G.R. No. L-68555 March 19, 1993 PRIME WHITE CEMENT CORPORATION, petitioner, vs.

HONORABLE INTERMEDIATE APPELLATE COURT and ALEJANDRO TE, respondents. CAMPOS, JR., J.: Before Us is a Petition for Review on Certiorari filed by petitioner Prime White Cement Corporation seeking the reversal of the decision * of the then Intermediate Appellate Court, the dispositive portion of which reads as follows: WHEREFORE, in view of the foregoing, the judgment appealed from is hereby affirmed in toto. 1 The facts, as found by the trial court and as adopted by the respondent Court are hereby quoted, to wit: On or about the 16th day of July, 1969, plaintiff and defendant corporation thru its President, Mr. Zosimo Falcon and Justo C. Trazo, as Chairman of the Board, entered into a dealership agreement (Exhibit A) whereby said plaintiff was obligated to act as the exclusive dealer and/or distributor of the said defendant corporation of its cement products in the entire Mindanao area for a term of five (5) years and proving (sic) among others that: a. The corporation shall, commencing September, 1970, sell to and supply the plaintiff, as dealer with 20,000 bags (94 lbs/bag) of white cement per month; b. The plaintiff shall pay the defendant corporation P9.70, Philippine Currency, per bag of white cement, FOB Davao and Cagayan de Oro ports; c. The plaintiff shall, every time the defendant corporation is ready to deliver the good, open with any bank or banking institution a confirmed, unconditional, and irrevocable letter of credit in favor of the corporation and that upon certification by the boat captain on the bill of lading that the goods have been loaded on board the vessel bound for Davao the said bank or banking institution shall

release the corresponding amount as payment of the goods so shipped. Right after the plaintiff entered into the aforesaid dealership agreement, he placed an advertisement in a national, circulating newspaper the fact of his being the exclusive dealer of the defendant corporation's white cement products in Mindanao area, more particularly, in the Manila Chronicle dated August 16, 1969 (Exhibits R and R-1) and was even congratulated by his business associates, so much so, he was asked by some of his businessmen friends and close associates if they can be his sub-dealer in the Mindanao area. Relying heavily on the dealership agreement, plaintiff sometime in the months of September, October, and December, 1969, entered into a written agreement with several hardware stores dealing in buying and selling white cement in the Cities of Davao and Cagayan de Oro which would thus enable him to sell his allocation of 20,000 bags regular supply of the said commodity, by September, 1970 (Exhibits O, O-1, O-2, P, P-1, P-2, Q, Q-1 and Q-2). After the plaintiff was assured by his supposed buyer that his allocation of 20,000 bags of white cement can be disposed of, he informed the defendant corporation in his letter dated August 18, 1970 that he is making the necessary preparation for the opening of the requisite letter of credit to cover the price of the due initial delivery for the month of September, 1970 (Exhibit B), looking forward to the defendant corporation's duty to comply with the dealership agreement. In reply to the aforesaid letter of the plaintiff, the defendant corporation thru its corporate secretary, replied that the board of directors of the said defendant decided to impose the following conditions: a. Delivery of white cement shall commence at the end of November, 1970; b. Only 8,000 bags of white cement per month for only a period of three (3) months will be delivered; c. The price of white cement was priced at P13.30 per bag; d. The price of white cement is subject to readjustment unilaterally on the part of the defendant;

e. The place of delivery of white cement shall be Austurias (sic); f. The letter of credit may be opened only with the Prudential Bank, Makati Branch; g. Payment of white cement shall be made in advance and which payment shall be used by the defendant as guaranty in the opening of a foreign letter of credit to cover costs and expenses in the procurement of materials in the manufacture of white cement. (Exhibit C). xxx xxx xxx Several demands to comply with the dealership agreement (Exhibits D, E, G, I, R, L, and N) were made by the plaintiff to the defendant, however, defendant refused to comply with the same, and plaintiff by force of circumstances was constrained to cancel his agreement for the supply of white cement with third parties, which were concluded in anticipation of, and pursuant to the said dealership agreement. Notwithstanding that the dealership agreement between the plaintiff and defendant was in force and subsisting, the defendant corporation, in violation of, and with evident intention not to be bound by the terms and conditions thereof, entered into an exclusive dealership agreement with a certain Napoleon Co for the marketing of white cement in Mindanao (Exhibit T) hence, this suit. (Plaintiff's Record on Appeal, pp. 86-90). 2 After trial, the trial court adjudged the corporation liable to Alejandro Te in the amount of P3,302,400.00 as actual damages, P100,000.00 as moral damages, and P10,000.00 as and for attorney's fees and costs. The appellate court affirmed the said decision mainly on the following basis, and We quote: There is no dispute that when Zosimo R. Falcon and Justo B. Trazo signed the dealership agreement Exhibit "A", they were the President and Chairman of the Board, respectively, of defendantappellant corporation. Neither is the genuineness of the said agreement contested. As a matter of fact, it appears on the face of the contract itself that both officers were duly authorized to enter into the said agreement and signed the same for and in behalf of

the corporation. When they, therefore, entered into the said transaction they created the impression that they were duly clothed with the authority to do so. It cannot now be said that the disputed agreement which possesses all the essential requisites of a valid contract was never intended to bind the corporation as this avoidance is barred by the principle of estoppel. 3 In this petition for review, petitioner Prime White Cement Corporation made the following assignment of errors. 4 I THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT ARE UNPRECEDENTED DEPARTURES FROM THE CODIFIED PRINCIPLE THAT CORPORATE OFFICERS COULD ENTER INTO CONTRACTS IN BEHALF OF THE CORPORATION ONLY WITH PRIOR APPROVAL OF THE BOARD OF DIRECTORS. II THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT ARE CONTRARY TO THE ESTABLISHED JURISPRUDENCE, PRINCIPLE AND RULE ON FIDUCIARY DUTY OF DIRECTORS AND OFFICERS OF THE CORPORATION. III THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT DISREGARDED THE PRINCIPLE AND JURISPRUDENCE, PRINCIPLE AND RULE ON UNENFORCEABLE CONTRACTS AS PROVIDED IN ARTICLE 1317 OF THE NEW CIVIL CODE. IV THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT DISREGARDED THE PRINCIPLE AND JURISPRUDENCE AS TO WHEN AWARD OF ACTUAL AND MORAL DAMAGES IS PROPER. V IN NOT AWARDING PETITIONER'S CAUSE OF ACTION AS STATED IN ITS ANSWER WITH SPECIAL AND AFFIRMATIVE DEFENSES WITH COUNTERCLAIM THE INTERMEDIATE APPELLATE COURT HAS

CLEARLY DEPARTED FROM THE ACCEPTED USUAL, COURSE OF JUDICIAL PROCEEDINGS. There is only one legal issue to be resolved by this Court: whether or not the "dealership agreement" referred by the President and Chairman of the Board of petitioner corporation is a valid and enforceable contract. We do not agree with the conclusion of the respondent Court that it is. Under the Corporation Law, which was then in force at the time this case arose, 5 as well as under the present Corporation Code, all corporate powers shall be exercised by the Board of Directors, except as otherwise provided by law. 6 Although it cannot completely abdicate its power and responsibility to act for the juridical entity, the Board may expressly delegate specific powers to its President or any of its officers. In the absence of such express delegation, a contract entered into by its President, on behalf of the corporation, may still bind the corporation if the board should ratify the same expressly or impliedly. Implied ratification may take various forms — like silence or acquiescence; by acts showing approval or adoption of the contract; or by acceptance and retention of benefits flowing therefrom. 7 Furthermore, even in the absence of express or implied authority by ratification, the President as such may, as a general rule, bind the corporation by a contract in the ordinary course of business, provided the same is reasonable under the circumstances. 8 These rules are basic, but are all general and thus quite flexible. They apply where the President or other officer, purportedly acting for the corporation, is dealing with a third person, i. e., a person outside the corporation. The situation is quite different where a director or officer is dealing with his own corporation. In the instant case respondent Te was not an ordinary stockholder; he was a member of the Board of Directors and Auditor of the corporation as well. He was what is often referred to as a "self-dealing" director. A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. 9 In case his interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit. As corporate managers, directors are committed to seek the maximum amount of profits for

the corporation. This trust relationship "is not a matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stockholders." 10 In the case of Gokongwei v. Securities and Exchange Commission, this Court quoted with favor from Pepper v. Litton, 11 thus: . . . He cannot by the intervention of a corporate entity violate the ancient precept against serving two masters. . . . He cannot utilize his inside information and his strategic position for his own preferment. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do directly. He cannot use his power for his personal advantage and to the detriment of the stockholders and creditors no matter how absolute in terms that power may be and no matter how meticulous he is to satisfy technical requirements. For that power is at all times subject to the equitable limitation that it may not be exercised for the aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the cestuis. . . . . On the other hand, a director's contract with his corporation is not in all instances void or voidable. If the contract is fair and reasonable under the circumstances, it may be ratified by the stockholders provided a full disclosure of his adverse interest is made. Section 32 of the Corporation Code provides, thus: Sec. 32. Dealings of directors, trustees or officers with the corporation. — A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present: 1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; 2. That the vote of such director or trustee was not necessary for the approval of the contract; 3. That the contract circumstances; and is fair and reasonable under the

70 per bag for the whole five years of the contract. 1970. void or voidable. However. why did the President and the Chairman of the Board not do so either? As director. this unfairness in the contract is also a basis which renders a contract entered into by the President.00 per bag (94 lbs). the contracts were for only two years from October. A similar contract with Prudencio Lim was made on December 29. the contract with the officer has been previously authorized by the Board of Directors. At the time of the contract.000 bags of white cement per month. 12 Granting arguendo that the "dealership agreement" involved here would be valid and enforceable if entered into with a person other than a director or officer of the corporation. except for the contract with Henry Wee. were not stable and were expected to rise. there would be a considerable rise in the price of white cement. In fact. Yet. although it may have been in the ordinary course of business. the price was pegged at P9. for five years starting September. 1969. and white cement in particular. Fairness on his part as a director of the corporation from whom he was to buy the cement. 1970. petitioner corporation's reputation and goodwill have been prejudiced. at thefixed price of P9. specially since he was the other party in interest. The contract was therefore not valid and this Court cannot allow him to reap the fruits of his disloyalty. it was already P37. such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members in a meeting called for the purpose: Provided. himself. it is to Us quite clear that he was guilty of disloyalty to the corporation. Where any of the first two conditions set forth in the preceding paragraph is absent. He must have known that within that period of six years. That in the case of an officer. 1970. the reason why delivery was not to begin until 14 months later. 1969. 1969. when he subsequently entered into contracts to resell the cement to his "new dealers" Henry Wee 13 and Gaudencio Galang 14 stipulated as follows: The price of white cement shall be mutually determined by us but in no case shall the same be less than P14. There is no showing that the stockholders ratified the "dealership agreement" or that they were fully aware of its provisions. prices of commodities in general. 1967. or at least must be presumed to know. yet the cited provision substantially incorporates well-settled principles in corporate law. however.70 per bag for a period of five years was not fair and reasonable. the fact that the other party to the contract was a Director and Auditor of the petitioner corporation changes the whole situation. Despite this. and by the middle of 1975. First of all. 15 All of these contracts were entered into soon after his "dealership agreement" with petitioner corporation. without authority from the Board of Directors. The contract with Henry Wee was on September 15. no provision was made in the "dealership agreement" to allow for an increase in price mutually acceptable to the parties. In the light of the circumstances of this case. respondent Te's bounden duty was to act in such manner as not to unduly prejudice the corporation. Why did he not protect the corporation in the same manner when he entered into the "dealership agreement"? For that matter. In fact. As a result of this action which has been proven to be without legal basis. that at that time.50. on October 13. That the contract is fair and reasonable under the circumstances. That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided. Instead. .4.50 per bag. Respondent Te is a businessman himself and must have known. Although the old Corporation Law which governs the instant case did not contain a similar provision. respondent Te's own Memorandum shows that in September. petitioner corporation had not even commenced the manufacture of white cement. We believe that the contract was neither fair nor reasonable. Respondent Te. was to sell and supply to respondent Te 20. The "dealership agreement" entered into in July. the price per bag was P14. to enrich himself at the expense of the corporation. would require such a provision. and in each one of them he protected himself from any increase in the market price of white cement. there can be no award for moral damages under Article 2217 and succeeding articles on Section 1 of Chapter 3 of Title XVIII of the Civil Code in favor of a corporation.70 per bag. he was attempting in effect. and that with Gaudencio Galang. We believe that the fixed price of P9. in the case of a contract with a director or trustee.

At the time of the amendment.127. ANTONIO. MIGUEL ORTIGAS. 1976.. arose out of two cases filed by petitioner with the Securities and Exchange Commission. JR. VISAYA. Enrique Zobel.974 common shares at P10. with prayer for issuance of writ of preliminary injunction. vs. Soriano.R. respectively. mandamus and injunction. SR. It was contended that according to section 22 of the Corporation Law and . Andres Soriano. the outstanding and paid up shares totalled 30. vs. SAN MIGUEL CORPORATION. are hereby SET ASIDE.. as stockholder of respondent San Miguel Corporation. Miguel Ortigas.: The instant petition for certiorari. ANTONIO PRIETO. petitioner.430. ENRIQUE ZOBEL. basing their authority to do so on a resolution of the stockholders adopted on March 13. The petition. 1976. when the outstanding capital stock of respondent corporation was only P70. J. No. ANDRES M.00 per share. Private respondent Alejandro Te is hereby ordered to pay petitioner corporation the sum of P20. SORIANO. injunction and damages with prayer for a preliminary injunction" against the majority of the members of the Board of Directors and San Miguel Corporation as an unwilling petitioner.000.. divided into 5. entitled "John Gokongwei Jr. Conde.270. individual respondents amended by bylaws of the corporation. filed with the Securities and Exchange Commission (SEC) a petition for "declaration of nullity of amended by-laws. ANTONIO ROXAS. Emeterio Bunao. 1984. As a first cause of action.00. 1375.047 with a total par value of P301. SO ORDERED. and EDUARDO R. was docketed as SEC Case No.000 preferred shares at P100. 1984 and August 6. 1961. the Decision and Resolution of the Intermediate Appellate Court dated March 30. EMETERIO BUNAO. 1979 JOHN GOKONGWEI. plus the cost of suit and expenses of litigation. cancellation of certificate of filing of amended by. EMIGDIO TANJUATCO.In view of the foregoing.139. Walthrode B.laws. JOSE M.00 per share and 150. Antonio Prieto and San Miguel Corporation". as follows: SEC CASE NO 1375 On October 22.740. Jose M. WALTHRODE B.00. petitioner.00 for attorney's fees. SORIANO. respondents. SECURITIES AND EXCHANGE COMMISSION. CONDE. petitioner alleged that on September 18. Jr. L-45911 April 11.513. G. Antonio Roxas.

privileged. 1976. such as the rights to vote and to be voted upon in the election of directors. alleging. and that some of the information sought are not part of the records of the corporation and. to petitioner. Soriano. On October 28. the questioned act is ultra vires and void. (b) copy of the management contract between San Miguel Corporation and A. and that individual respondents be made to pay damages. therefore. As a third cause of action. which was allowed because the questioned amendment gave the Board itself the prerogative of determining whether they or other persons are engaged in competitive or antagonistic business.. repeal or adopt new by-laws may be delegated to the Board of Directors only by the affirmative vote of stockholders representing not less than 2/3 of the subscribed and paid up capital stock of the corporation. petitioner had acquired rights inherent in stock ownership. Inc. During the pendency of the motion for production. Miguel Ortigas and Antonio . therefore.. Soriano. Enrique Conde. while representing other corporations. Inc. it was alleged that corporations have no inherent power to disqualify a stockholder from being elected as a director and. As a second cause of action. the power to amend. shall be submitted in writing to the Board of Directors at least five (5) working days before the date of the Annual Meeting" is likewise unreasonable and oppressive. petitioner averred that the membership of the Board of Directors had changed since the authority was given in 1961. the Board may consider such factors as business and family relationship. that as a stockholder. received by Andres M. It was. which 2/3 should have been computed on the basis of the capitalization at the time of the amendment.. that the motion is premature since the materiality or relevance of the evidence sought cannot be determined until the issues are joined. allowances. bonuses. Since the amendment was based on the 1961 authorization. Soriano. and/or its successor-in-interest. and other compensation. that it fails to show good cause and constitutes continued harrasment. it was alleged that the authority granted in 1961 had already been exercised in 1962 and 1963. in specified amounts. among others that the motion has no legal basis. there being six (6) new directors. petitioner had all the qualifications to be a director of respondent corporation. after which the authority of the Board ceased to exist. if any. and (e) lists of salaries. prayed that the amended by-laws be declared null and void and the certificate of filing thereof be cancelled. and/or Jose M. Jr. and that respondent corporation had been attempting to suppress information from its stockholders despite a negative reply by the SEC to its query regarding their authority to do so. being a Substantial stockholder thereof. 1 As additional causes of action. and that the portion of the amended by-laws which requires that "all nominations for election of directors . Jr. (c) latest balance sheet of San Miguel International.. is unreasonable and oppressive and. entered into contracts (specifically a management contract) with respondent corporation. petitioner contended that the Board acted without authority and in usurpation of the power of the stockholders. that the portion of the amended bylaws which states that in determining whether or not a person is engaged in competitive business. Among the documents requested to be copied were (a) minutes of the stockholder's meeting field on March 13. in connection with the same case. (d) authority of the stockholders to invest the funds of respondent corporation in San Miguel International. modify. 1961. Soriano Corporation (ANSCOR). that the demand is not based on good faith. void. petitioner filed with the Securities and Exchange Commission an "Urgent Motion for Production and Inspection of Documents". therefore. that Andres M. respondents purposely provided for petitioner's disqualification and deprived him of his vested right as aforementioned hence the amended by-laws are null and void. As a fourth cause of action. The "Urgent Motion for Production and Inspection of Documents" was opposed by respondents.Article VIII of the by-laws of the corporation. it was claimed that prior to the questioned amendment. respondents San Miguel Corporation. therefore. alleging that the Secretary of respondent corporation refused to allow him to inspect its records despite request made by petitioner for production of certain documents enumerated in the request. and that in amending the by-laws.

and thereafter.. amendments is valid and legal because the power to "amend. in part as follows: Considering the evidence submitted before the Commission by the petitioner and respondents in the above-entitled case. who is president and controlling shareholder of Robina and CFC (both closed corporations) purchased 5. began acquiring shares therein. "conducted malevolent and malicious publicity campaign against SMC" to generate support from the stockholder "in his effort to secure for himself and in representation of Robina and CFC interests. respondents Emigdio Tanjuatco. petitioner was rejected by the stockholders in his bid to secure a seat in the Board of Directors on the basic issue that petitioner was engaged in a competitive business and his securing a seat would have subjected respondent corporation to grave disadvantages. Subsequently. modify. Soriano. The application for writ of preliminary injunction was likewise on various grounds. 26. stating. 1976. that thereafter the Board of Directors amended the by-laws as afore-stated. that in the stockholders' meeting of March 18. until its total holdings amounted to P543. since he failed. "the vote requirement for a valid delegation of the power to amend. exemplary damages. Visaya were allowed to intervene as oppositors and they accordingly filed their oppositions-intervention to the petition. hence the. are valid and binding and are intended to prevent the possibility of violation of criminal and civil laws prohibiting combinations in restraint of trade. that petitioner is estopped from questioning the amendments on the ground of lack of authority of the Board. petitioner. It was. repeal or adopt new By-laws" delegated to said Board on March 13. that on January 12. moral damages. as part of their affirmative defenses. in behalf of himself. repeal or adopt new by-laws is determined in relation to the total subscribed capital stock at the time the delegation of said power is made. denying the material averments thereof and stating.000 shares of stock of respondent corporation. that in August 1972. that respondent corporation should not be precluded from adopting protective measures to minimize or eliminate situations where its directors might be tempted to put their personal interests over t I hat of the corporation.. 1976 resulting in the . Series of 1977. section I of the by-laws and section 22 of the Corporation law. not when the Board opts to exercise said delegated power". On December 29. denying the substantial allegations therein and stating. that petitioner has not availed of his intra-corporate remedy for the nullification of the amendment. the Consolidated Foods Corporation (CFC) likewise began acquiring shares in respondent (corporation. the Universal Robina Corporation (Robina). Sr. to object to other amendments made on the basis of the same 1961 authorization: that the power of the corporation to amend its by-laws is broad. Respondents Andres M.987 shares: that in October 1972. 1976. until September 1976 when its total holding amounted to 622. the Securities and Exchange Commission resolved the motion for production and inspection of documents by issuing Order No.00 in September 1976. and that the petition states no cause of action. CFC and Robina. expenses of litigation and attorney's fees were presented against petitioner. which is to secure its repeal by vote of the stockholders representing a majority of the subscribed capital stock at any regular or special meeting. as amended. subject only to the condition that the by-laws adopted should not be respondent corporation inconsistent with any existing law. therefore. a corporation engaged in business competitive to that of respondent corporation. that "petitioner nevertheless vowed to secure a seat in the Board of Directors at the next annual meeting. petition is premature. 1961 and long prior thereto has never been revoked of SMC". Soriano filed their opposition to the petition. prayed that the petition be dismissed and that petitioner be ordered to pay damages and attorney's fees to respondents. that contrary to petitioner's claim. Jr. actual damages. it is hereby ordered: . and Eduardo R.959. that the questioned amended by-laws is a matter of internal policy and the judgment of the board should not be interfered with: That the by-laws. by way of affirmative defenses that "the action taken by the Board of Directors on September 18. a seat in the Board of Directors of SMC". At this juncture. As counterclaims. 1976. and Jose M. This was duly opposed by petitioner.Prieto filed their answer to the petition. a Joint Omnibus Motion for the striking out of the motion for production and inspection of documents was filed by all the respondents. as provided in Article VIII.

a temporary restraining order be issued. This motion was duly opposed by respondents. and Andres Soriano from San Miguel International. After receipt of the order of denial. therefore. at 9:30 o'clock in the morning for purposes of enforcing the rights herein granted. the Commission holds in abeyance the resolution on the matter of production and inspection of the authority of the stockholders of San Miguel Corporation to invest the funds of respondent corporation in San Miguel International. The motion for summary judgment was opposed by private respondents. respondent corporation issued a notice of special stockholders' meeting for the purpose of "ratification and confirmation of the amendment to the By-laws". On February 14. however. Jr. Inc. That respondents produce and permit the inspection. praying that pending the determination of petitioner's application for the issuance of a preliminary injunction and/or petitioner's motion for summary judgment. copying and photographing of the said documents shall be undertaken under the direct and strict supervision of this Commission. petitioner filed a consolidated motion for contempt and for nullification of the special stockholders' meeting. and/or its successors-in. . allowances. 1976. as petitioner-movant is not a stockholder of San Miguel International. petitioner moved for its reconsideration. copying and photographing. by or on behalf of the petitioner-movant. Pending action on the motion. no inherent right to inspect said documents. 3. setting such meeting for February 10. Jr. respondent Commission issued an order denying the motion for issuance of temporary restraining order. respondents conducted the special stockholders' meeting wherein the amendments to the bylaws were ratified. on December 10. private respondents admitted the invalidity of the amendments of September 18. Finally. which are in the possession. 2 Dissatisfied with the foregoing Order. Likewise. while the petition was yet to be heard. and 4. 1977. 1961. This prompted petitioner to ask respondent Commission for a summary judgment insofar as the first cause of action is concerned. 1977. custody and control of the said corporation. as well as the list of salaries. the said motion had not yet been scheduled for hearing. 2. it appearing that the same is material and relevant to the issues involved in the main case. Inc.. until after the hearing on the merits of the principal issues in the aboveentitled case. In view of the Manifestation of petitioner-movant dated November 29.interest. 1976. the Commission takes note thereof.1. Soriano. Provided. Petitioner alleges that up to the time of the filing of the instant petition. the motion for reconsideration of the order granting in part and denying in part petitioner's motion for production of record had not yet been resolved.. it being understood that the inspection. the Petition to produce and inspect the same is hereby DENIED. withdrawing his request to copy and inspect the management contract between San Miguel Corporation and A. for the alleged reason that by calling a special stockholders' meeting for the aforesaid purpose. 1977. 1977. of the minutes of the stockholders' meeting of the respondent San Miguel Corporation held on March 13. As to the Balance Sheet of San Miguel International. 1977. that other documents and/or papers not heretofore included are not covered by this Order and any inspection thereof shall require the prior permission of this Commission. This Order is immediately executory upon its approval. 1976. the respondents should allow petitioner-movant entry in the principal office of the respondent Corporation. and has. Accordingly. petitioner filed an "Urgent Motion for the Issuance of a Temporary Restraining Order". San Miguel Corporation on January 14. Inc. Soriano Corporation and the renewal and amendments thereof for the reason that he had already obtained the same. bonuses. John Gokongwei. restraining respondents from holding the special stockholder's meeting as scheduled. A motion for reconsideration of the order denying petitioner's motion for summary judgment was filed by petitioner before respondent Commission on March 10. compensation and/or remuneration received by respondent Jose M. Inc. On February 10. Meanwhile.

By reason of the foregoing. in gross derogation of petitioner's rights to property and due process. respondents filed a Manifestation with respondent Commission. petitioner was not heard prior to the date of the stockholders' meeting. 1977. Respondent Commission. On February 4. he filed with respondent Commission. and set the case for hearing on April 29 and May 3. Soriano. CASE NO. having discovered that respondent corporation has been investing corporate funds in other corporations and businesses outside of the primary purpose clause of the corporation.In view of the fact that the annul stockholders' meeting of respondent corporation had been scheduled for May 10. the following: 6. it is petitioner's contention before this Court that respondent Commission gravely abused its discretion when it failed to act with deliberate dispatch on the motions of petitioner seeking to prevent illegal and/or arbitrary impositions or limitations upon his rights as stockholder of respondent corporation. cancelled the dates of hearing originally scheduled and reset the same to May 16 and 17. 1977. petitioner filed with the SEC an urgent motion for the issuance of a writ of preliminary injunction to restrain private respondents from taking up Item 6 of the Agenda at the annual stockholders' meeting. when it denied respondents' motion to dismiss and gave them two (2) days within which to file their answer. 1977. a petition seeking to have private respondents Andres M. With respect to the afore-mentioned SEC cases. in violation of section 17 1/2 of the Corporation Law. 1977. on January 20. and that respondent are acting oppressively against petitioner. and ratification of the investments thereafter made pursuant thereto. the date set for the second hearing of the case on the merits. submitting a Resolution of the Board of Directors of respondent corporation disqualifying and precluding petitioner from being a candidate for director unless he could submit evidence on May 3. Thereafter. Petitioner alleges that there appears a deliberate and concerted inability on the part of the SEC to act hence petitioner came to this Court. as well as the respondent corporation declared guilty of such violation. alleging that private respondents were seeking to nullify and render ineffectual the exercise of jurisdiction by the respondent Commission. 1977. 1977. Re-affirmation of the authorization to the Board of Directors by the stockholders at the meeting on March 20. petitioner filed with respondent Commission a Manifestation stating that he intended to run for the position of director of respondent corporation. Respondents issued notices of the annual stockholders' meeting. 1972 to invest corporate funds in other companies or businesses or for purposes other than the main purpose for which the Corporation has been organized. He prayed that this Court direct respondent SEC to act on collateral incidents pending before it. 1977 that he does not come within the disqualifications specified in the amendment to the by-laws. By reason thereof. to which a consolidated motion to strike and to declare individual respondents in default and an opposition ad abundantiorem cautelam were filed by petitioner. including in the Agenda thereof. 1977. but this notwithstanding. Soriano. 1423 Petitioner likewise alleges that. 1977. petitioner filed an urgent manifestation on May 3. and Jose M. Despite the fact that said motions were filed as early as February 4. requesting that the same be set for hearing on May 3. Allegedly despite a subsequent Manifestation to prod respondent Commission to act. Jr. to petitioner's irreparable damage and prejudice. 1375. subject matter of SEC Case No. however. or after the scheduled annual stockholders' meeting. on April 28. this Court issued a temporary restraining order restraining private respondents from disqualifying or preventing petitioner from running or from being voted as director of respondent corporation and from submitting for ratification or . On May 6. petitioner filed a manifestation and motion to resolve pending incidents in the case and to issue a writ of injunction. 1977. 1977. 1977. For the purpose of urging the Commission to act. the commission acted thereon only on April 25. no action has been taken up to the date of the filing of the instant petition. motions to dismiss were filed by private respondents. SEC. and ordered to account for such investments and to answer for damages.

Further. 1375). 1977. It is petitioner's assertions. 451. Soriano. it appearing that the owns and controls a greater portion of his SMC stock thru the Universal Robina Corporation and the Consolidated Foods Corporation. Series of 1977 (SEC Case No. alleging that the petition is without merit for the following reasons: (1) that the petitioner the interest he represents are engaged in business competitive and antagonistic to that of respondent San Miguel Corporation. when CFC and Robina had accumulated investments. the respondent Commission served upon petitioner copies of the following orders: (1) Order No. will illegally and unfairly utilize their direct access to its business secrets and plans for their own private gain to the irreparable prejudice of respondent SMC. 1375). denying petitioner's motion for reconsideration of the order of respondent Commission denying petitioner's motion for summary judgment. and without hearing petitioner thereon despite petitioner's request to have the same calendared for hearing . On May 17. which corporations are engaged in business directly and substantially competing with the allied businesses of respondent SMC and of corporations in which SMC has substantial investments. Further. (2) that the amended by law were adopted to preserve and protect respondent SMC from the clear and present danger that business competitors. 1977. Andres M. It is prayed in the supplemental petition that the SEC orders complained of be declared null and void and that respondent Commission be ordered to allow petitioner to undertake discovery proceedings relative to San Miguel International. and Jose M. 1375 and 1423 on the merits. 1375). Series of 1977 (SEC Case No. or on May 9. if allowed to become directors. denying petitioner's motion for reconsideration. petitioner filed a Supplemental Petition. its stockholders. of the order of the Commission denying in part petitioner's motion for production of documents. (2) that it acted without jurisdiction and in violation of petitioner's right to due process when it decided en banc an issue not raised before it and still pending before one of its Commissioners. Jr. petitioner's motion for reconsideration of the order denying the issuance of a temporary restraining order denying the issuance of a temporary restraining order. and denying deferment of Item 6 of the Agenda for the annual stockholders' meeting. the Board of Directors of SMC realized the clear and present danger that competitors or antagonistic parties may be elected directors and thereby have easy and direct access to SMC's business and trade secrets and plans. warranting immediate judicial intervention. and.confirmation or from causing the ratification or confirmation of Item 6 of the Agenda of the annual stockholders' meeting on May 10. (2) Order No. when CFC and Robina had accumulated shares in SMC. 450. and thereafter to decide SEC Cases No. Further. or from Making effective the amended by-laws of respondent corporation. 1977. and (3) Order No. ultimately. allowing petitioner to run as a director of respondent corporation but stating that he should not sit as such if elected. 1977. it is asserted that membership of a competitor in the Board of Directors is a blatant disregard of no less that the Constitution and pertinent laws against combinations in restraint of trade. and (3) that the respondents acted oppressively against the petitioner in violation of his rights as a stockholder. until further orders from this Court or until the Securities and Ex-change Commission acts on the matters complained of in the instant petition. with its supplement. under the law of self- . Soriano filed their comment. anent the foregoing orders. respondent SEC. until such time that the Commission has decided the validity of the bylaws in dispute. Inc. and petitioner's consolidated motion to declare respondents in contempt and to nullify the stockholders' meeting. (3) that by laws are valid and binding since a corporation has the inherent right and duty to preserve and protect itself by excluding competitors and antogonistic parties. Series of 1977 (SEC Case No. On May 14. 449. alleging that after a restraining order had been issued by this Court. (1) that respondent Commission acted with indecent haste and without circumspection in issuing the aforesaid orders to petitioner's irreparable damage and injury.

1977 did not render the case moot. voted upon. 450 and 451 in SEC Case No. and it should be allowed a wide latitude in the selection of means to preserve itself. 1977 that petitioner calendared the aforesaid petition for suspension (preliminary injunction) for hearing on May 3. therefore. that the amendment to the bylaws which specifically bars petitioner from being a director is void since it deprives him of his vested rights. since he failed to have the petition to suspend. On May 21. it has become moot and academic because respondent Commission has acted on the pending incidents. it is apparent that respondent Commission was not given a chance to act "with deliberate dispatch". such that the discussion.) Petitioner. alleging that after receiving a copy of the restraining order issued by this Court and noting that the restraining order did not foreclose action by it." It was alleged that the main petition has. become moot and academic. It was. 1977. it states that Order No. 927-928. among others that the acts of private respondent sought to be enjoined have reference to the annual meeting of the stockholders of respondent San Miguel Corporation. that the discussion of Item 6 of the Agenda be deferred. The reason given for denial of deferment was that "such action is within the authority of the corporation as well as falling within the sphere of stockholders' right to know. prayed that the petition be dismissed. and that in the same meeting. ratification and confirmation of Item 6 of the Agenda of the annual stockholders' meeting of May 10. petitioner filed a second supplemental petition with prayer for preliminary injunction." (Reno. took into consideration an urgent manifestation filed with the Commission by petitioner on May 3. thru the Solicitor General. in compliance with the order of respondent Commission. and no hearing on the merits has been had. among others. in his memorandum. It was emphasized that it was only on April 29. Sr. hence the elevation of these issues before the Supreme Court is premature. which was held on may 10. complained of. pp. ratified and confirmed. deliberate upon and/or to express their wishes regarding disposition of corporate funds considering that their investments are the ones directly affected. Petitioner filed a reply to the aforesaid comments. stating that the petition presents justiciable questions for the determination of this Court because (1) the respondent Commission acted without circumspection. 450 which denied deferment of Item 6 of the Agenda of the annual stockholders' meeting of respondent corporation. even assuming that the petition was meritorious was.preservation. (1) whether or not the provisions of the amended by-laws of respondent corporation. such as the instant case.1977. alleging that the petition has become moot and academic for the reason. warranting the intervention of this Court. filed a separate comment. respondent Emigdio G. the Commission en banc issued Orders Nos. therefore. 1977 which prayed. submits the following issues for resolution. In answer to the allegation in the supplemental petition. (2) a derivative suit. 449. 1977. 1977. (4) that the delay in the resolution and disposition of SEC Cases Nos. On September 29. Respondent Commission. 1375 and 1423 was due to petitioner's own acts or omissions. pendente lite the amended by-laws calendared for hearing. that in said meeting. Tanjuatco. Item 6 of the Agenda was discussed. and (5) that. filed his comment. and "that all possible questions on the facts now pending before the respondent Commission are now before this Honorable Court which has the authority and the competence to act on them as it may see fit. 1977. 1375. disqualifying a competitor from nomination or election to the Board of Directors are valid and reasonable. is not rendered academic by the act of a majority of stockholders. Further it was averred that the questions and issues raised by petitioner are pending in the Securities and Exchange Commission which has acquired jurisdiction over the case. The instant petition being dated May 4. petitioner was allowed to run and be voted for as director. (2) whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an examination of the records of . alleging that the actuations of respondent SEC tended to deprive him of his right to due process. unfairly and oppresively against petitioner.

: that the amended by-laws were adopted by the Board of Directors of the San Miguel Corporation in the exercise of the power delegated by the stockholders ostensibly pursuant to section 22 of the Corporation Law. citingGayong v. otherwise "the time spent and effort exerted by the parties concerned and. Security Credit and Acceptance Corporation.San Miguel International. and Jose M. or (b) where public interest demand an early disposition of the case. and "Commissioner Sulit . in Francisco v." Respondents Andres M. third: "petitioner was denied due process by SEC" when "Commissioner de Guzman had openly shown prejudice against petitioner .. 8a Because uniformity may be secured through review by a single Supreme Court. instead of remanding them to the trial court where (a) the ends of justice would not be subserved by the remand of the case. second: "it is for the interest and guidance of the public that an immediate and final ruling on the question be made . to decide the case on its merits. citing precedent where this Court. a fully owned subsidiary of San Miguel Corporation. ". I Whether or not amended by-laws are valid is purely a legal question which public interest requires to be resolved — It is the position of the petitioner that "it is not necessary to remand the case to respondent SEC for an appropriate ruling on the intrinsic validity of the amended by-laws in compliance with the principle of exhaustion of administrative remedies". and in Republic v. and finally: "to remand the case to SEC would only entail delay rather than serve the ends of justice. more importantly. 5 this Court resolved to decide the case on the merits instead of remanding it to the trial court for further proceedings since the ends of justice would not be subserved by the remand of the case. there are facts which cannot be denied. is purely a legal question.." Respondent Eduardo R. ". in similar situations resolved to decide the cases on the merits. 1977. and (3) whether or not respondent SEC committed grave abuse of discretion in allowing discussion of Item 6 of the Agenda of the Annual Stockholders' Meeting on May 10. the amended bylaws were ratified by more than 80% of the stockholders of record. 1977 held specially for that purpose. 7 this Court denied remand of the third-party complaint to the trial court for further proceedings. considering that: first: "whether or not the provisions of the amended by-laws are intrinsically valid .. questions of law may appropriately be determined in the first instance by courts. Soriano. approved the amended by-laws ex-parte and obviously found the same intrinsically valid. In Republic v. viz. invoking the latter's primary jurisdiction to hear and decide case involving intra-corporate controversies. It is an accepted rule of procedure that the Supreme Court should always strive to settle the entire controversy in a single proceeding. There is no factual dispute as to what the provisions are and evidence is not necessary to determine whether such amended by-laws are valid as framed and approved .. that in a special meeting on February 10. et al. ". leaving nor root or branch to bear the seeds of future litigation. that the foreign investment in the Hongkong Brewery and .. resolved to decide the case on the merits "because public interest demands an early disposition of the case". 8 It is settled that the doctrine of primary jurisdiction has no application where only a question of law is involved. based upon said evidence.. It is only the Solicitor General who contends that the case should be remanded to the SEC for hearing and decision of the issues involved.. 4 Thus... Soriano similarly pray that this Court resolve the legal issues raised by the parties in keeping with the "cherished rules of procedure" that "a court should always strive to settle the entire controversy in a single proceeding leaving no root or branch to bear the seeds of future ligiation". finding that the main issue is one of law. or (c) where the trial court had already received all the evidence presented by both parties and the Supreme Court is now in a position. would have been for naught because the main question will come back to this Honorable Court for final resolution. Gayos. Inc. 8b In the case at bar.. and the ratification of the investment in a foreign corporation of the corporate funds.. Central Surety and Insurance Company. allegedly in violation of section 17-1/2 of the Corporation Law. Jr. City of Davao.. by this Honorable Court. 3 To the same effect is the prayer of San Miguel Corporation that this Court resolve on the merits the validity of its amended by laws and the rights and obligations of the parties thereunder. 6 this Court. Visaya submits a similar appeal.

1978. or the promotion of both the interests of petitioner and respondent San Miguel Corporation.0% Woven Fabrics 17. (c) CFC Corporation — 658. It is also contended that petitioner is the president and substantial stockholder of Universal Robina Corporation and CFC Corporation. as of May 6. was made by the San Miguel Corporation in 1948. Since the outstanding capital stock of San Miguel Corporation. all foreign investments and operations of San Miguel Corporation were ratified by the stockholders. or with the charter of the corporation. and one upon which reasonable minds must necessarily differ. (b) Universal Robina Corporation — 738. has exercised.0% 12. that it is essentially a preventive measure to assure stockholders of San Miguel Corporation of reasonable protective from the unrestrained self-interest of those charged with the promotion of the corporate enterprise. ALLEGED AREAS OF COMPETITION BETWEEN CORPORATIONS AND SAN MIGUEL CORPORATION PETITIONER'S According to respondent San Miguel Corporation.139. both of which are allegedly controlled by petitioner and members of his family.5% 9.0% 52. Upon the other hand. result in a combination or agreement in violation of Article 186 of the Revised Penal Code by destroying free competition to the detriment of the consuming public.325 shares.749 shares with a par value of P10. conclusion of a competitor from the Board is legitimate corporate purpose. the areas of.1% 26. 9 Whether the by-law is in conflict with the law of the land.0% 57. the total shares owned or controlled by petitioner represents 4. however. control over the following shareholdings in San Miguel Corporation.0% Instant Coffee 45. 10 This rule is subject. or is in a legal sense unreasonable and therefore unlawful is a question of law. as of the present date. is represented by 33.0% 49..2344% of the total outstanding capital stock of San Miguel Corporation.0% 10. vis. It is further argued that there is not vested right of any stockholder under Philippine Law to be voted as director of a corporation.6% Layer Pullets 33. that access to confidential information by a competitor may result either in the promotion of the interest of the competitor at the expense of the San Miguel Corporation.403.00. respondents Andres M. Soriano and San Miguel Corporation content that ex. Soriano.0% Dressed Chicken 35.0% Ice Cream 70.0% 24.Distellery.0% Poultry & Hog Feeds 40. — 6. 1978. Jose M. a beer manufacturing company in Hongkong.6% .285 shares. thus: Product Line Estimated Market Share Total 1977 SMC Robina-CFC Table Eggs 0.0% 83. therefore. petitioner cannot devote an unselfish and undivided Loyalty to the corporation.313 shares. and that in the stockholders' annual meeting held in 1972 and 1977. II Whether or not the amended by-laws of SMC of disqualifying a competitor from nomination or election to the Board of Directors of SMC are valid and reasonable — The validity or reasonableness of a by-law of a corporation in purely a question of law. Jr. considering that being a competitor. It is also claimed that both the Universal Robina Corporation and the CFC Corporation are engaged in businesses directly and substantially competing with the alleged businesses of San Miguel Corporation.6% 10. Jr. or a total of 1. It is alleged that petitioner. and of corporations in which SMC has substantial investments. personally or thru two corporations owned or controlled by him.: (a) John Gokongwei. at the same time depriving petitioner of his "vested right" to be voted for and to vote for a person of his choice as director. to the limitation that where the reasonableness of a by-law is a mere matter of judgment. which may.0% 40. a court would not be warranted in substituting its judgment instead of the judgment of those who are authorized to make by-laws and who have exercised their authority.0% 14.647 shares.0% 13.0% 85. competition are enumerated in its Board the areas of competition are enumerated in its Board Resolution dated April 28. 11 Petitioner claims that the amended by-laws are invalid and unreasonable because they were tailored to suppress the minority and prevent them from having representation in the Board".

such power of self-government being essential to enable the corporation to accomplish the purposes of its creation. owning 23. according to respondent SMC. 1977.000. At the meeting of February 10. a subsidiary of SMC. " This must necessarily refer to a qualification in addition to that specified by section 30 of the Corporation Law. The CFC-Robina group (Robitex. on the ground that section 21 of the Corporation Law expressly gives the power to the corporation to provide in its by-laws for the . 13 In this jurisdiction. the CFC-Robina group was in direct competition on product lines which. a corporation may prescribe in its by-laws "the qualifications. in product sales amounting to more than P95 million. under section 21 of the Corporation Law. by "virtue of powers delegated to it by the stockholders.480 shareholders. which shall be held as security for their action.00. while 946 stockholders.Thus.716 shareholders owning 24. 1978. these amendments were confirmed and ratified by 5.349 shareholders.754 shares in SMC. the rule was "that the power to make and adopt by-laws was inherent in every corporation as one of its necessary and inseparable legal incidents. the combined market shares of SMC and CFCRobina in layer pullets dressed chicken. The areas of competition between SMC and CFC-Robina in 1977 represented. duties and compensation of directors. excluding Litton Mills recently acquired by petitioner) is purportedly also in direct competition with Ramie Textile. Only 12 shareholders.. or more than 90% of the outstanding shares.. is the issue — whether or not respondent San Miguel Corporation could. It is further asserted that in 1977. 12 At common law. rejected petitioner's candidacy for the Board of Directors because they "realized the grave dangers to the corporation in the event a competitor gets a board seat in SMC. for SMC. It is recognized by an authorities that 'every corporation has the inherent power to adopt by-laws 'for its internal government. 11. CFC-Robina was directly competing in the sale of coffee with Filipro. as a measure of self. owning more than 30 million shares. owning 27.945 shares. in 1976. or more than 80% of the total outstanding shares. or more than 90% of the total outstanding shares. therefore. disqualify a competitor from nomination and election to its Board of Directors. independent of any specific enabling provision in its charter or in general law.257. rejected petitioner's candidacy.005 shares. representing 1. 1977. poultry and hog feeds ice cream. instant coffee and woven fabrics would result in a position of such dominance as to affect the prevailing market factors. opposed the confirmation and ratification. which provides that "every director must own in his right at least one share of the capital stock of the stock corporation of which he is a director . 9." On September 18. every private corporation has this inherent power as one of its necessary and inseparable legal incidents. therefore." approved the amendment to ' he by-laws in question. 1976.. and to regulate the conduct and prescribe the rights and duties of its members towards itself and among themselves in reference to the management of its affairs.283. 14 the Court sustained the validity of a provision in the corporate by-law requiring that persons elected to the Board of Directors must be holders of shares of the paid up value of P5. or more than 90% of the total outstanding shares of SMC. for SMC.436. Significantly. a measure of self-defense to protect the corporation from the clear and present danger that the election of a business competitor to the Board may cause upon the corporation and the other stockholders inseparable prejudice.protection. At the Annual Stockholders' Meeting of May 10. On the May 9. the areas of competition affecting SMC involved product sales of over P400 million or more than 20% of the P2 billion total product sales of SMC. According to private respondents. Submitted for resolution. AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS EXPRESSLY CONFERRED BY LAW Private respondents contend that the disputed amended by laws were adopted by the Board of Directors of San Miguel Corporation a-. voted against petitioner. representing 7. In addition.648. 12.. product sales of more than P849 million.894 stockholders.014 shares.801 shares voted for him. represented sales amounting to more than ?478 million. And it is settled throughout the United States that in the absence of positive legislative provisions limiting it. Inc. subsidiary of SMC. the Board of Directors of SMC. " InGovernment v. 1978 Annual Stockholders' Meeting. El Hogar. in person or by proxy.. at the Annual Stockholders' Meeting of March 18. officers and employees . which product line represented sales for SMC amounting to more than P275 million.

according to Ashaman v... preference or advantage of the fiduciary to the exclusion or detriment of the cestuis.. He cannot by the intervention of a corporate entity violate the ancient precept against serving two masters . As agents entrusted with the management of the corporation for the collective benefit of the stockholders. It springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stockholders. there cannot be any doubt that their character is that of a fiduciary insofar as the corporation and the stockholders as a body are concerned. viz. . Their powers are powers in trust. . in Pepper v. It cannot therefore be justly said that the contract.: "to object thereto in writing and demand payment for his share.qualifications of directors and is "highly prudent and in conformity with good practice. by any act of the former which is authorized by a majority ." Under section 22 of the same law.. Litton. Justice Douglas. For that power is at all times subject to the equitable limitation that it may not be exercised for the aggrandizement.. and surrendered it to the will of the majority of his fellow incorporators. A DIRECTOR STANDS IN A FIDUCIARY CORPORATION AND ITS SHAREHOLDERS RELATION TO THE Although in the strict and technical sense. 17 It being settled that the corporation has the power to provide for the qualifications of its directors. 20 emphatically restated the standard of fiduciary obligation of the directors of corporations. in the face of the fact that the law at the time such right as stockholder was acquired contained the prescription that the corporate charter and the by-law shall be subject to amendment. between the corporation and the stockholders is infringed . .. It cannot be said.." 15 To this extent. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do so directly. Equity recognizes that stockholders are the proprietors of the corporate interests and are ultimately the only beneficiaries thereof * * *. the owners of the majority of the subscribed capital stock may amend or repeal any by-law or adopt new by-laws. diminishes or restricts the rights of the existing shareholders then the disenting minority has only one right. " NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR Any person "who buys stock in a corporation does so with the knowledge that its affairs are dominated by a majority of the stockholders and that he impliedly contracts that the will of the majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden by law. express or implied. He cannot use his power for his personal advantage and to the detriment of the stockholders and creditors no matter how absolute in terms that power may be and no matter how meticulous he is to satisfy technical requirements. thus: A director is a fiduciary. Miller. 19 "is not a matter of statutory or technical law. He cannot manipulate the affairs of his corporation to their detriment and in disregard of the standards of common decency. therefore.. the next question that must be considered is whether the disqualification of a competitor from being elected to the Board of Directors is a reasonable exercise of corporate authority. alteration and modification.. He cannot violate rules of fair play by doing indirectly though the corporation what he could not do so directly. . the stockholder may be considered to have "parted with his personal right or privilege to regulate the disposition of his property which he has invested in the capital stock of the corporation." 16 Pursuant to section 18 of the Corporation Law. that petitioner has a vested right to be elected director. "they occupy a fiduciary relation." 18 "The ordinary trust relationship of directors of a corporation and stockholders". directors of a private corporation are not regarded as trustees. .. He who is in such fiduciary position cannot serve himself first and his cestuis second. He cannot utilize his inside information and strategic position for his own preferment.. therefore... any corporation may amend its articles of incorporation by a vote or written assent of the stockholders representing at least two-thirds of the subscribed capital stock of the corporation If the amendment changes. .. and in this sense the relation is one of trust.

Human nature is too weak -for this. & P. .And in Cross v. This doctrine rests fundamentally on the unfairness. . it has been held that an officer of a corporation cannot engage in a business in direct competition with that of the corporation where he is a director by utilizing information he has received as such officer. Such an amendment "advances the benefit of the corporation and is good. and his suppose influence over her. section 21 of the Corporation Law expressly provides that a corporation may make by-laws for the qualifications of directors. IF HE BE ALSO DIRECTOR IN A CORPORATION WHOSE BUSINESS IS IN COMPETITION WITH THAT OF THE OTHER CORPORATION. without detriment to one of them. No more can a director. Take whatever statute provision you please giving power to stockholders to choose directors.. The only test that we can apply is as to whether or not the action of the Board is authorized and sanctioned by law. It is perhaps true that such stockholders ought not to be condemned as selfish and dangerous to the best interest of the corporation until tried and tested. therefore. 23 AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A STOCKHOLDER INELIGIBLE TO BE DIRECTOR. of an officer or director taking advantage of an opportunity for his own personal profit when the interest of the corporation justly calls for protection. 21 it was said: .. 30 ... and it would simply be going far to deny by mere implication the existence of such a salutary power . he cannot serve both. subjects to removal. If the by-law is to be held reasonable in disqualifying a stockholder in a competing company from being a director. 25 This is the exact opposite of the situation in the Philippines because as stated heretofore. (A)n amendment which renders ineligible.. The strife over the matter of control in this corporation as in many others is perhaps carried on not altogether in the spirit of brotherly love and affection. 28 The doctrine of "corporate opportunity" 29 is precisely a recognition by the courts that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing interests. R. according to Fletcher.." An exception exists in New Jersey." 27 In a case where directors of a corporation cancelled a contract of the corporation for exclusive sale of a foreign firm's products.. the directors entered into a new contract themselves with the foreign firm for exclusive sale of its products. . and therefore the corporation was not empowered to add additional qualifications. West Virginia Cent. that corporations have the power to make by-laws declaring a person employed in the service of a rival company to be ineligible for the corporation's Board of Directors. So it is also true that we cannot condemn as selfish and dangerous and unreasonable the action of the board in passing the by-law. the same reasoning would apply to disqualify the wife and immediate member of the family of such stockholder. where the Supreme Court held that the Corporation Law in New Jersey prescribed the only qualification. on account of the supposed interest of the wife in her husband's affairs." 24 This is based upon the principle that where the director is so employed in the service of a rival company. Co. in particular circumstances. A person cannot serve two hostile and adverse master. a director if he be also a director in a corporation whose business is in competition with or is antagonistic to the other corporation is valid. A judge cannot be impartial if personally interested in the cause. for the benefit of the corporation. and after establishing a rival business. 22 These principles have been applied by this Court in previous cases. or if elected. under "the established law that a director or officer of a corporation may not enter into a competing enterprise which cripples or injures the business of the corporation of which he is an officer or director. as a "faultless fiduciary may not reap the fruits of his misconduct to the exclusion of his principal.. the court held that equity would regard the new contract as an offshoot of the old contract and. but must betray one or the other. 26 It is also well established that corporate officers "are not permitted to use their position of trust and confidence to further their private interests.. Thus. HAS BEEN SUSTAINED AS VALID It is a settled state law in the United States. R. and in none will you find any express prohibition against a discretion to select directors having the company's interest at heart.

officer. (b) budget for expansion and diversification. where two corporations are competitive in a substantial sense. In McKee the Court further listed qualificational by-laws upheld by the courts. employee. nominees or attorneys of any other banking corporation. in addition to the direct conflict or potential conflict of interest. 7. supra the court sustained as valid and reasonable an amendment to the bylaws of a bank. such as: (a) marketing strategies and pricing structure. employee. and (d) sources of funding. that the questioned amendment of the bylaws was made. it would seem improbable. or association which competes with the subject corporation. for the policy of the law is to encourage and enforce responsible corporate management. With respect to attorneys or persons associated with a firm which is attorney for another bank. as follows: (1) A director shall not be directly or indirectly interested as a stockholder in any other firm. would not detract from the validity and reasonableness of the by-laws here involved. v. if not impossible. Defendant's directors determined that its welfare was best protected if this opportunity for conflicting loyalties and potential misuse and leakage of confidential information was foreclosed. (c) research and development. A bank director has access to a great deal of information concerning the business and plans of a bank which would likely be injurious to the bank if known to another bank. in McKee & Co. affiliate or subsidiary thereof. to satisfy his loyalty to both corporations and place the performance of his corporation duties above his personal concerns. it would be inconsistent with petitioner's primary motive in running for board membership — which is to protect his investments in San Miguel Corporation. The Ashkins case. agent. for the director. thus: . requiring that its directors should not be directors. or association which competes with the subject corporation. First National Bank of San Diego. there is also the danger of inadvertent leakage of confidential information through casual office discussions or accessibility of files.) These are not based on theorical abstractions but on human experience — that a person cannot serve two hostile masters without detriment to one of them.. if he were to discharge effectively his duty. in McKee. company. from taking advantage of the information which he acquires as director to promote his individual or corporate interests to the prejudice of San Miguel Corporation and its stockholders. proposals of mergers or tie-ups with other firms. Chief Judge Parker. (4) A director shall be of good moral character as an essential qualification to holding office. nominee. attorney. (5) No person who is an attorney against the corporation in a law suit is eligible for service on the board. The offer and assurance of petitioner that to avoid any possibility of his taking unfair advantage of his position as director of San Miguel Corporation. specifically recognizes protection against rivals and others who might acquire information which might be used against the interests of the corporation as a legitimate object of by-law protection.. or attorney of any other bank in California. company. or trustee in any other firm. who is also the officer or owner of a competing corporation. More important. and it was reasonable and prudent to enlarge this minimum disqualification to include any director. agents. or association which compete with the subject corporation. It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel Corporation. Apart from the impractical results that would ensue from such arrangement. without active and conscientious . (3) A director shall not be an officer.. As explained by Oleck: 31 "The law win not tolerate the passive attitude of directors . (At p. explained the reasons of the court. supra. Thus. officers. he would absent himself from meetings at which confidential matters would be discussed.. Certainly.It is not denied that a member of the Board of Directors of the San Miguel Corporation has access to sensitive and highly confidential information. (2) A director shall not be the immediate member of the family of any stockholder in any other firm. such a proposed norm of conduct would be against all accepted principles underlying a director's duty of fidelity to the corporation. company. availability of personnel. employees. agent.

Any person who shall enter into any contract or agreement or shall take part in any conspiracy or combination in the form of a trust or otherwise. or imported merchandise or object of commerce is used. There are other legislation in this jurisdiction. shall be imposed upon: 1. 32 There is another important consideration in determining whether or not the amended by-laws are reasonable. Any person who. It would seem manifest that in such situations. 186. production. for advance knowledge by the competitor of the strategies for the development of existing or new markets of existing or new products could enable said competitor to utilize such knowledge to his advantage. processed. 35 The law against monopolies and combinations in restraint of trade is aimed at contracts and combinations that.. section 2 of Article XIV of the Constitution provides: "The State shall regulate or prohibit private monopolies when the public interest so requires. or processor of any merchandise or object of commerce or an importer of any merchandise or object of commerce from any foreign country. 36 ." Sound principles of corporate management counsel against sharing sensitive information with a director whose fiduciary duty of loyalty may well require that he disclose this information to a competitive arrival. 33 Basically. or of increasing the market price in any part of the Philippines.. prejudice the public interest by unduly restraining competition or unduly obstructing the course of trade. which prohibit monopolies and combinations in restraint of trade. conspire or agree in any manner with any person likewise engaged in the manufacture. Any person who shag monopolize any merchandise or object of trade or commerce. the lowest prices and the highest quality . being a manufacturer. or shall combine with any other person or persons to monopolize said merchandise or object in order to alter the price thereof by spreading false rumors or making use of any other artifice to restrain free competition in the market. processing. Indeed. 3. wholesale or retailer. either as principal or agent. No combinations in restraint of trade or unfair competition shall be snowed." Article 186 of the Revised Penal Code also provides: Art. produced. or any such merchandise or object of commerce manufactured. —The penalty of prision correccional in its minimum period or a fine ranging from two hundred to six thousand pesos. . Monopolies and combinations in restraint of trade. producer. or both. produced. Thus. These dangers are enhanced considerably where the common director such as the petitioner is a controlling stockholder of two of the competing corporations. in restraint of trade or commerce or to prevent by artificial means free competition in the market. assembled in or imported into the Philippines. shall combine. "It rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources. by reason of the inherent nature of the contemplated acts. or of any article in the manufacture of which such manufactured. processed. The Constitution and the law prohibit combinations in restraint of trade or unfair competition. it is their duty to control and supervise the day to day business activities of the company or to promulgate definite policies and rules of guidance with a vigilant eye toward seeing to it that these policies are carried out.participation in the managerial functions of the company. 2. These laws are designed to preserve free and unfettered competition as the rule of trade. assembling or importation of such merchandise or object of commerce or with any other persons not so similarly engaged for the purpose of making transactions prejudicial to lawful commerce. the director has an economic incentive to appropriate for the benefit of his own corporation the corporate plans and policies of the corporation where he sits as director. access by a competitor to confidential information regarding marketing strategies and pricing policies of San Miguel Corporation would subject the latter to a competitive disadvantage and unjustly enrich the competitor. these anti-trust laws or laws against monopolies or combinations in restraint of trade are aimed at raising levels of competition by improving the consumers' effectiveness as the final arbiter in free markets. It is only then that directors may be said to have fulfilled their duty of fealty to the corporation. As directors." 34 they operate to forestall concentration of economic power.

but that power exists to raise prices or exclude competition when desired. knowledge by CFC-Robina of SMC's costs in various industries and regions in the country win enable the former . it is the concentration of business in the hands of a few.The terms "monopoly". Its dominant thought is the notion of exclusiveness or unity. it must be considered that the Idea of monopoly is now understood to include a condition produced by the mere act of individuals. 42 There is here a statutory recognition of the anti-competitive dangers which may arise when an individual simultaneously acts as a director of two or more competing corporations. if a competitor has access to the pricing policy and cost conditions of the products of San Miguel Corporation. The material consideration in determining its existence is not that prices are raised and competition actually excluded. The competitor could so manipulate the prices of his products or vary its marketing strategies by region or by brand in order to get the most out of the consumers. thus: The argument for prohibiting competing corporations from sharing even one director is that the interlock permits the coordination of policies between nominally independent firms to an extent that competition between them may be completely eliminated. competitors so that the elimination of competition between them would constitute violation of any provision of the anti-trust laws. Where the two competing firms control a substantial segment of the market this could lead to collusion and combination in restraint of trade. if a director. it was established that: "By means of the interlocking directorates one man or group of men have been able to dominate and control a great number of corporations . 41and what is to be considered is what the parties actually did and not the words they used. A common director of two or more competing corporations would have access to confidential sales. 39 From the foregoing definitions. or the suppression of competition by the qualification of interest or management. by virtue of their business and location of operation. shared information on production. As respondent SMC aptly observes. (Emphasis supplied. This is because an express agreement is not necessary for the existence of a combination or conspiracy in restraint of trade. Indeed.) According to the Report of the House Judiciary Committee of the U. some accommodation must result. The election of petitioner to the Board of respondent Corporation can bring about an illegal situation. the essence of competition in a free market for the purpose of serving the lowest priced goods to the consuming public would be frustrated. thereby stifling competition. 37 In short. to the detriment of the small ones dependent upon them and to the injury of the public. the Clayton Act prohibits a person from serving at the same time as a director in any two or more corporations. to seek out ways of compromising opposing interests. For instance. shipments.. Obviously. If the firms really do compete — in the sense of vying for economic advantage at the expense of the other — there can hardly be any reason for an interlock between competitors other than the suppression of 43 competition. Reason and experience point to the inevitable conclusion that the inherent tendency of interlocking directorates between companies that are related to each other as competitors is to blunt the edge of rivalry between the corporations. Congress on section 9 of the Clayton Act.. 38 Further. This situation has been aptly explained by Travers. Suppose X is a director of both Corporation A and Corporation B. it is apparent that the contentions of petitioner are not in accord with reality. for example. in brief. S. orders. X could hardly vote for a policy by A that would injure B without violating his duty of loyalty to B at the same time he could hardly abstain from voting without depriving A of his best judgment. A "monopoly" embraces any combination the tendency of which is to prevent competition in the broad and general sense. capacity and inventories may lead to control of production for the purpose of controlling prices. and thus eliminate competition. "combination in restraint of trade" and "unfair competition" appear to have a well defined meaning in other jurisdictions. or to control prices to the detriment of the public. It is. or it may be thru agreement and concert of action. 44 Shared information on cost accounting may lead to price fixing. Certainly. pricing and marketing information and would be in a position to coordinate policies or to aid one corporation at the expense of another. 40 It is enough that a concert of action is contemplated and that the defendants conformed to the arrangements. if such corporations are. is to be faithful to both corporations. unified tactics with regard to prices.

wide latitude may be accorded to the corporation in adopting measures to protect legitimate corporation interests. As trustees of the corporation and of the stockholders. Identity of products and area of competition should be taken into consideration. In the absence of any legal prohibition or overriding public policy. It is. but is very nature. Said section provides in part that "any stockholder of more than one corporation organized for the purpose of engaging in agriculture may hold his stock in such corporations solely for investment and not for the purpose of bringing about or attempting to bring about a combination to exercise control of incorporations . by its terms. Such factors as quantum and place of business. 45 Although it is asserted that the amended by-laws confer on the present Board powers to perpetua themselves in power such fears appear to be misplaced. any decision of the Board to disqualify a candidate for the Board of Directors should be reviewed by the Securities behind Exchange Commission en banc and its decision shall be final unless reversed by this Court on certiorari. it is a settled principle that where the action of a Board of Directors is an abuse . It means an independent endeavor of two or more persons to obtain the business patronage of a third by offering more advantageous terms as an inducement to secure trade. However. One of these is inherent in the very convert and definition of the terms "competition" and "competitor". before petitioner can be declared ineligible to run for director. CFC-Robina can segment the entire consuming population by geographical areas or income groups and change varying prices in order to maximize profits from every market segment. Consonant with the requirement of due process. Access to SMC pricing policy by CFC-Robina would in effect destroy free competition and deprive the consuming public of opportunity to buy goods of the highest possible quality at the lowest prices. there must be due hearing at which the petitioner must be given the fullest opportunity to show that he is not covered by the disqualification. 47 It is. Besides. Finally. then the election of petitioner to the Board of SMC may constitute a violation of the prohibition contained in section 13(5) of the Corporation Law. considering that both Robina and SMC are. . engaged in agriculture. Sound principles of public policy and management. While We here sustain the validity of the amended by-laws. 49 Indeed.. If the by-law were to be applied in the case of one stockholder but waived in the case of another. necessary to show that petitioner's business covers a substantial portion of the same markets for similar products to the extent of not less than 10% of respondent corporation's market for competing products. each possessing. is subject to certain well established limitations. not whether it is capable of an indirect and highly unsubstantial duplication of an isolated or non-characteristics activity. "Competition" implies a struggle for advantage between two or more forces. This power.. there must be hearing and evidence must be submitted to bring his case within the ambit of the disqualification. applies to all stockholders. therefore. to a certain extent. in substantially similar if not Identical degree. Thus. a court would not be warranted in substituting its judgment instead of the judgment of those who are authorized to make by-laws and who have expressed their authority. support the view that a by-law which disqualifies a competition from election to the Board of Directors of another corporation is valid and reasonable. therefore. it is the responsibility of directors to act with fairness to the stockholders. therefore. CFC-Robina could determine the most profitable volume at which it could produce for every product line in which it competes with SMC." Neither are We persuaded by the claim that the by-law was Intended to prevent the candidacy of petitioner for election to the Board. then it could be reasonably claimed that the by-law was being applied in a discriminatory manner. certain characteristics essential to the business sought. it does not follow as a necessary consequence that petitioner is ipso facto disqualified. 48 Pursuant to this obligation and to remove any suspicion that this power may be utilized by the incumbent members of the Board to perpetuate themselves in power. and upon which reasonable minds must necessarily differ. obvious that not every person or entity engaged in business of the same kind is a competitor. 46 The test must be whether the business does in fact compete. "where the reasonableness of a by-law is a mere matter of judgment. the by law.to practice price discrimination. The equal protection clause of the Constitution requires only that the by-law operate equally upon all persons of a class.

It is generally held by majority of the courts that where the right is granted by statute to the stockholder.50 III Whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an examination of the records of San Miguel International Inc.. "(t)he record of all business transactions of the corporation and minutes of any meeting shall be open to the inspection of any director. Andres Soriano. all earnings having been used in line with a program for the setting up of breweries by SMI These averments are supported by the affidavit of the Corporate Secretary. 1976. or for specific and honest purpose. 51 Pursuant to the second paragraph of section 51 of the Corporation Law. or for speculative or vexatious purposes. therefore. a court of equity has the power to grant appropriate relief. or a ownership. or is a fraud upon minority stockholders or creditors. 53 In other words. Inc. and not to gratify curiosity. for specific and honest purpose. The weight of judicial opinion appears to be. which deletions were not objected to by petitioner. this was SMC's first venture abroad. an incident of ownership of the corporate property. 1975. the late Col. or will result in waste. and has to be proper and lawful in character and not inimical to the interest of the corporation. and (4) that from 19721975. (5) a listing of the salaries. incorporated in Bermuda and wholly owned by SMC. a fully owned subsidiary of San Miguel Corporation — Respondent San Miguel Corporation stated in its memorandum that petitioner's claim that he was denied inspection rights as stockholder of SMC "was made in the teeth of undisputed facts that. (1) that SMC's foreign investments are handled by San Miguel International." The stockholder's right of inspection of the corporation's books and records is based upon their ownership of the assets and property of the corporation. the inspection has to be germane to the petitioner's interest as a stockholder. petitioner was informed in writing on September 18. enclosing photocopies of the afore-mentioned documents.00. 55 this Court held that "the right to examine the books of the corporation must be exercised in good faith. it was held that "the right given by statute is not absolute and may be refused when the information is not sought in good faith or is used to the detriment of the corporation. (2) that as of December 31. (6) a copy of the US $100 million Euro-Dollar Loan Agreement of SMC. and (7) copies of the minutes of all meetings of the Board of Directors from January 1975 to May 1976. and not to gratify curiosity. having started in 1948 with an initial outlay of ?500. 52 This right is predicated upon the necessity of selfprotection. 1975. or is against public policy. (3) a copy of the minutes of the stockholders' meeting of March 18.1976. a beneficial ownership. the estimated value of SMI would amount to almost P400 million (3) that the total cash dividends received by SMC from SMI since 1953 has amount to US $ 9. over a specific period. 56 Thus. member or stockholder of the corporation at reasonable hours.000.4 million. it is proper for the court to inquire into and consider the stockholder's good faith and his purpose and motives in seeking inspection. It is. (2) a complete list of proxies given by the stockholders for use at the annual stockholders' meeting of May 18. bonuses and other compensation or remunerations received by the directors and corporate officers of SMC. it is given to him as such and must be exercised by him with respect to his interest as a stockholder and for some purpose germane thereto or in the interest of the corporation. it was averred that upon request. petitioner had been furnished numerous documents and information." to wit: (1) a complete list of stockholders and their stockholdings. dissipation or misapplication of the corporation assets. Insular Lumber.of discretion. Further." 57But the "impropriety of purpose such as will defeat enforcement must be set up the corporation defensively if . (4) a breakdown of SMC's P186. whether this ownership or interest be termed an equitable ownership. with deletions of sensitive data. allowances. 1975. 54 In Grey v. augmented by a loan of Hongkong $6 million from a foreign bank under the personal guaranty of SMC's former President. that on application for mandamus to enforce the right.. or is ultra vires. or forbidden by statute. SMI did not declare cash or stock dividends.6 million investment in associated companies and other companies as of December 31.

" 59 While the right of a stockholder to examine the books and records of a corporation for a lawful purpose is a matter of law. therefore. IV Whether or not respondent SEC gravely abused its discretion in allowing the stockholders of respondent corporation to ratify the investment of corporate funds in a foreign corporation . and generally take an account of the stewardship of the officers and directors.the Court is to take cognizance of it as a qualification. under its control. the legal fiction of distinct corporate entities may be disregarded and the books. petitioner contended that respondent corporation "had been attempting to suppress information for the stockholders" and that petitioner. 63Likewise. and to inspection to obtain such information." 64 In the Nash case. considering that the foreign subsidiary is wholly owned by respondent San Miguel Corporation and. as the records of the subsidiary were." 67 There is no question that stockholders are entitled to inspect the books and records of a corporation in order to investigate the conduct of the management. is entitled to copies of some documents which for some reason or another. respondent corporation is very reluctant in revealing to the petitioner notwithstanding the fact that no harm would be caused thereby to the corporation. while others do not. 68 In the case at bar. although it owned a vast majority of the stock of the subsidiary. Some state courts recognize the right under certain conditions. "as stockholder of respondent corporation. it has been held that where a corporation owns approximately no property except the shares of stock of subsidiary corporations which are merely agents or instrumentalities of the holding company. 62 On the other hand. papers and documents of all the corporations may be required to be produced for examination. it would be more in accord with equity. may be granted. In his "Urgent Motion for Production and Inspection of Documents" before respondent SEC. inspection of the books of an allied corporation by stockholder of the parent company which owns all the stock of the subsidiary has been refused on the ground that the stockholder was not within the class of "persons having an interest. 65 The Supreme Court of New York held that the contractual right of former stockholders to inspect books and records of the corporation included the right to inspect corporation's subsidiaries' books and records which were in corporation's possession and control in its office in New York. 60 and that a writ of mandamus. mandamus at the suit of a stockholder was refused where the subsidiary corporation is a separate and distinct corporation domiciled and with its books and records in another jurisdiction. and is not legally subject to the control of the parent company." In the Bailey case. especially where it appears that the company is being mismanaged or that it is being managed for the personal benefit of officers or directors or certain of the stockholders to the exclusion of others. Thus. good faith and fair dealing to construe the statutory right of petitioner as stockholder to inspect the books and records of the corporation as extending to books and records of such wholly subsidiary which are in respondent corporation's possession and control. the right of such stockholder to examine the books and records of a whollyowned subsidiary of the corporation in which he is a stockholder is a different thing. the records of the parent even though subsidiary was not named as a party. to all incontents and purposes. 66 stockholders of a corporation were held entitled to inspect the records of a controlled subsidiary corporation which used the same offices and had Identical officers and directors. the specific provisions take from the stockholder the burden of showing propriety of purpose and place upon the corporation the burden of showing impropriety of purpose or motive. In other words. 58 It appears to be the general rule that stockholders are entitled to full information as to the management of the corporation and the manner of expenditure of its funds. 61mandamus was likewise held proper to inspect both the subsidiary's and the parent corporation's books upon proof of sufficient control or dominion by the parent showing the relation of principal or agent or something similar thereto. determine the financial condition of the corporation.

258-259). Sulpicio S. or for any purpose other than the main purpose for which it was organized.. one of the issues was the legality of an investment made by Manao Sugar Central Co. Manao Sugar Central Co.. Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other corporation or business or for any purpose other than the main purpose for which it was organized" provided that its Board of Directors has been so authorized by the affirmative vote of stockholders holding shares entitling them to exercise at least two-thirds of the voting power. Respondent SEC's position is that submission of the investment to the stockholders for ratification is a sound corporate practice and should not be thwarted but encouraged.. p. the ruling in De la Rama v. and other evidence of indebtedness of any domestic or foreign corporation. appears relevant. pledge or dispose of shares. which is to manufacture and market beer." The Philippine Corporation Law by Sulpicio S. the vote of approval of the stockholders is necessary. . quoting Prof. and (c) that such holdings shall be solely for investment and not for the purpose of bringing about a monopoly in any line of commerce of combination in restraint of trade. Inc. mortgage. supra. 108) (Emphasis ours.' and provided further. (a) that no agricultural or mining corporation shall be restricted to own not more than 15% of the voting stock of nay agricultural or mining corporation. Restructuring of the investment was made in 1970-1971 thru the organization of SMI in Bermuda as a tax free reorganization. Ltd. to require authority of the stockholders would be to unduly curtail the power of the Board of Directors. does not need the approval of stockholders. if done in pursuance of the corporate purpose. 1423 that respondent corporation invested corporate funds in SMI without prior authority of the stockholders.. Inc. Power to acquire or dispose of shares or securities.) 40. It is only when the purchase of shares is done solely for investment and not to accomplish the purpose of its incorporation that the vote of approval of the stockholders holding shares entitling them to exercise at least two-thirds of the voting power is necessary. Guevara.) (pp... — A private corporation. it does not need the approval of the stockholders. When the investment is necessary to accomplish its purpose or purposes as stated in its articles of incorporation the approval of the stockholders is not necessary. a company engaged in the manufacture of sugar bags. The lower court said that "there is more logic in the stand that if the investment is made in a corporation whose business is important to the investing corporation and would aid it in its purpose. 1967 Ed. in the Philippine Fiber Processing Co. provide that 'its board of directors has been so authorized in a resolution by the affirmative vote of stockholders holding shares in the corporation entitling them to exercise at least two-thirds of the voting power on such a propose at a stockholders' meeting called for that purpose." This Court affirmed the ruling of the court a quo on the matter and. securities. and subject to the limitations imposed by the Corporation Law.. the purchase of beer manufacturing facilities by SMC was an investment in the same business stated as its main purpose in its Articles of Incorporation. instead of allowing ratification of the investment by the stockholders. Inc. It appears that the original investment was made in 1947-1948. then San Miguel Brewery. purchased a beer brewery in Hongkong (Hongkong Brewery & Distillery. but when the purchase of shares of another corporation is done solely for investment and not to accomplish the purpose of its incorporation. Guevara. and alleges that respondent SEC should have investigated the charge. in order to accomplish is purpose as stated in its articles of incorporation. said: "j. — A private corporation has the power to invest its corporate funds "in any other corporation or business. Such an act. Under these circumstances. has the power to acquire. when SMC. hold. If the investment is made in pursuance of the corporate purpose. Inc. In any case. being a statutory offense. 69 As stated by respondent corporation."" (Id. Power to invest corporate funds. p. thus violating section 17-1/2 of the Corporation Law. bonds. In said case. that no agricultural or mining corporation shall in anywise be interested in any other agricultural or mining corporation. the purchase of such shares or securities must be subject to the limitations established by the Corporations law. 89) (Emphasis supplied..) for the manufacture and marketing of San Miguel beer thereat. namely. without prior resolution approved by the affirmative vote of 2/3 of the stockholders' voting power..Petitioner reiterates his contention in SEC Case No.

to run and if elected to sit as director of respondent San Miguel Corporation being decided. but which is defective from a supported failure to observe in its execution the. are merely voidable and may become binding and enforceable when ratified by the stockholders. 1977 cannot be construed as an admission that respondent corporation had committed an ultra vires act. It is a corporate transaction or contract which is within the corporate powers. Abad Santos and De Castro. Concepcion. Four (4) Justices. Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws. the investment was for the purchase of beer manufacturing and marketing facilities which is apparently relevant to the corporate purpose. therefore.. like an individual. whose decision shall be appealable to the respondent Securities and Exchange Commission deliberating and acting en banc and ultimately to this Court. No costs. Justices Barredo. They concur in the result that petitioner may be allowed to run for and sit as director of respondent SMC in the scheduled May 6. six (6) Justices. as specified in the petition. Inc. namely. Makasiar. The mere fact that respondent corporation submitted the assailed investment to the stockholders for ratification at the annual meeting of May 10. 1979 election and subsequent elections until disqualified after proper hearing by the respondent's Board of Directors and petitioner's disqualification shall have been sustained by respondent SEC en banc and ultimately by final judgment of this Court. On the matter of the validity of the amended by-laws of respondent San Miguel Corporation. wherein they voted against the validity of the questioned amended bylaws and that this question should properly be resolved first by the SEC as the agency of primary jurisdiction. Besides. the prohibition in the aforementioned amended by-laws shall not apply to petitioner. Inc. pending hearing by this Court on the applicability of section 13(5) of the Corporation Law to petitioner. "Mere ultra vires acts". may ratify and thereby render binding upon it the originally unauthorized acts of its officers or other agents. voted to sustain the validity per se of the amended by-laws in question and to dismiss the petition without prejudice to the question of the actual disqualification of petitioner John Gokongwei. is hereby DISMISSED. for lack of necessary votes. as specified by him.. This requirement is for the benefit of the stockholders. Antonio. namely. 71 "or those which are not illegal and void ab initio. there is no question that a corporation.Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed investment. after a new and proper hearing by the Board of Directors of said corporation. Jr. morals. requirement of the law that the investment must be authorized by the affirmative vote of the stockholders holding two-thirds of the voting power. considering the common practice of corporations of periodically submitting for the gratification of their stockholders the acts of their directors. The afore-mentioned six (6) Justices. WHEREFORE. insofar as it assails the validity of the amended by. . public order or public policy. Fernandez and Guerrero filed a separate opinion. Justices Teehankee. said this Court in Pirovano. Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but otherwise concurs in the result. Santos. In resume. subject to the qualifications aforestated judgment is hereby rendered GRANTING the petition by allowing petitioner to examine the books and records of San Miguel International. voted to declare the issue on the validity of the foreign investment of respondent corporation as moot. but are not merely within the scope of the articles of incorporation. together with Justice Fernando. Unless disqualified in the manner herein provided. Jr. ratify the investment and its ratification by said stockholders obliterates any defect which it may have had at the outset. judgment is hereby rendered as follows: The Court voted unanimously to grant the petition insofar as it prays that petitioner be allowed to examine the books and records of San Miguel International. officers and managers. The stockholders for whose benefit the requirement was enacted may. The petition.laws and the ratification of the foreign investment of respondent corporation. 70 This is true because the questioned investment is neither contrary to law.

Acuerdo No.R. acuerda enmendar el contrato de molienda enmendado medientelas siguentes: xxx xxx xxx 9. ET AL. dismissing plaintiff's complaint that sought to compel the defendant Milling Company to increase plaintiff's share in the sugar produced from their cane. the appellants initiated the present action. Inc. but a copy of the resolution of August 10.. resisted the claim. vs. starting from the 1951-1952 crop year. said contracts were stipulated to be in force for 30 years starting with the 1920-21 crop.. had been and are sugar planters adhered to the defendant-appellee's sugar central mill under identical milling contracts.ñët It is undisputed that plaintiffs-appellants. that reads as follows: ACTA No. inc. increasing the planters' share to 60% of the manufactured sugar and resulting molasses. therefore..1äwphï1. a printed Amended Milling Contract form was drawn up. . Alejandro Montelibano.. cuya produccion anual de azucar centrifugado sea mas de una tercera parte de la produccion total de todas lascentrales azucareras de Negros Occidental. J. and provided that the resulting product should be divided in the ratio of 45% for the mill and 55% for the planters. Sometime in 1936. 1936. the Board of Directors of the appellee Bacolod-Murcia Milling Co. otorgado por — y la Bacolod-Murcia Milling Co. entonces esas mejores condiciones se concederan y por el presente se entenderan concedidas a los platadores que hayan otorgado este Contrato de Molienda Enmendado. with the notation — Las enmiendas arriba transcritas forman parte del contrato de molienda enmendado. REYES. — Previa mocion debidamente secundada. plaintiffs-appellants. concedieren a sus plantadores mejores condiciones que la estipuladas en el presente contrato. The appellee Bacolod-Murcia Milling Co.. Alfredo Montelibano.B. adopted a resolution (Acts No. defendant-appellee. la Junta en consideracion a una peticion de los plantadores hecha por un comite nombrado por los mismos. The bone of contention is paragraph 9 of this resolution. Originally executed in 1919. 1. de Negros Occidental.: Appeal on points of law from a judgment of the Court of First Instance of Occidental Negros. Appellants signed and executed the printed Amended Milling Contract on September 10. with a total annual production exceeding one-third of the production of all the sugar central mills in the province. heretofore quoted. besides other concessions. 1962 ALFREDO MONTELIBANO. 1) granting further concessions to the planters over and above those contained in the printed Amended Milling Contract. but extending the operation of the milling contract from the original 30 years to 45 years. null and void ab initio.a Que si durante la vigencia de este contrato de Molienda Enmendado. On August 20. 1937. 2603. was not attached to the printed contract until April 17. In 1953.33%. 1936.L.G. No. 1936. that the resolution in question was.. J. and defended by urging that the stipulations contained in the resolution were made without consideration. BACOLOD-MURCIA MILLING CO. from 60% to 62. 1936 xxx xxx xxx Acuerdo No.5%) to their planters. To this effect.. the appellee had become obligated to grant similar concessions to the plaintiffs (appellants herein). Binalbagan-Isabela and San Carlos). in its Civil Case No. contending that three Negros sugar centrals (La Carlota. and that under paragraph 9 of the resolution of August 20. lascentrales azucareras. L-15092 May 18. Inc. it was proposed to execute amended milling contracts. being in effect a donation that was ultra vires and beyond the powers of the corporate directors to adopt. signed by the Central's General Manager. INC. and the Limited co-partnership Gonzaga and Company. 1936. 11. had already granted increased participation (of 62.. 11 SESSION DE LA JUNTA DIRECTIVA AGOSTO 20..

the promises and obligations undertaken thereunder by the planters. specially taking into account that appellant Alfredo Montelibano was. 1936 was not attached to the printed contract until April 17. All disquisition concerning donations and the lack of power of the directors of the respondent sugar milling company to make a gift to the planters would be relevant if the resolution in question had embodied a separate agreement after the appellants had already bound themselves to the terms of the printed milling contract. the concessions granted by the disputed resolution had been already incorporated into its terms. and not the setting down of its terms. at the time. 1936. and they do not now deny. and no binding contract at all. We agree with appellants that the appealed decisions can not stand. 1936 defendant corporation already understood that the printed terms were not controlling. Before that date. But this was not the case. on September 10. particularly. That agreement had to exist on the basis of the printed terms as modified by the resolution of August 20. And the fact that the addendum is only signed by the General Manager of the milling company emphasizes that the . the conclusion of the court below that the resolution constituted gratuitous concessions not supported by any consideration is legally untenable. No reason appears of record why. since they admittedly did not sign it until twenty-one days later. and not a separate bargain. it is the assent and concurrence (the "meeting of the minds") of the parties. so that when the Milling Contract was executed.e. that constitutes a binding contract. the proposed milling contract. It must be remembered that the controverted resolution was adopted by appellee corporation as a supplement to.. the appellants were not yet obligated by the terms of the printed contract. except in the case of statutory forms or solemn agreements (and it is not claimed that this is one). It follows from the foregoing that the terms embodied in the resolution of August 20. 1936. i. and we are satisfied that such was also the understanding of appellants herein. The same considerations apply to the "void innovation" theory of appellees. the President of the Planters Association (Exhibit 4. save as modified by its resolution of August 20. is further shown by the fact that a copy of the resolution was simply attached to the printed contract without special negotiations or agreement between the parties. Thereupon. But the conduct of the parties indicates that they assumed. 1936. There can be no novation unless two distinct and successive binding contracts take place. twenty-one days prior to the signing by appellants on September 10. the appellants should reject them or consider them as separate and apart from the main amended milling contract. 1936 were supported by the same causa or consideration underlying the main amended milling contract. Hence. 1936. Stress is placed on the fact that the text of the Resolution of August 20. and. of the Amended Milling Contract itself. with the later designed to replace the preceding convention. and that it was approved on August 20. in the face of such concessions. the court below rendered judgment upholding the stand of the defendant Milling company. Modifications introduced before a bargain becomes obligatory can in no sense constitute novation in law. Otherwise there would have been no consent or "meeting of the minds". that the signing of the contract on September 10. Since there is no rational explanation for the company's assenting to the further concessions asked by the planters before the contracts were signed. the printed form was no more than a proposal that either party could modify at its pleasure. did give rise to a binding agreement. to allow the company now to retract such concessions would be to sanction a fraud upon the planters who relied on such additional stipulations. or not at all. When the resolution was adopted and the additional concessions were made by the company. But. the extension of its operative period for an additional 15 years over and beyond the 30 years stipulated in the original contract. 1937. except as further inducement for the planters to agree to the extension of the contract period. 1936. plaintiffs duly appealed to this Court. or further amendment of. 1936. and dismissed the complaint. p.After trial. That the resolution formed an integral part of the amended milling contract. signed on September 10. and that the minds of the parties met upon that basis. and the appellee actually modified it by adopting the resolution in question. 11) that had agitated for the concessions embodied in the resolution of August 20. So that by September 10.

266-268) As the resolution in question was passed in good faith by the board of directors. since it contained mostly modifications in detail of the printed terms.3% 64. 1950. and in so doing they cannot be controlled in the reasonable exercise and performance of such duty. Vol. numerous provisions of the printed terms are alao glossed over. Much is made of the circumstance that the report submitted by the Board of Directors of the appellee company in November 19.333 for the 1951-52 crop % year. or close down at a smaller loss. The rule is that — It is a question. And it appearing undisputed in this appeal that sugar centrals of La Carlota. p.5% for 1952-53. 2. 1936. and not otherwise prohibited. it is valid and binding. in effective operation. (Fletcher on Corporations. If that act is one which is lawful in itself. for 1954-55. and so long as it acts in good faith its orders are not reviewable by the courts. It is a wellknown rule of law that questions of policy or of management are left solely to the honest decision of officers and directors of a corporation. The test to be applied is whether the act in question is in direct and immediate furtherance of the corporation's business. duty bound to grant similar increases to plaintiffs-appellants herein. pp. the court has no authority to review them. the planters having agreed to the 60-40 sharing of the sugar set forth in the printed "amended milling contracts". and might never be. and is reasonably tributary to the promotion of those ends. 390). the board is the business manager of the corporation. for 1953-54. and the court is without authority to substitute its judgment of the board of directors. The Directors of the appellee Milling Company had no reason at the time to call attention to the provisions of the resolution in question. fairly incident to the express powers and reasonably necessary to their exercise. 64. not. Rev. There can be no doubt that the directors of the appellee company had authority to modify the proposed terms of the Amended Milling Contract for the purpose of making its terms more acceptable to the other contracting parties. therefore. under the terms of its Resolution of August 20. (Fletcher Cyc. But a reading of this report shows that it was not intended to inventory all the details of the amended contract. Whether the business of a corporation should be operated at a loss during depression. in each case of the logical relation of the act to the corporate purpose expressed in the charter. If so. Corp. . and whether or not it will cause losses or decrease the profits of the central.. and the only major change was paragraph 9 heretofore quoted. the appellee Bacolod-Murcia Milling Company is. and for 1955-56. There was no reason in 1936 to emphasize a concession that was not yet. is done for the purpose of serving corporate ends.addition was made solely in order that the memorial of the terms of the agreement should be full and complete. since it was conditioned on other centrals granting better concessions to their planters. 1936 (Exhibit 4) only made mention of 90%. but when the report was made. it may fairly be considered within charter powers. San Carlos and Binalbagan (which produce over one-third of the entire annual sugar production in Occidental Negros) have granted progressively increasing participations to their adhered planter at an average rate of 62. is a purely business and economic problem to be determined by the directors of the corporation and not by the court.2% 64. and that did not happen until after 1950. otherwise. the corporation has the power to do it. and not in a remote and fanciful sense. Hawaiian Philippines. Ed. 6.5% 63. in a substantial. Vol. that paragraph was not yet in effect. and did not make any reference at all to the terms of the resolution of August 20. 1936. They hold such office charged with the duty to act for the corporation according to their best judgment.

The Securities and Exchange Commission is the government agency. as follows: 0.. G. and one of the most important. and judgment is decreed sentencing the defendant-appellee to pay plaintiffs-appellants the differential or increase of participation in the milled sugar in accordance with paragraph 9 of the appellee Resolution of August 20. recommended to the PSE's Board of Governors the approval of PALI's listing application.: . In January. to be listed in its stock market. partnerships or associations. 1995. which affirmed the decision of the Securities and Exchange Commission ordering the petitioner Philippine Stock Exchange. dated June 27. to allow the private respondent Puerto Azul Land. SECURITIES AND EXCHANGE COMMISSION and PUERTO AZUL LAND. Inc. 1996.WHEREFORE. vs. petitioner. JR. 1953. for the 1951-1952 crop and to all appellants thereafter 4. before it could act upon PALI's application. In this Petition for Review on Certiorari. J. — year. under the direct general supervision of the Office of the President. a domestic real estate corporation. Marcos.5% for the 1955-1956 crop year. INC. To facilitate the trading of its shares among investors. 1 with the immense task of enforcing the Revised Securities Act.. with regard to the Petitioner Philippine Stock Exchange. upon a perusal of PALI's application. the decision under appeal is reversed and set aside.3% for the 1953-1954 crop 4. PALI sought to course the trading of its shares through the Philippine Stock Exchange. Among its inumerable functions. Costs against appellee. 1996.2% for the 1952-1953 crop 4.333% to appellant Gonzaga & Co. respondents. 2. who are grantees of primary franchise and/or a license or permit issued by the government to operate in the Philippines. year. 1996.. is the supervision of all corporations. particularly. Inc. The Puerto Azul Land. for which purpose it filed with the said stock exchange an application to list its shares. On February 8. had sought to offer its shares to the public in order to raise funds allegedly to develop its properties and pay its loans with several banking institutions. year. said appellants having received an additional 2% corresponding to said year in October. 2 Just how far this regulatory authority extends.333% to appellants Montelibano for the 1951-1952 crop year. (PALI). INC.R. No. thus paving the way for the public offering of PALI's shares. The facts of the case are undisputed. THE HONORABLE COURT OF APPEALS. Inc. the Board of Governors of the PSE received a letter from the heirs of Ferdinand E. and the right is reserved to plaintiffs-appellants to sue for such additional increases as they may be entitled to for the crop years subsequent to those herein adjudged. TORRES. 1997 PHILIPPINE STOCK EXCHANGE. Inc. PALI was issued a Permit to Sell its shares to the public by the Securities and Exchange Commission (SEC). 125469 October 27. the Listing Committee of the PSE. is the issue in the case at bar. 1936. with supporting documents attached. or the value thereof when due. and are hereby restated in sum. year.5% for the 1954-1955 crop 3. (PSE). Inc. petitioner assails the resolution of the respondent Court of Appeals. On February 14.. over and in addition to the 60% expressed in the printed Amended Milling Contract. claiming that the late President Marcos was with interest at the legal rate on the value of such differential during the time they were withheld. Bacolod-Murcia Milling Co. and all other duties assigned to it by pertinent laws.

"further impeding. likewise appears to have been held and continue to be held in trust by one Rebecco Panlilio for then President Marcos and now. 1996. and requesting that the SEC. citing the existence of serious claims. review the PSE's action on PALI's listing application and institute such measures as are just and proper under the circumstances. bringing to the SEC's attention the action taken by the PSE in the application of PALI for the listing of its shares with the PSE. PALI's answer stated that the properties forming part of the Puerto Azul Beach Hotel and Resort Complex were not claimed by PALI as its assets. PSE filed a motion for reconsideration of the said order on April 29. the Board of Governors of the PSE reached its decision to reject PALI's application. In its regular meeting held on March 27. the decision of the Board of Governors of the Philippine Stock Exchange denying the listing of shares of Puerto Azul Land. obstructing. and invoking the Commissioner's authority and jurisdiction under Section 3 of the Revised Securities Act. PALI is hereby ordered to amend its . the SEC wrote to the PSE. issues and circumstances surrounding PALI's ownership over its assets that adversely affect the suitability of listing PALI's shares in the stock exchange. 1996. pending in Branch 69 thereof. processing and approval by the PSE of the initial public offering of PALI. the PSE was informed that the Marcoses received a Temporary Restraining Order on the same date. enjoining the Marcoses from. On the same date. 1996 Order which states: WHEREFORE. 1996. premises considered. On April 11. 1996.. The dispositive portion of the said order reads: WHEREFORE. entities distinct from PALI. No.20% of PALI. 902-A. On February 20. Inc. the Commission finds no compelling reason to reconsider its order dated April 24. On April 24. and the PSE is hereby ordered to immediately cause the listing of the PALI shares in the Exchange. 1996. which was. the SEC rendered its Order. and requested PALI's application to be deferred. reversing the PSE's decision. PALI was requested to comment upon the said letter. delaying or interfering in any manner by or any means with the consideration. is hereby set aside. 6(j) and 6(m) of Presidential Decree No. in the exercise of its supervisory and regulatory powers over stock exchanges under Section 6(j) of P. effectively for his estate. without prejudice to its authority to require PALI to disclose such other material information it deems necessary for the protection of the investigating public. which is among the stockholders of PALI. PSE should require PALI to submit full disclosure of material facts and information to protect the investing public. and in the light of recent developments on the adverse claim against the PALI properties. On March 4. the PSE wrote Chairman Magtanggol Gunigundo of the Presidential Commission on Good Government (PCGG) requesting for comments on the letters of the PALI and the Marcoses. the resort is actually owned by Fantasia Filipina Resort. however denied by the Commission in its May 9. and the Puerto Azul Country Club. This Order shall take effect immediately. thereby implying that they are also asserting legal and beneficial ownership of other properties titled under the name of PALI. Yasay." The TRO was issued by Judge Martin S. 1996. 1996. On April 22. 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 representative to appear for an "inquiry" on the matter. Furthermore. 1996. The Marcoses responded that their claim is not confined to the facilities forming part of the Puerto Azul Hotel and Resort Complex. PALI wrote a letter to the SEC addressed to the then Acting Chairman.. Inc. in conjunction with Section 3. or on April 11. Villarama. SO ORDERED. 65561. 1996. the PSE submitted a letter to the SEC containing its comments to the April 11. On the contrary. In this regard.the legal and beneficial 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. the Ternate Development Corporation owns only 1. premises considered. Executive Judge of the RTC of Pasig City in Civil Case No. Jr. among others. 1996 letter of PALI. Perfecto R. 902-A.D.

II. pursuant to Section 3 3 of the Revised Securities Act in relation to Section 6(j) and 6(m) 4 of P. PALI has clearly and admittedly complied with the Listing Rules and full disclosure requirements of the Exchange. JURISDICTION. 1996. and the power to alter and supplement rules of the exchange in the listing or delisting of securities. assailing the above mentioned orders of the SEC. the petitioner is subject to public respondent's jurisdiction. No. affirming the SEC's ruling to the effect that: . . On June 27. .D. THE FULL DISCLOSURE OF THE SEC WAS NOT PROPERLY PROMULGATED AND ITS IMPLEMENTATION AND APPLICATION IN THIS CASE VIOLATES THE DUE PROCESS CLAUSE OF THE CONSTITUTION. PALI filed its Comment to the Petition for Review and subsequently. 3. Both as a corporation and as a stock exchange. the power to authorize the establishment of stock exchanges. All in all. Dissatisfied with this ruling. 902-A. OR AUTHORITY. 1996 a Petition for Review (with Application for Writ of Preliminary Injunction and Temporary Restraining Order). then the law certainly granted to the public respondent the plenary authority over the petitioner. regulation and control. the right to supervise and regulate the same. would amount to serious consequences. 1996. the Philippine Stock Exchange has acted in an arbitrary and abusive manner in disapproving the application of PALI for listing of its shares in the face of the following considerations: 1. the Court of Appeals promulgated its Resolution dismissing the PSE's Petition for Review. In applying its clear and reasonable standards on the suitability for listing of shares. submitting the following as errors of the SEC: I. and the power of review necessarily comes within its authority. the PSE filed with the Court of Appeals on May 17. III. and for the purpose of ensuring fair administration of the exchange. the assertions of the Marcoses that they are owners of the disputed properties were not substantiated enough to overcome the strength of a title to .registration statements filed with the Commission to incorporate the full disclosure of these material facts and information. THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND VOID FOR ALLOWING FURTHER DISPOSITION OF PROPERTIES IN CUSTODIA LEGIS AND WHICH FORM PART OF NAVAL/MILITARY RESERVATION. Hence. AND IV. PSE fled its Reply to Comment and Opposition to Motion to Dismiss. On June 10. a Comment and Motion to Dismiss. SEC HAS NO POWER TO ORDER THE LISTING AND SALE OF SHARES OF PALI WHOSE ASSETS ARE SEQUESTERED AND TO REVIEW AND SUBSTITUTE DECISIONS OF PSE ON LISTING APPLICATIONS. the court held that PALI complied with all the requirements for public listing. this Petition by the PSE. as compared to the IPOs of other companies similarly situated that were allowed listing in the Exchange. It appears that the claims and issues on the title to PALI's properties were even less serious than the claims against the assets of the other companies in that. Accepting the argument that the public respondent has the authority merely to supervise or regulate. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN ISSUING THE ASSAILED ORDERS WITHOUT POWER. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN FINDING THAT PSE ACTED IN AN ARBITRARY AND ABUSIVE MANNER IN DISAPPROVING PALI'S LISTING APPLICATION. 2. PSE has failed to justify why it acted differently on the application of PALI. On June 4. 1996. and Section 38(b) 5 of the Revised Securities Act. considering that the petitioner is a stock exchange whose business is impressed with public interest. Abuse is not remote if the public respondent is left without any system of control. If the securities act vested the public respondent with jurisdiction and control over all corporations. The appellate court had ruled that the SEC had both jurisdiction and authority to look into the decision of the petitioner PSE.

A property losses its public character the moment it is covered by a title. Moreover. On August 15. and subject of forfeiture proceedings in the Sandiganbayan. 240 SCRA 376. the said rule precludes the reversal of the decision of the PSE to deny PALI's listing application. Yet the import of PSE's decision in denying PALI's application is that it would be PALI. 105205. nor with corporations whose properties are under sequestration. they can no longer be re-opened considering that the one year period has already passed. representing the SEC and the Court of Appeals. The point is. 1997. 1986 and April 4. PALI filed its Comment thereto on January 17. This ruling of the Court is the "law of the case" between the Republic and TDC and MSDC. PALI filed its Rejoinder to the said consolidated reply of PSE. 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. the determination of what standard to apply in allowing PALI's application for listing. On May 16. after it was granted an extension. whereas the PSE filed its own Comment on January 20. PSE argues that the SEC has no jurisdiction over sequestered corporations. In answer to the PCGG's motion for leave to file petition for intervention. when the same are made in good faith. No. G. 1996). In connection with this. that must go to court to prove the legality of its ownership on these properties before its shares can be listed. the powers of the SEC over stock exchanges under the Revised Securities Act are specifically enumerated.properties issued under the Torrens System as evidence of ownership thereof. A reading of Republic of the Philippines vs. it being the government agency that exercises both supervisory and regulatory authority over all corporations. which were derived from the Ternate Development Corporation (TDC) and the Monte del Sol Development Corporation (MSDC). the PCGG filed a Motion for Leave to file a Petition for Intervention. 1996. and the final decree having been registered. This is in accord with the "business judgment rule" whereby the SEC and the courts are barred from intruding into business judgments of corporations. the argument that the PALI properties belong to the Military/Naval Reservation does not inspire belief. Respondent PALI filed its Comment to the petition on October 17. On the same date. the powers of the SEC over stock exchanges are more limited as compared to its authority over ordinary corporations. It categorically declares that the assets of these corporations were sequestered by the PCGG on March 10. are under sequestration by the PCGG. 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. even if an issuer has complied with the PSE listing rules and requirements. the PSE filed its Consolidated Reply to the comments of respondent PALI (October 17. 1997. 1996. Under the listing rules of the PSE. Authorities are in abundance even in the United States. 4. This was followed up by the PCGG's Petition for Intervention on October 21.R. The Office of the Solicitor General. filed the instant Petition for Review on Certiorari. 1996. would reveal that the properties of PALI. 1996. Lastly. As a matter of fact. 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. Thus. not the Marcoses. 19961 the PSE. likewise filed its Comment on December 26. should be addressed to the Securities Commission. neither has the government instituted recovery proceedings against these properties. 1997. Sadiganbayan. the titles have long been settled by a final judgment. 902-A. the PALI properties are now titled. the PSE retains the discretion to accept or reject applications for listing. 1996) and the Solicitor General (December 26. No action has been filed in any court of competent jurisdiction seeking to nullify PALI's ownership over the disputed properties. whether the discretion method or the system of public disclosure adhered to by the SEC. and these do not include the power to reverse the decisions of the stock exchange. from which the country's security policies are patterned. Under presidential decree No. absent a showing of bad faith on the part of the PSE. 1997. A supplemental Comment was filed by PALI on October 25. 1988. taking exception to the rulings of the SEC and the Court of Appeals. . to the effect of giving the Securities Commission less control over stock exchanges. On February 25. to which PALI had previously agreed to comply. In addition.

it was in the alleged exercise of this authority that the SEC reversed the decision of the PSE to deny the application for listing in the stock exchange of the private respondent PALI. As it is. Thus. . therefore. 902-A. The SEC's action was affirmed by the Court of Appeals. it yields an immense influence upon the country's economy.D. and right of supervision the general grant of and control over all corporations under Sec. . Indeed. when a title covers a forest reserve or a government reservation. who are the grantees of primary franchises and/or a license or permit issued by the government to operate in the Philippines. read together with jurisdiction. likewise. and control over all corporations. 8 Thus. as the only operational stock exchange in the country today. This is in line with the SEC's mission to ensure proper compliance with the laws. may be implied from or be considered as necessary or incidental to the carrying out of the SEC's express power to insure fair dealing in securities traded upon a stock exchange or to ensure the fair administration of such exchange. is erroneous and ignores well settled jurisprudence on land titles. The SEC's power to look into the subject ruling of the PSE. if not necessarily. intimated that the Court of Appeals' sanction that PALI's ownership over its properties can no longer be questioned. likewise. This authority springs from the fact that a corporation owes its existence to the concession of its corporate franchise from the state. 6 These provisions. In fact. Section 3 of Presidential Decree 902-A. 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. It is undeniable that the petitioner PSE is not an ordinary corporation. and concealed material information. touching nearly all of a corporation's concerns. 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. and their activities for the promotion of economic development. PALI's documents supporting its application contained misrepresentations and misleading statements. such title is void. give the SEC the special mandate to be vigilant in the supervision of the affairs of stock exchanges so that the interests of the investing public may be fully safeguard. partnerships and associations with the end in view that investment in these entities may be encouraged and protected. including shares of stock of a corporation. 7 It is. partnerships or associations. The PSE's relevance to the continued operation and filtration of the securities transactions in the country gives it a distinct color of importance such that government intervention in its affairs becomes justified. in the absence of a clear mandate for the effectivity of such policy.It is. in that although it is clothed with the markings of a corporate entity. the country's lawmakers has seen it wise to give special treatment to the administration and regulation of stock exchanges. standing alone. 9 As the appellate court explains: . since certificates of title have been issued to PALI and more than one year has since lapsed. supervision. the PSE enjoys a monopoly of securities transactions. the case records reveal the truth that PALI did not comply with the listing rules and disclosure requirements. may be traded or not in the stock exchange. We affirm that the SEC is the entity with the primary say as to whether or not securities. Due to this special nature of stock exchanges. observed that the principal function of the SEC is the supervision and control over corporations. likewise. It is fundamental that forest lands or military reservations are non-alienable. and as such. PSE. assails the SEC's and the Court of Appeals reliance on the alleged policy of "full disclosure" to uphold the listing of PALI's shares with the PSE. is enough authority to uphold the SEC's challenged control authority over the petitioner PSE even as it provides that "the Commission shall have absolute jurisdiction. it functions as the primary channel through which the vessels of capital trade ply. such as the Revised Securities Act and to regulate the sale and disposition of securities in the country. 3 of P." The SEC's regulatory authority over private corporations encompasses a wide margin of areas.

In Board of Liquidators vs. the PSE considered important facts. to enter (or not to enter) into contracts with third persons. or false promises. after all. It means a breach of a known duty through some motive or interest of ill will.S. Presidential Decree No. Questions of policy and of management are left to the honest decision of the officers and directors of a corporation. which. the state will generally not interfere with the same. 11 As to its corporate and management decisions. the monopoly. and to perform all other legal acts within its allocated express or implied powers. 14 It is to be observed that the U. it waives no constitutional immunities and perquisites appropriate to such a body. and the courts are without authority to substitute their judgment for the judgment of the board of directors. its orders are not reviewable by the courts. through the Revised Securities Act. 13 it was held that bad faith does not simply connote bad judgment or negligence. the SEC may exercise such power only if the PSE's judgment is attended by bad faith. from the TDC and MSDC to Rebecco Panlilio. alter all. considering public interest. In reaching its decision to deny the application for listing of PALI. Petitioner can either allow or deny the entry to the market of securities. therefore. To repeat. thus: . allowed to transact under an assumed corporate name. The petitioner was in the right when it refused application of PALI. 902-A. is still the generation of profit for its stockholders. In fact. the PSE heard from the representative of the late President Ferdinand E. brings to serious question the qualification of PALI to sell its shares to the public through the stock exchange. The PSE is. and to the private respondent PALI. The legislature. and other pertinent laws. 10 This is not to say. but it is clear that such circumstances give rise to serious doubt as to the integrity of PALI as a stock issuer.Paramount policy also supports the authority of the public respondent to review petitioner's denial of the listing. is to give adequate and effective protection to the investing public against fraudulent representations. notwithstanding the regulatory power of the SEC over the PSE. if allowed to interpret its own rules liberally as it may please. One of the PSE's main concerns. and the imposition of worthless ventures. it has often been said that the economy moves on the basis of the rise and fall of stocks being traded. Securities Act emphasized its avowed protection to acts detrimental to legitimate business. as such. hence. however. including the right to sue and be sued. How the properties were effectively transferred. A corporation is but an association of individuals. are not yet explained to the Court. The board is the business manager of the corporation. a corporation authorized by its corporate franchise to engage in its proposed and duly approved business. and the resultant authority to reverse the PSE's decision in matters of application for listing in the market. Kalaw. then it should be subject to government regulation. the PSE has all the rights pertaining to corporations. that the PSE's management prerogatives are under the absolute control of the SEC. partaking of the nature of fraud. and so long as it acts in good faith. the petitioner certainly can dictate which and how many users are allowed to sell securities thru the facilities of a stock exchange. The role of the SEC in our national economy cannot be minimized. has entrusted to it the serious responsibility of enforcing all laws affecting corporations and other forms of associations not otherwise vested in some other government office. The purpose of the Revised Securities Act. During the time for receiving objections to the application. unless accompanied by control. in only a short span of time. for a contrary ruling was not to the best interest of the general public. becomes subject to abuse. Being a stock exchange. and suit for reconveyance to the state has been filed in the Sandiganbayan Court. the petitioner performs a function that is vital to the national economy. in the general scheme. Marcos and his family who claim the properties of the private respondent to be part of the Marcos estate. 12 Thus. an order of sequestration has been issued covering the properties of PALI. It imports a dishonest purpose or some moral obliquity and conscious doing of wrong. As a matter of fact. and with a distinct legal personality. Moreover. In time. to hold property in its own name. the PCGG confirmed this claim. as the business is affected with public interest. despite the sequestration order. In organizing itself as a collective body. By its economic power.

In sum. and should remain so. In this connection. to exercise its judgment in the manner it deems appropriate for its business identity. a corporation entity. Presidential Decree No. 902-A. Thus. and this puts to question the qualification of PALI's public offering. to be effective. The defense of indefeasibility of a Torrens Title does not extend to a transferee who takes the certificate of title with notice of a flaw. provides that no security. as regulatory agency. unless exempt by law. the Revised Securities Act. In mandating the SEC to administer the Revised Securities Act. 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 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. Securities & Exchange Commission. as long as no rights are trampled upon. 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. whose business judgments are respected in the absence of bad faith. 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. If any of these claims is established to be true. The question as to what policy is. merely by requirement of that their details be revealed. 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. must be made in good faith. U. and therefore beyond private dominion. (Idem). and were held only in trust by Rebecco Panlilio. often referred to as the "truth in securities" Act. besides the claim of the Marcoses that such properties belong to the Marcos estate. has . 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. provides that the SEC. for the purpose of determining whether PSE acted correctly in refusing the application of PALI. there is the claim that the properties were owned by TDC and MSDC and were transferred in violation of sequestration orders. It was reasonable for the PSE. or should be relied upon in approving the registration and sale of securities in the SEC is not for the Court to determine. the true ownership of the properties of PALI need not be determined as an absolute fact. and public welfare is safeguarded. which operating indirectly through investment services and expert investors. The second paragraph of Section 4 of the said law. but is left to the sound discretion of the Securities and Exchange Commission. was designed not only to provide investors with adequate information upon which to base their decisions to buy and sell securities. on the other hand. and in performing its other functions under pertinent laws. 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 effects of such an act are chiefly (1) prevention of excesses and fraudulent transactions. transferred or in any other manner conveyed to the public. The observation that the title of PALI over its properties is absolute and can no longer be assailed is of no moment. will tend to produce a more accurate appraisal of a security.The Securities Act. since this is a matter addressed to the sound discretion of the PSE. under Section 3 thereof. 14). Also. (Tenth Annual Report. it is proper to observe that the concept of government absolutism is a thing of the past. on the other hand. As has been pointed out. shall be issued. therefore. to Rebecco Panlilio and later on to PALI. but also to protect legitimate business seeking to obtain capital through honest presentation against competition from crooked promoters and to prevent fraud in the sale of securities. . as the primary market for securities. At this juncture. (2) placing the market during the early stages of the offering of a security a body of information. p. the PSE has established its name and goodwill. . It is also alleged by the petitioner that these properties belong to naval and forest reserves. sold. The inscription in the registry. In any case.S. endorsed. What is material is that the uncertainty of the properties' ownership and alienability exists. the certificates of title over the subject properties now held by PALI map be disregarded.

(v) is in any way dishonest or is not of good repute. director or principal stockholder. 1 and 5) has failed to support the propriety of the issue of its shares with unfailing clarity. (iv) has been engaged or is engaged or is about to engage in fraudulent transaction. in the exercise of its vested authority. the Court finds that the private respondent PALI. the Revised Securities Act sets substantial and procedural standards which a proposed issuer of securities must satisfy. In resume. all material information about themselves and the securities they sell. As it is. the Court finds that the PSE has acted with justified circumspection. and of the issuer. and under pain of administrative. are required to divulge truthfully and accurately. Pursuant to this regulatory authority. 15 While the employment of this policy is recognized and sanctioned by the laws. for the protection of the investing public. therefore. and as such. criminal and civil sanctions. untenable. in the public interest and for the protection of investors. or (2) The issuer or registrant — (i) is not solvent or not in sound financial condition. member of the board of directors. (3) The enterprise or the business of the issuer is not shown to be sound or to be based on sound business principles. In connection with this. thereby lending support to the conclusion that the PSE acted correctly in refusing the listing of PALI in its stock exchange. (ii) has violated or has not complied with the provisions of this Act. This measure was meant to protect the interests of the investing public against fraudulent and worthless securities. listed or applying for listing.supervision and control over all corporations and over the securities market as a whole. the SEC must recognize and implement the mandate of the law. impose before the security can be registered. to a certain extent. any imputation of . following the policies and rules therefore provided. However. or the rules promulgated pursuant thereto. or any order of the Commission. discounting. the provisions of which cannot be amended or supplanted by mere administrative issuance. or principal stockholder of the issuer is disqualified to be such officer. (Emphasis Ours) A reading of the foregoing grounds reveals the intention of the lawmakers to make the registration and issuance of securities dependent. to be determined by the Securities and Exchange Commission. This does not discount the effectivity of whatever method the SEC. (iii) has failed to comply with any of the applicable requirements and conditions that the Commission may. on the merits of the securities themselves. Section 9 of the Revised Securities Act sets forth the possibleGrounds 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 fact required to be stated therein or necessary to make the statements therein not misleading. 16 Pertinently. 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 of the public interest or as a fraud upon the purchasers or investors. a fact is deemed material if it tends to induce or otherwise effect the sale or purchase of its securities. particularly the Revised Securities Act. chooses in setting the standard for public offerings of corporations wishing to do so. or (vi) does not conduct its business in accordance with law or is engaged in a business that is illegal or contrary to government rules and regulations. The absolute reliance on the full disclosure method in the registration of securities is. (4) An officer. nonetheless. the SEC has manifested that it has adopted the policy of "full material disclosure" where all companies. and the SEC is mandated by law to safeguard these interests. therefore. on at least two points (nos. is given ample authority in determining appropriate policies.

. HEIRS OF MAXIMO M. (b) August 14. defendant Leonor Moll became director only on December 22. defendants Juan Bocar and Casimiro Garcia were members of the Board. embarked on copra trading activities.R. and dessicated coconut. affirming the decision of the Philippine Stock Exchange to deny the application for listing of the private respondent Puerto Azul Land.. 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. 1947.: The National Coconut Corporation (NACOCO. No. copra. o.2 JUAN BOCAR. if not altogether eliminate. preservation and development of the coconut industry in the Philippines. THE BOARD OF LIQUIDATORS1 representing THE GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES. Inc. for short) was chartered as a non-profit governmental organization on May 7. 1967 . to serve coconut producers by securing advantageous prices for them. KALAW. viz: (a) July 30. (Overseas) Ltd. 1996 and April 24.o. to cut down to a minimum. $167. as well as their by-products. L-18805 August 14. Kalaw. 1940 by Commonwealth Act 518 avowedly for the protection. coconut.b.arbitrariness and whimsical animation on its part.4 General manager and board chairman was Maximo M. 1947: Alexander Adamson & Co. broker or commission merchant of the producers.00: per ton. On August 1. sell. the Court hereby GRANTS the Petition for Review onCertiorari. vs.000 long tons.. mostly aliens. The Decisions of the Court of Appeals and the Securities and Exchange Commission dated July 27. NACOCO. for 2. 1947: Alexander Adamson & Co.. 1946. for 2. f.000 long tons $145. are hereby REVERSED and SET ASIDE. SANCHEZ. b. in view of the foregoing considerations. and to act as agent. dealers or merchants" thereof. 1947. defendants-appellees.3 and LEONOR MOLL. and a new Judgment is hereby ENTERED. export. delivery: August and September. This contract was later assigned to Louis Dreyfus & Co. barter. and in any other manner deal in. after the passage of Republic Act 5. the margin of middlemen.00 per long ton. SO ORDERED. ACCORDINGLY. 1996 respectively. Amongst the scores of contracts executed by general manager Kalaw are the disputed contracts.plaintiff-appellant. for the delivery of copra. Philippine ports. to be shipped: G. The charter amendment was enacted to stabilize copra prices. J. ESTATE OF THE DECEASED CASIMIRO GARCIA. NACOCO's charter was amended [Republic Act 5] to grant that corporation the express power "to buy. f.

for 2.55 The buyers threatened damage suits.00 per ton.000 500 2.. $137. on January 11. viz: Pacific Vegetable Oil Co. 1947.000 long tons.i. Neither did the board vote thereon at the meeting of January 7. that NACOCO was recouping its losses. 1947. Nature supervened. delivery: January. c.000 long tons.i.. This contract was assigned to Pacific Vegetable Co.091.45 9. 3 Philippine ports. 1947: Franklin Baker Division of General Foods Corporation.f. 1948. 1947) 245 TOTALS 7. $175. emphasized that government concerns faced the same risks that confronted private companies. 1948. Los Angeles. apprised the board of the impending heavy losses. for 3.000 tons.September-October. $160. delivery: November. $210. $164. They unanimously approved the contracts hereinbefore enumerated. for 3. Pacific ports. Garcia and Moll in attendance.613. Kalaw submitted them to the board for approval.. delivery: November and December. $154. This contract was assigned to Pacific Vegetable Co. the second and third in November.50 per ton. 1947. President Roxas made a statement that the NACOCO head did his best to avert the losses. the board met again with Kalaw. Deprivation of export facilities increased the time necessary to accumulate shiploads of copra. 1947: Louis Dreyfus & Co. 1947 when the membership was completed. 1948 following. Then.. delivery: September.00 per short ton. Some of the claims were settled.000 tons.000 800 Undeliver ed 4. (f) September 12. NACOCO but partially performed the contracts. and the fourth in December. 1948. on January 30. financing a problem. f. 1947.. Copra production decreased. for 1.000 tons. (g) September 13. in copra delivered by . for 1.150 July 30. for 1.b.. (i) October 28. A meeting was then held. 1947: Fairwood & Co. When it became clear that the contracts would be unprofitable.500 long tons.i.o..45 None 1.i. No action was taken on the contracts.00 per ton.408. as follows: Buyers Pacific Vegetable Oil Spencer Kellog Franklin Baker Louis Dreyfus Tons Delivered 2. $210. California. (h) October 27. that is. delivery: December.00 per ton. Bocar.. New York. Coconut trees throughout the country suffered extensive damage. This contract was assigned to Pacific Vegetable Co.f.755 August 14. 1947. 1947: Spencer Kellog & Sons.. 1947) Louis Dreyfus (Adamson Contract of 1. to be shipped in November. (c) August 22. It was not until December 22.55 1. for 1. (e) September 9. c. This contract was also assigned to Louis Dreyfus & Co. Quick turnovers became impossible. An unhappy chain of events conspired to deter NACOCO from fulfilling these contracts. (d) September 5. 1947: Juan Cojuangco. 1947 and January. c. Pacific ports.00 per ton.000 tons. c. (Overseas) Ltd. Prices spiralled.f.386.. Warehouses were destroyed. 1947: Fairwood & Co. 1947. Cash requirements doubled. Four devastating typhoons visited the Philippines: the first in October.00 per short ton. Defendant Moll took her oath on that date. and that Kalaw was to remain in his post.200 850 Louis Dreyfus (Adamson contract of 1. As was to be expected. Not long thereafter. 1947: Pacific Vegetable Co. (Overseas) Ltd. Kalaw made a full disclosure of the situation. delivery: November. 1947.f. 1948.

But one buyer. The fifth amended complaint. To project the utter unreasonableness of this compromise.NACOCO. P78. or at least settlement for nominal sums like what happened in the Syjuco case. if at all. It charges Kalaw with negligence under Article 1902 of the old Civil Code (now Article 2176. Plaintiff's brief did not.098. In this suit started in February.00.274. why should defendants be held liable for the large sum paid as compromise by the Board of Liquidators? This is just a sample to show how unjust it would be to hold defendants liable for the readiness with which the Board of Liquidators disposed of the NACOCO funds.94.52. including Kalaw.5 All the settlements sum up to P1. On appeal. we reproduce in haec verba this finding below: x x x However. whereby a corporation whose corporate existence is terminated. The corporation thereunder paid Dreyfus P567. NACOCO put up the defenses that: (1) the contracts were void because Louis Dreyfus & Co. was filed on July 2. and defendant board members. although there was much possibility of successfully resisting the claims. Rule 104.] against Santiago Syjuco for non-delivery of copra also involving a claim of P345. did in fact sue before the Court of First Instance of Manila.040.024.274. P287.94 for unpaid salaries and cash deposit due the deceased Kalaw from NACOCO. "shall nevertheless be continued as a body corporate for three years after the time when it would have been so dissolved. (Overseas) Ltd.028. Spencer Kellog & Sons. Defendants resisted the action upon defenses hereinafter in this opinion to be discussed.908. except that plaintiff was ordered to pay the heirs of Maximo Kalaw the sum of P2.000. P75.00 only (Exhs. of the Rules of Court [which superseded Section 66 of the Corporation Law]7 whereby. question the counterclaim for the sum of P2.601. 31 & 32 Heirs. for the purpose of prosecuting and defending suits by or against it and of enabling it gradually to settle and close its affairs. The lower court came out with a judgment dismissing the complaint without costs as well as defendants' counterclaims. 1949. Louis Dreyfus & Go. judgment on Kalaw's Right at the outset. arrest our attention. Accepted in this jurisdiction are three methods by which a corporation may wind up its affairs: (1) under Section 3. for the balance on the August 14 contract (Civil Case 4398). Kalaw.6 1.00.. First of the threshold questions is that advanced by defendants that plaintiff Board of Liquidators has lost its legal personality to continue with this suit.63. defendants renew their bid. on which this case was tried.210.000. to dispose of and convey its property and to divide its capital stock.00. the claim of Dreyfus against NACOCO should have been compromised for only P10. .000.52 representing 70% of the total claims. and may appoint a receiver to collect such assets and pay the debts of the corporation.40. NACOCO seeks to recover the above sum of P1. plaintiff accepted a promise of P5. 1959. (Overseas) Ltd. in similar cases brought by the same claimant [Louis Dreyfus & Co. (Overseas) Ltd. These cases culminated in an outof-court amicable settlement when the Kalaw management was already out.343. With particular reference to the Dreyfus claims.00. two preliminary questions raised before. the court may direct "such disposition of its assets as justice requires. upon claims as follows: For the undelivered copra under the July 30 contract (Civil Case 4459). Plaintiff appealed direct to this Court.68 wherein defendant set upsame defenses as above.00.52 from general manager and board chairman Maximo M. And this. and directors Juan Bocar." (2) under Section 77 of the Corporation Law. upon voluntary dissolution of a corporation. but adversely decided by. the typhoons. and (2) failure to deliver was due to force majeure.601. new Civil Code). with bad faith and/or breach of trust for having approved the contracts. Franklin Baker Corporation.) Following the same proportion.343. P539. did not have license to do business here. P447.654. Now. upon established jurisprudence that an appellate court may base its decision of affirmance of the judgment below on a point or points ignored by the trial court or in which said court was in error. appealed to this Court in L-2829). Casimiro Garcia and Leonor Moll. P159. for that per the September 12 contract reduced to judgment (Civil Case 4322. the court below.

that abatement of pending actions follows as a matter of course upon the expiration of the legal period for liquidation. convey its property in the manner hereinafter provided. By Section 2 of the executive order." By Section 4. while the boards of directors of the various corporations were abolished. That each of the said corporations shall nevertheless be continued as a body corporate for a period of three (3) years from the effective date of this Executive Order for the purpose of prosecuting and defending suits by or against it and of enabling the Board of Liquidators gradually to settle and close its affairs. by virtue of which the corporation. The said corporations shall be liquidated in accordance with law. NACOCO. the President had chosen to see to it that the Board of Liquidators step into the vacuum."8 It is defendants' pose that their case comes within the coverage of the second method." 10 So it is. . whereby the corporate existence of NACOCO was continued for a period of three years from the effectivity of the order for "the purpose of prosecuting and defending suits by or against it and of enabling the Board of Liquidators gradually to settle and close its affairs. And by Section. 12 For. They reason out that suit was commenced in February. The National Abaca and Other Fibers Corporation. at the same time. pp. the court cannot extend the time alloted by statute. 1949. is to be read not as an isolated provision but in conjunction with the whole. to dispose of and. and others interested.1. the provisions of this Order. under section 1. their powers and functions and duties under existing laws were to be assumed and exercised by the Board of Liquidators. was abolished. if rendered. Section 5. and that. and the Board of Liquidators was entrusted with the function of settling and closing its affairs. nor can a valid judgment be rendered therein. Thus. A glance at the other provisions of the executive order buttresses our conclusion. the Board of Liquidators may not now continue with. within the three year period just mentioned. however. the National Coconut Corporation. Citing Mr. . The Philippine Law of Stock Corporations. Corpus Juris Secundum likewise is authority for the statement that "[t]he dissolution of a corporation ends its existence so that there must be statutory authority for prolongation of its life even for purposes of pending litigation"9 and that suit "cannot be continued or revived. however." and (3) under Section 78 of the Corporation Law. it will be readily observed that no time limit has been tacked to the existence of the Board of Liquidators and its function of closing the affairs of the various government owned corporations. together with other government-owned corporations. fifty per centum . because Executive Order 372 provides in Section 1 thereof that — Sec. "is authorized and empowered to convey all of its property to trustees for the benefit of members. however. the present case to its conclusion. or project is transferred to any governmental instrumentality "for administration or continuance of any project. stockholders. creditors. since the three year period has elapsed. So reading. nonetheless. is not only erroneous. and a judgment. when any property. Justice Fisher.but not for the purpose of continuing the business for which it was established. and prosecute. And nowhere in the executive order was there any mention of the lifespan of the Board of Liquidators. the National Food Producer Corporation and the former enemyowned or controlled corporations or associations." the necessary funds therefor shall be taken from the corresponding special fund created in Section 5. The proviso in Section 1 of Executive Order 372. defendants proceed to argue that even where it may be found impossible within the 3 year period to reduce disputed claims to judgment. are hereby abolished. Provided. 11 unless the statute merely requires a commencement of suit within the added time. 13 We. . talks of special funds established from the "net proceeds of the liquidation" of the various corporations abolished. that by Executive Order 372. proceed in accordance with law. 390-391). fund. in turn. dated November 24. liquidation by the Board of Liquidators may. 7. the provisions of the executive order. "and/or in such manner as the President of the Philippines may direct. 1950. including NACOCO. and/or in such manner as the President of the Philippines may direct. to dispose of and convey its property in the manner hereinafter provided". "suits by or against a corporation abate when it ceases to be an entity capable of suing or being sued" (Fisher. but void and subject to collateral attack. The President thought it best to do away with the boards of directors of the defunct corporations. the National Tobacco Corporation. express the view that the executive order abolishing NACOCO and creating the Board of Liquidators should be examined in context.

August 16. the sole stockholder. That suit was for recovery of money advanced to defendant for the purchase of hemp in behalf of the corporation. Defendants' position is vulnerable to attack from another direction. Appellee heirs of Kalaw raised in their motion to dismiss. Contemporary history gives us the fact that the Board of Liquidators still exists as an office with officials and numerous employees continuing the job of liquidation and prosecution of several court actions. we. The beneficial interest remained with the sole stockholder — the government. Not that our views on the power of the Board of Liquidators to proceed to the final determination of the present case is without jurisprudential support. Mrs. and may not be deemed to have survived after his death. questioned the corporation's capacity to sue. de Ocampo. pending actions by or against a corporation are abated upon expiration of the period allowed by law for the liquidation of its affairs. and placed its assets in the hands of the Board of Liquidators. Pore. Receda Vda. 17 which was overruled. This motion was rejected below. Kalaw. abolished NACOCO. with instructions to admit plaintiff's amended complaint to include. after three (3) years from the expiration of its lifetime. or the authority to continue the present suit. Defendants' second poser is that the action is unenforceable against the heirs of Kalaw." 14 However. is that the term of life of the Board of Liquidators is without time limit. The legal interest became vested in the trustee — the Board of Liquidators. held in that case that the Board of Liquidators escapes from the operation thereof for the reason that "[o]bviously. to the damage and prejudice of . arising from contract. the Board of Liquidators. in effect. the government. 2.19 which provides that "[a]ll claims for money against the decedent. At no time had the government withdrawn the property. the complete loss of plaintiff's corporate existence after the expiration of the period of three (3) years for the settlement of its affairs is what impelled the President to create a Board of Liquidators. The Board of Liquidators. The Board of Liquidators thus became the trustee on behalf of the government. She failed to account for that money. rule that the Board of Liquidators has personality to proceed as: party-plaintiff in this case. 16 The provisions of Section 78 of the Corporation Law — the third method of winding up corporate affairs — find application. must be filed in the estate proceedings of the deceased. By Executive Order 372. Plaintiff failed to effect inclusion. Plaintiff moved to reconsider. Rule 87. in that its counsel prepared the amended complaint. We. express or implied"." We there said that "[o]ur Corporation Law contains no provision authorizing a corporation. to continue in its corporate name actions instituted by it within said period of three (3) years. If for this reason alone.of the fees collected from the copra standardization and inspection service shall accrue "to the special fund created in section 5 hereof for the rehabilitation and development of the coconut industry. of the 1940 Rules of Court. L-16779. 18 They say that the controlling statute is Section 5. in the absence of statutory provision to the contrary. from the Board of Liquidators. We there said that "the rule appears to be well settled that. It was an express trust. and instructed the board's incoming and outgoing correspondence clerk. already dissolved. and in their nineteenth special defense. Ground: excusable negligence. Plaintiff came to this Court on appeal. The suit here revolves around the alleged negligent acts of Kalaw for having entered into the questioned contracts without prior approval of the board of directors. commenced suit within the three-year extended period for liquidation. Defendant moved to dismiss. She mailed the copy to the latter but failed to send the original to the court. as directed. 1961. that plaintiff's action is personal to the deceased Maximo M. The first judicial test before this Court is National Abaca and Other Fibers Corporation vs. to mail the original thereof to the court and a copy of the same to defendant's counsel. the corporation. these precepts notwithstanding. In that case."15 We accordingly directed the record of said case to be returned to the lower court. to continue the management of such matters as may then be pending. The lower court ordered plaintiff to include as co-party plaintiff. The lower court dismissed the suit. accordingly. we cannot stay the hand of the Board of Liquidators from prosecuting this case to its final conclusion." Implicit in all these. to which the corporation's liquidation was entrusted by Executive Order 372. We disagree. as party plaintiff.

and (3) actions to recover damages for an injury to person or property. and these words (also used by the Rules in connection with attachments and derived from the common law) were construed in Leung Ben vs. real or personal". The complaint averred that Llemos had served plaintiff by registered mail with a copy of a petition for a writ of possession in Civil Case 4824 of the Court of First Instance at Catbalogan. enumerates actions that survive against a decedent's executors or administrators. Justice Jose B. there declared: Plaintiffs argue with considerable cogency that contrasting the correlated provisions of the Rules of Court. Plaintiff levelled a major attack on the lower court's holding that Kalaw justifiedly entered into the controverted contracts without the prior approval of the corporation's directorate. and (3) "all claims for money against the decedent.m. Rule 88. plaintiffs amended their complaint to include the heirs of the deceased. Reyes. The suit involves alleged tortious acts. it having been held that "injury to property" is not limited to injuries to specific property. for the matter." Upon the other hand. 1). recites. Araneta. and that. 1960 at 8:00 a. so that plaintiffs' expenditure and trouble turned out to be in vain. Defendant died before he could answer the complaint. 1395). plaintiffs proceeded to the said court of Samar from their residence in Manila accompanied by their lawyers. Crandall. against the Estate of Casimiro Garcia survives. "to include all purely personal obligations other than those which have their source in delict or tort. and that defendant Llemos maliciously failed to appear in court. Aug. with notice that the same would be submitted to the Samar court on February 23. arising from contract express or implied. This Court. the present case is not a mere action for the recovery of money nor a claim for money arising from contract. causing them mental anguish and undue embarrassment. Rep. which survive. only to discover that no such petition had been filed. for it is not enough that the claim against the deceased party be for money. the conclusion remains: Action against the Kalaw heirs and. There. 3. The court dismissed the complaint on the ground that the legal representative. L.R. The heirs moved to dismiss. (2) judgments for money. testate or intestate proceedings should be initiated and the claim filed therein. L-4369. section 5. plaintiffs sought to recover damages from defendant Llemos. Samar. 126. anyway. To maliciously cause a party to incur unnecessary expenses. 31. Article IV (b). The present suit is one for damages under the last class. also 171 A. sec. those concerning claims that are barred if not filed in the estate settlement proceedings (Rule 87. is certainly injury to that party's property (Javier vs. The ruling in the preceding case was hammered out of facts comparable to those of the present. that in view of the copy and notice served. thru Mr. O'Brien. section 1. 38 Phil. the action being for recovery of money. sec. it is apparent that actions for damages caused by tortious conduct of a defendant (as in the case at bar) survive the death of the latter. 1953). Upon leave of court. 189-194. L-18107.L. 5) and those defining actions that survive and may be prosecuted against the executor or administrator (Rule 88. but extends to other wrongs by which personal estate is injured or diminished (Baker vs. 20 The leading expositor of the law on this point is Aguas vs. all contracts necessary and .. as amongst the duties of the general manager. 182. And. Chapter III thereof. August 30. should have been made the party defendant." None of these includes that of the plaintiffsappellants. the actions that are abated by death are: (1) claims for funeral expenses and those for the last sickness of the decedent. and not the heirs. No cogent reason exists why we should break away from the views just expressed. And the action is embraced in suits filed "to recover damages for an injury to person or property. The preliminaries out of the way.. we now go to the core of the controversy. as charged in this case. Llemos. 1962. Plaintiff leans heavily on NACOCO's corporate by-laws. (2) actions to enforce a lien thereon. the obligation: "(b) To perform or execute on behalf of the Corporation upon prior approval of the Board. Under Rule 87.plaintiff. but it must arise from "contract express or implied". 47 Am." Clearly then. and they are: (1) actions to recover real and personal property from the estate. and is against Kalaw and the other directors for having subsequently approved the said contracts in bad faith and/or breach of trust.

Nothing was said by them. in Kalaw's absence.000 tons of copra to the Food Ministry. Said contracts were known all along to the board members. Copra contracts then had to be executed on short notice — at times within twenty-four hours. NACOCO. Soriano y Cia. The aforesaid contracts stand to prove one thing: Obviously. 1947. from those copra sales. Copra could not stay long in its hands. the board gave its nod to a contract for renewal of the services of Dr." These previous contract it should be stressed. One at least was executed by a predecessor way back in 1940. NACOCO's limited funds necessitated a quick turnover. thru its general manager Kalaw. 22 The problem. despite numerous handicaps and difficulties. London. it is concededly the practice of the trade.. Kalaw signed some 60 such contracts for the sale of copra to divers parties. for the lease of a space in Soriano Building On November 14. not before. on December 5. These agreements were not Kalaw's alone. 1946. Kalaw. Known in business parlance as forward sales. Long before the disputed contracts came into being. the quantity required before being accepted for loading. it would lose weight. when the controversy over the present contract cropped up. In fact. 1948. Ordinary in this enterprise are copra sales for future delivery. at this point. and may bind the corporation by contracts in matters arising in the usual course of business. NACOCO reaped a gross profit of P3. So pleased was NACOCO's board of directors that." Not of de minimis importance in a proper approach to the problem at hand. Kalaw contracted — by himself alone as general manager — for forward sales of copra.48. NACOCO board met the difficulties attendant to forward sales by leaving the adoption of means to end. its value decrease. This shortselling was inevitable at the time in the light of other factors such as availability of vessels. Maximo Rodriguez. on January 7. To be appreciated then is the difficulty of calling a formal meeting of the board. 1940 by the then general manager and board chairman. deserves express articulation. During that period. Above all. also on that date. A rule that has gained acceptance through the years is that a corporate officer "intrusted with the general management and control of its business. . is the nature of a general manager's position in the corporate structure. forward sales were a necessity. Roxas. which by usage or necessity are incident to his office. It was a contract of lease executed on November 16. On December 22. sold 3. "he may. The movement of the market requires that sales agreements be entered into.631.000 tons of copra each to a certain "SCAP" and a certain "GNAPO". Manuel L. A certain amount of speculation is inherent in the undertaking. and A. is whether the case at bar is to be taken out of the general concept of the powers of a general manager. to the sound discretion of NACOCO's general manager Maximo M. 1946. the board requested Kalaw to report for action all copra contracts signed by him "at the meeting immediately following the signing of the contracts.181. 1947. given the cited provision of the NACOCO by-laws requiring prior directorate approval of NACOCO contracts. To NACOCO. thru Sebastian Palanca. Liberally spread on the record are instances of contracts executed by NACOCO's general manager and submitted to the board after their consummation." This practice was observed in a later instance when.essential to the proper accomplishment for which the Corporation was organized. For the fiscal year ending June 30. the labor needed to prepare and sack the copra for market. the board voted to approve a lease contract previously executed between Kalaw and Fidel Isberto and Ulpiana Isberto covering a warehouse of the latter. Such were the environmental circumstances when Kalaw went into copra trading. has implied authority to make any contract or do any other act which is necessary or appropriate to the conduct of the ordinary business of the corporation. The peculiar nature of copra trading. therefore. On the same date. even though the goods are not yet in the hands of the seller. without any special authority from the Board of Directors perform all acts of an ordinary nature. the board approved two previous contracts for the sale of 1. NACOCO was much more conservative than the exporters with big capital. soon after NACOCO was chartered. it voted to grant him a special bonus "in recognition of the signal achievement rendered by him in putting the Corporation's business on a self-sufficient basis within a few months after assuming office. were signed by Kalaw without prior authority from the board. 21As such officer.

x x x authority to act for and bind a corporation may be presumed from acts of recognition in other instances where the power was in fact exercised. 1947.1äwphï1. 1947. Kalaw informed the board that "he intends to wait until he has signed contracts to sell before starting to buy copra.300 long tons of copra to the French Government. Bell and Co. It is to be noted in the foregoing cases that only the brokerage fee agreements were passed upon by the board. by proof of the course of business. it was not expected that copra prices would again rise very high as in the unprecedented boom during JanuaryApril. existence of such authority is established." On February 5. Such ratification was necessary because.00 per hundred kilos. custom. 1947. the usage and practices of the company and by the knowledge which the board of directors has. 28 . 1947. 26 In varying language. in the sale of 4. the brokerage fee agreements of 11/2% on three export contracts. the prices seemed to oscillate between $140 to $150 per ton. In view thereof. the directors discussed the copra situation: There was a slow downward trend but belief was entertained that the nadir might have already been reached and an improvement in prices was expected. the general manager may bind the company without formal authorization of the board of directors. 1947: 521. a radical rise or decrease was not indicated by the trends. the board resolved to ratify the brokerage commission of 2% of Smith.25 Settled jurisprudence has it that where similar acts have been approved by the directors as a matter of general practice. he said that the Nacoco is much more conservative than the other big exporters in this respect. Ltd. 1947. 1946. (2) The movement of the market is such that it may not be practical always to wait for the consummation of contracts of sale before beginning to buy copra. 27 So also. "under an existing resolution he is authorized to give a brokerage fee of only 1% on sales of copra made through brokers. on the sale of 2..00 to P7.not the sales contracts themselves. Knowledge by the board is also discernible from other recorded instances. However. for the sale of copra were approved by the board with a proviso authorizing the general manager to pay a commission up to the amount of 1-1/2% "without further action by the Board. The General Manager replied that this practice is generally followed but that it is not always possible to do so for two reasons: (1) The role of the Nacoco to stabilize the prices of copra requires that it should not cease buying even when it does not have actual contracts of sale since the suspension of buying by the Nacoco will result in middlemen taking advantage of the temporary inactivity of the Corporation to lower the prices to the detriment of the producers. the brokerage fee of 2% of J. as stated by Kalaw in that same meeting. Kalaw reported on the copra price conditions then current: The copra market appeared to have become fairly steady. The General Manager explained that in this connection a certain amount of speculation is unavoidable. or must bepresumed to have..000 tons of copra was favorably acted upon by the board. 1947. And even those fee agreements were submitted only when the commission exceeded the ceiling fixed by the board.000 tons of copra. On March 19. In connection with the buying and selling of copra the Board inquired whether it is the practice of the management to close contracts of sale first before buying. Cojuangco & Co. On December 19." On January 15. and policy." 24 We now lift the following excerpts from the minutes of that same board meeting of July 29. of acts and doings of its subordinates in and about the affairs of the corporation. Kalaw continued to say that "the Corporation has been closing contracts for the sale of copra generally with a margin of P5."23 In the board meeting of July 29. a 2% brokerage commission was similarly approved by the board for Pacific Trading Corporation on the sale of 2. and 2% on three others.And more.ñët When the board met on May 10.

or to serve their own private interests. we need but turn to the board's ratification of the contracts in dispute on January 30. Under the given circumstances. But that board itself. Kalaw had authority to execute the contracts without need of prior approval. Everybody.34 Applying this precept to the given facts herein. Doubts were first thrown on the way only when the contracts turned out to be unprofitable for NACOCO. even with hostile eyes. though it is our (and the lower court's) belief that ratification here is nothing more than a mere formality. practically laid aside the by-law requirement of prior approval." or "some moral obliquity. are one in the idea that "ratification by a corporation of an unauthorized act or contract by its officers or others relates back to the time of the act or contract ratified. 669. Spaulding." 32 By corporate confirmation. 141 U. For. the practice of the corporation has been to allow its general manager to negotiate and execute contracts in its copra trading activities for and in NACOCO's behalf without prior board approval. all that we have on the government's side of the scale is that the board knew that the contracts so confirmed would cause heavy losses." 36 Briggs vs." or "conscious doing of wrong. As we have earlier expressed. and is equivalent to original authority. 11). his authority to represent the corporation may be implied from the manner in which he has been permitted by the directors to manage its business. If the by-laws were to be literally followed. in reality. the following: "Upon a close examination of all the reported cases. it means breach of a known duty thru some motive or interest or ill will. to read the record in terms of "bad faith and/or breach of trust" in the board's ratification of the contracts without prior approval of the board. 71 Pa. 1948. great in number." or "Some motive or interest or ill will" that "partakes of the nature of fraud. a case is here presented whereunder. when." 31 Indeed." or "breach of a known duty. ed. except when they have themselves been personally guilty of some fraud on the corporation. thought so. the Kalaw contracts are valid corporate acts. 35 L. The theory of corporate ratification is predicated on the right of a corporation to contract. 35 We have had occasion to affirm that bad faith contemplates a "state of mind affirmatively operating with furtive design or with some motive of self-interest or ill will or for ulterior purposes. quotes with approval from Judge Sharswood (in Spering's App. even in the face of an express by-law requirement of prior approval. or where such fraud might have been prevented . and any ratification or adoption is equivalent to a grant of prior authority. 148-149. the law on corporations is not to be held so rigid and inflexible as to fail to recognize equitable considerations.. including Kalaw himself. it imports a dishonest purpose or some moral obliquity and conscious doing of wrong. And." Nor was it even intimated here that the NACOCO directors acted for personal reasons. by its acts and through acquiescence. our law pronounces that "[r]atification cleanses the contract from all its defects from the moment it was constituted. 4. the board should give its stamp of prior approval on all corporate contracts. although there are many dicta not easily reconcilable. 132. an officer has been allowed in his official capacity to manage its affairs." 30 The language of one case is expressive: "The adoption or ratification of a contract by a corporation is nothing more or less than the making of an original contract.x x x Thus.29 In the case at bar. Authorities. or to pocket money at the expense of the corporation. yet I have found no judgment or decree which has held directors to account. But if more were required. 5. we find that there was no "dishonest purpose." and that " [t]he corporation and the other party to the transaction are in precisely the same position as if the act or contract had been authorized at the time. Rightfully had it been said that bad faith does not simply connote bad judgment or negligence. 662. in the usual course of business of a corporation. the conclusion inevitably is that the embattled contracts remain valid. 33 In sum. It would be difficult. and for a long time. or have known and connived at some fraud in others. it partakes of the nature of fraud. the contracts executed by Kalaw are thus purged of whatever vice or defect they may have.S.

43 7. categorically stated that "it would be foolish to 6." 38 will take about one year until the coconut producing regions will be able to produce their normal coconut yield and it will take some time until the price of copra will reach normal levels. The various contracts involved delivery of but 16. Conjunction of damage and wrong is here absent. .had they given ordinary attention to their duties. By the same token. were it not for the typhoons. Plaintiff's corporate counsel 44 concedes that Kalaw all along thought that he had authority to enter into the contracts. To what then may we trace the damage suffered by NACOCO. with bigger facilities. is that no assertion is made and no proof is presented which would link Kalaw's acts — ratified by the board — to a matrix for defraudation of the government. by pleading in its answers force majeure as an affirmative defense and there vehemently asserted that "as a result of the said typhoons." and that "it had never been the intention of the contracting parties in entering into the contract in question that. Quick turnovers could not be expected. or for that matter. experienced. were not spared. The facts yield the answer. then. in the event of a sharp rise in the price of copra in the Philippine market produce by force majeureor by caused beyond defendant's control. warehouses destroyed.000. when unprofitable. this is a case of damnum absque injuria.00. The typhoons were known to plaintiff. 41 Indeed. by reason of the board's ratification of the contracts. 42 NACOCO could have. In fact. They did not think of raising their voice in protest against past contracts which brought in enormous profits to the corporation. that he entered into the contracts in pursuance of an overall policy to stabilize prices. Kalaw is clear of the stigma of bad faith. Four typhoons wreaked havoc then on our copra-producing regions." 40 A high regard for formal judicial admissions made in court pleadings would suffice to deter us from permitting plaintiff to stray away therefrom. Barretto. also suffered tremendous losses." 37 The directors are not liable. were at a level calculated to produce profits and higher than those prevailing in the local market. Obviously.500 tons over a five-month period. the board thought that to jettison Kalaw's contracts would contravene basic dictates of fairness.000 tons of copra a day. Profit or loss resulting from business ventures is no justification for turning one's back on contracts entered into. fair dealing disagrees with the idea that similar contracts. NACOCO had 90 buying agencies spread throughout the islands." Plaintiff did not even dare charge its defendant-directors with any of these malevolent acts. . It could purchase 2. On top of all these. The truth. Despite the typhoons. of the matter is that — in the words of the trial court — the ratification of the contracts was "an act of simple justice and fairness to the general manager and the best interest of the corporation whose prestige would have been seriously impaired by a rejection by the board of those contracts which proved disadvantageous. Plaintiff's witness Sisenando Barretto. Result: Copra production was impaired. met its contractual obligations. to charge now that the damage suffered was because of Kalaw's negligence. NACOCO was still able to deliver a little short of 50% of the tonnage required under the contracts. There cannot be an actionable wrong if either one or the other is wanting. should not merit the same treatment." 39 NACOCO was not immune from such usual business risk. As the trial court correctly observed. Stock accessibility was no problem. old. . the defendant should buy the copra contracted for at exorbitant prices far beyond the buying price of the plaintiff under the contract. NACOCO resisted the suits filed by Louis Dreyfus & Co. that he did so in the best interests of the corporation. observed that from late 1947 to early 1948 "there were many who lost money in the trade. eleven principal trading concerns did run losses to about P10. head of the copra marketing department of NACOCO. Plaintiff's witness. Roughly estimated. NACOCO was not alone in this misfortune. it . with ease. The record discloses that private traders.300. prices spiralled. The prices for which NACOCO contracted in the disputed agreements. extensive damage was caused to the coconut trees in the copra producing regions of the Philippines and according to estimates of competent authorities. to free the producers from the clutches of the middlemen.

would seem to be supported by the fact that even as the contracts were being questioned in Congress and in the NACOCO board itself. 390. clinch the case for defendants. It is a well known rule of law that questions of policy of management are left solely to the honest decision of officers and directors of a corporation. NACOCO eventually faltered in its contractual obligations.)48 Kalaw's good faith. and the court is without authority to substitute its judgment for the judgment of the board of directors. nothing came out of the negotiations with the bank. was engaged in the business of maintaining and conducting a theatre in the city of Manila for the exhibition of cinematographic films.00. defendants-appellants. The plaintiff J. plaintiff-appellee. Under the articles of incorporation the company is authorized to manufacture. L-15092. On December 27. or the Assistant General Manager. and that of the other directors." 47 And. in October. F. Ramirez was. Of course. He asked the Philippine National Bank to implement its commitment to extend a P400. FERNANDEZ. or closed down at a smaller loss. NACOCO envisioned a profit of around P752. Kalaw could not have been an insurer of profits. the judgment under review must be. Bacolod-Murcia Milling Co. 11897 September 24.. a . 49 Viewed in the light of the entire record." 45 Really. The dailies and quotations from abroad were guideposts to him. THE ORIENTALIST CO. Vol. F. 1947. He could not be expected to predict the coming of unpredictable typhoons.. Sisenando Barretto. No. p.000.. the board is the business manager of the corporation. appointed Maximo M. the board." (Fletcher on Corporations. Inc. not even the sum of P200. 1918 J. President Roxas expressed his desire "that the Board of Directors should reelect Hon. or otherwise obtain all accessories necessary for conducting such a business. duly organized under the laws of the Philippine Islands.00. Well may we profit from the following passage from Montelibano vs. Maximo M. on the basis of prices then prevailing.R. buy. at its regular meeting. and in 1913 and 1914. is a purely business and economic problem to be determined by the directors of the corporation. 1962: "They (the directors) hold such office charged with the duty to act for the corporation according to their best judgment. The bank did not release the loan. which. was approved by the bank's board of directors. 46 Kalaw's acts were not the result of haphazard decisions either.440. Without costs. J.00 loan. He exerted efforts to stave off losses. affirmed. That Kalaw cannot be tagged with crassa negligentia or as much as simple negligence. Kalaw turned to the President. at a time when the contracts had already been openly disputed. and not by the court. Whether the business of a corporation should be operated at a loss during a business depression. Kalaw as General Manager of the National Coconut Corporation. the time of the occurrences which gave rise to this lawsuit. 1948. In frustration. 1947. Kalaw invariably consulted with NACOCO's Chief Buyer.: The Orientalist Company is a corporation. G. And even as typhoons supervened Kalaw was not remissed in his duty. vs. May 18. President Roxas defended the actuations of Kalaw. at the same time. and RAMON J. Kalaw as acting general manager of the corporation. and solong as it acts in good faith its orders are not reviewable by the courts.think that one would sign (a) contract when you are going to lose money" and that no contract was executed "at a price unsafe for the Nacoco. 1947. as it is hereby. complained about the bank's shortsighted policy.000. In the end. on January 7. So ordered. RAMIREZ. 2. on December 12. STREET. and in so doing they cannot be controlled in the reasonable exercise and performance of such duty.

that the Orientalist Company should clothed J. transportation and other incidentals were to be at the cost of the purchaser. accepting the offer contained in the memorandum of July 4th for the exclusive agency of the Eclair films. J. had an informal conference with all the members of the company's board of directors except one. with the result that the only contracting parties in this . namely. if it desired to take advantage of said offer. France. would pay the manufacturer. J. Jose Ramirez. and as only about for the Orientalist Company to act on the matter speedily. There was added a clause in which J. in Manila. the "Eclair Films" and the "Milano Films. 1913. Fernandez to Jose Ramirez is in the following terms: We willingly accepted the officer under the terms communicated by your father in his letter dated at Paris on July 4th of the present year. being moved by the suggestions and representations of Vicente Ocampo. placed in the hands of Ramon J. as an individual. J. in which it will be noted the separate signature of R. manage of the Oriental Theater. The expenses of packing. The memorandum offer contained a statement of the price at which the films would be sold. and in the capacity of attorney-in-fact for the Orientalist Company. according to the tenor of the offer. dated July 4. was chiefly active in this matter. as representative of his father. By R. Accordingly. In the month of July. stating detail the terms upon which the plaintiff would undertake to supply from Paris the aforesaid films. addressed a letter to Jose Ramirez. Ramirez described his function in such transactions as that of a commission agent and stated that he would see to the prompt shipment of the films. A few days later. The defendant Ramon J. there engaged in the production or distribution of cinematographic material. Fernandez. R. Fernandez. FERNANDEZ. in Manila. on August 5. The idea behind the latter suggestion apparently was that the contract for the films would have to be made directly between the film-producing companies and the Orientalist Company. J. This idea was never given effect. and with approval of those with whom he had communicated. became apprised of the fact that the plaintiff in Paris had control of the agencies for two different marks of films. J. FERNANDEZ. Fernandez an offer. J. In this enterprise the plaintiff was represented in the city of Manila by his son. as agent of the plaintiff. on July 30. These communications were signed in the following form. the quantity which the representative of each was required to take and information concerning the manner and intervals of time for the respective shipments. 1913. in order to save time. for the purpose of placing the exclusive agency of these films in the hands of the Orientalist Company. and it seemed convenient. as he indicated in the officer of July 4 that he would do. Ramirez with full authority as its attorney-in-fact. What we consider to be the most portion of the two letters of acceptance written by R. This officer was declared to be good until the end of July. Near the end of July of the year aforesaid. and take care that the films were insured — his commission for such services being fixed at 5 per cent. likewise accepting the office of the exclusive agency for the Milano Films." and negotiations were begun with said officials of the Orientalist Company by Jose Ramirez. Both of these letters also contained a request that Jose Ramirez should at once telegraph to his father in Paris that his offer had been accepted by the Orientalist Company and instruct him to make a contract with the film companies. F. and so far as the record shows. certain of the directors of the Orientalist Company. one of the directors of the Orientalist Company and also its treasure. Ramirez himself procured the films upon his own responsibility. Fernandez. he addressed another letter couched in the same terms. Fernandez. Jose Ramirez. to the effect that the securing of the said films was necessary to the success of the corporation. is placed somewhat below and to the left of the signature of the Orientalist Company as singed by R. F. Ramon J. Treasurer. F. and was engaged in the business of marketing films for a manufacturer or manufacturers. in the capacity of treasurer: THE ORIENTALIST COMPANY.resident of the city of Paris.

the court. During the period between February 27.case are J. Hernandez. None of the drafts thus accepted were taken up by the drawee or by B. The action is not based upon the dishonored drafts which were accepted by B. Fernandez. Hernandez when they fell due. 1914. The amount realized from this sale was applied to the satisfaction of the plaintiff's claim and was accordingly delivered to him in part payment thereof. and it was finally necessary for the plaintiff himself to take them up as dishonored by non-payment. which was accepted by B. and all were accepted in the name of B. As the films which accompanied the dishonored were liable to deteriorate. based upon his personal signature to the same documents. as already . and they in fact never came into the actual possession of the Orientalist Company as owner at all. Thereupon this action was instituted by the plaintiff on May 19. In due time the films began to arrive in Manila. with interest from May 19. 1914. a draft for the cost and expenses incident to each shipment being attached to the proper bill of lading. In the discussion which is to follow we shall consider. In the judgment of the trial court the Orientalist Company was declared to be a principal debtor and Ramon J. 1913. The action. From this judgment both of the parties defendant appealed. and both of the letters mentioned are copied into the complaint as the foundation of the action. the question as to the liability of Ramon J. Hernandez in the name of the Orientalist Company. Fernandez. upon the Orientalist Company. have been introduced in evidence. Hernandez. the films which had been procured by he payment of said drafts were treated by him as his own property. upon application of the plaintiff. and apparently without opposition on the part of the defendants. As the drafts had thus been paid by B. In this Court neither of the parties appellant make any question with respect to the right of the plaintiff to recover from somebody the amount awarded by the lower court.93. in connection with the plaintiff's offer of July 4. with Ramon J. but each of the defendants insists the other is liable for the whole. as on former occasions.018. Hernandez individually. appointed a receiver who took charge of the films and sold them. F. 1914. It will be noted that the action is primarily founded upon the liability created by the letters dated July 30th and August 5. the date of the institution of the action. But if the latter is liable as principal obligor for the whole or any part of the debt. As to the liability of the corporation a preliminary point of importance arises upon the pleadings. 1913. and Ramon J. this was evidently done for the purpose of proving the amount of damages which the plaintiff was entitled to recover. It appears that the Orientalist Company was without funds to meet these obligations and the first few drafts were dealt with in the following manner: The drafts. it will be necessary to modify the judgment in order to adjust the rights of the defendants in accordance with such finding. first. Fernandez was declared to be liable subsidiarily as guarantor. It is stated in the brief of the appellant Ramon J. Hernandez individually. namely P6. Fernandez would be academic. and the Orientalist Company. which was accepted by B. and it is these shipments which have given occasion for the present action. 1914. upon presented through the bank. except the last. and April 30. Fernandez of the other. were accepted in the name of the Orientalist Company by its president B. there arrived in the city of Manila several remittances of films from Paris. and although these drafts. Fernandez and the statement is not challenged by the Orientalist Company that the judgment has already been executed as against the company is exclusively and primarily liable the entire indebtedness. secondly the question of the liability of Ramon J. though it is true Hernandez rented the films to the Orientalist Company and they were exhibited by it in the Oriental Theater under an arrangement which was made between him and the theater's manager. against the Orientalist Company. and were taken up by the latter with his own funds. as well as the last draft. All of the drafts accompanying these films were drawn. and. 1913. the question of the liability of the corporation upon the contracts contained in the letters of July 30 and August 5. It results that the real contention upon this appeal is between the two defendants. Hernandez. At trial judgment was given for the balance due to the plaintiff. Ramirez of the one part.

Rep. Upon this we observe that the statute manifestly refers to the legal effect of the signature. Quit facit per aliam facit per se. Tappan (2 Colo. the authority of the agent need not be. In the case of Merchant vs. 314).. tending to show that Ramon J. No sworn answer denying the genuineness and due execution of the contracts in question or questioning the authority of Ramon J. The bank was sued upon this guaranty and at the hearing attempted to prove that Brown had no authority to bind the bank by such contract. is based upon documents purporting to be signed by the Orientalist Company. or whether such failure should be considered a mere irregularity of procedure which was waived when the evidence referred to was admitted without objection from the plaintiff. Said Justice Willard: "The failure of the defendant to deny the genuineness and due execution of this guaranty under oath was an admission not only of the signature of Brown. Therefore.. the genuineness and due execution of the instrument shall be deemed admitted. and that this admission extended not only to the authenticity of the signature of Brown but also to his authority. Said section. and copies of the documents are set out in the complaint. Fernandez to bind the Orientalist Company was filed in this case. The rule thus stated is in entire accord with the doctrine prevailing in the United States. International Banking Corporation. reads as follows: When an action is brought upon a written instrument and the complaint contains or has annexed or has annexed a copy of such instrument.stated. This evidence consisted of extracts from the minutes of the proceedings of the company's board of directors and also of extracts from the minutes of the proceedings of the company's stockholders. The name of the company had been affixed to the obligation by an agent. if the principal would deny the authority of the agent. unless specifically denied under oath in the answer. it is as much as the signature of the principal as if written with his own hand. and when the name is signed by one thereunto authorized. in a bond. The proper solution of this problem makes it necessary to consider carefully the principle underlying the provision above quoted. That the situation was one in which an answer under oath denying the authority of the agent should have been interposed. and no sufficient affidavit was filed by the corporation questioning its signature or the authority of the agent to bind the company. supposing that the company desired to contest this point. in order to put the obligee to proof of the fact. it appeared that one Brown has signed the name of the defendant bank as guarantor of a promissory note. the bank had admitted the genuineness and due execution thereof. It was held that the plaintiff did not have to prove the due execution of the bond and that the corporation as to be taken as admitting the authority of the agent to make the signature. It therefore becomes necessary for us to consider whether the administration resulting from the failure of the defendant company to deny the execution of the contracts under oath is binding upon it for all purposes of this lawsuit. If the name of the obligor. is not open to question. among other authorities: The case of Barrett Mining Co. 124) was an action against a mining corporation upon an appeal bond. but evidence was admitted without objection from the plaintiff. Among other things the court said: "But it is said that the authority of Barrett to execute the bond is distinguishable from the signing and. as . to deny the due execution of said contracts under oath. although the signature must be denied under oath. the effect is the same as if his name should be signed with his own hand. It was held that buy failing to deny the contract under oath. in the part pertinent to the situation now under consideration. It was therefore incumbent upon the corporation. as will be seen by reference to the following. vs. and by his direction. Fernandez had no such authority. as prescribed in section 103 of the Code of Civil procedure. if it desired to question the authority of Fernandez to bind it. rather than the manual act of singing. but also his authority to make the contract in behalf of the defendant and of the power the contract in behalf of the defendant and of the power of the defendant to enter into such a contract. (6 Phil. and under such circumstances we do not doubt that the obligor must deny his signature under oath. showing that the making of this contract had been under consideration in both bodies and that the authority to make the same had been withheld by the stockholders. is subscribed by one in his presence.

. says the same author: A corporation can not avail itself of the defense that it had no power to enter into the obligation to enforce which the suit is brought. California Code of Civil Procedure.) In Simon vs. and the onus is then on the plaintiff to overcome the plea.. vol...) Again. and upon which they are sued. and if it be found that the directors had permitted the agent to exercise that authority and thereby held him out as a person competent to bind . Eureka Flour Mills Co. (Opus citat.) The reason for the rule enunciated in the foregoing authorities will. it was said: Though the power of the officers of a business corporation to issue negotiable paper in its name is not presumed. sec. 216). (Songco vs. any such lack of authority in him. 1st ed. 254. be readily appreciated. 37 Phil.the validity of the signature is thereby directly attacked. the defendant can not afterwards object that the plaintiff has not shown that the officer executing the note were empowered to do so. 7631. as a special defense. it must plead non est factum. If a man is found acting for a corporation with the external indicia of authority. Consumers' Coal Co. even though the answer is under oath. contained in section 103. let them say so upon oath. requiring the defendant to deny on oath an instrument of writing.. (Merill vs. may usually rely upon those appearances. was not authorized to make it. But is should not here escape observation that section 103 also requires — in denial contemplated in that section shall be specific. upon which he is sued. any person. that the answer setting up such defense should be verified by oath. and it has been held that where the answer in a suit against a corporation on its note relies simply on the want of power of the corporation to issue notes. (Thompson on Corporations. B. the plea in this case should have been verified. 1. If the person who signed this note for the company. had in the particular instance exceeded that authority. sec. the denial must be under oath. 6 Cal. This principle applies equally where the defendant intends to challenge the power of its officer or agent to execute in its behalf the contract upon which the action brought and where it intends to defend on the ground of total want of power in the corporation to make such a contract. 65). This question arises from the circumstance that the answer of the corporation does not in any was challenge the authority of Ramon J. In dealing with corporations the public at large is bound to rely to a large extent upon outward appearances.) There is really a broader question here involved than that which relates merely to the formality of verifying the answer with an affidavit. 447. Calfee (80 Ark. Sellner. An attack on the instrument in general terms is insufficient. In Union Dry Company vs. Reid (26 Ga. if it desires to set up the defense that the contract was executed by one not authorized as its agent.) In the first edition of a well-known treatise on the laws of corporations we find the following proposition: If an action is brought against a corporation upon a contract alleged to be its contract. Upon well-established principles of pleading lack of authority in an officer of a corporation to bind it by a contract executed by him in its name is a defense which should be specially pleaded — and this quite apart from the requirement.. we think. not having notice of want of authority. and it is not by any means peculiar to the laws of California. (Smith vs. (Secs. an action was brought upon a promissory note purporting to have been given by on A. though it appears to have been taken immediately from the statutes of that State. The rule has been applied where the question was whether corporate officer.. 6. Fernandez to bind it by the contracts in question and does not set forth.Y. Rep. such corporation can not avail itself of a want of power in its officers to bind it unless the defense was made on such ground. Said the court: "Under the Judiciary Act of 1799.. having admitted power to make a contract. 448. as the treasurer of the defendant company. 107).. 114 N. unless it pleads that defense." It should be noted that the provision contained in section 103 of our Code of Civil Procedure is embodied in some form or other in the statutes of probably all of the American States. 7619.

but at the trial evidence was submitted . and all proof submitted by him contrary thereto or inconsistent therewith should simply be ignored by the court. considered as a matter of mere pleading. We are of the opinion that the failure of the defendant corporation to make any issue in its answer with regard to the authority of Ramon J. Crowley.the corporation. we would either exercise that authority or remand the cause for a new trial in court below. however. under section 109 of the Code of Civil Procedure. And judgment must be in conformity with the case made in conformity with the case made in the pleadings and established by the proof. have the effect of elimination the question of his authority from the case. 103) plainly says that if a written instrument. has authority even now to permit the answer of the defendant to be amended. It is familiar doctrine that an admission made in a pleading can not be controverted by the party making such admission. so long as the pleadings remain that form. 628). the corporation will be bound. Of course this Court. recognizes the necessity for an amendment of the pleadings. alleged to have been killed by the negligence of the defendant. and the proof of it usually is not readily accessible to the stranger who deals with the corporation on the faith of the ostensible authority exercised by some of the corporate officers. The execution of the release was not denied under oath. It is true that it is declared in section 109 of the Code of Civil Procedure that immaterial variances between the allegations of a pleading and the proof shall be disregarded and the facts shall be found according to the evidence. The statute (sec.. that the corporation should be required. we think that the interests of justice will best be promoted by deciding the case. the foundation of the suit. and where the statute says that the due execution of a document which supplies the foundation of an action is to be taken as admitted unless denied under oath. in a case where an officer of a corporation has made a contract in its name. however. or had acquiesced in a contract and retained the benefit supposed to have been conferred by it. without more ado. Whether a particular officer actually possesses the authority which he assumes to exercise is frequently known to very few. it shall be deemed to be admitted. These documents supply the materials which the court must use in order to discover the points of contention between the parties. should be considered to have less effect than any other admission. and in its answer inserted a copy of the release. That we may not appear to have overlooked the matter. created by the express words of the statute. Railroad Co. The parties to an action are required to submit their respective contentions to the court in their complaint and answer. In the earlier of these cases. is not denied upon oath. We can see no reason why a constructive admission. the circumstance that it was not denied under oath is immaterial. and applies equality to the defendants special defense as to the plaintiffs cause of action. The public is not supposed nor required to know the transactions which happen around the table where the corporate board of directors or the stockholders are from time to time convoked. and if we believed that the interests of justice so required. As will appear further on in this opinion. if it denies his authority. and he is given an opportunity to adduce evidence showing either that the authority existed or that the contract was ratified and approved. The same section. vs. we will observe that two cases are cited from California in which the Supreme Court of the State has held that where a release is pleaded by way of defense and evidence tending to destroy its effect is introduced without objection. and particularly its failure to deny specifically under oath the genuineness and due execution of the contracts sued upon. notwithstanding the actual authority may never have been granted. Fernandez to bind it. the failure of the defendant to make such denial must be taken to operate as a conclusive admission. This rule of course operates with like effect upon both parties. By this means the plaintiff is apprised of the fact that the agent's authority is contested. and relief can not be granted that is substantially inconsistent with either. The defendant company pleaded by way of defense a release purporting to be signed by the plaintiff. an action was brought against a railroad company to recover damages for the death of the plaintiff's minor son. to state such defense in its answer. whether objection is interposed by the opposite party or not. upon the issues presented in the record as it now stands. A party can no more succeed upon a case proved but not alleged than upon a case alleged but nor proved. (60 Cal. It is therefore reasonable.

Like the defenses of fraud. imbecility. due to his drunken condition. Moore vs. It is declared by signing its name to the letters in question. like an individual. for the board can create liability. it was a matter which could be proved under the general issue and did not have to be set up in a sworn reply. Copp. as treasurer. the reasoning of the court is in our opinion unconvincing. 433. We shall now consider the liability of the defendant company on the merits just as if that liability had been properly put in issue by a specific answer under oath denying the authority of Fernandez go to bind it. The defendant company set up by way of defense that is secretary had no authority to bind it by such an engagement.. The fact that the power to make corporate contract is thus vested in the board of directors does not signify that a formal vote of the board must always be taken before contractual liability can be fixed upon a corporation. and of the acquiescence of the board charged with the duty of supervising and controlling the company's business. but this has reference rather to the formality of reducing to proper form the contract which are authorized by the board and is not intended to confer an independent power to make contract binding on the corporation.. it was proper for the court to consider it. (Cf. Columbia Rice Packing Co. 429. and it shall be his duty. to sign contract. that on July 30. the contract was binding. especially as the issue had been passed upon by a jury. vs. and mistake. so far as the authority of the secretary was concerned. in the case now before us. by proof of the usage which the company had permitted to grow up in business. as appears from the minutes. It may be established sometimes without reference to official record of the proceedings of the board. coercion. who had already signified their consent to the making of the contract. There were present the four members. 432. Fernandez. had no independent authority to bind the company by signing its name to the letters in question. . be given of the case of Clark vs. It was held that inasmuch as this evidence had been submitted by the plaintiff without objection. but we believe that the decision would have been more soundly planted if it had been said that the incapacity of the plaintiff. Fernandez at the request of the latter. Upon this question it must at the outset be premised that Ramon J. was a matter which did not involve either the genuineness or due execution of the release. It is declared in section 28 of the Corporation Law that corporate power shall be exercised. the date upon which the letter accepting the offer of the Eclair films was dispatched the board of directors of the Orientalist Company convened in special session in the office of Ramon J. The court found that the guaranty was given with the knowledge and consent of the president and directors. the court quoted with approval the following language form one of its prior decisions: The authority of the subordinate agent of a corporation often depends upon the course of dealings which the company or its director have sanctioned. We do not question the propriety of that decision. and that this consent of the president and directors. If there appeared that the secretary of the defendant corporation had signed an obligation on its behalf binding it as guarantor of the performance of an important contract upon which the name of another corporation appeared as principal. but at the suggestion of Fernandez it was decided to call a special meeting of the stockholders to consider the matter and definite action was postponed. 119 Cal. Fernandez informed the board of the offer which had been received from the plaintiff with reference to the importation of films. 194) is instructive. It appears in evidence. Child in which the rule declared in the earlier case was followed. including the president.) A somewhat similar explanation can. by other means than by a formal expression of its will. In discussing this point. we think. The minutes add that terms of this offer were approved. In this connection the case of Robert Gair Co.on behalf of the plaintiff tending to show that at the time he signed the release. and this principle is recognized in the by-laws of the corporation in question which contain a provision declaring that the power to make contracts shall be vested in the board of directors. With respect to both decisions which we merely observe that upon point of procedure which they are supposed to maintain. It was held that. and all corporate business conducted by the board of directors. At this meeting. It is true that it is also declared in the same by-laws that the president shall have the power. and that this consent was given with as much observance of formality as was customary in the transaction of the business of the company. he was incompetent by reason of drunkenness to bind himself thereby. (124 La.

Monroy. as the letter accepting the offer had been sent with their knowledge and consent. though indirect. The following extracts from the minutes of this meeting are here pertinent: Mr. upon which occasion Fernandez informed those present of the offer in question and of the terms upon which the films could be procured. inasmuch as the first shipment of films was then expected to arrive. the stockholders adopted a resolution to the effect that the agencies of the Eclair and Milano films should be accepted. In view of this circumstance. The possibility that the corporation might not see fit to authorize the contract. and we will here assume that in the end the contract were not approved by the stockholders. inasmuch as the corporation is lacking available funds for the purpose. but the bank declined to grant his credit. At the same time he informed the said stockholders that he had already made arrangements with respect to renting said films after they have been once exhibited in the Cine Oriental. just as it would have utilized the credit of the bank if such credit had been extended. Hernandez. Thereafter another special meeting of the shareholders of the defendant corporation was called at which the failure of their committee to obtain a credit from the bank was made known. and in such contingency the stockholders were informed.The stockholders meeting was convoked upon September 18. but that. and also because there are 88 shares of stock remaining still unsold. and Papa an amount equal to 10 per cent of their outlay in importing the films. Fernandez informed the stockholders that. 1913. big gains would be obtained through such a step. The evidence shows that an attempt was made. We believe it is a fair inference from the recitals of the minutes of the stockholders meeting of September 18. and that the corporation could very well meet the expenditure involved and net a certain profit. He estimated that the company would have to make an outlay of about P5. said payment to be made in shares of said corporation. Certainly four members of the board of directors there present were aware of this fact. that the corporation is bound. and shall be entitled only to a compensation of 10 per cent of their outlay in importing the films. that this body was then cognizant that the officer had already been accepted in the name of the Orientalist Company and that the films which were then expected to arrive were being imported by virtue of such acceptance. in view of the urgency of the matter and for the purpose of avoiding that other importers should get ahead of the corporation in this regard. It is not however. and especially from the first paragraph above quoted.000 from the Bank of the Philippine Islands for the purpose indicated. on behalf of the corporation.500 per month. Monroy. . and Dr. Fernandez. approval of the contract. or might for lack of funds be unable to make the necessary outlay. A resolution was thereupon passed to the effect that the company should pay to Hernandez. that the four gentlemen above mentioned (Hernandez. if we could enter into a contract with about nine cinematographs. a certain doubt arises whether they meant to utilize the financial assistance of the four so-called importers in order that the corporation might bet the benefit of the contract for the films. if the offer for the two films should be accepted by it. said payment to be made in shares of the company in accordance with the suggestion made at the previous meeting. he and Messrs. and to this end appointed a committee to apply to the bank for a credit." In view of this statement. made to the corporation by the film manufacturers ofEclair and Milano of Paris and Italy respectively. Fernandez. At the time this meeting was held three shipment of the films had already been received in Manila. Papa met for the purpose of considering the acceptance of the offer together with the responsibilities attached thereto. and Papa) "would continue importing said films at their own account and risk. was foreseen. Leon Monroy. if the corporation could obtain the money with which to meet the expenditure involved. to obtain a credit of P10. B. necessary to found the judgment on this interpretation of the stockholders proceedings. inasmuch as we think for reasons presently to be stated. If such was the intention of the stockholders their action amounted to a virtual.

The negotiations were conducted by him with the knowledge and consent of other members of the board. and the contract was made with their prior approval. The corporation. (6) Not to deliver any film for rent without first receiving the rental therefor or the guaranty for the payment thereof. It results that where a meeting of the stockholders is called for the purpose of passing on the propriety of making a corporate contract. said board adopted a resolution conferring the following among other powers on Vicente Ocampo. and reverting to the proceedings of the board of directors of the Orientalist Company.It will be observed that Ramon J. called directors. it must be remembered. The theory of a corporation is that the stockholders may have all the profits but shall turn over the complete management of the enterprise to their representatives and agents. the manager of the Oriental theater. (Cook on Corporations. Particularly suggestive is the direction given at this meeting for the publication of announcements in the newspapers to the effect that the company was engaged in importing films. (5) To advertise in the different newspapers that we are importing films to be exhibited in the Cine Oriental. namely: (1) To rent a box for the films in the "Kneeler Building. Accordingly. (10) Upon the motion of Mr. we find that upon October 27. The functions of the stockholders of a corporation are.) This conclusion is entirely accordant with the provisions of section 28 of our Corporation Law already referred to. Both upon principle and authority it is clear that the action of the stockholders. before the financial inability of the corporation to proceed with the project was revealed. 709. it was decided to give ample powers to the Hon. and we would be sorry to announce a doctrine which would permit the property of a man in the city of Paris to be whisked out of his hands and carried into a remote quarter of the earth without recourse against the corporations whose name and authority had been used in the manner disclosed in this case. for a moment. It thus appears that the board of directors. the transactions of the stockholders. had already recognized the contract as being in existence and had proceeded to take the steps necessary to utilize the films. making by-laws. its resolutions are at most advisory and not in any wise binding on the board. Ocampo. 708. R. Naturally he can have little or no information as to what occurs in corporate meetings. (7) To buy a book and cards for indexing the names of the films. must be ignored. Fernandez was the particular officer and member of the board of directors who was most active in the effort to secure the films for the corporation. Acuña to enter into agreements with cinematograph proprietors in the provinces for the purpose of renting films from us. In passing upon the liability of a corporation in cases of this kind it is always well to keep in mind the situation as it presents itself to the third party with whom the contract is made. as well as rubber stencil with which the name of the corporation could be signed to documents bearing its name. In the light of all the circumstances of the case. secs. Ignoring now. to be absent for many months." (4) To be in charge of the films and of the renting of the same. As appears from the papers in this record. is represented by the former and not by the latter. in such matters.. Fernandez was the person to who keeping was confided the printed stationery bearing the official style of the corporation. of a limited nature. whatever its character. The integrity of commercial transactions can only be maintained by holding the corporation strictly to the liability fixed upon it by its agents in accordance with law. sixth ed. after Fernandez had departed from the Philippine Islands. In conformity with this idea it is settled that contract between a corporation and third person must be made by the director and not by the stockholders. As already observed. it is familiar doctrine that if a corporation knowingly . and he must necessarily rely upon the external manifestations of corporate consent. we are of the opinion that the contracts in question were thus inferentially approved by the company's board of directors and that the company is bound unless the subsequent failure of the stockholders to approve said contracts had the effect of abrogating the liability thus created. 1913. there is little for the stockholders to do beyond electing directors. and exercising certain other special powers defined bylaw.

and where it is said "if the corporation permits" this means the same as "if the thing is permitted by the directing power of the corporation. not the approval of the contract. the signature of Fernandez. to be sure. a certain difference between these witnesses as to the nature of this guaranty. We are not unmindful of the force of that rule of law which declares that oral evidence is admissible to show the character in which the signature was affixed. but is set off to the left of the company's signature and somewhat who sign contracts in some capacity other than that of principal obligor to place their signature alone would justify a court in holding that Fernandez here took upon himself the responsibility of a guarantor rather than that of a principal obligor. But the conclusion reached is. while Ramirez says that the name was put on the contract for the purpose of guaranteeing. with costs equally against the two appellant. There is. which declares that if the words of a contract should appear contrary to the evident intention of the parties. It should be stated in conclusion that as the issues in this case have been framed. inasmuch as Fernandez would have us believe that his name was signed as a guaranty that the contract would be approved by the corporation. As appears upon the face of the contracts. Whether they may be bound to hold the company harmless is a matter upon which we express no opinion. J. So ordered. but its performance. . and thus hold him out to the public as possessing power to do those acts. This conclusion is perhaps supported by the language of the second paragraph of article 1281 of the Civil Code. The question here is whether Fernandez is liable jointly with the Orientalists Company as a principal obligor. We do. We are convinced that the latter was the real intention of the contracting parties. that the form in which the contract is signed raises a doubt as to what the real intention was. is not in line with the signature of the Orientalist Company. in his individual capacity. the intention shall prevail." It being determined that the corporation is bound by the contract in question. or any other agent. Ramirez? No contentious issue is raised directly between the defendants. in affixing his personal signature to said contract. The judgment appealed from is affirmed. we think. In this connection it is entirely clear. in looking to the evidence to discover that intention. or whether his liability is that of a guarantor merely. be estopped from denying his authority. the Orientalist Company and Ramon H. Fernandez. Fernandez. think. deducible from the general principle that in case of ambiguity parol evidence is admissible to show the intention of the contracting parties. to do acts within the scope of an apparent authority. F. the only question presented to this court is: To what extent are the signatory parties to the contract liable to the plaintiff J. that the responsibility of the latter was intended to be that of guarantor. nor does the present the present action involve any question as to the undertaking of Fernandez and his three associates to effect the importation of the films upon their own account and risk. and we feel justified. from the testimony of both Ramirez and Ramon J. however.permits one of its officer. Fernandez. the corporation will as against any one who has in good faith dealt with the corporation through such agent. it remains to consider the character of the liability assumed by R.

Their request was granted in a special meeting held on September 1. Inc. PUNO. Marissa Pascual and Allan Pimentel.: The controversy at bench arose from a complaint filed by private respondents. viz: (1) the sale of assets of the company to pay for its obligations. No.00 as Gratuity Fund covering the period from 1950 up to 1980. Lopez. resolving to set aside. 1 namely. AND ASUNCION LOPEZ GONZALES. 1995 LOPEZ REALTY.750. AND THE NATIONAL LABOR RELATIONS COMMISSION. Series of 1980. setting aside the amount of P157. ET AL. Marcial Mamaril. Lopez Rosendo de Leon Benjamin Bernardino Leo Rivera 7831 7830 7830 4 1 1 shares shares shares shares share share petitioner corporation among its three (3) main shareholders. Meanwhile..R. J. private respondents requested for the full payment of their gratuity pay. Benjamin Bernardino.Series of 1980. passed by the stockholders in a special meeting held on September 8. convened a special meeting and passed a resolution which reads: Resolved. 6. on July 28. namely: Rosendo de Leon. twice a year. INC. 1981. (2) the transfer of certain assets of the company to its three (3) main shareholders. as it is hereby resolved that the gratuity (pay) of the employees be given as follows: (a) Those who will be laid off be given the full amount of gratuity. petitioners. the rest of the shareholders also sit as members of the Board of Directors. Florentina Fontecha. 1981. 1982. In a letter. for alleged non-payment of their gratuity pay and other benefits. Mila Refuerzo. The proposal was deliberated upon and approved in a special meeting of the board of directors held on April 17. Asuncion Lopez Gonzales. portion of the minutes of the said board meeting reads: Except for Arturo F.. 10. Edward Mamaril. while petitioner Asuncion Lopez Gonzales is one of its majority shareholders. As found by the Labor arbiter. Perfecto Bautista. FLORENTINA FONTECHA. respondents. the remaining members of the Board of Directors. 76801 August 11. against their employer Lopez Realty Incorporated (petitioner) and its majority stockholder. 2-217682.. Arturo Lopez submitted a proposal relative to the distribution of certain assets of . and (b) Resolution No. and Leo Rivera. (b) Those who will be retained will receive 25% of their gratuity (pay) due on September 1. 2 The case was docketed as NLRC-NCR Case No. The proposal had three (3) aspects. and 50% to be retained by the office in the meantime. Her interest in the company vis-a-vis the other shareholders is as follows: 1 2 3 4 5 6 Asuncion Lopez Gonzales Teresita Lopez Marquez Arturo F.G. and another 25% on January 1. It appears that petitioner corporation approved two (2) resolutions providing for the gratuity pay of its employees. a certain sum of money for the gratuity pay of itsretiring employees and to create a Gratuity Fund for the said contingency. except for Asuncion Lopez Gonzales who was then abroad. The relevant. Lopez Realty. vs. dated August 31. 1980. and (3) the reduction of employees with provision for their gratuity pay. board member and majority stockholder Teresita Lopez Marquez died. 1981. 1981. while some other assets shall remain with the company. viz: (a) Resolution No. 3 sometime in 1978. is a corporation engaged in real estate business. 1981. On August 17. 1978. (emphasis supplied) Private respondents were the retained employees of petitioner corporation.

particularly. dated September 8. . 1980. and Resolution No. 1981. 1981 Board Resolutions during the Annual Stockholders' Meeting held on March 1. while she was still out of the country. Arturo F. Petitioners further insisted that the payment of the gratuity to some of the private respondents was a mere "mistake" on the part of petitioner corporation since. dated October 6. The records show that the stockholders did not revoke nor nullify these resolutions granting gratuities to complainants. Additionally. . Notwithstanding the "corporate squabble" between petitioner Asuncion Lopez Gonzales and Arturo Lopez. For some reason. 1981 and September 1. 4 On July 23. objecting to certain matters taken up by the board in her absence. time. said gratuity pay should be given only upon the employees' retirement. . Labor Arbiter Raymundo R. however. Edward Mamaril. . " . the proposed distribution of assets (Exh. 6." (Emphasis supplied) Let us be reminded. Valenzuela rendered judgment in favor of private respondents. 1981 of their respective gratuity. At that. it was also decided that. such as the sale of some of the assets of the corporation. she sent a cablegram to the corporation. 1982. all those remaining employees will receive another 25% (of their gratuity) on or before October 15. Lopez. Mila Refuerzo.In view of the request of the employees contained in the letter dated August 31. 10. This disproves respondents' argument allowing gratuities upon retirement of employees. Marcial Mamaril and Perfecto Bautista were paid by petitioner corporation. Allegedly. which were not approved in the annual stockholders meeting had no force and effect. she flied a derivative suit with the Securities and Exchange Commission (SEC) against majority shareholder Arturo F. 1980. (wherein) an employee who desires to resign from the LRI will be given the gratuity pay he or she earned. Upon her return. too. . 1984. The appeal focused on the alleged non-ratification and non-approval of the assailed August 17. deserves scant consideration. were precluded to (sic) receive gratuity because the said resolutions referred to only retiring employee could not be given credence. the first two (2) installments of the gratuity pay of private respondents Florentina Fontecha. that the complainants' resignation was not voluntary but it was pressurized (sic) due to "power struggle" which was evident between Arturo Lopez and Asuncion Gonzales. pursuant to Resolution No. public respondent. 1981 and another 25% on or before the end of November. 5 Petitioners appealed the adverse ruling of the Labor arbiter to public respondent National Labor Relations Commission. it appears that the said resolutions arose from the legitimate creation of the Board of Directors who steered the corporate affairs of the corporation. On November 20. Likewise. Mila E. Also. A reading of Resolutions dated 17 August 1981 and 1 September 1981 disclosed that there were periods mentioned for the payment of complainants' gratuities. Mila Refuerzo. . 1985. the two (2) resolutions dated 17 August 1981 and 1 September 1981 . Marissa S. Pascual and Edward Mamaril. the first. Marcial Mamaril and Perfecto Bautista). 1982. . said vouchers were cancelled by petitioner Asuncion Lopez Gonzales. the pertinent portion of which states: 6 We cannot agree with the contention of respondents (petitioners') that the Labor Arbiter a quocommitted abuse of discretion in his decision. Lopez also made mention of gratuity pay. Marissa Pascual and Allan Pimentel. Respondents' (petitioners') contention that. C-1) filed by Mr. Refuerzo. petitioner Asuncion Lopez Gonzales was still abroad. through its Second Division. dismissed the appeal for lack of merit. On record. were prepared but cancelled by petitioner Asuncion Lopez Gonzales. petitioner corporation had prepared the cash vouchers and checks for the third installments of gratuity pay of said private respondents (Florentina Fontecha. Despite private respondents' repeated demands for their gratuity pay. second and third installments of gratuity pay of the rest of private respondents. Respondents' (petitioners') allegation that the three (3) complainants. . who had resigned after filing the complaint on February 8. corporation refused to pay the same.

1986 (sic). be raised for the first time on appeal. 1981. in NLRCNCR-2-2176-82. petitioners never raised the issue of lack of notice to Asuncion Lopez Gonzales. we note that petitioners allegation on lack of notice to petitioner Asuncion Lopez Gonzales was raised for the first time in the in their motion for reconsideration filed before public respondent National Labor Relations Commission. 10 The sole issue is whether or not public respondent acted with grave abuse of discretion in holding that private respondents are entitled to receive their gratuity pay under the assailed board resolutions dated August 17. 1981. hence. 1951 and September 1. in a subsequent special board meeting held on September 29. We affirm. let the appealed decision be. 1981 and September 1. had deprived them the opportunity to present evidence that. the Commission finds no cogent reason to disturb the appealed decision. 7 In their motion for reconsideration. They also insist that the gratuity pay must be given only to the retiring employees. other than those it specified at the labor arbiter level. that petitioner Asuncion Lopez Gonzales was not notified of the special board meetings held on said dates. It is well settled that questions not raised in the lower courts cannot. On September 4. 11 private respondents maintain that the new ground of lack of notice was not raised before the labor arbiter. To stress. At the outset. the motion was denied by public respondent in a Minute Resolution dated November 19. petitioners assailed the validity of the board resolutions passed on August 17. are ultra vires on the ground that petitioner Asuncion Lopez Gonzales was not duly notified of the said special meetings. Petitioners reconsidered. The appeal dealt with (a) the failure of the stockholders to ratify the assailed resolutions and (b) the alleged "mistake" committed by petitioner corporation in giving the gratuity pay to some of its employees who are yet to retire from employment. Again. including petitioner Asuncion Lopez Gonzales. further. Petitioners contend that the board resolutions passed on August 17. to the exclusion of the retained employees or those who voluntarily resigned from their posts. the petition. as it is hereby. was unanimously approved by the board of directors of petitioner corporation. petitioners may not invoke any other ground. With regard to the award of service incentive leave and others. . 8 Hence. (has) no legal leg to stand on. dated November 20. In their comment. respectively.The respondents' (petitioners') contention of a mistake to have been committed in granting the first two (2) installments of gratuities to complainants Perfecto Bautista. 1981 and September 1. granting gratuity pay to their retained employees. 9 enjoining public respondent from enforcing or executing the Resolution. 1986. They aver. and claimed. 1986. Florentina Fontecha. Private respondents claim. SO ORDERED. it would be offensive to the basic rules of fair play and justice to allow petitioners to raise questions which have not been passed upon by the labor arbiter and the public respondent NLRC. 1986. AFFIRMED and let the instant appeal (be) dismissed for lack of merit. 1981. we issued a Temporary Restraining Order. petitioners are barred from raising the same on appeal. for the first time. that said board resolutions were not ratified by the stockholders of the corporation pursuant to Section 28 1/2 of the Corporation Law (Section 40 of the Corporation Code). The record is bereft of any evidence that the Board of Directors had passed a resolution nor is there any minutes of whatever nature proving mistakes in the award of damages (sic). The motion for reconsideration was denied by the Second Division on July 24. 1981. 12 Indeed. or after said public respondent had affirmed the decision of the labor arbiter. that such failure on the part of petitioners. 1981. As prayed for. further. Marcial Mamaril and Mila Refuerzo. in their appeal before the NLRC. the subject resolution dated September 1. WHEREFORE. petitioners filed another motion for reconsideration. to impugn the validity of the subject resolutions. 13 Hence.

by the corporation's subsequent course of conduct. 1981. Fletcher. Supp. that there was no notice given to Asuncion Lopez Gonzalez during the special meetings held on August 17. or by the corporations course of conduct . 1981. but it is not necessary. which was illegal for lack of notice. 1981 and September 1. to show a meeting and formal action by the board of directors in order to establish a ratification. any action taken therein may be questioned by any objecting director or shareholder. should act in the manner and within the formalities. that the conduct of petitioners after the passage of resolutions dated August. Such ratification may be express or may be inferred from silence and inaction. Cyclopedia of the Law of Private Corporations (Perm. 20 . Marcial Mamaril and Perfecto Bautista. . 1951 and September 1. by the action of the directors in subsequent legal meeting. both dated October 15. "ultra vires" act refers to one which is not within the corporate powers conferred by the Corporation Code or articles of incorporation or not necessary or incidental in the exercise of the powers so conferred. 19 The assailed resolutions before us cover a subject which concerns the benefit and welfare of the company's employees. 429. Ratification may be effected by a resolution or vote of the board of directors expressly ratifying previous acts either of corporate officers or agents. In the case at bench. 14 Thus. in one case.. they paid the gratuity pay. Mila Refuerzo. 1981. Despite the alleged lack of notice to petitioner Asuncion Lopez Gonzales at that time the assailed resolutions were passed. it is erroneous to state that the resolutions passed by the board during the said meetings were ultra vires. As pointed out by private respondents. supra. and September 1. the unauthorized acts of an officer of a corporation may be ratified by the corporation by conduct implying approval and adoption of the act in question.. 18 We hold.N. providing gratuity pay for its employees is one of the express powers of the corporation under the Corporation Code. 1964). 606. the court stated: Moreover. arguendo. or it may be implied from adoption of the act... Assuming. 17 it was held: . More importantly. Dakota Tractor and Equipment Co. hence. jurisprudence 16 tells us that an action of the board of directors during a meeting. directors must act as a body in a meeting called pursuant to the law or the corporation's by-laws. Instead. 234 F. it was established that petitioner corporation did not issue any resolution revoking nor nullifying the board resolutions granting gratuity pay to private respondents. Ed. of private respondents Florentina Fontecha. In 2 Fletcher. 81-10-510 and 81-10-506. we can glean from the records that she was aware of the corporation's obligation under the said resolutions. 1981.We now come to petitioners' argument that the resolutions passed by the board of directors during the special meetings on August 1. 611 (D. 17. otherwise. the first two (2) installments thereof. petitioner Asuncion Lopez Gonzales affixed her signature on Cash Voucher Nos. In American Casualty Co. if any. may be ratified either expressly. . To stress. ordinarily. 15 Be that as it may.D. acts of directors at a meeting which was illegal because of want of notice may be ratified by the directors at a subsequent legal meeting. therefore. 762. prescribed by its charter or by the general law. In legal parlance. through its board of directors. it is stated: Thus. she acquiesced thereto. particularly. further states in sec. at page 1073-1074: Ratification by directors may be by an express resolution or vote to that effect. had estopped them from assailing the validity of said board resolutions. were ultra vires for lack of notice. Thus. acceptance or acquiescence.) sec. 1981. v. evidencing the 2nd installment of the gratuity pay of private respondents Mila Refuerzo and Florentina Fontecha. at page 290. petitioners cannot invoke the doctrine of ultra vires to avoid any liability arising from the issuance the subject resolutions. The general rule is that a corporation. or impliedly.

November. 4 both registered in the name of IDP. with an area of 49. petitioners cite section 28 1/2 of the Corporation Law (Section 40 of the Corporation Code). including its goodwill. in the same year. Quezon City. 1982. was covered by two titles: Transfer Certificate of Title Nos. RT-26520 (176616) 3 and RT-26521 (170567). that is. To strengthen their position. 1981. MANUEL F. COURT OF APPEALS and IGLESIA NI CRISTO. the Board of Trustees of the IDP was composed of the following per Article 6 of its Articles of Incorporation: Senator Mamintal Tamano 5 Congressman Ali Dimaporo . It appears that in 1971. and January 1. for short) and the Islamic Directorate of the Philippines. are precluded from receiving their gratuity pay. petitioners are still liable to pay private respondents' gratuity pay. the instant petition is DISMISSED for lack of merit and the temporary restraining order we issued on February 9. Costs against petitioners. 1 dated October 28. lease. SO ORDERED G. for short) in SEC Case No. 2 Towards this end. Hence. 1981 and September 1. for short).R. setting aside the portion of the Decision of the Securities and Exchange Commission (SEC. Inc. petitioners. Carpizo Group. 1997 ISLAMIC DIRECTORATE OF THE PHILIPPINES. at the time the aforenamed private respondents tendered their resignation. Thus. even without the stockholders' approval of the subject resolutions. Under the circumstances in field.. No. it will be illogical and superfluous to require the stockholders' approval of the subject resolutions. 1981. respectively. IN VIEW WHEREOF. Accordingly. Petitioners try to convince us that the subject resolutions had no force and effect in view of the non-approval thereof during the Annual Stockholders' Meeting held on March 1. vs. and other religious infrastructures" so as to facilitate the effective practice of Islamic faith in the area. to be used as a Center for the Islamic populace. petitioner corporation obliged itself to give the gratuity pay of its retained employees in four (4) installments: on September 1.652 square meters. 1994. J. namely. the Libyan government donated money to the IDP to purchase land at Culiat. We are not persuaded. The following facts appear of record. The cited provision is not applicable to the case at bench as it refers to the sale. (IDP. Petitioner IDP-Tamano Group alleges that sometime in 1971. The land. except far Arturo Lopez. the action taken by the board of directors requires the authorization of the stockholders on record. 1981. This decision is immediately executory. 1982. 4012 which declared null and void the sale of two (2) parcels of land in Quezon City covered by the Deed of Absolute Sale entered into by and between private respondent Iglesia Ni Cristo (INC. respondents. 117897 May 14. the aforementioned private respondents were already entitled to receive their gratuity pay. October 15. Islamic leaders of all Muslim major tribal groups in the Philippines headed by Dean Cesar Adib Majul organized and incorporated the ISLAMIC DIRECTORATE OF THE PHILIPPINES (IDP). Tandang Sora. 1987 is LIFTED.We reject petitioners' allegation that private respondents. exchange or disposition of all or substantially all of the corporation's assets. PEREA and SECURITIES & EXCHANGE COMMISSION. HERMOSISIMA. 1981. It will be observed that. the primary purpose of which is to establish an Islamic Center in Quezon City for the construction of a "Mosque (prayer place). the assailed resolution of the National Labor Relations Commission in NLRC-NCR-2176-82 is AFFIRMED. Madrasah (Arabic School). the stockholders of petitioner corporation also sit as members of the board of directors.: The subject of this petition for review is the Decision of the public respondent Court of Appeals. In such a case. Mila Refuerzo. Marissa Pascual and Edward Mamaril who resigned from petitioner corporation after the filing of the case. JR.. Pursuant to board resolutions dated August 17.

Significantly. 1991. the petitioner 1971 IDP Board of Trustees headed by former Senator Mamintal Tamano. judgment is hereby rendered declaring the elections of both the petitioners 7 and respondents8 as null and void for being violative of the Articles of Incorporation of petitioner corporation.Congressman Salipada Pendatun Dean Cesar Adib Majul Sultan Harun Al-Rashid Lucman Delegate Ahmad Alonto Commissioner Datu Mama Sinsuat Mayor Aminkadra Abubakar 6 According to the petitioner. or the Tamano Group. With the nullification of the election of the respondents. thus. 4012. thus rendering the adoption of the by-laws likewise null and void. Meanwhile. On April 20. pursuant to the Deed of Absolute Sale executed in its favor. the Carpizo Group caused to be signed an alleged Board Resolution 11 of the IDP. authorizing the sale of the subject two parcels of land to the private respondent INC for a consideration of P22.00. Although the Carpizo Group 10 attempted to submit a set of bylaws. headed by Engineer Farouk Carpizo. Both groups claimed to be the legitimate IDP. INC filed a motion in the same case to compel one Mrs. Musib Buat. The dispositive portion of the SEC Decision reads: WHEREFORE. Zorayda Tamano and Atty. Martial Law was declared by the late President Ferdinand Marcos. Firdaussi Abbas. a vacuum is created as to who should adopt the bylaws and certify its adoption. and Congressman AlRashid Lucman flew to the Middle East to escape political persecution. to compel said group to clear the property of squatters and deliver complete and full physical possession thereof to INC. Ligon was alleged to be the mortgagee of the two parcels of land . Mrs. led by Mrs. two Muslim groups sprung. 1989. Ahmad Alonto. the Carpizo Group. SO ORDERED. came out with a Decision in SEC Case No. before any election of the members of the Board of Trustees could be conducted. Carpizo Group. Most of the members of the 1971 Board of Trustees like Senators Mamintal Tamano. however. Once approved. an election of the members of the Board of Trustees shall immediately be called pursuant to the approved by-laws. those who prepared and adopted the by-laws were not bona fide members of the IDP. docketed as SEC Case No. Ligon to produce and surrender to the Register of Deeds of Quezon City the owner's duplicate copy of TCT Nos. which sale was evidenced by a Deed of Absolute Sale 12 dated April 20. no valid election of the members of the Board of Trustees of IDP was ever called. the approved by-laws which they certified to this Commission as members of the Board of Trustees must necessarily be likewise declared null and void. On May 30. and the Abbas Group. Leticia P. 1986 Decision.343. without having been properly elected as new members of the Board of Trustee of IDP. 9 Neither group. RT-26521 and RT-26520 covering the aforementioned two parcels of land.400. so that the sale in INC's favor may be registered and new titles issued in the name of INC. However. the members of the petitioning corporation are hereby authorized to prepare and adopt their by-laws for submission to the Commission. Salipada Pendatun. the SEC. aside from Engineer Farouk Carpizo and Atty. 2687 declaring the election of both the Carpizo Group and the Abbas Group as IDP board members to be null and void. the SEC found that. Likewise. private respondent INC. docketed as Civil Case No. before Branch 81 of the Regional Trial Court of Quezon City. there must be an approved by-laws to govern the internal government of the association including the conduct of election. filed an action for Specific Performance with Damages against the vendor. seeking to declare null and void the Deed of Absolute Sale signed by the Carpizo Group and the INC since the group of Engineer Carpizo was not the legitimate Board of Trustees of the IDP. after the purchase of the land by the Libyan government in the name of IDP. Q-90-6937. took the necessary steps prescribed by the SEC in its October 3. filed a petition before the SEC. and. And since the election of both petitioners and respondents have been declared null and void. To remedy this unfortunate situation that the association has found itself in. in 1972. in a suit between these two contending groups. on October 3. 1989. Thereafter. 1986.

the SEC. pertaining also to Civil Case No. Ligon is hereby ordered to produce and/or surrender to plaintiff 17 the owner's copy of RT-26521 (170567) and RT-26520 (176616) in open court for the registration of the Deed of Absolute Sale in the latter's name and the annotation of the mortgage executed in her favor by herein defendant Islamic Directorate of the Philippines on the new transfer certificate of title to be issued to plaintiff. Intervenor herein is the duly constituted body which can lawfully and legally represent the Islamic Directorate of the Philippines. Declaring the sale of the two (2) parcels of land in Quezon City covered by the Deed of Absolute Sale entered into by Iglesia ni Kristo and the Islamic Directorate of the Philippines. finally came out with a Decision in SEC Case No. null and void. Q-90-6937 ordering the as 2.. That the said case before the SEC is docketed as Case No. 15 Apprised of the pendency of SEC Case No. al. Regional Trial Court of Quezon City. The IDP-Tamano Group. furthermore. 1992. and hence. thru a petition for certiorari. No. succeeded in executing the Deed of Sale between the IDP and the Iglesia Ni Kristo (plaintiff in the instant case) and which Deed of Sale is the subject of the case at bar. dated March 2. RT-26521 (170567) and RT-26520 (176616) to the Register of Deeds of Quezon City for the purposes stated in the Order of March 2. Judge Reyes. assailing the foregoing Orders of Judge Reyes. 3. Q-90-6937. 4. 21 Private respondent INC opposed the motion arguing. 1992. 16 Thereupon. rendered Partial Judgment in Civil Case No.executed in her favor by certain Abdulrahman R. Judge Reyes in another Order. A copy of the said case is hereto attached as Annex "A". Linzag and Rowaida Busran-Sampaco claimed to be in behalf of the Carpizo Group. through false schemes and machinations. Farouk Carpizo. docketed as CA-G. who. hence.T. Declaring the by-laws submitted by the respondents unauthorized. treated INC as the rightful owner of the real properties and disposed as follows: WHEREFORE. . 14 Judge Celia Lipana-Reyes of Branch 81. 1991.R No." 19 Mortgagee Ligon went to the Court of Appeals. Q-90-6937 averring.20 Undaunted. Leticia P. sought to intervene in Civil Case No. xxx xxx xxx 13 IDP-Carpizo Group to comply with its obligation under the Deed of Sale of clearing the subject lots of squatters and of delivering the actual possession thereof to INC. Inc. The appellate court dismissed her petition on October 28. jurisdiction thereto properly pertaining to the SEC. on September 12. 22 null and void. inter alia. SP-27973. That. on June 11. In the meantime. That the Intervenor has filed a case before the Securities and Exchange Commission (SEC) against Mr. on July 5. 18 On April 6.R. 04012. inter alia: xxx xxx xxx 2. 4012 involving the controverted status of the IDP-Carpizo Group but without waiting for the outcome of said case. that the issue sought to be litigated by way of intervention is an intracorporate dispute which falls under the jurisdiction of the SEC. the main issue of which is whether or not the aforesaid Deed of Sale between IDP and the Iglesia ni Kristo is null and void. SO ORDERED. et. Ligon filed a petition for review before the Supreme Court which was docketed as G. the above Order was amended by Judge Reyes directing Ligon "to deliver the owner's duplicate copies of TCT Nos. denied petitioner's motion to intervene on the ground of lack of juridical personality of the IDP-Tamano Group and that the issues being raised by way of intervention are intra-corporate in nature. Intervenor's legal interest in the instant case. 4012 in this wise: 1. 1992. 1991. 1993. 1992. 107751.

Quite the contrary. 1994. 23 of the (176616) to the Register of Deeds of Quezon City so that the Deed of Absolute Sale in INC's favor may be properly registered. the judgment on the merits rendered in the first constitutes an 4. Section 49(b) enunciates the first concept of res judicata known as "bar by prior judgment. When the three identities are present. in SEC Case No. 1994. 1993. 107751 on the petition filed by Mrs.R SP No. between the first case where the judgment was rendered. 1992 Decision of the Court of Appeals in CA-G. that only is deemed to have been adjudged in a former judgment which appears upon its face to have been so adjudged. however. with respect to the matter directly adjudged or as to any other matter that could have been raised in relation thereto.R. dated September 7. the IDP-Tamano Group brought the instant petition for review. Section 49. dated December 21. having jurisdiction to pronounce the judgment or order." There is "bar by former judgment" when. the Supreme Court rendered judgment in G. No pronouncement as to cost. dated June 1. Declaring the election of the Board of Directors. SO ORDERED. SP-27973 which sustained the Order of Judge Reyes compelling mortgagee Ligon to surrender the owner's duplicate copies of TCT Nos. to wit: Effect of judgment. Ligon. subject matter and cause of action.R. 4012. in no wise constitutes res judicatasuch that the petition under consideration would be barred if it were the ease." promulgated on June 1. corporation from 1986 to 1991 as null and void. 1995.3. we would like to point out that our disposition in G. and 3) Not applying the principles of estoppel and laches. 107751 entitled. conclusive between the parties and their successors in interest by title subsequent to the commencement of the action or special proceeding. 33295 granting INC's petition." whereas. 24 Private respondent INC filed a Motion for Intervention. — The effect of a judgment or final order rendered by a court or judge of the Philippines. 25 INC elevated SEC Case No. Leticia P. may be as follows: xxx xxx xxx (b) In other cases the judgment or order is.R. docketed as CA-G. but the same was denied on account of the fact that the decision of the case had become final and executory. there is identity of parties. No. submitting that the Court of Appeals gravely erred in: 1) Not upholding the jurisdiction of the SEC to declare the nullity of the sale. Thus. no appeal having been taken therefrom. No. denied the Ligon petition and affirmed the October 28. Section 49(c) is referred to as "conclusiveness of judgment. The portion of the SEC Decision in SEC Case No. except Farouk Carpizo and Musnib Buat. Rule 39 of the Revised Rules of Court lays down the dual aspects of res judicata in actions in personam. 2) Encouraging multiplicity of suits. The Decision. Before we rule upon the main issue posited in this petition. Declaring the acceptance of the respondents. 4012 which declared the sale of the two (2) lots in question to INC as void was ordered set aside by the Court of Appeals. On October 28. 1995.R. "Ligon v. 4012 to the public respondent Court of Appeals by way of a special civil action forcertiorari. 33295. (c) In any other litigation between the same parties or their successors in interest. as members of the IDP null and void. the requisites orres judicata do not obtain in the case at bench. 26 While the above petition was pending. the court a quo promulgated a Decision in CA-G. or which was actually and necessarily included therein or necessary thereto. litigating for the same thing and under the same title and in the same capacity. RT-26521 (170567) and RT-26520 . No. and the second case where such judgment is invoked. SP No. Court of Appeals.

34 The main question though in this petition is: Did the Court of Appeals commit reversible error in setting aside that portion of the SEC's Decision in SEC Case No. 107751 were mortgagee Leticia P. 107751 for purposes of applying the principle of res judicata since the contrary goes against the true import of the action of intervention as a mere subsidiary proceeding without an independent life apart from the principal action as well as the intrinsic character of the intervenor as a mere subordinate party in the main case whose right may be said to be only in aid of the right of the original party. no person (natural or juridical) shall be affected by a proceeding to which he is a stranger. a mere action in personam. the IDP-Tamano Group cannot be considered a principal party in G. In this connection. As a necessary consequence. was only made an ancillary party in G. although it is true that Civil Case No. Q-90-6937. But where between the first case wherein judgment is rendered and the second case wherein such judgment is invoked. 107751 cannot be considered determinative and conclusive on the matter of the validity of the sale for this particular issue was not the principal thrust of Ligon. thru a legitimate Board of Trustees. The principal parties in G. whereas the cause of action in the present case is the validity of the Carpizo Group-INC Deed of Absolute Sale. While there may be identity of subject matter (IDP property) in both cases. No. 32 Elsewise put. 30 It is only in the present case. 28 It was never originally a principal party thereto. 107751 is the surrender of the owner's duplicate copy of the transfer certificates of title to the rightful possessor thereof. 29 Indeed. Defendant. there is only identity of parties but there is no identity of cause of action. Res Judicata in the form of "conclusiveness of judgment" cannot likewise apply for the reason that any mention at all in Ligon as to the validity of the disputed Carpizo Board-INC sale may only be deemed incidental to the resolution of the primary issue posed in said case which is: Who between Ligon and INC has the better right of possession over the owner's duplicate copy of the TCTs covering the IDP property? G." 27 Neither of these concepts of res judicata find relevant application in the case at bench.R. 4012 which declared the sale of two (2) parcels of land in Quezon City between the IDP-Carpizo Group and private respondent INC null and void? ." 31 the IDP can not be considered essentially a formal party thereto for the simple reason that it was not duly represented by a legitimate Board of Trustees in that case. No. as petitioner. it should be disregarded if its rigid application would involve the sacrifice of justice to technicality.R. The IDP. only as to those matters actually and directly controverted and determined. was entitled. and not as to matters merely involved therein. there is no identity of parties.R. where the IDP-Tamano Group became a principal party. To rule otherwise would be to cause grave and irreparable injustice to IDP which never gave its consent to the sale. and the Iglesia Ni Cristo. as petitioner.R. as private respondent. It is just an interlocutory proceeding dependent on or subsidiary to the case between the original parties. but is merely collateral. 33 Granting arguendo. Matters adjudged in a cause do not prejudice those who were not parties to it. as represented by the 1971 Board of Trustees or the Tamano Group. No. accessory. there is no identity of parties in both cases. Ligon. In any case. Plaintiff v. was effectively deprived of its day in court in said case. that IDP may be considered a principal party in Ligon. for want of legitimate representation. The cause of action in G. which gave rise to G. res judicata as a "bar by former judgment" will still not set in on the ground that the cause of action in the two cases are different. No. No. or ancillary to the principal action.R. did not become final and executory insofar as the true IDP is concerned since petitioner corporation. Islamic Directorate of the Philippines. This is what is termed "conclusiveness of judgment. while it is true that the principle of res judicata is a fundamental component of our judicial system. Civil Case No. Res inter alios judicatae nullum allis praejudicium faciunt. 107751 as intervenor. No. as private respondent.R.absolute bar to the subsequent action. a case for Specific Performance with Damages. with the Iglesia Ni Cristo. the judgment is conclusive in the second case. It must be noted that intervention is not an independent action. Q-90-6937. "Iglesia Ni Kristo. actually. 107751. Clearly.

. to the disputed Deed of Absolute Sale executed in favor of INC. a case not only of vitiated consent. therefore. As far back as October 3. the subject sale is void and produces no effect whatsoever. in Case No. but one where consent on the part of one of the supposed contracting parties is totally wanting. As succinctly put by Tolentino. all acts carried out by the Carpizo Board. If the SEC can declare who is the legitimate IDP Board. This is precisely what the SEC did in SEC Case No. the contract is void. . it shall have original and exclusive jurisdiction to hear and decide cases involving: xxx xxx xxx c) Controversies in the selection or appointment of directors. it can also declare who is not the legitimate IDP Board. Article 1318 of the New Civil Code lays down the essential requisites of contracts: There is no contract unless the following requisites concur: (1) Consent of the contracting parties. partnership or associations. where even one is absent. All these elements must be present to constitute a valid contract. . allegedly in the name of the IDP. . (2) Object certain which is the subject matter of the contract. 4012 is not the first case wherein the SEC had the opportunity to pass upon the status of the Carpizo Group. Consequently. the Carpizo Group is bereft of any authority whatsoever to bind IDP in any kind of transaction including the sale or disposition of ID property. xxx xxx xxx Sec. 902A: Sec. For. already declared the election of the Carpizo Group (as well as the Abbas Group) to the IDP Board as null and void for being violative of the Articles of Incorporation. trustees. the contract is non-existent. Sale or other disposition of assets.We rule in the affirmative. 4012 when it adjudged the election of the Carpizo Group to the IDP Board of Trustees to be null and void. 35 By this ruling. thru a legitimate Board of Trustees. 40. 36 in a suit between the Carpizo Group and the Abbas Group. There can be no question as to the authority of the SEC to pass upon the issue as to who among the different contending groups is the legitimate Board of Trustees of the IDP since this is a matter properly falling within the original and exclusive jurisdiction of the SEC by virtue of Sections 3 and 5(c) of Presidential Decree No. partnerships or associations. officers. partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees. . the IDP. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations. The Commission shall have absolute jurisdiction. 1986. who are the grantees of primary franchises and/or a license or permit issued by the government to operate in the Philippines . never gave its consent. It must be noted that SEC Case No. then by parity of reasoning. . Premises considered. This is. 38 In this case. 3. (3) Cause of the obligation which is established. owner of the subject parcels of land. or managers of such corporations. 37 Nothing thus becomes more settled than that the IDP-Carpizo Group with whom private respondent INC contracted is a fake Board. . particularly the sale of the Tandang Sora property. supervision and control over all corporations. — Subject to the provisions of existing laws on illegal combinations and . the SEC. 2687. and where it is wanting. 5. have to be struck down for having been done without the consent of the IDP thru a legitimate Board of Trustees. the SEC in effect made the unequivocal finding that the IDP-Carpizo Group is a bogus Board of Trustees. The Carpizo Group-INC sale is further deemed null and void ab initio because of the Carpizo Group's failure to comply with Section 40 of the Corporation Code pertaining to the disposition of all or substantially all assets of the corporation: Sec. consent is essential for the existence of a contract. Ineluctably.

lease. 39 All told. INC is here trifling with the courts. Hence. We cannot put a premium on this clever legal maneuverings of private respondent which. It is unfortunate that private respondent INC opposed the motion for intervention filed by the 1971 Board of Trustees in Civil Case. including its goodwill. argued for the denial of the motion averring. wanting to acquire the property at all costs and threatened by the participation of the legitimate IDP Board in the civil suit. sell. by the vote of at least two-thirds (2/3) of the members. the majority vote of the legitimate Board of Trustees. would result in a failure of justice. its sale to a thirdparty is a sale or disposition of all the corporate property and assets of IDP falling squarely within the contemplation of the foregoing section. 4012 came out nullifying the sale. upon terms and conditions and for such consideration. in a stockholders' or members' meeting duly called for the purpose. there are only fifteen (15) official members of the petitioner corporation including the eight (8) members of the Board of Trustees. That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code. The legitimate IDP Board could have been granted ample opportunity before the regional trial court to shed light on the true status of the Carpizo Board and settled the matter as to the validity of the sale then and there. exchange. which has jurisdiction to rule on the validity of the sale. and those whose names and signatures were affixed by the Carpizo Group together with the sham Board Resolution authorizing the negotiation for the sale were. concurred in by the vote of at least 2/3 of the bona fide members of the corporation should have been obtained. owner of the subject property. inter alia. and not the SEC. quibbling over the issue that it is the regional trial court. 40 As a result. the same not being an intra-corporate dispute. stocks. it appears from the records. bonds or other instruments for the payment of money or other property or consideration. or in case of non-stock corporation. and remand the case to the regular courts for further litigation over an issue which is already determinable based on what we have in the records. No end of substantial justice will be served if we reverse the SEC's conclusion on the matter. from all indications. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid. pledge or otherwise dispose of all or substantially all of its property and assets. Apparently. the disputed Deed of Absolute Sale executed by the fake Carpizo Board and private respondent INC was intrinsically void ab initio. constitutes the only property of the IDP. Private respondent INC nevertheless questions the authority of the SEC to nullify the sale for being made outside of its jurisdiction. mortgage. a corporation may. But INC. the motion for intervention was denied. notbona fide members of the IDP as they were made to appear to be. by a majority vote of its board of directors or trustees.monopolies. These twin requirements were not met as the Carpizo Group which voted to sell the Tandang Sora property was a fake Board of Trustees. Q-90-6937. if countenanced. xxx xxx xxx The Tandang Sora property. or served personally: Provided. The resolution of the question as to whether or not the SEC had jurisdiction to declare the subject sale null and void is rendered moot and academic by the inherent nullity of the highly dubious sale due to lack of consent of the IDP. as its board of directors or trustees may deem expedient. when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock. For the sale to be valid. INC came forward. . a case for Specific Performance with Damages between INC and the Carpizo Group on the subject Deed of Absolute Sale. When the Decision in SEC Case No. that the issue sought to be litigated by the movant is intra-corporate in nature and outside the jurisdiction of the regional trial court. No. A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. this time. which may be money.

presumably knowledgeable on the aforesaid workings of the Torrens System.Furthermore. This is very strange considering that the subject lot is a large piece of real property in Quezon City worth millions. 33295 is SET ASIDE. Petitioner corporation is ordered to return to private respondent whatever amount has been initially paid by INC as consideration for the property with legal interest. The unexplained eagerness of INC to buy this valuable piece of land in Quezon City without even being presented with the owner's copy of the titles casts very serious doubt on the rightfulness of its position as vendee in the transaction. 1994 in CA-G. Otherwise. the Register of Deeds is hereby ordered to cancel the same. if the same was actually received by IDP. the petition is GRANTED. The Register of Deeds of Quezon City is hereby ordered to cancel the registration of the Deed of Absolute Sale in the name of respondent Iglesia Ni Cristo. The Decision of the public respondent Court of Appeals dated October 28. the Court observes that the INC bought the questioned property from the Carpizo Group without even seeing the owner's duplicate copy of the titles covering the property. 1993 in SEC Case No. The Decision of the Securities and Exchange Commission dated July 5. if one has already been made. did not take heed of this and nevertheless went through with the sale with undue haste. 4012 is REINSTATED. SP No. WHEREFORE. If new titles have been issued in the name of Iglesia Ni Cristo. the minimum requirement for one to be a good faith buyer for value is that the vendee at least sees the owner's duplicate copy of the title and relies upon the same. INC may run after Engineer Farouk Carpizo and his group for the amount of money paid. . and that under the Torrens System of Registration.R. and issue new ones in the name of petitioner Islamic Directorate of the Philippines. 41 The private respondent. SO ORDERED.

conditioned upon plaintiff's filing a bond of P5. set for hearing plaintiff's prayer for ancillary relief and required the parties to submit their respective memoranda. alleged that plaintiff was a corporation duly organized and existing under the laws of the . a motion to admit a counter-bond for the purpose of lifting the order granting the writ of preliminary injunction. unless immediately restrained exparte. 1964. Court of First Instance of Manila. 1963. that on January 14. On June 18. filed by Detective and Protective Bureau.G. the injunction be made permanent and defendant be ordered to render an accounting. petitioner. Inc. that. removed defendant as managing director and elected Jose de la Rosa in his stead. No. Alberto filed. that defendant not only had refused to vacate his office and to deliver the assets and books to Jose de la Rosa.. 56949 of the Court of First Instance of Manila. 1964. contrary to a resolution adopted by the Board of Directors on November 24. in Civil Case No. but also continued to perform unauthorized acts for and in behalf of plaintiff corporation. concealed them illegally and refused to allow any member of the corporation to see and examine the same. in a meeting.00. L-23428 November 29. 1968 Philippines. Herein respondent Judge. 1964. records. vouchers and receipts of the corporation from the accountant-cashier. Inspite of the opposition filed by plaintiff. respondent Judge issued. 1963. ALBERTO. the Honorable Gaudencio Cloribel.R. dated May 4. in his capacity as Presiding Judge of Branch VI. J. 1964. the stockholders. that defendant. that in June. and FAUSTINO S.. an order admitting the counterbond and setting aside the writ of preliminary injunction. that Jose M. on July 1. Plaintiff filed the bond. vs.: The complaint. would continue discharging the functions of managing director. 1964. on August 5. Plaintiff prayed that a preliminary injunction ex-parte be issued restraining defendant from exercising the functions of managing director and from disbursing and disposing of its funds. and that it was necessary to appoint a receiver to take charge of the assets and receive the income of the corporation. therein plaintiff (petitioner herein) against Fausto S. had been illegally disposing of corporate funds. THE HONORABLE GAUDENCIO CLORIBEL. ZALDIVAR.000. therein defendant (respondent herein). INC. that defendant was managing director of plaintiff corporation from 1952 until January 14. for accounting with preliminary injunction and receivership. but while the same was pending approval defendant Fausto S. respondents. that defendant had been required to submit a financial statement and to render an accounting of his administration from 1952 but defendant has failed to do so. Alberto. that defendant. respondent Judge granted the writ of preliminary injunction prayed for. 1964. On the belief that the order approving the counter-bond and lifting the writ of preliminary injunction was contrary to law and the act of DETECTIVE & PROTECTIVE BUREAU. defendant illegally seized and took control of all the assets as well as the books. after judgment. Barredo be appointed receiver.

praying that a writ of preliminary injunction enjoining defendant Fausto S. admitting and approving the counter-bond of P5. it appears that the only issue to be resolved is whether the order of respondent Judge dated August 5. et al. et al. a verbal application for the dissolution of the writ. From the pleadings. the record shows that respondent Alberto had filed a verified answer to the complaint and a verified opposition to the issuance of the writ of preliminary injunction. to dissolve or modify the same. however. 4634 was not verified. 6 of Rule 58 of the revised Rules of Court)inasmuch as the Judge set aside said order and directed the dissolution of the preliminary injunction without any formal petition of the parties and without having followed the procedure prescribed by the statute. Albert from exercising the functions of managing director be issued. and that there was no plain. et al. or to the judge of the court of which the action was brought. is also groundless inasmuch as even an indirect verbal application for the dissolution of an ex parteorder of preliminary injunction has been held to be a sufficient compliance with the provisions of Section 6 .1 the only question raised was whether the respondent Judge exceeded his jurisdiction and abused his discretion in setting aside an order directing the issuance of a writ of preliminary injunction. the defendant. at any time before trial. as required by Section 6 of Rule 58. because: (1) the motion to admit defendant's counterbond was not supported by affidavits showing why the counterbond should be admitted. to the judge who granted the injunction. this Court has ruled that the requirement of verification is not absolute but is dependent on the circumstances obtaining in a particular case. 1. Ramos. 164. However. and that the order dated August 5. On the strength of the decision in the above-cited case. and prayed for the dismissal of the petition. The first reason given by petitioner in support of its contention that the dissolution of the writ of preliminary injunction was contrary to law is that the motion to admit respondent's counterbond for the dissolution of the writ was not supported by affidavits as required by section 6 of Rule 58 of the Rules of Court. and the admission of the counter-bond rendered said writ ineffective.2 said. speedy and adequate remedy available to it. 1964 of respondent Judge approving the counter-bond and lifting the writ of preliminary injunction he had previously issued be set aside and declared null and void. Barrios and Buyson Lampa. The controverted motion. This Court said: Section 169 of Act 1909 does not prescribe the manner of filing the application to annul or modify a writ of preliminary injunction. may apply. to the irreparable damage of the corporation. 1964. In maintaining the affirmative. this Court in Caluya. does not appear in the record. now respondent Fausto S. (2) the preliminary injunction was not issued ex-parte but after hearing. (3) the writ was granted in accordance with Rule 58 of the Rules of Court and established precedents' (4) public interest required that the writ be not set aside because respondent had arrogated unto himself all the powers of petitioning corporation. however. vs. Now petitioner contends that the setting aside of the order granting the writ was contrary to law and was done with a grave abuse of discretion. In the case of Sy Sam Bio. petitioners in that case alleged that the questioned order was issued in violation of the provisions of Section 169 of Act 190(which is one of the sources of Sec. It simply states that if a temporary injunction be granted without notice. upon reasonable notice to the adverse party. In his answer.000 and setting aside the writ of preliminary injunction granted in his order dated June 18. Regarding the necessity of verification of the motion for dissolution of a writ of preliminary injunction. There was.respondent Judge constituted a grave abuse of discretion. justified the order complained of. The Court gave due course to the petition but did not issue a preliminary injunction. and that (5) the counter-bond could not compensate petitioner's damage.. Alberto traversed the material allegations of the petition. Petitioners' criticism that the motion to dissolve filed by the defendants in Civil Case No. vs. was issued contrary to law and with grave abuse of discretion. plaintiff filed with this Court the instant petition for certiorari. based upon the ground of the in suficiency of the complaint which was the basis of the application for the issuance of said writ of preliminary injunction.

a preliminary injunction prior to its issuance or after its granting ex parte. the obvious reason being that said rule does not prescribe the form by which an application for the dissolution or modification of an order of preliminary injunction should be presented. etc. maybe dissolved. II. Section 6 of Rule 60 (now sec. or. the first ground alleged by petitioner must be brushed aside. et al. 6.. Vol. in Caluya. and so We cannot rule on whether the motion should have been verified or not. Aquino. therefore. Reliance is placed on Section 6 of Rule 60 of the Rules of Court which provides that "the injunction may be reduced. This allegation was not denied in the answer. p. may be dissolved" can not be construed as putting beyond the reach of the court the dissolution of an injunction which was granted after hearing." Consequently. which states that "the filing of the counter-bond is in accordance with law. the same cannot be dissolved." The court granted the motion and dissolved the preliminary injunction. This contention is untenable. The second and third reasons alleged by petitioner in its petition for certiorari assume that a preliminary injunction issued after hearing and in accordance with Rule 58 cannot be set aside. if granted ex parte.. (Manila Electric Company vs. as urged by petitioner. as well as from the terminology of Section 6 of Rule 58 of the new Rules of Court. respondent Tayag filed an unverified motion for the dissolution of a writ of preliminary injunction. or for moving the dissolution of. In an original action for a writ of certiorari filed with this Court to annual said order. Comments on the Rules of Court.4 this Court said: The first contention of the petitioners is that. specially on the strength of an unverified motion for dissolution and in the absence to support it. has to rely on the order of respondent Judge. However. Artiaga and Green. This Court. The reason is because a writ of preliminary injunction is an interlocutory order. as said injunction was issued after a hearing. The contention is clearly erroneous.. dated August 5. 147). et al. it is alleged by petitioner that the motion for the dissolution of the writ of preliminary injunction was not verified. the motion should be verified. or. it does not thereby outlaw a dissolution if the injunction has been issued after a hearing. 144. 1964. vs. citing the case of Sy Yam Bio v. If the application is based on the insufficiency of the complaint. If according to the above rulings. 1959." thereby arguing that if an injunction is not issued ex parte the same cannot be dissolved. If the motion is based on the ground that the injunction would cause great damage to defendant while the plaintiff can be fully compensated for such damages as he may suffer. Barrios. was unverified.3 this Court ruled that a motion for the dissolution of a writ of preliminary injunction should be verified. Ramos. if granted ex parte. Thus.of Rule 60 (Moran. We cannot determine what are the grounds for the dissolution that are alleged therein. .. The provision of Section 6 of Rule 58 that "the injunction may be refused. alleging that the same "would work great damage to the defendant who had already spend a considerable sum of money" and that petitioners "can be fully compensated for any damages that they may suffer.. 2. Second Edition. this Court remarked in part: Petitioners herein are entitled to the writ prayed for. From the precedents quoted above.. 206). et al. 63 Phil. In the instant case. 50 Phil. 65. in Canlas. Rule 58) of the Rules of Court did not require any form for the application for the dissolution of the writ of preliminary injunction. Although said section prescribes the grounds for objecting to. the motion need not be verified. But because said motion does not appear in the record of the case now before this Court. and much less must the motion be supported by affidavits. In that case. it is evident that whether the application for the dissolution of the writ of preliminary injunction must be verified or not depends upon the ground upon which such application is based. The motion of respondent Tayag for the dissolution of the writ of preliminary injunction issued on October 22. because a writ of preliminary injunction is an interlocutory order which is always under the control of the court before final judgment. et al. This is to be so. vs. then respondent Fausto Alberto's motion to lift the preliminary injunction in the court below need not be verified. and as such it is always under the control of the court before final judgment.

Barredo.. he could also not be a managing director of the corporation. If he did not own any share of stock. Where ownership is in dispute. and hence that party should not be deprived of the control or possession until the court is prepared to adjudicate the controverted right in favor of the other party. The fifth reason alleged by herein petitioner in support of its contention that respondent Judge gravely abused his discretion when he lifted the preliminary injunction upon the filing of the counter-bond was that said counter-bond could not compensate for the irreparable damage that the corporation would suffer by reason of the continuance of respondent Fausto Alberto as managing director of the corporation. does not constitute an abuse of discretion and may be cured not by certiorari but by appeal. pursuant to Article V. even if the dissolution is ordered without giving the other party an opportunity to be heard. on the contrary. was disputed by respondent Alberto who stated that Jose de la Rosa could not be elected managing director because he did not own any stock in the corporation. if not more. Section 1 that "Directors shall serve until the election and qualification of their duly qualified successor. 48) If the managing director-elect was not qualified to become managing director. which in part provides: Sec. p.." 4. 3. might be dissolved upon an ex parte application by the defendant.. This assertion. Petitioner contended that respondent Alberto had arrogated to himself the power of the Board of Directors of the corporation because he refused to vacate the office and surrender the same to Jose de la Rosa who had been elected managing director by the Board to succeed him. Every director must own in his own right at least one share of the capital stock of the stock corporation of which he is a director.5 one of the issues presented was whether a writ of preliminary injunction granted the plaintiff by a trial court after hearing.. There is in the record no showing that Jose de la Rosa owned a share of stock in the corporation.29 as against the sum of P4. Inc. and this Court ruled that: The action of a trial court in dissolving a writ of preliminary injunction already issued after hearing. In Clarke vs. however. Philippine Ready Mix Concrete Co. We find that there was a question as to who own the controlling interest in the corporation. as the damages that the corporation . the party in control or possession of the disputed interest is presumed to have the better right until the contrary is adjudged. If he could not be a director..6 Should it be the truth that respondent Alberto is the controlling stockholder.. having invested therein a total of P57. Section 3 of the By-Laws of the Corporation which provides that: The manager shall be elected by the Board of Directors from among its members. Respondent Alberto. then the damages said respondent would suffer would be the same.. which stock shall stand in his name on the books of the corporations. et al.. which in part provides: There is in the record no showing that Jose de la Rosa owned a share of stock in the corporation..This Court has also ruled that the dissolution of a writ of preliminary injunction issued after hearing. certainly he could not be a director pursuant to the mandatory provision of Section 30 of the Corporation Law.727. and any irregularity committed by the trial court on this score may be cured not by certiorari but by appeal. (Record.000 only invested by one other director. If he did not own any share of stock. without giving petitioner an opportunity to be heard. does not constitute lack or excess of jurisdiction or an abuse of discretion. contended that he really was the owner of the controlling interest in the business carried on the name of the petitioner. Jose M. respondent Fausto Alberto could not be compelled to vacate his office and cede the same to the managing director-elect because the by-laws of the corporation provides in Article IV. 30. certainly he could not be a director pursuant to the mandatory provision of Section 30 of the Corporation Law. The fourth reason alleged by petitioner in support of its stand is that public interest demanded that the writ enjoining respondent Fausto Alberto from exercising the functions of managing director be maintained.

12 It being our considered view that respondent Judge had not committed grave abuse of discretion in issuing the order dated August 5. the instant petition for certiorari with preliminary injunction is dismissed. submitted to. and where there is a deprivation of the petitioner's fundamental right to due process. SACOBA MANUFACTURING CORP.8 and it is equally well settled that a wide latitude is given under Section 7 of Rule 58 of the Rules of Court to the trial court to modify or dissolve the injunction as justice may require..10 In the instant case. There is.would suffer if the injunction were maintained. LEE and ANTONIO DM. LACDAO. and the herein petition for certiorari having been filed without previously complying with a well settled procedural requirement. by means of a preliminary injunction.7 Let it be stated. in relation to all the reason given by petitioner. if any. PABLO GONZALES. where the questioned order is a patent nullity. one vital reason why the instant petition for certiorari should be denied. vs. and THOMAS GONZALES. however.. GUTIERREZ.000 filed by petitioner for the injunction would be sufficient to answer for the damages that would be suffered by respondent Alberto by reason of the injunction. If the bond of P5. JR. in an appropriate motion for reconsideration. petitioners. the petitioner has gone directly to this Court without giving the respondent Judge (or trial court) a chance or opportunity to correct his error. there is no alternative for this Court but to order its dismissal. 1964 lifting the writ of preliminary injunction which had previously been granted in the order dated June 18. THE HON.9 The exercise of sound judicial discretion by the lower court in injunctive matters should not be interfered with except in cases of manifest abuse. WHEREFORE. J. And it is. and met and decided by the respondent court. respondents. that it is a settled rule that the issuance of the writ of preliminary injunction as an ancillary or preventive remedy to secure the rights of a party in a pending case is entirely within the discretion of the court taking cognizance of the case — the only limitation being that this discretion should be exercised based upon the grounds and in the manner provided by law.: . 1964. argued before.11 The instant case is not one of the exceptions in the application of this rule.R. An omission to comply with this procedural requirement justifies a denial of the writ applied for. No. JR. that from the order dissolving the writ of preliminary injunction. The following ruling of this Court has a persuasive application in this case: The rule that a court should not. G. which are: where the questions of jurisdiction has been squarely raised. 93695 February 4. It is so ordered. The court which is to exercise that discretion is the trial court. transfer property in litigation from the possession of one party to another is more particularly applicable where the legal title is in dispute and the party having possession asserts ownership in himself. COURT OF APPEALS. not the appellate court. with costs againsts the petitioner. 1992 RAMON C. there seems to be no reason why the same amount would not be sufficient to answer for the damages that might be suffered by the petitioning corporation by reason of the lifting of the injunction. We find that petitioner failed to show manifest abuse of discretion by respondent Judge in setting aside the writ of preliminary injunction.

What is the nature of the voting trust agreement executed between two parties in this case? Who owns the stocks of the corporation under the terms of the voting trust agreement? How long can a voting trust agreement remain valid and effective? Did a director of the corporation cease to be such upon the creation of the voting trust agreement? These are the questions the answers to which are necessary in resolving the principal issue in this petition for certiorari — whether or not there was proper service of summons on Alfa Integrated Textile Mills (ALFA. On July 18. the petitioners filed a motion for reconsideration submitting that Rule 14. 1988. In a manifestation dated July 22. 1981 did not divest the petitioners of their positions as president and executive vicepresident of ALFA so that service of summons upon ALFA through the petitioners as corporate officers was proper. On August 4. the petitioners filed a motion to dismiss the third party complaint which the Regional Trial Court of Makati. allegedly. section 13 of the Revised Rules of Court is not applicable since they were no longer officers of ALFA and that the private respondents should have availed of another mode of service under Rule 14. 1988. they could no longer receive summons or any court processes for or on behalf of ALFA. Section 16 of the said Rules. 1988. In support of their second motion for reconsideration. On September 17. the trial court upheld the validity of the service of summons on ALFA through the petitioners. the private respondents argued that the voting trust agreement dated March 11. for short) through the petitioners as president and vice-president. On April 25. 1987. Branch 58 denied in an Order dated June 27. whereby the management and control of ALFA became vested upon the DBP. denying the latter's motion for reconsideration and requiring ALFA to filed its answer through the petitioners as its corporate officers. the petitioners attached thereto a copy of the voting trust agreement between all the stockholders of ALFA (the petitioners included). the following antecedent facts appear: On November 15. 1989. against the private respondents who. 1988. 1989 and declared that service upon the petitioners who were no longer corporate officers of ALFA cannot be considered as proper service of summons on ALFA. the petitioners filed their answer to the third party complaint. On September 12. the private respondents filed a Manifestation and Motion for the Declaration of Proper Service of Summons which the trial court granted on August 17. on the other hand. of the subject corporation after the execution of a voting trust agreement between ALFA and the Development Bank of the Philippines (DBP. . thus. filed a third party complaint against ALFA and the petitioners on March 17. 1988. 1988. 1988. From the records of the instant case. for short). 1989. In their Comment to the Motion for Reconsideration dated September 27. in turn.. hence. On August 16. 1989. the trial court issued an order requiring the issuance of an alias summons upon ALFA through the DBP as a consequence of the petitioner's letter informing the court that the summons for ALFA was erroneously served upon them considering that the management of ALFA had been transferred to the DBP. on July 12. a second motion for reconsideration was filed by the petitioners reiterating their stand that by virtue of the voting trust agreement they ceased to be officers and directors of ALFA. On January 19.through publication to effect proper service upon ALFA. and the DBP. 1985. 1988. on the one hand. the trial court issued an order advising the private respondents to take the appropriate steps to serve the summons to ALFA. 1988. On January 2. 1986. the trial court reversed itself by setting aside its previous Order dated January 2. Inc. Meanwhile. a complaint for a sum of money was filed by the International Corporate Bank. the DBP claimed that it was not authorized to receive summons on behalf of ALFA since the DBP had not taken over the company which has a separate and distinct corporate personality and existence. i.e.

the petitioners moved for a reconsideration of the decision of the public respondent which resolved to deny the same on May 10. 1991. Subsequently. not having been notified of the pending petition for certiorari with public respondent issued an Order declaring as final the Order dated April 25. Section 13 of the Rules of Court authorized to receive service of summons for and in behalf of the private domestic corporation so that the service of summons on ALFA effected through the petitioners is not valid and ineffective. as the respondent Court of Appeals did. (CA Rollo. holding that there was proper service of summons on ALFA through the petitioners. 1990 erroneously applying the rule that the period during which a motion for reconsideration has been pending must be deducted from the 15-day period to appeal. 1990. 1989. In the meantime.On May 15. A voting trust is defined in Ballentine's Law Dictionary as follows: (a) trust created by an agreement between a group of the stockholders of a corporation and the trustee or by a group of identical agreements between individual stockholders and a common trustee. the public respondent rendered its decision. to wit: (1) that the execution of the voting trust agreement by a stockholders whereby all his shares to the corporation have been transferred to the trustee deprives the stockholders of his position as director of the corporation. 1989 and August 14. 1989 the private respondents filed a motion for reconsideration on which the trial court took no further action. 24) On April 11. or for a period contingent upon a certain event. Hence. 1989 and August 14. On September 18. would be violative of section 23 of the Corporation Code ( Rollo. However. pp. The private respondents in the said Order were required to take positive steps in prosecuting the third party complaint in order that the court would not be constrained to dismiss the same for failure to prosecute. 1989. 176 SCRA 539 [1989]. (CA Decision. the petitioners filed this certiorari petition imputing grave abuse of discretion amounting to lack of jurisdiction on the part of the public respondent in reversing the questioned Orders dated April 25. p. to maintain the respondent Court of Appeals' position that ALFA was properly served its summons through the petitioners would be contrary to the general principle that a corporation can only be bound by such acts which are within the scope of its officers' or agents' authority (Rollo. 270-3273). 1989. On March 19. 1989 of the court a quo. Intermediate Appellate Court. 1989. On October 17. 8. nonetheless. 1990. the public respondent set aside the aforestated entry of judgment after further considering that the rule it relied on applies to appeals from decisions of the Regional Trial Courts to the Court of Appeals. and (2) that the petitioners were no longer acting or holding any of the positions provided under Rule 14. thus. 1989 are hereby SET ASIDE and respondent corporation is ordered to file its answer within the reglementary period. the private respondents moved for a reconsideration of the above Order which was affirmed by the court in its Order dated August 14. to rule otherwise. the trial court. Rollo. not to appeals from its decision to us pursuant to our ruling in the case of Refractories Corporation of the Philippines v. after the petitioners filed their answer to the private respondents' petition for certiorari. a petition for certiorari was belatedly submitted by the private respondent before the public respondent which. whereby it is provided that for a term of years. resolved to give due course thereto on September 21. 1990. p. the dispositive portion of which reads: WHEREFORE. the petitioners present the following arguments. 249-250) In their memorandum. 1989 denying the private respondent's motion for reconsideration. pp. or until the agreement is terminated. the public respondent inadvertently made an entry of judgment on July 16. control over the stock owned by such . on October 25. in view of the foregoing. 273-275) In resolving the issue of the propriety of the service of summons in the instant case. 1989. we dwell first on the nature of a voting trust agreement and the consequent effects upon its creation in the light of the provisions of the Corporation Code. in its Resolution dated January 3. the orders of respondent judge dated April 25. pp.

a more definitive meaning may be gathered.stockholders. supra. is to be lodged in the trustee. as trustee. a voting trust agreement may confer upon a trustee not only the stockholder's voting rights but also other rights pertaining to his shares as long as the voting trust agreement is not entered "for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or used for purposes of fraud. (2) that the voting rights granted are intended to be irrevocable for a definite period of time. 685). and the DBP. A voting trust agreement must be in writing and notarized. The law simply provides that a voting trust agreement is an agreement in writing whereby one or more stockholders of a corporation consent to transfer his or their shares to a trustee in order to vest in the latter voting or other rights pertaining to said shares for a period not exceeding five years upon the fulfillment of statutory conditions and such other terms and conditions specified in the agreement. on the one hand. otherwise. Supp. However. (5 Fletcher." (section 59. the point of controversy arises from the effects of the creation of the voting trust agreement. the right to sell certain interests in the assets of the corporation and other rights to which a stockholder may be entitled until the liquidation of the corporation. A certified copy of such agreement shall be filed with the corporation and with the Securities and Exchange Commission. (98 ALR 2d. either for certain purposes or for all purposes. In the books of the corporation. of the power to direct how such control shall be used. as the other party. in order to distinguish a voting trust agreement from proxies and other voting pools and agreements. the former assigned and transferred all their shares in ALFA to DBP. it must pass three criteria or tests. it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said voting trust agreement. therefore. 59. said agreement is ineffective and unenforceable. a voting trust agreement results in the separation of the voting rights of a stockholder from his other rights such as the right to receive dividends. 19 Am J 2d Corp. or persons designated by them. The five year-period may be extended in cases where the voting trust is executed pursuant to a loan agreement whereby the period is made contingent upon full payment of the loan. Cyclopedia of the Law on Private Corporations. the right to inspect the books of the corporation. as one party. and the legal title thereto on the other hand. section 2075 [1976] p. In the instant case. either with or without a reservation to the owners. 331citing Tankersly v. 374 F. that in the case of a voting trust specifically required as a condition in a loan agreement. and shall specify the terms and conditions thereof. Under Section 59 of the new Corporation Code which expressly recognizes voting trust agreements. and (3) that the principal purpose of the grant of voting rights is to acquire voting control of the corporation. The execution of a voting trust agreement. By its very nature. may create a dichotomy between the equitable or beneficial ownership of the corporate shares of a stockholders. Voting Trusts — One or more stockholders of a stock corporation may create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the share for a period rights pertaining to the shares for a period not exceeding five (5) years at any one time: Provided. 1 [d]. The petitioners maintain that with the execution of the voting trust agreement between them and the other stockholders of ALFA. Albright. They argue that by virtue to of the voting trust agreement the petitioners can . 5th paragraph of the Corporation Code) Thus. sec. said voting trust may be for a period exceeding (5) years but shall automatically expire upon full payment of the loan. the traditional concept of a voting trust agreement primarily intended to single out a stockholder's right to vote from his other rights as such and made irrevocable for a limited duration may in practice become a legal device whereby a transfer of the stockholder's shares is effected subject to the specific provision of the voting trust agreement. The certificate or certificates of stock covered by the voting trust agreement shall be cancelled and new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement. namely: (1) that the voting rights of the stock are separated from the other attributes of ownership. The said provision partly reads: Sec. 379 sec. 538) Under section 59 of the Corporation Code.

citing 5 Fletcher 326. 1969 ed. The Corporation Code. 92 [1969]citing People v. that: Every director must own at least one (1) share of the capital stock of the corporation of which he is a director which share shall stand in his name on the books of the corporation.no longer be considered directors of ALFA. the petitioners invoke section 23 of the Corporation Code which provides. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be director . a technical stockholders' suit in right of the corporation. The Law on Private Corporations and Corporate Practice. 109 N. Both under the old and the new Corporation Codes there is no dispute as to the most immediate effect of a voting trust agreement on the status of a stockholder who is a party to its execution — from legal titleholder or owner of the shares subject of the voting trust agreement. 536). 327] (Rollo. 296) Hence. Notes & Selected Cases. Pineda and Carlos. p. in part. 492-493. . Cyclopedia of the Law of Private Corporations. . p. . 268. p. and thus render them ineligible as directors. the stock as appearing on the books of the corporation (2 Fletcher. 269 Ill. to wit: The "transferring stockholder". Commentaries and Jurisprudence on the Commercial Laws of the Philippines. p. on the contrary. (Emphasis supplied) Under the old Corporation Code. 351. cannot be adversely affected by the simple act of such director being a party to a voting trust agreement inasmuch as he remains owner (although beneficial or equitable only) of the shares subject of the voting trust agreement pursuant to which a transfer of the stockholder's shares in favor of the trustee is required (section 36 of the old Corporation Code). Comments. Lihme. this is a clear indication that in order to be eligible as a director. Aguedo Agbayani on the right and status of the transferring stockholders. is whether the change in his status deprives the stockholder of the right to qualify as a director under section 23 of the present Corporation Code which deletes the phrase "in his own right. Agbayani. 270) The private respondents. Campos and LopezCampos. not beneficial ownership of. what is material is the legal title to.Philippine Law on Private Corporations. (Rollo. supra. 1051). p.. p. 3 pp." Section 30 of the old Code states that: Every director must own in his own right at least one share of the capital stock of the stock corporation of which he is a director.. 175. (Salonga. Vol. It is said that the voting trust agreement does not destroy the status of the transferring stockholders as such.. strictly speaking. . the eligibility of a director. section 300. A director who ceases to be the owner of at least one share of the capital stock of a stock corporation of which is a director shall thereby cease to be a director . . They cited the commentaries by Prof. is equitable owner for the stocks represented by the voting trust certificates and the stock reversible on termination of the trust by surrender. 1988 ed. 386. p. 291) We find the petitioners' position meritorious. such as. 1958 ed. [Commercial Laws of the Philippines by Agbayani.. But a more accurate statement seems to be that for some purposes the depositing stockholder holding voting trust certificates in lieu of his stock and being the beneficial owner thereof. ed. p. With the omission of the phrase "in his own right" the election of trustees and other persons who in fact are not beneficial owners of the shares registered in their names on the books of the corporation becomes formally legalized (see Campos and LopezCampos. insist that the voting trust agreement between ALFA and the DBP had all the more safeguarded the petitioners' continuance as officers and directors of ALFA inasmuch as the general object of voting trust is to insure permanency of the tenure of the directors of a corporation. he becomes the equitable or beneficial owner. remains and is treated as a stockholder. The penultimate question. which stock shall stand in his name on the books of the corporation. therefore. 1981. 3. also called the "depositing stockholder".E. It seems to be deducible from the case that he may sue as a stockholder if the suit is in equity or is of an equitable nature. In support of their contention. Vol. No disqualification arises by virtue of the phrase "in his own right" provided under the old Corporation Code.

4 of the subject voting trust agreement. 1987. The TRUSTEE shall issue to each of the TRUSTORS a trust certificate for the number of shares transferred. and this agreement shall have the same force and effect upon that said stockholder. the petitioners ceased to own at least one share standing in their names on the books of ALFA as required under Section 23 of the new Corporation Code. Emphasis supplied) Considering that the voting trust agreement between ALFA and the DBP transferred legal ownership of the stock covered by the agreement to the DBP as trustee. still directors . ALFA and the DBP. Consequently. the public respondent committed a reversible error when it ruled that: . while the individual respondents (petitioners Lee and Lacdao) may have ceased to be president and vice-president. 140-142) Inasmuch as the private respondents in this case failed to substantiate their claim that the subject voting trust agreement did not deprive the petitioners of their position as directors of ALFA. . 137-138. 1989 issued by the DBP through one Elsa A. The TRUSTEE shall vote upon the shares of stock at all meetings of ALFA. There appears to be no dispute from the records that DBP has taken over full control and management of the firm. The petitioners ceased to be directors. 3. the latter became the stockholder of record with respect to the said shares of stocks. . The transfer of shares from the stockholder of ALFA to the DBP is the essence of the subject voting trust agreement as evident from the following stipulations: 1. they were at least up to that time. all the directors of ALFA were stripped of their positions as such. respectively. The TRUSTORS hereby assign and deliver to the TRUSTEE the certificate of the shares of the stocks owned by them respectively and shall do all things necessary for the transfer of their respective shares to the TRUSTEE on the books of ALFA. 4." (CA Rollo. of the corporation at the time of service of summons on them on August 21. the transfer of the petitioners' shares to the DBP created vacancies in their respective positions as directors of ALFA. . the petitioners were no longer included in the list of officers of ALFA "as of April 1982. in the Certification dated January 24. and cause a certificate of stock evidencing the share so transferred to be issued in the name of such person. The aforequoted statement is quite inaccurate in the light of the express terms of Stipulation No. Remedial Management Group. There can be no reliance on the inference that the five-year period of the voting trust agreement in question had lapsed in 1986 so that the legal title to the stocks covered by the said voting trust agreement ipso facto reverted to the petitioners as beneficial . pp. which shall be transferrable in the same manner and with the same effect as certificates of stock subject to the provisions of this agreement. Guevarra. xxx xxx xxx 9. were aware at the time of the execution of the agreement that by virtue of the transfer of shares of ALFA to the DBP. annual or special. the petitioners can no longer be deemed to have retained their status as officers of ALFA which was the case before the execution of the subject voting trust agreement. Any stockholder not entering into this agreement may transfer his shares to the same trustees without the need of revising this agreement. and shall possess in that respect the same powers as owners of the equitable as well as the legal title to the stock. The TRUSTEE may cause to be transferred to any person one share of stock for the purpose of qualifying such person as director of ALFA. In the absence of a showing that the DBP had caused to be transferred in their names one share of stock for the purpose of qualifying as directors of ALFA. by virtue of the voting trust agreement executed in 1981 disposed of all their shares through assignment and delivery in favor of the DBP. as trustee. matter or business that may be submitted to any such meeting. Hence. (CA Rollo. Vice-President of its Special Accounts Department II. pp. 2. Both parties. upon any resolution. . Moreover.The facts of this case show that the petitioners. They also ceased to have anything to do with the management of the enterprise.

owners pursuant to the 6th paragraph of section 59 of the new Corporation Code which reads: Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the agreed period, and the voting trust certificate as well as the certificates of stock in the name of the trustee or trustees shall thereby be deemed cancelled and new certificates of stock shall be reissued in the name of the transferors. On the contrary, it is manifestly clear from the terms of the voting trust agreement between ALFA and the DBP that the duration of the agreement is contingent upon the fulfillment of certain obligations of ALFA with the DBP. This is shown by the following portions of the agreement. WHEREAS, the TRUSTEE is one of the creditors of ALFA, and its credit is secured by a first mortgage on the manufacturing plant of said company; WHEREAS, ALFA is also indebted to other creditors for various financial accomodations and because of the burden of these obligations is encountering very serious difficulties in continuing with its operations. WHEREAS, in consideration of additional accommodations from the TRUSTEE, ALFA had offered and the TRUSTEE has accepted participation in the management and control of the company and to assure the aforesaid participation by the TRUSTEE, the TRUSTORS have agreed to execute a voting trust covering their shareholding in ALFA in favor of the TRUSTEE; AND WHEREAS, DBP is willing to accept the trust for the purpose aforementioned. NOW, THEREFORE, it is hereby agreed as follows: xxx xxx xxx 6. This Agreement shall last for a period of Five (5) years, and is renewable for as long as the obligations of ALFA with DBP, or any portion thereof, remains outstanding; (CA Rollo, pp. 137-138)

Had the five-year period of the voting trust agreement expired in 1986, the DBP would not have transferred all its rights, titles and interests in ALFA "effective June 30, 1986" to the national government through the Asset Privatization Trust (APT) as attested to in a Certification dated January 24, 1989 of the Vice President of the DBP's Special Accounts Department II. In the same certification, it is stated that the DBP, from 1987 until 1989, had handled APT's account which included ALFA's assets pursuant to a management agreement by and between the DBP and APT (CA Rollo, p. 142) Hence, there is evidence on record that at the time of the service of summons on ALFA through the petitioners on August 21, 1987, the voting trust agreement in question was not yet terminated so that the legal title to the stocks of ALFA, then, still belonged to the DBP. In view of the foregoing, the ultimate issue of whether or not there was proper service of summons on ALFA through the petitioners is readily answered in the negative. Under section 13, Rule 14 of the Revised Rules of Court, it is provided that: Sec. 13. Service upon private domestic corporation or partnership. — If the defendant is a corporation organized under the laws of the Philippines or a partnership duly registered, service may be made on the president, manager, secretary, cashier, agent or any of its directors. It is a basic principle in Corporation Law that a corporation has a personality separate and distinct from the officers or members who compose it. (See Sulo ng Bayan Inc. v. Araneta, Inc., 72 SCRA 347 [1976]; Osias Academy v. Department of Labor and Employment, et al., G.R. Nos. 83257-58, December 21, 1990). Thus, the above rule on service of processes of a corporation enumerates the representatives of a corporation who can validly receive court processes on its behalf. Not every stockholder or officer can bind the corporation considering the existence of a corporate entity separate from those who compose it. The rationale of the aforecited rule is that service must be made on a representative so integrated with the corporation sued as to make it a priori supposable that he will realize his responsibilities

and know what he should do with any legal papers served on him. (Far Corporation v. Francisco, 146 SCRA 197 [1986] citing Villa Rey Transit, Inc. v. Far East Motor Corp. 81 SCRA 303 [1978]). The petitioners in this case do not fall under any of the enumerated officers. The service of summons upon ALFA, through the petitioners, therefore, is not valid. To rule otherwise, as correctly argued by the petitioners, will contravene the general principle that a corporation can only be bound by such acts which are within the scope of the officer's or agent's authority. (see Vicente v. Geraldez, 52 SCRA 210 [1973]). WHEREFORE, premises considered, the petition is hereby GRANTED. The appealed decision dated March 19, 1990 and the Court of Appeals' resolution of May 10, 1990 are SET ASIDE and the Orders dated April 25, 1989 and October 17, 1989 issued by the Regional Trial Court of Makati, Branch 58 are REINSTATED. SO ORDERED.

G.R. No. 96551 November 4, 1996 PREMIUM MARBLE RESOURCES, INC., petitioner, vs. THE COURT OF APPEALS and INTERNATIONAL CORPORATE BANK, respondents. PRINTLINE CORPORATION, petitioner, vs. THE COURT OF APPEALS and INTERNATIONAL CORPORATE BANK, respondents. TORRES, JR., J.: Assailed in the instant petition for review is the decision 1 of the Court of Appeals in CA-G.R. CV No. 16810 dated September 28, 1990 which affirmed the trial court's dismissal of petitioners' complaint for damages. The antecedents: On July 18, 1986, Premium Marble Resources, Inc. (Premium for brevity), assisted by Atty. Arnulfo Dumadag as counsel, filed an action for damages against International Corporate Bank which was docketed as Civil Case No. 14413. The complaint states, inter alia: 3. Sometime in August to October 1982, Ayala Investment and Development Corporation issued three (3) checks [Nos. 097088, 097414 & 27884] in the aggregate amount of P31,663.88 payable to the plaintiff and drawn against Citibank;

xxx xxx xxx 5. On or about August to October 1982, former officers of the plaintiff corporation headed by Saturnino G. Belen, Jr., without any authority whatsoever from the plaintiff deposited the abovementioned checks to the current account of his conduit corporation, Intervest Merchant Finance (Intervest, for brevity) which the latter maintained with the defendant bank under account No. 020002027-8; 6. Although the checks were clearly payable to the plaintiff corporation and crossed on their face and for payee's account only, defendant bank accepted the checks to be deposited to the current account of Intervest and thereafter presented the same for collection from the drawee bank which subsequently cleared the same thus allowing Intervest to make use of the funds to the prejudice of the plaintiff; xxx xxx xxx 14. The plaintiff has demanded upon the defendant to restitute the amount representing the value of the checks but defendant refused and continue to refuse to honor plaintiff's demands up to the present; 15. As a result of the illegal and irregular acts perpetrated by the defendant bank, the plaintiff was damaged to the extent of the amount of P31,663.88; Premium prayed that judgment be rendered ordering defendant bank to pay the amount of P31,663.88 representing the value of the checks plus interest, P100,000.00 as exemplary damages; and P30,000.00 as attorney's fees. In its Answer International Corporate Bank alleged, inter alia, that Premium has no capacity/personality/authority to sue in this instance and the complaint should, therefore, be dismissed for failure to state a cause of action. A few days after Premium filed the said case, Printline Corporation, a sister company of Premium also filed an action for damages

against International Corporate Bank docketed as Civil Case No. 14444. Thereafter, both civil cases were consolidated. Meantime, the same corporation, i.e., Premium, but this time represented by Siguion Reyna, Montecillio and Ongsiako Law Office as counsel, filed a motion to dismiss on the ground that the filing of the case was without authority from its duly constituted board of directors as shown by the excerpt of the minutes of the Premium's board of directors' meeting. 2 In its opposition to the motion to dismiss, Premium thru Atty. Dumadag contended that the persons who signed the board resolution namely Belen, Jr., Nograles & Reyes, are not directors of the corporation and were allegedly former officers and stockholders of Premium who were dismissed for various irregularities and fraudulent acts; that Siguion Reyna Law office is the lawyer of Belen and Nograles and not of Premium and that the Articles of Incorporation of Premium shows that Belen, Nograles and Reyes are not majority stockholders. On the other hand, Siguion Reyna Law firm as counsel of Premium in a rejoinder, asserted that it is the general information sheet filed with the Securities and Exchange Commission, among others, that is the best evidence that would show who are the stockholders of a corporation and not the Articles of Incorporation since the latter does not keep track of the many changes that take place after new stockholders subscribe to corporate shares of stocks. In the interim, defendant bank filed a manifestation that it is adopting in toto Premium's motion to dismiss and, therefore, joins it in the praying for the dismissal of the present case on the ground that Premium lacks authority from its duly constituted board of directors to institute the action. In its Order, the lower court concluded that: Considering that the officers (directors) of plaintiff corporation enumerated in the Articles of Incorporation, filed on November 9, 1979, were "to serve until their successors are elected and qualified" and considering further that as of March 4, 1981, the officers of the plaintiff corporation were Alberto Nograles, Fernando Hilario, Augusto Galace, Jose L.R. Reyes, Pido Aguilar and Saturnino

III The Court of Appeals erred when it ruled that undersigned counsel was not authorized by the Board of Directors to file Civil Case Nos. Dumadag nor that set represented by the Siguion Reyna. petitioner submitted its Articles of Incorporation 7 dated November 6. Jr. Jose Ma. 3 On appeal. II The Court of Appeals erred in giving due course to the motion to dismiss filed by the Siguion Reyna Law Office in behalf of petitioner when the said law office had already appeared in other cases wherein the petitioner is the adverse party. Nograles and Jose L. Later on. may prosecute cases in the name of the plaintiff corporation. who presumably are the officers represented by the Siguion Reyna Law Firm. viz. Reyes. IV The Court of Appeals erred in concluding that under SEC Case No. We find the petition without merit. 14413.R. 1986 8 that as of . to show that Premium did not authorize the filing in its behalf of any suit against the private respondent International Corporate Bank. It is clear from the pleadings filed by the parties in these two cases that the existence of a cause of action against the defendants is dependent upon the resolution of the case involving intra-corporate controversy still pending before the SEC. Saturnino G.. and Jose Ma. Gan. Oscar Gan. 2688 is pending has not even made the prohibition. the Court of Appeals affirmed the trial court's Order 4 which dismissed the consolidated cases. presented a Resolution 6 dated July 30. V The Court of Appeals is without jurisdiction to prohibit the incumbent Board of Directors from acting and filing this case when the SEC where SEC Case No. Montecillo and Ongsiako Law Office. through the first set of officers. Oscar B. 1982. Jr. On the other hand.. Petitioner. Lionel Pengson. Petitioner submits the following assignment of errors: I The Court of Appeals erred in giving due course to the motion to dismiss filed by the Siguion Reyna Law Office when the said motion is clearly filed not in behalf of the petitioner but in behalf of the group of Belen who are the clients of the said law office. Silva.. as proof that the filing of the case against private respondent was authorized by the Board. 2688 of the SEC could be decided is a premature exercise of authority or assumption of legal capacity for and in behalf of plaintiff corporation. However. 1979 with the following as Directors: Mario C. the Court finds that the officers represented by Atty.Belen. The only issue in this case is whether or not the filing of the case for damages against private respondent was authorized by a duly constituted Board of Directors of the petitioner corporation. neither the set of officers represented by Atty. Hence. Silva. Alberto C. Celso. 2688 could be decided. they are moving for the dismissal of the above-entitled case. Aderito Yujuico and Rodolfo Millare. and that together with the defendants. presented the Minutes 5 of the meeting of its Board of Directors held on April 1. viz.. Lionel Pengson. 14413 and 14444. the second set of officers. 2688 the incumbent directors could not act for and in behalf of the corporation. Pedro C. Belen. The issues raised in Civil Case No. Dumadag do not as yet have the legal capacity to sue for and in behalf of the plaintiff corporation and/or the filing of the present action (Civil Case 14413) by them before Case No. 1986. This Court is of the opinion that before SEC Case No. this petition. Mario Zavalla. Zavalla. 14444 are similar to those raised in Civil Case No. it appears from the general information sheet and the Certification issued by the SEC on August 19.

nationalities and residences of the directors. 1981. 108905 October 23. the names. trustees and officers elected. 10 The claim. the issue of authority and the invalidity of plaintiff-appellant 's subscription which is still pending. as of 1986 appears to be the set of officers elected in March 1981. Reyes — Secretary/Director Pido E. . — Within thirty (30) days after the election of the directors. 1982 states that the newly elected officers for the year 1982 were Oscar Gan. While the Minutes of the Meeting of the Board on April 1. to the sound judgment of the Securities & Exchange Commission. for lack of merit. . Sec. the present action must necessarily fail. therefore.R. Jr. . were: Alberto C. are the incumbent officers of Premium has not been fully substantiated. or any other officer of the corporation. the petition is hereby DENIED. of petitioners as represented by Atty. Mario Zavalla.March 4. Nograles — President/Director Fernando D. Galace — Treasurer Jose L.R. trustees and officers elected. petitioner failed to show proof that this election was reported to the SEC. The power of the corporation to sue and be sued in any court is lodged with the board of directors that exercises its corporate powers. 1997 . We agree with the finding of public respondent Court of Appeals. — Chairman of the Board. Evidently. ACCORDINGLY. nationalities and residences of the directors. SO ORDERED. the secretary." 9 By the express mandate of the Corporation Code (Section 26). the officers and members of the board of directors of the Premium Marble Resources. under sanction of oath of responsible officers. 26 of the Corporation Code provides. thus: Sec. all corporations duly organized pursuant thereto are required to submit within the period therein stated (30 days) to the Securities and Exchange Commission the names. considering the premises. no person. Report of election of directors. the objective sought to be achieved by Section 26 is to give the public information. can validly bind the corporation. is a matter that is also addressed. In fact. Thus. that Zaballa. Aderito Yujuico and Rodolfo Millare. trustees and officers of the corporation. 26. 11 We find no reversible error in the decision sought to be reviewed. Dumadag. Aquilar — Director Saturnino G. In the absence of an authority from the board of directors.. No. Hilario — Vice President/Director Augusto I. shall submit to the Securities and Exchange Commission. Inc. that "in the absence of /any board resolution from its board of directors the [sic] authority to act for and in behalf of the corporation. trustees and officers. G. Belen. not even the officers of the corporation. financial condition and operational status of the company together with information on its key officers or managers so that those dealing with it and those who intend to do business with it may know or have the means of knowing facts concerning the corporation's financial resources and business responsibility. of the nature of business. the last entry in their General Information Sheet with the SEC. et al.

GRACE VILLAGE ASSOCIATION. as a permanent member thereof. The Petitioner herein has already acquired a vested right to a permanent seat in the Board of Directors of Grace Village Association. and 3. Nevertheless..00) PESOS for one vote. On February 13. As the board denied petitioner's request to be allowed representation without election. in 1990. 1975 is valid and binding. which in turn upheld the decision of the HIGC's appeals board. As adopted in 1968. on the other hand. 2. composed of eleven (11) members to serve for one (1) year until their successors are duly elected and have qualified. lessees and residents at Grace Village. vs.. GRACE CHRISTIAN HIGH SCHOOL representative is a permanent Director of the ASSOCIATION. 1990. the facts are as follows: Petitioner Grace Christian High School is an educational institution offering preparatory. Go were its president and chairman of the committee on election. THE COURT OF APPEALS. ANNUAL MEETING The Annual Meeting of the members of the Association shall be held on the second Thursday of January of each year. INC. that on December 20. and ERNESTO L. But on February 13. 1 Briefly stated. The candidates receiving the first fourteen (14) highest number of votes shall be declared and proclaimed elected until their successors are elected and qualified. 2 It appears. a committee of the board of directors prepared a draft of an amendment to the by-laws. kindergarten and secondary courses at the Grace Village in Quezon City.: The question for decision in this case is the right of petitioner's representative to sit in the board of directors of respondent Grace Village Association. For fifteen years — from 1975 until 1989 — petitioner's representative had been recognized as a "permanent director" of the association. where they shall elect by plurality vote and by secret balloting. petitioner. MENDOZA. the Board of Directors. the by-laws of the association provided in Article IV. Private respondent Grace Village Association. while private respondents Alejandro G. is an organization of lot and/or building owners. Petitioner appealed to the Court of Appeals. Its action was dismissed by the hearing officer whose decision was subsequently affirmed by the appeals board. Hence this petition for review based on the following contentions: 1. up to 1990. GO. reading as follows: 3 VI. The Charter and Associate Members shall elect the Directors of the Association. ALEJANDRO G. 1990. The Practice of tolerating the automatic inclusion of petitioner as a permanent member of the Board of Directors of the Association without the benefit of election is allowed under the law. petitioner was given a permanent seat in the board of directors of the association. respectively. He shall be entitled to as many votes as he has acquired thru his monthly membership fees onlycomputed on a ratio of TEN (P10. Beltran and Ernesto L. Each Charter or Associate Member of the Association is entitled to vote. petitioner brought an action for mandamus in the Home Insurance and Guaranty Corporation. petitioner received notice from the association's committee on election that the latter was "reexamining" (actually. Inc. J.GRACE CHRISTIAN HIGH SCHOOL. the association's committee on election in a . as follows: The annual meeting of the members of the Association shall be held on the first Sunday of January in each calendar year at the principal office of the Association at 2:00 P.M. Inc. This draft was never presented to the general membership for approval. after it was presumably submitted to the board. respondents. reconsidering) the right of petitioner's representative to continue as an unelected member of the board. from 1975. The amended By-laws of the Association drafted and promulgated by a Committee on December 20. BELTRAN. when this suit was brought. 1975.

1990 for the purpose of discussing the amendment of the by-laws and a possible amicable settlement of the case. that. .P. 7 A preliminary conference was held on March 29. the school brought suit for mandamus in the Home Insurance and Guaranty Corporation to compel the board of directors of the association to recognize its right to a permanent seat in the board. had not yet been ratified by the members of the association nor approved by competent authority"." 6 In reply. 68). The parties merely agreed that the board of directors of the association should meet on April 17. Additionally. principal of the school. it contended. The hearing officer held that the amended by-laws. thereof: The Charter and Associate Members shall elect the Directors of the Association. 1975 prepared by the committee on by-laws . had become part of the by-laws of the association as Article VI. He held that past practice . upon which petitioner based its claim. Instead. on the contrary. the board adopted a resolution declaring the 1975 provision null and void for lack of approval by members of the association and the 1968 by-laws to be effective. the SEC rendered an opinion to the effect that the practice of allowing unelected members in the board was contrary to the existing by-laws of the association and to §92 of the Corporation Code (B. 1990." 4 For this reason. "[was] merely a proposed by-laws which. notices were sent to the members of the association that the provision on election of directors of the 1968 by-laws of the association would be observed. the directors of the association declared "the proposed by-law dated December 20. 1990 but nothing substantial was agreed upon. Blg. Petitioner based its claim on the following portion of the proposed amendment which. . GRACE CHRISTIAN HIGH SCHOOL representative is a permanent Director of the ASSOCIATION. in the meeting held on April 17." It argued that "the by-laws which was registered with the SEC on January 16. 1969 should be the prevailing by-laws of the association and not the proposed amended by-laws. that "it was the sentiment that all directors should be elected by members of the association" because "to make a person or entity a permanent Director would deprive the right of voters to vote for fifteen (15) members of the Board. The candidates receiving the first fourteen (14) highest number of votes shall be declared and proclaimed elected until their successors are elected and qualified. paragraph 2. although previously tolerated in the past elections should be reexamined." The hearing officer rejected petitioner's contention that it had acquired a vested right to a permanent seat in the board of directors.letter informed James Tan. Private respondent association cited the SEC opinion in its answer. claiming that the notice issued for the 1990 elections ran "counter to the practice in previous years" and was "in violation of the by-laws (of 1975)" and "unlawfully deprive[d] Grace Christian High School of its vested right [to] a permanent seat in the board. 1990. Petitioner requested the chairman of the election committee to change the notice of election by following the procedure in previous elections. the hearing officer of the HIGC rendered a decision dismissing petitioner's action." and "it is undemocratic for a person or entity to hold office in perpetuity. 1968 as the "prevailing by-laws under which the association is to operate until such time that the proposed amendments to the by-laws are approved and ratified by a majority of the members of the association and duly filed and approved by the pertinent government agency." 5 As the association denied its request. although implemented in the past. On June 20. Tan was told that "the proposal to make the Grace Christian High School representative as a permanent director of the association." Following this advice. 1990 and April 24. A meeting was held on April 17. the association contended that the basis of the petition for mandamus was merely "a proposed by-laws which has not yet been approved by competent authority nor registered with the SEC or HIGC. null and void" and the by-laws of December 17. 1990. petitioner maintained that the "amended by-laws is valid and binding" and that the association was estopped from questioning the by-laws. but the parties failed to reach an agreement. It appears that the opinion of the Securities and Exchange Commission on the validity of this provision was sought by the association and that in reply to the query.

amend or repeal any by-law or adopt new by-laws. But petitioner contends that the members of the committee which prepared the proposed amendment were duly authorized to do so and that because the members of the association thereafter implemented the provision for fifteen years. This provision of the by-laws actually implements §22 of the Corporation Law (Act No. may alter. may." 9 Petitioner appealed to the Court of Appeals but petitioner again lost as the appellate court on February 9." It said that "what is merely being upheld is the act of the incumbent directors of the Board of correcting a long standing practice which is not anchored upon any legal basis. at a regular or special meeting duly called for the purpose. The proposed amendment to the by-laws was never approved by the majority of the members of the association as required by these provisions of the law and by-laws. may delegate to the board of directors the power to amend or repeal any by-law or to adopt new bylaws: Provided. The owners of two-thirds of the subscribed capital stock. Election and term of trustees. which may be more than fifteen (15) in number as may be fixed in their articles of incorporation or by-laws. the board of trustees of non-stock corporations. or a majority of the members if there be no capital stock. 1990. the proposed amendment for all intents and purposes should be considered to have been ratified by them. 1459) which provides: §22. The HIGC appeals board denied claims that the school "[was] being deprived of its right to be a member of the Board of Directors of respondent association.in election of directors could not give rise to a vested right and that departure from such practice was justified because it deprived members of association of their right to elect or to be voted in office. And provided. The more has the amended by-laws become binding . as soon as organized. Trustees thereafter elected to fill vacancies occurring before the expiration of a particular term shall hold office only for the unexpired period. unless accompanied by certificate of the Bank Commissioner to the effect that such amendments are in accordance with law. that the "agents" or committee were duly authorized to draft the amended by-laws and the acts done by the "agents" were in accordance with such authority. change or adopt any new by-laws. — Unless otherwise provided in the articles of incorporation or the by-laws. prescribing the affirmative vote of the majority of the members of the association at a regular or special meeting called for the adoption of amendment to the by-laws. affirmed the decision of the HIGC. It cited the opinion of the SEC based on §92 of the Corporation Code which reads: §92. amend. not to say that "allowing the automatic inclusion of a member representative of petitioner as permanent director [was] contrary to law and the registered by-laws of respondent association. and subsequent elections of trustees comprising one-third (1/3) of the board of trustees shall be held annually and trustees so elected shall have a term of three (3) years. shall. The owners of a majority of the subscribed capital stock. Article XIX of the by-laws provides: 10 The members of the Association by an affirmative vote of the majority at any regular or special meeting called for the purpose. banking institution or building and loan association." 8 The appeals board of the HIGC affirmed the decision of the hearing officer in its resolution dated September 13. however. the acts of the "agents" from the very beginning were lawful and binding on the homeowners (the principals) per sewithout need of any ratification or adoption. That the Director of the Bureau of Commerce and Industry shall not hereafter file an amendment to the by-laws of any bank. so classify themselves that the term of office of one-third (1/3) of the number shall expire every year. 1993. That any power delegated to the board of directors to amend or repeal any by-law or adopt new by-laws shall be considered as revoked whenever a majority of the stockholders or of the members of the corporation shall so vote at a regular or special meeting. Petitioner contends: 11 Considering." because the fact was that "it may nominate as many representatives to the Association's Board as it may deem appropriate. or two-thirds of the members if there be no capital stock. therefore. The Court of Appeals held that there was no valid amendment of the association's by-laws because of failure to comply with the requirement of its existing by-laws. further.

And not only that. or both. 9095 of the President of the United States. Referring to §92 of the present Corporation Code. however. If there is anybody who has the right to take away such right of the petitioner. not a single member of the Association has registered any desire to remove the right of herein petitioner to an automatic membership in the board. He also automatically sits as the Chairman of the Board of Trustees. This is not merely tantamount to tacit ratification of the acts done by duly authorized "agents" but express approval and confirmation of what the "agents" did pursuant to the authority granted to them. One example is the Plus XII Catholic Center. the corporate powers of all corporations formed under this Act shall be exercised. Unless otherwise provided in this Act. and similar Acts of Congress of the United States relating to the same subject. That in corporations.on the homeowners when the homeowners followed and implemented the provisions of the amended by-laws. pursuant to the powers granted or delegated by the Trading with the Enemy Act. It is actually §§28 and 29 of the Corporation Law — not §92 of the present law or §29 of the former one — which require members of the boards of directors of corporations to be elected. that whoever is the Archbishop of Manila is considered a member of the board of trustees without benefit of election. where there is no stock. Says petitioner: The right of the petitioner to an automatic membership in the board of the Association was granted by the members of the Association themselves and this grant has been implemented by members of the board themselves all through the years. Inc. xxx xxx xxx If fact. or by Executive Order No. petitioner claims that it has acquired a vested right to a permanent seat in the board. from the members of the corporation: Provided. is contrary to law. These provisions read: §28. Under the by-laws of this corporation. Another concrete example is the Cardinal Santos Memorial Hospital. as heretofore or hereafter amended. Inc. It is also provided in the by-laws of this corporation that whoever is the Archbishop of Manila is considered a member of the board of trustees year after year without benefit of any election and he also sits automatically as the Chairman of the Board of Trustees. the truth is that this is allowed and is being practiced by some corporations duly organized and existing under the laws of the Philippines. all business conducted and all property of such corporations controlled and held by a board of not less than five nor more than eleven directors to be elected from among the holders of stock or. Petitioner disputes the ruling that the provision in question. as amended. it would be the individual members of the Association through a referendum and not the present board some of the members of which are motivated by personal interest. the directors need not . Even a careful perusal of the above provision of the Corporation Code would not show that it prohibits a non-stock corporation or association from granting one of its members a permanent seat in its board of directors or trustees. other than banks. again without need of any election. in which the United States has or may have a vested interest. If there is no such legal prohibition then it is allowable provided it is so provided in the Articles of Incorporation or in the by-laws as in the instant case. Petitioner claims that that is not so because there is really no provision of law prohibiting unelected members of boards of directors of corporations. petitioner says: It is clear that the above provision of the Corporation Code only provides for the manner of election of the members of the board of trustees of non-stock corporations which may be more than fifteen in number and which manner of election is even subject to what is provided in the articles of incorporation or by-laws of the association thus showing that the above provisions [are] not even mandatory. giving petitioner's representative a permanent seat in the board of the association. Outside the present membership of the board. Corollarily.

the members of the association were not aware that this was contrary to law. who shall hold office for one (1) year and until their successors are elected and qualified. no matter how long continued. . where there is no stock from the members of the corporation.be elected from among the holders of the stock. But in the case of petitioner. then to each member. postage pre-paid. Blg. at his last known place of residence." Practice. Even less tenable is petitioner's claim that its right is "coterminus with the existence of the association. there is no reason at all for its representative to be given a seat in the board. or at such subsequent meeting as may be then determined. the fact that for fifteen years it has not been questioned or challenged but. It contends that jurisdiction over this case is exclusively vested in the HIGC. Since the provision in question is contrary to law. 13 It is probable that. In fact it was not given such seat in the beginning. directors shall be elected to hold their offices for one year and until their successors are elected and qualified. Unless otherwise provided in the by-laws. Nor can petitioner claim a vested right to sit in the board on the basis of "practice. a notice of the election of directors shall be posted for a period of three weeks immediately preceding the election in at least three public places. in the place where the principal office of the corporation is established or located. (Emphasis added) The present Corporation Code (B. petitioner questions the authority of the SEC to render an opinion on the validity of the provision in question. Thereafter the directors of the corporation shall be elected annually by the stockholders if it be a stock corporation or by the members if it be a nonstock corporation. It was only in 1975 that a proposed amendment to the by-laws sought to give it one. 68). addressed to each stockholder. i. 1980. — Unless otherwise provided in this Code. on the contrary. two weeks' notice of the election of directors must be given by publication in some newspaper of general circulation devoted to the publication of general news at the place where the principal office of the corporation is established or located. At the meeting for the adoption of the original by-laws. all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be electedfrom among the holders of stocks. by virtue of and for as long as they hold a particular office. There may be corporations in which there are unelected members in the board but it is clear that in the examples cited by petitioner the unelected members sit as ex officio members. Nor does petitioner claim a right to such seat by virtue of an office held." 14 Finally. It is more accurate to say that the members merely tolerated petitioner's representative and tolerance cannot be considered ratification. If there be no newspaper published at the place where the principal office of the corporation is established or located. the corporate powers of all corporations formed under this Code shall be exercised. but certainly not the allowance of petitioner's representative as an unelected member of the board of directors. The Board of Directors or Trustees. in allowing petitioner's representative to sit on the board. cannot give rise to any vested right if it is contrary to law. (Emphasis added) These provisions of the former and present corporation law leave no room for doubt as to their meaning: the board of directors of corporations must be elected from among the stockholders or members. 12 similarly provides: §23. For that matter the members of the association may have formally adopted the provision in question.e.. or. and if no provision is made in the by-laws for the time of election the same shall be held on the first Tuesday after the first Monday in January. or. from among the members of the corporation. if it is contrary to law. but their action would be of no avail because no provision of the by-laws can be adopted if it is contrary to law. Neither can it attain validity through acquiescence because. (emphasis added) §29. if there be no stockholders. and by written notice deposited in the post-office. or where there is no stock. It should be noted that they did not actually implement the provision in question except perhaps insofar as it increased the number of directors from 11 to 15. it is beyond the power of the members of the association to waive its invalidity. which took effect on May 1. appears to have been implemented by the members of the association cannot forestall a later challenge to its validity.P.

The HIGC merely cited as authority for its ruling the opinion of the SEC chairman. SALAS & HON. ANTONIO S. The HIGC could have cited any other authority for the view that under the law members of the board of directors of a corporation must be elected and it would be none the worse for doing so. VILLASIS. SALAS. 1986 included Item No. respondents. Salas. 1997 WESTERN INSTITUTE OF TECHNOLOGY. 1986. Salas. and Richard S. VILLASIS & REGINALD F. Salas. INC. Inc. were distributed to all Board Members.R. petitioner.. The notice allegedly indicated that the meeting to be held on June 1. Private respondents Ricardo T. belonging to the same family. DIMAS ENRIQUEZ. SO ORDERED. Prior to aforesaid Special Board Meeting. PRESTON F. for short). a stock corporation engaged in the operation. SOLEDAD SALASTUBILLEJA. 1986 in the principal office of WIT at La Paz. 1993 of Branch 33 of the Regional Trial Court of Iloilo City in Criminal Cases Nos. RICHARD S. (WIT. 6 which states: . a Special Board Meeting was held. J. Salvador T. Iloilo City. the minority stockholders of WIT. 1993 and (2) the Order dated November 23. 113032 August 21. SALVADOR T.: Up for review on certiorari are: (1) the Decision dated September 6.. dated May 24. respectively. copies of notice thereof. RICARDO T. Salas. The judgment acquitted the private respondents of both charges. SALAS. sometime on June 1. G. JR. 37097 and 37098 for estafa and falsification of a public document. WHEREFORE. SALAS. but petitioners seek to hold them civilly liable. In attendance were other members of the Board including one of the petitioners Reginald Villasis. Antonio S. of an educational institution. are the majority and controlling members of the Board of Trustees of Western Institute of Technology. Soledad Salas-Tubilleja. According to petitioners. JUDGE PORFIRIO PARIAN. the decision of the Court of Appeals is AFFIRMED. HOMERO L. vs.But this case was not decided by the SEC but by the HIGC. HERMOSISIMA. No. VILLASIS. among others.

s. Reginald Villasis and Dimas Enriquez filed an affidavit-complaint against private respondents before the Office of the City Prosecutor of Iloilo. respectively. 1(b) of the RPC.470. There were no other business. Secretary. par.M. that is. 1986). and Trustee (who later became Secretary). were filed before Branch 33 of the Regional Trial Court of Iloilo City. SOLEDAD SALAS-TUBILLEJA. 1986. the above-named accused. (Sgd) ANTONIO S. a corporation duly organized and existing under the laws of the Republic of the Philippines. The charge for falsification of public document was anchored on the private respondents' submission of WIT's income statement for the fiscal year 1985-1986 with the Securities and Exchange Commission (SEC) reflecting therein the disbursement of corporate funds for the compensation of private respondents based on Resolution No. 1985 to April 30. Inc. in the City of Iloilo. 6 of the Amended By-Laws of Western Institute of Technology. Corporate Treasurer — P3. did then and there wilfully. it was unanimously resolved that: The Officers of the Corporation be granted monthly compensation for services rendered as follows: Chairman — P9. SALAS (whose dates and places of birth cannot be ascertained) of the crime of FALSIFICATION OF A PUBLIC DOCUMENT. 1986.Possible implementation of Art. Prestod Villasis. Series of 1986 was passed by the board of trustees on March 30. including therein the disbursement of the retroactive compensation of accused corporate officers in the amount of P186. 1991.00/month. This shall amend and superceed (sic) any previous resolution. unlawfully and criminally prepare and execute and subsequently cause to be submitted to the Securities and Exchange Commission an income statement of the corporation for the fiscal year 1985-1986. Vice-Chairman. SALAS. III.. when in truth and in fact. 48. petitioners Homero Villasis.00/month and Corporate Secretary — P3. by then and there making it appear that the basis thereof Resolution No. making it appear that the same was passed by the board on March 30.500. The Information for falsification of a public document states: The undersigned City Prosecutor accuses RICARDO T. SALAS Corporate Secretary 2 A few years later. 1986 On the motion of Mr. on compensation of all officers of the corporation. ANTONIO S. 1986.000. Sec. 48 s. on March 13. Treasurer. as said accused well knew. the Board of Trustees passed Resolution No. when in truth. Soledad Tubilleja (accused). 1986.00/month. Series of 1986 was passed on March 30. Inc. 171 of the Revised Penal Code. SALVADOR T. 48. the same being required to be submitted every end of the corporation fiscal year by the aforesaid Commission. 4. The Chairman declared the meeting adjourned at 5:11 P. SALAS and RICHARD S. a date not covered by the corporation's fiscal year 1985-1986 (beginning May 1. committed as follows: That on or about the 10th day of June. granting monthly compensation to the private respondents as corporate officers retroactive June 1. Inc.e. SALAS.: Resolution No. from May 1. duly seconded by Mrs. Richard Salas (accused). Philippines and within the jurisdiction of this Honorable Court. series of 1986. 1985 and the ten per centum of the net profits shall be distributed equally among the ten members of the Board of Trustees. 1985 and ending April 30. retroactive June 1. Vice Chairman — P3. a public document. 1985. 1986. 1986). . held on March 30. conspiring and confederating together and mutually helping one another. to better realized (sic) their purpose.500.. Art. 1 In said meeting. This is to certify that the foregoing minutes of the regular meeting of the Board of Trustees of Western Institute of Technology. one for falsification of a public document under Article 171 of the Revised Penal Code and the other for estafa under Article 315. as a result of which two (2) separate criminal informations. 4.70. the same was actually passed on June 1. being then the Chairman. no such Resolution No. a date covered by the corporation's fiscal year 1985-1986 (i.00/month. 1986.500. of the board of trustees of the Western Institute of Technology. 1986 is true and correct to the best of my knowledge and belief. and therefore. viz.

1985 in favor of private respondents.79 for the subsequent collective salaries of private respondents every 15th and 30th of the month until the filing of the criminal complaints against them on March 1991. disbursed the funds of the corporation by effecting payment of their retroactive salaries in the amount of P186. 4 [Emphasis ours] Thereafter. ANTONIO S. the instant petition.470. SALAS. SALVADOR T.470. Intervenor likewise prayed for the dismissal of the petition for being utterly without merit. private respondents are obliged to return these amounts to the corporation with interest. lawful authority to disburse — let alone violation of applicable laws and jurisprudence. had no authority whatsoever to represent the corporation in filing the petition. dated December 2. Inc. 315. counsel for the other petitioners.CONTRARY TO LAW. board members of WIT. trial for the two criminal cases. Gale..500. and within the jurisdiction of this Honorable Court. 7 Hence. 3 [Emphasis ours]. and Trustee (who later became Secretary).970. conspiring and confederating together and mutually helping one another to better realize their purpose. the above-named accused. 1991. did then and there wilfully. 1991. Philippines. 37097 and 37098. 1995. 1986 until the present. Iloilo City. committed as follows: That on or about the 1st day of June. 8 Petitioners would like us to hold private respondents civilly liable despite their acquittal in Criminal Cases Nos. a corporation duly organized and existing under the laws of the Republic of the Philippines. for estafa reads: The undersigned City Prosecutor accuses RICARDO SALAS. was consolidated.453. plus P1. docketed as Criminal Cases Nos. disowning its inclusion in the petition and submitting that Atty. to wit: herein accused. and still refuse. 1993 without imposing any civil liability against the accused therein. Secretary. November 22. par. denied in an Order dated November 23. of the Board of Trustees of Western Institute of Technology. Inc. SALAS. respectively. 1986 and every year thereafter. SOLEDAD SALAS-TUBILLEJA. they refused. The Motion for Intervention was granted on January 16. a Motion for Intervention.70 representing retroactive compensation as of June 1. Thus. Significantly on December 8. Iloilo City.453. After a full-blown hearing. to rectify the same to the damage and prejudice of the corporation (and its stockholders) in the total sum of P1. Art. was filed before this Court by Western Institute of Technology. 1993. 30. 1994. 1 (b) of the Revised Penal Code. 1986. as if the same were their own. the directors . SALAS (whose dates and places of birth cannot be ascertained) of the crime of ESTAFA. We cannot sustain the petitioners. Compensation of directors — In the absence of any provision in the by-laws fixing their compensation. Philippines.970. They base their claim on the alleged illegal issuance by private respondents of Resolution No. CONTRARY TO LAW. Treasurer. The Information. in the amount of P19. being then the Chairman. Judge Porfirio Parian handed down a verdict of acquittal on both counts 5 dated September 6. however. Petitioners maintain that this grant of compensation to private respondents is proscribed under Section 30 of the Corporation Code. unlawfully and feloniously defraud the said corporation (and its stockholders) in the following manner. Vice-Chairman. series of 1986 ordering the disbursement of corporate funds in the amount of P186.00 per month. RICHARD S. Tranquilino R.79 as of November 15. 37097 and 37098. supposedly one of the petitioners herein.. knowing fully well that they have no sufficient. Petitioners filed a Motion for Reconsideration 6 of the civil aspect of the RTC Decision which was.00 and subsequently paying themselves every 15th and 30th of the month starting June 15. 48. and when herein accused were informed of the illegality of these disbursements by the minority stockholders by way of objections made in an annual stockholders' meeting held on June 14. on the other hand. 1994. November 22. 1991. in the City of Iloilo. The pertinent section of the Corporation Code provides: Sec. Philippines.

. Treasurer and Secretary of Western Institute of Technology. . [Emphasis ours] There is no argument that directors or trustees. 1986 is true and correct to the best of my knowledge and belief. there are only two (2) ways by which members of the board can be granted compensation apart from reasonable per diems: (1) when there is a provision in the by-laws fixing their compensation. it was unanimously resolved that: The Officers of the Corporation be granted monthly compensation for services rendered as follows: Chairman — P9. exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year. 1986 On the motion of Mr. SALAS Corporate Secretary 11 [Emphasis ours] Clearly. This is to certify that the foregoing minutes of the regular meeting of the Board of Trustees of Western Institute of Technology. ." The phrase as such directors is not without significance for it delimits the scope of the prohibition to compensation given to them for services performed purely in their capacity as directors or trustees.500.M.: Resolution No. . as the case may be. Inc. . duly seconded by Mrs. In no case shall the total yearly compensation of directors.shall not receive any compensation. Consequently. however. Resolution No. 1986 for easy reference. against granting compensation to directors/trustees of a corporation is not a sweeping rule. as such directors. except for reasonable per diems: Provided. and (2) when the stockholders representing a majority of the outstanding capital stock at a regular or special stockholders' meeting agree to give it to them. . in addition to reasonable per diems. .500. exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year. [T]he directors shall not receive any compensation.00/month. as such directors. 48. the prohibition with respect to granting compensation to corporate directors/trustees as suchunder Section 30 is not violated in this particular case. therefore. without compensation. the last sentence of Section 30 which provides: . We quote once more Resolution No. (Sgd) ANTONIO S. 1985 and the ten per centum of the net profits shall be distributed equally among the ten members of the Board of Trustees. 48 s. and that the return upon their shares adequately furnishes the motives for service. Vice-Chairman. This rule is founded upon a presumption that directors/trustees render service gratuitously. (Emphasis ours] does not likewise find application in this case since the compensation is being given to private respondents in their capacity as officers of WIT and not as board members. s. but rather as officers of the corporation. however.00/month and Corporate Secretary — P3. That any such compensation (other than per diems) may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders' meeting.000.500. Vice Chairman — P3. 48.00/month. . s. viz. as such directors. There were no other business. Petitioners assert that the instant case is a derivative suit brought by them as minority shareholders of WIT for and on behalf of the . Soledad Tubilleja (accused). . held on March 30.10 In the case at bench. . The unambiguous implication is that members of the board may receive compensation. when they render services to the corporation in a capacity other than as directors/trustees. 1986 granted monthly compensation to private respondents not in their capacity as members of the board. Corporate Treasurer — P3. are not entitled to salary or other compensation when they perform nothing more than the usual and ordinary duties of their office. . as such directors. This proscription. In no case shall the total yearly compensation of directors. . The Chairman declared the meeting adjourned at 5:11 P.00/month. 9 Under the foregoing section. Richard Salas (accused). more particularly as Chairman. retroactive June 1. This shall amend and superceed (sic) any previous resolution. Worthy of note is the clear phraseology of Section 30 which states: ".

37097 and 37098 for falsification of public document and estafa. Granting. xxx xxx xxx [Emphasis ours] Once the case is decided by the SEC. the same is outrightly dismissible for having been wrongfully filed in the regular court devoid of any jurisdiction to entertain the complaint. s. It will be well to quote the respondent court's ratiocinations acquitting the private respondents on both counts: The prosecution wants this Court to believe and agree that there is falsification of public document because. As an appeal on the civil aspect of Criminal Cases Nos. We are unpersuaded. which it is not. which this petition truly is.corporation to annul Resolution No. members or associates. as claimed by the prosecution. merely states that "this is a petition for review on certiorari on pure questions of law to set aside a portion of the RTC decision in Criminal Cases Nos. the case is not a derivative suit but is merely an appeal on the civil aspect of Criminal Cases Nos. can it be brought to us via a petition for review on certiorari under Rule 45 raising only pure questions of law. it shall have original and exclusive jurisdiction to hear and decide cases involving: xxx xxx xxx b) Controversies arising out of intra-corporate or partnership relations. and between such corporation. 902-A: In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations. By no amount of equity considerations. however. No. partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees. Series of 1986 (Exh. 18 Petitioners. for which the directors refuse to sue. respectively. "1-E-1") was not taken up and passed during the Regular Meeting of the Board of Trustees of the Western Institute of Technology (WIT). partnership or association and the State insofar as it concerns their individual franchise or right to exist as such entity.D. The ease should have been filed with the Securities and Exchange Commission (SEC) which exercises original and exclusive jurisdiction over derivative suits. in pleading that we treat the instant petition as a derivative suit. between any or all of them and the corporation. but on June 1. Resolution No. . and not earlier. if at all deserved. Inc. 14 This is necessary to vest jurisdiction upon the tribunal in line with the rule that it is the allegations in the complaint that vests jurisdiction upon the court or quasi-judicial body concerned over the subject matter and nature of the action. 17 It is only after the case has ran this course. or mixed questions of fact and law. that this is a derivative suit as insisted by petitioners. of law. or associates. on March 30. 1986 which is prejudicial to the corporation. 13 Here. 48. 1986 special meeting of the same board of trustees. are trying to short-circuit the entire process which we cannot here sanction. for purposes of discussion. we have to deny the petition just the same. 1986. 37097 and 37098" 16 since the trial court's judgment of acquittal failed to impose any civil liability against the private respondents. partnership or association of which they are stockholders. 37097 and 37098 filed with the RTC of Iloilo for estafa and falsification of public document. the losing party may file a petition for review before the Court of Appeals raising questions of fact. per Section 5 (b) of P. 12 It is a remedy designed by equity and has been the principal defense of the minority shareholders against abuses by the majority. between and among stockholders. Among the basic requirements for a derivative suit to prosper is that the minority shareholder who is suing for and on behalf of the corporation must allege in his complaint before the proper forum that he is suing on a derivative cause of action on behalf of the corporation and all other shareholders similarly situated who wish to join. A derivative suit is an action brought by minority shareholders in the name of the corporation to redress wrongs committed against it. they being intra-corporate disputes.15 This was not complied with by the petitioners either in their complaint before the court a quo nor in the instant petition which. in part. 48. members. can a mere appeal on the civil aspect of a criminal case be treated as a derivative suit.

III of the Amended By-Laws of the Corporation (Exh. "3-E"). The money they received belongs to them and cannot be said to have been converted and/or misappropriated by them. which we find to be amply substantiated by the records. is authorized by both the Articles of Incorporation and the By-Laws of the corporation.. [Emphasis ours] Likewise. .This Court is reluctant to accept this claim of falsification. civilly liable. "1-E-1") giving compensation to corporate officers. It only presented in evidence Exh. it is evident that there is simply no basis to hold the accused. was indeed included in Other Business. xxx xxx xxx (b) Extinction of the penal action does not carry with it extinction of the civil. III of the same By-Laws. it is perceived by this Court that the receipt and the holding of the money by the accused as salary on basis of the authority granted by the Articles and By-Laws of the corporation are not tainted with abuse of confidence. 1957 (Exh. is simply an implication. 1986. which is page 5 or the last page of the said minutes. 315 of the Revised Penal Code. 48. Inc. 1986. 2. "C". This Court finds that under the Eleventh Article (Exh. Section 2(b) of Rule 111 on the New Rules on Criminal Procedure provides: Sec. According to Sec. 1986. Inc. "C" is part and parcel of the whole minutes of the Board of Trustees Regular Meeting on March 30. xxx xxx xxx . Rule 120 reads: Sec. . "3-B") of the Panay Educational Institution. xxx xxx xxx 19 [Emphasis ours] From the foregoing factual findings. Institution of separate civil action. . unless the extinction proceeds from a declaration in a final judgment that the fact from which the civil might arise did not exist. 1986. "3-D-1") of the Articles of Incorporation (Exh. No better and more credible proof can be considered other than the Minutes (Exh. The mere fact of existence of Exh. "1") itself of the Regular Meeting of the Board of Trustees on March 30. 48. now the Western Institute of Technology. 48. 1986 because the matter regarding compensation was not specifically stated or written in the Agenda and that the words "possible implementation of said Resolution No. it can be readily seen and understood that Resolution No. been submitted. and was taken up and passed on March 30. 1986. enacted on March 30. was expressly written in the Agenda for the Special Meeting of the Board on June 1. 1986 by the Board of Trustees. "1") consisting of five (5) pages. It is the perception of this Court that the grant of compensation or salary to the accused in their capacity as officers of the corporation. 3 and 4 of Art. Form and contents of judgment. In their defense the accused have properly and rightly asserted that the grant of salary is not for directors. all officers shall receive such compensation as may be fixed by the Board of Directors.[O]n the question of whether or not the accused can be held liable for estafa under Sec. private respondents herein. The Officers of the corporation and their corresponding duties are enumerated and stated in Sections 1. 2. "4-A") which was adopted on May 31. the officers of the corporation shall receive such compensation as the Board of Directors may provide. These Articles of Incorporation was adopted on May 17. 6 of the Agenda. No. Art. 1957. the last paragraph of Section 2. Had the complete minutes (Exh. This evidence by implication to the mind of the court cannot prevail over the Minutes (Exh. 1 (b) of Art. but for their being officers of the corporation who oversee the day to day activities and operations of the school. 2. through Resolution No. 1986 for Exh. Series of 1986 (Exh. The imputation that said Resolution No. "1") and cannot ripen into proof beyond reasonable doubt which is demanded in all criminal prosecutions. To state otherwise is to depart from the clear terms of the said articles and by-laws. The prosecution omitted to submit the complete minutes of the regular meeting of the Board of Trustees on March 30. "C" also proves that it was passed on March 30. 48 was neither taken up nor passed on March 30. 6..

located at Surigao del Norte. The facts are as follows: . petitioner. 1978 a Deed of Real Estate Mortgage and Chattel Mortgage in favor of PNB. As of November 20. exclusive of interest and charges. HONORABLE COURT OF APPEALS and REMINGTON INDUSTRIAL SALES CORPORATION. as well as assets of whatever kind. exclusive of interest and charges. 2001 DEVELOPMENT BANK OF THE PHILIPPINES. 20 WHEREFORE. and Antipolo. Rizal. the judgment shall make a finding on the civil liability of the accused in favor of the offended party. Thus.1 On July 13. Negros Occidental. unless there is a clear showing that the act from which the civil liability might arise did not exist. J. a corporation engaged in the manufacture of pure and refined nickel. cement and pyrite conc. Marinduque Mining had also obtained loans totaling P2 Billion from DBP.. 1981. and at Antipolo. 1980. Marinduque Mining executed in favor of PNB and DBP an Amendment to Mortgage Trust Agreement by virtue of which Marinduque Mining mortgaged in favor of PNB and DBP all other real and personal properties and other real rights subsequently acquired by Marinduque Mining. pursuant to the above rule and settled jurisprudence. the instant petition is hereby DENIED with costs against petitioners. vs. 37097 and 37098 is not merely based on reasonable doubt but rather on a finding that the accused-private respondents did not commit the criminal acts complained of. 1996. as follows: G. Marinduque Mining-Industrial Corporation (Marinduque Mining). Marinduque Mining executed on October 9. KAPUNAN. 126200 August 16. [Emphasis ours] The acquittal in Criminal Cases Nos. In said agreement. copper ore/concentrates. respondents. Marinduque Mining mortgaged to PNB and DBP all its real properties located at Surigao del Norte. 1978. any civil action ex delicto cannot prosper.3 For failure of Marinduque Mining to settle its loan obligations. 1984. The events following the foreclosure are narrated by DBP in its petition. The mortgage covered all of Marinduque Mining's real properties. seeking a review of the Decision of the Court of Appeals dated October 6. Apparently. Rizal. including the improvements thereon. the loans extended by PNB amounted to P4 Billion. Acquittal in a criminal action bars the civil action arising therefrom where the judgment of acquittal holds that the accused did not commit the criminal acts imputed to them.xxx xxx xxx In case of acquittal. nature and description which Marinduque Mining may subsequently acquire in substitution or replenishment or in addition to the properties covered by the previous Deed of Real and Chattel Mortgage dated October 7. Marinduque Mining executed in favor of PNB and the Development Bank of the Philippines (DBP) a second Mortgage Trust Agreement. To secure the loans. nickel and cobalt in mixed sulfides.: Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court. PNB and DBP instituted sometime on July and August 1984 extrajudicial foreclosure proceedings over the mortgaged properties.2 On April 27. Negros Occidental.R. Sipalay. obtained from the Philippine National Bank (PNB) various loan accommodations. SO ORDERED. including the improvements thereon. The mortgage also covered all of Marinduque Mining's chattels. No. 1995 and the Resolution of the same court dated August 29. Sipalay.

Nonoc Mining is the assignee of all real and personal properties. "10" to "10-X"-PNB/ DBP). 1984. in the amount of P2. 50 as amended. PNB and DBP thereafter thru a Deed of Transfer dated August 31. 1984. 1986. "13"PNB).755.00 (Exh.048. 1984 on the foreclosed personal properties of MMIC. PNB and DBP. PNB and DBP as highest bidders.534. Likewise. Maricalum Mining Corporation and Island Cement Corporation (Exh.383. between July 16. & machineries/equipment of MMIC located at Sipalay.00 (Exhs. "15" & "15-A" PNB/DBP).] over the foreclosed real properties.000.00 (Exhs.00 (Exhs.107. Nonoc Mining. mining claims. in order to ensure the continued operation of the Nickel refinery plant and to prevent the deterioration of the assets foreclosed. all its rights. chattels.800.In the ensuing public auction sale conducted on August 31. Marinduque Mining purchased and caused to be delivered construction materials and other merchandise from Remington Industrial Sales Corporation (Remington) worth P921. At the auction sale conducted on September 7. Surigao del Norte for an initial consideration of P14. Rizal. 1983. Finally. 1984. Negros Occidental for an initial consideration of P325.000. "11" and "12-QQQQQ"-PNB).610. "8" to "8-BB". likewise held on August 31.950. buildings. purposely. interest and participation over the foreclosed properties of MMIC located at Nonoc Island.4 In the meantime. 1984[.167. "9" to "90GGGGGG"-PNB/DBP). PNB and DBP assigned and transferred in favor of Maricalum Mining Corp. Remington filed a third amended complaint including the Maricalum Mining Corporation (Maricalum Mining) and Island Cement Corporation (Island Cement) as co-defendants. earlier assigned to Nonoc Mining and Industrial Corporation. 1984. major machineries & equipment and other improvements of MMIC located at Antipolo.00 [and] [o]ver the foreclosed chattels of MMIC located at Nonoc Refinery Plant at Surigao del Norte.6 On March 26.5 On September 13. On February 27. Remington asserted that Marinduque Mining. leasehold rights together with the improvements thereon as well as machineries [sic] and equipments [sic] of MMIC located at Nonoc Nickel Refinery Plant at Surigao del Norte for a bid price of P14.000. "14"-PNB/DBP). The purchases remained unpaid as of August 1. buildings. DBP. thru [sic] a Deed of Transfer dated June 6.00 respectively (Exhs. assigned and transferred to Nonoc Mining and Industrial Corporation all their rights. 1982 to October 4. Remington's original complaint was amended to include PNB and DBP as co-defendants in view of the foreclosure by the latter of the real and chattel mortgages on the real and personal properties. On September 7. equipment and other assets of Marinduque Mining. transferred and conveyed to the National Government thru [sic] the Asset Privatization Trust (APT) all its existing rights and interest over the assets of MMIC. PNB. chattels. For the foreclosed real properties together with all the buildings. again assigned. 1984. bidded for P170.000. PNB and DBP emerged and were declared the highest bidders over the foreclosed real properties.577.040. 1984 when Remington filed a complaint for a sum of money and damages against Marinduque Mining for the value of the unpaid construction materials and other merchandise purchased by Marinduque Mining. pursuant to Proclamation No.238. the same were sold to PNB and DBP as the highest bidder in the sum of P678. machinery. "5" to "5-A". equipment and all other assets of Marinduque Mining at its Nonoc Nickel Factory in Surigao del Norte. at the public auction sale conducted on September 18. were sold to PNB and DBP as highest bidders in the sum of P1.772. Remington filed a second amended complaint to include as additional defendant. "6". Maricalum Mining and Island Cement must be treated in law as one and the same entity by disregarding the veil of corporate fiction since: . mining claims. the Nonoc Mining and Industrial Corporation (Nonoc Mining).150. as well as interest.361.000. 1987. Negros Occidental were sold to PNB and DBP.00 (Exh. 1984.00 and P543. interest and participation over the foreclosed properties of MMIC at Sipalay.95. machinery. attorney's fees and the costs of suit. as highest bidders.000. "7" to "7-AA-" PNB/DBP).

DBP NMIC. NMIC. among others. copper mining operation in Sipalay. . key officers and rank-and-file workers and employees of co-defendants NMIC. MMIC. officers and rank-and-file workers in the legitimate pursuit of its business activities. protect fraud or confuse legitimate issues involving creditors such as plaintiff. so as not to defeat public convenience. when in fact and in law. DBP. mining claims and project premises of co-defendant MMIC as to make the aforesaid co-defendants NMIC. Philippine National Bank. aside from the fact that the aforesaid co-defendants NMIC. judgment is hereby rendered in favor of the plaintiff.8 . alter ego. by virtue of which it becomes doubly necessary to disregard the corporation fiction that co-defendants PNB. plus ten percent (10%) surcharge per annum by way of penalty. sweat and private money to supply. Island Cement Corporation and Asset Privatization Trust to pay. Maricalum and Island Cement to which were transferred all the assets. Maricalum and Island Cement likewise used to be the places of business. jointly and severally. Rizal to the prejudice of creditors of co-defendant MMIC such as plaintiff Remington Industrial Sales Corporation whose stockholders. business conduit. Maricalum and Island Cement mere adjuncts and subsidiaries of co-defendants PNB and DBP. agency (sic). On top of everything. Development Bank of the Philippines. subvert justice. invested considerable time.1. subsidiary or auxiliary corporation. and managed by their officers. and to pay the costs. 1989. machineries and equipment to the extent that major policies of co-defendant MMIC were being decided upon by co-defendants PNB and DBP as major financiers who were represented in its board of directors forming part of the majority thereof which through the alleged extrajudicial foreclosure culminated in a complete take-over by co-defendants PNB and DBP bringing about the organization of their co-defendants NMIC. machineries and equipment which were originally owned by co-defendant MMIC beyond the reach of creditors of the latter. representing the principal obligation. Maricalum and Island Cement were organized in such a hurry and in such suspicious circumstances by co-defendants PNB and DBP after the supposed extrajudicial foreclosure of MMIC's assets as to make their supposed projects assets. the dispositive portion of which reads: WHEREFORE. 1990. co-defendant MMIC with some of its vital needs for its operation. Remington filed a motion for leave to file a fourth amended complaint impleading the Asset Privatization Trust (APT) as co-defendant. which co-defendant MMIC during the time of the transactions material to this case became x x x co-defendants PNB and DBP's instrumentality. they should be treated as one and the same at least as far as plaintiff's transactions with co-defendant MMIC are concerned. 2. including the stipulated interest as of June 22. Maricalum Mining Corporation. the financial obligations of x x x MMIC whose operations co-defendants PNB and DBP had highly financed before the alleged extrajudicial foreclosure of defendant MMIC's assets. practically there has only been a change of name for all legal purpose and intents 3. Nonoc Mining and Industrial Corporation. Maricalum and Island Cement creations of co-defendants PNB and DBP were the personnel of codefendant MMIC such that . Maricalum and Island Cement. a fact which all defendants were as (sic) still are aware of during all the time material to the transactions subject of this case. Maricalum and Island Cement being all corporations created by the government in the pursuit of business ventures should not be allowed to ignore. Maricalum and Island Cement which are newly created entities are practically owned wholly by defendants PNB and DBP.95. the sum equivalent to 10% of the amount due as and for attorney's fees. the sum of P920. until the amount is fully paid. six (6) distinct and separate entities. and subject to their control and management. 1984. The places of business not to mention the mining claims and project premises of co-defendants NMIC. The personnel. Co-defendants NMIC. 1989. x x x or obliterate with impunity nay illegally. . justify wrong. Negros Occidental and cement factory in Antipolo. On April 10.755. Said fourth amended complaint was admitted by the lower court in its Order dated April 29. ordering the defendants Marinduque Mining & Industrial Corporation. co-defendants PNB.7 On April 3. the Regional Trial Court (RTC) rendered a decision in favor of Remington. machineries and pieces of equipment of co-defendant MMIC used in its nickel mining project in Surigao del Norte.

credits. as appearing in the books of account and/or related records of the financial institution concerned. where one corporation was 'insolvent and indebted to another. 71 Phil." The appellate court. affirmed the decision of the RTC.. did not point to any fact evidencing bad faith on the part of the Marinduque Mining and its transferees. "Every person must.. including the right to foreclose on loans. credit accommodation. However. and the APT. Milwaukee Refrigeration Transit Co. after the lapse of sixty (60) days from the issuance of this decree. DBP maintaining that Remington has no cause of action against it or PNB. The banks had no choice but to obey the statutory command. Maricalum Mining. justify wrong. there may be circumstances under which their interest as officers in one company may disqualify them in equity from representing both corporations in transactions between the two. merge them into one". Permanent Ed. it skirted the issue entirely by holding that the question of actual fraudulent intent on the part of the interlocking directors of DBP and Marinduque Mining was irrelevant because: As aptly stated by the appellee in its brief. pp. It bears stressing that PNB and DBP are mandated to foreclose on the mortgage when the past due account had incurred arrearages of more than 20% of the total outstanding obligation.. vs. The import of this mandate was lost on the Court of Appeals.Upon appeal by PNB. accommodations and/or guarantees on which the arrearages are less than twenty (20%) percent. Yatco. 1996. Island Cement. which reasoned that under Article 19 of the Civil Code. however.). this petition. Court of Tax Appeals. including accrued interest and other charges. Thus. 247. and/or guarantees granted by them whenever the arrearages on such account. the Court of Appeals. warrants the piercing of the corporate veil such that Marinduque Mining and its transferees could be considered as one and the same corporation. it has been held that the directors of the creditor corporation were disqualified. . but the duty under said law. amount to at least twenty percent (20%) of the total outstanding obligations. 255 per Sanborn. which was denied in the Resolution dated August 29.S. nor against their transferees. In accordance with the foregoing rule. 135-136. therefore.11 In this case. in its Decision dated October 6. we do not find any fraud on the part of Marinduque Mining and its transferees to warrant the piercing of the corporate veil. to foreclose the collateral and/or securities for any loan. protect fraud. The transferees. Inc. this Court has disregarded the separate personality of the corporation where the corporate entity was used to escape liability to third parties. Thus. the law will regard the corporation as an association of persons or in case of two corporations. Nonoc Mining. act with justice. 496. 385 (The Law on Mandatory Foreclosure) provides: It shall be mandatory for government financial institutions. to foreclose upon the subject properties.9 cited by the Court of Appeals in its decision. according to Remington. PNB and DBP did not only have a right. On the other hand. in the exercise of his rights and in the performance of his duties. J. DBP. 142 Fed. Section 1 of Presidential Decree No. Nonoc Mining. This shall be without prejudice to the exercise by the government financial institution of such rights and/or remedies available to them under their respective contracts with their debtors. Hence. 1995. and observe honesty and good faith.]. U. when the notion of legal entity is used to defeat public convenience. vs. give everyone his due. Indeed.10 this Court declared: It is an elementary and fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to which it may be connected. or defend crime. Island Cement and APT. are also liable for the value of Marinduque Mining's purchases. private respondent Remington submits that the transfer of the properties was made in fraud of creditors. including interest and other charges. Maricalum Mining. The presence of fraud. citing 1 Fletcher Encyclopedia of Corporation. (Koppel [Phils. In Yutivo Sons Hardware vs. Petitioner filed a Motion for Reconsideration.. however. x x x. "x x x where the corporations have directors and officers in common.

13The creation of the three corporations was necessary to manage and operate the assets acquired in the foreclosure sale lest they deteriorate from non-use and lose their value. As Remington itself concedes. the creditor of Marinduque Mining is DBP. many of these assets are heavy equipment and it may have been impossible to move them. Remington also asserted in its third amended complaint that the use of Nonoc Mining. but upon the violation of the fiduciary relation to the directors. they should have been classed as instruments rendered void by the legal principle which prevents directors of an insolvent corporation from giving themselves a preference over outside creditors. who are creditors of the company. from acting as directors of the debtor corporation in the authorization of a mortgage or deed of trust to the former to secure such indebtedness x x x" (page 105 of the Appellee's Brief). without reference to the question of any actual fraudulent intent on the part of the directors. The first pertains to transactions between corporations with interlocking directors resulting in the prejudice to one of the corporations." x x x (page 106 of the Appellee's Brief) We also concede that "x x x directors of insolvent corporation. When validity of these mortgages. protect fraud or defend crime. the Court finds that Remington failed to discharge its burden of proving bad faith on the part of Marinduque Mining and its transferees in the mortgage and foreclosure of the subject properties to justify the piercing of the corporate veil. the doctrine of piercing the veil of corporate fiction applies only when such corporate fiction is used to defeat public convenience.14 To disregard the separate juridical personality of a corporation. was questioned by other creditors of the corporation. however. In the absence of any entity willing to purchase these assets from the bank. equity will set aside the transaction at the suit of creditors of the corporation or their representatives. The second principle invoked by respondent court involves "directors x x x who are creditors" which is also inapplicable herein. Assuming that the premises of Marinduque Mining were not among those acquired by DBP in the foreclosure sale. In the same manner that "x x x when the corporation is insolvent. justified the hiring by Nonoc Mining. justify wrong. Neither do we discern any bad faith on the part of DBP by its creation of Nonoc Mining. The same reasons of convenience and practicality. can not secure to themselves any preference or advantage over other creditors in the payment of their claims.)12 The Court of Appeals made reference to two principles in corporation law. since the corporation allegedly prejudiced (Remington) is a third party. its directors who are its creditors can not secure to themselves any advantage or preference over other creditors.by reason of self-interest. DBP is not authorized by its charter to engage in the mining business. It cannot be presumed. what else would it do with these properties in the meantime? Sound business practice required that they be utilized for the purposes for which they were intended. not one of the corporations with interlocking directors (Marinduque Mining and DBP). They can not thus take advantage of their fiduciary relation and deal directly with themselves. Maricalum and Island Cement of Marinduque Mining's personnel to manage and operate the properties and to maintain the continuity of the mining operations. to the injury of others in equal right. . If they do. Here. The governing body of officers thereof are charged with the duty of conducting its affairs strictly in the interest of its existing creditors. not the directors of Marinduque Mining. It is not good morals or good law. Maricalum and Island Cement. for the right of the creditors does not depend upon fraud in fact. Maricalum and Island Cement of the premises of Marinduque Mining and the hiring of the latter's officers and personnel also constitute badges of bad faith. convenience and practicality dictated that the corporations so created occupy the premises where these assets were found instead of relocating them. and it would be a breach of such trust for them to undertake to give any one of its members any advantage over any other creditors in securing the payment of his debts in preference to all others. No doubt.15 In this case. the wrongdoing must be clearly and convincingly established. To reiterate. x x x" (page 106-107 of the Appellee's Brief. This rule does not apply in this case. not to mention efficiency. to secure debts upon which the directors were indorsers.

to secure a loan of P30.16 the Court had occasion to construe Article 2242. up to the value of the same. DBP should be held liable for the value thereof. and "(5) Mortgage credits recorded in the Registry of Property. the buyer could only pay P5. the lien may be enforced on the price. invoking Articles 2242. with the proviso that in case of sale under the foreclosure decree the vendor's lien and the mortgage credit of appellant Barretto should be paid pro rata from the proceeds. up to the value thereof. After hearing. Cruzado filed a motion for recognition for her "vendor's lien" in the amount of P12. and 2249 of the new Civil Code. In its decision upholding the order of the lower court. The facts that gave rise to the case were summarized by this Court in its resolution as follows: x x x Rosario Cruzado sold all her right. Baretto. substance and identity.500 in advance. xxx xxx xxx In Barretto vs. the claim of Remington cannot be enforced against DBP. In the meantime.500 on account of the note.00. Barretto. the buyer Villanueva was able to secure a clean certificate of title (No.000. However. they shall be satisfied pro-rata. plus legal interest. and if the movable has been resold by the debtor and the price is still unpaid.500. said mortgage having been duly recorded. Pura Villanueva defaulted on the mortgage loan in favor of Barretto. on said movables. so long as they are in the possession of the debtor. In the absence of liquidation proceedings. married to Jose C. and executed a promissory note for the balance of P17. this right is not lost by the immobilization of the thing by destination. Article 2241 of the Civil Code provides: ARTICLE 2241. The latter foreclosed the mortgage in her favor. and upon its becoming final asked for execution on 31 July 1958. title.000." Application of the above-quoted provisions to the case at bar would mean that the herein appellee Rosario Cruzado as an unpaid vendor of the property in question has the right to share prorata with the appellants the proceeds of the foreclosure sale. Our original decision affirmed this order of the Court of First Instance of Manila. Villanueva. after the payment of the taxes and assessments upon the immovable property or real rights.00. however. upon the things pledged or mortgaged. obtained judgment. when the price thereof can be determined proportionally. With reference to specific movable property of the debtor. for which reason the vendor obtained judgment for the unpaid .00. the Court ratiocinated thus: Article 2242 of the new Civil Code enumerates the claims. or those guaranteed by a chattel mortgage. and interest and that of her children in the house and lot herein involved to Pura L. (4) Credits guaranteed with a pledge so long as the things pledged are in the hands of the creditor.000. The purchaser paid P1. and among them are: "(2) For the unpaid price of real property sold. 32626)." Article 2249 of the same Code provides that "if there are two or more credits with respect to the same specific real property or real rights. upon the immovable sold". neither is the right lost by the sale of the thing together with other property for a lump sum. and as transferee of these purchases. governing claims or liens over specific immovable property. the following claims or liens shall be preferred: xxx xxx xxx balance. and mortgaged the property to appellant Magdalena C. On 14 August 1958. Villanueva for P19. 32526. the court below ordered the "lien" annotated on the back of Certificate of Title No. (3) Claims for the unpaid price of movables sold. mortgages and liens that constitute an encumbrance on specific immovable property.03.The Court of Appeals also held that there exists in Remington's favor a "lien" on the unpaid purchases of Marinduque Mining. 2243. provided it has not lost its form.

All the remaining thirteen classes of preferred creditors under Article 2242 enjoy no priority among themselves.e. et al. And the rule is further clarified in the Report of the Code Commission. or other liquidation proceedings of similar import. but must be paid pro rata. and could even exhaust proceeds if necessary. Under the system of the Civil Code of the Philippines. after the payment of the taxes and assessments upon the immovable property or real rights. Lantin.18 and in two cases both entitled Development Bank of the Philippines vs. such as insolvency." (Italics supplied) Thus. speaking for the Court.19 . [Emphasis supplied] The ruling in Barretto was reiterated in Phil.B. Reyes. NLRC. however. Hon. and it would render purposeless the special laws on insolvency.L. etc. they shall be satisfied pro rata. the settlement of decedent's estate under Rule 87 of the Rules of Court. is incorrect. whereby one class of creditors could exclude the creditors of lower order until the claims of the former were fully satisfied out of the proceeds of the sale of the real property subject of the preference. the order of the Court of First Instance of Manila now appealed from. Pursuant to the former Code. and must be reversed. explained the reasons for the reversal: A.. Article 2249 provides: "If there are two or more credits with respect to the same specific real property or real rights. then other creditor-debtor relationships where there are concurrence of credits would be left without any rules to govern them. If we are to interpret this portion of the Code as intended only for insolvency cases. or liens within the purview of legal provisions governing insolvency x x x (Italics supplied). conflicts among creditors entitled to preference as to specific real property under Article 1923 were to be resolved according to an order of priorities established by Article 1927. Savings Bank vs. as follows "The question as to whether the Civil Code and the Insolvency Law can be harmonized is settled by this Article (2243).17 Upon motion by appellants. The preferences named in Articles 2261 and 2262 (now 2241 and 2242) are to be enforced in accordance with the Insolvency Law. Jr.. the preferred creditors enumerated in Nos. 2 to 14 of Article 2242 (or such of them as have credits outstanding) must necessarily be convened. only taxes enjoy a similar absolute preference. unless the claimant were enforcing a credit for taxes that enjoy absolute priority. Thus. It is thus apparent that the full application of Articles 2249 and 2242 demands that there must be first some proceeding where the claims of all the preferred creditors may be bindingly adjudicated. This explains the rule of Article 2243 of the new Civil Code that — "The claims or credits enumerated in the two preceding articles shall be considered as mortgages or pledges of real or personal property.. Wherefore. the Court reconsidered its decision. Justice J.. decreeing that the proceeds of the foreclosure sale be apportioned only between appellant and appellee. The previous decision failed to take fully into account the radical changes introduced by the Civil Code of the Philippines into the system of priorities among creditors ordained by the Civil Code of 1889.xxx xxx xxx As to the point made that the articles of the Civil Code on concurrence and preference of credits are applicable only to the insolvent debtor. it becomes evident that one preferred creditor's third-party claim to the proceeds of a foreclosure sale (as in the case now before us) is not the proceeding contemplated by law for the enforcement of preferences under Article 2242. and the import of their claims ascertained. however. suffice it to say that nothing in the law shows any such limitation. because the rights of the other creditors likewise enjoying preference under Article 2242 can not be ascertained. If none of the claims is for taxes. i. a dispute between two creditors will not enable the Court to ascertain the pro rata dividend corresponding to each. in proportion to the amount of the respective credits." But in order to make this prorating fully effective.

Cagayan de Oro City. WHEREFORE. private respondent. Defendant contends that the trial court did not acquire jurisdiction over its person since the summons was improperly served upon its employee in its branch office at Cagayan de Oro City who is not one of those persons named in Section 11. Tambo. the ruling therein should apply equally in this case where specific movable property is involved. SO ORDERED. 98-824.: Before this Court is a petition for certiorari and prohibition with prayer for the issuance of a temporary restraining order and/or writ of preliminary injunction seeking to annul and set aside the Orders dated August 5. 1998 at their new office Villa Gonzalo. Ltd. as shown in the Sheriffs Return. 1998. before the Regional Trial Court of Makati allegedly for failure of the latter to comply with its contractual obligation in that. 1999 case of litigation regarding any dispute arising therefrom. The decision of the Court of Appeals dated October 6. plaintiff filed a Motion to Declare Defendant in Default5 alleging that defendant has failed to file an Answer despite its receipt allegedly on May 5. The original complaint filed in the Regional Trial Court in CV Case No. J. Nazareth. 1998 of the public respondent Judge Herminio I. Davao City and with branch offices at 2492 Bay View Drive. Lapasan. vs. filed a Complaint for Breach of Contract and Damages against petitioner.nêt On June 9. Metro Manila and Kolambog. other than a few unfinished low cost houses.1 Summons. 1995 and its Resolution promulgated on August 29. together with the complaint. Parañaque. LTD. in his capacity as Presiding Judge. G. defendant filed a Special Appearance with Motion to Dismiss4 alleging that on May 6. Defendant prayed for the dismissal of the complaint on the ground of improper service of summons and for lack of jurisdiction over the person of the defendant. 1998. on June 10. HERMINIO I. Wendell Sabulbero at the stated address at Kolambog.Although Barretto involved specific immovable property.R. Villarosa & Partner Co. WENDELL SALBULBERO on May 5. 84-25858 is hereby DISMISSED. there were no substantial developments therein. Meanwhile. as plaintiff. They further agreed that in ... RTC. Villarosa & Partner Co. 1998 and November 20. 1998.B. petitioner. Cagayan de Oro City2 but the Sheriff's Return of Service3 stated that the summons was duly served "upon defendant E. Ltd. Rule 14 of the 1997 Rules of Civil Procedure upon whom service of summons may be made. Benito of the Regional Trial Court of Makati City. respondent. Petitioner and private respondent executed a Deed of Sale with Development Agreement wherein the former agreed to develop certain parcels of land located at Barrio Carmen. 1998.1âwphi1. Wendell Sabulbero actually E. As the extrajudicial foreclosure instituted by PNB and DBP is not the liquidation proceeding contemplated by the Civil Code. On June 22. B. Cagayan de Oro belonging to the latter into a housing subdivision for the construction of low cost housing units. Petitioner E. "summons intended for defendant" was served upon Engr. Branch 132.B.. Lapasan. VILLAROSA & PARTNER CO. 1998. BENITO. 136426 August 6. 1996 is REVERSED and SET ASIDE. 1998 of the summons and the complaint. were served upon the defendant. Remington cannot claim its pro rata share from DBP. through its Branch Manager Engr. the venue shall be in the proper courts of Makati. HON. an employee of defendant at its branch office at Cagayan de Oro City. plaintiff filed an Opposition to Defendant's Motion to Dismiss6 alleging that the records show that defendant. Makati City and IMPERIAL DEVELOPMENT CORPORATION.. is a limited partnership with principal office address at 102 Juan Luna St. Wendell Sabulbero. Engr. as defendant.. the petition is GRANTED. and evidenced by the signature on the face of the original copy of the summons. through its branch manager. On April 3. thru its Branch Manager Engr. No. GONZAGA-REYES. Cagayan de Oro City. Branch 132 and praying that the public respondent court be ordered to desist from further proceeding with Civil Case No.

1998 as stated in the motion to dismiss. 13. NLRC13which held that a corporation is bound by the service of summons upon its assistant manager. Nazareth. Petitioner invokes Section 11 of Rule 14 of the 1997 Rules of Civil Procedure. Rule 14 of the 1997 Rules of Civil Procedure provides that: When the defendant is a corporation. Private respondent filed its Comment to the petition citing the cases Kanlaon Construction Enterprises Co. it validly acquired jurisdiction over the person of the defendant. On August 19. managing partner. restricted the service of summons on persons enumerated therein. 1998. On August 5. that defendant has transferred its office from Kolambog. vs. — If the defendant is a corporation organized under the laws of the Philippines or a partnership duly registered. and that the new provision is very specific and clear in that the word "manager" was changed to "general manager". general manager. Cagayan de Oro to its new office address at Villa Gonzalo.14 Sec. 11. 1998 as stated in the Sheriffs Return nor on May 6. 1998. and that it was one (1) month after receipt of the summons and the complaint that defendant chose to file a motion to dismiss. (emphasis supplied). Defendant's Motion for Reconsideration was denied in the Order dated November 20. and excluding therefrom agent and director. defendant.received the summons and the complaint on May 8. defendant. corporate secretary. service may be made on the president. and that the purpose of the rule is to bring home to the corporation notice of the filing of the action. Rule 14 of the Rules of Court which provided that: Sec. Petitioner contends that the enumeration of persons to whom summons may be served is "restricted. When the complaint was filed by Petitioner on April 3. secretary. or any of its directors. 1998. despite the fact that the trial court did not acquire jurisdiction over the person of petitioner because the summons intended for it was improperly served.NLRC12 wherein it was held that service upon a construction project manager is valid and in Gesulgon vs. on the contrary. On September 4. plaintiff filed an Opposition to defendant's Motion for Reconsideration9 alleging that defendant's branch manager "did bring home" to the defendant-corporation the notice of the filing of the action and by virtue of which a motion to dismiss was filed. filed a Motion for Reconsideration8 alleging that Section 11. filed a Reply10 contending that the changes in the new rules are substantial and not just general semantics. Service upon private domestic corporation or partnership. (emphasis supplied). by Special Appearance. The trial court stated that since the summons and copy of the complaint were in fact received by the corporation through its branch manager Wendell Sabulbero. "secretary" to "corporate secretary". Defendant was given ten (10) days within which to file a responsive pleading. cashier. Inc. agent. the 1997 Rules of Civil Procedure was already in force. 1998. On August 27. there was substantial compliance with the rule on service of summons and consequently. by Special Appearance. Rule 14 of the new Rules did not liberalize but. 1998 as evidenced by the signature appearing on the copy of the summons and not on May 5. manager. This provision revised the former Section 13. the present petition alleging that respondent court gravely abused its discretion tantamount to lack or in excess of jurisdiction in denying petitioner's motions to dismiss and for reconsideration. limited and exclusive" following the rule on statutory construction expressio unios est exclusio alterius and argues that if the Rules of Court Revision . service may be made on the president. The only issue for resolution is whether or not the trial court acquired jurisdiction over the person of petitioner upon service of summons on its Branch Manager. partnership or association organized under the laws of the Philippines with a juridical personality.11 Hence. or inhouse counsel. Cagayan de Oro. 1998. the trial court issued an Order7 denying defendant's Motion to Dismiss as well as plaintiffs Motion to Declare Defendant in Default. 1998. treasurer. Lapasan..

"corporate secretary" instead of "secretary". as distinguished from an independent practitioner. . is an illustration of the need for this revised section with limited scope and specific terminology. . secretary. he had sufficient responsibility and discretion to realize the importance of the legal papers served on him and to relay the same to the president or other responsible officer of petitioner such that summons for petitioner was validly served on him as agent and authorized representative of petitioner. under the new Rules. the then Sec. this Court ruled that under the NLRC Rules of Procedure. strict compliance with the rules has been enjoined. stated that "(T)he rule must be strictly observed. and "treasurer" instead of "cashier. In these cases." The aforesaid terms were obviously ambiguous and susceptible of broad and sometimes illogical interpretations. thus:23 . The Filoil case. if the party is represented by counsel or any other authorized representative or agent. . Estacio who managed and supervised the construction project in Iligan City (although the principal address of the corporation is in Quezon City) and supervised the work of the employees.22 Notably. involving the litigation lawyer of the corporation who precisely appeared to challenge the validity of service of summons but whose very appearance for that purpose was seized upon to validate the defective service. ordinary clerk of a corporation17. private secretary of corporate executives18. summons shall be served on such person. cashier. Thus the absurd result in the Filoil case necessitated the amendment permitting service only on the in-house counsel of the corporation who is in effect an employee of the corporation. . it could have easily done so by clear and concise language. . . The particular revision under Section 11 of Rule 14 was explained by retired Supreme Court Justice Florenz Regalado. In the Kanlaon case. In said case. Retired Justice Oscar Herrera. The purpose is to render it reasonably certain that the corporation will receive prompt and proper notice in an action against it or to insure that the summons be served on a representative so . agent or any of its directors. The designation of persons or officers who are authorized to accept summons for a domestic corporation or partnership is now limited and more clearly specified in Section 11. It was held that as manager. Also in the Gesulgon case cited by private respondent. The rule now states "general manager" instead of only "manager". or the corporation's Chief Finance and Administrative Officer21. In the case of Delta Motor Sales Corporation vs. 13 of this Rule allowed service upon a defendant corporation to "be made on the president. The officer upon whom service is made must be one who is named in the statute. We agree with petitioner. ." The phrase "agent.24 It should be noted that even prior to the effectivity of the 1997 Rules of Civil Procedure. summons on the respondent shall be served personally or by registered mail on the party himself. the summons was received by the clerk in the office of the Assistant Manager (at principal office address) and under Section 13 of Rule 14 (old rule). otherwise the service is insufficient. retained counsel19. service of summons upon an agent of the corporation is no longer authorized. Earlier cases have uphold service of summons upon a construction project manager15. who is also a consultant of the Rules of Court Revision Committee. Rule 14 of the 1997 Rules of Civil Procedure. . especially the word "agent" of the corporation. summons was served on one Engr. (emphasis supplied). a corporation's assistant manager16. these persons were considered as "agent" within the contemplation of the old rule.Committee intended to liberalize the rule on service of summons.25 the Court held: A strict compliance with the mode of service is necessary to confer jurisdiction of the court over a corporation. or any of its directors" is conspicuously deleted in the new rule. Mangosing. The cases cited by private respondent are therefore not in point. Service must be made to one named in (the) statute . summons may be made upon the clerk who is regarded as agent within the contemplation of the rule. like the assistant general manager20. manager. officials who had charge or control of the operations of the corporation.

1âwphi1.28 the Court succinctly clarified that. The assailed Orders of the public respondent trial court are ANNULLED and SET ASIDE. Inc. service upon a general manager of a firm's branch office has been held as improper as summons should have been served at the firm's principal office. Helen Bautista Ricafort. the filing of a motion to dismiss. . There is no question that the defendant's voluntary appearance in the action is equivalent to service of summons. . Any proceeding undertaken by the trial court will consequently be null and void. Section 20 now provides that "the inclusion in a motion to dismiss of other grounds aside from lack of jurisdiction over the person of the defendant shall not be deemed a voluntary appearance. 98-824.32 WHEREFORE. Dizon. There being no proper service of summons. . Hon. vs. The fact that defendant filed a belated motion to dismiss did not operate to confer jurisdiction upon its person..27 it was held that the service of summons on the general manager of the insurance firm's Cebu branch was improper. Inc.30 This doctrine has been abandoned in the case of La Naval Drug Corporation vs. the rule was that a party may challenge the jurisdiction of the court over his person by making a special appearance through a motion to dismiss and if in the same motion. .. the movant raised other grounds or invoked affirmative relief which necessarily involves the exercise of the jurisdiction of the court. which is now Section 20 of Rule 14 of the 1997 Rules. . precisely objecting to the jurisdiction of the court over the person of the defendant can by no means be deemed a submission to the jurisdiction of the court. Branch 132 is declared without jurisdiction to take cognizance of Civil Case No. vs. the trial court cannot take cognizance of a case for lack of jurisdiction over the person of the defendant. for the guidance of the Bench and Bar. Accordingly. et al. lest we allow circumvention of the innovation by the 1997 Rules in order to obviate delay in the administration of justice.integrated with the corporation that such person will know what to do with the legal papers served on him." . And in the case of Solar Team Entertainment. Court of Appeals. In First Integrated Bonding & Inc. et al. Service of summons upon persons other than those mentioned in Section 13 of Rule 14 (old rule) has been held as improper. Consequently. . (emphasis supplied).31 which became the basis of the adoption of a new provision in the former Section 23. instead of upon the general manager at its principal office at Davao City is improper.Co. "to bring home to the corporation notice of the filing of the action. whether or not belatedly filed by the defendant. default order could have been obviated had the summons been served at the firm's principal office. 26 Even under the old rule. the petition is hereby GRANTED. The liberal construction rule cannot be invoked and utilized as a substitute for the plain legal requirements as to the manner in which summons should be served on a domestic corporation. "strictest" compliance with Section 11 of Rule 13 of the 1997 Rules of Civil Procedure (on Priorities in modes of service and filing) is mandated and the Court cannot rule otherwise. his authorized agent or attorney.29 Before. .nêt SO ORDERED. Accordingly. and all its orders and issuances in connection therewith are hereby ANNULLED and SET ASIDE. . The public respondent Regional Trial Court of Makati. we rule that the service of summons upon the branch manager of petitioner at its branch office at Cagayan de Oro." The emplacement of this rule clearly underscores the purpose to enforce strict enforcement of the rules on summons. the trial court did not acquire jurisdiction over the person of the petitioner. In other words.

offered a "wash out" settlement. Branch XXV. covered by Purchase Contract Nos.. a complaint dated February 26. "IVO"). docketed as Civil Case No. instead. Under its second cause of action. vs. 126751 March 28. however.500. petitioner. Petitioner Safic alleged that on July 1.G. INC. 1986. Thus.000 long tons of crude coconut oil.. IVO bound itself to pay to Safic the difference between the said prevailing price and the contract price of the 2. A601681. A601415. A601683 and A601770A/B/C/. it placed purchase orders with IVO for a total of 4. (hereinafter. J. respondent. A601385. 1986. A601446 and A601655. to be delivered within the month of January 1987.750 tons of crude coconut oil.. 2001 SAFIC ALCAN & CIE. Safic demanded that IVO make marginal deposits within forty-eight hours on the eight .: Petitioner Safic Alcan & Cie (hereinafter.39597. sale and trading of coconut oil. whereby the coconut oil subject of the purchase contracts were to be "sold back" to IVO at the prevailing price in the international market at the time of wash out. it placed purchase orders with IVO for 2. 1986 and October 31. failed to deliver the said coconut oil and.00.000 long tons of crude coconut oil. Inc. IVO failed to pay this amount despite repeated oral and written demands. It filed with the Regional Trial Court of Manila. 1986 and September 25. Safic alleged that on eight occasions between April 24. "Safic") is a French corporation engaged in the international purchase. A601297A/B. 87. When IVO failed to honor its obligation under the wash out settlement narrated above. which amounted to US$293. Private respondent.R.50 per ton. No. IMPERIAL VEGETABLE OIL CO. A601391. YNARES-SANTIAGO. 1987 against private respondent Imperial Vegetable Oil Co. covered by Purchase Contract Nos. valued at US$222. A601384. respectively.

purchase contracts in amounts equivalent to the difference between the contract price and the market price of the coconut oil, to compensate it for the damages it suffered when it was forced to acquire coconut oil at a higher price. IVO failed to make the prescribed marginal deposits on the eight contracts, in the aggregate amount of US$391,593.62, despite written demand therefor. The demand for marginal deposits was based on the customs of the trade, as governed by the provisions of the standard N.I.O.P. Contract arid the FOSFA Contract, to wit: N.I.O.P. Contract, Rule 54 - If the financial condition of either party to a contract subject to these rules becomes so impaired as to create a reasonable doubt as to the ability of such party to perform its obligations under the contract, the other party may from time to time demand marginal deposits to be made within forty-eight (48) hours after receipt of such demand, such deposits not to exceed the difference between the contract price and the market price of the goods covered by the contract on the day upon which such demand is made, such deposit to bear interest at the prime rate plus one percent (1%) per annum. Failure to make such deposit within the time specified shall constitute a breach of contract by the party upon whom demand for deposit is made, and all losses and expenses resulting from such breach shall be for the account of the party upon whom such demand is made. (Underscoring ours.)1 FOSFA Contract, Rule 54 - BANKRUPTCY/INSOLVENCY: If before the fulfillment of this contract either party shall suspend payment, commit an act of bankruptcy, notify any of his creditors that he is unable to meet his debts or that he has suspended payment or that he is about to suspend payment of his debts, convene, call or hold a meeting either of his creditors or to pass a resolution to go into liquidation (except for a voluntary winding up of a solvent company for the purpose of reconstruction or amalgamation) or shall apply for an official moratorium, have a petition presented for winding up or shal1i have a Receiver appointed, the contract shall forthwith be closed either at the market price then current for similar goods or, at the option of the other party at a price to be ascertained by repurchase or resale and the difference between the contract price

and such closing-out price shall be the amount which the other party shall be entitled to claim shall be liable to account for under this contract (sic). Should either party be dissatisfied with the price, the matter shall be referred to arbitration. Where no such resale or repurchase takes place, the closing-out price shall be fixed by a Price Settlement Committee appointed by the Federation. (Underscoring ours.)2 Hence, Safic prayed that IVO be ordered to pay the sums of US$293,500.00 and US$391,593.62, plus attorney's fees and litigation expenses. The complaint also included an application for a writ of preliminary attachment against the properties of IVO. Upon Safic's posting of the requisite bond, the trial court issued a writ of preliminary attachment. Subsequently, the trial court ordered that the assets of IVO be placed under receivership, in order to ensure the preservation of the same. In its answer, IVO raised the following special affirmative defenses: Safic had no legal capacity to sue because it was doing business in the Philippines without the requisite license or authority; the subject contracts were speculative contracts entered into by IVO's then President, Dominador Monteverde, in contravention of the prohibition by the Board of Directors against engaging in speculative paper trading, and despite IVO's lack of the necessary license from Central Bank to engage in such kind of trading activity; and that under Article 2018 of the Civil Code, if a contract which purports to be for the delivery of goods, securities or shares of stock is entered into with the intention that the difference between the price stipulated and the exchange or market price at the time of the pretended delivery shall be paid by the loser to the winner, the transaction is null and void.1âwphi1.nêt IVO set up counterclaims anchored on harassment, paralyzation of business, financial losses, rumor-mongering and oppressive action. Later, IVO filed a supplemental counterclaim alleging that it was unable to operate its business normally because of the arrest of most of its physical assets; that its suppliers were driven away; and that its major creditors have inundated it with claims for immediate payment of its debts, and China Banking Corporation had foreclosed its chattel and real estate mortgages.

During the trial, the lower court found that in 1985, prior to the date of the contracts sued upon, the parties had entered into and consummated a number of contracts for the sale of crude coconut oil. In those transactions, Safic placed several orders and IVO faithfully filled up those orders by shipping out the required crude coconut oil to Safic, totaling 3,500 metric tons. Anent the 1986 contracts being sued upon, the trial court refused to declare the same as gambling transactions, as defined in Article 2018 of the Civil Code, although they involved some degree of speculation. After all, the court noted, every business enterprise carries with it a certain measure of speculation or risk. However, the contracts performed in 1985, on one hand, and the 1986 contracts subject of this case, on the other hand, differed in that under the 1985 contracts, deliveries were to be made within two months. This, as alleged by Safic, was the time needed for milling and building up oil inventory. Meanwhile, the 1986 contracts stipulated that the coconut oil were to be delivered within period ranging from eight months to eleven to twelve months after the placing of orders. The coconuts that were supposed to be milled were in all likelihood not yet growing when Dominador Monteverde sold the crude coconut oil. As such, the 1986 contracts constituted trading in futures or in mere expectations. The lower court further held that the subject contracts were ultra vires and were entered into by Dominador Monteverde without authority from the Board of Directors. It distinguished between the 1985 contracts, where Safic likewise dealt with Dominador Monteverde, who was presumably authorized to bind IVO, and the 1986 contracts, which were highly speculative in character. Moreover, the 1985 contracts were covered by letters of credit, while the 1986 contracts were payable by telegraphic transfers, which were nothing more than mere promises to pay once the shipments became ready. For these reasons, the lower court held that Safic cannot invoke the 1985 contracts as an implied corporate sanction for the high-risk 1986 contracts, which were evidently entered into by Monteverde for his personal benefit. The trial court ruled that Safic failed to substantiate its claim for actual damages. Likewise, it rejected IVO's counterclaim and supplemental counterclaim.

Thus, on August 28, 1992, the trial court rendered judgment as follows: WHEREFORE, judgment is hereby rendered dismissing the complaint of plaintiff Safic Alcan & Cie, without prejudice to any action it might subsequently institute against Dominador Monteverde, the former President of Imperial Vegetable Oil Co., Inc., arising from the subject matter of this case. The counterclaim and supplemental counterclaim of the latter defendant are likewise hereby dismissed for lack of merit. No pronouncement as to costs. The writ of preliminary attachment issued in this case as well as the order placing Imperial Vegetable Oil Co., Inc. under receivership are hereby dissolved and set aside.3 Both IVO and Safic appealed to the Court of Appeals, jointly docketed as CA-G.R. CV No.40820. IVO raised only one assignment of error, viz: THE TRIAL COURT ERRED IN HOLDING 'I'HAT THE ISSUANCE OF THE WRIT OF PRELIMINARY ATTACHMENT WAS NOT THE MAIN CAUSE OF THE DAMAGES SUFFERED BY DEFENDANT AND IN NOT AWARDING DEFENDANT-APPELLANT SUCH DAMAGES. For its part, Safic argued that: THE TRIAL COURT ERRED IN HOLDING THAT IVO'S PRESIDENT, DOMINADOR MONTEVERDE, ENTERED INTO CONTRACTS WHICH WERE ULTRA VIRES AND WHICH DID NOT BIND OR MAKE IVO LIABLE. THE TRIAL COURT ERRED IN HOLDING THA SAFIC WAS UNABLE TO PROVE THE DAMAGES SUFFERED BY IT AND IN NOT AWARDING SUCH DAMAGES. THE TRIAL COURT ERRED IN NOT HOLDING THAT IVO IS LIABLE UNDER THE WASH OUT CONTRACTS. On September 12, 1996, the Court of Appeals rendered the assailed Decision dismissing the, appeals and affirming the judgment appealed from in toto.4

Hence, Safic filed the instant petition for review with this Court, substantially reiterating the errors it raised before the Court of Appeals and maintaining that the Court of Appeals grievously erred when: a. it declared that the 1986 forward contracts (i.e., Contracts Nos. A601446 and A60155 (sic) involving 2,000 long tons of crude coconut oil, and Contracts Nos. A60l297A/B, A601385, A60l39l, A60l4l5, A601681. A601683 and A60l770A/B/C involving 4,500 tons of crude coconut oil) were unauthorized acts of Dominador Monteverde which do not bind IVO in whose name they were entered into. In this connection, the Court of Appeals erred when (i) it ignored its own finding that (a) Dominador Monteverde, as IVO's President, had "an implied authority to make any contract necessary or appropriate to the contract of the ordinary business of the company"; and (b) Dominador Monteverde had validly entered into similar forward contracts for and on behalf of IVO in 1985; (ii) it distinguished between the 1986 forward contracts despite the fact that the Manila RTC has struck down IVO's objection to the 1986 forward contracts (i.e. that they were highly speculative paper trading which the IVO Board of Directors had prohibited Dominador Monteverde from engaging in because it is a form of gambling where the parties do not intend actual delivery of the coconut oil sold) and instead found that the 1986 forward contracts were not gambling; (iii) it relied on the testimony of Mr. Rodrigo Monteverde in concluding that the IVO Board of Directors did not authorize its President, Dominador Monteverde, to enter into the 1986 forward contracts; and (iv) it did not find IVO, in any case, estopped from denying responsibility for, and liability under, the 1986 forward contracts because IVO had recognized itself bound to similar forward contracts which Dominador Monteverde entered into (for and on behalf of IVO) with Safic in 1985 notwithstanding that Dominador Monteverde was (like in the 1986 forward contracts) not expressly authorized by the IVO Board of Directors to enter into such forward contracts; b. it declared that Safic was not able, to prove damages suffered by it, despite the fact that Safic had presented not only testimonial, but also documentary, evidence which proved the higher amount it had to pay for crude coconut oil (vis-à-vis the contract price it was

to pay to IVO) when IVO refused to deliver the crude coconut oil bought by Safic under the 1986 forward contracts; and c. it failed to resolve the issue of whether or not IVO is liable to Safic under the wash out contracts involving Contracts Nos. A601446 and A60155 (sic), despite the fact that Safic had properly raised the issue on its appeal, and the evidence and the law support Safic's position that IVO is so liable to Safic. In fine, Safic insists that the appellate court grievously erred when it did not declare that IVO's President, Dominador Monteverde, validly entered into the 1986 contracts for and on behalf of IVO. We disagree. Article III, Section 3 [g] of the By-Laws5 of IVO provides, among others, that – Section 3. Powers and Duties of the President. - The President shall be elected by the Board of Directors from their own number . He shall have the following duties: xxxxxxxxx [g] Have direct and active management of the business and operation of the corporation, conducting the same according to, the orders, resolutions and instruction of the Board of Directors and according to his own discretion whenever and wherever the same is not expressly limited by such orders, resolutions and instructions. It can be clearly seen from the foregoing provision of IVO's By-laws that Monteverde had no blanket authority to bind IVO to any contract. He must act according to the instructions of the Board of Directors. Even in instances when he was authorized to act according to his discretion, that discretion must not conflict with prior Board orders, resolutions and instructions. The evidence shows that the IVO Board knew nothing of the 1986 contracts 6 and that it did not authorize Monteverde to enter into speculative contracts.7 In fact, Monteverde had earlier proposed that the company engage in such transactions but the IVO Board rejected his proposal.8 Since the 1986 contracts marked a sharp departure

the principal can not be held liable for the acts of the agent. Safic raises the novel point that the IVO Board of Directors did not set limitations on the extent of Monteverde's authority to sell coconut oil. not Monteverde. and his ignorance of that authority will not be any excuse. It must be borne in mind in this regard that a question that was never raised in the courts below can not be allowed to be raised for the first time on appeal without offending basic rules of fair play. as I have to supervise and monitor purchases of copras and also the sale of the same. are bound at their peril.15 Neither were they reflected in other books and records of the corporation. With more reason. exercises corporate power. I was not yet an officer of the corporation. The contracts were not reported in IVO's export sales book and turn-out book. testified that the IVO Board had set down the policy of engaging in purely physical trading thus: Q. IVO did not enter into identical contracts with Safic. what kind of trading was IVO engaged with? A. If the said third person is aware of such limits of authority. The basis for agency is representation and a person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent. Be that as it may. unless the latter undertook to secure the principal's ratification. rather as member of [the] Board of Directors. the acts of an agent beyond the scope of his authority do not bind the principal unless the latter ratifies the same expressly or impliedly. To bolster its cause. if they would hold the principal. If he does not make such inquiry.13 There was no such ratification in this case. Court of Appeals. petitioner can not seek relief on the basis of a supposed agency. I frequently visited the plant and from my observation. and would have been disregarded by the latter tribunal for the reasons previously stated. it usually trade its oil? A. Q. the same does not deserve consideration by this Court. and is not entitled to recover damages from the agent.17 Clearly. the burden of proof is upon them to establish it.11 The most prudent thing petitioner should have done was to ascertain the extent of the authority of Dominador Monteverde.10 we elucidated the rule on dealing with an agent thus: Every person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent. Safic can not rely on the doctrine of implied agency because before the controversial 1986 contracts.9 In the case of Bacaltos Coal Mines v. Safic's belated contention that the IVO Board of Directors did not set limitations on Monteverde's authority to sell coconut oil is belied by what appears on the record. It also bears emphasizing that when the third person knows that the agent was acting beyond his power or authority. although I was at the time already a stockholder. I think IVO is engaged in trading oil. who succeeded Dominador Monteverde as IVO President. Q. to ascertain not only the fact of the agency but also the nature and extent of the authority. Safic should have obtained from Monteverde the prior authorization of the IVO Board. no occasion at all for ratification. 16 It must be pointed out that the Board of Directors. As a stockholder. he is chargeable with knowledge of the agent's authority. whether the assumed agency be a general or special one. How did you know this? A. I observed that the policy of the corporation is for the .from past IVO transactions. he is to blame. Rodrigo Monteverde. in fact. Under Article 189812 of the Civil Code. he did not secure the Board's approval. and in case either is controverted.14 He also did not submit the contracts to the Board after their consummation so there was. I am not too familiar with trading because as of March 1987. Being remiss in this regard. Monteverde's speculative contracts with Safic never bound IVO and Safic can not therefore enforce those contracts against IVO. With whom does. It was purely on physical trading.18 Such an issue was not brought to the fore either in the trial court or the appellate court. justice and due process. Now you said that IVO is engaged in trading. Persons dealing with an assumed agent. When Monteverde entered into the speculative contracts with Safic. As far as you know.

Atty. Court Why don't you lay the basis? Atty. your Honor. sir. As far as I know it was sometime in 1985. the witness said they are engaged in physical trading and what I am saying [is] if there are any other kind or form of trading. Fernando Objection. Fernando No basis. Do you know the reason why the said proposal of Mr. Abad Well. We only have to sell the available stocks in our inventory. What we are talking is about 1985. The Board of Directors. Physical Trading means . Dominador Monteverde to engage in future[s] contract[s] was rejected by the Board of Directors? A. Q. Abad Q. Q. Trading future[s] contracts wherein the trader commits a price and to deliver coconut oil in the future in which he is yet to acquire the stocks in the future. Do you know where this meeting took place? A. Because this future[s] contract is too risky and it partakes of gambling. no basis. your Honor. How did you know that? A. Q. sir. Abad Q. your Honor. that the company should engaged (sic) in future[s] contract[s] but it was rejected by the Board of Directors. Who established the so-called physical trading in IVO? A.company to engaged (sic) or to purely engaged (sic) in physical trading. Fernando No basis. Dominador Monteverde. Atty. Court Witness may answer if he knows. In 1975. Abad. Were you a member of the board at the time? A. Then would [you] now answer my question? Atty. There was a meeting held in the office at the factory and it was brought out and suggested by our former president. Q. And what is the other form of trading? Atty. Yes. Do you know why the Board of Directors rejected the proposal of Dominador Monteverde that the company should engaged (sic) in future[s] contracts? Atty. When you mentioned about the meeting in 1985 wherein the Board of Directors rejected the future[s] contract[s]. Q. . I am already a stockholder and a member. Atty. It was only Ador Monteverde who then wanted to engaged (sic) in this future[s] contract[s].we buy and sell copras that are only available to us. Abad Q. Atty. What do you mean by physical trading? A. Q. Witness A. Q. were you already a member of the Board of Directors at that time? A.

Yes. died in 1987 or 1988. the Court has found some remarkable distinctions between the 1985 and 1986 contracts.Q. Those were not recorded at all in the books of accounts of the company. Dominador Monteverde never records those transactions he entered into in connection with these future[s] contracts in the company's books of accounts. Abad Q. And a resolution was passed disowning the illegal activities of the former president. Q. Dominador Monteverde. Subjecting the evidence on both sides to close scrutiny. Abad Q. x x x 1. SAFIC claims that there is no distinction between the 1985 and 1986 contracts. Do you keep records of the Board meetings of the company? A. both of which groups of contracts were signed or authorized by IVO's President. The contention is unpersuasive for. The 1985 contracts were performed within an average of two months from the date of the sale. What did you do when you discovered these transactions? A. SAFIC would bewail. forward sales contracts in which IVO had undertaken to deliver the crude coconut oil months after such contracts were entered into. the contract covered by Exhibit J was to be performed 11 to 12 months from the execution of the contract.20 xxxxxxxxx Q. Atty. On the other hand. has this policy of the Board of Directors been observed or followed? Witness A. How far has this Dominador Monteverde been using the name of I.V. and despite [the] request of our office for us to be furnished a copy he was not able to furnish us a copy. as the 1985 contracts were.0. Mr. Indeed. Do you have a copy of the minutes of your meeting in 1985? A. There was again a meeting by the Board of Directors of the corporation and that we agreed to remove the president and then I was made to replace him as president. The lead time between the closing of the deal and the delivery of the oil supposedly allowed the seller to accumulate enough copra to mill and to build up its inventory and so meet its delivery commitment to its foreign buyers. What else? A. were similarly with their 1985 predecessors. sir. sir. the 1986 contracts were to be performed within an average of eight and a half months from the dates of the sale. All the supposed performances fell in 1987. on IVO. As far as you know. Q. sir. It is evident that the 1986 contracts constituted trading .19 xxxxxxxxx Atty. Elfren Sarte. Yes.21 Petitioner next argues that there was actually no difference between the 1985 physical contracts and the 1986 futures contracts. Incidentally our Secretary of the Board of Directors. Q. The 1986 contracts. You said the Board of Directors were against the company engaging in future[s] contracts. as aptly pointed out by the trial court and sustained by the appellate court – Rejecting IVO's position. SAFIC concludes that the 1986 contracts were equally binding. in selling future contracts without the proper authority and consent of the company's Board of Directors? A. What do you mean by that the future[s] contracts were not entered into the books of accounts of the company? Witness A. These pattern (sic) belies plaintiffs contention that the lead time merely allowed for milling and building up of oil inventory.

the 1986 contracts were never recorded either in the 1986 accounting books of IVO or in its annual financial statement for 1986. a mere promise to pay by telegraphic transfer gives no assurance of [the] buyer's compliance with its contracts. The foregoing claim of petitioner is not.. It is not disputed that. using the name of IVO but concealing from it his speculative transactions. 2. testified that they were strange goings-on about the 1986 contract. Since the buyer's letter of credit guarantees payment to the seller as soon as the latter is able to present the shipping documents covering the cargo. second. it is not disputed that with respect to the 1985 contracts. its opening usually mark[s] the fact that the transaction would be consummated. Petitioner further contends that both the trial and appellate courts erred in concluding that Safic was not able to prove its claim for damages. to wit: 1.00 for some of the failed contracts was proof enough and. (b) and (c). (See Stipulation of Facts dated June 13. invoices. Dominador Monteverde made business or himself. since it was ready to pay when IVO was not ready to deliver. U. the coconuts that were supposed to be milled for oil were not yet on their trees when Dominador Monteverde sold the crude oil to SAFIC.] Did Safic pay damages to its buyers? Where were the receipts? Did Safic have to procure the equivalent oil from other sources? If so. price and date of delivery? The records disclose that during the course of the proceedings in the trial court. 151 dated April 1. seven out of the ten 1986 contracts were to be paid by telegraphic transfer upon presentation of the shipping documents.] the contracts of the purchase of oil that. substantiated by the evidence and only raises several questions. They were neither recorded in the books nor reported to the Central Bank. according to Safic. d. price and date of delivery? 2. The fact is that Safic did not pay for the coconut oil that it supposedly ordered from IVO through Monteverede.in futures or in mere expectations. 1990). b. In all likelihood. in those unreported cases where profits were made. requiring a coconut oil exporter to submit a Report of Foreign Sales within twenty-four (24) hours "after the closing of the relative sales contract" with a foreign buyer of coconut oil. Safic only claims that. confirmations.S. We remain unconvinced. formerly an assistant of Dominador Monteverde. in violation of its above requirement. Unlike the letter of credit. by Dominador Monteverde. such agreements did not prove Safic's actual losses in the transactions in question. 4. The so-called "wash out" agreements are clearly ultra vires and not binding on IVO. that it presented purchases of coconut oil it made from others during the period of IVO's default. c.1âwphi1. What is more. the parties stipulated during the hearing that none of these contracts were ever reported to the Central Bank. The 1986 sales were.] contracts of resale of coconut oil that Safic bought from IVO. IVO filed an amended motion22for production and inspection of the following documents: a. But with respect to the disputed 1986 contracts. IVO faithfully complied with Central Bank Circular No.A. The mode of payment agreed on by the parties in their 1985 contracts was uniformly thru the opening of a letter of credit LC by SAFIC in favor of IVO. a document that was prepared prior to the controversy. therefore suspect. however. wash out agreements and other documents of sale related to (a). (Exhibits 6 to 6-0 and 7 to 7-1).500. xxxxxxxxx Evidently. This fact lends an uncertain element in the 1986 contracts.] Did Safic commit to deliver the quantity of oil covered by the 1986 contracts to its own buyers? Who were these buyers? What were the terms of those contracts with respect to quantity.] the records of the pooling and sales contracts covering the oil from such pooling. . Apart from the above. who were these sources? Where were their contracts and what were the terms of these contracts as to quantity. Furthermore. Petitioner first points out that its wash out agreements with Monteverde where IVO allegedly agreed to pay US$293. 1963. such profits were ordered remitted to unknown accounts in California. Safic suffered damages to the extent that they had to buy the same commodity from others at higher prices. if the coconut oil has been pooled and sold as general oil.] all other contracts.nêt 3. On the other hand. unlike the 1985 contacts. Emelita Ortega. it had to resort to in order to fill up alleged undelivered commitments of IVO.

is a huge amount in terms of pesos. industrious. in open court. and 2."25 WHEREFORE. a substantially correct determination of its actual damages would have been possible. SO ORDERED.This amended motion was opposed by Safic. plaintiff seeks to recover damages from the defendant and these are intimately related to plaintiffs alleged losses which it attributes to the default of the defendant in its contractual commitments. prompting the court a quo to assume that if produced. its basis cannot be left to speculation and conjecture. secondly.because: 1. reason there would be none for the same witness to say later that they could not be produced. Safic suggests a substitute mode of computing its damages by getting the average price it paid for certain quantities of coconut oil that it allegedly bought in 1987 and deducting this from the average price of the 1986 contracts. by this nature of the plaintiffs claim for damages. and as. the amended motion for production and inspection of the defendant is in order. the documents would have been adverse to Safic's cause. conclusion can easily be drawn therefrom that there is materiality in the defendant's move: firstly.] it is conjectural since it rests on average prices not on actual prices multiplied by the actual volume of coconut oil per contract. There is also no evidence that Safic had contracted to supply third parties with coconut oil from the 1986 contracts and that Safic had to buy such oil from others to meet the requirement. This. however. certainly.24 ruled that: From the analysis of the parties' respective positions. But this mode of computation if flawed . that they are available. unfortunately. As such.593. if there would be a full disclosure by the parties on both sides of all documents related to the transactions in litigation. and which defendant disputes. Suffice it to state in this regard that "[T]he power of the courts to grant damages and attorney's fees demands factual. Plaintiff claims for the award of liquidated or actual damages to the tune of US$391. Besides. was not the case. all the foregoing. The interest of justice will be served best. In its efforts to bolster its claim for damages it purportedly sustained. as generally described. plaintiff would entertain no confusion as to what. hardworking and diligent personnel. thirdly. Safic did not produce the required documents. in view of is DENIED for lack of merit. Notwithstanding the foregoing ruling of the trial court. If the said witness represented that the documents.23 The trial court. the production and inspection of the desired documents would be of tremendous help in the ultimate resolution thereof. the desired production and inspection of the documents was precipitated by the testimony of plaintiffs witness (Donald O'Meara) who admitted. As the defendant cannot be precluded in taking exceptions to the correctness and validity of such claim which plaintiffs witness (Donald O'Meara) testified to. Had Safic produced the documents that the trial court required. legal and equitable justification. it is worthy to note that the quantities of oil covered by its 1987 contracts with third parties do not match the quantities of oil provided under the 1986 contracts. Along the same vein. are available. the documents are specified in the amended motion.62 which.] it is based on the unproven assumption that the 1987 contracts of purchase provided the coconut oil needed to make up for the failed 1986 contracts. in its September 16. the petition . which documents to locate and produce considering plaintiff to be (without doubt) a reputable going concern in the management of the affairs which is serviced by competent. 1988 Order . proof thereof is a must which can be better served. if the Court may additionally dwell on the issue of damages. even after they have been clearly described. if not amply ascertained by examining the records of the related sales admitted to be in plaintiffs possession.

. payable with a downpayment of P4. Inc. Nazario Dumpit. Nazario Dumpit. as well as the Resolution of October 28. 2167. a Contract to Sell a parcel of Land (Lot No. Case No. are being assailed in this petition. petitioner. through its President. with an area of 1.: The Resolution. issued by Presidential Executive Assistant Jacobo Clave in O. 90454.660.50 with 12% interest per annum. as resolved by the National Housing Authority in its Resolution of July 10. The sale price was P23. Respondent Dumpit paid the downpayment and several installments amounting to P13.covered by TCT No. and seeking its written consent to the assignment of his rights to a certain Lourdes Dizon. 1459. JACOBO C. directing petitioners Palay. CLAVE. L-56076 September 21. 1979 in Case No.722. Rizal. and ALBERT ONSTOTT.R.NATIONAL HOUSING AUTHORITY and NAZARIO DUMPIT respondents. private respondent wrote petitioner offering to update all his overdue accounts with interest. Paragraph 6 of the contract provided for automatic extrajudicial rescission upon default in payment of any monthly installment after the lapse of 90 days from the expiration of the grace period of one month. or almost six (6) years later. 1980. No.722. Block IV) of the Crestview Heights Subdivision in Antipolo.50.165 square meters. and Alberto Onstott jointly and severally. . vs.00 and monthly installments of P246. 1965. 1980.00 with 9% interest per annum. 1973. 1983 PALAY. INC. 8. MELENCIO-HERRERA. the amount of P13. On March 28.P. The last payment was made on December 5. Albert Onstott executed in favor of private respondent. Replying petitioners informed respondent that his Contract to Sell had long been rescinded pursuant to paragraph 6 of the contract. Inc. dated May 2. and owned by said corporation. G. He followed this up with another letter dated June 20. 1980 denying petitioners' Motion for Reconsideration of said Resolution of May 2.300. J. to refund to private respondent. 1967 for installments up to September 1967. On May 10. petitioner Palay. and that the lot had already been resold. without need of notice and with forfeiture of all installments paid.42 until fully paid. Presidential Executive Assistant . 1973 reiterating the same request.

Questioning the validity of the rescission of the contract, respondent filed a letter complaint with the National Housing Authority (NHA) for reconveyance with an altenative prayer for refund (Case No. 2167). In a Resolution, dated July 10, 1979, the NHA, finding the rescission void in the absence of either judicial or notarial demand, ordered Palay, Inc. and Alberto Onstott in his capacity as President of the corporation, jointly and severally, to refund immediately to Nazario Dumpit the amount of P13,722.50 with 12% interest from the filing of the complaint on November 8, 1974. Petitioners' Motion for Reconsideration of said Resolution was denied by the NHA in its Order dated October 23, 1979. 1 On appeal to the Office of the President, upon the allegation that the NHA Resolution was contrary to law (O.P. Case No. 1459), respondent Presidential Executive Assistant, on May 2, 1980, affirmed the Resolution of the NHA. Reconsideration sought by petitioners was denied for lack of merit. Thus, the present petition wherein the following issues are raised: I Whether notice or demand is not mandatory under the circumstances and, therefore, may be dispensed with by stipulation in a contract to sell. II Whether petitioners may be held liable for the refund of the installment payments made by respondent Nazario M. Dumpit. III Whether the doctrine of piercing the veil of corporate fiction has application to the case at bar. IV Whether respondent Presidential Executive Assistant committed grave abuse of discretion in upholding the decision of respondent NHA holding petitioners solidarily liable for the refund of the installment payments made by respondent Nazario M. Dumpit

thereby denying substantial justice to the petitioners, particularly petitioner Onstott We issued a Temporary Restraining Order on Feb 11, 1981 enjoining the enforcement of the questioned Resolutions and of the Writ of Execution that had been issued on December 2, 1980. On October 28, 1981, we dismissed the petition but upon petitioners' motion, reconsidered the dismissal and gave due course to the petition on March 15, 1982. On the first issue, petitioners maintain that it was justified in cancelling the contract to sell without prior notice or demand upon respondent in view of paragraph 6 thereof which provides6. That in case the BUYER falls to satisfy any monthly installment or any other payments herein agreed upon, the BUYER shall be granted a month of grace within which to make the payment of the t in arrears together with the one corresponding to the said month of grace. -It shall be understood, however, that should the month of grace herein granted to the BUYER expire, without the payment & corresponding to both months having been satisfied, an interest of ten (10%) per cent per annum shall be charged on the amounts the BUYER should have paid; it is understood further, that should a period of NINETY (90) DAYS elapse to begin from the expiration of the month of grace hereinbefore mentioned, and the BUYER shall not have paid all the amounts that the BUYER should have paid with the corresponding interest up to the date, the SELLER shall have the right to declare this contract cancelled and of no effect without notice, and as a consequence thereof, the SELLER may dispose of the lot/lots covered by this Contract in favor of other persons, as if this contract had never been entered into. In case of such cancellation of this Contract, all the amounts which may have been paid by the BUYER in accordance with the agreement, together with all the improvements made on the premises, shall be considered as rents paid for the use and occupation of the above mentioned premises and for liquidated damages suffered by virtue of the failure of the BUYER to fulfill his part of this agreement : and the BUYER hereby renounces his right to demand or reclaim the return of the same and further obligates peacefully to vacate the premises and deliver the same to the SELLER.

Well settled is the rule, as held in previous jurisprudence, 2 that judicial action for the rescission of a contract is not necessary where the contract provides that it may be revoked and cancelled for violation of any of its terms and conditions. However, even in the cited cases, there was at least a written notice sent to the defaulter informing him of the rescission. As stressed in University of the Philippines vs. Walfrido de los Angeles 3 the act of a party in treating a contract as cancelled should be made known to the other. We quote the pertinent excerpt: Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved in account of infractions by the other contracting party must be made known to the other and is always provisional being ever subject to scrutiny and review by the proper court. If the other party denies that rescission is justified it is free to resort to judicial action in its own behalf, and bring the matter to court. Then, should the court, after due hearing, decide that the resolution of the contract was not warranted, the responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced. In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law. But the law definitely does not require that the contracting party who believes itself injured must first file suit and wait for a judgment before taking extrajudicial steps to protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and watch its damages accumulate during the pendency of the suit until the final judgment of rescission is rendered when the law itself requires that he should exercise due diligence to minimize its own damages (Civil Code, Article 2203). We see no conflict between this ruling and the previous jurisprudence of this Court invoked by respondent declaring that judicial action is necessary for the resolution of a reciprocal obligation (Ocejo Perez & Co., vs. International Banking Corp., 37 Phil. 631; Republic vs. Hospital de San Juan De Dios, et al., 84 Phil

820) since in every case where the extrajudicial resolution is contested only the final award of the court of competent jurisdiction can conclusively settle whether the resolution was proper or not. It is in this sense that judicial action win be necessary, as without it, the extrajudicial resolution will remain contestable and subject to judicial invalidation unless attack thereon should become barred by acquiescense, estoppel or prescription. Fears have been expressed that a stipulation providing for a unilateral rescission in case of breach of contract may render nugatory the general rule requiring judicial action (v. Footnote, Padilla Civil Law, Civil Code Anno., 1967 ed. Vol. IV, page 140) but, as already observed, in case of abuse or error by the rescinder the other party is not barred from questioning in court such abuse or error, the practical effect of the stipulation being merely to transfer to the defaulter the initiative of instituting suit, instead of the rescinder (Emphasis supplied). Of similar import is the ruling in Nera vs. Vacante 4, reading: A stipulation entitling one party to take possession of the land and building if the other party violates the contract does not ex propio vigore confer upon the former the right to take possession thereof if objected to without judicial intervention and determination. This was reiterated in Zulueta vs. Mariano 5 where we held that extrajudicial rescission has legal effect where the other party does not oppose it. 6 Where it is objected to, a judicial determination of the issue is still necessary. In other words, resolution of reciprocal contracts may be made extrajudicially unless successfully impugned in Court. If the debtor impugns the declaration, it shall be subject to judicial determination. 7 In this case, private respondent has denied that rescission is justified and has resorted to judicial action. It is now for the Court to determine whether resolution of the contract by petitioners was warranted.

We hold that resolution by petitioners of the contract was ineffective and inoperative against private respondent for lack of notice of resolution, as held in the U.P. vs. Angeles case, supra Petitioner relies on Torralba vs. De los Angeles 8 where it was held that "there was no contract to rescind in court because from the moment the petitioner defaulted in the timely payment of the installments, the contract between the parties was deemed ipso facto rescinded." However, it should be noted that even in that case notice in writing was made to the vendee of the cancellation and annulment of the contract although the contract entitled the seller to immediate repossessing of the land upon default by the buyer. The indispensability of notice of cancellation to the buyer was to be later underscored in Republic Act No. 6551 entitled "An Act to Provide Protection to Buyers of Real Estate on Installment Payments." which took effect on September 14, 1972, when it specifically provided: Sec. 3(b) ... the actual cancellation of the contract shall take place after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act and upon full payment of the cash surrender value to the buyer. (Emphasis supplied). The contention that private respondent had waived his right to be notified under paragraph 6 of the contract is neither meritorious because it was a contract of adhesion, a standard form of petitioner corporation, and private respondent had no freedom to stipulate. A waiver must be certain and unequivocal, and intelligently made; such waiver follows only where liberty of choice has been fully accorded. 9 Moreover, it is a matter of public policy to protect buyers of real estate on installment payments against onerous and oppressive conditions. Waiver of notice is one such onerous and oppressive condition to buyers of real estate on installment payments. Regarding the second issue on refund of the installment payments made by private respondent. Article 1385 of the Civil Code provides:

ART. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. Neither sham rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith. In this case, indemnity for damages may be demanded from the person causing the loss. As a consequence of the resolution by petitioners, rights to the lot should be restored to private respondent or the same should be replaced by another acceptable lot. However, considering that the property had already been sold to a third person and there is no evidence on record that other lots are still available, private respondent is entitled to the refund of installments paid plus interest at the legal rate of 12% computed from the date of the institution of the action. 10 It would be most inequitable if petitioners were to be allowed to retain private respondent's payments and at the same time appropriate the proceeds of the second sale to another. We come now to the third and fourth issues regarding the personal liability of petitioner Onstott who was made jointly and severally liable with petitioner corporation for refund to private respondent of the total amount the latter had paid to petitioner company. It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as wen as from that of any other legal entity to which it may be related. 11 As a general rule, a corporation may not be made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may be connected and vice versa. However, the veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice 12 ; or for purposes that could not have been intended by the law that created it 13 ; or to defeat public convenience, justify wrong, protect fraud, or defend crime. 14 ; or to perpetuate fraud or confuse legitimate issues 15 ; or to circumvent the law or perpetuate deception 16 ; or as an alter

. and THE . No costs. petitioner Onstott was made liable because he was then the President of the corporation and he a to be the controlling stockholder. petitioners. The temporary Restraining Order heretofore issued is hereby lifted. vs. 18 In this respect then.50. 1974. 1980.R. the date of the filing of the Complaint. the questioned Resolution of respondent public official. No sufficient proof exists on record that said petitioner used the corporation to defraud private respondent. NATIONAL LABOR RELATIONS COMMISSION. In this case. on paragraph 6 (supra) of its contract with private respondent when it rescinded the contract to sell extrajudicially and had sold it to a third person. 1990 JAIME PABALAN AND EDUARDO LAGDAMEO. therefore. Dumpit the amount of P13. SISON. albeit mistakenly. ELIZABETH RODEROS. He cannot. SO ORDERED. is directed to refund to respondent Nazario M. a modification of the Resolution under review is called for. ET AL.722. No. adjunct or business conduit for the sole benefit of the stockholders. LABOR ARBITER AMBROSIO B.ego. Petitioner Palay. 89879 April 20. dated May 2. is hereby modified. Inc. with interest at twelve (12%) percent per annum from November 8. 17 We find no badges of fraud on petitioners' part. G. They had literally relied. be made personally liable just because he "appears to be the controlling stockholder". WHEREFORE. Mere ownership by a single stockholder or by another corporation is not of itself sufficient ground for disregarding the separate corporate personality.

PIF. THE DECISION AND THE RESOLUTION. 1988 to file their position paper. Complainants demanded reinstatement with full backwages. Inc. 1988.: Once again the parameters of the liability of the officers of a corporation as to unpaid wages and other claims of the employees of a corporation which has a separate and distinct personality are brought to fore in this case. Jaime Pabalan and Mr. Hence the herein petition for certiorari with prayer for the issuance of a temporary restraining order wherein the petitioners raised the following issues: A THE ARBITER AND THE NLRC DID NOT ACQUIRE JURISDICTION OVER THE PERSONS OF THE PETITIONERS AND. 1988 was re-set to March 9. 1988. On January 14. affirmed the appealed decision and dismissed the appeal for lack of merit in a resolution dated June 30. On November 30. 1988 a decision was rendered by the labor arbiter the dispositive part of which reads as follows: IN VIEW OF THE FOREGOING CONSIDERATION. respondents.SHERIFF OF THE NATIONAL LABOR RELATIONS COMMISSION. The labor arbiter granted the motion. the computation to be based from the latest minimum wage law at the time of their dismissal. complainants filed their supplemental position paper impleading the petitioners as officers of the PIF in the complaint for their illegal transfer to a new firm. living allowance. The heating for February 17. with leave of the labor arbiter. On July 13. (See attached Annex "A" of complainants' position paper. (PIF) filed a complaint against the latter for illegal transfer simultaneous with illegal dismissal without justifiable cause and in violation of the provision of the Labor Code on security of tenure as well as the provisions of Batas Pambansa Blg. 1987 respondents (petitioners herein) moved for the cancellation of the hearing scheduled on November 6. 1987 both parties were directed to submit their respective position papers within ten (10) days. On May 5. The PIF filed its position paper on January 22. The hearing was re-set on January 14. jointly and severally. On October 21. THEREFORE. their backwages and other benefits from the time they were dismissed up to the time they are actually reinstated. 1987. 1987 but on said date respondents and/or counsel failed to appear. 1988 complainants filed their position paper. Eduardo Lagdameo are hereby ordered to: 1. 1987 for failure of respondents to appear. 1988 counsel for respondents moved that he be given until January 22. By mutual agreement the hearing was re-set on December 21. 1988 and on March 29. 1987 so that they could engage a counsel to properly represent them preferably on November 17. through its General Manager. National Labor Relations Commission (NLRC). to pay. 1988 on which date respondents were given a deadline to submit their position paper. respondent Philippine Inter-Fashion and its officers Mr. 1987. 130. The hearing was re-set for November 27. 1 Not satisfied therewith petitioners filed a motion for reconsideration in the First Division of the public respondent. eighty-four (84) workers of the Philippine Inter-Fashion. Petitioners were ordered to pay the appeal fee in accordance with law. 2. On January 4. reinstate the sixty two (62) complainants to their former or equivalent position without loss of seniority rights and privileges. J.) SO ORDERED. UNDER DISPUTE. B . which nevertheless. 13th month pay and other benefits under existing laws and/or separation pay. 1987. 1987. On October 20. On December 10. 1989. ARE NULL AND VOID. was notified about the complaint and summons for the hearing set for November 6. 1988 on which dates respondents failed to appear. GANCAYCO.

petitioners also appeared in their behalf through counsel. having failed to comply with the Rules of Court and Administrative Circular No. C THE ARBITER AND THE NLRC COMMITTED A GRAVE ABUSE OF DISCRETION IN ADJUDGING PETITIONERS HEREIN AS JOINTLY AND SEVERALLY LIABLE WITH PHILIPPINE INTER-FASHION. on November 30. the legal fiction that a corporation has a personality separate and distinct from stockholders and members may be disregarded as follows: This finding does not ignore the legal fiction that a corporation has a personality separate and distinct from its stockholders and members. 2 Mere ownership by a single stockholder or by another corporation of all or nearly all capital stocks of the corporation is not by itself sufficient ground for disregarding the separate corporate personality. TO PAY THE JUDGMENT DEBT. On September 25. 3 As a general rule. 1989 in the court's calendar which the Court granted. the corporation and its members can be considered as one in order to avoid its being used as an instrument to commit injustice. the Court resolved to lift the temporary restraining order issued on November 13. They were therefore properly served with summons and they were not deprived of due process. petitioners were impleaded as respondents to which they filed an opposition inasmuch as they filed their own supplemental position papers. it was also held that the shield of corporate fiction should be pierced when it is deliberately and maliciously designed to evade financial obligations to employees.00. 1989. Thus. However. The settled rule is that the corporation is vested by law with a personality separate and distinct from the persons composing it. as this Court had held "where the incorporators and directors belong to a single family. 4 However. 1990 for failure of petitioner to file the required bond despite extensions of time granted them. INC. Petitioners contend however that under the circumstances of the case as officers of the corporation PIF they could not be jointly and severally held liable with the corporation for its liability in this case. acting on an urgent motion to include the motion for reconsideration of the resolution of September 25. A motion for reconsideration filed by the petitioners of the said resolution was denied on October 16. 1989 this Court dismissed the petition for insufficiency in form and substance. The Court finds these grounds to be devoid of merit. In the case of Claparols vs. Now to the merit of the petition. for. 1989 and October 16. As the record shows while originally it was PIF which was impleaded as respondent before the labor arbiter. . officers of a corporation are not personally liable for their official acts unless it is shown that they have exceeded their authority. However.THE DECISION AND THE NLRC RESOLUTION SUFFER FROM A LEGAL AND CONSTITUTIONAL INFIRMITY BECAUSE THEY SANCTION A DEPRIVATION OF PETITIONERS' PROPERTIES WITHOUT DUE PROCESS OF LAW. Thereafter when the supplemental position paper was filed by complainants. 1-88 requiting the verification of the petition. 1989. The first two issues they raised are to the effect that the public respondents never acquired jurisdiction over them as they have not been served with summons and thus they were deprived due process.000. 1989 the Court resolved to set aside said resolutions of September 25. CIR involving almost similar facts as in this case." or to further an end subversive of justice. Petitioners do not question the merits of the decision insofar as PIF is concerned in this proceeding. A temporary restraining order was issued enjoining respondents from enforcing or implementing the questioned decision of the labor arbiter affirmed by the NLRC upon a bond to be filed by petitioners in the amount of P100. 1989 for failure to raise any substantial arguments to warrant a modification thereof. including its officers as well as from that of any other legal entity to which it may be related. on February 7. a company manager acting in good faith within the scope of his authority in terminating the services of certain employees cannot be held personally liable for damages. and to require respondents to comment thereon within ten (10) days from notice thereof.

C. 1989 is hereby modified by relieving petitioners of any liability as officers of the PIF and holding that the liability shall be solely that of Philippine InterFashion. Hence petitioners can not be held jointly and severally liable with the PIF corporation under the questioned decision and resolution of the public respondent. NLRC 6 in that the liability in the cases of illegal termination of employees extends not only to the corporation as a corporate entity but also to its responsible officers acting in the interest of the corporation or employer. (are) this Court's rulings in still other cases: When the notion of legal entity is used as a means to perpetrate fraud or an illegal act or as a vehicle for the evasion of an existing obligation.C. in the questioned resolution of the NLRC dated June 30. or used the transfer of the employees as a means to perpetrate an illegal act or as a vehicle for the evasion of existing obligations. Indeed. and or (to) confuse legitimate issues the veil which protects the corporation will be lifted. .C. the petition is GRANTED and the questioned resolution of the public respondent dated June 30. Ransom Labor Union-CCLU vs. Ransom Labor Union-CCLU vs. the circumvention of statutes. Inc. Ransom Corporation were transferred to continue its business which acts of such officers and agents of A. It must be noted. 7 Not one of the above circumstances has been shown to be present. . as officers of the corporation deliberately and maliciously designed to evade the financial obligation of the corporation to its employees. 5 In this particular case complainants did not allege or show that petitioners. that A.C. the circumvention of statutes. NLRC the corporation was a family corporation and that during the strike the members of the family organized another corporation which was the Rosario Industrial Corporation to which all the assets of the A. WHEREFORE. Ransom Corporation were intended to avoid payment of its obligations to its employees. In such case this Court considered the president of the corporation to be personally liable together with the corporation for the satisfaction of the claim of the employees. . SO ORDERED. No costs. 1989 there is no finding as to why petitioners were being held jointly and severally liable for the liability and obligation of the corporation except as to invocation of the ruling of this Court in A. or to confuse the legitimate issues. however.To the same effect .

AND DAVID ONG. adequately explained: . Hence. sold the tractor. HON. doing business under the name and style of "Farmers Machineries. de la Cuesta filed an action for the recovery of P33. respondents. petitioners. one (1) unit HINOMOTO TRACTOR Model MB 1100D powered by a 13 H.000. Inc. the trial court rendered a decision. Tramat's president and manager. the Court of Appeals affirmed in toto the decision of the trial court.000. David Ong caused a "stop payment" of the check when NAWASA refused to pay the tractor and lawn mower after discovering that. Defendant-appellants' motion for reconsideration was denied.00.R.080. Ordering the defendants. David Ong.500. On 28 May 1985. INC. in view of the foregoing consideration. judgment is hereby rendered: G. in turn. In payment. as well as attorney's fees of P10. 111008 November 7.: This petition for review on certiorari challenges the 04th March 1993 decision of the Court of Appeals and its resolution of 01 July 1993 denying the motion for reconsideration. and 2. in its decision. and that the payment of the check was stopped because the subject tractor had been priced as a brand new. and not with Ong in his personal capacity. On 02 November 1989. averred. SO ORDERED.00 (apparently replacing an earlier postdated check for P33. jointly and severally. Tramat. Ong.. COURT OF APPEALS AND MELCHOR DE LA CUESTA. to pay the plaintiff the sum of P10. The appellate court. J. among other things. Ordering the defendants. the engine (sold by de la Cuesta) was a reconditioned unit. vs. that the questioned transaction was between plaintiff and Tramat Mercantile.500. VITUG. after the reception of evidence.P. On 09 April 1984.00. jointly and severally. not as a reconditioned unit. the instant petition. not conditional.00 as attorney's fees. and the costs of this suit. No." sold to Tramat Mercantile.00). 1984 until fully paid. in his answer. and the costs of suit.aside from some stated defects of the attached lawn mower. 1. sale of the tractor and that de la Cuesta did not violate any warranty on the sale of the tractor to TRAMAT. to pay the plaintiff the sum of P33.00. the dispositive portions of which read: WHEREFORE. to the Metropolitan Waterworks and Sewerage System ("NAWASA") for P67.000. On 04 March 1993. diesel engine. 1 An appeal was timely interposed by the defendants. Inc. issued a check for P33.500. particularly in holding that the contract between de la Cuesta and TRAMAT was one of absolute. ("Tramat"). that de la Cuesta had no cause of action.00 with legal interest thereon at the rate of 12% per annum from July 7. We could find no reason to reverse the factual findings of both the trial court and the appellate court. Melchor de la Cuesta. together with an attached lawn mower fabricated by it. 1994 TRAMAT MERCANTILE.

to satisfy the requirements of the MWSS. there was no assurance that the copy would function as well as with the model. 1988. and after the appellee had failed to remedy the defect. There is no showing that the appellants had had any previous experience in the fabrication of this lawn mower. had been a reconditioned. The engine malfunctioned not necessarily because the engine. Anent the first assigned error. and the first check was drawn at about the same time. and the tractor's engine was strained beyond its limits.00? These payments argue against the claim now made by the defendants that the sale was conditional. The appellants should have explained why they failed to include the freight charges in the first check. The appellants. then. 29. Such was the burden placed on the engine. But the product might have proved too much for the subject tractor to power. The repairs were done at Soledad Cac's gasoline station in Quezon City. the engine still leaked oil after being torturetested. on the other hand.500. and in a possibly patent-infringing effort to undercut their competition. it was a gasket Soledad Cac had to replace. The freight charges cannot be said to have been incurred when the tractor engine was delivered back to the supplier for repairs. Granting that the appellants informed the appellee that they would be reselling the unit to the MWSS. xxx xxx xxx In regard to the second assigned error. one. as alleged by the appellants. the appellants' witness declared that even after the replacement of that one gasket. The tractor was transported from Isabela to Metro Manila as early as April 1984. Isabela to Metro Manila. an entity admittedly not engaged in farming. at a cost chargeable to the appellants. We sustain the trial court's finding that at the time of the purchase. and not a brand new. the appellants borrowed a lawn mower from the MWSS so they could fabricate one such mower. claims the amount represented the freight charges for transporting the tractor from Cauayan. It has to be noted in this regard that. 73-74). which had by then stopped supplying the same (tsn. an error to hold David Ong jointly and severally liable with TRAMAT to de la Cuesta under the questioned . pp. the appellants did not reveal to the appellee the true purpose for which the tractor would be used. furthermore. No wonder. . they had to borrow one from the MWSS which they could copy. Having had no previous experience in the manufacture of lawn mowers of the same type as that in litigation. xxx xxx xxx Although the trial court discussed it in a different light. as aforesaid. The appellants' witness stated that the kind of mid-mounted lawn mower was being manufactured by their competitor. these in themselves would not constitute the required implied notice to the appellee as seller.If the perfection of the sale was dependent upon acceptance by the MWSS of the subject tractor why did the appellants issue a check in payment of the item to the appellee? And long after MWSS had complained about the defective tractor engine. nevertheless. the appellants gathered enough daring to do the fabrication themselves. Nov. The integrity of the other engine gaskets might have been impaired. It malfunctioned because it was made to do what it simply could not. The appellants admitted that the engine was not brought back to Isabela. causing it to overheat and damage its gaskets. an indispensable accessory if the tractor would be used in farming. We do not agree that the appellee should have been held liable for the tractor's alleged hidden defects. No wonder. Alpha Machinery. the additional amount covered the cost of replacing the oil gasket of the tractor engine when it was repaired in Soledad Cac's gasoline station in Quezon City. . In fact. why did the appellants still draw and deliver a replacement check to the appellee for the increased amount of P33. But although they made a copy with the same specifications and design. According to the appellee. and that they ordered the tractor without the power tiller. We view the matter in the same way the trial court did — that the lawn mower as fabricated by the appellants was the root of the parties' problems. too. 2 It was. .

NATIONAL LABOR RELATIONS COMMISSION and CELSO B. BALBASTRO respondents. 5 3. for wage differentials. 1995 MAM REALTY DEVELOPMENT CORPORATION and MANUEL CENTENO. is MODIFIED insofar as it holds petitioner David Ong jointly and severally liable with Tramat Mercantile. his work could so also be done either by Mercado or by the security guard. which portion of the questioned judgment is SET ASIDE. it should only be the corporation. to personally answer for his corporate action. incentive leave pay.transaction. or (b) for bad faith. On 23 May 1990. Marikina. G. the decision appealed from is AFFIRMED. at an agreed fee of P1. daily.m. Metro Manila. He consents to the issuance of watered stocks or who. holiday pay and rest day pay. Similar arrangements were likewise entered into by MAM with one Rodolfo Mercado and with a security guard of Rancho Estates III Homeowners' Association. prior to the filing of the complaint. vs. 7 In the case at bench. Inc. Centeno. 4 2. Ong had there so acted. his services were contracted by MAM for the operation of the Rancho Estates' water pump. does not forthwith file with the corporate secretary his written objection thereto. No. "ECOLA.590. He agrees to hold himself personally and solidarily liable with the corporation. only when — 1.590. Inc. resulting in damages to the corporation. SO ORDERED.R. J." overtime pay. affirmed by the appellate court. MAM countered that Balbastro had previously been employed by Francisco Cacho and Co. however. 6 or 4.. He is made. in favor of the Rancho Estates Phase III Homeowners Association. The case originated from a complaint filed with the Labor Arbiter by private respondent Celso B.m. and he made use of his free time by offering plumbing services to the residents of the subdivision. MAM Realty Development Corporation ("MAM") and its Vice President Manuel P. Sometime in May 1982.. but as an officer of a corporation. 3 Personal liability of a corporate director. the developer of Rancho Estates. Balbastro alleged that he was employed by MAM as a pump operator in 1982 and had since performed such work at its Rancho Estate. trustee or officer along (although not necessarily) with the corporation may so validly attach. He was not at all subject to the control or supervision of MAM for. MAM executed a Deed of Transfer. TRAMAT. or (c) for conflict of interest. Inc. conveying to the . In all other respects. as a rule. He was engaged. having knowledge thereof. there is no indication that petitioner David Ong could be held personally accountable under any of the abovementioned cases. 13th month pay (for the years 1988 and 1989)..: A prime focus in the instant petition is the question of when to hold a director or officer of a corporation solidarily obligated with the latter for a corporate liability.00 for seven days of work a week that started from 6:00 a. As such. 1effective 01 July 1990. VITUG. He worked for only a maximum period of three hours a day. He earned a basic monthly salary of P1. Balbastro was merely made to open and close on a daily basis the water supply system of the different phases of the subdivision in accordance with its water rationing scheme. with a distinct and separate personality. Under the agreement. petitioners. He assents (a) to a patently unlawful act of the corporation. the petition is given DUE COURSE and the decision of the trial court. but as a service contractor. not in his personal capacity.. or gross negligence in directing its affairs. 114787 June 2. that properly could be made liable thereon. in fact.00 a month. by a specific provision of law. Balbastro against herein petitioners. its stockholders or other persons. to up until 6:00 p. not as an employee. WHEREFORE. No costs. not the person acting for and on its behalf.

2 On 21 March 1994. and petitioner corporation should. refers merely to the existence of the power and not to the actual exercise thereof. it failed to sufficiently establish that its business losses or financial reverses were serious enough that possibly can warrant an exemption under the law.latter all its rights and interests over the water system in the subdivision. Obligations incurred by them. here. ordered: WHEREFORE. 7 While the transfer was allegedly due to MAM's financial constraints. solidary liabilities may at times be incurred but only when exceptional circumstances warrant such as. the period for the computation of the money claims should only be for the period from 06 March 1988 to 01 July 1990 (when petitioner corporation could be deemed to have ceased from the activity for which private respondent was employed). however.05 as abovecomputed. The NLRC might have missed the transfer by MAM of the water system to the Homeowners Association on 01 July 1990. 6 the latter being the date of the filing of the complaint. (1) in finding that an employer-employee relationship existed between petitioners and private respondent and (2) in holding petitioners jointly and severally liable for the money claims awarded to private respondent. 3 The instant petition asseverates that respondent NLRC gravely abused its discretion. 5 It would seem that the money claims awarded to private respondent were computed from 06 March 1988 to 06 March 1991. Not without any significance is that private respondent's employment with MAM has been registered by petitioners with the Social Security System. be made liable for the employee's separation pay equivalent to one-half (1/2) month pay for every year of service. the officers of a corporation — . pursuant to Article 218(c) of the Labor Code. Repeatedly. are not theirs but the direct accountabilities of the corporation they represent. in the following cases: 9 1. instead. (c) the power of dismissal. acting as such corporate agents. In a decision. officers and employees. unfortunately for petitioner corporation. Once again. respondent National Labor Relations Commission ("NLRC") rendered judgment (a) setting aside the questioned decision of the Labor Arbiter and (b) referring the case. We see no grave abuse of discretion on the part of NLRC in finding a full satisfaction. that the NLRC erred in holding Centeno jointly and severally liable with MAM. the matter of ascertaining the existence of an employer-employee relationship is raised. and (d) the employer's power to control the employee with respect to the result of the work to be done and to the means and methods by which the work is to be accomplished. however. On appeal to it. we have said that this factual issue is determined by: (a) the selection and engagement of the employee. The power of control. amounting to lack or excess of jurisdiction. respondent Commissioner. It is not essential for the employer to actually supervise the performance of duties of the employee. in appropriate cases. to Arbiter Cristeta D. the Labor Arbiter dismissed the complaint for lack of merit. 4 It is hard to accede to the contention of petitioners that private respondent should be considered totally free from such control merely because the work could equally and easily be done either by Mercado or by the subdivision's security guard. Tamayo for further hearing and submission of a report within 20 days from receipt of the Order. may act only through its directors. a point of controversy. When directors and trustees or. a matter that would appear not to be in dispute. of the criteria to establish that employer-employee relationship. 8 We agree with petitioners.641. True. the most important feature of that relationship and. in the case at bench. (b) the payment of wages. it is enough that the former has a right to wield the power. dated 23 December 1991. the respondents are hereby directed to pay jointly and severally complainant the sum of P86. Accordingly. being a juridical entity. after considering the report of Labor Arbiter Tamayo. A corporation. generally.

or any other plain. and other persons. The case is REMANDED to the NLRC for a re-computation of private respondent's monetary awards. SO ORDERED. 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. trustee or officer is made. conformably with this opinion. trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the Corporation. did not forthwith file with the corporate secretary his written objection thereto. by specific provision of law. When a director. WHEREFORE. which. its stockholders or members. The petition before us has been filed under Rule 65 of the Rules of Court. it is a relief that is open so long as it is availed of within a reasonable time. 14 In the case at Bench. the order of 21 March 1994 is MODIFIED. 13 In labor cases. prescinding from the foregoing. 11 3. When a director or officer has consented to the issuance of watered stocks or who. shall be paid solely by petitioner MAM Realty Development Corporation. 12 4 When a director. there being no appeal.(a) vote for or assent to patently unlawful acts of the corporation. personally liable for his corporate action. (c) are guilty of conflict of interest to the prejudice of the corporation. there is nothing substantial on record that can justify. having knowledge thereof. An extra note. No special pronouncement on costs. speedy and adequate remedy in the ordinary course of law from decisions of the National Labor Relations Commission. . Private respondent avers that the questioned decision. having already become final and executory. (b) act in bad faith or with gross negligence in directing the corporate affairs. 10 2. could no longer be reviewed by this Court. petitioner Centeno's solidary liability with the corporation.