CORPORATION LAW
Atty. Raoul C. Creencia
Course Description:
A study of the Corporation Code and other special laws governing
private corporations, including foreign corporation,
and the concept of doing business
in the Philippines. The course includes in-depth analysis of
the applicable common law and commercial principles
underlying the various relationships in the corporate setting,
with emphasis on the corporation being the medium for business enterprise
and a means of providing for the equity investment market.
The course includes the study of the Securities Regulations Code
I. Introduction to Business Entities and Juridical Persons
A. Evolution of Philippine Corporate Law Concept of
corporation is only introduced in the PH in 1880. But there
were already entities regulating a corporate set up but there
was no formal registration, etc. But in 1888, finally Spain
applied the Spanish Code of Commerce. Hence,
sociedades Anonimas, sociedades de cuentas
participaciones. Relevant provisions of code of commerce
contains the limited liability, centralized management,
granted to juridical entity. Why was it that it was only in 1888,
because 2 years prior, the code of commerce was
promulgated by Spain. It was only in that the same was
extended to the country.
• Sociedades Anonimas (SA)
o Anonymous Shareholders
o Provisions on the Code of Commerce regarding
Sociedad anonima were earlier repealed by
Section 191 of the Old Corpo law or Act No.
1459.
o Business organization under the Spanish regime
which has the same approximation and affinity
with corporation but not exactly the same.
o Limited liability rule, was to a certain extent,
applicable to sociedads anonimas.
o Anyone who buys a membership is a member of
a corporation. But ABC corporation wouldn’t
know who you are. Anonymous. ABC corp
knows that there are 100 certificates sold to the
public and any holder of that certificate is an
owner and is recognized by the corporation.
o 1888- it did not really take root in the country
because in 1898, Americans colonized us. It did
not really become well entrenched in PH
business practice. But if you watched youtube
about the history of corporations: ex. Ayala corp
traces to partnership set up in 1854. In 1834,
there was Antonio de ayala engaged in
agriculture, trading, agriculture was heavy at the
time. 1893: san Miguel corporation, etc. Before
1900, there were already corporations existing in
the PH.
o 1888: the Code of Spain was made effective in
the Philippines.
o Here, owners are anonymous. Not listed in
central stock holders’ book. Whoever is the
holder of certificate is the recognized owner.
Bearer shares: bearer of certificate of shares is
recognized as the owner. Do we still have that in
modern law? SEC Memorandum Circ 1 S. 2021
January 27 2021: the issuance of bearer shares
is already proscribed. Meaning, all shareholders
identity must be recorded. If you are holding
shares for the benefit of someone else, you must
say that also.
o After 8 years: The Act 1459:
• The Corporation Law or Act 1459
o First general law on corporations took effect on
April 1, 1906.
o Passed by the Philippine Commission
 o Purpose is to introduce the American
Corporation regime to the Philippines as
standard commercial entity.
o This is where we picked up the 5 or more
persons not exceeding 15 a majority of whom
a residence of Philippine Islands. (Section
16?) Now, with the RCC, not anymore.
o Repealed the provisions on Sociedades
Anonimas.
o Those that were already in existence at the time
of the enactment of the Corporation Law were
allowed to formally organize into corporations or
to continue as such.
o Likewise contains a provision to the effect that
existing sociedades anonimas, which elected to
continue their business as such, instead of
reforming and reorganizing under the
corporation Law, should continue to be governed
by laws that were in force prior to the passage of
Act No. 1459 in relation to their organization and
method of transacting business and to the rights
of members thereof as between themselves, but
their relations to the public and public officials
shall be governed by their provisions’ of the
Corporation Law.
o In other words, Sociedad anonimas, which opted
to continue as such, were already governed by
the Corporation Law as to their relationship with
the State.
o Section 75: existing sociedades may continue
doing business or they become organized under
the corporation law. (1906)
o Remember: But Corporation Code (1980 law)
Revised Corporation Code (2019)
• The Corporation Code of the Philippines – BP Blg.68
(Cabinet Bill No. 3)
o The Corporation Code of the PH. Repealed the
1459 in 1980 and took effect on May 1, 1980.
o The executive put together the law.
o Expressly repealed by Republic Act No. 11232
Section 187 of the RCCP Provides that BP Blg.
68 is repealed.
• Revised Corporation Code (Republic Act 11232)
o Published and effective on February 23, 2019.
o Applies to all corporations already in existence at
the time the RCCP took effect. The RCCP is
consistent with the mandate under Sec. 16 of
the Article XII of the Constitution for Congress
to prescribe all the criteria for the “formation,
organization, or regulation of private
corporations in a a general law applicable to all
without discrimination.
o corporate term to 50 years, as opposed to
perpetual to other types. Reckoned from May
1 1980 to May 1, 2030.
o Vested rights under the Corporation Code –
vested rights of and liabilities incurred by any
corporation, its stockholders, members,
directors, trustees, or officers under the
Corporation Code are not removed or impaired
by any subsequent amendment or repeal of the
said Code or of any part thereof.
o Provide for the formation and organization of
corporations, define their powers, fix the duties
of directors and other officers thereof, declare
the rights and liabilities of shareholders and
members and prescribe the conditions under
which corporations may transact business.
o Purpose:
§ Policies that would enhance the ease of
doing business in the PH
§ Rules that prioritize corporate and
stockholder protection
§ Provisions that instill corporate and civic
responsibility,
§ Amendments that will strengthen the
country’s policy and regulatory corporate
framework.
o Simplifies the registration, one person
corporation (OPC)- Natural Person, Estate,
Trust – sila lang pwede mag ano ng OPC,
perpetual existence of corporation.
Electronic filing and monitoring system,
 remote communication, strengthening
corporate governance,
B. Juridical Persons and Business Organizations
• Juridical persons vis-à-vis natural persons
o Natural Persons – All human beings are natural
persons.
o Juridical Persons – non human legal entities: these
are entities that is not a natural person but it is
authorized by law. It is empowered to have rights,
authorized to perform certain duties, they are
recognized as legal persons with a distinct
personality, with a distinct identity.
• Juridical persons in general
o A corporation is a being; it is a separate
juridical entity. It is one of the juridical person
as provided under Article 44 of the NCC.
o As a juridical entity, it has rights and
obligations under existing laws
o Art. 44. The following are juridical persons:
§ The State and its political
subdivisions;
§ Other corporations, institutions and
entities from public interest or
purpose, created by law; their
personality begins as soon as they
have been constituted according to
law;
§ Corporations, partnerships and
associations for private or public
purpose to which the law grants a
juridical personality, separate and
distinct from that of each shareholder,
partner or member.
o They may hold and acquire properties of all
kinds, incur obligations, bring criminal or civil
action before the courts.
o Only corporations for public purpose may
be created by law. No private corp may be
created by law. Basis: Article 12 section
16 of the Constitution.
o National Development Corporation march 10
919 by a legislative act 1248. One of the
oldest corporations. Juridical persons are not
always equivalent to business organizations
because when we talk of business
organization, we talk about sole
proprietorship.
• Sole Proprietorship
o A form of business organization with only one
proprietary owner;
o Not a juridical person; merely the alter ego of
the person. No separate identification
number, tin. It’s really just a business name.
o Represents the highest form of unlimited
liability
o A single individual conducts business under
his own name or under a business name.
o It has been said that the specialists of
primitive society were the first sole
proprietors.
o A sole proprietorship is the oldest, simplest,
and most prevalent form of business
enterprise.
o Neither a creature of statute nor of contract;
hence, it involves none of the complexity or
expense required of business associations
such as corporations and partnerships. The
reportorial requirements imposed on
corporations and registered partnerships do
not apply to sole proprietorship.
o In effect, a single proprietorship is an
unorganized business owned by a person.
The sole proprietor manages and exercises
complete control over the conduct of his
business. Only his or is agent’s acts may
bind the business. Individual proprietor is the
only who is personally liable for business
debts.
o Sole prop has no legal personality separate
from its proprietor or owner of the enterprise.
o Owner has unlimited personal liability for all
the debts and obligations of the business,
 and it is against him or her that a judgment
against the enterprise is to be enforced.
o A sole prop has no legal personality to file or
defend an action in court separate from the
proprietor. The law merely recognizes the
existence of a sole prop as a form of
business organization conducted for profit by
a single individual and requires its proprietor
owner to secure licenses and permits,
register its business name, and pay taxes to
the national government.
o SP total dependent upon the life of the
sole prop. Upon the latter’s death,
business operation may cease.
o Under FRIA, sole proprietorship is treated
separately from the individual that the sole
prop can file a petition for rehabilitation while
the individual debtor cannot file such petition.
Individual debtor can file a petition for
suspension of payments while sole prop
cannot.
o Still liable even if uses a different business
name.
o Simplest business form, people still want
this.
• Business Trusts
o Legal relation whereby one person, called the
trustor, conveys a property of another for the benefit
of a person called the beneficiary. The person in
whom confidence is reposed as regards the property
is called the trustee.
o Trusts are either express or implied
o Express created by the intention of the trustor or of
the parties.
o Implied comes into being by operation of law.
o Trust agreement can actually be entered into with a
trust department of a commercial or universal bank.
o Trust business – any activity resulting from a trustor-
trustee relationship (trusteeship) involving the
appointment of a trustee by a trustor for the
administration, holding, management of funds
and/or properties of the trustor by the trustee for the
use, benefit or advantage of the trustor or of others
called the beneficiaries.
• Partnerships
o Under the CC, there is partnership when two or more
persons bind themselves to contribute money,
property, or industry to a common fund, with the
intention of dividing the profits among themselves.
(1797 of the CC) (MPI)
o Separate juridical personality (1768) Separate and
distinct from the partners. It has to be formally
constituted.
o Created by mere agreement.
o It exists even if the partners do not use the word
partnership and partners: the elements are:
§ Two or more persons bound themselves to
contribute money, property, or industry to a
common fund; and
§ They indent to divide the profits among
themselves.
§ Register with SEC where the capital of the
partnership is 3000 or more, but the juridical
personality still exists even if not registered
with the SEC. Mere failure to register with the
SEC does not invalidate a contract that has
all essential requisite. Registration is to give
notice to 3rd parties.
§ Ltd= Limited Partnership
o General partnership: even if the registration is not
officially completed, the law itself (1768) tells us that
the partnership creates separate person distinct
from the parties itself.
Partnership v. Corporations: 4) Authority of Mutual agency in Stockholde 4) There is
Partnership Corporati Similaritie those who partnership and each rs are not distribution
on s compose general partner can agents of of profits in
1. Manner of By mere agreement Only from 1) Both represent and bind the stock
Creation the have the partnership corporation corporation
issuance of juridical in the s and in
a personality absence of partnership
Certificate distinct express s
of from their authority
Incorporati component 5) Transfer of Interest in Corporate 5) They
on by the s Interest partnership cannot shares are both act
SEC, or in (stockholde be transferred freely only
proper rs or without the consent transferabl through
cases, partners) of the other partners. e without their
passage of the agents;
special law. consent of
2. Number of 2 or more persons A single 2) Both are other
Organizers person groups of stockholde
may form a persons rs (unless
corporation (exception: stipulation
(One One person to the
Person Corporatio contrary)
Corporatio n) 6) Liability of May be liable beyond Liability of 6) They can
n) : No those who their investment stockholde be
longer the compose rs and organized
requiremen members only where
t of at least for there is a
5 corporate law
incorporato obligations authorizing
rs to forma. is limited to their
Corporatio their organizatio
n under BP investment n.
86. .
3) Powers Subject only to such A 3) Capitals 7) Right of No right of There is
limitations as may be corporation of both are Succession succession: death of right of
agreed upon. is restricted derived a general partner succession
in its from their dissolves the
powers component partnership.
because of s; 8) Capacity to be Partnership can be A
its limited partner/stockhol an corporation
personality der incorporator/stockhol can now
also enter
 der of a corporation into a Bourns v. D.M. Carman, et al.
(Sec. 10) partnership (GR 2800, December 4, 1906)
or joint
venture -The SC defined a joint account as a partnership constituted in such a
(Sec. 35) manner that “the existence of which is only known to those who had an
interest in the same, there being no mutual agreement between the
• Joint Accounts (Sociedad de Cuentas en partners, and without a corporate name initiating to the public in some
Participacion) way that there were other people besides the one who ostensibly
o Present when there is an arrangement whereby managed and conducted the business.
merchants may interest themselves in transaction of - PARTNERSHIP OF "CUENTAS EN PARTICIPACION." — A
other merchants, contributing thereto the amount of partnership constituted in such a manner that its existence was only
capital they may agree upon, and participating in the known to those who had an interest in the same, there being no mutual
favorable and unfavorable results thereof in the agreement between the partners, and without a corporate name
proportion they may determine. “Accidental indicating to the public in some way that there were other people
Partnership” besides the one who ostensibly managed and conducted the business,
is exactly the accidental partnership of cuentas en participacion defined
in article 239 of the Code of Commerce.
Joint accounts v. Partnerships: - Those who contracted with the person in whose name the business
of a partnership of cuentas en participacion is conducted, shall have
Joint Accounts Partnerships only the right of action against such person and not against the other
1) Juridical No juridical Has personality persons interested, and the latter, on the other hand, shall have no right
Personality personality separate and distinct of action against the third person who contracted with the manager
from the partners unless such manager formally transferred his right to them.
2) Business name No commercial Can adopt a - plaintiff seeks to recover the sum o f$437.50 US dollars due on a
name common to all partnership name contract for the sawing of lumber for the lumber yard of Lo-Chim-Lim.
participants can be The contract realting to the said work was entered into by said Lo-Chim-
adopted in joint Lim, acting as in his own name with the plaintiff.
accounts - It seems that the alleged partnership between Lo-Chim-Lim and the
3) Management Only the ostensible General partners are appellants was formed by verbal agreement only. At least there is no
partner manages all managers in evidence tending to show that said agreement was reduced to writing,
and transacts partnership or that it was ever recorded in a public instrument.
business in his own
name and under his Moreover, that partnership had no corporate name. The plaintiff himself
individual liability. alleges in his complaint that the partnership was engaged in business
4) Parties in cases Only the ostensible All general partners under the name and style of Lo-Chim-Lim only, which according to the
partner – the person may be liable even evidence was the name of one of the defendants. On the other hand,
carrying on the joint up to the extent of and this is very important, it does not appear that there was any mutual
business can be their personal agreement between the parties, and if there were any, it has not been
sued and is liable to properties and may shown what that agreement was. As far as the evidence shows it seems
persons transacting therefore be sued by that the business was conducted by Lo-Chim-Lim in his own name,
with the former third persons. although he gave to the appellants a share of the earnings of the
business; but what that share was has not been shown with certainty.
The contract made with the plaintiff were made by Lo-Chim-Lim
individually in his own name, and there is no evidence that the
partnership ever contracted in any other form. Under such
circumstances we find nothing upon which to consider this partnership
other than as a partnership of cuentas en participacion.
• Joint Venture
o An association of persons or companies jointly
undertaking some commercial enterprise; generally
all contribute assets and share risks. It requires a
community interest in the performance of the
subject, a right to direct and govern the policy
connected therewith, and duty, which may be altered
by agreement to share both in profit and losses.
o Rationale:
§ JV reduce the investment required of any
one company and distribute the risk of
undertaking an expensive and risky venture
because some projects are of such
magnitude that they strain the financial
reserves of corporations;
§ JV pool “know-how”, thereby permitting the
members to achieve diversification that it
would have difficulty achieving alone;
§ A member of the JV may gain possible legal,
political, or public relations advantages by
organizing and incorporating where activities
are to be conducted and;
§ A member may avoid government scrutiny of
corporate expansion.
§ It is the substance, rather than the form of the
agreement that determines if the parties
entered into a joint venture agreement. The
intention of the parties that is reflected in the
agreement governs. Hence, even if the
parties called the agreement a Power of
Attorney, the agreement may also be
considered a joint venture agreement if the
terms and conditions thereof indicate that it
is a JV agreement.
§ Corporations can enter into joint venture
agreements. Two or more corporations may
enter into a joint venture through a contract
or agreement if the nature of the venture is
in line with the business authorized by
their charters. The contract or agreement
need not be registered with the SEC
provided that the JV will not result in the
formation of a partnership or corporation.
§ JV may result into a JV corporation. Then
must comply with applicable nationalization
laws.
§ JV corporation is subject to corpo law not to
partnership law. It follows that violation of the
provisions of the JVA will not necessarily
prejudice the subsequent shareholders who
are not parties thereto. For example, the
provisions of the JVA granting preference to
holders of certain shares, which are not
reproduced in the Articles of Incorporation
and the certificates, will not be binding on
creditors, nad other shareholders who are
not part of the agreement.
Aubach v. Sanitary Wares Mfg. Corp.
(189 RA 130 [1989])
The supreme court adopted the view that a joint venture is an
organization formed for some temporary purpose. “it is hardly
distinguishable from the partnership, since their elements are
similar – community of interest in the business, sharing profits,
and losses, and mutual right of control. “It would seem that
under PH Law, a joint venture is a form of partnership and
should thus be governed by the law of partnership. “
Issue: who were the duly elected directors of Saniwares for the
year 1983 during its annual stockholders' meeting held
on March 8, 1983. To answer this question the following
factors should be determined: (1) the nature of the business
established by the parties - whether it was a joint venture or a
corporation and (2) whether or not the ASI Group may vote
their additional 10% equity during elections of Saniwares'
board of directors.
• Held: In the instant cases, our
examination of important provisions
of the Agreement as well as the
testimonial evidence presented by
the Lagdameo and Young Group
shows that the parties agreed to
establish a joint venture and not a
corporation. The history of the
organization of Saniwares and the
unusual arrangements which govern
its policy making body are all
consistent with a joint venture and not
with an ordinary corporation.
• Doctrine: The legal concept of a joint
venture is of common law origin. It
has no precise legal definition but it
has been generally understood to
mean an organization formed for
some temporary purpose. It is inf act
hardly distinguishable from the
partnership, since their elements are
similar community of interest in the
business, sharing of profits and
losses, and a mutual right of control.
The main distinction cited by most
opinions in common law jurisdiction is
that the partnership contemplates a
general business with some degree
of continuity, while the joint venture is
formed for the execution of a single
transaction, and is thus of a
temporary nature. This observation is
not entirely accurate in this
jurisdiction, since under the CC, a
partnership may be particular or
universal, and a particular
partnership may have for its object a
specific undertaking. (Art. 1783, CC).
It would seem therefore that under
PH law, a joint venture is a form of
partnership and should htus be
governed by the law of
partnerships.The SC has however
recognized a distinction between
these 2 business forms, and has held
that although a corporation cannot
enter into a partnership contract, it
may however engage I a joint venture
with others.
•
Kilosbayan, Inc. v. Guingona, Jr.
(232 SCRA 110 [1994])
-Issue: Does the challenged Contract of Lease violate or contravene
the exception in Section 1 of R.A. No. 1169, as amended by B.P. Blg.
42, which prohibits the PCSO from holding and conducting lotteries "in
collaboration, association or joint venture with" another?
- Held: Yes. The same is a joint venture.
- All of the foregoing unmistakably confirm the indispensable role of the
PGMC in the pursuit, operation, conduct, and management of the On-
Line Lottery System. They exhibit and demonstrate the parties'
indivisible community of interest in the conception, birth and growth of
the on-line lottery, and, above all, in its profits, with each having a right
in the formulation and implementation of policies related to the business
and sharing, as well, in the losses -- with the PGMC bearing the
greatest burden because of its assumption of expenses and risks, and
the PCSO the least, because of its confessed unwillingness to bear
expenses and risks. In a manner of speaking, each is wed to the other
for better or for worse. In the final analysis, however, in the light of the
PCSO's RFP and the above highlighted provisions, as well as the "Hold
Harmless Clause" of the Contract of Lease, it is even safe to conclude
that the actual lessor in this case is the PCSO and the subject matter
thereof is Its franchise to hold and conduct lotteries since it is, in reality,
the PGMC which operates and manages the on-line lottery system for
a period of eight years.
- Collaboration is defined as the acts of working together in a joint
project. Association means the act of a number of persons in uniting
together for some special purpose or business. Joint venture is defined
as an association of persons or companies jointly undertaking some
commercial enterprise; generally all contribute assets and share risks.
It requires a community of interest in the performance of the subject
matter, a right to direct and govern the policy in connection therewith,
and duty, which may be altered by agreement to share both in profit
and losses.
-

• Cooperatives
o Is an autonomous and duly registered association of
persons, with a common bond of interest, who have
voluntarily joined together to achieve their social,
economic and cultural needs and aspirations by
making equitable contributions to the capital
required, patronizing their products and services and
accepting a fair share of the risks and benefits of the
undertaking I accordance with universally accepted
cooperative principles.
o Cooperatives is another type of business
organization.
o Not primarily governed by the Corp Code, but they
are also treated as a corporate entity with their own
acts and liabilities. It is vested with powers and
capacities under Article 9 of the Philippine
Cooperative Code of 2008, including the power to
sue and be sued and the right of succession. The
law also expressly provides that a duly registered
cooperative shall have limited liability.
§ RA 9520 - The Philippine Cooperative
Code of 2008
• The governing law of cooperatives.
Article 2 of the said law states that it
is the “declared policy of the State to
foster the creation and growth of
cooperatives as a practical vehicle for
prompting self-reliance and
harnessing people power towards the
attainment of economic development
and social justice.
• The State encourages the private
sector to undertake the actual
formation and organization to
cooperatives and endeavors to
create an atmosphere that is
conducive to the growth and
development of these cooperatives.
• Syndicate
o A syndicate is a group of people who come together
to work for a common aim.
o This unincorporated business association is often
encountered among insurance companies who may
be underwriting a large risk or banks that are lending
a huge amount.
o Therefore, syndication the practice of dividing
investment risk between several persons in order to
minimize individual risk.
o The agreement to share the collateral is perfected
the moment there is a meeting of minds thereon
among the participating banks and the same
agreement is consummated with the execution of the
documents contemplated like a “mortgage trust
indenture” or a “joint real estate mortgage/”
• Homeowners’ Association
o HA may acquire juridical personality and corporate
powers.
o Association refers to the homeowners’ association
which is a non-stock, non-profit corporation
registered with the Housing and Land Use
Regulatory Board, or one previously registered with
the Home Insurance Guarantee Corporation (now
Home Guaranty Corporation) or the Securities
Exchange Commission (SEC0, organized by owners
or purchasers of a lot in a subdivision/village or other
residential real property located within the
jurisdiction of the association; or awardees,
usufructuaries, legal occupants and/or lessees of a
housing unit and/or lot in a government socialized or
economic housing or relocation project and other
urban estates; or underprivileged and homeless
citizens as defined under existing laws in the
process of being accredited as usufructuaries or
awardees of ownership rights under the Community
Mortgage Program (CMP), Land Tenure Assistance
Program (LTAP) and other similar programs in
relation to a socialized housing project actually being
implemented by the national government for the
LGU.
§ RA 9904 Magna Carta for Homeowners
and Homeowners Association
• The governing law of Has.
 • Section 2: Declaration of Policy – In
fulfillment of the constitutional
principles directing the State to
encourage, promote and respect
nongovernmental, community-based
and people’s organizations in serving
their legitimate collective interests in
our participatory democracy, it is
hereby declared the policy of the
State to uphold the rights of the
people to form union, associations, or
societies, and to recognize and
promote the rights and the roles of
homeowners as individuals and as
members of the society and of
homeowners’ associations. To this
end, the State shall endeavor to
make available resources and
assistance that will help them fulfill
their roles in serving the needs and
interests of their communities, in
complementing the efforts of the
LGUs in providing vital and basic
services to our citizens, and in
helping implement local and national
government policies, programs, rules
and ordinances for the development
of the nation.
• D.O. 2021-007, Series of 2021
(September 15, 2021)
• Corporations
o Have their origin in Roman law. The republic-
Populus Romanus, Senatus Popolusque Romanus,
Res public – is said to be the “original” corporation.
It was during the early republic that corporate forms
and other organizations gradually developed
including the religious sodalitas, the universitas, the
collegium, the governmental municipium and the
societas.
o As a business organization and juridical person:
article 12, section 16 of the PH law prohibits
Congress from forming, organizing a private
corporation. It has to be created according to the
revised corporation code.
o Advantages:
§ Capacity to act as a legal unit
§ Limitations of or exemption from, individual
liability of shareholders
§ Continuity of existence
§ Transferability of shares
§ Centralized management of board of
directors
§ Professional management
§ Standardized method of organization, and
finance, and
§ Easy capital generation
o Disadvantages:
§ Prone to double taxation
§ Subject to greater governmental regulation
and control;
§ A corporation may be burdened with an
inefficient management if stockholders
cannot organize to oppose management;
§ Limited liability of stockholders may at times
translate into limited ability to raise creditor
capital;
§ It is harder to organize compared to other
business organizations
§ Harder and more complicated to maintain
§ The owners or stockholders do not
participate in the day to day management.
II. Nature and Attributes of a Corporation
A. Definition and Theories of Formation
• Section 2, Revised Corporation Code (RCC)
SEC. 2. Corporation Defined. – A corporation is an artificial being
created by operation of law, having the right of succession and the
powers, attributes, and properties expressly authorized by law or
incidental to its existence.
Core Features:
a) Legal personality
b) Limited Liability of shareholders
c) Transferability of shares
d) Delegated management under a board structure,
e) Investor ownership
• Theories on the Formation of a Corporation
§ Theory of Concession – “creature of the
State” – “a corporation is an artificial being
created by operation of law.” It owes its life to
the State and its birth is purely dependent on
the State’s will. A corporation is a creation of
statute that defines its powers and prescribes
rules for the regulation of its internal as well
as its business affairs. Sometimes called as
Fiat Theory, Government Paternity Theory,
or the Franchise Theory.
Tayag v. Benguet Consolidated, Inc.
(26 SCRA 242 [1968])
-Facts: The Court ordered that the stock certificates be issued by the
Benguet Consolidated and the same to be delivered by said corporation
to either the incumbent ancillary administrator or to the Probate Division
of the Court.
Issue: Should the company issue the new certificates
-Held : Yes, a corporation once it comes into being, following American
law still of persuasive authority in our juris-diction, comes more often
within the ken of the judiciary than the other two coordinate branches.
It institutes the appropriate court action to enforce its rights.
Correlatively, it is not immune from judicial control in those instances,
where a duty under the law as ascertained in an appropriate legal
proceeding is cast upon it.
To assert that it can choose which court order to follow and which to
disregard is to confer upon it not autonomy which may be conceded but
license which cannot be tolerated. It is to argue that it may, when so
minded, overrule the state, the source of its very existence; it is to
contend that what any of its governmental organs may lawfully require
could be ignored at will. So extravagant a claim cannot possibly merit
approval.
Ang Pue v. Secretary of Commerce
(5 SCRA 645 [1962])
-Facts: plaintiffs want to extend for 5 years the term of the partnership
pursuant to the provisions of plaintiffs’ Amendment to the Articles of
Copartnership.
- The answer filed by the defendant alleged, in substance, that the
extension for another five years of the term of the plaintiffs' partnership
would be in violation of the provisions of Republic Act No. 1180.
- On June 19, 1954 Republic Act No. 1180 was enacted to regulate the
retail business. It provided, among other things, that, after its
enactment, a partnership not wholly formed by Filipinos could continue
to engage in the retail business until the expiration of its term.
- On April 15, 1958 prior to the expiration of the five-year term of the
partnership Ang Pue & Company, but after the enactment of Republic
Act 1180 the partners already mentioned amended the original articles
of partnership Exhibit B so as to extend the term of life of the partnership
to another five years. When the amended articles were presented for
registration in the Office of the Securities & Exchange Commission on
April 16, 1958, registration was refused upon the ground that the
extension was in violation of the aforesaid Act.
- Issue: w/n RA 1180 applies
- Held : Yes, The State, through Congress, and in the manner provided
by law, had the right to enact Republic Act No. 1180 and to provide
therein that only Filipinos and concerns wholly owned by Filipinos may
engage in the retail business can not be seriously disputed. That this
provision was clearly intended to apply to partnerships already existing
at the time of the enactment of the law is clearly shown by its provision
giving them the right to continue engaging in their retail business until
the expiration of their term of life. To argue that because the original
articles of partnership provided that the partners could extend the term
of the partnership, the provisions of Republic Act 1180 cannot
adversely affect appellants herein, is to erroneously assume that the
aforesaid provision constitute a property right of which the partners can
not be deprived without due process or without their consent. The
agreement contained therein must be deemed subject to the law
existing at the time when the partners come to agree regarding the
extension. In the present case, as already stated, when the partners
amended the articles of partnership, the provisions of Republic Act
1180 were already in force, and there can be not the slightest doubt
that the right claimed by appellants to extend the original term of their
partnership to another five years would be in violation of the clear intent
and purpose of the law aforesaid.
- putting up or setting up a corporation is not a matter of absolute right.
It is a privilege that is conferred by the State and may be enjoyed only
upon such terms that the State imposed. So you have to follow the
requirements for putting up corporations.
Torres v. Court of Appeals (278
SCRA 793 [1997
Facts: The late Manuel A. Torres Jr. was the majority stockholder of
Tormil Realty & Development Corporation while private respondents
who are the children of Judge Torres’ deceased brother Antonio A.
Torres, constituted the minority stockholders. In 1984, Judge Torres, in
order to make substantial savings in taxes, adopted an “estate
planning” scheme under which he had assigned to Tormil Realty &
Development Corporation various real properties he owned and his
shares of stock in other corporations in exchange for 225,972 Tormil
realty shares. Hence, on various dates in July and August of 1984, 10
deeds of assignment were executed by the late Judge Torres.
Consequently, the aforelisted properties were duly recorded in the
inventory of assets of Tormil realty and the revenues generated by the
said properties were correspondingly entered in the corporation’s
books of account and financial records. Likewise, all the assigned
parcel of land were duly registered with the respective register of deeds
in the name of Tormil realty, except for the ones located in Makati and
Pasay City. Due to the insufficient number of shares of stock issued to
Judge Torres and the alleged refusal to private respondents to
approved the needed increase in the corporations authorized capital
stock, on September 11, 1986 Judge Torres revoked the two deeds of
assignment covering the properties in Makati and Pasay City. Noting
the disappearance of the Makati and Pasay City properties from the
corporations inventory of assets and financial records private
respondents, on March 31, 1987, were constrained to file a complaint
with the Securities and Exchange Commission (SEC) docketed as SEC
Case No. 3153 to compel Judge Torres to deliver to Tormil corporation
the two deed of assignment covering the aforementioned Makati and
Pasay City properties which had unilaterally revoked and to cause the
registration of the corresponding titles in the name of Tormil. The 1987
annual stockholders meeting and election of directors of Tormil
corporation was scheduled on March 25, 1987, in compliance with the
provision of its by-laws. Pursuant thereto, Judge Torres assigned from
his own shares, one share each to petitioners. These assigned shares
were in the nature of “qualifying shares” for the sole purpose of meeting
the legal requirement to be able to elect them to the Board of directors
as Torres nominees.
Issues: Whether or not the revocation of the deeds of assignment
involving the Makati and Pasay City properties are valid.
Whether or not the issued qualifying shares are valid.
Held: No. The general rule is that rescission of a contract will not be
permitted for a slight or carnal breach, but only for substantial and
fundamental breach as would defeat the very object of the parties in
making the agreement.
The shortage of 972 shares definitely is not substantial and
fundamental breach as would defeat the very object of the parties in
entering into contract. Art 1355 of the civil code also provides: “Except
in cases specified by law, lesion or inadequacy of cause shall not
invalidate a contract, unless there has been fraud, mistake or undue
influences.” There being no fraud, mistake, or undue influence exerted
on respondent Torres by Tormil and the latter having already issued to
the former its 225,000 shares, the most logical course of action is to
declare as null and void the deed of revocation on executed by
respondent Torres.
No. In the absence of any provision to the contrary, the corporate
secretary is the custodian of corporate records, corollarily, he keeps the
stock and transfer book and makes proper and necessary entries
therein.
Contrary to the generally accepted corporate practice, the stock and
transfer book of Tormil was not kept by Ms. Maria Christina T. Carlos,
the corporate secretary but by respondent Torres, the president and
chairman of the board of directors of Tormil. In contravention to the
above cited provision, the stock and transfer book was not kept at the
principal office of the corporation either but at the place of respondent
Torres.
These being the obtaining circumstances, any entries made in the stock corporation and its
and transfer book on March 8, 1987 by respondent Torres of an alleged stockholders or
transfer of nominal shares to Pabalan and Company cannot therefore members. Therefore,
be given any valid effect. Where the entries made are not valid, Pabalan stockholders and
and company cannot be considered stockholders of record of Tormil. members cannot
Because they are not stockholders, they cannot therefore be elected as disregard the
directors of Tormil. The rule otherwise would not only encourage provisions of the
violation of clear mandate of Rule 74 of the corporation code that stock Articles of
and transfer book shall be kept in the principal office of the corporation Incorporation and By-
but would likewise open the flood gates of confusion in the corporation laws of the
as to who has the proper custody of the stock and transfer book and corporation. The
who are the real stockholders of records of a certain corporation as any corporation, in turn,
holder of the stock and transfer book, though not the corporate cannot disregard the
secretary, at pleasure would make entries therein. rights of the
shareholders or
The fact that Torres holds 81.28% of the outstanding capital stock of members provided for
Tormil is of no moment and is not a license for him to arrogate unto in the Articles of
himself a duty lodged to the corporate secretary. Incorporation and By-
laws.
§ Genossenschaft Theory – there is a
§ Theory of Enterprise Entity – Stresses the rejection of this, the basic theme of which to
underlying commercial enterprise without quote from Friedmann “is the reality of the
emphasis on entity-aggregate distinctions of group as social and legal entity, independent
the components. of state recognition and concession” In the
§ Contract Theory – incorporation is deemed PH, corporation is. A creature without any
to involved contracts among the members, existence until it has received the imprimatur
between the members and the corporation, of the State acing according to law. It is
and between the members or the corporation logically inconceivable therefore it it will have
and the State. Thus, the State cannot rights and privileges of a higher priority than
likewise take the life of the corporation that of its creator.
without due process since it is entitled to right • Tayag vs. Benguet
against impairment of contracts.
§ Incorporation is a
contract among those
who compose the B. Attributes and Core Characteristics of a Corporation
corporation and their
contract is governed • Attributes:
and evidenced by the
Articles of 1) Artificial being -- A corporation is granted
Incorporation. a juridical capacity to own properties, to
§ There is also a contract and to enter into legal
contract between the relationships.
 - although it is treated as a separate person,
the fact is that a corporation does not
have physical existence – its existence is
artificial. Consequently, the rights of
corporations cannot be exactly the same
as the rights of natural persons.
o Vazquez v. Borja (74 Phil.
560 [1944])
Facts
On January 1932, Francisco De Borja entered into a contract of sale
with the NVSD (Natividad-Vasquez Sabani Development Co., Inc.).
The subject of the sale was 4,000 cavans of rice valued at Php2.10 per
cavan. On behalf of the company, the contract was executed by Antonio
Vasquez as the company’s acting president. NVSD only delivered
2,488 cavans and failed and refused, despite demand, to deliver the
rest hence De Borja incurred damages (apparently, NVSD was
insolvent). He then sue Vasquez for payment of damages.
ISSUE: Whether or not Vasquez is liable for damages.
HELD: No. Vasquez is not party to the contract as it was NVSD which
De Borja contracted with. It is well known that a corporation is an
artificial being invested by law with a personality of its own, separate
and distinct from that of its stockholders and from that of its officers who
manage and run its affairs. The mere fact that its personality is owing
to a legal fiction and that it necessarily has to act thru its agents, does
not make the latter personally liable on a contract duly entered into, or
for an act lawfully performed, by them for an in its behalf.
The fact that the corporation, acting thru Vazquez as its manager, was
guilty of negligence in the fulfillment of the contract did not make
Vazquez principally or even subsidiarily liable for such negligence.
Since it was the corporation’s contract, its non fulfillment, whether due
to negligence or fault or to any other cause, made the corporation and
not its agent liable.
JUSTICE PARAS Dissenting :
Vasquez as president of NVSD is liable for damages. Vasquez, as
acting president and manager of NVSD, and with full knowledge of the
then insolvent status of his company, agreed to sell to De Borja 4,000
cavans of palay. Further, NVSD was soon thereafter dissolved.
Int’l Express Travel and Tour Services v. Court of Appeals
(343 SCRA 674 [2000])
-Issue: w/n Philippine Football Federation is a juridical person
-Held: No, it is required. that before an entity may be considered as a
national sports association, such entity must be recognized by the
accrediting organization, the Philippine Amateur Athletic Federation
under R.A. 3135, and the Department of Youth and Sports
Development under P.D. 604.
- This fact of recognition, however, Henri Kahn failed to substantiate. In
attempting to prove the juridical existence of the Federation, Henri Kahn
attached to his motion for reconsideration before the trial court a copy
of the constitution and by-laws of the Philippine Football Federation.
Unfortunately, the same does not prove that said Federation has indeed
been recognized and accredited by either the Philippine Amateur
Athletic Federation or the Department of Youth and Sports
Development. Accordingly, we rule that the Philippine Football
Federation is not a national sports association within the purview of the
aforementioned laws and does not have corporate existence of its own.
- Thus being said, it follows that private respondent Henry Kahn should
be held liable for the unpaid obligations of the unincorporated Philippine
Football Federation. It is a settled principal in corporation law that any
person acting or purporting to act on behalf of a corporation which has
no valid existence assumes such privileges and becomes personally
liable for contract entered into or for other acts performed as such
agent. As president of the Federation, Henri Kahn is presumed to have
known about the corporate existence or non-existence of the
Federation. We cannot subscribe to the position taken by the appellate
court that even assuming that the Federation was defectively
incorporated, the petitioner cannot deny the corporate existence of the
Federation because it had contracted and dealt with the Federation in
such a manner as to recognize and in effect admit its existence.The
doctrine of corporation by estoppel is mistakenly applied by the
respondent court to the petitioner. The application of the doctrine
applies to a third party only when he tries to escape liability on a
contract from which he has benefited on the irrelevant ground of
defective incorporation. In the case at bar, the petitioner is not trying
to escape liability from the contract but rather is the one claiming from
the contract.
Manacop vs. Equitable PCI Bank
(GR 162814, 25 August 2005)
-Here, the judgment in favor of a corporation was sought to be executed
pending appeal. It was explained that the plaintiff corporation’s financial
distress is sufficient reason to order execution pending appeal. The
plaintiff cited the rule that execution pending appeal may be granted if
the plaintiff is already of advanced age and in danger of extinction. The
SC rejected the argument. The juridical existence of a corporation
cannot be compared to a natural person. The precarious financial
condition of the long standing policy of enforcing only final and
executory judgments.
o laws allow Filipino citizens and corporations to do business in its own
• Nationality and Citizenship
o General rule is that a
corporation cannot be
considered as a citizen, as it
is understood in Political law.
Nevertheless, there are
circumstances where
determining the nationality of
a corporation for certain
purposes.
o Tests: 1) aggregate or control
test and 2) The entity test or
place of incorporation test
which looks into the nation
where the corporation was
incorporated
o All corporations registered in
the PH are not necessarily
called Filipino corporations,
they are all called domestic
corporations.
o Corporations that are
registered outside in a foreign
country, pursuant to their laws
are called foreign
corporations. Can a foreign
corporation be Filipino
owned? Yes.
o Registered in Singapore but
100% Filipino owned? Can be
considered as Filipino.
o Registered outside, to be
considered as Filipino, must
be 100% owned.
o Section 140 (RCC)
SEC. 140. Definition and Rights of Foreign Corporations. – For
purposes of this Code, a foreign corporation is one formed, organized
or existing under laws other than those of the Philippines’ and whose
country or State. It shall have the right to transact business in the
Philippines after obtaining a license for that purpose in accordance with
this Code and a certificate of authority from the appropriate government
agency.
Narra Nickel Mining & Development Corporation vs.
Redmont Consolidated Mines
(GR 195580; April 2014 & January 2015)
o The control test is still the
prevailing mode of determining
whether or not a corporation is a
Filipino corporation, within the
ambit of Section 2 article II of the
1987 Constitution, entitled to
undertake the exploration,
development and utilization of the
natural resources of the
Philippines.
o When in mind of the Court there
is doubt, based on the attendant
facts and circumstances of the
case, in the 60-40 Filipino equity
ownership in the corporation,
then it may apply the
“Grandfather Rule”
 o Grandfather Rule is a method I
of determining the nationality
of a corporation, which in turn
is owned by another
corporation by breaking down
the equity structure of the
shareholders of the
corporation that owns the other.
o It hews with the rule that
beneficial ownership of
corporations engaged in
nationalized activities must reside
in the hands of Filipino citizens.
o It is computed by at
o Grandfather rule – you get the
apo corporation and see whether
fully owned Filipino. If not, you get
the percentage what is blank
percent of 60% and you add that
to the overall foreign ownership.
o The Test of Controlling
Ownership Applies In:
- Beneficial ownership test: SEC Memo Circ. No. 15 Series of
2019 July 26, 2019: beneficial ownership information is now
required to be included in the GIS. It was issued by the SEC to
assist in the implementation of the Anti-Money Laundering Act
and the Terrorist Financing Prevention and Suppression Act.
Under the said circular, the methodology applied in the
Grandfather Rule is being applied in the determining the natural
person who ultimately owns the corporation through indirect
ownership.
- Control test
*both must be applied to determine whether the corporation is a
Philippine National
a) Exploitation of Natural Resources
Sec. 140; Sec. 2, Article XII, 1987 Constitution
Section 140: (see above)
Art. XII, Sec. 2 of the Constitution provides:
Sec. 2. All lands of the public domain, waters, minerals, coal,
petroleum and other mineral oils, all forces of potential energy,
fisheries, forests or timber, wildlife, flora and fauna, and other natural
resources are owned by the State. With the exception of agricultural
lands, all other natural resources shall not be alienated. The
exploration, development, and utilization of natural resources shall be
under the full control and supervision of the State. The State may
directly undertake such activities, or it may enter into co-
production, joint venture or production-sharing agreements with
Filipino citizens, or corporations or associations at least sixty per
centum of whose capital is owned by such citizens. Such
agreements may be for a period not exceeding twenty-five years,
renewable for not more than twenty-five years, and under such terms
and conditions as may be provided by law.
x x x x
The President may enter into agreements with Foreign-owned
corporations involving either technical or financial assistance for large-
scale exploration, development, and utilization of minerals, petroleum,
and other mineral oils according to the general terms and conditions
provided by law, based on real contributions to the economic growth
and general welfare of the country. In such agreements, the State shall
promote the development and use of local scientific and technical
resources. (emphasis supplied)
Roman Catholic Apostolic Administrator of Davao, Inc. v. The LRC
and the Register of Deeds of Davao, 102 Phil. 596 [1957]).
- No nationality for Corporation Sole
- “The Roman Catholic Apostolic Church in the Philippines has
no nationality and that the framers of the Constitution” did not
have in mid the religious corporations sole when they provided
the 60% requirement.
Consequently, the Constitutional Assembly must have known:
 1. That a corporation solely is organized by and composed of
a single individual, the head of any religious society or church
operating within the zone, area or jurisdiction covered by said '
corporation sole (Article 155, Public Act No. 1459);
2. That a corporation sole is a non-stock corporation;
3. That the Ordinary (the corporation sole proper) does not own
the temporalities which he merely administers;
4. That under the law the nationality of said Ordinary or of any
administrator has absolutely no bearing on the nationality of the
person desiring to acquire real property in the Philippines by
purchase or other lawful means other than by hereditary
succession, who, according to the Constitution must be a
Filipino (sections 1 and 5, Article XIII);
5. That section 159 of the Corporation Law expressly authorized
the corporation sole to purchase and hold Teal estate for its
church, charitable, benevolent or educational purposes, and to
receive bequests or gifts for such purposes;
6. That in approving our Magna Carta the Delegates to the
Constitutional Convention, almost all of whom were Roman
Catholics.
- shares, regardless of nomenclature and category, comprising the
Register of Deeds of Rizal v. Ung Sui Si Temple,
97 Phil. 58 (1955)
- that if the association had no capital, its controlling membership
must be composed of Filipinos. Because ownership divorced from
control is not true ownership.
-Issue : whether a deed of donation of a parcel of land executed in
favor of a religious organization whose founder, trustees and
administrator are Chinese citizens should be registered or not.
- Held: No. the Constitution makes no exception in favor of religious
associations. Neither is there any such saving found in sections 1 and
2 of Article XIII, restricting the acquisition of public agricultural lands
and other natural resources to "corporations or associations at least
sixty per centum of the capital of which is owned by such citizens" (of
the Philippines).
The fact that the appellant religious organization has no capital stock
does not suffice to escape the Constitutional inhibition, since it is
admitted that its members are of foreign nationality. The purpose of the
sixty per centum requirement is obviously to ensure that corporations
or associations allowed to acquire agricultural land or to exploit natural
resources shall be controlled by Filipinos; and the spirit of the
Constitution demands that in the absence of capital stock, the
controlling membership should be composed of Filipino citizens.
b) Public Utilities : The constitution limits foreign equity to
40%, “the legal and beneficial ownership of 60% equity of the
outstanding capital stock must rest in the hands of Filipinos in
accordance with the constitutional mandate”
- at least 60% of the shares with voting rights must pertain to
Filipinos. If the requirement will not be imposed, the corporation will not
be “effectively controlled” by Filipinos in accordance with the mandate
of Section 11, Article XII of the Constitution.
- The requirement of at least 60% Filipino ownership applies not
only to voting control of the copraotion but also to the beneficial
ownership of the corporation, it is therefore imperative that such
requirement apply uniformly and across the board to all classes of
capital of the corporation.
- The requirement of at least 60% must apply separately to
voting shares and to the total outstanding shares of stock.
capital – refers only to shares of stock entitled to vote in the
election of diretors.
• Sec. 11, Article XII, 1987 Constitution
Section 11. No franchise, certificate, or any other form of authorization
for the operation of a public utility shall be granted except to citizens of
the Philippines or to corporations or associations organized under the
laws of the Philippines, at least sixty per centum of whose capital is
owned by such citizens; nor shall such franchise, certificate, or
authorization be exclusive in character or for a longer period than fifty
years. Neither shall any such franchise or right be granted except under
the condition that it shall be subject to amendment, alteration, or repeal
by the Congress when the common good so requires. The State shall
encourage equity participation in public utilities by the general public.
The participation of foreign investors in the governing body of any public
utility enterprise shall be limited to their proportionate share in its
capital, and all the executive and managing officers of such corporation
or association must be citizens of the Philippines.
People v. Quasha, 93 Phil. 333 [1953])
- Issue w/n quasha can be held liable for the crime of falsification of a
public and commercial document in that, having been entrusted with
the preparation and registration of the articles of incorporation of the
Pacific Airways Corporation, a domestic corporation organized for the
purpose of engaging in business as a common carrier, he caused it to
appear in said articles of incorporation that one Arsenio Baylon, a
Filipino citizen, had subscribed to and was the owner of 60.005 per cent
of the subscribed capital stock of the corporation when in reality, as the
accused well knew, such was not the case, the truth being that the
owners of the portion of the capital stock subscribed to by Baylon and
the money paid thereon were American citizens whose names did not
appear in the articles of incorporation, and that the purpose for making
this false statement was to circumvent the constitutional mandate that
no corporation shall be authorized to operate as a public utility in the
Philippines unless 60 per cent of its capital stock is owned by Filipinos.
-Held :Contrary to the lower court's assumption, the Constitution does
not prohibit the mere formation of a public utility corporation without the
required proportion of Filipino capital. What it does prohibit is the
granting of a franchise or other form of authorization for the operation
of a public utility to a corporation already in existence but without the
requisite proportion of Filipino capital. This is obvious from the context,
for the constitutional provision in question qualifies the terms
"franchise", "certificate" or "any other form of authorization" with the
phrase "for the operation of a public utility," thereby making it clear that
the franchise meant is not the "primary franchise" that invests a body of
men with corporate existence but the "secondary franchise" or the
privilege to operate as a public utility after the corporation has already
come into being. Initially, it is okay if the 60% condition is still not met.
J.R.S. Business Corp. v. Imperial Insurance (11 SCRA 634 [1964])
-Issue: whether the business name or trade name, franchise (right to
operate) and capital stocks of the petitioner are properties or property
rights which could be the subject of levy, execution and sale.
-Held: The primary franchise of a corporation, that is. the right to exist
as such, is vested 'in the individuals who compose the corporation and
not in the corporation itself (14 CJ. pp. 169, 161; Adams vs. Railroad,
supra; 2 Fletcher's Cyclopedia Corp. Sees. 1153, 1158; 3 Thompson
on Corporations [2d Ed.] Sees. 2863, 2864), and cannot be conveyed
in the absence of legislative authority ho to do
- The right to operate a messenger and express delivery service, by
virtue of a legislative enactment, is admittedly a secondary franchise
(R.A. No. 3260, entitled "An Act granting the JRS Business Corporation
a franchise to conduct a messenger and express service)" and, as
such, under our corporation law, is subject to levy and sale on execution
together and including all the property necessary for the enjoyment
thereof. The law however, indicates the procedure under which the
same (secondary franchise and the properties necessary for its
enjoyment) may ba sold under execution. Said franchise can be sold
under execution, when such sale is especially decreed and ordered in
the judgment and it becomes effective only when the sale is confirmed
by the Court after due notice (Sec. 56, Corp. Law). The compromise
agreement and the judgment based thereon, do not contain any special
decree or order making the franchise answerable for the judgment debt.
The same thing may be stated with respect to petitioner's trade name
or business name and its capital stock. Incidentally, the trade name or
business name corresponds to the initials of the President of the
petitioner corporation and there can be no serious dispute regarding
the fact that a trade name or business name and capital stock arc
necessarily included in the enjoyment of the franchise.
Tatad v. Garcia, Jr. (243 SCRA 436 [1995])
Issue: "Can respondent EDSA LRT Corporation, Ltd., a foreign
corporation own EDSA LRT III, a public utility?"
Held
-It is well to point out that the role of private respondent as lessor during
the lease period must be distinguished from the role of the Philippine
Gaming Management Corporation (PGMC) in the case of Kilosbayan,
Inc. v. Guingona, 232 SCRA 110 (1994). Therein, the Contract of Lease
between PGMC and the Philippine Charity Sweepstakes Office (PCSO)
was actually a collaboration or joint venture agreement proscribed
under the charter of the PCSO. In the Contract of Lease, PGMC, the
lessor obligated itself to build, at its own expense, all the facilities
necessary to operate and maintain a nationwide on-line lottery system
from whom PCSO was to lease the facilities and operate the same.
Upon due examination of the contract, the Court found that PGMC's
participation was not confined to the construction and setting up of the
on-line lottery system. It spilled over to the actual operation thereof,
becoming indispensable to the pursuit, conduct, administration and
control of the highly technical and sophisticated lottery system. In effect, Issue w/n transfers in 1987 of the shares of stock to the new
the PCSO leased out its franchise to PGMC which actually operated stockholders amount to a transfer of ETCI's franchise need
and managed the same. congressional approval
- Even the mere formation of a public utility corporation does not ipso Held: No. The sale of shares of stock of a public utility is governed
facto characterize the corporation as one operating a public utility. The by another law, i.e., Section 20(h) of the Public Service Act
moment for determining the requisite Filipino nationality is when the (Commonwealth Act No. 146). Pursuant thereto, the Public
entity applies for a franchise, certificate or any other form of Service Commission (now the NTC) is the government agency
authorization for that purpose vested with the authority to approve the transfer of more than 40%
- While private respondent is the owner of the facilities necessary to of the subscribed capital stock of a telecommunications company
operate the EDSA LRT III, it admits that it is not enfranchised to operate to a single transferee, thus
a public utility (Revised and Restated Agreement, Sec. 3.2; Rollo, p. • SEC Memorandum Circular 8,
57). In view of this incapacity, private respondent and DOTC agreed series of 2013.
that on completion date, private respondent will immediately deliver o Constitutional requirement of
possession of the LRT system by way of lease for 25 years, during at least 60% Filipino
which period DOTC shall operate the same as a common carrier and ownership applies not only to
private respondent shall provide technical maintenance and repair voting control of the
services to DOTC (Revised and Restated Agreement, Secs. 3.2, 5.1 corporation but also to the
and 5.2; Rollo, pp. 57-58, 61-62). Technical maintenance consists of beneficial ownership of the
providing (1) repair and maintenance facilities for the depot and rail corporations, it is therefore
lines, services for routine clearing and security; and (2) producing and imperative that such
distributing maintenance manuals and drawings for the entire system requirement apply uniformly
(Revised and Restated Agreement, Annex F). and across the board to all
classes of shares, regardless
Since DOTC shall operate the EDSA LRT III, it shall assume all the of nomenclature and
obligations and liabilities of a common carrier. For this purpose, DOTC category, comprising the
shall indemnify and hold harmless private respondent from any losses, capital of the corporation. The
damages, injuries or death which may be claimed in the operation or requirement of at least 60%
implementation of the system, except losses, damages, injury or death Filipino ownership must apply
due to defects in the EDSA LRT III on account of the defective condition separately to voting shares
of equipment or facilities or the defective maintenance of such and to the total outstanding
equipment or facilities (Revised and Restated Agreement, Secs. 12.1 shares of stock.
and 12.2; Rollo, p. 68). o “All covered corporation shall
at all times, observe the
constitutional or statutory
ownership requirement. For
In sum, private respondent will not run the light rail vehicles and collect purposes of determining
fees from the riding public. It will have no dealings with the public and compliance therewith, the
the public will have no right to demand any services from it. required percentage of
Filipino ownership shall be
Philippine Long Distance Telephone Co. v. National applied to BOTH a) total
Telecommunications Commission (190 SCRA 717, 732 [1990]). number of outstanding shares
of stock entitled to vote in the
 election of directors; AND b)
the total number of
outstanding shares of stock,
whether or not entitled to vote
in the election of directors.
• Corporation’s Constitutional
Rights
o Entitled to due process –
Smith Bell & Co. v. Natividad, 40 Phil. 136, 144 [1919]).
Issue- whether Act No. 2761 of the Philippine Legislature is valid or,
more directly stated, whether the Government of the Philippine Islands,
through its Legislature, can deny the registry of vessels in its coastwise
trade to corporations having alien stockholders.
Held :
To justify that portion of Act No. .2761 which permits corporations or
companies to obtain a certificate of Philippine registry only on condition
that they be composed wholly of citizens of the Philippine Islands or of
the United States or both, as not infringing Philippine Organic Law, it
must be done under some one of the exceptions here mentioned. This
must be done, moreover, having particularly in mind what is so often of
controlling effect in this jurisdiction our local experience and our
peculiar local conditions.
We are inclined to the view that while Smith, Bell & Co. Ltd., a
corporation having alien stockholders, is entitled to the protection
afforded by the-due process of law and equal protection of the laws
clause of the Philippine Bill of Rights, nevertheless, Act No. 2761 of the
Philippine Legislature, in denying to corporations such as Smith, Bell &
Co. Ltd., ;the right to register vessels in the Philippines coastwise trade,
does not belong to that vicious species of class legislation which must
always be condemned, but. does fall within authorized exceptions,
notably, within the purview of the police power, and so does not offend
against the constitutional provision.
Without any subterfuge, the apparent purpose of the Philippine
Legislature is seen to be to enact an anti-alien shipping act. The
ultimate purpose of the Legislature is to encourage Philippine ship-
building. This, without doubt, has, likewise, been the intention of the
United States Congress in passing navigation or tariff laws on different
occasions. The object of such a law, the United States Supreme Court
once said, was to encourage American trade, navigation, and ship-
building by giving American ship-owners exclusive privileges. (Old
Dominion Steamship Co. vs. Virginia [1905], 198 U. S., 299; Kent's
Commentaries, Vol. 3, p. 139.)
o Equal protection clause -
Smith Bell & Co. v. Natividad
Doctrine: a corporation is also a person under the equal protection
clause. Its properties cannot also be take for public use without just
compensation. Congress cannot likewise pass a law that impairs the
obligations of contracts entered into by a corporation.
Facts
Smith Bell & Co. is a corporation organized and existing under the laws
of the Philippines. A majority of its stockholders are British Subjects. It
is the owner of a motor vessel known as Bato built for it in the
Philippines. The Bato was brought to Cebu for the purpose of
transporting plaintiff’s merchandise between ports of islands.
Application was made at Cebu, the home port of the vessel for a
certificate of registry. However, the Collector of Customs refused to
issue said certificate for the reason that all the stock-holders of Smith,
Bell & Co. were not citizens of either the US or the PH.
Issue
W/n the Government of the Philippines, through its legislature, can deny
the registry of vessels in its coastwide trade to corporations having alien
stockholders
Held
No, Smith, Bell & Co., a corporation having alien stockholders, is
entitled to the protection afforded by due process of law and equal
protection of the laws clause of the Philippine Bill of Rights,
nevertheless, Act. 2761, in denying to corporations the right to
registered vessels in the Philippines coastwide trade, does not belong
to that vicious species of class legislation which must always be
condemned, but does fall within authorized exceptions, within the
purview of the police power, and so does not offend against the
constitutional provision. Private corporations are “persons” within the
scope of the guaranties in so far as their property is concerned.
 Unreasonable
o Searches
and Seizure –
Stonehill v. Diokno, 20 SCRA 383 [1967])
FACTS:
Stonehill et al, herein petitioners, and the corporations they form
were alleged to have committed acts in “violation of Central Bank Laws,
Tariff and Customs Laws, Internal Revenue (Code) and Revised Penal
Code.”
Respondents issued, on different dates, 42 search warrants
against petitioners personally, and/or corporations for which they are
officers directing peace officers to search the persons of petitioners and
premises of their offices, warehouses and/or residences to search for
personal properties “books of accounts, financial records,
vouchers, correspondence, receipts, ledgers, journals, portfolios,
credit journals, typewriters, and other documents showing all
business transactions including disbursement receipts, balance
sheets and profit and loss statements and Bobbins(cigarette
wrappers)” as the subject of the offense for violations of Central
Bank Act, Tariff and Customs Laws, Internal Revenue Code, and
Revised Penal Code.
The documents, papers, and things seized under the alleged
authority of the warrants in question may be split into (2) major groups,
namely:
(a) those found and seized in the offices of the aforementioned
corporations and
(b) those found seized in the residences of petitioners herein.
Petitioners averred that the warrant is null and void for being
violative of the constitution and the Rules of court by:
(2) money not mentioned in the warrants were seized;
(3) the warrants were issued to fish evidence for deportation cases
filed against the petitioner;
(4) the searches and seizures were made in an illegal manner; and
(5) the documents paper and cash money were not delivered to the
issuing courts for disposal in accordance with law.
The prosecution counters that the search warrants are valid and
issued in accordance with law; The defects of said warrants were cured
by petitioners consent; and in any event, the effects are admissible
regardless of the irregularity. The Court granted the petition and issued
the writ of preliminary injunction. However, by a resolution, the writ was
partially lifted dissolving insofar as paper and things seized from the
offices of the corporations.
ISSUE:
WON the search warrant issued is valid.
HELD:
NO the search warrant is invalid.
The SC ruled in favor of petitioners.
The constitution protects the people’s right against
unreasonable search and seizure. It provides; (1) that no warrant shall issue
but upon probable cause, to be determined by the judge in the manner set
forth in said provision; and (2) that the warrant shall particularly describe the
things to be seized. In the case at bar, none of these are met.
The warrant was issued from mere allegation that petitioners committed
a “violation of Central Bank Laws, Tariff and Customs Laws, Internal
Revenue (Code) and Revised Penal Code.” As a consequence, it was
impossible for the judges who issued the warrants to have found the
existence of probable cause, for the same presupposes the introduction
of competent proof that the party against whom it is sought has
performed particular acts, or committed specific omissions, violating a
given provision of our criminal laws.
As a matter of fact, the applications involved in this case do not allege
any specific acts performed by herein petitioners. It would be a legal heresy,
of the highest order, to convict anybody of a “violation of Central Bank Laws,
Tariff and Customs Laws, Internal Revenue (Code) and Revised Penal
Code,” — as alleged in the aforementioned applications — without
reference to any determinate provision of said laws or codes.
The warrants authorized the search for and seizure of records
pertaining to all business transactions of petitioners regardless of
whether the transactions were legal or illegal.
Thus, openly contravening the explicit command of the Bill of Rights —
that the things to be seized be particularly described — as well as
tending to defeat its major objective: the elimination of general
warrants.
However, SC emphasized that petitioners cannot assail the validity of
the search warrant issued against their corporation because petitioners
are not the proper party.
The petitioners have no cause of action to assail the legality of the
contested warrants and of the seizures made in pursuance thereof, for
the simple reason that said corporations have their respective
personalities, separate and distinct from the personality of herein
petitioners, regardless of the amount of shares of stock or of the interest
of each of them in said corporations, and whatever the offices they hold
therein may be. Indeed, it is well settled that the legality of a seizure
can be contested only by the party whose rights have been impaired
thereby and that the objection to an unlawful search and seizure is
purely personal and cannot be availed of by third parties.
o But a corporation is not
entitled to privilege against
self-incrimination –
o to 1986 which it has apparently already complied with, was issued
Bataan Shipyard & Engineering Co v. PCGG, 150 SCRA 181, 234-
235 (1987).
Doctrine: PCGG issued an order requiring BASECO to produce
corporate records in the exercise of its powers under EO No. 2 to
require all persons in the Philippines holding alleged ill-gotten wealth of
President Ferdinand Marcos and his alleged cronies to make full
disclosure of the same. BASECO questioned the order alleging that
there was violation of tis right against unreasonable searches and
seizures and self-incrimination. The SC rejected the argument because
there was in fact no search and seizure in the case and BASECO as a
corporation is not entitled to the right against self-incrimination.
Facts
BASECO, a private corporation challenges EO 1 and 2, the
sequestration, takeover and other orders issued, and acts done, in
accordance with said EO orders by the PCGG and/or its
Commissioners and agents, affecting said corporation.
On the basis of such sequestration order, Baide, acting for
PCGG, addressed a letter to the President and other officers of
petitioner firm requesting for the production of certain documents;
1. Stock transfer book
2. Legal documents
3. Yearly list of stockholder with their corresponding shares
4. audited financial statements such as balance sheets, etc.
BASECO objected:
1. No notice and hearing was accorded to them before its properties
and business were taken over;
2. The PCGG is not a court but purely investigative agency and
therefore not competent to act as a prosecutor and judge in the same
cause;
3. There is nothing in the issuances which envisions any proceedings,
process, or remedy by which petitioner may expeditiously challenge the
validity of the takeover after the same has been effected; and
4. Being directed against specified person, and in disregard of the
constitutional presumption of innocence and general rules and
procedure.
Further, it argues that the order to produce corporate records from 1973
without court authority and infringed its constitutional right against self-
incrimination and unreasonable search and seizure.
Issue
Whether or not documents ask in by PCGG would vitiate their right
against self-incrimination
Held
No. The right against self-incrimination has no application to
juridical persons. While an individual may lawfully refuse to answer
incriminating questions unless protected by an immunity statute, it does
not follow that a corporation, vested with special privileges and
franchises, may refuse to show its hand when charged with an abuse
of such privileges.
The right against self-incrimination has no application to juridical
persons. While an individual may lawfully refuse to answer incriminating
questions unless protected by an immunity statute, it does not follow
that a corporation, vested with special privileges and franchises, may
refuse to show its hand when charged with an abuse of such privileges.
* * corporations are not entitled to all of the constitutional protections
which private individuals have. * * They are not at all within the privilege
against self-incrimination, although this court more than once has said
that the privilege runs very closely with the 4th Amendment's Search
and Seizure provisions.It is also settled that an officer of the company
cannot refuse to produce its records in its possession upon the plea
that they will either incriminate him or may incriminate it." (Oklahoma
Press Publishing Co. v. Walling, 327 U.S. 186; emphasis, the Solicitor
General's).
* * The corporation is a creature of the state. It is presumed to be
incorporated for the benefit of the public. It received certain special
privileges and franchises, and holds them subject to the laws of the
state and the limitations of its charter. Its powers are limited by law. It
can make no contract not authorized by its charter. Its rights to act as a
corporation are only preserved to it so long as it obeys the laws of its
creation. There is a reserve right in the legislature to investigate its
contracts and find out whether it has exceeded its powers. It would be
a strange anomaly to hold that a state, having chartered a corporation
to make use of certain franchises, could not, in the exercise of
sovereignty, inquire how these franchises had been employed, and
whether they had been abused, and demand the production of the
corporate books and papers for that purpose. The defense amounts to
this, that an officer of the corporation which is charged with a criminal
violation of the statute may plead the criminality of such corporation as
a refusal to produce its books. To state this proposition is to answer it.
While an individual may lawfully refuse to answer incriminating
questions unless protected by an immunity statute, it does not follow
that a corporation, vested with special privileges and franchises may
refuse to show its hand when charged with an abuse of such privileges.
• Liability for Torts
- A corporation is civilly liable in the same manner as a natural
person for torts, because generally speaking, the rules
governing the liability of a principal or master for a tort
committed by an agent or servant are the same whether the
principal or masqter be a natural person or a corporation, and
whether the servant or agent or artificial person. That a principal
is liable for every tort which he expressly directs or authorizes,
is just as true of a corporation as a natural person (PNB v. CA,
G.R. No. L-27155, 1978).
- corporate officer who caused the tort act to be committed in the
name of the corporation is also personally liable as a joint-
tortfeasor. The failure of the corporate employer to comply with
a legal duty, such as under the Labor Code to grant separation
pay to employees constitutes tort and its stockholder who was
actively engaged in the management of the business should be
held personally liable (Naguiat v. NLRC, G.R. No. 116123,
1997).
- As a general rule, however, a banking corporation is liable
for the wrongful or tortuous acts and declarations of its
officers or agents within the course and scope of their
employment. A bank will be held liable for negligence of its
officers or agents when acting within the course and scope of
their employment. It may be liable for the tortuous acts of its
officers even as regards that species of tort of which malice is
an essential element. (PCIB v. CA)
-
-
PNB v. CA ( 83 SCRA 237 [1978])
Doctrine : Corporation is civilly liable in the same manner as a natural
person for torts.
Facts
There was a complaint filed by PHILAMGEN (Philippine American
General Insurance Co.) as surety against Rita Tapnio and Cecilio
Gueco for recovery of sum of money paid by PHILAMGEN to the PNB
on behalf of respondents Tapnio and Gueco, pursuant to an indemnity
agreement. Petitioner bank was made a third-party defendant by
Tapnio and Gueco on the theory that their failure to pay the debt was
due to the fault or negligence of the petitioner.
Plaintiff executed its Bond with defendant Rita as principal, in favor of
the PNB to guarantee the payment of defendant Rita’s account with
said Bank. In turn, to guarantee the payment of whatever amount the
bonding company would pay to the PNB, both defendants executed the
indemnity agreement, whatever amount the plaintiff would pay would
earn interest at the rate of 12% per annum, plus atty’s fees in the
amount of 15% of the whole amount due in case of court litigation. The
original amount was for 4k later reduced to 2k.
Defendant Rita claims that when the demand by plaintiff was made, she
did not consider herself to be indebted to the Bank because she had an
agreement with Jacobo Tuazon whereby she leased to him her unused
export sugar quota for the 1956-1957 agricultural year or for a total of
2,800 which was in excess of her obligation guaranteed by plaintiff’s
bond. This lease agreement was with the knowledge of the bank. But
the bank has placed obstacles to the consummating of the lease and
the delay caused by said obstacles forced Tuazon to rescind the least
contract. Thus, Rita filed a third-party complaint against the Bank to
recover from the latter any and all sums of money which may be
adjudged against her and in favor of the plaintiff plus moral damages.
[The quota was mortgaged to PNB, the contract of lease had to be
approved by said bank - 2.80 per picul dapat in which Jacobo agreed
but was then raised to P3 per picul which resulted in Jacobo rescinding
the contract.]
Issue
Whether or not PNB is liable for the damage cause due to the unjustified
refusal of PNB to approve said lease contract and unreasonable
insistence on the rental price of 3 instead of 2.80 which resulted in
Jacobo rescinding the contract of lease
Held
YES. Being an entity with a separate juridical personality, a corporation
can be held liable for torts committed by its officers under express
direction from the stockholders or directors, acting as a body.
A corporation is civilly liable in the same manner as natural persons for
torts, because "generally speaking, the rules governing the liability of a
principal or master for a tort committed by an agent or servant are the
same whether the principal or master be a natural person or a
corporation, and whether the servant or agent be a natural or artificial
person. All of the authorities agree that a principal or master is liable for
every tort which he expressly directs or authorizes, and this is just as
true of a corporation as of a natural person. A corporation is liable,
therefore, whenever a tortious act is committed by an officer or
agent under express direction or authority from the stockholders
or members acting as a body, or, generally, from the directors as
the governing body."
The unreasonableness of the position adopted by petitioner’s BOD is
shown by the fact that the difference between P2.80 per picul offered
by Tuazon and the P3 per picul demanded by the Board amounted to
only 200 pesos.
While it is true that the petitioner had the ultimate authority of approving
or disapproving the proposed leased since the quota was mortgaged to
the bank, the latter cannot certainly escape its responsibility of
observing, for the protection of the interest of private respondents, that
degree of care, precaution and vigilance which the circumstances justly
demand in approving or disapproving the lease of said sugar quota.
The law makes it imperative that every person “must in the exercise of
his rights and in the performance of his duties, act with justice, give
everyone his due and observe honesty and good faith.
In failing to observe the reasonable degree of care and vigilance which
the surrounding circumstances reasonably impose, petitioner is liable
for the damages caused on private respondents.
Under Article 21 of the New Civil Code, "any person who wilfully causes
loss or injury to another in a manner that is contrary to morals, good
customs or public policy shall compensate the latter for the damage."
The afore-cited provisions on human relations were intended to expand
the concept of torts in this jurisdiction by granting adequate legal
remedy for the untold number of moral wrongs which is impossible for
human foresight to specifically provide in the statutes.
Sergio F. Naguiat v. NLRC (269 SCRA 564 [1997])
Facts
Petitioner CFTI held a concessionarie’s contract with the Army
Air Force Exchange Services AAFES for the operation of taxi services
within Clark Air Base. Sergio Naguiat was CFTI’s president while
Antolin Naguiat was its vice president.
Individual respondents were previously employed by CFTI as taxicab
drivers. However, due to the phase-out of the US military bases in the
PH, the AAFES was dissolved and the services of individual
respondents were officially terminated.
The AAFES Taxi Driver’s Association, through its local president
Castillo, and CFTI held negotiations as regards separation benefits that
should be awarded in favor of the drivers. They both agreed that the
separated drivers will be given 500 pesos for every year of service as
severance pay. Most accepted but individual respondents refused to
accept theirs. Individual respondents filed a complaint against “Sergio
F Naguiat doing business under the name and style Sergio F Naguiat
Enterprises Inc, AAFES with Mark Hooper as Area Service Manager
and AAFES Taxi Drivers Association with Eduardo Castillo as President
for payment of separation pay due to termination/phase-out. Said
complaint was later amended to include additional taxi drivers who were
similarly situated as complainants and CFTI with Antolin Naguiat as VP
and GM as party respondent.
Private respondents alleged that they were regular employees of
Naguiat Enterprises, altho their individual applications for employment
were approved by CFTI and have just been assigned to Naguiat
Enterprises.
Petitioners claimed that the cessation of business of CFTI was due to
“Great financial losses and lost business opportunity” resulting from the
phase-out of Clark Air Base.
A resolution was passed by the NLRC stating that in discharging the
obligations, Sergio Naguiat Enterprises, headed by Sergio Naguiat and
Antolin Naguiat should be joined as indispensable party whose liability
is joint and several.
Now, petitioners insist that Sergio Naguiat Enterprises is a separate
and distinct entity which cannot be held jointly and severally liable for
the obligations of CFTI. And similarly, Sergio Naguiat and Antolin
Naguat were mere officers and stockholders of CFTI and thus, could
not be held personally accountable for corporate debts.
Issue
Are officers of corporations ipo facto liable jointly and severally with the
companies they represent for the payment of separation pay? (YES
(sergio lang)) (but yung naguiat enterprises di siya liable cause there
was a failure to substantiate that naguiat enterprises managed,
supervised and controlled their employment.)
Held
YES. Petitioner corporation's officer (president) Sergio Naguiat
is held solidarity liable for corporate tort because he has actively
engaged in the management and operation of CFTI, a close
corporation.
Sergio Naguiat, in his capacity as president of CFTI cannot be
exonerated from joint and several liability in the payment of separation
pay to individual respondents. As the president of CFTI who actively
managed the business, he falls within the meaning of an employer
contemplated by the Labor Code, who may be held jointly and severally
liable for the obligations of the corporation to its dismissed employees.
Moreover, petitioners conceded that both CFTI and Naguiat
Enterprises were “close family corporations” owned by the Naguiat
Family. Section 100 of the Corporation Code also imposes personal
liability upon the stockholder actively managing or operating the
business and affairs of the close corporation.
In this case, there was corporate tort (a breach of legal duty) since CFTI
failed to comply with its duty or obligation found in Article 283 of the
Labor Code which mandates the employer to grant separation pay to
employees in case of closure or cessation of operations or undertaking
not due to serious business losses or financial reverses (since sabi ng
LA/NLRC wala naman serious business losses) Consequently, its
stockholders who was actively engaged in the management or
operation of the business should be held personally liable.
Further, in posting the surety bond required by the Court for the
issuance of a TRO, only Sergio Naguiat, in his individual and
personal capacity principally bound himself to comply with the
obligation- to guarantee the payment to private respondents of
any damages which may incur by reason of the TRO.
THE COURT FINDS NO APPLICATION TO THE RULE THAT A
CORPORATE OFFICER CANNOT BE HELD SOLIDARILY LIABLE
WITH A CORPORATION IN THE ABSENCE OF EVIDENCE THAT
HE ACTED IN BAD FAITH OR MALICE.
[[NAGUIAT ENTERPRISE is not liable since as a separate corporation
it does not appear to be involved at all in the taxi business. The private
respondents were confused about the personalities of Sergio Naguiat
as an individual who was the president of CFTI and Sergio Naguiat
Enterprises as a separate corporate entity with a separate business.]]
[[Antolin Naguiat is also not liable since it had not been shown that he
had acted in such capacity as general manager and no evidence on the
extent of his participation in the management or operation of the
business was proffered.]]
Philippine Commercial International Bank vs. Court of Appeals
(G.R. No. 121413, 29 January 2001)
Facts
Ford Philippines drew 4 checks in favor of the Commissioner of
Internal Revenue for payment of its percentage taxes. The checks were
deposited therein but the 2 checks were replaced with IBAA’s
managers’ check based on a request made by Rivera, Ford’s General
Ledger Accountant on an alleged error in the computation of the tax
due without IBAA verifying the authority of Rivera. These manager’s
checks were later deposited in another bank and misappropriated by
the syndicate. The last two checks were cleared by the Citibank but
failed to discover that the clearing stamps do not bear any initials. The
proceeds of the checks were also illegally diverted or switched by
officers of PCIB-members of the syndicate, who eventually encashed
them. Ford which was compelled to pay anew the percentage taxes,
sued in two actions for collection against the two banks.
CA held both banks liable for negligence in the selection and
supervision of their employees resulting in the erroneous encashment
of the checks.
Issue W/n both banks are liable for torts
Held
Yes, As a general rule, however, a banking corporation is liable for the
wrongful or tortuous acts and declarations of its officers or agents within
the course and scope of their employment. A bank will be held liable for
negligence of its officers or agents when acting within the course and
scope of their employment. It may be liable for the tortuous acts of
its officers even as regards that species of tort of which malice is
an essential element. A bank holding out its officers and agents
as worthy of confidence will not be permitted to profit by the
frauds these officers or agents were enabled to perpetrate in the
apparent course of their employment; nor will it be permitted to
shirk its responsibility for such frauds, even though no benefit
may accrue to the bank therefrom. For the general rule is that a
bank is liable for the fraudulent acts or representations of an
officer or agent acting within the course and apparent scope of his
employment or authority. And if an officer or employee of a bank, in
his official capacity, receives money to satisfy an evidence of
indebtedness lodged with his bank for collection, the bank is liable for
his misappropriation of such sum.
Further, banking business is so impressed with public interest where
the trust and confidence of the public in general is of paramount
importance such that the appropriate standard of diligence must be very
high, if not the highest, degree of diligence.
• Criminal Liability of a Corporation:
- GR: Corporations cannot commit felonies under the RPC for it
is incapable of the requisite intent to commit these crimes.It also
cannot commit crimes that are punishable under special laws
because crimes are personal in nature requiring personal
performance of overt acts. A corporation cannot be arrested and
imprisoned; hence, cannot be penalized for a crime punishable
by imprisonment.
- Exception: When a law expressly provides that a corporation
may be proceeded against criminally, the responsible officer will
be held personally liable for the crimes committed by the
corporation. However, such liability will only attach to the officer
when the corporation is directly required by law to do an act in
a given manner, and the same law makes the person who fails
to perform the act in the prescribed manner expressly liable
criminally (Sia v. Court of Appeals, G.R. No. 108222, 1997)
West Coast Life Ins. Co. v. Hurd (27 Phil. 401 [1914])
Facts
The petitioner is a foreign life-insurance corporation, duly organized
under and by virtue of the laws of the State of California, doing business
regularly and legally in the Philippine Islands. The assistant prosecuting
attorneys of the city of Manila filed an information in a criminal action in
the RTC against the plaintiff, said corporation and also against John
Northcott and Manuel Grey, who were agent and employee of West
Coast Life Insurance, charging said corporation and individuals with the
crime of libel.
It was alleged that West Coast Insurance Company, John Northcotth
and Manuel Grey caused damage and exposed Insular Life Insurance
Company to public hatred and contempt by printing a large number of
circulars containing a malicious defamation and libel and publishing and
distributing the same to policyholders and prospective policy holders of
Insular Life Insurance.
Plaintiff and the accused filed a motion to quash on the ground that the
court had no jurisdiction over the said company, there being no
authority in the court for the issuance of the process. The basis of the
action is that the RTC has no power or authority, under the laws of the
Philippines, to proceed against a corporation, as such criminally, to
bring it into court for the purpose of making it amenable to the criminal
laws. It is contended that the court had no jurisdiction to issue the
process in evidence against the plaintiff corporation; that the issuance
and service thereof upon the plaintiff corporation were outside of the
authority and jurisdiction of the court, were authorized by no law,
conferred no jurisdiction over said corporation, and that they were
absolutely void and without force or effect.
Issue : Whether or not the court may, of itself and on its own motion,
create not only a process but a procedure by which the process may
be made effective
Held
NO. There is no provision in the law relating to practice and
procedure in criminal actions whereby a corporation, as such, may be
proceeded against criminally and brought into court.
The authority of the courts of the PH does not extend that far. While
having the inherent powers which usually go with courts of general
jurisdiction, we are of the opinion that, under the circumstances of their
creation, they have only such authority in criminal matters as is
expressly conferred upon them by statute or which it is necessary to
imply from such authority in order to carry out fully and adequately the
express authority conferred.
To bring a corporation into court criminally requires many additions to
the present criminal procedure. While it may be said to be the duty of
courts to see to it that criminals are punished, it is no less their duty to
follow prescribed forms of procedure and not to gout upon unauthorized
manner.
People v. Tan Boon Kong (54 Phil. 607 [1930])
Facts
An order of the Judge of the 23rd district is being appealed sustaining
a demurrer to an information charging the defendant Tan Boon Kong
with the violation of section 1458 of Act No. 2711 as amended. (The
offense charged must be regarded as committed by the corporation and
not by its official or agents - Ruling of court below hence this appeal)
During the 4 quarters of 1924 in Iloilo, the accused, as manager of the
Visayan General Supply Co, Inc, a corporation organized under the
laws of the Philippines and engaged in the purchase and sale of sugar,
“bayon”, coprax and other native products and as such subject to the
payment of internal revenue taxes upon its sales, criminally decaled in
1924, for the purpose of taxation only the sum of 2,352,761 thereby
failing to declare for the purpose of taxation the amount of 190,541.50
and voluntarily and illegally not paying the Government as internal-
revenue percentage taxes the sum of 2,960.12.
Issue
As manager of the corporation, is Tan Boon Koong criminally liable for
violation of section 1458 of Act 2711 for the benefit of said corporation
Held
YES. A corporation can act only through its officers and agents, and
where the business itself involves a violation of the law, the correct rule
is that ALL WHO PARTICIPATE IN IT ARE LIABLE.
In this case, the information or complaint alleges that the defendant was
the manager of a corporation which was engaged in business
merchandise and as such manager, HE MADE A FALSE RETURN, for
purposes of taxation of the total amount of sales made by said
corporation during 1924.
As the filing of such false returns constitute a violation of law, the
defendant, as the author of the illegal act, must necessarily answer for
its consequences, provided that the allegations are proven. (An act
directly ordained by law to be performed by the corporation)
Sia v. CA (121 SCRA 655 [1983])
Doctrine : Here, the crime involved was estafa under the RPC, for the
alleged failure to return the goods covered by a trust receipt or to
account for the proceeds of the sale of the same goods. The SC
acquitted the president who signed the trust receipt in question
explaining that, “in the absence of an express provision of law making
the petitioner liable for the criminal offense committed by the
corporation of which he is a president as in fact there is no such
provision in the RPC under which the petitioner is being prosecuted,
the existence of criminal liability on his art may not be said to be beyond
any doubt.”
Facts
Jose Sia, was the General Manager of the Metal Manufacturing
Company of the Philippines (MEMAP). In this case defraud the
Continental Bank, a banking institution duly organized and doing
business in Manila. The said accused, in his capacity as president and
general manager of the Metal Manufacturing of the Philippines
(MEMAP) and on behalf of the said company, obtained delivery of
150M/T Cold Rolled Steel Sheets valued at 71,023.60 under a trust
receipt agreement, which cold rolled steel sheets were consigned to the
Continental Bank, under the express obligation on the part of said
accused of holding the said steel sheets in trust and selling them and
turning over the proceeds of the sale to the Continental Bank; but the
said accused, once in possession of the goods, far from complying with
his obligation and despite demands, failed and refused to return the
said cold rolled sheets or the proceeds thereof, if sold. The said
accused misappropriated the said amount to the damage and prejudice
of Continental Bank.
Issue W/n petitioner Jose Sia, having only acted for and in behalf of the
Metal Company, as president thereof in dealing with the complainant,
the Continental Bank, may be liable for the crime charged.
Held
NO. Corporation officers are not criminally liable for acts imposed by
agreement as distinguished from the Tan Boon Kong case. In Tan Boon
Koong, the corporation was directly required by law to do an ad in a
given manner, and the same law makes the person who fails to perform
the act in the prescribed manner expressly liable criminally.
HOWEVER, IN THE PRESENT CASE, The act is imposed by
agreement of parties, as a practice observed in the usual pursuit of a
business or a commercial transaction. The offense may arise, if at all,
from the peculiar terms and conditions agreed upon by the parties to
the transaction, not by direct provision of the law. The intention of the
parties, therefore, is a factor determinant of whether a crime was
committed or whether a civil obligation alone was intended by the
parties.
In the absence of an express provision of law making the petitioner
liable for the criminal offense committed by the corporation of which he
is a president there is no such provisions in the RPC under which
petitioner is being prosecuted, the existence of a criminal liability on his
part may not be said to be beyond any doubt.
o Articles 102 and 103,
Revised Penal Code
Article 102. Subsidiary civil liability of innkeepers, tavernkeepers
and proprietors of establishments. - In default of the persons
criminally liable, innkeepers, tavernkeepers, and any other persons or
corporations shall be civilly liable for crimes committed in their
establishments, in all cases where a violation of municipal ordinances
or some general or special police regulation shall have been committed
by them or their employees.
Innkeepers are also subsidiarily liable for the restitution of goods taken
by robbery or theft within their houses from guests lodging therein, or
for the payment of the value thereof, provided that such guests shall
have notified in advance the innkeeper himself, or the person
representing him, of the deposit of such goods within the inn; and shall
furthermore have followed the directions which such innkeeper or his
representative may have given them with respect to the care and
vigilance over such goods. No liability shall attach in case of robbery
with violence against or intimidation of persons unless committed by
the innkeeper's employees.
Article 103. Subsidiary civil liability of other persons. - The subsidiary
liability established in the next preceding article shall also apply
to employers, teachers, persons, and corporations engaged in any
kind of industry for felonies committed by their servants, pupils,
workmen, apprentices, or employees in the discharge of their
duties.
Times, Inc. v. Reyes (39 SCRA 303 [1971])
Facts
The petition alleges that petitioner Time, Inc. is an American
corporation with principal offices at Rockefeller Center, New York City,
N.Y., and is the publisher of "Time," a weekly news magazine; the
petition, however, does not allege the petitioner's legal capacity to sue
in the courts of the Philippines.
In the aforesaid Civil Case No. 10403, therein plaintiffs (herein
respondents) Antonio J, Villegas and Juan Ponce Enrile seek to recover
from the herein petitioner damages upon an alleged libel arising from a
publication of Time (Asia Edition) magazine, in its issue of 18 August
1967, of an essay, entitled "Corruption in Asia, which referred to Plaintiff
Mayor Antonio J. Villegas as a case in point in connection with graft,
corruption and nepotism and that Juan Ponce Enrile helped the plaintiff
under curious circumstances and that the Plaintiff mayor lent money to
him because they are compadre.
The case was deferred by the judge for the reason that "the rule laid
down under Republic Act No. 4363, amending Article 360 of the
Revised Penal Code, is not applicable to actions against non-resident
defendants, and because questions involving harassments and
inconvenience, as well as disruption of public service do not appear
indubitable
Issue
Whether or not Republic Act 4363 (which introduced amendments to
the Penal Code) is applicable to actions against a foreign corporation
or non-resident defendant.
Held
No, Republic Act 4363 is not applicable to action against a foreign
corporation or non-resident defendant. It is a fundamental rule of
international jurisdiction that no state can by its laws, and no court
which is only a creature of the state, can by its judgments or decrees,
directly bind or affect property or persons beyond the limits of the state.
Not only this, but if the accused is a corporation, no criminal action can
lie against it, whether such corporation or resident or non-resident. At
any rate, the case filed by respondents-plaintiffs is case for damages.
[[Since a corporation as a person is a mere legal fiction, it cannot be
proceeded against criminally because it cannot commit a crime in which
personal violence or malicious intent is required. Criminal action is
limited to the corporate agents guilty of an act amounting to a crime and
never against the corporation itself.]]
People v. Concepcion (44 Phil. 129 [1922])
Facts
By telegrams and a letter of confirmation to the manager of the
Aparri branch of the Philippine National Bank, Venancio Concepcion,
President of the Philippine National Bank, between April 10, 1919, and
May 7, 1919, authorized an extension of credit in favor of "Puno y
Concepcion, S. en C." in the amount of P300,000. This special
authorization was essential in view of the memorandum order of
President Concepcion dated May 17, 1918, limiting the discretional
power of the local manager at Aparri, Cagayan, to grant loans and
discount negotiable documents to P5,000, which, in certain cases,
could be increased to P10,000. Pursuant to this authorization, credit
aggregating P300,000, was granted the firm of "Puno y Concepcion, S.
en C," the only security required consisting of six demand notes. The
notes, together with the interest, were taken up and paid by July 17,
1919.
Venancio Concepcion, as President of the Philippine National Bank and
as member of the board of directors of this bank, was charged in the
Court of First Instance of Cagayan with a violation of section 35 of Act
No. 2747. He was found guilty by the Honorable Enrique V. Filamor,
Judge of First Instance, and was sentenced to imprisonment for one
year and six months, to pay a fine of P3,000, with subsidiary
imprisonment in case of insolvency, and the costs.
Section 35 of Act No. 2747, effective on February 20, 1918, reads as
follows: "The National Bank shall not, directly or indirectly, grant loans
to any of the members of the board of directors of the bank nor to agents
of the branch banks." Section 49 of the same Act provides : "Any person
who shall violate any of the provisions of this Act shall be punished by
a fine not to exceed ten thousand pesos, or by imprisonment not to
exceed five years, or by both such fine and imprisonment." These two
sections were in effect in 1919 when the alleged unlawful acts took
place, but were repealed by Act No. 2938, approved on January
30,1921.
Issue
Was the granting of a credit of P300,000 to the copartnership "Puno y
Concepcion, S. en C." by Venancio Concepcion, President of the
Philippine National Bank, in violation of section 35 of Act No. 2747,
penalized by this law?
Held
Yes, the granting of a credit of P300,000 to the copartnership "Puno y
Concepcion, S. en C." by Venancio Concepcion, President of the
Philippine National Bank, in violation of section 35 of Act No. 2747, is
penalized by this law.
Counsel argue that since the prohibition contained in section 35 of Act
No. 2747 is on the bank, and since section 49 of said Act provides a
punishment not on the bank when it violates any provision of the law,
but on a person violating any provision of the same, and imposing
imprisonment as a part of the penalty, the prohibition contained in said
section 35 is without penal sanction.
The answer is that when the corporation itself is forbidden to do an act,
the prohibition extends to the board of directors, and to each director
separately and individually.
• Recovery of Moral Damages and
Other Damages:
- GR: Corporation cannot recover damages because it cannot
suffer physical suffering and mental anguish (Prime White
Cement v. IAC)
- Exception : a corporation with good reputation, if besmirched, is
allowed to recover moral damages upon proof of existence of
factual basis of damage and its causal relation.
Mambulao Lumber Co. v. Philippine National Bank (22 SCRA 359
[1968])
Facts
Mambulao Lumber applied for an industrial loan of P155,000 with the
respondent PNB and the former offered real estate, machinery, logging
and transportation equipment as collaterals. The latter approved the
same for a loan of P100,000 only. To secure the payment of the loan,
the plaintiff mortgaged to defendant PNB a parcel of land, together with
the buildings and improvements existing thereon. Later on, petitioner
failed to pay and stopped its operation. PNB then moved for foreclosure
and sale of the properties mortgaged to them. After the properties are
sold, they sent a bank draft to PNB alleging the full settlement of the
obligation after applying the proceeds of the sale. They averred that the
foreclosure of chattel mortgage is no longer needed for being fully paid
and that it could be legally effected at a place other than the City of
Manila, as stipulated in their contract. PNB still alleged that there was
still a remaining balance and a foreclosure sale was still held.
Issue W/n Mambulao Lumber is entitled to moral damages.
Held
No, there is no legal or factual basis. Obviously, an artificial person like
herein appellant corporation cannot experience physical sufferings,
mental anguish, fright, serious anxiety, wounded feelings, moral shock
or social humiliation which are the basis of moral damages. A
corporation may have a good reputation which, if besmirched, may also
be a ground for the award of moral damages. The same cannot be
considered under the facts of this case, however, not only because it is
admitted that herein appellant had already ceased in its business
opera-tion at the time of the foreclosure sale of the chat-tels, but also
for the reason that whatever adverse effect the foreclosure sale of the
chattels could have upon its reputation or business standing would
undoubtedly be the same whether the sale was conducted at Jose
Panganiban, Camarines Norte, or in Manila which is the place agreed
upon by the parties in the mortgage contract.
But for the wrongful acts of herein appellee bank and the deputy sheriff
of Camarines Norte in proceeding with the sale in utter disregard of the
agreement to have the chattels sold in Manila as pro-vided for in the
mortgage contract, to which their attentions were timely called by herein
appellant, and in disposing of the chattels in gross for the mis-erable
amount of P4,200.00, herein appellant should be awarded exemplary
damages in the sum of P10,000.00. The circumstances of the case
also warrant the award of P3,000.00 as attorney's fees for herein
appellant.
Prime White Cement Corp. v. Intermediate Appellate Court
(220 SCRA 103, 113-114 [1993])
Facts
Plaintiff Te 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 5 years. Right after entering into such agreement, Te advertised
that he is the sole dealer of cement in Mindanao. He then entered into
various contracts with the sub-dealers who approached him.
Falcon and Trazo were not authorized by the Board of PWCC to enter
into the contract, but the Board wanted to amend the contract and
increase the selling price and to make the contract effective only for 3
months. Such offer was refused by Te and PWCC awarded the contract
to someone else.
Trial court said that the corporation is 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 basis that the
corporation is barred by principle of estoppel because Trazo and
Falcon, president and chairman of the Board, created the impression
that they were duly clothed with the authority to enter into the said
agreement and sign the same.
Issue
whether or not the "dealership agreement" referred by the President
and Chairman of the Board of petitioner corporation is a valid and
enforceable contract.
Held
No, the said agreement is not valid. Under the Corporation Law, which
was then in force at the time this case arose, 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. Here,
however, 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. 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.
Also, 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. Here, the contract was
neither fair nor reasonable.
The contract between PWCC and TE through Falcon and Trazo was
not reasonable because the selling price was very low and the contract
does not provide protection of PWCC from inflation. 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. The Court believes that the fixed price of P9.70 per
bag for a period of five years was not fair and reasonable.
However, the Court did not award 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.
LBC Express, Inc. v. Court of Appeals
(236 SCRA 602 [1994])
Facts
Private respondent Adolfo Carloto, incumbent President-Manager of
private respondent Rural Bank of Labason, as in Cebu transacting with
the Central Bank. He was supposed to go to Manila to move forward
with the transaction on or before 21 November 1984. Before going, he
called his sister to send him money (P1000) for his pocket money and
some papers and documents. On November 17, the documents arrived
without the cashpack. Respondent Carloto made personal follow-ups
on that same day, and also on November 19 and 20 at LBC’s office, but
the latter failed to deliver to him the cashpack. Because of this, he was
not able to move forward with the transaction with Central Bank on time
and Rural Bank was penalized in the amount of P32,000.
RTC: Ordered LBC to pay Carloto and Rural Bank of Labason moral
damages for P10,000, exemplary for P5,000, attorney’s fees for
P3,000, and to reimburse the Rural Bank for P32,000 which it paid as
penalty interest to the Central Bank of the Philippines.
Issue
W/n Rural Bank, being an artificial person should be awarded moral
damages.
Held
No, the Rural Bank of Labason, Inc, should not be awarded moral
damages as it is an artificial person.
Moral damages are granted in recompense for physical suffering,
mental anguish, fright, serious anxiety, besmirched reputation,
wounded feelings, moral shock, social humiliation, and similar injury. A
corporation, being an artificial person and having existence only in legal
contemplation, has no feelings, no emotions, no senses; therefore, it
cannot experience physical suffering and mental anguish. Mental
suffering can be experienced only by one having a nervous system and
it flows from real ills, sorrows, and griefs of life- all of which cannot be
suffered by respondent bank as an artificial person.
Acme Shoe, Rubber & Plastic Corp. v. Court of Appeals
(260 SCRA 714 [1996])
Facts
Petitioner Chua Pac, the president and general manager of co-
petitioner "Acme Shoe, Rubber & Plastic Corporation," executed on 27
June 1978, for and in behalf of the company, a chattel mortgage in favor
of private respondent Producers Bank of the Philippines. The mortgage
stood by way of security for petitioner's corporate loan of P3M. The
chattel mortgage contained a clause that provided for the mortgage to
stand as security for all other obligations contracted before, during and
after the constitution of the mortgage.
Later, the three million pesos was paid, the corporation obtained more
amounting to P2.7M, which was paid. Again, there was another loan of
P1M to the corporation. However, this time the corporation was not able
to pay and the respondent bank thereupon applied for an extrajudicial
foreclosure of the chattel mortgage, hereinbefore cited, with the Sheriff
of Caloocan City, prompting petitioner corporation to forthwith file an
action for injunction, with damages and a prayer for a writ of preliminary
injunction, before the Regional Trial Court of Caloocan City. Ultimately,
the court dismissed the complaint and ordered the foreclosure of the
chattel mortgage. It held petitioner corporation bound by the
stipulations, aforequoted, of the chattel mortgage.
One of petitioner corporation's prayer is that the case should be
remanded to the trial court for a specific finding on the amount of
damages it has sustained "as a result of the unlawful action taken by
respondent bank against it."
Issue
W/n the corporation should be awarded damages
Held
No, the corporation is not entitled to damages. The Court reiterated its
ruling in LBC Express, Inc. V. CA:
"Moral damages are granted in recompense for physical suffering,
mental anguish, fright, serious anxiety, besmirched reputation,
wounded feelings, moral shock, social humiliation, and similar injury. A
corporation, being an artificial person and having existence only in legal
contemplation, has no feelings, no emotions, no senses; therefore, it
cannot experience physical suffering and mental anguish. Mental
suffering can be experienced only by one having a nervous system and
it flows from real ills, sorrows, and griefs of life - all of which cannot be
suffered by respondent bank as an artificial person.”
While Chua Pac is included in the case, the complaint, however, clearly
states that he has merely been so named as a party in representation
of petitioner corporation.
Solid Homes, Inc. v. Court of Appeals (275 SCRA 267 [1997])
Doctrine: A corporation — being an artificial person which has no
feelings, emotions or senses, and which cannot experience physical
suffering or mental anguish — is not entitled to moral damages.
FACTS:
Solid Homes mortgaged some of its real estate properties to State
Financing Center in order to obtain loans from the latter. Solid Homes,
however, was unable to pay the loan obligations despite repeated
demands prompting State Financing to file a petition for extrajudicial
foreclosure of the mortgages.
Prior to the public auction sale, Solid Homes and State Financing
entered into a Memorandum of Agreement whereby State Financing
agreed to suspend the foreclosure provided, among others, that Solid
Homes pay State Financing 60% equivalent of the principal obligation
within 180 days, otherwise the document shall automatically operate to
be an instrument of dacion en pago without executing any document to
such an effect.
When Solid Homes failed to pay the agreed amount, State Financing
registered the Memorandum with Register of Deeds and Solid Homes’
TCTs over the mortgaged properties were cancelled and new ones
were issued in favor of State Financing.
Solid Homes asserted that the Memorandum is null and void because
State Financing, as mortgagee creditor, would be able to appropriate
unto itself the properties Solid Homes mortgaged (in contravention with
Art. 2088, NCC). It sought to have the Memorandum annulled for being
violative of pactum commissorium.
RTC found the Memorandum valid and binding and that it is a true sale
with right to repurchase. It also denied claims for damages of both
parties.
Solid Homes argues that its claim for damages resulted from the bad
faith and malice of State Financing in deliberately failing to annotate
Solid Homes’ right to repurchase the subject properties in their
consolidated titles which prevented Solid Homes from generating funds
from prospective buyers to enable it to comply with the Agreement.
ISSUE: W/N Solid Homes is entitled to damages – NO.
RULING:
State Financing’s failure to observe the proper procedure in affecting
the consolidation of the titles in its name does not automatically entitle
the petitioner to damages absent convincing proof of malice and bad
faith on the part of private respondent and actual damages suffered by
petitioner as a direct and probable consequence thereof.
Moral damages -- Neither can moral damages be awarded to petitioner.
It’s been consistently held that a corporation — being an artificial
person which has no feelings, emotions or senses, and which cannot
experience physical suffering or mental anguish — is not entitled to
moral damages.
While the amount of exemplary damages need not be proved, petitioner
must show that he is entitled to moral or actual damages; but the
converse obtains in the instant case. Award of attorney's fees is
likewise not warranted when moral damages are eliminated and
entitlement thereto is not demonstrated by the claimant.
Asset Privatization Trust v. Court of Appeals (300 SCRA 579
[1998])
Doctrine: Under Article 2217 of the Civil Code, moral damages include
besmirched reputation which a corporation may possibly suffer. A
corporation whose overdue and unpaid debts to the Government alone
reached a tremendous amount of 22 Billion Pesos cannot certainly
have a solid business reputation to brag about.
FACTS:
Marinduque Mining and Industrial Corporation (MMIC) entered into a
Mortgage Trust Agreement with PNB and DBP whereby MMIC, as
mortgagor, agreed to constitute a mortgage in favor of PNB and DBP
as mortgagees, over all MMIC's assets. MMIC was unable to pay its
outstanding loans to PNB and DBP reaching a total Government
exposure of over Php 22B.
As the loans by PNB and DBP became overdue and any restructuring
program relative to the loans was no longer feasible, the two bank-
mortgagees decided to exercise their right to extrajudicially foreclose
the mortgages in accordance with the Mortgage Trust Agreement. The
assets were sold to PNB and later transferred to herein petitioner Asset
Privatization Trust (APT).
MMIC’s stockholders filed a derivative suit against DBP and PNB for
Annulment of Foreclosures, Specific Performance and Damages
(moral and exemplary damages).
RTC dismissed the complaint after MMIC and APT agreed to submit
the case to arbitration by entering into a Compromise and Arbitration
Agreement. The arbitration committee, thereafter, ordered APT to,
among others, pay MMIC damages (moral and exemplary) which shall
be offset by APT to the outstanding balance of MMIC with DBP and
PNB. RTC confirmed the Arbitration Committee’s award
CA also denied APT’s special civil action for certiorari.
ISSUE: W/N MMIC’s claim for damages was rightfully granted – NO.
RULING:
PNB and DBP had the legitimate right to foreclose of the mortgages of
MMIC whose obligations were past due. The foreclosure was not a
wrongful act of the banks and, therefore, could not be the basis of any
award of damages. There was no financial restructuring agreement to
speak of that could have constituted an impediment to the exercise of
the banks' right to foreclose.
MMIC could not have been entitled to a big amount of moral damages
when its credit reputation was not exactly something to be considered
sound and wholesome. Under Article 2217 of the Civil Code, moral
damages include besmirched reputation which a corporation may
possibly suffer. A corporation whose overdue and unpaid debts to the
Government alone reached a tremendous amount of P22 Billion Pesos
cannot certainly have a solid business reputation to brag about.
Moreover, MMIC was not impleaded as a party. It was not joined as a
party plaintiff or party defendant at any stage of the proceedings. As it
is, the award of damages to MMIC, which was not a party before the
Arbitration Committee, is a complete nullity.
Settled is the doctrine that in a derivative suit, the corporation is the real
party in interest while the stockholder filing suit for the corporation's
behalf is only a nominal party. The corporation should be included as a
party in the suit. The reason is that it is its cause of action that is being
litigated and so that it may no
ABS-CBN Broadcasting Corp. v. Court of Appeals (301 SCRA 589
[1999])
Doctrine: Moral damages are in the category of an award designed to
compensate the claimant for actual injury suffered and not to impose a
penalty on the wrongdoer. The award of moral damages cannot be
granted in favor of a corporation because, being an artificial person and
having existence only in legal contemplation, it has no feelings, no
emotions, no senses.
FACTS:
ABS-CBN and VIVA, through VIVA’s representative Del Rosario,
entered into a Film Exhibition Agreement whereby Viva gave ABS-CBN
an exclusive right to exhibit some Viva films.
VIVA offered 36 titles from which ABS-CBN may exercise its right of
first refusal. Del Rosario offered a package of 104 movies for Php60M.
However, upon meeting with Lopez of ABS-CBN, Lopez claims that the
agreement was ABS-CBN would have exclusive film rights to 14 films
for Php36M. ABS-CBN offered a counter proposal which VIVA rejected.
The latter went on to give the exclusive rights to Republic Broadcasting
Corporation (RBS) to air the 104 movies including the 14 films which
was allegedly granted to ABS-CBN.
ABS-CBN filed a complaint for specific performance with a prayer for a
writ of preliminary injunction and/or TRO against VIVA and RBS. RTC
granted the prayer upon posting of a Php35M bond. ABS-CBN moved
for the reduction of the bond. Meanwhile, RBS offered a counterbond.
RTC subsequently issued an order dissolving the writ and ruled in favor
of RBS and VIVA. RTC ordered ABS-CBN to pay RBS the amount it
paid for the print advertisement and premium on the counterbond,
moral damages, exemplary damages and attorney's fee.
ABS-CBN, VIVA, and Del Rosario appealed before the CA. Viva and
Del Rosario sought for moral and exemplary damages plus additional
atty’s fees. CA, however, affirmed RTC’s Decision and likewise denied
VIVA and Del Rosario’s appeal.
ISSUE: W/N RBS is entitled to damages and attorney’s fees – NO.
RULING:
As to moral damages: The award of moral damages cannot be granted
in favor of a corporation because, being an artificial person and having
existence only in legal contemplation, it has no feelings, no emotions,
no senses. It cannot, therefore, experience physical suffering and
mental anguish, which can be experienced only by one having a
nervous system.
Moral damages are in the category of an award designed to
compensate the claimant for actual injury suffered and not to impose a
penalty on the wrongdoer. The award is not meant to enrich the
complainant at the expense of the defendant, but to enable the injured
party to obtain means, diversion, or amusements that will serve to
obviate the moral suffering he has undergone. It is aimed at the
restoration, within the limits of the possible, of the spiritual status quo
ante, and should be proportionate to the suffering inflicted.
As to exemplary damages: The claim of RBS against ABS-CBN is not
based on contract, quasi-contract, delict, or quasi-delict. There is no
adequate proof that ABS-CBN was inspired by malice or bad faith. It
was honestly convinced of the merits of its cause after it had undergone
serious negotiations culminating in its formal submission of a draft
contract. Settled is the rule that the adverse result of an action does not
per se make the action wrongful and subject the actor to damages, for
the law could not have meant to impose a penalty on the right to litigate.
If damages result from a person's exercise of a right, it is damnum
absque injuria.
Cometa v. Court of Appeals (301 SCRA 459 [1999]).
FACTS:
State Investment Trust, Inc (SITI), an investment house engaged in
quasi-banking activities, extended loans in various amounts to Guevent
Industrial Development Corp. (GIDC) which the latter failed to pay on
the dates they became due.
A rehabilitation plan was agreed upon under which GIDC mortgaged
several parcels of land to petitioner SITI. GIDC, again, defaulted
prompting SITI to foreclose the mortgages. SITI also acquired the
properties as the highest bidder in the foreclosure sale.
A complaint was filed by GIDC alleging irregularities in the foreclosure,
but was later settled thru a compromise agreement between SITI and
GIDC.
A dispute later arose concerning the interpretation of the compromise
agreement, as respondent Honeycomb Builders, Inc (HBI) offered to
purchase from GIDC the lot covered by TCT No. 462855 (20510) and
the latter agreed but petitioner SITI (the mortgagee) refused to give its
consent to the sale and release its lien on the property. The trial court
subsequently directed SITI to accept the offer of HBI to purchase the
subject property.
HBI later applied for a permit before the HLURB to develop the subject
property which HLURB granted. HBI built a condominium on the
property, and later applied for a license to sell the units. HLURB
required HBI to submit an Affidavit of Undertaking which in effect would
release the mortgage on said property by SITI (mortgagee). HBI
complied and submitted the required affidavit purportedly executed by
petitioner Cometa as president of SITI.
Cometa denied executing the affidavit and it was later found by the NBI
that Cometa’s signature was forged. A complaint for falsification of
public document was filed against HBI president Guevara which was
later dismissed.
Guevara then filed a complaint for malicious prosecution against
petitioners Cometa and SITI with RTC.
ISSUE: W/N HBI, a corporation, can be a real-party-in interest for the
purpose of bringing a civil action for malicious prosecution . – YES
RULING:
It is true that a criminal case can only be filed against the officers of a
corporation and not against the corporation itself. It does not follow from
this, however, that the corporation cannot be a real-party-in interest for
the purpose of bringing a civil action for malicious prosecution.
Just as it is bad to encourage the indiscriminate filing of actions for
damages by accused persons after they have been acquitted, whether
correctly or incorrectly, a blanket clearance of all who may be minded
to charge others with offenses, fancied or otherwise, without any
chance of the aggrieved parties in the appropriate cases of false
accusation to obtain relief, is short of being good law.
2) Creature of law -- Each corporation is
created by operation of law pursuant to a
covenant to pursue a business
enterprise.
3) Right of Succession -- A corporation
has a juridical personality separate and
distinct from its stockholder or members,
officers and directors or trustees.” A
corporation is invested by law with
a personality separate and distinct
from the persons composing it, and
from that of any other entity to which it
may be related. Its artificial being makes
possible the assembling of huge
amounts of capital upon which big
business depends. It also has the
advantage of non-dependence on the
lives of those who compose it, even as it
enjoys certain rights and conducts
activities of natural persons.
Reynoso IV v. CA (345 SCRA 335
[2000])
Doctrine: When the corporate fiction is used to perpetrate fraud or
promote injustice, the law steps in to remedy the problem. The
corporate character is not necessarily abrogated. It continues for
legitimate objectives. However, it is pierced in order to remedy injustice,
such as that inflicted in this case.
FACTS:
Commercial Credit Corp (CCC), a financing and investment firm,
decided to organize franchise companies all over Philippines, wherein
it shall hold 30% equity. CCC designated its employees as resident
managers of the franchise companies. Reynoso IV was the resident
manager of CCC Quezon City (CCC-QC).
CCC-QC entered into an exclusive management contract with CCC
wherein it was stipulated that CCC-QC shall sell, discount and/or assign
its receivables to CCC. However, this arrangement was discontinued
after Central Bank prohibited the lending of funds by corporations to its
directors, officers, stockholders, and other persons with related
interests therein. CCC thus decided to form CCC-Equity Corporation
where several CCC officials also became an employee of.
Reynoso was an employee of CCC-Equity at the same time the resident
manager of CCC-QC, but he drew his salaries and allowances from
CCC-Equity. He deposited his personal funds to CCC-QC as money
placements because of difficulties faced by the firm in implementing the
required phase-out program.
CCC-QC later filed a complaint for sum of money against Reynoso IV
alleging that he embezzled CCC-QC’s funds amounting to over Php1M.
Reynoso IV alleges that the amount was his money placement in CCC-
QC evidenced by the checks he issued in favor of CCC-QC.
Nonetheless, Reynoso was dismissed from his employment. RTC
rendered a decision in favor of Reynoso IV which became final and
executory and a Writ of Execution was issued. However, the judgment
remained unsatisfied, thus Reynoso IV filed an Alias Writ of Execution.
CCC-QC later became known as General Credit Corporation (GCC).
GCC was ordered to file a comment on Reynoso IV’s Motion, but it
alleged that it was not a party to the case. RTC then granted the alias
writ of execution. Subsequently, GCC filed a petition for certiorari before
the CA which nullified trial court’s decision.
ISSUE: W/N GCC, formerly CCC, may be held liable for the obligations
of CCC-QC– YES.
RULING:
A corporation is an artificial being created by operation of law, having
the right of succession and the powers, attributes, and properties
expressly authorized by law or incident to its existence. It is an artificial
being invested by law with a personality separate and distinct from
those of the persons composing it as well as from that of any other legal
entity to which it may be related.
Any piercing of the corporate veil has to be done with caution. However,
the corporate fiction has to be disregarded when necessary in the
interest of justice.
It is obvious that the use by CCC-QC of the same name of Commercial
Credit Corporation was intended to publicly identify it as a component
of the CCC group of companies engaged in one and the same
business, investment and financing. The organization of subsidiary
corporations as what was done here is usually resorted to for the
aggrupation of capital, the ability to cover more territory and population.
But when the mother corporation and its subsidiary cease to act in good
faith… when the corporate fiction is used to perpetrate fraud or promote
injustice, the law steps in to remedy the problem. The corporate
character is not necessarily abrogated. It continues for legitimate
objectives. However, it is pierced in order to remedy injustice, such as
that inflicted in this case.
CCC had dominant control of the business operations of CCC-QC. The
exclusive management contract insured that CCCQC would be
managed and controlled by CCC and would not deviate from the
commands of the mother corporation. There are other indications in the
record which attest to the applicability of the identity rule in this case,
namely: the unity of interests, management, and control; the transfer of
funds to suit their individual corporate conveniences; and the
dominance of policy and practice by the mother corporation insure that
CCC-QC was an instrumentality or agency of CCC.
As such, the contention of GCC the new name of CCC, that the
corporate fiction should be appreciated in its favor is without merit.
• Wensha Spa Center, Inc. v. Yung
(628 SCRA 311 [2010])
Doctrine: In labor cases, corporate directors and officers may be held
solidarily liable with the corporation for the termination of employment
only if done with malice or in bad faith.
FACTS:
Loreta Yung was Wensha Spa’s administrative manager at the time of
the termination of her employment. She was allegedly asked by Xu
(Wensha’s president) to go on a leave for one month with pay. She did
so. However, upon her return, she was asked to resign because
according to the Feng Shui master, her aura did not match that of Xu.
Despite her refusal to resign, she was informed that she could no longer
work at Wensha. Loreta thus filed for illegal dismissal against Xu before
the NLRC.
Wensha and Xu denied illegally terminating Loreta. They claimed that
numerous employees were complaining against Loreta, and so they
advised her to take a leave of absence while they conduct an
investigation. Based on the results of the investigation, they terminated
Loreta’s employment for loss of trust and confidence.
The LA dismissed Loreta’s complaint and found that she was
terminated due to loss of trust and confidence. NLRC affirmed this
ruling.
The CA reversed the ruling of the NLRC on the ground that it gravely
abused its discretion in appreciating the factual bases that led to
Loreta's dismissal. CA ordered Wensha and Xu to, jointly and severally,
pay Loreta her full backwages, other privileges, and benefits, or their
monetary equivalent
ISSUE: W/N Xu is solidarily liable with Wensha – NO.
RULING:
Elementary is the rule that a corporation is invested by law with a
personality separate and distinct from those of the persons composing
it and from that of any other legal entity to which it may be related.
"Mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a corporation
is not of itself sufficient ground for disregarding the separate
corporate personality." Monfort Hermanos Agricultural Dev. Corp. v. Monfort III
(434 SCRA 27 [2004])
In labor cases, corporate directors and officers may be held solidarily FACTS:
liable with the corporation for the termination of employment only if Complaints for forcible entry and replevin filed by petitioner
done with malice or in bad faith. Bad faith does not connote bad corporation and Ramon Monfort against the children, nephews and
judgment or negligence; it imports a dishonest purpose or some moral nieces of its original incorporators. Petitioner corporation, is a domestic
obliquity and conscious doing of wrong; it means breach of a known private corporation, and is the registered owner of a farm, fishpond, and
duty through some motive or interest or ill will; it partakes of the nature sugar cane plantation. It also owns one unit of motor vehicle and two
of fraud. units of tractors. The same allowed Ramon Monfort, its Exec. VP, to
breed and maintain fighting cocks in his personal capacity at Hacienda
In this case, there isn’t any finding of bad faith or malice on the part of San Antonio. In 1997, the group of Antonio Monfort III, through force
Xu. To sustain such a finding of the CA, there should be an evidence and intimidation, allegedly took possession of the 4 Haciendas, the
on record that an officer or director acted maliciously or in bad faith in produce thereon and the motor vehicles and tractors, as well as the
terminating the services of an employee. fighting cocks of Ramon.
Ma. Antonia Salvatierra, President of the Corporation and
Ramon, in his personal capacity, filed against the group of Antonio
Monfort III, a complaint for delivery of motor vehicle, tractors and 378
fighting cocks, with prayer for injunction and damages. The group of
• Creature of limited powers, Antonio filed a motion to dismiss contending that Salavatierra has no
attributes, and properties -- A capacity to sue on behalf of the Corporation because the 1997 Board
corporation has only such powers, Resolution authorizing Salvatierra and Ramon to represent the
attributes and properties as are Corporation is void as the purported Members of the Board who passed
expressly authorized by law or the same were not validly elected officers of the Corporation.
incident to its existence. A ISSUE:
corporation has no powers except for Whether Salvatierra has the legal capacity to sue on behalf of the
those that are expressly conferred on Corporation.
it by the (Revised) Corporation Code,
and those found in its charter, and are RULING:
implied by or are incidental to its No. Salvatierra has no legal capacity to sue on behalf of the
existence. It exercises its powers Corporation.
through its Board of Directors and/or
its duly authorized officers and A corporation has no power except those expressly conferred on it by
agents. the Corporation Code and those that are implied or incidental to its
existence. In turn, a corporation exercises said powers through its
• Section 44 RCC board of directors and/or its duly authorized officers and agents. The
power of the corporation to sue and be sued in any court is lodged with
the board of directors that exercises its corporate powers. Corporations
SEC. 44. Ultra Vires Acts of Corporations. – No corporation shall are required under Section 26 of the Corporation Code to submit to the
possess or exercise corporate powers other than those conferred by SEC within 30 days after the election the names, nationalities and
this Code or by its articles of incorporation and except as residences of the elected directors, trustees and officers of the
necessary or incidental to the exercise of the powers conferred. Corporation.

In the case at bar, the fact that 4 of the 6 Members of the Board listed
in the 1996 General Information Sheet are already dead at the time of
the 1997 Board Resolution was issued, does not automatically make
the 4 signatories to the said Board Resolution as among the incumbent
Members of the Board. A corporation is mandated to inform the SEC of
the names and the change in the composition of its officers and board
of directors within 30 days after election if one was held, or 15 days
after the death, resignation or cessation of office of any of its director,
trustee or officer if any of them died, resigned or in any manner ceased
to hold office. This, the Corporation failed to do.
Considering the foregoing, we find that Salvatierra failed to prove that
4 of those who authorized her to represent the Corporation were the
lawfully elected Member of the Board of the Corporation. As such, they
cannot confer valid authority for her to sue on behalf of the corporation.
However, since Ramon sought redress of the latter cause of action in
his personal capacity, the dismissal of the complaint for lack of capacity
to sue on behalf of the corporation should be limited only to the
corporation’s cause of action for delivery of motor vehicle and tractors.
Pascual and Santos, Inc. v. Members of the Tramo Wakas
Neighborhood Assn., Inc.,
( 442 SCRA 438 [2004])
FACTS:
Members of Tramo Wakas Neighborhood Association,
represented by Dominga Magno, lodged before the Presidential Action
Center a petition praying that the ownership over 3 parcels of land
situated in Barangay San Dionisio, Parañaque, Metro Manila be
awarded to them. In their petition, respondents alleged that petitioner
claims ownership of the subject lots which they have openly, peacefully
and continuously occupied since 1957. The petition was referred to the
Land Management Bureau for investigation and hearing.
CA dismissed the appeal due to infirm Verification and
Certification of non-forum shopping and belated filing. The Verification
and Certification of non-forum shopping was signed merely by Estela
Lombos and Anita Pascual who allege that they are the duly authorized
representatives of petitioner corporation, without showing any proof
whatsoever of such authority. Petitioner filed a Motion for
Reconsideration of the CA resolution, arguing that there was no
showing that the persons acting on its behalf were not authorized to do
so and that its petition was filed within the additional 15-day period
granted by the CA. Attached to the Motion was a Secretary’s certificate
showing that petitioner’s Board of Directors approved a resolution
appointing Lombos and Pascual, incumbent directors of the
corporation, as its duly authorized representatives who may sign all
papers, execute all documents, and do such other acts as may be
necessary to prosecute the petition for review.
ISSUE:
Whether the persons who executed the verification and certification of
non-forum shopping attached to PSI’s manifestation/petition for review
filed with the CA were authorized to do so.
RULING:
This Court has ruled that the subsequent submission of proof of
authority to act on behalf of a petitioner corporation justifies the
relaxation of the Rules for the purpose of allowing its petition to be given
due course.
The requirement that the petitioner should sign the certificate of non-
forum shopping applies even to corporation, considering that the
mandatory directives of the Rules of Court make no distinction between
natural and juridical persons. Except for the powers which are expressly
conferred on it by the Corporation Code and those that are implied by
or are incidental to its existence, a corporation has no powers. It
exercises its powers through its board of directors and/or its duly
authorized officers and agents. Its power to sue and be sued in any
court is lodged with the board of directors that exercises its corporate
powers.
It is undisputed that when the petition for certiorari was filed with the
CA, there was no proof attached thereto that Lombos and Pascual were
authorized to sign the verification and non-forum shopping certification.
Subsequent to the CA’s dismissal of the petition, petitioner filed a
motion for reconsideration to which it attached a certificate issued by its
board secretary that prior to the filing of the petition, Lombos and
Pascual had been authorized by petitioner’s board of directors to file
the petition before the CA.
 • Core Characteristics of a Corporation (next
meeting)
§ Separate Legal personality
- A corporation has a personality separate and distinct from its
members. It has a personality separate and distinct from the
persons composing it as well as from that of any other entity to
which it may be related. (Secosa v. Heirs of Francisco)
- Article 44: Corporations as among those considered as juridical
persons with juridical personality, separate, and distinct from
that of each shareholder and member.
- Rights can be enforced for and against the corporation and the
filing of a complaint against the stockholder is not ipso facto a
complaint against the corporation.
- o Respondent was employed by Stradcom as HRAD
Stradcom Corporation v. Orpilla
(G.R. No. 206800, 2 July 2018)
FACTS:
· Version of Respondent Joyce Orpilla
o Respondent was employed by Stradcom as Human
Resources Administration Department [HRAD] head,
under a probationary status for six months, with a
monthly salary of P60,000. Her duties included
administrative and training matters. Chua, the President
and CEO of Stradcom, issued a Memorandum
addressed to the COO Ramon Reyes and CFO Raul
Pagdanganan, announcing the reorganization of the
HRAD.
o Respondent inquired from Chua as to her status in
the light of the said reorganization. Chua replied that the
management has lost its trust and confidence in her and
it would be better if she resigned. She protested the
resignation and insisted that if there were charges
against her, she was open for formal investigation. Chua
was not able to come up with any charges. Atty. Pilapil,
Chief Legal Officer, offered a settlement to respondent
in exchange for her employment, otherwise, she would
have to undergo the burden of litigation in pursuing the
retention of her employment. Atty. Pilapil set another
meeting with the respondent and told her to take a leave
in the meantime to think about the settlement offer. He
assured respondent that she would continue to receive
her salary. On January 2003, as per advice of Atty.
Pilapil, respondent reported for work but the guards
refused her entry and advised her take a leave of
absence.
o Respondent claimed that she was informed by
Accounting Manager, Mr. Ocampo, that her salary was
already deposited in her bank account which included
the proportionate 13th month pay for the year 2003 and
was her last and final pay. She further claimed that she
was constructively dismissed on January 2, 2003 and
turned into an actual dismissal on January 15, 2003,
when she received her last pay.
· Version of Stradcom
Head. In December 2002, Pagdanganan gave
instructions to respondent to commence preparations
for Stradcom’s 2002 Christmas party. Chua also gave
instructions to respondent to include the Land
Registration Systems, Inc (Lares) officers and
employees, an affiliate of Stradcom in the Christmas
party, to foster camaderie and working relations
between the two companies. Respondent then called a
staff lunch meeting and expressed her intention of
easing out Lares’ employees from the party. It came to
the attention of Stradcom that respondent was not
comfortable with the idea to include Lares in the party,
as respondent appeared evasive on the queries about
the event made by Marcelo, the HRA of Lares. This
matter was brought to Chua, who decided to remove the
responsibility of organizing the party from the
respondent and transferred the same to another
committee. As part of the turnover, respondent furnished
the committee the copy of the initial budget which
included services from G&W Catering Services at P250
per head. The new members of the Christmas party
committee went to see Ms. Sese, the proprietress of the
catering services. They were surprised to find out that
the price was actually P200 per head and not P250 as
represented by respondent. The new members reported
the matter to the Stradcom’s management.
 o Stradcom began its investigation and interviewed
some employees regarding the conduct of respondent.
They discovered that respondent required her staff to
prepare presentation/training materials/manuals using
company resources for purposes not related to the
affairs of the company, on overtime and on Sundays.
Pagdanganan called for a conference with respondent
and discussed respondent’s acts. Respondent made a
bare denial. Chua notified his employees about the
reorganization of the HRAD and the Business
Operations Department. Respondent turned-over the
necessary documents and equipment. Respondent
reported to Reyes, her new immediate superior and
secured the latter’s approval for her leave of absence.
She approached Chua to discuss the reorganization and
her previous conference regarding her said infractions.
Chua told respondent that the management has lost its
trust and confidence in her due to her willful
disobedience and willful breach of trust.
o Respondent explained her side and asked Chua for
his advice. Chua replied that considering her position is
one that requires the trust and confidence of the
management, it would be difficult to force herself on the
management. Respondent conveyed her willingness to
resign, because of this, Stradcom’s officers agreed that
any formal investigation on respondent was
unnecessary in view of her willingness to resign.
However, on January 7, respondent reported for work
and informed Stradcom that she would not resign. Atty.
Pilapil invited respondent for dinner to discuss about her
situation. Petitioners were shocked when they found out
that respondent had filed a complaint for constructive
dismissal with monetary claims. Petitioners contended
that the dismissal of respondent was for just cause on
the ground of loss of trust and confidence and the same
was in compliance with the due process requirements.
ISSUE:
Whether petitioner Chua may be held jointly and severally liable with
co-petitioner Stradcom for the payment of whatever monetary award in
favor of respondent
RULING:
NO, Chua cannot be made solidarily liable with the petitioner
corporation for any award in favor of respondent. Stradcom is separate
and distinct from Chua.
It is well-settled that a corporation has its own legal personality separate
and distinct from those of its stockholders, directors or officers.
Absence of any evidence that a corporate officer and/or director has
exceeded their authority, or their acts are tainted with malice or bad
faith, they cannot be held personally liable for their official acts. In the
case at bar, there was neither any proof that Chua acted without or in
excess of his authority nor was motivated by personal ill-will towards
respondent to be solidarily liable with the company.
Tumagan v. Kairuz (G.R. No. 198124, 12 September 2018)
FACTS:
Mariam Kairuz alleged that she had been in actual and
physical possession of a property in Benguet until May 28,
2007. She alleged that on the afternoon of May 28, petitioners
John Tumagan, Alam Halil, and Bot Padilla conspired with each
other and took possession of the property by means of force,
intimidation, strategy, threat and stealth with the aid of armed
men. After forcibly gaining entry into the property, petitioners
then padlocked its three gates, posted armed men and excluded
Mariam from the property. She also sought the issuance of a
temporary restraining order and/or writ of preliminary injunction
against petitioner.
Petitioners averred that Kairuz could not bring the
present action for forcible entry because she was never the sole
owner or possessor of the property. They alleged that Mariam
is the spouse of the late Laurence Kairuz, who co-owned the
property with his sisters. Petitoners claimed that the property is
a good source of potable water and is publicly known as Kairuz
Spring. Laurence, in his own capacity and as attorney-in-fact for
his sistersn entered into a Memorandum of Agreement with
Balibago Waterworks System Incorporated [BWSI] and its
affiliate company, PASUDECO, to establish a new corporation,
Bali Irisan Resources, Inc [BIRI]. As stipulated in the MOA,
Laurence and his 2 sisters will sell the property containing
Kairuz Spring and other improvements to BIRI. The Kairuz
family sold the property, including the bottling building, Kairuz
Spring, machineries, equipment and other facilities following the
terms of the MOA. BIRI took full possession over the property;
 it is 30% owned by the Kairuz family and 70% owned by BWSI
and PASUDECO. Its Board of Directors is composed of 7
members, with a three-person Management Committee
[ManCom] handling its day-to-day operations. The one seat
accorded to the Kairuz family in the ManCom was initially
occupied by Laurence, while the other two other seats in the
ManCom were occupied by Tumagan and Victor Hontiveros.
They alleged that Mariam was aware of the MOA, the ManCom,
and of the operations of the BIRI properties precisely because
she succeeded Laurence’s seat in the BOD and ManCom after
his death.
Petitioners also asserted that under the MOA, the Kairuz
family assigned their Baguio Spring Mineral Water Corporation
[BSMWC] shares and water rights through the BSMWC water
permit. The MOA also stipulated the continued operation of the
truck water business by the Kairuzes and this was honored by
BIRI. However, this privilege enjoyed by the Kairuzes is
contingent on their compliance with their own obligations and
conditions as set forth in the MOA. Unfortunately, upon
Mariam’s assumption of the business, she started to commit
actions in conflict with the best interest of BIRI. This prompted
BIRI’s shareholders to write Mariam regarding her default on the
provisions of the MOA, warning her that unless appropriate
remedies are fulfilled, the MOA will be terminated. Mariam
refused to receive the registered mail sent by BIRI and ignored
their official communications, choosing instead to file the
present ejectment complaint against petitioners. BIRI, as a
corporation and owner of the spring property, merely exercised
its legal right to prevent unauthorized persons from entering its
property.
ISSUE:
Whether the issues are intra-corporate in nature which is under the
jurisdiction of the RTC as a special commercial court.
RULING:
Yes, the issue in this case contains intra-corporate controversy.
The parties involved in the controversy are respondent Mariam [a
shareholder of BIRI and successor to her late husband’s position on the
ManCom], petitioner Tumagan [then the branch manager, shareholder,
and part of the BIRI ManCom] and petitioners Bot and Alam [licensed
geodetic engineers engaged by BIRI for a contract to survey the
property subject of the dispute]. The controversy also involves BIRI
itself, the corporation of which Mariam is a shareholder, and which
authorized John, its branch manager, to do all acts fit and necessary to
enforce its corporate rights against the Kairuz family, including the
posting of guards to secure the property. The controversy is one
between corporation and one of its shareholders.
The property in question has already been transferred to BIRI and
registered in its name. It is likewise undisputed that based on the MOA,
the Kairuzes own 30% of the outstanding capital stock of BIRI. This
does not make, Mariam a co-owner of the property of BIRI, including
the property subject of this case. Shareholders are in no legal sense
the owners of corporate property, which is owned by the corporation as
a distinct legal person. At most, Mariam’s interest as a shareholder is
purely inchoate, or in sheer expectancy of a right, in the management
of the corporation and to share in its profits, and in its properties and
assets on dissolution after payment of the corporate debts and
obligations.
Union Bank versus Spouses Ong (G.R. No. 152347; 21 June 2006)
FACTS:
Petitioner agreed to purchase the cement business of respondent. Both
parties entered into a Sale and Purchase Agreement [SPA]. At the time
of the foregoing transactions, petitioners were well aware that CCC had
a case pending with the SC. In anticipation of the liability that the High
Tribunal might adjudge against CCC, the parties, under Clause 2 [c] of
the SPA, allegedly agreed to retain from the purchase price a portion
of the contract price in the amount of P117,020,846.84. This amount
was to be deposited in an interest-bearing account in the First National
City Bank of New York (Citibank) for payment to APT.
Petitioners allegedly refused to apply the sum of the payment to APT,
despite the subsequent finality of the decision in favor of the latter and
the repeated instructions of respondent CCC. CCC filed before the RTC
of Quezon City a complaint with application for preliminary attachment
against petitioners. The complaint prayed, among others, that
petitioners be directed to pay the “APT retained amount’ referred to in
the mentioned clause. Petitioners moved to dismiss the complaint on
the ground that it violated the prohibition on forum-shopping.
Respondent CCC had allegedly made the same claim in another action,
which involved the same parties and which was filed earlier before the
International Chamber of Commerce.
ISSUE:
May the defendants in civil cases implead in their counterclaims
persons who were not parties to the original complaints?
RULING:
Yes, the defendants in civil cases may implead in their counterclaims
persons who are not parties to the original complaints. The prerogative
of bringing in new parties to the action at any stage before judgment is
intended to accord complete relief to all of them in a single action and
to avert a duplicity and even a multiplicity of suits.
The inclusion of a corporate officer or stockholder is not premised on
the assumption that the plaintiff corporation does not have the financial
ability to answer for damages, such that it must share its liability with
individual defendants. Such inclusion is based on the allegations of
fraud and bad faith on the part of the corporate officer or stockholder.
These allegations may warrant the piercing of the veil of corporate
fiction, so that the said individual may not seek refuge therein but may
be held individually and personally liable for his or her actions.
A corporation has legal personality entirely separate and distinct from
that of its officers and cannot act for and on their behalf, without being
so authorized. Unless expressly adopted by Lim and Mariano, the
Motion to Dismiss the compulsory counterclaim filed by respondent has
no force and effect as to them.
Philippine Overseas Telecommunications Corp. vs.
Sandiganbayan
(G.R. 174462, 2 February 2016)
Doctrine: Rights can be enforced for and against the corporation and
the filing of a complaint against the stockholder is not ipso facto a
complaint against the corporation.
FACTS:
POTC is a private corporation, which is a main stockholder of
PHILCOMSAT, a government-owned and controlled corporation, which
was established in 1966 and was granted a legislative
telecommunications franchise by virtue of RA 5514, as amended by RA
7949, to establish and operate international satellite communication in
the Philippines. The OSG, on behalf of the Republic of the Philippines,
filed a Complaint for Reconveyance, Reversion, Accounting and
Restitution and Damages against Jose Africa, Manuel Nieto, Ferdinand
Marcos, Imelda Marcos, Ferdinand Marcos Jr., Roberto Benedicto,
Juan Ponce Enrile and Potenciano Illusorio. As alleged in the
complaint, through clever schemes, the wealth that should go to the
coffers of the government, which should be deemed acquired for the
benefit of the Republic, went to the defendants in their own individual
accounts – some, however, through conduits or corporations.
The PCGG appointed a comptroller, who controlled the
disbursement of funds of POTC and PHILCOMSAT. At the same time,
in a Memorandum by the PCGG, the PCGG informed the BSP that in
all cash withdrawals, transfer of funds, money market placements and
disbursements of POTC and PHILCOMSAT, the approval of the PCGG
appointed comptroller is required. The POTC and PHILCOMSAT filed
separate complaint for injunction with the Sandiganbayan against the
Republic to nullify and lift the sequestration order issued against them
to failure to file the necessary judicial action against them within the
period prescribed by the Constitution and to enjoin the PCGG from
interfering with their management and operation, which the
Sandiganbayan granted through a Resolution. However, the SC
reversed such Resolution and stated that the filing of the complaint was
filed within the required 6-month period.
ISSUE:
Whether the failure to properly implead POTC and PHILCOMSAT as
defendants in the civil case is a fatal jurisdictional error or not
RULING:
Yes, failure to implead POTC and PHILCOMSAT is a violation of the
fundamental principle that a corporation has a legal personality distinct
and separate from its stockholders; that the filing of a complaint against
a stockholder is not ipso facto a complaint against the corporation.
The complaint was filed only against POTC and PHILCOMSAT’s
stockholders, who are private individuals. POTC and PHILCOMSAT
were also merely annexed to the list of the corporations and were not
properly impleaded in the case. A corporation, as a legal entity distinct
and separate from its stockholders, must be impleaded as defendants,
giving it the opportunity to be heard. The failure to properly implead
POTC and PHILCOMSAT not only violates the latters’ legal personality
but is repugnant on POTC’s and PHILCOMSAT’s right to due process.
A suit against individual stockholders is not a suit against the
corporation.
Lafarge Cement Phils., Inc. v. Continental Cement Corp.
(443 SCRA 522 [2004])
FACTS
On a Letter of Intent or LOI whereby Petitioner Lafarge Cement
Philippines, Inc. (Lafarge) -- on behalf of its affiliates and other qualified
entities, including Petitioner Luzon Continental Land Corporation
(LCLC) -- agreed to purchase the cement business of Respondent
Continental Cement Corporation (CCC). On October 21, 1998, both
parties entered into a Sale and Purchase Agreement (SPA). At the time
of the foregoing transactions, petitioners were well aware that CCC had
a case pending with the Supreme Court. In anticipation of the liability
that the High Tribunal might adjudge against CCC, the parties, under
Clause 2 (c) of the SPA, allegedly agreed to retain from the purchase
price a portion of the contract price in the amount of P117,020,846.84
-- the equivalent of US$2,799,140.
However, petitioners allegedly refused to apply the sum to the payment
to APT. Fearful that nonpayment to APT would result in the foreclosure,
not just of its properties covered by the SPA with Lafarge but of several
other properties as well, CCC filed before the Regional Trial Court of
Quezon City on June 20, 2000, a "Complaint with Application for
Preliminary Attachment" against petitioners. Docketed as Civil Case
No. Q-00-41103, the Complaint prayed, among others, that petitioners
be directed to pay the "APT Retained Amount" referred to in Clause 2
(c) of the SPA.
Petitioners alleged that CCC, through Lim and Mariano, had filed the
"baseless" Complaint in Civil Case No. Q-00-41103 and procured the
Writ of Attachment in bad faith. Relying on this Court's pronouncement
in Sapugay v. CA, petitioners prayed that both Lim and Mariano be held
"jointly and solidarily" liable with Respondent CCC. On behalf of Lim
and Mariano who had yet to file any responsive pleading, CCC moved
to dismiss petitioners' compulsory counterclaims on grounds that
essentially constituted the very issues for resolution in the instant
Petition.
ISSUE:
Whether or not CCC's Motion to Dismiss the Counterclaim on Behalf of
Respondents Lim and Mariano is Allowed
RULING:
No. While Respondent CCC can move to dismiss the counterclaims
against it by raising grounds that pertain to individual defendants Lim
and Mariano, it cannot file the same Motion on their behalf for the simple
reason that it lacks the requisite authority to do so. A corporation has a
legal personality entirely separate and distinct from that of its officers
and cannot act for and on their behalf, without being so authorized.
Thus, unless expressly adopted by Lim and Mariano, the Motion to
Dismiss the compulsory counterclaim filed by Respondent CCC has no
force and effect as to them.
• Doctrine of Separate Property
- Corporation has a separate personality and thus, the properties
of the corporation are not properties of its shareholders,
members or officers. Properties registered n the name of the
corporation are owned by it as an entity separate and distinct
from those who compose it.
- A stockholder cannot sell, transfer, mortgage, or encumber the
properties of the corporation without property authority. Physical
acts like the offering of the property of the corporation for sale,
or the acceptance of a counter-offer of a prospective buyer of
the property of the corporation can be performed by the
corporation only through officer or agents duly authorized for the
purpose by corporate by-laws or by specific acts of the board of
directors. Similarly, a stockholder cannot use any such property
to pay for his personal debts. (Litonjua v. Eternit)
Litonjua vs. Eternit
(G.R. 144805; 8 June 2006)
FACTS:
· Eternit Corporation [EC] is a corporation duly organized
and registered under the PH laws. Since 1950, it had been
engaged in the manufacture of roofing materials and pipe
products. 90% of the shares of stocks of EC were owned by
Eteroutremer S.A. Corporation [ESAC], a corporation organized
and registered under the laws of Belgium. Jack Glanville, an
Australian citizen, was the General Manager and President of
EC, while Claude Delasux was the Regional Director for Asia of
ESAC Both had their offices in Belgium.
· In 1986, the management of ESAC grew concerned
about the political situation in the PH and wanted to stop its
operations in the country. The Committee for Asia of ESAC
instructed Michael Adams, a member of EC’s BOD, to dispose
of the 8 parcels of land. Adams engaged the services of
realtor/broker Lauro Marquez so that the properties could be
offered to sale to prospective buyers. Marquze offered the
parcels of land and the improvements to Eduardo Litonjua Jr.,
of the Litonjua & Company Inc., Marquez declared that he was
authorized to sell the properties for P27M and that the terms of
the sale were subject to negotiation. Petitioner responded to the
offer. Marques showed petitioner the property. The petitioners
offered to buy the property for P20M cash. Marquez apprised
Glanville of the petitioners’ offer and relayed the same to
Delsaux in Belgium, but the latter did not respond. Glanville
telexed Delsaux in Belgium, inquiring on his
position/counterproprosal ot the offer of the petitioners.
· Marquez furnished petitioners with a copy of the telex
sent by Delsaux which contains that based on the
“Belgian/Swiss decision”, the final offer was $1M and P2.5M to
cover all existing obligations prior to final liquidation. Marquez
conferred with Glanville and confirmed that the petitioners had
accepted the counter-proposal of Delsaux. He also stated that
the petitioners would confirm full payment within 90 days after
the execution and preparation of all documents of sale, together
with the necessary governmental clearances. The petitioners
deposited the $1M with the Security Bank & Trust Company and
drafted an escrow Agreement to expedite the sale. Marquez and
petitioners inquired from Glanville when the sale would be
implemented. Glanville, through a telex, informed Delsaux that
he had met with a buyer, which had given him the impression
that he is prepared to press for a satisfactory conclusion to the
sale. He also emphasized to Delsaux that the buyers were
concerned because they would incur expenses in bank
commitment fees as a consequence of prolonged period of
inaction. Marquez received a telephone call from Glanville,
advising that the sale would no longer proceed. It was followed
up with a Letter confirming that the has been instructed by his
principal to inform Marquez that the decision has been taken at
a Board Meeting not to sell the properties on which EC is
situated.
ISSUE:
Whether the CA erred in not holding that Glanville and Delsaux have
the necessary authority to sell the subject properties, or at very least,
were knowingly permitted by respondent corporation to do acts within
the scope of an apparent authority, and thus held them out to the public
as possessing power to sell the said properties.
RULING:
The petition has no merit. A corporation is a juridical person separate
and distinct from its members or stockholders and is not affected by the
personal rights, obligations and transactions of the latter. It 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.
Under Section 36 of the Corporation Code, a corporation may sell or
convey its real properties, subject to the limitations prescribed by law
and the Constitution. The property of a corporation, however, is not the
property of the stockholders or members, and as such, may not be sold
without express authority from the board of directors. Physical acts, like
the offering of the properties of the corporation for sale, or the
acceptance of a counter-offer of prospective buyers of such properties
and the execution of the deed of sale covering such property, can be
performed by the corporation only by officers or agents duly authorized
for the purpose by corporate by-laws or by specific acts of the board of
directors. Absent such valid delegation/authorization, the rule is that the
declarations of an individual director relating to the affairs of the
corporation, but not in the course of, or connected with, the
performance of authorized duties of such director, are not binding on
the corporation.
While a corporation may appoint agents to negotiate for the sale of its
real properties, the final say will have to be with the board of directors
through its officers and agents as authorized by a board resolution or
by its by-laws. An unauthorized act of an officer of the corporation is not
binding on it unless the latter ratifies the same expressly or impliedly by
its board of directors. Any sale of real property of a corporation by a
person purporting to be an agent thereof but without written authority
from the corporation is null and void.

§ Limited liability
- One that makes corporations more advantageous to investors
compared to partnerships and single proprietorships.
- Under this rule, “a stockholder is personal liable for the financial
obligations of a corporation to the extent of his unpaid
subscription.” (Donnina C. Halley v. Printwell)
- While stockholders are generally not liable, the stockholders
may be liable if they have not or have not fully paid the
subscription price.
• Piercing the veil of corporate
fiction
- Personality of corporation is separate and distinct. It is a fiction
created by law with the intent that it should be treated as true.
- The corporation’s separate juridical personality may be
disregarded when there is an abuse of the corporate form.
Whenever the doctrine applies, the principal and the conduit will
be treated as one; the controlled corporation will be deemed to
have, “so to speak, no separate mind, will or existence of its
own, and is but a conduit for its principal.”
Luis Juan L. Virata and UEM-MARA Philippines Corporation
(Now known as Cavitex Infrastructure Corporation) v. Alejandro
Ng Wee, et al. (G.R. No. 220926 and all related cases G.R. Nos.
221058, 221109, 221135, and 221218, 21 March 2018)
FACTS:
· Ng Wee was a valued client of Westmont Bank.
Sometime in 1998, he was enticed by the bank manager to
make money placements with Westmont Investment
Corporation [Wincorp], a domestic corporation organized and
licensed to operate as an investment house, and one of the
bank’s affiliates. Offered to him were “sans recourse”
transactions. Lured by the representations that the “sans
recourse” transactions are safe, stable, high-yielding, and
involve little to no risk, Ng Wee placed investments thereon
under accounts in his own name or in those of his trustees. In
exchange, Wincorp issued the Ng Wee and his trustees
Confirmation Advices informing them of the identity of the
borrower with whom they were matched, and the terms under
which the said borrower would repay them.
· Ng Wee’s initial investments were matched with Hottick
Holdings Corporation, one of Wincorp’s accredited borrowers.
Halim Saad, who owned the majority shares of said corporation,
was then the controlling shareowner of UEM-MARA, which has
substantial interests in the Cavitex project. Hottick was
extended a credit facility in consideration of the following
securities it issued in favor of Wincorp: 1) Suretyship agreement
with petitioner; 2) suretyship agreement by Halim Saad; and 3)
Thrid Party Real Estate Mortgage executed by National Steel
Corp. Hottick fully availed of the loan facility extended by
Wincorp, but it defaulted in paying its obligations when the Asian
financial crisis struck. As a result, Wincorp filed a collection suit
against Hottick, Halim Saad and NSC for the repayment of the
loan and related costs. A writ of prelim. Attachment was then
issued against Saad’s properties, which included the assets of
UEM-MARA. Petitioner was not impleaded as a party defendant
in the case. To induce the parties to settle, petitioner offered to
guarantee the full payment of the loan. The guarantee was
embodied in a MOA between him and Wincorp. In the
Settlement Agreement, Saad agreed to pay $1M to Wincorp in
satisfaction of any and all claims the latter may have against the
former under the Surety Agreement that secured Hottick’s loan.
As a result, Wincorp dropped the charges.
· Wincorp executed a waiver and quitclaim in favor of
petitioner, releasing the latter from any obligation arising from
the MOA, except for his obligation to transfer 40% equity of
UEM Development Philippines, Inc [UPDI] and 40% of UPDI’s
interest in the tollway project to WinCorp. Alarmed by the Hottick
incident, Ng Wee confronted Wincorp and inquired the status of
his investments. They assured him that the losses from Hottick’s
will be absorbed by the company and that his investments would
be transferred instead to a new borrower account. The new
borrower account is Power Merge, a domestic corporation, the
primary purpose of which is to "invest in, purchase, or otherwise
acquire and own, hold, use, sell, assign, transfer, mortgage,
pledge, exchange or otherwise dispose of real or personal
property of every kind and description." Petitioner Virata is the
majority stockholder of the corporation, owning 374,996 out of
its 375,000 subscribed capital stock.
ISSUE:
Whether it is proper to pierce the veil of corporate fiction under the
circumstance of the case

RULING:
No, it is not proper. A corporation is an entity separate and distinct from
its stockholders and from other corporations to which it may be
connected. But, this separate and distinct personality of a corporation
is merely a fiction created by law for convenience and to promote
justice. Thus, authorities discuss that when the notion of separate
juridical personality is used (1) to defeat public convenience, justify
wrong, protect fraud or defend crime; (2) as a device to defeat the labor
laws; or (3) when the corporation is merely an adjunct, a business
conduit or an alter ego of another corporation, this separate personality
of the corporation may be disregarded or the veil of corporate fiction
pierced.
The circumstances of Power Merge clearly present an alter ego case
that warrants the piercing of the corporate veil. To elucidate, case law
lays down a three-pronged test to determine the application of the
alter-ego theory, namely:
(1) Control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so that
the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own;
(2) Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a statutory
or other positive legal duty, or dishonest and unjust act in
contravention of plaintiff's legal right; and
(3) The aforesaid control and breach of duty must have
proximately caused the injury or unjust loss complained of.
In the present case, Virata not only owned majority of the Power Merge
shares; he exercised complete control thereof. Power Merge never
operated to perform its business functions, but for the benefit of Virata.
Specifically, it was merely created to fulfill his obligations under the
Waiver and Quitclaim, the same obligations for his release from liability
arising from Hottick's default and non-payment. Virata would later on
use his control over the Power Merge corporation in order to fulfill his
obligation under the Waiver and Quitclaim. Impelled by the desire to
settle the outstanding obligations of Hottick under the terms of the
settlement agreement, Virata effectively allowed Power Merge to be
used as Wincorp's pawn in avoiding its legal duty to pay the investors
under the failed investment scheme. Pursuant to the alter ego doctrine,
petitioner Virata should then be made liable for his and Power Merge's
obligations.
Maricalum Mining Corporation v. Ely G. Florentino, et al.
(G.R. No. 221813, 23 July 2018)
FACTS:
On October 2, 1992, the National Government thru the Asset
Privatization Trust (APT) executed a Purchase and Sale Agreement
(PSA) with G Holdings, a domestic corporation primarily engaged in the
business of owning and holding shares of stock of different companies.
G Holding bought 90% of Maricalum Mining's shares and financial
claims in the form of company notes. In exchange, the PSA obliged G
Holdings to pay APT the amount of ₱673,161,280.00, with a down
payment of ₱98,704,000.00 and with the balance divided into four
tranches payable in installment over a period of ten years.
Concomitantly, G Holdings also assumed Maricalum Mining's liabilities
in the form of company notes. The said financial liabilities were
converted into three (3) Promissory Notes (PNs) totaling
₱550,000,000.00 (₱114,715,360.00, ₱186,550,560.00 and
₱248,734,080.00), which were secured by mortgages over some of
Maricalum Mining's properties. These PNs obliged Maricalum Mining to
pay G Holdings the stipulated amount of ₱550,000,000.00. Upon the
signing of the PSA and paying the stipulated down payment, G
Holdings immediately took physical possession of Maricalum Mining's
Sipalay Mining Complex, as well as its facilities, and took full control of
the latter's management and operations.
On June 1, 2001, Maricalum Mining's Vice President and Resident
Manager Jesus H. Bermejo wrote a Memorandum to the cooperatives
informing them that Maricalum Mining has decided to stop its mining
and milling operations effective July 1, 2001 in order to avert continuing
losses brought about by the low metal prices and high cost of
production.
In July 2001, the properties of Maricalum Mining, which had been
mortgaged to secure the PNs, were extrajudicially foreclosed and
eventually sold to G Holdings as the highest bidder on December 3,
2001. Some of Maricalum Mining's workers, including complainants,
and some of Sipalay General Hospital's employees jointly filed a
Complaint with the LA against G Holdings, its president, and officer-in-
charge, and the cooperatives and its officers for illegal dismissal,
underpayment and nonpayment of salaries, underpayment of overtime
pay, underpayment of premium pay for holiday, nonpayment of
separation pay, underpayment of holiday pay, nonpayment of service
incentive leave pay, nonpayment of vacation and sick leave,
nonpayment of 13th month pay, moral and exemplary damages, and
attorneys fees.
ISSUE
Whether the transfer of assets from Maricalum Mining to G Holdings is
enough to invoke the equitable remedy of piercing the corporate veil
RULING:
No. The corporate veil may be lifted only if it has been used to shield
fraud, defend crime, justify a wrong, defeat public convenience, insulate
bad faith or perpetuate injustice. As a general rule that 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 misrepresented it had funds to pay and that it was simply a matter of
continuation of the selling corporation; and
4) Where the transaction is entered into fraudulently in
order to escape liability for such debts.
No clear and convincing evidence was presented by the complainants
to conclusively prove the presence of fraud on the part of G Holdings.
Although the quantum of evidence needed to establish a claim for illegal
dismissal in labor cases is substantial evidence, the quantum need to
establish the presence of fraud is clear and convincing evidence. Thus,
to disregard the separate juridical personality of a corporation, the
wrongdoing must be established clearly and convincingly-it cannot be
presumed.
Here, the complainants did not satisfy the requisite quantum of
evidence to prove fraud on the part of G Holdings. They merely offered
allegations and suppositions that, since Maricalum Mining's assets
appear to be continuously depleting and that the same corporation is a
subsidiary, G Holdings could have been guilty of fraud. As emphasized
earlier, bare allegations do not prove anything. There must be proof that
fraud-not the inevitable effects of a previously executed and valid
contract such as the PSA-was the cause of the latter's total asset
depletion. To be clear, the presence of control per se is not enough to
justify the piercing of the corporate veil.
Lanuza, Jr. v. BF Corp.
(G.R. No. 174938, 1 October 2014)
FACTS:
Gerardo Lanuza, Jr and Antonio Olbes are members of the Board of
Directors of Shangri-La. This is an Appeal on Certiorari, assailing the
CA's decision and resolution that affirmed the trial court's decision
holding that petitioners, as directors, should submit themselves as
parties to the arbitration proceedings between BF Corporation and
Shangri-La Properties, Inc. (Shangri-La). BF Corporation alleged that it
entered into agreements with Shangri-La wherein it undertook to
construct for Shangri-La a mall and a multilevel parking structure along
EDSA. Shangri-La had been consistent in paying BF Corp in
accordance with its progress billing statements. However, Shangri-La
started defaulting in payment. BF Corp filed a complaint against
Shangri-La and its board of directors. BF Corp alleged that Shangri-La
delayed processing of BF’s progress billing statements. Construction
eventually was completed but despite demands, Shangri-La refused to
pay the balance. BF also alleged that Shangri-La’s directors were in
bad faith so they should be held jointly and severally liable with Shangri-
La. Shangri-La and respondent board members filed a motion to
suspend the proceedings in view of BF’s failure to submit its dispute to
arbitration. RTC denied the motion, however. Petitioners filed an
answer saying they are resigned members of the board since July 15,
1991. Shangri-La and respondents then filed certiorari with CA which
granted their petition and ordered submission to arbitration.
ISSUE:
Whether petitioners be made parties to the arbitration proceedings,
pursuant to the arbitration clause provided in the contract between BF
Corporation and Shangri-La.
RULING:
Yes. Petitioners point out, their personalities as directors of Shangri-La
are separate and distinct from Shangri-La. Because a corporation's
existence is only by fiction of law, it can only exercise its rights and
powers through its directors, officers, or agents, who are all natural
persons. A corporation cannot sue or enter into contracts without them.
A consequence of a corporation's separate personality is that consent
by a corporation through its representatives is not consent of the
representative, personally. Its obligations, incurred through official acts
of its representatives, are its own. A stockholder, director, or
representative does not become a party to a contract. However, when
there are allegations of bad faith or malice against corporate directors
or representatives, it becomes the duty of courts or tribunals to
determine if these persons and the corporation should be treated as
one. Section 31 of the Corporation Code provides the instances
when directors, trustees, or officers may become solidarily liable
for corporate acts:
a) The director or trustee willfully and knowingly voted for or
assented to a patently unlawful corporate act;
b) The director or trustee was guilty of gross negligence or bad
faith in directing corporate affairs; and
c) The director or trustee acquired personal or pecuniary
interest in conflict with his or her duties as director or trustee.
When the courts disregard the corporation’s distinct and
separate personality from its directors or officers, the courts do not say
that the corporation, in all instances and for all purposes, is the same
as its directors, stockholders, officers, and agents. It does not result in
an absolute confusion of personalities of the corporation and the
persons composing or representing it. Courts merely discount the
distinction and treat them as one, in relation to a specific act, in order
to extend the terms of the contract and the liabilities for all damages to
erring corporate officials who participated in the corporation’s illegal
acts. This is done so that the legal fiction cannot be used to perpetrate
illegalities and injustices.
Thus, in cases alleging solidary liability with the corporation or
praying for the piercing of the corporate veil, parties who are normally
treated as distinct individuals should be made to participate in the
arbitration proceedings in order to determine if such distinction should
indeed be disregarded and, if so, to determine the extent of their
liabilities
Hence, the issue of whether the corporation's acts in violation
of complainant's rights, and the incidental issue of whether piercing of
the corporate veil is warranted, should be determined in a single
proceeding.
Philippine National Bank v. Andrada Electric and Engineering Co.
(381 SCRA 244 [2002])
FACTS:
Andrada Electric is a partnership existing under the Philippine laws.
PNB is a semi-government corporation under Philippine laws. It
organized NASUDECO to take ownership and possession of the assets
and its interest in other PNB controlled sugar mills. The latter is also a
semi-government corporation and the sugar arm of the PNB. Its
President is also the Vice-President of the PNB. Pampanga Sugar Mills
(PASUMIL) is a domestic corporation who engaged the services of
Andrada Electric for electrical rewinding and repair. It incurred the total
obligation in the amount of P777,263.80. However, PASUMIL had paid
only P250,000 and made a partial payment of P14,000. Because PNB
and NASUDECO now owned and possessed the assets of PASUMIL,
Andrada Electric seeks payment for its services rendered.
Nevertheless, PASUMIL, PNB, and NASUDECO failed and refused to
pay Andrada Electric. As a result, Andrada filed a complaint against
PASUMIL, PNB, and NASUDECO. PNB and NASUDECO filed a
motion to dismiss on the following grounds: a) NASUDECO and PNB
is not privy to the contact between Andrada Electrical and PASUMIL;
b) the taking over by NASUDECO of the assets of PASUMIL was solely
for the purpose of reconditioning the sugar central of PASUMIL; c)
nothing in the Letter of Instruction authorized or commanded the PNB
or its subsidiary corporation, the NASUDECO, to assume the corporate
obligations of PASUMIL; d) what was mentioned by the said letter of
instruction insofar as the PASUMIL liabilities were concerned was for
the PNB, or the NASUDECO, to make a study of, and submit
recommendation on the problems concerning the same; e) that the
alleged services rendered by Andrada to the PASUMIL was rendered
long before PNB took possession of the assets of the PASUMIL; f) that
the PNB and the Development Bank of the Philippines (DBP) entered
into a ‘Redemption Agreement’ whereby DBP sold, transferred and
conveyed in favor of the PNB, by way of redemption, all its (DBP) rights
and interest in and over the foreclosed real and/or personal properties
of PASUMIL; g) that the PNB pursuant to a Deed of Assignment,
conveyed, transferred, and assigned for valuable consideration, in
favor of NASUDECO, a distinct and independent corporation, all its
(PNB) rights and interest in and under the above ‘Redemption
Agreement.’; h) that as a consequence of the said Deed of Assignment,
PNB ceased to managed and operate the above-mentioned assets of
PASUMIL, which function was now actually transferred to NASUDECO.
TC rendered a judgment in favor of Andrada Electric. CA affirmed the
ruling of the TC. Hence, this petition.
ISSUE
Whether or not PNB is liable for the unpaid debts of PASUMIL to
Andrada Electric
RULING
No. As a rule, a corporation that purchases the assets of another will
not be liable for the debts of the selling corporation, provided the former
acted in good faith and paid adequate consideration for such assets,
except when any of the following circumstances is present:
(1) where the purchaser expressly or impliedly agrees to assume the
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 fraudulently entered into in order to escape
liability for those debts.
Piercing the veil of corporate fiction cannot be applied in this case
because:
First, other than the fact that petitioners acquired the assets of
PASUMIL, there is no showing that their control over it warrants the
disregard of corporate personalities. Second, there is no evidence that
their juridical personality was used to commit a fraud or to do a wrong;
or that the separate corporate entity was farcically used as a mere alter
ego of another entity or person. Lastly, respondent was not defrauded
or injured when petitioners acquired the assets of PASUMIL.
Respondent further claims that petitioners should be held liable for the
unpaid obligations of PASUMIL by virtue of LOI, which expressly
authorized PASUMIL and PNB to merge or consolidate. On the other
hand, petitioners contend that their takeover of the operations of
PASUMIL did not involve any corporate merger or consolidation,
because the latter had never lost its separate identity as a corporation.
A consolidation is the union of two or more existing entities to
form a new entity called the consolidated corporation. A merger,
on the other hand, is a union whereby one or more existing
corporations are absorbed by another corporation that survives
and continues the combined business. The merger, however, does
not become effective upon the mere agreement of the constituent
corporations. Since a merger or consolidation involves fundamental
changes in the corporation, there must be an express provision of law
authorizing them. For a valid merger or consolidation, the approval by
the Securities and Exchange Commission (SEC) and its stockholders
of the articles of merger or consolidation is required. In fact, PASUMIL’s
corporate existence had not been legally extinguished or terminated.
There is no merger or consolidation. Neither did petitioner expressly or
impliedly agree to assume the debt of PASUMIL to respondent.
Lim vs. CA (323 SCRA 102 [2000])
FACTS
Pastor died intestate. His surviving spouse, Rufina, and her nephew
filed a joint petition for administration of the estate. The properties of
private respondent corporations were included in the inventory of the
estate of the late Pastor Lim on the allegation that Pastor personally
owned the respondent corporations. They filed a motion for exclusion
of certain properties from the estate. However, the probate court denied
the motion for exclusion of respondent corporations.
ISSUE
Whether the private respondent corporations should be included in the
inventory of the estate of Pastor Lim.
RULING
No. The Court held that if a property covered by Torrens title is involved,
the presumptive conclusiveness of such title should be given due
weight, and it may only be nullified or modified by a court action when
presented with evidence to the contrary. Private corporations possess
a personality separate and distinct from their stockholders, and in the
absence of any cogency to shred the veil of corporate fiction, the
presumption of conclusiveness of said titles in favor of private
respondents should stand undisturbed. In this case, however, petitioner
presented no strong compelling evidence that Pastor owned the
properties.
It is settled that a corporation is clothed with personality separate and
distinct from that of the persons composing it. It may not generally be
held liable for that of the persons composing it. It may not be held liable
for the personal indebtedness of its stockholders or those of the entities
connected with it.
Piercing the veil of corporate entity requires the court to see through
the protective shroud which exempts its stockholders from liabilities that
ordinarily, they could be subject to, or distinguishes one corporation
from a seemingly separate one, were it not for the existing corporate
fiction.
The corporate mask may be lifted and the corporate veil may be pierced
when a corporation is just but the alter ego of a person or of another
corporation. Where badges of fraud exist, where public convenience is
defeated; where a wrong is sought to be justified thereby, the corporate
fiction or the notion of legal entity should come to naught.
Further, the test in determining the applicability of the doctrine of
piercing the veil of corporate fiction is as follows:
1) Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its
own;
(2) Such control must have been used by the defendant to commit fraud
or wrong, to perpetuate the violation of a statutory or other positive legal
duty, or dishonest and unjust act in contravention of plaintiffs legal right;
and
(3) The aforesaid control and breach of duty must proximately cause
the injury or unjust loss complained of. The absence of any of these
elements prevent "piercing the corporate veil."
Mere ownership by a single stockholder or by another corporation of all
or nearly all of the capital stock of a corporation is not of itself a sufficient
reason for disregarding the fiction of separate corporate personalities.
Francisco Motors vs. Court of Appeals
(G.R. No. 100812, June 25, 1999)
FACTS
Petitioner Francisco Motors Corporation filed a complaint for Sum of
Money against private respondents spouses Gregorio and Librada
Manuel for the balance of the jeep body purchased by them from the
petitioner, the cost of repair of the said vehicle and the costs of suit and
attorney's fees. Spouses Manuel filed their answer and interposed a
counterclaim for unpaid legal services by Gregorio Manuel which was
not paid by the incorporators, directors and officers of the petitioner
being the members of the Francisco family whom he represented in the
intestate estate proceedings of the late Benita Trinidad at time when he
was still the Assistant Legal Officer of the petitioner. The trial court
decided the case by granting the claims of both sides. On appeal, the
Court of Appeals affirmed the trial court's decision and held that equity
and justice demands the corporation’s veil of corporate identity should
be pierced and Manual be compensated for legal services rendered to
the heirs, which are directors of the corporation. Hence, this petition.
ISSUE
Whether the CA erred in applying the doctrine of piercing the veil of
corporate identity.
RULING
Yes. The Court held that the doctrine of piercing the corporate veil has
no relevant application in this case, and the CA erred in permitting the
trial court’s resort to this doctrine.
The rationale behind piercing a corporation's identity in a given case is
to remove the barrier between the corporation from the persons
comprising it to thwart the fraudulent and illegal schemes of those who
use the corporate personality as a shield for undertaking certain
proscribed activities. However, in the case at bar, instead of holding
certain individuals or persons responsible for an alleged corporate act,
the situation has been reversed. It is the petitioner as a corporation
which is being ordered to answer for the personal liability of certain
individual directors, officers and incorporators concerned.

Considering the nature of the legal services involved, the obligation
incurred by the incorporators, directors and officers was incurred in their
personal capacity. The claim for legal fees against the concerned
individuals could not be properly directed against the corporation.
General Credit Corporation vs. Alsons Development and
Investment Corporation
(GR 154975; January 29, 2007)
FACTS
Alsons and the Alcantara family sold their shareholdings in the CCC
franchise companies (now petitioner GCC) to Equity. Equity issued
Alsons a bearer promissory note. Some four years later, the Alcantara
family assigned its rights and interests over the bearer note to ALSONS
which thenceforth became the holder thereof. But even before the
execution of the assignment deal aforestated, letters of demand for
interest payment were already sent to EQUITY, through its President,
Wilfredo Labayen, who pleaded inability to pay the stipulated interest,
EQUITY no longer then having assets or property to settle its obligation
nor being extended financial support by GCC.
Alsons filed a complaint for sum of money against Equity and GCC. As
stated in the complaint, GCC is being impleaded as party-defendant for
any judgment ALSONS might secure against EQUITY and, under the
doctrine of piercing the veil of corporate fiction, against GCC, EQUITY
having been organized as a tool and mere conduit of GCC.
The trial court ruled in favor of Alsons. The CA affirmed.
ISSUE
Whether there is a basis for piercing GCC's veil of corporate identity.
RULING
Yes, the Court agrees with the CA on the application of the piercing
doctrine to the transaction subject of this case. The documented
circumstances and transaction strongly supported the conclusion that
respondent EQUITY was but an adjunct, an instrumentality or business
conduit of petitioner GCC. Certain circumstances that are also valid
grounds to pierce the corporate veil of petitioner GCC are the
commonality of directors, officers and stockholders and even
sharing of office between petitioner GCC and respondent EQUITY;
certain financing and management arrangements between the
two, allowing the petitioner to handle the funds of the latter; the
virtual domination if not control wielded by the petitioner over the
finances, business policies and practices of respondent EQUITY;
and the establishment of respondent EQUITY by the petitioner to
circumvent Central Bank rules.
WPM vs. Labayen
(GR 182770; September 2014)
FACTS
WPM entered into a management agreement with respondent
Labayen, by virtue of which the respondent was authorized to operate,
manage and rehabilitate Quickbite, a restaurant owned and operated
by WPM. Pursuant to the agreement, the respondent engaged the
services of CLN Engineering Services (CLN) to renovate Quickbite-
Divisoria. After the renovation, however, the total amount of the
renovation cost was not paid, leaving a balance of P112,876. This
prompted CLN to file a complaint for sum of money before the RTC
against respondent and Manlapaz (president of WPM). The complaint
was amended, excluding Manlapaz as defendant.
The RTC in its decision, found the respondent liable to pay CLN.
Thereafter, respondent instituted a complaint for damages against
WPM and Manlapaz, alleging that she should be entitled to
reimbursement for the payment to CLN, because she only entered a
contract with the latter for and in behalf of the petitioners. Manlapaz, in
his defense, claims, among others, that respondent entered into the
renovation agreement with CLN in her personal capacity and therefore
should only bind her, and that since WPM has a separate and distinct
personality, Manlapaz cannot be made liable for the respondent's
claim.
The RTC decided in favor of the respondent, because based on the
records, there is a clear indication that WPM is a mere instrumentality
or business conduit of Manlapaz and as such, WPM and Manlapaz are
considered one and the same. The CA affirmed the RTC ruling that
WPM and Manlapaz are one and the same.
ISSUE
whether WPM is a mere instrumentality, alter-ego, and business
conduit of Manlapaz

RULING
No. The Court held that WPM is not a mere alter ego of Manlapaz.
The doctrine of piercing the corporate veil applies only in three (3)
basic instances, namely:
a) when the separate and distinct corporate personality defeats
public convenience, as when the corporate fiction is used as a
vehicle for the evasion of an existing obligation;
b) in fraud cases, or when the corporate entity is used to justify a
wrong, protect a fraud, or defend a crime; or
c) is used in alter ego cases, i.e., where a corporation is essentially
a farce, since it is a mere alter ego or business conduit of a person,
or where the corporation is so organized and controlled and its
affairs so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation.
Piercing the corporate veil based on the alter ego theory requires the
concurrence of three elements, namely:
(1) Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its
own;
(2) Such control must have been used by the defendant to commit fraud
or wrong, to perpetuate the violation of a statutory or other positive legal
duty, or dishonest and unjust act in contravention of plaintiff's legal right;
and
(3) The aforesaid control and breach of duty must have proximately
caused the injury or unjust loss complained of.
The absence of any of these elements prevents piercing the corporate
veil.
In the present case, the attendant circumstances do not establish that
WPM is a mere alter ego of Manlapaz. Records do not show that WPM
was organized and controlled, and its affairs conducted in a manner
that made it merely an instrumentality, agency, conduit or adjunct of
Manlapaz. There was also not a single proof that WPM was formed to
defraud CLN or the respondent, or that Manlapaz was guilty of bad faith
or fraud.
Since no harm could be said to have been proximately caused by
Manlapaz for which the latter could be held solidarily liable with WPM,
and considering that there was no proof that WPM had insufficient
funds, there was no sufficient justification for the RTC and the CA to
have ruled that Manlapaz should be held jointly and severally liable to
the respondent for the amount she paid to CLN. Hence, only WPM is
liable to indemnify the respondent.
Nuccio Saverio and NS International Nuccio Saverio and NS
International, Inc. vs. Alfonso G. Puyat (GR 186433, November
2013)
FACTS
Respondent Alfonso Puyat granted a loan to NSI, represented by
Nuccio. The petitioners received P300,000 and certain machineries for
their business. However, the business failed to materialize.
Nucci made several payments but thereafter defaulted in the payment
of the loan. Respondent filed a collection suit with the RTC. The
petitioners insisted that they have already paid the loan, and that the
obligation to pay the machineries had long been extinguished by their
business’ failure to materialize. The RTC ruled in favor of the
respondents. It found merit in the latter's argument that petitioners are
one and the same, because the NS in NSI’s name stands for Nuccio
Saverio, so the doctrine of piercing the veil of corporate fiction was
proper. On appeal by the petitioners, the CA affirmed the RTC ruling.
Hence, this petition.
ISSUE
Whether the piercing of the veil of corporate fiction was proper.
RULING
No. The Court held that the evidence on record is not sufficient to apply
the piercing of the veil doctrine. A mere ownership by a single
stockholder or by another corporation of all or nearly all of the capital
stocks of the corporation is not, by itself, a sufficient ground for
disregarding the separate corporate personality. The elements of
alter-ego must first be sufficiently established.

For the ground of corporate ownership to stand, the ffg circumstances
should be established: (1) that the stockholders had control or complete
domination of the corporation's finances and that the latter had no
separate existence with respect to the act complained of; (2) that they
used such control to commit a wrong or fraud; and (3) the control was
the proximate cause of the loss or injury.
Applying these to the case, the Court held that the circumstances do
not warrant the piercing of the veil of NSI’s corporate fiction because
Nuccio had no control over NSI’s finances and the fact that he was the
signatory of the loan is not sufficient to prove that he exercised control
over the corporation’s finances. That the business did not materialize is
not also sufficient proof to justify a piercing, in the absence of proof that
the business plan was a fraudulent scheme geared to secure funds
from the respondent for the petitioners' undisclosed goals.
Sunio v. NLRC
(127 SCRA 390 [1984])
FACTS
EM Ramos & Co. (EMRACO) and Cabugao Ice Plant (CIPI) sold an ice
plant to Rizal Development and Finance Corp (RDFC). By virtue of that
sale, EMRACO-CIPI terminated the services of all their employees
including private respondents herein, and paid them their separation
pay. RDFC hired its own employees and operated the plant.
Thereafter, RDFC sold the Ice Plant to petitioner Ilocos Commercial
Corp (ICC), headed by its president and general manager, Sunio.
However, by reason of their failure to pay the balance of the purchase
price, EMRACO-CIPI foreclosed on the mortgage over the ice plant; the
property was sold at public auction to EMRACO-CIPI as the highest
bidders, and they eventually re-possessed the plant.
EMRACO-CIPI sold the ice plant to Nilo Villanueva, subject to the right
of redemption of RDFC. Nilo Villanueva then rehired private
respondents. Thereafter, RDFC redeemed the ice plant. When they
obtained its possession, the petitioners did not rehire the private
respondents, which prompted them to file a case for illegal dismissal.
The Asst. Regional Director decided in favor of private respondents.
Petitioners raise the issue that Sunio is not personally liable for the
award of relief or backwages to the private respondents.
ISSUE
Whether Sunio should be made liable with petitioner company for the
payment of the backwages, being the general manager of the petitioner
company
RULING
No. The Court held that Sunio cannot be made personally liable for the
payment of the private respondents’ backwages, because there is no
evidence on record that he acted maliciously or in bad faith in
terminating the services of private respondents. His act, therefore, was
within the scope of his authority and was a corporate act.
It is basic that a corporation is invested by law with a personality
separate and distinct from those of the persons composing it as well as
from that of any other legal entity to which it may be related. Mere
ownership by a single stockholder or by another corporation of all or
nearly all of the capital stock of a corporation is not of itself sufficient
ground for disregarding the separate corporate personality.
LBC v. CA (364 SCRA 375 [2001])
Facts: Landbank of the Philippines extended a series of credit
accomodations to apellee ECO, using the trust funds of the Philippine
Virginia Tobacco Administration in the aggregate amount of
P26,109,000.00. The proceeds of the credit accommodations were
received on behalf of ECO by appellee Oñate. On the respective
maturity dates of the loans, ECO failed to pay the same. Oral and
written demands were made, but ECO was unable to pay. ECO claims
that the company was in financial difficulty. ECO proposed and
submitted to LBP a “Plan of Payment” whereby the former would set up
a financing company which would absorb the loan obligations. The
Trust Committee deliberated on the “Revised Plan of Payment” and
resolved to reject it. Landbank filed a complaint for Collection of Sum
of Money against ECO and Emmanuel C. Oñate before the Regional
Trial Court of Manila, Branch 50.
After trial on the merits, a judgment was rendered in favor of LBP;
however, appellee Oñate was absolved from personal liability for
insufficiency of evidence.
Dissatisfied, both parties filed their respective Motions for
Reconsideration. LBP claimed that there was an error in computation
in the amounts to be paid. LBP also questioned the dismissal of the
case with regard to Oñate.
Issue: whether or not the corporate veil of ECO Management
Corporation should be pierced.
Ruling: NO.
A corporation, upon coming into existence, is invested by law with a
personality separate and distinct from those persons composing it as
well as from any other legal entity to which it may be related. The mere
fact that Oñate owned the majority of the shares of ECO is not a ground
to conclude that Oñate and ECO is one and the same. Mere ownership
by a single stockholder of all or nearly all of the capital stock of a
corporation is not by itself sufficient reason for disregarding the fiction
of separate corporate personalities. Neither is the fact that the name
“ECO” represents the first three letters of Oñate’s name sufficient
reason to pierce the veil. Even if it did, it does not mean that the said
corporation is merely a dummy of Oñate. A corporation may assume
any name provided it is lawful. There is nothing illegal in a corporation
acquiring the name or as in this case, the initials of one of its
shareholders.
The mere fact that one or more corporations are owned or controlled
by the same or single stockholder is not a sufficient ground for
disregarding separate corporate personalities
Marubeni v. Lirag (362 SCRA 620 [2001])
Facts:Marubeni Corporation (hereafter, Marubeni) is a foreign
corporation organized and existing under the laws of Japan. It was
doing business in the Philippines through its duly licensed, wholly
owned subsidiary, Marubeni Philippines Corporation. Petitioners
Ryoichi Tanaka, Ryohei Kimura and Shoichi One were officers of
Marubeni assigned to its Philippine branch. . Lirag claimed that on
February 2, 1987, petitioner Ryohei Kimura hired his consultancy group
for the purpose of obtaining government contracts of various projects.
Petitioner Kimura authorized him to work on the following projects. The
consultancy agreement was not reduced into Writing because of the
mutual trust between Marubeni and the Lirag family. Their close
business and personal relationship dates back to 1960, when
respondent’s family was engaged in the textile fabric manufacturing
business, in which Marubeni supplied the needed machinery,
equipment, spare parts and raw materials.6
Lirag demanded for his payment as a consultant. the trial court
promulgated a decision and ruled that respondent is entitled to a
commission. Respondent was led to believe that there existed an oral
consultancy agreement.
Issue: whether or not there was a consultancy agreement between
petitioners and respondent.
Ruling: No, there was no consultancy agreement between the parties.
the parties did not reach the second stage as the headquarters in
Tokyo, Japan did not see it fit to hire a consultant as they decided not
to participate in the bidding. Hence, no consultancy agreement was
perfected, whether oral or written. There was no absolute acceptance
of respondent’s offer of consultancy services.
• When piercing occurs:
o Fraud Cases - when a
corporate entity is used to
commit fraud or justify a
wrong or to defend a crime.
o
Enriquez Security Services, Inc. vs. Cabotaje
(G.R. No. 147993. July 21, 2006)
Facts: Victor A. Cabotaje was employed as a security guard by
Enriquez Security and Investigation Agency. Enriquez Security
Services, Inc. (ESSI) was incorporated.
Petitioner acknowledged that respondent was entitled to retirement
benefits but opposed his claim that the computation of such benefits
must be reckoned from January 1979 when he started working for
ESIA. It claimed that the benefits must be computed only from
November 13, 1985 when ESSI was incorporated.
Issue: Whether petitioner’s veil of corporate fiction should be pierced

Ruling: Yes
The attempt to make the security agencies appear as two separate
entities, when in reality they were but one, was a devise to defeat the
law and should not be permitted. Although respect for corporate
personality is the general rule, there are exceptions. In appropriate
cases, the veil of corporate fiction may be pierced as when it is used as
a means to perpetrate a social injustice or as a vehicle to evade
obligations. Petitioner was thus correctly ordered to pay respondent’s
retirement under RA 7641, computed from January 1979 up to the time
he applied for retirement in July 1997.
Koppel vs. Yatco
(GR L-47673, July 2015)
Facts: Koppel Inc. is a corporation duly organized and existing under
and by virtue of the laws of the Philippines, with principal office therein
at the City of Manila, the capital stock of which is divided into one
thousand (1,000) shares of P100 each. The Koppel Industrial Car and
Equipment Company, a corporation organized and existing under the
laws of the State of Pennsylvania, United States of America, and not
licensed to do business in the Philippines, owned nine hundred and
ninety-five (995) shares out of the total capital stock of the plaintiff from
the year 1928 up to and including the year 1936, and the remaining five
(5) shares only were and are owned one each by officers of the plaintiff
corporation
ISSUE: Whether or not Koppel Philippines is a domestic corporation
distinct and separate from, and not a mere branch of Koppel
Industrial Car and Equipment Co
RULING:
Koppel Philippines is a mere branch, subsidiary or agency of the latter.
A corporation will be looked upon as a legal entity as a general rule,
and until sufficient reason to the contrary appears; but, when the notion
of legal entity is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, the law will regard the corporation
as an association of persons. The corporate entity is disregarded where
it is so organized and controlled, and its affairs are so conducted, as to
make it merely an instrumentality, agency, conduit or adjunct of another
corporation.
Tan Boon Bee & Co. vs. Jarencio
(GR L-41337; June 1988)
Facts: Petitioner herein, doing business under the name and style of
Anchor Supply Co., sold on credit to herein private respondent Graphic
Publishing, Inc. (GRAPHIC for short) paper products amounting to
P55,214.73. failure of GRAPHIC to pay any instaUment, petitioner filed
with the then Court of First Instance of Manila, Branch XXIII, presided
over by herein respondent judge, Civil Case No. 91857 for a Sum of
Money (Rollo, pp. 36-38). Respondent judge declared GRAPHIC in
default for failure to file its answer within the reglementary period and
plaintiff (petitioner herein) was allowed to present its evidence exparte.
ISSUE: Whether or not the veil of corporate fiction should be pierced.
HELD: Yes. PADCO, as its name suggests, is a drug company not
engaged in the printing business. So it is dubious that it really owns the
said printing machine regardless of PADCO’s title over it. Further, the
printing machine, as shown by evidence, has been in GPI’s premises
even before the date when PADCO alleged that it acquired ownership
thereof. Premises considered, the veil of corporate fiction should be
pierced; PADCO and GPI should be considered as one. When a
corporation is merely an adjunct, business conduit or alter ego of
another corporation the fiction of separate and distinct corporation
entities should be disregarded.
o Instrumentality Rule / Alter-
Ego Doctrine –
- when a corporate entity is used to defeat public convenience or
is merely a farce since the corporation is merely the alter ego,
business conduit, or instrumentality of a person or another
entity.
- The doctrine applies in this case even in the absence of evil
intent; it applies because of the direct violation of a central
corporate law principle of separating ownership from
management.
 - The doctrine in such cases is based on estoppel: if stockholders
do not respect the separate entity, others cannot also be
expected to be bound by the separate juridical entity.
- Piercing in alter ego cases may prevail even when no monetary
claims are sought to be enforced against the stockholders or
officers of the corporation.
Philippine National Bank v. Hydro Resources Contractors
Corporation
(G.R. No. 167530, 13 March 2013)
Facts: DBP and PNB foreclosed on certain mortgages made on the
properties of Marinduque Mining and Industrial Corporation (MMIC). As
a result of the foreclosure, DBP and PNB acquired substantially all the
assets of MMIC and resumed the business operations of the defunct
MMIC by organizing NMIC.7 DBP and PNB owned 57% and 43% of the
shares of NMIC, respectively, except for five qualifying shares. As of
September 1984, the members of the Board of Directors of NMIC,
namely, Jose Tengco, Jr., Rolando Zosa, Ruben Ancheta, Geraldo
Agulto, and Faustino Agbada, were either from DBP or PNB. NMIC
engaged the services of Hercon, Inc., for NMIC’s Mine Stripping and
Road Construction Program in 1985 for a total contract price of
P35,770,120. After computing the payments already made by NMIC
under the program and crediting the NMIC’s receivables from Hercon,
Inc., the latter found that NMIC still has an unpaid balance of
P8,370,934.74.10 Hercon, Inc. made several demands on NMIC,
including a letter of final demand dated August 12, 1986, and when
these were not heeded, a complaint for sum of money was filed in the
RTC of Makati, Branch 136 seeking to hold petitioners NMIC, DBP, and
PNB solidarily liable for the amount owing Hercon, Inc.
President Corazon C. Aquino issued Proclamation No. 50 creating the
APT for the expeditious disposition and privatization of certain
government corporations and/or the assets thereof. Pursuant to the
said Proclamation, on February 27, 1987, DBP and PNB executed their
respective deeds of transfer in favor of the National Government
assigning, transferring and conveying certain assets and liabilities,
including their respective stakes in NMIC. In turn and on even date, the
National Government transferred the said assets and liabilities to the
APT as trustee under a Trust Agreement.
NMIC and DPB claimed that HRCC had no cause of action and
asserted that the contract with HRCC was entered into by its President
without any authority. It also failed o comply with the rules and
regulations concerning government of contracts. DBP asserts that it is
not a privy to the contact with NMIC and NMIC’s juridical personality id
separate from DBP.
ISSUE: Whether or not there is sufficient ground to pierce the
veil of corporate fiction
A corporation is an artificial entity created by operation of law. It
possesses the right of succession and such powers, attributes, and
properties expressly authorized by law or incident to its existence. It
has a personality separate and distinct from that of its stockholders and
from that of other corporations to which it may be connected. As a
consequence of its status as a distinct legal entity and as a result of a
conscious policy decision to promote capital formation, a corporation
incurs its own liabilities and is legally responsible for payment of its
obligations. In other words, by virtue of the separate juridical personality
of a corporation, the corporate debt or credit is not the debt or credit of
the stockholder. This protection from liability for shareholders is
the principle of limited liability.
Equally well-settled is the principle that the corporate mask may be
removed or the corporate veil pierced when the corporation is just an
alter ego of a person or of another corporation. For reasons of public
policy and in the interest of justice, the corporate veil will justifiably be
impaled only when it becomes a shield for fraud, illegality or inequity
committed against third persons.
The doctrine of piercing the corporate veil applies only in three (3)
basic areas, namely: 1) defeat of public convenience as when the
corporate fiction is used as a vehicle for the evasion of an existing
obligation; 2) fraud cases or when the corporate entity is used to justify
a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where
a corporation is merely a farce since it is a mere alter ego or business
conduit of a person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation.
In this connection, case law lays down a three-pronged test to
determine the application of the alter ego theory, which is also
known as the instrumentality theory, namely:
(1) Control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so
that the corporate entity as to this transaction had at the time
no separate mind, will or existence of its own;(Control Test)
(2) Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and unjust
act in contravention of plaintiff’s legal right; and (Fraud Test)
(3) The aforesaid control and breach of duty must have
proximately caused the injury or unjust loss complained of.
(Harm Test)
For piercing the corporate veil based on the alter ego theory requires
the concurrence of three elements: control of the corporation by the
stockholder or parent corporation, fraud or fundamental unfairness
imposed on the plaintiff, and harm or damage caused to the plaintiff by
the fraudulent or unfair act of the corporation. The absence of any of
these elements prevents piercing the corporate veil.
These are not present in this case.
Asset Privatization Trust v. Hydro Resources Contractors
Corporation (G.R. No. 167561)
Development Bank of the Philippines v. Hydro Resources
Contractors
Corporation (G.R.
No. 167603)
Concept Builders, Inc. vs. NLRC (257 SCRA, 149)
Facts: Private respondents were employed by Petitioner Concept
Builders, Inc. They were later on terminated and respondents filed a
complaint for illegal dismissal. The Labor Arbiter ordered the petitioner
to reinstate private respondents and pay them back their wages,
which was affirmed by the NLRC. An Alias Writ of Execution was
issued by the Labor Arbiter directing the sheriff to collect the balance
of the judgment award. However, it could not be served because a
different company was within the petitioner’s premises, namely Hydro
Pipes Philippines, Inc. Respondents filed a motion for issuance of a
break-open order alleging that HPPI and the petitioner corporation
were owned by the same incorporators/stockholders. It was also
alleged that petitioner temporarily suspended its business operations
in order to evade its legal obligations. HPPI argued that it is a
corporation that is separate and distinct from petitioner and the both
corporation are engaged in 2 different kinds of businesses. Petitioner
contended that the doctrine of piercing the corporate veil should not
have been applied in the absence of showing that it created HPPI in
order to evade its liability to private respondents.
Issue: WON the doctrine of piercing corporate veil should have been
applied
Ruling: Yes, the Court held that this separate and distinct
personality of a corporation is merely a fiction created by law for
convenience and to promote justice. So, when the notion of separate
juridical personality is used to defeat public convenience, justify
wrong, protect fraud or defend crime, or is used as a device to defeat
the labor laws, this separate personality of the corporation may be
disregarded or the veil of corporate fiction pierced. This is true
likewise when the corporation is merely an adjunct, a business conduit
or an alter ego of another corporation.
The test in determining the applicability of the doctrine of piercing the
veil of corporate fiction is as follows:
"1. Control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy and business
practice in respect to the transaction attacked so that the corporate
entity as to this transaction had at the time no separate mind, will or
existence of its own;
2. Such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in contravention of
plaintiff's legal rights; and
 3. The aforesaid control and breach of duty must proximately
cause the injury or unjust loss complained of.
The absence of any one of these elements prevents 'piercing the
corporate veil'. In applying the 'instrumentality' or 'alter ego' doctrine,
the courts are concerned with reality and not form, with how the
corporation operated and the individual defendant's relationship to
that operation."
In this case, the NLRC noted that while petitioner claimed it ceased
its business operations, it filed an Information Sheet with the
Securities and Exchange Commission stating that its office address is
at 355 Maysan Road, Valenzuela, Manila. On the other hand, HPPI,
submitted on the same day that its office address is the same. Both
GIS were filed by the same Virgilio Casino as the corporate secretary
and both corporations had the same president, the same board of
directors, corporate officers and subscribers. Thus, the Court ruled
that petitioner ceased its business operations in order to evade the
payment to private respondents of backwages.
Kukan International Corporation vs. Hon. Amor Reyes
(GR 182729; Sept. 2010)
Doctrine: Under certain circumstances, the courts may disregard the
separate and distinct personality of the corporation from its members
or stockholders and treat the corporation as a mere collection of
individuals or an aggregation of persons undertaking business as a
group such as when the corporate legal entity is used as a cloak for
fraud or illegality
Facts: Kukan, Inc. conducted a bidding for the supply and
installation of signages in a building. Respondent Morales tendered
the winning bid and was awarded the PhP5M contract. Despite his
compliance with his contractual undertakings, Morales was partially
paid and petitioner refused to pay despite demands. Starting
November 2000, Kukan no longer appeared and participated in the
proceedings. Morales moved for a writ of execution but it was levied
upon various personal properties by a different company named
Kukan International Corporation (KIC). Notably, KIC was incorporated
shortly after petitioner Kukan stopped participating in the civil case.
Morales then moved for the application of piercing the veil of corporate
fiction, which was both granted by the trail court and the Court of
Appeals. Petitioner argued that its constitutional right to due process
was violated since it was never made a party to the case.
Issue: WON the trial and the CA correctly applied the principle of
piercing the veil of corporate fiction
Ruling: No, the Court held that a corporation not impleaded in a suit
cannot be subject to the court’s process of piercing the veil since the
court has not acquired jurisdiction over the corporation. The doctrine
of piercing the veil comes to play only during the trial of the case after
the court has already acquired jurisdiction over the corporation.
Further, when the Court pierced the veil of corporate fiction of two
corporations, there was a confluence of the following factors:
1. A first corporation is dissolved;
2. The assets of the first corporation is transferred to a second
corporation to avoid a financial liability of the first
corporation; and
3. Both corporations are owned and controlled by the same
persons such that the second corporation should be
considered as a continuation and successor of the first
corporation.
In the instant case, however, the second and third factors are
conspicuously absent. There is, therefore, no compelling justification
for disregarding the fiction of corporate entity separating Kukan, Inc.
from KIC. In applying the principle, both the RTC and the CA
miserably failed to identify the presence of the abovementioned
factors.
o Equity Cases - when piercing
the corporate fiction is
necessary to achieve justice
or equity.
- These are cases, where there is no fraud or alter ego
circumstances that can warrant the piercing of the corporate
veil. This mainly used to render justice in the situation at hand,
or to brush aside technical defenses.
-
 o Identity Doctrine
- “If the plaintiff can show that there was such a unity of interest
and ownership that the independence of the corporations had
in effect ceased or had never begun, and adherence to the
fiction of separate identity would serve only to defeat justice and
equity by permitting the economic entity to escape liability
arising out of an operation of one corporation for the benefit of
the whole enterprise. ( Cox, Hazen and O’Neal)
Liddle & Co., Inc. vs. CIR (June 1961)
Facts: Petitioner Liddell & Co, a domestic corporation, who was
engaged as an importer of automobiles and trucks with Frank Liddell
as the major stockholder. Liddell Motors, Inc. was likewise a domestic
corporation with Frank Liddell as one of the stockholders. Beginning
January 1949, Liddell & Co stopped retailing cars and trucks and it
conveyed them to Liddell Motors, Inc which in turn sold the vehicles
to the public. Since then, Liddell & Co paid sales taxes on the basis of
its sales to Liddell Motors, Inc considering said sales as its original
sales. Upon review of the transactions between Liddell & Co and
Liddell Motors Inc, the BIR determined that the latter was an alter ego
of Liddell & Co. The sales made by Liddell Motors, Inc. to the public
were considered as the original sales of Liddell & Co. Thus, the BIR
assessed a million sales tax deficiency against Liddell & Co, which
was upheld by the Court of Tax Appeals.
Issue: WON Liddell Motors is the alter ego of Liddell & Co, Inc.
Ruling: Yes, the Court held that Frank Liddell owned both Liddell &
Co and Liddell Motors, Inc. He was the one who supplied the original
capital funds for both and was the one that participated in their affairs.
The Court explained that the mere fact that Liddel & Co and Liddell
Motors, Inc are corporations owned and controlled by Frank Liddell
directly or indirectly is not by itself sufficient to justify the disregard of
the separate corporate identity of one from the other. There is
however, in this instant case, a peculiar consequence of the
organization and activities of Liddell Motors, Inc.
Under the law in force at the time of its incorporation the sales tax on
original sales of cars (sections 184, 185 and 186 of the National
Internal Revenue Code), was progressive, i.e. 10% of the selling price
of the car if it did not exceed P5,000, and 15% of the price if more than
P5,000 but not more than P7,000, etc. This progressive rate of the
sales tax naturally would tempt the taxpayer to employ a way of
reducing the price of the first sale. And Liddell Motors, Inc. was the
medium created by Liddell & Co. to reduce the price and the tax
liability.
• Reverse piercing
o I/AME vs. Litton and
Company (G.R. No. 191525,
13 December 2017)
Facts: Atty. Emmanuel Santos owed monthly rentals to the owner of
the building, Respondent Litton. The METC ruled in favor of Litton and
levied on a piece of real property covered by a title in the name of the
petitioner in order to execute judgment against Santos. The petitioner
argued that it has a separate and distinct personality from Santos and
that its properties should not be made to answer for the latter’s
liabilities. The appellate court found that Santos represented himself
as the President of the petitioner in a deed of absolute of sale dated
in 1979 but records show that it was only in 1985 that the Corporation
was organized and that the subject real property was transferred to
the petitioner during the pendency of the appeal for the revival of the
judgment in the ejectment case.
Issue: WON reverse piercing is justified in this case
Ruling: Yes, "Reverse-piercing flows in the opposite direction (of
traditional
corporate veil-piercing) and makes the corporation liable for the
debt of the
shareholders."
It has two (2) types:
1. outsider - outsider reverse piercing and insider reverse piercing.
Outsider reverse piercing occurs when a party with a claim against an
individual or corporation attempts to be repaid with assets of a
corporation owned or substantially controlled by the defendant.
2. insider - In contrast, in insider reverse piercing, the controlling
members will attempt to ignore the corporate fiction in order to take
advantage of a benefit available to the corporation, such as an interest
in a lawsuit or protection of personal assets.

Outsider reverse veil-piercing is applicable in the instant case. Litton,
as judgment creditor, seeks the Court's intervention to pierce the
corporate veil of I/AME in order to make its Makati real property
answer for a judgment against Santos, who formerly owned and still
substantially controls I/AME.
§ Transferability of Shares
§ Delegated Management
§ Investor Ownership
• Advantages / Disadvantages of the Corporate Form
C. Classes of Corporations
• Section 3 (RCC)
SECTION 3 (RCC) - Corporations formed or organized under this
Code may be stock or non-stock corporations. Stock corporations
are those which have capital stock divided into shares and are
authorized to distribute to the holders of such shares, dividends,
or allotments of the surplus profits on the basis of the shares held.
All other corporations are nonstock corporations.
• Section 4 (RCC)
SECTION 4 (RCC) – Corporations created by special laws or
charters shall be governed primarily by the provisions of the
special law or charter creating them or applicable to them,
supplemented by the provisions of this Code, insofar as they are
applicable.
• Classes of Corporations:
§ In relation to the State
• Public and Private
- A public corporation is limited to corporation for the
government of the State or municipal corporations under Sec. 2
of the Old Corporation Code.
- Corporations may be considered as “public corporations”
according to the purpose for which they were organized.
- Public corporation, like Boy Scouts of the PH, that are created
by special law to serve a public purpose is a public corporation.
- In other jurisdictions, A public corporation has been defined as
such as are created for the purpose of government and
management of public affairs founded by the State and
managed by it for governmental purposes.
- In other jurisdictions, public corporation is involved in
problems relating to immunity from suit.
• Public Corporations
National Coal Co. v. CIR
(46 Phil. 584 [1924])
FACTS:
This action was brought for the purpose of recovering a sum of
12,044.68, alleged to have been paid under protest by the plaintiff
company to the defendant, as specific tax on tons of coal. Said
corporation is a corporation created by Act No. 2705 of the Philippine
Legislature for the purpose of developing the coal industry in the
Philippines and is actually engaged in coal mining on reserved lands
belonging to the Government. It claimed exemptions from taxes under
Sections 14 and 15 of Act No. 2719 and prayed to refund the plaintiff
said sum paid.
The defendant answered denying generally and specifically all the
material allegations of the complaint except the legal existence and
personality of the plaintiff. As a special defense, the defendant alleged
a) that the sum paid was paid by the plaintiff without protests, and b)
the said sum was due and owing from the plaintiff to the Government
of the Philippines under the provisions of the Administrative Code
(Section 1496).
After a consideration of the evidence, the Honorable Pedro Concepcin
held that the words “lands owned by any person, etc” in section 15 of
Act 2719 should be understood to mean “lands held in lease or
usufruct” in harmony with the other provision of said Act; that the coal
lands possessed by the plaintiff, belonging to the Government, fell
within the provision and that a tax of 0.04 pesos per ton of 1,016 kilos
on each ton of coal extracted therefrom, was the only tax which should
be collected from the plaintiff and sentenced the defendant to refund to
the plaintiff the sum of 11,081.11 which is the difference between the
amount collected under AC and the amount which should have been
collected under Act 2719.
Plaintiff claims to be the owner of the land which it has mined the coal
in question and is therefore subject to the provisions of sec 15act 2719
and not to the provisions of the section 1496 AC.
The plaintiff corporation took possession of the land in question by
virtue of the proclamation of the gov-gen known as proclamation no 39;
no document had been issued in favor of the plaintiff corporation; said
corporation had received no permission from the secretary of
agriculture and natural resources it took possession of said lands by
virtue of said proclamation.
ISSUE:
Whether the plaintiff is subject to the taxes under section 15 of act no
2719 or to the specific taxes under AC 1496 (it is subject to pay the
internal revenue tax under sec 1496 of the AC)
HELD:
The plaintiff corporation was created on March 10 1917 by act no 2705
for the purpose of developing the coal industry in the Philippines in
harmony with the general plan of the gov to encourage the development
plan of the natural resources of the country and to provide facilities
therefor.
By said Act, the company was granted the general powers of a
corporation “and such other powers as may be necessary to enable it
to prosecute the business of developing coal deposits in the pH and of
mining, extracting, transporting and selling the coal contained in said
deposits. By the the same law, the gov of ph is made the majority
stockholder, evidently in order to insure proper government supervision
and control, and thus place the gov in a position to render all possible
encouragement, assistance and help in the prosecution and
furtherance of the company’s business.
[[who owns the land from which the coal in question was mined( if
plaintiff, judgment should be affirmed, if no - judgment should be
reversed)]]
THE PLAINTIFF IS A PRIVATE CORPORATION. THE MERE FACT
THAT THE GOVERNMENT HAPPENS TO BE THE MAJORITY
STOCKHOLDER DOES NOT MAKE IT A PUBLIC CORPORATION.
Act No. 2705, as amended, makes it subject to all of the provisions of
the Corporation Law. As a private corporation, it has no greater rights,
powers or privileges than any other corporation, which might be
organized for the same purpose under the Corporation law, and it was
not the intention of the Legislature to give it a preference or right or
privilege over other legitimate private corporations in the mining of coal.
The following propositions are fully sustained by the facts and the law:
(1) The National Coal Company is an ordinary private corporation
organized under Act No. 2705, and has no greater powers nor
privileges than the ordinary private corporation, except those
mentioned, perhaps, in section 10 of Act No. 2719, and they do not
change the situation here.
(2) It mined on public lands between the month of July, 1920, and the
months of March, 1922, 24,089.3 tons of coal.
(3) Upon demand of the Collector of Internal Revenue it paid a tax of
P0.50 a ton, as taxes under the provisions of article 1946 of the
Administrative Code on the 15th day of December, 1922.
(4) It is admitted that it is neither the owner nor the lessee of the lands
upon which said coal was mined.
(5) The proclamation of Francis Burton Harrison, Governor-General, of
the 18th day of October, 1917, by authority of section 1 of Act No. 926,
withdrawing from settlement, entry, sale, or other disposition all coal-
bearing public lands within the Province of Zamboanga and the Island
of Polillo, was not a reservation for the benefit of the National Coal
Company, but for any person or corporation of the Philippine Islands or
of the United States.
(6) That the National Coal Company entered upon said land and mined
said coal, so far as the record shows, without any lease or other
authority from either the Secretary of Agriculture and Natural
Resources or any person having the power to grant a leave or authority.

o Cervantes v. Auditor-General
(91 Phil. 359 [1952])
FACTS:
Petitioner was in 1949 the manager of the NAFCO (National Abaca and
Other Fibers Corporations) with a salary of 15k. By a resolution of the
Board of Directors of this corporation, he was granted quarters
allowance of not exceeding 400php a month. Submitted the Control
Committee of the Government Enterprises Council for approval but was
disapproved due to the recommendation of the NAFCO Auditor stating
that quarters allowance constituted additional compensation prohibited
by the charter of the NAFCO, which fixes the salary of the general
manager not exceeding 15k and that the precarious financial condition
of the corporation did not warrant the granting of such allowance.
The NAFCO was created by the Commonwealth Act No. 332 in 1939,
with a capital stock of 20,000,000, 51% of which was to be subscribed
by the National Government and the remainder to be offered to
provincial, municipal and the city governments and to the general
public. The management of the corporation was vested in a board of
directors of not more than 5 members appointed by the president of the
Philippines with the consent of the Commission on Appointments. BUT
the corporation was MADE SUBJECT TO THE PROVISIONS OF THE
CORPORATION LAW in so far as they were compatible with the
provisions of its charger and the purposes of which it was created and
was to enjoy the general powers mentioned in the corporation law in
addition to those granted in its charter.
Republic Act No. 51 was approved which was to effect such reforms
and changes in government owned and controlled corporations for the
purpose of promotion simplicity, economy and efficiency in their
operation. EO 93 also created the Government Enterprises council, the
EO also provided that the council was to have a Control Committee
composed of the Sec of Commerce and the following functions:
1. To supervise, for and under the direction of the president, all the
corporations owned or controlled by the Government for the
purpose of insuring efficiency and economy in their operations;
2. To pass upon the program of activities and the yearly budget of
expenditures approved by the BOD of said corporations; and
3. To carry out the policies and measures formulated by the GEC
with the approval of the president.
ISSUE: Whether or not petitioner is entitled to quarter allowance
HELD:
With its controlling stock owned by the Government and the power of
appointing its directors vested in the President of the Philippines, there
can be no question that the NAFCO is Government controlled
corporation subject to the provisions of RA 51 and E 93. Consequently,
it was also subject to the powers of the Control Committee created in
said executive order, among which is the power of supervision for the
purpose of ensuring efficiency and the yearly budget of expenditures
approved by the board of directors.
That the Control Committee had good grounds for disapproving the
resolution is also clear since the granting of the allowance amounted to
an illegal increase of petitioner’s salary beyond the limit fixed in the
corporate charter and was furthermore not justified by the precarious
financial condition of the corporation.
Executive Order No. 332 of 1941, which prohibits the payment of
additional compensation to those working for the Government and its
Instrumentalities, including government-controlled corporations, was in
1945 amended by Executive Order No. 77 by expressly exempting from
the prohibition the payment of quarters allowance "in favor of local
government officials and employees entitled to this under existing law."
The amendment is a clear indication that quarters allowance was meant
to be included in the term "additional compensation", for otherwise the
amendment would not have expressly excepted it from the prohibition.
This being so, we hold that, for the purpose of the executive order just
mentioned, quarters allowance is considered additional compensation
and, therefore, prohibited.
o Philippine Society for the
Prevention of Cruelty to
 Animals v. COA (534 SCRA
112 [2007])
FACTS:
The petitioner was incorporated as a juridical entity over 100 years ago
by virtue of Act No. 1285 in 1915, by the Philippine Commission. The
petitioner, at the time it was created, was composed of animal
aficionados and animal propagandists. The objects of the petitioner as
stated in its charter, shall be to enforce laws relating to animal cruelty
inflicted upon animals or the protection of animals in the Philippines,
and generally, to do and perform all things which may tend in any way
to alleviate the suffering of animals and promote their welfare.
At the time of the enactment, the original Corporation Law (Act No.
1459) was not yet in existence. Act No. 1285 antedated both the
Corporation Law and the constitution of the SEC. Important to note is
that the nature of the petitioner as a corporate entity is distinguished
from the sociedad anonimas under the Spanish Code of Commerce.
For the purpose of enhancing its powers in promoting animal welfare
an enforcing laws for the protection of animals, the petitioner was
initially imbued under its charter with the power to apprehend violators
of animal welfare laws and shared ½ fines imposed and collected thru
its effort, however, the power to make arrests as well as the privilege to
retain a portion of the fines collected for violations of animal-related
laws were recalled subsequently.
In 2003, an audit team from COA visited the office of the petitioner to
conduct an audit survey pursuant to an office order addressed to the
petitioner. The petitioner demurred on the ground that IT WAS A
PRIVATE ENTITY NOT UNDER THE JURISDICTION OF COA citing
Section 2(1) of Art. 9 of the Consti which sepcifies the general
jurisdiction of COA.
Petitioner’s arguments;
1. Altho it was created by special legislation, there was as yet
neither a Corporation Law or any other general law under which
it may be organized and incorporated, nor an SEC which would
have passed upon its organization and incorporation.
2. EO 63 deprived the petitioner of its power to make arrests and
that the petitioner lost its operational funding and that it
exercises no governmental function. And that the government
by its over acts, confirmed petitioner’s status as a private
juridical entity. (Nowhere in its charter is it indicated that it is a
public corporation unlike the law which created Boy Scouts of
the PH specifically stating that it is a public corporation)
3. The employees of the petitioner are registered and clever by SS
and not GSIS
4. No government appointee or representative sits on the board of
trustees of the petitioner
ISSUE: Whether or not petitioner qualifies as a government agency that
may be subject to COA’s audit authority
HELD:
Petitioner is a private domestic corporation subject to the jurisdiction of
the SEC.
1. The Court agrees with the petitioner that the charter test cannot
be applied because the test had been introduced by the 1935
Constitution and not earlier, for it was incorporated 1905. It is
settled that laws in general have no retroactive effect, unless
the contrary is provided.
2. The general principle of prospectivity of the law likewise applies
to the Corporation Law.
1. SEC. 75. Any corporation or sociedad anonima formed,
organized, and existing under the laws of the Philippine
Islands and lawfully transacting business in the
Philippine Islands on the date of the passage of this Act,
shall be subject to the provisions hereof so far as such
provisions may be applicable and shall be entitled at its
option either to continue business as such corporation
or to reform and organize under and by virtue of the
provisions of this Act, transferring all corporate interests
to the new corporation which, if a stock corporation, is
authorized to issue its shares of stock at par to the
stockholders or members of the old corporation
according to their interests. (Emphasis supplied).
 3. A reading of petitioner’s charter shows that it is not subject to
control or supervision by any agency of the State, unlike
GOCCs. No government representative sits on the board of
trustees of the petitioner.
4. Like all private corporations, the successors of its members are
determined voluntarily and solely by the petitioner in
accordance with its by-laws, and may exercise those powers
generally accorded to private corporations.
5. The employees of the petitioner are registered and covered by
the SSS and not GSIS, which should be the case if the
employees are considered government employees. (An
indication of petitioner’s nature as a private entity)
6. The fact that a certain juridical entity is impressed with public
interest does not, alone, make the entity a public corporation,
inasmuch as a corporation may be private altho its charter
contains provisions of a public character, incorporated solely for
the public good. A QUASI-PUBLIC CORPORATION IS A
SPECIE OF PRIVATE CORPORATION, qualifying factor is the
type of service the former renders to the public; if it performs a
public service, then it becomes a quasi-public corporation. (like
bank, private schools, universities, private hospitals, etc)
The true criterion to determine whether a corporation is public or
private is found in the totality of the relation of the corporation to
the State. If the corporation is created by the State as the latter’s
own agency or instrumentality to help it in carrying out its
governmental functions, then that corporation is considered
public; otherwise, it is private.
The corporation is a creature of the state. It is presumed to be
incorporated for the benefit of the public. It received certain
special privileges and franchises, and holds them subject to the
laws of the state and the limitations of its charter. Its powers are
limited by law. It can make no contract not authorized by its
charter. Its rights to act as a corporation are only preserved to it
so long as it obeys the laws of its creation. There is a reserve[d]
right in the legislature to investigate its contracts and find out
whether it has exceeded its powers. It would be a strange anomaly
to hold that a state, having chartered a corporation to make use of
certain franchises, could not, in the exercise of sovereignty,
inquire how these franchises had been employed, and whether
they had been abused, and demand the production of the
corporate books and papers for that purpose. The defense
amounts to this, that an officer of the corporation which is charged
with a criminal violation of the statute may plead the criminality of
such corporation as a refusal to produce its books. To state this
proposition is to answer it. While an individual may lawfully refuse
to answer incriminating questions unless protected by an
immunity statute, it does not follow that a corporation vested with
special privileges and franchises may refuse to show its hand
when charged with an abuse of such privileges.
o Boy Scouts of the Philippines
v. NLRC, 196 SCRA 176
[1991]).
Facts
Private respondents Fortunato C. Esquerra, Roberto O. Malaborbor,
Estanislao M. Misa, Vicente N. Evangelista and Marcelino P. Garcia,
had all been rank-and-file employees of petitioner Boy Scouts of the
Philippines ("BSP"). At the time of termination of their services in
February 1985, private respondents were stationed at the BSP Camp
in Makiling, Los Baños, Laguna. They were then informed that they are
to be transferred to BSP Land Grant in Asuncion, Davao del Norte. The
private respondents opposed this and appealed the matter to the
President of the Boy Scouts of the Philippines.
Later on, they filed a complaint with then Ministry of Labor and
Employment, Sub-Regional Arbitration Branch VI, San Pablo City,
Laguna, to enjoin the implementation of the Special Orders of their
transfer. They were then suspended for 5 days, in lieu of their refusal,
which then to the termination of their services. Private respondents
amended their orignal complaint to include charges of illegal dismissal
and unfair labor practice.
Labor Arbiter: Dismissed the complaint
NLRC: Respondents had been illegally dismissed
Issue: Whether or not NLRC had jurisdiction to render the Decision and
Resolution.
Held
No, the NLRC had no jurisdiction over the complaint filed by the private
respondents. Instead, the employees of petitioner BSP are embraced
within the Civil Service and are accordingly governed by the Civil
Service Law and Regulations.
1) BSP’s functions as set out in its statutory charter do have a public
aspect. BSP's functions do relate to the fostering of the public virtues
of citizenship and patriotism and the general improvement of the moral
spirit and fiber of our youth. The social value of activities like those to
which the BSP dedicates itself by statutory mandate have in fact, been
accorded constitutional recognition. Article II of the 1987 Constitution
includes in the "Declaration of Principles and State Policies," the
following:
"Sec. 13. The State recognizes the vital role of the youth in nation-
building and shall promote and protect their physical, moral, spiritual,
intellectual, and social well-being. It shall inculcate in the youth
patriotism and nationalism, and encourage their involvement in public
and civic affairs."
It do not relate to the governance of any part of territory of the
Philippines; not a public corporation in the same sense that municipal
corporations or local governments are public corporations. BSP's
functions can not also be described as proprietary functions in the same
sense that the functions or activities of government-owned or controlled
corporations like the National Development Company or the National
Steel Corporation can be described as proprietary or "business-like" in
character. Nevertheless, the public character of BSP's functions and
activities must be conceded, for they pertain to the educational, civic
and social development of the youth which constitutes a very
substantial and important part of the nation.
2) There is substantial governmental (i.e., Presidential) participation or
intervention in the choice of the majority of the members of the National
Executive Board of the BSP. - The composition of the National
Executive Board of the BSP includes, as noted from Section 5 of its
charter quoted earlier, includes 7 Secretaries of Executive
Departments. The 7 Secretaries (now 6) in view of the abolition of the
Department of Youth and Sports and merger thereof into the
Department of Education, Culture and Sports) by themselves do not
constitute a majority of the members of the National Executive
Board. We must note at the same time that the appointments of
members of the National Executive Board, except only the
appointments of the Regional Chairman and Scouts of Senior age from
the various Scout Regions, are subject to ratification and confirmation
by the Chief Scout, who is the President of the Philippines. Vacancies
to the Board are filled by a majority vote of the remaining members
thereof, but again subject to ratification and confirmation by the Chief
Scout. We must assume that such confirmation or ratification involves
the exercise of choice or discretion on the part of ratifying or confirming
power.
3) As to the character of the assets and funds of the BSP - The original
assets of the BSP were acquired by purchase or gift or other equitable
arrangement with the Boy Scouts of America, of which the BSP was
part before the establishment of the Commonwealth of the
Philippines. The BSP charter, however, does not indicate that such
assets were public or statal in character or had originated from the
Government or the State. According to petitioner BSP, its operating
funds used for carrying out its purposes and programs, are derived
principally from membership dues paid by the Boy Scouts themselves
and from property rentals. In this respect, the BSP appears similar to
private non-stock, non-profit corporations, although its charter
expressly envisages donations and contributions to it from the
Government and any of its agencies and instrumentalities. The Court
notes only that BSP funds have not apparently heretofore been
regarded as public funds by the Commission on Audit, considering that
such funds have not been audited by the Commission.
While BSP is a mixed type of entity, combining both aspects of both
public and private entities, considering the character of its purposes and
its functions, the statutory designation of the BSP as “public
corporation” and the substantial participation of the Government in the
selection of members of the National Executive Board of the BSP, as
presently constituted under its charter, is a GOCC within the meaning
of article IX(B)(2)(1) of the Constitution.
BSP is a “government instrumentality” under the 1997 Admin Code -
Administrative Code of 1987 designates the BSP as one of the attached
agencies of the Department of Education, Culture and Sports ("DECS").
An "agency of the Government" is defined as referring to any of the
various units of the Government including a department, bureau, office,
instrumentality, government-owned or-controlled corporation, or local
government or distinct unit therein.

It then follows that the employees of petitioner BSP are embraced
within the Civil Service and are accordingly governed by the Civil
Service Law and Regulations.
o MIAA v. CA (495 SCRA 591
[2006])
Facts
Petitioner Manila International Airport Authority (MIAA) operates the
Ninoy Aquino International Airport (NAIA) Complex in Parañaque City
under Executive Order No. 903, otherwise known as the Revised
Charter of the Manila International Airport Authority ("MIAA Charter").
Executive Order No. 903 was issued on 21 July 1983 by then President
Ferdinand E. Marcos. Subsequently, Executive Order Nos. 909 and
298 amended the MIAA Charter.
As operator of the international airport, MIAA administers the land,
improvements and equipment within the NAIA Complex. The MIAA
Charter transferred to MIAA approximately 600 hectares of
land,including the runways and buildings ("Airport Lands and
Buildings") then under the Bureau of Air Transportation. The MIAA
Charter further provides that no portion of the land transferred to MIAA
shall be disposed of through sale or any other mode unless specifically
approved by the President of the Philippines.
The OGCC opined that the Local Government Code of 1991 withdrew
the exemption from real estate tax granted to MIAA under Section 21
of the MIAA Charter. Thus, MIAA negotiated with respondent City of
Parañaque to pay the real estate tax imposed by the City. MIAA then
paid some of the real estate tax already due.
On 28 June 2001, MIAA received Final Notices of Real Estate Tax
Delinquency from the City of Parañaque for the taxable years 1992 to
2001.
OGCC: pointed out that Section 206 of the Local Government Code
requires persons exempt from real estate tax to show proof of
exemption. The OGCC opined that Section 21 of the MIAA Charter is
the proof that MIAA is exempt from real estate tax.
IAA filed with the Court of Appeals an original petition for prohibition
and injunction, with prayer for preliminary injunction or temporary
restraining order. The petition sought to restrain the City of Parañaque
from imposing real estate tax on, levying against, and auctioning for
public sale the Airport Lands and Buildings.
MIAA: admits that the MIAA Charter has placed the title to the Airport
Lands and Buildings in the name of MIAA. However, MIAA points out
that it cannot claim ownership over these properties since the real
owner of the Airport Lands and Buildings is the Republic of the
Philippines. The MIAA Charter mandates MIAA to devote the Airport
Lands and Buildings for the benefit of the general public. Since the
Airport Lands and Buildings are devoted to public use and public
service, the ownership of these properties remains with the State. The
Airport Lands and Buildings are thus inalienable and are not subject to
real estate tax by local governments.
MIAA also points out that Section 21 of the MIAA Charter specifically
exempts MIAA from the payment of real estate tax. MIAA insists that it
is also exempt from real estate tax under Section 234 of the Local
Government Code because the Airport Lands and Buildings are owned
by the Republic. To justify the exemption, MIAA invokes the principle
that the government cannot tax itself. MIAA points out that the reason
for tax exemption of public property is that its taxation would not inure
to any public advantage, since in such a case the tax debtor is also the
tax creditor.
Respondents City of Paranaque: Section 193 of the Local Government
Code, which expressly withdrew the tax exemption privileges of
"government-owned and-controlled corporations" upon the effectivity of
the Local Government Code. Respondents also argue that a basic rule
of statutory construction is that the express mention of one person,
thing, or act excludes all others. An international airport is not among
the exceptions mentioned in Section 193 of the Local Government
Code. Thus, respondents assert that MIAA cannot claim that the Airport
Lands and Buildings are exempt from real estate tax.
Issue: W/n the international airport is among those mentioned in the
exceptions under Section 194 of the LGC and are exempt from real
estate tax
Held
Yes, the MIAA is not a GOCC and the real estate tax assessments
issued by the City of Paranaque, as well as the proceedings are void.
1. MIAA is not a GOCC - A government-owned or controlled
corporation must be "organized as a stock or non-stock corporation."
MIAA is not organized as a stock or non-stock corporation. MIAA is not
a stock corporation because it has no capital stock divided into shares.
MIAA has no stockholders or voting shares. Section 10 of the MIAA
Charter provides that it must have a capital stock divided into shares,
which MIAA does not have.
Section 3 of the Corporation Code defines a stock corporation as one
whose "capital stock is divided into shares and x x x authorized to
distribute to the holders of such shares dividends x x x." MIAA has
capital but it is not divided into shares of stock. MIAA has no
stockholders or voting shares. Hence, MIAA is not a stock corporation.
MIAA is also not a non-stock corporation because it has no members.
Section 87 of the Corporation Code defines a non-stock corporation as
"one where no part of its income is distributable as dividends to its
members, trustees or officers." A non-stock corporation must have
members. Even if we assume that the Government is considered as the
sole member of MIAA, this will not make MIAA a non-stock corporation.
Non-stock corporations cannot distribute any part of their income to
their members. Section 11 of the MIAA Charter mandates MIAA to remit
20% of its annual gross operating income to the National Treasury. This
prevents MIAA from qualifying as a non-stock corporation.
Section 88 of the Corporation Code provides that non-stock
corporations are "organized for charitable, religious, educational,
professional, cultural, recreational, fraternal, literary, scientific, social,
civil service, or similar purposes, like trade, industry, agriculture and like
chambers." MIAA is not organized for any of these purposes. MIAA, a
public utility, is organized to operate an international and domestic
airport for public use.
It is a government instrumentality vested with corporate powers to
perform efficiently its governmental functions. MIAA is like any other
government instrumentality, the only difference is that MIAA is vested
with corporate powers.
When the law vests in a government instrumentality corporate powers,
the instrumentality does not become a corporation. Unless the
government instrumentality is organized as a stock or non-stock
corporation, it remains a government instrumentality exercising not only
governmental but also corporate powers. Thus, MIAA exercises the
governmental powers of eminent domain,[12] police authority and the
levying of fees and charges. At the same time, MIAA exercises "all the
powers of a corporation under the Corporation Law, insofar as these
powers are not inconsistent with the provisions of this Executive Order."
Likewise, when the law makes a government instrumentality
operationally autonomous, the instrumentality remains part of the
National Government machinery although not integrated with the
department framework. The MIAA Charter expressly states that
transforming MIAA into a "separate and autonomous body" will make
its operation more "financially viable."
Many government instrumentalities are vested with corporate powers
but they do not become stock or non-stock corporations, which is a
necessary condition before an agency or instrumentality is deemed a
government-owned or controlled corporation. Examples are the Mactan
International Airport Authority, the Philippine Ports Authority, the
University of the Philippines and Bangko Sentral ng Pilipinas. All these
government instrumentalities exercise corporate powers but they are
not organized as stock or non-stock corporations as required by Section
2(13) of the Introductory Provisions of the Administrative Code. These
government instrumentalities are sometimes loosely called government
corporate entities. However, they are not government-owned or
controlled corporations in the strict sense as understood under the
Administrative Code, which is the governing law defining the legal
relationship and status of government entities.
o BCDA v. CIR (G.R. 205925 [20
June 2018])
Facts
On October 8, 2010, BCDA filed a petition for review with the CTA in
order to preserve its right to pursue its claim for refund of the Creditable
Withholding Tax (CWT) in the amount of Php122,079,442.53, which
was paid under protest from March 19, 2008 to October 8, 2008. The
CWT which BCDA paid under protest was in connection with its sale of
the BCDA-allocated units as its share in the Serendra Project pursuant
to the Joint Development Agreement with Ayala Land, Inc.
The petition for review was filed with a Request for Exemption from the
Payment of Filing Fees in the amount of Php1,209,457.90.
On October 20, 2010, the CTA First Division denied BCDA's Request
for Exemption and ordered it to pay the filing fees within five days from
notice.
CTA en banc: affirmed the decision of the CTA that BCDA is not
exempt.
Issue WHETHER OR NOT THE CTA EN BANC ERRED IN
AFFIRMING THE CTA FIRST DIVISION'S RULING THAT BCDA IS
NOT A GOVERNMENT INSTRUMENTALITY, HENCE, NOT EXEMPT
FROM PAYMENT OF LEGAL FEES.
Held
Yes, the CTA erred. BCDA is a government instrumentality vested with
corporate powers. Under Section 21, Rule 141 of the Rules of Court,
agencies and instrumentalities of the Republic of the Philippines are
exempt from paying legal or docket fees. Hence, BCDA is exempt from
the payment of docket fees.
RULE 141
LEGAL FEES
SEC. 1. Payment of fees. – Upon the filing of the pleading or other
application which initiates an action or proceeding, the fees prescribed
therefor shall be paid in full.
xxxx
SEC. 21. Government exempt. – The Republic of the Philippines, its
agencies and instrumentalities, are exempt from paying the legal fees
provided in this rule. Local governments and government-owned or
controlled corporations with or without independent charters are not
exempt from paying such fees. (Emphasis Ours)
Section 2(10) and (13) of the Introductory Provisions of the
Administrative Code of 1987 provides for the definition of a government
"instrumentality" and a "GOCC", to wit:
SEC. 2. General Terms Defined. x x x x
(10) Instrumentality refers to any agency of the National Government.
not integrated within the department framework, vested with special
functions or jurisdiction by law, endowed with some if not all corporate
powers, administering special funds, and enjoying operational
autonomy, usually through a charter. x x x.
xxxx
(13) Government-owned or controlled corporation refers to any agency
organized as a stock or non-stock corporation, vested with functions
relating to public needs whether governmental or proprietary in nature,
and owned by the Government directly or through its instrumentalities
either wholly, or, where applicable as in the case of stock corporations,
to the extent of at least fifty-one (51) percent of its capital stock: x x x.
(Emphasis Ours)
The grant of these corporate powers is likewise stated in Section 3 of
Republic Act (R.A.) No. 7227; also known as The Bases Conversion
and Development Act of 1992 which provides for BCDA's manner of
creation, to wit:
Sec. 3. Creation of the Bases Conversion and Development Authority.
- There is hereby created a body corporate to be known as the Bases
Conversion and Development Authority, which shall have the attribute
of perpetual succession and shall be vested with the powers of a
corporation. (Emphasis Ours)
From the foregoing, it is clear that a government instrumentality may be
endowed with corporate powers and at the same time retain its
classification as a government "instrumentality" for all other purposes.
Also, to be a GOCC, one must be organized as either a stock or non-
stock corporation, in accordance to section 2 of the Corporation Code.
Section 3 of the Corporation Code defines a stock corporation as one
whose "capital stock is divided into shares and x x x authorized to
distribute to the holders of such shares dividends x x x” Here, it is clear
that BCDA has an authorized capital of Php100 Billion, however, it is
not divided into shares of stock. BCDA has no voting shares. There is
likewise no provision which authorizes the distribution of dividends and
allotments of surplus and profits to BCDA's stockholders. Hence, BCDA
is not a stock corporation.
As to the remaining balance, if any, from the proceeds of BCDA's
activities shall be remitted to the National Treasury. The National
Treasury is not a stockholder of BCDA Hence, none of the proceeds
from BCDA's activities will be allotted to its stockholders.
BCDA also does not qualify as a non-stock corporation because it is
not organized for any of the purposes mentioned under Section 88 of
the Corporation Code. Section 4 of R.A. No. 7227 shows that BCDA is
organized for a specific purpose - to own, hold and/or administer the
military reservations in the country and implement its conversion to
other productive uses.
o Benguet Electric Cooperative,
Inc. v. NLRC
(209 SCRA 55 [1992])
FACTS:
Cosalan was BENECO’s General Manager. BENECO received an
audit memorandum from COA inviting attention to the fact that the audit
of per diems and allowances received by the members of the Board of
Directors of BENECO showed substantial inconsistencies with the
directives of National Electrification Administration (NEA). The following
year, BENECO received a COA Audit Report which noted and
enumerated irregularities in the utilization of funds amounting to P37M
released by NEA to Beneco, and recommended that appropriate
remedial action be taken.
BENECO’s Board of Directors adopted a series of resolutions:
abolishing of Cosalan’s housing allowance, reduction of his salary,
striking of his name out as principal signatory to transactions of
BENECO, to name a few. Ultimately, the resolutions resulted in
Cosalan’s ouster as general manager and his exclusion from
performance of his regular duties as such, as well as the withholding of
his salary and allowances.
Nonetheless, Cosalan continued to work as BENECO’s General
Manager in the belief that he could be suspended or removed only by
duly authorized officials of NEA in accordance with PD 269, as
amended by PD 1645 (law creating NEA). When Cosalan requested
release of compensation due him, BENECO, acting thru its Board
Members, denied the request.
Cosalan filed a complaint with NLRC challenging the legality of the
Board resolutions which ordered his suspension and termination from
the service and demanding payment of his salaries and allowances. He
likewise impleaded Beneco and respondent Board members, the latter
in their respective dual capacities as Directors and as private
individuals.
LA’s Decision: confirmed Cosalan’s reinstatement, ordered BENECO
and its board members, to jointly and severally, pay Cosalan: (a) his
backwages and allowances for a period of 3 years without deduction;
(b) moral damages, atty’s fees
NLRC: modified the Labor Arbiter’s ruling holding that BENCO alone is
liable for Cosalan’s backwages and not respondent Board members
ISSUE: W/N the Board Members are solidarily liable with BENECO –
YES.
RULING:
General rule: 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.
Here, the 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.
The dismissal of an officer or employee in bad faith, without lawful
cause and without procedural due process, is an act contrary to law.
Respondent Board members, in doing so, acted beyond the scope of
their authority as such Board members.
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. The liability generating acts here are the personal and
individual acts of respondent Board members, and are not properly
attributed to Beneco itself.
o GSIS Family Bank
Employees Union v.
Villanueva (GR 210773, 23
January 2019)
FACTS:
Royal Savings Bank (RSB) filed several complaints against Central
Bank for grave abuse of discretion when the latter denied the RSB’s
application for conservatorship, prohibited it from doing business, and
placed it under receivership. To amicably settle the case, Central Bank
offered to reopen and rehabilitate RSB in exchange of dropping the
complaints against it and transfer all its shares of stock to Commercial
Bank of Manila (CBM), a wholly-owned subsidiary of GSIS. RSB was
renamed Comsavings Bank.
A few years later, GSIS transferred its holdings from CBM to Boston
Bank due to the latter’s acquisition of CBM. GSIS took over the control
and management of Comsavings. Comsavings then changed its name
to GSIS Family Bank
In 2010, then Pres. Aquino issued EO No. 7, which placed an indefinite
moratorium on increases in salaries and benefits of employees in
GOCCs and government financial institutions. In 2011, he signed into
law RA 10149 (GOCC Governance Act of 2011). The law created the
Governance Commission.
GSIS Family Bank met with the representatives of the Governance
Commission which clarified that GSIS Family Bank was classified as a
government financial institution under Republic Act No. 10149.
GSIS Family Bank sought to clarify some matters with the Governance
Commission such as its impending CBAs with its employees, its
authority to enter into a CBA with the GSIS Union and its employees’
right to strike. Governance Commission replied that it cannot enter into
a CBA since the compensation and position classification is provided
for by law and not subject to private bargaining.
GSIS Union later sent a demand letter to GSIS Family Bank for the
payment of the Christmas bonus pursuant to the CBA. The Union
alleged that RA 10149 does not apply to GSIS Family Bank, as it was
a private bank created and established under the Corporation Code. It
also alleged that although GSIS owned majority of GSIS Family Bank’s
outstanding capital stock, the change in ownership of shares did not
automatically place the bank under the operation of Republic Act No.
10149.
GSIS Union filed a Complaint before the NCMB as well as a notice to
strike. Some of the bank employees likewise filed their respective
complaints before the DOLE to compel GSIS Family Bank to abide by
their CBA.
ISSUES:
1. W/N GSIS Family Bank is a GOCC – YES.
2. W/N GSIS Family Bank may enter into a CBA – NO.
RULING:
1. Three attributes necessary to be classified as a GOCC:
1. Established by original charter or through the general
corporation law;
2. Vested with functions relating to public need whether
governmental or proprietary in nature; and
3. Directly owned by the government or by its instrumentality, or
where the government owns a majority of the outstanding
capital stock.
There is no doubt that GSIS Family Bank is a government-owned or -
controlled corporation since 99.55% of its outstanding capital stock is
owned and controlled by GSIS.
2. The right of workers to self-organization, collective bargaining,
and negotiations is guaranteed by the Constitution under Article XIII,
Section 3. The right to self-organization encompasses both public and
private sectors.
However, While the right to self-organization is absolute, the right of
government employees to collective bargaining and negotiation is
subject to limitations. Collective bargaining is a series of negotiations
between an employer and a representative of the employees to
regulate the various aspects of the employer-employee
relationship. Relations between private employers and their
employees are subject to the minimum requirements of wage laws,
labor, and welfare legislation.
In contrast with the private sector, the terms and conditions of
employment of government workers are fixed by the legislature thus,
the negotiable matters in the public sector are limited to terms and
conditions of employment that are not fixed by law.
Government employees ought to course their petition for change in
terms and conditions of their employment thru the Congress for the
issuance of new laws, rules, or regulations to that effect.
RA 10149 does not differentiate between chartered and non-chartered
GOCC. Thus, its provisions apply equally to both. Moreover, EO 203
disallows negotiation of governing boards of all GOCCs, whether
chartered or non-chartered, with their officers and employees the
economic terms of their CBA. GSIS Family Bank could not be faulted
for refusing to enter into a new CBA with petitioner as it lacked the
authority to negotiate economic terms with its employees.
§ As to place of Incorporation
• Domestic and Foreign Corporations
Domestic – a corporation formed organized under existing Philippine
laws.
Foreign – a corporation formed, organized, or existing under laws
other than those of the Philippines and whose laws allow Filipino
citizens and corporatios to do business in its own country or State.
§ As to legal status
• De Jure and De Facto Corporations
De Jure – a corporation organized in accordance with the requirement
of law.
De Facto – a corporation that is formed where there exists a flaw in its
incorporation but there is colorable compliance with the requirements
of law.
o Missionary Sisters of our
Lady of Fatima v. Amando
Alzona (G.R. No. 224307, 6
August 2018)
Herein petitioner is NOT a de facto corp., but the Court applied
the doctrine of corporation by estoppel in this case
Doctrine: The filing of articles of incorporation and the issuance of the
certificate of incorporation are essential for the existence of a de facto
corporation. It is the act of registration with SEC through the issuance
of a certificate of incorporation that marks the beginning of an entity’s
corporate existence.
FACTS:
Petitioner is a religious and charitable group established under the
patronage of Roman Catholic Bishop of San Pablo with Mother
Concepcion as its Superior General. Its primary mission is to take care
of the abandoned and elderly persons.
Purificacion Alonza was a benefactor of petitioner, she was later
diagnosed with lung cancer. One day, she handed a handwritten letter
to Mo. Concepcion. There, it was stated that she is donating her house
and lot and Riceland located in Laguna.
On Aug. 28, 2001, Mo. Concepcion, acting on the advice of Atty.
Arcillas (Purificacion’s lawyer), filed with the SEC a registration
application for petitioner.
On Aug. 29, 2001, Purificacion later executed a Deed of Donation inter
vivos in favor of petitioner. The donation was accepted by Mo.
Concepcion on behalf of petitioner. On Oct. 30, 2001, Purificacion died
without any issue, and survived only by her brother of full blood,
Amando Alzona.
Amando filed a complaint before he RTC seeking to annul the Deed
executed between Purificacion and petitioner. He alleged that at the
time the donation was made, the latter was not registered with the SEC
and therefore has no juridical personality and cannot legally accept the
donation.
RTC: Dismissed the case. With respect to the capacity of the donee, it
held that at the time of the execution of the Deed, the petitioner was a
de facto corporation and as such has the personality to be a beneficiary
and has the power to acquire and possess property.
CA: Declared the Deed as void. It held that petitioner cannot be
considered as a de facto corporation considering that at the time of the
donation, there was no bona fide attempt on its part to incorporate.
Ultimately, bereft of juridical personality, petitioner cannot enter into a
contract of Donation with Purificacion.
ISSUE: W/N Petitioner is a de facto corporation – NO.
RULING:
Jurisprudence settled that “the filing of articles of incorporation and the
issuance of the certificate of incorporation are essential for the
existence of a de facto corporation.” It is the act of registration with SEC
through the issuance of a certificate of incorporation that marks the
beginning of an entity’s corporate existence.
SEC issued the Certificate of Incorporation 2 days after Purificacion
executed a Deed of Donation. Clearly, at the time the donation was
made, the Petitioner cannot be considered a corporation de facto.
RATHER, a review of the attendant circumstances reveals that it calls
for the application of the doctrine of corporation by estoppel.
Under Sec. 21 of the Corporation Code: “ x x x One who assumes an
obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no
corporation.”
Doctrine of corporation by estoppel applies when a nonexistent
corporation enters into contracts or dealings with third persons. In which
case, the person who has contracted or otherwise dealt with the
nonexistent corporation is estopped to deny the latter’s legal existence
in any action leading out of or involving such contract or dealing. While
the doctrine is generally applied to protect the sanctity of dealings
with the public, nothing prevents its application in the reverse.
Jurisprudence dictates that the doctrine of corporation by estoppel
applies for as long as there is no fraud and when the existence of the
association is attacked for causes attendant at the time the contract or
dealing sought to be enforced was entered into, and not thereafter.
Here, Purificacion dealt with the petitioner as if it were a corporation.
This is evident from the fact that Purificacion executed 2 documents
conveying her properties in favor of the petitioner — first, through the
handwritten letter, and second, 2001 through a Deed; the latter having
been executed the day after the petitioner filed its application for
registration with the SEC.
In this case, the existence of petitioner is upheld for the purpose of
validating the Deed to ensure that the primary objective for which the
donation was intended is achieved: to aid petitioner in the pursuit of its
charitable objectives
• Corporation by Estoppel
Corporation by Estoppel – a group of persons which holds itself out as
a corporation and enter sinto a contract with a third person on the
strength of such appearance. It cannot be permitted to deny its
existence in an action under such contract.
o Lim vs. Philippine Fishing
Gear Industries, Inc. (GR
136448, 3 November 1999)
FACTS:
· On behalf of Ocean Quest Fishing Corporation, Antonio
Chua and Peter Yao entered into a contract for the purchase of
fishing nets of various sizes from the Philippine Fishing Gear Inc
[respondent]. They claimed that they were engaged in a
business venture with petitioner, who however was not a
signatory to the agreement. The buyers failed to pay for the
fishing nets and the floats; hence private respondent filed a
collection suit against Chua, Yao and Lim with a prayer for a writ
 of preliminary attachment. The suit was brought against the
three in their capacities as general partners, on the allegation
that Ocean Quest Fishing Corporation was a nonexistent
corporation as shown by a certification from the SEC. Chua filed
a Manifestation admitting his liability and requesting a
reasonable time within which to pay. He also turned over to
respondent some of the nets which were in his possession. The
trial court rendered its Decision, ruling that respondent was
entitled to the writ of attachment and that Chua, Yao and Lim,
as general partners, were jointly liable to pay respondent.
ISSUE:
Whether petitioner should be held jointly liable with Chua and Yao
RULING:
Yes, petitioner is jointly liable with Chua and Yao. The doctrine of
corporation by estoppel may apply to the alleged corporation and
to a third party. In the first instance, an unincorporated association,
which represented itself to be a corporation, will be estopped from
denying its corporate capacity in a suit against it by a third person who
relied in good faith on such representation. It cannot allege lack of
personality to be sued to evade its responsibility for a contract it entered
into and by virtue of which it received advantages and benefits.
On the other hand, a third party who, knowing an association to be
unincorporated, nonetheless treated it as a corporation and
received benefits from it, may be barred from denying its
corporate existence in a suit brought against the alleged
corporation. In such case, all those who benefited from the transaction
made by the ostensible corporation, despite knowledge of its legal
defects, may be held liable for contracts they impliedly assented to or
took advantage of. Technically, it is true that petitioner did not directly
act on behalf of the corporation. However, having reaped the benefits
of the contract entered into by persons with whom he previously had an
existing relationship, he is deemed to be part of said association and is
covered by the scope of the doctrine of corporation by estoppel.
Section 21 of the Corporation Code of the Philippines provides:
"Sec. 21. Corporation by estoppel. — All persons who assume
to act as a corporation knowing it to be without authority to do
so shall be liable as general partners for all debts, liabilities and
damages incurred or arising as a result thereof: Provided
however, That when any such ostensible corporation is sued on
any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a
defense its lack of corporate personality.
"One who assumes an obligation to an ostensible corporation
as such, cannot resist performance thereof on the ground that
there was in fact no corporation."
Thus, even if the ostensible corporate entity is proven to be legally
nonexistent, a party may be estopped from denying its corporate
existence. "The reason behind this doctrine is obvious — an
unincorporated association has no personality and would be
incompetent to act and appropriate for itself the power and attributes of
a corporation as provided by law; it cannot create agents or confer
authority on another to act in its behalf; thus, those who act or purport
to act as its representatives or agents do so without authority and at
their own risk. And as it is an elementary principle of law that a person
who acts as an agent without authority or without a principal is himself
regarded as the principal, possessed of all the right and subject to all
the liabilities of a principal, a person acting or purporting to act on behalf
of a corporation which has no valid existence assumes such privileges
and obligations and becomes personally liable for contracts entered
into or for other acts performed as such agent."
§As to existence of shares of stocks
• Stock and Non-Stock Corporations
Stock Corporation – a corporation with capital stock that is divided
into shares and is authorized to distribute to holders of such shares,
dividends or allotments of the surplus profits on the basis of the shares
held. (Sec. 3 RCP)
Non-Stock – a corporation that has no capital stock, does not issue
stocks, and does not distribute dividends to its members.
o Bases Conversion and
Development Authority v.
Commissioner of Internal
Revenue (G.R. No. 205925, 20
June 2018)
FACTS:
 · BCDA filed a petition for review with the CTA in order to
preserve its right to pursue its claim for refund of the Creditable
Withholding Tax [CWT] which was paid under protest. The CWT
which BCDA paid under protest was in connection with its sale
of the BCDA-allocated units as its share in the Serendra Project
pursuant to the Joint Development Agreement with Ayala Land,
Inc. The petition for review was filed with a request for
exemption from the payment of filing fees. The CTA First
Division denied BCDA’s request for exemption and ordered it to
pay the filing fees within five days from notice. BCDA moved for
reconsideration which was denied. BCDA then filed a petition
for review with the CTA En Banc, which was returned and not
deemed filed without the payment of the correct legal fees.
BCDA emphasized its position that it is exempt from the
payment of such fees.
ISSUE:
Whether BCDA is a government instrumentality or a government-
owned and controlled corporation [GOCC].
RULING:
BCDA is a government instrumentality vested with corporate
powers. If it is an instrumentality, it is exempt from the payment of
docket fees. If it is a GOCC, it is not exempt and as such non-payment
thereof would mean that the tax court did not acquire jurisdiction over
the case and properly dismissed it for BCDA’s failure to settle the fees
on time.
Section 2 [10] and [13] of the Introductory Provisions of the
Administrative Code of 1987 provides for the definition of a government
“instrumentality” and a “GOCC”.
SEC. 2 General Terms Defined. –
[10] Instrumentality refers to any agency of the National
Government, not integrated within the department framework,
vested with special functions or jurisdiction by law, endowed
with some if not all corporate powers, administering special
funds, and enjoying operational autonomy, usually through a
charter.
[13] Government-owned or controlled corporation refers to
any agency organized as a stock or non-stock corporation,
vested with functions relating to public needs whether
governmental or proprietary in nature, and owned by the
Government directly or through instrumentalities either
wholly or where applicable as in the case of stock
corporations, to the extent of at least 51% of its capital
stock.
The grant of these corporate powers is stated in Section 3 of RA 7227,
also known as The Bases Conversion and Development Act of 1992. It
is clear that a government instrumentality may be endowed with
corporate powers and at the same time retain its classification as a
government “instrumentality” for all other purposes.
In order to qualify as a GOCC, one must be organized either as a stock
or non-stock corporation. Section 3 of the Corporation Code defines a
stock corporation as one whose “capital stock is divided into
shares and authorized to distribute to the holders of such shares
dividends. Sec. 6 of RA 7227, provides that BCDA has an authorized
capital of P100 Billion, however, it is not divided into shares of stock.
BCDA has no voting shares, There is likewise no provision which
authorizes the distribution of dividends and allotments of surplus and
profits to BCDA’s stockholders. Hence, BCDA is not a stock
corporation.
BCDA also does not qualify as a non-stock corporation because it is
not organized for any of the purposes mentioned under Section 88 of
the Corporation Code. Non-stock corporations may be formed or
organized for charitable, religious, educational, professional,
cultural, fraternal, literary, scientific, social, civic service or similar
purposes, like trade industry, agricultural and like chambers, or
any combination thereof, subject to the special provisions of this
Title governing particular classes of non-stock corporations.
It is clear that BCDA is neither a stock nor a non-stock corporation.
BCDA is a government instrumentality vested with corporate powers.
o CIR v. Club Filipino (5 SCRA
321 [2016])
FACTS:
· Club Filipino is a civic corporation organized under the
laws of the Philippines. Neither in the articles or by-laws is there
a provision relative to dividends and their distribution, although
it is covenanted that upon its dissolution, the Club’s remaining
 assets, after paying debts, shall be donated to a charitable
Philippine Institution in Cebu. The club owns and operates a
club house, a bowling alley, a golf course, and a bar-restaurant
where it sells wines and liquors, soft drinks, meals and short
orders to its members and their guests. The bar-restaurant was
a necessary incident to the operation of the club and its golf
course. The club operated mainly with the funds derived from
membership fees and dues. Whatever profits it had, were used
to defray its overhead expenses and to improve its golf course.
In 1951, as a result of a capital surplus, arising from the re-
evaluation of its real properties, the value or price of which
increased, the Club declared stock dividends; but no actual
cash dividends were distributed to the stockholders.
ISSUE:
Whether Club Filipino can be considered as a stock corporation as
contemplated by law
RULING:
No, it cannot be considered a stock corporation within the
contemplation of the corporation law.
For a stock corporation to exist, two requisites must be complied
with, to wit:
1) A capital stock divided into shares; and
2) An authority to distribute to the holders of such
shares, dividends or allotments of the surplus profits on
the basis of the shares held.
In the case at bar, while the respondent Club’s capital stock is divided
into shares, nowhere in its articles of incorporation or by-laws could be
found an authority for the distribution of its dividends or surplus profits.
The fact that the capital stock of the respondent Club is divided into
shares, does not detract from the finding of the trial court that it is not
engaged in the business of operator of bar and restaurant.
o Sections 86 and 87 (RCC)
SEC. 86. DEFINITION – For purposes of this Code and subject to its
provisions on dissolution, a nonstock corporation is one where no part
of its income is distributable as dividends to its members, trustees, or
officers: Provided, That any profit which a nonstock corporation may
obtain incidental to its operations shall, whenever necessary or proper
be used for the furtherance of purposes for which the corporation was
organized, subject to the provisions of this Title.
The provisions governing the stock corporations, when pertinent, shall
be applicable to nonstock corporations except as may be covered by
specific provisions of this Title.
SEC. 87. PURPOSES – Nonstock corporations may be formed or
organized for charitable, religious, educational, professional, cultural,
fraternal, literary, scientific, social, civic service, or similar purposes,
like trade industry, agricultural and like chambers, or any combination
thereof, subject to the special provisions of this Title governing
particular classes of nonstock corporations.
• Stocks and Stockholders (Title VII,
RCC)
Vicente Ponce v. Alsons Cement Corporation (393 SCRA 602, 10
December 2002)
Facts:
On January 25, 1996, plaintiff (now petitioner) Vicente C. Ponce, filed
a complaint with the SEC for mandamus and damages against
defendants (now respondents) Alsons Cement Corporation and its
corporate secretary Francisco M. Giron, Jr, alleging that: a. The late
Fausto G. Gaid was an incorporator of Victory Cement Corporation
(VCC), having subscribed to and fully paid 239,500 shares of said
corporation. b. On February 8, 1968, plaintiff and Fausto Gaid executed
a "Deed of Undertaking" and "Indorsement" whereby the latter
acknowledges that the former is the owner of said shares and he was
therefore assigning/endorsing the same to the plaintiff. A copy of the
said deed/indorsement is attached as Annex "A". On April 10, 1968,
VCC was renamed Floro Cement Corporation (FCC). On October 22,
1990, FCC was renamed Alsons Cement Corporation (ACC for brevity).
From the time of incorporation of VCC up to the present, no certificates
of stock corresponding to the 239,500 subscribed and fully paid shares
of Gaid were issued in the name of Fausto G. Gaid and/or the plaintiff.
Despite repeated demands, the defendants refused and continue to
refuse without any justifiable reason to issue to plaintiff the certificates
of stocks corresponding to the 239,500 shares of Gaid, in violation of
plaintiff’s right to secure the corresponding certificate of stock in his
name.
Petitioner prayed that judgment be rendered ordering
respondents (a) to issue in his name certificates of stocks covering the
239,500 shares of stocks and its legal increments and (b) to pay him
damages. Respondents moved to dismiss the complaint on the grounds
that: (a) the complaint states no cause of action; mandamus is improper
and not available to petitioner; (b) the petitioner is not the real party in
interest; (c) the cause of action is barred by the statute of limitations;
and (d) in any case, the petitioner’s cause of action is barred by laches.
They argued, inter alia, that there being no allegation that the alleged
"INDORSEMENT" was recorded in the books of the corporation, said
indorsement by Gaid to the plaintiff of the shares of stock in question—
assuming that the indorsement was in fact a transfer of stocks—was
not valid against third persons such as ALSONS under Section 63 of
the Corporation Code. There was, therefore, no specific legal duty on
the part of the respondents to issue the corresponding certificates of
stock, and mandamus will not lie.
Issue: Whether or not the certificates of stock issued to Fausto G. Gaid
can be validly transferred to Vicente Ponce
Ruling:
No. The Corporation Code states that: SEC. 63. Certificate of
stock and transfer of shares.–The capital stock of stock corporations
shall be divided into shares for which certificates signed by the
president or vice-president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall be issued in
accordance with the by-laws. Shares of stock so issued are personal
property and may be transferred by delivery of the certificate or
certificates indorsed by the owner or his attorney-in-fact or other
person legally authorized to make the transfer. No transfer,
however, shall be valid, except as between the parties, until the
transfer is recorded in the books of the corporation so as to show
the names of the parties to the transaction, the date of the transfer,
the number of the certificate or certificates and the number of
shares transferred. No shares of stock against which the
corporation holds any unpaid claim shall be transferable in the
books of the corporation.
Pursuant to the foregoing provision, a transfer of shares of stock
not recorded in the stock and transfer book of the corporation is non-
existent as far as the corporation is concerned. As between the
corporation on the one hand, and its shareholders and third persons on
the other, the corporation looks only to its books for the purpose of
determining who its shareholders are. It is only when the transfer has
been recorded in the stock and transfer book that a corporation may
rightfully regard the transferee as one of its stockholders. From this
time, the consequent obligation on the part of the corporation to
recognize such rights as it is mandated by law to recognize arises.
Hence, without such recording, the transferee may not be
regarded by the corporation as one among its stockholders and the
corporation may legally refuse the issuance of stock certificates in the
name of the transferee even when there has been compliance with the
requirements of Section 64 of the Corporation Code. This is the import
of Section 63 which states that "No transfer, however, shall be valid,
except between the parties, until the transfer is recorded in the books
of the corporation showing the names of the parties to the transaction,
the date of the transfer, the number of the certificate or certificates and
the number of shares transferred." The situation would be different
if the petitioner was himself the registered owner of the stock
which he sought to transfer to a third party, for then he would be
entitled to the remedy of mandamus. From the corporation’s point
of view, the transfer is not effective until it is recorded. Unless and
until such recording is made the demand for the issuance of stock
certificates to the alleged transferee has no legal basis. As between
the corporation on the one hand, and its shareholders and third persons
on the other, the corporation looks only to its books for the purpose of
determining who its shareholders are. In other words, the stock and
transfer book is the basis for ascertaining the persons entitled to
the rights and subject to the liabilities of a stockholder. Where a
transferee is not yet recognized as a stockholder, the corporation
is under no specific legal duty to issue stock certificates in the
transferee’s name.
Andaya v. Rural Bank of Cabadbaran, Inc. (GR 188769, 3 August 2016)
FACTS:
Andaya bought from Chute 2,200 shares of stock in the Rural
Bank of Cabadbaran for P220,000. Chute duly endorsed and delivered
the certificates of stock to Andaya and, subsequently, requested the
bank to register the transfer and issue new stock certificates in favor of
the latter. A few days later, the bank’s corporate secretary wrote Chute
to inform her that he could not register the transfer due to a previous’
stockholder’s Resolution where existing stockholders were given
priority to buy the shares of others in the event that the latter offered
those shares for sale. He then asked Chute if she, instead, wished to
have her shares offered to existing stockholders. Meanwhile, the bank’s
legal counsel, respondent Gonzalez, informed Andaya that the latter’s
request had been referred to the bank’s board of directors for
evaluation. Citing Section 98 of the Corporation Code, Andaya claimed
that the purported restriction on the transfer of shares of stock agreed
upon during the 2001 stockholders’ meeting could not deprive him of
his right as a transferee. The bank still refused the transfer arguing that
it may refuse to accept a competitor as one of its stockholders. Andaya
instituted an action for mandamus and damages against Rural Bank of
Cabadbaran which was dismissed by the RTC, hence this petition for
review.
ISSUE:
Whether Andaya, as a transferee of shares of stock, may initiate
an action for mandamus compelling the Rural Bank of Cabadbaran to
record the transfer of shares in its stock and transfer book, as well as
issue new stock certificates in his name.
RULING:
Yes. According to Price vs Martin, A person who has purchased
stock, and who desires to be recognized as a stockholder, for the
purpose of voting, must secure a standing by having the transfer
recorded upon the books. If the transfer is not duly made upon request,
he has, as his remedy, to compel it to be made. The registration of a
transfer of shares of stock is a ministerial duty on the part of the
corporation. It is already settled jurisprudence that the registration of a
transfer of shares of stock is a ministerial duty on the part of the
corporation. Aggrieved parties may then resort to the remedy of
mandamus to compel corporations that wrongfully or unjustifiably
refuse to record the transfer or to issue new certificates of stock.
Batangas Laguna Tayabas Bus Co. v. Bitanga (362 SCRA 635 [2001])
FACTS:
On October 28, 1997, Dolores A. Potenciano, Max A.
Potenciano, Mercedelin A. Potenciano, Delfin C. Yorro, and Maya
Industries, Inc., entered into a Sale and Purchase Agreement whereby
they sold to BMB Property Holdings, Inc., represented by its President,
Benjamin Bitanga. The purchase price for the shares of stock was
made payable upon signing of Agreement, while the balance was to be
paid on November 26, 1997. It was stipulated by the parties that the
down payment was conditioned upon receipt by the buyer of certain
documents upon signing of the Agreement, xxx a Declaration of Trust
acknowledging that the shares shall be held in trust by the sellers for
the buyer pending their transfer to the latter’s name. At a meeting of the
stockholders of BLTB , Benjamin Bitanga and Monina Grace Lim were
elected as directors replacing Dolores and Max. The newly elected
directors scheduled the annual stockholders’ meeting. Michael
Potenciano wrote Benjamin Bitanga requesting for the postponement
of the meeting due to the absence of a thirdday advance notice.
However, the stockholders’ meeting pushed through on May 19, 1998,
in absence of a prior notice of postponement. In the said meeting, the
postponement was rejected by the majority of the stockholders who
were then present and proceeded with the meeting. The Potenciano
group was re-elected to the Board of Directors. But the Bitanga group
refused to relinquish their position.
ISSUE:
Whether or not the meeting on May 19, 1998 is valid despite the
absence of Bitanga group, which owned 50.26% of BLTB’s shares
RULING:
Yes. The meeting was held valid by the SEC En Banc in light of
the principle that a transfer of shares is not valid unless recorded in the
books of the corporation. The transfer of the shares of the group of
Dolores to Bitanga has not yet been recorded in the books of the
corporation. Hence, the group of Dolores, in whose names those
shares still stand, were the ones entitled to attend and vote at the
stockholders’ meeting on May 19, 1998.
•Non-Stock Corporations (Title XI,
RCC)
Republic v. Sunlife Assurance Company of Canada (473 SCRA 129
[2005])
FACTS: Due to a decision rendered by the CTA which was affirmed by
the SC that mutual life insurance companies are purely cooperative
companies and are exempt from the payment of premium tax and
documentary stamp tax (DST), respondent Sunlife filed with the CIR an their insurance at cost, while reasonably and properly guarding and
administrative claim for tax credit (Sunlife already paid PT and DST) maintaining the stability and solvency of the company.
because it alleged that it is exempted from payment of premium tax an
DST, being a mutual life insurance company. The CIR argued that Sun It does not follow that because respondent is registered as a nonstock
Life is not registered with the Cooperative Development Authority, corporation and thus exists for a purpose other than profit, the company
which is required before it could avail of the exemptions which are can no longer make any profits. Earning profits is merely its secondary,
extended to purely cooperative companies and associations. not primary, purpose. In fact, it may not lawfully engage in any business
activity for profit, for to do so would change or contradict its nature as a
The CTA ruled in favor of Sun Life. The CA affirmed the CTA. non-profit entity. It may, however, invest its corporate funds in order to
earn additional income for paying its operating expenses and meeting
ISSUE: Whether or not respondent is a purely cooperative company or benefit claims. Any excess profit it obtains as an incident to its
association operations can only be used, whenever necessary or proper, for the
furtherance of the purpose for which it was organized.
RULING
Yes. The Tax Code defines a cooperative as an association "conducted
by the members thereof with the money collected from among o SEC Opinion, 19 September
themselves and solely for their own protection and not for profit." 1988
Without a doubt, respondent is a cooperative engaged in a mutual life o SEC Opinion, 24 February
insurance business. 1989
o Distribution of Assets
The reasons are first, it is managed by its members. The management
and affairs of respondent were conducted by its member-policyholders. § As to relationship of management and
Respondent has been mutualized or converted from a stock life control
insurance company to a nonstock mutual life insurance corporation • Parent and Holding Company
pursuant to the Insurance Code. On the basis of its bylaws, its o RA 10142 - the Financial
ownership has been vested in its member-policyholders who are each Rehabilitation and Insolvency
entitled to one vote; and who, in turn, elect from among themselves the
Act (FRIA) of 2020, Section
members of its board of trustees. Being the governing body of a
49(aa)
nonstock corporation, the board exercises corporate powers, lays down
all corporate business policies, and assumes responsibility for the • Affiliate Company – a corporation
efficiency of management. that directly or indirectly, through
one or more intermediaries, is
Second, it is operated with money collected from its members. Since controlled by, or is under the control
respondent is composed entirely of members who are also its of another corporation, which
policyholders, all premiums collected obviously come only from them. thereby becomes its parent company.
Third, it is licensed for the mutual protection of its members, not for the
profit of anyone. o Section 4b (FRIA)
• Parent and Subsidiary Companies
Verily, a mutual life insurance corporation is a cooperative that PARENT – a corporation that has control over another corporation
promotes the welfare of its own members. It does not operate for profit, directly or indirectly through one or more intermediaries. It is the
but for the mutual benefit of its member-policyholders. They receive
corporation that owns-all or substantially all or the controlling shares
in the subsidiary.
SUBSIDIARY - a corporation more than 50% of the voting stock of
which is owned or controlled directly or indirectly though one or more
intermediaries by another corporation, which thereby become a parent
company.
III. Incorporation: The Birth of the Corporate / Juridical
Person
Incorporation – the performance of conditions, acts, deeds, and
writings by incorporators, and the official acts, certification or records,
which give the corporation its existence.
o Mere grant of privilege from the
State and, in order to be entitled
to such privilege, the
requirements and procedures for
the grant thereof must be
complied with.
o The creation of a corporation
could be taken to include all of
the acts and doings from the
enactment of the general
corporation law by the
legislature, through the
promotion, underwriting,
preparation and execution and
filing the incorporation papers
and obtaining the certificate of
charter, to the organization and
the first meeting and election
which set the corporation in
motion full-fledged.
o Corporations are creatures of law
and can only come into existence
in the manner prescribed by law.
Effect if not incorporated – Only through incorporation and
registration with the SEC that a private corportion acquires juridical
personality under the RCCP.
When corporation becomes juridical person – only upon the approval
and issuance of a certificate of incorporation by the SEC that the
applicant corporation becomes a juridical corporation.
A. Name and Purpose
• Section 17 (RCC)
SEC. 17. Corporate Name. – No corporate name shall be allowed by
the Commission if it is not distinguishable from that already reserved or
registered for the use of another corporation, or if such name is already
protected by law, or when its use is contrary to existing law, rules and
regulations.
A name is not distinguishable even if it contains one or more of the
following:
(a) The word “corporation”, “company”, “incorporated”, “limited”,
“limited liability”, or an abbreviation of one of such words; and
(b) Punctuations, articles, conjunctions, contractions, prepositions,
abbreviations, different tenses, spacing, or number of the same word or
phrase.
The Commission, upon determination that the corporate name is:
(1) not distinguishable from a name already reserved or registered
for the use of another corporation;
(2) already protected by law; or
(3) contrary to law, rules and regulations, may summarily order the
corporation to immediately cease and desist from using such name
and require the corporation to register a new one.
The Commission shall also cause the removal of all visible signages,
marks, advertisements, labels, prints and other effects bearing such
corporate name. Upon the approval of the new corporate name, the
Commission shall issue a certificate of incorporation under the amended
name.
If the corporation fails to comply with the Commission’s order, the
Commission may hold the corporation and its responsible directors or
officers in contempt and/or hold them administratively, civilly and/or
criminally liable under this Code and other applicable laws and/or
revoke the registration of the corporation.
Basic Policy – a corporation cannot use a name that belongs to another
even as a trade name. If any corporation could assume at pleasure as
an unregistered trade name the name of another corporation, this
practice would result in confusion and open the door to frauds and
evasions and difficulties of administration and supervision.
Effects if Statutory Limitations are Violated:
a) SEC may summarily order the corporation to immediately cease and
desist from using such name and require the corporation to register a
new one.
b) The SEC shall also cause the removal of
all visible signages, marks, advertisements, labels, prints and other
effects bearing such corporate name.
c) Upon the approval of the new corporate name, the SEC shall issue a
certificate of incorporation under the amended name.
Doctrine of Secondary Meaning
General Rule: A corporation whose corporate name is a word or
phrase which is generally descriptive or geographical cannot prevent
another corporation, which uses the same or phrase as its corporate
name, from using such.
Exception: A word or phrase originally incapable of exclusive
appropriation with reference to an article on the market because
geographically or otherwise descriptive, might nevertheless have
been used so long and so exclusively by one producer with reference
to his article that, in that trade and to that branch of the purchasing
public, the word or phrase has come to mean that the article was his
product. (Lyceum v. CA, G.R. No. 101897, 1993)
• SEC MC 13, Series of 2019
De La Salle Montessori International of Malolos, Inc. v. De La Salle
Brothers, Inc. et al.
(G.R. No. 205548, 7 February 2018)
FACTS
Petitioner reserved with the SEC its corporate name De La Salle
Montessori International Malolos, Inc. Consequently, the SEC issued a
certificate of incorporation to petitioner. Respondents De La Salle
Brothers filed a petition with the SEC seeking to compel petitioner to
change its corporate name because it is misleading and gives an
interpretation that it is part of the “La Salle” group, which violates Sec
18 of the Corporation Code. Moreover, being the prior registrant,
respondents have acquired the use of said phrases as part of their
corporate names and have freedom from infringement of the same.
The SEC OGC thereafter ordered petitioner to change or modify its
corporate name, holding that the respondents have acquired the right
to the exclusive use of the name “La Salle” with freedom from
infringement by priority of adoption.
Petitioner argued that in the case of Lyceum v CA, the Court held that
the Lyceum of the Philippines, Inc. cannot claim exclusive use of the
name "lyceum" because it is a generic word that pertains to a category
of educational institutions and widely known around the world. The SEC
En Banc and the CA affirmed the ruling of the SEC OCG.
ISSUE: Whether or not the name “La Salle” is an exclusive name only
to those part of the La Salle group
RULING
Yes. Sec 18 of the Corporation Code provides that no corporate name
may be allowed by the Securities and Exchange Commission if the
proposed name is identical or deceptively or confusingly similar to that
of any existing corporation or to any other name already protected by
law or is patently deceptive, confusing or contrary to existing laws.
When a change in the corporate name is approved, the Commission
shall issue an amended certificate of incorporation under the amended
name.
The policy underlying the prohibition in Section 18 against the
registration of a corporate name which is "identical or deceptively or
confusingly similar" to that of any existing corporation is the
avoidance of fraud upon the public, the evasion of legal
obligations and duties, and the reduction of difficulties of
administration and supervision over corporations.
In Philips Export B.V. v. Court of Appeals, the Court held that to fall
within the prohibition of Section 18, two requisites must be proven, to
wit: (1) that the complainant corporation acquired a prior right over
the use of such corporate name; and (2) the proposed name is
either: (a) identical, or (b) deceptively or confusingly similar to that
of any existing corporation or (b) deceptively or confusingly
similar to that of any existing corporation or to any other name
already protected by law; or (c) patently deceptive, confusing or
contrary to existing law.
The first requisite is proven, because of the respondents’ dates of
registration, clearly prior the petitioner’s registration with the SEC. The
second requisite is also satisfied since there is a confusing similarity
between petitioner's and respondents' corporate names. In determining
the existence of confusing similarity in corporate names, the test is
whether the similarity is such as to mislead a person using ordinary care
and discrimination.
Finally, the Court held that the case of Lyceum cannot apply, because
the word Lyceum generally refers to a school or institution of learning.
However, the phrase "De La Salle" is not generic in relation to
respondents. It is not descriptive of respondent's business as
institutes of learning, unlike the meaning ascribed to "Lyceum."
Moreover, respondent De La Salle Brothers, Inc. was registered in
1961 and the De La Salle group had been using the name decades
before petitioner's corporate registration.
N. Term
• Section 11 (RCC)
SEC. 11. Corporate Term. – A corporation shall have perpetual existence
unless its articles of incorporation provides otherwise.
Corporations with certificates of incorporation issued prior to the effectivity of
this Code, and which continue to exist, shall have perpetual existence, unless
the corporation, upon a vote of its stockholders representing a majority of its
outstanding capital stock, notifies the Commission that it elects to retain its
specific corporate term pursuant to its articles of incorporation: Provided, That
any change in the corporate term under this section is without prejudice to the
appraisal right of dissenting stockholders in accordance with the provisions of
this Code.
A corporate term for a specific period may be extended or shortened by
amending the articles of incorporation: Provided, That no extension may be
made earlier than three (3) years prior to the original or subsequent expiry
date(s) unless there are justifiable reasons for an earlier extension as may be
determined by the Commission: Provided, further, That such extension of the
corporate term shall take effect only on the day following the original or
subsequent expiry date(s).
A corporation whose term has expired may apply for a revival of its corporate
existence, together with all the rights and privileges under its certificate of
incorporation and subject to all of its duties, debts and liabilities existing prior
to its revival. Upon approval by the Commission, the corporation shall be
deemed revived and a certificate of revival of corporate existence shall be
issued, giving it perpetual existence, unless its application for revival provides
otherwise.
No application for revival of certificate of incorporation of banks, banking and
quasi- banking institutions, preneed, insurance and trust companies, non-stock
savings and loan associations (NSSLAs), pawnshops, corporations engaged in
money service business, and other financial intermediaries shall be approved
by the Commission unless accompanied by a favorable recommendation of the
appropriate government agency.
Date of commencement of corporate existence and juridical
personality – from the date of the SEC issues the Certificate of
Incorporation under its official seals.
a) GR: corporate term I perpetual
b) the Articles of Incorporation of new corporations can specify
a fixed term – the incorporators can choose not to have a
perpetual term and specify a fixed term in the Articles of
Incorporation.
 c) Corporations duly incorporated prior to the effective date
of the RCCP and still existing shall also automatically have a
perpetual term
d) if existing corporations do not want perpetual term, they
must notify the SEC that they want to maintain their fixed term.
e) A corporation with a fixed term may extend their term; and
g) No extension can be made earlier than 3 years prior to the
original or subsequent expiry date.
For Corporations with certificates of incorporation issued prior to the
effectivity of this Code, and which continue to exist shall have perpetual
existence, unless:
• upon a vote of its stockholders representing a majority of its
outstanding capital stock
• the corporation notifies the SEC that it elects to retain its specific
corporate term pursuant to its articles of incorporation.
Any change in the corporate term under this section is without
prejudice to the appraisal right of dissenting stockholders in
accordance with the provisions of this Code.
General Rule: A corporate term for a specific period may be extended or
shortened by amending the articles of incorporation.
Limitation: No extension may be made earlier than three (3) years prior to the
original or subsequent expiry date(s)
Exception: There are justifiable reasons for an earlier extension as may be
determined by the SEC.
Effects:
If extended:
Such extension of the corporate term shall take effect only on the day following
the original or subsequent expiry date(s).
If not extended or expired:
Upon expiration of the period fixed in the articles of incorporation, in the
absence of compliance with the legal requisites for the extension of the period,
the corporation ceases to exist and is dissolved ipso facto (PNB v. CFI Rizal,
G.R. No. 63201, 1992)
Doctrine of Relations or Relating Back Doctrine
Where the delay in affecting the amendment is due to the neglect of the officer
with whom the certificate is required to be filed, or to a wrongful refusal on his
part to receive it, the same will be treated as having been filed before the expiry
date. The doctrine does not apply where the delay is attributable to the
corporation (Alhambra Cigar v. SEC, G.R. No. L-23606, 1968)
Revival: If a corporation’s term has expired, it may apply for a revival of its
corporate existence, together with all the rights and privileges under its
certificate of incorporation and subject to all of its duties, debts and liabilities
existing prior to its revival. Upon approval by the SEC, the corporation shall
be deemed revived and a certificate of revival of corporate existence shall be
issued, giving it perpetual existence, unless its application for revival
provides otherwise.
Who may file for petition for revival of corporate existence:
1. 1) Generally, a corporation whose term has expired;
2. 2) An Expired Corporation whose Certificate of Registration has been
revoked for non-filing of reports,
3. 3) An Expired Corporation whose Certificate of Registration has been
suspended
Note for 2) & 3): it shall file the proper Petition to Lift its Suspended Status,
which may be incorporated in its Petition to Revive, and must settle the
corresponding penalties thereof
4) An Expired Corporation whose corporate name has already been validly re-
used, and is currently being used, by another existing corporation duly
registered with the SEC, provided that the former shall change its corporate
name within thirty (30) days from the issuance of its Certificate of Revival of
Corporate Existence. (SEC Memo. Circ. no. 23-19)
O. Incorporators and Capital Stock
• Section 10 (RCC)
SEC. 10. Number and Qualifications of Incorporators. – Any person,
partnership, association or corporation, singly or jointly with others but not
more than fifteen (15) in number, may organize a corporation for any lawful
purpose or purposes: Provided, That natural persons who are licensed to
practice a profession, and partnerships or associations organized for the
purpose of practicing a profession, shall not be allowed to organize as a
corporation unless otherwise provided under special laws. Incorporators who
are natural persons must be of legal age.
Each incorporator of a stock corporation must own or be a subscriber to at least
one (1) share of the capital stock.
A corporation with a single stockholder is considered a One Person
Corporation as described in Title XIII, Chapter III of this Code.
Incorporators – those stockholders or members mentioned in the
articles of incorporation as originally forming and composing the
corporation and who are signatories thereof (Sec. 5)
Must be:
a) Natural person, partnership, association or corporation, singly or
jointly with others but not more than 15)
i. may be composed of any combination of natural person/s SEC-
registered partnership/s,SEC-registered domestic corporation/s or
associations, and foreign corporation/s. (SEC MC no. 16-19)
b) If natural persons, be of Legal Age;
c) Each owns or subscribes to at least one stock corporations and be a
member for non-stock corporations.
Note: Natural persons who are licensed to practice a profession, and
partnerships or associations organized for the purpose of practicing a
profession, shall not be allowed to organize as a corporation (for the practice
of such profession) unless otherwise provided under special laws.(Sec. 10)
• Section 12 (RCC)
SEC. 12. Minimum Capital Stock Not Required of Stock Corporations. –
Stock corporations shall not be required to have a minimum capital stock,
except as otherwise specifically provided by special law.
P. Registration and Contents of the Articles of Incorporation
• Contents: Section 13 (RCC)
SEC. 13. Contents of the Articles of Incorporation. – All corporations shall
file with the Commission articles of incorporation in any of the official
languages, duly signed and acknowledged or authenticated, in such form and
manner as may be allowed by the Commission, containing substantially the
following matters, except as otherwise prescribed by this Code or by special
law:
(a) The name of the corporation;
(b) The specific purpose or purposes for which the corporation is being formed.
Where a corporation has more than one stated purpose, the articles of
incorporation shall indicate the primary purpose and the secondary purpose or
purposes: Provided, That a nonstock corporation may not include a purpose
which would change or contradict its nature as such;
(c) The place where the principal office of the corporation is to be located,
which must be within the Philippines;
(d) The term for which the corporation is to exist, if the corporation has not
elected perpetual existence;
(e) The names, nationalities, and residence addresses of the incorporators;
(f) The number of directors, which shall not be more than fifteen (15) or the
number of trustees which may be more than fifteen (15);
(g) The names, nationalities, and residence addresses of persons who shall act
as directors or trustees until the first regular directors or trustees are duly
elected and qualified in accordance with this Code;
(h) If it be a stock corporation, the amount of its authorized capital stock,
number of shares into which it is divided, the par value of each, names,
nationalities, and residence addresses of the original subscribers, amount period of time mentioned therein, unless said period is extended or the
subscribed and paid by each on the subscription, and a statement that some or corporation is sooner dissolved in accordance with law. (Sec. 18)
all of the shares are without par value, if applicable;
Articles of Incorporation – Charter and Contract: a document that defines
(i) If it be a nonstock corporation, the amount of its capital, the names, the charter of the corporation stating its name, purpose or purposes, its capital
stock, as well as the description of its governing board and other stipulations
nationalities, and residence addresses of the contributors, and amount
under Sec. 13 and 14 of the RCCP. It defines the contractual relationship
contributed by each; and between the State and the Corporation, the stockholders and the State, and
between the corporation and its stockholders.
(j)Such other matters consistent with law and which the incorporators may
deem necessary and convenient. o It binds the state
o Constitutes the Consittution of
An arbitration agreement may be provided in the articles of incorporation corporation
pursuant to Section 181 of this Code. o An entry in the Articles of
incorporation Evidence of the factual
stipulations therein
The articles of incorporation and applications for amendments thereto may be
o It must comply with the form
filed with the Commission in the form of an electronic document, in prescribed by Articles 13 and 14. :
accordance with the Commission’s rules and regulations on electronic filing. substantial compliance.

Registration - a person or group of persons desiring to incorporate shall

submit the intended corporate name to the SEC for verification. If the SEC
finds that the name is distinguishable from a name already reserved or Provision of the New Requirements under the RCC
registered for the use of another corporation, not protected by law and not Articles of
contrary to law, rules and regulations, the name shall be reserved in favor of Incorporation
the incorporators. The incorporators shall then submit their articles of
1) Corporate The term OPC should be included in the corporate
incorporation and bylaws to the SEC. Name name if the corporation is a One Person Corporation
2) Incorporators a. Incorporators can be a natural person, partnership,
Issuance of Certificate of Incorporation:
corporation or association;
If the SEC finds that the submitted documents and information are fully
compliant with the requirements of this Code, other relevant laws, rules and b. one incorporator is sufficient.
regulations, the SEC shall issue the certificate of incorporation.
c. There is no residency requirement for incorporators
Commencement of Corporate Existence 3) Term The term can be perpetual or fixed term. The default
rule is that the term is perpetual.
A private corporation organized under this Code commences its corporate 4) Treasurer’s A separate treasurer’s affidavit is no longer required
existence and juridical personality from the date the SEC issues the Certificate but the certification of the treasurer is now
certificate of incorporation under its official seal and thereupon the incorporated in the 9th clause of the Articles of
incorporators, stockholders/ members and their successors shall constitute a incorporation
body corporate under the name stated in the articles of incorporation for the
 5) Undertaking to It is no longer required to submit a separate
Change Corporate undertaking but the contents of the undertaking are
Name now included in the 10th clause of the Articles of
Incorporation
6) Signatories The incorporators and the treasurer sign the Articles
of Incorporation.
7) Directors and a. There is no more minimum number of directors and
Trustees trustees. The exceptions are educational corporations
and religious societies which still require a minimum
of 5 trustees.
b. There is no more residency requirement for
directors.
8) Subscribed and a. Subscribed and paid-up capital are now both in the
paid-Up Capital eight clause of the new form under sec. 14 RCCP
b. There is no longer any required minimum
subscribed not paid-up capital unless special laws
provide otherwise.
Second: That the purpose or purposes for which such corporation is
incorporated are: (If there is more than one purpose, indicate primary and
secondary purposes);
Third: That the principal office of the corporation is located in the
City/Municipality of ______________________, Province of
_______________________, Philippines;
Fourth: That the corporation shall have perpetual existence or a term of
______________ years from the date of issuance of the certificate of
incorporation;
Fifth: That the names, nationalities, and residence addresses of the
incorporators of the corporation are as follows:
Name Nationality Residence
Sixth: That the number of directors or trustees of the corporation shall be
_________________; and the names, nationalities, and residence addresses of
the first directors or trustees of the corporation are as follows:

Name Nationality
Residence
• Form: Section 14 (RCC)
_____________________. ______________________.
______________________
SEC. 14. Form of Articles of Incorporation. – Unless otherwise prescribed
by special law, the articles of incorporation of all domestic corporations shall _____________________. ______________________.
comply substantially with the following form: ______________________

Articles of Incorporation of ______________________ (Name of _____________________. ______________________.

Corporation) ______________________

The undersigned incorporators, all of legal age, have voluntarily agreed to

form a (stock) (nonstock) corporation under the laws of the Republic of the
Philippines and certify the following: _____________________. ______________________.
______________________
First: That the name of said corporation shall be “_______________, Inc.,
Corporation or OPC”;
_____________________. ______________________.
______________________
Seventh: That the authorized capital stock of the corporation is
______________ PESOS (P________), divided into _____ shares with the par
value of ____________ PESOS (P_______________) per share. (In case all
the shares are without par value): That the capital stock of the corporation is
__________________________ shares without par value.
(In case some shares have par value and some are without par value): That the
capital stock of said corporation consists of __________________________
shares, of which _______________________ shares have a par value of
_________________ PESOS (P____________) each, and of which
_______________________ shares are without par value.
Eighth: That the number of shares of the authorized capital stock above-stated
has been subscribed as follows:
Name of Nationality No. of Shares Amount Amount
Subscriber Subscribed Subscribed Paid
(Modify No. 8 if shares are with no-par value. In case the corporation is
nonstock, Nos. 7 and 8 of the above articles may be modified accordingly, and
it is sufficient if the articles state the amount of capital or money contributed
or donated by specified persons, stating the names, nationalities, and residence
addresses of the contributors or donors and the respective amount given by
each.)
Ninth: That _____________________ has been elected by the subscribers as
Treasurer of the Corporation to act as such until after the successor is duly
elected and qualified in accordance with the bylaws, that as Treasurer,
authority has been given to receive in the name and for the benefit of the
corporation, all subscriptions, contributions or donations paid or given by the
subscribers or members, who certifies the information set forth in the seventh
and eighth clauses above, and that the paid-up portion of the subscription in
cash and/or property for the benefit and credit of the corporation has been duly
received.
Tenth: That the incorporators undertake to change the name of the corporation
immediately upon receipt of notice from the Commission that another
corporation, partnership or person has acquired a prior right to the use of such
name, that the name has been declared not distinguishable
from a name already registered or reserved for the use of another corporation,
or that it is contrary to law, public morals, good customs or public policy.
Eleventh: (Corporations which will engage in any business or activity reserved
for Filipino citizens shall provide the following):
“No transfer of stock or interest which shall reduce the ownership of Filipino
citizens to less than the required percentage of capital stock as provided by
existing laws shall be allowed or permitted to be recorded in the proper books
of the corporation, and this restriction shall be indicated in all stock certificates
issued by the corporation.”
IN WITNESS WHEREOF, we have hereunto signed these Articles of
Incorporation, this _______ day of _____________, 20_____ in the
City/Municipality of ______________________, Province of
_______________________, Republic of the Philippines.
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
_________________________ __________________________
(Names and signatures of the incorporators)
_______________________________________
(Name and signature of Treasurer)
• Amendments: Section 15 (RCC)
SEC. 15. Amendment of Articles of Incorporation. – Unless otherwise
prescribed by this Code or by special law, and for legitimate purposes, any
provision or matter stated in the articles of incorporation may be amended by
a majority vote of the board of directors or trustees and the vote or written
assent of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, without prejudice to the appraisal right of dissenting
stockholders in accordance with the provisions of this Code. The articles of
incorporation of a nonstock corporation may be amended by the vote or written
assent of majority of the trustees and at least two-thirds (2/3) of the members.
The original and amended articles together shall contain all provisions required
by law to be set out in the articles of incorporation. Amendments to the articles
shall be indicated by underscoring the change or changes made, and a copy
thereof duly certified under oath by the corporate secretary and a majority of
the directors or trustees, with a statement that the amendments have been duly
approved by the required vote of the stockholders or members, shall be
submitted to the Commission.
The amendments shall take effect upon their approval by the Commission or
from the date of filing with the said Commission if not acted upon within six
(6) months from the date of filing for a cause not attributable to the corporation.
Limitations for Amendment/Requirements:
1. the amendment must be for LEGITIMATE PURPOSES and
must not be contrary to other provisions of the Revised
Corporation Code and special laws;
2. The amendment must be APPROVED by the majority vote
of the board of directors or trustees;
3. There must be a Vote or Written assent of stockholders
representing 2/3 of the outstanding capital stock or 2/3 of
members.
4. The original and amendment articles together shall contain
all provisions required by law to be set out in the Articles of
Incorporation. The amendments to the Articles of incorporation
shall be indicated by underscoring the change or changes made;
5. A copy of the Amended Articles shall be duly certified under
oath by the corporate secretary and a majority of the directors
or trustees, stating the fact that the amendment or amendments
have been duly approved by the required vote of the
stockholders or members. The Amended Articles with the
certification shall be submitted to the SEC.
6. The amendment must be approved by the SEC.
Documentary Requirements:
1. Amended Articles of Incorporation
2. Director’s or Trustees’ Certificate – notarized document signed by a
majority of the directors or trustees and the corporate secretary,
certifying the amendment of the AOI, and indicating the amended
provisions, the vote of the directors or trustees and stockholder or
members, the date and place of the stockholder or members’ meeting,
and the tax identification number of the signatories which shall be
placed below their names;
3. Monitoring Clearance issued by the Compliance Monitoring
Division
4. Secretary’s Certificate – notarized document signed by the corporate
secretary certifying that no action or proceeding has been filed or is
pending before any Court or tribunal involving an intra-corporate
dispute or claim by any person or group against the directors, officers
or stockholders of the Corporation.
Express and Implied approval : the amendments shall take effect upon
their approval by the SEC. However, express approval is not
indispensable; the amendments shall take effect from the date of filing
with the said Commission if not acted upon within six months from the
date of filing for cause not attributable to the corporation.
Provisions cannot be allowed if they go against the nature of the
corporation.
Accomplished Fact Rule – provisions of the AOI that cannot be
amended because they are accomplished fact. Ex: names of
incorporators cannot be changed and their numbers cannot be
increased because the names and number of the original incorporators
are accomplished facts. Similarly, there can be no change in the names
of the original directors for the same reason.
• Sections 18 to 21 (RCC)
§ Marc II Marketing vs. Joson (GR 171993, 12
December 2011)
FACTS
Petitioner Marc II is a corporation primarily engaged in the business of
distributing in retail or wholesale household appliances and products.
Petitioner Lucila Joson is the President and majority stockholder of the
corp. Respondent Alfonso Joson was the general manager,
incorporator, director and stockholders of Marc II.
Before petitioner corporation was officially incorporated, 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. 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 IV of its
by-laws.
When Marc II was officially incorporated and registered with the SEC,
Marc Marketing was made non-operational, but respondent continued
to discharge his duties as General Manager this time under Marc II.
Pursuant to petitioner corporation's by-laws, 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. Respondent was one of those appointed by the
BOD as a General Manager.
A few years after, Marc II decided to stop and cease its operations due
to poor sales. Respondent was terminated since his services would no
longer be necessary for the winding up of its affairs. Aggrieved, he filed
a complaint for reinstatement and money claim against petitioners.
The Labor Arbiter declared respondent’s dismissal as illegal. The
NLRC, however, ruled in favor of the petitioners, giving credence to
BOD resolution that respondent was a corporate officer, and hence, his
dismissal involves a purely intra-corporate controversy. But, the CA
upheld the LA decision.
ISSUE: whether respondent as General Manager of petitioner
corporation is a corporate officer or a mere employee of the latter under
its by-laws
RULING
No. The Court held that the respondent was not a corporate officer of
petitioner corporation. The Court held that 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 25 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. Thus, pursuant to
the above provision, 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 by- 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.
A careful perusal of petitioner corporation's by-laws 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. The position of General Manager was not among those
enumerated.
Given the circumstances, the Court ruled 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.
SEC. 18. Registration, Incorporation and Commencement of Corporate
Existence. – A person or group of persons desiring to incorporate shall submit
the intended corporate name to the Commission for verification. If the
Commission finds that the name is distinguishable from a name already
reserved or registered for the use of another corporation, not protected by law
and is not contrary to law, rules and regulations, the name shall be reserved in
favor of the incorporators. The incorporators shall then submit their articles of
incorporation and bylaws to the Commission.
If the Commission finds that the submitted documents and information are
fully compliant with the requirements of this Code, other relevant laws, rules
and regulations, the Commission shall issue the certificate of incorporation.
A private corporation organized under this Code commences its corporate
existence and juridical personality from the date the Commission issues the
certificate of incorporation under its official seal and thereupon the
incorporators, stockholders/members and their successors shall constitute a
body 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.
Promoters- SRC: persons who, acting alone or with other, take
initiative in founding and organizing the business or enterprise.
However, the definition in the SRC pertains to organization of issuer of
securities and presupposes payment of consideration to the promoter.
GR: acts of promoters cannot bind the corporation except in certain
cases.
SEC. 19. De facto Corporations. – The due incorporation of any corporation
claiming in good faith to be a corporation under this Code, and its right to
exercise corporate powers, shall not be inquired into collaterally in any
private suit to which such corporation may be a party. Such inquiry may
be made by the Solicitor General in a quo warranto proceeding.
Requisites of De facto corporations
a. a valid law under which the corporation is organized
b. an attempt in good faith to incorporate
c. an assumption of corporate powers
Nature and Status of De facto Corporations – personality of de facto
corporation is subject to attack by the state in a proper proceeding.
However, so long as it exists, a de facto corporation is a reality and has
substantial, legal existence and independent status recognized by the
law as distinct from that of its members or shareholders. A de facto
corporation enjoys the attributes of a corporation until the State
questions its existence.
De facto – may have its existence inquired into and forfeited by the
State. It has a right to corporate existence even against the State if the
attack is collateral but not if the attack is direct. Dissolved corporation
cannot acquire the status of a de facto corporation: (when a group of
employees who continued the operations of a dissolved corporation or
a corporation whose registration had been revoked.)
SEC. 20. Corporation by Estoppel. – All persons who assume to act as a
corporation knowing it to be without authority to do so shall be liable as
general partners for all debts, liabilities and damages incurred or arising as a
result thereof: Provided, however, That when any such ostensible corporation
is sued on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use its lack of corporate
personality as a defense. Anyone who assumes an obligation to an ostensible
corporation as such cannot resist performance thereof on the ground that there
was in fact no corporation.
Estoppel – one who assumes an obligation to an ostensible corporation
as such cannot resist performance thereof on the ground that there was
in fact n corporation.
Liability as General partner – those who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general
partners: they are liable even beyond their investment; their personal
properties may be made to answer for what is purportedly corporate
debt of the no existent corporation. If without knowledge, they are
liable as if they are regular stockholders of a corporation.
Non application – not applicable if the party is not trying to escape
liability from the contract but rather is the one claiming from the
contract.
SEC. 21. Effects of Non-Use of Corporate Charter and Continuous
Inoperation. – If a corporation does not formally organize and commence its
business within five (5) years from the date of its incorporation, its certificate
of incorporation shall be deemed revoked as of the day following the end of
the five (5)-year period.
However, if a corporation has commenced its business but subsequently
becomes inoperative for a period of at least five (5) consecutive years, the
Commission may, after due notice and hearing, place the corporation under
delinquent status.
A delinquent corporation shall have a period of two (2) years to resume
operations and comply with all requirements that the Commission shall
prescribe. Upon compliance by the corporation, the Commission shall issue an
order lifting the delinquent status. Failure to comply with the requirements and
resume operations within the period given by the Commission shall cause the
revocation of the corporation’s certificate of incorporation.
The Commission shall give reasonable notice to, and coordinate with the
appropriate regulatory agency prior to the suspension or revocation of the
certificate of incorporation of companies under their special regulatory
jurisdiction.
o Failure to organize within 5 years
from incorporation
o Failure to commence business
within 5 years from incorporation
and
o Becoming continuously
inoperative for a period of at least
5 consecutive years.
o Must be continuous oeperation
Organize - process of forming and arranging into suitable disposition
the parties who are to act together in and defining the objects , of the
compound body. : a) adoption, filing by the corporation and approval
by the SEC of the corpraption By-laws after incorporation; b) election
of directors or trustees and officers; c) establishment of the principal
office; and d) providing for the subscription and payment of the capital
stock; f) taking such steps as necessary to endow the legal entity with
capacity to transact the legitimate business for which it was created.
Commencement of business – when it has performed preparatory ats
geared toward the fulfillment of the purposes for which it was
established as such as but not limited to the ff: 1) entering into contracts
or negotiation for lease or purchase of properties to be used as business
or factory site; 2) making plans for the construction of factory; 3) taking
steps to expedite the construction of the company’s working
equipment.
Q. The Governing Rules and By-Laws
• Contractual significance of By-Laws –
§ Fleischer v. Botica Nolasco, Co. (47 Phil 583
[1925])
FACTS:
That Manuel Gonzalez was the original owner of the five shares of stock
in question, Nos. 16, 17, 18, 19 and 20 of the Botica Nolasco, Inc.; that
on March 11, 1923, he assigned and delivered said five shares to the
plaintiff, Henry Fleischer, by accomplishing the form of endorsement.
The board of directors of the Botica Nolasco, Inc., a corporation duly
organized and existing under the laws of the Philippine Islands. The
plaintiff prayed that said board of directors be ordered to register in the
books of the corporation five shares of its stock in the name of Henry
Fleischer. plaintiff filed an amended complaint against the Botica
Nolasco, Inc., alleging that he became the owner of five shares of stock
of said corporation, by purchase from their original owner, one Manuel
Gonzalez. Plaintiff prayed for a judgment ordering the Botica Nolasco,
Inc. to register in his name in the books of the corporation the five
shares of stock recorded in said books in the name of Manuel
Gonzalez, and to indemnify him in the sum of P500 as damages, and
to pay the costs. the Honorable N. Capistrano, judge, held that, in his
opinion, article 12 of the bylaws of the corporation which gives it
preferential right to buy its shares from retiring stockholders, is in
conflict with Act No. 1459 (Corporation Law), especially with
section 35 thereof; and rendered a judgment ordering the
defendant corporation, through its board of directors, to register
in the books of said corporation the said five shares ,f stock in the
name of the plaintiff, Henry Fleischer, as the shareholder or owner
thereof, instead of the original owner, Manuel Gonzalez, with costs
against the defendant.
ISSUE: whether or not article 12 of the by-laws of the corporation is in
conflict with the provisions of the Corporation Law (Act No. 1459).
RULING: YES
The particular provisions of the Corporation Law referring to transfer of
shares of stock are as follows:
"SEC. 13. Every corporation has the power:" (7) To make by-laws, not
inconsistent with any existing law, for the fixing or changing of the
number of its officers and directors within the limits prescribed by law,
and for the transferring of its stock, the administration of its corporate
affairs, etc. Section 13, paragraph 7, above-quoted, empowers a
corporation to make by-laws, not inconsistent with any existing law, for
the transferring of its stock. It follows from said provision, that a by-law
adopted by a corporation relating to transfer of stock should be in
harmony with the law on the subject of transfer of stock. Under
said section they are personal property and may be transferred as
therein provided. Said section contemplates no restriction as to whom
they may be transferred or sold. It does not suggest that any
discrimination may be created by the corporation in favor or against a
certain purchaser. As a general rule, the by-laws
of a corporation are valid if they are reasonable and calculated afto
carry into effect the objects of the corporation, and are not contradictory
to the general policy of the laws of the land
§ Pena v. CA (193 SCRA 717 [1991])
FACTS:
Pampanga Bus Co.] PAMBUSCO, original owners of the lots in
question under TCT Nos. 4314, 4315 and 4316, mortgaged the same
to the Development Bank of the Philippines (DBP) on January 3, 1962
in consideration of the amount of P935.000.00. the board of directors
of PAMBUSCO, through three (3) out of its five (5) directors, resolved
to assign its right of redemption over the aforesaid lots and authorized
one of its members, Atty. Joaquin Briones, ‘to execute and sign a Deed
of Assignment for and in behalf of PAMBUSCO in favor of any
interested party. ,
A day after the aforesaid certificate was issued, Enriquez executed a
deed of absolute sale of the subject properties in favor of plaintiffs-
appellants, the spouses Rising T. Yap and Catalina Lugue, for the sum
of P140,000.00 Pena wrote the Sheriff notifying him that the
redemption was not valid as it was made under a void deed of
assignment. She then requested the recall of the said redemption and
a restraint on any registration or transaction regarding the lots in
question . The defense was that since the deed of assignment
executed by PAMBUSCO in favor of Enriquez was void ab initio
for being an ultra vires act of its board of directors and, for being
without any valuable consideration, it could not have had any legal
effect. According to Pena the resolution of the board must be
declared null and void for lack of quorum.The trial court ruled in
favor of Pena.
ISSUE: Whether there is a qourum?
RULING: No, qourum
The by-laws of a corporation are its own private laws which
substantially have the same effect as the laws of the corporation.
They are in effect, written, into the charter. In this sense they
become part of the fundamental law of the corporation with which
the corporation and its directors and officers must comply.11
Apparently, only three (3) out of five (5) members of the board of
directors of respondent PAMBUSCO convened on November 19,
1974 by virtue of a prior notice of a special meeting. There was no
quorum to validly transact business since, under Section 4 of the
amended by-laws hereinabove reproduced, at least four (4)
members must be present to constitute a quorum in a special
meeting of the board of directors of respondent PAMBUSCO.
Moreover, the records show that respondent PAMBUSCO ceased to
operate as of November 15, 1949 as evidenced by a
letter of the SEC to said corporation dated April 17, 1980.13 Being a
dormant corporation for several years, it was highly irregular, if not
anomalous, for a group of three (3) individuals representing themselves
to be the directors of respondent PAMBUSCO to pass a resolution
disposing of the only remaining asset of the corporation in favor of a
former corporate officer. The decision of the trial court are reinstated.
§ Yaokasin Trading v. CA (209 SCRA 763
[1992])
FACTS: The root of this controversy is the undated letter-offer of
Constancio B. Maglana, President and Chairman of the Board of private
respondent Prime White Cement Corporation, hereinafter referred to as
PWCC, to Yao Ka Sin Trading, hereinafter referred to as YKS, which
describes itself as "a business concern of single proprietorship,"3 and
is represented by its manager, Mr. Henry Yao. this case is whether or
not the aforesaid letter-offer, as accepted by YKS, is a contract
that binds the PWCC. According to the undated letter-offer the cement
to be delivered shall be at the option of P 24.30 per lbs, as to its quality
45,000.00 and the downpayment shall be P 243,000.00. The signed
letter was done by the President of Prime White Cement
Corporation without its board of directors knowledge and
resolution.
ISSUE: Whether the aforesaid letter-offer accepted by Yao Ka Sin
trading binds the Prime White Cement Corporation.
RULING: all corporate commitments and business are conducted by,
and contracts entered into through, the express authority of the Board
of Directors.
that Maglana is President of defendant corporation nowhere in the
Articles of Incorporation nor in the ByLaws of said corporation
was he empowered to enter into any contract all by himself and
bind the corporation without first securing the authority and
consent of the Board of Directors.
§ China Banking Corporation v. CA (270
SCRA 503 [1997])
Facts: Calapatia, Jr, a stockholder of private respondent Valley Golf
& Country Club, Inc., pledged his stock certificate to petitioner. The
deed of pledge was noted in the respondent’s corporate books.
Calapatia obtained a loan, which was secured by said pledge
agreement. Due to his failure to pay, petitioner moved for extrajudicial
foreclosure and a public bidding was held where the petitioner was the
highest bidder. Respondent refused to record the same in its corporate
books and issue a stock certificate in the petitioner’s name because of
Calapatia’s unsettled amount. It likewise held a public auction for
Calapati's delinquency, which was opposed by the petitioner.
Respondent argued that it claimed a prior right over the subject
share pursuant to its Sec. 3, Art VIII of its by-laws which provides
that “after a member shall have been posted as delinquent, the
Board may order his share sold to satisfy the claims of the Club.”
Issue: WON petitioner is bound by respondent’s by-laws
Ruling: No, the Supreme Court held that in order to be bound by the
by-laws, the third party must have acquired knowledge of the
pertinent by-laws at the time the pledge agreement was executed.
Respondent could have easily informed petitioner of its by-laws
when it sent notice formally recognizing petitioner as pledgee of
one of its shares registered in Calapatia’s name. Hence, petitioner,
as a third party, cannot be bound by respondent’s by-laws.
§ PMI Colleges v. NLRC (277 SCRA 462
[1997])
Facts: Petitioner hired private respondent as contractual instructor
with an agreement that the latter shall be paid a rate on hourly basis.
He was compensated until he stopped receiving payment for the rest
of his services. Thus, he was constrained to file a complaint with the
NLRC. Petitioner argued that private respondent’s must fail as the
contract was invalid since its signatory was not the Chairman of the
Board, which violated the petitioner’s by-laws that provides that the
Chairman is the only authorized to sign any contract.
Issue: WON private respondent is bound by petitioner’s by-laws
Ruling: The Supreme Court ruled in the negative since by-laws operate
merely as internal rules among the stockholders. As such, they cannot
affect or prejudice third persons who deal with the corporation, unless
they have knowledge of the same. No proof appears on record that the
private respondent ever knew anything about the provisions of said by-
laws.
§ Bernas v. Cinco (761 SCRA 104 [2015])
Facts: The corporation’s stockholders sought the assistance of the
MSC Oversight Committee for a special stockholders’ (SH) meeting for
the purpose of removing petitioner’s group as officers and electing new
ones. The Committee then called for the same and resolved to remove
the petitioners and elected the respondent’s group. Petitioners argued
that the authority to call a meeting lies with the Corp Sec while the
respondents contended that Sec 25 of the by-laws merely
authorized the Corp Sec but does not state that such authority
solely belongs to him and that the Corp Sec refused to take their
demand to call a special stockholders’ meeting. Accordingly, the
petitioners were removed and Bernas’ shares were sold in a public
auction.
Issue: WON the special SH meeting was valid
Ruling: The Supreme Court ruled in the negative. It was discovered
that the corporation’s by-laws provide that only the President and
the Board of Directors are authorized to call a special meeting. In
cases where the person authorized to call a meeting refuses, fails,
or neglects to call a meeting, then the stockholders representing
at least 100 shares, upon written request, may file a petition to call
a special SH’s meeting. In this case, the special SH meeting was
neither called by the President nor by the Board of Directors. To rule
otherwise would open the floodgates to abuse where any SH, who
considers himself aggrieved by certain corporate actions, could call a
special SH’s meeting for the purpose of removing the sitting officers in
direct violation of the rules pertaining to the call of meeting laid down in
the by-laws.
• Characteristics of By-Laws:
§ Loyola Grand Villas Homeowners’ (South)
Association, Inc. v. CA (GR 117188; 7
August 1997)
Facts: Loyola Grand Villas Homeowners Association, Inc. was
organized on February 8, 1983 as the registered sole homeowner’s
association for Loyola Grand Villas with the Home Financing
Corporation, which later became Home Insurance Guarantee
Corporation (HIGC). However, the association was not able to file
its corporate by-laws in the prescribed date as stated in the
Corporation Code Sec. 46, Adoption of by-laws, “Every
corporation formed under this code MUST within 1 month after
receipt of official notice of the issuance of its certificate of
incorporation by SEC, adopt a code of by-laws for its government
not inconsistent with this Code.”
They then discovered that there were other homeowners’ organization
within the subdivision – the North and South Association, and upon
inquiry by the LGVHAI to HIGC, it was discovered that LGVHAI was
dissolved for its failure to submit its by-laws within the period required
by the Corporation Code. These paved the way for the formation of the
two other associations. LGVHAI then lodged a complaint and
questioned the revocation with the HIGC Hearing Officer Javier.
Hearing Officer Javier ruled in favor of LGVHAI and revoked the
registration of the North and South Associations.
Petitioner South Association appealed the ruling contending that
LGVHAI failure to file automatically dissolved the corporation.
Issue: Is the failure to file LGVHAI’s by-laws within the period
prescribed by Sec. 46 of the Corporation Code had the effect of
automatically dissolving the said corporation.
Ruling: No, ordinarily the word “must” connotes imposition of
duty which must be enforced however, the word “must” in a
statute, (like “shall”) is not always imperative. It may be consistent
with an exercise of discretion. If the language of a statute, considered
as a whole with due regard to its nature and object, reveals that the
legislature intended to use the words “shall” and “must” to be directory,
they should be given that meaning.
ByLaws are indispensable to corporations, since they are required
by law for an orderly management of corporations. However,
failure to file them within the period prescribed does not equate to
the automatic dissolution of a corporation.

§ Government of Philippine Island v. El Hogar
Filipino (50 Phil. 430-431 [1927])
Facts:
The Philippine Commission enacted Act No. 1459, also kno
wn as the Corporation Law, on March 1, 1906. El Hogar Filipino,
organized in 1911 under the laws of the Philippine Islands, was the first
corporation organized under Sec. 171-190 Act No.1459, devoted to the
subject of building and loan associations, their organization and
administration. In the said law, the capital of the corporation was not
permitted to exceed P3M, but Act No. 2092 amended the statute,
permitting capitalization to the amount of ten millions.
El Hogar took advantage of the amendment of Act No. 1459 and
amended its AOI as a result thereof, stating that the amount of capital
must not exceed what has been stated in Act No. 2092. This resulted
to El Hogar having 5,826 shareholders,125,750 shares with paid-up
value of P8.7M. The corporation paid P7.16M to its withdrawing
stockholders.
The Government of the Philippine Islands filed an action against El
Hogar due tothe alleged illegal holding title to real property for a period
exceeding five (5) years after the same was bought in a foreclosure
sale. Sec. 13(5) of the Corporation Law states that corporations must
dispose of real estate obtained within 5 years from receiving the title.
The Philippine Government also prays that
El Hogar be excluded from all corporate rights and privileges and
effecting a final dissolution of said corporation.
It appears from the records that El Hogar was the holder of a recorded
mortgage
on the San Clemente land as security for a P24K loan to
El Hogar. However, shareholders and borrowers defaulted in
payment so El Hogar foreclosed the mortgage and purchased the land
during the auction sale. A deed of conveyance in favor of ElHogar was
executed and sent to the Register of Deeds of Tralac with a request
that thecertificate of title be cancelled and a new one be issued in favor
of El Hogar from the Register of Deeds of Tarlac. However, no reply
was received. El Hogar filed a complaintwith the Chief of the General
Land Registration Office. The certificate of title to the SanClemente land
was received by El Hogar and a board resolution authorizing Benzon
tofind a buyer was issued. Alcantara, the buyer of the land, was given
extension of time tomake payment but defaulted so the contract treated
rescinded. Efforts were made to find another buyer. Respondent
acquired title in December 1920 until the property was finally sold to
Felipa Alberto in July 1926. The interval exceeded 5 years but the
period did not commence to run until May 7, 1921 when the register of
deeds delivered the new certificate of title. It has been held that a
purchaser of land registered under the Torrens system cannot acquire
the status of an innocent purchaser for value unless the vendor is able
to place the owner’s duplicate in his hands showing the title to be in the
vendor. During the period before May 1921, El Hogar was not in a
position to pass an indefeasible title to any purchaser. Therefore, El
Hogar cannot be held accountable fo rthis delay which was not due to
its fault. Likewise, the period from March 25, 1926 toApril 20, 1926 must
not be part of the five-year period because this was the period where
respondent was under the obligation to sell the property to Alcantara
prior to thecontract’s rescission due to Alcantara’s non-payment.
Another circumstance causing the delay is the fact that El Hogar
purchased theproperty in the full amount of the loan made by the former
owner which is nearly P24Kwhen it was subsequently found that the
property was not salable and later sold for P6Knotwithstanding El
Hogar’s efforts to find a purchaser upon better terms.
ISSUE: W/N the acts of respondent corporation merit its dissolution or
deprivation of its corporate franchise and to exclude it from all corporate
rights and privileges
RULING:
SUSTAINED only as to administering of real property not owned by it
and when permitted by contract.
Causes of action:
1)Alleged illegal holding of real property for a period exceeding five
years from receipt of title-Cause of delay is not respondent’s fault
2)That respondent is owning and holding a business lot with the
structure thereonin excess of its reasonable requirements and in
contravention of Sec. 13(5) of Corpo. Law- WITHOUT MERIT
Every corporation has the power to purchase, hold and lease such real
property as the transaction would of the lawful business may
reasonably and necessarily require.
3)That respondent is engaged in activities foreign to the purposes for
which the corporation was created and not reasonably necessary to its
legitimate ends-VALID
The administration of property, payment of real estate taxes, causing
necessary repairs, managing real properties of non-borrowing
shareholders is more befitting to the business of a real estate agent or
a trust company than a building and loan association.
4)That the by-laws of the association stating that, “the board of
directors by the vote of an absolute majority of its members is
empowered to cancel shares and to return the balance to the
owner by reason of their conduct or any other motive or
liquidation” is in direct conflict with Sec. 187 of the Corporation
Law which provides that the board of directors shall not have the
power to force the surrender and withdrawal of unmatured stock
except in case of liquidation or forfeiture of stock for delinquency-
WITHOUT MERIT
There is no provision of law making it a misdemeanor to incorporate an
invalid provision in the by-laws of a corporation; and if there were such,
the hazards incident to corporate effort would be largely increased.
5)Art. 61 of El Hogar’s by-laws which states that “ attendance in person
or by proxy by shareholders owning one-half plus one of the
shareholders shall be necessary to constitute a quorum for the election
of directors” is contrary to Sec. 31 of the Corpo Law which provides that
owners of the majority of the subscribed capital stock entitled to vote
must be present either in person or by proxy at all elections of directors-
WITHOUT MERIT
No fault can be imputed to the corporation on account of the failure of
the shareholders to attend the annual meetings and their non-
attendance in meetings is doubtless to be interpreted in part as
expressing their satisfaction of the way in which things have been
conducted. Mere failure of a corporation to elect officers does not
terminate the terms of existing officers nor dissolve the corporation. The
general rule is to allow the officer to holdover until his successor is duly
qualified.
6)That the directors of El Hogar, instead of receiving nominal pay or
serving withoutpay, have been receiving large compensation, varying
in amount from time to time, out of respondents’ profits- WITHOUT
MERIT
With the growth of the corporation, the amount paid as compensation
to the directors has increased beyond what would probably be
necessary is a matter that cannot be corrected in this action. Nor can it
properly be made a basis for depriving respondent of its franchise or
enjoining it from compliance with the provisions of its own by-laws. If a
mistake has been made, the remedy is to lie rather in publicity and
competition.
7)That the promoter and organizer of El Hogar was Mr. Antonio Melian
and that in the early stages of the organization of the association, the
board of directors authorized the association to make a contract with
him and that the royalty given to him as founder is “unconscionable,
excessive and out of proportion to the services rendered”-NOT
SUSTAINED
The mere fact that compensation is in excess of what may be
considered appropriate is not a proper consideration for the court to
resolve. That El Hogar is in contact with its promoter did not affect the
association’s legal character. The court is of the opinion that the
traditional respect for the sanctity of the contract obligation should
prevail over the radical and innovating tendencies.
8)That Art. 70 of El Hogar’s by-
laws, requiring persons elected as board of directors to be
holders of shares of the paid up value of P5,000 which shall be
held as security, is objectionable since a poor member or wage
earner cannot serve as a director irrespective of other
qualifications- NOT SUSTAINED
Corpo. Law expressly gives the power to the corporation to
provide in its by-laws for the qualification of its directors and the
requirement of security from them for the proper discharge of the
duties of their office in the manner prescribed in Art. 70 is highly
prudent and in conformity with good practice.

9)That respondent abused its franchise in issuing “special” shares
alleged to
beillegal and inconsistent with the plan and purposes of bu
ilding and loan associations- WITHOUT MERIT
The said special shares are generally known as advance payment
shares which were evidently created for the purpose of meeting the
condition caused by the prepayment ofd ues that is permitted. Sec. 178
of Corpo Law allows payment of dues or interest to be paid in advance
but the corporation shall not allow interest on advance payment
graterthan 6% per annum nor for a period longer than one year. The
amount is satisfied by applying a portion of the shareholder’s
participation in the annual earnings. The mission of special shares does
not involve any violation of the principle that the shares must besold at
par.
10) That in making purchases at foreclosure sales constituting as
security for 54 ofthe loans, El Hogar bids the full amount after deducting
the withdrawal value,alleged to be pusuing a policy of depreciating at
the rate of 10 percent perannum, the value of the real properties it
acquired and that this rate is excessive-UNSUSTAINABLE
The board of directors possess discretion in this matter. There is
no provision of law prohibiting the association from writing off a
reasonable amount for depreciation on its assets for the purpose
of determining its real profits. Art. 74 of its by-laws expressly
authorizes the board of directors to determine each year the
amount to be written downupon the expenses for the installation
and the property of the corporation. The court cannot control the
discretion of the board of directors about an administrative matter
asto which they have no legitimate power of action.
11)That respondent maintains excessive reserve funds-UNFOUNDED
The function of this fund is to insure stockholders against losses. When
the reserves become excessive, the remedy is in the hands of the
Legislature.No prudent person would be inclined to take a policy in a
company which had so improvidently conducted its affairs that it only
retained a fundbarely sufficient to pay its present liabilities and therefore
was in a condition where anychange by the reduction of interest upon
or depreciation in the value of securities or increase of mortality would
render it insolvent and subject to be placed in the hands of a receiver.
12) That the board of directors has settled upon the unlawful policy
of paying a straight annual dividend of 10 percent per centum
regardless of losses suffered and profits made by the corporation, in
contravention with the requirements of Sec. 188 ofthe Corpo law-
UNFOUNDED
As provided in the previous cause of action, the profits and losses shall
be determined by the board of directors and this means that they shall
exercise the usual discretion of good businessmen in allocating a
portion of the annual profits to purposes needful ofthe welfare of the
association. The law contemplates distribution of earnings and
lossesafter legitimate obligations have been met.
13) That El Hogar has made loans to the knowledge of its officers which
were intended to be used by the borrowers for other purposes than the
building of homes andno attempt has been made to control the
borrowers with respect to the use made of the borrowed funds-
UNFOUNDED
There is no statute expressly declaring that loans may be made by
these associations SOLELY for the purpose of building homes. The
building of homes in Sec.171 of Corpo Law is only one among several
ends which building and loan associations
are designed to promote and Sec. 181 authorizes the boar
d of directors of the association to fix the premium to be charged.
14) That the loans made by defendant for purposes other than building
or acquiring homes have been extended in extremely large amounts
and to wealthy persons and large companies- WITHOUT MERIT
The question of whether the making of large loans constitutes a misuse
of the franchise as would justify the court in depriving the association
of its corporate life is a matter confided to the discretion of the board of
directors. The law states no limit as to the size of the loans to be made
by the association. Resort should be had to the legislature because it
is not a matter amenable to judicial control
15) That when the franchise expires, supposing the corporation is not
reorganized, upon final liquidation of the corporation, a reserve fund
may exist which is out of all proportion to the requirements that may fall
upon it in the liquidation of the company-NO MERIT
This matter may be left to the discretion of the board of directors or to
legislative action if it should be deemed expedient to require the gradual
suppression of reserve funds as the time for dissolution approaches. It
is no matter for judicial interference and much less could the resumption
of the franchise be justified on this ground.
16) That various outstanding loans have been made by the respondent
to corporations and partnerships and such entities subscribed to
respondents’ shares for the sole purpose of obtaining such loans-NO
MERIT
Sec. 173 of Corpo Law declares that “any person” may become a
stockholder inbuilding and loan associations. The phrase ANY
PERSON does not prevent a findin ghat the phrase may not be taken
in its proper and broad sense of either a natural or artificial person.
17) That in disposing real estate purchased by it, some of the properties
were sold on credit and the persons and entities to which it was sold
are not members nor shareholders nor were they made members or
shareholders, contrary to the provision of Corpo Law requiring loans to
be stockholders only- NOT SUSTAINED
The law does not prescribe that the property must be sold for cash
or that thepurchaser shall be a shareholder in the corporation.
Such sales can be made upon theterms and conditions approved
by the parties.Respondent is enjoined in the future from
administering real property not ownedby itself, except as may be
permitted to it by contract when a borrowing shareholder defaults
in his obligation. In all other respects, the complaint is
DISMISSED.
§ Grace Christian High School v. CA (281
SCRA 133 [1997])
Facts:
Petitioner Grace Christian High School is an educational institution
located at the Grace Village in Quezon City, while Private respondent
Grace Village Association, Inc. ["Association'] is an organization of lot
and/or building owners, lessees and residents at Grace Village.
The original 1968 by-laws provide that the Board of Directors,
composed of eleven (11) members, shall serve for one (1) year
until their successors are duly elected and have qualified.
On 20 December 1975, a committee of the board of directors
prepared a draft of an amendment to the by-laws which provides
that "GRACE CHRISTIAN HIGH SCHOOL representative is a
permanent Director of the ASSOCIATION."
However, this draft was never presented to the general
membership for approval. Nevertheless, from 1975 to 1990,
petitioner was given a permanent seat in the board of directors of
the association.
On 13 February 1990, the association's committee on election sought
to change the by-laws and informed the Petitioner's school principal
"the proposal to make the Grace Christian High School
representative as a permanent director of the association,
although previously tolerated in the past elections should be
reexamined."
Following this advice, notices were sent to the members of the
association that the provision on election of directors of the 1968
by-laws of the association would be observed. Petitioner
requested the chairman of the election committee to change the
notice to honor the 1975 by-laws provision, but was denied.
The school then brought suit for mandamus in the Home Insurance and
Guaranty Corporation (HIGC) to compel the board of directors to
recognize its right to a permanent seat in the board.
Meanwhile, the opinion of the SEC was sought by the association,
and SEC rendered an opinion to the effect that the practice of
allowing unelected members in the board was contrary to the
existing by-laws of the association and to §92 of the Corporation
Code (B.P. Blg. 68). This was adopted by the association in its
Answer in the mandamus filed with the HIGC.
The HIGC hearing officer ruled in favor of the association, which
decision was affirmed by the HIGC Appeals Board and the Court of
Appeals.
Issue: W/N the 1975 provision giving the petitioner a permanent board
seat was valid.
Ruling: No.
Section 23 of the Corporation Code (and its predecessor Section
28 and 29 of the Corporation Law) leaves no room for doubt that
the Board of Directors of a Corporation must be elected from
among the stockholders or members.
There may be corporations in which there are unelected members in
the board but it is clear that in these instances, the unelected members
sit as ex officio members, i.e., by virtue of and for as long as they hold
a particular office (e.g. whoever is the Archbishop of Manila is
considered a member of the board of Cardinal Santos Memorial
Hospital, Inc.)
But in the case of petitioner, there is no reason at all for its
representative to be given a seat in the board. Nor does petitioner claim
a right to such seat by virtue of an office held. In fact it was not given
such seat in the beginning. It was only in 1975 that a proposed
amendment to the by-laws sought to give it one.
Since the provision in question is contrary to law, the fact that it has
gone unchallenged for fifteen years cannot forestall a later challenge to
its validity. Neither can it attain validity through acquiescence because,
if it is contrary to law, it is beyond the power of the members of the
association to waive its invalidity.
It is more accurate to say that the members merely tolerated petitioner's
representative and tolerance cannot be considered ratification.
Nor can petitioner claim a vested right to sit in the board on the basis
of "practice." Practice, no matter how long continued, cannot give rise
to any vested right if it is contrary to law
§ Salafranca v. Philamlife (Pamplona) Village
Homeowners Association (300 SCRA 469,
479 [1998])
DOCTRINE: Admittedly, the right to amend the by-laws lies solely in
the discretion of the employer, this being in the exercise of
management prerogative or business judgment. However, this right,
extensive as it may be, cannot impair the obligation of existing contracts
or rights.
STATEMENT OF FACTS:
1. Petitioner Enrique Salafranca started working with the private
respondent on May 1, 1981 as administrative officer. From this
date until December 31, 1983, petitioner was reappointed to his
position three more times. After petitioner's term of employment
expired on December 31, 1983, he still continued to work in the
same capacity, albeit, without the benefit of a renewed contract.
2. Sometime in 1987, private respondent decided to amend its by-
laws. Included therein was a provision regarding officers,
specifically, the position of administrative officer under which
said officer shall hold office at the pleasure of the Board of
Directors. In view of this development, private respondent, on
July 3, 1987, informed the petitioner that his term of office shall
be co-terminus with the Board of Directors which appointed him
to his position.
3. Furthermore, until he submits a medical certificate showing his
state of health, his employment shall be on a month-to-month
basis. Oddly, notwithstanding the failure of herein petitioner to
submit his medical certificate, he continued working until his
termination in December 1992.
STATEMENT OF THE ISSUE:
Whether the dismissal is legal since it was in accordance with the
provision of the by-laws of the Association that the petitioner’s position
is coterminous with that of the Village's Board of Directors.
DECISION: NO. If private respondent wanted to make the petitioner's
position coterminus with that of the Board of Directors, then the
amendment must be effective after petitioner's stay with the
private respondent, not during his term. Obviously, the measure
taken by the private respondent in amending its by-laws is nothing but
a devious, but crude, attempt to circumvent petitioner's right to security
of tenure as a regular employee guaranteed under the Labor Code.
Private respondent's insistence that it can legally dismiss petitioner on
the ground that his tenure has expired is untenable. To reiterate,
petitioner, being a regular employee, is entitled to security of tenure,
hence, his services may only be terminated for causes provided by law.
A contrary interpretation would not find justification in the laws or the
Constitution. If we were to rule otherwise, it would enable an employer
to remove any employee from his employment by the simple
expediency of amending its by-laws and providing that his/her position
shall cease to exist upon the occurrence of a specified event.
§ Gokongwei, Jr. v. SEC (89 SCRA 336 [1979]
FACTS:
This is a petition for “declaration of nullity of amended by-laws,
cancellation of certificate of filing of amended by-laws and damages”
filed by petitioner John Gokongwei against the majority of the members
of the Board of Directors. He has the ff causes of action:
1. that the Board in amending the by-laws, had no
authority to do so because it was based on the
1961 authorization and the amendment being
contested was in 1976, and the authorization
should have been based on votes made
according to the 1976 shares, not the 1961
shares,
2. the authority granted in 1961 had already been
exercised in 1962 and 1963, after which the
authority of the Board ceased to exist,
3. membership of the Board changed since 1961,
there are 6 new directors,
4. that prior to the amendment of the by-laws[1],
he had all the qualifications to be a director
(he was a substantial stockholder) and the
amended by-laws disqualified him and
deprived him of a vested right to be voted,
5. that the corporation has no inherent power to
disqualify a stockholder from being elected
and therefore it is an ultra vires and void act.
Petitioner also wanted to inspect records and documents of San
Miguel Corporation but the request was denied because the request
was said to have been made in bad faith.
Respondents 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, withdrawn or otherwise nullified by the stockholders of SMC".
Also said that the power of the Board to amend the by-laws are broad,
subject only to existing laws.
August 1972, the Universal Robina Corporation (URC), a
corporation engaged in business competitive to that of respondent
corporation, began acquiring shares amounting to 622,987 shares. In
October 1972, the Consolidated Foods Corporation (CFC) likewise
began acquiring shares in respondent corporation that amounted to
P543,959.00. On January 12, 1976, petitioner, who is president and
controlling shareholder of URC and CFC (both closed corporations)
purchased 5,000 shares of stock of respondent corporation, and
thereafter, in behalf of himself, CFC and URC, "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 URC and CFC interests, a seat in the Board of
Directors of SMC". 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.
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 the amendment. SEC held
that petitioner should be allowed to run as a director but that he should
not sit as such until SEC has decided on the validity of the by-laws in
dispute.
Respondents reason out that petitioner is engaged in
businesses competitive and antagonistic to that of respondent SMC
and that the Board realized the clear and present danger in competitors
being directors because they would have easy and direct access to
SMC’s business and trade secrets.
ISSUE: W/N the amended by-laws of SMC disqualifying a
competitor from nomination or election to the Board of Directors of SMC
are valid and reasonable.
HELD/RATIONALE:
Amendments are valid.
The validity or reasonableness of a by-law of a corporation is
purely a question of law. 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.
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."
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 dissenting 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.
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, they should act for the collective
benefit of the stockholders.
It is a settled state law in the United States 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." 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."
The doctrine of "corporate opportunity" is precisely a
recognition that fiduciary standards could not be upheld where the
fiduciary was acting for two entities with competing interests. 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.
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.
 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 corporate interests. 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-
characteristic activity.
§ San Miguel Corporation v. Mandaue
Packing Products Union-FFW (467 SCRA
107 [2005])
Facts:
On 15 June 1998, respondent, identifying itself as an affiliate of
Federation of Free Workers (FFW), filed a petition for certification
election with the DOLE Regional Office No. VII. In the petition,
respondent stated that it sought to be certified and to represent the
permanent rank-and-file monthly paid employees of the petitioner. The
following documents were attached to the petition: (1) a Charter
Certificate issued by FFW on 5 June 1998 certifying that respondent
as of that date was duly certified as a local or chapter of FFW; (2) a
copy of the constitution of respondent prepared by its Secretary and
attested by its President; (3) a list of respondent’s officers and their
respective addresses; (4) a certification signifying that respondent had
just been organized and no amount had yet been collected from its
members, signed by respondent’s treasurer and (5) a list of all the rank-
and-file monthly paid employees of the Mandaue Packaging Products
Plants and Mandaue Glass Plant.
On 27 July 1998, petitioner filed a motion to dismiss the petition for
certification election on the sole ground that herein respondent is not
listed or included in the roster of legitimate labor organizations based
on the certification issued by the Officer-In-Charge, Regional Director
of the DOLE Regional Office No. VII, Atty. Jesus B. Gabor, on 24 July
1998.
On 20 August 1998, petitioner filed a petition to cancel the union
registration of respondent. However, this petition was denied, and such
denial was subsequently affirmed by the Court of Appeals in a decision
that has since become final.
Respondent promptly appealed the 15 September 1998 Order to the
DOLE. On 22 February 1999, DOLE Undersecretary rendered a
Decision reversing the Order.
Issue: WON the Union acquired legal personality.
Held:
Yes. Section 3, Rule VI of Department Order No. 9 provides when the
local/chapter acquires legal personality.
Section 3. Acquisition of legal personality by local chapter. – A
local/chapter constituted in accordance with Section 1 of this Rule shall
acquire legal personality from the date of filing of the complete
documents enumerated therein. Upon compliance with all the
documentary requirements, the Regional Office or Bureau shall issue
in favor of the local/chapter a certificate indicating that it is included in
the roster of legitimate labor organizations.
It is evident based on this rule that the local/chapter acquires legal
personality from the date of the filing of the complete documentary
requirements, and not from the issuance of a certification to such effect
by the Regional Office or Bureau. On the other hand, a labor
organization is deemed to have acquired legal personality only on the
date of issuance of its certificate of registration, which takes place only
after the Bureau of Labor Relations or its Regional Offices has
undertaken an evaluation process lasting up until thirty (30) days, within
which period it approves or denies the application. In contrast, no such
period of evaluation is provided in Department Order No. 9 for the
application of a local/chapter, and more importantly, under it such
local/chapter is deemed to acquire legal personality “from the date of
filing” of the documents enumerated under Section 1, Rule VI, Book V.
It may be noted though that respondent never submitted a separate by-
laws, nor does it appear that respondent ever intended to prepare a set
thereof. Section 1(c), Rule VI, Book V of Department Order No. 9
provides that the submission of both a constitution and a set of by-laws
is required, or at least an indication that the local/chapter is adopting
the constitution and by-laws of the federation or national union. A literal
reading of the provision might indicate that the failure to submit a
specific set of by-laws is fatal to the recognition of the local/chapter. A
more critical analysis of this requirement though is in order, especially
as it should apply to this petition.
By-laws has traditionally been defined as regulations, ordinances,
rules or laws adopted by an association or corporation or the like
for its internal governance, including rules for routine matters
such as calling meetings and the like.The importance of by-laws to
a labor organization cannot be gainsaid. Without such provisions
governing the internal governance of the organization, such as
rules on meetings and quorum requirements, there would be no
apparent basis on how the union could operate. Without a set of
by-laws which provides how the local/chapter arrives at its
decisions or otherwise wields its attributes of legal personality,
then every action of the local/chapter may be put into legal
controversy.
However, if those key by-law provisions on matters such as
quorum requirements, meetings, or on the internal governance of
the local/chapter are themselves already provided for in the
constitution, then it would be feasible to overlook the requirement
for by-laws. Indeed in such an event, to insist on the submission
of a separate document denominated as "By-Laws" would be an
undue technicality, as well as a redundancy.
An examination of respondent's constitution reveals it sufficiently
comprehensive in establishing the necessary rules for its operation.
Article IV establishes the requisites for membership in the local/chapter.
Articles V and VI name the various officers and what their respective
functions are. The procedure for election of these officers, including the
necessary vote requirements, is provided for in Article IX, while Article
XV delineates the procedure for the impeachment of these officers.
Article VII establishes the standing committees of the local/chapter and
how their members are appointed. Article VIII lays down the rules for
meetings of the union, including the notice and quorum requirements
thereof. Article X enumerates with particularity the rules for union dues,
special assessments, fines, and other payments. Article XII provides
the general rule for quorum in meetings of the Board of Directors and
of the members of the local/chapter, and cites the applicability of the
Robert's Rules of Order in its meetings. And finally, Article XVI governs
and institutes the requisites for the amendment of the constitution.
Indeed, it is difficult to see in this case what a set of by-laws separate
from the constitution for respondent could provide that is not already
provided for by the Constitution. These premises considered, there is
clearly no need for a separate set of by-laws to be submitted by
respondent.
Summary:
- The articles of incorporation is imperative for the registration of a
corporation. Without which, there can be no corporation. The
corporation clause will specify what is the extent of the authority of the
corporation. What is the extent or acts the corporation can validly
perform.
-It is necessary that the by-laws already accompany the registration,
but as a matter of practice the templated by-laws is already filed
together with the AOI for purposes of registration.
- AOI trumps By-laws. AOI is more important than the bylaws. In case
of conflict in the terms, the terms found in the AOI will prevail. There is
nothing in the by-laws that should expand what is provided in the AOI.
The by-laws can follow after the corporation has already been
registered. Filing of the by-laws can be dispensed with if the AOI
contains the specific provisions normally in the by-laws that would guide
the corporation on how it should do about in the business, in the voting
for officers.
-The complementary nature of the AOI and the by-laws: they always
come in pairs. But be mindful in San Miguel Corp v. Mandaue Packing
Products union. If the AOI already includes key by-laws provisions, then
the filing of by-laws may no longer be required. Take note of that outlier
rule. BUT always emphasized, as is customary, practice and followed
in real life that the AOI is always accompanied with the AOIs.
- hierarchy: RCP> other laws Foreign Investments Act > AOI > by-laws.
> shareholders agreements > board resolutions
- documents that is less superior than the other must not contradict the
more superior document.
- AOI importance is that in the purpose clause it delineates, limits, what
the corp can undertake. Metes and bounds of what the corporation can
do. So when you are asked can the corp do this? The first thing that we
have to take a look at is the primary purpose or the purpose clause
(primary and secondary purpose) . Can the corp actually engage in
investment, management activity? Go to purpose clause. Can the corp
go to quasi-banking activity? Go to purpose clause.
- is the corporation forever barred activity not in the AOI? No because
corp can cause amendment and supply additional amendment.
- Then SEC will require that that Corp apply for secondary license.
Because the primary license is the SEC. But can the SEC confer quasi-
banking license to entity? No, therefore it has to be the monetary board.
Can a corp adopt an amendment to say that it will also engage in pre-
need in insurance activities? Yes, it can cause the amendment but the
secondary license to be issued by regulatory body, the insurance
commission.
- don’t get confused by primary and secondary purpose and both can
be covered by the primary license.
- get the endorsement. In the meantime, SEC will hold or suspend the
approval. Pwede gawin basta comply and follow all requirements.
- primary license express authority to
- Activities not needed for secondary license:
- that will now be the franchise granted to the corporation, extent of the
authority granted.
- take note of the content of the by-laws in sec. 46
- Amendment of by-laws in sec. 47: (it is mortal sin not to know the
majority vote requirement).
- what other powers can be granted to corp??? that is what we are going
to talking about tonight.
- powers become express when the AOI is amended, got the favorable
the regulatory board on banking. Source of the express powers of the
corporation. All laws, guidelines, gov circualrs that spell out what a corp
can do is a source of express power of the corporation.
IV. Corporate Powers
A. Express Powers of a Corporation - Section 35 (RCC)
o Granted by law, the RCC, and its
Articles of Incorporation or
Charter, and admin regulations.
SEC. 35. Corporate Powers and Capacity. – Every corporation
incorporated under this Code has the power and capacity:
(a) To sue and be sued in its corporate name;
(b) To have perpetual existence unless the certificate of incorporation
provides otherwise;
(c) To adopt and use a corporate seal;
(d) To amend its articles of incorporation in accordance with the
provisions of this Code;
(e) To adopt bylaws, not contrary to law, morals or public policy, and to
amend or repeal the same in accordance with this Code;
(f) In case of stock corporations, to issue or sell stocks to subscribers
and to sell treasury stocks in accordance with the provisions of this
Code; and to admit members to the corporation if it be a nonstock
corporation;
(g) To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage, and otherwise deal with such real and personal property,
including securities and bonds of other corporations, as the transaction
of the lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the
Constitution;
(h) To enter into a partnership, joint venture, merger, consolidation, or
any other commercial agreement with natural and juridical persons;
(i) To make reasonable donations, including those for the public welfare
or for hospital, charitable, cultural, scientific, civic, or similar purposes:
Provided, That no foreign corporation shall give donations in aid of any
political party or candidate or for purposes of partisan political activity;
(j) To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers, and employees; and
(k) To exercise such other powers as may be essential or necessary to
carry out its purpose or purposes as stated in the articles of
incorporation.
• Power to amend the Articles of Incorporation
• Power to adopt BL
• Power to adopt and use a corporate seal
• Power to have perpetual existence
o SEC MC 23, Series of 2019 : Guidelines on
the Revival of Expired Corporations
• Power to sue and be sued: - commences upon the
issuance of Certificate of Incorporation
o The power of the corporation to
sue and be sued is exercised by
the board of directors.
o An unregistered corporation has
no right to sue or be sued for
want of corporate personality.
o There is a need for board
resolution to authorize a person.
o Except: a specific officer to file a
case in the by-laws
o Exception: derivative suit
o Derivative suit: filing of action
against corp in case of the
inaction of corp or refusal to do
something .But must allege that
you are suing in a derivative
cause of action.
o
o Tam Wing Tak v. Makasiar (350 SCRA 475
[2001])
FACTS:
Petitioner, in his capacity as director of Concord-World Properties, Inc,
a domestic corporation, filed an affidavit-complaint charging Vic Ang
Siong with violation of BP 22. The complaint alleged that a check for
the amount of P83,550,000.00, issued by Vic Ang Siong in favour of
Concord was dishonoured when presented for encashment.
Vic Ang Siong sought the dismissal of the case on the grounds that;
1. Petitioner had no authority to file the case on behalf of Concord,
the payee of the dishonoured check, since the firm’s board of
directors had not empowered him to act on its behalf;
2. He and Concord had already agreed to amicably settle the issue
after he made a partial payment of P19,000,000.00 on the
dishonoured check.
The City Prosecutor dismissed the complaint on the following grounds:
1. That petitioner lacked the requisite authority to initiate the
criminal complaint for and on Concord’s behalf;
2. Concord and Vic Ang Siong had already agreed upon the
payment of the latter’s balance on the dishonoured check.
ISSUE:
Whether or not the petitioner has standing to file the criminal
complaint even if he is neither the payee or holder of the bad
check
HELD:
NO. Concord, a domestic corporation, was the payee of the bum check,
not petitioner. Therefore, it is Concord, as payee of the bounced
check, which is the injured party.
Since petitioner was neither a payee nor a holder of the bad check,
he had neither the personality to sue nor a cause of action against
Vic Ang Siong. Under Section 36 of the Corporation Code, in
relation to Section 23, it is clear that where a corporation is an
injured party, its power to sue is lodged with its board of directors
or trustees.
The petitioner failed to show any proof that he was authorised or
deputised or granted specific powers by Concord’s board of directors
to sue Victor Ang Siong for and on behalf of the firm.
Petitioner, as a minority stockholder and member of the board of
directors, had no such power or authority to sue on Concord’s behalf.
Nor can a derivative suit prosper since before such, it is required
that the minority stockholder suing for and on behalf of the
corporation must allege in his complaint that he is suing on a
derivative cause of action on behalf of the corporation and all
other stockholders similarly situated who may wish to join him in
the suit. There is no showing that the petitioner has complied with the
foregoing requisites.
Petitioner has not shown any clear legal right which would warrant the
overturning of the decision of public response to dismiss the complaint
against Vic Ang Siong.
o EB Villarosa & Partners Co., Ltd v. Benito
(G.R. 136426, 6 August 1999)
Facts
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 Benito, as plaintiff, filed a
Complaint for Breach of Contract and Damages against petitioner, as
defendant, before the RTC 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.
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 City but the
Sheriff's Return of Service 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."
On June 9, 1998, defendant filed a Special Appearance with Motion to
Dismiss 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.
RTC: 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.
Issue whether or not the trial court acquired jurisdiction over the person
of petitioner upon service of summons on its Branch Manager.
Held
No, the trial court did not acquire jurisdiction over the person of
the petitioner. 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.
Section 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."
This revised the former Sec. 13 of the Rule 14 of the Rules of Court
which instead provides for “manager”.
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:
"x x x 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."
Retired Justice Oscar Herrera, who is also a consultant of the Rules of
Court Revision Committee, stated that "The rule must be strictly
observed. Service must be made to one named in (the) statute x x x".
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, 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. x x x.
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.' x x x.
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. x x x."
Further, Defendant’s voluntary appearance is not equivalent to service
of summons. The new rule is 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."
Petition is granted.
o South Cotabato Communications
Corporation v. Sto. Tomas (G.R. 217575, 15
June 2016)
FACTS:
DOLE conducted an inspection at the premises of DXCP Radio Station,
which is owned by petitioner. The inspection yielded to 9 violations of
labor standards provision under the labor code (underpayment of
wages & 13th month pay, nonpayment of rest day and holiday premium
pay, non remittance of SSS contributions, among others)
DOLE directed petitioner corp. and/or its president to correct the
alleged violations within 5 days from notice. Petitioners, however, failed
to comply with said directive. Neither petitioners nor their counsel
appeared in the Summary Investigation which DOLE scheduled. DOLE
therefore ordered petitioners to pay private respondents the total
amount of their claim for wage differentials, holiday premium, 13 month
th
pay, etc. This was affirmed by the Sec. of Labor on appeal.
Petitioners elevated the case to the CA (under R65, certiorari), but CA
dismissed their petition due to procedural infirmities because
petitioners failed to attach Secretary’s Certificate evidencing the
authority of petitioner Benzonan, as President, to sign the petition.
CA held that the petition was not properly verified and the certification
of non-forum shopping was not executed by the principal party allegedly
in violation of Sections 4 and 5, Rule 7 of the 1997 Rules of Civil
Procedure. It held that since Benzonan, President of South Cotabato
Communications Corp, acted on behalf of the corporation, it should
have been clothed with the corporation’s board resolution authorizing
him to institute the petition.
ISSUE: W/N Benzonan signing the verification in his capacity as
president of South Cotabato Communications Corp is in substantial
compliance with the rules on procedure. – YES.
HELD:
In Lepanto Consolidated Mining Company v. WMC Resources
International, the Court held 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.”
The Court has 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. (the authority is not
limited to the aforementioned enumeration)
The Court has relaxed, under justifiable circumstances, the rule
requiring the submission of certification of non-forum shopping
considering that, although it is obligatory, it is not jurisdictional. Not
being jurisdictional, it can be relaxed under the rule of substantial
compliance.
Petitioner Benzonan clearly satisfies the jurisprudential
requirement because he is the President of petitioner South
Cotabato Communications Corporation. He is also named as co-
respondent of petitioner-corporation in the labor case which is the
subject matter of the special civil action for certiorari filed in the Court
of Appeals.
Clearly, it was error on the part of the Court of Appeals to dismiss
petitioners’ special civil action for certiorari despite substantial
compliance with the rules on procedure.
• Power to enter into loans
• Power to enter into a partnership of joint venture –
must be authorized or limited to what it can do
pursuant to its primary purpose. If no special
requirements, requirements for entering the
contract: board reso authorizing the officers to enter
into a contract, etc. Dapat in pursuance to its
purposes, its express authority.
• Power to Extend or Shorten Corporate Life
Procedural requirements in extending/ shortening corporate term
1. Majority vote of the BOD or BOT
2. Ratification by 2/3 of the SH representing outstanding capital stock or
by at least 2/3 of the members in case of non-stock corporation.
3. 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 or when allowed in the bylaws or done with the consent of
the stockholder, sent electronically in accordance with the rules and
regulations of the Commission on the use of electronic data messages.
4. Copy of the amended AOI shall be submitted to the SEC for its approval;
5. In case of Special Corporation, a favorable recommendation of
appropriate government agency (CC, Sec. 37)
6. The extension must be done during the lifetime of the corporation not
earlier than 5 years prior to the expiry date unless exempted. The
extension must not exceed 50 years (CC, Sec 16
 • Power to Increase/Decrease Capital Stock
o for determining its capital impairment. The guidelines on
o Central Textile Mills, Inc. v. National Wages
and Productivity Commission (260 SCRA
368 [1996])
FACTS:
· Respondent Tripatite Wages and Productivity Board –
NCR issued Wage Order No. NCR-02 which mandated a
P12.00 increase in the minimum daily wage of all employees
and workers in the private sector in the NCR but exempted from
its application distressed employers whose capital has been
impaired by at least 25% in the preceding year. The Guidelines
on Exemption from Compliance with the Prescribed Wage/Cost
of Living Allowance Increase granted by the Regional Tripartite
Wage and Productivity Boards” defined “capital” as the “paid-up
capital at the end of the last full accounting period [in case of
corporations].” Petitioner filed its application for exemption from
compliance with the said Wage Order due to financial losses.
The Board’s Vice Chairman disapproved petitioner’s application
for exemption after concluding from the documents submitted
that petitioner sustained an impairment of only 22.41%.
· Petitioner’s motion for reconsideration was dismissed by
the Board for lack of merit. The Board opined that according to
the audited financial statements submitted by petitioner to them,
to the SEC and to the BIR, petitioner had a total paid-up capital
of P305,767,900.00 which amount should be the basis for
determining the capital impairment of petitioner, instead of its
authorized capital stock of P128,000,000.00 which it insists
should be the basis of computation.
· However, petitioner did not file with the SEC the
August 15, 1990 resolution of its Board of Directors,
approving an increase in petitioner’s authorized capital
stock from P128,000,000.00 to P640,000,000.00. Neither did
it file any petition to amend its Articles of Incorporation
brought about by such increase in its capitalization.
ISSUE: Whether petitioner’s authorized capital stock should be the
basis for determining its capital impairment
HELD:
Yes, the petitioner’s authorized capital stock should be the basis
exemption specifically refer to paid-up capital, not authorized
capital stock, as the basis of capital impairment for exemption
from the Wage Order. As provided in Section 38 of the Corporation
Code, it claims that “the capital stock of a corporation stands
increased or decreased only from and after approval and the
issuance of the certificate of filing of increase of capital stock.
The records reveal that petitioner included in its total paid-up
capital payments on advance subscriptions, although the
proposed increased in its capitalization had not yet been approved
by the SEC. These payments cannot yet be deemed part of the
petitioner’s paid-up capital, technically speaking, because its
capital stock has not yet been legally increased. Its authorized
capital stock in the year when exemption from said Wage Order
was sought stood at P128,000,000.00 which was impaired by
losses of nearly 50%. Such payments constitute deposits on
future subscriptions, money which the corporation will hold in
trust for the subscribers until it files a petition to increase its
capitalization and a certificate of filing of increase of capital stock
is approved and issued by the SEC. If a certificate of increase has
not yet been issued by the SEC, the subscribers to the
unauthorized issuance are not to be deemed as stockholders
possessed of such legal rights as the rights to vote and dividends.
o The payments made by the
shareholders, since not yet
reported as paid up, it was treated
as a future deposit on future
subscription
o Authorized capital stock, 100 of
the pie. The subscribed is 75 and
paid, unsubscribed is 25. the paid
up is 50. Subscribed but
unpaid???
• Power to Deny Preemptive Rights
Pre-emptive right - It is the preferential right of shareholders to subscribe to Two (2) rehabilitation plans were submitted to the SEC: the
all issues or disposition of shares of any class in proportion to their present BENHAR/RUBY Rehabilitation Plan of the majority stockholders led by
shareholdings (CC, Sec. 39). (now sec. 38) Yu Kim Giang, and the Alternative Plan of the minority stockholders
represented by Miguel Lim (Lim). BENHAR shall lend its P60 million
NOTE: The stockholder must exercise his pre- emptive right within the time fixed credit line in China Bank to RUBY, payable within ten (10)
in the resolution authorizing the increase of capital stock. years. Moreover, BENHAR shall purchase the credits of RUBY's
creditors and mortgage RUBY's properties to obtain credit facilities for
Purpose of pre-emptive right - The purpose of pre-emptive right is to enable RUBY. Upon approval of the rehabilitation plan, BENHAR shall control
the shareholder to retain his proportionate control in the corporation and to and manage RUBY's operations. For its service, BENHAR shall
retain his equity in the surplus. receive a management fee equivalent to 7.5% of RUBY's net sales. The
BENHAR/RUBY Plan was opposed by 40% of the stockholders,
Exercise of pre-emptive right – must be exercised within the period including Lim, a minority shareholder of RUBY.
stated in the AOI or the By-Laws. When the AOI and the By-Laws are
silent, the Board may fix a reasonable time within which the Due to various petitions filed against the rehabilitation plan, this Court
(G.R. No. L-88311), issued a minute resolution dated February 28,
stockholders may exercise the right.
1990 upholding the injunction against the implementation of the
BENHAR/RUBY Plan. Notwithstanding the injunction order, SEC
Note: pre-emptive right can only be exercised to the same class of shares issued an Order approving the Revised BENHAR/RUBY Plan and
issued or disposed with that owned by the stockholder. creating a new management committee to oversee its implementation.
It also dissolves the MANCOM. The Revised BENHAR/RUBY Plan had
proposed the calling for subscription of unissued shares through a
Majority Stockholders of Ruby Industrial
o Board Resolution from the P11.814 million of the P23.7 million
Corporation v. Lim (G.R. 165887; 6 June authorized capital stock “in order to allow the long overdue program of
2011) the REHAB Program.” To implement the Revised plan, RUBY’s board
FACTS: Ruby Industrial Corporation (RUBY) is a domestic corporation of directors held a special meeting and took up the capital infusion of
engaged in glass manufacturing. RUBY filed a petition for suspension of P11.814 Million representing the unissued and unsubscribed portion of
payments with the Securities and Exchange Commission (SEC). SEC the present ACS of P23.7 Million.
issued an order declaring RUBY under suspension of payments and
enjoining the disposition of its properties pending hearing of the petition, Lim together with other minority stockholders questioned the
except insofar as necessary in its ordinary operations, and making percentage of stockholders present in the meeting which the majority
payments outside of the necessary or legitimate expenses of its claimed stood at 74.75%(from 59.829%) of the outstanding capital
business. SEC Hearing Panel created the management committee stock of RUBY. Lim argued that the majority stockholders claimed to
(MANCOM) for RUBY, composed of representatives from RUBY’s have increased their shares to 74.75% by subscribing to the unissued
creditors. The MANCOM was tasked to perform the following functions: shares of the authorized capital stock (ACS). Lim pointed out that such
(1) undertake the management of RUBY; (2) take custody and control move of the majority was in implementation of the BENHAR/RUBY Plan
over all existing assets and liabilities of RUBY; (3) evaluate RUBY's which calls for capital infusion of P11.814 Million representing the
existing assets and liabilities, earnings and operations; (4) determine unissued and unsubscribed portion of the present ACS of P23.7 Million.
the best way to salvage and protect the interest of its investors and
creditors; and (5) study, review and evaluate the proposed rehabilitation
plan for RUBY. ISSUE: Whether or not the additional capital infusion done in the
exercise of the majority’s pre-emptive right is valid
HELD: NO. Pre-emptive right under Sec. 39 of the Corporation
Code refers to the right of a stockholder of a stock corporation to
subscribe to all issues or disposition of shares of any class, in
proportion to their respective shareholdings. The right may be
restricted or denied under the articles of incorporation, and
subject to certain exceptions and limitations.
The validity of issuance of additional shares may be
questioned if done in breach of trust by the controlling
stockholders. The SC ruled that an issue of shares may still be
objectionable if the directors acted in breach of trust and their
primary purpose is to perpetuate or shift control of the
corporation, or to "freeze out" the minority interest. other
stockholders are afforded the right to intervene especially during critical
periods in the life of a corporation like reorganization, or in this case,
suspension of payments, more so, when the majority seek to impose
their will and through fraudulent means, attempt to siphon off Ruby's
valuable assets to the great prejudice of Ruby itself, as well as the
minority stockholders and the unsecured creditors. Court affirmed, that:
the foregoing payment schedules as embodied in the said Revised plan
which gives Benhar undue advantage over the other creditors goes
against the very essence of rehabilitation, which requires that no
creditor should be preferred over the other. One of the salient
features of the Revised Benhar/Ruby Plan is to Call on unissued
shares forP11.814 M and if minority will take up their pre-emptive
rights and dilute minority shareholdings.
• Power to Dispose Properties
o Firme v. Bukal Enterprises and Development
Corporation (414 SCRA 190 [2003])
FACTS:
Petitioner Spouses Firme own a parcel of land. De Castro, vice
president of Bukal Enterprises, authorized his friend Aviles, a broker, to
negotiate with the spouses for the purchase of the property. Bukal
Enterprises filed a complaint for specific performance and damages
with the trial court, alleging that the Spouses Firme reneged on their
agreement to sell the Property. The complaint asked the trial court to
order the Spouses Firme to execute the deed of sale and to deliver the
title to the Property to Bukal Enterprises upon payment of the agreed
purchase price.
There were three drafts of a deed of absolute sale, which the spouses
Firme rejected because the provisions were one-sided. The Spouses
Firme repeatedly told Aviles that the Property was not for sale.
However, they one day discovered their property already fenced. So
the spouses demanded for its removal to Bukal Enterprises, but in
return received a letter demanding that they sell the property.
The trial court ruled against Bukal Enterprises because there was no
perfected contract of sale, and that Aviles had no valid authority to bind
Bukal Enterprises because he had no authorization from its Board of
Directors. On appeal, the CA reversed and set aside the trial court’s
decision and held that the lack of board resolution authorizing Aviles to
act on behalf of Bukal Enterprises in the purchase of the Property was
cured by ratification.
ISSUE:
Whether Aviles has authority to enter into a contract of sale in behalf of
Bukal Enterprises
HELD:
NO. The Court found that there was no approval from the Board of
Directors of Bukal Enterprises as would finalize any transaction
with the Spouses Firme. Aviles did not have the proper authority
to negotiate for Bukal Enterprises.
The Corporate Code 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
stock, 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. x x x
SEC. 36. Corporate powers and capacity. — Every corporation
incorporated under this Code has the power and capacity:
xxx
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such real and personal property,
including securities and bonds of other corporations, as the transaction
of a lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by the law and the
Constitution.
It is the board of directors or trustees which exercises almost all the
corporate powers in a corporation. Under the provisions of the
Corporate Code, the power to purchase real property is vested in
the board of directors or trustees. While a corporation may appoint
agents to negotiate for the purchase of real property needed by the
corporation, the final say will have to be with the board, whose approval
will finalize the transaction. A corporation can only exercise its
powers and transact its business through its board of directors
and through its officers and agents when authorized by a board
resolution or its by-laws.
In this case, Aviles, who negotiated the purchase of the Property,
is neither an officer of Bukal Enterprises nor a member of the
Board of Directors of Bukal Enterprises. There is no Board
Resolution authorizing Aviles to negotiate and purchase the
Property for Bukal Enterprises. There is also no evidence to prove
that Bukal Enterprises approved whatever transaction Aviles
made with the Spouses Firme. In fact, the president of Bukal
Enterprises did not sign any of the deeds of sale presented to the
Spouses Firme. Even De Castro admitted that he had never met
the Spouses Firme. Considering all these circumstances, it is
highly improbable for Aviles to finalize any contract of sale with
the Spouses Firme.
o Edward J. Nell Co. v. Pacific Farms, Inc.
(G.R. L-20850 [1965])
FACTS: Edward Nell Company, appellant secured in Civil Case No.
58579 of the Municipal Court of Manila against Insular Farms, Inc,—
hereinafter referred to as Insular Farms—a judgment for the sum of
P1,853.80—representing the unpaid balance of the price of a pump
sold by appellant to Insular Farms—with interest on said sum, plus
P125.00 as attorney's fees and P84.00 as costs. A writ of execution,
issued after the judgment had become final, was, on August 14, 1959,
returned unsatisfied, stating that Insular Farms had no leviable
property. Soon thereafter, or on November 13, 1959, appellant filed with
said court the present action against Pacific Farms, Inc.—hereinafter
referred to as appellee—for the collection of the judg-ment
aforementioned, upon the theory that appellee is the alter ego of Insular
Farms, which appellee has denied. In due course, the municipal court
rendered judgment dismissing: appellant's complaint.
ISSUE: Whether or not Edward Nell Company is liable for said unpaid
obligation of the Insular Farms
HELD: No, there is neither proof nor allegation that appellee had
expressly or impliedly agreed to assume the debt of Insular Farms in
favor of appellant herein, or that the appellee is a continuation of lnsular
Farms, or that the sale of either the shares of stock or the assets of
Insular Farms to the appellee has been entered into fraudulently, in
order to escape liability for the debt of the InsuIar Farms in favor of
appellant herein. In fact, the sales took place (March, 1958) not only
over six (6) months before the rendition of the judgment (October 9,
1958) sought to be collected in the present action, but, also, over a
month before the filing of the case (May 29, 1958) in which said
judgment was rendered, Moreover, appellee purchased the shares of
stock of Insular Farms as the highest bidder at an auction sale held at
the instance of a bank to which said shares had been as security for an
obligation of Insular Farms in favor of said bank. It has, also, been
established that the appellee had paid P285,126.99 for said shares of
stock, apart from the sum of P10,000.00 it, likewise, paid for the other
assets of Insular Farms
• Power to make donations
o Pirovano v. De la Rama Steamship Co. (40
Phil. 335 [1954])
ULTRA VIRES" ILLEGAL ACTS DISTINGUISHED; EFFECT OF
RATIFICATION BY STOCKHOLDERS.— Illegal acts of a corporation
contemplate the doing of an act which is contrary to law, morals, or
public order, or contravene some rules of public policy or public duty,
and are, like similar transactions between individuals, void. They can
not serve as basis of a court action, nor acquire validity by performance,
ratification, or estoppel. On the other hand, ultra vires acts or those
which are not illegal and void ab initio but are merely not within the
scope of the article of incorporation, are merely voidable and may
become binding and enforceable when ratified by the stockholders.
FACTS: 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 the proceeds of the insurance policies taken 011
the life of their deceased father Enrico Pirovano with the company as
beneficiary. De la Rama Steamship Co. 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.
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. 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"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 the 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.
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 then that Osmeña explained that because the
value then of the shares of stock was actually 3.6 times their par value,
the donation, although purporting to be only P400,000, would actually
amount to a total of P1,440,000.
ISSUE: 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 under the law or an ultra
vires act?
HELD: 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.
Since it is not contended that the donation under consideration is illegal,
or contrary to any of the express provisions 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
o Premium White Cement Corp. v. IAC (220
SCRA 103 [1993])
• No donation related topic in this case. The digest
below focuses on the power of the board of directors
only.
FACTS: The petitioner corporation, thru its President and Chairman,
and private respondent Te entered into a dealership agreement whereby
the latter was the exclusive dealer and/or distributor of the corporation
of its cement products in Mindanao. Te later entered into written
agreement with third parties dealing in buying and selling white cement.
He thus sent a letter to the corporation in connection with the third-party
agreements and the corporation, thru its corporate secretary, replied and
imposed new conditions, which are different from those in the
dealership agreement specifically the price. Several demands to comply
with the dealership agreement were made by Te but the corporation
refused to comply.
ISSUE: WON the dealership agreement was valid and enforceable
HELD: The Supreme Court ruled in the negative. The Court explained
that all corporate powers shall be exercised by the Board of Directors,
except as otherwise provided by law. 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. 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. These rules are basic, but are all general. They apply
where the President or other officer, purportedly acting for the
corporations, is dealing with a third person, i.e., a person outside the
corporation. In this case, Te was not an ordinary stockholder but a
member of the Board of Directors and Auditor of the corporation as
well.
o Premium white cement on
donations
• Power to acquire own shares
• Power to Invest
o SEC Opinion dated 21 August 1995
• Power to declare dividends
o can this power be exercised by
nonstock corp? No, not given to
members of a nonstock
corporation.
How dividends are released to
o
shareholders:
• Power to enter into Management Contract - The
Board of Directors or Trustees must act together as a
body in order to bind the corporation by their acts
(Yao KaSinTrading v. CA, et. al. G.R. No. 53820, June
15, 1992).
B. Implied and Incidental Powers –
Inherent/incidental powers – not expressly stated but are deemed to
be within the capacity of corporate entities;
Implied/necessary powers – exists as a necessary consequence of the
exercise of the express powers of the corporation or the pursuit of its
purposes as provided for in the Charter.
C. Ultra Vires Doctrine
Ultra vires acts entered into by the board of directors bind the corporation, and
the courts will not interfere unless terms are oppressive and unconscionable.
(Gamboa vs. Victoriano, G.R. No. L- 43324. May 5, 1979).
• Section 44 (RCC)
• University of Mindanao v. Banko Sentral ng
Pilipinas (G.R. Nos. 194964-65, 11 January 2016)
FACTS: The petitioner institution was chaired by Guillermo Torres
and the latter’s wife sat as its Assistant Treasurer. Spouses
incorporated and operated thrift banks, one of them was First Iligan
Savings & Loan Association (FISLAI). FISLAI was issued with an
emergency credit and subsequent loans by Bangko Sentral ng Pilipinas
(BSP). Later, petitioner’s Vice President for Finance, Saturnino
Petalcorin (Saturnino), executed deeds of real estate mortgage over
the petitioner’s properties to secure Guillermo’s debts. The deeds were
allegedly executed on petitioner’s behalf pursuant to a notarized
secretary’s certificate granting Saturnino with the authority to do such
acts. FISLAI failed to settle its obligations, thus, the BSP sent a letter
to the petitioner informing it that the bank would foreclose its properties.
Petitioner replied thru its Vice President for Accounting contending that
its properties were not mortgaged and that it never authorized
Saturnino to execute mortgage contracts. The trial court found that
there was no board resolution. Petitioner argued that the execution
of the mortgage contracts was ultra vires.
ISSUE: WON the execution of mortgage contracts was ultra vires
HELD: The Supreme Court ruled in the affirmative. The Court
explained that the petitioner does not have the power to mortgage its
properties in order to secure loans of other persons. As an educational
institution, it is limited to developing human capital through
formal instruction. It is not a corporation engaged in the business
of securing loans of others. As such, mortgage of its properties to
secure loan of third persons is deemed ultra vires.
• Montelibano v. Bacolod-Murcia Milling Co., Inc. (5
SCRA 36 [1962])
FACTS:
Plaintiffs-appellants, Alfredo Montelibano, Alejandro Montelibano, and
the Limited co-partnership Gonzaga and Company, had been and are
sugar planters adhered to the defendant-appellee's sugar central mill
under identical milling contracts.
Said contracts were stipulated to be in force for 30 years and that the
resulting product should be divided in the ratio of 45% for the mill and
55% for the planters.
1936 - A proposal was made to amend the milling contracts, increasing
the planters' share to 60% of the manufactured sugar and resulting
molasses, and to extend the operation of the milling contract to 45
years. (Through the corp’s BOD - adopted a resolution Acts No. 11,
Acuerdo No. 1 which was in spanish language).
In 1953 - Appellants initiated the present action, contending that three
Negros sugar centrals (La Carlota, Binalbagan-Isabela and San
Carlos),had already granted increased participation (of 62.5%) to their
planters. That according to the Resolution they adopted, the appellee
had become obligated to grant similar concessions to the plaintiffs.
Bacolod-Murcia Milling Co., inc., resisted the claim, and defended by
urging that the stipulations contained in the resolution were made
without consideration; that the resolution in question was, therefore,
null and void ab initio, being in effect a donation that was ultra vires
and beyond the powers of the corporate directors to adopt.
ISSUE: WON the board resolution is an ultra vires act and in effect a
donation from the board of directors?
HELD:
No. When the resolution was adopted and the additional concessions
were made by the company, the appellants were not yet obligated by
the terms of the printed contract, since they admittedly did not sign it
until twenty-one days later. Before that date, the printed form was no
more than a proposal that either party could modify at its pleasure, and
the appellee actually modified it by adopting the resolution in question.
There can be no doubt that the directors of the appellee company had
authority to modify the proposed terms of the Amended Milling Contract
for the purpose of making its terms more acceptable to the other
contracting parties. But they were not able to do so.
As the resolution in question was passed in good faith by the board of
directors, it is valid and binding, and whether or not it will cause losses
or decrease the profits of the central, the court has no authority to
review them.
The appellee Bacolod-Murcia Milling Company is, under the terms of
its Resolution of August 20, 1936, duty bound to grant similar increases
to plaintiffs-appellants herein.
• Carlos v. Mindoro Sugar Co. (57 Phil. 343 [1932])
FACTS:
Irineo G. Carlos filed this action to recover from the defendants the
value of four bonds with due and unpaid interest thereon, issued by the
Mindoro Sugar Company and placed in trust with the Philippine Trust
Company.
Mindoro Sugar Company is a corporation constituted in accordance
with the laws of the country. According to its articles of incorporation
one of its principal purposes was to acquire and exercise the franchise
granted by Act No. 2720 to George H. Fairchild, to substitute the
organized corporation.
Philippine Trust Company is another domestic corporation its principal
purpose, then, as its name indicates, is to engage in the trust business.
The board of directors of the Philippine Trust Company, adopted
a resolution authorizing its president, among other things, to
purchase the bonds in the Mindoro Sugar Company that was
about to issue, and to resell them, with or without the guarantee
of said trust corporation, at a price not less than par, and to
guarantee to the Philippine National Bank the payment of the
indebtedness to said bank by the Mindoro Sugar Company.
Pursuance of this resolution, the Mindoro Sugar Company executed in
favor of the Philippine Trust Company the deed of trust transferring all
of its property to it in consideration of the bonds it had issued.
Philippine Trust Company sold thirteen bonds, to Ramon Diaz. The
Philippine Trust Company paid the appellant, upon presentation of the
coupons, the stipulated interest from the date of their maturity then it
stopped payments; and thenceforth it alleged that it did not deem itself
bound to pay such interest or to redeem the obligation because the
guarantee given for the bonds was illegal and void.
ISSUE: WON PTC has the power to guarantee and does this act
constitute an ultra vires act?
HELD:
No. It is not ultra vires for a corporation to enter into contracts of
guaranty or suretyship where it does so in the legitimate
furtherance of its purposes and business. And it is well settled
that where a corporation acquires commercial paper or bonds in
the legitimate transaction of its business it may sell them, and in
furtherance of such a sale it may, in order to make them the more
readily marketable, indorse or guarantee their payment.
Whenever a corporation has the power to take and dispose of the
securities of another corporation, of whatsoever kind, it may, for the
purpose of giving them a marketable quality, guarantee their payment,
even though the amount involved in the guaranty may subject the
corporation to liabilities in excess of the limit of indebtedness which it is
authorized to incur. A corporation which has power by its charter to
issue its own bonds has power to guarantee the bonds of another
corporation, which has been taken in payment of a debt due to it, and
which it sells or transfers in payment of its own debt, the guaranty being
given to enable it to dispose of the bond to better advantage. And so
guaranties of payment of bonds taken by a loan and trust company in
the ordinary course of its business, made in connection with their sale,
are not ultra vires, and are binding.
When a contract is not on its face necessarily beyond the scope of the
power of the corporation by which it was made, it will, in the absence of
proof to the contrary, be presumed to be valid.
• Harden v. Benguet Consolidated Mining Co. (58
Phil, 140 [1933])
FACTS:
BENGUET CONSOLIDATED MINING was organized in June 1903 as
a sociedad anonima in conformity with Spanish Law. BALATOC
MINING CO. was organized in December 1925 as corporation in
conformity with Act. 1459 (Corporation Law). Harden et al. are
stockholders of Balatoc Mining.
When Balatoc Mining first organized the properties it acquired were
largely undeveloped and the original stockholders were unable to
supply the means needed for profitable operation. In order to solve such
problem, the company’s stockholders appointed a committee for the
purpose of interesting outside capital in the mine. By authority of a
resolution of the board of directors, the committee approached A.W.
Beam, president & general manager of Benguet Company in order to
secure capital necessary to the development of the Balatoc property.
A contract was signed between the 2 companies which provide that
BENGUET COMPANY was to proceed with the development of the
Balatoc property and in return BENGUET COMPANY would receive
from BALATOC COMPANY shares of par value of P600,000 in
payment for the first P600,000 be thus advanced to it by Benguet
company.
The total cost incurred by BENGUET COMPANY in developing the
Balatoc property was P1,417,952.15. In compensation for this work, a
certificate for P600,000 shares of stock of BALATOC COMPANY was
given to BENGUET COMPANY and the excess value was paid to
Benguet by Balatoc in cash.
Due to the improvements made on the company’s property, the value
of the shares of BALATOC increased in the market (from P1.00 to
P11.00) and the dividends of the company enriched its stockholders.
As soon as the success of the company became apparent, Harden
(owner of thousands of shares of Balatoc) questioned the transfer of
600,000 shares to Benguet. Harden seeks to annul the certificate
covering the 600,000 shares of stock transferred to Benguet.
Main argument of Harden: It is unlawful for the Benguet Company
to hold any interest in a mining corporation because in the former
Corporation Law (Act of Congress 1916) there is a provision
referring to mining corporations: “it shall be unlawful for any
member of a corporation engaged in agriculture or mining and for
any corporation organized for any purpose except irrigation to be
in any wise interested in any other corporation engaged in
agriculture or in mining.”
ISSUE:
Whether Harden et al can maintain an action based upon the violation
of law supposedly committed by Benguet Company.
If Benguet Company committed a violation, whether Benguet Company
(sociedad anonima) is a corporation within the meaning of the language
used by US Congress and later by Philippine Congress, prohibiting
mining corporations from becoming interested in another mining
corporation.
HELD:
1. WON Harden et al can maintain an action based upon the violation
of law supposedly committed by Benguet Company
BENGUET COMPANY committed NO CIVIL WRONG against the
plaintiffs, and if a public wrong has been committed, the directors of the
Balatoc Company, and Harden himself were the active inducers of the
commission of that wrong. THE CONTRACT WAS PERFORMED ON
BOTH SIDES: by the building of the Balatoc plant by the Benguet
Company and the delivery to the latter of the certificate of 600,000
shares of the Balatoc Company.
The penalties imposed on what is now Sec. 190 (A) of the Corporation
Law for the violation of the prohibition in question are of such nature
that they can be enforced only by a criminal prosecution or by an action
of quo warranto. However these proceedings can be maintained only
by the Attorney General in representation of the government.
2. If Benguet Company committed a violation, WON Benguet Company
(sociedad anonima) is a corporation within the meaning of the language
used by US Congress and later by Philippine Congress, prohibiting
mining corporations from becoming interested in another mining
corporation
Since the plaintiffs have no right of action against Benguet Company,
the COURT REFUSED TO GO FURTHER INTO THE QUESTION AS
TO WHETHER A SOCIEDAD ANONIMA CREATED UNDER
SPANISH LAW (Bengeut Company) IS A CORPORATION WITHIN
THE PROHIBITORY PROVISION,
Sociedad Anonima is much like the English joint stock company with
features resembling those of a partnership. Since it was the intention of
Congress to simulate the introduction of American Corporation into
Philippine law in place of sociedad anonima, it was necessary to make
certain adjustments resulting from the continued co-existence for a
time, of the 2 forms of commercial entities. Accordingly, in section 75
of the Corporation Law, a provision is found making the sociedad
anonima subject to the provisions of the Corporation Law "so far as
such provisions may be applicable", and giving to the sociedades
anonimas previously created in the Islands the option to continue
business as such or to reform and organize under the provisions of the
Corporation Law. Again, in section 191 of the Corporation Law, the
Code of Commerce is repealed in so far as it relates to sociedades
anonimas. The purpose of the commission in repealing this part of the
Code of Commerce was to compel commercial entities thereafter
organized to incorporate under the Corporation Law, unless they should
prefer to adopt some form or other of the partnership.
The provision in Section 75 of the Act Congress of July 1, 1902
(Philippine Bill), generally prohibiting corporations engaged in mining
and members of such from being interested in any other corporation
engaged in mining, was amended by section 7 of Act No. 3518 of the
Philippine Legislature, approved by Congress March 1, 1929.
As originally drawn, our Corporation Law (Act No. 1459) did not contain
any appropriate clause directly penalizing the act of a corporation, a
member of a corporation, in acquiring an interest contrary to paragraph
(5) of section 13 of the Act. The Philippine Legislature undertook to
remedy this situation in section 3 of Act No. 2792 of the Philippine
Legislature, approved on February 18, 1919, but this provision was
declared invalid by this court in Government of the Philippine Islands
vs. El Hogar Filipino (50 Phil., 399), for lack of an adequate title to the
Act. Subsequently the Legislature reenacted substantially the same
penal provision in section 21 of Act No. 3518, under a title sufficiently
broad to comprehend the subject matter. This part of Act No. 3518
became effective upon approval by the Governor-General, on
December 3, 1928, and it was therefore in full force when the contract
now in question was made.
This provision was inserted as a new section in the Corporation Law,
forming section 190 (A) of said Act as it now stands. Omitting the
proviso, which seems not to be pertinent to the present controversy,
said provision reads as follows:
SEC. 190 (A). Penalties. — The violation of any of the
provisions of this Act and its amendments not otherwise
penalized therein, shall be punished by a fine of not
more than five thousand pesos and by imprisonment for
not more than five years, in the discretion of the court. If
the violation is committed by a corporation, the same
shall, upon such violation being proved, be dissolved by
quo warranto proceedings instituted by the Attorney-
General or by any provincial fiscal by order of said
Attorney-General: . . . .
D. Trust Fund Doctrine
o The subscribed capital stock of
the corporation is a trust fund for
the payment of debts of the
corporation which the creditors
have the right to look up to satisfy
their credits, and which the
corporation may not dissipate.
The creditors may sue the
stockholders directly for the
latter’s unpaid subscription.
(2015 Bar)
• Securities and Exchange Commission (SEC) and
Insurance Commission (IC) v. College Assurance
Plan Philippines, Inc. (G.R. No. 202052, 7 March
2018)
FACTS:
CAP is a duly registered domestic corporation with the primary
purpose of selling pre-need educational plans. To guarantee the
payment of benefits under its educational plans, CAP set up a Trust
Fund contributing therein a certain percentage of the amount
actually collected from each planholder.
The Trust Fund, with the aid of trustee banks, is invested in assets
and securities with yields higher than projected increase in tuition
fees.
With the adoption of the policy of deregulation of private educational
institutions by the DepEd in 1993 and the economic crisis and peso
devaluation in 1997, CAP and its Trust Fund were adversely
affected.
In 2000, RA 8799 (Securities Regulation Code) was passed. SEC
promulgated on August 16, 2001 the New Rules on the Registration
and Sale of Pre-Need Plans under Section 16 of the Securities
Regulation Code.
With the adoption of the Pre-Need Uniform Chart of Accounts for
the accounting and reporting of the operations of the pre-need
companies in the Philippines and the new rules on the valuation of
trust funds invested in real property, CAP incurred a trust fund
deficiency of 3.179 billion as of December 31, 2001. In compliance
with the directive of SEC to submit a funding scheme to correct the
deficiency,
CAP, among others, proposed to purchase MRT III Bonds and
assign the same to the Trust Fund. Hence, on August 6, 2002, CAP
purchased MRT III Bonds then valued at $14 million from Smart and
FEMI, and assigned the same to the Trust Fund.
The purchase price to be paid by CAP in 60 monthly
installments payable over 5 years. This obligation was
secured by a Deed of Chattel Mortgage over 9,762,982
common shares of Comprehensive Annuity Plans &
Pension Corporation owned by CAP.
In 2003, after having paid US$6,536,405.01 of the purchase price,
CAP was ordered by the SEC Oversight Board to stop paying
SMART/FEMI due to its perceived inadequacy of CAP's funds.
On August 23, 2005, CAP filed a Petition for Rehabilitation. A Stay
Order was issued by the court suspending the enforcement of all
claims against CAP. Mr. Mamerto Marcelo, Jr. was appointed as
Interim Rehabilitation Receiver.
RTC: gave due course to CAP's Petition for Rehabilitation and
directed the Receiver to submit a report on the rehabilitation plan.
The 2006 Revised Business Plan was approved by the court on
November 8, 2006. Under the Rehabilitation Plan, CAP intended to
sell in 2009 the MRT Bonds at 60% of their face value of US$ 81.2
million.
While negotiations to effect the sale were ongoing, Smart
demanded that CAP settle its outstanding balance of US$
10,680,045.25 as February 28, 2009 and warned that, should CAP
insist on holding on to the MRT III Bonds instead of selling them,
Smart would demand the immediate return of the MRT III Bonds as
full and final settlement of CAP's outstanding obligation.
The Receiver denied that CAP has agreed to pay its liabilities to
FEMI and Smart from the proceeds of the prospective sale of the
MRT III Bonds.
On April 13, 2009, the Receiver filed a Manifestation seeking the
public respondent's approval of the sale of MRT III Bonds, with a
face value of US$ 81,2000,000.00, "at the best possible price" to
DBP and Land Bank.
Public respondent approved the sale of MRT III Bonds "at the best
possible price."
Two days later, the Receiver received a letter from FEMI that Smart
intended to annotate a notice of unpaid seller's lien on the MRT III
Bonds with Deutsche Bank, the custodian bank. However, Smart
opted not to do so and would instead assist in finding a buyer
provided that the seller's lien of US$ 9.5 million will be settled
through the arrangement it presented, subject to the approval of the
rehabilitation court.
The Receiver filed a Manifestation with Motion where he sought the
public respondent's approval of CAP's payment of its obligations to
Smart and FEMI, partly from proceeds of the sale of MRT III Bonds.
The MRT III Bonds were sold at US$ 21,501,760 to DBP and Land
Bank. The Buyers agreed to purchase the MRT III Bonds at a
premium of 3.30% made possible by: (1) Smart's desistance from
enforcing its unpaid seller's lien, (2) FEMI's relinquishing its 4 board
seats with MRT Corporation, (3) swap arrangement of FEMI shares
held by CAP to liquidate $3.5 million of the outstanding obligation;
and (4) substantial discount of $1.2 million from CAP's outstanding
liabilities. The contract of sale was perfected and partly
consummated-FEMI gave up its 4 board seats in MRTC, the MRT
III Bonds were delivered to the buyers, and the buyers paid
$21,501,760 to CAP, which amount was credited to its trust
accounts with Philippine Veterans Bank (PVB). However, CAP's
payment to Smart and FEMI remained to be executed.
Receiver moved for the payment of CAP’s obligations to Smart and
FEMI.
RTC approved the motion.
RTC withdrew the approval and instead ordered the receiver
and the respondent to file their reply to the opposition.
RTC issued a joint order denying the motion to approve payment to
Smart as well as the motion to approve CAP’s additional equity
infusion in CAP General Insurance.
 CAP received summons from the High Court of Hong Kong Special
Administrative Region, CFI, directing it to either satisfy the claim of
Smart and FEMI, or to return the Acknowledgment of Service,
stating whether it intended to contest the proceedings or to make
an admission.
CAP filed its motion w/ RTC seeking authorization to pay the claims
of Smart and FEMI and explaining that the institution of the action
in Hong Kong presented a real threat that the buyers would rescind
their contact with CAP and demand the return of the purchase price
of $21,501,760.00.
ISSUE:
#1: WON obligation to pay Smart and FEMI did not constitute the
"benefits" or "cost of services rendered" or "property delivered"
under Sec 16.4, Rule 16 of the New Rules and Sec 30 of RA 9829.
#2: WON Payment to Smart and FEMI was not an administrative
expense to be withdrawn from the trust fund.
HELD:
ISSUE 1: WON obligation to pay Smart and FEMI did not
constitute the "benefits" or "cost of services rendered" or
"property delivered" under Sec 16.4, Rule 16 of the New Rules
and Sec 30 of RA 9829.
Did not constitute the "benefits."
Petitioners’ Argument: trust fund should be treated separately
from corporate assets and obligations of CAP.
Respondent’s Argument: payment to Smart and FEMI
constituted a valid withdrawal from the trust fund because it
was upon a "benefit" in the nature of "cost for services
rendered or property delivered."
We agree w/ petitioners.
In respect of pre-need companies, the trust fund is set up
from the planholders' payments to pay for the cost of
benefits and services, termination values payable to the
planholders and other costs necessary to ensure the
delivery of benefits or services to the planholders. The
trust fund is to be treated as separate and distinct from
the paid-up capital of the company, and is established
with a trustee under a trust agreement approved by SEC
to pay the benefits.
Section 16.4, Rule 16 of the New Rules,: 16.4. No withdrawal
shall be made from the Trust Fund except for paying the
Benefits such as the monetary consideration, the cost of
services rendered or property delivered, trust fees, bank
charges and investment expenses in the operation of the
Trust Fund, termination values payable to the Planholders,
annuities, contributions of cancelled plans to the fund and
taxes on Trust Funds. Furthermore, only reasonable
withdrawals for minor repairs and costs of ordinary
maintenance of trust fund assets shall be allowed.
The term "benefits" is "the money or services which the Pre-
Need Company undertakes to deliver in the future to the
planholder or his beneficiary."
Moreover, Sec 30 of RA 9829 stipulates that the trust fund is
to be used at all times for the sole benefit of the planholders,
and cannot ever be applied to satisfy the claims of the
creditors of the company
Section 30. Trust Fund. - xxx Assets in the
trust fund shall at all times remain for the sole
benefit of the planholders. At no time shall any
part of the trust fund be used for or diverted to
any purpose other than for the exclusive benefit
of the planholders. In no case shall the trust
fund assets be used to satisfy claims of
other creditors of the pre-need company.
The provision of any law to the contrary
 notwithstanding, in case of insolvency of the
pre-need company, the general creditors
shall not be entitled to the trust fund.
Except for the payment of the cost of benefits or services, the
termination values payable to the planholders, the insurance
premium payments for insurance-funded benefits of memorial
life plans and other costs necessary to ensure the delivery of
benefits or services to planholders, no withdrawal shall be
made from the trust fund unless approved by the Commission.
xxx.
CA erred in authorizing the payment out of the trust fund of
the obligations due to Smart and FEMI. Even assuming that
the obligations were incurred by the respondent in order to
infuse sufficient money in the trust fund to correct its
deficiencies, such obligations should be paid for by its assets,
not by the trust fund.
The planholders are the beneficiaries of the trust
properties.
CA: only the paid value of the MRT III Bonds should be made
part of the trust fund; that with the MRT III Bonds being subject
to the unpaid seller's lien, Smart and FEMI were considered
as contributors to the source of the assets of the trust fund,
and for that reason were not to be treated as ordinary creditors
of the respondent.
We cannot sustain the observations of the CA.
SC: There had been no indication by respondent to the trustee
bank that only the paid value of the MRT III Bonds should
accrue to the trust fund. Even in its comment, the respondent
intimated that the bonds were assigned to the trust fund
without any reservations or conditions imposed thereon.
SC: uphold the petitioners' stance that the MRT III bonds,
upon their infusion to the Trust Fund, and consequently, the
proceeds of the sale thereof, were considered as the Trust
Fund assets themselves.
The Agreement dated August 6, 2002 between CAP and
BANK OF COMMERCE TRUST SERVICES GROUP AS
TRUSTEE states that
upon the sale and delivery by Vendors to CAP of said
Bonds, CAP shall assign the Bonds valued at
US$14,000,000.00 to the Trust Fund administered by
and in the possession of the TRUSTEE.
CAP warrants that: the Bonds are not mortgaged nor in
any way encumbered in favor of any person or
corporation.
That the unpaid purchase price of the MRT III bonds in favor
of Smart and FEMI was not the liability of the respondent's
Trust Fund is clearly shown in the Trust Fund Statements of
respondent's Trust Fund with the BOC. Specifically, the
Balance Sheet as of December 31, 2002 for CAP's Trust Fund
Account No. TG-91-07-00001-C x x x did not include among
the respondent's Trust Fund liabilities the outstanding
obligation of CAP to Smart and FEMI.
Likewise, the Balance Sheet as of February 28, 2009 of the Trust
Account of respondent with PVB with Trust Account Nos. TA
4450-58-000124 (Old TA No. 81), TA 4450-58-000126 (Old TA
No. 85) and TA 4450-58-000123 (Old TA No. 91), x x x did not
report any liability relating to the MRT III bonds.
ISSUE 2: WON Payment to Smart and FEMI was not an
administrative expense to be withdrawn from the trust fund.
Not to be withdrawn from the trust fund.
The CA ruled that the respondent's outstanding obligation to
Smart and FEMI could be considered an administrative
expense that was not covered by the stay order.
SC disagrees.
 Section 16.4, Rule 6 of the New Rules made an exclusive
enumeration of the administrative expenses that may be
withdrawn from the trust fund, as follows:
trust fees, bank charges and investment expenses in
the operation of the trust fund, taxes on trust funds, as
well as reasonable withdrawals for minor repairs and
costs of ordinary maintenance of trust fund assets.
Evidently, the purchase price of the bonds for the capital
infusion to the trust fund was not included as an
administrative expense that could be validly taken from
the trust fund.
Yet, assuming that the unpaid obligation to Smart and FEMI
constituted an administrative expense, its payment was the
liability of the respondent's assets, not of the trust fund.
It is already clear that the trust fund was separate and distinct
from the corporate assets of the respondent. In other words,
only the planholders as the beneficiaries of the trust fund
could claim against the trust fund, to the exclusion of
Smart and FEMI as the respondent's creditors.
corroation was regularized, ratified by the shareholders. Therefore not
ultra vires
Harden v. Benguet Consolidated – supreme court made the
interesting when it said that even if the corporate act or contract is
per se illegal, whenever no private party is wrong, whenever no
private wrong is committed, and only public policy is at stake, the
court will only leave the parties as they are.
- TRUST FUND DOCTRINE : the officers, the ones inside the
corporation will be the one to ensure that the trust fund doctrine
is complied. Basically holds that when the property of the
corporation is now in the hands of the shareholder, the
shareholder now holds it in trust for the corporation.
- Corporate assets are held in trust by the officers, especially by
the officers because they have control over the management of
the corporation. They have the fiduciary duty to take care of the
assets of the corporation.
- Trust fund, we speak of all of these unpaid subscription.
- Trust fund is really for the benefit of the creditors.
V. Persons inside a Juridical Person

SUMMARY: A. Directors
-must still undergo voting requirement
o GR: The Doctrine of centralized
- Ong v. Chu? Tiu? : read this 2003 case which is actually a reiteration
of the ruling that subscriptions to a capital stock constitute a fund to Management states that all
which the officers of the corporation must preserve. To which creditors corporate powers are exercised by
themselves can look into. To claim/ to pursue their claims. Payments the BOD, RCC 22
to the corporation, subscriptions of shareholders, unpaid subscriptions 1. Exercises all powers
of shareholders to the corporation constitute demandable. Pag nag provided for under the
subscribe, dapat bayaran yon. Need buo? Di naman pero pag Corp Code.
kinailangan ng company, kailangan bayaran yan. 2. Conducts all Business of
-if mag issue ng new shares, you shareholder, you are not required to the corporation; and
subscribe to that new issuance. You are given the preemptive right to 3. Controls and holds all
subscribe to equivalent percentage.
the properties of the
- Piruvano case; proceeds of insurance premium was donated to the
children. The act of donating is not illegal perse. Besides, the act of the
corporation (Sec. 22)
o Exceptions:
 1. In case of delegation to the
Executive Committee duly
authorized in the by-laws;
2. Authorization pursuant to a
contracted manager which
may be an individual, a
partnership, or another
corporation; and
3. In case of close corporations,
the stockholders may manage
the business of the corporation
instead of a board of directors,
if the articles of incorporation
so provide.
o BOD- Primarily responsible for the
governance of the corporation. Their
primary duty is to set the policies for the
accomplishment of the corporate
objectives. (evised Code of Governance,
Art. 3)
o They elect the officers who carry out the
policies that they have established.
o The general rule is that a corporation,
through its Board of Directors, should act
in a manner and within the formalities, if
any, prescribed by its charter or by the
general law. Directors must act as a body
in a meeting called for the pursuant to
the law or the corporation’s by laws,
otherwise, any action taken therein may
be questioned by any objecting director
or shareholder; but an action of the BOD
during a meeting, which was illegal for
lack of notice, may be ratified expressly,
by the action of directors in a subsequent
legal meeting, or impliedly, by the
corporation’s subsequent course of
conduct. (Lopez realty v. Fontecha)
o General Rule : The board may validly
delegate, either expressly or impliedly
some of its powers and functions to other
officers or agents of the corporation
appointed by it. (Yu Chuck v. Kong)
o Exception: Discretionary
powers vested exclusively in
BOD (either by provisions of
law, by-laws, vote of
stockholders)
o Cannot delegate entire
supervision and control of the
corporation to others for this is
not only unnecessary and
contrary to usagem but it is
inconsistent with section 23 of
the CC.
o Neither can the board delegate
special powers especially
conferred upon it by a
resolution of the stockholders
or members of the corporation.
o Ex officio member of the board –
Independent director - An independent director is a person who
apart from shareholdings and fees received from the corporation,
is independent of management and free from any business or
other relationship which could, or could reasonably be perceived
to materially interfere with the exercise of independent judgment
in carrying out the responsibilities as a director. (RCC, Sec 22)
Required when:
At least 2 independent directors required:
1. any corporation with a class of equity securities listed for
trading on an Exchange (Publicly Traded companies)
2. Banks
3. Corporations with secondary franchise
Board of the following corporations vested with public interest
shall have independent directors constituting at least 20% of
the board :
A. Corporation:
1. Securities are registered with the Commission
2. Corporations listed with an exchange
3. Corporations with
-Assets of at least 50M
-Having 200 or more shareholders
-Each shareholder holding at least 100 shares of a class of its
equity shares
B. Banks, quasi-banks, preneed, insurance and trust companies,
nonstock savings and loan associations, pawnshops,
corporations engaged in money service business and other
financial intermediaries;
C. Other corporations engaged in business vested with public
interest similar to the above, as may be determined by the
Commission, after taking into account relevant factors which are
germane to the objective and purpose of requiring the election of
independent directors.
How to know if corporation engaged in business with Public
Interest:
1. Extent of minority ownership
2. Type of financial products or securities issued or offered to
investors
3. Public interest involved in the nature of business operations
4. Other analogous factors
TERM OF OFFICE
GR: The regular director shall hold office for 1 year. [Amendment
in RCC, Sec 22: a trustee may be
elected for a period not exceeding 3 years
For a director, the rule remains the same {1 year}].
XPN: If no election is held, the directors and officers will continue
to occupy position even after the lapse of 1 year under a hold-
over capacity until their successors are elected and qualified.
NOTE: This is applicable to a going concern where there is no
break in the exercise of the duties of the officers and directors
(SEC Opinion, Dec. 15, 1989).
- Director must own at least 1 share of stock otherwise no
longer one. (Sec. 22). A person who does now own a stock
at the time of his election or appointment does not
disqualify him as a director if he becomes a shareholder
before assuming the duties of his office. 9SEC Opinions,
November 9 1987)
Holdover Period – the time from the lapse of one year from a
member’s election to the Board and until his successor’s election
and qualification. It 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. (Valle Verde Country Club v.
Africa)
QUALIFICATIONS
1. Majority of the directors/trustees must be residents of the
Philippines (CC, Sec. 23).
2. He must not have been convicted by final judgment of an
offense punishable by imprisonment for period exceeding 6 years
or a violation of the Corporation Code, committed within 5 years
prior to the date of his election (CC, Sec. 27).
3. He must be of legal age
4. Other qualifications as may be prescribed in
special laws or regulations or in the by-laws of the corporation.
Grounds for disqualification of a director/trustee
1. Conviction by final judgment of an offense punishable by
imprisonment exceeding 6 years (only for violation of other
laws); or
2. Violation of the Corporation Code committed within 5 years
prior to his election or appointment (CC, Sec. 27).
NOTE: Disqualification by reason of violation of the CC does not
require conviction for the reason that the decision of the SEC is
final and executory unless appealed in CA and a TRO is obtained
[Amendment in RCC, Sec 26:]
A person shall be disqualified from being a director, trustee or
officer of any corporation if, within 5 years prior to election or
appointment of such, the person was: (ConFoFo)
(a) Convicted by final judgment: (ICS)
(1) of an offense punishable by imprisonment for a period
exceeding 6 years;
(2) violation of the Corporation Code;
(3) Violation of RA 8799 (SRC)
(b) Found administratively liable for any offense involving
fraudulent acts; and
(c) By a foreign court or equivalent foreign regulatory authority
for acts, violations or misconduct similar to those enumerated in
paragraphs (a) and (b) above
ELECTIONS:
1. Presence of Stockholders representing a majority of the
outstanding capital stock of the corporation or majority of the
members, either in person or by proxy.
[New ways to vote in RCC, Sec 24]:
Through remote communication or in absentia
GR: it must be provided in the by-laws
XPN: the right to vote through such modes may be exercised in
corporations vested with public interest notwithstanding the
absence of a provision in the bylaws of such corporations
2. The election must be by ballot, if requested by any voting
stockholder or member.
3. The total number of votes cast by him must not exceed the
number of shares owned by him as shown in the books of the
corporation multiplied by the whole number of directors to be
elected.
4. No delinquent stock shall vote or be voted for.
5. A stockholder cannot be deprived in the articles of
incorporation or in the by-laws of his statutory right to use any
of the methods of voting in the election of directors.
6. The candidates receiving the highest number of votes shall
be declared elected (CC, Sec. 24 [RCC, Sec 23]).
Reportorial requirement
Within 30 days after the election of directors, trustees and officers
of the corporation, the secretary or any other officer of the
corporation, shall submit to the Commission, the names,
shareholdings, and residence addresses of the directors, trustees
and officers elected.
If no election: Within 30 days from the date of the scheduled of
election. The report shall specify a new date for the election,
which shall not be later than 60 days from the scheduled date (Sec
25, RCC)
Quorum required in a stock or non-stock corporation: Unless
otherwise provided for in the by-laws, a quorum shall consist of
the stockholders representing a majority of the outstanding
capital stock entitled to vote or a majority of the members in
the case of non-stock corporations (CC, Sec. 52).
Removal: Power to remove belongs to the stockholders. May be
with a cause or without case
Except: If the director was elected by the minority, there must be
cause for removal because the minority may not be deprived of
the right to representation to which they may be entitled under
Sec. 24 of the Code (Sec. 28, CC).
Replacement:
1. quorum
2. replacement must only don sa unexpired term
Theories on Source of Power
1. Agency Theory
2. Concession Theory
3. Platonic Guardian Theory
4. Sui Generis Theory (for sir this is what reflects the board of
directors) they are not agents, nor trustees, they are fiduciaries.
The board can decide on their own, It is an independent entity.
Shareholders cannot overrule the decision of the board.
Shareholder wealth maximization theory
Cumulative – allowed in non stock unless provided in by-laws
Straight
• Eizmendi, Jr. et al. v. Fernandez (G.R. No.
215280, 5 September 2018
FACTS:
Respondent Fernandez filed a Complaint for Invalidation of Corporate
Acts and Resolutions against individual petitioners who allegedly
constituted themselves as new members of the Board of Directors of
Valle Verde Country Club Inc (VVCCI), despite lack of quorum during
the annual members’ meeting. VVCCI is a duly organized nonstock
corporation engaged in promoting sports, recreational and social
activities, and the operation and maintenance of a sports and
clubhouse, among other things.
Fernandez averred that he is a proprietary member in good standing of
VVCCII and the individual petitioners held a meeting during which they
supposedly acted for and in behalf of VVCCI, and found him guilty of
less serious violations of the bylaws and imposed a penalty of
suspension of membership for 6 months.
Fernandez asserted that since petitioners were not validly constituted
as the new BOD in place of the hold-over BOD of VVCCI, they had no
legal authority to act as such BOD and to penalize him. Further, he
added that he was not accorded due process as petitioners failed to
give him opportunity to defend himself by notifying him of the charge
and the verdict against him.
RTC judge did not touch the election contest aspect of the complaint
since there was no election contest filed during the period allowed.
ISSUE:
Whether or not the board of directors’ composition is legitimate
HELD:
To allow Fernandez to indirectly question the validity of the election
would be a clear violation of the 15-day reglementary period to file an
election contest under the Interim Rules. As pointed out by the RTC,
what cannot be legally done directly cannot be done indirectly.
The 15 day reglementary period within which to file an election
contest under the Interim Rules is meant to hasten the submission
and resolution of corporate election controversies, so that the
state of uncertainty in the corporate leadership is settled; and that
the said period not meant to block suits questioning the unlawful
acts of winning directors, including the legitimacy of their
authorship. However, if the Court were to entertain one of the
causes of action in Fernandez’ complaint, which is partly an election
contest raised beyond the said period, then the salutary purposes of
the said period under the Interim Rules would be rendered futile; the
floodgates to election contests would be opened to the detriment of the
regime of efficient and stable corporate governance.

• Valle Verde Country Club, Inc. vs. Africa (GR
151969, 4 September 2009)
FACTS:
During the Annual Stockholders’ Meeting of petitioner VVCCI, different
members of the VVCC Board of Directors were elected. In the years
1997- 2001, however, the exquisite quorum for the holding of the
stockholders’ meeting could not be obtained. Consequently, the
directors continued to serve in the VVCC Board in a hold-over capacity.
In 1998, Dinglasan resigned from his position as member of the VVCC
Board. The remaining directors, still constituting a quorum of VVCC’s 9
member board, elected Eric Roxas to fill in the vacancy created by the
resignation of Dinglasan. A year later, Makalintal also resigned as a
member of the VVCC Board. He was replaced by Ramirez, who was
elected by the remaining members of the VVCC Board.
Respondent Africa, a member of VVCC, questioned the election of
Roxas and Ramirez as members of the VVCC Board with the SEC and
RTC.
Africa alleged that under Section 23 of the Corporation Code;
• “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 1 year until their successors
are elected and qualified.
• “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”
• Africa claimed that a year after Makalintal’s election
as member of the VVCC, his term as well as those
of the other members of the VVCC Board should be
considered to have already expired. Thus, 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.
• Additionally, Africa contends that for members to
exercise the authority to fill in vacancies in the board
of directors, Section 29 requires that there should be
an unexpired term during which the successor-
member shall serve. Since Makalinta’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.
ISSUE:
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
HELD:
• NO.
• The hold-over period is not part of the term of office
of a member of the board of directors.
• 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. This holdover period is not to be
considered as part of his term, as declared, had
already expired.
• With the expiration of Makalintal’s term, a vacancy
resulted which by the terms of Section 29 of the CC,
must be filled by the stockholders of VVCC in a
regular or special meeting called for that purpose.
• “Term” is the time during which the officer may i.e., when the remaining directors still constitute a
claim to hold the office as of right, and fixes the quorum and when the vacancy is caused for reasons
interval after which the several incumbents shall other than by removal by the stockholders or by
succeed one another. The term of office is not expiration of the term.
affected by the holdover. The term is fixed by
statute and it does not change simply because
the office may have become vacant, nor because TERM TENURE
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. Time during which the officer may claim The period within which
• Based on Section 23 of the Corporation Code, to hold the office as of right, and fixes the the director ACTUALLY
declaring that the board of directors shall hold office interval after which the several holds office, including the
for one year until their successors are elected and incumbents shall succeed on another. holdover period after the
qualified, it means that the term of the members of end of his term.
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, Not affected by the holdover INCLUDES HOLDOVER
nor is it a new term; the holdover period,
however constitutes part of his tenure. (Tenure
may be shorter or longer than the term for reasons
within or beyond the power of the incumbents) Fixed by statute, and it does not change May be shorter or longer
• The underlying policy of the Corporation Code is that simply because the office may have (in case of a holdover)
the business and affairs of a corporation must be become vacant, nor because the than the term for reasons
governed by a board of directors whose members incumbent holds over in office beyond within or beyond the
have stood for election, and who have actually been the end of the term due to the fact that a power of the incumbent.
elected by the stockholders, on an annual basis. successor has not been elected and has
Only in that way can the directors' continued failed to qualify.
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.
• 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 enacted and before • Grace Christian High School vs. Court of
its Section 29 limited the instances when the Appeals (GR 108905, 23 October 1997)
remaining directors can fill in vacancies in the board, FACTS:
For 15 years, petitioner’s representative had been recognized as a
permanent director of the association. But on February 13, 1990,
petitioner received notice from the association’s committee on
election that the latter was “reexamining” (actually, reconsidering)
the right of petitioner’s representative to continue as an unelected
member of the board. As the board denied petitioner’s request to be
allowed representation without election, petitioner brought an action
for mandamus in the Home Insurance and Guaranty Corporation. Its
action was dismissed by the hearing officer whose decision was
subsequently affirmed by the appeals board. Petitioner appealed to
the CA, which in turn upheld the decision of the HIGC’s appeals
board. Hence this petition for review on the following contentions:
1. The petitioner herein has already acquired a vested right to a
permanent seat in the BOD of Grace Village Association;
2. The amended bylaws of the Association drafted and
promulgated by a Committee on December 20, 1975 is valid and
binding; and
3. The practice of tolerating the automatic inclusion of petitioner
as a permanent member of the BOD of the Association without the
benefit of election is allowed under the law. (Since there is no
provision of law prohibiting unelected members of boards of
directors of corporation.
ISSUE:
Whether or not petitioner has the right to be the representative and
to sit in the board of directors of respondent Grace Village Association,
Inc. as a permanent member thereof
HELD:
The BOD of corporations must be elected from among the
stockholders or members directors every year. Estoppel does not set
in to legitimize what is wrongful.
As to directors, at the meeting for the adoption of the original bylaws,
or at such subsequent meeting as may then be determined, directors
shall be elected to hold their offices for one year and until their
successors are elected and qualified. Thereafter the directors of the
corporation shall be elected annually by the stockholders if it be a stock
corporation or by the members if it be a nonstock corporation, and if no
provision is made in the bylaws for the time of election the same shall
be held on the first Tuesday after the first Monday in January.
Unless otherwise provided in the bylaws, two weeks notice of the
election of directors must be given by publication in some newspaper
of general circulation devoted to the publication of general news at the
place where the principal office of the corpoation is established or
located, and by written notice deposited in the post-office, postage pre-
paid, addressed to each stockholder, or, if there be no stockholders,
then to each member, at his last known place of residence. If there be
no newspaper published at the place where the principal office of the
corporation is established or located, a notice of the election of directors
shall be posted for a period of 3 weeks immediately preceding the
election in at least 3 public places, in the place where the principal office
of the corporation is established or located.
These provisions of the former and present corporation law leave
no room for doubt as to their meaning; THE BOARD OF DIRECTORS
OF CORPORATION MUST BE ELECTED FROM AMONG THE
STOCKHOLDERS OR MEMBERS. There may be corporations in
which there are unelected members in the board BUT it is clear that in
the examples cited by petitioner the unelected members sit as ex officio
members, by virtue of and for as long as they hold a particular office.
But in the case of petitioner, there is no reason at all for its
representative to be given a seat in the board. Nor does petitioner claim
a right to such seat by virtue of an office held. Inf act it was not given
such seat in the beginning. It was only in 1975 that a proposed
amendment to the bylaws sought to give it one.
Granting a member of homeowner’s association, a permanent seat
at the board is contrary to law and it was already practiced.
*How about unelected members of the board – in this case, the SC
recognized the ex officio members of the board. They have to be
specifically identified. Expressly provided for in the By-Laws. If this is
contrary to law, then this is something that the members cannot waive.
This is something that the members can validate or regularize.
B. Trustees
 o GR: The Doctrine of centralized
Management states that all
corporate powers are exercised by
the BOD, RCC 22
1. Exercises all powers
provided for under the
Corp Code.
2. Conducts all Business of
the corporation; and
3. Controls and holds all
the properties of the
corporation (Sec. 22)
o Exceptions:
1. In case of delegation to the
Executive Committee duly
authorized in the by-laws;
2. Authorization pursuant to a
contracted manager which
may be an individual, a
partnership, or another
corporation; and
3. In case of close corporations,
the stockholders may manage
the business of the corporation
instead of a board of directors,
if the articles of incorporation
so provide.
TERM OF OFFICE
GR: RCC, Sec 22: a trustee may be elected for a period not
exceeding 3 years
For a director, the rule remains the same {1 year}].
XPN: If no election is held, the directors and officers will continue
to occupy position even after the lapse of 1 year under a hold-
over capacity until their successors are elected and qualified.
NOTE: This is applicable to a going concern where there is no
break in the exercise of the duties of the officers and directors
(SEC Opinion, Dec. 15, 1989).
- A trustee who ceases to be a member of the corporation
shall cease to be such (Sec. 22)
QUALIFICATIONS
1. Majority of the directors/trustees must be residents of the
Philippines (CC, Sec. 23).
2. He must not have been convicted by final judgment of an
offense punishable by imprisonment for period exceeding 6 years
or a violation of the Corporation Code, committed within 5 years
prior to the date of his election (CC, Sec. 27).
3. He must be of legal age
4. Other qualifications as may be prescribed in
special laws or regulations or in the by-laws of the corporation.
Grounds for disqualification of a director/trustee
1. Conviction by final judgment of an offense punishable by
imprisonment exceeding 6 years;or
2. Violation of the Corporation Code committed within 5 years
prior to his election or appointment (CC, Sec. 27).
NOTE: Disqualification by reason of violation of the CC does not
require conviction for the reason that the decision of the SEC is
final and executory unless appealed in CA and a TRO is obtained
[Amendment in RCC, Sec 26:]
A person shall be disqualified from being a director, trustee or
officer of any corporation if, within 5 years prior to election or
appointment of such, the person was: (ConFoFo)
(a) Convicted by final judgment: (ICS)
(1) of an offense punishable by imprisonment for a period 3. The total number of votes cast by him must not exceed the
exceeding 6 years; number of shares owned by him as shown in the books of the
(2) violation of the Corporation Code; corporation multiplied by the whole number of directors to be
(3) Violation of RA 8799 (SRC) elected.
(b) Found administratively liable for any offense involving 4. No delinquent stock shall vote or be voted for.
fraudulent acts; and 5. A stockholder cannot be deprived in the articles of
(c) By a foreign court or equivalent foreign regulatory authority incorporation or in the by-laws of his statutory right to use any
for acts, violations or misconduct similar to those enumerated in of the methods of voting in the election of directors.
paragraphs (a) and (b) above 6. The candidates receiving the highest number of votes shall
be declared elected (CC, Sec. 24 [RCC, Sec 23]).
FOREIGNERS ARE NOT DISQUALFIIED - While foreigners
are disqualified from being elected/ appointed as corporate Reportorial requirement
officers in wholly or partially nationalized business activities, Within 30 days after the election of directors, trustees and officers
they are allowed representation in the BOD or governing body of of the corporation, the secretary or any other officer of the
said entities in proportion to their shareholding (Anti-Dummy corporation, shall submit to the Commission, the names,
Law, Sec. 2-A; 1987Constitution, Art. XII, Sec. 11). The BOD/ shareholdings, and residence addresses of the directors, trustees
governing body performs specific duties as a “body”. Unlike and officers elected.
corporate officers, each member of the BOD/ governing body has C. Officers
no individual power or authority to perform management o After the election of directors,
functions (De Leon, supra). the latter must formally
organize by electing the
ELECTIONS: corporate officers. (Sec. 25, CC)
o The corporate officers are
1. Presence of Stockholders representing a majority of the tasked to carry out the policies
outstanding capital stock of the corporation or majority of the laid down by the Boards, the
members, either in person or by proxy. AOI and by the by-laws.
[New ways to vote in RCC, Sec 24]: o Office is created by the charter
of the corporation
Through remote communication or in absentia o Any 2 or more positions may
GR: it must be provided in the by-laws be held concurrently by the
XPN: the right to vote through such modes may be exercised in same person, except that no
corporations vested with public interest notwithstanding the one shall act as president and
absence of a provision in the bylaws of such corporations secretary or president and
treasurer at the same time. (CC
2. The election must be by ballot, if requested by any voting Sec. 25)
stockholder or member. o CORPORATE SECRETARY –
As required by the by-laws but
 the RCC provides that he or
she must be a Filipino Citizen
and a resident of the
Philippines. But the President
cannot be a president and a
secretary at the same time.
• Colegio Medicofarmaceutico de Filipinas, Inc.
v. Lily Lim (G.R. 212034, 2 July 2018)
FACTS:
Petitioner Colegio Medico Farmaceutico de Filipinas, Inc. filed before the
MeTC of Manila a Complaint for Ejectment with Damages against respondent
Lily Lim. Petitioner alleged, that in June 2005, it entered into a Contract of
Lease for the period June 2005 to May 2006 with respondent; that after
expiration of the lease period, petitioner, represented by its then President Dr.
Virgilio C. Del Castillo (Del Castillo), sent respondent another Contract of
Lease for the period June 2006 to May 2007 for her approval; that despite
several follow-ups, respondent failed to return the Contract of Lease; that
during a board meeting in December 2007, petitioner informed respondent of
the decision of the Board of Directors (Board) not to renew the Contract of
Lease; that on March 5, 2008, Del Castillo wrote a letter to respondent
demanding the payment of her back rentals and utility bills in the total amount
of P604,936.35, with a request to vacate the subject property on or before
March 16, 2008; and that respondent refused to comply with the demand.
Respondent contends that said demand letter had no legal effect because it
was issued without an express authority from the Board in the form of a board
resolution. Respondent harps on the fact that Del Castillo was authorized by
the Board to institute the instant case only on May 13, 2008 or two months
after the demand letter dated March 5, 2008 was issued.
MeTC: demand letter dated March 5 2008 as legally non-existent for failure of
petitioner to show that Del Castillo was duly authorized by the Board to issue
the same. The MeTC stressed that a demand letter is a jurisdictional
requirement the absence of which opens the case susceptible to dismissal.
RTC: the issuance of the demand letter dated March 5, 2008 was done by Del
Castillo in the usual course of business and that the issuance of the same was
ratified by petitioner when it passed the Board Resolution dated May 13, 2008
authorizing Del Castillo to file a case against respondent.
CA: reversed the Decision of RTC and dismissed the complaint for failure to
attach a copy of the Board of Resolution dated May 13, 2008 as it was a fatal
defect.
ISSUE:
a) W/n the failure to attach a copy of the Board of Resolution was a fatal defect,
w/n the president of a corporation is duly authorized to sign the verification and
certification without need of aboard resolution. – No, the president is duly
authorized.
b) w/n the Demand Letter written by Del Castillo has legal effect. – yes, the
demand letter has legal effect.
HELD:
a) No, it was not a fatal defect. The president of a corporation may sign the
verification and certification of non-forum shopping. A corporation exercises its
powers and transacts its business through its board of directors or trustees.
Accordingly, unless authorized by the board of directors or trustees, corporate
officers and agents cannot exercise any corporate power pertaining to the
corporation. A board resolution expressly authorizing the officers and agents
is therefore required. However, in filing a suit, jurisprudence has allowed the
president of a corporation to sign the verification and the certification of non-
forum shopping even without a board resolution as said officer is presumed to
have sufficient knowledge to swear to the truth of the allegations stated in the
complaint or petition.
b) The issuance of the demand letter dated March 5, 2008 to collect the
payment of unpaid rentals from respondent and to demand the latter to vacate
the subject property was done in the ordinary course of business, and thus,
within the scope of the powers of Del Castillo. In fact, it was his duty as
President to manage the affairs of petitioner, which included the collection of
receivables. Article IV, Section 2 of the By-laws of petitioner expressly states
that the President has the power to:
xxxx
b. Exercise general [supervision], control and direction of the business and
affairs of the Colegio;
xxxx
e. Execute in behalf of the Colegio, bonds, mortgages, and all other contracts
and agreements which the Colegio may enter into;
xxxx
j. Exercise or perform such other duties as are incident to his office or such
powers and duties as the Board may from time to time [prescribe].
Accordingly, even without a board resolution, Del Castillo had the power and
authority to issue the demand letter dated March 5, 2008.
In any case, even if, for the sake of argument, Del Castillo acted beyond the
scope of his authority in issuing the demand letter dated March 5, 2008, the
subsequent issuance of the Board Resolution dated May 13, 2008 cured any
defect possibly arising therefrom as it was a clear indication that the Board
agreed to, consented to, acquiesced in, or ratified the issuance of the said
demand letter.
All told, the Court agrees with the findings of the RTC that all the requisites of
an unlawful detainer were present in the instant case, and thus, petitioner was
entitled to the possession of the subject property.
Other Important Points:
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 x x x.
In the case of Aircargo and Warehousing Co., Inc. v. CA : 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. It requires presentation of evidence of similar act(s)
executed either in its favor or in favor of other parties. It is not the
quantity of similar acts which establishes apparent authority, but the
vesting of a corporate officer with the power to bind the corporation.
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.'
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.
• Ellao v. BATELEC I, et al. (G.R. 209166, 9 July
2018)
Facts
BATELEC I is an electric cooperative organized and existing
under Presidential Decree No. 269 (P.D. 269) and is engaged in
the business of distributing electric power or energy in the
province of Batangas,. At the time material to this petition,
respondent Raquel Rowena Rodriguez is the President of
BATELEC I's Board of Directors. Ellao was employed by
BATELEC I initially as Office Supplies and Equipment Control
Officer on January 4, 1982 until he was appointed as General
Manager on June 1, 2006.
On February 12, 2009, a complaint was filed by Nestor de Sagun
and Conrado Cornejo against Ellao, charging him of committing
irregularities in the discharge of his functions as General
Manager. Ellao was placed under preventive suspension.
Ellao submitted his explanation refuting the charges against him,
after which the matter was set for hearing. However, the
scheduled hearing was postponed at Ellao's instance. The re-
scheduled hearing did not push through, and instead, the fact-
finding body issued a report recommending Ellao's termination.
On March 13, 2009, the Board of Directors adopted and issued
Board Resolution terminating Ellao as General Manager on the
grounds of gross and habitual neglect of duties and
responsibilities and willful disobedience or insubordination
resulting to loss of trust and confidence. Ellao was formally
informed of his dismissal from employment made effective on
October 1, 2009. On December 9, 2009, the National
Electrification Administration (NEA) confirmed BATELEC I's
Board Resolution approved Ellao's termination.
On February 23, 2011, Ellao filed a Complaint for illegal dismissal
and money claims before the Labor Arbiter against BATELEC I
and/or its President Rowena A. Rodriguez. Alleging illegal
dismissal, Ellao complained that the charges against him were
unsubstantiated and that there was no compliance with
procedural due process as he was not afforded the opportunity
to explain and there was no written notice of termination
specifying the grounds of his termination.
LA: affirmed its jurisdiction over the complaint. Held that the law
creating the NEA, as amended by Presidential Decree No. 1645
(P.D. 1645), granted NEA the power to suspend or dismiss any
employee of electric cooperatives, the same does not authorize
NEA to hear and decide a labor termination case which power is
exclusively vested by Presidential Decree No. 442 or the Labor
Code, to Labor Arbiters.
NLRC: BATELEC I is not a corporation registered with the SEC,
but that it was formed and organized pursuant to P.D. 269 and
that Ellao is not an officer but a mere employee. Denied
BATELEC’s appeal.
CA: found merit in BATELEC I's certiorari petition and found
that Ellao, as BATELEC I's General Manager, is a corporate
officer. The CA found that under BATELEC I's By-laws, its Board
of Directors is authorized to appoint such officers as it may deem
necessary. It noted that Ellao was appointed as General Manager
by virtue of a board resolution and that Ellao's appointment was
duly approved by the NEA Administrator. The CA also found
that the position of General Manager is specifically provided for
under BATELEC I's By-laws. As such, the CA concluded that
Ellao's dismissal is considered an intra-corporate controversy
which falls under the jurisdiction of the SEC, now the RTC's, and
not with the NLRC.
Issue whether or not jurisdiction over Ellao's complaint for illegal
dismissal belong to the labor tribunals. - No
Held
No, the complaints for illegal dismissal filed by a cooperative
officer constitute an intra-cooperative controversy, jurisdiction
over which belongs to the regional trial courts and not the labor
tribunals.
As a rule, the illegal dismissal of an officer or other employee of
a private employer is properly cognizable by the labor arbiter
pursuant to Article 217 (a)2 of the Labor Code, as amended.
By way of exception, where the complaint for illegal dismissal
involves a corporate officer, the controversy falls under the
jurisdiction of the SEC, because the controversy arises out of
intra-corporate or partnership relations between and among
stockholders, members, or associates, or 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 the controversy concerns their individual
franchise or right to exist as such entity; or because the
controversy involves the election or appointment of a director,
trustee, officer, or manager of such corporation, partnership, or
association. With the advent of Republic Act No. 8799 (R.A. 8799)
or The Securities Regulation Code, the SEC's jurisdiction over all
intra-corporate disputes was transferred to the regional trial
courts. Since Ellao filed his Complaint for illegal dismissal on
February 23, 2011, after the passage and approval of R.A. 8799,
his complaint may either fall under the jurisdiction of the labor
arbiter or the regional trial courts, depending on his position. If
Ellao is determined to be a corporate officer then jurisdiction over
his complaint for illegal dismissal is to be treated as an intra-
corporate dispute, hence jurisdiction belongs to the regional trial
courts.

Matling Industrial and Commercial Corporation, et al., v.
Ricardo Coros,the Court held that in conformity with Section
25 of the Corporation Code, "a position must be expressly
mentioned in the By-Laws in order to be considered as a
corporate office. Thus, the creation of an office pursuant to or
under a By-Law enabling provision is not enough to make a
position a corporate office." Citing Guerrea v. Lezama, et
al.,Matling held that the only officers of a corporation were
those given that character either by the Corporation Code or by
the By-Laws so much so that the rest of the corporate officers
could be considered only as employees or subordinate officials.
Here, the position of General Manager is expressly provided
for under Article VI, Section 10 of BATELEC I's By-laws,
enumerating the cooperative offices which provides that the
functions of the office of the General Manager, i.e.,
management of the Cooperative and to keep the Board fully
informed of all aspects of the operations and activities of the
Cooperative are specifically laid down under BATELEC I's By-
laws itself. It is therefore beyond cavil that Ellao's position as
General Manager is a cooperative office. Accordingly, his
complaint for illegal dismissal partakes of the nature of an intra-
cooperative controversy; it involves a dispute between a
cooperative officer on one hand, and the Board of Directors, on
the other.
Ellao's main resistance to the regional trial court's exercise of
jurisdiction over his complaint for illegal dismissal rests on his
theory that BATELEC I, as a cooperative, is not a corporation
registered with the SEC. Registration with the SEC, however, is
not the operative factor in determining whether or not the latter
enjoys jurisdiction over a certain dispute or controversy.
To lend proper context, It is well to recall that a cooperative, as
defined under P.D. 269, refers to a "corporation organized under
Republic Act No. 6038 or [under P.D. 269] a cooperative
supplying or empowered to supply service which has heretofore
been organized under the Philippine Non-Agricultural
Cooperative Act, whether covered under this Decree or not." P.D.
269 further provides that "[c]ooperative non-stock, non-profit
membership corporations may be organized, and electric
cooperative corporations heretofore formed or registered under
the Philippine non- Agricultural Cooperative 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." Likewise, by express
provision of PD 269, an electric cooperative is hereby vested
with all powers necessary or convenient for the
accomplishment of its corporate purpose. Consistently, an
electric cooperative is defined under Republic Act No. 9136
(R.A. 9136) as a "distribution utility organized pursuant to [P.D.
269], as amended, xxx."
• Matling Industrial and Commercial
Corporation v. Coros (GR 157802, 13 October
2010)
Facts
Ricardo Coros was dismissed by Matling as its Vice President for
Finance and Administration. He then filed a complaint for illegal
suspension and illegal dismissal against Matling and some of its
corporate officers (petitioners) in the NLRC, Iligan City.
The petitioners moved to dismiss the complaint, raising the
ground, among others, that the complaint pertained to the
jurisdiction of the Securities and Exchange Commission (SEC)
due to the controversy being intra-corporate inasmuch as the
respondent was a member of Matling's Board of Directors aside
from being its Vice-President for Finance and Administration
prior to his termination.
The respondent opposed the petitioners' motion to dismiss,
insisting that his status as a member of Matling's Board of
Directors was doubtful, considering that he had not been
formally elected as such; that he did not own a single share of
stock in Matling, considering that he had been made to sign in
blank an undated indorsement of the certificate of stock he had
been given in 1992; that Matling had taken back and retained the
certificate of stock in its custody; and that even assuming that he
had been a Director of Matling, he had been removed as the Vice
President for Finance and Administration, not as a Director, a fact
that the notice of his termination dated April 10, 2000 showed.
On October 16, 2000, the LA granted the petitioners' motion to
dismiss, ruling that the respondent was a corporate officer
because he was occupying the position of Vice President for
Finance and Administration and at the same time was a Member
of the Board of Directors of Matling; and that, consequently, his
removal was a corporate act of Matling and the controversy
resulting from such removal was under the jurisdiction of the
SEC, pursuant to Section 5, paragraph (c) of Presidential Decree
No. 902.
CA: Coro’s alleged dismissal is within the jurisdiction of the LA.
Issue W/n the respondent is a corporate officer and is within the
jurisdiction of regular courts. ( In the case of the regular
employee, the LA has jurisdiction; otherwise, the RTC exercises
the legal authority to adjudicate.)
Held
No, respondent is not a corporate officer and the jurisdiction is
not within the regular courts.
Section 25 of the Corporation Code provides:
Section 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. Any two (2) or more
positions may be held concurrently by the same person, except
that no one shall act as president and secretary or as president
and treasurer at the same time.
The directors or trustees and officers to be elected shall perform
the duties enjoined on them by law and the by-laws of the
corporation. Unless the articles of incorporation or the by-laws
provide for a greater majority, a majority of the number of
directors or trustees as fixed in the articles of incorporation shall
constitute a quorum for the transaction of corporate business,
and every decision of at least a majority of the directors or
trustees present at a meeting at which there is a quorum shall be
valid as a corporate act, except for the election of officers which
shall require the vote of a majority of all the members of the
board.
Directors or trustees cannot attend or vote by proxy at board
meetings.
Conformably with Section 25, a position must be expressly
mentioned in the By-Laws in order to be considered as a
corporate office. Thus, the creation of an office pursuant to or
under a By-Law enabling provision is not enough to make a
position a corporate office. Guerrea v. Lezama, 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 By-Laws; 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:
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.
In this case, respondent was appointed vice president for
nationwide expansion by Malonzo, petitioner''s general
manager, not by the board of directors of petitioner. It was also
Malonzo who determined the compensation package of
respondent. Thus, respondent was an employee, not a "corporate
officer." The CA was therefore correct in ruling that jurisdiction
over the case was properly with the NLRC, not the SEC (now the
RTC).
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 By-Laws. 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 By-Laws.
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 By-Laws 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.
Moreover, the Board of Directors of Matling could not validly
delegate the power to create a corporate office to the President,
in light of Section 25 of the Corporation Code requiring the Board
of Directors itself to elect the corporate officers. Verily, the power
to elect the corporate officers was a discretionary power that the
law exclusively vested in the Board of Directors, and could not
be delegated to subordinate officers or agents. The office of
Vice President for Finance and Administration created by
Matling's President pursuant to By Law No. V was an ordinary,
not a corporate, office.
To emphasize, the power to create new offices and the power to
appoint the officers to occupy them vested by By-Law No. V
merely allowed Matling's President to create non-corporate
offices to be occupied by ordinary employees of Matling. Such
powers were incidental to the President's duties as the executive
head of Matling to assist him in the daily operations of the
business.
NOT WITHIN THE JURISDICTION OF SEC – The Court held
that the criteria for distinguishing between corporate officers
who may be ousted from office at will, on one hand, and ordinary
corporate employees who may only be terminated for just cause,
on the other hand, do not depend on the nature of the services
performed, but on the manner of creation of the office. In the
respondent's case, he was supposedly at once an employee, a
stockholder, and a Director of Matling. The circumstances
surrounding his appointment to office must be fully considered
to determine whether the dismissal constituted an intra-
corporate controversy or a labor termination dispute. We must
also consider whether his status as Director and stockholder
had any relation at all to his appointment and subsequent
dismissal as Vice President for Finance and Administration.
Here, the respondent was not appointed as Vice President for
Finance and Administration because of his being a stockholder
or Director of Matling. He had started working for Matling on
September 8, 1966, and had been employed continuously for 33
years until his termination on April 17, 2000, first as a
bookkeeper, and his climb in 1987 to his last position as Vice
President for Finance and Administration had been gradual but
steady.

Even though he might have become a stockholder of Matling in
1992, his promotion to the position of Vice President for Finance
and Administration in 1987 was by virtue of the length of quality
service he had rendered as an employee of Matling. His
subsequent acquisition of the status of Director/stockholder had
no relation to his promotion. Besides, his status of
Director/stockholder was unaffected by his dismissal from
employment as Vice President for Finance and Administration.
• WPP Marketing Communications v. Jocelyn
Galera (GR 169207, 169239, 25 March 2010)
FACTS: Galera was an American citizen recruited to work in the
Philippines for WPP Marketing Communications (WPP). She was
recruited by WPP Worldwide Chairman Steedman. Her employment
became effective solely on the instruction of the CEO and upon signing
of the contract, without any further action from the Board of Directors of
WPP.
WPP designated Galera as its VP and applied for a working visa from
the Bureau of Immigration in favor of her. Almost a year later, she was
verbally notified by Steedman that her services had been terminated
from WPP. The following day, she received a termination letter. She
then filed a case for illegal dismissal.
The LA ruled in favor of Galera and found that she was illegally
dismissed. On appeal, NLRC reversed the ruling of the LA. and found
that Galera was a corporate officer of WPP at the time she was
dismissed. As such, her dismissal may be the subject of a controversy
cognizable by the SEC. They further held that the present case is an
intra-corporate dispute which is therefore beyond LA’s jurisdiction.
CA, on the other hand, set aside NLRC’s Decision. It explained that to
be considered a “corporate officer,” the corporation’s BOD must appoint
them or such powers must be granted to them by the Articles of
Incorporation or the by-laws. It found that when Galera was appointed
as VP by the BOD, WPP’s By-Laws only provided for one VP and such
position was already occupied by Webster. Thus, when it issued the
Resolutions pertaining to Galera’s dismissal, it exceeded its authority
under the by-laws and are, therefore, considered as ultra vires. WPP’s
subsequent amendment of its by-laws does not cure the defect
because by-laws operate prospectively and cannot validate their
previous ultra vires acts.
ISSUE: Whether Galera is an employee or a corporate officer -
HELD: Galera was a regular employee.
Corporate officers are given such character either by the Corporation
Code or by the corporation’s by-laws. Under Section 25 of the
Corporation Code, the corporate officers are the president, secretary,
treasurer and such other officers as may be provided in the by-laws.
At the time of Galera’s appointment as VP, the by-laws only provided
for one VP and the position was already occupied by Webster. In
addition, she could not have been a Director because the by-laws
likewise provided for only 5 Directors which were all already occupied
as well.
There were several indicators that Galera was a regular employee.
First, the Court applied the 4-fold test. Her employment contract
provided for where and how often she is to perform her work, WPP has
complete control over her wages, and she is likewise subject to WPP’s
regular disciplinary procedures.
Galera’s contract states that her right of redress is through Mindshare’s
Chief Executive Officer for the Asia-Pacific. This implies that she was
not under the disciplinary control of WPP’s BOD, which should be the
case if she was in fact a corporate officer because only the BOD could
appoint and terminate such a corporate officer.
Her contract also clearly states that she is a regular employee and not
VP or a BOD member.
Galera being a regular employee, the LA and NLRC had jurisdiction
over the present case.
• Business judgment rule:
 - Questions of policy or management are left solely to the
honest decision of officers and directors of a corporation
and the courts are without authority to substitute their
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 or the SEC. (Montelibano v. Bacolod-Murica)
- GR: Contracts intra vires entered into by the board of
directors are binding upon the corporation beyond the
interference of courts. The courts are barred from
intruding into business judgments of corporations, when
the same are made in good faith (Ong v Tiu, G.R. No.
144476. April 8, 2003).
Except:
1. Unconscionable and oppressive as to amount to wanton
destruction to the rights of the minority,
2. Bad faith or gross negligence by the director.
Requirement for the Business Judgment Rule to apply:
1. Presence of a business decision including decisions on
policy management and administration;
2. The decision must be intra vires and must comply with
the procedural and substantive requirements of law;
3. Good faith
4. Due care in making the decision;
5. The director must not have personal interest or nor self-
dealing or otherwise on breach of the duty of loyalty.
(Villanueva, 2018)
o Presidential Commission on Good
Government v. Gutierrez (G.R. No.
189800, 9 July 2018)
FACTS:
The Bicolandia Sugar Development Corporation (BISUDECO) is a
domestic corporation engaged in the business of sugarcane milling.
Seeking to have its authorized capital increased, it filed for a loan
request with the Philippine National Bank (PNB) for the issuance of a
standby letter credit. However, at the time that the loan was approved
by PNB’s BOD, BISUDECO had no sufficient capital and collateral, and
had assets amounting to only P510,000.00 as reflected in its Balance
Sheet. Because of its failure to comply with the conditions of the loan
(that it must have sufficient capital and collateral), BISUDECO
requested for modifications in the guarantee conditions which PNB
subsequently approved.
However, BISUDECO was still unable to comply with the modified
guarantee conditions. Nonetheless, PNB still allowed (through a BOD
resolution) the implementation of a letter of credit to increase its
authorized capital of P36.3 Million.
According to PCGG, from 1977 to 1985, PNB continued to extend
unwarranted accommodations thru loans to BUSIDECO despite
continuously incurring losses in its milling operations resulting to capital
deficiency.
In 1987, thru a Deed of Transfer, PNB's rights, titles and interests were
transferred to the Philippine Government, including the account of
BISUDECO. The Presidential Ad Hoc Committee found that the loan
accounts of BUSIDECO were behest loans due to the following
characteristics: a) the accounts were under collateralized; and b)
the borrower corporation was undercapitalized.
Consequently, PCGG filed with the Ombudsman a complaint against
private respondents (in their capacities as members of PNB's Board of
Directors and Officers of BISUDECO) for violation of Sections 3(e) and
(g) of Republic Act (R.A.) No. 3019 or the Anti-Graft and Corrupt
Practices Act. However, the Ombudsman dismissed the case for lack
of probable cause and prescription.
ISSUE: W/N the private respondents, as directors of PNB, are liable –
NO.
HELD:
As a general rule, a corporation has a separate and distinct personality
from those who represent it. Its officers are solidarily liable only when
exceptional circumstances exist, such as cases enumerated in Section
31 of the Corporation Code. The liability of the officers must be proven
by evidence sufficient to overcome the burden of proof borne by the
plaintiff.
Pursuant to Sec. 31 of the Corporation Code, personal liability will
only attach to a director or officer if they are guilty of any of the
following: (1) willfully or knowingly vote or assent to patently
unlawful acts of the corporation; (2) gross negligence; or (3) bad
faith.
PCGG failed to allege in the complaint and in the present petition the
particular acts of private respondents which constitutes a violation of
Sections 3(e) and (g) of R.A. No. 3019. It is not sufficient for PCGG to
merely provide a list of names of the PNB Board members for the years
covering the subject loans absent proof of the latter's individual
participation in the approval thereof.
o Ayala Land, Inc. v. ASB Realty Corp.
(G.R. No. 210043, 26 September 2018)
FACTS:
· ALI and ASBRC are domestic corporations engaged in
real estate development. While EMRASON is a domestic
corporation principally organized to manage a 373-hectare
property located in Dasmariñas.
PETITIONER’S VERSION:
· ALI claimed that EMRASON’s brokers sent a proposal
for a joint venture agreement between ALI and EMRASON for
the development of the Dasmariñas property. ALI initially
declined but eventually negotiated with Emerito Ramos, Jr.,
Januario and Antonio Ramos to discuss the terms of the JVA.
According to ALI, EMRASON made it appear that Ramos, Jr.,
Antonio and Januario had full authority to act on behalf of the
corporation in relation to the JVA. ALI alleged that Emerito
Ramos Sr., then EMRASON’s President and Chairman, wrote
to ALI and acknowledge Ramos Jr., and Antonio were fully
authorized to represent EMRASON in the JVA.
· ALI and the Ramos children subsequently entered into
a contract to sell the property. ALI alleged that it came to know
that a Letter-Agreement and a Real Estate Mortgage with
respect to the Dasmariñas property was executed by Ramos
Jr., and Antonio for and in behalf of EMRASON, to ASBRC. It
also alleged that the Ramos children wrote to ASBRC’s
President, Luke Roxas, informing them of the contract to sell
between ALI and EMRASON.
RESPONDENT’S VERSION
· According to respondents, it was ALI who submitted a
proposal to EMRASON to purchase the property which was
however rejected. EMRASON, through Ramos Sr., informed
ALI that it had decided to accept the proposal of ASBRC
because the latter’s term were more beneficial and
advantageous to EMRASON. ASBRC and EMRASON entered
into an agreement and then EMRASON executed a Real Estate
Mortgage in relation to the agreement.
· Prior to the execution of the agreement, a special
stockholders’ meeting was held, during which EMRASON’s
stockholders “authorized, approved, confirmed and ratified” the
resolution of EMRASON’s Board of Directors [Board
Resolution]. The Board Resolution, which approved the
agreement and authorized Ramos Sr., and Antonio to sign the
same, was approved by EMRASON’s stockholders on the same
date. After ASBRC learned about the contract to sell executed
between ALI and the Ramos children and the annotation of the
Contract to Sell on the transfer certificates of title covering the
property, ASBRC and EMRASON filed a complaint for the
nullification of the contract to sell and the cancellation of the
annotations on the TCTs over the Dasmariñas property.
ISSUE: Whether there is a valid contract to sell between ALI and the
Ramos Children
HELD: No, there is no valid contract between them. A contract is void
if one of the essential requisites of contracts under Article 1318 of the
NCC is lacking. Consent, being one of these requisites, is vital to the
existence of a contract. For juridical entities, consent is given through
its board of directors. A juridical entity, like EMRASON, cannot act
except through its board of directors as a collective body, which is
vested with the power and responsibility to decide whether the
corporation should enter into a contract that will bind the corporation,
subject to the articles of incorporation, by-laws, or relevant provisions
of law.
In viewing the letter of Ramos Sr., to ALI, it authorized Ramos Jr., and
Antonio merely to collaborate and continue negotiating and discussing
with ALI, the terms and conditions that are mutually beneficial to the
parties therein. Nothing more, nothing less. Acts done by the corporate
officers beyond the scope of their authority cannot bind the corporation
unless it has ratified such acts expressly or is estopped from denying
them. What is clear from the letter is that EMRASON authorized the
Ramos children only to negotiate the terms of a potential sale over the
Dasmariñas property, and not to sell the property in an absolute way or
act as signatories in the contract.
The very filing of the instant case by EMRASON against ALI and the
Ramos children not only for the nullification of the contract to sell but
also for the confirmation of the agreement between ASBRC and
EMRASON is a pure and simple ratification on the part of EMRASON
of Ramos Sr.,’s act of entering into the said agreement.
o Metroheights Subdivision Homeowners
Association, Inc. v. CMS Construction
and Development Corp. (G.R. No.
209359, 17 October 2018)
FACTS:
· Petitioner sought the assistance of Metropolitan
Waterworks and Sewage System [MWSS] to address the
insufficient supply of water in its subdivision to which the latter
advised the improvement and upgrading of its private internal
water distribution lines. Petitioner entered into a contract with
MWSS for the new water service connection and MWSS
awarded the project to a contractor which implemented the
same, the cost of which was solely shouldered by the
contribution from petitioner’s members; and that since then,
there was already sufficient and strong water pressure 24 hours
a day in the petitioner subdivision.
· In April 1992, respondent corporation made diggings
and excavations and started to lay water pipes along petitioner’s
neighboring subdivision; that in the process, respondent
corporation, with the knowledge and consent of MWSS but
without petitioner’s knowledge and consent, unilaterally cut-off
and disconnected the latter’s new and separate water service
connection. Petitioner’s members were waterless for 3 days and
the PVC pipes that was owned by petitioner were stolen by the
workers of CMS Construction. When the petitioner’s officers
discovered of the illegal cutting of the water connection, they
immediately complained to the respondents CMS Corporation
and MWSS and demanded for the restoration of their water line;
that CMS Construction only made a temporary reconnection
with the use of a 2-inch rubber hose to the new water line it
constructed in Sanville Subdivision; and that despite the verbal
and written demands, respondents have failed to restore
petitioner’s water line connection in its original state and to
return the missing PVC pipes and radius elbow.
ISSUE: Whether the respondents should be held liable for damages for
the cutting off, disconnection and transfer of petitioner’s existing
separate water service connection without the latter’s knowledge and
consent which resulted in petitioner’s subdivision being waterless
HELD: Yes, respondents MWSS and CMS Construction should be held
liable for damages to petitioner but not the Cruzes who are the directors
and stockholders of respondent CMS Construction. Section 31 of the
Corporation Code is the governing law on personal liability of officers
for the debts of the corporation.
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 liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other
persons.

D. Stockholders
• Who are Stockholders
- A person becomes a shareholder the
moment he:
• Enters into a subscription contract
with an existing corporation )he is a
stockholder upon acceptance of the
corporation of his offer to subscribe
whether the consideration is full paid
or not);
• Purchase treasury shares from the
corporation;
• Acquires shares from existing
shareholders by sale or any other
contract, or acquires shares by
operation of law like succession (
• Rights of Stockholders
o Right to Attend Meetings / Vote
• The stockholders can
exercise their right to vote
through the election,
replacement and removal
of Board of Directors or
Trustees and on other
corporate acts which
require stockholders’
approval.
• Nature: One of the rights of
a stockholder is the right to
participate in the control
and management of the
corporation that is
exercised through his vote.
The right to vote is a right
inherent in and incidental
to the ownership of
corporate stock, and such is
a property right (Castillo v.
Balinghasay, 440 SCRA
442, 2004).
• Treasury shares shall have
no voting rights as long as
such shares remain in
treasury.
-
o Right to Dividends
• It is the right of the
stockholder to demand
payment of dividends after
the board’s declaration.
Stockholders are entitled to
dividends pr rata based on
the total number of shares
that they own and not on
the amount paid for the
shares.
• G.R. Stock corporations are
prohibited from retaining
surplus profits in excess of
100% of their paid-in
capital stock.
• XPN:
a) When justified by definite
corporate expansion projects
or programs approved by the
board of directors; or
b) When the corporation is
prohibited under any loan
agreement with any financial
institution or creditor, whether
 local or foreign, from declaring
dividends without its/his
consent, and such consent has
not yet been secured; or
c) When it can be clearly
shown that such retention is
necessary under special
circumstances obtaining in the
corporation, such as when
there is need for special
reserve for probable
contingencies (Sec. 43, CC)
• Villongco (G.R. 225024, 5 February 2018)
o Appraisal Right - Section 80 (RCC)
• It refers to the right of the
stockholder to demand
payment of the fair value of
his shares, after dissenting
from a proposed corporate
action involving a distributed among Geronima's six children, namely: Carolina Que
fundamental change in the
charter or articles of
incorporation in the cases
provided by law (De Leon,
2010).
•
SEC. 80. When the Right of Appraisal May Be Exercised. – Any
stockholder of a corporation shall have the right to dissent and demand
payment of the fair value of the shares in the following instances:
(a) In case an amendment to the articles of incorporation has the effect
of changing or restricting the rights of any stockholder or class of shares,
or of authorizing preferences in any respect superior to those of
outstanding shares of any class, or of extending or shortening the term
of corporate existence;
(b) In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and assets
as provided in this Code;
(c) In case of merger or consolidation; and
(d) In case of investment of corporate funds for any purpose other than
the primary purpose of the corporation.
• Carolina Que-Villongco, et al. v. Cecilia Que-
Yabut, et al. (G.R. 225022, 5 February 2018)
Cecilia Que-Yabut, et al. v. Carolina Que-
FACTS: Phil-Ville Development and Housing Corporation (Phil-Ville) is
a family corporation founded by Geronima Gallego Que (Geronima)
that is engaged in the real estate business. The authorized capital stock
of PhilVille is Twenty Million Pesos (₱20,000,000) divided into Two
Hundred Thousand (200,000) shares with a par value of One Hundred
Pesos (₱l00.00) per share. During her lifetime, Geronima owned 3,140
shares of stock while the remaining 196,860 shares were equally
Villongco, Ana Maria Que Tan, Angelica Que Gonzales, Cecilia Que
Yabut, Ma. Corazon Que Garcia, and Maria Luisa Que Camara.
Geronima died and Cecilia as the attorney-in-fact of Geronima, Cecilia
allegedly effected an inequitable distribution of the 3,140 shares that
belonged to Geronima.
Carolina, Ana Maria, and Angelica, comprising the majority of the Board
of Directors of Phil-Ville held an emergency meeting and made a
decision, by concensus, to postpone the annual stockholders' meeting
of Phil-Ville until the issue of the distribution of the 3,140 shares of
stocks in the name of certain stockholders is settled. All the
stockholders were apprised of the decision to postpone the meeting in
a letter dated January 21, 2013. Ana Maria, in her capacity as
Corporate Secretary and Director of Phil-Ville likewise gave notice to
the Securities and Exchange Commission (SEC) with regard to the
postponement of the meeting. however, Cecilia, et. al. proceeded with
the scheduled annual stockholder's meeting participated only by a few
stockholders where they elected the new members of the Board of
Directors and officers of Phil-Ville namely: Cecilia, Ma. Corazon and
Eumir, Chairman/Vice President/Treasurer, President/General
Manager, and Secretary, respectively.
Carolina, Ana Maria, Angelica, Elaine and Edison Williams filed the
instant election case against [Cecilia Que, et al.] before the RTC of
Malabon City and prayed that the election of Cecilia, Ma. Corazon and
Eumir Carlo as directors be declared void considering the invalidity of
the holding of the meeting for lack of quorum therein, the questionable
manner by which it was conducted, including the invalid inclusion in the
voting of the shares of the late Geronima, the questionable validation
of proxies, the representation and exercise of voting rights by the
alleged proxies representing those who were not personally present at
the said meeting, and the invalidity of the proclamation of the winners.
RTC rendered a Decision declaring the election of Cecilia Que, et al.
as void and of no effect considering the lack of quorum during the
annual stockholders' meeting conducted by the latter.
ISSUE: Whether the total undisputed shares of stocks in Phil-Ville
should be the basis in determining the presence of a quorum
HELD: Total outstanding capital stocks, without distinction as to
disputed or undisputed shares of stock, is the basis in determining the
presence of quorum.
Carolina et. al., claimed that the basis for determining quorum should
have been the total number of undisputed shares of stocks of Phil-Ville
due to the exceptional nature of the case since the 3,140 shares of the
late Geronima and the fractional .67, .67, and .66 shares of Eumir Que
Camara; Paolo Que Camara and Abimar Que Camara are the subject
of another dispute filed before the RTC. Thus, excluding the 3,142
shares from the 200,000 outstanding capital stock, the proper basis of
determining the presence of quorum should be 196,858 shares of
stocks.
Section 52 of the Corporation Code states that:
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.
While Section 13 7 of the same Code defines "outstanding capital
stock", 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.
It is settled that unissued stocks may not be voted or considered in
determining whether a quorum is present in a stockholders' meeting.
Only stocks actually issued and outstanding may be voted. Thus, for
stock corporations, the quorum is based on the number of outstanding
voting stocks. The distinction of undisputed or disputed shares of stocks
is not provided for in the law or the jurisprudence. The 200,000
outstanding capital stocks of Phil-Ville should be the basis for
determining the presence of a quorum, without any distinction.
Therefore, to constitute a quorum, the presence of 100,001 shares of
stocks in Phil-Ville is necessary.
SC affirmed the CA’s decision when it held that only 98,430 shares of
stocks were present during the January 25, 2014 stockholders meeting
at Max's Restaurant, therefore, no quorum had been established.
In this case, there is no evidence that the 3,140 shares of the late
Geronima were recorded in the stocks and transfer book of Phil-Ville.
Thus, insofar as Phil-Ville is concerned, the 3,140 shares of the late
Geronima allegedly transferred to several persons is non-existent.
Therefore, the transferees of the said shares cannot exercise the rights
granted unto stockholders of a corporation, including the right to vote
and to be voted upon.
• Florete, Sr., et al. v. Florete, Jr. and Muyco (G.R.
No. 223321, 2 April 2018)
FACTS:
Marsal & Co was organized as a close corporation by Marcelino Sr.,
Salome, Rogelio, Marcelino Jr., Ma. Elena, and Teresita (all surnamed
Florete). Since its incorporation, their Articles of Incorporation (AOI) has
been amended several times to increase its authorized capital stocks
of P500,000 to P5,000,000. Notwithstanding the amendments,
paragraph 7 of their AOI which provides for the procedure in the sale of
the shares of stocks of a stockholder remained the same, which
requires that any stockholder who desires to sell his share of stock in
the company must notify in writing the Board of his intention to sell, who
in turn must notify all stockholders on record. The latter has has the
preemptive right to buy any share offered for sale by any stockholder
of the company on book value base[d] on the balance sheet approved
by the Board of Directors.
Teresita died, leaving her estate to her husband. However, the latter
ceded all the shareholdings of Teresita to Rogelio. A year after,
Marcelino Sr. died. His estate was divided among Rogelio (½) and ¼
each for Marcelino Jr. and Ma. Elena. An order was also issued noting
the sale of all the shares of the late Teresita which she inherited from
her deceased parents to petitioner Rogelio.
Respondents Marcelino Jr. and Ma. Elena filed with the RTC a case for
annulment/rescission of sale of shares of stocks and the exercise of
their pre-emptive rights in Marsal corporation and damages against
petitioners Rogelio Florete, Sr. and the estate of the late Teresita,
alleging that the sale of Teresita's 3,464 Marsal shares of stocks made
by petitioner estate to petitioner Rogelio was void ab initio as it violated
Marsal’s AOI, since the sale was made without written notice to
the BOD who was not able to notify respondents in writing of the
petitioner estate and heirs' intention to sell and convey the Marsal
shares and depriving respondents of their preemptive rights.
RTC held in favor of Rogelio. However, this was reversed by the CA.
ISSUE:
Whether the sale of Teresita's 3,464 Marsal shares of stocks made by
petitioner estate of Teresita to petitioner Rogelio was in violation of
paragraph 7 of Marsal's Article of Incorporation and hence null and void
and must be annulled or rescinded.
HELD:
No. The Court held that while it would appear that the petitioners did
not comply with the procedure on the sale of Teresita's Marsal shares
as stated under paragraph 7 of the AOI, however, it appeared in the
records that respondents had nonetheless been informed of such
sale to which they had already given their consent thereto as
shown by the following circumstances:
First, the counsel of Marsal had conformed with the compromise
agreement where Rogelio got the shares of Teresita. As counsel,
it would be impossible for him to not have informed the
respondents of such agreement since they are the stockholders and
BOD of Marsal.
Second, there was already substantial compliance with paragraph
7 of the AOI when respondents obtained actual knowledge of the
sale of Teresita's 3,464 Marsal shares to petitioner Rogelio.
Respondents had already given their consent and conformity to
such sale by their inaction for 17 years despite knowledge of the sale.
As provided in Sec 99 of the Corporation Code, even if the transfer of
stocks is made in violation of the restrictions enumerated, such
transfer is still valid if it has been consented to by all the
stockholders of the close corporation and the corporation cannot
refuse to register the transfer of stock in the name of the
transferee. In this case, We find that the sale of Teresita's 3,464 Marsal
shares had already been consented to by respondents as the Court has
discussed, and may be registered in the name of petitioner Rogelio.
The Court finds that there is indeed no violation of paragraph 7 of
Marsal's Articles of Incorporation.
E. Members
• Chapter 1, Title XI (RCC)
• Right to Vote – Section 88 (RCC)
SEC. 88. Right to Vote. – The right of the members of any class or
classes to vote may be limited, broadened, or denied to the extent
specified in the articles of incorporation or the bylaws. Unless so
limited, broadened, or denied, each member, regardless of class, shall
be entitled to one (1) vote.
Unless otherwise provided in the articles of incorporation or the bylaws,
a member may vote by proxy, in accordance with the provisions of this
Code. The bylaws may likewise authorize voting through remote
communication and/or in absentia.
- In non-stock corporations, the voting rights
attach to membership. Members vote as persons,
in accordance with the law and the By-Laws of
the corporation. Each member shall be entitled to
one vote unless so limited, broadened or denied
in the AOI or By-Laws.
- Quorum : Only those who are actual members
with voting rights should be counted.
- By-Laws of non-stock corporation may provide
for a quorum that is more or less than the majority
of the members.
o Ao-As v. CA (491 SCRA [2006])
FACTS:
Lutheran Church in the PH (LCP) is a religious organization duly
registered with the SEC. Its members are comprised of the Luthergan
clergymen and local congregations, which was divided into 3 districts:
North Luzon (NLD), South Luzon (SLD) and Mindanao (MDD).
The original governing body of the LCP is its national BOD composed
of 7 members serving a term of two years, but it later increased into 11
through a resolution creating additional districts, pursuant to the LCP
By-laws which provides that: "LCP in convention may form additional
districts as it sees fit". The members were elected separately in their
districts, and a national president is elected at large in a national
convention every year. No controversies arose from the formation of
additional districts until there was an issue involving an LCP business
manager who was terminated. The termination of Mr. Hipe sparked a
series of intracorporate complaints lodged before SEC questioning the
legality of the 11 member Board since the Articles of Incorporation was
not amended. All were denied in favor of the SEC Management
Committee.
The respondents Batong group appealed to the CA seeking to annul
the decision of the SEC, contending that the Ao-As group (petitioners
herein) persisted in carrying out ultra vires and illegal acts. The CA held
in favor of the Batong group, ruling that the manner of elections of the
directors of the LCP as provided in their by-laws is contrary to Sec 24
of the Corp Code, because majority of the members are not present
which is the requirement in election of trustees in a non-stock
corporation.
ISSUE:
Whether the manner of elections of the BOD of the LCP is invalid as
provided for in its By-Laws.
HELD:
NO. The Court held that the stipulation in the By-Laws is not contrary
to the Corporation Code. Sec 89 (now 88) of the Corporation Code
pertaining to non- stock corporations provides that "the 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." 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.”
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.
o
• Nature of Membership in a Corporation –
Section 89 (RCC)
SEC. 89. Nontransferability of Membership. – Membership in a
nonstock corporation and all rights arising therefrom are personal and
non-transferable, unless the articles of incorporation or the bylaws
otherwise provide.
 - Rationale: as a GR, membership in a non-
stock corporation and the rights arising
therefrom are not transferable. The reason is
that membership in a non-stock corporation
has personal elements that require
qualification by social and other ties.
- Exception: AOI or the By-Laws may provide
for transferability of membership. If
transferable, the terms and conditions under
which transfer or membership in the non-
stock corporation may be effected may be
spelled out in the AOI and By-Laws. For the
transfer may be valid, such terms and
conditions must be strictly complied with,
the transfer being the exception and not the
general rule.
- TRANSFER : includes all transactions
whereby the property of one person
becomes that of another, whether by descent
and purchase. Hence, the prohibition
expressed in Sec. 89 of the RCCP includes
transfer by inheritance. In other words, the
heirs of the deceased member will not
acquire the membership unless the AOI or
By-Laws of the non-stock corporation
provides for such transfer.
- find that petitioners violated the rules governing human relations, the
o Cebu Country Club, Inc. v. Elizagaque
(542 SCRA 65 [2008])
Facts: Cebu Country Club, Inc. (CCCI), petitioner, is a domestic
corporation operating as a non-profit and non-stock private
membership club, having its principal place of business in Banilad,
Cebu City. Petitioners herein are members of its Board of Directors.
San Miguel Corporation, a special company proprietary member of
CCCI, designated respondent Ricardo F. Elizagaque, its Senior Vice
President and Operations Manager for the Visayas and Mindanao, as
a special non-proprietary member. The designation was thereafter
approved by the CCCI’s Board of Directors. respondent filed with CCCI
an application for proprietary membership. The application was
indorsed by CCCI’s two (2) proprietary members, namely: Edmundo T.
Misa and Silvano Ludo.
As the price of a proprietary share was around the P5 million range,
Benito Unchuan, then president of CCCI, offered to sell respondent a
share for only P3.5 million. Respondent, however, purchased the share
of a certain Dr. Butalid for only P3 million. Consequently, on September
6, 1996, CCCI issued Proprietary Ownership Certificate No. 1446 to
respondent.
ISSUE: whether in disapproving respondent’s application for
proprietary membership with CCCI, petitioners are liable to respondent
for damages, and if so, whether their liability is joint and several.
RULING: Obviously, the CCCI Board of Directors, under its Articles of
Incorporation, has the right to approve or disapprove an application for
proprietary membership. But such right should not be exercised
arbitrarily. Articles 19 and 21 of the Civil Code on the Chapter on
Human Relations provide restrictions, thus:
“Article 19. Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith.
Article 21. Any person who willfully causes loss or injury to another in a
manner that is contrary to morals, good customs or public policy shall
compensate the latter for the damage.”
In rejecting respondent’s application for proprietary membership, we
basic principles to be observed for the rightful relationship between
human beings and for the stability of social order. The trial court and
the Court of Appeals aptly held that petitioners committed fraud and
evident bad faith in disapproving respondent’s applications. This is
contrary to morals, good custom or public policy
o Calatagan Golf Club, Inc. v. Clemente,
Jr. (585 SCRA 300 [2009])
FACTS: Calatagan charges monthly dues on its members to meet
expenses for general operations, as well as costs for upkeep and
improvement of the grounds and facilities. The provision on monthly
dues is incorporated in Calatagan’s Articles of Incorporation and By-
Laws. It Calatagan charges monthly dues on its members to meet
expenses for general operations, as well as costs for upkeep and
improvement of the grounds and facilities. The provision on monthly
dues is incorporated in Calatagan’s Articles of Incorporation and By-
Laws. It – P.O. Box 240, MCC,” complete residential address, office
and residence telephone numbers, as well as the company (Phimco)
with which he was connected, Calatagan issued to him Certificate of
Stock No. A-01295 on 2 May 1990 after paying P120,000.00 for the
share.2
Calatagan charges monthly dues on its members to meet expenses for
general operations, as well as costs for upkeep and improvement of the
grounds and facilities. The provision on monthly dues is incorporated in
Calatagan’s Articles of Incorporation and By-Laws. Calatagan declared
Clemente delinquent for having failed to pay his monthly dues for more
than sixty (60) days, notice of auction sale was posted on the Club’s
bulletin board, as well as on the club’s premises specifically P5,600.00
as of 31 October 1992. Calatagan also included Clemente’s name in
the list of delinquent members posted on the club’s bulletin board.
ISSUE: Whether calatagan comply with the by law provisions when it
sold clemente;s share.
RULING:: Under the By-Laws, the Corporate Secretary is tasked to
“give or cause to be given, all notices required by law or by these By-
Laws... and … keep a record of the addresses of all stockholders. As
quoted above, Sec. 32 (a) of the By-Laws further provides that “within
ten (10) days after the Board has ordered the sale at auction of a
member’s share of stock for indebtedness under Section 31 (b) hereof,
the Secretary shall notify the owner thereof and shall advise the
Membership Committee of such fact.,” The records do not disclose
what report the Corporate Secretary transmitted to the Membership
Committee to comply with Section 32(a). Obviously, the reason for this
mandatory requirement is to give the Membership Committee the
opportunity to find out, before the share is sold, if proper notice has
been made to the shareholder member.
We presume that the Corporate Secretary, as a lawyer is
knowledgeable on the law and on the standards of good faith and
fairness that the law requires. As custodian of corporate records, he
should also have known that the first two letters sent to Clemente were
returned because the P.O. Box had been closed. Thus, we are
surprised—given his knowledge of the law and of corporate records—
that he would send the third and final letter—Clemente’s last chance
before his share is sold and his membership lost—to the same P.O.
Box that had been closed.
Calatagan argues that it “exercised due diligence before the foreclosure
sale” and “sent several notices to Clemente’s specified mailing
address.” We do not agree; we cannot label as due diligence
Calatagan’s act of sending the December 7, 1992 letter to Clemente’s
mailing address knowing fully well that the P.O. Box had been closed.
Due diligence or good faith imposes upon the Corporate Secretary—
the chief repository of all corporate records—the obligation to check
Clemente’s other address which, under the By-Laws, have to be kept
on file and are in fact on file. petition must fail because Calatagan had
failed to duly observe both the spirit and letter of its own by-laws. The
by-law provisions was clearly conceived to afford due notice to the
delinquent member of the impending sale, and not just to provide an
intricate façade that would facilitate Calatagan’s sale of the share. But
then, the bad faith on Calatagan’s part is palpable
o Valley Golf and Country Club v. Vda de
Caram (585 SCRA 218 [2009])
FACTS: Deceased husband (Caram) of the private respondent
subscribed to, purchased, and paid for in full 1 share (golf share) in the
capital stock of petitioner and a stock certificate in his name was issued
accordingly. Petitioner alleged that Caram stopped paying his monthly
dues. As such, petitioner sent letters, notice of delinquency, and
suspended his club privileges, advised him that petitioner would
exercise its right to sell the golf share to satisfy the outstanding amount
pursuant to the by-laws provisions. The golf share was then sold at
public auction. As it turned out, Caram had died in 1986. Included in his
estate proceedings was the golf share and the heirs only learned of the
sale following their inquiry with the petitioner. The heirs were later
informed that they were entitled to a refund out of the proceeds of the
sale. In an action filed by the heirs, the SEC ruled in favor of them since
pursuant to Sec 6 of the Corporation Code, a provision creating a lien
upon shares of stock for unpaid debts, liabilities, or assessments of
stockholders to the corporation, should be embodied in Articles of
Incorporation. The Court of Appeals affirmed the SEC’s decision and
held that the by-law provisions are of doubtful validity as they
purportedly conflict with Sec 6 of the Code. Another noteworthy fact
was mentioned by the SEC hearing officer that the petitioner’s third and
fourth demand letters were both addressed to “Est of Caram”, which
refers to estate. Petitioner still argued that its by-laws constitute valid
law or contractual agreement between the corporation and its
stockholders.
ISSUE: WON the actions of Valley Gold concerning the Golf Share
and membership of Caram warranted
HELD: No. The Court first clarified that the termination of membership
may also be provided for by the by-laws of the Corporation, quoting
Sec. 91 of the Corporation Code that states that membership shall be
terminated in the manner and for the causes provided in the articles of
incorporation or the by-laws. Further the Court explained that generally
in theory, a non-stock corporation has the power to effect the
termination of a member without having to constitute a lien on the
membership share or to undertake the elaborate process of selling the
same at public auction. The articles of incorporation or the by-laws can
very well simply provide that the failure of a member to pay the dues on
time is cause for the board of directors to terminate membership. Yet,
Valley Golf was organized in such away that membership is adjunct to
ownership of a share in the club; hence the necessity to dispose of the
share to terminate membership. Share ownership introduces another
dimension to the case- the reality that termination of membership may
also lead to the infringement of property rights. As such, termination of
membership in Valley Golf does not merely lead to the withdrawal of
the rights and privileges of the member to club properties and facilities
but also to the loss of the Golf Share itself for which the member fully
paid. While the Court recognizes the fact that termination may be
effected without any notice at all, the membership in Valley Gold entails
the acquisition of a property right. Thus, when the loss of membership
in a non-stock corporation also entails the loss of property rights, the
manner of deprivation of such property right should also be in
accordance with the provisions of the Civil Code. As such, the Court
held that the termination in a non-stock corporation should be done in
accordance with substantial justice. The Court ruled that the termination
of Caram’s membership betrayed the dictates of substantial justice. The
Court found that Valley Gold acted in clear bad faith when it sent the
final notice to Caram under the pretense they believed him to be still
alive, when in fact they had very well known that he had already died.
This was in contravention of Articles 19, 20, and 21 of the Civil Code
that impose an obligation to act fairly and in good faith, and non-stock
corporations and its officers are not exempt from the same. The Court
ruled that the arrangement whereby a lien is constituted on the
membership share to answer for subsequent obligations to the
corporation finds applicable parallels under the Civil Code. In this case,
Caram had not signed any document that manifests his agreement to
constitute his golf share as security in favor of petitioner to answer for
his obligations to the club.
o Tan v. Sycip (499 SCRA 216 [2006])
FACTS: Petitioner Grace Christian High School is a non-stock, non-
profit educational corporation with 15 regular members who also
constitute the board of trustees. During its annual members’ meeting in
1998, there were only 11 living member-trustees as 4 had already died.
Out of the 11, 7 attended the meeting and election took place to replace
the 4 deceased member-trustees. Later, the SEC hearing officer
declared that said annual meeting was null and void for lack of quorum
on the ground that the basis for determining the quorum in a meeting
should be their number as specified in the articles of incorporation, not
simply the number of living members. 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 and interests in the corporation.
ISSUE: WON the deceased member-trustees should be counted in
the computation of the quorum.
HELD: The Supreme Court ruled in the negative. The Court held that
when the principle for determining the quorum for stock corporation is
applied by analogy to nonstock corporation, only those who are actual
members with voting rights should be counted. 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. The determination of whether or no dead
members are entitled to exercise their voting rights depends on those
articles of incorporation or bylaws. Under the Bu-laws of the petitioner,
membership in the corporation shall, among others, be terminated by
the death of the member. Applying Sec. 91 of the Corporation Code,
the Court held that dead members who are dropped from the
membership roster in the manner and for the cause provided for in the
By-laws are not to be counted in determining the requisite vote in
corporation matters of the requisite quorum for the annual members’
meeting. Thus, there being a quorum, the annual members’ meeting
was valid.
• Termination of membership – Section 90
(RCC)
SEC. 90. Termination of Membership. – Membership shall be
terminated in the manner and for the causes provided in the articles of
incorporation or the bylaws. Termination of membership shall
extinguish all rights of a member in the corporation or in its property,
unless otherwise provided in the articles of incorporation or the bylaws.
- Acceptance of Membership: non-stock and
non-profit corporations may usually accept or
refuse members as they choose, subject to the
provisions of its AOI and By-Laws. In the
absence of charter or statutory restrictions, a non-
stock corporation may determine who shall be
admitted to membership and how they shall be
admitted. It may exclude any person whom it
deems unfit for membership. The non-stock
corporation is free to fix the qualifications for
membership and in the absence of restrictions,
the courts may not intervene.
- Termination of Membership: Since the power
to admit members pertains to the Board in the
absence of any contrary provisions in the Articles
and By-Laws, it must logically be the Board of
Trustees who has the power to terminate a
membership. In short, one’s status as member of
non-stock corporation is not within the absolute
control of the member but is generally within that
of the Board.
F. Intra-corporate disputes
• Cacho, et al. v. Balagtas (G.R. No. 202974, 7
February 2018)
FACTS:
This case stemmed from a Complaint for constructive dismissal filed by
respondent Virginia D. Balagtas (Balagtas) against petitioners North
Star International Travel, Inc. (North Star) and its President Norma D.
Cacho (Cacho) before the Labor Arbiter.
Balagtas alleged that she was a former employee of respondent North
Star International Travel, Inc. She also alleged that she was one of the
original incorporators-directors of the said corporation and later
became the Executive Vice President/Chief Executive Officer.
After 14 years of service in the said corporation, petitioner was placed
under 30 days preventive suspension pursuant to a Board Resolution
passed by the Board of Directors of the respondent Corporation due to
her alleged questionable transactions.
While under preventive suspension, Balagtas wrote a letter to private
respondent Norma Cacho informing the latter that she was assuming
her position as Executive Vice-President/Chief Executive Officer
however, she was prevented from re-assuming her position.
Consequently, Balagtas filed a complaint claiming that she was
constructively and illegally dismissed.
In their defense, respondents averred that, majority of the Board of
Directors of respondent corporation decided to suspend Balagtas for
30 days due to the questionable documents and transactions she
entered into without authority.
Respondents alleged that Balagtas violated her suspension when, on
several occasions, she went to the respondent corporation's office and
insisted on working despite respondent Norma Cacho's protestation.
Respondents also alleged that the complaint for constructive dismissal
was groundless. They asserted that petitioner was not illegally
dismissed but was merely placed under preventive suspension.
Labor Arbiter - found that respondent Balagtas was illegally dismissed
from North Star.
NLRC - North Star prayed that Balagtas's Complaint be dismissed for
lack of jurisdiction.
NLRC ruled that respondent Balagtas was a corporate officer of North
Star at the time of her dismissal and not a mere employee. A corporate
officer's dismissal is always an intra-corporate controversy, a
subject matter falling within the Regional Trial Court's (RTC)
jurisdiction.
Court of Appeals - reversed. Not an intra-corporate issue but labor.
Balagtas is not a corporate officer.
. cited provision of the bylaws includes the Executive Vice President
ISSUE: WON this case is an intra-corporate controversy
HELD:
Respondent Balagtas's dismissal is an intra-corporate
controversy.
A two-tier test must be employed to determine whether an intra-
corporate controversy exists in the present case, viz.: (a) the
relationship test, and (b) the nature of the controversy test.
A dispute is considered an intra-corporate controversy under the
relationship test when the relationship between or among the
disagreeing parties is any one of the following: (a) between the
corporation, partnership, or association and the public; (b) between the
corporation, partnership, or association and its stockholders, partners,
members, or officers; ( c) between the corporation, partnership, or
association and the State as far as its franchise, permit or license to
operate is concerned; and ( d) among the stockholders, partners, or
associates themselves. We must now determine whether or not the
Executive Vice President position is a corporate office so as to establish
the intra-corporate relationship between the parties.
One shall be considered a corporate officer only if two conditions
are met, viz.: ( 1) the position occupied was created by charter/by-laws,
and (2) the officer was elected (or appointed) by the corporation's board
of directors to occupy said position.
The Executive Vice President position is one of the corporate offices
provided in petitioner North Star's By-laws. Section 25 of the
Corporation Code explicitly provides for the election of the corporation's
president, treasurer, secretary, and such other officers as may be
provided for in the by-laws. In interpreting this provision, the Court has
ruled that if the position is other than the corporate president, treasurer,
or secretary, it must be expressly mentioned in the bylaws in order to
be considered as a corporate office.
North Star’s by-laws provides that there may be one or more vice
president positions in petitioner North Star and, by virtue of its by-laws,
all such positions shall be corporate offices. The next question is
whether or not the phrase "one or more vice president" in the above-
position held by respondent Balagtas.
The use of the phrase "one or more" in relation to the establishment of
vice president positions without particular exception indicates an
intention to give petitioner North Star's Board ample freedom to make
several vice president positions available as it may deem fit and in
consonance with sound business practice. To require that particular
designation/variation of each vicepresident (i.e., executive vice
president) be specified and enumerated is to invalidate the by-laws' true
intention and to encroach upon petitioner North
Star's inherent right and authority to adopt its own set of rules and
regulations to govern its internal affairs. By name, the Executive Vice
President position is embraced by the phrase "one or more vice
president" in North Star's by-laws.
To be considered an intra-corporate controversy, the dismissal of a
corporate officer must have something to do with the duties and
responsibilities attached to his/her corporate office or performed in
his/her official capacity.
The termination complained of is intimately and inevitably linked to
respondent Balagtas's role as petitioner North Star's Executive Vice
President: first, the alleged misappropriations were committed by
respondent Balagtas in her capacity as vice president, one of the
officers
responsible for approving the disbursements and signing the checks.
And, second, these alleged misappropriations breached petitioners
Cacho's and North Star's trust and confidence specifically reposed m
respondent Balagtas as vice president. That all these incidents are
adjuncts of her corporate office lead the Court to conclude that
respondent Balagtas's dismissal is an intracorporate controversy, not a
mere labor dispute.
All told, the issue in the present case is an intra-corporate controversy,
a matter outside the Labor Arbiter's jurisdiction.
• Ellao v. Batangas 1 Electric Cooperative, Inc.
(G.R. No. 2019166, 9 July 2018)
FACTS:
BATELEC I is an electric cooperative organized and existing under
Presidential Decree No. 269 (P.D. 269) and is engaged in the business of
distributing electric power or energy in the province of Batangas,. At the time
material to this petition, respondent Raquel Rowena Rodriguez is the
President of BATELEC I's Board of Directors. Ellao was employed by
BATELEC I initially as Office Supplies and Equipment Control Officer on
January 4, 1982 until he was appointed as General Manager on June 1, 2006.
On February 12, 2009, a complaint was filed by Nestor de Sagun and Conrado
Cornejo against Ellao, charging him of committing irregularities in the
discharge of his functions as General Manager. Ellao was placed under
preventive suspension.
Ellao submitted his explanation refuting the charges against him, after which
the matter was set for hearing. However, the scheduled hearing was
postponed at Ellao's instance. The re-scheduled hearing did not push through,
and instead, the fact-finding body issued a report recommending Ellao's
termination. On March 13, 2009, the Board of Directors adopted and issued
Board Resolution terminating Ellao as General Manager on the grounds of
gross and habitual neglect of duties and responsibilities and willful
disobedience or insubordination resulting to loss of trust and confidence. Ellao
was formally informed of his dismissal from employment made effective on
October 1, 2009. On December 9, 2009, the National Electrification
Administration (NEA) confirmed BATELEC I's Board Resolution approved
Ellao's termination.
On February 23, 2011, Ellao filed a Complaint for illegal dismissal and money
claims before the Labor Arbiter against BATELEC I and/or its President
Rowena A. Rodriguez. Alleging illegal dismissal, Ellao complained that the
charges against him were unsubstantiated and that there was no compliance
with procedural due process as he was not afforded the opportunity to explain
and there was no written notice of termination specifying the grounds of his
termination.
LA: affirmed its jurisdiction over the complaint. Held that the law creating the
NEA, as amended by Presidential Decree No. 1645 (P.D. 1645), granted NEA
the power to suspend or dismiss any employee of electric cooperatives, the
same does not authorize NEA to hear and decide a labor termination case
which power is exclusively vested by Presidential Decree No. 442 or the Labor
Code, to Labor Arbiters.
NLRC: BATELEC I is not a corporation registered with the SEC, but that it was
formed and organized pursuant to P.D. 269 and that Ellao is not an officer but
a mere employee. Denied BATELEC’s appeal.
CA: found merit in BATELEC I's certiorari petition and found that Ellao, as
BATELEC I's General Manager, is a corporate officer. The CA found that under
BATELEC I's By-laws, its Board of Directors is authorized to appoint such
officers as it may deem necessary. It noted that Ellao was appointed as
General Manager by virtue of a board resolution and that Ellao's appointment
was duly approved by the NEA Administrator. The CA also found that the
position of General Manager is specifically provided for under BATELEC I's
By-laws. As such, the CA concluded that Ellao's dismissal is considered an
intra-corporate controversy which falls under the jurisdiction of the SEC, now
the RTC's, and not with the NLRC.
ISSUE:
whether or not jurisdiction over Ellao's complaint for illegal dismissal belong to
the labor tribunals. - No
HELD:
No, the complaints for illegal dismissal filed by a cooperative officer constitute
an intra-cooperative controversy, jurisdiction over which belongs to the
regional trial courts and not the labor tribunals.
As a rule, the illegal dismissal of an officer or other employee of a private
employer is properly cognizable by the labor arbiter pursuant to Article 217
(a)2 of the Labor Code, as amended.
By way of exception, where the complaint for illegal dismissal involves a
corporate officer, the controversy falls under the jurisdiction of the SEC,
because the controversy arises out of intra-corporate or partnership relations
between and among stockholders, members, or associates, or 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 the
controversy concerns their individual franchise or right to exist as such entity;
or because the controversy involves the election or appointment of a director,
trustee, officer, or manager of such corporation, partnership, or association.
With the advent of Republic Act No. 8799 (R.A. 8799) or The Securities
Regulation Code, the SEC's jurisdiction over all intra-corporate disputes was
transferred to the regional trial courts. Since Ellao filed his Complaint for illegal
dismissal on February 23, 2011, after the passage and approval of R.A. 8799,
his complaint may either fall under the jurisdiction of the labor arbiter or the
regional trial courts, depending on his position. If Ellao is determined to be a
corporate officer then jurisdiction over his complaint for illegal dismissal is to
be treated as an intra-corporate dispute, hence jurisdiction belongs to the
regional trial courts.
Matling Industrial and Commercial Corporation, et al., v. Ricardo Coros,the
Court held that in conformity with Section 25 of the Corporation Code, "a
position must be expres sly mentioned in the By-Laws in order to be
considered as a corporate office. Thus, the creation of an office pursuant to or
under a By-Law enabling provision is not enough to make a position a
corporate office." Citing Guerrea v. Lezama, et al.,Matling held that the only
officers of a corporation were those given that character either by the
Corporation Code or by the By-Laws so much so that the rest of the corporate
officers could be considered only as employees or subordinate officials.
Here, the position of General Manager is expressly provided for under Article
VI, Section 10 of BATELEC I's By-laws, enumerating the cooperative offices
which provides that the functions of the office of the General Manager, i.e.,
management of the Cooperative and to keep the Board fully informed of all
aspects of the operations and activities of the Cooperative are specifically laid
down under BATELEC I's By-laws itself. It is therefore beyond cavil that Ellao's
position as General Manager is a cooperative office. Accordingly, his complaint
for illegal dismissal partakes of the nature of an intra-cooperative controversy;
it involves a dispute between a cooperative officer on one hand, and the Board
of Directors, on the other. Hence, jurisdiction over Ellao’s complaint belongs
to the RTC.
• Ku v. RCBC Securities, Inc. (G.R. No. 219491, 17
October 2018)
DOCTRINE:
An intra-corporate controversy is one which pertains to any of the
following relationships: (I) between the corporation, partnership or
association and the public; (2) between the corporation, partnership or
association and the State insofar as its franchise, permit or license to
operate is concerned; (3) between the corporation, partnership or
association and its stockholders, partners, members or officers; and (4)
among the stockholders, partners or associates themselves. Thus,
under the relationship test, the existence of any of the above intra-
corporate relations makes the case intra-corporate.
Indeed, this Court has held that the ruling in Manchester does not apply
to cases where insufficient filing fees were paid based on the
assessment made by the clerk of court, and there was no intention to
defraud the government. It was further held that the filing of the
complaint or appropriate initiatory pleading and the payment of the
prescribed docket fee vest a trial court with jurisdiction over the subject
matter or nature of the action. If the amount of docket fees paid is
insufficient considering the amount of the claim, the clerk of court of the
lower court involved or his duly-authorized deputy has the responsibility
of making a deficiency assessment. The party filing the case will be
required to pay the deficiency, but jurisdiction is not automatically lost.
FACTS:
Stephen Y. Ku opened an account with RCBC Securities on June 5,
2007 for the purchase and sale of securities.
On February 22, 2013, Ku filed with the RTC of Makati a Complaint for
Sum of Money and Specific Performance with Damages against
respondent. Pertinent portions of his allegations read as follows:
4. Unknown to plaintiff, the name of M.G. Valbuena ("MGV")
was deliberately inserted beside the name of Ivan L. Zalameda
as one of. the agents after plaintiff completed and signed the
Agreement.
5. As to when the fraudulent insertion was made, plaintiff has
no idea. Plaintiff only discovered this anomaly when plaintiff
recently requested for a copy of his Account Information.
6. In the course of plaintiff's trading transactions with RSEC,
MGV represented herself as a Sales Director of RSEC, duly
authorized to transact business on behalf of the latter. xxxx
 7. With this representation, plaintiff continued to transact
business with RSEC through MGV, on the honest belief that the
latter was acting for and in behalf of RSEC. xxx
13. Sometime in January 2012, it came to the knowledge of
plaintiff that his account with RSEC was subject of
mismanagement. MGV was blacklisted by RSEC due to
numerous fraudulent and unauthorized transactions committed
by the former. Worse, MGV allegedly was able to divert
investments made by "high networth" clients of RSEC into some
other accounts. xxx
16. In the same letter, plaintiff made clear to RSEC that it has
never authorized a discretionary account with MGV and
requested for all documents relative to plaintiff's audit. xxxx
17. After audit, plaintiff has conclusively determined that there
were FOUR HUNDRED SIXTY-SEVEN (467) unauthorized
transactions in his account. A review of the said transactions
would show that multiple buying and selling transactions on the
same day were repeatedly done over a period of four (4) years.
Ku prayed for the payment of the amounts and the shares of stock
resulting from his independent audit after excluding all unauthorized
trades. Ku also sought the recovery of treble damages, exemplary
damages and attorney's fees.
The Complaint, docketed as Civil Case No. 13-171, was raffled off to
Branch 63, RTC of Makati. On May 29, 2013, RCBC Securities filed a
Motion to Dismiss.
The RTC of Makati, Branch 63, issued its questioned Order dated
September 12, 2013, to wit:
xxxx After going over plaintiff's [herein Ku's] Complaint and
defendant's [herein respondent's] Motion to Dismiss and the
Reply that followed, the Court is of the considered view that this
case involves trading of securities.
Consequently, the case should be heard and tried before a
Special Commercial Court. Accordingly, the Court's Branch
Clerk of Court is forthwith directed to forward the entire record
of the case to the Office of the Clerk of Court for re-raffle.
The case was, subsequently, re-raffled to Branch 149 of the RTC of
Makati. Thereafter, in its Order dated October 25, 2013, the RTC of
Makati, Branch 149, denied the Motion to Dismiss for lack of merit. It
held that Ku's payment of insufficient docket fees does not warrant the
dismissal of the Complaint and that the trial court still acquires
jurisdiction over the case subject to the payment of the deficiency
assessment. The RTC, thus, ordered Ku "to pay the docket fees on the
value of the shares of stocks being prayed to be returned to him, within
thirty (30) days from receipt" of the said Order.
The CA reversed and dismissed Ku’s complaint, on the ground of lack
of jurisdiction by Branch 63. Thus, the case should have been
dismissed.
ISSUES:
1. WoN RTC Branch 63 has jurisdiction.
2. WoN the trial court acquired jurisdiction despite payment
of insufficient docket fees.
HELD:
1. YES. The Court finds, and so holds, that the case is not an intra-
corporate dispute and, instead, is an ordinary civil action. There
are no intra-corporate relations between the parties. Ku is
neither a stockholder, partner, member or officer of RCBC
Securities corporation. The parties' relationship is limited to that
of an investor and a securities broker. Moreover, the questions
involved neither pertain to the parties' rights and obligations
under the Corporation Code, if any, nor to matters directly
relating to the regulation of the corporation.
On the basis of the foregoing, since the Complaint filed
by Ku partakes of the nature of an ordinary civil action, it is clear
that it was correctly raffled-off to Branch 63. Hence, it is
improper for it (Branch 63) to have ordered the re-raffle of the
case to another branch of the Makati RTC.
Nonetheless, the September 12, 2013 Order of Branch
63, although erroneous, was issued in the valid exercise of the
 RTC's jurisdiction. Such mistaken Order can, thus, be
considered as a mere procedural lapse which does not affect
the jurisdiction which the RTC of Makati had already acquired.
Moreover, while designated as a Special Commercial
Court, Branch 149, to which it was subsequently re-raffled,
retains its general jurisdiction to try ordinary civil cases such as
Ku's Complaint. In addition, after its re-raffle to Branch 149, the
case remained docketed as an ordinary civil case. Thus, the
Order dated October 12, 2013 was, likewise issued by Branch
149 in the valid exercise of the RTC's jurisdiction.
2. In the present case, the Court does not agree with the CA when
it ruled that "the intention of [Ku] Ku to evade payment of the correct
filing fees[,] if not to mislead the docket clerk in the assessment of the
filing fees[,] is manifest." The fact alone that Ku failed to indicate in the
body of his Complaint as well as in his prayer, the value of the shares
of stocks he wishes to recover from RCBC Securities is not sufficient
proof of a deliberate intent to defraud the court in the payment of docket
fees. On the contrary, there is no dispute that upon filing of his
Complaint, Ku paid docket fees amounting to P1,465,971.41, which
was based on the assessment made by the clerk of court.
In a number of cases, this Court has ruled that the plaintiff's
payment of the docket fees based on the assessment made by
the docket clerk negates bad faith or intent to defraud the
government. There is, likewise, no dispute that, subsequently,
when ordered by Branch 149 to pay additional docket fees
corresponding to the value of the shares of stocks being
recovered, Ku immediately paid an additional sum of
P464,535.83.
Moreover, unlike in Manchester where the complainant
specified in the body of the complaint the amount of damages
sought to be recovered but omitted the same in its prayer, Ku in
the instant case consistently indicated both in the body of his
Complaint and in his prayer, the number of shares sought to be
recovered, albeit without their corresponding values. The
foregoing circumstances would show that there was no
deliberate intent to defraud the court in the payment of docket
fees.
CA decision REVERSED. Civil Case No. 13-171, entitled
Stephen Y. Ku v. RCBC Securities, Inc., is hereby
REINSTATED and the Regional Trial Court of Makati City,
Branch 149, is DIRECTED to PROCEED WITH THE HEARING
of the case, with utmost dispatch, until its termination. ·
• Malcaba v. ProHealth Pharma Philippines, Inc.
(G.R. 209085, 6 June 2018)
FACTS:
ProHealth Pharma Philippines, Inc. (ProHealth) is a corporation
engaged in the sale of pharmaceutical products and health food
on a wholesale and retail basis. Malcaba had been employed with
ProHealth since it started in 1997. He was one of its incorporators
together with Del Castillo and Busto, and they were all members
of the Board of Directors in 2004. He held 1,000,000 shares in
the corporation. He was initially the Vice President for Sales then
became President in 2005.
Malcaba alleged that Del Castillo (Chair of the Board of Directors
and Chief Executive Officer) did acts that made his job difficult.
He asked to take a leave on October 23, 2007. When he
attempted to return, Del Castillo insisted that he had already
resigned and had his things removed from his office. He attested
that he was paid a lower salary in December 2007 and his
benefits were withheld. Malcaba tendered his resignation.
The Labor Arbiter found that Malcaba was constructively
dismissed. He found that ProHealth never controverted the
allegation that Del Castillo made it difficult for Malcaba to
effectively fulfill his duties. He likewise ruled that ProHealth's
insistence that Malcaba's leave of absence in October 2007 was
an act of resignation was false since Malcaba continued to
perform his duties as President through December 2007. The
NLRC affirmed the decision of the Labor Arbiter but modified so
that del Castillo and Busto (Executive Vice President) are held Laws creates the office of the President. That foundational
jointly and severally liable with ProHealth for the claims of document also states that the President is elected by the Board
complainant Malcaba. of Directors. Finding that petitioner Malcaba is the President of
respondent corporation and a corporate officer, any issue on his
When elevated to CA, it held that there was no employer- alleged dismissal is beyond the jurisdiction of the Labor Arbiter or
employee relationship between Malcaba and ProHealth since he the National Labor Relations Commission. Their adjudication on
was a corporate officer. Thus, he should have filed his complaint his money claims is void for lack of jurisdiction. As a matter of
with the Regional Trial Court, not with the Labor Arbiter, since his equity, petitioner Malcaba must, therefore, return all amounts
dismissal from service was an intra-corporate dispute. received as judgment award pending final adjudication of his
claims. The Court's dismissal of petitioner Malcaba's claims,
ISSUE: however, is without prejudice to his filing of the appropriate case
in the proper forum.
Whether the Labor Arbiter and National Labor Relations
Commission had jurisdiction over petitioner Nicanor F. Malcaba's The Labor Arbiter and the National Labor Relations Commission
termination dispute considering the allegation that he was a only exercise jurisdiction over termination disputes between an
corporate officer, and not a mere employee. - NO employer and an employee. They do not exercise jurisdiction over
termination disputes between a corporation and a corporate
HELD:
officer.
No. Under Section 25 of the Corporation Code, the President of
a corporation is considered a corporate officer. The dismissal of
VI. Corporate Meetings and Records
a corporate officer is considered an intra-corporate dispute, not a
labor dispute. Thus, a corporate officer's dismissal is always a
corporate act, or an intracorporate controversy, and the nature is A. Meetings - Title VI (RCC)
not altered by the reason or wisdom with which the Board of
Directors may have in taking such action. Also, an intracorporate • Regular and Special Meetings
controversy is one which arises between a stockholder and the
corporation. There is no distinction, qualification, nor any Kind of meeting Date of Meeting Required Notice
exemption whatsoever. The provision is broad and covers all Regular 1. The date fixed in the 1. within the period
kinds of controversies between stockholders and corporations. By-Laws; or required in the By-
The clear weight of jurisprudence clarifies that to be considered Laws; or
a corporate officer, the office must be created by the charter 2. If there is no date in 2. In the absence of
of the corporation, and second, the officer must be elected the By-Laws-on any provision in the By-
by the board of directors or by the stockholders. date after April 15 of Laws – at least 21
every year as days prior to the
To be considered a corporate officer, first, the office must be determined by the meeting.
created by the charter of the corporation, and second, the officer Board.
must be elected by the board of directors or by the stockholders. Special 1. Any time deemed 1. Within the period
Petitioner Malcaba was an incorporator of the corporation and a necessary, or provided in the By-
member of the Board of Directors. Respondent corporation's By- Laws; or
 2. As provided in the 2. If there is no Three out of five directors of the board of directors present in a special meeting
By-laws provision in the By- do not constitute a quorum to validly transact business when its by- laws requires
Laws – at least 1 at least four members to constitute a quorum. Under Section 25 of the CC, the
articles of incorporation or by-laws may fix a greater number than the majority
week prior to the
of the number of directors to constitute a quorum. Any number less than the
meeting. number provided in the articles or by-laws cannot constitute a quorum; any
act therein would not bind the corporation; all that the attending directors
• Board and Stockholders’/Members’ Meetings could do is to adjourn (Pena vs. CA, G.R. No. 91478, February 7, 1991, in
Divina, 2014).

o Carolina Que-Villongco, et al. v. Cecilia

• Quorum Que-Yabut, et al. (G.R. 225022, 5
- Means the number of February 2018) Cecilia Que-Yabut, et al.
stockholders/members of the corporation, v. Carolina Que-Villongco (G.R. 225024,
board, or committee who must be present in 5 February 2018)
order to take action. The meeting is void FACTS: Phil-Ville Development and Housing Corporation (Phil-Ville) is
a family corporation founded by Geronima Gallego Que (Geronima)
without a quorum. that is engaged in the real estate business. The authorized capital stock
of PhilVille is Twenty Million Pesos (₱20,000,000) divided into Two
Quorum in board meetings Hundred Thousand (200,000) shares with a par value of One Hundred
GR: Majority of the number of directors or trustees. Pesos (₱l00.00) per share. During her lifetime, Geronima owned 3,140
shares of stock while the remaining 196,860 shares were equally
XPN: If AOI or the by-laws provide for a greater number (CC, Sec. 25) distributed among Geronima's six children, namely: Carolina Que
Villongco, Ana Maria Que Tan, Angelica Que Gonzales, Cecilia Que
NOTE: The quorum is the same even if there is vacancy in the board. Yabut, Ma. Corazon Que Garcia, and Maria Luisa Que Camara.

Rule as to the decision of the quorum Geronima died and Cecilia as the attorney-in-fact of Geronima, Cecilia
allegedly effected an inequitable distribution of the 3,140 shares that
GR: Every decision of at least a majority of the directors or trustees present belonged to Geronima.
at a meeting at which there is quorum shall be valid as a corporate act.
Carolina, Ana Maria, and Angelica, comprising the majority of the Board
XPNs: of Directors of Phil-Ville held an emergency meeting and made a
decision, by concensus, to postpone the annual stockholders' meeting
1. The election of officers which shall require the vote of a majority of all of Phil-Ville until the issue of the distribution of the 3,140 shares of
the members of the board. stocks in the name of certain stockholders is settled. All the
2. No board approval is necessary where there is custom, usage and stockholders were apprised of the decision to postpone the meeting in
practice in the corporation not requiring prior board approval or where a letter dated January 21, 2013. Ana Maria, in her capacity as
subsequent approval is sufficient (Board of Liquidators v. Kalaw, G.R. No. Corporate Secretary and Director of Phil-Ville likewise gave notice to
L-18805, August 14, 1967). the Securities and Exchange Commission (SEC) with regard to the
postponement of the meeting. however, Cecilia, et. al. proceeded with
the scheduled annual stockholder's meeting participated only by a few
stockholders where they elected the new members of the Board of
Directors and officers of Phil-Ville namely: Cecilia, Ma. Corazon and
Eumir, Chairman/Vice President/Treasurer, President/General
Manager, and Secretary, respectively.
Carolina, Ana Maria, Angelica, Elaine and Edison Williams filed the
instant election case against [Cecilia Que, et al.] before the RTC of
Malabon City and prayed that the election of Cecilia, Ma. Corazon and
Eumir Carlo as directors be declared void considering the invalidity of
the holding of the meeting for lack of quorum therein, the questionable
manner by which it was conducted, including the invalid inclusion in the
voting of the shares of the late Geronima, the questionable validation
of proxies, the representation and exercise of voting rights by the
alleged proxies representing those who were not personally present at
the said meeting, and the invalidity of the proclamation of the winners.
RTC rendered a Decision declaring the election of Cecilia Que, et al.
as void and of no effect considering the lack of quorum during the
annual stockholders' meeting conducted by the latter.
ISSUE: Whether the total undisputed shares of stocks in Phil-Ville
should be the basis in determining the presence of a quorum
HELD: Total outstanding capital stocks, without distinction as to
disputed or undisputed shares of stock, is the basis in determining the
presence of quorum.
Carolina et. al., claimed that the basis for determining quorum should
have been the total number of undisputed shares of stocks of Phil-Ville
due to the exceptional nature of the case since the 3,140 shares of the
late Geronima and the fractional .67, .67, and .66 shares of Eumir Que
Camara; Paolo Que Camara and Abimar Que Camara are the subject
of another dispute filed before the RTC. Thus, excluding the 3,142
shares from the 200,000 outstanding capital stock, the proper basis of
determining the presence of quorum should be 196,858 shares of
stocks.
Section 52 of the Corporation Code states that:
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.
While Section 137 of the same Code defines "outstanding capital
stock", 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.
It is settled that unissued stocks may not be voted or considered in
determining whether a quorum is present in a stockholders' meeting.
Only stocks actually issued and outstanding may be voted. Thus, for
stock corporations, the quorum is based on the number of outstanding
voting stocks. The distinction of undisputed or disputed shares of stocks
is not provided for in the law or the jurisprudence. The 200,000
outstanding capital stocks of Phil-Ville should be the basis for
determining the presence of a quorum, without any distinction.
Therefore, to constitute a quorum, the presence of 100,001 shares of
stocks in Phil-Ville is necessary.
SC affirmed the CA’s decision when it held that only 98,430 shares of
stocks were present during the January 25, 2014 stockholders meeting
at Max's Restaurant, therefore, no quorum had been established.
In this case, there is no evidence that the 3,140 shares of the late
Geronima were recorded in the stocks and transfer book of Phil-
Ville.1âшphi1 Thus, insofar as Phil-Ville is concerned, the 3,140 shares
of the late Geronima allegedly transferred to several persons is non-
existent. Therefore, the transferees of the said shares cannot exercise
the rights granted unto stockholders of a corporation, including the right
to vote and to be voted upon.
B. Corporate Books and Records - Title VIII (RCC)
o Tee Ling Kiat v. Ayala Corporation
(substituted by Bienvenido B.M. Amora,
Jr.) G.R. No. 192530, 7 March 2018
FACTS:
When CMC defaulted on its payment on one of its availments in the
money market line granted to it by Ayala Investment and Dev’t Corp
(AIDC), Ayala Corp. (endorsee of the promissory note executed by
Sps. Dee in favor of AIDC), filed a complaint for sum of money against
CMC and Spouses Dewey and Lily Dee. (Dewey Dee was CMC’s
President at the time). RTC ruled in favor of Ayala Corp and ordered
Sps. Dee to pay the amount + interest.
Thereafter, a Writ of Execution was issued and a Notice of Levy on
Execution was also issued to the Register of Deeds of Antipolo to levy
upon “the rights, claims, share, interest, title, and participation” that the
Sps. may have on parcels of land covered by TCTs R-24038 - 40.
However, it appears that the lands were registered in the name of
Vonnel Industrial Park (VIP), in which Dewey Dee was an incorporator.
Tee Ling Kiat, a stockholder of VIP and the alleged purchaser of Dewey
Dee’s shares with VIP, filed a third-party claim stating that Dewey was
indeed one of VIP’s incorporators, but he is no longer a stockholder.
Tee Ling Kiat presented as evidence a photocopy of the cancelled
checks issued by him in favor of Dewey Dee.
RTC’s Decision: Disallowed the third-party claim because the alleged
sale of shares of stock from Dewey Dee to Tee Ling Kiat was not
proven. RTC found, among others, that the purported Deed of Sale of
Shares of Stock was not recorded in the stock and transfer books of
VIP as required by Sec. 36 of the Corp. Code.
CA’s Decision: Also found that the alleged sale of Dewey Dee's shares
of stock to Tee Ling Kiat has not been proven. It held that it is insufficient
to attach photocopies of the deed or payment of checks to the motion.
It, therefore, found that Tee Ling Kiat utterly failed: (i) to prove that he
is a stockholder of VIP; and assuming he is, (ii) to show that he was
authorized by the corporation for the purpose of prosecuting the claim
on behalf of the corporation.
ISSUE: W/N Tee Ling Kiat has sufficiently proved that he is a
stockholder of VIP - NO.
HELD:
Tee Ling Kiat imputes error on the CA by the simple expedient of
arguing that he did not personally need to prove that the sale of shares
of stock between Dewey Dee and himself had in fact transpired, as the
duty to record the sale in the corporate books lies with VIP. Such an
argument, however, fails to recognize that the very right of Tee Ling
Kiat, as a third-party claimant, to institute a terceria is founded on his
claimed title over the levied property.
The only evidence adduced by Tee Ling Kiat to support his claim that
Dewey Dee's shares in VIP have been sold to him are a cancelled
check issued by Tee Ling Kiat in favor of Dewey Dee and a photocopy
of the Deed of Sale of Shares of Stock, with no explanation from Tee
Ling Kiat as to why the original Deed of Sale of Shares of Stock could
not be produced.
Even if it could be assumed that the sale of shares of stock contained
in the photocopies had indeed transpired, such transfer is only valid
as to the parties thereto, but is not binding on the corporation if
the same is not recorded in the books of the corporation.
Sec. 63 of the Corporation Code provides: “"No transfer, x x x shall
be valid, except as between the parties, until the transfer is recorded in
the books of the corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the certificate or
certificates and the number of shares transferred."
Here, the records show that the purported transaction between
Tee Ling Kiat and Dewey Dee has never been recorded in VIP's
corporate books. Thus, the transfer, not having been recorded in
the corporate books in accordance with law, is not valid or binding
as to the corporation or as to third persons.
o Torres, Jr. v. CA (278 SCRA 793 [1997])
FACTS:
Judge Torres was the majority stockholder of Tormil
Realty & Development Corp while private respondents, his
nieces and nephews, constituted the minority stockholders. In
order to make substantial savings in taxes, Judge Torres
adopted an ‘estate planning’ scheme under which he assigned
to Tormil various real properties he owned and his shares of
stock in other corporations in exchange for 225,972 Tormil
Realty shares. All the assigned parcels of land were duly
registered with the respective Register of Deeds in the name of
Tormil, except for the ones located in Makati and Pasay.
At the time of the assignments and exchange, only
225,000 Tormil Realty shares remained unsubscribed, all of
which were duly issued to and received by Judge Torres. Due
to the insufficient number of shares of stock issued to Judge
Torres and the alleged refusal of private respondents to approve
the needed increase in the corporation’s authorized capital
stock, Judge Torres revoked the 2 deeds of assignment
covering the properties in Makati and Pasay. The
disappearance of the Makati and Pasay properties from the
 corporation’s inventory of assets and financial records private
respondents, were constrained to file a complaint with the SEC
to compel Judge Torres to deliver to Tormil the 2 deeds of
assignment covering the mentioned properties which he had
unilaterally revoked and to cause the registration of the
corresponding titles in the name of Tormil. Private respondents
alleged that following the disappearance of the properties from
the corporation’s inventory of assets, they found out that Judge
Torres et al., formed and organized a corporation named
“Torres-Pabalan Realty and Development Corporation” and that
as part of Judge Torres’ contribution to the new corporation, he
executed in its favor a Deed of Assignment conveying the same
Makati and Pasay properties.
· Judge Torres assigned from his own shares one [1]
share each to Tobias, Jocson, Jurispurdencia, Azura and
Pabalan. These assigned shares were in the nature of
“qualifying shares” for the sole purpose of meeting the
legal requirement to be able to elect them to the Board of
Directors as Torres’ nominees. Private respondents
instituted a complaint with the SEC, praying that the
election of petitioners to the Board of Directors be
annulled. They alleged that the petitioner-nominees were not
legitimate stockholders of TORMIL because the assignment of
shares to them violated the minority stockholders’ right of pre-
emption as provided in the corporation’s articles and by-laws.
ISSUE: Whether the issued qualifying shares are valid
HELD: No, it is the corporate’s secretary’s duty and obligation to
register valid transfers of stocks and if said corporate officer refuses to
comply, the transferor-stockholder may rightfully bring suit to compel
performance.
According to the SEC, in interpreting Section 74 of the Corporation
Code. In the absence of any provision to the contrary, the corporate
secretary is the custodian of corporate records. He keeps the stock and
transfer book and makes proper and necessary entries therein.
Contrary to the generally accepted corporate practice, the stock and
transfer book of TORMIL, was not kept by Ms. Carlos, the
corporate secretary but by Torres, the President and Chairman of
the Board of Directors of TORMIL. The stock and transfer book
was not kept at the principal office of the corporation either but at
the place of Torres. Any entries made in the stock and transfer
book on March 1987 by Torres of an alleged transfer of nominal
shares to Pabalan and Co. cannot be given any valid effect. Where
the entries made are not valid, Pabalan and Co. cannot be considered
stockholders of record of TORMIL. Because they are not stockholders,
they cannot be elected as directors of TORMIL.
o Batangas Laguna Tayabas Bus Co. v.
Bitanga (362 SCRA 635 [2001])
FACTS:
On October 28, 1997, Dolores A. Potenciano, Max A. Potenciano,
Mercedelin A. Potenciano, Delfin C. Yorro, and Maya Industries, Inc.,
entered into a Sale and Purchase Agreement whereby they sold to
BMB Property Holdings, Inc., represented by its President, Benjamin
Bitanga. The purchase price for the shares of stock was made payable
upon signing of Agreement, while the balance was to be paid on
November 26, 1997. It was stipulated by the parties that the
downpayment was conditioned upon receipt by the buyer of certain
documents upon signing of the Agreement, xxx a Declaration of Trust
acknowledging that the shares shall be held in trust by the sellers for
the buyer pending their transfer to the latter’s name. At a meeting of the
stockholders of BLTB , Benjamin Bitanga and Monina Grace Lim were
elected as directors replacing Dolores and Max. The newly elected
directors scheduled the annual stockholders’ meeting. Michael
Potenciano wrote Benjamin Bitanga requesting for the
postponement of the meeting due to the absence of a third day
advance notice. However, the stockholders’ meeting pushed
through on May 19, 1998, in absence of a prior notice of
postponement. In the said meeting, the postponement was
rejected by the majority of the stockholders who were then
present and proceeded with the meeting. The Potenciano group
was re-elected to the Board of Directors. But the Bitanga group
refused to relinquish their position.
ISSUE:
Whether or not the meeting on May 19, 1998 is valid despite the
absence of Bitanga group, which owned 50.26% of BLTB’s shares
HELD:
Yes. The meeting was held valid by the SEC En Banc in light of the
principle that a transfer of shares is not valid unless recorded in the
books of the corporation. The transfer of the shares of the group
of Dolores to Bitanga has not yet been recorded in the books of
the corporation. Hence, the group of Dolores, in whose names
those shares still stand, were the ones entitled to attend and vote
at the stockholders’ meeting on May 19, 1998
o Ponce v. Alsons Cement Corp. (393 SCRA
602 [2002])
FACTS:
Petitioner Vicente Ponce filed a complaint with the SEC for mandamus
and damages against respondents Alsons Cement (ACC) and its
corporate secretary, Francisco Giron. Petitioner alleged that Fausto
Gaid was an incorporator of ACC, having subscribed to and fully paid
239,500 shares of said corporation, but despite such, no certificates of
stock corresponding to such shares were issued in his name. Attached
to the complaint was the Deed of Undertaking and Indorsement upon
which petitioner based his petition for mandamus.
Respondents moved to dismiss the complaint arguing that the alleged
indorsement was not recorded in the books of the corporation, making
it invalid. The SEC hearing officer decided against the petitioner
because there was no record of any assignment or transfer in the books
of the respondent corporation and there was neither instruction nor
authority from the transferor for such assignment or transfer. Petitioner
appealed the order of dismissal. The Commission en banc reversed the
decision of the hearing officer.
The motion for reconsideration having been denied, the
respondents appealed to the CA. The CA held that in the absence
of any allegations that the transfer of shares between Fausto Gaid
and the petitioner was registered in the stock and transfer book of
respondent corporation, petitioner failed to state a cause of
action. Thus, the CA dismissed the complaint for mandamus for
failure to state a cause of action.
ISSUE:
Whether transfers of shares of stock not recorded in the book of the
corporation are valid.
HELD:
No. Pursuant to the Corporation Code, a transfer of shares of stock not
recorded in the stock and transfer book of the corporation is non-
existent as far as the corporation is concerned. It is only when the
transfer has been recorded in the stock and transfer book that a
corporation may rightfully regard the transferee as one of its
stockholders. From this time, the consequent obligation on the
part of the corporation to recognize such rights as it is mandated
by law to recognize arises.
The Court ruled that petitioner had no cause of action and that his
petition for mandamus was properly dismissed. From the corporation's
point of view, the transfer is not effective until it is recorded. As
between the corporation, on one hand, and its stockholders and
third persons on the other, the corporation looks only to its books
for the purpose of determining who its stockholders are. In other
words, the stock and transfer book is the basis for ascertaining
the persons entitled to the rights and subject to the liabilities of a
stockholder. Where a transferee is not yet recognized as a
stockholder, the corporation is under no specific legal duty to
issue stock certificates in the transferee's name.
As to the indorsement, the Court held that a mere indorsement by the
supposed owners of the stock, in the absence of express
instructions from them, cannot be the basis of an action for
mandamus and that the rights of the parties have to be threshed
out in an ordinary action. A corporate secretary may not be compelled
to register transfers of shares on the basis merely of an indorsement of
stock certificates. With more reason, in the Court’s view, a corporate
secretary may not be compelled to issue stock certificates without such
registration.
o Lao v. Lao (567 SCRA 558 [2008])
Facts
On October 15, 1998, petitioners David and Jose Lao filed a petition with
the Securities and Exchange Commission (SEC) against respondent
Dionisio Lao, president of Pacific Foundry Shop Corporation (PFSC).
Petitioners prayed for a declaration as stockholders and directors of PFSC,
issuance of certificates of shares in their name and to be allowed to
examine the corporate books of PFSC.3
Petitioners claimed that they are stockholders of PFSC based on the
General Information Sheet filed with the SEC, in which they are named as
stockholders and directors of the corporation. Petitioner David Lao alleged
that he acquired 446 shares in PFSC from his father, Lao Pong Bao, which
shares were previously purchased from a certain Hipolito Lao. Petitioner
Jose Lao, on the other hand, alleged that he acquired 333 shares from
respondent Dionisio Lao himself.4
Respondent denied petitioners' claim. He alleged that the inclusion of their
names in the corporation's General Information Sheet was inadvertently
made. He also claimed that petitioners did not acquire any shares in PFSC
by any of the modes recognized by law, namely subscription, purchase, or
transfer. Since they were neither stockholders nor directors of PFSC,
petitioners had no right to be issued certificates or stocks or to inspect its
corporate books.5
On June 19, 2000, Republic Act 8799, otherwise known as the Securities
Regulation Code, was enacted, transferring jurisdiction over all intra-
corporate disputes from the SEC to the RTC. Pursuant to the law, the
petition with the SEC was transferred to the RTC in Cebu City and
docketed as Civil Case No. CEB-25916-SRC. The case was consolidated
with another intra-corporate dispute, Civil Case No. CEB-25910-SRC, filed
by the Heirs of Uy Lam Tiong against respondent Dionisio Lao
Issue IS the mere inclusion as shareholder in the General Information
Sheet of a corporation sufficient proof that one is a shareholder in such
corporation?
Held
Petitioners failed to prove that they are shareholders of PSFC.
Petitioners insist that they are shareholders of PFSC. They claim
purchasing shares in PFSC. Petitioner David Lao alleges that he acquired
446 shares in the corporation from his father, Lao Pong Bao, which shares
were previously purchased from a certain Hipolito Lao. Petitioner Jose Lao,
on the other hand, alleges that he acquired 333 shares from respondent
Dionisio Lao.
Records, however, disclose that petitioners have no certificates of shares
in their name. A certificate of stock is the evidence of a holder's interest
and status in a corporation. It is a written instrument signed by the proper
officer of a corporation stating or acknowledging that the person named in
the document is the owner of a designated number of shares of its
stock.24 It is prima facie evidence that the holder is a shareholder of a
corporation.
Nor is there any written document that there was a sale of shares, as
claimed by petitioners. Petitioners did not present any deed of assignment,
or any similar instrument, between Lao Pong Bao and Hipolito Lao; or
between Lao Pong Bao and petitioner David Lao. There is likewise no deed
of assignment between petitioner Jose Lao and private respondent
Dionisio Lao.
Absent a written document, petitioners must prove, at the very least,
possession of the certificates of shares in the name of the alleged seller.
Again, they failed to prove possession. They failed to prove the due
delivery of the certificates of shares of the sellers to them. Section 63 of
the Corporation Code provides:
Sec. 63. Certificate of stock and transfer of shares. - The capital
stock of stock corporations shall be divided into shares for which
certificates signed by the president or vice-president,
countersigned by the secretary or assistant secretary, and sealed
with the seal of the corporation shall be issued in accordance with
the by-laws. Shares of stock so issued are personal property and
may be transferred by delivery of the certificate or certificates
indorsed by the owner or his attorney-in-fact or other person legally
authorized to make the transfer. No transfer, however, shall be
valid, except as between the parties, until the transfer is recorded
in the books of the corporation so as to show the names of the
parties to the transaction, the date of the transfer, the number of
the certificate or certificates and the number of shares transferred.
In contrast, respondent was able to prove that he is the owner of the
disputed shares. He had in his possession the certificates of stocks of
Hipolito Lao. The certificates of stocks were also properly endorsed to him.
More importantly, the transfer was duly registered in the stock and transfer
book of the corporation. Thus, as between the parties, respondent has
proven his right over the disputed shares. As correctly ruled by the CA:
Au contraire, Dionisio C. Lao was able to show through competent
evidence that he is undeniably the owner of the disputed shares of
stocks being claimed by David C. Lao. He was able to validate that
he has the physical possession of the certificates covering the
shares of Hipolito Lao. Notably, it was Hipolito Lao who properly
endorsed said certificates to herein Dionisio Lao and that such
transfer was registered in PFSC's Stock and Transfer Book. These
circumstances are more in accord with the valid transfer
contemplated by Section 63 of the Corporation Code.25
The mere inclusion as shareholder of petitioners in the General
Information Sheet of PFSC is insufficient proof that they are
shareholders of the company.
Petitioners bank heavily on the General Information Sheet submitted by
PFSC to the SEC in which they were named as shareholders of PFSC.
They claim that respondent is now estopped from contesting the General
Information Sheet.
While it may be true that petitioners were named as shareholders in the
General Information Sheet submitted to the SEC, that document alone
does not conclusively prove that they are shareholders of PFSC. The
information in the document will still have to be correlated with the
corporate books of PFSC. As between the General Information Sheet
and the corporate books, it is the latter that is controlling. As
correctly ruled by the CA:
We agree with the trial court that mere inclusion in the General
Information Sheets as stockholders and officers does not make
one a stockholder of a corporation, for this may have come to pass
by mistake, expediency or negligence. As professed by
respondent-appellee, this was done merely to comply with the
reportorial requirements with the SEC. This maybe against the law
but "practice, no matter how long continued, cannot give rise to any
vested right."
If a transferee of shares of stock who failed to register such transfer
in the Stock and Transfer Book of the Corporation could not
exercise the rights granted unto him by law as stockholder, with
more reason that such rights be denied to a person who is not a
stockholder of a corporation. Petitioners-appellants never secured
such a standing as stockholders of PFSC and consequently, their
petition should be denied.26
It should be stressed that the burden of proof is on petitioners to show that
they are shareholders of PFSC. This is so because they do not have any
certificates of shares in their name. Moreover, they do not appear in the
corporate books as registered shareholders. If they had certificates of
shares, the burden would have been with PFSC to prove that they are not
shareholders of the corporation.
As discussed, petitioners failed to hurdle their burden. There is no written
document evidencing their claimed purchase of shares. We note that
petitioners agreed to submit their case for decision based merely on the
documents on record. Hence, no testimonial evidence was presented to
prove the alleged purchase of shares. Absent any documentary or
testimonial evidence, the bare assertion of petitioners that they are
shareholders cannot prevail.
All told, We agree with the RTC and CA decision that petitioners are not
shareholders of PFSC.
o Interport Resources Corp. v. Securities
Specialists, Inc. (792 SCRA 155 [2016])
FACTS: Oceanic Corporation entered into subscription agreement
with respondent RC Lee corporation covering 5M shares. RC Lee paid
25% of the said shares. Oceanic later on merged with petitioner Interport
with the latter as the surviving corporation. In 1979, SSI corporation
received in the ordinary course of business Oceanic subscription
agreements, all outstanding in the name of RC Lee. In 1989, Interport
issued a call for full payment of subscription receivables. SSI tendered
payment prior the deadline but Interport refused to honor Oceanic
subscriptions. After SSI’s tender of payment, it learned that Interport
issued 5M shares to RC Lee relying on the latter’s registration as the
owner of the subscription agreements.
In the latter part of 1989, SSI demanded the delivery of the shares or the
payment of the value of the same but since left unheeded, it commenced
its case with the SEC.
Interport argued that it just relied in its records that RC Lee is still the
owner and that pursuant to Sec. 63 of the Corporation Code, no transfer
of shares shall be valid until the transfer is recorded in the books of
the Corporation. Interport contended that 10 years passed since the
alleged assignment to SSI and the latter failed to assert its right to
have the assignment recorded in the books
ISSUE: WON Sec. 63 of the Corporation Code is applicable in this
case
HELD: The SC ruled in the negative because Interport had unduly
refused to recognize the assignment of the shares between RC Lee and
SSI. It adopted the SEC’s conclusion that the law does not prescribe any
period within which the registration should be effected. As such, the
right does not accrue until there has been a demand and a refusal
to record the transfer. Thus, in this case, the reckoning period
should not be in 1979 when SSI received the Oceanic subscription
agreements but in 1989 when it demanded the delivery of the shares
and when the complaint with SEC was filed.
o W.G. Philpotts v Philippine
Manufacturing Corporation (40 Phil. 471
[1919])
FACTS:
The petitioner, W. G.’ Philpotts, a stockholder in the Philippine
Manufacturing Company, seeks to obtain a writ of mandamus to compel
the respondents to permit the plaintiff, in person or by some authorized
agent or attorney, to inspect and examine the records of the business
transacted by said company since January 1, 1918.
There is no pretense that the respondent corporation or any of its
officials has refused to allow the petitioner himself to examine
anything relating to the affairs of the company, and the petition
prays for a peremptory order commanding the respondents to
place the records of all business transactions of the company,
during a specified period, at the disposal of the plaintiff or his duly
authorized agent or attorney, it being evident that the Petitioner
desires to exercise said right through an agent or attorney. In the
argument in support of the demurrer it is conceded by counsel for the
respondents that there is a right of examination in the stockholder
granted under section 51 of the Corporation Law, but it is insisted that
this right must be exercised in person.
ISSUE: Whether the right which the law concedes to a stockholder to
inspect the records can be exercised by a proper agent or attorney of
the stockholder as well as by the stockholder in person
HELD:
The right of inspection given to a stockholder in the provision above
quoted can be exercised either by himself or by any proper
representative or attorney in fact, and either with or without the
attendance of the stockholder.
This is in conformity with the general rule that what a man may do in
person he may do through another; and we find nothing in the
statute that would justify us in qualifying the right in the manner
suggested by the respondents.
Second paragraph of section 51 of Act No. 1459 states that: "The
record of all business transactions of the corporation and the minutes
of any meeting shall be open to the inspection of any director, member
or stockholder of the corporation at reasonable hours." This provision
is to be read of course in connecting with the related provisions of
sections 51 and 52, defining the duty of the corporation in respect to
the keeping of its records.
This conclusion is supported by the undoubted weight of authority in
the United States, where it is generally held that the provisions of law
conceding the right of inspection to stockholders of corporations are to
be liberally construed and that said right may be exercised through any
other properly authorized person. As was said in Foster vs. White (86
Ala., 467), "The right may be regarded as personal, in the sense that
only a stockholder may enjoy it; but the inspection and examination may
be made by another. Otherwise it would be unavailing in many
instances.
o Pardo v. Hercules Lumber Co. (89 SCRA
336 [1979])
FACTS:
Pardo is a stockholder of Hercules Lumber and Ferrer is the acting
secretary of the said company. The Company refused to permit the
Pardo to inspect the records and business transactions of the company.
There was no question regarding the right to inspect as it is guaranteed
in the Corp. Law.
The main consideration in this case has reference to the time, or times,
within which the right of inspection may be exercised.
The company, through various resolutions, had designated certain
times to which the stockholders can inspect the books. Allegedly, Pardo
didn’t get permission to inspect thus was denied such.
Hence this petition.
The main ground upon which the defense of the company appears to
be rested has reference to the time, or times, within which the right of
inspection may be exercised.
Article 10 of the By-laws of the company
"Every shareholder may examine the books of the
company and other documents pertaining to thesame upon the
days which the board of directors shall annually fix."
Board Resolution passed at the directors' meeting held on 16 February
1924
The board also resolved to call the usual general (meeting of
shareholders) for March 30 of the present year, with notice to the
shareholders that the books of the company are at their
disposition from the 15th to 25th of the same month for
examination, in appropriate hours.
ISSUE:
WON the BOD can restrict a stockholder from inspecting the books of
the corp. – NO!
HELD:
The general right given by the statute may not be lawfully abridged to
the extent attempted in this resolution. It may be admitted that the
officials in charge of a corporation may deny inspection when sought at
unusual hours or under other improper conditions; but neither the
executive officers nor the board of directors have the power to
deprive a stockholder of the right altogether. A by-law unduly
restricting the right of inspection is undoubtedly invalid.
Under a statute similar to our own it has been held that the statutory
right of inspection is not affected by the adoption by the board of
directors of a resolution providing for the closing of transfer books
thirty days before an election. (State vs. St. Louis Railroad Co., 29 Mo.,
Ap., 301.)
It will be noted that our statute declares that the right of inspection can
be exercised "at reasonable hours." This means at reasonable hours
on business days throughout the year, and not merely during some
arbitrary period of a few days chosen by the directors.
In addition to relying upon the by-law, to which reference is above
made, the answer of the respondents calls in question the motive which
is supposed to prompt the petitioner to make inspection; and in this
connection it is alleged that the information which the petitioner seeks
is desired for ulterior purposes in connection with a competitive firm with
which the petitioner is alleged to be connected. It is also insisted that
one of the purposes of the petitioner is to obtain evidence preparatory
to the institution of an action which he means to bring against the
corporation by reason of a contract of employment which once existed
between the corporation and himself. These suggestions are entirely
apart from the issue, as, generally speaking, the motive of the
shareholder exercising the right is immaterial. (7 R.C.L., 327.)
WRIT OF MANDAMUS WILL ISSUE.
*** BOD cannot entirely restrict a shareholder from
inspecting corporate books. A BOD resolution or by-law cannot
entirely restrict or provide for a period in which a shareholder
can be allowed to inspect corporate books. Inspection can only
be denied during unreasonable hours or improper conditions.
Discussion : (April 5)
- Genetic swine case: pwede kahit walang board resolution ang
pag sign ng President ng certificate of verification. Lack of
authority can be ratified subsequently. But in actual practice, it
will do well for the complaint to include already the proof of
authority.
- Treasury shares: salido Jr. v. Aramaywan metos? March 18
2021
- Corporate Powers to Sue: Derivative Suit: Agoh Realty Corp. v.
Dr. Angelito Goh. October 16 2019: GR rule is that when a
corporate sue, it must sue in its own name. Derivative suit is a
suit of last resort. It must not be someone from the majority.
Because if that I the case, just get the majority vote and file a
case.
- Derivative suit initiated by a person is a remedy of last resort.
You belong to the minority. Ommission on the part of the board.
- Pag may kaso nang sinampa, di na pwede derivative suit
because according to SC, it now takes a backseat.
- Corporate Officers
- Board Members
- Qualifications to be members of the board
- Corporate officer v. corporate employees
- Not all officers are denominated as corporate officer. The latter
is a different specie.
- Business Judgment Rules
- Prohibitions in relation to fiduciary duty of officers: conflict of
interest.
- When a director can be and will be held liable.
- Section 29. Computation and determination of appropriate
compensation of the dreictors
- Emergency Board concept. Kailan pwede iset ang emergency
rule? Wala nang quorum, there is an emergency. An action
must be taken to prevent grave, substantial, and irreparable
damage. The Court did not further flesh out what is grave,
substantial, irreparable. So the remaining directors must make
compelling argument that a decision needs to be done, thus
constituting an emergency board.
- Emergency board is constituted specifically to address the
emergency. What it is addressed, the term of the emergency
board ends.
- GR if there is no quorum: Election of directors wala nang
quorum, to fill in the vacancy, elected by shareholders.
- However if there is emergency,
- If the remaining of the board still constitue a quorum, the
director may still elect to complete the board. Only to serve for
the unexpired term.
- Sec. 28 : filling of vacancy: if by removal or expiration, the
removal must be filled by other causes, 45 days
- Amendment introduced, resulting to increase of board of
directors: transitory provision: even if there is quorum,
members of the board: filling the vacancy : shareholders will
elect the newly created seats( either in regular or special
meeting)
- Rules in making the conduct of meeting:
- Proof that certain policies have been conducted: records of
corporation
- How to know how many shareholders are in good standing?
How many shareholders are actual part of the corporation?
Corporate records
- General and basic guides and parameters that must be present
for that meeting to valid? Notice, quorum, recordings, place
and meeting
- Guide as to the time and the place of the meeting
- Special and regular meeting: requirements and requisites
- What makes a meeting special? And a regular meeting? Can
general aspects be discussed in the special meeting and vice
versa? Pwede.
- Regular meeting standard agenda-
- Regular meeting example: election, report,
- Special : when the decision has to be made and that decision
cannot wait until the next
- 11 na lang sila? 15 dapat. Is there a necessity of shareholder’s
special meeting? Pag may quorum pa, pwedeng board na lang.
- Can a stockholder/member propose a meeting? Yes, he or she
can seek the SEC’s intervention or intercession so that a meeting
can be held. Once that meeting is held, ayaw ng board or
chairman, who will preside? That person until someone is
 elected. Will a quorum still be required for such meeting to
prosper? Yes.
- Stock and Transfer :
- Relevance of Stock and Transfer of who should receive notice,
etc. : only the persons in that book are the only ones allowed to
attend/vote.
- What should the corporation do in relation to the ones who
should..? the secretary must send notice
- Is the secretary required to give notice to all the names
appearing in the stock and transfer book? Are they
automatically to receive and cast its vote? No kasi if not
delinquent. Di porket nasa stock and transfer book ang name,
does not necessarily mean na automatically allowed to join.
That is the rational of closing of the book of a
- Other importance of list: kunyari 100 shareholder, 20
delinquents. For purposes of quorum, ilan dapat? 41 ang
quorum.
- Place - Shareholder meeting: meeting (principal office is in the
AOI) BGC principal place tapos taguig that rule applicable
today?
- Proxies?
- 2 types: board and shareholders
- 2 subtypes: regular and special
- Who may call for special meeting? Shareholderr’s meeting then
it is the Board on its own. Board, upon the request or proposal
may also call for the special meeting. Or, if there is someone
who petiton’s the Board and the Board refuses, it is also the SEC
who can call for the special sahreholder’s meeting. Petitioning
shareholder will be the one presiding until presided.
o This recourse to SEC can also apply to regular meeting
- Notice requirement : shareholders’ we already know the 21, 1
week rule (special)
o Can be lengthen but no shorten.
- Place: principal’s office, if not practicable: withint he same city:
take note that no more alternative city or municipality within
the metropolitan area.
o Special : anywhere unless the bylaws provide na sa PH
lang
o Remote communication (sec. 49) corp can opt not to
allow or put it in the by-laws, so that therefore, all
shareholders meeting, di pwede ang remote.
- Take note of mc 062020 echoes the sec 49 of the
RCC: it should be in the by-laws but majority of
the Board can authorize the holding of meeting
via remote. Can only authorize for specific
meeting. It can only cover or apply to one
meeting.
- Proxy: allowed in shareholder’s meeting but not during the
board meeting, so if you are an elected member of the board; it
must be you who must participate, it must you who must
engage in the deliberation of the matters to be taken up the
board.
- Precatory Resolution : GR presiding officer is the chariman
pero pwede yung stockholder upon petition, or nagtawag SEC
because of SEC. The petitioning one may act as presiding
officer.
- Presiding officer: chairman or in the absence, the president,
unless the by-laws provide otherwise
- Manner of voting: shareholder casts the vote, either through
himself or through a proxy.
- Can a shareholder vote in person? Yes. Remote
communication? If authorized by the by-laws or for that
purpose, board of directors authorized it.
- Can shareholder vote via proxy? Yes, must it be found in the
bylaws?
- Is it dispensable that it is found in the bylaws? No because
nasa RCC na. So no need na nasa AOI or BL.
- Can a proxy cast its vote for a shareholder via remote
communication? Yes, if allowed in the bylaws and BOD.
Whatever is the shareholder can do, is also allowed for the
proxies.
- What if the vote was cast via remote communication and sent
to corporate secretary only after the tally? Will the votes be
recognized?
- Torres v. CA: it is the corporate’s secretary’s duty and obligation
to register valid transfers of stocks and if said corporate officer
refuses to comply, the transferor-stockholder may rightfully
bring suit to compel performance.
 - Lao v. lao : ultimate evidence of ownership is the stock and
transfer rule.
- Custodian? Coporate secretary. Stored in the principal office of
the corporation.
- Usually included in the stock and transfer:
- Can a shareholder be disallowed from inspecting documents?
GR: cannot be refused the right to expect the books/records.
Yes on several
- Can the corporation limit the number of days the corporation can
limit?
- Voting requirements, procedure, manner of voting,
determination of forum. Always it is not the
- Right to vote, dependents because of delinquents?
VII. The Corporate Set-Up
A. Capital Structures
B. Acquisitions and Mergers - Title IX (RCC)
• Spouses Ong v. BPI Family Savings Bank, Inc.
(G.R. No. 208638, 24 January 2018)
Facts
Petitioners Spouses Francisco Ong and Betty Lim Ong and Spouses
Joseph Ong Chuan and Esperanza Ong Chuan are engaged in the
business of printing under the name and style "MELBROS PRINTING
CENTER.
Sometime in December 1996, Bank of Southeast Asia's (BSA) managers,
Ronnie Denila and Rommel Nayve, visited petitioners' office and
discussed the various loan and credit facilities offered by their bank. In
view of petitioners' business expansion plans and the assurances made
by BSA's managers, they applied for the credit facilities offered by the
latter.
Sometime in April 1997, they executed a real estate mortgage (REM)
over their property situated in Paco, Manila, in favor of BSA as security
for a P15,000,000.00 term loan and P5,000,000.00 credit line or a total of
P20,000,000.00.
With regard to the term loan, only P10,444,271.49 was released by BSA
(the amount needed by the petitioners to pay out their loan with Ayala
life assurance, the balance was credited to their account with BSA).
With regard to the P5,000,000.00 credit line, only P3,000,000.00 was
released. BSA promised to release the remaining P2,000,000.00
conditioned upon the payment of the P3,000,000.00 initially released to
petitioners.
Petitioners acceded to the condition and paid the P3,000,000.00 in full.
However, BSA still refused to release the P2,000,000.00. Petitioners then
refused to pay the amortizations due on their term loan.
Later on, BPI Family Savings Bank (BPI) merged with BSA, thus,
acquired all the latter's rights and assumed its obligations. BPI filed
a petition for extrajudicial foreclosure of the REM for petitioners'
default in the payment of their term loan.
In order to enjoin the foreclosure, petitioners instituted an action for
damages with Temporary Restraining Order and Preliminary
Injunction against BPI praying for P23,570,881.32 as actual damages;
P1,000,000.00 as moral damages; P500,000.00 as attorney's fees,
litigation expenses and costs of suit.
RTC: held Petitioners entitled to damages.
CA: reversed the Decision of RTC.
Issue W/n BPI Family Savings Bank is liable for damages on account
of acts committed by the BSA, the absorbed corpraotion, prior to the
merger.
Held
Yes, BPI Family Savings Bank is liable for damages.
BPI insists that it acted in good faith when it sought extrajudicial
foreclosure of the mortgage and that it was not responsible for acts
committed by its predecessor, BSA. Good faith, however, is not an
excuse to exempt BPI from the effects of a merger or consolidation, viz.:
Section 80. Effects of merger or consolidation. – The merger or
consolidation shall have the following effects:
1. The constituent corporations shall become a single corporation
which, in case of merger, shall be the surviving corporation designated
in the plan of merge; and, in case of consolidation, shall be the
consolidated corporation designated in the plan of consolidation;
xxxxx
4. The surviving or the consolidated corporation shall thereupon and
thereafter possess all the right, privileges, immunities and franchises of
each of the constituent corporations; and all property, real or personal,
and all receivable due on whatever account, including subscriptions to
shares and other choses in action, and all and every other interest of, or
belonging to, or due to each constituent corporation, shall be deemed
transferred to and vested in such surviving or consolidated corporation
without further act or deed; and
5. The surviving or consolidated corporation shall be responsible and
liable for all the liabilities and obligations of each of the constituent
corporations in the same manner as if such surviving or consolidated
corporation had itself incurred such liabilities or obligations; and any
pending claim, action, or proceeding brought by or against any of such
constituent corporations may be prosecuted by or against the surviving
or consolidated corporation. The rights of creditors or liens upon the
property of any of such constituent corporations shall not be impaired
by such merger or consolidation.
Moreover, Section 1(e) of the Articles of Merger dated November 21,
2001 provides that all liabilities and obligations of BSA shall be
transferred to and become the liabilities and obligations of BPI in the
same manner as if it had itself incurred such liabilities or obligations.
Pursuant to such merger and consolidation, BPI's right to foreclose the
mortgage on petitioner's property depends on the status of the contract
and the corresponding obligations of the parties originally involved,
that is, the agreement between its predecessor BSA and petitioner.
Since BSA incurred delay in the performance of its obligations and
subsequently cancelled the omnibus line without petitioners' consent,
its successor BPI cannot be permitted to foreclose the loan for the
reason that its successor BSA violated the terms of the contract even
prior to petitioners' justified refusal to continue paying the
amortizations.
Applying the pertinent provisions of the Corporation Code, BPI did not
only acquire all the rights, privileges and assets of BSA but likewise
acquired the liabilities and obligations of the latter as if BPI itself
incurred it.
• Edward J. Nell Co. v. Pacific Farms, Inc. (15
SCRA 415 [1965])
FACTS:
Edward J. Nell Co. secured a judgment for the sum of P1,853.80
plus atty’s fees and costs from Insular Farms, Inc. representing
the unpaid balance of the price of a pump sold by it to Insular
Farms. However, it was unsatisfied because Insular Farms had
no leviable property. Edward J. Nell Co. thus went after Pacific
Farms, Inc. for the collection of the judgment sum claiming that it
was the alter ego of Insular Farms because Pacific Farms had
purchased all or substantially all of the shares of stock, as well as
the real and personal properties of the latter, including the
pumping equipment sold by appellant to Insular Farms. CFI and
subsequently, the CA, denied the complaint. CA held that Pacific
Farms, Inc. is not liable for the unpaid obligation of Insular Farms,
Inc.
ISSUE: W/N Pacific Farms should be made liable to the unpaid
obligations of Insular Farms, Inc. because it had purchased all or
substantially all of the shares of stock, as well as the real and
personal properties of the latter - NO.
RULING:
The Court in this case cited the rule set forth in Fletcher
Cyclopedia Corporations: 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
- Not only equity that was sold, asset was also sold in this case.
The records show that the Insular Farms sold 1,000 shares of
stock to Pacific Farms, Inc., and the latter then sold the said
shares of stock to certain individuals, who forthwith reorganized
said corporation and the BOD or the reorganized corporation,
caused its assets to be sold to Pacific Farms, Inc. According to
the Court, these facts do not prove that the appellee is an alter
ego of Insular Farms, or is liable for its debts.
Furthermore, it is not claimed that these transactions have
resulted in the consolidation or merger of the Insular Farms and
Pacific Farms herein. On the contrary, petitioner's theory to the
effect that Pacific Farms is an alter ego of the Insular Farms
negates such consolidation or merger, for a corporation
cannot be its own alter ego.
Although the Court finds the payment of Pacific Farms for the
assets of Insular Farms to be grossly inadequate, the Court held
that it must be presumed that the price paid was fair and
reasonable since the sale was submitted to and approved by the
SEC and also that the issue of whether the sale was fraudulent
was not put in issue.
Notes:
Pacific Farms became shareholder of Insular Farms. Pacific
Farms bought some equipment from insular Farms, which
happens to be equipment bought from Edward Neil. (Corporation
can become and invest in another corporation. But this did not
necessarily result to merger and no assumption of liabilities.
GR: a corporation which buys or acquires the assets of another
corporation do not assume the liabilities of htat corporation.
EXPN:
(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
Perfect example. Despite sale of equity, corporation still
continue to have separate existence.
• Y-I Leisure Phils., Inc. v. Yu (770 SCRA 56)
(2012)
FACTS:
In 1997, Mt. Arayat Development Co. Inc. (MADCI) offered for
sale shares of a golf and country club located in Mt. Arayat. Yu
bought 500 golf and 150 country club shares from MADCI.
However, when Yu visited the supposed site of the golf and
country club, he discovered that it was non-existent. Yu
demanded for refund, but even though MADCI recognized that he
had an investment with them, Yu did not receive any refund
Yu filed for collection of sum of money against MADCI and Sangil,
MADCI’s President. Yu alleged that he dealt with Sangil, who
used MADCI's corporate personality to defraud him
Yu later amended his complaint and impleaded YIL, Y-I Leisure
Phils., Inc. (YILPI) and Y-I Club & Resorts, Inc. (YICRI). He
alleged that he discovered that substantially, all the assets of
MADCI, consisting of 120 hectares of land 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 BOD
under Sec. 40 of the Corporation Code.
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 2 years AFTER Yu bought
the shares from MADCI. It alleged that YIL was only a
stockholder, thus not liable for MADCI’s liabilities. It was likewise
alleged that it was stipulated in the MOA that Sangil undertook to
settle all claims for refund of third parties.
The MOA was presented as evidence. It stated therein that Sangil
controlled 60% of MADCI’s capital stock and YIL was to subscribe
to the remaining 40%. As a condition for YIL’s subscription,
MADCI and Sangil were supposed to obtain several government
permits (EEC, Land conversion permit, etc), and that if they fail in
their obligations, they must return YIL’s payment, and if they
would still fail to return the same, YIL would be authorized to sell
the 120 hectare land to satisfy their obligation.
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. The lands of MADCI were eventually sold to
YICRI for a consideration definitely lower than their market price.
RTC: MADCI is liable to Yu because it did not deny its contractual
obligation with him. Sangil is also solidarily liable with MADCI.
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. YIL,
YILPI and YICRI were all exonerated from liability because they
were not part of the transactions between MADCI and Sangil, on
one hand and Yu, on the other hand.
CA: Transfer of the entire assets of MADCI to YICRI should not
prejudice the transferor's creditors. It 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.
Yu’s contention: YIL, YILPI, and YICRI inherited the obligations
of MADCI.
YIL, YILPI, and YICRI’s contention: they did not assume such
liabilities because the transfer of assets was not committed in
fraud of the MADCI's creditors.
ISSUES & RULING:
1. W/N fraud must exist in the transfer of all the corporate
assets in order for the transferee to assume the liabilities
of the transferor. – NO.
The Nell Doctrine (Edward J. Nell Co. v. Pacific Farms) 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 exceptions (see ruling
in Edward J. Nell Co. v. Pacific Farms) are present, then the
transferee corporation shall assume the liabilities of the
transferor.
The last exception, where the purchasing corporation is merely
a continuation of the selling corporation, contemplates the
"business-enterprise transfer." In such transfer, 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.
Sec. 40 of the Corporation Code contemplates business-
enterprise transfer, but the transfer must be of such degree
that the transferor corporation is rendered incapable of
continuing its business or its corporate purpose.
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.
Fraud is not an essential consideration in a business-
enterprise transfer.
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.
2. W/N petitioners became a continuation of MADCI's
business. – YES.
MADCI was a real estate development corporation. Because
of its alleged violation of the MOA, however, MADCI was made
to transfer all its assets to the petitioners, hence, it was left
without any property to develop eventually rendering it
incapable of continuing the business or accomplishing the
purpose for which it was incorporated.
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. 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.
Free and Harmless Clause
Petitioners are not left without a remedy. 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.
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.
- In the Neil doctrine, appreciate the general rule and the
exceptions as well.
- One such application was made by the SC here in this case.
• Sundowner Development Corporation v. Drilon
(180 SCRA 14 [1989])
FACTS:
· Private respondent Hotel Mabuhay leased the premises
belonging to Santiago Syjuco in Ermita. However, due to non-
payment of rentals, a case of ejectment was filed by Syjuco
against Mabuhay. Mabuhay offered to amicably settle the case
by surrendering the premises to Syjuco and to sell its assets
and personal property to any interested party.
· Syjuco offered the said premises for lease to petitioner.
Mabuhay offered to sell its assets and personal properties in the
premises to petitioner to which petitioner agreed. Syjuco
formally turned over the possession of the leased premises to
petitioner who actually took possession and occupied the same.
Respondent National Union of Workers in Hotel, Restaurant
and Allied Services [NUWHRAIN] picketed the leased
premises, barricaded the entrance to the leased premises and
denied petitioner’s officers, employees and guests free access
to and egress from said premises. Thus petitioner wrote a letter-
complaint to Syjuco.
· The Secretary of Labor issued an order requiring all
striking employees to return to work and for Mabuhay to accept
all returning employees. Mabuhay submitted its position paper
alleging among others that it had sold all its assets and personal
properties to petitioner and that there was no sale or transfer of
its shares whatsoever and that Mabuhay completely ceased
operation effective April 1987 and surrendered the premises to
petitioner so that there exists a legal and physical impossibility
on its party to comply with the return to work order specifically
on absorption.
· Petitioner signed a tri-partite agreement so that the
workers may lift their strike. NUWHRAIN alleged connivance
between Mabuhay and petitioner in selling the assets and
closing the hotel to escape its obligations to the employees of
 Mabuhay and so it prays that petitioner accepts the workforce
of Mabuhay and to pay its backwages.
ISSUE: WON the purchaser of the assets of an employer
corporation can be considered as a successor employer of the
latter’s employees
RULING: As a general rule, there is no law requiring a bona fide
purchaser of assets of an on-going concern to absorb in its
employ the employees of the latter. However, although the
purchaser of the assets or enterprise is not legally bound to
absorb in its employ the employers of the seller of such assets or
enterprise, the parties are liable to the employees if the
transaction between the parties is colored or clothed with bad
faith.
In the case at bar, there was no bad faith in the transaction
between petitioner and Mabuhay. Thus, the absorption of the
employees of Mabuhay may not be imposed on petitioner.
It is undisputed that when Mabuhay surrendered the leased
premises to Syjuco and asked Syjuco to offer same to other
lessees it was Syjuco who found petitioner and persuaded
petitioner to lease said premises. Mabuhay had nothing to do with
the negotiation and consummation of the lease contract between
petitioner and Syjuco. It was only when Mabuhay offered to sell
its assets and personal properties in the premises to petitioner
that they came to deal with each other. It appears that petitioner
agreed to purchase said assets of Mabuhay to enable Mabuhay
to pay its obligations to its striking employees and to Syjuco.
While it is true that petitioner is using the leased property for the
same type of business as that of Mabuhay, there can be no
continuity of the business operations of the predecessor
employer by the successor employer as Mabuhay had not
retained control of the business. Petitioner is a corporation
entirely different from Mabuhay. It has no controlling interest
whatever in Mabuhay.
- In personam character of
- Just because binenta na ng old lessee sa
bagong lessee, doesn’t mean na iaabsorb na
ng bagong lessee. Assets lang binenta, hindi
ibig sabihin na kasama ang liabilities or the
EER arising from the contracts are included.
- Connect to Sunia v. NLRC: when a corp sells
its business, that sale does not terminate the
EER between them.
- Sundowner talks about if na absob din ba
nung buying corporation?
- All other obligations: Edward J. Nell case.
But here, hindi siya plug and play. Dapat
pag isipan ano ang sitwasyon, baka mag fall
ka under any of the 4 exceptions. But it pays
to know what the doctrine is.
• Sunio v. NLRC (127 SCRA 390 [1984])
FACTS:
On July 30,1973, sister corporations, EM Ramos & Company,
Inc. (EMRACO) and Cabugao Ice Plant, Inc. (CIPI), sold an ice
plant to Rizal Development and Finance Corporation RDFC with
a mortgage on the same properties constituted by the latter in
favor of the former to secure the payment of the balance of the
purchase price. EMRACO-CIPI terminated the services of all their
employees including private respondents and paid them their
separation pay. RDFC hired its own employees and operated the
plant. RDFC sold the ice plant to petitioner Ilocos Commercial
Corporation ICC headed by petitioner Alberto S. Sunio. Both
RDFC-ICC failed to pay the balance of the purchase price, and
EMRACO-CIPI instituted extrajudicial foreclosure proceedings.
EMRACO-CIPI sold the ice plant to Nilo Villanueva, suspect to
the right of redemption of RDFC. Nilo Villanueva then re-hired
private respondents. RDFC and petitioners finally obtains
possession of the ice plant by virtue of the Mandatory Injunction
previously issued, which ordered defendant "particularly Nilo C.
Villanueva and his agents representatives, or any person found
in the premises to vacate and surrender the property in litigation."
Petitioners did not re-employ private respondents. Private
respondents filed complaints against petitioners for illegal
dismissal with prayer for reinstatement and payment of back
wages.
ISSUE:
Whether or not petitioner is liable to respondents for
reinstatement and payment of back wages
RULING:
No. Petitioner Sunio is not liable. The sale of a business of a going
concern does not ipso facto terminate the employer-employee
relations insofar as the successor-employer is concerned, and
that change of ownership or management of an
establishment or company is not one of the just causes
provided by law for termination of employment. The situation
here, however, was not one of simple change of ownership.
CIPI had terminated the services of its employees, including
herein private respondents, giving them their separation pay
which they had accepted. When RDFC took over ownership
and management, therefore, it hired its own employees, not the
private respondents, who were no longer there.
It cannot be justifiably said that the plant together with its staff
and personnel moved from one ownership to another. No
succession of employment rights and obligations can be said to
have taken place between EMRACO-CIPI-Nilo Villanueva, on the
one hand, and petitioners on the other. Petitioners eventually
acquired possession by virtue of the exercise of their right of
redemption and of a Mandatory Injunction in their favor which
ordered Nilo Villanueva and "any person found in the premises"
to vacate. When EMRACO-CIPI sold the ice plant to RDFC in
1973, private respondents' employment was terminated by
EMRACO-CIPI and they were given their separation pay, which
they accepted. Private respondents can neither successfully
invoke security of tenure in their favor. Their tenure should not be
reckoned from 1967 because they were already terminated in
1973. Private respondents were only rehired in 1974 by Nilo
Villanueva.
• Central Azucarera del Danao v. CA (137 SCRA
295 [1985])
FACTS:
Central Azucarera del Danao (Central Danao) is the owner-
operator of a sugar mill in Danao milling in Negros Occidental.
The private respondents (Bana-ay, Cosculluela and Palma) are
employees of the said business.
Central Danao sold its sugar mill properties and other assets to
Danao Development Corporation (Dadeco). Dadeco actually took
over the management and operation of the purchased sugar mill
properties pursuant to the terms and conditions of the Deed of
Sale. Although the document of sale made no express mention
of the continued employment status of the old employees of
Central Danao upon the consequent change of its ownership and
management, Dadeco, the purchasing corporation, however
hired Central Danao's regular and permanent employees but in
accordance with its own hiring and selection policies.
A few years later, the said employees were terminated. Separate
complaints were filed for recovery of termination pay with
damages against Dadeco and Central Danao. Dadeco, however,
denied liability because they are not the employer of the
terminated employees.
The trial court rendered a decision in favor of the employees. The
CA affirmed its decision.
ISSUE:
Whether or not Central Danao and Dadeco is liable to the
employees for termination pay upon a change of ownership of the
business or establishment
RULING:
Yes. In the exercise of management prerogative, the employer
may merge or consolidate its business with another, or sell or
dispose all or substantially all of its assets and properties which
may bring about the dismissal or termination of its employees in
the process. Such dismissal or termination should not however
be interpreted in such a manner as to permit the employer to
escape payment of termination pay. The sale or disposition
must be motivated by good faith as an element of exemption
from liability.
 An innocent transferee of a business establishment has no
liability to the employees of the transferor to continue employing
them. Nor is the transferee liable for past unfair labor practices
of the previous owner, except, when the liability therefor is
assumed by the new employer under the contract of sale,
or when liability arises because of the new owner's
participation in thwarting or defeating the rights of the
employees.
However, in this case, Cosculluela was hired the day after the
sale, and the other employees were hired 23 days after. This
shows an interruption of their employment in Central Danao,
and that it is considered a rehiring by Dadeco, their new
employer.
Records also reveal that Central Danao did not inform their
employees of the impending sale to Dadeco. Failure of the
employer to serve notice upon the employee that renders the
employer answerable to the employee for termination pay.
The Court held that the Dadeco and Central Danao is liable to
the employees of their separation pay, but only in the period of
their employment in the respective businesses.
- Right of succession as an attribute of a corporation. The owner
of the management is not the, it is the corporation.
- Employer was still the same regardless of the ins and outs. So
EER is not terminated.
- Sale of aasset does not terminate EER
- Sale of equty does not terminate EER
- Change of management is also not a ground to terminate EER.
• PNB v. Andrada Electric and Engineering Co.
(381 SCRA 244 [2002])
DOCTRINE: Consolidation is the union of two or more existing entities
to form a new entity called the consolidated corporation. A merger, on
the other hand, is a union whereby one or more existing corporations
are absorbed by another corporation that survives and continues the
combined business.
Merger does not become effective upon the mere agreement of the
constituent corporations; There must be an express provision of
law authorizing them; For a valid merger or consolidation, the
approval by the Securities and Exchange Commission of the
article of merger or consolidation is required.—The merger,
however, does not become effective upon the mere agreement of the
constituent corporations. Since a merger or consolidation involves
fundamental changes in the corporation, as well as in the rights of
stockholders and creditors, there must be an express provision of law
authorizing them. For a valid merger or consolidation, the approval by
the Securities and Exchange Commission (SEC) of the articles of
merger or consolidation is required. These articles must likewise be
duly approved by a majority of the respective stockholders of the
constituent corporations.
FACTS: plaintiff Andrada Electric Company alleged that it is a partnership
duly organized, existing, and operating under the laws of the Philippines,
with office and principal place of business at Nos. 794-812 Del Monte
[A]venue, Quezon City, while the defendant [herein petitioner] Philippine
National Bank (herein referred to as PNB), is a semi-government
corporation duly organized, existing and operating under the laws of the
Philippines, with office and principal place of business at Escolta Street,
Sta. Cruz, Manila; whereas, the other defendant, the National Sugar
Development Corporation (NASUDECO in brief), is also a semi-
government corporation and the sugar arm of the PNB, with office and
principal place of business at the 2nd Floor, Sampaguita Building, Cubao,
Quezon City; and the defendant Pampanga Sugar Mills (PASUMIL in
short), is a corporation organized, existing and operating under the 1975
laws of the Philippines, and had its business office before 1975 at Del
Carmen, Floridablanca, Pampanga; that the plaintiff is engaged in the
business of general construction for the repairs and/or construction of
different kinds of machineries and buildings;
on August 26, 1975, the defendant PNB acquired the assets of the
defendant PASUMIL that were earlier foreclosed by the Development Bank
of the Philippines (DBP) under LOI No. 311; that the defendant PNB
organized the defendant NASUDECO in September, 1975, to take
ownership and possession of the assets and ultimately to nationalize and
consolidate its interest in other PNB controlled sugar mills; that prior to
October 29, 1971, the defendant PASUMIL engaged the services of
plaintiff for electrical rewinding and repair, most of which were partially paid
by the defendant PASUMIL, leaving several unpaid accounts with the
plaintiff
ISSUE: Whether PNB and PASUMIL was one of merger and
consolidation
RULING: Andrada Elctric claims that petitioners should be held liable for
the unpaid obligations of PASUMIL by virtue of LOI Nos. 189-A and 311,
which expressly authorized PASUMIL and PNB to merge or consolidate.
On the other hand, petitioners contend that their takeover of the operations
of PASUMIL did not involve any corporate merger or consolidation,
because the latter had never lost its separate identity as a corporation.
A consolidation is the union of two or more existing entities to form a new
entity called the consolidated corporation. A merger, on the other hand, is
a union whereby one or more existing corporations are absorbed by
another corporation that survives and continues the combined business.54
The merger, however, does not become effective upon the mere
agreement of the constituent corporations.55 Since a merger or
consolidation involves fundamental changes in the corporation, as well as
in the rights of stockholders and creditors, there must be an express
provision of law authorizing them. For a valid merger or consolidation, the
approval by the Securities and Exchange Commission (SEC) of the articles
of merger or consolidation is required.57 These articles must likewise be
duly approved by a majority of the respective stockholders of the
constituent corporations.58
In the case at bar, we hold that there is no merger or consolidation with
respect to PASUMIL and PNB. The procedure prescribed under Title IX of
the Corporation Code59 was not followed.
In fact, PASUMIL’s corporate existence, as correctly found by the CA, had
not been legally extinguished or terminated.60 Further, prior to PNB’s
acquisition of the foreclosed assets, PASUMIL had previously made partial
payments to respondent for the former’s obligation in the amount of
P777,263.80. As of June 27, 1973, PASUMIL had paid P250,000 to
respondent and, from January 5, 1974 to May 23, 1974, another P14,000.
Neither did petitioner expressly or impliedly agree to assume the debt of
PASUMIL to respondent.61 LOI No. 11 explicitly provides that PNB shall
study and submit recommendations on the claims of PASUMIL’s creditors.
Clearly, the corporate separateness between PASUMIL and PNB remains,
despite respondent’s insistence to the contrary.
• Poliand Industrial Ltd. v. NDC (467 SCRA 500
[2005])
FACTS: Galleon, a domestic corporation, obtained various loans
and credit accommodations from Asian Hardwood and Japanese
lendors. Asian Hardwood assigned its rights over the outstanding
obligations of Galleon, which was later on passed to petitioner
Poliand.
Former President Marcos issued Letter of Instruction, directing
respondent National Development Company, NDC to acquire the
entire shareholdings of Galleon. Galleon, represented by its
President and NDC, forged a Memorandum of Agreement
whereby NDC and Galleon agreed to execute a share purchase
agreement within sixty days for the transfer of Galleon’s
shareholdings. Thereafter, NDC assumed the management and
operations of Galleon.
Poliand made written demands on Galleon, NDC and DBP for
payment of outstanding balance. NDC denied any participation in
the execution of the loan accommodations, credit advances, and
acquisition of ownership of Galleon. Thus, it denied assumption
of Galleon’s liabilities because no purchase and sale agreement
was executed and the delivery of the required shares of stock of
Galleon did not take place. The trial court made NDC liable, which
was superseded by the appellate court on the ground that NDC
did not acquire ownership of Galleon but merely assumed control
over its management and operations.
ISSUE: WON NDC is liable to pay Galleon’s outstanding
balance
RULING: The Supreme Court ruled in the negative. The Court
cannot accept POLIAND's theory that with the effectivity of LOI
No. 1155, NDC ipso facto acquired the interests in GALLEON
without disregarding applicable statutory requirements governing
the acquisition of a corporation. Ordinarily, in the merger of two
or more existing corporations, one of the combining corporations
survives and continues the combined business, while the rest are
dissolved and all their rights, properties and liabilities are
acquired by the surviving corporation. The merger, however,
does not become effective upon the mere agreement of the
constituent corporations. As specifically provided under Section
79 of said Code, the merger shall only be effective upon the
issuance of a certificate of merger by the Securities and
Exchange Commission (SEC), subject to its prior determination
that the merger is not inconsistent with the Code or existing laws.
Where a party to the merger is a special corporation governed by
its own charter, the Code particularly mandates that a favorable
recommendation of the appropriate government agency should
first be obtained. The issuance of the certificate of merger is
crucial because not only does it bear out SEC's approval but also
marks the moment whereupon the consequences of a merger
take place. By operation of law, upon the effectivity of the merger,
the absorbed corporation ceases to exist but its rights, and
properties as well as liabilities shall be taken and deemed
transferred to and vested in the surviving corporation. The
records do not show SEC approval of the merger. POLIAND
cannot assert that no conditions were required prior to the
assumption by NDC of ownership of GALLEON and its subsisting
loans. Compliance with the statutory requirements is a condition
precedent to the effective transfer of the shareholdings in
GALLEON to NDC. In directing NDC to acquire the shareholdings
in GALLEON, the President could not have intended that the
parties disregard the requirements of law. In the absence of SEC
approval, there was no effective transfer of the shareholdings in
GALLEON to NDC. Hence, NDC did not acquire the rights or
interests of GALLEON, including its liabilities.
• Associated Bank v. CA (291 SCRA 511 [1998])
FACTS:
Associated Banking Corporation and Citizens Bank and Trust
Company merged to form just one banking corporation known as
Associated Citizens Bank, the surviving bank. Associated
Citizens Bank changed its corporate name to Associated Bank by
virtue of the Amended Articles of Incorporation. The defendant
(Lorenzo Sarmiento Jr.) executed in favor of Associated Bank a
promissory note whereby the former undertook to pay the latter
the sum of P2,500,000.00 payable on or before March 6, 1978.
As per said promissory note, the defendant agreed to pay interest
at 14% per annum, 3% per annum in the form of liquidated
damages, compounded interests, and attorney's fees, in case of
litigation equivalent to 10% of the amount due. The defendant still
owes plaintiff bank the amount of P2,250,000.00 exclusive of
interest and other charges. Despite repeated demands the
defendant failed to pay the amount due.
The defendant alleged plaintiff is not the proper party in interest
because the promissory note was executed in favor of CBTC; that
the promissory note does not accurately reflect the true intention
and agreement of the parties; that several partial payments made
in the promissory note are not properly applied.
Trial court ordered Respondent Sarmiento to pay the bank his
remaining balance plus interests and attorney's fees. The
appellate court held that the Associated Bank had no cause of
action against Lorenzo Sarmiento Jr., since said bank was not
privy to the promissory note executed by Sarmiento in favor of
Citizens Bank and Trust Company (CBTC). The court (CA) ruled
that the earlier merger between the two banks could not have
vested Associated Bank with any interest arising from the
promissory note executed in favor of CBTC after such merger.
ISSUE:
WON Associated Bank, the surviving corporation, may enforce
the promissory note made by private respondent in favor of
CBTC, the absorbed company, after the merger agreement had
been signed.
RULING:
YES, although the records do not show when the SEC approved
the merger.
Ordinarily, in the merger of two or more existing corporations, one
of the combining corporations survives and continues the
combined business, while the rest are dissolved and all their
rights, properties and liabilities are acquired by the surviving
corporation. Although there is a dissolution of the absorbed
corporations, there is no winding up of their affairs or liquidation
of their assets, because the surviving corporation automatically
acquires all their rights, privileges and powers, as well as their
liabilities.
The merger, however, does not become effective upon the mere
agreement of the constituent corporations. The procedure to be
followed is prescribed under the Corporation Code. Section 79 of
said Code requires the approval by the Securities and Exchange
Commission (SEC) of the articles of merger which, in turn, must
have been duly approved by a majority of the respective
stockholders of the constituent corporations. The same provision
further states that the merger shall be effective only upon the
issuance by the SEC of a certificate of merger. The effectivity date
of the merger is crucial for determining when the merged or
absorbed corporation ceases to exist; and when its rights,
privileges, properties as well as liabilities pass on to the surviving
corporation.
The records do not show when the SEC approved the merger.
Private respondent’s theory is that it took effect on the date of the
execution of the agreement itself, which was September 16,
1975. Assuming that the effectivity date of the merger was the
date of its execution, the Supreme Court still did not agree that
petitioner no longer has any interest in the promissory note.
The fact that the promissory note was executed after the
effectivity date of the merger does not militate against petitioner.
The agreement itself clearly provides that all contracts —
irrespective of the date of execution — entered into in the name
of CBTC shall be understood as pertaining to the surviving bank,
herein petitioner. Since, in contrast to the earlier aforequoted
provision, the latter clause no longer specifically refers only to
contracts existing at the time of the merger, no distinction should
be made. The clause must have been deliberately included in
the agreement in order to protect the interests of the
combining banks; specifically, to avoid giving the merger
agreement a farcical interpretation aimed at evading fulfillment of
a due obligation.
Thus, although the subject promissory note names CBTC as the
payee, the reference to CBTC in the note shall be construed,
under the very provisions of the merger agreement, as a
reference to petitioner bank, "as if such reference [was a] direct
reference to" the latter "for all intents and purposes." No other
construction can be given to the unequivocal stipulation. Being
clear, plain and free of ambiguity, the provision must be given its
literal meaning.
The Court held that Associated Bank has a valid cause of
action against Lorenzo Sarmiento, Jr.
• Global Business Holdings, Inc. v.
Surecompsoftware, BV (633 SCRA 94 [2010])
FACTS:
Surecomp Software is a foreign corp organized under the laws of
the Netherlands. In 1999, it entered into a software license
agreement to let Asian Bank Corp (ABC) use Surecomp’s IMEX
Software System for 20 yrs
Pursuant to the agreement, Surecomp installed the system and
ABC also undertook to pay professional services and annual
maintenance fees for 5 yrs, and committed to purchase some
products at discounted prices. ABC also requested Surecomp to
purchase a certain software with a promise to reimburse.
However, Global failed to reimburse despite Surecomp’s delivery
of the product/
Sometime in 2000, ABC merged with Global Business. When
Global took over operations, it found the IMEX system
unworkable and informed Surecomp that it was going to
discontinue with the software agreement and that it was going to
stop payments.
Surecomp filed a complaint for breach of contract with damages
in RTC-Makati for Global’s failure to pay its obligations in the
agreement despite demands.
o Surecomp demanded payment of actual
damages and an additional amount for
Global’s unilateral pretermination of the
agreement, and damages.
Instead of filing an answer, Global filed an MTD based on two
grounds:
1. and
wasThat
doing
Surecomp
business had
in thenoPhilippines
capacity towithout
sue because
a license;it
2. That the claim on which the action was founded
was unenforceable under the Intellectual Property
Code of the Philippines. Being a technology transfer
arrangement, Surecomp failed to comply with Sec
87 & 88 of the Intellectual Property Code of the
Philippines.
· RTC ruled that:
o On Ground 1: Global is estopped from denying
Surecomp’s capacity to sue. Global’s argument that
it was not the one who actually contracted with
Surecomp is of no moment. It does not relieve
Global of its contractual obligation.
o On Gorund 2: This will require a hearing before the
MTD can be resolved.
· Surecomp moved for an outright denial of the MTD.
o RTC denied MTD. RTC says it sees no reason to
belabor the issue on Surecomp’s capacity to sue
since there is a prima facie showing that Global
entered into a contract with Surecomp and having
done so, willingly, it cannot now be made to raise the
issue of capacity to sue (Merrill Lynch Futures, Inc. v.
CA).
o As to unenforceability of the contract, it is an
executed, rather than an executor contract. The
statute of frauds finds no application here.
· Global filed a petition for certiorari with prayer for the
issuance of a TRO and/or writ of preliminary injunction under
Rule 65 before the CA, saying that the RTC abused its
discretion and acted in excess of its jurisdiction.
o CA denied the petition. MR denied.
ISSUES:
1. Whether a special civil action for certiorari is the proper remedy
for a denial of a motion to dismiss - NO
2. Whether Global is estopped from questioning Surecomp’s
capacity to sue- YES
RULING:
1.) An order denying an MTD is an interlocutory order. It neither
terminates nor finally disposes of a case (it leaves something to be
done by the court before the case is finally decided on the merits).
· The general rule is that the denial of an MTD cannot be
questioned in a special civil action for certiorari.
· A special civil action for certiorari is a remedy designed to correct
errors of jurisdiction and NOT errors of judgment.
To justify the grant of the extraordinary remedy of certiorari, the denial
of the MTD must have been tainted with grave abuse of discretion.
· "Grave abuse of discretion" is meant such capricious and
whimsical exercise of judgment that is equivalent to lack of
jurisdiction.
o The abuse of discretion must be grave as where the
power is exercised in an arbitrary or despotic manner
by reason of passion or personal hostility, and must
be so patent and gross as to amount to an evasion of
positive duty or to a virtual refusal to perform the duty
enjoined by or to act all in contemplation of law.
· In this case, Global did not properly substantiate its claim of
arbitrariness on the part of the TC judge denying the MTD. In a
petition for certiorari, absent such showing of arbitrariness,
capriciousness, or ill motive in the disposition of the trial judge in the
case, SC is constrained to uphold the ruling, especially because the
decision was upheld by the CA.
 Petition denied (CA affirmed)
2.) A corporation has a legal status only within the state or territory in
which it was organized.
· For this reason, a corp organized in another country has no
personality to file suits in the Philippines.
· In order to subject a foreign corp to the jurisdiction of our
courts, it must acquire a license from the SEC and appoint an agent
for service of process. Without the license, it cannot institute a suit
in the Philippines.
· A party is estopped from challenging the personality of a
corp after having acknowledged the same by entering into a
contract with it.
· The principle is applied to prevent a person contracting
with a foreign corp from later taking advantage of its
noncompliance with the statutes, chiefly in cases where such
person has received the benefits of the contract.
In the merger of two corps, one of the corps survives and continues,
while the other is dissolved, and all rights, properties, and liabilities are
acquired by the surviving corp.
· Global’s merger with ABC made it as if it was the one which
entered into contract with Surecomp.
· Global assumed all the liabilities of ABC as if it had
incurred such liabilities itself. Also, Global has the right to
exercise all defenses, rights, privileges, and counter-claims
which ABC may have.
Notes: April 24
- Always stockholders have final say when we speak of mergers
and consolidations
- Merger and consolidation is like getting married
- Company can sell its assets, its busines, the company itself.
- Corporation can hold properties in its name
- They can acquire properties
- Corporation can also dispose of these things
- Disposition and acquisition
- Corporation can even invest in shares in another corporation
- No prohibition: what a natural person can own, a corp can own,
subject to usual limitations
- Assets can be sold.
- Is the business itself separate from the corporation?
- Asset only sale: in the case of gagamba sabong business, yung
gagamba issale mo. Asset only sale
- Changes the ownership structure. Will change the composition
of the board. Even if only 60% is sold when we speak of equity
disposition. That is what will happen. Each level produces its
unique legal consequences, esp when it comes to liabilities. See
Edward Neil v. Pacific Farms.
- Edward Neil v. Pacific Farms
- Take note of the bulk sales law whenever a substantial asset of
a corporation is sold.
- Whenever assets are sold, there could be an express or implied
agreement, there could be collusion. Therefore, if in an asset
only transaction, if you find that there is express implied
agreement and collusion, do not apply the general rule.
- GR: Transferor retains liability, transferee no liability.
- All 3 levels, the Edward Neil doctrine, it applies to asset only
transaction. If there is continuation of business, that means that
shares were sold, shares were transferred. Exception C which is
continuation of business applies when there is transfer of
shares. Exception D would be consolidation or merger.
- In merger or consolation, the assumption of liabili
- In the absence of any clear arrangement, the liabilities are not
assumed, the presumption is that liabilities are assumed when
there is a consolidation/merger.
- Asset Only Transaction: take note of contract??, bulk sales law,
- Business Enterprise Transfer – sec. 39 (selling all or
substantially all) majority BOD, 2/3 of stockholders
- Take note of the effect of such sae to the employees
1. Merger – One where a corporation absorbs another corporation and
remains in existence while others are dissolved.
2. Consolidation - One where a new corporation is created and -
consolidating corporations are extinguished. not agree. That is the exit strategy of a dissenting shareholder.
- In both Merger and Consolidation, there is no liquidation of
assets. Ipso jure assumption of liabilities. Automatic yan.
Exception sa Edward Nell Doctrine ito.
- Merger/consolidation must be officially, formally adapted and
agreed upon. It cannot be implied. When 2 corporations agree
to consolidate or merger, there is also an assumption of
liabilities.
- Pwede naman hiwalay nila ang liabilities. Pwede na prior to
M/C, Company A and Company B will settle all liabilities
muna para pag nabuo si Company C, di siya liable.
- Sec. 75 of the RCC
- Appraisal right may be exercised when stockholder do not want
to M/C
- Both companies must go through the process.
- Sec. 77 – plan to be here in the Articles, and submit to SEC.
- PNB v. Andrada: SC said that the procedures laid down in 75-
77 must be strictly complied with. Otherwise, no consolidation.
- Just like the birth of corporation itself, the M/C, is only upon
the SEC approval. WIhtout SEC approval, no valid merger. No
Certificate of Merger, No company.
- Poliant case : SC reiterated that no merger/consoldaition until
and unless a certificate is issued by SEC,/approval is made by
the SEC.
- What are the effects? Sec. 79
- Sale of assets and M/C are 2 different
- Pag binenta gagama lang sale of asset. Pag binenta naman yung
license, yung mga gagamba: sale of business. In that case,
walang M/C.
- Associated Bank case: M/C not going up to winding up: 1)
assets can still be used 2) no creditors will be adversely affected
because the obligations will continue to be
honored/recognized.
- Merger/consolidation wil result to , the Philippine Comptition
will disapprove. Ex: Super Company X will buy all the fuel
distributors here. PH Competition Commission will disapprove
it.
Appraisal right – way out mechanism if the shareholder does
- It cannot be invoed in any matter. It must be one of those
enumerated in the Sec. 80 of the RCC: when the right of
appraisal can be exercised. Dissent or disagree with it. He wants
to no longer be a part of the corporation.
- Bearer shares are no longer allowed.
Discussion – May 17
- Shares can be purchased, subscription.
- Former shareholder can donate shares also
- All of you will contractually bind yourselves to purchase a
certain number of shares on the unissued shares. Promise pay
once it is incorporated.
- Authorized capital stock : amount fixed in the AOI. Which can
be increased or decreased by amendment.
- Do not confuse with proeprties/assets: properties and assets:
capital lang not the authoirzd capital stock.
- Sec. 60: Preincorporation subscription: Note its irrevocability
- Miguel cannot back out within 6 months. Can he back out
within 6 months and 1 day although it was filed 6 months and
1 day. No. Be part of the corp and later on, you can sell if there
is no prohibition in the subscription agreement.
- Normally. The sale of shares from a to b is just a contract
beween the 2 of them as a rule. However, in this case, Mr.
Miguel committed to pay, (di complete bayad), shareholders
agreement s between mr ramos and corp.
- On the other hand, ms. Pedro, after the incorporation of the CL
Club, paid her balance of 100k so her 200k subscription is now
fully paid. Ibebenta niya kay B, kasi gusto ni B pumasok sa
Tuesday CL Club. So kausap nila si Miguel. Si Pedro 200k
bayad, kay Miguel di pa complete. Need ba approval ng corp?
Kay Miguel: need pa kasi unpaid portion is utang. Miguel
wants out na agad. Kay Pedro, there is no need kasi kanya na
yon.
- Can be paid in cash or property
- Subscription agreement is only between the stockholder and
corp except in the case above (of Miguel)
- Take note of case of ponce v. cement: if the corporation has nevr - Transfer of shares must also be in the certificate of shares? If you
issued certificates, the transferee cannot demand issuance for. are a transferee,pag inendorse sayo cert, you already know the
The transferee can rest easy even without the certificate. limitations are on the part of the transferor. Sec. 98
- Recording in the stock and transfer: - Specific restrictions in the AOI will govern: inelligibility
- Provision which has interest (valid). There can be deadline to because of this.
pay. The failure to pay within the period agreed will result to - Conclsive presumption which the law tself recognizes
the shares being delinquent. Isusubasta delinquency
share/sale.
- Take no sec. 67: in the meantime di pa niya nababayaran, he
cannot attend meeting, he cannot exercise rights except rights
???
- Contrast that to non-stock corporation :
- Stock corporation can convert to non-stock by simple
amendment of AOI. But the reverse cannot be sanctioned. Non-
stock corp with members not owning anything, not in the
proprietary capacity suddenly becoming shareholders is not
allowed. Once you do not own, something you can convert by
way of amendment. Remember, shares of stock. Every share is
a property. When we talk of non-stock corp (sec. 87)
- Difference between directors/trustees : annual sa directors, but
sa bot- it can be up to 3 years.
- BOD can serve up to 3 years but he or she will be reelected
during the annual shareholders meeting.
- Quorum is identified:
- Stockholders may bumabalik: proprietary nature but if
nonstock, once you dissolve: walang mapupunta sa members.
- Stockholder: investment tapos nonstock holder: contribution.
Money na nung corporation. Kaya pinagbabawal ang isang
non stock to be converted to stock by amendment.
- Stock corp into non-stock = Pwede tapos naconvert and we
dissolve: 93 and 94 will apply. That distribution will apply. Di
na pwede baguhin. Kasi yan consequence.
- Close corporation is non stock or stock? Definition of close
corporation would tell us that they are stock corporation.
- Transfer : Should it be specifically provided in the AOI? Yes. In
the absence, pwede magbenta or transfer.
- No need to be bffs in close corporation.
- Can a corporation a shareholder of a close corporation? Pwede
hanggat di umaabot sa 2/3 closed corp pa din.
- What the AOI may provde to limit the close corp? sec 96
 • Bustos v. Millians Shoe, Inc. (G.R. 185024, 4
- April 2017)
Facts
Spouses Fernando and Amelia Cruz owned a 464-square-meter. On 6
VIII. Special Corporations January 2004, the City Government of Marikina levied the property for
nonpayment of real estate taxes. The Notice of Levy was annotated on
A. Close Corporations (Title XII) - limited to selected the title on 8 January 2004. On 14 October 2004, the City Treasurer of
persons or members of the family (Sec. 96-105, CC). Marikina auctioned off the property, with petitioner Joselito Hernand M.
Bustos emerging as the winning bidder.
A close corporation is one which AOI provides that:
Petitioner then applied for the cancellation of the Title. On 13 July 2006,
the RTC Marikina City rendered a final and executory Decision ordering
1. All of the corporation’s issued stock of all classes, exclusive of treasury
the cancellation of the previous title and the issuance of a new one
shares, shall be held of record by not more than a specified number of
persons, not exceeding 20; under the name of petitioner.
2. All of the issued stock of all classes shall be subject to one or more
specified restrictions on transfer permitted by the provisions on close Meanwhile, notices of lis pendens were annotated on the Title on 9
corporations; and February 2005.These markings indicated that SEC Corp. Case No.
3. The corporation shall not list in any stock exchange or make any public 036-04, which was filed before the RTC and involved the rehabilitation
offering of any of its stock of any class. proceedings for MSI, covered the subject property and included it in the
4. Notwithstanding the foregoing, a corporation shall be deemed NOT a Stay Order issued by the RTC dated 25 October 2004.
close corporation when at least 2/3 of its voting stock or voting rights is
owned or controlled by another corporation which is not a close On 26 September 2006, Bustos moved for the exclusion of the subject
corporation within the meaning of this Code. property from the Stay Order.He claimed that the lot belonged to
Spouses Cruz who were mere stockholders and officers of MSL He
Note: Stockholders of close corporations are personally liable for corporate torts further argued that since he had won the bidding of the property on 14
unless the corporation has obtained insurance (sec. 100 (5) CC) adequate October 2004, or before the annotation of the title on 9 February 2005,
the auctioned property could no longer be part of the Stay Order.
Right of First Refusal in close corp
RTC: denied the entreaty of petitioner. It ruled that because the period
GR: The right of first refusal can only arise by means of a contractual stipulation, of redemption up to 15 October 2005 had not yet lapsed at the time of
or when it is provided for in the AOI the issuance of the Stay Order on 25 October 2004, the ownership
thereof had not yet been transferred to petitioner.
XPN: In the case of a close corporation, the right of first refusal is required to be
found in the AOI. CA: Spouses Cruz as stockholders of MSI are personally liable for the
latter’s debt and obligations. “The Cruz Spouses were still the owners
When only the by-laws provide a right of first refusal without the corresponding of the land at the time of the issuance of the stay order. The said parcel
provision in the AOI and not printed in the stock certificate, it is null and void.
of land which secured several mortgage liens for the account of MSI
There is no authority to create property restrictions in by-laws provisions
remains to be an asset of the Cruz Spouses, who are the stockholders
(Hodges v. Lezama, G.R. No. L-17327, August 30, 1963).
and/or officers of MSI, a close corporation. Incidentally, as an exception
to the general rule, in a close corporation, the stockholders and/or
officers usually manage the business of the corporation and are subject
to all liabilities of directors, i.e. personally liable for corporate debts and
obligations.”
Issue
W/n the CA correctly considered the properties of Spouses Cruz
answerable for the obligations of MSI. (If the answer is in the
affirmative, then the courts a quo correctly ruled that the Stay Order
involving the assets of MSI included the property covered by TCT No.
N-126668. Petitioner would also be considered a creditor of MSI who
must timely file an opposition to the proposed rehabilitation plan of the
corporation.)
Held
No, the spouses Cruz are not liable for the debts of the MSI. The CA’s
conclusion that they are stockholders of close corporation and are liable
for its debts is baseless.
To be considered a close corporation, an entity must abide by the
requirements laid out in Section 96 of the Corporation Code, which
reads:
Sec. 96. Definition and applicability of Title. - A close corporation, within
the meaning of this Code, is one whose articles of incorporation provide
that: (1) All the corporation's issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more than a specified
number of persons, not exceeding twenty (20); (2) all the issued stock
of all classes shall be subject to one or more specified restrictions on
transfer permitted by this Title; and (3) The corporation shall not list in
any stock exchange or make any public offering of any of its stock of
any class. Notwithstanding the foregoing, a corporation shall not be
deemed a close corporation when at least two-thirds (2/3) of its voting
stock or voting rights is owned or controlled by another corporation
which is not a close corporation within the meaning of this Code. x x x.
(Emphasis supplied)
In San Juan Structural and Steel Fabricators. Inc. v. CA: a narrow
distribution of ownership does not, by itself, make a close corporation.
Courts must look into the articles of incorporation to find provisions
expressly stating that (1) the number of stockholders shall not exceed
20; or (2) a preemption of shares is restricted in favor of any stockholder
or of the corporation; or (3) the listing of the corporate stocks in any
stock exchange or making a public offering of those stocks is prohibited.
Here, neither the CA nor the RTC showed its basis for finding that MSI
is a close corporation. The courts a quo did not at all refer to the Articles
of Incorporation of MSI. The Petition submitted by respondent in the
rehabilitation proceedings before the RTC did not even include those
Articles of Incorporation among its attachments.
In effect, the CA and the RTC deemed MSI a close corporation based
on the allegation of Spouses Cruz that it was so. However, mere
allegation is not evidence and is not equivalent to proof.
CA seriously erred in portraying the import of Section 97 of the
Corporation Code. Citing that provision, the CA concluded that "in a
close corporation, the stockholders and/or officers usually manage the
business of the corporation and are subject to all liabilities of directors,
i.e. personally liable for corporate debts and obligations."
However, Section 97 of the Corporation Code only specifies that "the
stockholders of the corporation shall be subject to all liabilities of
directors." Nowhere in that provision do we find any inference that
stockholders of a close corporation are automatically liable for
corporate debts and obligations.
Instead, the Court applies the general doctrine of separate juridical
personality, which provides that a corporation has a legal personality
separate and distinct from that of people comprising it. By virtue of that
doctrine, stockholders of a corporation enjoy the principle of limited
liability: the corporate debt is not the debt of the stockholder. Thus,
being an officer or a stockholder of a corporation does not make one's
property the property also of the corporation.
B. Educational Corporations (Title XIII, Chapter 1,
RCC)
- Shall be governed by special laws and by the
general provisions of the RCCp. Special laws
include BP Blg. 231 as emended by RA 7798
or the Education Act of 1982.
• Education Act of 1982 – only organized as non-
stock and non-profit
 o The minimum paid up capital stock
should be – elementary educ only (not
less than 1M), both elem and secondary
(not less than 2.5 M); elementary,
secondary, tertiary and post grad (5M).
o Existing educational institutions
organized as stock corp may retain their
original capitalization.
o Stock educational institutions may be
allowed only in capital intensive courses
of study as may be determined by the
DEPED, CHED, and DOST>
Non stock – trustee shall not be less than 5 or more than 15
Number of trustees shall be in multiples of 5 and staggering of
terms is required.
Rationale of staggered terms: if the system will not be applied,
there would be a possibility of disruption of the prevailing
policies of educational institutions to the detriment of the student
body.
Foreigners are not allowed to become members of the BOT or
BOD of educational institutions (Art. XIV Sec. 4(2) of the
Constitution. Neither can a foreigner be elected as Chairman of
said governing body.
• Republic Act 7798 (1994)
• Barayuga v. Adventist University of the
Philippines (655 SCRA 640)
FACTS:
Adventist University of the Philippines (AUP) is a non-stock and
non-profit domestic educational institution which was under North
Philippine Union Mission (NPUM) of the Southern Asia Pacific
Division of the Seventh Day Adventists. During the 3rd
Quinquennial Session of the General Conference of Seventh Day
Adventists, members of the Board of Trustees of AUP was
elected. Dayson was elected Chairman and Barayuga as
Secretary.
Barayuga was later on appointed as President. An audit was
conducted which revealed Barayuga’s autocratic management
style. He made major decisions without prior approval, made
withdrawals and reimbursements without receipts, etc
The General Conference Auditing Service (GCAS) was hired to
determine the veracity of the audit findings. They confirmed the
initial findings of the auditors. Thus, Barayuga was asked to
explain the irregularities cited in the report. During the special
meeting, Barayuga, as the secretary, provided copies of the
report as well as his written explanation, but the meeting had to
be adjourned and a new one set for another schedule.
In the next special meeting, the members, thru secret ballot,
voted to remove him as President because of his serious
violations. Barayuga requested for reconsideration, but was
denied by the BOT. He was served the notice of denial, but
refused to receive it simply saying that he was already aware of
it.
An inter-school memorandum informing AUP students, staff, and
faculty members about his relief as President was given to
Barayuga prompting him to file a suit for injunction and damages
in the RTC, with prayer for the issuance of TRO alleging that he
was removed without valid grounds, in bad faith, and that he was
denied ample time to present evidence.
RTC: issued the TRO and subsequently, granted Barayuga’s
application for a writ of preliminary injunction
CA: Nullified RTC’s writ of preliminary injunction. It rejected the
petitioner’s argument that Article IV, Section 3 of AUP’s
Constitution and By-Laws and Working Policy of the Conference
provided a five-year term for him, because the provision was
inexistent. It ruled that the petitioner’s term of office had expired
two years from his appointment, based on AUP’s amended By-
Laws; that, consequently, he had been a mere de facto officer
appointed by the members of the Board of Trustees; and that he
held no legal right warranting the issuance of the writ of
preliminary injunction.
ISSUE: W/N Barayuga is entitled to serve for 5 years as AUP
President – NO.
RULING:
Petitioner rested his claim for injunction mainly upon his
representation that he was entitled to serve for five years as
President of AUP under the Constitution, By-Laws and Working
Policy of the General Conference of the Seventh Day Adventists
(AKA: Bluebook). This had no evidentiary value. It had not been
officially adopted for submission to and approval of the Securities
and Exchange Commission. It was nothing but an unfilled model
form.
Petitioner’s assertion of a five-year duration for his term of office
also lacked legal basis.
The second paragraph of Sec. 108 of the Corporation Code,
although setting the term of the members of the Board of Trustees
at five years, contains a proviso expressly subjecting the
duration to what is otherwise provided in the articles of
incorporation or by-laws of the educational corporation. That
contrary provision controls on the term of office.
AUP’s amended By-Laws provided the term of the members of
the Board of Trustees, and the period within which to elect the
officers. The provisions of the by-laws state that the members
of the Board of Trustees were to serve a term of office of only
two years; and the officers, who included the President, were to
be elected from among the members of the Board of Trustees
during their organizational meeting, which was held during the
election of the Board of Trustees every two years. Naturally, the
officers, including the President, were to exercise the
powers vested by Section 2 of the amended By-Laws for a
term of only two years, not five years.
Petitioner was appointed as President of AUP in Jan. 23, 2001
and hence he may only serve until Jan. 23, 2003. He was
removed as President on Jan. 27, 2003. At the time, he was
already occupying the office in a hold-over capacity, and could be
removed at any time, without cause, upon the election or
appointment of his successor
C. Religious Corporations (Title XIII, Chapter 2,
RCC)
• Corporation sole - Religious corporation which lands in the Philippines pursuant to provisions of Article XIII of the
consists of one member which is the head of the religious Constitution
sect or corporator only and his successor.
o Roman Catholic Apostolic
Administrator of Davao v. Land
Registration Commission (102 Phil. 596;
1957)
FACTS:
Mateo Rodis, a Filipino citizen and resident of the City of
Davao, executed a deed of sale of a parcel of land located
in the same city, in favor of the Roman Catholic
Administrator of Davao Inc., a corporation sole organized
and existing in accordance with Philippine laws, with Msgr.
Clovis Thibault, a Canadian citizen, as actual incumbent.
The vendee expressed willingness to submit an affidavit,
but not in the same tenor as that made by the Prioress of
the Carmelite Nuns because the two cases are not similar.
The congregation of the Carmelite Nuns had five
incorporators, the corporation sole has only one; that
according to their articles of incorporation, the organization
of the Carmelite Nuns became the owner of properties
donated to it, whereas the case at bar, the totality of the
Catholic population of Davao would become the owner of
the property sought to be registered.
· As the Register of Deeds entertained some doubts as to
the registrability of the document, the matter was referred to the
Land Registration Commissioner for resolution. The LRC issued
a resolution stating that the vendee was not qualified to acquire
private lands in the Philippines in the absence of proof that at
least 60% of the capital, property, or assets of the petitioner was
actually owned or controlled by Filipino citizens, there being no
question that the present incumbent of the corporation sole was
a Canadian citizen.
· Petitioner alleges that under the Corporation Law and
the Canon Law as well, the settled jurisprudence on the matter,
the deed of sale is actually in favor of the Catholic Church which
is qualified to acquire private agricultural lands for the
establishment and maintenance of places of worship.
ISSUE: Whether the petitioner is qualified to acquire private agricultural
RULING:

Yes, the petitioner is qualified to acquire private agricultural lands.
Sections 1 and 5 of Article XIII provide that only persons or corporations
qualified to acquire or hold lands of the public domain in the Philippines
may acquire or be assigned and hold private agricultural lands.
Petitioner is a corporation sole. A corporation sole is a special form of
corporation usually associated with the clergy. It consists of one person
only, and his successors [who will always be one at a time], in some
particular station, who are incorporated by law in order to give them
some legal capacities and advantages, particularly that of perpetuity,
which in their natural persons they could not have had.
According to the Corporation Law, a corporation sole is organized and
composed of a single individual, the head of any religious society or
church, for the administration of the temporalities of such society of
church. By temporalities is meant estates and properties not used
exclusively for religious worship. The successors in office of such
religious head or chief incorporated as a corporation sole shall become
the corporation sole on ascension to office, and shall be permitted to
transact business as such on filing with the SEC a copy of his
commission, certificate of election or letter of appointment duly certified
by any notary public or clerk of court of record.
The Corporation Law also contains the following provisions:
SECTION 159. Any corporation sole may purchase and
hold real estate and personal property for its church,
charitable, benevolent, or educational purposes, and
may receive bequests or gifts for such purposes. Such
corporation may mortgage or sell real property held by it
upon obtaining an order for that purpose from the Court
of First Instance of the province in which the property is
situated; but before making the order proof must be
made to the satisfaction of the Court that notice of the
application for leave to mortgage or sell has been given
by publication or otherwise in such manner and for such
time as said Court or the Judge thereof may have
directed, and that it is to the interest of the corporation
that leave to mortgage or sell should be granted. The
application for leave to mortgage or sell must be made
by petition, duly verified by the bishop, chief priest, or
presiding elder, acting as corporation sole, and may be
opposed by any member of the religious denomination,
society or church represented by the corporation sole:
Provided, however, That in cases where the rules,
regulations, and discipline of the religious denomination,
society or church concerned represented by such
corporation sole regulate the methods of acquiring,
holding, selling and mortgaging real estate and personal
property, such rules, regulations, and discipline shall
control and the intervention of the Courts shall not be
necessary.
• Religious Societies
- A religious denomination, sect or church,
society or organization, which does not want
to acquire juridical personality separate and
distinct from its member need not register
with the SEC. The RCCP does not require
any religious group to be registered as a
corporation. Even if not registered, the
members of religious organizations, by
agreement, may perform acts not contrary to
law, morals, good customs, public order, or
publicly.
- But unregistered religious group does not
acquire all the rights and attributes of a
juridical person if not registered.
Kinds:
1. corp sole (sec. 108 to 113)
2. coporation aggregate/ religious society under sec. 114
3. ordinary non-stock religious corp (sec. 86 to 94)
What if the head bishop dies? Will it result to dissolution?
D. One-Person Corporation (Title XIII, RCC) –
corporation with a single stockholder. The OPC has
a personality separate and distinct form the single
stockholder.
- Limited to a/an a) natural person b) trust –
does not include trust entities such as Trust
Companies regulated by BDP, trust means
the subject that is being managed by a
trustee c) estate of a deceased person.
- Ease of doing business
- No limit to the number of OPCs one may
avail. One person may incorporate two or
more OPCs.
- Even foreign nationals can form an OPC, but
subject to the applicable requirement and
constitutional and stature restrictions on
foreign participation in certain investment
areas or activities.
- Prohibited: Banks and quasi-banks, preneed,
trust, insurance, public and publicly listed
companies, and non-chartered government
owned and controlled corps.
- Prohibited: a natural person who is license
to exercise a profession may not organize as
an OPC for the purpose of exercising such
profession except as otherwise provided
under special laws.
- Why is a stockholder allowed to be treasurer
and president but not president and corp
secretary? (Atty Creencia) the value of the
corporate secretary, really comes to fore
when the solo stockholder dies.
- In OPC thre can be both common and
preferred shares but there is no commercial
value (kasi wala na naming voting eh).
- Single Sotckholder is also director
- Is the OPC required to submit and file By-
laws together with AOI? No, under RCCP.
Mag isa lang siya. Kaya walang bylaws. It
gives emphasis to the intramural value of
the by-laws.
- Estate? Who will be the president of the
OPC? The administrator, executor,
conservator.
- Who appoints these people? Administrator
by court, executor by the last will and
testament.
-
• SEC Memorandum Circular 7, s. 2019 (29 April
2019)
- Can an OPC be engaged in a banking
activity? No
- Paid up. Unless otherwise required by
applicable laws or regulations, o portion of
the authorized capital is required to be paid
up at the time of incorporation.
E. Foreign Corporation (Title XV, RCC) - A foreign
corporation is done, formed, organized or existing
under any laws other than those of the Philippines
and whose laws allow Filipino citizens and
corporations to do business in its own country or
State (CC, Sec. 123).
• The Incorporation Test - the corporation must
be formed, organized, or existing under foreign
law.
• Due to the enactment of RA 7042, the control
test is now used in the determination of
nationality of the corporation in case of
nationalized or partly nationalized activities.
However, this does not preclude the use of other
tests in determining the nationality of the
corporation. In fact, as per SEC Opinion on Nov.
28, 2009, the SEC opined that the grandfather
rule can be useful when a corporation’s
 economic activity is strictly limited by law to
Filipino citizens, such as certain types of retail
trading and mass media. Further, according to
the commission, the control test, which is more
liberal, is applied for corporations intending to
engage in commerce where 60%-40% equity
ratio is allowed by law.
• Policy of Reciprocity / Doctrine of State
Comity - It allows Filipino citizens to do
business in the foreign state or country. This is
merely prescribed as a requirement to secure a
license and not an essential element of being a
foreign corporation (De Leon, 2010).
• Resident Agent – one whom any summons and
other legal processes may be served in all
actions or other legal proceedings against the
foreign corp doing business in the PH. It is
limited to the authority to receive, for and in
behalf of the corp, services, and other legal
processes in all actions and other legal
proceedings against the foreign corp. he is not
atty-in-fact. He cannot sign the certificate of
non-forum shopping that is a requirement in
filing an initiatory pleading.
- When we speak of foreign corporations?
Does that mean they are owned by
foreigners?
- Relevance of foreign corp in ph law? Once it
obtains license when it transacts business
- Does it need to organize another corp?
- Various ways a foreign corporation may
establish its business in the PH? Resident
agent, branch,
- Who is a resident agent?
• Expertravel & Tours v. CA (459 SCRA
147 [2005])
FACTS:
· Korean Airlines [KAL] is a corporation established and
registered in the Republic of South Korea and licensed to do
business in the PH. Its general manager in the PH is Suk Kyoo
Kim, while its appointed counsel was Atty. Mario Aguinaldo and
his law firm. KAL, through Atty. Aguinaldo, filed a complaint
against ETI 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. KAL opposed
the motion, contending that Atty. Aguinaldo was its resident
agent and was registered as such with the SEC as required by
the Corporation Code. It was further alleged that Atty. Aguinaldo
was also the corporate secretary of KAL. 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 1999. KAL submitted an
affidavit, executed by its general manager, alleging that the
board of directors conducted a special teleconference on June
1999 which he and Atty. Aguinaldo attended. It was also averred
that on the same teleconference, the BOD approved a
resolution authorizing Atty. Aguinaldo to execute the certificate
of non-forum shopping and to file the complaint. However, the
general manager alleged, that the corporation had no written
copy of the resolution.
ISSUE: Whether Atty. Aguinaldo, as the resident agent of KAL, can
execute and sign the certificate of non-forum shopping?
RULING: No, 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.
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.
Under the law, Atty. Aguinaldo was not specifically authorized
to execute a certificate of non-forum shopping. This is because
while a resident agent may be aware of actions filed against his
principal, such resident may not be aware of actions initiated by
its principal, whether in the PH 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.
• Modes of Doing Business - Under the Foreign
Investment Act (R.A. No. 7402),a foreign
corporation is “deemed doing business in the
Philippines” if it is continuing the body or
substance of the business or enterprise for
which it was organized. It is the intention of an
entity to continue the body of its business in the
country. The grant and extension of 90-day
credit terms of a foreign corporation to a
domestic corporation for every purchase shows
an intention to continue transacting with the
latter.
1. Twin Characterization Test
a. Continuity Test –implies a continuity of
commercial dealings and arrangements, and
contemplates to some extent the performance of
acts or works or the exercise of some functions
normally incident to and in progressive
prosecution of, the purpose and object of its
organization.
b. Subsequent Test – a foreign corporation is
doing business in the country if it is continuing
the body or substance of the enterprise of
business for which it was organized (Sundiang
Sr. & Aquino, 2009).
2. Contract Test - Whether the contracts entered
into by the foreign corporation, or by an agent
acting under the control and direction of the
foreign corporation, are consummated in the
Philippines.
- Organized in Singapore, the primary
purpose is investment advisory service. But
they want a license in trading chemicals?
Can they do that? No they cannot do that.
- Singapore registered corp. consultancy here
advisory. Later on, amended the AOI in
Singapore no longer investment advisory,
they are now in forex trading, as amended in
AOI, can they be allowed to continue? What
the law requires is to advise the SEC of the
change of purpose. SEC will say no you are
no longer be allowed, the SEC will require
the corp to either cease or change its licence
in the PH.
- The license in the PH must always
correspond with its AOI in its government.
- Example may branch na, can a foreign corp
deal with the domestic corp to merge and
consolidate? Pwede pero need withdraw.
- Domestic corporation enters into contract
with a foreign corp knowing it does not have
license? Contract is still valid. Remedy will
be cured with subsequent registration.
(Home Insurance case)
- When a foreign corp is doing business I the
country without license, foreign corp cannot
sue. But the PH domestic corp which dealt
with foreign corp may be estopped.
- Struggling between foreign corp cannot sue
but if the foreign corp indeed sues the
domestic corp, estoppel may set in.
Domestic corporation won’t have an airtight
defense in the sense that estoppel may set in.
Agilan technology Singapore v. ???
https://lawphil.net/judjuris/juri2004/apr2
004/gr_154618_2004.html
- Foreign corp not doing business, no license,
foreign corp may sue on isolated transaction.
- With license doing business, can sue.
- Grounds for revoking a license.
- Not doing business in the PH
• Section 3(par. d) of RA 7042, as
amended by RA 8176 (Foreign
Investments Act of 1991)
• Cargill, Inc. v. Intra Strata Assurance
Corporation (615 SCRA 304 [2010])
FACTS:
Petitioner Cargill, Inc. is a corporation organized and existing
under the laws of the State of Delaware, USA. Petitioner and Northern
Mindanao Corporation (NMC) executed a contract whereby NMC
agreed to sell to petitioner 20,000 to 24,000 metric tons of molasses, to
be delivered from 1 January to 30 June 1990 at the price of $44 per
metric ton. The contract provides that petitioner would open a Letter of
Credit with the Bank of Philippine Islands. Under the "red clause" of the
Letter of Credit, NMC was permitted to draw up to $500,000
representing the minimum price of the contract upon presentation of
some documents. The contract was amended three times. The third
amendment required NMC to put up a performance bond equivalent to
$451,500, which represents the value of 10,500 metric tons of
molasses computed at $43 per metric ton. The performance bond was
intended to guarantee NMC’s performance to deliver the molasses
during the prescribed shipment periods according to the terms of the
amended contract. Respondent Intra Strata Assurance Corporation
issued on a performance bond in the sum of ₱11,287,500 to guarantee
NMC’s delivery of the 10,500 tons of molasses, and a surety bond in
the sum of ₱9,978,125 to guarantee the repayment of downpayment as
provided in the contract. NMC was only able to deliver 219.551 metric
tons of molasses out of the agreed 10,500 metric tons. Thus, petitioner
sent demand letters to respondent claiming payment under the
performance and surety bonds. When respondent refused to pay,
petitioner filed on 12 April 1991 a complaint for sum of money against
NMC and respondent. Petitioner, NMC, and respondent entered into a
compromise agreement which provides that NMC would pay petitioner
₱3,000,000 upon signing of the compromise agreement and would
deliver to petitioner 6,991 metric tons of molasses from 16-31
December 1991. However, NMC still failed to comply with its obligation
under the compromise agreement. Hence, trial proceeded against
respondent. The CA held that petitioner does not have the capacity to
file this suit since it is a foreign corporation doing business in the
Philippines without the requisite license. The Court of Appeals held that
petitioner’s purchases of molasses were in pursuance of its basic
business and not just mere isolated and incidental transactions.
ISSUE: Whether the petitioner, an unlicensed foreign corporation, has
legal capacity to sue before Philippine courts
RULING:
Yes.
Under Article 123 of the Corporation Code, a foreign corporation must
first obtain a license and a certificate from the appropriate government
agency before it can transact business in the Philippines. Where a
foreign corporation does business in the Philippines without the proper
license, it cannot maintain any action or proceeding before Philippine
courts as provided under Section 133 of the Corporation Code:
Sec. 133. Doing business without a license. – No foreign corporation
transacting business in the Philippines without a license, or its
successors or assigns, shall be permitted to maintain or intervene in
any action, suit or proceeding in any court or administrative agency of
the Philippines; but such corporation may be sued or proceeded against
before Philippine courts or administrative tribunals on any valid cause
of action recognized under Philippine laws.
The threshold question in this case is whether petitioner was
doing business in the Philippines. The Corporation Code provides
no definition for the phrase "doing business." Section 1 of Republic Act
No. 5455 (RA 5455), provides that the phrase "doing business" shall
include soliciting orders, purchases, service contracts, opening
offices, whether called ‘liaison’ offices or branches; appointing
representatives or distributors who are domiciled in the
Philippines or who in any calendar year stay in the Philippines for
a period or periods totalling one hundred eighty days or more;
participating in the management, supervision or control of any
domestic business firm, entity or corporation in the Philippines;
and any other act or acts that imply a continuity of commercial
dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the
functions normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the business
organization.
In the case at bar, the transactions entered into by the respondent with
the petitioners are not a series of commercial dealings which signify an
intent on the part of the respondent to do business in the Philippines
but constitute an isolated one which does not fall under the category of
"doing business." In the present case, petitioner is a foreign
company merely importing molasses from a Philippine exporter.
A foreign company that merely imports goods from a Philippine
exporter, without opening an office or appointing an agent in the
Philippines, is not doing business in the Philippines
• Columbia Pictures v. CA (261 SCRA 144
[1996])
FACTS:
Complainants thru counsel lodged a formal complaint with the National
Bureau of Investigation for violation of PD No. 49, as amended, and
sought its assistance in their anti-film piracy drive. Agents of the NBI
and private researchers made discreet surveillance on various video
establishments in Metro Manila including Sunshine Home Video Inc.
(Sunshine for brevity), owned and operated by Danilo A. Pelindario.
On November 14, 1987, NBI Senior Agent Lauro C. Reyes applied for
a search warrant with the court a quo against Sunshine seeking the
seizure, among others, of pirated video tapes of copyrighted films all of
which were enumerated in a list attached to the application; and,
television sets, video cassettes and/or laser disc recordings equipment
and other machines and paraphernalia used or intended to be used in
the unlawful exhibition, showing, reproduction, sale, lease or
disposition of videograms tapes in the premises above described. In
the hearing of the application, NBI Senior Agent Lauro C. Reyes, upon of capacity to sue," not "lack of personality to sue." Certainly, a
questions by the court a quo, reiterated in substance his averments in corporation whose legal rights have been violated is undeniably such,
his affidavit. Search Warrant No. 87-053 for violation of Section 56 of if not the only, real party in interest to bring suit thereon although, for
PD No. 49, as amended, was issued by the court a quo. In the course failure to comply with the licensing requirement, it is not capacitated to
of the search of the premises indicated in the search warrant, the NBI maintain any suit before our courts.
Agents found and seized various video tapes of duly copyrighted
motion pictures/films owned or exclusively distributed by private
complainants, and machines, equipment, television sets,
paraphernalia, materials, accessories all of which were included in the
receipt for properties accomplished by the raiding team. Copy of the
receipt was furnished and/or tendered to Mr. Danilo A. Pelindario,
registered owner-proprietor of Sunshine Home Video.

ISSUE: Whether or not petitioner has legal standing in our courts, they
being foreign corporations not licensed to do business in the Philippines

RULING:

Yes.

The obtainment of a license prescribed by Section 125 of the

Corporation Code is not a condition precedent to the
maintenance of any kind of action in Philippine courts by a foreign
corporation. However, under the aforequoted provision, no
foreign corporation shall be permitted to transact business in the
Philippines, as this phrase is understood under the Corporation
Code, unless it shall have the license required by law, and
until it complies with the law intransacting business here, it
shall not be permitted to maintain any suit in local courts. As
thus interpreted, any foreign corporation not doing business in the
Philippines may maintain an action in our courts upon any cause of
action, provided that the subject matter and the defendant are within
the jurisdiction of the court. It is not the absence of the prescribed
license but "doing business" in the Philippines without such license
which debars the foreign corporation from access to our courts. In
other words, although a foreign corporation is without license to
transact business in the Philippines, it does not follow that it has
no capacity to bring an action. Such license is not necessary if it
is not engaged in business in the Philippines. the ground available
for barring recourse to our courts by an unlicensed foreign corporation
doing or transacting business in the Philippines should properly be "lack

IX. Ending a Juridical Life: Dissolution and Liquidation
(Title XIV, RCC)
A. Methods of Dissolution
• Voluntary
a. By the vote of the BOD/ BOT and the
stockholders/ members where no creditors are
affected (CC, Sec. 118);
b. By the judgment of the SEC after hearing of
petition for voluntary dissolution, where creditors
are affected (CC, Sec. 119);
c. By amending the AOI to shorten the corporate
term (CC, Sec. 120);
d. In case of a corporation sole, by submitting to the
SEC a verified declaration of the
dissolution for approval (CC, Sec. 115); and
e. Merger or consolidation
• Involuntary
a. By expiration of corporate term provided for in the AOI (CC,
Sec. 11)
b. By legislative enactment
c. By failure to formally organize and commence the transaction
of its business within 2 years from the date of incorporation (CC,
Sec. 22)
d. By order of the SEC on grounds under existing laws (CC, Sec.
121)
e. Judicial decree on Quo Warranto Proceeding (CC, Sec. 20)
B. Dissolution by shortening corporate term –
Section 136 (RCC)
1. Amending the Articles of Incorporation pursuant to Sec. 16:
1. Approved by majority vote of the board of
directors or trustees
2. Ratified at a meeting by the stockholders
representing at least 2/3 of the outstanding capital stock or by
at least two-thirds (2/3) of the members in case of non-stock
corporations.
2. Copy of the amended AOI shall be submitted with the SEC.
3. Approval of SEC of the amended AOI.
4. As an additional requirement, the SEC requires to submit the final
audited Financial statement not older than 60 days before the
application for shortening the corporate term (CC, Sec. 120
in relation to Sec. 16)
NOTE: Under the RCC the dissolution now takes effect from the expiration of the
shortened terms stated in the approved articles, without any further proceedings,
And to prevent confusion, the new code now specifically provides that in case of
expiration of corporate term dissolution automatically takes effect in the day
following the last day of the corporate term as stated in the aritcles without need
for issuance by the SEC of a certificate of dissolution.
• SEC Opinion, 5 July 1979
• SEC Opinion 06-20, 13 March 2006
C. Corporate Liquidation - Section 139 (RCC) Process
by which all the assets of the corporation are
converted into liquid assets (cash) in order to
facilitate the payment of obligations to creditors
and the remaining balance if any is to be distributed
to the stockholders (Sundiang Sr. & Aquino, 2014).
SEC. 139. Corporate Liquidation. – Except for banks, which shall be
covered by the applicable provisions of Republic Act No. 7653,
otherwise known as the “New Central Bank Act”, as amended, and
Republic Act No. 3591, otherwise known as the Philippine Deposit
Insurance Corporation Charter, as amended, every corporation whose
charter expires pursuant to its articles of incorporation, is annulled by
forfeiture, or whose corporate existence is terminated in any other
manner, shall nevertheless remain as a body corporate for three (3) years
after the effective date of dissolution, for the purpose of prosecuting and
defending suits by or against it and enabling it to settle and close its
affairs, dispose of and convey its property, and distribute its assets, but
not for the purpose of continuing the business for which it was
established. At any time during said three (3) years, the corporation is
authorized and empowered to convey all of its property to trustees for
the benefit of stockholders, members, creditors and other persons in
interest. After any such conveyance by the corporation of its property in
trust for the benefit of its stockholders, members, creditors and others in
interest, all interest which the corporation had in the property
terminates, the legal interest vests in the trustees, and the beneficial
interest in the stockholders, members, creditors or other persons-in-
interest.
Except as otherwise provided for in Sections 93 and 94 of this Code,
upon the winding up of corporate affairs, any asset distributable to any
creditor or stockholder or member who is unknown or cannot be found
shall be escheated in favor of the national government.
Except by decrease of capital stock and as otherwise allowed by this
Code, no corporation shall distribute any of its assets or property except
upon lawful dissolution and after payment of all its debts and liabilities.
• Aguirre II v. FQB+7, Inc. (688 SCRA 242 [2013])
FACTS:
Vitaliano Aguirre filed a complaint, in his individual capacity and on
behalf of FQB+7 Inc, for intra-corporate dispute, injunction, inspection
of corporate books and records and damages against respondents for
allegedly changing the names of the directors and subscribers of the
company in the General Information Sheet, and for the continuous
representation of the corporation.
Proceedings transpired. The respondents sought for the annulment of
the proceedings and issuances. They also informed the CA that the
SEC had already revoked FQB+7's Certificate of Registration for its
failure to comply with the SEC reportorial requirements. The CA
determined that the corporation's dissolution was a conclusive fact after
petitioners Vitaliano and Fidel failed to dispute this factual assertion.
ISSUE:
1. Whether the complaint is a continuation of a dissolved
corporation’s business
2. Whether intra-corporate disputes remain even when the
corporation is dissolved
RULING:
1. No, the Court did not find in the prayer for relief any intention to
continue the business of FQB+7. Section 122 of the Corporation
Code (now Sec 139, RCC) prohibits a dissolved corporation
from continuing its business, but allows it to continue with a
limited personality in order to settle and close its affairs,
including its complete liquidation. The complaint’s aim is not to
continue the corporate business, but to determine and vindicate
an alleged stockholder's right to the return of his stockholdings
and to participate in the election of directors, and a corporation's
right to remove usurpers and strangers from its affairs.
2. Yes. It bears reiterating that Section 145 of the Corporation
Code protects among others, the rights and remedies of corporate
actors against other corporate actors. The statutory provision assures
an aggrieved party that the corporation's dissolution will not impair,
much less remove, his/her rights or remedies against the corporation,
its stockholders, directors or officers. It also states that corporate
dissolution will not extinguish any liability already incurred by the
corporation, its stockholders, directors, or officers. In short, Section 145
preserves a corporate actor's cause of action and remedy against
another corporate actor. In so doing, Section 145 also preserves the
nature of the controversy between the parties as an intra-corporate
dispute.
The dissolution of the corporation simply prohibits it from
continuing its business. However, despite such
dissolution, the parties involved in the litigation are still
 corporate actors. The dissolution does not automatically
convert the parties into total strangers or change their intra-
corporate relationships. Neither does it change or terminate
existing causes of action, which arose because of the corporate
ties between the parties. Thus, a cause of action involving an
intra-corporate controversy remains and must be filed as an
intra-corporate dispute despite the subsequent dissolution of
the corporation.
• Tan Tiong Bio v. Commissioner (100 Phil. 86;
1956)
FACTS:
The Central Syndicate, a corporation organized for the a period of 2
years, addressed a letter to the Collector of Internal Revenue advising
them of the purchase of surplus properties from one Dee Hong Lue,
which the latter purchased from the Foreign Liquidation Corp, with the
condition that the corp would pay the 3 ½ sales tax of such properties
in the name and in behalf of the vendor Dee Hong Lue. In the same
letter, CS deposited with the Collector the amount for the sales tax, but
representing that Lue expected a refund from the US Government on
the original purchase price because of non-delivery of various items
included in the contract.
Subsequently, Lue wrote the Collector that the FLC had given him a
refund of the purchase price, and requested for a refund on the sales
tax. Four years later, after investigation by the Collector, the request
was denied. The Collector then wrote CS that from the investigation, it
was revealed that it is them who purchased the surplus goods from FLC
and only named for Lue in trust, and that CS made it appear that they
purchased the goods from Lue to evade payment of sales tax and its
deficiencies. Because CS had no properties to satisfy the deficiencies,
the Collector wrote its manager and president to pay for it or else it will
be held criminally liable. The Collector issued a ruling reaffirming the
deficiency assessment of CS. It was then appealed to the CTA.
CTA: dismissed the appeal on the ground that whatever judgment it
would render in favor of the Government would be unenforceable
against the appellant because it is a non-existing entity.
ISSUE:
Whether the government can make a tax assessment against a
corporation that is no longer existing
RULING:
No. The government can not insist on making a tax assessment against
a corporation that no longer exists and then turn around and oppose
the appeal questioning the legality of the assessment precisely on the
ground that the corporation is non- existent, and has no longer capacity
to sue. The government can not adopt inconsistent stands and thereby
deprive the officers and directors of the defunct corporation of the
remedy to question the validity and correctness of the assessment for
which, if sustained, they would be held personally liable as successors-
in-interest to the corporate property.
However, the Court held that the Syndicate’s appeal should not have
been dismissed but that the respondent Court of Tax Appeals should
have allowed the substitution of its former officers and directors as
parties-appellants, since they are proper parties in interest in so far as
they may be (and in fact are) held personally liable for the unpaid
deficiency assessments made by the Collector of Internal Revenue
against the defunct Syndicate.
• De Guzman v. NLRC (211 SCRA 723; 1992)
D. Effects of dissolution and liquidation
• Buenaflor v. Camarines Sur Industry
Corporation (G.R. Nos. L-14991-94, 30 May
1960)
FACTS:
Petitioner Buenaflor filed his application to install and operate a
5-ton ice plant in Sabang with the Public Service Commission on June
25, 1957. The respondent Camarines Sur Industry Corporation filed also
its applications on October 1, 1957. It opposed petitioner’s proposed ice
business because it claimed to be the pioneer distributor of the
commodity in the locality.
Petitioner challenged respondent’s applications as well on the ground,
among others, that its corporate existence expired in November 1953.
Respondent then registered its new articles of incorporation on October
31, 1957 and executed a notarized deed of conveyance assigning to the
new corporation all the assets of the expired corporation and the existing
certificates of public convenience to operate ice factories in Naga and
Magarao. The new corporation answered petitioner by showing its
recent incorporation and its acquisition of assets and certificates of the
old corporation with the Commission’s approval. Petitioner contended
that it was the first to apply and the preference which the new Camarines
Corporation claims by virtue of the old corporation's having distributed
ice in Sabang for the years previous to Buenaflor's application, should
not be granted, because since 1953 such old corporation had ceased to
be a juridical entity, and could not lawfully continue in business nor
invoke any protection or preference.
However, the Commission granted the ice plant service to the new
corporation on the ground that it had been rendering such service in
Sabang up to the time of petitioner’s application.
ISSUE: WON the Commission was right in granting new corporation’s
application
RULING: The Supreme Court ruled in the negative. Since 1953, the old
Corporation had been illegally plying its business of selling ice in
Sabang because, under the Corporation Law, Sec. 77, after November
1953, it could not lawfully continue the business for which it had been
established (operate ice plant, sell ice, etc). After November 1953, it
could only continue to exist for three years 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 and convey its
property and to divide its capital stock. It could not, without violating
the law, continue to sell ice. When the old Camarines Corporation
docketed its application October 1, 1957, it had no juridical personality,
it had ceased to exist as a corporation and could not sue nor apply for a
certificate, for it was incapable of receiving a grant. It was not even a
corporation de facto. And then, there is no application subscribed by the
new Camarines Corporation. Far from being mere technicality, these
points support a conclusion which appears to be just and equitable, not
only for the reasons already indicated, but also to compensate
Buenaflor's diligence and courage in exposing the irregular practice of
a "ghost" corporation foisting its services upon the unsuspecting public
of Sabang and neighboring territory — enjoying a franchise without
paying, perhaps, the corporate income tax and other burdens attached
to corporate existence. With the respondent’s automatic cessation in
November 1956 (3 years after November 1953), the Court declined to
regard the new corporation as a continuation of the old. At most, it is
the transferee of the properties of the old corporation (or more properly,
the assets of the stockholders) plus the certificate of public convenience
to operate the ice plant in Naga and Magarao. And yet, as stated, the
new corporation has not filed any application for certificate of public
convenience in Sabang, and has not published such application. As such,
the Court found it erroneous that the preferential treatment was granted
to the new corporation over the petitioner, who besides being qualified,
had applied for the privilege months in advance of the respondent, and
of the new corporation.
• Clemente v. CA (242 SCRA 717; 1995)
FACTS:
The case was about “Declaration of Ownership with Receivership,"
instituted by the plaintiffs (herein petitioners) wherein they sought to be
declared the owners of a piece of land situated in the Barrio of Lecheria,
Municipality o Calamba, Province of Laguna, island of Luzon.
The defendants (herein private respondents), in their answer likewise
claimed ownership of the property by virtue of acquisitive prescription
but did not present any evidence despite the several opportunities
accorded to them by the trial court.
Trial court ruled that "Sociedad Popular Calambeña" organization
conceived by the parties as a "Sociedad Anonima," was organized on
or about the advent of the early American occupation of the Philippines.
The "sociedad" actually did business and held itself out as a corporation
from November, 1909, up to September 24, 1932. Its principal business
was cockfighting or the operation and management of a cockpit.
On June 8, 1911, or during its existence, the "Sociedad" acquired by
installments the parcel of land above described from the Friar
Lands Estate of Calamba, Laguna.
Plaintiffs evidence also shows that Mariano Elepaño and Pablo
Clemente, now both deceased, were original stockholders of the
aforesaid "sociedad." Mariano Elepaño subscribed and paid on
November, 1909 for FORTY (40) shares of stocks worth TWO
HUNDRED (P200.00) PESOS. While Pablo Clemente subscribed and
paid FOUR HUNDRED EIGHTEEN (418) shares of stocksworth TWO
THOUSAND (P2,000.00) PESOS.
The "sociedad" issued stock certificates to the aforesaid heirs of Pablo
Clemente. On the basis of their respective stocks certificates, present
plaintiffs Luis, Ricardo, Leonor and Placida, all surnamed Clemente,
heirs of Pablo Clemente, and, the heirs of Mariano Elepaño, namely
Concepcion, Mariano, Artemio, Vicente, Angelita, Roberto, Hernando
and Lourdes all surnamed Elepaño, jointly claim ownership over the
above described property.
The trial court dismissed the complaint on the ground that, absent a
corporate liquidation, it is the corporation, not the stockholders,
which can assert, if at all, any title to the corporate assets.
CA affirmed.
ISSUE: Whether or not petitioners can be held, given their submissions,
to have succeeded in establishing for themselves a firm title to the
property in question.
RULING:
No.
Among the causes for such dissolution are when the corporate
term has expired or when, upon a verified complaint and after
notice and hearing, the Securities and Exchange Commission
orders the dissolution of a corporation for its continuous inactivity
for at least five (5) years.
The corporation continues to be a body corporate for three (3)
years after its dissolution for purposes of prosecuting and
defending suits by and against it and for enabling it to settle and
close its affairs, culminating in the disposition and distribution of
its remaining assets. It may, during the three-year term, appoint
a trustee or a receiver who may act beyond that period. The
termination of the life of a juridical entity does not by itself cause
the extinction or diminution of the rights and liabilities of such
entity (see Gonzales vs. Sugar Regulatory Administration, 174
SCRA 377) nor those of its owners and creditors.
If the three-year extended life has expired without a trustee
or receiver. having been expressly designated by the
corporation within that period, the board of directors (or
trustees) itself, following the rationale of the Supreme
Court's decision in Gelano vs. Court of Appeals (103 SCRA
90) may be permitted to so continue as "trustees" by legal
implication to complete the corporate liquidation.
Still in the absence of a board of directors or trustees, those
having any pecuniary interest in the assets, including not only the
shareholders but likewise the creditors of the corporation, acting
for and in its behalf, might make proper representations with the
Securities and Exchange commission, which has primary and
sufficiently broad jurisdiction in matters of this nature, for working
out a final settlement of the corporate concerns.
AFFIRMED.
• Gelano v. CA; 103 SCRA 90);
FACTS:
Insular Sawmill was a corporation engaged in the general
lumber and sawmill business with a corporate life of fifty years,
beginning Sept 17, 1945 – Sept 17, 1995.
To carry on the business, Insular Sawmill leased paraphernal
property of petitioner Guillerma Gelano. It was while leasing the
property, that the Guillerma, and her husband Carlos, incurred
the following debts to the corporation:
 1. For cash advances made by
the corporation to Carlos which was supposed to
be deducted from the monthly rentals being paid by
the corporation
2. For credit purchases of lumber materials
from the company
3. For credit accommodation obtained by the
spouses from China Banking Corporation, for which
the corporation executed a promissory note in
favour of the bank from which the bank collected
Carlos’ debt from.
On May 22, 1959, the corporation, thru Atty. German Lee, filed
a complaint for collection against the spouses Gelano before
CFI- Manila. Trial was held and when the case was at the stage
of submitting memorandum, Atty. Lee retired from active law
practice and Atty. Eduardo F. Elizalde took over and prepared
the memorandum.
While the case was pending, Insular Sawmill amended its
Articles of Incorporation to shorten its term of existence up to
December 31, 1960 only. The amended Articles of Incorporation
was filed with, and approved by the Securities
and Exchange Commission, but the trial court was not notified
of the amendment shortening the corporate existence and no
substitution of party was ever made.
On November 20, 1964 and almost four (4) years after the
dissolution of the corporation, the trial court rendered a decision
in favor of Insular Sawmill. The CA modified the decision,
holding the spouses solidarily liable.
After the Gelanos received a copy of the decision on August
24, 1973, they came to know that the Insular Sawmill Inc. was
dissolved way back on December 31, 1960. Thus they filed an
MD on the ground that the case was prosecuted even after
dissolution of Insular Sawmill as a corporation and that a
defunct corporation cannot maintain any suit for or against it
without first complying with the requirements of the winding up
of the affairs of the corporation and the assignment of its
property rights within the required period.
Their MD was denied thus the present petition for review.
ISSUE:
Whether Insular Sawmill, a defunct corporation, complied with
the requirements for winding up affairs and is entitled to the
decision against the Gelanos? - YES
RULING:
Section 77 of Corp Law provides that the corporation shall "be
continued as a body corporate for three (3) years after the time
when it would have been dissolved, for the purpose of
prosecuting and defending suits by or against it. For this reason,
Sec 78 of the Corp Law authorizes the corporation, "at any time
during said three years to convey all of its property to
trustees for the benefit of members, stockholders, creditors and
other interested," evidently for the purpose, among others, of
enabling said trustees to prosecute and defend suits by or against
the corporation begun before the expiration of said period.
American corporate law dictates that while there is no time
limit within which the trustees must complete a liquidation
placed in their hands, it is provided only that the
conveyance to the trustees must be made within the three-
year period.
In this case, the SC held that the counsel who prosecuted
and defended the interest of the corporation in the instant
case and who in fact appeared in behalf of the corporation
may be considered a trustee of the corporation at least with
respect to the matter in litigation only. It deemed it
substantial compliance under Sec 78 of the Corp Law.
The word "trustee" as used in the corporation statute must be
understood in its general concept which could include the
counsel to whom was entrusted the prosecution of the suit filed
by the corporation. The purpose in the transfer of the assets
of the corporation to a trustee upon its dissolution is more
for the protection of its creditor and stockholders. Debtors
like the spouses Gelano may not take advantage of the
failure of the corporation to transfer its assets to a
trustee, assuming it has any to transfer which petitioner has
failed to show, in the first place. To sustain petitioners'
contention would be to allow them to enrich themselves at
the expense of another, which all enlightened legal systems
condemn.
WHEREFORE, with the modification that only the conjugal
partnership is liable, the appealed decision is hereby
affirmed in all other respects. Without pronouncement as to
costs. SO ORDERED.
X. The SEC’s Power to Investigate and Impose Penalties
XI. Rehabilitating a Distressed Corporation
• Republic Act 10142 -- Financial Rehabilitation
and Insolvency Act (FRIA) of 2010
• FRIA Rules of Procedure (A.M. No. 12-12-11-
SC)
A. Corporate Rehabilitation (Section 4 (gg), FRIA
2010)
(gg) Rehabilitation shall refer to the restoration of the debtor to a
condition of successful operation and solvency, if it is shown that
its continuance of operation is economically feasible and its
creditors can recover by way of the present value of payments
projected in the plan, more if the debtor continues as a going
concern than if it is immediately liquidated.
• Bureau of Internal Revenue v. Lepanto
Ceramics, Inc. (184 SCRA 125 [2017])
Facts
Lepanto Ceramics, Inc. (LCI) a corporation duly organized and existing under
Philippine Laws with principal office address in Calamba City, Laguna - filed a
petition for corporate rehabilitation pursuant to RA 10142.
Essentially, LCI alleged that due to the financial difficulties it has been
experiencing dating back to the Asian financial crisis, it had entered into a state
of insolvency considering its inability to pay its obligations as they become due
and that its total liabilities amounting to P4,213,682,715.00 far exceed its total
assets worth P1,112,723,941.00. Notably, LCI admitted in the annexes
attached to the aforesaid Petition its tax liabilities to the national government
in the amount of at least P6,355,368.00.
On January 13, 2012, the Rehabilitation Court issued a Commencement
Order, which, inter alia: (a) declared LCI to be under corporate rehabilitation;
(b) suspended all actions or proceedings, in court or otherwise, for the
enforcement of claims against LCI; (c) prohibited LCI from making any
payment of its liabilities outstanding as of even date, except as may be
provided under RA 10142; and (d) directed the BIR to file and serve on LCI its
comment or opposition to the petition, or its claims against LCI. Accordingly,
the Commencement Order was published in a newspaper of general
circulation and the same, together with the petition for corporate rehabilitation,
were personally served upon LCI's creditors, including the BIR.
Despite this, Misajon, et al., acting as Assistant Commissioner, Group
Supervisor, and Examiner, respectively, sent LCI a notice of informal
conference dated May 27 2013 informing LCI of its deficiency internal tax
liabilities for fiscal year ending 30 June 2010, as well as a Formal Letter of
Demand dated May 9, 2014, requiring the latter to pay its deficiency.
RTC: found Mijason, et al. guilty of indirect contempt. It said the acts of sending
LCI a notice of informal conference and Formal Letter of Demand are covered
by the Commencement Order as they were for the purpose of pursuing and
enforcing a claim for deficiency taxes, and thus, are in clear defiance of the
Commencement Order; and petitioners could have tolled the prescriptive
period to collect deficiency taxes without violating the Commencement Order
by simply ventilating their claim before the rehabilitation proceedings, which
they were adequately notified of. In this relation, the RTC Br. 35 held that while
the BIR is a juridical entity which can only act through its authorized
intermediaries, it cannot be concluded that it authorized the latter to commit
the contumacious acts complained of, i.e., defiance of the Commencement
Order.
Issue
whether or not the RTC Br. 35 correctly found Misajon, et al. to have defied
the Commencement Order and, accordingly, cited them for indirect contempt.
Held
Yes, the RTC is correct. The issuances of Commencement Order for the
rehabilitation of a distressed corporation suspends the collection of taxes
against it.
Section 16 of RA 10142 provides, inter alia, that upon the issuance of a
Commencement Order which includes a Stay or Suspension Order - all actions
or proceedings, in court or otherwise, for the enforcement of "claims" against
the distressed company shall be suspended. Under the same law, claim "shall
refer to all claims or demands of whatever nature or character against the
debtor or its property, whether for money or otherwise, liquidated or
unliquidated, fixed or contingent, matured or unmatured, disputed or
undisputed, including, but not limited to; (1) all claims of the government,
whether national or local, including taxes, tariffs and customs duties; and (2)
claims against directors and officers of the debtor arising from acts done in the
discharge of their functions falling within the scope of their authority: Provided,
That, this inclusion does not prohibit the creditors or third parties from filing
cases against the directors and officers acting in their personal capacities."
Corporate rehabilitation is an attempt to conserve and administer the assets
of an insolvent corporation in the hope of its eventual return from financial
stress to solvency. It contemplates the continuance of corporate life and
activities in an effort to restore and reinstate the corporation to its former
position of successful operation and liquidity.
The inherent purpose of rehabilitation is to find ways and means to minimize
the expenses of the distressed corporation during the rehabilitation period by
providing the best possible framework for the corporation to gradually regain
or achieve a sustainable operating form. It enables he company to gain a new
lease in life and thereby allow creditors to be paid their claims from its earnings.
Thus, rehabilitation shall be undertaken when it is shown that the continued
operation of the corporation is economically more feasible and its creditors can
recover, by way of the present value of payments projected in the plan, more,
if the corporation continues as a going concern than if it is immediately
liquidated.
To clarify, however, creditors of the distressed corporation are not without
remedy as they may still submit their claims to the rehabilitation court for proper
consideration so that they may participate in the proceedings, keeping in mind
the general policy of the law "to ensure or maintain certainty and predictability
in commercial affairs, preserve and maximize the value of the assets of these
debtors, recognize creditor rights and respect priority of claims, and ensure
equitable treatment of creditors who are similarly situated." In other words, the
creditors must ventilate their claims before the rehabilitation court, and any
attempts to seek legal or other resource against the distressed corporation
shall be sufficient to support a finding of indirect contempt of court.
As aptly put by the RTC they could have easily tolled the running of such
prescriptive period, and at the same time, perform their functions as officers of
the BIR, without defying the Commencement Order and without violating the
laudable purpose of RA 10142 by simply ventilating their claim before the
Rehabilitation Court. After all, they were adequately notified of the LCI's
corporate rehabilitation and the issuance of the corresponding
Commencement Order.
In sum, it was improper for Misajon, et al. to collect, or even attempt to collect,
deficiency taxes from LCI outside of the rehabilitation proceedings concerning
the latter, and in the process, willfully disregard the Commencement Order
lawfully issued by the Rehabilitation Court. Hence, the RTC Br. 35 correctly
cited them for indirect contempt.
• Philippine Asset Growth Two, Inc. v. Fastech
Synergy Philippines, Inc. (794 SCRA 625, [2016])
FACTS:
Respondents applied for corporate rehabilitation with prayer for the
issuance of a Stay or Suspension Order. They claim that: a) Their
business operations and daily affairs are being managed by the same
individuals; (b) they share a majority of their common assets; (c) they proceedings concern the viability and desirability of continuing the
have common creditors and common liabilities. business operations of the distressed corporation

PDB, one of respondents’ common creditors, earlier filed for a petition
for extrajudicial foreclosure of mortgage over 2 parcels of land which
were also listed as respondent’s common properties. PDB emerged as
the highest bidder in the foreclosure sale. Respondents claim that this
impacted on their chance to recover from their losses as these
properties were being used by two Fastech companies.
Respondents submitted to the court their rehabilitation plan which
sought: (a) a waiver of all accrued interests and penalties; (b) a grace
period of 2 years to pay the principal amount of respondents'
outstanding loans, with the interests accruing during the said period
capitalized as part of the principal, to be paid over a 12 year period after
the grace period; and (c) an interest rate of 4% and 2% per annum for
creditors whose credits are secured by real estate and chattel
mortgages, respectively. A rehabilitation receiver was later appointed
who gave a favorable recommendation.
RTC: dismissed the rehabilitation petition despite the favorable
recommendation of its appointed Rehabilitation Receiver.
CA: CA reinstated the rehabilitation petition, approved respondents'
Rehabilitation Plan. CA declared that the Rehabilitation Plan is feasible
and should be approved, finding that respondents would be able to
meet their obligations to their creditors within their operating cash
Characteristics of a feasible Characteristics
profits and other assets without disrupting their business operations,
rehabilitation plan:
which will be beneficial to their creditors, employees, stockholders, and
the economy.
Here, the Rehabilitation Plan failed to comply with the minimum
requirements, i.e.: (a) material financial commitments to support
the rehabilitation plan; and (b) a proper liquidation analysis, under
Section 18, Rule 3 of the 2008 Rules of Procedure on Corporate
Rehabilitation.
For respondents’ lack of material financial commitments to
support the rehabilitation plan: COO Mateo, Jr. averred that
respondents will not require the infusion of additional capital as
he, instead, proposed to have all accrued penalties, charges, and
interests waived, and a reduced interest rate prospectively
applied to all respondents' obligations, in addition to the
implementation of a 2-year period. There appears to be no
concrete plan to build on respondents' beleaguered financial
position through substantial investments as the plan for
rehabilitation appears to be pegged merely on financial reprieves.
For respondents’ lack of proper liquidation analysis: The total
liquidation assets and the estimated liquidation return to the
creditors, as well as the fair market value vis-a-vis the forced
liquidation value of the fixed assets were not shown
of an
infeasible rehabilitation plan:

ISSUE: W/N the Rehabilitation Plan is feasible – NO.

RULING:
Sec. 4 of FRIA defines rehabilitation as restoration of the debtor
to a condition of successful operation and solvency. Corporate
rehabilitation contemplates a continuance of corporate life and activities
in an effort to restore and reinstate the corporation to its former position
of successful operation and solvency, the purpose being to enable the
company to gain a new lease on life and allow its creditors to be paid
their claims out of its earnings. Thus, the basic issues in rehabilitation
 distress. Thus, the remedy of rehabilitation should be denied
a. The debtor has assets that a. the absence of a
to corporations whose insolvency appears to be irreversible
can generate more cash if used in sound and workable
and whose sole purpose is to delay the enforcement of any
its daily operations than if sold business plan
of the rights of the creditors, which is rendered obvious by:
b. Liquidity issues can be b. baseless and
(a) the absence of a sound and workable business plan; (b)
addressed by a practicable unexplained assumptions,
baseless and unexplained assumptions, targets, and goals;
business plan that will generate targets and goals;
and (c) speculative capital infusion or complete lack thereof
enough cash to sustain daily c. speculative capital
for the execution of the business plan, as in this case.
operations infusion or complete lack
c. The debtor has a definite thereof for the execution of
source of financing for the proper the business plan;
and full implementation of a d. cash flow cannot
Rehabilitation Plan that is sustain daily operations; • Metropolitan Bank and Trust Co. v. Fortuna
anchored on realistic assumptions and Paper Mill and Packaging Corporation (G.R.
and goals. e. negative net worth 190800, 7 November 2018)
and the assets are near full FACTS:
depreciation or fully MBTC is a domestic banking corporation organized and
depreciated. existing under the laws of the Republic of the Philippines, and who
extended various credit accommodations and loan facilities to
Fortuna. Fortuna was organized to manufacture special and craft
papers from waste and scrap materials, and which it used to sell its
Feasible rehab. plan requirements put emphasis on liquidity: the products principally to manufacturers of corrugated boxes, cement
cash flow that the distressed corporation will obtain from paper bags, and other stationary paper products.
rehabilitating its assets and operations. Rehabilitation sees to it
that these assets generate more value if used efficiently rather In order to secure the credit accommodations and loan
than if liquidated. facilities extended by MBTC to Fortuna, Fortuna mortgaged to MBTC
A perusal of the 2009 audited financial statements shows that its real and movable properties as well as several pieces of realty
owned by several sister companies. Fortuna ended up defaulting on
respondents' cash operating position was not even enough to its obligations to MBTC, and failed to pay said indebtedness along with
meet their maturing obligations. Notably, their current assets interests and penalties despite repeated demands on the part of
were materially lower than their current liabilities, and consisted MBTC.
mostly of advances to related parties in the case of Fastech
Microassembly, Fastech Electronique, and Fastech Properties. Instead of paying the overdue obligations to MBTC, Fortuna filed a
Petition for Corporate Rehabilitation with the RTC Malabon. Attached
Verily, respondents' Rehabilitation Plan should have shown that therein was Fortuna’s proposed Rehabilitation Plan, which consisted
they have enough serviceable assets to be able to continue its mainly of (i) the resumption and continuance of its business, to be
business operation. made possible by the entry of a supposed investor and a debt
moratorium on principal interest and (ii) entry into the business
condominium development. Finding the Rehabilitation Petition
The purpose of rehabilitation proceedings is not only to enable sufficient in form and substance, the RTC issued a Stay Order setting
the company to gain a new lease on life, but also to allow creditors the initial hearing involving the Rehabilitation Petition and directing all
to be paid their claims from its earnings when so rehabilitated. of Fortuna’s creditors and other interested parties to file their verified
Hence, the remedy must be accorded only after a judicious comments/oppositions.
regard of all stakeholders' interests; it is not a one-sided tool
that may be graciously invoked to escape every position of
 MBTC filed its comment/opposition to the rehabilitation
petition stating that Fortuna was not qualified for corporate
rehabilitation, that the petition is fatally defective and that the petition
was solely for the purpose of unjustly delaying the payment of its debt
obligations. Despite opposition, the Rehabilitation Petition was given
due course. The RTC found the proposed Rehabilitation Plan feasible
and viable and noted Fortuna’s effort to improve its financial standing
by establishing a new business of realty development in Malabon City.
The CA dismissed the petition of MBTC as it found that the
rehabilitation was feasible, and the opposition of the petitioning
creditors was manifestly unreasonable.
ISSUE: WON the CA erred in affirming the Rehabilitation Plan approved by
the RTC. - YES
RULING: Yes, but the case was dismissed for being moot and academic. The
RTC’s Order terminating the rehabilitation proceedings effectively puts an end
to the judicial controversy between the parties.
Nonetheless, this Court still considers it necessary to touch on
the question of whether or not a corporation in debt may qualify for
corporate rehabilitation. Fortuna is qualified to file for corporate
rehabilitation. Rehabilitation refers to the restoration of the debtor to a
condition of successful operation and solvency, if it is shown that its
continuance of operation is economically feasible and its creditors can
recover by way of the present value of payments projected in the plan,
more if the debtor continues as a going concern that if it is immediately
liquidated. Section 1, rule 4 of the Interim rules on the Procedure on
Corporate Rehabilitation provides for the qualifications of a
corporation to file a petition for corporate rehabilitation.
Sec. 1. Who May Petition. – Any debtor who foresees
the impossibility of meeting its debts when they
respectively fall due, or any creditor or creditors
holding at least 25% of the debtor’s total liabilities,
may petition the proper RTC to have the debtor
placed under rehabilitation.
A plain reading of the provision shows that the Interim rules
does not make any distinction between a corporation which is already
in debt and a corporation which foresees the possibility of debt, or
which would eventually yet surely fall into the same, but may at present
be free from any financial liability.
B. Rehabilitation Plan - It refers to a plan by which the
financial well-being and viability of an insolvent debtor can
be restored using various means including, but not limited to,
debt forgiveness, debt rescheduling, reorganization or quasi-
reorganization, dacion en pago, debt- equity conversion and
sale of the business (or parts of it) as a going concern, or
setting-up of new business entity as prescribed in Section 62
hereof, or other similar arrangements as may be approved by
the court or creditors [FRIA, Sec. 4(ii)].
NOTE: Rehabilitation refers to the restoration of the debtor to a condition of
successful operation and solvency, if it is shown that its continuance of operation
is economically feasible and its creditors can recover by way of the present value
of payments projected in the plan, more if the debtor continues as a going concern
than if it is immediately liquidated [FRIA, Sec. 4 (gg)].
Contents of rehabilitation plan
1. Specify the underlying assumptions, the financial goals and the
procedures proposed to accomplish such goals;
2. Compare the amounts expected to be received by the creditors under the
rehabilitation plan with those that they will receive if liquidation ensues
within the next one hundred twenty (120) days;
3. Contain information sufficient to give the various classes of creditors a
reasonable basis for determining whether supporting the plan is in their
financial interest when compared to the immediate liquidation of the
debtor, including any reduction of principal interest and penalties
payable to the creditors;
4. Establish classes of voting creditors;
5. Establish subclasses of voting creditors if prior approval has been
granted by the court;
6. Indicate how the insolvent debtor will be rehabilitated including, but not
limited to, debt forgiveness, debt rescheduling, reorganization or quasi-
reorganization, dacion en pago, debt- equity conversion and sale of the
business (or parts of it) as a going concern, or setting-up of a new
business entity or other similar arrangements as may be necessary to
restore the financial well-being and viability of the insolvent debtor;
7. Specify the treatment of each class or subclass described in subsections
(d) and (e);
 8. Provide for equal treatment of all claims within the same class or If no objections are filed within the relevant period or, if objections are filed, the
subclass, unless a particular creditor voluntarily agrees to less favorable court finds them lacking in merit, or determines that the basis for the objection
treatment; has been cured, or determines that the debtor has complied with an order to cure
9. Ensure that the payments made under the plan follow the priority the objection, the court shall issue an order confirming the Rehabilitation Plan.
established under the provisions of the civil code on concurrence and
preference of credits and other applicable laws; The court may confirm the Rehabilitation Plan notwithstanding unresolved
10. Maintain the security interest of secured creditors and preserve the disputes over claims if the Rehabilitation Plan has made adequate provisions for
liquidation value of the security unless such has been waived or modified paying such claims.
voluntarily;
11. Disclose all payments to creditors for pre- commencement debts made For the avoidance of doubt, the provisions of other laws to the contrary
during the proceedings and the justifications thereof; notwithstanding, the court shall have the power to approve or implement the
12. Describe the disputed claims and the provisioning of funds to account for Rehabilitation Plan despite the lack of approval, or objection from the owners,
appropriate payments should the claim be ruled valid or its amount partners or stockholders of the insolvent debtor: Provided, that the terms thereof
adjusted; are necessary to restore the financial well- being and viability of the insolvent
13. Identify the debtor's role in the implementation of the plan; debtor (FRIA, Sec. 68).
14. State any rehabilitation covenants of the debtor, the breach of which
shall be considered a material breach of the plan;
15. Identify those responsible for the future management of the debtor and Effects of confirmation of rehabilitation plan
the supervision and implementation of the plan, their affiliation with the
debtor and their remuneration; 1. The Rehabilitation Plan and its provisions shall be binding upon the
16. Address the treatment of claims arising after the confirmation of the debtor and all persons who may be affected by it, including the creditors,
rehabilitation plan; whether or not such persons have participated in the proceedings or
17. Require the debtor and its counter-parties to adhere to the terms of all opposed the Rehabilitation Plan or whether or not their claims have been
contracts that the debtor has chosen to confirm; scheduled;
18. Arrange for the payment of all outstanding administrative expenses as a 2. The debtor shall comply with the provisions of the Rehabilitation Plan
condition to the plan's approval unless such condition has been waived and shall take all actions necessary to carry out the Plan;
in writing by the creditors concerned; 3. Payments shall be made to the creditors in accordance with the
19. Arrange for the payment of all outstanding taxes and assessments, or an provisions of the Rehabilitation Plan;
adjusted amount pursuant to a compromise settlement with the bir or 4. Contracts and other arrangements between the debtor and its creditors
other applicable tax authorities; shall be interpreted as continuing to apply to the extent that they do not
20. Include a certified copy of a certificate of tax clearance or evidence of a conflict with the provisions of the Rehabilitation Plan;
compromise settlement with the bir; 5. Any compromises on amounts or rescheduling of timing of payments by
21. Include a valid and binding resolution of a meeting of the debtor's the debtor shall be binding on creditors regardless of whether or not the
stockholders to increase the shares by the required amount in cases Plan is successfully implemented; and
where the plan contemplates an additional issuance of shares by the 6. Claims arising after approval of the Plan that are otherwise not treated
debtor; by the Plan are not subject to any Suspension Order (FRIA, Sec. 69).
22. State the compensation and status, if any, of the rehabilitation receiver
after the approval of the plan; and
23. Contain provisions for conciliation and/or mediation as a prerequisite to
court assistance or intervention in the event of any disagreement in the CRAM DOWN POWER - refers to the power of the rehabilitation court to approve
interpretation or implementation of the rehabilitation plan (FRIA, sec. and implement a rehabilitation plan notwithstanding the objection of the
64). majority of creditors. (Bank of the Philippine Islands vs. Sarabia Manor Hotel
Corporation, G.R. No. 175844, 29 July 2013)
Confirmation of rehabilitation plan
A restructuring/workout Rehabilitation Plan that is approved pursuant to an After lengthy proceedings, partial payment of the sums due to the employees
informal workout framework (out of court or informal restructuring were made. However, due to the piecemeal hearings on the benefits, many
agreements) shall have the same legal effect as confirmation of a Plan under remain unpaid.2
Section 69 of FRIA. The notice of the Rehabilitation Plan or restructuring
agreement or Plan shall be published once a week for at least three (3) On March 8, 1991, petitioners moved to disqualify the respondent judge from
consecutive weeks in a newspaper of general circulation in the Philippines. The hearing the above case on grounds of bias and hostility towards petitioners.3
Rehabilitation Plan or restructuring agreement shall take effect upon the lapse of
fifteen (15) days from the date of the last publication of the notice thereof (FRIA, On January 2, 1992, the Congress enacted Republic Act No. 7169 providing
Sec. 86). for the rehabilitation of the Philippine Veterans Bank.4

Thereafter, petitioners filed with the labor tribunals their residual claims for
benefits and for reinstatement upon reopening of the bank.5

Sometime in May 1992, the Central Bank issued a certificate of authority

C. Rehabilitation versus Liquidation allowing the PVB to reopen.6

Despite the legislative mandate for rehabilitation and reopening of PVB,

Liquidator - A natural person or juridical entity may be respondent judge continued with the liquidation proceedings of the bank.
appointed as such by the court and entrusted with such powers Moreover, petitioners learned that respondents were set to order the payment
and duties as set forth in FRIA. and release of employee benefits upon motion of another lawyer, while
petitioners’ claims have been frozen to their prejudice.

• Philippine Veterans Bank Employees Union- Hence, the instant petition.

NUBE v. Vega (360 SCRA 33, 39 [2001])
Facts
May a liquidation court continue with liquidation proceedings of the Philippine
Veterans Bank (PVB) when Congress had mandated its rehabilitation and
reopening?
This is the sole issue raised in the instant Petition for Prohibition with Petition
for Preliminary Injunction and application for Ex Parte Temporary Restraining
Order.
The antecedent facts of the case are as follows:
Sometime in 1985, the Central Bank of the Philippines (Central Bank, for
brevity) filed with Branch 39 of the Regional Trial Court of Manila a Petition for
Assistance in the Liquidation of the Philippine Veterans Bank, the same
docketed as Case No. SP-32311. Thereafter, the Philipppine Veterans Bank
Employees Union-N.U.B.E., herein petitioner, represented by petitioner
Perfecto V. Fernandez, filed claims for accrued and unpaid employee wages
and benefits with said court in SP-32311.1
Petitioners argue that with the passage of R.A. 7169, the liquidation court
became functus officio, and no longer had the authority to continue with
liquidation proceedings.
In a Resolution, dated June 8, 1992, the Supreme Court resolved to issue a
Temporary Restraining Order enjoining the trial court from further proceeding
with the case.
Issue
May a liquidation court continue with liquidation proceedings of the Philippine
Veterans Bank (PVB) when Congress had mandated its rehabilitation and
reopening? - NO
Held
Republic Act No. 7169 entitled "An Act To Rehabilitate The Philippine Veterans
Bank Created Under Republic Act No. 3518, Providing The Mechanisms
Therefor, And For Other Purposes", which was signed into law by President
Corazon C. Aquino on January 2, 1992 and which was published in the Official
Gazette on February 24, 1992, provides in part for the reopening of the
Philippine Veterans Bank together with all its branches within the period of
three (3) years from the date of the reopening of the head office.7 The law
likewise provides for the creation of a rehabilitation committee in order to
facilitate the implementation of the provisions of the same.8
Pursuant to said R.A. No. 7169, the Rehabilitation Committee submitted the
proposed Rehabilitation Plan of the PVB to the Monetary Board for its
approval. Meanwhile, PVB filed a Motion to Terminate Liquidation of Philippine
Veterans Bank dated March 13, 1992 with the respondent judge praying that
the liquidation proceedings be immediately terminated in view of the passage
of R.A. No. 7169.
On April 10, 1992, the Monetary Board issued Monetary Board Resolution No.
348 which approved the Rehabilitation Plan submitted by the Rehabilitaion
Committee.
Thereafter, the Monetary Board issued a Certificate of Authority allowing PVB
to reopen.
On June 3, 1992, the liquidator filed A Motion for the Termination of the
Liquidation Proceedings of the Philippine Veterans Bank with the respondent
judge.
As stated above, the Court, in a Resolution dated June 8, 1992, issued a
temporary restraining order in the instant case restraining respondent judge
from further proceeding with the liquidation of PVB.
On August 3, 1992, the Philippine Veterans Bank opened its doors to the public
and started regular banking operations.
Clearly, the enactment of Republic Act No. 7169, as well as the subsequent
developments has rendered the liquidation court functus officio. Consequently,
respondent judge has been stripped of the authority to issue orders involving
acts of liquidation.
Liquidation, in corporation law, connotes a winding up or settling with creditors
and debtors.9 It is the winding up of a corporation so that assets are distributed
to those entitled to receive them. It is the process of reducing assets to cash,
discharging liabilities and dividing surplus or loss.
On the opposite end of the spectrum is rehabilitation which connotes a
reopening or reorganization. Rehabilitation contemplates a continuance of
corporate life and activities in an effort to restore and reinstate the corporation
to its former position of successful operation and solvency.10
It is crystal clear that the concept of liquidation is diametrically opposed or
contrary to the concept of rehabilitation, such that both cannot be undertaken
at the same time. To allow the liquidation proceedings to continue would
seriously hinder the rehabilitation of the subject bank.
Anent the claim of respondents Central Bank and Liquidator of PVB that R.A.
No. 7169 became effective only on March 10, 1992 or fifteen (15) days after
its publication in the Official Gazette; and, the contention of intervenors VOP
Security, et. al. that the effectivity of said law is conditioned on the approval of
a rehabilitation plan by the Monetary Board, among others, the Court is of the
view that both contentions are bereft of merit.
While as a rule, laws take effect after fifteen (15) days following the completion
of their publication in the Official Gazette or in a newspaper of general
circulation in the Philippines, the legislature has the authority to provide for
exceptions, as indicated in the clause "unless otherwise provided."
In the case at bar, Section 10 of R.A. No. 7169 provides:
Sec. 10. Effectivity. - This Act shall take effect upon its approval.
Hence, it is clear that the legislature intended to make the law
effective immediately upon its approval. It is undisputed that R.A. No. 7169
was signed into law by President Corazon C. Aquino on January 2, 1992.
Therefore, said law became effective on said date.
Assuming for the sake of argument that publication is necessary for the
effectivity of R.A. No. 7169, then it became legally effective on February 24,
1992, the date when the same was published in the Official Gazette, and not
on March 10, 1992, as erroneously claimed by respondents Central Bank and
Liquidator.
D. Rehabilitation Proceedings
• Viva Shipping Lines, Inc. v. Keppel Mining
Philippines, Inc., et al. (G.R. 177382, 17
February 2016)
FACTS:
Viva Shipping Lines filed a Petition for Corporate Rehabilitation before
the RTC of Lucena. It was however denied for failure to comply with the
requirements of the Interim Rules of Procedure on Corporate
Rehabilitation. Hence, Viva filed an Amended Petition.
 In the Amended Petition, there were irregularities in its property
inventory list and assessed value of properties. In its Company
Rehabilitation Plan, Viva Shipping Lines enumerated possible sources
of funding, and nominated 3 individuals to be appointed as rehabilitation
receiver. The RTC then found the Amended Petition to be sufficient in
form and substance and issued a stay order.
Before the initial hearing, the creditors and former employees of Viva
filed their respective comments and oppositions to the Amended
Petition. In an Order, the RTC lifted the stay order and dismissed Viva
Shipping Lines' Amended Petition for failure to show the company's
viability and the feasibility of rehabilitation.
Viva filed a Petition for Review under Rule 43 of the ROC before the CA,
but it only impleaded the judge of the RTC and not any of its creditors
or its former employees. However, it served copies of the petition to the
counsels of its creditors. The CA dismissed the petition for failure to
comply with the procedural requirements under Rule 43. Hence, this
petition.
ISSUE:
1. Whether or not the corporate rehabilitation is proper - no
2. Whether or not the Interim Rules of Procedure on Corporate
Rehabilitation shall prevail over the strict application of Rule 43 - no
RULING:
1. No. The RTC correctly dismissed petitioner's rehabilitation plan. It
found that petitioner's assets are non-performing. a rehabilitation plan
is infeasible if the assets are nearly fully or fully depreciated. This
reduces the probability that rehabilitation may restore and reinstate
petitioner to its former position of successful operation and solvency.
Petitioner's rehabilitation plan should have shown that petitioner has
enough serviceable assets to be able to continue its business. Yet, the
plan showed that the source of funding would be to sell petitioner's old
vessels. Disposing of the assets constituting petitioner's main
business cannot result in rehabilitation. A business primarily engaged
as a shipping line cannot operate without its ships. On the other hand,
the plan to purchase new vessels sacrifices the corporation's cash
flow. This is contrary to the goal of corporate rehabilitation, which is to
allow present value recovery for creditors. The plan to buy new
vessels after selling the two vessels it currently owns is neither sound
nor workable as a business plan.
As pointed out by respondents, petitioner's rehabilitation plan is almost
impossible to implement. Even an ordinary individual with no business
knowledge can discern the groundlessness of petitioner's
rehabilitation plan. Petitioner should have presented a more realistic
and practicable rehabilitation plan within the time periods allotted
2. No. The court clarified that all decisions and final orders falling under
the Interim Rules of Procedure on Corporate Rehabilitation shall be appealable
to the Court of Appeals through a petition for review under Rule 43 of the Rules
of Court.
Liberality in corporate rehabilitation procedure only generally refers to
the trial court, not to the proceedings before the appellate court. The
Interim Rules of Procedure on Corporate Rehabilitation cover petitions
for rehabilitation filed before the Regional Trial Court. Thus, Rule 2,
Section 2 of the Interim Rules of Procedure on Corporate
Rehabilitation, which refers to liberal construction, is limited to the
Regional Trial Court. The liberality was given "to assist the parties in
obtaining a just, expeditious, and inexpensive disposition of the case."
In this case, petitioners did not comply with some of the requirements
under Rule 43. First, it did not implead its credits as respondents. A
corporate rehabilitation case cannot be decided without the creditors'
participation. The courts will not be able to balance these interests if
the creditors are not parties to a case.
Second, it did not serve a copy of the Petition on some of its creditors,
specifically, its former employees. The former employees were unable
to raise their claims on time because petitioner did not declare them
as creditors. The Amended Petition did not contain any information
regarding pending litigation between petitioner and its former
employees.
Finally, it did not serve a copy of the petition on the RTC. Petitioner's
excuses do not trigger the application of the policy of liberality in
construing procedural rules. For the courts to exercise liberality,
petitioner must show that it is suffering from an injustice not
commensurate to the thoughtlessness of its procedural mistakes. Not
only did petitioner exercise injustice towards its creditors, its Rule 43
Petition for Review did not show that the Regional Trial Court erred in
dismissing its Amended Petition for Corporate Rehabilitation.
 Hence, the CA correctly dismissed the petition as a consequence of
non-compliance with procedural rules.
• Allied Banking v. In the Matter of the Petition to Have
Steel Corp place under Corporate Rehabilitation (G.R.
No. 191939, 14 March 2018)
FACTS: Equitable PCI Bank, Inc. (EPCIB), as creditor, filed a petition for the
corporate rehabilitation of its debtor SCP with the RTC. CIB alleged, among
others, that due to the onslaught of the 1997 Asian Financial Crisis, SCP began
experiencing a downward trend in its financial condition which prompted
various banks and financial institutions to grant it with term loan facilities and
working capital lines; that SCP failed to make timely payments on its term loan
facilities; that SCP also defaulted on its loan obligations under the December
2002 Omnibus Agreement,
Allied Banking Corporation (ABC) granted SCP with a revolving credit facility
denominated as a letter of credit/trust receipt line in the amount of P100 million,
which SCP availed of to finance the importation of its raw materials. Pursuant
to this arrangement, SCP executed a trust receipt. petitioner applied the
remaining proceeds of SCP's Current Account No. 1801-004-87-6 (subject
account) in the amount of P6,750,000.00, maintained with its Aguirre Branch,
to its obligations under the TR.
On 29 October 2006, SCP filed an urgent omnibus motion alleging that
petitioner violated the rehabilitation court's stay order when it applied the
proceeds of its current account to the payment of obligations covered by the
stay order. Consequently, it prayed for ABC to immediately restore its current
account, credit back to said account the amount of P6,750,000.00, and honor
any and all transactions of SCP in said account. The CA ruled that the RTC's
stay order was effective from the date of its issuance on 12 September 2006,
on the basis of Section 11, Rule 4, and Section 5, Rule 3, of the Interim Rules
of Corporate Rehabilitation; thus, ABC was bound to comply with it on said
date. The CA also ruled that the subject account was already under custodia
legis by virtue of the stay order, rendering ABC's unilateral application of the
proceeds in the subject account improper. On the issue of impairment of
contractual rights, the CA held that no impairment exists because no changes
were made in the amount or rate of SCP's debt to ABC. Only the enforcement
of the latter's claims is being stayed or suspended.
ISSUE: May the Rehabilitation Rules be applied to resolve the present
petition, when the subject petition for rehabilitation was filed under the Interim
Rules.- yes
RULING: Thee Court rules in the affirmative.
Section 2, Rule 1 of the Rehabilitation Rules governs rehabilitation cases
already pending, except when its application would not prove feasible or would
work injustice, to wit:
SEC. 2. SCOPE. - These Rules shall apply to petitions for rehabilitation of
corporations, partnerships, and sole proprietorships, filed pursuant to Republic
Act No. 10142, otherwise known as the Financial Rehabilitation and Insolvency
Act (FRIA) of 2010.
These Rules shall similarly govern all further proceedings in suspension
of payments and rehabilitation cases already pending, except to the
extent that, in the opinion of the court, its application would not be
feasible or would work injustice, in which event the procedures originally
applicable shall continue to govern. (emphasis supplied)
a stay order issued by the court in a corporate rehabilitation proceeding is
effective from the date of its issuance until the dismissal of the petition or the
termination of the rehabilitation proceedings. In fact, it is immediately
executory.
In the case at bar, there is no doubt that the rehabilitation court correctly held
that the appellant is bound by the September 12, 2006 Stay Order as of the
date of its issuance, the same being immediately executory and effective
without any further act, event, or condition being necessary to compel
compliance therewith as expressly provided in Sec. 11, Rule IV and Sec. 5,
Rule III of the Interim Rules of Procedure on Corporate Rehabilitation.
xxx
It should be stressed that the Interim Rules was enacted to provide for a
summary and non-adversarial rehabilitation proceedings. This is in
consonance with the commercial nature of a rehabilitation case, which is
aimed to be resolved expeditiously for the benefit of all the parties concerned
and the economy in general.
It is true that under the Interim Rules, similar to the Rehabilitation Rules,
publication of the notice of the commencement of the proceedings is
necessary to acquire jurisdiction over all persons affected, viz:
Section 1. Nature of Proceedings. - Any proceeding initiated under these Rules
shall be considered in rem. Jurisdiction over all those affected by the
proceedings shall be considered as acquired upon publication of the notice of
the commencement of the proceedings in any newspaper of general circulation
in the Philippines in the manner prescribed by these Rules.
xxx
The question posed herein is whether the immediate effectivity of the stay
order is inconsistent with the publication requirement under the Rules, such
that the rehabilitation court cannot invalidate acts made after its issuance but
prior to its publication. The Court rules in the negative.
Taking into consideration the laudable objectives of rehabilitation proceedings,
the immediate effectivity of the stay order means that the RTC, through an
order commencing rehabilitation and staying claims against the debtor,
acknowledges that the debtor requires rehabilitation immediately and therefore
it can not only prohibit but also nullify acts made after its effectivity, when such
acts are violative of the stay order, to prevent any irreparable detriment to the
debtor's successful restoration.
• Kinds of Proceedings
• Procedure
• Commencement Order
• Malayan Insurance Company, Inc. v.
Victorias Milling Company, Inc. (586
SCRA 45, [2009])
FACTS: On July 8, 1997, the SEC issued a Stay Order, suspending
all actions for
claims against respondent pending before any court, tribunal, office,
board, body or commission. On August 8, 1997, the SEC constituted a
Management Committee. On May 31, 1999, the Labor Arbiter rendered
a decision in "Abelido v. Victorias Milling", ordering respondent to pay
Abelido the sum of P6,605,275.24. On July 16, 1999, respondent
procured from the petitioner a surety bond as a requisite to the filing of
an appeal with the NLRC from the Labor Arbiter's decision. On
September 7, 2000, the NLRC affirmed the decision of the Labor
Arbiter, and a writ of execution was issued on April 4, 2001.
Failing to obtain reimbursement from the respondent despite a series
of demands, petitioner, on January 15, 2003, filed a complaint for sum
of money with the RTC. On January 27, 2003, SEC issued an order
appointing a rehabilitation receiver for respondent. On July 2, 2003, the
RTC suspended the proceedings against respondent, and
subsequently denied the petitioner's motion for
reconsideration. Petitioner now comes to the Court, insisting that since
its claim (for reimbursement of the amount it released to NLRC to
satisfy the judgment on the labor claims of Abelido) arose after the
respondent was placed under a management committee, such claim
should not be suspended nor covered by the SEC Stay Order.
ISSUE: whether the complaint for sum of money with damages is a
"claim" within the contemplation of P.D. No. 902-A.
RULING: The Court ruled in the affirmative. The Interim Rules of
Procedure on Corporate Rehabilitation provides an all- encompassing
definition of the term and thus includes all claims or demands of
whatever nature or character against a debtor or its property, whether
for money or otherwise. Clearly then, the complaint filed by petitioner
against respondent falls under the category of "claim". The
suspension of action for claims against a corporation under
rehabilitation receiver or management committee embraces all
phases of the suit, be it before the trial court or any tribunal or
before this Court. Otherwise stated, what are automatically stayed
or suspended are the proceedings of an action or suit and not just
the payment of claims. As long as the corporation is under a
management committee or a rehabilitation receiver, all actions for
claims against it — for money or otherwise — must yield to the
greater imperative of corporate rehabilitation, excepting only, as
already mentioned, claims for payment of obligations incurred by
the corporation in the ordinary course of business. Enforcement of
writs of execution issued by judicial or quasi-judicial tribunals, since
such writs emanate from "actions for claims", must, likewise, be
suspended. If we allow the reimbursement action to proceed, and if
petitioner's claim is granted, it would be in a position to assert a
preference over other creditors. Worse, respondent would be
compelled to dispose of its properties in order to satisfy the claim of
petitioner. It would in effect be a clear defiance of the proscription set
forth in the Interim Rules on "selling, encumbering, transferring, or
disposing in any manner any of its (respondent's) properties except in
the ordinary course of business." Certainly, petitioner's claim for
reimbursement did not arise from the usual operations of respondent's
business. Neither can we consider it as an ordinary expense for the
conduct of its operations.
• Sps. Sobrejuanite v. ASB Development
Corporation (471 SCRA 763, [2005])
FACTS: Spouses Eduardo and Fidela Sobrejuanite (Sobrejuanite)
filed a Complaint for rescission of contract, refund of payments and
damages, against ASB Development Corporation (ASBDC) before the
Housing and Land Use Regulatory Board (HLURB). They averred that
despite full payment and demands, ASBDC failed to deliver the
property on or before December 1999 as agreed. They prayed for the
rescission of the contract; refund of payments amounting to
P2,674,637.10; payment of moral and exemplary damages, attorney's
fees, litigation expenses, appearance fee and costs of the suit. ASBDC
filed a motion to dismiss or suspend proceedings in view of the approval
by the Securities and Exchange Commission (SEC) on April 26, 2001
of the rehabilitation plan of ASB Group of Companies, which includes
ASBDC, and the appointment of a rehabilitation receiver. The HLURB
arbiter however denied the motion and ordered the continuation of the
proceedings.
ISSUE: WON the HLURB proceedings should have been suspended
in view of the approved rehabilitation plan and appointment of receiver -
yes
RULING: The Court ruled in the affirmative. the complaint filed by
Sobrejuanite is a claim as defined under the Interim Rules of Procedure
on Corporate Rehabilitation. Under other court rulings, the complaint
for rescission with damages would fall under the category of claim
considering that it is for pecuniary considerations. In their complaint,
Sobrejuanite pray for the rescission of the contract and the refund of
P2,674,637.10 representing their total payments to ASBDC;
P200,000.00 as moral damages; P100,000.00 as exemplary damages;
P100,000.00 as attorney's fees; P50,000.00 as litigation expenses;
P1,500.00 per hearing as appearance fees; and costs of the suit. As
such, the HLURB arbiter should have suspended the proceedings upon
the approval by the SEC of the ASB Group of Companies' rehabilitation
plan and the appointment of its rehabilitation receiver. By the
suspension of the proceedings, the receiver is allowed to fully devote
his time and efforts to the rehabilitation and restructuring of the
distressed corporation.
It is well to note that even the execution of final judgments may be held
in abeyance when a corporation is under rehabilitation. Hence, there is
more reason in the instant case for the HLURB arbiter to order the
suspension of the proceedings as the motion to suspend was filed soon
after the institution of the complaint. By allowing the proceedings to
proceed, the HLURB arbiter unwittingly gave undue preference to
Sobrejuanite over the other creditors and claimants of ASBDC, which
is precisely the vice sought to be prevented by Section 6(c) of PD 902-
A.
• Castillo v. Uniwide (G.R. No. 169725, 30
April 2010)
FACTS:
The case stems from a Complaint for illegal dismissal filed by petitioner against
respondents Uniwide Warehouse Club, Inc. and its president, Jimmy N. Gow.
The complaint contained a prayer for the payment of worked Saturdays for the
year 2001; holiday pay; separation pay; actual, moral and exemplary
damages; and attorney’s fees.
However, respondents submitted a Motion to Suspend Proceedings on the
ground that the Uniwide Group of Companies had petitioned the Securities and
Exchange Commission (SEC) for suspension of payments and for approval of
its proposed rehabilitation plan- which was ruled favorably and the SEC
declared the Uniwide Group of Companies to be in a state of suspension of
payments and approved its rehabilitation plan.
In an order, the labor arbiter denied the Motion to Suspend Proceedings. The
NLRC sustained the labor arbiter. However, the Court of Appeals, on
appeal,reversed the NLRC decision. Meanwhile, the labor arbiter al
so issued a decision on the illegal dismissal of Castillo and ordered the
respondents
topay him his separation pay. The other claims of Castillo (i.e., holi
day pay,worked Saturday pay, etc.) were dismissed. Both Castillo
and respondentsappealed with the NLRC.
ISSUE:
Whether or not Castillo’s action for claim may be suspended while
rehabilitation efforts on the respondent company is ongoing. - yes
RULING:
YES.
Castillo’s claim is a claim covered by the suspension order by the SEC.
Corporate rehabilitation connotes the restoration of the debtor to a position
of successful operation and solvency. An essential function of corporate
rehabilitation is the mechanism of suspension of all actions and
claims
against the distressed corporation, upon the due appointment of a
management committee or rehabilitation receiver. To allow such other
actions to continue would only add to the burden of the management
committee or rehabilitation receiver, whose time, effort and resources would
be wasted in defending claims against the corporation, instead of being
directed toward its restructuring and rehabilitation.
The actions that were suspended cover all claims against a
distressed corporation whether for damages founded on a breach of contract
of carriage, labor cases, collection suits or any other claims of a pecuniary
nature. Moreover, the new rules on corporate rehabilitation provide an all-
encompassing definition of the term and, thus, include all claims or
demands of whatever nature or character against a debtor or its property,
whether for money or otherwise.
The Labor Arbiter should have abstained from resolving the illegal dismissal
case and, instead, directed petitioner to present his claim to the rehabilitation
receiver duly appointed by the SEC inasmuch as the stay or suspension order
was effective and it subsisted from issuance until the dismissal of the petition
for rehabilitation or the termination of the rehabilitation proceedings. The CA
was thus correct in directing the suspension of the proceedings.
Petition denied. CA affirmed.
• (Tyson’s Super Concrete, Inc. vs. Court of
Appeals (461 SCRA 69 [2005])
FACTS:
Romana Dela Cruz is the registered owner of several parcels of land
located at St., Sta. Quiteria, Caloocan City. Dela Cruz entered into a
contract of lease with Tyson's Super Concrete, Inc. where it was agreed
that the latter shall occupy the property as lessee for a period of twenty
(20) years 1993 - 2012.
In 1995, the two major blocs of stockholders of Tyson's the Chua and
Hao’s, due to internal squabbling, filed a joint motion with the SEC
praying for the appointment of a receiver to oversee the functions of the
corporation.
The SEC then issued an order creating a Management Committee to
undertake the management of Tyson's, to take custody of and control
over all the existing assets, funds and records of the corporation, and
to determine the best way to protect the interest of the stockholders and
creditors.
Then, a complaint for ejectment was filed by Dela Cruz against Tyson's
for the alleged failure of Tyson's to pay its rentals despite repeated
written demands for such payment. MeTC ruled in favor of Dela Cruz.
Tyson's, on the other hand, filed a motion praying for the stay of
execution of the MeTC decision contending that the MeTC did not
acquire jurisdiction over the defendant corporation on the ground that
said corporation was not validly and effectively served with summons -
DENIED.
ISSUE: Whether Tyson's was validly and effectively served with the
summons issued by the MeTC. - yes
RULING:
YES.
Rule 14, Section 13 of the Revised Rules of Court provides that 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.
In the instant case, it is established that at the time Francis Chua
received the summons from the MeTC, he was the incumbent corporate
secretary of Tyson's. In addition, he was a member of the management
committee created by the SEC to oversee the operations of Tyson's.
Being a member of the Committee, there is no question that he was an
agent of petitioner corporation as contemplated under then Section 13,
Rule 14 of the Revised Rules of Court. Hence, whether he was acting
in his capacity as corporate secretary or as an agent of Tyson's, or both,
when he received the summons from the MeTC, the service of said
summons upon him is valid.
The Court agreed with CA that nothing in the order of the SEC creating
the management committee nor in the language of P.D. No. 902-A,
provides that only the chairman of the Committee is authorized to
receive summons. Even if the SEC or the Committee has adopted a
rule to the effect that only the chairman of the latter may receive
summons, such rule cannot amend or alter the Rules of Court
promulgated by the Supreme Court, pursuant to Section 5(5), Article
VIII of the Constitution, which allows officers of a corporation to receive
summons on its behalf.
Petition denied. CA affirmed.
• Abrera vs. Barza 599 SCRA 534 [2009])
FACTS:
CAP was incorporated on February 14, 1980 for the purpose of engaging in
the sale of pre-need educational plans. Initially, it sold open-ended educational
plans which guaranteed the payment of tuition and other standard school fees
to the planholder irrespective of the cost at the time of availment. Later, it
engaged in the sale of fixed value plans which guaranteed the payment of a
predetermined amount to the planholder. In 1982, CAP was among the
country’s top 2000 corporations. It started sending its scholars to college in
1984 and saw its first batch of graduates in 1988. However, it subsequently
suffered financial difficulties.1
On April 28, 2005, six petitioners herein,2 together with other CAP planholders,
filed an action with the RTC of Makati City for Specific Performance and/or
Annulment of Contract due to Fraud, Return and Disgorgement of Illegal
Profits, Damages with Application for Receiver and/or Management
Committee against CAP, its Directors and Officers, and the Fil-Estate Group
of Companies. The case, docketed as Securities and Exchange Commission
(SEC) Case. No. 05-365,3 was assigned to respondent Judge Romeo Barza
of the RTC of Makati City, Branch 61.
Petitioners alleged that proceedings commenced in SEC Case No. 05-365, but
the prayer for the appointment of a receiver and creation of a management
committee was not acted upon by the RTC.
On September 8, 2005, CAP filed a Petition for Corporate Rehabilitation,
docketed as Sp. Proc. No. M-6144, which was raffled to the RTC of Makati
City, Branch 61, presided by respondent Judge Romeo F. Barza.
On September 13, 2005, Judge Barza issued an Order4 in Sp. Proc. No. M-
6144 staying the enforcement of all claims against CAP
The main issue is whether or not respondent Judge committed grave abuse of
discretion amounting to lack or excess of jurisdiction in issuing the Order dated
September 13, 2005 staying enforcement of all claims against CAP and the
Order dated December 16, 2005 giving due course to CAP’s petition for
rehabilitation.
Petitioners allege that the relationship between a planholder and a pre-need
corporation was one of trust and not a debtor-creditor relationship. They
avered that in 2002, the Securities and Exchange Commission (SEC)
implemented the New Pre-Need Rules, which mandated a pre-need company
to set up a trust fund for the benefit of the beneficiary and in compliance with
the agreement; hence, they contend that an express trust relationship exists
between the policyholder as trustor, the pre-need firm as trustee, and the
beneficiary as cestui que trust. Petitioners add that Section 1.9 of the Pre-Need
Rules defines "trust fund" as a fund set up from the planholders’ payments,
separate and distinct from the paid-up capital of a registered Pre-Need
Company, established with a trustee under a trust agreement approved by the
Commission, to pay for the benefits as provided in the Pre-Need Plan.
Petitioners assert that since a trust relationship exists between a
planholder and a pre-need company, CAP may not avail itself of
rehabilitation proceedings to stop payments from its trust assets to the
beneficiaries.
Petitioners contend that respondent Judge "acted completely without
jurisdiction in giving due course to the petition for rehabilitation, including
planholders in the Stay Order and including trust assets in the rehabilitation
proceedings notwithstanding the fact that there was a prior case filed by
planholders for receivership and management committee and that the assets
of debtors do not include the funds collected from planholders."
Petitioners also contend that the Rehabilitation Court may not appoint a
rehabilitation receiver when a previous intra-corporate dispute (SEC Case No.
05-365) with prayer for the immediate appointment of a receiver has been filed
ahead of the petition for rehabilitation.
ISSUE:
1. Whether the Judge committed grave abuse of discretion amounting
to lack or excess of jurisdiction in issuing the Order dated September
13, 2005 staying enforcement of all claims against CAP and the Order
dated December 16, 2005 giving due course to CAP’s petition for
rehabilitation. - no
2. Whether the Rehabilitation Court may not appoint a rehabilitation
receiver when a previous intra-corporate dispute (SEC Case No. 05-
365) with prayer for the immediate appointment of a receiver has been
filed ahead of the petition for rehabilitation. - no
RULING:
1. No.
CAP is a domestic corporation engaged in the business of selling pre-need
educational plans. Republic Act (R.A.) No. 8799, otherwise known as The
Securities Regulation Code, defines "pre-need plans" as "contracts which
provide for the performance of future services or the payment of future
monetary considerations at the time of actual need, for which planholders pay
in cash or installment at stated prices, with or without interest or insurance
coverage, and includes life, pension, education, interment, and other plans
which the Commission may from time to time approve."
Section 16, Chapter IV of R.A. No. 8799 provides for the regulation of pre-need
plans by SEC, thus:
SEC.16. Pre-Need Plans. -- No person shall sell or offer for sale to the public
any pre-need plan except in accordance with rules and regulations which the
Commission (SEC) shall prescribe. Such rules shall regulate the sale of pre-
need plans by, among other things, requiring the registration of pre-need
plans, licensing persons involved in the sale of pre-need plans, requiring
disclosures to prospective planholders, prescribing advertising guidelines,
providing for uniform accounting system, reports and recordkeeping with
respect to such plans, imposing capital, bonding and other financial
responsibility, and establishing trust funds for the payment of benefits under
such plans.
The law governing corporate rehabilitation and suspension of actions for
claims against corporations is Presidential Decree (P.D.) No. 902-A, as
amended. Section 5 of P.D. No. 902-A, as amended by P.D. No. 1758,
enumerates the cases over which SEC has jurisdiction to hear and decide,
which includes "[p]etitions of corporations, partnerships or associations to be
declared in the state of suspension of payments in cases where the
corporation, partnership or association possesses sufficient property to cover
all its debts, but foresees the impossibility of meeting them when they
respectively fall due or in cases where the corporation, partnership or
association has no sufficient assets to cover its liabilities, but is under the
management of a Rehabilitation Receiver or Management Committee." R.A.
No. 8799, which took effect on August 8, 2000, transferred SEC’s jurisdiction
over all cases enumerated under Section 5 of P.D. No. 902-A, as amended, to
the courts of general jurisdiction or the appropriate Regional Trial Court.
On November 21, 2000, this Court approved the Interim Rules of Procedure
on Corporate Rehabilitation of 2000 (Interim Rules), which took effect on
December 15, 2000. The Interim Rules apply to petitions for rehabilitation filed
by corporations, partnerships, and associations pursuant to P.D. No. 902-A,
as amended.
The Interim Rules governed the proceedings in Sp. Proc. No. M-6144. CAP
filed the petition for corporate rehabilitation, because it is "unable to service its
debts as they fall due and its assets are insufficient to cover its liabilities."12
CAP filed the petition under Section 1, Rule 4 of the Interim Rules, which
provides:
SECTION 1. Who May Petition.— Any debtor who foresees the impossibility
of meeting its debts when they respectively fall due, or any creditor or creditors
holding at least twenty-five percent (25%) of the debtor’s total liabilities, may
petition the proper Regional Trial Court to have the debtor placed under
rehabilitation.13
Under the Interim Rules, "debtor" shall mean "any corporation, partnership, or
association, whether supervised or regulated by the Securities and Exchange
Commission or other government agencies, on whose behalf a petition for
rehabilitation has been filed under these Rules."14
The Interim Rules does not distinguish whether a pre-need corporation like
CAP cannot file a petition for rehabilitation before the RTC. Courts are not
authorized to distinguish where the Interim Rules makes no distinction.15
Moreover, under the Interim Rules, "claim" shall include "all claims or demands
of whatever nature or characteragainst a debtor or its property, whether for
money or otherwise." "Creditor" shall mean "any holder of a claim."
Hence, the claim of petitioners for payment of tuition fees from CAP is included
in the definition of "claims" under the Interim Rules.
2. No.
The contention is without merit.
The case for specific performance and/or annulment of contract (SEC Case
No. 05-365) and CAP’s petition for rehabilitation (Sp. Proc. No. M 6144) are
two different cases; hence, respondent Judge has the discretion to decide
each case according to its merits. The case for specific performance and/or
annulment of contract was filed pursuant to the Interim Rules of Procedure for
Intra-Corporate Controversies, while CAP’s petition for rehabilitation was filed
under the Interim Rules of Procedure on Corporate Rehabilitation. Under
Section 6, Rule 4 of the latter Interim Rules,19 respondent Judge has the
authority to appoint a rehabilitation receiver after finding the petition for
rehabilitation to be sufficient in form and substance.
Absent any provision in the Interim Rules, as amended, or P.D. No. 902-A
exempting claims arising from pre-need contracts from a court order staying
enforcement of all claims against the debtor/pre-need company, the Court
holds that respondent Judge did not commit grave abuse of discretion in
enforcing the Stay Order against petitioners.
• Metropolitan Bank and Trust Company
vs. Liberty Corrugated Boxes
Manufacturing Corporation (815 SCRA
458 [2017])
FACTS:
• The Court of Appeals affirmed the Regional Trial Court's December
21, 2007
• Order approving Liberty Corrugated Boxes Manufacturing Corp.'s
rehabilitation plan.
Respondent Liberty Corrugated Boxes Manufacturing Corp. is a domestic
corporation that produces corrugated packaging boxes. It obtained various
credit accommodations and loan facilities from petitioner Metropolitan Bank
and Trust Company (Metrobank) amounting to Pl 9,940,000.00. To secure its
loans, Liberty mortgaged to Metrobank 12 lots in Valenzuela City.
On June 21, 2007, Liberty filed a Petition for corporate rehabilitation before
Branch 7 4 of the Regional Trial Court of Malabon City. Liberty claimed that it
could not meet its obligations to Metrobank because of the Asian Financial
Crisis, which resulted in a drastic decline in demand for its goods, and the
serious sickness of its Founder and President, Ki Kiao Koc.
Liberty's rehabilitation plan consisted of: (a) a debt moratorium; (b) renewal of
marketing efforts; (c) resumption of operations; and ( d) entry into
condominium development, a new business.
On August 6, 2007, Metro bank filed its comment/opposition. It argued that
Liberty was not qualified for corporate rehabilitation; that Liberty's Petition for
rehabilitation and rehabilitation plan were defective; and that rehabilitation was
not feasible. It also claimed that Liberty filed the Petition solely to avoid its
obligations to the bank.
Rehabilitation Receiver Rafael Chris F. Teston recommended the approval of
the plan, provided that Liberty would initiate construction on the property in
Valenzuela within 12 months from approval.
In its December 21, 2007 Order, the Regional Trial Court approved the
rehabilitation plan. Metrobank appealed to the Court of Appeals. On June 13,
2008, the Court of Appeals issued the Decision denying the Petition and
affirming the Regional Trial Court's December 21, 2007 Order.
The Court of Appeals also found that the trial court correctly approved the
rehabilitation plan over Metrobank's Opposition upon the recommendation of
the Rehabilitation Receiver, who had carefully considered and addressed
Metrobank's criticism on the plan's viability.
The Court of Appeals stressed that the purpose of rehabilitation proceedings
is to enable the distressed company to gain a new lease on life and to allow
the creditors to be paid their claims. It held that the approval of the Regional
Trial Court was precisely "'to effect a feasible and viable rehabilitation' of ailing
corporations” as required by Presidential Decree No. 902-A.
ISSUE:
Whether respondent, as a debtor in default, is qualified to file a petition for
rehabilitation under Presidential Decree No. 902-A and Rule 4, Section 1 of
the Interim Rules.
RULING:
A corporation that may seek corporate rehabilitation is characterized not by its
debt but by its capacity to pay this debt.
In this case, the phrase "any debtor who foresees the impossibility of meeting
its debts when they respectively fall due" in Rule 4, Section 1 of the Interim
Rules need not refer to a specific period or point in time when the debts mature.
It may refer to the debtor corporation's general realization that it will not be able
to fulfill its obligations— a realization that may come before default.
Construing the phrase "when they respectively fall due" to mean that the
debtor must already be in default defeats the clear purpose of the lawmakers.
It unjustly limits rehabilitation to corporations with matured obligations.
Rule 4, Section 1 of the Interim Rules provides:
RULE4
Debtor-Initiated Rehabilitation
SECTION 1. Who May Petition. - Any debtor who foresees the
impossibility of meeting its debts when they respectively fall
due, or any creditor or creditors holding at least twenty-five
percent (25%) of the debtor's total liabilities, may petition the
proper Regional Trial Court to • have the debtor placed under
rehabilitation.
Philippine Bank of Communications v. Basic Polyprinters and Packaging
Corporation reiterates the purpose of rehabilitation, which is to provide
meritorious corporations an opportunity for recovery: Under the Interim Rules,
rehabilitation is the process of restoring "the debtor to a position of successful
operation and solvency, if it is shown that its continuance of operation is
economically feasible and its creditors can recover by way of the present value
of payments projected in the plan more if the corporation continues as a going
concern that if it is immediately liquidated." It contemplates a continuance of
corporate life and activities in an effort to restore and reinstate the corporation The rehabilitation receiver shall be deemed an officer of the court with the
to its former position of successful operation and solvency. principal duty:

1. Of preserving and maximizing the value of the assets of the debtor during
the rehabilitation proceedings;
2. Of determining the viability of the rehabilitation of the debtor;
3. Of preparing and recommending a Rehabilitation Plan to the court; and
E. Rehabilitation Receiver - shall refer to the person or 4. Of implementing the approved Rehabilitation Plan (FRIA, Sec. 31).
persons, natural or juridical, appointed as such by the court 5. To take an oath and file a bond, in such amount to be fixed by the court,
pursuant to this Act and which shall be entrusted with such conditioned upon the faithful and proper discharge of his powers, duties
powers and duties as set forth herein [FRIA, Sec. 4(hh)]. and responsibilities (FRIA, Sec. 34).
6. To make an appropriate disclosure of conflict of interest either to the
If the rehabilitation receiver is a juridical entity, it must court or to the creditors in case of out-of-court rehabilitation
designate a natural person/s who possess/es all the proceedings (FRIA, Sec. 40).
qualifications and none of the disqualifications as its
representative, it being understood that the juridical entity The rehabilitation receiver shall have the following powers, duties and
and the representative/s are solidarily liable for all responsibilities:
obligations and responsibilities of the rehabilitation
receiver (FRIA, Sec. 28).
1. To verify the accuracy of the factual allegations in the petition and its
annexes;
2. To verify and correct, if necessary, the inventory of all of the assets of the
• Qualifications debtor, and their valuation;
3. To verify and correct, if necessary, the schedule of debts and liabilities of
the debtor;
Minimum qualifications
4. To evaluate the validity, genuineness and true amount of all the claims
against the debtor;
1. A citizen of the Philippines or a resident of the Philippines in the six (6) 5. To take possession, custody and control, and to preserve the value of all
months immediately preceding his nomination; the property of the debtor;
2. Of good moral character and with acknowledged integrity, impartiality 6. To sue and recover, with the approval of the court, all amounts owed to,
and independence; and all properties pertaining to the debtor;
3. Has the requisite knowledge of insolvency and other relevant 7. To have access to all information necessary, proper or relevant to the
commercial laws, rules and procedures, as well as the relevant training operations and business of the debtor and for its rehabilitation;
and/or experience that may be necessary to enable him to properly 8. To sue and recover, with the approval of the court, all property or money
discharge the duties and obligations of a rehabilitation receiver; and of the debtor paid, transferred or disbursed in fraud of the debtor or its
4. Has no conflict of interest: Provided, that such conflict of interest may be creditors, or which constitute undue preference of creditor/s;
waived, expressly or impliedly, by a party who may be prejudiced 9. To monitor the operations and the business of the debtor to ensure that
thereby (FRIA, Sec. 29). no payments or transfers of property are made other than in the
ordinary course of business;
10. With the court's approval, to engage the services of or to employ persons
• Duties or entities to assist him in the discharge of his functions;
11. To determine the manner by which the debtor may be best rehabilitated,
to review, revise and/or recommend action on the Rehabilitation Plan
Powers, duties and responsibilities of Rehabilitation Receiver
and submit the same or a new one to the court for approval;
12. To implement the Rehabilitation Plan as approved by the court, if so
provided under the Rehabilitation Plan;
 13. To assume and exercise the powers of management of the debtor, if to the proceedings. Without limiting the generality of the foregoing, an individual
directed by the court pursuant to Section 36 hereof; shall be deemed to have a conflict of interest if:
14. To exercise such other powers as may, from time to time, be conferred
upon him by the court; and 1. He is a creditor, owner, partner or stockholder of the debtor;
15. To submit a status report on the rehabilitation proceedings every 2. He is engaged in a line of business which competes with that of the
quarter or as may be required by the court motu proprio, or upon motion debtor;
of any creditor, or as may be provided, in the Rehabilitation Plan (FRIA, 3. He is, or was, within five (5) years from the filing of the petition, a
Sec. 31). director, officer, owner, partner or employee of the debtor or any of the
creditors, or the auditor or accountant of the debtor;
4. He is, or was, within two (2) years from the filing of the petition, an
underwriter of the outstanding securities of the debtor;
NOTE: Unless appointed by the court under section 36 (management committee), 5. He is related by consanguinity or affinity within the fourth civil degree
the rehabilitation receiver shall not take over the management and control of the to any individual creditor, owner/s of a sole proprietorship- debtor,
debtor but may recommend the appointment of a management committee over partners of a partnership-debtor or to any stockholder, director, officer,
the debtor in the cases provided by this Act. employee or underwriter of a corporation-debtor; or
6. He has any other direct or indirect material interest in the debtor or any
of the creditorS (FRIA, Sec. 40).

• Compensation
- The rehabilitation receiver and his direct
employees or independent contractors will
be entitled to compensation for reasonable
fees and expenses from the debtor
according to the terms approved by the
court after notice and hearing.
- Prior to such hearing, the rehabilitation
receiver and his direct employees will be
entitled to reasonable compensation based
on quantum meruit. Such costs will be
considered administrative expenses. (FRIA,
Sec. 33)
- Quantum meruit: ‘the amount he deserves”
• Conflict of Interest
NOTE: Any party to the proceeding adversely affected by the appointment of any
person with a conflict of interest to any of the positions enumerated above may
however waive his right to object to such appointment and, if the waiver is
unreasonably withheld, the court may disregard the conflict of interest, taking
into account the general interest of the stakeholders.
Immunity : The rehabilitation receiver and all persons employed by him, and
the members of the management committee and all persons employed by it, shall
not be subject to any action, claim or demand in connection with any act done or
omitted to be done by them in good faith in connection with the exercise of their
powers and functions under this Act or other actions duly approved by the court
(FRIA, Sec. 41).

No person may be appointed as a rehabilitation receiver, member of a

management committee, or be employed by the rehabilitation receiver or the
management committee if he has a conflict of interest.

An individual shall be deemed to have a conflict of interest if he is so situated as

to be materially influenced in the exercise of his judgment for or against any party