2. Ultra vires acts (Sec. 45 of the RCC)
Acts or contracts entered into in behalf of the
Section 45 of the Corporation Code, embodies in statutory form
the ultra vires doctrine as it provides that no corporation "shall
possess or exercise any corporate powers except those conferred
by this Code or by its articles of incorporation and except such as
are necessary or incidental to the exercise of the powers so
conferred." During the early history of Philippine Corporate Law, it
was the accepted notion that any contract made or by-law
provision adopted by a corporation in contravention of law were
ultra vires and void.
PRINCIPLES:
1. A corporation is a creature of the law, and has only
such powers and privileges as are granted by the
State.
Since the corporation is considered a legal creature,
the doctrine finds it hard to accommodate the notion that a
corporation can be more than just an entity of limited capacities
and powers, and could hold powers or privileges not emanating
from the State.
In other words, the ultra vires doctrine is really a product of the
theory of concession, which is expressed in the Corporation
Code's antediluvian definition of a corporation in Section 2. One
can see why much of the vigor of the ultra vires doctrine has since
dissipated.
2. Upholds the duty of trust and obedience
owed by the corporation's directors and officers to the
stockholders or members.
Such duty of obedience dictates that the corporation engage only
in transactions to which the stockholders and members bind
themselves, by way of the provisions of the purpose clause of the
articles of incorporation. In addition, the duties of corporate
directors and officers must necessarily include an obligation not to
enter into transactions which violate the law.
The ultra vires doctrine may be viewed as the creature of an
earlier time, when society was unfamiliar with the corporate
vehicle as a means of doing business. Suspicious of the mischief
such a medium made possible, society decided it was prudent
that it be controlled and regulated as much as possible.
NOTE: the strict application of the principle
of ultra vires has undermined corporate contracts and commercial
transactions. As a consequence, courts have had the tendency to
tone down the application of the ultra vires doctrine when it begins
to undermine public trust and confidence in corporate contracts.
a. Types of Ultra Vires Acts
1. Acts done beyond the powers of the corporation
as provided for in the law or its articles of
incorporation;
2.
corporation by persons who have no corporate
authority; and
 As a general rule, only the acts of corporate officers
within the scope of their authority are binding on the
corporation; but when these officers exceed their
authority, their actions cannot bind the corporation,
unless it has ratified such acts or is estopped from
disclaiming them. The officer acting without proper
authority cannot by his act be the basis upon which to
bind the corporation of ratification, nor can third-parties
rely upon such unauthorized act to bind the corporation
to ratification.
The primary rule therefore under the corporate set-up is that in
the
absence of an authority from the board of directors, no person,
not even the officers of the corporation, can validly bind the
corporation.
 persons who deal with corporate agents within
circumstances showing that the agents are acting in
excess of corporate authority, may not hold the
corporation liable.
 When it comes therefore to other corporate officers
who purport to act in favor of the corporation, their
dealings with third persons may be actual or apparent,
for which the corporation as the principal is liable for
the obligations contracted by its agent.
3. Acts or contracts which are per se illegal as being
contrary to law.
 if a corporation knowingly permits one of its officers, or
any other agent, to act within the scope of an apparent
authority, it holds him out to the public possessing the
power to so do those acts; and thus, the corporation
will, as against anyone who has in good faith dealt with
it through such agent, be estopped from denying the
agent‟s authority.
b. Test to Determine Ultra Vires
ALFREDO MONTELIBANO, ET AL. vs. BACOLOD-MURCIA
MILLING CO., INC
G.R. No. L-15092             May 18, 1962
REYES, J.B.L., J.:
It is undisputed that plaintiffs-appellants, Alfredo Montelibano,
Alejandro Montelibano, and the Limited co-partnership Gonzaga
and Company, had been and are sugar planters adhered to the
defendant-appellee's sugar central mill under identical milling
1
contracts. Originally executed in 1919, said contracts were
stipulated to be in force for 30 years starting with the 1920-21
crop, and provided that the resulting product should be divided in
the ratio of 45% for the mill and 55% for the planters. Sometime in
1936, it was proposed to execute amended milling contracts,
increasing the planters' share to 60% of the manufactured sugar
and resulting molasses, besides other concessions, but extending
the operation of the milling contract from the original 30 years to
45 years. To this effect, a printed Amended Milling Contract form
was drawn up. On August 20, 1936, the Board of Directors of the
appellee Bacolod-Murcia Milling Co., Inc., adopted a resolution
(Acts No. 11, Acuerdo No. 1) granting further concessions to the
planters over and above those contained in the printed Amended
Milling Contract. The bone of contention is paragraph 9 of this
resolution.
Appellants signed and executed the printed Amended Milling
Contract on September 10, 1936, but a copy of the resolution of
August 10, 1936, signed by the Central's General Manager, was
not attached to the printed contract until April 17, 1937; with the
notation —
Las enmiendas arriba transcritas forman parte del contrato de
molienda enmendado, otorgado por — y la Bacolod-Murcia
Milling Co., Inc.
In 1953, the appellants initiated the present action, contending
that three Negros sugar centrals (La Carlota, Binalbagan-Isabela
and San Carlos), with a total annual production exceeding one-
third of the production of all the sugar central mills in the province,
had already granted increased participation (of 62.5%) to their
planters, and that under paragraph 9 of the resolution of August
20, 1936, heretofore quoted, the appellee had become obligated
to grant similar concessions to the plaintiffs (appellants herein).
The appellee Bacolod-Murcia Milling Co., inc., resisted the claim,
and defended by urging that the stipulations contained in the
resolution were made without consideration; that the resolution in
question was, therefore, null and void ab initio, being in effect a
donation that was ultra vires and beyond the powers of the
corporate directors to adopt.
After trial, the court below rendered judgment upholding the stand
of the defendant Milling company, and dismissed the complaint.
Thereupon, plaintiffs duly appealed to this Court.
We agree with appellants that the appealed decisions can not
stand. It must be remembered that the controverted resolution
was adopted by appellee corporation as a supplement to, or
further amendment of, the proposed milling contract, and that it
was approved on August 20, 1936, twenty-one days prior to the
signing by appellants on September 10, of the Amended Milling
Contract itself; so that when the Milling Contract was executed,
the concessions granted by the disputed resolution had been
already incorporated into its terms. No reason appears of record
why, in the face of such concessions, the appellants should reject
them or consider them as separate and apart from the main
amended milling contract, specially taking into account that
appellant Alfredo Montelibano was, at the time, the President of
the Planters Association (Exhibit 4, p. 11) that had agitated for the
concessions embodied in the resolution of August 20, 1936. That
the resolution formed an integral part of the amended milling
contract, signed on September 10, and not a separate bargain, is
further shown by the fact that a copy of the resolution was simply
attached to the printed contract without special negotiations or
agreement between the parties.
It follows from the foregoing that the terms embodied in the
resolution of August 20, 1936 were supported by the
same causa or consideration underlying the main amended
milling contract; i.e., the promises and obligations undertaken
thereunder by the planters, and, particularly, the extension of its
operative period for an additional 15 years over and beyond the
30 years stipulated in the original contract. Hence, the conclusion
of the court below that the resolution constituted gratuitous
concessions not supported by any consideration is legally
untenable.
All disquisition concerning donations and the lack of power of the
directors of the respondent sugar milling company to make a gift
to the planters would be relevant if the resolution in question had
embodied a separate agreement after the appellants had already
bound themselves to the terms of the printed milling contract. But
this was not the case. When the resolution was adopted and the
additional concessions were made by the company, the
appellants were not yet obligated by the terms of the printed
contract, since they admittedly did not sign it until twenty-one
days later, on September 10, 1936. Before that date, the printed
form was no more than a proposal that either party could modify
at its pleasure, and the appellee actually modified it by adopting
the resolution in question. So that by September 10, 1936
defendant corporation already understood that the printed terms
were not controlling, save as modified by its resolution of August
20, 1936; and we are satisfied that such was also the
understanding of appellants herein, and that the minds of the
parties met upon that basis. Otherwise there would have been no
consent or "meeting of the minds", and no binding contract at all.
But the conduct of the parties indicates that they assumed, and
they do not now deny, that the signing of the contract on
September 10, 1936, did give rise to a binding agreement. That
agreement had to exist on the basis of the printed terms as
modified by the resolution of August 20, 1936, or not at all. Since
there is no rational explanation for the company's assenting to the
further concessions asked by the planters before the contracts
were signed, except as further inducement for the planters to
agree to the extension of the contract period, to allow the
company now to retract such concessions would be to sanction a
fraud upon the planters who relied on such additional stipulations.
The same considerations apply to the "void innovation" theory of
appellees. There can be no novation unless two distinct and
successive binding contracts take place, with the later designed to
replace the preceding convention. Modifications introduced before
a bargain becomes obligatory can in no sense constitute novation
in law.
Stress is placed on the fact that the text of the Resolution of
August 20, 1936 was not attached to the printed contract until
April 17, 1937. But, except in the case of statutory forms or
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solemn agreements (and it is not claimed that this is one), it is the directors of a corporation, and the court is without authority to
assent and concurrence (the "meeting of the minds") of the substitute its judgment of the board of directors; the board is the
parties, and not the setting down of its terms, that constitutes a business manager of the corporation, and so long as it acts in
binding contract. And the fact that the addendum is only signed by good faith its orders are not reviewable by the courts. (Fletcher on
the General Manager of the milling company emphasizes that the Corporations, Vol. 2, p. 390).
addition was made solely in order that the memorial of the terms
of the agreement should be full and complete. And it appearing undisputed in this appeal that sugar centrals of
La Carlota, Hawaiian Philippines, San Carlos and Binalbagan
Much is made of the circumstance that the report submitted by the (which produce over one-third of the entire annual sugar
Board of Directors of the appellee company in November 19, production in Occidental Negros) have granted progressively
1936 (Exhibit 4) only made mention of 90%, the planters having increasing participations to their adhered planter at an average
agreed to the 60-40 sharing of the sugar set forth in the printed rate of
"amended milling contracts", and did not make any reference at
all to the terms of the resolution of August 20, 1936. But a reading 62.333% for the 1951-52 crop year;
of this report shows that it was not intended to inventory all the
64.2% for 1952-53;
details of the amended contract; numerous provisions of the
printed terms are alao glossed over. The Directors of the appellee 64.3% for 1953-54;
Milling Company had no reason at the time to call attention to the
64.5% for 1954-55; and
provisions of the resolution in question, since it contained mostly
modifications in detail of the printed terms, and the only major 63.5% for 1955-56,
change was paragraph 9 heretofore quoted; but when the report the appellee Bacolod-Murcia Milling Company is, under the terms
was made, that paragraph was not yet in effect, since it was
of its Resolution of August 20, 1936, duty bound to grant similar
conditioned on other centrals granting better concessions to their increases to plaintiffs-appellants herein.
planters, and that did not happen until after 1950. There was no
reason in 1936 to emphasize a concession that was not yet, and WHEREFORE, the decision under appeal is reversed and set
might never be, in effective operation. aside; and judgment is decreed sentencing the defendant-
appellee to pay plaintiffs-appellants the differential or increase of
There can be no doubt that the directors of the appellee company participation in the milled sugar in accordance with paragraph 9 of
had authority to modify the proposed terms of the Amended
the appellee Resolution of August 20, 1936, over and in addition
Milling Contract for the purpose of making its terms more to the 60% expressed in the printed Amended Milling Contract, or
acceptable to the other contracting parties. The rule is that —
the value thereof when due, as follows:
It is a question, therefore, in each case of the logical relation of 0,333% to appellants Montelibano for the 1951-1952 crop year,
the act to the corporate purpose expressed in the charter. If that
said appellants having received an additional 2% corresponding
act is one which is lawful in itself, and not otherwise prohibited, is to said year in October, 1953;
done for the purpose of serving corporate ends, and is reasonably
tributary to the promotion of those ends, in a substantial, and not 2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year;
in a remote and fanciful sense, it may fairly be considered within and to all appellants thereafter —
charter powers. The test to be applied is whether the act in 4.2% for the 1952-1953 crop year;
question is in direct and immediate furtherance of the 4.3% for the 1953-1954 crop year;
corporation's business, fairly incident to the express powers and 4.5% for the 1954-1955 crop year;
reasonably necessary to their exercise. If so, the corporation has 3.5% for the 1955-1956 crop year;
the power to do it; otherwise, not. (Fletcher Cyc. Corp., Vol. 6,
Rev. Ed. 1950, pp. 266-268) with interest at the legal rate on the value of such differential
during the time they were withheld; and the right is reserved to
As the resolution in question was passed in good faith by the plaintiffs-appellants to sue for such additional increases as they
board of directors, it is valid and binding, and whether or not it will may be entitled to for the crop years subsequent to those herein
cause losses or decrease the profits of the central, the court has adjudged.
no authority to review them.

They hold such office charged with the duty to act for the
corporation according to their best judgment, and in so doing they
cannot be controlled in the reasonable exercise and performance
of such duty. Whether the business of a corporation should be
operated at a loss during depression, or close down at a smaller
loss, is a purely business and economic problem to be
determined by the directors of the corporation and not by the
court. It is a well-known rule of law that questions of policy or of
management are left solely to the honest decision of officers and
NOTE:
Montelibano v. Bacolod-Murcia Milling Co., Inc. , (2nd
type of ultra vires) clarified the extent of the application
of the ultra vires doctrine.
At issue was the validity and binding effect
on the corporation of an amended milling contract that granted
favorable terms to planters. Although the amended milling

3
contracts were approved by the board of directors, it was
interposed for the corporation that the resolution was null and
void ab initio, being in effect a donation that was ultra vires,
beyond the powers of the corporate directors to adopt.
The Supreme Court upheld the authority
the board acting for the corporation to modify the terms of the
amended milling contract for the purpose of making its terms
more acceptable to the other contracting parties. It gave the
formula for determining the applicability of the ultra vires doctrine:
It is a question, therefore, in each case of the logical
relation of the act to the corporate purpose expressed
in the charter. If that act is one which is lawful in itself ,
and not otherwise prohibited, is done for the purpose
of serving corporate ends, and is reasonably tributary
to the promotion of those ends, in a substantial, and
not in a remote and fanciful sense, it may fairly be
considered within charter powers. The test to be
applied is whether the act in question is in direct and
immediate furtherance of the corporation's business,
fairly incident to the express powers and reasonably
necessary to their exercise.
If so, the corporation has the power to do it;
otherwise, not.
Notes:
 The test uses the rather stringent terms "direct and
immediate" only with reference to the business of the
corporation; whereas, it uses the rather liberal
terms of "fairly incident" and "reasonably necessary"
with reference to powers of the corporation.
 When the business of a corporation is used as the
reference point, much latitude is given to the
corporation to enter into various contracts as long as
they have a logical relation to the pursuit of such
business.
Thus, in one early case, the Supreme Court upheld a
purpose clause in the articles of incorporation which allowed
the corporation to engage in what were rather broadly
worded activity as "mercantile purposes." The Court
construed that as allowing the corporation to " engage in
such incidental business as may be necessary and
advisable to give
effect to, and aid in, the successful operation and conduct of
the principal business."
 When the purpose clause of a corporation's articles of
incorporation has unwittingly used limiting words,
(describing its business as "transportation by water," )
 the Court will hold the corporation to such limited
business and will refuse to construe the same to allow
the corporation to engage in the land transportation
business.
In such instances, the corporation has no
one but itself (and perhaps its legal counsel who prepared
the articles of incorporation) to blame for tying its own
hands.
of
CASES:
Pirovano vs. De la Rama Streamship, 96 PHIL 335 (1954)
BAUTISTA ANGELO, J.:
This is an appeal from a decision of the Court of First
Instance of Rizal declaring the donation made by the
defendant in favor of the minor children of the late Enrico
Pirovano of the proceeds of the insurance policies taken on
his life valid and binding, and ordering said defendant to pay
to said minor children the sum of P583,813.59, with interest
thereon at the rate of per cent from the date of filing of the
complaint, plus an additional amount equivalent to 20 per
cent of said sum of P538,813.59 as damages by way of
attorney's fees and the costs of action.
Plaintiffs herein are the minor children of the late Enrico
Pirovano represented by their mother and judicial guardian
Estefania R. Pirovano. They seek to enforce certain
resolutions adopted by the Board of Directors and
stockholders of the defendant company giving to said minor
children of the proceeds of the insurance policies taken on
the life of their deceased father Enrico Pirovano with the
company as beneficiary. Defendant's main defense is: that
said resolutions and the contract executed pursuant thereto
are ultra vires, and, if valid, the obligation to pay the amount
given is not yet due and demandable.
The trial court resolved all the issues raised by the parties in
favor of the plaintiffs and, after considering the evidence,
both oral and documentary, arrived at the following
conclusions:
First. — That the contract executed between the plaintiffs
and the defendant is a renumerative donation.
Second. — That said contract or donation is not ultra vires,
but an act executed within the powers of the defendant
corporation in accordance with its articles of incorporation
and by laws, sanctioned and approved by its Board of
Directors and stockholders; and subsequently ratified by
other subsequent acts of the defendant company.
Third. — That the said donation is in accordance with the
trend of modern and more enlightened legislation in its
treatment of questions between labor and capital.
Fourth. — That the condition mentioned in the donation is
null and void because it depends on the provisions of Article
1115 of the old Civil Code.
Fifth. — That if the condition is valid, its non-fulfillment is due
to the desistance of the defendant company from obeying
4
and doing the wishes and mandates of the majority of the
stockholders.
Sixth. — That the non-payment of the debt in favor of the
National Development Company is not due to the lack of
funds, nor to lack of authority, but the desire of the President
of the corporation to preserve and continue the Government
participation in the company.
Seventh. — That due demands were made by the plaintiffs
and their attorneys and these demands were rejected for no
justifiable or legal grounds.
The important facts which need to be considered for
purposes of this appeal may be briefly stated as follows:
Defendant is a corporation duly organized in accordance
with law with an authorized capital of P500,000, divided into
5,000 shares, with a par value of P100 each share. The
stockholders were: Esteban de la Rama, 1,800 shares,
Leonor de la Rama, 100 shares, Estefania de la Rama, 100
shares, and Eliseo Hervas, Tomas Concepcion, Antonio G.
Juanco, and Gaudencio Volasote with 5 shares each.
Leonor and Estefania are daughters of Don Esteban, while
the rest his employees. Estefania de la Rama was married
to the late Enrico Pirovano and to them four children were
born who are the plaintiffs in this case.
Enrico Pirovano became the president of the defendant
company and under his management the company grew
and progressed until it became a multi-million corporation by
the time Pirovano was executed by the Japanese during the
occupation. On May 13, 1941, the capital stock of the
corporation was increased to P2,000,000, after which a 100
per cent stock dividend was declared. Subsequently, or
before the outbreak of the war , new stock dividends of 200
per cent and 33 1/3 per cent were again declared. On
December 4, 1941, the capital stock was once more
increased to P5,000,000. Under Pirovano's management,
the assets of the company grew and increased from an
original paid up capital of around P240,000 to
P15,538,024.37 by September 30, 1941 (Exhibit HH).
In the meantime, Don Esteban de la Rama, who practically
owned and controlled the stock of the defendant corporation,
distributed his shareholding among his five daughters,
namely, Leonor, Estefania, Lourdes, Lolita and Conchita and
his wife Natividad Aguilar so that, at that time, or on July 10,
1946, the stockholding of the corporation stood as follows:
Esteban de la Rama, 869 shares, Leonor de la Rama, 3,375
shares, Estefania de la Rama, 3,368 shares, Lourdes de la
Rama, 3,368 shares, Lolita de la Rama, 3,368 shares,
Conchita de la Rama, 3,376 shares, and Natividad Aguilar,
2,136 shares. The other stockholders , namely, Eliseo
Hervas, Tomas Concepcion, Antonio Juanco, and Jose
Aguilar, who were merely employees of Don Esteban, were
given 40 shares each, while Pio Pedrosa, Marcial P.
Lichauco and Rafael Roces, one share each, because they
merely represented the National Development Company.
This Company was given representation in the Board Of
Directors of the corporation because at that time the latter
had an outstanding bonded indebtedness to the National
Development Company.
This bonded indebtedness was incurred on February 26,
1940 and was in the amount of P7,500.00. The bond held by
the National Development Company was redeemable within
a period of 20 years from March 1, 1940,. bearing interest at
the rate of 5 per cent per annum. To secure said bonded
indebtedness, all the assets of the De la Rama Steamship
Co., Inc., and properties of Don Esteban de la Rama, as well
as those of the Hijos de I. de la Rama and Co., Inc., a sister
corporation owned by Don Esteban and his family, were
mortgaged to the National Development Company (Annexes
A, B, C, D of Exhibit 3, Deed of Trust). Payments made by
the corporation under the management of Pirovano reduced
this bonded indebtedness to P3,260,855.77.
Upon arrangement made with the National Development
Company, the outstanding bonded indebtedness was
converted into non-voting preferred shares of stock of the
De la Rama company under the express condition that they
would bear affixed cumulative dividend of 6 per cent per
annum and would be redeemable within 15 years (Exhibits 5
and 7). This conversion was carried out on September 23,
1949, when the National Development Company executed a
"Deed of Termination of Trust and Release of Mortgage" in
favor of the De la Rama company (Exhibit 6.) The immediate
effect of this conversion was the released from incumbrance
of all the properties Of Don Esteban and of the Hijos de I. de
la Rama and Co., Inc., which was apparently favorable to
the interests of the De la Rama company, but, on the other
hand, it resulted in the inconvenience that, as holder of the
preferred stock, the National Development Company, was
given to the right to 40 per cent of the membership of the
Board of Directors of the De la Rama company, which
meant an increase in the representation of the National
Development Company from 2 to 4 of the 9 members of said
Board of Directors.
The first resolution granting to the Pirovano children the
proceeds of the insurance policies taken on his life by the
defendant company was adopted by the Board of Directors
at a meeting held on July 10, 1946, (Exhibit B). This grant
was called in the resolution as "Special Payment to Minor
Heirs of the late Enrico Pirovano". Because of its direct
hearing on the issues involved in this case, said resolution is
hereunder reproduced in toto:
SPECIAL PAYMENT TO MINORS HEIRS OF THE LATE
ENRICO PIROVANO
The President stated that the principal purpose for which the
meeting had been called was to discuss the advisability of
making some form of compensation to the minor heirs of the
late Enrico Pirovano, former President and General
Manager of the Company. As every member of the Board
knows, said the President, the late Enrico Pirovano who was
largely responsible for the very successful development of
5
the activities of the Company prior to war was killed by the
Japanese in Manila sometime in 1944 leaving as his only
heirs four minor children, Maria Carla, Esteban, Enrico and
John Albert. Early in 1941, explained the President, the
Company had insured the life of Mr. Pirovano for a million
pesos. Following the occupation of the Philippines by
Japanese forces the Company was unable to pay the
premiums on those policies issued by Filipino companies
and these policies had lapsed. But with regards to the York
Office of the De la Rama Steamship Co., Inc. had kept up
payment of the premiums from year to year. The payments
made on account of these premiums, however, are very
small compared to the amount which the Company will now
receive as a result of Mr. Pirovano's death. The President
proposed therefore that out of the proceeds of these policies
the sum of P400,000 be set aside for the minor children of
the deceased, said sum of money to be convertible into
4,000 shares of the stock of the Company, at par, or 1,000
shares for each child. This proposal, explained the President
as being made by him upon suggestion of President
Roxas, but, he added, that he himself was very much in
favor of it also. On motion of Miss Leonor de la Rama duly
seconded by Mrs. Lourdes de la Rama de Osmeña, the
following resolution was, thereupon, unanimously approved:
Whereas, the late Enrico Pirovano, President and General
Manager of the De la Rama Steamship Company, died in
Manila sometime in November, 1944:
Whereas, the said Enrico Pirovano was largely responsible
for the rapid and very successful development of the
activities of thus company;
Whereas, early in 1941 this company insured the life of said
Enrico Pirovano in various Philippine and American Life
Insurance companies for the total sum of P1,000,000;
Whereas, the said Enrico Pirovano is survived by his widow,
Estefania Pirovano and four minor children, to wit: Esteban,
Maria Carla, Enrico and John Albert, all surnamed
Pirovano;lawphil.net
Whereas, said Enrico Pirovano left practically nothing to his
heirs and it is but fit proper that this company which owes so
much to the deceased should make some provision for his
children;
Whereas, this company paid premium on Mr. Pirovano's life
insurance policies for a period of only 4 years so that it will
receive from the insurance companies sums of money
greatly in excess of the premiums paid by this company.
Be it resolved, That out of the proceeds to be collected from
the life insurance policies on the life of the late Enrico
Pirovano, the sum of P400,000 be set aside for equal
division among the 4 minor children of the deceased, to wit:
Esteban, Maria Carla, Enrico and John Albert, all surnamed
Pirovano, which sum of money shall be convertible into
shares of stock of the De la Rama Steamship Company, at
par and, for that purpose, that the present registered
stockholders of the corporation be requested to waive their
preemptive right to 4,000 shares of the unissued stock of the
company in order to enable each of the 4 minor heirs of the
deceased, to wit: Esteban, Maria Carla, Enrico and John
Albert, all surnamed Pirovano, to obtain 1,000 shares at par;
Resolved, further, that in view of the fact that under the
provisions of the indenture with the National Development
Company, it is necessary that action herein proposed to be
confirmed by the Board of Directors of that company, the
Secretary is hereby instructed to send a copy of this
resolution to the proper officers of the National Development
Company for appropriate action. (Exhibit B)
The above resolution, which was adopted on July 10, 1946,
was submitted to the stockholders of the De la Rama
company at a meeting properly convened, and on that same
date, July 10, 1946, the same was duly approved.
It appears that, although Don Esteban and the Members of
his family were agreeable to giving to the Pirovano children
the amount of P400,000 out of the proceeds of the
insurance policies taken on the life of Enrico Pirovano, they
did not realize that when they provided in the above referred
two resolutions that said Amount should be paid in the form
of shares of stock, they would be actually giving to the
Pirovano children more than what they intended to give. This
came about when Lourdes de la Rama, wife of Sergio
Osmeña, Jr., showed to the latter copies of said resolutions
and asked him to explain their import and meaning, and it
was value then that Osmeña explained that because the
value then of the shares of stock was actually 3.6 times their
par value, the donation their value, the donation, although
purporting to be only P400,00, would actually amount to a
total of P1,440,000. He further explained that if the Pirovano
children would given shares of stock in lieu of the amount to
be donated, the voting strength of the five daughters of Don
Esteban in the company would be adversely affected in the
sense that Mrs. Pirovano would be adversely affected in the
sense that Mrs. Pirovano would have a voting power twice
as much as that of her sisters. This caused Lourdes de la
Rama to write to the secretary of the corporation, Atty.
Marcial Lichauco, asking him to cancel the waiver she
supposedly gave of her pre-emptive rights. Osmeña
elaborated on this matter at the annual meeting of the
stockholders held on December 12, 1946 but at said
meeting it was decided to leave the matter in abeyance
pending further action on the part of the members of the De
la Rama family.
Osmeña, in the meantime, took up the matter with Don
Esteban and, as consequence, the latter, on December 30,
1946, addressed to Marcial Lichauco a letter stating, among
other things, that "in view of the total lack of understanding
by me and my daughters of the two Resolutions
abovementioned, namely, Directors' and Stockholders'
dated July 10, 1946, as finally resolved by the majority of the
Stockholders and Directors present yesterday, that you
6
consider the abovementioned resolutions nullified." (Exhibit
CC).
On January 6, 1947, the Board of Directors of the De la
Rama company, as a consequence of the change of attitude
of Don Esteban, adopted a resolution changing the form of
the donation to the Pirovano children from a donation of
4,000 shares of stock as originally planned into a
renunciation in favor of the children of all the company's
"right, title, and interest as beneficiary in and to the proceeds
of the abovementioned life insurance policies", subject to the
express condition that said proceeds should be retained by
the company as a loan drawing interest at the rate of 5 per
cent per annum and payable to the Pirovano children after
the company "shall have first settled in full the balance of its
present remaining bonded indebtedness in the sum of
approximately P5,000,000" (Exhibit C). This resolution was
concurred in by the representatives of the National
Development Company. The pertinent portion of the
resolution reads as follows:
Be resolved, that out of gratitude to the late Enrico Pirovano
this Company renounce as it hereby renounces, all of his
right, title, and interest as beneficiary in and to the proceeds
of the abovementioned life insurance policies in favor of
Esteban, Maria Carla, Enrico and John Albert, all surnamed
Pirovano, subject to the terms and conditions herein after
provided;
That the proceeds of said insurance policies shall be
retained by the Company in the nature of a loan drawing
interest at the rate of 5 per cent annum from the date of
receipt of payment by the Company from the various
insurance companies above-mentioned until the time the
time the same amounts are paid to the minor heirs of Enrico
Pirovano previously mentioned;
That all amounts received from the above-mentioned
policies shall be divided equally among the minors heirs of
said Enrico Pirovano;
That the company shall proceed to pay the proceeds of said
insurance policies plus interests that may have accrued to
each of the heirs of the said Enrico Pirovano or their duly
appointed representatives after the Company shall have first
settled in full the balance of its present remaining bonded
indebtedness in the sum of the approximately P5,000,000.
The above resolution was carried out by the company and
Mrs. Estefania R. Pirovano, the latter acting as guardian of
her children, by executing a Memorandum Agreement on
January 10, 1947 and June 17, 1947, respectively, stating
therein that the De la Rama Steamship Co., Inc., shall enter
in its books as a loan the proceeds of the life insurance
policies taken on the life of Pirovano totalling S321,500,
which loan would earn interest at the rate of 5 per cent per
annum. Mrs. Pirovano, in executing the agreement, acted
with the express authority granted to her by the court in an
order dated March 26, 1947.
On June 24, 1947, the Board of Directors approved a
resolution providing therein that instead of the interest on the
loan being payable, together with the principal, only after the
company shall have first settled in full its bonded
indebtedness, said interest may be paid to the Pirovano
children "whenever the company is in a position to met said
obligation" (Exhibit D), and on February 26, 1948, Mrs.
Pirovano executed a public document in which she formally
accepted the donation (Exhibit H). The Dela Rama company
took "official notice" of this formal acceptance at a meeting
held by its Board of Directors on February 26, 1948.
In connection with the above negotiations, the Board of
Directors took up at its meeting on July 25, 1949, the
proposition of Mrs. Pirovano to buy the house at New
Rochelle, New York, owned by the Demwood Realty, a
subsidiary of the De la Rama company at its original costs of
$75,000, which would be paid from the funds held in trust
belonging to her minor children. After a brief discussion
relative to the matter, the proposition was approved in a
resolution adopted on the same date.
The formal transfer was made in an agreement signed on
September 5, 1949 by Mrs. Pirovano, as guardian of her
children, and by the De la Rama company, represented by
its new General Manager, Sergio Osmeña, Jr. The transfer
of this property was approved by the court in its order of
September 20, 1949.lawphil.net
On September 13, 1949, or two years and 3 months after
the donation had been approved in the various resolutions
herein above mentioned, the stockholders of the De la
Rama company formally ratified the donation (Exhibit E),
with certain clarifying modifications, including the resolution
approving the transfer of the Demwood property to the
Pirovano children. The clarifying modifications are quoted
hereunder:
1. That the payment of the above-mentioned donation shall
not be affected until such time as the Company shall have
first duly liquidated its present bonded indebtedness in the
amount of P3,260,855.77 with The National Development
Company, or fully redeemed the preferred shares of stock in
the amount which shall be issued to the National
Development Company in lieu thereof;
2. That any and all taxes, legal fees, and expenses in any
way connected with the above transaction shall be
chargeable and deducted from the proceeds of the life
insurance policies mentioned in the resolutions of the Board
of Directors. (Exhibit E)
Sometime in March 1950, the President of the corporation,
Sergio Osmeña, Jr., addressed an inquiry to the Securities
and Exchange Commission asking for opinion regarding the
validity of the donation of the proceeds of the insurance
policies to the Pirovano children. On June 20, 1950 that
office rendered its opinion that the donation was void
because the corporation could not dispose of its assets by
7
gift and therefore the corporation acted beyond the scope of
its corporate powers. This opinion was submitted to the
Board of Directors at its meting on July 12, 1950, on which
occasion the president recommend that other legal ways be
studied whereby the donation could be carried out. On
September 14, 1950, another meeting was held to discuss
the propriety of the donation. At this meeting the president
expressed the view that, since the corporation was not
authorized by its charter to make the donation to the
Pirovano children and the majority of the stockholders was
in favor of making provision for said children, the manner he
believed this could be done would be to declare a cash
dividend in favor of the stockholders in the exact amount of
the insurance proceeds and thereafter have the
stockholders make the donation to the children in their
individual capacity. Notwithstanding this proposal of the
president, the board took no action on the matter, and on
March 8, 1951, at a stockholders' meeting convened on that
date the majority of the stockholders' voted to revoke the
resolution approving the donation to the Pirovano children.
The pertinent portion of the resolution reads as follows:
Be it resolved, as it is hereby resolved, that in view of the
failure of compliance with the above conditions to which the
above donation was made subject, and in view of the
opinion of the Securities and Exchange Commissioner, the
stockholders revoke, rescind and annul, as they do thereby
revoke, rescind and annul, its ratification and approval on
September 13, 1949 of the aforementioned resolution of the
Board of Directors of January 6, 1947, as amended on June
24, 1947. (Exhibit T)
In view of the resolution declaring that the corporation failed
to comply with the condition set for the effectivity of the
donation and revoking at the same time the approval given
to it by the corporation, and considering that the corporation
can no longer set aside said donation because it had no
longer set aside said donation because it had long been
perfected and consummated, the minor children of the late
Enrico Pirovano, represented by their mother and guardian,
Estefania R. de Pirovano, demanded the payment of the
credit due them as of December 31, 1951, amounting to
P564,980.89, and this payment having been refused, they
instituted the present action in the Court of First Instance of
Rizal wherein they prayed that the be granted an alternative
relief of the following tenor: (1) sentencing defendant to pay
to the plaintiff the sum of P564,980.89 as of December 31,
1951, with the corresponding interest thereon; (2) as an
alternative relief, sentencing defendant to pay to the
plaintiffs the interests on said sum of P564,980.89 at the
rate of 5 per cent per annum, and the sum of P564,980.89
after the redemption of the preferred shares of the
corporation held by the National Development Company;
and (3) in any event, sentencing defendant to pay the
plaintiffs damages in the amount of not less than 20 per cent
of the sum that may be adjudged to the plaintiffs, and the
costs of action.
The only issues which in the opinion of the court need to be
determined in order to reach a decision in this appeal are:
(1) Is the grant of the proceeds of the insurance policies
taken on the life of the late Enrico Pirovano as embodied in
the resolution of the Board of Directors of defendant
corporation adopted on January 6, 1947 and June 24, 1947
a remunerative donation as found by the lower court?; (2) IN
the affirmative case, has that donation been perfected
before its rescission or nullification by the stockholders of
the corporation on March 8, 1951?; (3) Can defendant
corporation give by way of donation the proceeds of said
insurance policies to the minor children of the late Enrico
Pirovano under the law or its articles of corporation, or is
that donation an ultra vires act?; and (4) has the defendant
corporation, by the acts it performed subsequent to the
granting of the donation, deliberately prevented the
fulfillment of the condition precedent to the payment of said
donation such that it can be said it has forfeited its right to
demand its fulfillment and has made the donation entirely
due and demandable?
We will discuss these issues separately.
1. To determine the nature of the grant made by the
defendant corporation to the minor children of the late Enrico
Pirovano, we do not need to go far nor dig into the
voluminous record that lies at the bottom of this case. We do
not even need to inquire into the interest which has allegedly
been shown by President Roxas in the welfare of the
children of his good friend Enrico Pirovano. Whether
President Roxas has taken the initiative in the move to give
something to said children which later culminated in the
donation now in dispute, is of no moment for the fact is that,
from the mass of evidence on hand, such a donation has
been given the full indorsement and encouraging support by
Don Esteban de la Rama who was practically the owner of
the corporation. We only need to fall back to accomplish this
purpose on the several resolutions of the Board of Directors
of the corporations containing said grant for they clearly
state the reasons and purposes why the donation has been
given.
Before we proceed further, it is convenient to state here in
passing that, before the Board of Directors had approved its
resolution of January 6, 1947, as later amended by another
resolution adopted on June 24, 1947, the corporation had
already decided to give to the minor children of the late
Enrico Pirovano the sum of P400,000 out of the proceeds of
the insurance policies taken on his life in the form of shares,
and that when this form was considered objectionable
because its result and effect would be to give to said
children a much greater amount considering the value then
of the stock of the corporation, the Board of Directors
decided to amend the donation in the form and under the
terms stated in the aforesaid resolutions. Thus, in the
original resolution approved by the Board of Directors on
July 10, 1946, wherein the reasons for granting the donation
to the minor children of the late Enrico Pirovano were
clearly, we find out the following revealing statements:
8
Whereas, the late Enrico Pirovano President and General
Manager of the De la Rama Steamship Company, died in
Manila sometime in November, 1944;
Whereas, the said Enrico Pirovano was largely responsible
for the rapid and very successful development of the
activities of this company;
Whereas, early in 1941 this company insured the life of said
Enrico Pirovano in various Philippine and American Life
Insurance companies for the total sum of P1,000,000;
Whereas, the said Enrico Pirovano is survived by his widow,
Estefania Pirovano and 4 minor children, to wit: Esteban,
Maria Carla, Enrico and John Albert, all surnamed Pirovano;
Whereas, the said Enrico Pirovano left practically nothing to
his heirs and it is but fit and proper that this company which
owes so much to the deceased should make some
provisions for his children;
Whereas, this company paid premiums on Mr. Pirovano's
life insurance policies for a period of only 4 years so that it
will receive from the insurance companies sums of money
greatly in excess of the premiums paid by the company,
Again, in the resolution approved by the Board of Directors
on January 6, 1947, we also find the following expressive
statements which are but a reiteration of those already
expressed in the original resolution:
Whereas, the late Enrico Pirovano, President and General
Manager of the De la Rama Steamship Co., Inc., died in
Manila sometime during the latter part of the year 1944;
Whereas, the said Enrico Pirovano was to a large extent
responsible for the rapid and very successful development
and expansion of the activities of this company;
Whereas, early in 1941, the life of the said Enrico Pirovano
was insured in various life companies, to wit:
Whereas, the said Enrico Pirovano is survived by 4 minor
children, to wit: Esteban, Maria Carla, Enrico and John
Albert, all surnamed Pirovano; and
Whereas, the said Enrico Pirovano left practically nothing to
his heirs and it is but fit and proper that this Company which
owes so much to the deceased should make some provision
for his children;
Be it resolved, that out of gratitude to the late Enrico
Pirovano this Company renounce as it hereby
renounces, . . . .
From the above it clearly appears that the corporation
thought of giving the donation to the children of the late
Enrico Pirovano because he "was to a large extent
responsible for the rapid and very successful development
and expansion of the activities of this company"; and also
because he "left practically nothing to his heirs and it is but
fit and proper that this company which owes so much to the
deceased should make some provision to his children", and
so, the donation was given "out of gratitude to the late
Enrico Pirovano." We do not need to stretch our imagination
to see that a grant or donation given under these
circumstances is remunerative in nature in contemplation of
law.
That which is made to a person in consideration of his merits
or for services rendered to the donor, provided they do not
constitute recoverable debts, or that in which a burden less
than the value of the thing given is imposed upon the donee,
is also a donation." (Art. 619, old Civil Code.)
In donations made to a person for services rendered to the
donor, the donor's will is moved by acts which directly
benefit him. The motivating cause is gratitude,
acknowledgment of a favor, a desire to compensate. A
donation made to one who saved the donor's life, or a
lawyer who renounced his fees for services rendered to the
donor, would fall under this class of donations. These
donations are called remunerative donations . (Sinco and
Capistrano, The Civil Code, Vol. 1, p. 676; Manresa, 5th ed.,
pp. 72-73.)
2. The next question to be determined is whether the
donation has been perfected such that the corporation can
no longer rescind it even if it wanted to. The answer to this
question cannot but be in the affirmative considering that the
same has not only been granted in several resolutions duly
adopted by the Board of Directors of the defendant
corporation, and in all these corporate acts the concurrence
of the representatives of the National Development
Company, the only creditor whose interest may be affected
by the donation, has been expressly given. The corporation
has even gone further. It actually transferred the ownership
of the credit subject of donation to the Pirovano children with
the express understanding that the money would be retained
by the corporation subject to the condition that the latter
would pay interest thereon at the rate of 5 per cent per
annum payable whenever said corporation may be in a
financial position to do so. Thus, the following acts of the
corporation as reflected from the evidence bear this out:
(a) The donation was embodied in a resolution duly
approved by the Board of Directors on January 6, 19437. In
this resolution, the representatives of the National
Development Company, have given their concurrence. This
is the only creditor which can be considered as being
adversely affected by the donation. The resolution of June
24, 1947 did not modify the substance of the former
resolution for it merely provided that instead of the interest
on the loan being payable, together with the principal, only
after the corporation had first settled in full its bonded
indebtedness, said interest would be paid "whenever the
company is in a position to meet said obligation."
(b) The resolution of January 6, 1947 was actually carried
out when the company and Mrs. Estefania R. Pirovano,
9
executed a memorandum agreement stating therein hat the
proceeds of the insurance policies would be entered in the
books of the corporation as a loan which would bear an
interest at the rate of 5 per cent per annum, and said
agreement was signed by Mrs. Pirovano as judicial guardian
of her children after she had been expressly authorized by
the court to accept the donation in behalf of her children.
(c) While the donation can be considered as duly executed
by the execution of the document stated in the preceding
paragraph, and by the entry in the books of the corporation
of the donation as a loan, a further record of said execution
was made when Mrs. Pirovano executed a public document
on February 26, 1948 making similar acceptance of the
donation. And this acceptance was officially recorded by the
corporation when on the same date its Board of Directors
approved a resolution taking "official notice" of said
acceptance.
(d) On July 25, 1949, the Board of Directors approved the
proposal of Mrs. Pirovano to buy the house at New
Rochelle, New York, owned by a subsidiary of the
corporation at the costs of S75,000 which would be paid
from the sum held in trust belonging to her minor children.
And this agreement was actually carried out in a document
signed by the general manager of the corporation and by
Mrs. Pirovano, who acted on the matter with the express
authority of the court.
(e) And on September 30, 1949, or two years and 3 months
after the donation had been executed, the stockholders of
the defendant corporation formally ratified and gave
approval to the donation as embodied in the resolutions
above referred to, subject to certain modifications which did
not materially affect the nature of the donation.
There can be no doubt from the foregoing relation of facts
the donation was a corporate act carried out by the
corporation not only with the sanction of its Board of
Directors but also of its stockholders. It is evident that the
donation has reached the stage of perfection which is valid
and binding upon the corporation and as such cannot be
rescinded unless there is exists legal grounds for doing so.
In this case, we see none. The two reasons given for the
rescission of said donation in the resolution of the
corporation adopted on March 8, 1951, to wit: that the
corporation failed to comply with the conditions to which the
above donation was made subject, and that in the opinion of
the Securities and Exchange Commission said donation
is ultra vires, are not, in our opinion, valid and legal as to
justify the rescission of a perfected donation. These
reasons, as we will discuss in the latter part of this decision,
cannot be invoked by the corporation to rescind or set at
naught the donation, and the only way by which this can be
done is to show that the donee has been in default, or that
the donation has not been validly executed, or is illegal
or ultra vires, and such is not the case as we will see
hereafter. We therefore declare that the resolution approved
by the stockholders of the defendant corporation on March
8, 1951 did not and cannot have the effect of nullifying the
donation in question.
3. The third question to be determined is: Can defendant
corporation give by way of donation the proceeds of said
insurance policies to the minor children of the late Enrico
Pirovano under the law or its articles of corporation, or is
that donation an ultra vires act? To answer this question it is
important for us to examine the articles of incorporation of
the De la Rama company to see this question it is important
for us to examine the articles of incorporation of the De la
Rama company to see if the act or donation is outside of
their scope. Paragraph second of said articles provides:
Second.— The purposes for which said corporation is
formed are:
(a) To purchase, charter, hire, build, or otherwise acquire
steam or other ships or vessels, together with equipments
and furniture therefor, and to employ the same in
conveyance and carriage of goods, wares and merchandise
of every description, and of passengers upon the high seas.
(b) To sell, let, charter, or otherwise dispose of the said
vessels or other property of the company.
(c) To carry on the business of carriers by water.
(d) To carry on the business of shipowners in all of its
branches.
(e) To purchase or take on lease, lands, wharves, stores,
lighters, barges and other things which the company may
deem necessary or advisable to be purchased or leased for
the necessary and proper purposes of the business of the
company, and from time to time to sell the dispose of the
same.
(f) To promote any company or companies for the purposes
of acquiring all or any of the property or liabilities of this
company, or both, or for any other purpose which may seem
directly or indirectly calculated to benefit the company.
(g) To invest and deal with the moneys of the company and
immediately required, in such manner as from time to time
may be determined.
(h) To borrow, or raise, or secure the payment of money in
such manner as the company shall think fit.
(i) Generally, to do all such other thing and to transact all
business as may be directly or indirectly incidental or
conducive to the attainment of the above object, or any of
them respectively.
(j) Without in any particular limiting or restricting any of the
objects and powers of the corporation, it is hereby expressly
declared and provided that the corporation shall have power
to issue bonds and provided that the corporation shall have
power to issue bonds and other obligations, to mortgage or
pledge any stocks, bonds or other obligations or any
10
property which may be required by said corporations; to
secure any bonds, guarantees or other obligations by it
issued or incurred; to lend money or credit to and to aid in
any other manner any person, association, or corporation of
which any obligation or in which any interest is held by this
corporation or in the affairs or prosperity of which this
corporation or in the affairs or prosperity of which this
corporation has a lawful interest, and to do such acts and
things as may be necessary to protect, preserve, improve, or
enhance the value of any such obligation or interest; and, in
general, to do such other acts in connection with the
purposes for which this corporation has been formed which
is calculated to promote the interest of the corporation or to
enhance the value of its property and to exercise all the
rights, powers and privileges which are now or may
hereafter be conferred by the laws of the Philippines upon
corporations formed under the Philippine Corporation Act; to
execute from time to time general or special powers of
attorney to persons, firms, associations or corporations
either in the Philippines, in the United States, or in any other
country and to revoke the same as and when the Directors
may determine and to do any and or all of the things
hereinafter set forth and to the same extent as natural
persons might or could do.
After a careful perusal of the provisions above quoted we
find that the corporation was given broad and almost
unlimited powers to carry out the purposes for which it was
organized among them, (1) "To invest and deal with the
moneys of the company not immediately required, in such
manner as from time to time may be determined" and, (2) "to
aid in any other manner any person, association, or
corporation of which any obligation or in which any interest
is held by this corporation or in the affairs or prosperity of
which this corporation has a lawful interest." The
world deal is broad enough to include any manner of
disposition, and refers to moneys not immediately
required  by the corporation, and such disposition may be
made in such manner as from time to time may be
determined by the corporations. The donation in question
undoubtedly comes within the scope of this broad power for
it is a fact appearing in the evidence that the insurance
proceeds were not immediately required when they were
given away. In fact, the evidence shows that the corporation
declared a 100 per cent cash dividend, or P2,000,000, and
later on another 30 per cent cash dividend. This is clear
proof of the solvency of the corporation. It may be that, as
insinuated, Don Esteban wanted to make use of the
insurance money to rehabilitate the central owned by a
sister corporation, known as Hijos de I. de la Rama and Co.,
Inc., situated in Bago, Negros Occidental, but this, far from
reflecting against the solvency of the De la Rama company,
only shows that the funds were not needed by the
corporation.
Under the second broad power we have the above stated,
that is, to aid in any other manner any person  in the affairs
and prosperity of whom the corporation has a lawful interest,
the record of this case is replete with instances which clearly
show that the corporation knew well its scope and meaning
so much so that, with the exception of the instant case, no
one has lifted a finger to dispute their validity. Thus, under
this broad grant of power, this corporation paid to the heirs
of one Florentino Nonato, an engineer of one of the ships of
the company who died in Japan, a gratuity of P7,000,
equivalent to one month salary for each year of service. It
also gave to Ramon Pons, a captain of one of its ships , a
retirement gratuity equivalent to one month salary for every
year of service, the same to be based upon his highest
salary. And it contributed P2,000 to the fund raised by the
Associated Steamship Lines for the widow of the late
Francis Gispert, secretary of said Association, of which the
De la Rama Steamship Co., Inc., was a member along with
about 30 other steamship companies. In this instance,
Gispert was not even an employee of the corporation. And
invoking this vast power, the corporation even went to the
extent of contributing P100,000 to the Liberal Party
campaign funds, apparently in the hope that by conserving
its cordial relations with that party it might continue to retain
the patronage of the administration. All these acts executed
before and after the donation in question have never been
questioned and were willingly and actually carried out.
We don't see much distinction between these acts of
generosity or benevolence extended to some employees of
the corporation, and even to some in whom the corporation
was merely interested because of certain moral or political
considerations, and the donation which the corporation has
seen fit to give to the children of the late Enrico Pirovano
from the point of view of the power of the corporation as
expressed in its articles of incorporation. And if the former
had been sanctioned and had been considered valid
and intra vires, we see no plausible reasons why the latter
should now be deemed ultra vires. It may perhaps be
argued that the donation given to the children of the late
Enrico Pirovano is so large and disproportionate that it can
hardly be considered a pension of gratuity that can be
placed on a par with the instances above mentioned, but this
argument overlooks one consideration: the gratuity here
given was not merely motivated by pure liberality or act of
generosity, but by a deep sense of recognition of the
valuable services rendered by the late Enrico Pirovano
which had immensely contributed to the growth of the
corporation to the extent that from its humble capitalization it
blossomed into a multi-million corporation that it is today. In
other words of the very resolutions granting the donation or
gratuity, said donation was given not only because the
company was so indebted to him that it saw fit and proper to
make provisions for his children, but it did so out of a sense
of gratitude. Another factor that we should bear in mind is
that Enrico Pirovano was not only a high official of the
company but was at the same time a member of the De la
Rama family, and the recipient of the donation are the
grandchildren of Don Esteban de la Rama. This we, may
say, is the motivating root cause behind the grant of this
bounty.
11
It may be contended that a donation is different from a
gratuity. While technically this may be so in substance they
are the same. They are even similar to a pension. Thus, it
was granted for services previously rendered, and which at
the time they were rendered gave rise to no legal obligation.
" (Words and Phrases, Permanent Edition, p. 675; O'Dea vs.
Cook,, 169 Pac., 306, 176 Cal., 659.) Or stated in another
way, a "Gratuity is mere bounty given by the Government in
consideration or recognition or meritorious services and
springs from the appreciation an d graciousness of the
Government", (Ilagan vs. Ilaya, G.R. No. 33507, Dec. 20
1930) or "A gratuity is something given freely, or without
recompense, a gift, something voluntarily given in return for
a favor or services; a bounty; a tip." Wood Mercantile Co. vs.
Cole, 209 S.W. 2d. 290; Mendoza vs. Dizon, 77 Phil., 533,
43 Off. Gaz. p. 4633. We do not see much difference
between this definition of gratuity and a remunerative
donation contemplated in the Civil Code. In essence they
are the same. Such being the case, it may be said that this
donation is gratuity in a large sense for it was given for
valuable services rendered an ultra vires act in the light of
the following authorities:
Indeed, some cases seem to hold that the giving of a pure
gratuity to directors is ultra vires of corporation, so that it
could not be legalized even if the approval of the
shareholders; but this position has no sound reason to
support it, and is opposed to the weight of
authority (Suffaker vs. Kierger's Assignee, 53 S.W. Rep.
288; !07 Ky. 200; 46 L.R.A. 384).
But although business corporations cannot contribute to
charity or benevolence, yet they are not required always to
insist on the full extent of their legal rights. They are not
forbidden for the recognizing moral obligation of which strict
law takes no cognizance. They are not prohibited from
establishing a reputation for board, liberal, equitable dealing
which may stand them in good stead in competition with less
fair rivals. Thus, an incorporated fire insurance company
which policies except losses from explosions may
nevertheless pay a loss from that cause when other
companies are accustomed to do so, such liberal dealing
being deemed conducive to the prosperity of the
corporation." (Modern Law of Corporations, Machen, Vol. 1,
p. 81).
So, a bank may grant a five years pension to the family at
one of its officers. In all cases in this sorts, the amount of the
gratuity rests entirely within the discretion of the company,
unless indeed it be all together out of the reason and fitness.
But where the company has ceased to be going concerned,
this power to make gifts or present it at the end. (Modern
Law of Corporations, Machen, Vol. 1, p. 82.).
Payment of Gratitude out of Capital.— There seems on
principle no reason to doubt that gifts or gratuities wherever
they are lawful may be paid out of capital as well as out of
profits. (Modern Law of corporations, Machen, Vol. 1 p. 83.).
Whether desirable to supplement implied powers of this kind
by express provisions.— Enough has been said to show that
the implied powers of a corporation to give gratuities to its
servants and officers, as well as to strangers, are ample, so
that there is therefore no need to supplement them by
express provisions." (modern Law of Corporations, Machen,
Vol. 1, p. 83.) 1
Granting arguendo that the donation given by Pirovano
children is outside the scope of the powers of the defendant
corporation, or the scope of the powers that it may exercise
under the law, or it is an ultra vires act, still it may said that
the same can not be invalidated, or declared legally
ineffective for the reason alone, it appearing that the
donation represents not only the act of the Board of
Directors but of the stockholders themselves as shown by
the fact that the same has been expressly ratified in a
resolution duly approved by the latter. By this ratification, the
infirmity of the corporate act, it may has been obliterated
thereby making the cat perfectly valid and enforceable. This
is specially so if the donation is not merely executory but
executed and consummated and no creditors are prejudice,
or if there are creditors affected, the latter has expressly
given their confirmity.
In making this pronouncement, advertence should made of
the nature of the ultra vires act that is in question. A little
digression needs be made on this matter to show the
different legal effect that may result consequent upon the
performance of a particular ultra vires act on the part of the
corporation. may authorities may be cited interpreting or
defining, extent, and scope of an ultra vires act, but all of
them are uniform and unanimous that the same may be
either an act performed merely outside the scope of the
powers granted to it by it articles of incorporation, or one
which is contrary to law or violative of any principle which
will void any contract whether done individually or
collectively. In other words, a distinction should be made
between corporate acts or contracts which are illegal and
those which are merely ultra vires. The former contemplates
the doing of an act which is contrary to law, morals, or public
policy or public duty, and are, like similar transactions
between the individuals void. They cannot serve as basis of
a court action, nor require validity ultra vires acts on the
other hand, or those which are not illegal and void ab initio,
but are merely within are not illegal and void ab initio, but
are not merely within the scope of the articles of
incorporation, are merely voidable and may become binding
and enforceable when ratified by the stockholders.
Strictly speaking, an ultra vires act is one outside the scope
of the power conferred by the legislature, and although the
term has been used indiscriminately, it is properly
distinguishable from acts which are illegal, in excess or
abuse of power, or executed in an unauthorized manner, or
acts within corporate powers but outside the authority of
particular officers or agents (19 C. J. S. 419).
12
Corporate transactions which are illegal because prohibited
by statute or against public policy are ordinarily void and
unenforceable regardless of the part performance,
ratification, or estoppel; but general prohibitions against
exceeding corporate powers and prohibitions intended to
protect a particular class or specifying the consequences of
violation may not preclude enforcement of the transaction
and an action may be had for the part unaffected by the
illegality or for equitable restitution. (19 C.J.S. 421.)
Generally, a transaction within corporate powers but
executed in an irregular or unauthorized manner is voidable
only, and may become enforceable by reason of ratification
or express or implied assent by the stockholders or by
reason of estoppel of the corporation or the other party to
the transaction to raise the objection, particularly where the
benefits are retained
As appears in paragraphs 960-964 supra, the general rule is
that a corporation must act in the manner and with the
formalities, if any, prescribed by its character or by the
general law. However, a corporation transaction or contract
which is within the corporation powers, which is neither
wrong in itself nor against public policy, but which is
defective from a failure to observe in its execution a
requirement of law enacted for the benefit or protection of a
certain class, is voidable and is valid until avoided, not void
until validated; the parties for whose benefit the requirement
was enacted may ratify it or be estoppel to assert its
invalidity, and third persons acting in good faith are not
usually affected by an irregularity on the part of the
corporation in the exercise of its granted powers. (19 C.J.S.,
423-24.)
It is true that there are authorities which told that ultra
vires acts, or those performed beyond the powers conferred
upon the corporation either by law or by its articles of
incorporation, are not only voidable, but wholly void and of
no legal effect, and that such acts cannot be validated by
ratification or be the basis of any action in court; but such
ruling does not constitute the weight of authority, the reason
being that they fail to make the important distinction we have
above adverted to. Because rule has been rejected by most
of the state courts and even by the modern treaties or
corporations (7 Flethcer, Cyc. Corps., 563-564). And now it
can be said that the majority of the cases hold that acts
which are merely ultra vires, or acts which are not illegal,
may be ratified by the stockholders of a corporation
(Brooklyn Heights R. Co. vs. Brooklyn City R. Co., 135 N.Y.
Supp. 1001).
Strictly speaking, an act of a corporation outside of its
character powers is just as such ultra vires  where all the
stockholders consent thereto as in a case where none of the
stockholders expressly or cannot be ratified so as to make it
valid, even though all the stockholders consent thereto; but
inasmuch as the stockholders in reality constitute the
corporation, it should , it would seem, be estopped to
allege ultra vires, and it is generally so held where there are
no creditors, or the creditors are not injured thereby, and
where the rights of the state or the public are not involved,
unless the act is not only ultra vires but in addition illegal
and void. of course, such consent of all the stockholders
cannot adversely affect creditors of the corporation nor
preclude a proper attack by the state because of such ultra
vires act. (7 Fletcher Corp., Sec. 3432, p. 585)
Since it is not contended that the donation under
consideration is illegal, or contrary to any of the express
provision of the articles of incorporation, nor prejudicial to
the creditors of the defendant corporation, we cannot but
logically conclude, on the strength of the authorities we have
quoted above, that said donation, even if ultra vires in the
supposition we have adverted to, is not void, and if voidable
its infirmity has been cured by ratification and subsequent
acts of the defendant corporation. The defendant
corporation, therefore, is now prevented or estopped from
contesting the validity of the donation. This is specially so in
this case when the very directors who conceived the idea of
granting said donation are practically the stockholders
themselves, with few nominal exception. This applies to the
new stockholder Jose Cojuangco who acquired his interest
after the donation has been made because of the rule that a
"purchaser of shares of stock cannot avoid ultra vires acts of
the corporation authorized by its vendor, except those done
after the purchase" (7 Fletcher, Cyc. Corps. section 3456, p.
603; Pascual vs. Del Saz Orozco, 19 Phil., 82.) Indeed, how
can the stockholders now pretend to revoke the donation
which has been partly consummated? How can the
corporation now set at naught the transfer made to Mrs.
Pirovano of the property in New York, U.S.A., the price of
which was paid by her but of the proceeds of the insurance
policies given as donation. To allow the corporation to undo
what it has done would only be most unfair but would
contravene the well-settled doctrine that the defense of ultra
vires cannot be set up or availed of in completed
transactions (7 Fletcher, Cyc. Corps. Section 3497, p. 652;
19 C.J.S., 431).
4. We now come to the fourth and last question that the
defendant corporation, by the acts it has performed
subsequent to the granting of the donation, deliberately
prevented the fulfillment of the condition precedent to the
payment of said donation such that it can be said it has
forfeited entirely due and demandable.
It should be recalled that the original resolution of the Board
of Directors adopted on July 10, 1946 which provided for the
donation of P400,000 out of the proceeds which the De la
Rama company would collect on the insurance policies
taken on the life of the late Enrico Pirovano was, as already
stated above, amended on January 6, 1947 to include,
among the conditions therein provided, that the corporation
shall proceed to pay said amount, as well as the interest due
thereon, after it shall have settled in full balance of its
bonded indebtedness in the sum of P5,000,000. It should be
recalled that on September 13, 1949, or more than 2 years
after the last amendment referred too above, the
13
stockholders adopted another resolution whereby they
formally ratified said donation but subject to the following
clarifications: (1) that the amount of the donation shall not be
effected until such time as the company shall have first duly
liquidated its present bonded indebtedness in the amount of
P3,260,855.77 to the National Development Company, or
shall have first fully redeemed the preferred shares of stock
in the amount to be issued to said company in lieu thereof,
and (2) that any and all taxes, legal fees, and expenses
connected with the transaction shall be chargeable from the
proceeds of said insurance policies.
The trial court, in considering these conditions in the light of
the acts subsequently performed by the corporation in
connection with the proceeds of the insurance policies,
considered said conditions null and void, or at most not
written because in its pinion their non-fulfillment was due to
a deliberate desistance of the corporation and not to lack of
funds to redeem the preferred shares of the National
Development Company. The conclusions arrived at by the
trial court on this point are as follows:
Fourth. — that the condition mentioned in the donation is
null and void because it depends on the exclusive will of the
donor, in accordance with the provisions of Article 1115 of
the Old Civil Code.
Fifth. — That if the condition is valid, its non-fulfillment is due
to the desistance of the defendant company from obeying
and doing the wishes and mandate of the majority of the
stockholders.
Sixth. — That the non-payment of the debt in favor of the
National Development Company is due to the lack of funds,
nor to lack of authority, but to the desire of the President of
the corporation to preserve and continue the Government
participation in the company.
To this views of the trial court, we fail to agree. There are
many factors we can consider why the failure to immediately
redeem the preferred shares issued to the National
Development Company as desired by the minor children of
the late Enrico Pirovano cannot or should not be attributed
to a mere desire on the part of the corporation to delay the
redemption, or to prejudice the interest of the minors, but
rather to protect the interest of the corporation itself. One of
them is the text of the very resolution approved by the
National Development Company on February 18, 1949
which prescribed the terms and conditions under which it
expressed its conformity to the conversion of the bonded
indebtedness into preferred shares of stock. The text of the
resolution above mentioned reads:
Resolved: That the outstanding bonded indebtedness of the
Dela Rama Steamship Co., Inc., in the approximate amount
of P3,260,855.77 be converted into non-voting preferred
shares of stock of said company, said shares to bear a fixed
dividend of 6 percent per annum which shall be cumulative
and redeemable within 15 years. Said shares shall be
preferred as to assets in the event of liquidation or
dissolution of said company but shall be non-participating.
It is plain from the text of the above resolution that the
defendant corporation had 15 years from February 18, 1949,
or until 1964, within which to effect the redemption of the
preferred shares issued to the National Development
Company. This condition cannot but be binding and
obligatory upon the donees, if they desire to maintain the
validity of the donation, for it is not only the basis upon which
the stockholders of the defendant corporation expressed
their willingness to ratify the donation, but it is also by way
which its creditor, the National Development Company,
would want it to be. If the defendant corporation is given 15
years within which to redeem the preferred shares, and that
period would expire in 1964, one cannot blame the
corporation for availing itself of this period if in its opinion it
would redound to its best interest. It cannot therefore be said
that the fulfillment of the condition for the payment of the
donation is one that wholly depends on the exclusive will of
the donor, as the lower court has concluded, simply because
it failed to meet the redemption of said shares in her manner
desired by the donees. While it may be admitted that
because of the disposition of the assets of the corporation
upon the suggestion of its general manager more than
enough funds had been raised to effect the immediate
redemption of the above shares, it is not correct to say that
the management has completely failed in its duty to pay its
obligations for, according to the evidence, a substantial
portion of the indebtedness has been paid and only a
balance of about P1,805,169.98 was outstanding when the
stockholders of the corporation decided to revoke or cancel
the donation. (Exhibit P.)
But there are other good reasons why all the available funds
have not been actually applied to the redemption of the
preferred shares, one of them being the "desire of the
president of the corporation to preserve and continue the
government participation in the company" which even the
lower court found it to be meritorious, which is one way by
which it could continue receiving the patronage and
protection of the government. Another reason is that the
redemption of the shares does not depend on the will of the
corporation alone but to a great extent on the will of a third
party, the National Development Company. In fact, as the
evidence shows, this Company had pledged these shares to
the Philippine National Bank and the Rehabilitation Finance
Corporation as a security to obtain certain loans to finance
the purchase of certain ships to be built for the use of the
company under management contract entered into between
the corporation and the National Development Company,
and this was what prevented the corporation from carrying
out its offer to pay the sum P1,956,513.07 on April 5, 1951.
Had this offer been accepted, or favorably acted upon by the
National Development Company, the indebtedness would
have been practically liquidated, leaving outstanding only
one certificate worth P217,390.45. Of course, the
corporation could have insisted in redeeming the shares if it
14
wanted to even to the extent of taking a court action if
necessary to force its creditor to relinquish the shares that
may be necessary to accomplish the redemption, but such
would be a drastic step which would have not been
advisable considering the policy right along maintained by
the corporation to preserve its cordial and smooth relation
with the government. At any rate, whether such attitude be
considered as a mere excuse to justify the delay in effecting
the redemption of the shares, or a mere desire on the part of
the corporation to retain in its possession more funds
available to attend to other pressing need as demanded by
the interest of the corporation, we fail to see in such an
attitude an improper motive to circumvent the early
realization of the desire of the minors to obtain the
immediate payment of the donation which was made
dependent upon the redemption of said shares there being
no clear evidence that may justify such design. Anyway, a
great portion of the funds went to the stockholders
themselves by way of dividends to offset, so it appears, the
huge advances that the corporation had made to them which
were entered in the books of the corporation as loans and,
therefore, they were invested for their own benefit. As
General Manager Osmeña said, "we were first confronted
with the problem of the withdrawals of the family which had
to be repaid back to the National Development Company
and one of the most practical solutions to that was to declare
dividends and reduce the amounts of their withdrawals",
which then totalled about P3,000,000.
All things considered, we are of the opinion that the finding
of the lower court that the failure of the defendant
corporation to comply with the condition of the donation is
merely due to its desistance from obeying the mandate of
the majority of the stockholders and not to lack of funds, or
to lack of authority, has no foundation in law or in fact, and,
therefore, its conclusion that because of such desistance
that condition should be deemed as fulfilled and the
payment of the donation due and demandable, is not
justified. In this respect, the decision of the lower court
should be reversed.
Having reached the foregoing conclusion, we deem it
unnecessary to discuss the other issues raised by the
parties in their briefs.
The lower court adjudicated to plaintiff an additional amount
equivalent to 20 per cent of the amount claimed as damages
by way of attorney's fees, and in our opinion, this award can
be justified under Article 2208, paragraph 2, of the new Civil
Code, which provides: "When the defendant's act or
omission has compelled the plaintiff to litigate with third
persons or to incur expenses to protect his interest",
attorney's fees nay be awarded as damages. However, the
majority believes that this award should be reduced to 10
per cent.
Wherefore, the decision appealed from should be modified
as follows: (a) that the donation made in favor of the children
of the late Enrico Pirovano of the proceeds of the insurance
policies taken on his life is valid and binding on the
defendant corporation, (b) that said donation, which
amounts to a total of P583,813.59, including interest, as it
appears in the books of the corporation as of August 31,
1951, plus interest thereon at the rate of 5 per cent per
annum from the filing of the complaint, should be paid to the
plaintiffs after the defendant corporation shall have fully
redeemed the preferred shares issued to the National
Development Company under the terms and conditions
stated in the resolutions of the Board of Directors of January
6, 1947 and June 24, 1947, as amended by the resolution of
the stockholders adopted on September 13,1949; and (c)
defendant shall pay to plaintiffs an additional amount
equivalent to 10 per cent of said amount of P583,813.59 as
damages by way of attorney's fees, and to pay the costs of
action.
Luneta Motors vs. AD Santos, 5 SCRA 809 (1962)
DIZON, J.:
Appeal from the decision of the Public Service Commission
in case No. 123401 dismissing petitioner's application for the
approval of the sale in its favor, made by the Sheriff of the
City of Manila, of the certificate of public convenience
granted before the war to Nicolas Concepcion (Commission
Cases Nos. 60604 and 60605, reconstituted after the war in
Commission Case No. 1470) to operate a taxicab service of
27 units in the City of Manila and therefrom to any point in
Luzon.
It appears that on December 31, 1941, to secure payment of
a loan evidenced by a promissory note executed by Nicolas
Concepcion and guaranteed by one Placido Esteban in
favor of petitioner, Concepcion executed a chattel mortgage
covering the above mentioned certificate in favor of
petitioner.
To secure payment of a subsequent loan obtained by
Concepcion from the Rehabilitation Finance Corporation
(now Development Bank of the Philippines) he constituted a
second mortgage on the same certificate. This second
mortgage was approved by the respondent Commission,
subject to the mortgage lien in favor of petitioner.
The certificate was later sold to Francisco Benitez, Jr., who
resold it to Rodi Taxicab Company. Both sales were made
with assumption of the mortgage in favor of the RFC, and
were also approved provisionally by the Commission,
subject to petitioner's lien.
On October 10, 1953 petitioner filed an action to foreclose
the chattel mortgage executed in its favor by Concepcion
(Civil Case No. 20853 of the Court of First Instance of
Manila) in view of the failure of the latter and his guarantor,
Placido Esteban, to pay their overdue account.
While the above case was pending, the RFC also instituted
foreclosure proceedings on its second chattel mortgage, and
15
as a result of the decision in its favor therein rendered, the
certificate of public convenience was sold at public auction
in favor of Amador D. Santos for P24,010.00 on August 31,
1956. Santos immediately applied with the Commission for
the approval of the sale, and the same was approved on
January 26, 1957, subject to the mortgage lien in favor of
petitioner.
On June 9, 1958 the Court of First Instance of Manila
rendered judgment in Civil Case No. 20853, amended on
August 1, 1958, adjudging Concepcion indebted to petitioner
in the sum of P15,197.84, with 12% interest thereon from
December 2, 1941 until full payment, plus other
assessments, and ordered that the certificate of public
convenience subject matter of the chattel mortgage be sold
at public auction in accordance with law. Accordingly, on
March 3, 1959 said certificate was sold at public auction to
petitioner, and six days thereafter the Sheriff of the City of
Manila issued in its favor the corresponding certificate of
sale. Thereupon petitioner filed the application mentioned
heretofore for the approval of the sale. In the meantime and
before his death, Amador D. Santos sold and transferred
(Commission Case No. 1272231) all his rights and interests
in the certificate of public convenience in question in favor of
the now respondent A.D. Santos, Inc., who opposed
petitioner's application.
The record discloses that in the course of the hearing on
said application and after petitioner had rested its case, the
respondent A. D. Santos, Inc., with leave of court, filed a
motion to dismiss based on the following grounds:
a) under the petitioner's Articles of Incorporation, it was not
authorized to engage in the taxicab business or operate as a
common carrier
b) the decision in Civil Case No. 20853 of the Court of First
Instance of Manila did not affect the oppositor nor its
predecessor Amador D. Santos inasmuch as neither of them
had been impleaded into the case;
c) that what was sold to the petitioner were only the "rights,
interests and participation" of Nicolas Concepcion in the
certificate that had been granted to him which were no
longer existing at the time of the sale.
On October 18, 1960, the respondent Commission, after
considering the memoranda submitted by the parties,
rendered the appealed decision sustaining the first ground
relied upon in support thereof, namely, that under
petitioner's articles of incorporation it had no authority to
engage in the taxicab business or operate as a common
carrier, and that, is a result, it could not acquire by purchase
the certificate of public convenience referred to above.
Hence, the present appeal interposed by petitioner who
claims that, in accordance with the Corporation Law and its
articles of incorporation, it can acquire by purchase the
certificate of public convenience in question, maintaining
inferentially that, after acquiring said certificate, it could
make use of it by operating a taxicab business or operate is
a common carrier by land.
There is no question that a certificate of public convenience
granted to the public operator is liable to execution
(Raymundo vs. Luneta Motor Co., 58 Phil. 889) and may be
acquired by purchase. The question involved in the present
appeal, however, is not only whether, under the Corporation
Law and petitioner's articles of incorporation, it may acquire
by purchase a certificate of public convenience, such as the
one in question, but also whether, after its acquisition,
petitioner may hold the certificate and thereunder operate as
a common carrier by land.
It is not denied that under Section 13 (5) of the Corporation
Law, a corporation created thereunder may purchase, hold,
etc., and otherwise deal in such real and personal property
is the purpose for which the corporation was formed may
permit, and the transaction of its lawful business may
reasonably and necessarily require. The issue here is
precisely whether the purpose for which petitioner was
organized and the transaction of its lawful business
reasonably and necessarily require the purchase and
holding by it of a certificate of public convenience like the
one in question and thus give it additional authority to
operate thereunder as a common carrier by land.
Petitioner claims in this regard that its corporate purposes
are to carry on a general mercantile and commercial
business, etc., and that it is authorized in its articles of
incorporation to operate and otherwise deal in and
concerning automobiles and automobile accessories'
business in all its multifarious ramification (petitioner's brief
p. 7) and to operate, etc., and otherwise dispose of vessels
and boats, etc., and to own and operate steamship and
sailing ships and other floating craft and deal in the same
and engage in the Philippine Islands and elsewhere in the
transportation of persons, merchandise and chattels by
water; all this incidental to the transportation of automobiles
(id. pp. 7-8 and Exhibit B).
We find nothing in the legal provision and the provisions of
petitioner's articles of incorporation relied upon that could
justify petitioner's contention in this case. To the contrary,
they are precisely the best evidence that it has no authority
at all to engage in the business of land transportation and
operate a taxicab service. That it may operate and otherwise
deal in automobiles and automobile accessories; that it may
engage in the transportation of persons by water does not
mean that it may engage in the business of land
transportation - an entirely different line of business. If it
could not thus engage in the line of business, it follows that it
may not acquire an certificate of public convenience to
operate a taxicab service, such as the one in question,
because such acquisition would be without purpose and
would have no necessary connection with petitioner's
legitimate business.
16
In view of the conclusion we have arrived at on the decisive
issue involved in this appeal, we deem it unnecessary to
resolve the other incidental questions raised by petitioner.
Republic vs. Acoje Mining, 3 SCRA 361 (1963)
BAUTISTA ANGELO, J.:
On May 17, 1948, the Acoje Mining Company, Inc. wrote the
Director of Posts requesting the opening of a post, telegraph
and money order offices at its mining camp at Sta. Cruz,
Zambales, to service its employees and their families that
were living in said camp. Acting on the request, the Director
of Posts wrote in reply stating that if aside from free quarters
the company would provide for all essential equipment and
assign a responsible employee to perform the duties of a
postmaster without compensation from his office until such
time as funds therefor may be available he would agree to
put up the offices requested. The company in turn replied
signifying its willingness to comply with all the requirements
outlined in the letter of the Director of Posts requesting at
the same time that it be furnished with the necessary forms
for the early establishment of a post office branch.
On April 11, 1949, the Director of Posts again wrote a letter
to the company stating among other things that "In cases
where a post office will be opened under circumstances
similar to the present, it is the policy of this office to have the
company assume direct responsibility for whatever
pecuniary loss may be suffered by the Bureau of Posts by
reason of any act of dishonesty, carelessness or negligence
on the part of the employee of the company who is assigned
to take charge of the post office," thereby suggesting that a
resolution be adopted by the board of directors of the
company expressing conformity to the above condition
relative to the responsibility to be assumed buy it in the
event a post office branch is opened as requested. On
September 2, 1949, the company informed the Director of
Posts of the passage by its board of directors of a resolution
of the following tenor: "That the requirement of the Bureau of
Posts that the Company should accept full responsibility for
all cash received by the Postmaster be complied with, and
that a copy of this resolution be forwarded to the Bureau of
Posts." The letter further states that the company feels that
that resolution fulfills the last condition imposed by the
Director of Posts and that, therefore, it would request that an
inspector be sent to the camp for the purpose of acquainting
the postmaster with the details of the operation of the branch
office.
The post office branch was opened at the camp on October
13, 1949 with one Hilario M. Sanchez as postmaster. He is
an employee of the company. On May 11, 1954, the
postmaster went on a three-day leave but never returned.
The company immediately informed the officials of the
Manila Post Office and the provincial auditor of Zambales of
Sanchez' disappearance with the result that the accounts of
the postmaster were checked and a shortage was found in
the amount of P13,867.24.
The several demands made upon the company for the
payment of the shortage in line with the liability it has
assumed having failed, the government commenced the
present action on September 10, 1954 before the Court of
First Instance of Manila seeking to recover the amount of
Pl3,867.24. The company in its answer denied liability for
said amount contending that the resolution of the board of
directors wherein it assumed responsibility for the act of the
postmaster is ultra vires, and in any event its liability under
said resolution is only that of a guarantor who answers only
after the exhaustion of the properties of the principal, aside
from the fact that the loss claimed by the plaintiff is not
supported by the office record.
Wherefore, the parties respectfully pray that the foregoing
stipulation of facts be admitted and approved by this
Honorable Court, without prejudice to the parties adducing
other evidence to prove their case not covered by this
stipulation of facts. 
After trial, the court a quo found that, of the amount claimed
by plaintiff totalling P13,867.24, only the sum of P9,515.25
was supported by the evidence, and so it rendered judgment
for the plaintiff only for the amount last mentioned. The court
rejected the contention that the resolution adopted by the
company is ultra vires and that the obligation it has assumed
is merely that of a guarantor.
Defendant took the present appeal.
The contention that the resolution adopted by the company
dated August 31, 1949 is ultra vires in the sense that it has
no authority to act on a matter which may render the
company liable as a guarantor has no factual or legal basis.
In the first place, it should be noted that the opening of a
post office branch at the mining camp of appellant
corporation was undertaken because of a request submitted
by it to promote the convenience and benefit of its
employees. The idea did not come from the government,
and the Director of Posts was prevailed upon to agree to the
request only after studying the necessity for its
establishment and after imposing upon the company certain
requirements intended to safeguard and protect the interest
of the government. Thus, after the company had signified its
willingness to comply with the requirement of the
government that it furnish free quarters and all the essential
equipment that may be necessary for the operation of the
office including the assignment of an employee who will
perform the duties of a postmaster, the Director of Posts
agreed to the opening of the post office stating that "In
cases where a post office will be opened under
circumstances similar to the present, it is the policy of this
office to have the company assume direct responsibility for
whatever pecuniary loss may be suffered by the Bureau of
Posts by reason of any act of dishonesty, carelessness or
negligence on the part of the employee of the company who
is assigned to take charge of the post office," and accepting
this condition, the company, thru its board of directors,
adopted forthwith a resolution of the following tenor: "That
17
the requirement of the Bureau of Posts that the company
should accept full responsibility for all cash received by the
Postmaster, be complied with, and that a copy of this
resolution be forwarded to the Bureau of Posts." On the
basis of the foregoing facts, it is evident that the company
cannot now be heard to complain that it is not liable for the
irregularity committed by its employee upon the technical
plea that the resolution approved by its board of directors
is ultra vires. The least that can be said is that it cannot now
go back on its plighted word on the ground of estoppel.
The claim that the resolution adopted by the board of
directors of appellant company is an ultra vires act cannot
also be entertained it appearing that the same covers a
subject which concerns the benefit, convenience and
welfare of its employees and their families. While as a rule
an ultra vires act is one committed outside the object for
which a corporation is created as defined by the law of its
organization and therefore beyond the powers conferred
upon it by law (19 C.J.S., Section 965, p. 419), there are
however certain corporate acts that may be performed
outside of the scope of the powers expressly conferred if
they are necessary to promote the interest or welfare of the
corporation. Thus, it has been held that "although not
expressly authorized to do so a corporation may become a
surety where the particular transaction is reasonably
necessary or proper to the conduct of its business," 1 and
here it is undisputed that the establishment of the local post
office is a reasonable and proper adjunct to the conduct of
the business of appellant company. Indeed, such post office
is a vital improvement in the living condition of its employees
and laborers who came to settle in its mining camp which is
far removed from the postal facilities or means of
communication accorded to people living in a city or
municipality.
Even assuming arguendo that the resolution in question
constitutes an ultra vires act, the same however is not void
for it was approved not in contravention of law, customs,
public order or public policy. The term ultra vires should be
distinguished from an illegal act for the former is merely
voidable which may be enforced by performance,
ratification, or estoppel, while the latter is void and cannot be
validated.2 It being merely voidable, an ultra vires act can be
enforced or validated if there are equitable grounds for
taking such action. Here it is fair that the resolution be
upheld at least on the ground of estoppel. On this point, the
authorities are overwhelming:
The weight of authority in the state courts is to the effect that
a transaction which is merely ultra vires and not malum in
se or malum prohibitum, is, if performed by one party, not
void as between the parties to all intents and purposes, and
that an action may be brought directly on the transaction and
relief had according to its terms. (19 C.J.S., Section 976, p.
432, citing Nettles v. Rhett, C.C.A.S.C., 94 F. 2d, reversing,
D.C., 20 F. Supp. 48)
This rule is based on the consideration that as between
private corporations, one party cannot receive the benefits
which are embraced in total performance of a contract made
with it by another party and then set up the invalidity of the
transaction as a defense." (London & Lancashire Indemnity
Co. of America v. Fairbanks Steam Shovel Co., 147 N.E.
329, 332, 112 Ohio St. 136.)
The defense of ultra vires rests on violation of trust or duty
toward stockholders, and should not be entertained where
its allowance will do greater wrong to innocent parties
dealing with corporation.
The acceptance of benefits arising from the performance by
the other party may give rise to an estoppel precluding
repudiation of the transaction. (19 C.J.S., Section 976, p.
433.)
The current of modern authorities favors the rule that where
the ultra vires transaction has been executed by the other
party and the corporation has receive d the benefit of it, the
law interposes an estoppel, and will not permit the validity of
the transaction or contract to be questioned, and this is
especially true where there is nothing in the circumstances
to put the other party to the transaction on notice that the
corporation has exceeded its powers in entering into it and
has in so doing overstepped the line of corporate privileges.
(19 C.J.S., Section 977, pp. 435-437, citing Williams v.
Peoples Building & Loan Ass'n, 97 S.W. 2d 930, 193 Ark.
118; Hays v. Galion Gas Light Co., 29 Ohio St. 330)
Neither can we entertain the claim of appellant that its
liability is only that of a guarantor. On this point, we agree
with the following comment of the court a quo: "A mere
reading of the resolution of the Board of Directors dated
August 31, 1949, upon which the plaintiff based its claim
would show that the responsibility of the defendant company
is not just that of a guarantor. Notice that the phraseology
and the terms employed are so clear and sweeping and that
the defendant assumed 'full responsibility for all cash
received by the Postmaster.' Here the responsibility of the
defendant is not just that of a guarantor. It is clearly that of a
principal."
Crisologo-Jose vs. CA, 177 SCRA 594 (1989)
REGALADO, J.:
In 1980, plaintiff Ricardo S. Santos, Jr. was the vice-
president of Mover Enterprises, Inc. in-charge of marketing
and sales; and the president of the said corporation was
Atty. Oscar Z. Benares. On April 30, 1980, Atty. Benares, in
accommodation of his clients, the spouses Jaime and Clarita
Ong, issued Check No. 093553 drawn against Traders
Royal Bank, dated June 14, 1980, in the amount of
P45,000.00 (Exh- 'I') payable to defendant Ernestina
Crisologo-Jose. Since the check was under the account of
Mover Enterprises, Inc., the same was to be signed by its
president, Atty. Oscar Z. Benares, and the treasurer of the
18
said corporation. However, since at that time, the treasurer
of Mover Enterprises was not available, Atty. Benares
prevailed upon the plaintiff, Ricardo S. Santos, Jr., to sign
the aforesaid chEck as an alternate story. Plaintiff Ricardo
S. Santos, Jr. did sign the check.
It appears that the check (Exh. '1') was issued to defendant
Ernestina Crisologo-Jose in consideration of the waiver or
quitclaim by said defendant over a certain property which
the Government Service Insurance System (GSIS) agreed
to sell to the clients of Atty. Oscar Benares, the spouses
Jaime and Clarita Ong, with the understanding that upon
approval by the GSIS of the compromise agreement with the
spouses Ong, the check will be encashed accordingly.
However, since the compromise agreement was not
approved within the expected period of time, the aforesaid
check for P45,000.00 (Exh. '1') was replaced by Atty.
Benares with another Traders Royal Bank cheek bearing
No. 379299 dated August 10, 1980, in the same amount of
P45,000.00 (Exhs. 'A' and '2'), also payable to the defendant
Jose. This replacement check was also signed by Atty.
Oscar Z. Benares and by the plaintiff Ricardo S. Santos, Jr.
When defendant deposited this replacement check (Exhs.
'A' and '2') with her account at Family Savings Bank, Mayon
Branch, it was dishonored for insufficiency of funds. A
subsequent redepositing of the said check was likewise
dishonored by the bank for the same reason. Hence,
defendant through counsel was constrained to file a criminal
complaint for violation of Batas Pambansa Blg. 22 with the
Quezon City Fiscal's Office against Atty. Oscar Z. Benares
and plaintiff Ricardo S. Santos, Jr. The investigating
Assistant City Fiscal, Alfonso Llamas, accordingly filed an
amended information with the court charging both Oscar
Benares and Ricardo S. Santos, Jr., for violation of Batas
Pambansa Blg. 22 docketed as Criminal Case No. Q-14867
of then Court of First Instance of Rizal, Quezon City.
Meanwhile, during the preliminary investigation of the
criminal charge against Benares and the plaintiff herein,
before Assistant City Fiscal Alfonso T. Llamas, plaintiff
Ricardo S. Santos, Jr. tendered cashier's check No. CC
160152 for P45,000.00 dated April 10, 1981 to the
defendant Ernestina Crisologo-Jose, the complainant in that
criminal case. The defendant refused to receive the
cashier's check in payment of the dishonored check in the
amount of P45,000.00. Hence, plaintiff encashed the
aforesaid cashier's check and subsequently deposited said
amount of P45,000.00 with the Clerk of Court on August 14,
1981 (Exhs. 'D' and 'E'). Incidentally, the cashier's check
adverted to above was purchased by Atty. Oscar Z. Benares
and given to the plaintiff herein to be applied in payment of
the dishonored check. 3
After trial, the court a quo, holding that it was "not persuaded
to believe that consignation referred to in Article 1256 of the
Civil Code is applicable to this case," rendered judgment
dismissing plaintiff s complaint and defendant's
counterclaim. 4
As earlier stated, respondent court reversed and set aside
said judgment of dismissal and revived the complaint for
consignation, directing the trial court to give due course
thereto.
Hence, the instant petition, the assignment of errors wherein
are prefatorily stated and discussed seriatim.
1. Petitioner contends that respondent Court of Appeals
erred in holding that private respondent, one of the
signatories of the check issued under the account of Mover
Enterprises, Inc., is an accommodation party under the
Negotiable Instruments Law and a debtor of petitioner to the
extent of the amount of said check.
Petitioner avers that the accommodation party in this case is
Mover Enterprises, Inc. and not private respondent who
merely signed the check in question in a representative
capacity, that is, as vice-president of said corporation, hence
he is not liable thereon under the Negotiable Instruments
Law.
The pertinent provision of said law referred to provides:
Sec. 29. Liability of accommodation party an
accommodation party is one who has signed the instrument
as maker, drawer, acceptor, or indorser, without receiving
value therefor, and for the purpose of lending his name to
some other person. Such a person is liable on the
instrument to a holder for value, notwithstanding such
holder, at the time of taking the instrument, knew him to be
only an accommodation party.
Consequently, to be considered an accommodation party, a
person must (1) be a party to the instrument, signing as
maker, drawer, acceptor, or indorser, (2) not receive value
therefor, and (3) sign for the purpose of lending his name for
the credit of some other person.
Based on the foregoing requisites, it is not a valid defense
that the accommodation party did not receive any valuable
consideration when he executed the instrument. From the
standpoint of contract law, he differs from the ordinary
concept of a debtor therein in the sense that he has not
received any valuable consideration for the instrument he
signs. Nevertheless, he is liable to a holder for value as if
the contract was not for accommodation 5 in whatever
capacity such accommodation party signed the instrument,
whether primarily or secondarily. Thus, it has been held that
in lending his name to the accommodated party, the
accommodation party is in effect a surety for the latter. 6
Assuming arguendo  that Mover Enterprises, Inc. is the
accommodation party in this case, as petitioner suggests,
the inevitable question is whether or not it may be held liable
on the accommodation instrument, that is, the check issued
in favor of herein petitioner.
We hold in the negative.
19
The aforequoted provision of the Negotiable Instruments
Law which holds an accommodation party liable on the
instrument to a holder for value, although such holder at the
time of taking the instrument knew him to be only an
accommodation party, does not include nor apply to
corporations which are accommodation parties. 7 This is
because the issue or indorsement of negotiable paper by a
corporation without consideration and for the
accommodation of another is ultra vires. 8 Hence, one who
has taken the instrument with knowledge of the
accommodation nature thereof cannot recover against a
corporation where it is only an accommodation party. If the
form of the instrument, or the nature of the transaction, is
such as to charge the indorsee with knowledge that the
issue or indorsement of the instrument by the corporation is
for the accommodation of another, he cannot recover
against the corporation thereon. 9
By way of exception, an officer or agent of a corporation
shall have the power to execute or indorse a negotiable
paper in the name of the corporation for the accommodation
of a third person only if specifically authorized to do
so. 10 Corollarily, corporate officers, such as the president
and vice-president, have no power to execute for mere
accommodation a negotiable instrument of the corporation
for their individual debts or transactions arising from or in
relation to matters in which the corporation has no legitimate
concern. Since such accommodation paper cannot thus be
enforced against the corporation, especially since it is not
involved in any aspect of the corporate business or
operations, the inescapable conclusion in law and in logic is
that the signatories thereof shall be personally liable
therefor, as well as the consequences arising from their acts
in connection therewith.
The instant case falls squarely within the purview of the
aforesaid decisional rules. If we indulge petitioner in her
aforesaid postulation, then she is effectively barred from
recovering from Mover Enterprises, Inc. the value of the
check. Be that as it may, petitioner is not without recourse.
The fact that for lack of capacity the corporation is not bound
by an accommodation paper does not thereby absolve, but
should render personally liable, the signatories of said
instrument where the facts show that the accommodation
involved was for their personal account, undertaking or
purpose and the creditor was aware thereof.
Petitioner, as hereinbefore explained, was evidently charged
with the knowledge that the cheek was issued at the
instance and for the personal account of Atty. Benares who
merely prevailed upon respondent Santos to act as co-
signatory in accordance with the arrangement of the
corporation with its depository bank. That it was a personal
undertaking of said corporate officers was apparent to
petitioner by reason of her personal involvement in the
financial arrangement and the fact that, while it was the
corporation's check which was issued to her for the amount
involved, she actually had no transaction directly with said
corporation.
There should be no legal obstacle, therefore, to petitioner's
claims being directed personally against Atty. Oscar Z.
Benares and respondent Ricardo S. Santos, Jr., president
and vice-president, respectively, of Mover Enterprises, Inc.
2. On her second assignment of error, petitioner argues that
the Court of Appeals erred in holding that the consignation
of the sum of P45,000.00, made by private respondent after
his tender of payment was refused by petitioner, was proper
under Article 1256 of the Civil Code.
Petitioner's submission is that no creditor-debtor relationship
exists between the parties, hence consignation is not proper.
Concomitantly, this argument was premised on the
assumption that private respondent Santos is not an
accommodation party.
As previously discussed, however, respondent Santos is an
accommodation party and is, therefore, liable for the value of
the check. The fact that he was only a co-signatory does not
detract from his personal liability. A co-maker or co-drawer
under the circumstances in this case is as much an
accommodation party as the other co-signatory or, for that
matter, as a lone signatory in an accommodation instrument.
Under the doctrine in Philippine Bank of Commerce vs.
Aruego, supra, he is in effect a co-surety for the
accommodated party with whom he and his co-signatory, as
the other co-surety, assume solidary liability ex lege for the
debt involved. With the dishonor of the check, there was
created a debtor-creditor relationship, as between Atty.
Benares and respondent Santos, on the one hand, and
petitioner, on the other. This circumstance enables
respondent Santos to resort to an action of consignation
where his tender of payment had been refused by petitioner.
We interpose the caveat, however, that by holding that the
remedy of consignation is proper under the given
circumstances, we do not thereby rule that all the operative
facts for consignation which would produce the effect of
payment are present in this case. Those are factual issues
that are not clear in the records before us and which are for
the Regional Trial Court of Quezon City to ascertain in Civil
Case No. Q-33160, for which reason it has advisedly been
directed by respondent court to give due course to the
complaint for consignation, and which would be subject to
such issues or claims as may be raised by defendant and
the counterclaim filed therein which is hereby ordered
similarly revived.
3. That respondent court virtually prejudged Criminal Case
No. Q-14687 of the Regional Trial Court of Quezon City filed
against private respondent for violation of Batas Pambansa
Blg. 22, by holding that no criminal liability had yet attached
to private respondent when he deposited with the court the
amount of P45,000.00 is the final plaint of petitioner.
We sustain petitioner on this score.
20
Indeed, respondent court went beyond the ratiocination
called for in the appeal to it in CA-G.R. CV. No. 05464. In its
own decision therein, it declared that "(t)he lone issue dwells
in the question of whether an accommodation party can
validly consign the amount of the debt due with the court
after his tender of payment was refused by the creditor."
Yet, from the commercial and civil law aspects determinative
of said issue, it digressed into the merits of the aforesaid
Criminal Case No. Q-14867, thus:
Section 2 of B.P. 22 establishes the prima facie evidence of
knowledge of such insufficiency of funds or credit. Thus, the
making, drawing and issuance of a check, payment of which
is refused by the drawee because of insufficient funds in or
credit with such bank is prima facie evidence of knowledge
of insufficiency of funds or credit, when the check is
presented within 90 days from the date of the check.
It will be noted that the last part of Section 2 of B.P. 22
provides that the element of knowledge of insufficiency of
funds or credit is not present and, therefore, the crime does
not exist, when the drawer pays the holder the amount due
or makes arrangements for payment in full by the drawee of
such check within five (5) banking days after receiving notice
that such check has not been paid by the drawee.
Based on the foregoing consideration, this Court finds that
the plaintiff-appellant acted within Ms legal rights when he
consigned the amount of P45,000.00 on August 14, 1981,
between August 7, 1981, the date when plaintiff-appellant
receive (sic) the notice of non-payment, and August 14,
1981, the date when the debt due was deposited with the
Clerk of Court (a Saturday and a Sunday which are not
banking days) intervened. The fifth banking day fell on
August 14, 1981. Hence, no criminal liability has yet
attached to plaintiff-appellant when he deposited the amount
of P45,000.00 with the Court a quo on August 14, 1981. 11
That said observations made in the civil case at bar and the
intrusion into the merits of the criminal case pending in
another court are improper do not have to be belabored. In
the latter case, the criminal trial court has to grapple with
such factual issues as, for instance, whether or not the
period of five banking days had expired, in the process
determining whether notice of dishonor should be reckoned
from any prior notice if any has been given or from receipt
by private respondents of the subpoena therein with
supporting affidavits, if any, or from the first day of actual
preliminary investigation; and whether there was a
justification for not making the requisite arrangements for
payment in full of such check by the drawee bank within the
said period. These are matters alien to the present
controversy on tender and consignation of payment, where
no such period and its legal effects are involved.
These are aside from the considerations that the disputed
period involved in the criminal case is only a presumptive
rule, juris tantum  at that, to determine whether or not there
was knowledge of insufficiency of funds in or credit with the
drawee bank; that payment of civil liability is not a mode for
extinguishment of criminal liability; and that the requisite
quantum of evidence in the two types of cases are not the
same.
To repeat, the foregoing matters are properly addressed to
the trial court in Criminal Case No. Q-14867, the resolution
of which should not be interfered with by respondent Court
of Appeals at the present posture of said case, much less
preempted by the inappropriate and unnecessary holdings
in the aforequoted portion of the decision of said respondent
court. Consequently, we modify the decision of respondent
court in CA-G.R. CV No. 05464 by setting aside and
declaring without force and effect its pronouncements and
findings insofar as the merits of Criminal Case No. Q-14867
and the liability of the accused therein are concerned.
WHEREFORE, subject to the aforesaid modifications, the
judgment of respondent Court of Appeals is AFFIRMED.
d. Ratification of ultra vires acts (Doctrine of estoppel or
ratification)
Even when a particular corporate transaction does not pass the
lenient Montelibano test and is held ultra vires, the transaction
would nevertheless be held binding on the corporation under the
estoppel doctrine.
Carlos pointed out that the great weight of authority is to the effect
that, where a transaction is merely ultra vires and not malum in se
or malum prohibitum, although it may be made a basis for
forfeiture of the corporate charter or dissolution of the corporation,
such transaction is, if performed by one party, not void as
between the parties, and an action may be brought directly upon
the transaction and relief had according to its terms.
Therefore, even in the case of ultra vires acts which are not per
se illegal, a corporation cannot be heard to complain that it is not
liable for the acts of its board, because of estoppel by
representation.
In Republic v. Acoje Mining Co., Inc. , the Court, in making a
distinction between ultra vires acts and illegal acts, held:
. . . The term ultra vires should be distinguished from
an illegal act for the former is merely voidable which
may be enforced by performance, ratification, or
estoppel, while the latter is void and cannot be
validated. It being merely voidable, an ultra vires act
can be enforced or validated if there are equitable
grounds for taking such action. Here it is fair that the
resolution be upheld at least on the ground of estoppel.
 Even when the contract entered into in behalf of the
corporation is outside the usual powers of the
corporate officer, the corporation’s ratification of the
contract and acceptance of the benefits arising
therefrom have made such contract binding upon the
corporation; and that the enforceability of contracts
made under Article 1403(2) of the Civil Code, where
21
 there has been no authority by the principal, is ratified
“by acceptance of benefits under them” under
Article1405 of the Civil Code.
The ratification that would bind the corporation would
have to come from the board of directors or a properly
authorized representative. Thus, without any “enabling
act or attendant ratification of corporate act”, the
documents and admissions cannot bind the
corporation.
Ratification can never be made part of the corporation
by the same persons who wrongfully assume the
power to make the contract, but the ratification must be
by the officers as governing body having authority to
make such contract.
IRINEO G. CARLOS, vs. MINDORO SUGAR CO., ET AL.
G.R. No. L-36207             October 26, 1932
IMPERIAL, J.:
The Mindoro Sugar Company is a corporation constituted in
accordance with the laws of the country and registered on July
30, 1917. According to its articles of incorporation, Exhibit 5, one
of its principal purposes was to acquire and exercise the franchise
granted by Act No. 2720 to George H. Fairchild, to substitute the
organized corporation, the Mindoro Company, and to acquire all
the rights and obligations of the latter and of Horace Havemeyer
and Charles J. Welch in the so-called San Jose Estate in the
Province of Mindoro.
The Philippine Trust Company is another domestic corporation,
registered on October 21, 1917. In its articles of incorporation,
Exhibit A, some of its purposes are expressed thus: "To acquire
by purchase, subscription, or otherwise, and to invest in, hold,
sell, or otherwise dispose of stocks, bonds, mortgages, and other
securities, or any interest in either, or any obligations or
evidences of indebtedness, of any other corporation or
corporations, domestic or foreign. . . . Without in any particular
limiting any of the powers of the corporation, it is hereby expressly
declared that the corporation shall have power to make any
guaranty respecting the dividends, interest, stock, bonds,
mortgages, notes, contracts or other obligations of any
corporation, so far as the same may be permitted by the laws of
the Philippine Islands now or hereafter in force." Its principal
purpose, then, as its name indicates, is to engage in the trust
business.
On November 17, 1917, the board of directors of the Philippine
Trust Company, composed of Phil, C. Whitaker, chairman, and
James Ross, Otto Vorster, Charles D. Ayton, and William J.
O'Donovan, members, adopted a resolution authorizing its
president, among other things, to purchase at par and in the
name and for the use of the trust corporation all or such part as
he may deem expedient, of the bonds in the value of P3,000,000
that the Mindoro Sugar Company was about to issue, and to
resell them, with or without the guarantee of said trust corporation,
at a price not less than par, and to guarantee to the Philippine
National Bank the payment of the indebtedness to said bank by
the Mindoro Sugar Company or Charles J. Welch and Horace
Havemeyer, up to P2,000,000. The relevant part of the resolution,
Exhibit 3, reads as follows:
Resolved that Mr. Phil. C. Whitaker, president of this company, be
and he hereby is authorized to purchase at par in the name and
for the use of this company all, or such part as he may deem
expedient, of the said P3,000,000 of 20-year 8 per cent coupon
bonds of the said Mindoro Sugar Company, and to resell or
otherwise dispose of the said bonds, with or without this
company's guaranty, at a price not less than par; and it was
further
Resolved that Mr. Phil. C. Whitaker, president of the company be
and he hereby is authorized in the name of this company alone or
in connection with others, by joint and several obligations, to
guarantee to the Philippine National Bank the due and punctual
payment of any and all indebtedness owing to the said Bank by
either the Mindoro Sugar Company, the Mindoro Company, or
Charles J. Welch and Horace Havemeyer, up to P2,000,000; and
it was further
Resolved that the said president, Mr. Phil. C. Whitaker, be and he
hereby is authorized to execute in the name of this company any
and all notes, mortgages, bonds, guaranties, or instruments in
writing whatever necessary for the carrying into effect of the
authority hereby granted.
In pursuance of this resolution, on December 21, 1917, the
Mindoro Sugar Company executed in favor of the Philippine Trust
Company the deed of trust, Exhibit 6, transferring all of its
property to it in consideration of the bonds it had issued to the
value of P3,000,000, the value of each bond being $1,000, which
par value, with interest at 8 per cent per annum, the Philippine
Trust Company had guaranteed to the holders, and in
consideration, furthermore, of said trust corporation having
guaranteed to the Philippine National Bank all the obligations
contracted by the Mindoro Sugar Company, Charles J. Welch and
Horace Havemeyer up to the aforesaid amount of P2,000,000.
The aforementioned deed was approved by his Excellency, the
Governor-General, upon recommendation of the Secretary of
Agriculture and Natural Resources, and in accordance with the
provisions of Act No. 2720 of the Philippine Legislature. Following
are the clauses of said Exhibit 6 material to this decision:
Whereas, for the purposes aforesaid, and in further pursuance of
said resolutions of its board of directors and of its stockholders,
the company, in order to secure the payment of said First
Mortgage, Twenty Year, Eight Per Cent, Gold Bonds, has
determined to execute and deliver to said Philippine Trust
Company, as trustee, a deed of trust of its properties hereinafter
described, and the board of directors of the Company has
approved the form of this indenture and directed that the same be
executed and delivered to said trustee; and
22
Whereas, all things necessary to make said bonds, when certified FIRST ERROR
by said trustee as in this indenture provided, valid, binding, legal
and negotiable obligations of the company and this indenture a The lower court erred in sustaining the demurrer against the
valid deed of trust to secure the payment of said bonds, have amended complaint, filed by defendant J. S. Reis (Reese) and
been done and performed, and the creation and issue of said consequently in dismissing the same with regard to this
bonds, and the execution, acknowledgment and delivery of this defendant.
deed of trust have been duly authorized;
SECOND ERROR
Now, therefore, in order to secure the payment of the principal
The lower court, without a proof to support it or an averment in
and interest of all such bonds at any time issued and outstanding
defense by the defendant Philippine Trust Company, erred in
under this indenture, according to their tenor, purport and effect,
finding hypothetically that if the guarantee made by this company
and to secure the performance and observance of all the
be held valid, the trust funds and deposits in its hands would
covenants and conditions herein contained and to declare the
probably be endangered.
terms and conditions upon which said bonds are issued, received
and held, and for and in consideration of the premises, and of the THIRD ERROR
purchase or acceptance of such bonds by the holders thereof,
and of the sum of one dollar, United States currency, to it duly The lower court erred in holding that the Philippine Trust
paid at or before the ensealing and delivery of these presents, the Company has no power to guarantee the obligation of another
receipt whereof is hereby acknowledged, the Mindoro Sugar juridical personality, for value received.
Company, party of the first part, has sold and conveyed, and by
FOURTH ERROR
these presents does sell and convey to the Philippine Trust
Company, party of the second part, its successors and assigns The lower court erred in not recognizing the validity and effect of
forever; the guarantee subscribed by the Philippine Trust Company for the
payment of the four bonds claimed in the complaint, endorsed
(Description of the property.)
upon them, and in absolving said institution from the complaint.
In consequence of this transaction, the bonds, with their coupons
FIFTH ERROR
were placed on the market and sold by the Philippine Trust
Company, all endorsed as follows: The lower court erred in absolving the ex-directors of the
Philippine Trust Company, Phil. C. Whitaker, O. Vorster, and
This is to certify that the within bond is one of the series described
Charles D. Ayton, from the complaint.
in the trust deed therein mentioned.
We shall not follow the order of the appellant's argument,
PHILIPPINE TRUST COMPANY          
deeming it unnecessary, but shall decide only the third and fourth
by: (Sgd.) PHIL. C. WHITAKER          
assignments of error upon which the merits of the case depend.
President          
For the clear understanding of this decision and to avoid
For values received, the Philippine Trust Company hereby erroneous interpretations, however, we wish to state that in this
guarantees the payment of principal and interest of the within decision we shall decide only the rights of the parties with regard
bond. to the four bonds in question and whatever we say in no wise
affects or applies to the rest of the bonds.
Manila, Jan.—2, 1918
We shall begin by saying that the majority of the justices of this
PHILIPPINE TRUST COMPANY           court who took part in the case are of opinion that the only point of
by: (Sgd.)          PHIL. C. WHITAKER           law to be decided is whether the Philippine Trust Company
President           acquired the four bonds in question, and whether as such it bound
itself legally and acted within its corporate powers in guaranteeing
The Philippine Trust Company sold thirteen bonds, Nos. 1219 to
them. This question was answered in the affirmative.1awphil.net
1231, to Ramon Diaz for P27,300, at a net profit of P100 per
bond. The four bonds Nos. 1219, 1220, 1221, and 1222, here in In adopting this conclusion we have relied principally upon the
litigation, are included in the thirteen sold to Diaz. following facts and circumstances: Firstly, that the Philippine Trust
Company, although secondarily engaged in banking, was
The Philippine Trust Company paid the appellant, upon
primarily organized as a trust corporation with full power to
presentation of the coupons, the stipulated interest from the date
acquire personal property such as the bonds in question
of their maturity until the 1st of July, 1928, when it stopped
according to both section 13 (par. 5) of the Corporation Law and
payments; and thenceforth it alleged that it did not deem itself
its duly registered by-laws and articles of incorporation; secondly,
bound to pay such interest or to redeem the obligation because
that being thus authorized to acquire the bonds, it was given
the guarantee given for the bonds was illegal and void.
implied power to guarantee them in order to place them upon the
The appellant now contends that the judgment appealed from is market under better, more advantageous conditions, and thereby
untenable, assigning the following errors: secure the profit derived from their sale:

23
It is not, however, ultra vires for a corporation to enter into
contracts of guaranty or suretyship where it does so in the
legitimate furtherance of its purposes and business. And it is well
settled that where a corporation acquires commercial paper or
bonds in the legitimate transaction of its business it may sell
them, and in furtherance of such a sale it may, in order to make
them the more readily marketable, indorse or guarantee their
payment. (7 R. C. L., p. 604 and cases cited.)
"Whenever a corporation has the power to take and dispose of
the securities of another corporation, of whatsoever kind, it may,
for the purpose of giving them a marketable quality, guarantee
their payment, even though the amount involved in the guaranty
may subject the corporation to liabilities in excess of the limit of
indebtedness which it is authorized to incur. A corporation which
has power by its charter to issue its own bonds has power to
guarantee the bonds of another corporation, which has been
taken in payment of a debt due to it, and which it sells or transfers
in payment of its own debt, the guaranty being given to enable it
to dispose of the bond to better advantage. And so guaranties of
payment of bonds taken by a loan and trust company in the
ordinary course of its business, made in connection with their
sale, are not ultra vires, and are binding." (14-A C. J., pp. 742-743
and cases cited); thirdly, that although it does not clearly appear
in the deed of trust (Exhibit 6) that the Mindoro Sugar Company
transferred the bonds therein referred to, to the Philippine Trust
Company, nevertheless, in the resolution of the board of directors
(Exhibit 3), the president of the Philippine Trust Company was
expressly authorized to purchase all or some of the bonds and to
guarantee them; whence it may be inferred that subsequent
purchasers of the bonds in the market relied upon the belief that
they were acquiring securities of the Philippine Trust Company,
guaranteed by this corporation; fourthly, that as soon as
P3,000,000 worth of bonds was issued, and by the deed of trust
the Mindoro, Sugar Company transferred all its real property to
the Philippine Trust Company, the cause or consideration of the
transfer being, (1) the guarantee given by the purchaser to the
bonds, and (2) its having likewise guaranteed its obligations and
those of Welch and Havemeyer in favor of the Philippine National
Bank up to the amount of P2,000,000; fifthly, that in transferring
its real property as aforesaid the Mindoro Sugar Company was
reduced to a real state of bankruptcy, as the parties specifically
agreed during the hearing of the case, to the point of having
become a nominal corporation without any assets whatsoever;
sixthly, that such operation or transaction cannot mean anything
other than that the real intention of the parties was that the
Philippine Trust Company acquired the bonds issued and at the
same time guaranteed the payment of their par value with
interest, because otherwise the transaction would be fraudulent,
inasmuch as nobody would be answerable to the bond-holders for
their value and interest; seventhly, that the Philippine Trust
Company had been paying the appellant the interest accrued
upon the four bonds from the date of their issuance until July 1,
1928, such payment of interest being another proof that said
corporation had really become the owner of the aforesaid bonds;
and, eightly, that the Philippine Trust Company has not adduced
any evidence to show any other conclusions.
There are other considerations leading to the same result even in
the supposition that the Philippine Trust Company did not acquire
the bonds in question, but only guaranteed them. In such a case
the guarantee of these bonds would at any rate, be valid and the
said corporation would be bound to pay the appellant their value
with the accrued interest in view of the fact that they become due
on account of the lapse of sixty (60) days, without the accrued
interest due having been paid; and the reason is that it is
estopped from denying the validity of its guarantee.
. . . On the other hand, according to the view taken by other
courts, which it must be acknowledged are in the majority, a
recovery directly upon the contract is permitted, on the ground
that the corporation, having received money or property by virtue
of a contract not immoral or illegal of itself, is estopped to deny
liability; and that the only remedy is one on behalf of the state to
punish the corporation for violating the law. (7 R. C. L., pp. 680-
681 and cases cited.)
. . . The doctrine of ultra vires has been declared to be entirely the
creation of the courts and is of comparatively modern origin. The
defense is by some courts regarded as an ungracious and odious
one, to be sustained only where the most persuasive
considerations of public policy are involved, and there are
numerous decisions and dicta to the effect that the plea should
not as a general rule prevail whether interposed for or against the
corporation, where it will not advance justice but on the contrary
will accomplish a legal wrong. (14-A C. J., pp. 314-315.)
The doctrine of the Supreme Court of the United States together
with the English courts and some of the state courts is that no
performance upon either side can validate an ultra vires
transaction or authorize an action to be maintained directly upon
it. However, the great weight of authority in the state courts is to
the effect that a transaction which is merely ultra vires and not
malum in se or malum prohibitum although it may be made by the
state a basis for the forfeiture of the corporate charter or the
dissolution of the corporation, is, if performed by one party, not
void as between the parties to all intents and purposes, and that
an action may be brought directly upon the transaction and relief
had according to its terms. ( 14-A C. J., pp. 319-320.)
When a contract is not on its face necessarily beyond the scope
of the power of the corporation by which it was made, it will, in the
absence of proof to the contrary, be presumed to be valid.
Corporations are presumed to contract within their powers. The
doctrine of ultra vires, when invoked for or against a corporation,
should not be allowed to prevail where it would defeat the ends of
justice or work a legal wrong. (Coleman vs. Hotel de France Co.,
29 Phil., 323.)
Guaranties of payment of bonds taken by a loan and trust
company in the ordinary course of its business, made in
connection with their sale, are not ultra vires, and are binding.
(Broadway Nat. Bank vs. Baker, 57 N. E., p. 603.)
It has been intimated according to section 121 of the Corporation
Law, the Philippine Trust Company, as a banking institution, could
not guarantee the bonds to the value of P3,000,000 because this
24
amount far exceeds its capital of P1,000,000 of which only one-
half has been subscribed and paid. Section 121 reads as follows:
SEC. 212. No such bank shall at any time be indebted or in any
way liable to an amount exceeding the amount of its capital stock
at such time actually paid in and remaining undiminished by
losses or otherwise, except on account of demands of the
following nature:
(1) Moneys deposited with or collected by the bank;
(2) Bills of exchange or drafts drawn against money actually on
deposit to the credit of the bank or due thereto;
(3) Liabilities to the stockholders of the bank for dividends and
reserve profits.
This difficulty is easily obviated by bearing in mind that, as we
stated above, the banking operations are not the primary aim of
said corporation, which is engaged essentially in the trust
business, and that the prohibition of the law is not applicable to
the Philippine Trust Company, for the evidence shows that
Mindoro Sugar Company transferred all its real property, with the
improvements, to it, and the value of both, which surely could not
be less than the value of the obligation guaranteed, became a
part of its capital and assets; in other words, with the value of the
real property transferred to it, the Philippine Trust Company had
enough capital and assets to meet the amount of the bonds
guaranteed with interest thereon.
Wherefore, the decision appealed from is reversed and the
Philippine Trust Company is sentenced to pay to the appellant the
sum of four thousand dollars ($4,000) with interest at eight per
cent (8%) per annum from July 1, 1928 until fully paid, and the
costs of both instances. So ordered.
NOTE:
Carlos v. Mindoro Sugar:
"When a contract is not on its face necessarily beyond the scope
of the power of the corporation by which it was made, it will, in the
absence of proof to the contrary, be presumed to be valid.
Corporations are presumed to contract within their powers. The
doctrine of ultra vires, when invoked for or against a corporation,
should not be allowed to prevail where it would defeat the ends of
justice or work a legal wrong.
The defense of the ultra vires doctrine is by some courts regarded
as an ungracious and odious one, to be sustained only where the
most persuasive considerations of public policy are involved, and
there are numerous decisions and dicta to the effect that the plea
should not as a general rule prevail whether interposes for or
against the corporation, where it will not advance justice but on
the contrary will accomplish a legal wrong.
The doctrine is that no performance upon either side can validate
an ultra vires transaction or authorize an action to be maintained
directly upon it. However, the great weight of authority in the state
courts is to the effect that a transaction which is merely ultra vires
and not malum in se or malum prohibitum although it may
be made by the state a basis for the forfeiture of the corporate
charter or the dissolution of the corporation, is, if performed by
one party, not void as between the parties to all intents and
purposes, and that an action may be brought directly upon the
transaction and relief had according to its terms.
3. Liability for Torts or Crimes
a. For Torts
PHILIPPINE NATIONAL BANK vs. CA, et.al.
G.R. No. L-27155 May 18, 1978
ANTONIO, J.:
Plaintiff executed its Bond, Exh. A, with defendant Rita Gueco
Tapnio as principal, in favor of the Philippine National Bank
Branch at San Fernando, Pampanga, to guarantee the payment
of defendant Rita Gueco Tapnio's account with said Bank. In turn,
to guarantee the payment of whatever amount the bonding
company would pay to the Philippine National Bank, both
defendants executed the indemnity agreement, Exh. B. Under the
terms and conditions of this indemnity agreement, whatever
amount the plaintiff would pay would earn interest at the rate of
12% per annum, plus attorney's fees in the amount of 15 % of the
whole amount due in case of court litigation.
The original amount of the bond was for P4,000.00; but the
amount was later reduced to P2,000.00.
It is not disputed that defendant Rita Gueco Tapnio was indebted
to the bank in the sum of P2,000.00, plus accumulated interests
unpaid, which she failed to pay despite demands. The Bank wrote
a letter of demand to plaintiff, as per Exh. C; whereupon, plaintiff
paid the bank on September 18, 1957, the full amount due and
owing in the sum of P2,379.91, for and on account of defendant
Rita Gueco's obligation (Exhs. D and D-1).
Plaintiff, in turn, made several demands, both verbal and written,
upon defendants (Exhs. E and F), but to no avail.
Defendant Rita Gueco Tapnio admitted all the foregoing facts.
She claims, however, when demand was made upon her by
plaintiff for her to pay her debt to the Bank, that she told the
Plaintiff that she did not consider herself to be indebted to the
Bank at all because she had an agreement with one Jacobo-
Nazon whereby she had leased to the latter her unused export
sugar quota for the 1956-1957 agricultural year, consisting of
1,000 piculs at the rate of P2.80 per picul, or for a total of
P2,800.00, which was already in excess of her obligation
guaranteed by plaintiff's bond, Exh. A. This lease agreement,
according to her, was with the knowledge of the bank. But the
Bank has placed obstacles to the consummation of the lease, and
the delay caused by said obstacles forced 'Nazon to rescind the
lease contract. Thus, Rita Gueco Tapnio filed her third-party
complaint against the Bank to recover from the latter any and all
sums of money which may be adjudged against her and in favor
of the plaitiff plus moral damages, attorney's fees and costs.
25
Insofar as the contentions of the parties herein are concerned, we
quote with approval the following findings of the lower court based
on the evidence presented at the trial of the case:
It has been established during the trial that Mrs. Tapnio had an
export sugar quota of 1,000 piculs for the agricultural year 1956-
1957 which she did not need. She agreed to allow Mr. Jacobo C.
Tuazon to use said quota for the consideration of P2,500.00 (Exh.
"4"-Gueco). This agreement was called a contract of lease of
sugar allotment.
At the time of the agreement, Mrs. Tapnio was indebted to the
Philippine National Bank at San Fernando, Pampanga. Her
indebtedness was known as a crop loan and was secured by a
mortgage on her standing crop including her sugar quota
allocation for the agricultural year corresponding to said standing
crop. This arrangement was necessary in order that when Mrs.
Tapnio harvests, the P.N.B., having a lien on the crop, may
effectively enforce collection against her. Her sugar cannot be
exported without sugar quota allotment Sometimes, however, a
planter harvest less sugar than her quota, so her excess quota is
utilized by another who pays her for its use. This is the
arrangement entered into between Mrs. Tapnio and Mr. Tuazon
regarding the former's excess quota for 1956-1957 (Exh. "4"-
Gueco).
Since the quota was mortgaged to the P.N.B., the contract of
lease had to be approved by said Bank, The same was submitted
to the branch manager at San Fernando, Pampanga. The latter
required the parties to raise the consideration of P2.80 per picul
or a total of P2,800.00 (Exh. "2-Gueco") informing them that "the
minimum lease rental acceptable to the Bank, is P2.80 per picul."
In a letter addressed to the branch manager on August 10, 1956,
Mr. Tuazon informed the manager that he was agreeable to
raising the consideration to P2.80 per picul. He further informed
the manager that he was ready to pay said amount as the funds
were in his folder which was kept in the bank.
Explaining the meaning of Tuazon's statement as to the funds, it
was stated by him that he had an approved loan from the bank
but he had not yet utilized it as he was intending to use it to pay
for the quota. Hence, when he said the amount needed to pay
Mrs. Tapnio was in his folder which was in the bank, he meant
and the manager understood and knew he had an approved loan
available to be used in payment of the quota. In said Exh. "6-
Gueco", Tuazon also informed the manager that he would want
for a notice from the manager as to the time when the bank
needed the money so that Tuazon could sign the corresponding
promissory note.
Further Consideration of the evidence discloses that when the
branch manager of the Philippine National Bank at San Fernando
recommended the approval of the contract of lease at the price of
P2.80 per picul (Exh. 1 1-Bank), whose recommendation was
concurred in by the Vice-president of said Bank, J. V.
Buenaventura, the board of directors required that the amount be
raised to 13.00 per picul. This act of the board of directors was
communicated to Tuazon, who in turn asked for a reconsideration
thereof. On November 19, 1956, the branch manager submitted
Tuazon's request for reconsideration to the board of directors with
another recommendation for the approval of the lease at P2.80
per picul, but the board returned the recommendation unacted
upon, considering that the current price prevailing at the time was
P3.00 per picul (Exh. 9-Bank).
The parties were notified of the refusal on the part of the board of
directors of the Bank to grant the motion for reconsideration. The
matter stood as it was until February 22, 1957, when Tuazon
wrote a letter (Exh. 10-Bank informing the Bank that he was no
longer interested to continue the deal, referring to the lease of
sugar quota allotment in favor of defendant Rita Gueco Tapnio.
The result is that the latter lost the sum of P2,800.00 which she
should have received from Tuazon and which she could have
paid the Bank to cancel off her indebtedness,
The court below held, and in this holding we concur that failure of
the negotiation for the lease of the sugar quota allocation of Rita
Gueco Tapnio to Tuazon was due to the fault of the directors of
the Philippine National Bank, The refusal on the part of the bank
to approve the lease at the rate of P2.80 per picul which, as
stated above, would have enabled Rita Gueco Tapnio to realize
the amount of P2,800.00 which was more than sufficient to pay off
her indebtedness to the Bank, and its insistence on the rental
price of P3.00 per picul thus unnecessarily increasing the value
by only a difference of P200.00. inevitably brought about the
rescission of the lease contract to the damage and prejudice of
Rita Gueco Tapnio in the aforesaid sum of P2,800.00. The
unreasonableness of the position adopted by the board of
directors of the Philippine National Bank in refusing to approve
the lease at the rate of P2.80 per picul and insisting on the rate of
P3.00 per picul, if only to increase the retail value by only P200.00
is shown by the fact that all the accounts of Rita Gueco Tapnio
with the Bank were secured by chattel mortgage on standing
crops, assignment of leasehold rights and interests on her
properties, and surety bonds, aside from the fact that from Exh. 8-
Bank, it appears that she was offering to execute a real estate
mortgage in favor of the Bank to replace the surety bond This
statement is further bolstered by the fact that Rita Gueco Tapnio
apparently had the means to pay her obligation fact that she has
been granted several value of almost P80,000.00 for the
agricultural years from 1952 to 56. 1
Its motion for the reconsideration of the decision of the Court of
Appeals having been denied, petitioner filed the present petition.
The petitioner contends that the Court of Appeals erred:
(1) In finding that the rescission of the lease contract of the 1,000
piculs of sugar quota allocation of respondent Rita Gueco Tapnio
by Jacobo C. Tuazon was due to the unjustified refusal of
petitioner to approve said lease contract, and its unreasonable
insistence on the rental price of P3.00 instead of P2.80 per picul;
and
(2) In not holding that based on the statistics of sugar price and
prices of sugar quota in the possession of the petitioner, the
latter's Board of Directors correctly fixed the rental of price per
26
picul of 1,000 piculs of sugar quota leased by respondent Rita
Gueco Tapnio to Jacobo C. Tuazon at P3.00 per picul.
Petitioner argued that as an assignee of the sugar quota of
Tapnio, it has the right, both under its own Charter and under the
Corporation Law, to safeguard and protect its rights and interests
under the deed of assignment, which include the right to approve
or disapprove the said lease of sugar quota and in the exercise of
that authority, its
Board of Directors necessarily had authority to determine and fix
the rental price per picul of the sugar quota subject of the lease
between private respondents and Jacobo C. Tuazon. It argued
further that both under its Charter and the Corporation Law,
petitioner, acting thru its Board of Directors, has the perfect right
to adopt a policy with respect to fixing of rental prices of export
sugar quota allocations, and in fixing the rentals at P3.00 per
picul, it did not act arbitrarily since the said Board was guided by
statistics of sugar price and prices of sugar quotas prevailing at
the time. Since the fixing of the rental of the sugar quota is a
function lodged with petitioner's Board of Directors and is a matter
of policy, the respondent Court of Appeals could not substitute its
own judgment for that of said Board of Directors, which acted in
good faith, making as its basis therefore the prevailing market
price as shown by statistics which were then in their possession.
Finally, petitioner emphasized that under the appealed judgment,
it shall suffer a great injustice because as a creditor, it shall be
deprived of a just claim against its debtor (respondent Rita Gueco
Tapnio) as it would be required to return to respondent Philamgen
the sum of P2,379.71, plus interest, which amount had been
previously paid to petitioner by said insurance company in behalf
of the principal debtor, herein respondent Rita Gueco Tapnio, and
without recourse against respondent Rita Gueco Tapnio.
We must advert to the rule that this Court's appellate jurisdiction
in proceedings of this nature is limited to reviewing only errors of
law, accepting as conclusive the factual fin dings of the Court of
Appeals upon its own assessment of the evidence. 2
The contract of lease of sugar quota allotment at P2.50 per picul
between Rita Gueco Tapnio and Jacobo C. Tuazon was executed
on April 17, 1956. This contract was submitted to the Branch
Manager of the Philippine National Bank at San Fernando,
Pampanga. This arrangement was necessary because Tapnio's
indebtedness to petitioner was secured by a mortgage on her
standing crop including her sugar quota allocation for the
agricultural year corresponding to said standing crop. The latter
required the parties to raise the consideration to P2.80 per picul,
the minimum lease rental acceptable to the Bank, or a total of
P2,800.00. Tuazon informed the Branch Manager, thru a letter
dated August 10, 1956, that he was agreeable to raising the
consideration to P2.80 per picul. He further informed the manager
that he was ready to pay the said sum of P2,800.00 as the funds
were in his folder which was kept in the said Bank. This referred
to the approved loan of Tuazon from the Bank which he intended
to use in paying for the use of the sugar quota. The Branch
Manager submitted the contract of lease of sugar quota allocation
to the Head Office on September 7, 1956, with a recommendation
for approval, which recommendation was concurred in by the
Vice-President of the Bank, Mr. J. V. Buenaventura. This
notwithstanding, the Board of Directors of petitioner required that
the consideration be raised to P3.00 per picul.
Tuazon, after being informed of the action of the Board of
Directors, asked for a reconsideration thereof. On November 19,
1956, the Branch Manager submitted the request for
reconsideration and again recommended the approval of the
lease at P2.80 per picul, but the Board returned the
recommendation unacted, stating that the current price prevailing
at that time was P3.00 per picul.
On February 22, 1957, Tuazon wrote a letter, informing the Bank
that he was no longer interested in continuing the lease of sugar
quota allotment. The crop year 1956-1957 ended and Mrs. Tapnio
failed to utilize her sugar quota, resulting in her loss in the sum of
P2,800.00 which she should have received had the lease in favor
of Tuazon been implemented.
It has been clearly shown that when the Branch Manager of
petitioner required the parties to raise the consideration of the
lease from P2.50 to P2.80 per picul, or a total of P2,800-00, they
readily agreed. Hence, in his letter to the Branch Manager of the
Bank on August 10, 1956, Tuazon informed him that the minimum
lease rental of P2.80 per picul was acceptable to him and that he
even offered to use the loan secured by him from petitioner to pay
in full the sum of P2,800.00 which was the total consideration of
the lease. This arrangement was not only satisfactory to the
Branch Manager but it was also approves by Vice-President J. V.
Buenaventura of the PNB. Under that arrangement, Rita Gueco
Tapnio could have realized the amount of P2,800.00, which was
more than enough to pay the balance of her indebtedness to the
Bank which was secured by the bond of Philamgen.
There is no question that Tapnio's failure to utilize her sugar quota
for the crop year 1956-1957 was due to the disapproval of the
lease by the Board of Directors of petitioner. The issue, therefore,
is whether or not petitioner is liable for the damage caused.
As observed by the trial court, time is of the essence in the
approval of the lease of sugar quota allotments, since the same
must be utilized during the milling season, because any allotment
which is not filled during such milling season may be reallocated
by the Sugar Quota Administration to other holders of
allotments. 3 There was no proof that there was any other person
at that time willing to lease the sugar quota allotment of private
respondents for a price higher than P2.80 per picul. "The fact that
there were isolated transactions wherein the consideration for the
lease was P3.00 a picul", according to the trial court, "does not
necessarily mean that there are always ready takers of said price.
" The unreasonableness of the position adopted by the petitioner's
Board of Directors is shown by the fact that the difference
between the amount of P2.80 per picul offered by Tuazon and the
P3.00 per picul demanded by the Board amounted only to a total
sum of P200.00. Considering that all the accounts of Rita Gueco
Tapnio with the Bank were secured by chattel mortgage on
standing crops, assignment of leasehold rights and interests on
her properties, and surety bonds and that she had apparently "the
27
means to pay her obligation to the Bank, as shown by the fact that
she has been granted several sugar crop loans of the total value
of almost P80,000.00 for the agricultural years from 1952 to
1956", there was no reasonable basis for the Board of Directors of
petitioner to have rejected the lease agreement because of a
measly sum of P200.00.
While petitioner had the ultimate authority of approving or
disapproving the proposed lease since the quota was mortgaged
to the Bank, the latter certainly cannot escape its responsibility of
observing, for the protection of the interest of private respondents,
that degree of care, precaution and vigilance which the
circumstances justly demand in approving or disapproving the
lease of said sugar quota. The law makes it imperative that every
person "must in the exercise of his rights and in the performance
of his duties, act with justice, give everyone his due, and observe
honesty and good faith, 4 This petitioner failed to do. Certainly, it
knew that the agricultural year was about to expire, that by its
disapproval of the lease private respondents would be unable to
utilize the sugar quota in question. In failing to observe the
reasonable degree of care and vigilance which the surrounding
circumstances reasonably impose, petitioner is consequently
liable for the damages caused on private respondents. Under
Article 21 of the New Civil Code, "any person who wilfully causes
loss or injury to another in a manner that is contrary to morals,
good customs or public policy shall compensate the latter for the
damage." The afore-cited provisions on human relations were
intended to expand the concept of torts in this jurisdiction by
granting adequate legal remedy for the untold number of moral
wrongs which is impossible for human foresight to specifically
provide in the statutes. 5
A corporation is civilly liable in the same manner as natural
persons for torts, because "generally speaking, the rules
governing the liability of a principal or master for a tort committed
by an agent or servant are the same whether the principal or
master be a natural person or a corporation, and whether the
servant or agent be a natural or artificial person. All of the
authorities agree that a principal or master is liable for every tort
which he expressly directs or authorizes, and this is just as true of
a corporation as of a natural person, A corporation is liable,
therefore, whenever a tortious act is committed by an officer or
agent under express direction or authority from the stockholders
or members acting as a body, or, generally, from the directors as
the governing body."  And any such person who shall make a false or fraudulent return
b. Criminal Liability
People vs. Tan Boon Kong, 54 PHIL 607 (1930)
OSTRAND, J.:
This is an appeal from an order of the Judge of the Twenty-third
Judicial District sustaining to demurrer to an information charging
the defendant Tan Boon Kong with the violation of section 1458 of
Act No. 2711 as amended. The information reads as follows:
That on and during the four quarters of the year 1924, in the
municipality of Iloilo, Province of Iloilo, Philippine Islands, the said
accused, as corporation organized under the laws of the
Philippine Islands and engaged in the purchase and the sale of
sugar, "bayon," coprax, and other native products and as such
object to the payment of internal-revenue taxes upon its sales, did
then and there voluntarily, illegally, and criminally declare in 1924
for the purpose of taxation only the sum of P2,352,761.94, when
in truth and in fact, and the accused well knew that the total gross
sales of said corporation during that year amounted to
P2543,303.44, thereby failing to declare for the purpose of
taxation the amount of P190,541.50, and voluntarily and illegally
not paying the Government as internal-revenue percentage taxes
the sum of P2,960.12, corresponding to 1½ per cent of said
undeclared sales.
The question to be decided is whether the information sets forth
facts rendering the defendant, as manager of the corporation
liable criminally under section 2723 of Act No. 2711 for violation of
section 1458 of the same act for the benefit of said corporation.
Section 1458 and 2723 read as follows:
SEC. 1458. Payment of percentage taxes  — Quarterly reports of
earnings. — The percentage taxes on business shall be payable
at the end of each calendar quarter in the amount lawfully due on
the business transacted during each quarter; and it shall be on
the duty of every person conducting a business subject to such
tax, within the same period as is allowed for the payment of the
quarterly installments of the fixed taxes without penalty, to make a
true and complete return of the amount of the receipts or earnings
of his business during the preceeding quarter and pay the tax due
thereon. . . . (Act No. 2711.)
SEC. 2723. Failure to make true return of receipts and sales . —
Any person who, being required by law to make a return of the
amount of his receipts, sales, or business, shall fail or neglect to
make such return within the time required, shall be punished by a
fine not exceeding two thousand pesos or by imprisonment for a
term not exceeding one year, or both.
shall be punished by a fine not exceeding ten thousand pesos or
by imprisonment for a term not exceeding two years, or both. (Act
No. 2711.)
Apparently, the court below based the appealed ruling on the
ground that the offense charged must be regarded as committed
by the corporation and not by its officials or agents. This view is in
direct conflict with the great weight of authority. a corporation can
act only through its officers and agent s, and where the business
itself involves a violation of the law, the correct rule is that all who
participate in it are liable (Grall and Ostrand's Case, 103 Va., 855,
and authorities there cited.)
28
In case of State vs. Burnam (17 Wash., 199), the court went so far
as to hold that the manager of a diary corporation was criminally
liable for the violation of a statute by the corporation through he
was not present when the offense was committed.
In the present case the information or complaint alleges that he
defendant was the manager of a corporation which was engaged
in business as a merchant, and as such manager, he made a
false return, for purposes of taxation, of the total amount of sale
made by said false return constitutes a violation of law, the
defendant, as the author of the illegal act, must necessarily
answer for its consequences, provided that the allegation are
proven.
The ruling of the court below sustaining the demurrer to the
complaint is therefore reversed, and the case will be returned to
said court for further proceedings not inconsistent with our view as
hereinafter stated. Without costs. So ordered.
Sia vs. People, 121 SCRA 655 (1983)
DE CASTRO, J.:
Petition for review of the decision of the Court of Appeals affirming
the decision of the Court of First Instance of Manila convicting the
appellant of estafa, under an information which reads:
That in, about or during the period comprised' between July 24,
1963 and December 31, 1963, both dates inclusive, in the City of
Manila, Philippines, the said accused did then and there willfully,
unlawfully and feloniously defraud the Continental Bank, a
banking institution duly organized and doing business in the City
of Manila, in the following manner, to wit: the said accused, in his
capacity as president and general manager of the Metal
Manufacturing of the Philippines, Inc. (MEMAP) and on behalf of
said company, obtained delivery of 150 M/T Cold Rolled Steel
Sheets valued at P 71,023.60 under a trust receipt agreement
under L/C No. 63/109, which cold rolled steel sheets were
consigned to the Continental Bank, under the express obligation
on the part of said accused of holding the said steel sheets in
trust and selling them and turning over the proceeds of the sale to
the Continental Bank; but the said accused, once in possession of
the said goods, far from complying with his aforesaid obligation
and despite demands made upon him to do so, with intent to
defraud, failed and refused to return the said cold rolled sheets or
account for the proceeds thereof, if sold, which the said accused
willfully, unlawfully and feloniously misappropriated, misapplied
and converted to his own personal use and benefit, to the
damage and prejudice of the said Continental Bank in the total
amount of P146,818.68, that is the balance including the interest
after deducting the sum of P28,736.47 deposited by the said
accused with the bank as marginal deposit and forfeited by the
said from the value of the said goods, in the said sum of
P71,023.60. (Original Records, p. 1).
In reviewing the evidence, the Court of Appeals came up with the
following findings of facts which the Solicitor General alleges
should be conclusive upon this Court:
There is no debate on certain antecedents: Accused Jose 0. Sia
sometime prior to 24 May, 1963, was General Manager of the
Metal Manufacturing Company of the Philippines, Inc. engaged in
the manufacture of steel office equipment; on 31 May, 1963,
because his company was in need of raw materials to be
imported from abroad, he applied for a letter of credit to import
steel sheets from Mitsui Bussan Kaisha, Ltd. of Tokyo, Japan, the
application being directed to the Continental Bank, herein
complainant, Exhibit B and his application having been approved,
the letter of credit was opened on 5 June, 1963 in the amount of
$18,300, Exhibit D; and the goods arrived sometime in July, 1963
according to accused himself, tsn. II:7; now from here on there is
some debate on the evidence; according to Complainant Bank,
there was permitted delivery of the steel sheets only upon
execution of a trust receipt, Exhibit A; while according to the
accused, the goods were delivered to him sometime before he
executed that trust receipt in fact they had already been
converted into steel office equipment by the time he signed said
trust receipt, tsn. II:8; but there is no question - and this is not
debated - that the bill of exchange issued for the purpose of
collecting the unpaid account thereon having fallen due (see Exh.
B) neither accused nor his company having made payment
thereon notwithstanding demands, Exh. C and C-1, dated 17 and
27 December, 1963, and the accounts having reached the sum in
pesos of P46,818.68 after deducting his deposit valued at
P28,736.47; that was the reason why upon complaint by
Continental Bank, the Fiscal filed the information after preliminary
investigation as has been said on 22 October, 1964. (Rollo [CA],
pp. 103- 104).
The first issue raised, which in effect combines the first three
errors assigned, is whether petitioner Jose O. Sia, having only
acted for and in behalf of the Metal Manufacturing Company of
the Philippines (Metal Company, for short) as President thereof in
dealing with the complainant, the Continental Bank, (Bank for
short) he may be liable for the crime charged.
In discussing this question, petitioner proceeds, in the meantime,
on the assumption that the acts imputed to him would constitute
the crime of estafa, which he also disputes, but seeks to avoid
liability on his theory that the Bank knew all along that petitioner
was dealing with him only as an officer of the Metal Company
which was the true and actual applicant for the letter of credit
(Exhibit B) and which, accordingly, assumed sole obligation under
the trust receipt (Exhibit A). In disputing the theory of petitioner,
the Solicitor General relies on the general principle that when a
corporation commits an act which would constitute a punishable
offense under the law, it is the responsible officers thereof, acting
for the corporation, who would be punished for the crime, The
Court of Appeals has subscribed to this view when it quoted
approvingly from the decision of the trial court the following:
A corporation is an artificial person, an abstract being. If the
defense theory is followed unscrupulously legions would form
corporations to commit swindle right and left where nobody could
be convicted, for it would be futile and ridiculous to convict an
abstract being that can not be pinched and confined in jail like a
natural, living person, hence the result of the defense theory
29
would be hopeless chose in business and finance. It is completely
untenable. (Rollo [CA], p. 108.)
The above-quoted observation of the trial court would seem to be
merely restating a general principle that for crimes committed by a
corporation, the responsible officers thereof would personally bear
the criminal liability. (People vs. Tan Boon Kong, 54 Phil. 607.
See also Tolentino, Commercial Laws of the Philippines, p. 625,
citing cases.)
The case cited by the Court of Appeals in support of its stand-Tan
Boon Kong case, supra-may however not be squarely applicable
to the instant case in that the corporation was directly required by
law to do an act in a given manner, and the same law makes the
person who fails to perform the act in the prescribed manner
expressly liable criminally. The performance of the act is an
obligation directly imposed by the law on the corporation. Since it
is a responsible officer or officers of the corporation who actually
perform the act for the corporation, they must of necessity be the
ones to assume the criminal liability; otherwise this liability as
created by the law would be illusory, and the deterrent effect of
the law, negated.
In the present case, a distinction is to be found with the Tan Boon
Kong case in that the act alleged to be a crime is not in the
performance of an act directly ordained by law to be performed by
the corporation. The act is imposed by agreement of parties, as a
practice observed in the usual pursuit of a business or a
commercial transaction. The offense may arise, if at all, from the
peculiar terms and condition agreed upon by the parties to the
transaction, not by direct provision of the law. The intention of the
parties, therefore, is a factor determinant of whether a crime was
committed or whether a civil obligation alone intended by the
parties. With this explanation, the distinction adverted to between
the Tan Boon Kong case and the case at bar should come out
clear and meaningful. In the absence of an express provision of
law making the petitioner liable for the criminal offense committed
by the corporation of which he is a president as in fact there is no
such provisions in the Revised Penal Code under which petitioner
is being prosecuted, the existence of a criminal liability on his part
may not be said to be beyond any doubt. In all criminal
prosecutions, the existence of criminal liability for which the
accused is made answerable must be clear and certain. The
maxim that all doubts must be resolved in favor of the accused is
always of compelling force in the prosecution of offenses. This
Court has thus far not ruled on the criminal liability of an officer of
a corporation signing in behalf of said corporation a trust receipt
of the same nature as that involved herein. In the case of Samo
vs. People, L-17603-04, May 31, 1962, the accused was not
clearly shown to be acting other than in his own behalf, not in
behalf of a corporation.
The next question is whether the violation of a trust receipt
constitutes estafa under Art. 315 (1-[2]) of the Revised Penal
Code, as also raised by the petitioner. We now entertain grave
doubts, in the light of the promulgation of P.D. 115 providing for
the regulation of trust receipts transaction, which is a very
comprehensive piece of legislation, and includes an express
provision that if the violation or offense is committed by a
corporation, partnership, association or other juridical entities the
penalty provided for in this Decree shall be imposed upon the
directors, officers, employees or other officials or persons therein
responsible for the offense, without prejudice to civil liabilities
arising from the criminal offense. The question that suggests itself
is, therefore, whether the provisions of the Revised Penal Code,
Article 315, par. 1 (b) are not adequate to justify the punishment
of the act made punishable by P.D. 115, that the necessity was
felt for the promulgation of the decree. To answer this question, it
is imperative to make an indepth analysis of the conditions usually
embodied in a trust receipt to best their legal sufficiency to
constitute the basis for holding the violation of said conditions as
estafa under Article 315 of the Revised Penal Code which P.D.
115 now seeks to punish expressly.
As executed, the trust receipt in question reads:
I/WE HEREBY AGREE TO HOLD SAID GOODS IN TRUST FOR
THE SAID BANK as its property with liberty to sell the same for its
account but without authority to make any other disposition
whatsoever of the said goods or any part thereof (or the proceeds
thereof) either way of conditional sale, pledge or otherwise;
In case of sale I/we further agree to hand the proceeds as soon
as received to the BANK to apply against the relative acceptance
(as described above) and for the payment of any other
indebtedness of mine/ours to CONTINENTAL BANK. (Original
Records, p. 108)
One view is to consider the transaction as merely that of a
security of a loan, and that the trust element is but and inherent
feature of the security aspect of the arrangement where the goods
are placed in the possession of the "entrustee," to use the term
used in P.D. 115, violation of the element of trust not being
intended to be in the same concept as how it is understood in the
criminal sense. The other view is that the bank as the owner and
"entrustor" delivers the goods to the "entrustee, " with the
authority to sell the goods, but with the obligation to give the
proceeds to the "entrustor" or return the goods themselves if not
sold, a trust being thus created in the full sense as contemplated
by Art. 315, par. 1 (b).
We consider the view that the trust receipt arrangement gives rise
only to civil liability as the more feasible, before the promulgation
of P.D. 115. The transaction being contractual, the intent of the
parties should govern. Since the trust receipt has, by its nature, to
be executed upon the arrival of the goods imported, and acquires
legal standing as such receipt only upon acceptance by the
"entrustee," the trust receipt transaction itself, the antecedent acts
consisting of the application of the L/C, the approval of the L/C
and the making of the marginal deposit and the effective
importation of the goods, all through the efforts of the importer
who has to find his supplier, arrange for the payment and
shipment of the imported goods-all these circumstances would
negate any intent of subjecting the importer to criminal
prosecution, which could possibly give rise to a case of
imprisonment for non-payment of a debt. The parties, therefore,
are deemed to have consciously entered into a purely commercial
transaction that could give rise only to civil liability, never to
30
subject the "entrustee" to criminal prosecution. Unlike, for
instance, when several pieces of jewelry are received by a person
from the owner for sale on commission, and the former
misappropriates for his personal use and benefit, either the
jewelries or the proceeds of the sale, instead of returning them to
the owner as is his obligation, the bank is not in the same concept
as the jewelry owner with full power of disposition of the goods,
which the bank does not have, for the bank has previously
extended a loan which the L/C represents to the importer, and by
that loan, the importer should be the real owner of the goods. If
under the trust receipt the bank is made to appear as the owner, it
was but an artificial expedient, more of a legal fiction than fact, for
if it were really so, it could dispose of the goods in any manner it
wants, which it cannot do, just to give consistency with the
purpose of the trust receipt of giving a stronger security for the
loan obtained by the importer. To consider the bank as the true
owner from the inception of the transaction would be to disregard
the loan feature thereof, a feature totally absent in the case of the
transaction between the jewel-owner and his agent.
Consequently, if only from the fact that the trust receipt
transaction is susceptible to two reasonable interpretation, one as
giving rise only to civil liability for the violation of the condition
thereof, and the other, as generating also criminal liability, the
former should be adopted as more favorable to the supposed
offender. (Duran vs. CA, L-39758, May 7, 1976, 71 SCRA 68;
People vs. Parayno, L-24804, July 5, 1968, 24 SCRA 3; People
vs. Abendan, L-1481, January 28,1949,82 Phil. 711; People vs.
Bautista, L-1502, May 24, 1948, 81 Phil. 78; People vs. Abana, L-
39, February 1, 1946, 76 Phil. 1.)
There is, moreover, one circumstance appearing on record, the
significance of which should be properly evaluated. As stated in
petitioner's brief (page 2), not denied by the People, "before the
Continental Bank approved the application for a letter of credit
(Exhibit 'D'), subsequently covered by the trust receipt, the
Continental Bank examined the financial capabilities of the
applicant, Metal Manufacturing Company of the Philippines
because that was the bank's standard procedure (Testimony of
Mr. Ernesto Garlit, Asst. Manager of the Foreign Department,
Continental Bank, t.s.n., August 30, 1965). The Continental Bank
did not examine the financial capabilities of herein petitioner, Jose
O. Sia, in connection with the same letter of credit. ( Ibid). " From
this fact, it would appear as positively established that the
intention of the parties in entering into the "trust receipt"
agreement is merely to afford a stronger security for the loan
evidenced by the letter of credit, may be not as an ordinary
pledge as observed in P.N.B. vs. Viuda e Hijos de Angel Jose, et
al.,  63 Phil. 814, citing In re Dunlap C (206 Fed. 726) but neither
as a transaction falling under Article 315-1 (b) of the Revised
Penal Code giving rise to criminal liability, as previously explained
and demonstrated.
It is worthy of note that the civil liability imposed by the trust
receipt is exclusively on the Metal Company. Speaking of such
liability alone, as one arising from the contract, as distinguished
from the civil liability arising out of a crime, the petitioner was
never intended to be equally liable as the corporation. Without
being made so liable personally as the corporation is, there would
then be no basis for holding him criminally liable, for any violation
of the trust receipt. This is made clearly so upon consideration of
the fact that in the violation of the trust agreement and in the
absence of positive evidence to the contrary, only the corporation
benefited, not the petitioner personally, yet, the allegation of the
information is to effect that the misappropriation or conversion
was for the personal use and benefit of the petitioner, with respect
to which there is variance between the allegation and the
evidence.
It is also worthy of note that while the trust receipt speaks of
authority to sell, the fact is undisputed that the imported goods
were to be manufactured into finished products first before they
could be sold, as the Bank had full knowledge of. This fact is,
however, not embodied in the trust agreement, thus impressing
on the trust receipt vagueness and ambiguity which should not be
the basis for criminal prosecution, in the event of a violation of the
terms of the trust receipt. Again, P.D. 115 has express provision
relative to the "manufacture or process of the good with the
purpose of ultimate sale," as a distinct condition from that of "to
sell the goods or procure their sale" (Section 4, (1). Note that what
is embodied in the receipt in question is the  sale of imported
goods, the manufacture thereof not having been mentioned. The
requirement in criminal prosecution, that there must be strict
harmony, not variance, between the allegation and the evidence,
may therefore, not be said to have been satisfied in the instance
case.
c. Moral Damages
ABS-CBN vs. CA (G.R. No. 128690 [January 1999])
DAVIDE, JR., CJ.:
In this petition for review on certiorari, petitioner ABS-CBN
Broadcasting Corp. (hereafter ABS-CBN) seeks to reverse and
set aside the decision 1 of 31 October 1996 and the resolution 2 of
10 March 1997 of the Court of Appeals in CA-G.R. CV No. 44125.
The former affirmed with modification the decision 3 of 28 April
1993 of the Regional Trial Court (RTC) of Quezon City, Branch
80, in Civil Case No. Q-92-12309. The latter denied the motion to
reconsider the decision of 31 October 1996.
The antecedents, as found by the RTC and adopted by the Court
of Appeals, are as follows:
In 1990, ABS-CBN and Viva executed a Film Exhibition
Agreement (Exh. "A") whereby Viva gave ABS-CBN an exclusive
right to exhibit some Viva films. Sometime in December 1991, in
accordance with paragraph 2.4 [sic] of said agreement stating that
—.
1.4 ABS-CBN shall have the right of first refusal to the next
twenty-four (24) Viva films for TV telecast under such terms as
may be agreed upon by the parties hereto, provided, however,
that such right shall be exercised by ABS-CBN from the actual
offer in writing.
Viva, through defendant Del Rosario, offered ABS-CBN, through
its vice-president Charo Santos-Concio, a list of three(3) film
31
packages (36 title) from which ABS-CBN may exercise its right of
first refusal under the afore-said agreement (Exhs. "1" par, 2, "2,"
"2-A'' and "2-B"-Viva). ABS-CBN, however through Mrs. Concio,
"can tick off only ten (10) titles" (from the list) "we can purchase"
(Exh. "3" - Viva) and therefore did not accept said list (TSN, June
8, 1992, pp. 9-10). The titles ticked off by Mrs. Concio are not the
subject of the case at bar except the film ''Maging Sino Ka Man."
For further enlightenment, this rejection letter dated January 06,
1992 (Exh "3" - Viva) is hereby quoted:
6 January 1992
Dear Vic,
This is not a very formal business letter I am writing to you as I
would like to express my difficulty in recommending the purchase
of the three film packages you are offering ABS-CBN.
From among the three packages I can only tick off 10 titles we
can purchase. Please see attached. I hope you will understand
my position. Most of the action pictures in the list do not have big
action stars in the cast. They are not for primetime. In line with
this I wish to mention that I have not scheduled for telecast
several action pictures in out very first contract because of the
cheap production value of these movies as well as the lack of big
action stars. As a film producer, I am sure you understand what I
am trying to say as Viva produces only big action pictures.
In fact, I would like to request two (2) additional runs for these
movies as I can only schedule them in our non-primetime slots.
We have to cover the amount that was paid for these movies
because as you very well know that non-primetime advertising
rates are very low. These are the unaired titles in the first contract.
1. Kontra Persa [sic].
2. Raider Platoon.
3. Underground guerillas
4. Tiger Command
5. Boy de Sabog
6. Lady Commando
7. Batang Matadero
8. Rebelyon
I hope you will consider this request of mine.
The other dramatic films have been offered to us before and have
been rejected because of the ruling of MTRCB to have them aired
at 9:00 p.m. due to their very adult themes.
As for the 10 titles I have choosen [ sic] from the 3 packages
please consider including all the other Viva movies produced last
year. I have quite an attractive offer to make.
Thanking you and with my warmest regards.
(Signed)
Charo Santos-Concio
On February 27, 1992, defendant Del Rosario approached ABS-
CBN's Ms. Concio, with a list consisting of 52 original movie titles
(i.e. not yet aired on television) including the 14 titles subject of
the present case, as well as 104 re-runs (previously aired on
television) from which ABS-CBN may choose another 52 titles, as
a total of 156 titles, proposing to sell to ABS-CBN airing rights
over this package of 52 originals and 52 re-runs for
P60,000,000.00 of which P30,000,000.00 will be in cash and
P30,000,000.00 worth of television spots (Exh. "4" to "4-C" Viva;
"9" -Viva).
On April 2, 1992, defendant Del Rosario and ABS-CBN general
manager, Eugenio Lopez III, met at the Tamarind Grill Restaurant
in Quezon City to discuss the package proposal of Viva. What
transpired in that lunch meeting is the subject of conflicting
versions. Mr. Lopez testified that he and Mr. Del Rosario allegedly
agreed that ABS-CRN was granted exclusive film rights to
fourteen (14) films for a total consideration of P36 million; that he
allegedly put this agreement as to the price and number of films in
a "napkin'' and signed it and gave it to Mr. Del Rosario (Exh. D;
TSN, pp. 24-26, 77-78, June 8, 1992). On the other hand, Del
Rosario denied having made any agreement with Lopez regarding
the 14 Viva films; denied the existence of a napkin in which Lopez
wrote something; and insisted that what he and Lopez discussed
at the lunch meeting was Viva's film package offer of 104 films (52
originals and 52 re-runs) for a total price of P60 million. Mr. Lopez
promising [sic]to make a counter proposal which came in the form
of a proposal contract Annex "C" of the complaint (Exh. "1"·- Viva;
Exh. "C" - ABS-CBN).
On April 06, 1992, Del Rosario and Mr. Graciano Gozon of RBS
Senior vice-president for Finance discussed the terms and
conditions of Viva's offer to sell the 104 films, after the rejection of
the same package by ABS-CBN.
On April 07, 1992, defendant Del Rosario received through his
secretary, a handwritten note from Ms. Concio, (Exh. "5" - Viva),
which reads: "Here's the draft of the contract. I hope you find
everything in order," to which was attached a draft exhibition
agreement (Exh. "C''- ABS-CBN; Exh. "9" - Viva, p. 3) a counter-
proposal covering 53 films, 52 of which came from the list sent by
defendant Del Rosario and one film was added by Ms. Concio, for
a consideration of P35 million. Exhibit "C" provides that ABS-CBN
is granted films right to 53 films and contains a right of first refusal
to "1992 Viva Films." The said counter proposal was however
rejected by Viva's Board of Directors [in the] evening of the same
day, April 7, 1992, as Viva would not sell anything less than the
package of 104 films for P60 million pesos (Exh. "9" - Viva), and
such rejection was relayed to Ms. Concio.
On April 29, 1992, after the rejection of ABS-CBN and following
several negotiations and meetings defendant Del Rosario and
Viva's President Teresita Cruz, in consideration of P60 million,
signed a letter of agreement dated April 24, 1992. granting RBS
the exclusive right to air 104 Viva-produced and/or acquired films
32
(Exh. "7-A" - RBS; Exh. "4" - RBS) including the fourteen (14)
films subject of the present case. 4
On 27 May 1992, ABS-CBN filed before the RTC a complaint for
specific performance with a prayer for a writ of preliminary
injunction and/or temporary restraining order against private
respondents Republic Broadcasting Corporation 5 (hereafter
RBS ), Viva Production (hereafter VIVA), and Vicente Del
Rosario. The complaint was docketed as Civil Case No. Q-92-
12309.
On 27 May 1992, RTC issued a temporary restraining
order 6 enjoining private respondents from proceeding with the
airing, broadcasting, and televising of the fourteen VIVA films
subject of the controversy, starting with the film Maging Sino Ka
Man, which was scheduled to be shown on private respondents
RBS' channel 7 at seven o'clock in the evening of said date.
On 17 June 1992, after appropriate proceedings, the RTC issued
an
order 7 directing the issuance of a writ of preliminary injunction
upon ABS-CBN's posting of P35 million bond. ABS-CBN moved
for the reduction of the bond, 8 while private respondents moved
for reconsideration of the order and offered to put up a
counterbound. 9
In the meantime, private respondents filed separate answers with
counterclaim. 10 RBS also set up a cross-claim against VIVA..
On 3 August 1992, the RTC issued an order 11 dissolving the writ
of preliminary injunction upon the posting by RBS of a P30 million
counterbond to answer for whatever damages ABS-CBN might
suffer by virtue of such dissolution. However, it reduced
petitioner's injunction bond to P15 million as a condition precedent
for the reinstatement of the writ of preliminary injunction should
private respondents be unable to post a counterbond.
At the pre-trial 12 on 6 August 1992, the parties, upon suggestion
of the court, agreed to explore the possibility of an amicable
settlement. In the meantime, RBS prayed for and was granted
reasonable time within which to put up a P30 million counterbond
in the event that no settlement would be reached.
As the parties failed to enter into an amicable settlement RBS
posted on 1 October 1992 a counterbond, which the RTC
approved in its Order of 15 October 1992.13
On 19 October 1992, ABS-CBN filed a motion for
reconsideration 14 of the 3 August and 15 October 1992 Orders,
which RBS opposed. 15
On 29 October 1992, the RTC conducted a pre-trial. 16
Pending resolution of its motion for reconsideration, ABS-CBN
filed with the Court of Appeals a petition 17 challenging the RTC's
Orders of 3 August and 15 October 1992 and praying for the
issuance of a writ of preliminary injunction to enjoin the RTC from
enforcing said orders. The case was docketed as CA-G.R. SP No.
29300.
On 3 November 1992, the Court of Appeals issued a temporary
restraining order18 to enjoin the airing, broadcasting, and
televising of any or all of the films involved in the controversy.
On 18 December 1992, the Court of Appeals promulgated a
decision 19 dismissing the petition in CA -G.R. No. 29300 for being
premature. ABS-CBN challenged the dismissal in a petition for
review filed with this Court on 19 January 1993, which was
docketed as G.R. No. 108363.
In the meantime the RTC received the evidence for the parties in
Civil Case No. Q-192-1209. Thereafter, on 28 April 1993, it
rendered a decision 20 in favor of RBS and VIVA and against ABS-
CBN disposing as follows:
WHEREFORE, under cool reflection and prescinding from the
foregoing, judgments is rendered in favor of defendants and
against the plaintiff.
(1) The complaint is hereby dismissed;
(2) Plaintiff ABS-CBN is ordered to pay defendant RBS the
following:
a) P107,727.00, the amount of premium paid by RBS to the
surety which issued defendant RBS's bond to lift the injunction;
b) P191,843.00 for the amount of print advertisement for "Maging
Sino Ka Man" in various newspapers;
c) Attorney's fees in the amount of P1 million;
d) P5 million as and by way of moral damages;
e) P5 million as and by way of exemplary damages;
(3) For defendant VIVA, plaintiff ABS-CBN is ordered to pay
P212,000.00 by way of reasonable attorney's fees.
(4) The cross-claim of defendant RBS against defendant VIVA is
dismissed.
(5) Plaintiff to pay the costs.
According to the RTC, there was no meeting of minds on the price
and terms of the offer. The alleged agreement between Lopez III
and Del Rosario was subject to the approval of the VIVA Board of
Directors, and said agreement was disapproved during the
meeting of the Board on 7 April 1992. Hence, there was no basis
for ABS-CBN's demand that VIVA signed the 1992 Film Exhibition
Agreement. Furthermore, the right of first refusal under the 1990
Film Exhibition Agreement had previously been exercised per Ms.
Concio's letter to Del Rosario ticking off ten titles acceptable to
them, which would have made the 1992 agreement an entirely
new contract.
On 21 June 1993, this Court denied21 ABS-CBN's petition for
review in G.R. No. 108363, as no reversible error was committed
by the Court of Appeals in its challenged decision and the case
had "become moot and academic in view of the dismissal of the
main action by the court a quo  in its decision" of 28 April 1993.
33
Aggrieved by the RTC's decision, ABS-CBN appealed to the
Court of Appeals claiming that there was a perfected contract
between ABS-CBN and VIVA granting ABS-CBN the exclusive
right to exhibit the subject films. Private respondents VIVA and
Del Rosario also appealed seeking moral and exemplary
damages and additional attorney's fees.
In its decision of 31 October 1996, the Court of Appeals agreed
with the RTC that the contract between ABS-CBN and VIVA had
not been perfected, absent the approval by the VIVA Board of
Directors of whatever Del Rosario, it's agent, might have agreed
with Lopez III. The appellate court did not even believe ABS-
CBN's evidence that Lopez III actually wrote down such an
agreement on a "napkin," as the same was never produced in
court. It likewise rejected ABS-CBN's insistence on its right of first
refusal and ratiocinated as follows:
As regards the matter of right of first refusal, it may be true that a
Film Exhibition Agreement was entered into between Appellant
ABS-CBN and appellant VIVA under Exhibit "A" in 1990, and that
parag. 1.4 thereof provides:
1.4 ABS-CBN shall have the right of first refusal to the next
twenty-four (24) VIVA films for TV telecast under such terms as
may be agreed upon by the parties hereto, provided, however,
that such right shall be exercised by ABS-CBN within a period of
fifteen (15) days from the actual offer in writing (Records, p. 14).
[H]owever, it is very clear that said right of first refusal in favor of
ABS-CBN shall still be subject to such terms as may be agreed
upon by the parties thereto, and that the said right shall be
exercised by ABS-CBN within fifteen (15) days from the actual
offer in writing.
Said parag. 1.4 of the agreement Exhibit "A" on the right of first
refusal did not fix the price of the film right to the twenty-four (24)
films, nor did it specify the terms thereof. The same are still left to
be agreed upon by the parties.
In the instant case, ABS-CBN's letter of rejection Exhibit 3
(Records, p. 89) stated that it can only tick off ten (10) films, and
the draft contract Exhibit "C" accepted only fourteen (14) films,
while parag. 1.4 of Exhibit "A'' speaks of the next twenty-four (24)
films.
The offer of V1VA was sometime in December 1991 (Exhibits 2,
2-A. 2-B; Records, pp. 86-88; Decision, p. 11, Records, p. 1150),
when the first list of VIVA films was sent by Mr. Del Rosario to
ABS-CBN. The Vice President of ABS-CBN, Ms. Charo Santos-
Concio, sent a letter dated January 6, 1992 (Exhibit 3, Records, p.
89) where ABS-CBN exercised its right of refusal by rejecting the
offer of VIVA.. As aptly observed by the trial court, with the said
letter of Mrs. Concio of January 6, 1992, ABS-CBN had lost its
right of first refusal. And even if We reckon the fifteen (15) day
period from February 27, 1992 (Exhibit 4 to 4-C) when another list
was sent to ABS-CBN after the letter of Mrs. Concio, still the
fifteen (15) day period within which ABS-CBN shall exercise its
right of first refusal has already expired.22
Accordingly, respondent court sustained the award of actual
damages consisting in the cost of print advertisements and the
premium payments for the counterbond, there being adequate
proof of the pecuniary loss which RBS had suffered as a result of
the filing of the complaint by ABS-CBN. As to the award of moral
damages, the Court of Appeals found reasonable basis therefor,
holding that RBS's reputation was debased by the filing of the
complaint in Civil Case No. Q-92-12309 and by the non-showing
of the film "Maging Sino Ka Man." Respondent court also held that
exemplary damages were correctly imposed by way of example or
correction for the public good in view of the filing of the complaint
despite petitioner's knowledge that the contract with VIVA had not
been perfected, It also upheld the award of attorney's fees,
reasoning that with ABS-CBN's act of instituting Civil Case No, Q-
92-1209, RBS was "unnecessarily forced to litigate." The
appellate court, however, reduced the awards of moral damages
to P2 million, exemplary damages to P2 million, and attorney's
fees to P500, 000.00.
On the other hand, respondent Court of Appeals denied VIVA and
Del Rosario's appeal because it was "RBS and not VIVA which
was actually prejudiced when the complaint was filed by ABS-
CBN."
Its motion for reconsideration having been denied, ABS-CBN filed
the petition in this case, contending that the Court of Appeals
gravely erred in
I
. . . RULING THAT THERE WAS NO PERFECTED CONTRACT
BETWEEN PETITIONER AND PRIVATE RESPONDENT VIVA
NOTWITHSTANDING PREPONDERANCE OF EVIDENCE
ADDUCED BY PETITIONER TO THE CONTRARY.
II
. . . IN AWARDING ACTUAL AND COMPENSATORY DAMAGES
IN FAVOR OF PRIVATE RESPONDENT RBS.
III
. . . IN AWARDING MORAL AND EXEMPLARY DAMAGES IN
FAVOR OF PRIVATE RESPONDENT RBS.
IV
. . . IN AWARDING ATTORNEY'S FEES IN FAVOR OF RBS.
ABS-CBN claims that it had yet to fully exercise its right of first
refusal over twenty-four titles under the 1990 Film Exhibition
Agreement, as it had chosen only ten titles from the first list. It
insists that we give credence to Lopez's testimony that he and Del
Rosario met at the Tamarind Grill Restaurant, discussed the
terms and conditions of the second list (the 1992 Film Exhibition
Agreement) and upon agreement thereon, wrote the same on a
paper napkin. It also asserts that the contract has already been
effective, as the elements thereof, namely, consent, object, and
consideration were established. It then concludes that the Court
of Appeals' pronouncements were not supported by law and
jurisprudence, as per our decision of 1 December 1995
34
in Limketkai Sons Milling, Inc. v. Court of Appeals, 23 which
cited Toyota Shaw, Inc. v. Court of Appeals , 24 Ang Yu Asuncion
v. Court of Appeals, 25 and Villonco Realty Company v.
Bormaheco. Inc.26
Anent the actual damages awarded to RBS, ABS-CBN disavows
liability therefor. RBS spent for the premium on the counterbond
of its own volition in order to negate the injunction issued by the
trial court after the parties had ventilated their respective positions
during the hearings for the purpose. The filing of the counterbond
was an option available to RBS, but it can hardly be argued that
ABS-CBN compelled RBS to incur such expense. Besides, RBS
had another available option, i.e., move for the dissolution or the
injunction; or if it was determined to put up a counterbond, it could
have presented a cash bond. Furthermore under Article 2203 of
the Civil Code, the party suffering loss or injury is also required to
exercise the diligence of a good father of a family to minimize the
damages resulting from the act or omission. As regards the cost
of print advertisements, RBS had not convincingly established
that this was a loss attributable to the non showing "Maging Sino
Ka Man"; on the contrary, it was brought out during trial that with
or without the case or the injunction, RBS would have spent such
an amount to generate interest in the film.
ABS-CBN further contends that there was no clear basis for the
awards of moral and exemplary damages. The controversy
involving ABS-CBN and RBS did not in any way originate from
business transaction between them. The claims for such
damages did not arise from any contractual dealings or from
specific acts committed by ABS-CBN against RBS that may be
characterized as wanton, fraudulent, or reckless; they arose by
virtue only of the filing of the complaint, An award of moral and
exemplary damages is not warranted where the record is bereft of
any proof that a party acted maliciously or in bad faith in filing an
action. 27 In any case, free resort to courts for redress of wrongs is
a matter of public policy. The law recognizes the right of every
one to sue for that which he honestly believes to be his right
without fear of standing trial for damages where by lack of
sufficient evidence, legal technicalities, or a different interpretation
of the laws on the matter, the case would lose ground. 28 One who
makes use of his own legal right does no injury. 29 If damage
results front the filing of the complaint, it is damnum absque
injuria. 30 Besides, moral damages are generally not awarded in
favor of a juridical person, unless it enjoys a good reputation that
was debased by the offending party resulting in social
humiliation.31
As regards the award of attorney's fees, ABS-CBN maintains that
the same had no factual, legal, or equitable justification. In
sustaining the trial court's award, the Court of Appeals acted in
clear disregard of the doctrines laid down in Buan
v. Camaganacan  32 that the text of the decision should state the
reason why attorney's fees are being awarded; otherwise, the
award should be disallowed. Besides, no bad faith has been
imputed on, much less proved as having been committed by,
ABS-CBN. It has been held that "where no sufficient showing of
bad faith would be reflected in a party' s persistence in a case
other than an erroneous conviction of the righteousness of his
cause, attorney's fees shall not be recovered as cost." 33
On the other hand, RBS asserts that there was no perfected
contract between ABS-CBN and VIVA absent any meeting of
minds between them regarding the object and consideration of
the alleged contract. It affirms that the ABS-CBN's claim of a right
of first refusal was correctly rejected by the trial court. RBS insist
the premium it had paid for the counterbond constituted a
pecuniary loss upon which it may recover. It was obliged to put up
the counterbound due to the injunction procured by ABS-CBN.
Since the trial court found that ABS-CBN had no cause of action
or valid claim against RBS and, therefore not entitled to the writ of
injunction, RBS could recover from ABS-CBN the premium paid
on the counterbond. Contrary to the claim of ABS-CBN, the cash
bond would prove to be more expensive, as the loss would be
equivalent to the cost of money RBS would forego in case the
P30 million came from its funds or was borrowed from banks.
RBS likewise asserts that it was entitled to the cost of
advertisements for the cancelled showing of the film "Maging Sino
Ka Man" because the print advertisements were put out to
announce the showing on a particular day and hour on Channel
7, i.e., in its entirety at one time, not a series to be shown on a
periodic basis. Hence, the print advertisement were good and
relevant for the particular date showing, and since the film could
not be shown on that particular date and hour because of the
injunction, the expenses for the advertisements had gone to
waste.
As regards moral and exemplary damages, RBS asserts that
ABS-CBN filed the case and secured injunctions purely for the
purpose of harassing and prejudicing RBS. Pursuant then to
Article 19 and 21 of the Civil Code, ABS-CBN must be held liable
for such damages. Citing  Tolentino,34 damages may be awarded
in cases of abuse of rights even if the act done is not illicit and
there is abuse of rights were plaintiff institutes and action purely
for the purpose of harassing or prejudicing the defendant.
In support of its stand that a juridical entity can recover moral and
exemplary damages, private respondents RBS cited People
v. Manero,35 where it was stated that such entity may recover
moral and exemplary damages if it has a good reputation that is
debased resulting in social humiliation. it then ratiocinates; thus:
There can be no doubt that RBS' reputation has been debased by
ABS-CBN's acts in this case. When RBS was not able to fulfill its
commitment to the viewing public to show the film "Maging Sino
Ka Man" on the scheduled dates and times (and on two occasions
that RBS advertised), it suffered serious embarrassment and
social humiliation. When the showing was canceled, late viewers
called up RBS' offices and subjected RBS to verbal abuse
("Announce kayo nang announce, hindi ninyo naman ilalabas,"
"nanloloko yata kayo") (Exh. 3-RBS, par. 3). This alone was not
something RBS brought upon itself. it was exactly what ABS-CBN
had planned to happen.
The amount of moral and exemplary damages cannot be said to
be excessive. Two reasons justify the amount of the award.
The first is that the humiliation suffered by RBS is national extent.
RBS operations as a broadcasting company is [sic] nationwide. Its
35
clientele, like that of ABS-CBN, consists of those who own and
watch television. It is not an exaggeration to state, and it is a
matter of judicial notice that almost every other person in the
country watches television. The humiliation suffered by RBS is
multiplied by the number of televiewers who had anticipated the
showing of the film "Maging Sino Ka Man" on May 28 and
November 3, 1992 but did not see it owing to the cancellation.
Added to this are the advertisers who had placed commercial
spots for the telecast and to whom RBS had a commitment in
consideration of the placement to show the film in the dates and
times specified.
The second is that it is a competitor that caused RBS to suffer the
humiliation. The humiliation and injury are far greater in degree
when caused by an entity whose ultimate business objective is to
lure customers (viewers in this case) away from the
competition. 36
For their part, VIVA and Vicente del Rosario contend that the
findings of fact of the trial court and the Court of Appeals do not
support ABS-CBN's claim that there was a perfected contract.
Such factual findings can no longer be disturbed in this petition for
review under Rule 45, as only questions of law can be raised, not
questions of fact. On the issue of damages and attorneys fees,
they adopted the arguments of RBS.
The key issues for our consideration are (1) whether there was a
perfected contract between VIVA and ABS-CBN, and (2) whether
RBS is entitled to damages and attorney's fees. It may be noted
that the award of attorney's fees of P212,000 in favor of VIVA is
not assigned as another error.
I.
The first issue should be resolved against ABS-CBN. A contract is
a meeting of minds between two persons whereby one binds
himself to give something or to render some service to
another 37 for a consideration. there is no contract unless the
following requisites concur: (1) consent of the contracting parties;
(2) object certain which is the subject of the contract; and (3)
cause of the obligation, which is established.38 A contract
undergoes three stages:
(a) preparation, conception, or generation, which is the period of
negotiation and bargaining, ending at the moment of agreement
of the parties;
(b) perfection or birth of the contract, which is the moment when
the parties come to agree on the terms of the contract; and
(c) consummation or death, which is the fulfillment or performance
of the terms agreed upon in the contract. 39
Contracts that are consensual in nature are perfected upon mere
meeting of the minds, Once there is concurrence between the
offer and the acceptance upon the subject matter, consideration,
and terms of payment a contract is produced. The offer must be
certain. To convert the offer into a contract, the acceptance must
be absolute and must not qualify the terms of the offer; it must be
plain, unequivocal, unconditional, and without variance of any sort
from the proposal. A qualified acceptance, or one that involves a
new proposal, constitutes a counter-offer and is a rejection of the
original offer. Consequently, when something is desired which is
not exactly what is proposed in the offer, such acceptance is not
sufficient to generate consent because any modification or
variation from the terms of the offer annuls the offer.40
When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at
the Tamarind Grill on 2 April 1992 to discuss the package of films,
said package of 104 VIVA films was VIVA's offer to ABS-CBN to
enter into a new Film Exhibition Agreement. But ABS-CBN, sent,
through Ms. Concio, a counter-proposal in the form of a draft
contract proposing exhibition of 53 films for a consideration of P35
million. This counter-proposal could be nothing less than the
counter-offer of Mr. Lopez during his conference with Del Rosario
at Tamarind Grill Restaurant. Clearly, there was no acceptance of
VIVA's offer, for it was met by a counter-offer which substantially
varied the terms of the offer.
ABS-CBN's reliance in Limketkai Sons Milling, Inc. v. Court of
Appeals 41 and Villonco Realty Company v. Bormaheco, Inc., 42 is
misplaced. In these cases, it was held that an acceptance may
contain a request for certain changes in the terms of the offer and
yet be a binding acceptance as long as "it is clear that the
meaning of the acceptance is positively and unequivocally to
accept the offer, whether such request is granted or not." This
ruling was, however, reversed in the resolution of 29 March
1996, 43 which ruled that the acceptance of all offer must be
unqualified and absolute, i.e., it "must be identical in all respects
with that of the offer so as to produce consent or meeting of the
minds."
On the other hand, in Villonco, cited in Limketkai, the alleged
changes in the revised counter-offer were not material but merely
clarificatory of what had previously been agreed upon. It cited the
statement in Stuart v. Franklin Life Insurance Co.44 that "a
vendor's change in a phrase of the offer to purchase, which
change does not essentially change the terms of the offer, does
not amount to a rejection of the offer and the tender of a counter-
offer." 45 However, when any of the elements of the contract is
modified upon acceptance, such alteration amounts to a counter-
offer.
In the case at bar, ABS-CBN made no unqualified acceptance of
VIVA's offer. Hence, they underwent a period of bargaining. ABS-
CBN then formalized its counter-proposals or counter-offer in a
draft contract, VIVA through its Board of Directors, rejected such
counter-offer, Even if it be conceded arguendo that Del Rosario
had accepted the counter-offer, the acceptance did not bind VIVA,
as there was no proof whatsoever that Del Rosario had the
specific authority to do so.
Under Corporation Code,46 unless otherwise provided by said
Code, corporate powers, such as the power; to enter into
contracts; are exercised by the Board of Directors. However, the
Board may delegate such powers to either an executive
committee or officials or contracted managers. The delegation,
except for the executive committee, must be for specific
purposes, 47 Delegation to officers makes the latter agents of the
36
corporation; accordingly, the general rules of agency as to the
bindings effects of their acts would
apply. 48 For such officers to be deemed fully clothed by the
corporation to exercise a power of the Board, the latter must
specially authorize them to do so. That Del Rosario did not have
the authority to accept ABS-CBN's counter-offer was best
evidenced by his submission of the draft contract to VIVA's Board
of Directors for the latter's approval. In any event, there was
between Del Rosario and Lopez III no meeting of minds. The
following findings of the trial court are instructive:
A number of considerations militate against ABS-CBN's claim that
a contract was perfected at that lunch meeting on April 02, 1992
at the Tamarind Grill.
FIRST, Mr. Lopez claimed that what was agreed upon at the
Tamarind Grill referred to the price and the number of films, which
he wrote on a napkin. However, Exhibit "C" contains numerous
provisions which, were not discussed at the Tamarind Grill , if
Lopez testimony was to be believed nor could they have been
physically written on a napkin. There was even doubt as to
whether it was a paper napkin or a cloth napkin. In short what
were written in Exhibit "C'' were not discussed, and therefore
could not have been agreed upon, by the parties. How then could
this court compel the parties to sign Exhibit "C" when the
provisions thereof were not previously agreed upon?
SECOND, Mr. Lopez claimed that what was agreed upon as the
subject matter of the contract was 14 films. The complaint in fact
prays for delivery of 14 films. But Exhibit "C" mentions 53 films as
its subject matter. Which is which If Exhibits "C" reflected the true
intent of the parties, then ABS-CBN's claim for 14 films in its
complaint is false or if what it alleged in the complaint is true, then
Exhibit "C" did not reflect what was agreed upon by the parties.
This underscores the fact that there was no meeting of the minds
as to the subject matter of the contracts, so as to preclude
perfection thereof. For settled is the rule that there can be no
contract where there is no object which is its subject matter (Art.
1318, NCC).
THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit
testimony (Exh. "D") states:
We were able to reach an agreement. VIVA gave us the exclusive
license to show these fourteen (14) films, and we agreed to pay
Viva the amount of P16,050,000.00 as well as grant Viva
commercial slots worth P19,950,000.00. We had already
earmarked this P16, 050,000.00.
which gives a total consideration of P36 million (P19,950,000.00
plus P16,050,000.00. equals P36,000,000.00).
On cross-examination Mr. Lopez testified:
Q. What was written in this napkin?
A. The total price, the breakdown the known Viva movies, the 7
blockbuster movies and the other 7 Viva movies because the
price was broken down accordingly. The none [sic] Viva and the
seven other Viva movies and the sharing between the cash
portion and the concerned spot portion in the total amount of P35
million pesos.
Now, which is which? P36 million or P35 million? This weakens
ABS-CBN's claim.
FOURTH. Mrs. Concio, testifying for ABS-CBN stated that she
transmitted Exhibit "C" to Mr. Del Rosario with a handwritten note,
describing said Exhibit "C" as a "draft." (Exh. "5" - Viva; tsn pp.
23-24 June 08, 1992). The said draft has a well defined meaning.
Since Exhibit "C" is only a draft, or a tentative, provisional or
preparatory writing prepared for discussion, the terms and
conditions thereof could not have been previously agreed upon by
ABS-CBN and Viva Exhibit "C'' could not therefore legally bind
Viva, not having agreed thereto. In fact, Ms. Concio admitted that
the terms and conditions embodied in Exhibit "C" were prepared
by ABS-CBN's lawyers and there was no discussion on said
terms and conditions. . . .
As the parties had not yet discussed the proposed terms and
conditions in Exhibit "C," and there was no evidence whatsoever
that Viva agreed to the terms and conditions thereof, said
document cannot be a binding contract. The fact that Viva refused
to sign Exhibit "C" reveals only two [sic] well that it did not agree
on its terms and conditions, and this court has no authority to
compel Viva to agree thereto.
FIFTH. Mr. Lopez understand [sic] that what he and Mr. Del
Rosario agreed upon at the Tamarind Grill was only provisional, in
the sense that it was subject to approval by the Board of Directors
of Viva. He testified:
Q. Now, Mr. Witness, and after that Tamarind meeting ... the
second meeting wherein you claimed that you have the meeting
of the minds between you and Mr. Vic del Rosario, what
happened?
A. Vic Del Rosario was supposed to call us up and tell us
specifically the result of the discussion with the Board of Directors.
Q. And you are referring to the so-called agreement which you
wrote in [sic] a piece of paper?
A. Yes, sir.
Q. So, he was going to forward that to the board of Directors for
approval?
A. Yes, sir. (Tsn, pp. 42-43, June 8, 1992)
Q. Did Mr. Del Rosario tell you that he will submit it to his Board
for approval?
A. Yes, sir. (Tsn, p. 69, June 8, 1992).
The above testimony of Mr. Lopez shows beyond doubt that he
knew Mr. Del Rosario had no authority to bind Viva to a contract
with ABS-CBN until and unless its Board of Directors approved it.
The complaint, in fact, alleges that Mr. Del Rosario "is the
Executive Producer of defendant Viva" which "is a corporation."
(par. 2, complaint). As a mere agent of Viva, Del Rosario could
37
not bind Viva unless what he did is ratified by its Board of
Directors. (Vicente vs. Geraldez, 52 SCRA 210; Arnold
vs. Willets and Paterson, 44 Phil. 634). As a mere agent,
recognized as such by plaintiff, Del Rosario could not be held
liable jointly and severally with Viva and his inclusion as party
defendant has no legal basis. (Salonga vs. Warner Barner  [sic] ,
COLTA , 88 Phil. 125; Salmon vs. Tan, 36 Phil. 556).
The testimony of Mr. Lopez and the allegations in the complaint
are clear admissions that what was supposed to have been
agreed upon at the Tamarind Grill between Mr. Lopez and Del
Rosario was not a binding agreement. It is as it should be
because corporate power to enter into a contract is lodged in the
Board of Directors. (Sec. 23, Corporation Code). Without such
board approval by the Viva board, whatever agreement Lopez
and Del Rosario arrived at could not ripen into a valid contract
binding upon Viva (Yao Ka Sin Trading vs. Court of Appeals, 209
SCRA 763). The evidence adduced shows that the Board of
Directors of Viva rejected Exhibit "C" and insisted that the film
package for 140 films be maintained (Exh. "7-1" - Viva ). 49
The contention that ABS-CBN had yet to fully exercise its right of
first refusal over twenty-four films under the 1990 Film Exhibition
Agreement and that the meeting between Lopez and Del Rosario
was a continuation of said previous contract is untenable. As
observed by the trial court, ABS-CBN right of first refusal had
already been exercised when Ms. Concio wrote to VIVA ticking off
ten films, Thus:
[T]he subsequent negotiation with ABS-CBN two (2) months after
this letter was sent, was for an entirely different package. Ms.
Concio herself admitted on cross-examination to having used or
exercised the right of first refusal. She stated that the list was not
acceptable and was indeed not accepted by ABS-CBN, (TSN,
June 8, 1992, pp. 8-10). Even Mr. Lopez himself admitted that the
right of the first refusal may have been already exercised by Ms.
Concio (as she had). (TSN, June 8, 1992, pp. 71-75). Del Rosario
himself knew and understand [sic] that ABS-CBN has lost its
rights of the first refusal when his list of 36 titles were rejected
(Tsn, June 9, 1992, pp. 10-11) 50
II
However, we find for ABS-CBN on the issue of damages. We
shall first take up actual damages. Chapter 2, Title XVIII, Book IV
of the Civil Code is the specific law on actual or compensatory
damages. Except as provided by law or by stipulation, one is
entitled to compensation for actual damages only for such
pecuniary loss suffered by him as he has duly proved. 51 The
indemnification shall comprehend not only the value of the loss
suffered, but also that of the profits that the obligee failed to
obtain. 52 In contracts and quasi-contracts the damages which
may be awarded are dependent on whether the obligor acted with
good faith or otherwise, It case of good faith, the damages
recoverable are those which are the natural and probable
consequences of the breach of the obligation and which the
parties have foreseen or could have reasonably foreseen at the
time of the constitution of the obligation. If the obligor acted with
fraud, bad faith, malice, or wanton attitude, he shall be
responsible for all damages which may be reasonably attributed
to the non-performance of the obligation. 53 In crimes and quasi-
delicts, the defendant shall be liable for all damages which are the
natural and probable consequences of the act or omission
complained of, whether or not such damages has been foreseen
or could have reasonably been foreseen by the defendant.54
Actual damages may likewise be recovered for loss or impairment
of earning capacity in cases of temporary or permanent personal
injury, or for injury to the plaintiff's business standing or
commercial credit.55
The claim of RBS for actual damages did not arise from contract,
quasi-contract, delict, or quasi-delict. It arose from the fact of filing
of the complaint despite ABS-CBN's alleged knowledge of lack of
cause of action. Thus paragraph 12 of RBS's Answer with
Counterclaim and Cross-claim under the heading
COUNTERCLAIM specifically alleges:
12. ABS-CBN filed the complaint knowing fully well that it has no
cause of action RBS. As a result thereof, RBS suffered actual
damages in the amount of P6,621,195.32. 56
Needless to state the award of actual damages cannot be
comprehended under the above law on actual damages. RBS
could only probably take refuge under Articles 19, 20, and 21 of
the Civil Code, which read as follows:
Art. 19. Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due,
and observe honesty and good faith.
Art. 20. Every person who, contrary to law, wilfully or negligently
causes damage to another, shall indemnify the latter for tile same.
Art. 21. Any person who wilfully causes loss or injury to another in
a manner that is contrary to morals, good customs or public policy
shall compensate the latter for the damage.
It may further be observed that in cases where a writ of
preliminary injunction is issued, the damages which the defendant
may suffer by reason of the writ are recoverable from the
injunctive bond. 57 In this case, ABS-CBN had not yet filed the
required bond; as a matter of fact, it asked for reduction of the
bond and even went to the Court of Appeals to challenge the
order on the matter, Clearly then, it was not necessary for RBS to
file a counterbond. Hence, ABS-CBN cannot be held responsible
for the premium RBS paid for the counterbond.
Neither could ABS-CBN be liable for the print advertisements for
"Maging Sino Ka Man" for lack of sufficient legal basis. The RTC
issued a temporary restraining order and later, a writ of
preliminary injunction on the basis of its determination that there
existed sufficient ground for the issuance thereof. Notably, the
RTC did not dissolve the injunction on the ground of lack of legal
and factual basis, but because of the plea of RBS that it be
allowed to put up a counterbond.
As regards attorney's fees, the law is clear that in the absence of
stipulation, attorney's fees may be recovered as actual or
38
compensatory damages under any of the circumstances provided
for in Article 2208 of the Civil Code. 58
The general rule is that attorney's fees cannot be recovered as
part of damages because of the policy that no premium should be
placed on the right to litigate.59 They are not to be awarded every
time a party wins a suit. The power of the court to award
attorney's fees under Article 2208 demands factual, legal, and
equitable justification.60 Even when claimant is compelled to
litigate with third persons or to incur expenses to protect his rights,
still attorney's fees may not be awarded where no sufficient
showing of bad faith could be reflected in a party's persistence in
a case other than erroneous conviction of the righteousness of his
cause. 61
As to moral damages the law is Section 1, Chapter 3, Title XVIII,
Book IV of the Civil Code. Article 2217 thereof defines what are
included in moral damages, while Article 2219 enumerates the
cases where they may be recovered, Article 2220 provides that
moral damages may be recovered in breaches of contract where
the defendant acted fraudulently or in bad faith. RBS's claim for
moral damages could possibly fall only under item (10) of Article
2219, thereof which reads:
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30,
32, 34, and 35.
Moral damages are in the category of an award designed to
compensate the claimant for actual injury suffered. and not to
impose a penalty on the wrongdoer.62 The award is not meant to
enrich the complainant at the expense of the defendant, but to
enable the injured party to obtain means, diversion, or
amusements that will serve to obviate then moral suffering he has
undergone. It is aimed at the restoration, within the limits of the
possible, of the spiritual status quo ante, and should be
proportionate to the suffering inflicted. 63 Trial courts must then
guard against the award of exorbitant damages; they should
exercise balanced restrained and measured objectivity to avoid
suspicion that it was due to passion, prejudice, or corruption on
the part of the trial court. 64
The award of moral damages cannot be granted in favor of a
corporation because, being an artificial person and having
existence only in legal contemplation, it has no feelings, no
emotions, no senses, It cannot, therefore, experience physical
suffering and mental anguish, which call be experienced only by
one having a nervous system. 65 The statement in People
v. Manero 66 and Mambulao Lumber Co. v. PNB  67 that a
corporation may recover moral damages if it "has a good
reputation that is debased, resulting in social humiliation" is
an obiter dictum. On this score alone the award for damages must
be set aside, since RBS is a corporation.
The basic law on exemplary damages is Section 5, Chapter 3,
Title XVIII, Book IV of the Civil Code. These are imposed by way
of example or correction for the public good, in addition to moral,
temperate, liquidated or compensatory damages. 68 They are
recoverable in criminal cases as part of the civil liability when the
crime was committed with one or more aggravating
circumstances; 69 in quasi-contracts, if the defendant acted with
gross negligence; 70 and in contracts and quasi-contracts, if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or
malevolent manner.71
It may be reiterated that the claim of RBS against ABS-CBN is not
based on contract, quasi-contract, delict, or quasi-delict, Hence,
the claims for moral and exemplary damages can only be based
on Articles 19, 20, and 21 of the Civil Code.
The elements of abuse of right under Article 19 are the following:
(1) the existence of a legal right or duty, (2) which is exercised in
bad faith, and (3) for the sole intent of prejudicing or injuring
another. Article 20 speaks of the general sanction for all other
provisions of law which do not especially provide for their own
sanction; while Article 21 deals with acts contra bonus mores, and
has the following elements; (1) there is an act which is legal, (2)
but which is contrary to morals, good custom, public order, or
public policy, and (3) and it is done with intent to injure. 72
Verily then, malice or bad faith is at the core of Articles 19, 20,
and 21. Malice or bad faith implies a conscious and intentional
design to do a wrongful act for a dishonest purpose or moral
obliquity. 73 Such must be substantiated by evidence. 74
There is no adequate proof that ABS-CBN was inspired by malice
or bad faith. It was honestly convinced of the merits of its cause
after it had undergone serious negotiations culminating in its
formal submission of a draft contract. Settled is the rule that the
adverse result of an action does not per se make the action
wrongful and subject the actor to damages, for the law could not
have meant to impose a penalty on the right to litigate. If damages
result from a person's exercise of a right, it is damnum absque
injuria.75
WHEREFORE, the instant petition is GRANTED. The challenged
decision of the Court of Appeals in CA-G.R. CV No, 44125 is
hereby REVERSED except as to unappealed award of attorney's
fees in favor of VIVA Productions, Inc.
Filipinas Broadcasting vs. AMEC-BCCM (GR No. 141994 [2005])
"Exposé" is a radio documentary4 program hosted by Carmelo
'Mel' Rima ("Rima") and Hermogenes 'Jun' Alegre
("Alegre").5 Exposé is aired every morning over DZRC-AM which
is owned by Filipinas Broadcasting Network, Inc. ("FBNI").
"Exposé" is heard over Legazpi City, the Albay municipalities and
other Bicol areas.6
In the morning of 14 and 15 December 1989, Rima and Alegre
exposed various alleged complaints from students, teachers and
parents against Ago Medical and Educational Center-Bicol
Christian College of Medicine ("AMEC") and its administrators.
Claiming that the broadcast were defamatory, AMEC and Angelita
Ago ("Ago"), as Dean of AMEC's College of Medicine, filed a
complaint for damages7 against FBNI, Rima and Alegre on 27
February 1990. Quoted are portions of the allegedly libelous
broadcast:
39
JUN ALEGRE:
Let us begin with the less burdensome: if you have children taking
medical course at AMEC-BCCM, advise them to pass all subjects
because if they fail in any subject they will repeat their year level,
taking up all subjects including those they have passed already.
Several students had approached me stating that they had
consulted with the DECS which told them that there is no such
regulation. If [there] is no such regulation why is AMEC doing the
same?
xxx
Second: Earlier AMEC students in Physical Therapy had
complained that the course is not recognized by DECS. xxx
Third: Students are required to take and pay for the subject even
if the subject does not have an instructor - such greed for money
on the part of AMEC's administration. Take the subject Anatomy:
students would pay for the subject upon enrolment because it is
offered by the school. However there would be no instructor for
such subject. Students would be informed that course would be
moved to a later date because the school is still searching for the
appropriate instructor.
xxx
It is a public knowledge that the Ago Medical and Educational
Center has survived and has been surviving for the past few
years since its inception because of funds support from foreign
foundations. If you will take a look at the AMEC premises you ll
find out that the names of the buildings there are foreign
soundings. There is a McDonald Hall. Why not Jose Rizal or
Bonifacio Hall? That is a very concrete and undeniable evidence
that the support of foreign foundations for AMEC is substantial,
isn't it? With the report which is the basis of the expose in DZRC
today, it would be very easy for detractors and enemies of the
Ago family to stop the flow of support of foreign foundations who
assist the medical school on the basis of the latter's purpose. But
if the purpose of the institution (AMEC) is to deceive students at
cross purpose with its reason for being it is possible for these
foreign foundations to lift or suspend their donations temporarily.8
xxx
On the other hand, the administrators of AMEC-BCCM, AMEC
Science High School and the AMEC-Institute of Mass
Communication in their effort to minimize expenses in terms of
salary are absorbing or continues to accept "rejects". For example
how many teachers in AMEC are former teachers of Aquinas
University but were removed because of immorality? Does it
mean that the present administration of AMEC have the total
definite moral foundation from catholic administrator of Aquinas
University. I will prove to you my friends, that AMEC is a dumping
ground, garbage, not merely of moral and physical misfits.
Probably they only qualify in terms of intellect. The Dean of
Student Affairs of AMEC is Justita Lola, as the family name
implies. She is too old to work, being an old woman. Is the AMEC
administration exploiting the very [e]nterprising or compromising
and undemanding Lola? Could it be that AMEC is just patiently
making use of Dean Justita Lola were if she is very old. As in
atmospheric situation - zero visibility - the plane cannot land,
meaning she is very old, low pay follows. By the way, Dean
Justita Lola is also the chairman of the committee on scholarship
in AMEC. She had retired from Bicol University a long time ago
but AMEC has patiently made use of her.
xxx
MEL RIMA:
xxx My friends based on the expose, AMEC is a dumping ground
for moral and physically misfit people. What does this mean?
Immoral and physically misfits as teachers.
May I say I m sorry to Dean Justita Lola. But this is the truth. The
truth is this, that your are no longer fit to teach. You are too old.
As an aviation, your case is zero visibility. Don't insist.
xxx Why did AMEC still absorb her as a teacher, a dean, and
chairman of the scholarship committee at that. The reason is
practical cost saving in salaries, because an old person is not
fastidious, so long as she has money to buy the ingredient of
beetle juice. The elderly can get by - that's why she (Lola) was
taken in as Dean. xxx On our end our task is to attend to the
interests of students. It is likely that the students would be
influenced by evil. When they become members of society
outside of campus will be liabilities rather than assets. What do
you expect from a doctor who while studying at AMEC is so much
burdened with unreasonable imposition? What do you expect
from a student who aside from peculiar problems - because not all
students are rich - in their struggle to improve their social status
are even more burdened with false regulations. xxx9 (Emphasis
supplied)
The complaint further alleged that AMEC is a reputable learning
institution. With the supposed exposés, FBNI, Rima and Alegre
"transmitted malicious imputations, and as such, destroyed
plaintiffs' (AMEC and Ago) reputation." AMEC and Ago included
FBNI as defendant for allegedly failing to exercise due diligence in
the selection and supervision of its employees, particularly Rima
and Alegre.
On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil
Lozares, filed an Answer10 alleging that the broadcast against
AMEC were fair and true. FBNI, Rima and Alegre claimed that
they were plainly impelled by a sense of public duty to report the
"goings-on in AMEC, [which is] an institution imbued with public
interest."
Thereafter, trial ensued. During the presentation of the evidence
for the defense, Atty. Edmundo Cea, collaborating counsel of Atty.
Lozares, filed a Motion to Dismiss 11 on FBNI's behalf. The trial
court denied the motion to dismiss. Consequently, FBNI filed a
separate Answer claiming that it exercised due diligence in the
selection and supervision of Rima and Alegre. FBNI claimed that
before hiring a broadcaster, the broadcaster should (1) file an
application; (2) be interviewed; and (3) undergo an apprenticeship
and training program after passing the interview. FBNI likewise
claimed that it always reminds its broadcasters to "observe truth,
40
fairness and objectivity in their broadcast and to refrain from using
libelous and indecent language." Moreover, FBNI requires all
broadcasters to pass the Kapisanan ng mga Brodkaster sa
Pilipinas  ("KBP") accreditation test and to secure a KBP permit.
On 14 December 1992, the trial court rendered a
Decision12 finding FBNI and Alegre liable for libel except Rima.
The trial court held that the broadcast are libelous per se. The trial
court rejected the broadcasters' claim that their utterances were
the result of straight reporting because it had no factual basis.
The broadcasters did not even verify their reports before airing
them to show good faith. In holding FBNI liable for libel, the trial
court found that FBNI failed to exercise diligence in the selection
and supervision of its employees.
In absolving Rima from the charge, the trial court ruled that
Rima's only participation was when he agreed with Alegre's
exposé. The trial court found Rima's statement within the "bounds
of freedom of speech, expression, and of the press." The
dispositive portion of the decision reads:
WHEREFORE, premises considered, this court finds for the
plaintiff. Considering the degree of damages caused by the
controversial utterances, which are not found by this court to be
really very serious and damaging, and there being no showing
that indeed the enrollment of plaintiff school dropped, defendants
Hermogenes "Jun" Alegre, Jr. and Filipinas Broadcasting Network
(owner of the radio station DZRC), are hereby jointly and severally
ordered to pay plaintiff Ago Medical and Educational Center-Bicol
Christian College of Medicine (AMEC-BCCM) the amount
of P300,000.00 moral damages, plus P30,000.00 reimbursement
of attorney's fees, and to pay the costs of suit.
SO ORDERED.13 (Emphasis supplied)
Both parties, namely, FBNI, Rima and Alegre, on one hand, and
AMEC and Ago, on the other, appealed the decision to the Court
of Appeals. The Court of Appeals affirmed the trial court's
judgment with modification. The appellate court made Rima
solidarily liable with FBNI and Alegre. The appellate court denied
Ago's claim for damages and attorney's fees because the
broadcast were directed against AMEC, and not against her. The
dispositive portion of the Court of Appeals' decision reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED,
subject to the modification that broadcaster Mel Rima
is SOLIDARILY ADJUDGED liable with FBN[I] and Hermo[g]enes
Alegre.
SO ORDERED.14
FBNI, Rima and Alegre filed a motion for reconsideration which
the Court of Appeals denied in its 26 January 2000 Resolution.
Hence, FBNI filed this petition.15
The Ruling of the Court of Appeals
The Court of Appeals upheld the trial court's ruling that the
questioned broadcast are libelous per se and that FBNI, Rima
and Alegre failed to overcome the legal presumption of malice.
The Court of Appeals found Rima and Alegre's claim that they
were actuated by their moral and social duty to inform the public
of the students' gripes as insufficient to justify the utterance of the
defamatory remarks.
Finding no factual basis for the imputations against AMEC's
administrators, the Court of Appeals ruled that the broadcast were
made "with reckless disregard as to whether they were true or
false." The appellate court pointed out that FBNI, Rima and
Alegre failed to present in court any of the students who allegedly
complained against AMEC. Rima and Alegre merely gave a single
name when asked to identify the students. According to the Court
of Appeals, these circumstances cast doubt on the veracity of the
broadcasters' claim that they were "impelled by their moral and
social duty to inform the public about the students' gripes."
The Court of Appeals found Rima also liable for libel since he
remarked that "(1) AMEC-BCCM is a dumping ground for morally
and physically misfit teachers; (2) AMEC obtained the services of
Dean Justita Lola to minimize expenses on its employees'
salaries; and (3) AMEC burdened the students with unreasonable
imposition and false regulations."16
The Court of Appeals held that FBNI failed to exercise due
diligence in the selection and supervision of its employees for
allowing Rima and Alegre to make the radio broadcast without the
proper KBP accreditation. The Court of Appeals denied Ago's
claim for damages and attorney's fees because the libelous
remarks were directed against AMEC, and not against her. The
Court of Appeals adjudged FBNI, Rima and Alegre solidarily liable
to pay AMEC moral damages, attorney's fees and costs of suit.
Issues
FBNI raises the following issues for resolution:
I. WHETHER THE BROADCASTS ARE LIBELOUS;
II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;
III. WHETHER THE AWARD OF ATTORNEY'S FEES IS
PROPER; and
IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND
ALEGRE FOR PAYMENT OF MORAL DAMAGES, ATTORNEY'S
FEES AND COSTS OF SUIT.
The Court's Ruling
We deny the petition.
This is a civil action for damages as a result of the allegedly
defamatory remarks of Rima and Alegre against AMEC. 17 While
AMEC did not point out clearly the legal basis for its complaint, a
reading of the complaint reveals that AMEC's cause of action is
based on Articles 30 and 33 of the Civil Code. Article
3018 authorizes a separate civil action to recover civil liability
arising from a criminal offense. On the other hand, Article
3319 particularly provides that the injured party may bring a
separate civil action for damages in cases of defamation, fraud,
and physical injuries. AMEC also invokes Article 1920 of the Civil
41
Code to justify its claim for damages. AMEC cites Articles
217621 and 218022 of the Civil Code to hold FBNI solidarily liable
with Rima and Alegre.
I.
Whether the broadcast are libelous
A libel23 is a public and malicious imputation of a crime, or of a
vice or defect, real or imaginary, or any act or omission, condition,
status, or circumstance tending to cause the dishonor, discredit,
or contempt of a natural or juridical person, or to blacken the
memory of one who is dead.24
There is no question that the broadcast were made public and
imputed to AMEC defects or circumstances tending to cause it
dishonor, discredit and contempt. Rima and Alegre's remarks
such as "greed for money on the part of AMEC's administrators";
"AMEC is a dumping ground, garbage of xxx moral and physical
misfits"; and AMEC students who graduate "will be liabilities
rather than assets" of the society are libelous per se. Taken as a
whole, the broadcast suggest that AMEC is a money-making
institution where physically and morally unfit teachers abound.
However, FBNI contends that the broadcast are not malicious.
FBNI claims that Rima and Alegre were plainly impelled by their
civic duty to air the students' gripes. FBNI alleges that there is no
evidence that ill will or spite motivated Rima and Alegre in making
the broadcast. FBNI further points out that Rima and Alegre
exerted efforts to obtain AMEC's side and gave Ago the
opportunity to defend AMEC and its administrators. FBNI
concludes that since there is no malice, there is no libel.
FBNI's contentions are untenable.
Every defamatory imputation is presumed malicious. 25 Rima and
Alegre failed to show adequately their good intention and
justifiable motive in airing the supposed gripes of the students. As
hosts of a documentary or public affairs program, Rima and
Alegre should have presented the public issues "free
from inaccurate and misleading information."26 Hearing the
students' alleged complaints a month before the exposé, 27 they
had sufficient time to verify their sources and information.
However, Rima and Alegre hardly made a thorough investigation
of the students' alleged gripes. Neither did they inquire about nor
confirm the purported irregularities in AMEC from the Department
of Education, Culture and Sports. Alegre testified that he merely
went to AMEC to verify his report from an alleged AMEC official
who refused to disclose any information. Alegre simply relied on
the words of the students "because they were many and not
because there is proof that what they are saying is true."28 This
plainly shows Rima and Alegre's reckless disregard of whether
their report was true or not.
Contrary to FBNI's claim, the broadcast were not "the result of
straight reporting." Significantly, some courts in the United States
apply the privilege of "neutral reportage" in libel cases involving
matters of public interest or public figures. Under this privilege, a
republisher who accurately and disinterestedly reports certain
defamatory statements made against public figures is shielded
from liability, regardless of the republisher's subjective awareness
of the truth or falsity of the accusation. 29 Rima and Alegre cannot
invoke the privilege of neutral reportage because unfounded
comments abound in the broadcast. Moreover, there is no
existing controversy involving AMEC when the broadcast were
made. The privilege of neutral reportage applies where the
defamed person is a public figure who is involved in an existing
controversy, and a party to that controversy makes the
defamatory statement.30
However, FBNI argues vigorously that malice in law does not
apply to this case. Citing Borjal v. Court of Appeals,31 FBNI
contends that the broadcast "fall within the coverage of qualifiedly
privileged communications" for being commentaries on matters of
public interest. Such being the case, AMEC should prove malice
in fact or actual malice. Since AMEC allegedly failed to prove
actual malice, there is no libel.
FBNI's reliance on Borjal is misplaced. In Borjal, the Court
elucidated on the "doctrine of fair comment," thus:
[F]air commentaries on matters of public interest are privileged
and constitute a valid defense in an action for libel or slander. The
doctrine of fair comment means that while in general every
discreditable imputation publicly made is deemed false, because
every man is presumed innocent until his guilt is judicially proved,
and every false imputation is deemed malicious, nevertheless,
when the discreditable imputation is directed against a public
person in his public capacity, it is not necessarily actionable. In
order that such discreditable imputation to a public official may be
actionable, it must either be a false allegation of fact or a
comment based on a false supposition. If the comment is an
expression of opinion, based on established facts, then it is
immaterial that the opinion happens to be mistaken, as long as it
might reasonably be inferred from the facts. 32 (Emphasis
supplied)ςrαlαωlιbrαrÿ
True, AMEC is a private learning institution whose business of
educating students is "genuinely imbued with public interest." The
welfare of the youth in general and AMEC's students in particular
is a matter which the public has the right to know. Thus, similar to
the newspaper articles in Borjal, the subject broadcast dealt with
matters of public interest. However, unlike in Borjal, the
questioned broadcast are not based on established facts. The
record supports the following findings of the trial court:
xxx Although defendants claim that they were motivated by
consistent reports of students and parents against plaintiff, yet,
defendants have not presented in court, nor even gave name of a
single student who made the complaint to them, much less
present written complaint or petition to that effect. To accept this
defense of defendants is too dangerous because it could easily
give license to the media to malign people and establishments
based on flimsy excuses that there were reports to them although
they could not satisfactorily establish it. Such laxity would
encourage careless and irresponsible Broadcasting which is
inimical to public interests.
42
Secondly, there is reason to believe that defendant radio
broadcasters, contrary to the mandates of their duties, did not
verify and analyze the truth of the reports before they aired it, in
order to prove that they are in good faith.
Alegre contended that plaintiff school had no permit and is not
accredited to offer Physical Therapy courses. Yet, plaintiff
produced a certificate coming from DECS that as of Sept. 22,
1987 or more than 2 years before the controversial broast,
accreditation to offer Physical Therapy course had already been
given the plaintiff, which certificate is signed by no less than the
Secretary of Education and Culture herself, Lourdes R.
Quisumbing (Exh. C-rebuttal). Defendants could have easily
known this were they careful enough to verify. And yet,
defendants were very categorical and sounded too positive when
they made the erroneous report that plaintiff had no permit to offer
Physical Therapy courses which they were offering.
facts.34 However, the comments of Rima and Alegre were not
backed up by facts. Therefore, the broadcast are not privileged
and remain libelous per se.
The broadcast also violate the Radio Code 35 of the Kapisanan ng
mga Brodkaster sa Pilipinas, Ink.  ("Radio Code"). Item I(B) of the
Radio Code provides:
B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES
1. x x x
4. Public affairs program shall present public issues free
from personal bias, prejudice and inaccurate and misleading
information. x x x Furthermore, the station shall strive to present
balanced discussion of issues. x x x.
xxx

The allegation that plaintiff was getting tremendous aids from 7. The station shall be responsible at all times in the supervision
foreign foundations like Mcdonald Foundation prove not to be true of public affairs, public issues and commentary programs so that
also. The truth is there is no Mcdonald Foundation existing. they conform to the provisions and standards of this code.
Although a big building of plaintiff school was given the name
8. It shall be the responsibility of the newscaster, commentator,
Mcdonald building, that was only in order to honor the first
host and announcer to protect public interest, general welfare and
missionary in Bicol of plaintiffs' religion, as explained by Dr. Lita
good order in the presentation of public affairs and public
Ago. Contrary to the claim of defendants over the air, not a single
issues.36 (Emphasis supplied)Ï‚rαlαωlιbrαrÿ
centavo appears to be received by plaintiff school from the
aforementioned McDonald Foundation which does not exist. The broadcast fail to meet the standards prescribed in the Radio
Code, which lays down the code of ethical conduct governing
Defendants did not even also bother to prove their claim, though
practitioners in the radio broast industry. The Radio Code is a
denied by Dra. Ago, that when medical students fail in one
voluntary code of conduct imposed by the radio broast industry on
subject, they are made to repeat all the other subject[s], even
its own members. The Radio Code is a public warranty by the
those they have already passed, nor their claim that the school
radio broast industry that radio broast practitioners are subject to
charges laboratory fees even if there are no laboratories in the
a code by which their conduct are measured for lapses, liability
school. No evidence was presented to prove the bases for these
and sanctions.
claims, at least in order to give semblance of good faith.
The public has a right to expect and demand that radio broast
As for the allegation that plaintiff is the dumping ground for misfits,
practitioners live up to the code of conduct of their profession, just
and immoral teachers, defendant[s] singled out Dean Justita Lola
like other professionals. A professional code of conduct provides
who is said to be so old, with zero visibility already. Dean Lola
the standards for determining whether a person has acted justly,
testified in court last Jan. 21, 1991, and was found to be 75 years
honestly and with good faith in the exercise of his rights and
old. xxx Even older people prove to be effective teachers like
performance of his duties as required by Article 1937 of the Civil
Supreme Court Justices who are still very much in demand as law
Code. A professional code of conduct also provides the standards
professors in their late years. Counsel for defendants is past 75
for determining whether a person who willfully causes loss or
but is found by this court to be still very sharp and
injury to another has acted in a manner contrary to morals or
effective.ςηαñrοblεš  Î½Î¹r†υαl  lαω  lιbrαrÿ
good customs under Article 2138 of the Civil Code.
So is plaintiffs' counsel.
II.
Dr. Lola was observed by this court not to be physically decrepit
Whether AMEC is entitled to moral damages
yet, nor mentally infirmed, but is still alert and docile.
FBNI contends that AMEC is not entitled to moral damages
The contention that plaintiffs' graduates become liabilities rather
because it is a corporation.39
than assets of our society is a mere conclusion. Being from the
place himself, this court is aware that majority of the medical A juridical person is generally not entitled to moral damages
graduates of plaintiffs pass the board examination easily and because, unlike a natural person, it cannot experience physical
become prosperous and responsible professionals.33 suffering or such sentiments as wounded feelings, serious
anxiety, mental anguish or moral shock.40 The Court of Appeals
Had the comments been an expression of opinion based on
cites Mambulao Lumber Co. v. PNB, et al.41 to justify the award of
established facts, it is immaterial that the opinion happens to be
moral damages. However, the Court's statement
mistaken, as long as it might reasonably be inferred from the

43
in Mambulao that "a corporation may have a good reputation
which, if besmirched, may also be a ground for the award of moral
damages" is an obiter dictum.42
Nevertheless, AMEC's claim for moral damages falls under item 7
of Article 221943 of the Civil Code. This provision expressly
authorizes the recovery of moral damages in cases of libel,
slander or any other form of defamation. Article 2219(7) does not
qualify whether the plaintiff is a natural or juridical person.
Therefore, a juridical person such as a corporation can validly
complain for libel or any other form of defamation and claim for
moral damages.44
Moreover, where the broast is libelous per se, the law implies
damages.45 In such a case, evidence of an honest mistake or the
want of character or reputation of the party libeled goes only in
mitigation of damages.46 Neither in such a case is the plaintiff
required to introduce evidence of actual damages as a condition
precedent to the recovery of some damages. 47 In this case, the
broadcast are libelous per se. Thus, AMEC is entitled to moral
damages.
However, we find the award of P300,000 moral damages
unreasonable. The record shows that even though the broadcast
were libelous per se, AMEC has not suffered any substantial or
material damage to its reputation. Therefore, we reduce the
award of moral damages from P300,000 to P150,000.
III.
Whether the award of attorney's fees is proper
FBNI contends that since AMEC is not entitled to moral damages,
there is no basis for the award of attorney's fees. FBNI adds that
the instant case does not fall under the enumeration in Article
220848 of the Civil Code.
The award of attorney's fees is not proper because AMEC failed
to justify satisfactorily its claim for attorney's fees. AMEC did not
adduce evidence to warrant the award of attorney's fees.
Moreover, both the trial and appellate courts failed to explicitly
state in their respective decisions the rationale for the award of
attorney's fees.49 In Inter-Asia Investment Industries, Inc. v. Court
of Appeals ,50 we held that:
[I]t is an accepted doctrine that the award thereof as an item of
damages is the exception rather than the rule, and counsel's fees
are not to be awarded every time a party wins a suit. The power of
the court to award attorney's fees under Article 2208 of the Civil
Code demands factual, legal and equitable justification, without
which the award is a conclusion without a premise, its basis being
improperly left to speculation and conjecture. In all events, the
court must explicitly state in the text of the decision, and not only
in the decretal portion thereof, the legal reason for the award of
attorney's fees.51 (Emphasis supplied)Ï‚rαlαωlιbrαrÿ
While it mentioned about the award of attorney's fees by stating
that it "lies within the discretion of the court and depends upon the
circumstances of each case," the Court of Appeals failed to point
out any circumstance to justify the award.
IV.
Whether FBNI is solidarily liable with Rima and Alegre for moral
damages, attorney's fees and costs of suit
FBNI contends that it is not solidarily liable with Rima and Alegre
for the payment of damages and attorney's fees because it
exercised due diligence in the selection and supervision of its
employees, particularly Rima and Alegre. FBNI maintains that its
broadcasters, including Rima and Alegre, undergo a "very
regimented process" before they are allowed to go on air. "Those
who apply for broadcaster are subjected to interviews,
examinations and an apprenticeship program."
FBNI further argues that Alegre's age and lack of training are
irrelevant to his competence as a broadcaster. FBNI points out
that the "minor deficiencies in the KBP accreditation of Rima and
Alegre do not in any way prove that FBNI did not exercise the
diligence of a good father of a family in selecting and supervising
them." Rima's accreditation lapsed due to his non-payment of the
KBP annual fees while Alegre's accreditation card was delayed
allegedly for reasons attributable to the KBP Manila Office. FBNI
claims that membership in the KBP is merely voluntary and not
required by any law or government regulation.
FBNI's arguments do not persuade us.
The basis of the present action is a tort. Joint tort feasors are
jointly and severally liable for the tort which they commit. 52 Joint
tort feasors are all the persons who command, instigate, promote,
encourage, advise, countenance, cooperate in, aid or abet the
commission of a tort, or who approve of it after it is done, if done
for their benefit.53 Thus, AMEC correctly anchored its cause of
action against FBNI on Articles 2176 and 2180 of the Civil Code.
As operator of DZRC-AM and employer of Rima and Alegre, FBNI
is solidarily liable to pay for damages arising from the libelous
broadcast. As stated by the Court of Appeals, "recovery for
defamatory statements published by radio or television may be
had from the owner of the station, a licensee, the operator of the
station, or a person who procures, or participates in, the making of
the defamatory statements."54 An employer and employee are
solidarily liable for a defamatory statement by the employee within
the course and scope of his or her employment, at least when the
employer authorizes or ratifies the defamation.55 In this case,
Rima and Alegre were clearly performing their official duties as
hosts of FBNI's radio program Exposé when they aired the
broadcast. FBNI neither alleged nor proved that Rima and Alegre
went beyond the scope of their work at that time. There was
likewise no showing that FBNI did not authorize and ratify the
defamatory broadcast.
Moreover, there is insufficient evidence on record that FBNI
exercised due diligence in the selection and supervision of its
employees, particularly Rima and Alegre. FBNI merely showed
that it exercised diligence in the selection of its broadcasters
without introducing any evidence to prove that it observed the
same diligence in the supervision of Rima and Alegre. FBNI did
not show how it exercised diligence in supervising its
broadcasters. FBNI's alleged constant reminder to its
44
broadcasters to "observe truth, fairness and objectivity and to operating the affairs of the
refrain from using libelous and indecent language" is not enough corporation.
to prove due diligence in the supervision of its broadcasters.
Adequate training of the broadcasters on the industry's code of
conduct, sufficient information on libel laws, and continuous
evaluation of the broadcasters' performance are but a few of the
many ways of showing diligence in the supervision of
broadcasters.
FBNI claims that it "has taken all the precaution in the selection of
Rima and Alegre as broadcasters, bearing in mind their
SECONDARY PREFERENCE
qualifications." However, no clear and convincing evidence shows Shareholders, both common and
that Rima and Alegre underwent FBNI's "regimented process" of preferred, are considered risk
application. Furthermore, FBNI admits that Rima and Alegre had takers who invest capital in the
deficiencies in their KBP accreditation, 56 which is one of FBNI's business and who can look only
to what is left after corporate
requirements before it hires a broadcaster. Significantly,
debts and liabilities are fully paid.
membership in the KBP, while voluntary, indicates the
broadcaster's strong commitment to observe the broadcast
industry's rules and regulations. Clearly, these circumstances Investor is given a voice or
show FBNI's lack of diligence in selecting and supervising Rima say in management, in the ff.
and Alegre. Hence, FBNI is solidarily liable to pay damages instances:
together with Rima and Alegre. a. Entitled to
participate in the
WHEREFORE, we DENY the instant petition. We AFFIRM the election of the
Decision of 4 January 1999 and Resolution of 26 January 2000 of board of directors,
the Court of Appeals in CA-G.R. CV No. 40151 with the and
MODIFICATION that the award of moral damages is reduced b. Can cast votes on
from P300,000 to P150,000 and the award of attorney's fees is certain corporate
deleted. Costs against petitioner. structural matters,
in those instances
enumerated by
the law when
stockholders have
a ratificatory vote
on management
action.
II. FINANCIAL STRUCTURE
the corporate enterprise to pay
the stipulates return (interest)
remains even when the
operations are incurring losses.
Note: The relationship is
essentially contractual, the
investor has every right to
demand the payment of the
placement upon its maturity.
PRIMARY LEGAL
PREFERENCE IN PAYMENT
OF CORPORATE PROPERTIES
Investor’s rights are based on
contract, thus the corporate
venture must in case of
insolvency, devote and prefer all
corporate assets towards the
payment of its creditors.
Investor’s voice or say in the
management would depend
on the stipulations of the
contract.
The determining factor is if
there is an absolute
obligation of the corporation
to the investor. In cases of
casting votes on certain
corporate structural matters
would depend if such
investor has a seat in the
BOD—in accordance to the
contract.

Equity investments and debt contracts are the two basic sources
Causative instance: Since
the investor is intricately
by which a corporation is able to finance its operations, other than
woven into the business
from operational or transactional income. affairs of the corporation
 Debt securities— investment where the investors
places no stake in the corporate operations and his WITH PARTICIPATION IN NO PARTICIPATION IN
rights are based on contract. The investor only looks at ALL INCOME EARNED BY INCOME EARNED
THE VENTURE Investor can only demand the
the financial condition and operations of the
Investor’s interests in the stipulate fixed return of his
corporation as a means of gauging the ability of the
operations of the corporation investment even if by the
corporation to pay-back the loan at the specified is reflected in the retained use of the loan he extended,
period. Made through payment in cash or in assets. earnings component of the the enterprise is able to reap
stockholders’ equity wherein huge profits.
 Equity securities— where an investor expects that his he could expect to receive
returns shall be tied-up with the success or loss of the dividends.
operations of the corporation. Thus, upon the Generally non-withdrawable Investor can demand
insolvency of the corporation, he can look only to what for as long as the corporation corporation to pay back the
is left after corporate debts and liabilities are fully paid. has not been dissolved. loan at the specified period.

EQUITY SECURITIES DEBT SECURITIES Rationale: Assures the

INVESTMENT WITH RISK
Investor places his investment
ready and willing to take a risk
with the management’s style of
INVESTMENT WITHOUT RISK
Investor puts no stake on the
operations of the corporation,
thus the contractual obligation of
corporate enterprise and its
managers that they will have
such resources at their

45
 disposal so long as the
corporate enterprise remains
a going concern
Lirag Textile Mills, Inc., vs. SSS (GR No. L-33205 [1987])
The antecedent facts, as stipulated by the parties during the trial,
are as follows:
1. That on September 4, 1961, the plaintiff [herein respondent
Social Security System] and the defendants [herein petitioners]
Lirag Textile Mills, Inc. and Basilio Lirag entered into a Purchase
Agreement under which the plaintiff agreed to purchase from the
said defendant preferred shares of stock worth ONE MILLION
PESOS [P1,000,000.00] subject to the conditions set forth in such
agreement;...
2. That pursuant to the Purchase Agreement of September 4,
1961, the plaintiff, on January 31, 1962, paid the defendant Lirag
Textile Mills, Inc. the sum of FIVE HUNDRED THOUSAND
PESOS [P500,000.00] for which the said defendant issued to
plaintiff 5,000 preferred shares with a par value of one hundred
pesos [P10000] per share as evidenced by stock Certificate No.
128, ...
3. That further in pursuance of the Purchase Agreement of
September 4, 1961, the plaintiff paid to the Lirag Textile Mills, Inc.
the sum of FIVE UNDRED THOUSAND PESOS [P500,000.00] for
which the said defendant issued to plaintiff 5,000 preferred shares
with a par value of one hundred pesos [P100.00] per share as
evidenced by Stock Certificate No. 139, ...
4. That in accordance with paragraph 3 of the Purchase
Agreement of September 4, 1961 which provides for the
repurchase by the Lirag Textile Mills, Inc. of the shares of stock at
regular intervals of one year beginning with the 4th year following
the date of issue, Stock Certificates Nos. 128 and 139 were to be
repurchased by the Lirag Textile Mills, Inc. thus:
CERT. No. AMOUNT DATE OF REDEMPTION
128 P100,000.00 February 14, 1965
100,000.00 February 14, 1966
100,000.00 February 14, 1967
100,000.00 February 14, 1968
100,000.00 February 14, 1969
139 P100,000.00 July 3, 1966
100,000.00 July 3,1967
100,000.00 July 3,1968
100,000.00 July 3, 1969
100,000.00 July 3,1970
5. That to guarantee the redemption of the stocks purchased by
the plaintiff, the payment of dividends, as well as the other
obligations of the Lirag Textile Mills, Inc., defendants Basilio L.
Lirag signed the Purchase Agreement of September 4, 1961 not
only as president of the defendant corporation, but also as surety
so that should the Lirag Textile Mills, Inc. fail to perform any of its
obligations in the said Purchase Agreement, the surety shall
immediately pay to the vendee the amounts then outstanding
pursuant to Condition No. 4, to wit:
To guarantee the redemption of the stocks herein purchased, the
payment of the dividends, as well as other obligations of the
VENDOR herein, the SURETY hereby binds himself jointly and
severally liable with the VENDOR so that should the VENDOR fail
to perform any of its obligations hereunder, the SURETY shall
immediately pay to the VENDEE the amounts then outstanding. '
6. That defendant corporation failed to redeem certificates of
Stock Nos. 128 and 139 by payment of the amounts mentioned in
paragraph 4 above;
7. That the Lirag Textile Mills, lnc. has not paid dividends in the
amounts and within the period set forth in paragraph 10 of the
complaint;*
8. That letters of demands have been sent by the plaintiff to the
defendant to redeem the foregoing stock certificates and pay the
dividends set forth in paragraph 10 of the complaint, but the Lirag
Textile Mills, Inc. has not made such redemption nor made such
dividend payments;
9. That defendant Basilio L. Lirag likewise received letters of
demand from the plaintiff requiring him to make good his
obligation as surety;
10. That notwithstanding such letters of demand to the defendant
Basilio L. Lirag, Stock Certificates Nos. 128 and 139 issued to
plaintiff are still unredeemed and no dividends have been paid on
said stock certificates;
11. That paragraph 5 of the Purchase Agreement provides that
should the Lirag Textile Mills, Inc. fail to effect any of the
redemptions stipulated therein, the entire obligation shall
immediately become due and demandable and the Lirag Textile
Mills, Inc., shall, furthermore, be liable to the plaintiff in an amount
equivalent to twelve per cent [12%] of the amount then
outstanding as liquidated damages;
12. That the failure of the Lirag Textile Mills, Inc. to redeem the
foregoing certificates of stock and pay dividends thereon were
due to financial reverses, to wit:
[a] Unrestrained smuggling into the country of textiles from the
United States and other countries;
[b] Unrestricted entry of supposed remmants which competed with
textiles of domestic produce to the disadvantage and economic
prejudice of the latter;
[c] Scarcity of money and the unavailability of financing facilities;
46
[d] Payment of interest on matured loans extended to defendant
corporation;
[e] Construction of the Montalban plant of the defendant
corporation financed largely through reparation benefits;
[f] Labor problems occasioned by the fact that the defendant
company is financial (sic) unable to improve, in a substantial way,
the economic plight of its workers as a result of which two costly
strikes had occurred, one in 1965 and another in 1968; and
[g] The occurrence of a fire which destroyed more than 1 million
worth of raw cotton, paralyzed operations partially, increased
overhead costs and wiped out any expected profits that year;
13. That it has been the policy of the plaintiff to be represented in
the board of directors of the corporation or entity which has
obtained financial assistance from the System be it in terms of
loans, mortgages or equity investments. Thus, pursuant to
paragraph 6 of the Purchase Agreement of September 4, 1961
which provides as follows:
The VENDEE shall be allowed to have a representative in the
Board of Directors of the VENDOR with the right to participate in
the discussions and to vote therein;
14. That Messrs. Rene Espina, Bernardino Abes and Heber
Catalan were each issued one common share of stock as a
qualifying share to their election to the Board of Directors of the
Lirag Textiles Mills, Inc.;
15. That Messrs. Rene Espina, Bernardino Abes and Heber
Catalan, during their respective tenure as member of the Board of
Directors of the Lirag Textile Mills, Inc. attended the meetings of
the said Board, received per diems for their attendance therein in
the same manner and in the same amount as any other member
of the Board of Directors, participated in the deliberations therein
and freely exercised their right to vote in such meetings. However,
the per diems received by the SSS representative do not go to the
coffers of the System but personally to the representative in the
said board of directors. 1
For failure of Lirag Textile Mills, Inc. and Basilio L. Lirag to comply
with the terms of the Purchase Agreement, the SSS filed an
action for specific performance and damages before the then
Court of First Instance of Rizal, Quezon City, praying that therein
defendants Lirag Textile Mills, Inc. and Basilio L. Lirag be
adjudged liable for [1] the entire obligation of P1M which became
due and demandable upon defendants' failure to repurchase the
stocks as scheduled; [21 dividends in the amount of P220,000.00;
[31 liquidated damages in an amount equivalent to twelve percent
(12%) of the amount then outstanding; [4] exemplary damages in
the amount of P100,000.00 and [5] attorney's fees of P20,000.00.
Lirag Textile Mills, Inc. and Basilio L. Lirag moved for the
dismissal of the complaint, but were denied the relief sought.
Thus, they filed their answer with counterclaim, denying the
existence of any obligation on their part to redeem the preferred
stocks, on the ground that the SSS became and still is a preferred
stockholder of the corporation so that redemption of the shares
purchased depended upon the financial ability of said corporation.
Insofar as defendant Basilio Lirag is concerned, it was alleged
that his liability arises only if the corporation is liable and does not
perform its obligations under the Purchase Agreement. They
further contended that no liability on their part has arisen because
of the financial condition of the corporation upon which such
liability was made to depend, particularly the non-realization of
any profit or earned surplus. Thus, the other claims for dividends,
liquidated damages and exemplary damages are allegedly
without basis.
After entering into the Stipulation of Facts above-quoted, the
parties filed their respective memoranda and submitted the case
for decision.
The lower court, ruling that the purchase agreement was a debt
instrument, decided in favor of SSS and sentenced Lirag Textile
Mills, Inc. and Basilio L. Lirag to pay SSS jointly and severally
P1,000,000.00 plus legal interest until the said amount is fully
paid; P220,000.00 representing the 8% per annum dividends on
the preferred shares plus legal interest up to the time of actual
payment; P146,400.00 as liquidated damages; and P10,000.00
as attorney's fees. The counterclaim of Lirag Textile Mills, Inc. and
Basilio L. Lirag was dismissed.
Hence, this petition.
Petitioners assign the following errors:
1. The trial court erred in deciding that the Purchase Agreement is
a debt instrument;
2. Respondent judge erred in holding petitioner corporation liable
for the payment of the 8% preferred and cumulative dividends on
the preferred shares since the purchase agreement provides that
said dividends shall be paid from the net profits and earned
surplus of petitioner corporation and respondent SSS has
admitted that due to losses sustained since -1964, no dividends
had been and can be declared by petitioner corporation;
3. Respondent judge erred in sentencing petitioners to pay
P146,400.00 in liquidated damages;
4. Respondent judge erred in sentencing petitioners to pay
P10,000.00 by way of attorney's fees;
5. Respondent judge erred in sentencing petitioners to pay
interest from the time of firing the complaint u to the time of full
payment both on the P1,000,000.00 invested by respondent SSS
in petitioner's corporation and on the P220,000.00 which the SSS
claims as dividends due on its investments;
6. Respondent judge erred in holding that petitioner Lirag is liable
to redeem the P1,000,000.00 worth of preferred shares
purchased by respondent SSS from petitioner corporation and the
8% cumulative dividend, it appearing that Lirag was merely a
surety and not an insurer of the obligation;
7. Respondent judge erred in dismissing the counterclaim of
petitioners.
47
The fundamental issue in this case is whether or not the Purchase
Agreement entered into by petitioners and respondent SSS is a
debt instrument.
Petitioners claim that respondent SSS merely became and still is
a preferred stockholder of the petitioner corporation, the
redemption of the shares purchased by said respondent being
dependent upon the financial ability of petitioner corporation.
Petitioner corporation, thus, has no obligation to redeem the
preferred stocks.
On the other hand, respondent SSS claims that the Purchase
Agreement is a debt instrument, imposing upon the petitioners the
obligation to pay the amount owed, and creating as between them
the relation of creditor and debtor, not that of a stockholder and a
corporation.
We uphold the lower court's finding that the Purchase Agreement
is, indeed, a debt instrument. Its terms and conditions
unmistakably show that the parties intended the repurchase of the
preferred shares on the respective scheduled dates to be an
absolute obligation which does not depend upon the financial
ability of petitioner corporation. This absolute obligation on the
part of petitioner corporation is made manifest by the fact that a
surety was required to see to it that the obligation is fulfilled in the
event of the principal debtor's inability to do so. The unconditional
undertaking of petitioner corporation to redeem the preferred
shares at the specified dates constitutes a debt which is defined
"as an obligation to pay money at some fixed future time, or at a
time which becomes definite and fixed by acts of either party and
which they expressly or impliedly, agree to perform in the
contract. 2
A stockholder sinks or swims with the corporation and there is no
obligation to return the value of his shares by means of
repurchase if the corporation incurs losses and financial reverses,
much less guarantee such repurchase through a surety.
As private respondent rightly contends, if the parties intended it
[SSS] to be merely a stockholder of petitioner corporation, it
would have been sufficient that Preferred Certificates Nos. 128
and 139 were issued in its name as the preferred certificates
contained all the rights of a stockholder as well as certain
obligations on the part of petitioner corporation. However, the
parties did in fact execute the Purchase Agreement, at the same
time that the petitioner corporation issued its preferred stock to
the respondent SSS. The Purchase Agreement serves to define
the rights and obligations of the parties and to establish firmly the
liability of petitioners in case of breach of contract. The
Certificates of Preferred Stock serve as additional evidence of the
agreement between the parties, though the precise terms and
conditions thereof must be read together with, and regarded as
qualified by the terms and conditions of the Purchase Agreement.
The rights given by the Purchase Agreement to respondent SSS
are rights not enjoyed by ordinary stockholders. This fact could
only lead to the conclusion made by the trial court that:
The aforementioned rights specially stipulated for the benefit of
the plaintiff [respondent SSS] suggest eloquently an intention on
the part of the plaintiff [respondent SSS] to facilitate a loan to the
defendant corporation upon the latter's request. In order to afford
protection to the plaintiff which otherwise is provided by means of
collaterals, as the plaintiff exacts in its grants of loans in its
ordinary transactions of this kind, as it is looked upon more as a
lending institution rather than as an investing agency, the
purchase agreement supplied these protective rights which would
otherwise be furnished by collaterals to the loan. Thus, the
membership in the board is to have a watchdog in the operation
of the business of the corporation, so as to insure against
mismanagement which may result in losses not entirely
unavoidable since payment for purposes of redemption as well as
the dividends is expressly stipulated to come from profits and/or
surplus. Such a right is never exacted by an ordinary stockholder
merely investing in the corporation. 3
Moreover, the Purchase Agreement provided that failure on the
part of petitioner to repurchase the preferred shares on the
scheduled due dates renders the entire obligation due and
demandable, with petitioner in such eventuality liable to pay 12%
of the then outstanding obligation as liquidated damages. These
features of the Purchase Agreement, taken collectively, clearly
show the intent of the parties to be bound therein as debtor and
creditor, and not as corporation and stockholder.
Petitioners' contention that it is beyond the power and
competence of petitioner corporation to redeem the preferred
shares or pay the accrued dividends due to financial reverses can
not serve as legal justification for their failure to perform under the
Purchase Agreement. The Purchase Agreement constitutes the
law between the parties and obligations arising ex contractu must
be fulfilled in accordance with the stipulations. 4 Besides, it was
precisely this eventuality that was sought to be avoided when
respondent SSS required a surety for the obligation.
Thus, it follows that petitioner Basilio L. Lirag cannot deny liability
for petitioner corporation's default. As surety, Basilio L. Lirag is
bound immediately to pay respondent SSS the amount then
outstanding.
The obligation of a surety differs from that of a guarantor in that
the surety insures the debt, whereas the guarantor merely insures
solvency of the debtor; and the surety undertakes to pay if the
principal does not pay, whereas a guarantor merely binds itself to
pay if the principal is unable to pay. 5
On the liability of petitioners to pay 8% cumulative dividend, We
agree with the observation of the lower court that the dividends
stipulated by the parties served evidently as interests. 6 The
amount thereof was fixed at 8% per annum and was not made to
depend upon or to fluctuate with the amount of profits or surplus
realized, a clear indication that the parties intended to give a sure
and fixed earnings on the principal loan. The fact that the
dividends were supposed to be paid out of net profits and earned
surplus, of which there were none, does not excuse petitioners
from the payment thereof, again for the reason that the
undertaking of petitioner Basilio L. Lirag as surety, included the
payment of dividends and other obligations then outstanding.
48
The award of the sum of P146,400.00 in liquidated damages
representing 12% of the amount then outstanding is correct,
considering that petitioners in the stipulation of facts admitted
having failed to fulfill their obligations under the Purchase
Agreement. The grant of liquidated damages in the amount stated
is expressly provided for in the Purchase Agreement in case of
contractual breach.
The pronouncement of the lower court for the payment of
interests on both the unredeemed shares and unpaid dividends is
also in order. Per stipulation of facts, petitioners did not deny the
fact of non-payment of dividends nor their failure to purchase the
preferred shares. Since these involve sums of money which are
overdue, they are bound to earn legal interest from the time of
demand, in this case, judicial, i.e., the time of filing the action.
Petitioner Basilio L. Lirag is precluded from denying his liability
under the- Purchase Agreement. After his firm representation to
"pay immediately to the VENDEE the amounts then outstanding"
evidencing his commitment as SURETY, he is estopped from
denying the same. His signature in the agreement carries with it
the official imprimatur as petitioner corporation's president, in his
personal capacity as majority stockholder, as surety and as
solidary obligor. The essence of his obligation as surety is to pay
immediately without qualification whatsoever if petitioner
corporation does not pay. To have another interpretation of
petitioner Lirag's liability as surety would violate the integrity of the
Purchase Agreement as well as the clear and unmistakable intent
of the parties to the same.
WHEREFORE, the decision in Civil Case No. Q-12275 entitled
"Social Security System vs. Lirag Textile Mills, Inc. and Basilio L.
Lirag" is hereby affirmed in toto. Costs against petitioners.
Garcia vs. Lim Chu Sing, 59 PHIL 562
VILLA-REAL, J.:
This is an appeal taken by the defendant Lim Chu Sing from the
judgment rendered by the Court of First Instance of Manila, the
dispositive part of which reads as follows:
Wherefore, judgment is rendered sentencing the defendant to pay
the sum of P9,105.17 with interest thereon at the rate of six per
cent per annum from September 1, 1932, until fully paid, plus the
sum of P910.51, as attorney's fees, with the costs of this suit.
In conformity with the stipulation, this judgment shall be subject to
execution after ninety (90) days. So ordered.
In support of his appeal, the appellant assigns the following
alleged errors as committed by the court a quo in its decision, to
wit:
1. In denying the motion dated December 27, 1932, praying for
the inclusion of Lim Cuan Sy, being the principal debtor, as party
to this suit.
2. In holding as improper the compensation of the defendant's
debt of P9,106.17, claimed in the complaint, with his credit
amounting to P10,000 with the Mercantile Bank of China.
3. In not ordering that after the compensation the plaintiff-
appellee, as receiver of the Mercantile Bank of China, should
liquidate the dividends of the defendant-appellant's shares.
4. In sentencing the defendant-appellant to pay to the plaintiff-
appellee the sum of P910.51 as attorney's fees, plus interest at 6
per cent per annum on the sum of P9,105.17, with costs.
5. In denying the motion for a new trial.
When the case was called for hearing, the parties submitted the
following stipulation of facts for the consideration of the trial court,
to wit:
Come now both parties and to this Honorable Court respectfully
submit the following stipulation:
1. The defendant admits the facts alleged in the complaint.
2. The plaintiff admits the allegations in the answer, particularly
with reference to the fact that the defendant is the owner of two
hundred shares at a par value of fifty pesos (P50) each, that is
(Pl0,000).
3. The court may render judgment in accordance with this
stipulation, but the same shall be subject to execution after ninety
(90) days.
Wherefore, they respectfully submit this stipulation and pray that
judgment be rendered in accordance therewith.
The facts alleged in the complaint and admitted by both parties
under the above quoted stipulation of facts are as follows:
On June 20, 1930, the defendant-appellant Lim Chu Sing
executed and delivered to the Mercantile Bank of China
promissory note for the sum of P19,605.17 with interest thereon
at 6 per cent per annum, payable monthly as follows: P1,000 on
July 1, 1930; P500 on August 1, 1930; and P500 on the first of
every month thereafter until the amount of the promissory note
together with the interest thereon is fully paid (Exhibit A). One of
the conditions stipulated in said promissory note is that in case of
defendant's default in the payment of any of the monthly
installments, as they become due, the entire amount or the
unpaid balance thereof together with interest thereon at 6 per cent
per annum, shall become due and payable on demand. The
defendant had been, making several partial payments thereon,
leaving an unpaid balance of P9,105.17. However, he defaulted in
the payment of several installments by reason of which the unpaid
balance of P9,105.17 on the promissory note has ipso
facto become due and demandable.
The facts alleged in the answer and admitted by both parties
under the same stipulation of facts are as follows:
The debt which is the subject matter of the complaint was not
really an indebtedness of the defendant but of Lim Cuan Sy, who
49
had an account with the plaintiff bank in the form of "trust receipts"
guaranteed by the defendant as surety and with chattel mortgage
securities. The plaintiff bank, without the knowledge and consent
of the defendant, foreclosed the chattel mortgage and privately
sold the property covered thereby. Inasmuch as Lim Cuan Sy
failed to comply with his obligations, the plaintiff required the
defendant, as surety, to sign a promissory note for the sum of
P19,105.17 payable in the manner hereinbefore stated (Exhibit
A). The defendant had been paying the corresponding
installments until the debt was reduced to the sum of P9,105.17
claimed in the complaint. The defendant is the owner of shares of
stock of the plaintiff Mercantile Bank of China amounting to
P10,000. The plaintiff bank is now under liquidation.
On December 27, 1932, the defendant-appellant Lim Chu Sing
filed a motion praying for the inclusion of the principal debtor Lim
Cuan Sy as party defendant so that he could avail himself of the
benefit of the exhaustion of the property of said Lim Cuan Sy.
Said motion was denied in open court by the presiding judge
without the defendant-appellant having excepted to such order of
denial.
The proceeds of the sale of the mortgaged chattels together with
other payments made were applied to the amount of the
promissory note in question, leaving the balance which the
plaintiff now seeks to collect.
The first question to be decided in this appeal is whether or not
the court a quo erred in denying the motion for inclusion of a party
a defendant, filed by the defendant-appellant.
According to the provisions of section 141 of the Code of Civil
Procedure, ". . . Rulings of the court upon minor matters, such as
adjournments, postponements of trials, the extension of time for
filing pleadings or motions, and other matters addressed to the
discretion of the court in the performance of its duty, shall not be
subject to exception. But exception may be taken to any other
ruling, order, or judgment of the court made during the pendency
of the action in the Court of First Instance." "An `exception' has
been defined as an objection taken to the decision of the trial
court upon a matter of law, and is a notice that the party taking it
preserves for the consideration of the appellate court a ruling
deemed erroneous. (8 Am. Enc. P. and P., 157.)" " `Errors in a
judgment or decree will not be noticed on appeal in the absence
of objections and exceptions taken below, and they should be
sufficiently specific to direct the attention of the court to the
alleged defects.' (8 Enc. Pl and Pr., 289.)" (Garcia de Lara vs.
Gonzales de Lara, 2 Phil., 297.) Inasmuch as an exception is an
objection taken to the decision of the trial court upon a matter of
law and is a notice that the party taking it will submit for the
consideration of the appellate court the ruling deemed erroneous,
failure to interpose it deprived the appellant of the right to raise
the question whether or not the court a quo committed the alleged
error attributed to it in its ruling which had not been excepted to by
the said appellant. The inclusion in, or exclusion from an action of
a certain party is a question of law. The herein defendant-
appellant, not having excepted to the order of the Court of First
Instance of Manila denying his motion for the inclusion of Lim
Cuan Sy as party defendant, is estopped from raising such
question upon appeal (Roman Catholic Bishop of Lipa vs.
Municipality of San Jose, 27 Phil., 571; Vergara vs. Laciapag, 28
Phil., 439; Andrews vs. Morente Rosario, 9 Phil., 634).
The second question to be decided is whether or not it is proper
to compensate the defendant-appellant's indebtedness of
P9,105.17, which is claimed in the complaint, with the sum of
P10,000 representing the value of his shares of stock with the
plaintiff entity, the Mercantile Bank of China.
According to the weight of authority, a share of stock or the
certificate thereof is not an indebtedness to the owner nor
evidence of indebtedness and, therefore, it is not a credit (14
Corpus Juris, p. 388, see. 511). Stockholders, as such, are not
creditors of the corporation (14 Corpus Juris, p. 848, Sec. 1289).
It is the prevailing doctrine of the American courts, repeatedly
asserted in the broadest terms, that the capital stock of a
corporation is a trust fund to be used more particularly for the
security of creditors of the corporation, who presumably deal with
it on the credit of its capital stock (14 Corpus Juris, p. 383, sec.
505). Therefore, the defendant-appellant Lim Chu Sing not being
a creditor of the Mercantile Bank of China, although the latter is a
creditor of the former, there is no sufficient ground to justify a
compensation (art. 1195, Civil Code; Acuña Co Chongco vs.
Dievas, 12 Phil., 250).
The third question to be decided in this appeal is whether or not
the court a quo erred in sentencing the said defendant-appellant
to pay the sum of P910.51 as attorney's fees in addition to interest
at 6 per cent per annum on the amount sought in the complaint.
The pertinent clause of the promissory note Exhibit A reads as
follows: "In case of default of any of the above installments, the
total amount of the balance still unpaid of this note will become
due and payable on demand plus interest thereon at the rate of 6
per cent per annum from date of this note until payment is made.
And I further agree to pay an additional sum equivalent to 10 per
cent of the said note to cover cost and attorney's fees for
collection."
The stipulation relative to the payment of interest at the rate of 6
per cent per annum on the unpaid balance of the promissory note
Exhibit A refers to the capital and the 10 per cent stipulated for
costs and attorney's fees cannot be considered as interest but an
indemnity for damages occasioned by the collection of the
indebtedness through judicial process. Therefore the two rates in
question cannot be combined and considered usurious interest.
With reference to the costs, the 10 per cent stipulated in the
promissory note is for costs and attorney's fees which may be
incurred in the collection of the indebtedness through judicial
process. Therefore, the defendant-appellant should not again be
made to pay for them (Bank of the Philippine Islands vs. Yulo, 31
Phil., 476).
In view of the foregoing, this court is of the opinion and so holds:
(1) That failure to file an exception to a ruling rendered in open
court denying a motion for the inclusion of a party as defendant
deprives the petitioner, upon appeal of the right to raise the
question whether such denial proper or improper; (2) that the
50
shares of a banking corporation do not constitute an indebtedness
of the corporation to the stockholder and, therefore, the latter is
not a creditor of the former for such shares; (3) that the
indebtedness of a shareholder to a banking corporation cannot be
compensated with the amount of his shares therein, there being
no relation of creditor and debtor with respect to such shares; and
(4) that the percentage stipulated in a contract, for costs and
attorney's fees for the collection of an indebtedness, includes
judicial costs.
Roy III vs. Herbosa (G.R. No. 207246 [2016])
- (As to the difference between debt and equity instruments)
CAGUIOA, J.:
Before the Court is the Motion for Reconsideration dated January
19, 20171 (the Motion) filed by petitioner Jose M. Roy III (movant)
seeking the reversal and setting aside of the Decision dated
November 22, 20162 (the Decision) which denied the movant's
petition, and declared that the Securities and Exchange
Commission (SEC) did not commit grave abuse of discretion in
issuing Memorandum Circular No. 8, Series of 2013 (SEC-MC
No. 8) as the same was in compliance with, and in fealty to, the
decision of the Court in Gamboa v. Finance Secretary
Teves,3 (Gamboa  Decision) and the resolution4 denying the
Motion for Reconsideration therein (Gamboa  Resolution).
The Motion presents no compelling and new arguments to justify
the reconsideration of the Decision.
The grounds raised by movant are: (1) He has the requisite
standing because this case is one of transcendental importance;
(2) The Court has the constitutional duty to exercise judicial
review over any grave abuse of discretion by any instrumentality
of government; (3) He did not rely on an obiter dictum; and (4)
The Court should have treated the petition as the appropriate
device to explain the Gamboa Decision.
The Decision has already exhaustively discussed and directly
passed upon these grounds. Movant's petition was dismissed
based on both procedural and substantive grounds.
Regarding the procedural grounds, the Court ruled that petitioners
(movant and petitioners-in-intervention) failed to sufficiently allege
and establish the existence of a case or controversy and locus
standi  on their part to warrant the Court's exercise of judicial
review; the rule on the hierarchy of courts was violated; and
petitioners failed to implead indispensable parties such as the
Philippine Stock Exchange, Inc. and Shareholders' Association of
the Philippines, Inc. 5
In connection with the failure to implead indispensable parties, the
Court's Decision held:
Under Section 3, Rule 7 of the Rules of Court, an indispensable
party is a party-in-interest without whom there can be no final
determination of an action. Indispensable parties are those with
such a material and direct interest in the controversy that a final
decree would necessarily affect their rights, so that the court
cannot proceed without their presence. The interests of such
indispensable parties in the subject matter of the suit and the
relief are so bound with those of the other parties that their legal
presence as parties to the proceeding is an absolute necessity
and a complete and efficient determination of the equities and
rights of the parties is not possible if they are not joined.
Other than PLDT, the petitions failed to join or implead other
public utility corporations subject to the same restriction imposed
by Section 11, Article XII of the Constitution. These corporations
are in danger of losing their franchise and property if they are
found not compliant with the restrictive interpretation of the
constitutional provision under review which is being espoused by
petitioners. They should be afforded due notice and opportunity to
be heard, lest they be deprived of their property without due
process.
Not only are public utility corporations other than PLDT directly
and materially affected by the outcome of the petitions, their
shareholders also stand to suffer in case they will be forced to
divest their shareholdings to ensure compliance with the said
restrictive interpretation of the term "capital". As explained by
SHAREPHIL, in five corporations alone, more than Php158 Billion
worth of shares must be divested by foreign shareholders and
absorbed by Filipino investors if petitioners' position is upheld.
Petitioners' disregard of the rights of these other corporations and
numerous shareholders constitutes another fatal procedural flaw,
justifying the dismissal of their petitions. Without giving all of them
their day in court, they will definitely be deprived of their property
without due process of law. 6
This is highlighted to clear any misimpression that
the Gamboa  Decision and Gamboa  Resolution made a
categorical ruling on the meaning of the word "capital" under
Section 11, Article XII of the Constitution only in respect of, or only
confined to, respondent Philippine Long Distance Telephone
Company (PLDT). Nothing is further from the truth. Indeed, a fair
reading of the Gamboa  Decision and Gamboa  Resolution shows
that the Court's pronouncements therein would affect all public
utilities, and not just respondent PLDT.
On the substantive grounds, the Court disposed of the issue on
whether the SEC gravely abused its discretion in ruling that
respondent PLDT is compliant with the limitation on foreign
ownership under the Constitution and other relevant laws as
without merit. The Court reasoned that "in the absence of a
definitive ruling by the SEC on PLDT's compliance with the capital
requirement pursuant to the Gamboa  Decision and Resolution,
any question relative to the inexistent ruling is premature."7
In resolving the other substantive issue raised by petitioners, the
Court held that:
[E]ven if the resolution of the procedural issues were conceded in
favor of petitioners, the petitions, being anchored on Rule 65,
must nonetheless fail because the SEC did not commit grave
abuse of discretion amounting to lack or excess of jurisdiction
when it issued SEC-MC No. 8. To the contrary, the Court finds
51
SEC-MC No. 8 to have been issued in fealty to the Gamboa
Decision and Resolution.8
To belabor the point, movant's petition is not a continuation of
the Gamboa  case as the Gamboa  Decision attained finality on
October 18, 2012, and thereafter Entry of Judgment was issued
on December 11, 2012.9
As regards movant's repeated invocation of the transcendental
importance of the Gamboa  case, this does not ipso
facto  accord locus standi  to movant. Being a new petition,
movant had the burden to justify his locus standi  in his own
petition. The Court, however, was not persuaded by his
justification.
Pursuant to the Court's constitutional duty to exercise judicial
review, the Court has conclusively found no grave abuse of
discretion on the part of SEC in issuing SEC-MC No. 8.
The Decision has painstakingly explained why it considered
as obiter dictum  that pronouncement in the Gamboa  Resolution
that the constitutional requirement on Filipino ownership should
"apply uniformly and across the board to all classes of shares,
regardless of nomenclature and category, comprising the capital
of a corporation."[[9-a]] The Court stated that:
[T]he fallo  or decretal/dispositive portions of both
the Gamboa  Decision and Resolution are definite, clear and
unequivocal. While there is a passage in the body of
the Gamboa  Resolution that might have appeared contrary to
the fallo  of the Gamboa  Decision x x x the definiteness and clarity
of the fallo  of the Gamboa  Decision must control over the obiter
dictum  in the Gamboa  Resolution regarding the application of the
60-40 Filipino-foreign ownership requirement to "each class of
shares, regardless of differences in voting rights, privileges and
restrictions." 10
To the Court's mind and, as exhaustively demonstrated in the
Decision, the dispositive portion of the Gamboa  Decision was in
no way modified by the Gamboa  Resolution.
The heart of the controversy is the interpretation of Section 11,
Article XII of the Constitution, which provides: "No franchise,
certificate, or any other form of authorization for the operation of a
public utility shall be granted except to citizens of the Philippines
or to corporations or associations organized under the laws of the
Philippines at least sixty per centum of whose capital is owned by
such citizens x x x."
The Gamboa  Decision already held, in no uncertain terms, that
what the Constitution requires is "[fJull [and legal] beneficial
ownership of 60 percent of the outstanding capital stock, coupled
with 60 percent of the voting rights x x x must rest in the hands of
Filipino nationals x x x." 11 And, precisely that is what SEC-MC No.
8 provides, viz.:  "x x x For purposes of determining compliance
[with the constitutional or statutory ownership], the required
percentage of Filipino ownership shall be applied to BOTH (a) the
total number of outstanding shares of stock entitled to vote in the
election of directors; AND (b) the total number of outstanding
shares of stock, whether or not entitled to vote x x x." 12
In construing "full beneficial ownership," the Implementing Rules
and Regulations of the Foreign Investments Act of 1991 (FIA-IRR)
provides:
For stocks to be deemed owned and held by Philippine citizens or
Philippine nationals, mere legal title is not enough to meet the
required Filipino equity. Full beneficial ownership of the stocks,
coupled with appropriate voting rights is essential. Thus, stocks,
the voting rights of which have been assigned or transferred to
aliens cannot be considered held by Philippine citizens or
Philippine nationals. 13
In turn, "beneficial owner" or "beneficial ownership" is defined in
the Implementing Rules and Regulations of the Securities
Regulation Code (SRC-IRR) as:
[A]ny person who, directly or indirectly, through any contract,
arrangement, understanding, relationship or otherwise, has or
shares voting power (which includes the power to vote or direct
the voting of such security) and/or investment returns or power
(which includes the power to dispose of, or direct the disposition
of such security) x x x. 14
Thus, the definition of "beneficial owner or beneficial ownership"
in the SRC-IRR, which is in consonance with the concept of "full
beneficial ownership" in the FIA-IRR, is, as stressed in the
Decision, relevant in resolving only the question of who is the
beneficial owner or has beneficial ownership of each "specific
stock" of the public utility company whose stocks are under
review. If the Filipino has the voting power of the "specific
stock", i.e.,  he can vote the stock or direct another to vote for him,
or the Filipino has the investment power over the "specific
stock", i.e.,  he can dispose of the stock or direct another to
dispose of it for him, or both, i.e.,  he can vote and dispose of that
"specific stock" or direct another to vote or dispose it for
him, then such Filipino is the "beneficial owner" of that "specific
stock." Being considered Filipino, that "specific stock" is then to
be counted as part of the 60% Filipino ownership requirement
under the Constitution. The right to the dividends, jus fruendi  - a
right emanating from ownership of that "specific stock" necessarily
accrues to its Filipino "beneficial owner."
Once more, this is emphasized anew to disabuse any notion that
the dividends accruing to any particular stock are determinative of
that stock's "beneficial ownership." Dividend declaration is
dictated by the corporation's unrestricted retained earnings. On
the other hand, the corporation's need of capital for expansion
programs and special reserve for probable contingencies may
limit retained earnings available for dividend declaration. 15 It
bears repeating here that the Court in the Gamboa  Decision
adopted the foregoing definition of the term "capital" in Section 11,
Article XII of the 1987 Constitution in express recognition of the
sensitive and vital position of public utilities both in the national
economy and for national security, so that the evident purpose of
the citizenship requirement is to prevent aliens from assuming
control of public utilities, which may be inimical to the national
interest. 16 This purpose prescinds from the "benefits"/dividends
that are derived from or accorded to the particular stocks held by
Filipinos vis-a-vis the stocks held by aliens. So long as Filipinos
52
have controlling interest of a public utility corporation, their
decision to declare more dividends for a particular stock over
other kinds of stock is their sole prerogative - an act of ownership
that would presumably be for the benefit of the public utility
corporation itself. Thus, as explained in the Decision:
In this regard, it would be apropos  to state that since Filipinos
own at least 60% of the outstanding shares of stock entitled to
vote directors, which is what the Constitution precisely requires,
then the Filipino stockholders control the corporation, i.e.,  they
dictate corporate actions and decisions, and they have all the
rights of ownership including, but not limited to, offering certain
preferred shares that may have greater economic interest to
foreign investors - as the need for capital for corporate pursuits
(such as expansion), may be good for the corporation that they
own. Surely, these "true owners" will not allow any dilution of their
ownership and control if such move will not be beneficial to
them. 17
Finally, as to how the SEC will classify or treat certain stocks with
voting rights held by a trust fund that is created by the public
entity whose compliance with the limitation on foreign ownership
under the Constitution is under scrutiny, and how the SEC will
determine if such public utility does, in fact, control how the said
stocks will be voted, and whether, resultantly, the trust fund would
be considered as Philippine national or not - lengthily discussed in
the dissenting opinion of Justice Carpio - is speculative at this
juncture. The Court cannot engage in guesswork. Thus, there is
need of an actual case or controversy before the Court may
exercise its power of judicial review. The movant's petition
is not that actual case or controversy.
Thus, the discussion of Justice Carpio' s dissenting opinion as to
the voting preferred shares created by respondent PLDT, their
acquisition by BTF Holdings, Inc., which appears to be a wholly-
owned company of the PLDT Beneficial Trust Fund (BTF), and
whether or not it is respondent PLDT's management that controls
BTF and BTF Holdings, Inc. - all these are factual matters that are
outside the ambit of this Court's review which, as stated in the
beginning, is confined to determining whether or not the SEC
committed grave abuse of discretion in issuing SEC-MC No. 8;
that is, whether or not SEC-MC No. 8 violated the ruling of the
Court in Gamboa v. Finance Secretary Teves,  18 and the
resolution in Heirs of Wilson P. Gamboa  v. Finance Sec.
Teves19denying the Motion for Reconsideration therein as to the
proper understanding of "capital".
To be sure, it would be more prudent and advisable for the Court
to await the SEC's prior determination of the citizenship of specific
shares of stock held in trust - based on proven facts  - before the
Court proceeds to pass upon the legality of such determination.
As to whether respondent PLDT is currently in compliance with
the Constitutional provision regarding public utility entities, the
Court must likewise await the SEC's determination thereof
applying SEC-MC No. 8. After all, as stated in the Decision, it is
the SEC which is the government agency with the competent
expertise and the mandate of law to make such determination.
In conclusion, the basic issues raised in the Motion having been
duly considered and passed upon by the Court in the Decision
and no substantial argument having been adduced to warrant the
reconsideration sought, the Court resolves to DENY the Motion
with FINALITY.
WHEREFORE, the subject Motion for Reconsideration is
hereby DENIED WITH FINALITY. No further pleadings or motions
shall be entertained in this case. Let entry of final judgment be
issued immediately.
A. DEBT SECURITIES – note the differences of debt securities
and equity securities
Generally: Lirag v. SSS
1. Authority to Issue Debt Securities
- Power to incur, create or increase bonded indebtedness
(Section 38 of the RCC)
Section 38. Power to increase or decrease capital stock; incur,
create or increase bonded indebtedness. –
Both express and implied: A business corporation in the absence
of restriction may borrow money whenever the necessity of its
business so requires and issue security or customary evidence of
debt such as bonds, mortgages and or notes. corporations are
presumed to incur or create liabilities as part of their normal
operations of the business and in pursuit of the purpose of the
corporation
REQUIREMENTS:
1. Majority vote of the board of directors/trustees
2. At a stockholder's meeting duly called for the purpose
3. two-thirds (2/3) vote of the outstanding capital
stock/members— the requirement of 2/3 vote of the
OCS/Members is to ensure that the BOD/BOT cannot
alone bind the corporation in this financial
matter
4. Written notice:
Proposal for the increase or diminution of the capital
stock or of the incurring, creating, or
increasing of any bonded indebtedness
 the time and place of the stockholder's
 must be addressed to each stockholder/member at
his place of residence as shown on the
books of the corporation and deposited to the
addressee in the post office with postage
prepaid, or served personally
2. Types of Debt Securities
a. Unsecured Bonds
An unsecured bond is an obligation of an organization or
government that is not backed by any assets. An unsecured bond
53
is also not backed by the stream of cash flows from any revenue-
generating operations.
Unsecured debt has no collateral backing. Lenders issue funds in
an unsecured loan based solely on the borrower's
creditworthiness and promise to repay. 
b. Secured Bonds
Type of investment in debt that is secured by a specific asset
owned by the issuer. The asset serves as collateral for the loan. If
the issuer defaults on the bond, the title to the asset is transferred
to the bondholders.
A corporation that issues secured bonds guarantees that specific
assets are set aside to act as collateral in the event of bond
default or company bankruptcy. Secured bonds are also
sometimes called asset-backed bonds.
Secured bonds represent a significantly less risky investment for
bondholders than unsecured bonds. In the event of a bond
default, holders of secured bonds are entitled to seize the assets
that were designated as collateral. If the issuer suffers
bankruptcy, holders of secured bonds have high priority among
the list of those who have claims on the company's assets.
But secured bonds are only as secure as the company that issues
them. Secured bonds issued by a company on unsure financial
footing can be significantly more risky than unsecured bonds
issued by successful and well-established corporations.
c. Income Bonds
An income bond is a type of debt security in which only the face
value of the bond is promised to be paid to the investor, with any
coupon payments paid only if the issuing company has enough
earnings to pay for the coupon payment. In the context of
corporate bankruptcy, an adjustment bond is a type of income
bond.
d. Convertible Bonds
A convertible bond is a fixed-income corporate debt security that
yields interest payments, but can be converted into a
predetermined number of common stock or equity shares. The
conversion from the bond to stock can be done at certain times
during the bond's life and is usually at the discretion of the
bondholder.
Can be converted into shares or cash when the bond matures.
e. Callable Bonds
Callable or redeemable bonds are bonds that can be redeemed or
paid off by the issuer prior to the bonds' maturity date. When an
issuer calls its bonds, it pays investors the call price (usually the
face value of the bonds) together with accrued interest to date
and, at that point, stops making interest payments.
B. EQUITY SECURITIES
Generally: Garcia v. Lim Chu Sing, 59 Phil 562
DOCTRINE: A share of stock or certificate is not an indebtedness
to the owner or evidence of indebtedness and therefore is not a
credit. Stockholders as such are not creditors of the corporation.
VILLA-REAL, J.:
This is an appeal taken by the defendant Lim Chu Sing from the
judgment rendered by the Court of First Instance of Manila, the
dispositive part of which reads as follows:
Wherefore, judgment is rendered sentencing the defendant to pay
the sum of P9,105.17 with interest thereon at the rate of six per
cent per annum from September 1, 1932, until fully paid, plus the
sum of P910.51, as attorney's fees, with the costs of this suit.
In conformity with the stipulation, this judgment shall be subject to
execution after ninety (90) days. So ordered.
In support of his appeal, the appellant assigns the following
alleged errors as committed by the court a quo in its decision, to
wit:
1. In denying the motion dated December 27, 1932, praying for
the inclusion of Lim Cuan Sy, being the principal debtor, as party
to this suit.
2. In holding as improper the compensation of the defendant's
debt of P9,106.17, claimed in the complaint, with his credit
amounting to P10,000 with the Mercantile Bank of China.
3. In not ordering that after the compensation the plaintiff-
appellee, as receiver of the Mercantile Bank of China, should
liquidate the dividends of the defendant-appellant's shares.
4. In sentencing the defendant-appellant to pay to the plaintiff-
appellee the sum of P910.51 as attorney's fees, plus interest at 6
per cent per annum on the sum of P9,105.17, with costs.
5. In denying the motion for a new trial.
When the case was called for hearing, the parties submitted the
following stipulation of facts for the consideration of the trial court,
to wit:
Come now both parties and to this Honorable Court respectfully
submit the following stipulation:
1. The defendant admits the facts alleged in the complaint.
2. The plaintiff admits the allegations in the answer, particularly
with reference to the fact that the defendant is the owner of two
hundred shares at a par value of fifty pesos (P50) each, that is
(Pl0,000).
3. The court may render judgment in accordance with this
stipulation, but the same shall be subject to execution after ninety
(90) days.
Wherefore, they respectfully submit this stipulation and pray that
judgment be rendered in accordance therewith.
54
The facts alleged in the complaint and admitted by both parties
under the above quoted stipulation of facts are as follows:
On June 20, 1930, the defendant-appellant Lim Chu Sing
executed and delivered to the Mercantile Bank of China
promissory note for the sum of P19,605.17 with interest thereon
at 6 per cent per annum, payable monthly as follows: P1,000 on
July 1, 1930; P500 on August 1, 1930; and P500 on the first of
every month thereafter until the amount of the promissory note
together with the interest thereon is fully paid (Exhibit A). One of
the conditions stipulated in said promissory note is that in case of
defendant's default in the payment of any of the monthly
installments, as they become due, the entire amount or the
unpaid balance thereof together with interest thereon at 6 per cent
per annum, shall become due and payable on demand. The
defendant had been, making several partial payments thereon,
leaving an unpaid balance of P9,105.17. However, he defaulted in
the payment of several installments by reason of which the unpaid
balance of P9,105.17 on the promissory note has ipso
facto become due and demandable.
The facts alleged in the answer and admitted by both parties
under the same stipulation of facts are as follows:
The debt which is the subject matter of the complaint was not
really an indebtedness of the defendant but of Lim Cuan Sy, who
had an account with the plaintiff bank in the form of "trust receipts"
guaranteed by the defendant as surety and with chattel mortgage
securities. The plaintiff bank, without the knowledge and consent
of the defendant, foreclosed the chattel mortgage and privately
sold the property covered thereby. Inasmuch as Lim Cuan Sy
failed to comply with his obligations, the plaintiff required the
defendant, as surety, to sign a promissory note for the sum of
P19,105.17 payable in the manner hereinbefore stated (Exhibit
A). The defendant had been paying the corresponding
installments until the debt was reduced to the sum of P9,105.17
claimed in the complaint. The defendant is the owner of shares of
stock of the plaintiff Mercantile Bank of China amounting to
P10,000. The plaintiff bank is now under liquidation.
On December 27, 1932, the defendant-appellant Lim Chu Sing
filed a motion praying for the inclusion of the principal debtor Lim
Cuan Sy as party defendant so that he could avail himself of the
benefit of the exhaustion of the property of said Lim Cuan Sy.
Said motion was denied in open court by the presiding judge
without the defendant-appellant having excepted to such order of
denial.
The proceeds of the sale of the mortgaged chattels together with
other payments made were applied to the amount of the
promissory note in question, leaving the balance which the
plaintiff now seeks to collect.
The first question to be decided in this appeal is whether or not
the court a quo erred in denying the motion for inclusion of a party
a defendant, filed by the defendant-appellant.
According to the provisions of section 141 of the Code of Civil
Procedure, ". . . Rulings of the court upon minor matters, such as
adjournments, postponements of trials, the extension of time for
filing pleadings or motions, and other matters addressed to the
discretion of the court in the performance of its duty, shall not be
subject to exception. But exception may be taken to any other
ruling, order, or judgment of the court made during the pendency
of the action in the Court of First Instance." "An `exception' has
been defined as an objection taken to the decision of the trial
court upon a matter of law, and is a notice that the party taking it
preserves for the consideration of the appellate court a ruling
deemed erroneous. (8 Am. Enc. P. and P., 157.)" " `Errors in a
judgment or decree will not be noticed on appeal in the absence
of objections and exceptions taken below, and they should be
sufficiently specific to direct the attention of the court to the
alleged defects.' (8 Enc. Pl and Pr., 289.)" (Garcia de Lara vs.
Gonzales de Lara, 2 Phil., 297.) Inasmuch as an exception is an
objection taken to the decision of the trial court upon a matter of
law and is a notice that the party taking it will submit for the
consideration of the appellate court the ruling deemed erroneous,
failure to interpose it deprived the appellant of the right to raise
the question whether or not the court a quo committed the alleged
error attributed to it in its ruling which had not been excepted to by
the said appellant. The inclusion in, or exclusion from an action of
a certain party is a question of law. The herein defendant-
appellant, not having excepted to the order of the Court of First
Instance of Manila denying his motion for the inclusion of Lim
Cuan Sy as party defendant, is estopped from raising such
question upon appeal (Roman Catholic Bishop of Lipa vs.
Municipality of San Jose, 27 Phil., 571; Vergara vs. Laciapag, 28
Phil., 439; Andrews vs. Morente Rosario, 9 Phil., 634).
The second question to be decided is whether or not it is proper
to compensate the defendant-appellant's indebtedness of
P9,105.17, which is claimed in the complaint, with the sum of
P10,000 representing the value of his shares of stock with the
plaintiff entity, the Mercantile Bank of China.
According to the weight of authority, a share of stock or the
certificate thereof is not an indebtedness to the owner nor
evidence of indebtedness and, therefore, it is not a credit (14
Corpus Juris, p. 388, see. 511). Stockholders, as such, are not
creditors of the corporation (14 Corpus Juris, p. 848, Sec. 1289).
It is the prevailing doctrine of the American courts, repeatedly
asserted in the broadest terms, that the capital stock of a
corporation is a trust fund to be used more particularly for the
security of creditors of the corporation, who presumably deal with
it on the credit of its capital stock (14 Corpus Juris, p. 383, sec.
505). Therefore, the defendant-appellant Lim Chu Sing not being
a creditor of the Mercantile Bank of China, although the latter is a
creditor of the former, there is no sufficient ground to justify a
compensation (art. 1195, Civil Code; Acuña Co Chongco vs.
Dievas, 12 Phil., 250).
The third question to be decided in this appeal is whether or not
the court a quo erred in sentencing the said defendant-appellant
to pay the sum of P910.51 as attorney's fees in addition to interest
at 6 per cent per annum on the amount sought in the complaint.
The pertinent clause of the promissory note Exhibit A reads as
follows: "In case of default of any of the above installments, the
total amount of the balance still unpaid of this note will become
55
due and payable on demand plus interest thereon at the rate of 6
per cent per annum from date of this note until payment is made.
And I further agree to pay an additional sum equivalent to 10 per
cent of the said note to cover cost and attorney's fees for
collection."
The stipulation relative to the payment of interest at the rate of 6
per cent per annum on the unpaid balance of the promissory note
Exhibit A refers to the capital and the 10 per cent stipulated for
costs and attorney's fees cannot be considered as interest but an
indemnity for damages occasioned by the collection of the
indebtedness through judicial process. Therefore the two rates in
question cannot be combined and considered usurious interest.
With reference to the costs, the 10 per cent stipulated in the
promissory note is for costs and attorney's fees which may be
incurred in the collection of the indebtedness through judicial
process. Therefore, the defendant-appellant should not again be
made to pay for them (Bank of the Philippine Islands vs. Yulo, 31
Phil., 476).
In view of the foregoing, this court is of the opinion and so holds:
(1) That failure to file an exception to a ruling rendered in open
court denying a motion for the inclusion of a party as defendant
deprives the petitioner, upon appeal of the right to raise the
question whether such denial proper or improper; (2) that the
shares of a banking corporation do not constitute an indebtedness
of the corporation to the stockholder and, therefore, the latter is
not a creditor of the former for such shares; (3) that the
indebtedness of a shareholder to a banking corporation cannot be
compensated with the amount of his shares therein, there being
no relation of creditor and debtor with respect to such shares; and
(4) that the percentage stipulated in a contract, for costs and
attorney's fees for the collection of an indebtedness, includes
judicial costs.
Wherefore, with the sole modification that the costs be eliminated
from the appealed judgment, the same is hereby affirmed, without
special pronouncement as to costs of this instance. So ordered.
1. Issuance of Shares
NATURE: Properties and have intrinsic pecuniary value
Shares of stock in a corporation constitute personal property of
the stockholder, which he can contract with as in any other form of
property, like assignment by way of disposition, or pledge by way
of encumbrance.
Although shares of stock represent aliquot parts of the
corporation's capital, or the right to share in the proceeds when
the remaining assets of the corporation are distributed according
to law and equity, its holders do not own any part of the assets
represented by the capital of the corporation; nor are the
stockholders entitled to the possession of any definite portion of
the corporation's assets or properties. Shares of stock do not
legally represent a proprietary claim of co-ownership or tenancy-
in-common in the assets and properties of the corporation
a. Certificate of Stock (Section 62 of the RCC)
Section 63. Certificate of stock and transfer of shares . – capital
stock of stock corporations shall be divided into shares for which
certificates shall be issued
REQUIREMENTS:
1. signed by the president or vice president
2. countersigned by the secretary or assistant
secretary
3. sealed with the seal of the corporation
4. shall be issued in accordance with the by-laws.
Nature of the Shares of stock so issued : personal property thus
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.
RULES AS TO VALIDITY OF TRANSFER:
1. Transfer valid only between parties if not recorded in the
books of the corporation
2. Transfer valid as against 3rd persons if recorded in the
books of the corporation
Records must 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.
3. No shares of stock against which the corporation holds
any unpaid claim shall be transferable in the books of the
corporation
b. Pre-Emptive Rights (Section 38 of the RCC)
c. Consideration (Section 61 of the RCC)
- Cash and promissory notes for subscription
- Property consideration
- Debts and Service as consideration
- Set-off of corporation’s indebtness
- Unrestricted retained earnings or existing capital as
consideration
- Consequence of unlawful consideration
National Exchange vs. Dexter, 51 PHIL 601
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
56
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
57
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.
1. Par Value
2. No Par Value
d. Payment of the Balance of the Subscription
(Sections 65 and 66 of the RCC)
Lingayen Gulf vs. Baltazar, 93 PHIL 404
MONTEMAYOR, J.:
These two cases here on appeal stem from the same case, that of
civil case No. 10944 of the Court of First Instance of Pangasinan.
From the trial court's decision, plaintiff Lingayen Gulf Electric
Power Company, Inc. appealed directly to this court under G.R.
No. L-4824. Defendant Irineo Baltazar appealed to the Court of
Appeals. By a resolution of that appellate tribunal, the appeal was
certified to this court pursuant to section 17, (5) and (6) of the
Judiciary Act of 1948, and is now listed here under G.R. No. L-
6344.
The main facts of the case are not disputed, and we are
reproducing and making our own the relation of facts contained in
the decision appealed from.
The plaintiff, Lingayen Gulf Electric Power Company is a domestic
corporation with an authorized capital stock of P300,000 divided
into 3,000 shares with a par value of P100 per share. The
defendant, Irineo Baltazar appears to have subscribed for 600
shares on account of which he had paid upon the organization of
the corporation the sum of P15,000. (See Exhibit A, page 2). After
incorporation, the defendant made further payments on account
of his subscription, leaving a balance of P18,500 unpaid for,
which amount, the plaintiff now claims in this action.
On July 23, 1946, a majority of the stockholders of the
corporation, among them the herein defendant, held a meeting
and adopted stockholders' resolution No. 17. By said resolution, it
was agreed upon by the stockholders present to call the balance
of all unpaid subscribed capital stock as of July 23, 1946, the first
50 per cent payable within 60 days beginnning August 1, 1946,
and the remaining 50 per cent payable within 60 days beginning
October 1, 1946. The resolution also provided, that all unpaid
subscription after the due dates of both calls would be subject to
12 per cent interest per annum. Lastly, the resolution provided,
that after the expiration of 60 days' grace which would be on
December 1, 1946, for the first call, and on February 1, 1947, for
the second call, all subscribed stocks remaining unpaid would
revert to the corporation. (See Exhibit F and Exhibit I).
On September 22, 1946, the plaintiff corporation wrote a letter to
the defendant reminding him that the first 50 per cent of his
unpaid subscription would be due on October 1, 1946. The
plaintiff requested the defendant to "kindly advise the company
thru the undersigned your decision regarding this matter." (See
Exhibit 4). The defendant answered on September 25, 1946,
asking the corporation that he be allowed to pay his unpaid
subscription by February 1, 1947. In his answer, the defendant
also agreed that if he could not pay the balance of his
subscription by February 1, 1947, his unpaid subscription would
be reverted to the corporation. (See Exhibit 5).
On December 19, 1947, the defendant wrote another letter to the
members of the Board of Directors of the plaintiff corporation,
offering to withdraw completely from the corporation by selling out
to the corporation all his shares of stock in the total amount of
P23,000. (See Exhibit 8). Apparently this offer of the defendant
was left unacted upon by the plaintiff.
On April 17, 1948, the Board of Directors of the plaintiff
corporation held a meeting, and in the course of the said meeting
they adopted Resolution No. 17. This resolution in effect set aside
the stockholders resolution approved on June 23, 1946 (Exhibit
D), on the ground that said stockholders' resolution was null and
void, and because the plaintiff corporation was not in a financial
position to absorb the unpaid balance of the subscribed capital
stock. At the said meeting the directors also decided to call 50 per
cent of the unpaid subscription within 30 days from April 17, 1948,
the call payable within 60 days from receipt of notice from the
Secretary-Treasurer. This resolution also authorized legal counsel
of the company to take all the necessary legal steps for the
collection of the payment of the call. (See Exhibit E-2).
On June 10, 1949, the stockholders of the corporation held
another meeting in which the stockholders were all present, either
in person or by proxy. At such meeting, the stockholders adopted
resolution No. 4, whereby it was agreed to revalue the stocks and
assets of the company so as to attract outside investors to put in
money for the rehabilitation of the company. The president was
authorized to make all arrangement for such appraisal and the
Secretary to call a meeting upon completion of the reassessment.
(See Exhibit 2).
It was admitted by the defendant that he received notice from the
Secretary-Treasurer of the company, demanding payment of the
unpaid balance of his subscription. It was agreed by the parties
58
that the call of the Board of Directors was not published in a
newspaper of general circulation as required by section 40 of the
Corporation Law.
On September 28, 1949, the legal counsel of the plaintiff
corporation wrote a letter to the defendant, demanding the
payment of the unpaid balance of his subscription amounting to
P18,500. Copy of this letter was sent by registered mail to the
defendant on September 29,1 949. (See Exhibit G). The
defendant ignored the said demand. Hence this action.
The defendant, in his answer, disclaims liability tot he plaintiff
corporation on the following grounds:
1. That the plaintiffs' action is premature because there was no
valid call; and
2. That granting that there was a valid call, he was released from
the obligation of the balance of his subscription by stockholders'
resolution No. 17 and No. 4.
By way of counterclaim, the defendant also claims from the
plaintiff a reasonable compensation at the rate of P700 per month
as president of the company, for the period from March 1, 1946 to
December 31, 1948.
In the light of the foregoing undisputed facts, the only questions
are as follows:
1. Was the call Exhibit E-2 valid?
2. Was the defendant released from the obligation of the unpaid
balance of his subscription by virtue of stockholders' resolution
Nos. 17 and 4?
3. Is the defendant entitled to compensation as president of the
plaintiff corporation?
In an exhaustive and well prepared decision, Judge M. Mejia of
the lower court found that the call for payment embodied in
resolution No. 17 of July 23, 1946 was null and void for lack of
publication; consequently, he dismissed the complaint as
premature. He further held said resolution null and void in so far
as it tried to relieve the defend- ant from liability on his unpaid
subscription, on the ground that the resolution was not approved
by all the stockholders of the corporation. He also dismissed the
defendant's counterclaim for compensation as president of the
corporation.
Inasmuch as in the two appeals, the assignment of errors are
related to each other, and because they refer to the same case,
we propose to determine both appeals in one single decision.
We agree with the lower court that the law requires that notice of
any call for the payment of unpaid subscription should be made
not only personally but also by publication. This is clear from the
provisions of section 40 of the Corporation Law, Act No. 1459, as
amended, which reads as follows:
SEC. 40. Notice of call for unpaid subscriptions must be either
personally served upon each stockholder or deposited in the post
office, postage prepaid, addressed to him at his place of
residence, if known, and if not known, addressed to the place
where the principal office of the corporation is situated. The notice
must also be published once a week for four successive weeks in
some newspaper of general circulation devoted to the publication
of general news published at the place where the principal office
of the corporation is established or located, and posted in some
prominent place at the works of the corporation if any such there
be. If there be no newspaper published at the place where the
principal office of the corporation is established or located, then
such notice may be published in any newspaper of general news
in the Philippines.
It will be noted that section 40 is mandatory as regards
publication, using the word "must". As correctly stated by the trial
court, the reason for the mandatory provision is not only to assure
notice to all subscribers, but also to assure equality and uniformity
in the assessment on stockholders. (14 C.J. 639).
This rule finds support in authorities on corporation law, such as,
Thompson on Corporations, Vol. 5, 3rd edition, pages 588-590,
from which we make the following quotation:
SEC. 3744. Provisions requiring notice of calls. — The governing
statute, charter or by-laws usually require that notice of calls be
given the subscriber or stockholder. If any particular notice or
demand is required by either of these, or by the contract of
subscription, then such notice or demand must be given, and
must be alleged and proved in order to maintain an action for the
call.
xxx     xxx     xxx
SEC. 3745. Notice. — Compliance with requirements-From what
has preceded it is clear that where any particular form or kind of
notice is required, such form or kind must be given-the
requirement must be complied with. Thus, where the charter
expressly required notice to be given in certain newspapers for a
certain number of days, the corporation must show compliance
with the conditions before recovery on the call. An action is
ordinarily made effective by notice thereof to the subscribers, in
accordance with the by-laws or general regulations of the
corporation in that regard. So, where there are statutory or other
regulations as to the form and sufficiency of the notice, these
must be followed. Thus, where such a notice was required to be
signed by the directors, a notice with the names of the directors
signed by a clerk, was held insufficient. These cases and others
proceed on the theory that where the manner of giving notice is
prescribed by law every condition precedent must be strictly and
literally complied with. (Thompson on Corporations, Vol. 5, 3rd
ed.)
This view is shared by Justice Fisher. In his book "The Philippine
Law on Stock Corporations" he says: "Not only must personal
notice be given in one of these manners, but the notice must also
be published once a week, for four consecutive weeks, in some
newspaper." (p. 110.).
We find the citation of authorities made by the plaintiff and
appellant inapplicable. In the case of Velasco vs. Poizat (37 Phil.
59
805), the corporation involved was insolvent, in which case all
unpaid stock subscriptions become payable on demand and are
immediately recoverable in an action instituted by the assignee.
Said the court in that case:
. . . . it is now quite well settled that when the corporation
becomes insolvent, with proceedings instituted by creditors to
wind up and distribute its assets, no call or assessment is
necessary before the institution of suits to collect unpaid balance
on subscription.
But when the corporation is a solvent concern, the rule is:
It is again insisted that plaintiffs cannot recover because the suit
was not proceeded by a call or assessment against the defendant
as a subscriber, and that until this is done no right of action
accrues. In a suit by a solvent going corporation to collect a
subscription, and in certain suits provided by statute this would be
true;. . . . . (Id.)
Going to the claim of defendant and appellant that Resolution No.
17 of 1946 released him from the obligation to pay for his unpaid
subscription, the authorities are generally agreed that in order to
effect the release, there must be unanimous consent of the
stockholders of the corporation. We quote some authorities:
Subject to certain exceptions, considered in subdivision (3) of this
section, the general rule is that a valid and binding subscription
for stock of a corporation cannot be cancelled so as to release the
subscriber from liability thereon without the consent of all the
stockholders or subscribers. Furthermore, a subscription cannot
be cancelled by the company, even under a secret or collateral
agreement for cancellation made with the subscriber at the time of
the subscription, as against persons who subsequently
subscribed or purchased without notice of such agreement. (18
C.J.S. 874).
(3) Exceptions.
In particular circumstances, as where it is given pursuant to a
bona fide compromise, or to set off a debt due from the
corporation, a release, supported by consideration, will be
effectual as against dissenting stockholders and subsequent and
existing creditors. A release which might originally have been held
invalid may be sustained after a considerable lapse of time. (18
C.J.S. 874).
In the present case, the release claimed by defendant and
appellant does not fall under the exception above referred to,
because it was not given pursuant to a bona fide compromise, or
to set off a debt due from the corporation, and there was no
consideration for it.
Another authority:
SEC. 850. Unanimous consent of stockholders necessary to
release subscriber. — It may be asserted as the first rule under
this proposition that, after a valid subscription to the capital stock
of a corporation has been made and accepted, there can be no
cancellation or release from the obligation without the consent of
the corporation and all the stockholders; . . . . (2 Thompson on
Corporation, p. 186).
He states the reason for the rule as follows:
SEC. 855. Right to withdraw as against subscribers . — A contract
of subscription is, at least in the sense which creates as estoppel,
a contract among the several subscribers. For this reason no one
of the subscribers can withdraw from the contract without the
consent of all the others, and thereby diminish, without the
universal consent, the common fund in which all have acquired an
interest. . . . (2 Thompson on Corporations, p. 194.).
As already found by the trial court, the release attempted in
Resolution No. 17 of 1946 was not valid for lack of a unanimous
vote. If found that at least seven stockholders were absent from
the meeting when said resolution was approved.
Defendant and appellant, however, contends that after dismissing
the complaint for being premature, there was no necessity or
reason for the trial court to go further and say that defendant was
not validly released from the payment for his unpaid subscription.
It must be borne in mind, however, that this was one of the
principal issues involved in the case and the trial court was called
upon to pass upon it, because unless so passed upon and deter-
mined, it might decisively affect the case on appeal. Supposing
that on appeal the appellate court decides that the call was valid,
then it would be important to know whether or not in spite of the
validity of the call, defendant was nevertheless not liable because
he had been validly released by a resolution of the corporation. If
that question was not decided by the trial court, and naturally was
not touched upon in the appeal, then the appellate court would
have no occasion to pass upon it, and it might be necessary to
bring another action to determine the point, which means
multiplicity of suits. Moreover, the authority given to the courts to
render judgments for declaratory relief in order to determine the
rights or duties of parties over a certain transaction or under a
certain written instrument, or to remove the uncertainty or
controversy over the same (Rule 66 of the Rules of Court),
justified the trial court in passing upon this question of release.
As regards the compensation of President claimed by defendant
and appellant, it is clear that he is not entitled to the same. The
by-laws of the company are silent as to the salary of the
President. And, while resolutions of the incorporators and
stockholders (Exhibits G-1 and I-1) provide salaries for the
general manager, secretary-treasurer and other employees, there
was no provision for the salary of the President. On the other
hand, other resolutions (Exhibits H-1 and J-3) provide for per
diems to be paid to the President and the directors of each
meeting attended, P10 for the President and P8 for each director,
which were later increased to P25 and P15, respectively. This
leads to the conclusions that the President and the board of
directors were expected to serve without salary, and that the per
diems paid to them were sufficient compensation for their
services. Furthermore, for defendant's several years of service as
President and up to the filing of the action against him, he never
filed a claim for salary. He thought of claiming it only when this
suit was brought against him.
60
In conclusion we hold that under the Corporation Law, notice of
call for payment for unpaid subscribed stock must be published,
except when the corporation is insolvent, in which case, payment
is immediately demandable. We also rule that release from such
payment must be made by all the stockholders.
e. Liability for Unpaid Subscriptions
Keller vs. COB Group, 141 SCRA 86
AQUINO, C.J.:
This case is about the liability of a marketing distributor under its
sales agreements with the owner of the products. The petitioner
presented its evidence before Judges Castro Bartolome and
Benipayo. Respondents presented their evidence before Judge
Tamayo who decided the case.
A review of the record shows that Judge Tamayo acted under a
misapprehension of facts and his findings are contradicted by the
evidence. The Appellate Court adopted the findings of Judge
Tamayo. This is a case where this Court is not bound by the
factual findings of the Appellate Court. (See Director of Lands vs.
Zartiga, L-46068-69, September 30, 1982, 117 SCRA 346, 355).
Edward A. Keller & Co., Ltd. appointed COB Group Marketing,
Inc. as exclusive distributor of its household products, Brite and
Nuvan in Panay and Negros, as shown in the sales agreement
dated March 14, 1970 (32-33 RA). Under that agreement Keller
sold on credit its products to COB Group Marketing.
As security for COB Group Marketing's credit purchases up to the
amount of P35,000, one Asuncion Manahan mortgaged her land
to Keller. Manahan assumed solidarily with COB Group Marketing
the faithful performance of all the terms and conditions of the
sales agreement (Exh. D).
In July, 1970 the parties executed a second sales agreement
whereby COB Group Marketing's territory was extended to
Northern and Southern Luzon. As security for the credit
purchases up to P25,000 of COB Group Marketing for that area,
Tomas C. Lorenzo, Jr. and his father Tomas, Sr. (now deceased)
executed a mortgage on their land in Nueva Ecija. Like Manahan,
the Lorenzos were solidarily liable with COB Group Marketing for
its obligations under the sales agreement (Exh. E).
The credit purchases of COB Group Marketing, which started on
October 15, 1969, limited up to January 22, 1971. On May 8, the
board of directors of COB Group Marketing were apprised by
Jose E. Bax the firm's president and general manager, that the
firm owed Keller about P179,000.  Bax was authorized to
negotiate with Keller for the settlement of his firm's liability (Exh.
1, minutes of the meeting).
On the same day, May 8, Bax and R. Oefeli of Keller signed the
conditions for the settlement of COB Group Marketing's liability,
Exhibit J, reproduced as follows:
This formalizes our conditions for the settlement of C.O.B.'s
account with Edward Keller Ltd.
1. Increase of mortgaged collaterals to the full market value
(estimated by Edak at P90,000.00).
2. Turn-over of receivables (estimated outstandings P70,000.00
to P80,000.00).
3. Turn-over of 4 (four) trucks for outright sale to Edak, to be
credited against C.0.B.'s account.
4. Remaining 8 (eight) trucks to be assigned to Edak, C.O.B will
continue operation with these 8 trucks. They win be returned to
COB after settlement of full account.
5. C.O.B has to put up securities totalling P200,000.00.
P100,000.00 has to be liquidated within one year. The remaining
P100,000.00 has to be settled within the second year.
6. Edak wig agree to allow C.O.B. to buy goods to the value of the
difference between P200,000.00 and their outstandings, provided
C.O.B. is in a position to put up securities amounting to
P200,000.00.
Discussion held on May 8, 1971.
Twelve days later, or on May 20, COB Group Marketing, through
Bax executed two second chattel mortgages over its 12 trucks
(already mortgaged to Northern Motors, Inc.) as security for its
obligation to Keller amounting to P179,185.16 as of April 30, 1971
(Exh. PP and QQ). However, the second mortgages did not
become effective because the first mortgagee, Northern Motors,
did not give its consent. But the second mortgages served the
purpose of being admissions of the liability COB Group Marketing
to Keller.
The stockholders of COB Group Marketing, Moises P. Adao and
Tomas C. Lorenzo, Jr., in a letter dated July 24, 1971 to Keller's
counsel, proposed to pay Keller P5,000 on November 30, 1971
and thereafter every thirtieth day of the month for three years until
COB Group Marketing's mortgage obligation had been fully
satisfied. They also proposed to substitute the Manahan
mortgage with a mortgage on Adao's lot at 72 7th Avenue, Cubao,
Quezon City (Exh. L).
These pieces of documentary evidence are sufficient to prove the
liability of COB Group Marketing and to justify the foreclosure of
the two mortgages executed by Manahan and Lorenzo (Exh. D
and E).
Section 22, Rule 130 of the Rules of Court provides that the act,
declaration or omission of a party as to a relevant fact may be
given in evidence against him "as admissions of a party".
The admissions of Bax are supported by the documentary
evidence. It is noteworthy that all the invoices, with delivery
61
receipts, were presented in evidence by Keller, Exhibits KK-1 to
KK-277-a and N to N-149-a, together with a tabulation thereof,
Exhibit KK, covering the period from October 15, 1969 to January
22, 1971. Victor A. Mayo, Keller's finance manager, submitted a
statement of account showing that COB Group Marketing owed
Keller P184,509.60 as of July 31, 1971 (Exh. JJ). That amount is
reflected in the customer's ledger, Exhibit M.
On the other hand, Bax although not an accountant, presented his
own reconciliation statements wherein he showed that COB
Group Marketing overpaid Keller P100,596.72 (Exh. 7 and 8). He
claimed overpayment although in his answer he did not allege at
all that there was an overpayment to Keller.
The statement of the Appellate Court that COB Group Marketing
alleged in its answer that it overpaid Keller P100,596.72 is
manifestly erroneous first, because COB Group Marketing did not
file any answer, having been declared in default, and second,
because Bax and the other stockholders, who filed an answer, did
not allege any overpayment. As already stated, even before they
filed their answer, Bax admitted that COB Group Marketing owed
Keller around P179,000 (Exh. 1).
Keller sued on September 16, 1971 COB Group Marketing, its
stockholders and the mortgagors, Manahan and Lorenzo.
COB Group Marketing, Trinidad C. Ordonez and Johnny de la
Fuente were declared in default (290 Record on Appeal).
After trial, the lower court (1) dismissed the complaint; (2) ordered
Keller to pay COB Group Marketing the sum of P100,596.72 with
6% interest a year from August 1, 1971 until the amount is fully
paid: (3) ordered Keller to pay P100,000 as moral damages to be
allocated among the stockholders of COB Group Marketing in
proportion to their unpaid capital subscriptions; (4) ordered the
petitioner to pay Manahan P20,000 as moral damages; (5)
ordered the petitioner to pay P20,000 as attomey's fees to be
divided among the lawyers of all the answering defendants and to
pay the costs of the suit; (6) declared void the mortgages
executed by Manahan and Lorenzo and the cancellation of the
annotation of said mortgages on the Torrens titles thereof, and (7)
dismissed Manahan's cross-claim for lack of merit.
The petitioner appealed. The Appellate Court affirmed said
judgment except the award of P20,000 as moral damages which it
eliminated. The petitioner appealed to this Court.
Bax and the other respondents quoted the six assignments of
error made by the petitioner in the Appellate Court, not the four
assignments of error in its brief herein. Manahan did not file any
appellee's brief.
We find that the lower courts erred in nullifying the admissions of
liability made in 1971 by Bax as president and general manager
of COB Group Marketing and in giving credence to the alleged
overpayment computed by Bax .
The lower courts not only allowed Bax to nullify his admissions as
to the liability of COB Group Marketing but they also erroneously
rendered judgment in its favor in the amount of its supposed
overpayment in the sum of P100,596.72 (Exh. 8-A), in spite of the
fact that COB Group Marketing was declared in default and did
not file any counterclaim for the supposed overpayment.
The lower courts harped on Keller's alleged failure to thresh out
with representatives of COB Group Marketing their "diverse
statements of credits and payments". This contention has no
factual basis. In Exhibit J, quoted above, it is stated by Bax and
Keller's Oefeli that "discussion (was) held on May 8, 1971."
That means that there was a conference on the COB Group
Marketing's liability. Bax in that discussion did not present his
reconciliation statements to show overpayment. His Exhibits 7
and 8 were an afterthought. He presented them long after the
case was filed. The petitioner regards them as "fabricated" (p. 28,
Appellant's Brief).
Bax admitted that Keller sent his company monthly statements of
accounts (20-21 tsn, September 2, 1976) but he could not
produce any formal protest against the supposed inaccuracy of
the said statements (22). He lamely explained that he would have
to dig up his company's records for the formal protest (23-24). He
did not make any written demand for reconciliation of accounts
(27-28).
As to the liability of the stockholders, it is settled that a
stockholder is personally liable for the financial obligations of a
corporation to the extent of his unpaid subscription (Vda. de
Salvatierra vs. Garlitos 103 Phil. 757, 763; 18 CJs 1311-2).
While the evidence shows that the amount due from COB Group
Marketing is P184,509.60 as of July 31, 1971 or P186,354.70 as
of August 31, 1971 (Exh. JJ), the amount prayed for in Keller's
complaint is P182,994.60 as of July 31, 1971  (18-19 Record on
Appeal). This latter amount should be the one awarded to Keller
because a judgment entered against a party in default cannot
exceed the amount prayed for (Sec. 5, Rule 18, Rules of Court).
WHEREFORE, the decisions of the trial court and the Appellate
Court are reversed and set aside.
COB Group marketing, Inc. is ordered to pay Edward A. Keller &
Co., Ltd. the sum of P182,994.60 with 12% interest per annum
from August 1, 1971 up to the date of payment plus P20,000 as
attorney's fees.
Asuncion Manahan and Tomas C. Lorenzo, Jr. are ordered to pay
solidarity with COB Group Marketing the sums of P35,000 and
P25,000, respectively.
The following respondents are solidarity liable with COB Group
Marketing up to the amounts of their unpaid subscription to be
applied to the company's liability herein: Jose E. Bax P36,000;
Francisco C. de Castro, P36,000; Johnny de la Fuente, P12,000;
Sergio C. Ordonez, P12,000; Trinidad C. Ordonez, P3,000;
Magno C. Ordonez, P3,000; Adoracion C. Ordonez P3,000;
Tomas C. Lorenzo, Jr., P3,000 and Luz M. Aguilar-Adao, P6,000.
If after ninety (90) days from notice of the finality of the judgment
in this case the judgment against COB Group Marketing has not
been satisfied fully, then the mortgages executed by Manahan
62
and Lorenzo should be foreclosed and the proceeds of the sales
applied to the obligation of COB Group Marketing. Said mortgage
obligations should bear six percent legal interest per annum after
the expiration of the said 90-day period. Costs against the private
respondents.
SO ORDERED.
f. Delinquency Subscription(Sections 67 to 71 of the RCC)
Phil Trust vs. Rivera, 44 PHIL 496
STREET, J.:
This action was instituted on November 21, 1921, in the Court of
First Instance of Manila, by the Philippine Trust Company, as
assignee in insolvency of La Cooperativa Naval Filipina, against
Marciano Rivera, for the purpose of recovering a balance of
P22,500, alleged to be due upon defendant's subscription to the
capital stock of said insolvent corporation. The trial judge having
given judgment in favor of the plaintiff for the amount sued for, the
defendant appealed.
It appears in evidence that in 1918 the Cooperativa Naval
Filipina was duly incorporated under the laws of the Philippine
Islands, with a capital of P100,000, divided into one thousand
shares of a par value of P100 each. Among the incorporators of
this company was numbered the defendant Mariano Rivera, who
subscribed for 450 shares representing a value of P45,000, the
remainder of the stock being taken by other persons. The articles
of incorporation were duly registered in the Bureau of Commerce
and Industry on October 30 of the same year.
In the course of time the company became insolvent and went
into the hands of the Philippine Trust Company, as assignee in
bankruptcy; and by it this action was instituted to recover one-half
of the stock subscription of the defendant, which admittedly has
never been paid.
The reason given for the failure of the defendant to pay the entire
subscription is, that not long after the Cooperativa Naval
Filipina had been incorporated, a meeting of its stockholders
occurred, at which a resolution was adopted to the effect that the
capital should be reduced by 50 per centum and the subscribers
released from the obligation to pay any unpaid balance of their
subscription in excess of 50 per centum of the same. As a result
of this resolution it seems to have been supposed that the
subscription of the various shareholders had been cancelled to
the extent stated; and fully paid certificate were issued to each
shareholders for one-half of his subscription. It does not appear
that the formalities prescribed in section 17 of the Corporation
Law (Act No. 1459), as amended, relative to the reduction of
capital stock in corporations were observed, and in particular it
does not appear that any certificate was at any time filed in the
Bureau of Commerce and Industry, showing such reduction.
His Honor, the trial judge, therefore held that the resolution relied
upon the defendant was without effect and that the defendant was
still liable for the unpaid balance of his subscription. In this we
think his Honor was clearly right.
It is established doctrine that subscription to the capital of a
corporation constitute a find to which creditors have a right to look
for satisfaction of their claims and that the assignee in insolvency
can maintain an action upon any unpaid stock subscription in
order to realize assets for the payment of its debts.
(Velasco vs. Poizat, 37 Phil., 802.) A corporation has no power to
release an original subscriber to its capital stock from the
obligation of paying for his shares, without a valuable
consideration for such release; and as against creditors a
reduction of the capital stock can take place only in the manner
an under the conditions prescribed by the statute or the charter or
the articles of incorporation. Moreover, strict compliance with the
statutory regulations is necessary (14 C. J., 498, 620).
In the case before us the resolution releasing the shareholders
from their obligation to pay 50 per centum of their respective
subscriptions was an attempted withdrawal of so much capital
from the fund upon which the company's creditors were entitled
ultimately to rely and, having been effected without compliance
with the statutory requirements, was wholly ineffectual.
Miranda vs. Tarlac Rice Mill, 57 SCRA 619
SYLLABUS
1. CORPORATIONS; PAYMENT OF SUBSCRIPTIONS TO
CAPITAL STOCK. — Section 38 of the Corporation Law provides
that the board of directors of every corporation may at any time
declare due and payable to the corporation unpaid subscriptions
to the capital stock and may collect the same with interest
accrued thereon or such percentage of said unpaid subscriptions
as it may deem necessary.
2. ID.; A STOCK SUBSCRIPTION IS A CONTRACT. — A stock
subscription is a contract between the corporation and the
subscriber, and courts will enforce it for or against either. A
corporation has no legal capacity to release a subscriber to its
capital stock from the obligation to pay for his shares, and any
agreement to this effect is invalid. (Velasco v. Poizat, 37 Phil.,
802.)
3. ID.; ID.; ACTION TO RECOVER AMOUNT PAID IN TO THE
CORPORATION. — This is not an action by the corporation to
recover on a subscription agreement, but an action by the
administratrix of a stockholder to recover what was paid in to the
corporation by the stockholder. Neither the fact that the
corporation has ceased to do business, nor the fact that the other
stockholders have not been required to pay for their shares, in
accordance with their subscription agreement, would justify an
63
order requiring the corporation to return to the plaintiff the amount
paid by the stockholder.
DECISION
VICKERS, J.:
This is an appeal by the plaintiff from a decision of Judge A.M.
Recto of the Court of First Instance of Tarlac, dismissing the case
without a special finding as to costs.
The case was tried on the following agreed statement of facts:
The only additional evidence presented was the testimony of
Marciano David, which is of no consequence in our view of the
case.
The appellant makes the following assignment of errors:
"The trial court erred:
"1. In declaring that the defendant corporation did not violate the
terms of the power of attorney Exhibit B, for the plaintiff, when she
obtained the loan Exhibit C;
"2. In declaring that ’all responsibility originating in the execution
by the officers of the defendant corporation of the mortgage
contract Exhibit C has already ceased’;
"3. In pretending to base the decision in this case upon theories
neither presented by the pleadings of the parties nor deduced
from the evidence produced by the parties’
"4. In denying the motion for new trial of the plaintiff-appellant;
and
"5. In not sentencing the defendant to pay the plaintiff the sum of
P10,000, with interest thereon at P1,200 a year, from the year
1927 until paid, plus the sum of P1,500, which the principal had to
pay in the form of a penal clause for the violation of the terms of
the mortgage contract Exhibit C, aside from the legal interests of
all these amounts from the presentation of the present complaint,
and the costs of the suit."
It appears from the evidence that on June 8, 1926 Alberto
Miranda executed a written contract whereby he subscribed for
100 shares of the capital stock of a corporation to be organized
under the laws of the Philippine Islands for the purpose of
operating a rice mill in Tarlac, said corporation to be known as
Tarlac Rice Mill Company, Inc.; that the par value of each share
was P100; and that Alberto Miranda obligated himself to pay to
the treasurer of the corporation or its assign the sum of P10,000
as follows:chanrob1es virtual 1aw library
On or before September 21, 1926 P1,000.00
On or before January 21, 1927 2,000.00
On or before January 21, 1928 2,000.00
On or before January 21, 1929 2,500.00
On or before January 21, 1930 2,500.00
On July 10, 1926 Alberto Miranda by means of a public document
"assigned, mortgaged, or transferred in lieu of cash for the benefit
and to the credit of the Tarlac Rice Mill Company, Inc., a
corporation to be organized and to exist under and by virtue of the
laws of the Philippine Islands", the parcel of land described in
certificate No. 751 in the land records of the Province of Tarlac;
and "to carry out the true intent, meaning, and purposes thereof I
have hereby further voluntarily made, constituted, and appointed
and by these presents do make, constitute and appoint, either
jointly, Evaristo Magbag, duly elected President and Treasurer of
said Company, Eusebio R. Cabrera and Marcos P. Puno, duly
elected Vice-Presidents of the same company, or anyone of the
three named elected officers of the Tarlac Rice Mill Company,
Inc., jointly with C. M. Dizon to be my true and lawful attorneys-in-
fact, for me and in my name, and in my behalf to transfer,
mortgage, convey or confirm or in any way convenient to them to
any local or foreign bank, firm or individual in order to obtain,
secure or solicit credit against my above described property in an
amount not to exceed ten thousand pesos (P10,000), Philippine
currency, in accordance with the subscription contract voluntary
executed by me, for or to increase the capital of the said Tarlac
Rice Mill Company, Inc., in order to carry out the purposes for
which such firm is to be organized.
"That for the foregoing purposes, I hereby transfer my right and
interest in the said described properties, and by these presents do
hereby give and grant unto my said attorneys-in-fact full power
and authority to do and perform all and every act and thing
whatsoever requisite and necessary to be done in all about the
premises as fully to all intents and purposes as I might or could do
if personally present with full power of substitution or revocation,
hereby ratify and confirm all that my said attorneys-in-fact, anyone
or all of the three, Evaristo Magbag, Eusebio R. Cabrera, and
Marcos P. Puno, jointly with C.M. Dizon or their substitutes shall
lawfully do or cause to be done by virtue of these
presents."cralaw virtua1aw library
On February 19, 1927 the president and vice-president of the
Tarlac Rice Mill Company, Inc., and C.M. Dizon, acting on behalf
of said corporation and Alberto Miranda, borrowed P10,000 from
Mariano Tablante, and agreed to repay said sum on or before
February 19, 1928, with interest at 12 per cent per annum, and to
pay a further sum of 25 per cent of the principal for attorney’s fees
and expenses of collection in case the promissory note should not
be paid at maturity. Marcos Puno, Evaristo Magbag, and Dizon &
Co., Inc., jointly and severally guaranteed the payment of this
sum; and the president and vice-president of the Tarlac Rice Mill
Company, Inc., and C.M. Dizon as attorneys-in-fact of Alberto
Miranda mortgaged to Mariano Tablante the aforementioned
parcel of land to secure the payment of said promissory note.
The sum of P10,000 obtained from Mariano Tablante was
retained by the corporation. When the promissory note became
due, Alberto Miranda arranged for an extension of time in which to
pay it, and on July 19, 1929 he sold the aforementioned parcel of
land under pacto de retro to Vicente Panlilio for P10,000, and paid
64
Mariano Tablante.
According to an allegation in the complaint, Alberto Miranda died
on May 24, 1930.
It is agreed that the defendant corporation ceased to do business
from the year 1928, and that the other stockholders have not paid
for their shares in accordance with their subscription agreement,
and that no action has been taken by the corporation to require
them to do so.
The principal contention of the appellant is that the officers of the
corporation violated the terms of the power of attorney in
mortgaging the land on February 19, 1927 for P10,000, because
the only sum then due and payable by Alberto Miranda to the
corporation was P3,000, and that when the remaining installments
of the stock subscription became due, Alberto Miranda was under
no obligation to pay them, because the corporation had already
ceased to do business, and it had taken no steps to compel the
other stockholders to pay for the shares for which they had
subscribed.
No question as to the validity of subscription agreement is raised,
and no fraud on the part of the officers of the corporation is
alleged or proved. We shall therefore confine ourselves to the
issues raised by the pleading.
It is true that when the property was mortgaged on February 19,
1927 the amount due from Alberto Miranda in accordance with
the subscription agreement was only P3,000, and it is likewise
true that it does not appear from the evidence that any call was
issued by the directors for the payment of any subscriptions.
The fact that Alberto Miranda agreed on June 8, 1926 to pay the
amount of his subscription in installments on certain fixed dates
did not, of course, prevent him from authorizing the officers of the
corporation as his attorneys-in-fact to pay his subscription prior to
the dates fixed in the subscription agreement. Great stress is laid
by the appellant upon the fact that in one paragraph of the power
of attorney it is stated that the attorneys-in-fact of Alberto Miranda
are authorized to mortgage or convey the property in any way
convenient to them in the amount not to exceed P10,000 in
accordance with the subscription contract, but the phrase "in
accordance with the subscription contract" is followed by the
following words "for or to increase the capital of the said Tarlac
Rice Mill Company, Inc., in order to carry out the purposes for
which said firm is to be organized." Under the circumstances, it
seems to us that it would be a strained construction of the power
of attorney, taking into consideration the whole document, to hold
that the officers of the corporation acting as attorneys-in-fact of
Alberto Miranda were authorized to mortgage or convey the land
for only the amount then due from Alberto Miranda in accordance
with the subscription agreement. It can hardly be contended that
the power of attorney contemplated that the property should be
mortgaged three times, that is, each time that an installment
became due. We are inclined to the view that it was the intention
of the parties that the property should be mortgaged immediately
for a sum not to exceed P10,000, not only for the purpose of
paying the subscription agreement of Alberto Miranda, but also for
the purpose, as stated in the power of attorney, of increasing the
capital of the corporation, not the capital stock, in order to carry
out the purposes for which it was to be organized. This view of the
matter is confirmed by the subsequent conduct of the parties.
Although the corporation retained the full amount of the loan
obtained from Mariano Tablante, and Alberto Miranda had to pay
that obligation, he never sought, so far as the record shows, to
recover from the corporation any part of the sum of P10,000. As
we have already stated, the mortgage was executed on February
19, 1927; it was satisfied by Alberto Miranda on July 19, 1929,
and he lived until May 24, 1930. It does not appear that he ever
sought to evade the satisfaction of the mortgage by alleging that
his attorneys-in-fact exceeded their authority in mortgaging the
property on February 19, 1927 for P10,000. On the contrary he
repaid to Mariano Tablante the amount which the officers of the
corporation had borrowed. The fact that he at no time sought to
recover from the corporation any part of the sum borrowed by the
officers of the corporation in his name certainly tends to show that
he acquiesced in the action taken by them. The phrase "in
accordance with the subscription contract" found in the power of
attorney probably was intended to mean "in pursuance of the
subscription agreement", that is, it referred to the obligation, and
had no particular reference to the dates when the different
installments were to be paid.
Section 38 of the Corporation Law provides that the board of
directors of every corporation may at any time declared due and
payable to the corporation unpaid subscriptions to the capital
stock and may collect the same with interest accrued thereon or
such percentage of said unpaid subscriptions as it may deem
necessary. In his work, "The Philippine Law of Stock
Corporations", page 97, Justice Fisher expressed the opinion that
this power of the directors is absolute and cannot be limited by
the subscription contract, but this does not mean that the directors
may not rely on the subscription contract it they see fit to do so.
"No call is necessary when a subscription is payable, not upon
call or demand by the directors or stockholders, but immediately,
or on a specified day, or on or before a specified day, or when it is
payable in installments at specified times. In such cases it is the
duty of the subscriber to pay the subscription or installment
thereof as soon as it is due, without any call or demand, and , if
fails to do so, an action may be brought at any time." (Flecther:
Cyclopedia of the Law of Private Corporations, vol. 2, page 1509.)
When this action was filed on September 2, 1930, the last of the
installments had already become payable in accordance with the
subscription agreement. It must be borne in mind that this is not
an action by the corporation to recover on a subscription
agreement, but an action by the administratrix of a stockholder to
recover what was paid in to the corporation by the stockholder. It
does not appear from the evidence whether or not the corporation
has any debts. Neither the fact that the corporation has ceased to
do business nor the fact that the other stockholders have not
been required to pay for their shares in accordance with their
subscription agreement justifies us in ordering the corporation to
return to the plaintiff the amount paid in by Alberto Miranda. If the
65
directors have failed to perform their duty with respect to the other
stockholders, the law provides a remedy therefor.
In the case of Velasco v. Poizat (37 Phil., 802), this court held that
a stock subscription is a contract between the corporation and the
subscriber, and courts will enforce it for or against either; that a
corporation has no legal capacity to release a subscriber to its
capital stock from the obligation to pay for his shares, and that
any agreement to this effect is invalid.
In the case at bar it is not contended that Alberto Miranda
cancelled his subscription agreement, or that the corporation
attempted to release him therefrom.
De Silva vs. Aboitiz, 44 PHIL 755
ARAULLO, C. J.:  latter filed a demurrer to the complaint on the ground that the
The plaintiff subscribed for 650 shares of stock of the defendant
corporation of the value of P500 each, of which he has paid only
the total value of 200 shares, there remaining 450 shares unpaid,
for which he was indebted to the corporation in the sum of
P225,000, the value thereof. On April 22, 1922, he was notified by
the secretary of the corporation of a resolution adopted by the
board of directors of the corporation on the preceding day,
declaring the unpaid subscriptions to the capital stock of the
corporation to have become due and payable on the following
May 31st at the office thereof, the payment to be made to the
treasurer, and stating that all such shares as may have not been
paid then, with the accrued interest up to that date, will be
declared delinquent, advertised for sale at public auction, and
sold on the following June 16th, for the purpose of paying up the
amount of the subscription and accrued interest, with the
expenses of the advertisement and sale, unless said payment
was made before.
The proper advertisement having been published, as announced
in the aforesaid notice, the plaintiff filed a complaint in the Court of
First Instance of Cebu on May 5th of the same year against the
said corporation, wherein, after relating the above-mentioned
facts, he prayed for a judgment in his favor, decreeing that, in
prescribing another method of paying the subscription to the
capital stock different from that provided in article 46 of its by-
laws, in declaring the aforesaid 450 shares delinquent, and in
directing the sale thereof, as advertised, the corporation had
exceeded its executive authority, and as a consequence thereof
he asked that a writ of injunction be issued against the said
defendant, enjoining it from taking any further action of whatever
nature in connection with the acts complained of and that it pay
the costs of this suit.
The plaintiff alleged as the grounds of his petition: (1) That,
according to aforesaid article 46 of the by-law of the corporation,
which was inserted in the complaint, all the shares subscribed to
by the incorporation that were not paid for at the time of the
incorporation, shall be paid out of the 70 per cent of the profit
obtained, the same to be distributed among the subscribers, who
shall not receive any dividend until said shares were paid in full;
(2) that in declaring the plaintiff's unpaid subscription to the capital
stock to have become due and payable on May 31st, and in
publishing the aforesaid notice declaring his unpaid shares
delinquent, the defendant corporation has violated the aforesaid
article, which prescribes an operative method of paying for the
shares continuously until their full amortization, thus violating and
disregarding a right of the plaintiff vested under the said by-laws;
(3) that the aforesaid acts of the defendant corporation were in
excess of its powers and executive authority and the plaintiff had
no other plain, speedy and adequate remedy in the ordinary
course of law than that prayed for in the said complaint, to prevent
the defendant from taking any further action in connection with the
sale and alienation of the said shares.
A preliminary injunction having been issued against the
defendant, as prayed for by the plaintiff, upon the giving of the
proper bond, and the defendant having been summoned, the
facts alleged therein did not constitute a cause of action, and that
even supposing the plaintiff to have any lawful claim against the
defendant corporation, the special remedy applied for by the
plaintiff was not the most adequate and speedy.
Hearing having been had the court below by an order dated
September 21, 1922, sustained the aforesaid demurrer on the first
ground, giving the plaintiff five days within which to amend his
complaint, but the said period having elapsed without the plaintiff
having amended his complaint, upon motion of the defendant,
that court, by an order dated the 2d of the following month of
October, dismissed the complaint and ordered the dissolution of
the preliminary injunction previously issued, with costs, to which
orders the plaintiff excepted, asking at the same time for the
annulment thereof and a new hearing, which motion was denied
by the lower court. To that ruling the plaintiff also excepted, and
brought the case to this court by the proper bill of exceptions.
Assuming the truth of the facts alleged in the complaint filed
against the herein defendant, as the filling of a demurrer to a
complaint is made on that assumption, the question to be decided
reduces itself to determining whether or not, under the provision
of article 46 of the by-laws of the defendant corporation, the latter
may declare the unpaid shares delinquent, or collect their value
by another method different from that prescribed in the aforecited
article.
Said article reads thus:
ART. 46. The net profit resulting from the annual liquidation shall
be distributed as follows: Ten per cent (10%) for the Board of
Directors and in the manner prescribed in article twenty-six (26) of
these by-laws; ten per cent (10%) for the general manager; ten
per cent (10%) for the reserve fund, and seventy per cent (70%)
for the shareholders in equal parts; Provided, however, That from
this seventy per cent dividend the Board of Directors may
deduct such amount as it may deem fit for the payment of the
unpaid subscription to the capital stock and not pay any dividend
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to the holders of the said unpaid shares until they are fully
paid; Provided, further, That when all the shares have been paid
in full as provided in the preceding paragraph, the Board of
Directors may also deduct such amount as it may deem fit for the
creation of an emergency special fund, or extraordinary reserve
fund when in its judgment the same may convenient for the
development of the business of the corporation or for meeting any
such contingencies as may arise from its operation, whenever the
distributable dividend is found, after the foregoing deduction, to be
not less than ten per cent (10%) of the paid up capital stock.
No dividend shall be declared or paid, except when there remains
a net profit after the payment of all the expenses incurred, or
allowances made, by the corporation to carry out the operation of
its business; so that no such dividend may be declared as may
affect the capital of the corporation.
As will be seen from the context of the said article, its first part
specifies the manner in which the net profit from the annual
liquidation should be distributed, fixing a certain per cent for the
board of directors; another for the general manager; another for
the reserve fund, and the remaining 70 per cent to be distributed
in equal parts among the shareholders. But it authorizes or
empowers the board of directors to collect the value of the shares
subscribed to and not fully paid by deducting from the 70 per cent,
distributable in equal parts among the shareholders, such amount
as may be deemed convenient, to be applied on the payment of
the said shares, and not to pay the subscriber until the same are
fully paid up. In no other way can the words
"Provided, however, that from this seventy per cent
dividend the board of directors may deduct such
amount as it may deem fit for the payment, etc." And
this is so clear that in that same article the board of
directors is also authorized to create a special
emergency fund or extraordinary reserve fund, when,
in its judgment, and in case all the shares subscribed
to have been fully paid, the same is convenient for the
development of the business of the corporation or for
meeting any such contingencies as my arise from its
operation, applying said 70 per cent of the profit on the
payment of the shares that may have not been fully
paid, provided that the distributable dividend remaining
after the deduction to be made for the creation of the
said special emergency fund or extraordinary reserve
fund is not less than 10 per cent of the capital actually
paid. So that it is discretionary on the part of the board
of directors to do whatever is provided in the said
article relative to the application of a part of the 70 per
cent of the profit distributable in equal parts on the
payment of the shares subscribed to and not fully paid,
and to the creation of a special emergency fund or
extraordinary reserve fund; and the fact itself that said
special fund may not be created when the dividend
appearing to be distributable, after deducting from the
said 70 per cent the amount to be applied on the
payment of the unpaid subscription, is less than 10 per
cent of the capital actually paid, shows that it is the
board of directors and not the delinquent subscriber
that may and must judge and decide whether or not
such value must be paid out of a part of the 70 per
cent of the profit distributable in equal parts among the
shareholders, as provided in the first part of the said
article. It lies therefore, within the discretion of the
board of directors to make use of such authority.
If the board of directors does not wish to make, or does not make,
use of said authority it has two other remedies for accomplishing
the same purpose. As was said by this court in the case
of Velasco vs. Poizat (37 Phil., 802):
The first and most special remedy given by the statute consists in
permitting the corporation to put the unpaid stock for sale and
dispose of it for the account of the delinquent subscriber. In this
case the provisions of sections 38 to 48, inclusive, of the
Corporation Law are applicable and must be followed. The other
remedy is by action in court concerning which we find in section
49 the following provision:
"Nothing in this Act prevent the directors from collecting, by action
in any court of proper jurisdiction, the amount due on any unpaid
subscription, together with accrued interest and costs and
expenses incurred."
In the instant case the board of directors of the defendant
corporation elected to avail itself of the first of said two remedies,
and, complying strictly with the provisions of sections 37 to 49,
inclusive, of the aforesaid Corporation Law, which is binding upon
it and its stockholders. it being an artificial entity created by virtue
of that same law (sec. 2), the board of directors made use of the
discretionary power granted to it by that law and declared that
payment of plaintiff's subscription to 450 shares which had not
been paid by him was due, and that said shares were delinquent,
and performed all the other acts subsequent to said declaration
that are mentioned in the complaint, as it did not deem it
advantageous to the corporation to apply on the payment of said
shares, as was authorized by the by-law, a part of the profit that
was, or might have been realized, and was distributable among
the stockholders in equal parts, as to the existence of which profit
no allegation is made in the complaint, or to enforce payment of
such shares by bringing in court the proper action against the
debtor or delinquent stockholders. It is, however, alleged by the
appellant that the by-law of the corporation being of the nature of
a contract between it and its stockholders or members, and article
46 of the by-laws of the said corporation providing an operative
method for the payment of stock subscriptions continuously until
the full amortization thereof, application cannot be made in the
present case of the provisions above cited of the Corporation Law
for the purpose contemplated by the defendant, as the provision
of said article must prevail against that
Admitting that the provision of article 46 of the said by-laws
maybe regarded as a contract between the defendant corporation
and its stockholders , yet as it is only to the board of directors of
the corporation that said articles gives the authority or right to
apply on the payment of unpaid subscriptions such amount of the
70 per cent of the profit distributable among the shareholders in
equal parts as may be deemed fit, it cannot be maintained that
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the said article has prescribe an operative method for the
payment of said subscription continuously until their full
amortization, or, what would be the same thing, that said article
has prescribe that sole and exclusive method for that purpose,
for, in the first place, the adoption of that method for the purpose
of collecting the value of subscriptions due and unpaid lies,
according to said article, within the discretion of the board of
directions, that is, it is subject to this condition, and this can in no
way be reconciled with the idea of method, which implies
something fixed as a rule or permanent standard, and not variable
at the will of somebody and according to the circumstances; and,
in the second place, in connection with the provision of the said
article relative to the aforesaid discretionary power of the board of
directors to adopt that method, there is also the discretionary
power granted the same board of directors to avail itself, for the
same purpose, to either of the two remedies prescribed in
sections 38 to 49, inclusive, of the aforecited Corporation Law.

In the instant case, the defendant corporation, through its board of

directors, made use of its discretionary power, taking advantage
of the first of the two remedies provided by the aforesaid law. On
the other hand, the plaintiff has no right whatsoever under the
provision of the above cited article 46 of the said by-laws to
prevent the board of directors from following, for that purpose, any
other method than that mentioned in the said article, for the very
reason that the same does not give the stockholders any right in
connection with the determination of the question whether or not
there should be deducted from the 70 per cent of the profit
distributable among the stockholders such amount as may be
deemed fit for the payment of subscriptions due and unpaid.
Therefore, it is evident that the defendant corporation has not
violated, nor disregarded any right of the plaintiff recognized by
the said by-laws, nor exceeded its authority in the discharge of its
executive functions, nor abused its discretion when it performed
the acts mentioned in the complaint as grounds thereof, and,
consequently, the facts therein alleged do not constitute a cause
of action.

For the foregoing, the orders appealed from are affirmed, with the
costs of both instances against the appellant. So ordered.

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