Total Office Products (TOPROS), Inc. vs. Chang, Jr., G.R. Nos. 200070-71, Dec.

7, 2021

Facts:

Total Office Products (TOPROS), Inc. vs. Chang, Jr., G.R. Nos. 200070-71, Dec. 7, 2021

Facts:
According to the Amended Petition, Spouses Ramon (Ramon) and Yaona Ang Ty (Yaona)
(collectively, Spouses Ty) wanted to establish a corporation during the latter part of 1982
that would be the sole distributor of Minolta plain paper copiers in the Philippines. Chang, a
former employee of Pantrade, Inc., (Pantrade), a company also owned by the Ty Family, was
given the duty to manage the new corporation. The Ty Family gave Chang 10% shares in the
corporation with the assurance from Chang that he will render competent, exclusive, and
loyal service thereto. On January 31, 1983, TOPROS was incorporated with an authorized
capital stock of P4,000,000.00. Among the incorporators, Chang was the only one who is
[11]
not a member of the Ty Family.

The Ty Family elected Chang as President and General Manager and entrusted to him the
management as well as the funds of TOPROS. Meanwhile Yaona served as Treasurer and
Jennifer Ty (Jennifer) stood as Corporate Secretary. Upon Chang's request, Elizabeth,
[12]
Hector, and Cecilia, all employees of Pantrade, were transferred to TOPROS.

TOPROS grew into a multi-million enterprise; thus, Spouses Ty increased its authorized
capital stock to P10,000,000.00 and Chang's share to 20%. TOFROS included in its line of
business the distribution of various office equipment and supplies utilizing the brand
[13]
names Ultimax, Maruzen, Taros, and Intimus.

However, despite its success, no substantial cash dividends were distributed to the
stockholders because, according to Chang, the corporation was investing its funds in
[14]
several real properties in Metro Manila, Visayas, and Mindanao.

In 1998, the Ty Family sensed irregularities in Chang's dealings when their friends and
relatives began questioning the manner in which products and services from TOPROS were
issued receipts and vouchers from TOPGOLD, Golden Exim, and Identic. The Ty Family
requested Chang to return all corporate records of TOPROS. Chang, however, offered to buy
them out of their interest at TOPROS. This prompted the Ty Family to conduct an
investigation which revealed that while still a Corporate Director and an officer of TOPROS,
Chang, together with the individual respondents, incorporated the respondent-corporations
to siphon the assets, funds, goodwill, equipment, and resources of TOPROS. According to
TOPROS, Chang used its properties in organizing the respondent-corporations and obtained
opportunities properly belonging to it and its stockholders to their damage and prejudice.
Chang was, thereafter, ousted as Corporate Director and officer of TOPROS; and the instant
case was filed against him.

For his part, Chang denied the charges and asserted that from TOPROS' inception until his
ouster as President and General Manager therein, he alone ran TOPROS and shouldered its
liabilities. He further asserted that: (1) even with the absence of assistance from the Ty
Family, they received an estimated P14,000,000.00 cash dividends spread throughout the
15 years of his incumbency in the corporation; (2) he was able to save TOPROS from the
economic crisis in 1983 through personal loans and surety agreements with Chinabank; (3)
he registered the trade name and logo of the corporation and was able to develop its
goodwill all over the country; (4) he promoted the only Filipino brand of office machine,
"Ultimax" and eventually patented it under the name of TOPROS, even though he was the

1
one who coined its name; and (5) it was during the time that he was signing as surety for
the loans of TOPROS that he, together with the individual respondents, formed the
respondent-corporations.

Chang furthermore alleged that the Ty Family knew that he organized the three
corporations during his incumbency as President and General Manager of TOPROS. In 1993,
Golden Exim and Identic were exhibitors, together with TOPROS, in the Philippine Office
Machine Distributors Association (POMDA), wherein Ramon was a director while his son,
Warren Ty (Warren), was a member of the Exhibit Committee. Golden Exim, Identic,
together with TOPROS, and Pantrade marketed the product "Green-C Chlorella." In the
minutes of the special meeting of Identic in April 1989, Warren signed as a stockholder.
Then in April 1989, Warren acquired the shares of Edwin Tan in Identic through a Deed of
[19]
Assignment.

Chang also explained that: (1) from June 1997 to March 1998, he opened several letters of
credit for TOPROS through trust receipt arrangements with Chinabank and before the trust
receipts fell due, he took up the matter of repayment with Spouses Ty; (2) Ramon, however,
passed the matter to him and told Chang that if repayment was not possible, considering
that TOPROS was already heavily in debt, Chang should just let the corporation go
bankrupt; (3) he personally guaranteed TOPROS' loans, and, because of his fear of being
charged with estafa, he was compelled to seek other sources to pay off TOPROS'
indebtedness; (4) when the patriarch, Ramon, was no longer interested in rehabilitating
TOPROS and Chang wanted to protect his credibility and the welfare of 200 employees who
were about to lose jobs, he took it upon himself to serve the clients of TOPROS through
TOPGOLD which individual respondents incorporated in 1997; and (5) he alone was able to
pay TOPROS' loans including the payment of separation pay of its employees.

Petitioner asserts that: (1) Chang is guilty of violating the Corporation Code particularly
Section 31, as he brazenly disregarded the director's duty of loyalty; (2) he established the
respondent-corporations to acquire and utilize the assets, funds, properties, and resources
of TOPROS; and (3) he also violated Section 74 of the Corporation Code in failing to provide
[36]
the other directors access to the financial records of TOPROS.

According to TOPROS, Chang's acts amounted to violation of the "doctrine of corporate

opportunity" which rests on the unfairness, in particular circumstances, of an officer or
director taking advantage of an opportunity for his own personal profit when the interest of
the corporation calls for protection. If, in such circumstances the interests of the
corporation are betrayed, the corporation may elect to claim all the benefits of the
transaction for itself and the law will impress a trust in favor of the corporation upon the
[37]
property interest and profits acquired.

[38]
In his Comment, Chang avers that: (1) the doctrine of corporate opportunity does not
apply in the case because he was advised to allow the corporation to go under due to its
indebtedness; (2) the doctrine of corporate opportunity applies only if the corporation is
financially able to undertake its business; (3) TOPROS failed to prove the claim of fraud by
preponderance of evidence of fraud; (4) TOPROS' witnesses admitted that Chang and
Ramon had always been in close coordination in handling the affairs of TOPROS, while
members of the family formed part of the new businesses alleged to be part of the scheme
to defraud TOPROS; and (5) when Ramon advised Chang that they were no longer
interested to pursue the business and was willing to just have the business go under,
TOPROS' witnesses admitted that Chang was in constant communication with Ramon.

2
Issue:
Whether Chang is liable for violation of his fiduciary duties under the Corporation Code.

Ruling:

The doctrine of corporate opportunity traces its roots to the general principles on
directors' and officers' liabilities.

As a rule, a corporation is a juridical entity that is vested with a legal personality separate
and distinct from those acting in its behalf, and in general, from the people comprising it.
Following this principle, obligations incurred by the corporation, acting through its
directors, officers and employees are the corporation's sole liabilities. A corporate
director, trustee, or officer is generally not held personally liable for obligations that are
incurred by the corporation. This legal fiction, however, may be disregarded—through the
piercing of the corporate veil—if, inter alia, it is used as a means to perpetrate fraud or an
illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of
[44]
statutes, or to confuse legitimate issues.

Section 31 of the Corporation Code (now Section 30 of the RCC) specifies the liabilities of
directors, trustees, or officers. It reads:

Sec. 31. Liability of directors, trustees or officers . — Directors or trustees who willfully
and knowingly vote for or assent to patently unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire
any personal or pecuniary interest in conflict with their duty as such directors or trustees
shall be liable jointly and severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons .

When a director, trustee or officer attempts to acquire or acquires, in violation of his duty,
any interest adverse to the corporation in respect of any matter which has been reposed in
him in confidence as to which equity imposes a disability upon him to deal in his own
behalf, he shall be liable as a trustee for the corporation and must account for the profits
which otherwise would have accrued to the corporation. (Italics supplied.)
Section 34 of the Corporation Code (now Section 33 of the RCC) also states:

Sec. 34. Disloyalty of a director. — Where a director, by virtue of his office, acquires for
himself a business opportunity which should belong to the corporation, thereby obtaining
profits to the prejudice of such corporation, he must account to the latter for all such
profits by refunding the same, unless his act has been ratified by a vote of the
stockholders owning or representing at least two-thirds (2/3) of the outstanding capital
stock. This provision shall be applicable, notwithstanding the fact that the director risked
his own funds in the venture.
Thus, a claim of damages under Section 34 of the Corporation Code (now Section 33 of the
RCC) arises when a corporate officer or director takes a business opportunity for his own,
provided that it is sufficiently shown by the claimant that:

(a) The corporation is financially able to exploit the opportunity;

(b) The opportunity is within the corporation's line of business;

3
(c) The corporation has an interest or expectancy in the opportunity; and

(d) By taking the opportunity for his own, the corporate fiduciary (i.e., corporate director,
trustee or officer) will thereby be placed in a position inimicable to his duties to the
corporation.
In determining paragraph (b), whether the opportunity is within the corporation's line of
business, the involved corporations must be shown to be in competition with one another.
They must be engaged in related areas of businesses, producing the same products with
overlapping markets.

Chang's Liability

Here, the Court agrees with the RTC that Chang committed several acts showing personal
or pecuniary interest that were in conflict with his duties as director and officer of
TOPROS.

There is no dispute that Chang established Identic in 1989, Golden Exim in 1990, and
TOPGOLD in 1998 which were in the same line of business and while still an officer and
[90]
director of TOPROS. The Articles of Incorporation of Golden Exim and TOPGOLD show
that Chang owned 80% of the shares of Golden Exim; and Chang, together with his son,
owned 99.76% of the shares in TOPGOLD. The General Information Sheet of Identic also
[91]
showed that Chang owned 65% of Identic.

The service report of Linde, which was a client of TOPROS, as well as the provisional
receipts issued by Golden Exim, showed that Golden Exim entered into a service contract
[92]
with the same client at the same time that TOPROS was servicing it. In 1998, TOPGOLD
published printed advertisements which were strikingly similar to those previously printed
by TOPROS in 1997, with the difference that the phrase "now available at TOPROS" was
[93]
changed to "now available at TOPGOLD."

Chang, as President and General Manager of TOPGOLD, signed a deed of assignment with
Hector as Service and Operations Manager of TOPROS which made it appear that TOPROS
assigned its rights under several rental agreements with different entities for the lease of
various kinds of office equipment to TOPGOLD. It also authorized the corresponding rental
[94]
payments on the rental agreements to be paid to TOPGOLD.

TOPGOLD uses the same address as TOPROS which not only gives it the opportunity to use
TOPROS' resources but leads the public to believe that they are one and the same entity, if
not intimately related to each other. The Articles of Incorporation of TOPGOLD show its
[95]
address as 1465 E. Rodriguez, Sr. Ave., Cubao, Quezon City. A printed advertisement of
[96]
TOPROS shows that it has the same address.

A 1,445-square-meter parcel of land along E. Rodriguez Avenue, Quezon City, on which

TOPROS' building stands, was registered in the name of Golden Exim in 1993 even though
Golden Exim was incorporated only three years prior to the purchase of the property.
[97]
When it was incorporated in 1990, Golden Exim only had an authorized capital stock of

4
 [98]
P2,000,000.00.

When asked why he gave the investment opportunity to Golden Exim and not to TOPROS,
Chang answered that he had to make his own living.

In his Comment, Chang states: (1) that he practically shouldered the burden of running the
entire business, including bearing its liabilities, without any help from the rest of the board
of directors and stockholders and that because of Mr. Ramon Ty's refusal and strict order
that Chang sign the surety agreement in his personal capacity, Chang was convinced and
applied for and guaranteed TOPROS' loans in his personal capacity since 1986 until the
filing of the present action; (2) that in 1988, he talked to Ramon and expressed his intention
of leaving TOPROS to further his business and establish a name for himself; (3) that Ramon
asked him to remain with TOPROS but encouraged him to organize and establish his own
corporations; that he formed Identic, Golden Exim, and TOPGOLD with the full knowledge,
consent and approval of the Ty Family; and (4) that as proof, he cited the business ventures
entered into by the respondent-corporations with TOPROS and the participation of Warren
[102]
as incorporator and stockholder of Identic.

However, the fact that Chang risked his own funds in running TOPROS and paying off its
obligations will not absolve him of his duties as director and officer of TOPROS.

Even if admitted, the circumstances cited by Chang, which suggest of knowledge,

tolerance, or even acquiescence of TOPROS to his establishment of the respondent-
corporations which are in the same business as TOPROS, do not amount to the compliance
required of Section 34 to absolve a director of disloyalty. The law explicitly requires that
where a director, by virtue of his office, acquires for himself a business opportunity which
should belong to the corporation, he must account to the latter for all profits by refunding
them, unless his act has been ratified by a vote of the stockholders owning or representing
at least two-thirds of the outstanding capital stock.

The Court agrees with the RTC that even if the incorporation of the respondent-
corporations was with the full knowledge of the members of the Ty Family, this does not
equate to consent to the prejudicial transfer and acquisition of properties and
opportunities of TOPROS which Chang, through his corporations, has shown to have
[103]
committed.

Chang, to show that the incorporation of Golden Exim and Identic was with the full
knowledge of the Ty Family, presented as evidence: (a) the souvenir program of POMDA
[104] [105]
Exhibit in 1993; (b) advertisement clippings of health product Green-C Chlorella; (c)
[106]
letter indorsement of Ramon promoting Green-C Chlorella; (d) advertisement clippings
[107]
of TOPROS and Golden Exim and Identic; and (e) cover of VAT Book of Pantrade for
[108]
1997 where Golden Exim and Identic were listed as suppliers of Pantrade. However,
Chang failed to show that his actions have been ratified by a vote of the stockholders
representing at least two-thirds of the outstanding capital stock of TOPROS.

To determine the exact liability of Chang, however, the instant case should be remanded to
the trial court for the reception of additional evidence and the reevaluation of evidence
already submitted, guided by the parameters aforementioned. That is, TOPROS as claimant
bears the burden of proving the specific business opportunities that gave rise to its claim
of damages under Section 34 of the Corporation Code. In turn, Chang may present evidence

5
to support his claim that: (a) the corporation was already heavily in debt and that TOPROS'
patriarch, Ramon Ty, was no longer interested in corporate rehabilitation, so much so that
he was already letting Chang to allow TOPROS to go bankrupt; and (b) that the corporation
had already closed down prior to respondents' taking of certain corporate opportunities,
among others.

Also it should be made clear that the claim for damages under Section 34 of the
Corporation Code necessitates factual determinations which—while it may be arrived at
with the aid of an accounting committee—must be ultimately made by the RTC itself in the
exercise of its judicial functions, embodied in a final judgment.

In closing, it is well to recall that the doctrine of corporate opportunity is not based on
theoretical abstractions, but on human experience that a person cannot serve two hostile
masters without detriment to one of them. Where a director is so employed in the service
of a rival company, he cannot serve both, but must betray one or the other. An officer of a
corporation cannot engage in a business in direct competition with that of the corporation
where he is a director by utilizing information he has received as such officer, under the
established law that a director or officer of a corporation may not enter into a competing
enterprise which cripples or injures the business of the corporation of which he is an
officer or director. It is also established that corporate officers are not permitted to use
their position of trust and confidence to further their private interests. Where two
corporations are competitive in a substantial sense, it would seem improbable, if not
impossible, for the director, if he were to discharge effectively his duty, to satisfy his
loyalty to both corporations and place the performance of his corporation duties above his
personal concerns.

6
Metroplex Berhad vs. Sinophil Corp., G.R. No. 208281, June 28, 2021

Facts:

The Antecedents:

Petitioner Metroplex Berhad (Metroplex) is a corporation in liquidation duly organized and

existing under and by virtue of the laws of Malaysia, while petitioner Paxell Investment Limited
(Paxell) is a corporation duly organized and existing under and by virtue of the laws of Western
Somoa. Both Metroplex and Paxell have their principal offices at Kuala Lumpur, Malaysia.5

On the other hand, respondent Sinophil is a publicly-listed corporation duly organized and
existing under and by virtue of the laws of the Philippines with principal office at Pasig City,
Philippines. Respondent Belle Corporation (Belle) is another publicly-listed corporation duly
organized and existing under and by virtue of the laws of the Philippines with principal office also
at Pasig City.6

The other individual respondents are the SEC Directors, Assistant Directors, and officers of the
SEC who caused, facilitated, implemented, and approved the questioned actions of the
Operating Departments of the SEC. These Operating Departments included the Company
Registration and Monitoring Department (CRMD); the Corporation Finance Department (CFD);
the Corporate and Partnership Registration Division (CPRD); and the Financial Analysis and
Audit Division (FAAD) of the SEC.7

The Antecedents:

In August 1998, Sinophil entered into a Share Swap Agreement (Swap Agreement) with
Metroplex and Paxell. Under the Swap Agreement, Metroplex and Paxell would transfer 40% of
their shareholdings in Legend International Resorts Limited (Legend) for a combined 35.5%
stake in Sinophil.8

7
In their Comment/Opposition,9 however, Sinophil and Belle alleged that the Swap Agreement
was entered into in March 1997. Pursuant to the Swap Agreement, Sinophil issued 2.41 billion
shares to Metroplex and 1.45 billion shares to Paxell, totaling 3.87 billion shares in exchange for
46.38 million shares of Legend which were transferred by the Metroplex Group (Metroplex and
Paxell) to Sinophil's name.

In the interim, Metroplex pledged two billion of its Sinophil shares with Union Bank and Asian
Bank to secure the loans of Legend with the said banks.10

The following pertinent sequence of events followed:

On August 23, 2001, Sinophil and Belle executed a Memorandum of Agreement (Unwinding
Agreement) with Metroplex and Paxell rescinding the 1998 Swap Agreement. After the execution
of the Unwinding Agreement, Metroplex and Paxell were unable to return 1.87 billion of the
Sinophil shares while another two billion Sinophil shares remained pledged by Metroplex in favor
of International Exchange Bank and Asian Bank.11

On February 18, 2002 and June 3, 2005, the shareholders of Sinophil voted for the reduction of
Sinophil's authorized capital stock.12

On March 28, 2006, the CRMD and the CFD approved the first amendment of the Articles of
Incorporation of Sinophil, reducing its authorized capital stock by 1.87 billion shares. The
following day, or on March 29, 2006, the approval of the reduction of Sinophil's authorized capital
stock was disclosed to the Philippine Stock Exchange, Inc. (PSE).13

On June 21, 2007, the shareholders of Sinophil again approved the proposal of the Board of
Directors to reduce its authorized capital stock by another one billion shares.14

On June 24, 2008, the CRMD and the CFD approved the second amendment of the Articles of
Incorporation of Sinophil which further reduced its authorized capital stock by one billion shares.
On June 30, 2008, the approval of the reduction of Sinophil's authorized capital stock was
likewise disclosed to the PSE.15

On July 21, 2008, petitioners Yaw Chee Cheow (Yaw), Metroplex and Paxell filed a Petition for
Review Ad Cautelam Ex Abundanti16 before the SEC assailing the approval by the CRMD and
the CFD of the amendments by Sinophil of its Articles of Incorporation. Petitioners claimed that:

1. They opposed the decrease of the authorized capital stock;

2. They were not given the opportunity to be heard by the CFD;

3. The reduction was approved by the CRMD and CFD despite the lack of more than
two-thirds (2/3) approval of the Sinophil shareholders;

4. The decrease in the authorized capital stock of Sinophil violated the legal requirement
that a corporation cannot reduce its issued capital unless it has unrestricted retained
earnings;

5. The decreases involved the "selective reduction" of Sinophil 's authorized capital stock
which resulted in the diminution of the shareholdings of petitioner Yaw and other
shareholders of Sinophil, and the return of the investments of petitioners Metroplex and
Paxell ahead of Yaw and other shareholders of Sinophil;

8
 6. The selective reduction entailed the assumption and payment of loans secured by
Metroplex and Paxell 's Sinophil shares, to the prejudice of Sinophil and its shareholders
including petitioner Yaw.17

Thus, the following three issues were raised by the petitioners:

1. Whether the actions of the CRMD and the CFD allowing the reduction of the
outstanding capital stock of Sinophil authorized the "selective" reduction of its issued
capital;

2. Whether such "selective" reduction had complied with all relevant and procedural
requirements and could be legally done through the cancellation and delisting of the 3.87
billion Sinophil shares of Metroplex and Paxell over the objection of the petitioners; and

3. Whether the questioned actions of the CRMD and the CFD constitute grave reversible
errors or abuse of discretion amounting to lack or excess of jurisdiction which should be
set aside and declared null and void.18

On the other hand, private and public respondents claimed, among others, that there was full
compliance with Section 38 of the Corporation Code by the submission of all the requirements
and that there was a presumption of regularity in the performance of public respondents' duties.

Ruling:

The Court denies the Petition.

The appellate court is correct in finding that the decrease in respondent Sinophil's capital stock
was legal and that the public respondent SEC's approval thereof was proper.

Section 38 of the Corporation

Code clearly lists down the
requirements for a corporation
to decrease its capital stock.

Petitioners have been asserting from the beginning that private respondent Sinophil failed to
comply with the following legal requirements for a decrease in its authorized capital stock: (a)
notice and hearing; (b) approval of all stockholders; (c) legitimate business purposes; and (d)
approval of all creditors.

The Court agrees with the appellate court's rejection of petitioners' contentions considering that
the legal provisions they cited, i.e., Section 13 of the Securities Regulation Code, the SEC
Opinions, and the Trust Fund Doctrine, do not apply to the case at bar. What applies instead is
Section 38 of the Corporation Code, the pertinent portions of which provide:

Sec. 38. Power to increase or decrease capital stock; incur, create or increase bonded
indebtedness. - No corporation shall increase or decrease its capital stock or incur, create or
increase any bonded indebtedness unless approved by a majority vote of the board of directors,
and at a stockholder's meeting duly called for the purpose, two-thirds (2/3) of the outstanding
capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating
or increasing of any bonded indebtedness. Written notice of the proposed increase
or diminution of the capital stock or of the incurring, creating, or increasing of any bonded
indebtedness and of the time and place of the stockholders' meeting at which the
proposed increase or diminution of the capital stock or the incurring or increasing of any bonded

9
indebtedness is to be considered, must be addressed to each stockholder 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.

A certificate in duplicate must be signed by a majority of the directors of the corporation and
countersigned by the chairman and the secretary of the stockholders' meeting, setting forth:

(1) That the requirements of this section have been complied with;

(2) The amount of the increase or diminution of the capital stock;

(3) x x x;

(4) x x x;

(5) The actual indebtedness of the corporation on the day of the meeting;

(6) The amount of stock represented at the meeting; and

(7) The vote authorizing the increase or diminution of the capital stock, or the incurring,
creating or increasing of any bonded indebtedness.

Any increase or decrease in the capital stock or the incurring, creating or increasing of any
bonded indebtedness shall require prior approval of the Securities and Exchange Commission.

One of the duplicate certificates shall be kept on file in the office of the corporation and the other
shall be filed with the Securities and Exchange Commission and attached to the original articles
of incorporation. From and after approval by the Securities and Exchange Commission and the
issuance by the Commission of its certificate of filing, the capital stock shall stand increased or
decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as
the certificate of filing may declare: Provided, That the Securities and Exchange Commission
shall not accept for filing any certificate of increase of capital stock unless accompanied by the
sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing
of the certificate, showing that at least twenty-five (25%) percent of such increased capital stock
has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has
been paid either in actual cash to the corporation or that there has been transferred to the
corporation property the valuation of which is equal to twenty-five (25%) percent of the
subscription:

Provided, further, That no decrease of the capital stock shall be approved by the Commission if
its effect shall prejudice the rights of corporate creditors.

x x x x (Emphasis supplied)

Section 38 is clear. A corporation can only decrease its capital stock if the following are present:

1. Approval by a majority vote of the board of directors;

2. Written notice of the proposed diminution of the capital stock, and of the time and
place of a stockholders' meeting duly called for the purpose, addressed to each
stockholder at his place of residence;

3. 2/3 of the outstanding capital stock voting favorably at the said stockholders' meeting
duly;

10
 4. Certificate in duplicate, signed by majority of the directors and countersigned by the
chairman and secretary of the stockholders' meeting stating that legal requirements have
been complied with;

5. Prior approval of the SEC; and

6. Effects do not prejudice the rights of corporate creditors.

The list of requirements under Section 38 is altogether different from the list of legal requirements
presented by petitioners. In short, petitioners plainly did not comply with the law. The Court
agrees with the appellate court when it held that:

We reject petitioners' contentions as they do not even cite any particular rule wherein notice and
hearing is required before approval for the increase or decrease in the capital stock is granted or
denied. The provision cited by petitioners in their brief, Section 13 of RA 8799, is not even
appropriate as it refers to the rejection or revocation of the registration of securities, on any of the
grounds stated in said section, none of which obtains in the case at bar. There is likewise no
validity nor legal basis to the allegation that prior approval of all the stockholders is required for
the reduction in capital stock. Suffice it to state that under Section 38 of the Corporation
Code, such decrease only requires the approval of a majority of the board of directors and, at a
stockholder's meeting duly called for the purpose, two-thirds (2/3) vote of the outstanding capital
stock. So long as written notice of the proposed increase or diminution of the capital stock was
made to all stockholders, the presence and approval of at least 2/3 of the capital stock is enough
to make the increase or diminution valid. This is the plain language of the provision over which
no other interpretation may be made.32 (Emphasis supplied)

Here, a judicious perusal of the records of the case reveals that Sinophil submitted to the SEC
the following documents in support of its application for the decrease of its authorized capital
stock and in full compliance with the requirements laid down under Section 38:

1. Certificate of Decrease of Capital Stock;

2. Director's Certificate;

3. Amended Articles of Incorporation;

4. Audited Financial Statements as of the last fiscal year stamped and received by the
Bureau of Internal Revenue and the SEC (as of December 31, 2004 and 2007);

5. Long Form Audit Report of the Audited Financial Statements (as of December 31,
2004 and 2007);

6. List of Creditors (Schedule of Liabilities as of December 31, 2004 and 2007), as

certified by the Accountant;

7. Written consent of Creditors;

8. Notice of Decrease of Capital; and

9. Affidavits of Publication of the Notice of Decrease of Capital.33

Three stockholders' meeting were likewise held on February 18, 2002, June 3, 2005 and June
21, 2007 where the stockholders voted for the reduction of the corporation's authorized capital
stock.

11
SEC only has the ministerial
duty to approve the decrease of a
corporation's authorized capital
stock.

After a corporation faithfully complies with the requirements laid down in Section 38, the SEC has
nothing more to do other than approve the same. Pursuant to Section 38, the scope of the SEC's
determination of the legality of the decrease in authorized capital stock is confined only to the
determination of whether the corporation submitted the requisite authentic documents to support
the diminution. Simply, the SEC's function here is purely administrative in nature.

The "business judgment rule" simply means that "the SEC and the courts are barred from
intruding into business judgments of corporations, when the same are made in good faith."36

Furthermore, the SEC is not vested by law with any power to interpret contracts and interfere in
the determination of the rights between and among a corporation's stockholders. Neither can the
SEC adjudicate on the contractual relations among these same stockholders. Thus, petitioners'
ℒαwρhi ৷

allegation that it is the SEC that should determine the parties' rights under the contracts
executed, particularly the Swap Agreement, the Unwinding Agreement, and the general proxy,
has no basis. To stress, the SEC's only function here was to determine the corporation's
compliance with the formal requirements under Section 38 of Corporation Code.

Magallanes Watercraft Asso., Inc. vs. Margarito Auguis, et. al., G.R. No. 211485, May 30, 2016

Facts:

Petitioner Magallanes Watercraft Association, Inc. (MWAI) is a local association of

motorized banca owners and operators ferrying cargoes and passengers from
Magallanes, Agusan del Norte, to Butuan City and back. Respondents Margarito C.
Auguis (Auguis) and Dioscoro C. Basnig (Basnig) were members and officers of
MWAI - vice-president and secretary, respectively.3

On December 5, 2003, the Board of Trustees (Board) of MWAI passed Resolution No.
1, Series of 2003, and thereafter issued Memorandum No. 001 suspending the rights
and privileges of Auguis and Basnig as members of the association for thirty (30)
days for their refusal to pay their membership dues and berthing fees because of
their pending oral complaint and demand for financial audit of the association funds.
Auguis had an accumulated unpaid obligation of P4,059.00 while Basnig had
P7,552.00.4

In spite of the suspension of their privileges as members, Auguis and Basnig still
failed to settle their obligations with MWAI. For said reason, the latter issued
Memorandum No. 002, Series of 2004, dated January 8, 2004, suspending their
rights and privileges for another thirty (30) days.5

On February 6, 2004 respondents filed an action for damages and attorney's fees

12
with a prayer for the issuance of a writ of preliminary injunction before the RTC. In
its January 11, 2007 decision, the trial court ordered Auguis and Basnig to pay their
unpaid accounts. It, nonetheless, required MWAI to pay them actual damages and
attorney's fees.

CA Ruling:

In its March 14, 2013 decision, the CA affirmed with modification the RTC decision.
According to the appellate court, the RTC correctly held that MWAI was guilty of
an ultra vires act. The CA concluded that the suspension by MWAI of respondents'
rights as members for their failure to settle membership dues was an ultra vires act
as MWAFs articles of incorporation and by-laws were bereft of any provision that
expressly and impliedly vested power or authority upon its Board to recommend the
imposition of disciplinary actions on its delinquent officers and/or members.

Issue:

Whether or not petitioner are guilty of an ultra vires act when it suspended
respondents' berthing rights because its by-laws obliged Auguis and Basnig as
members to: (1) obey and comply with the by�laws, rules and regulations that
may be promulgated by the association from time to time; and (2) to pay its
membership dues and other assessments.

Ruling:

Section 45 of the Corporation Code provides for the powers possessed by a

corporation, to wit:
chanRoblesvirtualLawlibrary

Sec. 45. Ultra vires acts of corporations. - No corporation under this Code 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. cralawred

From a reading of the said provision, it is clear that a corporation has: (1) express
powers, which are bestowed upon by law or its articles of incorporation; and (2)
necessary or incidental powers to the exercise of those expressly conferred. An act
which cannot fall under a corporation's express or necessary or incidental powers is
an ultra vires act.

The Court disagrees.

Under Section 3(a) and Section 3(c) Article V of MWAI's By-Laws, its members are
bound "[t]o obey and comply with the by-laws, rules and regulations that may be
promulgated by the association from time to time" and "[t]o pay membership dues
and other assessments of the association."13� Thus, the respondents were
obligated to pay the membership dues of which they were delinquent. MWAI could
not be faulted in suspending the rights and privileges of its delinquent members.

13
The fact alone that neither the articles of incorporation nor the by�laws of MWAI
granted its Board the authority to discipline members does not make the suspension
of the rights and privileges of the respondents ultra vires.

In University of Mindanao, the Court wrote that corporations were not limited to the
express powers enumerated in their charters, but might also perform powers
necessary or incidental thereto, to wit:

Based on the foregoing, MWAI can properly impose sanctions on Auguis and Basnig
for being delinquent members considering that the payment of membership dues
enables MWAI to discharge its duties and functions enumerated under its charter.
Moreover, respondents were obligated by the by-laws of the association to pay said
dues. The suspension of their rights and privileges is not an ultra vires act as it is
reasonably necessary or proper in order to further the interest and welfare of MWAI.
Also, the imposition of the temporary ban on the use of MWAI's berthing facilities
until Auguis and Basnig have paid their outstanding obligations was a reasonable
measure that the former could undertake to ensure the prompt payment of its
membership dues.15� Otherwise, MWAI will be rendered inutile as it will have no
means of ensuring that its members will promptly settle their obligations. It will be
exposed to deleterious consequences as it will be unable to continue with its
operations if the members continue to be delinquent in the payment of their
obligations, without fear of possible sanctions.

Waterfront Philippines, Inc. v. Social Security System, G.R. No. 249337, July 6, 2021

Facts:

On October 28, 1999, a Contract of Loan with Real Estate Mortgage with Option to
Convert to Shares of Stock (contract of loan) for P375,000,000.00 was executed
between petitioners WPI, WII, and WGI, as debtor, and SSS as creditor.

As a security for the loan, WII constituted a mortgage in favor of SSS over two
parcels of land located at Temple Drive, Green Meadows Subdivision, Quezon City,
measuring 6,687.7 square meters, and registered under Transfer Certificate of Title
(TCT) Nos. N-153395 and N-153396 (mortgaged properties). As an additional
security, WGI delivered two hundred million of its common shares to an escrow
bank/agent for the account of SSS.

Then, from October to November 1999, SSS released to WPI P375,000,000.00 in

three tranches.7

Meanwhile, on April 26, 2000, the initial interest payment of P26,528,958.34 fell
due. Thus, on May 16, 2000, WPI made a partial payment amounting to
P10,875,000.00. To maintain the required 100 percent collateral cover, WPI and WII

14
added thirty-five million WPI shares of stock, and eighty million WII shares of stock
to those originally assigned to SSS.8

As of October 30, 2000, WPI's indebtedness amounted to P419,885,517.80,

representing the principal, interest, and penalties. Then, on December 13,2000, SSS
issued Social Security Commission (SSC) Resolution No. 1003 approving WPI's offer
to partially settle its indebtedness through a debt-to-property swap of the
mortgaged properties at the agreed transfer value of P267,508,000.00. WPI and
SSS further agreed to restructure WPI's remaining loan balance. 9

On March 14, 2001, SSS and WPI, with WII signing as registered owner of the
mortgaged properties, executed a Deed of Assignment (dacion en pago).10 It was
agreed that WPI and WII will transfer, register, and deliver the mortgaged
properties to SSS within 60 days from the execution of the dacion en pago. In case
of failure to effect the transfer of the mortgaged properties, the dacion en pago will
be ipso facto declared null and void and SSS will be allowed to collect the debt in
accordance with the contract of loan. WPI and WII were obligated to shoulder the
taxes and expenses for the transfer of the properties to SSS.

Unfortunately, WPI experienced difficulty in paying the capital gains tax, and thus
failed to transfer the mortgaged properties in SSS's name within the agreed period.
In a letter dated December 18, 2001, WPI submitted a formal restructuring proposal
to settle its delinquencies.

However, SSS rejected WPI's new proposal and declared the latter's entire loan
obligation due and demandable in accordance with the contract of loan.

Petitioners failed to settle the loan. Consequently, SSS extrajudicially foreclosed the
mortgaged properties.

This prompted SSS to file on May 13, 2004, a complaint for Sum of Money with
Damages16 against WPI, WII and WGI. In its Complaint, SSS likewise prayed for an
award of moral and exemplary damages due to WPI's alleged fraud in contracting
the loan and bad faith in complying with its prestations.

In response, WPI filed its Answer 17 countering that it had acted in good faith in
complying with its prestations. It alleged that SSS abused its rights as a creditor and
argued that the execution of the dacion en pago effectively transferred the
ownership of WII's mortgaged properties to SSS. It also asserted that SSS' action is
premature as its right of redemption had not yet expired.

Issue:

(i) whether or not the SSS officers had authority to enter into the contract
of loa

15
Ruling:

Petitioners lament that the CA erred in failing to consider that the authority of the
SSS to contract the loan is a primordial issue in this case. 40 They point out that
pursuant to the SSS charter, particularly, Section 3(b) of R.A. No. 8282, it is only
the President of the SSS who has the power to enter into contracts on its behalf. 41 In
this case, the signatories in the contract of loan were not the President, but EVP
Veroy and SVP Solilapsi.42

Petitioners further argue that under Section 26 of R.A. No. 8282, the SSC may only
invest the reserve fund in accordance with the purposes stated therein. Petitioners
contend that the subject contract of loan did not fall under the enumeration of
allowable investments.43 They proffer that SSS' act in entering into the contract
is ultra vires.

Anent the substantive matters, SSS retorts that the contract of loan was validly
executed.57 It maintains that its officials were authorized to enter into said
contract.58 Likewise, it avers that petitioners voluntarily entered into the contract of
loan without a scintilla of doubt as to its and its representatives' authority.

Authority of the SSS and its

officers to enter into the
contract of loan.

Significantly, a government contract is entered into by public officers acting on

behalf of the State.69 A government contract is perfected only upon approval by
competent authority, where such approval is required. The contracting officer
functions as an agent of the government for the purpose of making the contract.
There arises a principal-agent relationship between the government on the one
hand, and the contracting officer on the other. The latter possesses only actual
agency authority, which means that said officer's contracting power exists only
because of and by virtue or authority of a law creating and conferring it.
Consequently, said officer may make only such contract as he/she is authorized to
make. In turn, the government is bound only to the extent of the power it has
actually given to its officer-agent. It goes without saying then, that, conformably to
a fundamental principle in agency, the act of the agent in entering into agreements
or contracts beyond the scope of his/her actual authority does not bind or obligate
the government.70

In relation, the authority of the SSS to enter into contracts and other transactions is
conferred by its charter R.A. No. 1161, as amended in 1997 by R.A. No. 8282, and
further amended in 2018 by R.A. No. 11199. 71 It bears noting that at the time the
contract of loan was entered into, the law in force was R.A. No. 8282.

16
Remarkably, Section 3(b) of R.A. No. 8282 ordains that the general conduct of the
operation and management functions of the SSS shall be vested in its President who
shall serve as the chief executive officer immediately responsible for carrying out the
program of the SSS and the policies of the Commission. Interestingly, the same rule
regarding the powers of the SSS' President has been retained in Section 3(b) of R.A.
No. 11199.

Despite the clear tenor of the SSS' charter, the October 28, 1999 contract of loan
was not signed by the SSS President, but rather, by its EVP Veroy and SVP Solilapsi.
Albeit high-ranking officers of the SSS, they are not the ones authorized by law to
enter into contracts on behalf of the SSS. Nowhere in the contract of loan does the
signature or approval of the President appear.

Unfortunately, this glaring lack of authority was not dispelled during the trial of the
case. The SSS failed to present evidence proving that its President or the SSC
delegated and approved the authority of EVP Veroy and SVP Solilapsi to enter into
the contract with WPI. It cannot be gainsaid that the authority of government
officials to represent the government in any contract must proceed from an express
provision of law or a valid delegation of authority. 72 Without such actual authority
possessed by EVP Veroy and SVP Solilapsi, there could be no real consent, much
less, a perfected contract to speak of.

Aside from failing to prove the authority of SSS' signatories to the contract of loan, it
is further noted that said contract was entered into in stark violation of the rule
pertaining to the investment of SSS' reserve funds. Particularly, Section 26 of R.A.
No. 8282 allows the SSC to invest the reserve funds for limited purposes and under
stringent conditions:

In any event, even assuming arguendo that the contract of loan may tangentially be
classified under investments in real estate under Section 26(g), or loans secured by
such collaterals like cash, government securities or guarantees of multilateral
institutions under Section 26(l), still, SSS failed to prove that the loan was granted
in accordance with the conditions set forth therein. Particularly, SSS and its
witnesses did not offer any testimonial or documentary evidence to show that the
investment will redound to the benefit of the SSS, its members and the general
public; that the investment in real estate and/or shares of stock involving real estate
did not exceed five percent (5%) of the investment reserve fund; and that the
investment secured by collaterals did not exceed twenty-five (25%) percent of the
investment reserve fund, to fall within Section 26(g). In the same vein, SSS did not
present proof that the investment did not exceed thirty percent (30%) of the
investment reserve fund under Section 26(1). Certainly, the Court cannot surmise
on SSS' compliance with said essential conditions.

It is an elementary principle that the law is deemed written into every contract. The
provisions of positive law which regulate contracts are deemed included therein and
shall limit and govern the relations between the parties. Consequently, R.A. No.
8282, being SSS' charter is presumed to be incorporated into every contract entered
into by SSS. Likewise, as a corporate body, SSS may only exercise its powers within
the provisions of its charter. Corporate acts that are outside the express definitions
under the law or articles of incorporation or those committed outside the object for
which a corporation is created are ultra vires.75 Hence, the contract of loan which

17
was entered into in violation of Sections 3(b) and 26 of R.A. No. 8282 are ultra
vires.

An ultra vires act may be classified as either illegal or merely ultra vires. The former
contemplates the doing of an act which is contrary to law, morals, or public order, or
one that contravenes some rules of public policy or public duty, and is, like similar
transactions between individuals, void. It cannot serve as a basis of a court action,
nor acquire validity by performance, ratification, or estoppel. On the other hand, a
mere ultra vires act is that which is not illegal and void ab initio, but is merely
outside of the scope of the articles of incorporation, and is thus, merely voidable and
may become binding and enforceable when ratified by the stockholders. 76

In this case, the contract of loan is an illegal ultra vires act. The execution of the
loan contract was done in stark violation of R.A. No. 8282. As exhaustively
discussed, it was entered into without the approval of the SSS' President which is
clearly required under Section 3(b). Worse, it embodied a transaction that was not
authorized under Section 26 of the same law. Patently, said contract of loan
transgressed R.A. No. 8282, thereby rendering it ultra vires and void.

Correspondingly, ultra vires acts or those that are clearly beyond the scope of one's
authority are null and void and cannot be given any effect. The doctrine of estoppel
cannot operate to give effect to an act which is otherwise null and void or ultra
vires.77 Estoppel cannot be predicated on an illegal act.

Donnina C. Halley vs. Printwell, Inc., G.R. No. 157549, May 30, 2011

Facts:
Stockholders of a corporation are liable for the debts of the corporation up to the extent of their
unpaid subscriptions. They cannot invoke the veil of corporate identity as a shield from liability,
because the veil may be lifted to avoid defrauding corporate creditors.

The petitioner wasan incorporator and original director of Business Media Philippines, Inc.
(BMPI), which, at its incorporation on November 12, 1987,3had an authorized capital stock of
₱3,000,000.00 divided into 300,000 shares each with a par value of ₱10.00,of which 75,000
were initially subscribed, to wit:

Printwellengaged in commercial and industrial printing.BMPI commissioned Printwell for the

printing of the magazine Philippines, Inc. (together with wrappers and subscription cards) that
BMPI published and sold. For that purpose, Printwell extended 30-day credit accommodations to
BMPI.

In the period from October 11, 1988 until July 12, 1989, BMPI placedwith Printwell several orders
on credit, evidenced byinvoices and delivery receipts totaling₱316,342.76.Considering that BMPI

18
paidonly₱25,000.00,Printwell suedBMPIon January 26, 1990 for the collection of the unpaid
balance of ₱291,342.76 in the RTC.4

On February 8, 1990,Printwell amended thecomplaint in order to implead as defendants all the

original stockholders and incorporators to recover on theirunpaid subscriptions, as follows:

The defendants filed a consolidated answer,6averring that they all had paid their subscriptions in
full; that BMPI had a separate personality from those of its stockholders; thatRizalino C. Viñeza
had assigned his fully-paid up sharesto a certain Gerardo R. Jacinto in 1989; andthat the
directors and stockholders of BMPI had resolved to dissolve BMPI during the annual meetingheld
on February 5, 1990.

Issue:

THE HONORABLE COURT OF APPEALS ERRED IN APPLYING THE TRUST FUND

DOCTRINE WHEN THE GROUNDS THEREFOR HAVE NOT BEEN SATISFIED.

Ruling:

III
Unpaid creditor may satisfy its claim from
unpaid subscriptions;stockholders must
prove full payment oftheir subscriptions

Both the RTC and the CA applied the trust fund doctrineagainst the defendant stockholders,
including the petitioner.

The petitionerargues, however,that the trust fund doctrinewas inapplicablebecause she had
already fully paid her subscriptions to the capital stock of BMPI. She thus insiststhat both lower
courts erred in disregarding the evidence on the complete payment of the subscription, like
receipts, income tax returns, and relevant financial statements.

The petitioner’s argumentis devoid of substance.

The trust fund doctrineenunciates a –

xxx rule that the property of a corporation is a trust fund for the payment of creditors, but such
property can be called a trust fund ‘only by way of analogy or metaphor.’ As between the
corporation itself and its creditors it is a simple debtor, and as between its creditors and
stockholders its assets are in equity a fund for the payment of its debts. 32

The trust fund doctrine, first enunciated in the American case of Wood v. Dummer, 33was adopted
in our jurisdiction in Philippine Trust Co. v. Rivera,34where thisCourt declared that:

It is established doctrine that subscriptions to the capital of a corporation constitute a fund 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) xxx 35

19
We clarify that the trust fund doctrineis not limited to reaching the stockholder’s unpaid
subscriptions. The scope of the doctrine when the corporation is insolvent encompasses not only
the capital stock, but also other property and assets generally regarded in equity as a trust fund
for the payment of corporate debts.36All assets and property belonging to the corporation held in
trust for the benefit of creditors thatwere distributed or in the possession of the stockholders,
regardless of full paymentof their subscriptions, may be reached by the creditor in satisfaction of
its claim.

Also, under the trust fund doctrine,a corporation has no legal capacity to release an original
subscriber to its capital stock from the obligation of paying for his shares, in whole or in
part,37 without a valuable consideration,38 or fraudulently, to the prejudice of creditors.39The
creditor is allowed to maintain an action upon any unpaid subscriptions and thereby steps into
the shoes of the corporation for the satisfaction of its debt.40To make out a prima facie case in a
suit against stockholders of an insolvent corporation to compel them to contribute to the payment
of its debts by making good unpaid balances upon their subscriptions, it is only necessary to
establish that thestockholders have not in good faith paid the par value of the stocks of the
corporation.41

The petitionerposits that the finding of irregularity attending the issuance of the receipts (ORs)
issued to the other stockholders/subscribers should not affect her becauseher receipt did not
suffer similar irregularity.

Notwithstanding that the RTC and the CA did not find any irregularity in the OR issued in her
favor,we still cannot sustain the petitioner’s defense of full payment of her subscription.

In civil cases, theparty who pleads payment has the burden of proving it, that even where the
plaintiff must allege nonpayment, the general rule is that the burden rests on the defendant to
prove payment, rather than on the plaintiff to prove nonpayment. In other words, the debtor bears
the burden of showing with legal certainty that the obligation has been discharged by payment. 42

Apparently, the petitioner failed to discharge her burden.

A receipt is the written acknowledgment of the fact of payment in money or other settlement
between the seller and the buyer of goods, thedebtor or thecreditor, or theperson rendering
services, and theclient or thecustomer.43Althougha receipt is the best evidence of the fact of
payment, it isnot conclusive, but merely presumptive;nor is it exclusive evidence,considering
thatparole evidence may also establishthe fact of payment.44

The petitioner’s ORNo. 227,presentedto prove the payment of the balance of her subscription,
indicated that her supposed payment had beenmade by means of a check. Thus, to discharge
theburden to prove payment of her subscription, she had to adduce evidence satisfactorily
proving that her payment by check wasregardedas payment under the law.

Paymentis defined as the delivery of money.45Yet, because a check is not money and only
substitutes for money, the delivery of a check does not operate as payment and does not
discharge the obligation under a judgment.46 The delivery of a bill of exchange only produces the
fact of payment when the bill has been encashed.47The following passage fromBank of Philippine
Islands v. Royeca48is enlightening:

Settled is the rule that payment must be made in legal tender. A check is not legal tender and,
therefore, cannot constitute a valid tender of payment. Since a negotiable instrument is only a
substitute for money and not money, the delivery of such an instrument does not, by itself,
operate as payment. Mere delivery of checks does not discharge the obligation under a
judgment. The obligation is not extinguished and remains suspended until the payment by
commercial document is actually realized.

20
To establish their defense, the respondents therefore had to present proof, not only that they
delivered the checks to the petitioner, but also that the checks were encashed. The respondents
failed to do so. Had the checks been actually encashed, the respondents could have easily
produced the cancelled checks as evidence to prove the same. Instead, they merely averred that
they believed in good faith that the checks were encashed because they were not notified of the
dishonor of the checks and three years had already lapsed since they issued the checks.

Because of this failure of the respondents to present sufficient proof of payment, it was no longer
necessary for the petitioner to prove non-payment, particularly proof that the checks were
dishonored. The burden of evidence is shifted only if the party upon whom it is lodged was able
to adduce preponderant evidence to prove its claim.

Ostensibly, therefore, the petitioner’s mere submission of the receipt issued in exchange of the
check did not satisfactorily establish her allegation of full payment of her subscription. Indeed,
she could not even inform the trial court about the identity of her drawee bank, 49and about
whether the check was cleared and its amount paid to BMPI.50In fact, she did not present the
check itself.

Theincome tax return (ITR) and statement of assets and liabilities of BMPI, albeit presented, had
no bearing on the issue of payment of the subscription because they did not by themselves prove
payment. ITRsestablish ataxpayer’s liability for taxes or a taxpayer’s claim for refund. In the
same manner, the deposit slips and entries in the passbook issued in the name of BMPI were
hardly relevant due to their not reflecting the alleged payments.

It is notable, too, that the petitioner and her co-stockholders did not support their allegation of
complete payment of their respective subscriptions with the stock and transfer book of BMPI.
Indeed, books and records of a corporation (including the stock and transfer book) are
admissible in evidence in favor of or against the corporation and its members to prove the
corporate acts, its financial status and other matters (like the status of the stockholders), and are
ordinarily the best evidence of corporate acts and proceedings.51Specifically, a stock and transfer
book is necessary as a measure of precaution, expediency, and convenience because it
provides the only certain and accurate method of establishing the various corporate acts and
transactions and of showing the ownership of stock and like matters.52That she tendered no
explanation why the stock and transfer book was not presented warrants the inference that the
book did not reflect the actual payment of her subscription.

Nor did the petitioner present any certificate of stock issued by BMPI to her. Such a certificate
covering her subscription might have been a reliable evidence of full payment of the
subscriptions, considering that under Section 65 of the Corporation Code a certificate of stock
issues only to a subscriber who has fully paid his subscription. The lack of any explanation for
the absence of a stock certificate in her favor likewise warrants an unfavorable inference on the
issue of payment.

Lastly, the petitioner maintains that both lower courts erred in relying on the articles of
incorporationas proof of the liabilities of the stockholders subscribing to BMPI’s stocks, averring
that the articles of incorporationdid not reflect the latest subscription status of BMPI.

Although the articles of incorporation may possibly reflect only the pre-incorporation status of a
corporation, the lower courts’ reliance on that document to determine whether the original
subscribersalready fully paid their subscriptions or not was neither unwarranted nor erroneous.
As earlier explained, the burden of establishing the fact of full payment belonged not to Printwell
even if it was the plaintiff, but to the stockholders like the petitioner who, as the defendants,
averredfull payment of their subscriptions as a defense. Their failure to substantiate their
averment of full payment, as well as their failure to counter the reliance on the recitals found in
the articles of incorporation simply meant their failure or inability to satisfactorily prove their
defense of full payment of the subscriptions.

21
To reiterate, the petitionerwas liablepursuant to the trust fund doctrine for the corporate obligation
of BMPI by virtue of her subscription being still unpaid. Printwell, as BMPI’s creditor,had a right to
reachher unpaid subscription in satisfaction of its claim.

Enano-Bote v. Alvarez, G.R. No. 223572, November 10, 2020

Facts:
On February 3, 1999, plaintiff-appellee Subic Bay Metropolitan Authority (SBMA for brevity)
entered into a Lease Agreement with defendant/third-party plaintiff Centennial Air, Inc.
(CAIR for brevity), represented by defendant Roberto Lozada (Lozada for brevity), for the
lease of Building 8324 (subject property for brevity) located at Subic Bay International
Airport (SBIA), Subic Bay Freeport Zone (SBFZ), for a period of five (5) years commencing
on February 1, 1999 until midnight of January 31, 2004.

Under the pertinent provisions of the lease, the parties agreed that the monthly rental for
the use and occupation of the subject property shall be payable as follows:

For the duration of the lease, [CAIR] became delinquent and was constantly remiss in the
payment of its obligations. As a result, [SBMA], through its Accounting Department, sent a
letter dated November 9, 1999 to [CAIR] demanding the latter to settle its outstanding
obligation which, as of October 31, 1999, amounted to [P119,324.51]. In an attempt to settle
its account, [CAIR] proposed a payment scheme for its overdue debts which, as of
December 31, 2002, reached [P168,405.84]. Under this payment scheme, [CAIR] vowed to:
[18]
(1) pay an initial payment of [US$33,682.00]; (2) submit post dated checks to cover
payment of its balance of [US$134,723.84] payable in monthly installments of
[US$7,484.66]; and pay current rental starting January 2003. While the initial payment of
US$33,682.00 was received, [CAIR] never delivered the 18 post dated checks to [SBMA].

22
Thus, on February 7, 2003, another letter was sent to [CAIR], asking the same to comply
with its proposed payment scheme by submitting the 18 post dated checks for the
settlement of its outstanding balance of US$134,723.84 and pay the rent for March 2003.
Despite repeated demands, [CAIR] still failed to comply. On January 14, 2004, a Final
Demand Letter was sent to [CAIR], requiring the latter to pay its outstanding obligation
within five (5) days from receipt thereof. In the same letter, the Lease Agreement between
[SBMA] and [CAIR] was terminated, and the latter was ordered to vacate the premises.

Due to the continuous refusal of [CAIR] to settle its debts, [SBMA] was compelled to file a
Complaint against the former and its stockholders asking for the payment of [(1)] its
outstanding obligation in the total amount of US$163,341.89 plus legal interest; (2)
exemplary damages in the amount of [P]100,000.00[;] and (3) [a]ttorney's fees in the
amount of [P]20,000.00.

On September 3, 2004, [Enano-Bote, et al.] filed their Answer denying any liability to
[SBMA]. [They] argued that they were no longer stockholders of the corporation at the time
the Lease Agreement was executed between [CAIR] and [SBMA] on February 3, 1999.
Allegedly, on December 1, 1998, they entered into a Deed of Assignment of Subscription
Rights ([DASR)] for brevity) with third-party defendant-appellee Jose Ch. Alvarez (Alvarez
for brevity), whereby they assigned, transferred, and conveyed their aggregate subscription
of [400,000] shares, representing [100%] of the outstanding capital stock of [CAIR], in favor
of [Alvarez]. Pursuant to the [DASR], [Alvarez] was obliged to transfer and assign 76,000
and 4,000 of fully paid and non-assessable shares of the corporation to [Jennifer] and
[Virgilio]. Furthermore, [Alvarez] assumed to pay the unpaid balance of their subscriptions
in the amount of [P30,000,000.00]. In effect, only [Jennifer] and [Virgilio] remained as
nominal stockholders of the corporation while the rest of them were totally divested of
their corporate shares. Since they ceased to be stockholders of the corporation, they were
no longer parties to the Lease Agreement, thus they cannot be held liable for any breach
thereof.

Issue:

(1) whether the CA committed an error of law in applying the trust fund doctrine to make
petitioners personally and solidarily liable with CAIR for the unpaid rentals claimed by
SBMA against CAIR because of their supposedly unpaid subscriptions in CAIR's capital
stock

Ruling:
Anent the first issue, the CA affirmed the RTC's invocation of Halley v. Printwell, Inc.
[19]
(Halley) to justify the application of the trust fund doctrine in this wise:

Consistently, the [RTC] is convinced that [petitioners] may be held liable up to the extent
of their unpaid subscription for the payment of [CAIR's] outstanding obligation to [SBMA].
The rationale [for] the [RTC's] rulings find support in the case of [ Halley], which held that:

23
"[x x x] The trust fund doctrine, first enunciated in the American case of Wood v. Dummer,
was adopted in our jurisdiction in Philippine Trust Co. v. Rivera, where this Court declared
that:

It is established doctrine that subscriptions to the capital of a corporation constitute a

fund 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) ...

We clarify that the trust fund doctrine is not limited to reaching the stockholder's unpaid
subscriptions. The scope of the doctrine when the corporation is insolvent encompasses
not only the capital stock, but also other property and assets generally regarded in equity
as a trust fund for the payment of corporate debts. All assets and property belonging to the
corporation held in trust for the benefit of creditors that were distributed or in the
possession of the stockholders, regardless of full payment of their subscriptions, may be
reached by the creditor in satisfaction of its claim.

Also, under the trust fund doctrine, a corporation has no legal capacity to release an
original subscriber to its capital stock from the obligation of paying for his shares, in whole
or in part, without a valuable consideration, or fraudulently, to the prejudice of
creditors. The creditor is allowed to maintain an action upon any unpaid subscriptions and
thereby steps into the shoes of the corporation for the satisfaction of its debt. To make out
a prima facie case in a suit against stockholders of an insolvent corporation to compel
them to contribute to the payment of its debts by making good unpaid balances upon their
subscriptions, it is only necessary to establish that the stockholders have not in good faith
paid the par value of the stocks of the corporation. [x x x]" (emphasis ours)[20]
Petitioners argue that Halley is inapplicable and takes the position that the facts
[21]
of Halley are "not substantially on 'all fours' with the present action." They claim that
the corporate personality of Business Media Philippines, Inc. (the corporation subject
of Halley) was disregarded and the stockholders were held personally liable because it
was shown that the said stockholders were found and proved to be in charge of its
operation at the time the unpaid obligation was transacted and incurred which greatly
benefitted the corporation, and that Rizalino Vineza had assigned his "fully paid up" shares
to a certain Gerardo Jacinto in 1989 at the time when the directors and stockholders of the
[22]
corporation had resolved to dissolve the corporation during its annual meeting. They
further claim that there was no evidence whatsoever presented during the trial nor self-
evident on the records of this case to show that petitioners were in charge of the operation
of CAIR and they acted in bad faith or fraudulently when the lease was transacted with
SBMA. Having sold, ceded and assigned their entire subscription rights to the 400,000
shares in CAIR representing 100% of its entire outstanding capital stock to Alvarez who as
assignee agreed to assume the payment of the unpaid balance of the price of the
subscription rights in the total amount of P30,000,000.00 and Alvarez being then in charge
as President of CAIR and its major stockholder as well as the signatory to the Lease
Agreement, petitioners conclude that when Halley is invoked correctly, Alvarez should be
[23]
solely responsible and liable for the unpaid rentals of CAIR to SBMA.

Regarding petitioners' assignment of their subscription rights to Alvarez through the DASR,
the CA stated that for this to become a viable defense, it was incumbent upon petitioners
to show that a valid transfer/assignment of shares, binding against third persons, took
place under Section 63 of the Corporation Code, which provides:

SECTION 63. Certificate of stock and Transfer of Shares . - The capital stock of stock
corporation shall be divided into shares for which certificates signed by the president or
vice-president, countersigned by the secretary or assistant secretary, and sealed with the
seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so
issued are personal property and may be transferred by delivery of the certificate or
certificates indorsed by the owner or his attorney-in-fact or other person legally authorized

24
to make the transfer. No transfer, however, shall be valid, except as between the parties,
until the transfer is recorded in the books of the corporation so as to show the names of
the parties to the transaction, the date of the transfer, the number of the certificate or
certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation. (35)[24]
[25]
Citing The Rural Bank of Lipa City, Inc. v. Court of Appeals, the CA noted that there
must be strict compliance with the mode of transfer prescribed by law before a valid
transfer of stock takes place wherein the following requirements are complied with: (1)
there must be delivery of the stock certificate; (2) the certificate must be endorsed by the
owner or his attorney-in-fact or other persons legally authorized to make the transfer; and
(3) to be valid against third persons, the transfer must be recorded in the books of the
[26]
corporation. Based on these parameters, the CA stated that petitioners failed to hurdle
their burden as the record is bereft of any proof to show compliance with the requirements
for a valid transfer of shares; thus, without a valid transfer of shares, petitioners are still
[27]
deemed to be stockholders of CAIR at the time the lease was enforced. The CA further
stated that the unrecorded transfer/assignment of shares between petitioners and Alvarez
is not binding on SBMA, and the latter can proceed against petitioners, who in its eyes
remained as stockholders, against their unpaid subscriptions for the satisfaction of CAIR's
[28]
rental arrears pursuant to the trust fund doctrine.

Petitioners counter by insisting that under the DASR, which Alvarez failed to deny under
oath its genuineness and due execution in his Third-Party Answer with Counterclaim,
Alvarez is deemed to have admitted that petitioners had already assigned, transferred and
conveyed to him their entire subscription rights representing 100% of the outstanding
capital stock of CAIR with the exception of Jennifer and Virgilio who remained
stockholders with fully paid and non-assessable shares numbering 76,000 and 4,000,
[29]
respectively. With the assignment, petitioners claim that they are no longer
stockholders of CAIR with unpaid subscription and should not be made primarily and
principally liable to SBMA, and that instead Alvarez should be solely be responsible for the
unpaid rentals because he is the majority stockholder and the active President in charge of
[30]
CAIR at the time he signed the lease contract.

Petitioners further argue that as inactive stockholders with fully paid shares, Jennifer and
[31]
Virgilio cannot be liable for the debts of CAIR. Given the separate personality of CAIR,
they posit that the piercing of the corporate veil is unwarranted without any allegation in
the complaint and proof that individual petitioners consented or connived to commit
patently unlawful acts of the corporation or that any of them was guilty of gross
[32]
negligence or bad faith. In fact, they claim that, effective December 1, 1998, they
ceased to be directors of CAIR and had no participation in its operation, with Jennifer
being replaced by Bienvenido S. Santos as Treasurer based on the minutes of the election
[33]
of the corporate officers held in December 1998.

Moreover, petitioners claim that the unpaid stock subscriptions are receivables of the
corporation, which can only become due and owing upon a subscription call by the
corporation's Board of Directors or when it undergoes bankruptcy or its assets are being
[34]
levied under an execution or attachment, and none of them obtains in this case.

Lastly, petitioners claim that Alvarez has admitted liability to them when he did not
present contradictory evidence to the evidence presented by them despite the RTC giving

25
him several chances and a final opportunity to present evidence, with prior notice to his
counsel of record, on October 16, 2012

A trust implies a trustee holding a legal title and cestui que trusts who have the beneficial
interest. A court of equity will compel a trustee to hold and manage the property for the
sole benefit of a cestui, to whom alone, in its eyes, the property belongs. The trustee can
make no profit out of the property. His sole reward is his commission. All the property and
all the profits belong to the cestui que trust.

Manifestly, the property of a corporation is held by it in trust in no such sense. A

corporation has the beneficial or equitable as well as the legal title. It is in business to
make money for itself and its stockholders and not for its creditors; while a trustee can
only make money for his cestui que trust.

But it may be said that it is not claimed that the property of a going, solvent corporation is
a trust fund for its creditors; it is only when the corporation becomes insolvent and ceases
to do business that the assets become a trust fund. Many cases may be found where it is
so stated. For example, in the case of Appleton v. Turnbull (84 Me. 72), the court said:
"It is too firmly established at the present day to be questioned, that the capital stock of a
corporation is a trust fund for the payment of its debts * * * during the existence of the life
of the corporation, it is a trust to be managed for the benefit of its stockholders, but in the
event of a dissolution or of insolvency, it becomes a trust fund for the benefit of its
creditors."

xxxx
x x x The trust fund theory has been, perhaps, most often applied to the case where a
creditor of an insolvent corporation seeks to compel a stockholder to pay a balance
claimed to be due on stock for which the par value has never been paid to the corporation.
[37]

The trust fund doctrine or theory has been, perhaps, most often applied to the case where
a creditor of an insolvent corporation seeks to compel a stockholder to pay a balance
claimed to be due on stock for which the par value has never been paid to the corporation.
[38]
On this matter of the creditors running after shareholders for their unpaid
subscriptions, it has been said:

Sawyer v. Hoag[39] established that the stockholders of an insolvent corporation were

liable to its creditors to the extent of the amount unpaid on stock subscriptions. Justice
Miller based liability squarely on the trust-fund doctrine, saying that the doctrine applied to
the capital stock of a corporation "especially its unpaid subscriptions." This holding carved
a significant exception out of the general rule that stockholders of a corporation are
insulated from liability for its debts.

As long as a corporation remains solvent the subscriber's only liability runs to the
corporation. Once the corporation has matured the contract liability of the shareholder, it
can, of course, assign that debt like no other. But except by way of assignment,
the creditor of a solvent corporation, being in no sense a party to the subscription
contract, is unable to reach an unpaid subscription. Practically speaking, however, as long
as the corporation is solvent a corporate creditor will not need to pursue any remedy
beyond a direct action against the corporation taken to judgment; hence any absence of
privity between creditor and shareholder is not at this time a serious problem. But when
the corporation becomes insolvent judgments at law are relatively worthless. At this
juncture the trust-fund doctrine entered the picture to protect the creditor.

The crucial fact in Halley which justified the application of the trust fund doctrine is that
after the filing of the original complaint, the directors and stockholders of BMPI had
resolved to dissolve BMPI during the annual meeting held on February 5, 1990. This move to
dissolve BMPI triggered the amendment of Printwell's complaint on February 8, 1990 in

26
order to implead as defendants all the original stockholders and incorporators to recover
their unpaid subscriptions. The move to dissolve BMPI was viewed by the Court as a clear
attempt by the directors and stockholders to escape BMPI's liability to Printwell. And, as it
turned out, the subscriptions, while appearing on the books of the corporation as fully paid,
were in fact not paid. These circumstances thus justified the Court's piercing of BMPI's
corporate veil where the corporate personality may be disregarded if the corporate entity
is being used as a cloak or cover for fraud. While good faith is always presumed and prime
importance is accorded to the separate personality of the corporation as an alter ego, an
adjunct, or a business conduit for the sole benefit of stockholders, the corporate
personality can be disregarded only after the wrongdoing is first clearly and convincingly
[54]
established.

Clearly, the first instance finds no relevance in the present case. It is the second which
SBMA, as creditor, may invoke to collect from CAIR's stockholders for their unpaid
subscriptions and apply the same to CAIR's unpaid rentals. But, as stressed in Halley: "To
make out a prima facie case in a suit against stockholders of an insolvent corporation to
compel them to contribute to the payment of its debts by making good unpaid balances
upon their subscriptions, it is only necessary to establish that the stockholders have not in
[55]
good faith paid the par value of the stocks of the corporation."

Unfortunately, SBMA has not even pleaded either insolvency of CAIR or its dissolution.
What is evident in SBMA's complaint is that it is a simple collection suit, to wit:

Not only were the allegations of SBMA's complaint insufficient to justify the invocation and
application of the trust fund doctrine as appreciated in Halley, even the evidence adduced
by SBMA was solely to prove the uncollected rentals. SBMA presented two witnesses,
Editha Lim-Marzal (Editha) and Kenneth Lemuel G. Rementilla (Kenneth). Editha, the
Division Chief of the Accounting Department, Account Receivables of SBMA, testified in the
main that: as per records, CAIR was consistently remiss in paying its lease rentals and
airport fees; demand letters were sent to CAIR, which fell on deaf ears; and according to
the Summary of Outstanding Account, the obligation incurred by CAIR amounted to
[58]
US$212,135.55 or P10,171,899.60 as of March 28, 2007. Kenneth, the Manager of the
Locator's Registration and Licensing Department of SBMA, testified that: he was familiar
with CAIR; it underwent the usual process of registration to become a free port enterprise
and complied with all the documentary requirements to prove its existence as a business
enterprise, such as its Articles of Incorporation (AOI) duly registered with the Securities
and Exchange Commission; he was not notified of any changes or amendments in the AOI
with respect to the names of the incorporators; and SBMA and CAIR entered into a Lease
Agreement on February 3, 1999 but was pre-terminated on January 14, 2004 due to CAIR's
[59]
failure to settle its account.

In short, SBMA failed to either allege or prove any of the two grounds recognized
in Halley when the trust fund doctrine may be applied to compel the stockholders to
contribute to the payment of CAIR's debts by compelling them to pay the unpaid balances
upon their subscriptions.

The CA indeed misapplied Halley in this case. The CA miserably failed to identify the
salient facts of the case constituting the specific ground to justify the application of the
trust fund doctrine. The CA relied on Halley without showing, either in the pleadings or in
the evidence, how its ratio could be applied.

Given the failure of SBMA to make a case for the application of the trust fund doctrine

27
against petitioners, the Court will not provide the basis for the former.

With the Court's finding that the CA erred in applying the trust fund doctrine to make the
stockholders liable to SBMA for their unpaid subscriptions to the extent of CAIR unpaid
obligations to SBMA, and without any evidence to controvert the total amount of
US$163,341.89, plus legal interest, adjudged by the lower courts in favor of SBMA, only
CAIR should be solely liable therefor. The third-party complaint filed by petitioners against
Alvarez should also be dismissed with the award of damages in favor of petitioners
vacated. With the dismissal of the third party complaint, the resolution of the second issue
is rendered superfluous.

28