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CASES

1. PEA-PTGWO v. PNEI

SC: 1. Execution of judgment regarding to judgment debtor only pertain to its

properties. The Pantranco properties were not owned by the PNEI

 (RELATED TO OUR TOPIC) – since PNB Madecor and the other corporations have
separate and distinct juridical personality, the properties of each corporation
cannot be subject o writ of execution by the liabilities of PNB. Neither fact that
there was transfer of properties, it cannot be said that there was merger of one
corporation from the other.

 The properties of PNB Madecor cannot be executed to answer for the liabilities of
PNB because they have separate personality.

 As to PNB questioning the sale of properties for the reason that PNB Madecor
was indebted to them- SC said they cannot question such sale because they are
not the proper party because they have separate juridical personality, the proper
party is PNB Madecor the registered owner of such properties.

SIR: there is a union of employees filing a claim against Pantranco had failed to pay
the privileges, compensation as well as the salaries, so as the case went on, Pantranco
suffered losses and therefore PNB move in as well because Pantranco owed PNB, and
PNB eventually foreclose the mortgage.
PNB is engaged in banking, it is not engaged in real estate, it has to make ways to
preserve and administer all the real properties that they will foreclose, that is very
standard procedure for banks, all banks have what they called the real estate arm
corporation, in-charge of all the foreclosed real estate properties. That’s why PNB
organized PNB Madecor, Madecor therefore became the owner of the properties
previously owned by Pantranco foreclosed by PNB and sold in a public bidding,
Madecor now is in possession, meanwhile, the employees won their claims and only to
find out at the end of the line, after years of litigation, they discovered that Pantranco
does not have any property, so it was a paper victory.

So they inquired where the properties went. It went to the creditors because the
creditors have also valid claims against Pantranco these are secured by the properties
and as creditors they have all the rights to go against these properties…

These are secured by properties and as a creditor, it can go after the properties of the
debtor. So the Union pursued properties of bank and real estate arm. The sheriff
executed the properties even if they were under the name of PNB-Madecor. The SC
said: PNB & PNB-Madecor are separate entities from Pantranco. Pantranco is the
principal entity liable for Union’s claims.
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2. SEAOIL PETROLEUM V. AUTOCORP

Facts: Seaoil purchased 1 unit excavator from Autocorp and issued 12 checks. The
last 10 checks bounced because Seaoil made stop order on the checks. So Autocorp
filed a case for the collection of sum of money against Seaoil. Seaoil alleged that the
case is not as simple as presented by Autocorp.

According to Seaoil, the purchase is based from another agreement, the Lease
Purchase Agreement, between Uniline Asia and Focus Point. Francis Yu, the
stockholder of Seaoil, is also the president of Focus Point while Paul Rodriguez is the
stockholder and president of both Autocorp and Uniline Asia. The signatories of the
Lease Purchase Agreement were Focus Point as lessor and Uniline Asia as buyer. In
the purchase of the excavator, it’s the reverse –it was Seaoil which owed to Autocorp.

It is Seaoil that owes Autocorp. Seaoil will not pay because it said that this sale of the
excavator is actually in lieu of the Lease Purchase Agreement of Focus point and
Unline. Because Seaoil owns Focus Point and Autocorp owns Uniline. So it is like there
is compensation in the liabilities of both corporations.
Seaoil acquired the excavator from Autocorp. Seaoil did not pay so Autocorp
demanded payment. What did Seaoil say?

- Seaoil said that the excavator is a payment for the liability of Unline to Focus
point.

So what is the liability of Uniline?

- In the Lease Purchase Agreement, Focus point as the seller, sold to Uniline an
excavator.

Why would Autocorp be involved in this purchase (this is according to

Seaoil)?

- Because the owner of Autocorp and Uniline is the same. So Unilne and Autocorp
are considered as one, they are sister companies.

And Seaoil on the other hand?

- The owner of Focus point is a stockholder of Seaoil. So seaoil said “I will not pay
because we also own Focus point”. So in one hand, Unline owes Focuspoint, and
Seaoil owes Autocorp for the sale of excavator.

So here the SC ruled on two points. The first point is that Rodriguez, the stockholder
of Uniline and Autocorp, cannot be held solidarily liable because being an owner or a
stockholder of a corporation does not mean that it has one personality because the
corporation has a distinct and separate personality from its stockholders so he cannot
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be held liable. And on the second point, the SC ruled that the parties of the Lease
Purchase Agreement has nothing to do with the parties of this case.

Because even if a stockholder of one corporation is an owner of another corporation

does not automatically mean that those two corporations are one and the same or are
related. In this case, the Lease Purchase Agreement is a separate agreement, which
has nothing to do with the sale of the excavator of Autocorp to Seaoil. So the SC said
that it cannot use the Lease Purchase Agreement not to pay for its liability with
Autocorp.
In other words, the SC said the Lease Purchase Agreement between Focus Point and
Uniline should not be used for Seaoil not to pay his obligation to Autocorp even if
Rodriguez is a director of both Autocorp and Uniline. The director or officer of
Autocorop has nothing to do with the transactions of the other corporation. That is a
totally a separate transaction in so far as Autocorp is concerned, even if it involves the
same person or officer.

So what was the justification of the Supreme Court?

 The parties to the Lease Purchase Agreement are not parties to the sale of the
excavator in this case

The parties to the lease purchase agreement are not the same parties to the
transactions in this case. Once a corporation assumes a separate personality, it is
separate and distinct from its directors, stockholders, and officers.

3. CHINA BANK VS. DYNE-SEM

The parties to this case are petitioners China Bank and respondents Dyne-Sem.

What happened in this case was there was this corporation Dynetics, and a certain Mr.
Lim who borrowed money from Chinabank evidenced by a promissory note. What
happened was that they failed to pay so Chinabank executed an action for collection of
sum of money against Mr. Lim and Dynetics. However, the case was amended
impleading Dyne-Sem because according to Chinabank, Dyne-Sem is merely an alter
ego of Dynetics. Among the facts alleged were that they shared the same office and
some of the equipment of Dyne-Sem were actually acquired from Dynetics.

For it's part, Dyne-Sem raised as defense that the machineries were acquired through
public bidding and for valuable consideration. (2 issues I think, but the issue on
Merger was not mentioned here)

1.)The SC ruled in this case that Dyne-Sem should not be held liable to pay the
debt of Dynetics, because Dyne-Sem is a corporation that has separate juridical
personality from Dynetics. The mere fact that they acquired some of the
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machineries or retained some of the officers is not clear and convincing

evidence of being an instrumentality of Dyne-Sem.

Highlights of the case

1. Whether or not the sale of the assets and properties of Dynetics was with the
intent to defraud the creditor/s who is China Bank.

No because Dyne-Sem acquired the assets of Dynetics through arms length

transactions (execution sale/ public auction/ foreclosure proceedings).
China Bank was not able to prove that the transfer by Dynetics of its assets
to Dyne-Sem was intended to defraud them (China Bank).

2. The interlocking directors, operation of similar business, similar or exact location

of business, these alone do not signify that Dyne-Sem was an alter ego of
Dynetics and taken together cannot mean to defraud China Bank.

3. The fact of having the same set of directors or shareholders is not per se illegal,
it is a common practice and by that fact alone is not to say that two
corporations, Dynetics and Dyne-Sem for that matter are to be treated as one.

4. On the issue or allegation of China Bank that there was merger between
Dynetics and Dyne-Sam because of the transfer of the assets, the Supreme
Court said that such fact alone does not signify merger. The transfer of assets
did not make Dyne-Sem liable for the obligations of Dynetics.

4. SUBHASH PASRICHA V. DON LUIS DISON REALTY CORP.

Pasricha paid rents for 3 years but stopped paying alleging that there was an internal
trouble as to whom payment should be made. Since Don Luis was fed up, it filed a
case thru its agent Ms. Bautista wanting to evict the Pasrichas.

Sir: So this was a case for EJECTMENT.

Pasrichas countered that the certificate of registration was suspended and revoked and
that Baustista had no authority to file a case.

The Issue: WON the act of Bautista filing an Ejectment case was correct.

The SC said that in cases with interest of justice, the subsequent authorization by the
board authorizing its representative to act in its behalf will be accepted by the courts.
This is what happened. When Pasicha asked for the authority from Bautista to file an
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ejectment, she subsequently presented a letter from the corporate secretary

authorizing her to file an ejectment case

Pasricha also argued that they didn’t really stop the payment since they already
prepared checks for the months they didn’t pay. The only problem they had was that
they didn’t know who to hand the checks to. With this issue, the SC said they should
have consigned the checks.
Sir: They should have CONSIGNATED. Consignment is not the same of
CONSIGNATION. Few lawyers know this. The courts suggested that they should have
consignated.

Q: Any other issue?

As to corporations, (aside from the issue of authority of Bautista), was whether the
juridical personality of the Don Luis Realty was already dissolved. The court stated that
the suspension and revocation by the SEC was actually subsequently reversed. So
since it was reversed, they are authorized to permit Bautista to file the case.

The Supreme Court also ruled that since Bautista was able to subsequently present her
authority, the rules pertaining appointing authority to a person can be relaxed.

Sir: Very funny decision. That’s not what we learned in procedure. Procedure says At
the time we file, that filing must have already been authorized. As a matter of fact that
is the purpose of the verification. Among others you have to indicate in the verification
that you have been duly authorized by the corporation to file the case. The decision
says we relax; when will we relax, and when will we implement? This is something
that should be looked into. I don’t agree because majority of the cases of authority are
very strict; they throw away pleadings filed without authorization.

One important issue in Pasricha v. Don Luis Dison Realty Corp.

The fact that the corporation was suspended or revoked, as long as it can be proven
that the case was filed prior to the revocation, it does not invalidate the
same. In other words, subsequent revocation or dissolution of a corporation does not
nullify those cases already filed

5. SIAIN ENTERPRISES V. CUPERTINO REALTY

So that if you don’t have any collateral to apply for a loan in the bank, you ask a friend
to have his land be your collateral.
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The problem arose when Siain said that it did not receive the loaned amount it was its
subsidiary companies that receive this loaned amount thus making him not liable. But
Cupertino realty said these companies are your alter ego and that you cannot treat
them as separate corporations because you dominate and own these corporations.

SC: As a general rule, corporations have separate and distinct personality as to other
corporations and the piercing of the corporate veil is only permitted where a
corporation is merely an alter ego such that it is only a instrumentality of the
controlling corporation.

 Sir: So what are the circumstances that permitted the SC to pierce the corporate
veil?

1. Same board of directors

2. Same Stock holders
3. Same book keeper
4. Cua leleng had authority to decide even without the vote of the other
directors.
5. Cua leleng had a common law spouse who shared in the proceeds

Cua Le Leng had a common law spouse who even got some of the proceeds. She is
using these companies as alter –ego so we can pierce the veil of corporate entity.

COMPARE THIS WITH CHINA BANK vs DYNE SEM.

Dyne Sem acquired the assets of Dyenetics through auction sale. There was no control
from the stockholders or directors of the other corporation. Basically, they have similar
sets Board of Directors but other than that there were no other means that they were
controlled.

In this case, the circumstances are convincing:

1. Same incorporators, stockholders and directors

2. Same book keeper and accountant
3. Using the same office
4. Same majority stockholder and president, Cua le Leng
5. Cua le Leng had authority by and on herself to use the funds of Sian Trucking
6. BAUTISTA vs AUTO PLUS TRADERS

Bautista was acquitted with respect to the criminal liabity and as to the question
whether he can be made personally liable for the value of the two checks as
accommodation party?
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He is not an accommodation party who signed as a surety. An accommodation party

is one who meets all the three requisites, viz.: (1) he must be a party to the
instrument, signing as maker, drawer, acceptor, or indorser; (2) he must not
receive value therefor; and (3) he must sign for the purpose of lending his name
or credit to some other person.

The first two elements are present here, however there is insufficient evidence
presented in the instant case to show the presence of the third requisite. All that the
evidence shows is that petitioner signed a Check, which is drawn against his personal
account. There is no showing of when petitioner issued the check and in what
capacity. In the absence of concrete evidence it cannot just be assumed that petitioner
intended to lend his name to the corporation. Hence, petitioner cannot be considered
as an accommodation party.”

Contention of AUTOPLUS: you did not sign as a mere guarantor but you signed as
a surety. You are liable because you signed as an accommodation party, you offered
your name to be used as a surety and not as a mere guarantor. In the order of the
instrument, we go directly to you to demand payment because you are principally
liable of the obligation.
SC: there is no sufficient proof that Claude Bautista is an accommodation party, it did
not appear whether or not he understood the implications of his act in signing as an
accommodation party. There was no proof that that was his intention to become a
surety, that must be prove because it was a criminal case and must be proven beyond
reasonable doubt, that he had the intention to lend his name as an accommodation
party as contemplated in negotiable instruments.

In short, SC said, NOT liable because the liabilities of the corporation should not be
the same and separate and distinct from the liabilities of the SH

7. GCC V. ALSONS DEVELOPMENT CORP.

What is the relationship of GCC and Equity?

- GCC is the parent corporations and Equity is the subsidiary corporation.

What was the transaction of Alsons & Alcantara?

- They sold their shares in GCC franchise companies to Equity. Then Equity
couldn’t pay so Alsons demanded payment.
Alsons included GCC because it owned 90% of Equity.

Contention of the parties

- GCC: Not liable because we are separate entities. It’s Equity who didn’t pay so
go after Equity.
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- Alsons: Equity is a conduit of GCC.

What other circumstances showed by Alsons to hold GCC liable?

1. GCC funds Equity.

2. GCC have complete control over Equity.
3. GCC own 90% of Equity.
4. Equity doesn’t move without GCC’s conformity & act upon GCC’s instance.
5. Equity was formed by GCC to circumvent BSP rules.
In other words, they also violated certain CB rules (BSP rules).

 In short, how did the SC rule? What are the circumstances to prove to allow now
the piercing of the corporate veil?
- The SC ruled that GCC is liable for the promissory note issued by Equity to
Alsons, on the basis that it is proper to pierce the veil of corporate entity of
Equity because it was a mere conduit of GCC.

In other words, this is a case where the SC had the occasion again to review the
exceptions to the Principle of Separate Personality or Corporate Fiction.

 Circumstances when the veil of corporate fiction may be pierced?

1. To defeat public convenience
2. To perpetrate fraud, to justify a wrong, or to commit a crime
3. In alter ego cases

In this case, the SC had the occasion to explain alter ego cases. Other than the
four standard instances, the SC emphasized through this case that the
corporation may likewise be questioned and its veil of corporate entity
pierced if it involves alter ego cases.

 How did the SC explain alter ego cases?

- A corporation is an alter ego of another corporation if the latter corporation

does not have a separate juridical personality from its parent corporation but
only a mere instrumentality or conduit of that corporation.

Where one corporation is organized in such a way that its affairs are controlled by
another, where that corporation was organized as a mere farce, or as an
instrumentality to carry out the functions of the other, then that will be considered as
an alter ego of the other corporation, and therefore the corporate veil may be pierced.

8. STA. MONICA and DEVELOPMENT CORPORATION vs. DAR

There is this one Asuncion Trinidad who owns parcels of land. Her tenant was De
Guzman. Trinidad and De Guzman executed a Contract of Lease over the land. So a
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Land Transfer Certificate was issued to De Guzman. De Guzman desired an

emancipation patent over the land he tills. So he went to the DAR to secure a patent
over the land. The patent was issued in favor of De Guzman. About a year later, Sta.
Monica filed a petition to question the order of the DAR saying that Sta. Monica was
denied due process because it did not receive Notice of the Proceedings in the DAR.
According to Sta. Monica, Trinidad, the previous owner of the land, sold the land to the
Sta. Monica. So Sta. Monica now is the owner of the land. De Guzman countered the
contention of Sta. Monica by saying that the sale between Trinidad and Sta. Monica
was null and void because it violates the Agrarian Law.

 Contention of the parties

o It was the contention of Sta. Monica that the transfer from Trinidad and
De Guzman was void because Trinidad already previously sold the same
land to Sta. Monica.
o De Guzman countered that it was the sale between Trinidad and Sta.
Monica that was void because it violates the Agrarian Law.
The contention in relation to Corporation Law: So backtrack for a bit. It was alleged
that the emancipation process was void because it violates the corporation’s due
process. But it was contended that Trinidad was the treasurer of Sta. Monica. Supreme
Court ruled that: (1) Sale was really void because it was prohibited under the Agrarian
Law, and: (2) Since Trinidad was the secretary (sic) of the corporation party to the
transaction, there is constructive notice to the corporation and therefore it has not
been denied due process. The Supreme Court also said finally that the Corporation
Law should not be used by landowners to circumvent or defeat the purposes of
Agrarian Law.

The issue here is that the veil of corporate fiction must be pierced.

The corporate veil should not be used as a means to protect an individual in

order to avoid liability to another person.

 So when we lift the veil what do we see?

o The owners of the land that where sought to be transferred to the tenant.
They cannot claim separate personality of the corporation. So even when
the corporation is not notified, they turn out to be the owners, and
therefore, the corporate veil was lifted.

9. CONCEPT BUILDERS VS NLRC

Laborers of Concept Builders were illegally dismissed. Sued C.B. but was not able to
attach since the office was now occupied by another corporation, Hydro Pipes. A
“break-open order” was filed by the respondents since C.B. and HPPI, because
majority of the stockholders, officers, and directors of HPPI, is the same with C.B.
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Contention of the parties:

- Concept Builders alleged that Hydro was a separate corporation and cannot
be made liable
- Private Respondents alleged that Hydro was merely an alter-ego of Concept
Builders
Issue: whether or not, the break open order on the premises of HPPI be issued to
attach its properties for the liabilities of C.B.

SC: A break-open order can be had because it was found out that Hydropipes is just
but a continuation of the business of concept builders.” In this case, the NLRC noted
that, while petitioner claimed that it ceased its business operations on April 29, 1986, it
filed an Information Sheet with the Securities and Exchange Commission on May 15,
1987, stating that its office address is at 355  Maysan Road, Valenzuela, Metro Manila.
On the other hand, HPPI, the third-party claimant, submitted on the same day, a
similar information sheet stating that its office address is at 355  Maysan Road,
Valenzuela, Metro Manila.

Furthermore, the NLRC stated that:

“Both information sheets were filed by the same Virgilio O. Casino as the

corporate secretary of both corporations. It would also not be amiss to note that
both corporations had the same president, the same board of directors,
the same corporate officers, and substantially the same subscribers.
From the foregoing, it appears that, among other things, the respondent (herein
petitioner) and the third-party claimant shared the same address and/or premises.
Under this circumstances, (sic) it cannot be said that the property levied upon by the
sheriff were not of respondents.16

Clearly, petitioner ceased its business operations in order to evade the

payment to private respondents of backwages and to bar their
reinstatement to their former positions.  HPPI is obviously a business
conduit of petitioner corporation and its emergence was skillfully
orchestrated to avoid the financial liability that already attached to
petitioner corporation.

- In this case, the Supreme Court had the occasion to discuss the elements to
pierce the veil of corporate entity (Instrumentality test) :

i.) Control of one corporation over the other, this control is not limited
to control over the ownership, funds, affairs or properties of the
corporation but equally important is that control by the parent
corporation extends to business practices and management,
procedures and policies of the other corporation.
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ii.) Such control is used to commit or perpetuate fraud, defeat

convenience or evasion of obligation
iii.) Through this control injury or loss has been suffered or done to the
creditors or employees or those persons claiming against the
corporation (proximate cause).

10. PNB V. ANDRADA ENGINEERING AND ELECTRICAL CO.

Sir: In other words because PNB is involved in extending loans to sugar planters, and
the latter failed to pay their loans, necessarily PNB will have to foreclose against them.
Sometimes they have to confiscate the QUEDANS, this represents the sugar owned by
in a mill. Because if you are a sugar planter, you have your sugar cane brought to the
mill, and once milled, they will issue this quedan. So if you have 100 sacks, although
they call it TAGS (?), it’s there in the bodega. So the sugar planter will now own that
quedan, you can sell it. But you cannot tell which part of the bodega is your sugar, but
the quedan is limited to your volume in the quedan.

So if you borrow from the bank, your collateral is the quedan. If you cannot pay, the
bank will foreclose your quedan. Because the bank is not engaged in sugar business,
they will now create a corporation (Nasedeco) to manage the foreclosed sugar.

The burden would have been on Andrada to establish that such grounds exist.

And as to the letters of Instruction, the Supreme Court held that such cannot
tantamount to merger of the corporations because even if the corporations in this case
agreed to merge, there is a specified procedure for merger as provided in the
corporation code and it is a mandatory requirement. Since the corporations in this case
did not follow the procedure for merger, there was then no merger that occurred.

- A: The SC clarified the principle on alter ego, that there must be

(instrumentality test):

o Control- not just control on stocks and ownership but complete control on
finances and business practices;
o Fraud- control was used with the intention to defraud creditors
o Injury- such control was the proximate cause of the injury suffered
(creating that alter ego company)
These were not present in the case. The injury incurred by the contractor who
rendered technical services were incurred as a valid obligation and the failure to pay
was incurred by nasadeco as a mere client. The failure to pay was not caused by the
assumption of the assets of the company by PNB.
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Also there was also no merger. The letters of Instruction cannot be seen as a source
for merger. We have specific provisions in our corporation code for merger. No
government agency can declare for corporations to be merged. The ultimate test is
the approval of the SEC. In this case, they did not ask for such approval. So the
transfer of assets does not entail assumption of obligations unless the buyer expressly
assumes the same.

11. YAMAMOTO V. NISHINO

A: This case involves an offer to Yamamoto, a stockholder, by the lawyer of Nishino,

that if he want to take his machineries from the corporation just inform him about it,
but there was no reply.

 As to the issue on alter ego – no alter ego (three-pronged test /

instrumentality test)

o There was no control as to financial, policy, and business practice of the

corporation
o The control was not used to defraud the creditors
o There was no injury at all

 The most important issue in this case is on the Trust fund doctrine.

o These machineries are assets of the corporation. This cannot be distributed

or disposed to the stockholders even with a resolution. These assets form
part of the capital of the corporation, and under the trust fund doctrine,
the capital stock, property, and other assets of the a corporation are
regarded as equity in trust for the payment of corporate creditors which
are preferred over stockholders in the distribution of corporate assets.

Sir: Yamamoto said, you have all my machineries so you have to return it to me.
Council said yes you can get it just let me know when and there was no reply.

Sir: These are assets of the corporation and even if it was true that there was an offer
to give it to yamamoto, it cannot be done by a mere letter not even a resolution
because these assets of the corporation are held in trust for the creditors. This is in
line with the trust fund doctrine.

12. REYES VS RTC MAKATI & ZENITH INSURANCE

This case was regarding the distribution of shares of stock in a company of zenith. The
shares of stocks being disputed is the share of Anastasia their mother. One brother
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alleged that there was fraud because his brother OSCAR acquired the shares of his
mother and it was not properly distributed among them.

2main issue in this case. First was the jurisdiction of the commercial court (intra-
corporate dispute) and second was if it was a derivative suit. As to the first issue the
SC said that there must be the 2 test. In order for it to determine whether or not there
was Jurisdiction they adopted the NATURE OF THE CONTROVERSY test. The
RELATIONSHIP TEST was also explained in this case

 WON there is Intra-Corporate Controversy (two-tier test)

o Relationship test
Initially, the main consideration in determining whether a dispute
constitutes an intra-corporate controversy was limited to a
consideration of the intra-corporate relationship existing between or
among the parties.

a)between the corporation, partnership, or association and the

public;
b)between the corporation, partnership, or association and its
stockholders, partners, members, or officers;
c)between the corporation, partnership, or association and the State
as far as its franchise, permit or license to operate is concerned; and

d)among the stockholders, partners, or associates

themselves.

o Controversy test
 The controversy must not only be rooted in the existence of an
intra-corporate relationship, but must as well pertain to the
enforcement of the parties' correlative rights and obligations
under the CORPORATION CODE AND THE INTERNAL AND
INTRA-CORPORATE REGULATORY RULES OF THE
CORPORATION.

 WON this is a derivative suit; MECA

o MUST BE A SH at the time the controversy arose

o EXHAUSTION of remedies
o CAUSE OF ACTION belongs to the corporation

 When you say exhaustion of administrative remedies, what does the

law require?
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o There must be a demand to the corporation or to the board of directors

and a denial of such demand.

Sir: So here, the court further strengthened the doctrine of derivative suit. The
insurance proceeds as well as the shares of stock do not immediately belong to the
heirs although succession takes effect upon the death of the decedent because
becoming a stockholder must go through the process of acquiring the stocks and
registering these stocks in your name. Until then, you are not a stockholder

13. GOCHAN V. YOUNG & SPS. UY

SIR: In other words the majority of the management was also majority of the board,
declared allowances and salaries to them so that so that the funds of the corporation
were [siphoned] to them and the corporation was running out of funds and therefore
the financial condition of the corporation was not really good. Even if the shares were
offered to the market the price of these shares went down because it was not a
profitable corporation.

There is more loss because of mismanagement and so they filed a derivative suit
alleging among others the continuous [siphoning] of funds from the [corporation] to
the personal pockets of the majority SHs, so that was the cause of action in the
derivative suit. They added something that it caused the reduction of the price of
shares so that even if we sell our shares, we will be selling it at a very low price and
we will be compelled to sell it to them and if we sell it to them they will be paying us a
very low price.

Gochans said you’re filing a case a case in your behalf because you suffered loss,
you’re at a disadvantage, the case that you’ve intended to file is a personal case not a
derivative suit. And the spouses Uy said, we are also filing a case in behalf of the
corporation because of your mismanagement because you have [siphoned] the funds
of the corporation to your pockets.

SC: because the corporation indeed suffered a loss then the fact that these parties
suffered also a personal loss will not deprived them to file a derivative suit.

The fact that these parties suffered a personal loss does not deprive them to
file a derivative suit. As a matter of fact, this personal loss in addition to the
loss suffered by the corporation is merely incidental to the derivative suit.
The personal loss doesn’t deprive the stockholder to file a derivative suit. It will be
an additional cause of action.

14. HI-YIELD REALTY v. CA

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 Requisites of a Derivative Suit

1. You have to be a stockholder of the corporation.
2. Must have exhausted administrative remedies (i.e. demand from the
corporation).
3. The corporation suffered damage / loss.

There was this one Leonora, she was a majority stockholder and she obtained loans
for herself and secured the loans with corporate properties. And so she was not able to
pay for the loans, so the creditor foreclosed the corporate assets, which she
mortgaged. There is this Roberto, another stockholder of the corporation, who filed a
suit to annul the real estate mortgage and the foreclosure proceedings, contending
that Leonora was not authorized to mortgage the properties of the corporation
because it cannot be used to secure personal obligations.

So Roberto filed a Derivative suit to annul the real estate mortgage and foreclosure
proceedings. Roberto at first demanded from the corporation to remedy the REM but
the corporation did not head the demand. In other words, the corporation refused to
act on it. So the SC said the demand would have been useless because he could not
expect a favorable action on his demand.

That is why he did not get any answer because it was involving the very persons from
whom he heeded the demand. It will be a useless exercise and an act of futility. So
here the SC merely emphasized the fact that if it is addressed to the officers
who are in complete control of the corporation, you cannot expect the same
person to act on the demand because they are the same persons who are
guilty of violations that you have been demanding for.

 So, what happened to the Derivative Suit, was it proper?

o The SC said the Derivative Suit was proper for Roberto.

15. INTERNATIONAL EXPRESS TRAVEL AND TOURS VS. KHAN

Facts: Khan was the director of the Philippine Football Federation.

- In order to participate in the SEA Games in Kuala Lumpur, they contracted with
International Express to book the airline tickets for their trip. The costs for the
tickets amounted to P400K+.
- The PFF was not able to settle this obligation, so the travel agency filed suit against
the PFF and against Henri Khan as president.

Defenses:
 16

- It was the defense of Khan that he cannot be held personally liable for the
obligation because he had a personality separate and distinct from that of PFF.
- The doctrine of corporation by estoppel was also raised as a defense.

SC Ruling:

- The Philippine Football Federation is one capable of separate juridical existence

because it had the powers incident to individuals or organizations possessing
juridical personality, and the Law creating this PFF granted it these powers.

- But the mere passage of the Law does not automatically grant juridical existence.
You need to follow the provisions of the Code and register yourself.

- That law did not create the federation into a corporation. Unlike other corporations
that was in fact created by law; a private corporation but created by law. Here,
the association said, we are created by law. But that law did not create
you, only, it suggests that you can become a corporation.

- Corporation by estoppel
o Here we do not have a corporation by estoppel

- Because in corporation by estoppel?

o No corporation is recognized, but only its relationship & acts under
certain circumstances. And it is applied only when a party tries to escape
liability.

- Who claim a corporation by estoppel here?

o It was the travel agency who was trying to enforce a claim against the
federation. The appellate court, deciding in favor of Henry khan, applied
corporation by estoppel saying that since the travel agency transacted with
Henry khan, the travel agency is estopped to claim the entity of the
corporation. But the Supreme Court held that the doctrine was misapplied.
The doctrine by estoppel is applied when a third party is trying to
escape liability. In the instant case, the travel agency is not escaping
liability, rather, it is enforcing a claim. Henry khan being a president of the
federation is in the best position to know the existence or non-existence of
the corporate personality and cannot deny liability.

Sir: in here, khan said, I can’t be personally liable because I’m only acting in behalf of
the corporation. Express travel said, you are not a corporation because there is no law
creating you as a corporation. Khan said, but you dealt with me as a corporation, in
your mind I am a corporation, so you are now estopped to deny that we are a
corporation so that it is a corporation by estoppel. That’s not the case here. The
 17

doctrine of corporation by estoppel only applies when a party wanted to

escape liability. But here, it is the contrary, express travel now wanted to
enforce the claim, so there is no corporation by estoppel here.

16. SAWADJAAN V. CSC

Issues:
(i) the bank failed to issue rules and regulations for disciplining
employees and absent such, it has no authority to create the
investigative committee.

Ruling: The rules and regulations mandated by the Code refers to those administrative
matters, for salary purposes and is not mandatory for disciplining employees. Absent
such rules and regulations regarding discipline of employees, the bank can still
discipline its employees.

 (ii) the franchise of the bank should have been revoked for its failure to
submit its by-laws within 60 day period as mandated by the
Corporation Code.

Ruling: Failure to submit or file the by-laws on time does not render the corporation, in
this case, the bank, ipso facto dissolved, no automatic dissolution of the bank for
failure to submit the by-laws on time. At the very least, such corporation
becomes a de facto corporation.

 (iii) whether the contentions of Mr. Sawadjaan were correct regarding

to the matter whether it was an intra-corporate dispute or not.

Ruling: The contentions of Mr. Sawadjaan were misplaced because such dispute is
not an intra-corporate dispute but a labor dispute due to the fact that Mr.
Sawadjaan failed to show that he was more than an employee. He failed to
allege that he was a stockholder or an officer of the bank. The relationship established
was just an employer-employee relationship.

Petition dismissed.

 Q: In short, what was the issue in so far as de facto corporation is

concerned, Migs-kun?

- A: Sawadjaan attacked the corporate existence of the bank. However the

Supreme Court said that even if the bank failed to file its bylaws within the
said 60 day period is a ground for dissolution, it does not result in a ipso
facto revocation of its registration. The procedure for revocation must be
 18

followed. Notwithstanding the failure to file the bylaws, at the very least
the bank still has juridical personality as a corporation de facto

 Q: How do we now distinguish corporation de facto and estoppel, Migs-

kun?

- A: In Corporation de facto, there is colorable compliance with the

requirements and attempt in good faith to organize (bona fide attempt to
organize).
- In Corporation by estoppels, there is none of these
- In Corporation de facto the law recognizes the juridical personality of the
corporation
- In Corporation by estoppels, the law only recognizes the acts, not the
juridical personality.

17. GOKONGWEI JR VS SEC

AMENDMENT ISSUE

Sir: So there was an amendment. The Bylaws of San Miguel was

amended. What was the amendment, Luj-chan?
o A: There was an additional qualification for a director; that if a
stockholder is engaged in competing business, he cannot be
elected as a director of San Miguel.

 Q: That was the amendment, because Gokongwei was?

o A: A Competitor

 Q: What was his competition Luj-chan?

Sir: Beer na Beer (pero murag Lucio Tan tagiya sa Beer na Beer). And he bought
shares of stocks of San Miguel. Not only did he buy, he copied the bottles. He was
able to buy shares of stock which could have been enough to make him a director. His
holdings were enough to become a director. San Miguel Lumapas didn’t like this. So
they came out with that amendment; that no person shall become a director if he is a
stockholder of a competitor.

 Q: Proceed, Luj-chan

o A: He challenged the amendment because this violates the Equal

Protection Clause, and that this violates his rights as a stockholder to be
elected as a director.
 19

Sir: Right. Because what we said is voting in the Code is by cumulative voting. If I
have enough votes, I could compute it ahead.

INSPECTION ISSUE
INVESTMENT ISSUE

If they were to admit a director of a competing business It would tantamount to grave

injury to the business of San Miguel Corp and in relation to that defense, they also
denied the inspection of the corporate books.

Held:
 Partly granted the petition of Gokongwei. The amendment should be upheld
but he should be given the right to inspect the books.

Sir: so far as the amendment is concern, it was valid.

- Why did Gokongwei said that it was a violation of due process?

o Because he was singled out to be excluded as a nominee as a director.

Sir: para ako raman jud ni nga amendment, ang oban stockholders dili man tag eya og
beer company. It was intended to single me out, therefore equality clause is violated.
But SC said that it was not a violation of equal protection clause because it
applies to all stockholders similarly situated.
Sir: SC said that it was valid but Gokongwei should have been given due process. In
other words, he should have been heard. Are you a stockholder? Do you own the
other company?

Osahay kaning SC morag boang. What was the point?

But the SC also said that if you’re an owner of that other company you are obligated
to be loyal to that company and there is a tendency that you’d tell that company
everything you know, all the info you have. So that if you became a director in San
Miguel, you can gather all the info in San Miguel and just divulge it to your company,
even if you don’t want to divulge it, that other company can compel you because you
have a fiduciary obligation to fully disclose what you know.

18. Tam Wing Tak v. Makasiar

- derivative suit
o tak failed to allege that he was suing in behalf of the corporation
- bp 22 case
 20

o since concord was the payee, tak failed to allege that he was authorized
in behalf of concord to file a case against siong
o proper party here is concord, and there was no board resolution

19. Westmont bank v. Inland

- when a corporation will be estopped with clothing its officer/employee with

apparent authority

o a corporation is estopped from denying its officer’s apparent authority

when it allowed it to transact appearing as if it was authorized
o the bank never questioned acts of its officer, calo, from entering into
transactions. It was only after 7 years when one of its employee flagged
his transactions

- burden of proof whether a corporation’s officer is clothed with authority

o burden of proof falls on the corporation to prove that its officer has no
authority before it is shifted to the adverse party to prove that the officer
was authorized

SC said, all along, the bank authorized calo to act in their behalf despite the absence
of a board resolution. As an account officer, that was his apparent authority, so no
need for a board resolution.

Be careful with this case because it’s an exception

20. CCCI v. Elizagaque

- when the board of directors or officers of the corporation will be held solidarily
liable
o patently unlawful acts
o negligence and bad faith
o conflict of interest
o disloyalty

- case at bar
o the board of CCCI was found to be solidarily liable by the SC since despite
the amendment (that consent must be unanimous from the board of
trustees) for admission of new members, they never changed their
application forms
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o moreover, they never responded to letters sent by elizagaque asking why

his application for membership was denied

21. JG Summit Holdings v. CA

- issue over right of first refusal and option to top

- right of first refusal
o if holdings of Kawasaki exceed 40%, it could always sell the excess or even
assign it to someone else
o it did not violate anti-dummy law since there was no fraud or bad faith on
the part of PHI
 fraud could be done by transferring land to someone making it
appear that the recipient paid the corporation when it did not really
pay
 declaration of trust stating that “prince, owner of land is not
really the true owner since he did not pay for it. And that when
needed, prince will return it to the true owner”

22. HPPC v. SBMA

- whether a corporation is doing business in the philippines

o there is no hard and fast rule, but one determination is that there must be
an intention to do business in the philippines
- indicators of doing business in the philippines
o in this case, the SC added another indicator of doing business here in the
philippines
 since HPPC participated in bidding, there was intention for it to do
business here

bidding takes time, that’s an intention really to engage in business. It’s a long process.
So he SC said that since you are participating in a public bidding, you intend really to
conduct and engage in business here in the Philippines

23. Knecht v. United Cigarette Corp.

- issue on whether a corporation can wind up its affairs beyond the 3-year period
provided by the corporation code

despite the expiration of the 3 year period, so long as within the 3 year period, a
trustee was appointed, the SC said that the trustee is just a continuation of the
 22

existence of the corporation by fiction of law. He is representing the corporation

itself. So long as there are unsettled disputes, claims, or debts, then the trustee will
continue to enjoy such personality in behalf of the corporation