Stocks and Stockholders The Facts

Sections 59-72 of the Revised Corporation Code of the Philippines

On October 15, 1998, petitioners David and Jose Lao filed a petition
Cases: with the Securities and Exchange Commission (SEC) against
respondent Dionisio Lao, president of Pacific Foundry Shop
Corporation (PFSC). Petitioners prayed for a declaration as
stockholders and directors of PFSC, issuance of certificates of shares
1. Lao v. Lao, GR No. 170585, 6 in their name and to be allowed to examine the corporate books of
October 2008 PFSC.3

2. Commissioner of Internal Revenue v. First Express Petitioners claimed that they are stockholders of PFSC based on the
Pawnshop Company, Inc., GR Nos. General Information Sheet filed with the SEC, in which they are
named as stockholders and directors of the corporation. Petitioner
172045-46, 16 June 2009
David Lao alleged that he acquired 446 shares in PFSC from his
3. National Exchange Company v. Dexter, 51 Phil. 601, 25 father, Lao Pong Bao, which shares were previously purchased from a
certain Hipolito Lao. Petitioner Jose Lao, on the other hand, alleged
February 1928
that he acquired 333 shares from respondent Dionisio Lao himself. 4
4. Andaya v. Rural Bank of Cabadbaran, Inc. GR No. 188769,
3 August 2016 Respondent denied petitioners' claim. He alleged that the inclusion of
their names in the corporation's General Information Sheet was
5. Bank of America NT & SA v. CA, GR No. 78017, 8 June inadvertently made. He also claimed that petitioners did not acquire
1990 any shares in PFSC by any of the modes recognized by law, namely
subscription, purchase, or transfer. Since they were neither
6. Teng v. SEC, GR No. 184332, 17 February 2016 stockholders nor directors of PFSC, petitioners had no right to be
issued certificates or stocks or to inspect its corporate books. 5
7. Legaspi Towers 300, Inc. v. Muer, GR No. 170783, 18 June
2012Corporate Books and Records
On June 19, 2000, Republic Act 8799, otherwise known as the
Securities Regulation Code, was enacted, transferring jurisdiction over
all intra-corporate disputes from the SEC to the RTC. Pursuant to the
Sections 73-74 of the Revised Corporation Code of the Philippines law, the petition with the SEC was transferred to the RTC in Cebu City
and docketed as Civil Case No. CEB-25916-SRC. The case was
Merger and Consolidation Sections 75-79 of the Revised Corporation consolidated with another intra-corporate dispute, Civil Case No.
Code of the Philippines CEB-25910-SRC, filed by the Heirs of Uy Lam Tiong against
respondent Dionisio Lao.6
Cases:
During pre-trial, the parties agreed to submit the case for resolution
based on the evidence on record.7
1. PNB v. Andrada Electric, GR No. 142936, 17 April 2002
RTC Disposition
2. Bank of Commerce v. Radio Philippines Network, Inc., GR
No. 195615, 21 April 2014
On December 19, 2001, the RTC rendered a Joint Decision8 with the
Appraisal Right Sections 80 – 85 of the Revised Corporation Code of following pertinent disposition, thus:
the Philippines
WHEREFORE, in view of the foregoing premises, judgment
is hereby rendered by the Court in these cases:
G.R. No. 170585             October 6, 2008
(a) Denying the petition of David C. Lao and Jose C. Lao to
DAVID C. LAO and JOSE C. LAO, petitioners, be recognized as stockholders and directors of Pacific
vs. Foundry Shop Corporation, to be issued certificates of stock
DIONISIO C. LAO, respondents. of said corporation and to be allowed to exercise rights of
stockholders of the same corporation.9
DECISION
In denying the petition, the RTC ratiocinated:
REYES, R.T., J.:
x x x Thus, the petitioners David C. Lao and Jose C Lao do
IS the mere inclusion as shareholder in the General Information Sheet not appear to have become registered stockholders of Pacific
of a corporation sufficient proof that one is a shareholder in such Foundry Shop corporation, as they do not appear to have
corporation? acquired shares of stock of the corporation either as
subscribers or by purchase from a holder of outstanding
This is the main question for resolution in this petition for review shares or by purchase from the corporation of additionally
on certiorari of the Amended Decision1 of the Court of Appeals (CA) issued shares.
affirming the Decision2 of the Regional Trial Court (RTC), Branch 11,
Cebu City in CEB-25916-SRC. xxxx
 Secondly, the claim or contention of the petitioners David C.
Lao and Jose C. Lao is wanting in merit because they have
no stock certificates in their names. A stock certificate, as we
very well know, is the evidence of ownership of corporate
stock. If ever the said petitioners acquired shares of stock of
the corporation, there is a need for their acquisition of said
shares to be registered in the Stock and Transfer Book of the
corporation. Registration is necessary to entitle a person to
exercise the rights of a stockholder and to hold office as
director or other offices (12 Fletcher 343). That is why it is
explicitly provided in Section 63 of the Corporation Code of
the Philippines that no transfer of shares of stock shall be
valid until the transfer is recorded in the books of the
corporation. An unregistered transfer is not valid as against
the corporation (Uson vs. Diosomito, 61 Phil. 535). A
transfer must be registered, or at least notice thereof given to
the corporation for the purpose of registration, before the
transferee can acquire any right as against the corporation
other than the right to have the transfer registered (12
Fletcher 339). An unrecorded transferee can not enjoy the
status of a stockholder, he can not vote nor he voted for
(Price & Sulu Development Corp. vs. Martin, 58 Phil. 707).
Until the transfer is registered, the transferee is not a
stockholder but an outsider (Rivera vs. Florendo, G.R. No.
L-57586, October 8, 1986). So, a person who has acquired or
purchased shares of stock of a corporation, and who desires
to be recognized as stockholder for the purpose of voting and
exercising other rights of a stockholder, must secure such a
standing by having the acquisition or transfer recorded in the
corporate books (Price & Sulu development Corp. vs.
Martin, supra). Unfortunately, in the cases at bench, the
petitioners David C. Lao and Jose C. Lao did not secure such
a standing. Consequently, their petition to be recognized as
stockholders of Pacific Foundry Shop Corporation must
fail.10
Petitioners appealed to the CA.
CA Disposition
On May 27, 2005, the CA rendered a Decision11 modifying that of the
RTC, disposing as follows:
WHEREFORE, premises considered, judgment is hereby
rendered modifying the Joint Decision dated December 19,
2001 of the trial court in so far as it relates to Civil Case No.
CEB-25916-SRC by:
(a) Declaring that petitioners have owned since 1987 shares
of stock in Pacific Foundry Shop Corporation, numbering
446 for petitioner-appellant David C. Lao and 333 for
petitioner-appellant Jose C. Lao;
(b) Ordering respondent-appellee through the corporate
secretary to issue to petitioners-appellants the certificates of
stock for the aforementioned number of shares;
(c) Ordering respondent-appellee, as President of Pacific
Foundry Shop Corporation, to allow petitioners-appellants to
exercise their rights as stock holders;
(d) Ordering respondent-appellee to call a stockholders
meeting every fourth Saturday of January in accordance with
the By-Laws of Pacific Foundry shop Corporation.12
The CA decision was penned by Justice Arsenio Magpale and
concurred in by Justices Sesinando Villon and Enrico Lanzanas.
In modifying the RTC decision, the appellate court gave credence to
the General Information Sheet submitted by petitioners that names
them as stockholders of PFSC, thus:
The General Information Sheet of PFSC for the years 1987-
1998 state that petitioners-appellants David C. Lao and Jose
C. Lao own 446 and 333 shares, respectively, in PFSC. It is
also indicated therein that David C. Lao occupied various
key positions in PFSC from 1987-1998 and Jose C. Lao
served as Director in PFSC from 1990-1998. The Sworn
Statements of Uy Lam Tiong, former corporate secretary of
the PFSC, also state that petitioners-appellants David C. Lao
and Jose C. Lao, per corporate records of PFSC, own shares
of stock numbering 446 and 333, respectively. The minutes
of the Annual Stockholders Meeting of PFSC on January 28,
1988 at 3:00 o'clock p.m. shows that among those present
were petitioners-appellants David C. Lao and Jose C. Lao.
During the said meeting, petitioner-appellant David C. Lao
was nominated and elected Director of PFSC. Withal, the
Minutes of the Meeting of the Board of Directors of PFSC at
its Office at Hipodromo, Cebu City, on January 28, 1988 at
4:00 p.m. disclose that petitioner-appellant David C. Lao
was elected vice-president of PFSC. Both minutes were
signed by the officers of PFSC including respondent-
appellee.13
Respondent filed a motion for reconsideration14 of the CA decision.
On July 11, 2005, respondent moved to inhibit15 the ponente of the CA
decision, Justice Magpale, from resolving his pending motion for
reconsideration.
On July 22, 2005, Justice Magpale issued a Resolution16 voluntarily
inhibiting himself from further participating in the resolution of the
pending motion for reconsideration. Justice Magpale stated:
Although the undersigned ponente does not agree with the
imputations of respondent-appellee and that the same are not
any of those grounds mentioned in Rule 137 of the Revised
Rules of Court, nonetheless the ponente voluntarily inhibits
himself from further handling this case in order to free the
entire court of the slightest suspicion of bias and prejudice
against the respondent-appellee.17
Amended Decision
On August 31, 2005, the CA rendered an Amended
Decision18 affirming that of the RTC, with a fallo reading:
IN VIEW OF THE FOREGOING, the May 27, 2005
Decision of this Court is hereby SET ASIDE and the
Decision of the Regional Trial Court, Branch 11, Cebu City
with respect to Civil Case No. 25916-SRC is hereby
AFIRMED in toto.19
The Amended Decision was penned by Justice Enrico Lanzanas and
concurred in by Justices Sesinando Villon and Vicente Yap. The CA
stated:
Petitioners-appellants maintain that they acquired their
shares of stocks through transfer - the third mode mentioned
by the trial court. David C. Lao claims that he acquired his
446 shares through his father, Lao Pong Bao, when the latter
purchased said shares from Hipolito Lao. On the other hand,
Jose C. Lao asserts that he acquired his 333 shares through
Dionisio C. Lao himself from the original 1,333 shares of
stocks of the latter.
Petitioner-appellants asseverations are unavailing. To
substantiate their statements, they merely relied on the
General Information Sheets submitted to the Securities and
Exchange Commission for the year 1987 to 1998, as well as
on the Minutes of the Stockholders Meeting and Board of
Directors Meeting held on January 28, 1988. They did not
adduce evidence that would indubitably show that there was
indeed a valid transfer of stocks, i.e. endorsement and
delivery, from the transferors, Hipolito Lao and Dionisio
Lao, to them as transferees.
xxxx
To our mind, David C. Lao utterly failed to confute the
argument posited by respondent-appellee or demonstrate
compliance with any of the statutory requirements as to
warrant a favorable ruling on his part. No proof was ever
shown that there was endorsement and delivery to him of the
stock certificates representing the 446 shares of Hipolito
Lao. Neither was the transfer registered in PFSC's Stock and
Transfer Book. Conversely, Dionisio C. Lao was able to
show conformity with the aforementioned requirements.
Accordingly, it is but logical to conclude that the certificate
of stock covering 446 shares of Hipolito Lao was in fact
endorsed and delivered to Dionisio C. Lao and as such is
reflected in PFSC's Stock and Transfer Book x x x.
In fact, it is a rule that private transactions are presumed to
have been faire and regular and that the regular course of
business is presumed to have been followed. Thus, the
transfer made by Hipolito Lao of the 446 shares of stocks to
Dionisio C. Lao is deemed to have been valid and well-
founded unless proven otherwise. David C. Lao's mere
allegation that Dionisio Lao illegally appropriated upon
himself the 446 shares failed to hurdle such presumption. In
this jurisdiction, neither fraud nor evil is presumed and the
record does not show either as to establish by clear and
sufficient evidence that may lead Us to believe such
allegation. The party alleging the same has the burden of
proof to present evidence necessary to establish his claim,
unfortunately however petitioners failed to do so. The
General Information Sheets and the Minutes of the Meetings
adduced by petitioners-appellants do not prove such
allegation of fraud or deceit. In the absence thereof, the
presumption remains that private transactions have been fair
and regular.
As for the alleged shares of Jose C. Lao, We find his
position identically situated with David C. Lao. There is also
no evidence on record that would clearly establish how he
acquired said shares of PFSC. Jose C. Lao failed to show
that there was endorsement and delivery to him of the stock
certificates or any documents showing such transfer or
assignment. In fact, the 333 shares being claimed by him is
still under the name of Dionisio C. Lao was reflected by the
Certificate of Stock as well as in PFSC's Stock and Transfer
Book. Corollary, Jose C. Lao could not be considered a
stockholder of PFSC in the absence of support reflecting his
right to the 333 shares other than the inclusion of his name in
the General Information Sheets from 1987 to 1998 and the
Minutes of the Stockholder's Meeting and Board of
Director's Meeting.20
Petitioners moved for reconsideration but their motion was
denied.21 Hence, the present petition for review on certiorari under
Rule 45 of the 1997 Rules of Civil Procedure.
Issues
Petitioners raise five (5) issues for Our consideration, thus:
1. Whether or not the inhibition of Justice Arsenio J.
Magpale is proper when there is no "extrinsic evidence of
bias, bad faith, malice, or corrupt purpose" on the part of
Justice Magpale, which is required by this Honorable Court
in its decision in Webb, et al. v. People of the Philippines,
276 SCRA 243 [1997], as basis for disqualification.
2. Whether or not the inhibition of Justice Magpale
constitutes, in effect, forum shopping, which is proscribed
under Section 5, Rule 7 of the Rules of Court, as amended,
and decisions of this Honorable Court.
3. Whether or not determination of ownership of shares of
stock in a corporation shall be based on the Stock and
Transfer Book alone, or other evidence can be considered
pursuant to the decision of this Honorable Court in Tan v.
Securities and Exchange Commission, 206 SCRA 740.
4. Whether or not the admissions and representations of
respondent in the General Information Sheets submitted by
him to the Securities and Exchange Commission during the
years 1987 to 1998 that (a) petitioners were stockholders of
Pacific Foundry Shop Corporation; that (b) petitioner David
C. Lao and Jose C. Lao owned 446 and 333 shares in the
corporation, respectively; and that (c) petitioners had been
directors and officers of the corporation, as well as the
Sworn Statement of Uy Lam Tiong, former Corporate
Secretary, the Minutes of the Annual Stockholders Meeting
of PFSC on January 28, 1988, and the Minutes of Meeting of
the Board of Directors on January 28, 1988, mentioned by
Justice Magpale in his ponencia, are sufficient proof of
petitioners ownership of stocks in the corporation.
5. Whether or not respondent is stopped from questioning
petitioners' ownership of stocks in the corporation in view of
his admissions and representations in the General
Information Sheets he submitted to the Securities and
Exchange Commission from 1987 to 1998 that petitioners
were stockholders and officers of the corporation. 22
Essentially, only two (2) issues are raised in this petition. The first
concerns the voluntary inhibition of Justice Magpale, while the second
involves the substantive issue of whether or not petitioners are indeed
stockholders of PFSC.
Our Ruling
We deny the petition.
Voluntary inhibition is within the sound discretion of a judge.
Petitioners claim that the motion to inhibit Justice Magpale from
resolving the pending motion for reconsideration was improper and
unethical. They assert that the "bias and prejudice" grounds alleged by
private respondent were unsubstantiated and, worse, constituted
proscribed forum shopping. They argue that Justice Magpale should
have resolved the pending motion, instead of voluntarily inhibiting
himself from the case.
In cases of voluntary inhibition, the law leaves to the sound discretion
of the judge the decision to decide for himself the question of whether
or not he will inhibit himself from the case. Section 1, Rule 137 of the
Rules of Court provides:
Section 1. Disqualification of judges. - No judge or judicial
officer shall sit in any case in which he, or his wife or child,
is pecuniarily interested as heir, legatee, creditor, or
otherwise, or in which he is related to either party within the
sixth degree of consanguinity or affinity, or to counsel
within the fourth degree, computed according to the rules of
the civil law, or in which he has been executor,
administrator, guardian, trustee, or counsel, or in which he
has presided in any inferior court when his ruling or decision
is the subject of review, without the written consent of all
parties in interest, signed by them and entered upon the
record.
A judge may, in the exercise of his sound discretion,
disqualify himself from sitting in a case, for just or valid
reasons other than those mentioned above.
Here, Justice Magpale voluntarily inhibited himself "in order to free
the entire court [CA] of the slightest suspicion of bias and prejudice x
x x."23 We certainly cannot nullify the decision of Justice Magpale
recusing himself from the case because that is a matter left entirely to
his discretion. Nor can We fault him for doing so. No judge should
preside in a case in which he feels that he is not wholly free,
disinterested, impartial, and independent.
We agree with petitioners that it may seem unpalatable and even
revolting when a losing party seeks the disqualification of a judge who
had previously ruled against him in the hope that a new judge might be
more favorable to him. But We cannot take that basic proposition too
far. That Justice Magpale opted to voluntarily recuse himself from the
appealed case is already fait accompli. It is, in popular idiom, water
under the bridge.
Petitioners cannot bank on his voluntary inhibition to nullify the
Amended Decision later issued by the appellate court. It is highly
specious to assume that Justice Magpale would have ruled in favor of
petitioners on the pending motion for reconsideration if he took a
different course and opted to stay on with the case. It is also illogical
to presume that the Amended Decision would not have been issued
with or without the participation of Justice Magpale. The Amended
Decision is too far removed from the issue of voluntary inhibition. It
does not follow that petitioners would be better off were it not for the
voluntary inhibition.
Petitioners failed to prove that they are shareholders of PSFC.
Petitioners insist that they are shareholders of PFSC. They claim
purchasing shares in PFSC. Petitioner David Lao alleges that he
acquired 446 shares in the corporation from his father, Lao Pong Bao,
which shares were previously purchased from a certain Hipolito Lao.
Petitioner Jose Lao, on the other hand, alleges that he acquired 333
shares from respondent Dionisio Lao.
Records, however, disclose that petitioners have no certificates of
shares in their name. A certificate of stock is the evidence of a holder's
interest and status in a corporation. It is a written instrument signed by
the proper officer of a corporation stating or acknowledging that the
person named in the document is the owner of a designated number of
shares of its stock.24 It is prima facie evidence that the holder is a
shareholder of a corporation.
Nor is there any written document that there was a sale of shares, as
claimed by petitioners. Petitioners did not present any deed of
assignment, or any similar instrument, between Lao Pong Bao and
Hipolito Lao; or between Lao Pong Bao and petitioner David Lao.
There is likewise no deed of assignment between petitioner Jose Lao
and private respondent Dionisio Lao.
Absent a written document, petitioners must prove, at the very least,
possession of the certificates of shares in the name of the alleged
seller. Again, they failed to prove possession. They failed to prove the
due delivery of the certificates of shares of the sellers to them. Section
63 of the Corporation Code provides:
Sec. 63. Certificate of stock and transfer of shares. - The
capital stock of stock corporations shall be divided into
shares for which certificates signed by the president or vice-
president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall be
issued in accordance with the by-laws. Shares of stock so
issued are personal property and may be transferred by
delivery of the certificate or certificates indorsed by the
owner or his attorney-in-fact or other person legally
authorized to make the transfer. No transfer, however, shall
be valid, except as between the parties, until the transfer is
recorded in the books of the corporation so as to show the
names of the parties to the transaction, the date of the
transfer, the number of the certificate or certificates and the
number of shares transferred.
In contrast, respondent was able to prove that he is the owner of the
disputed shares. He had in his possession the certificates of stocks of
Hipolito Lao. The certificates of stocks were also properly endorsed to
him. More importantly, the transfer was duly registered in the stock
and transfer book of the corporation. Thus, as between the parties,
respondent has proven his right over the disputed shares. As correctly
ruled by the CA:
Au contraire, Dionisio C. Lao was able to show through
competent evidence that he is undeniably the owner of the
disputed shares of stocks being claimed by David C. Lao. He
was able to validate that he has the physical possession of
the certificates covering the shares of Hipolito Lao. Notably,
it was Hipolito Lao who properly endorsed said certificates
to herein Dionisio Lao and that such transfer was registered
in PFSC's Stock and Transfer Book. These circumstances are
more in accord with the valid transfer contemplated by
Section 63 of the Corporation Code.25
The mere inclusion as shareholder of petitioners in the General
Information Sheet of PFSC is insufficient proof that they are
shareholders of the company.
Petitioners bank heavily on the General Information Sheet submitted
by PFSC to the SEC in which they were named as shareholders of
PFSC. They claim that respondent is now estopped from contesting the
General Information Sheet.
While it may be true that petitioners were named as shareholders in the
General Information Sheet submitted to the SEC, that document alone
does not conclusively prove that they are shareholders of PFSC. The
information in the document will still have to be correlated with the
corporate books of PFSC. As between the General Information Sheet
and the corporate books, it is the latter that is controlling. As correctly
ruled by the CA:
We agree with the trial court that mere inclusion in the
General Information Sheets as stockholders and officers
does not make one a stockholder of a corporation, for this
may have come to pass by mistake, expediency or
negligence. As professed by respondent-appellee, this was
done merely to comply with the reportorial requirements
with the SEC. This maybe against the law but "practice, no
matter how long continued, cannot give rise to any vested
right."
If a transferee of shares of stock who failed to register such
transfer in the Stock and Transfer Book of the Corporation
could not exercise the rights granted unto him by law as
stockholder, with more reason that such rights be denied to a
person who is not a stockholder of a corporation. Petitioners-
appellants never secured such a standing as stockholders of
PFSC and consequently, their petition should be denied.26
It should be stressed that the burden of proof is on petitioners to show
that they are shareholders of PFSC. This is so because they do not
have any certificates of shares in their name. Moreover, they do not
appear in the corporate books as registered shareholders. If they had
certificates of shares, the burden would have been with PFSC to prove
that they are not shareholders of the corporation.
As discussed, petitioners failed to hurdle their burden. There is no
written document evidencing their claimed purchase of shares. We
note that petitioners agreed to submit their case for decision based
merely on the documents on record. Hence, no testimonial evidence
was presented to prove the alleged purchase of shares. Absent any
documentary or testimonial evidence, the bare assertion of petitioners
that they are shareholders cannot prevail.
All told, We agree with the RTC and CA decision that petitioners are
not shareholders of PFSC.
WHEREFORE, the petition is DENIED and the appealed Amended
Decision AFFIRMED IN FULL.
SO ORDERED.
G.R. Nos. 172045-46               June 16, 2009
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
FIRST EXPRESS PAWNSHOP COMPANY, INC., Respondent.
DECISION
CARPIO, J.:
The Case
The Commissioner of Internal Revenue (petitioner) filed this Petition
for Review1 to reverse the Court of Tax Appeals’ Decision2 dated 24
March 2006 in the consolidated cases of C.T.A. EB Nos. 60 and 62. In
the assailed decision, the Court of Tax Appeals (CTA) En Banc
partially reconsidered the CTA First Division’s Decision3 dated 24
September 2004.
The Facts
On 28 December 2001, petitioner, through Acting Regional Director
Ruperto P. Somera of Revenue Region 6 Manila, issued the following
assessment notices against First Express Pawnshop Company, Inc.
(respondent):
a. Assessment No. 31-1-984 for deficiency income tax of
₱20,712.58 with compromise penalty of ₱3,000;
b. Assessment No. 31-14-000053-985 for deficiency value-
added tax (VAT) of ₱601,220.18 with compromise penalty
of ₱16,000;
c. Assessment No. 31-14-000053-986 for deficiency
documentary stamp tax (DST) of ₱12,328.45 on deposit on
subscription with compromise penalty of ₱2,000; and
d. Assessment No. 31-1-000053-987 for deficiency DST of
₱62,128.87 on pawn tickets with compromise penalty of
₱8,500.
Respondent received the assessment notices on 3 January 2002. On 1
February 2002, respondent filed its written protest on the above
assessments. Since petitioner did not act on the protest during the 180-
day period,8 respondent filed a petition before the CTA on 28 August
2002.9
Respondent contended that petitioner did not consider the supporting
documents on the interest expenses and donations which resulted in
the deficiency income tax.10 Respondent maintained that pawnshops
are not lending investors whose services are subject to VAT, hence it
was not liable for deficiency VAT.11 Respondent also alleged that no
deficiency DST was due because Section 18012 of the National Internal
Revenue Code (Tax Code) does not cover any document or transaction
which relates to respondent. Respondent also argued that the issuance
of a pawn ticket did not constitute a pledge under Section 195 13 of the
Tax Code.14
In its Answer filed before the CTA, petitioner alleged that the
assessment was valid and correct and the taxpayer had the burden of
proof to impugn its validity or correctness. Petitioner maintained that
respondent is subject to 10% VAT based on its gross receipts pursuant
to Republic Act No. 7716, or the Expanded Value-Added Tax Law
(EVAT). Petitioner also cited BIR Ruling No. 221-91 which provides
that pawnshop tickets are subject to DST. 15
On 1 July 2003, respondent paid ₱27,744.88 as deficiency income tax
inclusive of interest.16
After trial on the merits, the CTA First Division ruled, thus:
IN VIEW OF ALL THE FOREGOING, the instant petition is
hereby PARTIALLY GRANTED. Assessment No. 31-1-000053-98
for deficiency documentary stamp tax in the amount of Sixty-Two
Thousand One Hundred Twenty-Eight Pesos and 87/100 (₱62,128.87)
and Assessment No. 31-14-000053-98 for deficiency documentary
stamp tax on deposits on subscription in the amount of Twelve
Thousand Three Hundred Twenty-Eight Pesos and 45/100
(₱12,328.45) are CANCELLED and SET ASIDE. However,
Assessment No. 31-14-000053-98 is hereby AFFIRMED except the
imposition of compromise penalty in the absence of showing that
petitioner consented thereto (UST vs. Collector, 104 SCRA 1062;
Exquisite Pawnshop Jewelry, Inc. vs. Jaime B. Santiago, et al., supra).
Accordingly petitioner is ORDERED to PAY the deficiency value
added tax in the amount of Six Hundred One Thousand Two Hundred
Twenty Pesos and 18/100 (₱601,220.18) inclusive of deficiency
interest for the year 1998. In addition, petitioner is ORDERED to
PAY 25% surcharge and 20% delinquency interest per annum from
February 12, 2002 until fully paid pursuant to Sections 248 and 249 of
the 1997 Tax Code.
SO ORDERED.17 (Boldfacing in the original)
Both parties filed their Motions for Reconsideration which were
denied by the CTA First Division for lack of merit. Thereafter, both
parties filed their respective Petitions for Review under Section 11 of
Republic Act No. 9282 (RA 9282) with the CTA En Banc. 18
On 24 March 2006, the CTA En Banc promulgated a Decision
affirming respondent’s liability to pay the VAT and ordering it to pay
DST on its pawnshop tickets. However, the CTA En Banc found that
respondent’s deposit on subscription was not subject to DST.19
Aggrieved by the CTA En Banc’s Decision which ruled that
respondent’s deposit on subscription was not subject to DST,
petitioner elevated the case before this Court.
The Ruling of the Court of Tax Appeals
On the taxability of deposit on subscription, the CTA, citing First
Southern Philippines Enterprises, Inc. v. Commissioner of Internal
Revenue,20 pointed out that deposit on subscription is not subject to
DST in the absence of proof that an equivalent amount of shares was
subscribed or issued in consideration for the deposit. Expressed
otherwise, deposit on stock subscription is not subject to DST if: (1)
there is no agreement to subscribe; (2) there are no shares issued or
any additional subscription in the restructuring plan; and (3) there is no
proof that the issued shares can be considered as issued certificates of
stock.21
The CTA ruled that Section 17522 of the Tax Code contemplates a
subscription agreement. The CTA explained that there can be
subscription only with reference to shares of stock which have been
unissued, in the following cases: (a) the original issuance from
authorized capital stock at the time of incorporation; (b) the opening,
during the life of the corporation, of the portion of the original
authorized capital stock previously unissued; or (c) the increase of
authorized capital stock achieved through a formal amendment of the
articles of incorporation and registration of the articles of
incorporation with the Securities and Exchange Commission. 23
The CTA held that in this case, there was no subscription or any
contract for the acquisition of unissued stock for ₱800,000 in the
taxable year assessed. The General Information Sheet (GIS) of
respondent showed only a capital structure of ₱500,000 as Subscribed
Capital Stock and ₱250,000 as Paid-up Capital Stock and did not
include the assessed amount. Mere reliance on the presumption that
the assessment was correct and done in good faith was unavailing vis-
à-vis the evidence presented by respondent. Thus, the CTA ruled that
the assessment for deficiency DST on deposit on subscription has not
become final.24
The Issue
Petitioner submits this sole issue for our consideration: whether the
CTA erred on a question of law in disregarding the rule on finality of
assessments prescribed under Section 228 of the Tax Code.
Corollarily, petitioner raises the issue on whether respondent is liable
to pay ₱12,328.45 as DST on deposit on subscription of capital stock.
The Ruling of the Court
Petitioner contends that the CTA erred in disregarding the rule on the
finality of assessments prescribed under Section 228 of the Tax
Code.25 Petitioner asserts that even if respondent filed a protest, it did
not offer evidence to prove its claim that the deposit on subscription
was an "advance" made by respondent’s stockholders. 26 Petitioner
alleges that respondent’s failure to submit supporting documents
within 60 days from the filing of its protest as required under Section
228 of the Tax Code caused the assessment of ₱12,328.45 for deposit
on subscription to become final and unassailable.27
Petitioner alleges that revenue officers are afforded the presumption of
regularity in the performance of their official functions, since they
have the distinct opportunity, aside from competence, to peruse
records of the assessments. Petitioner invokes the principle that by
reason of the expertise of administrative agencies over matters falling
under their jurisdiction, they are in a better position to pass judgment
thereon; thus, their findings of fact are generally accorded great
respect, if not finality, by the courts. Hence, without the supporting
documents to establish the non-inclusion from DST of the deposit on
subscription, petitioner’s assessment pursuant to Section 228 of the
Tax Code had become final and unassailable. 28
Respondent, citing Standard Chartered Bank-Philippine Branches v.
Commissioner of Internal Revenue,29 asserts that the submission of all
the relevant supporting documents within the 60-day period from
filing of the protest is directory.
Respondent claims that petitioner requested for additional documents
in petitioner’s letter dated 12 March 2002, to wit: (1) loan agreement
from lender banks; (2) official receipts of interest payments issued to
respondent; (3) documentary evidence to substantiate donations
claimed; and (4) proof of payment of DST on subscription.30 It must be
noted that the only document requested in connection with
respondent’s DST assessment on deposit on subscription is proof of
DST payment. However, respondent could not produce any proof of
DST payment because it was not required to pay the same under the
law considering that the deposit on subscription was an advance made
by its stockholders for future subscription, and no stock certificates
were issued.31 Respondent insists that petitioner could have issued a
subpoena requiring respondent to submit other documents to determine
if the latter is liable for DST on deposit on subscription pursuant to
Section 5(c) of the Tax Code.32
Respondent argues that deposit on future subscription is not subject to
DST under Section 175 of the Tax Code. Respondent explains:
It must be noted that deposits on subscription represent advances made
by the stockholders and are in the nature of liabilities for which
stocks may be issued in the future. Absent any express agreement
between the stockholders and petitioner to convert said
advances/deposits to capital stock, either through a subscription
agreement or any other document, these deposits remain as liabilities
owed by respondent to its stockholders. For these deposits to be
subject to DST, it is necessary that a conversion/subscription
agreement be made by First Express and its stockholders. Absent such
conversion, no DST can be imposed on said deposits under Section
175 of the Tax Code.33 (Underscoring in the original)
Respondent contends that by presenting its GIS and financial
statements, it had already sufficiently proved that the amount sought to
be taxed is deposit on future subscription, which is not subject to
DST.34 Respondent claims that it cannot be required to submit proof of
DST payment on subscription because such payment is non-existent.
Thus, the burden of proving that there was an agreement to subscribe
and that certificates of stock were issued for the deposit on
subscription rests on petitioner and his examiners. Respondent states
that absent any proof, the deficiency assessment has no basis and
should be cancelled.35
On the Taxability of Deposit on Stock Subscription
DST is a tax on documents, instruments, loan agreements, and papers
evidencing the acceptance, assignment, sale or transfer of an
obligation, right or property incident thereto. DST is actually an excise
tax because it is imposed on the transaction rather than on the
document.36 DST is also levied on the exercise by persons of certain
privileges conferred by law for the creation, revision, or termination of
specific legal relationships through the execution of specific
instruments.37 The Tax Code provisions on DST relating to shares or
certificates of stock state:
Section 175. Stamp Tax on Original Issue of Shares of Stock. - On
every original issue, whether on organization, reorganization or for
any lawful purpose, of shares of stock by any association, company or
corporation, there shall be collected a documentary stamp tax of Two
pesos (₱2.00) on each Two hundred pesos (₱200), or fractional part
thereof, of the par value, of such shares of stock: Provided, That in the
case of the original issue of shares of stock without par value the
amount of the documentary stamp tax herein prescribed shall be based
upon the actual consideration for the issuance of such shares of
stock: Provided, further, That in the case of stock dividends, on the
actual value represented by each share. 38
Section 176. Stamp Tax on Sales, Agreements to Sell, Memoranda of
Sales, Deliveries or Transfer of Due-bills, Certificates of Obligation,
or Shares or Certificates of Stock. - On all sales, or agreements to sell,
or memoranda of sales, or deliveries, or transfer of due-bills,
certificates of obligation, or shares or certificates of stock in any
association, company or corporation, or transfer of such securities by
assignment in blank, or by delivery, or by any paper or agreement, or
memorandum or other evidences of transfer or sale whether entitling
the holder in any manner to the benefit of such due-bills, certificates of
obligation or stock, or to secure the future payment of money, or for
the future transfer of any due-bill, certificate of obligation or stock,
there shall be collected a documentary stamp tax of One peso and fifty
centavos (₱1.50) on each Two hundred pesos (₱200), or fractional part
thereof, of the par value of such due-bill, certificate of obligation or
stock: Provided, That only one tax shall be collected on each sale or
transfer of stock or securities from one person to another, regardless of
whether or not a certificate of stock or obligation is issued, indorsed,
or delivered in pursuance of such sale or transfer: And provided,
further, That in the case of stock without par value the amount of the
documentary stamp tax herein prescribed shall be equivalent to
twenty-five percent (25%) of the documentary stamp tax paid upon the
original issue of said stock.39
In Section 175 of the Tax Code, DST is imposed on the original issue
of shares of stock. The DST, as an excise tax, is levied upon the
privilege, the opportunity and the facility of issuing shares of stock.
In Commissioner of Internal Revenue v. Construction Resources of
Asia, Inc.,40 this Court explained that the DST attaches upon
acceptance of the stockholder’s subscription in the corporation’s
capital stock regardless of actual or constructive delivery of the
certificates of stock. Citing Philippine Consolidated Coconut Ind., Inc.
v. Collector of Internal Revenue,41 the Court held:
The documentary stamp tax under this provision of the law may be
levied only once, that is upon the original issue of the certificate. The
crucial point therefore, in the case before Us is the proper
interpretation of the word ‘issue.’ In other words, when is the
certificate of stock deemed ‘issued’ for the purpose of imposing the
documentary stamp tax? Is it at the time the certificates of stock are
printed, at the time they are filled up (in whose name the stocks
represented in the certificate appear as certified by the proper officials
of the corporation), at the time they are released by the corporation, or
at the time they are in the possession (actual or constructive) of the
stockholders owning them?
xxx
Ordinarily, when a corporation issues a certificate of stock
(representing the ownership of stocks in the corporation to fully paid
subscription) the certificate of stock can be utilized for the exercise of
the attributes of ownership over the stocks mentioned on its face. The
stocks can be alienated; the dividends or fruits derived therefrom can
be enjoyed, and they can be conveyed, pledged or encumbered. The
certificate as issued by the corporation, irrespective of whether or not
it is in the actual or constructive possession of the stockholder, is
considered issued because it is with value and hence the documentary
stamp tax must be paid as imposed by Section 212 of the National
Internal Revenue Code, as amended.
In Section 176 of the Tax Code, DST is imposed on the sales,
agreements to sell, memoranda of sales, deliveries or transfer of shares
or certificates of stock in any association, company, or corporation, or
transfer of such securities by assignment in blank, or by delivery, or by
any paper or agreement, or memorandum or other evidences of
transfer or sale whether entitling the holder in any manner to the
benefit of such certificates of stock, or to secure the future payment of
money, or for the future transfer of certificates of stock. In Compagnie
Financiere Sucres et Denrees v. Commissioner of Internal Revenue,
this Court held that under Section 176 of the Tax Code, sales to secure
the future transfer of due-bills, certificates of obligation or certificates
of stock are subject to documentary stamp tax.42
Revenue Memorandum Order No. 08-98 (RMO 08-98) provides the
guidelines on the corporate stock documentary stamp tax program.
RMO 08-98 states that:
1. All existing corporations shall file the Corporation Stock
DST Declaration, and the DST Return, if applicable when
DST is still due on the subscribed share issued by the
corporation, on or before the tenth day of the month
following publication of this Order.
xxx
3. All existing corporations with authorization for increased
capital stock shall file their Corporate Stock DST
Declaration, together with the DST Return, if
applicable when DST is due on subscriptions made after
the authorization, on or before the tenth day of the month
following the date of authorization. (Boldfacing supplied)
RMO 08-98, reiterating Revenue Memorandum Circular No. 47-97
(RMC 47-97), also states that what is being taxed is the privilege of
issuing shares of stock, and, therefore, the taxes accrue at the time the
shares are issued. RMC 47-97 also defines issuance as the point in
which the stockholder acquires and may exercise attributes of
ownership over the stocks.
As pointed out by the CTA, Sections 175 and 176 of the Tax Code
contemplate a subscription agreement in order for a taxpayer to be
liable to pay the DST. A subscription contract is defined as any
contract for the acquisition of unissued stocks in an existing
corporation or a corporation still to be formed.43 A stock subscription
is a contract by which the subscriber agrees to take a certain number of
shares of the capital stock of a corporation, paying for the same or
expressly or impliedly promising to pay for the same.44
A. This payment stands as (sic) for the deposit for future
subscription.
Atty. Napiza
Q. Would you know if First Express issued corresponding
shares pertinent to the amount being deposited?

In this case, respondent’s Stockholders’ Equity section of its Balance Mr. Rosario Jr.
Sheet as of 31 December 199845 shows:
A. No.
Stockholders’ Equity 1998
Atty. Napiza
Authorized Capital Stock ₱ 2,000,000.00
Paid-up Capital Stock 250,000.00 Q. What do you mean by no? Did they or they did not?

Deposit on Subscription 800,000.00 Mr. Rosario Jr.

Retained Earnings 62,820.34
A. They did not issue any shares because that is not the
Net Income (858,498.38) payment of subscription. That is just a mere deposit.
Total ₱ 254,321.96
Atty. Napiza

The GIS submitted to the Securities and Exchange Commission on 31 Q. Would you know, Mr. Rosario, how much is the
March 1999 shows the following Capital Structure:46 Subscribed Capital of First Express Pawnshop?

B. Financial Profile Mr. Rosario Jr.

1. Capital Structure : A. The Subscribed Capital of First Express Pawnshop

Company, Inc. for the year 1998 is ₱500 thousand.
AUTHORIZ - ₱2,000,000.00
ED Atty. Napiza
SUBSCRIBE - 500,000.00
D Q. How about the Paid Up Capital?

PAID-UP - 250,000.00 Mr. Rosario Jr.

These entries were explained by Miguel Rosario, Jr. (Rosario), A. The Paid Up Capital is ₱250 thousand.
respondent’s external auditor, during the hearing before the CTA on
11 June 2003. Rosario testified in this wise: Atty. Napiza

Atty. Napiza Q. Are (sic) all those figures appear in the balance sheet?

Q. Mr. Rosario, I refer you to the balance sheet of First
Express for the year 1998 particularly the entry of deposit on
subscription in the amount of ₱800 thousand, will you please
tell us what is (sic) this entry represents?
Mr. Rosario Jr.
A. This amount of ₱800 thousand represents the case
given by the stockholders to the company but does not
necessarily made (sic) payment to subscribed portion.
Atty. Napiza
Mr. Rosario Jr.
A. The Paid Up Capital appeared here but the Subscribed
Portion was not stated. (Boldfacing supplied)
Based on Rosario’s testimony and respondent’s financial statements as
of 1998, there was no agreement to subscribe to the unissued shares.
Here, the deposit on stock subscription refers to an amount of money
received by the corporation as a deposit with the possibility of
applying the same as payment for the future issuance of capital
stock.47 In Commissioner of Internal Revenue v. Construction
Resources of Asia, Inc.,48 we held:

Q. What is (sic) that payment stands for? We are firmly convinced that the Government stands to lose nothing in
imposing the documentary stamp tax only on those stock certificates
Mr. Rosario Jr. duly issued, or wherein the stockholders can freely exercise the
attributes of ownership and with value at the time they are originally
issued. As regards those certificates of stocks temporarily subject
to suspensive conditions they shall be liable for said tax only when
released from said conditions, for then and only then shall they
truly acquire any practical value for their
owners.lavvphil (Boldfacing supplied)
Clearly, the deposit on stock subscription as reflected in respondent’s
Balance Sheet as of 1998 is not a subscription agreement subject to the
payment of DST. There is no ₱800,000 worth of subscribed capital
stock that is reflected in respondent’s GIS. The deposit on stock
subscription is merely an amount of money received by a corporation
with a view of applying the same as payment for additional issuance of
shares in the future, an event which may or may not happen. The
person making a deposit on stock subscription does not have the
standing of a stockholder and he is not entitled to dividends, voting
rights or other prerogatives and attributes of a stockholder. Hence,
respondent is not liable for the payment of DST on its deposit on
subscription for the reason that there is yet no subscription that creates
rights and obligations between the subscriber and the corporation.
On the Finality of Assessment as Prescribed
under Section 228 of the Tax Code
Section 228 of the Tax Code provides:
SEC. 228. Protesting of Assessment. - When the Commissioner or his
duly authorized representative finds that proper taxes should be
assessed, he shall first notify the taxpayer of his findings: Provided,
however, That a preassessment notice shall not be required in the
following cases:
(a) When the finding for any deficiency tax is the result of
mathematical error in the computation of the tax as
appearing on the face of the return; or
(b) When a discrepancy has been determined between the
tax withheld and the amount actually remitted by the
withholding agent; or
(c) When a taxpayer who opted to claim a refund or tax
credit of excess creditable withholding tax for a taxable
period was determined to have carried over and
automatically applied the same amount claimed against the
estimated tax liabilities for the taxable quarter or quarters of
the succeeding taxable year; or
(d) When the excise tax due on excisable articles has not
been paid; or
(e) When an article locally purchased or imported by an
exempt person, such as, but not limited to, vehicles, capital
equipment, machineries and spare parts, has been sold,
traded or transferred to non-exempt persons.
The taxpayer shall be informed in writing of the law and the facts on
which the assessment is made; otherwise, the assessment shall be void.
Within a period to be prescribed by implementing rules and
regulations, the taxpayer shall be required to respond to said notice. If
the taxpayer fails to respond, the Commissioner or his duly authorized
representative shall issue an assessment based on his findings.
Such assessment may be protested administratively by filing a request
for reconsideration or reinvestigation within thirty (30) days from
receipt of the assessment in such form and manner as may be
prescribed by implementing rules and regulations. Within sixty (60)
days from filing of the protest, all relevant supporting documents
shall have been submitted; otherwise, the assessment shall become
final.
If the protest is denied in whole or in part, or is not acted upon within
one hundred eighty (180) days from submission of documents, the
taxpayer adversely affected by the decision or inaction may appeal to
the Court of Tax Appeals within thirty (30) days from receipt of the
said decision, or from the lapse of the one hundred eighty (180)-day
period; otherwise, the decision shall become final, executory and
demandable. (Boldfacing supplied)
Section 228 of the Tax Code49 provides the remedy to dispute a tax
assessment within a certain period of time. It states that an assessment
may be protested by filing a request for reconsideration or
reinvestigation within 30 days from receipt of the assessment by the
taxpayer. Within 60 days from filing of the protest, all relevant
supporting documents shall have been submitted; otherwise, the
assessment shall become final.
In this case, respondent received the tax assessment on 3 January 2002
and it had until 2 February 2002 to submit its protest. On 1 February
2002, respondent submitted its protest and attached the GIS and
Balance Sheet as of 31 December 1998. Respondent explained that it
received ₱800,000 as a deposit with the possibility of applying the
same as payment for the future issuance of capital stock.
Within 60 days from the filing of protest or until 2 April 2002,
respondent should submit relevant supporting documents.
Respondent, having submitted the supporting documents together
with its protest, did not present additional documents anymore.
In a letter dated 12 March 2002, petitioner requested respondent to
present proof of payment of DST on subscription. In a letter-reply,
respondent stated that it could not produce any proof of DST payment
because it was not required to pay DST under the law considering that
the deposit on subscription was an advance made by its stockholders
for future subscription, and no stock certificates were issued.
Since respondent has not allegedly submitted any relevant supporting
documents, petitioner now claims that the assessment has become
final, executory and demandable, hence, unappealable.
We reject petitioner’s view that the assessment has become final and
unappealable. It cannot be said that respondent failed to submit
relevant supporting documents that would render the assessment final
because when respondent submitted its protest, respondent attached
the GIS and Balance Sheet. Further, petitioner cannot insist on the
submission of proof of DST payment because such document does not
exist as respondent claims that it is not liable to pay, and has not paid,
the DST on the deposit on subscription.
The term "relevant supporting documents" should be understood as
those documents necessary to support the legal basis in disputing a tax
assessment as determined by the taxpayer. The BIR can only inform
the taxpayer to submit additional documents. The BIR cannot demand
what type of supporting documents should be submitted. Otherwise, a
taxpayer will be at the mercy of the BIR, which may require the
production of documents that a taxpayer cannot submit.1awphi1
After respondent submitted its letter-reply stating that it could not
comply with the presentation of the proof of DST payment, no reply
was received from petitioner.
Section 228 states that if the protest is not acted upon within 180 days
from submission of documents, the taxpayer adversely affected by the
inaction may appeal to the CTA within 30 days from the lapse of the
180-day period. Respondent, having submitted its supporting
documents on the same day the protest was filed, had until 31 July
2002 to wait for petitioner’s reply to its protest. On 28 August 2002 or
within 30 days after the lapse of the 180-day period counted from the
filing of the protest as the supporting documents were simultaneously
filed, respondent filed a petition before the CTA.
Respondent has complied with the requisites in disputing an
assessment pursuant to Section 228 of the Tax Code. Hence, the tax
assessment cannot be considered as final, executory and demandable.
Further, respondent’s deposit on subscription is not subject to the
payment of DST. Consequently, respondent is not liable to pay the
deficiency DST of ₱12,328.45.
Wherefore, we DENY the petition. We AFFIRM the Court of Tax
Appeals’ Decision dated 24 March 2006 in the consolidated cases of
C.T.A. EB Nos. 60 and 62.
SO ORDERED.
G.R. No. L-27872             February 25, 1928
THE NATIONAL EXCHANGE CO., INC., plaintiff-appellee,
vs.
I. B. DEXTER, defendant-appellant.
Ross, Lawrence & Selph and Antonio T. Carrascoso, Jr., for
appellant.
Lucio Javillonar for appellee.
STREET, J.:
This action was instituted in the Court of First Instance of Manila by
the National Exchange Co., Inc., as assignee (through the Philippine
National Bank) of C. S. Salmon & Co., for the purpose of recovering
from I. B. Dexter a balance of P15,000, the par value of one hundred
fifty shares of the capital stock of C. S. Salmon & co., with interest
and costs. Upon hearing the cause the trial judge gave judgment for the
plaintiff to recover the amount claimed, with lawful interest from
January 1, 1920, and with costs. From this judgment the defendant
appealed.
It appears that on August 10, 1919, the defendant, I. B. Dexter, signed
a written subscription to the corporate stock of C. S. Salmon & Co. in
the following form:
I hereby subscribe for three hundred (300) shares of the
capital stock of C. S. Salmon and Company, payable from
the first dividends declared on any and all shares of said
company owned by me at the time dividends are declared,
until the full amount of this subscription has been paid.
Upon this subscription the sum of P15,000 was paid in January, 1920,
from a dividend declared at about that time by the company,
supplemented by money supplied personally by the subscriber.
Beyond this nothing has been paid on the shares and no further
dividend has been declared by the corporation. There is therefore a
balance of P15,000 still paid upon the subscription.
As the case reaches this court the sole question here presented for
consideration is one of law, namely, whether the stipulation contained
in the subscription to the effect that the subscription is payable from
the first dividends declared on the shares has the effect of relieving the
subscriber from personal liability in an action to recover the value of
the shares. The trial court held, in effect, that the stipulation mentioned
is invalid.
In discussing this problem we accept as sound law the proposition
propounded by the appellant's attorneys and taken from Fletcher's
Cyclopedia as follows:
In the absence of restrictions in its character, a corporation,
under its general power to contract, has the power to accept
subscriptions upon any special terms not prohibited by
positive law or contrary to public policy, provided they are
not such as to require the performance of acts which are
beyond the powers conferred upon the corporation by its
character, and provided they do not constitute a fraud upon
other subscribers or stockholders, or upon persons who are
or may become creditors of the corporation. (Fletcher, Cyc.
Corp., sec. 602, p. 1314.)
Under the American regime corporate franchises in the Philippine
Islands are granted subject to the provisions of section 74 of the
Organic Act of July 1, 1902, which, in the part here material, is
substantially reproduced in section 28 of the Autonomy Act of August
29, 1916. In the Organic Act it is among other things, declared: "That
all franchises, privileges, or concessions granted under this Act shall
forbid the issue of stock or bonds except in exchange for actual cash or
for property at a fair valuation equal to the par value of the stock or
bonds so issued; . . . ." (Act of Congress of July 1, 1902, sec. 74.)
Pursuant to this provision we find that the Philippine Commission
inserted in the Corporation Law, enacted March 1, 1906, the following
provision: ". . . no corporation shall issue stock or bonds except in
exchange for actual cash paid to the corporation or for property
actually received by it at a fair valuation equal to the par value of the
stock or bonds so issued." (Act No. 1459, sec. 16 as amended by Act
No. 2792, sec. 2.)
The prohibition against the issuance of shares by corporations except
for actual cash to the par value of the stock to its full equivalent in
property is thus enshrined in both the organic and statutory law of the
Philippine; Islands; and it would seem that our lawmakers could
scarely have chosen language more directly suited to secure absolute
equality stockholders with respect to their liability upon stock
subscriptions. Now, if it is unlawful to issue stock otherwise than as
stated it is self-evident that a stipulation such as that now under
consideration, in a stock subcription, is illegal, for this stipulation
obligates the subcriber to pay nothing for the shares except as
dividends may accrue upon the stock. In the contingency that
dividends are not paid, there is no liability at all. This is a
discrimination in favor of the particular subcriber, and hence the
stipulation is unlawful.
The general doctrine of corporation law is in conformity with this
conclusion, as may be seen from the following proposition taken from
the standard encyclopedia treatise, Corpus Juris:
Nor has a corporation the power to receive a subscription
upon such terms as will operate as a fraud upon the other
subscribers or stockholders by subjecting the particular
subcriber to lighter burdens, or by giving him greater rights
and privileges, or as a fraud upon creditors of the
corporation by withdrawing or decreasing the capital. It is
well settled therefore, as a general rule, that an agreement
between a corporation and a particular subscriber, by which
the subscription is not to be payable, or is to be payable in
part only, whether it is for the purpose of pretending that the
stock is really greater than it is, or for the purpose of
preventing the predominance of certain stockholders, or for
 any other purpose, is illegal and void as in fraud of other
stockholders or creditors, or both, and cannot be either
enforced by the subcriber or interposed as a defense in an
action on the subcription. (14 C. J., p. 570.)
The rule thus stated is supported by a long line of decisions from
numerous courts, with little or no diversity of opinion. As stated in the
headnote to the opinion of the Supreme Court of United States in the
case of Putnan vs. New Albany, etc. Railroad Co. as reported in 21
Law. ed., 361, the rule is that "Conditions attached to subcriptions,
which, if valid, lessen the capital of the company, are a fraud upon the
grantor of the franchise, and upon those who may become creditors of
the corporation, and upon unconditional stockholders."
In the appellant's brief attention is called to the third headnote to
Bank vs. Cook (125 Iowa, 111), where it is stated that a collateral
agreement with a subcriber to stock that his subcription shall not be
collectible except from dividends on the stock, is valid as between the
parties and a complete defense to a suit on notes given for the amount
of the subscription. A careful persual of the decision will show that the
rule thus broadly stated in the headnote is not justified by anything in
the reported decision; for what the court really held was that the
making of such promise by the agent of the corporation who sold the
stock is admissible in evidence in support of the defense of fraud and
failure of consideration. Moreover, even if the decision had been to the
effect supposed, the relu announced in the headnote could have no
weight in a jurisdiction like this were there is a statutory provision
prohibiting such agreements.
We may add that the law in force in this jurisdiction makes no
distinction, in respect to the liability of the subcriber, between shares
subscribed before incorporation is effected and shares subscribed
thereafter. All like are bound to pay full value in cash or its equivalent,
and any attempt to discriminate in favor of one subscriber by relieving
him of this liability wholly or in part is forbidden. In what is here said
we have reference of course primarily to subcriptions to shares that
have not been previously issued. It is conceivable that the power of the
corporation to make terms with the purchaser would be greater where
the shares which are the subject of the transaction have been acquired
by the corporation in course of commerce, after they have already been
once issued. But the shares with which are here concerned are not of
this sort.
The judgment appealed from must be affirmed, and it is so ordered,
with costs against the appellant.
G.R. No. 188769, August 03, 2016 - JOSEPH OMAR O. ANDAY A,
Petitioner, v. RURAL BANK OF CABADBARAN, INC.,
DEMOSTHENES P. ORAIZ and RICARDO D. GONZALEZ,
Respondents.
FIRST DIVISION
G.R. No. 188769, August 03, 2016
JOSEPH OMAR O. ANDAY A, Petitioner, v. RURAL BANK OF
CABADBARAN, INC., DEMOSTHENES P. ORAIZ and
RICARDO D. GONZALEZ, Respondents.
RESOLUTION
SERENO, C.J.:
This case concerns the dismissal1 of an action for mandamus  that
sought to compel respondents Rural Bank of Cabadbaran, Inc.,
Demosthenes P. Oraiz, and Ricardo D. Gonzalez to register the
transfer of shares of stock and issue the corresponding stock
certificates in favor of petitioner Joseph Omar O. Andaya. The
Cabadbaran City Regional Trial Court (RTC) ifuled that petitioner
Andaya was not entitled to the remedy of mandamus, s|ince the
transfer of the subject shares of stock had not yet been recorded in the
corporation's stock and transfer book, and the registered owner,
Conception O. Chute, had not given him a special power of attorney to
makq the transfer. Andaya has filed a Rule 45 petition directly before
this Court, insisting that he has a cause of action to institute the suit.
FACTS
Andaya bought from Chute 2,200 shares of stock in the Rural Bank of
Cabadbaran for P220,000.2    The transaction was evidenced by a
notarized document denominated as Sale of Shares of Stocks. 3 Chute
duly endorsed and delivered the certificates of stock to Andaya and,
subsequently, requested the bank to register the transfer and issue new
stock certificates in favor of the latter. 4 Andaya also separately
communicated5 with the bank's corporate secretary, respondent Oraiz,
reiterating Chute's request for the issuance of new stock certificates in
petitioner's favor.
A few days later, the bank's corporate secretary wrote6 Chute to inform
her that he could not register the transfer. He explained that under a
previous stockholders' Resolution, existing stockholders were given
priority to buy the shares of others in the event that the latter offered
those shares for sale (i.e., a right of first refusal). He then asked Chute
if she, instead, wished to have her shares offered to existing
stockholders. He told her that if no other stockholder would buy them,
she could then proceed to sell her shares to outsiders.
Meanwhile, the bank's legal counsel, respondent Gonzalez, informed 7 
Andaya that the latter's request had been referred to the bank's board of
directors for evaluation. Gonzalez also furnished him a copy of the
bank's previous reply to Chute concerning a similar request from her.
Andaya responded8 by reiterating his earlier request for the registration
of the transfer and the issuance of new certificates of stock in his
favor. Citing Section 98 of the Corporation Code, he claimed that the
purported restriction on the transfer of shares of stock agreed upon
during the 2001 stockholders' meeting could not deprive him of his
right as a transferee. He pointed out that the restriction did not appear
in the bank's articles of incorporation, bylaws, or certificates of stock.
The bank eventually denied the request of Andaya. 9 It reasoned that he
had a conflict of interest, as he was then president and chief executive
officer of the Green Bank of Caraga, a competitor bank. Respondent
bank concluded that the purchase of shares was not in good faith, and
that the purchase "could be the beginning of a hostile bid to take-over
control of the [Rural Bank of Cabadbaran]."10 Citing Gokongwei v.
Securities and Exchange Commission,11 respondent insisted that it may
refuse to accept a competitor as one of its stockholders. It also
maintained that Chute should have first offered her shares to the other
stockholders, as agreed upon during the 2001 stockholders' meeting.
Consequently, Andaya instituted an action for mandamus and
damages12 against the Rural Bank of Cabadbaran; its corporate
secretary, Oraiz; and its legal counsel, Gonzalez. Petitioner sought to
compel them to record the transfer in the bank's stock and transfer
book and to issue new certificates of stock in his name.
The RTC issued a Decision dismissing the complaint. Citing Porice v.
Alsons Cement Corporation13 the trial court ruled that Andaya had no
standing to compel the bank to register the transfer and issue stock
certificates in his name.14 It explained that he had failed "[to show] that
the transfer of subject shares of stock [was] recorded in the stock and
transfer book of [the] bank or that [he was] authorized by [Chute] to
make the transfer."15 According to the trial court, Ponce requires that a
person seeking to transfer shares must appear to have an express
instruction and a specific authority from the registered stockholder,
such as a special power of attorney, to cause the disposition of stocks
registered in the stockholder's name. It ruled that "[w]ithout the sale
first registered or an authority from the transferor, it [was] therefore
unmistakably clear that [Andaya had] no cause of action for
mandamus against [the] bank."
Consequently, Andaya directly filed with this Court a Rule 45 petition
for review on certiorari assailing the RTC Decision on pure questions
of law.
ISSUES
The Court culls the issues raised by petitioner as follows:
1. Whether Andaya, as a transferee of shares of stock, may
initiate an   action   for   mandamus   compelling the   Rural  
Bank  of Cabadbaran to record the transfer of shares in its
stock and transfer book, as well as issue new stock
certificates in his name
2. Whether a writ of mandamus should issue in favor of
petitioner
OUR RULING
The petition is partly meritorious.
It is already settled jurisprudence16   that the registration of a transfer
of shares of stock is a ministerial duty on the part of the corporation.
Aggrieved parties may then resort to the remedy of mandamus to
compel corporations that wrongfully or unjustifiably refuse to record
the transfer or to issue new certificates of stock. This remedy is
available even upon the instance of a bona fide transferee17 who is able
to establish a clear legal right to the registration of the transfer. 18 This
legal right inherently flows from the transferee's established ownership
of the stocks, a right that has been recognized by this Court as early as
in Price v. Martin:19
A person who has purchased stock, and who desires to be recognized
as a stockholder, for the purpose of voting, must secure a
standing by having the transfer recorded upon the books. If the
transfer is not duly made upon request, he has, as his remedy, to
compel it to be made.20 (Emphases supplied)
Thus, in Pacific Basin Securities Co., Inc., v. Oriental Petroleum and
Minerals Corp.,21this Court stressed that the registration of a transfer
of  shares is ministerial on the part of the
corporation:ChanRoblesVirtualawlibrary
Clearly, the right of a transferee/assignee to have stocks
transferred to his name is an inherent right flowing from his
ownership of the stocks. The Court had ruled in Rural Bank of
Salinas, Inc. v. Court of Appeals that the corporation's obligation to
register is ministerial, citing Fletcher, to
wit:ChanRoblesVirtualawlibrary
In transferring stock, the secretary of a corporation acts in purely
ministerial capacity, and does not try to decide the question of
ownership.
The duty of the corporation to transfer is a ministerial one and if it
refuses to make such transaction without good cause, it may be
compelled to do so by mandamus.
The Court further held in Rural Bank of Salinas that the only
limitation imposed by Section 63 of the Corporation Code is when
the corporation holds any unpaid claim against the shares
intended to be transferred.22 (Emphasis supplied; citations omitted)
Consequently, transferees of shares of stock are real parties in interest
having a cause of action for mandamus to compel the registration of
the transfer and the corresponding issuance of stock certificates.
We also rule that Andaya has been able to establish that he is a bona
fide transferee of the shares of stock of Chute. In proving this fact, he
presented to the RTC the following documents evidencing the sale: (1)
a notarized Sale of Shares of Stocks23 showing Chute's sale of 2,200
shares of stock to petitioner; (2) a Documentary Stamp Tax
Declaration/Return24 (3) Capital Gains Tax Return;25cralawred  and (4)
stock certificates26 covering the subject shares  duly  endorsed by 
Chute.  The  existence,  genuineness,  and due execution of these
documents have been admitted27 and remain undisputed. There is no
doubt that Andaya had the standing to initiate an action for mandamus
to compel the Rural Bank of Cabadbaran to record the transfer of
shares in its stock and transfer book and to issue new stock certificates
in his name. As the transferee of the shares, petitioner stands to be
benefited or injured by the judgment in the instant petition, a judgment
that will either order the bank to recognize the legitimacy of the
transfer and petitioner's status as stockholder or to deny the legitimacy
thereof.
This Court further finds that the reliance of the RTC on Ponce in
finding that petitioner had no cause of action for mandamus against the
defendant bank was misplaced. In Ponce, the issue resolved by this
Court was whether the petitioner therein had a cause of action for
mandamus to compel the issuance of stock certificates, not the
registration of the transfer. Ruling in the negative, the Court said in
that case that without any record of the transfer of shares in the stock
and transfer book of the corporation, there would be no clear basis to
compel that corporation to issue a stock certificate. By the import of
Section 63 of the Corporation Code, the stock and transfer book would
be the main reference book in ascertaining a person's entitlement to the
rights of a stockholder. Consequently, without the registration of the
transfer, the alleged transferee could not yet be recognized as a
stockholder who is entitled to be given a stock certificate.
In contrast, at the crux of this petition are the registration of the
transfer and the issuance of the corresponding stock certificates.
Requiring petitioner to register the transaction before he could institute
a mandamus suit in supposed abidance by the ruling in Ponce was a
palpable error. It led to an absurd, circuitous situation in which
Andaya was prevented from causing the registration of the transfer,
ironically because the shares had not been registered. With the logic
resorted to by the RTC, transferees of shares of stock would never be
able to compel the registration of the transfer and the issuance of new
stock certificates in their favor. They would first be required to show
the registration of the transfer in their names —  the ministerial act that
is the subject of the mandamus suit in the first place. The trial court
confuses the application of the dicta in Ponce, which is pertinent only
to the issuance of new stock certificates, and not to the registration of a
transfer of shares. As Ponce itself provides, these two are entirely
different events. The RTC's anomalous reasoning cannot be given
legal imprimatur by this Court.
With regard to the requisite authorization from the transferor, the
Court stresses that the concern in Ponce was rooted in whether or not
the alleged right of the petitioner therein to compel the issuance of new
stock certificates was clearly established. Reiterating the ruling
in Rivera v. FIorendo28 and Eager v. Bryan,29 the Court therein
maintained that a mere endorsement of stock certificates by the
supposed owners of the stock could not be the basis of an action for
mandamus in the absence of express instructions from them.
According to the Court, the reason behind this ruling was that the
corporation's duty and legal obligation therein were not so clear and
indisputable as to justify the issuance of the writ. The ambiguity of the
alleged transferee's deed of undertaking with endorsement led the
Court in Ponce to rule that mandamus would have issued had the
registered owner himself requested the registration of the transfer, or
had the person requesting the registration secured a special power of
attorney from the registered owner.
In the instant case, however, the submitted documents did not merely
consist of an endorsement. Rather, petitioner presented several
undisputed documents,30 among which was respondent Oraiz's letter to
Chute denying her request to transfer the stock standing in her name in
favor of Andaya. This letter clearly indicated that the registered owner
herself had requested the registration of the transfer of shares of stock.
There was therefore no sensible reason for the RTC to perfunctorily
extract the pronouncement in Ponce and then disregard it in the face of
admitted facts in addition to the duly endorsed stock certificates.
On whether the writ of mandamus should issue, Section 3, Rule 65 of
the Rules of Court, provides for the rules governing a petition for
mandamus, viz:
SECTION 3. Petition for mandamus. — When
any tribunal, corporation, board, officer or person unlawfully
neglects the performance of an act which the law specifically enjoins
as a duty resulting from  an  office,  trust,  or station,  or unlawfully
excludes another from the use and enjoyment of a right or office to
which such other is entitled, and there is no other plain, speedy and
adequate remedy in the ordinary course of law, the person aggrieved
thereby may file a verified petition in the proper court, alleging the
facts with certainty and praying that judgment be rendered
commanding the respondent, immediately or at some other time to be
specified by the court, to do the act required to be done to protect the
rights of the petitioner, and to pay the damages sustained by the
petitioner by reason of the wrongful acts of the respondent.
The petition shall also contain a sworn certification of non-forum
shopping as provided in the third paragraph of Section 3, Rule 46.
(Emphases supplied)
Accordingly, a writ of mandamus to enforce a ministerial act may
issue only when petitioner is able to establish the presence of the
following: (1) right clearly founded in law and is not doubtful; (2) a
legal duty to perform the act; (3) unlawful neglect in performing the
duty enjoined by law; (4) the ministerial nature of the act to be
performed; and (5) the absence of other plain, speedy, and adequate
remedy in the ordinary course of law.31chanrobleslaw
Respondents primarily challenge the mandamus suit on the grounds
that the transfer violated the bank stockholders' right of first refusal
and that petitioner was a buyer in bad faith. Both parties refer to
Section 98 of the Corporation Code to support their arguments, which
reads as follows:ChanRoblesVirtualawlibrary
SECTION 98. Validity of restrictions on transfer of
shares. — Restrictions on the right to transfer shares must appear
in the articles of incorporation and in the by-laws as well as in the
certificate of stock; otherwise, the same shall not be binding on
any purchaser thereof in  good faith. Said restrictions shall not be
more than onerous than granting  the existing stockholders or the
corporation the option to purchase the  shares of the transferring
stockholder with such reasonable terms,  conditions or period stated
therein. If upon the expiration of said period,  the existing stockholders
or the corporation fails to exercise the option to  purchase, the
transferring stockholder may sell his shares to any third  person.
(Emphases supplied)   
It must be noted that Section 98 applies only to close corporations.
Hence, before the Court can allow the operation of this section in the
case at bar, there must first be a factual determination that respondent
Rural Bank of Cabadbaran is indeed a close corporation. There needs
to be a presentation of evidence on the relevant restrictions in the
articles of incorporation j and bylaws of the said bank. From the
records or the RTC Decision, there is apparently no such
determination or even allegation that would assist this Court in ruling
on these two major factual matters. With the foregoing, the validity of
the transfer cannot yet be tested using that provision. These are the
factual matters that the parties must first thresh out before the RTC.  
After finding that petitioner has legal standing to initiate an action for
mandamus, the Court now reinstates the action he filed and remands
the case to the RTC to resolve the propriety of issuing a writ of
mandamus. The resolution of the case must include the determination
of all relevant factual matters in connection with the issues at bar. The
RTC must also resolve petitioner's prayer for the payment of attorney's
fees, litigation expenses, moral damages, and exemplary damages.    
WHEREFORE, premises considered, the instant petition I
is GRANTED. The Decision dated 17 April 2009 and the Order dated
15 July 2009 of the Regional Trial Court, Branch 34, Cabadbaran City,
which dismissed petitioner's action for mandamus, are SET
ASIDE. The action is hereby REINSTATED and the
case REMANDED to the court of origin  for further proceedings. The
trial court is further enjoined to proceed with [the resolution of this
case with dispatch.
SO ORDERED.
[G.R. No. 78017. June 8, 1990.]
BANK OF AMERICA NT & SA, Petitioner, v. COURT OF
APPEALS, SECURITIES AND EXCHANGE COMMISSION,
POTENCIANO ILUSORIO, JORGE GO, EDUARDO LOPEZ,
EDGARDO T. KALAW, WILLIAM CARLOS UY, CHAN TOH,
SY HIAN YU, AUGUSTO KALAW, MANILA WINE
MERCHANTS, INC., E.T. KALAW MANAGEMENT, INC.,
RELIANCE SENTIMENTAL INSURANCE CO., INC., TRADE
DEMANDS CORPORATION, JULIO TAN, TUAN CO.,
NICASIO ALCANTARA, NATIVIDAD BALBOA,
CONCEPCION BLAYLOCK, CARIDAD CHUA UNSU,
FRANCISCO SY GAISANO, JOHN GAISANO, PETER
GAISANO, STEPHEN GAISANO, ELENA GO, RICKY GO,
SEGUNDINO GO, BENJAMIN JALANDONI, EDGARDO
JALANDONI, JESUS JALANDONI, JUAN JALANDONI, PAZ
JALANDONI, VENICIO JALANDONI, J.M. & COMPANY,
INC., LIBERTY FLOUR MILLS, INC., CECILIA G. LOCSIN,
SERGIO G. LOCSIN, CARMEN SORIANO, PACITA
SORIANO, INC., and all other stockholders of INSULAR BANK
OF ASIA AND AMERICA who are similarly situated as above
named respondents, and ANDREW GOTIANUN, Respondents.
Siguion Reyna, Montecillo & Ongsiako for Petitioner.
Angara, Concepcion, Regala & Cruz, for respondent "Asia
Group."
Josieline A. Tia for Private Respondents.
DECISION
NARVASA, J.:
The Insular Bank of Asia and America (IBAA) was established in
accordance with a Memorandum of Agreement dated March 25,1974
executed by three (3) other banks, namely: First Insular Bank of Cebu,
Bank of Asia, and Bank of America NT & SA. A fourth bank, Dai-Ichi
Kangyo Bank, acquired 10% of the issued capital stock of the new
bank shortly after its formation. 1
Some four year later, or more precisely on July 19, 1978, a class action
was commenced in the Securities & Exchange Commission against (a)
Bank of America NT & SA (hereafter simply BA), (b) Andrew
Gotianun, and (c) six (6) other unknown defendants said to be relatives
of Gotianun and identified only as Mario Doe, Danilo Doe, etc. The
complaint described defendant Gotianun, and his relatives "and their
corporations" as owning and controlling the Family Saving Bank,
referred to them collectively as the "Family Savings Bank Group." 2
Also included among the defendants as "nominal party" was Manuel
Escaler, the Corporate Secretary of IBAA. The class suit was brought
by about 40 persons, Potenciano Ilusorio, Conrado Alcantara, etc.
(private respondents herein), allegedly constituting "a majority of the
successors in interest of the former Bank of Asia," and calling
themselves the ASIA GROUP. The plaintiffs averred that since the
subject matter of the suit was "of common interest to all the
stockholder of the Insular Bank of Asia and America (IBAA)," and
said stockholders "are so numerous that it is impraticable to bring them
all before the Commission," their complaint was being filed in their
own behalf and in behalf of "all other stockholders of INSULAR
BANK OF ASIA AND AMERICA similarly situated" as they. 3
In the complaint, BA was charged, essentially, with having violated
the Agreement of March 25, 1974 stipulating inter alia that "none of
the parties . . . shall sell their shares in the consolidated bank to any
other party without first offering the shares proportionately to the other
two or their nominees . . ." The basic accusation against Gotianun and
his Family Savings Bank Group, on the other hand, was that, although
aware of the Agreement of March 25, 1974 and "in complete and utter
disregard and violation thereof," they had induced their co-defendant
BA "to sell to them, as in fact they claim they have purchased, the
IBAA shares of defendant BA." 4 That illicit transfer, the complaint
alleged, had made all said defendants (except Escaler) liable to the
plaintiffs for actual, moral, and exemplary damages, as well as
attorney’s fees, in the aggregate sum of not less than P16,000,000.00.
5 The class action was docketed as SEC Case No. 1613.
Answer were filed in due course by the defendants, and trial
commenced on the issues thus raised.
In the course of the proceedings, three (3) orders of SEC Associate
Commissioner Sixto de Guzman were rendered and then challenged
before this Court through special civil actions of certiorari.
The first was an Order dated September 17, 1979 which basically: 6
"(a) Indefinitely prohibited the Vice Chairman of the Board of IBAA
from exercising the functions of the chairman and presiding over
meetings in the latter’s absence;
(b) Restricted the scope of the duties and functions of the Executive
Vice President;
(c) Declared as suspended all resolutions of the board which would
increase or otherwise change the participation of the respective
representation of the various groups therein prior to their adoption;
(d) Directed that ‘henceforth no movements of officers, directors and
members of the executive committees may be made without prior
consultation with and or approval by this Commission’;
(e) Recognized the continuing validity of the . . . Memorandum of
Agreement dated 25 March 1974."cralaw virtua1aw library
The order was impugned in two petitions filed in this Court by
"Benjamin Limso and Luis Aboitiz, Jr., Et Al., representing the Insular
Group in IBAA, . . . docketed as G.R. No. 51678 and G.R. No. 51651,
respectively." 7
The second order contested in this Court was a temporary restraining
order issued ex parte by Commissioner de Guzman on July 19, 1978,
"preventing the enforcement for the time being of the sale complained
of and the exercise of rights thereunder." 8 Invalidation thereof was
sought through two other petitions subsequently filed by Gotianun and
BA on March 31, 1980 and April 8, 1980, respectively, it being
alleged that Commissioner de Guzman had "unjustifiably refused to
act on the Motions to Lift/Dissolve . . . (said order of July 19, 1978)"
separately presented by Gotianun and BA in December, 1979. 9 The
petitions were docketed in this Court as G.R. Nos. 53493 and 43543,
respectively. 10 In these cases, this Court issued on April 21, 1980 an
injunctive writ, upon bonds of P1 million each posted by BA and
Gotianun, forbidding Commissioner de Guzman to give "continued
effect and force to the . . . Temporary Restraining Order of 19 July
1978," and directing him "to return to . . . Gotianun all the certificates
of stock covering the IBAA shares in dispute for the purpose of
registration of the sale in the name of . . . (said) Gotianun in the
corporate books . . ., save that no subsequent sale or assignment of his
rights by virtue thereof may be made without prior approval of the
Court." 11
The third order was that promulgated ex parte on December 17, 1979,
abolishing the IBAA board of directors and creating a management
committee with the same composition as the abolished board except
that the four directors representing BA were replaced. The order was
issued on petition of the ASIA Group on the ground that BA, having
wholly sold its IBAA stocks, had no more interest in IBAA and would
even be benefited if IBAA suffered business paralyzation or losses. 12
This order was attacked by Gotianun through petitions in intervention
in G.R. Nos. 51651 and 51678, which were admitted. The petitions in
intervention theorized that the order was issued without power, and
without due process of law, besides being confiscatory. This Court
issued a temporary restraining order enjoining implementation of the
Order of December 17, 1979. 13
After some time, a joint motion dated September 25, 1985 was filed
with the Securities and Exchange Commission in Case No. 1613 by
the plaintiffs therein (the ASIA GROUP, Potenciano Ilusorio, Et. Al.),
and one of the defendants, Andrew Gotianun, praying for the
dismissal; (1) of the complaint as against defendant Andrew Gotianun
in toto and with prejudice, as well as (2) of Gotianun’s "counterclaim
against plaintiffs in toto and with prejudice, . . . (both) without
pronouncements as to costs and attorney’s fees." The joint motion set
out the following additional stipulations:jgc:chanrobles.com.ph
"4. Plaintiffs hereby reserve their right to pursue all their causes of
action pleaded in the complaint against Bank of America NT & SA, it
being the position of the plaintiffs that the defendant Bank of America
NT & SA and Andrew Gotianun were sued on different causes of
action (i.e., plaintiffs sued defendant Bank of America NT & SA for
violation of contract and sued defendant Andrew Gotianun for tort).
Furthermore, plaintiffs contend that defendants Bank of America NT
& SA and Andrew Gotianun are not indispensable parties to the
adjudication of the distinct separate and independent causes of action
pleaded against each one. The plaintiffs, however, waive their cause of
action for rescission annulment of the subject sale of IBAA shares of
stock by Bank of America NT & SA to Andrew Gotianun. Defendant
Andrew Gotianun likewise reserves his right to pursue his cross-claim
against defendant Bank of America NT & SA.
5. The parties . . . (further) agree and undertake to file immediately
appropriate motions for the withdrawal/dismissal with prejudice and
without pronouncements as to costs and attorney’s fees, all related
cases now pending between them with the Supreme Court."cralaw
virtua1aw library

On the same day, September 25, 1989, the lawyers of petitioners
Benjamin Limso and of Eduardo Aboitiz, Et Al., together with the
lawyers of Andrew Gotianun, and of Potenciano Ilusorio, Et. Al. (the
ASIA GROUP, supra), filed with this Court separate motions jointly
praying for the dismissal of G.R. No. 51651 and G.R. No. 51678,
respectively, "with prejudice and without pronouncement as to costs
and attorney’s fees, the said parties having settled amicably the dispute
between themselves involved in SEC Case No. 1613 thereby rendering
(the proceedings in both cases) moot and academic." 14
Another joint motion bearing the same date, September 25, 1985, was
also filed in this Court by the attorneys of Andrew Gotianun and the
ASIA GROUP, in G.R. No. 53493, also asking for the dismissal of the
petition "with prejudice and without pronouncement as to cost and
attorney’s fees, said parties having settled amicably all disputes
between themselves involved in SEC Case No. 1613 thereby rendering
moot and academic the above-entitled proceedings before this
Honorable Court." 15 The joint motion further stipulated that —
"Private respondents (i.e., the ASIA GROUP: Potenciano Ilusorio, Et.
Al.) hereby waive and renounce, absolutely and irrevocably, the
restriction imposed, for their benefits, by this Honorable Court in its
Resolution of 21 April 1980 that petitioner may not sell or assign the
IBAA shares in dispute `without prior approval of this Court,’ and
private respondents, by reason of the amicable settlement, now
recognize the right of petitioner (Gotianun) to enjoy and dispose of
said shares of stock without other limitations than those established by
law.
G.R. Nos. 51651, 51678 and 53493, were accordingly dismissed as
prayed for, by Resolution of this Court dated October 1, 1985. 16 With
the dismissal of those three (3) cases, only G.R. No. 53543 was left
pending with this Court.
Said G.R. No. 53543 was decided by the Court en banc by Resolution
promulgated on November 5, 1985. The resolution annulled and set
aside the SEC TRO of July 19, 1978" effective as of April 21, 1980,
when this Court enjoined the continued enforcement of the said TRO."
The resolution 17 declared that it was not possible under the facts "to
hold that the SEC TRO of July 19, 1978 was, as of that time, issued by
respondent (Associate Commissioner) de Guzman with grave abuse of
discretion," there being then "a prima facie showing that the plaintiffs
in SEC Case No. 1613 were entitled to an injunctive relief." However,
the Resolution went on to say,
"The setting . . . was altogether different 17 months later, i.e., in
December 1979, when motions to lift the SEC TRO of July 19, 1978
were filed in SEC Case No. 1613. The issues raised in the motions
were dependent upon factual questions on which extended hearings
had been held and evidence taken in SEC, aside from the numerous
memoranda submitted by the parties. It may be presumed that by and
large, the SEC was then already in a position to act on the motions, but
it tarried and allowed protracted quibbling which effectively extended
the life of the TRO that had long been issued without the benefit of
hearing and without bond. Its inaction was an evasion of positive duty
to resolve the motions with all deliberate speed, amounting to a grave
abuse of discretion under the circumstances and violative of the rule
which frowns upon prolonged or indefinite ‘temporary restraining
order’ issued ex parte. (See Board of Transportation v. Castro, 125
SCRA 410). Incidentally, it was the same policy considerations which
impelled the subsequent issuance on April 16, 1982 of Presidential
Decree No. 114 fixing twenty days as the maximum duration of an ex
parte restraining order and providing for its automatic
termination."cralaw virtua1aw library
Now, with regard to the joint motion to dismiss in SEC Case No. 1613,
an opposition was submitted by BA, dated October 4, 1985. 18 BA
contended that the dismissal (1) of the complaint as against Gotianun
and (2) of the latter’s counterclaim should not be granted unless the
complaint and Gotianun’s cross-claim were also dismissed as against
BA. BA argued that by thus moving for dismissal, plaintiffs had
"effectively conceded that the subject sale was a lawful and valid sale
and was not tainted with any legal infirmities," and "if the sale is
considered valid and effective as against, the buyer, Andrew Gotianun,
then it must likewise be considered valid and effective as against the
seller, BA," what was involved being "a single, indivisible sales
transaction by virtue of which . . . Gotianun acquired ownership from
BA of the subject shares," and plaintiffs’ causes of action against BA
and Gotianun "are not distinct, separate and independent." BA also
pointed out that if the complaint against Gotianun were dismissed and
the case against BA allowed to proceed, Gotianun would be an
indispensable party, for if it were subsequently found that plaintiffs’
right of first refusal had indeed been violated by BA, "the logical result
arising from such a finding is that the sale of the subject shares must
be annulled or declared invalid," and the subject shares would have to
be reverted to BA and the purchase price thereof, returned by BA to
Gotianun.
The opposition was overruled. By Order dated October 29, 1985, the
SEC granted the joint motion and DISMISSED, with prejudice, the
complaint against defendant Andrew Gotianun and the latter’s
counterclaims against the plaintiffs in SEC Case No. 1613 — leaving
the action to proceed only as between the ASIA GROUP and BA. 19 If
found "the joint motion not to be contrary to law, morals, good
customs and public policy," and declared that since this Court, in the
Resolution of October 1, 1985, supra, had dismissed G.R. Nos. 51651,
51678 and 53493 "for being moot and academic because the parties
have settled amicably all disputed between themselves," it had "no
other alternative but to grant the joint motion to dismiss." BA moved
for reconsideration. Its motion was denied, by Order dated January 22,
1986. 20
BA went to the Court of Appeals. If filed with that Court a petition
for certiorari under Rule 65 of the Rules of Court, praying for
invalidation of the Orders of October 29, 1985 and January 22, 1986 in
SEC Case No. 1613. 21
The ASIA GROUP moved to dismiss the petition. It contended that the
orders sought to be annulled had long become final, and the SEC had
in truth acted in accordance with law. 22
The Court of Appeals dismissed the petition by a Resolution dated
January 8, 1987. 23 It ruled that —
1) the order of dismissal promulgated by the SEC on October 29, 1983
was a final one; appeal was available; for certiorari to lie, it must be
shown that there is no appeal or other plain, speedy and adequate
remedy in the ordinary course of law; where an appeal is lost for
failure to take it timely, a special civil action for certiorari cannot
substitute therefor;
2) even if the order were interlocutory, still certiorari would not lie
because the order was issued in the proper exercise of jurisdiction and
without grave abuse of discretion;
3) BA failed to exhaust its administrative remedies before resorting to
the special civil action of certiorari; it failed to appeal the order of
October 29, 1983 to the SEC en banc; and
4) laches had set in against BA; it waited for 107 days from denial of
its motion for reconsideration before it filed its certiorari suit, on May
9, 1986.
BA is before this Court once again, this time on an appeal
by certiorari under Rule 45 from the judgment of the Court of Appeals
above mentioned. It brands as reversible error the conclusions of the
Court of Appeals just described. It also faults said Court for not
passing upon the merits of its cause, i.e., that BA and Gotianun had
been sued under a common cause of action; they are indispensable
parties in SEC Case No. 1613; the ASIA GROUP cannot waive its
right to proceed against Gotianun without likewise waiving its right to
proceed against BA, and the benefit of a dismissal of the proceedings
against Gotianun must necessarily extend to and inure to the benefit of
BA.
Whether from the adjective or the substantive aspect, BA’s contentions
lack merit. They must be as they hereby are rejected.
The concept of a final order or judgment is well known. It is one that
finally disposes of a case, leaving nothing more to be done by the court
(or quasi-court) in respect thereto. 24 The challenged SEC Order of
October 29, 1985 was such a final order, in the sense that it finally
disposed of the case as between the plaintiffs, the ASIA GROUP, and
defendant Andrew Gotianun and his relatives and business partners. It
left nothing more for the SEC to adjudicate in so far as the case
affected the ASIA GROUP vis a vis Andrew Gotianun and his group.
Implicit in the order of dismissal of the action as between the ASIA
and Gotianun groups — leaving the action to proceed as between the
ASIA GROUP and BA — is the proposition that the interest of the
Gotianun Group is distinct and severable from that of BA, making
applicable the rule set forth in Section 4, Rule 36 of the Rules of Court
on several judgment, viz.:jgc:chanrobles.com.ph
"SEC. 4. Several judgments. — In an action against several
defendants, the court may, when a several judgment is proper, render
judgment against one or more of them, leaving the action to proceed
against the others."cralaw virtua1aw library
Of course the party aggrieved by such a "several" or separate judgment
may disagree with the Court as to its propriety, in which case he may
seek its reversal by appealing therefrom. 25 But it is appeal that is the
remedy against a final order or judgment, 26 not a special civil action
of certiorari under Rule 65. Appeal is in fact antithetical to the special
civil action of certiorari. Section 1, Rule 65 clearly and explicitly lays
down the rule that certiorari is proper only if "there is no appeal, nor
any plain, speedy and adequate remedy in the ordinary course of law;"
and the rule has been consistently applied except only in those rare
instances where appeal is satisfactorily shown to be an inadequate
remedy under the circumstances. 27
In the case at bar, BA did not appeal, either to the Commission en banc
or to the Court of Appeals. Actually, the law is that from an adverse
judgment or order of a Commissioner, an appeal may be taken to the
Commission en banc, 28 and thence, to the Court of Appeals. 29 There
is no showing whatever in this case that such an appeal court not have
been taken by BA on account of some insuperable cause, or that it
would not have been adequate in the premises, BA simply failed to
avail, within the prescribed period, of that plain remedy indicated by
law from the adverse Order of October 29, 1985. As a result, the final
Order of October 29, 1985 became final, 30 and unalterable.
Having become final because never appealed, the Order of October 29,
1985 may no longer be modified in any substantial respect. The issues
thereby resolved may no longer be relitigated. Any attempt to do so
through another action or proceeding would be barred by the familiar
doctrine of res adjudicata, even if the subsequent proceeding resorted
to were the special civil action of certiorari under Rule 65. Well
known is the rule, too, that certiorari as a special civil action may not
be resorted to as a substitute for a lost appeal 31 — whether the appeal
prescribed by law be by certiorari or by writ of error. 32
Moreover, it seems quite indubitable that the cause of action of the
ASIA GROUP against BA is distinct and separate from its cause of
action against the latter’s co-defendants, the Gotianun Group. The
violation by BA of its contractual commitment under the Agreement of
March 25, 1974, not to sell its stock in IBAA to any third person
without first offering it to the other parties to the agreement, it what
continues ASIA GROUP’s cause of action against it. On the other
hand, the act of the Gotianun Group of inducing BA to sell, and
actually purchasing, its IBAA stock, despite awareness of the
provisions of the Agreement, is what the complaint states to be the
cause of action against said Gotianun Group, from which allegations it
is necessarily inferred that if the Gotianun Group were in reality
unaware of the agreement, no cause of action could arise against it. In
other words, it is not alone the act of negotiating for, and subsequently
consummating, the purchase of BA’s stock in IBAA that would make
the Gotianun Group liable to the ASIA GROUP, but also the Gotianun
Group’s knowledge of the right of first refusal stipulated in the
agreement; so that the absence of such knowledge would remove any
basis for holding the Gotianun Group responsible in damages to the
ASIA GROUP. Stated otherwise, BA’s act of selling its stock to the
Gotianun Group, without first having offered it for sale to ASIA
GROUP or the other parties to the Agreement of March 25, 1974, is a
breach of the agreement and makes it liable in damages to said parties.
It does not however make the Gotianun Group necessarily liable; it
would be liable only if it bought the stock with knowledge of the
prohibition in the agreement, not if it was unaware thereof. This was
indeed this Court’s view of the parties’ situation, pronounced in its
Resolution of November 5, 1985 in G.R. No. 53543, 33
viz.:jgc:chanrobles.com.ph
"(b) Gotianun allegedly was aware of the stipulation in the
Consolidation Agreement that the majority of the successors in interest
of the former stockholders of the defunct ASIA (who have become,
IBAA stockholders) or their nominees had the right of first refusal. If
really such was the case, Gotianun — in the absence of a waiver of
said right could not be deemed a buyer in good faith. Conversely, if
Gotianun was not aware of ASIA Group’s right of first refusal, when
he bought the BA shares in 1978, he could claim to be a buyer in good
faith regardless of whether there was a waiver or not . . ."cralaw
virtua1aw library
The waiver, therefore, of ASIA GROUP of its cause of action against
the Gotianun Group — evidently founded on the acknowledgment that
the latter had no knowledge of the right of first refusal stipulated in the
Agreement of March 25,1974 — had no relevance and no possible
effect on the ASIA GROUP’s right to proceed against BA for violation
of such right of first refusal. Hence, the correctness of the rendition by
the SEC of the order approving the compromise agreement between
the ASIA and Gotianun Groups and dismissing the former’s complaint
against the latter — an order in the nature of a several or separate
judgment in accordance with Section 4, Rule 36 of the Rules of Court,
supra — cannot thus be gainsaid.
Besides, it would seem an obvious proposition that a plaintiff has the
right to choose which of several persons to implead as defendant in, or
to drop from, his complaint. None of the defendants has the right to
compel said plaintiff to prosecute the action against a party if he does
not wish to do so. Of course, the plaintiff will have to suffer the
consequences of any error he might commit in exercising his option.
For the defendant that he does not implead, or drops from the action,
may well be an indispensable party, in which event his action will
have to be dismissed, since according to the law, no final adjudication
can be had of the action without such an indispensable party. 34 The
remedy of a co-defendant who is not dropped, therefore, is not to insist
that the plaintiff continue to prosecute his action against the dropped
defendant, but to move for dismissal of the action against himself, or
take such appropriate action as might otherwise be proper.
WHEREFORE, the petition for review on certiorari is DENIED, with
costs against the petitioner.
SO ORDERED.
 G.R. No. 184332, February 17, 2016
ANNA TENG, Petitioner, v. SECURITIES AND EXCHANGE
COMMISSION (SEC) AND TING PING LAY, Respondents.
DECISION
REYES, J.:
This petition for review on certiorari1 under Rule 45 of the Rules of
Court seeks the reversal of the Decision2 dated April 29, 2008 and the
Resolution3 dated August 28, 2008 rendered by the Court of Appeals
(CA) in CA-G.R. SP No. 99836. The CA affirmed the orders of the
Securities and Exchange Commission (SEC) granting the issuance of
an alias writ of execution, compelling petitioner Anna Teng (Teng) to
register and issue new certificates of stock in favor of respondent Ting
Ping Lay (Ting Ping).
The Facts
This case has its origin in G.R. No. 1297774 entitled TCL Sales
Corporation and Anna Teng v. Hon. Court of Appeals and Ting Ping
Lay. Herein respondent Ting Ping purchased 480 shares of TCL Sales
Corporation (TCL) from Peter Chiu (Chiu) on February 2, 1979; 1,400
shares on September 22, 1985 from his brother Teng Ching Lay (Teng
Ching), who was also the president and operations manager of TCL;
and 1,440 shares from Ismaelita Maluto (Maluto) on September 2,
1989.5
Upon Teng Ching's death in 1989, his son Henry Teng (Henry) took
over the management of TCL. To protect his shareholdings with TCL,
Ting Ping on August 31, 1989 requested TCL's Corporate Secretary,
herein petitioner Teng, to enter the transfer in the Stock and Transfer
Book of TCL for the proper recording of his acquisition. Lie also
demanded the issuance of new certificates of stock in his favor. TCL
and Teng, however, refused despite repeated demands. Because of
their refusal, Ting Ping filed a petition for mandamus with the SEC
against TCL and Teng, docketed as SEC Case No. 3900. 6
In its Decision7 dated July 20, 1994, the SEC granted Ting Ping's
petition, ordering as follows:
WHEREFORE, in view of all the foregoing facts and circumstances,
judgment is hereby rendered.
A. Ordering [TCL and Teng] to record in the Books of the Corporation
the following shares:
1. 480 shares acquired by [Ting Ping] from [Chiu] per Deed of Sales
[sic] dated February 20, 1979;
2. 1,400 shares acquired by [Ting Ping] from [Teng Ching] per Deed
of Sale dated September 22, 1985; and
3. 1,440 shares acquired by [Ting Ping] from [Maluto] per Deed of
Assignment dated Sept. 2, 1989 [sic].
B. Ordering [TCL and Teng] to issue corresponding new certificates of
stocks (sic) in the name of [Ting Ping].
C. Ordering [TCL and Teng] to pay [Ting Ping] moral damages in the
amount of One Hundred Thousand (P 100,000.00) Pesos and Fifty
Thousand (P 50,000.00) Pesos for attorney's fees.
SO ORDERED.8
TCL and Teng appealed to the SEC en bane, which, in its Order  dated
9
June 11, 1996, affirmed the SEC decision with modification, in that
Teng was held solely liable for the payment of moral damages and
attorney's fees.
Not contented, TCL and Teng filed a petition for review with the CA,
docketed as CA-G.R. SP. No. 42035. On January 31, 1997, the CA,
however, dismissed the petition for having been filed out of time and
for finding no cogent and justifiable grounds to disturb the findings of
the SEC en banc.10 This prompted TCL and Teng to come to the
Court via a petition for review on certiorari under Rule 45.
On January 5, 2001, the Court promulgated its Decision in G.R. No.
129777, the dispositive portion of which states:
WHEREFORE, the petition is DENIED, and the Decision dated
January 31, 1997, as well as the Resolution dated July 3, 1997 of [the
CA] are hereby AFFIRMED. Costs against [TCL and Teng].
SO ORDERED.11
After the finality of the Court's decision, the SEC issued a writ of
execution addressed to the Sheriff of the Regional Trial Court (RTC)
of Manila. Teng, however, filed on February 4, 2004 a complaint for
interpleader with the RTC of Manila, Branch 46, docketed as Civil
Case No. 02-102776, where Teng sought to compel Henry and Ting
Ping to interplead and settle the issue of ownership over the 1,400
shares, which were previously owned by Teng Ching. Thus, the
deputized sheriff held in abeyance the further implementation of the
writ of execution pending outcome of Civil Case No. 02-102776. 12
On March 13, 2003, the RTC of Manila, Branch 46, rendered its
Decision13 in Civil Case No. 02-102776, finding Henry to have a better
right to the shares of stock formerly owned by Teng Ching, except as
to those covered by Stock Certificate No. 011 covering 262.5 shares,
among others.14
Thereafter, an Ex Parte Motion for the Issuance of Alias Writ of
Execution15 was filed by Ting Ping where he sought the partial
satisfaction of SEC en banc Order dated June 11, 1996 ordering TCL
and Teng to record the 480 shares he acquired from Chiu and the 1,440
shares he acquired from Maluto, and for Teng's payment of the
damages awarded in his favor.
Acting upon the motion, the SEC issued an Order16 dated August 9,
2006 granting partial enforcement and satisfaction of the Decision
dated July 20, 1994, as modified by the SEC en banc's Order dated
June 11, 1996.17 On the same date, the SEC issued an alias writ of
execution.18
Teng and TCL filed their respective motions to quash the alias writ of
execution,19 which was opposed by Ting Ping,20 who also expressed
his willingness to surrender the original stock certificates of Chiu and
Maluto to facilitate and expedite the transfer of the shares in his favor.
Teng pointed out, however, that the annexes in Ting Ping's opposition
did not include the subject certificates of stock, surmising that they
could have been lost or destroyed.21 Ting Ping belied this, claiming
that his counsel Atty. Simon V. Lao already communicated with TCL's
counsel regarding the surrender of the said certificates of stock. 22 Teng
then filed a counter manifestation where she pointed out a discrepancy
between the total shares of Maluto based on the annexes, which is only
1305 shares, as against the 1440 shares acquired by Ting Ping based
on the SEC Order dated August 9, 2006.23
On May 25, 2007, the SEC denied the motions to quash filed by Teng
and TCL, and affirmed its Order dated August 9, 2006.24
Unperturbed, Teng filed a petition for certiorari and prohibition under
Rule 65 of the Rules of Court, docketed as CA-G.R. SP No.
99836.25 The SEC, through the Office of the Solicitor General (OSG),
filed a Comment dated June 30, 2008,26 which, subsequently, Teng
moved to expunge.27cralawred
On April 29, 2008, the CA promulgated the assailed decision
dismissing the petition and denying the motion to expunge the SEC's
comment.28
Hence, Teng filed the present petition, raising the following grounds:
I. THE RESPONDENT [CA] GRAVELY ERRED
IN DECLARING THAT THERE WAS NO
NEED TO SURRENDER THE STOCK
CERTIFICATES (REPRESENTING THE
SHARES CONVEYED BY [MALUTO] TO
[TING PING] TO RECORD THE TRANSFER
THEREOF IN THE CORPORATE BOOKS AND
ISSUE NEW STOCK CERTIFICATES[;]
II. THE RESPONDENT [CA] GRAVELY ERRED
IN UPHOLDING THE POSE THAT THERE
WAS NEITHER AMENDMENT NOR
ALTERATION OF THE FINAL DECISION OF
THE SUPREME COURT IN "TCL SALE[S]
CORP., ET AL. VS. CA, ET AL.", G.R. NO.
129777, DESPITE THE CONTRARY RECORD
THERETO[;]
III. THE RESPONDENT [CA] GRAVELY ERRED
IN DECLARING THAT THE [OSG] WAS
ALREADY REQUIRED TO COMMENT ON
[TENG'S] MOTION FOR
RECONSIDERATION.29
The core question before the Court is whether the surrender of the
certificates of stock is a requisite before registration of the transfer
may be made in the corporate books and for the issuance of new
certificates in its stead. Note at this juncture that the present dispute
involves the execution of the Court's decision in G.R. No. 129777 but
only with regard to Chiu's and Maluto's respective shares. The subject
of the orders of execution issued by the SEC pertained only to these
shares and the Court's decision will revolve only on these shares.
Teng argues, among others, that the CA erred when it held that the
surrender of Maluto's stock certificates is not necessary before their
registration in the corporate books and before the issuance of new
stock certificates. She contends that prior to registration of stocks in
the corporate books, it is mandatory that the stock certificates are first
surrendered because a corporation will be liable to a bona fide holder
of the old certificate if, without demanding the said certificate, it issues
a new one. She also claims that the CA's reliance on Tan v. SEC30 is
misplaced since therein subject stock certificate was allegedly
surrendered.31
On the other hand, Ting Ping contends that Section 63 of the
Corporation Code does not require the surrender of the stock
certificate to the corporation, nor make such surrender an
indispensable condition before any transfer of shares can be registered
in the books of the corporation. Ting Ping considers Section 63 as a
permissive mode of transferring shares in the corporation.
Citing Rural Bank of Salinas, Inc. v. CA,32 he claims that the only
limitation imposed by Section 63 is when the corporation holds any
unpaid claim against the shares intended to be transferred. Thus, for as
long as the shares of stock are validly transferred, the corporate
secretary has the ministerial duty to register the transfer of such shares
in the books of the corporation, especially in this case because no less
than this Court has affirmed the validity of the transfer of the shares in
favor of Ting Ping.33
Ruling of the Court
To restate the basics -
A certificate of stock is a written instrument signed by the proper
officer of a corporation stating or acknowledging that the person
named in the document is the owner of a designated number of shares
of its stock. It is prima facie evidence that the holder is a shareholder
of a corporation.34 A certificate, however, is merely a tangible
evidence of ownership of shares of stock.35 It is not a stock in the
corporation and merely expresses the contract between the corporation
and the stockholder.36 The shares of stock evidenced by said
certificates, meanwhile, are regarded as property and the owner of
such shares may, as a general rule, dispose of them as he sees fit,
unless the corporation has been dissolved, or unless the right to do so
is properly restricted, or the owner's privilege of disposing of his
shares has been hampered by his own action.37
Section 63 of the Corporation Code prescribes the manner by which a
share of stock may be transferred. Said provision is essentially the
same as Section 35 of the old Corporation Law, which, as held
in Fleisher v. Botica Nolasco Co.,38 defines the nature, character and
transferability of shares of stock. Fleisher also stated that the provision
on the transfer of shares of stocks contemplates no restriction as to
whom they may be transferred or sold. As owner of personal property,
a shareholder is at liberty to dispose of them in favor of whomsoever
he pleases, without any other limitation in this respect, than the general
provisions of law.39
Section 63 provides:
Sec. 63. Certificate of stock and transfer of shares. - The capital stock
of stock corporations shall be divided into shares for which certificates
signed by the president or vice president, countersigned by the
secretary or assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the by-laws. Shares of
stock so issued are personal property and may be transferred by
delivery of the certificate or certificates indorsed by the owner or
his attorney-in-fact or other person legally authorized to make the
transfer. No transfer, however, shall be valid, except as between the
parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the transaction, the
date of the transfer, the number of the certificate or certificates and the
number of shares transferred.
No shares of stock against which the corporation holds any unpaid
claim shall be transferable in the books of the corporation. (Emphasis
and underscoring ours)
Under the provision, certain minimum requisites must be complied
with for there to be a valid transfer of stocks, to wit: (a) there must be
delivery of the stock certificate; (b) the certificate must be endorsed by
the owner or his attorney-in-fact or other persons legally authorized to
make the transfer; and (c) to be valid against third parties, the transfer
must be recorded in the books of the corporation.40cralawred
It is the delivery of the certificate, coupled with the endorsement by
the owner or his duly authorized representative that is the operative act
of transfer of shares from the original owner to the transferee. 41 The
Court even emphatically declared in Fil-Estate Golf and Development,
Inc., et al. v. Vertex Sales and Trading, Inc.42 that in "a sale of shares
of stock, physical delivery of a stock certificate is one of the essential
requisites for the transfer of ownership of the stocks purchased." 43 The
delivery contemplated in Section 63, however, pertains to the delivery
of the certificate of shares by the transferor to the transferee, that
is, from the original stockholder named in the certificate to the person
or entity the stockholder was transferring the shares to, whether by sale
or some other valid form of absolute conveyance of
ownership.44 "[S]hares of stock may be transferred by delivery to the
transferee of the certificate properly indorsed. Title may be vested in
the transferee by the delivery of the duly indorsed certificate of
stock."45
It is thus clear that Teng's position - that Ting Ping must first surrender
Chiu's and Maluto's respective certificates of stock before the transfer
to Ting Ping may be registered in the books of the corporation -does
not have legal basis. The delivery or surrender adverted to by Teng,
i.e., from Ting Ping to TCL, is not a requisite before the conveyance
may be recorded in its books. To compel Ting Ping to deliver to the
corporation the certificates as a condition for the registration of the
transfer would amount to a restriction on the right of Ting Ping to have
the stocks transferred to his name, which is not sanctioned by law. The
only limitation imposed by Section 63 is when the corporation holds
any unpaid claim against the shares intended to be transferred.
In Rural Bank of Salinas,46 the Court ruled that the right of a
transferee/assignee to have stocks transferred to his name is an
inherent right flowing from his ownership of the stocks.47 In said case,
the private respondent presented to the bank the deeds of assignment
for registration, transfer of the shares assigned in the bank's books,
cancellation of the stock certificates, and issuance of new stock
certificates, which the bank refused. In ruling favorably for the private
respondent, the Court stressed that a corporation, either by its board,
its by-laws, or the act of its officers, cannot create restrictions in
stock transfers. In transferring stock, the secretary of a corporation
acts in purely ministerial capacity, and does not try to decide the
question of ownership.48 If a corporation refuses to make such transfer
without good cause, it may, in fact, even be compelled to do so
by mandamus.49 With more reason in this case where the Court, in
G.R. No. 129777, already upheld Ting Ping's definite and uncontested
titles to the subject shares, viz:
Respondent Ting Ping Lay was able to establish prima
facie ownership over the shares of stocks in question, through deeds of
transfer of shares of stock of TCL Corporation. Petitioners could not
repudiate these documents. Hence, the transfer of shares to
him must be recorded on the corporation's stock and transfer
book.50 (Emphasis and underscoring ours)
In the same vein, Teng cannot refuse registration of the transfer on the
pretext that the photocopies of Maluto's certificates of stock submitted
by Ting Ping covered only 1,305 shares and not 1,440. As earlier
stated, the respective duties of the corporation and its secretary to
transfer stock are purely ministerial.51 Aside from this, Teng's
argument on this point was adequately explained by both the SEC and
CA in this wise:
In explaining the alleged discrepancy, the public respondent, in its 25
May 2007 order, cited the order of the Commission En Banc, thus:
chanRoblesvirtualLawlibrary
"An examination of this decision, however, reveals, no categorical
pronouncements of fraud. The refusal to credit in [Ting Ping's] favor
five hundred eighty-five (585) shares in excess of what [Maluto]
owned and the two hundred forty (240) shares that [Ting Ping] bought
from the corporation, is a mere product of the failure of the
corporation to register with the [SEC] the increase in the subscribed
capital stock by 4000 shares last 1981. Surely, [Ting Ping] cannot be
faulted for this."52
Nevertheless, to be valid against third parties and the corporation, the
transfer must be recorded or registered in the books of corporation.
There are several reasons why registration of the transfer is necessary:
one, to enable the transferee to exercise all the rights of a
stockholder;53 two, to inform the corporation of any change in share
ownership so that it can ascertain the persons entitled to the rights and
subject to the liabilities of a stockholder;54 and three, to avoid fictitious
or fraudulent transfers,55 among others. Thus, in Chita Giian v.
Samahang Magsasaka, Inc.,56 the Court stated that the only safe way
to accomplish the hypothecation of share of stock is for the transferee
[a creditor, in this case] to insist on the assignment and delivery of the
certificate and to obtain the transfer of the legal title to him on the
books of the corporation by the cancellation of the certificate and the
issuance of a new one to him.57 In this case, given the Court's decision
in G.R. No. 129777, registration of the transfer of Chiu's and Maluto's
shares in Ting Ping's favor is a mere formality in confirming the
latter's status as a stockholder of TCL.58
Upon registration of the transfer in the books of the corporation, the
transferee may now then exercise all the rights of a stockholder, which
include the right to have stocks transferred to his name. 59 In Ponce v.
Alsons Cement Corporation,60 the Court stated that "[f]rom the
corporation's point of view, the transfer is not effective until it is
recorded. Unless and until such recording is made[,] the demand for
the issuance of stock certificates to the alleged transferee has no legal
basis, x x x [T]he stock and transfer book is the basis for ascertaining
the persons entitled to the rights and subject to the liabilities of a
stockholder. Where a transferee is not yet recognized as a stockholder,
the corporation is under no specific legal duty to issue stock
certificates in the transferee's name."61
The manner of issuance of certificates of stock is generally regulated
by the corporation's by-laws. Section 47 of the Corporation Code
states: "a private corporation may provide in its by-laws for x x x the
manner of issuing stock certificates." Section 63, meanwhile, provides
that "[t]he capital stock of stock corporations shall be divided into
shares for which certificates signed by the president or vice president,
countersigned by the secretary or assistant secretary, and sealed with
the seal of the corporation shall be issued in accordance with the by-
laws." In Bitong v. CA,62 the Court outlined the procedure for the
issuance of new certificates of stock in the name of a transferee:
First, the certificates must be signed by the president or vice-president,
countersigned by the secretary or assistant secretary, and sealed with
the seal of the corporation, x x x Second, delivery of the certificate is
an essential element of its issuance, x x x Third, the par value, as to par
value shares, or the full subscription as to no par value shares, must
first be fully paid. Fourth, the original certificate must be
surrendered where the person requesting the issuance of a
certificate is a transferee from a stockholder.63 (Emphasis ours and
citations omitted)
The surrender of the original certificate of stock is necessary before
the issuance of a new one so that the old certificate may be cancelled.
A corporation is not bound and cannot be required to issue a new
certificate unless the original certificate is produced and
surrendered.64 Surrender and cancellation of the old certificates serve
to protect not only the corporation but the legitimate shareholder and
the public as well, as it ensures that there is only one document
covering a particular share of stock.
In the case at bench, Ting Ping manifested from the start his intention
to surrender the subject certificates of stock to facilitate the registration
of the transfer and for the issuance of new certificates in his name. It
would be sacrificing substantial justice if the Court were to grant the
petition simply because Ting Ping is yet to surrender the subject
certificates for cancellation instead of ordering in this case such
surrender and cancellation, and the issuance of new ones in his name. 65
On the other hand, Teng, and TCL for that matter, have already
deterred for so long Ting Ping's enjoyment of his rights as a
stockholder. As early as 1989, Ting Ping already requested Teng to
enter the transfer of the subject shares in TCL's Stock and Transfer
Book; in 2001, the Court, in G.R. No. 129777, resolved Ting Ping's
rights as a valid transferee and shareholder; in 2006, the SEC ordered
partial execution of the judgment; and in 2008, the CA affirmed the
SEC's order of execution. The Court will not allow Teng and TCL to
frustrate Ting Ping's rights any longer. Also, the Court will not dwell
on the other issues raised by Teng as it becomes irrelevant in light of
the Court's disquisition.chanrobleslaw
WHEREFORE, the petition is DENIED. The Decision dated April
29, 2008 and Resolution dated August 28, 2008 of the Court of
Appeals in CA-G.R. SP No. 99836 are AFFIRMED.
Respondent Ting Ping Lay is hereby ordered to surrender the
certificates of stock covering the shares respectively transferred by
Ismaelita Maluto and Peter Chiu. Petitioner Anna Teng or the
incumbent corporate secretary of TCL Sales Corporation, on the other
hand, is hereby ordered, under pain of contempt, to immediately
cancel Ismaelita Maluto's and Peter Chiu's certificates of stock and to
issue new ones in the name of Ting Ping Lay, which shall include
Ismaelita Maluto's shares not covered by any existing certificate of
stock but otherwise validly transferred to Ting Ping Lay.
Costs against petitioner Anna Teng.
SO ORDERED.cralawlawlibrary
G.R. No. 170783               June 18, 2012
LEGASPI TOWERS 300, INC., LILIA MARQUINEZ
PALANCA, ROSANNA D. IMAI, GLORIA DOMINGO and RAY
VINCENT, Petitioners,
vs.
AMELIA P. MUER, SAMUEL M. TANCHOCO, ROMEO
TANKIANG, RUDEL PANGANIBAN, DOLORES AGBAYANI,
ARLENEDAL A. YASUMA, GODOFREDO M. CAGUIOA and
EDGARDO M. SALANDANAN, Respondents.
DECISION
PERALTA, J.:
This is a petition for review on certiorari of the Court of Appeals’
Decision1 dated July 22, 2005 in CA-G.R. CV No. 87684, and its
Resolution2 dated November 24, 2005, denying petitioners’ motion for
reconsideration.
The Court of Appeals held that Judge Antonio I. De Castro of the
Regional Trial Court (RTC) of Manila, Branch 3, did not commit
grave abuse of discretion in issuing the Orders dated July 21, 2004 and
September 24, 2004 in Civil Case No. 04-109655, denying petitioners’
Motion to Admit Second Amended Complaint.
The facts, as stated by the Court of Appeals, are as follows:
Pursuant to the by-laws of Legaspi Towers 300, Inc., petitioners Lilia
Marquinez Palanca, Rosanna D. Imai, Gloria Domingo and Ray
Vincent, the incumbent Board of Directors, set the annual meeting of
the members of the condominium corporation and the election of the
new Board of Directors for the years 2004-2005 on April 2, 2004 at
5:00 p.m. at the lobby of Legaspi Towers 300, Inc.
Out of a total number of 5,723 members who were entitled to vote,
1,358 were supposed to vote through their respective proxies and their
votes were critical in determining the existence of a quorum, which
was at least 2,863 (50% plus 1). The Committee on Elections of
Legaspi Towers 300, Inc., however, found most of the proxy votes, at
its face value, irregular, thus, questionable; and for lack of time to
authenticate the same, petitioners adjourned the meeting for lack of
quorum.
However, the group of respondents challenged the adjournment of the
meeting. Despite petitioners' insistence that no quorum was obtained
during the annual meeting held on April 2, 2004, respondents pushed
through with the scheduled election and were elected as the new Board
of Directors and officers of Legaspi Towers 300, Inc. Subsequently,
they submitted a General Information Sheet to the Securities and
Exchange Commission (SEC) with the following new set of officers:
Amelia P. Muer, President; Samuel M. Tanchoco, Internal Vice
President; Romeo V. Tankiang, External Vice-President; Rudel H.
Panganiban, Secretary; Dolores B. Agbayani, Assistant Secretary;
Arlenedal A. Yasuma, Treasurer; Godofredo M. Caguioa, Assistant
Treasurer; and Edgardo M. Salandanan, Internal Auditor.
On April 13, 2004, petitioners filed a Complaint for the Declaration of
Nullity of Elections with Prayers for the lssuance of Temporary
Restraining Orders and Writ of Preliminary Injunction and
Damages against respondents with the RTC of Manila. Before
respondents could file an Answer to the original
Complaint, petitioners filed an Amended Complaint, which was
admitted by the RTC in an Order dated April 14, 2004.
On April 20, 2004, before respondents could submit an Answer to the
Amended Complaint, petitioners again filed an Urgent Ex-Parte
Motion to Admit Second Amended Complaint and for the lssuance of
Ex-Parte Temporary Restraining Order Effective only for Seventy-Two
(72) Hours. It was stated in the said pleading that the case was raffled
to Branch 24, but Presiding Judge Antonio Eugenio, Jr. inhibited
himself from handling the case; and when the case was assigned to
Branch 46, Presiding Judge Artemio S. Tipon also inhibited himself
from the case.
On April 21, 2004, Executive Judge Enrico A. Lanzanas of the RTC of
Manila acted on the Motion for the Issuance of an Ex
Parte Temporary Restraining Order, and issued an Order disposing,
thus:
WHEREFORE, pursuant to administrative Circular No. 20-95 of the
Supreme Court, a seventy-two (72) hour Temporary Restraining Order
is hereby issued, enjoining defendants from taking over management,
or to maintain a status quo, in order to prevent further irreparable
damages and prejudice to the corporation, as day-to-day activities will
be disrupted and will be paralyzed due to the legal controversy. 3
On the same date, April 21, 2004, respondents filed their Answer 4 to
the Amended Complaint, alleging that the election on April 2, 2004
was lawfully conducted. Respondents cited the Report5 of SEC
Counsel Nicanor P. Patricio, who was ordered by the SEC to attend the
annual meeting of Legaspi Towers 300, Inc. on April 2, 2004. Atty.
Patricio stated in his Report that at 5:40 p.m. of April 2, 2004, a
representative of the Board of the condominium corporation stated that
the scheduled elections could not proceed because the Election
Committee was not able to validate the authenticity of the proxies
prior to the election due to limited time available as the submission
was made only the day before. Atty. Patricio noted that the Board itself
fixed the deadline for submission of proxies at 5:00 p.m. of April 1,
2004. One holder of proxy stood up and questioned the motives of the
Board in postponing the elections. The Board objected to this and
moved for a declaration of adjournment. There was an objection to the
adjournment, which was ignored by the Board. When the Board
adjourned the meeting despite the objections of the unit owners, the
unit owners who objected to the adjournment gathered themselves at
the same place of the meeting and proceeded with the meeting. The
attendance was checked from among the members who stayed at the
meeting. Proxies were counted and recorded, and there was a
declaration of a quorum – out of a total of 5,721 votes, 2,938 were
present either in person or proxy. Thereafter, ballots were prepared,
proxies were counterchecked with the number of votes entitled to each
unit owner, and then votes were cast. At about 9:30 p.m., canvassing
started, and by 11:30 p.m., the newly-elected members of the Board of
Directors for the years 2004-2005 were named.
Respondents contended that from the proceedings of the election
reported by SEC representative, Atty. Patricio, it was clear that the
election held on April 2, 2004 was legitimate and lawful; thus, they
prayed for the dismissal of the complaint for lack cause of action
against them.
This case was scheduled to be re-raffled to regular courts on April 22,
2004, and was assigned to Judge Antonio I. De Castro of the RTC of
Manila, Branch 3 (trial court).
On April 26, 2004, the trial court conducted a hearing on the
injunction sought by petitioners, and issued an Order clarifying that
the TRO issued by Executive Judge Enrico A. Lanzanas, enjoining
respondents from taking over management, was not applicable as the
current Board of Directors (respondents) had actually assumed
management of the corporation. The trial court stated that the status
quo mentioned in the said TRO shall mean that the current board of
directors shall continue to manage the affairs of the condominium
corporation, but the court shall monitor all income earned and
expenses incurred by the corporation. The trial court stated:
Precisely this complaint seeks to annul the election of the Board due to
alleged questionable proxy votes which could not have produced a
quorum. As such, there is nothing to enjoin and so injunction shall fail.
As an answer has been filed, the case is ripe for pre-trial and the
parties are directed to file their pre-trial briefs by May 3, 2004.
As plaintiffs’ second amended complaint is admitted by the Court,
defendants are given up to May 3, 2004 to file a comment thereto. In
the meantime, the banks and other persons & entities are advised to
recognize the Board headed by its president, Amelia Muer. All
transactions made by the Board and its officers for the corporation are
considered legal for all intents and purposes.6
On May 3, 2004, respondents filed a Comment on the Motion to
Amend Complaint, praying that the name of Legaspi Towers 300, Inc.,
as party-plaintiff in the Second Amended Complaint, be deleted as the
said inclusion by petitioners was made without the authority of the
current Board
of Directors, which had been recognized by the trial court in its Order
dated April 26, 2004.
During the pre-trial conference held on July 21, 2004, the trial court
resolved various incidents in the case and other issues raised by the
contending parties. One of the incidents acted upon by the trial court
was petitioners' motion to amend complaint to implead Legaspi
Towers 300, Inc. as plaintiff, which motion was denied with the
issuance of two Orders both dated July 21, 2004. The first Order7 held
that the said motion could not be admitted for being improper, thus:
xxxx
On plaintiffs’ motion to admit amended complaint (to include Legaspi
Towers 300, Inc. as plaintiff), the Court rules to deny the motion for
being improper. (A separate Order of even date is issued.) As prayed
for, movants are given 10 days from today to file a motion for
reconsideration thereof, while defendants are given 10 days from
receipt thereof to reply.8
The second separate Order,9 also dated July 21, 2004, reads:
This resolves plaintiffs’ motion to amend complaint to include Legaspi
Towers 300, Inc. as party-plaintiff and defendants’ comment thereto.
Finding no merit therein and for the reasons stated in the comment, the
motion is hereby DENIED.
Petitioners filed a Motion for Reconsideration of the Orders dated July
21, 2004. In the Order10 dated September 24, 2004, the trial court
denied the motion for reconsideration for lack of merit.
Petitioners filed a petition for certiorari with the Court of Appeals
alleging that the trial court gravely abused its discretion amounting to
lack or excess of jurisdiction in issuing the Orders dated July 21, 2004
and September 24, 2004, and praying that judgment be rendered
annulling the said Orders and directing RTC Judge De Castro to admit
their Second Amended Complaint.
In a Decision dated July 22, 2005, the Court of Appeals dismissed the
petition for lack of merit. It held that RTC Judge De Castro did not
commit grave abuse of discretion in denying petitioners' Motion To
Admit Second Amended Complaint.
The Court of Appeals stated that petitioners’ complaint sought to
nullify the election of the Board of Directors held on April 2, 2004,
and to protect and enforce their individual right to vote. The appellate
court held that as the right to vote is a personal right of a stockholder
of a corporation, such right can only be enforced through a direct
action; hence, Legaspi Towers 300, Inc. cannot be impleaded as
plaintiff in this case.
Petitioners’ motion for reconsideration was denied by the Court of
Appeals in a Resolution dated November 24, 2005.
Petitioners filed this petition raising the following issues:
I
THE HONORABLE COURT OF APPEALS ERRED IN
RESOLVING THAT PUBLIC RESPONDENT-APPELLEE
DID NOT COMMIT ANY WHIMSICAL, ARBITRARY
AND OPPRESSIVE EXERCISE OF JUDICIAL
AUTHORITY WHEN THE LATTER REVERSED HIS
EARLIER RULING ALREADY ADMITTING THE
SECOND AMENDED COMPLAINT OF PETITIONERS-
APPELLANTS.
II
THERE IS NO LEGAL BASIS FOR THE HONORABLE
COURT OF APPEALS TO RESOLVE THAT
PETITIONERS-APPELLANTS HAVE NO RIGHT AS
BOARD OF DIRECTORS TO BRING AN ACTION IN
BEHALF OF LEGASPI TOWERS 300, INC.
III
THERE IS NO LEGAL BASIS FOR THE HONORABLE
COURT OF APPEALS TO RESOLVE THAT THE
ELECTIONS CONDUCTED IN LEGASPI TOWERS 300,
INC. FOR THE PERIOD OF 2005 TO 2006 HAVE
 RENDERED THE ISSUE IN CIVIL CASE NO. 04-10655
MOOT AND ACADEMIC.11
Petitioners contend that the Court of Appeals erred in not finding that
RTC Judge Antonio I. De Castro committed grave abuse of discretion
amounting to lack or excess of jurisdiction in denying the admission of
the Second Amended Complaint in the Orders dated July 21, 2004 and
September 24, 2004, despite the fact that he had already ordered its
admission in a previous Order dated April 26, 2004.
Petitioners’ contention is unmeritorious.
It is clear that in the Orders dated July 21, 2004, the trial court did not
admit the Second Amended Complaint wherein petitioners made the
condominium corporation, Legaspi Towers 300, Inc., the party-
plaintiff. In the Order dated September 24, 2004, denying petitioners’
motion for reconsideration of the Orders dated July 21, 2004, the RTC
explained its action, thus:
x x x The word "admitted" in the 3rd paragraph of the Order dated
April 26, 2004 should read "received" for which defendants were told
to comment thereon as an answer has been filed. It was an oversight of
the clerical error in said Order.
The Order of July 21, 2004 states "amended complaint" in the 3rd
paragraph thereof and so it does not refer to the second amended
complaint. The amended complaint was admitted by the court of origin
– Br. 24 in its Order of April 14, 2004 as there was no responsive
pleading yet.
Nonetheless, admission of the second amended complaint is improper.
Why should Legaspi Towers 300, Inc. x x x be included as party-
plaintiff when defendants are members thereof too like plaintiffs. Both
parties are deemed to be acting in their personal capacities as they both
claim to be the lawful board of directors. The motion for
reconsideration for the admission of the second amended complaint is
hereby DENIED.12
The courts have the inherent power to amend and control their
processes and orders so as to make them conformable to law and
justice.13 A judge has an inherent right, while his judgment is still
under his control, to correct errors, mistakes, or injustices. 14
Next, petitioners state that the Court of Appeals seems to be under the
impression that the action instituted by them is one brought forth
solely by way of a derivative suit. They clarified that the inclusion of
Legaspi Towers 300, Inc. as a party-plaintiff in the Second Amended
Complaint was, first and foremost, intended as a direct action by the
corporation acting through them (petitioners) as the reconstituted
Board of Directors of Legaspi Towers 300, Inc. Petitioners allege that
their act of including the corporation as party-plaintiff is consistent
with their position that the election conducted by respondents was
invalid; hence, petitioners, under their by-laws, could reconstitute
themselves as the Board of Directors of Legaspi Towers 300, Inc. in a
hold-over capacity for the succeeding term. By so doing, petitioners
had the right as the rightful Board of Directors to bring the action in
representation of Legaspi Towers 300, Inc. Thus, the Second Amended
Complaint was intended by the petitioners as a direct suit by the
corporation joined in by the petitioners to protect and enforce their
common rights.
Petitioners contend that Legaspi Towers 300, Inc. is a real party-in-
interest as it stands to be affected the most by the controversy, because
it involves the determination of whether or not the corporation’s by-
laws was properly carried out in the meeting held on April 2, 2004,
when despite the adjournment of the meeting for lack of quorum, the
elections were still conducted. Although petitioners admit that the
action involves their right to vote, they argue that it also involves the
right of the condominium corporation to be managed and run by the
duly-elected Board of Directors, and to seek redress against those who
wrongfully occupy positions of the corporation and who may
mismanage the corporation.
Petitioners’ argument is unmeritorious.
The Court notes that in the Amended Complaint, petitioners as
plaintiffs stated that they are the incumbent reconstituted Board of
Directors of Legaspi Towers 300, Inc., and that defendants, herein
respondents, are the newly-elected members of the Board of Directors;
while in the Second Amended Complaint, the plaintiff is Legaspi
Towers 300, Inc., represented by petitioners as the allegedly
incumbent reconstituted Board of Directors of Legaspi Towers 300,
Inc.
The Second Amended Complaint states who the plaintiffs are, thus:
1. That the plaintiffs are: LEGASPI TOWERS 300, INC., non-stock
corporation xxx duly represented by the incumbent reconstituted
Board of Directors of Legaspi Towers 300, Inc., namely: ELIADORA
FE BOTE VERA xxx, as President; BRUNO C. HAMAN xxx, as
Director; LILY MARQUINEZ PALANCA xxx, as Secretary;
ROSANNA DAVID IMAI xxx, as Treasurer; and members of the
Board of Directors, namely: ELIZABETH GUERRERO xxx,
GLORIA DOMINGO xxx, and RAY VINCENT.15
The Court agrees with the Court of Appeals that the Second Amended
Complaint is meant to be a derivative suit filed by petitioners in behalf
of the corporation. The Court of Appeals stated in its Decision that
petitioners justified the inclusion of Legaspi Towers 300, Inc. as
plaintiff in Civil Case No. 0410655 by invoking the doctrine of
derivative suit, as petitioners specifically argued, thus:
xxxx
x x x [T]he sudden takeover by private respondents of the management
of Legaspi Towers 300, Inc. has only proven the rightfulness of
petitioners’ move to include Legaspi Towers 300, Inc. as party-
plaintiff. This is because every resolution passed by private
respondents sitting as a board result[s] in violation of Legaspi Towers
300, Inc.’s right to be managed and represented by herein petitioners.
In short, the amendment of the complaint [to include] Legaspi Towers
300, Inc. was done in order to protect the interest and enforce the right
of the Legaspi [Towers 300,] Inc. to be administered and managed [by
petitioners] as the duly constituted Board of Directors. This is no
different from and may in fact be considered as a DERIVATIVE SUIT
instituted by an individual stockholder against those controlling the
corporation but is being instituted in the name of and for the benefit of
the corporation whose right/s are being violated. 16
Is a derivative suit proper in this case?
Cua, Jr. v. Tan17 differentiates a derivative suit and an individual/class
suit as follows:
A derivative suit must be differentiated from individual and
representative or class suits, thus:
Suits by stockholders or members of a corporation based on wrongful
or fraudulent acts of directors or other persons may be classified into
individual suits, class suits, and derivative suits. Where a stockholder
or member is denied the right of inspection, his suit would
be individual because the wrong is done to him personally and not to
the other stockholders or the corporation. Where the wrong is done to
a group of stockholders, as where preferred stockholders' rights are
violated, a class or representative suit will be proper for the
protection of all stockholders belonging to the same group. But where
the acts complained of constitute a wrong to the corporation itself, the
cause of action belongs to the corporation and not to the individual
stockholder or member. Although in most every case of wrong to the
corporation, each stockholder is necessarily affected because the value
of his interest therein would be impaired, this fact of itself is not
sufficient to give him an individual cause of action since the
corporation is a person distinct and separate from him, and can and
should itself sue the wrongdoer. Otherwise, not only would the theory
of separate entity be violated, but there would be multiplicity of suits
as well as a violation of the priority rights of creditors. Furthermore,
there is the difficulty of determining the amount of damages that
should be paid to each individual stockholder.
However, in cases of mismanagement where the wrongful acts are
committed by the directors or trustees themselves, a stockholder or
member may find that he has no redress because the former are vested
by law with the right to decide whether or not the corporation should
sue, and they will never be willing to sue themselves. The corporation
would thus be helpless to seek remedy. Because of the frequent
occurrence of such a situation, the common law gradually recognized
the right of a stockholder to sue on behalf of a corporation in what
eventually became known as a "derivative suit." It has been proven to
be an effective remedy of the minority against the abuses of
management. Thus, an individual stockholder is permitted to institute a
derivative suit on behalf of the corporation wherein he holds stock in
order to protect or vindicate corporate rights, whenever officials of the
corporation refuse to sue or are the ones to be sued or hold the control
of the corporation. In such actions, the suing stockholder is regarded as
the nominal party, with the corporation as the party-in- interest.18
Since it is the corporation that is the real party-in-interest in a
derivative suit, then the reliefs prayed for must be for the benefit or
interest of the corporation.19 When the reliefs prayed for do not pertain
to the corporation, then it is an improper derivative suit. 20
The requisites for a derivative suit are as follows:
a) the party bringing suit should be a shareholder as of the
time of the act or transaction complained of, the number of
his shares not being material;
b) he has tried to exhaust intra-corporate remedies, i.e., has
made a demand on the board of directors for the appropriate
relief but the latter has failed or refused to heed his plea; and
c) the cause of action actually devolves on the
corporation, the wrongdoing or harm having been, or being
caused to the corporation and not to the particular
stockholder bringing the suit.21
In this case, petitioners, as members of the Board of Directors of the
condominium corporation before the election in question, filed a
complaint against the newly-elected members of the Board of
Directors for the years 2004-2005, questioning the validity of the
election held on April 2, 2004, as it was allegedly marred by lack of
quorum, and praying for the nullification of the said election.
As stated by the Court of Appeals, petitioners’ complaint seek to
nullify the said election, and to protect and enforce their individual
right to vote. Petitioners seek the nullification of the election of the
Board of Directors for the years 2004-2005, composed of herein
respondents, who pushed through with the election even if petitioners
had adjourned the meeting allegedly due to lack of quorum. Petitioners
are the injured party, whose rights to vote and to be voted upon were
directly affected by the election of the new set of board of directors.
The party-in-interest are the petitioners as stockholders, who wield
such right to vote. The cause of action devolves on petitioners, not the
condominium corporation, which did not have the right to vote. Hence,
the complaint for nullification of the election is a direct action by
petitioners, who were the members of the Board of Directors of the
corporation before the election, against respondents, who are the
newly-elected Board of Directors. Under the circumstances, the
derivative suit filed by petitioners in behalf of the condominium
corporation in the Second Amended Complaint is improper.
The stockholder’s right to file a derivative suit is not based on any
express provision of The Corporation Code, but is impliedly
recognized when the law makes corporate directors or officers liable
for damages suffered by the corporation and its stockholders for
violation of their fiduciary duties,22 which is not the issue in this case.
Further, petitioners’ change of argument before this Court, asserting
that the Second Amended Complaint is a direct action filed by the
corporation, represented by the petitioners as the incumbent Board of
Directors, is an afterthought, and lacks merit, considering that the
newly-elected Board of Directors had assumed their function to
manage corporate affairs.23
In fine, the Court of Appeals correctly upheld the Orders of the trial
court dated July 21, 2004 and September 24, 2004 denying petitioners’
Motion to Admit Second Amended Complaint.
Lastly, petitioners contend that the Court of Appeals erred in resolving
that the recent elections conducted by Legaspi Towers, 300, Inc. have
rendered the issue raised via the special civil action for certiorari
before the appellate court moot and academic.
The Court of Appeals, in its Resolution dated November 24, 2005,
stated:
x x x [T]he election of the corporation’s new set of directors for the
years 2005-2006 has, finally, rendered the petition at bench moot and
academic. As correctly argued by private respondents, the nullification
of the orders assailed by petitioners would, therefore, be of little or no
practical and legal purpose.24
The statement of the Court of Appeals is correct.
Petitioners question the validity of the election of the Board of
Directors for the years 2004-2005, which election they seek to nullify
in Civil Case No. 04-109655. However, the valid election of a new set
of Board of Directors for the years 2005-2006 would, indeed, render
this petition moot and academic.
WHEREFORE, the petition is DENIED. The Decision of the Court of
Appeals in CA-G.R. CV No. 87684, dated July 22, 2005, and its
Resolution dated November 24, 2005 are AFFIRMED.
Costs against petitioners.
SO ORDERED.
G.R. No. 142936            April 17, 2002
PHILIPPINE NATIONAL BANK & NATIONAL SUGAR
DEVELOPMENT CORPORATION, petitioners,
vs.
ANDRADA ELECTRIC & ENGINEERING
COMPANY, respondent.
PANGANIBAN, J.:
Basic is the rule that a corporation has a legal personality distinct and
separate from the persons and entities owning it. 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. Thus, the mere fact that the Philippine National
Bank (PNB) acquired ownership or management of some assets of the
Pampanga Sugar Mill (PASUMIL), which had earlier been foreclosed
and purchased at the resulting public auction by the Development
Bank of the Philippines (DBP), will not make PNB liable for the
PASUMIL’s contractual debts to respondent.
Statement of the Case
Before us is a Petition for Review assailing the April 17, 2000
Decision1 of the Court of Appeals (CA) in CA-GR CV No. 57610. The
decretal portion of the challenged Decision reads as follows:
"WHEREFORE, the judgment appealed from is hereby
AFFIRMED."2
The Facts
The factual antecedents of the case are summarized by the Court of
Appeals as follows:
"In its complaint, the plaintiff [herein respondent] alleged
that it is a partnership duly organized, existing, and
operating under the laws of the Philippines, with office and
principal place of business at Nos. 794-812 Del Monte
[A]venue, Quezon City, while the defendant [herein
petitioner] Philippine National Bank (herein referred to as
PNB), is a semi-government corporation duly organized,
existing and operating under the laws of the Philippines,
with office and principal place of business at Escolta Street,
Sta. Cruz, Manila; whereas, the other defendant, the National
Sugar Development Corporation (NASUDECO in brief), is
also a semi-government corporation and the sugar arm of the
PNB, with office and principal place of business at the 2nd
Floor, Sampaguita Building, Cubao, Quezon City; and the
defendant Pampanga Sugar Mills (PASUMIL in short), is a
corporation organized, existing and operating under the 1975
laws of the Philippines, and had its business office before
1975 at Del Carmen, Floridablanca, Pampanga; that the
plaintiff is engaged in the business of general construction
for the repairs and/or construction of different kinds of
machineries and buildings; that on August 26, 1975, the
defendant PNB acquired the assets of the defendant
PASUMIL that were earlier foreclosed by the Development
Bank of the Philippines (DBP) under LOI No. 311; that the
defendant PNB organized the defendant NASUDECO in
September, 1975, to take ownership and possession of the
assets and ultimately to nationalize and consolidate its
interest in other PNB controlled sugar mills; that prior to
October 29, 1971, the defendant PASUMIL engaged the
services of plaintiff for electrical rewinding and repair, most
of which were partially paid by the defendant PASUMIL,
leaving several unpaid accounts with the plaintiff; that
finally, on October 29, 1971, the plaintiff and the defendant
PASUMIL entered into a contract for the plaintiff to perform
the following, to wit –
‘(a) Construction of one (1) power house building;
‘(b) Construction of three (3) reinforced concrete
foundation for three (3) units 350 KW diesel
engine generating set[s];
‘(c) Construction of three (3) reinforced concrete
foundation for the 5,000 KW and 1,250 KW turbo
generator sets;
‘(d) Complete overhauling and reconditioning tests
sum for three (3) 350 KW diesel engine generating
set[s];
‘(e) Installation of turbine and diesel generating
sets including transformer, switchboard, electrical
wirings and pipe provided those stated units are
completely supplied with their accessories;
‘(f) Relocating of 2,400 V transmission line,
demolition of all existing concrete foundation and
drainage canals, excavation, and earth fillings – all
for the total amount of P543,500.00 as evidenced
by a contract, [a] xerox copy of which is hereto
attached as Annex ‘A’ and made an integral part of
this complaint;’
that aside from the work contract mentioned-above, the
defendant PASUMIL required the plaintiff to perform extra
work, and provide electrical equipment and spare parts, such
as:
‘(a) Supply of electrical devices;
‘(b) Extra mechanical works;
‘(c) Extra fabrication works;
‘(d) Supply of materials and consumable items;
‘(e) Electrical shop repair;
‘(f) Supply of parts and related works for turbine
generator;
‘(g) Supply of electrical equipment for machinery;
‘(h) Supply of diesel engine parts and other related
works including fabrication of parts.’
that out of the total obligation of P777,263.80, the defendant
PASUMIL had paid only P250,000.00, leaving an unpaid
balance, as of June 27, 1973, amounting to P527,263.80, as
shown in the Certification of the chief accountant of the
PNB, a machine copy of which is appended as Annex ‘C’ of
the complaint; that out of said unpaid balance of
P527,263.80, the defendant PASUMIL made a partial
payment to the plaintiff of P14,000.00, in broken amounts,
covering the period from January 5, 1974 up to May 23,
1974, leaving an unpaid balance of P513,263.80; that the
defendant PASUMIL and the defendant PNB, and now the
defendant NASUDECO, failed and refused to pay the
plaintiff their just, valid and demandable obligation; that the
President of the NASUDECO is also the Vice-President of
the PNB, and this official holds office at the 10th Floor of
the PNB, Escolta, Manila, and plaintiff besought this official
to pay the outstanding obligation of the defendant
PASUMIL, inasmuch as the defendant PNB and
NASUDECO now owned and possessed the assets of the
defendant PASUMIL, and these defendants all benefited
from the works, and the electrical, as well as the engineering
and repairs, performed by the plaintiff; that because of the
failure and refusal of the defendants to pay their just, valid,
and demandable obligations, plaintiff suffered actual
damages in the total amount of P513,263.80; and that in
order to recover these sums, the plaintiff was compelled to
engage the professional services of counsel, to whom the
plaintiff agreed to pay a sum equivalent to 25% of the
amount of the obligation due by way of attorney’s fees.
Accordingly, the plaintiff prayed that judgment be rendered
against the defendants PNB, NASUDECO, and PASUMIL,
jointly and severally to wit:
‘(1) Sentencing the defendants to pay the plaintiffs
the sum of P513,263.80, with annual interest of
14% from the time the obligation falls due and
demandable;
‘(2) Condemning the defendants to pay attorney’s
fees amounting to 25% of the amount claim;
‘(3) Ordering the defendants to pay the costs of the
suit.’
"The defendants PNB and NASUDECO filed a joint motion
to dismiss the complaint chiefly on the ground that the
complaint failed to state sufficient allegations to establish a
cause of action against both defendants, inasmuch as there is
lack or want of privity of contract between the plaintiff and
the two defendants, the PNB and NASUDECO, said
defendants citing Article 1311 of the New Civil Code, and
the case law ruling in Salonga v. Warner Barnes & Co., 88
Phil. 125; and Manila Port Service, et al. v. Court of
Appeals, et al., 20 SCRA 1214.
"The motion to dismiss was by the court a quo denied in its
Order of November 27, 1980; in the same order, that court
directed the defendants to file their answer to the complaint
within 15 days.
"In their answer, the defendant NASUDECO reiterated the
grounds of its motion to dismiss, to wit:
‘That the complaint does not state a sufficient
cause of action against the defendant NASUDECO
because: (a) NASUDECO is not x x x privy to the
various electrical construction jobs being sued
upon by the plaintiff under the present complaint;
(b) the taking over by NASUDECO of the assets
of defendant PASUMIL was solely for the purpose
of reconditioning the sugar central of defendant
PASUMIL pursuant to martial law powers of the
President under the Constitution; (c) nothing in the
LOI No. 189-A (as well as in LOI No. 311)
authorized or commanded the PNB or its
subsidiary corporation, the NASUDECO, to
assume the corporate obligations of PASUMIL as
that being involved in the present case; and, (d) all
that was mentioned by the said letter of instruction
insofar as the PASUMIL liabilities [were]
concerned [was] for the PNB, or its subsidiary
corporation the NASUDECO, to make a study of,
and submit [a] recommendation on the problems
concerning the same.’
"By way of counterclaim, the NASUDECO averred that by
reason of the filing by the plaintiff of the present suit, which
it [labeled] as unfounded or baseless, the defendant
NASUDECO was constrained to litigate and incur litigation
expenses in the amount of P50,000.00, which plaintiff
should be sentenced to pay. Accordingly, NASUDECO
prayed that the complaint be dismissed and on its
counterclaim, that the plaintiff be condemned to pay
P50,000.00 in concept of attorney’s fees as well as
exemplary damages.
"In its answer, the defendant PNB likewise reiterated the
grounds of its motion to dismiss, namely: (1) the complaint
states no cause of action against the defendant PNB; (2) that
PNB is not a party to the contract alleged in par. 6 of the
complaint and that the alleged services rendered by the
plaintiff to the defendant PASUMIL upon which plaintiff’s
suit is erected, was rendered long before PNB took
possession of the assets of the defendant PASUMIL under
LOI No. 189-A; (3) that the PNB take-over of the assets of
the defendant PASUMIL under LOI 189-A was solely for
the purpose of reconditioning the sugar central so that
PASUMIL may resume its operations in time for the 1974-
75 milling season, and that nothing in the said LOI No. 189-
A, as well as in LOI No. 311, authorized or directed PNB to
assume the corporate obligation/s of PASUMIL, let alone
that for which the present action is brought; (4) that PNB’s
management and operation under LOI No. 311 did not refer
to any asset of PASUMIL which the PNB had to acquire and
thereafter [manage], but only to those which were foreclosed
by the DBP and were in turn redeemed by the PNB from the
DBP; (5) that conformably to LOI No. 311, on August 15,
1975, the PNB and the Development Bank of the Philippines
(DBP) entered into a ‘Redemption Agreement’ whereby
DBP sold, transferred and conveyed in favor of the PNB, by
way of redemption, all its (DBP) rights and interest in and
over the foreclosed real and/or personal properties of
PASUMIL, as shown in Annex ‘C’ which is made an
integral part of the answer; (6) that again, conformably with
LOI No. 311, PNB pursuant to a Deed of Assignment dated
October 21, 1975, conveyed, transferred, and assigned for
valuable consideration, in favor of NASUDECO, a distinct
and independent corporation, all its (PNB) rights and interest
in and under the above ‘Redemption Agreement.’ This is
shown in Annex ‘D’ which is also made an integral part of
the answer; [7] that as a consequence of the said Deed of
Assignment, PNB on October 21, 1975 ceased to managed
and operate the above-mentioned assets of PASUMIL,
which function was now actually transferred to
NASUDECO. In other words, so asserted PNB, the
complaint as to PNB, had become moot and academic
because of the execution of the said Deed of Assignment; [8]
that moreover, LOI No. 311 did not authorize or direct PNB
to assume the corporate obligations of PASUMIL, including
the alleged obligation upon which this present suit was
brought; and [9] that, at most, what was granted to PNB in
this respect was the authority to ‘make a study of and submit
recommendation on the problems concerning the claims of
PASUMIL creditors,’ under sub-par. 5 LOI No. 311.
 "In its counterclaim, the PNB averred that it was
unnecessarily constrained to litigate and to incur expenses in
this case, hence it is entitled to claim attorney’s fees in the
amount of at least P50,000.00. Accordingly, PNB prayed
that the complaint be dismissed; and that on its counterclaim,
that the plaintiff be sentenced to pay defendant PNB the sum
of P50,000.00 as attorney’s fees, aside from exemplary
damages in such amount that the court may seem just and
equitable in the premises.
"Summons by publication was made via the Philippines
Daily Express, a newspaper with editorial office at 371
Bonifacio Drive, Port Area, Manila, against the defendant
PASUMIL, which was thereafter declared in default as
shown in the August 7, 1981 Order issued by the Trial
Court.
"After due proceedings, the Trial Court rendered judgment,
the decretal portion of which reads:
‘WHEREFORE, judgment is hereby rendered in
favor of plaintiff and against the defendant
Corporation, Philippine National Bank (PNB)
NATIONAL SUGAR DEVELOPMENT
CORPORATION (NASUDECO) and
PAMPANGA SUGAR MILLS (PASUMIL),
ordering the latter to pay jointly and severally the
former the following:
‘1. The sum of P513,623.80 plus interest
thereon at the rate of 14% per annum as
claimed from September 25, 1980 until
fully paid;
‘2. The sum of P102,724.76 as
attorney’s fees; and,
‘3. Costs.
‘SO ORDERED.
‘Manila, Philippines, September 4, 1986.
'(SGD) ERNESTO S. TENGCO
‘Judge’"3
Ruling of the Court of Appeals
Affirming the trial court, the CA held that it was offensive to the basic
tenets of justice and equity for a corporation to take over and operate
the business of another corporation, while disavowing or repudiating
any responsibility, obligation or liability arising therefrom. 4
Hence, this Petition.5
Issues
In their Memorandum, petitioners raise the following errors for the
Court’s consideration:
"I
The Court of Appeals gravely erred in law in holding the
herein petitioners liable for the unpaid corporate debts of
PASUMIL, a corporation whose corporate existence has not
been legally extinguished or terminated, simply because of
petitioners[’] take-over of the management and operation of
PASUMIL pursuant to the mandates of LOI No. 189-A, as
amended by LOI No. 311.
"II
The Court of Appeals gravely erred in law in not applying
[to] the case at bench the ruling enunciated in Edward J. Nell
Co. v. Pacific Farms, 15 SCRA 415."6
Succinctly put, the aforesaid errors boil down to the principal issue of
whether PNB is liable for the unpaid debts of PASUMIL to
respondent.
This Court’s Ruling
The Petition is meritorious.
Main Issue:
Liability for Corporate Debts
As a general rule, questions of fact may not be raised in a petition for
review under Rule 45 of the Rules of Court.7 To this rule, however,
there are some exceptions enumerated in Fuentes v. Court of
Appeals.8 After a careful scrutiny of the records and the pleadings
submitted by the parties, we find that the lower courts misappreciated
the evidence presented.9 Overlooked by the CA were certain relevant
facts that would justify a conclusion different from that reached in the
assailed Decision.10
Petitioners posit that they should not be held liable for the corporate
debts of PASUMIL, because their takeover of the latter’s foreclosed
assets did not make them assignees. On the other hand, respondent
asserts that petitioners and PASUMIL should be treated as one entity
and, as such, jointly and severally held liable for PASUMIL’s unpaid
obligation.1âwphi1.nêt
As a rule, a corporation that purchases the assets of another will not be
liable for the debts of the selling corporation, provided the former
acted in good faith and paid adequate consideration for such assets,
except when any of the following circumstances is present: (1) where
the purchaser expressly or impliedly agrees to assume the 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
fraudulently entered into in order to escape liability for those debts. 11
Piercing the Corporate
Veil Not Warranted
A corporation is an artificial being created by operation of law. It
possesses the right of succession and such powers, attributes, and
properties expressly authorized by law or incident to its existence. 12 It
has a personality separate and distinct from the persons composing it,
as well as from any other legal entity to which it may be related. 13 This
is basic.
Equally well-settled is the principle that the corporate mask may be
removed or the corporate veil pierced when the corporation is just an
alter ego of a person or of another corporation.14 For reasons of public
policy and in the interest of justice, the corporate veil will justifiably
be impaled15 only when it becomes a shield for fraud, illegality or
inequity committed against third persons.16
Hence, any application of the doctrine of piercing the corporate veil
should be done with caution.17 A court should be mindful of the milieu
where it is to be applied.18 It must be certain that the corporate fiction
was misused to such an extent that injustice, fraud, or crime was
committed against another, in disregard of its rights. 19 The wrongdoing
must be clearly and convincingly established; it cannot be
presumed.20 Otherwise, an injustice that was never unintended may
result from an erroneous application.21
This Court has pierced the corporate veil to ward off a judgment
credit,22 to avoid inclusion of corporate assets as part of the estate of
the decedent,23 to escape liability arising from a debt,24 or to perpetuate
fraud and/or confuse legitimate issues25 either to promote or to shield
unfair objectives26 or to cover up an otherwise blatant violation of the
prohibition against forum-shopping.27 Only in these and similar
instances may the veil be pierced and disregarded. 28
The question of whether a corporation is a mere alter ego is one of
fact.29 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 plaintiff’s legal right; and (3) the
said control and breach of duty must have proximately caused the
injury or unjust loss complained of.30
We believe that the absence of the foregoing elements in the present
case precludes the piercing of the corporate veil. First, other than the
fact that petitioners acquired the assets of PASUMIL, there is no
showing that their control over it warrants the disregard of corporate
personalities.31 Second, there is no evidence that their juridical
personality was used to commit a fraud or to do a wrong; or that the
separate corporate entity was farcically used as a mere alter ego,
business conduit or instrumentality of another entity or person. 32 Third,
respondent was not defrauded or injured when petitioners acquired the
assets of PASUMIL.33
Being the party that asked for the piercing of the corporate veil,
respondent had the burden of presenting clear and convincing evidence
to justify the setting aside of the separate corporate personality
rule.34 However, it utterly failed to discharge this burden;35 it failed to
establish by competent evidence that petitioner’s separate corporate
veil had been used to conceal fraud, illegality or inequity. 36
While we agree with respondent’s claim that the assets of the National
Sugar Development Corporation (NASUDECO) can be easily traced
to PASUMIL,37 we are not convinced that the transfer of the latter’s
assets to petitioners was fraudulently entered into in order to escape
liability for its debt to respondent.38
A careful review of the records reveals that DBP foreclosed the
mortgage executed by PASUMIL and acquired the assets as the
highest bidder at the public auction conducted.39 The bank was justified
in foreclosing the mortgage, because the PASUMIL account had
incurred arrearages of more than 20 percent of the total outstanding
obligation.40 Thus, DBP had not only a right, but also a duty under the
law to foreclose the subject properties.41
Pursuant to LOI No. 189-A42 as amended by LOI No. 311,43 PNB
acquired PASUMIL’s assets that DBP had foreclosed and purchased in
the normal course. Petitioner bank was likewise tasked to manage
temporarily the operation of such assets either by itself or through a
subsidiary corporation.44
PNB, as the second mortgagee, redeemed from DBP the foreclosed
PASUMIL assets pursuant to Section 6 of Act No. 3135.45 These assets
were later conveyed to PNB for a consideration, the terms of which
were embodied in the Redemption Agreement.46 PNB, as successor-in-
interest, stepped into the shoes of DBP as PASUMIL’s creditor. 47 By
way of a Deed of Assignment,48 PNB then transferred to NASUDECO
all its rights under the Redemption Agreement.
In Development Bank of the Philippines v. Court of Appeals,49 we had
the occasion to resolve a similar issue. We ruled that PNB, DBP and
their transferees were not liable for Marinduque Mining’s unpaid
obligations to Remington Industrial Sales Corporation (Remington)
after the two banks had foreclosed the assets of Marinduque Mining.
We likewise held that Remington failed to discharge its burden of
proving bad faith on the part of Marinduque Mining to justify the
piercing of the corporate veil.
In the instant case, the CA erred in affirming the trial court’s lifting of
the corporate mask.50 The CA did not point to any fact evidencing bad
faith on the part of PNB and its transferee.51 The corporate fiction was
not used to defeat public convenience, justify a wrong, protect fraud or
defend crime.52 None of the foregoing exceptions was shown to exist in
the present case.53 On the contrary, the lifting of the corporate veil
would result in manifest injustice. This we cannot allow.
No Merger or Consolidation
Respondent further claims that petitioners should be held liable for the
unpaid obligations of PASUMIL by virtue of LOI Nos. 189-A and
311, which expressly authorized PASUMIL and PNB to merge or
consolidate. On the other hand, petitioners contend that their takeover
of the operations of PASUMIL did not involve any corporate merger
or consolidation, because the latter had never lost its separate identity
as a corporation.
A consolidation is the union of two or more existing entities to form a
new entity called the consolidated corporation. A merger, on the other
hand, is a union whereby one or more existing corporations are
absorbed by another corporation that survives and continues the
combined business.54
The merger, however, does not become effective upon the mere
agreement of the constituent corporations.55 Since a merger or
consolidation involves fundamental changes in the corporation, as well
as in the rights of stockholders and creditors, there must be an express
provision of law authorizing them.56 For a valid merger or
consolidation, the approval by the Securities and Exchange
Commission (SEC) of the articles of merger or consolidation is
required.57 These articles must likewise be duly approved by a majority
of the respective stockholders of the constituent corporations. 58
In the case at bar, we hold that there is no merger or consolidation with
respect to PASUMIL and PNB. The procedure prescribed under Title
IX of the Corporation Code59 was not followed.
In fact, PASUMIL’s corporate existence, as correctly found by the
CA, had not been legally extinguished or terminated. 60 Further, prior to
PNB’s acquisition of the foreclosed assets, PASUMIL had previously
made partial payments to respondent for the former’s obligation in the
amount of P777,263.80. As of June 27, 1973, PASUMIL had paid
P250,000 to respondent and, from January 5, 1974 to May 23, 1974,
another P14,000.
Neither did petitioner expressly or impliedly agree to assume the debt
of PASUMIL to respondent.61 LOI No. 11 explicitly provides that PNB
shall study and submit recommendations on the claims of PASUMIL’s
creditors.62 Clearly, the corporate separateness between PASUMIL and
PNB remains, despite respondent’s insistence to the contrary. 63
WHEREFORE, the Petition is hereby GRANTED and the assailed
Decision SET ASIDE. No pronouncement as to costs.
SO ORDERED.
G.R. No. 195615               April 21, 2014
BANK OF COMMERCE, Petitioner,
vs.
RADIO PHILIPPINES NETWORK, INC.,
INTERCONTINENTAL BROADCASTING CORPORATION,
and BANAHA W BROADCASTING CORPORATION, THRU
BOARD OF ADMINISTRATOR, and SHERIFF BIENVENIDO
S. REYES, JR., Sheriff, Regional Trial Court of Quezon City,
Branch 98, Respondents.
DECISION
ABAD, J.:
In late 2001 the Traders Royal Bank (TRB) proposed to sell to
petitioner Bank of Commerce (Bancommerce) for ₱10.4 billion its
banking business consisting of specified assets and liabilities.
Bancommerce agreed subject to prior Bangko Sentral ng Pilipinas'
(BSP's) approval of their Purchase and Assumption (P & A)
Agreement. On November 8, 2001 the BSP approved that agreement
subject to the condition that Bancommerce and TRB would set up an
escrow fund of PSO million with another bank to cover TRB liabilities
for contingent claims that may subsequently be adjudged against it,
which liabilities were excluded from the purchase.
Specifically, the BSP Monetary Board Min. No. 58 (MB Res. 58)
decided as follows:
1. To approve the revised terms sheet as finalized on September 21,
2001 granting certain incentives pursuant to Circular No. 237, series of
2000 to serve as a basis for the final Purchase and Assumption (P & A)
Agreement between the Bank of Commerce (BOC) and Traders Royal
Bank (TRB); subject to inclusion of the following provision in the P &
A:
The parties to the P & A had considered other potential liabilities
against TRB, and to address these claims, the parties have agreed to set
up an escrow fund amounting to Fifty Million Pesos (₱50,000,000.00)
in cash to be invested in government securities to answer for any such
claim that shall be judicially established, which fund shall be kept for
15 years in the trust department of any other bank acceptable to the
BSP. Any deviation therefrom shall require prior approval from the
Monetary Board.
xxxx
Following the above approval, on November 9, 2001 Bancommerce
entered into a P & A Agreement with TRB and acquired its specified
assets and liabilities, excluding liabilities arising from judicial actions
which were to be covered by the BSP-mandated escrow of ₱50
million.
To comply with the BSP mandate, on December 6, 2001 TRB placed
₱50 million in escrow with Metropolitan Bank and Trust Co.
(Metrobank) to answer for those claims and liabilities that were
excluded from the P & A Agreement and remained with TRB.
Accordingly, the BSP finally approved such agreement on July 3,
2002.
Shortly after or on October 10, 2002, acting in G.R. 138510, Traders
Royal Bank v. Radio Philippines Network (RPN), Inc., this Court
ordered TRB to pay respondents RPN, Intercontinental Broadcasting
Corporation, and Banahaw Broadcasting Corporation (collectively,
RPN, et al.) actual damages of ₱9,790,716.87 plus 12% legal interest
and some amounts. Based on this decision, RPN, et al.filed a motion
for execution against TRB before the Regional Trial Court (RTC) of
Quezon City. But rather than pursue a levy in execution of the
corresponding amounts on escrow with Metrobank, RPN, et al. filed a
Supplemental Motion for Execution1 where they described TRB as
"now Bank of Commerce" based on the assumption that TRB had been
merged into Bancommerce.
On February 20, 2004, having learned of the supplemental application
for execution, Bancommerce filed its Special Appearance with
Opposition to the same2 questioning the jurisdiction of the RTC over
Bancommerce and denying that there was a merger between TRB and
Bancommerce. On August 15, 2005 the RTC issued an Order3 granting
and issuing the writ of execution to cover any and all assets of TRB,
"including those subject of the merger/consolidation in the guise of a
Purchase and Sale Agreement with Bank of Commerce, and/or against
the Escrow Fund established by TRB and Bank of Commerce with the
Metropolitan Bank and Trust Company."
This prompted Bancommerce to file a petition for certiorari with the
Court of Appeals (CA) in CA-G.R. SP 91258 assailing the RTC’s
Order. On December 8, 2009 the CA4 denied the petition. The CA
pointed out that the Decision of the RTC was clear in that
Bancommerce was not being made to answer for the liabilities of TRB,
but rather the assets or properties of TRB under its possession and
custody.5
In the same Decision, the CA modified the Decision of the RTC by
deleting the phrase that the P & A Agreement between TRB and
Bancommerce is a farce or "a mere tool to effectuate a merger and/or
consolidation between TRB and BANCOM." The CA Decision partly
reads:
xxxx
We are not prepared though, unlike the respondent Judge, to declare
the PSA between TRB and BANCOM as a farce or "a mere tool to
effectuate a merger and/or consolidation" of the parties to the PSA.
There is just a dearth of conclusive evidence to support such a finding,
at least at this point. Consequently, the statement in the dispositive
portion of the assailed August 15, 2005 Order referring to a
merger/consolidation between TRB and BANCOM is deleted. 6
xxxx
WHEREFORE, the herein consolidated Petitions are DENIED. The
assailed Orders dated August 15, 2005 and February 22, 2006 of the
respondent Judge, are AFFIRMED with the MODIFICATION that the
pronouncement of respondent Judge in the August 15, 2005 Order that
the PSA between TRB and BANCOM is a farce or "a mere tool to
effectuate a merger and/or consolidation between TRB and
BANCOM" is DELETED.
SO ORDERED.7
On January 8, 2010 RPN, et al. filed with the RTC a motion to cause
the issuance of an alias writ of execution against Bancommerce based
on the CA Decision. The RTC granted8 the motion on February 19,
2010 on the premise that the CA Decision allowed it to execute on the
assets that Bancommerce acquired from TRB under their P & A
Agreement.
On March 10, 2010 Bancommerce sought reconsideration of the RTC
Order considering that the December 8,2009 CA Decision actually
declared that no merger existed between TRB and Bancommerce. But,
since the RTC had already issued the alias writ on March 9, 2010
Bancommerce filed on March 16, 2010 a motion to quash the same,
followed by supplemental Motion9 on April 29, 2010.
On August 18, 2010 the RTC issued the assailed Order10 denying
Bancommerce pleas and, among others, directing the release to the
Sheriff of Bancommerce’s "garnished monies and shares of stock or
their monetary equivalent" and for the sheriff to pay 25% of the
amount "to the respondents’ counsel representing his attorney’s fees
and ₱200,000.00 representing his appearance fees and litigation
expenses" and the balance to be paid to the respondents after deducting
court dues.
Aggrieved, Bancommerce immediately elevated the RTC Order to the
CA via a petition for certiorari under Rule 65 to assail the Orders dated
February 19, 2010 and August 18, 2010. On November 26, 2010 the
CA11 dismissed the petition outright for the supposed failure of
Bancommerce to file a motion for reconsideration of the assailed
order. The CA denied Bancommerce’s motion for reconsideration on
February 9, 2011, prompting it to come to this Court.
The issues this case presents are:
1. Whether or not the CA gravely erred in holding that
Bancommerce had no valid excuse in failing to file the
required motion for reconsideration of the assailed RTC
Order before coming to the CA; and
2. Whether or not the CA gravely erred in failing to rule that
the RTC’s Order of execution against Bancommerce was a
nullity because the CA Decision of December 8, 2009 in
CA-G.R. SP 91258 held that TRB had not been merged into
Bancommerce as to make the latter liable for TRB’s
judgment debts.
Direct filing of the petition for
certiorari by Bancommerce
Section 1, Rule 65 of the Rules of Court provides that a petition for
certiorari may only be filed when there is no plain, speedy, and
adequate remedy in the course of law. Since a motion for
reconsideration is generally regarded as a plain, speedy, and adequate
remedy, the failure to first take recourse to is usually regarded as fatal
omission.
But Bancommerce invoked certain recognized exceptions to the
rule.12 It had to forego the filing of the required motion for
reconsideration of the assailed RTC Order because a) there was an
urgent necessity for the CA to resolve the questions it raised and any
further delay would prejudice its interests; b) under the circumstances,
a motion for reconsideration would have been useless; c)
Bancommerce had been deprived of its right to due process when the
RTC issued the challenged order ex parte, depriving it of an
opportunity to object; and d) the issues raised were purely of law.
In this case, the records amply show that Bancommerce’s action fell
within the recognized exceptions to the need to file a motion for
reconsideration before filing a petition for certiorari.
First. The filing of a motion for reconsideration would be redundant
since actually the RTC’s August 18, 2010 Order amounts to a denial of
Bancommerce motion for reconsideration of the February 19, 2010
Order which granted the application for the issuance of the alias writ.
Significantly, the alias writ of execution itself, the quashal of which
was sought by Bancommerce two times (via a motion to quash the writ
and a supplemental motion to quash the writ) derived its existence
from the RTC’s February 19, 2010 Order. Another motion for
reconsideration would have been superfluous. The RTC had not budge
on those issues in the preceding incidents. There was no point in
repeatedly asking it to reconsider.
Second. An urgent necessity for the immediate resolution of the case
by the CA existed because any further delay would have greatly
prejudiced Bancommerce. The Sheriff had been resolute and relentless
in trying to execute the judgment and dispose of the levied assets of
Bancommerce. Indeed, on April 22, 2010 the Sheriff started garnishing
Bancommerce’s deposits in other banks, including those in Banco de
Oro-Salcedo-Legaspi Branch and in the Bank of the Philippine Islands
Ayala Paseo Branch.
Further, the Sheriff forcibly levied on Bancommerce’s Lipa Branch
cash on hand amounting to ₱1,520,000.00 and deposited the same with
the Landbank. He also seized the bank’s computers, printers, and
monitors, causing the temporary cessation of its banking operations in
that branch and putting the bank in an unwarranted danger of a run.
Clearly, Bancommerce had valid justifications for skipping the
technical requirement of a motion for reconsideration.
Merger and De Facto Merger
Merger is a re-organization of two or more corporations that results in
their consolidating into a single corporation, which is one of the
constituent corporations, one disappearing or dissolving and the other
surviving. To put it another way, merger is the absorption of one or
more corporations by another existing corporation, which retains its
identity and takes over the rights, privileges, franchises, properties,
claims, liabilities and obligations of the absorbed corporation(s). The
absorbing corporation continues its existence while the life or lives of
the other corporation(s) is or are terminated. 13
The Corporation Code requires the following steps for merger or
consolidation:
(1) The board of each corporation draws up a plan of merger
or consolidation. Such plan must include any amendment, if
necessary, to the articles of incorporation of the surviving
corporation, or in case of consolidation, all the statements
required in the articles of incorporation of a corporation.
(2) Submission of plan to stockholders or members of each
corporation for approval. A meeting must be called and at
least two (2) weeks’ notice must be sent to all stockholders
or members, personally or by registered mail. A summary of
 the plan must be attached to the notice. Vote of two-thirds of
the members or of stockholders representing two thirds of
the outstanding capital stock will be needed. Appraisal
rights, when proper, must be respected.
(3) Execution of the formal agreement, referred to as the
articles of merger o[r] consolidation, by the corporate
officers of each constituent corporation. These take the place
of the articles of incorporation of the consolidated
corporation, or amend the articles of incorporation of the
surviving corporation.
(4) Submission of said articles of merger or consolidation to
the SEC for approval.
(5) If necessary, the SEC shall set a hearing, notifying all
corporations concerned at least two weeks before.
(6) Issuance of certificate of merger or consolidation. 14
Indubitably, it is clear that no merger took place between
Bancommerce and TRB as the requirements and procedures for a
merger were absent. A merger does not become effective upon the
mere agreement of the constituent corporations. 15 All the requirements
specified in the law must be complied with in order for merger to take
effect. Section 79 of the Corporation Code further provides that the
merger shall be effective only upon the issuance by the Securities and
Exchange Commission (SEC) of a certificate of merger.
Here, Bancommerce and TRB remained separate corporations with
distinct corporate personalities. What happened is that TRB sold and
Bancommerce purchased identified recorded assets of TRB in
consideration of Bancommerce’s assumption of identified recorded
liabilities of TRB including booked contingent accounts. There is no
law that prohibits this kind of transaction especially when it is done
openly and with appropriate government approval. Indeed, the
dissenting opinions of Justices Jose Catral Mendoza and Marvic Mario
Victor F. Leonen are of the same opinion. In strict sense, no merger or
consolidation took place as the records do not show any plan or
articles of merger or consolidation. More importantly, the SEC did not
issue any certificate of merger or consolidation.
The dissenting opinion of Justice Mendoza finds, however, that a "de
facto" merger existed between TRB and Bancommerce considering
that (1) the P & A Agreement between them involved substantially all
the assets and liabilities of TRB; (2) in an Ex Parte Petition for
Issuance of Writ of Possession filed in a case, Bancommerce qualified
TRB, the petitioner, with the words "now known as Bancommerce;"
and (3) the BSP issued a Circular Letter (series of 2002) advising all
banks and non-bank financial intermediaries that the banking activities
and transaction of TRB and Bancommerce were consolidated and that
the latter continued the operations of the former.
The idea of a de facto merger came about because, prior to the present
Corporation Code, no law authorized the merger or consolidation of
Philippine Corporations, except insurance companies, railway
corporations, and public utilities.16 And, except in the case of insurance
corporations, no procedure existed for bringing about a merger. 17 Still,
the Supreme Court held in Reyes v. Blouse,18 that authority to merge
or consolidate can be derived from Section 28½ (now Section 40) of
the former Corporation Law which provides, among others, that a
corporation may "sell, exchange, lease or otherwise dispose of all or
substantially all of its property and assets" if the board of directors is
so authorized by the affirmative vote of the stockholders holding at
least two-thirds of the voting power. The words "or otherwise dispose
of," according to the Supreme Court, is very broad and in a sense,
covers a merger or consolidation.
But the facts in Reyes show that the Board of Directors of the
Corporation being dissolved clearly intended to be merged into the
other corporations. Said this Court:
It is apparent that the purpose of the resolution is not to dissolve the
[company] but merely to transfer its assets to a new corporation in
exchange for its corporation stock. This intent is clearly deducible
from the provision that the [company] will not be dissolved but will
continue existing until its stockholders decide to dissolve the same.
This comes squarely within the purview of Section 28½ of the
corporation law which provides, among others, that a corporation may
sell, exchange, lease, or otherwise dispose of all its property and
assets, including its good will, upon such terms and conditions as its
Board of Directors may deem expedient when authorized by the
affirmative vote of the shareholders holding at least 2/3 of the voting
power. [The phrase] "or otherwise dispose of" is very broad and in a
sense covers a merger or consolidation."19
In his book, Philippine Corporate Law,20 Dean Cesar Villanueva
explained that under the Corporation Code, "a de facto merger can be
pursued by one corporation acquiring all or substantially all of the
properties of another corporation in exchange of shares of stock of the
acquiring corporation. The acquiring corporation would end up with
the business enterprise of the target corporation; whereas, the target
corporation would end up with basically its only remaining assets
being the shares of stock of the acquiring corporation." (Emphasis
supplied)
No de facto merger took place in the present case simply because the
TRB owners did not get in exchange for the bank’s assets and
liabilities an equivalent value in Bancommerce shares of stock.
Bancommerce and TRB agreed with BSP approval to exclude from the
sale the TRB’s contingent judicial liabilities, including those owing to
RPN, et al.21
The Bureau of Internal Revenue (BIR) treated the transaction between
the two banks purely as a sale of specified assets and liabilities when it
rendered its opinion22 on the tax consequences of the transaction given
that there is a difference in tax treatment between a sale and a merger
or consolidation.
Indubitably, since the transaction between TRB and Bancommerce
was neither a merger nor a de facto merger but a mere "sale of assets
with assumption of liabilities," the next question before the Court is
whether or not the RTC could regard Bancommerce as RPN, et al.’s
judgment debtor.
It is pointed out that under common law,23 if one corporation sells or
otherwise transfers all its assets to another corporation, the latter is not
liable for the debts and liabilities of the transferor if it has acted in
good faith and has paid adequate consideration for the assets, 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. 24
But, in the first place, common law has no application in this
jurisdiction where existing statutes governing the situation are in place.
Secondly, none of the cited exceptions apply to this case.
1. Bancommerce agreed to assume those liabilities of TRB that are
specified in their P & A Agreement. That agreement specifically
excluded TRB’s contingent liabilities that the latter might have arising
from pending litigations in court, including the claims of respondent
RPN, et al.
The pertinent provision of the P & A provides:
Article II
CONSIDERATION: ASSUMPTION OF LIABILITIES
In consideration of the sale of identified recorded assets and properties
covered by this Agreement, BANCOMMERCE shall assume
identified recorded TRB’s liabilities including booked contingent
liabilities as listed and referred to in its Consolidated Statement of
Condition as of August 31, 2001, in the total amount of PESOS: TEN
BILLION FOUR HUNDRED ONE MILLION FOUR HUNDRED
THIRTY SIX THOUSAND (₱10,410,436,000.00), provided that the
liabilities so assumed shall not include:
xxxx
2. Items in litigation, both actual and prospective, against TRB which
include but not limited to the following:
2.1 Claims of sugar planters for alleged under
valuation of sugar export sales x x x;
2.2 Claims of the Republic of the Philippines for
peso-denominated certificates supposed to have
been placed by the Marcos family with TRB;
2.3 Other liabilities not included in said
Consolidated Statement of Condition; and
2.4 Liabilities accruing after the effectivity date of
this Agreement that were not incurred in the
ordinary course of business.25 (Underscoring
supplied)
2. As already pointed out above, the sale did not amount to merger or
de facto merger of Bancommerce and TRB since the elements required
of both were not present.
3. The evidence in this case fails to show that Bancommerce was a
mere continuation of TRB. TRB retained its separate and distinct
identity after the purchase. Although it subsequently changed its name
to Traders Royal Holding’s, Inc. such change did not result in its
dissolution. "The changing of the name of a corporation is no more
than creation of a corporation than the changing of the name of a
natural person is the begetting of a natural person. The act, in both
cases, would seem to be what the language which we use to designate
it imports—a change of name and not a change of being." 26 As such,
Bancommerce and TRB remained separate corporations.
4. To protect contingent claims, the BSP directed Bancommerce and
TRB to put up ₱50 million in escrow with another bank. It was the
BSP, not Bancommerce that fixed the amount of the escrow.
Consequently, it cannot be said that the latter bank acted in bad faith
with respect to the excluded liabilities. They did not enter into the P &
A Agreement to enable TRB to escape from its liability to creditors
with pending court cases.
Further, even without the escrow, TRB continued to be liable to its
creditors although under its new name. Parenthetically, the P & A
Agreement shows that Bancommerce acquired greater amount of TRB
liabilities than assets. Article II of the P & A Agreement shows that
Bancommerce assumed total liabilities of ₱10,401,436,000.00 while it
received total assets of only ₱10,262,154,000.00. This proves the arms
length quality of the transaction.
The dissenting opinion of Justice Mendoza cites certain instances
indicating the existence of a de facto merger in this case. One of these
is the fact that the P & A Agreement involved substantially all the
assets and liabilities of TRB. But while this is true, such fact alone
would not prove the existence of a de facto merger because a
corporation "does not really lose its juridical entity" 27 on account of
such sale. Actually, the law allows a corporation to "sell, lease,
exchange, mortgage, pledge or otherwise dispose of all or substantially
all of its properties and assets including its goodwill" to another
corporation.28 This is not merger because it recognizes the separate
existence of the two corporations that transact the sale.
The dissenting opinion of Justice Mendoza claims that another proof
of a de facto merger is that in a case, Bancommerce qualified TRB in
its Ex Parte Petition for Issuance of Writ of Possession with the words
"now known as Bancommerce." But paragraph 3 of the Ex Parte
Petition shows the context in which such qualification was made. It
reads:29
3. On November 09, 2001, Bank of Commerce and Traders Royal
Bank executed and signed a Purchase and Sale Agreement. The
account of the mortgagor was among those acquired under the
agreement. Photocopy of the agreement is hereto attached as Annex
"A."
It is thus clear that the phrase "now known as Bank of Commerce"
used in the petition served only to indicate that Bancommerce is now
the former property owner’s creditor that filed the petition for writ of
possession as a result of the P & A Agreement. It does not indicate a
merger.
Lastly, the dissenting opinion of Justice Mendoza cited the Circular
Letter (series of 2002) issued by the BSP advising all banks and non-
bank financial intermediaries that the banking activities and
transaction of TRB and Bancommerce were consolidated and that the
latter continued the operations of the former as an indication of a de
facto merger. The Circular Letter30 reads:
CIRCULAR LETTER
(series of 2002)
TO: ALL BANK AND NON-BANK
FINANCIAL INTERMEDIARIES
The Securities and Exchange Commission approved on August 15,
2002 the Amendment of the Articles of Incorporation and By-Laws of
Traders Royal Bank on the deletion of the term "banks" and "banking"
from the corporate name and purpose, pursuant to the purchase of
assets and assumption of liabilities of Traders Royal Bank by Bank of
Commerce. Accordingly, the bank franchise of Traders Royal Bank
has been automatically revoked and Traders Royal Bank has ceased to
operate as a banking entity.
Effective July 3, 2002, the banking activities and transactions of Bank
of Commerce and Traders Royal Bank have been consolidated and the
former has carried their operations since then.
For your information and guidance.
(Sgd.)
ALBERTO V. REYES
Deputy Governor
Indeed, what was "consolidated" per the above letter was the banking
activities and transactions of Bancommerce and TRB, not their
corporate existence. The BSP did not remotely suggest a merger of the
two corporations. What controls the relationship between those
corporations cannot be the BSP letter circular, which had been issued
without their participation, but the terms of their P & A Agreement
that the BSP approved through its Monetary Board.
Also, in a letter dated November 2,2005 Atty. Juan De Zuñiga, Jr.,
Assistant Governor and General Counsel of the BSP, clarified to the
RTC the use of the word "merger" in their January 29, 2003 letter.
According to him, the word "merger" was used "in a very loose sense
x x x and merely repeated, for convenience" the term used by the
RTC.31 It further stated that "Atty. Villanueva did not issue any legal
pronouncement in the said letter, which is merely transmittal in nature.
Thus it cannot, by any stretch of construction, be considered as
binding on the BSP. What is binding to the BSP is MB Res. 58
referring to the aforementioned transaction between TRB and
Bancommerce as a purchase and assumption agreement." 32
Since there had been no merger, Bancommerce cannot be considered
as TRB’s successor-in-interest and against which the Court’s Decision
of October 10, 2002 in G.R. 138510 may been forced. Bancommerce
did not hold the former TRBs assets in trust for it as to subject them to
garnishment for the satisfaction of the latter’s liabilities to RPN, et al.
Bancommerce bought and acquired those assets and thus, became their
absolute owner.
made to answer for TRB’s judgment credit but "the assets/properties
of TRB in the hands of BANCOM." The CA then went on to state that
it is not prepared, unlike the RTC, to declare the P & A Agreement but
a farce or a "mere tool to effectuate a merger and/or consolidation."
Thus, the CA deleted the RTC’s reliance on such supposed merger or
consolidation between the two as a basis for its questioned order.
The enforcement, therefore, of the decision in the main case should not
include the assets and properties that Bancommerce acquired from
TRB. These have ceased to be assets and properties of TRB under the
terms of the BSP-approved P & A Agreement between them. They are
not TRB assets and properties in the possession of Bancommerce. To
make them so would be an unwarranted departure from the CA’s
Decision in CA-G.R. SP 91258.
WHEREFORE, the petition is GRANTED. The assailed Resolution of
November 26, 2010 and the Resolution of February 9, 2011 of the
Court of Appeals both in CA-G.R. SP 116704 are REVERSED and
SET ASIDE. Accordingly, the assailed Orders dated February 19,
2010 and August 18, 2010, the Alias Writ of Execution dated March 9,
2010, all issued by the Regional Trial Court and all orders, notices of
garnishment/levy, or notices of sale and any other action emanating
from the Orders dated February 19, 2010 and August 18, 2010 in Civil
Case Q-89-3580 are ANNULLED and SET ASIDE. The Temporary
Restraining Order issued by this Court on April 13, 2011 is hereby
made PERMANENT.
SO ORDERED.

The CA Decision in
CA-G.R. SP 91258

According to the dissenting opinion of Justice Mendoza, the CA

Decision dated December 8, 2009 did not reverse the RTC’s Order
causing the issuance of a writ of execution against Bancommerce to
enforce the judgment against TRB. It also argues that the CA did not
find grave abuse of discretion on the RTC’s part when it issued its
August 15, 2005 Order granting the issuance of a writ of execution. In
fact, it affirmed that order.1âwphi1 Moreover, it argued that the CA’s
modification of the RTC Order merely deleted an opinion there
expressed and not reversed such order.

But it should be the substance of the CA’s modification of the RTC

Order that should control, not some technical flaws that are taken out
of context. Clearly, the RTC’s basis for holding Bancommerce liable
to TRB was its finding that TRB had been merged into Bancommerce,
making the latter liable for TRB’s debts to RPN, et al. The CA clearly
annulled such finding in its December 8, 2009 Decision in CA-G.R.
SP 91258, thus:

WHEREFORE, the herein consolidated Petitions are DENIED. The

assailed Orders dated August 15, 2005 and February 22, 2006 of the
respondent Judge, are AFFIRMED with the MODIFICATION that the
pronouncement of respondent Judge in the August 15, 2005 Order that
the PSA between TRB and BANCOM is a farce or "a mere tool to
effectuate a merger and/or consolidation between TRB and
BANCOM" is DELETED.

SO ORDERED.33

Thus, the CA was careful in its decision to restrict the enforcement of

the writ of execution only to "TRB’s properties found in
Bancommerce’s possession." Indeed, the CA clearly said in its
decision that it was not Bancommerce that the RTC Order was being