2014 Updates in The Law On Private Corporations

RECENT JURISPURDENCE: CORPORATION In the Decision of July 15, 2009, the Court
CODE, SECURITIES REGULATION CODE, recognized the public service rendered by

BANKING & RELATED LAWS the PNRC as the government’s partner in
the observance of its international
commitments, to wit:
ATTY. MARIA LULU G. REYES
The PNRC is a non-profit, donor-funded,
voluntary, humanitarian organization,
whose mission is to bring timely, effective,
and compassionate humanitarian assistance
KINDS OF CORPORATIONS for the most vulnerable without
consideration of nationality, race, religion,
Sui Generis Character of the Philippine National Red Cross. gender, social status, or political affiliation.
The PNRC provides six major services:
It is in recognition of this sui generis character of the Blood Services, Disaster Management,
Safety Services, Community Health and
PNRC that R.A. No. 95 has remained valid and
Nursing, Social Services and Voluntary
effective from the time of its enactment in March 22, Service.
1947 under the 1935 Constitution and during the
The Republic of the Philippines, adhering
effectivity of the 1973 Constitution and the 1987 to the Geneva Conventions, established the
Constitution. PNRC as a voluntary organization for the
purpose contemplated in the Geneva
Convention of 27 July 1929. x x x.(Citations
The PNRC Charter and its amendatory laws have not
omitted.)
been questioned or challenged on constitutional
grounds, not even in this case before the Court now. So must this Court recognize too the country’s
adherence to the Geneva Convention and respect
In the Decision, the Court, citing Feliciano v. the unique status of the PNRC in consonance
Commission on Audit,[1] explained that the purpose of with its treaty obligations. The Geneva Convention
the constitutional provision prohibiting Congress has the force and effect of law. Under the
from creating private corporations was to prevent Constitution, the Philippines adopts the generally
the granting of special privileges to certain accepted principles of international law as part of the
individuals, families, or groups, which were denied to law of the land. This constitutional provision must
other groups. Based on the above discussion, it can be reconciled and harmonized with Article XII,
be seen that the PNRC Charter does not come within Section 16 of the Constitution, instead of using the
the spirit of this constitutional provision, as it does latter to negate the former.
not grant special privileges to a particular individual,

By requiring the PNRC to organize under the
family, or group, but creates an entity that strives to
Corporation Code just like any other private
serve the common good.
corporation, the Decision of July 15, 2009 lost sight of
Furthermore, a strict and mechanical interpretation the PNRC’s special status under international
of Article XII, Section 16 of the 1987 Constitution will humanitarian law and as an auxiliary of the State,
hinder the State in adopting measures that will serve designated to assist it in discharging its obligations
the public good or national interest. It should be under the Geneva Conventions. Although the PNRC
noted that a special law, R.A. No. 9520, the is called to be independent under its Fundamental
Philippine Cooperative Code of 2008, and not the Principles, it interprets such independence as
general corporation code, vests corporate power and inclusive of its duty to be the government’s
capacities upon cooperatives which are private humanitarian partner. To be recognized in the
corporations, in order to implement the State’s International Committee, the PNRC must have an
avowed policy. autonomous status, and carry out its humanitarian

mission in a neutral and impartial manner.
However, in accordance with the Fundamental

1 464 Phil. 439 (2004).
Principle of Voluntary Service of National Societies
Recent Jurisprudence in Corporation Code, etc : A t t y . M a r i a L u l u g . R e y e s |2
of the Movement, the PNRC must be distinguished requirements. Its humanitarian work is unparalleled.
from private and profit-making entities. It is the The Court should not shake its existence to the core
main characteristic of National Societies that they in an untimely and drastic manner that would not
“are not inspired by the desire for financial gain but only have negative consequences to those who
by individual commitment and devotion to a depend on it in times of disaster and armed
humanitarian purpose freely chosen or accepted as hostilities but also have adverse effects on the image
part of the service that National Societies through its of the Philippines in the international community.
volunteers and/or members render to the Dante V. Liban, et al. Vs. Richard J. Gordon, respondent,
Community.” Philippine National Red Cross, intervenor, G.R. No.
175352. January 18, 2011
The PNRC, as a National Society of the International
Red Cross and Red Crescent Movement, can neither
“be classified as an instrumentality of the State, so as
Boy Scouts of the Philippines as a public corporation.
not to lose its character of neutrality” as well as its
Evidently, the BSP, which was created by a special
independence, nor strictly as a private corporation
law to serve a public purpose in pursuit of a
since it is regulated by international humanitarian
constitutional mandate, comes within the class of
law and is treated as an auxiliary of the State. [4]
“public corporations” defined by paragraph 2, Article
44 of the Civil Code and governed by the law which
Based on the above, the sui generis status of the PNRC
creates it, pursuant to Article 45 of the same Code.
is now sufficiently established. Although it is neither
a subdivision, agency, or instrumentality of the
The public, rather than private, character of the BSP
government, nor a government-owned or -controlled
is recognized by the fact that, along with the Girl
corporation or a subsidiary thereof, as succinctly
Scouts of the Philippines, it is classified as an
explained in the Decision of July 15, 2009, so much so
attached agency of the DECS under Executive Order
that respondent, under the Decision, was correctly
No. 292, or the Administrative Code of 1987.
allowed to hold his position as Chairman thereof
concurrently while he served as a Senator, such a
The administrative relationship of an attached
conclusion does not ipso facto imply that the PNRC is
agency to the department is defined in the
a “private corporation” within the contemplation of
Administrative Code of 1987 as follows:
the provision of the Constitution, that must be
organized under the Corporation Code. As correctly
SEC. 38. Definition of Administrative
mentioned by Justice Roberto A. Abad, the sui
generis character of PNRC requires us to approach Relationship. – Unless otherwise
controversies involving the PNRC on a case-to- expressly stated in the Code or in
case basis. other laws defining the special

relationships of particular agencies,
In sum, the PNRC enjoys a special status as an administrative relationships shall
important ally and auxiliary of the government in the be categorized and defined as
humanitarian field in accordance with its follows:
commitments under international law. This Court xxxx
cannot all of a sudden refuse to recognize its (3) Attachment. – (a) This refers
existence, especially since the issue of the to the lateral relationship between
constitutionality of the PNRC Charter was never the department or its equivalent
raised by the parties. It bears emphasizing that the and the attached agency or
PNRC has responded to almost all national disasters corporation for purposes of policy
since 1947, and is widely known to provide a and program coordination. The
substantial portion of the country’s blood coordination may be
accomplished by having the of goods and services produced by

department represented in the the nation for the benefit of the
governing board of the attached people; and an expanding
agency or corporation, either as productivity as the key to raising
chairman or as a member, with or the quality of life for all, especially
without voting rights, if this is the underprivileged.
permitted by the charter; having
the attached corporation or agency The State shall promote
comply with a system of periodic industrialization and full
reporting which shall reflect the employment based on sound
progress of programs and projects; agricultural development and
and having the department or its agrarian reform, through industries
equivalent provide general policies that make full and efficient use of
through its representative in the human and natural resources, and
board, which shall serve as the which are competitive in both
framework for the internal policies domestic and foreign markets.
of the attached corporation or However, the State shall protect
agency. (Emphasis ours.) Filipino enterprises against unfair
foreign competition and trade
As an attached agency, the BSP enjoys practices.
operational autonomy, as long as policy and program
coordination is achieved by having at least one In the pursuit of these goals, all
representative of government in its governing sectors of the economy and all
board, which in the case of the BSP is the DECS regions of the country shall be
Secretary. In this sense, the BSP is not under given optimum opportunity to
government control or “supervision and control.” develop. Private enterprises,
Still this characteristic does not make the attached including corporations,
chartered agency a private corporation covered by cooperatives, and similar collective
the constitutional proscription in question. organizations, shall be encouraged
to broaden the base of their
Art. XII, Sec. 16 of the Constitution refers ownership.
to “private corporations” created by
government for proprietary or The scope and coverage of Section 16, Article XII of
economic/business purposes the Constitution can be seen from the
aforementioned declaration of state policies and
At the outset, it should be noted that the provision of goals which pertains to national economy and
Section 16 in issue is found in Article XII of the patrimony and the interests of the people in
Constitution, entitled “National Economy and economic development.
Patrimony.” Section 1 of Article XII is quoted as
follows: Section 16, Article XII deals with “the formation,
organization, or regulation of private
SECTION 1. The goals of the corporations,” [4] which should be done through a
national economy are a more general law enacted by Congress, provides for an
equitable distribution of exception, that is: if the corporation is government
opportunities, income, and wealth; owned or controlled; its creation is in the interest of
a sustained increase in the amount the common good; and it meets the test of economic
viability. The rationale behind Article XII, Section 16 corporations are treated by law as agencies or
of the 1987 Constitution was explained in Feliciano v. instrumentalities of the government which are not
Commission on Audit, in the following manner: subject to the tests of ownership or control and
economic viability but to different criteria relating to
The Constitution emphatically their public purposes/interests or constitutional
prohibits the creation of private policies and objectives and their administrative
corporations except by a general relationship to the government or any of its
law applicable to all citizens. The Departments or Offices.
purpose of this constitutional

provision is to ban private Classification of Corporations Under
corporations created by special Section 16, Article XII of the Constitution
charters, which historically gave on National Economy and Patrimony
certain individuals, families or

groups special privileges denied Section 16, Article XII should not be construed so as
to other citizens. (Emphasis to prohibit Congress from creating public
added.) corporations. In fact, Congress has enacted
numerous laws creating public corporations or
It may be gleaned from the above discussion that government agencies or instrumentalities vested
Article XII, Section 16 bans the creation of “private with corporate powers. Moreover, Section 16, Article
corporations” by special law. The said XII, which relates to National Economy and
constitutional provision should not be construed so Patrimony, could not have tied the hands of Congress
as to prohibit the creation of public corporations or in creating public corporations to serve any of the
a corporate agency or instrumentality of the constitutional policies or objectives.

government intended to serve a public interest or xxx
purpose, which should not be measured on the basis Note that in Boy Scouts of the Philippines v. National Labor
of economic viability, but according to the public Relations Commission, the BSP, under its former charter,
interest or purpose it serves as envisioned by was regarded as both a government owned or
paragraph (2), of Article 44 of the Civil Code and controlled corporation with original charter and a
the pertinent provisions of the Administrative Code “public corporation.” The said case pertinently
of 1987. stated:
The BSP is a Public Corporation Not While the BSP may be seen to be
Subject to the Test of Government a mixed type of entity, combining
Ownership or Control and Economic aspects of both public and
Viability private entities, we believe that
considering the character of its
The BSP is a public corporation or a government purposes and its functions, the
agency or instrumentality with juridical personality, statutory designation of the BSP as
which does not fall within the constitutional "a public corporation" and the
prohibition in Article XII, Section 16, substantial participation of the
notwithstanding the amendments to its charter. Not Government in the selection of
all corporations, which are not government owned or members of the National Executive
controlled, are ipso facto to be considered private Board of the BSP, the BSP, as
corporations as there exists another distinct class of presently constituted under its
corporations or chartered institutions which are charter, is a government-
otherwise known as “public corporations.” These controlled corporation within the
meaning of Article IX (B) (2) (1) of The same Code describes a

the Constitution. "chartered institution" in the
following terms:
We are fortified in this conclusion
when we note that the Chartered institution -
Administrative Code of 1987 refers to any agency
designates the BSP as one of the organized or operating under
attached agencies of the a special charter, and vested
Department of Education, Culture by law with functions relating
and Sports ("DECS"). An "agency of to specific constitutional
the Government" is defined as policies or objectives. This
referring to any of the various units term includes the state
of the Government including a universities and colleges, and
department, bureau, office, the monetary authority of the
instrumentality, government- State.
owned or -controlled corporation,
or local government or distinct unit We believe that the BSP is
therein. "Government appropriately regarded as "a
instrumentality" is in turn defined government instrumentality" under
in the 1987 Administrative Code in the 1987 Administrative Code.
the following manner:
It thus appears that the BSP may
Instrumentality - refers to be regarded as both a
any agency of the "government controlled
National Government, corporation with an original
not integrated within charter" and as an
the department "instrumentality" of the
framework, vested with Government within the meaning
special functions or of Article IX (B) (2) (1) of the
jurisdiction by law, Constitution. x x x. (Emphases
endowed with some if supplied.)
not all corporate
powers, administering
special funds, and The existence of public or government
enjoying operational corporate or juridical entities or chartered
autonomy usually institutions by legislative fiat distinct from private
through a charter. This corporations and government owned or controlled
term includes corporation is best exemplified by the 1987
regulatory agencies, Administrative Code cited above, which we quote
chartered institutions in part:
and government-owned
or controlled Sec. 2. General Terms Defined. –
corporations. Unless the specific words of the
text, or the context as a whole, or a
particular statute, shall require a
different meaning:
categorized by the Department of

xxxx the Budget, the Civil Service
Commission, and the
(10) "Instrumentality" refers to any Commission on Audit for
agency of the National purposes of the exercise and
Government, not integrated within discharge of their respective
the department framework, vested powers, functions and
with special functions or responsibilities with respect to
jurisdiction by law, endowed with such corporations.
some if not all corporate powers,
administering special funds, and Assuming for the sake of argument that the BSP
enjoying operational autonomy, ceases to be owned or controlled by the government
usually through a charter. This because of reduction of the number of
term includes regulatory agencies, representatives of the government in the BSP Board,
chartered institutions and it does not follow that it also ceases to be a
government-owned or controlled government instrumentality as it still retains all the
corporations.   characteristics of the latter as an attached agency of
the DECS under the Administrative Code. Vesting
xxxx corporate powers to an attached agency or
instrumentality of the government is not
(12) "Chartered institution" refers constitutionally prohibited and is allowed by the
to any agency organized or above-mentioned provisions of the Civil Code and
operating under a special charter, the 1987 Administrative Code.
and vested by law with functions
relating to specific constitutional Economic Viability and Ownership
policies or objectives. This term and Control Tests Inapplicable to Public
includes the state universities and Corporations
colleges and the monetary
authority of the State. As presently constituted, the BSP still remains an
instrumentality of the national government. It is a
(13) "Government-owned or public corporation created by law for a public
controlled corporation" refers to purpose, attached to the DECS pursuant to its
any agency organized as a stock or Charter and the Administrative Code of 1987. It is
non-stock corporation, vested with not a private corporation which is required to be
functions relating to public needs owned or controlled by the government and be
whether governmental or economically viable to justify its existence under a
proprietary in nature, and owned special law. Boy Scouts of the Philippines Vs. Commssion on
by the Government directly or Audit, G.R. No. 177131. June 7, 2011
through its instrumentalities either
wholly, or, where applicable as in
the case of stock corporations, to
the extent of at least fifty-one (51) PRE-INCORPORATION/PROMOTION
per cent of its capital stock: CONTRACTS
Provided, That government-
owned or controlled Corporation; contracts before incorporation. With
corporations may be further respect to petitioners’ contention that the
Management Contract executed between respondent cover requires an approach characterized by due care
and petitioner Lucila has no binding effect on and caution:
petitioner corporation for having been executed way
before its incorporation, this Court finds the same Hence, any application of the doctrine of piercing
meritorious. the corporate veil should be done with caution. A
court should be mindful of the milieu where it is to
Logically, there is no corporation to speak of prior to be applied. It must be certain that the corporate
an entity’s incorporation. And no contract entered fiction was misused to such an extent that
into before incorporation can bind the corporation. injustice, fraud, or crime was committed against
March II Marketing, Inc. and Lucila V. Joson vs. Alfredo M. another, in disregard of its rights. The wrongdoing
Joson, G.R. No. 171993, December 12, 2011. must be clearly and convincingly established; it
cannot be presumed. x x x.
Sarona v. National Labor Relations Commission has

CORPORATE ENTITY FICTION/PIERCING
defined the scope of application of the doctrine of
THE VEIL OF CORPORATE FICTION
piercing the corporate veil: The doctrine of piercing
A corporation is an artificial entity created by the corporate veil applies only in three (3) basic
operation of law. It possesses the right of succession areas, namely: 1) defeat of public convenience as
and such powers, attributes, and properties when the corporate fiction is used as a vehicle for the
expressly authorized by law or incident to its evasion of an existing obligation; 2) fraud cases or
existence. It has a personality separate and distinct when the corporate entity is used to justify a wrong,
from that of its stockholders and from that of other protect fraud, or defend a crime; or 3) alter ego cases,
corporations to which it may be connected. As a where a corporation is merely a farce since it is a
consequence of its status as a distinct legal entity and mere alter ego or business conduit of a person, or
as a result of a conscious policy decision to promote where the corporation is so organized and controlled
capital formation, a corporation incurs its own and its affairs are so conducted as to make it merely
liabilities and is legally responsible for payment of its an instrumentality, agency, conduit or adjunct of
obligations. In other words, by virtue of the separate another corporation.
juridical personality of a corporation, the corporate

debt or credit is not the debt or credit of the Here, HRCC has alleged from the inception of this
stockholder. This protection from liability for case that DBP and PNB (and the APT as assignee of
shareholders is the principle of limited liability. DBP and PNB) should be held solidarily liable for
Equally well-settled is the principle that the using NMIC as alter ego. The RTC sustained the
corporate mask may be removed or the corporate veil allegation of HRCC and pierced the corporate veil of
pierced when the corporation is just an alter ego of a NMIC pursuant to the alter ego theory when it
person or of another corporation. For reasons of concluded that NMIC “is a mere adjunct, business
public policy and in the interest of justice, the conduit or alter ego of both DBP and PNB.” The Court
corporate veil will justifiably be impaled only when it of Appeals upheld such conclusion of the trial court.
becomes a shield for fraud, illegality or inequity In other words, both the trial and appellate courts
committed against third persons. However, the rule relied on the alter ego theory when they disregarded
is that a court should be careful in assessing the the separate corporate personality of NMIC.
milieu where the doctrine of the corporate veil may
be applied. Otherwise an injustice, although In this connection, case law lays down a three-
unintended, may result from its erroneous pronged test to determine the application of the alter
application. Thus, cutting through the corporate ego theory, which is also known as the
instrumentality theory, namely:
committed through the instrumentality of the

(1) Control, not mere majority or complete stock subsidiary and the injury suffered or the damage
control, but complete domination, not only of incurred by the plaintiff should be established. The
finances but of policy and business practice in plaintiff must prove that, unless the corporate veil is
respect to the transaction attacked so that the pierced, it will have been treated unjustly by the
corporate entity as to this transaction had at the time defendant’s exercise of control and improper use of
no separate mind, will or existence of its own; the corporate form and, thereby, suffer damages.
(2) Such control must have been used by the
defendant to commit fraud or wrong, to perpetuate To summarize, piercing the corporate veil based on
the violation of a statutory or other positive legal the alter ego theory requires the concurrence of three
duty, or dishonest and unjust act in contravention of elements: control of the corporation by the
plaintiff’s legal right; and stockholder or parent corporation, fraud or
(3) The aforesaid control and breach of duty must fundamental unfairness imposed on the plaintiff, and
have proximately caused the injury or unjust loss harm or damage caused to the plaintiff by the
complained of. fraudulent or unfair act of the corporation. The
absence of any of these elements prevents piercing
The first prong is the “instrumentality” or “control” the corporate veil.
test. This test requires that the subsidiary be
completely under the control and domination of the This Court finds that none of the tests has been
parent. It examines the parent corporation’s satisfactorily met in this case. In applying the alter ego
relationship with the subsidiary. It inquires whether doctrine, the courts are concerned with reality and
a subsidiary corporation is so organized and not form, with how the corporation operated and the
controlled and its affairs are so conducted as to make individual defendant’s relationship to that operation.
it a mere instrumentality or agent of the parent With respect to the control element, it refers not to
corporation such that its separate existence as a paper or formal control by majority or even complete
distinct corporate entity will be ignored. It seeks to stock control but actual control which amounts to
establish whether the subsidiary corporation has no “such domination of finances, policies and practices
autonomy and the parent corporation, though acting that the controlled corporation has, so to speak, no
through the subsidiary in form and appearance, “is separate mind, will or existence of its own, and is but
operating the business directly for itself.” a conduit for its principal.” In addition, the control
must be shown to have been exercised at the time the
The second prong is the “fraud” test. This test acts complained of took place.
requires that the parent corporation’s conduct in
using the subsidiary corporation be unjust, Both the RTC and the Court of Appeals applied the
fraudulent or wrongful. It examines the relationship alter ego theory and penetrated the corporate cover of
of the plaintiff to the corporation. It recognizes that NMIC based on two factors: (1) the ownership by
piercing is appropriate only if the parent corporation DBP and PNB of effectively all the stocks of NMIC,
uses the subsidiary in a way that harms the plaintiff and (2) the alleged interlocking directorates of DBP,
creditor. As such, it requires a showing of “an PNB and NMIC. Unfortunately, the conclusion of
element of injustice or fundamental unfairness.” the trial and appellate courts that the DBP and PNB
fit the alter ego theory with respect to NMIC’s
The third prong is the “harm” test. This test requires
transaction with HRCC on the premise of complete
the plaintiff to show that the defendant’s control,
stock ownership and interlocking directorates
exerted in a fraudulent, illegal or otherwise unfair
involved a quantum leap in logic and law exposing a
manner toward it, caused the harm suffered. A causal
gap in reason and fact.
connection between the fraudulent conduct
While ownership by one corporation of all or a great deception. This, unfortunately, petitioners have
majority of stocks of another corporation and their failed to do. Vivian T. Ramirez, et al. vs. Mar Fishing Co.,
interlocking directorates may serve as indicia of Inc,. et al., G.R. No. 168208, June 13, 2012.
control, by themselves and without more, however,
these circumstances are insufficient to establish an Corporation; piercing the corporate veil. the RTC
alter ego relationship or connection between DBP and had sufficient factual basis to find that petitioner and
PNB on the one hand and NMIC on the other hand, Travel and Tours Advisers, Inc. were one and the
that will justify the puncturing of the latter’s same entity, specifically:– (a) documents submitted
corporate cover. This Court has declared that “mere by petitioner in the RTC showing that William
ownership by a single stockholder or by another Cheng, who claimed to be the operator of Travel and
corporation of all or nearly all of the capital stock of a Tours Advisers, Inc., was also the President/Manager
corporation is not of itself sufficient ground for and an incorporator of the petitioner; and (b) Travel
disregarding the separate corporate personality.” and Tours Advisers, Inc. had been known in Sorsogon
This Court has likewise ruled that the “existence of as Goldline. Gold Line Tours, Inc. vs. Heirs of Maria
interlocking directors, corporate officers and
Concepcion Lacsa, G.R. No. 159108, June 18, 2012.
shareholders is not enough justification to pierce the
veil of corporate fiction in the absence of fraud or Corporation; piercing the corporate veil. A
other public policy considerations.” Philippine corporation is an artificial being created by operation
National Bank v. Hydro-Resources Contractors Corporation, of law. It possesses the right of succession and such
G.R. No. 167530, March 13, 2013. powers, attributes, and properties expressly
authorized by law or incident to its existence. It has
a personality separate and distinct from the persons
composing it, as well as from any other legal entity to
Corporation; piercing the corporate veil. This Court which it may be related. This is basic.
sustains the ruling of the LA as affirmed by the
NLRC that Miramar and Mar Fishing are separate Equally well-settled is the principle that the
and distinct entities, based on the marked differences corporate mask may be removed or the corporate veil
in their stock ownership. Also, the fact that Mar pierced when the corporation is just an alter ego of a
Fishing’s officers remained as such in Miramar does person or of another corporation. For reasons of
not by itself warrant a conclusion that the two public policy and in the interest of justice, the
companies are one and the same. As this Court held corporate veil will justifiably be impaled only when it
in Sesbreño v. Court of Appeals, the mere showing that becomes a shield for fraud, illegality or inequity
the corporations had a common director sitting in all committed against third persons.
the boards without more does not authorize
disregarding their separate juridical personalities. Hence, any application of the doctrine of piercing the
corporate veil should be done with caution. A court
Neither can the veil of corporate fiction between the should be mindful of the milieu where it is to be
two companies be pierced by the rest of petitioners’ applied. It must be certain that the corporate fiction
submissions, namely, the alleged take-over by was misused to such an extent that injustice, fraud,
Miramar of Mar Fishing’s operations and the evident or crime was committed against another, in disregard
similarity of their businesses. At this point, it bears of rights. The wrongdoing must be clearly and
emphasizing that since piercing the veil of corporate convincingly established; it cannot be presumed.
fiction is frowned upon, those who seek to pierce the Otherwise, an injustice that was never unintended
veil must clearly establish that the separate and may result from an erroneous application.
distinct personalities of the corporations are set up
to justify a wrong, protect a fraud, or perpetrate a Whether the separate personality of the corporation
should be pierced hinges on obtaining facts
Recent Jurisprudence in Corporation Code, etc : A t t y . M a r i a L u l u g . R e y e s | 10
appropriately pleaded or proved. However, any Sceptre in her favor. As far as Royale is concerned,
piercing of the corporate veil has to be done with the respondents do not deny that she has a hand in
caution, albeit the Court will not hesitate to its management and operation and possesses control
disregard the corporate veil when it is misused or and supervision of its employees, including the
when necessary in the interest of justice. After all, the petitioner. As the petitioner correctly pointed out,
concept of corporate entity was not meant to that Aida was the one who decided to stop giving
promote unfair objectives. any assignments to the petitioner and summarily
dismiss him is an eloquent testament of the power
The doctrine of piercing the corporate veil applies she wields insofar as Royale’s affairs are concerned.
only in three (3) basic areas, namely: 1) defeat of The presence of actual common control coupled with
public convenience as when the corporate fiction is the misuse of the corporate form to perpetrate
used as a vehicle for the evasion of an existing oppressive or manipulative conduct or evade
obligation; 2) fraud cases or when the corporate performance of legal obligations is patent; Royale
entity is used to justify a wrong, protect fraud, or cannot hide behind its corporate fiction.
defend a crime; or 3) alter ego cases, where a
corporation is merely a farce since it is a mere alter Aida’s control over Sceptre and Royale does not, by
ego or business conduit of a person, or where itself, call for a disregard of the corporate fiction.
the corporation is so organized and controlled and its There must be a showing that a fraudulent intent or
affairs are so conducted as to make it merely an illegal purpose is behind the exercise of such control
instrumentality, agency, conduit or adjunct of to warrant the piercing of the corporate veil.
another corporation. Timoteo H. Sarona vs. National However, the manner by which the petitioner was
Labor Relations Commission, Royale Security Agency, et al., made to resign from Sceptre and how he became an
G.R. No. 185280, January 18, 2012. employee of Royale suggest the perverted use of the
legal fiction of the separate corporate personality. It
Corporation; circumstances justifying piercing. is undisputed that the petitioner tendered his
Evidence abound showing that Royale is a mere resignation and that he applied at Royale at the
continuation or successor of Sceptre and fraudulent instance of Karen and Cesar and on the impression
objectives are behind Royale’s incorporation and the they created that these were necessary for his
petitioner’s subsequent employment therein. These continued employment. They orchestrated the
are plainly suggested by events that the respondents petitioner’s resignation from Sceptre and subsequent
do not dispute and which the CA, the NLRC and LA employment at Royale, taking advantage of their
Gutierrez accept as fully substantiated but ascendancy over the petitioner and the latter’s lack of
misappreciated as insufficient to warrant the use of knowledge of his rights and the consequences of his
the equitable weapon of piercing. actions. Furthermore, that the petitioner was made
to resign from Sceptre and apply with Royale only to
As correctly pointed out by the petitioner, it was be unceremoniously terminated shortly thereafter
Aida who exercised control and supervision over the leads to the ineluctable conclusion that there was
affairs of both Sceptre and Royale. Contrary to the intent to violate the petitioner’s rights as an
submissions of the respondents that Roso had been employee, particularly his right to security of tenure.
the only one in sole control of Sceptre’s finances and The respondents’ scheme reeks of bad faith and fraud
business affairs, Aida took over as early as 1999 when and compassionate justice dictates that Royale and
Roso assigned his license to operate Sceptre on May Sceptre be merged as a single entity, compelling
3, 1999. As further proof of Aida’s acquisition of the Royale to credit and recognize the petitioner’s length
rights as Sceptre’s sole proprietor, she caused the of service with Sceptre. The respondents cannot use
registration of the business name “Sceptre Security the legal fiction of a separate corporate personality
& Detective Agency” under her name with the DTI a for ends subversive of the policy and purpose behind
few months after Roso abdicated his rights to its creation or which could not have been intended
by law to which it owed its being. Timoteo H. Sarona Royale also claimed a right to the cash bond which
vs. National Labor Relations Commission, Royale Security the petitioner posted when he was still with Sceptre.
Agency, et al., G.R. No. 185280, January 18, 2012. If Sceptre and Royale are indeed separate entities,
Sceptre should have released the petitioner’s cash
Single proprietorship; applicability of piercing the bond when he resigned and Royale would have
corporate veil. For the piercing doctrine to apply, it required the petitioner to post a new cash bond in its
is of no consequence if Sceptre is a sole favor.
proprietorship. As ruled in Prince Transport, Inc., et
al. v. Garcia, et al., it is the act of hiding behind the Taking the foregoing in conjunction with Aida’s
separate and distinct personalities of juridical control over Sceptre’s and Royale’s business affairs, it
entities to perpetuate fraud, commit illegal acts, is patent that Royale was a mere subterfuge for Aida.
evade one’s obligations that the equitable piercing Since a sole proprietorship does not have a separate
doctrine was formulated to address and prevent: and distinct personality from that of the owner of the
enterprise, the latter is personally liable. This is what
A settled formulation of the doctrine of piercing the she sought to avoid but cannot prosper. Timoteo H.
corporate veil is that when two business enterprises Sarona vs. National Labor Relations Commission, Royale
are owned, conducted and controlled by the same Security Agency, et al., G.R. No. 185280, January 18, 2012.
parties, both law and equity will, when necessary to
protect the rights of third parties, disregard the legal Corporations; piercing the corporate veil. Piercing
fiction that these two entities are distinct and treat the veil of corporate fiction is warranted only in cases
them as identical or as one and the same. In the when the separate legal entity is used to defeat
present case, it may be true that Lubas is a single public convenience, justify wrong, protect fraud, or
proprietorship and not a corporation. However, defend crime, such that in the case of two
petitioners’ attempt to isolate themselves from and corporations, the law will regard the corporations as
hide behind the supposed separate and distinct merged into one. As succinctly discussed by the
personality of Lubas so as to evade their liabilities is Court in Velarde v. Lopez, Inc.:
precisely what the classical doctrine of piercing the
Petitioner argues nevertheless that
veil of corporate entity seeks to prevent and remedy.
jurisdiction over the subsidiary is justified
by piercing the veil of corporate fiction.
Also, Sceptre and Royale have the same principal Piercing the veil of corporate fiction is
warranted, however, only in cases when the
place of business. As early as October 14, 1994, Aida separate legal entity is used to defeat public
and Wilfredo became the owners of the property convenience, justify wrong, protect fraud, or
defend crime, such that in the case of two
used by Sceptre as its principal place of business by corporations, the law will regard the
virtue of a Deed of Absolute Sale they executed with corporations as merged into one. The
rationale behind piercing a corporation’s
Roso. Royale, shortly after its incorporation, started identity is to remove the barrier between
to hold office in the same property. These, the the corporation from the persons
comprising it to thwart the fraudulent and
respondents failed to dispute. illegal schemes of those who use the
corporate personality as a shield for
undertaking certain proscribed activities.
The respondents do not likewise deny that Royale
and Sceptre share the same officers and employees.
In applying the doctrine of piercing the veil
Karen assumed the dual role of Sceptre’s Operation of corporate fiction, the following requisites
must be established: (1) control, not merely
Manager and incorporator of Royale. With respect to
majority or complete stock control; (2) such
the petitioner, even if he has already resigned from control must have been used by the
defendant to commit fraud or wrong, to
Sceptre and has been employed by Royale, he was
perpetuate the violation of a statutory or
still using the patches and agency cloths of Sceptre other positive legal duty, or dishonest acts
in contravention of plaintiff’s legal rights;
during his assignment at Highlight Metal.
and (3) the aforesaid control and breach of
duty must proximately cause the injury or
unjust loss complained of. (Citations personal liability in his Answer, he made himself
omitted.)
accountable in the promissory note “in his personal
Nowhere, however, in the pleadings and capacity and as authorized by the Board Resolution”
other records of the case can it be gathered
of PRISMA. With this statement of personal liability
that respondent has complete control over
Sky Vision, not only of finances but of policy and in the absence of any representation on the part
and business practice in respect to the
of PRISMA that the obligation is all its own because
transaction attacked, so that Sky Vision
had at the time of the transaction no of its separate corporate identity, we see no occasion
separate mind, will or existence of its own.
to consider piercing the corporate veil as material to
The existence of interlocking directors,
corporate officers and shareholders is not the case. Prisma Construction and Development
enough justification to pierce the veil of
corporate fiction in the absence of fraud or Corporation and Rogelio S. Pantaleon vs. Arthur F.
other public policy considerations. Hacienda Menchavez, G.R. No. 160545, March 9, 2010.
Luisita Incorporated vs. Presidential Agrarian
Reform Council, G.R. No. 171101, November 22,
2011. Piercing the Corporate Veil between Parent
Corporation and Subsidiary. Pantranco Employees Asso.,
Corporations; piercing the corporate veil. Absent
et al. vs. NLRC, et al./Philippine National Bank Vs. Pantranco
any allegation or proof of fraud or other public policy
Employees Association Inc., et al., G.R. No. 170689/G.R. No.
considerations, the existence of interlocking
170705, March 17, 2009, is a where former employees of
directors, officers and stockholders is not enough
justification to pierce the veil of corporate fiction as a company sought to satisfy their unpaid labor claims
against another company that eventually acquired,
in the instant case. Hacienda Luisita Incorporated vs.
and then sold, the employer company.
Presidential Agrarian Reform Council, G.R. No. 171101,
November 22, 2011.
The Gonzales family owned two corporations,
namely, the Pantranco North Express, Inc. (PNEI)
Corporation; corporate veil. The doctrine of piercing
and Macris Realty Corporation (Macris). PNEI
the corporate veil applies only in three (3) basic
provided transportation services to the public, and
instances, namely: a) when the separate and distinct
had its bus terminal at the corner of Quezon and
corporate personality defeats public convenience, as
Roosevelt Avenues in Quezon City. The terminal
when the corporate fiction is used as a vehicle for the
stood on four valuable pieces of real estate (known as
evasion of an existing obligation; b) in fraud cases, or
Pantranco properties) registered under the name of
when the corporate entity is used to justify a wrong,
Macris. The Gonzales family later incurred huge
protect a fraud, or defend a crime; or c) is used in
financial losses despite attempts of rehabilitation and
alter ego cases, i.e., where a corporation is essentially
loan infusion. In March 1975, their creditors took
a farce, since it is a mere alter ego or business conduit
over the management of PNEI and Macris. By 1978,
of a person, or where the corporation is so organized
full ownership was transferred to one of their
and controlled and its affairs so conducted as to
creditors, the National Investment Development
make it merely an instrumentality, agency, conduit or
Corporation (NIDC), a subsidiary of the PNB.
adjunct of another corporation.
Macris was later renamed as the National Realty

In the absence of malice, bad faith, or a specific
Development Corporation (Naredeco) and eventually
provision of law making a corporate officer liable,
merged with the National Warehousing Corporation
such corporate officer cannot be made personally
(Nawaco) to form the new PNB subsidiary, the PNB-
liable for corporate liabilities.
Madecor.
In the present case, we see no competent and

In 1985, NIDC sold PNEI to North Express
convincing evidence of any wrongful, fraudulent or
Transport, Inc. (NETI), a company owned by
unlawful act on the part of PRISMA to justify
Gregorio Araneta III. In 1986, PNEI was among the
piercing its corporate veil. While Pantaleon denied
several companies placed under sequestration by the not a party to the labor case. In its Third-Party
Presidential Commission on Good Government Claim, PNB alleged that PNB-Madecor was indebted
(PCGG) shortly after the historic events in EDSA. In to the former and that the Pantranco properties
January 1988, PCGG lifted the sequestration order to would answer for such debt.
pave the way for the sale of PNEI back to the private
sector through the Asset Privatization Trust (APT). On September 10, 2002, the Labor Arbiter declared
APT thus took over the management of PNEI. that the subject Pantranco properties were owned by
PNB-Madecor. It being a corporation with a distinct
In 1992, PNEI applied with the Securities and and separate personality, its assets could not answer
Exchange Commission (SEC) for suspension of for the liabilities of PNEI. Considering, however, that
payments. A management committee was thereafter PNB-Madecor executed a promissory note in favor of
created which recommended to the SEC the sale of PNEI for P7,884,000.00, the writ of execution to the
the company through privatization. As a cost-saving extent of the said amount was concerned was
measure, the committee likewise suggested the considered valid. PNB’s third-party claim – to nullify
retrenchment of several PNEI employees. Eventually, the writ on the ground that it has an interest in the
PNEI ceased its operation. Along with the cessation Pantranco properties being a creditor of PNB-
of business came the various labor claims Madecor, – on the other hand, was denied because it
commenced by the former employees of PNEI where only had an inchoate interest in the properties.
the latter obtained favorable decisions.
The NLRC affirmed the Labor Arbiter’s decision.
On July 5, 2002, the Labor Arbiter issued the Sixth The CA also affirmed the NLRC’s decision. The
Alias Writ of Execution commanding the National appellate court pointed out that PNB, PNB-Madecor
Labor Relations Commission (NLRC) sheriffs to levy and Mega Prime are corporations with personalities
on the assets of PNEI in order to satisfy the separate and distinct from PNEI. As such, there being
P722,727,150.22 due its former employees, as full and no cogent reason to pierce the veil of corporate
final satisfaction of the judgment awards in the labor fiction, the separate personalities of the above
cases. The sheriffs were likewise instructed to corporations should be maintained. The CA added
proceed against PNB, PNB-Madecor and Mega that the Pantranco properties were never owned by
Prime. In implementing the writ, the sheriffs levied PNEI; rather, their titles were registered under the
upon the four valuable pieces of real estate located at name of PNB-Madecor. If PNB and PNB-Madecor
the corner of Quezon and Roosevelt Avenues, on could not answer for the liabilities of PNEI, with
which the former Pantranco Bus Terminal stood. more reason should Mega Prime not be held liable
These properties were covered by Transfer being a mere successor-in-interest of PNB-Madecor.
Certificate of Title (TCT) Nos. 87881-87884,
registered under the name of PNB-Madecor. The former PNEI employees argued before the
Subsequently, Notice of Sale of the foregoing real Supreme Court that PNB, through PNB-Madecor,
properties was published in the newspaper and the directly benefited from the operation of PNEI and
sale was set on July 31, 2002. had complete control over the funds of PNEI. Hence,
they are solidarily answerable with PNEI for the
Having been notified of the auction sale, motions to unpaid money claims of the employees. Citing A.C.
quash the writ were separately filed by PNB- Ransom Labor Union-CCLU v. NLRC, the
Madecor and Mega Prime, and PNB. They likewise employees insist that where the employer
filed their Third-Party Claims. PNB-Madecor corporation ceases to exist and is no longer able to
anchored its motion on its right as the registered satisfy the judgment awards in favor of its employees,
owner of the Pantranco properties, and Mega Prime the owner of the employer corporation should be
as the successor-in-interest. For its part, PNB sought made jointly and severally liable. The Supreme Court
the nullification of the writ on the ground that it was ruled that the former PNEI employees cannot attach
the properties (specifically the Pantranco properties) Prime Realty and Holdings Corporation/Mega Prime
of PNB, PNB-Madecor and Mega Prime to satisfy Realty and Holdings Corporation v. PNB where we
their unpaid labor claims against PNEI. According to stated that PNB was only a stockholder of PNB-
the Supreme Court: Madecor which later sold its shares to Mega Prime;
and that PNB-Madecor was the owner of the
“First, the subject property is not owned by the Pantranco properties. Moreover, these corporations
judgment debtor, that is, PNEI. Nowhere in the are registered as separate entities and, absent any
records was it shown that PNEI owned the valid reason, we maintain their separate identities
Pantranco properties. Petitioners, in fact, never and we cannot treat them as one.
alleged in any of their pleadings the fact of such
ownership. What was established, instead, in PNB Neither can we merge the personality of PNEI with
MADECOR v. Uy and PNB v. Mega Prime Realty and PNB simply because the latter acquired the former.
Holdings Corporation/Mega Prime Realty and Settled is the rule that where one corporation sells or
Holdings Corporation v. PNB was that the properties otherwise transfers all its assets to another
were owned by Macris, the predecessor of PNB- corporation for value, the latter is not, by that fact
Madecor. Hence, they cannot be pursued against by alone, liable for the debts and liabilities of the
the creditors of PNEI. We would like to stress the transferor.
settled rule that the power of the court in executing
judgments extends only to properties Lastly, while we recognize that there are peculiar
unquestionably belonging to the judgment debtor circumstances or valid grounds that may exist to
alone. To be sure, one man’s goods shall not be sold warrant the piercing of the corporate veil, none
for another man’s debts. A sheriff is not authorized to applies in the present case whether between PNB
attach or levy on property not belonging to the and PNEI; or PNB and PNB-Madecor.
judgment debtor, and even incurs liability if he

Under the doctrine of “piercing the veil of corporate
wrongfully levies upon the property of a third
fiction,” the court looks at the corporation as a mere
person.
collection of individuals or an aggregation of persons
Second, PNB, PNB-Madecor and Mega Prime are undertaking business as a group, disregarding the
corporations with personalities separate and distinct separate juridical personality of the corporation
from that of PNEI. PNB is sought to be held liable unifying the group. Another formulation of this
because it acquired PNEI through NIDC at the time doctrine is that when two business enterprises are
when PNEI was suffering financial reverses. PNB- owned, conducted and controlled by the same
Madecor is being made to answer for petitioners’ parties, both law and equity will, when necessary to
labor claims as the owner of the subject Pantranco protect the rights of third parties, disregard the legal
properties and as a subsidiary of PNB. Mega Prime is fiction that two corporations are distinct entities and
also included for having acquired PNB’s shares over treat them as identical or as one and the same.
PNB-Madecor.
Whether the separate personality of the corporation
The general rule is that a corporation has a should be pierced hinges on obtaining facts
personality separate and distinct from those of its appropriately pleaded or proved. However, any
stockholders and other corporations to which it may piercing of the corporate veil has to be done with
be connected. This is a fiction created by law for caution, albeit the Court will not hesitate to
convenience and to prevent injustice. Obviously, disregard the corporate veil when it is misused or
PNB, PNB-Madecor, Mega Prime, and PNEI are when necessary in the interest of justice. After all, the
corporations with their own personalities. The concept of corporate entity was not meant to
“separate personalities” of the first three corporations promote unfair objectives.
had been recognized by this Court in PNB v. Mega

As between PNB and PNEI, petitioners want us to More importantly, as aptly observed by this Court in
disregard their separate personalities, and insist that AC Ransom, it appears that Ransom, foreseeing the
because the company, PNEI, has already ceased possibility or probability of payment of backwages to
operations and there is no other way by which the its employees, organized Rosario to replace Ransom,
judgment in favor of the employees can be satisfied, with the latter to be eventually phased out if the
corporate officers can be held jointly and severally strikers win their case. The execution could not be
liable with the company. Petitioners rely on the implemented against Ransom because of the
pronouncement of this Court in A.C. Ransom Labor disposition posthaste of its leviable assets evidently
Union-CCLU v. NLRC and subsequent cases. in order to evade its just and due obligations. Hence,
the Court sustained the piercing of the corporate veil
This reliance fails to persuade. We find the aforesaid and made the officers of Ransom personally liable for
decisions inapplicable to the instant case. the debts of the latter.
For one, in the said cases, the persons made liable Clearly, what can be inferred from the earlier cases is
after the company’s cessation of operations were the that the doctrine of piercing the corporate veil
officers and agents of the corporation. The rationale applies only in three (3) basic areas, namely: 1) defeat
is that, since the corporation is an artificial person, it of public convenience as when the corporate fiction
must have an officer who can be presumed to be the is used as a vehicle for the evasion of an existing
employer, being the person acting in the interest of obligation; 2) fraud cases or when the corporate
the employer. The corporation, only in the technical entity is used to justify a wrong, protect fraud, or
sense, is the employer. In the instant case, what is defend a crime; or 3) alter ego cases, where a
being made liable is another corporation (PNB) corporation is merely a farce since it is a mere alter
which acquired the debtor corporation (PNEI). ego or business conduit of a person, or where the
corporation is so organized and controlled and its
Moreover, in the recent cases Carag v. National
affairs are so conducted as to make it merely an
Labor Relations Commission and McLeod v.
instrumentality, agency, conduit or adjunct of
National Labor Relations Commission, the Court
another corporation. In the absence of malice, bad
explained the doctrine laid down in AC Ransom
faith, or a specific provision of law making a
relative to the personal liability of the officers and
corporate officer liable, such corporate officer cannot
agents of the employer for the debts of the latter. In
be made personally liable for corporate liabilities.
AC Ransom, the Court imputed liability to the
officers of the corporation on the strength of the The Court ruled that assuming, for the sake of
definition of an employer in Article 212(c) (now argument, that PNB may be held liable for the debts
Article 212[e]) of the Labor Code. Under the said of PNEI, petitioners still cannot proceed against the
provision, employer includes any person acting in the Pantranco properties, the same being owned by PNB-
interest of an employer, directly or indirectly, but Madecor, notwithstanding the fact that PNB-
does not include any labor organization or any of its Madecor was a subsidiary of PNB. The general rule
officers or agents except when acting as employer. It remains that PNB-Madecor has a personality
was clarified in Carag and McLeod that Article separate and distinct from PNB. The mere fact that a
212(e) of the Labor Code, by itself, does not make a corporation owns all of the stocks of another
corporate officer personally liable for the debts of the corporation, taken alone, is not sufficient to justify
corporation. It added that the governing law on their being treated as one entity. If used to perform
personal liability of directors or officers for debts of legitimate functions, a subsidiary’s separate
the corporation is still Section 31 of the Corporation existence shall be respected, and the liability of the
Code. parent corporation as well as the subsidiary will be
confined to those arising in their respective
businesses.
Piercing Corporate Veil; parent-subsidiary. the trustees of BAP-SBP. In other words, petitioner
Circumstances which are useful in the Villafuerte never validly assumed the position of
determination of whether a subsidiary is but a mere Chairman because he failed in the first place to
instrumentality of the parent-corporation, to wit: (1) qualify therefor. Rep. Luis R. Villafuerte, et al. vs. Gov.
the parent corporation owns all or most of the Oscar S. Moreno, et al., G.R. No. 186566, October 2, 2009
capital stock of the subsidiary; (2) the parent and
subsidiary corporations have common directors or Directors; per diem. Under section 30 of the
officers; (3) the parent corporation finances the Corporation Code, the directors of a corporation
subsidiary; (4) the parent corporation subscribes to shall not receive any compensation for being
all the capital stock of the subsidiary or otherwise members of the board of directors, except for
causes its incorporation; (5) the subsidiary has reasonable per diems. The two instances where the
grossly inadequate capital; (6) the parent directors are to be entitled to compensation shall be
corporation pays the salaries and other expenses or when it is fixed by the corporation’s by-laws or when
losses of the subsidiary; (7) the subsidiary has the stockholders, representing at least a majority of
substantially no business except with the parent the outstanding capital stock, vote to grant the same
corporation or no assets except those conveyed to or at a regular or special stockholder’s meeting, subject
by the parent corporation; (8) in the papers of the to the qualification that, in any of the two situations,
parent corporation or in the statements of its officers, the total yearly compensation of directors, as such
the subsidiary is described as a department or directors, shall in no case exceed ten (10%) percent
division of the parent corporation, or its business or of the net income before income tax of the
financial responsibility is referred to as the parent corporation during the preceding year. Gabriel C.
corporation’s own; (9) the parent corporation uses Singson, et al. vs. Commission on Audit, G.R. No. 159355,
the property of the subsidiary as its own; (10) the August 9, 2010.
directors or executives of the subsidiary do not act
independently in the interest of the subsidiary, but Corporation; board vacancy. After the lapse of one
take their orders from the parent corporation; (11) year from his election as member of the VVCC Board
the formal legal requirements of the subsidiary are in 1996, Makalintal’s term of office is deemed to have
not observed. Pantranco Employees Asso., et al. vs. NLRC, already expired. That he continued to serve in
et al./Philippine National Bank Vs. Pantranco Employees the VVCC Board in a holdover capacity cannot be
Association Inc., et al., G.R. No. 170689/G.R. No. 170705, considered as extending his term. To be
March 17, 2009. precise, Makalintal’s term of office began in 1996 and
expired in 1997, but, by virtue of the holdover
doctrine in Section 23 of the Corporation Code, he
continued to hold office until his resignation on
MANAGEMENT OF A CORPORATION/ November 10, 1998. This holdover period, however, is
DUTIES AND LIABILITIES OF CORPORATE not to be considered as part of his term, which, as
OFFICERS declared, had already expired.
Board of trustees; qualification of Chairman. The With the expiration of Makalintal’s term of office, a
Court of Appeals correctly held that petitioner vacancy resulted which, by the terms of Section 29 of
Villafuerte’s nomination must of necessity be the Corporation Code, must be filled by the
understood as being subject to or in accordance with stockholders of VVCC in a regular or special meeting
the qualifications set forth in the By-Laws of the called for the purpose. Valle Verde Country Club,
BAP-SBP. Since the said by-laws require the Inc., et al. Vs. Victor Africa, G.R. No. 151969, September 4,
Chairman of the Board of Trustees to be a trustee
2009.
himself, petitioner Villafuerte was not qualified since
he had neither been elected nor appointed as one of
Holdover. As a general rule, officers and directors of a to create other corporate offices without first
corporation hold over after the expiration of their amending the corporate by-laws so as to include
terms until such time as their successors are elected therein the newly created corporate office. Though
or appointed. Sec. 23 of the Corporation Code the board of directors may create appointive
contains a provision to this effect. The holdover positions other than the positions of corporate
doctrine has, to be sure, a purpose which is at once officers, the persons occupying such positions cannot
legal as it is practical. It accords validity to what be viewed as corporate officers under Section 25 of
would otherwise be deemed as dubious corporate the Corporation Code. In view thereof, this Court
acts and gives continuity to a corporate enterprise in holds that unless and until petitioner corporation’s
its relation to outsiders. by-laws is amended for the inclusion of General
Manager in the list of its corporate officers, such
Authorities are almost unanimous that one who position cannot be considered as a corporate office
continues with the discharge of the functions of an within the realm of Section 25 of the Corporation
office after the expiration of his or her legal term––no Code. March II Marketing, Inc. and Lucila V. Joson vs.
successor having, in the meantime, been appointed or
Alfredo M. Joson, G.R. No. 171993, December 12, 2011.
chosen––is commonly regarded as a de factoofficer,
even where no provision is made by law for his Corporation; persons considered as corporate
holding over and there is nothing to indicate the officers. Conformably with Section 25 of the
contrary. By fiction of law, the acts of such de facto Corporation Code, a position must be expressly
officer are considered valid and effective. Dr. Hans mentioned in the By-Laws in order to be considered
Christian M. Señeres vs. Commission on Elections and as a corporate office. Thus, the creation of an office
Melquiades A. Robles, G.R. No. 178678, April 16, 2009. pursuant to or under a By-Law enabling provision is
not enough to make a position a corporate
Corporation; corporate officers. In the context of office. Guerrea v. Lezama, the first ruling on the matter,
Presidential Decree No. 902-A, corporate officers are held that the only officers of a corporation were those
those officers of a corporation who are given that given that character either by the Corporation Code or
character either by the Corporation Code or by the by the By-Laws; the rest of the corporate officers
corporation’s by-laws. Section 25 of the Corporation could be considered only as employees or
Code specifically enumerated who are these subordinate officials.
corporate officers, to wit: (1) president; (2) secretary;
(3) treasurer; and (4) such other officers as may be This interpretation is the correct application of
provided for in the by-laws. Section 25 of the Corporation Code, which plainly
states that the corporate officers are the President,
With the given circumstances and in conformity Secretary, Treasurer and such other officers as may be
with Matling Industrial and Commercial Corporation v. provided for in the By-Laws. Accordingly, the
Coros, this Court rules that respondent was not a corporate officers in the context of PD No. 902-A are
corporate officer of petitioner corporation because exclusively those who are given that character either
his position as General Manager was not specifically by the Corporation Code or by the corporation’s By-
mentioned in the roster of corporate officers in its Laws.
corporate by-laws. The enabling clause in petitioner
corporation’s by-laws empowering its Board of A different interpretation can easily leave the way
Directors to create additional officers, i.e., General open for the Board of Directors to circumvent the
Manager, and the alleged subsequent passage of a constitutionally guaranteed security of tenure of the
board resolution to that effect cannot make such employee by the expedient inclusion in the By-Laws
position a corporate office. Matling clearly of an enabling clause on the creation of just any
enunciated that the board of directors has no power corporate officer position.
It is relevant to state in this connection that the SEC, controlling. Matling Industrial and Commercial Corp., et al.
the primary agency administering the Corporation vs. Ricardo R. Coros, G.R. No. 157802, October 13, 2010.
Code, adopted a similar interpretation of Section 25
of the Corporation Code in its Opinion dated Corporation; officer. The issue revolves mainly on
November 25, 1993, whether petitioner was an employee or a corporate

officer of Slimmers World. Section 25 of the
Moreover, the Board of Directors of Matling could Corporation Code enumerates corporate officers as
not validly delegate the power to create a corporate the president, secretary, treasurer and such other
office to the President, in light of Section 25 of officers as may be provided for in the by-laws.
the Corporation Code requiring the Board of Directors In Tabang v. NLRC, the Supreme Court held that an
itself to elect the corporate officers. Verily, the power “office” is created by the charter of the corporation
and the officer is elected by the directors or
to elect the corporate officers was a discretionary
stockholders. On the other hand, an “employee”
power that the law exclusively vested in the Board of
usually occupies no office and generally is employed
Directors, and could not be delegated to subordinate
not by action of the directors or stockholders but by
officers or agents. The office of Vice President for
the managing officer of the corporation who also
Finance and Administration created by Matling’s
determines the compensation to be paid to such
President pursuant to By Law No. V was an ordinary,
not a corporate, office. employee. Leslie Okol vs. Slimmers World
International, et al., G.R. No. 160146, December 11, 2009.
The petitioners’ reliance on Tabang, supra, is
Corporate employees; appointment. Ordinary
misplaced. The statement in Tabang, to the effect that
company employees are generally employed not by
offices not expressly mentioned in the By-Laws but
action of the directors and stockholders but by that
were created pursuant to a By-Law enabling
of the managing officer of the corporation who also
provision were also considered corporate offices, was
determines the compensation to be paid such
plainly obiter dictum due to the position subject of the
employees. Corporate officers, on the other hand, are
controversy being mentioned in the By-Laws. Thus,
elected or appointed by the directors or
the Court held therein that the position was a
stockholders, and are those who are given that
corporate office, and that the determination of the
character either by the Corporation Code or by the
rights and liabilities arising from the ouster from the
corporation’s by-laws.
position was an intra-corporate controversy within
the SEC’s jurisdiction.
Here, it was the PDMC president who appointed
petitioner Gomez administrator, not its board of
In Nacpil v. Intercontinental Broadcasting Corporation,
directors or the stockholders. The president alone
which may be the more appropriate ruling, the
also determined her compensation package.
position subject of the controversy was not
Moreover, the administrator was not among the
expressly mentioned in the By-Laws, but was
corporate officers mentioned in the PDMC by-laws.
created pursuant to a By-Law enabling provision
The corporate officers proper were the chairman,
authorizing the Board of Directors to create other
president, executive vice-president, vice-president,
offices that the Board of Directors might see fit to
general manager, treasurer, and secretary. Gloria V.
create. The Court held there that the position was a
Gomez vs. PNOC Development and Management Corporation
corporate office, relying on the obiter dictum in Tabang.
(PDMC), G.R. No. 174044, November 27, 2009.
Considering that the observations earlier made

Board action. A corporate loan entered into by the
herein show that the soundness of their dicta is not
President without board approval is binding on the
unassailable, Tabang and Nacpil should no longer be
corporation when the President is authorized under
the by-laws to enter into loans on behalf of the from Tsukahara. As payment for the
corporation. Cebu Mactan Members Center, Inc. vs. loan, CMMCI issued seven postdated checks
Masahiro Tsukahara, G.R. No. 159624, July 17, 2009. of CMMCI payable to Tsukahara. On 13 April
1994, Sugimoto, again purportedly on behalf
Validity of corporate loan without board approval. of CMCI, obtained another loan amounting to
Generally, all corporate powers are exercised by the P10,000,000 from Tsukahara. Sugimoto executed and
board of directors. Section 23 of the Corporation signed a promissory note in his capacity
Code provides that “[u]nless otherwise provided in as CMMCI President and Chairman, as well as in his
this Code, the corporate powers of all corporations personal capacity.
formed under this Code shall be exercised, all
business conducted and all property of such Upon maturity, the seven checks were presented for
corporations controlled and held by the board of payment by Tsukahara, but the same were
directors or trustees. . . “ dishonored by PNB, the drawee bank. After several

failed attempts to collect the loan amount totaling
Jurisprudence has recognized that: P16,500,000, Tsukahara filed a case for collection of
sum of money against CMMCI and Sugimoto with
“. . . under Section 23, the power and the the Regional Trial Court.
responsibility to decide whether the corporation
should enter into a contract that will bind the Tsukahara alleged that the amount of P16,500,000
corporation are lodged in the board of directors, was used by CMMCI for the improvement of its
subject to the articles of incorporation, by-laws, or beach resort, which included the construction of a
relevant provisions of law. However, just as a natural wave fence, the purchase of airconditioners and
person may authorize another to do certain acts for curtains, and the provision of salaries of resort
and on his behalf, the board of directors may validly employees. He also asserted that Sugimoto, as the
delegate some of its functions and powers to officers, President of CMMCI, “has the power to borrow
committees or agents. The authority of such money for said corporation by any legal means
individuals to bind the corporation is generally whatsoever and to sign, endorse and deliver all
derived from law, corporate by-laws or authorization checks and promissory notes on behalf of the
from the board, either expressly or impliedly by corporation.”
habit, custom or acquiescence in the general course
of business. (see People’s Aircargo and Warehousing Co., The Regional Trial Court ruled in favor of Tsukahara.
The Court of Appeals affirmed. The Supreme Court
Inc. v. Court of Appeals, 357 Phil. 850, 862 [1998]).
agreed.
In Cebu Mactan Members Center, Inc. vs. Masahiro

The Supreme Court ruled that the CMMCI President
Tsukahara, G.R. No. 159624, July 17, 2009, Cebu
is given the power under CMMCI’s by-laws to
Mactan Members Center, Inc. (CMMCI) denied the
borrow money, execute contracts, and sign
borrowing obtain by its President and Chairman of
and indorse checks and promissory notes, in the
the Board (Mitsumasa Sugimoto) from Masahiro
name and on behalf of CMMCI.
Tsukahara. CMMCI claimed that the loans obtained
by the CMMCI President were his personal loans.
ARTICLE III
CMMCI also contended that if the loans were those Officers
of CMMCI, the same should have been supported by
2. President. The President shall be
resolutions issued by CMMCI’s board of directors. elected by the Board of Directors from their
own number. He shall have the following
powers and duties . . .
It appears that on February 1994, c. Borrow money for the company by any
the CMMCI President, purportedly on behalf legal means whatsoever, including the
arrangement of letters of credit
of CMMCI, obtained a loan amounting to P6,500,000
and overdrafts with any and all banking apparent. Actual authority is either express or
institutions;
implied. The extent of an agent’s express authority is
d. Execute on behalf of the company all
contracts and agreements which the said to be measured by the power delegated to him by the
company may enter into;
corporation, while the extent of his implied authority
e. Sign, indorse, and deliver all checks,
drafts, bill of exchange, promissory notes is measured by his prior acts which have been
and orders of payment of sum of money in
ratified or approved, or their benefits accepted by his
the name and on behalf of the corporation
principal. The doctrine of “apparent authority,” on
the other hand, with special reference to banks, had
With such powers expressly conferred under the long been recognized in this jurisdiction. The
corporate by-laws, the Supreme Court ruled that existence of apparent authority may be ascertained
the CMMCI president, in exercising such powers, through:
need not secure a resolution from the company’s
board of directors: (1) the general manner in which the corporation
holds out an officer or agent as having the power to
“Thus, given the president’s express powers under act, or in other words, the apparent authority to act
the CMMCI’s by-laws, Sugimoto, as the president in general, with which it clothes him; or
of CMMCI, was more than equipped to enter into
loan transactions on CMMCI’s behalf. Accordingly, (2) the acquiescence in his acts of a particular
the loans obtained by Sugimoto from Tsukahara on nature, with actual or constructive knowledge
behalf of CMMCI are valid and binding against the thereof, within or beyond the scope of his ordinary
latter, and CMMCI may be held liable to pay such powers. Violeta Tudtud Banate, et al. vs. Philippine
loans.” Countryside Rural Bank (Liloan, Cebu), Inc. and Teofilo Soon,
Jr., G.R. No. 163825, July 13, 2010.
Corporation; authority of corporate officer. Section
23 of the Corporation Code expressly provides that Corporation; board resolution. The second letter-
the corporate powers of all corporations shall be agreement modified the first one entered into by
exercised by the board of directors. The power and petitioner, through Atty. Jose Soluta, Jr. In previously
the responsibility to decide whether the corporation allowing Atty. Soluta to enter into the first letter-
should enter into a contract that will bind the agreement without a board resolution expressly
corporation are lodged in the board, subject to the authorizing him, petitioner had clothed him with
articles of incorporation, bylaws, or relevant apparent authority to modify the same via the second
provisions of law. In the absence of authority from
letter-agreement. Associated Bank (now United Overseas
the board of directors, no person, not even its
Bank [Phils.]) vs. Spouses Rafael
officers, can validly bind a corporation.
and Monaliza Pronstroller/Spouses Eduardo and
However, just as a natural person may authorize Ma. Pilar Vaca (Intervenors), G.R. No. 148444, September 3,
another to do certain acts for and on his behalf, the 2009.

board of directors may validly delegate some of its
Corporations; doctrine of apparent authority. The
functions and powers to its officers, committees or
doctrine of apparent authority provides that a
agents. The authority of these individuals to bind the
corporation will be estopped from denying the
corporation is generally derived from law, corporate
agent’s authority if it knowingly permits one of its
bylaws or authorization from the board, either
officers or any other agent to act within the scope of
expressly or impliedly by habit, custom or
an apparent authority, and it holds him out to the
acquiescence in the general course of business.
public as possessing the power to do those acts. The
The authority of a corporate officer or agent in doctrine of apparent authority does not apply if the
dealing with third persons may be actual or principal did not commit any acts or conduct which
a third party knew and relied upon in good faith as a Unless it can be shown that the closure was
result of the exercise of reasonable prudence. deliberate, malicious and in bad faith, the Court must
Moreover, the agent’s acts or conduct must have apply the general rule that a corporation has, by law,
produced a change of position to the third party’s a personality separate and distinct from that of its
detriment. owners. As there is no evidence that Go, as EEMI’s
President, acted maliciously or in bad faith in
In People’s Aircargo and Warehousing Co., Inc. v. handling their business affairs and in eventually
Court of Appeals, we ruled that the doctrine of implementing the closure of its business, he cannot
apparent authority is applied when the petitioner, be held jointly and solidarily liable with EEMI. Ever
through its president Antonio Punsalan Jr., entered
Electrical Manufacturing, Inc. (EEMI) and Vicente Go vs.
into the First Contract without first securing board
Samahang Manggagawa ng Ever Electrical/NAMAWU Local
approval. Despite such lack of board approval,
224 represented by Felimon Panganiban, G.R. No. 194795. June
petitioner did not object to or repudiate said
13, 2012.
contract, thus “clothing” its president with the
power to bind the corporation. “Inasmuch as a
Corporations; liability of officers in general.
corporate president is often given general supervision
Obligations incurred by corporate officers, acting as
and control over corporate operations, the strict rule
such corporate agents, are not theirs but the direct
that said officer has no inherent power to act for the
accountabilities of the corporation they represent. As
corporation is slowly giving way to the realization
such, they should not be generally held jointly and
that such officer has certain limited powers in the
solidarily liable with the corporation, except:
transaction of the usual and ordinary business of the
corporation.” 1. When directors and trustees or, in appropriate
cases, the officers of a corporation –
In the absence of a charter or bylaw provision to the
contrary, the president is presumed to have the (a) vote for or assent to [patently] unlawful acts of
authority to act within the domain of the general the corporation;
objectives of its business and within the scope of his
or her usual duties. Advance Paper Corporation and (b) act in bad faith or with gross negligence in
George Haw, in his capacity as President of Advance Paper directing the corporate affairs;
Corporation v. Arma Traders Corporation, Manuel Ting, et
(c) are guilty of conflict of interest to the prejudice
al., G.R. No. 176897, December 11, 2013.
of the corporation, its stockholders or members, and
Corporations; liability of corporate officers. As a other persons;
general rule, the officer cannot be held personally

2. When the director or officer has consented to the
liable with the corporation, whether civilly or
issuance of watered stock or who, having knowledge
otherwise, for the consequences his acts, if acted for
thereof, did not forthwith file with the corporate
and in behalf of the corporation, within the scope of
secretary his written objection thereto;
his authority and in good faith. Rodolfo Laborte, et al. v.
Pagsanjan Tourism Consumers’ Cooperative, et al., G.R. No. 3. When a director, trustee or officer has
183860, January 15, 2014. contractually agreed or stipulated to hold himself
personally and solidarily liable with the corporation;
Corporations; solidary liability of corporate officers.
Go may have acted in behalf of EEMI but the 4. When a director, trustee or officer is made, by
company’s failure to operate cannot be equated to specific provision of law, personally liable for his
bad faith. Cessation of business operation is brought corporate action.
about by various causes like mismanagement, lack of
demand, negligence, or lack of business foresight.
The general rule is grounded on the theory that a MAM Realty Development Corporation v. NLRC,
corporation has a legal personality separate and the solidary liability of corporate officers in labor
distinct from the persons comprising it. To warrant disputes was discussed in this wise:
the piercing of the veil of corporate fiction, the
officer’s bad faith or wrongdoing must be established A corporation, being a juridical entity, may act only
clearly and convincingly as bad faith is never through its directors, officers and employees.
presumed. Harpoon Marine Services, Inc., et al. v. Fernan H. Obligations incurred by them, acting as such
corporate agents, are not theirs but the direct
Francisco, G.R. No. 167751, March 2, 2011.
accountabilities of the corporation they represent.
Corporations; liability of officers for labor claims. True, solidary liabilities may at times be incurred
The Court of Appeals’ basis for petitioner Rosit’s but only when exceptional circumstances warrant
liability was that he acted in bad faith when he such as, generally, in the following cases:
approached respondent and told him that the

1. When directors and trustees or, in appropriate
company could no longer afford his salary and that he
cases, the officers of a corporation−
will be paid instead his separation pay and accrued
commissions. This finding, however, could not
(a) vote for or assent to patently unlawful acts of the
substantially justify the holding of any personal
corporation;
liability against petitioner Rosit. The records are
bereft of any other satisfactory evidence that (b) act in bad faith or with gross negligence in
petitioner Rosit acted in bad faith with gross or directing the corporate affairs;
inexcusable negligence, or that he acted outside the
scope of his authority as company president. Indeed, xxxx
petitioner Rosit informed respondent that the
company wishes to terminate his services since it In labor cases, for instance, the Court has held
could no longer afford his salary. Moreover, the corporate directors and officers solidarily liable with
promise of separation pay, according to petitioners, the corporation for the termination of employment of
was out of goodwill and magnanimity. At the most, employees done with malice or in bad faith.
petitioner Rosit’s actuations only show the illegality
of the manner of effecting respondent’s termination From the decisions of the LA, the NLRC, and the CA,
from service due to absence of just or valid cause and there is no indication that Estrella’s dismissal was
non-observance of procedural due process but do not effected with malice or bad faith on the part of
point to any malice or bad faith on his part. Besides, Grandteq’s officers. Their liability for Estrella’s illegal
good faith is still presumed. In addition, liability only dismissal, the consequential monetary award arising
attaches if the officer has assented to patently from such dismissal and the other money claims
unlawful acts of the corporation. awarded in the LA’s decision, as correctly affirmed by
the CA, could thus only be joint, not solidary.
Thus, it was error for the Court of Appeals to hold This pronouncement does not extend to Estrella’s
petitioner Rosit solidarily liable with petitioner claims for commissions, allowances, and incentives,
Harpoon for illegally dismissing respondent. Harpoon as the same are still subject to the LA’s scrutiny.
Marine Services, Inc., et al. v. Fernan H. Francisco, G.R. No. Grandteq Industrial Steel Products, Inc., et al. vs. Annaliza M.
167751, March 2, 2011. Estrella, G.R. No. 192416. March 23, 2011
Corporations; liability of officers for labor claims. Board members; criminal liability for illegal trading
There is solidary liability when the obligation of petroleum products. Sec. 4 of BP 33, as amended,
expressly so states, when the law so provides, or provides for the penalties and persons who are
when the nature of the obligation so requires. In criminally liable, thus:
Sec. 4. Penalties. — Any person who cannot be held liable for any perceived violations of
commits any act herein prohibited shall,
BP 33, as amended. To bolster their position, they
upon conviction, be punished with a fine of
not less than twenty thousand pesos attest to being full-time employees of various firms as
(P20,000) but not more than fifty thousand
shown by the Certificates of Employment[71] they
pesos (P50,000), or imprisonment of at
least two (2) years but not more than five submitted tending to show that they are neither
(5) years, or both, in the discretion of the
involved in the day-to-day business of Omni nor
court. In cases of second and subsequent
conviction under this Act, the penalty shall managing it. Consequently, they posit that even if BP
be both fine and imprisonment as provided
33, as amended, had been violated by Omni they
herein. Furthermore, the petroleum and/or
petroleum products, subject matter of the cannot be held criminally liable thereof not being in
illegal trading, adulteration, shortselling,
any way connected with the commission of the
hoarding, overpricing or misuse, shall be
forfeited in favor of the Government: alleged violations, and, consequently, the criminal
Provided, That if the petroleum and/or
complaints filed against them based solely on their
petroleum products have already been
delivered and paid for, the offended party being members of the board of directors as per the
shall be indemnified twice the amount paid,
GIS submitted by Omni to SEC are grossly
and if the seller who has not yet delivered
has been fully paid, the price received shall discriminatory.
be returned to the buyer with an additional
amount equivalent to such price; and in
addition, if the offender is an oil company, On this point, we agree with petitioners except as to
marketer, distributor, refiller, dealer, sub- petitioner Arnel U. Ty who is indisputably the
dealer and other retail outlets, or hauler, the
cancellation of his license. President of Omni.
Trials of cases arising from this Act shall be It may be noted that Sec. 4 above enumerates the
terminated within thirty (30) days after
arraignment. persons who may be held liable for violations of the
law, viz: (1) the president, (2) general manager, (3)
When the offender is a corporation,
managing partner, (4) such other officer charged
partnership, or other juridical person, the
president, the general manager, managing with the management of the business affairs of the
partner, or such other officer charged with
corporation or juridical entity, or (5) the employee
the management of the business affairs
thereof, or employee responsible for the responsible for such violation. A common thread of
violation shall be criminally liable; in case
the first four enumerated officers is the fact that they
the offender is an alien, he shall be subject to
deportation after serving the sentence. manage the business affairs of the corporation or
juridical entity. In short, they are operating officers
If the offender is a government official or
employee, he shall be perpetually of a business concern, while the last in the list is self-
disqualified from office. (Emphasis explanatory.
supplied.)
Relying on the third paragraph of the above statutory It is undisputed that petitioners are members of the
proviso, petitioners argue that they cannot be held board of directors of Omni at the time pertinent.
liable for any perceived violations of BP 33, as There can be no quibble that the enumeration of
amended, since they are mere directors of Omni who persons who may be held liable for corporate
are not in charge of the management of its business violators of BP 33, as amended, excludes the members
affairs. Reasoning that criminal liability is personal, of the board of directors. This stands to reason for
liability attaches to a person from his personal act or the board of directors of a corporation is generally a
omission but not from the criminal act or negligence policy making body. Even if the corporate powers of
of another. Since Sec. 4 of BP 33, as amended, clearly a corporation are reposed in the board of directors
provides and enumerates who are criminally liable, under the first paragraph of Sec. 23 of the
which do not include members of the board of Corporation Code, it is of common knowledge and
directors of a corporation, petitioners, as mere practice that the board of directors is not directly
members of the board of directors who are not in engaged or charged with the running of the recurring
charge of Omni’s business affairs, maintain that they business affairs of the corporation. Depending on the
powers granted to them by the Articles of involved as they believed there was a justifiable
Incorporation, the members of the board generally do reason to withhold his salary. Thus, although they
not concern themselves with the day-to-day affairs of unlawfully withheld respondent’s salary, it cannot be
the corporation, except those corporate officers who concluded that such was made in bad faith.
are charged with running the business of the Accordingly, corporate officers, Hartmannshenn and
corporation and are concomitantly members of the Schumacher, cannot be held personally liable for the
board, like the President. Section 25 of the corporate obligations of SHS. SHS Perforated Materials,
Corporation Code requires the president of a Inc., et al. vs. Manuel F. Diaz, G.R. No. 185814, October 13,
corporation to be also a member of the board of 2010.
directors.
Corporation; liability of officers and directors.
Thus, the application of the legal maxim expressio unius Doctrine dictates that a corporation is invested by
est exclusio alterius, which means the mention of one law with a personality separate and distinct from
thing implies the exclusion of another thing not those of the persons composing it, such that, save for
mentioned. If a statute enumerates the thing upon certain exceptions, corporate officers who entered
which it is to operate, everything else must into contracts in behalf of the corporation cannot be
necessarily and by implication be excluded from its held personally liable for the liabilities of the latter.
operation and effect. The fourth officer in the Personal liability of a corporate director, trustee, or
enumerated list is the catch-all “such other officer officer, along (although not necessarily) with the
charged with the management of the business affairs” corporation, may validly attach, as a rule, only when
of the corporation or juridical entity which is a – (1) he assents to a patently unlawful act of the
factual issue which must be alleged and supported by corporation, or when he is guilty of bad faith or gross
evidence. Arnel U. Ty, et al. vs. National Bureau of negligence in directing its affairs, or when there is a
Investigation Supervising Agent Marvin E. De Jemil,et al., G.R. conflict of interest resulting in damages to the
No. 182147, December 15, 2010. corporation, its stockholders, or other persons; (2)
he consents to the issuance of watered down stocks
Corporation; liability of corporate officers. With or who, having knowledge thereof, does not
respect to the personal liability of Hartmannshenn forthwith file with the corporate secretary his
and Schumacher, this Court has held that corporate written objection thereto; (3) he agrees to hold
directors and officers are only solidarily liable with himself personally and solidarily liable with the
the corporation for termination of employment of corporation; or (4) he is made by a specific provision
corporate employees if effected with malice or in bad of law personally answerable for his corporate action.
faith. Bad faith does not connote bad judgment or Queensland-Tokyo Commodities, Inc., et al. vs. Thomas
negligence; it imports dishonest purpose or some George, G.R. No. 172727, September 8, 2010.
moral obliquity and conscious doing of wrong; it
means breach of unknown duty through some motive Corporation; liability of directors and officers.
or interest or ill will; it partakes of the nature of Elementary is the rule that a corporation is invested
fraud. To sustain such a finding, there should be by law with a personality separate and distinct from
evidence on record that an officer or director acted those of the persons composing it and from that of
maliciously or in bad faith in terminating the any other legal entity to which it may be related.
employee. “Mere ownership by a single stockholder or by
another corporation of all or nearly all of the capital
Petitioners withheld respondent’s salary in the stock of a corporation is not of itself sufficient
sincere belief that respondent did not work for the ground for disregarding the separate corporate
period in question and was, therefore, not entitled to personality.”
it. There was no dishonest purpose or ill will
In labor cases, corporate directors and officers may Bad faith implies breach of faith and willful failure to
be held solidarily liable with the corporation for the respond to plain and well understood obligation. It
termination of employment only if done with malice does not simply connote bad judgment or negligence;
or in bad faith. Bad faith does not connote bad it imports a dishonest purpose or some moral
judgment or negligence; it imports a dishonest obliquity and conscious doing of wrong; it means
purpose or some moral obliquity and conscious doing breach of a known duty through some motive or
of wrong; it means breach of a known duty through interest or ill will. It partakes of the nature of fraud.
some motive or interest or ill will; it partakes of the
nature of fraud. Wensha Spa Center, inc. and/or Xu Zhi Jie Gross negligence, on the other hand, is the want of
even slight care, acting or omitting to act in a
vs. Loreta T. Yung, G.R. No. 185122, August 16, 2010.
situation where there is duty to act, not
Corporation; liability of officers. A corporation is inadvertently but willfully and intentionally, with a
vested by law with a personality separate and conscious indifference to consequences insofar as
distinct from the people comprising it. Ownership by other persons may be affected. It evinces a
a single or small group of stockholders of nearly all of thoughtless disregard of consequences without
the capital stock of the corporation is not by itself a exerting any effort to avoid them; the want or
sufficient ground to disregard the separate corporate absence of or failure to exercise slight care or
personality. Thus, obligations incurred by corporate diligence, or the entire absence of care.
officers, acting as corporate agents, are

Petitioner Sanchez of course claims that the funds
direct accountabilities of the corporation they
they had collected proved inadequate even to meet
represent.
expenses. But, as the appellate court held, he had
In this case, none of these exceptional circumstances been unable to substantiate such claims. As the
is present. In its decision, the trial court failed to officer charged with approving and implementing
provide a clear ground why Eugene Lim was corporate disbursements, Sanchez had the duty to
held solidarily liable with Shrimp Specialists. The present documents showing how the incomes of the
trial court merely stated that Eugene Lim signed on foundation were spent. But he failed to do so even
behalf of the Shrimp Specialists as President without after the DECS, which took custody of the records,
explaining the need to disregard the separate asked Kahn to submit a list of the documents they
corporate personality. The CA correctly ruled that needed for establishing their defenses so these may
the evidence to hold Eugene Lim solidarily liable be made available to them. Under the circumstances,
should be more than just signing on behalf of the the indubitable conclusion is that petitioner Sanchez
corporation because artificial entities can only act and Kahn acted with bad faith, if not with gross
through natural persons. Thus, the CA was correct negligence, in failing to perform their duty to remit to
in dismissing the case against Eugene Lim. Shrimp DECS or keep in safe hands ULFI’s incomes from the
Specialist, Inc., vs. Fuji-Triumph Agri-Industrial leases. Manuel Luis S. Sanchez vs. Republic of the Philippines,
Corporation/Fuji-Trimph Agri-Industrial Corporation vs. Represented by the Department of Education, Culture and
Shrimp Specialist, Inc. et al., G.R. No. 168756/G.R. No. 171476, Sports, G.R. No. 172885, October 9, 2009.
December 7, 2009.
Officers; personal liability. It is settled that in the
absence of malice, bad faith, or specific provision of
Directors; liability. Section 31 of the Corporation
law, a director or an officer of a corporation cannot
Code makes directors-officers of corporations jointly
be made personally liable for corporate
and severally liable even to third parties for their
liabilities. Gustilo and Castro, as corporate officers of
gross negligence or bad faith in directing the affairs
Lowe, have personalities which are distinct and
of their corporations.
separate from that of Lowe’s. Hence, in the absence
of any evidence showing that they acted with malice
or in bad faith in declaring Mutuc’s position

redundant, Gustilo and Castro are not personally
liable for the monetary awards to Mutuc. Lowe, DERIVATIVE SUITS
Inc., et al. vs. Court of Appeals and Irma Mutuc, G.R. Nos.
Corporation; derivative suits . The petition has no
164813 & G.R. No. 174590, August 14, 2009.
merit. We uphold the CA-Cebu’s finding that the
Complaint is not a derivative suit. A derivative suit is
Liability of corporate officers. Article 212(e) of the
an action brought by a stockholder on behalf of the
Labor Code, by itself, does not make a corporate
corporation to enforce corporate rights against the
officer personally liable for the debts of the
corporation’s directors, officers or other insiders.
corporation because Section 31 of the Corporation
Under Sections 23 and 36 of the Corporation Code,
Code is still the governing law on personal liability of
the directors or officers, as provided under the by-
officers for the debts of the corporation. There was
laws, have the right to decide whether or not a
no showing of David willingly and knowingly voting
corporation should sue. Since these directors or
for or assenting to patently unlawful acts of the
officers will never be willing to sue themselves, or
corporation, or that David was guilty of gross
impugn their wrongful or fraudulent decisions,
negligence or bad faith. Armando David vs. National
stockholders are permitted by law to bring an action
Federation of Labor Union, et al., G.R. No. 148263 and 148271-
in the name of the corporation to hold these directors
72, April 21, 2009.
and officers accountable. In derivative suits, the real
party in interest is the corporation, while the
Illegal dismissal; liability of corporate officer. The
stockholder is a mere nominal party. This Court, in
general manager of a corporation should not be made
Yu v. Yukayguan, explained:
personally answerable for the payment of an illegally
dismissed employee’s monetary claims arising from
The Court has recognized that a
the dismissal unless he had acted maliciously or in stockholder’s right to institute a
bad faith in terminating the services of the employee. derivative suit is not based on any
express provision of the
The employer corporation has a separate and distinct Corporation Code, or even the
personality from its officers who merely act as its Securities Regulation Code, but is
impliedly recognized when the
agents. said laws make corporate directors
or officers liable for damages
suffered by the corporation and its
The exception noted is where the official “had acted
stockholders for violation of their
maliciously or in bad faith,” in which event he may be fiduciary duties. Hence, a
stockholder may sue for
made personally liable for his own act. That
mismanagement, waste or
exception is not applicable in the case at bar, because dissipation of corporate assets
because of a special injury to him
it has not been proven
for which he is otherwise
that Wiltschek was impleaded in his capacity as without redress. In effect, the suit
is an action for specific
General Manager of petitioner corporation and there
performance of an obligation owed
appears to be no evidence on record that he acted by the corporation to the
stockholders to assist its rights of
maliciously or in bad faith in terminating the services
action when the corporation has
of respondent. His act, therefore, was within the been put in default by the wrongful
refusal of the directors or
scope of his authority and was a corporate act for
management to make suitable
which he should not be held personally liable for. measures for its protection. The
basis of a stockholder’s suit is
M+W Zander Philippines, Inc. and Rolf Wiltschek vs. always one in equity. However, it
Trinidad M. Enriquez, G.R. No. 169173, June 5, 2009; see also cannot prosper without first
complying with the legal requisites
Bienvenido C. Gilles vs. Court of Appeals, Schema Konsult and for its institution. (Emphasis in the
original)
Edgardo Abores, G.R. No. 149273, June 5, 2009
Section 1, Rule 8 of the Interim Rules imposes the behalf of the corporation as “owner, “as the
following requirements for derivative suits: transaction of the lawful business of the corporation
may reasonably and necessarily require.” However,
(1) [The person filing the suit must be] a stockholder the wording of the Mortgage reveals that it was
or member at the time the acts or transactions signed by Juanito and Anecita in their personal
subject of the action occurred and the time the action capacity as the “owners” of a pro-indiviso share in
was filed; SMBI’s land and not on behalf of SMBI.
(2) [He must have] exerted all reasonable efforts, and Juanito and Anecita, as stockholders of SMBI, are not
alleges the same with particularity in the complaint, co-owners of SMBI assets. They do not own pro-
to exhaust all remedies available under the articles of indiviso shares, and therefore, cannot mortgage the
incorporation, by-laws, laws or rules governing the same except in their capacity as directors or officers
corporation or partnership to obtain the relief he of SMBI. JUANITO ANG, for and in behalf of Sunrise
desires;
Marketing (Bacolod), Inc., V. Spouses Roberto And Rachel
Ang, G.R. No. 201675, June 1 9, 2013.
(3) No appraisal rights are available for the act or
acts complained of; and
Corporation; derivative suits. The requisites for a
derivative suit are as follows:
(4) The suit is not a nuisance or harrassment suit.
a) the party bringing suit should be a shareholder as

Applying the foregoing, we find that the Complaint
of the time of the act or transaction complained of,
is not a derivative suit. The Complaint failed to show
the number of his shares not being material;
how the acts of Rachel and Roberto resulted in any
detriment to SMBI. The CA-Cebu correctly
b) he has tried to exhaust intra-corporate
concluded that the loan was not a corporate
remedies, i.e., has made a demand on the board of
obligation, but a personal debt of the Ang brothers
directors for the appropriate relief but the latter has
and their spouses. The check was issued to “Juanito
failed or refused to heed his plea; and
Ang and/or Anecita Ang and/or Roberto Ang and/or
Rachel Ang” and not SMBI. The proceeds of the loan
c) the cause of action actually devolves on the
were used for payment of the obligations of the other
corporation, the wrongdoing or harm having been, or
corporations owned by the Angs as well as the
being caused to the corporation and not to the
purchase of real properties for the Ang brothers.
particular stockholder bringing the suit.
SMBI was never a party to the Settlement Agreement
or the Mortgage. It was never named as a co-debtor In this case, petitioners, as members of the Board of
or guarantor of the loan. Both instruments were Directors of the condominium corporation before the
executed by Juanito and Anecita in their personal election in question, filed a complaint against the
capacity, and not in their capacity as directors or newly-elected members of the Board of Directors for
officers of SMBI. Thus, SMBI is under no legal the years 2004-2005, questioning the validity of the
obligation to satisfy the obligation. election held on April 2, 2004, as it was allegedly
marred by lack of quorum, and praying for the
The fact that Juanito and Anecita attempted to
nullification of the said election.
constitute a mortgage over “their” share in a
corporate asset cannot affect SMBI. The Civil Code As stated by the Court of Appeals, petitioners’
provides that in order for a mortgage to be valid, the complaint seek to nullify the said election, and to
mortgagor must be the “absolute owner of the thing protect and enforce their individual right to vote.
x x x mortgaged.” Corporate assets may be Petitioners seek the nullification of the election of
mortgaged by authorized directors or officers on the Board of Directors for the years 2004-2005,
composed of herein respondents, who pushed particular stockholder bringing the suit. Lisam
through with the election even if petitioners had Enterprises, Inc., represented by Lolita A. Soriano and Lolita
adjourned the meeting allegedly due to lack of A. Soriano vs. Banco de Oro Unibank, Inc., et al., G.R. No.
quorum. Petitioners are the injured party, whose
143264, April 23, 2012.
rights to vote and to be voted upon were directly
affected by the election of the new set of board of Corporation; derivative suit. It is well settled in this
directors. The party-in-interest are the petitioners as jurisdiction that where corporate directors are guilty
stockholders, who wield such right to vote. of a breach of trust — not of mere error of judgment
The cause of action devolves on petitioners, not the or abuse of discretion — and intracorporate remedy
condominium corporation, which did not have the is futile or useless, a stockholder may institute a suit
right to vote. Hence, the complaint for nullification in behalf of himself and other stockholders and for
of the election is a direct action by petitioners, who the benefit of the corporation, to bring about a
were the members of the Board of Directors of the redress of the wrong inflicted directly upon the
corporation before the election, against respondents, corporation and indirectly upon the stockholders.
who are the newly-elected Board of Directors. Under Santiago Cua, Jr., et al. vs.
the circumstances, the derivative suit filed by Miguel Ocampo Tan, et al./Santiago Cua, Sr., et al. vs. Court of
petitioners in behalf of the condominium corporation
Appeals, et al, G.R. No. 181455-56/G.R. No. 182008, December
in the Second Amended Complaint is improper.
4, 2009.
The stockholder’s right to file a derivative suit is not

Derivative suits. The general rule is that where a
based on any express provision of The Corporation
corporation is an injured party, its power to sue is
Code, but is impliedly recognized when the law lodged with its board of directors or trustees.
makes corporate directors or officers liable for Nonetheless, an individual stockholder is permitted
damages suffered by the corporation and its to institute a derivative suit on behalf of the
stockholders for violation of their fiduciary duties, corporation wherein he holds stocks in order to
which is not the issue in this case. Legaspi Towers 300, protect or vindicate corporate rights, whenever the
Inc., Lilia Marquinez Palanca, et al. vs. Amelia P. Muer, officials of the corporation refuse to sue, or are the
Samuel M. Tanchoco, et al., G.R. No. 170783. June 18, 2012. ones to be sued, or hold the control of the
corporation. In such actions, the suing stockholder is
Corporation; derivative suit. In Hi-Yield Realty, regarded as a nominal party, with the corporation as
Incorporated v. Court of Appeals, the Court the real party in interest. A derivative action is a suit
enumerated the requisites for filing a derivative suit, by a shareholder to enforce a corporate cause of
as follows: action. The corporation is a necessary party to the
suit. And the relief which is granted is a judgment
(a) the party bringing the suit should be a
against a third person in favor of the corporation.
shareholder as of the time of the act or transaction
Similarly, if a corporation has a defense to an action
complained of, the number of his shares not being
against it and is not asserting it, a stockholder may
material;
intervene and defend on behalf of the corporation. By
virtue of Republic Act No. 8799, otherwise known as
(b) he has tried to exhaust intra-corporate remedies,
the Securities Regulation
i.e., has made a demand on the board of directors for
Code, jurisdiction over intra-corporate disputes,
the appropriate relief but the latter has failed or
including derivative suits, is now vested in the
refused to heed his plea; and
Regional Trial Courts designated by the Supreme
Court pursuant to A.M. No. 00-11-03-SC
(c) the cause of action actually devolves on the
promulgated on 21 November 2000.
corporation, the wrongdoing or harm having been, or
being caused to the corporation and not to the
The Supreme Court has recognized that of a share of stock or the nature of the relation of
a stockholder’s right to institute a derivative suit is shareholder to the corporation. Makati Sports Club, Inc.
not based on any express provision of the vs. Cecile H. Cheng, et al., G.R. No. 178523, June 16, 2010.
Corporation Code, or even the Securities Regulation
Code, but is impliedly recognized when the said laws Shares; preemptive rights. McFoods properly
make corporate directors or officers liable for complied with the requirement of Section 30(e) of
damages suffered by the corporation and the Amended By-Laws on MSCI’s pre-emptive rights.
its stockholders for violation of their fiduciary duties. Without doubt, MSCI failed to repurchase
Hence, a stockholder may sue for mismanagement, McFoods’ Class “A” share within the thirty (30) day
waste or dissipation of corporate assets because of a pre-emptive period as provided by the Amended By-
special injury to him for which he is otherwise Laws. It was only on January 29, 1996, or 32 days
without redress. In effect, the suit is an action for after December 28, 1995, when MSCI received Mc
specific performance of an obligation owed by the Foods’ letter of offer to sell the share, that Mc Foods
corporation to the stockholders to assist its rights of and Hodreal executed the Deed of Absolute Sale over
action when the corporation has been put in default the said share of stock.
by the wrongful refusal of the directors or
management to make suitable measures for its MSCI cannot argue that McFoods was not yet a
protection. The basis of a stockholder’s suit is always registered owner of the share of stock when the latter
one in equity. However, it cannot prosper without offered it for resale, in order to void the transfer from
first complying with the legal requisites for its Mc Foods to Hodreal. The corporation’s obligation
institution. Anthony S. Yu, et al., vs. Joseph to register is ministerial upon the buyer’s acquisition
of ownership of the share of stock. The corporation,
S. Yukayguan, et al., G.R. No. 177549, June 18, 2009.
either by its board, its by-laws, or the act of its
officers, cannot create restrictions in stock transfers.
Makati Sports Club, Inc. vs. Cecile H. Cheng, et al., G.R. No.
SHARES AND SHAREHOLDERS 178523, June 16, 2010.
Shares; proposed sale by stockholder not holding Stock certificate; issuance. Upon payment by
stock certificate. On December 27, 1995, when McFoods of P1,800,000.00 to MSCI and the
McFoods offered for sale one Class “A” share of stock execution of the Deed of Absolute Sale on December
to MSCI for the price of P2,800,000.00 for the latter 15, 1995, it then had the right to demand the delivery
to exercise its pre-emptive right as required by of the stock certificate in its name. The right of a
Section 30(e) of MSCI’s Amended By-Laws, it legally transferee to have stocks transferred to its name is an
had the right to do so since it was already an owner inherent right flowing from its ownership of the
of a Class “A” share by virtue of its payment on stocks. Makati Sports Club, Inc. vs. Cecile H. Cheng, et al.,
November 28, 1995, and the Deed of Absolute Share
G.R. No. 178523, June 16, 2010.
dated December 15, 1995, notwithstanding the fact
that the stock certificate was issued only on January Corporation; sequestered corporation. Tañada, et al.
5, 1996. A certificate of stock is the paper posit the view that the conversion of shares needs the
representative or tangible evidence of the stock itself acquiescence of the 14 CIIF companies.
and of the various interests therein. The certificate is
not a stock in the corporation but is merely evidence The SMC shares allegedly owned by the CIIF
of the holder’s interest and status in the corporation, companies are sequestered assets under the control
his ownership of the share represented thereby. It is and supervision of the PCGG pursuant to Executive
not in law the equivalent of such ownership. It Order No. 1, Series of 1986. It is the duty of the
expresses the contract between the corporation and PCGG to preserve the sequestered assets and prevent
the stockholder, but is not essential to the existence their dissipation. In the exercise of its powers, the
PCGG need not seek or obtain the consent or even Espiritu, Jr., et al. vs. Petron Corporation, et al., G.R. No.
the acquiescence of the sequestered assets owner 170891, November 24, 2009.
with respect to any of its acts intended to preserve
such assets. Otherwise, it would be well-nigh Corporation; stockholders. Upon the death of a
impossible for PCGG to perform its duties and shareholder, the heirs do not automatically become
exercise its powers under existing laws, for the stockholders of the corporation and acquire the
owner of the sequestered assets will more often than rights and privileges of the deceased as shareholder
not oppose or resist PCGG’s actions if their consent of the corporation. The stocks must be distributed
is a condition precedent. The act of PCGG of first to the heirs in estate proceedings, and the
proposing the conversion of the sequestered SMC transfer of the stocks must be recorded in the books
shares to Series 1 Preferred Shares was clearly an of the corporation. Section 63 of the Corporation
exercise of its mandate under existing laws, where Code provides that no transfer shall be valid, except
the consent of the CIIF Companies is rendered as between the parties, until the transfer is recorded
unnecessary. in the books of the corporation. During such interim
period, the heirs stand as the equitable owners of the
Additionally, the above contention has been rendered stocks, the executor or administrator duly appointed
moot with the filing on October 26, 2009 of the by the court being vested with the legal title to the
Manifestation dated October 23, 2009. Attached to stock. Until a settlement and division of the estate is
such Manifestation is the Secretary’s Certificate of effected, the stocks of the decedent are held by the
the 14 CIIF companies approving the conversion of administrator or executor. Consequently, during
the SMC Common Shares into Series 1 Preferred such time, it is the administrator or executor who is
Shares. Philippine Coconut Producers Federation, Inc. entitled to exercise the rights of the deceased as
(COCOFED), et al. vs. Republic of the Philippines, G.R. Nos. stockholder.
177857-58/G.R. No. 178193/G.R. No. 180705, February 11,
Thus, even if petitioner presents sufficient evidence
2010.
in this case to establish that he is the son of Carlos
Stockholders; liability. The “owners” of a corporate L. Puno, he would still not be allowed to inspect
organization are its stockholders and they are to be respondent’s books and be entitled to receive
distinguished from its directors and officers. The dividends from respondent, absent any showing in
petitioners here, with the exception of Audie Llona, its transfer book that some of the shares owned by
are being charged in their capacities as stockholders Carlos L. Puno were transferred to him. This would
of Bicol Gas. But the Court of Appeals forgets that in only be possible if petitioner has been recognized as
a corporation, the management of its business is an heir and has participated in the settlement of the
generally vested in its board of directors, not its estate of the deceased. Joselito Musni Puno (as heir of the
stockholders. Stockholders are basically investors in late Carlos Puno) vs. Puno Enterprises, Inc., represented
a corporation. They do not have a hand in running by Jesusa Puno, G.R. No. 177066, September 11, 2009.
the day-to-day business operations of the
corporation unless they are at the same time Dividends. Dividends are payable to the stockholders
directors or officers of the corporation. Before a of record as of the date of the declaration of
stockholder may be held criminally liable for acts dividends or holders of record on a certain future
committed by the corporation, therefore, it must be date, as the case may be, unless the parties have
shown that he had knowledge of the criminal act agreed otherwise. A transfer of shares which is not
committed in the name of the corporation and that recorded in the books of the corporation is valid only
he took part in the same or gave his consent to its as between the parties; hence, the transferor has the
commission, whether by action or inaction. Manuel C. right to dividends as against the corporation without
notice of transfer but it serves as trustee of the real
owner of the dividends, subject to the contract may be stated in the articles of
between the transferor and transferee as to who is incorporation which are not violative of the
entitled to receive the dividends. Imelda O. Cojuangco, provisions of this Code: Provided, That
Prime Holdings, Inc., and the Estate of Ramon U. Cojuangco preferred shares of stock may be issued only
vs. Sandiganbayan, Republic of the Philippines and the Sheriff with a stated par value. The Board of
Directors, where authorized in the articles
of Sandiganbayan, G.R. No. 183278, April 24, 2009.
of incorporation, may fix the terms and
“CAPITAL” conditions of preferred shares of stock or

any series thereof: Provided, That such
We agree with petitioner and petitioners-in- terms and conditions shall be effective upon
intervention. The term “capital” in Section 11, Article the filing of a certificate thereof with the
XII of the Constitution refers only to shares of stock Securities and Exchange Commission.
entitled to vote in the election of directors, and thus
in the present case only to common shares, and not Shares of capital stock issued without par
to the total outstanding capital stock comprising value shall be deemed fully paid and non-
both ommon and non-voting preferred shares. assessable and the holder of such shares
shall not be liable to the corporation or to
The Corporation Code of the Philippines classifies its creditors in respect thereto: Provided;
shares as common or preferred, thus: That shares without par value may not be
issued for a consideration less than the value
Sec. 6. Classification of shares. - The shares of of five (P5.00) pesos per share: Provided,
stock of stock corporations may be divided further, That the entire consideration
into classes or series of shares, or both, any received by the corporation for its no-par
of which classes or series of shares may have value shares shall be treated as capital and
such rights, privileges or restrictions as may shall not be available for distribution as
be stated in the articles of incorporation: dividends.
Provided, That no share may be deprived
of voting rights except those classified A corporation may, furthermore, classify its
and issued as “preferred” or “redeemable” shares for the purpose of insuring
shares, unless otherwise provided in this compliance with constitutional or legal
Code: Provided, further, That there shall requirements.
always be a class or series of shares which
Except as otherwise provided in the articles
have complete voting rights. Any or all of
of incorporation and stated in the certificate
the shares or series of shares may have a par
of stock, each share shall be equal in all
value or have no par value as may be
respects to every other share.
provided for in the articles of incorporation:
Provided, however, That banks, trust
Where the articles of incorporation provide
companies, insurance companies, public
for non-voting shares in the cases allowed
utilities, and building and loan associations
by this Code, the holders of such shares
shall not be permitted to issue no-par value
shall nevertheless be entitled to vote on the
shares of stock.
following matters:
Preferred shares of stock issued by any

1. Amendment of the articles of
corporation may be given preference in the
incorporation;
distribution of the assets of the corporation
2. Adoption and amendment of by-
in case of liquidation and in the distribution
laws;
of dividends, or such other preferences as
3. Sale, lease, exchange, mortgage, refers only to common shares. However, if the
pledge or other disposition of all or preferred shares also have the right to vote in the
substantially all of the corporate election of directors, then the term “capital” shall
property; include such preferred shares because the right to
4. Incurring, creating or increasing participate in the control or management of the
bonded indebtedness; corporation is exercised through the right to vote in
5. Increase or decrease of capital the election of directors. In short, the term “capital”
stock; in Section 11, Article XII of the Constitution refers
6. Merger or consolidation of the only to shares of stock that can vote in the
corporation with another election of directors.
corporation or other corporations;
7. Investment of corporate funds in This interpretation is consistent with the intent of
another corporation or business in the framers of the Constitution to place in the hands
accordance with this Code; and of Filipino citizens the control and management of
8. Dissolution of the corporation. public utilities. As revealed in the deliberations of the
Constitutional Commission, “capital” refers to the
Except as provided in the immediately voting stock or controlling interest of a corporation,
preceding paragraph, the vote necessary to to wit:
approve a particular corporate act as
provided in this Code shall be deemed to MR. NOLLEDO. In Sections 3, 9 and 15, the
refer only to stocks with voting rights. Committee stated local or Filipino equity
and foreign equity; namely, 60-40 in Section
Indisputably, one of the rights of a stockholder is the 3, 60-40 in Section 9 and 2/3-1/3 in Section
right to participate in the control or management of 15.
the corporation. This is exercised through his vote in
the election of directors because it is the board of MR. VILLEGAS. That is right.
directors that controls or manages the corporation.
MR. NOLLEDO. In teaching law, we are
In the absence of provisions in the articles of
always faced with this question: “Where do
incorporation denying voting rights to preferred
we base the equity requirement, is it on the
shares, preferred shares have the same voting rights
authorized capital stock, on the subscribed
as common shares. However, preferred shareholders
capital stock, or on the paid-up capital
are often excluded from any control, that is, deprived
stock of a corporation”? Will the Committee
of the right to vote in the election of directors and on
please enlighten me on this?
other matters, on the theory that the preferred
shareholders are merely investors in the corporation
MR. VILLEGAS. We have just had a long
for income in the same manner as bondholders. In
discussion with the members of the team
fact, under the Corporation Code only preferred or
from the UP Law Center who provided us a
redeemable shares can be deprived of the right to
draft. The phrase that is contained here
vote. Common shares cannot be deprived of the right
which we adopted from the UP draft is
to vote in any corporate meeting, and any provision
“60 percent of voting stock.”
in the articles of incorporation restricting the right of
common shareholders to vote is invalid.
MR. NOLLEDO. That must be based on the
subscribed capital stock, because unless
Considering that common shares have voting rights
declared delinquent, unpaid capital stock
which translate to control, as opposed to preferred
shall be entitled to vote.
shares which usually have no voting rights, the term
“capital” in Section 11, Article XII of the Constitution
MR. VILLEGAS. That is right. situation where the corporation is

controlled by foreigners despite being the
MR. NOLLEDO. Thank you.With respect minority because they have the voting
to an investment by one corporation in capital. That is the anomaly that would
another corporation, say, a corporation with result here.
60-40 percent equity invests in another
corporation which is permitted by the MR. BENGZON. No, the reason we
Corporation Code, does the Committee eliminated the word “stock” as stated in
adopt the grandfather rule? the 1973 and 1935 Constitutions is that
according to Commissioner Rodrigo,
MR. VILLEGAS. Yes, that is the there are associations that do not have
understanding of the Committee. stocks. That is why we say “CAPITAL.”
MR. NOLLEDO. Therefore, we need MR. AZCUNA. We should not eliminate

additional Filipino capital?
the phrase “controlling interest.”
MR. VILLEGAS. Yes.

MR. BENGZON. In the case of stock
corporations, it is assumed. (Emphasis
xxxx
supplied)
MR. AZCUNA. May I be clarified as to that

Thus, 60 percent of the “capital” assumes, or should
portion that was accepted by the
result in, “controlling interest” in the corporation.
Committee.
Reinforcing this interpretation of the term “capital,”
as referring to controlling interest or shares entitled
MR. VILLEGAS. The portion accepted by
to vote, is the definition of a “Philippine national” in
the Committee is the deletion of the phrase
the Foreign Investments Act of 1991, to wit:
“voting stock or controlling interest.”
MR. AZCUNA. Hence, without the Davide SEC. 3. Definitions. - As used in this Act:
amendment, the committee report would

a. The term “Philippine national” shall mean a
read: “corporations or associations at least
citizen of the Philippines; or a domestic
sixty percent of whose CAPITAL is owned
partnership or association wholly owned by
by such citizens.”
citizens of the Philippines; or a corporation
MR. VILLEGAS. Yes. organized under the laws of the
Philippines of which at least sixty percent
MR. AZCUNA. So if the Davide amendment (60%) of the capital stock outstanding
is lost, we are stuck with 60 percent of the and entitled to vote is owned and held by
capital to be owned by citizens. citizens of the Philippines; or a
corporation organized abroad and
MR. VILLEGAS. That is right. registered as doing business in the
Philippines under the Corporation Code of
MR. AZCUNA. But the control can be
which one hundred percent (100%) of the
with the foreigners even if they are the
capital stock outstanding and entitled to
minority. Let us say 40 percent of the
vote is wholly owned by Filipinos or a
capital is owned by them, but it is the
trustee of funds for pension or other
voting capital, whereas, the Filipinos own
employee retirement or separation benefits,
the nonvoting shares. So we can have a
where the trustee is a Philippine national
and at least sixty percent (60%) of the fund shall be considered a Philippine national.
will accrue to the benefit of Philippine The control test shall be applied for this
nationals: Provided, That where a purpose.
corporation and its non-Filipino
stockholders own stocks in a Securities and Compliance with the required Filipino
Exchange Commission (SEC) registered ownership of a corporation shall be
enterprise, at least sixty percent (60%) of determined on the basis of outstanding
the capital stock outstanding and entitled capital stock whether fully paid or not,
to vote of each of both corporations must be but only such stocks which are generally
owned and held by citizens of the entitled to vote are considered.
Philippines and at least sixty percent (60%)

For stocks to be deemed owned and held
of the members of the Board of Directors of
by Philippine citizens or Philippine
each of both corporations must be citizens
nationals, mere legal title is not enough to
of the Philippines, in order that the
meet the required Filipino equity. Full
corporation, shall be considered a
beneficial ownership of the stocks,
“Philippine national.”
coupled with appropriate voting rights is
In explaining the definition of a “Philippine national,” essential. Thus, stocks, the voting rights
the Implementing Rules and Regulations of the of which have been assigned or
Foreign Investments Act of 1991 provide: transferred to aliens cannot be considered
held by Philippine citizens or Philippine
b. “Philippine national” shall mean a citizen of nationals.
the Philippines or a domestic partnership or
association wholly owned by the citizens of Individuals or juridical entities not
the Philippines; or a corporation organized meeting the aforementioned
under the laws of the Philippines of qualifications are considered as non-
which at least sixty percent [60%] of the Philippine nationals. (Emphasis supplied)
capital stock outstanding and entitled to

Mere legal title is insufficient to meet the 60 percent
vote is owned and held by citizens of the
Filipino-owned “capital” required in the
Philippines; or a trustee of funds for
Constitution. Full beneficial ownership of 60 percent
pension or other employee retirement or
of the outstanding capital stock, coupled with 60
separation benefits, where the trustee is a
percent of the voting rights, is required. The legal and
Philippine national and at least sixty
beneficial ownership of 60 percent of the
percent [60%] of the fund will accrue to the
outstanding capital stock must rest in the hands of
benefit of the Philippine nationals; Provided,
Filipino nationals in accordance with the
that where a corporation its non-Filipino
constitutional mandate. Otherwise, the corporation
stockholders own stocks in a Securities and
is “considered as non-Philippine national[s].”
Exchange Commission [SEC] registered
enterprise, at least sixty percent [60%] of
Under Section 10, Article XII of the Constitution,
the capital stock outstanding and entitled
Congress may “reserve to citizens of the Philippines
to vote of both corporations must be owned
or to corporations or associations at least sixty per
and held by citizens of the Philippines and
centum of whose capital is owned by such citizens, or
at least sixty percent [60%] of the members
such higher percentage as Congress may prescribe,
of the Board of Directors of each of both
certain areas of investments.” Thus, in numerous
corporation must be citizens of the
laws Congress has reserved certain areas of
Philippines, in order that the corporation
investments to Filipino citizens or to corporations at
least sixty percent of the “capital” of which is owned the other hand, the Filipinos, holding more than
by Filipino citizens. Some of these laws are: (1) 99.999 percent of the equity, cannot vote in the
Regulation of Award of Government Contracts or election of directors and hence, have no control over
R.A. No. 5183; (2) Philippine Inventors Incentives the public utility. This starkly circumvents the intent
Act or R.A. No. 3850; (3) Magna Carta for Micro, of the framers of the Constitution, as well as the clear
Small and Medium Enterprises or R.A. No. 6977; (4) language of the Constitution, to place the control of
Philippine Overseas Shipping Development Act or public utilities in the hands of Filipinos. It also
R.A. No. 7471; (5) Domestic Shipping Development renders illusory the State policy of an independent
Act of 2004 or R.A. No. 9295; (6) Philippine national economy effectively controlled by
Technology Transfer Act of 2009 or R.A. No. 10055; Filipinos.
and (7) Ship Mortgage Decree or P.D. No. 1521.
Hence, the term “capital” in Section 11, Article XII of The example given is not theoretical but can be
the Constitution is also used in the same context in found in the real world, and in fact exists in the
numerous laws reserving certain areas of present case.

investments to Filipino citizens.
Holders of PLDT preferred shares are explicitly
To construe broadly the term “capital” as the total denied of the right to vote in the election of directors.
outstanding capital stock, including both common PLDT’s Articles of Incorporation expressly state that
and non-voting preferred shares, grossly contravenes “the holders of Serial Preferred Stock shall not be
the intent and letter of the Constitution that the entitled to vote at any meeting of the stockholders
“State shall develop a self-reliant and independent for the election of directors or for any other
national economy effectively controlled by purpose or otherwise participate in any action taken
Filipinos.” A broad definition unjustifiably disregards by the corporation or its stockholders, or to receive
who owns the all-important voting stock, which notice of any meeting of stockholders.”
necessarily equates to control of the public utility.
On the other hand, holders of common shares are
We shall illustrate the glaring anomaly in giving a granted the exclusive right to vote in the election of
broad definition to the term “capital.” Let us assume directors. PLDT’s Articles of Incorporation state that
that a corporation has 100 common shares owned by “each holder of Common Capital Stock shall have one
foreigners and 1,000,000 non-voting preferred shares vote in respect of each share of such stock held by
owned by Filipinos, with both classes of share having him on all matters voted upon by the stockholders,
a par value of one peso (P1.00) per share. Under the and the holders of Common Capital Stock shall
broad definition of the term “capital,” such have the exclusive right to vote for the election of
corporation would be considered compliant with the directors and for all other purposes.”
40 percent constitutional limit on foreign equity of
In short, only holders of common shares can vote in
public utilities since the overwhelming majority, or
the election of directors, meaning only common
more than 99.999 percent, of the total outstanding
shareholders exercise control over PLDT. Conversely,
capital stock is Filipino owned. This is obviously
holders of preferred shares, who have no voting
absurd.
rights in the election of directors, do not have any
control over PLDT. In fact, under PLDT’s Articles of
Incorporation, holders of common shares have voting
In the example given, only the foreigners holding the rights for all purposes, while holders of preferred
common shares have voting rights in the election of shares have no voting right for any purpose
directors, even if they hold only 100 shares. The whatsoever.
foreigners, with a minuscule equity of less than 0.001
percent, exercise control over the public utility. On
It must be stressed, and respondents do not control and Filipino beneficial ownership in a public
dispute, that foreigners hold a majority of the utility.
common shares of PLDT. In fact, based on PLDT’s
2010 General Information Sheet (GIS), which is a The legal and beneficial ownership of 60 percent of
document required to be submitted annually to the the outstanding capital stock must rest in the hands
Securities and Exchange Commission, foreigners of Filipinos in accordance with the constitutional
hold 120,046,690 common shares of PLDT whereas mandate. Full beneficial ownership of 60 percent of
Filipinos hold only 66,750,622 common shares. In the outstanding capital stock, coupled with 60
other words, foreigners hold 64.27% of the total percent of the voting rights, is constitutionally
number of PLDT’s common shares, while Filipinos required for the State’s grant of authority to operate a
hold only 35.73%. Since holding a majority of the public utility. The undisputed fact that the PLDT
common shares equates to control, it is clear that preferred shares, 99.44% owned by Filipinos, are
foreigners exercise control over PLDT. Such amount non-voting and earn only 1/70 of the dividends that
of control unmistakably exceeds the allowable 40 PLDT common shares earn, grossly violates the
percent limit on foreign ownership of public utilities constitutional requirement of 60 percent Filipino
expressly mandated in Section 11, Article XII of the control and Filipino beneficial ownership of a public
Constitution. utility.
Moreover, the Dividend Declarations of PLDT for In short, Filipinos hold less than 60 percent of the
2009, as submitted to the SEC, shows that per share voting stock, and earn less than 60 percent of the
the SIP58 preferred shares earn a pittance in dividends, of PLDT. This directly contravenes the
dividends compared to the common shares. PLDT express command in Section 11, Article XII of the
declared dividends for the common shares at P70.00 Constitution that “[n]o franchise, certificate, or any
per share, while the declared dividends for the other form of authorization for the operation of a
preferred shares amounted to a measly P1.00 per public utility shall be granted except to x x x
share. So the preferred shares not only cannot vote in corporations x x x organized under the laws of the
the election of directors, they also have very little and Philippines, at least sixty per centum of whose
obviously negligible dividend earning capacity capital is owned by such citizens x x x.”
compared to common shares.
To repeat, (1) foreigners own 64.27% of the common
As shown in PLDT’s 2010 GIS, as submitted to the shares of PLDT, which class of shares exercises the
SEC, the par value of PLDT common shares is P5.00 sole right to vote in the election of directors, and
per share, whereas the par value of preferred shares is thus exercise control over PLDT; (2) Filipinos own
P10.00 per share. In other words, preferred shares only 35.73% of PLDT’s common shares, constituting a
have twice the par value of common shares but minority of the voting stock, and thus do not exercise
cannot elect directors and have only 1/70 of the control over PLDT; (3) preferred shares, 99.44%
dividends of common shares. Moreover, 99.44% of owned by Filipinos, have no voting rights; (4)
the preferred shares are owned by Filipinos while preferred shares earn only 1/70 of the dividends that
foreigners own only a minuscule 0.56% of the common shares earn; (5) preferred shares have twice
preferred shares. Worse, preferred shares constitute the par value of common shares; and (6) preferred
77.85% of the authorized capital stock of PLDT while shares constitute 77.85% of the authorized capital
common shares constitute only 22.15%. This stock of PLDT and common shares only 22.15%. This
undeniably shows that beneficial interest in PLDT is kind of ownership and control of a public utility is a
not with the non-voting preferred shares but with mockery of the Constitution.
the common shares, blatantly violating the
Incidentally, the fact that PLDT common shares with
constitutional requirement of 60 percent Filipino
a par value of P5.00 have a current stock market
value of P2,328.00 per share, while PLDT preferred legislature would have the power to ignore
shares with a par value of P10.00 per share have a and practically nullify the mandate of the
current stock market value ranging from only P10.92 fundamental law. This can be cataclysmic.
to P11.06 per share, is a glaring confirmation by the That is why the prevailing view is, as it has
market that control and beneficial ownership of always been, that —
PLDT rest with the common shares, not with the
preferred shares. . . . in case of doubt, the Constitution should
be considered self-executing rather than
Indisputably, construing the term “capital” in Section non-self-executing. . . . Unless the contrary
11, Article XII of the Constitution to include both is clearly intended, the provisions of the
voting and non-voting shares will result in the abject Constitution should be considered self-
surrender of our telecommunications industry to executing, as a contrary rule would give
foreigners, amounting to a clear abdication of the the legislature discretion to determine
State’s constitutional duty to limit control of public when, or whether, they shall be effective.
utilities to Filipino citizens. Such an interpretation These provisions would be subordinated to
certainly runs counter to the constitutional provision the will of the lawmaking body, which
reserving certain areas of investment to Filipino could make them entirely meaningless by
citizens, such as the exploitation of natural resources simply refusing to pass the needed
as well as the ownership of land, educational implementing statute. (Emphasis supplied)
institutions and advertising businesses. The Court
should never open to foreign control what the In Manila Prince Hotel, even the Dissenting Opinion of
Constitution has expressly reserved to Filipinos for then Associate Justice Reynato S. Puno, later Chief
that would be a betrayal of the Constitution and of Justice, agreed that constitutional provisions are
the national interest. The Court must perform its presumed to be self-executing. Justice Puno stated:
solemn duty to defend and uphold the intent and
letter of the Constitution to ensure, in the words of Courts as a rule consider the provisions of
the Constitution, “a self-reliant and independent the Constitution as self-executing, rather
national economy effectively controlled by Filipinos.” than as requiring future legislation for their
enforcement. The reason is not difficult to
Section 11, Article XII of the Constitution, like other discern. For if they are not treated as self-
provisions of the Constitution expressly reserving to executing, the mandate of the
Filipinos specific areas of investment, such as the fundamental law ratified by the sovereign
development of natural resources and ownership of people can be easily ignored and nullified
land, educational institutions and advertising by Congress. Suffused with wisdom of

business, is self-executing. There is no need for the ages is the unyielding rule that
legislation to implement these self-executing legislative actions may give breath to
provisions of the Constitution. The rationale why constitutional rights but congressional
these constitutional provisions are self-executing inaction should not suffocate them.
was explained in Manila Prince Hotel v. GSIS, thus:

Thus, we have treated as self-executing the
x x x Hence, unless it is expressly provided provisions in the Bill of Rights on arrests,
that a legislative act is necessary to enforce a searches and seizures, the rights of a person
constitutional mandate, the presumption under custodial investigation, the rights of
now is that all provisions of the constitution an accused, and the privilege against self-
are self-executing. If the constitutional incrimination. It is recognized that
provisions are treated as requiring legislation is unnecessary to enable courts to
legislation instead of self-executing, the effectuate constitutional provisions

guaranteeing the fundamental rights of life, public utilities, the exploitation by corporations of
liberty and the protection of property. The mineral resources, the ownership by corporations of
same treatment is accorded to real estate, and the ownership of educational
constitutional provisions forbidding the institutions. All the legislatures that convened since
taking or damaging of property for public 1935 also miserably failed to enact legislations to
use without just compensation. (Emphasis implement these vital constitutional provisions that
supplied) determine who will effectively control the national
economy, Filipinos or foreigners. This Court cannot
Thus, in numerous cases, this Court, even in the allow such an absurd interpretation of the
absence of implementing legislation, applied directly Constitution. Wilson P. Gamboa vs. Finance Secretary
the provisions of the 1935, 1973 and 1987
Margarito B. Teves, et. al., G.R. No. 176579, June 28, 2011.
Constitutions limiting land ownership to Filipinos.
In Soriano v. Ong Hoo, this Court ruled: Both the Voting Control Test and the Beneficial
Ownership Test must be applied to determine
x x x As the Constitution is silent as to the whether a corporation is a “Philippine national.” Xxx
effects or consequences of a sale by a citizen
of his land to an alien, and as both the With respect to public utilities, the 1987
citizen and the alien have violated the law, Constitution specifically ordains:
none of them should have a recourse against Section 11. No franchise,
the other, and it should only be the State certificate, or any other form of
authorization for the operation of
that should be allowed to intervene and
a public utility shall be granted
determine what is to be done with the except to citizens of the
Philippines or to corporations or
property subject of the violation. We have
associations
said that what the State should do or could organized under the laws of the
Philippines, at least sixty per
do in such matters is a matter of public
centum
policy, entirely beyond the scope of judicial of whose capital is owned by
such citizens; nor shall such
authority. (Dinglasan, et al. vs. Lee Bun
franchise,
Ting, et al., 6 G. R. No. L-5996, June 27, certificate, or authorization be
exclusive in character or for a
1956.) While the legislature has not
longer period
definitely decided what policy should be than fifty years. Neither shall any
such franchise or right be granted
followed in cases of violations against the
except
constitutional prohibition, courts of under the condition that it shall be
subject to amendment, alteration,
justice cannot go beyond by declaring the
or
disposition to be null and void as violative repeal by the Congress when the
common good so requires. The
of the Constitution. x x x (Emphasis State
supplied) shall encourage equity
participation in public utilities by
the general
To treat Section 11, Article XII of the Constitution as public. The participation of foreign
not self-executing would mean that since the 1935 investors in the governing body of
any
Constitution, or over the last 75 years, not one of the public utility enterprise shall be
constitutional provisions expressly reserving specific limited to their proportionate share
in its
areas of investments to corporations, at least 60 capital, and all the executive and
percent of the “capital” of which is owned by managing officers of such
corporation or
Filipinos, was enforceable. In short, the framers of association must be citizens of the
the 1935, 1973 and 1987 Constitutions miserably Philippines. (Emphasis supplied)
Section 10, Article XII of the 1987
failed to effectively reserve to Filipinos specific areas Constitution.
of investment, like the operation by corporations of
This provision, which mandates the Filipinization of Nonetheless, preferred shares, even if denied the
public utilities, requires that any form of right to vote in the election of directors, are entitled
authorization for the operation of public utilities to vote on the following corporate matters: (1)
shall be granted only to “citizens of the Philippines or amendment of articles of incorporation; (2) increase
to corporations or associations organized under the and decrease of capital stock; (3) incurring, creating
laws of the Philippines at least sixty per centum of or increasing bonded indebtedness; (4) sale, lease,
whose capital is owned by such citizens.” “The mortgage or other disposition of substantially all
provision is [an express] recognition of the corporate assets; (5) investment of funds in another
sensitive and vital position of public utilities both business or corporation or for a purpose other than
in the national economy and for national the primary purpose for which the corporation was
security.” organized; (6) adoption, amendment and repeal of
by-laws; (7) merger and consolidation; and (8)
The 1987 Constitution reserves the ownership and dissolution of corporation.
operation of public utilities exclusively to (1) Filipino
citizens, or (2) corporations or associations at least Since a specific class of shares may have rights and
60 percent of whose “capital” is owned by Filipino privileges or restrictions different from the rest of the
citizens. Hence, in the case of individuals, only shares in a corporation, the 60-40 ownership
Filipino citizens can validly own and operate a public requirement in favor of Filipino citizens in Section 11,
utility. In the case of corporations or associations, at Article XII of the Constitution must apply not only
least 60 percent of their “capital” must be owned by to shares with voting rights but also to shares
Filipino citizens. In other words, under Section 11, without voting rights. Preferred shares, denied the
Article XII of the 1987 Constitution, to own and right to vote in the election of directors, are anyway
operate a public utility a corporation’s capital still entitled to vote on the eight specific corporate
must at least be 60 percent owned by Philippine matters mentioned above. Thus, if a corporation,
nationals.xxx engaged in a partially nationalized industry, issues
a mixture of common and preferred non-voting
Since the constitutional requirement of at least 60 shares, at least 60 percent of the common shares
percent Filipino ownership applies not only to voting and at least 60 percent of the preferred non-voting
control of the corporation but also to the beneficial shares must be owned by Filipinos. Of course, if a
ownership of the corporation, it is therefore corporation issues only a single class of shares, at
imperative that such requirement apply uniformly least 60 percent of such shares must necessarily be
and across the board to all classes of shares, owned by Filipinos. In short, the 60-40 ownership
regardless of nomenclature and category, comprising requirement in favor of Filipino citizens must
the capital of a corporation. Under the Corporation apply separately to each class of shares, whether
Code, capital stock35 consists of all classes of shares common, preferred non-voting, preferred voting
issued to stockholders, that is, common shares as or any other class of shares.
well as preferred shares, which may have different
rights, privileges or restrictions as stated in the This uniform application of the 60-40 ownership
articles of incorporation. requirement in favor of Filipino citizens clearly
breathes life to the constitutional command that the
The Corporation Code allows denial of the right to ownership and operation of public utilities shall be
vote to preferred and redeemable shares, but reserved exclusively to corporations at least 60
disallows denial of the right to vote in specific percent of whose capital is Filipino-owned. Applying
corporate matters. Thus, common shares have the uniformly the 60-40 ownership requirement in favor
right to vote in the election of directors, while of Filipino citizens to each class of shares, regardless
preferred shares may be denied such right. of differences in voting rights, privileges and
restrictions, guarantees effective Filipino control of controlled” by Filipinos. Consistent with such State
public utilities, as mandated by the Constitution. policy, the Constitution explicitly reserves the
Moreover, such uniform application to each class of ownership and operation of public utilities to
shares insures that the “controlling interest” in Philippine nationals, who are defined in the Foreign
public utilities always lies in the hands of Filipino Investments Act of 1991 as Filipino citizens, or
citizens. This addresses and extinguishes corporations or associations at least 60 percent of
Pangilinan’s worry that foreigners, owning most of whose capital with voting rights belongs to
the non-voting shares, will exercise greater control Filipinos.
over fundamental corporate matters requiring two-
thirds or majority vote of all shareholders. xxx The FIA’s implementing rules explain that “[f]or
stocks to be deemed owned and held by Philippine
There is no dispute, and respondents do not claim citizens or Philippine nationals, mere legal title is not
the contrary, that (1) foreigners own 64.27% of the enough to meet the required Filipino equity. Full
common shares of PLDT, which class of shares beneficial ownership of the stocks, coupled with
exercises the sole right to vote in the election of appropriate voting rights is essential.” In effect, the
directors, and thus foreigners control PLDT; (2) FIA clarifies, reiterates and confirms the
Filipinos own only 35.73% of PLDT’s interpretation that the term “capital” in Section 11,
common shares, constituting a minority of the voting Article XII of the 1987 Constitution refers to shares
stock, and thus Filipinos do not control PLDT; (3) with voting rights, as well as with full beneficial
preferred shares, 99.44% owned by Filipinos, have no ownership.
voting rights; (4) preferred shares earn only 1/70 of
the dividends that common shares earn;50 (5) This is precisely because the right to vote in the
preferred shares have twice the par value of common election of directors, coupled with full beneficial
shares; and (6) preferred shares constitute 77.85% of ownership of stocks, translates to effective control of
the authorized capital stock of PLDT and common a corporation. Any other construction of the term
shares only 22.15%. “capital” in Section 11, Article XII of the Constitution
contravenes the letter and intent of the Constitution.
Despite the foregoing facts, the Court did not decide, Any other meaning of the term “capital” openly
and in fact refrained from ruling on the question of invites alien domination of
whether PLDT violated the 60-40 ownership economic activities reserved exclusively to Philippine
requirement in favor of Filipino citizens in Section 11, nationals. Therefore, respondents’ interpretation will
Article XII of the 1987 Constitution. Such question ultimately result in handing over effective control of
indisputably calls for a our national economy to foreigners in patent
presentation and determination of evidence through violation of the Constitution, making Filipinos
a hearing, which is generally outside the province of second-class citizens in their own country.
the Court’s jurisdiction, but well within the SEC’s
statutory powers. Thus, for obvious reasons, the Filipinos have only to remind themselves of how this
Court limited its decision on the purely legal and country was exploited under the Parity Amendment,
threshold issue on the definition of the term “capital” which gave Americans the same rights as Filipinos in
in Section 11, Article XII of the Constitution and the exploitation of natural resources, and in the
directed the SEC ownership and control of public utilities, in the
to apply such definition in determining the exact Philippines. To do this the 1935 Constitution, which
percentage of foreign ownership in PLDT. contained the same 60 percent Filipino ownership
and control requirement as the present 1987
The Constitution expressly declares as State policy Constitution, had to be amended to give Americans
the development of an economy “effectively parity rights with Filipinos. There was bitter
opposition to the Parity Amendment62 and many Secretary Margarito B. Teves, et. al., G.R. No. 176579, October
Filipinos eagerly awaited its expiration. In late 1968, 9, 2012.
PLDT was one of the American-controlled public
utilities that became Filipino-controlled when the
controlling American stockholders divested in Petitioners fault the Court of Appeals for ruling that
anticipation of the expiration of the Parity the debt-to equity conversion rate of 77.7%, as
Amendment on 3 July 1974. No economic suicide proposed by The Bank of New York, violates the
happened when control of public utilities and mining Filipinization provision of the Constitution.
corporations passed to Filipinos’ hands upon Petitioners explain that the acquisition of shares by
expiration of the Parity Amendment. foreign Omnibus and Financial Creditors shall be
done, both directly and indirectly in order to meet
Movants’ interpretation of the term “capital” would the control test principle under RA 704293 or the
bring us back to the same evils spawned by the Foreign Investments Act of 1991. Under the
Parity Amendment, effectively giving foreigners proposed structure, said creditors shall own 40% of
parity rights with Filipinos, but this time even the outstanding capital stock of the
without any amendment to the present telecommunications company on a direct basis, while
Constitution. Worse, movants’ interpretation opens the remaining 40% of shares shall be registered to a
up our national economy to effective control not holding company that shall retain, on a direct basis,
only by Americans but also by all foreigners, be they the other 60% equity reserved for Filipino citizens.
Indonesians, Malaysians or Chinese, even in the Moreover, petitioners maintain that it is

absence of reciprocal treaty arrangements. At least only fair to impose upon the Omnibus and Financial
the Parity Amendment, as implemented by the Creditors a bigger equity conversion in Bayantel
Laurel-Langley Agreement, gave the capital-starved considering that petitioners will bear the bulk of the
Filipinos theoretical parity – the same rights as accrued interests and penalties to be written off.
Americans to exploit natural resources, and to own Initially, the Rehabilitation Court approved the
and control public utilities, in the United States of Receiver’s recommendation to write-off interests and
America. Here, movants’ interpretation would penalties in the amount of US$34,044,553.00. The
effectively mean a unilateral opening up of our Rehabilitation Court likewise ordered a re-
national economy to all foreigners, without any computation of past due interest in accordance with
reciprocal arrangements. That would mean that the rate proposed by the Receiver. Following this,
Indonesians, Malaysians and Chinese nationals could petitioners estimate the total unpaid accrued interest
effectively control our mining companies and public of Bayantel as of July 30, 2003 to be at
utilities while Filipinos, even if they have the capital, US$140,098,750.66 while the Rehabilitation Court
could not control similar corporations in these arrived at the total amount of past due interest and
countries. penalties of US$114,855,369.59 upon recomputation.
This makes for a difference of US$25,243,381.07
The 1935, 1973 and 1987 Constitutions have the same which, petitioners claim, represents an additional
60 percent Filipino ownership and control write-off to be borne by them for a total write-off of
requirement for public utilities like PLDT. Any US$59,287,934.07.
deviation from this requirement necessitates an
The provision adverted to is Article XII,
amendment to the Constitution as exemplified by
Section 11 of the 1987 Constitution which states:
the Parity Amendment. This Court has no
power to amend the Constitution for its power and SEC. 11. No franchise, certificate, or any
duty is only to faithfully apply and interpret the other form of
authorization for the operation of a public
Constitution. Heirs of Wilson P. Gamboa v. Finance utility shall be granted except to
citizens of the Philippines or to stock violates the constitutional limit on foreign

corporations or associations organized
ownership of a public utility: First, identify into
under the laws of the Philippines at least
sixty per centum of whose capital which class of shares the debt shall be converted,
is owned by such citizens, nor shall such
whether common shares, preferred shares that have
franchise, certificate or
authorization be exclusive in character or the right to vote in the election of directors or non-
for a longer period than fifty
voting preferred shares; Second, determine the
years. Neither shall any such franchise or
right be granted except under the number of shares with voting right held by foreign
condition that it shall be subject to
entities prior to conversion. If upon conversion, the
amendment, alteration, or repeal by the
total number of shares held by foreign entities
Congress when the common good so
exceeds 40% of the capital stock with voting rights,
requires. The State shall encourage
equity participation in public utilities by the constitutional limit on foreign ownership is
the general public. The
violated. Otherwise, the conversion shall be
participation of foreign investors in the
governing body of any public respected.
utility enterprise shall be limited to their
proportionate share in its capital,
and all the executive and managing officers In its Rehabilitation Plan, among the
of such corporation or material financial commitments made by respondent
association must be citizens of the
Philippines. Bayantel is that its shareholders shall “relinquish the
agreed-upon amount of common stock[s] as payment
to Unsecured Creditors as per the Term Sheet.”
This provision explicitly reserves to Filipino
Evidently, the parties intend to convert the
citizens control over public utilities, pursuant to an
unsustainable portion of respondent's debt into
overriding economic goal of the 1987 Constitution: to
common stocks, which have voting rights. If we
“conserve and develop our patrimony” and ensure “a
indulge petitioners on their proposal, the Omnibus
self-reliant and independent national economy
Creditors which are foreign corporations, shall have
effectively controlled by Filipinos.”
control over 77.7% of Bayantel, a public utility
In the recent case of Gamboa v. Teves, the company. This is precisely the scenario proscribed by
Court settled once and for all the meaning of the Filipinization provision of the Constitution.
“capital” in the above-quoted Constitutional Therefore, the Court of Appeals acted correctly in
provision limiting foreign ownership in public sustaining the 40% debt-to-equity ceiling on
utilities. In said case, we held that considering that conversion. Express Investments III Private Limited and
common shares have voting rights which translate to Export Development Canada vs. Bayan Telecommunications,
control as opposed to preferred shares which usually et. al., G.R. No. 174457-59, December 5, 2012.
have no voting rights, the term “capital” in Section 11,
Article XII of the Constitution refers only to common
shares. However, if the preferred shares also have the SEC MEMORANDUM CIRCULAR NO. 8, Series of 2013
right to vote in the election of directors, then the
term “capital” shall include such preferred shares Section 2. All covered corporations shall, at all times,
because the right to participate in the control or observe the constitutional or statutory ownership
management of the corporation is exercised through requirement. For purposes of determining
the right to vote in the election of directors. In short, compliance therewith, the required percentage of
the term “capital” in Section 11, Article XII of the Filipino ownership shall be applied to BOTH (a) the
Constitution refers only to shares of stock that can total number of outstanding shares of stock entitled
vote in the election of directors. to vote in the election of directors; AND (b) the total
number of outstanding shares of stock, whether or
Applying this, two steps must be followed not entitled to vote in the election of directors.
in order to determine whether the conversion of debt
to equity in excess of 40% of the outstanding capital
BY-LAWS violation of Section 74 of the Corporation Code,

which provides that “the records of all business
By-laws; membership. Under the by-laws, a three- transaction of the corporation and the minutes of any
man panel is mandated to review, verify and validate meeting shall be open to the inspection of any
the lists of members submitted by BAP and PB to director, trustee, stockholder or member of the
FIBA based on an agreed set of criteria for corporation at reasonable hours on business days”; it
membership formulated by the three-man panel. further provides that the the shareholder “may
There is no question that the three-man panel had demand, in writing, for a copy of excerpts from said
not yet formulated a set of criteria prior to or as of records or minutes, at his expense.”
the time of signing of the Bangkok Agreement. If only
for this, it stands to reason that the three-man panel A corporate office or director who violates Section 74
could not have, by any stretch of the imagination, commits a penal offense, and if found guilty, can be
possibly validated all organizations proposed by the punished by: (a) a fine not less than PhP1,000 but
BAP and PB for BAP-SBP membership as “active” or not more than PhP10,000; (b) imprisonment for not
“voting” members on a wholesale basis. It could not less than 30 days but not more than 5 years; (c) or
have done so since there was still no set of criteria by both fine and imprisonment, at the discretion of the
which to embark on such an endeavor. The rules and court.
procedures for validation were formulated by the
three-man panel only after the execution of the The elements of the offense are:
Bangkok Agreement. In fact, several of the

First. A director, trustee, stockholder or member has
petitioners actively participated in the membership
made a prior demand in writing for a copy of
validation process which was done after the
excerpts from the corporation’s records or minutes;
execution of the Bangkok Agreement.
Second. Any officer or agent of the concerned

The membership validation resulted in the
corporation shall refuse to allow the said director,
conferment of active membership status upon 19
trustee, stockholder or member of the corporation to
BAP-SBP members, 17 of which participated in the
examine and copy said excerpts;
June 12, 2008 meeting. Hence, respondents, who
were elected by 17 of the 19 active and voting
Third. If such refusal is made pursuant to a
members of the BAP-SBP during the meeting held on
resolution or order of the board of directors or
June 12, 2008, are the legitimate officers of the
trustees, the liability under this section for such
organization, their election in accordance with the
action shall be imposed upon the directors or
applicable rules on the said exercise. Rep. Luis R.
trustees who voted for such refusal; and,
Villafuerte, et al. vs. Gov. Oscar S. Moreno, et al., G.R. No.
186566, October 2, 2009 Fourth. Where the officer or agent of the corporation
sets up the defense that the person demanding to
examine and copy excerpts from the corporation’s
records and minutes has improperly used any
CORPORATE BOOKS AND RECORDS
information secured through any prior examination
of the records or minutes of such corporation or of
Mere pendency of cases not a defense to denying
any other corporation, or was not acting in good faith
right to inspect. When there is a dispute among
or for a legitimate purpose in making his demand, the
stockholders of a corporation, there appears to be a
contrary must be shown or proved.
natural inclination on the part of those who possess
corporate records to limit access to certain records
Thus, in a criminal complaint for violation of Section
by stockholders belonging to another faction. The
74 of the Corporation Code, the defense of improper
stockholders who are refused access will then cite
use or motive is in the nature of a justifying
circumstance that would exonerate those who raise thus constituted a prejudicial question that should
and are able to prove the same. Accordingly, where require the suspension of the criminal complaints.
the corporation denies inspection on the ground of They also argued that the Spouses Sy’s request for
improper motive or purpose, the burden of proof is inspection was premature as the latter’s concern may
taken from the shareholder and placed on the be properly addressed once an answer is filed in the
corporation. However, where no such improper civil case. Sy Tiong Shiou, on the other hand, denied
motive or purpose is alleged, and even though so the accusations against him, alleging that before the
alleged, it is not proved by the corporation, then 2003 GIS was submitted to the Securities and
there is no valid reason to deny the requested Exchange Commission (SEC), the same was shown
inspection. to respondents, who at that time were the
President/Chairman of the Board and Assistant
In Sy Tiong Shiou, et al. vs. Sy Chim, et al./Sy Chim, et al. vs. Sy Treasurer of the corporation, and that they did not
Tiong Shiou, et al., G.R. No. 174168/G.R. No. 179438, March 30, object to the entries in the GIS. Sy Tiong Shiou also
2009, the officers of the corporation (Sy Tiong Shiou, argued that the issues raised in the pending civil case
et al.) denied the Spouses Sy access to corporate for accounting presented a prejudicial question that
records because of pending civil and intra-corporate necessitated the suspension of criminal proceedings.
cases. This prompted the Spouses Sy to file several
cases against Tiong Shiou, et al. On 29 December 2003, the investigating prosecutor
issued a resolution recommending the suspension of
Two of the complaints, I.S. Nos. 03E-15285 and 03E- the criminal complaints for violation of the
15286, were for alleged violation of Section 74 in Corporation Code and the dismissal of the criminal
relation to Section 144 of the Corporation Code. In complaints for falsification and perjury against Sy
these complaints, the Spouses Sy averred that they Tiong Shiou. The reviewing prosecutor approved the
are stockholders and directors of Sy Siy Ho & Sons, resolution. The Spouses Sy moved for the
Inc. (the corporation) who asked Sy Tiong Shiou, et reconsideration of the resolution, but their motion
al., officers of the corporation, to allow them to was denied on 14 June 2004. The Spouses Sy
inspect the books and records of the business on thereupon filed a petition for review with the
three occasions to no avail. In a letter dated 21 May Department of Justice (DOJ), which the latter denied
2003, Sy Tiong Shiou, et al. denied the request, citing in a resolution issued on 02 September 2004. Their
civil and intra-corporate cases pending in court. subsequent motion for reconsideration was likewise
denied in the resolution of 20 July 2005.
In the two other complaints, I.S. No. 03E-15287 and
03E-15288, Sy Tiong Shiou was charged with The Spouses Sy elevated the DOJ’s resolutions to the
falsification under Article 172, in relation to Article Court of Appeals through a petition for certiorari,
171 of the Revised Penal Code (RPC), and perjury imputing grave abuse of discretion on the part of the
under Article 183 of the RPC. According to the DOJ. The appellate court granted the petition and
Spouses Sy, Sy Tiong Shiou executed under oath the directed the City Prosecutor’s Office to file the
2003 General Information Sheet (GIS) wherein he appropriate informations against Sy Tiong Shiou, et
falsely stated that the shareholdings of the Spouses al. for violation of Section 74, in relation to Section
Sy had decreased despite the fact that they had not 144 of the Corporation Code and of Articles 172 and
executed any conveyance of their shares. 183 of the RPC.
Sy Tiong Shiou, et al. argued before the prosecutor The appellate court ruled that the civil case for
that the issues involved in the civil case for accounting and damages cannot be deemed
accounting and damages pending before the RTC of prejudicial to the maintenance or prosecution of a
Manila were intimately related to the two criminal criminal action for violation of Section 74 in relation
complaints filed by the Spouses Sy against them, and to Section 144 of the Corporation Code since a
finding in the civil case that respondents mishandled expense, rigors and embarrassment of trial, is the
or misappropriated the funds would not be function of the prosecution. This Court has adopted
determinative of their guilt or innocence in the a policy of non-interference in the conduct of
criminal complaint. In the same manner, the criminal preliminary investigations and leaves to the
complaints for falsification and/or perjury should not investigating prosecutor sufficient latitude of
have been dismissed on the ground of prejudicial discretion in the determination of what constitutes
question because the accounting case is unrelated sufficient evidence as will establish probable cause
and not necessarily determinative of the success or for the filing of information against the supposed
failure of the falsification or perjury charges. offender.
Furthermore, the Court of Appeals held that there
was probable cause that Sy Tiong Shiou had As in every rule, however, there are settled
committed falsification and that the City of Manila exceptions. Hence, the principle of non-interference
where the 2003 GIS was executed is the proper does not apply when there is grave abuse of
venue for the institution of the perjury charges. Sy discretion which would authorize the aggrieved
Tiong Shiou, et al. sought reconsideration of the person to file a petition for certiorari and prohibition
Court of Appeals decision but their motion was under Rule 65, 1997 Rules of Civil Procedure.
denied.
As correctly found by the Court of Appeals, the DOJ
Sy Tiong argue before the Supreme Court that: gravely abused its discretion when it suspended the
hearing of the charges for violation of the
. . . in affirming, modifying or reversing the Corporation Code on the ground of prejudicial
recommendations of the public prosecutor cannot be question and when it dismissed the criminal
the subject of certiorari or review of the Court of complaints.
Appeals because the DOJ is not a quasi-judicial body
within the purview of Section 1, Rule 65 of the Rules A prejudicial question comes into play generally in a
of Court. In any event, they argue, assuming without situation where a civil action and a criminal action
admitting that the findings of the DOJ may be are both pending and there exists in the former an
subject to judicial review under Section 1, Rule 65 of issue which must be preemptively resolved before
the Rules of Court, the DOJ has not committed any the criminal action may proceed since howsoever the
grave abuse of discretion in affirming the findings of issue raised in the civil action is resolved would be
the City Prosecutor of Manila. determinative juris et de jure of the guilt or

innocence of the accused in the criminal case. The
The Supreme Cort ruled that the DOJ gravely abused reason behind the principle of prejudicial question is
its discretion when it suspended the hearing of the to avoid two conflicting decisions. It has two
charges for violation of the Corporation Code on the essential elements: (a) the civil action involves an
ground of prejudicial question and when it dismissed issue similar or intimately related to the issue raised
the criminal complaints. According to the Supreme in the criminal action; and (b) the resolution of such
Court: issue determines whether or not the criminal action
Indeed, a preliminary proceeding is not a quasi- may proceed.
judicial function and that the DOJ is not a quasi-
judicial agency exercising a quasi-judicial function The civil action and the criminal cases do not involve
when it reviews the findings of a public prosecutor any prejudicial question.
regarding the presence of probable cause. Moreover,

The civil action for accounting and damages, Civil
it is settled that the preliminary investigation proper,
Case No. 03-106456 pending before the RTC Manila,
i.e., the determination of whether there is reasonable
Branch 46, seeks the issuance of an order compelling
ground to believe that the accused is guilty of the
the Spouses Sy to render a full, complete and true
offense charged and should be subjected to the
accounting of all the amounts, proceeds and fund In the instant case, however, the Court finds that the
paid to, received and earned by the corporation since denial of inspection was predicated on the pending
1993 and to restitute it such amounts, proceeds and civil case against the Spouses Sy. This is evident from
funds which the Spouses Sy have misappropriated. the 21 May 2003 letter of Sy Tiong Shiou, et al.’s
The criminal cases, on the other hand, charge that the counsel to the Spouses Sy . . .
Spouses Sy were illegally prevented from getting
inside company premises and from inspecting Even in their Joint Counter-Affidavit dated 23
company records, and that Sy Tiong Shiou falsified September 2003, Sy Tiong Shiou, et al. did not make
the entries in the GIS, specifically the Spouses Sy’s any allegation that “the person demanding to
shares in the corporation. Surely, the civil case examine and copy excerpts from the corporation’s
presents no prejudicial question to the criminal cases records and minutes has improperly used any
since a finding that the Spouses Sy mishandled the information secured through any prior examination
funds will have no effect on the determination of of the records or minutes of such corporation or of
guilt in the complaint for violation of Section 74 in any other corporation, or was not acting in good faith
relation to Section 144 of the Corporation Code; the or for a legitimate purpose in making his demand.”
civil case concerns the validity of Sy Tiong Shiou’s Instead, they merely reiterated the pendency of the
refusal to allow inspection of the records, while in civil case. There being no allegation of improper
the falsification and perjury cases, what is material is motive, and it being undisputed that Sy Tiong Shiou,
the veracity of the entries made by Sy Tiong Shiou in et al. denied Sy Chim and Felicidad Chan Sy’s
the sworn GIS. request for inspection, the Court rules and so holds
that the DOJ erred in dismissing the criminal charge
On the issue of probable cause, the Supreme Court for violation of Section 74 in relation to Section 144
ruled: of the Corporation Code.
Anent the issue of probable cause, the Court also With respect to probable cause for falsification, the
finds that there is enough probable cause to warrant Supreme Court ruled:
the institution of the criminal cases.
The Spouses Sy charge Sy Tiong Shiou with the
The term probable cause does not mean ‘actual and offense of falsification of public documents under
positive cause’ nor does it import absolute certainty. Article 171, paragraph 4; and/or perjury under Article
It is merely based on opinion and reasonable belief. 183 of the Revised Penal Code (RPC). The elements
Thus a finding of probable cause does not require an of falsification of public documents through an
inquiry into whether there is sufficient evidence to untruthful narration of facts are: (a) the offender
procure a conviction. It is enough that it is believed makes in a document untruthful statements in a
that the act or omission complained of constitutes narration of facts; (b) the offender has a legal
the offense charged. Precisely, there is a trial for the obligation to disclose the truth of the facts
reception of evidence of the prosecution in support of narrated;(c) the facts narrated by the offender are
the charge. absolutely false; and (d) the perversion of truth in the
narration of facts was made with the wrongful intent
In order that probable cause to file a criminal case to injure a third person. On the other hand, the
may be arrived at, or in order to engender the well- elements of perjury are: (a) that the accused made a
founded belief that a crime has been committed, the statement under oath or executed an affidavit upon a
elements of the crime charged should be present. material matter; (b) that the statement or affidavit
This is based on the principle that every crime is was made before a competent officer, authorized to
defined by its elements, without which there should receive and administer oath; (c) that in that
be-at the most-no criminal offense. . . statement or affidavit, the accused made a willful and
deliberate assertion of a falsehood; and, (d) that the
sworn statement or affidavit containing the falsity is false statement is made. Thus in this case, it was
required by law or made for a legal purpose. alleged that the perjury was committed when Sy
Tiong Shiou subscribed and sworn to the GIS in the
A General Information Sheet (GIS) is required to be City of Manila, thus, following Section 10(a), Rule
filed within thirty (30) days following the date of the 110 of the Revised Rules of Court, the City of Manila
annual or a special meeting, and must be certified is the proper venue for the offense.
and sworn to by the corporate secretary, or by the
president, or any duly authorized officer of the NON-STOCK CORPORATIONS
corporation. From the records, the 2003 GIS
submitted to the SEC on 8 April 2003 was executed Non-stock corporations. A non-stock corporation
under oath by Sy Tiong Shiou in Manila, in his may seize and dispose of the membership share of a
capacity as Vice President and General Manager. By fully-paid member on account of its unpaid debts to
executing the document under oath, he, in effect, the corporation when it is authorized to do so under
attested to the veracity of its contents. The Spouses the corporate by-laws (even if not so provided in the
Sy claim that the entries in the GIS pertaining to Articles of Incorporation). Valley Golf & Country Club,
them do not reflect the true number of shares that Inc. vs. Rosa O. Vda. Caram, G.R. No. 158805, April 16, 2009.
they own in the company. They attached to their
complaint the 2002 GIS of the company, also RELIGIOUS CORPORATIONS
executed by Sy Tiong Shiou, and compared the
Corporation sole; conversion into corporation
entries therein vis-a-vis the ones in the 2003 GIS. The
aggregate. A corporation may change its character as
Spouses Sy noted the marked decrease in their
a corporation sole into a corporation aggregate by
shareholdings, averring that at no time after the
mere amendment of its articles of incorporation
execution of the 2002 GIS, up to the time of the filing
without first going through the process of
of their criminal complaints did they execute or
dissolution.
authorize the execution of any document or deed
transferring, conveying or disposing their shares or
True, the Corporation Code provides no specific
any portion thereof; and thus there is absolutely no
mechanism for amending the articles of
basis for the figures reflected in the 2003 GIS. The
incorporation of a corporation sole. However,
Spouses Sy claim that the false statements were
Section 109 of the Corporation Code allows the
made by Sy Tiong Shiou with the wrongful intent of
application to religious corporations of the general
injuring them. All the elements of both offenses are
provisions governing non-stock corporations.
sufficiently averred in the complaint-affidavits.
For non-stock corporations, the power to amend its

The Court agrees with the Court of Appeals’ holding,
articles of incorporation lies in its members. The
citing the case of Fabia v. Court of Appeals, that the
code requires two-thirds of their votes for the
doctrine of primary jurisdiction no longer precludes
approval of such an amendment. So how will this
the simultaneous filing of the criminal case with the
requirement apply to a corporation sole that has
corporate/civil case. Moreover, the Court finds that
technically but one member (the head of the religious
the City of Manila is the proper venue for the perjury
organization) who holds in his hands its broad
charges, the GIS having been subscribed and sworn
corporate powers over the properties, rights, and
to in the said place. Under Section 10(a), Rule 110 of
interests of his religious organization?
the Revised Rules of Court, the criminal action shall
be instituted and tried in the court of the
Although a non-stock corporation has a personality
municipality or territory where the offense was
that is distinct from those of its members who
committed or where any of its essential ingredients
established it, its articles of incorporation cannot be
occurred. In Villanueva v. Secretary of Justice, the
amended solely through the action of its board of
Court held that the felony is consummated when the
trustees. The amendment needs the concurrence of Resident Pastor of the Tondo Congregation. If the
at least two-thirds of its membership. If such transformation did materialize, the corporation
approval mechanism is made to operate in a aggregate would be composed of the Highest
corporation sole, its one member in whom all the Consistory of Elders, which nevertheless approved
powers of the corporation technically belongs, needs the very same acts. As either Bishop Lazaro or the
to get the concurrence of two-thirds of its Highest Consistory of Elders had the authority to
membership. The one member, here the General appoint Juane as Resident Pastor of the IEMELIF
Superintendent, is but a trustee, according to Section Tondo Congregation, it also had the power to remove
110 of the Corporation Code, of its membership. him as such or transfer him to another congregation.
Iglesia Evangelisca Metodista En Las Islas Filipinas
There is no point to dissolving the corporation sole of
(IEMELIF), Inc. vs. Nataniel B. Juane/Nataniel B. Juane Vs.
one member to enable the corporation aggregate to
Iglesia Evangelisca Metodista En Las Islas Filipinas
emerge from it. Whether it is a non-stock
(IEMELIF), Inc., G.R. No. 172447, September 18, 2009.
corporation or a corporation sole, the corporate
being remains distinct from its members, whatever
be their number. The increase in the number of its
corporate membership does not change the MERGERS AND CONSOLIDATIONS
complexion of its corporate responsibility to third
parties. The one member, with the concurrence of Merger; effect on employment and workers rights.
two-thirds of the membership of the organization for Taking a second look on this point, we have come to
whom he acts as trustee, can self-will the agree with Justice Brion’s view that it is more in
amendment. He can, with membership concurrence, keeping with the dictates of social justice and the
increase the technical number of the members of the State policy of according full protection to labor to
corporation from “sole” or one to the greater number deem employment contracts as automatically
authorized by its amended articles. Iglesia Evangelica assumed by the surviving corporation in a merger,
Metodista En Las Islas Filipinas (IEMELIF), Inc., et al. vs. even in the absence of an express stipulation in the
Bishop Nathanael Lazaro, et al., G.R. No. 184088, July 6, 2010. articles of merger or the merger plan. In his
dissenting opinion, Justice Brion reasoned that:
Corporation; corporation sole. Even if the
transformation of IEMELIF from a corporation sole
to a corporation aggregate was legally defective, its To my mind, due
head or governing body, i.e., Bishop Lazaro, whose consideration of Section 80 of the
Corporation Code, the
acts were approved by the Highest Consistory of
constitutionally declared policies
Elders, still did not change. A corporation sole is one on work, labor and employment,
formed by the chief archbishop, bishop, priest, and the specific FEBTC-BPI
minister, rabbi or other presiding elder of a religious situation — i.e., a merger with
complete "body and soul" transfer
denomination, sect, or church, for the purpose of
of all that FEBTC embodied and
administering or managing, as trustee, the affairs, possessed and where both
properties and temporalities of such religious participating banks were willing
(albeit by deed, not by their
denomination, sect or church. As opposed to a
written agreement) to provide for
corporation aggregate, a corporation sole consists of the affected human resources by
a single member, while a corporation aggregate recognizing continuity of
employment — should point this
consists of two or more persons. If the
Court to a declaration that in a
transformation did not materialize, the corporation complete merger situation where
sole would still be Bishop Lazaro, who himself there is total takeover by one
performed the questioned acts of removing Juane as corporation over another and there
is silence in the merger agreement
on what the fate of the human or the right of such an employee to resign, retire or
resource complement shall be, the otherwise sever his employment, whether before or
latter should not be left in legal
after the merger, subject to existing contractual
limbo and should be properly
provided for, by compelling the obligations. In this manner, Justice Brion’s theory of
surviving entity to absorb these automatic assumption may be reconciled with the
employees. This is what Section 80
majority’s concerns with the successor employer’s
of the Corporation Code
commands, as the surviving prerogative to choose its employees and the
corporation has the legal obligation prohibition against involuntary servitude.
to assume all the obligations and
liabilities of the merged Notwithstanding this concession, we find
constituent corporation.
no reason to reverse our previous pronouncement
that the absorbed FEBTC employees are covered by
the Union Shop Clause.
Not to be forgotten is that
the affected employees managed,
operated and worked on the Even in our August 10, 2010 Decision, we
transferred assets and properties as already observed that the legal fiction in the law on
their means of livelihood; they
mergers (that the surviving corporation continues
constituted a basic component of
their corporation during its the corporate existence of the non-surviving
existence. In a merger and corporation) is mainly a tool to adjudicate the rights
consolidation situation, they
and obligations between and among the merged
cannot be treated without
consideration of the applicable corporations and the persons that deal with them.
constitutional declarations and Such a legal fiction cannot be unduly extended to an
directives, or, worse, be simply
interpretation of a Union Shop Clause so as to defeat
disregarded. If they are so treated,
it is up to this Court to read and its purpose under labor law. Bank of the Philippine
interpret the law so that they are Islands vs. BPI Employees Union-Davao Chapter-Federation
treated in accordance with the
of Unions in BPI Unibank, G.R. No. 164301, October 19, 2011(
legal requirements of mergers and
consolidation, read in light of the Motion for Reconsideration).
social justice, economic and social
provisions of our Constitution.
Merger; effect on employment and seniority rights.
Hence, there is a need for the
surviving corporation to take Although not binding on this Court, American
responsibility for the affected jurisprudence on the consequences of voluntary
employees and to absorb them into mergers on the right to employment and seniority
its workforce where no appropriate
provision for the merged rights is persuasive and illuminating. We quote the
corporation's human resources following pertinent discussion from the American
component is made in the Merger Law Reports:
Plan.
By upholding the automatic assumption of Several cases have involved the situation where as a
the non-surviving corporation’s existing employment result of mergers, consolidations, or shutdowns, one
contracts by the surviving corporation in a merger, group of employees, who had accumulated seniority
the Court strengthens judicial protection of the right at one plant or for one employer, finds that their jobs
to security of tenure of employees affected by a have been discontinued except to the extent that
merger and avoids confusion regarding the status of they are offered employment at the place or by the
their various benefits which were among the chief employer where the work is to be carried on in the
objections of our dissenting colleagues. However, future. Such cases have involved the question
nothing in this Resolution shall impair the right of an whether such transferring employees should be
employer to terminate the employment of the entitled to carry with them their accumulated
absorbed employees for a lawful or authorized cause seniority or whether they are to be compelled to start
over at the bottom of the seniority list in the “new” (1962, Ky) 356 SW2d 241, that the trucker was not
job. It has been recognized in some cases that the required to absorb the affected employees as well as
accumulated seniority does not survive and cannot the business, the court saying that they could find no
be transferred to the “new” job. such meaning in the above clause, stating that it
dealt only with seniority, and not with initial
In Carver v Brien (1942) 315 Ill App 643, 43 NE2d employment. Unless and until the absorbing
597, the shop work of three formerly separate company agreed to take the employees of the
railroad corporations, which had previously operated company whose business was being absorbed, no
separate facilities, was consolidated in the shops of seniority problem was created, said the court, hence
one of the roads. Displaced employees of the other the provision of the contract could have no
two roads were given preference for the new jobs application. Furthermore, said the court, it did not
created in the shops of the railroad which took over require that the absorbing company take these
the work. A controversy arose between the employees, but only that if it did take them the
employees as to whether the displaced employees question of seniority between the old and new
were entitled to carry with them to the new jobs the employees would be worked out by agreement or
seniority rights they had accumulated with their else be submitted to the grievance procedure.
prior employers, that is, whether the rosters of the (Emphasis ours.)
three corporations, for seniority purposes, should be
“dovetailed” or whether the transferring employees Indeed, from the tenor of local and foreign
should go to the bottom of the roster of their new authorities, in voluntary mergers, absorption of the
employer. Labor representatives of the various dissolved corporation’s employees or the recognition
systems involved attempted to work out an of the absorbed employees’ service with their
agreement which, in effect, preserved the seniority previous employer may be demanded from the
status obtained in the prior employment on other surviving corporation if required by provision of law
roads, and the action was for specific performance of or contract. The dissent of Justice Arturo D. Brion
this agreement against a demurring group of the tries to make a distinction as to the terms and
original employees of the railroad which was conditions of employment of the absorbed employees
operating the consolidated shops. The relief sought in the case of a corporate merger or consolidation
was denied, the court saying that, absent some which will, in effect, take away from corporate
specific contract provision otherwise, seniority rights management the prerogative to make purely business
were ordinarily limited to the employment in which decisions on the hiring of employees or will give it an
they were earned, and concluding that the contract excuse not to apply the CBA in force to the prejudice
for which specific performance was sought was not of its own employees and their recognized collective
such a completed and binding agreement as would bargaining agent. In this regard, we disagree with
support such equitable relief, since the railroad, Justice Brion.
whose concurrence in the arrangements made was
essential to their effectuation, was not a party to the Justice Brion takes the position that because the
agreement. surviving corporation continues the personality of

the dissolved corporation and acquires all the latter’s
Where the provisions of a labor contract provided rights and obligations, it is duty-bound to absorb the
that in the event that a trucker absorbed the business dissolved corporation’s employees, even in the
of another private contractor or common carrier, or absence of a stipulation in the plan of merger. He
was a party to a mergerof lines, the seniority of the proposes that this interpretation would provide the
employees absorbed or affected thereby should be necessary protection to labor as it spares workers
determined by mutual agreement between the from being “left in legal limbo.”
trucker and the unions involved, it was held in
Moore v International Brotherhood of Teamsters, etc.
However, there are instances where an employer can should be compelled to absorb the dissolved
validly discontinue or terminate the employment of corporation’s employees as a legal consequence of the
an employee without violating his right to security of merger and as a social justice consideration, it bears
tenure. Among others, in case of redundancy, for to emphasize his dissent also recognizes that the
example, superfluous employees may be terminated employee may choose to end his employment at any
and such termination would be authorized under time by voluntarily resigning. For the employee to be
Article 283 of the Labor Code. “absorbed” by BPI, it requires the employees’ implied
or express consent. It is because of this human
Moreover, assuming for the sake of argument that element in employment contracts and the personal,
there is an obligation to hire or absorb all employees consensual nature thereof that we cannot agree that,
of the non-surviving corporation, there is still no in a merger situation, employment contracts are
basis to conclude that the terms and conditions of automatically transferable from one entity to another
employment under a valid collective bargaining in the same manner that a contract pertaining to
agreement in force in the surviving corporation purely proprietary rights – such as a promissory note
should not be made to apply to the absorbed or a deed of sale of property – is perfectly and
employees. Bank of the Philippine Islands vs. BPI Employees automatically transferable to the surviving
Union-Davao Chapter-Federation of Unions in BPI Unibank, corporation. Bank of the Philippine Islands vs. BPI
G.R. No. 164301, August 18, 2010. Employees Union-Davao Chapter-Federation of Unions in
BPI Unibank, G.R. No. 164301, August 18, 2010.
Merger; mandatory absorption of employees of
corporation. The lack of a provision in the plan of DISSOLUTION
merger regarding the transfer of employment
contracts to the surviving corporation could have Effects of dissolution on right of stockholders. Is the
very well been deliberate on the part of the parties to Complaint a continuation of business? Section 122 of
the merger, in order to grant the surviving the Corporation Code prohibits a dissolved
corporation the freedom to choose who among the corporation from continuing its business, but allows
dissolved corporation’s employees to retain, in it to continue with a limited personality in order to
accordance with the surviving corporation’s business settle and close its affairs, including its complete
needs. If terminations, for instance due to liquidation, thus:
redundancy or labor-saving devices or to prevent Sec. 122. Corporate liquidation. –
losses, are done in good faith, they would be valid. Every corporation whose charter
expires by its own limitation or is
The surviving corporation too is duty-bound to annulled by forfeiture or otherwise,
protect the rights of its own employees who may be or whose corporate existence for
other purposes is terminated in any
affected by the merger in terms of seniority and other other manner, shall nevertheless be
conditions of their employment due to the merger. continued as a body corporate for
three (3) years after the time when
Thus, we are not convinced that in the absence of a it would have been so dissolved, for
stipulation in the merger plan the surviving the purpose of prosecuting and
defending suits by or against it and
corporation was compelled, or may be judicially enabling it to settle and close its
compelled, to absorb all employees under the same affairs, to dispose of and convey its
property and to distribute its
terms and conditions obtaining in the dissolved assets, but not for the purpose of
corporation as the surviving corporation should also continuing the business for
which it was established.
take into consideration the state of its business and
its obligations to its own employees, and to their xxxx
certified collective bargaining agent or labor union. Upon learning of the corporation’s dissolution by
revocation of its corporate franchise, the CA held
Even assuming we accept Justice Brion’s theory that that the intra-corporate Complaint, which aims to
in a merger situation the surviving corporation continue the corporation’s business, must now be
dismissed under Section 122. Petitioners concede The same is true with regard to Vitaliano’s
that a dissolved corporation can no longer continue shareholdings in the dissolved corporation. A party’s
its business. They argue, however, that Section 122 stockholdings in a corporation, whether existing or
allows a dissolved corporation to wind up its affairs dissolved, is a property right which he may vindicate
within 3 years from its dissolution. Petitioners then against another party who has deprived him thereof.
maintain that the Complaint, which seeks only a The corporation’s dissolution does not extinguish
declaration that respondents are strangers to the such property right. Vitaliano N. Aguirre and Fidel N.
corporation and have no right to sit in the board or Aguirre v. FQB+7, Inc., Nathaniel D. Bocobo, et. al., January 9,
act as officers thereof, and a return of Vitaliano’s 2013, G.R. No. 170770.
stockholdings, intends only to resolve remaining
corporate issues. The resolution of these issues is Corporation; corporate approval for appointment of
allegedly part of corporate winding up. trustee. Reading carefully the Secretary’s Certificate,
Does the Complaint seek a continuation of business it is clear that the main purpose of the directors’
or is it a settlement of corporate affairs? The answer Resolution was to appoint petitioner as the new
lies in the prayers of the Complaint. trustee of the previously executed and amended MTI.
Going through the original and the revised MTI, we
The Court fails to find in the prayers above any find no substantial amendments to the provisions of
intention to continue the corporate business of the contract. We agree with petitioner that the act of
FQB+7. The Complaint does not seek to enter into appointing a new trustee of the MTI was a regular
contracts, issue new stocks, acquire properties, business transaction. The appointment necessitated
execute business transactions, etc. Its aim is not to only a decision of at least a majority of the directors
continue the corporate business, but to determine present at the meeting in which there was a quorum,
and vindicate an alleged stockholder’s right to the pursuant to Section 25 of the Corporation Code.
return of his stockholdings and to participate in the Metropolitan Bank and Trust Company vs. Centro
election of directors, and a corporation’s right to Development Corp., et al., G.R. No. 180974, June 13, 2012.
remove usurpers and strangers from its affairs. The
Court fails to see how the resolution of these issues Corporation; dissolution. Under Section 122 of
can be said to continue the business of FQB+7. the Corporation Code, a dissolved corporation shall
nevertheless continue as a body corporate for three
Neither are these issues mooted by the dissolution of (3) years for the purpose of prosecuting and
the corporation. A corporation’s board of directors is defending suits by or against it and enabling it to
not rendered functus officio by its dissolution. Since settle and close its affairs, to dispose and convey its
Section 122 allows a corporation to continue its property and to distribute its assets, but not for the
existence for a limited purpose, necessarily there purpose of continuing the business for which it was
must be a board that will continue acting for and on established. Within those three (3) years, the
behalf of the dissolved corporation for that purpose. corporation may appoint a trustee or receiver who
In fact, Section 122 authorizes the dissolved shall carry out the said purposes beyond the three
corporation’s board of directors to conduct its (3)-year winding-up period. Thus, a trustee of a
liquidation within three years from its dissolution. dissolved corporation may commence a suit which
Jurisprudence has even recognized the board’s can proceed to final judgment even beyond the three
authority to act as trustee for persons in interest (3)-year period of liquidation.
beyond the said three-year period. Thus, the
determination of which group is the bona fide or In the same manner, during and beyond the three (3)-
rightful board of the dissolved corporation will still year winding-up period of RMC, the Board of
provide practical relief to the parties involved. Trustees of RMCPRF may do no more than settle
and close the affairs of the Fund. The Board retains
its authority to act on behalf of its members, albeit,in pursuant to Section 6(d) of Presidential Decree No.
a limited capacity. It may commence suits on behalf 902-A, the SEC Rules on Corporate Recovery, the
of its members but not continue managing the Fund Corporation Code of the Philippines, the Securities
for purposes of maximizing profits. Here, the Board’s Regulation Code, and other related laws enforced by
act of issuing the Resolution authorizing petitioner the SEC. Catmon Sales International Corporation vs. Atty.
to release the Fund to its beneficiaries is still part of Manuel D. Yngson, Jr. as Liquidator of Catmon Sales
the liquidation process, that is, satisfaction of the International Corporation, G.R. No. 179761, January 15, 2010.
liabilities of the Plan, and does not amount to doing
business. Hence, it was properly within the Board’s FOREIGN CORPORATIONS
power to promulgate. Metropolitan Bank & trust
Corporation; doing business without a license. The
Company, Inc. vs. The Board of Trustees of Riverside Mills
appointment of a distributor in the Philippines is not
Corp. Provident and Retirement Fund, et al., G.R. No. 176959,
sufficient to constitute “doing business” unless it is
September 8, 2010.
under the full control of the foreign corporation. On
the other hand, if the distributor is an independent
SEC; power to fix compensation of liquidators. To
entity which buys and distributes products, other
countenance petitioner’s posturing would be to
than those of the foreign corporation, for its own
unduly delimit the broad powers granted to the SEC
name and its own account, the latter cannot be
under Presidential Decree No. 902-A, specifically the
considered to be doing business in the Philippines. It
all-encompassing provision in Section 3 that the SEC
should be kept in mind that the determination of
has “absolute jurisdiction, supervision and control”
whether a foreign corporation is doing business in
over all corporations who are the grantees of primary
the Philippines must be judged in light of the
franchises and/or license or permit issued by the
attendant circumstances.
government to operate in the Philippines. There is no
gainsaying, therefore, that the SEC is authorized to
In the case at bench, it is undisputed that DISI was
determine the fees of receivers and liquidators not
founded in 1979 and is independently owned and
only when there is “failure of agreement” between the
managed by the spouses Leandro and Josephine
parties but also in the absence thereof. A contrary
Bantug. In addition to Steelcase products, DISI also
ruling would give license to corporations under
distributed products of other companies including
liquidation or receivership to refuse to participate in
carpet tiles, relocatable walls and theater settings.
negotiations for the fixing of the compensation of
The dealership agreement between Steelcase and
their liquidators or receivers so as to evade their
DISI had been described by the owner himself as:
obligation to pay the same.
basically a buy and sell arrangement whereby we

Petitioner may not have been given the chance to
would inform Steelcase of the volume of the products
meet face to face with respondent for the purpose of
needed for a particular project and Steelcase would,
determining the latter’s fee. But this fact alone should
in turn, give ‘special quotations’ or discounts after
not invalidate the amount fixed by the SEC. What
considering the value of the entire package. In
matters is the reasonableness of the fee in light of the
making the bid of the project, we would then add out
services rendered by the liquidator. It is the policy of
profit margin over Steelcase’s prices. After the
the SEC to provide uniform/fair and reasonable
approval of the bid by the client, we would thereafter
compensation or fees for the comparable services
place the orders to Steelcase. The latter, upon our
rendered by the duly designated members of the
payment, would then ship the goods to the
Management Committee (MANCOM),
Philippines, with us shouldering the freight charges
rehabilitation receivers and liquidators in
and taxes.
corporations or partnerships placed
under MANCOM/receivership or liquidation,
This clearly belies DISI’s assertion that it was a mere without a license may still sue before the Philippine
conduit through which Steelcase conducted its courts a Filipino or a Philippine entity that had
business in the country. From the preceding facts, derived some benefit from their contractual
the only reasonable conclusion that can be reached is arrangement because the latter is considered to be
that DISI was an independent contractor, estopped from challenging the personality of a
distributing various products of Steelcase and of corporation after it had acknowledged the said
other companies, acting in its own name and for its corporation by entering into a contract with it.
own account. Steelcase, Inc. vs. Design International
In Antam Consolidated, Inc. v. Court of Appeals, this
Selections, Inc. G.R. No. 171995, April 18, 2012.
Court had the occasion to draw attention to the
Corporation; doing business without a license. In common ploy of invoking the incapacity to sue of an
this case, the contract between petitioner and NMC unlicensed foreign corporation utilized by defaulting
involved the purchase of molasses by petitioner from domestic companies which seek to avoid the suit by
NMC. It was NMC, the domestic corporation, which the former. The Court cannot allow this to continue
derived income from the transaction and not by always ruling in favor of local companies, despite
petitioner. To constitute “doing business,” the the injustice to the overseas corporation which is left
activity undertaken in the Philippines should involve with no available remedy. Steelcase, Inc. vs. Design
profit-making. Besides, under Section 3(d) of RA International Selections, Inc., G.R. No. 171995, April 18, 2012.
7042, “soliciting purchases” has been deleted from
the enumeration of acts or activities which Corporation; head office and branch as one entity.
constitute “doing business.” The Court begins by examining the manner by which
a foreign corporation can establish its presence in the
Other factors which support the finding that Philippines. It may choose to incorporate its own
petitioner is not doing business in the Philippines subsidiary as a domestic corporation, in which case
are: (1) petitioner does not have an office in the such subsidiary would have its own separate and
Philippines; (2) petitioner imports products from the independent legal personality to conduct business in
Philippines through its non-exclusive local broker, the country. In the alternative, it may create a
whose authority to act on behalf of petitioner is branch in the Philippines, which would not be a
limited to soliciting purchases of products from legally independent unit, and simply obtain a license
suppliers engaged in the sugar trade in the to do business in the Philippines.
Philippines; and (3) the local broker is an
independent contractor and not an agent of In the case of Citibank and BA, it is apparent that
petitioner. they both did not incorporate a separate domestic

corporation to represent its business interests in the
In the present case, petitioner is a foreign company Philippines. Their Philippine branches are, as the
merely importing molasses from a Philippine name implies, merely branches, without a separate
exporter. A foreign company that merely imports legal personality from their parent company,
goods from a Philippine exporter, without opening Citibank and BA. Thus, being one and the same
an office or appointing an agent in the Philippines, is entity, the funds placed by the respondents in their
not doing business in the Philippines. Cargill, Inc. Vs. respective branches in the Philippines should not be
Intra Strata Assurance Corporation, G.R. No. 168266, March treated as deposits made by third parties subject to
15, 2010. deposit insurance under the PDIC Charter.
Corporation; doing business without a license; For lack of judicial precedents on this issue, the
estoppel. As shown in the previously cited cases, this Court seeks guidance from American jurisprudence.
Court has time and again upheld the principle that a In the leading case of Sokoloff v. The National City
foreign corporation doing business in the Philippines

Bank of New York, where the Supreme Court of New etc. Its aim is not to continue the corporate business,
York held: but to determine and vindicate an alleged
stockholder’s right to the return of his stockholdings
Where a bank maintains branches, each branch and to participate in the election of directors, and a
becomes a separate business entity with separate corporation’s right to remove usurpers and strangers
books of account. A depositor in one branch cannot from its affairs. The Court fails to see how the
issue checks or drafts upon another branch or resolution of these issues can be said to continue the
demand payment from such other branch, and in business of FQB+7.
many other respects the branches are considered
separate corporate entities and as distinct from one Neither are these issues mooted by the dissolution of
another as any other bank. Nevertheless, when the corporation. A corporation’s board of directors is
considered with relation to the parent bank they are not rendered functus officio by its dissolution. Since
not independent agencies; they are, what their name Section 122 allows a corporation to continue its
imports, merely branches, and are subject to the existence for a limited purpose, necessarily there
supervision and control of the parent bank, and are must be a board that will continue acting for and on
instrumentalities whereby the parent bank carries on behalf of the dissolved corporation for that purpose.
its business, and are established for its own In fact, Section 122 authorizes the dissolved
particular purposes, and their business conduct and corporation’s board of directors to conduct its
policies are controlled by the parent bank and their liquidation within three years from its dissolution.
property and assets belong to the parent bank, Jurisprudence has even recognized the board’s
although nominally held in the names of the authority to act as trustee for persons in interest
particular branches. Ultimate liability for a debt of a beyond the said three-year period.43 Thus, the
branch would rest upon the parent bank.
determination of which group is the bona fide or
rightful board of the dissolved corporation will still
This ruling was later reiterated in the more recent
provide practical relief to the parties involved.
case of United States v. BCCI Holdings Luxembourg
where the United States Court of Appeals, District of
The same is true with regard to Vitaliano’s
Columbia Circuit, emphasized that “while individual
shareholdings in the dissolved corporation. A party’s
bank branches may be treated as independent of one
stockholdings in a corporation, whether existing or
another, each branch, unless separately incorporated,
dissolved, is a property right44 which he may
must be viewed as a part of the parent bank rather
vindicate against another party who has deprived
than as an independent entity.”
him thereof. The corporation’s dissolution does not
In addition, Philippine banking laws also support the extinguish such property right. Section 145 of the
conclusion that the head office of a foreign bank and Corporation Code ensures the protection of this
right, thus:
its branches are considered as one legal entity. PDIC
Sec. 145. Amendment or repeal. – No
vs. Citibank, N.A. and Bank of America, S.T. & N.A, G.R. No.
right or remedy in favor of or
170290, April 11, 2012.
against any corporation, its
stockholders, members, directors,
trustees, or officers, nor any
INTRA-CORPORATE CONTROVERSIES liability incurred by any such
corporation, stockholders,
Intra-corporate disputes remain even when the members, directors, trustees, or
corporation is dissolved. The Complaint does not officers, shall be removed or
seek to enter into contracts, issue new stocks, impaired either by the subsequent
acquire properties, execute business transactions, dissolution of said corporation or
by any subsequent amendment or relations, between and among

repeal of this Code or of any part stockholders, members, or
thereof. (Emphases supplied.) associates; between any or all of
them and the corporation,
The CA held that the trial court does not have partnership or association of which
jurisdiction over an intra-corporate dispute involving they are stockholders, members or
a dissolved corporation. It further held that due to associates, respectively; and
the corporation’s dissolution, the qualifications of between such corporation,
the respondents can no longer be questioned and partnership or association and the
that the dissolved corporation must now commence state insofar as it concerns their
liquidation proceedings with the respondents as its individual franchise or right to
directors and officers. The CA’s ruling is founded on exist as such entity;
the assumptions that intra-corporate controversies c) Controversies in the election or
continue only in existing corporations; that when the appointments of directors, trustees,
corporation is dissolved, these controversies cease to officers or managers of such
be intra-corporate and need no longer be resolved; corporations, partnerships or
and that the status quo in the corporation at the time associations.
of its dissolution must be maintained. The Court
finds no basis for the said assumptions. The Court reproduced the above jurisdiction in Rule
1 of the Interim Rules of Procedure Governing Intra-
Jurisdiction over the subject matter is conferred by corporate Controversies under R.A. No. 8799:
law. R.A. No. 8799 conferred jurisdiction over intra-

corporate controversies on courts of general SECTION 1. (a) Cases Covered –
jurisdiction or RTCs, to be designated by the These Rules shall govern the
Supreme Court. Thus, as long as the nature of the procedure to be observed in civil
controversy is intra-corporate, the designated RTCs cases involving the following:
have the authority to exercise jurisdiction over such (1) Devices or schemes employed
cases. by, or any act of, the board of
directors, business associates,
So what are intra-corporate controversies? R.A. No. officers or partners, amounting to
8799 refers to Section 5 of Presidential Decree (P.D.) fraud or misrepresentation which
No. 902-A (or The SEC Reorganization Act) for a may be detrimental to the interest
description of such controversies: of the public and/or of the
stockholders, partners, or members
a) Devices or schemes employed by of any corporation, partnership, or
or any acts, of the board of association;
directors, business associates, its (2) Controversies arising out of
officers or partners, amounting to intra-corporate, partnership, or
fraud and misrepresentation which association relations, between and
may be detrimental to the interest among stockholders, members, or
of the public and/or of the associates; and between, any or all
stockholder, partners, members of of them and the corporation,
associations or organizations partnership, or association of
registered with the Commission; which they are stockholders,
b) Controversies arising out of members, or associates,
intra-corporate or partnership respectively;
(3) Controversies in the election or sufficient to confer jurisdiction to

appointment of directors, trustees, the SEC [now the RTC], regardless
officers, or managers of of the subject matter of the dispute.
corporations, partnerships, or This came to be known as the
associations; relationship test.
(4) Derivative suits; and
(5) Inspection of corporate books. However, in the 1984 case of DMRC
Enterprises v. Esta del SolMountain
Meanwhile, jurisprudence has elaborated on the Reserve, Inc., the Court introduced
above definitions by providing tests in determining the nature of the controversy
whether a controversy is intra-corporate. Reyes v. test. We declared in this case that
Regional Trial Court of Makati, Br. 142 contains a it is not the mere existence of an
comprehensive discussion of these two tests, thus: intracorporate relationship that
gives rise to an intra-corporate
A review of relevant jurisprudence controversy; to rely on the
shows a development in the relationship test alone will divest
Court's approach in classifying the regular courts of their
what constitutes an intra- jurisdiction for the sole reason that
corporate controversy. Initially, the the dispute involves a corporation,
main consideration in determining its directors, officers, or
whether a dispute constitutes an stockholders. We saw that there is
intracorporate controversy was no legal sense in disregarding or
limited to a consideration of the minimizing the value of the nature
intra-corporate relationship of the transactions which gives rise
existing between or among the to the dispute.
parties. The types of relationships
embraced under Section 5(b) x x x Under the nature of the
were as follows: controversy test, the incidents of
a) between the corporation, that relationship must also be
partnership, or association and the considered for the purpose of
public; ascertaining whether the
b) between the corporation, controversy itself is intra-
partnership, or association and its corporate. The controversy must
stockholders, partners, members, not only be rooted in the
or officers; existence of an intra-corporate
c) between the corporation, relationship, but must as well
partnership, or association and the pertain to the enforcement of the
State as far as its franchise, permit parties' correlative rights and
or license to operate is concerned; obligations under the
and Corporation Code and the
d) among the stockholders, internal and intra-corporate
partners or associates themselves. regulatory rules of the
xxx corporation. If the relationship
and its incidents are merely
The existence of any of the above incidental to the controversy or if
intra-corporate relations was there will still be conflict even if
the relationship does not exist, the corporation. If the nature of

then no intra-corporate the controversy involves matters
controversy exists. that are purely civil in character,
necessarily, the case does not
The Court then combined the involve an intracorporate
two tests and declared that controversy.'
jurisdiction should be
determined by considering not Thus, to be considered as an intra-corporate dispute,
only the status or relationship of the case: (a) must arise out of intra-corporate or
the parties, but also the nature of partnership relations, and (b) the nature of the
the question under controversy. question subject of the controversy must be such
This two-tier test was adopted in that it is intrinsically connected with the regulation
the recent case of SpeedDistribution, of the corporation or the enforcement of the parties’
Inc. v. Court of Appeals: rights and obligations under the Corporation Code
and the internal regulatory rules of the corporation.
'To determine whether a case So long as these two criteria are satisfied, the dispute
involves an intra-corporate is intracorporate and the RTC, acting as a special
controversy, and is to be heard and commercial court, has jurisdiction over it.
decided by the branches of the Examining the case before us in relation to these two
RTC specifically designated by the criteria, the Court finds and so holds that the case is
Court to try and decide such cases, essentially an intra-corporate dispute. It obviously
two elements must concur: (a) arose from the intra-corporate relations between the
the status or relationship of the parties, and the questions involved pertain to their
parties, and [b] the nature of the rights and obligations under the Corporation Code
question that is the subject of and matters relating to the regulation of the
their controversy. The first corporation. We further hold that the nature of the
case as an intra-corporate dispute was not affected
element requires that the
by the subsequent dissolution of the corporation.
controversy must arise out of
intra-corporate or partnership
It bears reiterating that Section 145 of the
relations between any or all of the
Corporation Code protects, among others, the rights
parties and the corporation,
and remedies of corporate actors against other
partnership, or association of
corporate actors. The statutory provision assures an
which they are stockholders,
aggrieved party that the corporation’s dissolution
members or associates, between
will not impair, much less remove, his/her rights or
any or all of them and the
remedies against the corporation, its stockholders,
corporation, partnership or
directors or officers. It also states that corporate
association of which they are
dissolution will not extinguish any liability already
stockholders, members or
incurred by the corporation, its stockholders,
associates, respectively; and
directors, or officers. In short, Section 145 preserves a
between such corporation,
corporate actor’s cause of action and remedy against
partnership, or association and the
another corporate actor. In so doing, Section 145 also
State insofar as it concerns the
preserves the nature of the controversy between the
individual franchises. The second
parties as an intra-corporate dispute.
element requires that the dispute
among the parties be intrinsically
connected with the regulation of
The dissolution of the corporation simply prohibits it Code specifically enumerated who are these
from continuing its business. However, despite such corporate officers, to wit: (1) president; (2) secretary;
dissolution, the parties involved in the litigation are (3) treasurer; and (4) such other officers as may be
still corporate actors. The dissolution does not provided for in the by-laws.
automatically convert the parties into total strangers
or change their intra-corporate relationships. Neither With the given circumstances and in conformity
does it change or terminate existing causes of action, with Matling Industrial and Commercial Corporation v.
which arose because of the corporate ties between Coros, this Court rules that respondent was not a
the parties. Thus, a cause of action involving an corporate officer of petitioner corporation because
intracorporate controversy remains and must be filed his position as General Manager was not specifically
as an intra-corporate dispute despite the subsequent mentioned in the roster of corporate officers in its
dissolution of the corporation. Vitaliano N. Aguirre and corporate by-laws. The enabling clause in petitioner
Fidel N. Aguirre vs. FQB+7 Inc., Nathaniel D. Bocobo, et. al., corporation’s by-laws empowering its Board of
G.R. No. 170770, January 9, 2013. Directors to create additional officers, i.e., General
Manager, and the alleged subsequent passage of a
Corporation; intra-corporate controversy. An intra- board resolution to that effect cannot make such
corporate controversy is one which “pertains to any position a corporate office. Matling clearly
of the following relationships: (1) between the enunciated that the board of directors has no power
corporation, partnership or association and the to create other corporate offices without first
public; (2) between the corporation, partnership or amending the corporate by-laws so as to include
association and the State in so far as its franchise, therein the newly created corporate office. Though
permit or license to operate is concerned; (3) the board of directors may create appointive
between the corporation, partnership or association positions other than the positions of corporate
and its stockholders, partners, members or officers; officers, the persons occupying such positions cannot
and (4) among the stockholders, partners or be viewed as corporate officers under Section 25 of
associates themselves.” the Corporation Code. In view thereof, this Court
holds that unless and until petitioner corporation’s
Based on the foregoing definition, there is no doubt by-laws is amended for the inclusion of General
that the controversy in this case is essentially intra- Manager in the list of its corporate officers, such
corporate in character, for being between a position cannot be considered as a corporate office
condominium corporation and its members-unit within the realm of Section 25 of the Corporation
owners. In the recent case of Chateau De Baie Code. March II Marketing, Inc. and Lucila V. Joson vs.
Condominium Corporation v. Sps. Moreno, an action Alfredo M. Joson, G.R. No. 171993, December 12, 2011.
involving the legality of assessment dues against the
condominium owner/developer, the Court held that, Corporate officers; definition. “‘Corporate officers’ in
the matter being an intra-corporate dispute, the RTC the context of Presidential Decree No. 902-A are
had jurisdiction to hear the same pursuant to R.A. those officers of the corporation who are given that
No. 8799. Philip L. Go, Pacifico Q. Lim, et al. vs. Distinction character by the Corporation Code or by the
Properties Development and Construction, Inc., G.R. No. corporation’s by-laws. There are three specific
194024, April 25, 2012. officers whom a corporation must have under Section
25 of the Corporation Code. These are the president,
Corporation; corporate officers. In the context of secretary and the treasurer. The number of officers is
Presidential Decree No. 902-A, corporate officers are not limited to these three. A corporation may have
those officers of a corporation who are given that such other officers as may be provided for by its by-
character either by the Corporation Code or by the laws like, but not limited to, the vice-president,
corporation’s by-laws. Section 25 of the Corporation cashier, auditor or general manager. The number of
corporate officers is thus limited by law and by the as constituting willful breach of the trust reposed
corporation’s by-laws. upon petitioner as Manager. It was only after
respondents invoked the Labor Arbiter’s lack of
It has been consistently held that “[a]n ‘office’ is jurisdiction over petitioner’s complaint in the
created by the charter of the corporation and the Supplemental Memorandum of Appeal filed before
officer is elected (or appointed) by the directors or the NLRC that respondents started considering said
stockholders.” Clearly here, respondents failed to acts as such. Third, in saying that they were
prove that petitioner was appointed by the board of dismissing petitioner to cut operational expenses,
directors. Thus, we cannot subscribe to their claim respondents actually want to save on the salaries and
that petitioner is a corporate officer. Having said other remunerations being given to petitioner as its
this, we find that there is no intra-corporate Manager. Thus, when petitioner sought for
relationship between the parties insofar as reinstatement, he wanted to recover his position as
petitioner’s complaint for illegal dismissal is Manager, a position which we have, however, earlier
concerned and that same does not satisfy the declared to be not a corporate position. He is not
relationship test. Renato Real vs. Sangu Philippines, Inc. et trying to recover a seat in the board of directors or to
al., G.R. No. 168757, January 19, 2011. any appointive or elective corporate position which
has been declared vacant by the board. Certainly,
Intra-corporate controversy. Respondents what we have here is a case of termination of
terminated the services of petitioner for the employment which is a labor controversy and not an
following reasons: (1) his continuous absences at his intra-corporate dispute. In sum, we hold that
post at Ogino Philippines, Inc; (2) respondents’ loss petitioner’s complaint likewise does not satisfy the
of trust and confidence on petitioner; and, (3) to cut nature of controversy test.
down operational expenses to reduce further losses
being experienced by the corporation. Hence, With the elements of intra-corporate controversy
petitioner filed a complaint for illegal dismissal and being absent in this case, we thus hold that
sought reinstatement, backwages, moral damages petitioner’s complaint for illegal dismissal against
and attorney’s fees. From these, it is not difficult to respondents is not intra-corporate. Rather, it is a
see that the reasons given by respondents for termination dispute and, consequently, falls under
dismissing petitioner have something to do with his the jurisdiction of the Labor Arbiter pursuant to
being a Manager of respondent corporation and Section 217 of the Labor Code. Renato Real vs. Sangu
nothing with his being a director or stockholder. For Philippines, Inc. et al., G.R. No. 168757, January 19, 2011.
one, petitioner’s continuous absences in his post in
Ogino relates to his performance as Manager. Intra-corporate dispute; definition. An intra-
Second, respondents’ loss of trust and confidence in corporate dispute is understood as a suit arising from
petitioner stemmed from his alleged acts of intra-corporate relations or between or among
establishing a company engaged in the same line of stockholders or between any or all of them and the
business as respondent corporation’s and submitting corporation. Applying what has come to be known
proposals to the latter’s clients while he was still as the relationship test, it has been held that the
serving as its Manager. While we note that types of actions embraced by the foregoing definition
respondents also claim these acts as constituting acts include the following suits: (a) between the
of disloyalty of petitioner as director and corporation, partnership or association and the
stockholder, we, however, think that same is a mere public; (b) between the corporation, partnership or
afterthought on their part to make it appear that the association and its stockholders, partners, members,
present case involves an element of intra-corporate or officers; (c) between the corporation, partnership
controversy. This is because before the Labor or association and the State insofar as its franchise,
Arbiter, respondents did not see such acts to be permit or license to operate is concerned; and, (d)
disloyal acts of a director and stockholder but rather, among the stockholders, partners or associates
themselves. As the definition is broad enough to Petitioner GD Express’ allegation that respondent
cover all kinds of controversies between Filchart has not fully paid its subscription to the
stockholders and corporations, the traditional shares in PEAC and, thus, cannot claim to be a
interpretation was to the effect that the relationship stockholder in PEAC does not oust the SCC of its
test brooked no distinction, qualification or any jurisdiction over the case. For the purpose of
exemption whatsoever. determining whether SEC Case No. 08-97-5746
should be heard as an intra-corporate proceeding, the
However, the unqualified application of the allegation in respondent Filchart’s petition that it is a
relationship test has been modified on the ground stockholder in PEAC is deemed hypothetically
that the same effectively divests regular courts of admitted. It is only after a full-blown hearing that the
jurisdiction over cases for the sole reason that the SCC may determine whether respondent Filchart’s
suit is between the corporation and/or its may be considered a bona fide stockholder of PEAC
corporators. It was held that the better policy in and is entitled to the reliefs prayed for in its petition.
determining which body has jurisdiction over a case
would be to consider not only the status or However, in view of the transfer of jurisdiction over
relationship of the parties but also the nature of the intra-corporate disputes from the SEC to the SCCs,
question that is the subject of their controversy. which are the same RTCs exercising general
Under the nature of the controversy test, the dispute jurisdiction, the question of jurisdiction is no longer
must not only be rooted in the existence of an intra- decisive to the resolution of the instant case. GD
corporate relationship, but must also refer to the Express Worldwide N.V., et al. vs. Court of Appeals, et
enforcement of the parties’ correlative rights and al., G.R. No. 136978, May 8, 2009.
obligations under the Corporation Code as well as
the internal and intra-corporate regulatory rules of Intra-corporate controversy. A corporate officer’s
the corporation. The combined application of the dismissal or removal is always a corporate act and/or
relationship test and the nature of the controversy an intra-corporate controversy, over which the
test has, consequently, become the norm in Securities and Exchange Commission [SEC] (now
determining whether a case is an intra-corporate the Regional Trial Court) has original and exclusive
controversy or is purely civil in character. Strategic jurisdiction. Atty. Virgilio R. Garcia vs. Eastern
Alliance Development Corporation vs. Star Infrastructure Telecommunications Philippines, Inc. et al./Eastern
Development Corporation Corporation, BEDE S. Tabalingcos, Telecommunications Philippines Inc. vs. Atty. Virgilio R.
et al., G.R. No. 187872, November 17, 2010. Garcia, G.R. No. 173115/G.R. No. 173163-64, April 16,
2009.
Intra-corporate controversy. There is no question

that the prayers for the appointment of a
management receiver, the nullification and CORPORATE REHABILITATION
amendment of certain provisions of PEAC’s articles
of incorporation and by-laws, the recognition of the PARI PASSU PRINCIPLE. The petitioners
election of respondent Filchart’s directors, as well as essentially proffer the following issues for resolution:
the inspection of the corporate books, are intra- (1) whether the claims of secured and unsecured
corporate in nature as they pertain to the regulation creditors should be treated pari passu during
of corporate affairs. rehabilitation; (2) whether the pari passu treatment

of creditors during rehabilitation impairs the
Even the issue of respondent Filchart’s status as Assignment Agreement between respondent and
stockholder in PEAC and, concomitantly, its petitioners; (3) whether an impairment in the
capacity to file SEC Case No. 08-97-5746 must be security position of petitioners can be justified as a
threshed out in the intra-corporate proceedings. valid exercise of police power.
The petitioners/secured creditors argue The law governing rehabilitation and

primarily that the pari passu treatment of creditors suspension of actions for claims against corporations
during rehabilitation has no basis in law. According is PD 902-A, as amended. On December 15, 2000, the
to petitioners, all that Presidential Decree No. 902- Court promulgated A.M. No. 00-8-10-SC or the
A49 (PD 902-A) provides is the suspension of all Interim Rules of Procedure on Corporate
claims against the debtor corporation during Rehabilitation, which applies to petitions for
rehabilitation so that the Receiver can exercise his rehabilitation filed by corporations, partnerships and
powers free from judicial or extrajudicial associations pursuant to PD 902-A.
interference. If the equity policy is to be considered
In January 2004, Republic Act No. 8799 (RA
at all, they believe that the equity policy should be
8799), otherwise known as the Securities Regulation
construed to accord creditors with similar rights or
Code, amended Section 5 of PD 902-A, and
uniform treatment. In line with this, petitioners
transferred to the Regional Trial Courts the
assert priority under the Assignment Agreement to
jurisdiction of the Securities and Exchange
receive from Bayantel’s surplus cash flow and to be
Commission (SEC) over petitions of corporations,
paid in full, ahead of all other creditors.
partnerships or associations to be declared in the
state of suspension of payments in cases where the
corporation, partnership or association possesses
The petitioners/secured creditors contend
property to cover all its debts but foresees the
that the pari passu treatment of claims impairs the
impossibility of meeting them when they
Omnibus Agreement and the Assignment Agreement.
respectively fall due or in cases where the
Such impairment, they posit, cannot be justified as a
corporation, partnership or association has no
proper exercise of police power for three reasons:
sufficient assets to cover its liabilities, but is under
first, there is no law which authorizes the equal
the management of a rehabilitation receiver or a
treatment of claims; second, there is no enabling law;
management committee.
and third, it is not reasonably necessary for the
success of the rehabilitation. In order to effectively exercise such
jurisdiction, Section 6(c), PD 902-A empowers the
Rehabilitation is an attempt to conserve and
Regional Trial Court to appoint one or more
administer the assets of an insolvent corporation in
receivers of the property, real and personal, which is
the hope of its eventual return from financial stress
the subject of the pending action before the
to solvency.58 It contemplates the continuance of
Commission whenever necessary in order to preserve
corporate life and activities in an effort to restore and
the rights of the parties-litigants and/or protect the
reinstate the corporation to its former position of
interest of the investing public and creditors.
successful operation and liquidity. The purpose of
rehabilitation proceedings is precisely to enable the Under Section 6, Rule 4 of the Interim
company to gain a new lease on life and thereby Rules, if the court finds the petition to be sufficient
allow creditors to be paid their claims from its in form and substance, it shall issue, not later than
earnings. five (5) days from the filing of the petition, an Order
with the following pertinent effects:
Rehabilitation shall be undertaken when it
is shown that the continued operation of the (a) appointing a Rehabilitation Receiver
and fixing his bond;
corporation is economically feasible and its creditors
(b) staying enforcement of all claims,
can recover, by way of the present value of payments whether for money or
otherwise and whether such enforcement is
projected in the plan, more, if the corporation
by court action or
continues as a going concern than if it is immediately otherwise, against the debtor, its guarantors
and sureties not solidarily
liquidated.
liable with the debtor;
(c) prohibiting the debtor from selling, except those authorized in the plan under Section
encumbering, transferring,
24(c), Rule 4 of the Interim Rules.
or disposing in any manner any of its
properties except in the ordinary
course of business; In this case, in an Order dated April 19,
(d) prohibiting the debtor from making any 2004, the Rehabilitation Court held that “[t]he
payment of its
liabilities outstanding as at the date of filing creditors of Bayantel, whether secured or unsecured,
of the petition; x x x should be treated equally and on the same footing or
pari passu until the rehabilitation proceedings is
The stay order shall be effective from the terminated in accordance with the Interim Rules.”
date of its issuance until the dismissal of the petition The court reiterated this pronouncement in its
or the termination of the rehabilitation proceedings. Decision dated June 28, 2004.
Under the Interim Rules, the petition shall be
Before us, petitioners contend that such pari
dismissed if no rehabilitation plan is approved by the
passu treatment of claims violates not only the “due
court upon the lapse of 180 days from the date of the
regard” provision in the Interim Rules but also the
initial hearing. The court may grant an extension
Contract Clause in the 1987 Constitution. Petitioners
beyond this period only if it appears by convincing
assert precedence in the payment of claims during
and compelling evidence that the debtor may
rehabilitation by virtue of the Assignment Agreement
successfully be rehabilitated. In no instance,
dated September 19, 1995. Under said Agreement,
however, shall the period for approving or
Bayantel assigned, charged, conveyed and transferred
disapproving a rehabilitation plan exceed 18 months
to a Collateral Agent, properties as collateral for the
from the date of filing of the petition.
prompt and complete payment of its obligations to
On the other hand, Section 27, Rule 4 of the secured creditors.
Interim Rules provides when the rehabilitation
The resolution of the issue at hand rests on a
proceedings is deemed terminated:
determination of whether secured creditors may
SEC. 27. Termination of Proceedings. – In enforce preference in payment during rehabilitation
case of the failure of
by virtue of a contractual agreement.
the debtor to submit the rehabilitation plan,
or the disapproval thereof by
the court, or the failure of the rehabilitation Section 6(c), PD 902-A provides that upon
of the debtor because of the appointment of a management committee,
failure to achieve the desired targets or goals
as set forth therein, or the rehabilitation receiver, board or body, all actions for
failure of the said debtor to perform its claims against corporations, partnerships or
obligations under the said plan, or
a determination that the rehabilitation plan associations under management or receivership
may no longer be implemented pending before any court, tribunal, board or body
in accordance with its terms, conditions,
restrictions, or assumptions, the shall be suspended accordingly.66 The suspension of
court shall upon motion, motu proprio, or action for claims against the corporation under a
upon the recommendation of the
Rehabilitation Receiver, terminate the rehabilitation receiver or management committee
proceedings. The proceedings embraces all phases of the suit, be it before the trial
shall also terminate upon the successful
implementation of the court or any tribunal or before this Court.
rehabilitation plan. (Emphasis supplied)
The justification for suspension of actions
for claims is to enable the management committee or
Hence, unless the petition is dismissed for
rehabilitation receiver to effectively exercise its/his
any reason, the stay order shall be effective until the
powers free from any judicial or extrajudicial
rehabilitation plan has been successfully
interference that might unduly hinder or prevent the
implemented. In the meantime, the debtor is
“rescue” of the debtor company. It is intended to give
prohibited from paying any of its outstanding
enough breathing space for the management
liabilities as of the date of the filing of the petition
committee or rehabilitation receiver to make the disallowed the foreclosure of the debtor company’s
business viable again without having to divert property after the latter had filed a Petition for
attention and resources to litigation in various fora. Rehabilitation and Declaration of Suspension of
Payments with the SEC. We ruled that whenever a
In the 1990 case of Alemar’s Sibal & Sons,
distressed corporation asks the SEC for
Inc. v. Judge Elbinias, the Court first enunciated the
rehabilitation and suspension of payments, preferred
prevailing principle which governs the relationship
creditors may no longer assert preference but shall
among creditors during rehabilitation. In said case,
stand on equal footing with other creditors.
G.A. Yupangco sought the issuance of a writ of
Foreclosure shall be disallowed so as not to prejudice
execution to implement a final and executory default
other creditors, or cause discrimination among them.
judgment in its favor and after Alemar’s Sibal & Sons,
In 1999, the Court qualified this ruling by stating
Inc. was placed under rehabilitation. In ordering the
that preferred creditors of distressed corporations
stay of execution, the Court held:
shall stand on equal footing with all other creditors
During rehabilitation receivership, the only after a rehabilitation receiver or management
assets are held in trust committee has been appointed. More importantly,
for the equal benefit of all creditors to
preclude one from obtaining an the Court laid the guidelines for the treatment of
advantage or preference over another by the claims against corporations undergoing
expediency of an
attachment, execution or otherwise. For rehabilitation:
what would prevent an alert
creditor, upon learning of the receivership, 1. All claims against corporations,
from rushing posthaste to the
courts to secure judgments for the partnerships, or associations that are
satisfaction of its claims to the prejudice pending before any court, tribunal, or board,
of the less alert creditors.
without distinction as to whether or not a
As between the creditors, the key phrase is creditor is secured or unsecured, shall be
“equality is equity.”
When a corporation threatened by suspended effective upon the appointment
bankruptcy is taken over by a of a management committee, rehabilitation
receiver, all the creditors should stand on
equal footing. Not anyone of receiver, board, or body in accordance with
them should be given any preference by the provisions of Presidential Decree No.
paying one or some of them
ahead of the others. This is precisely the 902-A.
reason for the suspension of all
pending claims against the corporation 2. Secured creditors retain their preference
under receivership. Instead of
over unsecured creditors, but enforcement
creditors vexing the courts with suits
against the distressed firm, they are of such preference is equally suspended
directed to file their claims with the receiver
upon the appointment of a management
who is a duly appointed
officer of the SEC.71 (Emphasis supplied) committee, rehabilitation receiver, board, or
body. In the event that the assets of the
Since then, the principle of equality in corporation, partnership, or association are
equity has been cited as the basis for placing secured finally liquidated, however, secured and
and unsecured creditors in equal footing or in pari preferred credits under the applicable
passu with each other during rehabilitation. In legal provisions of the Civil Code will definitely
parlance, pari passu is used especially of creditors have preference over unsecured ones.
who, in marshaling assets, are entitled to receive out

Basically, once a management committee or
of the same fund without any precedence over each
rehabilitation receiver has been appointed
other.
in accordance with PD 902-A, no action for
In Rizal Commercial Banking Corporation claims may be initiated against a distressed
v. Intermediate Appellate Court, 73 the Court corporation and those already pending in
court shall be suspended in whatever stage
they may be. Notwithstanding, secured provides that the property may be sold on default in
creditors shall continue to have preferred order to satisfy the obligation for which the security
status but the enforcement thereof is interest is given. Often, the term “lien” is used as a
likewise held in abeyance. However, if the synonym, although lien most commonly refers only
court later determines that the to interests providing security that are created by
rehabilitation of the distressed corporation operation of law, not through agreement of the
is no longer feasible and its assets are debtor and creditor. In contrast, the term “security
liquidated, secured claims shall enjoy interest” means any interest in property acquired by
priority in payment. contract for the purpose of securing payment or
performance of an obligation or indemnifying against
We perceive no good reason to depart from
loss or liability.
established jurisprudence.
Under the Interim Rules, the only pertinent
While Section 24(d), Rule 4 of the Interim
reference to creditor security is found in Section 12,
Rules states that contracts and other arrangements
Rule 4 on relief from, modification or termination of
between the debtor and its creditors shall be
stay order. Said provision states that the creditor is
interpreted as continuing to apply, this holds true
regarded as lacking adequate protection if it can be
only to the extent that they do not conflict with the
shown that: (a) the debtor fails or refuses to honor a
provisions of the plan.
pre-existing agreement with the creditor to keep the
Here, the stipulation in the Assignment property insured; (b) the debtor fails or refuses to
Agreement to the effect that respondent Bayantel take commercially reasonable steps to maintain the
shall pay petitioners in full and ahead of other property; or (c) the property has depreciated to an
creditors out of its cash flow during rehabilitation extent that the creditor is undersecured.
directly impinges on the provision of the approved
Upon a showing that the creditor is lacking
Rehabilitation Plan that “[t]he creditors of Bayantel,
in protection, the court shall order the rehabilitation
whether secured or unsecured, should be treated
receiver to take steps to ensure that the property is
equally and on the same footing or pari passu until
insured or maintained or to make payment or provide
the rehabilitation proceedings is terminated in
replacement security such that the obligation is fully
accordance with the Interim Rules.”
secured. If such arrangements are not feasible, the
During rehabilitation, the only payments court may allow the secured creditor to enforce its
sanctioned by the Interim Rules are those made to claim against the debtor. Nonetheless, the court may
creditors in accordance with the provisions of the deny the creditor the foregoing remedies if allowing
plan. Pertinent to this is Section 5(b), Rule 4 of the so would prevent the continuation of the debtor as a
Interim Rules which states that the terms and going concern or otherwise prevent the approval and
conditions of the rehabilitation plan shall include the implementation of a rehabilitation plan.
manner of its implementation, giving “due regard to
In the context of the foregoing provisions,
the interests of secured creditors”. This very phrase
“giving due regard to the interests of secured
is what petitioners invoke as basis for demanding
creditors” primarily entails ensuring that the
priority in payment out of respondent’s cash flow.
property comprising the collateral is insured,
But petitioners’ reliance thereon is maintained or replacement security is provided such
misplaced. that the obligation is fully secured. The reason for

this rule is simple, in the event that the court
By definition, due regard means terminates the proceedings for reasons other than the
consideration in a degree appropriate to the demands successful implementation of the plan, the secured
of a particular case.76 On the other hand, security creditors may foreclose the securities and the
interest is a form of interest in property which
proceeds thereof applied to the satisfaction of their On this point, suffice it to state that
preferred claims. petitioners are not without any remedy to address a
deficiency in securities, if and when it comes about.
When the Rules of Procedure on Corporate
Under Section 12, Rule 4 of the Interim Rules, a
Rehabilitation took effect on January 16, 2009, the
secured creditor may file a motion with the
“due regard” provision was amended to read:
Rehabilitation Court for the modification or
SEC. 18. Rehabilitation Plan. – The termination of the stay order. If petitioners can show
rehabilitation plan shall that arrangements to insure or maintain the property
include (a) the desired business targets or
goals and the duration and or to make payment or provide additional security
coverage of the rehabilitation; (b) the terms therefor is not feasible, the court shall modify the
and conditions of such
rehabilitation which shall include the stay order to allow petitioners to enforce their claim -
manner of its implementation, giving that is, to foreclose the mortgage and apply the
due regard to the interests of secured
creditors such as, but not limited, to proceeds thereof to their claims. Be that as it may, the
the non-impairment of their security liens or court may deny the creditor this remedy if allowing
interests; x x x.
so would prevent the continuation of the debtor as a
going concern or otherwise prevent the approval and
Despite the additional phrase, however, it is implementation of a rehabilitation plan.
our view that the amendment simply amplifies the
meaning of the “due regard provision” in the Interim Indeed, neither the “due regard provision”
Rules. First, the amendment exemplifies what giving nor contractual arrangements can shackle the
“due regard to the interests of secured creditors” Rehabilitation Court in determining the best means
contemplates, mainly, the non-impairment of of rehabilitating a distressed corporation. Truth be
securities. At the same time, the specific reference to told, the Rehabilitation Court may approve a
“security liens” and “interests,” separated by the rehabilitation plan even over the opposition of
disjunctive “or,” describes what “the interests of creditors holding a majority of the total liabilities of
secured creditors” consist of. Again, lien pertains the debtor if, in its judgment, the rehabilitation of the
only to interests providing security that are created debtor is feasible and the opposition of the creditors
by operation of law while security interests include is manifestly unreasonable. Express Investments III
those acquired by contract for the purpose of Private Limited and Export Development Canada vs. Bayan
securing payment or performance of an obligation or
Telecommunications, et. al., G.R. No. 174457-59, December 5,
indemnifying against loss or liability. Lastly, the
2012.
addition of the phrase “but not limited” in the
amendment shuns a rigid application of the provision Rehabilitation; property covered by rehabilitation.
by recognizing that “giving due regard to the interest Cash dividends held by Belson and claimed by both
of secured creditors” may be rendered in other ways the Alcantaras and Advent Capital does not
than taking care that the security liens and interests constitute corporate assets of the latter that the
of secured creditors are adequately protected. rehabilitation court may, upon motion, require to be
conveyed to the rehabilitation receiver for his
In this case, petitioners Express
disposition.
Investments III Private Ltd. and Export Development
Canada are concerned, not so much with the
Advent Capital asserts that the cash dividends in
adequacy of the securities offered by respondent, but
Belson’s possession formed part of its assets based on
with the devaluation of such securities over time.
paragraph 9 of its Trust Agreement with the
Petitioners fear that the proceeds of respondent’s
Alcantaras,
collateral would be insufficient to cover their claims
in the event of liquidation. According to Advent Capital, it could automatically
deduct its management fees from the Alcantaras’
portfolio that they entrusted to it. Paragraph 9 of the and liabilities and the inventory of assets submitted
Trust Agreement provides that Advent Capital could in support of the petition; (2) accept and
automatically deduct its trust fees from the incorporate, when justified, amendments to the
Alcantaras’ portfolio, “at the end of each calendar schedule of debts and liabilities; (3) recommend to
quarter,” with the corresponding duty to submit to the court the disallowance of claims and rejection of
the Alcantaras a quarterly accounting report within amendments to the schedule of debts and liabilities
20 days after. that lack sufficient proof and justification; (4)
submit to the court and make available for review by
But the problem is that the trust fees that Advent the creditors a revised schedule of debts and
Capital’s receiver was claiming were for past liabilities; (5) investigate the acts, conduct,
quarters. Based on the stipulation, these should have properties, liabilities, and financial condition of the
been deducted as they became due. As it happened, debtor, the operation of its business and the
at the time Advent Capital made its move to collect desirability of the continuance thereof, and any other
its supposed management fees, it neither had matter relevant to the proceedings or to the
possession nor control of the money it wanted to formulation of a rehabilitation plan; (6) examine
apply to its claim. Belson, a third party, held the under oath the directors and officers of the debtor
money in the Alcantaras’ names. Whether it should and any other witnesses that he may deem
deliver the same to Advent Capital or to the appropriate; (7) make available to the creditors
Alcantaras is not clear. What is clear is that the issue documents and notices necessary for them to follow
as to who should get the same has been seriously and participate in the proceedings; (8) report to the
contested. court any fact ascertained by him pertaining to the
causes of the debtor’s problems, fraud, preferences,
The real owner of the trust property is the trustor-
dispositions, encumbrances, misconduct,
beneficiary. In this case, the trustors-beneficiaries
mismanagement, and irregularities committed by the
are the Alcantaras. Thus, Advent Capital could not
stockholders, directors, management, or any other
dispose of the Alcantaras’ portfolio on its own. The
person; (9) employ such person or persons such as
income and principal of the portfolio could only be
lawyers, accountants, appraisers, and staff as are
withdrawn upon the Alcantaras’ written instruction
necessary in performing his functions and duties as
or order to Advent Capital. The latter could not also
rehabilitation receiver; (10) monitor the operations of
assign or encumber the portfolio or its income
the debtor and to immediately report to the court
without the written consent of the Alcantara. All
any material adverse change in the debtor’s business;
these are stipulated in the Trust Agreement. Advent
(11) evaluate the existing assets and liabilities,
Capital and Finance Corporation vs. Nicasio I. Alcantara and earnings and operations of the debtor; (12) determine
Editha I. Alcantara, G.R. No. 183050, January 25, 2012. and recommend to the court the best way to salvage
and protect the interests of the creditors,
Rehabilitation receiver; role. As an officer of the stockholders, and the general public; (13) study the
court and an expert, the rehabilitation receiver plays rehabilitation plan proposed by the debtor or any
an important role in corporate rehabilitation rehabilitation plan submitted during the
proceedings. In Pryce Corporation v. Court of proceedings, together with any comments made
Appeals, the Court held that, “the purpose of the law thereon; (14) prohibit and report to the court any
in directing the appointment of receivers is to protect encumbrance, transfer, or disposition of the debtor’s
the interests of the corporate investors and property outside of the ordinary course of business or
creditors.” Section 14 of the Interim Rules of what is allowed by the court; (15) prohibit and report
Procedure on Corporate Rehabilitation enumerates to the court any payments outside of the ordinary
the powers and functions of the rehabilitation course of business; (16) have unlimited access to the
receiver: (1) verify the accuracy of the petition, debtor’s employees, premises, books, records, and
including its annexes such as the schedule of debts
financial documents during business hours; (17) rehabilitation plan, which may include conversion of
inspect, copy, photocopy, or photograph any the debts or any portion thereof to equity,
document, paper, book, account, or letter, whether in restructuring of the debts, dacion en pago, or sale of
the possession of the debtor or other persons; (18) assets or of the controlling interest; (e) a liquidation
gain entry into any property for the purpose of analysis that estimates the proportion of the claims
inspecting, measuring, surveying, or photographing it that the creditors and shareholders would receive if
or any designated relevant object or operation the debtor’s properties were liquidated; and (f) such
thereon; (19) take possession, control, and custody of other relevant information to enable a reasonable
the debtor’s assets; (20) notify the parties and the investor to make an informed decision on the
court as to contracts that the debtor has decided to feasibility of the rehabilitation plan.
continue to perform or breach; (21) be notified of,
and to attend all meetings of the board of directors The Court notes that petitioners failed to include a
and stockholders of the debtor; (22) recommend any liquidation analysis in their rehabilitation plan.
modification of an approved rehabilitation plan as he Siochi Fishery Enterprises, Inc., et al. vs. Bank of the
may deem appropriate; (23) bring to the attention of Philippine Islands, G.R. No. 193872. October 19, 2011.
the court any material change affecting the debtor’s
ability to meet the obligations under the Corporate rehabilitation; feature. Corporate
rehabilitation plan; (24) recommend the rehabilitation connotes the restoration of the debtor
appointment of a management committee in the to a position of successful operation and solvency, if
cases provided for under Presidential Decree No. it is shown that its continued operation is
902-A, as amended; (25) recommend the termination economically feasible and its creditors can recover
of the proceedings and the dissolution of the debtor more, by way of the present value of payments
if he determines that the continuance in business of projected in the rehabilitation plan, if the
such entity is no longer feasible or profitable or no corporation continues as a going concern than if it is
longer works to the best interest of the stockholders, immediately liquidated.It contemplates a
parties-litigants, creditors, or the general public; and continuance of corporate life and activities in an
(26) apply to the court for any order or directive that effort to restore and reinstate the corporation to its
he may deem necessary or desirable to aid him in the former position of successful operation and solvency,
exercise of his powers. Siochi Fishery Enterprises, Inc., et the purpose being to enable the company to gain a
new lease on life and allow its creditors to be paid
al. vs. Bank of the Philippine Islands, G.R. No. 193872. October
their claims out of its earnings
19, 2011.
A principal feature of corporate rehabilitation is the

Rehabilitation; rehabilitation plan. The
suspension of claims against the distressed
rehabilitation plan is an indispensable requirement
corporation. Jose Marcel Panlilio, et al. vs. Regional Trial
in corporate rehabilitation proceedings. Section 5 of
Court, et al., People of the Philippines and Social Security
the Rules enumerates the essential requisites of a
rehabilitation plan: System, G.R. No. 173846, February 2, 2011
The rehabilitation plan shall include (a) the desired Corporate rehabilitation; suspension of criminal
business targets or goals and the duration and proceedings. The rehabilitation of SIHI and the
coverage of the rehabilitation; (b) the terms and settlement of claims against the corporation is not a
conditions of such rehabilitation which shall include legal ground for the extinction of petitioners’
the manner of its implementation, giving due regard criminal liabilities. There is no reason why criminal
to the interests of secured creditors; (c) the material proceedings should be suspended during corporate
financial commitments to support the rehabilitation rehabilitation, more so, since the prime purpose of
plan; (d) the means for the execution of the the criminal action is to punish the offender in order
to deter him and others from committing the same or
similar offense, to isolate him from society, reform the Philippines and Social Security System, G.R. No. 173846,
and rehabilitate him or, in general, to maintain social February 2, 2011.
order. As correctly observed in Rosario, it would be
absurd for one who has engaged in criminal conduct Suspension of payments; properties owned by
could escape punishment by the mere filing of a private individuals. In Chung Ka Bio v. Intermediate
petition for rehabilitation by the corporation of Appellate Court, this Court resolved in the negative the
which he is an officer. issue of whether private individuals can file with the
SEC petitions for declaration in a state of suspension
The prosecution of the officers of the corporation has of payments. We held that Sec. 5(d) of PD 902-A
no bearing on the pending rehabilitation of the clearly does not allow a mere individual to file the
corporation, especially since they are charged in their petition, which is limited to “corporations,
individual capacities. Such being the case, the partnerships or associations.” Besides, We pointed
purpose of the law for the issuance of the stay order out that the SEC, being a mere administrative
is not compromised, since the appointed agency, is a tribunal of limited jurisdiction and, as
rehabilitation receiver can still fully discharge his such, can only exercise those powers, which are
functions as mandated by law. It bears to stress that specifically granted to them by their enabling
the rehabilitation receiver is not charged to defend statutes. We, thus, concluded that where no
the officers of the corporation. If there is anything authority is granted to hear petitions of individuals
that the rehabilitation receiver might be remotely for suspension of payments, such petitions are
interested in is whether the court also rules that beyond the competence of the SEC. In short, the
petitioners are civilly liable. Such a scenario, SEC has no jurisdiction over private individuals
however, is not a reason to suspend the criminal relative to any petition for suspension of payments,
proceedings, because as aptly discussed in Rosario, whether the private individual is a petitioner or a co-
should the court prosecuting the officers of the petitioner. We have said time and again that the
corporation find that an award or indemnification is SEC’s “jurisdiction is limited only to corporations
warranted, such award would fall under the category and corporate assets;” it has no jurisdiction over the
of claims, the execution of which would be subject to properties of private individuals or natural persons,
the stay order issued by the rehabilitation court. The even if they are the corporation’s officers or
penal sanctions as a consequence of violation of the sureties. We have, thus, consistently applied this
SSS law, in relation to the revised penal code can ruling to the subsequent Ong v. Philippine Commercial
therefore be implemented if petitioners are found
International Bank, Modern Paper Products, Inc. v. Court of
guilty after trial. However, any civil indemnity
Appeals, and Union Bank of the Philippines v. Court of
awarded as a result of their conviction would be
Appeals.
subject to the stay order issued by the rehabilitation
court. Only to this extent can the order of suspension
Here, it is undisputed that the petition for
be considered obligatory upon any court, tribunal,
suspension of payments was collectively filed by the
branch or body where there are pending actions for
five corporations owned by the Lee family. It is
claims against the distressed corporation.
likewise undisputed that together with the
consolidated petition is a list of properties, which
Congress has recently enacted Republic Act No.
included the subject Antipolo properties owned by
10142, or the Financial Rehabilitation and Insolvency
Samuel and Pauline Lee. The fact, however, that the
Act of 2010. Section 18 thereof explicitly provides
subject properties were included in the list
that criminal actions against the individual officer of
submitted to the SEC does not confer jurisdiction on
a corporation are not subject to the Stay or
the SEC over such properties. It is apparent that
Suspension Order in rehabilitation proceedings. Jose
even if the members of the Lee family are joined as
Marcel Panlilio, et al. vs. Regional Trial Court, et al., People of
co-petitioners with the five corporations,
still, this could not confer jurisdiction on the SEC shall be suspended. Ricardo V. Castillo vs.
over the Lee family members—as private Uniwide Warehouse Club, Inc. and/or Jimmy Gow, G.R. No.
individuals—nor could this affect their privately 169725, April 30, 2010.
owned properties.
Corporate rehabilitation; labor claim. The term
Further, the fact that the debts of MDEC and MHI to “claim” has been construed to refer to debts or
Bangkok Bank are secured by the Lee family through demands of a pecuniary nature, or the assertion to
the guarantees will not likewise put the Lee family
have money paid. It was referred to, in Arranza v. B.F.
and their privately owned properties under the
Homes, Inc., as an action involving monetary
jurisdiction of the SEC through the consolidated
considerations and in Philippine Airlines v. Kurangking,
petition for suspension of payments.
the term was identified as the right to payment,
whether or not it is reduced to judgment, liquidated
Therefore, the February 20, 1998 Suspension Order
or unliquidated, fixed or contingent, matured
issued by the SEC did not and could not have
or unmatured, disputed or undisputed, legal or
included the subject properties. Samuel U. Lee, et al. vs.
equitable, and secured or unsecured. Furthermore,
Bangkok Bank Public Company, Limited, G.R. No. 173349,
the actions that were suspended cover all claims
February 9, 2011.
against a distressed corporation whether for damages
founded on a breach of contract of carriage, labor
Corporate rehabilitation; function. Corporate
cases, collection suits or any other claims of a
rehabilitation connotes the restoration of the debtor
pecuniary nature. More importantly, the new rules
to a position of successful operation and solvency, if
on corporate rehabilitation, as well as the interim
it is shown that its continued operation is
rules, provide an all-encompassing definition of the
economically feasible and its creditors can recover by
term and, thus, include all claims or demands of
way of the present value of payments projected in the
whatever nature or character against a debtor or its
rehabilitation plan, more if the corporation continues
property, whether for money or otherwise. There is
as a going concern than if it is immediately
no doubt that petitioner’s claim in this case, arising
liquidated. It contemplates a continuance of
as it does from his alleged illegal dismissal, is a claim
corporate life and activities in an effort to restore and
covered by the suspension order issued by the SEC,
reinstate the corporation to its former position of
as it is one for pecuniary consideration. Ricardo V.
successful operation and solvency, the purpose being
to enable the company to gain a new lease on life and Castillo vs. Uniwide Warehouse Club, Inc. and/or Jimmy Gow,
allow its creditors to be paid their claims out of its G.R. No. 169725, April 30, 2010.
earnings.
Corporate rehabilitation; suspension of proceedings.
An essential function of corporate rehabilitation is Jurisprudence is settled that the suspension of
the mechanism of suspension of all actions and proceedings referred to in the law uniformly applies
claims against the distressed corporation, which to “all actions for claims” filed against a corporation,
operates upon the due appointment of a management partnership or association under management or
committee or rehabilitation receiver. The governing receivership, without distinction, except only those
law concerning rehabilitation and suspension of expenses incurred in the ordinary course of business.
actions for claims against corporations is P.D. No. In the oft-cited case of Rubberworld (Phils.) Inc. v. NLRC,
902-A, as amended. Section 6(c) of the law mandates the Court noted that aside from the given exception,
that, upon appointment of a management committee, the law is clear and makes no distinction as to the
rehabilitation receiver, board, or body, all actions for claims that are suspended once a management
claims against corporations, partnerships or committee is created or a rehabilitation receiver is
associations under management or receivership appointed. Since the law makes no distinctionor
pending before any court, tribunal, board, or body exemptions, neither should this
Court. Ubi lex non distinguit nec nos distinguere debemos. state of suspension of payments. Ricardo V. Castillo vs.
Philippine Airlines, Inc. v. Zamora declares that the Uniwide Warehouse Club, Inc. and/or Jimmy Gow, G.R. No.
automatic suspension of an action for claims against 169725, April 30, 2010.
a corporation under a rehabilitation receiver or
management committee embraces all phases of the Rehabilitation proceedings and the non-
suit, that is, the entire proceedings of an action or impairment clause. In Pacific Wide Realty and
suit and not just the payment of claims. Development Corporation vs. Puerto Azul Land, Inc./Pacific
Wide Realty and Development Corporation Vs. Puerto Azul
The reason behind the imperative nature of a
Land, Inc., G.R. No. 178768/G.R. No. 180893, November 25,
suspension or stay order in relation to the creditors’
2009, the borrower, Puerto Azul Land, Inc. (PALI) is
claims cannot be downplayed, for indeed the
the owner and developer of the Puerto Azul Complex
indiscriminate suspension of actions for claims
situated in Ternate, Cavite. Its business involves the
intends to expedite the rehabilitation of the
development of Puerto Azul into a satellite city with
distressed corporation by enabling the management
residential areas, resort, tourism and retail
committee or the rehabilitation receiver to effectively
commercial centers with recreational areas. In order
exercise its/his powers free from any judicial or
to finance its operations, it obtained loans from
extrajudicial interference that might unduly hinder
various banks, the principal amount of which
or prevent the rescue of the debtor company. To
amounted to aroundPhP640 million.
allow such other actions to continue would only add
to the burden of the management committee or
Because of financial difficulties, PALI subsequently
rehabilitation receiver, whose time, effort and
filed a petition for rehabilitation. After trial, the
resources would be wasted in defending claims
rehabilitation court issued a decision which reads, in
against the corporation, instead of being directed
part:
toward its restructuring and rehabilitation.
The rehabilitation of the petitioner, therefore, shall
At this juncture, it must be conceded that the date
proceed as follows. . .
when the claim arose, or when the action was filed,
has no bearing at all in deciding whether the given 2. Creditors who will not opt for dacion shall be
action or claim is covered by the stay or suspension paid in accordance with the restructuring of the
order. What matters is that as long as the obligations as recommended by the Receiver as
corporation is under a management committee or a follows:
rehabilitation receiver, all actions for claims against
it, whether for money or otherwise, must yield to the a) The obligations to secured creditors will be
greater imperative of corporate revival, excepting subject to a 50% haircut of the principal, and
only, as already mentioned, claims for payment of repayment shall be semi-annually over a period of 10
obligations incurred by the corporation in the years, with 3-year grace period. Accrued interests
ordinary course of business. and penalties shall be condoned. Interest shall be
paid at the rate of 2% p.a. for the first 5 years and 5%
It is, thus, not difficult to see why the subject action p.a. thereafter until the obligations are fully paid. The
for illegal dismissal and damages against respondent petitioner shall allot 50% of its cash flow available
corporation ought to have been suspended at the first for debt service for secured creditors. Upon
instance respondents submitted before the Labor completion of payments to government and
Arbiter their motion to suspend proceedings in the employee accounts, the petitioner’s cash flow
illegal dismissal case. This, considering that at the available for debt service shall be used until the
time the labor case was filed on August 26, 2002, obligations are fully paid.
respondent corporation was undergoing proceedings
for rehabilitation and was later on declared to be in a
b) One half (1/2) of the principal of the petitioner’s On EIB’s argument that the rehabilitation plan
unsecured loan obligations to other creditors shall be violates the non-impairment clause, the court ruled:
settled through non-cash offsetting arrangements,
with the balance payable semi-annually over a period In G.R. No. 180893, the rehabilitation plan is
of 10 years, with 3-year grace period, with interest at contested on the ground that the same is
the rate of 2% p.a. for the first 5 years and 5% p.a. unreasonable and results in the impairment of the
from the 6th year onwards until the obligations are obligations of contract.PWRDC contests the
settled in full. Accrued interest and penalties shall be following stipulations in PALI’s rehabilitation plan:
condoned. (underscoring supplied) fifty percent (50%) reduction of the principal

obligation; condonation of the accrued and
One of the lenders, Export and Industry Bank (EIB), substantial interests and penalty charges; repayment
filed with the Court of Appeals (CA) a petition for over a period of ten years, with minimal interest of
review under Rule 42 of the Rules of Court. The CA two percent (2%) for the first five years and five
affirmed the decision of the rehabilitation court. percent (5%) for the next five years until fully paid,
and only upon availability of cash flow for debt
In its petition before the Supreme Court, EIB argues service.
that the rehabilitation plan was unreasonable and in
violation of the non-impairment clause. The Supreme We find nothing onerous in the terms of PALI’s
Court disagreed. The court first explained the nature rehabilitation plan. The Interim Rules on Corporate
of rehabilitation proceedings: Rehabilitation provides for means of execution of the
rehabilitation plan, which may include, among
Rehabilitation contemplates a continuance of others, the conversion of the debts or any portion
corporate life and activities in an effort to restore and thereof to equity, restructuring of the debts, dacion
reinstate the corporation to its former position of en pago, or sale of assets or of the controlling
successful operation and solvency. The purpose of interest.
rehabilitation proceedings is to enable the company
to gain a new lease on life and thereby allow The restructuring of the debts of PALI is part and
creditors to be paid their claims from its earnings. parcel of its rehabilitation. Moreover, per findings of
The rehabilitation of a financially distressed fact of the RTC and as affirmed by the CA, the
corporation benefits its employees, creditors, restructuring of the debts of PALI would not be
stockholders and, in a larger sense, the general prejudicial to the interest of PWRDC as a secured
public. creditor. Enlightening is the observation of the CA in
this regard,viz.:
Under the Rules of Procedure on Corporate
Rehabilitation, “rehabilitation” is defined as the There is nothing unreasonable or onerous about the
restoration of the debtor to a position of successful 50% reduction of the principal amount when, as
operation and solvency, if it is shown that its found by the court a quo, a Special Purpose Vehicle
continuance of operation is economically feasible and (SPV) acquired the credits of PALI from its creditors
its creditors can recover by way of the present value at deep discounts of as much as 85%. Meaning,
of payments projected in the plan, more if the PALI’s creditors accepted only 15% of their credit’s
corporation continues as a going concern than if it is value. Stated otherwise, if PALI’s creditors are in a
immediately liquidated. position to accept 15% of their credit’s value, with
more reason that they should be able to accept 50%
An indispensable requirement in the rehabilitation of thereof as full settlement by their debtor. x x x.
a distressed corporation is the rehabilitation plan . . .
We also find no merit in PWRDC’s contention that
there is a violation of the impairment clause. Section
10, Article III of the Constitution mandates that no 7(b), Rule 3 of the said Rules explicitly allows the
law impairing the obligations of contract shall be foreclosure by a creditor of a property not belonging
passed. This case does not involve a law or an to a debtor under corporate rehabilitation. Pacific
executive issuance declaring the modification of the Wide Realty and Development Corporation vs. Puerto Azul
contract among debtorPALI, its creditors and its Land, Inc./Pacific Wide Realty and Development Corporation
accommodation mortgagors. Thus, the non-
Vs. Puerto Azul Land, Inc., G.R. No. 178768/G.R. No. 180893,
impairment clause may not be invoked. Furthermore,
November 25, 2009.
as held in Oposa v. Factoran, Jr. even assuming that
the same may be invoked, the non-impairment clause Rehabilitation; opposition. Successful rehabilitation
must yield to the police power of the State. Property of a distressed corporation will benefit its debtors,
rights and contractual rights are not absolute. The creditors, employees, and the economy in general.
constitutional guaranty of non-impairment of The court may approve a rehabilitation plan even
obligations is limited by the exercise of the police over the opposition of creditors holding a majority of
power of the State for the common good of the the total liabilities of the debtor if, in its judgment,
general public. the rehabilitation of the debtor is feasible and the
opposition of the creditors is manifestly
Successful rehabilitation of a distressed corporation
unreasonable. The rehabilitation plan, once
will benefit its debtors, creditors, employees, and the
approved, is binding upon the debtor and all persons
economy in general. The court may approve a
who may be affected by it, including the creditors,
rehabilitation plan even over the opposition of
whether or not such persons have participated in the
creditors holding a majority of the total liabilities of
proceedings or have opposed the plan or whether or
the debtor if, in its judgment, the rehabilitation of the
not their claims have been scheduled. Pacific Wide
debtor is feasible and the opposition of the creditors
Realty and Development Corporation vs. Puerto Azul Land,
is manifestly unreasonable. The rehabilitation plan,
Inc./Pacific Wide Realty and Development Corporation Vs.
once approved, is binding upon the debtor and all
persons who may be affected by it, including the Puerto Azul Land, Inc., G.R. No. 178768/G.R. No. 180893,
creditors, whether or not such persons have November 25, 2009.

participated in the proceedings or have opposed the
Rehabilitation; coverage. The claim of petitioners for
plan or whether or not their claims have been
payment of tuition fees from CAP is included in the
scheduled.”
definition of “claims” under the Interim
Rehabilitation; accommodation mortgagors. The Rules.In addiin, the Interim Rules do not provide
rehabilitation court committed no reversible error that a claim arising from a pre-need contract is an
when it removed TCT No. 133164 from the coverage exception to the power of the trial court to stay
of the stay order. The Interim Rules of Procedure on enforcement of allclaims upon the finding that the
Corporate Rehabilitation is silent on the petition for rehabilitation is sufficient in form and
enforcement of claims specifically against the substance. Kei Marie and Bianca Angelica
properties of accommodation mortgagors. It only both surnamed Abrera, minors, represented by their parents
covers the suspension, during the pendency of the Evelyn C. Abrera, et al. vs. Hon. Romeo F. Barza, in his
rehabilitation, of the enforcement of all claims capacity as Presiding Judge of Regional Trial Court, Branch
against the debtor, its guarantors and sureties not 61, Makati City and College Assurance Plan Philippines, Inc.
solidarily liable with the mortgagor.
G.R. No. 171681, September 11, 2009.
Furthermore, the newly adopted Rules of Procedure

on Corporate Rehabilitation has a specific provision
for this special arrangement among a debtor, its FINANCIAL REHABILITATION AND
creditor and its accommodation mortgagor. Section INSOLVENCY ACT OF 2010
Republic Act No. 10142, the Financial Rehabilitation The Out-of-Court or Informal Restructuring
and Insolvency Act (FRIA) of 2010. The FRIA Agreements or Rehabilitation Plans (see Chapter IV
expressly repealed the Insolvency Law (Act No. of the FRIA) must be agreed upon by the debtor, and
1956) as amended, and impliedly repealed, to the approved by creditors holding at least 85% of the
extent that they are inconsistent with the provisions debtor’s total liabilities, including secured creditors
of the Act, all other laws, orders, rules and holding at least 67% of the secured obligations and
regulations. The FRIA is significant because it covers unsecured creditors holding at least 75% of the
the rehabilitation of sole proprietorships, unsecured obligations.
partnerships and corporations, provides the legal
basis for our procedural rules on corporate A liquidator or rehabilitation receiver may be a
rehabilitation (the latest of which is A.M. No. 00-8- juridical entity, provided that it designates as a
10-SC, promulgated by the Supreme Court en banc representative a natural person who possesses all the
on December 2, 2009, and took effect on January 16, qualifications and none of the disqualifications. The
2009), and consolidates the laws on insolvency and juridical entity and the representative are solidarily
rehabilitation. The FRIA shall take effect 15 days liable for all obligations and responsibilities of a
after its complete publication in the Official Gazette liquidator or rehabilitation receiver.
or in at least two national newspapers of general

The Rehabilitation Plan may include various means
circulation.
to restore the financial well-being and viability of an
The FRIA provides for different types of insolvent debtor, including but not limited to debt
rehabilitation proceedings for sole proprietorships, forgiveness, debt rescheduling, reorganization or
partnerships and corporations. The Court- quasi-reorganization, dacion en pago, debt-to-equity
Supervised Rehabilitation (see Chapter II of the conversion, sale of business (or parts of it) as a going
FRIA) includes: concern, or setting up of a new business entity, or

other similar arrangements as may be approved by
(a) Voluntary Proceedings which is a rehabilitation the rehabilitation court or creditors. The FRIA
petition initiated by the sole proprietor, by a majority however does not specify limitations on the scope of
of the partners, or by a majority of the board of these means, such as the amount or percentage of
directors/trustees and authorized by the debt that may be forgiven, or the maximum period of
corporation’s stockholders representing at least 2/3 time when debts may be rescheduled.
of the outstanding capital stock or 2/3 of the
members, and The FRIA expressly allows for rehabilitation
proceedings for a group of debtors, which should be
(b) Involuntary Proceedings which is a rehabilitation (a) corporations that are financially related to one
petition initiated by creditors with an aggregate another as parent corporation, subsidiaries or
claim of at least P1 Million or at least 25% of the affiliates, (b) partnerships that are owned more than
subscribed capital stock or partners’ contribution, 50% by the same person, and (c) single
whichever is higher. The Pre-Negotiated proprietorships that are owned by the same person.
Rehabilitation (see Chapter III of the FRIA) is The group of debtors may jointly file a rehabilitation
initiated by the insolvent debtor, by itself or jointly petition when one or more of its members foresees
with any of its creditors, and seeks the approval of a the impossibility of meeting debts when they
pre-negotiated Rehabilitation Plan endorsed or respectively fall due, and the financial distress will
approved by creditors holding at least 2/3 of the likely adversely affect the financial condition and/or
debtor’s total liabilities, including secured creditors operations of the other members of the group, and/or
holding more than 50% of the secured claims, and the participation of the other members is essential
unsecured creditors holding more than 50% of the under the terms and conditions of the proposed
unsecured claims. Rehabilitation Plan. In this connection however, the
assets and liabilities of a debtor may not be on the claims of the petitioners, and the due and
commingled or aggregated with those of another, demandable payments have not been made for at
unless the latter is a related enterprise that is owned least 60 days or that the debtor has generally failed to
or controlled, directly or indirectly, by the same meet its liabilities as they fall due, or (b) a creditor,
interest, and only where (i) there was commingling other than petitioners, has initiated foreclosure
in fact of assets and liabilities prior to the proceedings against the debtor that will prevent the
commencement of the rehabilitation proceedings, (ii) debtor from paying its debts as they become due or
they have common creditors and it will be more will render it insolvent.
convenient to treat them together rather than
separately, (iii) the related enterprise voluntarily If the court finds the rehabilitation petition sufficient
accedes to join the debtor as party petitioner and to in form and substance, it shall, within 5 working
commingle its assets and liabilities with the debtor’s, days from the filing of a petition, issue a
and (iv) the consolidation of assets and liabilities is Commencement Order, which shall include a Stay or
beneficial to all concerned and promotes the Suspension Order. If the petition is deficient, the
objectives of rehabilitation. rehabilitation court may, in its discretion, grant

petitioner a reasonable period to amend or
The FRIA punishes an individual debtor, a sole supplement the petition, or to submit such
proprietor, partners, or directors and officers of a documents as may be necessary or proper to put the
debtor, having notice of the commencement of the petition in order, in which case, the 5 working days
proceedings, or having reason to believe that shall be counted from the date of such filing or
rehabilitation or liquidation proceedings are about to submission.
be commenced, or in contemplation of these
proceedings, (a) dispose of or caused to be disposed The rehabilitation proceedings are declared
any property of the debtor other than in the ordinary commenced upon the issuance of the
course of business, or authorize or approve any Commencement Order. The FRIA clarifies, among
transaction in fraud of creditors or in a manner others, that the Commencement Order (a) prohibits
grossly disadvantageous to the debtor and/or and renders null and void extrajudicial process or
creditors, or (b) conceal, or authorize or approve the activity to seize property, sell encumbered property,
concealment of, from the creditors, or embezzles or or otherwise attempt to collect on or enforce a claim
misappropriates, any property of the debtor. They against the debtor, after the commencement date,
shall be liable for double the value of the property unless otherwise allowed under the FRIA, (b)
sold, embezzled, or disposed of, or double the renders null and void any set-off, after the
amount of the transaction involved, whichever is commencement date, of any debt owed to the debtor
higher. by any of the debtor’s creditors, and (c) renders null

and void the perfection, after the commencement
The FRIA authorizes any bank, whether universal or date, of any lien against the debtor’s properties. The
not, to acquire and hold an equity interest in the FRIA also declares that attempts to seek legal or
debtor or its subsidiaries, pursuant to an approved other recourse against the debtor outside the
Rehabilitation or Liquidation Plan, subject to the rehabilitation proceedings shall be sufficient to
ownership limits applicable to universal banks for support a finding of indirect contempt of court.
equity investments, and provided that such equity
investment or interest shall be disposed of by the The FRIA enumerates the exceptions to the Stay or
bank within a period of 5 years or as may be Suspension Order, i.e., where the order shall not
prescribed by the Monetary Board. apply, including but not limited to (a) cases already
pending appeal in the Supreme Court as of
Involuntary Proceedings may be initiated by commencement date, (b) cases pending or filed in a
creditors if (a) there is no genuine issue of fact or law specialized court or quasi-judicial agency which the
court, in its discretion, may determine, is capable of receiver shall review, revise and/or recommend
resolving the claim more quickly, fairly, and action on the Rehabilitation Plan, and submit the
efficiently than the rehabilitation court, (c) same or a new one to the court, within 90 days from
enforcement of claims against sureties and other the due course order; (i) the rehabilitation receiver
persons solidarily liable with the debtor, and third shall have 20 days from assumption of office within
party or accommodation mortgagors as well as which to establish a preliminary registry of claims,
issuers of letters of credit, unless the property subject which may be challenged by the debtor, creditors,
of the mortgage is necessary for the rehabilitation of stakeholders and other interested parties within 30
the debtor, and (d) any criminal action against the days from the expiration of the 20-day period; (j) the
individual debtor, owner, partner, director or officer rehabilitation receiver shall submit the registry of
of the debtor. claims (which shall include undisputed claims not
subject of any challenge) upon expiration of the 30-
The FRIA declares that, upon the issuance of the day period; (k) within 20 days from notice by the
Commencement Order, up to the approval of the rehabilitation receiver that the Rehabilitation Plan is
Rehabilitation Plan or the dismissal of the petition, ready for examination, the rehabilitation receiver
whichever is earlier, the imposition of all taxes and shall convene the creditors for purposes of voting on
fees, including penalties, interests, and charges, due the Rehabilitation Plan; (l) within the same 20-day
to the national government and the local government period, a creditor may file an objection to the
unit, shall be considered waived, in the furtherance Rehabilitation Plan on limited grounds; and (m) the
of the objectives of rehabilitation. court shall have a maximum period of 1 year from the
filing of the petition to confirm the Rehabilitation
The FRIA provides shorter periods for the different
Plan and, if no Rehabilitation Plan is confirmed
stages of the rehabilitation proceedings. For example,
within said period, the proceedings may, upon
(a) the Commencement Order shall be published in a
motion or motu proprio, be converted into
newspaper of general circulation once a week for at
liquidation proceedings.
least 2 consecutive weeks, with the first publication
being made within 7 days from its issuance; (b) Under the FRIA, all valid and subsisting contracts of
copies of the petition shall be personally served on the debtor with creditors and other third parties as
creditors holding at least 10% of the total liabilities of at the commencement date shall continue in force,
the debtor (or on the debtor, in creditor-initiated unless cancelled by virtue of a final judgment of a
rehabilitation proceedings) within 5 days from the competent court prior to the issuance of the
issuance of the Commencement Order; (c) creditors Commencement Order or at any time thereafter by
shall file their claims with the court, and nominate the rehabilitation court. The debtor, with the
any other person as rehabilitation receiver, at least 5 consent of the rehabilitation receiver, shall, within 90
days before the initial hearing; (d) the initial hearing days following the commencement date, inform its
shall be set not more than 40 days from the filing of contractual counter-party whether or not it is
the petition; (e) creditors shall file their comment on confirming the particular contract. Contractual
the petition and the Rehabilitation Plan within a obligations of the debtor arising or performed during
period of not more than 20 days from the initial this period, and afterwards for confirmed contracts,
hearing; (f) the rehabilitation receiver shall submit to shall be considered administrative expenses.
the court a report on his preliminary findings and Contracts not confirmed within the deadline shall be
recommendations within 40 days from the initial considered terminated. Any contract of the debtor
hearing; (g) the court shall give due course to the may be cancelled or terminated for any ground
petition, dismiss the petition, or convert the petition provided by law.
into a liquidation proceedings, within 10 days from
receipt of the rehabilitation receiver’s report; (h) if For Pre-Negotiated Rehabilitation, (a) any creditor
the petition is given due course, the rehabilitation or other interested party may submit to the court a
verified objection to the petition or the rehabilitated, or when the Rehabilitation Plan is not
Rehabilitation Plan on specified grounds within 8 confirmed by the rehabilitation court within 1 year
days from the date of the second publication of the from filing of the petition, or when the rehabilitation
Commencement Order; (b) if there is no such proceedings is terminated due to failure of
objection, the court shall approve the Rehabilitation rehabilitation or dismissal of the rehabilitation
Plan within 10 days from the date of said second petition for reasons other than technical grounds, or
publication; (c) hearings on any objection shall be at any time upon the recommendation of the
held not earlier than 20 days, and not later than 30 rehabilitation receiver that the rehabilitation of the
days, from the date of said second publication; and debtor is not feasible. The Involuntary Liquidation is
(d) the court shall have a maximum period of 1 year initiated by 3 or more creditors whose aggregate
from the filing of the petition to approve the claims amount to at least P1 Million or at least 25%
Rehabilitation Plan although, if the court fails to act of the subscribed capital stock or partners’
within said period, the Rehabilitation Plan shall be contribution, whichever is higher, also via a verified
deemed approved. petition or a verified motion in a court-supervised or
pre-negotiated rehabilitation proceedings.
For Out-of-Court or Informal Restructuring
Agreements or Rehabilitation Plans, a standstill On the other hand, for insolvent individual debtors
period agreed upon the parties pending negotiation (see Chapter VI of the FRIA), the FRIA provides for
and finalization of the Restructuring Agreement or (a) the suspension of payments, when the debtor
Rehabilitation Plan shall be effective and enforceable possesses sufficient properties to cover all his debts
also against other creditors if (a) such agreement is but foresees the impossibility of meeting them when
approved by creditors representing more than 50% of they respectively fall due, (b) voluntary liquidation,
the total liabilities of the debtor, (b) notice of the initiated by the debtor who does not have sufficient
agreement is published in a newspaper of general properties to cover his liabilities and owes debts
circulation once a week for at least 2 consecutive exceeding P500 thousand, and (c) involuntary
weeks, and (c) the standstill period does not exceed liquidation, initiated by creditors with claims
120 days from the date of effectivity. The approved aggregating at least P500 thousand.
Restructuring Agreement or Rehabilitation Plan is
granted a cram-down effect such that it shall have SECURITIES REGULATION CODE
the same legal effect as a court-confirmed

Investment contract; definition. The Securities
Rehabilitation Plan. The notice thereof shall be
Regulation Code treats investment contracts as
published in a newspaper of general circulation once
“securities” that have to be registered with the SEC
a week for at least 3 consecutive weeks, and the
before they can be distributed and sold. An
Restructuring Agreement or Rehabilitation Plan
investment contract is a contract, transaction, or
shall be effective 15 days from the date of the last
scheme where a person invests his money in a
publication of the notice.
common enterprise and is led to expect profits
The FRIA also provides for the liquidation of primarily from the efforts of others.
insolvent juridical debtors (see Chapter V of the
Apart from the definition, which the Implementing
FRIA). The Voluntary Liquidation is initiated by the
Rules and Regulations provide, Philippine
debtor via a verified petition, or a verified motion in
jurisprudence has so far not done more to add to the
court-supervised or pre-negotiated rehabilitation
same. Of course, the United States Supreme Court,
proceedings. In this connection, rehabilitation
grappling with the problem, has on several occasions
proceedings may also be converted into liquidation
discussed the nature of investment contracts. That
proceedings, when the rehabilitation court finds that
court’s rulings, while not binding in the Philippines,
the debtor is insolvent and there is no substantial
enjoy some degree of persuasiveness insofar as they
likelihood for the debtor to be successfully
are logical and consistent with the country’s best open to the investing public in general. The Bank also
interests. requested the Court to take into consideration the
financial impact to the cause of “veteranism”;
The United States Supreme Court held in Securities compliance with the reportorial requirements under
and Exchange Commission v. W.J. Howey Co. that, the SRC, if the Bank would be considered a “public
for an investment contract to exist, the following company,” would compel the Bank to spend
elements, referred to as the Howey test must concur: approximately P40 million just to reproduce and
(1) a contract, transaction, or scheme; (2) an mail the “Information Statement” to its 400,000
investment of money; (3) investment is made in a shareholders nationwide.
common enterprise; (4) expectation of profits; and
(5) profits arising primarily from the efforts of others. Rule 3(1)(m) of the Amended Implementing Rules
Thus, to sustain the SEC position in this case, PCI’s and Regulations of the SRC defines a “public
scheme or contract with its buyers must have all company” as “any corporation with a class of equity
these elements. securities listed on an Exchange or with assets in
excess of Fifty Million Pesos (P50,000,000.00) and
An example that comes to mind would be the long- having two hundred (200) or more holders, at least
term commercial papers that large companies, like two hundred (200) of which are holding at least one
San Miguel Corporation (SMC), offer to the public hundred (100) shares of a class of its equity
for raising funds that it needs for expansion. When securities.”
an investor buys these papers or securities, he invests
his money, together with others, in SMC with an From these provisions, it is clear that a “public
expectation of profits arising from the efforts of those company,” as contemplated by the SRC, is not
who manage and operate that company. SMC has to limited to a company whose shares of stock are
register these commercial papers with the SEC publicly listed; even companies like the Bank, whose
before offering them to investors. shares are offered only to a specific group of people,
are considered a public company, provided they meet
Here, PCI’s clients do not make such investments. the requirements enumerated above.
They buy a product of some value to them: an
Internet website of a 15-MB capacity. The client can The records establish, and the Bank does not dispute,
use this website to enable people to have internet that the Bank has assets exceeding P50,000,000.00
access to what he has to offer to them, say, some skin and has 395,998 shareholders. It is thus considered a
cream. The buyers of the website do not invest public company that must comply with the
money in PCI that it could use for running some reportorial requirements set forth in Section 17.1 of
business that would generate profits for the the SRC. Philippine Veterans Bank vs. Justina Callangan,
investors. The price of US$234.00 is what the buyer etc. and/or the Securities and Exchange Commission G.R. No.
pays for the use of the website, a tangible asset that 191995, August 3, 2011.
PCI creates, using its computer facilities and
technical skills. Securities and Exchange Commission vs. BANKING
Prosperity.Com, Inc., G.R. No. 164197, January 25, 2012.
Banks; outsourcing of functions. D.O. No. 10 is but a
Securities Regulation Code; public company. The guide to determine what functions may be
Philippine Veterans Bank (the “Bank”) argued that it contracted out, subject to the rules and established
is not a “public company” subject to the reportorial jurisprudence on legitimate job contracting and
requirements under Section 17.1 of the SRC because prohibited labor only contracting.41 Even if the
its shares can be owned only by a specific group of Court considers D.O. No. 10 only, BPI would still be
people, namely, World War II veterans and their within the bounds of D.O. No. 10 when it contracted
widows, orphans and compulsory heirs, and is not out the subject functions. This is because the subject
functions were not related or not integral to the main negligent in the conduct of its business when it
business or operation of the principal which is the extended unsecured loans to the debtors. Worse, it
lending of funds obtained in the form of deposits.42 was in serious breach of its duty as the trustee of the
From the very definition of “banks” as provided MTI. It was not able to protect the interests of the
under the General Banking Law, it can easily be parties and was even instrumental in violating the
discerned that banks perform only two (2) main or terms of the MTI, to the detriment of the parties
basic functions – deposit and loan functions. Thus, thereto. Thus, petitioner has only itself to blame for
cashiering, distribution and bookkeeping are but being left with insufficient recourse against
ancillary functions whose outsourcing is sanctioned petitioner under the assailed MTI. Metropolitan Bank
under CBP Circular No. 1388 as well as D.O. No. 10. and Trust Company vs. Centro Development Corp., et al., G.R.
Even BPI itself recognizes that deposit and loan No. 180974, June 13, 2012.
functions cannot be legally contracted out as they are
directly related or integral to the main business or PDIC Law; Inter-branch deposits; not covered by
operation of banks. The CBP’s Manual of Regulations PDIC Law. As explained by the respondents, the
has even categorically stated and emphasized on the transfer of funds, which resulted from the inter-
prohibition against outsourcing inherent banking branch transactions, took place in the books of
functions, which refer to any contract between the account of the respective branches in their head
bank and a service provider for the latter to supply, office located in theUnited States. Hence, because it
or any act whereby the latter supplies, the manpower is payable outside of the Philippines, it is not
to service the deposit transactions of the former. BPI considered a deposit pursuant to Section 3(f) of the
Employees Union-Davao City-Fubu (BPIEU-Davao City- PDIC Charter:
Fubu) v. Bank of the Philippine Islands (BPI), et al., G.R. No.
Sec. 3(f) The term “deposit” means the unpaid
174912, July 24, 2013.
balance of money or its equivalent received by a bank
Banks; degree of diligence. Being a banking in the usual course of business and for which it has
institution, DBP owed it to Guariña Corporation given or is obliged to give credit to a commercial,
toexercise the highest degree of diligence, as well as checking, savings, time or thrift account or which is
to observe the high standards of integrity and evidenced by its certificate of deposit, and trust
performance in all its transactionsbecause its funds held by such bank whether retained or
business was imbued with public interest. The high deposited in any department of said bank or deposit
standards were also necessary to ensure public in another bank, together with such other
confidence in the banking system. Development Bank obligations of a bank as the Board of Directors shall
of the Philippines (DBP) v. Guariña Agricultural and find and shall prescribe by regulations to be deposit
Realty Development Corporation, G.R. No. 160758. liabilities of the Bank; Provided, that any obligation
January 15, 2014. of a bank which is payable at the office of the bank
located outside of the Philippines shall not be a
Banks; diligence required. Republic Act No. 8971, or deposit for any of the purposes of this Act or
the General Banking Law of 2000, recognizes included as part of the total deposits or of the
the vital role of banks in providing an environment insured deposits; Provided further, that any insured
conducive to the sustained development of the bank which is incorporated under the laws of the
national economy and the fiduciary nature of Philippines may elect to include for insurance its
banking; thus, the law requires banks to have high deposit obligation payable only at such branch.
standards of integrity and performance. The fiduciary
nature of banking requires banks to assume a degree The testimony of Mr. Shaffer as to the treatment of
of diligence higher than that of a good father of a such inter-branch deposits by the FDIC, after which
family. In the case at bar, petitioner itself was PDIC was modelled, is also persuasive. Inter-branch
deposits refer to funds of one branch deposited in
another branch and both branches are part of the secured and unsecured loans regardless of maturity.
same parent company and it is the practice of the The effect of these circulars is to allow the parties to
FDIC to exclude such inter-branch deposits from a agree on any interest that may be charged on a loan.
bank’s total deposit liabilities subject to assessment. The virtual repeal of the Usury Law is within the
PDIC vs. Citibank, N.A. and Bank of America, S.T. & N.A, range of judicial notice which courts are bound to
G.R. No. 170290, April 11, 2012. take into account. Although interest rates are no
longer subject to a ceiling, the lender still does not
Banks; degree of diligence required. The General have an unbridled license to impose increased
Banking Law of 2000 requires of banks the highest interest rates. The lender and the borrower should
standards of integrity and performance. The banking agree on the imposed rate, and such imposed rate
business is impressed with public interest. Of should be in writing.
paramount importance is the trust and confidence of
the public in general in the banking industry. Here, the stipulations on interest rate repricing are
Consequently, the diligence required of banks is valid because (1) the parties mutually agreed on said
more than that of a Roman pater familias or a good stipulations; (2) repricing takes effect only upon
father of a family. The highest degree of diligence is Solidbank’s written notice to Permanent of the new
expected. Philippine Commercial Bank vs. Antonio B. interest rate; and (3) Permanent has the option to
prepay its loan if Permanent and Solidbank do not
Balmaceda and Rolando N. Ramos, G.R. No. 158143,
agree on the new interest rate. The phrases
September 21, 2011.
“irrevocably authorize,” “at any time” and
Banks; negligence. The petitioner, being a banking “adjustment of the interest rate shall be effective
institution, had the direct obligation to supervise from the date indicated in the written notice sent to
very closely the employees handling its depositors’ us by the bank, or if no date is indicated, from the
accounts, and should always be mindful of the time the notice was sent,” emphasize that
fiduciary nature of its relationship with the Permanent should receive a written notice from
depositors. Such relationship required it and its Solidbank as a condition for the adjustment of the
employees to record accurately everysingle interest rates. Solidbank Corporation vs. Permanent
transaction, and as promptly as possible, considering Homes, Inc., G.R. No. 171925, July 23, 2010.
that the depositors’ accounts should always reflect
the amounts of money the depositors could dispose Bank; same day crediting. Based on the records, there
of as they saw fit, confident that, as a bank, it would is no sufficient evidence to show that BPI
deliver the amounts to whomever they directed. If it conclusively confirmed the same-day crediting of the
fell short of that obligation, it should bear the RCBC check which Suarez’s client deposited late on
responsibility for the consequences to the depositors, 16 June 1997.
who, like the respondent, suffered particular

Clearly, Suarez failed to prove that BPI confirmed the
embarrassment and disturbed peace of mind from the
same-day crediting of the RCBC check, or that BPI
negligence in the handling of the accounts. Citytrust
assured Suarez that he had sufficient available funds
Banking Corporation vs. Carlos Romulo N. Cruz, G.R. No.
in his account. Accordingly, BPI was not estopped
157049, August 11, 2010.
from dishonoring the checks for inadequacy of
available funds in Suarez’s account since the RCBC
Usury Law; interest rate ceiling. The Usury Law had
check remained uncleared at that time.
been rendered legally ineffective by Resolution No.
224 dated 3 December 1982 of the Monetary Board of
While BPI had the discretion to undertake the same-
the Central Bank, and later by Central Bank Circular
day crediting of the RCBC check, and disregard the
No. 905 which took effect on 1 January 1983. These
banking industry’s 3-day check clearing policy,
circulars removed the ceiling on interest rates for
Suarez failed to convincingly show his entitlement to
such privilege. As BPI pointed out, Suarez had no sufficient that a person offering to redeem manifests
credit or bill purchase line with BPI which would his desire to do so. The statement of intention must
qualify him to the exceptions to the 3-day check be accompanied by an actual
clearing policy. and simultaneous tender of payment. This
constitutes the exercise of the right to repurchase. In
Considering that there was no binding several cases decided by the Court where the right to
representation on BPI’s part as regards the same-day repurchase was held to have been properly exercised,
crediting of the RCBC check, no negligence can be there was an unequivocal tender of payment for the
ascribed to BPI’s dishonor of the checks precisely full amount of the repurchase price. Otherwise, the
because BPI was justified in dishonoring the checks offer to redeem is ineffectual.
for lack of available funds in Suarez’s account. Bank of
the Philippines Islands Vs. Reynald R. Suarez, G.R. No. 167750, Bona fide redemption necessarily implies a
March 15, 2010. reasonable and valid tender of the entire repurchase
price, otherwise the rule on the redemption period
Banks; unilateral freezing of bank account. We also fixed by law can easily be circumvented. Allied
find that PCIB acted illegally in freezing and debiting Banking Corporation vs. Ruperto Jose H. Mateo, represented
Ramos’ bank account. In BPI Family Bank v. Franco, by Warlito Mateo, as Attorney-in-fact, G.R. No. 167420,
we cautioned against the unilateral freezing of bank June 5, 2009
accounts by banks, noting that:
TRUTH IN LENDING ACT
More importantly, [BPI Family Bank] does not have a
unilateral right to freeze the accounts of Franco Truth in Lending Act. The Monetary Board issued
based on its mere suspicion that the funds therein Circular No. 730, Series of 2011 on July 20, 2011
were proceeds of the multi-million peso scam Franco entitled “Updated Rules Implementing the Truth in
was allegedly involved in. To grant [BPI Family Lending Act to Enhance Loan Transaction
Bank], or any bank for that matter, the right to take Transparency.” These Updated Rules shall take effect
whatever action it pleases on deposits which it on July 1, 2012.
supposes are derived from shady transactions, would
open the floodgates of public distrust in the banking The Truth in Lending Act was a law passed in 1963
industry. to promote awareness by the public of the true cost
of credit. It requires a creditor to furnish the debtor
We see no legal merit in PCIB’s claim that legal prior to the consummation of the transaction a clear
compensation took place between it and Ramos, statement showing, among others, the total amount
thereby warranting the automatic deduction from to be financed, the finance charges, and the
Ramos’ bank account. For legal compensation to take percentage that the finance charges bear to the total
place, two persons, in their own right, must first be amount to be financed expressed as a simple annual
creditors and debtors of each other. While PCIB, as rate. A person who willfully violates the provisions
the depositary bank, is Ramos’ debtor in the amount of the Act may be fined or imprisoned, or both.
of his deposits, Ramos is not PCIB’s debtor under the Violation of the Act, however, will not affect the
evidence the PCIB adduced. PCIB thus had no basis, validity of the credit transaction.
in fact or in law, to automatically debit from Ramos’
bank account. Philippine Commercial Bank vs. Antonio B. The Act gave the Monetary Board the power to
Balmaceda and Rolando N. Ramos, G.R. No. 158143, promulgate rules and regulations to carry out its
provisions. Pursuant to that rulemaking power, the
September 21, 2011.
Monetary Board mandated under the Updated Rules
Redemption of foreclosed property; General Banking that banks may only charge interest based on the
Act. The general rule in redemption is that it is not outstanding balance of a loan at the beginning of an
interest period. For a loan where the principal is decisions cited BPI’s alleged violation of the Truth in
payable in installments, interest per installment Lending Act and the ruling of the Court in
period shall be calculated based on the outstanding New Sampaguita Builders Construction, Inc. v.
balance of the loan at the beginning of each Philippine National Bank to justify their deletion of
installment period. All loan-related documents and the penalty charges.
marketing materials shall show repayment schedules
in a manner consistent with these guidelines. In this case, although BPI failed to state the penalty
charges in the disclosure statement, the promissory
The Updated Rules also clarified the definition of note that the Yus signed, on the same date as the
finance charge as including interest, fees, service disclosure statement, contained a penalty clause that
charges, discounts and such other charges incident to said: “I/We jointly and severally, promise to further
the extension of credit. On the other hand, simple pay a late payment charge on any overdue amount
annual rate has been defined as the uniform herein at the rate of 3% per month.” The promissory
percentage which represents the ratio between the note is an acknowledgment of a debt and
finance charge and the amount to be financed under commitment to repay it on the date and under the
the assumption that the loan is payable in one year conditions that the parties agreed on. It is a valid
with single payment upon maturity and there are no contract absent proof of acts which might have
upfront deductions to principal. If the loan has terms vitiated consent.
different from these assumptions, the effective
annual interest shall be calculated and disclosed to The question is whether or not the reference to the
the borrower as the true cost of the loan. The total penalty charges in the promissory note constitutes
amount to be financed, the finance charges, substantial compliance with the disclosure
expressed in terms of pesos and centavos, the net requirement of the Truth in Lending Act.
proceeds of the loan, and the percentage that the

The Court has affirmed that financial charges are
finance charge bears to the total amount to be
amply disclosed if stated in the promissory note in
financed expressed as a simple annual rate or an
the case of Development Bank of the Philippines
effective annual interest rate shall be disclosed to the
v. Arcilla, Jr. The Court there said, “Under Circular
borrower in a disclosure statement prior to the
158 of the Central Bank, the lender is required to
consummation of the transaction.
include the information required by R.A. 3765 in the
Banks are required to post in conspicuous places in contract covering the credit transaction or any other
their premises the information as contained in the document to be acknowledged and signed by the
revised format of disclosure statement and the borrower. In addition, the contract or document shall
posters shall include an explicit notice that the specify additional charges, if any, which will be
disclosure statement is a required attachment to the collected in case certain stipulations in the contract
loan contract and that the customer has a right to are not met by the debtor.” In this case, the
demand a copy of such disclosure. promissory notes signed by the Yus contained data,
including penalty charges, required by the Truth in
The revised format of disclosure statement is Lending Act. They cannot avoid liability based on a
specifically targeted towards small business, retail rigid interpretation of the Truth in Lending Act that
and consumer loans, the borrowers of which, contravenes its goal. Bank of the Philippines Islands, Inc.
historically, are almost always the victims of lack of vs. Sps. Norman and Angelina Yu, et al., G.R. No. 184122,
information or misinformation regarding the true January 20, 2010.
cost of credit.
BANK SECRECY LAWS
Truth in Lending Act; disclosure of financial charges
in the promissory note. Both the RTC and CA
Bank secrecy; foreign currency deposits. Republic Under the PDIC regulation, the account is an
Act No. 1405 was enacted for the purpose of giving investment product if no debtor-creditor
encouragement to the people to deposit their money relationship exists between the bank and the client,
in banking institutions and to discourage private and instead, the relationship is that of trustor-trustee
hoarding so that the same may be properly utilized or principal-agent; the principal amount is not
by banks in authorized loans to assist in the protected; the amount is not withdrawable on
economic development of the country. It covers all demand; and other analogous features. On the other
bank deposits in the Philippines and no distinction hand, deposit accounts are unfunded or are fictitious
was made between domestic and foreign deposits. or fraudulent if the bank did not receive the money
Thus, Republic Act No. 1405 is considered a law of alleged to be deposited, or when the deposit is
general application. On the other hand, Republic Act simulated or feigned, as when it was made to appear
No. 6426 was intended to encourage deposits from that money was received by the bank but in fact was
foreign lenders and investors. It is a special law not, or when the bank employed means calculated to
designed especially for foreign currency deposits in deceive.
the Philippines. A general law does not nullify a
specific or special law. Generalia specialibus non Deposit accounts constituting or emanating from
unsafe or unsound banking practices are those which
derogant. Therefore, it is beyond cavil that Republic
are so determined by the PDIC, in consultation with
Act No. 6426 applies in this case.
the Bangko Sentral ng Pilipinas. Under the PDIC
Applying Section 8 of Republic Act No. 6426, absent rules, if in the course of its examination of a bank, or
the written permission from Domsat, Westmont upon complaint or report, the PDIC finds that the
Bank cannot be legally compelled to disclose the deposit emanates from unsafe or unsound banking
bank deposits of Domsat, otherwise, it might expose practices, the PDIC may issue a Directive to Cease
itself to criminal liability under the same act. and Desist (DCD) enjoining the bank from offering
Government Service Insurance System vs. Court of Appeals, et or continuing to offer to the public such deposits and
advising the bank and the public of the withdrawal
al., G.R. No. 189206. June 8, 2011.
of the insurance coverage over these types of
Rules and Regulations Governing Deposits Not Covered by deposits. The DCD shall be effective upon
publication notwithstanding any request for
Deposit Insurance. Regulatory Issuance No. 2011-02 was
reconsideration filed by the bank or a depositor.
published by the Philippine Deposit Insurance
Corporation (PDIC) last January to clarify which
Deposits that are determined to be the proceeds of
deposit accounts and transactions are excluded from
unlawful activity, the payment of deposit insurance
the coverage of deposit insurance. It will be recalled
on which shall be deferred, are those which are the
that Congress passed Republic Act No. 9576 in 2009
subject of any freeze order, civil forfeiture
which increased the maximum amount of deposits
proceedings, money laundering, or any other case
covered by PDIC insurance to P500,000. The same
involving an unlawful activity, as enumerated in the
law excluded from the coverage of the PDIC
Anti-Money Laundering Act of 2001. Deposits
insurance the following accounts or transactions: (i)
determined with finality by the courts to be proceeds
investment products, such as bonds and securities,
of unlawful activity shall not be paid deposit
(ii) deposit accounts which are unfunded, or that are
insurance.
fictitious or fraudulent, (iii) deposit accounts
constituting or emanating from unsafe or unsound
The public should be aware of these rules in the
banking practices, and (iv) deposits determined to be
wake of recent bank closures. More often than not,
the proceeds of unlawful activity.
the closure of banks is due to unsafe and unsound
banking practices. One of the unsafe and unsound
banking practices which the PDIC has identified is
the offering of high interest rates when the bank has In the present case, since the transaction between
negative unimpaired capital and either a liquid assets PCILF and TMI involved equipment already owned
to deposits ratio of less than 10% or an operating loss. by TMI, it cannot be considered as one of financial
High interest in the contemplation of the PDIC is leasing, as defined by law, but simply a loan secured
interest over 50% higher than the prevailing market by the various equipment owned by TMI. PCI Leasing
rate. The public should, thus, beware of such and Finance, inc. vs. Trojan Metal Industries Inc., et al., G.R.
attractive yet risky offers. No. 176381, December 15, 2010.
Financial leasing. Republic Act No. 8556 (RA 8556),

Ω
otherwise known as the Financing Company Act of
1998, Section 3(d) of RA 8556 defines financial
leasing as:
a mode of extending credit through

a non-cancelable lease contract
under which the lessor purchases
or acquires, at the instance of the
lessee, machinery, equipment,
motor vehicles, appliances,
business and office machines, and
other movable or immovable
property in consideration of the
periodic payment by the lessee of a
fixed amount of money sufficient to
amortize at least seventy (70%) of
the purchase price or acquisition
cost, including any incidental
expenses and a margin of profit
over an obligatory period of not
less than two (2) years during
which the lessee has the right to
hold and use the leased property
with the right to expense the lease
rentals paid to the lessor and bears
the cost of repairs, maintenance,
insurance and preservation thereof,
but with no obligation or option on
his part to purchase the leased
property from the owner-lessor at
the end of the lease contract.
Thus, in a true financial leasing, whether under RA

5980 or RA 8556, a finance company purchases on
behalf of a cash-strapped lessee the equipment the
latter wants to buy but, due to financial limitations,
is incapable of doing so. The finance company then
leases the equipment to the lessee in exchange for the
latter’s periodic payment of a fixed amount of rental.
In this case, however, TMI already owned the subject

equipment before it transacted with PCILF.
Therefore, the transaction between the parties in this
case cannot be deemed to be in the nature of a
financial leasing as defined by law.

2014 Updates in The Law On Private Corporations

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RECENT JURISPURDENCE: CORPORATION In the Decision of July 15, 2009, the Court

CODE, SECURITIES REGULATION CODE, recognized the public service rendered by

not grant special privileges to a particular individual,

avowed policy. autonomous status, and carry out its humanitarian

However, in accordance with the Fundamental

controversies involving the PNRC on a case-to- expressly stated in the Code or in

case basis. other laws defining the special

accomplished by having the of goods and services produced by

The Constitution emphatically their public purposes/interests or constitutional

corporations except by a general relationship to the government or any of its

law applicable to all citizens. The Departments or Offices.

purpose of this constitutional

corporations created by special Section 16, Article XII of the Constitution

charters, which historically gave on National Economy and Patrimony

certain individuals, families or

a corporate agency or instrumentality of the constitutional policies or objectives.

meaning of Article IX (B) (2) (1) of The same Code describes a

categorized by the Department of

Sarona v. National Labor Relations Commission has

corporations to which it may be connected. As a where a corporation is merely a farce since it is a

obligations. In other words, by virtue of the separate another corporation.

juridical personality of a corporation, the corporate

committed through the instrumentality of the

Macris was later renamed as the National Realty

In the present case, we see no competent and

judgment debtor, and even incurs liability if he

“separate personalities” of the first three corporations promote unfair objectives.

had been recognized by this Court in PNB v. Mega

November 25, 1993, whether petitioner was an employee or a corporate

Considering that the observations earlier made

directors or trustees. . . “ dishonored by PNB, the drawee bank. After several

In Cebu Mactan Members Center, Inc. vs. Masahiro

another to do certain acts for and on his behalf, the 2009.

Corporations; liability of corporate officers. As a other persons;

general rule, the officer cannot be held personally

approached respondent and told him that the

officers, acting as corporate agents, are

or in bad faith in declaring Mutuc’s position

a) the party bringing suit should be a shareholder as

The stockholder’s right to file a derivative suit is not

“CAPITAL” conditions of preferred shares of stock or

Preferred shares of stock issued by any

MR. VILLEGAS. That is right. situation where the corporation is

MR. NOLLEDO. Therefore, we need MR. AZCUNA. We should not eliminate

MR. VILLEGAS. Yes.

MR. AZCUNA. May I be clarified as to that

amendment, the committee report would

Exchange Commission (SEC) registered ownership of a corporation shall be

enterprise, at least sixty percent (60%) of determined on the basis of outstanding

owned and held by citizens of the entitled to vote are considered.

Philippines and at least sixty percent (60%)

the Philippines; or a corporation organized meeting the aforementioned

under the laws of the Philippines of qualifications are considered as non-

capital stock outstanding and entitled to

numerous laws reserving certain areas of present case.

the Constitution, “a self-reliant and independent the Constitution as self-executing, rather

land, educational institutions and advertising by Congress. Suffused with wisdom of

was explained in Manila Prince Hotel v. GSIS, thus:

x x x Hence, unless it is expressly provided provisions in the Bill of Rights on arrests,

constitutional mandate, the presumption under custodial investigation, the rights of

are self-executing. If the constitutional incrimination. It is recognized that

provisions are treated as requiring legislation is unnecessary to enable courts to