COMMERCIAL LAW REVIEW I (aq) “Qualified person” means any citizen of the Philippines with capacity to contract, or

CORPORATION LAW a corporation, partnership, association, or cooperative organized or authorized for the
purpose of engaging in mining, with technical and financial capability to undertake
mineral resources development and duly registered in accordance with law at least sixty
GRANDFATHER RULE per cent (60%) of the capital of which is owned by citizens of the Philippines: Provided,
That a legally organized foreign-owned corporation shall be deemed a qualified person
NARRA NICKEL MINING AND DEVELOPMENT CORP., VS. REDMONT CONSOLIDATED MINES CORP., G.R.
for purposes of granting an exploration permit, financial or technical assistance
No.195580. April 21, 2014
agreement or mineral processing permit.
VELASCO JR., J.:
Additionally, they stated that their nationality as applicants is immaterial because they also applied for Financial
or Technical Assistance Agreements (FTAA), which are granted to foreign-owned corporations.
FACTS: Nevertheless, they claimed that the issue on nationality should not be raised since McArthur, Tesoro and
Respondent Redmont Consolidated Mines Corp., a domestic corporation organized and existing under Philippine Narra are in fact Philippine Nationals as 60% of their capital is owned by citizens of the Philippines . They
laws, took interest in mining and exploring certain areas of the province of Palawan. After inquiring with the asserted that though MBMI owns 40% of the shares of PLMC (which owns 5,997 shares of Narra), 40% of the
Department of Environment and Natural Resources (DENR), it learned that the areas where it wanted to shares of MMC (which owns 5,997 shares of McArthur) and 40% of the shares of SLMC (which, in turn, owns
undertake exploration and mining activities where already covered by Mineral Production Sharing Agreement 5,997 shares of Tesoro), the shares of MBMI will not make it the owner of at least 60% of the capital stock of
(MPSA) applications of petitioners Narra, Tesoro and McArthur. each of petitioners. They added that the best tool used in determining the nationality of a corporation is the
“control test,” embodied in Sec. 3 of RA 7042 or the Foreign Investments Act of 1991.
Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI), filed an application for
an MPSA and Exploration Permit (EP) with the Mines and Geo-Sciences Bureau (MGB), Region IV-B, Office of the The POA issued a Resolution disqualifying petitioners from gaining MPSAs.
Department of Environment and Natural Resources (DENR). Subsequently, SMMI was issued MPSA-AMA-IVB-
153 covering an area of over 1,782 hectares in Barangay Sumbiling, Municipality of Bataraza, Province of The POA considered petitioners as foreign corporations being “effectively controlled” by MBMI, a 100%
Palawan and EPA-IVB-44 which includes an area of 3,720 hectares in Barangay Malatagao, Bataraza, Palawan. Canadian company and declared their MPSAs null and void. In the same Resolution, it gave due course to
The MPSA and EP were then transferred to Madridejos Mining Corporation (MMC) and, on November 6, 2006, Redmont’s EPAs. Thereafter, the POA issued an Order denying the Motion for Reconsideration filed by
assigned to petitioner McArthur. petitioners.

Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation and Patricia Louise Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a joint Notice of Appeal and
Mining & Development Corporation (PLMDC) which previously filed an application for an MPSA with the MGB, Memorandum of Appeal with the Mines Adjudication Board (MAB) while Narra separately filed its Notice of
Region IV-B, DENR on January 6, 1992. Through the said application, the DENR issued MPSA-IV-1-12 covering an Appeal and Memorandum of Appeal. In their respective memorandum, petitioners emphasized that they are
area of 3.277 hectares in barangays Calategas and San Isidro, Municipality of Narra, Palawan. Subsequently, qualified persons under the law. Also, through a letter, they informed the MAB that they had their individual
PLMDC conveyed, transferred and/or assigned its rights and interests over the MPSA application in favor of MPSA applications converted to FTAAs.
Narra.
Pending the resolution of the appeal filed by petitioners with the MAB, Redmont filed a Complaint with the
Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled as MPSA-AMA-IVB-154 Securities and Exchange Commission (SEC), seeking the revocation of the certificates for registration of
(formerly EPA-IVB-47) over 3,402 hectares in Barangays Malinao and Princesa Urduja, Municipality of Narra, petitioners on the ground that they are foreign-owned or controlled corporations engaged in mining in
Province of Palawan. SMMI subsequently conveyed, transferred and assigned its rights and interest over the violation of Philippine laws. Thereafter, Redmont filed on September 1, 2008 a Manifestation and Motion to
said MPSA application to Tesoro. Suspend Proceeding before the MAB praying for the suspension of the proceedings on the appeals filed by
McArthur, Tesoro and Narra.
Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3) separate petitions for the denial of
petitioners’ applications for MPSA designated. Subsequently, on September 8, 2008, Redmont filed before the Regional Trial Court of Quezon City, Branch 92
(RTC) a Complaint for injunction with application for issuance of a temporary restraining order (TRO) and/or writ
In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro and Narra are of preliminary injunction. Redmont prayed for the deferral of the MAB proceedings pending the resolution of
owned and controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian corporation. Redmont reasoned the Complaint before the SEC.
that since MBMI is a considerable stockholder of petitioners, it was the driving force behind petitioners’ filing of
the MPSAs over the areas covered by applications since it knows that it can only participate in mining activities But before the RTC can resolve Redmont’s Complaint and applications for injunctive reliefs, the MAB issued an
through corporations which are deemed Filipino citizens. Redmont argued that given that petitioners’ capital Order on September 10, 2008, finding the appeal meritorious.
stocks were mostly owned by MBMI, they were likewise disqualified from engaging in mining activities
through MPSAs, which are reserved only for Filipino citizens. Belatedly, the RTC issued an Order granting Redmont’s application for a TRO and setting the case for hearing the
prayer for the issuance of a writ of preliminary injunction on September 19, 2008.
In their Answers, petitioners averred that they were qualified persons under Section 3(aq) of Republic Act No.
(RA) 7942 or the Philippine Mining Act of 1995 which provided: Meanwhile, Redmont filed a Motion for Reconsideration of the September 10, 2008 Order of the MAB.
Subsequently, it filed a Supplemental Motion for Reconsideration.

UE-0200673-2023

Before the MAB could resolve Redmont’s Motion for Reconsideration and Supplemental Motion for
Reconsideration, Redmont filed before the RTC a Supplemental Complaint in Civil Case.
On October 6, 2008, the RTC issued an Order granting the issuance of a writ of preliminary injunction enjoining
the MAB from finally disposing of the appeals of petitioners and from resolving Redmont’s Motion for
Reconsideration and Supplement Motion for Reconsideration of the MAB’s September 10, 2008 Resolution.
On July 1, 2009, however, the MAB issued a second Order denying Redmont’s Motion for Reconsideration and
Supplemental Motion for Reconsideration and resolving the appeals filed by petitioners.
Hence, the petition for review filed by Redmont before the CA, assailing the Orders issued by the MAB. On
October 1, 2010, the CA rendered a Decision, that the Petition is PARTIALLY GRANTED. The assailed Orders,
dated September 10, 2008 and July 1, 2009 of the Mining Adjudication Board are reversed and set aside. The
findings of the Panel of Arbitrators of the Department of Environment and Natural Resources that respondents
McArthur, Tesoro and Narra are foreign corporations is upheld and, therefore, the rejection of their applications
for Mineral Product Sharing Agreement should be recommended to the Secretary of the DENR.
With respect to the applications of respondents McArthur, Tesoro and Narra for Financial or Technical
Assistance Agreement (FTAA) or conversion of their MPSA applications to FTAA, the matter for its rejection or
approval is left for determination by the Secretary of the DENR and the President of the Republic of the
Philippines.
In a Resolution, the CA denied the Motion for Reconsideration filed by petitioners.
After a careful review of the records, the CA found that there was doubt as to the nationality of petitioners when
it realized that petitioners had a common major investor, MBMI, a corporation composed of 100% Canadians.
Pursuant to the first sentence of paragraph 7 of Department of Justice (DOJ) Opinion No. 020, Series of 2005,
adopting the 1967 SEC Rules which implemented the requirement of the Constitution and other laws
pertaining to the exploitation of natural resources, the CA used the “grandfather rule” to determine the
nationality of petitioners. It provided:
Shares belonging to corporations or partnerships at least 60% of the capital of which is owned
by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of
Filipino ownership in the corporation or partnership is less than 60%, only the number of
shares corresponding to such percentage shall be counted as of Philippine nationality .
Thus, if 100,000 shares are registered in the name of a corporation or partnership at least
60% of the capital stock or capital, respectively, of which belong to Filipino citizens, all of the
shares shall be recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital
stock or capital of the corporation or partnership, respectively, belongs to Filipino citizens,
only 50,000 shares shall be recorded as belonging to aliens.
In determining the nationality of petitioners, the CA looked into their corporate structures and their
corresponding common shareholders. Using the grandfather rule, the CA discovered that MBMI in effect
owned majority of the common stocks of the petitioners as well as at least 60% equity interest of other
majority shareholders of petitioners through joint venture agreements. The CA found that through a “web of
corporate layering, it is clear that one common controlling investor in all mining corporations involved x x x
is MBMI.” Thus, it concluded that petitioners McArthur, Tesoro and Narra are also in partnership with, or privies-
in-interest of, MBMI.
Finally, the CA upheld the findings of the POA in its December 14, 2007 Resolution which considered petitioners
McArthur, Tesoro and Narra as foreign corporations. Nevertheless, the CA determined that the POA’s
UE-0200673-2023
declaration that the MPSAs of McArthur, Tesoro and Narra are void is highly improper.
While the petition was pending with the CA, Redmont filed with the Office of the President (OP) a petition dated
May 7, 2010 seeking the cancellation of petitioners’ FTAAs. The OP rendered a Decision on April 6, 2011,
wherein it canceled and revoked petitioners’ FTAAs for violating and circumventing the “Constitution x x x[,]
the Small Scale Mining Law and Environmental Compliance Certificate as well as Sections 3 and 8 of the
Foreign Investment Act and E.O. 584.” The OP, in affirming the cancellation of the issued FTAAs, agreed with
Redmont stating that petitioners committed violations against the abovementioned laws and failed to submit
evidence to negate them. The Decision further quoted the December 14, 2007 Order of the POA focusing on the
alleged misrepresentation and claims made by petitioners of being domestic or Filipino corporations and the
admitted continued mining operation of PMDC using their locally secured Small Scale Mining Permit inside the
area earlier applied for an MPSA application which was eventually transferred to Narra. It also agreed with the
POA’s estimation that the filing of the FTAA applications by petitioners is a clear admission that they are “not
capable of conducting a large scale mining operation and that they need the financial and technical assistance of
a foreign entity in their operation, that is why they sought the participation of MBMI Resources, Inc.” The
Decision further quoted:
The filing of the FTAA application on June 15, 2007, during the pendency of the case only
demonstrate the violations and lack of qualification of the respondent corporations to engage
in mining. The filing of the FTAA application conversion which is allowed foreign corporation
of the earlier MPSA is an admission that indeed the respondent is not Filipino but rather of
foreign nationality who is disqualified under the laws. Corporate documents of MBMI
Resources, Inc. furnished its stockholders in their head office in Canada suggest that they are
conducting operation only through their local counterparts.
The Motion for Reconsideration of the Decision was further denied by the OP in a Resolution dated July 6, 2011.
Petitioners then filed a Petition for Review on Certiorari of the OP’s Decision and Resolution with the CA. In the
CA Decision dated February 29, 2012, the CA affirmed the Decision and Resolution of the OP. Thereafter,
petitioners appealed the same CA decision to this Court which is now pending with a different division.
ISSUE:
Whether or not the petitioners are Filipino or foreign.
RULING:
Basically, there are two acknowledged tests in determining the nationality of a corporation: the control test and
the grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which
implemented the requirement of the Constitution and other laws pertaining to the controlling interests in
enterprises engaged in the exploitation of natural resources owned by Filipino citizens, provides:
Shares belonging to corporations or partnerships at least 60% of the capital of which is owned
by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of
Filipino ownership in the corporation or partnership is less than 60%, only the number of
shares corresponding to such percentage shall be counted as of Philippine nationality. Thus,
if 100,000 shares are registered in the name of a corporation or partnership at least 60% of
the capital stock or capital, respectively, of which belong to Filipino citizens, all of the shares
shall be recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital stock
or capital of the corporation or partnership, respectively, belongs to Filipino citizens, only
50,000 shares shall be counted as owned by Filipinos and the other 50,000 shall be recorded
as belonging to aliens.
The first part of paragraph 7, DOJ Opinion No. 020, stating “shares belonging to corporations or partnerships at
least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality,”
pertains to the control test or the liberal rule. On the other hand, the second part of the DOJ Opinion which
provides, “if the percentage of the Filipino ownership in the corporation or partnership is less than 60%, only the
number of shares corresponding to such percentage shall be counted as Philippine nationality,” pertains to the
stricter, more stringent grandfather rule.
Prior to this recent change of events, petitioners were constant in advocating the application of the “control
test” under RA 7042, as amended by RA 8179, otherwise known as the Foreign Investments Act (FIA), rather than
using the stricter grandfather rule. The pertinent provision under Sec. 3 of the FIA provides:
SECTION 3. Definitions. - As used in this Act:
a.) The term Philippine national shall mean a citizen of the Philippines; or a domestic partnership or association
wholly owned by the citizens of the Philippines; a corporation organized under the laws of the Philippines of
which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is wholly owned by
Filipinos or a trustee of funds for pension or other employee retirement or separation benefits, where the
trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That were a corporation and its non-Filipino stockholders own stocks in a Securities and
Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock outstanding
and entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and at
least sixty percent (60%) of the members of the Board of Directors, in order that the corporation shall be
considered a Philippine national.
The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case since the definition of a
“Philippine National” under Sec. 3 of the FIA does not provide for it. They further claim that the grandfather rule
“has been abandoned and is no longer the applicable rule.” They also opined that the last portion of Sec. 3 of the
FIA admits the application of a “corporate layering” scheme of corporations. Petitioners claim that the clear and
unambiguous wordings of the statute preclude the court from construing it and prevent the court’s use of
discretion in applying the law. They said that the plain, literal meaning of the statute meant the application of
the control test is obligatory.
We disagree. “Corporate layering” is admittedly allowed by the FIA; but if it is used to circumvent the
Constitution and pertinent laws, then it becomes illegal. Further, the pronouncement of petitioners that the
grandfather rule has already been abandoned must be discredited for lack of basis.
Art. XII, Sec. 2 of the Constitution provides:
Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other mineral
oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and
other natural resources are owned by the State. With the exception of agricultural lands, all
other natural resources shall not be alienated. The exploration, development, and utilization
of natural resources shall be under the full control and supervision of the State. The State
may directly undertake such activities, or it may enter into co-production, joint venture or
production-sharing agreements with Filipino citizens, or corporations or associations at
least sixty per centum of whose capital is owned by such citizens. Such agreements may be
for a period not exceeding twenty-five years, renewable for not more than twenty-five years,
and under such terms and conditions as may be provided by law.
x x x x
The President may enter into agreements with Foreign-owned corporations involving either
technical or financial assistance for large-scale exploration, development, and utilization of
minerals, petroleum, and other mineral oils according to the general terms and conditions
provided by law, based on real contributions to the economic growth and general welfare of
UE-0200673-2023
the country. In such agreements, the State shall promote the development and use of local
scientific and technical resources.
The emphasized portion of Sec. 2 which focuses on the State entering into different types of agreements for the
exploration, development, and utilization of natural resources with entities who are deemed Filipino due to 60
percent ownership of capital is pertinent to this case, since the issues are centered on the utilization of our
country’s natural resources or specifically, mining. Thus, there is a need to ascertain the nationality of
petitioners since, as the Constitution so provides, such agreements are only allowed corporations or associations
“at least 60 percent of such capital is owned by such citizens.” The deliberations in the Records of the 1986
Constitutional Commission shed light on how a citizenship of a corporation will be determined.
It is apparent that it is the intention of the framers of the Constitution to apply the grandfather rule in cases
where corporate layering is present. Elementary in statutory construction is when there is conflict between the
Constitution and a statute, the Constitution will prevail. In this instance, specifically pertaining to the provisions
under Art. XII of the Constitution on National Economy and Patrimony, Sec. 3 of the FIA will have no place of
application. As decreed by the honorable framers of our Constitution, the grandfather rule prevails and must
be applied.
Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:
The above-quoted SEC Rules provide for the manner of calculating the Filipino interest in a
corporation for purposes, among others, of determining compliance with nationality
requirements (the ‘Investee Corporation’). Such manner of computation is necessary since
the shares in the Investee Corporation may be owned both by individual stockholders
(‘Investing Individuals’) and by corporations and partnerships (‘Investing Corporation’). The
said rules thus provide for the determination of nationality depending on the ownership of
the Investee Corporation and, in certain instances, the Investing Corporation.
Under the above-quoted SEC Rules, there are two cases in determining the nationality of the
Investee Corporation. The first case is the ‘liberal rule’, later coined by the SEC as the Control
Test in its 30 May 1990 Opinion, and pertains to the portion in said Paragraph 7 of the 1967
SEC Rules which states, ‘(s)hares belonging to corporations or partnerships at least 60% of the
capital of which is owned by Filipino citizens shall be considered as of Philippine nationality.’
Under the liberal Control Test, there is no need to further trace the ownership of the 60% (or
more) Filipino stockholdings of the Investing Corporation since a corporation which is at least
60% Filipino-owned is considered as Filipino.
The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion
in said Paragraph 7 of the 1967 SEC Rules which states, “but if the percentage of Filipino
ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality.” Under the
Strict Rule or Grandfather Rule Proper, the combined totals in the Investing Corporation
and the Investee Corporation must be traced (i.e., “grandfathered”) to determine the total
percentage of Filipino ownership.
Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of
the Investing Corporation and added to the shares directly owned in the Investee Corporation
x x x.
x x x x
In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the
 second part of the SEC Rule applies only when the 60-40 Filipino-foreign equity ownership is
in doubt (i.e., in cases where the joint venture corporation with Filipino and foreign Interestingly, looking at the corporate structure of MMC, we take note that it has a similar structure and
stockholders with less than 60% Filipino stockholdings [or 59%] invests in other joint venture composition as McArthur. In fact, it would seem that MBMI is also a major investor and “controls” MBMI and
corporation which is either 60-40% Filipino-alien or the 59% less Filipino). Stated differently, also, similar nominal shareholders were present, i.e. Fernando B. Esguerra (Esguerra), Lauro L. Salazar (Salazar),
where the 60-40 Filipino-foreign equity ownership is not in doubt, the Grandfather Rule will Michael T. Mason (Mason) and Kenneth Cawkell (Cawkell):
not apply.
Madridejos Mining Corporation
After a scrutiny of the evidence extant on record, the Court finds that this case calls for the application of the
grandfather rule since, as ruled by the POA and affirmed by the OP, doubt prevails and persists in the corporate Number of Amount
ownership of petitioners. Also, as found by the CA, doubt is present in the 60-40 Filipino equity ownership of Name Nationality Amount Paid
Shares Subscribed
petitioners Narra, McArthur and Tesoro, since their common investor, the 100% Canadian corporation––MBMI,
funded them. However, petitioners also claim that there is “doubt” only when the stockholdings of Filipinos are Olympic Mines &
Filipino 6,663 PhP 6,663,000.00 PhP 0
less than 60%.[43] Development Corp.
MBMI Resources, Inc. Canadian 3,331 PhP 3,331,000.00 PhP 2,803,900.00
The assertion of petitioners that “doubt” only exists when the stockholdings are less than 60% fails to convince Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00
this Court. DOJ Opinion No. 20, which petitioners quoted in their petition, only made an example of an instance
where “doubt” as to the ownership of the corporation exists. It would be ludicrous to limit the application of the Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00
said word only to the instances where the stockholdings of non-Filipino stockholders are more than 40% of the Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
total stockholdings in a corporation. The corporations interested in circumventing our laws would clearly strive
Emmanuel G. Hernando Filipino 1 PhP 1,000.00 PhP 1,000.00
to have “60% Filipino Ownership” at face value. It would be senseless for these applying corporations to state in
their respective articles of incorporation that they have less than 60% Filipino stockholders since the applications Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
will be denied instantly. Thus, various corporate schemes and layerings are utilized to circumvent the Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
application of the Constitution.
Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00
Obviously, the instant case presents a situation which exhibits a scheme employed by stockholders to
circumvent the law, creating a cloud of doubt in the Court’s mind. To determine, therefore, the actual Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay any amount with respect to the
participation, direct or indirect, of MBMI, the grandfather rule must be used. number of shares they subscribed to in the corporation, which is quite absurd since Olympic is the major
stockholder in MMC. MBMI’s 2006 Annual Report sheds light on why Olympic failed to pay any amount with
McArthur Mining, Inc. respect to the number of shares it subscribed to. It states that Olympic entered into joint venture agreements
with several Philippine companies, wherein it holds directly and indirectly a 60% effective equity interest in the
To establish the actual ownership, interest or participation of MBMI in each of petitioners’ corporate structure, Olympic Properties. Quoting the said Annual report:
they have to be “grandfathered.”
On September 9, 2004, the Company and Olympic Mines & Development Corporation
As previously discussed, McArthur acquired its MPSA application from MMC, which acquired its application from (“Olympic”) entered into a series of agreements including a Property Purchase and
SMMI. McArthur has a capital stock of ten million pesos (PhP 10,000,000) divided into 10,000 common shares at Development Agreement (the Transaction Documents) with respect to three nickel laterite
one thousand pesos (PhP 1,000) per share, subscribed to by the following: properties in Palawan, Philippines (the “Olympic Properties”). The Transaction Documents
effectively establish a joint venture between the Company and Olympic for purposes of
developing the Olympic Properties. The Company holds directly and indirectly an initial
Number of Amount
Name Nationality Amount Paid 60% interest in the joint venture. Under certain circumstances and upon achieving certain
Shares Subscribed
milestones, the Company may earn up to a 100% interest, subject to a 2.5% net revenue
Madridejos Mining royalty.
Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00
Corporation
MBMI Resources, Inc. Canadian 3,998 PhP 3,998,000.00 PhP 1,878,174.60 Thus, as demonstrated in this first corporation, McArthur, when it is “grandfathered,” company layering was
utilized by MBMI to gain control over McArthur. It is apparent that MBMI has more than 60% or more equity
Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
interest in McArthur, making the latter a foreign corporation
Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
Tesoro Mining and Development, Inc.
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00 Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten million pesos (PhP
Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60 10,000,000) divided into ten thousand (10,000) common shares at PhP 1,000 per share, as demonstrated below:

UE-0200673-2023
 Number of Amount Narra Nickel Mining and Development Corporation
Name Nationality Amount Paid
Shares Subscribed
Moving on to the last petitioner, Narra, which is the transferee and assignee of PLMDC’s MPSA application,
Sara Marie Mining, Inc. Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00 whose corporate structure’s arrangement is similar to that of the first two petitioners discussed. The capital
MBMI Resources, Inc. Canadian 3,998 PhP 3,998,000.00 PhP 1,878,174.60 stock of Narra is ten million pesos (PhP 10,000,000), which is divided into ten thousand common shares (10,000)
Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00 at one thousand pesos (PhP 1,000) per share, shown as follows:

Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00

Number of Amount
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00 Name Nationality Amount Paid
Shares Subscribed
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00 Patricia Louise Mining &
Filipino 5,997 PhP 5,997,000.00 PhP 1,677,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00 Development Corp.
Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60 MBMI Resources, Inc. Canadian 3,998 PhP 3,996,000.00 PhP 1,116,000.00
Higinio C. Mendoza, Jr. Filipino 1 PhP 1,000.00 PhP 1,000.00
Except for the name “Sara Marie Mining, Inc.,” the table above shows exactly the same figures as the corporate Henry E. Fernandez Filipino 1 PhP 1,000.00 PhP 1,000.00
structure of petitioner McArthur, down to the last centavo. All the other shareholders are the same: MBMI,
Salazar, Esguerra, Agcaoili, Mason and Cawkell. The figures under “Nationality,” “Number of Shares,” “Amount Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
Subscribed,” and “Amount Paid” are exactly the same. Delving deeper, we scrutinize SMMI’s corporate Ma. Elena A. Bocalan Filipino 1 PhP 1,000.00 PhP 1,000.00
structure: Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00
Sara Marie Mining, Inc. Robert L. McCurdy American 1 PhP 1,000.00 PhP 1,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Number of Amount Total 10,000 PhP 10,000,000.00 PhP 2,800,000.00
Name Nationality Amount Paid
Shares Subscribed
Olympic Mines & Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and Esguerra, is present in this
Filipino 6,663 PhP 6,663,000.00 PhP 0
Development Corp. corporate structure.
MBMI Resources, Inc. Canadian 3,331 PhP 3,331,000.00 PhP 2,803,900.00
Patricia Louise Mining & Development Corporation
Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00 Using the grandfather method, we further look and examine PLMDC’s corporate structure:
Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00 Number of Amount
Name Nationality Amount Paid
Shares Subscribed
Emmanuel G. Hernando Filipino 1 PhP 1,000.00 PhP 1,000.00
Palawan Alpha
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
South Resources Filipino 6,596 PhP 6,596,000.00 PhP 0
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00 Development Corporation
Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00 MBMI Resources, Inc. Canadian 3,396 PhP 3,396,000.00 PhP 2,796,000.00
Higinio C. Mendoza, Jr. Filipino 1 PhP 1,000.00 PhP 1,000.00
After subsequently studying SMMI’s corporate structure, it is not farfetched for us to spot the glaring similarity
between SMMI and MMC’s corporate structure. Again, the presence of identical stockholders, namely: Olympic, Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00
MBMI, Amanti Limson (Limson), Esguerra, Salazar, Hernando, Mason and Cawkell. The figures under the Henry E. Fernandez Filipino 1 PhP 1,000.00 PhP 1,000.00
headings “Nationality,” “Number of Shares,” “Amount Subscribed,” and “Amount Paid” are exactly the same Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
except for the amount paid by MBMI which now reflects the amount of two million seven hundred ninety four
thousand pesos (PhP 2,794,000). Oddly, the total value of the amount paid is two million eight hundred nine Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
thousand nine hundred pesos (PhP 2,809,900). Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Accordingly, after “grandfathering” petitioner Tesoro and factoring in Olympic’s participation in SMMI’s
corporate structure, it is clear that MBMI is in control of Tesoro and owns 60% or more equity interest in Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Tesoro. This makes petitioner Tesoro a non-Filipino corporation and, thus, disqualifies it to participate in the Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60
exploitation, utilization and development of our natural resources.

UE-0200673-2023
Yet again, the usual players in petitioners’ corporate structures are present. Similarly, the amount of money
paid by the 2nd tier majority stock holder, in this case, Palawan Alpha South Resources and Development Corp.
(PASRDC), is zero.

Studying MBMI’s Summary of Significant Accounting Policies dated October 31, 2005 explains the reason behind
the intricate corporate layering that MBMI immersed itself in:

JOINT VENTURES The Company’s ownership interests in various mining ventures engaged in
the acquisition, exploration and development of mineral properties in the
Philippines is described as follows:

(a) Olympic Group

The Philippine companies holding the Olympic Property, and the ownership and interests therein, are as follows:
Olympic- Philippines (the “Olympic Group”)
Sara Marie Mining Properties Ltd. (“Sara Marie”) 33.3%
Tesoro Mining & Development, Inc. (Tesoro) 60.0%

Pursuant to the Olympic joint venture agreement the Company holds directly and indirectly an effective equity
interest in the Olympic Property of 60.0%. Pursuant to a shareholders’ agreement, the Company exercises joint
control over the companies in the Olympic Group.

(b) Alpha Group

The Philippine companies holding the Alpha Property, and the ownership interests therein, are as follows:
Alpha- Philippines (the “Alpha Group”)
Patricia Louise Mining Development Inc. (“Patricia”) 34.0%
Narra Nickel Mining & Development Corporation (Narra) 60.4%

Under a joint venture agreement the Company holds directly and indirectly an effective equity interest in the
Alpha Property of 60.4%. Pursuant to a shareholders’ agreement, the Company exercises joint control over
the companies in the Alpha Group.

Concluding from the above-stated facts, it is quite safe to say that petitioners McArthur, Tesoro and Narra are
not Filipino since MBMI, a 100% Canadian corporation, owns 60% or more of their equity interests. Such
conclusion is derived from grandfathering petitioners’ corporate owners, namely: MMI, SMMI and PLMDC.
Going further and adding to the picture, MBMI’s Summary of Significant Accounting Policies statement––
regarding the “joint venture” agreements that it entered into with the “Olympic” and “Alpha” groups––involves
SMMI, Tesoro, PLMDC and Narra. Noticeably, the ownership of the “layered” corporations boils down to MBMI,
Olympic or corporations under the “Alpha” group wherein MBMI has joint venture agreements with, practically
exercising majority control over the corporations mentioned. In effect, whether looking at the capital structure
or the underlying relationships between and among the corporations, petitioners are NOT Filipino nationals and
must be considered foreign since 60% or more of their capital stocks or equity interests are owned by MBMI.

UE-0200673-2023

SEPARATE PERSONALITY / PIERCING THE VEIL
TEAM PACIFIC CORPORATION, FEDERICO M. FERNANDEZ, AND AURORA Q. GARCIA, PETITIONERS, VS. LAYLA M.
PARENTE, G.R. No. 206789. July 15, 2020.
LEONEN, J.:
FACTS:
Team Pacific hired Parente as a production operator in its Hermetic Department. Later, Parente was promoted
to being a quality assurance calibration technician.
On April 23, 2009, Parente filed for and commenced her 60-day maternity leave, which would end on June 21,
2009. She gave birth on April 27, 2009.
On May 8, 2009, while on her maternity leave, Parente was asked to see Team Pacific's human resource and
administrative manager, Aurora Q. Garcia (Garcia). Parente protested, saying that she was still on maternity
leave and experiencing post-natal weakness, dizziness, and shakiness. However, when she was told that there
were reports circulating within the plant that she would be terminated from employment, Parente acceded.
During their meeting on May 21, 2009, Garcia handed Parente a letter and informed her of her dismissal,
effective on June 22, 2009, the day after the end of her maternity leave. She was told that she would receive
her separation pay on the same date. Parente was about to ask why she was being dismissed, but Garcia
interrupted her and asked her to just affix her name and signature on the space provided in the letter.
The Termination Letter dated May 21, 2009 states:
There has been a 30% reduction in business volume resulting to substantial losses which
cannot be allowed to continue as it threatens the organization's survival.
To minimize continuing losses and to ensure survival of the company, management has no
alternative but to implement a retrenchment program. As such, Management, in accordance
with the 30-day notice required by law, is constrained to advise that your services will be
terminated effective close of business hours of June 22, 2009.
Parente then went to the Department of Labor and Employment, where she was advised to first accept her
separation pay before filing a complaint. Thus, on June 8, 2009, after she had been required to process her
clearance and sign several documents, Parente received her separation pay.
On July 9, 2009, Parente lodged her Complaint for illegal dismissal.
A copy of the Complaint and summons were served on Team Pacific, Garcia, and the company
president, Federico M. Fernandez (Fernandez). These were returned to the Labor Arbitration Office with the
notation "Refused to Receive."
Thus, a Notice of Hearing was sent to Team Pacific, Fernandez, and Garcia, informing them of the conference on
September 8, 2009. None of them attended the hearing. The Labor Arbiter noted further that they did not even
verify the charges against them and tried to hold the Labor Arbitration Office accountable for their failure to
attend. Thus, the Labor Arbiter rendered a decision only based on Parente's evidence.
In a January 29, 2010 Decision, the Labor Arbiter dismissed Parente's Complaint. It found her dismissal
valid, noting that the Termination Letter clearly stated that the retrenchment was to prevent losses amid the
global economic crisis, which had led to establishment closures and layoffs.
UE-0200673-2023
The Labor Arbiter ruled that Team Pacific complied with the Labor Code's requirements for retrenchment, as
there was no showing of bad faith or malice, and Parente was duly notified one month prior to the date of her
dismissal. Parente was also held to be bound by the clearance certificate she signed and the separation pay she
received, which was more than the amount required under the Labor Code.
In its May 28, 2010 Resolution, the National Labor Relations Commission affirmed the Labor Arbiter's Decision.
It found that Parente's documents contradicted her claim of illegal dismissal. It ruled that Parente's acts of
receiving the notice of termination, processing her clearance, accepting her separation pay, and receiving her
employment certificate were conclusive on her. It ruled that Parente had been estopped from suing Team
Pacific, which believed that she voluntarily accepted her dismissal.
On July 30, 2010, the National Labor Relations Commission also denied Parente's Motion for Reconsideration.
Thus, Parente filed a Petition for Certiorari before the Court of Appeals.
In its October 30, 2012 Decision, the Court of Appeals reversed the ruling of the National Labor Relations
Commission. It held that Parente was illegally dismissed.
The Court of Appeals noted that Team Pacific did not submit to the Labor Arbiter's jurisdiction when it refused to
receive summons and file its position paper and other documents. Thus, no evidence was found to support
Team Pacific's claim of business losses to justify the dismissal.
Moreover, the Court of Appeals held that Parente was not estopped from questioning her dismissal just because
she accepted her separation pay. It ruled that waivers and quitclaims are frowned upon, especially as to
employees who may have been pressured by employers seeking to evade legal responsibilities. It also noted how
Parente was in no position to resist the money offered as she had just given birth, as well as the Department of
Labor and Employment's advice that she accept her separation pay before filing a complaint. It found that by
proceeding with the illegal dismissal case, Parente showed that she did not sleep on her rights. The Court of
Appeals disposed that the Resolution dated May 28, 2010 issued by the National Labor Relations Commission as
well as the Decision dated January 29, 2010 rendered by the Labor Arbiter are hereby REVERSED and SET ASIDE.
In lieu thereof, a judgment adjudging private respondents liable for illegally dismissing Layla M. Parente as
follows:
1. Ordering private respondents to REINSTATE Parente to her former position without loss of seniority
rights and other privileges; and
2. Holding private respondents JOINTLY and SEVERALLY liable to PAY Parente full backwages,
inclusive of allowances, and other benefits or their monetary equivalent to be computed and
determined by the Labor Arbiter from the time her compensation was withheld from her up to the
time of her actual reinstatement.
Team Pacific, Fernandez, and Garcia moved for reconsideration, but the Court of Appeals denied this in its
March 27, 2013 Resolution. Thus, they filed this Petition against Parente.
ISSUE:
Whether or not petitioners Garcia and Fernando should be solidarity liable with petitioner Team Pacific.
RULING:
The petitioners Garcia and Fernandez should not be solidarily liable with petitioner Team Pacific Corporation.
In case of dismissals, directors and officers of corporations may only be held solidarily liable with the
corporation if they acted in bad faith or with malice. In Mandaue Dinghow Dimsum House, Co., Inc. v. National
Labor Relations Commission:
 It must be emphasized that a corporation is invested by law with a personality separate and
distinct from those of the persons composing it as well as from that of any other legal entity
to which it may be related. Because of this, the doctrine of piercing the veil of corporate
fiction must be exercised with caution.

In Malayang Samahan ng mga Manggagawa sa M. Greenfield v. Ramos, this Court reiterated the rule that
corporate directors and officers are solidarily liable with the corporation for the termination of employees done
with malice or bad faith. It has been held that bad faith does not connote bad judgment or negligence; it imports
a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty
through some motive or interest or ill will; it partakes of the nature of fraud.
In MAM Realty Development Corporation v. National Labor Relations Commission:
A corporation, being a juridical entity, may act only through its directors, officers and
employees. Obligations incurred by them, acting as such corporate agents, are not theirs but
the direct accountabilities of the corporation they represent. True, solidary liabilities may at
times be incurred but only when exceptional circumstances warrant such as, generally, in the
following cases:

1. When directors and trustees or, in appropriate cases, the officers of a corporation —
(a) vote for or assent to patently unlawful acts of the corporation;
(b) act in bad faith or with gross negligence in directing the corporate affairs;
(c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders
or members, and other persons.

2. When a director or officer has consented to the issuance of watered stock or who,
having knowledge thereof, did not forthwith file with the corporate secretary his written
objection thereto.
3. When the director, trustee or officer has contractually agreed or stipulated to hold
himself personally and solidarity liable with the Corporation.
4. When a director, trustee or officer is made, by specific provision of law, personally liable
for his corporate action.

In labor cases, for instance, the Court has held corporate directors and officers solidarily liable with the
corporation for the termination of employment of employees done with malice or in bad faith.

Here, respondent's dismissal was not shown to have been done in bad faith or with malice. The documents
submitted by petitioners reveal that the company may have indeed been suffering business losses. The Regional
Trial Court has even granted its Petition for Corporate Rehabilitation.

While petitioners failed to show that they applied fair and reasonable criteria in selecting the employees to be
entrenched, it does not mean that the dismissals were automatically done in bad faith or with malice. They may
have simply failed to strictly comply or to sufficiently prove compliance with the stringent rules for a valid
retrenchment. As such, bad faith or malice must still be proved.

Respondent failed to present clear and convincing evidence that petitioners Garcia or Fernandez acted in bad
faith or with malice. They did not breach any duty or were motivated by ill will. Absent proof, the corporation's
separate and distinct personality must be respected.

UE-0200673-2023
 MARIA LEA JANE I. GESOLGON AND MARIE STEPHANIE N. SANTOS, VS. CYBERONE PH., INC., MACIEJ MIKRUT, CyberOne AU was shown to have previously paid petitioners' salaries for services actually rendered including
AND BENJAMIN JUSON, G.R. No.210741. October 14, 2020 allowance and phone CSR allowance as per the terms of employment and pay slips presented by petitioners.

HERNANDO, J.: The NLRC also found that petitioners were illegally dismissed from service. It ratiocinated that due to
respondents' allegations that petitioners had not made enough progress on their leadership skills and failed to
FACTS: follow the directives of the management which resulted in the issuance of several warnings by CyberOne AU,
Gesolgon and Santos alleged that they were hired on March 3, 2008 and April 5, 2008, respectively, by Mikrut as they effectively admitted they indeed terminated or eventually dismissed petitioners, although on
part-time home-based remote Customer Service Representatives of CyberOne Pty. Ltd. (CyberOne AU), an unsubstantiated grounds as it turned out. Also, the NLRC held that respondents' claim that they received a
Australian company. Thereafter, they became full time and permanent employees of CyberOne AU and were number of complaints and non-compliance repmis from call center customers which prompted them to
eventually promoted as Supervisors. terminate petitioners' services but later on decided to give them furlough status, is additional proof that they
had indeed terminated petitioners.
Sometime in October 2009, Mikrut, the Chief Executive Officer (CEO) of both CyberOne AU and CyberOne PH,
asked petitioners, together with Juson, to become dummy directors and/or incorporators of CyberOne PH to The NLRC noted that the Furlough Notifications dated March 30, 2011 issued by CyberOne AU to petitioners
which petitioners agreed. As a result, petitioners were promoted as Managers and were given increases in their were, in fact, notices of dismissal. Petitioners were informed that respondent CyberOne AU was unable to
salaries. The salary increases were made to appear as paid for by CyberOne PH. provide them with work but that it may engage their services again in the future. The NLRC concluded that
petitioners were dismissed without valid cause and due process.
However, in the payroll for November 16 to 30, 2010, Mikrut reduced petitioners' salaries from P50,000.00 to
P36,000.00, of which P26,000.00 was paid by CyberOne AU while the remaining P10,000.00 was paid by Lastly, the NLRC noted that CyberOne AU is doing business in the Philippines due to its participation in the
CyberOne PH. Aside from the decrease in their salaries, petitioners were only given P20,000.00 each as management, supervision or control of CyberOne PH which is indicative of a continuity of commercial dealings
13th month pay for the year 2010. or arrangements. Thus, the doctrine of piercing the corporate veil must be applied as to it.

Sometime in March 2011, Mikrut made petitioners choose one from three options: (a) to take an indefinite The NLRC thus reversed and set aside the LA's March 30, 2012 Decision and ordered Respondents to reinstate
furlough and be placed in a manpower pool to be recalled in case there is an available position; (b) to stay with complainants to their previous or equivalent position without loss of seniority rights and privileges, and to
CyberOne AU but with an entry level position as home-based Customer Service Representative; or (c) to tender solidarily pay complainant.
their irrevocable resignation. Petitioners alleged that they were constrained to pick the first option in order to
save their jobs. In April 2011, petitioners received P13,000.00 each as their last salary. Respondents moved for reconsideration of the NLRC's November 26, 2012 Decision but this was denied by the
NLRC in its January 21, 2013 Resolution for lack of merit.
Hence, petitioners filed a case against respondents and CyberOne AU for illegal dismissal. They likewise
claimed for non-payment or underpayment of their salaries and 13 th month pay; moral and exemplary damages; In its assailed September 2, 2013 Decision, the appellate court reversed the findings of the NLRC and ruled that
and attorney's fees. no employer-employee relationship existed between petitioners, on one hand, and respondent CyberOne PH, on
the other hand.
On the other hand, CyberOne PH, Mikrut and Juson denied that any employer-employee relationship existed
between petitioners and CyberOne PH. They insisted that petitioners were incorporators or directors and not The appellate court also held that the NLRC misapplied the doctrine of piercing the corporate veil. It ruled that
regular employees of CyberOne PH. They claimed that petitioners were employees of CyberOne AU and that the although it was established that Mikrut and CyberOne AU owned majority of the shares of CyberOne PH, such
NLRC had no jurisdiction over CyberOne AU because it is a foreign corporation not doing business in the fact may not be a basis for disregarding the independent corporate status of CyberOne PH. Mere ownership by a
Philippines. single stocld1older or by another corporation of all or nearly all of the capital stock of a corporation is not in
In his March 30, 2012 Decision, the LA held that petitioners are not employees of CyberOne PH as the latter did itself sufficient reason for disregarding the fiction of separate corporate personalities. There was no evidence on
not exercise control over them. Also, since there was no evidence showing that CyberOne PH and CyberOne record to show that the polices, corporate finances, and business practices of CyberOne PH were completely
AU are one and the same entity, the presumption that they have personalities separate and distinct from one controlled by CyberOne AU. Also, no evidence was presented to show that CyberOne PH was organized and
another stands. The LA ruled that petitioners are merely shareholders or directors of CyberOne PH and not its controlled, and its affairs conducted, in a manner that made it merely an instrumentality, agency, conduit or
regular employees. adjunct of CyberOne AU or that it was established to defraud third persons, including herein petitioners. Hence,
the appellate court concluded that CyberOne AU and CyberOne PH are two distinct and separate entities.
Also, since CyberOne AU is a foreign corporation not doing business in the Philippines, then the LA has no
jurisdiction over it. Hence, petitioners' complaint had to be dismissed for lack of merit. Petitioners moved for reconsideration of the CA's September 2, 2013 Decision but it was consequently denied by
the appellate court in its January 10, 2014 Resolution.
In its November 26, 2012 Decision, the NLRC ruled that petitioners are employees of CyberOne AU and
CyberOne PH. The fact that petitioners are nominal shareholders of CyberOne PH does not preclude them from Hence, petitioners filed this Petition for Review on Certiorari under Rule 45.
being employees of CyberOne PH.
ISSUE:
Moreover, the NLRC noted that for January 2010 to April 2011, CyberOne PH paid petitioners their P20,000.00 Whether or not petitioners were employees of CyberOne PH and CyberOne AU.
monthly salary and P1,000.00 monthly allowance net of withholding tax and other mandatory government
deductions. Respondents did not present any proof of payment of director's fee to petitioners. Similarly RULING:
UE-0200673-2023
Notably, CyberOne AU is a foreign corporation organized and existing under the laws of Australia and is not
licensed to do business in the Philippines. CyberOne AU did not appoint and authorize respondents CyberOne
PH, a domestic corporation, and Mikrut, the Managing Director of CyberOne AU and a stockholder of CyberOne
PH, as its agents in the Philippines to act in its behalf. Also, it was not shown that CyberOne AU is doing business
in the Philippines.

While it is true that CyberOne AU owns majority of the shares of CyberOne PH, this, nonetheless, does not
warrant the conclusion that CyberOne PH is a mere conduit of CyberOne AU. The doctrine of piercing the
corporate veil applies only in three basic instances, namely:
(a) when the separate distinct corporate personality defeats public convenience, as when the corporate
fiction is used as a vehicle for the evasion of an existing obligation;
(b) in fraud cases, or when the corporate entity is used to justify a wrong, protect a fraud, or defend a
crime; or
(c) is used in alter ego cases, i.e., where a corporation is essentially a farce, since it is a mere alter ego or
business conduit of a person, or where the corporation is so organized and controlled and its affairs
conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation.

We find that the application of the doctrine of piercing the corporate veil is unwarranted in the present case.
 First, no evidence was presented to prove that CyberOne PH was organized for the purpose of
defeating public convenience or evading an existing obligation.
 Second, petitioners failed to allege any fraudulent acts committed by CyberOne PH in order to justify
a wrong, protect a fraud, or defend a crime.
 Lastly, the mere fact that CyberOne PH's major stockholders are CyberOne AU and respondent
Mikrut does not prove that CyberOne PH was organized and controlled and its affairs conducted in a
manner that made it merely an instrumentality, agency, conduit or adjunct of CyberOne AU.

In order to disregard the separate corporate personality of a corporation, the wrongdoing must be clearly and
convincingly established.

Moreover, petitioners failed to prove that CyberOne AU and Mikrut, acting as the Managing Director of both
corporations, had absolute control over CyberOne PH. Even granting that CyberOne AU and Mikrut exercised a
certain degree of control over the finances, policies and practices of CyberOne PH, such control does not
necessarily warrant piercing the veil of corporate fiction since there was not a single proof that CyberOne PH
was formed to defraud petitioners or that CyberOne PH was guilty of bad faith or fraud.

Hence, the doctrine of piercing the corporate veil cannot be applied in the instant case. This means that
CyberOne AU cannot be considered as doing business in the Philippines through its local subsidiary CyberOne
PH. This means as well that CyberOne AU is to be classified as a non-resident corporation not doing business in
the Philippines.

UE-0200673-2023
GENUINO AGRO-INDUSTRIAL DEVELOPMENT CORPORATION, VS. ARMANDO G. ROMANO, JAY A. CABRERA AND
MOISES V. SARMIENTO, G.R. No. 204782. September 18, 2019
REYES, J. JR., J.:
FACTS:
Respondents averred that sometime in September 2004, the workers were given a work schedule where one
worker was not made to report for work for 15 consecutive days while the six other workers report for work on
their regular schedules. In other words, each worker does not work for 15 days for a period of 90 days. When
Romano reported back to work on June 25, 2005 after his 15 days forced leave, he was told then and there
that his employment was already terminated. Sarmiento and Cabrera also suffered the same fate. They were
dismissed from work on July 10, 2005. Thus, on August 3, 2005, respondents filed a complaint for illegal dismissal
with prayer for separation pay against Genuino Ice and Vicar before the Department of Labor and Employment
(DOLE).
Genuino Ice, for its part, claimed that respondents charged the wrong party as they were never its employees
but of petitioner, its affiliate company. They were contractual employees of Vicar and L.C. Moreno which
deployed them to work at petitioner's ice plant at Turbina, Calamba City. Due to the continuous and
tremendous decline in the demand for ice products being produced by the petitioner, it shut down its block ice
production plant facilities. Its six workers were reduced to two. Among those affected were the respondents
who were relieved from their posts by Vicar and L.C Moreno.
By reason of Genuino Ice's contention that respondents charged the wrong party, they amended their complaint
by impleading the petitioner, including the relief of reinstatement, and asking for attorney's fees.
In his Decision dated December 29, 2006, the Labor Arbiter held that respondents were regular employees of
the petitioner since they were performing functions that were necessary and desirable to the operations of
the ice plant.
The Labor Arbiter disposed the case adjudging [petitioner] and [Vicar] jointly and severally liable to pay
[respondents] the amount of [P] 133,395.51 each as backwages, as of the date of this decision for a total amount
of [P]400,186.53. This is only partial payment, full satisfaction of which shall be reckoned to the date of the
actual reinstatement of [respondents].
On appeal before the NLRC, petitioner, in compliance with the reinstatement aspect of the Labor Arbiter's
Decision, the petitioner served upon the respondents a Notice of Compliance informing them that they could no
longer be reinstated to their former posts at its ice plant in Turbina, Calamba City, due to the closure of its block
ice production facilities. Thus, they were directed to report at petitioner's main office within five days from
receipt of the said notice of compliance for their reinstatement/placement at petitioner's other branches or
affiliate companies, particularly at its ice plant in Navotas. By virtue of the said directive, respondents reported
at petitioner's main office on March 6, 2007. However, they were simply made to wait the whole day and were
not given any job assignments. When respondents inquired on their work assignments on March 8 and 12, 2007,
they were told that there were still no available work assignments for them, prompting them to file a motion for
the issuance of a writ of partial execution ordering their reinstatement in the payroll effective March 6, 2007.
Petitioner opposed the motion for partial execution. It argued that it could not be forced to reinstate the
respondents whether in their previous positions or in the payroll because the department where they used to
work had already closed and there were no other equivalent positions available in petitioner's only branch in
Navotas.
In an Order dated July 5, 2007, the Labor Arbiter granted the motion and issued a writ of partial execution. Since
the writ of partial execution was returned unsatisfied, petitioner moved for the issuance of an alias writ of
UE-0200673-2023
partial execution reiterating their prayer to be reinstated in the payroll. After the petitioner filed its opposition to
the motion, the Labor Arbiter issued an Order on September 28, 2007 granting the issuance of an alias writ of
partial execution. Petitioner appealed the said September 28, 2007 Order and prayed that the same be lifted and
set aside pending resolution of the main case on appeal.
On November 29, 2007, the NLRC rendered its Decision finding that the Labor Arbiter did not err in holding the
petitioner and Vicar guilty of illegal dismissal, and ordering respondents' reinstatement with full backwages. The
NLRC held that they could not justify respondents' dismissal on the ground of retrenchment considering that
petitioner and Vicar totally disregarded the requirements laid down in Article 298 of the Labor Code and failed
to adduce documentary proof, like an audited financial statement, to substantiate their claim.
Not accepting defeat, petitioner moved for the reconsideration of the NLRC Decision. Petitioner stressed that as
it had explained in its Notice of Compliance, respondents could no longer be reinstated to their former positions
due to the closure of its block ice production facilities. There were also no equivalent positions available at its
other branch where the respondents may be placed. As such, petitioner reiterated that in view of the situation,
it could not be forced to reinstate the respondents to their former positions or even in the payroll. The closure
of its ice plants one after the other must be treated as a supervening event that warrants the modification of the
order of reinstatement with payment of full backwages, to the payment of separation pay.
Finding the motion for reconsideration filed by the petitioner to have raised no new matters of substance, the
NLRC denied the same in a Resolution dated February 26, 2008.
Undaunted, the petitioner sought recourse before the CA via a Petition for Certiorari alleging grave abuse of
discretion on the part of the NLRC in: (1) not finding that respondents were retrenched from employment and
that they are not entitled to reinstatement and backwages, but only to nominal damages; (2) not modifying the
Labor Arbiter's Decision which ordered respondents' reinstatement and payment of full backwages to the
payment of separation pay.
In the interim, or on September 26, 2011, the Labor Arbiter issued a Writ of Execution commanding the sheriff to
proceed to the premises of the petitioner and Vicar, and collect from them the amount of P1,392,579.93
representing respondents' backwages, inclusive of 13th month pay and service incentive leave pay, for the
period of July 10, 2005 to April 30, 2010, among others.
In a Decision dated May 31, 2012, the CA found no grave abuse of discretion on the part of the NLRC in deciding
the case as it did and denied the petition. It held that while retrenchment is one of the recognized authorized
causes for the dismissal of an employee, petitioner failed to discharge its burden of proving that respondents'
retrenchment was valid for the reason that petitioner not only failed to notify them and the DOLE of the
retrenchment, it also failed to prove that it was losing financially. Thus, respondents' dismissal was clearly illegal.
Petitioner cannot also claim that it is liable only for nominal damages considering that retrenchment was shown
not to be justified. The CA also found no reason to modify the award of reinstatement and full backwages for
failure of the petitioner to sufficiently prove that the department where respondents' used to work had indeed
closed, or that there were no other similar unfilled posts available at its other branch.
Its motion for reconsideration having been denied, petitioner is now before this Court via the present petition.
Respondents filed their Comment with Motion thereto, praying that Genuino Ice be declared solidarity liable
with the petitioner to pay respondents the monetary awards granted to them by the Labor Arbiter, to which
the petitioner has filed its Opposition. In a Resolution dated January 14, 2015, the Court required the parties to
submit their respective memoranda.
ISSUE:
Whether or not Genuino Ice shall be declared solidarity liable with the petitioner to pay respondents the
monetary awards granted to them by the Labor Arbiter.

RULING:
Genuino Ice should be held solidarity liable with petitioner Genuino Agro
It is an elementary and fundamental principle of corporation law that a corporation is an artificial being invested
by law with a personality separate and distinct from its stockholders and from other corporations to which it
may be connected. However, the corporate mask may be lifted and the corporate veil may be pierced when a
corporation is just but the alter ego of a person or of another corporation. Moreover, piercing the corporate veil
may also be resorted to by the courts or quasi-judicial bodies when "[the separate personality of a corporation]
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 statutes, or to confuse legitimate issues." Furthermore, the veil of corporate
fiction may also be pierced as when the same is made as a shield to confuse legitimate issues. As such,
in Zambrano v. Philippine Carpet Manufacturing Corporation, the Court held:
The doctrine of piercing the corporate veil applies in three (3) basic areas, namely:
(1) defeat of public convenience as when the corporate fiction is used as a vehicle for the
evasion of an existing obligation;
(2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or
defend a crime; or
(3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or
business conduit of a person, or where the corporation is so organized and controlled
and its affairs are so conducted as to make it merely an instrumentality, agency, conduit
or adjunct of another corporation.
Furthermore, once the veil of corporate fiction is pierced, the separate but related corporation becomes
solidarity liable in labor cases. Thus, the Court in Symex Security Services, Inc. v. Rivera, Jr., pronounced:
The common thread running among the aforementioned cases, however, is that the veil of
corporate fiction can be pierced, and responsible corporate directors and officers or even a
separate but related corporation, may be impleaded and held answerable solidarily in a labor
case, even after final judgment and on execution, so long as it is established that such persons
have deliberately used the corporate vehicle to unjustly evade the judgment obligation, or
have resorted to fraud, bad faith or malice in doing so. When the shield of a separate
corporate identity is used to commit wrongdoing and opprobriously elude responsibility, the
courts and the legal authorities in a labor case have not hesitated to step in and shatter the
said shield and deny the usual protections to the offending party, even after final judgment.
The key element is the presence of fraud, malice or bad faith. Bad faith, in this instance, does
not connote bad judgment or negligence but imparts a dishonest purpose or some moral
obliquity and conscious doing of wrong; it means breach of a known duty through some
motive or interest or ill will; it partakes of the nature of fraud.
Thus, for purposes of determining whether to pierce Genuino Ice's separate corporate personality and hold it
solidarily liable with the petitioner to pay the monetary claims due to the respondents, the following factual
circumstances have to be considered:
(1) Petitioner and its supposed affiliate Genuino Ice have the same address, sets of officers, and
representative to this suit.
(2) The Calamba City ice plant where respondents used to work appears to be owned and operated
by both the petitioner and Genuino Ice.
UE-0200673-2023
(3) Genuino Ice, after being sued for illegal dismissal before the Labor Arbiter, claimed that the
respondents were actually employees of its affiliate company, which is the petitioner.
(4) Genuino Ice, despite claiming that employer, manifested during the proceedings that it is willing
to re-hire the respondents.
(5) Respondents impleaded petitioner in the proceedings before the Labor Arbiter.
(6) Genuino Ice filed all the pleadings in the proceedings before the Labor Arbiter while the
petitioner stood idly by despite having been already impleaded by the respondents.
(7) The Labor Arbiter found the petitioner jointly liable with Vicar for illegally dismissing the
respondents.
(8) Petitioner, after the Labor Arbiter handed its verdict, filed the appeal before the NLRC with
Genuino Ice posting its appeal bond.
(9) Genuino Ice, by virtue of the surety bond it posted, acknowledged its obligation to pay the
monetary claims awarded to the respondents on account of the December 29, 2006 Decision of
the Labor Arbiter, should the same not be reversed on appeal, despite the fact that the one
adjudged liable therein was not Genuino Ice but the petitioner.
(10) Respondents tried to collect from the appeal bond that was posted by Genuino Ice (and which
the petitioner had previously assured was sufficient) but failed to do so due to the opposition of
Genuino Ice where it invoked its separate corporate personality.
(11) Petitioner insists before this Court that, since the Labor Arbiter's Decision adjudged it liable to
pay the respondents' monetary claims, its affiliate, Genuino Ice, cannot be declared as solidarily
liable to pay the same claims for lack of factual and legal basis.
A deep scrutiny of the aforementioned circumstances necessitates the application of the doctrine of piercing the
veil of corporate fiction. The circumstances indubitably establish that both Genuino Ice and the petitioner are
using their respective distinct corporate personalities in bad faith and to confuse legitimate issues in the hope
of evading its obligation to the respondents.
The aforementioned circumstances show that both Genuino Ice and the petitioner have taken turns in
representing each other's common cause and in pursuing remedies to protect its common interest in repelling
the respondents' monetary claims. Whenever a claim is directed against one of them, the other admits the
monetary liability so that the former may be shielded and vice versa. This was demonstrated, for example, when
Genuino Ice posted a bond for the appeal filed by the petitioner with the NLRC. In the said surety bond, Genuino
Ice acknowledged its obligation to satisfy the monetary awards granted to the respondents notwithstanding the
fact that it was not the one found liable for illegal dismissal, but the petitioner. Petitioner, for its part, assured
the respondents that the bond it posted was sufficient to answer for their monetary claims in the event that the
decision rendered in their favor becomes final and executory. However, despite their assurances, when the
respondents went for the appeal bond to satisfy their claims, Genuino Ice opposed the move and through
Carriaga, its manager and who also happened to be the personnel manager of the petitioner, argued that the
funds cannot be pursued for it belongs to Genuino Ice. Such evasive maneuver clearly demonstrates bad faith on
the part of the petitioner and Genuino Ice, and is clearly indicative of using the veil of corporate fiction to
unjustly elude the monetary obligation due to respondents as adjudged.
As observed, when an "affiliate company" takes the cudgels for another, it means that both have a common
interest. If indeed there was no commonality or intertwining of an interest in frustrating the respondents'
monetary claims, the petitioner and not Genuino Ice would have posted a bond for its own appeal. The Court
cannot allow its intelligence to be insulted by Genuino Ice's representation that it has a corporate personality
which is separate and distinct from the petitioner because both companies have pursued legal remedies and
measures for the benefit of each other, and made representations that clearly defrauded the respondents.
Hence, for purposes of this litigation and for the satisfaction of the respondents' monetary claims, both Genuino
Ice and the petitioner shall be treated as one and the same entity, and held liable solidarity for the same.

UE-0200673-2023
 EMILIO D. MONTILLA, JR., VS. G HOLDINGS, INC., G.R. No. 194995. November 18, 2021
LOPEZ, J., J.:
FACTS:
RTC of Kabankalan City, Branch 61, issued a Decision granting Emilio D. Montilla, Jr.'s Demanda for Complimiento
de Contrator, Rendecion de Cuentas con Daños y Perjuicios (Compliance for Contracts, Submission of Accounts
with Damages), and ordered San Remigio Mines Inc., Ricardo Genora, and Jesus Domingo to do certain acts, the
dispositive portion of which reads:
WHEREFORE, premises considered, judgement is hereby rendered as follows:
1. Declaring as rescinded the "1938 Contract" entered into by and between San Remigio and Real
Copper, on the one hand, and Don Emilio Montilla Sr., on the other hand, on 4 November 1938.
2. Ordering San Remigio and Real Copper and Marinduque to render an accounting of all payments
made by Marinduque in favor of San Remigio and Real Copper for the exploitation of the "Binulig",
"Manghal", "Negros", Cartagena", and "Cauayan" groups of claims.
3. Ordering San Remigio and Real Copper to deliver to plaintiff Emilio Montilla, Jr., by himself and in his
capacity as sole heir of his mother, Catalina Domingo, and legatee and administrator of the estate of
his father, Don Emilio Montilla, Sr., 30% of all the amount already received by San Remigio and Real
Copper from Marinduque, particularly in "Binulig 1, 2, 9, and 10", as well as 30% of the P50,000.00
already paid by Sipalay Mines in favor of San Remigio and Real Copper;
4. Ordering San Remigio and Real Copper to deliver to Emilio Montilla, Jr. the 30% of all amounts
received by them as well as future receipts of payments from Marinduque as regards the exploitation
of the "Lolong", "Herminia" and "Doming" claims which are within the "Binulig Group".
5. Ordering San Remigio, Real Copper and Marinduque to return in favor of plaintiff Emilio Montilla, Jr.,
all mining rights fraudulently acquired by San Remigio and Real Copper, mover the mining claims
"Binulig 1, 2, 9, and 10", "Lolong", "Luri", "Herminia" and "Doming", without prejudice to the 10% to
be delivered to Wenceslao Endencia, Jose Domingo and Mansuela Nala.
6. Declaring as null and void the contracts marked as Annexes "E", "G", and "H" of the Complaint of
Emilio Montilla, Jr., for having been fraudulently obtained from Jose Domingo and Mansuela Nala.
7. Declaring as null and void Annex "F" of the Complaint for being fraudulently obtained from
Wenceslao Endencia.
8. Declaring as null and void Annexes "A" and "J", executed by Ricardo Genora in favor of San Remigio.
9. Declaring as null and void Annexes "K", "L", and "M", executed by San Remigio, Real Copper, Sipalay
Mines and Marinduque to the extent that said contracts affect the 50 mining claims over the "Binulig
Group", particularly "Binulig 1, 2, 9, and 10" and "Loleng", "Luri", "Herminia", and "Doming".
10. Ordering Marinduque to cease and desist from further exploiting the claims and to return the
possession thereof to plaintiff Emilio Montilla, Jr.
11. Declaring as valid and subsisting the contract marked Annex "N" which refers to the "Cansibit" and
"Panlubongan" groups.
12. Ordering defendants San Remigio, Real Copper and Marinduque to render an accounting of all
payments by Marinduque in favor of San Remigio and Real Copper in relation to the exploitation of
the claims included in the "Cansibit" and "Panlubongan" groups of mining claims.
13. Ordering defendants San Remigio, Real Copper and Marinduque to pay directly to Emilio Montilla, Jr.
15% of all payments to be made by Marinduque in favor of San Remigio and Real Copper in relation
to the exploitation of the claims Cebu City, Bacolod City, Salvador, Palma, Yakal, Magdo, Ipil, Baolao,
Pili-pili, Alomic, Lucky, Souvenir Security and Courage, all within the "Cansibit" and "Panlubongan"
groups of mining claims.
14. Ordering Marinduque to pay royalty in favor of Emilio Montilla, Jr. for the exploitation and
development of all claims included in the "Cansibit" and "Panlubongan" groups, equivalent to 23% of
the gross of all gold molidbinum and other minerals which have already been extracted and which
may be extracted in the future from the said claims.
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15. Ordering defendants San Remigio and Real Copper to pay, jointly and severally, to plaintiffs a sum
equivalent to 10% of the whole amount already received and which may be received in the future
from Marinduque as moral and exemplary damages.
16. Ordering defendants to pay, jointly and severally, to plaintiffs 35% of the amounts already received
and which may be received in the future, for attorney's fees.
17. Ordering defendants to pay the expenses and costs of the suit.
The aforementioned Decision attained finality, which prompted Montilla, Jr. to move for its execution.
Accordingly, the RTC ordered the issuance of a writ of execution.
In a Sheriff's Report dated April 30, 2003, Sheriff Roberto O. Repique informed the court that Marinduque
Mining and Industrial Corporation (MMIC) had no more properties at Sipalay City, Negros Occidental, as the
properties found on site were already acquired by respondent "G" Holdings, Inc. (GHI) from Maricalum Mining
Corporation (Maricalum) pursuant to a foreclosure sale in December 2001.
On June 12, 2003, Montilla, Jr. moved for the issuance of an amended writ of execution, praying, among others,
for the court issue a writ to direct the court sheriff to take properties belonging to San Remigio Mines Inc. and its
assigns/successors, including, but not limited to, GHI, to satisfy the judgment provided in the April 12, 2002 RTC
Decision.
After due hearing on the motion, the RTC issued an Amended Order dated July 9, 2004, the pertinent portion of
which reads:
"G" Holdings, Inc. does not appear to be a privy of defendant Marinduque for the decision to
be enforced against the former. It got hold of the subject properties and mining claims under
a badge of regularity by way of foreclosure sale and mortgagee and highest bidder from
Maricalum Mining Corporation, an entity owned and controlled by the government organized
by PNP and DBP after the latter had earlier acquired said properties and mining claims as
mortgagees and highest bidders from defendant Maricalum in a foreclosure sale. "G"
Holdings, Inc. did not derive its rights and interest over said properties and mining claims
directly from defendant Maricalum nor was its immediate successor in interest. To enforce
the subject decision which is already final and executory against "G" Holdings, Inc. which is
not a party to the case and which was not heard would be in violation of due process of law. It
would also materially and substantially alter the decision which the Court is bereft of
jurisdiction to do. As held by the Supreme Court, any amendment made which substantially
affects the final and executory decision in the case is null and void for lack of jurisdiction,
including the entire proceedings held for that purpose. The liability of "G" Holdings, Inc.
should be ventilated in a separate and independent civil action.
Montilla, Jr. filed a Motion for Reconsideration but the same was denied in an Order dated November 8, 2004.
Aggrieved, Montilla, Jr. elevated the case to the CA by way of a petition for certiorari, which was denied in a
Decision dated July 30, 2010 based on the following:
GHI was not a party to the case where the assets of MMC are disputed; as a consequence, the
lower court cannot enforce its judgment against GHI. To enforce the subject decision which
has become final and executory against GHI, that is not a party to the case, and was not heard
thereon, would be a violation of due process of law. As the lower court succinctly put, such
amended writ of execution would materially and substantially alter the decision which the
court is bereft of jurisdiction.
The CA disregarded Montilla, Jr.'s assertion that GHI and the defunct MMIC are one and the same person as the
mere presence of interlocking directors is not by itself a ground to pierce the corporate fiction. The CA said that By way of background, the transfer of some of Maricalum's assets in favor of respondent was by virtue of a
the mortgage deed transaction made as a basis to pierce the corporate veil was a transaction that was a purchase service agreement (PSA) as part of an official measure to dispose the government's non-performing
derivative of the mortgages earlier constituted by GHI with Asset Privatization Trust (APT) in the name of MMIC, assets. Thereat, respondent bought 90% of Maricalum's mining shares and financial claims in the form of
in a full privatization process. The CA concluded that if there was any control exercised over MMIC, it was APT, company notes. In exchange, the PSA obliged respondent to pay APT a certain amount. Concomitantly,
not GHI, that wielded it. respondent also assumed Maricalum's liabilities in the form of promissory notes, which were secured by
mortgages over some of Maricalum's properties. These notes obliged Maricalum to pay respondent a stipulated
In the end, the CA reminded the parties of the finality of the issue of the validity of the mortgage and foreclosure amount. However, in July 2001, the properties of Maricalum, which had been mortgaged to secure the notes,
sale as well as the issue on the separate and distinct personalities of GHI and MMIC by citing Our ruling in the were extrajudicially foreclosed and eventually sold to respondent as the highest bidder. nSince then, respondent
case of "G" Holdings Inc. v. National Mines and Allied Workers Union. had been the controlling stockholder of Maricalum.

In time, Montilla, Jr. moved for reconsideration essentially arguing that GHI, as transferee of interest pendente Settled is the rule that where one corporation sells or otherwise transfers all its assets to another corporation
lite, is bound by the judgment rendered by the trial court against the transferor, regardless of whether GHI was for value, the latter is not, by that fact alone, liable for the debts and liabilities of the transferor.
substituted in the case or joined with the original party. He added that GHI had actual and constructive
knowledge of his claims, therefore, it is not an innocent purchaser or mortgagee in good faith. According to Here, when respondent purchased Maricalum's shares from the APT, it did so not for the purpose of continuing
Montilla, Jr., GHI, as a purchaser at public auction of a foreclosed property, acquired not only the right, title, Maricalum's existence/operations or evading liability to creditors, but for the purpose of investing in the mining
interest and claim of the judgment debtor or mortgagor to the property under the principle of caveat emptor, industry without having to directly engage in the management and operation of mining. As a holding company,
but also assumed the risks involved when it agreed to become a transferee pendente lite. He also insisted that respondent's acquisition of Maricalum's properties was merely to invest in the equity of another corporation for
GHI is a mere alter ego of Maricalum and therefore the veil of corporate fiction between GHI and Maricalum the purpose of earning from the latter's endeavors.[41] Hence, in the absence of clear and convincing evidence
must be pierced. that GHI committed fraud in taking over the assets of Maricalum, the former cannot be held automatically liable
for the satisfaction of claims against Maricalum.
In a Resolution. dated December 8, 2010, the CA denied Montilla, Jr.'s motion.
At this point, We deem it necessary to point out that the transfer of Maricalum's mining claims and properties
Undaunted, Montilla, Jr. went to this Court via a petition for review on certiorari. In seeking this Court's to GHI does not automatically shift the former's liabilities to the latter. To restate, where one corporation sells
discretionary appellate jurisdiction, petitioner reiterates his arguments below and additionally argues that or otherwise transfers all its assets to another corporation for value, the latter is not, by that fact alone, liable
respondent is a mere transferee pendente lite whose title is subject to the incidents and results of the pending for the debts and liabilities of the transferor.
case, and the transfer of title affords it no special protection. Briefly, petitioner recalls that the Development
Bank of the Philippines (DBP) and Philippine National Bank (PNB) acquired the mining claims from MMIC, one of Neither can We find for petitioner's argument that respondent is a mere alter ego of Maricalurn to support the
the original parties in Civil Case No. 142 (96-5488) when it foreclosed the latter's mortgage. In turn, DBP and PNB piercing of corporate veil between these two entities and ultimately enforce the judgment award against
incorporated Maricalum purposely to own, manage, and operate the foreclosed properties. Later on, respondent.
respondent acquired the mining claims from Maricalum. By its acquisition of Maricalum's mining rights,
respondent stepped into the shoes of its transferor which clearly binds it to the judgment against its The matter of separate corporate personality between respondent and Maricalum has already been resolved as
predecessor. early as the case of "G" Holdings, Inc. v. National Mines and Allied Workers Union where We explained that:

Petitioner emphasizes that even if respondent was not a party to the case, law and jurisprudence dictate that a [t]he mere interlocking of directors and officers does not warrant piercing the separate
transferee pendente lite is bound by the proceedings involved before the property was transferred to it, and corporate personalities of MMC and GHI. Not only must there be a showing that there was
respondent, as a transferee pendente lite, cannot evade its liability. majority or complete control, but complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked, so that the corporate entity as to this
ISSUE transaction had at the time no separate mind, will or existence of its own. The mortgage deed
Whether or not respondent GHI is a mere alter ego of Maricalurn. transaction attacked as a basis for piercing the corporate veil was a transaction that was an
offshoot, a derivative, of the mortgages earlier constituted in the Promissory Notes dated
RULING: October 2, 1992. But these Promissory Notes with mortgage were executed by GHI with APT
Petitioner, however, insists that respondent is a successor-in-interest of Maricalum. According to petitioner, in the name of MMC, in a full privatization process. It appears that if there was any control or
with respondents's purchase of Maricalum's mining claims and properties, the former has effectively acquired domination exercised over MMC, it was APT, not GHI, that wielded it.
not only the rights to the properties but likewise assumed the risks involved pursuant to the principle of caveat
emptor. The above-mentioned ruling was reinforced in the more recent case of Maricalum where We discussed the
parameters, guidelines and indicators for proper piercing of the corporate veil. Therein, We said:
In Maricalum Mining Corp. v. Florentino, We had the occasion to explain that the transfer of all assets of one
corporation to another does not make the transferee liable for the debts and liabilities of the transferor The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely:
except when there is an express or implied assumption of obligation, corporate merger or consolidation, (a) defeat of public convenience as when the corporate fiction is used as a vehicle for the
where the transfer is merely a continuation of the existence of the transferor, and fraud is employed to evasion of an existing obligation;
escape liability.
UE-0200673-2023
 (b) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or adequately establish that Maricalum Mining is an instrumentality of G Holdings.
defend a crime; or
(c) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or However, mere presence of control and full ownership of a parent over a subsidiary is not enough to pierce the
business conduit of a person, or where the corporation is so organized and controlled veil of corporate fiction. It has been reiterated by this Court time and again that mere ownership by a single
and its affairs are so conducted as to make it merely an instrumentality, agency, conduit stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself
or adjunct of another corporation. sufficient ground for disregarding the separate corporate personality.

A parent or holding company is a corporation which owns or is organized to own a substantial portion of Indeed, in the absence of proof necessary to puncture respondent's corporate cover, its separate corporate
another company's voting shares of stock enough to control or influence the latter's management, policies or personality must be respected.
affairs thru election of the latter's board of directors or otherwise. However, the term "holding company" is
customarily used interchangeably with the term "investment company" which, in turn, is defined by Section 4
(a) of Republic Act (R.A.) No. 2629 as "any issuer (corporation) which is or holds itself out as being engaged
primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities."

In other words, a "holding company" is organized and is basically conducting its business by investing
substantially in the equity securities of another company for the purposes of controlling their policies (as
opposed to directly engaging in operating activities) and "holding" them in a conglomerate or umbrella
structure along with other subsidiaries. Significantly, the holding company itself-being a separate entity-does
not own the assets of and does not answer for the liabilities of the subsidiary or affiliate. The management of
the subsidiary or affiliate still rests in the hands of its own board of directors and corporate officers. It is in
keeping with the basic rule a corporation is a juridical entity which is vested with a legal personality separate
and distinct from those acting for and in its behalf and, in general, from the people comprising it. The corporate
form was created to allow shareholders to invest without incurring personal liability for the acts of the
corporation.

While the veil of corporate fiction may be pierced under certain instances, mere ownership of a subsidiary does
not justify the imposition of liability on the parent company. It must further appear that to recognize a parent
and a subsidiary as separate entities would aid in the consummation of a wrong. Thus, a holding corporation
has a separate corporate existence and is to be treated as a separate entity; unless the facts show that such
separate corporate existence is a mere sham, or has been used as an instrument for concealing the truth.

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

1) Control - not mere stock control, but complete domination - not only of finances, but of policy and
business practice in respect to the transaction attacked, must have been such that the corporate
entity as to this transaction had at the time no separate mind, will or existence of its own;
2) Such control must have been used by the defendant to commit a fraud or a wrong, to perpetuate the
violation of a statutory or other positive legal duty, or a dishonest and an unjust act in contravention
of plaintiffs legal right; and
3) The said control and breach of duty must have proximately caused the injury or unjust loss
complained of.

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

UE-0200673-2023
 BIR was presented for registration. The Register of Deeds, however, denied the registration on account of the
CORPORATION BY ESTOPPEL Affidavit of Adverse Claim dated September 26, 2001 filed by the brother of Purificacion, respondent Amando
Y. Alzona (Amando).
THE MISSIONARY SISTERS OF OUR LADY OF FATIMA (PEACH SISTERS OF LAGUNA), REPRESENTED BY REV.
MOTHER MA. CONCEPCION R. REALON, ET AL., VS. AMANDO V. ALZONA, ET AL., G.R. No. 224307. August 06,
On October 30, 2001, Purificacion died without any issue, and survived only by her brother of full blood,
2018
Amando, who nonetheless died during the pendency of this case and is now represented and substituted by his
legal heirs, joined as herein respondents.
REYES, JR., J:
On April 9, 2002, Amando filed a Complaint before the RTC, seeking to annul the Deed executed between
FACTS: Purificacion and the petitioner, on the ground that at the time the donation was made, the latter was not
The Missionary Sisters of Our Lady of Fatima (petitioner), otherwise known as the Peach Sisters of Laguna, is a registered with the SEC and therefore has no juridical personality and cannot legally accept the donation.
religious and charitable group established under the patronage of the Roman Catholic Bishop of San Pablo on
May 30, 1989. Its primary mission is to take care of the abandoned and neglected elderly persons. The After trial, on August 14, 2013, the RTC rendered its Decision finding no merit in the complaint.
petitioner came into being as a corporation by virtue of a Certificate issued by the Securities and Exchange
Commission (SEC) on August 31, 2001. Mother Ma. Concepcion R. Realon (Mother Concepcion) is the In its decision, the RTC held that all the essential elements of a donation are present. The RTC set aside the
petitioner's Superior General. allegation by the respondents relating to the incapacity of the parties to enter into a donation.

The respondents, on the other hand, are the legal heirs of the late Purificacion Y. Alzona (Purificacion).
On the capacity of the donee, the RTC held that at the time of the execution of the Deed, the petitioner was a de
facto corporation and as such has the personality to be a beneficiary and has the power to acquire and
Purificacion, a spinster, is the registered owner of two parcels of land covered by Transfer Certificate of Title
possess property. Further then, the petitioner's incapacity cannot be questioned or assailed in the instant case
(TCT); and a co-owner of another property covered by TCT, all of which are located in Calamba City, Laguna.
as it constitutes a collateral attack which is prohibited by the Corporation Code of the Philippines. In this regard,
the RTC found that the recognition by the petitioner of Mother Concepcion's authority is sufficient to vest the
In 1996, Purificacion, impelled by her unmaterialized desire to be nun, decided to devote the rest of her life in
latter of the capacity to accept the donation.
helping others. In the same year, she then became a benefactor of the petitioner by giving support to the
community and its works.
Acting on the appeal filed by the respondents, the CA rendered the herein assailed Decision on January 7, 2016,
the dispositive portion of which partly granted the appeal. The assailed August 14, 2013 Decision of the RTC,
In 1997, during a doctor's appointment, Purificacion then accompanied by Mother Concepcion, discovered that
Branch 92, Calamba City in Civil Case No. 3250-02 is SET ASIDE by declaring as VOID the deed of Donation dated
she has been suffering from lung cancer. Considering the restrictions in her movement, Purificacion requested
August 14, 2013. [The respondents'] prayer for the award of moral and exemplary damages as well as attorney's
Mother Concepcion to take care of her in her house, to which the latter agreed.
fees is nevertheless DENIED.
In October 1999, Purificacion called Mother Concepcion and handed her a handwritten letter dated October
1999. Therein, Purificacion stated that she is donating her house and lot at F. Mercado Street and Riceland at In so ruling, the CA, citing the case of Seventh Day Adventist Conference Church of Southern Phils., Inc. v.
Banlic, both at Calamba, Laguna, to the petitioner through Mother Concepcion. On the same occasion, Northeastern Mindanao Mission of Seventh Day Adventist, Inc., held that the petitioner cannot be considered as
Purificacion introduced Mother Concepcion to her nephew, Francisco Del Mundo (Francisco), and niece, Ma. a de facto corporation considering that at the time of the donation, there was no bona fide attempt on its part
Lourdes Alzona Aguto-Africa (Lourdes). Purificacion, instructed Francisco to give a share of the harvest to to incorporate. As an unregistered corporation, the CA concluded that the petitioner cannot exercise the
Mother Concepcion, and informed Lourdes that she had given her house to Mother Concepcion. powers, rights, and privileges expressly granted by the Corporation Code. Ultimately, bereft of juridical
personality, the CA ruled that the petitioner cannot enter into a contract of Donation with Purificacion.
Sometime in August 2001, at the request of Purificacion, Mother Concepcion went to see Atty. Nonato Arcillas
(Atty. Arcillas) in Los Baños, Laguna. During their meeting, Atty. Arcillas asked Mother Concepcion whether The petitioner sought a reconsideration of the Decision dated January 7, 2016, but the CA denied it in its
their group is registered with the SEC, to which the latter replied in the negative. Acting on the advice given by Resolution dated April 19, 2016.
Atty. Arcillas, Mother Concepcion went to SEC and filed the corresponding registration application on August
28, 2001. ISSUE:
Whether or not the petitioner has the requisite legal personality to accept the donation as a religious institution
On August 29, 2001, Purificacion executed a Deed of Donation Inter Vivos (Deed) in favor of the petitioner, organized under the Roman Catholic Bishop of San Pablo, a corporation sole.
conveying her properties, and her undivided share in the property. The Deed was notarized by Atty. Arcillas and
witnessed by Purificacion's nephews Francisco and Diosdado Alzona, and grandnephew, Atty. Fernando M. RULING:
Alonzo. The donation was accepted on even date by Mother Concepcion for and in behalf of the petitioner. The Court finds that for the purpose of accepting the donation, the petitioner is deemed vested with personality
Thereafter, Mother Concepcion filed an application before the Bureau of Internal Revenue (BIR) that the to accept, and Mother Concepcion is clothed with authority to act on the latter's behalf.
petitioner be exempted from donor's tax as a religious organization. The application was granted by the BIR
through a letter dated January 14, 2002 of Acting Assistant Commissioner, Legal Service, Milagros Regalado. At the outset, it must be stated that as correctly pointed out by the CA, the RTC erred in holding that the
petitioner is a de facto corporation.
Subsequently, the Deed, together with the owner's duplicate copies of TCTs, and the exemption letter from the

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Jurisprudence settled that "[t]he filing of articles of incorporation and the issuance of the certificate of deed partakes of the nature of a remuneratory or compensatory donation, having been made "for the purpose
incorporation are essential for the existence of a de facto corporation." In fine, it is the act of registration with of rewarding the donee for past services, which services do not amount to a demandable debt."
SEC through the issuance of a certificate of incorporation that marks the beginning of an entity's corporate
existence. As elucidated by the Court in Pirovano, et al. v. De La Rama Steamship Co.:

Petitioner filed its Articles of Incorporation and by-laws on August 28, 2001. However, the SEC issued the
corresponding Certificate of Incorporation only on August 31, 2001, two (2) days after Purificacion executed a
Deed of Donation on August 29, 2001. Clearly, at the time the donation was made, the Petitioner cannot be
considered a corporation de facto.
Rather, a review of the attendant circumstances reveals that it calls for the application of the doctrine of
corporation by estoppel as provided for under Section 21 of the Corporation Code, viz.:
Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it
to be without authority to do so shall be liable as general partners for all debts, liabilities and
damages incurred or arising as a result thereof: Provided, however, That when any such
ostensible corporation is sued on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a defense its lack of corporate
personality.
In donations made to a person for services rendered to the donor, the donor's will is moved
by acts which directly benefit him. The motivating cause is gratitude, acknowledgment of a
favor, a desire to compensate. A donation made to one who saved the donor's life, or a
lawyer who renounced his fees for services rendered to the donor, would fall under this class
of donations.[49]
Therefore, under the premises, past services constitutes consideration, which in tum can be regarded as
"benefit" on the part of the donor, consequently, there exists no obstacle to the application of the doctrine of
corporation by estoppel; although strictly speaking, the petitioner did not perform these services on the
expectation of something in return.
Precisely, the existence of the petitioner as a corporate entity is upheld in this case for the purpose of validating
the Deed to ensure that the primary objective for which the donation was intended is achieved, that is, to
convey the property for the purpose of aiding the petitioner in the pursuit of its charitable objectives.

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

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

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

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

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

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

In this case, while the underlying contract which is sought to be enforced is that of a donation, and thus rooted
on liberality, it cannot be said that Purificacion, as the donor failed to acquire any benefit therefrom so as to
prevent the application of the doctrine of corporation by estoppel. To recall, the subject properties were given
by Purificacion, as a token of appreciation for the services rendered to her during her illness. In fine, the subject

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 violation of Section 31[11] of the Corporation Code. Among the prayers in the Complaint were: (a) the annulment
BOARD OF DIRECTORS / POWER OF THE BOD
of the MOA and the accounting of and refund by the petitioners of all profits, income and benefits derived from
ANGELES P. BALINGHASAY, VS. CECILIA CASTILLO, G.R. No. 185664. April 08, 2015. the said agreement; and (b) payment of damages and attorney’s fees. [12]

REYES, J.: In their Answer with Counterclaim, the petitioners argued that the derivative suit must be dismissed for non-
joinder of MCPI, an indispensable party. The petitioners likewise claimed that under Section 32 [13] of the
Corporation Code, the MOA was merely voidable. Since there was no proof that the subsequent Board of
FACTS:
Directors of MCPI moved to annul the MOA, the same should be considered as having been ratified. Further, in
The MCPI, a domestic corporation organized in 1977, operates the Medical Center Parañaque (MCP) located in
the Annual Stockholders Meeting held on February 11, 2000, the MOA had already been discussed and passed
Dr. A. Santos Avenue, Sucat, Parañaque City. Castillo, Oscar, Flores, Navarro, and Templo are minority
upon.[14]
stockholders of MCPI. Each of them holds 25 Class B shares. On the other hand, nine of the herein petitioners,
namely, Balinghasay, Bernabe, Alodia, Jimenez, Oblepias, Savet, Villamora, Valdez and Villareal, are holders of
To implead MCPI as a party-plaintiff, the individual respondents filed an Amended Complaint dated September
Class A shares and were Board Directors of MCPI. The other eight petitioners are holders of Class B shares. The
11, 2001. The RTC admitted the said amended complaint on October 12, 2001.
petitioners are part of a group who invested in the purchase of ultrasound equipment, the operation of and
earnings from which gave rise to the instant controversy.
On March 22, 2005, the RTC rendered a Decision dismissing the respondents’ amended complaint. The RTC
found that MCPI had, in effect, impliedly ratified the MOA by accepting or retaining benefits flowing
Before 1997, the laboratory, physical therapy, pulmonary and ultrasound services in MCP were provided to
therefrom. Moreover, the elected MCPI’s Board Directors for the years 1998 to 2000 did not institute legal
patients by way of concessions granted to independent entities. When the concessions expired in 1997, MCPI
actions against the petitioners. MCPI slept on its rights for almost four years, and estoppel had already set in
decided that it would provide on its own the said services, except ultrasound. [5]
before the derivative suit was filed in 2001. The RTC likewise stressed that the sharing agreement, per MOA
provisions, was fair, just and reasonable. From the ultrasound unit’s operations for the years 1997 to 1999, MCPI
In 1997, the MCPI’s Board of Directors awarded the operation of the ultrasound unit to a group of investors
received a net share of P1,567,699.78, while the ultrasound investors only got P803,723.00. Further, under the
(ultrasound investors) composed mostly of Obstetrics-Gynecology (Ob-gyne) doctors. The ultrasound investors
“business judgment rule,” the trial court cannot undertake to control the discretion of the corporation’s board
held either Class A or Class B shares of MCPI. Among them were nine of the herein petitioners, who were then,
as long as good faith attends its exercise.
likewise, MCPI Board Directors. The group purchased a Hitachi model EUB-200 C ultrasound equipment costing
P850,000.00 and operated the same. Albeit awarded by the Board of Directors, the operation was not yet
The petitioners challenged the RTC’s judgment before the CA.
covered by a written contract. [6]

On May 23, 2008, the CA rendered the herein assailed decision, declaring the [MOA] (ultrasound contract) as
In the meeting of the MCPI’s Board of Directors held on August 14, 1998, seven (7) of the twelve (12) Directors
invalid. Further, [petitioners] Angeles Balinghasay, Dr. Renato Bernabe, Dr. Alodia del Rosario, Dr. Rustico
present were part of the ultrasound investors. The Board Directors made a counter offer anent the operation of
Jimenez, Dr. Virgilio Oblepias, Dr. Reynaldo Savet, Dr. Salvacion Villamora and Dr. Humberto Villareal are
the ultrasound unit. Hence, essentially then, the award of the ultrasound operation still bore no formal stamp of
hereby ordered to fully account to [respondent MCPI] all the profits from said ultrasound contract which
approval.[7]
otherwise would have accrued to [MCPI] and to jointly and severally pay the amount of P200,000.00 as
attorney’s fees in favor of the [respondents]. Costs against said named [petitioners].
On February 5, 1999, twelve (12) Board Directors attended the Board meeting and eight (8) of them were among
the ultrasound investors. A Memorandum of Agreement (MOA) was entered into by and between MCPI,
represented by its President then, Bernabe, and the ultrasound investors, represented by Oblepias. Per MOA, The CA, however, denied the respondents’ claims for moral and exemplary damages. The appellate court
the gross income to be derived from the operation of the ultrasound unit, minus the sonologists’ professional explained that moral damages cannot be awarded in favor of a corporation, which in this case is MCPI, the real
fees, shall be divided between the ultrasound investors and MCPI, in the proportion of 60% and 40%, party-in-interest. Further, there is no ample evidence to prove that the petitioners acted wantonly, recklessly
respectively. Come April 1, 1999, MCPI’s share would be 45%, while the ultrasound investors would receive 55%. and oppressively.
Further, the ownership of the ultrasound machine would eventually be transferred to MCPI. [8]
In declaring the invalidity of the MOA, the CA explained that:
On October 6, 1999, Flores wrote MCPI’s counsel a letter challenging the Board of Directors’ approval of the “Quorum” is defined as that number of members of a body which, when legally assembled in their proper
MOA for being prejudicial to MCPI’s interest. Thereafter, on February 7, 2000, Flores manifested to MCPI’s Board places, will enable the body to transact its proper business. “Majority,” when required to constitute a quorum,
of Directors and President his view regarding the illegality of the MOA, which, therefore, cannot be validly means the greater number than half or more than half of any total.
ratified.[9]
In the case at bar, the majority of the number of directors, if it is indeed thirteen (13), is seven (7), while if it is
On March 22, 2001, the herein respondents filed with the RTC a derivative suit [10] against the petitioners for eleven (11), the majority is six (6). During the meetings held by the MCPI Board of Directors i.e.

UE-0200673-2023
 1) 14 August 1998 meeting x x x, twelve (12) directors were present, and of said number, seven (7) of
them belong to the ultrasound investors x x x, and at which meeting, the Board decided to make a
counter-offer x x x to the ultrasound group and;
2) 05 February 1999 meeting x x x, twelve (12) directors were present, and of said number, eight (8) of
them belong to the ultrasound investors x x x, and at which meeting, the Board decided to proceed
with the signing of the [MOA] x x x. As can be gleaned from the Minutes of said Board meetings,
without the presence of the [petitioners] directors/ultrasound investors, there can be no quorum.
At any rate, during the Board meeting on 14 August 1998, the [MOA] was not approved as only a counter-offer
was agreed upon. As to the 05 February 1999 Board meeting, without considering the votes of the [petitioners]
directors/ultrasound investors, in connection with the signing of the [MOA], no valid decision can be made. It
further appears that x x x [Oblepias], who signed the [MOA] on behalf of the ultrasound/Ob-Gyne group as
OWNER of the ultrasound equipment, and x x x President Dr. Bernabe, who signed the same on behalf of MCPI
x x x, are both ultrasound investors. Thus, We find that the [MOA] was not validly approved by the MCPI
Board. Plainly, [the petitioners/directors] x x x, in acquiring an interest adverse to the corporation, are liable as
trustees for the corporation and must account for the profits under the [MOA] which otherwise would have
accrued to MCPI.
x x x x
x x x [T]he presence of the [petitioners] directors/ultrasound investors who approved the signing of the [MOA]
was necessary to constitute a quorum for such meeting on 05 February 1999 and the votes of [the petitioners]
directors/ultrasound investors were necessary in connection with the decision to proceed with the signing of the
[MOA]. Further, there is no clear and convincing evidence that the [MOA] was ratified by the vote of 2/3 of the
outstanding capital stock of MCPI in a meeting called for the purpose and that a full disclosure of the interest
of the [petitioners] directors/ultrasound investors, was made at such meeting. At any rate, if the ultrasound
contract has indeed been impliedly ratified[,] there would have been no need to submit the matter repeatedly to
the stockholders of MCPI in a vain attempt to have the same ratified.
The [RTC’s] observation that [the respondents’] silence and acquiescence to the [MOA] impliedly ratified the
same is also belied by the fact that [the respondents] did not stop questioning the validity of the [MOA]. x x x.
Further, under the Corporation Code, where a corporation is an injured party, its power to sue is lodged with
its board of directors or trustees. But an individual stockholder may be permitted to institute a derivative suit
in behalf of the corporation in order to protect or vindicate corporate rights whenever the officials of the
corporation refuse to sue, or when a demand upon them to file the necessary action would be futile because
they are the ones to be sued, or because they hold control of the corporation. In such actions, the corporation
is the real party-in-interest while the suing stockholder, in behalf of the corporation, is only a nominal party.
x x x x
In the instant case, [the respondents] filed an Amended Complaint dated 11 September 2001. Paragraphs 1a, 3
and 17-24 thereof sufficiently allege their derivative action. There was compliance with Section 1, Rule 8 of the
Interim Rules of Procedure for Intra-Corporate Controversies. x x x It is undisputed that [the respondents] are
stockholders of MCPI x x x; [the respondents] exerted all reasonable efforts to exhaust all remedies available to
UE-0200673-2023
them x x x; there are no appraisal rights available to [the respondents] for the act complained of; and the case is
clearly not a nuisance or harassment suit. x x x
x x x x
It is clear that under the “business judgment rule”, the courts are barred from intruding into the business
judgments of the corporation, when the same are made in good faith.
x x x x
[The petitioners] MCPI directors, who are ultrasound investors, in violation of their duty as such directors,
acquired an interest adverse to the corporation when they entered into the ultrasound contract. By doing so,
they have unjustly profited from the transaction which otherwise would have accrued to MCPI. In fact, as
reflected in the ultrasound income x x x for the year 1997 to 2001, the ultrasound investors earned a net share
of P4,417,573.81. [The petitioners] directors/ultrasound investors failed to inhibit themselves from participating
in the meeting and from voting with respect to the decision to proceed with the signing of the [MOA]. Certainly,
said [petitioners] directors/ultrasound investors have dealt in their behalf and took an interest adverse to MCPI.
Moreover, based on the audited financial statements of MCPI x x x for the year 1996-2000, it appears that the
corporation has available cash to purchase its own ultrasound unit. It was testified to by Dr. Villamora that the
cost of the ultrasound unit is P850,000.00, while the cash and cash equivalents of MCPI for the year 1996 is
P5,479,242.00; for the year 1997, P5,509,058.51; and for the year 1998, P8,662,909.00.
In the now assailed Resolution issued on December 12, 2008, the CA denied the Motion for Reconsideration filed
by the herein petitioners.
ISSUE:
The respondents aver as well that the petitioners’ several attempts for the MOA’s ratification by the
stockholders through the required two-third votes had failed in the years 2000 up to 2003. Despite the
foregoing, the ultrasound investors continue to operate the unit and receive income therefrom causing
prejudice to MCPI.[37] Pursuant to Section 31 of the Corporation Code, the petitioners should therefore be liable
not just for the profits or revenues they had received from the ultrasound unit’s operation, but for all profits
which otherwise would have accrued to MCPI.
RULING:
As acknowledged by the petitioners and aptly pointed out by the respondents, the existence of the
circumstances and urgent hospital necessity justifying the purchase and operation of the ultrasound unit by the
investors were not at the outset offered as evidence. Having been belatedly raised, the aforesaid defenses were
not scrutinized during the trial and their truth or falsity was not uncovered. This is fatal to the petitioners’ cause.
The CA thus cannot be faulted for ruling against the petitioners in the face of evidence showing that: (a) there
was no quorum when the Board meetings were held on August 14, 1998 and February 5, 1999; (b) the MOA was
not ratified by a vote of two-thirds of MCPI’s outstanding capital stock; and (c) the Balance Sheets for the years
1996 to 2000 indicated that MCPI was in a financial position to purchase the ultrasound equipment.
The petitioners harp on their lofty purpose, which had supposedly moved them to purchase and operate the
ultrasound unit. Unfortunately, their claims are not evident in the records. Further, even if their claims were to
be assumed as true for argument’s sake, the fact remains that the Board Directors, who approved the MOA, did
not outrightly inform the stockholders about it. The ultrasound equipment was purchased and had been in
operation since 1997, but the matter was only brought up for ratification by the stockholders in the annual
meetings held in the years 2000 to 2003. This circumstance lends no credence to the petitioners’ cause.

The Court thus finds the CA’s ruling anent the invalidity of the MOA as amply supported by both evidence and
jurisprudence.

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 UNERA, ET AL., VS. SHIN HEUNG ELECTRODIGITAL, INC., / MR. SEUNG RAE CHO / JENNIFER VILLAMAYOR, G.R.
No. 228328. March 11, 2020
ZALAMEDA, J.:
FACTS:
Respondent Shin Heung Electrodigital, Inc. (Shin Heung) is a company primarily engaged in the manufacture of a
computer part called "deck" exclusively for Smart Electronics Manufacturing Service Philippines, Inc. (SEPHIL).
Due to dwindling sales and decreasing use of their manufactured product, Shin Heung was initially forced to
reduce its labor force from 2000 to 991 employees. Eventually, Shin Heung decided to close shop after SEPHIL
formally terminated its contract with the company. It, thus, issued a Memorandum dated 18 April 2013,
informing its employees of the company's impending closure on 31 July 2013, to wit:
Much to our regret, we are informing all workers and staff that our company, Shin
Heung Electro Digital, Inc., will cease to operate starting at the close of business hours
on July 31, 2013. Retrenchment of workers shall however start after 30-days from notice
due to lack of work and so that the company may be able to save from further losses.
Workers who last joined the company shall be the first to go (LAST IN, FIRST OUT).
However, workers may volunteer to be retrenched ahead. Those who belong to a
section that was closed for lack of work maybe be (sic) retrenched earlier regardless of
their date of joining the company.
Regular and probationary, workers who has (sic) rendered service of more than six (6)
months shall be paid of separation pay in accordance with law, that of fifteen (15) days
basic salary for every year of service, a fraction of six (6) months or more shall be
considered one year for the purpose of computation of separation pay, in no case will a
worker receive separation pay of less than one month salary, as provided for under
Article 283 of the Labor Code of the Philippines. Workers will however be required to
process their individual clearance and to execute and sign the required documents as a
condition for the payment of separation. NO DOCUMENT, NO PAY.
The decision to close is due to the sad fact that our only client, SEPHIL has officially
informed our management that they can no longer maintain orders with our company
and with Shin Yae at the same time. Shin Yae will remain as the vendor for SEPHIL based
on the decision of the parties concerned.
The decision of SEPHIL may have been prompted by the continuous decrease in the
market demand and due to the very stiff business competition in the electronic industry.
On the same day, Shin Heung also informed the Department of Labor and Employment (DOLE) of its intent to
completely close operations.
According to Shing Heung, several workers immediately inquired with the personnel department whether they
may be allowed to resign for early payment of separation pay. Having received an affirmative response to their
query, the workers submitted their handwritten letters of resignation. Those who did not resign were served
with their respective notices of termination at least 30 days prior to the scheduled company closure.
A number of Shin Heung's properties, including buildings, machineries and equipment, were later sold. The
company also took a loan to pay all its workers separation pay at the rate of 15 days per year of service for a
grand total of P28,973,250.00. Those who volunteered to resign were paid first, while the workers who did not
resign and opted to work until 31 July 2013 were paid on their last day of work or some days or weeks
thereafter.
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Before its scheduled closure, Shin Heung sent another letter dated 29 July 2013 to the DOLE to recall its earlier
notice of closure. The letter reads as follows:
We found no interested buyer nor investor as of this date but luckily, we found new
clients within the Philippines and from other parts of the world such as Canon,
Brother, Panasonic, etc. Thus, our company stockholders decided to infuse more
capital, sufficient to start a full blast production operation and specially that we still
have our manpower, machineries and building ready and available for operation.
In this regard, we are REACALLING (sic) our said letter dated April 18, 2013 addressed to
your Honor, with the ardent request to DISREGARD the said notice and to allow us to
continue to operator (sic) under the same DOLE registration, license and permit.
Shin Heung, however, asserted that the expected infusion of capital did not follow through. Moreover, the
customers it found had limited product orders, which were manufactured using only the press, mold and
injection sections of the company. Thus, the company resumed operations over a small portion of the business
to alleviate losses and to help maintain company equipment and machineries until the company assets are
finally sold. It also leased 80% of its company premises to THN Autoparts Philippines, Inc. for the period 01
September 2014 until 31 August 2017.
Claiming the closure as a ruse to circumvent their tenurial rights, petitioners, who are Shin Heung's previous
employees, filed separate complaints for illegal closure of establishment with claims for reinstatement,
backwages, additional separation pay, damages and attorney's fees before the Labor Arbiter. To their mind,
Shing Heung was in evident bad faith when it resumed business operations after their dismissals.
On 11 September 2014, the Labor Arbiter rendered a decision confirming the validity of petitioners' dismissal
due to the authorized cause of closure of business, excepting three (3) complainants, the respondents are
hereby ordered jointly and severally to pay Jervin Pasacsac, Edna Mavida and Girlie Zamora the aggregate
amount of P70,679.70 representing full backwages reckoned from respective dates of dismissal up to 31 July
2013.
Anent the remaining complaints, the Labor Arbiter determined closure of business rather than retrenchment as
the proper ground relied upon in the termination of their employment. Accordingly, Shin Heung was found to
have followed all the requirements for a valid cessation of business thereby making the dismissal of its
employees valid. For some reason, however, the Labor Arbiter ruled that Shin Heung failed to properly refute
the termination complaints of Jervin Pasacsac, Edna Marvida and Girlie Zamora. Hence, they were deemed
illegally dismissed and awarded backwages from the date of their termination until the scheduled closure of Shin
Heung's business.
On appeal, the NLRC reversed the ruling of the Labor Arbiter and declared petitioners' dismissal as illegal.
Using retrenchment as basis for the dismissal of petitioners, the NLRC ruled that the evidence on record were
insufficient to sustain its claim of continuous losses. It gave no credence to the income tax returns and audited
financial statements submitted by Shin Heung. It also noted the resumption of business by the company. Hence,
the NLRC deemed Shin Heung's act of dismissing its employees by retrenchment as lacking in merit. Likewise,
those who submitted letters of resignation cannot be said to have done so voluntarily and were also ordered
reinstated.
The Court of Appeals, in its Decision promulgated on 23 May 2016, ruled in favor of respondents and reinstated
the Labor Arbiter's decision.
The appellate court found the NLRC to have acted with grave abuse of discretion when it declared as illegal the when the cause for closure of business is due to serious losses. Moreover, there was no union busting or any
dismissal of petitioners. Shin Heung's decision to close its business was not tainted with bad faith considering union activity that the company sought to prevent.
the termination of contract with its sole client, the heavy losses it incurred as evidenced by audited financial
statements, and the lack of any labor-related union activities that may precipitate a fabricated closure of the To be clear, the resumption of Shin Heung's operations was limited to the press, injection and mold section of
company. In view of the valid cessation of Shin Heung's business, petitioners were declared lawfully dismissed. the company. It rehired its previous employees who were working in the said sections based on their availability
to immediately return to work. Moreover, the re-hired workers were given the status of regular employees
Petitioners moved to reconsider the decision but the Court of Appeals denied the same through the assailed immediately upon their first day of work on 19 August 2013. Unfortunately, Shin Heung cannot rehire all of its
Resolution dated 4 November 2016. workers, especially those who worked in the now defunct assembly section.

ISSUE:
Whether or not the decision of Shin Heung to close its business or cease operations was done in good faith.
RULING:
In the present case, there is no indication that Shin Heung was impelled by any unlawful or dishonest motive
aimed to circumvent the rights of its workers. To recall, Shin Heung's sole client for its manufactured products
terminated its agreement with the company. Prior to this, the company had already reduced its manpower from
2000 to 991 due to declining sales. The substantial losses suffered by the company are also supported by audited
financial statements covering the years 2010 to 2013, as well as findings of an independent auditor. These
documents were appropriately given evidentiary weight in accordance with the Court's pronouncement in Asian
Alcohol Corp. v. National Labor Relations Commission, viz:
The condition of business losses is normally shown by audited financial documents like
yearly balance sheets and profit and loss statements as well as annual income tax
returns. It is our ruling that financial statements must be prepared and signed by
independent auditors. Unless duly audited, they can be assailed as self-serving
documents. But it is not enough that only the financial statements for the year during
which retrenchment was undertaken, are presented in evidence. For it may happen that
while the company has indeed been losing, its losses may be on a downward trend,
indicating that business is picking up and retrenchment, being a drastic move, should no
longer be resorted to. Thus, the failure of the employer to show its income or loss for
the immediately preceding year or to prove that it expected no abatement of such
losses in the coming years, may be speak the weakness of its cause. It is necessary that
the employer also show that its losses increased through a period of time and that the
condition of the company is not likely to improve in the near future.
With the declining demand for its manufactured product and the pullout of its sole client, Shin Heung was left
with no other option but to close shop. Its decision to do so was clearly communicated to stakeholders months
before the target date. Accordingly, the company sold its equipment and other assets. It, however, found it
difficult to find a buyer for its real estate prompting it to lease a large part of the premises to generate more
income.
In the interim of finding a solution to their financial woes, Shin Heung was able to find a few customers who
were willing to do business with them. The customers, however, only have limited orders, which were
manufactured using the press, injection and mold sections of the company. The assembly section, which formed
more or less 90% of the its previous operation, remained non-functional. The decision to push through with the
minimal orders were also a result of wanting to keep the company's unsold equipment in good running
condition thereby commanding a good resale price.
In Beralde v. Lapanday Agricultural and Development Corp., the Court did not accord bad faith on the
subsequent acts of the employer to re hire its retrenched workers or to hire new employees since the employer
had already sufficiently proven economic or business losses, to wit:
In exercising its right retrench employees, the firm may choose to close all, or a part of, its business to avoid
further losses or mitigate expenses. In Caffco International Limited v. Office of the MinisterMinistry of Labor and
Employment, the Court has aptly observed that -
Business enterprises today are faced with the pressures of economic recession, stiff
competition, and labor unrest. Thus, businessmen are always pressured to adopt certain
changes and programs in order to enhance their profits and protect their investments.
Such changes may take various forms. Management may even choose to close a branch,
a department, a plant, or a shop.
In the same manner, when Lapanday continued its business operation and eventually hired some of its
retrenched employees and new employees, it was merely exercising its right to continue its business. The fact
that Lapanday chose to continue its business does not automatically make the retrenchment illegal. We reiterate
that in retrenchment, the goal is to prevent impending losses or further business reversals - it therefore does not
require that there is an actual closure of the business. Thus, when the employer satisfactorily proved economic
or business losses with sufficient supporting evidence and have complied with the requirements mandated
under the law to justify retrenchment, as in this case, it cannot be said that the subsequent acts of the employer
to re-hire the retrenched employees or to hire new employees constitute bad faith. It could have been different
if from the beginning the retrenchment was illegal and the employer subsequently hired new employees or
rehired some of the previously dismissed employees because that would have constituted bad faith.
Consequently, when Lapanday continued its operation, it was merely exercising its prerogative to streamline its
operations, and to re-hire or hire only those who are qualified to replace the services rendered by the
retrenched employees in order to effect more economic and efficient methods of production and to forestall
business losses. The rehiring or reemployment of retrenched employees does not necessarily negate the
presence or imminence of losses which prompted Lapanday to retrench.
Similarly, Shin Heung had already sufficiently proven substantial business losses on its part thereby necessitating
the closure of the company. Its decision to continue a part of its previous operations did not negate good faith in
its decision to close shop, but is seen as an exercise of its right to continue its business. As long as no arbitrary or
malicious action on the part of the employer is shown, the wisdom of a business judgment to implement a cost
saving device is beyond the court's determination. After all, the free will of management to conduct its own
business affairs to achieve its purpose cannot be denied.

From the foregoing, the Court finds the totality of the circumstances surrounding Shin Heung's decision to cease
operations as refutation of the claim of bad faith. What the Court sees is a company struggling to stay afloat or
trying to get by. There is no indication to defraud its employees of any of their deserving rights. In fact, the
company took a loan to pay its employees separation pay despite the rule that dispenses with such payment
UE-0200673-2023

AGO REALTY & DEVELOPMENT CORPORATION (ARDC), V. DR. ANGELITA F. AGO, ET AL., G.R. No. 210906.
October 16, 2019
A. REYES, JR., J.:
FACTS:
Petitioner Ago Realty & Development Corporation (ARDC) is a close corporation. Its stockholders are petitioner
Emmanuel F. Ago (Emmanuel); his wife, petitioner Corazon C. Ago (Corazon); their children, Emmanuel Victor C.
Ago and Arthur Emmanuel C. Ago (collectively Emmanuel, et al.); and Emmanuel's sister, respondent Angelita F.
Ago (Angelita). Per ARDC's General Information Sheet, their respective stockholdings are as follows:
Number of Subscribed
Amount
Shares
Emmanuel 2,498 P249,800.00
Corazon 1,000 P100,000.00
Victor 1 P100.00
Arthur 1 P100.00
Angelita 1,500 P150,000.00
TOTAL 5,000 P500,000.00
This controversy arose when Angelita introduced improvements on Lot No. H-3, titled in the name of ARDC,
without the proper resolution from the corporation's Board of Directors. The improvements also encroached
on Lot No. H-1 and Lot No. H-2, which also belonged to ARDC.
Consequently, on August 11, 2006, ARDC and Emmanuel, et al. filed a complaint before the Legazpi City Regional
Trial Court (RTC). They essentially alleged that Angelita, in connivance with Teresita P. Apin (Teresita), Maribel
Amaro (Maribel), and certain local officials of Legazpi City, introduced unauthorized improvements on corporate
property. For her part, Teresita was accused of operating a restaurant named "Kicks Resto Bar" in the
improvements, while Maribel was impleaded as Angelita's employee. On the other hand, the local officials were
impleaded as defendants since they were responsible for issuing the permits relative to the improvements
introduced by Angelita and the business concerns thereon.
On September 15, 2006, Teresita filed her answer. She denied all the material allegations and averred that her
restaurant was operating not on Lot No. H-3, as stated in the complaint, but on Lot No. 1-B, which is not ARDC's
property.
On February 9, 2007, after their motion to dismiss was denied, Angelita and Maribel filed their answer. Angelita
admitted to introducing improvements on the subject lots. She narrated that sometime in the 1960s, Emmanuel
and Corazon immigrated to the United States, leaving the management of ARDC's properties to her. She thus
took control of the corporation's properties and introduced improvements thereon, particularly a semi-
permanent multipurpose structure and a fence designed to protect the lot.
Angelita further claimed that the suit was brought because she refused to heed to Emmanuel's demand that she
buyout his shares in ARDC for $6,000,000.00. After she failed to satisfy the unreasonable demand, Emmanuel,
through two letters sent by counsel, allegedly accused her of introducing improvements on ARDC's property and
allowing Teresita to operate a restaurant business thereon, without the necessary authorization from the
UE-0200673-2023
corporation's Board of Directors. For such acts, Emmanuel supposedly demanded damages amounting to
P10,000,000.00.
Anent Maribel's inclusion as defendant, it was argued that the plaintiffs had no cause of action against her since
the complaint failed to point out any act for which she should be held accountable. Being a mere employee of
Angelita, she had no participation in the acts complained of.
Notably, a defense common to all the defendants was that ARDC never authorized the institution of the suit.
Without a resolution emanating from the corporation's Board of Directors, it was argued that Emmanuel, et
al. had no legal standing to bring the case since the lots in question belonged to ARDC.
On September 20, 2012, the RTC rendered a Decision dismissing the complaint and holding Emmanuel and
Corazon jointly and severally liable for damages. Finding ARDC to be the real party in interest, the trial court
ruled that the plaintiffs had no cause of action. Since Emmanuel, et al. brought the case without the proper
resolution from the Board of Directors, it was held that they were not authorized to sue on behalf of the
corporation. The RTC gave consideration to the undisputed fact that the properties in litigation belonged to
ARDC, concluding that Emmanuel, et al., in their individual capacities, were not the real parties in interest.
On September 26, 2013, the CA rendered the herein assailed Decision affirming the RTC's ruling anent the
plaintiffs' lack of cause of action, but deleting the lower court's award of moral damages and attorney's fees. The
appellate court held that the case partook of the nature of a derivative suit. As such, Emmanuel, et al. needed
the imprimatur of ARDC's Board of Directors to institute the action. While they were able to present a
resolution purportedly authorizing the filing of the case, the CA refused to give credence thereto on the ground
that the same was passed by the corporation's stockholders, and not its Board of Directors.
ISSUE:
Whether or not Emmanuel, et al. may sue on behalf of ARDC absent a resolution or any other grant of authority
from its Board of Directors sanctioning the institution of the case.
RULING:
While corporations are subjected to the State's broad regulatory powers, it is their directors and officers who are
tasked with addressing questions of internal policy and management. The business of a corporation is
conducted by its board of directors, and so long as the board acts in good faith, the State, through the courts,
may not interfere with its management decisions. This finds support in Section 23 of the Corporation Code,
which provides that a corporation exercises its powers, conducts its business, and controls and holds its property
through its board of directors.
As creatures of the law, corporations only possess those powers that are granted through statute, either
expressly or by way of implication, or those that are incidental to their existence.
One of the powers expressly granted by law to corporations is the power to sue. As with other corporate
powers, the power to sue is lodged in the board of directors, acting as a collegial body. Thus, in the absence of
any clear authority from the board, charter, or by-laws, no suit may be maintained on behalf of the
corporation. A case instituted by a corporation without authority from its board of directors is subject to
dismissal on the ground of failure to state a cause of action.
As an exception to the foregoing rule, jurisprudence has recognized certain instances when minority
stockholders may bring suits on behalf of corporations. Where the board of directors itself is a party to the
wrong, either because it is the author thereof or because it refuses to take remedial action, equity permits
individual stockholders to seek redress. These actions have come to be known as derivative suits. In Chua v.
Court of Appeals, the Court defined a derivative suit as "a suit by a shareholder to enforce a corporate cause of
action."
In derivative suits, it is the corporation that is the victim of the wrong. As such, it is the corporation that is
properly regarded as the real party in interest, while the relator-stockholder is merely a nominal party. The
corporation must be impleaded so that the benefits of the suit accrue to it and also because it must be barred
from bringing a subsequent case against the same defendants for the same cause of action. Stated otherwise,
the judgment rendered in the suit must constitute res judicata against the corporation, even though it refuses to
sue through its board of directors.
That said, not every wrong suffered by a stockholder involving a corporation will vest in him or her the standing
to commence a derivative suit. In Cua, Jr., et al. v. Tan, et al., the Court explained when such actions lie, viz.:
Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of
directors or other persons may be classified into individual suits, class suits, and derivative
suits. Where a stockholder or member is denied the right of inspection, his suit would be
individual because the wrong is done to him personally and not to the other stockholders or
the corporation. Where the wrong is done to a group of stockholders, as where preferred
stockholders' rights are violated, a class or representative suit will be proper for the
protection of all stockholders belonging to the same group. But where the acts complained
of constitute a wrong to the corporation itself, the cause of action belongs to the
corporation and not to the individual stockholder or member. Although in most every case
of wrong to the corporation, each stockholder is necessarily affected because the value of his
interest therein would be impaired, this fact of itself is not sufficient to give him an individual
cause of action since the corporation is a person distinct and separate from him, and can and
should itself sue the wrongdoer. Otherwise, not only would the theory of separate entity be
violated, but there would be multiplicity of suits as well as a violation of the priority rights of
creditors. Furthermore, there is the difficulty of determining the amount of damages that
should be paid to each individual stockholder.
However, in cases of mismanagement where the wrongful acts are committed by the directors or trustees
themselves, a stockholder or member may find that he has no redress because the former are vested by law
with the right to decide whether or not the corporation should sue, and they will never be willing to sue
themselves. The corporation would thus be helpless to seek remedy. Because of the frequent occurrence of
such a situation, the common law gradually recognized the right of a stockholder to sue on behalf of a
corporation in what eventually became known as a "derivative suit." It has been proven to be an effective
remedy of the minority against the abuses of management. Thus, an individual stockholder is permitted to
institute a derivative suit on behalf of the corporation wherein he holds stock in order to protect or vindicate
corporate rights, whenever officials of the corporation refuse to sue or are the ones to be sued or hold the
control of the corporation. In such actions, the suing stockholder is regarded as the nominal party, with the
corporation as the party in interest.
Here, the CA held that since the cause of action belongs to ARDC, the properties in question being titled in its
name, the case instituted by Emmanuel, et al. was derivative in nature. As such, they should have first secured
a board resolution authorizing them to bring suit. Emmanuel, et al. counter, arguing that a derivative suit does
not require the imprimatur of the board of directors. Since, in derivative suits, the corporation is usually under
the control of the wrongdoers, it would be absurd to require the stockholders to obtain board authority prior
to the commencement of litigation. Emmanuel et al. are correct.
The record reveals that the complaint a quo was filed by Emmanuel, et al. While the caption states that ARDC
was also one of the plaintiffs, there is nothing showing that the corporation's Board of Directors had authorized
the filing of the case. Thus, the case is deemed as instituted by Emmanuel, et al. without ARDC's acquiescence.
As discussed above, the corporate power to sue is exercised by the board of directors. For this purpose, the
board may authorize a representative of the corporation to perform all necessary physical acts, such as the
UE-0200673-2023
signing of documents. Such authority may be derived from the by-laws or from a specific act of the board of
directors, i.e., a board resolution.
In Rep. of the Phils. v. Coalbrine Int'l. Phils., Inc., et al., the Court dismissed a complaint for damages instituted by
a corporation because the managing director who signed the certification against forum shopping failed to show
that the board of directors authorized her to do so. Ruling that the lack of such certification was prejudicial to
the corporation's cause, the Court held that the managing director should have first obtained a valid board
resolution sanctioning the filing of the case and the signing of the certification.
However, in derivative suits, the recognized rule is different. Since the board is guilty of breaching the trust
reposed in it by the stockholders, it is but logical to dispense with the requirement of obtaining from it
authority to institute the case and to sign the certification against forum shopping. It has been held that when
"the corporation x x x is under the complete control of the principal defendants in the case, x x x it is obvious
that a demand upon the [board] to institute an action and prosecute the same effectively would [be] useless,
and the law does not require litigants to perform useless acts." Thus, the institution of a derivative suit need
not be preceded by a board resolution.
ISSUE:
But, given that authority from the board of directors can be dispensed with in derivative suits, can the case filed
by Emmanuel, et al. even be classified as such in the first place?
RULING:
Emmanuel, et al. argue that they have the right to file a derivative suit on behalf of ARDC. Since the corporation
was the victim of the wrong committed by Angelita, i.e., the introduction of improvements on its property
without its consent, a derivative suit lies as the appropriate remedy. On this score, they err.
The right of stockholders to bring derivative suits is not based on any provision of the Corporation Code or the
Securities Regulation Code, but is a right that is implied by the fiduciary duties that directors owe corporations
and stockholders. Derivative suits are, therefore, grounded not on law, but on equity.
In Hi-Yield Realty, Incorporated v. Court of Appeals, et al., a corporation, through its controlling stockholder and
without authority from its board of directors, entered into loan obligations that later led to the foreclosure of its
property. A minority stockholder then instituted a petition to annul the subject mortgage deeds and the
consequent foreclosure sales. The complaint alleged that the suing minority stockholder had been excluded
from corporate affairs and that attempts between him and the other stockholders to compromise the case had
failed. Since the board of directors did nothing to rectify the corporation's questionable transactions, the Court
allowed the institution of the complaint as a derivative suit.
In Gochan v. Young, minority stockholders instituted a complaint against directors and officers who appropriated
for themselves corporate funds through excessive salaries and cash advances. It was stated that the capital of
the corporation was impaired, as the firm was prevented from using its own funds in the conduct of its regular
business. The Court held that the suit was correctly classified as derivative in nature since the relator-
stockholders had clearly alleged injury to the corporation. The fact that the plaintiffs alleged damage to
themselves in their personal capacities on top of the damage done to the corporation merely gave rise to an
additional cause of action, but it did not disqualify them from filing a derivative suit.
In San Miguel Corporation v. Kahn, a significant number of shares of San Miguel Corporation (SMC) were
acquired by 14 other companies. SMC tried to repurchase shares through its wholly-owned foreign subsidiary,
Neptunia Corporation Limited (Neptunia). However, the shares had been sequestered by the Presidential
Commission on Good Government (PCGG) on the ground that they were owned by one of the cronies of former
President Ferdinand E. Marcos. Later, SMC's Board of Directors passed a resolution assuming Neptunia's liability
for the purchase of the subject shares. The board opined that there was nothing illegal about the assumption of
liability since Neptunia was wholly-owned by SMC. Subsequently, Eduardo de los Angeles (De los Angeles),
director and minority stockholder of SMC, brought a derivative suit challenging the board resolution as
constituting an improper use of corporate funds. When the case reached the Court, it was held that De los
Angeles had properly resorted to a derivative suit. It was of no moment that he owned only 20 SMC shares or
that he was elected to the board of directors by the PCGG. Since the case concerned the validity of the
assumption by SMC of the indebtedness of Neptunia, a cause of action that indeed belonged to the former
corporation, the Court held that De los Angeles could maintain the suit on behalf of SMC.
Despite derivative suits being grounded on equity, they cannot prosper in the absence of any or some of the
requisites enumerated in the Interim Rules of Procedure for Intra-Corporate Controversies, viz.:
Rule 8
DERIVATIVE SUITS
Section 1. Derivative action. - A stockholder or member may bring an action in the name of a corporation or
association, as the case may be, provided, that:
(1) He was a stockholder or member at the time the acts or transactions subject of the action occurred and
the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all
remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or
partnership to obtain the relief he desires;
(3) No appraisal rights are available for the acts or acts complained of; and
(4) The suits is not a nuisance or harassment suit.
The second requisite does not obtain in this case.
Before instituting a derivative suit, the relator-stockholder must exert all reasonable efforts to exhaust all
remedies available under the articles of incorporation, the by-laws, and the laws or rules governing the
corporation or partnership to obtain the relief he or she desires. Such fact must then be alleged with
particularity in the complaint. "The obvious intent behind the rule is to make the derivative suit the final
recourse of the stockholder, after all other remedies to obtain the relief sought had failed."
In their petition, Emmanuel, et al. allege that they exerted all reasonable efforts to exhaust all remedies
available to them. They point to the fact that they invited Angelita to a meeting to amicably settle the dispute.
Indeed, the record shows that Emmanuel, Corazon, and Angelita came together for a special stockholders'
meeting on August 11, 2006. However, their attempt to resolve the dispute turned sour when Angelita walked
out before the meeting even started.
Contrary to the postulation of Emmanuel and Corazon, their attempt to settle the dispute with Angelita can
hardly be considered "all reasonable efforts to exhaust all remedies available."
In Yu, et al. v. Yukayguan, et al., the Court rejected the argument that attempts between stockholders to
amicably settle a corporate dispute constitute "all reasonable efforts to exhaust all remedies available." It was
held that:
The allegation of respondent Joseph in his Affidavit of his repeated attempts to talk to
petitioner Anthony regarding their dispute hardly constitutes "all reasonable efforts to
exhaust all remedies available." Respondents did not refer to or mention at all any other
remedy under the articles of incorporation or by-laws of Winchester, Inc., available for
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dispute resolution among stockholders, which respondents unsuccessfully availed themselves
of. And the Court is not prepared to conclude that the articles of incorporation and by-laws of
Winchester, Inc. absolutely failed to provide for such remedies.
More importantly, an apparent remedy available to Emmanuel, et al. was to cause ARDC itself, through its
Board of Directors, to directly institute the case. Because of their controlling interest in the corporation,
Emmanuel, et al. could have prevailed upon the board to pass a resolution authorizing any of them to file the
case and sign the certification against forum shopping.
The derivative suit has proven to be an effective tool for the protection of the minority shareholder's corporate
interest. It is essentially an exception to the rule that a wrong done to a corporation must be vindicated through
legal action commenced by the board of directors.
Through the voting procedure found in the Corporation Code, the majority shareholders exercise control over
the board of directors. In Gamboa v. Finance Secretary Teves, et al., the Court, in no uncertain terms, declared
that: "[i]ndisputably, one of the rights of a stockholder is the right to participate in the control or management
of the corporation. This is exercised through his vote in the election of directors because it is the board of
directors that controls or manages the corporation." Hence, in the normal course of things, when a corporation
is wronged, the board will readily litigate in order to protect the majority's corporate interests . For the
minority, on the other hand, this may not be the case. There may be situations where a corporation is wronged,
but the board of directors refuses to take remedial action. The board's refusal may be based on valid business
considerations, such as that the costs of litigation exceed the potential judgment award. But in situations where
the board's decision is tantamount to breaching the trust reposed in it by the minority, equity necessitates
that the aggrieved stockholders be given a remedy. Thus, the minority, in a derivative capacity, may sue or
defend on behalf of the corporation.
Due to their control over the board of directors, the majority should not ordinarily be allowed to resort to
derivative suits. Where a corporation under the effective control of the majority is wronged, board-sanctioned
litigation should take precedence over derivative actions. After all, the law expressly vests the power to sue in
the board of directors, and a remedy based on equity, such as the derivative suit, can prevail only in the
absence of one provided by statute. In other words, majority stockholders who have undisputed corporate
control cannot resort to derivative suits when there is nothing preventing the corporation itself from filing the
case.
In the complaint they filed before the Legazpi City RTC, Emmanuel, et al. alleged that, together, they own 70%
of ARDC's shares of capital stock. In support of their allegation, they attached to their complaint the
corporation's General Information Sheet, which shows that, out of ARDC's 5,000 shares of stock, 3,500 belong to
Emmanuel, et al. collectively, while only 1,500 belong to Angelita.
Clearly, the case before the RTC was instituted by the stockholders holding the controlling interest in ARDC.
However, the wrong done directly to ARDC was a wrong done only indirectly to the inchoate corporate
interests of Emmanuel, et al. If ARDC truly desired to vindicate its rights, it should have done so through its
Board of Directors. Considering the majority shareholdings of the plaintiffs a quo, their interests should have
been protected by the board through affirmative action.
However, this could not happen because ARDC did not have a board of directors. On this point, the record is
bereft of any showing that ARDC's stockholders ever met to elect its governing board. Before the trial court,
Emmanuel admitted that ARDC never held any stockholders' meetings from the time it was incorporated until
2005.
There is likewise no showing that ARDC held an election for its Board of Directors from 2005 until the filing of the
complaint before the RTC. While Emmanuel, Corazon, and Angelita came together for a special stockholders'
meeting on August 11, 2006, no election was held then. As mentioned earlier, Angelita walked out before the
meeting started, and Emmanuel and Corazon were only able to pass a stockholders' resolution purportedly Further, assuming arguendo that ARDC is a close family corporation, the same cannot be considered a
authorizing the institution of the instant case. However, as amply discussed above, a corporation's power to sue justification for noncompliance with the requirements for the filing of a derivative suit. In Ang v. Sps. Ang, the
is lodged in its board of directors. Hence, the resolution, not emanating from the board, was inefficacious. Court declared:

The failure of ARDC's majority stockholders to elect a board of directors must be taken against them. To be
sure, there was nothing preventing Emmanuel, et al. from holding a meeting for the purpose of electing a
board, even in Angelita's absence or over her objection. It is admitted that the plaintiffs a quo hold a majority
of ARDC's capital stock, by virtue of which they could have constituted a board to exercise the corporation's
powers. If they had done so, the instant case could have been instituted by ARDC itself.
The fact that [SMBI] is a family corporation does not exempt private respondent Juanito Ang from complying
with the Interim Rules. In the x x x Yu case, the Supreme Court held that a family corporation is not exempt from
complying with the clear requirements and formalities of the rules for filing a derivative suit. There is nothing in
the pertinent laws or rules which state that there is a distinction between x x x family corporations x x x and
other types of corporations in the institution by a stockholder of a derivative suit.

Being necessary to the legitimate operation of business, the board of directors is an organ that is indispensable
to the corporate vehicle. If this case were allowed to prosper as a derivative suit, the non-election of boards of
directors would be incentivized, and the stability brought by "centralized management" eroded. Majority
shareholders cannot be allowed to bypass the formation of a board and directly conduct corporate business
themselves. The Court cannot stress enough that the law mandates corporations to exercise their powers
through their governing boards. Hence, if a person or group of persons truly desires to conduct business
through the corporate medium, then he, she, or they, as a matter of law, must form a board of directors. To
allow Emmanuel, et al. to forego the election of directors, and directly commence and prosecute this case would
not only downplay the key role of the board in corporate affairs, but also undermine the theory of separate
juridical personality.
ISSUE:
Whether or not Emmanuel, as President of ARDC, had the authority to institute the case and sign the
certification against forum shopping.
RULING:
Emmanuel's designation as President was ineffectual because ARDC did not have a board of directors. Section 25
of the Corporation Code explicitly requires the president of a corporation to concurrently hold office as a
director. This only serves to further highlight the key role of the board as a corporate manager. By designating a
director as president of the corporation, the law intended to create a close-knit relationship between the top
corporate officer and the collegial body that ultimately wields the corporation's powers.

It is axiomatic that a corporation is an entity with a legal personality separate and distinct from the people
comprising it. Accordingly, a wrong done to a corporation does not vest in its shareholders a cause of action
against the wrongdoer. Since the corporation is the real party in interest, it must seek redress itself. As stated
above, a case instituted by the stockholders would be subject to dismissal on the ground that the complaint fails
to state a cause of action.

Here, because ARDC is the victim of the act complained of, the cause of action does not lie with Emmanuel, et
al. The corporation should have filed the case itself through its board of directors. However, this could not be
done since those responsible for the institution of this case never bothered to elect a governing body to wield
ARDC's powers and to manage its affairs. Their omission cannot be without consequence. Verily, by virtue of
their admitted controlling interest in ARDC, Emmanuel, et al. could have come together and formed a board
of directors consisting of all five of the corporation's stockholders. Even without Angelita's participation, such a
board would have been able to validly conduct business and, accordingly, could have sanctioned the filing of the
complaint before the Legazpi City RTC. The aggrieved stockholders cannot now come before the Court, claiming
that their remedy is a derivative suit. Their failure to elect a board ultimately resulted in their failure to
exhaust all legal remedies to obtain the relief they desired. Since this case could have been brought by ARDC,
through its board, its stockholders cannot maintain the suit themselves, purporting to sue in a derivative
capacity. Emmanuel, et al. should not be allowed to use a derivative suit to shortcut the law.

Neither can Emmanuel, et al. take refuge in their assertion that ARDC is a close family corporation. They claim
that the stockholders of a close corporation may take part in the active management of corporate affairs. Hence,
they, as ARDC's stockholders, are legally invested with the power to sue for the corporation.

As correctly claimed, under Section 97 of the Corporation Code, a close corporation may task its stockholders
with the management of business, essentially designating them as directors. However, the law is clear that a
close corporation must do so through a provision to that effect contained in its articles of incorporation.
Nowhere in ARDC's Articles of incorporation [119] can such a provision be found. There is nothing that expressly or
impliedly allows Emmanuel, et al. and Angelita, or any of them, to manage the corporation. Hence, the merger
of stock ownership and active management that Emmanuel, et al. rely on cannot be applied to ARDC.

UE-0200673-2023
 On the same date, or on April 11, 1996, the SEC wrote to the PSE, attaching thereto the letter of PALI and
directing the PSE to file its comments thereto within five days from its receipt and for its authorized
BUSINESS JUDGMENT RULE representative to appear for an “inquiry” on the matter. On April 22, 1996, the PSE submitted a letter to the SEC
containing its comments to the April 11, 1996 letter of PALI.
PHILIPPINE STOCK EXCHANGE, INC., VS. THE HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE
COMMISSION AND PUERTO AZUL LAND, INC., G.R. No. 125469. October 27, 1997
On April 24, 1996, the SEC rendered its Order, reversing the PSE’s decision. The dispositive portion of the said
order reads:
TORRES, JR., J.:
“the decision of the Board of Governors of the Philippine Stock Exchange denying the listing of shares of Puerto
FACTS: Azul Land, Inc., is hereby set aside, and the PSE is hereby ordered to immediately cause the listing of the PALI
The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had sought to offer its shares to the public shares in the Exchange, without prejudice to its authority to require PALI to disclose such other material
in order to raise funds allegedly to develop its properties and pay its loans with several banking institutions. In information it deems necessary for the protection of the investing public.
January, 1995, PALI was issued a Permit to Sell its shares to the public by the Securities and Exchange
Commission (SEC). To facilitate the trading of its shares among investors, PALI sought to course the trading of its
PSE filed a motion for reconsideration of the said order on April 29, 1996, which was, however denied by the
shares through the Philippine Stock Exchange, Inc. (PSE), for which purpose it filed with the said stock exchange
Commission in its May 9, 1996 Order.
an application to list its shares, with supporting documents attached.
Dissatisfied with this ruling, the PSE filed with the Court of Appeals on May 17, 1996 a Petition for Review (with
On February 8, 1996, the Listing Committee of the PSE, upon a perusal of PALI’s application, recommended to
application for Writ of Preliminary Injunction and Temporary Restraining Order), assailing the above mentioned
the PSE’s Board of Governors the approval of PALI’s listing application.
orders of the SEC.
On February 14, 1996, before it could act upon PALI’s application, the Board of Governors of PSE received a
On June 4, 1996, PALI filed its Comment to the Petition for Review and subsequently, a Comment and Motion to
letter from the heirs of Ferdinand E. Marcos, claiming that the late President Marcos was the legal and beneficial
Dismiss. On June 10, 1996, PSE filed its Reply to Comment and Opposition to Motion to Dismiss.
owner of certain properties forming part of the Puerto Azul Beach Hotel and Resort Complex which PALI claims
to be among its assets and that the Ternate Development Corporation, which is among the stockholders of PALI,
On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing the PSE’s Petition for Review.
likewise appears to have been held and continue to be held in trust by one Rebecco Panlilio for then President
Hence, this Petition by the PSE.
Marcos and now, effectively for his estate, and requested PALI’s application to be deferred. PALI was requested
to comment upon the said letter.
The appellate court had ruled that the SEC had both jurisdiction and authority to look into the decision of the
petitioner PSE, pursuant to Section 3 of the Revised Securities Act in relation to Section 6(j) and 6(m) [4] of P.D.
PALI’s answer stated that the properties forming part of Puerto Azul Beach Hotel and Resort Complex were not
No. 902-A, and Section 38(b) of the Revised Securities Act, and for the purpose of ensuring fair administration of
claimed by PALI as its assets. On the contrary, the resort is actually owned by Fantasia Filipina Resort, Inc. and
the exchange. Both as a corporation and as a stock exchange, the petitioner is subject to public respondent’s
the Puerto Azul Country Club, entities distinct from PALI. Furthermore, the Ternate Development Corporation
jurisdiction, regulation and control. Accepting the argument that the public respondent has the authority merely
owns only 1.20% of PALI. The Marcoses responded that their claim is not confined to the facilities forming part
to supervise or regulate, would amount to serious consequences, considering that the petitioner is a stock
of the Puerto Azul Hotel and Resort Complex, thereby implying that they are also asserting legal and beneficial
exchange whose business is impressed with public interest. Abuse is not remote if the public respondent is left
ownership of other properties titled under the name of PALI.
without any system of control. If the securities act vested the public respondent with jurisdiction and control
over all corporations; the power to authorize the establishment of stock exchanges; the right to supervise and
On February 20, 1996, the PSE wrote Chairman Magtanggol Gunigundo of the Presidential Commission on Good
regulate the same; and the power to alter and supplement rules of the exchange in the listing or delisting of
Government (PCGG) requesting for comments on the letter of the PALI and the Marcoses. On March 4, 1996, the
securities, then the law certainly granted to the public respondent the plenary authority over the petitioner; and
PSE was informed that the Marcoses received a Temporary Restraining Order on the same date, enjoining the
the power of review necessarily comes within its authority.
Marcoses from, among others, “further impeding, obstructing, delaying or interfering in any manner by or any
All in all, the court held that PALI complied with all the requirements for public listing, affirming the SEC’s ruling
means with the consideration, processing and approval by the PSE of the initial public offering of PALI.” The TRO
to the effect that:
was issued by Judge Martin S. Villarama, Executive Judge of the RTC of Pasig City.
“x x x the Philippine Stock Exchange has acted in an arbitrary and abusive manner in disapproving the application
In its regular meeting held on March 27, 1996, the Board of Governors of the PSE reached its decision to reject
of PALI for listing of its shares in the face of the following considerations:
PALI’s application, citing the existence of serious claims, issues and circumstances surrounding PALI’s ownership
1. PALI has clearly and admittedly complied with the Listing Rules and full disclosure requirements of
over its assets that adversely affect the suitability of listing PALI’s shares in the stock exchange.
the Exchange;
2. In applying its clear and reasonable standards on the suitability for listing of shares, PSE has failed to
On April 11, 1996, PALI wrote a letter to the SEC addressed to the then Acting Chairman, Perfecto R. Yasay, Jr.,
justify why it acted differently on the application of PALI, as compared to the IPOs of other companies
bringing to the SEC’s attention the action taken by the PSE in the application of PALI for the listing of its shares
similarly that were allowed listing in the Exchange;
with the PSE, and requesting that the SEC, in the exercise of its supervisory and regulatory powers over stock
3. It appears that the claims and issues on the title to PALI’s properties were even less serious than the
exchanges under Section 6(j) of P.D. No. 902-A, review the PSE’s action on PALI’s listing application and institute
claims against the assets of the other companies in that, the assertions of the Marcoses that they are
such measures as are just and proper and under the circumstances.
owners of the disputed properties were not substantiated enough to overcome the strength of a title
to properties issued under the Torrens System as evidence of ownership thereof;
UE-0200673-2023
 4. No action has been filed in any court of competent jurisdiction seeking to nullify PALI’s ownership
over the disputed properties, neither has the government instituted recovery proceedings against
these properties. Yet the import of PSE’s decision in denying PALI’s application is that it would be
PALI, not the Marcoses, that must go to court to prove the legality of its ownership on these
properties before its shares can be listed.”
In addition, the argument that the PALI properties belong to the Military/Naval Reservation does not inspire
belief. The point is, the PALI properties are now titled. A property losses its public character the moment it is
covered by a title. As a matter of fact, the titles have long been settled by a final judgment; and the final decree
having been registered, they can no longer be re-opened considering that the one year period has already
passed. Lastly, the determination of what standard to apply in allowing PALI’s application for listing, whether the
discretion method or the system of public disclosure adhered to by the SEC, should be addressed to the
Securities Commission, it being the government agency that exercises both supervisory and regulatory authority
over all corporations.
On August 15, 1996, the PSE, after it was granted an extension, filed an instant Petition for Review on Certiorari,
taking exception to the rulings of the SEC and the Court of Appeals. Respondent PALI filed its Comment to the
petition on October 17, 1996. On the same date, the PCGG filed a Motion for Leave to file a Petition for
Intervention. This was followed up by the PCGG’s Petition for Intervention on October 21, 1996. A supplemental
Comment was filed by PALI on October 25, 1997. The Office of the Solicitor General, representing the SEC and
the Court of Appeals, likewise filed its Comment on December 26, 1996. In answer to the PCGG’s motion for
leave to file petition for intervention, PALI filed its Comment thereto on January 17, 1997, whereas the PSE filed
its own Comment on January 20, 1997.
On February 25, 1996, the PSE filed its Consolidated Reply to the comments of respondent PALI (October 17,
1996) and the Solicitor General (December 26, 1996). On may 16, 1997, PALI filed its Rejoinder to the said
consolidated reply of PSE.
PSE submits that the Court of Appeals erred in ruling that the SEC had authority to order the PSE to list the
shares of PALI in the stock exchange. Under presidential decree No. 902-A, the powers of the SEC over stock
exchanges are more limited as compared to its authority over ordinary corporations. In connection with this, the
powers of the SEC over stock exchanges under the Revised Securities Act are specifically enumerated, and these
do not include the power to reverse the decisions of the stock exchange. Authorities are in abundance even in
the United States, from which the country’s security policies are patterned, to the effect of giving the Securities
Commission less control over stock exchanges, which in turn are given more lee-way in making the decision
whether or not to allow corporations to offer their stock to the public through the stock exchange. This is in
accord with the “business judgment rule” whereby the SEC and the courts are barred from intruding into
business judgments of corporations, when the same are made in good faith. The said rule precludes the reversal
of the decision of the PSE to deny PALI’s listing application, absent a showing a bad faith on the part of the PSE.
Under the listing rule of the PSE, to which PALI had previously agreed to comply, the PSE retains the discretion to
accept or reject applications for listing. Thus, even if an issuer has complied with the PSE listing rules and
requirements, PSE retains the discretion to accept or reject the issuer’s listing application if the PSE determines
that the listing shall not serve the interests of the investing public.
Moreover, PSE argues that the SEC has no jurisdiction over sequestered corporations, nor with corporations
whose properties are under sequestration. A reading of Republic of the Philippines vs. Sandiganbayan, G.R. No.
105205, 240 SCRA 376, would reveal that the properties of PALI, which were derived from the Ternate
Development Corporation (TDC) and the Monte del Sol Development Corporation (MSDC), are under
sequestration by the PCGG, and the subject of forfeiture proceedings in the Sandiganbayan. This ruling of the
Court is the “law of the case” between the Republic and the TDC and MSDC. It categorically declares that the
assets of these corporations were sequestered by the PCGG on March 10, 1986 and April 4, 1988.
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It is, likewise, intimidated that the Court of Appeals’ sanction that PALI’s ownership over its properties can no
longer be questioned, since certificates of title have been issued to PALI and more than one year has since
lapsed, is erroneous and ignores well settled jurisprudence on land titles. That a certificate of title issued under
the Torrens System is a conclusive evidence of ownership is not an absolute rule and admits certain exceptions.
It is fundamental that forest lands or military reservations are non-alienable. Thus, when a title covers a forest
reserve or a government reservation, such title is void.
PSE, likewise, assails the SEC’s and the Court of Appeals reliance on the alleged policy of “full disclosure” to
uphold the listing of the PALI’s shares with the PSE, in the absence of a clear mandate for the effectivity of such
policy. As it is, the case records reveal the truth that PALI did not comply with the listing rules and disclosure
requirements. In fact, PALI’s documents supporting its application contained misrepresentations and misleading
statements, and concealed material information. The matter of sequestration of PALI’s properties and the fact
that the same form part of military/naval/forest reservations were not reflected in PALI’s application.
ISSUE:
Whether or not the SEC has the authority to reversed the decision of the PSE to deny the application for listing in
the stock exchange of the private respondent PALI.
RULING:
We affirm that the SEC is the entity with the primary say as to whether or not securities, including shares of
stock of a corporation, may be traded or not in the stock exchange. This is in line with the SEC’s mission to
ensure proper compliance with the laws, such as the Revised Securities Act and to regulate the sale and
disposition of securities in the country. As the appellate court explains:
“Paramount policy also supports the authority of the public respondent to review petitioner’s
denial of the listing. Being a stock exchange, the petitioner performs a function that is vital to
the national economy, as the business is affected with public interest. As a matter of fact, it
has often been said that the economy moves on the basis of the rise and fall of stocks being
traded. By its economic power, the petitioner certainly can dictate which and how many users
are allowed to sell securities thru the facilities of a stock exchange, if allowed to interpret its
own rules liberally as it may please. Petitioner can either allow or deny the entry to the
market of securities. To repeat, the monopoly, unless accompanied by control, becomes
subject to abuse; hence, considering public interest, then it should be subject to government
regulation.”
This is not to say, however, that the PSE’s management prerogatives are under the absolute control of the SEC.
The PSE is, after all, a corporation authorized by its corporate franchise to engage in its proposed and duly
approved business. One of the PSE’s main concerns, as such, is still the generation of profit for its stockholders.
Moreover, the PSE has all the rights pertaining to corporations, including the right to sue and be sued, to hold
property in its own name, to enter (or not to enter) into contracts with third persons, and to perform all other
legal acts within its allocated express or implied powers.
A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and
with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional immunities
and perquisites appropriate to such body. As to its corporate and management decisions, therefore, the state
will generally not interfere with the same. Questions of policy and of management are left to the honest
decision of the officers and directors of a corporation, and the courts are without authority to substitute their
judgment for the judgment of the board of directors. The board is the business manager of the corporation, and
so long as it acts in good faith, its orders are not reviewable by the courts.
Thus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant authority to reverse
the PSE’s decision in matters of application for listing in the market, the SEC may exercise such power only if
the PSE’s judgment is attended by bad faith. In board of Liquidators vs. Kalaw, it was held that bad faith does
not simply connote bad judgment or negligence. It imports a dishonest purpose or some moral obliquity and
conscious doing of wrong. It means a breach of a known duty through some motive or interest of ill will,
partaking of the nature of fraud.
In reaching its decision to deny the application for listing of PALI, the PSE considered important facts, which in
the general scheme, brings to serious question the qualification of PALI to sell its shares to the public through
the stock exchange. During the time for receiving objections to the application, the PSE heard from the
representative of the late President Ferdinand E. Marcos and his family who claim the properties of the private
respondent to be part of the Marcos estate. In time, the PCGG confirmed this claim. In fact, an order of
sequestration has been issued covering the properties of PALI, and suit for reconveyance to the state has been
filed in the Sandiganbayan Court. How the properties were effectively transferred, despite the sequestration
order, from the TDC and MSDC to Rebecco Panlilio, and to the private respondent PALI, in only a short span of
time, are not yet explained to the Court, but it is clear that such circumstances give rise to serious doubt as to
the integrity of PALI as a stock issuer. The petitioner was in the right when it refused application of PALI, for a
contrary ruling was not to the best interest of the general public. The purpose of the Revised Securities Act, after
all, is to give adequate and effective protection to the investing public against fraudulent representations, or
false promises, and the imposition of worthless ventures.
It is to be observed that the U.S. Securities Act emphasized its avowed protection to acts detrimental to
legitimate business, thus:
“The Securities Act, often referred to as the “truth in securities” Act, was designed not only to
provide investors with adequate information upon which to base their decisions to buy and
sell securities, but also to protect legitimate business seeking to obtain capital through honest
presentation against competition form crooked promoters and to prevent fraud in the sale of
securities. (Tenth Annual Report, U.S. Securities and Exchange Commission, p. 14).
As has been pointed out, the effects of such an act are chiefly (1) prevention of excesses and fraudulent
transactions, merely by requirement of that details be revealed; (2) placing the market during the early stages
of the offering of a security a body of information, which operating indirectly through investment services and
expert investors, will tend to produce a more accurate appraisal of a security. x x x. Thus, the Commission may
refuse to permit a registration statement to become effective if it appears on its face to be incomplete or
inaccurate in any material respect, and empower the Commission to issue a stop order suspending the
effectiveness of any registration statement which is found to include any untrue statement of a material fact
or to omit to state any material fact required to be stated therein or necessary to make the statements
therein not misleading. (Idem).”
Also, as the primary market for securities, the PSE has established its name and goodwill, and it has the right to
protect such goodwill by maintaining a reasonable standard of propriety in the entities who choose to transact
through its facilities. It was reasonable for PSE, therefore, to exercise its judgment in the manner it deems
appropriate for its business identity, as long as no rights are trampled upon, and public welfare is safeguarded.
The observation that the title of PALI over its properties is absolute and can no longer be assailed is of no
moment. At this juncture, there is the claim that the properties were owned by the TDC and MSDC and were
transferred in violation of sequestration orders, to Rebecco Panlilio and later on to PALI, besides the claim of
the Marcoses that such properties belong to Marcos estate, and were held only in trust by Rebecco Panlilio. It is
also alleged by the petitioner that these properties belong to naval and forest reserves, and therefore beyond
private dominion. If any of these claims is established to be true, the certificates of title over the subject
properties now held by PALI may be disregarded, as it is an established rule that a registration of a certificate of
title does not confer ownership over the properties described therein to the person named as owner. The
inscription in the registry, to be effective, must be made in good faith. The defense of indefeasibility of a
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Torrens Title does not extend to a transferee who takes the certificate of title with notice of a flaw.
In any case, for the purpose of determining whether PSE acted correctly in refusing the application of PALI, the
true ownership of the properties of PALI need not be determined as an absolute fact. What is material is that
the uncertainty of the properties’ ownership and alienability exists, and this puts to question the
qualification of PALI’s public offering. In sum, the Court finds that the SEC had acted arbitrarily in arrogating
unto itself the discretion of approving the application for listing in the PSE of the private respondent PALI, since
this is a matter addressed to the sound discretion of the PSE, a corporate entity, whose business judgments are
respected in the absence of bad faith.
The question as to what policy is, or should be relied upon in approving the registration and sale of securities in
the SEC is not for the Court to determine, but is left to the sound discretion of the Securities and Exchange
Commission. In mandating the SEC to administer the Revised Securities Act, and in performing its other
functions under pertinent laws, the Revised Securities Act, under Section 3 thereof, gives the SEC the power to
promulgate such rules and regulations as it may consider appropriate in the public interest for the enforcement
of the said laws. The second paragraph of Section 4 of the said law, on the other hand, provides that no
security, unless exempt by law, shall be issued, endorsed, sold, transferred or in any other manner conveyed to
the public, unless registered in accordance with the rules and regulations that shall be promulgated in the
public interest and for the protection of investors by the Commission. Presidential Decree No. 902-A, on the
other hand, provides that the SEC, as regulatory agency, has supervision and control over all corporations and
over the securities market as a whole, and as such, is given ample authority in determining appropriate policies.
Pursuant to this regulatory authority, the SEC has manifested that it has adopted the policy of “full material
disclosure” where all companies, listed or applying for listing, are required to divulge truthfully and accurately,
all material information about themselves and the securities they sell, for the protection of the investing public,
and under pain of administrative, criminal and civil sanctions. In connection with this, a fact is deemed material
if it tends to induce or otherwise effect the sale or purchase of its securities. While the employment of this
policy is recognized and sanctioned by laws, nonetheless, the Revised Securities Act sets substantial and
procedural standards which a proposed issuer of securities must satisfy. Pertinently, Section 9 of the Revised
Securities Act sets forth the possible Grounds for the Rejection of the registration of a security:
“- - The Commission may reject a registration statement and refuse to issue a permit to sell the securities
included in such registration statement if it finds that - -
(1) The registration statement is on its face incomplete or inaccurate in any material respect or includes
any untrue statement of a material fact or omits to state a material facts required to be stated
therein or necessary to make the statements therein not misleading; or
(2) The issuer or registrant - -
(i) is not solvent or not is sound financial condition;
(ii) has violated or has not complied with the provisions of this Act, or the rules promulgated
pursuant thereto, or any order of the Commission;
(iii) has failed to comply with any of the applicable requirements and conditions that the
Commission may, in the public interest and for the protection of investors, impose before
the security can be registered;
(iv) had been engaged or is engaged or is about to engaged in fraudulent transactions;
(v) is in any was dishonest of is not of good repute; or
(vi) does not conduct its business in accordance with law or is engaged in a business that is
illegal or contrary or government rules and regulations.
(3) The enterprise or the business of the issuer is not shown to be sound or to be based on sound
business principles;
 (4) An officer, member of the board of directors, or principal stockholder of the issuer is disqualified to
such officer, director or principal stockholder; or
(5) The issuer or registrant has not shown to the satisfaction of the Commission that the sale of its
security would not work to the prejudice to the public interest or as a fraud upon the purchaser or
investors.”

A reading of the foregoing grounds reveals the intention of the lawmakers to make the registration and
issuance of securities dependent, to a certain extent, on the merits of the securities themselves, and of the
issuer, to be determined by the Securities and Exchange Commission. This measure was meant to protect the
interest of the investing public against fraudulent and worthless securities, and the SEC is mandated by law to
safeguard these interests, following the policies and rules therefore provided. The absolute reliance on the full
disclosure method in the registration of securities is, therefore, untenable.

At it is, the Court finds that the private respondent PALI, on at least two points (nos. 1 and 5) has failed to
support the propriety of the issue of its shares with unfailing clarity, thereby lending support to the conclusion
that the PSE acted correctly in refusing the listing of PALI in its stock exchange. This does not discount the
effectivity of whatever method the SEC, in the exercise of its vested authority, chooses in setting the standard
for public offerings of corporations wishing to do so. However, the SEC must recognize and implement the
mandate of the law, particularly the Revised Securities Act, the provisions of which cannot be amended or
supplanted my mere administrative issuance.

In resumé, the Court finds that the PSE has acted with justified circumspection, discounting, therefore, any
imputation of arbitrariness and whimsical animation on its part. Its action in refusing to allow the listing of PALI
in the stock exchange is justified by the law and by the circumstances attendant to this case.

UE-0200673-2023
 2. the increases in the salaries/emoluments of the Chairman, Vice-President, Treasurer and Assistant
FILIPINAS PORT SERVICES, INC., VS. GO, G.R. No. 161886. March 16, 2007 General Manager were well within the financial capacity of the corporation and well-deserved by the
officers elected thereto; and
GARCIA, J.: 3. the positions of AVPs for Corporate Planning, Operations, Finance and Administration were already
in existence during the tenure of Cruz as president of the corporation, and were merely recreated by
FACTS: the Board, adding that all those appointed to said positions of Assistant Vice Presidents, as well as
Petitioner Eliodoro C. Cruz, Filport's president from 1968 until he lost his bid for reelection as Filport's president the additional position of Special Assistants to the Chairman and the President, rendered services to
during the general stockholders' meeting in 1991, wrote a letter to the corporation's Board of Directors deserve their compensation.
questioning the board's creation of the positions with a monthly remuneration of P13,050.00 each, and the
election thereto of certain members of the board. In the same Answer, respondents further averred that Cruz and his co-petitioner Minterbro, while admittedly
stockholders of Filport, have no authority nor standing to bring the so-called "derivative suit" for and in
In his aforesaid letter, Cruz requested the board to take necessary action/actions to recover from those elected behalf of the corporation; that respondent Mary Jean D. Co has already ceased to be a corporate director and
to the aforementioned positions the salaries they have received. so with Fortunato V. de Castro, one of those holding an assailed position; and that no demand to cease and
desist from further committing the acts complained of was made upon the board. By way of affirmative
On 15 September 1992, the board met and took up Cruz's letter. The records do not show what specific defenses, respondents asserted that
action/actions the board had taken on the letter. Evidently, whatever action/actions the board took did not sit (1) the petition is not duly verified by petitioner Filport which is the real party-in-interest;
well with Cruz. (2) Filport, as represented by Cruz and Minterbro, failed to exhaust remedies for redress within the
corporation before bringing the suit; and
On 14 June 1993, Cruz, purportedly in representation of Filport and its stockholders, among which is herein co- (3) the petition does not show that the stockholders bringing the suit are joined as nominal parties. In
petitioner Mindanao Terminal and Brokerage Services, Inc. (Minterbro), filed with the SEC a petition which he support of their counterclaim, respondents averred that Cruz filed the alleged derivative suit in bad
describes as a derivative suit against the herein respondents who were then the incumbent members of faith and purely for harassment purposes on account of his non-reelection to the board in the 1991
Filport's Board of Directors, for alleged acts of mismanagement detrimental to the interest of the corporation general stockholders' meeting.
and its shareholders at large, namely:
As earlier narrated, the derivative suit (SEC Case No. 06-93-4491) hibernated with the SEC for a long period of
1. creation of an executive committee in 1991 composed of seven (7) members of the board with time. With the enactment of R.A. No. 8799, the case was first turned over to the RTC of Manila, Branch 14,
compensation of P500.00 for each member per meeting, an office which, to Cruz, is not provided for sitting as a corporate court. Thereafter, on respondents' motion, it was eventually transferred to the RTC of
in the by-laws of the corporation and whose function merely duplicates those of the President and Davao City whereat it was docketed as Civil Case No. 28,552-2001 and raffled to Branch 10 thereof.
General Manager;
2. increase in the emoluments of the Chairman, Vice-President, Treasurer and Assistant General On 10 December 2001, RTC-Davao City rendered its decision in the case. Even as it found that
Manager which increases are greatly disproportionate to the volume and character of the work of (1) Filport's Board of Directors has the power to create positions not provided for in the by-laws of
the directors holding said positions; the corporation since the board is the governing body; and
3. re-creation of the positions of Assistant Vice-Presidents (AVPs) for Corporate Planning, Operations, (2) the increases in the salaries of the board chairman, vice-president, treasurer and assistant general
Finance and Administration, and the election thereto of board members Edgar C. Trinidad, Eliezer de manager are reasonable, the trial court nonetheless rendered judgment against the respondents by
Jesus, Mary Jean D. Co and Henry Chua, respectively; and ordering the directors holding the positions of Assistant Vice President for Corporate Planning,
4. creation of the additional positions of Special Assistants to the President and the Board Chairman, Special Assistant to the President and Special Assistant to the Board Chairman to refund to the
with Fortunato V. de Castro and Arsenio Lopez Chua elected to the same, the directors corporation the salaries they have received as such officers "considering that Filipinas Port Services is
elected/appointed thereto not doing any work to deserve the monthly remuneration of P13,050.00 not a big corporation requiring multiple executive positions" and that said positions "were just
each. created for accommodation."

In the same petition, Cruz alleged that despite demands made upon the respondent members of the board of
directors to desist from creating the positions in question and to account for the amounts incurred in creating
the same, the demands were unheeded. Cruz thus prayed that the respondent members of the board of
directors be made to pay Filport, jointly and severally, the sums of money variedly representing the damages
incurred as a result of the creation of the offices/positions complained of and the aggregate amount of the
questioned increased salaries.
In their common Answer with Counterclaim, the respondents denied the allegations of mismanagement and
materially averred as follows:
1. the creation of the executive committee and the grant of per diems for the attendance of each
member are allowed under the by-laws of the corporation;
From the adverse decision of the trial court, herein respondents went on appeal to the CA.
In its decision of 19 January 2004, the CA, taking exceptions to the findings of the trial court that the creation of
the positions of Assistant Vice President for Corporate Planning, Special Assistant to the President and Special
Assistant to the Board Chairman was merely for accommodation purposes, granted the respondents' appeal,
reversed and set aside the appealed decision of the trial court and accordingly dismissed the so-called
derivative suit filed by Cruz, et al.
Intrigued, and quite understandably, by the fact that, in its decision, the CA, before proceeding to address the
merits of the appeal, prefaced its disposition with the statement reading "[T]he appeal is bereft of
merit," thereby contradicting the very fallo of its own decision and the discussions made in the body thereof,
respondents filed with the appellate court a Motion For Nunc Pro Tunc Order , thereunder praying that the
phrase "[T]he appeal is bereft of merit," be corrected to read "[T]he appeal is impressed with merit." In its
resolution of 23 April 2004, the CA granted the respondents' motion and accordingly effected the desired

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correction.
xxx The Board of Directors shall fix the compensation of the officers and agents of the corporation.
Hence, petitioners' present recourse.
Unfortunately, the bylaws of the corporation are silent as to the creation by its board of directors of
ISSUE: an executive committee. Under Section 35 of the Corporation Code, the creation of an executive committee
Whether or not the Filport's Board of Directors acted within its powers in creating the executive committee and must be provided for in the bylaws of the corporation.
the positions of AVPs for Corporate Planning, Operations, Finance and Administration, and those of the Special
Assistants to the President and the Board Chairman, each with corresponding remuneration, and in increasing Notwithstanding the silence of Filport's bylaws on the matter, we cannot rule that the creation of the executive
the salaries of the positions of Board Chairman, Vice-President, Treasurer and Assistant General Manager. committee by the board of directors is illegal or unlawful. One reason is the absence of a showing as to the true
nature and functions of said executive committee considering that the "executive committee," referred to in
RULING: Section 35 of the Corporation Code which is as powerful as the board of directors and in effect acting for the
The governing body of a corporation is its board of directors. Section 23 of the Corporation Code explicitly board itself, should be distinguished from other committees which are within the competency of the board to
provides that unless otherwise provided therein, the corporate powers of all corporations formed under the create at anytime and whose actions require ratification and confirmation by the board. Another reason is that,
Code shall be exercised, all business conducted and all property of the corporation shall be controlled and held ratiocinated by both the two (2) courts below, the Board of Directors has the power to create positions not
by a board of directors. Thus, with the exception only of some powers expressly granted by law to stockholders provided for in Filport's bylaws since the board is the corporation's governing body, clearly upholding the power
(or members, in case of non-stock corporations), the board of directors (or trustees, in case of non-stock of its board to exercise its prerogatives in managing the business affairs of the corporation.
corporations) has the sole authority to determine policies, enter into contracts, and conduct the ordinary
business of the corporation within the scope of its charter, i.e., its articles of incorporation, by-laws and relevant As well, it may not be amiss to point out that, as testified to and admitted by petitioner Cruz himself, it was
provisions of law. Verily, the authority of the board of directors is restricted to the management of the regular during his incumbency as Filport president that the executive committee in question was created, and that he
business affairs of the was even the one who moved for the creation of the positions of the AVPs for Operations, Finance and
corporation, unless more extensive power is expressly conferred. Administration. By his acquiescence and/or ratification of the creation of the aforesaid offices, Cruz is virtually
precluded from suing to declare such acts of the board as invalid or illegal. And it makes no difference that he
The raison d'etre behind the conferment of corporate powers on the board of directors is not lost on the Court. sues in behalf of himself and of the other stockholders. Indeed, as his voice was not heard in protest when he
Indeed, the concentration in the board of the powers of control of corporate business and of appointment of was still Filport's president, raising a hue and cry only now leads to the inevitable conclusion that he did so out
corporate officers and managers is necessary for efficiency in any large organization. Stockholders are too of spite and resentment for his non-reelection as president of the corporation.
numerous, scattered and unfamiliar with the business of a corporation to conduct its business directly. And so
the plan of corporate organization is for the stockholders to choose the directors who shall control and With regard to the increased emoluments of the Board Chairman, Vice-President, Treasurer and Assistant
supervise the conduct of corporate business. General Manager which are supposedly disproportionate to the volume and nature of their work, the Court,
after a judicious scrutiny of the increase vis-à-vis the value of the services rendered to the corporation by the
In the present case, the board's creation of the positions of Assistant Vice Presidents for Corporate Planning, officers concerned, agrees with the findings of both the trial and appellate courts as to the reasonableness and
Operations, Finance and Administration, and those of the Special Assistants to the President and the Board fairness thereof.
Chairman, was in accordance with the regular business operations of Filport as it is authorized to do so by the
corporation's by-laws, pursuant to the Corporation Code. Continuing, petitioners contend that the CA did not appreciate their evidence as to the alleged acts of
mismanagement by the then incumbent board. A perusal of the records, however, reveals that petitioners
The election of officers of a corporation is provided for under Section 25 of the Code which reads: merely relied on the testimony of Cruz in support of their bold claim of mismanagement. To the mind of the
Sec. 25. Corporate officers, quorum. - Immediately after their election, the directors of a Court, Cruz' testimony on the matter of mismanagement is bereft of any foundation. As it were, his testimony
corporation must formally organize by the election of a president, who shall be a director, a consists merely of insinuations of alleged wrongdoings on the part of the board. Without more, petitioners'
treasurer who may or may not be a director, a secretary who shall be a resident and citizen of posture of mismanagement must fall and with it goes their prayer to hold the respondents liable therefor.
the Philippines, and such other officers as may be provided for in the by-laws.
But even assuming, in gratia argumenti, that there was mismanagement resulting to corporate damages and/or
In turn, the amended Bylaws of Filport provides the following: business losses, still the respondents may not be held liable in the absence, as here, of a showing of bad faith in
doing the acts complained of.
Officers of the corporation, as provided for by the by-laws, shall be elected by the board of
directors at their first meeting after the election of Directors. xxx If the cause of the losses is merely error in business judgment, not amounting to bad faith or negligence,
directors and/or officers are not liable. [17] For them to be held accountable, the mismanagement and the
The officers of the corporation shall be a Chairman of the Board, President, a Vice-President, a resulting losses on account thereof are not the only matters to be proven; it is likewise necessary to show that
Secretary, a Treasurer, a General Manager and such other officers as the Board of Directors may the directors and/or officers acted in bad faith and with malice in doing the assailed acts. Bad faith does not
from time to time provide, and these officers shall be elected to hold office until their successors are simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and
elected and qualified. conscious doing of a wrong, a breach of a known duty through some motive or interest or ill-will partaking of
the nature of fraud.[18] We have searched the records and nowhere do we find a "dishonest purpose" or "some
Likewise, the fixing of the corresponding remuneration for the positions in question is provided for in the same moral obliquity," or "conscious doing of a wrong" on the part of the respondents that "partakes of the nature of
by-laws of the corporation, viz: fraud."

UE-0200673-2023

We thus extend concurrence to the following findings of the CA, affirmatory of those of the trial court:
xxx As a matter of fact, it was during the term of appellee Cruz, as president and
director, that the executive committee was created. What is more, it was appellee
himself who moved for the creation of the positions of assistant vice presidents for
operations, for finance, and for administration. He should not be heard to complain
thereafter for similar corporate acts.
The increase in the salaries of the board chairman, president, treasurer, and assistant
general manager are indeed reasonable enough in view of the responsibilities assigned
to them, and the special knowledge required, to be able to effectively discharge their
respective functions and duties.
Questions of policy or of management are left solely to the honest decision of the board as the business
manager of the corporation, and the court is without authority to substitute its judgment for that of the board,
and as long as it acts in good faith and in the exercise of honest judgment in the interest of the corporation, its
orders are not reviewable by the courts.
In a last-ditch attempt to salvage their cause, petitioners assert that the CA went beyond the issues raised in the
court of origin when it ruled on the absence of receipt of actual payment of the salaries/emoluments pertaining
to the positions of Assistant Vice-President for Corporate Planning, Special Assistant to the Board Chairman and
Special Assistant to the President. Petitioners insist that the issue of nonpayment was never raised by the
respondents before the trial court, as in fact, the latter allegedly admitted the same in their Answer With
Counterclaim.
We are not persuaded.

Surely, factual findings of trial courts, especially when affirmed by the CA, are binding and conclusive on this By claiming that Filport suffered damages because the directors appointed to the assailed positions are not
Court. doing anything to deserve their compensation, petitioners are saddled with the burden of proving that salaries
were actually paid. Since the trial court, in effect, found that the petitioners successfully proved payment of the
There is, however, a factual matter over which the CA and the trial court parted ways. We refer to the salaries when it directed the reimbursements of the same, respondents necessarily have to raise the issue on
accommodation angle. appeal. And the CA rightly resolved the issue when it found that no evidence of actual payment of the salaries
in question was actually adduced. Respondents' alleged admission of the fact of payment cannot be inferred
The trial court was with petitioner Cruz in saying that the creation of the positions of the three (3) AVPs for from a reading of the pertinent portions of the parties' respective initiatory pleadings. Respondents' allegations
Corporate Planning, Special Assistant to the President and Special Assistant to the Board Chairman, each with a in their Answer With Counterclaim that the officers corresponding to the positions created "performed the work
salary of P13,050.00 a month, was merely for accommodation purposes considering that Filport is not a big called for in their positions" or "deserve their compensation," cannot be interpreted to mean that they were
corporation requiring multiple executive positions. Hence, the trial court's order for said officers to return the "actually paid" such compensation. Directly put, the averment that "one deserves one's compensation" does
amounts they received as compensation. not necessarily carry the implication that "such compensation was actually remitted or received." And because
payment was not duly proven, there is no evidentiary or factual basis for the trial court to direct respondents to
On the other hand, the CA took issue with the trial court and ruled that Cruz's accommodation theory is not make reimbursements thereof to the corporation.
based on facts and without any evidentiary substantiation. CHING, V. QUEZON CITY SPORTS CLUB, INC., G.R. No. 200150. November 07, 2016

We concur with the line of the appellate court. For truly, aside from Cruz's bare and self-serving testimony, no LEONARDO-DE CASTRO, J.:
other evidence was presented to show the fact of "accommodation." By itself, the testimony of Cruz is not
enough to support his claim that accommodation was the underlying factor behind the creation of the FACTS:
aforementioned three (3) positions. Respondent Club is a duly registered domestic corporation providing recreational activities, sports facilities, and
exclusive privileges and services to its members.
It is elementary in procedural law that bare allegations do not constitute evidence adequate to support a
conclusion. It is basic in the rule of evidence that he who alleges a fact bears the burden of proving it by the Petitioner Catherine became a member and regular patron of respondent Club in 1989. Per policy of respondent
quantum of proof required. Bare allegations, unsubstantiated by evidence, are not equivalent to proof under Club, petitioner Catherine's membership privileges were extended to immediate family members.
the Rules of Court.[19] The party having the burden of proof must establish his case by a preponderance of
evidence.[20] On June 15, 1999, the National Labor Relations Commission (NLRC) rendered a Decision in NLRC NCR Case No.
00-07-06219, ordering respondent Club to pay backwages, 13 th and 14th month pay, and allowances to six
Besides, the determination of the necessity for additional offices and/or positions in a corporation is a illegally dismissed employees. The successive appeals of respondent Club to the Court of Appeals and this Court
management prerogative which courts are not wont to review in the absence of any proof that such were unsuccessful, and the judgment for illegal dismissal against respondent Club became final and executory.
prerogative was exercised in bad faith or with malice. As a result, an alias writ of execution of said judgment was served on respondent Club on September 19, 200 1
for the total amount of P4,433,550.00.
Indeed, it would be an improper judicial intrusion into the internal affairs of Filport were the Court to determine
the propriety or impropriety of the creation of offices therein and the grant of salary increases to officers Because respondent Club was not in a financial position to pay the monetary awards in NLRC NCR Case No. 00-
thereof. Such are corporate and/or business decisions which only the corporation's Board of Directors can 07-06219, respondent BOD approved on September 20, 200I Board Resolution No. 7-2001, entitled "Special
determine. Assessment for Club Members in Relation to the Marie Rose Navarro, et al. v. QCSI, et al. Case," resolving to
"seek the assistance of its members by assessing each member the amount of TWO THOUSAND FIVE
So it is that in Philippine Stock Exchange, Inc. v. CA, the Court unequivocally held: HUNDRED PESOS (P2,500.00) payable in five (5) equal monthly payments starting the month of September
2001."

UE-0200673-2023
Petitioner Catherine was duly notified of the implementation of the special assessment through a Letter dated
September 25, 2001 from the Treasurer of respondent Club. The amount of P500.00 was debited and/or
charged to Catherine's account each month from September 2001 to January 2002, as reflected in the
Statements of Account issued by respondent Club. Each Statement of Account sent by respondent Club to
petitioner Catherine included a general notice, quoted below:
(*) This statement is rendered as of the above date and shall be deemed correct if no discrepancy is reported
within ten (10) days from receipt hereof.
(*) Accounts which are past due for 60 days and the amount is over Php20,000.00 will be automatically
suspended.
(*) Accounts that are 75 days in arrears will be automatically suspended regardless of amount.
(*) Over the counter (OTC) payments are now accepted at 27 Asiatrust Banks branches Metro Manila wide.
Petitioner Catherine believed that the imposition of the special assessment in Board Resolution No. 7-2001
was unjust and/or illegal, however, she took no action against the same. Petitioner Catherine simply avoided
paying the special assessment by settling the amounts due in her Statements of Account from September 2001
to January 2002 short of P500.00.
Respondent BOD then passed Board Resolution No. 3-2002 on April 18, 2002 which suspended the privileges
of the members of respondent Club who had not yet paid the special assessment.
Petitioner Catherine continued availing herself of the services of respondent Club and regularly paid the
amounts due in her Statements of Account from February 2002 to May 2003, but always leaving behind a
balance of more or less P2,500.00. Petitioner Catherine was not personally informed of Board Resolution No. 3-
2002 nor advised that she was already deemed delinquent in the payment of any other Statements of Account.
On May 22, 2003, petitioner Laurence went to respondent Club intending to avail himself of its services using
the account of his mother, petitioner Catherine. Respondent Club refused to accommodate petitioner Laurence
because his mother's membership privileges had been suspended. The following day, May 23, 2003, petitioner
Catherine went to respondent Club to verify the suspension of her membership privileges. Respondent Lopez,
the Finance Manager of respondent Club, gave petitioner Catherine copies of Board Resolution Nos. 7-2001 and
3-2002. Petitioner Catherine also noticed during said visit that her name was included and highlighted in
respondent Lopez's Memorandum dated May 22, 2003 addressed to "All Outlets" with the subject matter of
"Suspended Members Due to Non-Payment of P2,500.00 Special Assessment," copies of which were posted at
the workstations of the employees of respondent Club and in other conspicuous places within the premises of
respondent Club.
Petitioner Catherine, through counsel, sent respondents a letter dated May 24, 2003 demanding the immediate
recall of the suspension of her membership privileges, an explanation why she should not file a case for damages
against respondents, and an apology for besmirching her name and good reputation. Respondents, also through
counsel, replied in a letter dated May 29, 2003 pointing out that respondent Club had never besmirched the
reputation of any of its members in its 20 years of existence; that petitioner Catherine herself admitted that she
had failed to pay the P2,500.00 special assessment fee; and that the list of suspended members who failed to
pay the special assessment fee was never posted but was given to the members concerned.
Meanwhile, so she can avail herself of the services of respondent Club, petitioner Catherine registered as a guest
of either her husband, petitioner Lorenzo, or her other daughter, Noelle Ching (Noelle). Consequently, petitioner
Catherine was paying more than double her customary fees to enjoy the services of respondent Club.
On July 7, 2003, petitioners instituted before the RTC a Complaint for damages against respondents, based on
Articles 19, 20, and 21 of the Civil Code.
UE-0200673-2023
Respondents filed their separate Answers with Counterclaims, seeking the dismissal of petitioners' Complaint
and payment of moral damages, exemplary damages, and attorney's fees.
During trial, petitioners Catherine and Lorenzo and Roland Dacut (Dacut), an employee of respondent Club and
petitioner Catherine's regular tennis trainer for 10 years, all took the witness stand. All documentary exhibits
formally offered by petitioners were admitted by the RTC in its Order dated November 21, 2005.
It was revealed during trial that a few days after the filing of the Complaint, petitioner Catherine was refused
access to respondent Club, even as a mere guest of her daughter Noelle. Apparently, respondents "disapproved"
Noelle's letter dated July 8, 2003 extending her membership privileges at respondent Club to her mother,
petitioner Catherine, and other immediate family members. To lift the suspension of her membership privileges,
petitioner Catherine finally paid "under protest" the special assessment of P2,500.00 on July 13, 2003.
Petitioner Catherine lamented that even though she had already paid the special assessment, respondents
continued harassing her when she was at respondent Club. Every time petitioner Catherine went to respondent
Club, a security guard would unusually monitor her movements and activities. Dacut was also directed by the
management of respondent Club to stop playing with petitioner Catherine or other members of her family.
Petitioners also filed a Manifestation on January 22, 2007 informing the RTC that on September 21, 2006,
respondent BOD issued Board Resolution No. 10-2006, in which they resolved to expel petitioner Catherine as a
regular member of respondent Club due to her filing of the civil suit against respondents. Petitioner Catherine
received a notice of her expulsion on November 20, 2006. Petitioner Catherine's expulsion from respondent Club
became the subject matter of another case before the RTC.
Respondents, for their part, presented the testimonies of respondent Lopez, Finance Manager; respondent
Ho, BOD member; and Karen Layug, Human Resources Department Manager, all of respondent Club. The RTC, in
its Order dated July 10, 2007, admitted all the documentary evidence formally offered by respondents.
The RTC rendered its Decision on May 23, 2008. The RTC, based on the "Business Judgment Rule" and Philippine
Stock Exchange, Inc. v. Court of Appeals, held that questions of policy and management are left to the honest
decision of the officers and directors of a corporation; and the courts are without authority to substitute their
judgment for that of the BOD unless said judgment had been attended with bad faith. The RTC found no
evidence of bad faith on the part of respondents in adopting Board Resolution No. 7-2001 on September 20,
2001, imposing the special assessment of P2,500.00 on all members of respondent Club. Respondent Club was
forced to adopt said Board Resolution because it was not in a financial capacity to pay the judgment in NLRC NCR
Case No. 00-07-06219. The special assessment was reasonable and fair in order to save respondent Club from
the execution of the alias writ of execution.
The RTC pointed out petitioner Catherine's admission in the Pre-Trial Order dated July 26, 2005 that she was
aware of the issuance of Board Resolution No. 7-2001. Petitioner Catherine's silence and/or failure to
immediately challenge the validity of said Board Resolution could only be construed as her assent to the same
and/or waiver of her right to question its propriety.
The RTC though ruled that respondents failed to comply with the By-Laws of respondent Club when they
suspended petitioner Catherine's privileges. According to the trial court:
Section 35 of the By-laws of the [respondent] Club provides the grounds and the procedure
for the suspension and/or expulsion of a member. A member maybe suspended or expelled if
he or she violates the By-laws, rules, regulations, resolution and orders duly promulgated by
the Board of Directors or for an act, which in the opinion of the board, are serious or
prejudicial to the Club. In either case however, a suspension or expulsion comes after proper
notice and hearing. It could be for this reason why Board Resolution [No.] 3-2002 required
"receipt of a demand" upon a member before his privileges are suspended. Here, it appears
 that the privileges of [petitioners] were suspended without notice or demand having been
issued to [petitioner] Catherine to pay the special assessment and if she fails her privileges
and that of her dependents will be suspended. True it is that the statement of account
contains a reminder that an account which is more than seventy-five (75) days in arrears,
regardless of the amount, will be suspended but the Statements of Account, offered in
evidence by [respondents] were for other expenses and billings incurred by [petitioners] such
as Sports and Recreation Chits (CHH), Charge Account Slip Chits (CHC), Beauty Parlor Chits
(CBP), Reflexology Chits (RC), Restaurant Chits (CHR), Monthly Dues (MD) and Locker Rental
(LR), and none containing a demand for the payment for the special assessment. There could
be some other Statements of Account but these were not formally offered and since they
were not offered the Court will not consider them as such. Needless to state, the Statements
of Account forming part of the [respondents'] evidence do not prove demand upon the
[petitioners] to pay for the Special Assessment before their privileges can be suspended. True
also that [petitioner] Catherine admitted during the Pre-trial Conference of her being aware
of the billings for the special assessment but this admission is vague as to the time when she
came to know of these billings partaking of a demand.
In addition, the RTC adjudged that respondents acted in bad faith or with malice in continuing to deprive
petitioner Catherine her membership privileges even after she had already paid the special assessment, thus:
The [c]ourt finds no reason to doubt the testimony of Roland Dacut. It gains weight because
he has no reason to testify particularly against his employer whom he has served for twenty
(20) years. His testimony establishes [respondent] Chua's deliberate intention to deny the
[petitioners] of their privilege of playing tennis at the [respondent] Club despite their
membership. This deliberate intention is further established by Roland Dacut's testimony that
everytime [petitioner] Catherine would come to the [respondent] Club the security guards
would monitor her moves or activities by following where she would go. The [c]ourt is
appalled by these actions because at the time he was directed to stop playing with the
[petitioners] sometime around August or September of 2004, [petitioner] Catherine's
membership with the [respondent] Club has already been reinstated when she paid the
special assessment in July 2003. [Respondent] Club's action in depriving [petitioners] of their
privileges are certainly not consistent with good faith. [Respondents'] violation of their By-
laws coupled by their acts of depriving the [petitioners] of their privileges despite their
reinstatement in July 2003 thus would entitle them for the damages they claim. [Petitioners']
evidence while not preponderant to support the invalidity of Board Resolution No. 7-2001
however are strong enough to prove violation of the Club's By-laws where [petitioners] were
immediately suspended without notice and hearing and for their continuous act of depriving
them of their privilege as members of the [respondent] Club.
The RTC rendered judgment in favor of petitioners.
Respondents filed a Motion for Reconsideration of the foregoing RTC judgment, attaching certified true copies of
petitioner Catherine's Statements of Account issued by respondent Club from September 2001 to January 2002,
which included the P500.00 monthly installment charges for the special assessment. In an Order dated
September 24, 2008, the RTC denied the Motion for Reconsideration of respondents. Respondents appealed
before the Court of Appeals.
In its Decision dated June 27, 2011, the Court of Appeals narrowed down the pivotal issue for its resolution to
whether or not respondents are liable to pay petitioners moral and exemplary damages, attorney's fees, and
costs of suit for (a) suspending petitioner Catherine's membership privileges without prior notice as required by
the By-Laws of respondent Club; and (b) posting the Memorandum dated May 22, 2003 within the premises of
respondent Club.
UE-0200673-2023
The Court of Appeals determined that Section 33(a) of the By-Laws of respondent Club on the "Billing of
Members, Posting of Suspended Accounts" applied to petitioners' case, instead of Section 35 of the same By
Laws on "Suspension and Expulsion;" and the former allowed automatic suspension of a member's privileges
after notice, but with no need for a hearing. The appellate court reasoned:
The fact that there is a separate provision in the Club's By-Laws specifically dealing with
suspension due to non-payment of accounts negates [petitioners'] claim that
Catherine's suspension may only be implemented upon proper notice and hearing. As
testified to by the Club's Finance Manager and admitted by Catherine during the pre-
trial, the Club's policy on the suspension of accounts was implemented on the basis of
the following annotations found in the monthly Statement of Account, to wit:
* * * * NOTICE * * * *
(*) This statement is rendered as of the above date and shall be deemed correct if no
discrepancy is reported within ten (10) days from receipt hereof.
(*) Accounts which are past due for 60 days and the amount is over Php 20,000.00 will
be automatically suspended.
(*) Accounts that are 75 days in arrears will be automatically suspended regardless of
amount.
xxxx
While the Club's Treasurer was previously required to notify the member that if his bill is not paid in full by the
end of the same month, his name will be posted as suspended the following day, it is apparent that the policy of
the club regarding non-payment of accounts was changed into automatic suspension, depending on the amount
and length of time that the bill remains unpaid. However, the current policy appears to be beneficial to the
members since they are granted an extension of 60 or 75 days, as the case may be, within which to settle their
outstanding obligations before their accounts may be suspended.
At any rate, We find that the monthly Statements of Account (Statements) sent to Catherine should be
considered as sufficient notice of suspension. An examination of Catherine's Statements for the months of
September to December 2001 and January 2002 show that she was billed for the special assessment in the
amount of P500.00 and was reflected therein as "SAL-02", "SAL-03", "SAL-04", and "SAL-05". Catherine cannot
feign ignorance of this fact in view of her admission, viz.: (1) her Statements clearly indicate that accounts that
are 75 days in arrears will be automatically suspended; (2) she was billed for the P2,500.00 special assessment
from September 2001 to January 2002; and (3) the special assessment remained unpaid for 1 year and 4
months. In addition, the amount of the special assessment, together with the penalties for non payment
thereof, were written in the box with the heading "OVER 60 DAYS" in her subsequent Statements. In view of the
foregoing, the Club correctly suspended Catherine's account considering that the special assessment remained
unpaid for more than 75 days.
Be that as it may, the court a quo ruled that the entries with the code "SAL" do not appear in the Statements
which were formally offered by [respondents]. Indeed, a formal offer is necessary, since judges are required to
base their findings of fact and their judgment solely and strictly upon the evidence offered by the parties at the
trial. In the case at bar, it appears that while [respondents] Alano, Ho, and Lopez attached the pertinent pages of
Catherine's Statements (September 2001 to January 2002) which contain the entries "SAL" to their Answer, they
failed to include these pages to the Statements which they formally offered in evidence. However, a scrutiny of
the Statements attached to their Answer reveals that they form an integral part of the Statements formally
offered in evidence. More importantly, the offer of the Statements attached to their Answer would be a mere
superfluity since Catherine had already admitted that she was aware that she was billed for the P2,500.00
special assessment from September 2001 to January 2002.

The Court of Appeals also found no bad faith or intent to injure/humiliate on the part of respondents,
considering that: (a) the suspension of petitioner Catherine's privileges was in accordance with the By-Laws and
policy of respondent Club; (b) despite petitioner Catherine's failure to pay the special assessment charged
against her from September 2001 to January 2002, and the approval on April 18, 2002 of Board Resolution No.
3-2002 which suspended the privileges of members of respondent Club who had not paid the special
assessment, petitioner Catherine's privileges were not actually suspended until respondent Lopez issued her
Memorandum dated May 22, 2003: (c) billing clerks and attendants were furnished copies of respondent Lopez's
Memorandum dated May 22, 2003 for their guidance or reference since it was their duty to check the status of a
member's account, and if they wrongfully accommodated a suspended member, then the charges incurred by
said member would be automatically deducted from their salaries; (d) copies of respondent Lopez's
Memorandum dated May 22, 2003 were posted in the billing clerks' cubicles and there was no proof that copies
of said Memorandum were posted in conspicuous places within the premises of respondent Club; and (e) there
was likewise no evidence that respondents instructed or authorized the billing clerks to post copies of
respondent Lopez's Memorandum dated May 22, 2003 in their cubicles and to highlight petitioner Catherine's
name. Hence, there was no basis for awarding moral and exemplary damages, attorney's fees, and costs of suit
in petitioners' favor.
To the Court of Appeals, Dacut's testimony that they were instructed by the management of respondent Club to
avoid petitioners was hearsay, as the instructions were merely relayed to him by Sonny Torres (Torres), a tennis
attendant. Dacut had no personal knowledge as to whether respondents had in fact directed Torres to give such
an instruction to the trainers. Although hearsay evidence could be admitted due to the lack of objection to the
same, as what happened in this case, it was still without probative value.
Lastly, the Court of Appeals denied the counterclaims for damages of respondents. Respondents failed to
establish that petitioners were moved by bad faith or malice in impleading the respondent BOD in the case a
quo. In the absence of a wrongful act or omission, or of fraud or bad faith on petitioners' part, moral damages
could not be awarded; and without moral damages, then there was no basis to award exemplary damages and
attorney's fees.
Petitioners' Motion for Reconsideration was denied by the Court of Appeals in its Resolution dated January 12,
2012.
Hence, petitioners filed the instant Petition.
ISSUE:
Whether or not the manner by which respondents suspended petitioner Catherine's membership privileges at
respondent Club was done in violation of petitioners' right to due process and with ill motive and in bad faith,
causing damage to petitioners.
RULING:
The following facts are undisputed: (1) respondent BOD approved Board Resolution No. 7-2001 on September
20, 2001 imposing the special assessment of P2,500.00 upon every member of the respondent Club, payable in
five monthly installments of P500.00, to raise the payment for the monetary judgment against respondent Club
in NLRC NCR Case No. 00-07-06219; (2) petitioner Catherine was charged the P500.00 monthly installment for
the special assessment in her Statements of Account from September 2001 to January 2002, but she did not pay
any of them; (3) petitioner Catherine was continually charged the total of P2,500.00 special assessment in her
Statements of Account from February 2002 to May 2003, which she still did not pay; (4) petitioner Catherine
received all the said Statements of Account; (5) by virtue of Board Resolution No. 3-2002, passed by respondent
BOD on April 18, 2002, and respondent Lopez's Memorandum dated May 22, 2003, the membership privileges
of members of respondent Club who did not pay the special assessment, which included petitioner Catherine,
UE-0200673-2023
were suspended; (6) petitioner Catherine paid the P2,500.00 special assessment only on July 13, 2003, after her
membership privileges were already suspended.
Petitioners, on one hand, maintain that petitioner Catherine's nonpayment of the special assessment of
P2,500.00 was a violation of a resolution of the respondent Board, to which Section 35(a) of the By-Laws of
respondent Club - requiring notice and hearing prior to the member's suspension - should have applied.
Respondents, on the other hand, invoke Section 33(a) of the By-Laws of respondent Club, which allows the
suspension of a member with unpaid bills after notice.
The suspension of petitioner Catherine's privileges was due to the P2,500.00 special assessment charged in her
Statements of Account from September 2001 to January 2002, which remained unpaid for over three months by
the time respondent BOD passed Board Resolution No. 3-2002 on April 18, 2002; and for one year and four
months by the time respondent Lopez issued her Memorandum dated May 22, 2003. However, tracing back, the
P2,500.00 special assessment was not an ordinary account or bill incurred by petitioners in respondent Club, as
contemplated in Section 33(a) of the By-Laws.
Section 33(a) of the By-Laws refers to the regular dues and ordinary accounts or bills incurred by members as
they avail of the services at respondent Club, and for which the members are charged in their monthly
Statement of Account. The immediate payment or collection of the amount charged in the member's monthly
Statement of Account is essential so respondent Club can carry-on its day-to-day operations, which is why
Section 33(a) allows for the automatic suspension of a nonpaying member after a specified period and
notification.
The special assessment in the instant case arose from an extraordinary circumstance, i.e., the necessity of
raising payment for the monetary judgment against respondent Club in an illegal dismissal case. The special
assessment of P2,500.00 was imposed upon the members by respondent BOD through Board Resolution No. 7-
2001 dated September 20, 2001; it only so happened that said Board Resolution was implemented by directly
charging the special assessment, in P500.00 installments, in the members' Statements of Account for five
months. Thus, petitioner Catherine's nonpayment of the special assessment was, ultimately, a violation of Board
Resolution No. 7-2001, covered by Section 35(a) of the By-Laws. This much was acknowledged by respondent
BOD itself when it mentioned in Board Resolution No. 3-2002 that "[t]o enforce Board Resolution No. 7-2001," it
was suspending the members who did not pay the special assessment.
Section 35(a) of the By-Laws requires notice and hearing prior to a member's suspension. Definitely, in this
case, petitioner Catherine did not receive notice specifically advising her that she could be suspended for
nonpayment of the special assessment imposed by Board Resolution No. 7-2001 and affording her a hearing
prior to her suspension through Board Resolution No. 3-2002. Respondents merely relied on the general notice
printed in petitioner Catherine's Statements of Account from September 2001 to April 2002 warning of
automatic suspension for accounts of over P20,000.00 which are past due for 60 days, and accounts regardless
of amount which are 75 days in arrears. While said general notice in the Statements of Account might have been
sufficient for purposes of Section 33(a) of the By-Laws, it fell short of the stricter requirement under Section
35(a) of the same By-Laws. Petitioner Catherine's right to due process was clearly violated.
Nevertheless, it is not lost upon this Court that petitioner Catherine herself admitted violating Board Resolution
No. 7-2001 by not paying the P2,500.00 special assessment. Petitioner Catherine cannot deny knowledge of the
special assessment because the first installment of P500.00 was already charged in her Statement of Account for
September 2001 and she willfully did not pay said amount. Despite being aware of the special assessment,
petitioner Catherine simply chose not to pay the same, without taking any other step to let respondents know of
her opposition to said special assessment, until she complained in her letter dated May 24, 2003 about the
suspension of her membership privileges. Again, the Court is not called upon to determine the propriety of the
imposition of the special assessment upon the members of the respondent Club. Whatever reasons petitioner
Catherine might have against the special assessment would not change the fact of her nonpayment of the same
in violation of Board Resolution No. 7-2001. Consequently, there was ground for respondents to suspend
petitioner Catherine's membership privileges.
Moreover, bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or
some moral obliquity and conscious doing of wrong. It means a breach of a known duty through some motive or
interest or ill will that partakes of the nature of fraud. The determination of whether one acted in bad faith is
evidentiary in nature, and acts of bad faith must be substantiated by evidence. Indeed, it is well-settled that bad
faith under the law cannot be presumed; it must be established by clear and convincing evidence. The
ascertainment of good faith, or lack of it, is a question of fact.
suspension of petitioner Catherine's privileges, respondent Club is liable to pay petitioners nominal damages in
the amount of P25,000.00.
The Court clarifies that only respondent Club shall be liable for the nominal damages because in the absence of
malice and bad faith, officers of a corporation cannot be made personally liable for the liabilities of the
corporation which, by legal fiction, has a personality separate and distinct from its officers, stockholders, and
members.

After a review of the records, the Court, like the Court of Appeals, finds no bad faith on the part of respondents
in implementing petitioner Catherine's suspension. Petitioners utterly failed to establish that respondents acted
with malice or ill will or motive in the issuance and distribution to the billing clerks and attendants of respondent
Lopez's Memorandum dated May 22, 2003, which bore the list of suspended members of respondent Club. In
contrast, respondents were able to explain that these were done in the ordinary course of business, i.e., to
implement Board Resolution Nos. 7-2001 and 3-2002. It was necessary that the billing clerks and attendants had
a list of the suspended members of respondent Club as they were the ones on the frontline who directly deal
with the members and would bear the penalty if they mistakenly allowed suspended members access to the
services of respondent Club. There was also no proof that respondents actually ordered the highlighting of
petitioner Catherine's name in the list and/or the posting of the list in the billing clerks' work stations; these
could have been easily done by the billing clerks themselves on their own volition. Noticeably, there were also
other names highlighted in the list, not just petitioner Catherine's. In addition, the posting of the list of
suspended members in conspicuous places in respondent Club did not necessarily connote bad faith on the part
of respondents because Section 33(a) of the By-Laws, which respondents misguidedly believed applied to this
case, authorized the posting of such a list on the Clubhouse Bulletin Board.

In all, there was no evidence that respondents acted in bad faith by particularly singling out petitioners, from
among all other members of respondent Club who did not pay the assessment, to be harassed or humiliated.

Considering that there was justifiable ground for the suspension of petitioner Catherine's privileges in
respondent Club, but her right to due process was violated as she was not afforded notice and hearing prior to
the suspension, the Court proceeds to determine the reliefs to which petitioners are entitled.

The elements for the award of moral damages in a case are: (1) an injury clearly sustained by the claimant; (2) a
culpable act or omission factually established; (3) a wrongful act or omission by the defendant as the proximate
cause of the injury sustained by the claimant; and (4) the award of damages predicated on any of the cases
stated in Article 2219 of the Civil Code. Also, the person claiming moral damages must prove the existence of
bad faith by clear and convincing evidence, for the law always presumes good faith. It is not enough that one
suffered sleepless nights, mental anguish, and serious anxiety as the result of the actuations of the other party.
Invariably, such action must be shown to have been willfully done in bad faith or with ill motive.

There being no clear and convincing evidence of respondents' bad faith in suspending petitioner Catherine's
privileges in respondent Club nor in implementing such suspension, petitioners are not entitled to moral
damages. Since the basis for moral damages has not been established, there is no basis to recover exemplary
damages and attorney's fees, as well.
Even so, the Court deems it proper to award nominal damages to petitioners. Article 2221 of the Civil Code
authorizes the award of nominal damages to a plaintiff whose right has been violated or invaded by the
defendant, for the purpose of vindicating or recognizing that right, not for indemnifying the plaintiff for any loss
suffered. The Court may also award nominal damages in every case where a property right has been invaded.
The amount of such damages is addressed to the sound discretion of the court, taking into account the relevant
circumstances. For its failure to observe due process, as provided under Section 35(a) of the By-Laws, in the

UE-0200673-2023
 To prove the loan transactions, the petitioners presented the copies of the checks which Advance Paper issued
in favor of Arma Traders. The petitioners also filed a manifestation [22] dated June 14, 1995, submitting a bank
DOCTRINE OF APPARENT AUTHORITY statement from Metrobank EDSA Kalookan Branch. This was to show that Advance Paper’s credit line with
Metrobank has been transferred to the account of Arma Traders as payee from October 1994 to December
ADVANCE PAPER CORPORATION VS. ARMA TRADERS CORPORATION, G.R. No. 176897. December 11, 2013
1994.
BRION, J.:
Moreover, Haw testified to prove the loan transactions. When asked why he considered extending the loans
without any collateral and loan agreement or promissory note, and only on the basis of the issuance of the
FACTS: postdated checks, he answered that it was because he trusted Arma Traders since it had been their customer for
Petitioner Advance Paper is a domestic corporation engaged in the business of producing, printing, a long time and that none of the previous checks ever bounced.
manufacturing, distributing and selling of various paper products. Petitioner George Haw (Haw) is the President
while his wife, Connie Haw, is the General Manager. The respondents argued that the purchases on credit were spurious, simulated and fraudulent since there was
no delivery of the P7,000,000.00 worth of notebooks and other paper products.
Respondent Arma Traders is also a domestic corporation engaged in the wholesale and distribution of school
and office supplies, and novelty products. Respondent Antonio Tan (Tan) was formerly the President while During the trial, Ng testified that Arma Traders did not purchase notebooks and other paper products from
respondent Uy Seng Kee Willy (Uy) is the Treasurer of Arma Traders. They represented Arma Traders when September to December 1994. He claimed that during this period, Arma Traders concentrated on Christmas
dealing with its supplier, Advance Paper, for about 14 years. items, not school and office supplies. He also narrated that upon learning about the complaint filed by the
petitioners, he immediately looked for Arma Traders’ records and found no receipts involving the purchases of
On the other hand, respondents Manuel Ting, Cheng Gui and Benjamin Ng worked for Arma Traders as Vice- notebooks and other paper products from Advance Paper. [25]
President, General Manager and Corporate Secretary, respectively.
As to the loan transactions, the respondents countered that these were the personal obligations of Tan and Uy
On various dates from September to December 1994, Arma Traders purchased on credit notebooks and other to Advance Paper. These loans were never intended to benefit the respondents.
paper products amounting to P7,533,001.49 from Advance Paper.
The respondents also claimed that the loan transactions were ultra vires because the board of directors of Arma
Upon the representation of Tan and Uy, Arma Traders also obtained three loans from Advance Paper in Traders did not issue a board resolution authorizing Tan and Uy to obtain the loans from Advance Paper. They
November 1994 in the amounts of P3,380,171.82, P1,000,000.00, and P3,408,623.94 or a total of claimed that the borrowing of money must be done only with the prior approval of the board of directors
P7,788,796.76. Arma Traders needed the loan to settle its obligations to other suppliers because its own because without the approval, the corporate officers are acting in excess of their authority or ultra vires. When
collectibles did not arrive on time. Because of its good business relations with Arma Traders, Advance Paper the acts of the corporate officers are ultra vires, the corporation is not liable for whatever acts that these officers
extended the loans. committed in excess of their authority. Further, the respondents claimed that Advance Paper failed to verify Tan
and Uy’s authority to transact business with them. Hence, Advance Paper should suffer the consequences. [26]
As payment for the purchases on credit and the loan transactions, Arma Traders issued 82 postdated
checks payable to cash or to Advance Paper. Tan and Uy were Arma Traders’ authorized bank signatories who The respondents accused Tan and Uy for conspiring with the petitioners to defraud Arma Traders through a
signed and issued these checks which had the aggregate amount of P15,130,636.87. series of transactions known as rediscounting of postdated checks. In rediscounting, the respondents explained
that Tan and Uy would issue Arma Traders’ postdated checks to the petitioners in exchange for cash, discounted
Advance Paper presented the checks to the drawee bank but these were dishonored either for “insufficiency by as much as 7% to 10% depending on how long were the terms of repayment. The rediscounted percentage
of funds” or “account closed.” Despite repeated demands, however, Arma Traders failed to settle its account represented the interest or profit earned by the petitioners in these transactions. [27]
with Advance Paper.
Tan did not file his Answer and was eventually declared in default.
On December 29, 1994, the petitioners filed a complaint for collection of sum of money with application for
preliminary attachment against Arma Traders, Tan, Uy, Ting, Gui, and Ng. On the other hand, Uy filed his Answer [28] dated January 20, 1995 but was subsequently declared in default upon
his failure to appear during the pre-trial. In his Answer, he admitted that Arma Traders together with its
The petitioners claimed that the respondents fraudulently issued the postdated checks as payment for the corporate officers have been transacting business with Advance Paper. [29] He claimed that he and Tan have been
purchases and loan transactions knowing that they did not have sufficient funds with the drawee banks. authorized by the board of directors for the past 13 years to issue checks in behalf of Arma Traders to pay its
obligations with Advance Paper. Furthermore, he admitted that Arma Traders’ checks were issued to pay its
To prove the purchases on credit, the petitioners presented the summary of the transactions and their contractual obligations with Advance Paper. However, according to him, Advance Paper was informed
corresponding sales invoices as their documentary evidence. beforehand that Arma Traders’ checks were funded out of the P20,000,000.00 worth of collectibles coming from
the provinces. Unfortunately, the expected collectibles did not materialize for unknown reasons.
During the trial, Haw also testified that within one or two weeks upon delivery of the paper products, Arma
Traders paid the purchases in the form of postdated checks. Thus, he personally collected these checks on Ng filed his Answer and claimed that the management of Arma Traders was left entirely to Tan and Uy. Thus, he
Saturdays and upon receiving the checks, he surrendered to Arma Traders the original of the sales invoices while never participated in the company’s daily transactions.
he retained the duplicate of the invoices.
Atty. Ernest S. Ang, Jr. (Atty. Ang), Arma Traders’ Vice-President for Legal Affairs and Credit and Collection,

UE-0200673-2023
testified that he investigated the transactions involving Tan and Uy and discovered that they were financing their
own business using Arma Traders’ resources. He also accused Haw for conniving with Tan and Uy in fraudulently
making Arma Traders liable for their personal debts. He based this conclusion from the following: First, basic
human experience and common sense tell us that a lender will not agree to extend additional loan to another
person who already owes a substantial sum from the lender – in this case, petitioner Advance Paper. Second,
there was no other document proving the existence of the loan other than the postdated checks. Third, the total
of the purchase and loan transactions vis-à-vis the total amount of the postdated checks did not tally. Fourth, he
found out that the certified true copy of Advance Paper’s report with the Securities and Exchange Commission
(SEC report) did not reflect the P15,000,000.00 collectibles it had with Arma Traders. [35]
Hence, the CA set aside the RTC’s order for Arma Traders to pay Advance Paper the sum of P15,321,798.25,
P1,500,000.00 for attorney’s fees, plus cost of suit. It affirmed the RTC decision dismissing the complaint against
respondents Tan, Uy, Ting, Gui and Ng. The CA also directed the petitioners to solidarily pay each of the
respondents their counterclaims of P250,000.00 as moral damages, P250,000.00 as exemplary damages, and
P250,000.00 as attorney’s fees.
ISSUE:
Whether or not Arma Traders is liable to pay the loans applying the doctrine of apparent authority.

Atty. Ang also testified that he already filed several cases of estafa and qualified theft [36] against Tan and Uy and RULING:
that several warrants of arrest had been issued against them. Arma Traders is liable to pay the loans on the basis of the doctrine of apparent authority.

In their pre-trial brief,[37] the respondents named Sharow Ong, the secretary of Tan and Uy, to testify on how Tan The doctrine of apparent authority provides that a corporation will be estopped from denying the agent’s
and Uy conspired with the petitioners to defraud Arma Traders. However, the respondents did not present her authority if it knowingly permits one of its officers or any other agent to act within the scope of an apparent
on the witness stand. authority, and it holds him out to the public as possessing the power to do those acts. The doctrine of apparent
authority does not apply if the principal did not commit any acts or conduct which a third party knew and relied
On June 18, 2001, the RTC ruled that the purchases on credit and loans were sufficiently proven by the upon in good faith as a result of the exercise of reasonable prudence. Moreover, the agent’s acts or conduct
petitioners. Hence, the RTC ordered Arma Traders to pay Advance Paper the sum of P15,321,798.25 with must have produced a change of position to the third party’s detriment.
interest, and P1,500,000.00 for attorney’s fees, plus the cost of the suit.
In Inter-Asia Investment Industries v. Court of Appeals, we explained:
The RTC held that the respondents failed to present hard, admissible and credible evidence to prove that the
sale invoices were forged or fictitious, and that the loan transactions were personal obligations of Tan and Uy. Under this provision [referring to Sec. 23 of the Corporation Code], the power and
Nonetheless, the RTC dismissed the complaint against Tan, Uy, Ting, Gui and Ng due to the lack of evidence responsibility to decide whether the corporation should enter into a contract that will bind
showing that they bound themselves, either jointly or solidarily, with Arma Traders for the payment of its the corporation is lodged in the board, subject to the articles of incorporation, bylaws, or
account.[38] relevant provisions of law. However, just as a natural person who may authorize another to
do certain acts for and on his behalf, the board of directors may validly delegate some of its
Arma Traders appealed the RTC decision to the CA. functions and powers to officers, committees or agents. The authority of such individuals to
bind the corporation is generally derived from law, corporate bylaws or authorization from
The CA held that the petitioners failed to prove by preponderance of evidence the existence of the purchases on the board, either expressly or impliedly by habit, custom or acquiescence in the general
credit and loans based on the following grounds: course of business, viz.:
A corporate officer or agent may represent and bind the corporation in
First, Arma Traders was not liable for the loan in the absence of a board resolution authorizing Tan and Uy to transactions with third persons to the extent that [the] authority to do so has been
obtain the loan from Advance Paper.[39] The CA acknowledged that Tan and Uy were Arma Traders’ authorized conferred upon him, and this includes powers as, in the usual course of the
bank signatories. However, the CA explained that this is not sufficient because the authority to sign the checks is particular business, are incidental to, or may be implied from, the powers
different from the required authority to contract a loan. [40] intentionally conferred, powers added by custom and usage, as usually pertaining
to the particular officer or agent, and such apparent powers as the corporation has
Second, the CA also held that the petitioners presented incompetent and inadmissible evidence to prove the caused person dealing with the officer or agent to believe that it has conferred.
purchases on credit since the sales invoices were hearsay. [41] The CA pointed out that Haw’s testimony as to the
identification of the sales invoices was not an exception to the hearsay rule because there was no showing that [A]pparent authority is derived not merely from practice. Its existence may be ascertained through
the secretaries who prepared the sales invoices are already dead or unable to testify as required by the Rules of (1) the general manner in which the corporation holds out an officer or agent as having the power to act
Court.[42] Further, the CA noted that the secretaries were not identified or presented in court. [43] or, in other words the apparent authority to act in general, with which it clothes him; or
(2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof,
Third, the CA ruling heavily relied on Ng’s Appellant’s Brief[44] which made the detailed description of the “badges within or beyond the scope of his ordinary powers.
of fraud.” The CA averred that the petitioners failed to satisfactorily rebut the badges of fraud [45] which include
the inconsistencies in: It requires presentation of evidence of similar act(s) executed either in its favor or in favor of other parties . It
(1) “Exhibit E-26,” a postdated check, which was allegedly issued in favor of Advance Paper but turned out to is not the quantity of similar acts which establishes apparent authority, but the vesting of a corporate officer
be a check payable to Top Line, Advance Paper’s sister company;[46] with the power to bind the corporation.
(2) “Sale Invoice No. 8946,” an evidence to prove the existence of the purchases on credit, whose photocopy
failed to reflect the amount stated in the duplicate copy,[47] and; In People’s Aircargo and Warehousing Co., Inc. v. Court of Appeals, we ruled that the doctrine of apparent
(3) The SEC report of Advance Paper for the year ended 1994 reflected its account receivables amounting to authority is applied when the petitioner, through its president Antonio Punsalan Jr., entered into the First
P219,705.19 only – an amount far from the claimed P15,321,798.25 receivables from Arma Traders. [48] Contract without first securing board approval. Despite such lack of board approval, petitioner did not object to

UE-0200673-2023
or repudiate said contract, thus "clothing" its president with the power to bind the corporation.

“Inasmuch as a corporate president is often given general supervision and control over corporate operations,
the strict rule that said officer has no inherent power to act for the corporation is slowly giving way to the
realization that such officer has certain limited powers in the transaction of the usual and ordinary business of
the corporation.” “In the absence of a charter or bylaw provision to the contrary, the president is presumed to
have the authority to act within the domain of the general objectives of its business and within the scope of
his or her usual duties.”

In the present petition, we do not agree with the CA’s findings that Arma Traders is not liable to pay the loans
due to the lack of board resolution authorizing Tan and Uy to obtain the loans. To begin with, Arma Traders’
Articles of Incorporation provides that the corporation may borrow or raise money to meet the financial
requirements of its business by the issuance of bonds, promissory notes and other evidence of indebtedness.
Likewise, it states that Tan and Uy are not just ordinary corporate officers and authorized bank signatories
because they are also Arma Traders’ incorporators along with respondents Ng and Ting, and Pedro Chao.
Furthermore, the respondents, through Ng who is Arma Traders’ corporate secretary, incorporator, stockholder
and director, testified that the sole management of Arma Traders was left to Tan and Uy and that he and the
other officers never dealt with the business and management of Arma Traders for 14 years. He also confirmed
that since 1984 up to the filing of the complaint against Arma Traders, its stockholders and board of directors
never had its meeting.

Thus, Arma Traders bestowed upon Tan and Uy broad powers by allowing them to transact with third persons
without the necessary written authority from its non-performing board of directors. Arma Traders failed to take
precautions to prevent its own corporate officers from abusing their powers. Because of its own laxity in its
business dealings, Arma Traders is now estopped from denying Tan and Uy’s authority to obtain loan from
Advance Paper.

We also reject the respondents’ claim that Advance Paper, through Haw, connived with Tan and Uy. The records
do not contain any evidence to prove that the loan transactions were personal to Tan and Uy. A different
conclusion might have been inferred had the cashier’s checks been issued in favor of Tan and Uy, and had the
postdated checks in favor of Advance Paper been either Tan and/or Uy’s, or had the respondents presented
convincing evidence to show how Tan and Uy conspired with the petitioners to defraud Arma Traders. [84] We
note that the respondents initially intended to present Sharow Ong, the secretary of Tan and Uy, to testify on
how Advance Paper connived with Tan and Uy. As mentioned, the respondents failed to present her on the
witness stand.

UE-0200673-2023
 TERP CONSTRUCTION CORPORATION, V. BANCO FILIPINO SAVINGS AND MORTGAGE BANK, G.R. No. 221771.
September 18, 2019
LEONEN, J.
FACTS:
Terp Construction planned to develop a housing project called the Margarita Eastville and a condominium called
Margarita Plaza. To finance the projects, Terp Construction, Home Insurance Guaranty Corporation, and Planters
Development Bank (Planters Bank) agreed to raise funds through the issuance of bonds worth P400 million
called the Margarita Project Participation Certificates (Margarita Bonds).
The three (3) companies entered into a Contract of Guaranty in which they agreed that Terp Construction would
sell the Margarita Bonds and convey the funds generated into an asset pool named the Margarita Asset Pool
Formation and Trust Agreement. Planters Bank, as trustee, would be the custodian of the assets in the asset
pool with the corresponding obligation to pay the interests and redeem the bonds at maturity. Home Insurance
Guaranty Corporation, as guarantor, would pay investors the value of the bond at maturity plus 8.5% interest
per year.
Banco Filipino purchased Margarita Bonds for P100 million. It asked for additional interest other than the
guaranteed 8.5% per annum, based on the letters dated February 3, 1997 and April 8, 1997 written by Terp
Construction Senior Vice President Alberto Escalona (Escalona).
Terp Construction began constructing Margarita Eastville and Margarita Plaza. After the economic crisis in 1997,
however, it suffered unrealized income and could not proceed with the construction.
When the Margarita Bonds matured, the funds in the asset pool were insufficient to pay the bond holders.
Pursuant to the Contract of Guaranty, Planters Bank conveyed the asset pool funds to Home Insurance Guaranty
Corporation, which then paid Banco Filipino interest earnings of 8.5% per year. Banco Filipino, however, sent
Terp Construction a demand letter dated January 31, 2001, alleging that it was entitled to a 15.5% interest on
its investment and that as of July 1, 2001, it was entitled to a seven percent (7%) remaining unpaid interest of
P 18,104,431.33. Terp Construction refused to pay the demanded interest.
Terp Construction filed a Complaint for declaration of nullity of interest, damages, and attorney's fees against
Banco Filipino. It alleged that it only agreed to pay the seven percent (7%) additional interest on the condition
that all the asset pool funds would be released to Terp Construction for it to pay the additional interest.
However, it could not have paid the additional interest since the funds of the asset pool were never released to
it.
Banco Filipino, on the other hand, alleged that it was induced into buying the Margarita Bonds after Terp
Construction, through its senior vice president's letters, committed to pay 15.5% interest on a P50 million bond
that Banco Filipino held for a client and 16.5% interest on a P50 million bond it held for another client. It alleged
that Terp Construction paid the additional interest twice during the Margarita Bonds' holding period.
Banco Filipino claimed that in September 1998, after no payment of interest on the bonds had been made,
Planters Bank called on the guaranty of Home Insurance Guaranty Corporation, which only paid 8.5% interest
instead of the 15.5% and 16.5% interests that Terp Construction had committed to pay. Thus, it demanded the
interest differentials, but to no avail.
Banco Filipino further alleged that it investigated the cause of default and found that it was because Terp
Construction was unable to finish the Margarita projects. It also found that despite raising P400 million from the
bonds, only P39 million was actually used for the projects. It alleged that as of November 30, 2001, the unpaid
interest differentials already amounted to P29,932,827.71.
UE-0200673-2023
On May 29, 2010, the Regional Trial Court issued a Decision in favor of Terp Construction. It found that there
was no evidence to show that Terp Construction was obligated to pay the interest differentials, and that the act
of Escalona, the senior vice president, were not binding on the corporation since they were not ratified.
Banco Filipino appealed before the Court of Appeals, arguing, among others, that the two (2) letters sent by
Escalona were sufficient evidence to prove that Terp Construction committed to pay the interest differentials.
On October 16, 2014, the Court of Appeals rendered a Decision setting aside the Regional Trial Court Decision
and ordering Terp Construction to pay Banco Filipino interest differentials of P18,104,431.33.
According to the Court of Appeals, both parties agreed that Terp Construction would pay Banco Filipino
additional interest other than the guaranteed 8.5%. The only issue was Terp Construction's allegation that the
payment of this additional interest was subject to a condition that the asset pool funds would be released to
Terp Construction.
The Court of Appeals, however, found that from the February 3, 1997 and April 8, 1997 letters of Terp
Construction to Banco Filipino, the obligation to pay 16.5% and 15.5% interest was a pure obligation since the
condition alleged was never mentioned.
The Court of Appeals also found unmeritorious Terp Construction's defense that the letters were unauthorized
acts of Escalona, its then senior vice president, since his acts were ratified when Terp Construction paid interest
differentials twice to Banco Filipino during the Margarita Bonds' holding period.
Terp Construction filed a Motion for Reconsideration, but this was denied in a December 9, 2015 Resolution.
Hence, this Petition was filed.
ISSUE:
Whether or not petitioner Terp Construction Corporation expressly agreed to be bound to respondent Banco
Filipino Savings Mortgage Bank for additional interest in the bonds it purchased.
RULING:
In any case, there was no error in the factual findings of the Court of Appeals. Petitioner categorically committed
itself to pay respondent over and above the guaranteed interest of 8.5% per annum.
Relevant portions of the letters sent by its then Senior Vice President Escalona to respondent, as reproduced in
the Court of Appeals Decision read:
[February 3, 1997 letter]:
... We hereby commit a guaranteed floor rate of 16.5% as project proponent. This would
commit us to pay the differential interest earnings to be paid by Planters Development
Bank as Trustee every 182 days from purchase date of period of three (3) years until
maturity date....
[April 8, 1997 letter]:
Terp Construction commit (sic) that the yield to you for this investment is 15.5%. The
difference between the yield approved by the Project Governing Board will be paid for
by, Terp Construction Corp.
Petitioner disavows this obligation and contends that it was merely an unauthorized offer made by one (1) of
its officers during the negotiation stage of a contract. Petitioner, however, does not deny that it paid
respondent the additional interest during the Margarita Bonds' holding period, not just once, but twice.
A corporation exercises its corporate powers through its board of directors. This power may be validly delegated
to its officers, committees, or agencies. "The authority of such individuals to bind the corporation is generally
derived from law, corporate bylaws or authorization from the board, either expressly or impliedly by habit,
custom or acquiescence in the general course of business[.]"

The authority of the board of directors to delegate its corporate powers may either be: (1) actual; or (2)
apparent.

Actual authority may be express or implied. Express actual authority refers to the corporate powers expressly
delegated by the board of directors. Implied actual authority, on the other hand, "can be measured by his or her
prior acts which have been ratified by the corporation or whose benefits have been accepted by the
corporation."

Petitioner's subsequent act of twice paying the additional interest Escalona committed to during the term of the
Margarita Bonds is considered a ratification of Escalona's acts. Petitioner's only defense that they were
"erroneous payment[s]" since it never obligated itself from the start cannot stand. Corporations are bound by
errors of their own making.

Escalona likewise had apparent authority to transact on behalf of petitioner. In Yao Ka Sin Trading v. Court of
Appeals:

The rule is of course settled that "[a]lthough an officer or agent acts without, or in excess of,
his actual authority if he acts within the scope of an apparent authority with which the
corporation has clothed him by holding him out or permitting him to appear as having such
authority, the corporation is bound thereby in favor of a person who deals with him in good
faith in reliance on such apparent authority, as where an officer is allowed to exercise a
particular authority with respect to the business, or a particular branch of its continuously and
publicly, for a considerable time."

Apparent authority is ascertained through:

(1) the general manner by which the corporation holds out an officer or agent as having
power to act or, in other words, the apparent authority with which it clothes him to act in
general, or
(2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge
thereof, whether within or without the scope of his ordinary powers.

Here, respondent relied on Escalona's apparent authority to promise interest payments over and above the
guaranteed 8.5%, considering that Escalona was petitioner's then senior vice president. His apparent authority
was further demonstrated by petitioner paying respondent what Escalona promised during the Margarita Bonds'
term.

It should likewise be noted that at the time this Petition was filed, Escalona signed the Verification and
Certification as the president of the corporation, signifying that petitioner did not consider his alleged
unauthorized acts as fatal to his continued involvement in corporate affairs.

UE-0200673-2023
 ALLIED BANKING CORPORATION* VS. SPOUSES MACAM**, G.R. No. 200635. February 01, 2021 (b) Gilda Tiglao - P1.7 Million; and
(c) Rosite Capili -P5.7 Million.
HERNANDO, J.:
Once again, Berras inquired about Helen's promised deposit but Caña told her to just wait.
FACTS:
Mario Macam (Mario), on the recommendation of his brother Manuel and facilitation of Elena Valerio (Valerio), Meanwhile, Mamalayan sent Short Messaging Service (SMS) messages to Caña regarding Helen's deposit and the
invested P1,572,000.00 in the cellular card business of respondent Helen Garcia (Helen). Valerio was a Unit arrival of the requested armored vans. Caña's answer to Mamalayan was no different; the latter was likewise
Manager in Helen's business, soliciting investments and promising weekly interest payments of 2.29%. told to wait.

On November 4, 2002, Mario deposited P1,572,000.00 in Valerio's Savings Account with Allied Bank-Pasay Road Mamalayan learned of the debiting of the three accounts after the Branch Head of Allied Bank-Imus (AB-I)
Branch (AB-Pasay). In turn, Valerio issued Bank of the Philippines Island Check to Mario covering the principal inquired about the huge debit on their client's account. Mamalayan told the AB-I Branch Head to contact Caña
amount of his investment. as she was unaware of the said debit transactions.

On February 6, 2003, a series of transactions occurred at the Allied Bank-Alabang Las Piñas Branch (AB-ALP),
headed by respondent Maribel Caña (Caña). At 8:45 a.m., Caña informed bank teller Melissa Berras (Berras) to
anticipate a deposit by Helen in the amount of P46 Million. Caña likewise instructed the Branch Operating
Officer, Milani Mamalayan (Mamalayan), to arrange for two armored vans to pick up the P46 Million deposit.
At 9:45 a.m., Mamalayan informed Caña of the arrival of the armored vans. Thereupon, Caña gave Berras five
filled out and approved fund transfer receipts in the total amount of P46 Million with the following details:
At 3:30 p.m., Mamalayan received an SMS from Caña that the P46 Million deposit had been cancelled. As soon
as Berras overheard Mamalayan telling the Pick-Up Tellers and the Cash Center about the cancellation, Berras
approached Mamalayan and told her about the fund transfer transactions totaling P46 Million which she had
expedited. Berras disclosed to Mamalayan: (1) Caña's specific instructions; (2) Caña's override and approval of
the fund transfer transactions from Helen's account to five different accounts despite the lack of fund deposit of
P46 Million, and (3) the subsequent credits, debits and reversals made on the accounts of Valerio, Capili and
Tiglao.

NAME ACCOUNT NO. AMOUNT At 5:50 p.m., Caña instructed Mamalayan to book the amount of P20.3 Million under "Accounts Receivable"
a. Digna Gonzales 3680-01407-1 P6 Million corresponding to the unrecovered amount from the P46 Million which had been earlier transferred to various
b. Elena Valerio 3090-045359-1 P10 Million deposit accounts.
c. Rosite Capili (Capili) 1840-04249-3 P10 Million
d. Yolanda Lim 1823-00281-5 P10 Million Due to the significant discrepancy, Allied Bank investigated the branch, AB-ALP, and its transactions on February
e. Gilda Tiglao (Tiglao) 3090-04535-9 P10 Million 6, 2003. Allied Bank was able to recover more than half of the amount, leaving a balance of P9,800,000.00.

The fund transfer receipts bore only Caña's signature and ostensibly indicated Helen's deposit account as the On February 19, 2003, Angela Barcelona, Region Head, Retail Banking Group for Allied Bank's South Metro
source of the P46 Million fund transfer. Manila Branches, ordered the debit of the remaining P1.1 Million from the account of the Spouses Mario
Macam which resulted in the closure thereof.
Since Helen had yet to make the promised deposit and her account balance did not amount to P46 Million,
Berras protested to Caña that she cannot credit the corresponding amounts to the five accounts as indicated On March 3, 2003, the Spouses Mario Macam learned of the closure after they were unable to withdraw from
in the fund transfer receipts. Nonetheless, Caña effected a local override and approved the fund their account. Hence, the Spouses Mario Macam filed the complaint for Damages against the bank and the AB-
transfer. Consequently, the amounts were credited to the five deposit accounts, including Valerio's, in the PT Branch Head, Dimog.
amount of P10 Million.
Not unexpectedly, Allied Bank denied any liability for the closure of the Spouses Mario Macam's account and
Meanwhile, at 11:57:23 a.m., Valerio withdrew P1,722,500.00 from her deposit account at AB-Pasay. At claimed ownership of the P1.1 Million deposit. Allied Bank traced its title to the dubious transfers amounting to
11:58:35 a.m., via electronic fund transfer. Valerio deposited P1,590,000.00 to the account of Mario's brother P46 Million on February 6, 2003 beginning from the crediting of Helen's account and the ensuing fund transfers
Manuel and the latter's wife and Sheila Macam. To prove the fund transfer to the Spouses Manuel Macam's to various deposit accounts maintained by particular individuals with different branches of Allied Bank.
account, Valerio presented the deposit slip with her handwritten notation addressed to Mario.
Given its allegations in its Answer, Allied Bank subsequently filed a Third Party Complaint against respondents,
On that same date, through Sheila's deposit of P1,590,000.00 by way of a credit memo, the Spouses Mario the Spouses Willar Felix and Maribel Caña and the Spouses Melchor and Helen Garcia ( Spouses Garcia).
Macam opened Savings Account No. 1850-06565-2 at Allied Bank-Pasong Tamo (AB-PT) Branch. In subsequent
and separate instances, the Spouses Mario Macam were able to make withdrawals in the total amount of Third party defendants, the Spouses Caña and the Spouses Garcia, renounced liability for the initial P46 Million
P490,000.00, leaving a balance of P1.1 Million in their savings account with AB-PT. fund transfer transactions effected by Caña and all succeeding fund transfer transactions linked thereto on the
ubiquitous date of February 6, 2003.
Yet still on February 6, 2003, Caña instructed Berras to reverse the P10 Million fund transfer to Yolanda Lim.
Berras again inquired about the P46 Million deposit but was told by Caña to wait. Caña maintained that she did not and has never conspired with Helen to defraud the bank. Pursuant to the
requirements of Republic Act No. 9160 (RA 9160) or the Anti-Money Laundering Act of 2001, Caña conducted an
Later that day, Caña again instructed Berras to debit specific amounts from different accounts, to wit: investigation into the source of Helen's funds and confirmed that Helen was indeed engaged in the cell card
(a) Elena Valerio - P8.3 Million; business.

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 Allied Bank and the Spouses Garcia appealed to the CA insisting on their exculpation from liability. However, the
According to Caña, Helen was a valued client of Allied Bank, maintaining another deposit account with the appellate court affirmed in toto the ruling of the trial court.
bank's Molino-Cavite Branch. Helen's transactions with Allied Bank nearly consisted of huge cash inter branch
deposits and/or withdrawals as well as regular fund transfers to different Allied Bank branches where Helen's As the trial court had done, the appellate court likewise found that Allied Bank is liable to the Spouses Mario
business colleagues (including Valerio) maintained their respective deposit accounts. Macam for breach of contract, or culpa contractual. It held that Allied Bank reneged on its contractual
obligation to the Spouses Mario Macam to pay their money in deposit on demand. Citing Section 2 of RA
In prior instances of fund transfers, Helen's account initially lacked sufficient funds which Helen immediately 8791 (The General Banking Law of 2000 or GBL) and jurisprudence, the appellate court held that given the
funded within 20 minutes of the notice of insufficiency. Thus, as previously practiced, and as a valued client of fiduciary nature of the relationship between a bank and its depositors, a bank is under obligation to treat the
Allied Bank, on the date and transaction in question, Caña promptly approved the request of Helen for an accounts of its depositors with meticulous care. In the performance of that obligation, the appellate court found
overdraft of F46 Million and the succeeding transfer of funds to Helen's regular target deposit accounts. Allied Bank to have failed and thus liable to the Spouses Mario Macam for damages.

The Spouses Garcia, on the other hand, denied any hand and participation in the P46 Million fund transfer Hence, this appeal by certiorari of Allied Bank.
transaction: Helen did not instruct Caña to credit the said amount to her account nor did she instruct Caña to
approve the subsequent fund transfer to the different deposit accounts of certain individuals. ISSUES:
Whether or not Allied Bank is liable for unilaterally debiting and closing the deposit account of the Spouses
The Pre-Trial Order contained the following stipulation of facts: Macam.

1. That demands were made upon [Allied Bank] for the return of the said amount attached to the complaint. RULING:
Allied Bank clothed Caña with sufficient authority to effect the ostensible crediting of Helen's account and
2. The bank also admitted the opening of the accounts on February 6, 2003 with an opening balance of approve the subsequent fund transfers to five different accounts in the total amount of P46 Million. The trial
P1,590,000.00. court found that in previous instances, Caña had extended Helen the same credit arrangement via a temporary
overdraft line.
3. The bank also admitted that this opening balance of P1,590,00.00 was a transfer from the account of Sheila
Marie Macam with Allied-Bank Pasong Tamo Branch to the opening the account of plaintiffs Mario Antonio This is consistent with Caña's testimony that, on other occasions when Helen's account lacked sufficient funds
Macam and Rose T. Macam. for transfer, the latter would be allowed a temporary overdraft which was immediately settled upon notice of
the insufficient funds.
4. The bank also admitted that the amount of P10 Million was remitted from Allied Bank-Alabang Las Pinas
Branch to the account of Elena Valerio with Allied Bank-Pasay Road. In this case, AB-ALP Branch, headed by Caña, held the top spot in terms of low cost deposit within the Metro
Manila South area for the year 2002, which Caña partly attributed to the business transactions Helen conducted
5. The bank also admitted that on the same date of February 6, 2003 Elena Valerio withdrew the sum of with their branch. In year 2002 alone, Helen's deposit balance ranged from P20 to P80 Million, with the highest
P1,722,500.00 from her account with Allied Bank- Pasay Road Branch and remitted the sum of P1,590,000.00 to deposits made in October but declined significantly in December. Evidently, Caña was intent to retain the
the account Sheila and Manuel Macam with Allied Bank-Pasong Tamo Branch. deposit account of Helen for Allied Bank.

6. The bank also admitted several withdrawals made by the plaintiff as stated in the complaint particularly on The RTC correctly observed, thus:
February 6, 2003 in the amount of P125,000.00, on February 10,2003 in the amount of P40,000.00 and on It may be worthy to mention the fact that banks accord overdraft line to their favored clients. These
February 12, 2003 in the amount of P325,000.00. fund transfers to and credits to accounts as against overdraft account to debit from, constitutes valid
transactions.
7. The bank also admitted that on February 19,2003 it withdrew or debited the entire remaining balance of
P1,100,000.00 from the subject account, thereby resulting in the closure of the account without any notice [to] It is admitted that third-party defendant Caña is the Bank Manager of Allied Bank who authorized the debiting of
the plaintiff.[32] the P46,000,000.00 funds from the current account of third-party defendant Helen Garcia. The act of Caña
albeit unauthorized by the bank still binds the bank. One thing clear from the record is that the unauthorized
After trial, the RTC issued its Decision, thus: acts of Caña may have been a practice in the past, where favored clients are accorded Temporary Over Draft
1. On the main complaint, ordering [petitioners] Allied Bank and Guillermo P. Dimog jointly and severally, to pay Line. This is manifested in the treatment of the unrecovered amount after the reversals made, where Third-
respondents Mario Antonio Y. Macam and Rose Trinidad T. Macam, the amount of Pl.l Million with interest Party Defendants Sps. Melchor and Helen Garcia were made to execute a Real Estate Mortgage to secure
thereon at 12% interest per annum, computed from the date [the accounts of respondents, the Spouses Mario payment for the unrecovered amount of T9.8 Million. It is a policy practiced by banking institutions wherein the
Macam] had been closed on February 19, 2003 until the full amount is actually paid; bank's loan committee approves in the form of loan the amount constituting the overdraft balance for the
2. On the third-party complaint, ordering the third-party defendants [Spouses] Willard Felix and Maribel Caña purpose of regularizing the temporary overdraft (TOD) granted the depositors against Chattel or Real Estate
and Spouses Melchor and Helen Garcia, jointly and severally to pay defendants and third-party plaintiffs Allied Mortgages.
Bank and Guillermo Dimog, the amount of P 1.1 Million plus interest thereon, which this Court orders said
defendants and third-party plaintiffs to pay [respondents, the Spouses Mario Macam] in the principal complaint It appears that in the previous instances, there were [occasions] of promised belated deposits of Helen Garcia
by way of reimbursement and/or subrogation. that have always materialized hence, the practice went on.

UE-0200673-2023
It is true that it was Caña who facilitated the transactions by making an override and through the use of fund
transfer tickets which she accomplished and which did not bear the required validation of the teller and the
Branch Operations Officer. It is inconceivable that the bank would not have known the unauthorized transaction
it appearing to involve too huge an amount to have [gone] unnoticed. For this reason, [Allied Bank] had indeed
failed to perform what was incumbent upon it, which is to ensure regularity in the banking transactions, x x x

The authority of a corporate officer or agent in dealing with third persons may be actual or apparent. The
apparent authority to act for and to bind a corporation may be presumed from acts of recognition in other
instances, wherein the power was exercised without any objection from its board or shareholders. Caña's act of
approving the P46 Million fund transfer and the subsequent transfers to different accounts in various branches
of Allied Bank leading to the P1,590,000.00 transfer to the account of the Spouses Mario Macam all appear to
have been clothed with authority. Indeed, the subsequent transfers (of funds) were approved by several
Branch Heads.

The doctrine of "apparent authority", with special reference to banks, has long been recognized in this
jurisdiction. Apparent authority is derived not merely from practice. Its existence may be ascertained through
1) the general manner in which the corporation holds out an officer or agent as having the power to act,
or in other words, the apparent authority to act in general, with which it clothes him; or
2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof,
within or beyond the scope of his ordinary powers.

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 LIABILITY OF CORPORATE OFFICER
MIRANT (PHILIPPINES) CORPORATION PETITIONERS, VS. JOSELITO A. CARO, G.R. No. 181490. April 23, 2014.
VILLARAMA, JR., J.:
FACTS:
Petitioner corporation is organized and operating under and by virtue of the laws of the Republic of the
Philippines. It is a holding company that owns shares in project companies such as Mirant Sual Corporation and
Mirant Pagbilao Corporation (Mirant Pagbilao) which operate and maintain power stations located in Sual,
Pangasinan and Pagbilao, Quezon, respectively. Petitioner corporation and its related companies maintain
around 2,000 employees detailed in its main office and other sites. Petitioner corporation had changed its name
to CEPA Operations in 1996 and to Southern Company in 2001. In 2002, Southern Company was sold to
petitioner Mirant whose corporate parent is an Atlanta-based power producer in the United States of
America. Petitioner corporation is now known as Team Energy Corporation.
Petitioner Edgardo A. Bautista (Bautista) was the President of petitioner corporation when respondent was
terminated from employment.
On January 3, 1994, respondent was hired by petitioner corporation as its Logistics Officer and was assigned at
petitioner corporation’s corporate office in Pasay City. At the time of the filing of the complaint, respondent was
already a Supervisor at the Logistics and Purchasing Department with a monthly salary of P39,815.00.
On November 3, 2004, petitioner corporation conducted a random drug test where respondent was randomly
chosen among its employees who would be tested for illegal drug use. Through an Intracompany
Correspondence, these employees were informed that they were selected for random drug testing to be
conducted on the same day that they received the correspondence. Respondent was duly notified that he was
scheduled to be tested after lunch on that day. His receipt of the notice was evidenced by his signature on the
correspondence.
Respondent avers that at around 11:30 a.m. of the same day, he received a phone call from his wife’s colleague
who informed him that a bombing incident occurred near his wife’s work station in Tel Aviv, Israel where his
wife was then working as a caregiver. Respondent attached to his Position Paper a Press Release of the
Department of Foreign Affairs (DFA) in Manila to prove the occurrence of the bombing incident and a letter from
the colleague of his wife who allegedly gave him a phone call from Tel Aviv.
Respondent claims that after the said phone call, he proceeded to the Israeli Embassy to confirm the news on
the alleged bombing incident. Respondent further claims that before he left the office on the day of the random
drug test, he first informed the secretary of his Department, Irene Torres (Torres), at around 12:30 p.m. that he
will give preferential attention to the emergency phone call that he just received. He also told Torres that he
would be back at the office as soon as he has resolved his predicament. Respondent recounts that he tried to
contact his wife by phone but he could not reach her. He then had to go to the Israeli Embassy to confirm the
bombing incident. However, he was told by Eveth Salvador (Salvador), a lobby attendant at the Israeli Embassy,
that he could not be allowed entry due to security reasons.
On November 8, 2004, respondent received a Show Cause Notice from petitioner corporation through Jaime
Dulot (Dulot), his immediate supervisor, requiring him to explain in writing why he should not be charged with
“unjustified refusal to submit to random drug testing.” Respondent submitted his written explanation on
November 11, 2004. Petitioner corporation further required respondent on December 14, 2004 to submit
additional pieces of supporting documents to prove that respondent was at the Israeli Embassy in the afternoon
of November 3, 2004 and that the said bombing incident actually occurred. Respondent requested for a hearing
to explain that he could not submit proof that he was indeed present at the Israeli Embassy during the said day
because he was not allegedly allowed entry by the embassy due to security reasons. On January 3, 2005,
respondent submitted the required additional supporting documents.
On January 13, 2005, petitioner corporation’s Investigating Panel issued an Investigating Report finding
respondent guilty of “unjustified refusal to submit to random drug testing” and recommended a penalty of
four working weeks suspension without pay, instead of termination, due to the presence of mitigating
circumstances. In the same Report, the Investigating Panel also recommended that petitioner corporation
should review its policy on random drug testing, especially of the ambiguities cast by the term “unjustified
refusal.”
On January 19, 2005, petitioner corporation’s Asst. Vice President for Material Management Department,
George K. Lamela, Jr. (Lamela), recommended that respondent be terminated from employment instead of
merely being suspended. Lamela argued that even if respondent did not outrightly refuse to take the random
drug test, he avoided the same. Lamela averred that “avoidance” was synonymous with “refusal.”
On February 14, 2005, respondent received a letter from petitioner corporation’s Vice President for Operations,
Tommy J. Sliman (Sliman), terminating him on the same date. Respondent filed a Motion to Appeal his
termination on February 23, 2005. The motion was denied by petitioner corporation on March 1, 2005.
It is the contention of respondent that he was illegally dismissed by petitioner corporation due to the latter’s
non-compliance with the twin requirements of notice and hearing. He asserts that while there was a notice
charging him of “unjustified refusal to submit to random drug testing,” there was no notice of hearing and
petitioner corporation’s investigation was not the equivalent of the “hearing” required under the law which
should have accorded respondent the opportunity to be heard.
Respondent further asserts that he was illegally dismissed due to the following circumstances:
1. He signed the notice that he was randomly selected as a participant to the company drug testing;
2. Even the Investigating Panel was at a loss in interpreting the charge because it believed that the term
“refusal” was ambiguous, and therefore such doubt must be construed in his favor; and
3. He agreed to take the drug test the following day at his own expense, which he says was clearly not
an indication of evasion from the drug test.
On November 3, 2004, a random drug test was conducted on petitioner corporation’s employees at its
Corporate Office at the CTC Bldg. in Roxas Blvd., Pasay City. The random drug test was conducted pursuant to
Republic Act No. 9165, otherwise known as the “Comprehensive Dangerous Drugs Act of 2002.” Respondent
was randomly selected among petitioner’s employees to undergo the said drug test which was to be carried out
by Drug Check Philippines, Inc.

On that same day, at around 6:15 p.m., respondent returned to petitioner corporation’s office. When he was When respondent failed to appear at the scheduled drug test, Cecilia prepared an incident report addressed to
finally able to charge his cellphone at the office, he received a text message from Tina Cecilia (Cecilia), a member Dulot, the Logistics Manager of the Materials Management Department. Since it was stated under petitioner
of the Drug Watch Committee that conducted the drug test, informing him to participate in the said drug test. corporation’s Mirant Drugs Policy Employee Handbook to terminate an employee for “unjustified refusal to
He immediately called up Cecilia to explain the reasons for his failure to submit himself to the random drug submit to a random drug test” for the first offense, Dulot sent respondent a Show Cause Notice dated
test that day. He also proposed that he would submit to a drug test the following day at his own expense. November 8, 2004, requiring him to explain why no disciplinary action should be imposed for his failure to take
Respondent never heard from Cecilia again. the random drug test. Respondent, in a letter dated November 11, 2004, explained that he attended to an

UE-0200673-2023
emergency call from his wife’s colleague and apologized for the inconvenience he had caused. He offered to
submit to a drug test the next day even at his expense. Finding respondent’s explanation unsatisfactory,
petitioner corporation formed a panel to investigate and recommend the penalty to be imposed on
respondent. The Investigating Panel found respondent’s explanations as to his whereabouts on that day to be
inconsistent, and recommended that he be suspended for four weeks without pay. The Investigating Panel took
into account that respondent did not directly refuse to be subjected to the drug test and that he had been
serving the company for ten years without any record of violation of its policies. The Investigating Panel further
recommended that the Mirant Drug Policy be reviewed to clearly define the phrase “unjustified refusal to
submit to random drug testing.” Petitioner corporation’s Vice-President for Operations, Sliman, however
disagreed with the Investigating Panel’s recommendations and terminated the services of respondent in
accordance with the subject drug policy. Sliman likewise stated that respondent’s violation of the policy
amounted to willful breach of trust and loss of confidence.
A cursory examination of the pleadings of petitioner corporation would show that it concurs with the narration
of facts of respondent on material events from the time that Cecilia sent an electronic mail at about 9:23 a.m. on
November 3, 2004 to all employees of petitioner corporation assigned at its Corporate Office advising them of
the details of the drug test – up to the time of respondent’s missing his schedule to take the drug test.
Petitioner corporation and respondent’s point of disagreement, however, is whether respondent’s proffered
reasons for not being able to take the drug test on the scheduled day constituted valid defenses that would have
taken his failure to undergo the drug test out of the category of “unjustified refusal.” Petitioner corporation
argues that respondent’s omission amounted to “unjustified refusal” to submit to the random drug test as he
could not proffer a satisfactory explanation why he failed to submit to the drug test:
1. Petitioner corporation is not convinced that there was indeed such a phone call at noon of November
3, 2004 as respondent could not even tell who called him up.
2. Respondent could not even tell if he received the call via the landline telephone service at petitioner
corporation’s office or at his mobile phone.
3. Petitioner corporation was also of the opinion that granting there was such a phone call, there was
no compelling reason for respondent to act on it at the expense of his scheduled drug testing.
Petitioner corporation principally pointed out that the call merely stated that a bomb exploded near
his wife’s work station without stating that his wife was affected. Hence, it found no point in
confirming it with extraordinary haste and forego the drug test which would have taken only a few
minutes to accomplish. If at all, respondent should have undergone the drug testing first before
proceeding to confirm the news so as to leave his mind free from this obligation.
4. Petitioner corporation maintained that respondent could have easily asked permission from the Drug
Watch Committee that he was leaving the office since the place where the activity was conducted
was very close to his work station.
To the mind of petitioners, they are not liable for illegal dismissal because all of these circumstances prove
that respondent really eluded the random drug test and was therefore validly terminated for cause after
being properly accorded with due process. Petitioners further argue that they have already fully settled the
claim of respondent as evidenced by a Quitclaim which he duly executed. Lastly, petitioners maintain that they
are not guilty of unfair labor practice as respondent’s dismissal was not intended to curtail his right to self-
organization; that respondent is not entitled to the payment of his 13 th and 14th month bonuses and other
incentives as he failed to show that he is entitled to these amounts according to company policy; that
respondent is not entitled to reinstatement, payment of full back wages, moral and exemplary damages and
attorney’s fees due to his termination for cause.
In a decision dated August 31, 2005, Labor Arbiter Aliman D. Mangandog found respondent to have been
illegally dismissed. The Labor Arbiter also found that the quitclaim purportedly executed by respondent was
not a bona fide quitclaim which effectively discharged petitioners of all the claims of respondent in the case at
bar. If at all, the Labor Arbiter considered the execution of the quitclaim as a clear attempt on the part of
UE-0200673-2023
petitioners to mislead its office into thinking that respondent no longer had any cause of action against
petitioner corporation.
The Labor Arbiter stated that while petitioner corporation observed the proper procedure in the termination of
an employee for a purported authorized cause, such just cause did not exist in the case at bar. The decision did
not agree with the conclusions reached by petitioner corporation’s own Investigating Panel that while
respondent did not refuse to submit to the questioned drug test and merely “avoided” it on the designated day,
“avoidance” and “refusal” are one and the same. It also held that the terms “avoidance” and “refusal” are
separate and distinct and that “the two words are not even synonymous with each other.” The Labor Arbiter
considered as more tenable the stance of respondent that his omission merely resulted to a “failure” to submit
to the said drug test – and not an “unjustified refusal.” Even if respondent’s omission is to be considered as
refusal, the Labor Arbiter opined that it was not tantamount to “unjustified refusal” which constitutes as just
cause for his termination. Finally, the Labor Arbiter found that respondent was entitled to moral and exemplary
damages and attorney’s fees.
On appeal to the NLRC, petitioners alleged that the decision of the Labor Arbiter was rendered with grave abuse
of discretion for being contrary to law, rules and established jurisprudence, and contained serious errors in the
findings of facts which, if not corrected, would cause grave and irreparable damage or injury to petitioners. The
NLRC, giving weight and emphasis to the inconsistencies in respondent’s explanations, considered his
omission as “unjustified refusal” in violation of petitioner corporation’s drug policy.
The CA disagreed with the NLRC and ruled that it was immaterial whether respondent failed, refused, or avoided
being tested. To the appellate court, the singular fact material to this case was that respondent did not get
himself tested in clear disobedience of company instructions and policy. Despite such disobedience, however,
the appellate court considered the penalty of dismissal to be too harsh to be imposed on respondent.
A. In invalidating respondent Caro’s dismissal, the Court of Appeals, in effect, belittled the
importance and seriousness of petitioner Mirant’s Anti-Drugs Policy and consequently
hampered the effective implementation of the same.
ISSUE:
Whether or not petitioner Bautista should be held personally liable for respondent’s dismissal.
RULING:
Petitioner Bautista should not be held personally liable for respondent’s dismissal as he acted in good faith and
within the scope of his official functions as then president of petitioner corporation. Both decisions of the Labor
Arbiter and the CA did not discuss the basis of the personal liability of petitioner Bautista, and yet the dispositive
portion of the decision of the Labor Arbiter – which was affirmed by the appellate court – held him jointly and
severally liable with petitioner corporation, viz.:
HEREFORE, premises considered, this Office finds respondents GUILTY of illegal dismissal, and
hereby ordered to jointly and severally reinstate complainant back to his former position
without loss on seniority rights and benefits and to pay him his backwages and other benefits
from the date he was illegally dismissed up to the time he is actually reinstated, partially
computed as of this date in the amount of P258,797.50 (P39,815.00 x 6.5 mos.) plus his 13th
and 14th month pay in the amount of P43,132.91 or in the total amount of P301,930.41.
Respondents are also ordered to pay complainant the amount of P3,000,000.00 as and by
way of moral and exemplary damages, and to pay complainant the amount equivalent to ten
percent (10%) of the total awards as and by way of attorney’s fees.
A corporation has a personality separate and distinct from its officers and board of directors who may only be
held personally liable for damages if it is proven that they acted with malice or bad faith in the dismissal of an
employee. Absent any evidence on record that petitioner Bautista acted maliciously or in bad faith in effecting
the termination of respondent, plus the apparent lack of allegation in the pleadings of respondent that
petitioner Bautista acted in such manner, the doctrine of corporate fiction dictates that only petitioner
corporation should be held liable for the illegal dismissal of respondent.

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QUEENSLAND-TOKYO COMMODITIES, INC., ET AL., VS. THOMAS GEORGE, G.R. No. 172727. September 08, 2010 decide the merits of the case, affirming in toto the decision of the SEC Hearing Officer. The appellate court
failed to see any reason to disturb the SEC Hearing Officer's finding of liability on the part of petitioners. It
sustained the finding that petitioners violated the Revised Rules and Regulations on Commodity Futures
NACHURA, J.: Trading when they allowed an unlicensed salesman, like Mendoza, to handle respondent's account. The CA
also upheld the nullification of the Customer's Agreement, and the award of moral and exemplary damages, as
FACTS: well attorney's fees, in favor of respondent.
QTCI is a duly licensed broker engaged in the trading of commodity futures. In 1995, Guillermo Mendoza, Jr.
(Mendoza) and Oniler Lontoc (Lontoc) of QTCI met with respondent Thomas George (respondent), encouraging Petitioners filed a motion for reconsideration, but the CA denied it on January 20, 2006.
the latter to invest with QTCI. On July 7, 1995, upon Mendoza's prodding, respondent finally invested with
QTCI. On the same day, Collado, in behalf of QTCI, and respondent signed the Customer's Agreement. Forming ISSUE:
part of the agreement was the Special Power of Attorney executed by respondent, appointing Mendoza as his Whether or not petitioners Collado and Lau is solidarily liable for the payment of respondent's claim.
attorney-in-fact with full authority to trade and manage his account.
RULING:
On June 20, 1996, the Securities and Exchange Commission (SEC) issued a Cease-and-Desist Order (CDO) against Doctrine dictates that a corporation is invested by law with a personality separate and distinct from those of the
QTCI. Alarmed by the issuance of the CDO, respondent demanded from QTCI the return of his investment, but persons composing it, such that, save for certain exceptions, corporate officers who entered into contracts in
it was not heeded. He then sought legal assistance, and discovered that Mendoza and Lontoc were not behalf of the corporation cannot be held personally liable for the liabilities of the latter. Personal liability of a
licensed commodity futures salesmen. corporate director, trustee, or officer, along (although not necessarily) with the corporation, may validly attach,
as a rule, only when –
On February 4, 1998, respondent filed a complaint for Recovery of Investment with Damages with the SEC (1) he assents to a patently unlawful act of the corporation, or when he is guilty of bad faith or gross
against QTCI, Lau, and Collado (petitioners), and against the unlicensed salesmen, Mendoza and Lontoc. negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the
corporation, its stockholders, or other persons;
Only petitioners answered the complaint, as Mendoza and Lontoc had since vanished into thin air. Traversing (2) he consents to the issuance of watered down stocks or who, having knowledge thereof, does not
the complaint, petitioners denied the material allegations in the complaint and alleged lack of cause of action, as forthwith file with the corporate secretary his written objection thereto;
a defense. Petitioners averred that QTCI only assigned duly qualified persons to handle the accounts of its (3) he agrees to hold himself personally and solidarily liable with the corporation; or
clients; and denied allowing unlicensed brokers or agents to handle respondent's account. They claimed that (4) he is made by a specific provision of law personally answerable for his corporate action.
they were not aware of, nor were they privy to, any arrangement which resulted in the account of respondent
being handled by unlicensed brokers. They added that even assuming that the subject account was handled by In holding Lau and Collado jointly and severally liable with QTCI for respondent's claim, the SEC Hearing Officer
an unlicensed broker, respondent is now estopped from raising it as a ground for the return of his investment. explained in this wise:
They pointed out that respondent transacted business with QTCI for almost a year, without questioning the
license or the authority of the traders handling his account. It was only after it became apparent that QTCI Anent the issue of who among the individual [petitioners] are jointly liable with QTCI in the
could no longer resume its business transactions by reason of the CDO that respondent raised the alleged lack of payment of the awards, the Commission took into consideration, among others, that audit
authority of the brokers or traders handling his account. The losses suffered by respondent were due to report on the trading activities submitted by the Brokers and Exchange Department (BED) of
circumstances beyond petitioners' control and could not be attributed to them. Respondent's remedy, they this Commission (Exhibit "J"). The findings contained in the report include the presence of
added, should be against the unlicensed brokers who handled the account. Thus, petitioners prayed for the seven (7) unlicensed investment consultants in QTCI, and the company practice of changing
dismissal of the complaint. deeds of Special Power of Attorney bearing those who are licensed (exhibits "J-1" and "J-
2").
After due proceedings, the SEC Hearing Officer rendered a decision in favor of respondent, decreeing that
[petitioners] Queensland Tokyo [C]ommodities, Inc., Romeo Y. Lau (aka "Lau Ching Yee") and Charlie F. Collado The Commission also took into consideration the fact that [petitioner] Collado, who is not a
are hereby ordered to jointly and severally pay the [respondent]. licensed commodity salesman, himself violated the aforequoted provisions of the Revised
Rules and Regulations on Commodity Futures Trading when he admitted having participated
Petitioners appealed to the Commission en banc, but the appeal was dismissed because the Notice of Appeal in the execution of the customers orders (p. 7, TSN dated January 21, 1999) without giving
and the Memorandum on Appeal were not verified. any exception thereto, which presumably includes his participation in the execution of
customers orders of the [respondent].
Petitioners then went to the CA via a petition for review under Rule 43, faulting the Commission en banc for
dismissing their appeal on purely technical ground. They insisted that they did not violate the rules on Such being the case, [Mendoza's] participation in the trading of [respondent's] account is
commodity futures trading. Thus, they faulted the SEC Hearing Officer for nullifying the Customer's within the knowledge of [petitioner] Collado.
Agreement and for holding them liable for respondent's claims.
The presence of seven (7) unlicensed investment consultants within QTCI apart from x x x
On September 30, 2005, the CA rendered the now challenged Decision. It declared the dismissal of petitioners' Mendoza, and [petitioner] Collado's participation in the unlawful execution of orders under
appeal by the Commission en banc improper. Nevertheless, it did not order a remand of the case to the the [respondent's] account clearly established the fact that the management of QTCI failed
Commission en banc because jurisdiction over petitioners' appeal had already been transferred to the Regional to implement the rules and regulations against the hiring of, and associating with,
Trial Court (RTC) by virtue of Republic Act No. 8799 or the Securities Regulation Code. The CA thus proceeded to unlicensed consultants or traders. How these unlicensed personnel been able to pursue

UE-0200673-2023
 their unlawful activities is a reflection of how negligent [the] management was.

[Petitioner] Romeo Lau, as president of [petitioner] QTCI, cannot feign innocence on the
existence of these unlawful activities within the company, especially so that Collado, himself
a ranking officer of QTCI, is involved in the unlawful execution of customers orders.
[Petitioner] Lau, being the chief operating officer, cannot escape the fact that had he
exercised a modicum of care and discretion in supervising the operations of QTCI, he could
have detected and prevented the unlawful acts of [petitioner] Collado and Mendoza.

It is therefore safe to conclude that although Lau may not have participated nor been aware
of the unlawful acts, he is however deemed to have been grossly negligence in directing the
affairs of QTCI.

In all, it having been established by substantial evidence that [petitioner] Collado assented to
the unlawful act of QTCI, and that [petitioner] Lau is grossly negligent in directing the affairs
of QTCI, and pursuant to Section 31 of the Corporation Code, they are therefore, jointly and
severally liable with QTCI for all the damages and awards due to the [respondent].

We find no compelling reason to depart from the conclusion of the SEC Hearing Officer, which was affirmed by
the CA. We are in full accord with his reasons for holding Lau and Collado jointly and severally liable with QTCI
for the payment of respondent's claim.

UE-0200673-2023
 JOHN A. OSCARES, VS. MAGSAYSAY MARITIME CORP., G.R. No. 245858. December 02, 2020
CARANDANG, J.:
FACTS:
On August 14, 2015, the Philippine Overseas Employment Administration (POEA) approved the contract of
employment between Oscares and respondent SK Shipping (Singapore) Pte. Ltd., through its manning agent
respondent Magsaysay Maritime Corporation (respondents). He was certified as fit to work by respondents'
examining physician on August 29, 2015. As Second Assistant Engineer on board the vessel MV K. Garnet, he was
responsible for the maintenance, operation of engineering, electrical and electronic systems of the vessel.
On November 4, 2015, while the vessel was anchored in Panama, Oscares was singing in front of a videoke
machine together with another crew member when he slipped and fell out of balance. As a result, he suffered
major knee injuries. First aid was administered to him. On November 11, 2015, he was sent to a medical facility
in San Luis Hospital, Mexico. He was diagnosed with fracture fragmentary of the tibia bone epiphysis in the right
leg and fracture crack of the tibia bone epyphysis in the left leg. It was recommended that he undergo major
knee surgery or osteosintesis-fixation and sterilization. Oscares was declared unfit to work for 10 weeks.
On December 10, 2015, Oscares was repatriated to Manila. Upon arrival, he reported to respondents who
referred him to NGC Medical Specialist Clinic, Inc. (NGC) for post-employment medical examination and
management. Oscares underwent x-ray of both knees on December 14, 2015. The result revealed that he had
complete oblique fracture of the right medical condyle. Thus, he was recommended to undergo major knee
surgery. Respondents insisted that Oscares should shoulder the cost of his surgery. Since his protests fell on deaf
ears, he was compelled to undergo the necessary surgery on December 29, 2016. Oscares also shouldered his
physical rehabilitation which ensued thereafter. Nonetheless, he was required to report to NGC.
On March 16, 2016, NGC issued an interim disability assessment of Grade 10-complete immobility of a knee joint
in full flexion. However, Oscares' attending physician in Seamen's Hospital, Iloilo declared him unfit for duty on
April 12, 2016. The removal of his plates was recommended thereafter.
On July 28, 2016, Dr. Nicomedes G. Cruz (Dr. Cruz) issued a final disability assessment of Grade 10 for Oscares.
Oscares then sought the opinion of Dr. Manuel Magtira, an orthopaedist, who issued a medical report dated July
12, 2016 recommending permanent disability and considered him permanently unfit in any capacity for further
sea duties. Dr. Victor Pundavela (Dr. Pundavela), another doctor consulted by Oscares, issued a medical
report on July 14, 2016 likewise stating that he is permanently disabled and unfit for sea duty in any capacity.
Consequently, Oscares sent a demand letter dated July 25, 2016 to respondents for a copy of his final
assessment and referral to a third doctor. Since respondents took no action, he filed a notice to arbitrate against
them. After mandatory conciliation/mediation, they reached a deadlock.
On July 14, 2017, the Panel ruled that Oscares is entitled to total and permanent disability benefits worth
US$131,797.00 based on the Collective Bargaining Agreement (CBA). In addition, it awarded moral damages of
P100,000.00 for respondents' gross negligence in its delay in addressing and refusing to shoulder the medical
needs of Oscares, as well as for circumventing the provisions of the POEA-Standard Employment Contract
(POEA-SEC) and the CBA. The Panel likewise awarded ten percent (10%) of the total award as attorney's fees
since he was compelled to incur litigation expenses to protect his rights. [16]
According to the Panel, a work-related injury is one arising out of and in the course of employment. An injury
occurs in the course of employment when it takes place within the period of employment, at a place where the
employee reasonably may be in the performance of his duties, and while fulfilling those duties or engaged in
something incidental thereto.[17] Under the personal comfort doctrine, [18] acts of personal ministration for the
comfort or convenience of the employee is an incident of employment. Thus, the Panel held that when Oscares
UE-0200673-2023
suffered from his injury, he was engaged in an act necessary to his physical well-being and incidental to his
employment.
The Panel also found no evidence to show that respondents gave Oscares a copy of his final disability
assessment. Moreover, Dr. Cruz was not an expert on Oscares' case since his area of expertise is general and
cancer surgery. The Panel was more convinced with the findings of Oscares' attending physician in Seamen's
Hospital, Dr. Magtira, and Dr. Pundavela that his disability was total and permanent. [20]
After the Panel denied its motion for reconsideration, respondents filed a petition for review with the CA.
Respondents argued that the Panel erred in applying the personal comfort doctrine since it only covers acts
which are related to one's personal comfort for a brief momentary period, such as using the restroom. Oscares'
act of singing while jumping is not included, is a purely personal and social function, and is not incidental to his
work. Further, Oscares should not have consulted private physicians before respondents' designated physician
issued his final assessment. Thus, the former's assessment was premature. [24] Also, Dr. Cruz and NGC's
assessment should prevail since they conducted a more adequate, thorough, and exhaustive examination on
Oscares. Moreover, Oscares submitted the CBA only after it submitted its position paper. Worse, it is not even
the CBA stated in the contract of employment. With respect to the costs of Oscares' treatment, respondents
asserted that it presented proof of payment of sickness allowance, medical and transportation reimbursements.
On August 29, 2018, the CA granted the petition and reversed and set aside the decision of the panel of
voluntary arbitrators. The CA held that Oscares' injury was not work-related, work-caused, or work-aggravated.
It has no connection whatsoever to his official duties. Consequently, it is not compensable.
Oscares filed a motion for reconsideration, but it was denied by the CA.
ISSUE:
Whether or not respondents, including Arnold Javier as the President of Magsaysay Maritime Corporation shall
be jointly and severally liable to Oscares.
RULING:
Respondents, including Arnold Javier as the President of Magsaysay Maritime Corporation, shall be jointly and
severally liable to Oscares in accordance with Section 10 of Republic Act (RA) No. 8042, as amended by RA No.
10022, which provides that "if the recruitment/placement agency is a juridical being, the corporate officers and
directors and partners as the case may be, shall themselves be jointly and solidarily liable with the corporation
or partnership for the aforesaid claims and damages." In Gargallo v. Dohle Seafront Crewing (Manila), Inc., We
explained that corporate officers or directors cannot, as a general rule, be personally held liable for the contracts
entered into by the corporation because the corporation has a separate and distinct legal personality. However,
"personal liability of such corporate director, trustee, or officer, along (although not necessarily) with the
corporation, may validly attach when he is made by a specific provision of law personally answerable for his
corporate action." As such, We upheld the joint and solidary liability of the officer in that case following Sec. 10
of RA No. 8042, as amended. We similarly imposed joint and several liability on the foreign employer, local
manning agency, and its officer/director in Cariño v. Maine Marine Phils., Inc.
Respondents alleged that pursuant to a Writ of Execution issued by the National Conciliation and Mediation
Board on October 3, 2017, they paid the full judgment award. If it is true, Oscares must return the excess of what
he received to respondents because he is only entitled to disability benefits of Grade 10, sickness allowance,
moral damages, and attorney's fees. This is in accordance with Section 18, Rule XI of the 2011 National Labor
Relations Commission Rules of Procedure, as amended by En Bane Resolution Nos. 11-12, Series of 2012 and 05-
14, Series of 2014. However, respondents have not submitted proof that it has paid the full judgment award to
Oscares. Hence, We do not have any basis to order the return the excess of what they allegedly paid to Oscares.
 SPOUSES FERNANDEZ, V. SMART COMMUNICATIONS, INC., G.R. No. 212885. July 17, 2019
A. REYES, JR., J.:
FACTS:
Everything Online, Inc. (EOL) is a corporation that offers internet services nationwide through franchisees. Smart
Communications, Inc. (SMART), on the other hand, is a mobile phone service provider. Petitioners Nolasco and
Maricris were the Chief Executive Officer (CEO) and Member of the Board of Directors of EOL, respectively.
As alleged in the Amended Complaint, EOL sought SMART sometime in 2006 to provide the mobile
communication requirements for its expansion. Series of meetings ensued between the parties where it was
determined that EOL would be needing approximately 2,000 post-paid lines with corresponding cell phone units.
Nineteen (19) of these lines shall be under the corporate account of EOL while the rest of the lines and phones
shall be distributed to EOL's franchisees. In view of this, EOL's corporate president Salustiano G. Samaco III
(Samaco III), signed on separate occasions, two (2) Corporate Service Applications (SAF) for the 2,000 post-
paid lines with corresponding cell phone units. He also signed Letters of Undertaking to cover for the 1,119
phone lines issued by SMART to EOL thus far. Paragraph 8 of these Letters of Undertaking read:
8. The President and each one of the directors and officers of the corporation shall be held
solidarily liable in their personal capacity with the SUBSCRIBER for all charges for the use of
the SMART Celfones (sic) units acquired by the said SUBSCRIBER.
In September 2006, EOL demanded the release of the remaining phone lines to cover its initial order of 2,000
units. SMART informed EOL that before it approved further phone line applications, the parties should restate
and clarify the agreements between them, to which EOL agreed.
In a letter dated September 13, 2006 (Letter Agreement), SMART specified the terms of the agreement over the
1,119 phone lines it already issued in favor of EOL. In addition to the Letter Agreement, EOL executed an
Undertaking (EOL Undertaking) where it affirmed its availment of 1,119 SMART cell phones and services. EOL
also agreed to assume full responsibility for the charges incurred on the use of all these units. The pertinent
portion of the EOL Undertaking signed by Samaco III and petitioner Nolasco provides:
9. The President and each one of the directors and officers of Everything Online, Inc. shall
be held solidarity liable in their personal capacity with the franchisee or assignee for all
charges for the use of the SMART cellphone units acquired by Everything Online, Inc.
SMART averred that after the execution of the EOL Undertaking, its credit and collection department sent, by
email, phone bills to EOL that had been previously returned to SMART. These bills were for the collection of the
monthly payment due on the lines that were supposedly given to EOL's franchisees. However, EOL allegedly
refused to receive the bills, stating that it was not liable for the payment of bills of phone lines assigned to
franchisees.
On October 13, 2006, SMART notified EOL that its collectibles already amounted to at least P18,000,000.00
representing the costs of cell phone units and the plans usage. EOL officers were also reminded that under the
EOL Undertaking and the Letter Agreements, it is bound to pay the bills of the franchisees, whether the phones
were in the possession of the franchisees or not.
On July 27, 2007, a meeting was purportedly held between the parties where EOL proposed to update the
payments for 304 accounts of its franchisees and it would update and amend the monthly plan for the other 765
accounts. EOL then issued Banco De Oro Check No. 1003473 dated August 3, 2007 for P394,064.62 in favor of
SMART as partial payment and as a sign of good faith. However, the BDO check was dishonored upon
presentment due to insufficiency of funds.
UE-0200673-2023
On November 8, 2007, SMART sent EOL a notice of final demand for the payment of the outstanding amount of
F17,506,740.55. Despite receipt of the demand letter, EOL failed to pay the amount due. On January 2, 2008,
another demand letter for P20,662,073.45 was sent by SMART to EOL. No payment was made by EOL. SMART
claimed that the total due from EOL already amounted to P39,770,810.87 as of October 31, 2008.
SMART failed to collect from EOL despite repeated demands. Thus, on April 1, 2009, an Amended Complaint with
an application for a writ of preliminary attachment was filed by SMART before the RTC of Makati, Branch 62 for
Collection of Sum of Money docketed as Civil Case No. 09-199 against EOL and all its directors and officers
including petitioners Nolasco and Maricris.
On April 20, 2009, the trial court gave due course to the application for the issuance of a writ of attachment and
ordered the posting of an attachment bond in the amount of P39,770,810.87.
On June 15, 2009, petitioners filed a Motion to Dismiss With a Very Urgent Motion to Lift and Discharge Writ of
Preliminary Attachment issued against them. Petitioners averred that they are not the real party in interest in
the case. Maricris claimed that the only allegation holding the directors and officers personally and solidarily
liable with EOL was the alleged provisions in the Letter Agreements and EOL Undertaking. The Letter
Agreements and EOL Undertaking failed to show that she expressly agreed to be bound by the provisions
contained therein. Accordingly, the complaint against her must be dismissed.
With respect to Nolasco, petitioners argued that while his signature appears in the EOL Undertaking, it is not a
sufficient ground to implead him in the complaint together with EOL. It was SMART that drafted the EOL
Undertaking and Nolasco's participation is limited to the affixing of his signature thereon after EOL's President
has already signed it. Nolasco signed in good faith and without the opportunity to read the contents of the same.
Be that as it may, Nolasco is not the real party in interest in this case because he was no longer an
Officer/Director of EOL at the time the complaint was filed as their entire share was already assigned to one of
EOL's directors.
On November 11, 2009, the RTC issued an Order granting the motions to dismiss. EOL and SMART filed separate
motions for partial reconsideration but these were denied by the trial court in its February 22, 2010 Order.
Ascribing grave abuse of discretion amounting to lack or excess of jurisdiction on the part of the RTC, SMART
elevated the case to the CA via a Petition for Certiorari under Rule 65 of the 1997 Rules of Civil Procedure.
On December 2, 2013, the CA promulgated the assailed Decision partly grating the respondent's petition
for certiorari. The appellate court found grave abuse on the part of the trial court in dismissing the complaint
against individual defendants. The CA ruled that there was overwhelming evidence indicating that Samaco III and
Spouses Fernandez expressly bound themselves to be solidarity liable with EOL to SMART.
Petitioners moved for reconsideration but, their Motion was denied by the CA in its Resolution dated June 4,
2014, leading the petitioners to file the instant recourse.
ISSUE:
Whether or not there was a ground to dismiss complaint for a collection of sum of money against petitioners as
corporate officer and director.
RULING:
A judicious examination of the Amended Complaint shows that petitioners were impleaded in the instant action
based on the provisions of the Letter Agreement and EOL Undertaking, which purportedly bound them to be
solidarity liable with the corporation in its obligation with SMART. In effect, the Amended Complaint seeks to
pierce the veil of corporate fiction against Nolasco and Maricris in their capacities as corporate officer and
director of EOL.
It is basic in corporation law that a corporation is an artificial being invested by law with a personality separate
and distinct from its stockholders and from other corporations to which it may be connected. Inferred from a
corporation's separate personality is that "consent by a corporation through its representatives is not consent of
the representative, personally." The corporate obligations, incurred through official acts of its representatives,
are its own. Corollarily, a stockholder, director, or representative does not become a party to a contract just
because a corporation executed a contract through that stockholder, director, or representative.
As a general rule, a corporation's representatives are not bound by the terms of the contract executed by the
corporation. "They are not personally liable for obligations and liabilities incurred on or in behalf of the
corporation."
There are instances, however, when the distinction between personalities of directors, officers, and
representatives, and of the corporation, are disregarded. This is piercing the veil of corporate fiction.
The doctrine of piercing the veil of corporate fiction is a legal precept that allows a corporation's separate
personality to be disregarded under certain circumstances, so that a corporation and its stockholders or
members, or a corporation and another related corporation could be treated as a single entity. It is meant to
apply only in situations where the separate corporate personality of a corporation is being abused or being used
for wrongful purposes.
The piercing of the corporate veil must be done with caution. To justify the piercing of the veil of corporate
fiction, "it must be shown by clear and convincing proof that the separate and distinct personality of the
corporation was purposefully employed to evade a legitimate and binding commitment and perpetuate a fraud
or like wrongdoings."
A corporate director, trustee, or officer is to be held solidarity liable with the corporation in the following
instances:
1. When directors and trustees or, in appropriate cases, the officers of a corporation:
(a) vote for or assent to patently unlawful acts of the corporation;
(b) act in bad faith or with gross negligence in directing the corporate affairs;
(c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or
members, and other persons;
2. When a director or officer has consented to the issuance of watered stocks or who, having knowledge
thereof, did not forthwith file with the corporate secretary his written objection thereto;
3. When a director, trustee or officer has contractually agreed or stipulated to hold himself personally
and solidarily liable with the Corporation; or
4. When a director, trustee or officer is made, by specific provision of law, personally liable for his
corporate action.
These instances have not been shown in the case of petitioner Maricris. While the Amended Complaint alleged
that EOL fraudulently refused to pay the amount due, nothing in the said pleading or its annexes would show
the basis of Maricris' alleged fraudulent act that warrants piercing the corporate veil. No explanation or
narration of facts was presented pointing to the circumstances constituting fraud which must be stated with
particularity, thus rendering the allegation of fraud simply an unfounded conclusion of law. Without specific
averments, "the complaint presents no basis upon which the court should act, or for the defendant to meet it
with an intelligent answer and must, perforce, be dismissed for failure to state a cause of action."
In the determination of sufficiency of a cause of action for purposes of resolving a motion to dismiss, the court
must decide, "hypothetically admitting the factual allegations in a complaint, whether it can grant the prayer in
the complaint."
The Court pronounced in Guillermo, et al. v. Philippine Information Agency, et al., that:
UE-0200673-2023
It is well to point out that the plaintiffs cause of action should not merely be "stated" but,
importantly, the statement thereof should be "sufficient," This is why the elementary test in a
motion to dismiss on such ground is whether or not the complaint alleges facts which if true
would justify the relief demanded. As a corollary, it has been held that only ultimate facts and
not legal conclusions or evidentiary facts are considered for purposes of applying the test.
This is consistent with Section 1, Rule 8 of the Rules of Court which states that the complaint
need only allege the ultimate facts or the essential facts constituting the plaintiffs cause of
action. A fact is essential if they cannot be stricken out without leaving the statement of the
cause of action inadequate. Since the inquiry is into the sufficiency, not the veracity, of the
material allegations, it follows that the analysis should be confined to the four corners of the
complaint, and no other.
By merely stating a legal conclusion, the Amended Complaint presented no sufficient allegation against
petitioner Maricris upon which the Court could grant the relief prayed for. The trial court correctly dismissed the
complaint against Maricris on the ground of failure to state cause of action.
This is not the case with petitioner Nolasco. Nolasco, as CEO, signed the EOL Undertaking purportedly binding
himself to be "held solidarily liable in his personal capacity with the franchisee or assignee for all charges for the
use of SMART cell phone units acquired by Everything Online, Inc." Such allegation proffers hypothetically
admitted ultimate facts, which would warrant an action for a collection for sum of money based on the provision
of the EOL Undertaking.
The following is clearly stipulated in Item 9 of the EOL Undertaking signed by Nolasco, viz.:
9. The President and each one of the directors and officers of Everything Online, Inc. shall
be held solidarily liable in their personal capacity with the franchisee or assignee for all
charges for the use of the SMART cellphone units acquired by Everything Online, Inc.
Verily, the trial court erred in dismissing the complaint against petitioner Nolasco. The allegations in the
complaint, regarding the possible personal liability of petitioner Nolasco based on Item 9 of EOL Undertaking,
sufficiently stated a cause of action. The question of whether petitioner Nolasco is a real party-in-interest who
would be benefited or injured by the judgment, would be better threshed out in a full-blown trial. Indeed, in
cases that call for the piercing of the corporate veil, "parties who are normally treated as distinct individuals
should be made to participate in the proceedings in order to determine if such distinction should be disregarded
and, if so, to determine the extent of their liabilities."
 5. The decreases involved the "selective reduction" of Sinophil 's authorized capital stock which resulted
POWER OF THE CORPORATION 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
METROPLEX BERHAD AND PAXELL INVESTMENT LIMITED, VS. SINOPHIL CORPORATION, G.R. No. 208281. June
of Sinophil;
28, 2021
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.
HERNANDO, J.:
On the other hand, private and public respondents claimed, among others, that there was full compliance with
FACTS: Section 38 of the Corporation Code by the submission of all the requirements and that there was a presumption
In August 1998, Sinophil entered into a Share Swap Agreement (Swap Agreement) with Metroplex and Paxell. of regularity in the performance of public respondents' duties. [19]
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] The SEC found that the decrease in capital stock complied with the requirements imposed by the Corporation
Code, particularly Section 38. It held that the equal or unequal reduction of a corporation's capital stock is a
In their Comment/Opposition, however, Sinophil and Belle alleged that the Swap Agreement was entered into in matter solely between the stockholders and cannot be enjoined either by the courts or the creditors.
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 Moreover, the SEC found no basis to grant the prayer for the issuance of a cease and desist order. Petitioners
transferred by the Metroplex Group (Metroplex and Paxell) to Sinophil's name. failed to raise valid grounds for its issuance. The Commission held that a cease and desist order could not be
ultimately issued because the grave and irreparable danger to the investing public that petitioners fear is not
In the interim, Metroplex pledged two billion of its Sinophil shares with Union Bank and Asian Bank to secure the present in the case.
loans of Legend with the said banks. [10]
Aggrieved, petitioners appealed before the CA raising the following alleged errors in the SEC's ruling:
On August 23, 2001, Sinophil and Belle executed a Memorandum of Agreement (Unwinding Agreement) with
1. The SEC committed serious and manifest errors in affirming the actions of its respondent Operating
Metroplex and Paxell rescinding the 1998 Swap Agreement. After the execution of the Unwinding Agreement,
Departments (CRMD, CFD, CPRD and FAAD) which approved the reduction of the authorized capital
Metroplex and Paxell were unable to return 1.87 billion of the Sinophil shares while another two billion Sinophil
stock of private respondent Sinophil through the selective reduction of the latter's issued capital;
shares remained pledged by Metroplex in favor of International Exchange Bank and Asian Bank. [11]
2. The SEC committed serious and manifest errors in ruling that the selective reduction of the issued
capital of private respondent Sinophil complied with all relevant legal and procedural requirements;
On February 18, 2002 and June 3, 2005, the shareholders of Sinophil voted for the reduction of Sinophil's
and
authorized capital stock.[12]
3. The SEC committed serious and manifest errors in denying the application of petitioners for a cease
and desist order against the respondents.
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
On January 29, 2013, the CA promulgated its Decision which upheld the findings of the SEC. On July 17, 2013, the
approval of the reduction of Sinophil's authorized capital stock was disclosed to the Philippine Stock Exchange,
CA issued a Resolution denying petitioners' motion for reconsideration for lack of merit as all the issues raised
Inc. (PSE).[13]
were a mere rehash of the arguments already passed upon.
On June 21, 2007, the shareholders of Sinophil again approved the proposal of the Board of Directors to reduce
ISSUES:
its authorized capital stock by another one billion shares.[14]
Whether or not the decrease in respondent Sinophil's capital stock was legal and that the public respondent
SEC's approval thereof was proper.
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
RULING:
of the reduction of Sinophil's authorized capital stock was likewise disclosed to the PSE. [15]
Sec. 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness . - No
On July 21, 2008, petitioners Yaw Chee Cheow (Yaw), Metroplex and Paxell filed a Petition for Review Ad
corporation shall increase or decrease its capital stock or incur, create or increase any bonded
Cautelam Ex Abundanti before the SEC assailing the approval by the CRMD and the CFD of the amendments by
indebtedness unless approved by a majority vote of the board of directors, and at a stockholder's meeting
Sinophil of its Articles of Incorporation. Petitioners claimed that:
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
1. They opposed the decrease of the authorized capital stock;
notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of
2. They were not given the opportunity to be heard by the CFD;
any bonded indebtedness and of the time and place of the stockholders' meeting at which the
3. The reduction was approved by the CRMD and CFD despite the lack of more than two-thirds (2/3)
proposed increase or diminution of the capital stock or the incurring or increasing of any bonded
approval of the Sinophil shareholders;
indebtedness is to be considered, must be addressed to each stockholder at his place of residence as shown
4. The decrease in the authorized capital stock of Sinophil violated the legal requirement that a
on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or
corporation cannot reduce its issued capital unless it has unrestricted retained earnings;
served personally.

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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.
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;
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
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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.
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.
In Ong Yang v. Tiu, the Court held that decreasing a corporation's authorized capital stock, which is an
amendment of the corporation's Articles of Incorporation, is a decision that only the stockholders and the
directors can make, considering that they are the contracting parties thereto. For third persons or parties
outside the corporation like the SEC to interfere to the decrease of the capital stock without reasonable ground
is a violation of the "business judgment rule" which states that:
[C]ontracts intra vires entered into by the board of directors are binding upon the
corporation and courts will not interfere unless such contracts are so unconscionable
and oppressive as to amount to wanton destruction to the rights of the minority, as
when plaintiffs aver that the defendants (members of the board), have concluded a
transaction among themselves as will result in serious injury to the plaintiffs
stockholders.
The reason behind the rule is aptly explained by Dean Cesar L. Villanueva, an esteemed
author in corporate law, thus:
Courts and other tribunals are wont to override the business judgment of the board mainly because, courts are
not in the business of business, and the laissez faire rule or the free enterprise system prevailing in our social
and economic set-up dictates that it is better for the State and its organs to leave business to the businessmen;
especially so, when courts are ill-equipped to make business decisions. More importantly, the social contract in
the corporate family to decide the course of the corporate business has been vested in the board and not with
the courts.

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."

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' 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.

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