility of
prompt personal service as basis for resorting to substituted service may be waived by the defendant
either expressly or impliedly.29

There is no question that Sheriff Medina twice attempted to serve the summons upon each of petitioners
in person at their office address, the first in the morning of September 18, 2000 and the second in the
afternoon of the same date. Each attempt failed because Macasaet and Quijano were "always out and not
available" and the other petitioners were "always roving outside and gathering news." After Medina
learned from those present in the office address on his second attempt that there was no likelihood of any
of petitioners going to the office during the business hours of that or any other day, he concluded that
further attempts to serve them in person within a reasonable time would be futile. The circumstances fully
warranted his conclusion. He was not expected or required as the serving officer to effect personal service
by all means and at all times, considering that he was expressly authorized to resort to substituted service
should he be unable to effect the personal service within a reasonable time. In that regard, what was a
reasonable time was dependent on the circumstances obtaining. While we are strict in insisting on
personal service on the defendant, we do not cling to such strictness should the circumstances already
justify substituted service instead. It is the spirit of the procedural rules, not their letter, that governs.30

In reality, petitioners’ insistence on personal service by the serving officer was demonstrably superfluous.
They had actually received the summonses served through their substitutes, as borne out by their filing of
several pleadings in the RTC, including an answer with compulsory counterclaim ad cautelam and a pre-
trial brief ad cautelam. They had also availed themselves of the modes of discovery available under the
Rules of Court. Such acts evinced their voluntary appearance in the action.
Nor can we sustain petitioners’ contention that Abante Tonite could not be sued as a defendant due to its
not being either a natural or a juridical person. In rejecting their contention, the CA categorized Abante
Tonite as a corporation by estoppel as the result of its having represented itself to the reading public as a
corporation despite its not being incorporated. Thereby, the CA concluded that the RTC did not gravely
abuse its discretion in holding that the non-incorporation of Abante Tonite with the Securities and
Exchange Commission was of no consequence, for, otherwise, whoever of the public who would suffer
any damage from the publication of articles in the pages of its tabloids would be left without recourse. We
cannot disagree with the CA, considering that the editorial box of the daily tabloid disclosed that basis,
nothing in the box indicated that Monica Publishing Corporation had owned Abante Tonite.

WHEREFORE, the Court AFFIRMS the decision promulgated on March 8, 2002; and ORDERS
petitioners to pay the costs of suit.

SO ORDERED.
G.R. No. 119002               October 19, 2000

INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petitioner,

vs.
HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINE FOOTBALL FEDERATION, respondents.

DECISION

KAPUNAN, J.:

On June 30 1989, petitioner International Express Travel and Tour Services, Inc., through its managing
director, wrote a letter to the Philippine Football Federation (Federation), through its president private
respondent Henri Kahn, wherein the former offered its services as a travel agency to the latter. The offer
1 

was accepted.

Petitioner secured the airline tickets for the trips of the athletes and officials of the Federation to the South
East Asian Games in Kuala Lumpur as well as various other trips to the People's Republic of China and
Brisbane. The total cost of the tickets amounted to P449,654.83. For the tickets received, the Federation
made two partial payments, both in September of 1989, in the total amount of P176,467.50. 2

On 4 October 1989, petitioner wrote the Federation, through the private respondent a demand letter
requesting for the amount of P265,894.33. On 30 October 1989, the Federation, through the Project
3 

Gintong Alay, paid the amount of P31,603.00. 4

On 27 December 1989, Henri Kahn issued a personal check in the amount of P50,000 as partial payment
for the outstanding balance of the Federation. Thereafter, no further payments were made despite
5 

repeated demands.

This prompted petitioner to file a civil case before the Regional Trial Court of Manila. Petitioner sued Henri
Kahn in his personal capacity and as President of the Federation and impleaded the Federation as an
alternative defendant. Petitioner sought to hold Henri Kahn liable for the unpaid balance for the tickets
purchased by the Federation on the ground that Henri Kahn allegedly guaranteed the said obligation. 6

Henri Kahn filed his answer with counterclaim. While not denying the allegation that the Federation owed
the amount P207,524.20, representing the unpaid balance for the plane tickets, he averred that the
petitioner has no cause of action against him either in his personal capacity or in his official capacity as
president of the Federation. He maintained that he did not guarantee payment but merely acted as an
agent of the Federation which has a separate and distinct juridical personality. 7

On the other hand, the Federation failed to file its answer, hence, was declared in default by the trial
court. 8

In due course, the trial court rendered judgment and ruled in favor of the petitioner and declared Henri
Kahn personally liable for the unpaid obligation of the Federation. In arriving at the said ruling, the trial
court rationalized:

Defendant Henri Kahn would have been correct in his contentions had it been duly established that
defendant Federation is a corporation. The trouble, however, is that neither the plaintiff nor the defendant
Henri Kahn has adduced any evidence proving the corporate existence of the defendant Federation. In
paragraph 2 of its complaint, plaintiff asserted that "Defendant Philippine Football Federation is a sports
association xxx." This has not been denied by defendant Henri Kahn in his Answer. Being the President of
defendant Federation, its corporate existence is within the personal knowledge of defendant Henri Kahn.
He could have easily denied specifically the assertion of the plaintiff that it is a mere sports association, if
it were a domestic corporation. But he did not.

xxx

A voluntary unincorporated association, like defendant Federation has no power to enter into, or to ratify,
a contract. The contract entered into by its officers or agents on behalf of such association is not binding
on, or enforceable against it. The officers or agents are themselves personally liable.

xxx 9

The dispositive portion of the trial court's decision reads:

WHEREFORE, judgment is rendered ordering defendant Henri Kahn to pay the plaintiff the principal sum
of P207,524.20, plus the interest thereon at the legal rate computed from July 5, 1990, the date the
complaint was filed, until the principal obligation is fully liquidated; and another sum of P15,000.00 for
attorney's fees.

The complaint of the plaintiff against the Philippine Football Federation and the counterclaims of the
defendant Henri Kahn are hereby dismissed.

With the costs against defendant Henri Kahn. 10

Only Henri Kahn elevated the above decision to the Court of Appeals. On 21 December 1994, the
respondent court rendered a decision reversing the trial court, the decretal portion of said decision reads:

WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED and SET ASIDE
and another one is rendered dismissing the complaint against defendant Henri S. Kahn. 11

In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of the Federation. It
rationalized that since petitioner failed to prove that Henri Kahn guaranteed the obligation of the
Federation, he should not be held liable for the same as said entity has a separate and distinct personality
from its officers.

Petitioner filed a motion for reconsideration and as an alternative prayer pleaded that the Federation be
held liable for the unpaid obligation. The same was denied by the appellate court in its resolution of 8
February 1995, where it stated that:

As to the alternative prayer for the Modification of the Decision by expressly declaring in the dispositive
portion thereof the Philippine Football Federation (PFF) as liable for the unpaid obligation, it should be
remembered that the trial court dismissed the complaint against the Philippine Football Federation, and
the plaintiff did not appeal from this decision. Hence, the Philippine Football Federation is not a party to
this appeal and consequently, no judgment may be pronounced by this Court against the PFF without
violating the due process clause, let alone the fact that the judgment dismissing the complaint against it,
had already become final by virtue of the plaintiff's failure to appeal therefrom. The alternative prayer is
therefore similarly DENIED. 12

Petitioner now seeks recourse to this Court and alleges that the respondent court committed the following
assigned errors:13

A. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAD

DEALT WITH THE PHILIPPINE FOOTBALL FEDERATION (PFF) AS A CORPORATE ENTITY
AND IN NOT HOLDING THAT PRIVATE RESPONDENT HENRI KAHN WAS THE ONE WHO
REPRESENTED THE PFF AS HAVING A CORPORATE PERSONALITY.

B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE

RESPONDENT HENRI KAHN PERSONALLY LIABLE FOR THE OBLIGATION OF THE
UNINCORPORATED PFF, HAVING NEGOTIATED WITH PETITIONER AND CONTRACTED
THE OBLIGATION IN BEHALF OF THE PFF, MADE A PARTIAL PAYMENT AND ASSURED
PETITIONER OF FULLY SETTLING THE OBLIGATION.

C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT PERSONALLY

LIABLE, THE HONORABLE COURT OF APPEALS ERRED IN NOT EXPRESSLY DECLARING
IN ITS DECISION THAT THE PFF IS SOLELY LIABLE FOR THE OBLIGATION.

The resolution of the case at bar hinges on the determination of the existence of the Philippine Football
Federation as a juridical person. In the assailed decision, the appellate court recognized the existence of
the Federation. In support of this, the CA cited Republic Act 3135, otherwise known as the Revised
Charter of the Philippine Amateur Athletic Federation, and Presidential Decree No. 604 as the laws from
which said Federation derives its existence.

As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604 recognized the juridical
existence of national sports associations. This may be gleaned from the powers and functions granted to
these associations. Section 14 of R.A. 3135 provides:

SEC. 14. Functions, powers and duties of Associations. - The National Sports' Association shall have the
following functions, powers and duties:
 1. To adopt a constitution and by-laws for their internal organization and government;

2. To raise funds by donations, benefits, and other means for their purposes.

3. To purchase, sell, lease or otherwise encumber property both real and personal, for the
accomplishment of their purpose;

4. To affiliate with international or regional sports' Associations after due consultation with the
executive committee;

xxx

13. To perform such other acts as may be necessary for the proper accomplishment of their
purposes and not inconsistent with this Act.

Section 8 of P.D. 604, grants similar functions to these sports associations:

SEC. 8. Functions, Powers, and Duties of National Sports Association. - The National sports associations
shall have the following functions, powers, and duties:

1. Adopt a Constitution and By-Laws for their internal organization and government which shall be
submitted to the Department and any amendment thereto shall take effect upon approval by the
Department: Provided, however, That no team, school, club, organization, or entity shall be
admitted as a voting member of an association unless 60 per cent of the athletes composing said
team, school, club, organization, or entity are Filipino citizens;

2. Raise funds by donations, benefits, and other means for their purpose subject to the approval of
the Department;

3. Purchase, sell, lease, or otherwise encumber property, both real and personal, for the
accomplishment of their purpose;

4. Conduct local, interport, and international competitions, other than the Olympic and Asian
Games, for the promotion of their sport;

5. Affiliate with international or regional sports associations after due consultation with the
Department;

xxx

13. Perform such other functions as may be provided by law.

The above powers and functions granted to national sports associations clearly indicate that these entities
may acquire a juridical personality. The power to purchase, sell, lease and encumber property are acts
which may only be done by persons, whether natural or artificial, with juridical capacity. However, while
we agree with the appellate court that national sports associations may be accorded corporate status,
such does not automatically take place by the mere passage of these laws.

It is a basic postulate that before a corporation may acquire juridical personality, the State must give its
consent either in the form of a special law or a general enabling act. We cannot agree with the view of the
appellate court and the private respondent that the Philippine Football Federation came into existence
upon the passage of these laws. Nowhere can it be found in R.A. 3135 or P.D. 604 any provision creating
the Philippine Football Federation. These laws merely recognized the existence of national sports
associations and provided the manner by which these entities may acquire juridical personality. Section
11 of R.A. 3135 provides:

SEC. 11. National Sports' Association; organization and recognition. - A National Association shall be
organized for each individual sports in the Philippines in the manner hereinafter provided to constitute the
Philippine Amateur Athletic Federation. Applications for recognition as a National Sports' Association shall
be filed with the executive committee together with, among others, a copy of the constitution and by-laws
and a list of the members of the proposed association, and a filing fee of ten pesos.

The Executive Committee shall give the recognition applied for if it is satisfied that said association will
promote the purposes of this Act and particularly section three thereof. No application shall be held
pending for more than three months after the filing thereof without any action having been taken thereon
by the executive committee. Should the application be rejected, the reasons for such rejection shall be
clearly stated in a written communication to the applicant. Failure to specify the reasons for the rejection
shall not affect the application which shall be considered as unacted upon: Provided, however, That until
the executive committee herein provided shall have been formed, applications for recognition shall be
passed upon by the duly elected members of the present executive committee of the Philippine Amateur
Athletic Federation. The said executive committee shall be dissolved upon the organization of the
executive committee herein provided: Provided, further, That the functioning executive committee is
charged with the responsibility of seeing to it that the National Sports' Associations are formed and
organized within six months from and after the passage of this Act.

Section 7 of P.D. 604, similarly provides:

SEC. 7. National Sports Associations. - Application for accreditation or recognition as a national sports
association for each individual sport in the Philippines shall be filed with the Department together with,
among others, a copy of the Constitution and By-Laws and a list of the members of the proposed
association.

The Department shall give the recognition applied for if it is satisfied that the national sports association to
be organized will promote the objectives of this Decree and has substantially complied with the rules and
regulations of the Department: Provided, That the Department may withdraw accreditation or recognition
for violation of this Decree and such rules and regulations formulated by it.

The Department shall supervise the national sports association: Provided, That the latter shall have
exclusive technical control over the development and promotion of the particular sport for which they are
organized.

Clearly the above cited provisions require that before an entity may be considered as a national sports
association, such entity must be recognized by the accrediting organization, the Philippine Amateur
Athletic Federation under R.A. 3135, and the Department of Youth and Sports Development under P.D.
604. This fact of recognition, however, Henri Kahn failed to substantiate. In attempting to prove the
juridical existence of the Federation, Henri Kahn attached to his motion for reconsideration before the trial
court a copy of the constitution and by-laws of the Philippine Football Federation. Unfortunately, the same
does not prove that said Federation has indeed been recognized and accredited by either the Philippine
Amateur Athletic Federation or the Department of Youth and Sports Development. Accordingly, we rule
that the Philippine Football Federation is not a national sports association within the purview of the
aforementioned laws and does not have corporate existence of its own.

Thus being said, it follows that private respondent Henry Kahn should be held liable for the unpaid
obligations of the unincorporated Philippine Football Federation. It is a settled principal in corporation law
that any person acting or purporting to act on behalf of a corporation which has no valid existence
assumes such privileges and becomes personally liable for contract entered into or for other acts
performed as such agent. As president of the Federation, Henri Kahn is presumed to have known about
14 

the corporate existence or non-existence of the Federation. We cannot subscribe to the position taken by
the appellate court that even assuming that the Federation was defectively incorporated, the petitioner
cannot deny the corporate existence of the Federation because it had contracted and dealt with the
Federation in such a manner as to recognize and in effect admit its existence. The doctrine of corporation
15 

by estoppel is mistakenly applied by the respondent court to the petitioner. The application of the doctrine
applies to a third party only when he tries to escape liability on a contract from which he has benefited on
the irrelevant ground of defective incorporation. In the case at bar, the petitioner is not trying to escape
16 

liability from the contract but rather is the one claiming from the contract.

WHEREFORE, the decision appealed from is REVERSED and SET ASIDE. The decision of the Regional
Trial Court of Manila, Branch 35, in Civil Case No. 90-53595 is hereby REINSTATED.

SO ORDERED.
G.R. No. 195580               January 28, 2015

NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT,
INC., and McARTHUR MINING, INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.

RESOLUTION

VELASCO, JR., J.:

Before the Court is the Motion for Reconsideration of its April 21, 2014 Decision, which denied the Petition
for Review on Certiorari under Rule 45 jointly interposed by petitioners Narra Nickel and Mining
Development Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and McArthur Mining Inc.
(McArthur), and affirmed the October 1, 2010 Decision and February 15, 2011 Resolution of the Court of
Appeals (CA) in CA-G.R. SP No. 109703.

Very simply, the challenged Decision sustained the appellate court's ruling that petitioners, being foreign
corporations, are not entitled to Mineral Production Sharing Agreements (MPSAs). In reaching its
conclusion, this Court upheld with approval the appellate court's finding that there was doubt as to
petitioners' nationality since a 100% Canadian-owned firm, MBMI Resources, Inc. (MBMI), effectively
owns 60% of the common stocks of the petitioners by owning equity interest of petitioners' other majority
corporate shareholders.

In a strongly worded Motion for Reconsideration dated June 5, 2014, petitioners-movants argued, in the
main, that the Court's Decision was not in accord with law and logic. In its September 2, 2014 Comment,
on the other hand, respondent Redmont Consolidated Mines Corp. (Redmont) countered that petitioners’
motion for reconsideration is nothing but a rehash of their arguments and should, thus, be denied outright
for being pro-forma. Petitioners have interposed on September 30, 2014 their Reply to the respondent’s
Comment.

After considering the parties’ positions, as articulated in their respective submissions, We resolve to deny
the motion for reconsideration.

I.

The case has not been rendered moot and academic

Petitioners have first off criticized the Court for resolving in its Decision a substantive issue, which,as
argued, has supposedly been rendered moot by the fact that petitioners’ applications for MPSAs had
already been converted to an application for a Financial Technical Assistance Agreement (FTAA), as
petitioners have in fact been granted an FTAA. Further, the nationality issue, so petitioners presently
claim, had been rendered moribund by the fact that MBMI had already divested itself and sold all its
shareholdings in the petitioners, as well as in their corporate stockholders, to a Filipino corporation—DMCI
Mining Corporation (DMCI).

As a counterpoint, respondent Redmontavers that the present case has not been rendered moot by the
supposed issuance of an FTAA in petitioners’ favor as this FTAA was subsequently revoked by the Office
of the President (OP) and is currently a subject of a petition pending in the Court’s First Division. Redmont
likewise contends that the supposed sale of MBMI’s interest in the petitioners and in their "holding
companies" is a question of fact that is outside the Court’s province to verify in a Rule 45 certiorari
proceedings. In any case, assuming that the controversy has been rendered moot, Redmont claims that
its resolution on the merits is still justified by the fact that petitioners have violated a constitutional
provision, the violation is capable of repetition yet evading review, and the present case involves a matter
of public concern.

Indeed, as the Court clarified in its Decision, the conversion of the MPSA application to one for FTAAs
and the issuance by the OP of an FTAA in petitioners’ favor are irrelevant. The OP itself has already
cancelled and revoked the FTAA thusissued to petitioners. Petitioners curiously have omitted this critical
factin their motion for reconsideration. Furthermore, the supposed sale by MBMI of its shares in the
petition ercorporations and in their holding companies is not only a question of fact that this Court is
without authority toverify, it also does not negate any violation of the Constitutional provisions previously
committed before any such sale.
We can assume for the nonce that the controversy had indeed been rendered moot by these two events.
Asthis Court has time and again declared, the "moot and academic" principle is not a magical formula that
automatically dissuades courts in resolving a case.  The Court may still take cognizance of an otherwise
1

moot and academic case, if it finds that (a) there is a grave violation of the Constitution;(b) the situation is
of exceptional character and paramount public interest is involved; (c) the constitutional issue raised
requires formulation of controlling principles to guide the bench, the bar, and the public; and (d) the case
is capable of repetition yet evading review.  The Court’s April 21, 2014 Decision explained in some detail
2

that all four (4) of the foregoing circumstances are present in the case. If only to stress a point, we will do
so again. First, allowing the issuance of MPSAs to applicants that are owned and controlled by a 100%
foreign-owned corporation, albeit through an intricate web of corporate layering involving alleged Filipino
corporations, is tantamount to permitting a blatant violation of Section 2, Article XII of the Constitution. The
Court simply cannot allow this breach and inhibit itself from resolving the controversy on the facile pretext
that the case had already been rendered academic.

Second, the elaborate corporate layering resorted to by petitioners so as to make it appear that there is
compliance with the minimum Filipino ownership in the Constitution is deftly exceptional in character.
More importantly, the case is of paramount public interest, as the corporate layering employed by
petitioners was evidently designed to circumvent the constitutional caveat allowing only Filipino citizens
and corporations 60%-owned by Filipino citizens to explore, develop, and use the country’s natural
resources.

Third, the facts of the case, involving as they do a web of corporate layering intended to go around the
Filipino ownership requirement in the Constitution and pertinent laws, requirethe establishment of a
definite principle that will ensure that the Constitutional provision reserving to Filipino citizens or
"corporations at least sixty per centum of whose capital is owned by such citizens" be effectively enforced
and complied with. The case, therefore, is an opportunity to establish a controlling principle that will "guide
the bench, the bar, and the public."

Lastly, the petitioners’ actions during the lifetime and existence of the instant case that gave rise to the
present controversy are capable of repetition yet evading review because, as shown by petitioners’
actions, foreign corporations can easily utilize dummy Filipino corporations through various schemes and
stratagems to skirt the constitutional prohibition against foreign mining in Philippine soil.

II.

The application of the Grandfather Ruleis justified by the circumstances of the case to determine the
nationality of petitioners.

To petitioners, the Court’s application of the Grandfather Rule to determine their nationality is erroneous
and allegedly without basis in the Constitution, the Foreign Investments Act of 1991 (FIA), the Philippine
Mining Act of 1995,3 and the Rules issued by the Securities and Exchange Commission (SEC). These
laws and rules supposedly espouse the application of the Control Test in verifying the Philippine
nationality of corporate entities for purposes of determining compliance withSec. 2, Art. XII of the
Constitution that only "corporations or associations at least sixty per centum of whose capital is owned by
such [Filipino] citizens" may enjoy certain rights and privileges, like the exploration and development of
natural resources.

The application of the Grandfather Rule in the present case does not eschew the Control Test.

Clearly, petitioners have misread, and failed to appreciate the clear import of, the Court’s April 21, 2014
Decision. Nowhere in that disposition did the Court foreclose the application of the Control Test in
determining which corporations may be considered as Philippine nationals. Instead, to borrow Justice
Leonen’s term, the Court used the Grandfather Rule as a "supplement" to the Control Test so that the
intent underlying the averted Sec. 2, Art. XII of the Constitution be given effect. The following excerpts of
the April 21, 2014 Decision cannot be clearer:

In ending, the "control test" is still the prevailing mode of determining whether or not a corporation is a
Filipino corporation, within the ambit of Sec. 2, Art. XII of the 1987 Constitution, entitled to undertake the
exploration, development and utilization of the natural resources of the Philippines. When in the mind of
the Court, there is doubt, based on the attendant facts and circumstances of the case, in the 60-40 Filipino
equity ownership in the corporation, then it may apply the "grandfather rule." (emphasis supplied)

With that, the use of the Grandfather Rule as a "supplement" to the Control Test is not proscribed by the
Constitution or the Philippine Mining Act of 1995.
The Grandfather Rule implements the intent of the Filipinization provisions of the Constitution.

To reiterate, Sec. 2, Art. XII of the Constitution reserves the exploration, development, and utilization of
natural resources to Filipino citizens and "corporations or associations at least sixty per centum of whose
capital is owned by such citizens." Similarly, Section 3(aq) of the Philippine Mining Act of 1995 considers
a "corporation x x x registered in accordance with law at least sixty per cent of the capital of which is
owned by citizens of the Philippines" as a person qualified to undertake a mining operation. Consistent
with this objective, the Grandfather Rulewas originally conceived to look into the citizenshipof the
individuals who ultimately own and control the shares of stock of a corporation for purposes of determining
compliance with the constitutional requirement of Filipino ownership. It cannot, therefore, be denied that
the framers of the Constitution have not foreclosed the Grandfather Rule as a tool in verifying the
nationality of corporations for purposes of ascertaining their right to participate in nationalized or partly
nationalized activities. The following excerpts from the Record of the 1986 Constitutional Commission
suggest as much:

MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity;
namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.

MR. VILLEGAS: That is right.

xxxx

MR. NOLLEDO: Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-40
percent equity invests in another corporation which is permitted by the Corporation Code, does the
Committee adopt the grandfather rule?

MR. VILLEGAS: Yes, that is the understanding of the Committee.

As further defined by Dean Cesar Villanueva, the Grandfather Rule is "the method by which the
percentage of Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of
activities, provided for under the Constitution and other nationalization laws, is computed, in cases where
corporate shareholders are present, by attributing the nationality of the second or even subsequent tier of
ownership to determine the nationality of the corporate shareholder."  Thus, to arrive at the actual Filipino
4

ownership and control in a corporation, both the direct and indirect shareholdings in the corporation are
determined.

This concept of stock attribution inherent in the Grandfather Rule to determine the ultimate ownership in a
corporation is observed by the Bureau of Internal Revenue (BIR) in applying Section 127 (B)  of the
5

National Internal Revenue Code on taxes imposed on closely held corporations, in relation to Section 96
of the Corporation Code  on close corporations. Thus, in BIR Ruling No. 148-10, Commissioner Kim
6

Henares held:

In the case of a multi-tiered corporation, the stock attribution rule must be allowed to run continuously
along the chain of ownership until it finally reaches the individual stockholders. This is in consonance with
the "grandfather rule" adopted in the Philippines under Section 96 of the Corporation Code(Batas
Pambansa Blg. 68) which provides that notwithstanding the fact that all the issued stock of a corporation
are held by not more than twenty persons, among others, a corporation is nonetheless not to be deemed
a close corporation when at least two thirds of its voting stock or voting rights is owned or controlled by
another corporation which is not a close corporation. 7

In SEC-OGC Opinion No. 10-31 dated December 9, 2010 (SEC Opinion 10-31), the SEC applied the
Grandfather Rule even if the corporation engaged in mining operation passes the 60-40 requirement of
the Control Test, viz:

You allege that the structure of MML’s ownership in PHILSAGA is as follows: (1) MML owns 40% equity in
MEDC, while the 60% is ostensibly owned by Philippine individual citizens who are actually MML’s
controlled nominees; (2) MEDC, in turn, owns 60% equity in MOHC, while MML owns the remaining 40%;
(3) Lastly, MOHC owns 60% of PHILSAGA, while MML owns the remaining 40%. You provide the
following figure to illustrate this structure:

xxxx
We note that the Constitution and the statute use the concept "Philippine citizens." Article III, Section 1 of
the Constitution provides who are Philippine citizens: x x x This enumeration is exhaustive. In other words,
there can be no other Philippine citizens other than those falling within the enumeration provided by the
Constitution. Obviously, only natural persons are susceptible of citizenship. Thus, for purposes of the
Constitutional and statutory restrictions on foreign participation in the exploitation of mineral resources, a
corporation investing in a mining joint venture can never be considered as a Philippine citizen.

The Supreme Court En Banc confirms this [in]… Pedro R. Palting, vs. San Jose Petroleum [Inc.]. The
Court held that a corporation investing in another corporation engaged ina nationalized activity cannot be
considered as a citizen for purposes of the Constitutional provision restricting foreign exploitation of
natural resources:

xxxx

Accordingly, we opine that we must look into the citizenship of the individual stockholders, i.e. natural
persons, of that investor-corporation in order to determine if the Constitutional and statutory restrictions
are complied with. If the shares of stock of the immediate investor corporation is in turn held and
controlled by another corporation, then we must look into the citizenship of the individual stockholders of
the latter corporation. In other words, if there are layers of intervening corporations investing in a mining
joint venture, we must delve into the citizenship of the individual stockholders of each corporation. This is
the strict application of the grandfather rule, which the Commission has been consistently applying prior to
the 1990s. Indeed, the framers of the Constitution intended for the "grandfather rule" to apply in case a
60%-40% Filipino-Foreign equity corporation invests in another corporation engaging in an activity where
the Constitution restricts foreign participation.

xxxx

Accordingly, under the structure you represented, the joint mining venture is 87.04 % foreign owned, while
it is only 12.96% owned by Philippine citizens. Thus, the constitutional requirement of 60% ownership by
Philippine citizens isviolated. (emphasis supplied)

Similarly, in the eponymous Redmont Consolidated Mines Corporation v. McArthur Mining Inc., et al.,  the8

SEC en bancapplied the Grandfather Rule despite the fact that the subject corporations ostensibly have
satisfied the 60-40 Filipino equity requirement. The SEC en bancheld that to attain the Constitutional
objective of reserving to Filipinos the utilization of natural resources, one should not stop where the
percentage of the capital stock is 60%.Thus:

[D]oubt, we believe, exists in the instant case because the foreign investor, MBMI, provided practically all
the funds of the remaining appellee-corporations. The records disclose that: (1) Olympic Mines and
Development Corporation ("OMDC"), a domestic corporation, and MBMI subscribed to 6,663 and 3,331
shares, respectively, out of the authorized capital stock of Madridejos; however, OMDC paid nothing for
this subscription while MBMI paid ₱2,803,900.00 out of its total subscription cost of ₱3,331,000.00; (2)
Palawan Alpha South Resource Development Corp. ("Palawan Alpha"), also a domestic corporation, and
MBMI subscribed to 6,596 and 3,996 shares, respectively, out of the authorized capital stock of
PatriciaLouise; however, Palawan Alpha paid nothing for this subscription while MBMI paid ₱2,796,000.00
out of its total subscription cost of ₱3,996,000.00; (3) OMDC and MBMI subscribed to 6,663 and 3,331
shares, respectively, out of the authorized capital stock of Sara Marie; however, OMDC paid nothing for
this subscription while MBMI paid ₱2,794,000.00 out of its total subscription cost of ₱3,331,000.00; and
(4) Falcon Ridge Resources Management Corp. ("Falcon Ridge"), another domestic corporation, and
MBMI subscribed to 5,997 and 3,998 shares, respectively, out of the authorized capital stock of San
Juanico; however, Falcon Ridge paid nothing for this subscription while MBMI paid ₱2,500,000.00 out of
its total subscription cost of ₱3,998,000.00. Thus, pursuant to the afore-quoted DOJ Opinion, the
Grandfather Rule must be used.

xxxx

The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our natural
resources. Necessarily, therefore, the Rule interpreting the constitutional provision should not diminish
that right through the legal fiction of corporate ownership and control. But the constitutional provision, as
interpreted and practicedvia the 1967 SEC Rules, has favored foreigners contrary to the command of the
Constitution. Hence, the Grandfather Rule must be applied to accurately determine the actual
participation, both direct and indirect, of foreigners in a corporation engaged in a nationalized activity or
business.
The method employed in the Grandfather Rule of attributing the shareholdings of a given corporate
shareholder to the second or even the subsequent tier of ownership hews with the rule that the "beneficial
ownership" of corporations engaged in nationalized activities must reside in the hands of Filipino citizens.
Thus, even if the 60-40 Filipino equity requirement appears to have been satisfied, the Department of
Justice (DOJ), in its Opinion No. 144, S. of 1977, stated that an agreement that may distort the actual
economic or beneficial ownership of a mining corporation may be struck down as violative of the
constitutional requirement, viz:

In this connection, you raise the following specific questions:

1. Can a Philippine corporation with 30% equity owned by foreigners enter into a mining service contract
with a foreign company granting the latter a share of not morethan 40% from the proceeds of the
operations?

xxxx

By law, a mining lease may be granted only to a Filipino citizen, or to a corporation or partnership
registered with the [SEC] at least 60% of the capital of which is owned by Filipino citizens and possessing
x x x.The sixty percent Philippine equity requirement in mineral resource exploitation x x xis intended to
insure, among other purposes, the conservation of indigenous natural resources, for Filipino posterityx x x.
I think it is implicit in this provision, even if it refers merely to ownership of stock in the corporation holding
the mining concession, that beneficial ownership of the right to dispose, exploit, utilize, and develop
natural resources shall pertain to Filipino citizens, and that the nationality requirementis not satisfied
unless Filipinos are the principal beneficiaries in the exploitation of the country’s natural resources. This
criterion of beneficial ownership is tacitly adopted in Section 44 of P.D. No. 463, above-quoted, which
limits the service fee in service contracts to 40% of the proceeds of the operation, thereby implying that
the 60-40 benefit-sharing ration is derived from the 60-40 equity requirement in the Constitution.

xxxx

It is obvious that while payments to a service contractor may be justified as a service fee, and therefore,
properly deductible from gross proceeds, the service contract could be employed as a means of going
about or circumventing the constitutional limit on foreign equity participation and the obvious constitutional
policy to insure that Filipinos retain beneficial ownership of our mineral resources. Thus, every service
contract scheme has to be evaluated in its entirety, on a case to case basis, to determine reasonableness
of the total "service fee" x x x like the options available tothe contractor to become equity participant in the
Philippine entity holding the concession, or to acquire rights in the processing and marketing stages. x x x
(emphasis supplied)

The "beneficial ownership" requirement was subsequently used in tandem with the "situs of control"
todetermine the nationality of a corporation in DOJ Opinion No. 84, S.of 1988, through the Grandfather
Rule, despite the fact that both the investee and investor corporations purportedly satisfy the 60-40
Filipino equity requirement: 9

This refers to your request for opinion on whether or not there may be an investment in real estate by a
domestic corporation (the investing corporation) seventy percent (70%) of the capital stock of which is
owned by another domestic corporation withat least 60%-40% Filipino-Foreign Equity, while the remaining
thirty percent (30%) of the capital stock is owned by a foreign corporation.

xxxx

This Department has had the occasion to rule in several opinions that it is implicit in the constitutional
provisions, even if it refers merely to ownership of stock in the corporation holding the land or natural
resource concession, that the nationality requirement is not satisfied unless it meets the criterion of
beneficial ownership, i.e. Filipinos are the principal beneficiaries in the exploration of natural
resources(Op. No. 144, s. 1977; Op. No. 130, s. 1985), and that in applying the same "the primordial
consideration is situs of control, whether in a stock or nonstock corporation"(Op. No. 178, s. 1974). As
stated in the Register of Deeds vs. Ung Sui Si Temple (97 Phil. 58), obviously toinsure that corporations
and associations allowed to acquire agricultural land or to exploit natural resources "shall be controlled by
Filipinos." Accordingly, any arrangement which attempts to defeat the constitutional purpose should be
eschewed (Op. No 130, s. 1985).

We are informed that in the registration of corporations with the [SEC], compliance with the sixty per
centum requirement is being monitored by SEC under the "Grandfather Rule" a method by which the
percentage of Filipino equity in corporations engaged in nationalized and/or partly nationalized areas of
activities provided for under the Constitution and other national laws is accurately computed, and the
diminution if said equity prevented (SEC Memo, S. 1976). The "Grandfather Rule" is applied specifically in
cases where the corporation has corporate stockholders with alien stockholdings, otherwise, if the rule is
not applied, the presence of such corporate stockholders could diminish the effective control of Filipinos.

Applying the "Grandfather Rule" in the instant case, the result is as follows: x x x the total foreign equity in
the investing corporation is 58% while the Filipino equity is only 42%, in the investing corporation, subject
of your query, is disqualified from investing in real estate, which is a nationalized activity, as it does not
meet the 60%-40% Filipino-Foreign equity requirement under the Constitution.

This pairing of the concepts "beneficial ownership" and the "situs of control" in determining what
constitutes"capital" has been adopted by this Court in Heirs of Gamboa v. Teves.  In its October 9, 2012
10

Resolution, the Court clarified, thus:

This is consistent with Section 3 of the FIA which provides that where 100% of the capital stock is heldby
"a trustee of funds for pension or other employee retirement or separation benefits," the trustee is a
Philippine national if "at least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals." Likewise, Section 1(b) of the Implementing Rules of the FIA provides that "for stocks to be
deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to
meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting
rights, is essential." (emphasis supplied)

In emphasizing the twin requirements of "beneficial ownership" and "control" in determining compliance
with the required Filipino equity in Gamboa, the en bancCourt explicitly cited with approval the SEC en
banc’s application in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al. of the
Grandfather Rule, to wit:

Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules and
opinions on behalf of SEC, has adopted the Grandfather Rulein determining compliance with the 60-40
ownership requirement in favor of Filipino citizens mandated by the Constitution for certain economic
activities. This prevailing SEC ruling, which the SEC correctly adopted to thwart any circumvention of the
required Filipino "ownership and control," is laid down in the 25 March 2010 SEC en banc ruling in
Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al. x x x (emphasis supplied)

Applying Gamboa, the Court, in Express Investments III Private Ltd. v. Bayantel Communications,
Inc.,  denied the foreign creditors’ proposal to convert part of Bayantel’s debts to common shares of the
11

company at a rate of 77.7%. Supposedly, the conversion of the debts to common shares by the foreign
creditors would be done, both directly and indirectly, in order to meet the control test principle under the
FIA.Under the proposed structure, the foreign creditors would own 40% of the outstanding capital stock of
the telecommunications company on a direct basis, while the remaining 40% of shares would be
registered to a holding company that shall retain, on a direct basis, the other 60% equity reserved for
Filipino citizens. Nonetheless, the Court found the proposal non-compliant with the Constitutional
requirement of Filipino ownership as the proposed structure would give more than 60% of the ownership
of the common shares of Bayantel to the foreign corporations, viz:

In its Rehabilitation Plan, among the material financial commitments made by respondent Bayantelis that
its shareholders shall relinquish the agreed-upon amount of common stock[s] as payment to Unsecured
Creditors as per the Term Sheet. Evidently, the parties intend to convert the unsustainable portion of
respondent’s debt into common stocks, which have voting rights. If we indulge petitioners on their
proposal, the Omnibus Creditors which are foreign corporations, shall have control over 77.7% of
Bayantel, a public utility company. This is precisely the scenario proscribed by the Filipinization provision
of the Constitution.Therefore, the Court of Appeals acted correctly in sustaining the 40% debt-to-equity
ceiling on conversion. (emphasis supplied) As shown by the quoted legislative enactments, administrative
rulings, opinions, and this Court’s decisions, the Grandfather Rule not only finds basis, but more
importantly, it implements the Filipino equity requirement, in the Constitution.

Application of the Grandfather

Rule with the Control Test.

Admittedly, an ongoing quandary obtains as to the role of the Grandfather Rule in determining compliance
with the minimum Filipino equity requirement vis-à-vis the Control Test. This confusion springs from the
erroneous assumption that the use of one method forecloses the use of the other.
As exemplified by the above rulings, opinions, decisions and this Court’s April 21, 2014 Decision, the
Control Test can be, as it has been, applied jointly withthe Grandfather Rule to determine the observance
of foreign ownership restriction in nationalized economic activities. The Control Test and the Grandfather
Rule are not, as it were, incompatible ownership-determinant methods that canonly be applied alternative
to each other. Rather, these methodscan, if appropriate, be used cumulatively in the determination of the
ownership and control of corporations engaged in fully or partly nationalized activities, as the mining
operation involved in this case or the operation of public utilities as in Gamboa or Bayantel.

The Grandfather Rule, standing alone, should not be used to determine the Filipino ownership and control
in a corporation, as it could result in an otherwise foreign corporation rendered qualified to perform
nationalized or partly nationalized activities. Hence, it is only when the Control Test is first complied with
that the Grandfather Rule may be applied. Put in another manner, if the subject corporation’s Filipino
equity falls below the threshold 60%, the corporation is immediately considered foreign-owned, in which
case, the needto resort to the Grandfather Rule disappears.

On the other hand, a corporation that complies with the 60-40 Filipino to foreign equity requirement can be
considered a Filipino corporation if there is no doubtas to who has the "beneficial ownership" and "control"
of the corporation. In that instance, there is no need fora dissection or further inquiry on the ownership of
the corporate shareholders in both the investing and investee corporation or the application of the
Grandfather Rule.  As a corollary rule, even if the 60-40 Filipino to foreign equity ratio is apparently met by
12

the subject or investee corporation, a resort to the Grandfather Rule is necessary if doubt existsas to the
locusof the "beneficial ownership" and "control." In this case, a further investigation as to the nationality of
the personalities with the beneficial ownership and control of the corporate shareholders in both the
investing and investee corporations is necessary.

As explained in the April 21,2012 Decision, the "doubt" that demands the application of the Grandfather
Rule in addition to or in tandem with the Control Test is not confined to, or more bluntly, does not refer to
the fact that the apparent Filipino ownership of the corporation’s equity falls below the 60% threshold.
Rather, "doubt" refers to various indicia that the "beneficial ownership" and "control" of the corporation do
not in fact reside in Filipino shareholders but in foreign stakeholders. As provided in DOJ Opinion No. 165,
Series of 1984, which applied the pertinent provisions of the Anti-DummyLaw in relation to the minimum
Filipino equity requirement in the Constitution, "significant indicators of the dummy status" have been
recognized in view of reports "that some Filipino investors or businessmen are being utilized or [are]
allowing themselves to be used as dummies by foreign investors" specifically in joint ventures for national
resource exploitation. These indicators are:

1. That the foreign investors provide practically all the funds for the joint investment undertaken by
these Filipino businessmen and their foreign partner;

2. That the foreign investors undertake to provide practically all the technological support for the
joint venture;

3. That the foreign investors, while being minority stockholders, manage the company and prepare
all economic viability studies.

Thus, In the Matter of the Petition for Revocation of the Certificate of Registration of Linear Works Realty
Development Corporation,  the SEC held that when foreigners contribute more capital to an enterprise,
13

doubt exists as to the actual control and ownership of the subject corporation even if the 60% Filipino
equity threshold is met. Hence, the SEC in that one ordered a further investigation, viz:

x x x The [SEC Enforcement and Prosecution Department (EPD)] maintained that the basis for
determining the level of foreign participation is the number of shares subscribed, regardless of the par
value. Applying such an interpretation, the EPD rules that the foreign equity participation in Linear works
Realty Development Corporation amounts to 26.41% of the corporation’s capital stock since the amount of
shares subscribed by foreign nationals is 1,795 only out of the 6,795 shares. Thus, the subject corporation
is compliant with the 40% limit on foreign equity participation. Accordingly, the EPD dismissed the
complaint, and did not pursue any investigation against the subject corporation.

xxxx

x x x [I]n this respect we find no error in the assailed order made by the EPD. The EPD did not err when it
did not take into account the par value of shares in determining compliance with the constitutional and
statutory restrictionson foreign equity.
However, we are aware that some unscrupulous individuals employ schemes to circumvent the
constitutional and statutory restrictions on foreign equity. In the present case, the fact that the shares of
the Japanese nationals have a greater par value but only have similar rights to those held by Philippine
citizens having much lower par value, is highly suspicious. This is because a reasonable investor would
expect to have greater control and economic rights than other investors who invested less capital than
him. Thus, it is reasonable to suspectthat there may be secret arrangements between the corporation and
the stockholders wherein the Japanese nationals who subscribed to the shares with greater par value
actually have greater control and economic rights contrary to the equality of shares based on the articles
of incorporation.

With this in mind, we find it proper for the EPD to investigate the subject corporation. The EPD is advised
to avail of the Commission’s subpoena powers in order to gather sufficient evidence, and file the
necessary complaint.

As will be discussed, even if atfirst glance the petitioners comply with the 60-40 Filipino to foreign equity
ratio, doubt exists in the present case that gives rise to a reasonable suspicion that the Filipino
shareholders do not actually have the requisite number of control and beneficial ownership in petitioners
Narra, Tesoro, and McArthur. Hence, a further investigation and dissection of the extent of the ownership
of the corporate shareholders through the Grandfather Rule is justified.

Parenthetically, it is advanced that the application of the Grandfather Rule is impractical as tracing the
shareholdings to the point when natural persons hold rights to the stocks may very well lead to an
investigation ad infinitum. Suffice it to say in this regard that, while the Grandfather Rule was originally
intended to trace the shareholdings to the point where natural persons hold the shares, the SEC had
already set up a limit as to the number of corporate layers the attribution of the nationality of the corporate
shareholders may be applied.

In a 1977 internal memorandum, the SEC suggested applying the Grandfather Rule on two (2) levels of
corporate relations for publicly-held corporations or where the shares are traded in the stock exchanges,
and to three (3) levels for closely held corporations or the shares of which are not traded in the stock
exchanges.  These limits comply with the requirement in Palting v. San Jose Petroleum, Inc.  that the
14 15

application of the Grandfather Rule cannot go beyond the level of what is reasonable.

A doubt exists as to the extent of control and beneficial ownership of MBMI over the petitioners and their
investing corporate stockholders.

In the Decision subject of this recourse, the Court applied the Grandfather Rule to determine the matter of
true ownership and control over the petitioners as doubt exists as to the actual extent of the participation
of MBMI in the equity of the petitioners and their investing corporations.

We considered the following membership and control structures and like nuances:

Tesoro

Supposedly Filipino corporation Sara Marie Mining, Inc. (Sara Marie) holds 59.97% of the 10,000
commonshares of petitioner Tesoro while the Canadian-owned company, MBMI, holds 39.98% of its
shares.

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Sara Marie Filipino 5,997 ₱5,997,000.00 ₱825,000.00

Mining, Inc.

MBMI Canadian 3,998 ₱3,998,000.00 ₱1,878,174.60

Resources,
Inc. 16

Lauro L. Filipino 1 ₱1,000.00 ₱1,000.00

Salazar
 Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Esguerra

Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00

Agcaoili

Michael T. American 1 ₱1,000.00 ₱1,000.00

Mason

Kenneth Canadian 1 ₱1,000.00 ₱1,000.00

Cawkel

  Total 10,000 ₱10,000,000.00 ₱2,708,174.60

In turn, the Filipino corporation Olympic Mines & Development Corp. (Olympic) holds 66.63% of Sara
Marie’s shares while the same Canadian company MBMI holds 33.31% of Sara Marie’s shares.
Nonetheless, it is admitted that Olympic did not pay a single peso for its shares. On the contrary, MBMI
paid for 99% of the paid-up capital of Sara Marie.

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Olympic Mines Filipino 6,663 ₱6,663,000.00 P0.00

& Development
Corp. 17

MBMI Canadian 3,331 ₱3,331,000.00 ₱2,794,000.00

Resources, Inc.

Amanti Limson Filipino 1 ₱1,000.00 ₱1,000.00

Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00

Esguerra

Lauro Salazar Filipino 1 ₱1,000.00 ₱1,000.00

Emmanuel G. Filipino 1 ₱1,000.00 ₱1,000.00

Hernando
Michael T. American 1 ₱1,000.00 ₱1,000.00
Mason

Kenneth Canadian 1 ₱1,000.00 ₱1,000.00

Cawkel

  Total 10,000 ₱10,000,000.00 ₱2,800,000.00

The fact that MBMI had practically provided all the funds in Sara Marie and Tesoro creates serious
doubt as to the true extent of its (MBMI) control and ownership over both Sara Marie and
Tesoro since, as observed by the SEC, "a reasonable investor would expect to have greater control and
economic rights than other investors who invested less capital than him." The application of the
Grandfather Rule is clearly called for, and as shown below, the Filipinos’ control and economic benefits in
petitioner Tesoro (through Sara Marie) fallbelow the threshold 60%, viz:
 Filipino participation in petitioner Tesoro: 40.01%

66.67

(Filipino equity in Sara Marie) x 59.97 (Sara Marie’s share in Tesoro) = 39.98%

100

39.98% + .03% (shares of individual Filipino shareholders [SHs] in Tesoro)

=40.01%

Foreign participation in petitioner Tesoro: 59.99%

33.33

(Foreign equity in Sara Marie) x 59.97 (Sara Marie’s share in Tesoro) = 19.99%

100

19.99% + 39.98% (MBMI’s direct participation in Tesoro) + .02% (shares of foreign individual SHs
in Tesoro)
= 59.99%

With only 40.01% Filipino ownership in petitioner Tesoro, as compared to 59.99% foreign ownership of its
shares, it is clear that petitioner Tesoro does not comply with the minimum Filipino equity requirement
imposed in Sec. 2, Art. XII of the Constitution. Hence, the appellate court’s observation that Tesoro is a
foreign corporation not entitled to an MPSA is apt.

McArthur

Petitioner McArthur follows the corporate layering structure of Tesoro, as 59.97% of its 10, 000 common
shares is owned by supposedly Filipino Madridejos Mining Corporation (Madridejos), while 39.98%
belonged to the Canadian MBMI.

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Madridejos Filipino 5,997 ₱5,997,000.00 ₱825,000.00

Mining
Corporation

MBMI Canadian 3,998 ₱3,998,000.0 ₱1,878,174.60

Resources,
Inc. 18

Lauro L. Filipino 1 ₱1,000.00 ₱1,000.00

Salazar

Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00

Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00

Agcaoili

Michael T. American 1 ₱1,000.00 ₱1,000.00

Mason
 Kenneth Canadian 1 ₱1,000.00 ₱1,000.00
Cawkel

  Total 10,000 ₱10,000,000.00 ₱2,708,174.60

In turn, 66.63% of Madridejos’ shares were held by Olympic while 33.31% of its shares belonged to MBMI.
Yet again, Olympic did not contribute to the paid-up capital of Madridejos and it was MBMI that provided
99.79% of the paid-up capital of Madridejos.

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Olympic Mines Filipino 6,663 ₱6,663,000.00 P0.00

& Development
Corp. 19

MBMI Canadian 3,331 ₱3,331,000.00 ₱2,803,900.00

Resources, Inc.

Amanti Limson Filipino 1 ₱1,000.00 ₱1,000.00

Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00

Esguerra

Lauro Salazar Filipino 1 ₱1,000.00 ₱1,000.00

Emmanuel G. Filipino 1 ₱1,000.00 ₱1,000.00

Hernando

Michael T. American 1 ₱1,000.00 ₱1,000.00

Mason

Kenneth Canadian 1 ₱1,000.00 ₱1,000.00

Cawkel

  Total 10,000 ₱10,000,000.00 ₱2,809,900.00

Again, the fact that MBMI had practically provided all the funds in Madridejos and McArthur creates
serious doubt as to the true extent of its control and ownership of MBMI over both Madridejos and
McArthur. The application of the Grandfather Rule is clearly called for, and as will be shown below, MBMI,
along with the other foreign shareholders, breached the maximum limit of 40% ownership in petitioner
McArthur, rendering the petitioner disqualified to an MPSA:

Filipino participation in petitioner McArthur: 40.01%

66.67

(Filipino equity in Madridejos) x 59.97 (Madridejos’ share in McArthur) = 39.98%

100

39.98% + .03% (shares of individual Filipino SHs in McArthur)

=40.01%
 Foreign participation in petitioner McArthur: 59.99%

33.33
(Foreign equity in Madridejos) x 59.97 (Madridejos’ share in McArthur) = 19.99%

19.99% + 39.98% (MBMI’s direct participation inMcArthur) + .02% (shares of foreign individual SHs
in McArthur)
= 59.99%

As with petitioner Tesoro, with only 40.01% Filipino ownership in petitioner McArthur, as compared to
59.99% foreign ownership of its shares, it is clear that petitioner McArthur does not comply with the
minimum Filipino equity requirement imposed in Sec. 2, Art. XII of the Constitution. Thus, the appellate
court did not err in holding that petitioner McArthur is a foreign corporation not entitled to an MPSA.

Narra

As for petitioner Narra, 59.97% of its shares belonged to Patricia Louise Mining & Development
Corporation (PLMDC), while Canadian MBMI held 39.98% of its shares.

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Patricia Lousie Filipino 5,997 ₱5,997,000.00 ₱1,677,000.00

Mining and
Development
Corp.

MBMI Canadian 3,996 ₱3,996,000.00 ₱1,116,000.00

Resources,
Inc. 20

Higinio C. Filipino 1 ₱1,000.00 ₱1,000.00

Mendoza,

Henry E. Filipino 1 ₱1,000.00 ₱1,000.00

Fernandez

Ma. Elena A. Filipino 1 ₱1,000.00 ₱1,000.00

Bocalan

Michael T. American 1 ₱1,000.00 ₱1,000.00

Mason

Robert L. Canadian 1 ₱1,000.00 ₱1,000.00

McCurdy

Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00

Agcaoili

Bayani H. Filipino 1 ₱1,000.00 ₱1,000.00

Agabin

  Total 10,000 ₱10,000,000.00 ₱2,800,000.00

PLMDC’s shares, in turn, were held by Palawan Alpha South Resources Development Corporation
(PASRDC), which subscribed to 65.96% of PLMDC’s shares, and the Canadian MBMI, which subscribed
to 33.96% of PLMDC’s shares.

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Palawan Alpha Filipino 6,596 ₱6,596,000.00 P0

South Resource
Development
Corp.

MBMI Canadian 3,396 ₱3,396,000.00 ₱2,796,000.00

Resources,
Inc.21

Higinio C. Filipino 1 ₱1,000.00 ₱1,000.00

Mendoza, Jr.

Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00

Esguerra

Henry E. Filipino 1 ₱1,000.00 ₱1,000.00

Fernandez

Ma. Elena A. Filipino 1 ₱1,000.00 ₱1,000.00

Bocalan

Michael T. American 1 ₱1,000.00 ₱1,000.00

Mason

Robert L. Canadian 1 ₱1,000.00 ₱1,000.00

McCurdy

Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00

Agcaoili

Bayani H, Filipino 1 ₱1,000.00 ₱1,000.00

Agabin

  Total 10,000 ₱10,000,000.00 ₱2,804,000.00

Yet again, PASRDC did not pay for any of its subscribed shares, while MBMI contributed 99.75% of
PLMDC’s paid-up capital. This fact creates serious doubt as to the true extent of MBMI’s control and
ownership over both PLMDC and Narra since "a reasonable investor would expect to have greater control
and economic rights than other investors who invested less capital than him." Thus, the application of the
Grandfather Rule is justified. And as will be shown, it is clear that the Filipino ownership in petitioner Narra
falls below the limit prescribed in both the Constitution and the Philippine Mining Act of 1995.

Filipino participation in petitioner Narra: 39.64%

66.02 (Filipino equity in PLMDC) x 59.97 (PLMDC’s share in Narra) = 39.59%

 100

39.59% + .05% (shares of individual Filipino SHs in McArthur)

=39.64%

Foreign participation in petitioner Narra: 60.36%

33.98

(Foreign equity in PLMDC) x 59.97 (PLMDC’s share in Narra) = 20.38%

100

20.38% + 39.96% (MBMI’s direct participation in Narra) + .02% (shares of foreign individual SHs in
McArthur)
= 60.36%

With 60.36% foreign ownership in petitioner Narra, as compared to only 39.64% Filipino ownership of its
shares, it is clear that petitioner Narra does not comply with the minimum Filipino equity requirement
imposed in Section 2, Article XII of the Constitution. Hence, the appellate court did not err in holding that
petitioner McArthur is a foreign corporation not entitled to an MPSA.

It must be noted that the foregoing determination and computation of petitioners’ Filipino equity
composition was based on their common shareholdings, not preferred or redeemable shares. Section 6 of
the Corporation Code of the Philippines explicitly provides that "no share may be deprived of voting rights
except those classified as ‘preferred’ or ‘redeemable’ shares." Further, as Justice Leonen puts it, there is
"no indication that any of the shares x x x do not have voting rights, [thus] it must be assumed that all such
shares have voting rights."  It cannot therefore be gain said that the foregoing computation hewed with the
22

pronouncements of Gamboa, as implemented by SEC Memorandum Circular No. 8, Series of 2013, (SEC
Memo No. 8)  Section 2 of which states:
23

Section 2. All covered corporations shall, at all times, observe the constitutional or statutory
requirement.  For purposes of determining compliance therewith, the required percentage of Filipino
1âwphi1

ownership shall be applied to BOTH (a) the total outstanding shares of stock entitled to vote in the election
of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the
election of directors.

In fact, there is no indication that herein petitioners issued any other class of shares besides the 10,000
common shares. Neither is it suggested that the common shares were further divided into voting or non-
voting common shares. Hence, for purposes of this case, items a) and b) in SEC Memo No. 8 both refer to
the 10,000 common shares of each of the petitioners, and there is no need to separately apply the 60-40
ratio to any segment or part of the said common shares.

III.

In mining disputes, the POA has jurisdiction to pass upon the nationality of applications for MPSAs

Petitioners also scoffed at this Court’s decision to uphold the jurisdiction of the Panel of Arbitrators (POA)
of the Department of Environment and Natural Resources (DENR) since the POA’s determination of
petitioners’ nationalities is supposedly beyond its limited jurisdiction, as defined in Gonzales v. Climax
Mining Ltd.  and Philex Mining Corp. v. Zaldivia.
24 25

The April 21, 2014 Decision did not dilute, much less overturn, this Court’s pronouncements in either
Gonzales or Philex Mining that POA’s jurisdiction "is limited only to mining disputes which raise questions
of fact," and not judicial questions cognizable by regular courts of justice. However, to properly recognize
and give effect to the jurisdiction vested in the POA by Section 77 of the Philippine Mining Act of
1995,  and in parallel with this Court’s ruling in Celestial Nickel Mining Exploration Corporation v.
26

Macroasia Corp.,  the Court has recognized in its Decision that in resolving disputes "involving rights to
27

mining areas" and "involving mineral agreements or permits," the POA has jurisdiction to make a
preliminary finding of the required nationality of the corporate applicant in order to determine its right to a
mining area or a mineral agreement.

There is certainly nothing novel or aberrant in this approach. In ejectment and unlawful detainer cases,
where the subject of inquiry is possession de facto, the jurisdiction of the municipal trial courts to make a
preliminary adjudication regarding ownership of the real property involved is allowed, but only for
purposes of ruling on the determinative issue of material possession.

The present case arose from petitioners' MPSA applications, in which they asserted their respective rights
to the mining areas each applied for. Since respondent Redmont, itself an applicant for exploration
permits over the same mining areas, filed petitions for the denial of petitioners' applications, it should be
clear that there exists a controversy between the parties and it is POA's jurisdiction to resolve the said
dispute. POA's ruling on Redmont's assertion that petitioners are foreign corporations not entitled to
MPSA is but a necessary incident of its disposition of the mining dispute presented before it, which is
whether the petitioners are entitled to MPSAs.

Indeed, as the POA has jurisdiction to entertain "disputes involving rights to mining areas," it necessarily
follows that the POA likewise wields the authority to pass upon the nationality issue involving petitioners,
since the resolution of this issue is essential and indispensable in the resolution of the main issue, i.e., the
determination of the petitioners' right to the mining areas through MPSAs.

WHEREFORE, We DENY the motion for reconsideration WITH FINALITY. No further pleadings shall be
entertained. Let entry of judgment be made in due course.

SO ORDERED.
G.R. No. 195580               January 28, 2015

NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT,
INC., and McARTHUR MINING, INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.

RESOLUTION

VELASCO, JR., J.:

Before the Court is the Motion for Reconsideration of its April 21, 2014 Decision, which denied the Petition
for Review on Certiorari under Rule 45 jointly interposed by petitioners Narra Nickel and Mining
Development Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and McArthur Mining Inc.
(McArthur), and affirmed the October 1, 2010 Decision and February 15, 2011 Resolution of the Court of
Appeals (CA) in CA-G.R. SP No. 109703.

Very simply, the challenged Decision sustained the appellate court's ruling that petitioners, being foreign
corporations, are not entitled to Mineral Production Sharing Agreements (MPSAs). In reaching its
conclusion, this Court upheld with approval the appellate court's finding that there was doubt as to
petitioners' nationality since a 100% Canadian-owned firm, MBMI Resources, Inc. (MBMI), effectively
owns 60% of the common stocks of the petitioners by owning equity interest of petitioners' other majority
corporate shareholders.

In a strongly worded Motion for Reconsideration dated June 5, 2014, petitioners-movants argued, in the
main, that the Court's Decision was not in accord with law and logic. In its September 2, 2014 Comment,
on the other hand, respondent Redmont Consolidated Mines Corp. (Redmont) countered that petitioners’
motion for reconsideration is nothing but a rehash of their arguments and should, thus, be denied outright
for being pro-forma. Petitioners have interposed on September 30, 2014 their Reply to the respondent’s
Comment.

After considering the parties’ positions, as articulated in their respective submissions, We resolve to deny
the motion for reconsideration.

I.

The case has not been rendered moot and academic

Petitioners have first off criticized the Court for resolving in its Decision a substantive issue, which,as
argued, has supposedly been rendered moot by the fact that petitioners’ applications for MPSAs had
already been converted to an application for a Financial Technical Assistance Agreement (FTAA), as
petitioners have in fact been granted an FTAA. Further, the nationality issue, so petitioners presently
claim, had been rendered moribund by the fact that MBMI had already divested itself and sold all its
shareholdings in the petitioners, as well as in their corporate stockholders, to a Filipino corporation—DMCI
Mining Corporation (DMCI).

As a counterpoint, respondent Redmontavers that the present case has not been rendered moot by the
supposed issuance of an FTAA in petitioners’ favor as this FTAA was subsequently revoked by the Office
of the President (OP) and is currently a subject of a petition pending in the Court’s First Division. Redmont
likewise contends that the supposed sale of MBMI’s interest in the petitioners and in their "holding
companies" is a question of fact that is outside the Court’s province to verify in a Rule 45 certiorari
proceedings. In any case, assuming that the controversy has been rendered moot, Redmont claims that
its resolution on the merits is still justified by the fact that petitioners have violated a constitutional
provision, the violation is capable of repetition yet evading review, and the present case involves a matter
of public concern.

Indeed, as the Court clarified in its Decision, the conversion of the MPSA application to one for FTAAs
and the issuance by the OP of an FTAA in petitioners’ favor are irrelevant. The OP itself has already
cancelled and revoked the FTAA thusissued to petitioners. Petitioners curiously have omitted this critical
factin their motion for reconsideration. Furthermore, the supposed sale by MBMI of its shares in the
petition ercorporations and in their holding companies is not only a question of fact that this Court is
without authority toverify, it also does not negate any violation of the Constitutional provisions previously
committed before any such sale.
We can assume for the nonce that the controversy had indeed been rendered moot by these two events.
Asthis Court has time and again declared, the "moot and academic" principle is not a magical formula that
automatically dissuades courts in resolving a case.  The Court may still take cognizance of an otherwise
1

moot and academic case, if it finds that (a) there is a grave violation of the Constitution;(b) the situation is
of exceptional character and paramount public interest is involved; (c) the constitutional issue raised
requires formulation of controlling principles to guide the bench, the bar, and the public; and (d) the case
is capable of repetition yet evading review.  The Court’s April 21, 2014 Decision explained in some detail
2

that all four (4) of the foregoing circumstances are present in the case. If only to stress a point, we will do
so again. First, allowing the issuance of MPSAs to applicants that are owned and controlled by a 100%
foreign-owned corporation, albeit through an intricate web of corporate layering involving alleged Filipino
corporations, is tantamount to permitting a blatant violation of Section 2, Article XII of the Constitution. The
Court simply cannot allow this breach and inhibit itself from resolving the controversy on the facile pretext
that the case had already been rendered academic.

Second, the elaborate corporate layering resorted to by petitioners so as to make it appear that there is
compliance with the minimum Filipino ownership in the Constitution is deftly exceptional in character.
More importantly, the case is of paramount public interest, as the corporate layering employed by
petitioners was evidently designed to circumvent the constitutional caveat allowing only Filipino citizens
and corporations 60%-owned by Filipino citizens to explore, develop, and use the country’s natural
resources.

Third, the facts of the case, involving as they do a web of corporate layering intended to go around the
Filipino ownership requirement in the Constitution and pertinent laws, requirethe establishment of a
definite principle that will ensure that the Constitutional provision reserving to Filipino citizens or
"corporations at least sixty per centum of whose capital is owned by such citizens" be effectively enforced
and complied with. The case, therefore, is an opportunity to establish a controlling principle that will "guide
the bench, the bar, and the public."

Lastly, the petitioners’ actions during the lifetime and existence of the instant case that gave rise to the
present controversy are capable of repetition yet evading review because, as shown by petitioners’
actions, foreign corporations can easily utilize dummy Filipino corporations through various schemes and
stratagems to skirt the constitutional prohibition against foreign mining in Philippine soil.

II.

The application of the Grandfather Ruleis justified by the circumstances of the case to determine the
nationality of petitioners.

To petitioners, the Court’s application of the Grandfather Rule to determine their nationality is erroneous
and allegedly without basis in the Constitution, the Foreign Investments Act of 1991 (FIA), the Philippine
Mining Act of 1995,3 and the Rules issued by the Securities and Exchange Commission (SEC). These
laws and rules supposedly espouse the application of the Control Test in verifying the Philippine
nationality of corporate entities for purposes of determining compliance withSec. 2, Art. XII of the
Constitution that only "corporations or associations at least sixty per centum of whose capital is owned by
such [Filipino] citizens" may enjoy certain rights and privileges, like the exploration and development of
natural resources.

The application of the Grandfather Rule in the present case does not eschew the Control Test.

Clearly, petitioners have misread, and failed to appreciate the clear import of, the Court’s April 21, 2014
Decision. Nowhere in that disposition did the Court foreclose the application of the Control Test in
determining which corporations may be considered as Philippine nationals. Instead, to borrow Justice
Leonen’s term, the Court used the Grandfather Rule as a "supplement" to the Control Test so that the
intent underlying the averted Sec. 2, Art. XII of the Constitution be given effect. The following excerpts of
the April 21, 2014 Decision cannot be clearer:

In ending, the "control test" is still the prevailing mode of determining whether or not a corporation is a
Filipino corporation, within the ambit of Sec. 2, Art. XII of the 1987 Constitution, entitled to undertake the
exploration, development and utilization of the natural resources of the Philippines. When in the mind of
the Court, there is doubt, based on the attendant facts and circumstances of the case, in the 60-40 Filipino
equity ownership in the corporation, then it may apply the "grandfather rule." (emphasis supplied)

With that, the use of the Grandfather Rule as a "supplement" to the Control Test is not proscribed by the
Constitution or the Philippine Mining Act of 1995.
The Grandfather Rule implements the intent of the Filipinization provisions of the Constitution.

To reiterate, Sec. 2, Art. XII of the Constitution reserves the exploration, development, and utilization of
natural resources to Filipino citizens and "corporations or associations at least sixty per centum of whose
capital is owned by such citizens." Similarly, Section 3(aq) of the Philippine Mining Act of 1995 considers
a "corporation x x x registered in accordance with law at least sixty per cent of the capital of which is
owned by citizens of the Philippines" as a person qualified to undertake a mining operation. Consistent
with this objective, the Grandfather Rulewas originally conceived to look into the citizenshipof the
individuals who ultimately own and control the shares of stock of a corporation for purposes of determining
compliance with the constitutional requirement of Filipino ownership. It cannot, therefore, be denied that
the framers of the Constitution have not foreclosed the Grandfather Rule as a tool in verifying the
nationality of corporations for purposes of ascertaining their right to participate in nationalized or partly
nationalized activities. The following excerpts from the Record of the 1986 Constitutional Commission
suggest as much:

MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity;
namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.

MR. VILLEGAS: That is right.

xxxx

MR. NOLLEDO: Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-40
percent equity invests in another corporation which is permitted by the Corporation Code, does the
Committee adopt the grandfather rule?

MR. VILLEGAS: Yes, that is the understanding of the Committee.

As further defined by Dean Cesar Villanueva, the Grandfather Rule is "the method by which the
percentage of Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of
activities, provided for under the Constitution and other nationalization laws, is computed, in cases where
corporate shareholders are present, by attributing the nationality of the second or even subsequent tier of
ownership to determine the nationality of the corporate shareholder."  Thus, to arrive at the actual Filipino
4

ownership and control in a corporation, both the direct and indirect shareholdings in the corporation are
determined.

This concept of stock attribution inherent in the Grandfather Rule to determine the ultimate ownership in a
corporation is observed by the Bureau of Internal Revenue (BIR) in applying Section 127 (B)  of the
5

National Internal Revenue Code on taxes imposed on closely held corporations, in relation to Section 96
of the Corporation Code  on close corporations. Thus, in BIR Ruling No. 148-10, Commissioner Kim
6

Henares held:

In the case of a multi-tiered corporation, the stock attribution rule must be allowed to run continuously
along the chain of ownership until it finally reaches the individual stockholders. This is in consonance with
the "grandfather rule" adopted in the Philippines under Section 96 of the Corporation Code(Batas
Pambansa Blg. 68) which provides that notwithstanding the fact that all the issued stock of a corporation
are held by not more than twenty persons, among others, a corporation is nonetheless not to be deemed
a close corporation when at least two thirds of its voting stock or voting rights is owned or controlled by
another corporation which is not a close corporation. 7

In SEC-OGC Opinion No. 10-31 dated December 9, 2010 (SEC Opinion 10-31), the SEC applied the
Grandfather Rule even if the corporation engaged in mining operation passes the 60-40 requirement of
the Control Test, viz:

You allege that the structure of MML’s ownership in PHILSAGA is as follows: (1) MML owns 40% equity in
MEDC, while the 60% is ostensibly owned by Philippine individual citizens who are actually MML’s
controlled nominees; (2) MEDC, in turn, owns 60% equity in MOHC, while MML owns the remaining 40%;
(3) Lastly, MOHC owns 60% of PHILSAGA, while MML owns the remaining 40%. You provide the
following figure to illustrate this structure:

xxxx
We note that the Constitution and the statute use the concept "Philippine citizens." Article III, Section 1 of
the Constitution provides who are Philippine citizens: x x x This enumeration is exhaustive. In other words,
there can be no other Philippine citizens other than those falling within the enumeration provided by the
Constitution. Obviously, only natural persons are susceptible of citizenship. Thus, for purposes of the
Constitutional and statutory restrictions on foreign participation in the exploitation of mineral resources, a
corporation investing in a mining joint venture can never be considered as a Philippine citizen.

The Supreme Court En Banc confirms this [in]… Pedro R. Palting, vs. San Jose Petroleum [Inc.]. The
Court held that a corporation investing in another corporation engaged ina nationalized activity cannot be
considered as a citizen for purposes of the Constitutional provision restricting foreign exploitation of
natural resources:

xxxx

Accordingly, we opine that we must look into the citizenship of the individual stockholders, i.e. natural
persons, of that investor-corporation in order to determine if the Constitutional and statutory restrictions
are complied with. If the shares of stock of the immediate investor corporation is in turn held and
controlled by another corporation, then we must look into the citizenship of the individual stockholders of
the latter corporation. In other words, if there are layers of intervening corporations investing in a mining
joint venture, we must delve into the citizenship of the individual stockholders of each corporation. This is
the strict application of the grandfather rule, which the Commission has been consistently applying prior to
the 1990s. Indeed, the framers of the Constitution intended for the "grandfather rule" to apply in case a
60%-40% Filipino-Foreign equity corporation invests in another corporation engaging in an activity where
the Constitution restricts foreign participation.

xxxx

Accordingly, under the structure you represented, the joint mining venture is 87.04 % foreign owned, while
it is only 12.96% owned by Philippine citizens. Thus, the constitutional requirement of 60% ownership by
Philippine citizens isviolated. (emphasis supplied)

Similarly, in the eponymous Redmont Consolidated Mines Corporation v. McArthur Mining Inc., et al.,  the8

SEC en bancapplied the Grandfather Rule despite the fact that the subject corporations ostensibly have
satisfied the 60-40 Filipino equity requirement. The SEC en bancheld that to attain the Constitutional
objective of reserving to Filipinos the utilization of natural resources, one should not stop where the
percentage of the capital stock is 60%.Thus:

[D]oubt, we believe, exists in the instant case because the foreign investor, MBMI, provided practically all
the funds of the remaining appellee-corporations. The records disclose that: (1) Olympic Mines and
Development Corporation ("OMDC"), a domestic corporation, and MBMI subscribed to 6,663 and 3,331
shares, respectively, out of the authorized capital stock of Madridejos; however, OMDC paid nothing for
this subscription while MBMI paid ₱2,803,900.00 out of its total subscription cost of ₱3,331,000.00; (2)
Palawan Alpha South Resource Development Corp. ("Palawan Alpha"), also a domestic corporation, and
MBMI subscribed to 6,596 and 3,996 shares, respectively, out of the authorized capital stock of
PatriciaLouise; however, Palawan Alpha paid nothing for this subscription while MBMI paid ₱2,796,000.00
out of its total subscription cost of ₱3,996,000.00; (3) OMDC and MBMI subscribed to 6,663 and 3,331
shares, respectively, out of the authorized capital stock of Sara Marie; however, OMDC paid nothing for
this subscription while MBMI paid ₱2,794,000.00 out of its total subscription cost of ₱3,331,000.00; and
(4) Falcon Ridge Resources Management Corp. ("Falcon Ridge"), another domestic corporation, and
MBMI subscribed to 5,997 and 3,998 shares, respectively, out of the authorized capital stock of San
Juanico; however, Falcon Ridge paid nothing for this subscription while MBMI paid ₱2,500,000.00 out of
its total subscription cost of ₱3,998,000.00. Thus, pursuant to the afore-quoted DOJ Opinion, the
Grandfather Rule must be used.

xxxx

The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our natural
resources. Necessarily, therefore, the Rule interpreting the constitutional provision should not diminish
that right through the legal fiction of corporate ownership and control. But the constitutional provision, as
interpreted and practicedvia the 1967 SEC Rules, has favored foreigners contrary to the command of the
Constitution. Hence, the Grandfather Rule must be applied to accurately determine the actual
participation, both direct and indirect, of foreigners in a corporation engaged in a nationalized activity or
business.
The method employed in the Grandfather Rule of attributing the shareholdings of a given corporate
shareholder to the second or even the subsequent tier of ownership hews with the rule that the "beneficial
ownership" of corporations engaged in nationalized activities must reside in the hands of Filipino citizens.
Thus, even if the 60-40 Filipino equity requirement appears to have been satisfied, the Department of
Justice (DOJ), in its Opinion No. 144, S. of 1977, stated that an agreement that may distort the actual
economic or beneficial ownership of a mining corporation may be struck down as violative of the
constitutional requirement, viz:

In this connection, you raise the following specific questions:

1. Can a Philippine corporation with 30% equity owned by foreigners enter into a mining service contract
with a foreign company granting the latter a share of not morethan 40% from the proceeds of the
operations?

xxxx

By law, a mining lease may be granted only to a Filipino citizen, or to a corporation or partnership
registered with the [SEC] at least 60% of the capital of which is owned by Filipino citizens and possessing
x x x.The sixty percent Philippine equity requirement in mineral resource exploitation x x xis intended to
insure, among other purposes, the conservation of indigenous natural resources, for Filipino posterityx x x.
I think it is implicit in this provision, even if it refers merely to ownership of stock in the corporation holding
the mining concession, that beneficial ownership of the right to dispose, exploit, utilize, and develop
natural resources shall pertain to Filipino citizens, and that the nationality requirementis not satisfied
unless Filipinos are the principal beneficiaries in the exploitation of the country’s natural resources. This
criterion of beneficial ownership is tacitly adopted in Section 44 of P.D. No. 463, above-quoted, which
limits the service fee in service contracts to 40% of the proceeds of the operation, thereby implying that
the 60-40 benefit-sharing ration is derived from the 60-40 equity requirement in the Constitution.

xxxx

It is obvious that while payments to a service contractor may be justified as a service fee, and therefore,
properly deductible from gross proceeds, the service contract could be employed as a means of going
about or circumventing the constitutional limit on foreign equity participation and the obvious constitutional
policy to insure that Filipinos retain beneficial ownership of our mineral resources. Thus, every service
contract scheme has to be evaluated in its entirety, on a case to case basis, to determine reasonableness
of the total "service fee" x x x like the options available tothe contractor to become equity participant in the
Philippine entity holding the concession, or to acquire rights in the processing and marketing stages. x x x
(emphasis supplied)

The "beneficial ownership" requirement was subsequently used in tandem with the "situs of control"
todetermine the nationality of a corporation in DOJ Opinion No. 84, S.of 1988, through the Grandfather
Rule, despite the fact that both the investee and investor corporations purportedly satisfy the 60-40
Filipino equity requirement: 9

This refers to your request for opinion on whether or not there may be an investment in real estate by a
domestic corporation (the investing corporation) seventy percent (70%) of the capital stock of which is
owned by another domestic corporation withat least 60%-40% Filipino-Foreign Equity, while the remaining
thirty percent (30%) of the capital stock is owned by a foreign corporation.

xxxx

This Department has had the occasion to rule in several opinions that it is implicit in the constitutional
provisions, even if it refers merely to ownership of stock in the corporation holding the land or natural
resource concession, that the nationality requirement is not satisfied unless it meets the criterion of
beneficial ownership, i.e. Filipinos are the principal beneficiaries in the exploration of natural
resources(Op. No. 144, s. 1977; Op. No. 130, s. 1985), and that in applying the same "the primordial
consideration is situs of control, whether in a stock or nonstock corporation"(Op. No. 178, s. 1974). As
stated in the Register of Deeds vs. Ung Sui Si Temple (97 Phil. 58), obviously toinsure that corporations
and associations allowed to acquire agricultural land or to exploit natural resources "shall be controlled by
Filipinos." Accordingly, any arrangement which attempts to defeat the constitutional purpose should be
eschewed (Op. No 130, s. 1985).

We are informed that in the registration of corporations with the [SEC], compliance with the sixty per
centum requirement is being monitored by SEC under the "Grandfather Rule" a method by which the
percentage of Filipino equity in corporations engaged in nationalized and/or partly nationalized areas of
activities provided for under the Constitution and other national laws is accurately computed, and the
diminution if said equity prevented (SEC Memo, S. 1976). The "Grandfather Rule" is applied specifically in
cases where the corporation has corporate stockholders with alien stockholdings, otherwise, if the rule is
not applied, the presence of such corporate stockholders could diminish the effective control of Filipinos.

Applying the "Grandfather Rule" in the instant case, the result is as follows: x x x the total foreign equity in
the investing corporation is 58% while the Filipino equity is only 42%, in the investing corporation, subject
of your query, is disqualified from investing in real estate, which is a nationalized activity, as it does not
meet the 60%-40% Filipino-Foreign equity requirement under the Constitution.

This pairing of the concepts "beneficial ownership" and the "situs of control" in determining what
constitutes"capital" has been adopted by this Court in Heirs of Gamboa v. Teves.  In its October 9, 2012
10

Resolution, the Court clarified, thus:

This is consistent with Section 3 of the FIA which provides that where 100% of the capital stock is heldby
"a trustee of funds for pension or other employee retirement or separation benefits," the trustee is a
Philippine national if "at least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals." Likewise, Section 1(b) of the Implementing Rules of the FIA provides that "for stocks to be
deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to
meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting
rights, is essential." (emphasis supplied)

In emphasizing the twin requirements of "beneficial ownership" and "control" in determining compliance
with the required Filipino equity in Gamboa, the en bancCourt explicitly cited with approval the SEC en
banc’s application in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al. of the
Grandfather Rule, to wit:

Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules and
opinions on behalf of SEC, has adopted the Grandfather Rulein determining compliance with the 60-40
ownership requirement in favor of Filipino citizens mandated by the Constitution for certain economic
activities. This prevailing SEC ruling, which the SEC correctly adopted to thwart any circumvention of the
required Filipino "ownership and control," is laid down in the 25 March 2010 SEC en banc ruling in
Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al. x x x (emphasis supplied)

Applying Gamboa, the Court, in Express Investments III Private Ltd. v. Bayantel Communications,
Inc.,  denied the foreign creditors’ proposal to convert part of Bayantel’s debts to common shares of the
11

company at a rate of 77.7%. Supposedly, the conversion of the debts to common shares by the foreign
creditors would be done, both directly and indirectly, in order to meet the control test principle under the
FIA.Under the proposed structure, the foreign creditors would own 40% of the outstanding capital stock of
the telecommunications company on a direct basis, while the remaining 40% of shares would be
registered to a holding company that shall retain, on a direct basis, the other 60% equity reserved for
Filipino citizens. Nonetheless, the Court found the proposal non-compliant with the Constitutional
requirement of Filipino ownership as the proposed structure would give more than 60% of the ownership
of the common shares of Bayantel to the foreign corporations, viz:

In its Rehabilitation Plan, among the material financial commitments made by respondent Bayantelis that
its shareholders shall relinquish the agreed-upon amount of common stock[s] as payment to Unsecured
Creditors as per the Term Sheet. Evidently, the parties intend to convert the unsustainable portion of
respondent’s debt into common stocks, which have voting rights. If we indulge petitioners on their
proposal, the Omnibus Creditors which are foreign corporations, shall have control over 77.7% of
Bayantel, a public utility company. This is precisely the scenario proscribed by the Filipinization provision
of the Constitution.Therefore, the Court of Appeals acted correctly in sustaining the 40% debt-to-equity
ceiling on conversion. (emphasis supplied) As shown by the quoted legislative enactments, administrative
rulings, opinions, and this Court’s decisions, the Grandfather Rule not only finds basis, but more
importantly, it implements the Filipino equity requirement, in the Constitution.

Application of the Grandfather

Rule with the Control Test.

Admittedly, an ongoing quandary obtains as to the role of the Grandfather Rule in determining compliance
with the minimum Filipino equity requirement vis-à-vis the Control Test. This confusion springs from the
erroneous assumption that the use of one method forecloses the use of the other.
As exemplified by the above rulings, opinions, decisions and this Court’s April 21, 2014 Decision, the
Control Test can be, as it has been, applied jointly withthe Grandfather Rule to determine the observance
of foreign ownership restriction in nationalized economic activities. The Control Test and the Grandfather
Rule are not, as it were, incompatible ownership-determinant methods that canonly be applied alternative
to each other. Rather, these methodscan, if appropriate, be used cumulatively in the determination of the
ownership and control of corporations engaged in fully or partly nationalized activities, as the mining
operation involved in this case or the operation of public utilities as in Gamboa or Bayantel.

The Grandfather Rule, standing alone, should not be used to determine the Filipino ownership and control
in a corporation, as it could result in an otherwise foreign corporation rendered qualified to perform
nationalized or partly nationalized activities. Hence, it is only when the Control Test is first complied with
that the Grandfather Rule may be applied. Put in another manner, if the subject corporation’s Filipino
equity falls below the threshold 60%, the corporation is immediately considered foreign-owned, in which
case, the needto resort to the Grandfather Rule disappears.

On the other hand, a corporation that complies with the 60-40 Filipino to foreign equity requirement can be
considered a Filipino corporation if there is no doubtas to who has the "beneficial ownership" and "control"
of the corporation. In that instance, there is no need fora dissection or further inquiry on the ownership of
the corporate shareholders in both the investing and investee corporation or the application of the
Grandfather Rule.  As a corollary rule, even if the 60-40 Filipino to foreign equity ratio is apparently met by
12

the subject or investee corporation, a resort to the Grandfather Rule is necessary if doubt existsas to the
locusof the "beneficial ownership" and "control." In this case, a further investigation as to the nationality of
the personalities with the beneficial ownership and control of the corporate shareholders in both the
investing and investee corporations is necessary.

As explained in the April 21,2012 Decision, the "doubt" that demands the application of the Grandfather
Rule in addition to or in tandem with the Control Test is not confined to, or more bluntly, does not refer to
the fact that the apparent Filipino ownership of the corporation’s equity falls below the 60% threshold.
Rather, "doubt" refers to various indicia that the "beneficial ownership" and "control" of the corporation do
not in fact reside in Filipino shareholders but in foreign stakeholders. As provided in DOJ Opinion No. 165,
Series of 1984, which applied the pertinent provisions of the Anti-DummyLaw in relation to the minimum
Filipino equity requirement in the Constitution, "significant indicators of the dummy status" have been
recognized in view of reports "that some Filipino investors or businessmen are being utilized or [are]
allowing themselves to be used as dummies by foreign investors" specifically in joint ventures for national
resource exploitation. These indicators are:

1. That the foreign investors provide practically all the funds for the joint investment undertaken by
these Filipino businessmen and their foreign partner;

2. That the foreign investors undertake to provide practically all the technological support for the
joint venture;

3. That the foreign investors, while being minority stockholders, manage the company and prepare
all economic viability studies.

Thus, In the Matter of the Petition for Revocation of the Certificate of Registration of Linear Works Realty
Development Corporation,  the SEC held that when foreigners contribute more capital to an enterprise,
13

doubt exists as to the actual control and ownership of the subject corporation even if the 60% Filipino
equity threshold is met. Hence, the SEC in that one ordered a further investigation, viz:

x x x The [SEC Enforcement and Prosecution Department (EPD)] maintained that the basis for
determining the level of foreign participation is the number of shares subscribed, regardless of the par
value. Applying such an interpretation, the EPD rules that the foreign equity participation in Linear works
Realty Development Corporation amounts to 26.41% of the corporation’s capital stock since the amount of
shares subscribed by foreign nationals is 1,795 only out of the 6,795 shares. Thus, the subject corporation
is compliant with the 40% limit on foreign equity participation. Accordingly, the EPD dismissed the
complaint, and did not pursue any investigation against the subject corporation.

xxxx

x x x [I]n this respect we find no error in the assailed order made by the EPD. The EPD did not err when it
did not take into account the par value of shares in determining compliance with the constitutional and
statutory restrictionson foreign equity.
However, we are aware that some unscrupulous individuals employ schemes to circumvent the
constitutional and statutory restrictions on foreign equity. In the present case, the fact that the shares of
the Japanese nationals have a greater par value but only have similar rights to those held by Philippine
citizens having much lower par value, is highly suspicious. This is because a reasonable investor would
expect to have greater control and economic rights than other investors who invested less capital than
him. Thus, it is reasonable to suspectthat there may be secret arrangements between the corporation and
the stockholders wherein the Japanese nationals who subscribed to the shares with greater par value
actually have greater control and economic rights contrary to the equality of shares based on the articles
of incorporation.

With this in mind, we find it proper for the EPD to investigate the subject corporation. The EPD is advised
to avail of the Commission’s subpoena powers in order to gather sufficient evidence, and file the
necessary complaint.

As will be discussed, even if atfirst glance the petitioners comply with the 60-40 Filipino to foreign equity
ratio, doubt exists in the present case that gives rise to a reasonable suspicion that the Filipino
shareholders do not actually have the requisite number of control and beneficial ownership in petitioners
Narra, Tesoro, and McArthur. Hence, a further investigation and dissection of the extent of the ownership
of the corporate shareholders through the Grandfather Rule is justified.

Parenthetically, it is advanced that the application of the Grandfather Rule is impractical as tracing the
shareholdings to the point when natural persons hold rights to the stocks may very well lead to an
investigation ad infinitum. Suffice it to say in this regard that, while the Grandfather Rule was originally
intended to trace the shareholdings to the point where natural persons hold the shares, the SEC had
already set up a limit as to the number of corporate layers the attribution of the nationality of the corporate
shareholders may be applied.

In a 1977 internal memorandum, the SEC suggested applying the Grandfather Rule on two (2) levels of
corporate relations for publicly-held corporations or where the shares are traded in the stock exchanges,
and to three (3) levels for closely held corporations or the shares of which are not traded in the stock
exchanges.  These limits comply with the requirement in Palting v. San Jose Petroleum, Inc.  that the
14 15

application of the Grandfather Rule cannot go beyond the level of what is reasonable.

A doubt exists as to the extent of control and beneficial ownership of MBMI over the petitioners and their
investing corporate stockholders.

In the Decision subject of this recourse, the Court applied the Grandfather Rule to determine the matter of
true ownership and control over the petitioners as doubt exists as to the actual extent of the participation
of MBMI in the equity of the petitioners and their investing corporations.

We considered the following membership and control structures and like nuances:

Tesoro

Supposedly Filipino corporation Sara Marie Mining, Inc. (Sara Marie) holds 59.97% of the 10,000
commonshares of petitioner Tesoro while the Canadian-owned company, MBMI, holds 39.98% of its
shares.

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Sara Marie Filipino 5,997 ₱5,997,000.00 ₱825,000.00

Mining, Inc.

MBMI Canadian 3,998 ₱3,998,000.00 ₱1,878,174.60

Resources,
Inc. 16

Lauro L. Filipino 1 ₱1,000.00 ₱1,000.00

Salazar
 Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Esguerra

Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00

Agcaoili

Michael T. American 1 ₱1,000.00 ₱1,000.00

Mason

Kenneth Canadian 1 ₱1,000.00 ₱1,000.00

Cawkel

  Total 10,000 ₱10,000,000.00 ₱2,708,174.60

In turn, the Filipino corporation Olympic Mines & Development Corp. (Olympic) holds 66.63% of Sara
Marie’s shares while the same Canadian company MBMI holds 33.31% of Sara Marie’s shares.
Nonetheless, it is admitted that Olympic did not pay a single peso for its shares. On the contrary, MBMI
paid for 99% of the paid-up capital of Sara Marie.

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Olympic Mines Filipino 6,663 ₱6,663,000.00 P0.00

& Development
Corp. 17

MBMI Canadian 3,331 ₱3,331,000.00 ₱2,794,000.00

Resources, Inc.

Amanti Limson Filipino 1 ₱1,000.00 ₱1,000.00

Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00

Esguerra

Lauro Salazar Filipino 1 ₱1,000.00 ₱1,000.00

Emmanuel G. Filipino 1 ₱1,000.00 ₱1,000.00

Hernando
Michael T. American 1 ₱1,000.00 ₱1,000.00
Mason

Kenneth Canadian 1 ₱1,000.00 ₱1,000.00

Cawkel

  Total 10,000 ₱10,000,000.00 ₱2,800,000.00

The fact that MBMI had practically provided all the funds in Sara Marie and Tesoro creates serious
doubt as to the true extent of its (MBMI) control and ownership over both Sara Marie and
Tesoro since, as observed by the SEC, "a reasonable investor would expect to have greater control and
economic rights than other investors who invested less capital than him." The application of the
Grandfather Rule is clearly called for, and as shown below, the Filipinos’ control and economic benefits in
petitioner Tesoro (through Sara Marie) fallbelow the threshold 60%, viz:
 Filipino participation in petitioner Tesoro: 40.01%

66.67

(Filipino equity in Sara Marie) x 59.97 (Sara Marie’s share in Tesoro) = 39.98%

100

39.98% + .03% (shares of individual Filipino shareholders [SHs] in Tesoro)

=40.01%

Foreign participation in petitioner Tesoro: 59.99%

33.33

(Foreign equity in Sara Marie) x 59.97 (Sara Marie’s share in Tesoro) = 19.99%

100

19.99% + 39.98% (MBMI’s direct participation in Tesoro) + .02% (shares of foreign individual SHs
in Tesoro)
= 59.99%

With only 40.01% Filipino ownership in petitioner Tesoro, as compared to 59.99% foreign ownership of its
shares, it is clear that petitioner Tesoro does not comply with the minimum Filipino equity requirement
imposed in Sec. 2, Art. XII of the Constitution. Hence, the appellate court’s observation that Tesoro is a
foreign corporation not entitled to an MPSA is apt.

McArthur

Petitioner McArthur follows the corporate layering structure of Tesoro, as 59.97% of its 10, 000 common
shares is owned by supposedly Filipino Madridejos Mining Corporation (Madridejos), while 39.98%
belonged to the Canadian MBMI.

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Madridejos Filipino 5,997 ₱5,997,000.00 ₱825,000.00

Mining
Corporation

MBMI Canadian 3,998 ₱3,998,000.0 ₱1,878,174.60

Resources,
Inc. 18

Lauro L. Filipino 1 ₱1,000.00 ₱1,000.00

Salazar

Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00

Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00

Agcaoili

Michael T. American 1 ₱1,000.00 ₱1,000.00

Mason
 Kenneth Canadian 1 ₱1,000.00 ₱1,000.00
Cawkel

  Total 10,000 ₱10,000,000.00 ₱2,708,174.60

In turn, 66.63% of Madridejos’ shares were held by Olympic while 33.31% of its shares belonged to MBMI.
Yet again, Olympic did not contribute to the paid-up capital of Madridejos and it was MBMI that provided
99.79% of the paid-up capital of Madridejos.

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Olympic Mines Filipino 6,663 ₱6,663,000.00 P0.00

& Development
Corp. 19

MBMI Canadian 3,331 ₱3,331,000.00 ₱2,803,900.00

Resources, Inc.

Amanti Limson Filipino 1 ₱1,000.00 ₱1,000.00

Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00

Esguerra

Lauro Salazar Filipino 1 ₱1,000.00 ₱1,000.00

Emmanuel G. Filipino 1 ₱1,000.00 ₱1,000.00

Hernando

Michael T. American 1 ₱1,000.00 ₱1,000.00

Mason

Kenneth Canadian 1 ₱1,000.00 ₱1,000.00

Cawkel

  Total 10,000 ₱10,000,000.00 ₱2,809,900.00

Again, the fact that MBMI had practically provided all the funds in Madridejos and McArthur creates
serious doubt as to the true extent of its control and ownership of MBMI over both Madridejos and
McArthur. The application of the Grandfather Rule is clearly called for, and as will be shown below, MBMI,
along with the other foreign shareholders, breached the maximum limit of 40% ownership in petitioner
McArthur, rendering the petitioner disqualified to an MPSA:

Filipino participation in petitioner McArthur: 40.01%

66.67

(Filipino equity in Madridejos) x 59.97 (Madridejos’ share in McArthur) = 39.98%

100

39.98% + .03% (shares of individual Filipino SHs in McArthur)

=40.01%
 Foreign participation in petitioner McArthur: 59.99%

33.33
(Foreign equity in Madridejos) x 59.97 (Madridejos’ share in McArthur) = 19.99%

19.99% + 39.98% (MBMI’s direct participation inMcArthur) + .02% (shares of foreign individual SHs
in McArthur)
= 59.99%

As with petitioner Tesoro, with only 40.01% Filipino ownership in petitioner McArthur, as compared to
59.99% foreign ownership of its shares, it is clear that petitioner McArthur does not comply with the
minimum Filipino equity requirement imposed in Sec. 2, Art. XII of the Constitution. Thus, the appellate
court did not err in holding that petitioner McArthur is a foreign corporation not entitled to an MPSA.

Narra

As for petitioner Narra, 59.97% of its shares belonged to Patricia Louise Mining & Development
Corporation (PLMDC), while Canadian MBMI held 39.98% of its shares.

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Patricia Lousie Filipino 5,997 ₱5,997,000.00 ₱1,677,000.00

Mining and
Development
Corp.

MBMI Canadian 3,996 ₱3,996,000.00 ₱1,116,000.00

Resources,
Inc. 20

Higinio C. Filipino 1 ₱1,000.00 ₱1,000.00

Mendoza,

Henry E. Filipino 1 ₱1,000.00 ₱1,000.00

Fernandez

Ma. Elena A. Filipino 1 ₱1,000.00 ₱1,000.00

Bocalan

Michael T. American 1 ₱1,000.00 ₱1,000.00

Mason

Robert L. Canadian 1 ₱1,000.00 ₱1,000.00

McCurdy

Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00

Agcaoili

Bayani H. Filipino 1 ₱1,000.00 ₱1,000.00

Agabin

  Total 10,000 ₱10,000,000.00 ₱2,800,000.00

PLMDC’s shares, in turn, were held by Palawan Alpha South Resources Development Corporation
(PASRDC), which subscribed to 65.96% of PLMDC’s shares, and the Canadian MBMI, which subscribed
to 33.96% of PLMDC’s shares.

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Palawan Alpha Filipino 6,596 ₱6,596,000.00 P0

South Resource
Development
Corp.

MBMI Canadian 3,396 ₱3,396,000.00 ₱2,796,000.00

Resources,
Inc.21

Higinio C. Filipino 1 ₱1,000.00 ₱1,000.00

Mendoza, Jr.

Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00

Esguerra

Henry E. Filipino 1 ₱1,000.00 ₱1,000.00

Fernandez

Ma. Elena A. Filipino 1 ₱1,000.00 ₱1,000.00

Bocalan

Michael T. American 1 ₱1,000.00 ₱1,000.00

Mason

Robert L. Canadian 1 ₱1,000.00 ₱1,000.00

McCurdy

Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00

Agcaoili

Bayani H, Filipino 1 ₱1,000.00 ₱1,000.00

Agabin

  Total 10,000 ₱10,000,000.00 ₱2,804,000.00

Yet again, PASRDC did not pay for any of its subscribed shares, while MBMI contributed 99.75% of
PLMDC’s paid-up capital. This fact creates serious doubt as to the true extent of MBMI’s control and
ownership over both PLMDC and Narra since "a reasonable investor would expect to have greater control
and economic rights than other investors who invested less capital than him." Thus, the application of the
Grandfather Rule is justified. And as will be shown, it is clear that the Filipino ownership in petitioner Narra
falls below the limit prescribed in both the Constitution and the Philippine Mining Act of 1995.

Filipino participation in petitioner Narra: 39.64%

66.02 (Filipino equity in PLMDC) x 59.97 (PLMDC’s share in Narra) = 39.59%

 100

39.59% + .05% (shares of individual Filipino SHs in McArthur)

=39.64%

Foreign participation in petitioner Narra: 60.36%

33.98

(Foreign equity in PLMDC) x 59.97 (PLMDC’s share in Narra) = 20.38%

100

20.38% + 39.96% (MBMI’s direct participation in Narra) + .02% (shares of foreign individual SHs in
McArthur)
= 60.36%

With 60.36% foreign ownership in petitioner Narra, as compared to only 39.64% Filipino ownership of its
shares, it is clear that petitioner Narra does not comply with the minimum Filipino equity requirement
imposed in Section 2, Article XII of the Constitution. Hence, the appellate court did not err in holding that
petitioner McArthur is a foreign corporation not entitled to an MPSA.

It must be noted that the foregoing determination and computation of petitioners’ Filipino equity
composition was based on their common shareholdings, not preferred or redeemable shares. Section 6 of
the Corporation Code of the Philippines explicitly provides that "no share may be deprived of voting rights
except those classified as ‘preferred’ or ‘redeemable’ shares." Further, as Justice Leonen puts it, there is
"no indication that any of the shares x x x do not have voting rights, [thus] it must be assumed that all such
shares have voting rights."  It cannot therefore be gain said that the foregoing computation hewed with the
22

pronouncements of Gamboa, as implemented by SEC Memorandum Circular No. 8, Series of 2013, (SEC
Memo No. 8)  Section 2 of which states:
23

Section 2. All covered corporations shall, at all times, observe the constitutional or statutory
requirement.  For purposes of determining compliance therewith, the required percentage of Filipino
1âwphi1

ownership shall be applied to BOTH (a) the total outstanding shares of stock entitled to vote in the election
of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the
election of directors.

In fact, there is no indication that herein petitioners issued any other class of shares besides the 10,000
common shares. Neither is it suggested that the common shares were further divided into voting or non-
voting common shares. Hence, for purposes of this case, items a) and b) in SEC Memo No. 8 both refer to
the 10,000 common shares of each of the petitioners, and there is no need to separately apply the 60-40
ratio to any segment or part of the said common shares.

III.

In mining disputes, the POA has jurisdiction to pass upon the nationality of applications for MPSAs

Petitioners also scoffed at this Court’s decision to uphold the jurisdiction of the Panel of Arbitrators (POA)
of the Department of Environment and Natural Resources (DENR) since the POA’s determination of
petitioners’ nationalities is supposedly beyond its limited jurisdiction, as defined in Gonzales v. Climax
Mining Ltd.  and Philex Mining Corp. v. Zaldivia.
24 25

The April 21, 2014 Decision did not dilute, much less overturn, this Court’s pronouncements in either
Gonzales or Philex Mining that POA’s jurisdiction "is limited only to mining disputes which raise questions
of fact," and not judicial questions cognizable by regular courts of justice. However, to properly recognize
and give effect to the jurisdiction vested in the POA by Section 77 of the Philippine Mining Act of
1995,  and in parallel with this Court’s ruling in Celestial Nickel Mining Exploration Corporation v.
26

Macroasia Corp.,  the Court has recognized in its Decision that in resolving disputes "involving rights to
27

mining areas" and "involving mineral agreements or permits," the POA has jurisdiction to make a
preliminary finding of the required nationality of the corporate applicant in order to determine its right to a
mining area or a mineral agreement.

There is certainly nothing novel or aberrant in this approach. In ejectment and unlawful detainer cases,
where the subject of inquiry is possession de facto, the jurisdiction of the municipal trial courts to make a
preliminary adjudication regarding ownership of the real property involved is allowed, but only for
purposes of ruling on the determinative issue of material possession.

The present case arose from petitioners' MPSA applications, in which they asserted their respective rights
to the mining areas each applied for. Since respondent Redmont, itself an applicant for exploration
permits over the same mining areas, filed petitions for the denial of petitioners' applications, it should be
clear that there exists a controversy between the parties and it is POA's jurisdiction to resolve the said
dispute. POA's ruling on Redmont's assertion that petitioners are foreign corporations not entitled to
MPSA is but a necessary incident of its disposition of the mining dispute presented before it, which is
whether the petitioners are entitled to MPSAs.

Indeed, as the POA has jurisdiction to entertain "disputes involving rights to mining areas," it necessarily
follows that the POA likewise wields the authority to pass upon the nationality issue involving petitioners,
since the resolution of this issue is essential and indispensable in the resolution of the main issue, i.e., the
determination of the petitioners' right to the mining areas through MPSAs.

WHEREFORE, We DENY the motion for reconsideration WITH FINALITY. No further pleadings shall be
entertained. Let entry of judgment be made in due course.

SO ORDERED.