G.R. No.

207161, September 08, 2015

Y-I LEISURE PHILIPPINES, INC., YATS INTERNATIONAL LTD. AND Y-I CLUBS AND RESORTS,
INC., Petitioners, v. JAMES YU, Respondent.

DECISION

MENDOZA, J.:

The present case attempts to unravel whether the transfer of all or substantially all the assets of a
corporation under Section 40 of the Corporation Code carries with it the assumption of corporate liabilities.

This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the January 30,
2012 Decision1 and the April 29, 2013 Resolution2 of the Court of Appeals (CA), in CA-G.R. CV No. 96036,
which affirmed with modification the August 31, 2010 Decision3 of the Regional Trial Court, Branch 81,
Quezon City (RTC).

The Facts

Mt. Arayat Development Co. Inc. (MADCI) was a real estate development corporation, which was
registered4 on February 7, 1996 before the Security and Exchange Commission (SEC). On the other hand,
respondent James Yu (Yu) was a businessman, interested in purchasing golf and country club shares.

Sometime in 1997, MADCI offered for sale shares of a golf and country club located in the vicinity of Mt.
Arayat in Arayat, Pampanga, for the price of P550.00 per share. Relying on the representation of MADCI's
brokers and sales agents, Yu bought 500 golf and 150 country club shares for a total price of P650,000.00
which he paid by installment with fourteen (14) Far East Bank and Trust Company (FEBTC)
checks.5cralawrednad

Upon full payment of the shares to MADCI, Yu visited the supposed site of the golf and country club and
discovered that it was non-existent. In a letter, dated February 5, 2000, Yu demanded from MADCI that
his payment be returned to him.6 MADCI recognized that Yu had an investment of P650,000.00, but the
latter had not yet received any refund.7cralawrednad

On August 14, 2000, Yu filed with the RTC a complaint8 for collection of sum of money and damages with
prayer for preliminary attachment against MADCI and its president Rogelio Sangil (Sangil) to recover his
payment for the purchase of golf and country club shares. In his transactions with MADCI, Yu alleged that
he dealt with Sangil, who used MADCI's corporate personality to defraud him.

In his Answer,9 Sangil alleged that Yu dealt with MADCI as a juridical person and that he did not benefit
from the sale of shares. He added that the return of Yu's money was no longer possible because its
approval had been blocked by the new set of officers of MADCI, which controlled the majority of its board
of directors.

In its Answer,10 MADCI claimed that it was Sangil who defrauded Yu. It invoked the Memorandum of
Agreement11 (MOA), dated May 29, 1999, entered into by MADCI, Sangil and petitioner Yats International
Ltd. (YIL). Under the MOA, Sangil undertook to redeem MADCI proprietary shares sold to third persons or
settle in full all their claims for refund of payments.12 Thus, it was MADCI's position that Sangil should be
ultimately liable to refund the payment for shares purchased.

After the pre-trial, Yu filed an Amended Complaint,13 wherein he also impleaded YIL, Y-I Leisure Phils.,
Inc. (YILPI) and Y-I Club & Resorts, Inc. (YICRI). According to Yu, he discovered in the Registry of Deeds
of Pampanga that, substantially, all the assets of MADCI, consisting of one hundred twenty (120) hectares
of land located in Magalang, Pampanga, were sold to YIL, YILPI and YICRI. The transfer was done in fraud
of MADCI's creditors, and without the required approval of its stockholders and board of directors under
Section 40 of the Corporation Code. Yu also alleged that Sangil even filed a case in Pampanga which
assailed the said irregular transfers of lands.
In their Answer,14 YIL, YILPI and YICRI alleged that they only had an interest in MADCI in 1999 when YIL
bought some of its corporate shares pursuant to the MOA. This occurred two (2) years after Yu bought his
golf and country club shares from MADCI. As a mere stockholder of MADCI, YIL could not be held
responsible for the liabilities of the corporation. As to the transfer of properties from MADCI to YILPI15 and
subsequently to YICRI,16 they averred that it was not undertaken to defraud MADCI's creditors and it was
done in accordance with the MOA. In fact, it was stipulated in the MOA that Sangil undertook to settle all
claims for refund of third parties.

During the trial, the MOA was presented before the RTC. It stated that Sangil controlled 60% of the capital
stock of MADCI, while the latter owned 120 hectares of agricultural land in Magalang, Pampanga, the
property intended for the development of a golf course; that YIL was to subscribe to the remaining 40% of
the capital stock of MADCI for a consideration of P31,000,000.00; that YIL also gave P500,000.00 to
acquire the shares of minority stockholders; that as a condition for YIL's subscription, MADCI and Sangil
were obligated to obtain several government permits, such as an environmental compliance certificate and
land conversion permit; that should MADCI and Sangil fail in their obligations, they must return the
amounts paid by YIL with interests; that if they would still fail to return the same, YIL would be authorized
to sell the 120 hectare land to satisfy their obligation; and that, as an additional security, Sangil
undertook to redeem all the MADCI proprietary shares sold to third parties or to settle in full all their
claims for refund.

Sangil then testified that MADCI failed to develop the golf course because its properties were taken over
by YIL after he allegedly violated the MOA.17 The lands of MADCI were eventually sold to YICRI for a
consideration of P9.3 million, which was definitely lower than their market price.18 Unfortunately, the case
assailing the transfers was dismissed by a trial court in Pampanga.19cralawrednad

The president and chief executive officer of YILPI and YICRI, and managing director of YIL, Denny On Yat
Wang (Wang), was presented as a witness by YIL. He testified that YIL was an investment company
engaged in the development of real estates, projects, leisure, tourism, and related businesses.20 He
explained that YIL subscribed to. the shares of MADCI because it was interested in its golf course
development project in Pampanga.21 Thus, he signed the MOA on behalf of YIL and he paid P31.5 million
to subscribe to MADCI's shares, subject to the fulfilment of Sangil's obligations.22cralawrednad

Wang further testified that the MOA stipulated that MADCI would execute a special power of attorney in
his favor, empowering him to sell the property of MADCI in case of default in the performance of
obligations.23 Due to Sangil's subsequent default, a deed of absolute sale over the lands of MADCI was
eventually executed in favor of YICRI, its designated company.24 Wang also stated that, aside from its
lands, MADCI had other assets in the form of loan advances of its directors.25cralawredcralawrednad

The RTC Ruling

In its August 31, 2010 Decision, the RTC ruled that because MADCI did not deny its contractual obligation
with Yu, it must be liable for the return of his payments. The trial court also ruled that Sangil should be
solidarily liable with MADCI because he used the latter as a mere alter ego or business conduit. The RTC
was convinced that Sangil had absolute control over the corporation and he started selling golf and
country club shares under the guise of MADCI even without clearance from SEC.

The RTC, however, exonerated YIL, YILPI and YICRI from liability because they were not part of the
transactions between MADCI and Sangil, on one hand and Yu, on the other hand. It opined that YIL, YILPI
and YICRI even had the foresight of protecting the creditors of MADCI when they made Sangil responsible
for settling the claims of refunds of thirds persons in the proprietary shares. The decretal portion of the
decision reads:ChanRoblesvirtualLawlibrary

WHEREFORE, premises considered, judgment is hereby rendered as follows:ChanRoblesvirtualLawlibrary

1. Ordering defendants Mt. Arayat Development Corporation, Inc. and Rogelio Sangil to pay plaintiff James
Yu jointly and severally the amounts of P650,000.04 with 6% legal rate of interest from the filing of the
amended complaint until full payment and and P50,000.00 as attorney's fees.

2. Dismissing the instant case against defendant Y-I Leisure Philippines, Inc., YATS International Limited
and Y-I Clubs and Resorts, Inc.; and

3. Dismissing the counterclaims of Y-I Leisure Philippines, Inc., YATS International Limited and Y-I Clubs
and Resorts, Inc.

SO ORDERED.26

In two separate appeals, the parties elevated the case to the CA.

The CA Ruling

In its assailed Decision, dated January 30, 2012, the CA partly granted the appeals and modified the RTC
decision by holding YIL and its companies, YILPI and YICRI, jointly and severally, liable for the satisfaction
of Yu's claim.

The CA held that the sale of lands between MADCI and YIL must be upheld because Yu failed to prove that
it was simulated or that fraud was employed. This did not mean, however, that YIL and its companies
were free from any liability for the payment of Yu's claim.

The CA explained that YIL, YILPI and YICRI could not escape liability by simply invoking the provision in
the MOA that Sangil undertook the responsibility of paying all the creditors' claims for refund. The
provision was, in effect, a novation under Article 1293 of the Civil Code, specifically the substitution of
debtors. Considering that Yu, as creditor of MADCI, had no knowledge of the "change of debtors," the
MOA could not validly take effect against him. Accordingly, MADCI remained to be a debtor of Yu.

Consequently, as the CA further held, the transfer of the entire assets of MADCI to YICRI should not
prejudice the transferor's creditors. Citing the case of Caltex Philippines, Inc. v, PNOC Shipping and
Transport Corporation27 (Caltex), the CA ruled that the sale by MADCI of all its corporate assets to YIL and
its companies necessarily included the assumption of the its liabilities. Otherwise, the assets were put
beyond the reach of the creditors, like Yu. The CA stated that the liability of YIL and its companies was
determined not by their participation in the sale of the golf and country club shares, but by the fact that
they bought the entire assets of MADCI and its creditors might not have other means of collecting the
amounts due to them, except by going after the assets sold.

Anent Sangil's liability, the CA ruled that he could not use the separate corporate personality of MADCI as
a tool to evade his existing personal obligations under the MOA. The dispositive portion of the decision
reads:ChanRoblesvirtualLawlibrary

WHEREFORE, the appeals are PARTLY GRANTED. Accordingly, the assailed Decision dated August 31, 2010
in Civil Case No. Q-oo-41579 of the RTC of Quezon City, Branch 81, is hereby AFFIRMED WITH
MODIFICATION, in that defendants-appellees YIL, YILPI and YICRI are hereby held jointly and severally
liable with defendant-appellee MADCI and defendant-appellant Sangil for the satisfaction of plaintiff-
appellant Yu's claim.

In all other respects, the assailed decision stands.

SO ORDERED.28

YIL and its companies, YILPI and YICRI, moved for reconsideration, but their motion was denied by the CA
in its assailed Resolution, dated April 29,2013.

Hence, this petition.

ISSUE

WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT PETITIONERS YATS GROUP
SHOULD BE HELD JOINTLY AND SEVERALLY LIABLE TO RESPONDENT YU DESPITE THE ABSENCE
OF FRAUD IN THE SALE OF ASSETS AND BAD FAITH ON THE PART OF PETITIONERS YATS
GROUP.29

Petitioners YIL, YILPI and YICRI contend that the facts of Caltex are not on all fours with the case at
bench. In Caltex, there was an express stipulation of the assumption of all the obligations of the judgment
debtor. Here, there was no stipulation whatsoever stating that the petitioners shall assume the payment
of MADCI's debts.

The petitioners also argue that fraud must exist to hold third parties liable. The sale in this case was not in
any way tainted by any of the "badges of fraud" cited in Oria v. McMicking.30 The CA itself stated that the
alleged simulation of the sale was not established by respondent Yu. Moreover, Article 1383 of the Civil
Code requires that the creditor must prove that he has no other legal remedy to satisfy his claim. Such
requirement must be followed whether by an action for rescission or action for sum of money.

On September 20, 2013, respondent Yu filed his Comment.31 He asserted that the CA correctly
applied Caltex in the present case as the lands sold to the petitioners were the only assets of MADCI. After
the sale, MADCI became incapable of continuing its business, and its corporate existence has just
remained to this day in a virtual state of suspended animation. Thus, unless the creditors had agreed to
the sale of all the assets of the corporation and had accepted the purchasing corporation as the new
debtor, sufficient assets should have been reserved to pay their claims.

On June 19, 2014, the petitioners filed their Reply,32 reiterating their previous argument that the element
of fraud was required in order for a third party buyer to be liable to the seller's creditors.

The Court's Ruling

The petition lacks merit.

To recapitulate, respondent Yu bought several golf and country club shares from MADCI. Regrettably, the
latter did not develop the supposed project. Yu then demanded the return of his payment, but MADCI
could not return it anymore because all its assets had been transferred. Through the acts of YIL, MADCI
sold all its lands to YILPI and, subsequently to YICRI. Thus, Yu now claims that the petitioners inherited
the obligations of MADCI. On the other hand, the petitioners counter that they did not assume such
liabilities because the transfer of assets was not committed in fraud of the MADCI's creditors.

Hence, the issue at hand presents a complex question of law - whether fraud must exist in the transfer of
all the corporate assets in order for the transferee to assume the liabilities of the transferor. To resolve
this issue, a review of the laws and jurisprudence concerning corporate assumption of liabilities must be
undertaken.

Background on the corporate

assumption of liabilities

In the 1965 case of Nell v. Pacific Farms, Inc.,33 the Court first pronounced the rule regarding the transfer
of all the assets of one corporation to another (hereafter referred to as the Nell Doctrine) as
follows:ChanRoblesvirtualLawlibrary

Generally, where one corporation sells or otherwise transfers all of its assets to another corporation, the
latter is not liable for the debts and liabilities of the transferor, except:

1. Where the purchaser expressly or impliedly agrees to assume such debts;

2. Where the transaction amounts to a consolidation or merger of the corporations;

3. Where the purchasing corporation is merely a continuation of the selling corporation; and

4. Where the transaction is entered into fraudulently in order to escape liability for such debts.
The Nell Doctrine states the general rule that the transfer of all the assets of a corporation to another shall
not render the latter liable to the liabilities of the transferor. If any of the above-cited exceptions are
present, then the transferee corporation shall assume the liabilities of the transferor.

Legal bases of the Nell Doctrine

An evaluation of our contract and corporation laws validates that the Nell Doctrine is fully supported by
Philippine statutes. The general rule expressed by the doctrine reflects the principle of relativity
under Article 131134 of the Civil Code. Contracts, including the rights and obligations arising therefrom,
are valid and binding only between the contracting parties and their successors-in-interest. Thus, despite
the sale of all corporate assets, the transferee corporation cannot be prejudiced as it is not in privity with
the contracts between the transferor corporation and its creditors.

The first exception under the Nell Doctrine, where the transferee corporation expressly or impliedly agrees
to assume the transferor's debts, is provided under Article 204735 of the Civil Code. When a person binds
himself solidarity with the principal debtor, then a contract of suretyship is produced. Necessarily, the
corporation which expressly or impliedly agrees to assume the transferor's debts shall be liable to the
same.

The second exception under the doctrine, as to the merger and consolidation of corporations, is well-
established under Sections 76 to 80, Title X of the Corporation Code. If the transfer of assets of one
corporation to another amounts to a merger or consolidation, then the transferee corporation must take
over the liabilities of the transferor.

Another exception of the doctrine, where the sale of all corporate assets is entered into fraudulently to
escape liability for transferor's debts, can be found under Article 1388 of the Civil Code. It provides that
whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for
damages suffered. Thus, if there is fraud in the transfer of all the assets of the transferor corporation, its
creditors can hold the transferee liable.

The legal basis of the last in the four (4) exceptions to the Nell Doctrine, where the purchasing corporation
is merely a continuation of the selling corporation, is challenging to determine. In his book, Philippine
Corporate Law,36 Dean Cesar Villanueva explained that this exception contemplates the "business-
enterprise transfer." In such transfer, the transferee corporation's interest goes beyond the assets of the
transferor's assets and its desires to acquire the latter's business enterprise, including its goodwill.

In Villa Rev Transit, Inc. v. Ferrer,37 the Court held that when one were to buy the business of another as
a going concern, he would usually wish to keep it going; he would wish to get the location, the building,
the stock in trade, and the customers. He would wish to step into the seller's shoes and to enjoy the same
business relations with other men. He would be willing to pay much more if he could get the "good will" of
the business, meaning by this, the good will of the customers, that they may continue to tread the old
footpath to his door and maintain with him the business relations enjoyed by the seller.

In other words, in this last exception, the transferee purchases not only the assets of the transferor, but
also its business. As a result of the sale, the transferor is merely left with its juridical existence, devoid of
its industry and earning capacity. Fittingly, the proper provision of law that is contemplated by this
exception would be Section 40 of the Corporation Code,38 which provides:ChanRoblesvirtualLawlibrary

Sec. 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal
combinations and monopolies, a corporation may, by a majority vote of its board of directors or
trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all
of its property and assets, including its goodwill, upon such terms and conditions and for such
consideration, which may be money, stocks, bonds or other instruments for the payment of money or
other property or consideration, as its board of directors or trustees may deem expedient, when
authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital
stock, or in case of non-stock corporation, by the vote of at least two-thirds (2/3) of the members, in a
stockholder's or member's meeting duly called for the purpose. Written notice of the proposed action and
of the time and place of the meeting shall be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited to the addressee in the post office with
postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his
appraisal right under the conditions provided in this Code.

A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if
thereby the corporation would be rendered incapable of continuing the business or accomplishing
the purpose for which it was incorporated.

After such authorization or approval by the stockholders or members, the board of directors or trustees
may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other
disposition of property and assets, subject to the rights of third parties under any contract relating
thereto, without further action or approval by the stockholders or members.

Nothing in this section is intended to restrict the power of any corporation, without the authorization by
the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its
property and assets if the same is necessary in the usual and regular course of business of said
corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated
for the conduct of its remaining business.

In non-stock corporations where there are no members with voting rights, the vote of at least a majority
of the trustees in office will be sufficient authorization for the corporation to enter into any transaction
authorized by this section.

[Emphases Supplied]

To reiterate, Section 40 refers to the sale, lease, exchange or disposition of all or substantially all of the
corporation's assets, including its goodwill.39 The sale under this provision does not contemplate an
ordinary sale of all corporate assets; the transfer must be of such degree that the transferor corporation is
rendered incapable of continuing its business or its corporate purpose.40cralawrednad

Section 40 suitably reflects the business-enterprise transfer under the exception of the Nell Doctrine
because the purchasing or transferee corporation necessarily continued the business of the selling or
transferor corporation. Given that the transferee corporation acquired not only the assets but also the
business of the transferor corporation, then the liabilities of the latter are inevitably assigned to the
former.

It must be clarified, however, that not every transfer of the entire corporate assets would qualify under
Section 40. It does not apply (1) if the sale of the entire property and assets is necessary in the usual and
regular course of business of corporation, or (2) if the proceeds of the sale or other disposition of such
property and assets will be appropriated for the conduct of its remaining business. 41 Thus, the litmus test
to determine the applicability of Section 40 would be the capacity of the corporation to continue its
business after the sale of all or substantially all its assets.

Jurisprudential recognition of the

business-enterprise transfer

Jurisprudence has held that in a business-enterprise transfer, the transferee is liable for the debts and
liabilities of his transferor arising from the business enterprise conveyed. Many of the application of the
business-enterprise transfer have been related by the Court to the application of the piercing
doctrine.42cralawrednad

In A.D. Santos, Inc. v. Vasquez,43 a taxi driver filed a suit for workmen's compensation against the
petitioner corporation therein. The latter's defense was that the taxi driver's employer was Amador
Santos, and not the corporation. Initially, the taxi driver was employed by City Cab, a sole proprietary by
Amador Santos. The taxi business was, however, transferred to the petitioner. Applying the piercing
doctrine, the Court held that the petitioner must still be held liable due to the transfer of the business and
should not be allowed to confuse the legitimate issues.
In Buan v. Alcantara,44 the Spouses Buan were the owners of Philippine Rabbit Bus Lines. They died in a
vehicular accident and the administrators of their estates were appointed. The administrators then
incorporated the Philippine Rabbit Bus Lines. The issue raised was whether the liabilities of the estates of
the spouses were conveyed to the new corporation due to the transfer of the business. Utilizing the alter-
ego doctrine, the Court ruled in the affirmative and stated that:ChanRoblesvirtualLawlibrary

As between the estate and the corporation, the intention of incorporation was to make the corporation
liable for past and pending obligations of the estate as the transportation business itself was being
transferred to and placed in the name of the corporation. That liability on the part of the corporation, vis-
a-vis the estate, should continue to remain with it even after the percentage of the estate's shares of
stock in the corporation should be diluted.45

The Court, however, applied the business-enterprise transfer doctrine independent of the piercing doctrine
in other cases. In San Teodoro Development Enterprises v. SSS,46 the petitioner corporation therein
attempted to avoid the compulsory coverage of the Social Security Law by alleging that it was a distinct
and separate entity from its limited partnership predecessor, Chua Lam & Company, Ltd. The Court,
however, upheld the findings of the SSS that the entire business of the previous partnership was
transferred to the corporation ostensibly for a valuable consideration. Hence, "[t]he juridical person
owning and operating the business remain the same even if its legal personality was
changed."47cralawrednad

Similarly, in Laguna Trans. Co., Inc. v. SSS,48 the Court held that the transferee corporation continued the
same transportation business of the unregistered partnership therein, using the same lines and
equipment. There was, in effect, only a change in the form of the organization of the entity engaged in the
business of transportation of passengers.

Perhaps the most telling jurisprudence which recognized the business-enterprise transfer would be the
assailed case of Caltex. In that case, under an agreement of assumption of obligations, LUSTEVECO
transferred, conveyed and assigned to respondent PSTC all of its business, properties and assets
pertaining to its tanker and bulk business together with all the obligations, properties and
assets.49 Meanwhile, petitioner Caltex, Inc. obtained a judgment debt against LUSTEVECO, and it sought
to enforce the same against PSTC. The Court ruled that PSTC was bound by its agreement with
LUSTEVECO and the former assumed all of the latter's obligations pertaining to such business.

More importantly, the Court held that, even without the agreement, PSTC was still liable to Caltex, Inc.
based on Section 40, as follows:ChanRoblesvirtualLawlibrary

While the Corporation Code allows the transfer of all or substantially all the properties and assets of a
corporation, the transfer should not prejudice the creditors of the assignor. The only way the transfer can
proceed without prejudice to the creditors is to hold the assignee liable for the obligations of the
assignor. The acquisition by the assignee of all or substantially all of the assets of the assignor
necessarily includes the assumption of the assignor's liabilities, unless the creditors who did not
consent to the transfer choose to rescind the transfer on the ground of fraud. To allow an assignor to
transfer all its business, properties and assets without the consent of its creditors and without requiring
the assignee to assume the assignor's obligations will defraud the creditors. The assignment will place the
assignor's assets beyond the reach of its creditors.

Here, Caltex could not enforce the judgment debt against LUSTEVECO. The writ of execution could not be
satisfied because LUSTEVECO's remaining properties had been foreclosed by lienholders. In addition, all of
LUSTEVECO's business, properties and assets pertaining to its tanker and bulk business had been
assigned to PSTC without the knowledge of its creditors. Caltex now has no other means of enforcing the
judgment debt except against PSTC.50cralawrednad

[Emphasis Supplied]

The Caltex case, thus, affirmed that the transfer of all or substantially all the proper from one corporation
to another under Section 40 necessarily entails the assumption of the assignor's liabilities, notwithstanding
the absence of any agreement on the assumption of obligations. The transfer of all its business, properties
and assets without the consent of its creditors must certainly include the liabilities; or else, the
assignment will place the assignor's assets beyond the reach of its creditors. In order to protect the
creditors against unscrupulous conveyance of the entire corporate assets, Caltex justifiably concluded that
the transfer of assets of a corporation under Section 40 must likewise carry with it the transfer of its
liabilities.

Fraud is not an essential

consideration in a business-
enterprise transfer

Notably, an evaluation of the relevant jurisprudence reveals that fraud is not an essential element for the
application of the business-enterprise transfer.51 The petitioners in this case, however, assert otherwise.
They insist that under the Caltex case, there was an assumption of liabilities because fraud existed on the
part of PSTC, as the transferee corporation.

The Court disagrees.

The exception of the Nell doctrine,52 which finds its legal basis under Section 40, provides that the
transferee corporation assumes the debts and liabilities of the transferor corporation because it is merely
a continuation of the latter's business. A cursory reading of the exception shows that it does not require
the existence of fraud against the creditors before it takes full force and effect. Indeed, under the Nell
Doctrine, the transferee corporation may inherit the liabilities of the transferor despite the lack of fraud
due to the continuity of the latter's business.

The purpose of the business-enterprise transfer is to protect the creditors of the business by allowing
them a remedy against the new owner of the assets and business enterprise. Otherwise, creditors would
be left "holding the bag," because they may not be able to recover from the transferor who has
"disappeared with the loot," or against the transferee who can claim that he is a purchaser in good faith
and for value.53 Based on the foregoing, as the exception of the Nell doctrine relates to the protection of
the creditors of the transferor corporation, and does not depend on any deceit committed by the
transferee -corporation, then fraud is certainly not an element of the business enterprise doctrine.

The Court also agrees with the CA, in its assailed April 29, 2013 resolution, that there was no finding of
fraud in the Caltex case; otherwise it should have been clearly and categorically stated.54 The discussion
in Caltex relative to fraud seems more hypothetical than factual, thus:ChanRoblesvirtualLawlibrary

If PSTC refuses to honor its written commitment to assume the obligations of LUSTEVECO, there will be a
fraud on the creditors of LUSTEVECO. x x x To allow PSTC now to welsh on its commitment is to sanction
a fraud on LUSTEVECO's creditors.55

Besides, the supposed fraud in Caltex referred to PSTC's refusal to pay LUSTEVECO's creditors despite the
agreement on assumption of the latter's obligations. Again, the Court emphasizes in the said case, even
without the agreement, PSTC was still liable to Caltex, Inc. under Section 40, due to the transfer of all or
substantially all of the corporate assets. At best, transfers of all or substantially all of the assets to a
transferee corporation without the consent of the transferor corporation's creditor gives rise to a
presumption of fraud against the said creditors.56cralawrednad

Applicability of the
business-enterprise transfer
in the present case

Bearing in mind that fraud is not required to apply the business-enterprise transfer, the next issue to be
resolved is whether the petitioners indeed became a continuation of MADCI's business. Synthesizing
Section 40 and the previous rulings of this Court, it is apparent that the business-enterprise transfer rule
applies when two requisites concur: (a) the transferor corporation sells all or substantially all of its assets
to another entity; and (b) the transferee corporation continues the business of the transferor corporation.
Both requisites are present in this case.
According to its articles of incorporation, the primary purpose of MADCI was "[t]o acquire by purchase,
lease, donation or otherwise, and to own, use, improve, develop, subdivide, sell, mortgage, exchange,
lease, develop and hold for investment or otherwise, real estate of all kinds, whether improved, managed
or otherwise disposed of buildings, houses, apartment, and other structures of whatever kind, together
with their appurtenance."57 During the trial before the RTC, Sangil testified that MADCI was a development
company which acquired properties in Magalang, Pampanga to be developed into a golf
course.58cralawrednad

The CA found that MADCI had an entire asset consisting of 120 hectares of land, and that its sale to the
petitioners rendered it incapable of continuing its intended golf and country club business.59 The Court
holds that such finding is fully substantiated by the records of the case. The MOA itself stated that MADCI
had 120 hectares of agricultural land in Magalang, Pampanga, for the development of a golf
course.60 MADCI had the right of ownership over these properties consisting of 97 land titles, except for
the 27 titles previous delivered to YIL.61 The 120-hectare land, however, was then sold to YILPI,62 and
then transferred to YICRI.63cralawrednad

Respondent Yu testified that he verified the landholdings of MADCI with the Register of Deeds in
Pamapanga and discovered that all its lands were transferred to YICRI.64 Because the properties of MADCI
were already conveyed, Yu had no other way of collecting his refund.65cralawrednad

Sangil also testified that MADCI had no more properties left after the sale of the lands to the
petitioners:ChanRoblesvirtualLawlibrary

Atty. Nuguid: And after the sale, it has no more properties?

Sangil: That's right, Sir.

Q: And the business of MADCI was to operate and build golf course?
A: That's right, Sir.

Q: And because of the sale of all these properties, MADCI was not able to build the golf course?
A: Yes, Sir.

Q: And did not anymore operate as a corporation?

A: MADCI is still there but as far the development of the golf course, it was taken over by Mr.
Wang.66cralawrednad

[Emphasis Supplied]

As a witness for the petitioners, Wang testified that Y1L bought the shares of stock of MADCI because it
had some interest in the project involving the development of a golf course. The petitioners then found
that MADCI had landholdings in Pampanga which it would be able to develop into a golf course.67 Hence,
the petitioners were fully aware of the nature of MADCFs business and its assets, but they continued to
acquire its lands through the designated company, YICRI.68cralawrednad

Based on these factual findings, the Court is convinced that MADCI indeed had assets consisting of 120
hectares of landholdings in Magalang, Pampanga, to be developed into a golf course, pursuant to its
primary purpose. Because of its alleged violation of the MOA, however, MADCI was made to transfer all its
assets to the petitioners. No evidence existed that MADCI subsequently acquired other lands for its
development projects. Thus, MADCI, as a real estate development corporation, was left without any
property to develop eventually rendering it incapable of continuing the business or accomplishing the
purpose for which it was incorporated.

Section 40 must apply.

Consequently, the transfer of the assets of MADCI to the petitioners should have complied with the
requirements under Section 40. Nonetheless, the present petition is not concerned with the validity of the
transfer; but the respondent's claim of refund of his P650,000.00 payment for golf and country club
shares. Both the CA and the RTC ruled that MADCI and Sangil were liable.
On the question of whether the petitioners must also be held solidarily liable to Yu, the Court answers in
the affirmative.

While the Corporation Code allows the transfer of all or substantially all of the assets of a corporation, the
transfer should not prejudice the creditors of the assignor corporation.69 Under the business-enterprise
transfer, the petitioners have consequently inherited the liabilities of MADCI because they acquired all the
assets of the latter corporation. The continuity of MADCI's land developments is now in the hands of the
petitioners, with all its assets and liabilities. There is absolutely no certainty that Yu can still claim its
refund from MADCI with the latter losing all its assets. To allow an assignor to transfer all its business,
properties and assets without the consent of its creditors will place the assignor's assets beyond the reach
of its creditors. Thus, the only way for Yu to recover his money would be to assert his claim against the
petitioners as transferees of the assets.

The MOA cannot

prejudice respondent

The MOA, which contains a provision that Sangil undertook to redeem MADCI proprietary shares sold to
third persons or settle in full all their claims for refund of payments, should not prejudice respondent Yu.
The CA correctly ruled that such provision constituted novation under Article 129370 of the Civil Code.
When there is a substitution of debtors, the creditor must consent to the same; otherwise, it shall not in
any way affect the creditor. In this case, it was established that Yu's consent was not secured in the
execution of the MOA. Thus, insofar as the respondent was concerned, the debtor remained to be MADCI.
And given that the assets and business of MADCI have been transferred to the petitioners, then the latter
shall be liable.

Interestingly, the same issue on novation was tackled in the Caltex case and the Court resolved it in this
wise:ChanRoblesvirtualLawlibrary

The Agreement, under Article 1291 of the Civil Code, is also a novation of LUSTEVECO's obligations by
substituting the person of the debtor. Under Article 1293 of the Civil Code, a novation which consists in
substituting a new debtor in place of the original debtor cannot be made without the consent of the
creditor. Here, since the Agreement novated the debt without the knowledge and consent of
Caltex, the Agreement cannot prejudice Caltex. Thus, the assets that LUSTEVECO transferred to
PSTC in consideration, among others, of the novation, or the value of such assets, remain even in the
hands of PSTC subject to execution to satisfy the judgment claim of Caltex.71cralawrednad

[Emphasis Supplied]

Free and Harmless Clause

The petitioners, however, are not left without recourse as they can invoke the free and harmless clause
under the MOA. In business-enterprise transfer, it is possible that the transferor and the transferee may
enter into a contractual stipulation stating that the transferee shall not be liable for any or all debts arising
from the business which were contracted prior to the time of transfer. Such stipulations are valid, but only
as to the transferor and the transferee. These stipulations, though, are not binding on the creditors of the
business enterprise who can still go after the transferee for the enforcement of the
liabilities.72cralawrednad

An example of a free and harmless clause can be observed in the case of PCI Leasing v. UCPB.73 In that
case, a claim for damages was filed against the petitioner therein as the registered owner of the vehicle,
even though it was the latter's lessee that committed an infraction. The Court granted the claim against
the petitioner based on the registered-owner rule. Even so, the Court stated therein
that:ChanRoblesvirtualLawlibrary

xxx the Court believes that petitioner and other companies so situated are not entirely left without
recourse. They may resort to third-party complaints against their lessees or whoever are the actual
operators of their vehicles. In the case at bar, there is, in fact, a provision in the lease contract between
petitioner and SUGECO to the effect that the latter shall indemnify and hold the former free and harmless
from any "liabilities, damages, suits, claims or judgments" arising from the latter's use of the motor
vehicle. Whether petitioner would act against SUGECO based on this provision is its own option.

In the present case, the MOA stated that Sangil undertook to redeem MADCI proprietary shares sold to
third persons or settle in full all their claims for refund of payments. While this free and harmless clause
cannot affect respondent as a creditor, the petitioners may resort to this provision to recover damages in
a third-party complaint. Whether the petitioners would act against Sangil under this provision is their own
option.

WHEREFORE, the petition is DENIED. The January 30, 2012 Decision and the April 29, 2013 Resolution
of the Court of Appeals in CA-G.R. CV No. 96036 are hereby AFFIRMED in toto.

SO ORDERED.chanrobles virtuallawlibrary

G.R. No. L-5377        December 29, 1954

MARIA CLARA PIROVANA ET AL., plaintiffs-appellees,

vs.
THE DE LA RAMA STEAMSHIP CO., defendant-appellant.

Del Rosario and Garcia for appellant.

Vicente J. Francisco for appellees.

BAUTISTA ANGELO, J.:

This is an appeal from a decision of the Court of First Instance of Rizal declaring the donation made by the
defendant in favor of the minor children of the late Enrico Pirovano of the proceeds of the insurance
policies taken on his life valid and binding, and ordering said defendant to pay to said minor children the
sum of P583,813.59, with interest thereon at the rate of per cent from the date of filing of the complaint,
plus an additional amount equivalent to 20 per cent of said sum of P538,813.59 as damages by way of
attorney's fees and the costs of action.

Plaintiffs herein are the minor children of the late Enrico Pirovano represented by their mother and judicial
guardian Estefania R. Pirovano. They seek to enforce certain resolutions adopted by the Board of Directors
and stockholders of the defendant company giving to said minor children of the proceeds of the insurance
policies taken on the life of their deceased father Enrico Pirovano with the company as beneficiary.
Defendant's main defense is: that said resolutions and the contract executed pursuant thereto are ultra
vires, and, if valid, the obligation to pay the amount given is not yet due and demandable.

The trial court resolved all the issues raised by the parties in favor of the plaintiffs and, after considering
the evidence, both oral and documentary, arrived at the following conclusions:

First. — That the contract executed between the plaintiffs and the defendant is a renumerative
donation.

Second. — That said contract or donation is not ultra vires, but an act executed within the powers
of the defendant corporation in accordance with its articles of incorporation and by laws, sanctioned
and approved by its Board of Directors and stockholders; and subsequently ratified by other
subsequent acts of the defendant company.

Third. — That the said donation is in accordance with the trend of modern and more enlightened
legislation in its treatment of questions between labor and capital.
 Fourth. — That the condition mentioned in the donation is null and void because it depends on the
provisions of Article 1115 of the old Civil Code.

Fifth. — That if the condition is valid, its non-fulfillment is due to the desistance of the defendant
company from obeying and doing the wishes and mandates of the majority of the stockholders.

Sixth. — That the non-payment of the debt in favor of the National Development Company is not
due to the lack of funds, nor to lack of authority, but the desire of the President of the corporation
to preserve and continue the Government participation in the company.

Seventh. — That due demands were made by the plaintiffs and their attorneys and these demands
were rejected for no justifiable or legal grounds.

The important facts which need to be considered for purposes of this appeal may be briefly stated as
follows: Defendant is a corporation duly organized in accordance with law with an authorized capital of
P500,000, divided into 5,000 shares, with a par value of P100 each share. The stockholders were: Esteban
de la Rama, 1,800 shares, Leonor de la Rama, 100 shares, Estefania de la Rama, 100 shares, and Eliseo
Hervas, Tomas Concepcion, Antonio G. Juanco, and Gaudencio Volasote with 5 shares each. Leonor and
Estefania are daughters of Don Esteban, while the rest his employees. Estefania de la Rama was married
to the late Enrico Pirovano and to them four children were born who are the plaintiffs in this case.

Enrico Pirovano became the president of the defendant company and under his management the company
grew and progressed until it became a multi-million corporation by the time Pirovano was executed by the
Japanese during the occupation. On May 13, 1941, the capital stock of the corporation was increased to
P2,000,000, after which a 100 per cent stock dividend was declared. Subsequently, or before the outbreak
of the war , new stock dividends of 200 per cent and 33 1/3 per cent were again declared. On December
4, 1941, the capital stock was once more increased to P5,000,000. Under Pirovano's management, the
assets of the company grew and increased from an original paid up capital of around P240,000 to
P15,538,024.37 by September 30, 1941 (Exhibit HH).

In the meantime, Don Esteban de la Rama, who practically owned and controlled the stock of the
defendant corporation, distributed his shareholding among his five daughters, namely, Leonor, Estefania,
Lourdes, Lolita and Conchita and his wife Natividad Aguilar so that, at that time, or on July 10, 1946, the
stockholding of the corporation stood as follows: Esteban de la Rama, 869 shares, Leonor de la Rama,
3,375 shares, Estefania de la Rama, 3,368 shares, Lourdes de la Rama, 3,368 shares, Lolita de la Rama,
3,368 shares, Conchita de la Rama, 3,376 shares, and Natividad Aguilar, 2,136 shares. The other
stockholders , namely, Eliseo Hervas, Tomas Concepcion, Antonio Juanco, and Jose Aguilar, who were
merely employees of Don Esteban, were given 40 shares each, while Pio Pedrosa, Marcial P. Lichauco and
Rafael Roces, one share each, because they merely represented the National Development Company. This
Company was given representation in the Board Of Directors of the corporation because at that time the
latter had an outstanding bonded indebtedness to the National Development Company.

This bonded indebtedness was incurred on February 26, 1940 and was in the amount of P7,500.00. The
bond held by the National Development Company was redeemable within a period of 20 years from March
1, 1940,. bearing interest at the rate of 5 per cent per annum. To secure said bonded indebtedness, all
the assets of the De la Rama Steamship Co., Inc., and properties of Don Esteban de la Rama, as well as
those of the Hijos de I. de la Rama and Co., Inc., a sister corporation owned by Don Esteban and his
family, were mortgaged to the National Development Company (Annexes A, B, C, D of Exhibit 3, Deed of
Trust). Payments made by the corporation under the management of Pirovano reduced this bonded
indebtedness to P3,260,855.77.

Upon arrangement made with the National Development Company, the outstanding bonded indebtedness
was converted into non-voting preferred shares of stock of the De la Rama company under the express
condition that they would bear affixed cumulative dividend of 6 per cent per annum and would be
redeemable within 15 years (Exhibits 5 and 7). This conversion was carried out on September 23, 1949,
when the National Development Company executed a "Deed of Termination of Trust and Release of
Mortgage" in favor of the De la Rama company (Exhibit 6.) The immediate effect of this conversion was
the released from incumbrance of all the properties Of Don Esteban and of the Hijos de I. de la Rama and
Co., Inc., which was apparently favorable to the interests of the De la Rama company, but, on the other
hand, it resulted in the inconvenience that, as holder of the preferred stock, the National Development
Company, was given to the right to 40 per cent of the membership of the Board of Directors of the De la
Rama company, which meant an increase in the representation of the National Development Company
from 2 to 4 of the 9 members of said Board of Directors.

The first resolution granting to the Pirovano children the proceeds of the insurance policies taken on his
life by the defendant company was adopted by the Board of Directors at a meeting held on July 10, 1946,
(Exhibit B). This grant was called in the resolution as "Special Payment to Minor Heirs of the late Enrico
Pirovano". Because of its direct hearing on the issues involved in this case, said resolution is hereunder
reproduced in toto:

SPECIAL PAYMENT TO MINORS HEIRS OF THE LATE ENRICO PIROVANO

The President stated that the principal purpose for which the meeting had been called was to
discuss the advisability of making some form of compensation to the minor heirs of the late Enrico
Pirovano, former President and General Manager of the Company. As every member of the Board
knows, said the President, the late Enrico Pirovano who was largely responsible for the very
successful development of the activities of the Company prior to war was killed by the Japanese in
Manila sometime in 1944 leaving as his only heirs four minor children, Maria Carla, Esteban, Enrico
and John Albert. Early in 1941, explained the President, the Company had insured the life of Mr.
Pirovano for a million pesos. Following the occupation of the Philippines by Japanese forces the
Company was unable to pay the premiums on those policies issued by Filipino companies and these
policies had lapsed. But with regards to the York Office of the De la Rama Steamship Co., Inc. had
kept up payment of the premiums from year to year. The payments made on account of these
premiums, however, are very small compared to the amount which the Company will now receive
as a result of Mr. Pirovano's death. The President proposed therefore that out of the proceeds of
these policies the sum of P400,000 be set aside for the minor children of the deceased, said sum of
money to be convertible into 4,000 shares of the stock of the Company, at par, or 1,000 shares for
each child. This proposal, explained the President as being made by him upon suggestion of
President Roxas, but, he added, that he himself was very much in favor of it also. On motion of
Miss Leonor de la Rama duly seconded by Mrs. Lourdes de la Rama de Osmeña, the following
resolution was, thereupon, unanimously approved:

Whereas, the late Enrico Pirovano, President and General Manager of the De la Rama Steamship
Company, died in Manila sometime in November, 1944:

Whereas, the said Enrico Pirovano was largely responsible for the rapid and very successful
development of the activities of thus company;

Whereas, early in 1941 this company insured the life of said Enrico Pirovano in various Philippine
and American Life Insurance companies for the total sum of P1,000,000;

Whereas, the said Enrico Pirovano is survived by his widow, Estefania Pirovano and four minor
children, to wit: Esteban, Maria Carla, Enrico and John Albert, all surnamed Pirovano;lawphil.net

Whereas, said Enrico Pirovano left practically nothing to his heirs and it is but fit proper that this
company which owes so much to the deceased should make some provision for his children;

Whereas, this company paid premium on Mr. Pirovano's life insurance policies for a period of only 4
years so that it will receive from the insurance companies sums of money greatly in excess of the
premiums paid by this company.

Be it resolved, That out of the proceeds to be collected from the life insurance policies on the life of
the late Enrico Pirovano, the sum of P400,000 be set aside for equal division among the 4 minor
children of the deceased, to wit: Esteban, Maria Carla, Enrico and John Albert, all surnamed
Pirovano, which sum of money shall be convertible into shares of stock of the De la Rama
 Steamship Company, at par and, for that purpose, that the present registered stockholders of the
corporation be requested to waive their preemptive right to 4,000 shares of the unissued stock of
the company in order to enable each of the 4 minor heirs of the deceased, to wit: Esteban, Maria
Carla, Enrico and John Albert, all surnamed Pirovano, to obtain 1,000 shares at par;

Resolved, further, that in view of the fact that under the provisions of the indenture with the
National Development Company, it is necessary that action herein proposed to be confirmed by the
Board of Directors of that company, the Secretary is hereby instructed to send a copy of this
resolution to the proper officers of the National Development Company for appropriate action.
(Exhibit B)

The above resolution, which was adopted on July 10, 1946, was submitted to the stockholders of the De la
Rama company at a meeting properly convened, and on that same date, July 10, 1946, the same was
duly approved.

It appears that, although Don Esteban and the Members of his family were agreeable to giving to the
Pirovano children the amount of P400,000 out of the proceeds of the insurance policies taken on the life of
Enrico Pirovano, they did not realize that when they provided in the above referred two resolutions that
said Amount should be paid in the form of shares of stock, they would be actually giving to the Pirovano
children more than what they intended to give. This came about when Lourdes de la Rama, wife of Sergio
Osmeña, Jr., showed to the latter copies of said resolutions and asked him to explain their import and
meaning, and it was value then that Osmeña explained that because the value then of the shares of stock
was actually 3.6 times their par value, the donation their value, the donation, although purporting to be
only P400,00, would actually amount to a total of P1,440,000. He further explained that if the Pirovano
children would given shares of stock in lieu of the amount to be donated, the voting strength of the five
daughters of Don Esteban in the company would be adversely affected in the sense that Mrs. Pirovano
would be adversely affected in the sense that Mrs. Pirovano would have a voting power twice as much as
that of her sisters. This caused Lourdes de la Rama to write to the secretary of the corporation, Atty.
Marcial Lichauco, asking him to cancel the waiver she supposedly gave of her pre-emptive rights. Osmeña
elaborated on this matter at the annual meeting of the stockholders held on December 12, 1946 but at
said meeting it was decided to leave the matter in abeyance pending further action on the part of the
members of the De la Rama family.

Osmeña, in the meantime, took up the matter with Don Esteban and, as consequence, the latter, on
December 30, 1946, addressed to Marcial Lichauco a letter stating, among other things, that "in view of
the total lack of understanding by me and my daughters of the two Resolutions abovementioned, namely,
Directors' and Stockholders' dated July 10, 1946, as finally resolved by the majority of the Stockholders
and Directors present yesterday, that you consider the abovementioned resolutions nullified." (Exhibit
CC).

On January 6, 1947, the Board of Directors of the De la Rama company, as a consequence of the change
of attitude of Don Esteban, adopted a resolution changing the form of the donation to the Pirovano
children from a donation of 4,000 shares of stock as originally planned into a renunciation in favor of the
children of all the company's "right, title, and interest as beneficiary in and to the proceeds of the
abovementioned life insurance policies", subject to the express condition that said proceeds should be
retained by the company as a loan drawing interest at the rate of 5 per cent per annum and payable to
the Pirovano children after the company "shall have first settled in full the balance of its present remaining
bonded indebtedness in the sum of approximately P5,000,000" (Exhibit C). This resolution was concurred
in by the representatives of the National Development Company. The pertinent portion of the resolution
reads as follows:

Be resolved, that out of gratitude to the late Enrico Pirovano this Company renounce as it hereby
renounces, all of his right, title, and interest as beneficiary in and to the proceeds of the
abovementioned life insurance policies in favor of Esteban, Maria Carla, Enrico and John Albert, all
surnamed Pirovano, subject to the terms and conditions herein after provided;

That the proceeds of said insurance policies shall be retained by the Company in the nature of a
loan drawing interest at the rate of 5 per cent annum from the date of receipt of payment by the
 Company from the various insurance companies above-mentioned until the time the time the same
amounts are paid to the minor heirs of Enrico Pirovano previously mentioned;

That all amounts received from the above-mentioned policies shall be divided equally among the
minors heirs of said Enrico Pirovano;

That the company shall proceed to pay the proceeds of said insurance policies plus interests that
may have accrued to each of the heirs of the said Enrico Pirovano or their duly appointed
representatives after the Company shall have first settled in full the balance of its present
remaining bonded indebtedness in the sum of the approximately P5,000,000.

The above resolution was carried out by the company and Mrs. Estefania R. Pirovano, the latter acting as
guardian of her children, by executing a Memorandum Agreement on January 10, 1947 and June 17,
1947, respectively, stating therein that the De la Rama Steamship Co., Inc., shall enter in its books as a
loan the proceeds of the life insurance policies taken on the life of Pirovano totalling S321,500, which loan
would earn interest at the rate of 5 per cent per annum. Mrs. Pirovano, in executing the agreement, acted
with the express authority granted to her by the court in an order dated March 26, 1947.

On June 24, 1947, the Board of Directors approved a resolution providing therein that instead of the
interest on the loan being payable, together with the principal, only after the company shall have first
settled in full its bonded indebtedness, said interest may be paid to the Pirovano children "whenever the
company is in a position to met said obligation" (Exhibit D), and on February 26, 1948, Mrs. Pirovano
executed a public document in which she formally accepted the donation (Exhibit H). The Dela Rama
company took "official notice" of this formal acceptance at a meeting held by its Board of Directors on
February 26, 1948.

In connection with the above negotiations, the Board of Directors took up at its meeting on July 25, 1949,
the proposition of Mrs. Pirovano to buy the house at New Rochelle, New York, owned by the Demwood
Realty, a subsidiary of the De la Rama company at its original costs of $75,000, which would be paid from
the funds held in trust belonging to her minor children. After a brief discussion relative to the matter, the
proposition was approved in a resolution adopted on the same date.

The formal transfer was made in an agreement signed on September 5, 1949 by Mrs. Pirovano, as
guardian of her children, and by the De la Rama company, represented by its new General Manager,
Sergio Osmeña, Jr. The transfer of this property was approved by the court in its order of September 20,
1949.lawphil.net

On September 13, 1949, or two years and 3 months after the donation had been approved in the various
resolutions herein above mentioned, the stockholders of the De la Rama company formally ratified the
donation (Exhibit E), with certain clarifying modifications, including the resolution approving the transfer
of the Demwood property to the Pirovano children. The clarifying modifications are quoted hereunder:

1. That the payment of the above-mentioned donation shall not be affected until such time as the
Company shall have first duly liquidated its present bonded indebtedness in the amount of
P3,260,855.77 with The National Development Company, or fully redeemed the preferred shares of
stock in the amount which shall be issued to the National Development Company in lieu thereof;

2. That any and all taxes, legal fees, and expenses in any way connected with the above
transaction shall be chargeable and deducted from the proceeds of the life insurance policies
mentioned in the resolutions of the Board of Directors. (Exhibit E)

Sometime in March 1950, the President of the corporation, Sergio Osmeña, Jr., addressed an inquiry to
the Securities and Exchange Commission asking for opinion regarding the validity of the donation of the
proceeds of the insurance policies to the Pirovano children. On June 20, 1950 that office rendered its
opinion that the donation was void because the corporation could not dispose of its assets by gift and
therefore the corporation acted beyond the scope of its corporate powers. This opinion was submitted to
the Board of Directors at its meting on July 12, 1950, on which occasion the president recommend that
other legal ways be studied whereby the donation could be carried out. On September 14, 1950, another
meeting was held to discuss the propriety of the donation. At this meeting the president expressed the
view that, since the corporation was not authorized by its charter to make the donation to the Pirovano
children and the majority of the stockholders was in favor of making provision for said children, the
manner he believed this could be done would be to declare a cash dividend in favor of the stockholders in
the exact amount of the insurance proceeds and thereafter have the stockholders make the donation to
the children in their individual capacity. Notwithstanding this proposal of the president, the board took no
action on the matter, and on March 8, 1951, at a stockholders' meeting convened on that date the
majority of the stockholders' voted to revoke the resolution approving the donation to the Pirovano
children. The pertinent portion of the resolution reads as follows:

Be it resolved, as it is hereby resolved, that in view of the failure of compliance with the above
conditions to which the above donation was made subject, and in view of the opinion of the
Securities and Exchange Commissioner, the stockholders revoke, rescind and annul, as they do
thereby revoke, rescind and annul, its ratification and approval on September 13, 1949 of the
aforementioned resolution of the Board of Directors of January 6, 1947, as amended on June 24,
1947. (Exhibit T)

In view of the resolution declaring that the corporation failed to comply with the condition set for the
effectivity of the donation and revoking at the same time the approval given to it by the corporation, and
considering that the corporation can no longer set aside said donation because it had no longer set aside
said donation because it had long been perfected and consummated, the minor children of the late Enrico
Pirovano, represented by their mother and guardian, Estefania R. de Pirovano, demanded the payment of
the credit due them as of December 31, 1951, amounting to P564,980.89, and this payment having been
refused, they instituted the present action in the Court of First Instance of Rizal wherein they prayed that
the be granted an alternative relief of the following tenor: (1) sentencing defendant to pay to the plaintiff
the sum of P564,980.89 as of December 31, 1951, with the corresponding interest thereon; (2) as an
alternative relief, sentencing defendant to pay to the plaintiffs the interests on said sum of P564,980.89 at
the rate of 5 per cent per annum, and the sum of P564,980.89 after the redemption of the preferred
shares of the corporation held by the National Development Company; and (3) in any event, sentencing
defendant to pay the plaintiffs damages in the amount of not less than 20 per cent of the sum that may
be adjudged to the plaintiffs, and the costs of action.

The only issues which in the opinion of the court need to be determined in order to reach a decision in this
appeal are: (1) Is the grant of the proceeds of the insurance policies taken on the life of the late Enrico
Pirovano as embodied in the resolution of the Board of Directors of defendant corporation adopted on
January 6, 1947 and June 24, 1947 a remunerative donation as found by the lower court?; (2) IN the
affirmative case, has that donation been perfected before its rescission or nullification by the stockholders
of the corporation on March 8, 1951?; (3) Can defendant corporation give by way of donation the
proceeds of said insurance policies to the minor children of the late Enrico Pirovano under the law or its
articles of corporation, or is that donation an ultra vires act?; and (4) has the defendant corporation, by
the acts it performed subsequent to the granting of the donation, deliberately prevented the fulfillment of
the condition precedent to the payment of said donation such that it can be said it has forfeited its right to
demand its fulfillment and has made the donation entirely due and demandable?

We will discuss these issues separately.

1. To determine the nature of the grant made by the defendant corporation to the minor children of the
late Enrico Pirovano, we do not need to go far nor dig into the voluminous record that lies at the bottom of
this case. We do not even need to inquire into the interest which has allegedly been shown by President
Roxas in the welfare of the children of his good friend Enrico Pirovano. Whether President Roxas has taken
the initiative in the move to give something to said children which later culminated in the donation now in
dispute, is of no moment for the fact is that, from the mass of evidence on hand, such a donation has
been given the full indorsement and encouraging support by Don Esteban de la Rama who was practically
the owner of the corporation. We only need to fall back to accomplish this purpose on the several
resolutions of the Board of Directors of the corporations containing said grant for they clearly state the
reasons and purposes why the donation has been given.
Before we proceed further, it is convenient to state here in passing that, before the Board of Directors had
approved its resolution of January 6, 1947, as later amended by another resolution adopted on June 24,
1947, the corporation had already decided to give to the minor children of the late Enrico Pirovano the
sum of P400,000 out of the proceeds of the insurance policies taken on his life in the form of shares, and
that when this form was considered objectionable because its result and effect would be to give to said
children a much greater amount considering the value then of the stock of the corporation, the Board of
Directors decided to amend the donation in the form and under the terms stated in the aforesaid
resolutions. Thus, in the original resolution approved by the Board of Directors on July 10, 1946, wherein
the reasons for granting the donation to the minor children of the late Enrico Pirovano were clearly, we
find out the following revealing statements:

Whereas, the late Enrico Pirovano President and General Manager of the De la Rama Steamship
Company, died in Manila sometime in November, 1944;

Whereas, the said Enrico Pirovano was largely responsible for the rapid and very successful
development of the activities of this company;

Whereas, early in 1941 this company insured the life of said Enrico Pirovano in various Philippine
and American Life Insurance companies for the total sum of P1,000,000;

Whereas, the said Enrico Pirovano is survived by his widow, Estefania Pirovano and 4 minor
children, to wit: Esteban, Maria Carla, Enrico and John Albert, all surnamed Pirovano;

Whereas, the said Enrico Pirovano left practically nothing to his heirs and it is but fit and proper
that this company which owes so much to the deceased should make some provisions for his
children;

Whereas, this company paid premiums on Mr. Pirovano's life insurance policies for a period of only
4 years so that it will receive from the insurance companies sums of money greatly in excess of the
premiums paid by the company,

Again, in the resolution approved by the Board of Directors on January 6, 1947, we also find the following
expressive statements which are but a reiteration of those already expressed in the original resolution:

Whereas, the late Enrico Pirovano, President and General Manager of the De la Rama Steamship
Co., Inc., died in Manila sometime during the latter part of the year 1944;

Whereas, the said Enrico Pirovano was to a large extent responsible for the rapid and very
successful development and expansion of the activities of this company;

Whereas, early in 1941, the life of the said Enrico Pirovano was insured in various life companies,
to wit:

Whereas, the said Enrico Pirovano is survived by 4 minor children, to wit: Esteban, Maria Carla,
Enrico and John Albert, all surnamed Pirovano; and

Whereas, the said Enrico Pirovano left practically nothing to his heirs and it is but fit and proper
that this Company which owes so much to the deceased should make some provision for his
children;

Be it resolved, that out of gratitude to the late Enrico Pirovano this Company renounce as it hereby
renounces, . . . .

From the above it clearly appears that the corporation thought of giving the donation to the children of the
late Enrico Pirovano because he "was to a large extent responsible for the rapid and very successful
development and expansion of the activities of this company"; and also because he "left practically
nothing to his heirs and it is but fit and proper that this company which owes so much to the deceased
should make some provision to his children", and so, the donation was given "out of gratitude to the late
Enrico Pirovano." We do not need to stretch our imagination to see that a grant or donation given under
these circumstances is remunerative in nature in contemplation of law.

That which is made to a person in consideration of his merits or for services rendered to the donor,
provided they do not constitute recoverable debts, or that in which a burden less than the value of
the thing given is imposed upon the donee, is also a donation." (Art. 619, old Civil Code.)

In donations made to a person for services rendered to the donor, the donor's will is moved by acts
which directly benefit him. The motivating cause is gratitude, acknowledgment of a favor, a desire
to compensate. A donation made to one who saved the donor's life, or a lawyer who renounced his
fees for services rendered to the donor, would fall under this class of donations. These donations
are called remunerative donations . (Sinco and Capistrano, The Civil Code, Vol. 1, p. 676; Manresa,
5th ed., pp. 72-73.)

2. The next question to be determined is whether the donation has been perfected such that the
corporation can no longer rescind it even if it wanted to. The answer to this question cannot but be in the
affirmative considering that the same has not only been granted in several resolutions duly adopted by the
Board of Directors of the defendant corporation, and in all these corporate acts the concurrence of the
representatives of the National Development Company, the only creditor whose interest may be affected
by the donation, has been expressly given. The corporation has even gone further. It actually transferred
the ownership of the credit subject of donation to the Pirovano children with the express understanding
that the money would be retained by the corporation subject to the condition that the latter would pay
interest thereon at the rate of 5 per cent per annum payable whenever said corporation may be in a
financial position to do so. Thus, the following acts of the corporation as reflected from the evidence bear
this out:

(a) The donation was embodied in a resolution duly approved by the Board of Directors on January 6,
19437. In this resolution, the representatives of the National Development Company, have given their
concurrence. This is the only creditor which can be considered as being adversely affected by the
donation. The resolution of June 24, 1947 did not modify the substance of the former resolution for it
merely provided that instead of the interest on the loan being payable, together with the principal, only
after the corporation had first settled in full its bonded indebtedness, said interest would be paid
"whenever the company is in a position to meet said obligation."

(b) The resolution of January 6, 1947 was actually carried out when the company and Mrs. Estefania R.
Pirovano, executed a memorandum agreement stating therein hat the proceeds of the insurance policies
would be entered in the books of the corporation as a loan which would bear an interest at the rate of 5
per cent per annum, and said agreement was signed by Mrs. Pirovano as judicial guardian of her children
after she had been expressly authorized by the court to accept the donation in behalf of her children.

(c) While the donation can be considered as duly executed by the execution of the document stated in the
preceding paragraph, and by the entry in the books of the corporation of the donation as a loan, a further
record of said execution was made when Mrs. Pirovano executed a public document on February 26, 1948
making similar acceptance of the donation. And this acceptance was officially recorded by the corporation
when on the same date its Board of Directors approved a resolution taking "official notice" of said
acceptance.

(d) On July 25, 1949, the Board of Directors approved the proposal of Mrs. Pirovano to buy the house at
New Rochelle, New York, owned by a subsidiary of the corporation at the costs of S75,000 which would be
paid from the sum held in trust belonging to her minor children. And this agreement was actually carried
out in a document signed by the general manager of the corporation and by Mrs. Pirovano, who acted on
the matter with the express authority of the court.

(e) And on September 30, 1949, or two years and 3 months after the donation had been executed, the
stockholders of the defendant corporation formally ratified and gave approval to the donation as embodied
in the resolutions above referred to, subject to certain modifications which did not materially affect the
nature of the donation.
There can be no doubt from the foregoing relation of facts the donation was a corporate act carried out by
the corporation not only with the sanction of its Board of Directors but also of its stockholders. It is
evident that the donation has reached the stage of perfection which is valid and binding upon the
corporation and as such cannot be rescinded unless there is exists legal grounds for doing so. In this case,
we see none. The two reasons given for the rescission of said donation in the resolution of the corporation
adopted on March 8, 1951, to wit: that the corporation failed to comply with the conditions to which the
above donation was made subject, and that in the opinion of the Securities and Exchange Commission
said donation is ultra vires, are not, in our opinion, valid and legal as to justify the rescission of a
perfected donation. These reasons, as we will discuss in the latter part of this decision, cannot be invoked
by the corporation to rescind or set at naught the donation, and the only way by which this can be done is
to show that the donee has been in default, or that the donation has not been validly executed, or is
illegal or ultra vires, and such is not the case as we will see hereafter. We therefore declare that the
resolution approved by the stockholders of the defendant corporation on March 8, 1951 did not and cannot
have the effect of nullifying the donation in question.

3. The third question to be determined is: Can defendant corporation give by way of donation the
proceeds of said insurance policies to the minor children of the late Enrico Pirovano under the law or its
articles of corporation, or is that donation an ultra vires act? To answer this question it is important for us
to examine the articles of incorporation of the De la Rama company to see this question it is important for
us to examine the articles of incorporation of the De la Rama company to see if the act or donation is
outside of their scope. Paragraph second of said articles provides:

Second.— The purposes for which said corporation is formed are:

(a) To purchase, charter, hire, build, or otherwise acquire steam or other ships or vessels, together
with equipments and furniture therefor, and to employ the same in conveyance and carriage of
goods, wares and merchandise of every description, and of passengers upon the high seas.

(b) To sell, let, charter, or otherwise dispose of the said vessels or other property of the company.

(c) To carry on the business of carriers by water.

(d) To carry on the business of shipowners in all of its branches.

(e) To purchase or take on lease, lands, wharves, stores, lighters, barges and other things which
the company may deem necessary or advisable to be purchased or leased for the necessary and
proper purposes of the business of the company, and from time to time to sell the dispose of the
same.

(f) To promote any company or companies for the purposes of acquiring all or any of the property
or liabilities of this company, or both, or for any other purpose which may seem directly or
indirectly calculated to benefit the company.

(g) To invest and deal with the moneys of the company and immediately required, in such manner
as from time to time may be determined.

(h) To borrow, or raise, or secure the payment of money in such manner as the company shall
think fit.

(i) Generally, to do all such other thing and to transact all business as may be directly or indirectly
incidental or conducive to the attainment of the above object, or any of them respectively.

(j) Without in any particular limiting or restricting any of the objects and powers of the corporation,
it is hereby expressly declared and provided that the corporation shall have power to issue bonds
and provided that the corporation shall have power to issue bonds and other obligations, to
mortgage or pledge any stocks, bonds or other obligations or any property which may be required
by said corporations; to secure any bonds, guarantees or other obligations by it issued or incurred;
 to lend money or credit to and to aid in any other manner any person, association, or corporation
of which any obligation or in which any interest is held by this corporation or in the affairs or
prosperity of which this corporation or in the affairs or prosperity of which this corporation has a
lawful interest, and to do such acts and things as may be necessary to protect, preserve, improve,
or enhance the value of any such obligation or interest; and, in general, to do such other acts in
connection with the purposes for which this corporation has been formed which is calculated to
promote the interest of the corporation or to enhance the value of its property and to exercise all
the rights, powers and privileges which are now or may hereafter be conferred by the laws of the
Philippines upon corporations formed under the Philippine Corporation Act; to execute from time to
time general or special powers of attorney to persons, firms, associations or corporations either in
the Philippines, in the United States, or in any other country and to revoke the same as and when
the Directors may determine and to do any and or all of the things hereinafter set forth and to the
same extent as natural persons might or could do.

After a careful perusal of the provisions above quoted we find that the corporation was given broad and
almost unlimited powers to carry out the purposes for which it was organized among them, (1) "To invest
and deal with the moneys of the company not immediately required, in such manner as from time to time
may be determined" and, (2) "to aid in any other manner any person, association, or corporation of which
any obligation or in which any interest is held by this corporation or in the affairs or prosperity of which
this corporation has a lawful interest." The world deal is broad enough to include any manner of
disposition, and refers to moneys not immediately required by the corporation, and such disposition may
be made in such manner as from time to time may be determined by the corporations. The donation in
question undoubtedly comes within the scope of this broad power for it is a fact appearing in the evidence
that the insurance proceeds were not immediately required when they were given away. In fact, the
evidence shows that the corporation declared a 100 per cent cash dividend, or P2,000,000, and later on
another 30 per cent cash dividend. This is clear proof of the solvency of the corporation. It may be that,
as insinuated, Don Esteban wanted to make use of the insurance money to rehabilitate the central owned
by a sister corporation, known as Hijos de I. de la Rama and Co., Inc., situated in Bago, Negros
Occidental, but this, far from reflecting against the solvency of the De la Rama company, only shows that
the funds were not needed by the corporation.

Under the second broad power we have the above stated, that is, to aid in any other manner any
person in the affairs and prosperity of whom the corporation has a lawful interest, the record of this case
is replete with instances which clearly show that the corporation knew well its scope and meaning so much
so that, with the exception of the instant case, no one has lifted a finger to dispute their validity. Thus,
under this broad grant of power, this corporation paid to the heirs of one Florentino Nonato, an engineer
of one of the ships of the company who died in Japan, a gratuity of P7,000, equivalent to one month
salary for each year of service. It also gave to Ramon Pons, a captain of one of its ships , a retirement
gratuity equivalent to one month salary for every year of service, the same to be based upon his highest
salary. And it contributed P2,000 to the fund raised by the Associated Steamship Lines for the widow of
the late Francis Gispert, secretary of said Association, of which the De la Rama Steamship Co., Inc., was a
member along with about 30 other steamship companies. In this instance, Gispert was not even an
employee of the corporation. And invoking this vast power, the corporation even went to the extent of
contributing P100,000 to the Liberal Party campaign funds, apparently in the hope that by conserving its
cordial relations with that party it might continue to retain the patronage of the administration. All these
acts executed before and after the donation in question have never been questioned and were willingly
and actually carried out.

We don't see much distinction between these acts of generosity or benevolence extended to some
employees of the corporation, and even to some in whom the corporation was merely interested because
of certain moral or political considerations, and the donation which the corporation has seen fit to give to
the children of the late Enrico Pirovano from the point of view of the power of the corporation as
expressed in its articles of incorporation. And if the former had been sanctioned and had been considered
valid and intra vires, we see no plausible reasons why the latter should now be deemed ultra vires. It may
perhaps be argued that the donation given to the children of the late Enrico Pirovano is so large and
disproportionate that it can hardly be considered a pension of gratuity that can be placed on a par with the
instances above mentioned, but this argument overlooks one consideration: the gratuity here given was
not merely motivated by pure liberality or act of generosity, but by a deep sense of recognition of the
valuable services rendered by the late Enrico Pirovano which had immensely contributed to the growth of
the corporation to the extent that from its humble capitalization it blossomed into a multi-million
corporation that it is today. In other words of the very resolutions granting the donation or gratuity, said
donation was given not only because the company was so indebted to him that it saw fit and proper to
make provisions for his children, but it did so out of a sense of gratitude. Another factor that we should
bear in mind is that Enrico Pirovano was not only a high official of the company but was at the same time
a member of the De la Rama family, and the recipient of the donation are the grandchildren of Don
Esteban de la Rama. This we, may say, is the motivating root cause behind the grant of this bounty.

It may be contended that a donation is different from a gratuity. While technically this may be so in
substance they are the same. They are even similar to a pension. Thus, it was granted for services
previously rendered, and which at the time they were rendered gave rise to no legal obligation. " (Words
and Phrases, Permanent Edition, p. 675; O'Dea vs. Cook,, 169 Pac., 306, 176 Cal., 659.) Or stated in
another way, a "Gratuity is mere bounty given by the Government in consideration or recognition or
meritorious services and springs from the appreciation an d graciousness of the Government", (Ilagan vs.
Ilaya, G.R. No. 33507, Dec. 20 1930) or "A gratuity is something given freely, or without recompense, a
gift, something voluntarily given in return for a favor or services; a bounty; a tip." Wood Mercantile Co.
vs. Cole, 209 S.W. 2d. 290; Mendoza vs. Dizon, 77 Phil., 533, 43 Off. Gaz. p. 4633. We do not see much
difference between this definition of gratuity and a remunerative donation contemplated in the Civil Code.
In essence they are the same. Such being the case, it may be said that this donation is gratuity in a large
sense for it was given for valuable services rendered an ultra vires act in the light of the following
authorities:

Indeed, some cases seem to hold that the giving of a pure gratuity to directors is ultra vires of
corporation, so that it could not be legalized even if the approval of the shareholders; but this
position has no sound reason to support it, and is opposed to the weight of authority (Suffaker vs.
Kierger's Assignee, 53 S.W. Rep. 288; !07 Ky. 200; 46 L.R.A. 384).

But although business corporations cannot contribute to charity or benevolence, yet they are not
required always to insist on the full extent of their legal rights. They are not forbidden for the
recognizing moral obligation of which strict law takes no cognizance. They are not prohibited from
establishing a reputation for board, liberal, equitable dealing which may stand them in good stead
in competition with less fair rivals. Thus, an incorporated fire insurance company which policies
except losses from explosions may nevertheless pay a loss from that cause when other companies
are accustomed to do so, such liberal dealing being deemed conducive to the prosperity of the
corporation." (Modern Law of Corporations, Machen, Vol. 1, p. 81).

So, a bank may grant a five years pension to the family at one of its officers. In all cases in this
sorts, the amount of the gratuity rests entirely within the discretion of the company, unless indeed
it be all together out of the reason and fitness. But where the company has ceased to be going
concerned, this power to make gifts or present it at the end. (Modern Law of Corporations, Machen,
Vol. 1, p. 82.).

Payment of Gratitude out of Capital.— There seems on principle no reason to doubt that gifts or
gratuities wherever they are lawful may be paid out of capital as well as out of profits. (Modern
Law of corporations, Machen, Vol. 1 p. 83.).

Whether desirable to supplement implied powers of this kind by express provisions.— Enough has
been said to show that the implied powers of a corporation to give gratuities to its servants and
officers, as well as to strangers, are ample, so that there is therefore no need to supplement them
by express provisions." (modern Law of Corporations, Machen, Vol. 1, p. 83.) 1

Granting arguendo that the donation given by Pirovano children is outside the scope of the powers of the
defendant corporation, or the scope of the powers that it may exercise under the law, or it is an ultra
vires act, still it may said that the same can not be invalidated, or declared legally ineffective for the
reason alone, it appearing that the donation represents not only the act of the Board of Directors but of
the stockholders themselves as shown by the fact that the same has been expressly ratified in a resolution
duly approved by the latter. By this ratification, the infirmity of the corporate act, it may has been
obliterated thereby making the cat perfectly valid and enforceable. This is specially so if the donation is
not merely executory but executed and consummated and no creditors are prejudice, or if there are
creditors affected, the latter has expressly given their confirmity.

In making this pronouncement, advertence should made of the nature of the ultra vires act that is in
question. A little digression needs be made on this matter to show the different legal effect that may
result consequent upon the performance of a particular ultra vires act on the part of the corporation. may
authorities may be cited interpreting or defining, extent, and scope of an ultra vires act, but all of them
are uniform and unanimous that the same may be either an act performed merely outside the scope of the
powers granted to it by it articles of incorporation, or one which is contrary to law or violative of any
principle which will void any contract whether done individually or collectively. In other words, a
distinction should be made between corporate acts or contracts which are illegal and those which are
merely ultra vires. The former contemplates the doing of an act which is contrary to law, morals, or public
policy or public duty, and are, like similar transactions between the individuals void. They cannot serve as
basis of a court action, nor require validity ultra vires acts on the other hand, or those which are not illegal
and void ab initio, but are merely within are not illegal and void ab initio, but are not merely within the
scope of the articles of incorporation, are merely voidable and may become binding and enforceable when
ratified by the stockholders.

Strictly speaking, an ultra vires act is one outside the scope of the power conferred by the
legislature, and although the term has been used indiscriminately, it is properly distinguishable
from acts which are illegal, in excess or abuse of power, or executed in an unauthorized manner, or
acts within corporate powers but outside the authority of particular officers or agents (19 C. J. S.
419).

Corporate transactions which are illegal because prohibited by statute or against public policy are
ordinarily void and unenforceable regardless of the part performance, ratification, or estoppel; but
general prohibitions against exceeding corporate powers and prohibitions intended to protect a
particular class or specifying the consequences of violation may not preclude enforcement of the
transaction and an action may be had for the part unaffected by the illegality or for equitable
restitution. (19 C.J.S. 421.)

Generally, a transaction within corporate powers but executed in an irregular or unauthorized

manner is voidable only, and may become enforceable by reason of ratification or express or
implied assent by the stockholders or by reason of estoppel of the corporation or the other party to
the transaction to raise the objection, particularly where the benefits are retained

As appears in paragraphs 960-964 supra, the general rule is that a corporation must act in the
manner and with the formalities, if any, prescribed by its character or by the general law. However,
a corporation transaction or contract which is within the corporation powers, which is neither wrong
in itself nor against public policy, but which is defective from a failure to observe in its execution a
requirement of law enacted for the benefit or protection of a certain class, is voidable and is valid
until avoided, not void until validated; the parties for whose benefit the requirement was enacted
may ratify it or be estoppel to assert its invalidity, and third persons acting in good faith are not
usually affected by an irregularity on the part of the corporation in the exercise of its granted
powers. (19 C.J.S., 423-24.)

It is true that there are authorities which told that ultra vires acts, or those performed beyond the powers
conferred upon the corporation either by law or by its articles of incorporation, are not only voidable, but
wholly void and of no legal effect, and that such acts cannot be validated by ratification or be the basis of
any action in court; but such ruling does not constitute the weight of authority, the reason being that they
fail to make the important distinction we have above adverted to. Because rule has been rejected by most
of the state courts and even by the modern treaties or corporations (7 Flethcer, Cyc. Corps., 563-564).
And now it can be said that the majority of the cases hold that acts which are merely ultra vires, or acts
which are not illegal, may be ratified by the stockholders of a corporation (Brooklyn Heights R. Co. vs.
Brooklyn City R. Co., 135 N.Y. Supp. 1001).
 Strictly speaking, an act of a corporation outside of its character powers is just as such ultra
vires where all the stockholders consent thereto as in a case where none of the stockholders
expressly or cannot be ratified so as to make it valid, even though all the stockholders consent
thereto; but inasmuch as the stockholders in reality constitute the corporation, it should , it would
seem, be estopped to allege ultra vires, and it is generally so held where there are no creditors, or
the creditors are not injured thereby, and where the rights of the state or the public are not
involved, unless the act is not only ultra vires but in addition illegal and void. of course, such
consent of all the stockholders cannot adversely affect creditors of the corporation nor preclude a
proper attack by the state because of such ultra vires act. (7 Fletcher Corp., Sec. 3432, p. 585)

Since it is not contended that the donation under consideration is illegal, or contrary to any of the express
provision of the articles of incorporation, nor prejudicial to the creditors of the defendant corporation, we
cannot but logically conclude, on the strength of the authorities we have quoted above, that said donation,
even if ultra vires in the supposition we have adverted to, is not void, and if voidable its infirmity has been
cured by ratification and subsequent acts of the defendant corporation. The defendant corporation,
therefore, is now prevented or estopped from contesting the validity of the donation. This is specially so in
this case when the very directors who conceived the idea of granting said donation are practically the
stockholders themselves, with few nominal exception. This applies to the new stockholder Jose Cojuangco
who acquired his interest after the donation has been made because of the rule that a "purchaser of
shares of stock cannot avoid ultra vires acts of the corporation authorized by its vendor, except those
done after the purchase" (7 Fletcher, Cyc. Corps. section 3456, p. 603; Pascual vs. Del Saz Orozco, 19
Phil., 82.) Indeed, how can the stockholders now pretend to revoke the donation which has been partly
consummated? How can the corporation now set at naught the transfer made to Mrs. Pirovano of the
property in New York, U.S.A., the price of which was paid by her but of the proceeds of the insurance
policies given as donation. To allow the corporation to undo what it has done would only be most unfair
but would contravene the well-settled doctrine that the defense of ultra vires cannot be set up or availed
of in completed transactions (7 Fletcher, Cyc. Corps. Section 3497, p. 652; 19 C.J.S., 431).

4. We now come to the fourth and last question that the defendant corporation, by the acts it has
performed subsequent to the granting of the donation, deliberately prevented the fulfillment of the
condition precedent to the payment of said donation such that it can be said it has forfeited entirely due
and demandable.

It should be recalled that the original resolution of the Board of Directors adopted on July 10, 1946 which
provided for the donation of P400,000 out of the proceeds which the De la Rama company would collect
on the insurance policies taken on the life of the late Enrico Pirovano was, as already stated above,
amended on January 6, 1947 to include, among the conditions therein provided, that the corporation shall
proceed to pay said amount, as well as the interest due thereon, after it shall have settled in full balance
of its bonded indebtedness in the sum of P5,000,000. It should be recalled that on September 13, 1949,
or more than 2 years after the last amendment referred too above, the stockholders adopted another
resolution whereby they formally ratified said donation but subject to the following clarifications: (1) that
the amount of the donation shall not be effected until such time as the company shall have first duly
liquidated its present bonded indebtedness in the amount of P3,260,855.77 to the National Development
Company, or shall have first fully redeemed the preferred shares of stock in the amount to be issued to
said company in lieu thereof, and (2) that any and all taxes, legal fees, and expenses connected with the
transaction shall be chargeable from the proceeds of said insurance policies.

The trial court, in considering these conditions in the light of the acts subsequently performed by the
corporation in connection with the proceeds of the insurance policies, considered said conditions null and
void, or at most not written because in its pinion their non-fulfillment was due to a deliberate desistance
of the corporation and not to lack of funds to redeem the preferred shares of the National Development
Company. The conclusions arrived at by the trial court on this point are as follows:

Fourth. — that the condition mentioned in the donation is null and void because it depends on the
exclusive will of the donor, in accordance with the provisions of Article 1115 of the Old Civil Code.

Fifth. — That if the condition is valid, its non-fulfillment is due to the desistance of the defendant
company from obeying and doing the wishes and mandate of the majority of the stockholders.
 Sixth. — That the non-payment of the debt in favor of the National Development Company is due
to the lack of funds, nor to lack of authority, but to the desire of the President of the corporation to
preserve and continue the Government participation in the company.

To this views of the trial court, we fail to agree. There are many factors we can consider why the failure to
immediately redeem the preferred shares issued to the National Development Company as desired by the
minor children of the late Enrico Pirovano cannot or should not be attributed to a mere desire on the part
of the corporation to delay the redemption, or to prejudice the interest of the minors, but rather to protect
the interest of the corporation itself. One of them is the text of the very resolution approved by the
National Development Company on February 18, 1949 which prescribed the terms and conditions under
which it expressed its conformity to the conversion of the bonded indebtedness into preferred shares of
stock. The text of the resolution above mentioned reads:

Resolved: That the outstanding bonded indebtedness of the Dela Rama Steamship Co., Inc., in the
approximate amount of P3,260,855.77 be converted into non-voting preferred shares of stock of
said company, said shares to bear a fixed dividend of 6 percent per annum which shall be
cumulative and redeemable within 15 years. Said shares shall be preferred as to assets in the
event of liquidation or dissolution of said company but shall be non-participating.

It is plain from the text of the above resolution that the defendant corporation had 15 years from February
18, 1949, or until 1964, within which to effect the redemption of the preferred shares issued to the
National Development Company. This condition cannot but be binding and obligatory upon the donees, if
they desire to maintain the validity of the donation, for it is not only the basis upon which the stockholders
of the defendant corporation expressed their willingness to ratify the donation, but it is also by way which
its creditor, the National Development Company, would want it to be. If the defendant corporation is given
15 years within which to redeem the preferred shares, and that period would expire in 1964, one cannot
blame the corporation for availing itself of this period if in its opinion it would redound to its best interest.
It cannot therefore be said that the fulfillment of the condition for the payment of the donation is one that
wholly depends on the exclusive will of the donor, as the lower court has concluded, simply because it
failed to meet the redemption of said shares in her manner desired by the donees. While it may be
admitted that because of the disposition of the assets of the corporation upon the suggestion of its general
manager more than enough funds had been raised to effect the immediate redemption of the above
shares, it is not correct to say that the management has completely failed in its duty to pay its obligations
for, according to the evidence, a substantial portion of the indebtedness has been paid and only a balance
of about P1,805,169.98 was outstanding when the stockholders of the corporation decided to revoke or
cancel the donation. (Exhibit P.)

But there are other good reasons why all the available funds have not been actually applied to the
redemption of the preferred shares, one of them being the "desire of the president of the corporation to
preserve and continue the government participation in the company" which even the lower court found it
to be meritorious, which is one way by which it could continue receiving the patronage and protection of
the government. Another reason is that the redemption of the shares does not depend on the will of the
corporation alone but to a great extent on the will of a third party, the National Development Company. In
fact, as the evidence shows, this Company had pledged these shares to the Philippine National Bank and
the Rehabilitation Finance Corporation as a security to obtain certain loans to finance the purchase of
certain ships to be built for the use of the company under management contract entered into between the
corporation and the National Development Company, and this was what prevented the corporation from
carrying out its offer to pay the sum P1,956,513.07 on April 5, 1951. Had this offer been accepted, or
favorably acted upon by the National Development Company, the indebtedness would have been
practically liquidated, leaving outstanding only one certificate worth P217,390.45. Of course, the
corporation could have insisted in redeeming the shares if it wanted to even to the extent of taking a court
action if necessary to force its creditor to relinquish the shares that may be necessary to accomplish the
redemption, but such would be a drastic step which would have not been advisable considering the policy
right along maintained by the corporation to preserve its cordial and smooth relation with the government.
At any rate, whether such attitude be considered as a mere excuse to justify the delay in effecting the
redemption of the shares, or a mere desire on the part of the corporation to retain in its possession more
funds available to attend to other pressing need as demanded by the interest of the corporation, we fail to
see in such an attitude an improper motive to circumvent the early realization of the desire of the minors
to obtain the immediate payment of the donation which was made dependent upon the redemption of said
shares there being no clear evidence that may justify such design. Anyway, a great portion of the funds
went to the stockholders themselves by way of dividends to offset, so it appears, the huge advances that
the corporation had made to them which were entered in the books of the corporation as loans and,
therefore, they were invested for their own benefit. As General Manager Osmeña said, "we were first
confronted with the problem of the withdrawals of the family which had to be repaid back to the National
Development Company and one of the most practical solutions to that was to declare dividends and
reduce the amounts of their withdrawals", which then totalled about P3,000,000.

All things considered, we are of the opinion that the finding of the lower court that the failure of the
defendant corporation to comply with the condition of the donation is merely due to its desistance from
obeying the mandate of the majority of the stockholders and not to lack of funds, or to lack of authority,
has no foundation in law or in fact, and, therefore, its conclusion that because of such desistance that
condition should be deemed as fulfilled and the payment of the donation due and demandable, is not
justified. In this respect, the decision of the lower court should be reversed.

Having reached the foregoing conclusion, we deem it unnecessary to discuss the other issues raised by
the parties in their briefs.

The lower court adjudicated to plaintiff an additional amount equivalent to 20 per cent of the amount
claimed as damages by way of attorney's fees, and in our opinion, this award can be justified under Article
2208, paragraph 2, of the new Civil Code, which provides: "When the defendant's act or omission has
compelled the plaintiff to litigate with third persons or to incur expenses to protect his interest", attorney's
fees nay be awarded as damages. However, the majority believes that this award should be reduced to 10
per cent.

Wherefore, the decision appealed from should be modified as follows: (a) that the donation made in favor
of the children of the late Enrico Pirovano of the proceeds of the insurance policies taken on his life is valid
and binding on the defendant corporation, (b) that said donation, which amounts to a total of
P583,813.59, including interest, as it appears in the books of the corporation as of August 31, 1951, plus
interest thereon at the rate of 5 per cent per annum from the filing of the complaint, should be paid to the
plaintiffs after the defendant corporation shall have fully redeemed the preferred shares issued to the
National Development Company under the terms and conditions stated in the resolutions of the Board of
Directors of January 6, 1947 and June 24, 1947, as amended by the resolution of the stockholders
adopted on September 13,1949; and (c) defendant shall pay to plaintiffs an additional amount equivalent
to 10 per cent of said amount of P583,813.59 as damages by way of attorney's fees, and to pay the costs
of action.

G.R. No. L-18062             February 28, 1963

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
ACOJE MINING COMPANY, INC., defendant-appellant.

Office of the Solicitor General for plaintiff-appellee.

Jalandoni & Jamir for defendant-appellant.

BAUTISTA ANGELO, J.:

On May 17, 1948, the Acoje Mining Company, Inc. wrote the Director of Posts requesting the opening of a
post, telegraph and money order offices at its mining camp at Sta. Cruz, Zambales, to service its
employees and their families that were living in said camp. Acting on the request, the Director of Posts
wrote in reply stating that if aside from free quarters the company would provide for all essential
equipment and assign a responsible employee to perform the duties of a postmaster without
compensation from his office until such time as funds therefor may be available he would agree to put up
the offices requested. The company in turn replied signifying its willingness to comply with all the
requirements outlined in the letter of the Director of Posts requesting at the same time that it be furnished
with the necessary forms for the early establishment of a post office branch.

On April 11, 1949, the Director of Posts again wrote a letter to the company stating among other things
that "In cases where a post office will be opened under circumstances similar to the present, it is the
policy of this office to have the company assume direct responsibility for whatever pecuniary loss may be
suffered by the Bureau of Posts by reason of any act of dishonesty, carelessness or negligence on the part
of the employee of the company who is assigned to take charge of the post office," thereby suggesting
that a resolution be adopted by the board of directors of the company expressing conformity to the above
condition relative to the responsibility to be assumed buy it in the event a post office branch is opened as
requested. On September 2, 1949, the company informed the Director of Posts of the passage by its
board of directors of a resolution of the following tenor: "That the requirement of the Bureau of Posts that
the Company should accept full responsibility for all cash received by the Postmaster be complied with,
and that a copy of this resolution be forwarded to the Bureau of Posts." The letter further states that the
company feels that that resolution fulfills the last condition imposed by the Director of Posts and that,
therefore, it would request that an inspector be sent to the camp for the purpose of acquainting the
postmaster with the details of the operation of the branch office.

The post office branch was opened at the camp on October 13, 1949 with one Hilario M. Sanchez as
postmaster. He is an employee of the company. On May 11, 1954, the postmaster went on a three-day
leave but never returned. The company immediately informed the officials of the Manila Post Office and
the provincial auditor of Zambales of Sanchez' disappearance with the result that the accounts of the
postmaster were checked and a shortage was found in the amount of P13,867.24.

The several demands made upon the company for the payment of the shortage in line with the liability it
has assumed having failed, the government commenced the present action on September 10, 1954 before
the Court of First Instance of Manila seeking to recover the amount of Pl3,867.24. The company in its
answer denied liability for said amount contending that the resolution of the board of directors wherein it
assumed responsibility for the act of the postmaster is ultra vires, and in any event its liability under said
resolution is only that of a guarantor who answers only after the exhaustion of the properties of the
principal, aside from the fact that the loss claimed by the plaintiff is not supported by the office record.

Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved
by this Honorable Court, without prejudice to the parties adducing other evidence to prove their case not
covered by this stipulation of facts. 1äwphï1.ñët

After trial, the court a quo found that, of the amount claimed by plaintiff totalling P13,867.24, only the
sum of P9,515.25 was supported by the evidence, and so it rendered judgment for the plaintiff only for
the amount last mentioned. The court rejected the contention that the resolution adopted by the company
is ultra vires and that the obligation it has assumed is merely that of a guarantor.

Defendant took the present appeal.

The contention that the resolution adopted by the company dated August 31, 1949 is ultra vires in the
sense that it has no authority to act on a matter which may render the company liable as a guarantor has
no factual or legal basis. In the first place, it should be noted that the opening of a post office branch at
the mining camp of appellant corporation was undertaken because of a request submitted by it to promote
the convenience and benefit of its employees. The idea did not come from the government, and the
Director of Posts was prevailed upon to agree to the request only after studying the necessity for its
establishment and after imposing upon the company certain requirements intended to safeguard and
protect the interest of the government. Thus, after the company had signified its willingness to comply
with the requirement of the government that it furnish free quarters and all the essential equipment that
may be necessary for the operation of the office including the assignment of an employee who will
perform the duties of a postmaster, the Director of Posts agreed to the opening of the post office stating
that "In cases where a post office will be opened under circumstances similar to the present, it is the
policy of this office to have the company assume direct responsibility for whatever pecuniary loss may be
suffered by the Bureau of Posts by reason of any act of dishonesty, carelessness or negligence on the part
of the employee of the company who is assigned to take charge of the post office," and accepting this
condition, the company, thru its board of directors, adopted forthwith a resolution of the following tenor:
"That the requirement of the Bureau of Posts that the company should accept full responsibility for all cash
received by the Postmaster, be complied with, and that a copy of this resolution be forwarded to the
Bureau of Posts." On the basis of the foregoing facts, it is evident that the company cannot now be heard
to complain that it is not liable for the irregularity committed by its employee upon the technical plea that
the resolution approved by its board of directors is ultra vires. The least that can be said is that it cannot
now go back on its plighted word on the ground of estoppel.

The claim that the resolution adopted by the board of directors of appellant company is an ultra vires act
cannot also be entertained it appearing that the same covers a subject which concerns the benefit,
convenience and welfare of its employees and their families. While as a rule an ultra vires act is one
committed outside the object for which a corporation is created as defined by the law of its organization
and therefore beyond the powers conferred upon it by law (19 C.J.S., Section 965, p. 419), there are
however certain corporate acts that may be performed outside of the scope of the powers expressly
conferred if they are necessary to promote the interest or welfare of the corporation. Thus, it has been
held that "although not expressly authorized to do so a corporation may become a surety where the
particular transaction is reasonably necessary or proper to the conduct of its business,"1 and here it is
undisputed that the establishment of the local post office is a reasonable and proper adjunct to the
conduct of the business of appellant company. Indeed, such post office is a vital improvement in the living
condition of its employees and laborers who came to settle in its mining camp which is far removed from
the postal facilities or means of communication accorded to people living in a city or municipality..

Even assuming arguendo that the resolution in question constitutes an ultra vires act, the same however
is not void for it was approved not in contravention of law, customs, public order or public policy. The
term ultra vires should be distinguished from an illegal act for the former is merely voidable which may be
enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated.2 It
being merely voidable, an ultra vires act can be enforced or validated if there are equitable grounds for
taking such action. Here it is fair that the resolution be upheld at least on the ground of estoppel. On this
point, the authorities are overwhelming:

The weight of authority in the state courts is to the effect that a transaction which is merely ultra
vires and not malum in se or malum prohibitum, is, if performed by one party, not void as between
the parties to all intents and purposes, and that an action may be brought directly on the
transaction and relief had according to its terms. (19 C.J.S., Section 976, p. 432, citing Nettles v.
Rhett, C.C.A.S.C., 94 F. 2d, reversing, D.C., 20 F. Supp. 48)

This rule is based on the consideration that as between private corporations, one party cannot
receive the benefits which are embraced in total performance of a contract made with it by another
party and then set up the invalidity of the transaction as a defense." (London & Lancashire
Indemnity Co. of America v. Fairbanks Steam Shovel Co., 147 N.E. 329, 332, 112 Ohio St. 136.)

The defense of ultra vires rests on violation of trust or duty toward stockholders, and should not be
entertained where its allowance will do greater wrong to innocent parties dealing with corporation..

The acceptance of benefits arising from the performance by the other party may give rise to an
estoppel precluding repudiation of the transaction. (19 C.J.S., Section 976, p. 433.)

The current of modern authorities favors the rule that where the ultra vires transaction has been
executed by the other party and the corporation has received the benefit of it, the law interposes
an estoppel, and will not permit the validity of the transaction or contract to be questioned, and
this is especially true where there is nothing in the circumstances to put the other party to the
transaction on notice that the corporation has exceeded its powers in entering into it and has in so
doing overstepped the line of corporate privileges. (19 C.J.S., Section 977, pp. 435-
437, citing Williams v. Peoples Building & Loan Ass'n, 97 S.W. 2d 930, 193 Ark. 118; Hays v.
Galion Gas Light Co., 29 Ohio St. 330)

Neither can we entertain the claim of appellant that its liability is only that of a guarantor. On this point,
we agree with the following comment of the court a quo: "A mere reading of the resolution of the Board of
Directors dated August 31, 1949, upon which the plaintiff based its claim would show that the
responsibility of the defendant company is not just that of a guarantor. Notice that the phraseology and
the terms employed are so clear and sweeping and that the defendant assumed 'full responsibility for all
cash received by the Postmaster.' Here the responsibility of the defendant is not just that of a guarantor.
It is clearly that of a principal."

WHEREFORE, the decision appealed from is affirmed. No costs.

G.R. No. L-45911 April 11, 1979

JOHN GOKONGWEI, JR., petitioner,

vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M. SORIANO, ENRIQUE
ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL ORTIGAS,
ANTONIO PRIETO, SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and EDUARDO R.
VISAYA, respondents.

De Santos, Balgos & Perez for petitioner.

Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents Sorianos

Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel Corporation.

R. T Capulong for respondent Eduardo R. Visaya.

ANTONIO, J.:

The instant petition for certiorari, mandamus and injunction, with prayer for issuance of writ of preliminary
injunction, arose out of two cases filed by petitioner with the Securities and Exchange Commission, as
follows:

SEC CASE NO 1375

On October 22, 1976, petitioner, as stockholder of respondent San Miguel Corporation, filed with the
Securities and Exchange Commission (SEC) a petition for "declaration of nullity of amended by-laws,
cancellation of certificate of filing of amended by- laws, injunction and damages with prayer for a
preliminary injunction" against the majority of the members of the Board of Directors and San Miguel
Corporation as an unwilling petitioner. The petition, entitled "John Gokongwei Jr. vs. Andres Soriano, Jr.,
Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao, Walthrode B. Conde, Miguel Ortigas,
Antonio Prieto and San Miguel Corporation", was docketed as SEC Case No. 1375.

As a first cause of action, petitioner alleged that on September 18, 1976, individual respondents amended
by bylaws of the corporation, basing their authority to do so on a resolution of the stockholders adopted
on March 13, 1961, when the outstanding capital stock of respondent corporation was only
P70,139.740.00, divided into 5,513,974 common shares at P10.00 per share and 150,000 preferred
shares at P100.00 per share. At the time of the amendment, the outstanding and paid up shares totalled
30,127,047 with a total par value of P301,270,430.00. It was contended that according to section 22 of
the Corporation Law and Article VIII of the by-laws of the corporation, the power to amend, modify, repeal
or adopt new by-laws may be delegated to the Board of Directors only by the affirmative vote of
stockholders representing not less than 2/3 of the subscribed and paid up capital stock of the corporation,
which 2/3 should have been computed on the basis of the capitalization at the time of the amendment.
Since the amendment was based on the 1961 authorization, petitioner contended that the Board acted
without authority and in usurpation of the power of the stockholders.
As a second cause of action, it was alleged that the authority granted in 1961 had already been exercised
in 1962 and 1963, after which the authority of the Board ceased to exist.

As a third cause of action, petitioner averred that the membership of the Board of Directors had changed
since the authority was given in 1961, there being six (6) new directors.

As a fourth cause of action, it was claimed that prior to the questioned amendment, petitioner had all the
qualifications to be a director of respondent corporation, being a Substantial stockholder thereof; that as a
stockholder, petitioner had acquired rights inherent in stock ownership, such as the rights to vote and to
be voted upon in the election of directors; and that in amending the by-laws, respondents purposely
provided for petitioner's disqualification and deprived him of his vested right as afore-mentioned hence the
amended by-laws are null and void. 1

As additional causes of action, it was alleged that corporations have no inherent power to disqualify a
stockholder from being elected as a director and, therefore, the questioned act is ultra vires and void; that
Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing other corporations, entered into
contracts (specifically a management contract) with respondent corporation, which was allowed because
the questioned amendment gave the Board itself the prerogative of determining whether they or other
persons are engaged in competitive or antagonistic business; that the portion of the amended bylaws
which states that in determining whether or not a person is engaged in competitive business, the Board
may consider such factors as business and family relationship, is unreasonable and oppressive and,
therefore, void; and that the portion of the amended by-laws which requires that "all nominations for
election of directors ... shall be submitted in writing to the Board of Directors at least five (5) working
days before the date of the Annual Meeting" is likewise unreasonable and oppressive.

It was, therefore, prayed that the amended by-laws be declared null and void and the certificate of filing
thereof be cancelled, and that individual respondents be made to pay damages, in specified amounts, to
petitioner.

On October 28, 1976, in connection with the same case, petitioner filed with the Securities and Exchange
Commission an "Urgent Motion for Production and Inspection of Documents", alleging that the Secretary
of respondent corporation refused to allow him to inspect its records despite request made by petitioner
for production of certain documents enumerated in the request, and that respondent corporation had been
attempting to suppress information from its stockholders despite a negative reply by the SEC to its query
regarding their authority to do so. Among the documents requested to be copied were (a) minutes of the
stockholder's meeting field on March 13, 1961, (b) copy of the management contract between San Miguel
Corporation and A. Soriano Corporation (ANSCOR); (c) latest balance sheet of San Miguel International,
Inc.; (d) authority of the stockholders to invest the funds of respondent corporation in San Miguel
International, Inc.; and (e) lists of salaries, allowances, bonuses, and other compensation, if any, received
by Andres M. Soriano, Jr. and/or its successor-in-interest.

The "Urgent Motion for Production and Inspection of Documents" was opposed by respondents, alleging,
among others that the motion has no legal basis; that the demand is not based on good faith; that the
motion is premature since the materiality or relevance of the evidence sought cannot be determined until
the issues are joined, that it fails to show good cause and constitutes continued harrasment, and that
some of the information sought are not part of the records of the corporation and, therefore, privileged.

During the pendency of the motion for production, respondents San Miguel Corporation, Enrique Conde,
Miguel Ortigas and Antonio Prieto filed their answer to the petition, denying the substantial allegations
therein and stating, by way of affirmative defenses that "the action taken by the Board of Directors on
September 18, 1976 resulting in the ... amendments is valid and legal because the power to "amend,
modify, repeal or adopt new By-laws" delegated to said Board on March 13, 1961 and long prior thereto
has never been revoked of SMC"; that contrary to petitioner's claim, "the vote requirement for a valid
delegation of the power to amend, repeal or adopt new by-laws is determined in relation to the total
subscribed capital stock at the time the delegation of said power is made, not when the Board opts to
exercise said delegated power"; that petitioner has not availed of his intra-corporate remedy for the
nullification of the amendment, which is to secure its repeal by vote of the stockholders representing a
majority of the subscribed capital stock at any regular or special meeting, as provided in Article VIII,
section I of the by-laws and section 22 of the Corporation law, hence the, petition is premature; that
petitioner is estopped from questioning the amendments on the ground of lack of authority of the Board.
since he failed, to object to other amendments made on the basis of the same 1961 authorization: that
the power of the corporation to amend its by-laws is broad, subject only to the condition that the by-laws
adopted should not be respondent corporation inconsistent with any existing law; that respondent
corporation should not be precluded from adopting protective measures to minimize or eliminate situations
where its directors might be tempted to put their personal interests over t I hat of the corporation; that
the questioned amended by-laws is a matter of internal policy and the judgment of the board should not
be interfered with: That the by-laws, as amended, are valid and binding and are intended to prevent the
possibility of violation of criminal and civil laws prohibiting combinations in restraint of trade; and that the
petition states no cause of action. It was, therefore, prayed that the petition be dismissed and that
petitioner be ordered to pay damages and attorney's fees to respondents. The application for writ of
preliminary injunction was likewise on various grounds.

Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the petition, denying the
material averments thereof and stating, as part of their affirmative defenses, that in August 1972, the
Universal Robina Corporation (Robina), a corporation engaged in business competitive to that of
respondent corporation, began acquiring shares therein. until September 1976 when its total holding
amounted to 622,987 shares: that in October 1972, the Consolidated Foods Corporation (CFC) likewise
began acquiring shares in respondent (corporation. until its total holdings amounted to P543,959.00 in
September 1976; that on January 12, 1976, petitioner, who is president and controlling shareholder of
Robina and CFC (both closed corporations) purchased 5,000 shares of stock of respondent corporation,
and thereafter, in behalf of himself, CFC and Robina, "conducted malevolent and malicious publicity
campaign against SMC" to generate support from the stockholder "in his effort to secure for himself and in
representation of Robina and CFC interests, a seat in the Board of Directors of SMC", that in the
stockholders' meeting of March 18, 1976, petitioner was rejected by the stockholders in his bid to secure a
seat in the Board of Directors on the basic issue that petitioner was engaged in a competitive business and
his securing a seat would have subjected respondent corporation to grave disadvantages; that "petitioner
nevertheless vowed to secure a seat in the Board of Directors at the next annual meeting; that thereafter
the Board of Directors amended the by-laws as afore-stated.

As counterclaims, actual damages, moral damages, exemplary damages, expenses of litigation and
attorney's fees were presented against petitioner.

Subsequently, a Joint Omnibus Motion for the striking out of the motion for production and inspection of
documents was filed by all the respondents. This was duly opposed by petitioner. At this juncture,
respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya were allowed to intervene as oppositors and
they accordingly filed their oppositions-intervention to the petition.

On December 29, 1976, the Securities and Exchange Commission resolved the motion for production and
inspection of documents by issuing Order No. 26, Series of 1977, stating, in part as follows:

Considering the evidence submitted before the Commission by the petitioner and
respondents in the above-entitled case, it is hereby ordered:

1. That respondents produce and permit the inspection, copying and photographing, by or
on behalf of the petitioner-movant, John Gokongwei, Jr., of the minutes of the stockholders'
meeting of the respondent San Miguel Corporation held on March 13, 1961, which are in the
possession, custody and control of the said corporation, it appearing that the same is
material and relevant to the issues involved in the main case. Accordingly, the respondents
should allow petitioner-movant entry in the principal office of the respondent Corporation,
San Miguel Corporation on January 14, 1977, at 9:30 o'clock in the morning for purposes of
enforcing the rights herein granted; it being understood that the inspection, copying and
photographing of the said documents shall be undertaken under the direct and strict
supervision of this Commission. Provided, however, that other documents and/or papers not
heretofore included are not covered by this Order and any inspection thereof shall require
the prior permission of this Commission;
 2. As to the Balance Sheet of San Miguel International, Inc. as well as the list of salaries,
allowances, bonuses, compensation and/or remuneration received by respondent Jose M.
Soriano, Jr. and Andres Soriano from San Miguel International, Inc. and/or its successors-
in- interest, the Petition to produce and inspect the same is hereby DENIED, as petitioner-
movant is not a stockholder of San Miguel International, Inc. and has, therefore, no
inherent right to inspect said documents;

3. In view of the Manifestation of petitioner-movant dated November 29, 1976, withdrawing

his request to copy and inspect the management contract between San Miguel Corporation
and A. Soriano Corporation and the renewal and amendments thereof for the reason that he
had already obtained the same, the Commission takes note thereof; and

4. Finally, the Commission holds in abeyance the resolution on the matter of production and
inspection of the authority of the stockholders of San Miguel Corporation to invest the funds
of respondent corporation in San Miguel International, Inc., until after the hearing on the
merits of the principal issues in the above-entitled case.

This Order is immediately executory upon its approval. 2

Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.

Meanwhile, on December 10, 1976, while the petition was yet to be heard, respondent corporation issued
a notice of special stockholders' meeting for the purpose of "ratification and confirmation of the
amendment to the By-laws", setting such meeting for February 10, 1977. This prompted petitioner to ask
respondent Commission for a summary judgment insofar as the first cause of action is concerned, for the
alleged reason that by calling a special stockholders' meeting for the aforesaid purpose, private
respondents admitted the invalidity of the amendments of September 18, 1976. The motion for summary
judgment was opposed by private respondents. Pending action on the motion, petitioner filed an "Urgent
Motion for the Issuance of a Temporary Restraining Order", praying that pending the determination of
petitioner's application for the issuance of a preliminary injunction and/or petitioner's motion for summary
judgment, a temporary restraining order be issued, restraining respondents from holding the special
stockholder's meeting as scheduled. This motion was duly opposed by respondents.

On February 10, 1977, respondent Commission issued an order denying the motion for issuance of
temporary restraining order. After receipt of the order of denial, respondents conducted the special
stockholders' meeting wherein the amendments to the by-laws were ratified. On February 14, 1977,
petitioner filed a consolidated motion for contempt and for nullification of the special stockholders'
meeting.

A motion for reconsideration of the order denying petitioner's motion for summary judgment was filed by
petitioner before respondent Commission on March 10, 1977. Petitioner alleges that up to the time of the
filing of the instant petition, the said motion had not yet been scheduled for hearing. Likewise, the motion
for reconsideration of the order granting in part and denying in part petitioner's motion for production of
record had not yet been resolved.

In view of the fact that the annul stockholders' meeting of respondent corporation had been scheduled for
May 10, 1977, petitioner filed with respondent Commission a Manifestation stating that he intended to run
for the position of director of respondent corporation. Thereafter, respondents filed a Manifestation with
respondent Commission, submitting a Resolution of the Board of Directors of respondent corporation
disqualifying and precluding petitioner from being a candidate for director unless he could submit evidence
on May 3, 1977 that he does not come within the disqualifications specified in the amendment to the by-
laws, subject matter of SEC Case No. 1375. By reason thereof, petitioner filed a manifestation and motion
to resolve pending incidents in the case and to issue a writ of injunction, alleging that private respondents
were seeking to nullify and render ineffectual the exercise of jurisdiction by the respondent Commission,
to petitioner's irreparable damage and prejudice, Allegedly despite a subsequent Manifestation to prod
respondent Commission to act, petitioner was not heard prior to the date of the stockholders' meeting.
Petitioner alleges that there appears a deliberate and concerted inability on the part of the SEC to act
hence petitioner came to this Court.

SEC. CASE NO. 1423

Petitioner likewise alleges that, having discovered that respondent corporation has been investing
corporate funds in other corporations and businesses outside of the primary purpose clause of the
corporation, in violation of section 17 1/2 of the Corporation Law, he filed with respondent Commission, on
January 20, 1977, a petition seeking to have private respondents Andres M. Soriano, Jr. and Jose M.
Soriano, as well as the respondent corporation declared guilty of such violation, and ordered to account
for such investments and to answer for damages.

On February 4, 1977, motions to dismiss were filed by private respondents, to which a consolidated
motion to strike and to declare individual respondents in default and an opposition ad abundantiorem
cautelam were filed by petitioner. Despite the fact that said motions were filed as early as February 4,
1977, the commission acted thereon only on April 25, 1977, when it denied respondents' motion to
dismiss and gave them two (2) days within which to file their answer, and set the case for hearing on April
29 and May 3, 1977.

Respondents issued notices of the annual stockholders' meeting, including in the Agenda thereof, the
following:

6. Re-affirmation of the authorization to the Board of Directors by the stockholders at the

meeting on March 20, 1972 to invest corporate funds in other companies or businesses or
for purposes other than the main purpose for which the Corporation has been organized,
and ratification of the investments thereafter made pursuant thereto.

By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent motion for the
issuance of a writ of preliminary injunction to restrain private respondents from taking up Item 6 of the
Agenda at the annual stockholders' meeting, requesting that the same be set for hearing on May 3, 1977,
the date set for the second hearing of the case on the merits. Respondent Commission, however,
cancelled the dates of hearing originally scheduled and reset the same to May 16 and 17, 1977, or after
the scheduled annual stockholders' meeting. For the purpose of urging the Commission to act, petitioner
filed an urgent manifestation on May 3, 1977, but this notwithstanding, no action has been taken up to
the date of the filing of the instant petition.

With respect to the afore-mentioned SEC cases, it is petitioner's contention before this Court that
respondent Commission gravely abused its discretion when it failed to act with deliberate dispatch on the
motions of petitioner seeking to prevent illegal and/or arbitrary impositions or limitations upon his rights
as stockholder of respondent corporation, and that respondent are acting oppressively against petitioner,
in gross derogation of petitioner's rights to property and due process. He prayed that this Court direct
respondent SEC to act on collateral incidents pending before it.

On May 6, 1977, this Court issued a temporary restraining order restraining private respondents from
disqualifying or preventing petitioner from running or from being voted as director of respondent
corporation and from submitting for ratification or confirmation or from causing the ratification or
confirmation of Item 6 of the Agenda of the annual stockholders' meeting on May 10, 1977, or from
Making effective the amended by-laws of respondent corporation, until further orders from this Court or
until the Securities and Ex-change Commission acts on the matters complained of in the instant petition.

On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a restraining order had been
issued by this Court, or on May 9, 1977, the respondent Commission served upon petitioner copies of the
following orders:

(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's motion for reconsideration,
with its supplement, of the order of the Commission denying in part petitioner's motion for production of
documents, petitioner's motion for reconsideration of the order denying the issuance of a temporary
restraining order denying the issuance of a temporary restraining order, and petitioner's consolidated
motion to declare respondents in contempt and to nullify the stockholders' meeting;

(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a director of
respondent corporation but stating that he should not sit as such if elected, until such time that the
Commission has decided the validity of the bylaws in dispute, and denying deferment of Item 6 of the
Agenda for the annual stockholders' meeting; and

(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's motion for reconsideration of
the order of respondent Commission denying petitioner's motion for summary judgment;

It is petitioner's assertions, anent the foregoing orders, (1) that respondent Commission acted with
indecent haste and without circumspection in issuing the aforesaid orders to petitioner's irreparable
damage and injury; (2) that it acted without jurisdiction and in violation of petitioner's right to due
process when it decided en banc an issue not raised before it and still pending before one of its
Commissioners, and without hearing petitioner thereon despite petitioner's request to have the same
calendared for hearing , and (3) that the respondents acted oppressively against the petitioner in violation
of his rights as a stockholder, warranting immediate judicial intervention.

It is prayed in the supplemental petition that the SEC orders complained of be declared null and void and
that respondent Commission be ordered to allow petitioner to undertake discovery proceedings relative to
San Miguel International. Inc. and thereafter to decide SEC Cases No. 1375 and 1423 on the merits.

On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed their comment,
alleging that the petition is without merit for the following reasons:

(1) that the petitioner the interest he represents are engaged in business competitive and antagonistic to
that of respondent San Miguel Corporation, it appearing that the owns and controls a greater portion of his
SMC stock thru the Universal Robina Corporation and the Consolidated Foods Corporation, which
corporations are engaged in business directly and substantially competing with the allied businesses of
respondent SMC and of corporations in which SMC has substantial investments. Further, when CFC and
Robina had accumulated investments. Further, when CFC and Robina had accumulated shares in SMC, the
Board of Directors of SMC realized the clear and present danger that competitors or antagonistic parties
may be elected directors and thereby have easy and direct access to SMC's business and trade secrets
and plans;

(2) that the amended by law were adopted to preserve and protect respondent SMC from the clear and
present danger that business competitors, if allowed to become directors, will illegally and unfairly utilize
their direct access to its business secrets and plans for their own private gain to the irreparable prejudice
of respondent SMC, and, ultimately, its stockholders. Further, it is asserted that membership of a
competitor in the Board of Directors is a blatant disregard of no less that the Constitution and pertinent
laws against combinations in restraint of trade;

(3) that by laws are valid and binding since a corporation has the inherent right and duty to preserve and
protect itself by excluding competitors and antogonistic parties, under the law of self-preservation, and it
should be allowed a wide latitude in the selection of means to preserve itself;

(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423 was due to
petitioner's own acts or omissions, since he failed to have the petition to suspend, pendente lite the
amended by-laws calendared for hearing. It was emphasized that it was only on April 29, 1977 that
petitioner calendared the aforesaid petition for suspension (preliminary injunction) for hearing on May 3,
1977. The instant petition being dated May 4, 1977, it is apparent that respondent Commission was not
given a chance to act "with deliberate dispatch", and

(5) that, even assuming that the petition was meritorious was, it has become moot and academic because
respondent Commission has acted on the pending incidents, complained of. It was, therefore, prayed that
the petition be dismissed.
On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment, alleging that the petition has
become moot and academic for the reason, among others that the acts of private respondent sought to be
enjoined have reference to the annual meeting of the stockholders of respondent San Miguel Corporation,
which was held on may 10, 1977; that in said meeting, in compliance with the order of respondent
Commission, petitioner was allowed to run and be voted for as director; and that in the same meeting,
Item 6 of the Agenda was discussed, voted upon, ratified and confirmed. Further it was averred that the
questions and issues raised by petitioner are pending in the Securities and Exchange Commission which
has acquired jurisdiction over the case, and no hearing on the merits has been had; hence the elevation of
these issues before the Supreme Court is premature.

Petitioner filed a reply to the aforesaid comments, stating that the petition presents justiciable questions
for the determination of this Court because (1) the respondent Commission acted without circumspection,
unfairly and oppresively against petitioner, warranting the intervention of this Court; (2) a derivative suit,
such as the instant case, is not rendered academic by the act of a majority of stockholders, such that the
discussion, ratification and confirmation of Item 6 of the Agenda of the annual stockholders' meeting of
May 10, 1977 did not render the case moot; that the amendment to the bylaws which specifically bars
petitioner from being a director is void since it deprives him of his vested rights.

Respondent Commission, thru the Solicitor General, filed a separate comment, alleging that after receiving
a copy of the restraining order issued by this Court and noting that the restraining order did not foreclose
action by it, the Commission en banc issued Orders Nos. 449, 450 and 451 in SEC Case No. 1375.

In answer to the allegation in the supplemental petition, it states that Order No. 450 which denied
deferment of Item 6 of the Agenda of the annual stockholders' meeting of respondent corporation, took
into consideration an urgent manifestation filed with the Commission by petitioner on May 3, 1977 which
prayed, among others, that the discussion of Item 6 of the Agenda be deferred. The reason given for
denial of deferment was that "such action is within the authority of the corporation as well as falling within
the sphere of stockholders' right to know, deliberate upon and/or to express their wishes regarding
disposition of corporate funds considering that their investments are the ones directly affected." It was
alleged that the main petition has, therefore, become moot and academic.

On September 29,1977, petitioner filed a second supplemental petition with prayer for preliminary
injunction, alleging that the actuations of respondent SEC tended to deprive him of his right to due
process, and "that all possible questions on the facts now pending before the respondent Commission are
now before this Honorable Court which has the authority and the competence to act on them as it may
see fit." (Reno, pp. 927-928.)

Petitioner, in his memorandum, submits the following issues for resolution;

(1) whether or not the provisions of the amended by-laws of respondent corporation, disqualifying a
competitor from nomination or election to the Board of Directors are valid and reasonable;

(2) whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an
examination of the records of San Miguel International, Inc., a fully owned subsidiary of San Miguel
Corporation; and

(3) whether or not respondent SEC committed grave abuse of discretion in allowing discussion of Item 6
of the Agenda of the Annual Stockholders' Meeting on May 10, 1977, and the ratification of the investment
in a foreign corporation of the corporate funds, allegedly in violation of section 17-1/2 of the Corporation
Law.

Whether or not amended by-laws are valid is purely a legal question which public interest requires to be
resolved —
It is the position of the petitioner that "it is not necessary to remand the case to respondent SEC for an
appropriate ruling on the intrinsic validity of the amended by-laws in compliance with the principle of
exhaustion of administrative remedies", considering that: first: "whether or not the provisions of the
amended by-laws are intrinsically valid ... is purely a legal question. There is no factual dispute as to what
the provisions are and evidence is not necessary to determine whether such amended by-laws are valid as
framed and approved ... "; second: "it is for the interest and guidance of the public that an immediate and
final ruling on the question be made ... "; third: "petitioner was denied due process by SEC" when
"Commissioner de Guzman had openly shown prejudice against petitioner ... ", and "Commissioner
Sulit ... approved the amended by-laws ex-parte and obviously found the same intrinsically valid; and
finally: "to remand the case to SEC would only entail delay rather than serve the ends of justice."

Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court resolve the legal
issues raised by the parties in keeping with the "cherished rules of procedure" that "a court should always
strive to settle the entire controversy in a single proceeding leaving no root or branch to bear the seeds of
future ligiation", citing Gayong v. Gayos. 3 To the same effect is the prayer of San Miguel Corporation that
this Court resolve on the merits the validity of its amended by laws and the rights and obligations of the
parties thereunder, otherwise "the time spent and effort exerted by the parties concerned and, more
importantly, by this Honorable Court, would have been for naught because the main question will come
back to this Honorable Court for final resolution." Respondent Eduardo R. Visaya submits a similar appeal.

It is only the Solicitor General who contends that the case should be remanded to the SEC for hearing and
decision of the issues involved, invoking the latter's primary jurisdiction to hear and decide case involving
intra-corporate controversies.

It is an accepted rule of procedure that the Supreme Court should always strive to settle the entire
controversy in a single proceeding, leaving nor root or branch to bear the seeds of future litigation. 4 Thus,
in Francisco v. City of Davao, 5 this Court resolved to decide the case on the merits instead of remanding it
to the trial court for further proceedings since the ends of justice would not be subserved by the remand
of the case. In Republic v. Security Credit and Acceptance Corporation, et al., 6 this Court, finding that the
main issue is one of law, resolved to decide the case on the merits "because public interest demands an
early disposition of the case", and in Republic v. Central Surety and Insurance Company, 7 this Court
denied remand of the third-party complaint to the trial court for further proceedings, citing precedent
where this Court, in similar situations resolved to decide the cases on the merits, instead of remanding
them to the trial court where (a) the ends of justice would not be subserved by the remand of the case; or
(b) where public interest demand an early disposition of the case; or (c) where the trial court had already
received all the evidence presented by both parties and the Supreme Court is now in a position, based
upon said evidence, to decide the case on its merits. 8 It is settled that the doctrine of primary jurisdiction
has no application where only a question of law is involved. 8a Because uniformity may be secured through
review by a single Supreme Court, questions of law may appropriately be determined in the first instance
by courts. 8b In the case at bar, there are facts which cannot be denied, viz.: that the amended by-laws
were adopted by the Board of Directors of the San Miguel Corporation in the exercise of the power
delegated by the stockholders ostensibly pursuant to section 22 of the Corporation Law; that in a special
meeting on February 10, 1977 held specially for that purpose, the amended by-laws were ratified by more
than 80% of the stockholders of record; that the foreign investment in the Hongkong Brewery and
Distellery, a beer manufacturing company in Hongkong, was made by the San Miguel Corporation in 1948;
and that in the stockholders' annual meeting held in 1972 and 1977, all foreign investments and
operations of San Miguel Corporation were ratified by the stockholders.

II

Whether or not the amended by-laws of SMC of disqualifying a competitor from nomination or election to
the Board of Directors of SMC are valid and reasonable —

The validity or reasonableness of a by-law of a corporation in purely a question of law. 9 Whether the by-
law is in conflict with the law of the land, or with the charter of the corporation, or is in a legal sense
unreasonable and therefore unlawful is a question of law. 10 This rule is subject, however, to the limitation
that where the reasonableness of a by-law is a mere matter of judgment, and one upon which reasonable
minds must necessarily differ, a court would not be warranted in substituting its judgment instead of the
judgment of those who are authorized to make by-laws and who have exercised their authority. 11

Petitioner claims that the amended by-laws are invalid and unreasonable because they were tailored to
suppress the minority and prevent them from having representation in the Board", at the same time
depriving petitioner of his "vested right" to be voted for and to vote for a person of his choice as director.

Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel Corporation
content that ex. conclusion of a competitor from the Board is legitimate corporate purpose, considering
that being a competitor, petitioner cannot devote an unselfish and undivided Loyalty to the corporation;
that it is essentially a preventive measure to assure stockholders of San Miguel Corporation of reasonable
protective from the unrestrained self-interest of those charged with the promotion of the corporate
enterprise; that access to confidential information by a competitor may result either in the promotion of
the interest of the competitor at the expense of the San Miguel Corporation, or the promotion of both the
interests of petitioner and respondent San Miguel Corporation, which may, therefore, result in a
combination or agreement in violation of Article 186 of the Revised Penal Code by destroying free
competition to the detriment of the consuming public. It is further argued that there is not vested right of
any stockholder under Philippine Law to be voted as director of a corporation. It is alleged that petitioner,
as of May 6, 1978, has exercised, personally or thru two corporations owned or controlled by him, control
over the following shareholdings in San Miguel Corporation, vis.: (a) John Gokongwei, Jr. — 6,325 shares;
(b) Universal Robina Corporation — 738,647 shares; (c) CFC Corporation — 658,313 shares, or a total of
1,403,285 shares. Since the outstanding capital stock of San Miguel Corporation, as of the present date, is
represented by 33,139,749 shares with a par value of P10.00, the total shares owned or controlled by
petitioner represents 4.2344% of the total outstanding capital stock of San Miguel Corporation. It is also
contended that petitioner is the president and substantial stockholder of Universal Robina Corporation and
CFC Corporation, both of which are allegedly controlled by petitioner and members of his family. It is also
claimed that both the Universal Robina Corporation and the CFC Corporation are engaged in businesses
directly and substantially competing with the alleged businesses of San Miguel Corporation, and of
corporations in which SMC has substantial investments.

ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS AND SAN MIGUEL

CORPORATION

According to respondent San Miguel Corporation, the areas of, competition are enumerated in its Board
the areas of competition are enumerated in its Board Resolution dated April 28, 1978, thus:

Product Line Estimated Market Share Total

1977 SMC Robina-CFC

Table Eggs 0.6% 10.0% 10.6%

Layer Pullets 33.0% 24.0% 57.0%
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%

Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC involved product
sales of over P400 million or more than 20% of the P2 billion total product sales of SMC. Significantly, the
combined market shares of SMC and CFC-Robina in layer pullets dressed chicken, poultry and hog feeds
ice cream, instant coffee and woven fabrics would result in a position of such dominance as to affect the
prevailing market factors.

It is further asserted that in 1977, the CFC-Robina group was in direct competition on product lines which,
for SMC, represented sales amounting to more than ?478 million. In addition, CFC-Robina was directly
competing in the sale of coffee with Filipro, a subsidiary of SMC, which product line represented sales for
SMC amounting to more than P275 million. The CFC-Robina group (Robitex, excluding Litton Mills recently
acquired by petitioner) is purportedly also in direct competition with Ramie Textile, Inc., subsidiary of
SMC, in product sales amounting to more than P95 million. The areas of competition between SMC and
CFC-Robina in 1977 represented, therefore, for SMC, product sales of more than P849 million.

According to private respondents, at the Annual Stockholders' Meeting of March 18, 1976, 9,894
stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or more than 90% of the total
outstanding shares of SMC, rejected petitioner's candidacy for the Board of Directors because they
"realized the grave dangers to the corporation in the event a competitor gets a board seat in SMC." On
September 18, 1978, the Board of Directors of SMC, by "virtue of powers delegated to it by the
stockholders," approved the amendment to ' he by-laws in question. At the meeting of February 10, 1977,
these amendments were confirmed and ratified by 5,716 shareholders owning 24,283,945 shares, or more
than 80% of the total outstanding shares. Only 12 shareholders, representing 7,005 shares, opposed the
confirmation and ratification. At the Annual Stockholders' Meeting of May 10, 1977, 11,349 shareholders,
owning 27,257.014 shares, or more than 90% of the outstanding shares, rejected petitioner's candidacy,
while 946 stockholders, representing 1,648,801 shares voted for him. On the May 9, 1978 Annual
Stockholders' Meeting, 12,480 shareholders, owning more than 30 million shares, or more than 90% of
the total outstanding shares. voted against petitioner.

AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS EXPRESSLY CONFERRED

BY LAW

Private respondents contend that the disputed amended by laws were adopted by the Board of Directors
of San Miguel Corporation a-, a measure of self-defense to protect the corporation from the clear and
present danger that the election of a business competitor to the Board may cause upon the corporation
and the other stockholders inseparable prejudice. Submitted for resolution, therefore, is the issue —
whether or not respondent San Miguel Corporation could, as a measure of self- protection, disqualify a
competitor from nomination and election to its Board of Directors.

It is recognized by an authorities that 'every corporation has the inherent power to adopt by-laws 'for its
internal government, and to regulate the conduct and prescribe the rights and duties of its members
towards itself and among themselves in reference to the management of its affairs. 12 At common law, the
rule was "that the power to make and adopt by-laws was inherent in every corporation as one of its
necessary and inseparable legal incidents. And it is settled throughout the United States that in the
absence of positive legislative provisions limiting it, every private corporation has this inherent power as
one of its necessary and inseparable legal incidents, independent of any specific enabling provision in its
charter or in general law, such power of self-government being essential to enable the corporation to
accomplish the purposes of its creation. 13

In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in its by-laws
"the qualifications, duties and compensation of directors, officers and employees ... " This must
necessarily refer to a qualification in addition to that specified by section 30 of the Corporation Law, which
provides that "every director must own in his right at least one share of the capital stock of the stock
corporation of which he is a director ... " In Government v. El Hogar, 14 the Court sustained the validity of
a provision in the corporate by-law requiring that persons elected to the Board of Directors must be
holders of shares of the paid up value of P5,000.00, which shall be held as security for their action, on the
ground that section 21 of the Corporation Law expressly gives the power to the corporation to provide in
its by-laws for the qualifications of directors and is "highly prudent and in conformity with good practice. "

NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR

Any person "who buys stock in a corporation does so with the knowledge that its affairs are dominated by
a majority of the stockholders and that he impliedly contracts that the will of the majority shall govern in
all matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden by
law." 15 To this extent, therefore, the stockholder may be considered to have "parted with his personal
right or privilege to regulate the disposition of his property which he has invested in the capital stock of
the corporation, and surrendered it to the will of the majority of his fellow incorporators. ... It cannot
therefore be justly said that the contract, express or implied, between the corporation and the
stockholders is infringed ... by any act of the former which is authorized by a majority ... ." 16
Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of incorporation by
a vote or written assent of the stockholders representing at least two-thirds of the subscribed capital stock
of the corporation If the amendment changes, diminishes or restricts the rights of the existing
shareholders then the disenting minority has only one right, viz.: "to object thereto in writing and demand
payment for his share." Under section 22 of the same law, the owners of the majority of the subscribed
capital stock may amend or repeal any by-law or adopt new by-laws. It cannot be said, therefore, that
petitioner has a vested right to be elected director, in the face of the fact that the law at the time such
right as stockholder was acquired contained the prescription that the corporate charter and the by-law
shall be subject to amendment, alteration and modification. 17

It being settled that the corporation has the power to provide for the qualifications of its directors, the
next question that must be considered is whether the disqualification of a competitor from being elected to
the Board of Directors is a reasonable exercise of corporate authority.

A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS SHAREHOLDERS

Although in the strict and technical sense, directors of a private corporation are not regarded as trustees,
there cannot be any doubt that their character is that of a fiduciary insofar as the corporation and the
stockholders as a body are concerned. As agents entrusted with the management of the corporation for
the collective benefit of the stockholders, "they occupy a fiduciary relation, and in this sense the relation is
one of trust." 18 "The ordinary trust relationship of directors of a corporation and stockholders", according
to Ashaman v. Miller, 19 "is not a matter of statutory or technical law. It springs from the fact that
directors have the control and guidance of corporate affairs and property and hence of the property
interests of the stockholders. Equity recognizes that stockholders are the proprietors of the corporate
interests and are ultimately the only beneficiaries thereof * * *.

Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of fiduciary obligation of the
directors of corporations, thus:

A director is a fiduciary. ... Their powers are powers in trust. ... He who is in such fiduciary
position cannot serve himself first and his cestuis second. ... He cannot manipulate the
affairs of his corporation to their detriment and in disregard of the standards of common
decency. He cannot by the intervention of a corporate entity violate the ancient precept
against serving two masters ... He cannot utilize his inside information and strategic position
for his own preferment. He cannot violate rules of fair play by doing indirectly through the
corporation what he could not do so directly. He cannot violate rules of fair play by doing
indirectly though the corporation what he could not do so directly. He cannot use his power
for his personal advantage and to the detriment of the stockholders and creditors no matter
how absolute in terms that power may be and no matter how meticulous he is to satisfy
technical requirements. For that power is at all times subject to the equitable limitation that
it may not be exercised for the aggrandizement, preference or advantage of the fiduciary to
the exclusion or detriment of the cestuis.

And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was said:

... A person cannot serve two hostile and adverse master, without detriment to one of them.
A judge cannot be impartial if personally interested in the cause. No more can a director.
Human nature is too weak -for this. Take whatever statute provision you please giving
power to stockholders to choose directors, and in none will you find any express prohibition
against a discretion to select directors having the company's interest at heart, and it would
simply be going far to deny by mere implication the existence of such a salutary power

... If the by-law is to be held reasonable in disqualifying a stockholder in a competing company from being
a director, the same reasoning would apply to disqualify the wife and immediate member of the family of
such stockholder, on account of the supposed interest of the wife in her husband's affairs, and his suppose
influence over her. It is perhaps true that such stockholders ought not to be condemned as selfish and
dangerous to the best interest of the corporation until tried and tested. So it is also true that we cannot
condemn as selfish and dangerous and unreasonable the action of the board in passing the by-law. The
strife over the matter of control in this corporation as in many others is perhaps carried on not altogether
in the spirit of brotherly love and affection. The only test that we can apply is as to whether or not the
action of the Board is authorized and sanctioned by law. ... . 22

These principles have been applied by this Court in previous cases.23

AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A STOCKHOLDER INELIGIBLE TO BE

DIRECTOR, IF HE BE ALSO DIRECTOR IN A CORPORATION WHOSE BUSINESS IS IN COMPETITION WITH
THAT OF THE OTHER CORPORATION, HAS BEEN SUSTAINED AS VALID

It is a settled state law in the United States, according to Fletcher, that corporations have the power to
make by-laws declaring a person employed in the service of a rival company to be ineligible for the
corporation's Board of Directors. ... (A)n amendment which renders ineligible, or if elected, subjects to
removal, a director if he be also a director in a corporation whose business is in competition with or is
antagonistic to the other corporation is valid." 24 This is based upon the principle that where the director is
so employed in the service of a rival company, he cannot serve both, but must betray one or the other.
Such an amendment "advances the benefit of the corporation and is good." An exception exists in New
Jersey, where the Supreme Court held that the Corporation Law in New Jersey prescribed the only
qualification, and therefore the corporation was not empowered to add additional qualifications. 25 This is
the exact opposite of the situation in the Philippines because as stated heretofore, section 21 of the
Corporation Law expressly provides that a corporation may make by-laws for the qualifications of
directors. Thus, it has been held that an officer of a corporation cannot engage in a business in direct
competition with that of the corporation where he is a director by utilizing information he has received as
such officer, under "the established law that a director or officer of a corporation may not enter into a
competing enterprise which cripples or injures the business of the corporation of which he is an officer or
director. 26

It is also well established that corporate officers "are not permitted to use their position of trust and
confidence to further their private interests." 27 In a case where directors of a corporation cancelled a
contract of the corporation for exclusive sale of a foreign firm's products, and after establishing a rival
business, the directors entered into a new contract themselves with the foreign firm for exclusive sale of
its products, the court held that equity would regard the new contract as an offshoot of the old contract
and, therefore, for the benefit of the corporation, as a "faultless fiduciary may not reap the fruits of his
misconduct to the exclusion of his principal. 28

The doctrine of "corporate opportunity" 29 is precisely a recognition by the courts that the fiduciary
standards could not be upheld where the fiduciary was acting for two entities with competing interests.
This doctrine rests fundamentally on the unfairness, in particular circumstances, of an officer or director
taking advantage of an opportunity for his own personal profit when the interest of the corporation justly
calls for protection. 30

It is not denied that a member of the Board of Directors of the San Miguel Corporation has access to
sensitive and highly confidential information, such as: (a) marketing strategies and pricing structure; (b)
budget for expansion and diversification; (c) research and development; and (d) sources of funding,
availability of personnel, proposals of mergers or tie-ups with other firms.

It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel
Corporation, who is also the officer or owner of a competing corporation, from taking advantage of the
information which he acquires as director to promote his individual or corporate interests to the prejudice
of San Miguel Corporation and its stockholders, that the questioned amendment of the by-laws was made.
Certainly, where two corporations are competitive in a substantial sense, it would seem improbable, if not
impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both
corporations and place the performance of his corporation duties above his personal concerns.

Thus, in McKee & Co. v. First National Bank of San Diego, supra the court sustained as valid and
reasonable an amendment to the by-laws of a bank, requiring that its directors should not be directors,
officers, employees, agents, nominees or attorneys of any other banking corporation, affiliate or
subsidiary thereof. Chief Judge Parker, in McKee, explained the reasons of the court, thus:
 ... A bank director has access to a great deal of information concerning the business and
plans of a bank which would likely be injurious to the bank if known to another bank, and it
was reasonable and prudent to enlarge this minimum disqualification to include any
director, officer, employee, agent, nominee, or attorney of any other bank in California.
The Ashkins case, supra, specifically recognizes protection against rivals and others who
might acquire information which might be used against the interests of the corporation as a
legitimate object of by-law protection. With respect to attorneys or persons associated with
a firm which is attorney for another bank, in addition to the direct conflict or potential
conflict of interest, there is also the danger of inadvertent leakage of confidential
information through casual office discussions or accessibility of files. Defendant's directors
determined that its welfare was best protected if this opportunity for conflicting loyalties and
potential misuse and leakage of confidential information was foreclosed.

In McKee the Court further listed qualificational by-laws upheld by the courts, as follows:

(1) A director shall not be directly or indirectly interested as a stockholder in any other firm,
company, or association which competes with the subject corporation.

(2) A director shall not be the immediate member of the family of any stockholder in any
other firm, company, or association which competes with the subject corporation,

(3) A director shall not be an officer, agent, employee, attorney, or trustee in any other
firm, company, or association which compete with the subject corporation.

(4) A director shall be of good moral character as an essential qualification to holding office.

(5) No person who is an attorney against the corporation in a law suit is eligible for service
on the board. (At p. 7.)

These are not based on theorical abstractions but on human experience — that a person cannot serve two
hostile masters without detriment to one of them.

The offer and assurance of petitioner that to avoid any possibility of his taking unfair advantage of his
position as director of San Miguel Corporation, he would absent himself from meetings at which
confidential matters would be discussed, would not detract from the validity and reasonableness of the by-
laws here involved. Apart from the impractical results that would ensue from such arrangement, it would
be inconsistent with petitioner's primary motive in running for board membership — which is to protect his
investments in San Miguel Corporation. More important, such a proposed norm of conduct would be
against all accepted principles underlying a director's duty of fidelity to the corporation, for the policy of
the law is to encourage and enforce responsible corporate management. As explained by Oleck: 31 "The
law win not tolerate the passive attitude of directors ... without active and conscientious participation in
the managerial functions of the company. As directors, it is their duty to control and supervise the day to
day business activities of the company or to promulgate definite policies and rules of guidance with a
vigilant eye toward seeing to it that these policies are carried out. It is only then that directors may be
said to have fulfilled their duty of fealty to the corporation."

Sound principles of corporate management counsel against sharing sensitive information with a director
whose fiduciary duty of loyalty may well require that he disclose this information to a competitive arrival.
These dangers are enhanced considerably where the common director such as the petitioner is a
controlling stockholder of two of the competing corporations. It would seem manifest that in such
situations, the director has an economic incentive to appropriate for the benefit of his own corporation the
corporate plans and policies of the corporation where he sits as director.

Indeed, access by a competitor to confidential information regarding marketing strategies and pricing
policies of San Miguel Corporation would subject the latter to a competitive disadvantage and unjustly
enrich the competitor, for advance knowledge by the competitor of the strategies for the development of
existing or new markets of existing or new products could enable said competitor to utilize such
knowledge to his advantage. 32

There is another important consideration in determining whether or not the amended by-laws are
reasonable. The Constitution and the law prohibit combinations in restraint of trade or unfair competition.
Thus, section 2 of Article XIV of the Constitution provides: "The State shall regulate or prohibit private
monopolies when the public interest so requires. No combinations in restraint of trade or unfair
competition shall be snowed."

Article 186 of the Revised Penal Code also provides:

Art. 186. Monopolies and combinations in restraint of trade. —The penalty of prision

correccional in its minimum period or a fine ranging from two hundred to six thousand
pesos, or both, shall be imposed upon:

1. Any person who shall enter into any contract or agreement or shall take part in any
conspiracy or combination in the form of a trust or otherwise, in restraint of trade or
commerce or to prevent by artificial means free competition in the market.

2. Any person who shag monopolize any merchandise or object of trade or commerce, or
shall combine with any other person or persons to monopolize said merchandise or object in
order to alter the price thereof by spreading false rumors or making use of any other artifice
to restrain free competition in the market.

3. Any person who, being a manufacturer, producer, or processor of any merchandise or

object of commerce or an importer of any merchandise or object of commerce from any
foreign country, either as principal or agent, wholesale or retailer, shall combine, conspire
or agree in any manner with any person likewise engaged in the manufacture, production,
processing, assembling or importation of such merchandise or object of commerce or with
any other persons not so similarly engaged for the purpose of making transactions
prejudicial to lawful commerce, or of increasing the market price in any part of the
Philippines, or any such merchandise or object of commerce manufactured, produced,
processed, assembled in or imported into the Philippines, or of any article in the
manufacture of which such manufactured, produced, processed, or imported merchandise or
object of commerce is used.

There are other legislation in this jurisdiction, which prohibit monopolies and combinations in restraint of
trade. 33

Basically, these anti-trust laws or laws against monopolies or combinations in restraint of trade are aimed
at raising levels of competition by improving the consumers' effectiveness as the final arbiter in free
markets. These laws are designed to preserve free and unfettered competition as the rule of trade. "It
rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of
our economic resources, the lowest prices and the highest quality ... ." 34 they operate to forestall
concentration of economic power. 35 The law against monopolies and combinations in restraint of trade is
aimed at contracts and combinations that, by reason of the inherent nature of the contemplated acts,
prejudice the public interest by unduly restraining competition or unduly obstructing the course of trade. 36

The terms "monopoly", "combination in restraint of trade" and "unfair competition" appear to have a well
defined meaning in other jurisdictions. A "monopoly" embraces any combination the tendency of which is
to prevent competition in the broad and general sense, or to control prices to the detriment of the
public. 37 In short, it is the concentration of business in the hands of a few. The material consideration in
determining its existence is not that prices are raised and competition actually excluded, but
that power exists to raise prices or exclude competition when desired. 38 Further, it must be considered
that the Idea of monopoly is now understood to include a condition produced by the mere act of
individuals. Its dominant thought is the notion of exclusiveness or unity, or the suppression of competition
by the qualification of interest or management, or it may be thru agreement and concert of action. It is, in
brief, unified tactics with regard to prices. 39

From the foregoing definitions, it is apparent that the contentions of petitioner are not in accord with
reality. The election of petitioner to the Board of respondent Corporation can bring about an illegal
situation. This is because an express agreement is not necessary for the existence of a combination or
conspiracy in restraint of trade. 40 It is enough that a concert of action is contemplated and that the
defendants conformed to the arrangements, 41 and what is to be considered is what the parties actually
did and not the words they used. For instance, the Clayton Act prohibits a person from serving at the
same time as a director in any two or more corporations, if such corporations are, by virtue of their
business and location of operation, competitors so that the elimination of competition between them would
constitute violation of any provision of the anti-trust laws. 42 There is here a statutory recognition of the
anti-competitive dangers which may arise when an individual simultaneously acts as a director of two or
more competing corporations. A common director of two or more competing corporations would have
access to confidential sales, pricing and marketing information and would be in a position to coordinate
policies or to aid one corporation at the expense of another, thereby stifling competition. This situation has
been aptly explained by Travers, thus:

The argument for prohibiting competing corporations from sharing even one director is that
the interlock permits the coordination of policies between nominally independent firms to an
extent that competition between them may be completely eliminated. Indeed, if a director,
for example, is to be faithful to both corporations, some accommodation must result.
Suppose X is a director of both Corporation A and Corporation B. X could hardly vote for a
policy by A that would injure B without violating his duty of loyalty to B at the same time he
could hardly abstain from voting without depriving A of his best judgment. If the firms
really do compete — in the sense of vying for economic advantage at the expense of the
other — there can hardly be any reason for an interlock between competitors other than the
suppression of competition. 43 (Emphasis supplied.)

According to the Report of the House Judiciary Committee of the U. S. Congress on section 9 of the
Clayton Act, it was established that: "By means of the interlocking directorates one man or group of men
have been able to dominate and control a great number of corporations ... to the detriment of the small
ones dependent upon them and to the injury of the public. 44

Shared information on cost accounting may lead to price fixing. Certainly, shared information on
production, orders, shipments, capacity and inventories may lead to control of production for the purpose
of controlling prices.

Obviously, if a competitor has access to the pricing policy and cost conditions of the products of San
Miguel Corporation, the essence of competition in a free market for the purpose of serving the lowest
priced goods to the consuming public would be frustrated, The competitor could so manipulate the prices
of his products or vary its marketing strategies by region or by brand in order to get the most out of the
consumers. Where the two competing firms control a substantial segment of the market this could lead to
collusion and combination in restraint of trade. Reason and experience point to the inevitable conclusion
that the inherent tendency of interlocking directorates between companies that are related to each other
as competitors is to blunt the edge of rivalry between the corporations, to seek out ways of compromising
opposing interests, and thus eliminate competition. As respondent SMC aptly observes, knowledge by
CFC-Robina of SMC's costs in various industries and regions in the country win enable the former to
practice price discrimination. CFC-Robina can segment the entire consuming population by geographical
areas or income groups and change varying prices in order to maximize profits from every market
segment. CFC-Robina could determine the most profitable volume at which it could produce for every
product line in which it competes with SMC. Access to SMC pricing policy by CFC-Robina would in effect
destroy free competition and deprive the consuming public of opportunity to buy goods of the highest
possible quality at the lowest prices.

Finally, considering that both Robina and SMC are, to a certain extent, engaged in agriculture, then the
election of petitioner to the Board of SMC may constitute a violation of the prohibition contained in section
13(5) of the Corporation Law. Said section provides in part that "any stockholder of more than one
corporation organized for the purpose of engaging in agriculture may hold his stock in such
corporations solely for investment and not for the purpose of bringing about or attempting to bring about
a combination to exercise control of incorporations ... ."

Neither are We persuaded by the claim that the by-law was Intended to prevent the candidacy of
petitioner for election to the Board. If the by-law were to be applied in the case of one stockholder but
waived in the case of another, then it could be reasonably claimed that the by-law was being applied in a
discriminatory manner. However, the by law, by its terms, applies to all stockholders. The equal protection
clause of the Constitution requires only that the by-law operate equally upon all persons of a class.
Besides, before petitioner can be declared ineligible to run for director, there must be hearing and
evidence must be submitted to bring his case within the ambit of the disqualification. Sound principles of
public policy and management, therefore, support the view that a by-law which disqualifies a competition
from election to the Board of Directors of another corporation is valid and reasonable.

In the absence of any legal prohibition or overriding public policy, wide latitude may be accorded to the
corporation in adopting measures to protect legitimate corporation interests. Thus, "where the
reasonableness of a by-law is a mere matter of judgment, and upon which reasonable minds must
necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment of
those who are authorized to make by-laws and who have expressed their authority. 45

Although it is asserted that the amended by-laws confer on the present Board powers to perpetua
themselves in power such fears appear to be misplaced. This power, but is very nature, is subject to
certain well established limitations. One of these is inherent in the very convert and definition of the terms
"competition" and "competitor". "Competition" implies a struggle for advantage between two or more
forces, each possessing, in substantially similar if not Identical degree, certain characteristics essential to
the business sought. It means an independent endeavor of two or more persons to obtain the business
patronage of a third by offering more advantageous terms as an inducement to secure trade. 46 The test
must be whether the business does in fact compete, not whether it is capable of an indirect and highly
unsubstantial duplication of an isolated or non-characteristics activity. 47 It is, therefore, obvious that not
every person or entity engaged in business of the same kind is a competitor. Such factors as quantum and
place of business, Identity of products and area of competition should be taken into consideration. It is,
therefore, necessary to show that petitioner's business covers a substantial portion of the same markets
for similar products to the extent of not less than 10% of respondent corporation's market for competing
products. While We here sustain the validity of the amended by-laws, it does not follow as a necessary
consequence that petitioner is ipso facto disqualified. Consonant with the requirement of due process,
there must be due hearing at which the petitioner must be given the fullest opportunity to show that he is
not covered by the disqualification. As trustees of the corporation and of the stockholders, it is the
responsibility of directors to act with fairness to the stockholders.48 Pursuant to this obligation and to
remove any suspicion that this power may be utilized by the incumbent members of the Board to
perpetuate themselves in power, any decision of the Board to disqualify a candidate for the Board of
Directors should be reviewed by the Securities behind Exchange Commission en banc and its decision shall
be final unless reversed by this Court on certiorari. 49 Indeed, it is a settled principle that where the action
of a Board of Directors is an abuse of discretion, or forbidden by statute, or is against public policy, or is
ultra vires, or is a fraud upon minority stockholders or creditors, or will result in waste, dissipation or
misapplication of the corporation assets, a court of equity has the power to grant appropriate relief. 50

III

Whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an
examination of the records of San Miguel International Inc., a fully owned subsidiary of San Miguel
Corporation —

Respondent San Miguel Corporation stated in its memorandum that petitioner's claim that he was denied
inspection rights as stockholder of SMC "was made in the teeth of undisputed facts that, over a specific
period, petitioner had been furnished numerous documents and information," to wit: (1) a complete list of
stockholders and their stockholdings; (2) a complete list of proxies given by the stockholders for use at
the annual stockholders' meeting of May 18, 1975; (3) a copy of the minutes of the stockholders' meeting
of March 18,1976; (4) a breakdown of SMC's P186.6 million investment in associated companies and other
companies as of December 31, 1975; (5) a listing of the salaries, allowances, bonuses and other
compensation or remunerations received by the directors and corporate officers of SMC; (6) a copy of the
US $100 million Euro-Dollar Loan Agreement of SMC; and (7) copies of the minutes of all meetings of the
Board of Directors from January 1975 to May 1976, with deletions of sensitive data, which deletions were
not objected to by petitioner.

Further, it was averred that upon request, petitioner was informed in writing on September 18, 1976; (1)
that SMC's foreign investments are handled by San Miguel International, Inc., incorporated in Bermuda
and wholly owned by SMC; this was SMC's first venture abroad, having started in 1948 with an initial
outlay of ?500,000.00, augmented by a loan of Hongkong $6 million from a foreign bank under the
personal guaranty of SMC's former President, the late Col. Andres Soriano; (2) that as of December 31,
1975, the estimated value of SMI would amount to almost P400 million (3) that the total cash dividends
received by SMC from SMI since 1953 has amount to US $ 9.4 million; and (4) that from 1972-1975, SMI
did not declare cash or stock dividends, all earnings having been used in line with a program for the
setting up of breweries by SMI

These averments are supported by the affidavit of the Corporate Secretary, enclosing photocopies of the
afore-mentioned documents. 51

Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all business
transactions of the corporation and minutes of any meeting shall be open to the inspection of any director,
member or stockholder of the corporation at reasonable hours."

The stockholder's right of inspection of the corporation's books and records is based upon their ownership
of the assets and property of the corporation. It is, therefore, an incident of ownership of the corporate
property, whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or
a ownership. 52 This right is predicated upon the necessity of self-protection. It is generally held by
majority of the courts that where the right is granted by statute to the stockholder, it is given to him as
such and must be exercised by him with respect to his interest as a stockholder and for some purpose
germane thereto or in the interest of the corporation. 53 In other words, the inspection has to be germane
to the petitioner's interest as a stockholder, and has to be proper and lawful in character and not inimical
to the interest of the corporation. 54 In Grey v. Insular Lumber, 55 this Court held that "the right to
examine the books of the corporation must be exercised in good faith, for specific and honest purpose,
and not to gratify curiosity, or for specific and honest purpose, and not to gratify curiosity, or for
speculative or vexatious purposes. The weight of judicial opinion appears to be, that on application for
mandamus to enforce the right, it is proper for the court to inquire into and consider the stockholder's
good faith and his purpose and motives in seeking inspection. 56 Thus, it was held that "the right given by
statute is not absolute and may be refused when the information is not sought in good faith or is used to
the detriment of the corporation." 57 But the "impropriety of purpose such as will defeat enforcement must
be set up the corporation defensively if the Court is to take cognizance of it as a qualification. In other
words, the specific provisions take from the stockholder the burden of showing propriety of purpose and
place upon the corporation the burden of showing impropriety of purpose or motive. 58 It appears to be
the general rule that stockholders are entitled to full information as to the management of the corporation
and the manner of expenditure of its funds, and to inspection to obtain such information, especially where
it appears that the company is being mismanaged or that it is being managed for the personal benefit of
officers or directors or certain of the stockholders to the exclusion of others." 59

While the right of a stockholder to examine the books and records of a corporation for a lawful purpose is
a matter of law, the right of such stockholder to examine the books and records of a wholly-owned
subsidiary of the corporation in which he is a stockholder is a different thing.

Some state courts recognize the right under certain conditions, while others do not. Thus, it has been held
that where a corporation owns approximately no property except the shares of stock of subsidiary
corporations which are merely agents or instrumentalities of the holding company, the legal fiction of
distinct corporate entities may be disregarded and the books, papers and documents of all the
corporations may be required to be produced for examination, 60 and that a writ of mandamus, may be
granted, as the records of the subsidiary were, to all incontents and purposes, the records of the parent
even though subsidiary was not named as a party. 61 mandamus was likewise held proper to inspect both
the subsidiary's and the parent corporation's books upon proof of sufficient control or dominion by the
parent showing the relation of principal or agent or something similar thereto. 62

On the other hand, mandamus at the suit of a stockholder was refused where the subsidiary corporation is
a separate and distinct corporation domiciled and with its books and records in another jurisdiction, and is
not legally subject to the control of the parent company, although it owned a vast majority of the stock of
the subsidiary. 63 Likewise, inspection of the books of an allied corporation by stockholder of the parent
company which owns all the stock of the subsidiary has been refused on the ground that the stockholder
was not within the class of "persons having an interest." 64

In the Nash case, 65 The Supreme Court of New York held that the contractual right of former stockholders
to inspect books and records of the corporation included the right to inspect corporation's subsidiaries'
books and records which were in corporation's possession and control in its office in New York."

In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the records of a controlled

subsidiary corporation which used the same offices and had Identical officers and directors.

In his "Urgent Motion for Production and Inspection of Documents" before respondent SEC, petitioner
contended that respondent corporation "had been attempting to suppress information for the
stockholders" and that petitioner, "as stockholder of respondent corporation, is entitled to copies of some
documents which for some reason or another, respondent corporation is very reluctant in revealing to the
petitioner notwithstanding the fact that no harm would be caused thereby to the corporation." 67 There is
no question that stockholders are entitled to inspect the books and records of a corporation in order to
investigate the conduct of the management, determine the financial condition of the corporation, and
generally take an account of the stewardship of the officers and directors. 68

In the case at bar, considering that the foreign subsidiary is wholly owned by respondent San Miguel
Corporation and, therefore, under its control, it would be more in accord with equity, good faith and fair
dealing to construe the statutory right of petitioner as stockholder to inspect the books and records of the
corporation as extending to books and records of such wholly subsidiary which are in respondent
corporation's possession and control.

IV

Whether or not respondent SEC gravely abused its discretion in allowing the stockholders of respondent
corporation to ratify the investment of corporate funds in a foreign corporation

Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation invested corporate
funds in SMI without prior authority of the stockholders, thus violating section 17-1/2 of the Corporation
Law, and alleges that respondent SEC should have investigated the charge, being a statutory offense,
instead of allowing ratification of the investment by the stockholders.

Respondent SEC's position is that submission of the investment to the stockholders for ratification is a
sound corporate practice and should not be thwarted but encouraged.

Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other corporation or
business or for any purpose other than the main purpose for which it was organized" provided that its
Board of Directors has been so authorized by the affirmative vote of stockholders holding shares entitling
them to exercise at least two-thirds of the voting power. If the investment is made in pursuance of the
corporate purpose, it does not need the approval of the stockholders. It is only when the purchase of
shares is done solely for investment and not to accomplish the purpose of its incorporation that the vote of
approval of the stockholders holding shares entitling them to exercise at least two-thirds of the voting
power is necessary. 69

As stated by respondent corporation, the purchase of beer manufacturing facilities by SMC was an
investment in the same business stated as its main purpose in its Articles of Incorporation, which is to
manufacture and market beer. It appears that the original investment was made in 1947-1948, when
SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong Brewery &
Distillery, Ltd.) for the manufacture and marketing of San Miguel beer thereat. Restructuring of the
investment was made in 1970-1971 thru the organization of SMI in Bermuda as a tax free reorganization.

Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co., Inc., supra, appears
relevant. In said case, one of the issues was the legality of an investment made by Manao Sugar Central
Co., Inc., without prior resolution approved by the affirmative vote of 2/3 of the stockholders' voting
power, in the Philippine Fiber Processing Co., Inc., a company engaged in the manufacture of sugar bags.
The lower court said that "there is more logic in the stand that if the investment is made in a corporation
whose business is important to the investing corporation and would aid it in its purpose, to require
authority of the stockholders would be to unduly curtail the power of the Board of Directors." This Court
affirmed the ruling of the court a quo on the matter and, quoting Prof. Sulpicio S. Guevara, said:

"j. Power to acquire or dispose of shares or securities. — A private corporation, in order to

accomplish is purpose as stated in its articles of incorporation, and subject to the limitations
imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge or
dispose of shares, bonds, securities, and other evidence of indebtedness of any domestic or
foreign corporation. Such an act, if done in pursuance of the corporate purpose, does not
need the approval of stockholders; but when the purchase of shares of another corporation
is done solely for investment and not to accomplish the purpose of its incorporation, the
vote of approval of the stockholders is necessary. In any case, the purchase of such shares
or securities must be subject to the limitations established by the Corporations law; namely,
(a) that no agricultural or mining corporation shall be restricted to own not more than 15%
of the voting stock of nay agricultural or mining corporation; and (c) that such holdings shall
be solely for investment and not for the purpose of bringing about a monopoly in any line of
commerce of combination in restraint of trade." The Philippine Corporation Law by Sulpicio
S. Guevara, 1967 Ed., p. 89) (Emphasis supplied.)

40. Power to invest corporate funds. — A private corporation has the power to invest its
corporate funds "in any other corporation or business, or for any purpose other than the
main purpose for which it was organized, provide that 'its board of directors has been so
authorized in a resolution by the affirmative vote of stockholders holding shares in the
corporation entitling them to exercise at least two-thirds of the voting power on such a
propose at a stockholders' meeting called for that purpose,' and provided further, that no
agricultural or mining corporation shall in anywise be interested in any other agricultural or
mining corporation. When the investment is necessary to accomplish its purpose or
purposes as stated in its articles of incorporation the approval of the stockholders is not
necessary."" (Id., p. 108) (Emphasis ours.) (pp. 258-259).

Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed investment,
there is no question that a corporation, like an individual, may ratify and thereby render binding upon it
the originally unauthorized acts of its officers or other agents. 70 This is true because the questioned
investment is neither contrary to law, morals, public order or public policy. It is a corporate transaction or
contract which is within the corporate powers, but which is defective from a supported failure to observe
in its execution the. requirement of the law that the investment must be authorized by the affirmative
vote of the stockholders holding two-thirds of the voting power. This requirement is for the benefit of the
stockholders. The stockholders for whose benefit the requirement was enacted may, therefore, ratify the
investment and its ratification by said stockholders obliterates any defect which it may have had at the
outset. "Mere ultra vires acts", said this Court in Pirovano, 71 "or those which are not illegal and void ab
initio, but are not merely within the scope of the articles of incorporation, are merely voidable and may
become binding and enforceable when ratified by the stockholders.

Besides, the investment was for the purchase of beer manufacturing and marketing facilities which is
apparently relevant to the corporate purpose. The mere fact that respondent corporation submitted the
assailed investment to the stockholders for ratification at the annual meeting of May 10, 1977 cannot be
construed as an admission that respondent corporation had committed an ultra vires act, considering the
common practice of corporations of periodically submitting for the gratification of their stockholders the
acts of their directors, officers and managers.
WHEREFORE, judgment is hereby rendered as follows:

The Court voted unanimously to grant the petition insofar as it prays that petitioner be allowed to examine
the books and records of San Miguel International, Inc., as specified by him.

On the matter of the validity of the amended by-laws of respondent San Miguel Corporation, six (6)
Justices, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and De Castro, voted to
sustain the validity per se of the amended by-laws in question and to dismiss the petition without
prejudice to the question of the actual disqualification of petitioner John Gokongwei, Jr. to run and if
elected to sit as director of respondent San Miguel Corporation being decided, after a new and proper
hearing by the Board of Directors of said corporation, whose decision shall be appealable to the
respondent Securities and Exchange Commission deliberating and acting en banc and ultimately to this
Court. Unless disqualified in the manner herein provided, the prohibition in the afore-mentioned amended
by-laws shall not apply to petitioner.

The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare the issue on the
validity of the foreign investment of respondent corporation as moot.

Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws, pending hearing
by this Court on the applicability of section 13(5) of the Corporation Law to petitioner.

Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but otherwise
concurs in the result.

Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero filed a separate
opinion, wherein they voted against the validity of the questioned amended bylaws and that this question
should properly be resolved first by the SEC as the agency of primary jurisdiction. They concur in the
result that petitioner may be allowed to run for and sit as director of respondent SMC in the scheduled
May 6, 1979 election and subsequent elections until disqualified after proper hearing by the respondent's
Board of Directors and petitioner's disqualification shall have been sustained by respondent SEC en
banc and ultimately by final judgment of this Court.

In resume, subject to the qualifications aforestated judgment is hereby rendered GRANTING the petition
by allowing petitioner to examine the books and records of San Miguel International, Inc. as specified in
the petition. The petition, insofar as it assails the validity of the amended by- laws and the ratification of
the foreign investment of respondent corporation, for lack of necessary votes, is hereby DISMISSED. No
costs.

G.R. No. 100866 July 14, 1992

REBECCA BOYER-ROXAS and GUILLERMO ROXAS, petitioners,

vs.
HON. COURT OF APPEALS and HEIRS OF EUGENIA V. ROXAS, INC., respondents.

GUTIERREZ, JR., J.:

This is a petition to review the decision and resolution of the Court of Appeals in CA-G.R. No. 14530
affirming the earlier decision of the Regional Trial Court of Laguna, Branch 37, at Calamba, in the
consolidated RTC Civil Case Nos. 802-84-C and 803-84-C entitled "Heirs of Eugenia V. Roxas, Inc. v.
Rebecca Boyer-Roxas" and Heirs of Eugenia V. Roxas, Inc. v. Guillermo Roxas," the dispositive portion of
which reads:

IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the plaintiff and
against the defendants, by ordering as it is hereby ordered that:
 1) In RTC Civil Case No. 802-84-C: Rebecca Boyer-Roxas and all persons claiming under her
to:

a) Immediately vacate the residential house near the Balugbugan pool located inside the
premises of the Hidden Valley Springs Resort at Limao, Calauan, Laguna;

b) Pay the plaintiff the amount of P300.00 per month from September 10, 1983, for her
occupancy of the residential house until the same is vacated;

c) Remove the unfinished building erected on the land of the plaintiff within ninety (90)
days from receipt of this decision;

d) Pay the plaintiff the amount of P100.00 per month from September 10, 1983, until the
said unfinished building is removed from the land of the plaintiff; and

e) Pay the costs.

2) In RTC Civil Case No. 803-84-C: Guillermo Roxas and all persons claiming under him to:

a) Immediately vacate the residential house near the tennis court located within the
premises of the Hidden Valley Springs Resort at Limao, Calauan, Laguna;

b) Pay the plaintiff the amount of P300.00 per month from September 10, 1983, for his
occupancy of the said residential house until the same is vacated; and

c) Pay the costs. (Rollo, p. 36)

In two (2) separate complaints for recovery of possession filed with the Regional Trial Court of Laguna
against petitioners Rebecca Boyer-Roxas and Guillermo Roxas respectively, respondent corporation, Heirs
of Eugenia V. Roxas, Inc., prayed for the ejectment of the petitioners from buildings inside the Hidden
Valley Springs Resort located at Limao, Calauan, Laguna allegedly owned by the respondent corporation.

In the case of petitioner Rebecca Boyer-Roxas (Civil Case No-802-84-C), the respondent corporation
alleged that Rebecca is in possession of two (2) houses, one of which is still under construction, built at
the expense of the respondent corporation; and that her occupancy on the two (2) houses was only upon
the tolerance of the respondent corporation.

In the case of petitioner Guillermo Roxas (Civil Case No. 803-84-C), the respondent corporation alleged
that Guillermo occupies a house which was built at the expense of the former during the time when
Guillermo's father, Eriberto Roxas, was still living and was the general manager of the respondent
corporation; that the house was originally intended as a recreation hall but was converted for the
residential use of Guillermo; and that Guillermo's possession over the house and lot was only upon the
tolerance of the respondent corporation.

In both cases, the respondent corporation alleged that the petitioners never paid rentals for the use of the
buildings and the lots and that they ignored the demand letters for them to vacate the buildings.

In their separate answers, the petitioners traversed the allegations in the complaint by stating that they
are heirs of Eugenia V. Roxas and therefore, co-owners of the Hidden Valley Springs Resort; and as co-
owners of the property, they have the right to stay within its premises.

The cases were consolidated and tried jointly.

At the pre-trial, the parties limited the issues as follows:

1) whether plaintiff is entitled to recover the questioned premises;

 2) whether plaintiff is entitled to reasonable rental for occupancy of the premises in
question;

3) whether the defendant is legally authorized to pierce the veil of corporate fiction and
interpose the same as a defense in an accion publiciana;

4) whether the defendants are truly builders in good faith, entitled to occupy the questioned
premises;

5) whether plaintiff is entitled to damages and reasonable compensation for the use of the
questioned premises;

6) whether the defendants are entitled to their counterclaim to recover moral and
exemplary damages as well as attorney's fees in the two cases;

7) whether the presence and occupancy by the defendants on the premises in questioned
(sic) hampers, deters or impairs plaintiff's operation of Hidden Valley Springs Resort; and

8) whether or not a unilateral and sudden withdrawal of plaintiffs tolerance allowing

defendants' occupancy of the premises in questioned (sic) is unjust enrichment. (Original
Records, 486)

Upon motion of the plaintiff respondent corporation, Presiding Judge Francisco Ma. Guerrero of Branch 34
issued an Order dated April 25, 1986 inhibiting himself from further trying the case. The cases were re-
raffled to Branch 37 presided by Judge Odilon Bautista. Judge Bautista continued the hearing of the cases.

For failure of the petitioners (defendants below) and their counsel to attend the October 22, 1986 hearing
despite notice, and upon motion of the respondent corporation, the court issued on the same day, October
22, 1986, an Order considering the cases submitted for decision. At this stage of the proceedings, the
petitioners had not yet presented their evidence while the respondent corporation had completed the
presentation of its evidence.

The evidence of the respondent corporation upon which the lower court based its decision is as follows:

To support the complaints, the plaintiff offered the testimonies of Maria Milagros Roxas and
that of Victoria Roxas Villarta as well as Exhibits "A" to "M-3".

The evidence of the plaintiff established the following: that the plaintiff, Heirs of Eugenia V
Roxas, Incorporated, was incorporated on December 4, 1962 (Exh. "C") with the primary
purpose of engaging in agriculture to develop the properties inherited from Eugenia V.
Roxas and that of y Eufrocino Roxas; that the Articles of Incorporation of the plaintiff, in
1971, was amended to allow it to engage in the resort business (Exh.
"C-1"); that the incorporators as original members of the board of directors of the plaintiff
were all members of the same family, with Eufrocino Roxas having the biggest share; that
accordingly, the plaintiff put up a resort known as Hidden Valley Springs Resort on a portion
of its land located at Bo. Limao, Calauan, Laguna, and covered by TCT No. 32639 (Exhs. "A"
and "A-l"); that improvements were introduced in the resort by the plaintiff and among
them were cottages, houses or buildings, swimming pools, tennis court, restaurant and
open pavilions; that the house near the Balugbugan Pool (Exh. "B-l") being occupied by
Rebecca B. Roxas was originally intended as staff house but later used as the residence of
Eriberto Roxas, deceased husband of the defendant Rebecca Boyer-Roxas and father of
Guillermo Roxas; that this house presently being occupied by Rebecca B. Roxas was built
from corporate funds; that the construction of the unfinished house (Exh. "B-2") was
started by the defendant Rebecca Boyer-Roxas and her husband Eriberto Roxas; that the
third building (Exh. "B-3") presently being occupied by Guillermo Roxas was originally
intended as a recreation hall but later converted as a residential house; that this house was
built also from corporate funds; that the said house occupied by Guillermo Roxas when it
 was being built had nipa roofing but was later changed to galvanized iron sheets; that at the
beginning, it had no partition downstairs and the second floor was an open space; that the
conversion from a recreation hall to a residential house was with the knowledge of Eufrocino
Roxas and was not objected to by any of the Board of Directors of the plaintiff; that most of
the materials used in converting the building into a residential house came from the
materials left by Coppola, a film producer, who filmed the movie "Apocalypse Now"; that
Coppola left the materials as part of his payment for rents of the rooms that he occupied in
the resort; that after the said recreation hall was converted into a residential house,
defendant Guillermo Roxas moved in and occupied the same together with his family
sometime in 1977 or 1978; that during the time Eufrocino Roxas was still alive, Eriberto
Roxas was the general manager of the corporation and there was seldom any board
meeting; that Eufrocino Roxas together with Eriberto Roxas were (sic) the ones who were
running the corporation; that during this time, Eriberto Roxas was the restaurant and wine
concessionaire of the resort; that after the death of Eufrocino Roxas, Eriberto Roxas
continued as the general manager until his death in 1980; that after the death of Eriberto
Roxas in 1980, the defendants Rebecca B. Roxas and Guillermo Roxas, committed acts that
impeded the plaintiff's expansion and normal operation of the resort; that the plaintiff could
not even use its own pavilions, kitchen and other facilities because of the acts of the
defendants which led to the filing of criminal cases in court; that cases were even filed
before the Ministry of Tourism, Bureau of Domestic Trade and the Office of the President by
the parties herein; that the defendants violated the resolution and orders of the Ministry of
Tourism dated July 28, 1983, August 3, 1983 and November 26, 1984 (Exhs. "G", "H" and
"H-l") which ordered them or the corporation they represent to desist from and to turn over
immediately to the plaintiff the management and operation of the restaurant and wine
outlets of the said resort (Exh. "G-l"); that the defendants also violated the decision of the
Bureau of Domestic Trade dated October 23, 1983 (Exh. "C"); that on August 27, 1983,
because of the acts of the defendants, the Board of Directors of the plaintiff adopted
Resolution No. 83-12 series of 1983 (Exh. "F") authorizing the ejectment of the defendants
from the premises occupied by them; that on September 1, 1983, demand letters were sent
to Rebecca Boyer-Roxas and Guillermo Roxas (Exhs. "D" and "D-1") demanding that they
vacate the respective premises they occupy; and that the dispute between the plaintiff and
the defendants was brought before the barangay level and the same was not settled (Exhs.
"E" and "E-l"). (Original Records, pp. 454-456)

The petitioners appealed the decision to the Court of Appeals. However, as stated earlier, the appellate
court affirmed the lower court's decision. The Petitioners' motion for reconsideration was likewise denied.

Hence, this petition.

In a resolution dated February 5, 1992, we gave due course to the petition.

The petitioners now contend:

I Respondent Court erred when it refused to pierce the veil of corporate fiction over private respondent
and maintain the petitioners in their possession and/or occupancy of the subject premises considering that
petitioners are owners of aliquot part of the properties of private respondent. Besides, private respondent
itself discarded the mantle of corporate fiction by acts and/or omissions of its board of directors and/or
stockholders.

II The respondent Court erred in not holding that petitioners were in fact denied due process or their day
in court brought about by the gross negligence of their former counsel.

III The respondent Court misapplied the law when it ordered petitioner Rebecca Boyer-Roxas to remove
the unfinished building in RTC Case No. 802-84-C, when the trial court opined that she spent her own
funds for the construction thereof. (CA Rollo, pp. 17-18)

Were the petitioners denied due process of law in the lower court?
After the cases were re-raffled to the sala of Presiding Judge Odilon Bautista of Branch 37 the following
events transpired:

On July 3, 1986, the lower court issued an Order setting the hearing of the cases on July 21, 1986.
Petitioner Rebecca V. Roxas received a copy of the Order on July 15, 1986, while petitioner Guillermo
Roxas received his copy on July 18, 1986. Atty. Conrado Manicad, the petitioners' counsel received
another copy of the Order on July 11, 1986. (Original Records, p. 260)

On motion of the respondent corporation's counsel, the lower court issued an Order dated July 15, 1986
cancelling the July 21, 1986 hearing and resetting the hearing to August 11, 1986. (Original records, 262-
263) Three separate copies of the order were sent and received by the petitioners and their counsel.
(Original Records, pp. 268, 269, 271)

A motion to cancel and re-schedule the August 11, 1986 hearing filed by the respondent corporation's
counsel was denied in an Order dated August 8, 1986. Again separate copies of the Order were sent and
received by the petitioners and their counsel. (Original Records, pp. 276-279)

At the hearing held on August 11, 1986, only Atty. Benito P. Fabie, counsel for the respondent corporation
appeared. Neither the petitioners nor their counsel appeared despite notice of hearing. The lower court
then issued an Order on the same date, to wit:

ORDER

When these cases were called for continuation of trial, Atty. Benito P. Fabie appeared before
this Court, however, the defendants and their lawyer despite receipt of the Order setting the
case for hearing today failed to appear. On Motion of Atty. Fabie, further cross examination
of witness Victoria Vallarta is hereby considered as having been waived.

The plaintiff is hereby given twenty (20) days from today within which to submit formal
offer of evidence and defendants are also given ten (10) days from receipt of such formal
offer of evidence to file their objection thereto.

In the meantime, hearing in these cases is set to September 29, 1986 at 10:00 o'clock in
the morning. (Original Records, p. 286)

Copies of the Order were sent and received by the petitioners and their counsel on the following dates —
Rebecca Boyer-Roxas on August 20, 1986, Guillermo Roxas on August 26, 1986, and Atty. Conrado
Manicad on September 19, 1986. (Original Records, pp. 288-290)

On September 1, 1986, the respondent corporation filed its "Formal Offer of Evidence." In an Order dated
September 29, 1986, the lower court issued an Order admitting exhibits "A" to "M-3" submitted by the
respondent corporation in its "Formal Offer of Evidence . . . there being no objection . . ." (Original
Records, p. 418) Copies of this Order were sent and received by the petitioners and their counsel on the
following dates: Rebecca Boyer-Roxas on October 9, 1986; Guillermo Roxas on October 9, 1986 and Atty.
Conrado Manicad on October 4, 1986 (Original Records, pp. 420, 421, 428).

The scheduled hearing on September 29, 1986 did not push through as the petitioners and their counsel
were not present prompting Atty. Benito Fabie, the respondent corporation's counsel to move that the
cases be submitted for decision. The lower court denied the motion and set the cases for hearing on
October 22, 1986. However, in its Order dated September 29, 1986, the court warned that in the event
the petitioners and their counsel failed to appear on the next scheduled hearing, the court shall consider
the cases submitted for decision based on the evidence on record. (Original Records, p. 429, 430 and 431)

Separate copies of this Order were sent and received by the petitioners and their counsel on the following
dates: Rebecca Boyer-Roxas on October 9, 1986, Guillermo Roxas on October 9, 1986; and Atty. Conrado
Manicad on October 1, 1986. (Original Records, pp. 429-430)
Despite notice, the petitioners and their counsel again failed to attend the scheduled October 22, 1986
hearing. Atty. Fabie representing the respondent corporation was present. Hence, in its Order dated
October 22, 1986, on motion of Atty. Fabie and pursuant to the order dated September 29, 1986, the
Court considered the cases submitted for decision. (Original Records, p. 436)

On November 14, 1986, the respondent corporation, filed a "Manifestation", stating that ". . . it is
submitting without further argument its "Opposition to the Motion for Reconsideration" for the
consideration of the Honorable Court in resolving subject incident." (Original Records, p. 442)

On December 16, 1986, the lower court issued an Order, to wit:

ORDER

Considering that the Court up to this date has not received any Motion for Reconsideration
filed by the defendants in the above-entitled cases, the Court cannot act on the Opposition
to Motion for Reconsideration filed by the plaintiff and received by the Court on November
14, 1986. (Original Records, p. 446)

On January 15, 1987, the lower court rendered the questioned decision in the two (2) cases. (Original
Records, pp. 453-459)

On January 20, 1987, Atty. Conrado Manicad, the petitioners' counsel filed an Ex-Parte Manifestation and
attached thereto, a motion for reconsideration of the October 22, 1986 Order submitting the cases for
decision. He prayed that the Order be set aside and the cases be re-opened for reception of evidence for
the petitioners. He averred that: 1) within the reglementary period he prepared the motion for
reconsideration and among other documents, the draft was sent to his law office thru his messenger; after
signing the final copies, he caused the service of a copy to the respondent corporation's counsel with the
instruction that the copy of the Court be filed; however, there was a miscommunication between his
secretary and messenger in that the secretary mailed the copy for the respondent corporation's counsel
and placed the rest in an envelope for the messenger to file the same in court but the messenger thought
that it was the secretary who would file it; it was only later on when it was discovered that the copy for
the Court has not yet been filed and that such failure to file the motion for reconsideration was due to
excusable neglect and/or accident. The motion for reconsideration contained the following allegations: that
on the date set for hearing (October 22, 1986), he was on his way to Calamba to attend the hearing but
his car suffered transmission breakdown; and that despite efforts to repair said transmission, the car
remained inoperative resulting in his absence at the said hearing. (Original Records, pp. 460-469)

On February 3, 1987, Atty. Manicad filed a motion for reconsideration of the January 15, 1987 decision.
He explained that he had to file the motion because the receiving clerk refused to admit the motion for
reconsideration attached to the ex-parte manifestation because there was no proof of service to the other
party. Included in the motion for reconsideration was a notice of hearing of the motion on February 3,
1987. (Original Records, p. 476-A)

On February 4, 1987, the respondent corporation through its counsel filed a Manifestation and Motion
manifesting that they received the copy of the motion for reconsideration only today (February 4, 1987),
hence they prayed for the postponement of the hearing. (Original Records, pp. 478-479)

On the same day, February 4, 1987, the lower court issued an Order setting the hearing on February 13,
1987 on the ground that it received the motion for reconsideration late. Copies of this Order were sent
separately to the petitioners and their counsel. The records show that Atty. Manicad received his copy on
February 11, 1987. As regards the petitioners, the records reveal that Rebecca Boyer-Roxas did not
receive her copy while as regards Guillermo Roxas, somebody signed for him but did not indicate when
the copy was received. (Original Records, pp. 481-483)

At the scheduled February 13, 1987 hearing, the counsels for the parties were present. However, the
hearing was reset for March 6, 1987 in order to allow the respondent corporation to file its opposition to
the motion for reconsideration. (Order dated February 13, 1987, Original Records, p. 486) Copies of the
Order were sent and received by the petitioners and their counsel on the following dates: Rebecca Boyer-
Roxas on February 23, 1987; Guillermo Roxas on February 23, 1987 and Atty. Manicad on February 19,
1987. (Original Records, pp. 487, 489-490)

The records are not clear as to whether or not the scheduled hearing on March 6, 1987 was held.
Nevertheless, the records reveal that on March 13, 1987, the lower court issued an Order denying the
motion for reconsideration.

The well-settled doctrine is that the client is bound by the mistakes of his lawyer. (Aguila v. Court of First
Instance of Batangas, Branch I, 160 SCRA 352 [1988]; See also Vivero v. Santos, et al., 98 Phil. 500
[1956]; Isaac v. Mendoza, 89 Phil. 279 [1951]; Montes v. Court of First Instance of Tayabas, 48 Phil. 640
[1926]; People v. Manzanilla, 43 Phil. 167 [1922]; United States v. Dungca, 27 Phil. 274 [1914]; and
United States v. Umali, 15 Phil. 33 [1910]) This rule, however, has its exceptions. Thus, in several cases,
we ruled that the party is not bound by the actions of his counsel in case the gross negligence of the
counsel resulted in the client's deprivation of his property without due process of law. In the case
of Legarda v. Court of Appeals (195 SCRA 418 [1991]), we said:

In People's Homesite & Housing Corp. v. Tiongco and Escasa (12 SCRA 471 [1964]), this
Court ruled as follows:

Procedural technicality should not be made a bar to the vindication of a

legitimate grievance. When such technicality deserts from being an aid to
Justice, the courts are justified in excepting from its operation a particular
case. Where there was something fishy and suspicious about the actuations of
the former counsel of petitioners in the case at bar, in that he did not give
any significance at all to the processes of the court, which has proven
prejudicial to the rights of said clients, under a lame and flimsy explanation
that the court's processes just escaped his attention, it is held that said
lawyer deprived his clients of their day in court, thus entitling said clients to
petition for relief from judgment despite the lapse of the reglementary period
for filing said period for filing said petition.

In Escudero v. Judge Dulay (158 SCRA 69 [1988]), this Court, in holding that the counsel's
blunder in procedure is an exception to the rule that the client is bound by the mistakes of
counsel, made the following disquisition:

Petitioners contend, through their new counsel, that the judgment rendered
against them by the respondent court was null and void, because they were
therein deprived of their day in court and divested of their property without
due process of law, through the gross ignorance, mistake and negligence of
their previous counsel. They acknowledge that, while as a rule, clients are
bound by the mistake of their counsel, the rule should not be applied
automatically to their case, as their trial counsel's blunder in procedure and
gross ignorance of existing jurisprudence changed their cause of action and
violated their substantial rights.

We are impressed with petitioner's contentions.

x x x           x x x          x x x

While this Court is cognizant of the rule that, generally, a client will suffer
consequences of the negligence, mistake or lack of competence of his
counsel, in the interest of Justice and equity, exceptions may be made to
such rule, in accordance with the facts and circumstances of each case.
Adherence to the general rule would, in the instant case, result in the outright
deprivation of their property through a technicality.
 In its questioned decision dated November 19, 1989 the Court of Appeals found, in no
uncertain terms, the negligence of the then counsel for petitioners when he failed to file the
proper motion to dismiss or to draw a compromise agreement if it was true that they agreed
on a settlement of the case; or in simply filing an answer; and that after having been
furnished a copy of the decision by the court he failed to appeal therefrom or to file a
petition for relief from the order declaring petitioners in default. In all these instances the
appellate court found said counsel negligent but his acts were held to bind his client,
petitioners herein, nevertheless.

The Court disagrees and finds that the negligence of counsel in this case appears to be so
gross and inexcusable. This was compounded by the fact, that after petitioner gave said
counsel another chance to make up for his omissions by asking him to file a petition for
annulment of the judgment in the appellate court, again counsel abandoned the case of
petitioner in that after he received a copy of the adverse judgment of the appellate court,
he did not do anything to save the situation or inform his client of the judgment. He allowed
the judgment to lapse and become final. Such reckless and gross negligence should not be
allowed to bind the petitioner. Petitioner was thereby effectively deprived of her day in
court. (at pp. 426-427)

The herein petitioners, however, are not similarly situated as the parties mentioned in the abovecited
cases. We cannot rule that they, too, were victims of the gross negligence of their counsel.

The petitioners are to be blamed for the October 22, 1986 order issued by the lower court submitting the
cases for decision. They received notices of the scheduled hearings and yet they did not do anything. More
specifically, the parties received notice of the Order dated September 29, 1986 with the warning that if
they fail to attend the October 22, 1986 hearing, the cases would be submitted for decision based on the
evidence on record. Earlier, at the scheduled hearing on September 29, 1986, the counsel for the
respondent corporation moved that the cases be submitted for decision for failure of the petitioners and
their counsel to attend despite notice. The lower court denied the motion and gave the petitioners and
their counsel another chance by rescheduling the October 22, 1986 hearing.

Indeed, the petitioners knew all along that their counsel was not attending the scheduled hearings. They
did not take steps to change their counsel or make him attend to their cases until it was too late. On the
contrary, they continued to retain the services of Atty. Manicad knowing fully well his lapses vis-a-vis their
cases. They, therefore, cannot raise the alleged gross negligence of their counsel resulting in their denial
of due process to warrant the reversal of the lower court's decision. In a similar case, Aguila v. Court of
First Instance of Batangas, Branch 1 (supra), we ruled:

In the instant case, the petitioner should have noticed the succession of errors committed
by his counsel and taken appropriate steps for his replacement before it was altogether too
late. He did not. On the contrary, he continued to retain his counsel through the series of
proceedings that all resulted in the rejection of his cause, obviously through such counsel's
"ineptitude" and, let it be added, the clients' forbearance. The petitioner's reverses should
have cautioned him that his lawyer was mishandling his case and moved him to seek the
help of other counsel, which he did in the end but rather tardily.

Now petitioner wants us to nullify all of the antecedent proceedings and recognize his earlier
claims to the disputed property on the justification that his counsel was grossly inept. Such
a reason is hardly plausible as the petitioner's new counsel should know. Otherwise, all a
defeated party would have to do to salvage his case is claim neglect or mistake on the part
of his counsel as a ground for reversing the adverse judgment. There would be no end to
litigation if these were allowed as every shortcoming of counsel could be the subject of
challenge by his client through another counsel who, if he is also found wanting, would
likewise be disowned by the same client through another counsel, and so on ad infinitum.
This would render court proceedings indefinite, tentative and subject to reopening at any
time by the mere subterfuge of replacing counsel. (at pp. 357-358)

We now discuss the merits of the cases.

In the first assignment of error, the petitioners maintain that their possession of the questioned properties
must be respected in view of their ownership of an aliquot portion of all the properties of the respondent
corporation being stockholders thereof. They propose that the veil of corporate fiction be pierced,
considering the circumstances under which the respondent corporation was formed.

Originally, the questioned properties belonged to Eugenia V. Roxas. After her death, the heirs of Eugenia
V. Roxas, among them the petitioners herein, decided to form a corporation — Heirs of Eugenia V. Roxas,
Incorporated (private respondent herein) with the inherited properties as capital of the corporation. The
corporation was incorporated on December 4, 1962 with the primary purpose of engaging in agriculture to
develop the inherited properties. The Articles of Incorporation of the respondent corporation were
amended in 1971 to allow it to engage in the resort business. Accordingly, the corporation put up a resort
known as Hidden Valley Springs Resort where the questioned properties are located.

These facts, however, do not justify the position taken by the petitioners.

The respondent is a bona fide corporation. As such, it has a juridical personality of its own separate from
the members composing it. (Western Agro Industrial Corporation v. Court of Appeals, 188 SCRA 709
[1990]; Tan Boon Bee & Co., Inc. v. Jarencio, 163 SCRA 205 [1988]; Yutivo Sons Hardware Company v.
Court of Tax Appeals, 1 SCRA 160 [1961]; Emilio Cano Enterprises, Inc. v. Court of Industrial Relations,
13 SCRA 290 [1965]) There is no dispute that title over the questioned land where the Hidden Valley
Springs Resort is located is registered in the name of the corporation. The records also show that the staff
house being occupied by petitioner Rebecca Boyer-Roxas and the recreation hall which was later on
converted into a residential house occupied by petitioner Guillermo Roxas are owned by the respondent
corporation. Regarding properties owned by a corporation, we stated in the case of Stockholders of F.
Guanzon and Sons, Inc. v. Register of Deeds of Manila, (6 SCRA 373 [1962]):

xxx xxx xxx

. . . Properties registered in the name of the corporation are owned by it as an entity

separate and distinct from its members. While shares of stock constitute personal property,
they do not represent property of the corporation. The corporation has property of its own
which consists chiefly of real estate (Nelson v. Owen, 113 Ala., 372, 21 So. 75; Morrow v.
Gould, 145 Iowa 1, 123 N.W. 743). A share of stock only typifies an aliquot part of the
corporation's property, or the right to share in its proceeds to that extent when distributed
according to law and equity (Hall & Faley v. Alabama Terminal, 173 Ala., 398, 56 So. 235),
but its holder is not the owner of any part of the capital of the corporation (Bradley v.
Bauder, 36 Ohio St., 28). Nor is he entitled to the possession of any definite portion of its
property or assets (Gottfried V. Miller, 104 U.S., 521; Jones v. Davis, 35 Ohio St., 474). The
stockholder is not a co-owner or tenant in common of the corporate property (Harton v.
Johnston, 166 Ala., 317, 51 So. 992). (at pp. 375-376)

The petitioners point out that their occupancy of the staff house which was later used as the residence of
Eriberto Roxas, husband of petitioner Rebecca Boyer-Roxas and the recreation hall which was converted
into a residential house were with the blessings of Eufrocino Roxas, the deceased husband of Eugenia V.
Roxas, who was the majority and controlling stockholder of the corporation. In his lifetime, Eufrocino
Roxas together with Eriberto Roxas, the husband of petitioner Rebecca Boyer-Roxas, and the father of
petitioner Guillermo Roxas managed the corporation. The Board of Directors did not object to such an
arrangement. The petitioners argue that . . . the authority thus given by Eufrocino Roxas for the
conversion of the recreation hall into a residential house can no longer be questioned by the stockholders
of the private respondent and/or its board of directors for they impliedly but no leas explicitly delegated
such authority to said Eufrocino Roxas. (Rollo, p. 12)

Again, we must emphasize that the respondent corporation has a distinct personality separate from its
members. The corporation transacts its business only through its officers or agents. (Western Agro
Industrial Corporation v. Court of Appeals, supra). Whatever authority these officers or agents may have
is derived from the board of directors or other governing body unless conferred by the charter of the
corporation. An officer's power as an agent of the corporation must be sought from the statute, charter,
the by-laws or in a delegation of authority to such officer, from the acts of the board of directors, formally
expressed or implied from a habit or custom of doing business. (Vicente v. Geraldez, 52 SCRA 210
[1973])

In the present case, the record shows that Eufrocino V. Roxas who then controlled the management of the
corporation, being the majority stockholder, consented to the petitioners' stay within the questioned
properties. Specifically, Eufrocino Roxas gave his consent to the conversion of the recreation hall to a
residential house, now occupied by petitioner Guillermo Roxas. The Board of Directors did not object to
the actions of Eufrocino Roxas. The petitioners were allowed to stay within the questioned properties until
August 27, 1983, when the Board of Directors approved a Resolution ejecting the petitioners, to wit:

R E S O L U T I O N No. 83-12

RESOLVED, That Rebecca B. Roxas and Guillermo Roxas, and all persons claiming under
them, be ejected from their occupancy of the Hidden Valley Springs compound on which
their houses have been constructed and/or are being constructed only on tolerance of the
Corporation and without any contract therefor, in order to give way to the Corporation's
expansion and improvement program and obviate prejudice to the operation of the Hidden
Valley Springs Resort by their continued interference.

RESOLVED, Further that the services of Atty. Benito P. Fabie be engaged and that he be
authorized as he is hereby authorized to effect the ejectment, including the filing of the
corresponding suits, if necessary to do so. (Original Records, p. 327)

We find nothing irregular in the adoption of the Resolution by the Board of Directors. The petitioners' stay
within the questioned properties was merely by tolerance of the respondent corporation in deference to
the wishes of Eufrocino Roxas, who during his lifetime, controlled and managed the corporation. Eufrocino
Roxas' actions could not have bound the corporation forever. The petitioners have not cited any provision
of the corporation by-laws or any resolution or act of the Board of Directors which authorized Eufrocino
Roxas to allow them to stay within the company premises forever. We rule that in the absence of any
existing contract between the petitioners and the respondent corporation, the corporation may elect to
eject the petitioners at any time it wishes for the benefit and interest of the respondent corporation.

The petitioners' suggestion that the veil of the corporate fiction should be pierced is untenable. The
separate personality of the corporation may be disregarded only when the corporation is used "as a cloak
or cover for fraud or illegality, or to work injustice, or where necessary to achieve equity or when
necessary for the protection of the creditors." (Sulong Bayan, Inc. v. Araneta, Inc., 72 SCRA 347 [1976]
cited in Tan Boon Bee & Co., Inc., v. Jarencio, supra and Western Agro Industrial Corporation v. Court of
Appeals, supra) The circumstances in the present cases do not fall under any of the enumerated
categories.

In the third assignment of error, the petitioners insist that as regards the unfinished building, Rebecca
Boyer-Roxas is a builder in good faith.

The construction of the unfinished building started when Eriberto Roxas, husband of Rebecca Boyer-Roxas,
was still alive and was the general manager of the respondent corporation. The couple used their own
funds to finance the construction of the building. The Board of Directors of the corporation, however, did
not object to the construction. They allowed the construction to continue despite the fact that it was within
the property of the corporation. Under these circumstances, we agree with the petitioners that the
provision of Article 453 of the Civil Code should have been applied by the lower courts.

Article 453 of the Civil Code provides:

If there was bad faith, not only on the part of the person who built, planted or sown on the
land of another but also on the part of the owner of such land, the rights of one and the
other shall be the same as though both had acted in good faith.
In such a case, the provisions of Article 448 of the Civil Code govern the relationship between petitioner
Rebecca-Boyer-Roxas and the respondent corporation, to wit:

Art. 448 — The owner of the land on which anything has been built, sown or planted in good
faith, shall have the right to appropriate as his own the works, sowing or planting after
payment of the indemnity provided for in articles 546 and 548, or to oblige the one who
built or planted to pay the price of the land, and the one who sowed, the proper rent.
However, the builder or planter cannot be obliged to buy the land if its value is considerably
more than that of the building or trees. In such case, he shall pay reasonable rent, if the
owner of the land does not choose to appropriate the buildings or trees after proper
indemnity. The parties shall agree upon the terms of the lease and in case of disagreement,
the court shall fix the terms thereof.

WHEREFORE, the present petition is partly GRANTED. The questioned decision of the Court of Appeals
affirming the decision of the Regional Trial Court of Laguna, Branch 37, in RTC Civil Case No. 802-84-C is
MODIFIED in that subparagraphs (c) and (d) of Paragraph 1 of the dispositive portion of the decision are
deleted. In their stead, the petitioner Rebecca Boyer-Roxas and the respondent corporation are ordered to
follow the provisions of Article 448 of the Civil Code as regards the questioned unfinished building in RTC
Civil Case No. 802-84-C. The questioned decision is affirmed in all other respects.

SO ORDERED.

G.R. No. 152392             May 26, 2005

EXPERTRAVEL & TOURS, INC., petitioner,

vs.
COURT OF APPEALS and KOREAN AIRLINES, respondent.

DECISION

CALLEJO, SR., J.:

Before us is a petition for review on certiorari of the Decision1 of the Court of Appeals (CA) in CA-G.R. SP
No. 61000 dismissing the petition for certiorari and mandamus filed by Expertravel and Tours, Inc. (ETI).

The Antecedents

Korean Airlines (KAL) is a corporation established and registered in the Republic of South Korea and
licensed to do business in the Philippines. Its general manager in the Philippines is Suk Kyoo Kim, while its
appointed counsel was Atty. Mario Aguinaldo and his law firm.

On September 6, 1999, KAL, through Atty. Aguinaldo, filed a Complaint2 against ETI with the Regional
Trial Court (RTC) of Manila, for the collection of the principal amount of P260,150.00, plus attorney’s fees
and exemplary damages. The verification and certification against forum shopping was signed by Atty.
Aguinaldo, who indicated therein that he was the resident agent and legal counsel of KAL and had caused
the preparation of the complaint.

ETI filed a motion to dismiss the complaint on the ground that Atty. Aguinaldo was not authorized to
execute the verification and certificate of non-forum shopping as required by Section 5, Rule 7 of the
Rules of Court. KAL opposed the motion, contending that Atty. Aguinaldo was its resident agent and was
registered as such with the Securities and Exchange Commission (SEC) as required by the Corporation
Code of the Philippines. It was further alleged that Atty. Aguinaldo was also the corporate secretary of
KAL. Appended to the said opposition was the identification card of Atty. Aguinaldo, showing that he was
the lawyer of KAL.

During the hearing of January 28, 2000, Atty. Aguinaldo claimed that he had been authorized to file the
complaint through a resolution of the KAL Board of Directors approved during a special meeting held on
June 25, 1999. Upon his motion, KAL was given a period of 10 days within which to submit a copy of the
said resolution. The trial court granted the motion. Atty. Aguinaldo subsequently filed other similar
motions, which the trial court granted.

Finally, KAL submitted on March 6, 2000 an Affidavit3 of even date, executed by its general manager Suk
Kyoo Kim, alleging that the board of directors conducted a special teleconference on June 25, 1999, which
he and Atty. Aguinaldo attended. It was also averred that in that same teleconference, the board of
directors approved a resolution authorizing Atty. Aguinaldo to execute the certificate of non-forum
shopping and to file the complaint. Suk Kyoo Kim also alleged, however, that the corporation had no
written copy of the aforesaid resolution.

On April 12, 2000, the trial court issued an Order4 denying the motion to dismiss, giving credence to the
claims of Atty. Aguinaldo and Suk Kyoo Kim that the KAL Board of Directors indeed conducted a
teleconference on June 25, 1999, during which it approved a resolution as quoted in the submitted
affidavit.

ETI filed a motion for the reconsideration of the Order, contending that it was inappropriate for the court
to take judicial notice of the said teleconference without any prior hearing. The trial court denied the
motion in its Order5 dated August 8, 2000.

ETI then filed a petition for certiorari and mandamus, assailing the orders of the RTC. In its comment on
the petition, KAL appended a certificate signed by Atty. Aguinaldo dated January 10, 2000, worded as
follows:

SECRETARY’S/RESIDENT AGENT’S CERTIFICATE

KNOW ALL MEN BY THESE PRESENTS:

I, Mario A. Aguinaldo, of legal age, Filipino, and duly elected and appointed Corporate Secretary
and Resident Agent of KOREAN AIRLINES, a foreign corporation duly organized and existing under
and by virtue of the laws of the Republic of Korea and also duly registered and authorized to do
business in the Philippines, with office address at Ground Floor, LPL Plaza Building, 124 Alfaro St.,
Salcedo Village, Makati City, HEREBY CERTIFY that during a special meeting of the Board of
Directors of the Corporation held on June 25, 1999 at which a quorum was present, the said Board
unanimously passed, voted upon and approved the following resolution which is now in full force
and effect, to wit:

RESOLVED, that Mario A. Aguinaldo and his law firm M.A. Aguinaldo & Associates or any of
its lawyers are hereby appointed and authorized to take with whatever legal action
necessary to effect the collection of the unpaid account of Expert Travel & Tours. They are
hereby specifically authorized to prosecute, litigate, defend, sign and execute any document
or paper necessary to the filing and prosecution of said claim in Court, attend the Pre-Trial
Proceedings and enter into a compromise agreement relative to the above-mentioned claim.

IN WITNESS WHEREOF, I have hereunto affixed my signature this 10th day of January, 1999, in the
City of Manila, Philippines.

(Sgd.)

MARIO A. AGUINALDO
Resident Agent

SUBSCRIBED AND SWORN to before me this 10th day of January, 1999, Atty. Mario A. Aguinaldo
exhibiting to me his Community Tax Certificate No. 14914545, issued on January 7, 2000 at
Manila, Philippines.
 Doc. No. 119; (Sgd.)
Page No. 25; ATTY. HENRY D. ADASA
Book No. XXIV Notary Public
Series of 2000. Until December 31, 2000
PTR #889583/MLA 1/3/20006

On December 18, 2001, the CA rendered judgment dismissing the petition, ruling that the verification and
certificate of non-forum shopping executed by Atty. Aguinaldo was sufficient compliance with the Rules of
Court. According to the appellate court, Atty. Aguinaldo had been duly authorized by the board resolution
approved on June 25, 1999, and was the resident agent of KAL. As such, the RTC could not be faulted for
taking judicial notice of the said teleconference of the KAL Board of Directors.

ETI filed a motion for reconsideration of the said decision, which the CA denied. Thus, ETI, now the
petitioner, comes to the Court by way of petition for review on certiorari and raises the following issue:

DID PUBLIC RESPONDENT COURT OF APPEALS DEPART FROM THE ACCEPTED AND USUAL COURSE
OF JUDICIAL PROCEEDINGS WHEN IT RENDERED ITS QUESTIONED DECISION AND WHEN IT
ISSUED ITS QUESTIONED RESOLUTION, ANNEXES A AND B OF THE INSTANT PETITION?7

The petitioner asserts that compliance with Section 5, Rule 7, of the Rules of Court can be determined
only from the contents of the complaint and not by documents or pleadings outside thereof. Hence, the
trial court committed grave abuse of discretion amounting to excess of jurisdiction, and the CA erred in
considering the affidavit of the respondent’s general manager, as well as the Secretary’s/Resident Agent’s
Certification and the resolution of the board of directors contained therein, as proof of compliance with the
requirements of Section 5, Rule 7 of the Rules of Court. The petitioner also maintains that the RTC cannot
take judicial notice of the said teleconference without prior hearing, nor any motion therefor. The
petitioner reiterates its submission that the teleconference and the resolution adverted to by the
respondent was a mere fabrication.

The respondent, for its part, avers that the issue of whether modern technology is used in the field of
business is a factual issue; hence, cannot be raised in a petition for review on certiorari under Rule 45 of
the Rules of Court. On the merits of the petition, it insists that Atty. Aguinaldo, as the resident agent and
corporate secretary, is authorized to sign and execute the certificate of non-forum shopping required by
Section 5, Rule 7 of the Rules of Court, on top of the board resolution approved during the teleconference
of June 25, 1999. The respondent insists that "technological advances in this time and age are as
commonplace as daybreak." Hence, the courts may take judicial notice that the Philippine Long Distance
Telephone Company, Inc. had provided a record of corporate conferences and meetings through FiberNet
using fiber-optic transmission technology, and that such technology facilitates voice and image
transmission with ease; this makes constant communication between a foreign-based office and its
Philippine-based branches faster and easier, allowing for cost-cutting in terms of travel concerns. It points
out that even the E-Commerce Law has recognized this modern technology. The respondent posits that
the courts are aware of this development in technology; hence, may take judicial notice thereof without
need of hearings. Even if such hearing is required, the requirement is nevertheless satisfied if a party is
allowed to file pleadings by way of comment or opposition thereto.

In its reply, the petitioner pointed out that there are no rulings on the matter of teleconferencing as a
means of conducting meetings of board of directors for purposes of passing a resolution; until and after
teleconferencing is recognized as a legitimate means of gathering a quorum of board of directors, such
cannot be taken judicial notice of by the court. It asserts that safeguards must first be set up to prevent
any mischief on the public or to protect the general public from any possible fraud. It further proposes
possible amendments to the Corporation Code to give recognition to such manner of board meetings to
transact business for the corporation, or other related corporate matters; until then, the petitioner asserts,
teleconferencing cannot be the subject of judicial notice.

The petitioner further avers that the supposed holding of a special meeting on June 25, 1999 through
teleconferencing where Atty. Aguinaldo was supposedly given such an authority is a farce, considering
that there was no mention of where it was held, whether in this country or elsewhere. It insists that the
Corporation Code requires board resolutions of corporations to be submitted to the SEC. Even assuming
that there was such a teleconference, it would be against the provisions of the Corporation Code not to
have any record thereof.

The petitioner insists that the teleconference and resolution adverted to by the respondent in its pleadings
were mere fabrications foisted by the respondent and its counsel on the RTC, the CA and this Court.

The petition is meritorious.

Section 5, Rule 7 of the Rules of Court provides:

SEC. 5. Certification against forum shopping.— The plaintiff or principal party shall certify under
oath in the complaint or other initiatory pleading asserting a claim for relief, or in a sworn
certification annexed thereto and simultaneously filed therewith: (a) that he has not theretofore
commenced any action or filed any claim involving the same issues in any court, tribunal or quasi-
judicial agency and, to the best of his knowledge, no such other action or claim is pending therein;
(b) if there is such other pending action or claim, a complete statement of the present status
thereof; and (c) if he should thereafter learn that the same or similar action or claim has been filed
or is pending, he shall report that fact within five (5) days therefrom to the court wherein his
aforesaid complaint or initiatory pleading has been filed.

Failure to comply with the foregoing requirements shall not be curable by mere amendment of the
complaint or other initiatory pleading but shall be cause for the dismissal of the case without
prejudice, unless otherwise provided, upon motion and after hearing. The submission of a false
certification or non-compliance with any of the undertakings therein shall constitute indirect
contempt of court, without prejudice to the corresponding administrative and criminal actions. If
the acts of the party or his counsel clearly constitute willful and deliberate forum shopping, the
same shall be ground for summary dismissal with prejudice and shall constitute direct contempt, as
well as a cause for administrative sanctions.

It is settled that the requirement to file a certificate of non-forum shopping is mandatory8 and that the
failure to comply with this requirement cannot be excused. The certification is a peculiar and personal
responsibility of the party, an assurance given to the court or other tribunal that there are no other
pending cases involving basically the same parties, issues and causes of action. Hence, the certification
must be accomplished by the party himself because he has actual knowledge of whether or not he has
initiated similar actions or proceedings in different courts or tribunals. Even his counsel may be unaware
of such facts.9 Hence, the requisite certification executed by the plaintiff’s counsel will not suffice.10

In a case where the plaintiff is a private corporation, the certification may be signed, for and on behalf of
the said corporation, by a specifically authorized person, including its retained counsel, who has personal
knowledge of the facts required to be established by the documents. The reason was explained by the
Court in National Steel Corporation v. Court of Appeals,11 as follows:

Unlike natural persons, corporations may perform physical actions only through properly delegated
individuals; namely, its officers and/or agents.

The corporation, such as the petitioner, has no powers except those expressly conferred on it by
the Corporation Code and those that are implied by or are incidental to its existence. In turn, a
corporation exercises said powers through its board of directors and/or its duly-authorized officers
and agents. Physical acts, like the signing of documents, can be performed only by natural persons
duly-authorized for the purpose by corporate by-laws or by specific act of the board of directors.
"All acts within the powers of a corporation may be performed by agents of its selection; and
except so far as limitations or restrictions which may be imposed by special charter, by-law, or
statutory provisions, the same general principles of law which govern the relation of agency for a
natural person govern the officer or agent of a corporation, of whatever status or rank, in respect
 to his power to act for the corporation; and agents once appointed, or members acting in their
stead, are subject to the same rules, liabilities and incapacities as are agents of individuals and
private persons."

… For who else knows of the circumstances required in the Certificate but its own retained counsel.
Its regular officers, like its board chairman and president, may not even know the details required
therein.

Indeed, the certificate of non-forum shopping may be incorporated in the complaint or appended thereto
as an integral part of the complaint. The rule is that compliance with the rule after the filing of the
complaint, or the dismissal of a complaint based on its non-compliance with the rule, is impermissible.
However, in exceptional circumstances, the court may allow subsequent compliance with the rule.12 If the
authority of a party’s counsel to execute a certificate of non-forum shopping is disputed by the adverse
party, the former is required to show proof of such authority or representation.

In this case, the petitioner, as the defendant in the RTC, assailed the authority of Atty. Aguinaldo to
execute the requisite verification and certificate of non-forum shopping as the resident agent and counsel
of the respondent. It was, thus, incumbent upon the respondent, as the plaintiff, to allege and establish
that Atty. Aguinaldo had such authority to execute the requisite verification and certification for and in its
behalf. The respondent, however, failed to do so.

The verification and certificate of non-forum shopping which was incorporated in the complaint and signed
by Atty. Aguinaldo reads:

I, Mario A. Aguinaldo of legal age, Filipino, with office address at Suite 210 Gedisco Centre, 1564 A.
Mabini cor. P. Gil Sts., Ermita, Manila, after having sworn to in accordance with law hereby deposes
and say: THAT -

1. I am the Resident Agent and Legal Counsel of the plaintiff in the above entitled case and have
caused the preparation of the above complaint;

2. I have read the complaint and that all the allegations contained therein are true and correct
based on the records on files;

3. I hereby further certify that I have not commenced any other action or proceeding involving the
same issues in the Supreme Court, the Court of Appeals, or different divisions thereof, or any other
tribunal or agency. If I subsequently learned that a similar action or proceeding has been filed or is
pending before the Supreme Court, the Court of Appeals, or different divisions thereof, or any
tribunal or agency, I will notify the court, tribunal or agency within five (5) days from such
notice/knowledge.

(Sgd.)

MARIO A. AGUINALDO
Affiant
CITY OF MANILA

SUBSCRIBED AND SWORN TO before me this 30th day of August, 1999, affiant exhibiting to me his
Community Tax Certificate No. 00671047 issued on January 7, 1999 at Manila, Philippines.

Doc. No. 1005; (Sgd.)

Page No. 198;
Book No. XXI ATTY. HENRY D. ADASA
Series of 1999. Notary Public
 Until December 31, 2000
PTR No. 320501 Mla.
1/4/9913

As gleaned from the aforequoted certification, there was no allegation that Atty. Aguinaldo had been
authorized to execute the certificate of non-forum shopping by the respondent’s Board of Directors;
moreover, no such board resolution was appended thereto or incorporated therein.

While Atty. Aguinaldo is the resident agent of the respondent in the Philippines, this does not mean that
he is authorized to execute the requisite certification against forum shopping. Under Section 127, in
relation to Section 128 of the Corporation Code, the authority of the resident agent of a foreign
corporation with license to do business in the Philippines is to receive, for and in behalf of the foreign
corporation, services and other legal processes in all actions and other legal proceedings against such
corporation, thus:

SEC. 127. Who may be a resident agent. – A resident agent may either be an individual residing in
the Philippines or a domestic corporation lawfully transacting business in the Philippines: Provided,
That in the case of an individual, he must be of good moral character and of sound financial
standing.

SEC. 128. Resident agent; service of process. – The Securities and Exchange Commission shall
require as a condition precedent to the issuance of the license to transact business in the
Philippines by any foreign corporation that such corporation file with the Securities and Exchange
Commission a written power of attorney designating some persons who must be a resident of the
Philippines, on whom any summons and other legal processes may be served in all actions or other
legal proceedings against such corporation, and consenting that service upon such resident agent
shall be admitted and held as valid as if served upon the duly-authorized officers of the foreign
corporation as its home office.14

Under the law, Atty. Aguinaldo was not specifically authorized to execute a certificate of non-forum
shopping as required by Section 5, Rule 7 of the Rules of Court. This is because while a resident agent
may be aware of actions filed against his principal (a foreign corporation doing business in the
Philippines), such resident may not be aware of actions initiated by its principal, whether in the Philippines
against a domestic corporation or private individual, or in the country where such corporation was
organized and registered, against a Philippine registered corporation or a Filipino citizen.

The respondent knew that its counsel, Atty. Aguinaldo, as its resident agent, was not specifically
authorized to execute the said certification. It attempted to show its compliance with the rule subsequent
to the filing of its complaint by submitting, on March 6, 2000, a resolution purporting to have been
approved by its Board of Directors during a teleconference held on June 25, 1999, allegedly with Atty.
Aguinaldo and Suk Kyoo Kim in attendance. However, such attempt of the respondent casts veritable
doubt not only on its claim that such a teleconference was held, but also on the approval by the Board of
Directors of the resolution authorizing Atty. Aguinaldo to execute the certificate of non-forum shopping.

In its April 12, 2000 Order, the RTC took judicial notice that because of the onset of modern technology,
persons in one location may confer with other persons in other places, and, based on the said premise,
concluded that Suk Kyoo Kim and Atty. Aguinaldo had a teleconference with the respondent’s Board of
Directors in South Korea on June 25, 1999. The CA, likewise, gave credence to the respondent’s claim that
such a teleconference took place, as contained in the affidavit of Suk Kyoo Kim, as well as Atty.
Aguinaldo’s certification.

Generally speaking, matters of judicial notice have three material requisites: (1) the matter must be one
of common and general knowledge; (2) it must be well and authoritatively settled and not doubtful or
uncertain; and (3) it must be known to be within the limits of the jurisdiction of the court. The principal
guide in determining what facts may be assumed to be judicially known is that of notoriety. Hence, it can
be said that judicial notice is limited to facts evidenced by public records and facts of general notoriety.
[15]
 Moreover, a judicially noticed fact must be one not subject to a reasonable dispute in that it is either:
(1) generally known within the territorial jurisdiction of the trial court; or (2) capable of accurate and
ready determination by resorting to sources whose accuracy cannot reasonably be questionable.16

Things of "common knowledge," of which courts take judicial matters coming to the knowledge of men
generally in the course of the ordinary experiences of life, or they may be matters which are generally
accepted by mankind as true and are capable of ready and unquestioned demonstration. Thus, facts which
are universally known, and which may be found in encyclopedias, dictionaries or other publications, are
judicially noticed, provided, they are of such universal notoriety and so generally understood that they
may be regarded as forming part of the common knowledge of every person. As the common knowledge
of man ranges far and wide, a wide variety of particular facts have been judicially noticed as being
matters of common knowledge. But a court cannot take judicial notice of any fact which, in part, is
dependent on the existence or non-existence of a fact of which the court has no constructive knowledge.17

In this age of modern technology, the courts may take judicial notice that business transactions may be
made by individuals through teleconferencing. Teleconferencing is interactive group communication (three
or more people in two or more locations) through an electronic medium. In general terms,
teleconferencing can bring people together under one roof even though they are separated by hundreds of
miles.18 This type of group communication may be used in a number of ways, and have three basic types:
(1) video conferencing - television-like communication augmented with sound; (2) computer conferencing
- printed communication through keyboard terminals, and (3) audio-conferencing-verbal
communication via the telephone with optional capacity for telewriting or telecopying.19

A teleconference represents a unique alternative to face-to-face (FTF) meetings. It was first introduced in
the 1960’s with American Telephone and Telegraph’s Picturephone. At that time, however, no demand
existed for the new technology. Travel costs were reasonable and consumers were unwilling to pay the
monthly service charge for using the picturephone, which was regarded as more of a novelty than as an
actual means for everyday communication.20 In time, people found it advantageous to hold
teleconferencing in the course of business and corporate governance, because of the money saved, among
other advantages include:

1. People (including outside guest speakers) who wouldn’t normally attend a distant FTF meeting
can participate.

2. Follow-up to earlier meetings can be done with relative ease and little expense.

3. Socializing is minimal compared to an FTF meeting; therefore, meetings are shorter and more
oriented to the primary purpose of the meeting.

4. Some routine meetings are more effective since one can audio-conference from any location
equipped with a telephone.

5. Communication between the home office and field staffs is maximized.

6. Severe climate and/or unreliable transportation may necessitate teleconferencing.

7. Participants are generally better prepared than for FTF meetings.

8. It is particularly satisfactory for simple problem-solving, information exchange, and procedural

tasks.

9. Group members participate more equally in well-moderated teleconferences than an FTF

meeting.21

On the other hand, other private corporations opt not to hold teleconferences because of the following
disadvantages:
 1. Technical failures with equipment, including connections that aren’t made.

2. Unsatisfactory for complex interpersonal communication, such as negotiation or bargaining.

3. Impersonal, less easy to create an atmosphere of group rapport.

4. Lack of participant familiarity with the equipment, the medium itself, and meeting skills.

5. Acoustical problems within the teleconferencing rooms.

6. Difficulty in determining participant speaking order; frequently one person monopolizes the
meeting.

7. Greater participant preparation time needed.

8. Informal, one-to-one, social interaction not possible.22

Indeed, teleconferencing can only facilitate the linking of people; it does not alter the complexity of group
communication. Although it may be easier to communicate via teleconferencing, it may also be easier to
miscommunicate. Teleconferencing cannot satisfy the individual needs of every type of meeting.23

In the Philippines, teleconferencing and videoconferencing of members of board of directors of private

corporations is a reality, in light of Republic Act No. 8792. The Securities and Exchange Commission
issued SEC Memorandum Circular No. 15, on November 30, 2001, providing the guidelines to be complied
with related to such conferences.24 Thus, the Court agrees with the RTC that persons in the Philippines
may have a teleconference with a group of persons in South Korea relating to business transactions or
corporate governance.

Even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim participated in a teleconference along
with the respondent’s Board of Directors, the Court is not convinced that one was conducted; even if there
had been one, the Court is not inclined to believe that a board resolution was duly passed specifically
authorizing Atty. Aguinaldo to file the complaint and execute the required certification against forum
shopping.

The records show that the petitioner filed a motion to dismiss the complaint on the ground that the
respondent failed to comply with Section 5, Rule 7 of the Rules of Court. The respondent opposed the
motion on December 1, 1999, on its contention that Atty. Aguinaldo, its resident agent, was duly
authorized to sue in its behalf. The respondent, however, failed to establish its claim that Atty. Aguinaldo
was its resident agent in the Philippines. Even the identification card25 of Atty. Aguinaldo which the
respondent appended to its pleading merely showed that he is the company lawyer of the respondent’s
Manila Regional Office.

The respondent, through Atty. Aguinaldo, announced the holding of the teleconference only during the
hearing of January 28, 2000; Atty. Aguinaldo then prayed for ten days, or until February 8, 2000, within
which to submit the board resolution purportedly authorizing him to file the complaint and execute the
required certification against forum shopping. The court granted the motion.26 The respondent, however,
failed to comply, and instead prayed for 15 more days to submit the said resolution, contending that it
was with its main office in Korea. The court granted the motion per its Order27 dated February 11, 2000.
The respondent again prayed for an extension within which to submit the said resolution, until March 6,
2000.28 It was on the said date that the respondent submitted an affidavit of its general manager Suk
Kyoo Kim, stating, inter alia, that he and Atty. Aguinaldo attended the said teleconference on June 25,
1999, where the Board of Directors supposedly approved the following resolution:

RESOLVED, that Mario A. Aguinaldo and his law firm M.A. Aguinaldo & Associates or any of its
lawyers are hereby appointed and authorized to take with whatever legal action necessary to effect
the collection of the unpaid account of Expert Travel & Tours. They are hereby specifically
authorized to prosecute, litigate, defend, sign and execute any document or paper necessary to the
 filing and prosecution of said claim in Court, attend the Pre-trial Proceedings and enter into a
compromise agreement relative to the above-mentioned claim.29

But then, in the same affidavit, Suk Kyoo Kim declared that the respondent "do[es] not keep a written
copy of the aforesaid Resolution" because no records of board resolutions approved during teleconferences
were kept. This belied the respondent’s earlier allegation in its February 10, 2000 motion for extension of
time to submit the questioned resolution that it was in the custody of its main office in Korea. The
respondent gave the trial court the impression that it needed time to secure a copy of the resolution kept
in Korea, only to allege later (via the affidavit of Suk Kyoo Kim) that it had no such written copy.
Moreover, Suk Kyoo Kim stated in his affidavit that the resolution was embodied in the
Secretary’s/Resident Agent’s Certificate signed by Atty. Aguinaldo. However, no such resolution was
appended to the said certificate.

The respondent’s allegation that its board of directors conducted a teleconference on June 25, 1999 and
approved the said resolution (with Atty. Aguinaldo in attendance) is incredible, given the additional fact
that no such allegation was made in the complaint. If the resolution had indeed been approved on June
25, 1999, long before the complaint was filed, the respondent should have incorporated it in its complaint,
or at least appended a copy thereof. The respondent failed to do so. It was only on January 28, 2000 that
the respondent claimed, for the first time, that there was such a meeting of the Board of Directors held on
June 25, 1999; it even represented to the Court that a copy of its resolution was with its main office in
Korea, only to allege later that no written copy existed. It was only on March 6, 2000 that the respondent
alleged, for the first time, that the meeting of the Board of Directors where the resolution was approved
was held via teleconference.

Worse still, it appears that as early as January 10, 1999, Atty. Aguinaldo had signed a
Secretary’s/Resident Agent’s Certificate alleging that the board of directors held a teleconference on June
25, 1999. No such certificate was appended to the complaint, which was filed on September 6, 1999. More
importantly, the respondent did not explain why the said certificate was signed by Atty. Aguinaldo as early
as January 9, 1999, and yet was notarized one year later (on January 10, 2000); it also did not explain its
failure to append the said certificate to the complaint, as well as to its Compliance dated March 6, 2000. It
was only on January 26, 2001 when the respondent filed its comment in the CA that it submitted the
Secretary’s/Resident Agent’s Certificate30 dated January 10, 2000.

The Court is, thus, more inclined to believe that the alleged teleconference on June 25, 1999 never took
place, and that the resolution allegedly approved by the respondent’s Board of Directors during the said
teleconference was a mere concoction purposefully foisted on the RTC, the CA and this Court, to avert the
dismissal of its complaint against the petitioner.

IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision of the Court of Appeals in
CA-G.R. SP No. 61000 is REVERSED and SET ASIDE. The Regional Trial Court of Manila is hereby
ORDERED to dismiss, without prejudice, the complaint of the respondent.

SO ORDERED.

G.R. No. 128464             June 20, 2006

REV. LUIS AO-AS, REV. JOSE LAKING, EUSQUICIO GALANG, REV. ISABELO MONONGGIT, REV.
EDWINO MERCADO, REV. DANIEL PONDEVIDA, REV. TEODORICO TARAN and DR. BENJAMIN
GALAPIA, Petitioners,
vs.
HON. COURT OF APPEALS, THOMAS P. BATONG, JUANITO BASALONG, AUGUSTO CATANGI, PAUL
GARCIA, QUIDO RIVERA, VICTORIO Y. SAQUILAYAN and DANILO ZAMORA, Respondents.

DECISION

CHICO-NAZARIO, J.:
This is a Petition for Certiorari under Rule 45 of the Rules of Court to seek the reversal of the Court of
Appeals’ Decision1 dated 10 October 1996 in favor of respondents [hereinafter referred to as the Batong
group] and Resolution2 dated 3 March 1997 denying the Motion for Reconsideration of the herein
petitioners [hereinafter referred to as the Ao-As group].

The Court of Appeals found the facts to be as follows:

The Lutheran Church in the Philippines (hereinafter referred to as the LCP) is a religious organization duly
registered with the Securities and Exchange Commission on May 8, 1967. Its members are comprised of
the Lutheran clergymen and the local Lutheran congregations in the Philippines which, at the time of its
incorporation, was divided into three districts, namely: the North Luzon District (hereinafter referred to as
the NLD); the South Luzon District (hereinafter referred to as the SLD); [and] the Mindanao district
(hereinafter referred to as the MDD).

The governing body of the LCP is its national board of directors (hereinafter referred to as the LCP Board)
which was originally composed of seven (7) members serving a term of two years. Six members of the
LCP Board are elected separately in district conferences held in each district, with two members
representing each district – the elected district president becomes the clergy representative to the LCP
Board and the other is a lay representative to the LCP Board. The seventh member of the Board is the
National President of the LCP who is elected at large in a national convention held in October of every
even-numbered year.

During the 1976 LCP national convention, a resolution was passed dividing the North Luzon district (NLD)
into two districts: the NLD Highland District (NLHD) and the NLD Lowland District (NLLD) -- thereby
increasing the number of directors from seven (7) to nine (9). Again in the 1984 LCP national convention,
a resolution was passed creating another district, namely, the Visayan Islands District (VID) thereby
increasing further the number of directors to eleven (11). Both resolutions were passed pursuant to
Section 2 of Article 7 of the LCP By-Laws which provides that: "LCP in convention may form additional
districts as it sees fit".

Since the addition of two or more districts, an eleven (11) member board of directors representing the five
(5) districts managed the LCP without any challenge from the membership until several years later when
certain controversies arose involving the resolutions of the Board terminating the services of the LCP
business manager and corporate treasurer since 1979, Mr. Eclesio Hipe.

The termination of Mr. Hipe sparked a series of intracorporate complaints lodged before the Securities and
Exchange Commission (SEC). For the first time, the legality of the eleven (11) member Board was put in
issue as being in excess of the number of directors provided in the Articles of Incorporation since no
amendments were made thereto to reflect the increase.

Aside from the present case, SEC-SICD Case no. 3556 entitled "Excelsio Hipe, et. al. vs. Thomas Batong,
et. al." and SEC-SICD Case No. 3524, "Domingo Shambu, et. al. vs. Thomas Batong, et. al." respectively,
sought to declare null and void Board Resolution Nos. LCP-BD-6-89 and LCP-BD-7-89; and SEC-SICD Case
No. 3550 entitled "The Lutheran Church in the Philippines vs. Exclesio Hipe" which sought to recover the
corporate records still in the possession of Mr. Hipe.

[The members of the Batong group] are the duly elected board of directors of the LCP at the time of the
filing of SEC-SICD Case No. 3857. On the other hand, [the Ao-As group] have served in various capacities
as directors or officers of the LCP.

On August 17, 1990, [the Ao-As group] filed SEC-SICD Case No. 3857 for accounting and damages with
prayer for preliminary injunction and appointment of a management committee asserting the following
causes of action:

"First, the alleged non-liquidation and/or non-accounting of a part of the proceeds of the La
Trinidad land transaction in the amount of P64,000.00 by petitioner Thomas Batong;
 Second, the alleged non-liquidation and/or unaccounting of cash advances in the aggregate
amount of P323,750.00 by petitioner Thomas Batong;

Third, the alleged dissipation and/or unaccounting of the LCP general fund in the amount of 4.8
million;

Fourth, the non-registration of the Leyte land purchased with LCP funds by petitioner Victorio
Saquilayan;

Fifth, severance of church-partnership relationship with Lutheran Church-Missouri Synod (LCMS);

and

Sixth, the transfer of LCP corporate books from the Sta. Mesa office to the Caloocan office."

During the hearings on the application for creation of a management committee, [the Batong group] filed
an Urgent Motion to Suspend the Proceedings of the Case in view of an amicable settlement agreed upon
by the parties entitled "A FORMULA FOR CONCORD". However, notwithstanding the FORMULA FOR
CONCORD, the SEC-SICD denied [the Batong group’s] motion to suspend proceedings.

On January 23, 1992, petitioners filed a Motion to Dismiss alleging again the FORMULA OF CONCORD.
Again, the SEC-SICD denied [the Batong group’s] motion.

Subsequently, on September 3, 1992, the SEC-SICD Hearing Officer after the presentation of the parties
respective evidence, issued an Order creating a management committee. Said Order reads, in part:

" x x x All board resolutions and/or management actions or decisions passed and approved by them are
deemed null and void ab initio for they were passed, and approved by an illegally constituted Board of
Directors. . . And worse, several resolutions or Board’s actions are not only (deemed) null and void but
have caused irreparable damage to the corporation such as the termination of all LCP staff and employee
(LCP-BD-29-90); dissolution of LCP Business Office (LCP-BD-37-90); termination of the partner-church
relationship between the LCP and the Lutheran Church Missouri Synod which is the major benefactor and
source of funds of LCP (LCP-BD-28-90); forcible taking of almost all official records and equipment of LCP
by respondent Thomas B. Batong and transferring the (same) from the LCP business office; acquisition of
some lands using the corporate funds were in the name of some person other than the LCP; and various
cash advances of corporate funds by the respondents are not liquidated up to the present.

WHEREFORE, premises considered, A MANAGEMENT COMMITTEE is hereby created to undertake the

management of the Lutheran Church in the Philippines until such time that new members of the LCP Board
of Directors shall have been elected and qualified in the election to be called and conducted by the
Management Committee in accordance with the LCP’s Articles of Incorporation and By-Laws preferably in
October 1992."

On September 14, 1992, [the Batong group] filed their Motion for Reconsideration which was
subsequently denied in an Order dated September 23, 1992.

On September 23, 1992, [the Batong group] filed with the SEC En Banc a Petition for Certiorari with
prayer for a temporary restraining order alleging that the SEC-SIDC acted with grave abuse of discretion
in creating the management committee.

Shortly thereafter, on September 29, 1992, the following were appointed to the management committee:
Atty. Puno as Chairman; and private respondents Jose Laking, Eduardo Ladlad, Romeo Celiz as members.
However, Atty. Puno later resigned and was replaced by Atty. Oscar Almazan who was appointed as
Chairman. After the death of Romeo Celiz, he was replaced by private respondent Luis Ao-As.

On October 6, 1992, [the Ao-As group] filed a motion for issuance of a writ of preliminary injunction
seeking to enjoin [the Batong group] not only from continuing to act as LCP board of directors but also
from calling a national convention to elect new set of officers and members of the Board as provided in the
LCP Constitution and By-Laws.

On October 16, 1992, the SEC-SIDC ordered the issuance of a writ of preliminary injunction prohibiting
[the Batong group] from "acting as a board of directors or officers of Lutheran Church in the Philippines,
Inc. (LCP) and from holding any convention or general or special membership meeting as well as election
of the members of the LCP board of directors, until further orders".

The [the Batong group] allege that the SEC-SIDC management committee used the Order dated October
16, 1992 to carry out ultra vires acts, more specifically: (i) to take control of and closing down church
buildings; (ii) to evict LCP clergymen from their church parsonages; (iii) to ordain and appoint new
clergymen to replace incumbent members of the church hierarchy. In at least one case which has reached
this Court, CA-G.R. No. 34504, it was found that:

"On August 13, 1993, [members of the Ao-As group] Oscar Almazan, James Cerdenola, Edgar Balunsat
and Edwino Mercado, together with armed security guards, acting in behalf of LCP, forcibly took
possession of the houses occupied by [the Batong group]. In view of the latter’s refusal to leave the
premises, they permanently padlocked the main gate of the compound confining [the Batong group] and
their families therein and prevented the ingress and egress thereto. Later the [Batong group] left their
houses due to the alleged intimidation and threats employed by the [Ao-As group]. Thereafter, the latter
entered the dwelling and took possession of the same."

However, even before the creation of the management committee, the LCP national convention had
already been called in a Board meeting held on September 26, 1991 at the Lutheran Hospice, Quezon
City. Hence, by the time the writ of preliminary injunction was issued, all notices had already been
received by all local congregations and convention delegates had likewise already been chosen to attend
the national convention.

Thus, the 17th LCP National Convention was held on October 26 to 30, 1992 as earlier scheduled at the
Immanuel Lutheran Church and School, Tugatong, Malabon, Metro-Manila. The list of official delegates to
the Convention is shown in pages 32 to 33 of the Convention Records.

During the 17th LCP National Convention, the delegates representing the majority of the members which
comprised the three districts (North Luzon, South Luzon and Mindanao) issued a "Manifesto" to initiate by
themselves the election for a new set of church leaders because the incumbent directors were enjoined to
act as a board. In the election, the following were elected as LCP officers, namely:

President -- Rev. Victorino Saquilayan

Vice-President -- Rev. Juanito Basalong

Secretary -- Rev. Charlito Mercado

Treasurer -- Rev. Benjamin Lasegan

Similarly, prior to the issuance of the writ of preliminary injunction and the appointment of the
management committee, the SLD (South Luzon District) of LCP already held its district conference on
august 26 to 28, 1992 which elected, among other of its officers, the SLD Lay Representative pursuant to
the LCP Constitution and By Laws. The following were elected:

SLD President and

Clergy Representative : Rev. Elmer Banes

SLD Lay Representative: Roman Moscoso

The district conference for NLD was likewise held before the issuance of the writ of preliminary injunction
on October 7 to 9, 1992. In said convention, the local congregations and clergymen executed a manifesto
expressing their own opposition to the appointment of a management committee.

[The Batong group] then filed with the SEC En Banc a Supplemental Petition dated November 13, 1992
alleging the supervening events in the case which took place after the filing of the original petition on
September 23, 1992.

Subsequent to the 17th LCP national convention of October 1992, a special convention was called by the
SEC Management Committee on January 25 to 29, 1993 at Cagayan de Oro City to elect a different set of
officers for LCP. [The Batong group] allege that the required notices were not sent to several local
congregations and even fewer LCP members were permitted by [the Ao-As group] to attend the special
convention as evidenced by the list of official delegates contained in the minutes of the special convention.

On July 21, 1993, [the Batong Group] filed a Second Supplement to its petition for certiorari in the SEC En
Banc alleging the supervening events and seeking the review of an Order of the Hearing Officer dated
June 9, 1993 which enlisted the aid of the Secretary of the Department of Interior and Local Government
and the PNP Director General to enforce the writ of preliminary injunction.

Pending the resolution of the above-mentioned petitions, the management committee took control of
several church properties, replaced clergymen from their parsonages and froze all bank accounts in the
name of LCP.

[The Batong group] then filed a Petition for Mandamus and Damages with Prayer for Preliminary
Mandatory Injunction on August 19, 1993 seeking to unfreeze the bank accounts and recover the seized
buildings.

All of the aforementioned petitioners (sic) were denied by the SEC En Banc. A motion for reconsideration
was filed but the same was likewise denied.3

The Batong group then filed a Petition for Review with the Court of Appeals seeking to annul the Decision
of the Securities and Exchange Commission En Banc. In said Petition, the Batong group alleged that the
Ao-As group persisted in carrying out ultra vires and illegal acts, to wit:

(a) Private respondent Luis L. Ao-As, purportedly on the strength of a board action held at Baguio
on February 22-24, 1994 and of the assailed Order dated October 16, 1992, closed the premises of
the Gloria Dei School after school year 1993-1994 in an attempt to take-over the management and
operations of the said school. The closure of the Gloria Dei School is the subject of SEC Case No.
05-93-4463.

(b) On February 1, 1994, Rev. Eduardo Ladlad, acting as President of the LCP, executed a Contract
to Sell with Solid Gold Realty Corporation whereby he agreed to sell a portion of LCP’s property in
Cavite with an area of 7,218 square meters at a price of P1,000 per square meter or a total
of P7,218,000 with a down payment of P1,000,000.

(c) Upon application of the [Ao-As group], the SEC-SIDC issued an Order dated June 1, 1994 ex
parte and on June 14, 1994 at around 7 p.m., a certain Rev. Laking, using the Order of the SEC-
SIDC dated June 1, 1994 and October 16, 1992 writ of preliminary injunction, entered the
premises of the Abatan Hospital located in Baguias, Benguet Province, took over the management
and control of the Abatan Hospital and forced the pastor previously assigned therein – Pastor
Laapniten – to leave his post simply because Pastor Lapniten is identified with the Saquilayan
Group.4

On 30 June 1994, the Batong group filed with the Court of Appeals a motion for the issuance of a
Temporary Restraining Order and/or Preliminary Injunction. On 12 July 1994, the Court of Appeals issued
a Temporary Restraining Order to enjoin the Ao-As group "from implementing the contract to sell between
the Lutheran church in the Philippines (LCP) and Solid Gold Realty Corporation and from selling,
transferring, assigning and/or disposing of any other property of the LCP; to enjoin the Ao-As group
and/or those officers elected in their convention from enforcing or implementing the Order dated October
16, 1992 and the writ of preliminary injunction issued in SEC Case 3857."

On 22 September 1994, the Batong group filed a Motion/ Manifestation to cite Eduardo Ladlad, Harry Roa,
James Cerdenola and Luis Ao-As in contempt of court, alleging that the latter, on 15 September 1994,
entered the Olongapo Lutheran Church with six armed men and there and then padlocked the main gate
of the church. Consequently, Rev. Elmer Bañes, the assigned overseer at said church, was barred from
entering the premises on 17 September 1994.

On 10 October 1996, the Court of Appeals ruled in favor of the Batong group, disposing the petition as
follows:

WHEREFORE, the petition is hereby granted. The Decision dated August 25, 1993 of the SEC En Banc is
hereby RECONSIDERED and SET-ASIDE and the Orders of the SEC-SIDC dated September 3, 1992 and
October 16, 1992 are hereby ANNULLED and SET ASIDE. The SEC is hereby directed to conduct a new
election of the directors of the LCP consistent with the provisions of the Corporation Code.5

Hence, this petition, where the Ao-As group brings forth the following issues to be resolved by this Court:

I.

Whether or not the Court of Appeals gravely erred in utterly ignoring and disregarding all the evidence
adduced by [the Ao-As group], and in making findings of facts contradicted by the evidence on record and
not supported by any evidence whatsoever.

II.

Whether or not the Court of Appeals reversibly erred in ruling that SEC-SICD Case No. 3857 is a case of
forum shopping.

III.

Whether or not the Court of Appeals committed reversible error in declaring as invalid the manner of
elections of the Board of Directors of the Lutheran Church in the Philippines as provided for in its By-Laws.

IV.

Whether or not the Court of Appeals committed reversible error in ruling that the SEC-SICD had no
jurisdiction to call for a special election of the Board of Directors of the Lutheran Church in the
Philippines.6

In addition to the prayer to reverse the 10 October 1996 Decision and 3 March 1997 Resolution of the
Court of Appeals, and the revival of Resolution of the SEC En Banc in SEC-EB Case No. 330 and the Order
of the SEC-SIDC in Case No. 3857, the Ao-As group prays for the following:

1. x x x x

2. Declaring the Board of Directors elected at the National Convention called by the Management
Committee on January 25-27, 1993 in Cagayan de Oro as the legitimate members of the Board of
LCP;

3. Declaring all acts and resolutions passed by the Batong group invalid and of no legal effect; and

4. Ordering the Batong group to return all the properties seized from the LCP and to refrain from
the representing the LCP.7
The Ao-As group did not commit willful and deliberate forum shopping in the filing of SEC-SIDC Case No.
3857.

Since a ruling upholding the Court of Appeals on the issue of forum shopping would render all the other
issues in this petition moot, we resolve to pass upon the same at the onset.

The Ao-As group claims that the Court of Appeals reversibly erred in ruling that SEC-SICD Case No. 3857
is a case of forum shopping. The Court of Appeals had ruled:

Finally, SEC-SICD Case No. 3857 is a clear case of forum shopping. The acts of [the Batong group], as
embodied in several board resolutions, have already been raised and passed upon in other cases pending
at the time the [Ao-As group] instituted the present controversy.

The board resolutions denominated as LCP-BD-29-90 and LCP-BD-37-90 – authorizing the dissolution of
the LCP business office and termination of the employees connected therewith – was the subject of NLRC
CASE NOS. 03-01935-90 and 04-01979-90 pending before the National Labor Relations Commission.

The board resolution denominated as LCP-BD-28-90 authorizing the transfer of the LCP corporate records
from the Sta. Mesa Office to the Caloocan Office – was the subject of Civil Case No. 133394-CV and
131879-CV pending before the Metropolitan Trial Court of Manila, Branches 20 and 21 and subsequently
dismissed in view of the FORMULA OF CONCORD entered into between the parties.

On the other hand, the legality of the composition of the eleven-member LCP Board was already the
subject matter of SICD Case No. 3524 which was appealed to the SEC En Banc and docketed as SEC Case
No. 352.

SEC Case No. 3857 is not the first case where the [Ao-As group], or those with similar interests, have
asked for the appointment of a management committee. In SEC Case 3556 entitled "Exclesio Hipe and
Lutheran Church of the Philippines v. Thomas Batong, et al.", in a motion dated June 18, 1991, private
respondent Exclesio Hipe prayed for the appointment of a management committee for LCP. In an Order
dated August 15, 1991, the SEC-SICD ruled that the Motion for the Appointment of a Management
Committee and Accounting filed by the petitioners cannot be given due course considering that the same
is one of the incidents in SEC Case No. 3857 entitled Rev. Luis Ao-As, et al. vs. Thomas Batong now
pending in the sala of Hon. Elpidio Salgado". Petitioners knew that similar petitions have been previously
commenced because Atty. Oscar Almazan who is also a co-counsel in the case was the counsel of record
in SEC Case No. 3556 and the other cases.

Clearly, the act of the [Ao-as group] in filing multiple petitions involving the same issues constitutes forum
shopping and should be sanctioned with dismissal. x x x8

SEC-SICD Case No. 3857 is a petition for accounting with prayer for the appointment of a management
committee and the issuance of a writ of injunction. The Ao-As group claims that the issue involved in the
case is whether the Ao-As group is entitled to an accounting and to the creation of a management
committee due to the Batong group’s alleged dissipation and waste of the assets of the LCP, and the
subject matter is the act of dissipation and waste committed by the Batong group. On the other hand:

1. NLRC Cases No. 03-01935-90 and 04-01979-90 pending before the National Labor Relations
Commission, is a case for illegal termination, which allegedly "obviously involves a different cause
of action";

2. The cases pending before Branches 20 and 21 of the Municipal Trial Court of Manila, docketed as
Civil Cases No. 133394-CV and 131879-CV, respectively, are actions for forcible entry and unlawful
detainer; and

3. SEC-SICD Case No. 3556 puts in issue the validity of LCP Board resolutions LCP-BD-6-89 and
LCP-BD-7-89, where what are involved are the incidents resulting from the issuance of the
resolutions – the unjust termination of Mr. Exclesio Hipe as LCP Business Manager and treasurer
 and the illegal appointment of one Hildelberto Espejo in his place. SEC-SIDC Case No. 3524 puts in
issue the legality of the composition of the eleven-member LCP Board. These are allegedly different
issues from that of SEC-SIDC Case No. 3857 where the acts of respondents are claimed to the
basis of a prayer for accounting and appointment of a management committee.

As elucidated above, the causes of action under SEC-SIDC Case No. 3857 are the following:

First, the alleged non-liquidation and/or non-accounting of a part of the proceeds of the La Trinidad
land transaction in the amount of P64,000.00 by petitioner Thomas Batong;

Second, the alleged non-liquidation and/or unaccounting of cash advances in the aggregate
amount of P323,750.00 by petitioner Thomas Batong;

Third, the alleged dissipation and/or unaccounting of the LCP general fund in the amount of 4.8
million;

Fourth, the non-registration of the Leyte land purchased with LCP funds by petitioner Victorio
Saquilayan;

Fifth, severance of church-partnership relationship with Lutheran Church-Missouri Synod (LCMS);

and

Sixth, the transfer of LCP corporate books from the Sta. Mesa office to the Caloocan office.

The elements of forum shopping are: (a) identity of parties, or at least such parties as represent the same
interests in both actions; (b) identity of rights asserted and the relief prayed for, the relief being founded
on the same facts; and (c) the identity of the two preceding particulars, such that any judgment rendered
in the other action will, regardless of which party is successful, amount to res judicata in the action under
consideration.9

Otherwise stated, there is forum shopping where a litigant sues the same party against whom another
action or actions for the alleged violation of the same right and the enforcement of the same relief is/are
still pending. The defense of litis pendentia in one case is a bar to the other/others; and, a final judgment
is one that would constitute res judicata and thus would cause the dismissal of the rest. Absolute identity
of the parties is not required. It is enough that there is substantial identity of the parties. It is enough that
the party against whom the estoppel is set up is actually a party to the former case. There is identity of
causes of action if the same evidence will sustain the second action. The principle applies even if the relief
sought in the two cases may be different. Forum shopping consists of filing multiple suits involving the
same parties for the same cause of action, either simultaneously or successively, for the purpose of
obtaining a favorable judgment.10

As the present jurisprudence now stands, forum shopping can be committed in three ways: (1) filing
multiple cases based on the same cause of action and with the same prayer, the previous case not having
been resolved yet (litis pendentia); (2) filing multiple cases based on the same cause of action and the
same prayer, the previous case having been finally resolved (res judicata); and (3) filing multiple cases
based on the same cause of action but with different prayers (splitting of causes of action, where the
ground for dismissal is also either litis pendentia or res judicata11 ). If the forum shopping is not
considered willful and deliberate, the subsequent cases shall be dismissed without prejudice on one of the
two grounds mentioned above. However, if the forum shopping is willful and deliberate, both (or all, if
there are more than two) actions shall be dismissed with prejudice.12lavvphi1.net

The six grounds originally relied upon by the Ao-As group in SEC-SICD Case No. 3857 are entirely
different from the causes of action in NLRC Cases No. 03-01935-90 and 04-01979-90, Civil Cases No.
133394-CV and 131879-CV, and SEC-SICD Cases No. 3556 and 3524. It is true that the causes of action
in the latter cases were included as additional grounds in SEC-SICD Case No. 3857 for the appointment of
the management committee and for accounting "of all funds, properties and assets of LCP which may have
come into their possession during their incumbency as officers and/or directors of LCP."13 However, the
creation of a management committee and the prayer for accounting could not have been asked for in the
labor (NLRC Cases No. 03-01935-90 and 04-01979-90) and forcible entry (Civil Cases No. 133394-CV and
131879-CV) cases.

As regards the other SEC Cases, though, the Ao-As group could have indeed prayed for the creation of the
management committee and the accounting of the funds of the LCP. In fact, as stated by the Court of
Appeals, the petitioner in SEC-SICD Case No. 3556 had prayed for the appointment of a management
committee in a motion dated 18 June 1991. This motion, however, was subsequent to the filing of SEC-
SICD Case No. 3857 on 17 August 1990, for which reason the SEC-SICD ruled that such motion cannot be
given due course considering that it was one of the incidents of SEC-SIDC Case No. 3857. In effect, the
SEC-SIDC had denied the subsequent motion on the ground of litis pendentia. But should SEC-SICD Case
No. 3857, which contains the earlier prayer to create a management committee, be likewise dismissed?
Following the rules set forth in the preceding paragraphs, it would depend on whether the different SEC
cases constitute willful and deliberate forum shopping on the part of Ao-As group.

We hold that this is not a case of willful and deliberate forum shopping and, hence, the SEC-SICD Case
No. 3857, which contains the earlier prayer to create a management committee, should not be dismissed.
The reason for this is the strict evidentiary requirement needed to grant a prayer to create a management
committee. The power of the SEC14 to create a management committee is found in Section 6(d) of
Presidential Decree No. 902-A, as amended, which provides:

Sec. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following
powers:

d) To create and appoint a management committee, board or body upon petition or motu propio to
undertake the management of corporations, partnerships or other associations not supervised or regulated
by other government agencies in appropriate cases when there is imminent danger of dissipation, loss,
wastage or destruction of assets or other properties or paralization of business operations of such
corporations or entities which may be prejudicial to the interest of the minority stockholders, parties-
litigants or the general public.

Evidently, it should be difficult to deduce the "imminent danger of dissipation, loss, wastage or destruction
of assets or other properties" from an allegation of a single act of previous misappropriation or dissipation
on the part of the Batong group. It is often only when the previous misappropriations and dissipations
have become extensive and out of control that it can be candidly said that there is an imminent danger of
further dissipation. The Ao-As group cannot be faulted therefore for not praying for the creation of a
management committee in the first couple of cases it filed with the SEC, and neither can they be faulted
for using the causes of action in previously filed cases to prove their allegation of imminent dissipation.
We cannot rule out the possibility that the danger of imminent dissipation of the corporate assets became
apparent only in the acts of the respondents subsequent to the filing of the first two SEC cases.

The creation of a management committee is not warranted by the facts of the case.

The Ao-As group claims that the Court of Appeals "unceremoniously disregarded all the undisputed
testimonial and documentary evidence presented before the SEC,"15 and strongly pointed to their evidence
which "clearly show the dissipation, wastage and loss of LCP funds and assets."16 These pieces of evidence
supposedly proved the following:

1. The alleged anomaly concerning the sale of the land and the purchase of another land, both
located in La Trinidad. The La Trinidad Land Transaction, the proceeds whereof were allegedly
unliquidated, was testified to by petitioner Ao-As and Mr. Excelsio Hipe before the SEC-SICD in a
hearing conducted on 11 September 1990.

2. Unliquidated cash advances and unaccounted funds. Petitioners presented evidence to prove the
failure of respondent Batong to liquidate cash advances and account for P4,000,000 of LCP funds.
 3. Purchase of Leyte Land in the name of respondent Saquilayan with LCP funds. Respondent LCP
Vice-President Victorio Y. Saquilayan allegedly purchased a parcel of land in Albuera, Leyte in his
name, using LCP funds. Respondent Saquilayan subsequently donated to the LCP, and explained
that the purchase in his name was upon advice of LCP’s lawyers to comply with the rulings
in Republic of the Philippines v. Hon. Arsenio M. Gonong17 and Republic of the Philippines v. Iglesia
Ni Cristo.18

4. Severance of partner-church relationship between the LCP and the LCMS. Respondents issued
LCP Board Resolution No. LCP-BD-28-90 severing all relations with the Lutheran Church-Missouri
Synod (LCMS), allegedly in violation of LCP Board Resolution No. LCP-BD-33-70 which stated that
"all actions taken by LCP in convention can only be amended, modified and changed by LCP in
convention."

5. Taking of LCP Books of Account. Respondent Batong, accompanied by members of the LCP

Board and about 15 armed security guards allegedly barged into the premises of the LCP in Old
Sta. Mesa, Manila, and removed all of the official records and documents of the LCP (including the
books of account, official receipts, check and journal vouchers, official papers and titles to
property) and had the same relocated to his residence in Caloocan City and to the offices of
Immanuel Lutheran Church in Malabon.

The Court of Appeals had ruled:

Nothing in [Ao-As group’s] evidence presented in support for their application for a management
committee showed an impending or imminent danger of dissipation of funds. In the assailed SEC-SICD
Order dated September 3, 1992, the appointment of a management committee was justified because of
"acquisition of some lands using the corporate funds . . . in the name of some person other than the LCP,
and various cash advances of corporate funds by the respondents not liquidated up to the present".

The SEC-SICD Order refers to the La Trinidad and Leyte land transactions and the alleged non-liquidation
or unaccountability of cash advances and other funds – which constitutes the four causes of action alleged
in the petition.

[The Ao-As group] admit[s] that the La Trinidad Land transactions [were] consummated in 1984 while the
Leyte transaction was made in 1989. Both occurred prior to the Commencement (sic) of the present
petition in 1990. Similarly, the alleged unliquidated cash advances referred to accumulated funds long
withdrawn in the past by Dr. Thomas Batong "(in varying amounts) for personal, travel and other
miscellaneous purposes, all in the aggregate amount of not less than P 323,750.00". And the alleged
unaccounted funds referred to the "trial balance of LCP as of September 15, 1989".

Notably, the remaining two causes of action in the aforementioned petition do not involve dissipation of
funds, namely: (i) the severance of partner-church relationship between LCP and Lutheran Church-
Missouri Synod; and (ii) the transfer of corporate books from the Sta. Mesa Office to Caloocan City.

All of the grounds relied upon by [the Ao-As group] pertain to past delinquencies for which there are other
available remedies such as accounting and reconveyance. The [Ao-As group] did not allege, much less
prove, any present or imminent loss or destruction of LCP properties and assets. At best, it expresses
merely a general apprehension for possible mismanagement by respondent on the basis of the
aforementioned past transactions.

It must be stressed that the appointment of a management committee inevitably results in the drastic
summary removal of all directors and officers of LCP. Clearly, the appointment of a management
committee is not justified due to the failure of only two (2) of the LCP Board members to liquidate past
cash advances and other transactions involving corporate property and funds.

Where the corporation is solvent, a receiver will not be appointed because of past misconduct and a
subsequent mere apprehension of a future misdoing, where the present situation and the prospects for
the future are not such as to warrant a receivership. x x x"
Significantly, the SEC En Banc even pointed out that: "the question of whether or not the [Batong group]
have to account for all funds, properties and assets of LCP which may come into their possession as
directors and/or officers of LCP is still to be resolved by the hearing officer after trial on the merits."

Under prevailing law, the SEC-SICD should have refused the appointment of a management committee.

"It is the general rule that a receiver (or a management committee) will not be appointed unless it
appears that the appointment is necessary either to prevent fraud, or to save the property from fraud or
threatened destruction, or at least in case of solvent corporation x x x. The burden of proof is a heavy one
which requires a clear showing that an emergency exists.

"x x x Similarly, a receiver (or a management committee) should not be appointed in an action by a
minority stockholder against corporate officers for an accounting where the corporation is solvent and
going concern and a receiver is not necessary to preserve the corporate property pending the accounting".

Furthermore, a management committee should not be created when there was an adequate remedy
available to private respondents for the liquidation of unaccounted funds.19

The Court of Appeals went on to rule that the members of the Ao-As group "have not positively shown
that the said funds are unaccounted for,"20 and analyzed the evidence presented by the Ao-As group to
illustrate that the unaccounted funds were only P1,572.43, "which may be attributable to adjustment
errors but certainly not a case of misappropriation or misuse."21

The Ao-As group maintains that the unaccounted funds amount to around P4.8 million, and claim that if
the Court of Appeals "had only given the [the Ao-As group] a chance to prove their allegations (concerning
acts committed by respondents subsequent to the creation of the management committee), then it would
have confirmed the earlier determination made by the SEC-SICD regarding the necessity for the creation
of the management committee."22 It further asseverates:

20. The acts constituting [the Ao-As group’s] six causes of action in the petition filed with the SEC-SICD
(the La Trinidad land transaction, the unliquidated cash advances, the unaccounted funds amounting
to P4.8 million, the Leyte land transaction, the severance of the sister-church relationship and forcible
removal of the LCP books of account) could not be characterized merely as "past delinquencies". The six
causes of action and the subsequent acts of the [Batong group], after the filing of the petition with the
SEC-SICD, clearly show a continuing and deliberate scheme of the dissipation and wastage of LCP
properties and assets, which if unrestricted would cause further destruction of LCP assets and paralyzation
of its operations, as it had already done. The creation of the Management Committee was, therefore,
perfectly legal and justified. And the ruling of respondent Court of Appeals that these acts do not justify its
appointment is, [the Ao-As group] humbly submit, reversible error.

21. In addition, the CA Decision also declared that "in any event, the past anomalies were only done by
some of the Batong group." This is erroneous. Under the By-Laws of the LCP, the Board of Directors is in
charge of the disbursement of funds. Sections 1 and 2 of Article 6 of the LCP By-Laws state:

"Section 1. The President of the LCP shall be given the following executive powers and supervisory duties:

xxx xxx xxx

b. The President together with two other members of the LCP Board of Directors, may
authorize the release of surplus funds in emergencies or in cases of sudden need.

xxx xxx xxx

Section 2. The Board of Directors of the LCP

xxx xxx xxx

 c. The Board of Directors shall prepare the annual budget of the LCP.

d. The Board of Directors shall be responsible for the annual auditing of all the LCP Properties and
may initiate special auditing at any time."

22. From the foregoing, it is clear that respondent Batong did not act alone, but in concert with the other
members of the LCP Board. The creation of the management committee was therefore justified.

23. The CA Decision also noted that since there were other remedies available to the petitioners to correct
these anomalies, the creation of the management committee was unjustified. [The Ao-As group] again
humbly submit again (sic) that respondent Court of Appeals erred when it made this statement. The LCP
management committee was created precisely because of the extreme urgency that [mere] caused by the
continued dissipation, loss and wastage of LCP funds and assets by the Batong group. If [the Ao-As group]
were to avail of these so-called available remedies then by the time a decision is to be rendered in these
"available remedies" the assets and funds of the LCP would have indubitably been lost forever since the
dissipation, loss and wastage were then, and still is, an on going process. Consequently, it is clearly
unreasonable for respondent Court of Appeals to declare that the [Ao-As group] should have first availed
of these so-called remedies.23

Even without delving into the analysis of the prosecution evidence concerning the six causes of action and
the alleged acts subsequent to these six causes of action, it is already appropriate for us to rule that the
facts as they appear to us now do not warrant the creation of a management committee.

Refusal to allow stockholders (or members of a non-stock corporation) to examine books of the company
is not a ground for appointing a receiver (or creating a management committee) since there are other
adequate remedies, such as a writ of mandamus.24 Misconduct of corporate directors or other officers is
not a ground for the appointment of a receiver where there are one or more adequate legal action against
the officers, where they are solvent, or other remedies.25

The appointment of a receiver for a going corporation is a last resort remedy, and should not be employed
when another remedy is available. Relief by receivership is an extraordinary remedy and is never
exercised if there is an adequate remedy at law or if the harm can be prevented by an injunction or a
restraining order. Bad judgment by directors, or even unauthorized use and misapplication of the
company’s funds, will not justify the appointment of a receiver for the corporation if appropriate relief can
otherwise be had.26

The fact that the President of the LCP needs the concurrence of only two other directors to authorize the
release of surplus funds plainly contradicts the conclusion of conspiracy among the presently 11-man
board. Neither does the fact that the Board of Directors of the LCP prepares the annual budget and the
annual auditing of properties of the LCP justify the conclusion that the alleged acts of respondent Batong
was done in concert with the other directors. There should have been evidence that such dissipation took
place with the knowledge and express or implied consent of most or the entire board. Good faith is always
presumed.27 As it is the obligation of one who alleges bad faith to prove it, so should he prove that such
bad faith was shared by all persons to whom he attributes the same. The last resort remedy of replacing
the entire board, therefore, with a management committee, is uncalled for.

The Court of Appeals erred in declaring as invalid the manner of elections of the Board of Directors of the
LCP as provided in its By-Laws.

The Ao-As group stresses that the Court of Appeals committed reversible error in declaring as invalid the
manner of elections of the Board of Directors of the Lutheran Church in the Philippines as provided in its
By-Laws. The Court of Appeals ruled:

The Court notes that the LCP By-Laws provide for a special procedure for the election of its directors. This
was the procedure followed by both the [Batong group] and the [Ao-As group].

"Section 2. Composition of the Board of Directors of LCP.

 a. The Board of Directors shall be composed of the President of LCP and the President and lay
representative of each District.

b. Newly elected members of the LCP Board of Directors shall assume their positions immediately
after LCP conventions or the October LCP Board of Directors’ meeting in the year in which they are
elected."

However, Section 24 of the Corporation Code provides that "[a]t all elections of directors or trustees,
there must be present, either in person or by representative to act by written proxy, x x x if there be no
capital stock, a majority of the members entitled to vote."

It is clear from Section 24 that in the election of the trustees of a non-stock corporation, it is necessary
that at least "a majority of the members entitled to vote" must be present at the meeting held for the
purpose. It follows that trustees cannot be elected by zones or regions, each zone or region electing
independently and separately a member of the board of trustees of the corporation, such method being
violative of Section 24. (SEC Opinions, Jan. 30, 1969, April 1, 1981). The election of the directors by
district or regions as provided in the LCP By-Laws where a majority of the members are not present is
inconsistent with the Corporation [Code] and must be struck down as invalid. Consequently, the directors
elected by district cannot be considered as bona fide directors. Even the election of LCP officers in the
SEC-SICD sponsored national convention of the LCP must be considered as invalid.28

As argued by the Ao-As group, however, the validity of the LCP By-Laws providing for a special procedure
in the election of the LCP Board of Directors was never put in issue, either by the Ao-As group or the
Batong group. The Court of Appeals, therefore, should have refrained from passing upon such issue, motu
propio. According to Rule 51, Section 8 of the Rules of Court, which pertains to matters which may be
decided on appeal:

Sec. 8. Questions that may be decided. – No error which does not affect the jurisdiction over the subject
matter or the validity of the judgment appealed from or the proceedings therein will be considered unless
stated in the assignment of errors, or closely related to or dependent on an assigned error and properly
argued in the brief, save as the court may pass upon plain errors and clerical errors.

The ruling of the SEC En Banc setting aside the SEC-SICD determination that LCP Board of Directors was
illegally constituted has therefore become final and executory, subject to the determination by the SEC-
SICD of the seven members that should comprise the Board, as likewise provided in said Decision.29

Even the Batong group agrees with the Ao-As group on the validity of the by-laws provision concerning
the election of the directors by districts:

[The Batong group] respectfully submit[s] that the matter of how the directors or other leaders of a
church shall be chosen is a matter of ecclesiastical law or custom which is outside the jurisdiction of civil
courts. Hence, even assuming arguendo, that the mode of election of the LCP is not strictly in accordance
with the Corporation Code, it was improper for the Securities and Exchange Commission to apply the
provisions of the said Code to the LCP.30

In any case, the stipulation in the By-Laws is not contrary to the Corporation Code. Section 89 of the
Corporation Code pertaining to non-stock corporations provides that "(t)he right of the members of any
class or classes (of a non-stock corporation) to vote may be limited, broadened or denied to the extent
specified in the articles of incorporation or the by-laws."31 This is an exception to Section 6 of the same
code where it is provided that "no share may be deprived of voting rights except those classified and
issued as ‘preferred’ or ‘redeemable’ shares, unless otherwise provided in this Code."32 The stipulation in
the By-Laws providing for the election of the Board of Directors by districts is a form of limitation on the
voting rights of the members of a non-stock corporation as recognized under the aforesaid Section 89.
Section 24, which requires the presence of a majority of the members entitled to vote in the election of
the board of directors, applies only when the directors are elected by the members at large, such as is
always the case in stock corporations by virtue of Section 6.
WHEREFORE, the Decision of the Court of Appeals annulling and setting aside the order to create a
management committee is thereby AFFIRMED, with the MODIFICATION that every subsequent election of
the directors of Lutheran Church in the Philippines shall henceforth be in accordance with the By-Laws and
Articles of Incorporation of the same. Costs against petitioners.

SO ORDERED.

G.R. No. 153468 August 17, 2006

PAUL LEE TAN, ANDREW LIUSON, ESTHER WONG, STEPHEN CO, JAMES TAN, JUDITH TAN,
ERNESTO TANCHI JR., EDWIN NGO, VIRGINIA KHOO, SABINO PADILLA JR., EDUARDO P.
LIZARES and GRACE CHRISTIAN HIGH SCHOOL, Petitioners,
vs.
PAUL SYCIP and MERRITTO LIM, Respondents.

DECISION

PANGANIBAN, CJ.:

For stock corporations, the "quorum" referred to in Section 52 of the Corporation Code is based on the
number of outstanding voting stocks. For nonstock corporations, only those who are actual, living
members with voting rights shall be counted in determining the existence of a quorum during members’
meetings. Dead members shall not be counted.

The Case

The present Petition for Review on Certiorari [1] under Rule 45 of the Rules of Court seeks the reversal of
the January 23 2 and May 7, 2002, 3 Resolutions of the Court of Appeals (CA) in CA-GR SP No. 68202. The
first assailed Resolution dismissed the appeal filed by petitioners with the CA. Allegedly, without the
proper authorization of the other petitioners, the Verification and Certification of Non-Forum Shopping
were signed by only one of them -- Atty. Sabino Padilla Jr. The second Resolution denied reconsideration.

The Facts

Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit educational corporation with
fifteen (15) regular members, who also constitute the board of trustees. [4] During the annual members’
meeting held on April 6, 1998, there were only eleven (11) [5] living member-trustees, as four (4) had
already died. Out of the eleven, seven (7) 6 attended the meeting through their respective proxies. The
meeting was convened and chaired by Atty. Sabino Padilla Jr. over the objection of Atty. Antonio C. Pacis,
who argued that there was no quorum. 7 In the meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia
Khoo, and Judith Tan were voted to replace the four deceased member-trustees.

When the controversy reached the Securities and Exchange Commission (SEC), petitioners maintained
that the deceased member-trustees should not be counted in the computation of the quorum because,
upon their death, members automatically lost all their rights (including the right to vote) and interests in
the corporation.

SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting null and void for lack of quorum.
She held that the basis for determining the quorum in a meeting of members should be their number as
specified in the articles of incorporation, not simply the number of living members. 8 She explained that
the qualifying phrase "entitled to vote" in Section 24 9 of the Corporation Code, which provided the basis
for determining a quorum for the election of directors or trustees, should be read together with Section
89. 10

The hearing officer also opined that Article III (2) 11 of the By-Laws of GCHS, insofar as it prescribed the
mode of filling vacancies in the board of trustees, must be interpreted in conjunction with Section 29 12 of
the Corporation Code. The SEC en banc denied the appeal of petitioners and affirmed the Decision of the
hearing officer in toto. 13 It found to be untenable their contention that the word "members," as used in
Section 52 14 of the Corporation Code, referred only to the living members of a nonstock corporation. 15

As earlier stated, the CA dismissed the appeal of petitioners, because the Verification and Certification of
Non-Forum Shopping had been signed only by Atty. Sabino Padilla Jr. No Special Power of Attorney had
been attached to show his authority to sign for the rest of the petitioners.

Hence, this Petition. 16

Issues

Petitioners state the issues as follows:

"Petitioners principally pray for the resolution of the legal question of whether or not in NON-STOCK
corporations, dead members should still be counted in determination of quorum for purposed of
conducting the Annual Members’ Meeting.

"Petitioners have maintained before the courts below that the DEAD members should no longer be
counted in computing quorum primarily on the ground that members’ rights are ‘personal and non-
transferable’ as provided in Sections 90 and 91 of the Corporation Code of the Philippines.

"The SEC ruled against the petitioners solely on the basis of a 1989 SEC Opinion that did not even involve
a non-stock corporation as petitioner GCHS.

"The Honorable Court of Appeals on the other hand simply refused to resolve this question and instead
dismissed the petition for review on a technicality – the failure to timely submit an SPA from the
petitioners authorizing their co-petitioner Padilla, their counsel and also a petitioner before the Court of
Appeals, to sign the petition on behalf of the rest of the petitioners.

"Petitioners humbly submit that the action of both the SEC and the Court of Appeals are not in accord with
law particularly the pronouncements of this Honorable Court in Escorpizo v. University of Baguio (306
SCRA 497), Robern Development Corporation v. Quitain (315 SCRA 150,) and MC Engineering, Inc. v.
NLRC, (360 SCRA 183). Due course should have been given the petition below and the merits of the case
decided in petitioners’ favor." 17

In sum, the issues may be stated simply in this wise: 1) whether the CA erred in denying the Petition
below, on the basis of a defective Verification and Certification; and 2) whether dead members should still
be counted in the determination of the quorum, for purposes of conducting the annual members’ meeting.

The Court’s Ruling

The present Petition is partly meritorious.

Procedural Issue:

Verification and Certification of Non-Forum Shopping

The Petition before the CA was initially flawed, because the Verification and Certification of Non-Forum
Shopping were signed by only one, not by all, of the petitioners; further, it failed to show proof that the
signatory was authorized to sign on behalf of all of them. Subsequently, however, petitioners submitted a
Special Power of Attorney, attesting that Atty. Padilla was authorized to file the action on their behalf. 18

In the interest of substantial justice, this initial procedural lapse may be excused. 19 There appears to be
no intention to circumvent the need for proper verification and certification, which are aimed at assuring
the truthfulness and correctness of the allegations in the Petition for Review and at discouraging forum
shopping. 20 More important, the substantial merits of petitioners’ case and the purely legal question
involved in the Petition should be considered special circumstances 21 or compelling reasons that justify an
exception to the strict requirements of the verification and the certification of non-forum shopping. 22

Main Issue:

Basis for Quorum

Generally, stockholders’ or members’ meetings are called for the purpose of electing directors or
trustees 23 and transacting some other business calling for or requiring the action or consent of the
shareholders or members, 24 such as the amendment of the articles of incorporation and bylaws, sale or
disposition of all or substantially all corporate assets, consolidation and merger and the like, or any other
business that may properly come before the meeting.

Under the Corporation Code, stockholders or members periodically elect the board of directors or trustees,
who are charged with the management of the corporation. 25 The board, in turn, periodically elects officers
to carry out management functions on a day-to-day basis. As owners, though, the stockholders or
members have residual powers over fundamental and major corporate changes.

While stockholders and members (in some instances) are entitled to receive profits, the management and
direction of the corporation are lodged with their representatives and agents -- the board of directors or
trustees. 26 In other words, acts of management pertain to the board; and those of ownership, to the
stockholders or members. In the latter case, the board cannot act alone, but must seek approval of the
stockholders or members. 27

Conformably with the foregoing principles, one of the most important rights of a qualified shareholder or
member is the right
to vote -- either personally or by proxy -- for the directors or trustees who are to manage the corporate
affairs. 28 The right to choose the persons who will direct, manage and operate the corporation is
significant, because it is the main way in which a stockholder can have a voice in the management of
corporate affairs, or in which a member in a nonstock corporation can have a say on how the purposes
and goals of the corporation may be achieved. 29 Once the directors or trustees are elected, the
stockholders or members relinquish corporate powers to the board in accordance with law.

In the absence of an express charter or statutory provision to the contrary, the general rule is that every
member of a nonstock corporation, and every legal owner of shares in a stock corporation, has a right to
be present and to vote in all corporate meetings. Conversely, those who are not stockholders or members
have no right to vote. 30 Voting may be expressed personally, or through proxies who vote in their
representative capacities. 31 Generally, the right to be present and to vote in a meeting is determined by
the time in which the meeting is held. 32

Section 52 of the Corporation Code states:

"Section 52. Quorum in Meetings. – Unless otherwise provided for in this Code or in the by-laws, a
quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a
majority of the members in the case of non-stock corporations."

In stock corporations, the presence of a quorum is ascertained and counted on the basis of the
outstanding capital stock, as defined by the Code thus:

"SECTION 137. Outstanding capital stock defined. – The term ‘outstanding capital stock’ as used in this
Code, means the total shares of stock issued under binding subscription agreements to subscribers or
stockholders, whether or not fully or partially paid, except treasury shares." (Underscoring supplied)

The Right to Vote in

Stock Corporations
The right to vote is inherent in and incidental to the ownership of corporate stocks. 33 It is settled that
unissued stocks may not be voted or considered in determining whether a quorum is present in a
stockholders’ meeting, or whether a requisite proportion of the stock of the corporation is voted to adopt a
certain measure or act. Only stock actually issued and outstanding may be voted. 34 Under Section 6 of
the Corporation Code, each share of stock is entitled to vote, unless otherwise provided in the articles of
incorporation or declared delinquent 35 under Section 67 of the Code.

Neither the stockholders nor the corporation can vote or represent shares that have never passed to the
ownership of stockholders; or, having so passed, have again been purchased by the corporation. 36 These
shares are not to be taken into consideration in determining majorities. When the law speaks of a
given proportion of the stock, it must be construed to mean the shares that have passed from the
corporation, and that may be voted. 37

Section 6 of the Corporation Code, in part, provides:

"Section 6. Classification of shares. – The shares of stock of stock corporations may be divided into classes
or series of shares, or both, any of which classes or series of shares may have such rights, privileges or
restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of
voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise
provided in this Code: Provided, further, that there shall always be a class or series of shares which have
complete voting rights.

xxxxxxxxx

"Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the
holders of such shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporation
property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or other corporations;

7. Investment of corporate funds in another corporation or business in accordance with this Code; and

8. Dissolution of the corporation.

"Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular
corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights."

Taken in conjunction with Section 137, the last paragraph of Section 6 shows that the intention of the
lawmakers was to base the quorum mentioned in Section 52 on the number of outstanding voting
stocks. 38

The Right to Vote in

Nonstock Corporations
In nonstock corporations, the voting rights attach to membership. 39 Members vote as persons, in
accordance with the law and the bylaws of the corporation. Each member shall be entitled to one vote
unless so limited, broadened, or denied in the articles of incorporation or bylaws. 40 We hold that when the
principle for determining the quorum for stock corporations is applied by analogy to nonstock
corporations, only those who are actual members with voting rights should be counted.

Under Section 52 of the Corporation Code, the majority of the members representing the actual number of
voting rights, not
the number or numerical constant that may originally be specified in the articles of incorporation,
constitutes the quorum. 41

The March 3, 1986 SEC Opinion 42 cited by the hearing officer uses the phrase "majority vote of the
members"; likewise Section 48 of the Corporation Code refers to 50 percent of 94 (the number of
registered members of the association mentioned therein) plus one. The best evidence of who are the
present members of the corporation is the "membership book"; in the case of stock corporations, it is the
stock and transfer book. 43

Section 25 of the Code specifically provides that a majority of the directors or trustees, as fixed in the
articles of incorporation, shall constitute a quorum for the transaction of corporate business (unless the
articles of incorporation or the bylaws provide for a greater majority). If the intention of the lawmakers
was to base the quorum in the meetings of stockholders or members on their absolute number as fixed in
the articles of incorporation, it would have expressly specified so. Otherwise, the only logical conclusion is
that the legislature did not have that intention.

Effect of the Death

of a Member or Shareholder

Having thus determined that the quorum in a members’ meeting is to be reckoned as the actual number
of members of the corporation, the next question to resolve is what happens in the event of the death of
one of them.

In stock corporations, shareholders may generally transfer their shares. Thus, on the death of a
shareholder, the executor or administrator duly appointed by the Court is vested with the legal title to the
stock and entitled to vote it. Until a settlement and division of the estate is effected, the stocks of the
decedent are held by the administrator or executor. 44

On the other hand, membership in and all rights arising from a nonstock corporation are personal and
non-transferable, unless the articles of incorporation or the bylaws of the corporation provide
otherwise. 45 In other words, the determination of whether or not "dead members" are entitled to exercise
their voting rights (through their executor or administrator), depends on those articles of incorporation or
bylaws.

Under the By-Laws of GCHS, membership in the corporation shall, among others, be terminated by the
death of the member. 46 Section 91 of the Corporation Code further provides that termination extinguishes
all the rights of a member of the corporation, unless otherwise provided in the articles of incorporation or
the bylaws.

Applying Section 91 to the present case, we hold that dead members who are dropped from the
membership roster in the manner and for the cause provided for in the By-Laws of GCHS are not to be
counted in determining the requisite vote in corporate matters or the requisite quorum for the annual
members’ meeting. With 11 remaining members, the quorum in the present case should be 6. Therefore,
there being a quorum, the annual members’ meeting, conducted with six 47 members present, was valid.

Vacancy in the

Board of Trustees
As regards the filling of vacancies in the board of trustees, Section 29 of the Corporation Code provides:

"SECTION 29. Vacancies in the office of director or trustee. -- Any vacancy occurring in the board of
directors or trustees other than by removal by the stockholders or members or by expiration of term, may
be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting
a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting
called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only for the
unexpired term of his predecessor in office."

Undoubtedly, trustees may fill vacancies in the board, provided that those remaining still constitute a
quorum. The phrase "may be filled" in Section 29 shows that the filling of vacancies in the board by the
remaining directors or trustees constituting a quorum is merely permissive, not
mandatory. 48 Corporations, therefore, may choose how vacancies in their respective boards may be filled
up -- either by the remaining directors constituting a quorum, or by the stockholders or members in a
regular or special meeting called for the purpose. 49

The By-Laws of GCHS prescribed the specific mode of filling up existing vacancies in its board of directors;
that is, by a majority vote of the remaining members of the board. 50

While a majority of the remaining corporate members were present, however, the "election" of the four
trustees cannot be legally upheld for the obvious reason that it was held in an annual meeting of the
members, not of the board of trustees. We are not unmindful of the fact that the members of GCHS
themselves also constitute the trustees, but we cannot ignore the GCHS bylaw provision, which specifically
prescribes that vacancies in the board must be filled up by the remaining trustees. In other words, these
remaining member-trustees must sit as a board in order to validly elect the new ones.

Indeed, there is a well-defined distinction between a corporate act to be done by the board and that by
the constituent members of the corporation. The board of trustees must act, not individually or separately,
but as a body in a lawful meeting. On the other hand, in their annual meeting, the members may be
represented by their respective proxies, as in the contested annual members’ meeting of GCHS.

WHEREFORE, the Petition is partly GRANTED.The assailed Resolutions of the Court of Appeals are hereby
REVERSED AND SET ASIDE. The remaining members of the board of trustees of Grace Christian High
School (GCHS) may convene and fill up the vacancies in the board, in accordance with this Decision. No
pronouncement as to costs in this instance.

SO ORDERED.

G.R. No. 151969               September 4, 2009

VALLE VERDE COUNTRY CLUB, INC., ERNESTO VILLALUNA, RAY GAMBOA, AMADO M.
SANTIAGO, JR., FORTUNATO DEE, AUGUSTO SUNICO, VICTOR SALTA, FRANCISCO ORTIGAS III,
ERIC ROXAS, in their capacities as members of the Board of Directors of Valle Verde Country
Club, Inc., and JOSE RAMIREZ, Petitioners,
vs.
VICTOR AFRICA, Respondent.

DECISION

BRION, J.:

In this petition for review on certiorari,1 the parties raise a legal question on corporate governance: Can
the members of a corporation’s board of directors elect another director to fill in a vacancy caused by the
resignation of a hold-over director?

THE FACTUAL ANTECEDENTS

On February 27, 1996, during the Annual Stockholders’ Meeting of petitioner Valle Verde Country Club,
Inc. (VVCC), the following were elected as members of the VVCC Board of Directors: Ernesto Villaluna,
Jaime C. Dinglasan (Dinglasan), Eduardo Makalintal (Makalintal), Francisco Ortigas III, Victor Salta,
Amado M. Santiago, Jr., Fortunato Dee, Augusto Sunico, and Ray Gamboa.2 In the years 1997, 1998,
1999, 2000, and 2001, however, the requisite quorum for the holding of the stockholders’ meeting could
not be obtained. Consequently, the above-named directors continued to serve in the VVCC Board in a
hold-over capacity.

On September 1, 1998, Dinglasan resigned from his position as member of the VVCC Board. In a meeting
held on October 6, 1998, the remaining directors, still constituting a quorum of VVCC’s nine-member
board, elected Eric Roxas (Roxas) to fill in the vacancy created by the resignation of Dinglasan.

A year later, or on November 10, 1998, Makalintal also resigned as member of the VVCC Board. He was
replaced by Jose Ramirez (Ramirez), who was elected by the remaining members of the VVCC Board on
March 6, 2001.

Respondent Africa (Africa), a member of VVCC, questioned the election of Roxas and Ramirez as members
of the VVCC Board with the Securities and Exchange Commission (SEC) and the Regional Trial Court
(RTC), respectively. The SEC case questioning the validity of Roxas’ appointment was docketed as SEC
Case No. 01-99-6177. The RTC case questioning the validity of Ramirez’ appointment was docketed as
Civil Case No. 68726.

In his nullification complaint3 before the RTC, Africa alleged that the election of Roxas was contrary to
Section 29, in relation to Section 23, of the Corporation Code of the Philippines (Corporation Code). These
provisions read:

Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code, the corporate
powers of all corporations formed under this Code shall be exercised, all business conducted and all
property of such corporations controlled and held by the board of directors or trustees to be elected from
among the holders of stocks, or where there is no stock, from among the members of the corporation,
who shall hold office for one (1) year until their successors are elected and qualified.

xxxx

Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board of
directors or trustees other than by removal by the stockholders or members or by expiration of term, may
be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a
quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called
for that purpose. A director or trustee so elected to fill a vacancy shall be elected only for the unexpired
term of his predecessor in office. xxx. [Emphasis supplied.]

Africa claimed that a year after Makalintal’s election as member of the VVCC Board in 1996, his
[Makalintal’s] term – as well as those of the other members of the VVCC Board – should be considered to
have already expired. Thus, according to Africa, the resulting vacancy should have been filled by the
stockholders in a regular or special meeting called for that purpose, and not by the remaining members of
the VVCC Board, as was done in this case.

Africa additionally contends that for the members to exercise the authority to fill in vacancies in the board
of directors, Section 29 requires, among others, that there should be an unexpired term during which the
successor-member shall serve. Since Makalintal’s term had already expired with the lapse of the one-year
term provided in Section 23, there is no more "unexpired term" during which Ramirez could serve.

Through a partial decision4 promulgated on January 23, 2002, the RTC ruled in favor of Africa and
declared the election of Ramirez, as Makalintal’s replacement, to the VVCC Board as null and void.

Incidentally, the SEC issued a similar ruling on June 3, 2003, nullifying the election of Roxas as member of
the VVCC Board, vice hold-over director Dinglasan. While VVCC manifested its intent to appeal from the
SEC’s ruling, no petition was actually filed with the Court of Appeals; thus, the appellate court considered
the case closed and terminated and the SEC’s ruling final and executory.5

THE PETITION

VVCC now appeals to the Court to assail the RTC’s January 23, 2002 partial decision for being contrary to
law and jurisprudence. VVCC made a direct resort to the Court via a petition for review
on certiorari, claiming that the sole issue in the present case involves a purely legal question.

As framed by VVCC, the issue for resolution is whether the remaining directors of the corporation’s Board,
still constituting a quorum, can elect another director to fill in a vacancy caused by the resignation of a
hold-over director.

Citing law and jurisprudence, VVCC posits that the power to fill in a vacancy created by the resignation of
a hold-over director is expressly granted to the remaining members of the corporation’s board of
directors.

Under the above-quoted Section 29 of the Corporation Code, a vacancy occurring in the board of directors
caused by the expiration of a member’s term shall be filled by the corporation’s stockholders. Correlating
Section 29 with Section 23 of the same law, VVCC alleges that a member’s term shall be for one
year and until his successor is elected and qualified; otherwise stated, a member’s term expires only
when his successor to the Board is elected and qualified. Thus, "until such time as [a successor is] elected
or qualified in an annual election where a quorum is present," VVCC contends that "the term of [a
member] of the board of directors has yet not expired."

As the vacancy in this case was caused by Makalintal’s resignation, not by the expiration of his term,
VVCC insists that the board rightfully appointed Ramirez to fill in the vacancy.

In support of its arguments, VVCC cites the Court’s ruling in the 1927 El Hogar6 case which states:

Owing to the failure of a quorum at most of the general meetings since the respondent has been in
existence, it has been the practice of the directors to fill in vacancies in the directorate by choosing
suitable persons from among the stockholders. This custom finds its sanction in Article 71 of the By-Laws,
which reads as follows:

Art. 71. The directors shall elect from among the shareholders members to fill the vacancies that may
occur in the board of directors until the election at the general meeting.

xxxx

Upon failure of a quorum at any annual meeting the directorate naturally holds over and continues to
function until another directorate is chosen and qualified. Unless the law or the charter of a corporation
expressly provides that an office shall become vacant at the expiration of the term of office for which the
officer was elected, the general rule is to allow the officer to hold over until his successor is duly qualified.
Mere failure of a corporation to elect officers does not terminate the terms of existing officers nor dissolve
the corporation. The doctrine above stated finds expression in article 66 of the by-laws of the respondent
which declares in so many words that directors shall hold office "for the term of one year or until their
successors shall have been elected and taken possession of their offices." xxx.

It results that the practice of the directorate of filling vacancies by the action of the directors
themselves is valid. Nor can any exception be taken to the personality of the individuals chosen by the
directors to fill vacancies in the body. [Emphasis supplied.]

Africa, in opposing VVCC’s contentions, raises the same arguments that he did before the trial court.

THE COURT’S RULING

We are not persuaded by VVCC’s arguments and, thus, find its petition unmeritorious.

To repeat, the issue for the Court to resolve is whether the remaining directors of a corporation’s Board,
still constituting a quorum, can elect another director to fill in a vacancy caused by the resignation of a
hold-over director. The resolution of this legal issue is significantly hinged on the determination of what
constitutes a director’s term of office.

The holdover period is not part of the term of office of a member of the board of directors

The word "term" has acquired a definite meaning in jurisprudence. In several cases, we have defined
"term" as the time during which the officer may claim to hold the office as of right, and fixes the interval
after which the several incumbents shall succeed one another.7 The term of office is not affected by the
holdover.8 The term is fixed by statute and it does not change simply because the office may have become
vacant, nor because the incumbent holds over in office beyond the end of the term due to the fact that a
successor has not been elected and has failed to qualify.

Term is distinguished from tenure in that an officer’s "tenure" represents the term during which the
incumbent actually holds office. The tenure may be shorter (or, in case of holdover, longer) than the term
for reasons within or beyond the power of the incumbent.

Based on the above discussion, when Section 239 of the Corporation Code declares that "the board of
directors…shall hold office for one (1) year until their successors are elected and qualified," we construe
the provision to mean that the term of the members of the board of directors shall be only for one year;
their term expires one year after election to the office. The holdover period – that time from the lapse of
one year from a member’s election to the Board and until his successor’s election and qualification – is not
part of the director’s original term of office, nor is it a new term; the holdover period, however, constitutes
part of his tenure. Corollary, when an incumbent member of the board of directors continues to serve in a
holdover capacity, it implies that the office has a fixed term, which has expired, and the incumbent is
holding the succeeding term.10

After the lapse of one year from his election as member of the VVCC Board in 1996, Makalintal’s term of
office is deemed to have already expired. That he continued to serve in the VVCC Board in a holdover
capacity cannot be considered as extending his term. To be 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 November 10, 1998. This holdover period, however, is
not to be considered as part of his term, which, as declared, had already expired.

With the expiration of Makalintal’s term of office, a vacancy resulted which, by the terms of Section 2911 of
the Corporation Code, must be filled by the stockholders of VVCC in a regular or special meeting called for
the purpose. To assume – as VVCC does – that the vacancy is caused by Makalintal’s resignation in 1998,
not by the expiration of his term in 1997, is both illogical and unreasonable. His resignation as a holdover
director did not change the nature of the vacancy; the vacancy due to the expiration of Makalintal’s term
had been created long before his resignation.

The powers of the corporation’s board of directors emanate from its stockholders

VVCC’s construction of Section 29 of the Corporation Code on the authority to fill up vacancies in the
board of directors, in relation to Section 23 thereof, effectively weakens the stockholders’ power to
participate in the corporate governance by electing their representatives to the board of directors. The
board of directors is the directing and controlling body of the corporation. It is a creation of the
stockholders and derives its power to control and direct the affairs of the corporation from them. The
board of directors, in drawing to themselves the powers of the corporation, occupies a position of
trusteeship in relation to the stockholders, in the sense that the board should exercise not only care and
diligence, but utmost good faith in the management of corporate affairs.12

The underlying policy of the Corporation Code is that the business and affairs of a corporation must be
governed by a board of directors whose members have stood for election, and who have actually been
elected by the stockholders, on an annual basis. Only in that way can the directors' continued
accountability to shareholders, and the legitimacy of their decisions that bind the corporation's
stockholders, be assured. The shareholder vote is critical to the theory that legitimizes the exercise of
power by the directors or officers over properties that they do not own.13

This theory of delegated power of the board of directors similarly explains why, under Section 29 of the
Corporation Code, in cases where the vacancy in the corporation’s board of directors is caused not by the
expiration of a member’s term, the successor "so elected to fill in a vacancy shall be elected only for the
unexpired term of the his predecessor in office." The law has authorized the remaining members of the
board to fill in a vacancy only in specified instances, so as not to retard or impair the corporation’s
operations; yet, in recognition of the stockholders’ right to elect the members of the board, it limited the
period during which the successor shall serve only to the "unexpired term of his predecessor in office."

While the Court in El Hogar approved of the practice of the directors to fill vacancies in the directorate, we
point out that this ruling was made before the present Corporation Code was enacted14 and before its
Section 29 limited the instances when the remaining directors can fill in vacancies in the board, i.e., when
the remaining directors still constitute a quorum and when the vacancy is caused for reasons other than
by removal by the stockholders or by expiration of the term.1avvphi1

It also bears noting that the vacancy referred to in Section 29 contemplates a vacancy occurring within
the director’s term of office. When a vacancy is created by the expiration of a term, logically, there is no
more unexpired term to speak of. Hence, Section 29 declares that it shall be the corporation’s
stockholders who shall possess the authority to fill in a vacancy caused by the expiration of a member’s
term.

As correctly pointed out by the RTC, when remaining members of the VVCC Board elected Ramirez to
replace Makalintal, there was no more unexpired term to speak of, as Makalintal’s one-year term had
already expired. Pursuant to law, the authority to fill in the vacancy caused by Makalintal’s leaving lies
with the VVCC’s stockholders, not the remaining members of its board of directors.

WHEREFORE, we DENY the petitioners’ petition for review on certiorari, and AFFIRM the partial decision
of the Regional Trial Court, Branch 152, Manila, promulgated on January 23, 2002, in Civil Case No.
68726. Costs against the petitioners.

SO ORDERED.

G.R. No. 171993               December 12, 2011

MARC II MARKETING, INC. and LUCILA V. JOSON, Petitioners,

vs.
ALFREDO M. JOSON, Respondent.

DECISION

PEREZ, J.:

In this Petition for Review on Certiorari under Rule 45 of the Rules of Court, herein petitioners Marc II
Marketing, Inc. and Lucila V. Joson assailed the Decision1 dated 20 June 2005 of the Court of Appeals in
CA-G.R. SP No. 76624 for reversing and setting aside the Resolution2 of the National Labor Relations
Commission (NLRC) dated 15 October 2002, thereby affirming the Labor Arbiter’s Decision3 dated 1
October 2001 finding herein respondent Alfredo M. Joson’s dismissal from employment as illegal. In the
questioned Decision, the Court of Appeals upheld the Labor Arbiter’s jurisdiction over the case on the basis
that respondent was not an officer but a mere employee of petitioner Marc II Marketing, Inc., thus, totally
disregarding the latter’s allegation of intra-corporate controversy. Nonetheless, the Court of Appeals
remanded the case to the NLRC for further proceedings to determine the proper amount of monetary
awards that should be given to respondent.
Assailed as well is the Court of Appeals Resolution4 dated 7 March 2006 denying their Motion for
Reconsideration.

Petitioner Marc II Marketing, Inc. (petitioner corporation) is a corporation duly organized and existing
under and by virtue of the laws of the Philippines. It is primarily engaged in buying, marketing, selling and
distributing in retail or wholesale for export or import household appliances and products and other
items.5 It took over the business operations of Marc Marketing, Inc. which was made non-operational
following its incorporation and registration with the Securities and Exchange Commission (SEC). Petitioner
Lucila V. Joson (Lucila) is the President and majority stockholder of petitioner corporation. She was also
the former President and majority stockholder of the defunct Marc Marketing, Inc.

Respondent Alfredo M. Joson (Alfredo), on the other hand, was the General Manager, incorporator,
director and stockholder of petitioner corporation.

The controversy of this case arose from the following factual milieu:

Before petitioner corporation was officially incorporated,6 respondent has already been engaged by
petitioner Lucila, in her capacity as President of Marc Marketing, Inc., to work as the General Manager of
petitioner corporation. It was formalized through the execution of a Management Contract7 dated 16
January 1994 under the letterhead of Marc Marketing, Inc.8 as petitioner corporation is yet to be
incorporated at the time of its execution. It was explicitly provided therein that respondent shall be
entitled to 30% of its net income for his work as General Manager. Respondent will also be granted 30%
of its net profit to compensate for the possible loss of opportunity to work overseas.9

Pending incorporation of petitioner corporation, respondent was designated as the General Manager of
Marc Marketing, Inc., which was then in the process of winding up its business. For occupying the said
position, respondent was among its corporate officers by the express provision of Section 1, Article IV10 of
its by-laws.11

On 15 August 1994, petitioner corporation was officially incorporated and registered with the SEC.
Accordingly, Marc Marketing, Inc. was made non-operational. Respondent continued to discharge his
duties as General Manager but this time under petitioner corporation.

Pursuant to Section 1, Article IV12 of petitioner corporation’s by-laws,13 its corporate officers are as follows:
Chairman, President, one or more Vice-President(s), Treasurer and Secretary. Its Board of Directors,
however, may, from time to time, appoint such other officers as it may determine to be necessary or
proper.

Per an undated Secretary’s Certificate,14 petitioner corporation’s Board of Directors conducted a meeting

on 29 August 1994 where respondent was appointed as one of its corporate officers with the designation
or title of General Manager to function as a managing director with other duties and responsibilities that
the Board of Directors may provide and authorized.15

Nevertheless, on 30 June 1997, petitioner corporation decided to stop and cease its operations, as
evidenced by an Affidavit of Non-Operation16 dated 31 August 1998, due to poor sales collection
aggravated by the inefficient management of its affairs. On the same date, it formally informed
respondent of the cessation of its business operation. Concomitantly, respondent was apprised of the
termination of his services as General Manager since his services as such would no longer be necessary for
the winding up of its affairs.17

Feeling aggrieved, respondent filed a Complaint for Reinstatement and Money Claim against petitioners
before the Labor Arbiter which was docketed as NLRC NCR Case No. 00-03-04102-99.

In his complaint, respondent averred that petitioner Lucila dismissed him from his employment with
petitioner corporation due to the feeling of hatred she harbored towards his family. The same was rooted
in the filing by petitioner Lucila’s estranged husband, who happened to be respondent’s brother, of a
Petition for Declaration of Nullity of their Marriage.18
For the parties’ failure to settle the case amicably, the Labor Arbiter required them to submit their
respective position papers. Respondent complied but petitioners opted to file a Motion to Dismiss
grounded on the Labor Arbiter’s lack of jurisdiction as the case involved an intra-corporate controversy,
which jurisdiction belongs to the SEC [now with the Regional Trial Court (RTC)].19 Petitioners similarly
raised therein the ground of prescription of respondent’s monetary claim.

On 5 September 2000, the Labor Arbiter issued an Order20 deferring the resolution of petitioners’ Motion
to Dismiss until the final determination of the case. The Labor Arbiter also reiterated his directive for
petitioners to submit position paper. Still, petitioners did not comply. Insisting that the Labor Arbiter has
no jurisdiction over the case, they instead filed an Urgent Motion to Resolve the Motion to Dismiss and the
Motion to Suspend Filing of Position Paper.

In an Order21 dated 15 February 2001, the Labor Arbiter denied both motions and declared final the Order
dated 5 September 2000. The Labor Arbiter then gave petitioners a period of five days from receipt
thereof within which to file position paper, otherwise, their Motion to Dismiss will be treated as their
position paper and the case will be considered submitted for decision.

Petitioners, through counsel, moved for extension of time to submit position paper. Despite the requested
extension, petitioners still failed to submit the same. Accordingly, the case was submitted for resolution.

On 1 October 2001, the Labor Arbiter rendered his Decision in favor of respondent. Its decretal portion
reads as follows:

WHEREFORE, premises considered, judgment is hereby rendered declaring [respondent’s] dismissal from
employment illegal. Accordingly, [petitioners] are hereby ordered:

1. To reinstate [respondent] to his former or equivalent position without loss of seniority rights,
benefits, and privileges;

2. Jointly and severally liable to pay [respondent’s] unpaid wages in the amount of ₱450,000.00
per month from [26 March 1996] up to time of dismissal in the total amount of ₱6,300,000.00;

3. Jointly and severally liable to pay [respondent’s] full backwages in the amount of ₱450,000.00
per month from date of dismissal until actual reinstatement which at the time of promulgation
amounted to ₱21,600,000.00;

4. Jointly and severally liable to pay moral damages in the amount of ₱100,000.00 and attorney’s
fees in the amount of 5% of the total monetary award.22 [Emphasis supplied.]

In the aforesaid Decision, the Labor Arbiter initially resolved petitioners’ Motion to Dismiss by finding the
ground of lack of jurisdiction to be without merit. The Labor Arbiter elucidated that petitioners failed to
adduce evidence to prove that the present case involved an intra-corporate controversy. Also,
respondent’s money claim did not arise from his being a director or stockholder of petitioner corporation
but from his position as being its General Manager. The Labor Arbiter likewise held that respondent was
not a corporate officer under petitioner corporation’s by-laws. As such, respondent’s complaint clearly
arose from an employer-employee relationship, thus, subject to the Labor Arbiter’s jurisdiction.

The Labor Arbiter then declared respondent’s dismissal from employment as illegal. Respondent, being a
regular employee of petitioner corporation, may only be dismissed for a valid cause and upon proper
compliance with the requirements of due process. The records, though, revealed that petitioners failed to
present any evidence to justify respondent’s dismissal.

Aggrieved, petitioners appealed the aforesaid Labor Arbiter’s Decision to the NLRC.

In its Resolution dated 15 October 2002, the NLRC ruled in favor of petitioners by giving credence to the
Secretary’s Certificate, which evidenced petitioner corporation’s Board of Directors’ meeting in which a
resolution was approved appointing respondent as its corporate officer with designation as General
Manager. Therefrom, the NLRC reversed and set aside the Labor Arbiter’s Decision dated 1 October 2001
and dismissed respondent’s Complaint for want of jurisdiction.23

The NLRC enunciated that the validity of respondent’s appointment and termination from the position of
General Manager was made subject to the approval of petitioner corporation’s Board of Directors. Had
respondent been an ordinary employee, such board action would not have been required. As such, it is
clear that respondent was a corporate officer whose dismissal involved a purely intra-corporate
controversy. The NLRC went further by stating that respondent’s claim for 30% of the net profit of the
corporation can only emanate from his right of ownership therein as stockholder, director and/or corporate
officer. Dividends or profits are paid only to stockholders or directors of a corporation and not to any
ordinary employee in the absence of any profit sharing scheme. In addition, the question of remuneration
of a person who is not a mere employee but a stockholder and officer of a corporation is not a simple
labor problem. Such matter comes within the ambit of corporate affairs and management and is an intra-
corporate controversy in contemplation of the Corporation Code.24

When respondent’s Motion for Reconsideration was denied in another Resolution25 dated 23 January 2003,
he filed a Petition for Certiorari with the Court of Appeals ascribing grave abuse of discretion on the part of
the NLRC.

On 20 June 2005, the Court of Appeals rendered its now assailed Decision declaring that the Labor Arbiter
has jurisdiction over the present controversy. It upheld the finding of the Labor Arbiter that respondent
was a mere employee of petitioner corporation, who has been illegally dismissed from employment
without valid cause and without due process. Nevertheless, it ordered the records of the case remanded to
the NLRC for the determination of the appropriate amount of monetary awards to be given to respondent.
The Court of Appeals, thus, decreed:

WHEREFORE, the petition is by us PARTIALLY GRANTED. The Labor Arbiter is DECLARED to have
jurisdiction over the controversy. The records are REMANDED to the NLRC for further proceedings to
determine the appropriate amount of monetary awards to be adjudged in favor of [respondent]. Costs
against the [petitioners] in solidum.26

Petitioners moved for its reconsideration but to no avail.27

Petitioners are now before this Court with the following assignment of errors:

THE COURT OF APPEALS ERRED AND COMMITTED GRAVE ABUSE OF DISCRETION IN DECIDING
THAT THE NLRC HAS THE JURISDICTION IN RESOLVING A PURELY INTRA-CORPORATE MATTER
WHICH IS COGNIZABLE BY THE SECURITIES AND EXCHANGE COMMISSION/REGIONAL TRIAL
COURT.

ASSUMING, GRATIS ARGUENDO, THAT THE NLRC HAS JURISDICTION OVER THE CASE, STILL THE
COURT OF APPEALS SERIOUSLY ERRED IN NOT RULING THAT THERE IS NO EMPLOYER-EMPLOYEE
RELATIONSHIP BETWEEN [RESPONDENT] ALFREDO M. JOSON AND MARC II MARKETING, INC.
[PETITIONER CORPORATION].

ASSUMING GRATIS ARGUENDO THAT THE NLRC HAS JURISDICTION OVER THE CASE, THE COURT
OF APPEALS ERRED IN NOT RULING THAT THE LABOR ARBITER COMMITTED GRAVE ABUSE OF
DISCRETION IN AWARDING MULTI-MILLION PESOS IN COMPENSATION AND BACKWAGES BASED
ON THE PURPORTED GROSS INCOME OF [PETITIONER CORPORATION].

THE COURT OF APPEALS SERIOUSLY ERRED AND COMMITTED GRAVE ABUSE OF DISCRETION IN
NOT MAKING ANY FINDINGS AND RULING THAT [PETITIONER LUCILA] SHOULD NOT BE HELD
SOLIDARILY LIABLE IN THE ABSENCE OF EVIDENCE OF MALICE AND BAD FAITH ON HER PART.28

Petitioners fault the Court of Appeals for having sustained the Labor Arbiter’s finding that respondent was
not a corporate officer under petitioner corporation’s by-laws. They insist that there is no need to amend
the corporate by-laws to specify who its corporate officers are. The resolution issued by petitioner
corporation’s Board of Directors appointing respondent as General Manager, coupled with his assumption
of the said position, positively made him its corporate officer. More so, respondent’s position, being a
creation of petitioner corporation’s Board of Directors pursuant to its by-laws, is a corporate office
sanctioned by the Corporation Code and the doctrines previously laid down by this Court. Thus,
respondent’s removal as petitioner corporation’s General Manager involved a purely intra-corporate
controversy over which the RTC has jurisdiction.

Petitioners further contend that respondent’s claim for 30% of the net profit of petitioner corporation was
anchored on the purported Management Contract dated 16 January 1994. It should be noted, however,
that said Management Contract was executed at the time petitioner corporation was still nonexistent and
had no juridical personality yet. Such being the case, respondent cannot invoke any legal right therefrom
as it has no legal and binding effect on petitioner corporation. Moreover, it is clear from the Articles of
Incorporation of petitioner corporation that respondent was its director and stockholder. Indubitably,
respondent’s claim for his share in the profit of petitioner corporation was based on his capacity as such
and not by virtue of any employer-employee relationship.

Petitioners further avow that even if the present case does not pose an intra-corporate controversy, still,
the Labor Arbiter’s multi-million peso awards in favor of respondent were erroneous. The same was
merely based on the latter’s self-serving computations without any supporting documents.

Finally, petitioners maintain that petitioner Lucila cannot be held solidarily liable with petitioner
corporation. There was neither allegation nor iota of evidence presented to show that she acted with
malice and bad faith in her dealings with respondent. Moreover, the Labor Arbiter, in his Decision, simply
concluded that petitioner Lucila was jointly and severally liable with petitioner corporation without making
any findings thereon. It was, therefore, an error for the Court of Appeals to hold petitioner Lucila solidarily
liable with petitioner corporation.

From the foregoing arguments, the initial question is which between the Labor Arbiter or the RTC, has
jurisdiction over respondent’s dismissal as General Manager of petitioner corporation. Its resolution
necessarily entails the determination of whether respondent as General Manager of petitioner corporation
is a corporate officer or a mere employee of the latter.

While Article 217(a)229 of the Labor Code, as amended, provides that it is the Labor Arbiter who has the
original and exclusive jurisdiction over cases involving termination or dismissal of workers when the
person dismissed or terminated is a corporate officer, the case automatically falls within the province of
the RTC. The dismissal of a corporate officer is always regarded as a corporate act and/or an intra-
corporate controversy.30

Under Section 531 of Presidential Decree No. 902-A, intra-corporate controversies are those controversies
arising out of intra-corporate or partnership relations, between and among stockholders, members or
associates; between any or all of them and the corporation, partnership or association of which they are
stockholders, members or associates, respectively; and between such corporation, partnership or
association and the State insofar as it concerns their individual franchise or right to exist as such entity. It
also includes controversies in the election or appointments of directors, trustees, officers or
managers of such corporations, partnerships or associations.32

Accordingly, in determining whether the SEC (now the RTC) has jurisdiction over the controversy, the
status or relationship of the parties and the nature of the question that is the subject of their controversy
must be taken into consideration.33

In Easycall Communications Phils., Inc. v. King, this Court held that in the context of Presidential Decree
No. 902-A, corporate officers are those officers of a corporation who are given that character either by the
Corporation Code or by the corporation’s by-laws. Section 2534 of the Corporation Code specifically
enumerated who are these corporate officers, to wit: (1) president; (2) secretary; (3) treasurer; and (4)
such other officers as may be provided for in the by-laws.35
The aforesaid Section 25 of the Corporation Code, particularly the phrase "such other officers as may be
provided for in the by-laws," has been clarified and elaborated in this Court’s recent pronouncement in
Matling Industrial and Commercial Corporation v. Coros, where it held, thus:

Conformably with Section 25, a position must be expressly mentioned in the [b]y-[l]aws in order to be
considered as a corporate office. Thus, the creation of an office pursuant to or under a [b]y-[l]aw enabling
provision is not enough to make a position a corporate office. [In] Guerrea v. Lezama [citation omitted]
the first ruling on the matter, held that the only officers of a corporation were those given that character
either by the Corporation Code or by the [b]y-[l]aws; the rest of the corporate officers could be
considered only as employees or subordinate officials. Thus, it was held in Easycall Communications Phils.,
Inc. v. King [citation omitted]:

An "office" is created by the charter of the corporation and the officer is elected by the directors or
stockholders. On the other hand, an employee occupies no office and generally is employed not by the
action of the directors or stockholders but by the managing officer of the corporation who also determines
the compensation to be paid to such employee.

xxxx

This interpretation is the correct application of Section 25 of the Corporation Code, which plainly states
that the corporate officers are the President, Secretary, Treasurer and such other officers as may be
provided for in the [b]y-[l]aws. Accordingly, the corporate officers in the context of PD No. 902-A are
exclusively those who are given that character either by the Corporation Code or by the corporation’s
[b]y[l]aws.

A different interpretation can easily leave the way open for the Board of Directors to circumvent the
constitutionally guaranteed security of tenure of the employee by the expedient inclusion in the [b]y-
[l]aws of an enabling clause on the creation of just any corporate officer position.

It is relevant to state in this connection that the SEC, the primary agency administering the Corporation
Code, adopted a similar interpretation of Section 25 of the Corporation Code in its Opinion dated
November 25, 1993 [citation omitted], to wit:

Thus, pursuant to the above provision (Section 25 of the Corporation Code), whoever are the corporate
officers enumerated in the by-laws are the exclusive Officers of the corporation and the Board has no
power to create other Offices without amending first the corporate [b]y-laws. However, the Board may
create appointive positions other than the positions of corporate Officers, but the persons
occupying such positions are not considered as corporate officers within the meaning of
Section 25 of the Corporation Code and are not empowered to exercise the functions of the corporate
Officers, except those functions lawfully delegated to them. Their functions and duties are to be
determined by the Board of Directors/Trustees.36 [Emphasis supplied.]

A careful perusal of petitioner corporation’s by-laws, particularly paragraph 1, Section 1, Article

IV,37 would explicitly reveal that its corporate officers are composed only of: (1) Chairman; (2) President;
(3) one or more Vice-President; (4) Treasurer; and (5) Secretary.38 The position of General Manager was
not among those enumerated.

Paragraph 2, Section 1, Article IV of petitioner corporation’s by-laws, empowered its Board of Directors to
appoint such other officers as it may determine necessary or proper.39 It is by virtue of this enabling
provision that petitioner corporation’s Board of Directors allegedly approved a resolution to make the
position of General Manager a corporate office, and, thereafter, appointed respondent thereto making him
one of its corporate officers. All of these acts were done without first amending its by-laws so as to include
the General Manager in its roster of corporate officers.

With the given circumstances and in conformity with Matling Industrial and Commercial Corporation v.
Coros, this Court rules that respondent was not a corporate officer of petitioner corporation because his
position as General Manager was not specifically mentioned in the roster of corporate officers in its
corporate by-laws. The enabling clause in petitioner corporation’s by-laws empowering its Board of
Directors to create additional officers, i.e., General Manager, and the alleged subsequent passage of a
board resolution to that effect cannot make such position a corporate office. Matling clearly enunciated
that the board of directors has no power to create other corporate offices without first amending the
corporate by-laws so as to include therein the newly created corporate office. Though the board of
directors may create appointive positions other than the positions of corporate officers, the persons
occupying such positions cannot be viewed as corporate officers under Section 25 of the Corporation
Code.40 In view thereof, this Court holds that unless and until petitioner corporation’s by-laws is amended
for the inclusion of General Manager in the list of its corporate officers, such position cannot be considered
as a corporate office within the realm of Section 25 of the Corporation Code.

This Court considers that the interpretation of Section 25 of the Corporation Code laid down in Matling
safeguards the constitutionally enshrined right of every employee to security of tenure. To allow the
creation of a corporate officer position by a simple inclusion in the corporate by-laws of an enabling clause
empowering the board of directors to do so can result in the circumvention of that constitutionally well-
protected right.41

It is also of no moment that respondent, being petitioner corporation’s General Manager, was given the
functions of a managing director by its Board of Directors. As held in Matling, the only officers of a
corporation are those given that character either by the Corporation Code or by the corporate by-laws. It
follows then that the corporate officers enumerated in the by-laws are the exclusive officers of the
corporation while the rest could only be regarded as mere employees or subordinate
officials.42 Respondent, in this case, though occupying a high ranking and vital position in petitioner
corporation but which position was not specifically enumerated or mentioned in the latter’s by-laws, can
only be regarded as its employee or subordinate official. Noticeably, respondent’s compensation as
petitioner corporation’s General Manager was set, fixed and determined not by the latter’s Board of
Directors but simply by its President, petitioner Lucila. The same was not subject to the approval of
petitioner corporation’s Board of Directors. This is an indication that respondent was an employee and not
a corporate officer.

To prove that respondent was petitioner corporation’s corporate officer, petitioners presented before the
NLRC an undated Secretary’s Certificate showing that corporation’s Board of Directors approved a
resolution making respondent’s position of General Manager a corporate office. The submission, however,
of the said undated Secretary’s Certificate will not change the fact that respondent was an employee. The
certification does not amount to an amendment of the by-laws which is needed to make the position of
General Manager a corporate office.

Moreover, as has been aptly observed by the Court of Appeals, the board resolution mentioned in that
undated Secretary’s Certificate and the latter itself were obvious fabrications, a mere afterthought. Here
we quote with conformity the Court of Appeals findings on this matter stated in this wise:

The board resolution is an obvious fabrication. Firstly, if it had been in existence since [29 August 1994],
why did not [herein petitioners] attach it to their [M]otion to [D]ismiss filed on [26 August 1999], when it
could have been the best evidence that [herein respondent] was a corporate officer? Secondly, why did
they report the [respondent] instead as [herein petitioner corporation’s] employee to the Social Security
System [(SSS)] on [11 October 1994] or a later date than their [29 August 1994] board resolution?
Thirdly, why is there no indication that the [respondent], the person concerned himself, and the [SEC]
were furnished with copies of said board resolution? And, lastly, why is the corporate [S]ecretary’s
[C]ertificate not notarized in keeping with the customary procedure? That is why we called it manipulative
evidence as it was a shameless sham meant to be thrown in as a wild card to muddle up the [D]ecision of
the Labor Arbiter to the end that it be overturned as the latter had firmly pointed out that [respondent] is
not a corporate officer under [petitioner corporation’s by-laws]. Regrettably, the [NLRC] swallowed the
bait hook-line-and sinker. It failed to see through its nature as a belatedly manufactured evidence. And
even on the assumption that it were an authentic board resolution, it did not make [respondent] a
corporate officer as the board did not first and properly create the position of a [G]eneral [M]anager by
amending its by-laws.
 (2) The scope of the term "officer" in the phrase "and such other officers as may be provided for in
the by-laws["] (Sec. 25, par. 1), would naturally depend much on the provisions of the by-laws of
the corporation. (SEC Opinion, [4 December 1991.]) If the by-laws enumerate the officers to be
elected by the board, the provision is conclusive, and the board is without power to create new
offices without amending the by-laws. (SEC Opinion, [19 October 1971.])

(3) If, for example, the general manager of a corporation is not listed as an officer, he is to be
classified as an employee although he has always been considered as one of the principal officers
of a corporation [citing De Leon, H. S., The Corporation Code of the Philippines Annotated, 1993
Ed., p. 215.]43 [Emphasis supplied.]

That respondent was also a director and a stockholder of petitioner corporation will not automatically
make the case fall within the ambit of intra-corporate controversy and be subjected to RTC’s jurisdiction.
To reiterate, not all conflicts between the stockholders and the corporation are classified as intra-
corporate. Other factors such as the status or relationship of the parties and the nature of the question
that is the subject of the controversy44 must be considered in determining whether the dispute involves
corporate matters so as to regard them as intra-corporate controversies.45 As previously discussed,
respondent was not a corporate officer of petitioner corporation but a mere employee thereof so there was
no intra-corporate relationship between them. With regard to the subject of the controversy or issue
involved herein, i.e., respondent’s dismissal as petitioner corporation’s General Manager, the same did not
present or relate to an intra-corporate dispute. To note, there was no evidence submitted to show that
respondent’s removal as petitioner corporation’s General Manager carried with it his removal as its
director and stockholder. Also, petitioners’ allegation that respondent’s claim of 30% share of petitioner
corporation’s net profit was by reason of his being its director and stockholder was without basis, thus,
self-serving. Such an allegation was tantamount to a mere speculation for petitioners’ failure to
substantiate the same.

In addition, it was not shown by petitioners that the position of General Manager was offered to
respondent on account of his being petitioner corporation’s director and stockholder. Also, in contrast to
NLRC’s findings, neither petitioner corporation’s by-laws nor the Management Contract stated that
respondent’s appointment and termination from the position of General Manager was subject to the
approval of petitioner corporation’s Board of Directors. If, indeed, respondent was a corporate officer
whose termination was subject to the approval of its Board of Directors, why is it that his termination was
effected only by petitioner Lucila, President of petitioner corporation? The records are bereft of any
evidence to show that respondent’s dismissal was done with the conformity of petitioner corporation’s
Board of Directors or that the latter had a hand on respondent’s dismissal. No board resolution whatsoever
was ever presented to that effect.

With all the foregoing, this Court is fully convinced that, indeed, respondent, though occupying the
General Manager position, was not a corporate officer of petitioner corporation rather he was merely its
employee occupying a high-ranking position.

Accordingly, respondent’s dismissal as petitioner corporation’s General Manager did not amount to an
intra-corporate controversy. Jurisdiction therefor properly belongs with the Labor Arbiter and not with the
RTC.

Having established that respondent was not petitioner corporation’s corporate officer but merely its
employee, and that, consequently, jurisdiction belongs to the Labor Arbiter, this Court will now determine
if respondent’s dismissal from employment is illegal.

It was not disputed that respondent worked as petitioner corporation’s General Manager from its
incorporation on 15 August 1994 until he was dismissed on 30 June 1997. The cause of his dismissal was
petitioner corporation’s cessation of business operations due to poor sales collection aggravated by the
inefficient management of its affairs.

In termination cases, the burden of proving just and valid cause for dismissing an employee from his
employment rests upon the employer. The latter's failure to discharge that burden would necessarily
result in a finding that the dismissal is unjustified.46
Under Article 283 of the Labor Code, as amended, one of the authorized causes in terminating the
employment of an employee is the closing or cessation of operation of the establishment or undertaking.
Article 283 of the Labor Code, as amended, reads, thus:

ART. 283. Closure of establishment and reduction of personnel. – The employer may also terminate the
employment of any employee due to the installation of labor saving-devices, redundancy, retrenchment to
prevent losses or the closing or cessation of operation of the establishment or undertaking unless the
closing is for the purpose of circumventing the provisions of this Title, by serving a written notice on the
workers and the Department of Labor and Employment at least one (1) month before the intended date
thereof. x x x In case of retrenchment to prevent losses and in cases of closures or cessation of operations
of establishment or undertaking not due to serious business losses or financial reverses, the separation
pay shall be equivalent to one (1) month pay or to at least one-half (1/2) month pay for every year of
service, whichever is higher. A fraction of at least six (6) months shall be considered one (1) whole year.
[Emphasis supplied.]

From the afore-quoted provision, the closure or cessation of operations of establishment or undertaking
may either be due to serious business losses or financial reverses or otherwise. If the closure or cessation
was due to serious business losses or financial reverses, it is incumbent upon the employer to sufficiently
and convincingly prove the same. If it is otherwise, the employer can lawfully close shop anytime as long
as it was bona fide in character and not impelled by a motive to defeat or circumvent the tenurial rights of
employees and as long as the terminated employees were paid in the amount corresponding to their
length of service.47

Accordingly, under Article 283 of the Labor Code, as amended, there are three requisites for a valid
cessation of business operations: (a) service of a written notice to the employees and to the Department
of Labor and Employment (DOLE) at least one month before the intended date thereof; (b) the cessation
of business must be bona fide in character; and (c) payment to the employees of termination pay
amounting to one month pay or at least one-half month pay for every year of service, whichever is higher.

In this case, it is obvious that petitioner corporation’s cessation of business operations was not due to
serious business losses. Mere poor sales collection, coupled with mismanagement of its affairs does not
amount to serious business losses. Nonetheless, petitioner corporation can still validly cease or close its
business operations because such right is legally allowed, so long as it was not done for the purpose of
circumventing the provisions on termination of employment embodied in the Labor Code.48 As has been
stressed by this Court in Industrial Timber Corporation v. Ababon, thus:

Just as no law forces anyone to go into business, no law can compel anybody to continue the same. It
would be stretching the intent and spirit of the law if a court interferes with management's prerogative to
close or cease its business operations just because the business is not suffering from any loss or because
of the desire to provide the workers continued employment.49

A careful perusal of the records revealed that, indeed, petitioner corporation has stopped and ceased
business operations beginning 30 June 1997. This was evidenced by a notarized Affidavit of Non-Operation
dated 31 August 1998. There was also no showing that the cessation of its business operations was done
in bad faith or to circumvent the Labor Code. Nevertheless, in doing so, petitioner corporation failed to
comply with the one-month prior written notice rule. The records disclosed that respondent, being
petitioner corporation’s employee, and the DOLE were not given a written notice at least one month
before petitioner corporation ceased its business operations. Moreover, the records clearly show that
respondent’s dismissal was effected on the same date that petitioner corporation decided to stop and
cease its operation. Similarly, respondent was not paid separation pay upon termination of his
employment.

As respondent’s dismissal was not due to serious business losses, respondent is entitled to payment of
separation pay equivalent to one month pay or at least one-half month pay for every year of service,
whichever is higher. The rationale for this was laid down in Reahs Corporation v. National Labor Relations
Commission,50 thus:
The grant of separation pay, as an incidence of termination of employment under Article 283, is a
statutory obligation on the part of the employer and a demandable right on the part of the employee,
except only where the closure or cessation of operations was due to serious business losses or financial
reverses and there is sufficient proof of this fact or condition. In the absence of such proof of serious
business losses or financial reverses, the employer closing his business is obligated to pay his employees
and workers their separation pay.

The rule, therefore, is that in all cases of business closure or cessation of operation or undertaking of the
employer, the affected employee is entitled to separation pay. This is consistent with the state policy of
treating labor as a primary social economic force, affording full protection to its rights as well as its
welfare. The exception is when the closure of business or cessation of operations is due to serious
business losses or financial reverses duly proved, in which case, the right of affected employees to
separation pay is lost for obvious reasons.51 [Emphasis supplied.]

As previously discussed, respondent’s dismissal was due to an authorized cause, however, petitioner
corporation failed to observe procedural due process in effecting such dismissal. In Culili v. Eastern
Telecommunications Philippines, Inc.,52 this Court made the following pronouncements, thus:

x x x there are two aspects which characterize the concept of due process under the Labor Code: one is
substantive — whether the termination of employment was based on the provision of the Labor Code or in
accordance with the prevailing jurisprudence; the other is procedural — the manner in which the dismissal
was effected.

Section 2(d), Rule I, Book VI of the Rules Implementing the Labor Code provides:

(d) In all cases of termination of employment, the following standards of due process shall be substantially
observed:

xxxx

For termination of employment as defined in Article 283 of the Labor Code, the requirement of due
process shall be deemed complied with upon service of a written notice to the employee and the
appropriate Regional Office of the Department of Labor and Employment at least thirty days before
effectivity of the termination, specifying the ground or grounds for termination.

In Mayon Hotel & Restaurant v. Adana, [citation omitted] we observed:

The requirement of law mandating the giving of notices was intended not only to enable the employees to
look for another employment and therefore ease the impact of the loss of their jobs and the corresponding
income, but more importantly, to give the Department of Labor and Employment (DOLE) the opportunity
to ascertain the verity of the alleged authorized cause of termination.53 [Emphasis supplied].

The records of this case disclosed that there was absolutely no written notice given by petitioner
corporation to the respondent and to the DOLE prior to the cessation of its business operations. This is
evident from the fact that petitioner corporation effected respondent’s dismissal on the same date that it
decided to stop and cease its business operations. The necessary consequence of such failure to comply
with the one-month prior written notice rule, which constitutes a violation of an employee’s right to
statutory due process, is the payment of indemnity in the form of nominal damages.54 In Culili v. Eastern
Telecommunications Philippines, Inc., this Court further held:

In Serrano v. National Labor Relations Commission [citation omitted], we noted that "a job is more than
the salary that it carries." There is a psychological effect or a stigma in immediately finding one’s self laid
off from work. This is exactly why our labor laws have provided for mandating procedural due process
clauses. Our laws, while recognizing the right of employers to terminate employees it cannot sustain, also
recognize the employee’s right to be properly informed of the impending severance of his ties with the
company he is working for. x x x.
x x x Over the years, this Court has had the opportunity to reexamine the sanctions imposed upon
employers who fail to comply with the procedural due process requirements in terminating its employees.
In Agabon v. National Labor Relations Commission [citation omitted], this Court reverted back to the
doctrine in Wenphil Corporation v. National Labor Relations Commission [citation omitted] and held that
where the dismissal is due to a just or authorized cause, but without observance of the due process
requirements, the dismissal may be upheld but the employer must pay an indemnity to the employee. The
sanctions to be imposed however, must be stiffer than those imposed in Wenphil to achieve a result fair to
both the employers and the employees.

In Jaka Food Processing Corporation v. Pacot [citation omitted], this Court, taking a cue from Agabon,
held that since there is a clear-cut distinction between a dismissal due to a just cause and a dismissal due
to an authorized cause, the legal implications for employers who fail to comply with the notice
requirements must also be treated differently:

Accordingly, it is wise to hold that: (1) if the dismissal is based on a just cause under Article 282 but the
employer failed to comply with the notice requirement, the sanction to be imposed upon him should be
tempered because the dismissal process was, in effect, initiated by an act imputable to the employee; and
(2) if the dismissal is based on an authorized cause under Article 283 but the employer failed to comply
with the notice requirement, the sanction should be stiffer because the dismissal process was initiated by
the employer's exercise of his management prerogative.55 [Emphasis supplied.]

Thus, in addition to separation pay, respondent is also entitled to an award of nominal damages. In
conformity with this Court’s ruling in Culili v. Eastern Telecommunications Philippines, Inc. and Shimizu
Phils. Contractors, Inc. v. Callanta, both citing Jaka Food Processing Corporation v. Pacot,56 this Court
fixed the amount of nominal damages to ₱50,000.00.

With respect to petitioners’ contention that the Management Contract executed between respondent and
petitioner Lucila has no binding effect on petitioner corporation for having been executed way before its
incorporation, this Court finds the same meritorious.

Section 19 of the Corporation Code expressly provides:

Sec. 19. Commencement of corporate existence. - A private corporation formed or organized under

this Code commences to have corporate existence and juridical personality and is deemed incorporated
from the date the Securities and Exchange Commission issues a certificate of incorporation under its
official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute
a body politic and corporate under the name stated in the articles of incorporation for the period of time
mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance
with law. [Emphasis supplied.]

Logically, there is no corporation to speak of prior to an entity’s incorporation. And no contract entered
into before incorporation can bind the corporation.

As can be gleaned from the records, the Management Contract dated 16 January 1994 was executed
between respondent and petitioner Lucila months before petitioner corporation’s incorporation on 15
August 1994. Similarly, it was done when petitioner Lucila was still the President of Marc Marketing, Inc.
Undeniably, it cannot have any binding and legal effect on petitioner corporation. Also, there was no
evidence presented to prove that petitioner corporation adopted, ratified or confirmed the Management
Contract. It is for the same reason that petitioner corporation cannot be considered estopped from
questioning its binding effect now that respondent was invoking the same against it. In no way, then, can
it be enforced against petitioner corporation, much less, its provisions fixing respondent’s compensation as
General Manager to 30% of petitioner corporation’s net profit. Consequently, such percentage cannot be
the basis for the computation of respondent’s separation pay. This finding, however, will not affect the
undisputed fact that respondent was, indeed, the General Manager of petitioner corporation from its
incorporation up to the time of his dismissal.
Accordingly, this Court finds it necessary to still remand the present case to the Labor Arbiter to conduct
further proceedings for the sole purpose of determining the compensation that respondent was actually
receiving during the period that he was the General Manager of petitioner corporation, this, for the proper
computation of his separation pay.

As regards petitioner Lucila’s solidary liability, this Court affirms the same.

As a rule, corporation has a personality separate and distinct from its officers, stockholders and members
such that corporate officers are not personally liable for their official acts unless it is shown that they have
exceeded their authority. However, this corporate veil can be pierced when the notion of the legal entity is
used as a means to perpetrate fraud, an illegal act, as a vehicle for the evasion of an existing obligation,
and to confuse legitimate issues. Under the Labor Code, for instance, when a corporation violates a
provision declared to be penal in nature, the penalty shall be imposed upon the guilty officer or officers of
the corporation.57

Based on the prevailing circumstances in this case, petitioner Lucila, being the President of petitioner
corporation, acted in bad faith and with malice in effecting respondent’s dismissal from employment.
Although petitioner corporation has a valid cause for dismissing respondent due to cessation of business
operations, however, the latter’s dismissal therefrom was done abruptly by its President, petitioner Lucila.
Respondent was not given the required one-month prior written notice that petitioner corporation will
already cease its business operations. As can be gleaned from the records, respondent was dismissed
outright by petitioner Lucila on the same day that petitioner corporation decided to stop and cease its
business operations. Worse, respondent was not given separation pay considering that petitioner
corporation’s cessation of business was not due to business losses or financial reverses.

WHEREFORE, premises considered, the Decision and Resolution dated 20 June 2005 and 7 March 2006,
respectively, of the Court of Appeals in CA-G.R. SP No. 76624 are hereby AFFIRMED with the
MODIFICATION finding respondent’s dismissal from employment legal but without proper observance of
due process. Accordingly, petitioner corporation, jointly and solidarily liable with petitioner Lucila, is
hereby ordered to pay respondent the following; (1) separation pay equivalent to one month pay or at
least one-half month pay for every year of service, whichever is higher, to be computed from the
commencement of employment until termination; and (2) nominal damages in the amount of ₱50,000.00.

This Court, however, finds it proper to still remand the records to the Labor Arbiter to conduct further
proceedings for the sole purpose of determining the compensation that respondent was actually receiving
during the period that he was the General Manager of petitioner corporation for the proper computation of
his separation pay.

Costs against petitioners.

SO ORDERED.

G.R. No. L-22450        December 3, 1924

YU CHUCK, MACK YUENG, and DING MOON, plaintiffs-appellees,

vs.
"KONG LI PO," defendant-appellant.

J. W. Ferrier for appellant.

G. E. Campbell for appellees.

OSTRAND, J.:
The defendant is a domestic corporation organized in accordance with the laws of the Philippine Islands
and engaged in the publication of a Chinese newspaper styled Kong Li Po. Its articles of incorporation and
by-laws are in the usual form and provide for a board of directors and for other officers among them a
president whose duty it is to "sign all contracts and other instruments of writing." No special provision is
made for a business or general manager.

Some time during the year 1919 one C. C. Chen or T. C. Chen was appointed general business manager of
the newspaper. During the month of December of that year he entered into an agreement with the
plaintiffs by which the latter bound themselves to do the necessary printing for the newspaper for the sum
of P580 per month as alleged in the complaint. Under this agreement the plaintiffs worked for the
defendant from January 1, 1920, until January 31, 1921, when they were discharged by the new
manager, Tan Tian Hong, who had been appointed in the meantime, C. C. Chen having left for China. The
letter of dismissal stated no special reasons for the discharge of the plaintiffs.

The plaintiffs thereupon brought the present action alleging, among other things, in the complaint that
their contract of employment was for a term of three years from the first day of January, 1920; that in the
case of their discharge by the defendant without just cause before the expiration of the term of the
contract, they were to receive full pay for the remaining portion of the term; that they had been so
discharged without just cause and therefore asked judgment for damages in the sum of P20,880.

In its amended answer the defendant denies generally and specifically the allegations of the complaint and
sets up five special defenses and counterclaims. The first of these is to the effect that C. C. Chen, the
person whose name appears to have been signed to the contract of employment was not authorized by
the defendant to execute such a contract in its behalf. The second special defense and counterclaim is to
the effect that during the month of January, 1921, the plaintiffs purposely delayed the issuance of
defendant's newspaper on three separate and distinct occasions causing damage and injury to the
defendant in the amount of P300. Under the third special defense and counterclaim it is alleged that the
plaintiffs failed, neglected, and refused to prepare extra pages for the January 1, 1921, issue of the
defendant's newspaper and thus compelled the defendant to secure the preparation of said extra pages by
other persons at a cost of P110. In the fourth special defense and counterclaim the defendant alleged that
the plaintiffs neglected and failed to correct errors in advertisements appearing in defendant's newspaper,
although their attention was specifically called to such errors and they were requested to make the
corrections, as a result of which certain advertisers withdrew their patronage from the paper and refused
to pay for the advertisements, thus causing a loss to the defendant of P160.50. For its fifth special
defense and counterclaim the defendant alleged that the plaintiffs neglected and refused to do certain job
printing such neglect and refusal causing injury and damage to the defendant in the sum of P150.

At the trial of the case the plaintiffs presented in evidence Exhibit A which purports to be a contract
between Chen and the plaintiffs and which provides that in the event the plaintiffs should be discharged
without cause before the expirations of the term of three years from January 1, 1920, they would be given
full pay for the unexpired portion of the term "even if the said paper has to fall into bankruptcy." The
contract is signed by the plaintiffs and also bears the signature "C. C. Chen, manager of Kong Li Po." The
authenticity of the latter signature is questioned by the defendant, but the court below found that the
evidence upon this point preponderate in favor of the plaintiffs and there appears to be no sufficient
reason to disturb this finding.

The trial court further found that the contract had been impliedly ratified by the defendant and rendered
judgment in favor of the plaintiffs for the sum of P13,340, with interest from the date of the filing of the
complaint and the costs. From this judgment the defendant appeals to this court and makes eighteen
assignments of error. The fourth and seventeenth assignments relate to defendant's special defense and
counterclaims; the sum and substance of the other assignments is that the contract on which the action is
based was not signed by C. C. Chen; that, in any event, C. C. Chen had no power or authority to bind the
defendant corporation by such contract; and that there was no ratification of the contract by the
corporation.

Before entering upon a discussion of the questions raised by the assignments of error, we may draw
attention to a matter which as not been mentioned either by counsel or by the court below, but which, to
prevent misunderstanding, should be briefly explained: It is averred in the complaint that it is
accompanied by a copy of the contract between the parties (Exhibit A) which copy, by the terms of the
complaint, is made a part thereof. The copy is not set forth in the bill of exceptions and aside from said
avernment, there is no indication that the copy actually accompanied the complaint, but an examination of
the record of the case in the Court of First Instance shows that a translation of the contract was attached
to the complaint and served upon the defendant. As this translation may be considered a copy and as the
defendant failed to deny its authenticity under oath, it will perhaps be said that under section 103 of the
Code of Civil Procedure the omission to so deny it constitutes an admission of the genuineness and due
execution of the document as well as of the agent's authority to bind the defendant.
(Merchant vs. International Banking Corporation, 6 Phil., 314.)

In ordinary circumstances that would be true. But this case appears to have been tried upon the theory
that the rule did not apply; at least, it was wholly overlooked or disregarded by both parties. The plaintiffs
at the beginning of the trial presented a number of witnesses to prove the due execution of the document
as well as the agent's authority; no objections were made to the defendant's evidence in refutation and no
exceptions taken; and the matter is not mentioned in the decision of the trial court.

The object of the rule is "to relieve a party of the trouble and expense of proving in the first instance an
alleged fact, the existence or nonexistence of which is necessarily within the knowledge of the adverse
party, and of the necessity (to his opponent's case) of establishing which such adverse party is notified by
his opponent's pleading." (Nery Lim-Chingco vs. Terariray, 5 Phil., at p. 124.)lawphi1.net

The plaintiff may, of course, waive the rule and that is what he must be considered to have done in the
present case by introducing evidence as to the execution of the document and failing to object to the
defendant's evidence in refutation; all this evidence is now competent and the case must be decided
thereupon. Moreover, the question as to the applicability of the rule is not even suggested in the briefs
and is not properly this court. In these circumstances it would, indeed, be grossly unfair to the defendant
if this court should take up the question on its own motion and make it decisive of the case, and such is
not the law. Nothing of what has here been said is in conflict with former decisions of this court; it will be
found upon examination that in all cases where the applicability of the rule has been sustained the party
invoking it has relied on it in the court below and conducted his case accordingly.

The principal question presented by the assignments of error is whether Chen had the power to bind the
corporation by a contract of the character indicated. It is conceded that he had no express authority to do
so, but the evidence is conclusive that he, at the time the contract was entered into, was in effect the
general business manager of the newspaper Kong Li Po and that he, as such, had charge of the printing of
the paper, and the plaintiff maintain that he, as such general business manager, had implied authority to
employ them on the terms stated and that the defendant corporation is bound by his action. The general
rule is that the power to bind a corporation by contract lies with its board of directors or trustees, but this
power may either expressly or impliedly be delegated to other officers or agents of the corporation, and it
is well settled that except where the authority of employing servants and agent is expressly vested in the
board of directors or trustees, an officer or agent who has general control and management of the
corporation's business, or a specific part thereof, may bind the corporation by the employment of such
agent and employees as are usual and necessary in the conduct of such business. But the contracts of
employment must be reasonable. (14a C. J., 431.)

In regard to the length of the term of employment, Corpus Juris says:

In the absence of express limitations, a manager has authority to hire an employee for such a
period as is customary or proper under the circumstances, such as for a year, for the season, or for
two season. But unless he is either expressly authorized, or held out as having such authority, he
cannot make a contract of employment for a long future period, such as for three years, although
the contract is not rendered invalid by the mere fact that the employment extends beyond the
term of the manager's own employment. . . . (14a C. J., 431.)

From what has been said, there can be no doubt that Chen, as general manager of the Kong Li Po, had
implied authority to bind the defendant corporation by a reasonable and usual contract of employment
with the plaintiffs, but we do not think that the contract here in question can be so considered. Not only is
the term of employment unusually long, but the conditions are otherwise so onerous to the defendant that
the possibility of the corporation being thrown into insolvency thereby is expressly contemplated in the
same contract. This fact in itself was, in our opinion, sufficient to put the plaintiffs upon inquiry as to the
extent of the business manager's authority; they had not the rights to presume that he or any other single
officer or employee of the corporation had implied authority to enter into a contract of employment which
might bring about its ruin.

Neither do we think that the contention that the corporation impliedly ratified the contract is supported by
the evidence. The contention is based principally on the fact that Te Kim Hua, the president of the
corporation for the year 1920, admitted on the witness stand that he saw the plaintiffs work as printers in
the office of the newspaper. He denied, however, any knowledge of the existence of the contract and
asserted that it was never presented neither to him nor to the board of directors. Before a contract can be
ratified knowledge of its existence must, of course, be brought home to the parties who have authority to
ratify it or circumstances must be shown from which such knowledge may be presumed. No such
knowledge or circumstances have been shown here. That the president of the corporation saw the
plaintiffs working in its office is of little significance; there were other printers working there at that time
and as the president had nothing to do with their employment, it was hardly to be expected that be would
inquire into the terms of their contracts. Moreover, a ratification by him would have been of no avail; in
order to validate a contract, a ratification by the board of directors was necessary. The fact that the
president was required by the by-laws to sign the documents evidencing contracts of the corporation, does
not mean that he had power to make the contracts.

In his decision his Honor, the learned judge of the court below appears to have placed some weight on a
notice inserted in the January 14th issue of the Kong Li Po by T. C. Chen and which, in translation, reads
as follows:

To Whom It May Concern: Announcement is hereby given that thereafter all contracts, agreements
and receipts are considered to be null and void unless duly signed by T. C. Chen, General Manager
of this paper.

(Sgd.) CHEN YOU MAN

General Manager of this paper

(The evidence shows that Chen You Man and T. C. Chen is one and the same person.)

His Honor evidently overestimated the importance of this notice. It was published nearly a month after the
contract in question is alleged to have been entered into and can therefore not have been one of the
circumstances which led the plaintiffs to think that Chen had authority to make the contract. It may
further be observed that the notice confers no special powers, but is, in effect, only an assertion by Chen
that he would recognize no contracts, agreements, and receipts not duty signed by him. It may be
presumed that the contracts, agreements, and receipts were such as were ordinarily made in the course of
the business of managing the newspaper. There is no evidence to show that the notice was ever brought
to the attention of the officers of the defendant corporation.

The defendant's counterclaims have not been sufficiently established by the evidence.

The judgment appealed from is reversed and the defendant corporation is absolved from the complaint.
No costs will be allowed. So ordered.

G.R. No. 140667             August 12, 2004

WOODCHILD HOLDINGS, INC., petitioner,

vs.
ROXAS ELECTRIC AND CONSTRUCTION COMPANY, INC., respondent.
 DECISION

CALLEJO, SR., J.:

This is a petition for review on certiorari of the Decision1 of the Court of Appeals in CA-G.R. CV No. 56125
reversing the Decision2 of the Regional Trial Court of Makati, Branch 57, which ruled in favor of the
petitioner.

The Antecedents

The respondent Roxas Electric and Construction Company, Inc. (RECCI), formerly the Roxas Electric and
Construction Company, was the

owner of two parcels of land, identified as Lot No. 491-A-3-B-1 covered by Transfer Certificate of Title
(TCT) No. 78085 and Lot No. 491-A-3-B-2 covered by TCT No. 78086. A portion of Lot No. 491-A-3-B-1
which abutted Lot No. 491-A-3-B-2 was a dirt road accessing to the Sumulong Highway, Antipolo, Rizal.

At a special meeting on May 17, 1991, the respondent's Board of Directors approved a resolution
authorizing the corporation, through its president, Roberto B. Roxas, to sell Lot No. 491-A-3-B-2 covered
by TCT No. 78086, with an area of 7,213 square meters, at a price and under such terms and conditions
which he deemed most reasonable and advantageous to the corporation; and to execute, sign and deliver
the pertinent sales documents and receive the proceeds of the sale for and on behalf of the company.3

Petitioner Woodchild Holdings, Inc. (WHI) wanted to buy Lot No. 491-A-3-B-2 covered by TCT No. 78086
on which it planned to construct its warehouse building, and a portion of the adjoining lot, Lot No. 491-A-
3-B-1, so that its 45-foot container van would be able to readily enter or leave the property. In a Letter to
Roxas dated June 21, 1991, WHI President Jonathan Y. Dy offered to buy Lot No. 491-A-3-B-2 under
stated terms and conditions for P1,000 per square meter or at the price of P7,213,000.4 One of the terms
incorporated in Dy's offer was the following provision:

5. This Offer to Purchase is made on the representation and warranty of the OWNER/SELLER, that
he holds a good and registrable title to the property, which shall be conveyed CLEAR and FREE of
all liens and encumbrances, and that the area of 7,213 square meters of the subject property
already includes the area on which the right of way traverses from the main lot (area) towards the
exit to the Sumulong Highway as shown in the location plan furnished by the Owner/Seller to the
buyer. Furthermore, in the event that the right of way is insufficient for the buyer's purposes
(example: entry of a 45-foot container), the seller agrees to sell additional square meter from his
current adjacent property to allow the buyer to full access and full use of the property.5

Roxas indicated his acceptance of the offer on page 2 of the deed. Less than a month later or on July 1,
1991, Roxas, as President of RECCI, as vendor, and Dy, as President of WHI, as vendee, executed a
contract to sell in which RECCI bound and obliged itself to sell to Dy Lot No. 491-A-3-B-2 covered by TCT
No. 78086 for P7,213,000.6 On September 5, 1991, a Deed of Absolute Sale7 in favor of WHI was issued,
under which Lot No. 491-A-3-B-2 covered by TCT No. 78086 was sold for P5,000,000, receipt of which
was acknowledged by Roxas under the following terms and conditions:

The Vendor agree (sic), as it hereby agrees and binds itself to give Vendee the beneficial use of
and a right of way from Sumulong Highway to the property herein conveyed consists of 25 square
meters wide to be used as the latter's egress from and ingress to and an additional 25 square
meters in the corner of Lot No. 491-A-3-B-1, as turning and/or maneuvering area for Vendee's
vehicles.
 The Vendor agrees that in the event that the right of way is insufficient for the Vendee's use (ex
entry of a 45-foot container) the Vendor agrees to sell additional square meters from its current
adjacent property to allow the Vendee full access and full use of the property.

The Vendor hereby undertakes and agrees, at its account, to defend the title of the Vendee to the
parcel of land and improvements herein conveyed, against all claims of any and all persons or
entities, and that the Vendor hereby warrants the right of the Vendee to possess and own the said
parcel of land and improvements thereon and will defend the Vendee against all present and future
claims and/or action in relation thereto, judicial and/or administrative. In particular, the Vendor
shall eject all existing squatters and occupants of the premises within two (2) weeks from the
signing hereof. In case of failure on the part of the Vendor to eject all occupants and squatters
within the two-week period or breach of any of the stipulations, covenants and terms and
conditions herein provided and that of contract to sell dated 1 July 1991, the Vendee shall have the
right to cancel the sale and demand reimbursement for all payments made to the Vendor with
interest thereon at 36% per annum.8

On September 10, 1991, the Wimbeco Builder's, Inc. (WBI) submitted its quotation for P8,649,000 to WHI
for the construction of the warehouse building on a portion of the property with an area of 5,088 square
meters.9 WBI proposed to start the project on October 1, 1991 and to turn over the building to WHI on
February 29, 1992.10

In a Letter dated September 16, 1991, Ponderosa Leather Goods Company, Inc. confirmed its lease
agreement with WHI of a 5,000-square-meter portion of the warehouse yet to be constructed at the rental
rate of P65 per square meter. Ponderosa emphasized the need for the warehouse to be ready for
occupancy before April 1, 1992.11 WHI accepted the offer. However, WBI failed to commence the
construction of the warehouse in October 1, 1991 as planned because of the presence of squatters in the
property and suggested a renegotiation of the contract after the squatters shall have been
evicted.12 Subsequently, the squatters were evicted from the property.

On March 31, 1992, WHI and WBI executed a Letter-Contract for the construction of the warehouse
building for P11,804,160.13 The contractor started construction in April 1992 even before the building
officials of Antipolo City issued a building permit on May 28, 1992. After the warehouse was finished, WHI
issued on March 21, 1993 a certificate of occupancy by the building official. Earlier, or on March 18, 1993,
WHI, as lessor, and Ponderosa, as lessee, executed a contract of lease over a portion of the property for a
monthly rental of P300,000 for a period of three years from March 1, 1993 up to February 28, 1996.14

In the meantime, WHI complained to Roberto Roxas that the vehicles of RECCI were parked on a portion
of the property over which WHI had been granted a right of way. Roxas promised to look into the matter.
Dy and Roxas discussed the need of the WHI to buy a 500-square-meter portion of Lot No. 491-A-3-B-1
covered by TCT No. 78085 as provided for in the deed of absolute sale. However, Roxas died soon
thereafter. On April 15, 1992, the WHI wrote the RECCI, reiterating its verbal requests to purchase a
portion of the said lot as provided for in the deed of absolute sale, and complained about the latter's
failure to eject the squatters within the three-month period agreed upon in the said deed.

The WHI demanded that the RECCI sell a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 for its
beneficial use within 72 hours from notice thereof, otherwise the appropriate action would be filed against
it. RECCI rejected the demand of WHI. WHI reiterated its demand in a Letter dated May 29, 1992. There
was no response from RECCI.

On June 17, 1992, the WHI filed a complaint against the RECCI with the Regional Trial Court of Makati, for
specific performance and damages, and alleged, inter alia, the following in its complaint:

5. The "current adjacent property" referred to in the aforequoted paragraph of the Deed of
Absolute Sale pertains to the property covered by Transfer Certificate of Title No. N-78085 of the
Registry of Deeds of Antipolo, Rizal, registered in the name of herein defendant Roxas Electric.
 6. Defendant Roxas Electric in patent violation of the express and valid terms of the Deed of
Absolute Sale unjustifiably refused to deliver to Woodchild Holdings the stipulated beneficial use
and right of way consisting of 25 square meters and 55 square meters to the prejudice of the
plaintiff.

7. Similarly, in as much as the 25 square meters and 55 square meters alloted to Woodchild
Holdings for its beneficial use is inadequate as turning and/or maneuvering area of its 45-foot
container van, Woodchild Holdings manifested its intention pursuant to para. 5 of the Deed of Sale
to purchase additional square meters from Roxas Electric to allow it full access and use of the
purchased property, however, Roxas Electric refused and failed to merit Woodchild Holdings'
request contrary to defendant Roxas Electric's obligation under the Deed of Absolute Sale (Annex
"A").

8. Moreover, defendant, likewise, failed to eject all existing squatters and occupants of the
premises within the stipulated time frame and as a consequence thereof, plaintiff's planned
construction has been considerably delayed for seven (7) months due to the squatters who
continue to trespass and obstruct the subject property, thereby Woodchild Holdings incurred
substantial losses amounting to P3,560,000.00 occasioned by the increased cost of construction
materials and labor.

9. Owing further to Roxas Electric's deliberate refusal to comply with its obligation under Annex
"A," Woodchild Holdings suffered unrealized income of P300,000.00 a month or P2,100,000.00
supposed income from rentals of the subject property for seven (7) months.

10. On April 15, 1992, Woodchild Holdings made a final demand to Roxas Electric to comply with
its obligations and warranties under the Deed of Absolute Sale but notwithstanding such demand,
defendant Roxas Electric refused and failed and continue to refuse and fail to heed plaintiff's
demand for compliance.

Copy of the demand letter dated April 15, 1992 is hereto attached as Annex "B" and made an
integral part hereof.

11. Finally, on 29 May 1991, Woodchild Holdings made a letter request addressed to Roxas Electric
to particularly annotate on Transfer Certificate of Title No. N-78085 the agreement under Annex
"A" with respect to the beneficial use and right of way, however, Roxas Electric unjustifiably
ignored and disregarded the same.

Copy of the letter request dated 29 May 1992 is hereto attached as Annex "C" and made an
integral part hereof.

12. By reason of Roxas Electric's continuous refusal and failure to comply with Woodchild Holdings'
valid demand for compliance under Annex "A," the latter was constrained to litigate, thereby
incurring damages as and by way of attorney's fees in the amount of P100,000.00 plus costs of suit
and expenses of litigation.15

The WHI prayed that, after due proceedings, judgment be rendered in its favor, thus:

WHEREFORE, it is respectfully prayed that judgment be rendered in favor of Woodchild Holdings

and ordering Roxas Electric the following:

a) to deliver to Woodchild Holdings the beneficial use of the stipulated 25 square meters and 55
square meters;

b) to sell to Woodchild Holdings additional 25 and 100 square meters to allow it full access and use
of the purchased property pursuant to para. 5 of the Deed of Absolute Sale;
 c) to cause annotation on Transfer Certificate of Title No. N-78085 the beneficial use and right of
way granted to Woodchild Holdings under the Deed of Absolute Sale;

d) to pay Woodchild Holdings the amount of P5,660,000.00, representing actual damages and
unrealized income;

e) to pay attorney's fees in the amount of P100,000.00; and

f) to pay the costs of suit.

Other reliefs just and equitable are prayed for.16

In its answer to the complaint, the RECCI alleged that it never authorized its former president, Roberto
Roxas, to grant the beneficial use of any portion of Lot No. 491-A-3-B-1, nor agreed to sell any portion
thereof or create a lien or burden thereon. It alleged that, under the Resolution approved on May 17,
1991, it merely authorized Roxas to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086. As such, the
grant of a right of way and the agreement to sell a portion of Lot No. 491-A-3-B-1 covered by TCT No.
78085 in the said deed are ultra vires. The RECCI further alleged that the provision therein that it would
sell a portion of Lot No. 491-A-3-B-1 to the WHI lacked the essential elements of a binding contract.17

In its amended answer to the complaint, the RECCI alleged that the delay in the construction of its
warehouse building was due to the failure of the WHI's contractor to secure a building permit thereon.18

During the trial, Dy testified that he told Roxas that the petitioner was buying a portion of Lot No. 491-A-
3-B-1 consisting of an area of 500 square meters, for the price of P1,000 per square meter.

On November 11, 1996, the trial court rendered judgment in favor of the WHI, the decretal portion of
which reads:

WHEREFORE, judgment is hereby rendered directing defendant:

(1) To allow plaintiff the beneficial use of the existing right of way plus the stipulated 25 sq. m. and
55 sq. m.;

(2) To sell to plaintiff an additional area of 500 sq. m. priced at P1,000 per sq. m. to allow said
plaintiff full access and use of the purchased property pursuant to Par. 5 of their Deed of Absolute
Sale;

(3) To cause annotation on TCT No. N-78085 the beneficial use and right of way granted by their
Deed of Absolute Sale;

(4) To pay plaintiff the amount of P5,568,000 representing actual damages and plaintiff's
unrealized income;

(5) To pay plaintiff P100,000 representing attorney's fees; and

To pay the costs of suit.

SO ORDERED.19

The trial court ruled that the RECCI was estopped from disowning the apparent authority of Roxas under
the May 17, 1991 Resolution of its Board of Directors. The court reasoned that to do so would prejudice
the WHI which transacted with Roxas in good faith, believing that he had the authority to bind the WHI
relating to the easement of right of way, as well as the right to purchase a portion of Lot No. 491-A-3-B-1
covered by TCT No. 78085.
The RECCI appealed the decision to the CA, which rendered a decision on November 9, 1999 reversing
that of the trial court, and ordering the dismissal of the complaint. The CA ruled that, under the resolution
of the Board of Directors of the RECCI, Roxas was merely authorized to sell Lot No. 491-A-3-B-2 covered
by TCT No. 78086, but not to grant right of way in favor of the WHI over a portion of Lot No. 491-A-3-B-
1, or to grant an option to the petitioner to buy a portion thereof. The appellate court also ruled that the
grant of a right of way and an option to the respondent were so lopsided in favor of the respondent
because the latter was authorized to fix the location as well as the price of the portion of its property to be
sold to the respondent. Hence, such provisions contained in the deed of absolute sale were not binding on
the RECCI. The appellate court ruled that the delay in the construction of WHI's warehouse was due to its
fault.

The Present Petition

The petitioner now comes to this Court asserting that:

I.

THE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF ABSOLUTE SALE (EXH. "C") IS
ULTRA VIRES.

II.

THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE RULING OF THE COURT A QUO
ALLOWING THE PLAINTIFF-APPELLEE THE BENEFICIAL USE OF THE EXISTING RIGHT OF WAY PLUS
THE STIPULATED 25 SQUARE METERS AND 55 SQUARE METERS BECAUSE THESE ARE VALID
STIPULATIONS AGREED BY BOTH PARTIES TO THE DEED OF ABSOLUTE SALE (EXH. "C").

III.

THERE IS NO FACTUAL PROOF OR EVIDENCE FOR THE COURT OF APPEALS TO RULE THAT THE
STIPULATIONS OF THE DEED OF ABSOLUTE SALE (EXH. "C") WERE DISADVANTAGEOUS TO THE
APPELLEE, NOR WAS APPELLEE DEPRIVED OF ITS PROPERTY WITHOUT DUE PROCESS.

IV.

IN FACT, IT WAS WOODCHILD WHO WAS DEPRIVED OF PROPERTY WITHOUT DUE PROCESS BY
THE ASSAILED DECISION.

V.

THE DELAY IN THE CONSTRUCTION WAS DUE TO THE FAILURE OF THE APPELLANT TO EVICT THE
SQUATTERS ON THE LAND AS AGREED IN THE DEED OF ABSOLUTE SALE (EXH. "C").

VI.

THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE RULING OF THE COURT A QUO
DIRECTING THE DEFENDANT TO PAY THE PLAINTIFF THE AMOUNT OF P5,568,000.00
REPRESENTING ACTUAL DAMAGES AND PLAINTIFF'S UNREALIZED INCOME AS WELL AS
ATTORNEY'S FEES.20

The threshold issues for resolution are the following: (a) whether the respondent is bound by the
provisions in the deed of absolute sale granting to the petitioner beneficial use and a right of way over a
portion of Lot

No. 491-A-3-B-1 accessing to the Sumulong Highway and granting the option to the petitioner to buy a
portion thereof, and, if so, whether such agreement is enforceable against the respondent; (b) whether
the respondent failed to eject the squatters on its property within two weeks from the execution of the
deed of absolute sale; and, (c) whether the respondent is liable to the petitioner for damages.

On the first issue, the petitioner avers that, under its Resolution of May 17, 1991, the respondent
authorized Roxas, then its president, to grant a right of way over a portion of Lot No. 491-A-3-B-1 in favor
of the petitioner, and an option for the respondent to buy a portion of the said property. The petitioner
contends that when the respondent sold Lot No. 491-A-3-B-2 covered by TCT No. 78086, it (respondent)
was well aware of its obligation to provide the petitioner with a means of ingress to or egress from the
property to the Sumulong Highway, since the latter had no adequate outlet to the public highway. The
petitioner asserts that it agreed to buy the property covered by TCT No. 78085 because of the grant by
the respondent of a right of way and an option in its favor to buy a portion of the property covered by TCT
No. 78085. It contends that the respondent never objected to Roxas' acceptance of its offer to purchase
the property and the terms and conditions therein; the respondent even allowed Roxas to execute the
deed of absolute sale in its behalf. The petitioner asserts that the respondent even received the purchase
price of the property without any objection to the terms and conditions of the said deed of sale. The
petitioner claims that it acted in good faith, and contends that after having been benefited by the said
sale, the respondent is estopped from assailing its terms and conditions. The petitioner notes that the
respondent's Board of Directors never approved any resolution rejecting the deed of absolute sale
executed by Roxas for and in its behalf. As such, the respondent is obliged to sell a portion of Lot No. 491-
A-3-B-1 covered by TCT No. 78085 with an area of 500 square meters at the price of P1,000 per square
meter, based on its evidence and Articles 649 and 651 of the New Civil Code.

For its part, the respondent posits that Roxas was not so authorized under the May 17, 1991 Resolution of
its Board of Directors to impose a burden or to grant a right of way in favor of the petitioner on Lot No.
491-A-3-B-1, much less convey a portion thereof to the petitioner. Hence, the respondent was not bound
by such provisions contained in the deed of absolute sale. Besides, the respondent contends, the
petitioner cannot enforce its right to buy a portion of the said property since there was no agreement in
the deed of absolute sale on the price thereof as well as the specific portion and area to be purchased by
the petitioner.

We agree with the respondent.

In San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals,21 we held that:

A corporation is a juridical person separate and distinct from its stockholders or members.
Accordingly, the property of the corporation is not the property of its stockholders or members and
may not be sold by the stockholders or members without express authorization from the
corporation's board of directors. Section 23 of BP 68, otherwise known as the Corporation Code of
the Philippines, provides:

"SEC. 23. The Board of Directors or Trustees. – Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of
directors or trustees to be elected from among the holders of stocks, or where there is no
stock, from among the members of the corporation, who shall hold office for one (1) year
and until their successors are elected and qualified."

Indubitably, a corporation may act only through its board of directors or, when authorized either by
its by-laws or by its board resolution, through its officers or agents in the normal course of
business. The general principles of agency govern the relation between the corporation and its
officers or agents, subject to the articles of incorporation, by-laws, or relevant provisions of law. …
22

Generally, the acts of the corporate officers within the scope of their authority are binding on the
corporation. However, under Article 1910 of the New Civil Code, acts done by such officers beyond the
scope of their authority cannot bind the corporation unless it has ratified such acts expressly or tacitly, or
is estopped from denying them:
 Art. 1910. The principal must comply with all the obligations which the agent may have contracted
within the scope of his authority.

As for any obligation wherein the agent has exceeded his power, the principal is not bound except
when he ratifies it expressly or tacitly.

Thus, contracts entered into by corporate officers beyond the scope of authority are unenforceable
against the corporation unless ratified by the corporation.23

In BA Finance Corporation v. Court of Appeals,24 we also ruled that persons dealing with an assumed
agency, whether the assumed agency be a general or special one, are bound at their peril, if they would
hold the principal liable, to ascertain not only the fact of agency but also the nature and extent of
authority, and in case either is controverted, the burden of proof is upon them to establish it.

In this case, the respondent denied authorizing its then president Roberto B. Roxas to sell a portion of Lot
No. 491-A-3-B-1 covered by TCT No. 78085, and to create a lien or burden thereon. The petitioner was
thus burdened to prove that the respondent so authorized Roxas to sell the same and to create a lien
thereon.

Central to the issue at hand is the May 17, 1991 Resolution of the Board of Directors of the respondent,
which is worded as follows:

RESOLVED, as it is hereby resolved, that the corporation, thru the President, sell to any interested
buyer, its 7,213-sq.-meter property at the Sumulong Highway, Antipolo, Rizal, covered by Transfer
Certificate of Title No. N-78086, at a price and on terms and conditions which he deems most
reasonable and advantageous to the corporation;

FURTHER RESOLVED, that Mr. ROBERTO B. ROXAS, President of the corporation, be, as he is
hereby authorized to execute, sign and deliver the pertinent sales documents and receive the
proceeds of sale for and on behalf of the company.25

Evidently, Roxas was not specifically authorized under the said resolution to grant a right of way in favor
of the petitioner on a portion of Lot No. 491-A-3-B-1 or to agree to sell to the petitioner a portion thereof.
The authority of Roxas, under the resolution, to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086 did
not include the authority to sell a portion of the adjacent lot, Lot No. 491-A-3-B-1, or to create or convey
real rights thereon. Neither may such authority be implied from the authority granted to Roxas to sell Lot
No. 491-A-3-B-2 to the petitioner "on such terms and conditions which he deems most reasonable and
advantageous." Under paragraph 12, Article 1878 of the New Civil Code, a special power of attorney is
required to convey real rights over immovable property.26 Article 1358 of the New Civil Code requires that
contracts which have for their object the creation of real rights over immovable property must appear in a
public document.27 The petitioner cannot feign ignorance of the need for Roxas to have been specifically
authorized in writing by the Board of Directors to be able to validly grant a right of way and agree to sell a
portion of Lot No. 491-A-3-B-1. The rule is that if the act of the agent is one which requires authority in
writing, those dealing with him are charged with notice of that fact.28

Powers of attorney are generally construed strictly and courts will not infer or presume broad powers from
deeds which do not sufficiently include property or subject under which the agent is to deal.29 The general
rule is that the power of attorney must be pursued within legal strictures, and the agent can neither go
beyond it; nor beside it. The act done must be legally identical with that authorized to be done.30 In sum,
then, the consent of the respondent to the assailed provisions in the deed of absolute sale was not
obtained; hence, the assailed provisions are not binding on it.

We reject the petitioner's submission that, in allowing Roxas to execute the contract to sell and the deed
of absolute sale and failing to reject or disapprove the same, the respondent thereby gave him apparent
authority to grant a right of way over Lot No. 491-A-3-B-1 and to grant an option for the respondent to
sell a portion thereof to the petitioner. Absent estoppel or ratification, apparent authority cannot remedy
the lack of the written power required under the statement of frauds.31 In addition, the petitioner's fallacy
is its wrong assumption of the unproved premise that the respondent had full knowledge of all the terms
and conditions contained in the deed of absolute sale when Roxas executed it.

It bears stressing that apparent authority is based on estoppel and can arise from two instances: first, the
principal may knowingly permit the agent to so hold himself out as having such authority, and in this way,
the principal becomes estopped to claim that the agent does not have such authority; second, the
principal may so clothe the agent with the indicia of authority as to lead a reasonably prudent person to
believe that he actually has such authority.32 There can be no apparent authority of an agent without acts
or conduct on the part of the principal and such acts or conduct of the principal must have been known
and relied upon in good faith and as a result of the exercise of reasonable prudence by a third person as
claimant and such must have produced a change of position to its detriment. The apparent power of an
agent is to be determined by the acts of the principal and not by the acts of the agent.33

For the principle of apparent authority to apply, the petitioner was burdened to prove the following: (a)
the acts of the respondent justifying belief in the agency by the petitioner; (b) knowledge thereof by the
respondent which is sought to be held; and, (c) reliance thereon by the petitioner consistent with ordinary
care and prudence.34 In this case, there is no evidence on record of specific acts made by the
respondent35 showing or indicating that it had full knowledge of any representations made by Roxas to the
petitioner that the respondent had authorized him to grant to the respondent an option to buy a portion of
Lot No. 491-A-3-B-1 covered by TCT No. 78085, or to create a burden or lien thereon, or that the
respondent allowed him to do so.

The petitioner's contention that by receiving and retaining the P5,000,000 purchase price of Lot No. 491-
A-3-B-2, the respondent effectively and impliedly ratified the grant of a right of way on the adjacent lot,
Lot No. 491-A-3-B-1, and to grant to the petitioner an option to sell a portion thereof, is barren of merit.
It bears stressing that the respondent sold Lot No. 491-A-3-B-2 to the petitioner, and the latter had taken
possession of the property. As such, the respondent had the right to retain the P5,000,000, the purchase
price of the property it had sold to the petitioner. For an act of the principal to be considered as an implied
ratification of an unauthorized act of an agent, such act must be inconsistent with any other hypothesis
than that he approved and intended to adopt what had been done in his name.36 Ratification is based on
waiver – the intentional relinquishment of a known right. Ratification cannot be inferred from acts that a
principal has a right to do independently of the unauthorized act of the agent. Moreover, if a writing is
required to grant an authority to do a particular act, ratification of that act must also be in writing.37 Since
the respondent had not ratified the unauthorized acts of Roxas, the same are unenforceable.38 Hence, by
the respondent's retention of the amount, it cannot thereby be implied that it had ratified the
unauthorized acts of its agent, Roberto Roxas.

On the last issue, the petitioner contends that the CA erred in dismissing its complaint for damages
against the respondent on its finding that the delay in the construction of its warehouse was due to its
(petitioner's) fault. The petitioner asserts that the CA should have affirmed the ruling of the trial court that
the respondent failed to cause the eviction of the squatters from the property on or before September 29,
1991; hence, was liable for P5,660,000. The respondent, for its part, asserts that the delay in the
construction of the petitioner's warehouse was due to its late filing of an application for a building permit,
only on May 28, 1992.

The petitioner's contention is meritorious. The respondent does not deny that it failed to cause the eviction
of the squatters on or before September 29, 1991. Indeed, the respondent does not deny the fact that
when the petitioner wrote the respondent demanding that the latter cause the eviction of the squatters on
April 15, 1992, the latter were still in the premises. It was only after receiving the said letter in April 1992
that the respondent caused the eviction of the squatters, which thus cleared the way for the petitioner's
contractor to commence the construction of its warehouse and secure the appropriate building permit
therefor.

The petitioner could not be expected to file its application for a building permit before April 1992 because
the squatters were still occupying the property. Because of the respondent's failure to cause their eviction
as agreed upon, the petitioner's contractor failed to commence the construction of the warehouse in
October 1991 for the agreed price of P8,649,000. In the meantime, costs of construction materials
spiraled. Under the construction contract entered into between the petitioner and the contractor, the
petitioner was obliged to pay P11,804,160,39 including the additional work costing P1,441,500, or a net
increase of P1,712,980.40 The respondent is liable for the difference between the original cost of
construction and the increase thereon, conformably to Article 1170 of the New Civil Code, which reads:

Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or
delay and those who in any manner contravene the tenor thereof, are liable for damages.

The petitioner, likewise, lost the amount of P3,900,000 by way of unearned income from the lease of the
property to the Ponderosa Leather Goods Company. The respondent is, thus, liable to the petitioner for
the said amount, under Articles 2200 and 2201 of the New Civil Code:

Art. 2200. Indemnification for damages shall comprehend not only the value of the loss suffered,
but also that of the profits which the obligee failed to obtain.

Art. 2201. In contracts and quasi-contracts, the damages for which the obligor who acted in good
faith is liable shall be those that are the natural and probable consequences of the breach of the
obligation, and which the parties have foreseen or could have reasonably foreseen at the time the
obligation was constituted.

In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all
damages which may be reasonably attributed to the non-performance of the obligation.

In sum, we affirm the trial court's award of damages and attorney's fees to the petitioner.

IN LIGHT OF ALL THE FOREGOING, judgment is hereby rendered AFFIRMING the assailed Decision of

the Court of Appeals WITH MODIFICATION. The respondent is ordered to pay to the petitioner the
amount of P5,612,980 by way of actual damages and P100,000 by way of attorney's fees. No costs.

SO ORDERED.

G.R. No. 117847 October 7, 1998

PEOPLE'S AIRCARGO AND WAREHOUSING CO. INC., petitioner,

vs.
COURT OF APPEALS and STEFANI SAÑO, respondents.

PANGANIBAN, J.:

Contracts entered into by a corporate president without express prior board approval bind the corporation,
when such officer's apparent authority is estabished and when these contracts are ratified by the
corporation.

The Case

This principle is stressed by the Court in rejecting the Petition for Review of the February 28, 1994
Decision and the October 28, 1994 Resolution of the Court of Appeals in CA-GR CV No. 30670.

In a collection case1 filed by Stefani Saño against People's Aircargo and Warehousing Co., Inc.,
the Regional Trial Court (RTC) of Pasay City, Branch 110, rendered a Decision2 dated October
26, 1990, the dispositive portion of which reads: 3

WHEREFORE, in light of all the foregoing, Judgment is hereby rendered, ordering

[petitioner] to pay [private respondent] the amount of sixty thousand
(P60,000.00) pesos representing payment of [private respondents] services in
 preparing the manual of operations and in the conduct of a seminar for
[petitioner]. The Counterclaim is hereby dismissed.

Aggrieved by what he considered a minuscule award of P60,000, private respondent appealed

to the Court of Appeals4 (CA) which, in its Decision promulgated February 28, 1994, granted his
prayer for P400,000, as follows: 5

WHEREFORE, PREMISES CONSIDERED, the appealed judgment is hereby

MODIFIED in that [petitioner] is ordered to pay [private respondent] the amount
of four hundred thousand pesos (P400,000.00) representing payment of [private
respondent's] services in preparing the manual of operations and in the conduct of
a seminar for [petitioner].

As no new ground was raised by petitioner, reconsideration of the above-mentioned Decision

was denied in the Resolution promulgated on October 28, 1994.

The Facts

Petitioner is a domestic corporation, which was organized in the middle of 1986 to operate a
customs bonded warehouse at the old Manila International Airport in Pasay City. 6

To obtain a license for the corporation from the Bureau of Customs, Antonio Punsalan Jr., the
corporation president, solicited a proposal from private respondent for the preparation of a
feasibility study.7 Private respondent submitted a letter-proposal dated October 17, 1986
("First Contract" hereafter) to Punsalan, which is reproduced hereunder: 8

Dear Mr. Punsalan:

With reference to your request for professional engineering consultancy services

for your proposed MIA Warehousing Project may we offer the following outputs
and the corresponding rate and terms of agreement:

=======================================

Project Feasibility Study consisting of

Market Study

Technical Study

Financial Feasibility Study

Preparation of pertinent documentation requirements for the

application

_____________________________________________

The above services will be provided for a fee of [p]esos 350,000.00 payable
according to the following schedule:

=====================================================

Fifty percent (50%) upon confirmation of the agreement

Twenty-five percent (25%) 15 days after the confirmation of the agreement

 Twenty-five percent (25%) upon submission of the specified outputs

The outputs will be completed and submitted within 30 days upon confirmation of
the agreement and receipt by us of the first fifty percent payment.

---------------------------------------------------------------------------------

Thank you.

Yours truly, CONFORME:

(S)STEFANI C. SAÑO (S)ANTONIO C. PUNSALAN, JR.

(T)STEFANI C. SAÑO (T)ANTONIO C. PUNSALAN, JR.

Consultant for President, PAIRCARGO

Industrial Engineering

Initially, Cheng Yong, the majority stockholder of petitioner, objected to private respondent's
offer, as another company priced a similar proposal at only P15,000. 9 However, Punsalan
preferred private respondent's service because of the latter's membership in the task force,
which was supervising the transition of the Bureau of Customs from the Marcos government to
the Aquino administration. 10

On October 17, 1986, pertitioner, through Punsalan, sent private respondent a letter,
confirming their agreement as follows:

Dear Mr. Saño:

With regard to the services offered by your company in your letter dated 13
October 1986, for the preparation of the necessary study and documentations to
support our Application for Authority to Operate a public Customs Bonded
Warehouse located at the old MIA Compound in Pasay City, please be informed
that our company is willing to hire your services and will pay the amount of THREE
HUNDRED FIFTY THOUSAND PESOS (P350,000.00) as follows:

P100,000.00 — uppon signing of the agreement;

150,000.00 — on or before October 31, 1986, with the favorable Recommendation

of the CBW on our application.

100,000.00 — upon receipt of the study in final form.

Very truly yours,

(S)ANTONIO C.
PUNSALAN

(T)ANTONIO C.
PUNSALAN

P
r
e
s
 i
d
e
n
t

CONFORME & RECEIVED from PAIRCARGO, the

amount of ONE HUNDRED THOUSAND PESOS

(P100,000.00), this 17th day of October, 1986

as 1st Installment payment of the service agreement

dated October 13, 1986.

(S)STEFANI C. SAÑO

(T)STEFANI C. SAÑO

Accordingly, private respondent prepared a feasibility study for petitioner which eventually
paid him the balance of the contract price, although not according to the schedule agreed
upon. 11

On December 4, 1986, upon Punsalan's request, private respondent sent petitioner another
letter-proposal ("Second Contract" hereafter), which reads:

People's Air Cargo & Warehousing Co., Inc.

Old MIA Compound, Metro Manila

Attention: Mr. ANTONIO PUN[S]ALAN, JR.

President

Dear Mr. Pun[s]alan:

This is to formalize our proposal for consultancy services to your company the
scope of which is defined in the attached service description.

The total service you have decided to avail . . . would be available upon signing of
the conforme below and would come [in] the amount of FOUR HUNDRED
THOUSAND PESOS (P400,000.00) payable at the schedule defined as follows (with
the balance covered by post-dated cheques):

Downpayment upon signing conforme P80,000.00

15 January 1987 53,333.00

30 January 1987 53,333.00

15 February 1987 53,333.00

28 February 1987 53,333.00

 15 March1987 53,333.00

30 March 1987 53,333.00

With is package, you are assured of the highest service quality as our performance
record shows we always deliver no less.

Thank you very much.

Yours truly,

(S)STEFANI C. SAÑO

(T)STEFANI C. SAÑO

Industrial Engineering Consultant

CONFORME:

(S)ANTONIO C. PUNSALAN JR.

(T)PAIRCARGO CO. INC.

During the trial, the lower court observed that the Second Contract bore, at the lower right
portion of the letter, the following notations in pencil:

1. Operations Manual

2. Seminar/workshop for your employees

P400,000 — package deal

50% upon completion of seminar/workshop

50% upon approval by the Commissioner

The Manual has already been approved by the Commissioner but payment has not
yet been made.

The lower left corner of the letter also contained the following notations:

1st letter — 4 Dec. 1986

2nd letter — 15 June 1987 with

"Hinanakit".

On January 10, 1987, Andy Villaceren, vice president of petitioner, received the operations
manual prepared by private respondent. 12 Petitioner submitted said operations manual to the
Bureau of Customs is connection with the former's application to operate a bonded warehouse;
thereafter, in May 1987, the Bureau issued to it a license to operate, enabling it to become one
of the three public bonded warehouses at the international airport. 13 Private respondent also
conducted, in the third week of January 1987 in the warehouse of petitioner, a three-day
training seminar for the latter's employees. 14
On March 25, 1987, private respondent joined the Bureau of Customs as special assistant to
then Commissioner Alex Padilla, a position he held until he became technical assitant to then
Commissioner Miriam Defensor-Santiago on March 7, 1988. 15 Meanwhile, Punsalan sold his
shares in petitioner-corporation and resigned as its president in 1987. 16

On February 9, 1988, private respondent filed a collection suit against petitioner. He allege that
he had prepared an operations manual for petitioner, conducted a seminar-workshop for its
employees and delivered to it a computer program; but that, despite demand, petitioner
refused to pay him for his services.

Petitioner, in its answer, denied that private respondent had prepared an operations manual
and a computer program or conducted a seminar-workshop for its employees. It further alleged
that the letter-agreement was signed by Punsalan without authority, "in collusion with [private
respondent] in order to unlawfully get some money from [petitioner]," and despite his
knowledge that a group of employees of the company had been commissioned by the board of
directors to prepare an operations manual. 17

The trial court declared the Second Contract unenforceable or simulated. However, since
private respondent had actually prepared the operations manual and conducted a training
seminar for petitioner and its employees, the trial court awarded P60,000 to the former, on the
ground that no one should be unjustly enriched at the expense of another (Article 2142, Civil
Code). The trial court determined the amount "in light of the evidence presented by defendant
on the usual charges made by a leading consultancy firm on similar services." 18

The Ruling of the Court of Appeals

To Respondent Court, the pivotal issue of private respondent's appeal was the enforceability of
the Second Contract. It noted that petitioner did not appeal the Decision of the trial court,
implying that it had agreed to pay the P60,000 award. If the contract was valid and
enforceable, then petitioner should be held liable for the full amount stated therein, not
P60,000 as held by the lower court.

Rejecting the finding of the trial court that the December 4, 1986 contract was simulated or
unenforceable, the CA ruled in favor of its validity and enforceability. According to the Court of
Appeals, the evidence on record shows that the president of petititoner-corporation had
entered into the First Contract, which was similar to the Second Contract. Thus, petitioner had
clothed its president with apparent authority to enter into the disputed agreement. As it had
also become the practice of the petitioner-corporation to allow its president to negotiate and
execute contracts necessary to secure its license as a customs bonded warehouse without prior
board approval, the board itself, by its acts and through acquiescence, practically laid aside the
normal requirement of prior express approval. The Second Contract was declared valid and
binding on the petitioner, which was held liable to private respondent in the full amount of
P400,000.

Disagreeing with the CA, petitioner lodged this petition before us. 19

The Issues

Instead of alleging reversible errors, petitioner imputes "grave abuse of discretion" to the
Court of Appeals, viz.: 20

I. . . . [I]n ruling that the subject letter-agreement for services was binding on the
corporation simply because it was entered into by its president[;]

II. . . . [I]n ruling that the subject letter-agreement for services was binding on
the corporation notwithstanding the lack of any board authority since it was the
 purported "practice" to allow the president to enter into contracts of said nature
(citing one previous instance of a similar contract)[;] and

III. . . . [I]n ruling that the subject letter-agreement for services was a valid
contract and not merely simulated.

The Court will overlook the lapse of petitioner in alleging grave abuse of discretion as its
ground for seeking reversal of the assailed Decision. Although the Rules of Court specify
"reversible errors" as grounds for a petition for review under Rule 45, the Court will lay aside
for the nonce this procedural lapse and consider the allegations of "grave abuse" as statements
of reversible errors of law.

Petitioner does not contest its liability; it merely disputes the amount of such accountability.
Hence, the resolution of this petition rests on the sole issue of the enforceability and validity of
the Second Contract, more specifically: (1) whether the president of the petitioner-corporation
had apparent authority to bind petitioner to the Second Contract; and (2) whether the said
contract was valid and not merely simulated.

The Court's Ruling

The petition is not meritorious.

First Issue:

Apparent Authority of a Corporate President

Petitioner argues that the disputed contract is unenforceable, because Punsalan, its president,
was not authorized by its board of directors to enter into said contract.

The general rule is that, in the absence of authority from the board of directors, no person, not
even its officers, can validly bind a corporation. 21 A corporation is a juridical person, separate
and distinct from its stockholders and members, "having . . . powers, attributes and properties
expressly authorized by law or incident to its existence." 22

Being a juridical entity, a corporation may board of directors, which exercises almost all
corporate powers, lays down all corporate business policies and is responsible for the efficiency
of management, 23 as provided in Section 23 of the Corporation Code of the Philippines:

Sec. 23. The Board of Directors or Trustees. — Unless otherwise provided in this
Code, the corporate powers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such corporations controlled
and held by the board of directors or trustees . . . .

Under this provision, the power and the responsibility to decide whether the corporation should
enter into a contract that will bind the corporation is lodged in the board, subject to the articles
of incorporaration, bylaws, or relevant provisions of law. 24 Howeever, just as a natural person
may authorize another to do certain acts for and on his behalf, the board of directors may
validly delegate some of its functions and powers to officers, committees or agents. The
authority of such individuals to bind the corporation is generally derived from law, corporate
bylaws or authorization from the board, either expressly or impliedly by habit, custom or
acquiescence in the general course of business, viz.: 25

A corporate officer or agent may represent and bind the corporation in

transactions with third persons to the extent that [the] authority to do so has
been conferred upon him, and this includes powers which have been intentionally
conferred, and also such powers as, in the usual course of the particular business,
are incidental to, or may be implied from, the powers intentionally conferred,
 powers added by custom and usage, as usually pertaining to the particular officer
or agent, and such apparent powers as the corporation has caused persons
dealing with the officer or agent to believe that it has conferred.

Accordingly, the appellate court ruled in this case that the authority to act for and to bind a
corporation may be presumed from acts of recognition in other instances, wherein the power
was in fact exercised without any objection from its board or shareholders. Petitioner had
previously allowed its president to enter into the First Contract with private respondent
without a board resolution expressly authorizing him; thus, it had clothed its president with
apparent authority to execute the subject contract.

Petitioner rebuts, arguing that a single isolated agreement prior to the subject contract does
not constitute corporate practice, which Webster defines as "frequent or custmary action." It
cites Board of Liquidators v. Kalaw, 26 in which the practice of NACOCO allowing its general
manager to negotiate and execute contract in its copra trading activities for and on its behalf,
without prior board approval, was inferred from sixty contract — not one, as in present case —
previously entered into by the corporation without such board resolution.

Petitioner's argument is not persuasive. Apparent authority is derived not merely from
practice. Its existence may be ascertained through (1) the general manner in which the
corporation holds out an officer or agent as having the power to act or, in other words, the
apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his
acts of a particular nature, with actual or constructive knowledge thereof, whether within or
beyond the scope of his ordinary powers.27 It requires presentation of evidence of similar
act(s) executed either in its favor or in favor of other parties. 28 It is not the quantity of similar
acts which establishes apparent authority, but the vesting of a corporale officer with the power
to bind the corporation.

In the case at bar, petitioner, through its president Antonio Punsalan Jr., entered into the First
Contract without first securing board approval. Despite such lack of board approval, petitioner
did not object to or repudiate said contract, thus "clothing" its president with the power to bind
the corporation. The grant of apparent authority to Punsalan is evident in the testimony of
Yong — senior vice president, treasurer and major stockholder of petitioner. Testifying on the
First Contract, he said: 29

A: Mr. [Punsalan] told me that he prefer[s] Mr. Saño because Mr.

Saño is very influential with the Collector of Customs[s]. Because the
Collector of Custom[s] will be the one to approve our project study
and I objected to that, sir. And I said it [was an exorbitant] price. And
Mr. Punsalan he is the [p]resident, so he [gets] his way.

Q: And so did the company eventually pay this P350,000.00 to Mr.

Saño?

A: Yes, sir.

The First Contract was consummated, implemented and paid without a hitch.

Hence, private respondent should not be faulted for believing that Punsalan's conformity to the
contract in dispute was also binding on petitioner. It is familiar doctrine that if a corporation
knowingly permits one of its officers, or any other agent, to act within the scope of an apparent
authority, it holds him out to the public as possessing the power to do those acts; and thus, the
corporation will, as against anyone who has in good faith dealt with it through such agent, be
estopped from denying the agent's authority. 30

Furthermore, private respondent prepared an operations manual and conducted a seminar for
the employees of petitioner in accordance with their contract. Petitioner accepted the
operations manual, submitted it to the Bureau of Customs and allowed the seminar for its
employees. As a result of its aforementioned actions, petitioner was given by the Bureau of
Customs a license to operate a bonded warehouse. Granting arguendo then that the Second
Contract was outside the usual powers of the president, petitioner's ratification of said contract
and acceptance of benefits have made it binding, nonetheless. The enforceability of contracts
under Article 1403(2) is ratified "by the acceptance of benefits under them" under Article
1405.

Inasmuch as a corporate president is often given general supervision and control over
corporate operations, the strict rule that said officer has no inherent power to act for the
corporation is slowly giving way to the realization that such officer has certain limited powers
in the transaction of the usual and ordinary business of the corporation. 31 In the absence of a
charter or bylaw provision to the contrary, the president is presumed to have the authority to
act within the domain of the general objectives of its business and within the scope of his or
her usual duties. 32

Hence, it has been held in other jurisdictions that the president of a corporation possesses the
power to enter into a contract for the corporation, when the "conduct on the part of both the
president and the corporation [shows] that he had been in the habit of acting in similar matters
on behalf of the company and that the company had authorized him so to act and had
recognized, approved and ratified his former and similar actions." 33 Furthermore, a party
dealing with the president of a corporation is entitled to assume that he has the authority to
enter, on behalf of the corporation, into contracts that are within the scope of the powers of
said corporation and that do not violate any statute or rule on public policy. 34

Second Issue:
Alleged Simulation of the First Contract

As an alternative position, petitioner seeks to pare down its liabilities by limiting its exposure
from P400,000 to only P60,000, the amount awarded by the RTC. Petitioner capitalizes on the
"badges of fraud" cited by the trial court in declaring said contract either simulated or
unenforceable, viz.:

. . . The October 1986 transaction with [private respondent] involved P350,000.

The same was embodied in a letter which bore therein not only the conformity of
[petitioner's] then President Punsalan but also drew a letter-confirmation from
the latter for, indeed, he was clothed with authority to enter into the contract after
the same was brought to the attention and consideration of [petitioner]. Not only
that, a [down payment] was made. In the alleged agreement of December 4, 1986
subject of the present case, the amount is even bigger - P400,000.00. Yet, the
alleged letter-agreement drew no letter of confirmation. And no [down payment]
and postdated checks were given. Until the filing of the present case in February
1988, no written demand for payment was sent to [petitioner]. [Private
respondent's] claim that he sent one in writing, and one was sent by his counsel
who manifested that "[h]e was looking for a copy in [his] files" fails in light of his
failure to present any such copy. These and the following considerations, to wit:

1) Despite the fact that no [down payment] and/or postdated checks [partial
payments] (as purportedly stipulated in the alleged contract) [was given, private
respondent] went ahead with the services[;]

2) [There was a delay in the filing of the present suit, more than a year after
[private respondent] allegedly completed his services or eight months after the
alleged last verbal demand for payment made on Punsalan in June 1987;

3) Does not Punsalan's writing allegedly in June 1987 on the alleged letter-
agreement of "your employees[,]" when it should have been "our employees", as
he was then still connected with [petitioner], indicate that the letter-agreement
 was signed by Punsalan when he was no longer connected with [petitioner] or, as
claimed by [petitioner], that Punsalan signed it without [petitioner's] authority
and must have been done "in collusion with plaintiff in order to unlawfully get
some money from [petitioner]?

4) If, as [private respondent] claims, the letter was returned by Punsalan after
affixing thereon his conformity, how come . . . when Punsalan allegedly visited
[private respondent] in his office at the Bureau of Customs, in June 1987,
Punsalan "brought" (again?) the letter (with the pencil [notation] at the left
bottom portion allegedly already written)?

5) How come . . . [private respondent] did not even keep a copy of the alleged
service contract allegedly attached to the letter-agreement?

6) Was not the letter-agreement a mere draft, it bearing the corrections made by
Punsalan of his name (the letter "n" is inserted before the last letter "o" in
Antonio) and of the spelling of his family name (Punsalan, not Punzalan)?

7) Why was not Punsalan impleaded in the case?

The issue of whether the contract is simulated or real is factual in nature, and the Court
eschews factual examinanon in a petition for review under Rule 45 of the Rules of Court. 35 This
rule, however, admits of exceptions, one of which is a conflict between the factual findings of
the lower and of the appellate courts 36 as in the case at bar.

After judicious deliberation, the Court agrees with the appellate court that the alleged "badges
of fraud" mentioned earlier have not affected in any manner the perfection thereof. First, the
lack of payment (whether down, partial or full payment), even after completion of private
respondent's obligations, imports only a defect in the performance of the contract on the part
of petitioner. Second, the delay in the filing of action was not fatal to private respondent's
cause. Despite the lapse of one year after private respondent completed his services or eight
months after the alleged last demand for payment in June 1987, the action was still filed within
the allowable period, considering that an action based on a written contract prescribes only
after ten years from the time the right of action accrues. 37 Third, a misspelling in the contract
does not establish vitiation of consent, cause or object of the contract. Fourth, a confirmation
letter is not an essential element of a contract, neither is it necessary to perfect one. Fifth,
private respondent's failure to implead the corporate president does not establish collusion
between them. Petitioner could have easily filed a third-party claim against Punsalan if it
believed that it had recourse against the latter. Lastly, the mere fact that the contract price
was six times the alleged going rate does not invalidate it. 38 In short, these "badges" do not
establish simulation of said contract.

A fictitious and simulated agreement lacks consent which is essential to a valid and enforceable
contract. 39 A contract is simulated if the parties do not intend to be bound at all (absolutely
simulated), 40 or if the parties conceal their true agreement (relatively simulated). 41 In the case
at bar, petitioner received from private respondent a letter-offer containing the terms of the
former, including a stipulation of the consideration for the latter's services. Punsalan's
conformity, as well as the receipt and use of the operations manual, shows petitioner's consent
to or, at the very least, ratification of the contract. To repeat, petitioner even submitted the
manual to the Bureau of Customs and allowed private respondent to conduct the seminar for its
employees. Private respondent heard no objection from the petitioner, until he claimed
payment for the services he had rendered.

Contemporaneous and subsequent acts are also principal factors in the determination of the
will of the contracting parties. 42 The circumstances outlined above do not establish any
intention to simulate the contract in dispute. On the contrary, the legal presumption is always
on the validity of contracts. A corporation, by accepting benefits of a transaction entered into
without authority, has ratified the agreement and is, therefore, bound by it. 43
WHEREFORE, the petition is hereby DENIED and the assailed Decision AFFIRMED. Costs against
petitioner.

SO ORDERED.

G.R. No. 136426           August 6, 1999

E. B. VILLAROSA & PARTNER CO., LTD., petitioner,

vs.
HON. HERMINIO I. BENITO, in his capacity as Presiding Judge, RTC, Branch 132, Makati City
and IMPERIAL DEVELOPMENT CORPORATION, respondent.

GONZAGA-REYES, J.:

Before this Court is a petition for certiorari and prohibition with prayer for the issuance of a temporary
restraining order and/or writ of preliminary injunction seeking to annul and set aside the Orders dated
August 5, 1998 and November 20, 1998 of the public respondent Judge Herminio I. Benito of the Regional
Trial Court of Makati City, Branch 132 and praying that the public respondent court be ordered to desist
from further proceeding with Civil Case No. 98-824.

Petitioner E.B. Villarosa & Partner Co., Ltd. is a limited partnership with principal office address at 102
Juan Luna St., Davao City and with branch offices at 2492 Bay View Drive, Tambo, Parañaque, Metro
Manila and Kolambog, Lapasan, Cagayan de Oro City. Petitioner and private respondent executed a Deed
of Sale with Development Agreement wherein the former agreed to develop certain parcels of land located
at Barrio Carmen, Cagayan de Oro belonging to the latter into a housing subdivision for the construction
of low cost housing units. They further agreed that in case of litigation regarding any dispute arising
therefrom, the venue shall be in the proper courts of Makati.

On April 3, 1998, private respondent, as plaintiff, filed a Complaint for Breach of Contract and Damages
against petitioner, as defendant, before the Regional Trial Court of Makati allegedly for failure of the latter
to comply with its contractual obligation in that, other than a few unfinished low cost houses, there were
no substantial developments therein.1

Summons, together with the complaint, were served upon the defendant, through its Branch Manager
Engr. Wendell Sabulbero at the stated address at Kolambog, Lapasan, Cagayan de Oro City2 but the
Sheriff's Return of Service3 stated that the summons was duly served "upon defendant E.B. Villarosa &
Partner Co., Ltd. thru its Branch Manager Engr. WENDELL SALBULBERO on May 5, 1998 at their new office
Villa Gonzalo, Nazareth, Cagayan de Oro City, and evidenced by the signature on the face of the original
copy of the summons.1âwphi1.nêt

On June 9, 1998, defendant filed a Special Appearance with Motion to Dismiss4 alleging that on May 6,
1998, "summons intended for defendant" was served upon Engr. Wendell Sabulbero, an employee of
defendant at its branch office at Cagayan de Oro City. Defendant prayed for the dismissal of the complaint
on the ground of improper service of summons and for lack of jurisdiction over the person of the
defendant. Defendant contends that the trial court did not acquire jurisdiction over its person since the
summons was improperly served upon its employee in its branch office at Cagayan de Oro City who is not
one of those persons named in Section 11, Rule 14 of the 1997 Rules of Civil Procedure upon whom
service of summons may be made.

Meanwhile, on June 10, 1998, plaintiff filed a Motion to Declare Defendant in Default5 alleging that
defendant has failed to file an Answer despite its receipt allegedly on May 5, 1998 of the summons and
the complaint, as shown in the Sheriffs Return.

On June 22, 1998, plaintiff filed an Opposition to Defendant's Motion to Dismiss6 alleging that the records
show that defendant, through its branch manager, Engr. Wendell Sabulbero actually received the
summons and the complaint on May 8, 1998 as evidenced by the signature appearing on the copy of the
summons and not on May 5, 1998 as stated in the Sheriffs Return nor on May 6, 1998 as stated in the
motion to dismiss; that defendant has transferred its office from Kolambog, Lapasan, Cagayan de Oro to
its new office address at Villa Gonzalo, Nazareth, Cagayan de Oro; and that the purpose of the rule is to
bring home to the corporation notice of the filing of the action.

On August 5, 1998, the trial court issued an Order7 denying defendant's Motion to Dismiss as well as
plaintiffs Motion to Declare Defendant in Default. Defendant was given ten (10) days within which to file a
responsive pleading. The trial court stated that since the summons and copy of the complaint were in fact
received by the corporation through its branch manager Wendell Sabulbero, there was substantial
compliance with the rule on service of summons and consequently, it validly acquired jurisdiction over the
person of the defendant.

On August 19, 1998, defendant, by Special Appearance, filed a Motion for Reconsideration8 alleging that
Section 11, Rule 14 of the new Rules did not liberalize but, on the contrary, restricted the service of
summons on persons enumerated therein; and that the new provision is very specific and clear in that the
word "manager" was changed to "general manager", "secretary" to "corporate secretary", and excluding
therefrom agent and director.

On August 27, 1998, plaintiff filed an Opposition to defendant's Motion for Reconsideration9 alleging that
defendant's branch manager "did bring home" to the defendant-corporation the notice of the filing of the
action and by virtue of which a motion to dismiss was filed; and that it was one (1) month after receipt of
the summons and the complaint that defendant chose to file a motion to dismiss.

On September 4, 1998, defendant, by Special Appearance, filed a Reply10 contending that the changes in
the new rules are substantial and not just general semantics.

Defendant's Motion for Reconsideration was denied in the Order dated November 20, 1998.11

Hence, the present petition alleging that respondent court gravely abused its discretion tantamount to lack
or in excess of jurisdiction in denying petitioner's motions to dismiss and for reconsideration, despite the
fact that the trial court did not acquire jurisdiction over the person of petitioner because the summons
intended for it was improperly served. Petitioner invokes Section 11 of Rule 14 of the 1997 Rules of Civil
Procedure.

Private respondent filed its Comment to the petition citing the cases Kanlaon Construction Enterprises
Co., Inc. vs. NLRC12 wherein it was held that service upon a construction project manager is valid and
in Gesulgon vs. NLRC13 which held that a corporation is bound by the service of summons upon its
assistant manager.

The only issue for resolution is whether or not the trial court acquired jurisdiction over the person of
petitioner upon service of summons on its Branch Manager.

When the complaint was filed by Petitioner on April 3, 1998, the 1997 Rules of Civil Procedure was already
in force.14

Sec. 11, Rule 14 of the 1997 Rules of Civil Procedure provides that:

When the defendant is a corporation, partnership or association organized under the laws of the
Philippines with a juridical personality, service may be made on the president, managing
partner, general manager, corporate secretary, treasurer, or in-house counsel. (emphasis
supplied).

This provision revised the former Section 13, Rule 14 of the Rules of Court which provided that:

Sec. 13. Service upon private domestic corporation or partnership. — If the defendant is a

corporation organized under the laws of the Philippines or a partnership duly registered, service
may be made on the president, manager, secretary, cashier, agent, or any of its directors.
(emphasis supplied).
Petitioner contends that the enumeration of persons to whom summons may be served is "restricted,
limited and exclusive" following the rule on statutory construction expressio unios est exclusio alterius and
argues that if the Rules of Court Revision Committee intended to liberalize the rule on service of
summons, it could have easily done so by clear and concise language.

We agree with petitioner.

Earlier cases have uphold service of summons upon a construction project manager15; a corporation's
assistant manager16; ordinary clerk of a corporation17; private secretary of corporate executives18; retained
counsel19; officials who had charge or control of the operations of the corporation, like the assistant
general manager20; or the corporation's Chief Finance and Administrative Officer21. In these cases, these
persons were considered as "agent" within the contemplation of the old rule.22 Notably, under the new
Rules, service of summons upon an agent of the corporation is no longer authorized.

The cases cited by private respondent are therefore not in point.

In the Kanlaon case, this Court ruled that under the NLRC Rules of Procedure, summons on the
respondent shall be served personally or by registered mail on the party himself; if the party is
represented by counsel or any other authorized representative or agent, summons shall be served on such
person. In said case, summons was served on one Engr. Estacio who managed and supervised the
construction project in Iligan City (although the principal address of the corporation is in Quezon City) and
supervised the work of the employees. It was held that as manager, he had sufficient responsibility and
discretion to realize the importance of the legal papers served on him and to relay the same to the
president or other responsible officer of petitioner such that summons for petitioner was validly served on
him as agent and authorized representative of petitioner. Also in the Gesulgon case cited by private
respondent, the summons was received by the clerk in the office of the Assistant Manager (at principal
office address) and under Section 13 of Rule 14 (old rule), summons may be made upon the clerk who is
regarded as agent within the contemplation of the rule.

The designation of persons or officers who are authorized to accept summons for a domestic corporation
or partnership is now limited and more clearly specified in Section 11, Rule 14 of the 1997 Rules of Civil
Procedure. The rule now states "general manager" instead of only "manager"; "corporate secretary"
instead of "secretary"; and "treasurer" instead of "cashier." The phrase "agent, or any of its directors" is
conspicuously deleted in the new rule.

The particular revision under Section 11 of Rule 14 was explained by retired Supreme Court Justice
Florenz Regalado, thus:23

. . . the then Sec. 13 of this Rule allowed service upon a defendant corporation to "be made on the
president, manager, secretary, cashier, agent or any of its directors." The aforesaid terms were
obviously ambiguous and susceptible of broad and sometimes illogical interpretations, especially
the word "agent" of the corporation. The Filoil case, involving the litigation lawyer of the
corporation who precisely appeared to challenge the validity of service of summons but whose very
appearance for that purpose was seized upon to validate the defective service, is an illustration of
the need for this revised section with limited scope and specific terminology. Thus the absurd result
in the Filoil case necessitated the amendment permitting service only on the in-house counsel of
the corporation who is in effect an employee of the corporation, as distinguished from an
independent practitioner. (emphasis supplied).

Retired Justice Oscar Herrera, who is also a consultant of the Rules of Court Revision Committee, stated
that "(T)he rule must be strictly observed. Service must be made to one named in (the) statute . . . .24

It should be noted that even prior to the effectivity of the 1997 Rules of Civil Procedure, strict compliance
with the rules has been enjoined. In the case of Delta Motor Sales Corporation vs. Mangosing,25 the Court
held:
 A strict compliance with the mode of service is necessary to confer jurisdiction of the court over a
corporation. The officer upon whom service is made must be one who is named in the statute;
otherwise the service is insufficient. . . .

The purpose is to render it reasonably certain that the corporation will receive prompt and proper
notice in an action against it or to insure that the summons be served on a representative so
integrated with the corporation that such person will know what to do with the legal papers served
on him. In other words, "to bring home to the corporation notice of the filing of the action." . . . .

The liberal construction rule cannot be invoked and utilized as a substitute for the plain legal
requirements as to the manner in which summons should be served on a domestic corporation. . . .
. (emphasis supplied).

Service of summons upon persons other than those mentioned in Section 13 of Rule 14 (old rule) has
been held as improper.26 Even under the old rule, service upon a general manager of a firm's branch office
has been held as improper as summons should have been served at the firm's principal office. In First
Integrated Bonding & Inc. Co., Inc. vs. Dizon,27 it was held that the service of summons on the general
manager of the insurance firm's Cebu branch was improper; default order could have been obviated had
the summons been served at the firm's principal office.

And in the case of Solar Team Entertainment, Inc. vs. Hon. Helen Bautista Ricafort, et al.28 the Court
succinctly clarified that, for the guidance of the Bench and Bar, "strictest" compliance with Section 11 of
Rule 13 of the 1997 Rules of Civil Procedure (on Priorities in modes of service and filing) is mandated and
the Court cannot rule otherwise, lest we allow circumvention of the innovation by the 1997 Rules in order
to obviate delay in the administration of justice.

Accordingly, we rule that the service of summons upon the branch manager of petitioner at its branch
office at Cagayan de Oro, instead of upon the general manager at its principal office at Davao City is
improper. Consequently, the trial court did not acquire jurisdiction over the person of the petitioner.

The fact that defendant filed a belated motion to dismiss did not operate to confer jurisdiction upon its
person. There is no question that the defendant's voluntary appearance in the action is equivalent to
service of summons.29 Before, the rule was that a party may challenge the jurisdiction of the court over
his person by making a special appearance through a motion to dismiss and if in the same motion, the
movant raised other grounds or invoked affirmative relief which necessarily involves the exercise of the
jurisdiction of the court.30 This doctrine has been abandoned in the case of La Naval Drug Corporation
vs. Court of Appeals, et al.,31 which became the basis of the adoption of a new provision in the former
Section 23, which is now Section 20 of Rule 14 of the 1997 Rules. Section 20 now provides that "the
inclusion in a motion to dismiss of other grounds aside from lack of jurisdiction over the person of the
defendant shall not be deemed a voluntary appearance." The emplacement of this rule clearly underscores
the purpose to enforce strict enforcement of the rules on summons. Accordingly, the filing of a motion to
dismiss, whether or not belatedly filed by the defendant, his authorized agent or attorney, precisely
objecting to the jurisdiction of the court over the person of the defendant can by no means be deemed a
submission to the jurisdiction of the court. There being no proper service of summons, the trial court
cannot take cognizance of a case for lack of jurisdiction over the person of the defendant. Any proceeding
undertaken by the trial court will consequently be null and void.32

WHEREFORE, the petition is hereby GRANTED. The assailed Orders of the public respondent trial court are
ANNULLED and SET ASIDE. The public respondent Regional Trial Court of Makati, Branch 132 is declared
without jurisdiction to take cognizance of Civil Case No. 98-824, and all its orders and issuances in
connection therewith are hereby ANNULLED and SET ASIDE.1âwphi1.nêt

SO ORDERED.

G.R. No. 151413             February 13, 2008

CAGAYAN VALLEY DRUG CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

VELASCO, JR., J.:

The Case

This petition for review under Rule 45 of the Rules of Court seeks the recall of the August 31, 2000
Resolution1 of the Court of Appeals (CA) in CA-G.R. SP No. 59778, which dismissed petitioner Cagayan
Valley Drug Corporation’s petition for review of the April 26, 2000 Decision2 of the Court of Tax Appeals
(CTA) in C.T.A. Case No. 5581 on the ground of defective verification and certification against forum
shopping.

The Facts

Petitioner, a corporation duly organized and existing under Philippine laws, is a duly licensed retailer of
medicine and other pharmaceutical products. It operates two drugstores, one in Tuguegarao, Cagayan,
and the other in Roxas, Isabela, under the name and style of "Mercury Drug."

Petitioner alleged that in 1995, it granted 20% sales discounts to qualified senior citizens on purchases of
medicine pursuant to Republic Act No. (RA) 74323 and its implementing rules and regulations.

In compliance with Revenue Regulation No. (RR) 2-94, petitioner treated the 20% sales discounts granted
to qualified senior citizens in 1995 as deductions from the gross sales in order to arrive at the net sales,
instead of treating them as tax credit as provided by Section 4 of RA 7432.

On December 27, 1996, however, petitioner filed with the Bureau of Internal Revenue (BIR) a claim for
tax refund/tax credit of the full amount of the 20% sales discount it granted to senior citizens for the year
1995, allegedly totaling to PhP 123,083 in accordance with Sec. 4 of RA 7432.

The BIR’s inaction on petitioner’s claim for refund/tax credit compelled petitioner to file on March 18, 1998
a petition for review before the CTA docketed as C.T.A. Case No. 5581 in order to forestall the two-year
prescriptive period provided under Sec. 2304 of the 1977 Tax Code, as amended. Thereafter, on March 31,
2000, petitioner amended its petition for review.

The Ruling of the Court of Tax Appeals

On April 26, 2000, the CTA rendered a Decision dismissing the petition for review for lack of merit.5

The CTA sustained petitioner’s contention that pursuant to Sec. 4 of RA 7432, the 20% sales discounts
petitioner extended to qualified senior citizens in 1995 should be treated as tax credit and not as
deductions from the gross sales as erroneously interpreted in RR 2-94. The CTA reiterated its consistent
holdings that RR 2-94 is an invalid administrative interpretation of the law it purports to implement as it
contravenes and does not conform to the standards RA 7432 prescribes.

Notwithstanding petitioner’s entitlement to a tax credit from the 20% sales discounts it extended to
qualified senior citizens in 1995, the CTA nonetheless dismissed petitioner’s action for refund or tax credit
on account of petitioner’s net loss in 1995. First, the CTA rejected the refund as it is clear that RA 7432
only grants the 20% sales discounts extended to qualified senior citizens as tax credit and not as tax
refund. Second, in rejecting the tax credit, the CTA reasoned that while petitioner may be qualified for a
tax credit, it cannot be so extended to petitioner on account of its net loss in 1995.
The CTA ratiocinated that on matters of tax credit claim, the government applies the amount determined
to be reimbursable after proper verification against any sum that may be due and collectible from the
taxpayer. However, if no tax has been paid or if no amount is due and collectible from the taxpayer, then
a tax credit is unavailing. Moreover, it held that before allowing recovery for claims for a refund or tax
credit, it must first be established that there was an actual collection and receipt by the government of the
tax sought to be recovered. In the instant case, the CTA found that petitioner did not pay any tax by
virtue of its net loss position in 1995.

Petitioner’s Motion for Reconsideration was likewise denied through the appellate tax court’s June 30,
2000 Resolution.6

The Ruling of the Court of Appeals

Aggrieved, petitioner elevated the matter before the CA, docketed as CA-G.R. SP No. 59778. On August
31, 2000, the CA issued the assailed Resolution7 dismissing the petition on procedural grounds. The CA
held that the person who signed the verification and certification of absence of forum shopping, a certain
Jacinto J. Concepcion, President of petitioner, failed to adduce proof that he was duly authorized by the
board of directors to do so.

As far as the CA was concerned, the main issue was whether or not the verification and certification of
non-forum shopping signed by the President of petitioner is sufficient compliance with Secs. 4 and 5, Rule
7 of the 1997 Rules of Civil Procedure.

The verification and certification in question reads:

I, JACINTO J. CONCEPCION, of legal age with office address at 2nd Floor, Mercury Drug Corporation,
No. 7 Mercury Ave, Bagumbayan, Quezon City, under oath, hereby state that:

1. I am the President of Cagayan Valley Drug Corporation, Petitioner in the above-entitled case and
am duly authorized to sign this Verification and Certification of Absence of Forum Shopping by the
Board of Director.

xxxx

The CA found no sufficient proof to show that Concepcion was duly authorized by the Board of Directors of
petitioner. The appellate court anchored its disposition on our ruling in Premium Marble Resources, Inc. v.
Court of Appeals (Premium), that "[i]n the absence of an authority from the Board of Directors, no person,
not even the officers of the corporation, can validly bind the corporation."8

Hence, we have this petition.

The Issues

Petitioner raises two issues: first, whether petitioner’s president can sign the subject verification and
certification sans the approval of its Board of Directors. And second, whether the CTA committed
reversible error in denying and dismissing petitioner’s action for refund or tax credit in C.T.A. Case No.
5581.

The Court’s Ruling

The petition is meritorious.

Premium not applicable

As regards the first issue, we find the CA to have erroneously relied on Premium. In said case, the issue
tackled was not on whether the president of Premium Marble Resources, Inc. was authorized to sign the
verification and certification against forum shopping, but rather on which of the two sets of officers, both
claiming to be the legal board of directors of Premium, have the authority to file the suit for and in behalf
of the company. The factual antecedents and issues in Premium are not on all fours with the instant case
and is, therefore, not applicable.

With respect to an individual litigant, there is no question that litigants must sign the sworn verification
and certification unless they execute a power of attorney authorizing another person to sign it. With
respect to a juridical person, Sec. 4, Rule 7 on verification and Sec. 5, Rule 7 on certification against
forum shopping are silent as to who the authorized signatory should be. Said rules do not indicate if the
submission of a board resolution authorizing the officer or representative is necessary.

Corporate powers exercised through board of directors

It must be borne in mind that Sec. 23, in relation to Sec. 25 of the Corporation Code, clearly enunciates
that all corporate powers are exercised, all business conducted, and all properties controlled by the board
of directors. A corporation has a separate and distinct personality from its directors and officers and can
only exercise its corporate powers through the board of directors. Thus, it is clear that an individual
corporate officer cannot solely exercise any corporate power pertaining to the corporation without
authority from the board of directors. This has been our constant holding in cases instituted by a
corporation.

In a slew of cases, however, we have recognized the authority of some corporate officers to sign the
verification and certification against forum shopping. In Mactan-Cebu International Airport Authority v. CA,
we recognized the authority of a general manager or acting general manager to sign the verification and
certificate against forum shopping;9 in Pfizer v. Galan, we upheld the validity of a verification signed by an
"employment specialist" who had not even presented any proof of her authority to represent the
company;10 in Novelty Philippines, Inc., v. CA, we ruled that a personnel officer who signed the petition
but did not attach the authority from the company is authorized to sign the verification and non-forum
shopping certificate;11 and in Lepanto Consolidated Mining Company v. WMC Resources International Pty.
Ltd. (Lepanto), we ruled that the Chairperson of the Board and President of the Company can sign the
verification and certificate against non-forum shopping even without the submission of the board’s
authorization.12

In sum, we have held that the following officials or employees of the company can sign the verification
and certification without need of a board resolution: (1) the Chairperson of the Board of Directors, (2) the
President of a corporation, (3) the General Manager or Acting General Manager, (4) Personnel Officer, and
(5) an Employment Specialist in a labor case.

While the above cases do not provide a complete listing of authorized signatories to the verification and
certification required by the rules, the determination of the sufficiency of the authority was done on a case
to case basis. The rationale applied in the foregoing cases is to justify the authority of corporate officers or
representatives of the corporation to sign the verification or certificate against forum shopping, being "in a
position to verify the truthfulness and correctness of the allegations in the petition."13

Authority from board of directors required

In Philippine Airlines v. Flight Attendants and Stewards Association of the Philippines, we ruled that only
individuals vested with authority by a valid board resolution may sign the certificate of non-forum
shopping on behalf of a corporation. The action can be dismissed if the certification was submitted
unaccompanied by proof of the signatory’s authority.14 We believe that appending the board resolution to
the complaint or petition is the better procedure to obviate any question on the authority of the signatory
to the verification and certification. The required submission of the board resolution is grounded on the
basic precept that corporate powers are exercised by the board of directors,15 and not solely by an officer
of the corporation. Hence, the power to sue and be sued in any court or quasi-judicial tribunal is
necessarily lodged with the said board.

There is substantial compliance with Rule 7, Secs. 4 and 5

In the case at bar, we so hold that petitioner substantially complied with Secs. 4 and 5, Rule 7 of the 1997
Revised Rules on Civil Procedure. First, the requisite board resolution has been submitted albeit belatedly
by petitioner. Second, we apply our ruling in Lepanto with the rationale that the President of petitioner is
in a position to verify the truthfulness and correctness of the allegations in the petition. Third, the
President of petitioner has signed the complaint before the CTA at the inception of this judicial claim for
refund or tax credit.

Consequently, the petition in CA-G.R. SP No. 59778 ought to be reinstated. However, in view of the
enactment of RA 9282 which made the decisions of the CTA appealable to this Court, we will directly
resolve the second issue which is a purely legal one.

Petitioner entitled to tax credit

The pith of the dispute between petitioner and respondent is whether petitioner is entitled to a tax refund
or tax credit of 20% sales discount granted to senior citizens under RA 7432 or whether the discount
should be treated as a deduction from gross income.

This issue is not new, as the Court has resolved several cases involving the very same issue.
In Commissioner of Internal Revenue v. Central Luzon Drug Corporation (Central Luzon),16 we held that
private drug companies are entitled to a tax credit for the 20% sales discounts they granted to qualified
senior citizens under RA 7432 and nullified Secs. 2.i and 4 of RR 2-94. In Bicolandia Drug Corporation
(formerly Elmas Drug Corporation) v. Commissioner of Internal Revenue,17 we ruled that petitioner therein
is entitled to a tax credit of the "cost" or the full 20% sales discounts it granted pursuant to RA 7432. In
the related case of Commissioner of Internal Revenue v. Bicolandia Drug Corporation,18 we likewise ruled
that respondent drug company was entitled to a tax credit, and we struck down RR 2-94 to be null and
void for failing to conform with the law it sought to implement.

A perusal of the April 26, 2000 CTA Decision shows that the appellate tax court correctly ruled that the
20% sales discounts petitioner granted to qualified senior citizens should be deducted from petitioner’s
income tax due and not from petitioner’s gross sales as erroneously provided in RR 2-94. However, the
CTA erred in denying the tax credit to petitioner on the ground that petitioner had suffered net loss in
1995, and ruling that the tax credit is unavailing.

Net loss in a taxable year does not preclude grant of tax credit

It is true that petitioner did not pay any tax in 1995 since it suffered a net loss for that taxable year. This
fact, however, without more, does not preclude petitioner from availing of its statutory right to a tax credit
for the 20% sales discounts it granted to qualified senior citizens. The law then applicable on this point is
clear and without any qualification. Sec. 4 (a) of RA 7432 pertinently provides:

Sec. 4. Privileges for the Senior citizens.––The senior citizens shall be entitled to the following:

a) the grant of twenty percent (20%) discount from all establishments relative to utilization of
transportation services, hotels and similar lodging establishments, restaurants and recreation
centers and purchase of medicines anywhere in the country: Provided, That private
establishments may claim the cost as tax credit. (Emphasis ours.)

The fact that petitioner suffered a net loss in 1995 will not make the tax credit due to petitioner
unavailable. This is the core issue resolved in Central Luzon, where we ruled that the net loss for a taxable
year does not bar the grant of the tax credit to a taxpayer pursuant to RA 7432 and that prior tax
payments are not required for such grant. We explained:

Although this tax credit benefit is available, it need not be used by losing ventures, since there is
no tax liability that calls for its application. Neither can it be reduced to nil by the quick yet callow
stroke of an administrative pen, simply because no reduction of taxes can instantly be effected. By
its nature, the tax credit may still be deducted from a future, not a present, tax liability, without
which it does not have any use. x x x
 xxxx

While a tax liability is essential to the availment or use of any tax credit, prior tax payments are
not. On the contrary, for the existence or grant solely of such credit, neither a tax liability nor a
prior tax payment is needed. The Tax Code is in fact replete with provisions granting or
allowing tax credits, even though no taxes have been previously paid.19

It is thus clear that petitioner is entitled to a tax credit for the full 20% sales discounts it extended to
qualified senior citizens for taxable year 1995. Considering that the CTA has not disallowed the PhP
123,083 sales discounts petitioner claimed before the BIR and CTA, we are constrained to grant them as
tax credit in favor of petitioner.

Consequently, petitioner’s appeal before the CA in CA-G.R. SP No. 59778 must be granted, and,
necessarily, the April 26, 2000 CTA Decision in C.T.A. Case No. 5581 reversed and set aside.

WHEREFORE, the petition is GRANTED. The August 31, 2000 CA Resolution in CA-G.R. SP No. 59778
is ANNULLED AND SET ASIDE. The April 26, 2000 CTA Decision in C.T.A. Case No. 5581 dismissing
petitioner’s claim for tax credit is accordingly REVERSED AND SET ASIDE. The Commissioner of Internal
Revenue is ORDERED to issue a Tax Credit Certificate in the name of petitioner in the amount of PhP
123,083. No costs.

SO ORDERED.

G.R. No. 161886             March 16, 2007

FILIPINAS PORT SERVICES, INC., represented by stockholders, ELIODORO C. CRUZ and

MINDANAO TERMINAL AND BROKERAGE SERVICES, INC., Petitioners,
vs.
VICTORIANO S. GO, ARSENIO LOPEZ CHUA, EDGAR C. TRINIDAD, HERMENEGILDO M.
TRINIDAD, JESUS SYBICO, MARY JEAN D. CO, HENRY CHUA, JOSELITO S. JAYME, ERNESTO S.
JAYME, and ELIEZER B. DE JESUS, Respondents.

DECISION

GARCIA, J.:

Assailed and sought to be set aside in this petition for review on certiorari is the Decision1 dated 19
January 2004 of the Court of Appeals (CA) in CA-G.R. CV No. 73827, reversing an earlier decision of the
Regional Trial Court (RTC) of Davao City and accordingly dismissing the derivative suit instituted by
petitioner Eliodoro C. Cruz for and in behalf of the stockholders of co-petitioner Filipinas Port Services, Inc.
(Filport, hereafter).

The case is actually an intra-corporate dispute involving Filport, a domestic corporation engaged in
stevedoring services with principal office in Davao City. It was initially instituted with the Securities and
Exchange Commission (SEC) where the case hibernated and remained unresolved for several years until it
was overtaken by the enactment into law, on 19 July 2000, of Republic Act (R.A.) No. 8799, otherwise
known as the Securities Regulation Code. From the SEC and consistent with R.A. No. 8799, the case was
transferred to the RTC of Manila, Branch 14, sitting as a corporate court. Subsequently, upon respondents’
motion, the case eventually landed at the RTC of Davao City where it was docketed as Civil Case No.
28,552-2001. RTC-Davao City, Branch 10, ruled in favor of the petitioners prompting respondents to go to
the CA in CA-G.R. CV No. 73827. This time, the respondents prevailed, hence, this petition for review by
the petitioners.

The relevant facts:

On 4 September 1992, petitioner Eliodoro C. Cruz, Filport’s president from 1968 until he lost his bid for
reelection as Filport’s president during the general stockholders’ meeting in 1991, wrote a letter2 to the
corporation’s Board of Directors questioning the board’s creation of the following positions with a monthly
remuneration of ₱13,050.00 each, and the election thereto of certain members of the board, to wit:

Asst. Vice-President for Corporate Planning - Edgar C. Trinidad (Director)

Asst. Vice-President for Operations - Eliezer B. de Jesus (Director)

Asst. Vice-President for Finance - Mary Jean D. Co (Director)

Asst. Vice-President for Administration - Henry Chua (Director)

Special Asst. to the Chairman - Arsenio Lopez Chua (Director)

Special Asst. to the President - Fortunato V. de Castro

In his aforesaid letter, Cruz requested the board to take necessary action/actions to recover from those
elected to the aforementioned positions the salaries they have received.

On 15 September 1992, the board met and took up Cruz’s letter. The records do not show what specific
action/actions the board had taken on the letter. Evidently, whatever action/actions the board took did not
sit well with Cruz.

On 14 June 1993, Cruz, purportedly in representation of Filport and its stockholders, among which is
herein co-petitioner Mindanao Terminal and Brokerage Services, Inc. (Minterbro), filed with the SEC a
petition3 which he describes as a derivative suit against the herein respondents who were then the
incumbent members of Filport’s Board of Directors, for alleged acts of mismanagement detrimental to the
interest of the corporation and its shareholders at large, namely:

1. creation of an executive committee in 1991 composed of seven (7) members of the board with
compensation of ₱500.00 for each member per meeting, an office which, to Cruz, is not provided
for in the by-laws of the corporation and whose function merely duplicates those of the President
and General Manager;

2. increase in the emoluments of the Chairman, Vice-President, Treasurer and Assistant General
Manager which increases are greatly disproportionate to the volume and character of the work of
the directors holding said positions;

3. re-creation of the positions of Assistant Vice-Presidents (AVPs) for Corporate Planning,

Operations, Finance and Administration, and the election thereto of board members Edgar C.
Trinidad, Eliezer de Jesus, Mary Jean D. Co and Henry Chua, respectively; and

4. creation of the additional positions of Special Assistants to the President and the Board
Chairman, with Fortunato V. de Castro and Arsenio Lopez Chua elected to the same, the directors
elected/appointed thereto not doing any work to deserve the monthly remuneration of ₱13,050.00
each.

In the same petition, docketed as SEC Case No. 06-93-4491, Cruz alleged that despite demands made
upon the respondent members of the board of directors to desist from creating the positions in question
and to account for the amounts incurred in creating the same, the demands were unheeded. Cruz thus
prayed that the respondent members of the board of directors be made to pay Filport, jointly and
severally, the sums of money variedly representing the damages incurred as a result of the creation of the
offices/positions complained of and the aggregate amount of the questioned increased salaries.

In their common Answer with Counterclaim,4 the respondents denied the allegations of mismanagement
and materially averred as follows:
 1. the creation of the executive committee and the grant of per diems for the attendance of each
member are allowed under the by-laws of the corporation;

2. the increases in the salaries/emoluments of the Chairman, Vice-President, Treasurer and

Assistant General Manager were well within the financial capacity of the corporation and well-
deserved by the officers elected thereto; and

3. the positions of AVPs for Corporate Planning, Operations, Finance and Administration were
already in existence during the tenure of Cruz as president of the corporation, and were merely
recreated by the Board, adding that all those appointed to said positions of Assistant Vice
Presidents, as well as the additional position of Special Assistants to the Chairman and the
President, rendered services to deserve their compensation.

In the same Answer, respondents further averred that Cruz and his co-petitioner Minterbro, while
admittedly stockholders of Filport, have no authority nor standing to bring the so-called "derivative suit"
for and in behalf of the corporation; that respondent Mary Jean D. Co has already ceased to be a
corporate director and so with Fortunato V. de Castro, one of those holding an assailed position; and that
no demand to cease and desist from further committing the acts complained of was made upon the board.
By way of affirmative defenses, respondents asserted that (1) the petition is not duly verified by petitioner
Filport which is the real party-in-interest; (2) Filport, as represented by Cruz and Minterbro, failed to
exhaust remedies for redress within the corporation before bringing the suit; and (3) the petition does not
show that the stockholders bringing the suit are joined as nominal parties. In support of their
counterclaim, respondents averred that Cruz filed the alleged derivative suit in bad faith and purely for
harassment purposes on account of his non-reelection to the board in the 1991 general stockholders’
meeting.

As earlier narrated, the derivative suit (SEC Case No. 06-93-4491) hibernated with the SEC for a long
period of time. With the enactment of R.A. No. 8799, the case was first turned over to the RTC of Manila,
Branch 14, sitting as a corporate court. Thereafter, on respondents’ motion, it was eventually transferred
to the RTC of Davao City whereat it was docketed as Civil Case No. 28,552-2001 and raffled to Branch 10
thereof.

On 10 December 2001, RTC-Davao City rendered its decision5 in the case. Even as it found that (1)
Filport’s Board of Directors has the power to create positions not provided for in the by-laws of the
corporation since the board is the governing body; and (2) the increases in the salaries of the board
chairman, vice-president, treasurer and assistant general manager are reasonable, the trial court
nonetheless rendered judgment against the respondents by ordering the directors holding the positions of
Assistant Vice President for Corporate Planning, Special Assistant to the President and Special Assistant to
the Board Chairman to refund to the corporation the salaries they have received as such officers
"considering that Filipinas Port Services is not a big corporation requiring multiple executive positions" and
that said positions "were just created for accommodation." We quote the fallo of the trial court’s decision.

WHEREFORE, judgment is rendered ordering:

Edgar C. Trinidad under the third and fourth causes of action to restore to the corporation the total
amount of salaries he received as assistant vice president for corporate planning; and likewise ordering
Fortunato V. de Castro and Arsenio Lopez Chua under the fourth cause of action to restore to the
corporation the salaries they each received as special assistants respectively to the president and board
chairman. In case of insolvency of any or all of them, the members of the board who created their
positions are subsidiarily liable.

The counter claim is dismissed.

From the adverse decision of the trial court, herein respondents went on appeal to the CA in CA-G.R. CV
No. 73827.
In its decision6 of 19 January 2004, the CA, taking exceptions to the findings of the trial court that the
creation of the positions of Assistant Vice President for Corporate Planning, Special Assistant to the
President and Special Assistant to the Board Chairman was merely for accommodation purposes, granted
the respondents’ appeal, reversed and set aside the appealed decision of the trial court and accordingly
dismissed the so-called derivative suit filed by Cruz, et al., thus:

IN VIEW OF ALL THE FOREGOING, the instant appeal is GRANTED, the challenged decision
is REVERSED and SET ASIDE, and a new one entered DISMISSING Civil Case No. 28,552-2001 with no
pronouncement as to costs.

SO ORDERED.

Intrigued, and quite understandably, by the fact that, in its decision, the CA, before proceeding to address
the merits of the appeal, prefaced its disposition with the statement reading "[T]he appeal is bereft of
merit,"7 thereby contradicting the very fallo of its own decision and the discussions made in the body
thereof, respondents filed with the appellate court a Motion For Nunc Pro Tunc Order,8 thereunder praying
that the phrase "[T]he appeal is bereft of merit," be corrected to read "[T]he appeal is impressed with
merit." In its resolution9 of 23 April 2004, the CA granted the respondents’ motion and accordingly
effected the desired correction.

Hence, petitioners’ present recourse.

Petitioners assigned four (4) errors allegedly committed by the CA. For clarity, we shall formulate the
issues as follows:

1. Whether the CA erred in holding that Filport’s Board of Directors acted within its powers in
creating the executive committee and the positions of AVPs for Corporate Planning, Operations,
Finance and Administration, and those of the Special Assistants to the President and the Board
Chairman, each with corresponding remuneration, and in increasing the salaries of the positions of
Board Chairman, Vice-President, Treasurer and Assistant General Manager; and

2. Whether the CA erred in finding that no evidence exists to prove that (a) the positions of AVP for
Corporate Planning, Special Assistant to the President and Special Assistant to the Board Chairman
were created merely for accommodation, and (b) the salaries/emoluments corresponding to said
positions were actually paid to and received by the directors appointed thereto.

For their part, respondents, aside from questioning the propriety of the instant petition as the same
allegedly raises only questions of fact and not of law, also put in issue the purported derivative nature of
the main suit initiated by petitioner Eliodoro C. Cruz allegedly in representation of and in behalf of Filport
and its stockholders.

The petition is bereft of merit.

It is axiomatic that in petitions for review on certiorari under Rule 45 of the Rules of Court, only questions
of law may be raised and passed upon by the Court. Factual findings of the CA are binding and conclusive
and will not be reviewed or disturbed on appeal.10 Of course, the rule is not cast in stone; it admits of
certain exceptions, such as when the findings of fact of the appellate court are at variance with those of
the trial court,11 as here. For this reason, and for a proper and complete resolution of the case, we shall
delve into the records and reexamine the same.

The governing body of a corporation is its board of directors. Section 23 of the Corporation
Code12 explicitly provides that unless otherwise provided therein, the corporate powers of all corporations
formed under the Code shall be exercised, all business conducted and all property of the corporation shall
be controlled and held by a board of directors. Thus, with the exception only of some powers expressly
granted by law to stockholders (or members, in case of non-stock corporations), the board of directors (or
trustees, in case of non-stock corporations) has the sole authority to determine policies, enter into
contracts, and conduct the ordinary business of the corporation within the scope of its charter, i.e., its
articles of incorporation, by-laws and relevant provisions of law. Verily, the authority of the board of
directors is restricted to the management of the regular business affairs of the corporation, unless more
extensive power is expressly conferred.

The raison d’etre behind the conferment of corporate powers on the board of directors is not lost on the
Court. Indeed, the concentration in the board of the powers of control of corporate business and of
appointment of corporate officers and managers is necessary for efficiency in any large organization.
Stockholders are too numerous, scattered and unfamiliar with the business of a corporation to conduct its
business directly. And so the plan of corporate organization is for the stockholders to choose the directors
who shall control and supervise the conduct of corporate business.13

In the present case, the board’s creation of the positions of Assistant Vice Presidents for Corporate
Planning, Operations, Finance and Administration, and those of the Special Assistants to the President and
the Board Chairman, was in accordance with the regular business operations of Filport as it is authorized
to do so by the corporation’s by-laws, pursuant to the Corporation Code.

The election of officers of a corporation is provided for under Section 25 of the Code which reads:

Sec. 25. Corporate officers, quorum. – Immediately after their election, the directors of a corporation
must formally organize by the election of a president, who shall be a director, a treasurer who may or may
not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers
as may be provided for in the by-laws. (Emphasis supplied.)

In turn, the amended Bylaws of Filport14 provides the following:

Officers of the corporation, as provided for by the by-laws, shall be elected by the board of directors at
their first meeting after the election of Directors. xxx

The officers of the corporation shall be a Chairman of the Board, President, a Vice-President, a Secretary,
a Treasurer, a General Manager and such other officers as the Board of Directors may from time to time
provide, and these officers shall be elected to hold office until their successors are elected and qualified.
(Emphasis supplied.)

Likewise, the fixing of the corresponding remuneration for the positions in question is provided for in the
same by-laws of the corporation, viz:

xxx The Board of Directors shall fix the compensation of the officers and agents of the corporation.
(Emphasis supplied.)

Unfortunately, the bylaws of the corporation are silent as to the creation by its board of directors of an
executive committee. Under Section 3515 of the Corporation Code, the creation of an executive committee
must be provided for in the bylaws of the corporation.

Notwithstanding the silence of Filport’s bylaws on the matter, we cannot rule that the creation of the
executive committee by the board of directors is illegal or unlawful. One reason is the absence of a
showing as to the true nature and functions of said executive committee considering that the "executive
committee," referred to in Section 35 of the Corporation Code which is as powerful as the board of
directors and in effect acting for the board itself, should be distinguished from other committees which are
within the competency of the board to create at anytime and whose actions require ratification and
confirmation by the board.16 Another reason is that, ratiocinated by both the two (2) courts below, the
Board of Directors has the power to create positions not provided for in Filport’s bylaws since the board is
the corporation’s governing body, clearly upholding the power of its board to exercise its prerogatives in
managing the business affairs of the corporation.

As well, it may not be amiss to point out that, as testified to and admitted by petitioner Cruz himself, it
was during his incumbency as Filport president that the executive committee in question was created, and
that he was even the one who moved for the creation of the positions of the AVPs for Operations, Finance
and Administration. By his acquiescence and/or ratification of the creation of the aforesaid offices, Cruz is
virtually precluded from suing to declare such acts of the board as invalid or illegal. And it makes no
difference that he sues in behalf of himself and of the other stockholders. Indeed, as his voice was not
heard in protest when he was still Filport’s president, raising a hue and cry only now leads to the
inevitable conclusion that he did so out of spite and resentment for his non-reelection as president of the
corporation.

With regard to the increased emoluments of the Board Chairman, Vice-President, Treasurer and Assistant
General Manager which are supposedly disproportionate to the volume and nature of their work, the
Court, after a judicious scrutiny of the increase vis-à-vis the value of the services rendered to the
corporation by the officers concerned, agrees with the findings of both the trial and appellate courts as to
the reasonableness and fairness thereof.

Continuing, petitioners contend that the CA did not appreciate their evidence as to the alleged acts of
mismanagement by the then incumbent board. A perusal of the records, however, reveals that petitioners
merely relied on the testimony of Cruz in support of their bold claim of mismanagement. To the mind of
the Court, Cruz’ testimony on the matter of mismanagement is bereft of any foundation. As it were, his
testimony consists merely of insinuations of alleged wrongdoings on the part of the board. Without more,
petitioners’ posture of mismanagement must fall and with it goes their prayer to hold the respondents
liable therefor.

But even assuming, in gratia argumenti, that there was mismanagement resulting to corporate damages
and/or business losses, still the respondents may not be held liable in the absence, as here, of a showing
of bad faith in doing the acts complained of.

If the cause of the losses is merely error in business judgment, not amounting to bad faith or negligence,
directors and/or officers are not liable.17 For them to be held accountable, the mismanagement and the
resulting losses on account thereof are not the only matters to be proven; it is likewise necessary to show
that the directors and/or officers acted in bad faith and with malice in doing the assailed acts. Bad faith
does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral
obliquity and conscious doing of a wrong, a breach of a known duty through some motive or interest or ill-
will partaking of the nature of fraud.18 We have searched the records and nowhere do we find a "dishonest
purpose" or "some moral obliquity," or "conscious doing of a wrong" on the part of the respondents that
"partakes of the nature of fraud."

We thus extend concurrence to the following findings of the CA, affirmatory of those of the trial court:

xxx As a matter of fact, it was during the term of appellee Cruz, as president and director, that the
executive committee was created. What is more, it was appellee himself who moved for the creation of
the positions of assistant vice presidents for operations, for finance, and for administration. He should not
be heard to complain thereafter for similar corporate acts.

The increase in the salaries of the board chairman, president, treasurer, and assistant general manager
are indeed reasonable enough in view of the responsibilities assigned to them, and the special knowledge
required, to be able to effectively discharge their respective functions and duties.

Surely, factual findings of trial courts, especially when affirmed by the CA, are binding and conclusive on
this Court.

There is, however, a factual matter over which the CA and the trial court parted ways. We refer to the
accommodation angle.

The trial court was with petitioner Cruz in saying that the creation of the positions of the three (3) AVPs
for Corporate Planning, Special Assistant to the President and Special Assistant to the Board Chairman,
each with a salary of ₱13,050.00 a month, was merely for accommodation purposes considering that
Filport is not a big corporation requiring multiple executive positions. Hence, the trial court’s order for said
officers to return the amounts they received as compensation.
On the other hand, the CA took issue with the trial court and ruled that Cruz’s accommodation theory is
not based on facts and without any evidentiary substantiation.

We concur with the line of the appellate court. For truly, aside from Cruz’s bare and self-serving
testimony, no other evidence was presented to show the fact of "accommodation." By itself, the testimony
of Cruz is not enough to support his claim that accommodation was the underlying factor behind the
creation of the aforementioned three (3) positions.

It is elementary in procedural law that bare allegations do not constitute evidence adequate to support a
conclusion. It is basic in the rule of evidence that he who alleges a fact bears the burden of proving it by
the quantum of proof required. Bare allegations, unsubstantiated by evidence, are not equivalent to proof
under the Rules of Court.19 The party having the burden of proof must establish his case by a
preponderance of evidence.20

Besides, the determination of the necessity for additional offices and/or positions in a corporation is a
management prerogative which courts are not wont to review in the absence of any proof that such
prerogative was exercised in bad faith or with malice.1awphi1.nét

Indeed, it would be an improper judicial intrusion into the internal affairs of Filport were the Court to
determine the propriety or impropriety of the creation of offices therein and the grant of salary increases
to officers thereof. Such are corporate and/or business decisions which only the corporation’s Board of
Directors can determine.

So it is that in Philippine Stock Exchange, Inc. v. CA,21 the Court unequivocally held:

Questions of policy or of management are left solely to the honest decision of the board as the business
manager of the corporation, and the court is without authority to substitute its judgment for that of the
board, and as long as it acts in good faith and in the exercise of honest judgment in the interest of the
corporation, its orders are not reviewable by the courts.

In a last-ditch attempt to salvage their cause, petitioners assert that the CA went beyond the issues raised
in the court of origin when it ruled on the absence of receipt of actual payment of the salaries/emoluments
pertaining to the positions of Assistant Vice-President for Corporate Planning, Special Assistant to the
Board Chairman and Special Assistant to the President. Petitioners insist that the issue of nonpayment was
never raised by the respondents before the trial court, as in fact, the latter allegedly admitted the same in
their Answer With Counterclaim.

We are not persuaded.

By claiming that Filport suffered damages because the directors appointed to the assailed positions are not
doing anything to deserve their compensation, petitioners are saddled with the burden of proving that
salaries were actually paid. Since the trial court, in effect, found that the petitioners successfully proved
payment of the salaries when it directed the reimbursements of the same, respondents necessarily have
to raise the issue on appeal. And the CA rightly resolved the issue when it found that no evidence of actual
payment of the salaries in question was actually adduced. Respondents’ alleged admission of the fact of
payment cannot be inferred from a reading of the pertinent portions of the parties’ respective initiatory
pleadings. Respondents’ allegations in their Answer With Counterclaim that the officers corresponding to
the positions created "performed the work called for in their positions" or "deserve their compensation,"
cannot be interpreted to mean that they were "actually paid" such compensation. Directly put, the
averment that "one deserves one’s compensation" does not necessarily carry the implication that "such
compensation was actually remitted or received." And because payment was not duly proven, there is no
evidentiary or factual basis for the trial court to direct respondents to make reimbursements thereof to the
corporation.

This brings us to the respondents’ claim that the case filed by the petitioners before the SEC, which
eventually landed in RTC-Davao City as Civil Case No. 28,552-2001, is not a derivative suit, as maintained
by the petitioners.
We sustain the petitioners.

Under the Corporation Code, where a corporation is an injured party, its power to sue is lodged with its
board of directors or trustees. But an individual stockholder may be permitted to institute a derivative suit
in behalf of the corporation in order to protect or vindicate corporate rights whenever the officials of the
corporation refuse to sue, or when a demand upon them to file the necessary action would be futile
because they are the ones to be sued, or because they hold control of the corporation.22 In such actions,
the corporation is the real party-in-interest while the suing stockholder, in behalf of the corporation, is
only a nominal party.23

Here, the action below is principally for damages resulting from alleged mismanagement of the affairs of
Filport by its directors/officers, it being alleged that the acts of mismanagement are detrimental to the
interests of Filport. Thus, the injury complained of primarily pertains to the corporation so that the suit for
relief should be by the corporation. However, since the ones to be sued are the directors/officers of the
corporation itself, a stockholder, like petitioner Cruz, may validly institute a "derivative suit" to vindicate
the alleged corporate injury, in which case Cruz is only a nominal party while Filport is the real party-in-
interest. For sure, in the prayer portion of petitioners’ petition before the SEC, the reliefs prayed were
asked to be made in favor of Filport.

Besides, the requisites before a derivative suit can be filed by a stockholder are present in this case, to
wit:

a) the party bringing suit should be a shareholder as of the time of the act or transaction
complained of, the number of his shares not being material;

b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of
directors for the appropriate relief but the latter has failed or refused to heed his plea; and

c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been,
or being caused to the corporation and not to the particular stockholder bringing the suit.24

Indisputably, petitioner Cruz (1) is a stockholder of Filport; (2) he sought without success to have its
board of directors remedy what he perceived as wrong when he wrote a letter requesting the board to do
the necessary action in his complaint; and (3) the alleged wrong was in truth a wrong against the
stockholders of the corporation generally, and not against Cruz or Minterbro, in particular. In the end, it is
Filport, not Cruz which directly stands to benefit from the suit. And while it is true that the complaining
stockholder must show to the satisfaction of the court that he has exhausted all the means within his
reach to attain within the corporation itself the redress for his grievances, or actions in conformity to his
wishes, nonetheless, where the corporation is under the complete control of the principal defendants, as
here, there is no necessity of making a demand upon the directors. The reason is obvious: a demand upon
the board to institute an action and prosecute the same effectively would have been useless and an
exercise in futility. In fine, we rule and so hold that the petition filed with the SEC at the instance of Cruz,
which ultimately found its way to the RTC of Davao City as Civil Case No. 28,552-2001, is a derivative suit
of which Cruz has the necessary legal standing to institute.

WHEREFORE, the petition is DENIED and the challenged decision of the CA is AFFIRMED in all respects.

No pronouncement as to costs.

SO ORDERED.

January 25, 2017

G.R. No. 206038

MARY E. LIM, represented by her Attorney-in-fact, REYNALDO V. LIM, Petitioner,

vs.
MOLDEX LAND, INC., 1322 ROXAS BOULEVARD CONDOMINIUM CORPORATION, and JEFFREY
JAMINOLA, EDGARDO MACALINTAL, JOJI MILANES, and CLOTHILDA ANNE ROMAN, in their
capacity as purported MENDOZA, and LEONEN,JJ. members of the Board of Directors of 1322
Golden Empire Corporation,, Respondents.

DECISION

MENDOZA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the
March 4, 2013 Decision 1 of the Regional Trial Court of Manila, Branch 24, (RTC) in Civil Case No. 12-
128478, which dismissed the complaint against the respondents for 1] annulment of the July 21, 2012
general membership meeting of 1322 Roxas Boulevard Condominium Corporation (Condocor); 2]
annulment of election of Jeffrey Jaminola (Jaminola), Edgardo Macalintal (Macalintal), Joji
Milanes (Milanes), and Clothilda Anne Roman (Roman) (collectively referred to as "individual
respondents") as members of the Board of Directors; and 3] accounting.

The primordial issue presented before the R TC, acting as a special commercial court, was the validity,
legality and effectivity of the July 21, 2012 Annual General Membership Meeting and Organizational
Meeting of Condocor's Board of Directors.2

Initially, the Court, in its Resolution3 dated April 1, 2013, denied the petition for having availed of the
wrong mode of appeal because Lim raised mixed questions of fact and law, which should have been filed
before the Court of Appeals (CA).4Upon motion for reconsideration, however, the Court granted it.
Thereafter, the respondents filed their Comment5 and Lim filed a Reply6 thereto.

The Antecedents

Lim is a registered unit owner of 1322 Golden Empire Tower (Golden Empire Tower), a condominium
project of Moldex Land, Inc. (Moldex), a real estate company engaged in the construction and
development of high-end condominium projects and in the marketing and sale of the units thereof to the
general public. Condocor, a non-stock, non-profit corporation, is the registered condominium corporation
for the Golden Empire Tower. Lim, as a unit owner of Golden Empire Tower, is a member of Condocor.

Lim claimed that the individual respondents are non-unit buyers, but all are members of the Board of
Directors of Condocor, having been elected during its organizational meeting in 2008. They were again
elected during the July 21, 2012 general membership meeting.7

Moldex became a member of Condocor on the basis of its ownership of the 220 unsold units in the Golden
Empire Tower. The individual respondents acted: as its representatives.

On July 21, 2012, Condocor held its annual general membership meeting. Its corporate secretary certified,
and Jaminola, as Chairman, declared the existence of a quorum even though only 29 of the 1088 unit
buyers were present. The declaration of quorum was based on the presence of the majority of the voting
rights, including those pertaining to the 220 unsold units held by Moldex through its representatives. Lim,
through her attorney-in-fact, objected to the validity of the meeting. The objection was denied. Thus, Lim
and all the other unit owners present, except for one, walked out and left the meeting.

Despite the walkout, the individual respondents and the other unit owner proceeded with the annual
general membership meeting and elected the new members of the Board of Directors for 2012-2013. All
four (4) individual respondents were voted as members of the board, together with three (3) others whose
election was conditioned on their subsequent confirmation.9 Thereafter, the newly elected members of the
board conducted an organizational meeting and proceeded with the election of its officers. The individual
respondents were elected as follows:

1. Atty. Jeffrey Jaminola - Chairman of the Board and President

2. Ms. Joji Milanes - Vice-President

3. Ms. Clothilda Ann Roman - Treasurer

4. Mr. Edgardo Macalintal - Corporate Secretary

5. Atty. Ma. Rosario Bernardo - Asst. Corporate Secretary

6. Atty. Mary Rose Pascual - Asst. Corporate Secretary

7. Atty. Jasmin Cuizon - Asst. Corporate Secretary10

Consequently, Lim filed an election protest before the RTC. Said court, however, dismissed the complaint
holding that there was a quorum during the July 21, 2012 annual membership meeting; that Moldex is a
member of Condocor, being the registered owner of the unsold/unused condominium units, parking lots
and storage areas; and that the individual respondents, as Moldex's representatives, were entitled to
exercise all membership rights, including the right to vote and to be voted. 11 In so ruling, the trial court
explained that the presence or absence of a quorum in the subject meeting was determined on the basis
of the voting rights of all the units owned by the members in good standing. 12 The total voting rights of
unit owners in good standing was 73,376 and, as certified by the corporate secretary, 83.33% of the
voting rights in good standing were present in the said meeting, inclusive of the 5 8,504 voting rights of
Moldex. 13

Not in conformity, Lim filed the subject petition raising the following

ISSUES

A. THE LOWER COURT GRAVELY ERRED IN RULING THAT IN DETERMINING THE PRESENCE OR
ABSENCE OF QUORUM AT GENERAL OR ANNUAL MEMBERSHIP MEETINGS OF RESPONDENT
CONDOCOR, EVEN NONUNIT BUYERS SHOULD BE INCLUDED DESPITE THE EXPRESS PROVISION
OF ITS BY-LAWS, THE LAW AND SETTLED JURISPRUDENCE;

B. THE LOWER COURT ERRED IN RULING THAT RESPONDENT MOLDEX IS A MEMBER OF

RESPONDENT CONDOCOR AND THAT IT MAY APPOINT INDIVIDUAL RESPONDENTS TO
REPRESENT IT THEREIN;

C. EVEN ASSUMING THAT RESPONDENT MOLDEX MAY BE A MEMBER OF RESPONDENT

CONDOCOR, THERE IS STILL NO BASIS FOR IT TO BE ELECTED TO THE BOARD OF DIRECTORS
OF RESPONDENT CONDOCOR BECAUSE IT IS A JURIDICAL PERSON;

D. ASSUMING FURTHER THAT DESPITE BEING A JURIDICAL PERSON, IT MAY BE ELECTED TO

THE BOARD OF DIRECTORS OF RESPONDENT CONDOCOR, THERE IS NO LEGAL BASIS FOR THE
LOWER COURT TO HOLD THAT RESPONDENT MOLDEX HAS AUTOMATICALLY RESERVED FOUR
SEATS THEREIN; AND,

E. THE LOWER COURT GRAVELY ERRED IN RULING TO RECOGNIZE RESPONDENT MOLDEX AS

OWNERDEVELOPER HAVING FOUR RESERVED SEATS IN RESPONDENT CONDOCOR BOARD, AS
SUCH RULING EFFECTIVELY ALLOWED THE VERY EVIL THAT PD 957 SOUGHT TO PREVENT
FROM DOMINATING THE CONTROL AND MANAGEMENT OF RESPONDENT CONDOCOR TO THE
GRAVE AND IRREPARABLE DAMAGE AND INJURY OF PETITIONER AND THE OTHER UNIT
BUYERS, WHO ARE THE BONA FIDE MEMBERS OF RESPONDENT CONDOCOR.

In sum, the primordial issues to be resolved are: 1) whether the July 21, 2012 membership meeting was
valid; 2) whether Moldex can be deemed a member of Condocor; and 3) whether a non-unit owner can be
elected as a member of the Board of Directors of Condocor.
Procedural Issues

The issues raised being purely legal, the Court may properly entertain the subject petition.

The subject case was initially denied because it appeared that Lim raised mixed questions of fact and law
which should have been filed before the CA. After judicious perusal of Lim's arguments, however, the
Court ascertained that a reconsideration of its April 1, 2013 Resolution14 was in order.

It has been consistently held that only pure questions of law can be entertained in a petition for review
under Rule 45 of the Rules of Court. In Century Iron Works, Inc. v. Banas,15the Court held:

A petition for review on certiorari under Rule 45 is an appeal from a ruling of a lower tribunal on pure
questions of law. It is only in exceptional circumstances that we admit and review questions of fact.

A question of law arises when there is doubt as to what the law is on a certain state of facts, while there is
a question of fact when the doubt arises as to the truth or falsity of the alleged facts. For a question to be
one of law, the question must not involve an examination of the probative value of the evidence presented
by the litigants or any of them. The resolution of the issue must rest solely on what the law provides on
the given set of circumstances. Once it is clear that the issue invites a review of the evidence presented,
the question posed is one of fact.

Thus, the test of whether a question is one of law or of fact is not the appellation given to such
question by the party raising the same; rather, it is whether the appellate court can determine
the issue raised without reviewing or evaluating the evidence, in which case, it is a question of
law; otherwise it is a question of fact. 16 [Emphasis supplied]

Respondents argued that the initial denial of the petition was correct because Lim availed of the wrong
mode of appeal. As the assailed judgment involved an intra-corporate dispute cognizable by the RTC, the
appeal should have been filed before the CA, and not before this Court.

Doubtless, this case involves intra-corporate controversies and, thus, jurisdiction lies with the R TC, acting
as a special commercial court. Section 5.2 of Republic Act No. 8799 (R.A. No. 8799)17effectively
transferred to the appropriate RTCs jurisdiction over all cases enumerated under Section 5 of Presidential
Decree No. 902-A (P.D. No. 902-A), to wit:

a) Devices or schemes employed by or any acts, of the board of directors, business associates, its officers
or partnership, amounting to fraud and misrepresentation which may be detrimental to the interest of the
public and/ or of the stockholder, partners, members of associations or organizations registered with the
Commission;

b) Controversies arising out of intra-corporate or partnership relations, between and

among stockholders, members, or associates; between any or all of them and the corporation,
partnership or association of which they are stockholders, members or associates, respectively; and
between such corporation, partnership or association and the state insofar as it concerns their individual
franchise or right to exist as such entity; and

c) Controversies in the election or appointments of directors, trustees, officers or managers of

such corporations, partnerships or associations. [Emphases supplied]

Pursuant to A.M. No. 04-9-07-SC, all decisions and final orders in cases falling under the Interim Rules of
Corporate Rehabilitation and the Interim Rules of Procedure Governing Intra-Corporate Controversies shall
be appealable to the CA through a petition for review under Rule 43 of the Rules of Court. Such petition
shall be taken within fifteen (15) days from notice of the decision or final order of the RTC.18

In turn, Rule 43 governs the procedure for appeals from judgments or final orders of quasi-judicial
agencies to the CA, whether it involves questions of fact, of law, or mixed questions of fact and law.
Nevertheless, a party may directly file a petition for review on certiorari before the Court to question the
judgment of a lower court, especially when the issue raised is purely of law and is one of novelty.

Substantive Issues

Lim is still a member of Condocor

Respondents argued that Lim had no cause of action to file the subject action because she was no longer
the owner of a condominium unit by virtue of a Deed of Assignment19 she executed in favor of Reynaldo
Valera Lim and Dianna Mendoza Lim, her nephew and niece.

Section 90 of the Corporation Code states that membership in a non-stock corporation and all rights
arising therefrom are personal and non-transferable, unless the articles of incorporation or the by-laws
otherwise provide. A perusal of Condocor's By-Laws as regards membership and transfer of rights or
ownership over the unit reveal that:

Membership in the CORPORATION is a mere appurtenance of the ownership of any unit in the
CONDOMINIUM and may not therefore be sold, transferred or otherwise encumbered separately from the
said unit. Any member who sells or transfer his/her/its unit/s in the CONDOMINIUM shall
automatically cease to be a member of the CORPORATION, the membership being
automatically assumed by the buyer or transferee upon registration of the sale or transfer and
ownership of the latter over the unit with the Register of Deeds for the City of
Manila.20 [Emphasis supplied.]

Likewise, the Master Deed of Condocor provides:

Section 11 : MORTGAGES, LIENS, LEASES, TRANSFERS OF RIGHTS AND SALE OF UNITS: All transactions
involving the transfer of the ownership or occupancy of any UNIT, such as sale, transfer of rights or
leases, as well as encumbrances involving said UNIT, such as mortgages, liens and the like, shall be
reported to the CORPORATION within five (5) days after the effectivity of said transactions. 21

Nothing in the records showed that the alleged transfer made by Lim was registered with the Register of
Deeds of the City of Manila or was reported to the corporation. Logically, until and unless the registration
is effected, Lim remains to be the registered owner of the condominium unit and thus, continues to be a
member of Condocor.

Moreover, even assuming that there was a transfer by virtue of the Deed of Assignment, the Confirmatory
Special Power of Attorney22 executed later by Lim, wherein she reiterated her membership in Condocor
and constituted Reynaldo V. Lim as her true and lawful Attorney-in-Fact, strengthened the fact that she
still owns the condominium unit and that there has been no transfer of ownership over the said property
to her nephew, but only a mere assignment of rights to the latter. As held by the Court in Casabuena
v. CA,23 at most, an assignee can only acquire rights duplicating those which his assignor is entitled by law
to exercise. 24 Had it been otherwise, Reynaldo V. Lim himself would have questioned and objected to the
granting of the special power of attorney, and would have insisted that he was really the owner of the
condominium unit.

In non-stock corporations, quorum

is determined by the majority
of its actual members

In corporate parlance, the term "meeting" applies to every duly convened assembly either of stockholders,
members, directors, trustees, or managers for any legal purpose, or the transaction of business of a
common interest.25 Under Philippine corporate laws, meetings may either be regular or special. A
stockholders' or members' meeting must comply with the following requisites to be valid:

1. The meeting must be held on the date fixed in the By-Laws or in accordance with law;26
2. Prior written notice of such meeting must be sent to all stockholders/members of record;27

3. It must be called by the proper party;28

4. It must be held at the proper place;29 and

5. Quorum and voting requirements must be met. 30

Of these five (5) requirements, the existence of a quorum is crucial. Any act or transaction made during a
meeting without quorum is rendered of no force and effect, thus, not binding on the corporation or parties
concerned.

In relation thereto, Section 52 of the Corporation Code of the Philippines (Corporation Code) provides:

Section 52. Quorum in meetings. - Unless otherwise provided for in this Code or in the by-laws, a quorum
shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of
the members in the case of non-stock corporations.

Thus, for stock corporations, the quorum is based on the number of outstanding voting stocks while for
non-stock corporations, only those who are actual, living members with voting rights shall be counted in
determining the existence of a quorum. 31

To be clear, the basis in determining the presence of quorum in non-stock corporations is the numerical
equivalent of all members who are entitled to vote, unless some other basis is provided by the By-Laws of
the corporation. The qualification "with voting rights" simply recognizes the power of a non-stock
corporation to limit or deny the right to vote of any of its members.32 To include these members without
voting rights in the total number of members for purposes of quorum would be superfluous for although
they may attend a particular meeting, they cannot cast their vote on any matter discussed therein.

Similarly, Section 6 of Condocor's By-Laws reads: "The attendance of a simple majority of the members
who are in good standing shall constitute a quorum ... x x x." The phrase, "members in good standing," is
a mere qualification as to which members will be counted for purposes of quorum. As can be gleaned from
Condocor's By-Laws, there are two (2) kinds of members: 1) members in good standing; and 2)
delinquent members. Section 6 merely stresses that delinquent members are not to be taken into
consideration in determining quorum. In relation thereto, Section 733 of the By-Laws, referring to voting
rights, also qualified that only those members in good standing are entitled to vote. Delinquent members
are stripped off their right to vote. Clearly, contrary to the ruling of the RTC, Sections 6 and 7 of
Condocor's By-Laws do not provide that majority of the total voting rights, without qualification, will
constitute a quorum.

It must be emphasized that insofar as Condocor is concerned, quorum is different from voting rights.
Applying the law and Condocor's By-Laws, if there are 100 members in a non-stock corporation, 60 of
which are members in good standing, then the presence of 50% plus 1 of those members in good
standing will constitute a quorum. Thus, 31 members in good standing will suffice in order to consider a
meeting valid as regards the presence of quorum. The 31 members will naturally have to exercise their
voting rights. It is in this instance when the number of voting rights each member is entitled to becomes
significant. If 29 out of the 31 members are entitled to 1 vote each, another member (known as A) is
entitled to 20 votes and the remaining member (known as B) is entitled to 15 votes, then the total
number of voting rights of all 31 members is 64. Thus, majority of the 64 total voting rights, which is 33
(50% plus 1), is necessary to pass a valid act. Assuming that only A and B concurred in approving a
specific undertaking, then their 35 combined votes are more than sufficient to authorize such act.

The By-Laws of Condocor has no rule different from that provided in the Corporation Code with respect
the determination of the existence of a quorum. The quorum during the July 21, 2012 meeting should
have been majority of Condocor's members in good standing. Accordingly, there was no quorum during
the July 21, 2012 meeting considering that only 29 of the 108 unit buyers were present.
As there was no quorum, any resolution passed during the July 21, 2012 annual membership meeting was
null and void and, therefore, not binding upon the corporation or its members. The meeting being null and
void, the resolution and disposition of other legal issues emanating from the null and void July 21, 2012
membership meeting has been rendered unnecessary.

To serve as a guide for the bench and the bar, however, the Court opts to discuss and resolve the same.

Moldex is a member
Of Condocor

Matters involving a condominium are governed by Republic Act No. 4726 (Condominium Act). Said law
sanctions the creation of a condominium corporation which is especially formed for the purpose of holding
title to the common areas, including the land, or the appurtenant interests in such areas, in which the
holders of separate interest shall automatically be members or shareholders, to the exclusion of others, in
proportion to the appurtenant interest of their respective units in the common areas. 34 In relation thereto,
Section 10 of the same law clearly provides that the condominium corporation shall constitute the
management body of the project.

Membership in a condominium corporation is limited only to the unit owners of the condominium project.
This is provided in Section 10 of the Condominium Act which reads:

Membership in a condominium corporation, regardless of whether it is a stock or non-stock corporation,

shall not be transferable separately from the condominium unit of which it is an appurtenance. When a
member or stockholder ceases to own a unit in the project in which the condominium corporation
owns or holds the common areas, he shall automatically cease to be a member or stockholder of the
condominium corporation.35 [Emphases supplied]

Although the Condominium Act provides for the minimum requirement for membership in a condominium
corporation, a corporation's articles of incorporation or by-laws may provide for other terms of
membership, so long as they are not inconsistent with the provisions of the law, the enabling or master
deed, or the declaration of restrictions of the condominium project.

In this case, Lim argued that Moldex cannot be a member of Condocor. She insisted that a condominium
corporation is an association of homeowners for the purpose of managing the condominium project,
among others. Thus, it must be composed of actual unit buyers or residents of the condominium
project.36 Lim further averred that the ownership contemplated by law must result from a sale transaction
between the owner-developer and the purchaser. She advanced the view that the ownership of Moldex
was only in the nature of an owner-developer and only for the sole purpose of selling the units.37 In
justifying her arguments, Lim cited Section 30 of Presidential Decreee No. 957, known as The Subdivision
and Condominium Buyers' Protective Decree (P.D. No. 957), to wit:

Section 30. Organization of Homeowners Association. The owner or developer of a subdivision project or

condominium project shall initiate the organization of a homeowners association among the buyers and
residents of the projects for the purpose of promoting and protecting their mutual interest and assist in
their community development. [Emphasis in the original.]

Furthermore, in distinguishing between a unit buyer and an owner-developer of a project, Lim cited
Section 25 of P.D. No. 957, which provides:

Section 25. Issuance of Title. The owner or developer shall deliver the title of the lot or unit to the buyer
upon full payment of the lot or unit. xxx

Likewise, Lim relied on Sunset View Condominium Corp. v. Hon. Campos, Jr.,  38 where the Court wrote:

The share of stock appurtenant to the unit will be transferred accordingly to the purchaser of the
unit only upon full payment of the purchase price at which time he will also become the owner
of the unit. Consequently, even under the contract, it is only the owner of a unit who is a shareholder of
the Condominium Corporation.

Inasmuch as owners is conveyed only upon full payment of the purchase price, it necessarily
follows that a purchaser of a unit who has not paid the full purchase price thereof is not the
owner of the unit and consequently is not a shareholder of the Condominium
Corporation. [Emphasis in the original]

On these grounds, Lim asserted that only unit buyers are entitled to become members of Condocor. 39

The Court finds itself unable to agree.

Lim's reliance of P.D. No. 957 is misplaced. There is no provision in P.D. No. 957 which states that an
owner-developer of a condominium project cannot be a member of a condominium corporation. Section 30
of P.D. No. 957 determines the purposes of a homeowners association - to promote and protect the
mutual interest of the buyers and residents, and to assist in their community development. A
condominium corporation, however, is not just a management body of the condominium project. It also
holds title to the common areas, including the land, or the appurtenant interests in such areas. Hence, it is
especially governed by the Condominium Act. Clearly, a homeowners association is different from a
condominium corporation. P.D. No. 957 does not regulate condominium corporations and, thus, cannot be
applied in this case.

Sunset View merely delineated the difference between a "purchaser" and an "owner," whereby the former
could be considered an owner only upon full payment of the purchase price. The case merely clarified that
not every purchaser of a condominium unit could be a shareholder of the condominium corporation.

Respondents, for their part, countered that a registered owner of a unit in a condominium project or the
holders of duly issued condominium certificate of title (CCT),40automatically becomes a member of the
condominium corporation,41 relying on Sections 2 and 10 of the Condominium Act, the Master Deed and
Declaration of Restrictions, as well as the By-Laws of Condocor. For said reason, respondents averred that
as Moldex is the owner of 220 unsold units and the parking slots and storage areas attached thereto, it
automatically became a member of Condocor upon the latter's creation.42

On this point, respondents are correct.

Section 2 of the Condominium Act states:

Sec. 2. A condominium is an interest in real property consisting of separate interest in a unit in a

residential, industrial or commercial building and an undivided interest in common, directly or indirectly, in
the land on which it is located and in other common areas of the building. A condominium may include, in
addition, a separate interest in other portions of such real property. Title to the common areas,
including the land, or the appurtenant interests in such areas, may be held by a corporation
specially formed for the purpose (hereinafter known as the "condominium corporation") in
which the holders of separate interest shall automatically be members or shareholders, to the
exclusion of others, in proportion to the appurtenant interest of their respective units in the
common areas. [Emphasis supplied]

In Sunset View,43the Court elucidated on what constitutes "separate interest," in relation to membership,
as mentioned in the Condominium Act, to wit:

By necessary implication, the "separate interest" in a condominium, which entitles the holder
to become automatically a shareholder in the condominium corporation, as provided in Section
2 of the Condominium Act, can be no other than ownership of a unit. This is so because nobody
can be a shareholder unless he is the owner of a unit and when he ceases to be the owner, he also ceases
automatically to be a shareholder.44 [Emphasis supplied.]
Thus, law and jurisprudence dictate that ownership of a unit entitles one to become a member of a
condominium corporation.1âwphi1 The Condominium Act does not provide a specific mode of acquiring
ownership. Thus, whether one becomes an owner of a condominium unit by virtue of sale or donation is of
no moment.

It is erroneous to argue that the ownership must result from a sale transaction between the owner-
developer and the purchaser. Such interpretation would mean that persons who inherited a unit, or have
been donated one, and properly transferred title in their names cannot become members of a
condominium corporation.

The next issue is - may Moldex appoint duly authorized representatives who will exercise its membership
rights, specifically the right to be voted as corporate directors/officers?

Moldex may appoint a

duly authorized representative

A corporation can act only through natural persons duly authorized for the purpose or by a specific act of
its board of directors.45 Thus, in order for Moldex to exercise its membership rights and privileges, it
necessarily has to appoint its representatives.

Section 58 of the Corporation Code mandates:

Section 58. Proxies. - Stockholders and members may vote in person or by proxy in all meetings
of stockholders or members. Proxies shall in writing, signed by the stockholder or member and filed
before the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall
be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period
longer than five (5) years at any one time. [Emphasis supplied]

Relative to the above provision is Section 1, Article II of Condocor's By-Laws, 46 which grants registered
owners the right to designate any person or entity to represent them in Condocor, subject to the
submission of a written notification to the Secretary of such designation. Further, the owner's
representative is entitled to enjoy and avail himself of all the rights and privileges, and perform all the
duties and responsibilities of a member of the corporation. The law and Condocor's By-Laws evidently
allow proxies in members' meeting.

Prescinding therefrom, Moldex had the right to send duly authorized representatives to represent it during
the questioned general membership meeting. Records showed that, pursuant to a Board Resolution, as
certified47 by Sandy T. Uy, corporate secretary of Moldex, the individual respondents were instituted as
Moldex's representatives. This was attested to by Mary Rose V. Pascual, Assistant Corporate Secretary of
Condocor, in a sworn statement48 she executed on August 31, 2012.

Next question is - can the individual respondents be elected as directors of Condocor?

Individual respondents who

are non-members cannot be
elected as directors and officers
of the condominium corporation

The governance and management of corporate affairs in a corporation lies with its board of directors in
case of stock corporations, or board of trustees in case of non-stock corporations. As the board exercises
all corporate powers and authority expressly vested upon it by law and by the corporations' by-laws, there
are minimum requirements set in order to be a director or trustee, one of which is ownership of a share in
one's name or membership in a non-stock corporation. Section 23 of the Corporation Code provides:

Section 23. The Board of Directors or Trustees. - Unless otherwise provided in this Code, the corporate
powers of all corporations formed under this Code shall be exercised, all business conducted and all
property of such corporations controlled and held by the board of directors or trustees to be elected from
among the holders of stocks, or where there is no stock, from among the members of the
corporation, who shall hold office for one (1) year until their successors are elected and qualified.

Every director must own at least one (1) share of the capital stock of the corporation of which he is a
director, which share shall stand in his name on the books of the corporation. Any director who ceases to
be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall
thereby cease to be a director. Trustees of non-stock corporations must be members thereof. A
majority of the directors or trustees of all corporations organized under this Code must be residents of the
Philippines. [Emphases supplied]

This rule was reiterated in Section 92 of the Corporation Code, which states:

Section 92. Election and term of trustees. – x x x No person shall be elected as trustee unless he is a
member of the corporation. x x x

While Moldex may rightfully designate proxies or representatives, the latter, however, cannot be elected
as directors or trustees of Condocor. First, the Corporation Code clearly provides that a director or trustee
must be a member of record of the corporation. Further, the power of the proxy is merely to vote. If said
proxy is not a member in his own right, he cannot be elected as a director or proxy.

Respondents cannot rely on the Securities and Exchange Commission (SEC) Opinions they cited to justify
the individual respondents' election as directors. In Heirs of Gamboa v. Teves,49 the Court En Banc held
that opinions issued by SEC legal officers do not have the force and effect of SEC rules and regulations
because only the SEC en banc can adopt rules and regulations.

Following Section 25 of the Corporation Code, the election of individual respondents, as corporate officers,
was likewise invalid.

Section 25 of the Corporation Code mandates that the President shall be a director. As previously
discussed, Jaminola could not be elected as a director. Consequently, Jaminola's election as President was
null and void.

The same provision allows the election of such other officers as may be provided for in the by-laws.
Condocor's By-Laws, however, require that the Vice-President shall be elected by the Board from among
its member-directors in good standing, and the Secretary may be appointed by the Board under the same
circumstance. Like Jaminola, Milanes and Macalintal were not directors and, thus, could not be elected and
appointed as Vice-President and Secretary, respectively.

Insofar as Roman's election as Treasurer is concerned, the same would have been valid, as a corporate
treasurer may or may not be a director of the corporation's board. The general membership meeting of
Condocor, however, was null and void. As a consequence, Roman's election had no legal force and effect.

In fine, the July 21, 2012 annual general membership meeting of Condocor being null and void, all acts
and resolutions emanating therefrom are likewise null and void.

WHEREFORE, the petition is GRANTED. The March 4, 2013 Decision of the Regional Trial Court, Branch
24, Manila, in Civil Case No. 12-128478 is hereby REVERSED and SET ASIDE. The Court declares that:

a) The July 21, 2012 Annual General Membership Meeting of Condocor is null and void;

b) The election of members of the Board of Directors in the annual general membership meeting is
likewise null and void; and

c) The succeeding Organizational Meeting of Condocor's Board of Directors as well as the election of its
corporate officers are of no force and effect.
Costs against respondents.

SO ORDERED.

G.R. No. 113032 August 21, 1997

WESTERN INSTITUTE OF TECHNOLOGY, INC., HOMERO L. VILLASIS, DIMAS ENRIQUEZ,

PRESTON F. VILLASIS & REGINALD F. VILLASIS, petitioner,
vs.
RICARDO T. SALAS, SALVADOR T. SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S. SALAS,
RICHARD S. SALAS & HON. JUDGE PORFIRIO PARIAN, respondents.

HERMOSISIMA, JR., J.:

Up for review on certiorari are: (1) the Decision dated September 6, 1993 and (2) the Order dated
November 23, 1993 of Branch 33 of the Regional Trial Court of Iloilo City in Criminal Cases Nos. 37097
and 37098 for estafa and falsification of a public document, respectively. The judgment acquitted the
private respondents of both charges, but petitioners seek to hold them civilly liable.

Private respondents Ricardo T. Salas, Salvador T. Salas, Soledad Salas-Tubilleja, Antonio S. Salas, and
Richard S. Salas, belonging to the same family, are the majority and controlling members of the Board of
Trustees of Western Institute of Technology, Inc. (WIT, for short), a stock corporation engaged in the
operation, among others, of an educational institution. According to petitioners, the minority stockholders
of WIT, sometime on June 1, 1986 in the principal office of WIT at La Paz, Iloilo City, a Special Board
Meeting was held. In attendance were other members of the Board including one of the petitioners
Reginald Villasis. Prior to aforesaid Special Board Meeting, copies of notice thereof, dated May 24, 1986,
were distributed to all Board Members. The notice allegedly indicated that the meeting to be held on June
1, 1986 included Item No. 6 which states:

Possible implementation of Art. III, Sec. 6 of the Amended By-Laws of Western Institute of
Technology, Inc. on compensation of all officers of the corporation.1

In said meeting, the Board of Trustees passed Resolution No. 48, s. 1986, granting monthly compensation
to the private respondents as corporate officers retroactive June 1, 1985, viz.:

Resolution No. 48 s. 1986

On the motion of Mr. Richard Salas (accused), duly seconded by Mrs. Soledad Tubilleja (accused),
it was unanimously resolved that:

The Officers of the Corporation be granted monthly compensation for services

rendered as follows: Chairman — P9,000.00/month, Vice Chairman —
P3,500.00/month, Corporate Treasurer — P3,500.00/month and Corporate Secretary
— P3,500.00/month, retroactive June 1, 1985 and the ten per centum of the net
profits shall be distributed equally among the ten members of the Board of Trustees.
This shall amend and superceed (sic) any previous resolution.

There were no other business.

The Chairman declared the meeting adjourned at 5:11 P.M.

This is to certify that the foregoing minutes of the regular meeting of the Board of Trustees of
Western Institute of Technology, Inc. held on March 30, 1986 is true and correct to the best of my
knowledge and belief.
 (Sgd) ANTONIO S. SALAS
Corporate Secretary2

A few years later, that is, on March 13, 1991, petitioners Homero Villasis, Prestod Villasis, Reginald Villasis
and Dimas Enriquez filed an affidavit-complaint against private respondents before the Office of the City
Prosecutor of Iloilo, as a result of which two (2) separate criminal informations, one for falsification of a
public document under Article 171 of the Revised Penal Code and the other for estafa under Article 315,
par. 1(b) of the RPC, were filed before Branch 33 of the Regional Trial Court of Iloilo City. The charge for
falsification of public document was anchored on the private respondents' submission of WIT's income
statement for the fiscal year 1985-1986 with the Securities and Exchange Commission (SEC) reflecting
therein the disbursement of corporate funds for the compensation of private respondents based on
Resolution No. 4, series of 1986, making it appear that the same was passed by the board on March 30,
1986, when in truth, the same was actually passed on June 1, 1986, a date not covered by the
corporation's fiscal year 1985-1986 (beginning May 1, 1985 and ending April 30, 1986). The Information
for falsification of a public document states:

The undersigned City Prosecutor accuses RICARDO T. SALAS, SALVADOR T. SALAS, SOLEDAD
SALAS-TUBILLEJA, ANTONIO S. SALAS and RICHARD S. SALAS (whose dates and places of birth
cannot be ascertained) of the crime of FALSIFICATION OF A PUBLIC DOCUMENT, Art. 171 of the
Revised Penal Code, committed as follows:

That on or about the 10th day of June, 1986, in the City of Iloilo, Philippines and
within the jurisdiction of this Honorable Court, the above-named accused, being then
the Chairman, Vice-Chairman, Treasurer, Secretary, and Trustee (who later became
Secretary), respectively, of the board of trustees of the Western Institute of
Technology, Inc., a corporation duly organized and existing under the laws of the
Republic of the Philippines, conspiring and confederating together and mutually
helping one another, to better realized (sic) their purpose, did then and there
wilfully, unlawfully and criminally prepare and execute and subsequently cause to be
submitted to the Securities and Exchange Commission an income statement of the
corporation for the fiscal year 1985-1986, the same being required to be submitted
every end of the corporation fiscal year by the aforesaid Commission, and therefore,
a public document, including therein the disbursement of the retroactive
compensation of accused corporate officers in the amount of P186,470.70, by then
and there making it appear that the basis thereof Resolution No. 4, Series of 1986
was passed by the board of trustees on March 30, 1986, a date covered by the
corporation's fiscal year 1985-1986 (i.e., from May 1, 1985 to April 30, 1986), when
in truth and in fact, as said accused well knew, no such Resolution No. 48, Series of
1986 was passed on March 30, 1986.

CONTRARY TO LAW.

Iloilo City, Philippines, November 22, 1991.3 [Emphasis ours].

The Information, on the other hand, for estafa reads:

The undersigned City Prosecutor accuses RICARDO SALAS, SALVADOR T. SALAS, SOLEDAD SALAS-
TUBILLEJA, ANTONIO S. SALAS, RICHARD S. SALAS (whose dates and places of birth cannot be
ascertained) of the crime of ESTAFA, Art. 315, par. 1 (b) of the Revised Penal Code, committed as
follows:

That on or about the 1st day of June, 1986, in the City of Iloilo, Philippines, and
within the jurisdiction of this Honorable Court, the above-named accused, being then
the Chairman, Vice-Chairman, Treasurer, Secretary, and Trustee (who later became
Secretary), respectively; of the Board of Trustees of Western Institute of Technology,
Inc., a corporation duly organized and existing under the laws of the Republic of the
Philippines, conspiring and confederating together and mutually helping one another
to better realize their purpose, did then and there wilfully, unlawfully and feloniously
 defraud the said corporation (and its stockholders) in the following manner, to wit:
herein accused, knowing fully well that they have no sufficient, lawful authority to
disburse — let alone violation of applicable laws and jurisprudence, disbursed the
funds of the corporation by effecting payment of their retroactive salaries in the
amount of P186,470.00 and subsequently paying themselves every 15th and 30th of
the month starting June 15, 1986 until the present, in the amount of P19,500.00 per
month, as if the same were their own, and when herein accused were informed of
the illegality of these disbursements by the minority stockholders by way of
objections made in an annual stockholders' meeting held on June 14, 1986 and every
year thereafter, they refused, and still refuse, to rectify the same to the damage and
prejudice of the corporation (and its stockholders) in the total sum of P1,453,970.79
as of November 15, 1991.

CONTRARY TO LAW.

Iloilo City, Philippines, November 22, 1991.4 [Emphasis ours]

Thereafter, trial for the two criminal cases, docketed as Criminal Cases Nos. 37097 and 37098, was
consolidated. After a full-blown hearing, Judge Porfirio Parian handed down a verdict of acquittal on both
counts5 dated September 6, 1993 without imposing any civil liability against the accused therein.

Petitioners filed a Motion for Reconsideration6 of the civil aspect of the RTC Decision which was, however,
denied in an Order dated November 23, 1993.7

Hence, the instant petition.

Significantly on December 8, 1994, a Motion for Intervention, dated December 2, 1994, was filed before
this Court by Western Institute of Technology, Inc., supposedly one of the petitioners herein, disowning its
inclusion in the petition and submitting that Atty. Tranquilino R. Gale, counsel for the other petitioners,
had no authority whatsoever to represent the corporation in filing the petition. Intervenor likewise prayed
for the dismissal of the petition for being utterly without merit. The Motion for Intervention was granted
on January 16, 1995.8

Petitioners would like us to hold private respondents civilly liable despite their acquittal in Criminal Cases
Nos. 37097 and 37098. They base their claim on the alleged illegal issuance by private respondents of
Resolution No. 48, series of 1986 ordering the disbursement of corporate funds in the amount of
P186,470.70 representing retroactive compensation as of June 1, 1985 in favor of private respondents,
board members of WIT, plus P1,453,970.79 for the subsequent collective salaries of private respondents
every 15th and 30th of the month until the filing of the criminal complaints against them on March 1991.
Petitioners maintain that this grant of compensation to private respondents is proscribed under Section 30
of the Corporation Code. Thus, private respondents are obliged to return these amounts to the corporation
with interest.

We cannot sustain the petitioners. The pertinent section of the Corporation Code provides:

Sec. 30. Compensation of directors — In the absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any compensation, as such directors, except for
reasonable per diems: Provided, however, That any such compensation (other than per diems)
may be granted to directors by the vote of the stockholders representing at least a majority of the
outstanding capital stock at a regular or special stockholders' meeting. In no case shall the total
yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income
before income tax of the corporation during the preceding year. [Emphasis ours]

There is no argument that directors or trustees, as the case may be, are not entitled to salary or other
compensation when they perform nothing more than the usual and ordinary duties of their office. This rule
is founded upon a presumption that directors/trustees render service gratuitously, and that the return
upon their shares adequately furnishes the motives for service, without compensation.9 Under the
foregoing section, there are only two (2) ways by which members of the board can be granted
compensation apart from reasonable per diems: (1) when there is a provision in the by-laws fixing their
compensation; and (2) when the stockholders representing a majority of the outstanding capital stock at a
regular or special stockholders' meeting agree to give it to them.

This proscription, however, against granting compensation to directors/trustees of a corporation is not a

sweeping rule. Worthy of note is the clear phraseology of Section 30 which states: ". . . [T]he directors
shall not receive any compensation, as such directors, . . . ." The phrase as such directors is not without
significance for it delimits the scope of the prohibition to compensation given to them for services
performed purely in their capacity as directors or trustees. The unambiguous implication is that members
of the board may receive compensation, in addition to reasonable per diems, when they render services to
the corporation in a capacity other than as directors/trustees.10 In the case at bench, Resolution No. 48, s.
1986 granted monthly compensation to private respondents not in their capacity as members of the
board, but rather as officers of the corporation, more particularly as Chairman, Vice-Chairman, Treasurer
and Secretary of Western Institute of Technology. We quote once more Resolution No. 48, s. 1986 for
easy reference, viz.:

Resolution No. 48 s. 1986

On the motion of Mr. Richard Salas (accused), duly seconded by Mrs. Soledad Tubilleja (accused),
it was unanimously resolved that:

The Officers of the Corporation be granted monthly compensation for services

rendered as follows: Chairman — P9,000.00/month, Vice Chairman —
P3,500.00/month, Corporate Treasurer — P3,500.00/month and Corporate Secretary
— P3,500.00/month, retroactive June 1, 1985 and the ten per centum of the net
profits shall be distributed equally among the ten members of the Board of Trustees.
This shall amend and superceed (sic) any previous resolution.

There were no other business.

The Chairman declared the meeting adjourned at 5:11 P.M.

This is to certify that the foregoing minutes of the regular meeting of the Board of Trustees of
Western Institute of Technology, Inc. held on March 30, 1986 is true and correct to the best of my
knowledge and belief.

(Sgd) ANTONIO S. SALAS

Corporate Secretary11 [Emphasis ours]

Clearly, therefore, the prohibition with respect to granting compensation to corporate directors/trustees as
such under Section 30 is not violated in this particular case. Consequently, the last sentence of Section 30
which provides:

. . . . . . . In no case shall the total yearly compensation of directors, as such directors, exceed ten
(10%) percent of the net income before income tax of the corporation during the preceding year.
(Emphasis ours]

does not likewise find application in this case since the compensation is being given to private respondents
in their capacity as officers of WIT and not as board members.

Petitioners assert that the instant case is a derivative suit brought by them as minority shareholders of
WIT for and on behalf of the corporation to annul Resolution No. 48, s. 1986 which is prejudicial to the
corporation.

We are unpersuaded. A derivative suit is an action brought by minority shareholders in the name of the
corporation to redress wrongs committed against it, for which the directors refuse to sue.12 It is a remedy
designed by equity and has been the principal defense of the minority shareholders against abuses by the
majority.13 Here, however, the case is not a derivative suit but is merely an appeal on the civil aspect of
Criminal Cases Nos. 37097 and 37098 filed with the RTC of Iloilo for estafa and falsification of public
document. Among the basic requirements for a derivative suit to prosper is that the minority shareholder
who is suing for and on behalf of the corporation must allege in his complaint before the proper forum that
he is suing on a derivative cause of action on behalf of the corporation and all other shareholders similarly
situated who wish to join.14 This is necessary to vest jurisdiction upon the tribunal in line with the rule that
it is the allegations in the complaint that vests jurisdiction upon the court or quasi-judicial body concerned
over the subject matter and nature of the action.15 This was not complied with by the petitioners either in
their complaint before the court a quo nor in the instant petition which, in part, merely states that "this is
a petition for review on certiorari on pure questions of law to set aside a portion of the RTC decision in
Criminal Cases Nos. 37097 and 37098"16 since the trial court's judgment of acquittal failed to impose any
civil liability against the private respondents. By no amount of equity considerations, if at all deserved, can
a mere appeal on the civil aspect of a criminal case be treated as a derivative suit.

Granting, for purposes of discussion, that this is a derivative suit as insisted by petitioners, which it is not,
the same is outrightly dismissible for having been wrongfully filed in the regular court devoid of any
jurisdiction to entertain the complaint. The ease should have been filed with the Securities and Exchange
Commission (SEC) which exercises original and exclusive jurisdiction over derivative suits, they being
intra-corporate disputes, per Section 5 (b) of P.D. No. 902-A:

In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission
over corporations, partnerships and other forms of associations registered with it as expressly
granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear
and decide cases involving:

xxx xxx xxx

b) Controversies arising out of intra-corporate or partnership relations, between and among

stockholders, members, or associates; between any or all of them and the corporation, partnership
or association of which they are stockholders, members or associates, respectively; and between
such corporation, partnership or association and the State insofar as it concerns their individual
franchise or right to exist as such entity;

xxx xxx xxx

[Emphasis ours]

Once the case is decided by the SEC, the losing party may file a petition for review before the Court of
Appeals raising questions of fact, of law, or mixed questions of fact and law.17 It is only after the case has
ran this course, and not earlier, can it be brought to us via a petition for review on certiorari under Rule
45 raising only pure questions of law.18 Petitioners, in pleading that we treat the instant petition as a
derivative suit, are trying to short-circuit the entire process which we cannot here sanction.

As an appeal on the civil aspect of Criminal Cases Nos. 37097 and 37098 for falsification of public
document and estafa, which this petition truly is, we have to deny the petition just the same. It will be
well to quote the respondent court's ratiocinations acquitting the private respondents on both counts:

The prosecution wants this Court to believe and agree that there is falsification of public document
because, as claimed by the prosecution, Resolution No. 48, Series of 1986 (Exh. "1-E-1") was not
taken up and passed during the Regular Meeting of the Board of Trustees of the Western Institute
of Technology (WIT), Inc. on March 30, 1986, but on June 1, 1986 special meeting of the same
board of trustees.

This Court is reluctant to accept this claim of falsification. The prosecution omitted to submit the
complete minutes of the regular meeting of the Board of Trustees on March 30, 1986. It only
presented in evidence Exh. "C", which is page 5 or the last page of the said minutes. Had the
 complete minutes (Exh. "1") consisting of five (5) pages, been submitted, it can be readily seen
and understood that Resolution No. 48, Series of 1986 (Exh. "1-E-1") giving compensation to
corporate officers, was indeed included in Other Business, No. 6 of the Agenda, and was taken up
and passed on March 30, 1986. The mere fact of existence of Exh. "C" also proves that it was
passed on March 30, 1986 for Exh. "C" is part and parcel of the whole minutes of the Board of
Trustees Regular Meeting on March 30, 1986. No better and more credible proof can be considered
other than the Minutes (Exh. "1") itself of the Regular Meeting of the Board of Trustees on March
30, 1986. The imputation that said Resolution No. 48 was neither taken up nor passed on March
30, 1986 because the matter regarding compensation was not specifically stated or written in the
Agenda and that the words "possible implementation of said Resolution No. 48, was expressly
written in the Agenda for the Special Meeting of the Board on June 1, 1986, is simply an
implication. This evidence by implication to the mind of the court cannot prevail over the Minutes
(Exh. "1") and cannot ripen into proof beyond reasonable doubt which is demanded in all criminal
prosecutions.

This Court finds that under the Eleventh Article (Exh. "3-D-1") of the Articles of Incorporation (Exh.
"3-B") of the Panay Educational Institution, Inc., now the Western Institute of Technology, Inc., the
officers of the corporation shall receive such compensation as the Board of Directors may provide.
These Articles of Incorporation was adopted on May 17, 1957 (Exh. "3-E"). The Officers of the
corporation and their corresponding duties are enumerated and stated in Sections 1, 2, 3 and 4 of
Art. III of the Amended By-Laws of the Corporation (Exh. "4-A") which was adopted on May 31,
1957. According to Sec. 6, Art. III of the same By-Laws, all officers shall receive such
compensation as may be fixed by the Board of Directors.

It is the perception of this Court that the grant of compensation or salary to the accused in their
capacity as officers of the corporation, through Resolution No. 48, enacted on March 30, 1986 by
the Board of Trustees, is authorized by both the Articles of Incorporation and the By-Laws of the
corporation. To state otherwise is to depart from the clear terms of the said articles and by-laws. In
their defense the accused have properly and rightly asserted that the grant of salary is not for
directors, but for their being officers of the corporation who oversee the day to day activities and
operations of the school.

xxx xxx xxx

. . .[O]n the question of whether or not the accused can be held liable for estafa under Sec. 1 (b)
of Art. 315 of the Revised Penal Code, it is perceived by this Court that the receipt and the holding
of the money by the accused as salary on basis of the authority granted by the Articles and By-
Laws of the corporation are not tainted with abuse of confidence. The money they received belongs
to them and cannot be said to have been converted and/or misappropriated by them.

xxx xxx xxx 19

[Emphasis ours]

From the foregoing factual findings, which we find to be amply substantiated by the records, it is evident
that there is simply no basis to hold the accused, private respondents herein, civilly liable. Section 2(b) of
Rule 111 on the New Rules on Criminal Procedure provides:

Sec. 2. Institution of separate civil action.

xxx xxx xxx

(b) Extinction of the penal action does not carry with it extinction of the civil, unless the extinction
proceeds from a declaration in a final judgment that the fact from which the civil might arise did
not exist. [Emphasis ours]

Likewise, the last paragraph of Section 2, Rule 120 reads:

 Sec. 2. Form and contents of judgment.

xxx xxx xxx

In case of acquittal, unless there is a clear showing that the act from which the civil liability might
arise did not exist, the judgment shall make a finding on the civil liability of the accused in favor of
the offended party. [Emphasis ours]

The acquittal in Criminal Cases Nos. 37097 and 37098 is not merely based on reasonable doubt but rather
on a finding that the accused-private respondents did not commit the criminal acts complained of. Thus,
pursuant to the above rule and settled jurisprudence, any civil action ex delicto cannot prosper. Acquittal
in a criminal action bars the civil action arising therefrom where the judgment of acquittal holds that the
accused did not commit the criminal acts imputed to them.20

WHEREFORE, the instant petition is hereby DENIED with costs against petitioners.

SO ORDERED.

G.R. No. L-18805             August 14, 1967

THE BOARD OF LIQUIDATORS1 representing THE GOVERNMENT OF THE REPUBLIC OF THE

PHILIPPINES, plaintiff-appellant,
vs.
HEIRS OF MAXIMO M. KALAW,2 JUAN BOCAR, ESTATE OF THE DECEASED CASIMIRO
GARCIA,3 and LEONOR MOLL, defendants-appellees.

Simeon M. Gopengco and Solicitor General for plaintiff-appellant.

L. H. Hernandez, Emma Quisumbing, Fernando and Quisumbing, Jr.; Ponce Enrile, Siguion Reyna,
Montecillo and Belo for defendants-appellees.

SANCHEZ, J.:

The National Coconut Corporation (NACOCO, for short) was chartered as a non-profit governmental
organization on May 7, 1940 by Commonwealth Act 518 avowedly for the protection, preservation and
development of the coconut industry in the Philippines. On August 1, 1946, NACOCO's charter was
amended [Republic Act 5] to grant that corporation the express power "to buy, sell, barter, export, and in
any other manner deal in, coconut, copra, and dessicated coconut, as well as their by-products, and to act
as agent, broker or commission merchant of the producers, dealers or merchants" thereof. The charter
amendment was enacted to stabilize copra prices, to serve coconut producers by securing advantageous
prices for them, to cut down to a minimum, if not altogether eliminate, the margin of middlemen, mostly
aliens.4

General manager and board chairman was Maximo M. Kalaw; defendants Juan Bocar and Casimiro Garcia
were members of the Board; defendant Leonor Moll became director only on December 22, 1947.

NACOCO, after the passage of Republic Act 5, embarked on copra trading activities. Amongst the scores of
contracts executed by general manager Kalaw are the disputed contracts, for the delivery of copra, viz:

(a) July 30, 1947: Alexander Adamson & Co., for 2,000 long tons, $167.00: per ton, f. o. b.,
delivery: August and September, 1947. This contract was later assigned to Louis Dreyfus & Co.
(Overseas) Ltd.

(b) August 14, 1947: Alexander Adamson & Co., for 2,000 long tons $145.00 per long ton, f.o.b.,
Philippine ports, to be shipped: September-October, 1947. This contract was also assigned to Louis
Dreyfus & Co. (Overseas) Ltd.
 (c) August 22, 1947: Pacific Vegetable Co., for 3,000 tons, $137.50 per ton, delivery: September,
1947.

(d) September 5, 1947: Spencer Kellog & Sons, for 1,000 long tons, $160.00 per ton, c.i.f., Los
Angeles, California, delivery: November, 1947.

(e) September 9, 1947: Franklin Baker Division of General Foods Corporation, for 1,500 long tons,
$164,00 per ton, c.i.f., New York, to be shipped in November, 1947.

(f) September 12, 1947: Louis Dreyfus & Co. (Overseas) Ltd., for 3,000 long tons, $154.00 per
ton, f.o.b., 3 Philippine ports, delivery: November, 1947.

(g) September 13, 1947: Juan Cojuangco, for 2,000 tons, $175.00 per ton, delivery: November
and December, 1947. This contract was assigned to Pacific Vegetable Co.

(h) October 27, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f., Pacific ports,
delivery: December, 1947 and January, 1948. This contract was assigned to Pacific Vegetable Co.

(i) October 28, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f., Pacific ports,
delivery: January, 1948. This contract was assigned to Pacific Vegetable Co.

An unhappy chain of events conspired to deter NACOCO from fulfilling these contracts. Nature
supervened. Four devastating typhoons visited the Philippines: the first in October, the second and third in
November, and the fourth in December, 1947. Coconut trees throughout the country suffered extensive
damage. Copra production decreased. Prices spiralled. Warehouses were destroyed. Cash requirements
doubled. Deprivation of export facilities increased the time necessary to accumulate shiploads of copra.
Quick turnovers became impossible, financing a problem.

When it became clear that the contracts would be unprofitable, Kalaw submitted them to the board for
approval. It was not until December 22, 1947 when the membership was completed. Defendant Moll took
her oath on that date. A meeting was then held. Kalaw made a full disclosure of the situation, apprised the
board of the impending heavy losses. No action was taken on the contracts. Neither did the board vote
thereon at the meeting of January 7, 1948 following. Then, on January 11, 1948, President Roxas made a
statement that the NACOCO head did his best to avert the losses, emphasized that government concerns
faced the same risks that confronted private companies, that NACOCO was recouping its losses, and that
Kalaw was to remain in his post. Not long thereafter, that is, on January 30, 1948, the board met again
with Kalaw, Bocar, Garcia and Moll in attendance. They unanimously approved the contracts hereinbefore
enumerated.

As was to be expected, NACOCO but partially performed the contracts, as follows:

Buyers Tons Delivered Undelivered

Pacific Vegetable Oil 2,386.45 4,613.55
Spencer Kellog None 1,000
Franklin Baker 1,000 500
Louis Dreyfus 800 2,200
Louis Dreyfus (Adamson contract of July 30, 1947) 1,150 850
Louis Dreyfus (Adamson Contract of August 14, 1947) 1,755 245

TOTALS 7,091.45 9,408.55

The buyers threatened damage suits. Some of the claims were settled, viz: Pacific Vegetable Oil Co., in
copra delivered by NACOCO, P539,000.00; Franklin Baker Corporation, P78,210.00; Spencer Kellog &
Sons, P159,040.00.

But one buyer, Louis Dreyfus & Go. (Overseas) Ltd., did in fact sue before the Court of First Instance of
Manila, upon claims as follows: For the undelivered copra under the July 30 contract (Civil Case 4459);
P287,028.00; for the balance on the August 14 contract (Civil Case 4398), P75,098.63; for that per the
September 12 contract reduced to judgment (Civil Case 4322, appealed to this Court in L-2829),
P447,908.40. These cases culminated in an out-of-court amicable settlement when the Kalaw
management was already out. The corporation thereunder paid Dreyfus P567,024.52 representing 70% of
the total claims. With particular reference to the Dreyfus claims, NACOCO put up the defenses that: (1)
the contracts were void because Louis Dreyfus & Co. (Overseas) Ltd. did not have license to do business
here; and (2) failure to deliver was due to force majeure, the typhoons. To project the utter
unreasonableness of this compromise, we reproduce in haec verba this finding below:

x x x However, in similar cases brought by the same claimant [Louis Dreyfus & Co. (Overseas)
Ltd.] against Santiago Syjuco for non-delivery of copra also involving a claim of P345,654.68
wherein defendant set up same defenses as above, plaintiff accepted a promise of P5,000.00 only
(Exhs. 31 & 32 Heirs.) Following the same proportion, the claim of Dreyfus against NACOCO should
have been compromised for only P10,000.00, if at all. Now, why should defendants be held liable
for the large sum paid as compromise by the Board of Liquidators? This is just a sample to show
how unjust it would be to hold defendants liable for the readiness with which the Board of
Liquidators disposed of the NACOCO funds, although there was much possibility of successfully
resisting the claims, or at least settlement for nominal sums like what happened in the Syjuco
case.5

All the settlements sum up to P1,343,274.52.

In this suit started in February, 1949, NACOCO seeks to recover the above sum of P1,343,274.52 from
general manager and board chairman Maximo M. Kalaw, and directors Juan Bocar, Casimiro Garcia and
Leonor Moll. It charges Kalaw with negligence under Article 1902 of the old Civil Code (now Article 2176,
new Civil Code); and defendant board members, including Kalaw, with bad faith and/or breach of trust for
having approved the contracts. The fifth amended complaint, on which this case was tried, was filed on
July 2, 1959. Defendants resisted the action upon defenses hereinafter in this opinion to be discussed.

The lower court came out with a judgment dismissing the complaint without costs as well as defendants'
counterclaims, except that plaintiff was ordered to pay the heirs of Maximo Kalaw the sum of P2,601.94
for unpaid salaries and cash deposit due the deceased Kalaw from NACOCO.

Plaintiff appealed direct to this Court.

Plaintiff's brief did not, question the judgment on Kalaw's counterclaim for the sum of P2,601.94.

Right at the outset, two preliminary questions raised before, but adversely decided by, the court below,
arrest our attention. On appeal, defendants renew their bid. And this, upon established jurisprudence that
an appellate court may base its decision of affirmance of the judgment below on a point or points ignored
by the trial court or in which said court was in error.6

1. First of the threshold questions is that advanced by defendants that plaintiff Board of Liquidators has
lost its legal personality to continue with this suit.

Accepted in this jurisdiction are three methods by which a corporation may wind up its affairs: (1) under
Section 3, Rule 104, of the Rules of Court [which superseded Section 66 of the Corporation
Law]7 whereby, upon voluntary dissolution of a corporation, the court may direct "such disposition of its
assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of the
corporation;" (2) under Section 77 of the Corporation Law, whereby a corporation whose corporate
existence is terminated, "shall nevertheless be continued as a body corporate for three years after the
time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or
against it and of enabling it gradually to settle and close its affairs, to dispose of and convey its property
and to divide its capital stock, but not for the purpose of continuing the business for which it was
established;" and (3) under Section 78 of the Corporation Law, by virtue of which the corporation, within
the three year period just mentioned, "is authorized and empowered to convey all of its property to
trustees for the benefit of members, stockholders, creditors, and others interested."8

It is defendants' pose that their case comes within the coverage of the second method. They reason out
that suit was commenced in February, 1949; that by Executive Order 372, dated November 24, 1950,
NACOCO, together with other government-owned corporations, was abolished, and the Board of
Liquidators was entrusted with the function of settling and closing its affairs; and that, since the three
year period has elapsed, the Board of Liquidators may not now continue with, and prosecute, the present
case to its conclusion, because Executive Order 372 provides in Section 1 thereof that —

Sec.1. The National Abaca and Other Fibers Corporation, the National Coconut Corporation, the
National Tobacco Corporation, the National Food Producer Corporation and the former enemy-
owned or controlled corporations or associations, . . . are hereby abolished. The said corporations
shall be liquidated in accordance with law, the provisions of this Order, and/or in such manner as
the President of the Philippines may direct; Provided, however, That each of the said corporations
shall nevertheless be continued as a body corporate for a period of three (3) years from the
effective date of this Executive Order for the purpose of prosecuting and defending suits by or
against it and of enabling the Board of Liquidators gradually to settle and close its affairs, to
dispose of and, convey its property in the manner hereinafter provided.

Citing Mr. Justice Fisher, defendants proceed to argue that even where it may be found impossible within
the 3 year period to reduce disputed claims to judgment, nonetheless, "suits by or against a corporation
abate when it ceases to be an entity capable of suing or being sued" (Fisher, The Philippine Law of Stock
Corporations, pp. 390-391). Corpus Juris Secundum likewise is authority for the statement that "[t]he
dissolution of a corporation ends its existence so that there must be statutory authority for prolongation of
its life even for purposes of pending litigation"9 and that suit "cannot be continued or revived; nor can a
valid judgment be rendered therein, and a judgment, if rendered, is not only erroneous, but void and
subject to collateral attack." 10 So it is, that abatement of pending actions follows as a matter of course
upon the expiration of the legal period for liquidation, 11 unless the statute merely requires a
commencement of suit within the added time. 12 For, the court cannot extend the time alloted by
statute. 13

We, however, express the view that the executive order abolishing NACOCO and creating the Board of
Liquidators should be examined in context. The proviso in Section 1 of Executive Order 372, whereby the
corporate existence of NACOCO was continued for a period of three years from the effectivity of the order
for "the purpose of prosecuting and defending suits by or against it and of enabling the Board of
Liquidators gradually to settle and close its affairs, to dispose of and convey its property in the manner
hereinafter provided", is to be read not as an isolated provision but in conjunction with the whole. So
reading, it will be readily observed that no time limit has been tacked to the existence of the Board of
Liquidators and its function of closing the affairs of the various government owned corporations, including
NACOCO.

By Section 2 of the executive order, while the boards of directors of the various corporations were
abolished, their powers and functions and duties under existing laws were to be assumed and exercised by
the Board of Liquidators. The President thought it best to do away with the boards of directors of the
defunct corporations; at the same time, however, the President had chosen to see to it that the Board of
Liquidators step into the vacuum. And nowhere in the executive order was there any mention of the
lifespan of the Board of Liquidators. A glance at the other provisions of the executive order buttresses our
conclusion. Thus, liquidation by the Board of Liquidators may, under section 1, proceed in accordance with
law, the provisions of the executive order, "and/or in such manner as the President of the Philippines may
direct." By Section 4, when any property, fund, or project is transferred to any governmental
instrumentality "for administration or continuance of any project," the necessary funds therefor shall be
taken from the corresponding special fund created in Section 5. Section 5, in turn, talks of special funds
established from the "net proceeds of the liquidation" of the various corporations abolished. And by
Section, 7, fifty per centum of the fees collected from the copra standardization and inspection service
shall accrue "to the special fund created in section 5 hereof for the rehabilitation and development of the
coconut industry." Implicit in all these, is that the term of life of the Board of Liquidators is without time
limit. Contemporary history gives us the fact that the Board of Liquidators still exists as an office with
officials and numerous employees continuing the job of liquidation and prosecution of several court
actions.

Not that our views on the power of the Board of Liquidators to proceed to the final determination of the
present case is without jurisprudential support. The first judicial test before this Court is National Abaca
and Other Fibers Corporation vs. Pore, L-16779, August 16, 1961. In that case, the corporation, already
dissolved, commenced suit within the three-year extended period for liquidation. That suit was for
recovery of money advanced to defendant for the purchase of hemp in behalf of the corporation. She
failed to account for that money. Defendant moved to dismiss, questioned the corporation's capacity to
sue. The lower court ordered plaintiff to include as co-party plaintiff, The Board of Liquidators, to which
the corporation's liquidation was entrusted by Executive Order 372. Plaintiff failed to effect inclusion. The
lower court dismissed the suit. Plaintiff moved to reconsider. Ground: excusable negligence, in that its
counsel prepared the amended complaint, as directed, and instructed the board's incoming and outgoing
correspondence clerk, Mrs. Receda Vda. de Ocampo, to mail the original thereof to the court and a copy of
the same to defendant's counsel. She mailed the copy to the latter but failed to send the original to the
court. This motion was rejected below. Plaintiff came to this Court on appeal. We there said that "the rule
appears to be well settled that, in the absence of statutory provision to the contrary, pending actions by or
against a corporation are abated upon expiration of the period allowed by law for the liquidation of its
affairs." We there said that "[o]ur Corporation Law contains no provision authorizing a corporation, after
three (3) years from the expiration of its lifetime, to continue in its corporate name actions instituted by it
within said period of three (3) years." 14 However, these precepts notwithstanding, we, in effect, held in
that case that the Board of Liquidators escapes from the operation thereof for the reason that
"[o]bviously, the complete loss of plaintiff's corporate existence after the expiration of the period of
three (3) years for the settlement of its affairs is what impelled the President to create a Board of
Liquidators, to continue the management of such matters as may then be pending." 15 We accordingly
directed the record of said case to be returned to the lower court, with instructions to admit plaintiff's
amended complaint to include, as party plaintiff, the Board of Liquidators.

Defendants' position is vulnerable to attack from another direction.

By Executive Order 372, the government, the sole stockholder, abolished NACOCO, and placed its assets
in the hands of the Board of Liquidators. The Board of Liquidators thus became the trustee on behalf of
the government. It was an express trust. The legal interest became vested in the trustee — the Board of
Liquidators. The beneficial interest remained with the sole stockholder — the government. At no time had
the government withdrawn the property, or the authority to continue the present suit, from the Board of
Liquidators. If for this reason alone, we cannot stay the hand of the Board of Liquidators from prosecuting
this case to its final conclusion. 16 The provisions of Section 78 of the Corporation Law — the third method
of winding up corporate affairs — find application.

We, accordingly, rule that the Board of Liquidators has personality to proceed as: party-plaintiff in this
case.

2. Defendants' second poser is that the action is unenforceable against the heirs of Kalaw.

Appellee heirs of Kalaw raised in their motion to dismiss, 17 which was overruled, and in their nineteenth
special defense, that plaintiff's action is personal to the deceased Maximo M. Kalaw, and may not be
deemed to have survived after his death.18 They say that the controlling statute is Section 5, Rule 87, of
the 1940 Rules of Court.19 which provides that "[a]ll claims for money against the decedent, arising from
contract, express or implied", must be filed in the estate proceedings of the deceased. We disagree.

The suit here revolves around the alleged negligent acts of Kalaw for having entered into the questioned
contracts without prior approval of the board of directors, to the damage and prejudice of plaintiff; and is
against Kalaw and the other directors for having subsequently approved the said contracts in bad faith
and/or breach of trust." Clearly then, the present case is not a mere action for the recovery of money nor
a claim for money arising from contract. The suit involves alleged tortious acts. And the action is
embraced in suits filed "to recover damages for an injury to person or property, real or personal", which
survive. 20

The leading expositor of the law on this point is Aguas vs. Llemos, L-18107, August 30, 1962. There,
plaintiffs sought to recover damages from defendant Llemos. The complaint averred that Llemos had
served plaintiff by registered mail with a copy of a petition for a writ of possession in Civil Case 4824 of
the Court of First Instance at Catbalogan, Samar, with notice that the same would be submitted to the
Samar court on February 23, 1960 at 8:00 a.m.; that in view of the copy and notice served, plaintiffs
proceeded to the said court of Samar from their residence in Manila accompanied by their lawyers, only to
discover that no such petition had been filed; and that defendant Llemos maliciously failed to appear in
court, so that plaintiffs' expenditure and trouble turned out to be in vain, causing them mental anguish
and undue embarrassment. Defendant died before he could answer the complaint. Upon leave of court,
plaintiffs amended their complaint to include the heirs of the deceased. The heirs moved to dismiss. The
court dismissed the complaint on the ground that the legal representative, and not the heirs, should have
been made the party defendant; and that, anyway, the action being for recovery of money, testate or
intestate proceedings should be initiated and the claim filed therein. This Court, thru Mr. Justice Jose B. L.
Reyes, there declared:

Plaintiffs argue with considerable cogency that contrasting the correlated provisions of the Rules of
Court, those concerning claims that are barred if not filed in the estate settlement proceedings
(Rule 87, sec. 5) and those defining actions that survive and may be prosecuted against the
executor or administrator (Rule 88, sec. 1), it is apparent that actions for damages caused by
tortious conduct of a defendant (as in the case at bar) survive the death of the latter. Under Rule
87, section 5, the actions that are abated by death are: (1) claims for funeral expenses and those
for the last sickness of the decedent; (2) judgments for money; and (3) "all claims for money
against the decedent, arising from contract express or implied." None of these includes that of the
plaintiffs-appellants; for it is not enough that the claim against the deceased party be for money,
but it must arise from "contract express or implied", and these words (also used by the Rules in
connection with attachments and derived from the common law) were construed in Leung Ben vs.
O'Brien, 38 Phil. 182, 189-194,

"to include all purely personal obligations other than those which have their source
in delict or tort."

Upon the other hand, Rule 88, section 1, enumerates actions that survive against a decedent's
executors or administrators, and they are: (1) actions to recover real and personal property from
the estate; (2) actions to enforce a lien thereon; and (3) actions to recover damages for an injury
to person or property. The present suit is one for damages under the last class, it having been held
that "injury to property" is not limited to injuries to specific property, but extends to other wrongs
by which personal estate is injured or diminished (Baker vs. Crandall, 47 Am. Rep. 126; also 171
A.L.R., 1395). To maliciously cause a party to incur unnecessary expenses, as charged in this case,
is certainly injury to that party's property (Javier vs. Araneta, L-4369, Aug. 31, 1953).

The ruling in the preceding case was hammered out of facts comparable to those of the present. No
cogent reason exists why we should break away from the views just expressed. And, the conclusion
remains: Action against the Kalaw heirs and, for the matter, against the Estate of Casimiro Garcia
survives.

The preliminaries out of the way, we now go to the core of the controversy.

3. Plaintiff levelled a major attack on the lower court's holding that Kalaw justifiedly entered into the
controverted contracts without the prior approval of the corporation's directorate. Plaintiff leans heavily on
NACOCO's corporate by-laws. Article IV (b), Chapter III thereof, recites, as amongst the duties of the
general manager, the obligation: "(b) To perform or execute on behalf of the Corporation upon prior
approval of the Board, all contracts necessary and essential to the proper accomplishment for which the
Corporation was organized."
Not of de minimis importance in a proper approach to the problem at hand, is the nature of a general
manager's position in the corporate structure. A rule that has gained acceptance through the years is that
a corporate officer "intrusted with the general management and control of its business, has implied
authority to make any contract or do any other act which is necessary or appropriate to the conduct of the
ordinary business of the corporation. 21 As such officer, "he may, without any special authority from the
Board of Directors perform all acts of an ordinary nature, which by usage or necessity are incident to his
office, and may bind the corporation by contracts in matters arising in the usual course of business. 22

The problem, therefore, is whether the case at bar is to be taken out of the general concept of the powers
of a general manager, given the cited provision of the NACOCO by-laws requiring prior directorate
approval of NACOCO contracts.

The peculiar nature of copra trading, at this point, deserves express articulation. Ordinary in this
enterprise are copra sales for future delivery. The movement of the market requires that sales agreements
be entered into, even though the goods are not yet in the hands of the seller. Known in business parlance
as forward sales, it is concededly the practice of the trade. A certain amount of speculation is inherent in
the undertaking. NACOCO was much more conservative than the exporters with big capital. This short-
selling was inevitable at the time in the light of other factors such as availability of vessels, the quantity
required before being accepted for loading, the labor needed to prepare and sack the copra for market. To
NACOCO, forward sales were a necessity. Copra could not stay long in its hands; it would lose weight, its
value decrease. Above all, NACOCO's limited funds necessitated a quick turnover. Copra contracts then
had to be executed on short notice — at times within twenty-four hours. To be appreciated then is the
difficulty of calling a formal meeting of the board.

Such were the environmental circumstances when Kalaw went into copra trading.

Long before the disputed contracts came into being, Kalaw contracted — by himself alone as general
manager — for forward sales of copra. For the fiscal year ending June 30, 1947, Kalaw signed some 60
such contracts for the sale of copra to divers parties. During that period, from those copra sales, NACOCO
reaped a gross profit of P3,631,181.48. So pleased was NACOCO's board of directors that, on December
5, 1946, in Kalaw's absence, it voted to grant him a special bonus "in recognition of the signal
achievement rendered by him in putting the Corporation's business on a self-sufficient basis within a few
months after assuming office, despite numerous handicaps and difficulties."

These previous contract it should be stressed, were signed by Kalaw without prior authority from the
board. Said contracts were known all along to the board members. Nothing was said by them. The
aforesaid contracts stand to prove one thing: Obviously, NACOCO board met the difficulties attendant to
forward sales by leaving the adoption of means to end, to the sound discretion of NACOCO's general
manager Maximo M. Kalaw.

Liberally spread on the record are instances of contracts executed by NACOCO's general manager and
submitted to the board after their consummation, not before. These agreements were not Kalaw's alone.
One at least was executed by a predecessor way back in 1940, soon after NACOCO was chartered. It was
a contract of lease executed on November 16, 1940 by the then general manager and board chairman,
Maximo Rodriguez, and A. Soriano y Cia., for the lease of a space in Soriano Building On November 14,
1946, NACOCO, thru its general manager Kalaw, sold 3,000 tons of copra to the Food Ministry, London,
thru Sebastian Palanca. On December 22, 1947, when the controversy over the present contract cropped
up, the board voted to approve a lease contract previously executed between Kalaw and Fidel Isberto and
Ulpiana Isberto covering a warehouse of the latter. On the same date, the board gave its nod to a contract
for renewal of the services of Dr. Manuel L. Roxas. In fact, also on that date, the board requested Kalaw
to report for action all copra contracts signed by him "at the meeting immediately following the signing of
the contracts." This practice was observed in a later instance when, on January 7, 1948, the board
approved two previous contracts for the sale of 1,000 tons of copra each to a certain "SCAP" and a certain
"GNAPO".

And more. On December 19, 1946, the board resolved to ratify the brokerage commission of 2% of Smith,
Bell and Co., Ltd., in the sale of 4,300 long tons of copra to the French Government. Such ratification was
necessary because, as stated by Kalaw in that same meeting, "under an existing resolution he is
authorized to give a brokerage fee of only 1% on sales of copra made through brokers." On January 15,
1947, the brokerage fee agreements of 1-1/2% on three export contracts, and 2% on three others, for
the sale of copra were approved by the board with a proviso authorizing the general manager to pay a
commission up to the amount of 1-1/2% "without further action by the Board." On February 5, 1947, the
brokerage fee of 2% of J. Cojuangco & Co. on the sale of 2,000 tons of copra was favorably acted upon by
the board. On March 19, 1947, a 2% brokerage commission was similarly approved by the board for
Pacific Trading Corporation on the sale of 2,000 tons of copra.

It is to be noted in the foregoing cases that only the brokerage fee agreements were passed upon by the
board, not the sales contracts themselves. And even those fee agreements were submitted only when the
commission exceeded the ceiling fixed by the board.

Knowledge by the board is also discernible from other recorded instances.1äwphï1.ñët

When the board met on May 10, 1947, the directors discussed the copra situation: There was a slow
downward trend but belief was entertained that the nadir might have already been reached and an
improvement in prices was expected. In view thereof, Kalaw informed the board that "he intends to wait
until he has signed contracts to sell before starting to buy copra."23

In the board meeting of July 29, 1947, Kalaw reported on the copra price conditions then current: The
copra market appeared to have become fairly steady; it was not expected that copra prices would again
rise very high as in the unprecedented boom during January-April, 1947; the prices seemed to oscillate
between $140 to $150 per ton; a radical rise or decrease was not indicated by the trends. Kalaw
continued to say that "the Corporation has been closing contracts for the sale of copra generally with a
margin of P5.00 to P7.00 per hundred kilos." 24

We now lift the following excerpts from the minutes of that same board meeting of July 29, 1947:

521. In connection with the buying and selling of copra the Board inquired whether it is the
practice of the management to close contracts of sale first before buying. The General Manager
replied that this practice is generally followed but that it is not always possible to do so for two
reasons:

(1) The role of the Nacoco to stabilize the prices of copra requires that it should not cease buying
even when it does not have actual contracts of sale since the suspension of buying by the Nacoco
will result in middlemen taking advantage of the temporary inactivity of the Corporation to lower
the prices to the detriment of the producers.

(2) The movement of the market is such that it may not be practical always to wait for the
consummation of contracts of sale before beginning to buy copra.

The General Manager explained that in this connection a certain amount of speculation is
unavoidable. However, he said that the Nacoco is much more conservative than the other big
exporters in this respect.25

Settled jurisprudence has it that where similar acts have been approved by the directors as a matter of
general practice, custom, and policy, the general manager may bind the company without formal
authorization of the board of directors. 26 In varying language, existence of such authority is established,
by proof of the course of business, the usage and practices of the company and by the knowledge which
the board of directors has, or must be presumed to have, of acts and doings of its subordinates in and
about the affairs of the corporation. 27 So also,

x x x authority to act for and bind a corporation may be presumed from acts of recognition in other
instances where the power was in fact exercised. 28
 x x x Thus, when, in the usual course of business of a corporation, an officer has been allowed in
his official capacity to manage its affairs, his authority to represent the corporation may be implied
from the manner in which he has been permitted by the directors to manage its business.29

In the case at bar, the practice of the corporation has been to allow its general manager to negotiate and
execute contracts in its copra trading activities for and in NACOCO's behalf without prior board approval.
If the by-laws were to be literally followed, the board should give its stamp of prior approval on all
corporate contracts. But that board itself, by its acts and through acquiescence, practically laid aside the
by-law requirement of prior approval.

Under the given circumstances, the Kalaw contracts are valid corporate acts.

4. But if more were required, we need but turn to the board's ratification of the contracts in dispute on
January 30, 1948, though it is our (and the lower court's) belief that ratification here is nothing more than
a mere formality.

Authorities, great in number, are one in the idea that "ratification by a corporation of an unauthorized act
or contract by its officers or others relates back to the time of the act or contract ratified, and is
equivalent to original authority;" and that " [t]he corporation and the other party to the transaction are in
precisely the same position as if the act or contract had been authorized at the time." 30 The language of
one case is expressive: "The adoption or ratification of a contract by a corporation is nothing more or less
than the making of an original contract. The theory of corporate ratification is predicated on the right of a
corporation to contract, and any ratification or adoption is equivalent to a grant of prior authority." 31

Indeed, our law pronounces that "[r]atification cleanses the contract from all its defects from the moment
it was constituted." 32 By corporate confirmation, the contracts executed by Kalaw are thus purged of
whatever vice or defect they may have. 33

In sum, a case is here presented whereunder, even in the face of an express by-law requirement of prior
approval, the law on corporations is not to be held so rigid and inflexible as to fail to recognize equitable
considerations. And, the conclusion inevitably is that the embattled contracts remain valid.

5. It would be difficult, even with hostile eyes, to read the record in terms of "bad faith and/or breach of
trust" in the board's ratification of the contracts without prior approval of the board. For, in reality, all that
we have on the government's side of the scale is that the board knew that the contracts so confirmed
would cause heavy losses.

As we have earlier expressed, Kalaw had authority to execute the contracts without need of prior
approval. Everybody, including Kalaw himself, thought so, and for a long time. Doubts were first thrown
on the way only when the contracts turned out to be unprofitable for NACOCO.

Rightfully had it been said that bad faith does not simply connote bad judgment or negligence; it imports
a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known
duty thru some motive or interest or ill will; it partakes of the nature of fraud.34 Applying this precept to
the given facts herein, we find that there was no "dishonest purpose," or "some moral obliquity," or
"conscious doing of wrong," or "breach of a known duty," or "Some motive or interest or ill will" that
"partakes of the nature of fraud."

Nor was it even intimated here that the NACOCO directors acted for personal reasons, or to serve their
own private interests, or to pocket money at the expense of the corporation. 35 We have had occasion to
affirm that bad faith contemplates a "state of mind affirmatively operating with furtive design or with
some motive of self-interest or ill will or for ulterior purposes." 36 Briggs vs. Spaulding, 141 U.S. 132, 148-
149, 35 L. ed. 662, 669, quotes with approval from Judge Sharswood (in Spering's App., 71 Pa. 11), the
following: "Upon a close examination of all the reported cases, although there are many dicta not easily
reconcilable, yet I have found no judgment or decree which has held directors to account, except when
they have themselves been personally guilty of some fraud on the corporation, or have known and
connived at some fraud in others, or where such fraud might have been prevented had they given
ordinary attention to their duties. . . ." Plaintiff did not even dare charge its defendant-directors with any
of these malevolent acts.

Obviously, the board thought that to jettison Kalaw's contracts would contravene basic dictates of
fairness. They did not think of raising their voice in protest against past contracts which brought in
enormous profits to the corporation. By the same token, fair dealing disagrees with the idea that similar
contracts, when unprofitable, should not merit the same treatment. Profit or loss resulting from business
ventures is no justification for turning one's back on contracts entered into. The truth, then, of the matter
is that — in the words of the trial court — the ratification of the contracts was "an act of simple justice and
fairness to the general manager and the best interest of the corporation whose prestige would have been
seriously impaired by a rejection by the board of those contracts which proved disadvantageous." 37

The directors are not liable." 38

6. To what then may we trace the damage suffered by NACOCO.

The facts yield the answer. Four typhoons wreaked havoc then on our copra-producing regions. Result:
Copra production was impaired, prices spiralled, warehouses destroyed. Quick turnovers could not be
expected. NACOCO was not alone in this misfortune. The record discloses that private traders, old,
experienced, with bigger facilities, were not spared; also suffered tremendous losses. Roughly estimated,
eleven principal trading concerns did run losses to about P10,300,000.00. Plaintiff's witness Sisenando
Barretto, head of the copra marketing department of NACOCO, observed that from late 1947 to early
1948 "there were many who lost money in the trade." 39 NACOCO was not immune from such usual
business risk.

The typhoons were known to plaintiff. In fact, NACOCO resisted the suits filed by Louis Dreyfus & Co. by
pleading in its answers force majeure as an affirmative defense and there vehemently asserted that "as a
result of the said typhoons, extensive damage was caused to the coconut trees in the copra producing
regions of the Philippines and according to estimates of competent authorities, it will take about one year
until the coconut producing regions will be able to produce their normal coconut yield and it will take some
time until the price of copra will reach normal levels;" and that "it had never been the intention of the
contracting parties in entering into the contract in question that, in the event of a sharp rise in the price of
copra in the Philippine market produce by force majeure or by caused beyond defendant's control, the
defendant should buy the copra contracted for at exorbitant prices far beyond the buying price of the
plaintiff under the contract." 40

A high regard for formal judicial admissions made in court pleadings would suffice to deter us from
permitting plaintiff to stray away therefrom, to charge now that the damage suffered was because of
Kalaw's negligence, or for that matter, by reason of the board's ratification of the contracts. 41

Indeed, were it not for the typhoons, 42 NACOCO could have, with ease, met its contractual obligations.
Stock accessibility was no problem. NACOCO had 90 buying agencies spread throughout the islands. It
could purchase 2,000 tons of copra a day. The various contracts involved delivery of but 16,500 tons over
a five-month period. Despite the typhoons, NACOCO was still able to deliver a little short of 50% of the
tonnage required under the contracts.

As the trial court correctly observed, this is a case of damnum absque injuria. Conjunction of damage and
wrong is here absent. There cannot be an actionable wrong if either one or the other is wanting. 43

7. On top of all these, is that no assertion is made and no proof is presented which would link Kalaw's acts
— ratified by the board — to a matrix for defraudation of the government. Kalaw is clear of the stigma of
bad faith. Plaintiff's corporate counsel  44 concedes that Kalaw all along thought that he had authority to
enter into the contracts, that he did so in the best interests of the corporation; that he entered into the
contracts in pursuance of an overall policy to stabilize prices, to free the producers from the clutches of
the middlemen. The prices for which NACOCO contracted in the disputed agreements, were at a level
calculated to produce profits and higher than those prevailing in the local market. Plaintiff's witness,
Barretto, categorically stated that "it would be foolish to think that one would sign (a) contract when you
are going to lose money" and that no contract was executed "at a price unsafe for the Nacoco." 45 Really,
on the basis of prices then prevailing, NACOCO envisioned a profit of around P752,440.00. 46

Kalaw's acts were not the result of haphazard decisions either. Kalaw invariably consulted with NACOCO's
Chief Buyer, Sisenando Barretto, or the Assistant General Manager. The dailies and quotations from
abroad were guideposts to him.

Of course, Kalaw could not have been an insurer of profits. He could not be expected to predict the
coming of unpredictable typhoons. And even as typhoons supervened Kalaw was not remissed in his duty.
He exerted efforts to stave off losses. He asked the Philippine National Bank to implement its commitment
to extend a P400,000.00 loan. The bank did not release the loan, not even the sum of P200,000.00,
which, in October, 1947, was approved by the bank's board of directors. In frustration, on December 12,
1947, Kalaw turned to the President, complained about the bank's short-sighted policy. In the end,
nothing came out of the negotiations with the bank. NACOCO eventually faltered in its contractual
obligations.

That Kalaw cannot be tagged with crassa negligentia or as much as simple negligence, would seem to be
supported by the fact that even as the contracts were being questioned in Congress and in the NACOCO
board itself, President Roxas defended the actuations of Kalaw. On December 27, 1947, President Roxas
expressed his desire "that the Board of Directors should reelect Hon. Maximo M. Kalaw as General
Manager of the National Coconut Corporation." 47 And, on January 7, 1948, at a time when the contracts
had already been openly disputed, the board, at its regular meeting, appointed Maximo M. Kalaw as acting
general manager of the corporation.

Well may we profit from the following passage from Montelibano vs. Bacolod-Murcia Milling Co., Inc., L-
15092, May 18, 1962:

"They (the directors) hold such office charged with the duty to act for the corporation according to their
best judgment, and in so doing they cannot be controlled in the reasonable exercise and performance of
such duty. Whether the business of a corporation should be operated at a loss during a business
depression, or closed down at a smaller loss, is a purely business and economic problem to be determined
by the directors of the corporation, and not by the court. It is a well known rule of law that questions of
policy of management are left solely to the honest decision of officers and directors of a corporation, and
the court is without authority to substitute its judgment for the judgment of the board of directors; the
board is the business manager of the corporation, and so long as it acts in good faith its orders are not
reviewable by the courts." (Fletcher on Corporations, Vol. 2, p. 390.) 48

Kalaw's good faith, and that of the other directors, clinch the case for defendants. 49

Viewed in the light of the entire record, the judgment under review must be, as it is hereby, affirmed.

Without costs. So ordered.

G.R. No. 89070 May 18, 1992

BENGUET ELECTRlC COOPERATIVE, INC., petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION, PETER COSALAN and BOARD OF DIRECTORS OF
BENGUET ELECTRIC COOPERATIVE, INC., * respondents.

Raymundo W. Celino for respondent Peter Cosalan.

Reenan Orate for respondent Board of Directors of BENECO.

FELICIANO, J.:

Private respondent Peter Cosalan was the General Manager of Petitioner Benguet Electric Cooperative, Inc.
("Beneco"), having been elected as such by the Board of Directors of Beneco, with the approval of the
National Electrification Administrator, Mr. Pedro Dumol, effective 16 October 1982.

On 3 November 1982, respondent Cosalan received Audit Memorandum No. 1 issued by the Commission
on Audit ("COA"). This Memorandum noted that cash advances received by officers and employees of
petitioner Beneco in the amount of P129,618.48 had been virtually written off in the books of Beneco. In
the Audit Memorandum, the COA directed petitioner Beneco to secure the approval of the National
Electrification Administration ("NEA") before writing off or condoning those cash advances, and
recommended the adoption of remedial measures.

On 12 November 1982, COA issued another Memorandum — Audit Memorandum No. 2 –– addressed to
respondent Peter Cosalan, inviting attention to the fact that the audit of per diems and allowances
received by officials and members of the Board of Directors of Beneco showed substantial inconsistencies
with the directives of the NEA. The Audit Memorandum once again directed the taking of immediate action
in conformity with existing NEA regulations.

On 19 May 1983, petitioner Beneco received the COA Audit Report on the financial status and operations
of Beneco for the eight (8) month period ended 30 September 1982. This Audit Report noted and
enumerated irregularities in the utilization of funds amounting to P37 Million released by NEA to Beneco,
and recommended that appropriate remedial action be taken.

Having been made aware of the serious financial condition of Beneco and what appeared to be
mismanagement, respondent Cosalan initiated implementation of the remedial measures recommended by
the COA. The respondent members of the Board of Beneco reacted by adopting a series of resolutions
during the period from 23 June to 24 July 1984. These Board Resolutions abolished the housing allowance
of respondent Cosalan; reduced his salary and his representation and commutable allowances; directed
him to hold in abeyance all pending personnel disciplinary actions; and struck his name out as a principal
signatory to transactions of petitioner Beneco.

During the period from 28 July to 25 September 1984, the respondent Beneco Board members adopted
another series of resolutions which resulted in the ouster of respondent Cosalan as General Manager of
Beneco and his exclusion from performance of his regular duties as such, as well as the withholding of his
salary and allowances. These resolutions were as follows:

1. Resolution No. 91-4 dated 28 July 1984:

. . . that the services of Peter M. Cosalan as General Manager of BENECO is

terminated upon approval of the National Electrification Administration;

2. Resolution No. 151-84 dated September 15, 1984;

. . . that Peter M. Cosalan is hereby suspended from his position as General

Manager of the Benguet Electric Cooperative, Inc. (BENECO) effective as of
the start of the office hours on September 24, 1984, until a final decision has
been reached by the NEA on his dismissal;

. . . that GM Cosalan's suspension from office shall remain in full force and
effect until such suspension is sooner lifted, revoked or rescinded by the
Board of Directors; that all monies due him are withheld until cleared;

3. Resolution No. 176-84 dated September 25, 1984;

. . . that Resolution No. 151-84, dated September 15, 1984 stands as

preventive suspension for GM Peter M. Cosalan. 1
Respondent Cosalan nevertheless continued to work as General Manager of Beneco, in the belief that he
could be suspended or removed only by duly authorized officials of NEA, in accordance with provisions of
P.D. No, 269, as amended by P.D. No. 1645 (the statute creating the NEA, providing for its capitalization,
powers and functions and organization), the loan agreement between NEA and petitioner Beneco 2 and the
NEA Memorandum of 2 July 1980. 3 Accordingly, on 5 October and 10 November 1984, respondent
Cosalan requested petitioner Beneco to release the compensation due him. Beneco, acting through
respondent Board members, denied the written request of respondent Cosalan.

Respondent Cosalan then filed a complaint with the National Labor Relations Commission ("NLRC") on 5
December 1984 against respondent members of the Beneco Board, challenging the legality of the Board
resolutions which ordered his suspension and termination from the service and demanding payment of his
salaries and allowances. On 18 February 1985, Cosalan amended his complaint to implead petitioner
Beneco and respondent Board members, the latter in their respective dual capacities as Directors and as
private individuals.

In the course of the proceedings before the Labor Arbiter, Cosalan filed a motion for reinstatement which,
although opposed by petitioner Beneco, was granted on 23 October 1987 by Labor Arbiter Amado T.
Adquilen. Petitioner Beneco complied with the Labor Arbiter's order on 28 October 1987 through
Resolution No. 10-90.

On 5 April 1988, the Labor Arbiter rendered a decision (a) confirming Cosalan's reinstatement; (b)
ordering payment to Cosalan of his backwages and allowances by petitioner Beneco and respondent Board
members, jointly and severally, for a period of three (3) years without deduction or qualification,
amounting to P344,000.00; and (3) ordering the individual Board members to pay, jointly and severally,
to Cosalan moral damages of P50,000.00 plus attorney's fees of ten percent (10%) of the wages and
allowances awarded him.

Respondent Board members appealed to the NLRC, and there filed a Memorandum on Appeal. Petitioner
Beneco did not appeal, but moved to dismiss the appeal filed by respondent Board members and for
execution of judgment. By this time, petitioner Beneco had a new set of directors.

In a decision dated 21 November 1988, public respondent NLRC modified the award rendered by the Labor
Arbiter by declaring that petitioner Beneco alone, and not respondent Board members, was liable for
respondent Cosalan's backwages and allowances, and by ruling that there was no legal basis for the award
of moral damages and attorney's fees made by the Labor Arbiter.

Beneco, through its new set of directors, moved for reconsideration of the NLRC decision, but without
success.

In the present Petition for Certiorari, Beneco's principal contentions are two-fold: first, that the NLRC had
acted with grave abuse of discretion in accepting and giving due course to respondent Board members'
appeal although such appeal had been filed out of time; and second, that the NLRC had acted with grave
abuse of discretion amounting to lack of jurisdiction in holding petitioner alone liable for payment of the
backwages and allowances due to Cosalan and releasing respondent Board members from liability
therefor.

We consider that petitioner's first contention is meritorious. There is no dispute about the fact that the
respondent Beneco Board members received the decision of the labor Arbiter on 21 April 1988.
Accordingly, and because 1 May 1988 was a legal holiday, they had only up to 2 May 1988 within which to
perfect their appeal by filing their memorandum on appeal. It is also not disputed that the respondent
Board members' memorandum on appeal was posted by registered mail on 3 May 1988 and received by
the NLRC the following day. 4 Clearly, the memorandum on appeal was filed out of time.

Respondent Board members, however, insist that their Memorandum on Appeal was filed on time because
it was delivered for mailing on 1 May 1988 to the Garcia Communications Company, a licensed private
letter carrier. The Board members in effect contend that the date of delivery to Garcia Communications
was the date of filing of their appeal memorandum.
Respondent Board member's contention runs counter to the established rule that transmission through a
private carrier or letter-forwarder –– instead of the Philippine Post Office –– is not a recognized mode of
filing pleadings. 5 The established rule is that the date of delivery of pleadings to a private letter-
forwarding agency is not to be considered as the date of filing thereof in court, and that in such cases, the
date of actual receipt by the court, and not the date of delivery to the private carrier, is deemed the date
of filing of that pleading. 6

There, was, therefore, no reason grounded upon substantial justice and the prevention of serious
miscarriage of justice that might have justified the NLRC in disregarding the ten-day reglementary period
for perfection of an appeal by the respondent Board members. Accordingly, the applicable rule was that
the ten-day reglementary period to perfect an appeal is mandatory and jurisdictional in nature, that failure
to file an appeal within the reglementary period renders the assailed decision final and executory and no
longer subject to review. 7 The respondent Board members had thus lost their right to appeal from the
decision of the Labor Arbiter and the NLRC should have forthwith dismissed their appeal memorandum.

There is another and more compelling reason why the respondent Board members' appeal should have
been dismissed forthwith: that appeal was quite bereft of merit. Both the Labor Arbiter and the NLRC had
found that the indefinite suspension and termination of services imposed by the respondent Board
members upon petitioner Cosalan was illegal. That illegality flowed, firstly, from the fact that the
suspension of Cosalan was continued long after expiration of the period of thirty (30) days, which is the
maximum period of preventive suspension that could be lawfully imposed under Section 4, Rule XIV of the
Omnibus Rules Implementing the Labor Code. Secondly, Cosalan had been deprived of procedural due
process by the respondent Board members. He was never informed of the charges raised against him and
was given no opportunity to meet those charges and present his side of whatever dispute existed; he was
kept totally in the dark as to the reason or reasons why he had been suspended and effectively dismissed
from the service of Beneco Thirdly, respondent Board members failed to adduce any cause which could
reasonably be regarded as lawful cause for the suspension and dismissal of respondent Cosalan from his
position as General Manager of Beneco. Cosalan was, in other words, denied due process both procedural
and substantive. Fourthly, respondent Board members failed to obtain the prior approval of the NEA of
their suspension now dismissal of Cosalan, which prior approval was required, inter alia, under the
subsisting loan agreement between the NEA and Beneco. The requisite NEA approval was subsequently
sought by the respondent Board members; no NEA approval was granted.

In reversing the decision of the Labor Arbiter declaring petitioner Beneco and respondent Board members
solidarily liable for the salary, allowances, damages and attorney's fees awarded to respondent Cosalan,
the NLRC said:

. . . A perusal of the records show that the members of the Board never acted in their
individual capacities. They were acting as a Board passing resolutions affecting their general
manager. If these resolutions and resultant acts transgressed the law, to then BENECO for
which the Board was acting in behalf should bear responsibility. The records do not disclose
that the individual Board members were motivated by malice or bad faith, rather, it reveals
an intramural power play gone awry and misapprehension of its own rules and regulations.
For this reason, the decision holding the individual board members jointly and severally
liable with BENECO for Cosalan's backwages is untenable. The same goes for the award of
damages which does not have the proverbial leg to stand on.

The Labor Arbiter below should have heeded his own observation in his decision —

Respondent BENECO as an artificial person could not have, by itself, done

anything to prevent it. But because the former have acted while in office and
in the course of their official functions as directors of BENECO, . . .

Thus, the decision of the Labor Arbiter should be modified conformably with all the
foregoing holding BENECO solely liable for backwages and releasing the appellant board
members from any individual liabilities. 8 (Emphasis supplied)
The applicable general rule is clear enough. The Board members and officers of a corporation who purport
to act for and in behalf of the corporation, keep within the lawful scope of their authority in so acting, and
act in good faith, do not become liable, whether civilly or otherwise, for the consequences of their acts,
Those acts, when they are such a nature and are done under such circumstances, are properly attributed
to the corporation alone and no personal liability is incurred by such officers and Board members. 9

The major difficulty with the conclusion reached by the NLRC is that the NLRC clearly overlooked or
disregarded the circumstances under which respondent Board members had in fact acted in the instant
case. As noted earlier, the respondent Board members responded to the efforts of Cosalan to take
seriously and implement the Audit Memoranda issued by the COA explicitly addressed to the petitioner
Beneco, first by stripping Cosalan of the privileges and perquisites attached to his position as General
Manager, then by suspending indefinitely and finally dismissing Cosalan from such position. As also noted
earlier, respondent Board members offered no suggestion at all of any just or lawful cause that could
sustain the suspension and dismissal of Cosalan. They obviously wanted to get rid of Cosalan and so
acted, in the words of the NLRC itself, "with indecent haste" in removing him from his position and
denying him substantive and procedural due process. Thus, the record showed strong indications that
respondent Board members had illegally suspended and dismissed Cosalan precisely because he was
trying to remedy the financial irregularities and violations of NEA regulations which the COA had brought
to the attention of Beneco. The conclusion reached by the NLRC that "the records do not disclose that the
individual Board members were motivated by malice or bad faith" flew in the face of the evidence of
record. At the very least, a strong presumption had arisen, which it was incumbent upon respondent
Board members to disprove, that they had acted in reprisal against respondent Cosalan and in an effort to
suppress knowledge about and remedial measures against the financial irregularities the COA Audits had
unearthed. That burden respondent Board members did not discharge.

The Solicitor General has urged that respondent Board members may be held liable for damages under
the foregoing circumstance under Section 31 of the Corporation Code which reads as follows:

Sec. 31. Liability of directors, trustees or officers. — Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of
gross negligence or bad faith in directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty as such directors or trustees shall
be jointly liable and severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons . . . (Emphasis supplied)

We agree with the Solicitor General, firstly, that Section 31 of the Corporation Code is applicable in
respect of Beneco and other electric cooperatives similarly situated. Section 4 of the Corporation Code
renders the provisions of that Code applicable in a supplementary manner to all corporations, including
those with special or individual charters so long as those provisions are not inconsistent with such
charters. We find no provision in P.D. No. 269, as amended, that would exclude expressly or by necessary
implication the applicability of Section 31 of the Corporation Code in respect of members of the boards of
directors of electric cooperatives. Indeed, P.D. No. 269 expressly describes these cooperatives as
"corporations:"

Sec. 15. Organization and Purpose. — Cooperative non-stock, non-profit

membership corporations may be organized, and electric cooperative
corporations heretofore formed or registered under the Philippine non-Agricultural Co-
operative Act may as hereinafter provided be converted, under this Decree for the purpose
of supplying, and of promoting and encouraging-the fullest use of, service on an area
coverage basis at the lowest cost consistent with sound economy and the prudent
management of the business of such corporations. 10 (Emphasis supplied)

We agree with the Solicitor General, secondly, that respondent Board members were guilty of "gross
negligence or bad faith in directing the affairs of the corporation" in enacting the series of resolutions
noted earlier indefinitely suspending and dismissing respondent Cosalan from the position of General
Manager of Beneco. Respondent Board members, in doing so, acted belong the scope of their authority as
such Board members. The dismissal of an officer or employee in bad faith, without lawful cause and
without procedural due process, is an act that is contra legem. It cannot be supposed that members of
boards of directors derive any authority to violate the express mandates of law or the clear legal rights of
their officers and employees by simply purporting to act for the corporation they control.

We believe and so hold, further, that not only are Beneco and respondent Board members properly held
solidarily liable for the awards made by the Labor Arbiter, but also that petitioner Beneco which was
controlled by and which could act only through respondent Board members, has a right to be reimbursed
for any amounts that Beneco may be compelled to pay to respondent Cosalan. Such right of
reimbursement is essential if the innocent members of Beneco are not to be penalized for the acts of
respondent Board members which were both done in bad faith and ultra vires. The liability-generating acts
here are the personal and individual acts of respondent Board members, and are not properly attributed to
Beneco itself.

WHEREFORE, the Petition for Certiorari is GIVEN DUE COURSE, the comment filed by respondent Board
members is TREATED as their answer, and the decision of the National Labor Relations Commission dated
21 November 1988 in NLRC Case No. RAB-1-0313-84 is hereby SET ASIDE and the decision dated 5 April
1988 of Labor Arbiter Amado T. Adquilen hereby REINSTATED in toto. In addition, respondent Board
members are hereby ORDERED to reimburse petitioner Beneco any amounts that it may be compelled to
pay to respondent Cosalan by virtue of the decision of Labor Arbiter Amado T. Adquilen. No
pronouncement as to costs.

SO ORDERED.

G.R. No. L-68555 March 19, 1993

PRIME WHITE CEMENT CORPORATION, petitioner,

vs.
HONORABLE INTERMEDIATE APPELLATE COURT and ALEJANDRO TE, respondents.

De Jesus & Associates for petitioner.

Padlan, Sutton, Mendoza & Associates for private respondent.

CAMPOS, JR., J.:

Before Us is a Petition for Review on Certiorari filed by petitioner Prime White Cement Corporation seeking
the reversal of the decision * of the then Intermediate Appellate Court, the dispositive portion of which
reads as follows:

WHEREFORE, in view of the foregoing, the judgment appealed from is hereby affirmed in
toto.1

The facts, as found by the trial court and as adopted by the respondent Court are hereby quoted, to wit:

On or about the 16th day of July, 1969, plaintiff and defendant corporation thru its
President, Mr. Zosimo Falcon and Justo C. Trazo, as Chairman of the Board, entered into a
dealership agreement (Exhibit A) whereby said plaintiff was obligated to act as the exclusive
dealer and/or distributor of the said defendant corporation of its cement products in the
entire Mindanao area for a term of five (5) years and proving (sic) among others that:

a. The corporation shall, commencing September, 1970, sell to and supply

the plaintiff, as dealer with 20,000 bags (94 lbs/bag) of white cement per
month;
 b. The plaintiff shall pay the defendant corporation P9.70, Philippine Currency,
per bag of white cement, FOB Davao and Cagayan de Oro ports;

c. The plaintiff shall, every time the defendant corporation is ready to deliver
the good, open with any bank or banking institution a confirmed,
unconditional, and irrevocable letter of credit in favor of the corporation and
that upon certification by the boat captain on the bill of lading that the goods
have been loaded on board the vessel bound for Davao the said bank or
banking institution shall release the corresponding amount as payment of the
goods so shipped.

Right after the plaintiff entered into the aforesaid dealership agreement, he placed an
advertisement in a national, circulating newspaper the fact of his being the exclusive dealer
of the defendant corporation's white cement products in Mindanao area, more particularly,
in the Manila Chronicle dated August 16, 1969 (Exhibits R and R-1) and was even
congratulated by his business associates, so much so, he was asked by some of his
businessmen friends and close associates if they can be his
sub-dealer in the Mindanao area.

Relying heavily on the dealership agreement, plaintiff sometime in the months of

September, October, and December, 1969, entered into a written agreement with several
hardware stores dealing in buying and selling white cement in the Cities of Davao and
Cagayan de Oro which would thus enable him to sell his allocation of 20,000 bags regular
supply of the said commodity, by September, 1970 (Exhibits O, O-1, O-2, P, P-1, P-2, Q, Q-
1 and Q-2). After the plaintiff was assured by his supposed buyer that his allocation of
20,000 bags of white cement can be disposed of, he informed the defendant corporation in
his letter dated August 18, 1970 that he is making the necessary preparation for the
opening of the requisite letter of credit to cover the price of the due initial delivery for the
month of September, 1970 (Exhibit B), looking forward to the defendant corporation's duty
to comply with the dealership agreement. In reply to the aforesaid letter of the plaintiff, the
defendant corporation thru its corporate secretary, replied that the board of directors of the
said defendant decided to impose the following conditions:

a. Delivery of white cement shall commence at the end of November, 1970;

b. Only 8,000 bags of white cement per month for only a period of three (3)
months will be delivered;

c. The price of white cement was priced at P13.30 per bag;

d. The price of white cement is subject to readjustment unilaterally on the

part of the defendant;

e. The place of delivery of white cement shall be Austurias (sic);

f. The letter of credit may be opened only with the Prudential Bank, Makati
Branch;

g. Payment of white cement shall be made in advance and which payment

shall be used by the defendant as guaranty in the opening of a foreign letter
of credit to cover costs and expenses in the procurement of materials in the
manufacture of white cement. (Exhibit C).

xxx xxx xxx

Several demands to comply with the dealership agreement (Exhibits D, E, G, I, R, L, and N)

were made by the plaintiff to the defendant, however, defendant refused to comply with the
 same, and plaintiff by force of circumstances was constrained to cancel his agreement for
the supply of white cement with third parties, which were concluded in anticipation of, and
pursuant to the said dealership agreement.

Notwithstanding that the dealership agreement between the plaintiff and defendant was in
force and subsisting, the defendant corporation, in violation of, and with evident intention
not to be bound by the terms and conditions thereof, entered into an exclusive dealership
agreement with a certain Napoleon Co for the marketing of white cement in Mindanao
(Exhibit T) hence, this suit. (Plaintiff's Record on Appeal, pp. 86-90).2

After trial, the trial court adjudged the corporation liable to Alejandro Te in the amount of P3,302,400.00
as actual damages, P100,000.00 as moral damages, and P10,000.00 as and for attorney's fees and costs.
The appellate court affirmed the said decision mainly on the following basis, and We quote:

There is no dispute that when Zosimo R. Falcon and Justo B. Trazo signed the dealership
agreement Exhibit "A", they were the President and Chairman of the Board, respectively, of
defendant-appellant corporation. Neither is the genuineness of the said agreement
contested. As a matter of fact, it appears on the face of the contract itself that both officers
were duly authorized to enter into the said agreement and signed the same for and in behalf
of the corporation. When they, therefore, entered into the said transaction they created the
impression that they were duly clothed with the authority to do so. It cannot now be said
that the disputed agreement which possesses all the essential requisites of a valid contract
was never intended to bind the corporation as this avoidance is barred by the principle of
estoppel.3

In this petition for review, petitioner Prime White Cement Corporation made the following assignment of
errors. 4

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT ARE

UNPRECEDENTED DEPARTURES FROM THE CODIFIED PRINCIPLE THAT CORPORATE
OFFICERS COULD ENTER INTO CONTRACTS IN BEHALF OF THE CORPORATION ONLY WITH
PRIOR APPROVAL OF THE BOARD OF DIRECTORS.

II

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT ARE

CONTRARY TO THE ESTABLISHED JURISPRUDENCE, PRINCIPLE AND RULE ON FIDUCIARY
DUTY OF DIRECTORS AND OFFICERS OF THE CORPORATION.

III

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT

DISREGARDED THE PRINCIPLE AND JURISPRUDENCE, PRINCIPLE AND RULE ON
UNENFORCEABLE CONTRACTS AS PROVIDED IN ARTICLE 1317 OF THE NEW CIVIL CODE.

IV

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT

DISREGARDED THE PRINCIPLE AND JURISPRUDENCE AS TO WHEN AWARD OF ACTUAL AND
MORAL DAMAGES IS PROPER.

IN NOT AWARDING PETITIONER'S CAUSE OF ACTION AS STATED IN ITS ANSWER WITH

SPECIAL AND AFFIRMATIVE DEFENSES WITH COUNTERCLAIM THE INTERMEDIATE
 APPELLATE COURT HAS CLEARLY DEPARTED FROM THE ACCEPTED USUAL, COURSE OF
JUDICIAL PROCEEDINGS.

There is only one legal issue to be resolved by this Court: whether or not the "dealership agreement"
referred by the President and Chairman of the Board of petitioner corporation is a valid and enforceable
contract. We do not agree with the conclusion of the respondent Court that it is.

Under the Corporation Law, which was then in force at the time this case arose,5 as well as under the
present Corporation Code, all corporate powers shall be exercised by the Board of Directors, except as
otherwise provided by law.6 Although it cannot completely abdicate its power and responsibility to act for
the juridical entity, the Board may expressly delegate specific powers to its President or any of its officers.
In the absence of such express delegation, a contract entered into by its President, on behalf of the
corporation, may still bind the corporation if the board should ratify the same expressly or impliedly.
Implied ratification may take various forms — like silence or acquiescence; by acts showing approval or
adoption of the contract; or by acceptance and retention of benefits flowing therefrom.7 Furthermore,
even in the absence of express or implied authority by ratification, the President as such may, as a
general rule, bind the corporation by a contract in the ordinary course of business, provided the same is
reasonable under the circumstances.8 These rules are basic, but are all general and thus quite flexible.
They apply where the President or other officer, purportedly acting for the corporation, is dealing with
a third person, i. e., a person outside the corporation.

The situation is quite different where a director or officer is dealing with his own corporation. In the instant
case respondent Te was not an ordinary stockholder; he was a member of the Board of Directors and
Auditor of the corporation as well. He was what is often referred to as a "self-dealing" director.

A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his
corporation.9 In case his interests conflict with those of the corporation, he cannot sacrifice the latter to
his own advantage and benefit. As corporate managers, directors are committed to seek the maximum
amount of profits for the corporation. This trust relationship "is not a matter of statutory or technical law.
It springs from the fact that directors have the control and guidance of corporate affairs and property and
hence of the property interests of the stockholders." 10 In the case of Gokongwei v. Securities and
Exchange Commission, this Court quoted with favor from Pepper v. Litton,11 thus:

. . . He cannot by the intervention of a corporate entity violate the ancient precept against
serving two masters. . . . He cannot utilize his inside information and his strategic position
for his own preferment. He cannot violate rules of fair play by doing indirectly through the
corporation what he could not do directly. He cannot use his power for his personal
advantage and to the detriment of the stockholders and creditors no matter how absolute in
terms that power may be and no matter how meticulous he is to satisfy technical
requirements. For that power is at all times subject to the equitable limitation that it may
not be exercised for the aggrandizement, preference, or advantage of the fiduciary to the
exclusion or detriment of the cestuis. . . . .

On the other hand, a director's contract with his corporation is not in all instances void or voidable. If the
contract is fair and reasonable under the circumstances, it may be ratified by the stockholders provided a
full disclosure of his adverse interest is made. Section 32 of the Corporation Code provides, thus:

Sec. 32. Dealings of directors, trustees or officers with the corporation. — A contract of the
corporation with one or more of its directors or trustees or officers is voidable, at the option
of such corporation, unless all the following conditions are present:

1. That the presence of such director or trustee in the board meeting in which the contract
was approved was not necessary to constitute a quorum for such meeting;

2. That the vote of such director or trustee was not necessary for the approval of the
contract;
 3. That the contract is fair and reasonable under the circumstances; and

4. That in the case of an officer, the contract with the officer has been previously authorized
by the Board of Directors.

Where any of the first two conditions set forth in the preceding paragraph is absent, in the
case of a contract with a director or trustee, such contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of
two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full
disclosure of the adverse interest of the directors or trustees involved is made at such
meeting: Provided, however, That the contract is fair and reasonable under the
circumstances.

Although the old Corporation Law which governs the instant case did not contain a similar provision, yet
the cited provision substantially incorporates well-settled principles in corporate law. 12

Granting arguendo that the "dealership agreement" involved here would be valid and enforceable if
entered into with a person other than a director or officer of the corporation, the fact that the other party
to the contract was a Director and Auditor of the petitioner corporation changes the whole situation. First
of all, We believe that the contract was neither fair nor reasonable. The "dealership agreement" entered
into in July, 1969, was to sell and supply to respondent Te 20,000 bags of white cement per month, for
five years starting September, 1970, at the fixed price of P9.70 per bag. Respondent Te is a businessman
himself and must have known, or at least must be presumed to know, that at that time, prices of
commodities in general, and white cement in particular, were not stable and were expected to rise. At the
time of the contract, petitioner corporation had not even commenced the manufacture of white cement,
the reason why delivery was not to begin until 14 months later. He must have known that within that
period of six years, there would be a considerable rise in the price of white cement. In fact, respondent
Te's own Memorandum shows that in September, 1970, the price per bag was P14.50, and by the middle
of 1975, it was already P37.50 per bag. Despite this, no provision was made in the "dealership
agreement" to allow for an increase in price mutually acceptable to the parties. Instead, the price was
pegged at P9.70 per bag for the whole five years of the contract. Fairness on his part as a director of the
corporation from whom he was to buy the cement, would require such a provision. In fact, this unfairness
in the contract is also a basis which renders a contract entered into by the President, without authority
from the Board of Directors, void or voidable, although it may have been in the ordinary course of
business. We believe that the fixed price of P9.70 per bag for a period of five years was not fair and
reasonable. Respondent Te, himself, when he subsequently entered into contracts to resell the cement to
his "new dealers" Henry Wee 13 and Gaudencio Galang 14 stipulated as follows:

The price of white cement shall be mutually determined by us but in no case shall the same
be less than P14.00 per bag (94 lbs).

The contract with Henry Wee was on September 15, 1969, and that with Gaudencio Galang, on October
13, 1967. A similar contract with Prudencio Lim was made on December 29, 1969. 15 All of these contracts
were entered into soon after his "dealership agreement" with petitioner corporation, and in each one of
them he protected himself from any increase in the market price of white cement. Yet, except for the
contract with Henry Wee, the contracts were for only two years from October, 1970. Why did he not
protect the corporation in the same manner when he entered into the "dealership agreement"? For that
matter, why did the President and the Chairman of the Board not do so either? As director, specially since
he was the other party in interest, respondent Te's bounden duty was to act in such manner as not to
unduly prejudice the corporation. In the light of the circumstances of this case, it is to Us quite clear that
he was guilty of disloyalty to the corporation; he was attempting in effect, to enrich himself at the
expense of the corporation. There is no showing that the stockholders ratified the "dealership agreement"
or that they were fully aware of its provisions. The contract was therefore not valid and this Court cannot
allow him to reap the fruits of his disloyalty.

As a result of this action which has been proven to be without legal basis, petitioner corporation's
reputation and goodwill have been prejudiced. However, there can be no award for moral damages under
Article 2217 and succeeding articles on Section 1 of Chapter 3 of Title XVIII of the Civil Code in favor of a
corporation.

In view of the foregoing, the Decision and Resolution of the Intermediate Appellate Court dated March 30,
1984 and August 6, 1984, respectively, are hereby SET ASIDE. Private respondent Alejandro Te is hereby
ordered to pay petitioner corporation the sum of P20,000.00 for attorney's fees, plus the cost of suit and
expenses of litigation.

SO ORDERED.

G.R. No. L-7154             February 21, 1912

ELEANOR ERICA STRONG, ET AL., plaintiffs-appellees,

vs.
FRANCISCO GUTIERREZ REPIDE, defendant-appellant.

Chicote and Miranda and Tirso de Irureta Goyena for appellant.

Bruce, Lawrence, Ross and Block for appellees.

MORELAND, J.:

Prior to October 10, 1903, the plaintiff, Eleanor Erica Strong, was the owner of 800 shares of the capital
stock of the Philippine Sugar Estates Development Company, Limited (sociedad anonima), of the par value
of P100 each, evidenced by certificates Nos. 2125 to 2924, inclusive. On the said 10th day of October,
1903, the defendant, Francisco Gutierrez Repide, by means subsequently found and adjudged to have
been fraudulent, obtained possession of said shares and thereafter alleged to be the owner thereof. On
the 12th day of January, 1904, the plaintiff commenced an action against the defendant in the Court of
First Instance of the city of Manila (case No. 2365) asking that the fraudulent sale by means of which the
defendant obtained possession of the said shares be declared null and void and that they be returned to
her. On the 29th of April, 1904, the Court of First Instance of the city of Manila rendered its decision,
finding in part as follows:

Upon the facts stated, the court holds that the sale of these shares was made without the authority
of Mrs. Strong, that she never ratified the sale but repudiated it as soon as she learned of it, that
this sale was induced by fraud on the part of the defendant, and therefore was a fraudulent sale.

The court, therefore, declares that the purchase of these shares of stock by the defendant is
fraudulent and void, and it is ordered by the court that the same be set aside and for nothing held.

This judgment fixed the value of the shares at P138,352.71, awarding judgment in this amount to the
plaintiff and directing that the said judgment might be satisfied by defendant's delivering to the plaintiff
the said shares, in which event the plaintiff should pay to the defendant $16,000 Mexican currency, or its
equivalent in Philippine currency. This judgment was, on appeal to the Supreme Court of the Philippine
Islands, reversed, and plaintiff's complaint dismissed on the merits.1 Thereupon plaintiff prosecuted an
appeal to the Supreme Court of the United States, which court, on the 3d of May, 1909, rendered its
judgment, reversing the decision of the Supreme Court of the Philippine Islands and affirming the
judgment of the trial court. On the 27th of July, 1909, the said judgment of April 29, 1904, was satisfied
by defendant's returning to the plaintiff 800 shares of stock of said company, evidenced by certificates
Nos. 1621, 1623, 1624, 1625, 1626, 1628, 1629, and 1630, and the payment by the plaintiff to the
defendant of P14,159.29 Philippine currency, equivalent to $16,000 Mexican currency. Said satisfaction
was effected by means of a stipulation or agreement entered into between the attorneys for the plaintiff
and the defendant, in which the satisfaction of the judgment was acknowledged by both parties. From the
10th day of October, 1903, the date of the said fraudulent purchase by the defendant, until the 27th day
of July, 1909, the defendant retained said shares in his possession or under his control and after the
rendition of said judgment of April 29, 1904, collected the dividends earned by said shares for the years
1905, 1906, 1907, and 1908 at the rate of 6 per cent per annum, amounting to a total of P19,200, which
sum the defendant retained and refused to pay over to the plaintiff. After demand upon and refusal by the
defendant, the plaintiff began this action for the recovery of said sum. On the 24th of March, 1911, the
Court of First Instance of the city of Manila rendered judgment in favor of the plaintiff for the said sum of
P19,200, with interest thereon at the rate of 6 per cent per annum from the date of the filing of the
complaint, allowing to the defendant as an offset interest on P14,159.29 at 6 per cent per annum from
October 10, 1903, to July 27, 1909, being the dates, respectively, of the purchase of the stock by the
defendant and the satisfaction of the judgment in case No. 2365. Both parties excepted to this judgment
and filed motions for a new trial, and the court upon the hearings modified its judgment by allowing
defendant to offset against plaintiff's judgment interest on P14,159.29 at the rate of 6 per cent per annum
from the 10th day of October, 1903, to the 12th day of January, 1904, the latter date being that of
plaintiff's tender of repayment of defendant. From said judgment as modified the defendant prosecutes
this appeal. The plaintiff is satisfied.

The appellant in this case relies for the success of this appeal upon the form of the judgment of the court
below in said action No. 2365. He asserts that that judgment is for a sum of money and not for the
rescission of a contract and the return of shares of stock. This being so, he maintains that the payment of
the sum named in the judgment, whether by money or by shares of stock, was a complete satisfaction of
the judgment in that case. The mere fact that it was paid in shares of stock did not indicate that the
judgment of the trial court was for shares of stock but said judgment was, on the contrary, in reality and
in legal effect for a sum of money which could be paid in shares of stock as well as in coin of the realm.
Basing himself upon this contention appellant asserts that that judgment having been satisfied by the
payment of the sum adjudged to be due, a subsequent action for dividends on said stock is in effect an
action for interest on the said sum found to be due, that it affects the subject matter of a judgment
already paid and discharged.

We do not believe that the contention of the appellant is sound. The action begun in the trial court was to
set aside a sale made by the plaintiff to the defendant and for the return of the shares of stock which were
the subject of that sale. The basis of that action was the claim that the plaintiff had been deprived of the
shares of stock in question by false and fraudulent representations and fraudulent concealment on the
part of the defendant, or of his agents, and that thereby she had been induced to part with those shares
without just compensation and, in reality, without her legal consent. The trial court found in favor of the
plaintiff, declaring the sale of the stock to have been fraudulently obtained and setting aside the sale
absolutely, as is indicated by that portion of its opinion heretofore quoted. On the appeal to the Supreme
Court of the United States the fraudulent character of the representations by which the plaintiff had been
induced to part with her stock was fully affirmed after a thorough consideration of the facts and
circumstances of the case and the judgment of the trial court setting aside the sale on the ground of fraud
was affirmed in every particular. It is a necessary conclusion, therefore, that the action was in reality for
the return of the stock itself, with appropriate damages in case the return was not made by the defendant.
The finding of the court that the value of the stock was P138,352.71 was not made for the purpose of
declaring the nature of the action to be one for the recovery of money, but rather, for the purpose of
giving to the plaintiff her alternative remedy in case the stock itself should not be returned. That the same
identical shares of stock obtained by the defendant were not, as a matter of fact, returned to plaintiff is
not controlling. They were identical in everything except their numbers and were tendered and received in
fulfillment of the provisions of the judgment. All of the stock of said company was the same kind and paid
the same dividend.

The judgment of the trial court, as affirmed by the Supreme Court of the United States, set aside the sale
as fraudulent, and, therefore, by necessary result, the title to the shares of stock in question passed to the
plaintiff if it be conceded that the title ever legally passed from her. The delivery of those shares to her by
the defendant under that judgment was an admission of her title as declared by the court and was a
delivery of possession in pursuance of that declaration of ownership. Under the decisions referred to, as
between the parties thereto, the plaintiff was legally the owner of said stock from the time when she was
fraudulently deprived of it until the time it was returned to her as fully and as completely as she was after
the adjudication of the title and return of the stock itself. Whoever, therefore, during that period collected
the dividends upon the said stock took from the plaintiff something which belonged to her. While the
defendant asserts that he was at no time the owner of said stock, the finding of the trial court and the
finding of the Supreme Court of the United States on appeal were to the effect that the defendant was the
real purchaser of the stock from the plaintiff under the fraudulent sale, although the negotiations leading
up to the sale were carried on by other persons. The fraudulent sale having been made to him, it is
unquestionable that he became responsible to the plaintiff from that moment forward. So far as the
responsibility of the defendant was concerned, it is of no consequence who actually collected and retained
the dividends. The plaintiff had a right to look to the defendant and to him alone.

Unless, therefore, the plaintiff has, by some act subsequent to obtaining the judgment referred to,
released her rights to recover of the defendant the income of the stock during the time he held it, that
right still subsists. The consideration of this question brings us to the other contention of the appellant. It
is to the effect that when the judgement in question was paid a stipulation or agreement was entered into
between him and the plaintiff by virtue of which the plaintiff released him from all responsibility in
connection with the transaction relating to the stock. That agreement, translated, reads as follows:

I, W. H. Lawrence, lawyer, with full authority from the plaintiff in the above-entitled action for the
purpose of this instrument; and I, Eduardo Gutierrez Repide, lawyer, and being also fully
authorized and empowered hereto by the defendant in said action, now, for the purpose of
satisfying the judgment rendered therein, I, W. H. Lawrence, hereby deliver to Eduardo Gutierrez
P14,159.29, and I, Eduardo Gutierrez, on my part deliver to said W. H. Lawrence the cost of this
action and eight certificates of stock of the Philippine Sugar Estates Development Company, each
certificate representing 100 shares, which certificates are of the par value of P10,000 each, and are
numbered 1621, 1623, 1624, 1625, 1626, 1628, 1629, and 1630. Wherefore, both parties agree
and stipulate that, by reason of the said payments hereby mutually made, the judgment in the
above-entitled action is entirely paid and the action is finally settled and terminated, together with
all the legal results flowing from said judgment.

We see nothing in this written discharge which could properly be given the legal effects which the
appellant in this case assigns to it. It is a discharge of a judgment and nothing more. Being such, it
reaches no further than the terms of the judgment itself. It is to be presumed that an instrument
satisfying a debt or obligation manifested in another instrument extends no further than the terms of the
instrument which manifests the obligation to be discharged, unless, from the terms of the instrument, it is
clear that the parties intended something more. So far as the record discloses, at the time this satisfaction
was executed nothing whatever occurred between the parties relative to the dividends on the stock which
formed the subject-matter of that judgment, nor did anything transpire as to any other relations between
the parties than those embraced within the judgment itself. There was nothing in the conduct of the
parties, or in their relations or attitudes, from which it could be implied or inferred that they were dealing
with aught else than the judgement itself. There is no basis, then, for the contention of the appellant
unless it be found in the wording of that instrument itself. As we have already indicated, however, there is
nothing in the phraseology of that document which in the remotest way touches the rights of the parties
as to the dividends upon the stock or which embraces any other matter between the parties than the
subject matter of the judgment itself. The words employed in such an instrument should not be extended
beyond the consideration upon which the instrument was executed as otherwise the courts would be
making for the parties a release which they never intended or contemplated.

Relative to the scope and extent of the satisfaction referred to the trial court said:

While it may appear from the stipulation entered into when the judgment was satisfied between
the parties interchanging the shares of stock and money, as before stated, that the plaintiff had no
further claim against the defendant, because at that time the plaintiff paid the defendant a large
sum of money without making claim, it also appears that the plaintiff was not aware that the
defendant had collected the dividends before referred to.

In arguing this question plaintiff's counsel devotes himself at some length to sustaining this finding of fact,
and asserts that "even had she been aware of this fact it would make no difference for the reason that the
matter of dividends was not and could not have been involved in the original suit." It is true that the
dividends were not included in the cause of action set forth in the complaint in cause No. 2365 and were
not, therefore, a subject of adjudication in that action. We are of the opinion, however, that they might
have been, at least in part. The plaintiff in suing for the recovery of shares illegally taken from her by the
defendant had the right to demand their return and with them whatever damages she had sustained by
reason of their retention, which would be in this case the dividends which had been collected on them by
the defendant while they were in his possession. That is, strictly speaking, what the plaintiff should have
demanded in her complaint. Generally speaking, it is not permitted that a plaintiff sue for the recovery of
property which is illegally detained by another, and, after recovering that property, sue in a separate
action for the damages sustained by that illegal detention. The law seeks to prevent multiplicity of actions,
and it is the duty of every person suing to join in one action every cause of action which he has against
the defendant, to the end that all questions between the parties be litigated in one suit and multiplicity of
actions and resulting expenses prevented. This is a question, however, which could have been raised in
the court below by the defendant. He did not do so. Neither has he raised the question in this court
directly. We, therefore, do not pass upon it or base any finding upon it. The purpose which we have in
referring to it at all is to indicate that the real question arising from the controversy between the parties
relative to this particular assignment of error really resolves itself into one of multiplicity of actions, that
is, of the duty of the plaintiff to join all her causes of action against the defendant in one complaint, and
not the one presented by the appellant in his argument relative to the reach which should be given to the
document of satisfaction. We, therefore, disapprove of the contention of the appellant that the satisfaction
of the judgment reaches further than the terms of the judgment itself. It does not embrace any other
relations between the parties than those embraced in the plain wording of the judgment. While the
dividends might, in part, have been included in the cause of action set forth in the complaint in that action
and, as far as possible, should have been incorporated therein, nevertheless they were not so made and,
therefore, formed no part of the judgment in which that action terminated. When, therefore, after the
satisfaction of that judgment, plaintiff began a separate action to recover the dividends, the only defense
available to the defendant was the plea of multiplicity. That plea not having been made, no question
relating thereto is presented on this appeal.

It is true that plaintiff could have included in her action and recovered at the most only those dividends
which were due at the time judgment in her favor was entered. It happens in this case that most of the
dividends became payable after the plaintiff had secured her judgment. That being so, they could not have
been included by her in the original complaint, not could they have been incorporated within the judgment
in that action. This, then, furnishes another reason why the contention of the appellant in this regard
cannot be sustained. Under such circumstances a plea of multiplicity, even if made, would not have been
available as to those dividends which became payable after the judgment was entered in that action.

The remaining question presented by appellant relates to the interest which he was entitled to recover or
the amount due him from the plaintiff. As we have already seen, the judgment of the court in the first
place gave him the interest on said amount from the 10th day of October, 1903, to the 27th day of July,
1909. On motion made by the plaintiff the court amended that judgment by giving the defendant interest
on said sum from the 10th day of October, 1903, to the 12th day of January, 1904. The reason for the
amendment was the fact, as disclosed by the proofs, that on the latter date the plaintiff tendered to the
defendant said sum of money and the defendant at that time refused to accept the same. Under such
circumstances, the court properly held that the tender of the sum and its refusal by the defendant stopped
the running of interest in favor of the latter and he was not, therefore, entitled to recover interest from
that day forward. The appellant argues in this connection that he should not be blamed or punished for
the refusal to accept the tender of the plaintiff for the reason that he was not the owner of the stock at
the time of such tender and, therefore, could not accept it. As we have already seen in touching another
question raised on this appeal, the court, in a judgment now final, found that the sale of stock afterwards
declared fraudulent was executed between the plaintiff and the defendant. As to this there can be no
question. As a necessary result the plaintiff need look for her redress no further than the defendant
himself and she could produce all of the legal effects possible in her favor by dealing directly with him, as
she did when she made the tender in question.

For these reasons the judgment appealed from is affirmed, without special finding as to costs. So ordered.

G.R. No. L-30460             March 12, 1929

C. H. STEINBERG, as Receiver of the Sibuguey Trading Company, Incorporated, plaintiff-appellant,

vs.
GREGORIO VELASCO, ET AL., defendants-appellees.

Frank H. Young for appellant.

Pablo Lorenzo and Delfin Joven for appellees.
 STATEMENT

Plaintiff is the receiver of the Sibuguey Trading Company, a domestic corporation. The defendants are
residents of the Philippine Islands.

It is alleged that the defendants, Gregorio Velasco, as president, Felix del Castillo, as vice-president,
Andres L. Navallo, as secretary-treasurer, and Rufino Manuel, as director of Trading Company, at a
meeting of the board of directors held on July 24, 1922, approved and authorized various lawful purchases
already made of a large portion of the capital stock of the company from its various stockholders, thereby
diverting its funds to the injury, damage and in fraud of the creditors of the corporation. That pursuant to
such resolution and on March 31, 1922, the corporation purchased from the defendant S. R. Ganzon 100
shares of its capital stock of the par value of P10, and on June 29, 1922, it purchased from the defendant
Felix D. Mendaros 100 shares of the par value of P10, and on July 16, 1922, it purchased from the
defendant Felix D. Mendaros 100 shares of the par value of P10, each, and on April 5, 1922, it purchased
from the defendant Dionisio Saavedra 10 shares of the same par value, and on June 29, 1922, it
purchased from the defendant Valentin Matias 20 shares of like value. That the total amount of the capital
stock unlawfully purchased was P3,300. That at the time of such purchase, the corporation had accounts
payable amounting to P13,807.50, most of which were unpaid at the time petition for the dissolution of
the corporation was financial condition, in contemplation of an insolvency and dissolution.

As a second cause of action, plaintiff alleges that on July 24, 1922, the officers and directors of the
corporation approved a resolution for the payment of P3,000 as dividends to its stockholders, which was
wrongfully done and in bad faith, and to the injury and fraud of its creditors. That at the time the petition
for the dissolution of the corporation was presented it had accounts payable in the sum of P9,241.19, "and
practically worthless accounts receivable."

Plaintiff prays judgment for the sum of P3,300 from the defendants Gregorio Velasco, Felix del Castillo,
Andres L. Navallo and Rufino Manuel, personally as members of the Board of Directors, or for the recovery
from the defendants S. R. Ganzon, of the sum of P1,000, from the defendant Felix D. Mendaros, P2,000,
and from the defendant Dionisio Saavedra, P100, and under his second cause of action, he prays
judgment for the sum of P3,000, with legal interest against the board of directors, and costs.

For answer the defendants Felix del Castillo, Rufino Manuel, S. R. Ganzon, Dionisio Saavedra and Valentin
Matias made a general and specific denial.

In his amended answer, the defendant Gregorio Velasco admits paragraphs, 1, 2 and 3 of each cause of
action of the complaint, and that the shares mentioned in paragraph 4 of the first cause of action were
purchased, but alleges that they were purchased by virtue of a resolution of the board of directors of the
corporation "when the business of the company was going on very well." That the defendant is one of the
principal shareholders, and that about the same time, he purchase other shares for his own account,
because he thought they would bring profits. As to the second cause of action, he admits that the
dividends described in paragraph 4 of the complaint were distributed, but alleges that such distribution
was authorized by the board of directors, "and that the amount represented by said dividends really
constitutes a surplus profit of the corporation," and as counterclaim, he asks for judgment against the
receiver for P12,512.47 for and on account of his negligence in failing to collect the accounts.

Although duly served, the defendant Mendaros did not appear or answer. The defendant Navallo was not
served, and the case against him was dismissed.

April 30, 1928, the case was tried and submitted on a stipulation of facts, based upon which the lower
court dismissed plaintiff's complaint, and rendered judgment for the defendants, with costs against the
plaintiff, and absolved him from the cross-complaint of the defendant Velasco, and on appeal, the plaintiff
assigns the following errors:

1. In holding that the Sibuguey Trading Company, Incorporated, could legally purchase its own
stock.
 2. In holding that the Board of Directors of the said Corporation could legally declared a dividend of
P3,000, July 24, 1922.

JOHNS, J.:

It is stipulated that on July 24, 1922, the directors of the corporation approved the purchase of stocks as
follows:

One hundred shares from S. R. Ganzon for P1,000;

One hundred shares from Felix D. Mendaros at the same price; which purchase was made on June 29,
1922; another

One hundred shares from Felix D. Mendaros at the same price on July 16, 1922;

Ten shares from Dionisio Saavedra at the same price on June 29, 1922.

That during such times, the defendant Gregorio Velasco purchased 13 shares for the corporation for P130;
Felix del Castillo — 42 shares for P420; Andres Navallo — 15 shares for P150; and the defendant
Mendaros — 10 shares for P100. That during the time these various purchases were made, the total
amount of subscribed and paid up capital stock of the corporation was P10,030, out of the authorized
capital stock 2,000 shares of the par value of P10 each.

Paragraph 4 of the stipulation also recites:

Be it also admitted as a fact that the time of the said purchases there was a surplus profit of the
corporation above-named of P3,314.72.

Paragraph 5 is as follows:

That at the time of the repeatedly mentioned various purchases of the said capital stock were
made, the said corporation had Accounts Payable in the total amount of P13,807.50 as shown by
the statement of the corporation, dated June 30, 1922, and the Accounts Receivable in the sum of
P19,126.02 according to the books, and that the intention of the Board of Directors was to resell
the stocks purchased by the corporations at a sum above par for each stock, this expectation being
justified by the then satisfactory and sound financial condition of the business of the corporation.

It is also stipulated that on September 11, 1923, when the petition for the dissolution of the corporation
was presented to the court, according to a statement made June 30, 1923, it has accounts payable
aggregating P9,41.19, and accounts receivable for P12,512.47.

Paragraph 7 of the stipulation recites:

That the same defendants, mentioned in paragraph 2 of this stipulation of facts and in the same
capacity, on the same date of July 24, 1922, and at the said meeting of the said Board of Directors,
approved and authorized by resolution the payment of dividends to its stockholders, in the sum of
three thousand pesos (P3,000), Philippine currency, which payments were made at different dates,
between September 30, 1922, and May 12, 1923, both dates inclusive, at a time when the
corporation had accounts less in amount than the accounts receivable, which resolution was based
upon the balance sheet made as June 30, 1922, said balance sheet showing that the corporation
had a surplus of P1,069.41, and a profit on the same date of P2,656.08, or a total surplus amount
of P3,725.49, and a reserve fund of P2,889.23 for bad and doubtful accounts and depreciation of
equipment, thereby leaving a balance of P3,314.72 of net surplus profit after paying this dividend.

It is also stipulated at a meeting of the board of directors held on July 24, 1922, as follows:
 6. The president and manager submitted to the Board of Directors his statement and balance sheet
for the first semester ending June 30, 1922 and recommended that P3,000 — out of the surplus
account be set aside for dividends payable, and that payments be made in installments so as not to
effect the financial condition of the corporation. That stockholders having outstanding account with
the corporation should settle first their accounts before payments of their dividends could be made.
Mr. Castillo moved that the statement and balance sheet be approved as submitted, and also the
recommendations of the president. Seconded by Mr. Manuel. Approved.

Paragraph 8 of the stipulation is as follows:

That according to the balance sheet of the corporation, dated June 30, 1923, it had accounts
receivable in the sum of P12,512.47, due from various contractor and laborers of the National Coal
Company, and also employees of the herein corporation, which the herein receiver, after his
appointment on February 28, 1924, although he made due efforts by personally visiting the
location of the corporation, and of National Coal Company, at its offices, at Malangas, Mindanao,
and by writing numerous letters of demand to the debtors of the corporation, in order to collect
these accounts receivable, he was unable to do so as most of them were without goods or
property, and he could not file any suit against them that might have any property, for the reason
that he had no funds on hand with which to pay the filing and sheriff fees to Malangas, and other
places of their residences.

From all of which, it appears that on June 30, 1922, the board of directors of the corporation authorized
the purchase of, purchased and paid for, 330 shares of the capital stock of the corporation at the agreed
price of P3,300, and that at the time the purchase was made, the corporation was indebted in the sum of
P13,807.50, and that according to its books, it had accounts receivable in the sum of P19,126.02. That on
September 11, 1923, when the petition was filed for its dissolution upon the ground that it was insolvent,
its accounts payable amounted to P9,241.19, and its accounts receivable P12,512.47, or an apparent
asset of P3,271.28 over and above its liabilities. But it will be noted that there is no stipulation or finding
of facts as to what was the actual cash value of its accounts receivable. Neither is there any stipulation
that those accounts or any part of them ever have been or will be collected, and it does appear that after
his appointment on February 28, 1924, the receiver made a diligent effort to collect them, and that he
was unable to do so, and it also appears from the minutes of the board of directors that the president and
manager "recommended that P3,000 — out of the surplus account to be set aside for dividends payable,
and that payments be made in installments so as not to effect the financial condition of the corporation."

If in truth and in fact the corporation had an actual bona fide surplus of P3,000 over and above all of its
debt and liabilities, the payment of the P3,000 in dividends would not in the least impair the financial
condition of the corporation or prejudice the interests of its creditors.

It is very apparent that on June 24, 1922, the board of directors acted on assumption that, because it
appeared from the books of the corporation that it had accounts receivable of the face value of
P19,126.02, therefore it had a surplus over and above its debts and liabilities. But as stated there is no
stipulation as to the actual cash value of those accounts, and it does appear from the stipulation that on
February 28, 1924, P12,512.47 of those accounts had but little, if any, value, and it must be conceded
that, in the purchase of its own stock to the amount of P3,300 and in declaring the dividends to the
amount of P3,000, the real assets of the corporation were diminished P6,300. It also appears from
paragraph 4 of the stipulation that the corporation had a "surplus profit" of P3,314.72 only. It is further
stipulated that the dividends should "be made in installments so as not to effect financial condition of the
corporation." In other words, that the corporation did not then have an actual bona fide surplus from
which the dividends could be paid, and that the payment of them in full at the time would "affect the
financial condition of the corporation."

It is, indeed, peculiar that the action of the board in purchasing the stock from the corporation and in
declaring the dividends on the stock was all done at the same meeting of the board of directors, and it
appears in those minutes that the both Ganzon and Mendaros were formerly directors and resigned before
the board approved the purchase and declared the dividends, and that out of the whole 330 shares
purchased, Ganzon, sold 100 and Mendaros 200, or a total of 300 shares out of the 330, which were
purchased by the corporation, and for which it paid P3,300. In other words, that the directors were
permitted to resign so that they could sell their stock to the corporation. As stated, the authorized capital
stock was P20,000 divided into 2,000 shares of the par value of P10 each, which only P10,030 was
subscribed and paid. Deducting the P3,300 paid for the purchase of the stock, there would be left P7,000
of paid up stock, from which deduct P3,000 paid in dividends, there would be left P4,000 only. In this
situation and upon this state of facts, it is very apparent that the directors did not act in good faith or that
they were grossly ignorant of their duties.

Upon each of those points, the rule is well stated in Ruling Case Law, vol. 7, p. 473, section 454 where it
is said:

General Duty to Exercise Reasonable Care. — The directors of a corporation are bound to care for
its property and manage its affairs in good faith, and for a violation of these duties resulting in
waste of its assets or injury to the property they are liable to account the same as other trustees.
Are there can be no doubt that if they do acts clearly beyond their power, whereby loss ensues to
the corporation, or dispose of its property or pay away its money without authority, they will be
required to make good the loss out of their private estates. This is the rule where the disposition
made of money or property of the corporation is one either not within the lawful power of the
corporation, or, if within the authority of the particular officer or officers.

And section 458 which says:

Want of Knowledge, Skill, or Competency. — It has been said that directors are not liable for losses
resulting to the corporation from want of knowledge on their part; or for mistake of judgment,
provided they were honest, and provided they are fairly within the scope of the powers and
discretion confided to the managing body. But the acceptance of the office of a director of a
corporation implies a competent knowledge of the duties assumed, and directors cannot excuse
imprudence on the ground of their ignorance or inexperience; and if they commit an error of
judgment through mere recklessness or want of ordinary prudence or skill, they may be held liable
for the consequences. Like a mandatory, to whom he has been likened, a director is bound not only
to exercise proper care and diligence, but ordinary skill and judgment. As he is bound to exercise
ordinary skill and judgment, he cannot set up that he did not possess them.

Creditors of a corporation have the right to assume that so long as there are outstanding debts and
liabilities, the board of directors will not use the assets of the corporation to purchase its own stock, and
that it will not declare dividends to stockholders when the corporation is insolvent.

The amount involved in this case is not large, but the legal principles are important, and we have given
them the consideration which they deserve.

The judgment of the lower court is reversed, and (a), as to the first cause of action, one will be entered
for the plaintiff and against the defendant S. R. Ganzon for the sum of P1,000, with legal interest from the
10th of February, 1926, and against the defendant Felix D. Medaros for P2,000, with like interests, and
against the defendant Dionisio Saavedra for P100, with like interest, and against each of them for costs,
each on their primary liability as purchasers of stock, and (b) against the defendants Gregorio Velasco,
Felix del Castillo and Rufino Manuel, personally, as members of the board of directors of the Sibuguey
Trading Company, Incorporated, as secondarily liable for the whole amount of such stock sold and
purchased as above stated, and on the second cause of action, judgment will be entered (c) for the
plaintiff and jointly and severally against the defendants Gregorio Velasco, Felix del Castillo and Rufino
Manuel, personally, as members of the board of directors of the Sibuguey Trading Company, Incorporated,
for P3,000, with interest thereon from February 10, 1926, at the rate of 6 per cent per annum, and costs.
So ordered.