FORMATION AND ORGANIZATION OF CORPORATION – CASE DIGEST
LLB-3
ASIA BANKING CORP v. STANDARD PRODUCTS
September 11, 1924, G.R. No. 22106
TOPIC: Corporation by Estoppel
CASE LAW/ DOCTRINE:
Absent any fraud, any person who recognized and in effect
admitted its legal existence as a corporate body is estopped to
deny its corporate existence, unless its existence is attacked since
making the contract or dealings.
FACTS
1. On Nov. 28, 1921, Standard Products, Inc. (note the inclusion of
“Inc. as an indication of a corporation) issued a promissory note
amounting to P24, 736.47 to Asia Banking Corporation.
2. Asian Banking filed a case to recover the said amount plus 10%
interest.
3. The lower court, on Nov. 1, 1923 ruled in favor of Asia Banking
Corp.
(No mention where appeal was brought, presumably to SC)
4. But, Standard Products, Inc. (appellant) contended that Asia
Banking Corp (plaintiff) failed to prove affirmatively the corporate
existence of the parties. Appellant also assigned this as a
reversible error.
ISSUE: Whether or not the failure of Asia Banking Corp to prove
corporate existence of both parties is fatal to its suit to recover?
HELD: No. The defendant having recognized the corporate
existence of the plaintiff by making a promissory note in its favor
and making partial payments on the same is therefore estopped to
deny said plaintiff's corporate existence.
RATIO:
1. There is no merit whatever in the appellant's contention. The
general rule is that in the absence of fraud a person who has
contracted or otherwise dealt with an association in such a way as
to recognize and in effect admit its legal existence as a corporate
body is thereby estopped to deny its corporate existence in any
action leading out of or involving such contract or dealing, unless
its existence is attacked for cause which have arisen since making
the contract or other dealing relied on as an estoppel and this
applies to foreign as well as to domestic corporations.
2. The defendant having recognized the corporate existence of the
plaintiff by making a promissory note in its favor and making
partial payments on the same is therefore estopped to deny said
plaintiff's corporate existence. It is, of course, also estopped from
denying its own corporate existence. Under these circumstances it
was unnecessary for the plaintiff to present other evidence of the
corporate existence of either of the parties. It may be noted that
there is no evidence showing circumstances taking the case out of
the rules stated.
Manuela Vda. De Salvatierra vs Lorenzo Garlitos
103 Phil 757 – Business Organization – Corporation Law –
Separate and Distinct Personality – When Not Applicable
FACTS: In 1954, Manuela Vda. De Salvatierra entered into a lease
contract with Philippine Fibers Producers Co., Inc. (PFPC). PFPC
was represented by its president Segundino Refuerzo. It was
agreed that Manuela shall lease her land to PFPC in exchange of
rental payments plus shares from the sales of crops. However,
PFPC failed to comply with its obligations and so in 1955, Manuela
sued PFPC and she won. An order was issued by Judge Lorenzo
Garlitos of CFI Leyte ordering the execution of the judgment
against Refuerzo’s property (there being no property under PFPC).
Refuerzo moved for reconsideration on the ground that he should
not be held personally liable because he merely signed the lease
contract in his official capacity as president of PFPC. Garlitos
granted Refuerzo’s motion.
Manuela assailed the decision of the judge on the ground that she
sued PFPC without impleading Refuerzo because she initially
believed that PFPC was a legitimate corporation. However, during
trial, she found out that PFPC was not actually registered with the
Securities and Exchange Commission (SEC) hence Refuerzo should
be personally liable.
ISSUE: Whether or not Manuela is correct.
HELD: Yes. It is true that as a general rule, the corporation has a
personality separate and distinct from its incorporators and as
such the incorporators cannot be held personally liable for the
obligations of the corporation. However, this doctrine is not
applicable to unincorporated associations. The reason behind this
doctrine is obvious-since an organization which before the law is
non-existent has no personality and would be incompetent to act
and appropriate for itself the powers and attribute of a
corporation as provided by law; it cannot create agents or confer
authority on another to act in its behalf; thus, those who act or
purport to act as its representatives or agents do so without
authority and at their own risk. In this case, Refuerzo was the
moving spirit behind PFPC. As such, his liability cannot be limited
or restricted that imposed upon [would-be] corporate
shareholders. In acting on behalf of a corporation which he knew
to be unregistered, he assumed the risk of reaping the
consequential damages or resultant rights, if any, arising out of
such transaction.
CHIANG KAI SHEK SCHOOL VS COURT OF APPEALS and FAUSTINA
FRANCO OH
G.R. No. L-58028 [April 18, 1989]
Facts: Fausta F. Oh had been teaching in the Chiang Kai Shek
School since 1932 for a continuous period of almost 33 years. She
was told she had no assignment for the next semester. For no
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apparent or given reason, she was dismissed from her work. As a
result, she sued and demanded separation pay, social security
benefits, salary differentials, maternity benefits and moral and
exemplary damages. The original defendant was the Chiang Kai
Shek School but when it filed a motion to dismiss on the ground
that it could not be sued, the complaint was amended. Certain
officials of the school were also impleaded to make them solidarily
liable with the school.
The Court of First Instance of Sorsogon dismissed the
complaint. On appeal, its decision was set aside by the respondent
court, which held the school suable and liable while absolving the
other defendants. The motion for reconsideration having been
denied, the school then came to this Court in this petition for
review on certiorari.
Issue: Whether or not a school that has not been incorporated
may be sued by reason alone of its long continued existence and
recognition by the government
Ruling: As a school, the petitioner was governed by Act No. 2706
as amended by C.A. No. 180, which provided as follows: Unless
exempted for special reasons by the Secretary of Public
Instruction, any private school or college recognized by the
government shall be incorporated under the provisions of Act No.
1459 known as the Corporation Law, within 90 days after the date
of recognition, and shall file with the Secretary of Public
Instruction a copy of its incorporation papers and by-laws. Having
been recognized by the government, it was under obligation to
incorporate under the Corporation Law within 90 days from such
recognition. It appears that it had not done so at the time the
complaint was filed notwithstanding that it had been in existence
even earlier than 1932. The petitioner cannot now invoke its own
non-compliance with the law to immunize it from the private
respondent’s complaint. There should also be no question that
having contracted with the private respondent every year for
thirty two years and thus represented itself as possessed of
juridical personality to do so, the petitioner is now estopped from
denying such personality to defeat her claim against it. According
to Article 1431 of the Civil Code, “through estoppel an admission
or representation is rendered conclusive upon the person making
it and cannot be denied or disproved as against the person relying
on it.” As the school itself may be sued in its own name, there is
no need to apply Rule 3, Section 15, under which the persons
joined in an association without any juridical personality may be
sued with such association. Besides, it has been shown that the
individual members of the board of trustees are not liable, having
been appointed only after the private respondent’s dismissal.
Reynaldo Lozano vs Eliezer De Los Santos
274 SCRA 452 – Business Organization – Corporation Law –
Jurisdiction of the SEC
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FORMATION AND ORGANIZATION OF CORPORATION – CASE DIGEST
FACTS: Reynaldo Lozano was the president of KAMAJDA
(Kapatirang Mabalacat-Angeles Jeepney Drivers’ Association, Inc.).
Antonio Anda was the president of SAMAJODA (Samahang
Angeles-Mabalacat Jeepney Operators’ and Drivers’ Association,
Inc.). In 1995, the two agreed to consolidate the two corporations,
thus, UMAJODA (Unified Mabalacat-Angeles Jeepney Operators’
and Drivers Association, Inc.). In the same year, elections for the
officers of UMAJODA were held. Lozano and Anda both ran for
president. Lozano won but Anda alleged fraud and the elections
and thereafter he refused to participate with UMAJODA. Anda
continued to collect fees from members of SAMAJODA and
refused to recognize Lozano as president of UMAJODA. Lozano
then filed a complaint for damages against Anda with the MCTC
of Mabalacat (and Magalang), Pampanga. Anda moved for the
dismissal of the case for lack of jurisdiction. The MCTC judge
denied Anda’s motion. On certiorari, Judge Eliezer De Los Santos
of RTC Angeles City reversed and ordered the dismissal of the case
on the ground that what is involved is an intra-corporate dispute
which should be under the jurisdiction of the Securities and
Exchange Commission (SEC).
ISSUE: Whether or not the RTC Judge is correct.
HELD: No. The regular courts have jurisdiction over the case. The
case between Lozano and Anda is not an intra-corporate dispute.
UMAJODA is not yet incorporated. It is yet to submit its articles of
incorporation to the SEC. It is not even a dispute between
KAMAJDA or SAMAJODA. The controversy between Lozano and
Anda does not arise from intra-corporate relations but rather from
a mere conflict from their plan to merge the two associations.
NOTE: Regular courts can now hear intra-corporate disputes
(expanded jurisdiction).
Lim Tong Lim vs Philippine Fishing Gear Industries, Inc.
Business Organization – Partnership, Agency, Trust – Corporation
by Estoppel
FACTS: It was established that Lim Tong Lim requested Peter Yao to
engage in commercial fishing with him and one Antonio Chua. The
three agreed to purchase two fishing boats but since they do not
have the money they borrowed from one Jesus Lim (brother of
Lim Tong Lim). They again borrowed money and they agreed to
purchase fishing nets and other fishing equipments. Now, Yao and
Chua represented themselves as acting in behalf of “Ocean Quest
Fishing Corporation” (OQFC) they contracted with Philippine
Fishing Gear Industries (PFGI) for the purchase of fishing nets
amounting to more than P500k.
They were however unable to pay PFGI and so they were sued in
their own names because apparently OQFC is a non-existent
corporation. Chua admitted liability and asked for some time to
pay. Yao waived his rights. Lim Tong Lim however argued that he’s
not liable because he was not aware that Chua and Yao
represented themselves as a corporation; that the two acted
without his knowledge and consent.
ISSUE: Whether or not Lim Tong Lim is liable.
HELD: Yes. From the factual findings of both lower courts, it is
clear that Chua, Yao and Lim had decided to engage in a fishing
business, which they started by buying boats worth P3.35 million,
financed by a loan secured from Jesus Lim. In their Compromise
Agreement, they subsequently revealed their intention to pay the
loan with the proceeds of the sale of the boats, and to divide
equally among them the excess or loss. These boats, the purchase
and the repair of which were financed with borrowed money, fell
under the term “common fund” under Article 1767. The
contribution to such fund need not be cash or fixed assets; it could
be an intangible like credit or industry. That the parties agreed
that any loss or profit from the sale and operation of the boats
would be divided equally among them also shows that they had
indeed formed a partnership.
Lim Tong Lim cannot argue that the principle of corporation by
estoppels can only be imputed to Yao and Chua. Unquestionably,
Lim Tong Lim benefited from the use of the nets found in his
boats, the boat which has earlier been proven to be an asset of
the partnership. Lim, Chua and Yao decided to form a corporation.
Although it was never legally formed for unknown reasons, this
fact alone does not preclude the liabilities of the three as
contracting parties in representation of it. Clearly, under the law
on estoppel, those acting on behalf of a corporation and those
benefited by it, knowing it to be without valid existence, are held
liable as general partners.
International Express Travel & Tour Services, Inc. vs Court of
Appeals
343 SCRA 674 – Business Organization – Corporation Law –
Corporation by Estoppel – When Applied
FACTS: In 1989, International Express Travel & Tour Services, Inc.
(IETTI), offered to the Philippine Football Federation (PFF) its travel
services for the South East Asian Games. PFF, through Henri Kahn,
its president, agreed. IETTI then delivered the plane tickets to PFF,
PFF in turn made a down payment. However, PFF was not able to
complete the full payment in subsequent installments despite
repeated demands from IETTI. IETTI then sued PFF and Kahn was
impleaded as a co-defendant.
Kahn averred that he should not be impleaded because he merely
acted as an agent of PFF which he averred is a corporation with
separate and distinct personality from him. The trial court ruled
against Kahn and held him personally liable for the said obligation
MAYORDO, M.A.N. LLB-3
(PFF was declared in default for failing to file an answer). The trial
court ruled that Kahn failed to prove that PFF is a corporation. The
Court of Appeals however reversed the decision of the trial court.
The Court of Appeals took judicial notice of the existence of PFF as
a national sports association; that as such, PFF is empowered to
enter into contracts through its agents; that PFF is therefore liable
for the contract entered into by its agent Kahn. The CA further
ruled that IETTI is in estoppel; that it cannot now deny the
corporate existence of PFF because it had contracted and dealt
with PFF in such a manner as to recognize and in effect admit its
existence.
ISSUE: Whether or not the Court of Appeals is correct.
HELD: No. PFF, upon its creation, is not automatically considered a
national sports association. It must first be recognized and
accredited by the Philippine Amateur Athletic Federation and the
Department of Youth and Sports Development. This fact was never
substantiated by Kahn. As such, PFF is considered as an
unincorporated sports association. And under the law, any person
acting or purporting to act on behalf of a corporation which has no
valid existence assumes such privileges and becomes personally
liable for contract entered into or for other acts performed as such
agent. Kahn is therefore personally liable for the contract entered
into by PFF with IETTI.
There is also no merit on the finding of the CA that IETTI is in
estoppel. The application of the doctrine of corporation by
estoppel applies to a third party only when he tries to escape
liability on a contract from which he has benefited on the
irrelevant ground of defective incorporation. In the case at bar,
IETTI is not trying to escape liability from the contract but rather is
the one claiming from the contract.
Loyola Grand Villas Homeowners (South) Association, Inc. vs
Court of Appeals
276 SCRA 681 – Business Organization – Corporation Law – Failure
to File By-Laws
FACTS: In 1983, the Loyola Grand Villas Association, Inc. (LGVAI)
was incorporated by the homeowners of the Loyola Grand Villas
(LGV), a subdivision. The Securities and Exchange Commission
(SEC) issued a certificate of incorporation under its official seal to
LGVAI in the same year. LGVAI was likewise recognized by the
Home Insurance and Guaranty Corporation (HIGC), a government-
owned-and-controlled corporation whose mandate is to oversee
associations like LGVAI.
Later, LGVAI later found out that there are two homeowners
associations within LGV, namely: Loyola Grand Villas Homeowners
(South) Association, Inc. (LGVAI-South) and Loyola Grand Villas
Homeowners (North) Association, Inc. (LGVAI-North). The two
associations asserted that they have to be formed because LGVAI
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FORMATION AND ORGANIZATION OF CORPORATION – CASE DIGEST
is inactive. When LGVAI inquired about its status with HIGC, HIGC
advised that LGVAI was already terminated; that it was
automatically dissolved when it failed to submit it By-Laws after it
was issued a certificate of incorporation by the SEC.
ISSUE: Whether or not a corporation’s failure to submit its by-laws
results to its automatic dissolution.
HELD: No. A private corporation like LGVAI commences to have
corporate existence and juridical personality from the date the
Securities and Exchange Commission (SEC) issues a certificate of
incorporation under its official seal. The submission of its by-laws
is a condition subsequent but although it is merely such, it is a
MUST that it be submitted by the corporation. Failure to submit
however does not warrant automatic dissolution because such a
consequence was never the intention of the law. The failure is
merely a ground for dissolution which may be raised in a quo
warranto proceeding. It is also worthwhile to note that failure to
submit can’t result to automatic dissolution because there are
some instances when a corporation does not require a by-laws.
FLEISCHER vs. BOTICA NOLASCO CO. DIGEST
G.R. No. L-23241 March 14, 1925
FACTS: This action was commenced in the CFI against the board of
directors of the Botica Nolasco, Inc., a corporation duly organized
and existing under the laws of the Philippine Islands. The plaintiff
prayed that said board of directors be ordered to register in the
books of the corporation five shares of its stock in the name of
Henry Fleischer, the plaintiff, and to pay him the sum of P500 for
damages sustained by him resulting from the refusal of said body
to register the shares of stock in question. (Basta na amend ung
complaint)
defendant answered the amended complaint denying generally
and specifically each and every one of the material allegations
thereof, and, as a special defense, alleged that the defendant,
pursuant to article 12 of its by-laws, had preferential right to buy
from the plaintiff said shares at the par value of P100 a share,
plus P90 as dividends corresponding to the year 1922, and that
said offer was refused by the plaintiff.
Trial Court held that, in his opinion, article 12 of the by-laws of the
corporation which gives it preferential right to buy its shares from
retiring stockholders, is in conflict with Act No. 1459 (Corporation
Law), especially with section 35 thereof; and rendered a judgment
in favor of plaintiff.
Hence, this appeal.
ISSUE: whether or not article 12 of the by-laws of the corporation
is in conflict with the provisions of the Corporation Law (Act No.
1459).
Questioned article 12 creates in favor of the Botica Nolasco, Inc., a
preferential right to buy, under the same conditions, the share or
shares of stock of a retiring shareholder. Has said corporation any
power, under the Corporation Law (Act. No. 1459), to adopt such
by-law?
HELD: The particular provisions of the Corporation Law referring
to transfer of shares of stock are as follows:
SEC. 13. Every corporation has the power:
xxx xxx xxx
(7) To make by-laws, not inconsistent with any existing law, for the
fixing or changing of the number of its officers and directors within
the limits prescribed by law, and for the transferring of its stock,
the administration of its corporate affairs, etc.
xxx xxx xxx
SEC. 35. The capital stock of stock corporations shall de divided
into shares for which certificates signed by the president or the
vice-president, countersigned by the secretary or clerk and sealed
with the seal of the corporation, shall be issued in accordance
with the by-laws. Shares of stock so issued are personal property
and may be transferred by delivery of the certificate indorsed by
the owner or his attorney in fact or other person legally authorized
to make the transfer. No transfer, however, shall be valid, except
as between the parties, until the transfer is entered and noted
upon the books of the corporation so as to show the names of the
parties to the transaction, that date of the transfer, the number of
the certificate, and the number of shares transferred.
No share of stock against which the corporation holds any unpaid
claim shall be transferable on the books of the corporation.
The holder of shares, as owner of personal property, is at liberty,
under said section (Sec. 35), to dispose of them in favor of
whomsoever he pleases, without any other limitation in this
respect, than the general provisions of law. Therefore, a stock
corporation in adopting a by-law governing transfer of shares of
stock should take into consideration the specific provisions of
section 35 of Act No. 1459, and said by-law should be made to
harmonize with said provisions. It should not be inconsistent
therewith.
The by-law now in question was adopted under the power
conferred upon the corporation by section 13, paragraph 7,
above quoted; but in adopting said by-law the corporation has
transcended the limits fixed by law in the same section, and has
not taken into consideration the provisions of section 35 of Act
No. 1459.
As a general rule, the by-laws of a corporation are valid if they are
reasonable and calculated to carry into effect the objects of the
MAYORDO, M.A.N. LLB-3
corporation, and are not contradictory to the general policy of the
laws of the land.
On the other hand, it is equally well settled that by-laws of a
corporation must be reasonable and for a corporate purpose,
and always within the charter limits. They must always be strictly
subordinate to the constitution and the general laws of the land.
They must not infringe the policy of the state, nor be hostile to
public welfare. They must not disturb vested rights or impair the
obligation of a contract, take away or abridge the substantial rights
of stockholder or member, affect rights of property or create
obligations unknown to the law.
The validity of the by-law of a corporation is purely a question of
law. (South Florida Railroad Co. vs. Rhodes, 25 Fla., 40.)
The power to enact by-laws restraining the sale and transfer of
stock must be found in the governing statute or the
charter. Restrictions upon the traffic in stock must have their
source in legislative enactment, as the corporation itself cannot
create such impediments. By-law are intended merely for the
protection of the corporation, and prescribe regulation and not
restriction; they are always subject to the charter of the
corporation. The corporation, in the absence of such a power,
cannot ordinarily inquire into or pass upon the legality of the
transaction by which its stock passes from one person to another,
nor can it question the consideration upon which a sale is based. A
by-law cannot take away or abridge the substantial rights of
stockholder. Under a statute authorizing by- laws for the transfer
of stock, a corporation can do no more than prescribe a general
mode of transfer on the corporate books and cannot justify an
unreasonable restriction upon the right of sale.
Xxx
that a corporation has no power to prevent or to restrain transfers
of its shares, unless such power is expressly conferred in its charter
or governing statute. This conclusion follows from the further
consideration that by-laws or other regulations restraining such
transfers, unless derived from authority expressly granted by the
legislature, would be regarded as impositions in restraint of trade.
The only restraint imposed by the Corporation Law upon transfer
of shares is found in section 35 of Act No. 1459, quoted above, as
follows: “No transfer, however, shall be valid, except as between
the parties, until the transfer is entered and noted upon the books
of the corporation xxx This restriction is necessary in order that
the officers of the corporation may know who are the
stockholders, which is essential in conducting elections of officers,
in calling meeting of stockholders, and for other purposes. But any
restriction of the nature of that imposed in the by-law now in
question, is ultra vires, violative of the property rights of
shareholders, and in restraint of trade.
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FORMATION AND ORGANIZATION OF CORPORATION – CASE DIGEST
And moreover, the by-laws now in question cannot have any
effect on the appellee. He had no knowledge of such by-law
when the shares were assigned to him. He obtained them in
good faith and for a valuable consideration. He was not a privy to
the contract created by said by-law between the shareholder
Manuel Gonzalez and the Botica Nolasco, Inc. Said by-law cannot
operate to defeat his rights as a purchaser.
A by-law of a corporation which provides that transfers of stock
shall not be valid unless approved by the board of directors, while
it may be enforced as a reasonable regulation for the protection of
the corporation against worthless stockholders, cannot be made
available to defeat the rights of third persons. (Farmers’ and
Merchants’ Bank of Lineville vs. Wasson, 48 Iowa, 336.)
Whenever a corporation refuses to transfer and register stock in
cases like the present, mandamus will lie to compel the officers of
the corporation to transfer said stock upon the books of the
corporation.
Petition denied. Decision of trial court affirmed.
The Government of the Philippine Islands vs. El Hogar Filipino
G.R. No. L-26649 July 13, 1917
FACTS: The Philippine Commission enacted Act No. 1459, also
known as the Corporation Law, on March 1, 1906. El Hogar
Filipino, organized in 1911 under the laws of the Philippine Islands,
was the first corporation organized under Sec. 171-190 Act No.
1459, devoted to the subject of building and loan associations,
their organization and administration. In the said law, the capital
of the corporation was not permitted to exceed P3M, but Act No.
2092 amended the statute, permitting capitalization to the
amount of ten millions.
El Hogar took advantage of the amendment of Act No. 1459 and
amended its AOI as a result thereof, stating that the amount of
capital must not exceed what has been stated in Act No. 2092.
This resulted to El Hogar having 5,826 shareholders, 125,750
shares with paid-up value of P8.7M. The corporation paid P7.16M
to its withdrawing stockholders.
The Government of the Philippine Islands filed an action against El
Hogar due to the alleged illegal holding title to real property for a
period exceeding five (5) years after the same was bought in a
foreclosure sale. Sec. 13(5) of the Corporation Law states that
corporations must dispose of real estate obtained within 5 years
from receiving the title. The Philippine Government also prays
that El Hogar be excluded from all corporate rights and privileges
and effecting a final dissolution of said corporation.
It appears from the records that El Hogar was the holder of a
recorded mortgage on the San Clemente land as security for a
P24K loan to El Hogar. However, shareholders and borrowers
defaulted in payment so El Hogar foreclosed the mortgage and
purchased the land during the auction sale. A deed of conveyance
in favor of El Hogar was executed and sent to the Register of
Deeds of Tralac with a request that the certificate of title be
cancelled and a new one be issued in favor of El Hogar from the
Register of Deeds of Tarlac. However, no reply was received. El
Hogar filed a complaint with the Chief of the General Land
Registration Office. The certificate of title to the San Clemente
land was received by El Hogar and a board resolution authorizing
Benzon to find a buyer was issued. Alcantara, the buyer of the
land, was given extension of time to make payment but defaulted
so the contract treated rescinded. Efforts were made to find
another buyer. Respondent acquired title in December 1920 until
the property was finally sold to Felipa Alberto in July 1926. The
interval exceeded 5 years but the period did not commence to run
until May 7, 1921 when the register of deeds delivered the new
certificate of title. It has been held that a purchaser of land
registered under the Torrens system cannot acquire the status of
an innocent purchaser for value unless the vendor is able to place
the owner’s duplicate in his hands showing the title to be in the
vendor. During the period before May 1921, El Hogar was not in a
position to pass an indefeasible title to any purchaser. Therefore,
El Hogar cannot be held accountable for this delay which was not
due to its fault. Likewise, the period from March 25, 1926 to April
20, 1926 must not be part of the five-year period because this was
the period where respondent was under the obligation to sell the
property to Alcantara prior to the contract’s rescission due to
Alcantara’s non-payment.
Another circumstance causing the delay is the fact that El Hogar
purchased the property in the full amount of the loan made by the
former owner which is nearly P24K when it was subsequently
found that the property was not salable and later sold for P6K
notwithstanding El Hogar’s efforts to find a purchaser upon better
terms.
ISSUE: Whether the acts of respondent corporation merit its
dissolution or deprivation of its corporate franchise and to exclude
it from all corporate rights and privileges
HELD: SUSTAINED only as to administering of real property not
owned by it and when permitted by contract.
Causes of action:
1) Alleged illegal holding of real property for a period
exceeding five years from receipt of title-Cause of delay is not
respondent’s fault
2) That respondent is owning and holding a business lot
with the structure thereon in excess of its reasonable
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requirements and in contravention of Sec. 13(5) of Corpo. Law-
WITHOUT MERIT
Every corporation has the power to purchase, hold and lease such
real property as the transaction would of the lawful business may
reasonably and necessarily require.
3) That respondent is engaged in activities foreign to the
purposes for which the corporation was created and not
reasonably necessary to its legitimate ends-VALID
The administration of property, payment of real estate taxes,
causing necessary repairs, managing real properties of non-
borrowing shareholders is more befitting to the business of a real
estate agent or a trust company than a building and loan
association.
4) That the by-laws of the association stating that, “the
board of directors by the vote of an absolute majority of its
members is empowered to cancel shares and to return the
balance to the owner by reason of their conduct or any other
motive or liquidation” is in direct conflict with Sec. 187 of the
Corporation Law which provides that the board of directors shall
not have the power to force the surrender and withdrawal of
unmatured stock except in case of liquidation or forfeiture of stock
for delinquency-WITHOUT MERIT
There is no provision of law making it a misdemeanor to
incorporate an invalid provision in the by-laws of a corporation;
and if there were such, the hazards incident to corporate effort
would be largely increased.
5) Art. 61 of El Hogar’s by-laws which states that “
attendance in person or by proxy by shareholders owning one-half
plus one of the shareholders shall be necessary to constitute a
quorum for the election of directors” is contrary to Sec. 31 of the
Corpo Law which provides that owners of the majority of the
subscribed capital stock entitled to vote must be present either in
person or by proxy at all elections of directors- WITHOUT MERIT
No fault can be imputed to the corporation on account of the
failure of the shareholders to attend the annual meetings and
their non-attendance in meetings is doubtless to be interpreted in
part as expressing their satisfaction of the way in which things
have been conducted. Mere failure of a corporation to elect
officers does not terminate the terms of existing officers nor
dissolve the corporation. The general rule is to allow the officer to
holdover until his successor is duly qualified.
6) That the directors of El Hogar, instead of receiving
nominal pay or serving without pay, have been receiving large
compensation, varying in amount from time to time, out of
respondents’ profits- WITHOUT MERIT
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 FORMATION AND ORGANIZATION OF CORPORATION – CASE DIGEST
With the growth of the corporation, the amount paid as
compensation to the directors has increased beyond what would
probably be necessary is a matter that cannot be corrected in this
action. Nor can it properly be made a basis for depriving
respondent of its franchise or enjoining it from compliance with
the provisions of its own by-laws. If a mistake has been made, the
remedy is to lie rather in publicity and competition.
7) That the promoter and organizer of El Hogar was Mr.
Antonio Melian and that in the early stages of the organization of
the association, the board of directors authorized the association
to make a contract with him and that the royalty given to him as
founder is “unconscionable, excessive and out of proportion to the
services rendered”-NOT SUSTAINED
The mere fact that compensation is in excess of what may be
considered appropriate is not a proper consideration for the court
to resolve. That El Hogar is in contact with its promoter did not
affect the association’s legal character. The court is of the opinion
that the traditional respect for the sanctity of the contract
obligation should prevail over the radical and innovating
tendencies.
8) That Art. 70 of El Hogar’s by-laws, requiring persons
elected as board of directors to be holders of shares of the paid up
value of P5,000 which shall be held as security, is objectionable
since a poor member or wage earner cannot serve as a director
irrespective of other qualifications- NOT SUSTAINED
Corpo. Law expressly gives the power to the corporation to
provide in its by-laws for the qualification of its directors and the
requirement of security from them for the proper discharge of the
duties of their pffice in the manner prescribed in Art. 70 is highly
prudent and in conformity with good practice.
9) That respondent abused its franchise in issuing
“special” shares alleged to be illegal and inconsistent with the plan
and purposes of building and loan associations- WITHOUT MERIT
The said special shares are generally known as advance payment
shares which were evidently created for the purpose of meeting
the condition caused by the prepayment of dues that is permitted.
Sec. 178 of Corpo Law allows payment of dues or interest to be
paid in advance but the corporation shall not allow interest on
advance payment grater than 6% per annum nor for a period
longer than one year. The amount is satisfied by applying a portion
of the shareholder’s participation in the annual earnings.The
mission of special shares does not involve any violation of the
principle that the shares must be sold at par.
10) That in making purchases at foreclosure sales
constituting as security for 54 of the loans, El Hogar bids the full
amount after deducting the withdrawal value, alleged to be
pusuing a policy of depreciating at the rate of 10 percent per
annum, the value of the real properties it acquired and that this
rate is excessive-UNSUSTAINABLE
The board of directors possess discretion in this matter. There is
no provision of law prohibiting the association from writing off a
reasonable amount for depreciation on its assets for the purpose
of determining its real profits. Art. 74 of its by-laws expressly
authorizes the board of directors to determine each year the
amount to be written down upon the expenses for the installation
and the property of the corporation. The court cannot control the
discretion of the board of directors about an administrative matter
as to which they have no legitimate power of action.
11) That respondent maintains excessive reserve funds-
UNFOUNDED
The function of this fund is to insure stockholders against losses.
When the reserves become excessive, the remedy is in the hands
of the Legislature.
No prudent person would be inclined to take a policy in a
company which had so improvidently conducted its affairs that it
only retained a fund barely sufficient to pay its present liabilities
and therefore was in a condition where any change by the
reduction of interest upon or depreciation in the value of
securities or increase of mortality would render it insolvent and
subject to be placed in the hands of a receiver.
12) That the board of directors has settled upon the unlawful
policy of paying a straight annual dividend of 10 percent per
centum regardless of losses suffered and profits made by the
corporation, in contravention with the requirements of Sec. 188 of
the Corpo law- UNFOUNDED
As provided in the previous cause of action, the profits and losses
shall be determined by the board of directors and this means that
they shall exercise the usual discretion of good businessmen in
allocating a portion of the annual profits to purposes needful of
the welfare of the association. The law contemplates distribution
of earnings and losses after legitimate obligations have been met.
13) That El Hogar has made loans to the knowledge of its officers
which were intended to be used by the borrowers for other
purposes than the building of homes and no attempt has been
made to control the borrowers with respect to the use made of
the borrowed funds- UNFOUNDED
There is no statute expressly declaring that loans may be made by
these associations SOLELY for the purpose of building homes. The
building of himes in Sec. 171 of Corpo Law is only one among
several ends which building and loan associations are designed to
promote and Sec. 181 authorizes the board of directors of the
association to fix the premium to be charged.
MAYORDO, M.A.N. LLB-3
14) That the loans made by defendant for purposes other than
building or acquiring homes have been extended in extremely
large amounts and to wealthy persons and large companies-
WITHOUT MERIT
The question of whether the making of large loans constitutes a
misuser of the franchise as would justify the court in depriving the
association of its corporate life is a matter confided to the
discretion of the board of directors. The law states no limit as to
the size of the loans to be made by the association. Resort should
be had to the legislature because it is not a matter amenable to
judicial control
15) That when the franchise expires, supposing the corporation is
not reorganized, upon final liquidation of the corporation, a
reserve fund may exist which is out of all proportion to the
requirements that may fall upon it in the liquidation of the
company-NO MERIT
This matter may be left to the discretion of the board of directors
or to legislative action if it should be deemed expedient to require
the gradual suppression of reserve funds as the time for
dissolution approaches. It is no matter for judicial interference and
much less could the resumption of the franchise be justified on
this ground.
16) That various outstanding loans have been made by the
respondent to corporations and partnerships and such entities
subscribed to respondents’ shares for the sole purpose of
obtaining such loans-NO MERIT
Sec. 173 of Corpo Law declares that “any person” may become a
stockholder in building and loan associations. The phrase ANY
PERSON does not prevent a finding that the phrase may not be
taken in its proper and broad sense of either a natural or artificial
person.
17) That in disposing real estate purchased by it, some of the
properties were sold on credit and the persons and entities to
which it was sold are not members nor shareholders nor were
they made members or shareholders, contrary to the provision of
Corpo Law requiring requiring loans to be stockholders only- NOT
SUSTAINED
The law does not prescribe that the property must be sold for cash
or that the purchaser shall be a shareholder in the corporation.
Such sales can be made upon the terms and conditions approved
by the parties.
Respondent is enjoined in the future from administering real
property not owned by itself, except as may be permitted to it by
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FORMATION AND ORGANIZATION OF CORPORATION – CASE DIGEST MAYORDO, M.A.N. LLB-3

contract when a borrowing shareholder defaults in his obligation.

In all other respects, the complaint is DISMISSED.

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