1

Articles of Incorporation

Corporate Name

EN BANC
[G.R. No. 41570. September 6, 1934.]
RED LINE TRANSPORTATION CO., Petitioner-Appellant,
v. RURAL TRANSIT CO., LTD. ,Respondent-Appellee.
SYLLABUS
1. PUBLIC SERVICE; AUTHORITY OF PUBLIC SERVICE
COMMISSION TO AUTHORIZE A CORPORATION TO ASSUME
THE NAME OF ANOTHER. There is no law that empowers the
Public Service Commission or any court in this jurisdiction to
authorize one corporation to assume the name of another
corporation as a trade name. Both the Rural Transit Company,
Ltd., and the Bachrach Motor Co., Inc., are Philippine
corporations and the very law of their creation and continued
existence requires each to adopt and certify a distinctive
name.
2. ID.; ID.; CHANGE OF CORPORATIONS NAME. The
incorporators "constitute a body politic and corporate under
the name stated in the certificate." (Section 11, Act No. 1459,
as amended.) A corporation has the power "of succession by
its corporate name." (Section 13, ibid.) The name of a
corporation is therefore essential to its existence. It cannot
change its name except in the manner provided by the
statute. By that name alone is it authorized to transact
business.
3. ID.; ID.; ID. The law gives a corporation no express or
implied authority to assume another name that is
unappropriated; still less that of another corporation, which is
expressly set apart for it and protected by the law. 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.
4. ID.; ID.; ID.; POLICY OF THE LAW. The policy of the law as
expressed in our corporation statute and the Code of
Commerce is clearly against such a practice. (Cf. Scarsdale
Pub. Co. -Colonial Press v. Carter, 116 New York Supplement,
731; Svenska Nat. F. i. C. v. Swedish Nat. Assn., 205 Illinois
[Appellate Courts], 428, 434.)
DECISION

convenience of the herein applicant and herein incorporated

are made a part hereof."
On January 14, 1933, the oppositor Red Line Transportation
Company filed a motion for rehearing and reconsideration in
which it called the commissions attention to the fact that
there was pending in the Court of First Instance of Manila case
No. 42343, an application for the voluntary dissolution of the
corporation, Rural Transit Company, Ltd. Said motion for
reconsideration was set down for hearing on March 24, 1933.
On March 23, 1933, the Rural Transit Company, Ltd., the
applicant, filed a motion for postponement. This motion was
verified by M. Olsen who swears "that he was the secretary of
the Rural Transit Company, Ltd., in the above entitled case."
Upon the hearing of the motion for reconsideration, the
commission admitted without objection the following
documents filed in said case No. 42343 in the Court of First
Instance of Manila for the dissolution dated July 6, 1932, the
decision of the said Court of First Instance of Manila, dated
February 28, 1933, decreeing the dissolution of the Rural
Transit Company, Ltd.
At the trial of this case before the Public Service Commission
an issue was raised as to who was the real party in interest
making the application, whether the Rural Transit Company,
Ltd., as appeared on the face of the application, or the
Bachrach Motor Company, Ltd., as a trade name. The
evidence given by the applicants secretary, Olsen, is certainly
very dubious and confusing, as may be seen from the
following:
"Q. Will you please answer the question whether it is the
Bachrach Motor Company operating under the trade name of
the Rural Transit Company, Limited, or whether it is the Rural
Transit Company, Limited in its own name this application was
filed?
"A. The Bachrach Motor Company is the principal stockholder.
"Q. Please answer the question.
"ESPELETA. Objecion
contestada.

porque

la

pregunta

ya

ha

sido

"JUEZ. Puede contestar.

"A. I do not know what the legal construction or relationship
existing between the two.
"JUDGE. I do not know what is in your mind by not telling the
real applicant in this case?
"A. It is the Rural Transit Company, Ltd.
"JUDGE. As an entity by itself and not by the Bachrach Motor
Company?

This case is before us on a petition for review of an order of

the Public Service Commission entered December 21, 1932,
granting to the Rural Transit Company, Ltd., a certificate of
public convenience to operate a transportation service
between Ilagan in the Province of Isabela and Tuguegarao in
the Province of Cagayan, and additional trips in its existing
express service between Manila and Tuguegarao.

"A. I do not know. I have not given that phase of the matter
much thought, as in previous occasion had not necessitated.

On June 4, 1932, the Rural Transit Company, Ltd., a Philippine

corporation, filed with the Public Service Commission an
application in which it is stated in substance that it is the
holder of a certificate of public convenience to operate a
passenger bus service between Manila and Tuguegarao; that it
is the only operator of direct service between said points and
the present authorized schedule of only one trip daily is not
sufficient; that it will be also to the public convenience to
grant the applicant a certificate for a new service between
Tuguegarao and Ilagan.

"JUDGE. Who is that operator?

On July 22, 1932, the appellant, Red Line Transportation

Company, filed an opposition to the said application alleging
in substance that as to the service between Tuguegarao and
Ilagan, the oppositor already holds a certificate of public
convenience and is rendering adequate and satisfactory
service; that the granting of the application of the Rural
Transit Company, Ltd., would not serve public convenience
but would constitute a ruinous competition for the oppositor
over said route.
After testimony was taken, the commission, on December 21,
1932, approved the application of the Rural Transit Company
Ltd., and ordered that the certificate of public convenience
applied for be "issued to the applicant Rural Transit Company,
Ltd.," with the conditions of the various certificates of public

"JUDGE. In filing this application, you filed it for the operator

on that line? Is it not?
"A. Yes, sir.

"A. The Rural Transit Company, Ltd.

"JUDGE. By itself, or as a commercial name of the Bachrach
Motor Company?
"A. I cannot say.
"ESPELETA. The Rural Transit Company, Ltd., is a corporation
duly established in accordance with the laws of the Philippine
Islands.
"JUDGE. According to the records of this commission the
Bachrach Motor Company is the owner of the certificates and
the Rural Transit Company, Ltd., is operating without any
certificate.
"JUDGE. If you filed this application for the Rural Transit
Company, Ltd., and afterwards it is found out that the Rural
Transit Company, Ltd., is not an operator, everything will be
turned down.
"JUDGE. My question was, when you filed this application you
evidently made it for the operator?

2
"A. Yes, sir.
"JUDGE. Who was that operator you had in mind?
"A. According to the status of the ownership of the certificates
of the former Rural Transit Company, the operator was the
operator authorized in case No. 23217 to whom all of the
assets of the former Rural Transit Company were sold.
"JUDGE. The Bachrach Motor Company?
"A. All actions have been prosecuted in the name of the Rural
Transit Company, Ltd.
"JUDGE. You mean the Bachrach Motor Company, Inc., doing
business under the name of the Rural Transit Company, Ltd.?
"A. Yes, sir.
"LOCKWOOD. I move that this case be dismissed, your Honor,
on the ground that this application was made in the name of
one party but the real owner is another party.

In view of the dissolution of the Rural Transit Company, Ltd. by

judicial decree of February 28, 1933, we do not see how we
can assess costs against said respondent, Rural Transit
Company, Ltd.

THIRD DIVISION
[G.R. No. 117890. September 18, 1997]
PISON-ARCEO AGRICULTURAL and DEVELOPMENT
CORPORATION, petitioner, vs. NATIONAL
LABOR RELATIONS COMMISSION and NATIONAL
FEDERATION OF SUGAR WORKERS-FOOD and
GENERAL TRADE (NFSW-FGT)/ JESUS PASCO,
MARTIN BONARES, EVANGELINE PASCO,
TERESITA NAVA, FELIXBERTO NAVA, JOHNNY
GARRIDO, EDUARDO NUEZ and DELMA
NUEZ,respondents.

"ESPELETA. We object to that petition.

"JUDGE. I will have that in mind when I decide the case. If I
agree with you everything would be finished."
The Bachrach Motor Company, Inc., entered no appearance
and ostensibly took no part in the hearing of the application of
the Rural Transit Company, Ltd. It may be a matter of some
surprise that the commission did not on its own motion order
the amendment of the application by substituting the
Bachrach Motor Company, Inc., as the applicant. However, the
hearing proceeded on the application as filed and the decision
of December 21, 1932, was rendered in favor of the Rural
Transit Company, Ltd., and the certificate ordered to be issued
in its name, in the face of the evidence that the said
corporation was not the real party in interest. In its said
decision, the commission undertook to meet the objection by
referring to its resolution of November 26, 1932, entered in
another case. This resolution in case No. 23217 concludes as
follows:
"Premises considered we hereby authorize the Bachrach
Motor Co., Inc., to continue using the name of Rural Transit
Co., Ltd., as its trade name in all the applications, motions or
other petitions to be filed in this commission in connection
with said business and that this authority is given retroactive
effect as of the date of filing of the application in this case, to
wit, April 28, 1930."
We know of no law that empowers the Public Service
Commission or any court in this jurisdiction to authorize one
corporation to assume the name of another corporation as a
trade name. Both the Rural Transit Company, Ltd., and the
Bachrach Motor Co., Inc., are Philippine corporations and the
very law of their creation and continued existence requires
each to adopt and certify a distinctive name. The
incorporators "constitute a body politic and corporate under
the name stated in the certificate." (Section 11, Act No. 1459,
as amended.) A corporation has the power "of succession by
its corporate name." (Section 13, ibid.) The name of a
corporation is therefore essential to its existence. It cannot
change its name except in the manner provided by the
statute. By that name alone is it authorized to transact
business. The law gives a corporation no express or implied
authority to assume another name that is unappropriated; still
less that of another corporation, which is expressly set apart
for it and protected by the law. 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. The policy of the law as
expressed in our corporation statute and the Code of
Commerce is clearly against such a practice. (Cf. Scarsdale
Pub. Co. -Colonial Press v. Carter, 116 New York Supplement,
731; Svenska Nat. F. i. C. v. Swedish Nat. Assn., 205 Illinois
[Appellate Courts], 428, 434.)
The order of the commission of November 26, 1932,
authorizing the Bachrach Motor Co., Incorporated, to assume
the name of the Rural Transit Co., Ltd., likewise incorporated,
as its trade name being void, and accepting the order of
December 21, 1932, at its face as granting a certificate of
public convenience to the applicant Rural Transit Co., Ltd., the
said order last mentioned is set aside and vacated on the
ground that the Rural Transit Company, Ltd., is not the real
party in interest and its application was fictitious.

DECISION
In the proceedings before the labor arbiter, only the
unregistered trade name of the employer-corporation and its
administrator/manager were impleaded and subsequently
held liable for illegal dismissal, backwages and separation
pay. On appeal, however, the National Labor Relations
Commission motu proprio included the corporate name of the
employer as jointly and severally liable for the workers
claims. Because of such inclusion, the corporation now raises
issues of due process and jurisdiction before this Court.
The Case
Assailed in this petition for certiorari under Rule 65 of
the Rules of Court is the Decision [1] of Public Respondent
National Labor Relations Commission[2] in NLRC Case No. V0334-92[3] promulgated on September 27, 1993 and its
Resolution[4] promulgated on September 12, 1994 denying
reconsideration. Affirming the decision[5] dated September 2,
1992 of Executive Labor Arbiter Oscar S. Uy, the impugned
NLRC Decision disposed thus:[6]
WHEREFORE, judgment is hereby rendered affirming the
decision of Executive Labor Arbiter Oscar S. Uy, dated
September 2, 1992, subject to the amendments and
modification stated above and ordering the respondentappellant, Jose Edmundo Pison and the respondent PisonArceo Agricultural and Development Corporation to pay jointly
and severally the claims for backwages and separation pay of
the complainant-appellees in the above-entitled case, except
the claims of Danny Felix and Helen Felix, in the amount
specified below:
Name Backwages Separation Pay Total
1. Jesus Pasco P14,729.00 P12,818.06 P27,547.06
2. Evangeline Pasco 14,729.00 12,874.81 27,603.81
3. Martin Bonares 14,729.00 9,035.06 23,764.06
4. Mariolita Bonares 14,729.00 8,455.00 23,184.00
5. Felixberto Nava 14,729.00 13,505.31 28,234.31
6. Teresita NAva 14,729.00 3,417.31 18,146.31
7. Johnny Garrido 8,489.00 4,463.94 12,952.94
8. Eduardo Nuez 8,489.00 11,399.44 19,888.44
9. Delma Nuez 8,489.00 9,507.94 17,996.94

3
In addition, the respondent-appellant and the respondent
corporation are ordered to pay attorneys fees equivalent to
ten (10%) percent of the total award.
The dispositive portion of the assailed Resolution, on the
other hand, reads:[7]
WHEREFORE, the decision in question is hereby modified in
the sense that the monetary award of Mariolita Bonares be
[sic] deleted. Except for such modification, the rest of the
decision stands.
Arguing that the National Labor Relations Commission
did not have jurisdiction over it because it was not a party
before the labor arbiter, petitioner elevated this matter before
this Court via a petition for certiorari under Rule 65.
Acting on petitioners prayer[8], this Court (First Division)
issued on January 18, 1995 a temporary restraining order
enjoining the respondents from executing the assailed
Decision and Resolution.
The Facts
As gathered from the complaint [9] and other submissions
of the parties filed with Executive Labor Arbiter Oscar S. Uy,
the facts of the case are as follows:
Together with Complainants Danny and Helen Felix, private
respondents -- Jesus Pasco, Evangeline Pasco, Martin Bonares,
Teresita Nava, Felixberto Nava, Johnny Garrido, Eduardo Nuez
and Delma Nuez, all represented by Private Respondent
National Federation of Sugar Workers-Food and General Trade
(NSFW-FGT) -- filed on June 13, 1988 a complaint for illegal
dismissal, reinstatement, payment of backwages and
attorneys fees against Hacienda Lanutan/Jose Edmundo Pison.
Complainants alleged that they were previously employed as
regular sugar farm workers of Hacienda Lanutan in Talisay,
Negros Occidental. On the other hand, Jose Edmundo Pison
claimed that he was merely the administrator of Hacienda
Lanutan which was owned by Pison-Arceo Agricultural and
Development Corporation.
As earlier stated, the executive labor arbiter rendered on
September 2, 1992 a decision in favor of the workerscomplainants, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby
rendered ordering respondent Jose Edmundo Pison/Hda.
Lanutan, Talisay, Negros Occidental, to PAY the following
complainants their backwages (one year) plus separation pay
in the following amounts, to wit:
BACKWAGES SEPARATION PAY TOTAL
1. J. Pasco -P14,729.00 P12,818.06 P27,547.06
2. E. Pasco - 14,729.00 12,784.81 27,603,81
3. Bonares - 14,729.00 8,404.56 23,133.56
4. F. Nava - 14,729.00 13,505.31 28,234.31
5. T. Nava - 14,729.00 3,427.31 18,146.31
6. J. Garido - 8,489.00 4,463.94 12,952.94
7. E. Nuez - 8,489.00 11,399.44 19,888.44
8. D. Nuez - 8,489.00 9,507.94 17,996.94
plus ten percent (10%) of the total award as attorneys fees in
the amount of P17,550.34 or in the total amount of ONE

HUNDRED NINETY THREE THOUSAND FIFTY THREE AND

71/100 (P193,053.71), all these amounts to be deposited with
this Office within ten (10) days from receipt of this
decision. The claim of complainants Danny and Helen Felix are
hereby DENIED for lack of merit.
In affirming the decision of the executive labor arbiter,
public respondent ordered respondent-appellant, Jose
Edmundo Pison and the respondent Pison-Arceo Agricultural
and Development Corporation to pay jointly and severally the
claims for backwages and separation pay of private
respondents. The motion for reconsideration dated October
14, 1993 was apparently filed by Jose Edmundo Pison for and
on his own behalf only. However, Pison did not elevate his
case before this Court. The sole petitioner now before us is
Pison-Arceo Agricultural and Development Corporation, the
owner of Hacienda Lanutan.
The Issue
Petitioner submits only one issue for our resolution:[10]
Public Respondent NLRC acted without or in excess of
jurisdiction or with grave abuse of discretion when it
included motu proprio petitioner corporation as a party
respondent and ordered said corporation liable to pay jointly
and severally, with Jose Edmundo Pison the claims of private
respondents.
In essence, petitioner alleges deprivation of due process.
The Courts Ruling
The petition lacks merit.
Petitioner contends that it was never served any
summons; hence, public respondent did not acquire
jurisdiction over it. It argues that from the time the complaint
was filed before the Regional Arbitration Branch No. VI up to
the time the said case was appealed by Jose Edmundo Pison
to the NLRC, Cebu, petitioner Corporation was never
impleaded as one of the parties x x x. It was only in the public
respondents assailed Decision of September 27, 1993 that
petitioner Corporation was wrongly included as party
respondent without its knowledge. Copies of the assailed
Decision and Resolution were not sent to petitioner but only to
Jose Edmundo Pison, on the theory that the two were one and
the same. Petitioner avers that Jose Edmundo Pison is only a
minority stockholder of Hacienda Lanutan, which in turn is one
of the businesses of petitioner.[11] Petitioner further argues
that it did not voluntarily appear before said tribunal and that
it was not given (any) opportunity to be heard; [12] thus, the
assailed Decision and Resolution in this case are void for
having been issued without jurisdiction.[13]
In its memorandum, petitioner adds that Eden vs.
Ministry of Labor and Employment,[14] cited by public
respondent, does not apply to this case. In Eden, petitioners
were duly served with notices of hearings, while in the instant
case, the petitioner was never summoned nor was served
with notice of hearings as a respondent in the case. [15]
At the outset, we must stress that in quasi-judicial
proceedings, procedural rules governing service of summons
are not strictly construed. Substantial compliance thereof is
sufficient.[16] Also, in labor cases, punctilious adherence to
stringent technical rules may be relaxed in the interest of the
working man; it should not defeat the complete and equitable
resolution of the rights and obligations of the parties. This
Court is ever mindful of the underlying spirit and intention of
the Labor Code to ascertain the facts of each case speedily
and objectively without regard to technical rules of law and
procedure, all in the interest of due process. [17] Furthermore,
the Labor Code itself, as amended by RA 6715, [18] provides for
the specific power of the Commission to correct, amend, or
waive any error, defect or irregularity whether in the

4
substance or in the form of the proceedings before it [19] under
Article 218 (c) as follows:
(c) To conduct investigation for the determination of a
question, matter or controversy within its jurisdiction, proceed
to hear and determine the disputes in the absence of any
party thereto who has been summoned or served with notice
to appear, conduct its proceedings or any part thereof in
public or in private, adjourn its hearings to any time and
place, refer technical matters or accounts to an expert and to
accept his report as evidence after hearing of the parties upon
due notice, direct parties to be joined in or excluded from the
proceedings, correct, amend, or waive any error, defect or
irregularity whether in substance or in form, give all such
directions as it may deem necessary or expedient in the
determination of the dispute before it, and dismiss any matter
or refrain from further hearing or from determining the
dispute or part thereof, where it is trivial or where further
proceedings by the Commission are not necessary or
desirable; xxx (Underscoring supplied.)
In this case, there are legal and factual reasons to hold
petitioner jointly and severally liable with Jose Edmundo Pison.
Jurisdiction Acquired over Petitioner
Consistent with the foregoing principles applicable to
labor cases, we find that jurisdiction was acquired over the
petitioner. There is no dispute that Hacienda Lanutan, which
was owned SOLELY by petitioner, was impleaded and was
heard. If at all, the non-inclusion of the corporate name of
petitioner in the case before the executive labor arbiter was a
mere procedural error which did not at all affect the
jurisdiction of the labor tribunals.[20] Petitioner was adequately
represented in the proceedings conducted at the regional
arbitration branch by no less than Hacienda Lanutans
administrator, Jose Edmundo Pison, who verified and signed
his/Hacienda Lanutans position paper and other pleadings
submitted before the labor arbiter. It can thus be said that
petitioner, acting through its corporate officer Jose Edmundo
Pison, traversed private respondents complaint and
controverted their claims. Further unrebutted by petitioner are
the following findings of public respondent:[21]
It should further be noted that two responsible employees of
the said corporation, namely, Teresita Dangcasil, the secretary
of the administrator/manager, and Fernando Gallego, the
hacienda overseer, had submitted their affidavits, both dated
July 20, 1988, as part of the evidence for the respondent, and
that, as shown by the records, the lawyer who appeared as
the legal counsel of the respondent-appellant, specifically,
Atty. Jose Ma. Torres, of the Torres and Valencia Law Office in
Bacolod City, (Rollo, p. 17) was also the legal counsel of the
said corporation. (Rollo, p. 23)
Also, it is undisputed that summons and all notices of
hearing were duly served upon Jose Edmundo Pison. Since
Pison is the administrator and representative of petitioner in
its property (Hacienda Lanutan) and recognized as such by
the workers therein, we deem the service of summons upon
him as sufficient and substantial compliance with the
requirements for service of summons and other notices in
respect of petitioner corporation. Insofar as the complainants
are concerned, Jose Edmundo Pison was their employer and/or
their employers representative. In view of the peculiar
circumstances of this case, we rule that Jose Pisons knowledge
of the labor case and effort to resist it can be deemed
knowledge and action of the corporation. Indeed, to apply the
normal precepts on corporate fiction and the technical rules
on service of summons would be to overturn the bias of the
Constitution and the laws in favor of labor.
Hence, it is fair to state that petitioner, through its
administrator and manager, Jose Edmundo Pison, was duly
notified of the labor case against it and was actually afforded
an opportunity to be heard. That it refused to take advantage
of such opportunity and opted to hide behind its corporate veil

will not shield it from the encompassing application of labor

laws. As we held in Bautista vs. Secretary of Labor and
Employment:[22]
Moreover, since the proceeding was not judicial but merely
administrative, the rigid requirements of procedural laws were
not strictly enforceable. It is settled that -While the administrative tribunals exercising quasi-judicial
powers are free from the rigidity of certain procedural
requirements they are bound by law and practice to observe
the fundamental and essential requirements of due process in
justiciable cases presented before them. However, the
standard of due process that must be met in administrative
tribunals allows a certain latitude as long as the element of
fairness is not ignored. (fn: Adamson & Adamson,
Inc. vs. Amores, 152 SCRA 237).
xxx
It is of course also sound and settled rule that administrative
agencies performing quasi-judicial functions are unfettered by
the rigid technicalities of procedure observed in the courts of
law, and this is so that disputes brought before such bodies
may be resolved in the most expeditious and inexpensive
manner possible. (fn: Rizal Workers Union vs. Ferrer-Calleja,
186 SCRA 431).
Given all these circumstances, we feel that the lack of
summons upon the petitioners is not sufficient justification for
annulling the acts of the public respondents.
Contrary to petitioners contention, the principles laid
down in Eden are relevant to this case. In that case, a
religious organization, SCAFI,[23] denied responsibility for the
monetary claims of several employees, as these were filed
against SCAPS[24] and its officer in charge -- the employees
believed that SCAPS was their employer. In rejecting such
defense, this Court ruled:[25]
With regard to the contention that SCAPS and SCAFI are two
different entities, this lacks merit. The change from SCAPS to
SCAFI was a mere modification, if not rectification of the
caption as to respondent in the MOLE case, when it was
pointed out in the complainants position paper that SCAPS
belongs to or is integral with SCAFI as gleaned from the
brochure, Annex A of said position paper, which is already part
of the records of the case and incorporated in the Comment
by way of reference. The brochure stated that SCAPS is the
implementing and service arm of SCAFI, with Bishop Gaviola
as National Director of SCAPS and Board Chairman of SCAFI,
both their address: 2655 F.B. Harrison, St., Pasay City. Thus,
the real party in interest is SCAFI, more so because it has the
juridical personality that can sue and be sued. The change in
caption from SCAPS to SCAFI however does not absolve SCAPS
from liability, for SCAFI includes SCAPS, SCAPS -- the arm,
SCAFI, -- the organism to which the arm is an integral part of
the rise and fall of SCAPS, and vice-versa. Thus, SCAFI has
never been a stranger to the case. Jurisprudence is to the
effect that:
An action may be entertained, notwithstanding the failure to
include an indispensable party where it appears that the
naming
of
the
party
would
be
a
formality. (Baguio vs. Rodriguez, L-11078, May 27, 1959)

5
Comparable to Eden, Hacienda Lanutan is an arm of
petitioner, the organism of which it is an integral
part. Ineluctably, the real party in interest in this case is
petitioner, not Hacienda Lanutan which is merely its nonjuridical arm. In dealing with private respondents, petitioner
represented itself to be Hacienda Lanutan. Hacienda Lanutan
is roughly equivalent to its trade name or even nickname or
alias. The
names
may
have
been
different,
but
the IDENTITY of the petitioner is not in dispute. Thus, it may
be sued under the name by which it made itself known to the
workers.

PEBV, and the previous registration of Petitioners Philips

Electrical and Philips Industrial with the SEC.

Liability of Jose Edmundo Pison

In its Answer, dated 7 March 1985, Private Respondent

countered that Petitioner PEBV has no legal capacity to sue;
that its use of its corporate name is not at all similar to
Petitioners' trademark PHILIPS when considered in its entirety;
and that its products consisting of chain rollers, belts,
bearings and cutting saw are grossly different from
Petitioners' electrical products.

Jose Edmundo Pison did not appeal from the Decision of

public respondent. It thus follows that he is bound by the said
judgment. A party who has not appealed an adverse decision
cannot obtain from the appellate court any affirmative relief
other than those granted, if there is any, in the decision of the
lower court or administrative body.[26]
WHEREFORE, premises considered, the petition is
hereby DISMISSED, for its failure to show grave abuse of
discretion amounting to lack or excess of jurisdiction on the
part of the National Labor Relations Commission. The assailed
Decision and Resolution are AFFIRMED. The temporary
restraining order issued on January 19, 1995 is
hereby LIFTED. Costs against petitioner.
SO ORDERED.

SECOND DIVISION
G.R. No. 96161 February 21, 1992
PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC.
and PHILIPS INDUSTRIAL DEVELOPMENT,
INC., Petitioners, vs. COURT OF APPEALS, SECURITIES &
EXCHANGE COMMISSION and STANDARD PHILIPS
CORPORATION, Respondents.
Petitioners challenge the Decision of the Court of Appeals,
dated 31 July 1990, in CA-GR Sp. No. 20067, upholding the
Order of the Securities and Exchange Commission, dated 2
January 1990, in SEC-AC No. 202, dismissing petitioners'
prayer for the cancellation or removal of the word "PHILIPS"
from private respondent's corporate name.
Petitioner Philips Export B.V. (PEBV), a foreign corporation
organized under the laws of the Netherlands, although not
engaged in business here, is the registered owner of the
trademarks PHILIPS and PHILIPS SHIELD EMBLEM under
Certificates of Registration Nos. R-1641 and R-1674,
respectively issued by the Philippine Patents Office (presently
known as the Bureau of Patents, Trademarks and Technology
Transfer). Petitioners Philips Electrical Lamps, Inc. (Philips
Electrical, for brevity) and Philips Industrial Developments,
Inc. (Philips Industrial, for short), authorized users of the
trademarks PHILIPS and PHILIPS SHIELD EMBLEM, were
incorporated on 29 August 1956 and 25 May 1956,
respectively. All petitioner corporations belong to the PHILIPS
Group of Companies.
Respondent Standard Philips Corporation (Standard Philips),
on the other hand, was issued a Certificate of Registration by
respondent Commission on 19 May 1982.
On 24 September 1984, Petitioners filed a letter complaint
with the Securities & Exchange Commission (SEC) asking for
the cancellation of the word "PHILIPS" from Private
Respondent's corporate name in view of the prior registration
with the Bureau of Patents of the trademark "PHILIPS" and the
logo "PHILIPS SHIELD EMBLEM" in the name of Petitioner,

As a result of Private Respondent's refusal to amend its

Articles of Incorporation, Petitioners filed with the SEC, on 6
February 1985, a Petition (SEC Case No. 2743) praying for the
issuance of a Writ of Preliminary Injunction, alleging, among
others, that Private Respondent's use of the word PHILIPS
amounts to an infringement and clear violation of Petitioners'
exclusive right to use the same considering that both parties
engage in the same business.

After conducting hearings with respect to the prayer for

Injunction; the SEC Hearing Officer, on 27 September 1985,
ruled against the issuance of such Writ.
On 30 January 1987, the same Hearing Officer dismissed the
Petition for lack of merit. In so ruling, the latter declared that
inasmuch as the SEC found no sufficient ground for the
granting of injunctive relief on the basis of the testimonial and
documentary evidence presented, it cannot order the removal
or cancellation of the word "PHILIPS" from Private
Respondent's corporate name on the basis of the same
evidence adopted in totoduring trial on the merits. Besides,
Section 18 of the Corporation Code (infra) is applicable only
when the corporate names in question are identical. Here,
there is no confusing similarity between Petitioners' and
Private Respondent's corporate names as those of the
Petitioners contain at least two words different from that of
the Respondent. Petitioners' Motion for Reconsideration was
likewise denied on 17 June 1987.
On appeal, the SEC en banc affirmed the dismissal declaring
that the corporate names of Petitioners and Private
Respondent hardly breed confusion inasmuch as each
contains at least two different words and, therefore, rules out
any possibility of confusing one for the other.
On 30 January 1990, Petitioners sought an extension of time
to file a Petition for Review on Certiorari before this Court,
which Petition was later referred to the Court of Appeals in a
Resolution dated 12 February 1990.
In deciding to dismiss the petition on 31 July 1990, the Court
of Appeals 1swept aside Petitioners' claim that following the
ruling in Converse Rubber Corporation v. Universal Converse
Rubber Products, Inc., et al, (G. R. No. L-27906, January 8,
1987, 147 SCRA 154), the word PHILIPS cannot be used as
part of Private Respondent's corporate name as the same
constitutes a dominant part of Petitioners' corporate names.
In so holding, the Appellate Court observed that
the Converse case is not four-square with the present case
inasmuch as the contending parties in Converseare engaged
in a similar business, that is, the manufacture of rubber shoes.
Upholding the SEC, the Appellate Court concluded that
"private respondents' products consisting of chain rollers,
belts, bearings and cutting saw are unrelated and noncompeting with petitioners' products i.e. electrical lamps such
that consumers would not in any probability mistake one as
the source or origin of the product of the other."
The Appellate Court denied Petitioners' Motion for
Reconsideration on 20 November 1990, hence, this Petition
which was given due course on 22 April 1991, after which the
parties were required to submit their memoranda, the latest
of which was received on 2 July 1991. In December 1991, the
SEC was also required to elevate its records for the perusal of

6
this Court, the same not having been apparently before
respondent Court of Appeals.
We find basis for petitioners' plea.
As early as Western Equipment and Supply Co. v. Reyes, 51
Phil. 115 (1927), the Court declared that a corporation's right
to use its corporate and trade name is a property right, a
right in rem, which it may assert and protect against the world
in the same manner as it may protect its tangible property,
real or personal, against trespass or conversion. It is regarded,
to a certain extent, as a property right and one which cannot
be impaired or defeated by subsequent appropriation by
another corporation in the same field (Red Line Transportation
Co. vs. Rural Transit Co., September 8, 1934, 20 Phil 549).
A name is peculiarly important as necessary to the very
existence of a corporation (American Steel Foundries vs.
Robertson, 269 US 372, 70 L ed 317, 46 S Ct 160; Lauman vs.
Lebanon Valley R. Co., 30 Pa 42; First National Bank vs.
Huntington Distilling Co. 40 W Va 530, 23 SE 792). Its name is
one of its attributes, an element of its existence, and essential
to its identity (6 Fletcher [Perm Ed], pp. 3-4). The general rule
as to corporations is that each corporation must have a name
by which it is to sue and be sued and do all legal acts. The
name of a corporation in this respect designates the
corporation in the same manner as the name of an individual
designates the person (Cincinnati Cooperage Co. vs. Bate. 96
Ky 356, 26 SW 538; Newport Mechanics Mfg. Co. vs. Starbird.
10 NH 123); and the right to use its corporate name is as
much a part of the corporate franchise as any other privilege
granted (Federal Secur. Co. vs. Federal Secur. Corp., 129 Or
375, 276 P 1100, 66 ALR 934; Paulino vs. Portuguese
Beneficial Association, 18 RI 165, 26 A 36).
A corporation acquires its name by choice and need not select
a name identical with or similar to one already appropriated
by a senior corporation while an individual's name is thrust
upon him (See Standard Oil Co. of New Mexico, Inc. v.
Standard Oil Co. of California, 56 F 2d 973, 977). A corporation
can no more use a corporate name in violation of the rights of
others than an individual can use his name legally acquired so
as to mislead the public and injure another (Armington vs.
Palmer, 21 RI 109. 42 A 308).
Our own Corporation Code, in its Section 18, expressly
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
law.Where a change in a corporate name is approved, the
commission shall issue an amended certificate of
incorporation under the amended name. (Emphasis supplied)
The statutory prohibition cannot be any clearer. To come
within its scope, two requisites must be proven, namely:
(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 to any other name
already protected by law; or
(c) patently deceptive, confusing or contrary to existing law.

The right to the exclusive use of a corporate name with

freedom from infringement by similarity is determined by
priority of adoption (1 Thompson, p. 80 citing Munn v.
Americana Co., 82 N. Eq. 63, 88 Atl. 30; San Francisco Oyster
House v. Mihich, 75 Wash. 274, 134 Pac. 921). In this regard,
there is no doubt with respect to Petitioners' prior adoption of'
the name ''PHILIPS" as part of its corporate name. Petitioners
Philips Electrical and Philips Industrial were incorporated on
29 August 1956 and 25 May 1956, respectively, while
Respondent Standard Philips was issued a Certificate of
Registration on 12 April 1982, twenty-six (26) years later
(Rollo, p. 16). Petitioner PEBV has also used the trademark
"PHILIPS" on electrical lamps of all types and their accessories
since 30 September 1922, as evidenced by Certificate of
Registration No. 1651.
The second requisite no less exists in this case. 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. In so doing, the Court
must look to the record as well as the names themselves
(Ohio Nat. Life Ins. Co. v. Ohio Life Ins. Co., 210 NE 2d 298).
While the corporate names of Petitioners and Private
Respondent are not identical, a reading of Petitioner's
corporate names, to wit: PHILIPS EXPORT B.V., PHILIPS
ELECTRICAL
LAMPS,
INC.
and
PHILIPS
INDUSTRIAL
DEVELOPMENT, INC., inevitably leads one to conclude that
"PHILIPS" is, indeed, the dominant word in that all the
companies affiliated or associated with the principal
corporation, PEBV, are known in the Philippines and abroad as
the PHILIPS Group of Companies.
Respondents maintain, however, that Petitioners did not
present an iota of proof of actual confusion or deception of the
public much less a single purchaser of their product who has
been deceived or confused or showed any likelihood of
confusion. It is settled, however, that proof of actual confusion
need not be shown. It suffices that confusion is probably or
likely to occur (6 Fletcher [Perm Ed], pp. 107-108,
enumerating a long line of cases).
It may be that Private Respondent's products also consist of
chain rollers, belts, bearing and the like, while petitioners deal
principally with electrical products. It is significant to note,
however, that even the Director of Patents had denied Private
Respondent's application for registration of the trademarks
"Standard Philips & Device" for chain, rollers, belts, bearings
and cutting saw. That office held that PEBV, "had shipped to
its subsidiaries in the Philippines equipment, machines and
their parts which fall under international class where "chains,
rollers, belts, bearings and cutting saw," the goods in
connection with which Respondent is seeking to register
'STANDARD PHILIPS' . . . also belong" ( Inter Partes Case No.
2010, June 17, 1988, SEC Rollo).
Furthermore, the records show that among Private
Respondent's primary purposes in its Articles of Incorporation
(Annex D, Petition p. 37, Rollo) are the following:
To buy, sell, barter, trade, manufacture, import, export, or
otherwise acquire, dispose of, and deal in and deal with any
kind of goods, wares, and merchandise such as but not limited
to plastics, carbon products, office stationery and supplies,
hardware
parts, electrical
wiring
devices,
electrical
component
parts,
and/or
complement
of industrial,
agricultural
or
commercial
machineries,
constructive
supplies, electrical supplies and other merchandise which are
or may become articles of commerce except food, drugs and
cosmetics and to carry on such business as manufacturer,
distributor,
dealer,
indentor,
factor,
manufacturer's
representative capacity for domestic or foreign companies.
(emphasis ours)
For its part, Philips Electrical also includes, among its primary
purposes, the following:

7
To develop manufacture and deal in electrical products,
including
electronic,
mechanical
and
other
similar
products . . . (p. 30, Record of SEC Case No. 2743)
Given Private Respondent's aforesaid underlined primary
purpose, nothing could prevent it from dealing in the same
line of business of electrical devices, products or supplies
which fall under its primary purposes. Besides, there is
showing that Private Respondent not only manufactured and
sold ballasts for fluorescent lamps with their corporate name
printed thereon but also advertised the same as, among
others, Standard Philips (TSN, before the SEC, pp. 14, 17, 25,
26, 37-42, June 14, 1985; pp. 16-19, July 25, 1985). As aptly
pointed out by Petitioners, [p]rivate respondent's choice of
"PHILIPS" as part of its corporate name [STANDARD PHILIPS
CORPORATION] . . . tends to show said respondent's intention
to ride on the popularity and established goodwill of said
petitioner's business throughout the world" (Rollo, p. 137).
The subsequent appropriator of the name or one confusingly
similar thereto usually seeks an unfair advantage, a free ride
of another's goodwill (American Gold Star Mothers, Inc. v.
National Gold Star Mothers, Inc., et al, 89 App DC 269, 191 F
2d 488).
In allowing Private Respondent the continued use of its
corporate name, the SEC maintains that the corporate names
of Petitioners PHILIPS ELECTRICAL LAMPS. INC. and PHILIPS
INDUSTRIAL DEVELOPMENT, INC. contain at least two words
different from that of the corporate name of respondent
STANDARD PHILIPS CORPORATION, which words will readily
identify Private Respondent from Petitioners and vice-versa.
True, under the Guidelines in the Approval of Corporate and
Partnership Names formulated by the SEC, the proposed name
"should not be similar to one already used by another
corporation or partnership. If the proposed name contains a
word already used as part of the firm name or style of a
registered company; the proposed name must contain two
other
words
different
from
the
company
already
registered" (Emphasis ours). It is then pointed out that
Petitioners Philips Electrical and Philips Industrial have two
words different from that of Private Respondent's name.
What is lost sight of, however, is that PHILIPS is a trademark
or trade name which was registered as far back as 1922.
Petitioners, therefore, have the exclusive right to its use which
must be free from any infringement by similarity. A
corporation has an exclusive right to the use of its name,
which may be protected by injunction upon a principle similar
to that upon which persons are protected in the use of
trademarks and tradenames (18 C.J.S. 574). Such principle
proceeds upon the theory that it is a fraud on the corporation
which has acquired a right to that name and perhaps carried
on its business thereunder, that another should attempt to
use the same name, or the same name with a slight variation
in such a way as to induce persons to deal with it in the belief
that they are dealing with the corporation which has given a
reputation to the name (6 Fletcher [Perm Ed], pp. 3940, citing Borden Ice Cream Co. v. Borden's Condensed Milk
Co., 210 F 510). Notably, too, Private Respondent's name
actually contains only a single word, that is, "STANDARD",
different from that of Petitioners inasmuch as the inclusion of
the term "Corporation" or "Corp." merely serves the Purpose
of distinguishing the corporation from partnerships and other
business organizations.
The fact that there are other companies engaged in other
lines of business using the word "PHILIPS" as part of their
corporate names is no defense and does not warrant the use
by Private Respondent of such word which constitutes an
essential feature of Petitioners' corporate name previously
adopted and registered and-having acquired the status of a
well-known mark in the Philippines and internationally as well
(Bureau of Patents Decision No. 88-35 [TM], June 17, 1988,
SEC Records).

In support of its application for the registration of its Articles

of Incorporation with the SEC, Private Respondent had
submitted an undertaking "manifesting its willingness to
change its corporate name in the event another person, firm
or entity has acquired a prior right to the use of the said firm
name or one deceptively or confusingly similar to it." Private
respondent must now be held to its undertaking.
As a general rule, parties organizing a corporation must
choose a name at their peril; and the use of a name similar to
one adopted by another corporation, whether a business or a
nonbusiness or non-profit organization if misleading and likely
to injure it in the exercise in its corporate functions, regardless
of intent, may be prevented by the corporation having the
prior right, by a suit for injunction against the new corporation
to prevent the use of the name (American Gold Star Mothers,
Inc. v. National Gold Star Mothers, Inc., 89 App DC 269, 191 F
2d 488, 27 ALR 2d 948).
WHEREFORE, the Decision of the Court of Appeals dated 31
July 1990, and its Resolution dated 20 November 1990, are
SET ASIDE and a new one entered ENJOINING private
respondent from using "PHILIPS" as a feature of its corporate
name, and ORDERING the Securities and Exchange
Commission to amend private respondent's Articles of
Incorporation by deleting the word PHILIPS from the corporate
name of private respondent.
No costs.
SO ORDERED.

THIRD DIVISION
G.R. No. 101897 March 5, 1993
LYCEUM OF THE PHILIPPINES, INC. Petitioner, vs. COURT
OF APPEALS, LYCEUM OF APARRI, LYCEUM OF
CABAGAN, LYCEUM OF CAMALANIUGAN, INC., LYCEUM
OF LALLO, INC., LYCEUM OF TUAO, INC., BUHI LYCEUM,
CENTRAL LYCEUM OF CATANDUANES, LYCEUM OF
SOUTHERN PHILIPPINES, LYCEUM OF EASTERN
MINDANAO, INC. and WESTERN PANGASINAN LYCEUM,
INC., Respondents.
Petitioner is an educational institution duly registered with the
Securities and Exchange Commission ("SEC"). When it first
registered with the SEC on 21 September 1950, it used the
corporate name Lyceum of the Philippines, Inc. and has used
that name ever since.
On 24 February 1984, petitioner instituted proceedings before
the SEC to compel the private respondents, which are also
educational institutions, to delete the word "Lyceum" from
their corporate names and permanently to enjoin them from
using "Lyceum" as part of their respective names.
Some of the private respondents actively participated in the
proceedings before the SEC. These are the following, the
dates of their original SEC registration being set out below
opposite their respective names:
Western Pangasinan Lyceum - 27 October 1950
Lyceum of Cabagan - 31 October 1962
Lyceum of Lallo, Inc. - 26 March 1972
Lyceum of Aparri - 28 March 1972
Lyceum of Tuao, Inc. - 28 March 1972
Lyceum of Camalaniugan - 28 March 1972
The following private respondents were declared in default for
failure to file an answer despite service of summons:

8
Buhi Lyceum;
Central Lyceum of Catanduanes;
Lyceum of Eastern Mindanao, Inc.; and
Lyceum of Southern Philippines
Petitioner's original complaint before the SEC had included
three (3) other entities:
1. The Lyceum of Malacanay;
2. The Lyceum of Marbel; and
3. The Lyceum of Araullo.
The complaint was later withdrawn insofar as concerned the
Lyceum of Malacanay and the Lyceum of Marbel, for failure to
serve summons upon these two (2) entities. The case against
the Lyceum of Araullo was dismissed when that school motu
proprio change its corporate name to "Pamantasan ng
Araullo."chanrobles virtual law library
The background of the case at bar needs some recounting.
Petitioner had sometime before commenced in the SEC a
proceeding (SEC-Case No. 1241) against the Lyceum of
Baguio, Inc. to require it to change its corporate name and to
adopt another name not "similar [to] or identical" with that of
petitioner. In an Order dated 20 April 1977, Associate
Commissioner Julio Sulit held that the corporate name of
petitioner and that of the Lyceum of Baguio, Inc. were
substantially identical because of the presence of a
"dominant" word, i.e., "Lyceum," the name of the
geographical location of the campus being the only word
which distinguished one from the other corporate name. The
SEC also noted that petitioner had registered as a corporation
ahead of the Lyceum of Baguio, Inc. in point of time, 1 and
ordered the latter to change its name to another name "not
similar or identical [with]" the names of previously registered
entities.
The Lyceum of Baguio, Inc. assailed the Order of the SEC
before the Supreme Court in a case docketed as G.R. No. L46595. In a Minute Resolution dated 14 September 1977, the
Court denied the Petition for Review for lack of merit. Entry of
judgment in that case was made on 21 October 1977. 2
Armed with the Resolution of this Court in G.R. No. L-46595,
petitioner then wrote all the educational institutions it could
find using the word "Lyceum" as part of their corporate name,
and advised them to discontinue such use of "Lyceum." When,
with the passage of time, it became clear that this recourse
had failed, petitioner instituted before the SEC SEC-Case No.
2579 to enforce what petitioner claims as its proprietary right
to the word "Lyceum." The SEC hearing officer rendered a
decision sustaining petitioner's claim to an exclusive right to
use the word "Lyceum." The hearing officer relied upon the
SEC ruling in the Lyceum of Baguio, Inc. case (SEC-Case No.
1241) and held that the word "Lyceum" was capable of
appropriation and that petitioner had acquired an enforceable
exclusive right to the use of that word.
On appeal, however, by private respondents to the SEC En
Banc, the decision of the hearing officer was reversed and set
aside. The SEC En Banc did not consider the word "Lyceum" to
have become so identified with petitioner as to render use
thereof by other institutions as productive of confusion about
the identity of the schools concerned in the mind of the
general public. Unlike its hearing officer, the SEC En Banc held
that the attaching of geographical names to the word
"Lyceum" served sufficiently to distinguish the schools from
one another, especially in view of the fact that the campuses
of petitioner and those of the private respondents were
physically quite remote from each other. 3
Petitioner then went on appeal to the Court of Appeals. In its
Decision dated 28 June 1991, however, the Court of Appeals
affirmed the questioned Orders of the SEC En Banc.4 Petitioner
filed a motion for reconsideration, without success.

Before this Court, petitioner asserts that the Court of Appeals

committed the following errors:
1. The Court of Appeals erred in holding that the Resolution of
the Supreme Court in G.R. No. L-46595 did not
constitute stare decisis as to apply to this case and in not
holding that said Resolution bound subsequent determinations
on the right to exclusive use of the word Lyceum.
2. The Court of Appeals erred in holding that respondent
Western Pangasinan Lyceum, Inc. was incorporated earlier
than petitioner.
3. The Court of Appeals erred in holding that the word Lyceum
has not acquired a secondary meaning in favor of petitioner.
4. The Court of Appeals erred in holding that Lyceum as a
generic word cannot be appropriated by the petitioner to the
exclusion of others. 5
We will consider all the foregoing ascribed errors, though not
necessarily seriatim. We begin by noting that the Resolution of
the
Court
in
G.R.
No.
L-46595 does not, of course, constitute res adjudicata in
respect of the case at bar, since there is no identity of parties.
Neither is stare decisis pertinent, if only because the SEC En
Banc itself has re-examined Associate Commissioner Sulit's
ruling in the Lyceum of Baguio case. The Minute Resolution of
the Court in G.R. No. L-46595 was not a reasoned adoption of
the Sulit ruling.
The Articles of Incorporation of a corporation must, among
other things, set out the name of the corporation. 6 Section 18
of the Corporation Code establishes a restrictive rule insofar
as corporate names are concerned:
Sec. 18. Corporate name. - 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 orcontrary 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. (Emphasis supplied)
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 or which is "patently deceptive" or "patently
confusing" or "contrary to existing laws," is the avoidance of
fraud upon the public which would have occasion to deal with
the entity concerned, the evasion of legal obligations and
duties, and the reduction of difficulties of administration and
supervision over corporations. 7
We do not consider that the corporate names of private
respondent institutions are "identical with, or deceptively or
confusingly similar" to that of the petitioner institution. True
enough, the corporate names of private respondent entities
all carry the word "Lyceum" but confusion and deception are
effectively precluded by the appending of geographic names
to the word "Lyceum." Thus, we do not believe that the
"Lyceum of Aparri" can be mistaken by the general public for
the Lyceum of the Philippines, or that the "Lyceum of
Camalaniugan" would be confused with the Lyceum of the
Philippines.
Etymologically, the word "Lyceum" is the Latin word for the
Greek lykeion which in turn referred to a locality on the river
Ilissius in ancient Athens "comprising an enclosure dedicated
to Apollo and adorned with fountains and buildings erected by
Pisistratus, Pericles and Lycurgus frequented by the youth for
exercise and by the philosopher Aristotle and his followers for
teaching." 8 In time, the word "Lyceum" became associated
with schools and other institutions providing public lectures

9
and concerts and public discussions. Thus today, the word
"Lyceum" generally refers to a school or an institution of
learning. While the Latin word "lyceum" has been
incorporated into the English language, the word is also found
in Spanish (liceo ) and in French (lycee ). As the Court of
Appeals noted in its Decision, Roman Catholic schools
frequently use the term; e.g., "Liceo de Manila," "Liceo de
Baleno" (in Baleno, Masbate), "Liceo de Masbate," "Liceo de
Albay." 9 "Lyceum" is in fact as generic in character as the
word "university." In the name of the petitioner, "Lyceum"
appears to be a substitute for "university;" in other places,
however, "Lyceum," or "Liceo" or "Lycee" frequently denotes a
secondary school or a college. It may be (though this is a
question of fact which we need not resolve) that the use of
the word "Lyceum" may not yet be as widespread as the use
of "university," but it is clear that a not inconsiderable number
of educational institutions have adopted "Lyceum" or "Liceo"
as part of their corporate names. Since "Lyceum" or "Liceo"
denotes a school or institution of learning, it is not unnatural
to use this word to designate an entity which is organized and
operating as an educational institution.
It is claimed, however, by petitioner that the word "Lyceum"
has acquired a secondary meaning in relation to petitioner
with the result that that word, although originally a generic,
has become appropriable by petitioner to the exclusion of
other institutions like private respondents herein.
The doctrine of secondary meaning originated in the field of
trademark law. Its application has, however, been extended to
corporate names since the right to use a corporate name to
the exclusion of others is based upon the same principle
which underlies the right to use a particular trademark or
tradename. 10 In Philippine Nut Industry, Inc. v. Standard
Brands, Inc., 11 the doctrine of secondary meaning was
elaborated in the following terms:
. . . 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. 12
The question which arises, therefore, is whether or not the use
by petitioner of "Lyceum" in its corporate name has been for
such length of time and with such exclusivity as to have
become associated or identified with the petitioner institution
in the mind of the general public (or at least that portion of
the general public which has to do with schools). The Court of
Appeals recognized this issue and answered it in the negative:
Under the doctrine of secondary meaning, a word or phrase
originally incapable of exclusive appropriation with reference
to an article in the market, because geographical or otherwise
descriptive might nevertheless have been used so long and so
exclusively by one producer with reference to this article that,
in that trade and to that group of the purchasing public, the
word or phrase has come to mean that the article was his
produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This
circumstance has been referred to as the distinctiveness into
which the name or phrase has evolved through the substantial
and exclusive use of the same for a considerable period of
time. Consequently, the same doctrine or principle cannot be
made to apply where the evidence did not prove that the
business (of the plaintiff) has continued for so long a time that
it has become of consequence and acquired a good will of
considerable value such that its articles and produce have
acquired a well-known reputation, and confusion will result by
the use of the disputed name (by the defendant) (Ang Si Heng
vs. Wellington Department Store, Inc., 92 Phil. 448).
With the foregoing as a yardstick, [we] believe the appellant
failed to satisfy the aforementioned requisites. No evidence
was ever presented in the hearing before the Commission
which sufficiently proved that the word "Lyceum" has indeed

acquired secondary meaning in favor of the appellant. If there

was any of this kind, the same tend to prove only that the
appellant had been using the disputed word for a long period
of time. Nevertheless, its (appellant) exclusive use of the
word (Lyceum) was never established or proven as in fact the
evidence tend to convey that the cross-claimant was already
using the word "Lyceum" seventeen (17) years prior to the
date the appellant started using the same word in its
corporate name. Furthermore, educational institutions of the
Roman Catholic Church had been using the same or similar
word like "Liceo de Manila," "Liceo de Baleno" (in Baleno,
Masbate), "Liceo de Masbate," "Liceo de Albay" long before
appellant started using the word "Lyceum". The appellant also
failed to prove that the word "Lyceum" has become so
identified with its educational institution that confusion will
surely arise in the minds of the public if the same word were
to be used by other educational institutions.
In other words, while the appellant may have proved that it
had been using the word "Lyceum" for a long period of time,
this fact alone did not amount to mean that the said word had
acquired secondary meaning in its favor because
the appellant failed to prove that it had been using the same
word all by itself to the exclusion of others. More so, there
was no evidence presented to prove that confusion will surely
arise if the same word were to be used by other educational
institutions. Consequently, the allegations of the appellant in
its first two assigned errors must necessarily fail. 13 (Emphasis
partly in the original and partly supplied)
We agree with the Court of Appeals. The number alone of the
private respondents in the case at bar suggests strongly that
petitioner's use of the word "Lyceum" has not been attended
with the exclusivity essential for applicability of the doctrine of
secondary meaning. It may be noted also that at least one of
the private respondents, i.e., the Western Pangasinan Lyceum,
Inc., used the term "Lyceum" seventeen (17) years before the
petitioner registered its own corporate name with the SEC and
began using the word "Lyceum." It follows that if any
institution had acquired an exclusive right to the word
"Lyceum," that institution would have been the Western
Pangasinan Lyceum, Inc. rather than the petitioner institution.
In this connection, petitioner argues that because the Western
Pangasinan Lyceum, Inc. failed to reconstruct its records
before the SEC in accordance with the provisions of R.A. No.
62, which records had been destroyed during World War II,
Western Pangasinan Lyceum should be deemed to have lost
all rights it may have acquired by virtue of its past
registration. It might be noted that the Western Pangasinan
Lyceum, Inc. registered with the SEC soon after petitioner had
filed its own registration on 21 September 1950. Whether or
not Western Pangasinan Lyceum, Inc. must be deemed to
have lost its rights under its original 1933 registration,
appears to us to be quite secondary in importance; we refer to
this earlier registration simply to underscore the fact that
petitioner's use of the word "Lyceum" was neither the first use
of that term in the Philippines nor an exclusive use thereof.
Petitioner's use of the word "Lyceum" was not exclusive but
was in truth shared with the Western Pangasinan Lyceum and
a little later with other private respondent institutions which
registered with the SEC using "Lyceum" as part of their
corporation names. There may well be other schools using
Lyceum or Liceo in their names, but not registered with the
SEC because they have not adopted the corporate form of
organization.
We conclude and so hold that petitioner institution is not
entitled to a legally enforceable exclusive right to use the
word "Lyceum" in its corporate name and that other
institutions may use "Lyceum" as part of their own corporate
names. To determine whether a given corporate name is
"identical" or "confusingly or deceptively similar" with another
entity's corporate name, it is not enough to ascertain the
presence of "Lyceum" or "Liceo" in both names. One must
evaluate corporate names in their entirety and when the
name of petitioner is juxtaposed with the names of private

10
respondents, they are not reasonably regarded as "identical"
or "confusingly or deceptively similar" with each other.
WHEREFORE, the petitioner having failed to show any
reversible error on the part of the public respondent Court of
Appeals, the Petition for Review is DENIED for lack of merit,
and the Decision of the Court of Appeals dated 28 June 1991
is hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED.

Purpose Clause

EN BANC
G.R. No. 9321

September 24, 1914

NORBERTO ASUNCION, ET AL., petitioners-appellants,

vs. MANUEL DE YRIARTE,Respondent-Appellee.
This is an action to obtain a writ of mandamus to compel the
chief of the division of achieves of the Executive Bureau to file
a certain articles of incorporation.
The chief of the division of archives, the respondent, refused
to file the articles of incorporation, hereinafter referred to,
upon the ground that the object of the corporation, as stated
in the articles, was not lawful and that, in pursuance of
section 6 of Act No. 1459, they were not registerable.
The proposed incorporators began an action in the Court of
First Instance of the city of Manila to compel the chief of the
division of archives to receive and register said articles of
incorporation and to do any and all acts necessary for the
complete incorporation of the persons named in the articles.
The court below found in favor of the defendant and refused
to order the registration of the articles mentioned,
maintaining ad holding that the defendant, under the
Corporation Law, had authority to determine both the
sufficiency of the form of the articles and the legality of the
object of the proposed corporation. This appeal is taken from
that judgment.
The first question that arises is whether or not the chief of the
division of archives has authority, under the Corporation for
registration, to decide not only as to the sufficiency of the
form of the articles, but also as to the lawfulness of the
purpose of the proposed corporation.
It is strongly urged on the part of the appellants that the
duties of the defendant are purely ministerial and that he has
no authority to pass upon the lawfulness of the object for
which the incorporators propose to organize. No authorities
are cited to support this proposition and we are of the opinion
that it is not sound.
Section 6 of the Corporation Law reads in part as follows:
Five or more persons, not exceeding fifteen, a majority of
whom are residents of the Philippine Islands, may form a
private corporation for any lawful purpose by filing with the
division of archives, patents, copyrights, and trademarks if the
Executive Bureau articles of incorporation duly executed and
acknowledged before a notary public, . . . .
Simply because the duties of an official happens to be
ministerial, it does not necessarily follow that he may not, in
the administration of his office, determine questions of law.
We are of the opinion that it is the duty of the division of
archives, when articles of incorporation are presented for
registration, to determine whether the objects of the

corporation as expressed in the articles are lawful. We do not

believe that, simply because articles of incorporation
presented foe registration are perfect in form, the division of
archives must accept and register them and issue the
corresponding certificate of incorporation no matter what the
purpose of the corporation may be as expressed in the
articles. We do not believe it was intended that the division of
archives should issue a certificate of incorporation to, and
thereby put the seal of approval of the Government upon, a
corporation which was organized for base of immoral
purposes. That such corporation might later, if it sought to
carry out such purposes, be dissolved, or its officials
imprisoned or itself heavily fined furnished no reason why it
should have been created in the first instance. It seems to us
to be not only the right but the duty of the divisions of
archives to determine the lawfulness of the objects and
purposes of the corporation before it issues a certificate of
incorporation.
It having determined that the division of archives, through its
officials, has authority to determine not only the sufficiency as
to form of the articles of incorporation offered for registration,
but also the lawfulness of the purposes of leads us to the
determination of the question whether or not the chief of the
division of archives, who is the representative thereof and
clothed by it with authority to deal subject to mandamus in
the performance of his duties.
We are of the opinion that he may be mandamused if he act in
violation of law or if he refuses, unduly, to comply with the
law. While we have held that defendant has power to pass
upon the lawfulness of the purposes of the proposed
corporation and that he may, in the fulfillment of his duties,
determine the question of law whether or not those purposes
are lawful and embraced within that class concerning which
the law permits corporations to be formed, that does not
necessarily mean, as we have already intimated, that his
duties are not ministerial. On the contrary, there is no
incompatibility in holding, as we do hold, that his duties are
ministerial and that he has no authority to exercise discretion
in receiving and registering articles of incorporation. He may
exercise judgment - that is, the judicial function - in the
determination of the question of law referred to, but he may
not use discretion. The question whether or not the objects of
a proposed corporation are lawful is one that can be decided
one way only. If he err in the determination of that question
and refuse to file articles which should be filed under the law,
the decision is subject to review and correction and, upon
proper showing, he will be ordered to file the articles. This is
the same kind of determination which a court makes when it
decides a case upon the merits, the court makes when it
decides a case upon the merits. When a case is presented to a
court upon the merits, the court can decide only one way and
be right. As a matter of law, there is only one way and be
right. As a matter of law, there is only one course to pursue. In
a case where the court or other official has discretion in the
resolution of a question, then, within certain limitations, he
may decide the question either way and still be right.
Discretion, it may be said generally, is a faculty conferred
upon a court or other official by which he may decide a
question either way and still be right. The power conferred
upon the division of archives with respect to the registration
of articles of incorporation is not of that character. It is of the
same character as the determination of a lawsuit by a court
upon the merits. It can be decided only one way correctly.
If, therefore, the defendant erred in determining the question
presented when the articles were offered for registration, then
that error will be corrected by this court in this action and he
will be compelled to register the articles as offered. If,
however, he did not commit an error, but decided that
question correctly, then, of course, his action will be affirmed
to the extent that we will deny the relief prayed for.
The next question leads us to the determination of whether or
not the purposes of the corporation as stated in the articles of
incorporation are lawful within the meaning of the Corporation
Law.

11
The purpose of the incorporation as stated in the articles is:
"That the object of the corporation is ( a) to organize and
regulate the management, disposition, administration and
control which the barrio of Pulo or San Miguel or its
inhabitants or residents have over the common property of
said residents or inhabitants or property belonging to the
whole barrio as such; and ( b) to use the natural products of
the said property for institutions, foundations, and charitable
works of common utility and advantage to the barrio or its
inhabitants."
The municipality of Pasig as recognized by law contains within
its limits several barrios or small settlements, like Pulo or San
Miguel, which have no local government of their own but are
governed by the municipality of Pasig through its municipal
president and council. The president and members of the
municipal council are elected by a general vote of the
municipality, the qualified electors of all the barrios having
the right to participate.
The municipality of Pasig is a municipal corporation organized
by law. It has the control of all property of the municipality.
The various barrios of the municipality have no right to own or
hold property, they not being recognized as legal entities by
any law. The residents of the barrios participate in the
advantages which accrue to the municipality from public
property and receive all the benefits incident to residence in a
municipality organized by law. If there is any public property
situated in the barrio of Pulo or San Miguel not belonging to
the general government or the province, it belongs to the
municipality of Pasig and the sole authority to manage and
administer the same resides in that municipality. Until the
present laws upon the subject are charged no other entity can
be the owner of such property or control or administer it.
The object of the proposed corporation, as appears from the
articles offered for registration, is to make of the barrio of Pulo
or San Miguel a corporation which will become the owner of
and have the right to control and administer any property
belonging to the municipality of Pasig found within the limits
of that barrio. This clearly cannot be permitted. Otherwise
municipalities as now established by law could be deprived of
the property which they now own and administer. Each barrio
of the municipality would become under the scheme
proposed, a separate corporation, would take over the
ownership, administration, and control of that portion of the
municipal territory within its limits. This would disrupt, in a
sense, the municipalities of the Islands by dividing them into a
series of smaller municipalities entirely independent of the
original municipality.
What the law does not permit cannot be obtained by
indirection. The object of the proposed corporation is clearly
repugnant to the provisions of the Municipal Code and the
governments of municipalities as they have been organized
thereunder. (Act No. 82, Philippine Commission.)
The judgment appealed from is affirmed, with costs against
appellants.

FIRST DIVISION
[G.R. No. 156819. December 11, 2003]
ALICIA E. GALA, GUIA G. DOMINGO and RITA G.
BENSON, petitioners, vs. ELLICE AGROINDUSTRIAL CORPORATION, MARGO
MANAGEMENT AND DEVELOPMENT
CORPORATION, RAUL E. GALA, VITALIANO N.
AGUIRRE II, ADNAN V. ALONTO, ELIAS N.
CRESENCIO, MOISES S. MANIEGO, RODOLFO B.
REYNO, RENATO S. GONZALES, VICENTE C.
NOLAN, NESTOR N. BATICULON ,respondents.

2002[1] and the resolution dated December 27, 2002[2] of the

Court of Appeals in CA-G.R. SP No. 71979.
On March 28, 1979, the spouses Manuel and Alicia Gala,
their children Guia Domingo, Ofelia Gala, Raul Gala, and Rita
Benson,
and
their encargados Virgilio Galeonand
Julian Jader formed and organized the Ellice Agro-Industrial
Corporation.[3] The total subscribed capital stock of the
corporation was apportioned as follows:
Name Number of Shares Amount
Manuel R. Gala 11, 700 1,170,000.00
Alicia E. Gala 23,200 2,320,000.00
Guia G. Domingo 16 1,600.00
Ofelia E. Gala 40 4,000.00
Raul E. Gala 40 4,000.00
Rita G. Benson 2 200.00
Virgilio Galeon 1 100.00
Julian Jader 1 100.00
TOTAL 35,000 P3,500,000.00[4]
As payment for their subscriptions, the Gala spouses
transferred several parcels of land located in the provinces
of Quezon and Laguna to Ellice. [5]
In 1982, Manuel Gala, Alicia Gala and Ofelia Gala
subscribed to an additional 3,299 shares, 10,652.5 shares and
286.5 shares, respectively. [6]
On June 28, 1982, Manuel Gala and Alicia Gala acquired
an additional 550 shares and 281 shares, respectively. [7]
Subsequently, on September 16, 1982, Guia Domingo,
Ofelia
Gala,
Raul
Gala, Virgilio Galeon and
Julian Jader incorporated the Margo Management and
Development Corporation (Margo). [8] The total subscribed
capital stock of Margo was apportioned as follows:

Name

Number
Shares

of

Amount

Raul E. Gala

6,640

66,400.00

Ofelia E. Gala

6,640

66,400.00

Guia G. Domingo

6,640

66,400.00

Virgilio Galeon

40

40.00

Julian Jader

40

40.00

TOTAL

20,000

P200,000.00[9]

On November 10, 1982, Manuel Gala sold 13,314 of his

shares in Ellice to Margo. [10]
Alicia Gala transferred 1,000 of her shares in Ellice to a
certain Victor de Villa on March 2, 1983. That same day, de
Villa transferred said shares to Margo. [11] A few months later,
on August 28, 1983, Alicia Gala transferred 854.3 of her
shares to Ofelia Gala, 500 to Guia Domingo and 500 to Raul
Gala. [12]
Years later, on February 8, 1988, Manuel Gala transferred
all of his remaining holdings in Ellice, amounting to 2,164
shares, to Raul Gala. [13]
On July 20, 1988, Alicia Gala transferred 10,000 of her
shares to Margo. [14]
Thus, as of the date on which this case was commenced,
the stockholdings in Ellice were allocated as follows:

DECISION
This is a petition for review under Rule 45 of the Rules of
Court, seeking the reversal of the decision dated November 8,

Name

Number

of

Amount

12
The two cases were
dated November 23, 1993. [20]

Shares

Margo

24,312.5

2,431,250.00

Alicia Gala

21,480.2

2,148,020.00

Raul Gala

2,704.5

270,450.00

Ofelia Gala

980.8

98,080.00

consolidated

in

an

Order

Meanwhile, during the pendency of the SEC cases, the

shares of stock of Alicia and Ofelia Gala in Ellice were levied
and sold at public auction to satisfy a judgment rendered
against them by he Regional Trial Court of Makati, Branch 66,
in Civil Case No. 42560, entitled Regines Condominium v.
Ofelia (Gala) Panes and Alicia Gala. [21]
On November 3, 1998, the SEC rendered a Joint Decision
in SEC Cases Nos. 3747 and 4027, the dispositive portion of
which states:
WHEREFORE, premises
rendered, as follows:

considered,

judgment

is

hereby

1. Dismissing the petition in SEC Case No. 3747,

2. Issuing the following orders in SEC Case No. 4027;

Gina Domingo

516

51,600.00

Rita Benson

200.00

Virgilio Galeon

100.00

Julian Jader

100.00

Adnan Alonto

100.00

Elias Cresencio

100.00

TOTAL

50,000

P5,000,000.00

On June 23, 1990, a special stockholders meeting of

Margo was held, where a new board of directors was
elected. [15] That same day, the newly-elected board elected a
new set of officers. Raul Gala was elected as chairman,
president and general manager. During the meeting, the
board approved several actions, including the commencement
of proceedings to annul certain dispositions of Margos
property made by Alicia Gala. The board also resolved to
change the name of the corporation to MRG Management and
Development Corporation. [16]
Similarly, a special stockholders meeting of Ellice was
held on August 24, 1990 to elect a new board of directors. In
the ensuing organizational meeting later that day, a new set
of corporate officers was elected. Likewise, Raul Gala was
elected as chairman, president and general manager.
On March 27, 1990, respondents filed against petitioners
with the Securities and Exchange Commission (SEC) a petition
for the appointment of a management committee or receiver,
accounting and restitution by the directors and officers, and
the dissolution of Ellice Agro-Industrial Corporation for alleged
mismanagement, diversion of funds, financial losses and the
dissipation of assets, docketed as SEC Case No. 3747. [17] The
petition was amended to delete the prayer for the
appointment of a management committee or receiver and for
the dissolution of Ellice. Additionally, respondents prayed that
they be allowed to inspect the corporate books and
documents of Ellice. [18]
In turn, petitioners initiated a complaint against the
respondents on June 26, 1991, docketed as SEC Case No.
4027, praying for, among others, the nullification of the
elections of directors and officers of both Margo Management
and
Development
Corporation
and Ellice Industrial
Corporation; the nullification of all board resolutions issued by
Margo from June 23, 1990 up to the present and all board
resolutions issued by Ellice from August 24, 1990 up to the
present; and the return of all titles to real property in the
name of Margo and Ellice, as well as all corporate papers and
records of both Margo and Ellice which are in the possession
and control of the respondents.[19]

(a) Enjoining herein respondents to perform

corporate acts of both Ellice and
Margo, as directors and officers
thereof.
(b) Nullifying the election of the new sets of
Board of Directors and Officers of
Ellice and Margo from June 23,
1990 to the present, and that of
Ellice from August 24, 1990to the
present.
(c) Ordering the respondent Raul Gala to
return all the titles of real
properties in the names of Ellice
and Margo which were unlawfully
taken and held by him.
(d) Directing the respondents to return to
herein petitioners all corporate
papers, records of both Ellice and
Margo which are in their possession
and control.
SO ORDERED. [22]
Respondents appealed to the SEC En Banc, which,
on July 4, 2002, rendered its Decision, the decretal portion of
which reads:
WHEREFORE,
the Decision of the
Hearing
Officer
dated November 3, 1998 is hereby REVERSED and SET ASIDE
and a new one hereby rendered granting the appeal,
upholding the Amended Petition in SEC Case No. 3747, and
dismissing the Petition with Prayer for Issuance of Preliminary
Restraining Order and granting the Compulsory Counterclaim
in SEC Case No. 4027.
Accordingly, appellees Alicia Gala and Guia G. Domingo are
ordered as follows:
(1) jointly and solidarily pay ELLICE and/or MARGO
the amount of P700,000.00 representing the
consideration for the unauthorized sale of a
parcel of land to Lucky Homes and
Development Corporation (Exhs. N and
CCC);
(2) jointly and severally pay ELLICE and MARGO
the proceeds of sales of agricultural
products averaging P120,000.00 per month
from February 17, 1988;
(3) jointly and severally indemnify the appellants
P90,000.00 as attorneys fees;
(4) jointly and solidarily pay the costs of suit;
(5) turn over to the individual appellants the
corporate records of ELLICE and MARGO in
their possession; and

13
(6) desist and refrain from interfering with the
management of ELLICE and MARGO.
SO ORDERED. [23]
Petitioners filed a petition for review with the Court of
Appeals which dismissed the petition for review and affirmed
the decision of the SEC En Banc. [24]
Hence, this petition, raising the following issues:
I
WHETHER OR NOT THE LOWER COURT ERRED
IN NOT DECLARING AS ILLEGAL AND CONTRARY
TO PUBLIC POLICY THE PURPOSES AND MANNER
IN WHICH RESPONDENT CORPORATIONS WERE
ORGANIZED WHICH WERE, E.G. TO (1) PREVENT
THE GALA ESTATE FROM BEING BROUGHT
UNDER
THE
COVERAGE(SIC) OF
THE
COMPREHENSIVE AGRARIAN REFORM PROGRAM
(CARP) AND (2) PURPORTEDLY FOR ESTATE
PLANNING.
II
WHETHER OR NOT THE LOWER COURT ERRED
(1) IN SUSPICIOUSLY RESOLVING THE CASE
WITHIN TWO (2) DAYS FROM RECEIPT OF
RESPONDENTS
COMMENT;
AND
(2)
IN NOT MAKING A DETERMINATION OF THE
ISSUES OF FACTS AND INSTEAD RITUALLY
CITING THE FACTUAL FINDINGS OF THE
COMMISSION A
QUO WITHOUT
DISCUSSION
AND ANALYSIS;
III
WHETHER OR NOT THE LOWER COURT ERRED
IN RULING THAT THE ORGANIZATION OF
RESPONDENT
CORPORATIONS
WAS
NOT
ILLEGAL FOR DEPRIVING PETITIONER RITA G.
BENSON OF HER LEGITIME.
IV
WHETHER OR NOT THE LOWER COURT ERRED
IN NOT PIERCING THE VEILS OF CORPORATE
FICTION OF RESPONDENTS CORPORATIONS
ELLICE AND MARGO. [25]
In essence, petitioners want this Court to disregard the
separate juridical personalities of Ellice and Margo for the
purpose of treating all property purportedly owned by said
corporations as property solely owned by the Gala spouses.
The petitioners first contention in support of this theory
is that the purposes for which Ellice and Margo were
organized should be declared as illegal and contrary to public
policy. They claim that the respondents never pursued
exemption from land reform coverage in good faith and
instead merely used the corporations as tools to circumvent
land reform laws and to avoid estate taxes. Specifically, they
point out that respondents have not shown that the transfers
of the land in favor of Ellice were executed in compliance with
the requirements of Section 13 of R.A. 3844. [26] Furthermore,
they alleged that respondent corporations were run without
any of the conventional corporate formalities. [27]
At the outset, the Court holds that petitioners
contentions impugning the legality of the purposes for
which Ellice and Margo were organized, amount to collateral
attacks which are prohibited in this jurisdiction. [28]
The best proof of the purpose of a corporation is its
articles of incorporation and by-laws. The articles of
incorporation must state the primary and secondary purposes
of the corporation, while the by-laws outline the
administrative organization of the corporation, which, in turn,
is supposed to insure or facilitate the accomplishment of said
purpose. [29]

be the corporations true purposes, we are still precluded from

granting them relief. We cannot address here their concerns
regarding circumvention of land reform laws, for the doctrine
of primary jurisdiction precludes a court from arrogating unto
itself the authority to resolve a controversy the jurisdiction
over which is initially lodged with an administrative body of
special competence.[31] Since primary jurisdiction over any
violation of Section 13 of Republic Act No. 3844 that may have
been committed is vested in the Department of Agrarian
Reform Adjudication Board (DARAB),[32] then it is with said
administrative agency that the petitioners must first plead
their case. With regard to their claim that Ellice and Margo
were meant to be used as mere tools for the avoidance of
estate taxes, suffice it say that the legal right of a taxpayer to
reduce the amount of what otherwise could be his taxes or
altogether avoid them, by means which the law permits,
cannot be doubted. [33]
The petitioners allegation that Ellice and Margo were run
without any of the typical corporate formalities, even if true,
would not merit the grant of any of the relief set forth in their
prayer. We
cannot
disregard
the
corporate
entities
of Ellice and Margo on this ground. At most, such allegations,
if proven to be true, should be addressed in an administrative
case before the SEC. [34]
Thus, even if Ellice and Margo were organized for the
purpose of exempting the properties of the Gala spouses from
the coverage of land reform legislation and avoiding estate
taxes, we cannot disregard their separate juridical
personalities.
Next, petitioners make much of the fact that the Court of
Appeals promulgated its assailed Decision a mere two days
from the time the respondents filed their Comment. They
alleged that the appellate court could not have made a
deliberate study of the factual questions in the case,
considering the sheer volume of evidence available. [35] In
support of this allegation, they point out that the Court of
Appeals merely adopted the factual findings of the SEC En
Banc verbatim, without deliberation and analysis. [36]
In People v. Mercado, [37] we ruled that the speed with
which a lower court disposes of a case cannot thus be
attributed
to
the
injudicious
performance
of
its
function.Indeed, magistrates are not supposed to study a case
only after all the pertinent pleadings have been filed. It is a
mark of diligence and devotion to duty that jurists study a
case long before the deadline set for the promulgation of their
decision has arrived. The two-day period between the filing of
petitioners Comment and the promulgation of the decision
was sufficient time to consider their arguments and to
incorporate these in the decision. As long as the lower court
does not sacrifice the orderly administration of justice in favor
of a speedy but reckless disposition of a case, it cannot be
taken to task for rendering its decision with due dispatch. The
Court of Appeals in this intra-corporate controversy
committed no reversible error and, consequently, its decision
should be affirmed. [38] Verily, if such swift disposition of a case
is considered a non-issue in cases where the life or liberty of a
person is at stake, then we see no reason why the same
principle cannot apply when only private rights are involved.
Furthermore, well-settled is the rule that the factual
findings of the Court of Appeals are conclusive on the parties
and are not reviewable by the Supreme Court. They carry
even more weight when the Court of Appeals affirms the
factual findings of a lower fact-finding body.[39] Likewise, the
findings of fact of administrative bodies, such as the SEC, will
not be interfered with by the courts in the absence of grave
abuse of discretion on the part of said agencies, or unless the
aforementioned findings are not supported by substantial
evidence. [40]

In the case at bar, a perusal of the Articles of

Incorporation of Ellice and Margo shows no sign of the
allegedly illegal purposes that petitioners are complaining
of. It is well to note that, if a corporations purpose, as stated
in the Articles of Incorporation, is lawful, then the SEC has no
authority to inquire whether the corporation has purposes
other than those stated, and mandamus will lie to compel it to
issue the certificate of incorporation. [30]

However, in the interest of equity, this Court has

reviewed the factual findings of the SEC En Banc, which were
affirmed in toto by the Court of Appeals, and has found no
cogent reason to disturb the same. Indeed, we are convinced
that the arguments raised by the petitioners are nothing but
unwarranted conclusions of law. Specifically, they insist that
the Gala spouses never meant to part with the ownership of
the shares which are in the names of their children
and encargados, and that all transfers of property to these
individuals are supposedly void for being absolutely simulated
for lack of consideration.[41] However, as correctly held by the
SEC En Banc, the transfers were only relatively simulated,
inasmuch as the evident intention of the Gala spouses was to
donate portions of their property to their children
and encargados. [42]

Assuming there was even a grain of truth to the

petitioners claims regarding the legality of what are alleged to

In an attempt to bolster their theory that the

organization of the respondent corporations was illegal, the

14
petitioners aver that the legitime pertaining to petitioners Rita
G. Benson and Guia G. Domingo from the estate of their
father had been subject to unwarranted reductions as a result
thereof. In sum, they claim that stockholdings inEllice which
the late Manuel Gala had assigned to them were insufficient
to cover their legitimes, since Benson was only given two
shares while Domingo received only sixteen shares out of a
total number of 35,000 issued shares. [43]
Moreover, the reliefs sought by petitioners should have
been raised in a proceeding for settlement of estate, rather
than in the present intra-corporate controversy. If they are
genuinely interested in securing that part of their late fathers
property which has been reserved for them in their capacity
as compulsory heirs, then they should simply exercise
their actio ad supplendam legitimam, or
their
right of
completion of legitime.[44] Such relief must be sought during
the distribution and partition stage of a case for the
settlement of the estate of Manuel Gala, filed before a court
which has taken jurisdiction over the settlement of said
estate. [45]
Finally, the petitioners pray that the veil of corporate
fiction that shroud both Ellice and Margo be pierced,
consistent with their earlier allegation that both corporations
were formed for purposes contrary to law and public policy. In
sum, they submit that the respondent corporations are mere
business conduits of the deceased Manuel Gala and thus may
be disregarded to prevent injustice, the distortion or hiding of
the truth or the letting in of a just defense. [46]
However, to warrant resort to the extraordinary remedy
of piercing the veil of corporate fiction, there must be proof
that the corporation is being used as a cloak or cover for fraud
or illegality, or to work injustice, [47] and the petitioners have
failed to prove that Ellice and Margo were being used
thus. They have not presented any evidence to show how the
separate juridical entities of Ellice and Margo were used by
the respondents to commit fraudulent, illegal or unjust
acts. Hence, this contention, too, must fail.
On June 5, 2003, the petitioners filed a Reply, where,
aside from reiterating the contentions raised in their Petition,
they averred that there is no proof that either capital gains
taxes or documentary stamp taxes were paid in the series of
transfers of Ellice and Margo shares. Thus, they invoke
Sections 176 and 201 of the National Internal Revenue Code,
which would bar the presentation or admission into evidence
of any document that purports to transfer any benefit derived
from certificates of stock if the requisite documentary stamps
have not been affixed thereto and cancelled.
Curiously, the petitioners never raised this issue before
the SEC Hearing Officer, the SEC En Banc or the Court of
Appeals. Thus, we are precluded from passing upon the same
for, as a rule, no question will be entertained on appeal unless
it has been raised in the court below, for points of law,
theories, issues and arguments not brought to the attention of
the lower court need not be, and ordinarily will not be,
considered by a reviewing court, as they cannot be raised for
the first time at that late stage. Basic considerations of due
process impel this rule.[48] Furthermore, even if these
allegations were proven to be true, such facts would not
render the underlying transactions void, for these instruments
would not be the sole means, much less the best means, by
which the existence of these transactions could be proved. For
this purpose, the books and records of a corporation, which
include the stock and transfer book, are generally admissible
in evidence in favor of or against the corporation and its
members.They can be used to prove corporate acts, a
corporations financial status and other matters, including
ones status as a stockholder. Most importantly, these books
and records are, ordinarily, the best evidence of corporate
acts and proceedings.[49] Thus, reference to these should have
been made before the SEC Hearing Officer, for this Court will
not entertain this belated questioning of the evidence now.
It is always sad to see families torn apart by money
matters and property disputes. The concept of a close
corporation organized for the purpose of running a family
business or managing family property has formed the
backbone of Philippine commerce and industry. Through this
device, Filipino families have been able to turn their humble,
hard-earned life savings into going concerns capable of
providing them and their families with a modicum of material
comfort and financial security as a reward for years of hard
work. A family corporation should serve as a rallying point for
family unity and prosperity, not as a flashpoint for familial
strife. It is hoped that people reacquaint themselves with the
concepts of mutual aid and security that are the original
driving forces behind the formation of family corporations and

use these tenets in order to facilitate more civil, if not more

amicable, settlements of family corporate disputes.
WHEREFORE, in view of the foregoing, the petition is
DENIED. The Decision dated November 8, 2002 and the
Resolution dated December 27, 2002, both of the Court of
Appeals, are AFFIRMED. Costs against petitioners.
SO ORDERED.

Principal Place of Business

THIRD DIVISION
G.R. No. 161026
HYATT ELEVATORS AND ESCALATORS CORPORATION,
Petitioner, versus GOLDSTAR ELEVATORS,
PHILS., INC., Respondent.
Promulgated: October 24, 2005
DECISION

Well established in our jurisprudence is the rule that

the residence of a corporation is the place where its principal
office is located, as stated in its Articles of Incorporation.
The Case
Before us is a Petition for Review [1] on Certiorari,
under Rule 45 of the Rules of Court, assailing the June 26,
2003 Decision[2] and the November 27, 2003 Resolution [3] of
the Court of Appeals (CA) in CA-GR SP No. 74319. The decretal
portion of the Decision reads as follows:
WHEREFORE, in view of the
foregoing, the assailed Orders dated May
27, 2002 and October 1, 2002 of the RTC,
Branch 213, Mandaluyong City in Civil Case
No. 99-600, are hereby SET ASIDE. The
said case is hereby ordered DISMISSED on
the ground of improper venue.[4]
The assailed Resolution
Reconsideration.

denied

petitioners

Motion

for

The Facts
The relevant facts of the case are summarized by the
CA in this wise:
Petitioner
[herein
Respondent]
Goldstar
Elevator
Philippines,
Inc.
(GOLDSTAR for brevity) is a domestic
corporation primarily engaged in the
business of marketing, distributing, selling,
importing,
installing,
and
maintaining
elevators and escalators, with address at
6th Floor, Jacinta II Building, 64 EDSA,
Guadalupe, Makati City.
On the other hand, private
respondent
[herein
petitioner]
Hyatt
Elevators and Escalators Company (HYATT
for brevity) is a domestic corporation
similarly engaged in the business of selling,
installing
and
maintaining/servicing
elevators,
escalators
and
parking
equipment, with address at the 6 th Floor,
Dao I Condominium, Salcedo St., Legaspi
Village, Makati, as stated in its Articles of
Incorporation.
On February 23, 1999, HYATT filed
a Complaint for unfair trade practices and
damages under Articles 19, 20 and 21 of the
Civil Code of the Philippines against LG
Industrial Systems Co. Ltd. (LGISC) and LG
International Corporation (LGIC), alleging
among others, that: in 1988, it was
appointed by LGIC and LGISC as the
exclusive distributor of LG elevators and
escalators in the Philippines under a
Distributorship Agreement; x x x LGISC, in
the latter part of 1996, made a proposal to
change the exclusive distributorship agency

15
to that of a joint venture partnership; while
it looked forward to a healthy and fruitful
negotiation for a joint venture, however, the
various meetings it had with LGISC and
LGIC, through the latters representatives,
were conducted in utmost bad faith and with
malevolent intentions; in the middle of the
negotiations, in order to put pressures upon
it, LGISC and LGIC terminated the Exclusive
Distributorship Agreement; x x x [A]s a
consequence,
[HYATT]
sufferedP120,000,000.00
as
actual
damages, representing loss of earnings and
business opportunities, P20,000,000.00 as
damages
for
its
reputation
and
goodwill, P1,000,000.00 as and by way of
exemplary damages, and P500,000.00 as
and by way of attorneys fees.

Hyatts rights. In the Order dated May 27,

2002, which is the main subject of the
present petition, the [trial] court denied the
motion to dismiss, ratiocinating as follows:
Upon
perusal
of
the
factual
and
legal
arguments raised by the
movants-defendants, the
court finds that these are
substantially the same
issues posed by the then
defendant LG Industrial
System Co. particularly
the matter dealing [with]
the issues of improper
venue, failure to state
cause of action as well as
this
courts
lack
of
jurisdiction.
Under
the
circumstances obtaining,
the court resolves to rule
that
the
complaint
sufficiently states a cause
of action and that the
venue is properly laid. It is
significant to note that in
the amended complaint,
the same allegations are
adopted as in the original
complaint with respect to
the Goldstar Philippines to
enable
this
court
to
adjudicate a complete
determination
or
settlement of the claim
subject of the action it
appearing preliminarily as
sufficiently alleged in the
plaintiffs pleading that
said
Goldstar
Elevator
Philippines Inc., is being
managed and operated by
the same Korean officers
of defendants LG-OTIS
Elevator Company and LG
International Corporation.

On March 17, 1999, LGISC and LGIC

filed a Motion to Dismiss raising the
following grounds: (1) lack of jurisdiction
over the persons of defendants, summons
not having been served on its resident
agent; (2) improper venue; and (3) failure to
state a cause of action. The [trial] court
denied the said motion in an Order dated
January 7, 2000.
On March 6, 2000, LGISC and LGIC
filed
an
Answer
with
Compulsory
Counterclaim ex
abundante
cautela.
Thereafter, they filed a Motion for
Reconsideration and to Expunge Complaint
which was denied.
On December 4, 2000, HYATT filed
a motion for leave of court to amend the
complaint, alleging that subsequent to the
filing of the complaint, it learned that LGISC
transferred all its organization, assets and
goodwill, as a consequence of a joint
venture agreement with Otis Elevator
Company of the USA, to LG Otis Elevator
Company (LG OTIS, for brevity). Thus, LGISC
was to be substituted or changed to LG
OTIS, its successor-in-interest. Likewise, the
motion averred that x x x GOLDSTAR was
being utilized by LG OTIS and LGIC in
perpetrating their unlawful and unjustified
acts against HYATT. Consequently, in order
to afford complete relief, GOLDSTAR was to
be additionally impleaded as a partydefendant.
Hence,
in
the
Amended
Complaint, HYATT impleaded x x x
GOLDSTAR as a party-defendant, and all
references to LGISC were correspondingly
replaced with LG OTIS.
On December 18, 2000, LG OTIS
(LGISC) and LGIC filed their opposition to
HYATTs motion to amend the complaint. It
argued that: (1) the inclusion of GOLDSTAR
as party-defendant would lead to a change
in the theory of the case since the latter
took no part in the negotiations which led to
the alleged unfair trade practices subject of
the case; and (b) HYATTs move to amend the
complaint at that time was dilatory,
considering that HYATT was aware of the
existence of GOLDSTAR for almost two years
before it sought its inclusion as partydefendant.
On January 8, 2001, the [trial] court
admitted the Amended Complaint. LG OTIS
(LGISC) and LGIC filed a motion for
reconsideration thereto but was similarly
rebuffed on October 4, 2001.
On April 12, 2002, x x x GOLDSTAR
filed a Motion to Dismiss the amended
complaint, raising the following grounds: (1)
the venue was improperly laid, as neither
HYATT
nor
defendants
reside
in
Mandaluyong City, where the original case
was filed; and (2) failure to state a cause of
action against [respondent], since the
amended complaint fails to allege with
certainty what specific ultimate acts x x x
Goldstar performed in violation of x x x

On June 11, 2002, [Respondent]

GOLDSTAR filed a motion for reconsideration
thereto. On June 18, 2002, without waiving
the grounds it raised in its motion to
dismiss, [it] also filed an Answer Ad
Cautelam. On October 1, 2002, [its] motion
for reconsideration was denied.
From the aforesaid Order denying x
x x Goldstars motion for reconsideration, it
filed the x x x petition for certiorari [before
the CA] alleging grave abuse of discretion
amounting to lack or excess of jurisdiction
on the part of the [trial] court in issuing the
assailed Orders dated May 27, 2002 and
October 1, 2002.[5]
Ruling of the Court of Appeals
The CA ruled that the trial court had committed
palpable error amounting to grave abuse of discretion when
the latter denied respondents Motion to Dismiss. The
appellate court held that the venue was clearly improper,
because none of the litigants resided in Mandaluyong City,
where the case was filed.
According to the appellate court, since Makati was
the principal place of business of both respondent and
petitioner, as stated in the latters Articles of Incorporation,
that place was controlling for purposes of determining the
proper venue. The fact that petitioner had abandoned its
principal office in Makati years prior to the filing of the original
case did not affect the venue where personal actions could be
commenced and tried.
Hence, this Petition.[6]
The Issue
In its Memorandum, petitioner submits this sole issue for our
consideration:

16
Whether or not the Court of
Appeals, in reversing the ruling of the
Regional Trial Court, erred as a matter of law
and jurisprudence, as well as committed
grave abuse of discretion, in holding that in
the light of the peculiar facts of this case,
venue was improper[.][7]
This Courts Ruling
The Petition has no merit.
Sole Issue: Venue
The resolution of this case rests upon a proper
understanding of Section 2 of Rule 4 of the 1997 Revised
Rules of Court:
Sec.
2. Venue
of
personal
actions. All
other
actions
may
be
commenced and tried where the plaintiff or
any of the principal plaintiff resides, or
where the defendant or any of the principal
defendant resides, or in the case of a nonresident defendant where he may be found,
at the election of the plaintiff.
Since both parties to this case are corporations, there
is a need to clarify the meaning of residence. The law
recognizes two types of persons: (1) natural and (2) juridical.
Corporations come under the latter in accordance with Article
44(3) of the Civil Code.[8]
Residence is the permanent home -- the place to
which, whenever absent for business or pleasure, one intends
to return.[9] Residence is vital when dealing with venue. [10] A
corporation, however, has no residence in the same sense in
which this term is applied to a natural person. This is precisely
the reason why the Court in Young Auto Supply Company v.
Court of Appeals[11] ruled that for practical purposes, a
corporation is in a metaphysical sense a resident of the place
where its principal office is located as stated in the articles of
incorporation.[12] Even before this ruling, it has already been
established that the residence of a corporation is the place
where its principal office is established.[13]
This Court has also definitively ruled that for
purposes of venue, the term residence is synonymous with
domicile.[14] Correspondingly, the Civil Code provides:
Art. 51. When the law creating or
recognizing them, or any other provision
does not fix the domicile of juridical
persons, the same shall be understood to be
the place where their legal representation is
established or where they exercise their
principal functions.[15]
It now becomes apparent that the residence or
domicile of a juridical person is fixed by the law creating or
recognizing it. Under Section 14(3) of the Corporation Code,
the place where the principal office of the corporation is to be
located is one of the required contents of the articles of
incorporation, which shall be filed with the Securities and
Exchange Commission (SEC).
In the present case, there is no question as to the
residence of respondent. What needs to be examined is that
of petitioner. Admittedly,[16]the latters principal place of
business is Makati, as indicated in its Articles of Incorporation.
Since the principal place of business of a corporation
determines its residence or domicile, then the place indicated
in petitioners articles of incorporation becomes controlling in
determining the venue for this case.
Petitioner argues that the Rules of Court do not
provide that when the plaintiff is a corporation, the complaint
should be filed in the location of its principal office as
indicated in its articles of incorporation. [17] Jurisprudence has,
however, settled that the place where the principal office of a
corporation is located, as stated in the articles, indeed
establishes its residence.[18] This ruling is important in
determining the venue of an action by or against a
corporation,[19] as in the present case.
Without merit is the argument of petitioner that the
locality stated in its Articles of Incorporation does not
conclusively indicate that its principal office is still in the same
place. We agree with the appellate court in its observation
that the requirement to state in the articles the place where

the principal office of the corporation is to be located is not a

meaningless requirement. That proviso would be rendered
nugatory if corporations were to be allowed to simply
disregard what is expressly stated in their Articles of
Incorporation.[20]
Inconclusive are the bare allegations of petitioner
that it had closed its Makati office and relocated to
Mandaluyong City, and that respondent was well aware of
those
circumstances.
Assuming arguendo that
they
transacted business with each other in the Mandaluyong
office of petitioner, the fact remains that, in law, the latters
residence was still the place indicated in its Articles of
Incorporation. Further unacceptable is its faulty reasoning that
the ground for the CAs dismissal of its Complaint was its
failure to amend its Articles of Incorporation so as to reflect its
actual and present principal office. The appellate court was
clear enough in its ruling that the Complaint was dismissed
because the venue had been improperly laid, not because of
the failure of petitioner to amend the latters Articles of
Incorporation.
Indeed, it is a legal truism that the rules on the
venue of personal actions are fixed for the convenience of the
plaintiffs and their witnesses. Equally settled, however, is the
principle that choosing the venue of an action is not left to a
plaintiffs caprice; the matter is regulated by the Rules of
Court.[21] Allowing petitioners arguments may lead precisely to
what this Court was trying to avoid in Young Auto Supply
Company v. CA:[22] the creation of confusion and untold
inconveniences to party litigants. Thus enunciated the CA:
x x x. To insist that the proper
venue is the actual principal office and not
that stated in its Articles of Incorporation
would indeed create confusion and work
untold inconvenience. Enterprising litigants
may, out of some ulterior motives, easily
circumvent the rules on venue by the simple
expedient of closing old offices and opening
new ones in another place that they may
find well to suit their needs.[23]
We find it necessary to remind party litigants,
especially corporations, as follows:
The rules on venue, like the other
procedural rules, are designed to insure a
just and orderly administration of justice or
the
impartial
and
evenhanded
determination
of
every
action
and
proceeding. Obviously, this objective will not
be attained if the plaintiff is given
unrestricted freedom to choose the court
where he may file his complaint or petition.
The choice of venue should not be
left to the plaintiffs whim or caprice. He may
be impelled by some ulterior motivation in
choosing to file a case in a particular court
even if not allowed by the rules on venue.[24]
WHEREFORE, the Petition is hereby DENIED, and the
assailed Decision and Resolution AFFIRMED. Costs against
petitioner.
SO ORDERED.
SECOND DIVISION
G.R. No. L-56763 December 15, 1982
JOHN SY and UNIVERSAL PARTS SUPPLY
CORPORATION, Petitioners, vs. TYSON ENTERPRISES,
INC., JUDGE GREGORIO G. PINEDA of the Court of First
Instance of Rizal, Pasig Branch XXI and COURT OF
APPEALS, Respondents.
This is a case about the venue of a collection suit. On August
29, 1979, Tyson Enterprises, Inc. filed against John Sy and
Universal Parts Supply Corporation in the Court of First
Instance of Rizal, Pasig Branch XXI, a complaint for the
collection of P288,534.58 plus interest, attorney's fees and
litigation expenses (Civil Case No. 34302).chanrobles virtual
law library

17
It is alleged in the complaint that John Sy, doing business
under the trade name, Universal Parts Supply, is a resident of
Fuentebella Subdivision, Bacolod City and that his codefendant, Universal Parts Supply Corporation, allegedly
controlled by Sy, is doing business in Bacolod City.
Curiously enough, there is no allegation in the complaint as to
the office or place of business of plaintiff Tyson Enterprises,
Inc., a firm actually doing business at 1024 Magdalena, now
G. Masangkay Street, Binondo, Manila (p. 59, Rollo).
What is alleged is the postal address or residence of
Dominador Ti, the president and general manager of plaintiff
firm, which is at 26 Xavier Street, Greenhills Subdivision, San
Juan, Rizal. The evident purpose of alleging that address and
not mentioning the place of business of plaintiff firm was to
justify the filing of the suit in Pasig, Rizal instead of in Manila.
Defendant Sy and Universal Parts Supply Corporation first filed
a motion for extension of time to file their answer and later a
motion for a bill of particulars. The latter motion was denied.
Then, they filed a motion to dismiss on the ground of improper
venue.
They invoked the provision of section 2(b), Rule 4 of the Rules
of Court that personal actions "may be commenced and tried
where the defendant or any of the defendants resides or may
be found, or where the plaintiffs or any of the plaintiffs
resides, at the election of the plaintiff."
To strengthen that ground, they also cited the stipulation in
the sales invoice that "the parties expressly submit to the
jurisdiction of the Courts of the City of Manila for any legal
action arising out of" the transaction which stipulation is
quoted in paragraph 4 of plaintiff's complaint.
The plaintiff opposed the motion to dismiss on the ground that
the defendants had waived the objection based on improper
venue because they had previously filed a motion for a bill of
particulars which was not granted. The trial court denied the
motion to dismiss on the ground that by filing a motion for a
bill of particulars the defendants waived their objection to the
venue. That denial order was assailed in a petition for
certiorari and prohibition in the Court of Appeals which issued
on July 29, 1980 a restraining order, enjoining respondent
judge from acting on the case. He disregarded the restraining
order (p. 133, Rollo).
The Appellate Court in its decision of October 6, 1980
dismissed the petition. It ruled that the parties did not intend
Manila as the exclusive venue of the actions arising under
their transactions and that since the action was filed in Pasig,
which is near Manila, no useful purpose would be served by
dismissing the same and ordering that it be filed in Manila (Sy
vs. Pineda, CA-G.R. No. SP-10775). That decision was
appealed to this Court.
There is no question that the venue was improperly laid in this
case. The place of business of plaintiff Tyson Enterprises, Inc.,
which for purposes of venue is considered as its residence (18
C.J.S 583; Clavecilla Radio system vs. Antillon, L-22238,
February 18, 1967, 19 SCRA 379), because a corporation has
a personality separate and distinct from that of its officers and
stockholders.
Consequently, the collection suit should have been filed in
Manila, the residence of plaintiff corporation and the place
designated in its sales invoice, or it could have been filed also
in Bacolod City, the residence of defendant Sy.
We hold that the trial court and the Court of Appeals erred in
ruling that the defendants, now the petitioners, waived their
objection to the improper venue. As the trial court proceeded
in defiance of the Rules of Court in not dismissing the case,
prohibition lies to restrain it from acting in the case (Enriquez
vs. Macadaeg, 84 Phil. 674).

Section 4, Rule 4 of the Rules of Court provides that, "when

improper venue is not objected to in a motion to dismiss it is
deemed waived" and it can no longer be pleaded as an
affirmative defense in the answer (Sec. 5, Rule 16).
In this case, the petitioners, before filing their answer, filed a
motion to dismiss based on improper venue. That motion was
seasonably filed (Republic vs. Court of First Instance of Manila,
L-30839, November 28, 1975, 68 SCRA 231, 239). The fact
that they filed a motion for a bill of particulars before they
filed their motion to dismiss did not constitute a waiver of
their objection to the venue.
It should be noted that the provision of Section 377 of the
Code of Civil Procedure that "the failure of a defendant to
object to the venue of the action at the time of entering his
appearance in the action shall be deemed a waiver on his part
of all objection to the place or tribunal in which the action is
brought" is not found in the Rules of Court.
And the provision of section 4, Rule 5 of the 1940 Rules of
Court that "when improper venue is not objected to prior to
the trial, it is deemed waived" is not reproduced in the present
Rules of Court.
To repeat, what section 4 of Rule 4 of the present Rules of
court provides is that the objection to improper venue should
be raised in a motion to dismiss seasonably filed and, if not so
raised, then the said objection is waived. Section 4 does not
provide that the objection based on improper venue should be
interposed by means of a special appearance or before any
pleading is filed.
The rules on venue, like the other procedural rules, are
designed to insure a just and orderly administration of justice
or the impartial and evenhanded determination of every
action and proceeding. Obviously, this objective will not be
attained if the plaintiff is given unrestricted freedom to choose
the court where he may file his complaint or petition.
The choice of venue should not be left to the plaintiff's whim
or caprice. He may be impelled by some ulterior motivation in
choosing to file a case in a particular court even if not allowed
by the rules on venue.
As perspicaciously observed by Justice Moreland, the purpose
of procedure is not to restrict the court's jurisdiction over the
subject matter but to give it effective facility "in righteous
action", "to facilitate and promote the administration of
justice" or to insure "just judgments" by means of a fair
hearing. If that objective is not achieved, then "the
administration
of
justice
becomes
incomplete
and
unsatisfactory and lays itself open to grave criticism." (Manila
Railroad Co. vs. Attorney General, 20 Phil. 523, 530.)
The case of Marquez Lim Cay vs. Del Rosario, 55 Phil. 962,
does not sustain the trial court's order of denial because in
that case the defendants, before filing a motion to dismiss on
the ground of improper venue, interposed a demurrer on the
ground that the complaint does not state a cause of action.
Then, they filed a motion for the dissolution of an attachment,
posted a bond for its dissolution and later filed a motion for
the assessment of the damages caused by the attachment. All
those acts constituted a submission to the trial court's
jurisdiction and a waiver of the objection based on improper
venue under section 377 of the Code of Civil Procedure.
The instant case is similar to Evangelista vs. Santos, 86 Phil.
387, where the plaintiffs sued the defendant in the Court of
First Instance of Rizal on the assumption that he was a
resident of Pasay City because he had a house there. Upon
receipt of the summons, the defendant filed a motion to
dismiss based on improper venue. He alleged under oath that
he was a resident of Iloilo City.

18
This Court sustained the dismissal of the complaint on the
ground of improper venue, because the defendant was really
a resident of Iloilo City. His Pasay City residence was used by
his children who were studying in Manila. Same holding
in Casilan vs. Tomassi,90 Phil. 765; Corre vs. Corre, 100 Phil.
321; Calo vs. Bislig Industries, Inc., L-19703, January 30, 1967,
19 SCRA 173; Adamos vs. J. M. Tuason, Co., Inc.,. L-21957,
October 14, 1968, 25 SCRA 529.
Where one Cesar Ramirez, a resident of Quezon City, sued in
the Court of First Instance of Manila Manuel F. Portillo, a
resident of Caloocan City, for the recovery of a sum of money,
the trial court erred in not granting Portillo's motion to dismiss
the complaint on the ground of improper venue This Court
issued the writ of prohibition to restrain the trial court from
proceeding in the case (Portillo vs. Judge Reyes and Ramirez,
113 Phil. 288).
WHEREFORE, the decision of the Court of Appeals and the
order of respondent judge denying the motion to dismiss are
reversed and set aside. The writ of prohibition is granted. Civil
Case No. 34302 should be considered dismissed without
prejudice to refiling - it in the Court of First Instance of Manila
or Bacolod City at the election of plaintiff which should be
allowed to withdraw the documentary evidence submitted in
that case. All the proceedings in said case, including the
decision, are also set aside. Costs against Tyson Enterprises,
Inc.

P4,000,000.00 and the balance of P4,000,000.00 in four post

dated checks of P1,000,000.00 each.
Immediately after the execution of the agreement, Roxas took
full control of the four markets of CMDC. However, the
vendors held on to the stock certificates of CMDC as security
pending full payment of the balance of the purchase price.
The first check of P4,000,000.00, representing the downpayment, was honored by the drawee bank but the four other
checks representing the balance of P4,000,000.00 were
dishonored. In the meantime, Roxas sold one of the markets
to a third party. Out of the proceeds of the sale, YASCO
received P600,000.00, leaving a balance of P3,400,000.00
(Rollo, p. 176).
Subsequently, Nelson Garcia and Vicente Sy assigned all their
rights and title to the proceeds of the sale of the CMDC shares
to Nemesio Garcia.
On June 10, 1988, petitioners filed a complaint against Roxas
in the Regional Trial Court, Branch 11, Cebu City, praying that
Roxas be ordered to pay petitioners the sum of P3,400,00.00
or that full control of the three markets be turned over to
YASCO and Garcia. The complaint also prayed for the
forfeiture of the partial payment of P4,600,000.00 and the
payment of attorney's fees and costs (Rollo, p. 290).
Roxas filed two motions for extension of time to submit his
answer. But despite said motion, he failed to do so causing
petitioners to file a motion to have him declared in default.
Roxas then filed, through a new counsel, a third motion for
extension of time to submit a responsive pleading.

SOORDERED.
Separate Opinions
ESCOLIN, J., dissenting:
It is my view that petitioners, by filing a motion for a bill of
particulars, had submitted themselves to the jurisdiction of
the respondent court, and has thus waived their objection to
the venue of action.

On August 19, 1988, the trial court declared Roxas in default.

The order of default was, however, lifted upon motion of
Roxas.
On August 22, 1988, Roxas filed a motion to dismiss on the
grounds that:

DE CASTRO, J., concurring:

I concur, because as stated in the main opinion, the residence
of the plaintiff is not alleged in the complaint. The fact of
improper venue is, therefore, not manifest on the face of the
complaint. Were it so manifest, I would say, along with Justice
Escolin, that, in filing a motion for a bill of particulars,
petitioners as defendants in Civil Case No. 34302 of the Court
of First Instance of Rizal, waived objection to improper venue.

FIRST DIVISION
G.R. No. 104175 June 25, 1993
YOUNG AUTO SUPPLY CO. AND NEMESIO
GARCIA, Petitioners, vs. THE HONORABLE COURT OF
APPEALS (THIRTEENTH DIVISION) AND GEORGE CHIONG
ROXAS,Respondents.
Petitioners seek to set aside the decision of respondent Court
of Appeals in CA-G.R. SP No. 25237, which reversed the Order
dated February 8, 1991 issued by the Regional Trial Court,
Branch 11, Cebu City in Civil Case No. CEB 6967. The order of
the trial court denied the motion to dismiss filed by
respondent George C. Roxas of the complaint for collection
filed by petitioners.
It appears that sometime on October 28, 1987, Young Auto
Supply Co. Inc. (YASCO) represented by Nemesio Garcia, its
president, Nelson Garcia and Vicente Sy, sold all of their
shares of stock in Consolidated Marketing & Development
Corporation (CMDC) to Roxas. The purchase price was
P8,000,000.00 payable as follows: a downpayment of

1. The complaint did not state a cause of action due to nonjoinder of indispensable parties;
2. The claim or demand set forth in the complaint had been
waived, abandoned or otherwise extinguished; and
3. The venue was improperly laid (Rollo, p. 299).
After a hearing, wherein testimonial and documentary
evidence were presented by both parties, the trial court in an
Order dated February 8, 1991 denied Roxas' motion to
dismiss. After receiving said order, Roxas filed another motion
for extension of time to submit his answer. He also filed a
motion for reconsideration, which the trial court denied in its
Order dated April 10, 1991 for being pro-forma (Rollo, p. 17).
Roxas was again declared in default, on the ground that his
motion for reconsideration did not toll the running of the
period to file his answer.
On May 3, 1991, Roxas filed an unverified Motion to Lift the
Order of Default which was not accompanied with the required
affidavit or merit. But without waiting for the resolution of the
motion, he filed a petition for certiorari with the Court of
Appeals.
The Court of Appeals sustained the findings of the trial court
with regard to the first two grounds raised in the motion to
dismiss but ordered the dismissal of the complaint on the
ground of improper venue (Rollo, p. 49).
A subsequent motion for reconsideration by petitioner was to
no avail.

19
Petitioners now come before us, alleging that the Court of
Appeals erred in:
1. holding the venue should be in Pasay City, and not in Cebu
City (where both petitioners/plaintiffs are residents;
2. not finding that Roxas is estopped from questioning the
choice of venue (Rollo, p. 19).
The petition is meritorious.
In holding that the venue was improperly laid in Cebu City, the
Court of Appeals relied on the address of YASCO, as appearing
in the Deed of Sale dated October 28, 1987, which is "No.
1708 Dominga Street, Pasay City." This was the same address
written in YASCO's letters and several commercial documents
in the possession of Roxas (Decision, p. 12;Rollo, p. 48).
In the case of Garcia, the Court of Appeals said that he gave
Pasay City as his address in three letters which he sent to
Roxas' brothers and sisters (Decision, p. 12; Rollo, p. 47). The
appellate court held that Roxas was led by petitioners to
believe that their residence is in Pasay City and that he had
relied upon those representations (Decision, p. 12, Rollo, p.
47).
The Court of Appeals erred in holding that the venue was
improperly laid in Cebu City.
In the Regional Trial Courts, all personal actions are
commenced and tried in the province or city where the
defendant or any of the defendants resides or may be found,
or where the plaintiff or any of the plaintiffs resides, at the
election of the plaintiff [Sec. 2(b) Rule 4, Revised Rules of
Court].
There are two plaintiffs in the case at bench: a natural person
and a domestic corporation. Both plaintiffs aver in their
complaint that they are residents of Cebu City, thus:
1.1. Plaintiff Young Auto Supply Co., Inc., ("YASCO") is a
domestic corporation duly organized and existing under
Philippine laws with principal place of business at M. J. Cuenco
Avenue, Cebu City. It also has a branch office at 1708
Dominga Street, Pasay City, Metro Manila.
Plaintiff Nemesio Garcia is of legal age, married, Filipino
citizen and with business address at Young Auto Supply Co.,
Inc., M. J. Cuenco Avenue, Cebu City. . . . (Complaint, p.
1; Rollo, p. 81).
The Article of Incorporation of YASCO (SEC Reg. No. 22083)
states:
THIRD That the place where the principal office of the
corporation is to be established or located is at Cebu City,
Philippines (as amended on December 20, 1980 and further
amended on December 20, 1984) (Rollo, p. 273).
A corporation has no residence in the same sense in which
this term is applied to a natural person. But for practical
purposes, a corporation is in a metaphysical sense a resident
of the place where its principal office is located as stated in
the articles of incorporation (Cohen v. Benguet Commercial
Co., Ltd., 34 Phil. 256 [1916] Clavecilla Radio System v.
Antillon, 19 SCRA 379 [1967]). The Corporation Code precisely
requires each corporation to specify in its articles of
incorporation the "place where the principal office of the
corporation is to be located which must be within the
Philippines" (Sec. 14 [3]). The purpose of this requirement is
to fix the residence of a corporation in a definite place,
instead of allowing it to be ambulatory.
In Clavencilla Radio System v. Antillon, 19 SCRA 379 ([1967]),
this Court explained why actions cannot be filed against a

corporation in any place where the corporation maintains its

branch offices. The Court ruled that to allow an action to be
instituted in any place where the corporation has branch
offices,
would
create
confusion
and
work
untold
inconvenience to said entity. By the same token, a corporation
cannot be allowed to file personal actions in a place other
than its principal place of business unless such a place is also
the residence of a co-plaintiff or a defendant.
If it was Roxas who sued YASCO in Pasay City and the latter
questioned the venue on the ground that its principal place of
business was in Cebu City, Roxas could argue that YASCO was
in estoppel because it misled Roxas to believe that Pasay City
was its principal place of business. But this is not the case
before us.
With the finding that the residence of YASCO for purposes of
venue is in Cebu City, where its principal place of business is
located, it becomes unnecessary to decide whether Garcia is
also a resident of Cebu City and whether Roxas was in
estoppel from questioning the choice of Cebu City as the
venue.
WHEREFORE, the petition is GRANTED. The decision of the
Court of Appeals appealed from is SET ASIDE and the Order
dated February 8, 1991 of the Regional Trial Court is
REINSTATED.
SO ORDERED.

Corporate Term

SECOND DIVISION
[G.R. No. L-7231. March 28, 1956.]
BENGUET CONSOLIDATED MINING CO., Petitioner, vs.
MARIANO PINEDA, in his capacity as Securities and
Exchange Commissioner, Respondent. CONSOLIDATED
MINES, INC., Intervenor.

DECISION
Appeal under Rule 43 from a decision of the Securities and
Exchange Commissioner, denying the right of a sociedad
anonima to extend its corporate existence by amendment of
its original articles of association, or alternatively, to reform
and continue existing under the Corporation Law (Act 1459)
beyond the original period.
The Petitioner, the Benguet Consolidated Mining Co.
(hereafter termed Benguet for short), was organized on June
24,1903, as a sociedad anonima regulated by Articles 151 et
seq., of the Spanish Code of Commerce of 1886, then in force
in the Philippines. The articles of association expressly
provided that it was organized for a term of fifty (50) years. In
1906, the governing Philippine Commission enacted Act 1459,
commonly known as the Corporation Law, establishing in the
islands the American type of juridical entities known as
corporation, to take effect on April 1, 1906. Of its enactment,
this Court said in its decision in Harden vs. Benguet
Consolidated Mining Co., 58 Phil., 141, at pp. 145-146, and
147:
When the Philippine Islands passed to the sovereignty of the
United States, the attention of the Philippine Commission was
early drawn to the fact there is no entity in Spanish law
exactly corresponding to the motion of the corporation in
English and American law;
And in the Philippine Bill, approved July 1, 1906, the Congress
of the United States inserted certain provisions, under the
head of Franchises, which were intended to control the
lawmaking power in the Philippine Islands in the matter of
granting of franchises, privileges and concessions. These
provisions are found in sections 74 and 75 of the Act. The
provisions of section 74 have been superseded by section 28
of the Act of Congress of August 29, 1916, but in section 75
there is a provision referring to mining corporations, which still
remains the law, as amended. This provision, in its original
form, reads as follows:

20
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.
Under the guidance of this and certain other provisions thus
enacted by Congress, the Philippine Commission entered upon
the enactment of a general law authorizing the creation of
corporations in the Philippine Islands. This rather elaborate
piece of legislation is embodied in what is called our
Corporation Law (Act No. 1459 of the Philippine Commission).
The evident purpose of the commission was to introduce the
American corporation into the Philippine Islands as the
standard commercial entity and to hasten the day when the
sociedad anonima of the Spanish law would be obsolete. That
statute is a sort of codification of American corporate law.
As it was the intention of our lawmakers to stimulate the
introduction of the American corporation into the Philippine
law in the place of the sociedad anonima, it was necessary to
make certain adjustment resulting from the continued coexistence, for a time, of the two 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. To this
provision was added another 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 the
laws that were in force prior to the passage of this Act 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 the provisions of this Act.
Specifically, the two sections of Act No. 1459 referring to
sociedades anonimas then already existing, provide as
follows:
SEC. 75. Any corporation or a sociedad anonima formed,
organized, and existing under the laws of the Philippines 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.
SEC. 191. The Code of Commerce, in so far as it relates to
corporation or sociedades anonimas, and all other Acts or
parts of Acts in conflict or inconsistent with this Act, are
hereby repealed with the exception of Act Numbered fifty-two,
entitled An Act providing for examinations of banking
institutions in the Philippines, and for reports by their officers,
as amended, and Act Numbered Six hundred sixty-seven,
entitled An Act prescribing the method of applying to
governments of municipalities, except the city of Manila and
of provinces for franchises to contract and operate street
railway, electric light and power and telephone lines, the
conditions upon which the same may be granted, certain
powers of the grantee of said franchises, and of grantees of
similar franchises under special Act of the Commission, and
for other purposes. Provided, however, That nothing in this
Act contained shall be deemed to repeal the existing law
relating to those classes of associations which are termed
sociedades colectivas, and sociedades de cuentas en
participacion, as to which association the existing law shall be
deemed to be still in force;
And provided, further, That existing corporations or
sociedades anonimas, lawfully organized as such, which elect
to continue their business as such sociedades anonimas
instead of reforming and reorganizing under and by virtue of
the provisions of this Act, shall continue to be governed by the
laws that were in force prior to the passage of this Act 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 the provisions of this Act.

As the expiration of its original 50 year term of existence

approached, the Board of Directors of Benguet adopted in
1946 a resolution to extend its life for another 50 years from
July 3, 1946 and submitted it for registration to
the Respondent Securities and Exchange Commissioner. Upon
advice of the Secretary of Justice (Op. No. 45, Ser. 1917) that
such extension was contrary to law, the registration was
denied. The matter was dropped, allegedly because the
stockholders of Benguet did not approve of the Directors
action.
Some six years later in 1953, the shareholders of Benguet
adopted a resolution empowering the Director to effectuate
the extension of the Companys business life for not less than
20 and not more than 50 years, and this by either (1) an
amendment to the Articles of Association or Charter of this
Company or (2) by reforming and reorganizing the Company
as a Philippine Corporation, or (3) by both or (4) by any other
means. Accordingly, the Board of Directors on May 27, 1953,
adopted a resolution to the following effect
Be It
Resolved, that the Company be reformed, reorganized and
organized under the provisions of section 75 and other
provisions of the Philippine Corporation Law as a Philippine
corporation with a corporate life and corporate powers as set
forth in the Articles of Incorporation attached hereto as
Schedule I and made a part hereof by this reference;
Be It
FURTHER RESOLVED, that any five or more of the following
shareholders of the Company be and they hereby are
authorized as instructed to act for and in behalf of the share
holders of the Company and of the Company as Incorporators
in the reformation, reorganization and organization of the
Company under and in accordance with the provisions
aforesaid of said Philippine Corporation Law, and in such
capacity, they are hereby authorized and instructed to
execute the aforesaid Articles of Incorporation attached to
these Minutes as Schedule I hereof, with such amendments,
deletion and additions thereto as any five or more of those so
acting shall deem necessary, proper, advisable or convenient
to effect prompt registration of said Articles under Philippine
Law;
And five or more of said Incorporators are hereby further
authorized and directed to do all things necessary, proper,
advisable or convenient to effect such registration.
In pursuance of such resolution, Benguet submitted in June,
1953, to the Securities and Exchange Commissioner, for
alternative registration, two documents:
(1) Certification as to the Modification of (the articles of
association of) the Benguet Consolidated Mining Company,
extending the term of its existence to another fifty years from
June 15, 1953; and,
(2) articles of incorporation, covering its reformation or
reorganization as a corporation in accordance with section 75
of the Philippine Corporation Law.
Relying mainly upon the adverse opinion of the Secretary of
Justice (Op. No. 180, s. 1953), the Securities and Exchange
Commissioner denied the registration and ruled:
(1) That the Benguet, as sociedad anonima, had no right to
extend the original term of corporate existence stated in its
Articles of Association, by subsequent amendment thereof
adopted after enactment of the Corporation Law (Act No.
1459); and,
(2) That Benguet, by its conduct, had chosen to continue as
sociedad anonima, under section 75 of Act No. 1459, and
could no longer exercise the option to reform into a
corporation, specially since it would indirectly produce the
effect of extending its life.
This ruling is the subject of the present appeal.
Petitioner Benguet contends:
(1) That the proviso of section 18 of the Corporation Law to
the effect
that the life of said corporation shall not be extended by
amendment beyond the time fixed in the original articles.
does not apply to sociedades anonimas already in existence
at the passage of the law, like Petitioner herein;
(2) That to apply the said restriction imposed by section 18 of
the Corporation Law to sociedades anonimas already
functioning when the said law was enacted would be in
violation of constitutional inhibitions;

21
(3) That even assuming that said restriction was applicable to
it, Benguet could still exercise the option of reforming and
reorganizing under section 75 of the Corporation Law, thereby
prolonging its corporate existence, since the law is silent as to
the time when such option may be exercised or availed of.
The first issue arises because the Code of Commerce of 1886
under which Benguet was organized, contains no prohibition
(to extend the period of corporate existence), equivalent to
that set forth in section 18 of the Corporation Law. Neither
does it expressly authorize the extension. But the text of
Article 223, reading:
ART. 223. After the termination of the period for which
commercial associations are constituted, it shall not be
understood as extended by the implied or presumed will of
the members;
and if the members desire to continue in association, they
shall draw up new articles, subject to all the formalities
prescribed for their creation as provided in Article 119. (Code
of Commerce.)
would seem to imply that the period of existence of the
sociedad anonimas (or of any other commercial association
for that matter) may be extended if the partners or members
so agree before the expiration of the original period.
While the Code of Commerce, in so far as sociedades
anonimas are concerned, was repealed by Act No 1459,
Benguet claims that article 223 is still operative in its favor
under the last proviso of section 191 of the Corporation law
(ante, p. 4 to the effect that existing sociedades anonimas
would continue to be governed by the law in force before Act
1459,

y a los terceros, porque les advierte el momento en que,

extinguida la compaia, no cabe y a la creacion con ella de
nuevas relaciones juridicas, de que nazcan reciprocamente
derechos y obligaciones, sino solo la liquidacion de los
negocios hasta entonces convenidos, sin otra excepcion que
la que luego mas adelante habremos de sealar. (3 Benito,
Derecho Mercantil, p. 245.)
The State and its officers also have an obvious interest in the
term of life of associations, since the conferment of juridical
capacity upon them during such period is a privilege that is
derived from statute. It is obvious that no agreement between
associates can result in giving rise to a new and distinct
personality, possessing independent rights and obligations,
unless the law itself shall decree such result. And the State is
naturally interested that this privilege be enjoyed only under
the conditions and not beyond the period that it sees fit to
grant;
And, particularly, that it be not abused in fraud and to the
detriment of other parties;
And for this reason it has been ruled that the limitation (of
corporate existence) to a definite period is an exercise of
control in the interest of the public (Smith vs. Eastwood Wire
Manufacturing Co., 43 Atl. 568).
We cannot assent to the thesis of Benguet that its period of
corporate existence has relation to its organization. The
latter term is defined in Websters International Dictionary as:
The executive structure of a business;
The personnel of management, with its several duties and
places in administration;

in relation to their organization and method of transacting

business and to the rights of members among themselves,
but their relations to the public and public officials shall be
governed by the provisions of this Act.

The various persons who conduct a business, considered as a

unit.

Benguet contends that the period of corporate life relates to

its organization and the rights of its members inter se, and not
to its relations to the public or public officials.

Organize or organization, as used in reference to

corporations, has a well-understood meaning, which is the
election of officers, providing for the subscription and
payment of the capital stock, the adoption of by-laws, and
such other steps as are necessary to endow the legal entity
with the capacity to transact the legitimate business for which
it was created. Waltson vs. Oliver, 30 P. 172, 173, 49 Kan. 107,
33 Am. St. Rep. 355; Topeka Bridge Co. vs. Cummings, 3 Kan.
55, 77; Hunt vs. Kansas & M. Bridge Co., 11 Kan. 412, 439;
Aspen Water & Light Co., vs. City of Aspen, 37 P. 728, 730, 6
Colo. App. 12; Nemaha Coal & Mining Co., vs. Settle 38 P.
483, 484, 54 Kan. 424.

We find this contention untenable.

The term of existence of association (partnership or sociedad
anonima) is coterminous with their possession of an
independent legal personality, distinct from that of their
component members. When the period expires, the sociedad
anonima loses the power to deal and enter into further legal
relations with other persons;
It is no longer possible for it to acquire new rights or incur new
obligations, have only as may be required by the process of
liquidating and winding up its affairs. By the same token, its
officers and agents can no longer represent it after the
expiration of the life term prescribed, save for settling its
business. Necessarily, therefore, third persons or strangers
have an interest in knowing the duration of the juridical
personality of the sociedad anonima, since the latter cannot
be dealt with after that period;
Wherefore its prolongation or cessation is a matter directly
involving the companys relations to the public at large.
On the importance of the term of existence set in the articles
of association of commercial companies under the Spanish
Code of Commerce, D. Lorenzo Benito y Endar, professor of
mercantile law in the Universidad Central de Madrid, has this
to say:
La duracion de la Sociedad. La necesidad de consignar
este requisito en el contrato social tiene un valor analogo al
que dijimos tenia el mismo al tratar de las compaias
colectivas, aun cuando respecto de las anonimas no haya de
tenerse en cuenta para nada lo que dijimos entonces acerca
de la trascendencia que ello tiene para los socios;
Porque no existiendo en las anonimas la serie de
responsibilidades de caracter personal que afectan a los
socios colectivos, es claro que la duracion de la sociedad
importa conocerla a los socios y los terceros, porque ella
marca al limite natural del desenvolvimiento de la empresa
constituida y el comienzo de la liquidacion de la sociedad. (3
Benito, Derecho Mercantil, 292-293.)
Interesa, pues, la fijacion de la vida de la compaia,
desenvolviendose con normalidad y regularidad, tanto a los
asociados como a los terceros. A aquellos, porque su libertad
economica, en cierto modo limitada por la existencia del
contrato de compaia, se recobra despues de realizada, mas
o menos cumplidamente, la finalidad comun perseguida;

The legal definitions of the term organization are concordant

with that given above:

Under a statute providing that, until articles of incorporation

should be recorded, the corporation should transact no
business except its own organization, it is held that the term
organization means simply the process of forming and
arranging into suitable disposition the parties who are to act
together in, and defining the objects of, the compound body,
and that this process, even when complete in all its parts,
does not confer a franchise either valid or defective, but, on
the contrary, it is only the act of the individuals, and
something else must be done to secure the corporate
franchise. Abbott vs. Omaha Smelting & Refining Co. 4 Neb.
416, 421. (30 Words and Phrases, p. 282.)
It is apparent from the foregoing definitions that the term
organization relates merely to the systematization and
orderly arrangement of the internal and managerial affairs
and organs of the Petitioner Benguet, and has nothing to do
with the prorogation of its corporate life.
From the double fact that the duration of its corporate life
(and juridical personality) has evident connection with
the Petitioners relations to the public, and that it bears none
to the Petitioners organization and method of transacting
business, we derive the conclusion that the prohibition
contained in section 18 of the Corporation Law (Act No. 1459)
against extension of corporate life by amendment of the
original articles was designed and intended to apply to
compaias anonimas that, like Petitioner Benguet, were
already existing at the passage of said law. This conclusion is
reinforced by the avowed policy of the law to hasten the day
when compaias anonimas would be extinct, and replace
them with the American type of corporation (Harden vs.
Benguet Consolidated Mining Co., supra), for the indefinite
prorogation of the corporation life of sociedades anonimas
would maintain the unnecessary duality of organizational
types instead of reducing them to a single one;

22
And what is more, it would confer upon these sociedades
anonimas, whose obsolescence was sought, the advantageous
privilege of perpetual existence that the new corporation
could not possess.
Of course, the retroactive application of the limitations on the
terms of corporate existence could not be made in violation of
constitutional inhibitions specially those securing equal
protection of the laws and prohibiting impairment of the
obligation of contracts. It needs no argument to show that if
Act No. 1459 allowed existing compaias anonimas to be
governed by the old law in respect to their organization,
methods of transacting business and the rights of the
members among themselves, it was precisely in deference to
the vested rights already acquired by the entity and its
members at the time the Corporation Law was enacted. But
we do not agree with Petitioner Benguet (and here lies the
second issue in this appeal) that the possibility to extend its
corporate life under the Code of Commerce constituted a right
already vested when Act No. 1459 was adopted. At that time,
Benguets existence was well within the 50 years period set in
its articles of association; and its members had not entered
into any agreement that such period should be extended. It is
safe to say that none of the members of Benguet anticipated
in 1906 any need to reach an agreement to increase the term
of its corporate life, barely three years after it had started.
The prorogation was purely speculative; a mere possibility
that could not be taken for granted. It was as yet conditional,
depending upon the ultimate decision of the members and
directors. They might agree to extend Benguets existence
beyond the original 50 years; or again they might not. It must
be remembered that in 1906, the success of Benguet in its
mining ventures was by no means so certain as to warrant
continuation of its operations beyond the 50 years set in its
articles. The records of this Court show that Benguet ran into
financial difficulties in the early part of its existence, to the
extent that, as late as 1913, ten years after it was found,
301,100 shares of its capital stock (with a par value of $1 per
share) were being offered for sale at 25 centavos per share in
order to raise the sum of P75,000 that was needed to
rehabilitate the company (Hanlon vs. Hausermann and Beam,
40 Phil., 796). Certainly the prolongation of the corporate
existence of Benguet in 1906 was merely a possibility in
futuro, a contingency that did not fulfill the requirements of a
vested right entitled to constitutional protection, defined by
this Court in Balboa vs. Farrales, 51 Phil., 498, 502, as follows:
Vested right is some right or interest in the property which
has become fixed and established, and is no longer open to
doubt or controversy,
A vested right is defined to be an immediate fixed right of
present or future enjoyment, and rights are vested in
contradistinction to being expectant or contingent (Pearsall
vs. Great Northern R. Co., 161 U. S. 646, 40 L. Ed. 838).
In Corpus Juris Secundum we find:
Rights are vested when the right to enjoyment, present or
prospective, has become the property of some particular
person or persons as a present interest. The right must be
absolute, complete, and unconditional, independent of a
contingency, and a mere expectancy of future benefit, or a
contingent interest in property founded on anticipated
continuance of existing laws, does not constitute a vested
right. So, inchoate rights which have not been acted on are
not vested. (16C.J. S. 214-215.)
Since there was no agreement as yet to extend the period of
Benguets corporate existence (beyond the original 50 years)
when the Corporation Law was adopted in 1906, neither
Benguet nor its members had any actual or vested right to
such extension at that time. Therefore, when the Corporation
Law, by section 18, forbade extensions of corporate life,
neither Benguet nor its members were deprived of any actual
or fixed right constitutionally protected.
To hold, as Petitioner Benguet asks, that the legislative power
could not deprive Benguet or its members of the possibility to
enter at some indefinite future time into an agreement to
extend Benguets corporate life, solely because such
agreements were authorized by the Code of Commerce, would
be tantamount to saying that the said Code was irrepealable
on that point. It is a well settled rule that no person has a
vested interest in any rule of law entitling him to insist that it
shall remain unchanged for his benefit. (New York C. R. Co. vs.
White, 61 L. Ed (U.S.) 667; Mondou vs. New York N. H. & H. R.
Co., 56 L. Ed. 327; Rainey vs. U. S., 58 L. Ed. 617; Lilly Co. vs.
Saunders, 125 ALR. 1308; Shea vs. Olson, 111 ALR. 998).
There can be no vested right in the continued existence of a
statute or rule of the common law which precludes its change
or repeal, nor in any omission to legislate on a particular

matter or subject. Any right conferred by statute may be

taken away by statute before it has become vested, but after
a right has vested, repeal of the statute or ordinance which
created the right does not and cannot affect much right.
(16 C.J. S. 222-223.)
It is a general rule of constitutional law that a person has no
vested right in statutory privileges and exemptions (Brearly
School vs. Ward, 201 NY. 358, 40 LRA NS. 1215; also, Cooley,
Constitutional Limitations, 7th ed., p. 546).
It is not amiss to recall here that after Act No. 1459 the
Legislature found it advisable to impress further restrictions
upon the power of corporations to deal in public lands, or to
hold real estate beyond a maximum area; and to prohibit any
corporation from endeavouring to control or hold more than
15 per cent of the voting stock of an agricultural or mining
corporation (Act No. 3518). These prohibitions are so closely
integrated with our public policy that Commonwealth Act No.
219 sought to extend such restrictions to associations of all
kinds. It would be subversive of that policy to enable Benguet
to prolong its peculiar status of sociedad anonimas, and
enable it to cast doubt and uncertainty on whether it is, or
not, subject to those restrictions on corporate power, as it
once endeavoured to do in the previous case of Harden vs.
Benguet Mining Corp. 58 Phil., 149.
Stress has been laid upon the fact that the Compaia
Maritima (like Benguet, a sociedad anonima established
before the enactment of the Corporation Law) has been twice
permitted to extend its corporate existence by amendment of
its articles of association, without objection from the officers
of the defunct Bureau of Commerce and Industry, then in
charge of the enforcement of the Corporation Laws, although
the exact question was never raised then. Be that as it may, it
is a well established rule in this jurisdiction that the
government is never estopped by mistake or error on the part
of its agents (Pineda vs. Court of First Instance of Tayabas, 52
Phil., 803, 807), and that estopped cannot give validity to an
act that is prohibited by law or is against public policy
(Eugenio vs. Perdido, (97 Phil., 41, May 19, 1955; 19 Am. Jur.
802); so that the Respondent, Securities and Exchange
Commissioner, was not bound by the rulings of his
predecessor if they be inconsistent with law. Much less could
erroneous decisions of executive officers bind this Court and
induce it to sanction an unwarranted interpretation or
application of legal principles.
We now turn to the third and last issue of this appeal,
concerning the exercise of the option granted by section 75 of
the Corporation Law to every sociedad anonima formed,
organized and existing under the laws of the Philippines on
the date of the passage of this Act to either continue
business as such sociedad anonima or to reform and organize
under the provisions of the Corporation Law. PetitionerAppellant Benguet contends that as the law does not
determine the period within which such option may be
exercised, Benguet may exercise it at any time during its
corporate existence; and that in fact on June 22, 1953, it
chose to reform itself into a corporation for a period of 50
years from that date, filing the corresponding papers and bylaws with the Respondent Commissioner of Securities and
Exchange registration; but the latter refused to accept them
as belatedly made.
The Petitioners argument proceeds from the unexpressed
assumption that Benguet, as sociedad anonima, had not
exercised the option given by section 75 of the Corporation
Law until 1953. This we find to be incorrect. Under that
section, by continuing to do business as sociedad anonima,
Benguet in fact rejected the alternative to reform as a
corporation under Act No. 1459. It will be noted from the text
of section 75 (quoted earlier in this opinion) that no special
act or manifestation is required by the law from the existing
sociedades anonimas that prefer to remain and continue as
such. It is when they choose to reform and organize under the
Corporation Law that they must, in the words of the section,
transfer all corporate interests to the new corporation.
Hence if they do not so transfer, the sociedades anonimas
affected are to be understood to have elected the alternative
to continue business as such corporation (sociedad
anonima) 2
The election of Benguet to remain a sociedad anonima after
the enactment of the Corporation Law is evidence, not only by
its failure, from 1906 to 1953, to adopt the alternative to
transfer its corporate interests to a new corporation, as
required by section 75; it also appears from positive acts.
Thus around 1933, Benguet claimed and defended in court its
acquisition of shares of the capital stock of the Balatoc Mining
Company, on the ground that as a sociedad anonima it
(Benguet) was not a corporation within the purview of the
laws prohibiting a mining corporation from becoming

23
interested in another mining corporation (Harden vs. Benguet
Mining Corp., 58 Phil., p. 149). Even in the present
proceedings, Benguet has urged its right to amend its original
articles of association as sociedad anonima and extend its
life as such under the provisions of the Spanish Code of
Commerce. Such appeals to privileges as sociedad anonima
under the Code of 1886 necessarily imply that Benguet has
rejected the alternative of reforming under the Corporation
Law. As Respondent Commissioners order, now under appeal,
has stated
A sociedad anonima could not claim the benefit of both, but
must have to choose one and discard the other. If it elected to
become a corporation it could not continue as a sociedad
anonima; and if it choose to remain as a sociedad anonima, it
could not become a corporation.
Having thus made its choice, Benguet may not now go back
and seek to change its position and adopt the reformation
that it had formerly repudiated. The election of one of several
alternatives is irrevocable once made (as now expressly
recognized in article 940 of the new Civil Code of the
Philippines):
Such rule is inherent in the nature of the choice, its purpose
being to clarify and render definite the rights of the one
exercising the option, so that other persons may act in
consequence. While successive choices may be provided
there is nothing in section 75 of the Corporation Law to show
or hint that a sociedad anonima may make more than one
choice thereunder, since only one option is provided for.
While no express period of time is fixed by the law within
which sociedades anonimas may elect under section 75 of Act
No. 1459 either to reform or to retain their status quo, there
are powerful reasons to conclude that the legislature intended
such choice to be made within a reasonable time from the
effectivity of the Act. To enable a sociedad anonima to choose
reformation when its stipulated period of existence is nearly
ended, would be to allow it to enjoy a term of existence far
longer than that granted to corporations organized under the
Corporation Law; in Benguets case, 50 years as sociedad
anonima, and another 50 years as an American type of
corporation under Act 1459; a result incompatible with the
avowed purpose of the Act to hasten the disappearance of the
sociedades anonimas. Moreover, such belated election, if
permitted, would enable sociedades anonimas to reap the full
advantage of both types of organization. Finally, it would
permit sociedades anonimas to prolong their corporate
existence indirectly by belated reformation into corporations
under Act No. 1459, when they could not do so directly by
amending their articles of association.
Much stress is laid upon allegedly improper motives on the
part of the intervenor, Consolidated Mines, Inc., in supporting
the orders appealed from, on the ground that intervenor seeks
to terminate Benguets operating contract and appropriate
the profits that are the result of Benguets efforts in
developing the mines of the intervenor. Suffice it to say that
whatever such motives should be, they are wholly irrelevant
to the issues in this appeal, that exclusively concern the legal
soundness of the order of the Respondent Securities and
Exchange Commissioner rejecting the claims of the Benguet
Consolidated Mining Company to extend its corporate life.
Neither are we impressed by the prophesies of economic
chaos that would allegedly ensure with the cessation of
Benguets activities. If its mining properties are really
susceptible of profitable operation, inexorable economic laws
will ensure their exploitation; if, on the other hand, they can
no longer be worked at a profit, then catastrophe becomes
inevitable, whether or not Petitioner Benguet retains
corporate existence.
Sustaining the opinions of the Respondent Securities and
Exchange Commissioner and of the Secretary of Justice, we
rule that:
(1) The prohibition contained in section 18 of Act No. 1459,
against extending the period of corporate existence by
amendment of the original articles, was intended to apply,
and does apply, to sociedades anonimas already formed,
organized and existing at the time of the effectivity of the
Corporation Law (Act No. 1459) in 1906;
(2) The statutory prohibition is valid and impairs no vested
rights or constitutional inhibition where no agreement to
extend the original period of corporate life was perfected
before the enactment of the Corporation Law;
(3) A sociedad anonima, existing before the Corporation Law,
that continues to do business as such for a reasonable time
after its enactments, is deemed to have made its election and

may not subsequently claim to reform into a corporation

under section 75 of Act No. 1459.
In view of the foregoing, the order appealed from is affirmed.
Costs against Petitioner-Appellant Benguet Consolidated
Mining Company.

Separate Opinions
PARAS, C.J., dissenting:
The Petitioner, Benguet Consolidated Mining Company, was
organized as a sociedad anonima on June 24, 1903, under the
provisions of the Code of Commerce, and its term as fixed in
the articles of association was fifty years. It has been a
leading enterprise, long and widely reputed to have pioneered
in and boosted the mining industry, distributed profits among
its shareholders, and given employment to thousands. To be
more approximately exact, the Petitioner has kept on its
payrolls over four thousand Filipino employees who have
about twenty thousand dependents. The taxes and other dues
paid by it to the Government have been in enormous
amounts. It has always been subject to such supervision and
control of Government officials as are prescribed by law.
When, therefore, the Petitioner on June 3, 1953, presented all
necessary documents to theRespondent, the Securities and
Exchange Commissioner, with a view to the extension of its
term as a sociedad anonima for a period of fifty years from
June 15, 1953; when on June 22, 1953, it filed with
said Respondent the necessary articles of incorporation and
other documents, with a view to reforming itself as a
corporation under the Corporation Law for a period of fifty
years from June 22, 1953, followed by the filing on July 22,
1953, of the corresponding by-laws; and when on October 27,
1953,
the Respondent issued
an
order
denying
the
registration of the instruments as well for extension as for
reformation, Petitioners corporate life was being snapped out
with such lightning abruptness as undoubtedly to spell
damage and prejudice not so much to its shareholders as to
its beneficiaries thousands of employees and their
dependents and even to the Government which stands to
lose a good source of revenue.
The Petitioner contends (1) that the Respondent had the
ministerial duty of registering the documents presented either
for extension of Petitioners term as a sociedad anonima or for
its reformation under the Corporation Law, in the absence (as
in this case) of any pretense that said documents are formally
defective or that Petitioners purposes are unlawful; and (2)
that as thePetitioner had organized as a sociedad anonima
under the Code of Commerce, it has acquired a vested right
which cannot subsequently be affected or taken away by the
Corporation Law enacted on April 1, 1906. I would not dwell
upon these contentions, because I hold that, even under the
provisions of the Corporation Law, the Petitioner may either
extend its life as a sociedad anonima or reform as a
corporation.
Section 75 of the Corporation Law provides:
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.
Upon the other hand, section 191 reads as follows:
The Code of Commerce, in so far as it relates to corporations
or sociedades anonimas, and all other or parts of Acts in
conflict or inconsistent with this Act, are hereby repealed
And provided, further, That existing corporations or
sociedades anonimas lawfully organized as such, which elect
to continue their business as such sociedades anonimas
instead of reforming and reorganizing under and by virtue of
the provisions of this Act, shall continue to be governed by the
laws that were in force prior to the passage of this Act 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 the provisions of this Act.
It is noteworthy that section 75 has not limited the optional
continuance of a sociedad anonima to its unexpired term, and

24
section 191 expressly allows a sociedad anonima which has
elected to continue its business as such to be governed by the
laws in force prior to the enactment of the Corporation Law in
relation to its organization and method of transacting business
and to the rights of members as between themselves. It is
admitted that the Code of Commerce, while containing no
express provision allowing it, does not prohibit a sociedad
anonima
from
extending
its
term; chan
roblesvirtualawlibraryand commentators Gay de Montella
(Tratado Practico de Sociedad Marcantiles Compaias
Anonimas, Tomo II, p. 285) and Cesar Vivante (Tratado de
Derecho Mercantil, pp. 254, 258) have observed that a
sociedad anonima may prolong its corporate duration by
amendment of its articles of association before the expiration
of the term.
When a business or commercial association is organized, the
members are naturally interested in knowing not only their
rights and obligations but also the duration of their legal
relations. While organization in a strict sense may refer to
formalities like election of officers, adoption of by-laws, and
subscription and payment of capital stock, it cannot be spoken
of or conceived in a wider sense without necessarily involving
the specification of the term of the entity formed. Extension of
corporation life is thus essentially an incident of organization
and, in any event, a matter directly affecting or in relation to
the rights of the shareholders as between themselves, within
the contemplation of section 191, and should accordingly be
governed by the Code of Commerce. As pointed out by the
Supreme Court of Wyoming in the case of Drew vs. Beckwith,
(114 P. 2d. 98), extension merely involves an additional
privilege to carry out the business of enterprise undertaken by
the corporation, and is but an enlargement of the enterprise
undertaken by the corporation. It is true that the duration of
a sociedad anonima is of some concern to the public and
public officials who ought to know the time when it will cease
to exist and its business will be wound up. Notice to the world
is however served by the registration of Petitioners articles of
association as a sociedad anonima or articles of incorporation
as a reformed corporation with the Securities and Exchange
Commission.
When section 191 mentions relations to the public and public
officials as being governed by the provisions of the
Corporation Law, the idea is obviously more to enable the
Government to enforce its powers of supervision, inspection
and investigation, than to restrict the freedom of the
corporate entity as to organizational or substantive rights of
members as between themselves. In one of the public
hearings conducted by the Philippine Commission before the
enactment of the Corporation Law, Commissioner Ide
pertinently expressed, Of course, whether they (sociedades)
come under the new law or not they would be subject to
inspection, regulations, and examination for the purpose of
protecting the community. The Attorney General in turn held
that sociedades anonimas, although governed by the Code of
Commerce, are subject to the examination provided in section
54 of the Corporation Law (5 Op. Atty. Gen. 442). In this
connection, the Petitioner has admittedly subjected itself to
the provisions of the Corporation Law.
In Harden vs. Benguet Consolidated Mining Co., 58 Phil., 141,
it was remarked:
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. This Court already indicated that the
commercial entities compelled to incorporate under the
Corporation Law were those organized after its enactment.
Section 6, subsection 4, of the Corporation Law provides that
the term for which corporations shall exist shall not exceed
fifty years;
Section 18 provides that the life of a corporation shall not be
extended by amendment beyond the time fixed in the original
articles; and section 11 provides that upon the issuance by
the Securities and Exchange Commissioner of the certificate
of incorporation, the persons organizing the corporation shall
constitute a body politic and corporate for the term specified
in the articles of incorporation, not exceeding fifty years. The
corporations contemplated are those defined in section 22
corporations organized under the Corporation Law. They
cannot be sociedades anonimas formed under the Code of
Commerce and licensed to continue as such in virtue of
sections 75 and 191. Otherwise the words or sociedad
anonima would have been added to the term corporation in
section 18, as was done in sections 75 and 191. A similar
observation was made in Harden vs. Benguet Consolidated
Mining Co., supra:

But when the word corporation is used in the sense of

sociedad anonima and close discrimination is necessary, it
should be associated with the Spanish expression sociedad
anonima either in parenthesis or connected by the word or.
This latter device was adopted in sections 75 and 191 of the
Corporation Law.
The citation from 3 Benito, Derecho Mercantil, p. 245, invoked
in the majority decision, to the effect that the duration of a
sociedad anonima is of interest both to its members and to
third persons, is clearly an authority for our conclusions that
the extension of Petitioners term is in relation to the rights
of members thereof as between themselves. Section 191
does not say that a sociedad anonima shall be governed by
the provisions of the Corporation Law when the matter
involved affects not only the rights of members thereof as
between themselves but also the public and public
officials.
We are also of the opinion that alternatively, under section 75,
the Petitioner may elect to reform and organize under the
Corporation Law, transferring all its corporate interests to the
new corporation. Contrary to the ruling of the Respondent, we
are convinced that, as no period was fixed within which it
should exercise the option either of continuing as a sociedad
anonima or reforming and organizing under the Corporation
Law, the Petitioner was entitled to have its articles of
incorporation and by-laws presented respectively on June 22
and July 22, 1953, registered by the Respondent. Section 75
did not take away Petitioners right to exhaust its term as a
sociedad anonima, already vested before the enactment of
the Corporation Law, but merely granted it the choice to
organize as a regular corporation, instead of extending its life
as a sociedad anonima. The only limitation imposed is that
prescribed in section 191, namely, that if a sociedad anonima
elects to continue its business as such, it shall be governed by
the prior law in relation to its organization and method of
transacting business and to the rights of its members as
between themselves, and by the provisions of the Corporation
Law as to its relations to the public and public officials. If the
intention were to fix a period for reformation, the law would
have expressly so provided, in the same way that section 19
fixes two years during which a corporation should formally
organize and commence the transaction of its business,
otherwise its corporate powers would cease;
Section 77 fixes three years from the dissolution of a
corporation within which it may clear and settle its affairs;
And section 78 fixes the same period of three years within
which a corporation may convey its properties to a trustee for
the benefit of its stockholders and other interested persons.
It is not correct to argue that the Petitioner is not entitled to
elect to continue as a sociedad anonima and at the same time
reform and organize as a regular corporation, because when it
continued as a sociedad anonima after the passage of the
Corporation Law and during its full term of fifty years, it
merely exercised a right it theretofore had;
and
the Petitioner can be said properly to have availed itself of the
other option only when in June 1953 it filed the necessary
papers of incorporation under the Corporation Law. It is
likewise
not
accurate
to
contend
that,
as
the Respondent ruled, the Petitioner could reform as and be a
regular corporation at most only for the remainder of its term
as a sociedad anonima. Section 75, in allowing a sociedad
anonima to reform and organize under the Corporation Law,
also authorizes the transfer of its corporate interests to the
new corporation. This new corporation should have the
advantage of the prescribed maximum duration, regardless of
the original term of the old or substituted entity. There is no
basis for the criticism that, if the Petitioner were allowed to
exhaust its full term as a sociedad anonima, and afterwards to
reform as a regular corporation for another fifty years, it
would have a span of life twice as long as that granted to
corporations organized under the Corporation Law. The simple
reason is that the Petitioner was already a corporate entity
before the enactment of the Corporation Law, with a fixed
duration under its original articles of association. It was clearly
not in parity with any corporation organized under and coming
into existence after the effectivity of the Corporation Law
which has no choice on the matter and can therefore have
only the prerogative granted by said law, no more no less.
The Respondent has suggested that the Petitioner, if desirous
of continuing its business, may organize a new corporation
a suggestion which need not be made because no one would
probably think of denying it that right. But we cannot see any
cogent reason or practical purpose for the suggestion. In the
first place, the filing of Petitioners articles of incorporation
and by-laws in July, 1953, in effect amounted to the formation
of a new corporation. To require more is to give greater
importance to form than to substance. In the second place,

25
the public and public officials may not as a matter of fact be
adversely affected by allowing the Petitioner to reform,
instead of requiring it technically to form a new corporation. It
will acquire no greater rights or obligations by simple
reformation than by newly organizing another corporation.
Conversely, the public and public officials will acquire no
greater benefit or control by requiring the Petitioner to form a
new corporation, than by allowing it to reform. And as already
stated, whatever interest the public and public officials may
have in determining the duration of a sociedad anonima or
any corporation for that matter, is amply protected by
registration in the Securities and Exchange Commission.
The Respondent and the intervenor, Consolidated Mines, Inc.,
have tried to show that the Petitioner holds or owns interests
in eight mining companies, in violation of section 13,
subsection 5 of the Corporation Law, in that it has operating
contracts with the intervenor and seven other mining
companies, besides owning the majority shares in Balatoc
Mining Co. This matter has not merited any attention or
favorable comment in the majority decision, and rightly of
course. Even so, we may observe that the alleged violation
was not the subject of any finding by the Respondent, nor
relied upon in his order of denial; that the Petitioner has
denied the charge; that the holding by the Petitioner of
shares of stock in Balatoc Mining Co., if really illegal, may look
into only in a quo warranto proceeding instituted by the
Government; that at any rate the Petitioner has always been
ready and willing to dispose of said shares and, in a proper
proceeding, it should be given reasonable time to do so, as
this Court gave the Philippine Sugar Estates a period of six
months after final decision within which to liquidate, dissolve
and separate absolutely in every respect and in all of its
relations, complained of in the petition, with the Tayabas Land
Company (Government vs. Philippine Sugar Estates Co., 38
Phil., 15).
With special reference to the intervenor, it may be of some
moment to know the antecedents and nature of business
relations existing between it and the Petitioner, at least to
demonstrate the righteousness of the position of one or the
other even from a factual point of view. The following excerpts
from Petitioners Reply to a portion of Intervenors Brief are
in point:
What has happened in our case is that prior to the execution
of the Operating Agreement of July 9, 1934, the stockholders,
directors, and officers of the intervenor, Consolidated Mines,
Inc., did not want to risk one centavo of their own funds for
the development of their chrome ore mining claims in
Zambales province, and proposed to the Petitioner herein,
Benguet Consolidated Mining Company, to explore, develop
and operate their mining claims, Benguet to furnish all the
funds that might be necessary, and to explore, develop, mine
and concentrate and market all the pay are found on or
within paid claims or properties, the intervenor, Consolidated
Mines, Inc., and the Petitioner, Benguet Consolidated Mining
Company, after the latter had reimbursed itself for all its
advances, to divide half and half the excess of receipts over
disbursements. Benguet agreed to it, and advanced
approximately three million pesos, one-half thereof before the
war, and the other half after the war (the intervenors
properties having been destroyed during the war). Paragraph
XII of the intervenors complaint in the civil action instituted
by it against Benguet in the Court of First Instance of Manila,
No. 18938, and to which counsel for the intervenor refer in
page 5 of their brief, makes mention of the large sums of
money that Benguet advanced, as follows:
Initial advances amounting to approximately P1,500,000
made by Defendant during the first phases of said Operating
Agreement which had been fully reimbursed to it before the
war, end of the amounts likewise advanced by it (Benguet) for
rehabilitation amounting to close P1,500,000.00.
While Benguet risked and poured approximately three million
pesos (P3,000,000) into the venture, and while Benguet was
looking for, and establishing, a market for intervenors chrome
ore, the intervenor, Consolidated Mines, Inc., considered the
said Operating Agreement of July 9, 1934, as valid. Now that
Benguets efforts have been crowned with success, and
Benguet has established a market for intervenors chrome
ore, the intervenor claims that its said operating Agreement of
July 9, 1934, with the Petitioner, Benguet, is contrary to law
because Benguet has become interested in intervenors
chrome ore mining claims (although the agreement expressly
states that Benguet has no interest therein), and objects to
the registration of the documents which Benguet filed with
the Respondent Securities and Exchange Commissioner,
extending its life as a sociedad anonima, and reforming itself s
a corporation, in accordance with the provisions of section 75
of the Corporation Law.

Under the foregoing facts, the intervenor, Consolidated

Mines, Inc., cannot be heard to complain against Benguet. No
court can give now a helping hand to the intervenor, which
claims that Benguet no longer lives, and wants to keep for
itself all the products of Benguets efforts after the latter
risked into the venture approximately three million pesos
(P3,000,000).
The foregoing considerations may not constitute a legal
justification for ruling that the Petitionershould be allowed
either to extend its life as a sociedad anonima or to reform
and organize under the provisions of the Corporation Law, but
they may aid in resolving in Petitioners favor and doubt as to
the clarity or definiteness of sections 75 and 191 of the
Corporation Law regarding its right to exercise either option in
the manner claimed by it.
The same result may be arrived at if, in addition, we bear in
mind the possible economic harm that may be brought about
by the affirmance of the order complained of. This aspect is
adequately touched in Petitioners brief, as follows:
1. A loss of employment in the Baguio district by about
4,000 Filipino and a loss of direct living from the Benguet
operation supplied to 20,000, that is, the 4,000 employed and
their dependents.
(a) This would be calamity to the district of the highest order
which could very well produce a snow balling depression
which could react all over the Philippine Islands.
2. Losses of direct and indirect taxes to the Philippine
Government in an extremely large yearly amount.
3. No one would be able to continue the Benguet and
Balatoc mines in operation should a liquidation of Benguet
take place because the net profits after labor and material
costs and taxes in the last two years or more from the gold
mining operations have not warranted their continued
operation as independent units. The profits in 1953 certainly
do not warrant it. It is merely a case of taking gold out of the
ground in order to pay for labor, materials and taxes with very
little return to the stockholders and on the huge investment
made in the reconstruction since 1946.
(a) The relief provided by the elimination of the 17 per cent
Excise Tax, the 7 per cent Compensating Tax and the lowering
of the Extraction Tax, when counter-balanced against
consistently increasing costs from month to month up to this
very month, is now nothing but an offsetting item against
constantly increasing costs.
For whatever persuasive effect it may have, we cannot help
calling attention to the fact that there are only about nine
sociedades anonimas in the country, foremost among them
being Compaia Maritima, which have existed for years and
along with the Petitioner figured prominently in our economic
development. Compaia Maritima, in particular, has been
twice allowed to extend its life by amendment of its articles of
incorporation. It may be argued that if there was an official
mistake in acceding to the extension of the term of Compaia
Maritima, the same should not warrant the commission of
another mistake. But it will go to show that sections 75 and
191 of the Corporation Law are, on the points herein involved,
of doubtful construction; and it is for this reason that we had
to advert hereinabove to the somewhat unequitable position
of the intervenor and to the possible adverse effect on
Philippine economy of the abrupt termination ofPetitioners
corporate existence.
By and large, it is my considered opinion that
the Respondents order of denial dated October 27, 1953,
should be reversed and the Respondent ordered to register at
least the documents presented by the Petitioner, reforming
and organizing itself as a corporation under the provisions of
the Corporation Law. This would be in line with the policy of
doing away with sociedad anonimas, at the same time saving
the goose that lays the golden egg.

Endnotes:
2. It must be remembered that sections 75 and 191 of the
Corporation law use the phrase corporation or sociedad
anonima thus employing corporation as the equivalent
legal designation in English of the Spanish term sociedad
anonima, in designating the same entity. See Harden vs.
Benguet Cons. Mining Co., 58 Phil., p. 146.

EN BANC

26
G.R. No. L-23606

July 29, 1968

ALHAMBRA CIGAR & CIGARETTE MANUFACTURING

COMPANY, INC., Petitioner, vs.SECURITIES & EXCHANGE
COMMISSION, Respondent.
To the question - May a corporation extend its life by
amendment of its articles of incorporation effected during the
three-year statutory period for liquidation when its original
term of existence had already expired? - the answer of the
Securities and Exchange Commissioner was in the negative.
Offshoot is this appeal.
That problem emerged out of the following controlling
facts:chanrobles virtual law library
Petitioner Alhambra Cigar and Cigarette Manufacturing
Company, Inc. (hereinafter referred to simply as Alhambra)
was duly incorporated under Philippine laws on January 15,
1912. By its corporate articles it was to exist for fifty (50)
years from incorporation. Its term of existence expired on
January 15, 1962. On that date, it ceased transacting
business, entered into a state of liquidation.
Thereafter, a new corporation. - Alhambra Industries, Inc. was formed to carry on the business of Alhambra.
On May 1, 1962, Alhambra's stockholders, by resolution
named Angel S. Gamboa trustee to take charge of its
liquidation.
On June 20, 1963 - within Alhambra's three-year statutory
period for liquidation - Republic Act 3531 was enacted into
law. It amended Section 18 of the Corporation Law; it
empowered domestic private corporations to extend their
corporate life beyond the period fixed by the articles of
incorporation for a term not to exceed fifty years in any one
instance. Previous to Republic Act 3531, the maximum nonextendible term of such corporations was fifty years.
On July 15, 1963, at a special meeting, Alhambra's board of
directors resolved to amend paragraph "Fourth" of its articles
of incorporation to extend its corporate life for an additional
fifty years, or a total of 100 years from its incorporation.
On August 26, 1963, Alhambra's stockholders, representing
more than two-thirds of its subscribed capital stock, voted to
approve the foregoing resolution. The "Fourth" paragraph of
Alhambra's articles of incorporation was thus altered to read:
FOURTH. That the term for which said corporation is to exist is
fifty (50) years from and after the date of incorporation, and
for an additional period of fifty (50) years thereafter.
On October 28, 1963, Alhambra's articles of incorporation as
so amended certified correct by its president and secretary
and a majority of its board of directors, were filed with
respondent Securities and Exchange Commission (SEC).
On November 18, 1963, SEC, however, returned said
amended articles of incorporation to Alhambra's counsel with
the ruling that Republic Act 3531 "which took effect only on
June 20, 1963, cannot be availed of by the said corporation,
for the reason that its term of existence had already expired
when the said law took effect in short, said law has no
retroactive effect."
On December 3, 1963, Alhambra's counsel sought
reconsideration of SEC's ruling aforesaid, refiled the amended
articles of incorporation.
On September 8, 1964, SEC, after a conference hearing,
issued an order denying the reconsideration sought.

Alhambra now invokes the jurisdiction of this Court to

overturn the conclusion below.1chanrobles virtual law library
1. Alhambra relies on Republic Act 3531, which amended
Section 18 of the Corporation Law. Well it is to take note of the
old and the new statutes as they are framed. Section 18, prior
to and after its modification by Republic Act 3531, covers the
subject of amendment of the articles of incorporation of
private corporations. A provision thereof which remains
unaltered is that a corporation may amend its articles of
incorporation "by a majority vote of its board of directors or
trustees and ... by the vote or written assent of the
stockholders representing at least two-thirds of the subscribed
capital stock ... "
But prior to amendment by Republic Act 3531, an explicit
prohibition existed in Section 18, thus:
... Provided, however, That the life of said corporation shall
not be extended by said amendment beyond the time fixed in
the original articles: ...
This was displaced by Republic Act 3531 which enfranchises
all private corporations to extend their corporate existence.
Thus incorporated into the structure of Section 18 are the
following:
... Provided, however, That should the amendment consist in
extending the corporate life, the extension shall not exceed
fifty years in any one instance: Provided, further, That the
original articles, and amended articles together shall contain
all provisions required by law to be set out in the articles of
incorporation: ...
As we look in retrospect at the facts, we find these: From July
15 to October 28, 1963, when Alhambra made its attempt to
extend its corporate existence, its original term of fifty years
had already expired (January 15, 1962); it was in the midst of
the three-year grace period statutorily fixed in Section 77 of
the Corporation Law, thus: .
SEC. 77. Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or whose
corporate existence for other purposes is terminated in any
other manner, shall nevertheless be continued as a body
corporate for three years after the time when it would have
been so dissolved, for the purpose of prosecuting and
defending suits by or against it and of enabling it gradually to
settle and close its affairs, to dispose of and convey its
property and to divide its capital stock, but not for the
purpose of continuing the business for which it was
established.2
Plain from the language of the provision is its meaning:
continuance of a "dissolved" corporation as a body corporate
for three years has for its purpose the final closure of its
affairs, and no other; the corporation is specifically enjoined
from "continuing the business for which it was established".
The liquidation of the corporation's affairs set forth in Section
77 became necessary precisely because its life had ended. For
this reason alone, the corporate existence and juridical
personality of that corporation to do business may no longer
be extended.
Worth bearing in mind, at this juncture, is the basic
development of corporation law.
The common law rule, at the beginning, was rigid and
inflexible in that upon its dissolution, a corporation became
legally dead for all purposes. Statutory authorizations had to
be provided for its continuance after dissolution "for limited
and specified purposes incident to complete liquidation of its
affairs".3 Thus, the moment a corporation's right to exist as an
"artificial person" ceases, its corporate powers are terminated
"just as the powers of a natural person to take part in
mundane affairs cease to exist upon his death". 4 There is

27
nothing left but to conduct, as it were, the settlement of the
estate of a deceased juridical person.
2. Republic Act 3531, amending Section 18 of the Corporation
Law, is silent, it is true, as to when such act of extension may
be made. But even with a superficial knowledge of corporate
principles, it does not take much effort to reach a correct
conclusion. For, implicit in Section 77 heretofore quoted is that
the privilege given to prolong corporate life under the
amendment must be exercised before the expiry of the term
fixed in the articles of incorporation.
Silence of the law on the matter is not hard to understand.
Specificity is not really necessary. The authority to prolong
corporate life was inserted by Republic Act 3531 into a section
of the law that deals with the power of a corporation
to amend its articles of incorporation. (For, the manner of
prolongation is through an amendment of the articles.) And it
should be clearly evident that under Section 77 no corporation
in a state of liquidation can act in any way, much less amend
its articles, "for the purpose of continuing the business for
which it was established".
All these dilute Alhambra's position that it could revivify its
corporate life simply because when it attempted to do so,
Alhambra was still in the process of liquidation. It is surely
impermissible for us to stretch the law - that merely
empowers a corporation to act in liquidation - to inject therein
the power to extend its corporate existence.
3. Not that we are alone in this view. Fletcher has written:
"Since the privilege of extension is purely statutory, all of the
statutory conditions precedent must be complied with in order
that the extension may be effectuated. And, generally these
conditions must be complied with, and the steps necessary to
effect the extension must be taken,during the life of the
corporation, and before the expiration of the term of
existence as original fixed by its charter or the general law,
since, as a rule, the corporation is ipso facto dissolved as soon
as that time expires. So where the extension is by
amendment of the articles of incorporation, the amendment
must be adopted before that time. And, similarly, the filing
and recording of a certificate of extension after that time
cannot relate back to the date of the passage of a resolution
by the stockholders in favor of the extension so as to save the
life of the corporation. The contrary is true, however, and the
doctrine of relation will apply, where the delay 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. And
statutes in some states specifically provide that a renewal
may be had within a specified time before or after the time
fixed for the termination of the corporate existence". 5
The logic of this position is well expressed in a foursquare
case decided by the Court of Appeals of Kentucky. 6 There,
pronouncement was made as follows:
... But section 561 (section 2147) provides that, when any
corporation expires by the terms of its articles of
incorporation, it may be thereafter continued to act for the
purpose of closing up its business, but for no other purpose.
The corporate life of the Home Building Association expired on
May 3, 1905. After that date, by the mandate of the statute, it
could continue to act for the purpose of closing up its
business, but for no other purpose. The proposed amendment
was not made until January 16, 1908, or nearly three years
after the corporation expired by the terms of the articles of
incorporation. When the corporate life of the corporation was
ended, there was nothing to extend. Here it was proposed
nearly three years after the corporate life of the association
had expired to revivify the dead body, and to make that relate
back some two years and eight months. In other words, the
association for two years and eight months had only existed
for the purpose of winding up its business, and, after this
length of time, it was proposed to revivify it and make it a live
corporation for the two years and eight months daring which
it had not been such.

The law gives a certain length of time for the filing of records
in this court, and provides that the time may be extended by
the court, but under this provision it has uniformly been held
that when the time was expired, there is nothing to extend,
and that the appeal must be dismissed... So, when the articles
of a corporation have expired, it is too late to adopt an
amendment extending the life of a corporation; for, the
corporation having expired, this is in effect to create a new
corporation ..."7
True it is, that the Alabama Supreme Court has stated in one
case.8 that a corporation empowered by statute to renew its
corporate existence may do so even after the expiration of its
corporate life, provided renewal is taken advantage of within
the extended statutory period for purposes of liquidation. That
ruling, however, is inherently weak as persuasive authority for
the situation at bar for at least two reasons: First. That case
was a suit for mandamus to compel a former corporate officer
to turn over books and records that came into his possession
and control by virtue of his office. It was there held that such
officer was obliged to surrender his books and records even if
the corporation had already expired. The holding on the
continued existence of the corporation was a mere
dictum. Second. Alabama's law is different. Corporations in
that state were authorized not only to extend but also
to renew their corporate existence.That very case defined the
word "renew" as follows; "To make new again; to restore to
freshness; to make new spiritually; to regenerate; to begin
again; to recommence; to resume; to restore to existence, to
revive; to re-establish; to recreate; to replace; to grant or
obtain an extension of Webster's New International Dict.; 34
Cyc. 1330; Carter v. Brooklyn Life Ins. Co., 110 N.Y. 15, 21, 22,
17 N.E. 396; 54 C.J. 379. Sec".9
On this point, we again draw from Fletcher: "There is a broad
distinction between the extension of a charter and the grant
of a new one. To renew a charter is to revive a charter which
has expired, or, in other words, "to give a new existence to
one which has been forfeited, or which has lost its vitality by
lapse of time". To "extend" a charter is "to increase the time
for the existence of one which would otherwise reach its limit
at an earlier period".10 Nowhere in our statute - Section 18,
Corporation Law, as amended by Republic Act 3531 - do we
find the word "renew" in reference to the authority given to
corporations to protract their lives. Our law limits itself
to extension of corporate existence. And, as so understood,
extension may be made only before the term provided in the
corporate charter expires.
Alhambra draws attention to another case 11 which declares
that until the end of the extended period for liquidation, a
dissolved corporation "does not become an extinguished
entity". But this statement was obviously lifted out of context.
That case dissected the question whether or not suits can be
commenced by or against a corporation within its liquidation
period. Which was answered in the affirmative. For, the
corporation still exists for the settlement of its affairs.
People, ex rel. vs. Green,12 also invoked by Alhambra, is as
unavailing. There, although the corporation amended its
articles to extend its existence at a time when it had no legal
authority yet, it adopted the amended articles later on when it
had the power to extend its life and during its original term
when it could amend its articles.
The foregoing notwithstanding, Alhambra falls back on the
contention that its case is arguably within the purview of the
law. It says that before cessation of its corporate life, it could
not have extended the same, for the simple reason that
Republic Act 3531 had not then become law. It must be
remembered that Republic Act 3531 took effect on June 20,
1963, while the original term of Alhambra's existence expired
before that date - on January 15, 1962. The mischief that
flows from this theory is at once apparent. It would certainly
open the gates for all defunct corporations - whose charters
have expired even long before Republic Act 3531 came into
being - to resuscitate their corporate existence.

28
4. Alhambra brings into argument Republic Act 1932, which
amends Section 196 of the Insurance Act, now reading as
follows:
SEC. 196. Any provision of law to the contrary
notwithstanding, every domestic life insurance corporation,
formed for a limited period under the provisions of its articles
of incorporation, may extend its corporate existence for a
period not exceeding fifty years in any one instance by
amendment to its articles of incorporation on or before the
expiration of the term so fixed in said articles ...
To be observed is that the foregoing statute - unlike Republic
Act 3531 - expressly authorizes domestic insurance
corporations to extend their corporate existence "on or before
the expiration of the term" fixed in their articles of
incorporation. Republic Act 1932 was approved on June 22,
1957, long before the passage of Republic Act 3531 in 1963.
Congress, Alhambra points out, must have been aware of
Republic Act 1932 when it passed Republic Act 3531. Since
the phrase "on or before", etc., was omitted in Republic Act
3531, which contains no similar limitation, it follows,
according to Alhambra, that it is not necessary to extend
corporate existence on or before the expiration of its original
term.
That Republic Act 3531 stands mute as to when extension of
corporate existence may be made, assumes no relevance. We
have already said, in the face of a familiar precept, that a
defunct corporation is bereft of any legal faculty not otherwise
expressly sanctioned by law.
Illuminating here is the explanatory note of H.B. 1774, later
Republic Act 3531 - now in dispute. Its first paragraph states
that "Republic Act No. 1932 allows the automatic extension of
the corporate existence of domestic life insurance
corporations upon amendment of their articles of
incorporation on or before the expiration of the terms fixed by
said articles". The succeeding lines are decisive: "This is a
good law, a sane and sound one. There appears to be no valid
reason why it should not be made to apply to other private
corporations.13
The situation here presented is not one where the law under
consideration is ambiguous, where courts have to put in
harness extrinsic aids such as a look at another statute to
disentangle doubts. It is an elementary rule in legal
hermeneutics that where the terms of the law are clear, no
statutory construction may be permitted. Upon the basic
conceptual scheme under which corporations operate, and
with Section 77 of the Corporation Law particularly in mind,
we find no vagueness in Section 18, as amended by Republic
Act 3531. As we view it, by directing attention to Republic Act
1932, Alhambra would seek to create obscurity in the law;
and, with that, ask of us a ruling that such obscurity be
explained. This, we dare say, cannot be done.
The pari materia rule of statutory construction, in fact,
commands that statutes must be harmonized with each
other.14 So harmonizing, the conclusion is clear that Section
18 of the Corporation Law, as amended by Republic Act 3531
in reference to extensions of corporate existence, is to be read
in the same light as Republic Act 1932. Which means that
domestic corporations in general, as with domestic insurance
companies, can extend corporate existence only on or before
the expiration of the term fixed in their charters.
5. Alhambra pleads for munificence in interpretation, one
which brushes technicalities aside. Bases for this posture are
that Republic Act 3531 is a remedial statute, and that
extension of corporate life is beneficial to the economy.
Alhambra's stance does not induce assent. Expansive
construction is possible only whenthere is something to
expand. At the time of the passage of Republic Act 3531,
Alhambra's corporate life had already expired. It had

overstepped the limits of its limited existence. No life there is

to prolong.
Besides, a new corporation - Alhambra Industries, Inc., with
but slight change in stockholdings15 - has already been
established. Its purpose is to carry on, and it actually does
carry on,16 the business of the dissolved entity. The beneficialeffects argument is off the mark.
The way the whole case shapes up then, the only possible
drawbacks of Alhambra might be that, instead of the new
corporation (Alhambra Industries, Inc.) being written off, the
old one (Alhambra Cigar & Cigarette Manufacturing Company,
Inc.) has to be wound up; and that the old corporate name
cannot be retained fully in its exact form. 17 What is important
though is that the word Alhambra, the name that counts [it
has goodwill], remains.
FOR THE REASONS GIVEN, the ruling of the Securities and
Exchange Commission of November 18, 1963, and its order of
September 8, 1964, both here under review, are hereby
affirmed.
Costs against petitioner Alhambra Cigar
Manufacturing Company, Inc. So ordered.

&

Cigarette

THIRD DIVISION
MAJORITY STOCKHOLDERS OF RUBY INDUSTRIAL
CORPORATION, Petitioners, - versus - MIGUEL
LIM, in his personal capacity as Stockholder of
Ruby Industrial Corporation and representing
the
MINORITY
STOCKHOLDERS
OF
RUBY
INDUSTRIAL
CORPORATION
and
the
MANAGEMENT COMMITTEE OF RUBY INDUSTRIAL
CORPORATION, Respondents.

G.R. No. 165

x- - - - - - - - - - - - - - - - - - - - - - - - - -x
CHINA BANKING CORPORATION, Petitioner, - versus MIGUEL LIM, in his personal capacity as a
stockholder of Ruby Industrial Corporation and
representing the MINORITY STOCKHOLDERS OF
RUBY INDUSTRIAL CORPORATION, Respondents.

G.R. No. 165

Present:

CARPIO MORA
Chairperson,
BRION,
BERSAMIN,
ABAD,* and
VILLARAMA, J

Promulgated:
June 6, 2011
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
This case is brought to us on appeal for the fourth time,
involving the same parties and interests litigating on issues
arising from rehabilitation proceedings initiated by Ruby
Industrial Corporation wayback in 1983.
Following is the factual backdrop of the present controversy,
as culled from the records and facts set forth in
the ponencia of Chief Justice Reynato S. Puno inRuby
Industrial Corporation v. Court of Appeals.[1]
The Antecedents
Ruby Industrial Corporation (RUBY) is a domestic corporation
engaged in glass manufacturing. Reeling from severe liquidity
problems beginning in 1980, RUBY filed on December 13,
1983 a petition for suspension of payments with the Securities
and Exchange Commission (SEC) docketed as SEC Case No.
2556.On December 20, 1983, the SEC issued an order
declaring RUBY under suspension of payments and enjoining
the disposition of its properties pending hearing of the
petition, except insofar as necessary in its ordinary
operations, and making payments outside of the necessary or
legitimate expenses of its business.

29
On August 10, 1984, the SEC Hearing Panel created the
management committee (MANCOM) for RUBY, composed of
representatives from Allied Leasing and Finance Corporation
(ALFC), Philippine Bank of Communications (PBCOM), China
Banking Corporation (China Bank), Pilipinas Shell Petroleum
Corporation (Pilipinas Shell), and RUBY represented by Mr. Yu
Kim Giang. The MANCOM was tasked to perform the following
functions: (1) undertake the management of RUBY; (2) take
custody and control over all existing assets and liabilities of
RUBY; (3) evaluate RUBYs existing assets and liabilities,
earnings and operations; (4) determine 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.
Subsequently, two (2) rehabilitation plans were
submitted to the SEC: the BENHAR/RUBY Rehabilitation Plan of
the majority stockholders led by Yu Kim Giang, and the
Alternative Plan of the minority stockholders represented by
Miguel Lim (Lim).
Under the BENHAR/RUBY Plan, Benhar International, Inc.
(BENHAR) -- a domestic corporation engaged in the
importation and sale of vehicle spare parts which is wholly
owned by the Yu family and headed by Henry Yu, who is also a
director and majority stockholder of RUBY -- shall lend its P60
million credit line in China Bank to RUBY, payable within ten
(10) years. Moreover, BENHAR shall purchase the credits of
RUBYs creditors and mortgage RUBYs properties to obtain
credit facilities for RUBY. Upon approval of the rehabilitation
plan, BENHAR shall control and manage RUBYs operations. For
its service, BENHAR shall receive a management fee
equivalent to 7.5% of RUBYs net sales.
The BENHAR/RUBY Plan was opposed by 40% of the
stockholders, including Lim, a minority shareholder of RUBY.
ALFC, the biggest unsecured creditor of RUBY and chairman of
the management committee, also objected to the plan as it
would transfer RUBYs assets beyond the reach and to the
prejudice of its unsecured creditors.
On the other hand, the Alternative Plan of RUBYs minority
stockholders proposed to: (1) pay all RUBYs creditors without
securing any bank loan; (2) run and operate RUBY without
charging management fees; (3) buy-out the majority shares or
sell their shares to the majority stockholders; (4) rehabilitate
RUBYs two plants; and (5) secure a loan at 25% interest, as
against the 28% interest charged in the loan under the
BENHAR/RUBY Plan.
Both plans were endorsed by the SEC to the
MANCOM for evaluation.
On October 28, 1988, the SEC Hearing Panel
approved the BENHAR/RUBY Plan. The minority stockholders
thru Lim appealed to the SEC En Bancwhich, in its November
15, 1988 Order, enjoined the implementation of the
BENHAR/RUBY
Plan. On December
20,
1988 after
the
expiration of the temporary restraining order (TRO), the
SEC En Banc granted the writ of preliminary injunction against
the enforcement of the BENHAR/RUBY Plan. BENHAR, Henry
Yu, RUBY and Yu Kim Giang questioned the issuance of the
writ in their petition filed in the Court of Appeals (CA),
docketed as CA-G.R. SP No. 16798. The CA denied their
appeal.[2] Upon elevation to this Court (G.R. No. L-88311), we
issued a minute resolution dated February 28, 1990 denying
the petition and upholding the injunction against the
implementation of the BENHAR/RUBY Plan.
Meanwhile, BENHAR paid off Far East Bank & Trust
Company (FEBTC), one of RUBYs secured creditors. By May 30,
1988, FEBTC had already executed a deed of assignment of
credit and mortgage rights in favor of BENHAR. BENHAR
likewise paid the other secured creditors who, in turn,
assigned their rights in favor of BENHAR. These acts were
done
by
BENHAR
despite
the
SECs
TRO
and
injunction and even before the SEC Hearing Panel approved
the BENHAR/RUBY Plan on October 28, 1988.
ALFC and Miguel Lim moved to nullify the deeds of
assignment executed in favor of BENHAR and cite the parties
thereto in contempt for willful violation of the December 20,
1983 SEC order enjoining RUBY from disposing its properties

and making payments pending the hearing of its petition for

suspension of payments. They also charged that in paying off
FEBTCs credits, FEBTC was given undue preference over the
other creditors of RUBY. Acting on the motions, the SEC
Hearing Panel nullified the deeds of assignment executed by
RUBYs creditors in favor of BENHAR and declared the parties
thereto guilty of indirect contempt. BENHAR and RUBY
appealed to the SEC En Banc which denied their appeal.
BENHAR and RUBY joined by Henry Yu and Yu Kim Giang
appealed to the CA (CA-G.R. SP No. 18310). By
Decision[3] dated August 29, 1990, the CA affirmed the SEC
ruling nullifying the deeds of assignment.The CA also declared
its decision final and executory as to RUBY and Yu Kim Giang
for their failure to file their pleadings within the reglementary
period. By Resolution dated August 26, 1991 in G.R. No.
96675,[4] this Court affirmed the CAs decision.
Earlier, on May 29, 1990, after the SEC En
Banc enjoined the implementation of BENHAR/RUBY Plan,
RUBY filed with the SEC En Banc an ex partepetition to create
a new management committee and to approve its revised
rehabilitation plan (Revised BENHAR/RUBY Plan). Under the
revised plan, BENHAR shall receive P34.068 million of
the P60.437 Million credit facility to be extended to RUBY, as
reimbursement for BENHARs payment to some of RUBYs
creditors. The SEC En Banc directed RUBY to submit its
revised rehabilitation plan to its creditors for comment and
approval while the petition for the creation of a new
management committee
was
remanded
for further
proceedings to the SEC Hearing Panel. The Alternative Plan of
RUBYs minority stockholders was also forwarded to the
hearing panel for evaluation.
On April 26, 1991, over ninety percent (90%) of
RUBYs creditors objected to the Revised BENHAR/RUBY Plan
and the creation of a new management committee. Instead,
they endorsed the minority stockholders Alternative Plan. At
the hearing of the petition for the creation of a new
management committee, three (3) members of the original
management committee (Lim, ALFC and Pilipinas Shell)
opposed the Revised BENHAR/RUBY Plan on grounds that: (1)
it would legitimize the entry of BENHAR, a total stranger, to
RUBY as BENHAR would become the biggest creditor of
RUBY; (2) it would put RUBYs assets beyond the reach of the
unsecured creditors and the minority stockholders; and (3) it
was not approved by RUBYs stockholders in a meeting called
for the purpose.
Notwithstanding the objections of 90% of RUBYs
creditors and three members of the MANCOM, the SEC
Hearing Panel approved on September 18, 1991 the Revised
BENHAR/RUBY Plan and dissolved the existing management
committee. It also created a new management committee and
appointed BENHAR as one of its members. In addition to the
powers originally conferred to the management committee
under Presidential Decree (P.D.) No. 902-A, the new
management committee was tasked to oversee the
implementation by the Board of Directors of the revised
rehabilitation plan for RUBY.
The original management committee (MANCOM), Lim and
ALFC appealed to the SEC En Banc which affirmed the
approval of the Revised BENHAR/RUBY Plan and the creation
of a new management committee on July 30, 1993. To ensure
that the management of RUBY will not be controlled by any
group, the SEC appointed SEC lawyers Ruben C. Ladia and
Teresita R. Siao as additional members of the new
management committee. Further, it declared that BENHARs
membership in the new management committee is subject to
the condition that BENHAR will extend its credit facilities to
RUBY without using the latters assets as security or collateral.
Lim, ALFC and MANCOM moved for reconsideration while
RUBY and BENHAR asked the SEC to reconsider the portion of
its Order prohibiting BENHAR from utilizing RUBYs assets as
collateral. On October 15, 1993, the SEC denied the motion of
Lim, ALFC and the original management committee but
granted RUBY and BENHARs motion and allowed BENHAR to
use RUBYs assets as collateral for loans, subject to the
approval of the majority of all the members of the new
management committee. Lim, ALFC and MANCOM appealed to
the CA (CA-G.R. SP Nos. 32404, 32469 & 32483) which by
Decision[5] dated March 31, 1995 set aside the SECs approval
of the Revised BENHAR/RUBY Plan and remanded the case to
the SEC for further proceedings. The CA ruled that the revised
plan circumvented its earlier decision (CA-G.R. SP No. 18310)

30
nullifying the deeds of assignment executed by RUBYs
creditors in favor of BENHAR.Since under the revised plan,
BENHAR was to receive P34.068 Million of the P60.437 Million
credit facility to be extended to RUBY, as settlement for its
advance payment to RUBYs seven (7) secured creditors, such
payments made by BENHAR under the void Deeds of
Assignment, in effect were recognized as payable to BENHAR
under the revised plan. The motion for reconsideration filed by
BENHAR and RUBY was likewise denied by the CA.[6]
Undaunted, RUBY and BENHAR filed a petition for review in
this Court (G.R. Nos. 124185-87 entitled Ruby Industrial
Corporation v. Court of Appeals) alleging that the CA gravely
abused its discretion in substituting its judgment for that of
the SEC, and in allowing Lim, ALFC and MANCOM to file
separate petitions prepared by lawyers representing
themselves
as
belonging
to
different
firms. By
Decision[7] dated January 20, 1998, we sustained the CAs
ruling that the Revised BENHAR/RUBY Plan contained
provisions which circumvented its final decision in CA-G.R. SP
No. 18310, nullifying the deeds of assignment of credits and
mortgages executed by RUBYs creditors in favor of BENHAR,
as well as this Courts Resolution in G.R. No. 96675, affirming
the said CAs decision.We thus held:
Specifically,
the
Revised
BENHAR/RUBY Plan considered as valid the
advance payments made by BENHAR in
favor of some of RUBYs creditors. The nullity
of BENHARs unauthorized dealings with
RUBYs creditors is settled. The deeds of
assignment between BENHAR and RUBYs
creditors had been categorically declared
void by the SEC Hearing Panel in two (2)
orders
issued
on January
12,
1989 and March 15, 1989. x x x
xxxx
These orders were upheld by the SEC en
banc and the Court of Appeals. In CA-G.R. SP
No. 18310, the Court of Appeals ruled as
follows:
xxxxxxxxx
1) x x x when the
Deed of Assignment was
executed on May 30, 1988
by and between Ruby
Industrial Corp., Benhar
International, Inc., and
FEBTC,the Rehabilitation
Plan
proposed
by
petitioner Ruby Industrial
Corp.
for
Benhar
International,
Inc.
to
assume all petitioners
obligation has not been
approved by the SEC. The
Rehabilitation Plan was
not
approved
until October
28,
1988. There was a willful
and blatant violation of
the
SEC
order
dated December
20,
1983 on
the
part
of
petitioner Ruby Industrial
Corp., represented by Yu
Kim Giang, by Benhar
International,
Inc.,
represented by Henry Yu
and by FEBTC.
2) The magnitude
and coverage of the
transactions involved were
such that Yu Kim Giang
and the other signatories
cannot feign ignorance or
pretend lack of knowledge
thereto in view of the fact
that
they
were
all
signatories
to
the
transaction and privy to all
the negotiations leading to
the
questioned

transactions. In executing
the Deeds of Assignment,
the
petitioners
totally
disregarded the mandate
contained in the SEC
order not to dispose the
properties
of
Ruby
Industrial
Corp. in
any
manner
whatsoever
pending the approval of
the Rehabilitation Plan and
rendered illusory the SEC
efforts to rehabilitate the
petitioner corporation to
the best interests of all
the creditors.
3) The
assignments were made
without prior approval of
the
Management
Committee created by the
SEC
in
an
Order
dated August
10,
1984. Under Sec. 6, par. d,
sub. par. (2) of P.D. 902-A
as amended by P.D. 1799,
the
Management
Committee, rehabilitation
receiver, board or body
shall have the power to
take custody and control
over all existing assets of
such
entities
under
management
notwithstanding
any
provision of law, articles of
incorporation or by-law to
the
contrary. The
SEC
therefore has the power
and authority, through a
Management Committee
composed of petitioners
creditors or through itself
directly, to declare all
assignment of assets of
the petitioner Corporation
declared under suspension
of payments, null and
void, and to conserve the
same in order to effect a
fair,
equitable
and
meaningful rehabilitation
of
the
insolvent
corporation.
4) x x x. The acts
for which petitioners were
held in indirect contempt
by the SEC arose from the
failure or willful refusal by
petitioners to obey the
lawful order of the SEC not
to dispose of any of its
properties in any manner
whatsoever
without
authority or approval of
the SEC. The execution of
the Deeds of Assignment
tend to defeat or obstruct
the
administration
of
justice. Such
acts
are
offenses against the SEC
because they
are
calculated to embarrass,
hinder and obstruct the
tribunal
in
the
administration of justice
or lessen its authority.
xxx
Even the SEC en banc, in its July
30, 1993 Order affirming the approval of the
Revised
BENHAR/RUBY
Plan,
has
acknowledged the invalidity of the subject
deeds of assignment. However, to justify its
approval of the plan and the appointment of
BENHAR
to
the
new
management

31
committee, it gave the lame excuse that
BENHAR became RUBYs creditor for having
paid RUBYs debts. x x x
xxxx
For its part, the Court of Appeals
noted
that
the
approved
Revised
BENHAR/RUBY Plan gave undue preference
to BENHAR. The records, indeed, show that
BENHARs offer to lend its credit facility in
favor of RUBY is conditioned upon the
payment of the amount it advanced to
RUBYs creditors, x x x
xxxx
In fact, BENHAR shall receive
P34.068 Million out of the P60.437 Million
credit facility to be extended to RUBY for the
latters rehabilitation.
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. When a
distressed company is placed under
rehabilitation, the appointment of a
management committee follows to avoid
collusion
between
the
previous
management and creditors it might favor, to
the prejudice of the other creditors. All
assets
of
a
corporation
under
rehabilitation receivership are held in
trust for the equal benefit of all
creditors
to
preclude
one
from
obtaining an advantage or preference
over another by the expediency of
attachment, execution or otherwise.As
between the creditors, the key phrase is
equality in equity. Once the corporation
threatened by bankruptcy is taken over by a
receiver, all the creditors ought to stand on
equal footing. Not any one of them
should
be
paid
ahead
of
the
others. This is precisely the reason for
suspending all pending claims against
the corporation under receivership.
[8]
(Additional emphasis supplied.)

Aside from the undue preference that would have been given
to BENHAR under the Revised BENHAR/RUBY Plan, we also
found RUBYs dealing with BENHAR highly irregular and its
proposed financing scheme more costly and ultimately
prejudicial to RUBY. Thus:
Parenthetically,
BENHAR
is
a
domestic corporation engaged in importing
and selling vehicle spare parts with an
authorized capital stock of thirty million
pesos. Yet, it offered to lend its credit facility
in the amount of sixty to eighty million
pesos to RUBY. It is to be noted that BENHAR
is not a lending or financing corporation and
lending its credit facilities, worth more than
double its authorized capitalization, is not
one of the powers granted to it under its
Articles of Incorporation. Significantly, Henry
Yu, a director and a majority stockholder of
RUBY is, at the same time, a stockholder of
BENHAR,
a
corporation
owned
and
controlled
by
his
family.
These
circumstances render the deals between
BENHAR and RUBY highly irregular.
xxxx
Moreover, when RUBY initiated its
petition for suspension of payments with the
SEC, BENHAR was not listed as one of RUBYs
creditors. BENHAR is a total stranger to
RUBY. If at all, BENHAR only served as a
conduit of RUBY. As aptly stated in the
challenged Court of Appeals decision:

Benhars role in
the Revised Benhar/Ruby
Plan, as envisioned by the
majority stockholders, is
to contract the loan for
Ruby and, serving the role
of a financier, relend the
same to Ruby. Benhar is
merely extending its credit
line facility with China
Bank, under which the
bank agrees to advance
funds to the company
should
the
need
arise. This is unlikely a
loan in which the entire
amount is made available
to the borrower so that it
can
be
used
and
programmed
for
the
benefit of the companys
financial and operational
needs. Thus, it is actually
China Bank which will be
the source of the funds to
be relent to Ruby. Benhar
will not shell out a single
centavo
of
its
own
funds. It is the assets of
Ruby
which
will
be
mortgaged in favor of
Benhar. Benhars
participation will only
make the rehabilitation
plan more costly and,
because
of
the
mortgage of its (Rubys)
assets
to
a
new
creditor, will create a
situation
which
is
worse
than
the
present. x x x
We need not say
emphasis supplied.)

more. [9] (Additional

After the finality of the above decision, the SEC set the case for
further proceedings.[10] On March 14, 2000, Bank of the
Philippine Islands (BPI), one of RUBYs secured creditors, filed a
Motion to Vacate Suspension Order[11] on grounds that there is
no existing management committee and that no decision has
been rendered in the case for more than 16 years already,
which is beyond the period mandated by Sec. 3-8 of the Rules
of Procedure on Corporate Recovery. RUBY filed its opposition,
[12]
asserting that the MANCOM never relinquished its status as
the duly appointed management committee as it resisted the
orders of the second and third management committees
subsequently created, which have been nullified by the CA and
later this Court. As to the applicability of the cited rule under
the Rules on Corporate Recovery, RUBY pointed out that this
case was filed long before the effectivity of said rules. It also
pointed out that the undue delay in the approval of the
rehabilitation plan being due to the numerous appeals taken by
the minority stockholders and MANCOM to the CA and this
Court, from the SEC approval of the BENHAR/RUBY Plan. Since
there have already been steps taken to finally settle RUBYs
obligations with its creditors, it was contended that the
application of the mandatory period under the cited provision
would cause prejudice and injustice to RUBY.
It appears that even earlier during the pendency of the
appeals in the CA, BENHAR and RUBY have performed other
acts in pursuance of the BENHAR/RUBY Plan approved by the
SEC.
On September 1, 1996, Lim received a Notice of Stockholders
Meeting scheduled on September 3, 1996 signed by a certain
Mr. Edgardo M. Magtalas, the Designated Secretary of RUBY
and stating the matters to be taken up in said meeting, which
include the extension of RUBYs corporate term for another
twenty-five (25) years and election of Directors. [13] At the
scheduled stockholders meeting of September 3, 1996, Lim
together with other minority stockholders, appeared in order
to put on record their objections on the validity of holding
thereof and the matters to be taken therein. Specifically, they
questioned the percentage of stockholders present in the

32
meeting which the majority claimed stood at 74.75% of the
outstanding capital stock of RUBY.
The aforesaid stockholders meeting was the subject of the
Motion to Cite For Contempt[14] and Supplement to Motion to
Cite For Contempt[15] filed by Lim before the CA where their
petitions for review (CA-G.R. Nos. 32404, 32469 and 32483)
were then pending. Lim argued that the majority stockholders
claimed to have increased their shares to 74.75% by
subscribing to the unissued shares of the authorized capital
stock (ACS). Lim pointed out that such move of the majority
was in implementation of the BENHAR/RUBY Plan which calls
for capital infusion of P11.814 Million representing the
unissued and unsubscribed portion of the present ACS
of P23.7 Million, and the Revised BENHAR/RUBY Plan which
proposed an additional subscription of P30 Million. Since the
implementation of both majority plans have been enjoined by
the SEC and CA, the calling of the special stockholders
meeting by the majority stockholders clearly violated the said
injunction orders. This circumstance certainly affects the
determination of quorum, the voting requirements for
corporate term extension, as well as the election of Directors
pursuant to the July 30, 1993 Order and October 15, 1993
Resolution of the SEC enjoining not only the implementation
of the revised plan but also the doing of any act that may
render the appeal from the approval of the said plan moot and
academic.
The aforementioned capital infusion was taken up by RUBYs
board of directors in a special meeting [16] held on October 2,
1991 following the issuance by the SEC of its Order
dated September
18,
1991[17] approving
the
Revised
BENHAR/RUBY Plan and creating a new management
committee to oversee its implementation. During the said
meeting, the board asserted its authority and resolved to take
over the management of RUBYs funds, properties and records
and to demand an accounting from the MANCOM which was
ordered dissolved by the SEC. The board thus resolved that:
The corporation be authorized to
issue out of the unissued portion of the
authorized capital stocks of the corporation
in the form of common stocks 11.8134.00
[Million] after comparing this with the
audited financial statement prepared by
SGV as of December 31, 1982, to be
subscribed and paid in full by the present
stockholders in proportion to their present
stockholding
in
the
corporation
on
staggered
basis
starting
October 28,
December 27 then February 28 and April 28
as the last installment date at 25% for each
period. It was also moved and seconded
that should any of the stockholders fail to
exercise their rights to buy the number of
shares they are qualified to buy by making
the first installment payment of 25% on or
before October 13, 1991, then the other
stockholders may buy the same and that
only when none of the present stockholders
are interested in the shares may there be a
resort to selling them by public auction.[18]

As reflected in the Minutes of the special board meeting, a

representative of the absent directors (Tan Chai, Tomas Lim,
Miguel Lim and Yok Lim) came to submit their letter addressed
to the Chairman suggesting that said meeting be deferred
until the September 18, 1991 SEC Order becomes final and
executory. The directors present nevertheless proceeded with
the meeting upon their belief that neither appeal nor motion
for reconsideration can stay the SEC order.[19]
The resolution to extend RUBYs corporate term, which was to
expire on January 2, 1997, was approved during the
September 3, 1996 stockholders meeting, as recommended
by the board of directors composed of Henry Yu (Chairman),
James Yu, David Yukimteng, Harry L. Yu, Yu Kim Giang, Mary L.
Yu and Vivian L. Yu. The board certified that said resolution
was approved by stockholders representing two-thirds (2/3) of
RUBYs
outstanding
capital
stock.[20] Per
Certification[21] dated August 31, 1995 issued by Yu Kim Giang
as Executive Vice-President of RUBY, the majority stockholders
own 74.75% of RUBYs outstanding capital stock as of October
27, 1991. The Amended Articles of Incorporation was filed
with the SEC on September 24, 1996.[22]

On March 17, 2000, Lim filed a Motion[23] informing the SEC of

acts being performed by BENHAR and RUBY through directors
who were illegally elected, despite the pendency of the appeal
before this Court questioning the SEC approval of the
BENHAR/RUBY Plan and creation of a new management
committee, and after this Court had denied their motion for
reconsideration of the January 20, 1998 decision in G.R. Nos.
124185-87. Lim reiterated that before the matter of extension
of corporate life can be passed upon by the stockholders, it is
necessary to determine the percentage ownership of the
outstanding shares of the corporation. The majority
stockholders claimed that they have increased their
shareholdings from 59.828% to 74.75% as a result of the
illegal and invalid stockholders meeting on September 3,
1996. The additional subscription of shares cannot be done as
it implements the BENHAR/RUBY Plan against which an
existing injunction is still effective based on the SEC Order
dated January 6, 1989, and which was struck down under the
final decision of this Court in G.R. Nos. 124185-87. Hence, the
implementation of the new percentage stockholdings of the
majority stockholders and the calling of stockholders meeting
and the subsequent resolution approving the extension of
corporate life of RUBY for another twenty-five (25) years, were
all done in violation of the decisions of the CA and this Court,
and without compliance with the legal requirements under
the Corporation Code. There being no valid extension of
corporate term, RUBYs corporate life had legally ceased.
Consequently, Lim moved that the SEC: (1) declare as null
and void the infusion of additional capital made by the
majority stockholders and restore the capital structure of
RUBY to its original structure prior to the time injunction was
issued; and (2) declare as null and void the resolution of the
majority stockholders extending the corporate life of RUBY for
another twenty-five (25) years.
The MANCOM concurred with Lim and made a similar
manifestation/comment[24] regarding the irregular and invalid
capital infusion and extension of RUBYs corporate term
approved by stockholders representing only 60% of RUBYs
outstanding capital stock. It further stated that the foregoing
acts were perpetrated by the majority stockholders without
even consulting the MANCOM, which technically stepped into
the shoes of RUBYs board of directors. Since RUBY was still
under a state of suspension of payment at the time the
special stockholders meeting was called, all corporate acts
should have been made in consultation and close coordination
with the MANCOM.
Lim likewise filed an Opposition [25] to BPIs Motion to Vacate
Suspension Order, asserting that the management committee
originally created by the SEC continues to control the
corporate affairs and properties of RUBY. He also contended
that the SEC Rules of Procedure on Corporate Recovery cannot
apply in this case which was filed long before the effectivity of
said rules.
On the other hand, RUBY filed its Opposition[26] to the Motion
filed by Lim denying the allegation of Lim that RUBYs
corporate existence had ceased. RUBY claimed that due
notice were given to all stockholders of the October 2,
1991 special meeting in which the infusion of additional
capital was discussed. It further contended that the CA
decision setting aside the SEC orders approving the Revised
BENHAR/RUBY Plan, which was subsequently affirmed by this
Court onJanuary 20, 1998, did not nullify the resolution of
RUBYs board of directors to issue the previously unissued
shares. The amendment of its articles of incorporation on the
extension of RUBYs corporate term was duly submitted with
and approved by the SEC as per the Certification
dated September 24, 1996.
The MANCOM also filed its Opposition [27] to BPIs
Motion to Vacate Suspension Order, stating that it has
continuously performed its primary function of preserving the
assets of RUBY and undertaken the management of RUBYs
day-to-day affairs. It expressed belief that between chaotic
foreclosure proceedings and collection suits that would be
triggered by the vacation of the suspension order and an
orderly settlement of creditors claims before the SEC, the
latter path is the more prudent and logical course of
action. On April 28, 2000, it submitted to the court copies of
the
minutes
of
meetings
held
from January
18,
1999 toDecember 1, 1999 in pursuance of its mandate to
preserve the assets and administer the business affairs of
RUBY.[28]

33
On August 23, 2000, China Bank filed a
Manifestation[29] echoing the contentions of BPI that as there
is no existing management committee and no rehabilitation
plan approved even after the 240-day period, warrants the
application of Sec. 4-9 of the SEC Rules of Procedure on
Corporate Recovery such that the petition is deemed ipso
facto denied and dismissed. China Bank lamented that the
length of time that has lapsed, as well as the parties
actuations, completely betrays a genuine attempt to
rehabilitate RUBYs moribund operations all to the dismay,
damage and prejudice of RUBYs creditors. It stressed that the
proceedings cannot be prolonged nor used as a ploy to defer
indefinitely the payment of long overdue obligations of RUBY
to
its
creditors. With
the
case
having
been ipso
facto dismissed, there is no need of further action from the
parties or an order from the SEC. Consequently, RUBYs
creditors may now take whatever legal action they may deem
appropriate to protect their rights including, but not limited to
extrajudicial foreclosure.
On September 11, 2000, the SEC granted Lims
request for the issuance of subpoena duces tecum/ad
testificandum to Ms. Jocelyn Sta. Ana of BPI for the latter to
testify and bring all documents and records pertaining to
RUBY.[30] Earlier, Lim moved for a hearing to verify the
information that China Bank and BPI had separately executed
deeds of assignment in favor of Greener Investment
Corporation, a company owned by Yu Kim Giang, one of RUBYs
majority stockholders.[31] Said hearing, however, did not push
through in view of RUBYs proposal for a compromise
agreement.[32] Lim submitted his comments on the Proposed
Compromise Agreement, but there was no response from
RUBY and the majority stockholders.[33] The minority
stockholders likewise served a copy of the revised
Compromise Agreement to the majority stockholders. [34] Lim
moved that the case be assigned to a new Panel of Hearing
Officers and the majority stockholders be made to declare in a
hearing whether they accept the counterproposals of the
minority in their draft Amicable Settlement in order that the
case can proceed immediately to liquidation.[35]
On January 25, 2001, the MANCOM filed with the SEC
its Resolution unanimously adopted on January 19, 2001
affirming that: (1) MANCOM was never informed nor advised
of the supposed capital infusion by the majority stockholders
in October 1991 and it never actually received any such
additional subscription nor signed any document attesting to
or authorizing the said increase of RUBYs capital stock or the
extension of its corporate life; (2) MANCOM continuously
recognizes the 60%-40% ratio of shareholding profile between
the majority and minority stockholders, with the majority
having 59.828% while the minority holds 40.172%
shareholding; (3) as there was no valid increase in the
shareholding of the majority and consequently no valid
extension of corporate term, the liquidation of RUBY is thus in
order; (4) to date, the majority stockholders or Yu Kim Giang
have not complied with the December 22, 1989 SEC order for
them to turn over the cash including bank deposits, all other
financial records and documents of RUBY including transfer
certificates of title over its real properties, and render an
accounting of all the money received by RUBY; and (5)
pursuant to this Courts ruling in G.R. No. 96675 dated August
26, 1991, the previous deeds of assignment made in favor of
BENHAR
by
Florence
Damon,
Philippine
Bank
of
Communications, Philippine Commercial International Bank,
Philippine Trust Company, PCI Leasing and Finance, Inc. and
FEBTC, having been earlier declared void by the SEC Hearing
Panel, and the CA decision in CA-G.R. SP No. 18310 affirmed
by this Court have no legal effect and are deemed void.[36]
On the other hand, Lim filed a Supplement (to
Manifestation and Motion dated January 18, 2001)
[37]
reiterating his pending motion filed on March 15, 2000 for
the SEC to implement this Courts January 20, 1998 Decision in
G.R. Nos. 124185-87 which states in part that [t]he SEC
therefore has the power and authority, directly to declare all
assignment of assets of the petitioner Corporation declared
under suspension of payments, null and void, and to conserve
the same in order to effect a fair, equitable and meaningful
rehabilitation of the insolvent corporation. Lim contended that
the SEC retains jurisdiction over pending suspension of
payment/rehabilitation cases filed as of June 30, 2000 until
these are finally disposed, pursuant to Sec. 5.2 of the
Securities Regulation Code (Republic Act [R.A.] No.
8799). Considering that the Management Committee is intact,
the majority stockholders cannot act in an illegal manner with
regard to RUBYs assets. He thus concluded that the continued
disobedience of the majority stockholders to the orders and

decisions of the SEC and CA, as affirmed by this Court, have

certainly rendered any additional assignments, such as the
Deeds of Assignment executed by BPI and China Bank with
BENHAR, Henry Yu or conduits of the majority stockholders,
null and void.
The MANCOM manifested that it is adopting in
toto the Manifestation and Motion dated January 18,
2001 filed by Lim. It also moved for the SEC to conduct further
proceedings as directed by this Court. Considering that there
is no chance at all for the proposed rehabilitation of RUBY in
light of strict implementation by government authorities of
environmental laws particularly on pollution control, and
MANCOMs assent to effect a liquidation, the MANCOM
asserted that a hearing should focus on the eventual
liquidation of RUBY. It added that a dismissal under the
circumstances would be tantamount to a perceived shirking
by the SEC of its mandate to afford all creditors ample
opportunity to recover on their respective financial exposure
with RUBY.[38]
On May 15, 2001, the MANCOM submitted copies of
minutes of meetings held from April 13, 2000 to December
29, 2000.[39]
On September 20, 2001, the SEC issued an Order
directing the Management Committee to submit a detailed
report not mere minutes of meetings -- on the status of the
rehabilitation process and financial condition of RUBY, which
should contain a statement on the feasibility of the
rehabilitation plan.[40] The MANCOM complied with the said
order on February 15, 2002.[41] The majority stockholders and
RUBY moved to dismiss the petition and strike from the
records the Compliance/Report. MANCOM filed its omnibus
opposition to the said motions. There was further exchange of
pleadings by the parties on the matter of whether the SEC
should already dismiss the petition of RUBY as prayed for by
the majority stockholders and RUBY, or proceed with
supervised liquidation of RUBY as proposed by the MANCOM
and minority stockholders.
The SECs Ruling
On September 18, 2002, the SEC issued its
Order[42] denying the petition for suspension of payments, as
follows:
WHEREFORE, in view of the
foregoing, the Commission hereby resolves
to terminate the proceedings and DENY the
instant petition.
Accordingly, pursuant to Sec. 5-5 of
the SECs Rules of Procedure on Corporate
Recovery, which provides:
Discharge of the
Management Committee -The
Management
Committee
shall
be
discharged and dissolved
under
the
following
circumstances:
a. Whenever
the
Commission, on
motion or motu
prop[r]io,
has
determined that
the necessity for
the Management
Committee
no
longer exists;
b. Upon
the
appointment of a
liquidator under
these Rules;
c. By agreement of
the parties;
d. Upon
termination
of
the
proceedings.
Upon its discharge
and
dissolution,
the
Management Committee

34
shall submit its final report
and render an accounting
of its management within
such reasonable time as
the
Commission
may
allow.
the Management Committee is
hereby DISSOLVED. It is likewise ordered to:
(1) Make an inventory of the
assets, funds and properties
of the petitioner;
(2) Turn-over the aforementioned
assets, funds and properties
to the proper party(ies);
(3) Render an accounting of its
management; and
(4) Submit its Final Report to the
Commission.
The MANCOM is ordered to comply
with the foregoing within a non-extendible
period of thirty (30) days from receipt of this
Order. Relative to any compensation owing
to the MANCOM, it is left to the
determination of the parties concerned.

meeting held on 03 September 1996 be

declared null and void;
(3) implementing the invalidation
of any and all illegal assignments of
credit/purchase
of
credits
and
the
cancellation
of
mortgages
connected
therewith made by the creditors of Ruby
Industrial Corporation during the effectivity
of the suspension of payments order
including that of China Bank and BPI and to
deliver to MANCOM or the Liquidator all the
original of the Deeds of Assignments and
the registered titles thereto and any other
documents related thereto; and order their
unwinding and requiring the majority
stockholders to account for all illegal
assignments (amounts, dates, interests, etc.
and present the original documents
supporting the same); and
(4) ordering the Securities and
Exchange Commission to supervise the
liquidation of Ruby Industrial Corporation
after the foregoing steps shall have been
undertaken.
SO ORDERED.[46]

No pronouncement as to costs.
SO ORDERED.[43]

The SEC declared that since its order declaring RUBY under a
state of suspension of payments was issued on December 20,
1983, the 180-day period provided in Sec. 4-9 of the Rules of
Procedure on Corporate Recovery had long lapsed. Being a
remedial rule, said provision can be applied retroactively in
this case. The SEC also overruled the objections raised by the
minority stockholders regarding the questionable issuance of
shares of stock by the majority stockholders and extension of
RUBYs corporate term, citing the presumption of regularity in
the act of a government entity which obtains upon the SECs
approval of RUBYs amendment of articles of incorporation. It
pointed out that Lim raised the issue only in the year
2000. Moreover, the SEC found that notwithstanding his
allegations of fraud, Lim never proved the illegality of the
additional infusion of the capitalization by RUBY so as to
warrant a finding that there was indeed an unlawful act. [44]

Lim, in his personal capacity and in representation of the

minority stockholders of RUBY, filed a petition for review with
prayer for a temporary restraining order and/or writ of
preliminary injunction before the CA (CA-G.R. SP No. 73195)
assailing the SEC order dismissing the petition and dissolving
the MANCOM.
Ruling of the CA
On May 26, 2004, the CA rendered its Decision,[45] the
dispositive portion of which states:
WHEREFORE, the Questioned Order
dated 18 September 2002 issued by the
Securities and Exchange Commission in SEC
Case No. 2556 entitled In the Matter of the
Petition for Suspension of Payments, Ruby
Industrial Corporation, Petitioner, is hereby
SET ASIDE, and consequently:
(1) the infusion of additional capital
made by the majority stockholders be
declared null and void and restoring the
capital structure of Ruby to its original
structure prior to the time the injunction
was issued, that is, majority stockholders
59.828% and the minority stockholders
40.172% of the authorized capital stock of
Ruby Industrial Corporation.
(2) the resolution of the majority
stockholders, who represents only 59.828%
of the outstanding capital stock of Ruby,
extending the corporate life of Ruby for
another twenty-five (25) years which was
made during the supposed stockholders

According to the CA, the SEC erred in not finding that

the October 2, 1991 meeting held by RUBYs board of directors
was illegal because the MANCOM was neither involved nor
consulted in the resolution approving the issuance of
additional shares of RUBY.
The CA further noted that the October 2, 1991 board meeting
was conducted on the basis of the September 18, 1991 order
of the SEC Hearing Panel approving the Revised
BENHAR/RUBY Plan, which plan was set aside under this
Courts January 20, 1998 Decision in G.R. Nos. 124185-87. The
CA pointed out that records confirmed the proposed infusion
of additional capital for RUBYs rehabilitation, approved during
said meeting, as implementing the Revised BENHAR/RUBY
Plan. Necessarily then, such capital infusion is covered by the
final injunction against the implementation of the revised
plan. It must be recalled that this Court affirmed the CAs
ruling that the revised plan not only recognized the void
deeds of assignments entered into with some of RUBYs
creditors in violation of the CAs decision in CA-G.R. SP No.
18310, but also maintained a financing scheme which will just
make the rehabilitation plan more costly and create a worse
situation for RUBY.
On the supposed delay of the minority stockholders in raising
the issue of the validity of the infusion of additional capital
effected by the board of directors, the CA held that laches is
inapplicable in this case. It noted that Lim sought relief while
the case is still pending before the SEC. If ever there was
delay, the same is not fatal to the cause of the minority
stockholders.
The CA likewise faulted the SEC in relying on the presumption
of regularity on the matter of the extension of RUBYs
corporate term through the filing of amended articles of
incorporation. In doing so, the CA totally disregarded the
evidence which rebutted said presumption, as demonstrated
by Lim: (1) it was the board of directors and not the
stockholders which conducted the meeting without the
approval of the MANCOM; (2) there was no written waivers of
the minority stockholders pre-emptive rights and thus it was
irregular to merely notify them of the board of directors
meeting and ask them to exercise their option; (3) there was
an existing permanent injunction against any additional
capital infusion on the BENHAR/RUBY Plan, while the CA and
this Court both rejected the Revised BENHAR/RUBY Plan; (4)
there was no General Information Sheet reports made to the
SEC on the alleged capital infusion, as per certification by the
SEC; (5) the Certification stating the present percentage of
majority shareholding, dated December 21, 1993 and signed
by Yu Kim Giang -- which was not sworn to before a Notary
Public -- was supposedly filed in 1996 with the SEC but it does
not bear a stamped date of receipt, and was only attached in
a 2000 motion long after the October 1991 board meeting; (6)
said Certification was contradicted by the SEC list of all
stockholders of RUBY, in which the majority remained at

35
59.828% and the minority shareholding at 40.172% as of
October 27, 1991; (7) certain receipts for the amount of P1.7
million was presented by the majority stockholders only in the
year 2000, long after Lim questioned the inclusion of
extension of corporate term in the Notice of Meeting when Lim
filed before the CA a motion to cite for contempt (CA-G.R. Nos.
32404, 32469 and 32483); and (8) this Courts decisions in the
cases elevated to it had recognized the 40% stockholding of
the minority. Upon the foregoing grounds, the CA said that the
SEC should have invalidated the resolution extending the
corporate term of RUBY for another twenty-five (25) years.
With the expiration of the RUBYs corporate term, the CA ruled
that it was error for the SEC in not commencing liquidation
proceedings. As to the dismissal of RUBYs petition for
suspension of payments, the CA held that the SEC erred when
it retroactively applied Sec. 4-9 of the Rules of Procedure on
Corporate Recovery. Such retroactive application of
procedural rules admits of exceptions, as when it would impair
vested rights or cause injustice. In this case, the CA
emphasized that the two decisions of this Court still have to
be implemented by the SEC, but to date the SEC has failed to
unwound the illegal assignments and order the assignees to
surrender the Deeds of Assignment to the MANCOM.
On the issue of violation of the rule against forum shopping,
the CA held that this is not applicable because the parties in
CA-G.R. SP No. 73169 (filed by MANCOM) and CA-G.R. SP No.
73195 (filed by Lim) are not the same and they do not have
the same interest. This issue was in fact already resolved in
G.R. Nos. 124185-87 wherein this Court, citing Ramos, Sr. v.
Court of Appeals[47] declared that private respondents Lim, the
unsecured creditors (ALFC) and MANCOM cannot be
considered to have engaged in forum shopping in filing
separate petitions with the CA as each have distinct rights to
protect.
The CA also found that the belated submission of the special
power of attorney executed by the other minority stockholders
representing 40.172% of RUBYs ownership has no bearing to
the continuation of the petition filed with the appellate
court. Moreover, since the petition is in the nature of a
derivative suit, Lim clearly can file the same not only in
representation of the minority stockholders but also in behalf
of the corporation itself which is the real party in
interest. Thus, notwithstanding that Lims ownership in RUBY
comprises only 1.4% of the outstanding capital stock, as
claimed by the majority stockholders, his petition may not be
dismissed on this ground.
The Consolidated Petitions
From the Decision of the CA, China Bank and the Majority
Stockholder joined by RUBY, filed separate petitions before
this Court.
In G.R. No. 165887, petitioners Majority Stockholders and
RUBY raised the following grounds for the reversal of the
assailed decision and the reinstatement of the SECs
September 18, 2002 Order:
First Reason
THE COURT OF APPEALS ERRED
AND WHEN IT DID, IT ACTED CONTRARY TO
LAW AND PRECEDENTS WHEN IT GAVE DUE
COURSE TO, AND, THEREAFTER, SUSTAINED,
A
FORMALLY
AND
SUBSTANTIALLY
DEFECTIVE PETITION FOR REVIEW.
Second Reason
THE COURT OF APPEALS ERRED
AND WHEN IT DID, IT ACTED IN A MANNER
AT WAR WITH ORDERLY PROCEDURE AND
APPLICABLE JURISPRUDENCE WHEN IT
REVERSED THE ORDER OF DISMISSAL OF
THE
SECURITIES
AND
EXCHANGE
COMMISSION
AND
SUBSTITUTED
ITS
JUDGMENT FOR THAT OF THE LATTER IN THE
DETERMINATION OF ISSUES WELL WITHIN
THE EXPERTISE OF THE COMMISSION.
Third Reason

THE COURT OF APPEALS ERRED

AND WHEN IT DID, IT ACTED IN GRAVE
ABUSE OF ITS DISCRETION AND, IN FACT, IN
EXCESS OR LACK OF JURISDICTION -- WHEN
IT SUSTAINED COLLATERAL ATTACKS OF
FINAL ADJUDICATIONS OF THE SECURITIES
AND EXCHANGE COMMISSION.[48]

On the other hand, petitioner China Bank in G.R. No. 165929

puts forth the argument that the principle of stare
decisis cannot be given effect in this case considering the
prevailing factual circumstances, as to do so would result in
manifest injustice. It contends that the reason for the
declaration of nullity of the Deed of Assignment pronounced
more than a decade ago, has become legally inefficacious by
its obsolescence. The creditors of RUBY have the right to
recover their credit. But when the CA ordered the nullification
of China Banks Deed of Assignment in favor of Greener
Investment Corporation, it practically dashed its last hope for
ever recovering its credit.
China Bank is of the view that the CA overstretched
the import of this Courts January 20, 1998 decision in G.R.
Nos. 124185-87 when the SEC was ordered to conduct further
proceedings, as to include the unwinding of the alleged illegal
assignment of credits. The rehabilitation of RUBY, if it still may
be capable of, is not made dependent on the unwinding by
the SEC of the illegal assignments, as the same concerns only
the issue of who shall now become the creditors of RUBY, and
does not alter the fact that RUBY has hefty loan obligations
and it has not enough cash flow to pay for the same.
Deploring the principal parties penchant for
prolonged litigation resulting considerably in irreversible
losses to RUBY, China Bank maintains that from the report
submitted by the MANCOM to the SEC, it can be clearly seen
that no attempt at rehabilitation whatsoever had been
pursued. Given the current situation, China Bank prays that
the CA Decision be reversed and its Deed of Assignment in
favor of Greener Investment Corporation be recognized and
given full legal effect.
In fine, main issues to be resolved are: (1) whether private
respondents MANCOM and Lim engaged in forum shopping
when they filed separate petitions before the CA assailing the
September 18, 2002 SEC Order; (2) whether the defects in the
certification of non-forum shopping submitted by Lim warrant
the dismissal of his petition before the CA; (3) whether the CA
was correct in reversing the SECs order dismissing the petition
for suspension of payment.
Our Ruling
The petitions have no merit.
On the charge of forum shopping, we have already ruled on
the matter in G.R. Nos. 124185-87. Thus:
We hold that private respondents
are not guilty of forum-shopping. In Ramos,
Sr. v. Court of Appeals, we ruled:
The
private
respondents
can
be
considered
to
have
engaged
in
forum
shopping if all of them,
acting as one group, filed
identical
special
civil
actions in the Court of
Appeals
and
in
this
Court. There
must
be
identity of parties or
interests
represented,
rights asserted and relief
sought
in
different
tribunals. In the case at
bar, two groups of private
respondents appear to
have acted independently
of each other when they
sought relief from the
appellate
court. Both
groups sought relief from
the same tribunal.

36
It
would
not
matter even if there are
several divisions in the
Court
of
Appeals. The
adverse party can always
ask for the consolidation
of the two cases. x x x
In the case at bar, private
respondents represent different groups with
different interests the minority stockholders
group, represented by private respondent
Lim; the unsecured creditors group, Allied
Leasing & Finance Corporation; and the old
management group. Each group has distinct
rights to protect. In line with our ruling
in Ramos,the
cases
filed
by
private
respondents should be consolidated. In fact,
BENHAR and RUBY did just that in their
urgent motions filed on December 1,
1993 and December 6, 1993, respectively,
they prayed for the consolidation of the
cases before the Court of Appeals.[49]

In the present case, no consolidation of CA-G.R. SP Nos. 73169

(filed by MANCOM) which was earlier assigned to the
Thirteenth Division and CA-G.R. SP No. 73195 (filed by Lim)
decided by the Second Division, took place. In their Comment
filed before CA-G.R. SP No. 73169, the Majority Stockholders
and RUBY (private respondents therein) prayed for the
dismissal of said case arguing that MANCOM, of which Lim is a
member, circumvented the proscription against forum
shopping. The CAs Thirteenth Division, however, disagreed
with private respondents and granted the motion to withdraw
petition filed by MANCOM which manifested that the Second
Division in CA-G.R. SP No. 73195 by Decision dated May 26,
2004 had granted the reliefs similar to those prayed for in
their petition, said decision being binding on MANCOM which
was also impleaded in said case (CA-G.R. SP No. 73195). The
Thirteenth Division also cited our pronouncement in G.R. Nos.
124185-87 to the effect that there was no violation on the rule
on forum shopping because MANCOM and Lim or the minority
shareholders of RUBY represent different interests.[50]
As to the alleged defects in the certificate of non-forum
shopping submitted by Lim, we find no error committed by the
CA in holding that the belated submission of a special power
of attorney executed in Lims favor by the minority
stockholders has no bearing to the continuation of the case as
supported by ample jurisprudence. To appreciate the liberal
stance adopted by the CA, one must take into account the
previous history of the petitions for review before the CA
involving the SEC September 18, 2002 Order. It was actually
the third time that Lim and/or MANCOM have challenged
certain acts perpetrated by the majority stockholders which
are prejudicial to RUBY, such as the execution of deeds of
assignment during the effectivity of the suspension order in
pursuit of two rehabilitation plans submitted by them together
with BENHAR. The assignment of RUBYs credits to BENHAR
gave the secured creditors undue advantage over RUBYs
prime properties and put these assets beyond the reach of the
unsecured creditors. Each time they go to court, Lim and
MANCOM essentially advance the interest of the corporation
itself. They have consistently taken the position that RUBYs
assets should be preserved for the equal benefit of all its
creditors, and vigorously resisted any attempt of the
controlling stockholders to favor any or some of its creditors
by entering into questionable deals or financing schemes
under two BENHAR/RUBY Plans. Viewed in this light, the CA
was therefore correct in recognizing Lims right to institute a
stockholders action in which the real party in interest is the
corporation itself.
A derivative action is a suit by a shareholder to enforce a
corporate cause of action.[51] It is a remedy designed by equity
and has been the principal defense of the minority
shareholders against abuses by the majority.[52] For this
purpose, it is enough that a member or a minority of
stockholders file a derivative suit for and in behalf of a
corporation.[53] An individual stockholder is permitted to
institute a derivative suit on behalf of the corporation wherein
he holds stock in order to protect or vindicate corporate
rights, whenever officials of the corporation refuse to sue or
are the ones to be sued or hold the control of the
corporation. In such actions, the suing stockholder is regarded
as the nominal party, with the corporation as the party in
interest.[54]

Now, on the third and substantive issue concerning the SECs

dismissal of RUBYs petition for suspension of payment.
The SEC based its action on Sec. 4-9 of the Rules of Procedure
on Corporate Recovery,[55] which provides:
SEC. 4-9. Period of Suspension
Order. The suspension order shall be
effective for a period of sixty (60) days from
the date of its issuance. The order shall be
automatically vacated upon the lapse of the
sixty-day period unless extended by the
Commission. Upon motion, the Commission
may grant an extension thereof for a period
of not more than sixty (60) days in each
application if the Commission is satisfied
that the debtor and its officers have been
acting in good faith and with due diligence,
and that the debtor would likely be able to
make a viable rehabilitation plan. After the
lapse of one hundred and eighty (180) days
from the issuance of the suspension order,
no extension of the said order shall be
granted by the Commission if opposed in
writing by a majority of any class of
creditors. The Commission may grant an
extension beyond one hundred eighty (180)
days only if it appears by convincing
evidence that there is a good chance for the
successful rehabilitation of the debtor and
the opposition thereto by the creditor
appears manifestly unreasonable.
In any event, the petition is
deemed ipso
facto denied
and
dismissed if no Rehabilitation Plan was
approved by the Commission upon the
lapse of the order or the last extension
thereof. In such case, the debtor shall
come
under
the dissolution
and
liquidation proceedings of Rule V of
these Rules. (Emphasis supplied.)

According to the SEC, even if the 180 days maximum period

of suspension order is counted from the finality of this Courts
decision in G.R. Nos. 124185-87 in December 1998, still this
case had gone beyond the period mandated in the Rules for a
corporation under suspension of payment to have a
rehabilitation plan approved by the Commission.
While it is true that the Rules of Procedure on Corporate
Recovery authorizes the dismissal of a petition for suspension
of payment where there is no rehabilitation plan approved
within the maximum period of the suspension order, it must
be recalled that there was in fact not one, but two
rehabilitation
plans(BENHAR/RUBY
Plan
and
Revised
BENHAR/RUBY Plan) submitted by the majority stockholders
which were approved by the SEC. The implementation of the
first plan was enjoined when it was seriously challenged in the
courts by the minority stockholders through Lim. The second
revised plan superseded the first plan, but eventually nullified
by the CA and the CA decision declaring it void was affirmed
by this Court in G.R. Nos. 124185-87. Given this factual milieu,
the automatic application of the lifting of the suspension order
as interpreted by the SEC in its September 18, 2002 Order
would be unfair and highly prejudicial to the financially
distressed corporation.
Moreover, records reveal that the delay in the
proceedings after the case was set for hearing following this
Courts final judgment in G.R. Nos. 124185-87, was not due to
any fault or neglect on the part of MANCOM or the minority
stockholders. The idea propounded by the petitioners majority
stockholders that this case is about a minority in a corporation
holding hostage the majority indefinitely by simple assertion
that the formers rights have been transgressed by the latter
is, downright misleading.
First, the SEC did not even mention in its September
18, 2002 Order that when this Court remanded to it the case
for further proceedings, there remained only the Alternative
Plan of RUBYs minority stockholders which had earlier been
forwarded to the SEC Hearing Panel. With the CA Decision
setting aside the SEC approval of the Revised BENHAR/RUBY
Plan, as affirmed by this Court, it behooves on the SEC to

37
recognize the fact that the Alternative Plan was endorsed by
90% of the RUBYs creditors who had objected to the Revised
BENHAR/RUBY Plan. Yet, not a single step was taken by the
SEC to address those findings and conclusions made by the
CA and this Court on the highly disadvantageous and onerous
provisions of the Revised BENHAR/RUBY Plan.
Moreover, the SEC failed to act on motions filed by Lim and
MANCOM to implement this Courts January 20, 1998 Decision
in G.R. Nos. 124185-87, by declaring all deeds of assignment
with BENHAR and/or the conduits of Henry Yu of no force and
legal effect, which of course necessitates the surrender by the
concerned
creditors
of
those
void
deeds
of
assignment. Petitioner
China
Bank
dismisses
it
as
unnecessary and immaterial to the continued inability of RUBY
to settle its long overdue debts. However, the CA said that the
foregoing acts should have been done by the SEC for proper
documentation and orderly settlement after proper
accounting of the assignment transactions. The appellate
court then concluded that dismissal of the petition under Sec.
4-9 of the Rules of Procedure on Corporate Recovery would
impair the vested rights of the minority stockholders under
this Courts decision invalidating the aforesaid deeds of
assignment, thus:
We agree with the observations of
the petition that if the illegal assignments
not having been unwound and the
mortgages not canceled, the majority, their
alter ego, and/or cohorts will claim to be
secured creditors and freely collect extrajudicially the obligations covered by the
illegal assignments. Ruby has very little
money compared to the P200 Million
probable liability to the illegal assignees as
unilaterally stated by Ruby without audit
(previously merely totaled to P34 Million in
1998 as stated in the revised rehabilitation
plan). Foreclosure of the mortgages by the
illegal assignees will follow; Ruby will lose all
its prime properties; there will be no assets
left for unsecured creditors; and there will
be no residual P600 Million assets to divide.
[56]

Evidently, the minority stockholders and MANCOM had already

foreseen the impossibility of implementing a viable
rehabilitation plan if the illegal assignments made by its
creditors with BENHAR and the majority stockholders, and
subsequently, with conduits of RUBY or Henry Yu, are not
properly unwound and those directors responsible for the void
transactions not required to make a full accounting. Contrary
to petitioner China Banks insinuation that the minority
stockholders merely want to prolong the litigation to the great
prejudice and damage to RUBYs creditors, MANCOM and Lim
had determined and moved for SEC-supervised liquidation
proceedings as the more prudent course of action for an
orderly and equitable settlement of RUBYs liabilities.
Records likewise revealed that the SEC chose to keep silent
and failed to assist the MANCOM and minority stockholders in
their efforts to demand compliance from the majority
stockholders or Yu Kim Giang (who headed the first MANCOM)
with the December 22, 1989 Order directing them to turn over
the cash, financial records and documents of RUBY,
including certificates of title over RUBYs real properties, and
render an accounting of all moneys received and payments
made by RUBY. On January 18, 2002, the MANCOM even filed
a
Motion[57] to
require
Yu
Kim
Giang
to
render
report/accounting of RUBY from 1983 to the 1 st quarter of
1990, stating that despite a commitment from Mr. Giang, he
has seemingly delayed his compliance, hence frustrating the
desire of MANCOM to submit a comprehensive and complete
report for the whole period of 1983 up to the present. To
underscore the importance of making the said records
available for scrutiny of the SEC and MANCOM, Lim
manifested before the SEC that-Indeed, the majority is actually
unwilling (and not merely unable) to submit
such records because these will show,
among others:
(1) The majority to minority ratio in
the corporate ownership is
59.828% :40.172%;

(2) The actual amounts of the bank

loans paid off by Benhar
International[,] Inc. and/or
Henry Yu would be very low;
(3) The illegal payment of the bank
loans and illegal assignments
of
the
mortgages
to
Benhar/Henry Yu are contrary
to
the
Honorable
Commissions
Order
of 20
December
1983 for
suspension of payments;
(4) The earnings of the corporation
from 1983 to 1989 amounted
to millions and cannot be
accounted for by the majority
and the first Mancom;
(5) The money may have been
spent to pay off some of the
loans to the bank but Benhar
and Henry Yu fraudulently
claim credit therefor.[58]

It must be noted that MANCOM had rejected the two

rehabilitation plans proposed by BENHAR and the majority
stockholders. In shifting the blame to the MANCOM and
minority stockholders for the delay in the approval of a viable
rehabilitation plan, the SEC apparently overlooked that from
the time the SEC approved the Revised BENHAR/RUBY Plan
and dissolved the MANCOM, the majority stockholders has
denied MANCOM access to corporate papers, documents
evidencing
the
amounts
actually
paid
to creditor
banks/assignors, financial statements and titles over RUBYs
real properties.
Although the SEC granted MANCOM and Lims request for a
hearing and direct a representative from BPI to bring all
documents relative to the assignment of RUBYs credit, said
hearing did not materialize after the majority stockholders
proposed a compromise agreement with the minority
stockholders. But as it turned out, this development only
caused further delay because the majority stockholders were
unwilling to turn over documents, funds and properties in their
possession, and would neither make a full accounting or
disclosure of RUBYs transactions, especially the actual
amounts paid and rates of interest on the loan assignments.
In this state of things, the MANCOM and minority stockholders
resolved that the more reasonable and practical option is to
move for a SEC-supervised liquidation proceedings.
The other ground invoked by Lim and MANCOM for the
propriety of liquidation is the expiration of RUBYs corporate
term. The SEC, however, held that the filing of the
amendment of articles of incorporation by RUBY in 1996
complied with all the legal requisites and hence the
presumption of regularity stands.Records show that the
validity of the infusion of additional capital which resulted in
the alleged increase in the shareholdings of petitioners
majority stockholders in October 1991 was questioned by
MANCOM and Lim even before the majority stockholders filed
their motion to dismiss in the year 2000.
A stock corporation is expressly granted the power to issue or
sell stocks.[59] The power to issue shares of stock in a
corporation is lodged in the board of directors and no
stockholders meeting is required to consider it because
additional issuances of shares of stock does not need approval
of the stockholders.[60]What is only required is the board
resolution approving the additional issuance of shares. The
corporation shall also file the necessary application with the
SEC to exempt these from the registration requirements under
the Revised Securities Act (now the Securities Regulation
Code).
The new management committee created pursuant to SEC
Order dated September 18, 1991 apparently had no
participation in the October 2, 1991 board resolution
approving the issuance of additional shares. The move was
part of the boards assertion of control over the management
in RUBY following the approval of the Revised BENHAR/RUBY
Plan. The minority stockholders registered their objection

38
during the said meeting by asking the board to defer action as
the SEC September 18, 1991 Order was still on appeal with
the SEC En Banc. When the SEC En Banc denied their appeal
and
motion
for
reconsideration
under
its July
30,
1993 and October 15, 1993 orders, Lim, MANCOM and ALFC
filed petitions for review with the CA which set aside the said
orders. As already mentioned, this Court affirmed the CA
ruling in G.R. Nos. 124185-87.
Contrary to the assertion of petitioners majority stockholders,
our decision in G.R. Nos. 124185-87 nullified the deeds of
assignment not solely on the ground of violation of the
injunction orders issued by the SEC and CA. As earlier
mentioned, we affirmed the CAs finding that the re-lending
scheme under the Revised BENHAR/RUBY Plan will not only
make rehabilitation more costly for RUBY, but also worsen its
financial condition because of the mortgage of its assets to a
new creditor. To better illumine this point, we quote from the
CA decision in CA-G.R. SP Nos. 32404, 32469 and 32483
comparing the provisions of the rehabilitation proposals
submitted
by
the
majority
stockholders
(Revised
BENHAR/RUBY
Plan)
and
the
minority
stockholders
(Alternative Plan):
there is no need for Benhar to act
as financier, as Ruby itself can very well
secure such credit accommodation using its
assets as collateral. Verily, Benhars pretext
at magnanimity is deception of the highest
order considering that: (1) as embodied in
the heading Sources and Uses of Funds in
the Revised Benhar/Ruby Plan, the P80Million loan/credit facility to be extended by
Benhar will be used to pay P60.437-Million
loans
of
Ruby. Of
the P60.437Million, P34.068-Million will be paid to
Benhar as payment for the amounts it paid
in
consideration
of
the
nullified
assignments; (2) The Deed of Assignment of
Credit Facility will be executed by Benhar in
favor of Ruby only upon payment of Ruby of
such amount already advanced by Benhar,
i.e. the P34.068-Million credit assigned to
Benhar by the seven (7) secured creditors.
The Revised Benhar/Ruby Plan, in
fact, gives Benhar undue preference on the
matter of repayment. Under the said plan,
the creditors of Ruby will be paid in
accordance with the following schedules:
Secured Creditors
China
Banking
Corp.
BPI
Philippine Orient

P17.022M

Unsecured
Creditors
Allied
Leasing
Filcor Finance

P 9.347M

Benhar
For having paid
Ruby obligations
to 7 creditors
Trade/Other
Creditors

Benhar/Ruby Plan

Alternative Plan

1. Benhar
plays
a
major role. It will
be
paid P34.068M
out ofP60.437 M
total amount due
to creditors but
not explained as
to how arrived at.

1. The
original
creditors are
the
ones
recognized.
The
amount
payable
is
lower
because
interests are
not
capitalized.

2. Benhar
will
not
assign the credit
facility
of P80M
unless
theP34.068M
above stated is
paid.

2. Direct credit of
P80M
loan and will
be borrowed
from
the
bank(s)
like
Allied, UCPB,
Metrobank or
Equitable
Bank or even
China Bank.

3. The main assets are

to bemortgaged
to the creditorassignor
of
Benhar and if the
illegal
assignments are
recognized, then
Benhar
shall
have
to
be
recognized
as
mortgagee even
when it is a
disqualified
creditor and/or
mortgagee.

3. Mortgaged
to bank(s)dire
ctly.

4. Start
up
cost P16,880 and
based on 1988
figures
and
projections.

4. Plant
= P25,640

To be paid in cash
with 12% interest p.a.

Year

P34.068M

P2.871M
(p.a. for
years)

To be paid in cash
with interest charge

Totalling P8.614M
to
be paid in 3- year
installment, interestfree

(Rollo, CA-G.R. SP No. 32404, p. 727)

Needless to state, the foregoing
payment schedules as embodied in the
said 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. Indeed, a comparison of the salient
features of the Revised Benhar/Ruby Plan
and the Alternative Plan will readily show
just how stacked in favor of Benhar are the
provisions of the former plan:

IV
estimated P4
0. M

Plant A = 22.40
Year

To be paid in cash
interest-f[r]ee

5. Rehabilitation
of Plant B.

only

V
estimated P3
0. M

5. Rehabilitation of
both plants.

6. Recognition
of
Benhar
relender/financier.

6. None

7. Because of the SEC

Order he got an
MC seat and and
the Pilipinas Shell
representative of
trade
creditors
was retained.

7. Pilipinas
Shell
representativ
e be retained.

8. Credit
facility
is
being assigned or
re-lent by Benhar.

8. Credit
facility
directly
to
Ruby.

9. Authorized Benhar
to
mortgage
assets of Ruby
itself.
Only
remaining
unencumbered
asset is one (1)
real property. Two
(2)
prime
properties
already

9. None going to
the minority
but to actual
lenders.

39
encumbered
Assignor
Benhar.

agreement with and endorsement of the Alternative Plan of

the minority stockholders.[62]

to
of

10. Capacity of only

one
(1)
plant
stated at 72%
(overrated)

10. Capacity of two

(2)
plants
progressive to
75% or 80%
with purchase
of
new
machines.

11. Projection figures

based on May,
1990
forex
exchange
rate. Cost
of
importation and
other
local
supplier currently
cannot be met.

11. Minority RP can

be updated at
current
foreign
exchange
rate.

12. Market
and
economic
slow
down not taken
into
consideration.

12. Taken
into
consideration
so
will
upgrade
to
meet
competition.

13. Discriminatory to
creditors Benharcapitalized with
undisclosed rates
of interest.

13. Not
discriminatory
.

14. Original Figures of

illegally assigned
loans
from
FEBTC, PCIB, PTC
which
totaled
toP11,419,036.87
but now entered
as P21,378,002.7
1.The interest is
undisclosed and
may have been
capitalized.Figure
s for the other
four (4) secured
lenders
not
available
individually. Total
of
seven
(7)
secured lenders
given asP34.068
M.

14. Original figures

will
be
used original
figures plans
12% interest
only.

15. Interest is 28%

with Benhar as
conduit.

15. Interest is 25%

payable
to
the bank. This
is still subject
to
current
market rates
to
be
negotiated by
the minority.

16. Call on unissued

shares
forP11.814 M and
if minority will
take up their preemptive
rights
and
dilute
minority
shareholdings.
x x x x[61]

15. Additional
subscription
of P16M
within
6
months
by
the minority
stockholders.

The Revised BENHAR/RUBY Plan had proposed the

calling for subscription of unissued shares through a Board
Resolution from the P11.814 million of the P23.7 million ACS in
order to allow the long overdue program of the REHAB
Program. RUBY will offer for subscription 118,140 shares of
stocks at par value of P100 each to all stockholders on record,
payable within 15 days, or within a reasonable period from
SEC approval of the revised plan.[63] This was implemented by
the October 2, 1991 meeting of the Board of Directors led by
Yu Kim Giang. The minority directors claimed they were not
notified of said board meeting. At any rate, the CA decision
nullifying the Revised BENHAR/RUBY Plan was affirmed by this
Court on January 20, 1998. Hence, the legitimate concerns of
the minority stockholders and MANCOM who objected to the
capital infusion which resulted in the dilution of their
shareholdings, the expiration of RUBYs corporate term and the
pending incidents on the void deeds of assignment of credit
all these should have been duly considered and acted upon by
the SEC when the case was remanded to it for further
proceedings. With the final rejection of the courts of the
Revised BENHAR/RUBY Plan, it was grave error for the SEC not
to act decisively on the motions filed by the minority
stockholders who have maintained that the issuance of
additional shares did not help improve the situation of RUBY
except to stifle the opposition coming from the MANCOM and
minority stockholders by diluting the latters shareholdings.
Worse, the SEC ignored the evidence adduced by the minority
stockholders indicating that the correct amount of
subscription of additional shares was not paid by the majority
stockholders and that SEC official records still reflect the 60%40% percentage of ownership of RUBY.
The SEC remained indifferent to the reliefs sought by
the minority stockholders, saying that the issue of the validity
of the additional capital infusion was belatedly raised. Even
assuming the October 2, 1991 board meeting indeed took
place, the SEC did nothing to ascertain whether indeed, as the
minority claimed: (1) the minority stockholders were not given
notice as required and reasonable time to exercise their preemptive rights; and (2) the capital infusion was not for the
purpose of rehabilitation but a mere ploy to divest the
minority stockholders of their 40.172% shareholding and
reduce it to a mere 25.25%.
The foregoing matters, along with the persistent
refusal of the majority stockholders, led by Yu Kim Giang, to
give a full accounting of their transactions involving RUBYs
credits and properties, were extensively argued by the
minority stockholders in their opposition to the motions to
dismiss/vacate suspension order filed by the majority
stockholders and BPI, as follows:

Prior to the September 18, 1991 Order approving the

Revised BENHAR/RUBY Plan and dissolving the MANCOM,
majority of RUBYs creditors (90%) have already withdrawn
their support to the revised plan and manifested that they
were only lately informed about another plan submitted by
the minority stockholders. Hence, these creditors wrote
individual letters to the SEC Hearing Panel expressing their

Their receipts only show supposed

payment by the majority of a total of
P1,759,150.00 out of the correct amount of
P7,068,079.92.00 (sic) (59.828% of P11.814
million required capital infusion under the
MRP and RRP) which should have been the
amount paid by them under the RRP which
requires full payment. Thus, they sought to
attain a 74.75% equity from a 59.828%
original equity by playing more tricks and
stating that, under the general rule, they
are supposedly allowed to pay-up only 25%
of their subscription. Unfortunately for
them, in a rehabilitation supervised by the
SEC and with an existing Mancom, the
general rule does not apply. What is stated
in the rehabilitation plan must be strictly
followed provided the rehabilitation plan
has been finally approved.
It must be remembered that
in October 2 to 17, 1991, the amounts owed
by Ruby to the banks who illegally assigned
their loans/credit was stated at P34
Million.Operations needed another P20
Million
plus. A
capital
infusion
of
P1,759,150.00 was so miniscule and clearly
not for rehabilitation but was intended to
deprive the minority of its blocking position
and property rights since distribution after
liquidation is based on the percentage of
stockholdings. It
is
not
only
unfair,

40
inequitable and not meaningful it is clearly
dishonest.
xxxx
Assuming arguendo that the Board
of Directors could act independently and
this did not violate any injunction, if the
capital infusion was actually made, the
Board of Directors had the duty to report
this to the Mancom because they would
then fall under existing assets and would be
part of the evaluation of the proposed RRP,
necessary for management and in the
overall plan of rehabilitation. Nothing of this
kind happened and the belated proof cannot
correct this situation.
xxxx
It is not true that there is
benevolence on the part of the majority
when
they
maneuvered
the
illegal
assignments and paid the banks. The loan
obligations remain as accounts payable of
Ruby and have even been bloated to
gigantic proportions and yet the SEC does
not even ask them to account how much
these obligations are now and the majority
should have reported these to the Mancom,
but the majority has not. These anomalous
situations have been made to continue long
enough and, we pray, should be addressed
by the Honorable Commission.
xxxx
The SEC must understand that,
being head of the first Mancom, YU KIM
GIANG had the same obligation to render a
report to the SEC as the present Mancom
now.To single out the present Mancom to do
this when a complete report cannot be
made without these starting records is
discriminatory, unfair and violates the rules
of accountancy. For example, where is the
report on the illegal assignments and
mortgages complete with details? Where did
the rentals for the period from 1983 to 1989
go?This amounted to millions. There are no
reports on these. By not requiring the
first Mancom to Report, the SEC is
preventing the complete picture on the
liabilities and finances of Ruby from
being seen and is sheltering Ruby and
the
majority.[64] (Additional
emphasis
supplied.)
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 stockholder
must be given a reasonable time within which to exercise their
preemptive rights. Upon the expiration of said period, any
stockholder who has not exercised such right will be deemed
to have waived it.[65]
The validity of issuance of additional shares may be
questioned if done in breach of trust by the controlling
stockholders. Thus, even if the pre-emptive right does not
exist, either because the issue comes within the exceptions in
Section 39 or because it is denied or limited in the articles of
incorporation, 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. [66] In this case, the
following relevant observations should have signaled greater
circumspection on the part of the SEC -- upon the third and
last remand to it pursuant to our January 20, 1998 decision -to demand transparency and accountability from the majority
stockholders, in view of the illegal assignments and
objectionable features of the Revised BENHAR/RUBY Plan, as
found by the CA and as affirmed by this Court:

There can be no gainsaying the

well-established rule in corporate practice
and procedure that the will of the majority
shall govern in all matters within the limits
of the act of incorporation and lawfully
enacted by-laws not proscribed by law. It is,
however,
equally
true
that
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 Rubys valuable assets to the great
prejudice of Ruby itself, as well as the
minority
stockholders
and
the
unsecured creditors.
Certainly, the minority stockholders
and the unsecured creditors are given some
measure of protection by the law from the
abuses and impositions of the majority,
more so in this case, considering the giveaway signs of private respondents
perfidy strewn all over the factual
landscape. Indeed, equity cannot deprive
the minority of a remedy against the abuses
of the majority, and the present action has
been instituted precisely for the purpose of
protecting the true and legitimate interests
of
Ruby
against
the
Majority
Stockholders. On this score, the Supreme
Court, has ruled that:
Generally
speaking, the voice of the
majority
of
the
stockholders is the law of
the corporation, but there
are exceptions to this
rule. There
must
necessarily be a limit upon
the
power
of
the
majority. Without such a
limit the will of the
majority will be absolute
and irresistible and might
easily degenerate into
absolute
tyranny. x
x
x[67] (Additional emphasis
supplied.)

Lamentably, the SEC refused to heed the plea of the

minority stockholders and MANCOM for the SEC to order RUBY
to commence liquidation proceedings, which is allowed under
Sec. 4-9 of the Rules on Corporate Recovery. Under the
circumstances, liquidation was the only hope of the minority
stockholders for effecting an orderly and equitable settlement
of RUBYs obligations, and compelling the majority
stockholders to account for all funds, properties and
documents in their possession, and make full disclosure on
the nullified credit assignments. Oblivious to these pending
incidents so crucial to the protection of the interest of the
majority of creditors and minority shareholders, the SEC
simply stated that in the interim, RUBYs corporate term was
validly extended, as if such extension would provide the
solution to RUBYs myriad problems.
Extension of corporate term requires the vote of 2/3
of the outstanding capital stock in a stockholders meeting
called for the purpose.[68] The actual percentage of
shareholdings in RUBY as of September 3, 1996 -- when the
majority stockholders allegedly ratified the board resolution
approving the extension of RUBYs corporate life to another 25
years
was
seriously
disputed
by
the
minority
stockholders, and we find the evidence of compliance with the
notice and quorum requirements submitted by the majority
stockholders insufficient and doubtful. Consequently, the SEC
had no basis for its ruling denying the motion of the minority
stockholders to declare as without force and effect the
extension of RUBYs corporate existence.
Liquidation, or the settlement of the affairs of the
corporation, consists of adjusting the debts and claims, that
is, of collecting all that is due the corporation, the settlement
and adjustment of claims against it and the payment of its

41
just debts.[69] It involves the winding up of the affairs of the
corporation, which means the collection of all assets, the
payment of all its creditors, and the distribution of the
remaining assets, if any, among the stockholders thereof in
accordance with their contracts, or if there be no special
contract, on the basis of their respective interests. [70]
Section 122 of the Corporation Code, which is
applicable to the present case, provides:
SEC.
122. Corporate
liquidation. -- Every
corporation
whose
charter expires by its own limitation or is
annulled by forfeiture or otherwise, or
whose corporate existence for other
purposes is terminated in any other manner,
shall nevertheless be continued as a body
corporate for three (3) years after the time
when it would have been so dissolved, for
the purpose of prosecuting and defending
suits by or against it and enabling it to settle
and close its affairs, to dispose of and
convey its property and to 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, said 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. From
and
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 interests 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.
Upon winding up of the corporate
affairs, any asset distributable to any
creditor or stockholder or member who is
unknown or cannot be found shall be
escheated to the city or municipality where
such assets are located.
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.

Since the corporate life of RUBY as stated in its articles of

incorporation expired, without a valid extension having been
effected, it was deemed dissolved by such expiration without
need of further action on the part of the corporation or the
State.[71] With greater reason then should liquidation ensue
considering that the last paragraph of Sec. 4-9 of the Rules of
Procedure on Corporate Recovery mandates the SEC to order
the dissolution and liquidation proceedings under Rule VI. Sec.
6-1, Rule VI likewise authorizes the SEC on motion or motu
proprio, or upon recommendation of the management
committee, to order dissolution of the debtor corporation and
the liquidation of its remaining assets, appointing a Liquidator
for the purpose, if the continuance in business of the debtor is
no longer feasible or profitable or no longer works to the best
interest of the stockholders, parties-litigants, creditors, or the
general public.
It cannot be denied that with the current divisiveness, distrust
and antagonism between the majority and minority
stockholders, the long agony and extreme prejudice caused
by numerous litigations to the creditors, and the bleak
prospects for business recovery in the light of problems with
the local government which are implementing more
restrictions and anti-pollution measures that practically
banned the operation of RUBYs glass plant liquidation
becomes the only viable course for RUBY to stave off any
further losses and dissipation of its assets. Liquidation would
also
ensure
an
orderly
and
equitable
settlement
of all creditors of RUBY, both secured and unsecured.

The SECs utter disregard of the rights of the minority in

applying the provisions of the Rules of Procedure on Corporate
Recovery is inconsistent with the policy of liberal construction
of the said rules to assist the parties in obtaining a just,
expeditious
and
inexpensive settlement
of
cases.
[72]
Petitioners majority stockholders, however, assert that the
findings and conclusions of the SEC on the matter of the
dismissal of RUBYs petition are binding and conclusive upon
the CA and this Court. They contend that reviewing courts are
not supposed to substitute their judgment for those made by
administrative bodies specifically clothed with authority to
pass upon matters over which they have acquired expertise.
[73]
Given our foregoing findings clearly showing that the SEC
acted arbitrarily and committed patent errors and grave
abuse of discretion, this case falls under the exception to the
general rule.

Appeals:

As we held in Ruby Industrial Corporation v. Court of

The settled doctrine is that factual

findings of an administrative agency are
accorded respect and, at times, finality for
they have acquired the expertise inasmuch
as their jurisdiction is confined to specific
matters. Nonetheless, these doctrines do
not apply when the board or official has
gone beyond his statutory authority,
exercised unconstitutional powers or clearly
acted arbitrarily and without regard to his
duty
or
with
grave
abuse
of
discretion. In Leongson
vs.
Court
of
Appeals, we held: once the actuation of the
administrative official or administrative
board or agency is tainted by a failure to
abide by the command of the law, then it is
incumbent on the courts of justice to set
matters right, with this Tribunal having the
last say on the matter.[74]

Petitioners majority stockholders further insist that the

minority stockholders were mistaken when they contended
that the rehabilitation of RUBY is dependent on the unwinding
by the SEC of the illegal assignments and mortgages. They
assert that aside from the fact that the SEC had nothing to
unwind because the alleged illegal assignments and
mortgages were already declared null and void, the said
assignments and mortgages will not affect the rehabilitation
of Ruby; the same affecting only the issue of how, as
to who will be its creditors.
Such contention is untenable and contrary to our previous
ruling in G.R. Nos. 124185-87. With the nullification of the
deeds of assignments of credit executed by some of Rubys
secured creditors in favor of BENHAR, it logically follows that
the assignors or the original bank creditors remain as the
creditors on record of RUBY. We have noted that BENHAR,
which is controlled by the family of Henry Yu who is also a
director and stockholder of RUBY, was not listed as one of
RUBYs creditors at the time RUBY filed the petition for
suspension of payment. Petitioners majority stockholders
insinuation that RUBYs credits may have been assigned to
third parties, if not referring to BENHAR or its conduits, implies
two things: either the assignments declared void by this
Courts January 20, 1998 decision continues to be recognized
by the majority stockholders, in violation of the said decision,
or other third parties in connivance with BENHAR and/or the
controlling stockholders had subsequently entered the picture,
without approval of the SEC and while the SEC December 20,
1983 Order enjoining the disposition of RUBYs properties was
in force.
The majority stockholders eagerness to have the suspension
order lifted or vacated by the SEC without any order for its
liquidation evinces a total disregard of the mandate of Sec. 49 of the Rules of Procedure on Corporate Recovery, and their
obvious lack of any intent to render an accounting of all funds,
properties and details of the unlawful assignment transactions
to the prejudice of RUBY, minority stockholders and the
majority of RUBYs creditors. The majority stockholders and
BENHARs conduits must not be allowed to evade the duty to
make such full disclosure and account any money due to
RUBY to enable the latter to effect a fair, orderly and equitable
settlement of all its obligations, as well as distribution of any
remaining assets after paying all its debtors.

42
In fine, no error was committed by the CA when it set aside
the September 18, 2002 Order of the SEC and declared the
nullity of the acts of majority stockholders in implementing
capital infusion through issuance of additional shares in
October 1991, the board resolution approving the extension of
RUBYs corporate term for another 25 years, and any illegal
assignment of credit executed by RUBYs creditors in favor of
third
parties
and/or
conduits
of
the
controlling
stockholders. The CA likewise correctly ordered the delivery of
all documents relative to the said assignment of credits to the
MANCOM or the Liquidator, the unwinding of these void deeds
of assignment, and their full accounting by the majority
stockholders.
The petitioners majority stockholders and China Bank cannot
be permitted to raise any issue again regarding the validity
of any assignment of credit made during the effectivity of the
suspension order and before the finality of the September 18,
2002 Order lifting the same. While China Bank is not
precluded from questioning the validity of the December 20,
1983 suspension order on the basis of res judicata, it is,
however, barred from doing so by the principle of law of the
case. We have held that when the validity of an interlocutory
order has already been passed upon on appeal, the Decision
of the Court on appeal becomes the law of the case between
the same parties. Law of the case has been defined as the
opinion delivered on a former appeal. More specifically, it
means that whatever is once irrevocably established as the
controlling legal rule of decision between the same parties in
the same case continues to be the law of the case, whether
correct on general principles or not, so long as the facts on
which such decision was predicated continue to be the facts of
the case before the court.[75]
The unwinding process of all such illegal assignment
of RUBYs credits is critical and necessary, in keeping with
good faith and as a matter of fairness and justice to all parties
affected, particularly the unsecured creditors who stands to
suffer most if left with nothing of the assets of RUBY, and the
minority stockholders who waged legal battles to defend the
interest of RUBY and protect the rights of the minority from
the abuses of the controlling stockholders. As correctly stated
by the CA:
Liquidation is imperative because
the unsecured creditor must negotiate the
amount of the imputable interest rate on its
long unpaid credit, the decision on which
assets are to be sold to liquidate the illegally
assigned credits must be made, the other
secured credits and the trade credits must
be determined, and most importantly, the
restoration of the 40.172% minority
percentage of ownership must be done.[76]

However, we do not agree that it is the SEC which has the

authority to supervise RUBYs liquidation.
In the case of Union Bank of the Philippines v. Concepcion,
[77]
the Court is presented with the issue of whether the SEC
had jurisdiction to proceed with insolvency proceedings after
it was shown that the debtor corporation can no longer be
rehabilitated. We held that although jurisdiction over a
petition to declare a corporation in a state of insolvency
strictly lies with regular courts, the SEC possessed ample
power under P.D. No. 902-A, as amended, to declare a
corporation insolvent as an incident of and in continuation of
its already acquired jurisdiction over the petition to be
declared in a state of suspension of payments in the two
instances provided in Sec. 5 (d)[78] thereof.
Subsequently, in Consuelo Metal Corporation v. Planters
Development Bank[79] the Court was again confronted with the
same issue. The original petition filed by the debtor
corporation was for suspension of payment, rehabilitation and
appointment of a rehabilitation receiver or management
committee. Finding the petition sufficient in form and
substance, the SEC issued an order suspending immediately
all actions for claims against the petitioner pending before
any court, tribunal or body until further orders from the court.
It also created a management committee to undertake
petitioners rehabilitation. Four years later, upon the
management committees recommendation, the SEC issued an
omnibus order directing the dissolution and liquidation of the
petitioner, and that the proceedings on and implementation of

the order of liquidation be commenced at the Regional Trial

Court to which the case was transferred. However, the trial
court refused to act on the motion filed by the petitioner who
requested for the issuance of a TRO against the extrajudicial
foreclosure initiated by one of its creditors. The trial court
ruled that since the SEC had already terminated and decided
on the merits the petition for suspension of payment, the trial
court no longer had legal basis to act on petitioners motion. It
likewise denied the motion for reconsideration stating that
petition for suspension of payment could not be converted
into a petition for dissolution and liquidation because they
covered different subject matters and were governed by
different rules. Petitioners remedy thus was to file a new
petition for dissolution and liquidation either with the SEC or
the trial court.
When the case was elevated to the CA, the petition was
dismissed affirming that under Sec. 121 of the Corporation
Code, the SEC had jurisdiction to hear the petition for
dissolution and liquidation. On motion for reconsideration, the
CA remanded the case to the SEC for proceedings under Sec.
121 of the Corporation Code. The CA denied the motion for
reconsideration filed by the respondent creditor, who then
filed a petition for review with this Court.
We ruled that the SEC observed the correct procedure under
the present law, in cases where it merely retained jurisdiction
over pending cases for suspension of payments/rehabilitation,
thus:
Republic Act No. 8799 (RA 8799)
transferred to the appropriate regional trial
courts the SECs jurisdiction defined under
Section 5(d) of Presidential Decree No. 902A. Section 5.2 of RA 8799 provides:
The
Commissions
jurisdiction over all cases
enumerated under Sec. 5
of Presidential Decree No.
902-A
is
hereby
transferred to the Courts
of general jurisdiction or
the appropriate Regional
Trial Court: Provided, That
the Supreme Court in the
exercise of its authority
may
designate
the Regional Trial Court
branches
that
shall
exercise jurisdiction over
these
cases. The
Commission shall retain
jurisdiction over pending
cases
involving
intracorporate
disputes
submitted
for
final
resolution which should be
resolved within one (1)
year from the enactment
of
this
Code. The
Commission
shall
retain jurisdiction over
pending suspension of
payments/rehabilitatio
n cases filed as of 30
June 2000 until finally
disposed. (Emphasis
supplied)
The SEC assumed jurisdiction over
CMCs petition for suspension of payment
and issued a suspension order on 2 April
1996 after it found CMCs petition to be
sufficient in form and substance. While
CMCs petition was still pending with the SEC
as of 30 June 2000, it was finally disposed of
on 29 November 2000 when the SEC issued
its Omnibus Order directing the dissolution
of CMC and the transfer of the liquidation
proceedings before the appropriate trial
court. The SEC finally disposed of CMCs
petition for suspension of payment when it
determined that CMC could no longer be
successfully rehabilitated.
However, the SECs jurisdiction
does not extend to the liquidation of a
corporation. While
the
SEC
has

43
jurisdiction to order the dissolution of
a corporation, jurisdiction over the
liquidation of the corporation now
pertains to the appropriate regional
trial courts. This is the reason why the
SEC, in its 29 November 2000Omnibus
Order, directed that the proceedings on and
implementation of the order of liquidation
be commenced at the Regional Trial Court to
which this case shall be transferred. This is
the correct procedure because the
liquidation of a corporation requires
the settlement of claims for and
against the corporation, which clearly
falls under the jurisdiction of the
regular courts. The trial court is in the
best position to convene all the
creditors of the corporation, ascertain
their claims, and determine their
preferences.[80] (Additional
emphasis
supplied.)
In view of the foregoing, the SEC should now be directed to
transfer this case to the proper RTC which shall supervise the
liquidation proceedings under Sec. 122 of the Corporation
Code. Under Sec. 6 (d) of P.D. 902-A, the SEC is empowered,
on the basis of the findings and recommendations of the
management committee or rehabilitation receiver, or on its
own findings, to determine that the continuance in business of
a debtor corporation under suspension of payment or
rehabilitation would not be feasible or profitable nor work to
the best interest of the stockholders, parties-litigants,
creditors, or the general public, order the dissolution of such
corporation and its remaining assets liquidated accordingly. As
mentioned earlier, the procedure is governed by Rule VI of the
SEC Rules of Procedure on Corporate Recovery.
However, R.A. No. 10142[81] otherwise known as the Financial
Rehabilitation and Insolvency Act (FRIA) of 2010, now provides
for court proceedings in the rehabilitation or liquidation of
debtors, both juridical and natural persons, in a manner that
will 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. Considering that this case was still
pending when the new law took effect last year, the RTC to
which this case will be transferred shall be guided by Sec. 146
of said law, which states:
SEC. 146. Application to Pending
Insolvency, Suspension of Payments and
Rehabilitation Cases. This Act shall govern
all petitions filed after it has taken effect. All
further
proceedings
in
insolvency,
suspension of payments and rehabilitation
cases then pending, except to the extent
that in opinion of the court their application
would not be feasible or would work
injustice, in which event the procedures set
forth in prior laws and regulations shall
apply.
WHEREFORE, the
petitions
for
review
on
certiorari
are DENIED. The Decision dated May 26, 2004 and Resolution
dated November 4, 2004 of the Court of Appeals in CA-G.R. SP
No. 73195 are hereby AFFIRMED with MODIFICATION in that
the Securities and Exchange Commission is hereby ordered
toTRANSFER SEC Case No. 2556 to the appropriate Regional
Trial Court which is hereby DIRECTED to supervise the
liquidation of Ruby Industrial Corporation under the provisions of
R.A. No. 10142.
With costs against the petitioners.
SO ORDERED.
Commencement of Corporate Existence
SECOND DIVISION
MARC
II
INC.
and
JOSON,

MARKETING,
LUCILA
V.

G.R. No. 171993

Promulgated:

Petitioners,
versus
ALFREDO
M.
JOSON,Respondent.

December 12, 2011

DECISION
In this Petition for Review on Certiorari under Rule 45 of the
Rules of Court, herein petitioners Marc II Marketing, Inc. and
Lucila V. Joson assailed the Decision [1] dated 20 June 2005 of
the Court of Appeals in CA-G.R. SP No. 76624 for reversing
and setting aside the Resolution[2] of the National Labor
Relations Commission (NLRC) dated 15 October 2002, thereby
affirming the Labor Arbiters Decision [3] dated 1 October 2001
finding herein respondent Alfredo M. Josons dismissal from
employment as illegal. In the questioned Decision, the Court
of Appeals upheld the Labor Arbiters jurisdiction over the case
on the basis that respondent was not an officer but a mere
employee of petitioner Marc II Marketing, Inc., thus, totally
disregarding the latters allegation of intra-corporate
controversy. Nonetheless, the Court of Appeals remanded the
case to the NLRC for further proceedings to determine the
proper amount of monetary awards that should be given to
respondent.
Assailed as well is the Court of Appeals Resolution[4] dated 7
March 2006 denying their Motion for Reconsideration.
Petitioner Marc II Marketing, Inc. (petitioner corporation) is a
corporation duly organized and existing under and by virtue of
the laws of the Philippines. It is primarily engaged in buying,
marketing, selling and distributing in retail or wholesale for
export or import household appliances and products and other
items.[5]It took over the business operations of Marc
Marketing, Inc. which was made non-operational following its
incorporation and registration with the Securities and
Exchange Commission (SEC). Petitioner Lucila V. Joson (Lucila)
is the President and majority stockholder of petitioner
corporation. She was also the former President and majority
stockholder of the defunct Marc Marketing, Inc.
Respondent Alfredo M. Joson (Alfredo), on the other hand, was
the General Manager, incorporator, director and stockholder
of petitioner corporation.
The controversy of this case arose from the following
factual milieu:
Before
petitioner
corporation
was
officially
incorporated,[6] respondent has already been engaged by
petitioner Lucila, in her capacity as President of Marc
Marketing, Inc., to work as the General Manager of petitioner
corporation. It was formalized through the execution of a
Management Contract[7] dated 16 January 1994 under the
letterhead of Marc Marketing, Inc.[8] as petitioner corporation
is yet to be incorporated at the time of its execution. It was
explicitly provided therein that respondent shall be entitled to
30% of its net income for his work as General
Manager. Respondent will also be granted 30% of its net profit
to compensate for the possible loss of opportunity to work
overseas.[9]
Pending incorporation of petitioner corporation,
respondent was designated as the General Manager of Marc
Marketing, Inc., which was then in the process of winding up
its business. For occupying the said position, respondent was
among its corporate officers by the express provision of
Section 1, Article IV[10] of its by-laws.[11]
On 15 August 1994, petitioner corporation was officially
incorporated and registered with the SEC. Accordingly, Marc
Marketing, Inc. was made non-operational. Respondent
continued to discharge his duties as General Manager but this
time under petitioner corporation.
Pursuant to Section 1, Article IV [12] of petitioner corporations
by-laws,[13] its corporate officers are as follows: Chairman,
President, one or more Vice-President(s), Treasurer and
Secretary. Its Board of Directors, however, may, from time to
time, appoint such other officers as it may determine to be
necessary or proper.
Per an undated Secretarys Certificate,[14] petitioner
corporations Board of Directors conducted a meeting on 29
August 1994 where respondent was appointed as one of its
corporate officers with the designation or title of General
Manager to function as a managing director with other duties

44
and responsibilities that the Board of Directors may provide
and authorized.[15]
Nevertheless, on 30 June 1997, petitioner corporation
decided to stop and cease its operations, as evidenced by an
Affidavit of Non-Operation[16] dated 31 August 1998, due to
poor sales collection aggravated by the inefficient
management of its affairs. On the same date, it formally
informed respondent of the cessation of its business
operation. Concomitantly, respondent was apprised of the
termination of his services as General Manager since his
services as such would no longer be necessary for the winding
up of its affairs.[17]
Feeling aggrieved, respondent filed a Complaint for
Reinstatement and Money Claim against petitioners before
the Labor Arbiter which was docketed as NLRC NCR Case No.
00-03-04102-99.
In his complaint, respondent averred that petitioner
Lucila dismissed him from his employment with petitioner
corporation due to the feeling of hatred she harbored towards
his family. The same was rooted in the filing by petitioner
Lucilas estranged husband, who happened to be respondents
brother, of a Petition for Declaration of Nullity of their
Marriage.[18]
For the parties failure to settle the case amicably, the
Labor Arbiter required them to submit their respective
position papers. Respondent complied but petitioners opted to
file a Motion to Dismiss grounded on the Labor Arbiters lack of
jurisdiction as the case involved an intra-corporate
controversy, which jurisdiction belongs to the SEC [now with
the Regional Trial Court (RTC)].[19] Petitioners similarly raised
therein the ground of prescription of respondents monetary
claim.
On 5 September 2000, the Labor Arbiter issued an
Order[20] deferring the resolution of petitioners Motion to
Dismiss until the final determination of the case. The Labor
Arbiter also reiterated his directive for petitioners to submit
position paper. Still, petitioners did not comply. Insisting that
the Labor Arbiter has no jurisdiction over the case, they
instead filed an Urgent Motion to Resolve the Motion to
Dismiss and the Motion to Suspend Filing of Position Paper.
In an Order[21] dated 15 February 2001, the Labor
Arbiter denied both motions and declared final the Order
dated 5 September 2000. The Labor Arbiter then gave
petitioners a period of five days from receipt thereof within
which to file position paper, otherwise, their Motion to Dismiss
will be treated as their position paper and the case will be
considered submitted for decision.
Petitioners, through counsel, moved for extension of
time to submit position paper. Despite the requested
extension,
petitioners
still
failed
to
submit
the
same. Accordingly, the case was submitted for resolution.
On 1 October 2001, the Labor Arbiter rendered his
Decision in favor of respondent. Its decretal portion reads as
follows:
WHEREFORE, premises considered,
judgment is hereby rendered declaring
[respondents]
dismissal
from
employment
illegal. Accordingly,
[petitioners] are hereby ordered:
1.

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

2.

Jointly and severally liable to

pay
[respondents]
unpaid
wages
in
the
amount
of P450,000.00
per
month
from [26 March 1996] up to
time of dismissal in the total
amount of P6,300,000.00;

3.

Jointly and severally liable to

pay
[respondents]
full
backwages in the amount
of P450,000.00
per
month
from date of dismissal until
actual reinstatement which at

the time of promulgation

amounted to P21,600,000.00;
4.

Jointly and severally liable to

pay moral damages in the
amount of P100,000.00 and
attorneys fees in the amount
of 5% of the total monetary
award.[22][Emphasis supplied.]

In the aforesaid Decision, the Labor Arbiter initially

resolved petitioners Motion to Dismiss by finding the ground
of lack of jurisdiction to be without merit. The Labor Arbiter
elucidated that petitioners failed to adduce evidence to prove
that the present case involved an intra-corporate
controversy. Also, respondents money claim did not arise from
his being a director or stockholder of petitioner corporation
but from his position as being its General Manager. The Labor
Arbiter likewise held that respondent was not a corporate
officer under petitioner corporations by-laws. As such,
respondents complaint clearly arose from an employeremployee relationship, thus, subject to the Labor Arbiters
jurisdiction.
The Labor Arbiter then declared respondents
dismissal from employment as illegal. Respondent, being a
regular employee of petitioner corporation, may only be
dismissed for a valid cause and upon proper compliance with
the requirements of due process. The records, though,
revealed that petitioners failed to present any evidence to
justify respondents dismissal.
Aggrieved, petitioners appealed the aforesaid Labor
Arbiters Decision to the NLRC.
In its Resolution dated 15 October 2002, the NLRC
ruled in favor of petitioners by giving credence to the
Secretarys
Certificate,
which
evidenced
petitioner
corporations Board of Directors meeting in which a resolution
was approved appointing respondent as its corporate officer
with designation as General Manager. Therefrom, the NLRC
reversed and set aside the Labor Arbiters Decision dated 1
October 2001 and dismissed respondents Complaint for want
of jurisdiction.[23]
The NLRC enunciated that the validity of respondents
appointment and termination from the position of General
Manager was made subject to the approval of petitioner
corporations Board of Directors. Had respondent been an
ordinary employee, such board action would not have been
required. As such, it is clear that respondent was a corporate
officer whose dismissal involved a purely intra-corporate
controversy. The NLRC went further by stating that
respondents claim for 30% of the net profit of the corporation
can only emanate from his right of ownership therein as
stockholder, director and/or corporate officer. Dividends or
profits are paid only to stockholders or directors of a
corporation and not to any ordinary employee in the absence
of any profit sharing scheme. In addition, the question of
remuneration of a person who is not a mere employee but a
stockholder and officer of a corporation is not a simple labor
problem. Such matter comes within the ambit of corporate
affairs and management and is an intra-corporate controversy
in contemplation of the Corporation Code.[24]
When respondents Motion for Reconsideration was
denied in another Resolution[25] dated 23 January 2003, he
filed a Petition for Certiorari with the Court of Appeals
ascribing grave abuse of discretion on the part of the NLRC.
On 20 June 2005, the Court of Appeals rendered its
now assailed Decision declaring that the Labor Arbiter has
jurisdiction over the present controversy. It upheld the finding
of the Labor Arbiter that respondent was a mere employee of
petitioner corporation, who has been illegally dismissed from
employment without valid cause and without due
process. Nevertheless, it ordered the records of the case
remanded to the NLRC for the determination of the
appropriate amount of monetary awards to be given to
respondent. The Court of Appeals, thus, decreed:
WHEREFORE, the petition is by us
PARTIALLY GRANTED. The Labor Arbiter is
DECLARED to have jurisdiction over the
controversy. The records are REMANDED to
the NLRC for further proceedings to
determine the appropriate amount of
monetary awards to be adjudged in favor of
[respondent]. Costs
against
the
[petitioners] in solidum.[26]

45
Petitioners moved for its reconsideration but to no

Court of Appeals to hold petitioner Lucila solidarily liable with

petitioner corporation.

Petitioners are now before this Court with the

following assignment of errors:

From the foregoing arguments, the initial question is

which between the Labor Arbiter or the RTC, has jurisdiction
over respondents dismissal as General Manager of petitioner
corporation. Its
resolution
necessarily
entails
the
determination of whether respondent as General Manager of
petitioner corporation is a corporate officer or a mere
employee of the latter.

avail.[27]

I.

II.

THE COURT OF APPEALS ERRED AND

COMMITTED GRAVE ABUSE OF DISCRETION
IN DECIDING THAT THE NLRC HAS THE
JURISDICTION IN RESOLVING A PURELY
INTRA-CORPORATE
MATTER
WHICH
IS
COGNIZABLE BY THE SECURITIES AND
EXCHANGE COMMISSION/REGIONAL TRIAL
COURT.
ASSUMING, GRATIS ARGUENDO, THAT THE
NLRC HAS JURISDICTION OVER THE CASE,
STILL THE COURT OF APPEALS SERIOUSLY
ERRED IN NOT RULING THAT THERE IS NO
EMPLOYER-EMPLOYEE
RELATIONSHIP
BETWEEN [RESPONDENT] ALFREDO M.
JOSON AND MARC II MARKETING, INC.
[PETITIONER CORPORATION].

III.

ASSUMING GRATIS ARGUENDO THAT THE

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

IV.

THE COURT OF APPEALS SERIOUSLY ERRED

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

Petitioners fault the Court of Appeals for having

sustained the Labor Arbiters finding that respondent was not a
corporate officer under petitioner corporations by-laws. They
insist that there is no need to amend the corporate by-laws to
specify who its corporate officers are. The resolution issued by
petitioner corporations Board of Directors appointing
respondent as General Manager, coupled with his assumption
of the said position, positively made him its corporate
officer. More so, respondents position, being a creation of
petitioner corporations Board of Directors pursuant to its bylaws, is a corporate office sanctioned by the Corporation Code
and the doctrines previously laid down by this Court. Thus,
respondents removal as petitioner corporations General
Manager involved a purely intra-corporate controversy over
which the RTC has jurisdiction.
Petitioners further contend that respondents claim
for 30% of the net profit of petitioner corporation was
anchored on the purported Management Contract dated 16
January 1994. It should be noted, however, that said
Management Contract was executed at the time petitioner
corporation was still nonexistent and had no juridical
personality yet. Such being the case, respondent cannot
invoke any legal right therefrom as it has no legal and binding
effect on petitioner corporation. Moreover, it is clear from the
Articles of Incorporation of petitioner corporation that
respondent was its director and stockholder. Indubitably,
respondents claim for his share in the profit of petitioner
corporation was based on his capacity as such and not by
virtue of any employer-employee relationship.
Petitioners further avow that even if the present case
does not pose an intra-corporate controversy, still, the Labor
Arbiters multi-million peso awards in favor of respondent were
erroneous. The same was merely based on the latters selfserving computations without any supporting documents.
Finally, petitioners maintain that petitioner Lucila
cannot
be
held
solidarily
liable
with
petitioner
corporation. There was neither allegation nor iota of evidence
presented to show that she acted with malice and bad faith in
her dealings with respondent. Moreover, the Labor Arbiter, in
his Decision, simply concluded that petitioner Lucila was
jointly and severally liable with petitioner corporation without
making any findings thereon. It was, therefore, an error for the

While Article 217(a)2[29] of the Labor Code, as

amended, provides that it is the Labor Arbiter who has the
original and exclusive jurisdiction over cases involving
termination or dismissal of workers when the person
dismissed or terminated is a corporate officer, the case
automatically falls within the province of the RTC. The
dismissal of a corporate officer is always regarded as a
corporate act and/or an intra-corporate controversy. [30]
Under Section 5[31] of Presidential Decree No. 902-A,
intra-corporate controversies are those controversies arising
out of intra-corporate or partnership relations, between and
among stockholders, members or associates; between any or
all of them and the corporation, partnership or association of
which they are stockholders, members or associates,
respectively; and between such corporation, partnership or
association and the State insofar as it concerns their
individual franchise or right to exist as such entity. It also
includes controversies in the election or appointments
of directors, trustees, officers or managers of such
corporations, partnerships or associations.[32]

Accordingly, in determining whether the SEC (now

the RTC) has jurisdiction over the controversy, the status or
relationship of the parties and the nature of the question that
is the subject of their controversy must be taken into
consideration.[33]

In Easycall Communications Phils., Inc. v. King, this

Court held that in the context of Presidential Decree No. 902A, corporate officers are those officers of a corporation
who are given that character either by the Corporation
Code or by the corporations by-laws. Section 25[34] of the
Corporation Code specifically enumerated who are these
corporate officers, to wit: (1) president; (2) secretary; (3)
treasurer; and (4) such other officers as may be provided
for in the by-laws.[35]

The aforesaid Section 25 of the Corporation Code,

particularly the phrase such other officers as may be provided
for in the by-laws, has been clarified and elaborated in this
Courts recent pronouncement in Matling Industrial and
Commercial Corporation v. Coros, where it held, thus:

Conformably with Section 25, a

position must be expressly mentioned
in the [b]y-[l]aws in order to be
considered as a corporate office. Thus,
the creation of an office pursuant to or
under a [b]y-[l]aw enabling provision is
not enough to make a position a
corporate
office.
[In] Guerrea
v.
Lezama [citation omitted] the first ruling on
the matter, held that the only officers of a
corporation were those given that
character either by the Corporation
Code or by the [b]y-[l]aws; the rest of
the
corporate
officers
could
be
considered only as employees or

46
subordinate officials. Thus, it was held
in Easycall Communications Phils., Inc. v.
King [citation omitted]:

An "office" is created
by
the
charter
of
the
corporation and the officer is
elected
by the directors
or
stockholders. On the other hand,
an employee occupies no office
and generally is employed not
by the action of the directors or
stockholders
but by
the
managing
officer
of
the
corporation
who
also
determines the compensation
to be paid to such employee.

positions are not considered as

corporate officers within the
meaning of Section 25 of the
Corporation Code and are not
empowered
to
exercise
the
functions of the corporate Officers,
except those functions lawfully
delegated to them. Their functions
and duties are to be determined by
the Board of Directors/Trustees.
[36]
[Emphasis supplied.]

A careful perusal of petitioner corporations by-laws,

particularly paragraph 1, Section 1, Article IV, [37] would
explicitly reveal that its corporate officers are composed only
of: (1) Chairman; (2) President; (3) one or more Vice-President;
(4) Treasurer; and (5) Secretary.[38] The position of General
Manager was not among those enumerated.

xxxx

This
interpretation
is
the
correct application of Section 25 of the
Corporation Code, which plainly states
that the corporate officers are the President,
Secretary, Treasurer and such other officers
as may be provided for in the [b]y[l]aws. Accordingly,
the
corporate
officers in the context of PD No. 902-A
are exclusively those who are given
that
character
either
by
the
Corporation
Code
or
by
the
corporations [b]y[l]aws.

A different interpretation can

easily leave the way open for the Board
of
Directors
to
circumvent
the
constitutionally guaranteed security of
tenure of the employee by the
expedient inclusion in the [b]y-[l]aws
of an enabling clause on the creation of
just any corporate officer position.

It is relevant to state in this

connection that the SEC, the primary
agency administering the Corporation
Code, adopted a similar interpretation
of Section 25 of the Corporation Code
in its Opinion dated November 25,
1993 [citation omitted], to wit:

Thus, pursuant to the

above provision (Section 25 of the
Corporation Code), whoever are
the
corporate
officers
enumerated in the by-laws are
the exclusive Officers of the
corporation and the Board has
no power to create other
Offices without amending first
the
corporate
[b]ylaws. However, the Board may
create
appointive
positions
other than the positions of
corporate Officers, but the
persons
occupying
such

Paragraph 2, Section 1, Article IV of petitioner

corporations by-laws, empowered its Board of Directors to
appoint such other officers as it may determine necessary or
proper.[39] It is by virtue of this enabling provision that
petitioner corporations Board of Directors allegedly approved
a resolution to make the position of General Manager a
corporate office, and, thereafter, appointed respondent
thereto making him one of its corporate officers. All of these
acts were done without first amending its by-laws so as to
include the General Manager in its roster of corporate officers.

With the given circumstances and in conformity

with Matling Industrial and Commercial Corporation v.
Coros, this Court rules that respondent was not a corporate
officer of petitioner corporation because his position as
General Manager was not specifically mentioned in the roster
of corporate officers in its corporate by-laws. The enabling
clause in petitioner corporations by-laws empowering its
Board of Directors to create additional officers, i.e., General
Manager, and the alleged subsequent passage of a board
resolution to that effect cannot make such position a
corporate office. Matling clearly enunciated that the board of
directors has no power to create other corporate offices
without first amending the corporate by-laws so as to include
therein the newly created corporate office.Though the board
of directors may create appointive positions other than the
positions of corporate officers, the persons occupying such
positions cannot be viewed as corporate officers under
Section 25 of the Corporation Code.[40] In view thereof, this
Court holds that unless and until petitioner corporations bylaws is amended for the inclusion of General Manager in the
list of its corporate officers, such position cannot be
considered as a corporate office within the realm of Section 25
of the Corporation Code.

This Court considers that the interpretation of

Section
25
of
the
Corporation
Code laid
down
in Matling safeguards the constitutionally enshrined right of
every employee to security of tenure. To allow the creation of
a corporate officer position by a simple inclusion in the
corporate by-laws of an enabling clause empowering the
board of directors to do so can result in the circumvention of
that constitutionally well-protected right.[41]

It is also of no moment that respondent, being

petitioner corporations General Manager, was given the
functions of a managing director by its Board of Directors. As

47
held in Matling, the only officers of a corporation are those
given that character either by the Corporation Code or by the
corporate by-laws. It follows then that the corporate officers
enumerated in the by-laws are the exclusive officers of the
corporation while the rest could only be regarded as mere
employees or subordinate officials.[42] Respondent, in this
case, though occupying a high ranking and vital position in
petitioner corporation but which position was not specifically
enumerated or mentioned in the latters by-laws, can only be
regarded as its employee or subordinate official. Noticeably,
respondents compensation as petitioner corporations General
Manager was set, fixed and determined not by the latters
Board of Directors but simply by its President, petitioner
Lucila. The same was not subject to the approval of petitioner
corporations Board of Directors. This is an indication that
respondent was an employee and not a corporate officer.

To prove that respondent was petitioner corporations

corporate officer, petitioners presented before the NLRC an
undated Secretarys Certificate showing that corporations
Board of Directors approved a resolution making respondents
position of General Manager a corporate office. The
submission, however, of the said undated Secretarys
Certificate will not change the fact that respondent was an
employee. The certification does not amount to an
amendment of the by-laws which is needed to make the
position of General Manager a corporate office.
Moreover, as has been aptly observed by the Court
of Appeals, the board resolution mentioned in that undated
Secretarys Certificate and the latter itself were obvious
fabrications, a mere afterthought. Here we quote with
conformity the Court of Appeals findings on this matter stated
in this wise:
The board resolution is an obvious
fabrication. Firstly, if it had been in
existence since [29 August 1994], why did
not [herein petitioners] attach it to their
[M]otion to [D]ismiss filed on [26 August
1999], when it could have been the best
evidence that [herein respondent] was a
corporate officer? Secondly, why did they
report the [respondent] instead as [herein
petitioner corporations] employee to the
Social Security System [(SSS)] on [11
October 1994] or a later date than their [29
August 1994] board resolution? Thirdly, why
is there no indication that the [respondent],
the person concerned himself, and the [SEC]
were furnished with copies of said board
resolution?And, lastly, why is the corporate
[S]ecretarys [C]ertificate not notarized in
keeping with the customary procedure? That
is why we called it manipulative evidence as
it was a shameless sham meant to be
thrown in as a wild card to muddle up the
[D]ecision of the Labor Arbiter to the end
that it be overturned as the latter had firmly
pointed out that [respondent] is not a
corporate
officer
under
[petitioner
corporations
by-laws]. Regrettably,
the
[NLRC] swallowed the bait hook-line-and
sinker. It failed to see through its nature as a
belatedly
manufactured
evidence. And
even on the assumption that it were an
authentic board resolution, it did not
make [respondent] a corporate officer
as the board did not first and properly
create the position of a [G]eneral
[M]anager by amending its by-laws.
(2) The scope of the term
officer in the phrase and such other
officers as may be provided for in
the by-laws[] (Sec. 25, par. 1),
would naturally depend much on
the provisions of the by-laws of the
corporation. (SEC
Opinion,
[4
December 1991.]) If the by-laws
enumerate the officers to be
elected by the board, the provision
is conclusive, and the board is
without power to create new
offices without amending the

by-laws. (SEC
October 1971.])

Opinion,

[19

(3) If, for example, the

general manager of a corporation
is not listed as an officer, he is to
be classified as an employee
although he has always been
considered as one of the principal
officers of a corporation [citing De
Leon, H. S., The Corporation Code
of the Philippines Annotated, 1993
Ed.,
p.
215.][43][Emphasis
supplied.]
That respondent was also a director and a
stockholder of petitioner corporation will not automatically
make the case fall within the ambit of intra-corporate
controversy and be subjected to RTCs jurisdiction. To reiterate,
not all conflicts between the stockholders and the corporation are
classified as intra-corporate. Other factors such as the status or
relationship of the parties and the nature of the question that
is the subject of the controversy[44] must be considered in
determining whether the dispute involves corporate matters so as to
regard them as intra-corporate controversies. [45] As previously
discussed, respondent was not a corporate officer of petitioner
corporation but a mere employee thereof so there was no intracorporate relationship between them. With regard to the subject of
the controversy or issue involved herein, i.e., respondents dismissal
as petitioner corporations General Manager, the same did not
present or relate to an intra-corporate dispute. To note, there was
no evidence submitted to show that respondents removal as
petitioner corporations General Manager carried with it his
removal as its director and stockholder. Also, petitioners
allegation that respondents claim of 30% share of petitioner
corporations net profit was by reason of his being its director
and stockholder was without basis, thus, self-serving. Such an
allegation was tantamount to a mere speculation for
petitioners failure to substantiate the same.
In addition, it was not shown by petitioners that the
position of General Manager was offered to respondent on
account of his being petitioner corporations director and
stockholder. Also, in contrast to NLRCs findings, neither
petitioner corporations by-laws nor the Management Contract
stated that respondents appointment and termination from
the position of General Manager was subject to the approval
of petitioner corporations Board of Directors. If, indeed,
respondent was a corporate officer whose termination was
subject to the approval of its Board of Directors, why is it that
his termination was effected only by petitioner Lucila,
President of petitioner corporation? The records are bereft of
any evidence to show that respondents dismissal was done
with the conformity of petitioner corporations Board of
Directors or that the latter had a hand on respondents
dismissal. No board resolution whatsoever was ever presented
to that effect.
With all the foregoing, this Court is fully convinced
that, indeed, respondent, though occupying the General
Manager position, was not a corporate officer of petitioner
corporation rather he was merely its employee occupying a
high-ranking position.
Accordingly, respondents dismissal as petitioner
corporations General Manager did not amount to an intracorporate controversy. Jurisdiction therefor properly belongs
with the Labor Arbiter and not with the RTC.
Having established that respondent was not
petitioner corporations corporate officer but merely its
employee, and that, consequently, jurisdiction belongs to the
Labor Arbiter, this Court will now determine if respondents
dismissal from employment is illegal.
It was not disputed that respondent worked as
petitioner
corporations
General
Manager
from
its
incorporation on 15 August 1994 until he was dismissed on 30
June 1997. The cause of his dismissal was petitioner
corporations cessation of business operations due to poor
sales collection aggravated by the inefficient management of
its affairs.
In termination cases, the burden of proving just and
valid cause for dismissing an employee from his employment
rests upon the employer. The latter's failure to discharge that
burden would necessarily result in a finding that the dismissal
is unjustified.[46]

48
Under Article 283 of the Labor Code, as
amended, one of the authorized causes in terminating
the employment of an employee is the closing or
cessation of operation of the establishment or
undertaking. Article 283 of the Labor Code, as amended,
reads, thus:
ART.

283. Closure
of
establishment
and
reduction of personnel. The employer
may also terminate the employment of any
employee due to the installation of labor
saving-devices, redundancy, retrenchment
to prevent losses or the closing or
cessation
of
operation
of
the
establishment or undertaking unless the
closing is for the purpose of circumventing
the provisions of this Title, by serving a
written notice on the workers and the
Department of Labor and Employment at
least one (1) month before the intended
date thereof. x x x In case of retrenchment
to prevent losses and in cases of closures
or
cessation
of
operations
of
establishment or undertaking not due
to serious business losses or financial
reverses, the separation pay shall be
equivalent to one (1) month pay or to
at least one-half (1/2) month pay for
every year of service, whichever is
higher. A fraction of at least six (6)
months shall be considered one (1)
whole year. [Emphasis supplied.]

From the afore-quoted provision, the closure or

cessation
of
operations
of
establishment
or
undertaking may either be due to serious business
losses or financial reverses or otherwise. If the closure or
cessation was due to serious business losses or financial
reverses, it is incumbent upon the employer to sufficiently and
convincingly prove the same. If it is otherwise, the employer
can lawfully close shop anytime as long as it was bona fide in
character and not impelled by a motive to defeat or
circumvent the tenurial rights of employees and as long as
the terminated employees were paid in the amount
corresponding to their length of service.[47]

Accordingly, under Article 283 of the Labor Code, as

amended, there are three requisites for a valid cessation
of business operations: (a) service of awritten notice to
the employees and to the Department of Labor and
Employment (DOLE) at least one month before the
intended date thereof; (b) the cessation of business must
be bona fide in character; and (c) payment to the
employees of termination pay amounting to one month
pay or at least one-half month pay for every year of service,
whichever is higher.

In this case, it is obvious that petitioner corporations

cessation of business operations was not due to serious
business losses. Mere poor sales collection, coupled with
mismanagement of its affairs does not amount to serious
business losses. Nonetheless, petitioner corporation can still
validly cease or close its business operations because such
right is legally allowed, so long as it was not done for the
purpose of circumventing the provisions on termination of
employment embodied in the Labor Code.[48] As has been
stressed by this Court in Industrial Timber Corporation v.
Ababon, thus:
Just as no law forces anyone to go into
business, no law can compel anybody to

continue the same. It would be stretching

the intent and spirit of the law if a court
interferes with management's prerogative to
close or cease its business operations just
because the business is not suffering from
any loss or because of the desire to provide
the workers continued employment.[49]

A careful perusal of the records revealed that, indeed,

petitioner corporation has stopped and ceased business
operations beginning 30 June 1997. This was evidenced by a
notarized Affidavit of Non-Operation dated 31 August
1998. There was also no showing that the cessation of its
business operations was done in bad faith or to circumvent
the Labor Code. Nevertheless, in doing so, petitioner
corporation failed to comply with the one-month prior written
notice rule. The records disclosed that respondent, being
petitioner corporations employee, and the DOLE were not
given a written notice at least one month before petitioner
corporation ceased its business operations. Moreover, the
records clearly show that respondents dismissal was effected
on the same date that petitioner corporation decided to stop
and cease its operation. Similarly, respondent was not paid
separation pay upon termination of his employment.

As respondents dismissal was not due to serious business

losses, respondent is entitled to payment of separation pay
equivalent to one month pay or at least one-half month pay
for every year of service, whichever is higher. The rationale
for this was laid down in Reahs Corporation v. National Labor
Relations Commission,[50] thus:

The grant of separation pay, as

an
incidence
of
termination
of
employment under Article 283, is a
statutory obligation on the part of the
employer and a demandable right on
the part of the employee, except only
where the closure or cessation of operations
was due to serious business losses or
financial reverses and there is sufficient
proof of this fact or condition. In the
absence of such proof of serious
business losses or financial reverses,
the employer closing his business is
obligated to pay his employees and
workers their separation pay.

The rule, therefore, is that in all

cases of business closure or cessation
of operation or undertaking of the
employer, the affected employee is
entitled to separation pay. This is
consistent with the state policy of
treating labor as a primary social
economic
force,
affording
full
protection to its rights as well as its
welfare. The exception is when the closure
of business or cessation of operations is due
to serious business losses or financial
reverses duly proved, in which case, the
right of affected employees to separation
pay is lost for obvious reasons. [51] [Emphasis
supplied.]

49
As previously discussed, respondents dismissal was
due to an authorized cause, however, petitioner corporation
failed to observe procedural due process in effecting such
dismissal. In Culili v. Eastern Telecommunications Philippines,
Inc.,[52] this Court made the following pronouncements, thus:
x x x there are two aspects which
characterize the concept of due
process under the Labor Code: one
is substantive whether the termination of
employment was based on the provision of
the Labor Code or in accordance with the
prevailing
jurisprudence;
the
other
is procedural the manner in which the
dismissal was effected.
Section 2(d), Rule I, Book VI of the Rules
Implementing the Labor Code provides:

(d)
In
all
cases
of
termination
of
employment, the following
standards of due process
shall
be
substantially
observed:

xxxx

For termination of
employment as defined in
Article 283 of the Labor
Code,
the requirement
of due process shall be
deemed complied with
upon
service
of
a
written notice to the
employee
and
the
appropriate
Regional
Office
of
the
Department of Labor
and
Employment
at
least thirty days before
effectivity
of
the
termination, specifying
the ground or grounds
for termination.

In Mayon Hotel & Restaurant v. Adana, [citation

omitted] we observed:

The requirement
of law mandating the
giving of notices was
intended not only to
enable the employees to
look
for
another
employment and therefore
ease the impact of the
loss of their jobs and the
corresponding income, but
more importantly, to give
the Department of Labor
and Employment (DOLE)
the
opportunity
to
ascertain the verity of the
alleged authorized cause

of
[53]

termination.
[Emphasis supplied].

The records of this case disclosed that there was

absolutely no written notice given by petitioner corporation to
the respondent and to the DOLE prior to the cessation of its
business operations. This is evident from the fact that
petitioner corporation effected respondents dismissal on the
same date that it decided to stop and cease its business
operations. The necessary consequence of such failure to
comply with the one-month prior written notice rule, which
constitutes a violation of an employees right to statutory due
process, is the payment of indemnity in the form of nominal
damages.[54] In Culili
v.
Eastern
Telecommunications
Philippines, Inc., this Court further held:
In Serrano
v.
National
Labor
Relations Commission [citation omitted], we
noted that a job is more than the salary that
it carries. There is a psychological effect or a
stigma in immediately finding ones self laid
off from work. This is exactly why our labor
laws
have
provided
for
mandating
procedural
due
process
clauses. Our
laws, while recognizing the right of
employers to terminate employees it
cannot sustain, also recognize the
employees
right
to
be
properly
informed of the impending severance
of his ties with the company he is
working for. x x x.

x x x Over the years, this Court has had the

opportunity to reexamine the sanctions
imposed upon employers who fail to comply
with
the
procedural
due
process
requirements in terminating its employees.
In Agabon v. National Labor Relations
Commission [citation omitted], this Court
reverted back to the doctrine in Wenphil
Corporation v. National Labor Relations
Commission [citation omitted] and held
that where the dismissal is due to a just
or authorized cause, but without
observance
of
the
due
process
requirements, the dismissal may be
upheld but the employer must pay an
indemnity
to
the
employee.
The
sanctions to be imposed however, must be
stiffer than those imposed in Wenphil to
achieve a result fair to both the employers
and the employees.

In Jaka
Food
Processing
Corporation v. Pacot [citation omitted], this
Court, taking a cue from Agabon, held that
since there is a clear-cut distinction between
a dismissal due to a just cause and a
dismissal due to an authorized cause, the
legal implications for employers who fail to
comply with the notice requirements must
also be treated differently:

Accordingly, it is wise to
hold that: (1) if the dismissal is
based on a just cause under Article
282 but the employer failed to
comply
with
the
notice

50
requirement, the sanction to be
imposed upon him should be
tempered because the dismissal
process was, in effect, initiated by
an act imputable to the employee;
and (2) if the dismissal is based on
an authorized cause under Article
283 but the employer failed to
comply
with
the
notice
requirement, the sanction should
be stiffer because the dismissal
process was initiated by the
employer's
exercise
of
his
management
prerogative.
[55]
[Emphasis supplied.]

Thus, in addition to separation pay, respondent is

also entitled to an award of nominal damages. In conformity
with this Courts ruling in Culili v. Eastern Telecommunications
Philippines, Inc. and Shimizu Phils. Contractors, Inc. v.
Callanta, both citing Jaka Food Processing Corporation v.
Pacot,[56] this Court fixed the amount of nominal damages
to P50,000.00.

With respect to petitioners contention that the Management

Contract executed between respondent and petitioner Lucila
has no binding effect on petitioner corporation for having
been executed way before its incorporation, this Court finds
the same meritorious.

Section 19 of the Corporation Code expressly provides:

have any binding and legal effect on petitioner

corporation. Also, there was no evidence presented to prove
that petitioner corporation adopted, ratified or confirmed the
Management Contract. It is for the same reason that
petitioner corporation cannot be considered estopped from
questioning its binding effect now that respondent was
invoking the same against it. In no way, then, can it be
enforced against petitioner corporation, much less, its
provisions fixing respondents compensation as General
Manager
to
30%
of
petitioner
corporations
net
profit. Consequently, such percentage cannot be the basis for
the computation of respondents separation pay. This finding,
however, will not affect the undisputed fact that respondent
was, indeed, the General Manager of petitioner corporation
from its incorporation up to the time of his dismissal.
Accordingly, this Court finds it necessary to still
remand the present case to the Labor Arbiter to conduct
further proceedings for the sole purpose of determining the
compensation that respondent was actually receiving during
the period that he was the General Manager of petitioner
corporation, this, for the proper computation of his separation
pay.
As regards petitioner Lucilas solidary liability, this
Court affirms the same.

As a rule, corporation has a personality separate and

distinct from its officers, stockholders and members such
that corporate officers are not personally liable for their
official acts unless it is shown that they have exceeded
their authority. However, this corporate veil can be pierced
when the notion of the legal entity is used as a means to
perpetrate fraud, an illegal act, as a vehicle for the evasion of
an existing obligation, and to confuse legitimate issues. Under
the Labor Code, for instance, when a corporation violates a
provision declared to be penal in nature, the penalty shall be
imposed upon the guilty officer or officers of the corporation.
[57]

Sec.
19. Commencement
of
corporate
existence. A
private
corporation formed or organized under this
Code commences to have corporate
existence and juridical personality and
is deemed incorporated from the date
the
Securities
and
Exchange
Commission issues a certificate of
incorporation under its official seal; and
thereupon
the
incorporators,
stockholders/members and their successors
shall constitute a body politic and corporate
under the name stated in the articles of
incorporation for the period of time
mentioned therein, unless said period is
extended or the corporation is sooner
dissolved in accordance with law. [Emphasis
supplied.]

Logically, there is no corporation to speak of prior to an

entitys incorporation. And no contract entered into before
incorporation can bind the corporation.

As can be gleaned from the records, the

Management Contract dated 16 January 1994 was executed
between respondent and petitioner Lucila months before
petitioner
corporations
incorporation
on 15
August
1994. Similarly, it was done when petitioner Lucila was still
the President of Marc Marketing, Inc.Undeniably, it cannot

Based on the prevailing circumstances in this case,

petitioner Lucila, being the President of petitioner corporation,
acted in bad faith and with malice in effecting respondents
dismissal from employment. Although petitioner corporation
has a valid cause for dismissing respondent due to cessation
of business operations, however, the latters dismissal
therefrom was done abruptly by its President, petitioner
Lucila. Respondent was not given the required one-month
prior written notice that petitioner corporation will already
cease its business operations. As can be gleaned from the
records, respondent was dismissed outright by petitioner
Lucila on the same day that petitioner corporation decided to
stop and cease its business operations. Worse, respondent
was not given separation pay considering that petitioner
corporations cessation of business was not due to business
losses or financial reverses.

WHEREFORE, premises considered, the Decision

and Resolution dated 20 June 2005 and 7 March 2006,
respectively, of the Court of Appeals in CA-G.R. SP No. 76624
are
hereby AFFIRMED with
the MODIFICATION finding
respondents dismissal from employment legal but without
proper observance of due process. Accordingly, petitioner
corporation, jointly and solidarily liable with petitioner Lucila,
is hereby ordered to pay respondent the following; (1)
separation pay equivalent to one month pay or at least onehalf month pay for every year of service, whichever is higher,
to be computed from the commencement of employment until
termination; and (2) nominal damages in the amount
of P50,000.00.
the

This Court, however, finds it proper to still remand

records to the Labor Arbiter to conduct further

51
proceedings for the sole purpose of determining the
compensation that respondent was actually receiving during
the period that he was the General Manager of petitioner
corporation for the proper computation of his separation pay.
Costs against petitioners.
SO ORDERED.

formalize his offer to buy Yumuls 15% share in Nautica on or

before August 20, 1996; and demanding the issuance of the
corresponding certificate of shares in his name should Dee
refuse to buy the same. Dee, through Atty. Fernando R.
Arguelles, Jr., Nauticas corporate secretary, denied the
request claiming that Yumul was not a stockholder of Nautica.
On September 6, 1996[8] and September 9, 1996,
Yumul requested that the Deed of Trust and Assignment be
recorded in the Stock and Transfer Book of Nautica, and that
he, as a stockholder, be allowed to inspect its books and
records.
[9]

Incorporators

FIRST DIVISION
G.R. No. 164588
NAUTICA CANNING CORPORATION, FIRST DOMINION
PRIME HOLDINGS, INC. and FERNANDO R. ARGUELLES,
JR., Petitioners, versus ROBERTO C. YUMUL,
Respondent. Promulgated:

Yumuls requests were denied allegedly because he

neither exercised the option to purchase the shares nor paid
for the acquisition price of the 14,999 shares. Atty. Arguelles
maintained that the cash dividend received by Yumul is held
by him only in trust for First Dominion Prime Holdings, Inc.

October 19, 2005

Thus, Yumul filed on October 3, 1996, before the SEC

a petition for mandamus with damages, with prayer that
the Deed of Trust and Assignment be recorded in the Stock
and Transfer Book of Nautica and that the certificate of stocks
corresponding thereto be issued in his name. [10]

DECISION

On October 12, 2000, the SEC En Banc rendered the

Decision,[11] the dispositive portion of which reads:

Petitioners assail the September 26, 2001 Decision [1] of the

Court of Appeals in CA-G.R. SP No. 61919, affirming in toto the
Decision of the Securities and Exchange Commission (SEC) En
Banc in SEC Case No. 10-96-5455, as well as the July 16, 2004
Resolution[2] denying the motion for reconsideration.

WHEREFORE, judgment is hereby

rendered in favor of the petitioner and
against the respondents, as follows:

The facts of the case show that Nautica Canning Corporation

(Nautica) was organized and incorporated on May 11, 1994
with an authorized capital stock of P40,000,000 divided into
400,000 shares with a par value of P100.00 per share. It had a
subscribed capital stock of P10,000,000 with paid-in
subscriptions from its incorporators as follows: [3]

1.

Declaring
petitioner
as
a
stockholder
of
respondent Nautica;

2.

Declaring
petitioner
as beneficial owner of
14,999 shares of Nautica
under the Deed of Trust
and Assignment dated
June 22, 1995

3.

Declaring petitioner to
be entitled to the right of
inspection of the books of
the corporation pursuant
to the pertinent provisions
of the Corporation Code;
and

4.

Directing
the
Corporate Secretary of
Nautica to recognize and
register the Deed of Trust
and Assignment dated
June 22, 1995.

Name No. of Shares Amount Subscribed Amount Paid

ALVIN Y. DEE 89,991 P8,999,100 P4,499,100
JONATHAN Y. DEE 2 200 200
JOANNA D. LAUREL 2 200 200
DARLENE EDSA MARIE
GONZALES 2 200 200
JENNIFER Y. DEE 2 200 200
ROBERTO C. YUMUL 1 100 100
JERRY ANGPING 10,000 1,000,000 500,000
-------------- -------------------- ------------------100,000 P10,000,000 P5,000,000
On December 19, 1994, respondent Roberto C. Yumul
was appointed Chief Operating Officer/General Manager of
Nautica with a monthly compensation of P85,000 and an
additional compensation equal to 5% of the companys
operating profit for the calendar year. [4] On the same date,
First Dominion Prime Holdings, Inc., Nauticas parent company,
through its Chairman Alvin Y. Dee, granted Yumul an Option to
Purchase[5] up to 15% of the total stocks it subscribed from
Nautica.
On June 22, 1995, a Deed of Trust and
Assignment[6] was executed between First Dominion Prime
Holdings, Inc. and Yumul whereby the former assigned 14,999
of its subscribed shares in Nautica to the latter. The deed
stated that the 14,999 shares were acquired and paid for in
the name of the ASSIGNOR only for convenience, but actually
executed in behalf of and in trust for the ASSIGNEE.
In March 1996, Nautica declared a P35,000,000 cash
dividend, P8,250,000 of which was paid to Yumul representing
his 15% share.
After Yumuls resignation from Nautica on August 5,
1996, he wrote a letter[7] to Dee requesting the latter to

SO ORDERED.[12]
On appeal, the Court of Appeals affirmed the decision of the
SEC En Banc. Petitioners motion for reconsideration was
denied in a Resolution dated July 16, 2004.

Hence, this petition.

At the outset, we note that petitioners recourse to

this Court via a combined petition under Rule 65 and an
appeal under Rule 45 of the Rules of Court is irregular. A
petition for review under Rule 45 is the proper remedy of a
party aggrieved by a decision of the Court of Appeals, which is
not identical to a petition for certiorari under Rule 65. Under

52
Rule 45, decisions, final orders or resolutions of the Court of
Appeals is appealed by filing a petition for review, which is a
continuation of the appellate process over the original case.
[13]
On the other hand, the writ of certiorari under Rule 65 is
filed when petitioner has no plain, speedy and adequate
remedy in the ordinary course of law against its perceived
grievance. A remedy is considered plain, speedy and
adequate if it will promptly relieve the petitioner from the
injurious effects of the judgment and the acts of the lower
court or agency.

In this case, petitioners speedy, available and

adequate remedy is appeal via Rule 45, and not certiorari
under Rule 65. Notwithstanding petitioners procedural lapse,
we shall treat the petition as one filed under Rule 45.

The petition is partly meritorious.

Petitioners contend that Yumul was not a stockholder of

Nautica; that he was just a nominal owner of one share as the
beneficial ownership belonged to Dee who paid for said share
when Nautica was incorporated. They presented China
Banking Corporation Check No. A2620636 and Citibank Check
No. B82642 as proof of payment by Dee; a letter by Dee dated
July 15, 1994 requesting the corporate secretary of Nautica to
issue a certificate of stock in Yumuls name but in trust for
Dee; and Stock Certificate No. 6 with annotation ITF Alvin Y.
Dee which means that respondent held said stock In Trust For
Alvin Y. Dee.

We held in Ponce v. Alsons Cement Corp.[17] that:

... [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
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[.]

Moreover, the contents of the articles of

incorporation bind the corporation and its stockholders. Its
contents cannot be disregarded considering that it was the
basic document which legally triggered the creation of the
corporation.[18]

We are not persuaded.

The Court of Appeals, in affirming the factual findings of SEC,
held that:

Indeed, it is possible for a business to be wholly

owned by one individual. The validity of its incorporation is
not affected when such individual gives nominal ownership of
only one share of stock to each of the other four
incorporators. This is not necessarily illegal. [14] But, this is valid
only between or among the incorporators privy to the
agreement. It does bind the corporation which, at the time the
agreement is made, was non-existent. Thus, incorporators
continue to be stockholders of a corporation unless,
subsequent to the incorporation, they have validly transferred
their subscriptions to the real parties in interest. 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.[15]

In the case at bar, the SEC and the Court of Appeals correctly
found Yumul to be a stockholder of Nautica, of one share of
stock recorded in Yumuls name, although allegedly held in
trust for Dee. Nauticas Articles of Incorporation and By-laws,
as well as the General Information Sheet filed with the SEC
indicated that Yumul was an incorporator and subscriber of
one share.[16] Even granting that there was an agreement
between Yumul and Dee whereby the former is holding the
share in trust for Dee, the same is binding only as between
them. From the corporations vantage point, Yumul is its
stockholder with one share, considering that there is no
showing that Yumul transferred his subscription to Dee, the
alleged real owner of the share, after Nauticas incorporation.

The evidence submitted by petitioners to

establish trust is palpably incompetent,
consisting mainly of the self-serving
allegations by the petitioners and the China
Banking Corporation checks issued as
payment for the shares of stock of Nautica.
Dee did not testify on the supposed trust
relationship between him and Yumul. While
Atty. Arguelles testified, his testimony is
barren of probative value since he had no
first-hand knowledge of the relationship in
question. The isolated fact that Dee might
have paid for the share in the name of
Yumul did not by itself make the latter a
man of straw. Such act of payment is so
nebulous and equivocal that it can not yield
the meaning which the petitioners would
want to squeeze from it without the
clarificatory testimony of Dee.[19]
We see no cogent reason to set aside the factual
findings of the SEC, as upheld by the Court of Appeals.
Findings of fact of quasi-judicial agencies, like the SEC, are
generally accorded respect and even finality by the Supreme
Court, if supported by substantial evidence, in recognition of
their expertise on the specific matters under their
consideration,[20] moreso if the same has been upheld by the
appellate court, as in this case.

53
Besides, other than petitioners self-serving assertion
that the beneficial ownership belongs to Dee, they failed to
show that the subscription was transferred to Dee after
Nauticas incorporation. The conduct of the parties also
constitute sufficient proof of Yumuls status as a stockholder.
On April 4, 1995, Yumul was elected during the regular annual
stockholders meeting as a Director of Nauticas Board of
Directors.[21] Thereafter, he was elected as president of
Nautica.[22]Thus, Nautica and its stockholders knowingly held
respondent out to the public as an officer and a stockholder of
the corporation.

Section 23 of Batas Pambansa (BP) Blg. 68 or The

Corporation Code of the Philippines requires that every
director must own at least one share of the capital stock of
the corporation of which he is a director. Before one may be
elected president of the corporation, he must be a director.
[23]
Since Yumul was elected as Nauticas Director and as
President thereof, it follows that he must have owned at least
one share of the corporations capital stock.

Thus, from the point of view of the corporation,

Yumul was the owner of one share of stock. As such, the SEC
correctly ruled that he has the right to inspect the books and
records of Nautica,[24] pursuant to Section 74 of BP Blg. 68
which states that the records of all business transactions of
the corporation and the minutes of any meetings shall be
open to inspection by any director, trustee, stockholder or
member of the corporation at reasonable hours on business
days and he may demand, in writing, for a copy of excerpts
from said records or minutes, at his expense.

As to whether or not Yumul is the beneficial owner of the

14,999 shares of stocks of Nautica, petitioners allege that
Yumul was given the option to purchase shares of stocks in
Nautica under the Option to Purchase dated December 19,
1994. However, he failed to exercise the option, thus there
was no cause or consideration for the Deed of Trust and
Assignment, which makes it void for being simulated or
fictitious.[25]

Anent this issue, the SEC did not make a categorical

finding on whether Yumul exercised his option and also on the
validity of the Deed of Trust and Assignment. Instead, it held
that:

... Although unsubstantiated, the apparent

objective of the respondents allegation was
to refute petitioners claim over the shares
covered by the Deed of Trust and
Assignment. This must therefore be deemed
as nothing but a ploy to deprive petitioner of
his right over the shares in question, which
to us should not be countenanced.[26]

Neither did the Court of Appeals rule on the issue as

it only held that:

Petitioners also contend that the

Deed is a simulated contract.

Simulation is the declaration of a

fictitious
will,
deliberately
made
by
agreement of the parties, in order to
produce, for the purposes of deception, the
appearances of a judicial act which does not
exist or is different with that which was
really executed. The characteristic of
simulation is that the apparent contract is
not really desired or intended to produce
legal effect or in any way alter the juridical
situation of the parties.

The requisites for simulation are:

(a) an outward declaration of will different
from the will of the parties; (b) the false
appearance must have been intended by
mutual agreement; and (c) the purpose is to
deceive third persons. These requisites have
not been proven in this case.[27]

Thus, other than defining and enumerating the

requisites of a simulated contract or deed, the Court of
Appeals did not make a determination whether the SEC has
the jurisdiction to resolve the issue and whether the
questioned deed was fictitious or simulated.

In Intestate Estate of Alexander T. Ty v. Court of

Appeals,[28] we held that:
The question raised in the complaints is
whether or not there was indeed a sale in
the absence of cause or consideration. The
proper forum for such a dispute is a regular
trial court. The Court agrees with the ruling
of the Court of Appeals that no special
corporate skill is necessary in resolving the
issue of the validity of the transfer of shares
from one stockholder to another of the same
corporation.
Both
actions,
although
involving different property, sought to
declare the nullity of the transfers of said
property to the decedent on the ground that
they were not supported by any cause or
consideration, and thus, are considered
void ab initio for being absolutely simulated
or fictitious. The determination whether
a contract is simulated or not is an
issue that could be resolved by
applying pertinent provisions of the
Civil Code, particularly those relative
to obligations and contracts. Disputes
concerning the application of the Civil
Code are properly cognizable by courts
of general jurisdiction. No special skill
is necessary that would require the
technical
expertise
of
the
SEC. (Emphasis supplied)

Thus, when the controversy involves matters purely

civil in character, it is beyond the ambit of the limited
jurisdiction of the SEC. As held in Viray v. Court of Appeals,
[29]
the better policy in determining which body has jurisdiction
over a case would be to consider not only the status or
relationship of the parties, but also the nature of the question
that is the subject of their controversy. This, however, is now
moot and academic due to the passage of Republic Act No.
8799 or The Securities Regulation Code which took effect on

54
August 8, 2000. The Act transferred from the SEC to the
regional trial court jurisdiction over cases involving intracorporate disputes. Thus, whether or not the issue is intracorporate, it is now the regional trial court and no longer the
SEC that takes cognizance of the controversy.
Considering that the issue of the validity of the Deed of Trust
and Assignment is civil in nature, thus, under the competence
of the regular courts, and the failure of the SEC and the Court
of Appeals to make a determinative finding as to its validity,
we are constrained to refrain from ruling on whether or not
Yumul can compel the corporate secretary to register said
deed. It is only after an appropriate case is filed and decision
rendered thereon by the proper forum can the issue be
resolved.

WHEREFORE, the petition is PARTIALLY GRANTED.

The September 26, 2001 Decision of the Court of Appeals in
CA-G.R. SP No. 61919, isAFFIRMED insofar as it declares
respondent Roberto C. Yumul as a subscriber and stockholder
of one share of stock of Nautica Canning Corporation. The
Decision is REVERSED and SET ASIDE insofar as it affirms
the validity of the Deed of Trust and Assignment and orders
its registration in the Stock and Transfer Book of Nautica
Canning Corporation.

SO ORDERED.

By-Laws

EN BANC
[G.R. No. L-45911. April 11, 1979.]
JOHN GOKONGWEI, JR., Petitioner, v. SECURITIES AND
EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M.
SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO
BUAO, WALTHRODE B. CONDE, MIGUEL ORTIGAS,
ANTONIO PRIETO, SAN MIGUEL CORPORATION, EMIGDIO
TANJUATCO, SR., and EDUARDO R.
VISAYA, Respondents.
SYNOPSIS
Petitioner (a) seeks to declare null and void the amended bylaws of respondent corporation which disqualifies any
stockholder engaged in any business that competes with or is
antagonistic to that of the corporation from being nominated
or elected to the Board of Directors; (b) assails the order of
the Securities and Exchange Commission denying his right to
inspect the books of a wholly-owned subsidiary of respondent
corporation; (c) assails the act of the Securities and Exchange
Commission in allowing the stockholders of respondent
corporation to ratify the investment of corporate funds in a
foreign corporation.
The Court voted unanimously to grant the petition insofar as it
prays that petitioner be allowed to examine the books and
records of the wholly-owned subsidiary of respondent
corporation.
For lack of necessary votes the Court denied the petition
insofar as it assails the validity of the by-laws and ratification
of the foreign investment of respondent corporation.
On the validity of the amended By-laws, six justices (Barredo,
Makasiar, Antonio, Santos, Abad Santos and De Castro, JJ.,)
voted to sustain the validity per se of the amended by-laws
and to dismiss the petition without prejudice to the question
of petitioners actual disqualification from running if elected
from sitting as director of respondent corporation being
decided, after a new and proper hearing by the Board of
Directors of said corporation, whose decision shall be
appealable to the respondent Securities and Exchange
Commission and ultimately to the Supreme Court.
The aforementioned six justices, together with Fernando, J.,
voted to declare the issue on the validity of the foreign
investment of respondent corporation as moot.

Fred Ruiz Castro, C.J., reserved his vote on the validity of the
amended by-laws pending hearing by this Court on the
applicability of section 13(5) of the Corporation law to
petitioner.
Fernando, J., reserved his vote on the validity of subject
amendment to the by-laws but otherwise concurs in the
result.
Four Justices (Teehankee, Conception Jr., Fernandez and
Guerrero, JJ.,) in a separate opinion voted against the validity
of the questioned amended by-laws and held that this
question should properly be resolved first by the SEC as the
agency of primary jurisdiction. They concur in the result that
petitioner may be allowed to run for and sit as director in the
scheduled election and subsequent elections until disqualified
after proper hearing by the respondents Board of Directors
and petitioners disqualification shall have been sustained by
respondent SEC en banc and ultimately by final judgment of
this Court.

SYLLABUS

1. APPEAL; SUPREME COURT MAY RESOLVED CASE ON THE

MERITS, INSTEAD OF REMANDING IT TO LOWER COURT. The
Supreme Court always strives to settle the entire controversy
in a single proceeding, "leaving no root or branch to bear the
seeds of future litigation," and to decide a case on the merits
instead of remanding it to the trial court for further
proceedings (a) where the ends of justice would not be
subserved by the remand of the case, or (b) where public
interest demands an early disposition of the case; or (c) while
the trial court had already received all the evidence presented
by both parties and the Supreme Court is in a position, based
upon said evidence, to decide the case on its merits.
2. ID.; ID.; QUESTION OF PRIMARY JURISDICTION HAS NO
APPLICATION WHERE ONLY QUESTION OF LAW IS INVOLVED.
The doctrine of primary jurisdiction has no application where
only a question of law is involved. Because uniformity may be
secured through review by a single Supreme Court questions
of law may appropriately de determined in the first instance
by courts.
3. ID.; VALIDITY OF BY-LAW OF CORPORATION IS A QUESTION
OF LAW. The validity of reasonableness of a by-laws of a
corporation, whether the by-law is in conflict with the law of
the land, or with the charter of the corporation, or is in a legal
sense unreasonable and therefore unlawful is purely a
question of law. This rule is subject, however, to the limitation
that where the reasonableness of a by-law is a mere matter of
judgment, and one upon which reasonable minds must
necessarily differ, a court would not be warranted in
substituting its judgment instead of the judgment of those
who are authorized to make by-laws and who have exercised
their authority.
4. CORPORATIONS; POWER TO ADOPT BY-LAWS. Every
corporation has the inherent power to adopt by-laws for its
internal government, and to regulate the conduct and
prescribe the rights and duties of its members towards itself
and among themselves in reference to the management of it
affairs. In the absence of positive legislative provisions
limiting it, every private corporation has this inherent power
as one of its necessary and inseparable legal incidents,
independent of any specific enabling provision in its character
or in general law, such power of self-government being
essential to enable the corporation to accomplish the
purposes of its creation.
5. ID.; ID.; QUALIFICATIONS OF OFFICERS AND EMPLOYEES.
The term "qualifications" under section 21 of the Corporation
Law which expressly empowers a corporation to prescribed in
its by-laws the qualifications of directors must necessarily
refer to qualifications in addition to that specified by section
30 of the Corporation law, which provides that "every director
must own in his own right at least one share of the capital
stock of the stock corporation of which he is a director."
6. ID.; STOCKHOLDERS MUST ABIDE BY RULE OF THE
MAJORITY. 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 bylaws and not forbidden by law. To this extent the stockholder
may be considered to have parted with his personal right or

55
privilege to regulate the disposition of his property which he
has invested in the capital stock of the corporation, and
surrendered it to the will of majority of his fellow
incorporators. It cannot, therefore, be justly said that the
contract, express or implied, between the corporation and the
stockholders is infringed by any act of the former which is
authorized by a majority.
7. ID.; ID.; AMENDMENT OF BY-LAWS; RIGHT OF DISSENTING
MINORITY STOCKHOLDER. Where the articles of the
incorporation or the by-laws of a corporation has been
amended by the required number of votes as provided for in
the Corporation Law, and the amendment changes,
diminishes or restricts the rights of the existing stockholders,
the dissenting minority has only one right, viz.; to object
thereto in writing and demand payment of his share.
8. ID.; STOCKHOLDER HAS NO VESTED RIGHT TO BE ELECTED
DIRECTOR. A stockholder has no vested right to be elected
director, where the law at the time such right as stockholder
was acquired contained the prescription that the corporate
charter and the by-law will be subject to amendment,
alteration and modification.
9. ID.; DIRECTOR STANDS IN A FIDUCIARY RELATION TO
CORPORATION AND STOCKHOLDER. Although in the strict
and technical sense, directors of a private corporation are not
regarded as trustees, there cannot be any doubt that their
character is that of a fiduciary insofar as the corporation and
the stockholders as a body are concerned. As agents
entrusted with the management of the corporation for the
collective benefit of the stockholders, "they occupy a fiduciary
relation, and in this sense the relation is one of trust." The
ordinary trust relationship of directors of a corporation and
stockholders is not a matter of statutory or technical law. It
springs from the fact that directors have the control and
guidance of corporate affairs and property and hence of the
property interests of the stockholders. Equity recognizes that
stockholders are the proprietors of the corporate interests and
are ultimately the only beneficiaries thereof.
10. ID.; BY-LAWS; QUALIFICATION OF DIRECTORS.
Corporations have the power to make by-laws declaring a
person employed in the service of a rival company to be
ineligible for the corporations Board of Directors.
11. ID.; ID.; ID.; CONFLICT OF INTERESTS. An amendment
which renders ineligible, or if elected, subjects to removal, a
director if he be also 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 were the director also employed in the
service of a rival company, he cannot serve both, but must
betray one or the other. Thus, an officer of a corporation
cannot engage in a business in direct competition with that of
the corporation where he is a director by utilizing information
he has received as such officer, under "the established law
that a director or officer of a corporation may not enter into a
competing enterprise which cripples or injuries the business of
the corporation of which he is an officer or director."
12. ID.; ID.; DOCTRINE OF "CORPORATE OPPORTUNITY."
Corporate officers are not permitted to the use their position
of trust and confidence to further their interests. The doctrine
of "corporate opportunity" is precisely a recognition by the
courts that the fiduciary standards could not be upheld where
the fiduciary was acting for two entities with competing
interests. This doctrine rests fundamentally of the unfairness,
in particular circumstances, of an officer or director taking
advantage of an opportunity for his own personal profit when
the interest of the corporation justly calls for protection.
13. ID.; MONOPOLIES. The Constitution and the law prohibit
combinations in restraint of trade and unfair competition.
Thus, section 2 of article XIV of the Constitution provides:
"The State shall regulate or prohibit private monopolies when
the public interest so requires. No combination in restraint of
trade or unfair competition shall be allowed." These anti-trust
laws or laws against monopolies or combinations in restraint
of trade are aimed at raising levels of competition by
improving the consumers effectiveness as the final arbiter in
free markets. They are designed to preserve free and
unfettered competition as the rule of trade, and operate to
forestall concentration of economic power.
14. ID.; ID.; NATURE AND DEFINITION OF MONOPOLY. A
"monopoly" embraces any combination, the tendency of
which is to prevent competition in the broad and general
sense, or to control prices to the detriment of the public. It is
the concentration of business in the hands of a few. The
material consideration in determining its existence is not that

prices are raised and competition actually excluded, but that

power exists to raise prices or exclude competition when
desired. It includes a condition produced by the mere act of
individuals. Its dominant thought is the notion of
exclusiveness or unity, or the suppression of competition by
the unification of interest or management, or thru agreement
and concert of action. An express agreement is not necessary
for the existence of a combination or conspiracy in restraint of
trade.
15. ID.; ID.; STOCK OWNERSHIP IN AGRICULTURAL
CORPORATIONS, LIMITATIONS. The election of the president
and controlling shareholder of a corporation engaged in
agriculture, to the board of another corporation, also engaged
in agriculture, may constitute a violation of the prohibition
contained in section 13 (5) of the Corporation Law which
provides in part that "any stockholder of more than one
corporation organized for the purpose of engaging in
agriculture may hold his stock in such corporations solely for
investment and not for the purpose of bringing about or
attempting to bring about a combination to exercise control of
such corporations."
16. ID.; BY-LAW; QUALIFICATION IF MEMBERS OF THE BOARD;
EQUAL PROTECTION. If the by-law were to be applied in the
case of one stockholder but waived in the case of another,
then it could be reasonably claimed that the by-law was being
applied in a discriminatory manner, but not if the by-law, by
its terms, applies to all stockholders. The equal protection
clause of the Constitution requires only that the by-law
operate equally upon all persons of a class. Sound principles
of public policy and management support the view that a bylaw which disqualifies a competitor from election to the Board
of Directors of another corporation is valid and reasonable.
17. ID.; ID.; PROTECTION OF LEGITIMATE CORPORATE
INTERESTS. 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.
18. ID.; COMPETITION DEFINED. "Competition" implies a
struggle for advantage between two or more forces, each
possessing, in substantially similar if not identical degree,
certain characteristics essential to the business sought. It
means an independent endeavor of two or more persons to
obtain the business patronage of a third by offering more
advantageous terms as an inducement to secure trade. 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.
19. ID.; ID.; EXERCISE OF POWER TO DISQUALIFY A
STOCKHOLDER FROM BEING MEMBER OF THE BOARD. The
amended by-laws which grants the Board the power by 3/4
votes to bar a stockholder from his right to be elected as
director where such stockholder is found to be engaged in a
"competitive or antagonistic business" is valid. However,
consonant with the requirement of due process, there must be
due hearing at which the stockholder must be given the
fullest opportunity to show that he is not covered by the
disqualification. As trustees of the corporation and of the
stockholders, it is the responsibility of directors to act with
fairness to the stockholders. Pursuant to this obligation and to
remove any suspicion that this power may be utilized by the
incumbent members of the Board to perpetuate themselves in
power, any decision of the Board to disqualify a candidate for
the Board of Directors should be reviewed by the Securities
and Exchange Commission en banc and its decision shall be
final unless reversed by the Supreme Court on certiorari.
20. ID.; REVIEW OF ACTION OF THE BOARD OF DIRECTORS.
Where the action of a Board of Directors is an abuse of
discretion, or forbidden by statute, or is against public policy,
or is ultra vires, or is a fraud upon minority stockholders or
creditors, or will result in waste, dissipation or misapplication
of the corporate assets, a court of equity has the power to
grant appropriate relief.
21. ID.; STOCKHOLDERS RIGHT; INSPECTION OF BOOKS.
The stockholders right of inspection of the corporations
books and records is based upon their ownership of the assets
and property of the corporation. It is an incident of ownership
of the corporate property, whether this ownership or interest
be termed an equitable ownership, a beneficial ownership, or
quasi-ownership. It is predicated upon the necessity of selfprotection.
22. ID.; ID.; RIGHT MUST BE EXERCISED IN GOOD FAITH.
Where a right is granted by statute to the stockholder, it is
given to him as such and must be exercised by him with

56
respect to his interest as stockholder and for some purpose
germane thereto or in the interest of the corporation. In other
words, the inspection has to be germane to the petitioners
interest as a stockholder, and has to be proper and lawful in
character and not inimical to the interest of the corporation. It
must be exercised in good faith, for specific and honest
purpose, and not to gratify curiosity, or for speculative or
vexatious purposes.
23. ID.; ID.; COURT MAY INQUIRE INTO MOTIVE OF
STOCKHOLDER. On application for mandamus to enforce
the right to examine the books of a corporation, it is proper for
the court to inquire into and consider the stockholders good
faith and his purpose and motives in seeking inspection. The
right given by the statute is not absolute and may be refused
when the information is not sought in good faith or is used to
the detriment of the corporation.
24. ID.; ID.; RIGHT TO EXAMINE BOOKS OF A WHOLLY OWNED
SUBSIDIARY. While the right of a stockholder to examine the
books and records of a corporation for a lawful purpose is a
matter of law, the right of such stockholder to examine the
books and records of a wholly-owned subsidiary of the
corporation in which he is a stockholder is a different thing.
Where a foreign subsidiary is wholly owned by respondent
corporation and, therefore, under its control, it would be in
accord with equity, good faith and fair dealing to construe the
statutory right of a stockholder to inspect the books and
records of the corporation as extending to books and records
of such wholly owned subsidiary which are in respondent
corporations possession and control.
25. ID.; BOARD DIRECTORS; POWER TO INVEST FUNDS.
Section 17-1/2 of the Corporation Law allows a corporation to
"invest its fund in any corporation or business or for any
purpose other than the main purpose for which it was
organized" provided that its Board of Directors has been so
authorized by the affirmative vote of stockholders holding
shares entitling them to exercise at least two-thirds of the
voting power. If the investment is made in pursuance of the
corporate purpose, it does not need the approval of the
stockholders. It is only when the purchase of shares is done
solely for investment and not to accomplish the purpose of its
incorporation that the vote of approval of the stockholders
holding shares entitling them to exercise at least two-thirds of
the voting power is necessary.
26. ID.; ID.; RATIFICATION OF ACT OF BOARD OF DIRECTORS.
Where the Board of Directors had no authority to make an
investment, the corporation, like an individual, may ratify and
thereby render binding upon it the originally unauthorized
acts of its officers or other agents. Mere ultra vires acts or
those which are not illegal and void ab initio, but are not
merely within the scope of the articles of incorporation, are
merely voidable and may become binding and enforceable
when ratified by the stockholders.
27. ID.; ID.; INVESTMENT IN AID OF CORPORATE PURPOSE.
The purchase of beer manufacturing facilities by San Miguel
Corporation was an investment in the same business as its
main purpose in its Articles of Incorporation and is relevant to
the corporate purpose.
28. ID.; ID.; SUBMISSION OF ASSAILED INVESTMENT FOR
RATIFICATION BY STOCKHOLDERS. The mere fact that a
corporation submits the assailed investment to the
stockholders for its ratification at the annual meeting cannot
be construed as an admission that the corporation had
committed an ultra vires act, considering the common
practices of corporations of periodically submitting for
ratification of their stockholders the acts of their directors,
officers and managers.
BARREDO, J., concurring:
1. JUDGMENTS; DISMISSAL FOR LACK OF NECESSARY VOTES;
LAW OF THE CASE. Where petitioner and respondents
placed the issue of the validity of amended by-laws squarely
before the Court for resolution and six justices voted in favor,
while four justices voted against, its validity, thereby resulting
in the dismissal, of the petition "insofar as it assails the
validity of the amended by-laws . . . for lack of necessary
votes," such dismissal is the law of the case as far as the
parties are concerned albeit the majority of six against four
justices is not doctrinal in the sense that it cannot be cited as
necessarily a precedent for subsequent cases. This means
that the petitioner and respondents are bound by the
foregoing result, namely that the Court en banc has not found
merit in the claim that the amended by-laws in question are
invalid. In other words, the issue of the challenged amended
by-laws is already a settled matter for the parties as the law

of the case, and said amended by-law already enforceable in

so far as the parties are concerned. Petitioner may not
thereafter act on the assumption that he can revive the issue
of validity whether in the Securities and Exchange
Commission, the Supreme Court or in any other forum, unless,
he proceeds on the basis of a different factual milieu from the
setting of the case. Only the actual implementation of the
impugned amended by-laws remained to be passed upon by
the Securities and Exchange Commission.
2. ID.; ID.; DECISION ON THE MERITS. It is somewhat of a
misreading and misconstruction of Section 11 of Rule 56,
contrary to the well-known established norm observed by the
Supreme Court, to state that the dismissal of a petition for
lack of necessary votes does not amount to a decision on the
merits. The Supreme Court is deemed to find no merit in a
petition in two ways, namely, (1) when eight or more
members vote expressly in that sense and (2) when the
required number of justices needed to sustain the same
cannot be had.
DE CASTRO, J., concurring:
1. CORPORATION; STOCKHOLDERS; DISQUALIFICATION TO BE
ELECTED DIRECTOR. If a person became a stockholder of a
corporation and gets himself elected as a director, and while
he is such a director, he forms his own corporation
competitive or antagonistic to the corporation of which he is a
director, and becomes Chairman of the Board and President of
his own corporation, he may be removed from his position as
director, admittedly one of trust and confidence. If this is so, a
person controlling, and also the Chairman of the Board and
President of, a corporation, may be barred form becoming a
member of the Board of Directors of a competitive
corporation.
2. ID.; AGRICULTURE, CORPORATION ENGAGED IN. The
scope of the provision of Section 13(5) of the Philippine
Corporation Law should be limited to corporations engaged in
agriculture, only as the word "agriculture" refers to its more
limited meaning as distinguished from its general and broad
connotation. The term would then mean "farming" or raising
the natural products of the soil, such as by cultivation, in the
manner as is required by the Public Land Act in the acquisition
of agricultural land, such as by homestead, before the patent
may be issued, but does not extend to poultry raising or
piggery which may be included in the term "agriculture" in its
broad sense.
3. JUDGMENTS; LAW OF THE CASE. Although only six votes
are for upholding the validity of the by-laws, their validity is
deemed upheld as constituting the "law of the case." It could
not be otherwise, after the petition is dismissed with the relief
sought do declare null and void the said by-laws being denied
in effect. A vicious circle would be created should petitioner
come against to the Court, raising the same question he
raised in the present petition, unless the principle of the "law
of the case" is applied.
TEEHANKEE,
CONCEPCION
JR.,
FERNANDEZ
GUERRERO, JJ., : Supplement to separate opinion.

and

1. JUDGMENTS; LAW OF THE CASE. The doctrine of the law

of the case may be invoked only where there has been a final
and conclusive determination of an issue in the first case later
invoked as the law of the case. It has no application where the
judgment in the first case is inconclusive, as where no final
and conclusive determination could be reached on account of
lack of necessary votes and the case was simply dismissed
pursuant to Rule 56, Section 11. It cannot be contended that
the Supreme Court in dismissing the petition for lack of
necessary votes had directly ruled on the issue presented
when it itself could not reach a final conclusive vote thereon.
DECISION
The instant petition for certiorari, mandamus and injunction,
with prayer for issuance of writ of preliminary injunction,
arose out of two cases filed by petitioner with the Securities
and Exchange Commission, as follows:
SEC CASE NO. 1375
On October 22, 1976, Petitioner, as stockholder of respondent
San Miguel Corporation, filed with the Securities and
Exchange Commission (SEC) a petition for "declaration of
nullity of amended by-laws, cancellation of certificate of filing
of amended by-laws, injunction and damages with prayer for a
preliminary injunction" against the majority of the members of
the Board of Directors and San Miguel Corporation as an
unwilling petitioner. The petition, entitled "John Gokongwei, Jr.,

57
v. Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio
Roxas, Emeterio Buao, Walthrode B. Conde, Miguel Ortigas,
Antonio Prieto and San Miguel Corporation", was docketed as
SEC Case No. 1375.
As a first cause of action, petitioner alleged that on
September 18, 1976, individual respondents amended by
bylaws of the corporation, basing their authority to do so on a
resolution of the stockholders adopted on March 13, 1961,
when the outstanding capital stock of respondent corporation
was only P70,139.740.00, divided into 5,513,974 common
shares at P10.00 per share and 150,000 preferred shares at
P100.00 per share. At the time of the amendment, the
outstanding and paid up shares totalled 30,127,043, with a
total par value of P301,270,430.00. It was contended that
according to section 22 of the Corporation Law and Article VIII
of the by-laws of the corporation, the power to amend,
modify, repeal or adopt new by-laws may be delegated to the
Board of Directors only by the affirmative vote of stockholders
representing not less than 2/3 of the subscribed and paid up
capital stock of the corporation, which 2/3 should have been
computed on the basis of the capitalization at the time of the
amendment. Since the amendment was based on the 1961
authorization, petitioner contended that the Board acted
without authority and in usurpation of the power of the
stockholders.
As a second cause of action, it was alleged that the authority
granted in 1961 had already been exercised in 1962 and
1963, after which the authority of the Board ceased to exist.
As a third cause of action, petitioner averred that the
membership of the Board of Directors had changed since the
authority was given in 1961, there being six (6) new directors.
As a fourth cause of action, it was claimed that prior to the
questioned amendment, petitioner had all the qualifications to
be a director of respondent corporation, being a substantial
stockholder thereof; that as a stockholder, petitioner had
acquired rights inherent in stock ownership, such as the rights
to vote and to be voted upon in the election of directors; and
that in amending the by-laws, respondents purposely provided
for petitioners disqualification and deprived him of his vested
right as afore-mentioned, hence the amended by-laws are null
and void. 1
As additional causes of action, it was alleged that corporations
have no inherent power to disqualify a stockholder from being
elected as a director and, therefore, the questioned act is
ultra vires and void; that Andres M. Soriano, Jr. and/or Jose M.
Soriano, while representing other corporations, entered into
contracts (specifically a management contract) with
respondent corporation, which was avowed because the
questioned amendment gave the Board itself the prerogative
of determining whether they or other persons are engaged in
competitive or antagonistic business; that the portion of the
amended by-laws which states that in determining whether or
not a person is engaged in competitive business, the Board
may consider such factors as business and family relationship,
is unreasonable and oppressive and, therefore, void; and that
the portion of the amended by-laws which requires that "all
nominations for election of directors . . . shall be submitted in
writing to the Board of Directors at least five (5) working days
before the date of the Annual Meeting" is likewise
unreasonable and oppressive.
It was, therefore, prayed that the amended by-laws be
declared null and void and the certificate of filing thereof be
cancelled, and that individual respondents be made to pay
damages, in specified amounts, to petitioner.
On October 28, 1976, in connection with the same case,
petitioner filed with the Securities and Exchange Commission
an "Urgent Motion for Production and Inspection of
Documents", alleging that the Secretary of respondent
corporation refused to allow him to inspect its records despite
request made by petitioner for production of certain
documents enumerated in the request, and that respondent
corporation had been attempting to suppress information from
its stockholders despite a negative reply by the SEC to its
query regarding their authority to do so. Among the
documents requested to be copied were (a) minutes of the
stockholders meeting held on March 13, 1961; (b) copy of the
management contract between San Miguel Corporation and A.
Soriano Corporation (ANSCOR); (c) latest balance sheet of San
Miguel International, Inc.; (d) authority of the stockholders to
invest the funds of respondent corporation in San Miguel
International, Inc.; and (e) lists of salaries, allowances,
bonuses, and other compensation, if any, received by Andres
M. Soriano, Jr. and/or its successor-in-interest.

The "Urgent Motion for Production and Inspection of

Documents" was opposed by respondents, alleging, among
others, that the motion has no legal basis; that the demand is
not based on good faith; that the motion is premature since
the materiality or relevance of the evidence sought cannot be
determined until the issues are joined; that it fails to show
good cause and constitutes continued harassment; and that
some of the information sought are not part of the records of
the corporation and, therefore, privileged.
During the pendency of the motion for production,
respondents San Miguel Corporation, Enrique Conde, Miguel
Ortigas and Antonio Prieto filed their answer to the petition,
denying the substantial allegations therein and stating, by
way of affirmative defenses that "the action taken by the
Board of Directors on September 18, 1976 resulting in the . . .
amendments is valid and legal because the power to amend,
modify, repeal or adopt new By-laws delegated to said Board
on March 13, 1961 and long prior thereto has never been
revoked, withdrawn or otherwise nullified by the stockholders
of SMC" ; that contrary to petitioners claim, "the vote
requirement for a valid delegation of the power to amend,
repeal or adopt new by-laws is determined in relation to the
total subscribed capital stock at the time the delegation of
said power is made, not when the Board opts to exercise said
delegated power" ; that petitioner has not availed of his intracorporate remedy for the nullification of the amendment,
which is to secure its repeal by vote of the stockholders
representing a majority of the subscribed capital stock at any
regular or special meeting, as provided in Article VIII, section 1
of the by-laws and section 22 of the Corporation Law, hence
the petition is premature; that petitioner is estopped from
questioning the amendments on the ground of lack of
authority of the Board, since he failed to object to other
amendments made on the basis of the same 1961
authorization; that the power of the corporation to amend its
by-laws is broad, subject only to the condition that the by-laws
adopted should not be inconsistent with any existing law; that
respondent corporation should not be precluded from
adopting protective measures to minimize or eliminate
situations where its directors might be tempted to put their
personal interests over that of the corporation; that the
questioned amended by-laws is a matter of internal policy and
the judgment of the board should not be interfered with; that
the by-laws, as amended, are valid and binding and are
intended to prevent the possibility of violation of criminal and
civil laws prohibiting combinations in restraint of trade; and
that the petition states no cause of action. It was, therefore,
prayed that the petition be dismissed and that petitioner be
ordered to pay damages and attorneys fees to respondents.
The application for writ of preliminary injunction was likewise
on various grounds.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed
their opposition to the petition, denying the material
averments thereof and stating, as part of their affirmative
defenses, that in August 1972, the Universal Robina
Corporation (Robina), a corporation engaged in business
competitive to that of respondent corporation, began
acquiring shares therein, until September 1976 when its total
holding amounted to 622,987 shares; that in October 1972,
the Consolidated Foods Corporation (CFC) likewise began
acquiring shares in respondent corporation, until its total
holdings amounted to P543,959.00 in September 1976; that
on January 12, 1976, Petitioner, who is president and
controlling shareholder of Robina and CFC (both closed
corporations) purchased 5,000 shares of stock of respondent
corporation, and thereafter, in behalf of himself, CFC and
Robina, "conducted malevolent and malicious publicity
campaign against SMC" to generate support from the
stockholder "in his effort to secure for himself and in
representation of Robina and CFC interests, a seat in the
Board of Directors of SMC", that in the stockholders meeting
of March 18, 1976, petitioner was rejected by the stockholders
in his bid to secure a seat in the Board of Directors on the
basic issue that petitioner was engaged in a competitive
business and his securing a seat would have subjected
respondent corporation to grave disadvantages; that
"petitioner nevertheless vowed to secure a seat in the Board
of Directors at the next annual meeting" ; that thereafter the
Board of Directors amended the by-laws as afore-stated.
As counterclaims, actual damages, moral damages,
exemplary damages, expenses of obligation and attorneys
fees were presented against petitioner.
Subsequently, a Joint Omnibus Motion for the striking out of
the motion for production and inspection of documents was
filed by all the respondents. This was duly opposed by
petitioner. At this juncture, respondents Emigdio Tanjuatco, Sr.

58
and Eduardo R. Visaya were allowed to intervene as
oppositors and they accordingly filed their oppositions-inintervention to the petition.
On December 29, 1976, the Securities and Exchange
Commission resolved the motion for production and inspection
of documents by issuing Order No. 26, Series of 1977, stating,
in part as follows:
"Considering the evidence submitted before the Commission
by the petitioner and respondents in the above-entitled case,
it is hereby ordered:
1. That respondents produce and permit the inspection,
copying and photographing, by or on behalf of the petitionermovant, John Gokongwei, Jr., of the minutes of the
stockholders meeting of the respondent San Miguel
Corporation held on March 13, 1961, which are in the
possession, custody and control of the said corporation, it
appearing that the same is material and relevant to the issues
involved in the main case. Accordingly, the respondents
should allow petition-movant entry in the principal office of
the respondent Corporation, San Miguel Corporation on
January 14, 1977, at 9:30 oclock in the morning for purposes
of enforcing the rights herein granted; it being understood
that the inspection, copying and photographing of the said
documents shall be undertaken under the direct and strict
supervision of this Commission. Provided, however, that other
documents and/or papers not heretofore included are not
covered by this Order and any inspection thereof shall require
the prior permission of this Commission;
2. As to the Balance Sheet of San Miguel International, Inc. as
well as the list of salaries, allowances, bonuses, compensation
and/or remuneration received by respondent Jose M. Soriano,
Jr. and Andres Soriano from San Miguel International, Inc.
and/or its successors-in-interest, the Petition to produce and
inspect the same is hereby DENIED, as petitioner-movant is
not a stockholder of San Miguel International, Inc. and has,
therefore, no inherent right to inspect said documents;
3. In view of the Manifestation of petitioner-movant dated
November 29, 1976, withdrawing his request to copy and
inspect the management contract between San Miguel
Corporation and A. Soriano Corporation and the renewal and
amendments thereof for the reason that he had already
obtained the same, the Commission takes note thereof; and
4. Finally, the Commission holds in abeyance the resolution on
the matter of production and inspection of the authority of the
stockholders of San Miguel Corporation to invest the funds of
respondent corporation in San Miguel International, Inc., until
after the hearing on the merits of the principal issues in the
above-entitled case.
This Order is immediately executory upon its approval." 2
Dissatisfied with the foregoing Order, petitioner moved for its
reconsideration.
Meanwhile, on December 10, 1976, while the petition was yet
to be heard, respondent corporation issued a notice of special
stockholders meeting for the purpose of "ratification and
confirmation of the amendment to the By-laws", setting such
meeting for February 10, 1977. This prompted petitioner to
ask respondent Commission for a summary judgment insofar
as the first cause of action is concerned, for the alleged
reason that by calling a special stockholders meeting for the
aforesaid purpose, private respondents admitted the invalidity
of the amendments of September 18, 1976. The motion for
summary judgment was opposed by private respondents.
Pending action on the motion, petitioner filed an "Urgent
Motion for the Issuance of a Temporary Restraining Order",
praying that pending the determination of petitioners
application for the issuance of a preliminary injunction and or
petitioners motion for summary judgment, a temporary
restraining order be issued, restraining respondents from
holding the special stockholders meeting as scheduled. This
motion was duly opposed by respondents.
On February 10, 1977, respondent Cremation issued an order
denying the motion for issuance of temporary restraining
order. After receipt of the order of denial, respondents
conducted the special stockholders meeting wherein the
amendments to the by-laws were ratified. On February 14,
1977, petitioner filed a consolidated motion for contempt and
for nullification of the special stockholders meeting.
A motion for reconsideration of the order denying petitioners
motion for summary judgment was filed by petitioner before
respondent Commission on March 10, 1977. Petitioner alleges

that up to the time of the filing of the instant petition, the said
motion had not yet been scheduled for hearing. Likewise, the
motion for reconsideration of the order granting in part and
denying in part petitioners motion for production of records
had not yet been resolved.
In view of the fact that the annual stockholders meeting of
respondent corporation had been scheduled for May 10, 1977,
petitioner filed with respondent Commission a Manifestation
stating that he intended to run for the position of director of
respondent corporation. Thereafter, respondents filed a
Manifestation with respondent Commission, submitting a
Resolution of the Board of Directors of respondent corporation
disqualifying and precluding petitioner from being a candidate
for director unless he could submit evidence on May 3, 1977
that he does not come within the disqualifications specified in
the amendment to the by-laws, subject matter of SEC Case
No. 1375. By reason thereof, petitioner filed a manifestation
and motion to resolve pending incidents in the case and to
issue a writ of injunction, alleging that private respondents
were seeking to nullify and render ineffectual the exercise of
jurisdiction by the respondent Commission, to petitioners
irreparable damage and prejudice. Allegedly despite a
subsequent Manifestation to prod respondent Commission to
act, petitioner was not heard prior to the date of the
stockholders meeting.
Petitioner alleges that there appears a deliberate and
concerted inability on the part of the SEC to act, hence
petitioner came to this Court.
SEC CASE NO. 1423
Petitioner likewise alleges that, having discovered that
respondent corporation has been investing corporate funds in
other corporations and businesses outside of the primary
purpose clause of the corporation, in violation of section 171/2 of the Corporation Law, he filed with respondent
Commission, on January 20, 1977, a petition seeking to have
private respondents Andres M. Soriano, Jr. and Jose M.
Soriano, as well as the respondent corporation declared guilty
of such violation, and ordered to account for such investments
and to answer for damages.
On February 4, 1977, motions to dismiss were filed by private
respondents, to which a consolidated motion to strike and to
declare individual respondents in default and an opposition ad
abundantiorem cautelam were filed by petitioner. Despite the
fact that said motions were filed as early as February 4, 1977,
the Commission acted thereon only on April 25, 1977, when it
denied respondents motions to dismiss and gave them two
(2) days within which to file their answer, and set the case for
hearing on April 29 and May 3, 1977.
Respondents issued notices of the annual stockholders
meeting, including in the Agenda thereof, the following:
"6. Reaffirmation of the authorization to the Board of Directors
by the stockholders at the meeting on March 20, 1972 to
invest corporate funds in other companies or businesses or for
purposes other than the main purpose for which the
Corporation has been organized, and ratification of the
investments thereafter made pursuant thereto."
By reason of the foregoing, on April 28, 1977, petitioner filed
with the SEC an urgent motion for the issuance of a writ of
preliminary injunction to restrain private respondents from
taking up Item 6 of the Agenda at the annual stockholders
meeting, requesting that the same be set for hearing on May
3, 1977, the date set for the second hearing of the case on
the merits. Respondent Commission, however, cancelled the
dates of hearing originally scheduled and reset the same to
May 16 and 17, 1977, or after the scheduled annual
stockholders meeting. For the purpose of urging the
Commission to act, petitioner filed an urgent manifestation on
May 3, 1977, but this notwithstanding, no action has been
taken up to the date of the filing of the instant petition.
With respect to the afore-mentioned SEC cases, it is
petitioners contention before this Court that respondent
Commission gravely abused its discretion when it failed to act
with deliberate dispatch on the motions of petitioner seeking
to prevent illegal and/or arbitrary impositions or limitations
upon his rights as stockholder of respondent corporation, and
that respondent are acting oppressively against petitioner, in
gross derogation of petitioners rights to property and due
process. He prayed that this Court direct respondent SEC to
act on collateral incidents pending before it.
On May 6, 1977, this Court issued a temporary restraining
order restraining private respondents from disqualifying or

59
preventing petitioner from running or from being voted as
director of respondent corporation and from submitting for
ratification or confirmation or from causing the ratification or
confirmation of Item 6 of the Agenda of the annual
stockholders meeting on May 10, 1977, or from making
effective the amended by-laws of respondent corporation,
until further orders from this Court or until the Securities and
Exchange Commission acts on the matters complained of in
the instant petition.
On May 14, 1977, petitioner filed a Supplemental Petition,
alleging that after a restraining order had been issued by this
Court, or on May 9, 1977, the respondent Commission served
upon petitioner copies of the following orders:
(1) Order No. 449, Series of 1977 (SEC Case No. 1375);
denying petitioners motion for reconsideration, with its
supplement, of the order of the Commission denying in part
petitioners motion for production of documents, petitioners
motion for reconsideration of the order denying the issuance
of a temporary restraining order denying the issuance of a
temporary restraining order, and petitioners consolidated
motion to declare respondents in contempt and to nullify the
stockholders meeting;
(2) Order No. 450, Series of 1977 (SEC Case No. 1375),
allowing petitioner to run as a director of respondent
corporation but stating that he should not sit as such if
elected, until such time that the Commission has decided the
validity of the by-laws in dispute, and denying deferment of
Item 6 of the Agenda for the annual stockholders meeting;
and
(3) Order No. 451, Series of 1977 (SEC Case No. 1375),
denying petitioners motion for reconsideration of the order of
respondent Commission denying petitioners motion for
summary judgment;
It is petitioners assertions, anent the foregoing orders, (1)
that respondent Commission acted with indecent haste and
without circumspection in issuing the aforesaid orders to
petitioners irreparable damage and injury; (2) that it acted
without jurisdiction and in violation of petitioners right to due
process when it decided en banc an issue not raised before it
and still pending before one of its Commissioners, and without
hearing petitioner thereon despite petitioners request to have
the same calendared for hearing; and (3) that the respondents
acted oppressively against the petitioner in violation of his
rights as a stockholder, warranting immediate judicial
intervention.
It is prayed in the supplemental petition that the SEC orders
complained of be declared null and void and that respondent
Commission be ordered to allow petitioner to undertake
discovery proceedings relative to San Miguel International,
Inc. and thereafter to decide SEC Cases No. 1375 and 1423 on
the merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and
Jose M. Soriano filed their comment, alleging that the petition
is without merit for the following reasons:
(1) that the petitioner and the interests he represents are
engaged in businesses competitive and antagonistic to that of
respondent San Miguel Corporation, it appearing that he owns
and controls a greater portion of his SMC stock thru the
Universal Robina Corporation and the Consolidated Foods
Corporation, which corporations are engaged in businesses
directly and substantially competing with the allied businesses
of respondent SMC and of corporations in which SMC has
substantial investments. Further, when CFC and Robina had
accumulated shares in SMC, the Board of Directors of SMC
realized the clear and present danger that competitors or
antagonistic parties may be elected directors and thereby
have easy and direct access to SMCs business and trade
secrets and plans;
(2) that the amended by-laws were adopted to preserve and
protect respondent SMC from the clear and present danger
that business competitors, if allowed to become directors, will
illegally and unfairly utilize their direct access to its business
secrets and plans for their own private gain to the irreparable
prejudice of respondent SMC, and, ultimately, its stockholders.
Further, it is asserted that membership of a competitor in the
Board of Directors is a blatant disregard of no less than the
Constitution and pertinent laws against combinations in
restraint of trade;
(3) that by-laws are valid and binding since a corporation has
the inherent right and duty to preserve and protect itself by
excluding competitors and antagonistic parties, under the law

of self-preservation, and it should be allowed a wide latitude in

the selection of means to preserve itself;
(4) that the delay in the resolution and disposition of SEC
Cases Nos. 1375 and 1423 was due to petitioners own acts or
omissions, since he failed to have the petition to suspend,
pendente lite, the amended by-laws calendared for hearing. It
was emphasized that it was only on April 29, 1977 that
petitioner calendared the aforesaid petition for suspension
(preliminary injunction) for hearing on May 3, 1977. The
instant petition being dated May 4, 1977, it is apparent that
respondent Commission was not given a chance to act "with
deliberate dispatch" ; and
(5) that even assuming that the petition was meritorious, it
has become moot and academic because respondent
Commission has acted on the pending incidents complained
of. It was, therefore, prayed that the petition be dismissed.
On May 21, 1977, respondent Emigdio G. Tanjuatco, Sr. filed
his comment, alleging that the petition has become moot and
academic for the reason, among others, that the acts of
private respondents sought to be enjoined have reference to
the annual meeting of the stockholders of respondent San
Miguel Corporation, which was held on May 10, 1977; that in
said meeting, in compliance with the order of respondent
Commission, petitioner was allowed to run and be voted for as
director; and that in the same meeting, Item 6 of the Agenda
was discussed, voted upon, ratified and confirmed. Further, it
was averred that the questions and issues raised by petitioner
are pending in the Securities and Exchange Commission which
has acquired jurisdiction over the case, and no hearing on the
merits has been had; hence the elevation of these issues
before the Supreme Court is premature.
Petitioner filed a reply to the aforesaid comments, stating that
the petition presents justiciable questions for the
determination of this Court because (1) the respondent
Commission acted without circumspection, unfairly and
oppresively against petitioner, warranting the intervention of
this Court; (2) a derivative suit, such as the instant case, is
not rendered academic by the act of a majority of
stockholders, such that the discussion, ratification and
confirmation of Item 6 of the Agenda of the annual
stockholders meeting of May 10, 1977 did not render the
case moot; that the amendment to the bylaws which
specifically bars petitioner from being a director is void since
it deprives him of his vested rights.
Respondent Commission, thru the Solicitor General, filed a
separate comment, alleging that after receiving a copy of the
restraining order issued by this Court and noting that the
restraining order did not foreclose action by it, the
Commission en banc issued Orders Nos. 449, 450 and 451 in
SEC Case No. 1375.
In answer to the allegation in the supplemental petition, it
states that Order No. 450 which denied deferment of Item 6 of
the Agenda of the annual stockholders meeting of respondent
corporation, took into consideration an urgent manifestation
filed with the Commission by petitioner on May 3, 1977 which
prayed, among others, that the discussion of Item 6 of the
Agenda be deferred. The reason given for denial of deferment
was that "such action is within the authority of the corporation
as well as falling within the sphere of stockholders right to
know, deliberate upon and/or to express their wishes
regarding disposition of corporate funds considering that their
investments are the ones directly affected." It was alleged
that the main petition has, therefore, become moot and
academic.
On September 29, 1977, petitioner filed a second
supplemental petition with prayer for preliminary injunction,
alleging that the actuations of respondent SEC tended to
deprive him of his right to due process, and "that all possible
questions on the facts now pending before the respondent
Commission are now before this Honorable Court which has
the authority and the competence to act on them as it may
see fit." (Rollo, pp. 927-928.)
Petitioner, in his memorandum, submits the following issues
for resolution;
(1) Whether or not the provisions of the amended by-laws of
respondent corporation, disqualifying a competitor from
nomination or election to the Board of Directors are valid and
reasonable;
(2) whether or not respondent SEC gravely abused its
discretion in denying petitioners request for an examination

60
of the records of San Miguel International, Inc., a fully owned
subsidiary of San Miguel Corporation; and
(3) whether or not respondent SEC committed grave abuse of
discretion in allowing discussion of Item 6 of the Agenda of
the Annual Stockholders Meeting on May 10, 1977, and the
ratification of the investment in a foreign corporation of the
corporate funds, allegedly in violation of section 17-1/2 of the
Corporation Law.
I
Whether or not amended by-laws are valid is purely a legal
question, which public interest requires to be resolved
It is the position of the petitioner that "it is not necessary to
remand the case to respondent SEC for an appropriate ruling
on the intrinsic validity of the amended by-laws in compliance
with the principle of exhaustion of administrative remedies",
considering that: first: "whether or not the provisions of the
amended by-laws are intrinsically valid . . . is purely a legal
question. There is no factual dispute as to what the provisions
are and evidence is not necessary to determine whether such
amended by-laws are valid as framed and approved . . ." ;
second: "it is for the interest and guidance of the public that
an immediate and final ruling on the question be made . . ." ;
third: "petitioner was denied due process by SEC" when
"Commissioner de Guzman had openly shown prejudice
against petitioner . . .", and "Commissioner Sulit . . . approved
the amended by-laws ex-parte and obviously found the same
intrinsically valid" ; and finally: "to remand the case to SEC
would only entail delay rather than serve the ends of justice."
Respondents Andres M. Soriano, Jr. and Jose M. Soriano
similarly pray that this Court resolve the legal issues raised by
the parties in keeping with the "cherished rules of procedure"
that "a court should always strive to settle the entire
controversy in a single proceeding leaving no root or branch
to bear the seeds of future ligiation", citing Gayos v. Gayos. 3
To the same effect is the prayer of San Miguel Corporation
that this Court resolve on the merits the validity of its
amended by-laws and the rights and obligations of the parties
thereunder, otherwise "the time spent and effort exerted by
the parties concerned and, more importantly, by this
Honorable Court, would have been for naught because the
main question will come back to this Honorable Court for final
resolution." Respondent Eduardo R. Visaya submits a similar
appeal.
It is only the Solicitor General who contends that the case
should be remanded to the SEC for hearing and decision of
the issues involved, invoking the latters primary jurisdiction
to hear and decide cases involving intra-corporate
controversies.
It is an accepted rule of procedure that the Supreme Court
should always strive to settle the entire controversy in a
single proceeding, leaving no root or branch to bear the seeds
of future litigation. 4 Thus, in Francisco v. City of Davao, 5 this
Court resolved to decide the case on the merits instead of
remanding it to the trial court for further proceedings since
the ends of justice would not be subserved by the remand of
the case. In Republic v. Security Credit and Acceptance
Corporation, Et Al., 6 this Court, finding that the main issue is
one of law, resolved to decide the case on the merits
"because public interest demands an early disposition of the
case", and in Republic v. Central Surety and Insurance
Company, 7 this Court denied remand of the third-party
complaint to the trial court for further proceedings, citing
precedents where this Court, in similar situations, resolved to
decide the cases on the merits, instead of remanding them to
the trial court where (a) the ends of justice would not be
subserved by the remand of the case; or (b) where public
interest demands an early disposition of the case; or (c) where
the trial court had already received all the evidence presented
by both parties and the Supreme Court is now in a position,
based upon said evidence, to decide the case on its merits. 8
It is settled that the doctrine of primary jurisdiction has no
application where only a question of law is involved. 8
Because uniformity may be secured through review by a
single Supreme Court, questions of law may appropriately be
determined in the first instance by courts. 8 In the case at bar,
there are facts which cannot be denied, viz: that the amended
by-laws were adopted by the Board of Directors of the San
Miguel Corporation in the exercise of the power delegated by
the stockholders ostensibly pursuant to section 22 of the
Corporation Law; that in a special meeting on February 10,
1977 held specially for that purpose, the amended by-laws
were ratified by more than 80% of the stockholders of record;

that the foreign investment in the Hongkong Brewery and

Distillery, a beer manufacturing company in Hongkong, was
made by the San Miguel Corporation in 1948; and that in the
stockholders annual meeting held in 1972 and 1977, all
foreign investments and operations of San Miguel Corporation
were ratified by the stockholders.
II
Whether or not the amended by-laws of SMC disqualifying a
competitor from nomination or election to the Board of
Directors of SMC are valid and reasonable
The validity or reasonableness of a by-law of a corporation is
purely a question of law. 9 Whether the by-law is in conflict
with the law of the land, or with the charter of the corporation,
or is in a legal sense unreasonable and therefore unlawful is a
question of law. 10 This rule is subject, however, to the
limitation that where the reasonableness of a by-law is a mere
matter of judgment, and one upon which reasonable minds
must necessarily differ, a court would not be warranted in
substituting its judgment instead of the judgment of those
who are authorized to make by-laws and who have exercised
their authority. 11
Petitioner claims that the amended by-laws are invalid and
unreasonable because they were tailored to suppress the
minority and prevent them from having representation in the
Board", at the same time depriving petitioner of his "vested
right" to be voted for and to vote for a person of his choice as
director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose
M. Soriano and San Miguel Corporation content that exclusion
of a competitor from the Board is legitimate corporate
purpose, considering that being a competitor, petitioner
cannot devote an unselfish and undivided loyalty to the
corporation; that it is essentially a preventive measure to
assure stockholders of San Miguel Corporation of reasonable
protection from the unrestrained self-interest of those charged
with the promotion of the corporate enterprise; that access to
confidential information by a competitor may result either in
the promotion of the interest of the competitor at the expense
of the San Miguel Corporation, or the promotion of both the
interests of petitioner and respondent San Miguel Corporation,
which may, therefore, result in a combination or agreement in
violation of Article 186 of the Revised Penal Code by
destroying free competition to the detriment of the consuming
public. It is further argued that there is not vested right of any
stockholder under Philippine Law to be voted as director of a
corporation. It is alleged that petitioner, as of May 6,1978, has
exercised, personally or thru two corporations owned or
controlled by him, control over the following shareholdings in
San Miguel Corporation, vis.: (a) John Gokongwei, Jr. 6,325
shares; (b) Universal Robina Corporation 738,647 shares;
(c) CFC Corporation 658,313 shares, or a total of 1,403,285
shares. Since the outstanding capital stock of San Miguel
Corporation, as of the present date, is represented by
33,139,749 shares with a par value of P10.00, the total shares
owned or controlled by petitioner represents 4.2344% of the
total outstanding capital stock of San Miguel Corporation. It is
also contended that petitioner is the president and substantial
stockholder of Universal Robina Corporation and CFC
Corporation, both of which are allegedly controlled by
petitioner and members of his family. It is also claimed that
both the Universal Robina Corporation and the CFC
Corporation are engaged in businesses directly and
substantially competing with the allied businesses of San
Miguel Corporation, and of corporations in which SMC has
substantial investments.
ALLEGED AREAS OF COMPETITION BETWEEN PETITIONERS
CORPORATIONS AND SAN MIGUEL CORPORATION
According to respondent San Miguel Corporation, the areas of,
competition are enumerated in its Board the areas of
competition are enumerated in its Board Resolution dated
April 28, 1978, thus:
Product Line Estimated Market Share Total
1977 SMC Robina-CFC
Table Eggs 0.6% 10.0% 10.6%
Layer Pullets 33.0% 24.0% 57.0%

61
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%
Thus, according to respondent SMC, in 1976, the areas of
competition affecting SMC involved product sales of over P400
million or more than 20% of the P2 billion total product sales
of SMC. Significantly, the combined market shares of SMC and
CFC-Robina in layer pullets, dressed chicken, poultry and hog
feeds, ice cream, instant coffee and woven fabrics would
result in a position of such dominance as to affect the
prevailing market factors.
It is further asserted that in 1977, the CFC-Robina group was
in direct competition on product lines which, for SMC,
represented sales amounting to more than P478 million. In
addition, CFC-Robina was directly competing in the sale of
coffee with Filipino, a subsidiary of SMC, which product line
represented sales for SMC amounting to more than P275
million. The CFC-Robina group (Robitex, excluding Litton Mills
recently acquired by petitioner) is purportedly also in direct
competition with Ramie Textile, Inc., subsidiary of SMC, in
product sales amounting to more than P95 million. The areas
of competition between SMC and CFC-Robina in 1977
represented, therefore, for SMC, product sales of more than
P849 million.
According to private respondents, at the Annual Stockholders
Meeting of March 18, 1976, 9,894 stockholders, in person or
by proxy, owning 23,436,754 shares in SMC, or more than
90% of the total outstanding shares of SMC, rejected
petitioners candidacy for the Board of Directors because they
"realized the grave dangers to the corporation in the event a
competitor gets a board seat in SMC." On September 18,
1978, the Board of Directors of SMC, by "virtue of powers
delegated to it by the stockholders," approved the
amendment to the by-laws in question. At the meeting of
February 10, 1977, these amendments were confirmed and
ratified by 5,716 shareholders owning 24,283,945 shares, or
more than 80% of the total outstanding shares. Only 12
shareholders, representing 7,005 shares, opposed the
confirmation and ratification. At the Annual Stockholders
Meeting of May 10, 1977, 11,349 shareholders, owning
27,257.014 shares, or more than 90% of the outstanding
shares,
rejected
petitioners
candidacy,
while
946
stockholders, representing 1,648,801 shares voted for him. On
the May 9, 1978 Annual Stockholders Meeting, 12,480
shareholders, owning more than 30 million shares, or more
than 90% of the total outstanding shares, voted against
petitioner.
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS
OF DIRECTORS EXPRESSLY CONFERRED BY LAW
Private respondents contend that the disputed amended bylaws were adopted by the Board of Directors of San Miguel
Corporation as a measure of self-defense to protect the
corporation from the clear and present danger that the
election of a business competitor to the Board may cause
upon the corporation and the other stockholders "irreparable
prejudice." Submitted for resolution, therefore, is the issue
whether or not respondent San Miguel Corporation could, as a
measure of self-protection, disqualify a competitor from
nomination and election to its Board of Directors.
It is recognized by all authorities that every corporation has
the inherent power to adopt by-laws for its internal
government, and to regulate the conduct and prescribe the
rights and duties of its members towards itself and among
themselves in reference to the management of its affairs." 12
At common law, the rule was "that the power to make and
adopt by-laws was inherent in every corporation as one of its
necessary and inseparable legal incidents. And it is settled
throughout the United States that in the absence of positive
legislative provisions limiting it, every private corporation has
this inherent power as one of its necessary and inseparable
legal incidents, independent of any specific enabling provision
in its charter or in general law, such power of self-government
being essential to enable the corporation to accomplish the
purposes of its creation." 13

In this jurisdiction under section 21 of the Corporation Law, a

corporation may prescribe in its by-laws "the qualifications,
duties and compensation of directors, officers and
employees . . ." This must necessarily refer to a qualification
in addition to that specified by section 30 of the Corporation
Law, which provides that "every director must own in his right
at least one share of the capital stock of the stock corporation
of which he is a director . . ." In Government v. El Hogar, 14
the Court sustained the validity of a provision in the corporate
by-law requiring that persons elected to the Board of Directors
must be holders of shares of the paid up value of P5,000.00,
which shall be held as security for their action, on the ground
that section 21 of the Corporation Law expressly gives the
power to the corporation to provide in its by-laws for the
qualifications of directors and is "highly prudent and in
conformity with good practice."
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED
DIRECTOR
Any person "who buys stock in a corporation does so with the
knowledge that its affairs are dominated by a majority of the
stockholders and that he impliedly contracts that the will of
the majority shall govern in all matters within the limits of the
act of incorporation and lawfully enacted by-laws and not
forbidden by law." 15 To this extent, therefore, the stockholder
may be considered to have "parted with his personal right or
privilege to regulate the disposition of his property which he
has invested in the capital stock of the corporation, and
surrendered it to the will of the majority of his fellow
incorporators. . . . It can not therefore be justly said that the
contract, express or implied, between the corporation and the
stockholders is infringed . . . by any act of the former which is
authorized by a majority . . ." 16
Pursuant to section 18 of the Corporation Law, any
corporation may amend its articles of incorporation by a vote
or written assent of the stockholders representing at least
two-thirds of the subscribed capital stock of the corporation. If
the amendment changes, diminishes or restricts the rights of
the existing shareholders, then the 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. 17
It being settled that the corporation has the power to provide
for the qualifications of its directors, the next question that
must be considered is whether the disqualification of a
competitor from being elected to the Board of Directors is a
reasonable exercise of corporate authority.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE
CORPORATION AND ITS SHAREHOLDERS
Although in the strict and technical sense, directors of a
private corporation are not regarded as trustees, there cannot
be any doubt that their character is that of a fiduciary insofar
as the corporation and the stockholders as a body are
concerned. As agents entrusted with the management of the
corporation for the collective benefit of the stockholders,
"they occupy a fiduciary relation, and in this sense the relation
is one of trust." 18 "The ordinary trust relationship of directors
of a corporation and stockholders", according to Ashaman v.
Miller, 19 "is not a matter of statutory or technical law. It
springs from the fact that directors have the control and
guidance of corporate affairs and property and hence of the
property interests of the stockholders. Equity recognizes that
stockholders are the proprietors of the corporate interests and
are ultimately the only beneficiaries thereof . . ."
Justice Douglas, in Pepper v. Litton, 20 emphatically restated
the standard of fiduciary obligation of the directors of
corporations, thus:
"A director is a fiduciary. . . . Their powers are powers in
trust. . . . He who is in such fiduciary position cannot serve
himself first and his cestuis second. . . . He cannot manipulate
the affairs of his corporation to their detriment and in
disregard of the standards of common decency. He cannot by
the intervention of a corporate entity violate the ancient
precept against serving two masters. . . . He cannot utilize his
inside information and strategic position for his own

62
preferment. He cannot violate rules of fair play by doing
indirectly through the corporation what he could not do so
directly. He cannot violate rules of fair play by doing indirectly
through the corporation what he could not do so directly. He
cannot use his power for his personal advantage and to the
detriment of the stockholders and creditors no matter how
absolute in terms that power may be and no matter how
meticulous he is to satisfy technical requirements. For that
power is at all times subject to the equitable limitation that it
may not be exercised for the aggrandizement, preference, or
advantage of the fiduciary to the exclusion or detriment of the
cestuis."

the benefit of the corporation, as a "faultless fiduciary may

not reap the fruits of his misconduct to the exclusion of his
principal. 28

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

said:

It is not denied that a member of the Board of Directors of the

San Miguel Corporation has access to sensitive and highly
confidential information, such as: (a) marketing strategies and
pricing structure; (b) budget for expansion and diversification;
(c) research and development; and (d) sources of funding,
availability of personnel, proposals of mergers or tie-ups with
other firms.

". . . A person cannot serve two hostile and adverse masters

without detriment to one of them. A judge cannot be impartial
if personally interested in the cause. No more can a director.
Human nature is too weak for this. Take whatever statute
provision you please giving power to stockholders to choose
directors, and in none will you find any express prohibition
against a discretion to select directors having the companys
interest at heart, and it would simply be going far to deny by
mere implication the existence of such a salutary power.
". . . If the by-law is to be held reasonable in disqualifying a
stockholder in a competing company from being a director,
the same reasoning would apply to disqualify the wife and
immediate member of the family of such stockholder, on
account of the supposed interest of the wife in her husbands
affairs, and his supposed influence over her. It is perhaps true
that such stockholders ought not to be condemned as selfish
and dangerous to the best interest of the corporation until
tried and tested. So it is also true that we cannot condemn as
selfish and dangerous and unreasonable the action of the
board in passing the by-law. The strife over the matter of
control in this corporation as in many others is perhaps
carried on not altogether in the spirit of brotherly love and
affection. The only test that we can apply is as to whether or
not the action of the Board is authorized and sanctioned by
law. . . ." 22
These principles have been applied by this Court in previous
cases. 23
AN AMENDMENT TO THE CORPORATE BY-LAW WHICH
RENDERS A STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF
HE BE ALSO DIRECTOR IN A CORPORATION WHOSE BUSINESS
IS IN COMPETITION WITH THAT OF THE OTHER CORPORATION,
HAS BEEN SUSTAINED AS VALID
It is a settled state law in the United States, according to
Fletcher, that corporations have the power to make by-laws
declaring a person employed in the service of a rival company
to be ineligible for the corporations Board of Directors.." . .
(A)n amendment which renders ineligible, or if elected,
subjects to removal, a director if he be also a director in a
corporation whose business is in competition with or is
antagonistic to the other corporation is valid." 24 This is based
upon the principle that where the director is so employed in
the service of a rival company, he cannot serve both, but
must betray one or the other. Such an amendment "advances
the benefit of the corporation and is good." An exception
exists in New Jersey, where the Supreme Court held that the
Corporation Law in New Jersey prescribed the only
qualification, and therefore the corporation was not
empowered to add additional qualifications. 25 This is the
exact opposite of the situation in the Philippines because as
stated heretofore, section 21 of the Corporation Law expressly
provides that a corporation may make by-laws for the
qualifications of directors. Thus, it has been held that an
officer of a corporation cannot engage in a business in direct
competition with that of the corporation where he is a director
by utilizing information he has received as such officer, under
"the established law that a director or officer of a corporation
may not enter into a competing enterprise which cripples or
injures the business of the corporation of which he is an
officer or director." 26
It is also well established that corporate officers "are not
permitted to use their position of trust and confidence to
further their private interests." 27 In a case where directors of
a corporation cancelled a contract of the corporation for
exclusive sale of a foreign firms products, and after
establishing a rival business, the directors entered into a new
contract themselves with the foreign firm for exclusive sale of
its products, the court held that equity would regard the new
contract as an offshoot of the old contract and, therefore, for

The doctrine of "corporate opportunity" 29 is precisely a

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

It is obviously to prevent the creation of an opportunity for an

officer or director of San Miguel Corporation, who is also the
officer or owner of a competing corporation, from taking
advantage of the information which he acquires as director to
promote his individual or corporate interests to the prejudice
of San Miguel Corporation and its stockholders, that the
questioned amendment of the by-laws was made. Certainly,
where two corporations are competitive in a substantial
sense, it would seem improbable, if not impossible, for the
director, if he were to discharge effectively his duty, to satisfy
his loyalty to both corporations and place the performance of
his corporation duties above his personal concerns.
Thus, in McKee & Co. v. First National Bank of San Diego,
supra, the court sustained as valid and reasonable an
amendment to the by-laws of a bank, requiring that its
directors should not be directors, officers, employees, agents,
nominees or attorneys of any other banking corporation,
affiliate or subsidiary thereof. Chief Judge Parker, in McKee,
explained the reasons of the court, thus:
". . . A bank director has access to a great deal of information
concerning the business and plans of a bank which would
likely be injurious to the bank if known to another bank, and it
was reasonable and prudent to enlarge this minimum
disqualification to include any director, officer, employee,
agent, nominee, or attorney of any other bank in California.
The Ashkins case, supra, specifically recognizes protection
against rivals and others who might acquire information which
might be used against the interests of the corporation as a
legitimate object of by-law protection. With respect to
attorneys or persons associated with a firm which is attorney
for another bank, in addition to the direct conflict or potential
conflict of interest, there is also the danger of inadvertent
leakage of confidential information through casual office
discussions or accessibility of files. Defendants directors
determined that its welfare was best protected if this
opportunity for conflicting loyalties and potential misuse and
leakage of confidential information was foreclosed."
In McKee, the Court further listed qualificational by-laws
upheld by the courts, as follows:
"(1) A director shall not be directly or indirectly interested as a
stockholder in any other firm, company, or association which
competes with the subject corporation.
(2) A director shall not be the immediate member of the
family of any stockholder in any other firm, company, or
association which competes with the subject corporation.
(3) A director shall not be an officer, agent, employee,
attorney, or trustee in any other firm, company, or association
which compete with the subject corporation.
(4) A director shall be of good moral character as an essential
qualification to holding office.
(5) No person who is an attorney against the corporation in a
law suit is eligible for service on the board." (At p. 7.)
These are not based on theorical abstractions but on human
experience that a person cannot serve two hostile masters
without detriment to one of them.

63
The offer and assurance of petitioner that to avoid any
possibility of his taking unfair advantage of his position as
director of San Miguel Corporation, he would absent himself
from meetings at which confidential matters would be
discussed, would not detract from the validity and
reasonableness of the by-laws here involved. Apart from the
impractical results that would ensue from such arrangement,
it would be inconsistent with petitioners primary motive in
running for board membership which is to protect his
investments in San Miguel Corporation. More important, such
a proposed norm of conduct would be against all accepted
principles underlying a directors duty of fidelity to the
corporation, for the policy of the law is to encourage and
enforce responsible corporate management. As explained by
Oleck: 31 "The law will not tolerate the passive attitude of
directors . . . without active and conscientious participation in
the managerial functions of the company. As directors, it is
their duty to control and supervise the day to day business
activities of the company or to promulgate definite policies
and rules of guidance with a vigilant eye toward seeing to it
that these policies are carried out. It is only then that directors
may be said to have fulfilled their duty of fealty to the
corporation."
Sound principles of corporate management counsel against
sharing sensitive information with a director whose fiduciary
duty of loyalty may well require that he disclose this
information to a competitive rival. These dangers are
enhanced considerably where the common director such as
the petitioner is a controlling stockholder of two of the
competing corporations. It would seem manifest that in such
situations, the director has an economic incentive to
appropriate for the benefit of his own corporation the
corporate plans and policies of the corporation where he sits
as director.
Indeed, access by a competitor to confidential information
regarding marketing strategies and pricing policies of San
Miguel Corporation would subject the latter to a competitive
disadvantage and unjustly enrich the competitor, for advance
knowledge by the competitor of the strategies for the
development of existing or new markets of existing or new
products could enable said competitor to utilize such
knowledge to his advantage. 32
There is another important consideration in determining
whether or not the amended by-laws are reasonable. The
Constitution and the law prohibit combinations in restraint of
trade or unfair competition. Thus, section 2 of Article XIV of
the Constitution provides: "The State shall regulate or prohibit
private monopolies when the public interest so requires. No
combinations in restraint of trade or unfair competition shall
be allowed."
Article 186 of the Revised Penal Code also provides:
"Art. 186. Monopolies and combinations in restraint of trade.
The penalty of prision correccional in its minimum period or
a fine ranging from two hundred to six thousand pesos, or
both, shall be imposed upon:
1. Any person who shall enter into any contract or agreement
or shall take part in any conspiracy or combination in the form
of a trust or otherwise, in restraint of trade or commerce or to
prevent by artificial means free competition in the market.
2. Any person who shall monopolize any merchandise or
object of trade or commerce, or shall combine with any other
person or persons to monopolize said merchandise or object
in order to alter the price thereof by spreading false rumors or
making use of any other artifice to restrain free competition in
the market.
3. Any person who, being a manufacturer, producer, or
processor of any merchandise or object of commerce or an
importer of any merchandise or object of commerce from any
foreign country, either as principal or agent, wholesale or
retailer, shall combine, conspire or agree in any manner with
any person likewise engaged in the manufacture, production,
processing, assembling or importation of such merchandise or
object of commerce or with any other persons not so similarly
engaged for the purpose of making transactions prejudicial to
lawful commerce, or of increasing the market price in any part
of the Philippines, or any such merchandise or object of
commerce manufactured, produced, processed, assembled in
or imported into the Philippines, or of any article in the
manufacture of which such manufactured, produced,

processed, or imported merchandise or object of commerce is

used."
There are other legislation in this jurisdiction, which prohibit
monopolies and combinations in restraint of trade. 33
Basically, these anti-trust laws or laws against monopolies or
combinations in restraint of trade are aimed at raising levels
of competition by improving the consumers effectiveness as
the final arbiter in free markets. These laws are designed to
preserve free and unfettered competition as the rule of trade.
"It rests on the premise that the unrestrained interaction of
competitive forces will yield the best allocation of our
economic resources, the lowest prices and the highest
quality . . ." 34 they operate to forestall concentration of
economic power. 35 The law against monopolies and
combinations in restraint of trade is aimed at contracts and
combinations that, by reason of the inherent nature of the
contemplated acts, prejudice the public interest by unduly
restraining competition or unduly obstructing the course of
trade. 36
The terms "monopoly", "combination in restraint of trade" and
"unfair competition" appear to have a well defined meaning in
other jurisdictions. A "monopoly" embraces any combination
the tendency of which is to prevent competition in the broad
and general sense, or to control prices to the detriment of the
public. 37 In short, it is the concentration of business in the
hands of a few. The material consideration in determining its
existence is not that prices are raised and competition
actually excluded, but that power exists to raise prices or
exclude competition when desired. 38 Further, it must be
considered that the idea of monopoly is now understood to
include a condition produced by the mere act of individuals.
Its dominant thought is the notion of exclusiveness or unity, or
the suppression of competition by the unification of interest or
management, or it may be thru agreement and concert of
action. It is, in brief, unified tactics with regard to prices. 39
From the foregoing definitions, it is apparent that the
contentions of petitioner are not in accord with reality. The
election of petitioner to the Board of respondent Corporation
can bring about an illegal situation. This is because an express
agreement is not necessary for the existence of a combination
or conspiracy in restraint of trade. 40 It is enough that a
concert of action is contemplated and that the defendants
conformed to the arrangements, 41 and what is to be
considered is what the parties actually did and not the words
they used. For instance, the Clayton Act prohibits a person
from serving at the same time as a director in any two or
more corporations, if such corporations are, by virtue of their
business and location of operation, competitors so that the
elimination of competition between them would constitute
violation of any provision of the anti-trust laws. 42 There is
here a statutory recognition of the anti-competitive dangers
which may arise when an individual simultaneously acts as a
director of two or more competing corporations. A common
director of two or more competing corporations would have
access to confidential sales, pricing and marketing information
and would be in a position to coordinate policies or to aid one
corporation at the expense of another, thereby stifling
competition. This situation has been aptly explained by
Travers, thus:
"The argument for prohibiting competing corporations from
sharing even one director is that the interlock permits the
coordination of policies between nominally independent firms
to an extent that competition between them may be
completely eliminated. Indeed, if a director, for example, is to
be faithful to both corporations, some accommodation must
result. Suppose X is a director of both Corporation A and
Corporation B. X could hardly vote for a policy by A that would
injure B without violating his duty of loyalty to B; at the same
time he could hardly abstain from voting without depriving A
of his best judgment. If the firms really do compete in the
sense of vying for economic advantage at the expense of the
other there can hardly be any reason for an interlock
between competitors other than the suppression of
competition." 43 (Emphasis supplied.)
According to the Report of the House Judiciary Committee of
the U. S. Congress on section 9 of the Clayton Act, it was
established that: "By means of the interlocking directorates
one man or group of men have been able to dominate and
control a great number of corporations . . . to the detriment of
the small ones dependent upon them and to the injury of the
public." 44
Shared information on cost accounting may lead to price
fixing. Certainly, shared information on production, orders,

64
shipments, capacity and inventories may lead to control of
production for the purpose of controlling prices.
Obviously, if a competitor has access to the pricing policy and
cost conditions of the products of San Miguel Corporation, the
essence of competition in a free market for the purpose of
serving the lowest priced goods to the consuming public
would be frustrated. The competitor could so manipulate the
prices of his products or vary its marketing strategies by
region or by brand in order to get the most out of the
consumers. Where the two competing firms control a
substantial segment of the market this could lead to collusion
and combination in restraint of trade. Reason and experience
point to the inevitable conclusion that the inherent tendency
of interlocking directorates between companies that are
related to each other as competitors is to blunt the edge of
rivalry between the corporations, to seek out ways of
compromising opposing interests, and thus eliminate
competition. As respondent SMC aptly observes, knowledge
by CFC-Robina of SMCs costs in various industries and regions
in the country will enable the former to practice price
discrimination. CFC-Robina can segment the entire consuming
population by geographical areas or income groups and
change varying prices in order to maximize profits from every
market segment. CFC-Robina could determine the most
profitable volume at which it could produce for every product
line in which it competes with SMC. Access to SMC pricing
policy by CFC-Robina would in effect destroy free competition
and deprive the consuming public of opportunity to buy goods
of the highest possible quality at the lowest prices.
Finally, considering that both Robina and SMC are, to a certain
extent, engaged in agriculture, then the election of petitioner
to the Board of SMC may constitute a violation of the
prohibition contained in section 13(5) of the Corporation Law.
Said section provides in part that "any stockholder of more
than one corporation organized for the purpose of engaging in
agriculture may hold his stock in such corporations solely for
investment and not for the purpose of bringing about or
attempting to bring about a combination to exercise control of
such corporations . . .).
Neither are We persuaded by the claim that the by-law was
intended to prevent the candidacy of petitioner for election to
the Board. If the by-law were to be applied in the case of one
stockholder but waived in the case of another, then it could be
reasonably claimed that the by-law was being applied in a
discriminatory manner. However, the by-law, by its terms,
applies to all stockholders. The equal protection clause of the
Constitution requires only that the by-law operate equally
upon all persons of a class. Besides, before petitioner can be
declared ineligible to run for director, there must be hearing
and evidence must be submitted to bring his case within the
ambit of the disqualification. Sound principles of public policy
and management, therefore, support the view that a by-law
which disqualifies a competition from election to the Board of
Directors of another corporation is valid and reasonable.
In the absence of any legal prohibition or overriding public
policy, wide latitude may be accorded to the corporation in
adopting measures to protect legitimate corporate interests.
Thus, "where the reasonableness of a by-law is a mere matter
of judgment, and upon which reasonable minds must
necessarily differ, a court would not be warranted in
substituting its judgment instead of the judgment of those
who are authorized to make by-laws and who have expressed
their authority." 45
Although it is asserted that the amended by-laws confer on
the present Board powers to perpetuate themselves in power,
such fears appear to be misplaced. This power, by its very
nature, is subject to certain well established limitations. One
of these is inherent in the very concept and definition of the
terms "competition" and "competitor." "Competition" implies a
struggle for advantage between two or more forces, each
possessing, in substantially similar if not identical degree,
certain characteristics essential to the business sought. It
means an independent endeavor of two or more persons to
obtain the business patronage of a third by offering more
advantageous terms as an inducement to secure trade. 46
The test must be whether the business does in fact compete,
not whether it is capable of an indirect and highly
unsubstantial duplication of an isolated or non-characteristic
activity. 47 It is, therefore, obvious that not every person or
entity engaged in business of the same kind is a competitor.
Such factors as quantum and place of business, identity of
products and area of competition should be taken into
consideration. It is, therefore, necessary to show that
petitioners business covers a substantial portion of the same

markets for similar products to the extent of not less than

10% of respondent corporations market for competing
products. While We here sustain the validity of the amended
by-laws, it does not follow as a necessary consequence that
petitioner is ipso facto disqualified. Consonant with the
requirement of due process, there must be due hearing at
which the petitioner must be given the fullest opportunity to
show that he is not covered by the disqualification. As
trustees of the corporation and of the stockholders, it is the
responsibility of directors to act with fairness to the
stockholders. 48 Pursuant to this obligation and to remove
any suspicion that this power may be utilized by the
incumbent members of the Board to perpetuate themselves in
power, any decision of the Board to disqualify a candidate for
the Board of Directors should be reviewed by the Securities
and Exchange Commission en banc and its decision shall be
final unless reversed by this Court on certiorari. 49 Indeed, it
is a settled principle that where the action of a Board of
Directors is an abuse of discretion, or forbidden by statute, or
is against public policy, or is ultra vires, or is a fraud upon
minority stockholders or creditors, or will result in waste,
dissipation or misapplication of the corporation assets, a court
of equity has the power to grant appropriate relief. 50
III
Whether or not respondent SEC gravely abused its discretion
in denying petitioners request for an examination of the
records of San Miguel International, Inc., a fully owned
subsidiary of San Miguel Corporation
Respondent
San
Miguel
Corporation
stated
in
its
memorandum that petitioners claim that he was denied
inspection rights as stockholder of SMC "was made in the
teeth of undisputed facts that, over a specific period,
petitioner had been furnished numerous documents and
information," to wit: (1) a complete list of stockholders and
their stockholdings; (2) a complete list of proxies given by the
stockholders for use at the annual stockholders meeting of
May 18, 1975; (3) a copy of the minutes of the stockholders
meeting of March 18, 1976; (4) a breakdown of SMCs P186.6
million investment in associated companies and other
companies as of December 31, 1975; (5) a listing of the
salaries, allowances, bonuses and other compensation or
remunerations received by the directors and corporate
officers of SMC; (6) a copy of the US$100 million Euro-Dollar
Loan Agreement of SMC; and (7) copies of the minutes of all
meetings of the Board of Directors from January 1975 to May
1976, with deletions of sensitive data, which deletions were
not objected to by petitioner.
Further, it was averred that upon request, petitioner was
informed in writing on September 18, 1976; (1) that SMCs
foreign investments are handled by San Miguel International,
Inc., incorporated in Bermuda and wholly owned by SMC; this
was SMCs first venture abroad, having started in 1948 with
an initial outlay of P500,000.00, augmented by a loan of
Hongkong $6 million from a foreign bank under the personal
guaranty of SMCs former President, the late Col. Andres
Soriano; (2) that as of December 31, 1975, the estimated
value of SMI would amount to almost P400 million; (3) that the
total cash dividends received by SMC from SMI since 1953 has
amount to US$9.4 million; and (4) that from 1972-1975, SMI
did not declare cash or stock dividends, all earnings having
been used in line with a program for the setting up of
breweries by SMI.
These averments are supported by the affidavit of the
Corporate Secretary, enclosing photocopies of the aforementioned documents. 51
Pursuant to the second paragraph of section 51 of the
Corporation Law," (t)he record of all business transactions of
the corporation and minutes of any meeting shall be open to
the inspection of any director, member or stockholder of the
corporation at reasonable hours."
The stockholders right of inspection of the corporations
books and records is based upon their ownership of the assets
and property of the corporation. It is, therefore, an incident of
ownership of the corporate property, whether this ownership
or interest be termed an equitable ownership, a beneficial
ownership, or a quasi-ownership. 52 This right is predicated
upon the necessity of self-protection. It is generally held by
majority of the courts that where the right is granted by
statute to the stockholder, it is given to him as such and must
be exercised by him with respect to his interest as a
stockholder and for some purpose germane thereto or in the
interest of the corporation. 53 In other words, the inspection

65
has to be germane to the petitioners interest as a
stockholder, and has to be proper and lawful in character and
not inimical to the interest of the corporation. 54 In Grey v.
Insular Lumber, 55 this Court held that "the right to examine
the books of the corporation must be exercised in good faith,
for specific and honest purpose, and not to gratify curiosity, or
for speculative or vexatious purposes." The weight of judicial
opinion appears to be, that on application for mandamus to
enforce the right, it is proper for the court to inquire into and
consider the stockholders good faith and his purpose and
motives in seeking inspection. 56 Thus, it was held that "the
right given by statute is not absolute and may be refused
when the information is not sought in good faith or is used to
the detriment of the corporation." 57 But the "impropriety of
purpose such as will defeat enforcement must be set up the
corporation defensively if the Court is to take cognizance of it
as a qualification. In other words, the specific provisions take
from the stockholder the burden of showing propriety of
purpose and place upon the corporation the burden of
showing impropriety of purpose or motive." 58 It appears to
be the "general rule that stockholders are entitled to full
information as to the management of the corporation and the
manner of expenditure of its funds, and to inspection to obtain
such information, especially where it appears that the
company is being mismanaged or that it is being managed for
the personal benefit of officers or directors or certain of the
stockholders to the exclusion of others." 59
While the right of a stockholder to examine the books and
records of a corporation for a lawful purpose is a matter of
law, the right of such stockholder to examine the books and
records of a wholly-owned subsidiary of the corporation in
which he is a stockholder is a different thing.
Some state courts recognize the right under certain
conditions, while others do not. Thus, it has been held that
where a corporation owns approximately no property except
the shares of stock of subsidiary corporations which are
merely agents or instrumentalities of the holding company,
the legal fiction of distinct corporate entities may be
disregarded and the books, papers and documents of all the
corporations may be required to be produced for examination,
60 and that a writ of mandamus may be granted, as the
records of the subsidiary were, to all intents and purposes, the
records of the parent even though the subsidiary was not
named as a party. 61 Mandamus was likewise held proper to
inspect both the subsidiarys and the parent corporations
books upon proof of sufficient control or dominion by the
parent showing the relation of principal or agent or something
similar thereto. 62
On the other hand, mandamus at the suit of a stockholder was
refused where the subsidiary corporation is a separate and
distinct corporation domiciled and with its books and records
in another jurisdiction, and is not legally subject to the control
of the parent company, although it owned a vast majority of
the stock of the subsidiary. 63 Likewise, inspection of the
books of an allied corporation by a stockholder of the parent
company which owns all the stock of the subsidiary has been
refused on the ground that the stockholder was not within the
class of "persons having an interest." 64
In the Nash case, 65 The Supreme Court of New York held that
the contractual right of former stockholders to inspect books
and records of the corporation "included the right to inspect
corporations subsidiaries books and records which were in
corporations possession and control in its office in New York."
In the Bailey case, 66 stockholders of a corporation were held
entitled to inspect the records of a controlled subsidiary
corporation which used the same offices and had identical
officers and directors.
In his "Urgent Motion for Production and Inspection of
Documents" before respondent SEC, petitioner contended that
respondent corporation "had been attempting to suppress
information from the stockholders" and that petitioner, "as
stockholder of respondent corporation, is entitled to copies of
some documents which for some reason or another,
respondent corporation is very reluctant in revealing to the
petitioner notwithstanding the fact that no harm would be
caused thereby to the corporation." 67 There is no question
that stockholders are entitled to inspect the books and
records of a corporation in order to investigate the conduct of
the management, determine the financial condition of the
corporation, and generally take an account of the stewardship
of the officers and directors. 68

In the case at bar, considering that the foreign subsidiary is

wholly owned by respondent San Miguel Corporation and,
therefore, under Its control, it would be more in accord with
equity, good faith and fair dealing to construe the statutory
right of petitioner as stockholder to inspect the books and
records of the corporation as extending to books and records
of such wholly owned subsidiary which are in respondent
corporations possession and control.
IV

Whether or not respondent SEC gravely abused its discretion

in allowing the stockholders of respondent corporation to
ratify the investment of corporate funds in a foreign
corporation
Petitioner reiterates his contention in SEC Case No. 1423 that
respondent corporation invested corporate funds in SMI
without prior authority of the stockholders, thus violating
section 17-112 of the Corporation Law, and alleges that
respondent SEC should have investigated the charge, being a
statutory offense, instead of allowing ratification of the
investment by the stockholders.
Respondent SECs position is that submission of the
investment to the stockholders for ratification is a sound
corporate practice and should not be thwarted but
encouraged.
Section 17-1/2 of the Corporation Law allows a corporation to
"invest its funds in any other corporation or business or for
any purpose other than the main purpose for which it was
organized" provided that its Board of Directors has been so
authorized by the affirmative vote of stockholders holding
shares entitling them to exercise at least two-thirds of the
voting power. If the investment is made in pursuance of the
corporate purpose, it does not need the approval of the
stockholders. It is only when the purchase of shares is done
solely for investment and not to accomplish the purpose of its
incorporation that the vote of approval of the stockholders
holding shares entitling them to exercise at least two-thirds of
the voting power is necessary. 69
As stated by respondent corporation, the purchase of beer
manufacturing facilities by SMC was an investment in the
same business stated as its main purpose in its Articles of
Incorporation, which is to manufacture and market beer. It
appears that the original investment was made in 1947-1948,
when SMC, then San Miguel Brewery, Inc., purchased a beer
brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for
the manufacture and marketing of San Miguel beer thereat.
Restructuring of the investment was made in 1970-1971 thru
the organization of SMI in Bermuda as a tax free
reorganization.
Under these circumstances, the ruling in De la Rama v. Ma-ao
Sugar Central Co., Inc., supra, appears relevant. In said case,
one of the issues was the legality of an investment made by
Ma-ao Sugar Central Co., Inc., without prior resolution
approved by the affirmative vote of 2/3 of the stockholders
voting power, in the Philippine Fiber Processing Co., Inc., a
company engaged in the manufacture of sugar bags. The
lower court said that "there is more logic in the stand that if
the investment is made in a corporation whose business is
important to the investing corporation and would aid it in its
purpose, to require authority of the stockholders would be to
unduly curtail the power of the Board of Directors." This Court
affirmed the ruling of the court a quo on the matter and,
quoting Prof. Sulpicio S. Guevara, said:
"j. Power to acquire or dispose of shares or securities. A
private corporation, in order to accomplish is purpose as
stated in its articles of incorporation, and subject to the
limitations imposed by the Corporation Law, has the power to
acquire, hold, mortgage, pledge or dispose of shares, bonds,
securities, and other evidences of indebtedness of any
domestic or foreign corporation. Such an act, if done in
pursuance of the corporate purpose, does not need the
approval of stockholders; but when the purchase of shares of
another corporation is done solely for investment and not to
accomplish the purpose of its incorporation, the vote of
approval of the stockholders is necessary. In any case, the
purchase of such shares or securities must be subject to the
limitations established by the Corporation law; namely, (a)
that no agricultural or mining corporation shall in anywise be
interested in any other agricultural or mining corporation; or
(b) that a non-agricultural or non-mining corporation shall be

66
restricted to own not more than 15% of the voting stock of
any agricultural or mining corporation; and (c) that such
holdings shall be solely for investment and not for the purpose
of bringing about a monopoly in any line of commerce or
combination in restraint of trade. (The Philippine Corporation
Law by Sulpicio S. Guevara, 1967 Ed., p. 89) (Emphasis ours.)
"40. Power to invest corporate funds. A private corporation
has the power to invest its corporate funds "in any other
corporation or business, or for any purpose other than the
main purpose for which it was organized, provided that its
board of directors has been so authorized in a resolution by
the affirmative vote of stockholders holding shares in the
corporation entitling them to exercise at least two-thirds of
the voting power on such a proposal at a stockholders
meeting called for that purpose, and provided further, that no
agricultural or mining corporation shall in anywise be
interested in any other agricultural or mining corporation.
When the investment is necessary to accomplish its purpose
or purposes as stated in its articles of incorporation, the
approval of the stockholders is not necessary." " (Id., p. 108.)
(Emphasis ours.)" (pp. 258-259.)
Assuming arguendo that the Board of Directors of SMC had no
authority to make the assailed investment, there is no
question that a corporation, like an individual, may ratify and
thereby render binding upon it the originally unauthorized
acts of its officers or other agents. 70 This is true because the
questioned investment is neither contrary to law, morals,
public order or public policy. It is a corporate transaction or
contract which is within the corporate powers, but which is
defective from a purported failure to observe in its execution
the requirement of the law that the investment must be
authorized by the affirmative vote of the stockholders holding
two-thirds of the voting power. This requirement is for the
benefit of the stockholders. The stockholders for whose
benefit the requirement was enacted may, therefore, ratify
the investment and its ratification by said stockholders
obliterates any defect which it may have had at the outset.
"Mere ultra vires acts", said this Court in Pirovano, 71 "or
those which are not illegal and void ab initio, but are not
merely within the scope of the articles of incorporation, are
merely voidable and may become binding and enforceable
when ratified by the stockholders."
Besides, the investment was for the purchase of beer
manufacturing and marketing facilities which is apparently
relevant to the corporate purpose. The mere fact that
respondent corporation submitted the assailed investment to
the stockholders for ratification at the annual meeting of May
10, 1977 cannot be construed as an admission that
respondent corporation had committed an ultra vires act,
considering the common practice of corporations of
periodically submitting for the ratification of their stockholders
the acts of their directors, officers and managers.
WHEREFORE, judgment is hereby rendered as follows:
The Court voted unanimously to grant the petition insofar as it
prays that petitioner be allowed to examine the books and
records of San Miguel International, Inc., as specified by him.
On the matter of the validity of the amended by-laws of
respondent San Miguel Corporation, six (6) Justices, namely,
Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and
De Castro, voted to sustain the validity per se of the amended
by-laws in question and to dismiss the petition without
prejudice to the question of the actual disqualification of
petitioner John Gokongwei, Jr. to run and if elected to sit as
director of respondent San Miguel Corporation being decided,
after a new and proper hearing by the Board of Directors of
said corporation, whose decision shall be appealable to the
respondent Securities and Exchange Commission deliberating
and acting en banc, and ultimately to this Court. Unless
disqualified in the manner herein provided, the prohibition in
the afore-mentioned amended by-laws shall not apply to
petitioner.
The afore-mentioned six (6) Justices, together with Justice
Fernando, voted to declare the issue on the validity of the
foreign investment of respondent corporation as moot.
Chief Justice Fred Ruiz Castro reserved his vote on the validity
of the amended by-laws, pending hearing by this Court on the
applicability of section 13(5) of the Corporation Law to
petitioner.

Justice Fernando reserved his vote on the validity of subject

amendment to the by-laws but otherwise concurs in the
result.
Four (4) Justices, namely, Justices Teehankee, Concepcion Jr.,
Fernandez and Guerrero filed a separate opinion, wherein they
voted against the validity of the questioned amended by-laws
and that this question should properly be resolved first by the
SEC as the agency of primary jurisdiction. They concur in the
result that petitioner may be allowed to run for and sit as
director of respondent SMC in the scheduled May 6, 1979
election and subsequent elections until disqualified after
proper hearing by the respondents Board of Directors and
petitioners disqualification shall have been sustained by
respondent SEC en banc and ultimately by final judgment of
this
Court.
In resume, subject to the qualifications afore-stated, judgment
is hereby rendered GRANTING the petition by allowing
petitioner to examine the books and records of San Miguel
International, Inc. as specified in the petition. The petition, *
insofar as it assails the validity of the amended by-laws and
the ratification of the foreign investment of respondent
corporation, for lack of necessary votes, is hereby DISMISSED.
No costs.
Separate Opinions
TEEHANKEE, CONCEPCION JR.,
FERNANDEZ and GUERRERO, JJ., concurring:
I
As correctly stated in the main opinion of Mr. Justice Antonio,
the Court is unanimous in its judgment granting the petitioner
as stockholder of respondent San Miguel Corporation the right
to inspect, examine and secure copies of the records of San
Miguel International, Inc. (SMI), a wholly owned foreign
subsidiary corporation of respondent San Miguel Corporation.
Respondent commissions en banc Order No. 449, Series of
1977, denying petitioners right of inspection for "not being a
stockholder of San Miguel International, Inc." has been
accordingly set aside. It need be only pointed out that:
a) The commissions reasoning grossly disregards the fact that
the stockholders of San Miguel Corporation are likewise the
owners of San Miguel International, Inc. as the corporations
wholly owned foreign subsidiary and therefore have every
right to have access to its books and records otherwise, the
directors and management of any Philippine corporation by
the simple device of organizing with the corporations funds
foreign subsidiaries would be granted complete immunity
from the stockholders scrutiny of its foreign operations and
would have a conduit for dissipating, if not misappropriating,
the corporate funds and assets by merely channeling them
into foreign subsidiaries operations; and
b) Petitioners right of examination herein recognized refers to
all books and records of the foreign subsidiary SMI which are
"in respondent corporations possession and control" 1 ,
meaning to say regardless of whether or not such books and
records are physically within the Philippines. All such books
and records of SMI are legally within respondent corporations
"possession and control" and if any books or records are kept
abroad, (e.g. in the foreign subsidiarys state of domicile, as is
to be expected), then the respondent corporations board and
management are obliged under the Courts judgment to bring
and make them (or true copies thereof) available within the
Philippines for petitioners examination and inspection.
II
On the other main issue of the validity of respondent San
Miguel Corporations amendment of its by-laws 2 whereby
respondent corporations board of directors under its
resolution dated April 29, 1977 declared petitioner ineligible
to be nominated or to be voted or to be elected as of the
board of directors, the Court, composed of 12 members (since
Mme. Justice Ameurfina Melencio Herrera inhibited herself
from taking part herein, while Mr. Justice Ramon C. Aquino
upon submittal of the main opinion of Mr. Justice Antonio
decided not to take part), failed to reach a conclusive vote or
the required majority of 8 votes to settle the issue one way or
the other.
Six members of the Court, namely, Justices Barredo, Makasiar,
Antonio, Santos, Abad Santos and De Castro, considered the

67
issue purely legal and voted to sustain the validity per se of
the questioned amended by-laws but nevertheless voted that
the prohibition and disqualification therein provided shall not
apply to petitioner Gokongwei until and after he shall have
been given "a new and proper hearing" by the corporations
board of directors and the boards decision of disqualification
shall have been sustained on appeal by respondent Securities
and Exchange Commission and ultimately by this Court.
The undersigned Justices do not consider the issue as purely
legal in the light of respondent commissions Order No. 451,
Series of 1977, denying petitioners "Motion for Summary
Judgment" on the ground that "the Commission en banc finds
that there (are) unresolved and genuine issues of fact" 3 as
well as its position in this case thru the Solicitor General that
the case at bar is "premature" and that the administrative
remedies before the commission should first be availed of and
exhausted. 4
We are of the opinion that the questioned amended by-laws,
as they are, (adopted after almost a century of respondent
corporations existence as a public corporation with its shares
freely purchased and traded in the open market without
restriction and disqualification) which would bar petitioner
from qualification, nomination and election as director and
worse, grant the board by 3/4 vote the arbitrary power to bar
any stockholder from his right to be elected as director by the
simple expedient of declaring him to be engaged in a
"competitive or antagonistic business" or declaring him as a
"nominee" of the "competitive or antagonistic" stockholder
are illegal, oppressive, arbitrary and unreasonable.
We consider the questioned amended by-laws as being
specifically tailored to discriminate against petitioner and
depriving him in violation of substantive due process of his
vested substantial rights as stockholder of respondent
corporation. We further consider said amended by-laws as
violating specific provisions of the Corporation Law which
grant and recognize the right of a minority stockholder like
petitioner to be elected director by the process of cumulative
voting ordained by the Law (secs. 21 and 30) and the right of
a minority director once elected not to be removed from office
of director except for cause by vote of the stockholders
holding 2/3 of the subscribed capital stock (sec. 31). If a
minority stockholder could be disqualified by such a by-laws
amendment under the guise of providing for "qualifications,"
these mandates of the Corporation Law would have no
meaning or purpose.
These vested and substantial rights granted stockholders
under the Corporation Law may not be diluted or defeated by
the general authority granted by the Corporation Law itself to
corporations to adopt their by-laws (in section 21) which deal
principally with the procedures governing their internal
business. The by-laws of any corporation must be always
within the charter limits. What the Corporation Law has
granted stockholders may not be taken away by the
corporations by-laws. The amendment is further an
instrument of oppressiveness and arbitrariness in that the
incumbent directors are thereby enabled to perpetuate
themselves in office by the simple expedient of disqualifying
any unwelcome candidate, no matter how many votes he may
have.
However, in view of the inconclusiveness of the vote, we
sustain respondent commissions stand as expressed in its
Orders Nos. 450 and 451, Series of 1977 that there are
"unresolved and genuine issues of fact" and that it has yet to
rule on and finally decide the validity of the disputed by-law
provision", subject to appeal by either party to this Court.
In view of prematurity of the proceedings here (as likewise
expressed by Mr. Justice Fernando), the case should as a
consequence be remanded to the Securities and Exchange
Commission as the agency of primary jurisdiction for a full
hearing and reception of evidence of all relevant facts (which
should property be submitted to the commission instead of
the piecemeal documents submitted as annexes to this Court
which is not a trier of facts) concerning not only the petitioner
but the members of the board of directors of respondent
corporation as well, so that it may determine on the basis
thereof the issue of the legality of the questioned amended
by-laws, and assuming that it holds the same to be valid
whether the same are arbitrarily and unreasonably applied to
petitioner vis a vis other directors, who, petitioner claims,
should in such event be likewise disqualified from sitting in
the board of directors by virtue of conflict of interests or their
being likewise engaged in "competitive or antagonistic

business" with the corporation such as investment and

finance, coconut oil mills, cement, milk and hotels. 5
It should be noted that while the petition may be dismissed in
view of the inconclusiveness of the vote and the Courts
failure to attain the required 8-vote majority to resolve the
issue, such as dismissal (for lack of necessary votes) is of no
doctrinal value and does not in any manner resolve the issue
of the validity of the questioned amended by-laws nor
foreclose the same. The same should properly be determined
in a proper case in the first instance by the Securities and
Exchange Commission as the agency of primary jurisdiction,
as above indicated.
The Court is unanimous, therefore, in its judgment that
petitioner Gokongwei may run for the office of, and if elected,
sit as, member of the board of directors of respondent San
Miguel Corporation as stated in the dispositive portion of the
main opinion of Mr. Justice Antonio, to wit: Until and after
petitioner has been given a "new and proper hearing by the
board of directors of said corporation, whose decision shall be
appealable to the respondent Securities and Exchange
Commission deliberating and acting en banc and ultimately to
this Court" and until "disqualified in the manner herein
provided, the prohibition in the aforementioned amended bylaws shall not apply to petitioner." In other words, until and
after petitioner shall have been given due process and proper
hearing by the respondent board of directors as to the
question of his qualification or disqualification under the
questioned amended by-laws (assuming that the respondent
Securities and Exchange Commission ultimately upholds the
validity of said by-laws), and such disqualification shall have
been sustained by respondent Securities and Exchange
Commission and ultimately by final judgment of this Court,
petitioner is deemed eligible for all legal purposes and effects
to be nominated and voted and if elected to sit as a member
of the board of directors of respondent San Miguel
Corporation.
In view of the Courts unanimous judgment on this point, the
portion of respondent commissions Order No. 450, Series of
1977 which imposed "the condition that he [petitioner] cannot
sit as board member if elected until after the Commission
shall have finally decided the validity of the disputed by-law
provision" has been likewise accordingly set aside.
III
By way of recapitulation, so that the Courts decision and
judgment may be clear and not subject to ambiguity, we state
the following:
1. With the votes of the six Justices concurring unqualifiedly in
the main opinion added to our four votes, plus the Chief
Justices vote and that of Mr. Justice Fernando, the Court has
by twelve (12) votes unanimously rendered judgment granting
petitioners right to examine and secure copies of the books
and records of San Miguel International, Inc. as a foreign
subsidiary of respondent corporation and respondent
commissions Order No. 449, Series of 1977, to the contrary is
set aside:
2. With the same twelve (12) votes, the Court has also
unanimously rendered judgment declaring that until and after
petitioner shall have been given due process and proper
hearing by the respondent board of directors as to the
question of his disqualification under the questioned amended
by-laws (assuming that the respondent Securities and
Exchange Commission ultimately upholds the validity of said
by-laws), and such disqualification shall have been sustained
by respondent Securities and Exchange Commission and
ultimately by final judgment of this Court petitioner is deemed
eligible for all legal purposes and effect to be nominated and
voted and if elected to sit as a member of the board of
directors of respondent San Miguel Corporation. Accordingly,
respondent commissions Order No. 450, Series of 1977 to the
contrary has likewise been set aside; and
3. The Courts voting on the validity of respondent
corporations amendment of the by-laws (sec. 2, Art. III) is
inconclusive without the required majority of eight votes to
settle the issue one way or the other having been reached. No
judgment is rendered by the Court thereon and the
statements of the six Justices who have signed the main
opinion on the legality thereof have no binding effect, much
less doctrinal value.

68
The dismissal of the petition insofar as the question of the
validity of the disputed by-laws amendment is concerned is
not by any judgment with the required eight votes but simply
by force of Rule 56, section 11 of the Rules of Court, the
pertinent portion of which provides that "where the court en
banc is equally divided in opinion, or the necessary majority
cannot be had, the case shall be reheard, and if on re-hearing
no decision is reached, the action shall be dismissed if
originally commenced in the court . . ." The end result is that
the Court has thereby dismissed the petition which prayed
that the Court bypass the commission and directly resolved
the issue and therefore the respondent commission may now
proceed, as announced in its Order No. 450, Series of 1977, to
hear the case before it and receive all relevant evidence
bearing on the issue as hereinabove indicated, and resolve
the "unresolved and genuine issues of fact" (as per Order No.
451, Series of 1977) and the issues of legality of the disputed
by-laws amendment.
TEEHANKEE, CONCEPCION JR.,
FERNANDEZ and GUERRERO, JJ., concurring:
Supplement to separate opinion.
JUDGMENT; LAW OF THE CASE. The doctrine of the law of
the case may be invoked only where there has been a final
and conclusive determination of an issue in the first case later
invoked as the law of the case. It has no application where the
judgment in the first case is inconclusive, as where no final
and conclusive determination could be reached on account of
lack of necessary votes and the case was simply dismissed
pursuant to Rule 56, Section 11. It cannot be contended that
the Supreme Court is dismissing the petition for lack of
necessary votes had directly ruled on the issue presented
when it itself could not reach a final and conclusive vote
thereon.
This supplemental opinion is issued with reference to the
advance separate opinion of Mr. Justice Barredo issued by him
as to "certain misimpressions as to the import of the decision
in this case" which might be produced by our joint separate
opinion of April 11, 1979 and "urgent(ly) to clarify (his)
position in respect to the rights of the parties resulting from
the dismissal of the petition herein and the outline of the
procedure by which the disqualification of petitioner
Gokongwei can be made effective."
1. Mr. Justice Barredos advances separate opinion "that as
between the parties herein, the issue of the validity of the
challenged by-laws is already settled" had, of course, no
binding effect. The judgment of the Court is found on pages
59-61 of the decision of April 11, 1979, penned by Mr. Justice
Antonio, wherein on the question of the validity of the
amended by-laws the Courts inconclusive voting is set forth
as follows:
"Chief Justice Fred Ruiz Castro reserved his vote on the
validity of the amended by-laws, pending hearing by this
Court on the applicability of section 13(5) of the Corporation
Law to petitioner.
"Justice Fernando reserved his vote on the validity of subject
amendment to the by-laws but otherwise concurs in the
result.
"Four (4) Justices, namely, Justices Teehankee, Concepcion Jr.,
Fernandez and Guerrero filed a separate opinion, wherein they
voted against the validity of the questioned amended by-laws
and that this question should properly be resolved first by the
SEC as the agency of primary jurisdiction . . ." 1
As stated in said judgment itself, for lack of the necessary
votes, the petition, insofar as it assails the validity of the
questioned by-laws, was dismissed.
2. Mr. Justice Barredo now contends contrary to the
undersigneds understanding, as stated on pages 8 and 9 of
our joint separate opinion of April 11, 1979 that the legal
effect of the dismissal of the petition on the question of
validity of the amended by-laws for lack of the necessary
votes simply means that "the Court has thereby dismissed the
petition which prayed that the Court by-pass the commission
and directly resolve the issue and therefore the respondent
commission may now proceed, as announced in its Order No.
450, Series of 1977, to hear the case before it and receive all
relevant evidence bearing on the issue as hereinabove

indicated, and resolve the unresolved and genuine issues of

fact (as per Order No. 451, Series of 1977) and the issue of
legality of the disputed by-laws amendment," that such
dismissal "has no other legal consequence than that it is the
law of the case as far as the parties are concerned, albeit the
majority of the opinion of six against four Justices is not
doctrinal in the sense that it cannot be cited as necessarily a
precedent for subsequent cases."
We hold on our part that the doctrine of the law of the case
invoked by Mr. Justice Barredo has no applicability for the
following reasons:
a) Our jurisprudence is quite clear that this doctrine may be
invoked only where there has been a final and conclusive
determination of an issue in the first case later invoked as the
law of the case.
Thus, in People v. Olarte 2 , we held that
"Law of the case has been defined as the opinion delivered
on a former appeal. More specifically, it means that whatever
is once irrevocably established as the controlling legal rule of
decision between the same parties in the same case
continues to be the law of the case, whether correct on
general principles or not, so long as the facts on which such
decision was predicated continue to be the facts of the case
before the court. . . .
"It need not be stated that the Supreme Court, being the court
of last resort, is the final arbiter of all legal questions properly
brought before it and that its decision in any given case
constitutes the law of that particular case. Once its judgment
becomes final it is binding on all inferior courts, and hence
beyond their power and authority to alter or modify (Kabigting
v. Acting Director of Prisons, G. R. No. L-15548, October 30,
1962).
"The decision of this Court on that appeal by the government
from the order of dismissal, holding that said appeal did not
place the appellants, including Absalon Bignay, in double
jeopardy, signed and concurred in by six Justices as against
three dissenters headed by the Chief Justice, promulgated
way back in the year 1952, has long become the law of the
case. It may be erroneous, judged by the law on double
jeopardy as recently interpreted by this same Tribunal. Even
so, it may not be disturbed and modified. Our recent
interpretation of the law may be applied to new cases, but
certainly not to an old one finally and conclusively
determined. As already stated, the majority opinion in that
appeal is now the law of the case." (People v. Pinuila)
The doctrine of the law of the case, therefore, has no
applicability whatsoever herein insofar as the question of the
validity or invalidity of the amended by-laws is concerned. The
Courts judgment of April 11, 1979 clearly shows that the
voting on this question was inconclusive with six against four
Justices and two other Justices (the Chief Justice and Mr.
Justice Fernando) expressly reserving their votes thereon, and
Mr. Justice Aquino while taking no part in effect likewise
expressly reserved his vote thereon. No final and conclusive
determination could be reached on the issue and pursuant to
the provisions of Rule 56, section 11, since this special civil
action originally commenced in this Court, the action was
simply dismissed with the result that no law of the case was
laid down insofar as the issue of the validity or invalidity of
the questioned by-laws is concerned, and the relief sought
herein by petitioner that this Court by-pass the SEC which has
yet to hear and determine the same issue pending before it
below and that this Court itself directly resolve the said issue
stands denied.
b) The contention of Mr. Justice Barredo that the result of the
dismissal of the case was that "petitioner Gokongwei may not
hereafter act on the assumption that he can revive the issue
of the validity whether in the Securities and Exchange
Commission, in this Court or in any other forum, unless he
proceeds on the basis of a factual milieu different from the
setting of this case. Not even the Securities and Exchange
Commission may pass on such question anymore at the
instance of herein petitioner or anyone acting in his stead or
on his behalf," appears to us to be untenable.
The Court through the decision of April 11, 1979, by the
unanimous votes of the twelve participating Justices headed
by the Chief Justice, ruled that petitioner Gokongwei was
entitled to a "new and proper hearing" by the SMC board of
directors on the matter of his disqualification under the

69
questioned by-laws and that the boards "decision shall be
appealable to the respondent Securities and Exchange
Commission deliberating and acting en banc and ultimately to
this Court (and) unless disqualified in the manner herein
provided, the prohibition in the aforementioned amended bylaws shall not apply to petitioner."
The entire Court, therefore, recognized that petitioner had not
been given procedural due process by the SMC board on the
matter of his disqualification and that he was entitled to a
"new and proper hearing." It stands to reason that in such
hearing, petitioner could raise not only questions of fact but
questions of law, particularly questions of law affecting the
investing public and their right to representation on the board
as provided by law not to mention that as borne out by the
fact that no restriction whatsoever appears in the Courts
decision, it was never contemplated that petitioner was to be
limited to questions of fact and could not raise the
fundamental questions of law bearing on the invalidity of the
questioned amended by-laws at such hearing before the SMC
board. Furthermore, it was expressly provided unanimously in
the Courts decision that the SMC boards decision on the
disqualification of petitioner ("assuming the board of directors
of San Miguel Corporation should, after the proper hearing,
disqualify him" as qualified in Mr. Justice Barredos own
separate opinion, at page 2) shall be appealable to
respondent
Securities
and
Exchange
Commission
"deliberating and acting en banc" and "untimately to this
Court." Again, the Courts judgment as set forth in its decision
of April 11, 1979 contains nothing that would warrant the
opinion now expressed that respondent Securities and
Exchange Commission may not pass anymore on the question
of the invalidity of the amended by-laws. Certainly, it cannot
be contended that the Court in dismissing the petition for lack
of necessary votes actually by-passed the Securities and
Exchange Commission and directly ruled itself on the
invalidity of the questioned by-laws when it itself could not
reach a final and conclusive vote (a minimum of eight votes)
on the issue and three other Justices (the Chief Justice and
Messrs. Justices Fernando and Aquino) had expressly reserved
their vote until after further hearings (first before the
Securities and Exchange Commission and ultimately in this
Court).
Such a view espoused by Mr. Justice Barredo could
conceivably result in an incongruous situation where
supposedly under the law of this case the questioned by-laws
would be held valid as against petitioner Gokongwei and yet
the same may be stricken off as invalid as to all other SMC
shareholders in a proper case.
3. It need only be pointed out that Mr. Justice Barredos
advance separate opinion can in no way affect or modify the
judgment of this Court as set forth in the decision of April 11,
1979 and discussed hereinabove. The same bears the
unqualified concurrence of only three Justices out of the six
Justices who originally voted for the validity per se of the
questioned by-laws, namely, Messrs. Justices Antonio, Santos
and De Castro. Messrs. Justices Fernando and Makasiar did not
concur therein but they instead concurred with the limited
concurrence of the Chief Justice touching on the law of the
case which guardedly held that the Court has not found merit
in the claim that the amended by-laws in question are invalid
but without in any manner foreclosing the issue and as a
matter of fact and law, without in any manner changing or
modifying the above-quoted vote of the Chief Justice as
officially rendered in the decision of April 11, 1979, wherein he
precisely "reserved (his) vote on the validity of the amended
by-laws."
4. A word on the separate opinion of Mr. Justice Pacifico de
Castro attached to the advance separate opinion of Mr. Justice
Barredo. Mr. Justice De Castro advances his interpretation as
to a restrictive construction of section 13(5) of the Philippine
Corporation Law, ignoring or disregarding the fact that during
the Courts deliberations it was brought out that this
prohibitory provision was and is not raised in issue in this case
whether here or in the Securities and Exchange Commission
below (outside of a passing argument by Messrs. Angara,
Abello, Concepcion, Regala & Cruz, as counsels for respondent
Sorianos in their Memorandum of June 26, 1978 that" (T)he
disputed By-Laws does not prohibit petitioner from holding
onto, or even increasing his SMC investment; it only restricts
any shifting on the part of petitioner from passive investor to
a director of the company." 3
As a consequence, the Court abandoned the idea of calling for
another hearing wherein the parties could properly raise and
discuss this question as a new issue and instead rendered the

decision in question, under which the question of section

13(5) could be raised at a new and proper hearing before the
SMC board and in the Securities and Exchange Commission
and in due course before this Court (but with the clear
understanding that since both corporations, the Robina and
SMC are engaged in agriculture as submitted by the Sorianos
counsel in their said memorandum, the issue could be raised
likewise against SMC and its other shareholders, directors, if
not against SMC itself. As expressly stated in the Chief
Justices reservation of his vote, the matter of the question of
the applicability of the said section 13(5) to petitioner would
be heard by this Court at the appropriate time after the
proceedings below (and necessarily the question of the
validity of the amended by-laws would be taken up anew and
the Court would at that time be able to reach a final and
conclusive vote).
Mr. Justice De Castros personal interpretation of the decision
of April 11, 1979 that petitioner may be allowed to run for
election despite adverse decision of both the SMC board and
the Securities and Exchange Commission "only if he comes to
this Court and obtains an injunction against the enforcement
of the decision disqualifying him" is patently contradictory of
his vote on the matter as expressly given in the judgment in
the Courts decision of April 11, 1979 (at page 59) that
petitioner could run and if elected, sit as director of the
respondent SMC and could be disqualified only after a "new
and proper hearing by the board of directors of said
corporation, whose decision shall be appealable to the
respondent Securities and Exchange Commission deliberating
and acting en banc and ultimately to this Court. Unlessdisqualified in the manner herein provided, the prohibition in
the aforementioned amended by-laws shall not apply to
petitioner."
BARREDO, J., concurring:
1. JUDGMENTS; DISMISSAL FOR LACK OF NECESSARY VOTES;
LAW OF THE CASE. Where petitioner and respondents
placed the issue of the validity of amended by-laws squarely
before the Court for resolution and six justices vote in favor,
while four justices voted against, its validity, thereby resulting
in the dismissal of the petition "insofar as it assails the validity
of the amended by-laws . . . for lack of necessary votes," such
dismissal is the law of the case as far as the parties are
concerned, albeit the majority of six against four justices is
not doctrinal in the sense that it cannot be cited as
necessarily a precedent for subsequent cases. This means
that the petitioner and respondents are bound by the forgoing
result, namely, that the Court en banc has not found merit in
the claims that the amended by-laws in question are invalid.
In other words, the issue of the challenged amended by-laws
is already a settled matter for the parties as the law of the
case, and said amended by-laws already enforceable in so far
as the parties are concerned. Petitioner may not thereafter act
on the assumption that he can revive the issue of validity
whether in the Securities and Exchange Commission, the
Supreme Court or in any other forum, unless, he proceeds on
the basis of a different factual milieu from the setting of the
case. Only the actual implementation of the impugned
amended by-laws remained to be passed upon by the
Securities and Exchange Commission.
2. ID.; ID.; DECISION ON THE MERITS. It is somewhat of a
misreading and misconstruction of Section 11 of Rule 56,
contrary to the well-known established norm observed by the
Supreme Court, to estate that the dismissal of a petition for
lack of necessary votes does not amount to a decision on the
merits. The Supreme Court is deemed to find no merit in a
petition in two ways, namely, (1) when eight or more
members vote expressly in that sense and (2) when the
required number of justices needed to sustain the same
cannot be had.
I reserved the filing of a separate opinion in order to state my
own reasons for voting in favor of the validity of the amended
by-laws in question. Regrettably, I have not yet finished
preparing the same. In view, however, of the joint separate
opinion of Justices Teehankee, Concepcion Jr., Fernandez and
Guerrero, the full text of which has just come to my attention,
and which I am afraid might produce certain misimpressions
as to the import of the decision in this case, I consider it
urgent to clarify my position in respect to the rights of the
parties resulting from the dismissal of the petition herein and
the outlining of the procedure by which the disqualification of
petitioner Gokongwei can be made effective, hence this
advance separate opinion.

70
To start with, inasmuch as petitioner Gokongwei himself
placed the issue of the validity of said amended by-laws
squarely before the Court for resolution, because he feels,
rightly or wrongly, he can no longer have due process or
justice from the Securities and Exchange Commission, and the
private respondents have joined with him in that respect, the
six votes cast by Justices Makasiar, Antonio, Santos, Abad
Santos, de Castro and this writer in favor of validity of the
amended by-laws in question, with only four members of this
Court, namely, Justices Teehankee, Concepcion Jr., Fernandez
and Guerrero opining otherwise, and with Chief Justice Castro
and Justice Fernando reserving their votes thereon, and
Justices Aquino and Melencio Herrera not voting, thereby
resulting in the dismissal of the petition "insofar as it assails
the validity of the amended by-laws . . . for lack of necessary
votes", has no other legal consequence than that it is the law
of the case as far as the parties herein are concerned, albeit
the majority opinion of six against four Justices is not doctrinal
in the sense that it cannot be cited as necessarily a precedent
for subsequent cases. This means that petitioner Gokongwei
and the respondents, including the Securities and Exchange
Commission, are bound by the foregoing result, namely, that
the Court en banc has not found merit in the claim that the
amended by-laws in question are invalid. Indeed, it is one
thing to say that dismissal of the case is not doctrinal and
entirely another thing to maintain that such dismissal leaves
the issue unsettled. It is somewhat of a misreading and
misconstruction of Section 11 of Rule 56, contrary to the wellknown established norm observed by this Court, to state that
the dismissal of a petition for lack of the necessary votes does
not amount to a decision on the merits. Unquestionably, the
Court is deemed to find no merit in a petition in two ways,
namely, (1) when eight or more members vote expressly in
that sense and (2) when the required number of justices
needed to sustain the same cannot be had.
I reiterate, therefore, that as between the parties herein, the
issue of validity of the challenged by-laws is already settled.
From which it follows that the same are already enforceable
insofar as they are concerned. Petitioner Gokongwei may not
hereafter act on the assumption that he can revive the issue
of validity whether in the Securities and Exchange
Commission, in this Court or in any other forum, unless he
proceeds on the basis of a factual milieu different from the
setting of this case. Not even the Securities and Exchange
Commission may pass on such question anymore at the
instance of herein petitioner or anyone acting in his stead or
on his behalf. The vote of four justices to remand the case
thereto cannot alter the situation.
It is very clear that under the decision herein, the issue of
validity is a settled matter for the parties herein as the law of
the case, and it is only the actual implementation of the
impugned amended by-laws in the particular case of
petitioner that remains to be passed upon by the Securities
and Exchange Commission, and on appeal therefrom to Us,
assuming the board of directors of San Miguel Corporation
should, after the proper hearing, disqualify him.
To be sure, the record is replete with substantial indications,
nay admissions of petitioner himself, that he is a controlling
stockholder of corporations which are competitors of San
Miguel Corporation. The very substantial areas of such
competition involving hundreds of millions of pesos worth of
businesses stand uncontroverted in the records hereof. In fact,
petitioner has even offered, if he should be elected, as
director, not to take part when the board takes up matters
affecting the corresponding areas of competition between his
corporation and San Miguel. Nonetheless, perhaps, it is best
that such evidence be formally offered at the hearing
contemplated in Our decision.
As to whether or not petitioner may sit in the board, if he win,
definitely, under the decision in this case, even if petitioner
should win, he will have to immediately leave his position or
should be ousted, the moment this Court settles the issue of
his actual disqualification, either in a full blown decision or by
denying the petition for review of corresponding decision of
the Securities and Exchange Commission unfavorable to him.
And, of course, as a matter of principle, it is to be expected
that the matter of his disqualification should be resolved
expeditiously and within the shortest possible time, so as to
avoid as much juridical injury as possible, considering that the
matter of the validity of the prohibition against competitors
embodied in the amended by-laws is already unquestionable
among the parties herein and to allow him to be in the board
for sometime would create an obviously anomalous and
legally incongruous situation that should not be tolerated.

Thus, all the parties concerned must act promptly and

expeditiously.
Additionally, my reservation to explain my vote on the validity
of the amended by-laws still stands.
Castro, C.J., concurs in Justice Barredos statement that the
dismissal (for lack of necessary votes) of the petition to the
extent that "it assails the validity of the amended by-laws," is
the law of the case at bar, which means in effect that as far
and only in so far as the parties and the Securities and
Exchange Commission are concerned, the Court has not found
merit in the claim that the amended by-laws in question are
invalid.
DE CASTRO, J., concurring:
1. CORPORATION; STOCKHOLDERS; DISQUALIFICATION TO BE
ELECTED DIRECTOR. If a person becomes a stockholder of a
corporation and gets himself elected as a director, and while
he is such a director, he forms his own corporation
competitive or antagonistic to the corporation of which he is a
director, and becomes Chairman of the Board and President of
his own corporation, he may be removed from his position as
director, admittedly one of trust and confidence. If this is so, a
person controlling, and also the Chairman of the Board and
President of, a corporation, may be barred from becoming a
member of the Board of Directors of a competitive
corporation.
2. ID.; AGRICULTURE, CORPORATION ENGAGED IN. The
scope of the provision of Section 13(5) of the Philippine
Corporation Law should be limited to corporations engaged in
agriculture, only as the word "agriculture" refers to its more
limited meaning as distinguished from its general and broad
connotation. The term would then mean "farming" or raising
the natural products of the soil, such as by cultivation, in the
manner as is required by the Public Land Act in the acquisition
of agricultural land, such as by homestead, before the patent
may be issued, but does not extend to poultry raising or
piggery which may be included in the term "agriculture" in its
broad sense.
3. JUDGMENT; LAW OF THE CASE. Although only six votes
are for upholding the validity of the by-laws, their validity is
deemed upheld as constituting the "law of the case." It could
not be otherwise, after the petition is dismissed with the relief
sought do declare null and void the said by-laws being denied
in effect. A vicious circle would be created should petitioner
come against to the Court, raising the same question he
raised in the present petition, unless the principle of the "law
of the case" is applied.
As stated in the decision penned by Justice Antonio, I voted to
uphold the validity of the amendment to the by-laws in
question. What induced me to this view is the practical
consideration easily perceived in the following illustration: If a
person becomes a stockholder of a corporation and gets
himself elected as a director, and while he is such a director,
he forms his own corporation competitive or antagonistic to
the corporation of which he is a director, and becomes
Chairman of the Board and President of his own corporation,
he may be removed from his position as director, admittedly
one of trust and confidence. If this is so, as seems
undisputably to be the case, a person already controlling, and
also the Chairman of the Board and President of, a
corporation, may be barred from becoming a member of the
board of directors of a competitive corporation. This is my
view,. even as I am for a restrictive interpretation of Section
13(5) of the Philippine Corporation Law, under which I would
limit the scope of the provision to corporations engaged in
agricultural, but only as the word "agriculture" refers to its
more limited meaning as distinguished from its general and
broad connotation. The term would then mean "farming" or
raising the natural products of the soil, such as by cultivation,
in the manner as is required by the Public Land Act in the
acquisition of agricultural land, such as by homestead, before
the patent may be issued. It is my opinion that under the
public land statute, the development of a certain portion of
the land applied for as specified in the law as a condition
precedent before the applicant may obtain a patent, is
cultivation, not let us say, poultry raising or piggery, which
may be included in the term "agriculture" in its broad sense.
For under Section 13(5) of the Philippine Corporation Law,
construed not in the strict way as I believe it should, because
the provision is in derogation of property rights, the petitioner
in this case would be disqualified from becoming an officer of
either the San Miguel Corporation or his own supposedly
agricultural corporations. It is thus beyond my comprehension

71
why, feeling as though I am the only member of the Court for
a restricted interpretation of Section 13(5) of Act 1459, doubt
still seems to be in the minds of other members giving the
cited provision an unrestricted interpretation, as to the
validity of the amended by-laws in question, or even holding
them null and void.

laws against combinations in restraint of trade shall be

violated by such persons membership in the Board of
Directors.

I concur with the observation of Justice Barredo that despite

that less than six votes are for upholding the validity of the
by-laws, their validity is deemed upheld, as constituting the
"law of the case." It could not be otherwise, after the present
petition is dismissed with the relief sought to declare null and
void the said by-laws being denied in effect. A vicious circle
would be created if, should petitioner Gokongwei be barred or
disqualified from running by the Board of Directors of San
Miguel Corporation and the Securities and Exchange
Commission sustain the Board, petitioner could come again to
Us, raising the same question he has raised in the present
petition, unless the principle of the "law of the case" is
applied.

In determining whether or not a person is a controlling person,

beneficial owner, or the nominee of another, the Board may
take into account such factors as business and family
relationship.

Clarifying therefore, my position, I am of the opinion that with

the validity of the by-laws in question standing unimpaired, it
is now for petitioner to show that he does not come within the
disqualification as therein provided, both to the Board and
later to the Securities and Exchange Commission, it being a
foregone conclusion that, unless petitioner disposes of his
stockholdings in the so-called competitive corporations, San
Miguel Corporation would apply the by-laws against him. His
right, therefore, to run depends on what, on election day, May
8, 1979, the ruling of the Board and or the Securities and
Exchange Commission on his qualification to run would be,
certainly, not the final ruling of this Court in the event
recourse thereto is made by the party feeling aggrieved, as
intimated in the "Joint Separate Opinion" of Justices
Teehankee, Concepcion, Jr., Fernandez and Guerrero, that only
after petitioners "disqualification" has ultimately been passed
upon by this Court should petitioner not be allowed to run,
Petitioner may be allowed to run, despite an adverse decision
of both the Board and the Securities and Exchange
Commission, only if he comes to this Court and obtain an
injunction against the enforcement of the decision
disqualifying him. Without such injunction being required, all
that petitioner has to do is to take his time in coming to this
Court, and in so doing, he would in the meantime, be allowed
to run, and if he wins, to sit. This would, however, be contrary
to the doctrine that gives binding, if not conclusive, effect of
findings of facts of administrative bodies exercising quasijudicial functions upon appellate courts, which should,
accordingly, be enforced until reversed by this Tribunal.

"(5) The doctrine corporate opportunity is not new to the law

and is but one phase of the cardinal rule of undivided loyalty
on the part of the fiduciaries. 3 Fletcher Cyc. Corporations,
Perm. Ed., 1965 Revised Volume, section 861.1, page 227; 19
Am Jur. 2d, Corporations, section 1311, page 717. Our own
consideration of the quoted terms as such is mainly in Ontjes
v. MacNider, supra, 232 Iowa 562, 579, 5 N.W., 2d 860, 869,
which quotes at length with approval from Guth v. Loft, Inc.,
23 Del. Ch. 255, 270, 5 A 2d 503, 511, a leading case in this
area of the law. The quotation cites several precedents for
this: . . . if there is presented to a corporate officer or director
a business opportunity which the corporation is financially
able to undertake, is from its nature, in the line of the
corporations business and is of practical advantage to it, is
one in which the corporation has an interest or a reasonable
expectancy, and by embracing the opportunity, the selfinterest of the officer or director will be brought into conflict
with that of his corporation, the law will not permit him to
seize the opportunity for himself. And, if, in such
circumstances, the interests of the corporation are betrayed,
the corporation may elect to claim all of the benefits of the
transaction for itself, and the law will impress a trust in favor
of the corporation upon the property, interests and profits so
acquired."

Endnotes:

1. The pertinent amendment reads as follows:

RESOLVED, That Section 2, Article III of the By-laws of San
Miguel Corporation, which reads as follows:
SECTION 2. Any stockholder having at least five thousand
shares registered in his name may be elected director, but he
shall not be qualified to hold office unless he pledges said five
thousand shares to the Corporation to answer for his conduct.
bee, and the same hereby is, amended, to read as follows;
SECTION 2. Any stockholder having at least five thousand
shares registered in his name may be elected Director,
provided, however, that no person shall qualify or be eligible
for nomination or election to the Board of Directors if he is
engaged in any business which competes with or is
antagonistic to that of the Corporation. Without limiting the
generality of the foregoing, a person shall be deemed to be so
engaged:chanrob1es
virtual
1aw
library
a) if he is an officer, manager or controlling person of, or the
owner (either of record or beneficially) of 10% or more of any
outstanding class of shares of, any corporation (other than
one in which the corporation owns at least 30% of the capital
stock) engaged in a business which the Board, by at least
three fourths vote, determines to be competitive or
antagonistic
to
that
of
the
Corporation;
or
b) If he is an officer, manager or controlling person of, or the
owner (either of record or beneficially) of 10% or more of any
outstanding class of shares of, any other corporation or entity
engaged in any time of business of the Corporation, when in
the judgment of the Board, by at least three-fourths vote, the

c) If the Board, in the exercise of its judgment in good faith,

determines by at least three-fourths vote that he is the
nominee of any person set forth in (a) or (b).

For the proper implementation of this provision, all

nominations for election of Directors by the stockholders shall
be submitted in writing to the Board of Directors at least five
working days before the date of the Annual Meeting." (Rollo,
pp. 462-463.)
29. Schildberg Rock Products Co. v. Brooks, 140 NW 2d 132,
137. Chief Justice Garfield quotes the doctrine as follows:

32. "The CFC and Robina companies, which are reportedly

worth more than P500 Million, are principally owned and
controlled by Mr. Gokongwei and are in substantial
competition to San Miguel. As against his almost 100%
ownership in these basically family companies, Mr.
Gokongweis holding in San Miguel are approximately 4% of
the total shareholdings of your Company. As a consequence,
One Peso (P1.00) of profit resulting from a sale by CFC and
Robina in the lines competing with San Miguel, is earned
almost completely by Mr. Gokongwei, his immediate family
and close associates. On the other hand, the loss of that sale
to San Miguel, resulting in a One Peso (P1.00) loss of profit to
San Miguel, in the lines competing with CFC and Robina,
would result in a loss in profit of only Four Centavos (P0.04) to
Mr. Gokongwei." (Letter to stockholders of SMC, dated April 3,
1978, Annex "R", Memo for respondent San Miguel
Corporation,
rollo,
p.
1867).
49. Sections 3 and 5 of Presidential Decree No. 902-A
provides:
"SEC. 3. The Commission shall have absolute jurisdiction,
supervision and control over all corporations . . . who are
grantees of . . . license or permit issued by the
government . . ."
"SEC. 5. In addition to the regulatory and adjudicative
functions of the Securities and Exchange Commission over
corporations, partnerships and other forms of associations
registered with its as expressly granted under existing laws
and decrees, it shall have original and exclusive jurisdiction to
hear and decide cases involving:
a) Devices or schemes employed by or any acts, of the board
of directors, business associates, its officers or partners
amounting to fraud and misrepresentation which may be
detrimental to the interest of the public and/or of the
stockholders, partners, members of associations or
organizations
registered
with
the
Commission.
b) Controversies arising out of intra-corporate or partnership
relations, between and among stockholders, members, or
associates; between any or all of them and the corporation,
partnership or association of which they are stockholders,

72
members or associates, respectively; and between such
corporation, partnership or association and the state insofar
as it concerns their individual franchise or right to exist as
such
entity;
c) Controversies in the election or appointments of directors,
trustees, officers or managers of such corporations,
partnership or associations."

SECOND DIVISION
[G.R. No. 117188. August 7, 1997]
LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH)
ASSOCIATION, INC., petitioner, vs. HON. COURT
OF APPEALS, HOME INSURANCEAND GUARANTY
CORPORATION, EMDEN ENCARNACION and
HORATIO AYCARDO, respondents.
DECISION
May the failure of a corporation to file its by-laws within
one month from the date of its incorporation, as mandated by
Section 46 of the Corporation Code, result in its automatic
dissolution?
This is the issue raised in this petition for review
on certiorari of the Decision[1] of the Court of Appeals affirming
the decision of the Home Insurance and Guaranty Corporation
(HIGC). This quasi-judicial body recognized Loyola Grand Villas
Homeowners Association (LGVHA) as the sole homeowners
association in Loyola Grand Villas, a duly registered
subdivision in Quezon City and Marikina City that was owned
and developed by Solid Homes, Inc. It revoked the certificates
of registration issued to Loyola Grand Villas Homeowners
(North) Association Incorporated (the North Association for
brevity) and Loyola Grand Villas Homeowners (South)
Association Incorporated (the South Association).
LGVHAI was organized on February 8, 1983 as the
association of homeowners and residents of the Loyola Grand
Villas. It was registered with the Home Financing Corporation,
the predecessor of herein respondent HIGC, as the sole
homeowners organization in the said subdivision under
Certificate of Registration No. 04-197. It was organized by the
developer of the subdivision and its first president was
Victorio V. Soliven, himself the owner of the developer. For
unknown reasons, however, LGVHAI did not file its corporate
by-laws.
Sometime in 1988, the officers of the LGVHAI tried to
register its by-laws. They failed to do so. [2] To the officers
consternation, they discovered that there were two other
organizations within the subdivision the North Association and
the South Association. According to private respondents, a
non-resident and Soliven himself, respectively headed these
associations. They also discovered that these associations had
five (5) registered homeowners each who were also the
incorporators, directors and officers thereof. None of the
members of the LGVHAI was listed as member of the North
Association while three (3) members of LGVHAI were listed as
members of the South Association.[3] The North Association
was registered with the HIGC on February 13, 1989 under
Certificate of Registration No. 04-1160 covering Phases West
II, East III, West III and East IV. It submitted its by-laws on
December 20, 1988.
In July, 1989, when Soliven inquired about the status of
LGVHAI, Atty. Joaquin A. Bautista, the head of the legal
department of the HIGC, informed him that LGVHAI had been
automatically dissolved for two reasons. First, it did not submit
its by-laws within the period required by the Corporation Code
and, second, there was non-user of corporate charter because
HIGC had not received any report on the associations
activities. Apparently, this information resulted in the
registration of the South Association with the HIGC on July 27,

1989 covering Phases West I, East I and East 11. It filed its bylaws on July 26, 1989.
These developments prompted the officers of the
LGVHAI to lodge a complaint with the HIGC. They questioned
the revocation of LGVHAIs certificate of registration without
due notice and hearing and concomitantly prayed for the
cancellation of the certificates of registration of the North and
South Associations by reason of the earlier issuance of a
certificate of registration in favor of LGVHAI.
On January 26, 1993, after due notice and hearing,
private respondents obtained a favorable ruling from HIGC
Hearing Officer Danilo C. Javier who disposed of HIGC Case
No. RRM-5-89 as follows:
WHEREFORE, judgment is hereby rendered recognizing the
Loyola Grand Villas Homeowners Association, Inc., under
Certificate of Registration No. 04-197 as the duly registered
and existing homeowners association for Loyola Grand Villas
homeowners, and declaring the Certificates of Registration of
Loyola Grand Villas Homeowners (North) Association, Inc. and
Loyola Grand Villas Homeowners (South) Association, Inc. as
hereby revoked or cancelled; that the receivership be
terminated and the Receiver is hereby ordered to render an
accounting and turn-over to Loyola Grand Villas Homeowners
Association, Inc., all assets and records of the Association now
under his custody and possession.
The South Association appealed to the Appeals Board of
the HIGC. In its Resolution of September 8, 1993, the
Board[4] dismissed the appeal for lack of merit.
Rebuffed, the South Association in turn appealed to the
Court of Appeals, raising two issues. First, whether or not
LGVHAIs failure to file its by-laws within the period prescribed
by Section 46 of the Corporation Code resulted in the
automatic dissolution of LGVHAI. Second, whether or not two
homeowners associations may be authorized by the HIGC in
one sprawling subdivision. However, in the Decision of August
23, 1994 being assailed here, the Court of Appeals affirmed
the Resolution of the HIGC Appeals Board.
In resolving the first issue, the Court of Appeals held that
under the Corporation Code, a private corporation
commences to have corporate existence and juridical
personality from the date the Securities and Exchange
Commission (SEC) issues a certificate of incorporation under
its official seal. The requirement for the filing of by-laws under
Section 46 of the Corporation Code within one month from
official notice of the issuance of the certificate of incorporation
presupposes that it is already incorporated, although it may
file its by-laws with its articles of incorporation. Elucidating on
the effect of a delayed filing of by-laws, the Court of Appeals
said:
We also find nothing in the provisions cited by the petitioner,
i.e., Sections 46 and 22, Corporation Code, or in any other
provision of the Code and other laws which provide or at least
imply that failure to file the by-laws results in an automatic
dissolution of the corporation. While Section 46, in prescribing
that by-laws must be adopted within the period prescribed
therein, may be interpreted as a mandatory provision,
particularly because of the use of the word must, its meaning
cannot be stretched to support the argument that automatic
dissolution results from non-compliance.
We realize that Section 46 or other provisions of the
Corporation Code are silent on the result of the failure to
adopt and file the by-laws within the required period. Thus,
Section 46 and other related provisions of the Corporation
Code are to be construed with Section 6 (1) of P.D. 902-A. This
section empowers the SEC to suspend or revoke certificates of
registration on the grounds listed therein. Among the grounds
stated is the failure to file by-laws (see also II Campos: The
Corporation Code, 1990 ed., pp. 124-125). Such suspension or

73
revocation, the same section provides, should be made upon
proper notice and hearing. Although P.D. 902-A refers to the
SEC, the same principles and procedures apply to the public
respondent HIGC as it exercises its power to revoke or
suspend the certificates of registration or homeowners
associations. (Section 2 [a], E.O. 535, series 1979, transferred
the powers and authorities of the SEC over homeowners
associations to the HIGC.)
We also do not agree with the petitioners interpretation that
Section 46, Corporation Code prevails over Section 6, P.D.
902-A and that the latter is invalid because it contravenes the
former.There is no basis for such interpretation considering
that these two provisions are not inconsistent with each other.
They are, in fact, complementary to each other so that one
cannot be considered as invalidating the other.
The Court of Appeals added that, as there was no
showing that the registration of LGVHAI had been validly
revoked, it continued to be the duly registered homeowners
association in the Loyola Grand Villas. More importantly, the
South Association did not dispute the fact that LGVHAI had
been organized and that, thereafter, it transacted business
within the period prescribed by law.
On the second issue, the Court of Appeals reiterated its
previous ruling[5] that the HIGC has the authority to order the
holding of a referendum to determine which of two contending
associations should represent the entire community, village or
subdivision.
Undaunted, the South Association filed the instant
petition for review on certiorari. It elevates as sole issue for
resolution the first issue it had raised before the Court of
Appeals, i.e., whether or not the LGVHAIs failure to file its bylaws within the period prescribed by Section 46 of the
Corporation Code had the effect of automatically dissolving
the said corporation.
Petitioner contends that, since Section 46 uses the word
must with respect to the filing of by-laws, noncompliance
therewith would result in self-extinction either due to nonoccurrence of a suspensive condition or the occurrence of a
resolutory condition under the hypothesis that (by) the
issuance of the certificate of registration alone the corporate
personality is deemed already formed. It asserts that the
Corporation Code provides for a gradation of violations of
requirements. Hence, Section 22 mandates that the
corporation must be formally organized and should commence
transactions within two years from date of incorporation.
Otherwise, the corporation would be deemed dissolved. On
the other hand, if the corporation commences operations but
becomes continuously inoperative for five years, then it may
be suspended or its corporate franchise revoked.

the inevitable consequence that is, OR ELSE. The use of the

word MUST in Sec. 46 is no exception it means file the bylaws within one month after notice of issuance of certificate of
registration OR ELSE. The OR ELSE, though not specified, is
inextricably a part of MUST. Do this or if you do not you are
Kaput. The importance of the by-laws to corporate existence
compels such meaning for as decreed the by-laws is `the
government of the corporation. Indeed, how can the
corporation do any lawful act as such without by-laws. Surely,
no law is intended to create chaos.[7]
Petitioner asserts that P.D. No. 902-A cannot exceed the
scope and power of the Corporation Code which itself does
not provide sanctions for non-filing of by-laws.For the
petitioner, it is not proper to assess the true meaning of Sec.
46 x x x on an unauthorized provision on such matter
contained in the said decree.
In their comment on the petition, private respondents
counter that the requirement of adoption of by-laws is not
mandatory. They point to P.D. No. 902-A as having resolved
the issue of whether said requirement is mandatory or merely
directory. Citing Chung Ka Bio v. Intermediate Appellate Court,
[8]
private respondents contend thatSection 6(I) of that decree
provides that non-filing of by-laws is only a ground for
suspension or revocation of the certificate of registration of
corporations and, therefore, it may not result in automatic
dissolution of the corporation. Moreover, the adoption and
filing of by-laws is a condition subsequent which does not
affect the corporate personality of a corporation like the
LGVHAI. This is so because Section 9 of the Corporation Code
provides that the corporate existence and juridical personality
of a corporation begins from the date the SEC issues a
certificate
of
incorporation
under
its
official
seal.
Consequently, even if the by-laws have not yet been filed, a
corporation may be considered a de facto corporation. To
emphasize the fact the LGVHAI was registered as the sole
homeowners association in the Loyola Grand Villas, private
respondents point out that membership in the LGVHAI was an
unconditional restriction in the deeds of sale signed by lot
buyers.
In its reply to private respondents comment on the
petition, petitioner reiterates its argument that the word must
in Section 46 of the Corporation Code is mandatory. It adds
that, before the ruling in Chung Ka Bio v. Intermediate
Appellate Court could be applied to this case, this Court
must first resolve the issue of whether or not the provisions of
P.D. No. 902-A prescribing the rules and regulations to
implement the Corporation Code can rise above and change
the substantive provisions of the Code.
The pertinent provision of the Corporation Code that is
the focal point of controversy in this case states:

Petitioner concedes that Section 46 and the other

provisions of the Corporation Code do not provide for
sanctions for non-filing of the by-laws. However, it insists that
no sanction need be provided because the mandatory nature
of the provision is so clear that there can be no doubt about
its being an essential attribute of corporate birth.To petitioner,
its submission is buttressed by the facts that the period for
compliance is spelled out distinctly; that the certification of
the SEC/HIGC must show that the by-laws are not inconsistent
with the Code, and that a copy of the by-laws has to be
attached to the articles of incorporation. Moreover, no
sanction is provided for because in the first place, no
corporate identity has been completed. Petitioner asserts that
non-provision for remedy or sanction is itself the tacit
proclamation that non-compliance is fatal and no corporate
existence had yet evolved, and therefore, there was no need
to proclaim its demise.[6] In a bid to convince the Court of its
arguments, petitioner stresses that:

Sec. 46. Adoption of by-laws. Every corporation formed

under this Code, must within one (1) month after receipt of
official notice of the issuance of its certificate of incorporation
by the Securities and Exchange Commission, adopt a code of
by-laws for its government not inconsistent with this Code. For
the adoption of by-laws by the corporation, the affirmative
vote of the stockholders representing at least a majority of the
outstanding capital stock, or of at least a majority of the
members, in the case of non-stock corporations, shall be
necessary. The by-laws shall be signed by the stockholders or
members voting for them and shall be kept in the principal
office of the corporation, subject to the stockholders or
members voting for them and shall be kept in the principal
office of the corporation, subject to inspection of the
stockholders or members during office hours; and a copy
thereof, shall be filed with the Securities and Exchange
Commission which shall be attached to the original articles of
incorporation.

x x x the word MUST is used in Sec. 46 in its universal literal

meaning and corollary human implication its compulsion is
integrated in its very essence MUST is always enforceable by

Notwithstanding the provisions of the preceding paragraph,

by-laws may be adopted and filed prior to incorporation; in
such case, such by-laws shall be approved and signed by all

74
the incorporators and submitted to the Securities and
Exchange Commission, together with the articles of
incorporation.
In all cases, by-laws shall be effective only upon the issuance
by the Securities and Exchange Commission of a certification
that the by-laws are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for
filing the by-laws or any amendment thereto of any bank,
banking institution, building and loan association, trust
company, insurance company, public utility, educational
institution or other special corporations governed by special
laws, unless accompanied by a certificate of the appropriate
government agency to the effect that such by-laws or
amendments are in accordance with law.
As correctly postulated by the petitioner, interpretation
of this provision of law begins with the determination of the
meaning
and
import
of
the
word must in
this
section.Ordinarily, the word must connotes an imperative act
or operates to impose a duty which may be enforced. [9] It is
synonymous with ought which connotes compulsion or
mandatoriness.[10] However, the word must in a statute, like
shall, is not always imperative. It may be consistent with an
exercise of discretion. In this jurisdiction, the tendency has
been to interpret shall as the context or a reasonable
construction of the statute in which it is used demands or
requires.[11] This is equally true as regards the word
must. Thus, if the language of a statute considered as a whole
and 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.[12]
In this respect, the following portions of the deliberations
of the Batasang Pambansa No. 68 are illuminating:
MR.
Speaker.

FUENTEBELLA. Thank

you,

Mr.

On page 34, referring to the adoption of

by-laws, are we made to understand here, Mr.
Speaker, that by-laws must immediately be
filed within one month after the issuance? In
other words, would this be mandatory or
directory in character?

account the gravity of the violation

committed. If the by-laws were late the filing
of the by-laws were late by, perhaps, a day or
two, I would suppose that might be a tolerable
delay, but if they are delayed over a period of
months as is happening now because of the
absence of a clear requirement that by-laws
must be completed within a specified period
of time, the corporation must suffer certain
consequences.[13]
This exchange of views demonstrates clearly that
automatic corporate dissolution for failure to file the by-laws
on time was never the intention of the legislature.Moreover,
even without resorting to the records of deliberations of the
Batasang Pambansa, the law itself provides the answer to the
issue propounded by petitioner.
Taken as a whole and under the principle that the best
interpreter of a statute is the statute itself (optima statuli
interpretatix
est
ipsum
statutum),[14] Section
46
aforequoted reveals the legislative intent to attach a
directory, and not mandatory, meaning for the word must in
the first sentence thereof. Note should be taken of the second
paragraph of the law which allows the filing of the by-laws
even prior to incorporation. This provision in the same section
of the Code rules out mandatory compliance with the
requirement of filing the by-laws within one (1) month after
receipt of official notice of the issuance of its certificate of
incorporation by the Securities and Exchange Commission. It
necessarily follows that failure to file the by-laws within that
period does not imply the demise of the corporation. By-laws
may be necessary for the government of the corporation but
these are subordinate to the articles of incorporation as well
as to the Corporation Code and related statutes. [15] There are
in fact cases where by-laws are unnecessary to corporate
existence or to the valid exercise of corporate powers, thus:
In the absence of charter or statutory provisions to the
contrary, by-laws are not necessary either to the existence of
a corporation or to the valid exercise of the powers conferred
upon it, certainly in all cases where the charter sufficiently
provides for the government of the body; and even where the
governing statute in express terms confers upon the
corporation the power to adopt by-laws, the failure to
exercise the power will be ascribed to mere nonaction
which will not render void any acts of the corporation
which would otherwise be valid.[16] (Italics supplied.)

MR. MENDOZA. This is mandatory.

As Fletcher aptly puts it:
MR. FUENTEBELLA. It being mandatory,
Mr. Speaker, what would be the effect of the
failure of the corporation to file these by-laws
within one month?
MR. MENDOZA. There is a provision in the
latter part of the Code which identifies and
describes the consequences of violations of
any provision of this Code. One such
consequence is the dissolution of the
corporation for its inability, or perhaps,
incurring certain penalties.
MR. FUENTEBELLA. But it will not
automatically amount to a dissolution of the
corporation by merely failing to file the bylaws within one month. Supposing the
corporation was late, say, five days, what
would be the mandatory penalty?
MR. MENDOZA. I do not think it will
necessarily result in the automatic or ipso
facto dissolution of the corporation. Perhaps,
as in the case, as you suggested, in the case
of
El
Hogar
Filipino
where
a quo
warranto action is brought, one takes into

It has been said that the by-laws of a corporation are the rule
of its life, and that until by-laws have been adopted the
corporation may not be able to act for the purposes of its
creation, and that the first and most important duty of the
members is to adopt them. This would seem to follow as a
matter of principle from the office and functions of by-laws.
Viewed in this light, the adoption of by-laws is a matter of
practical, if not one of legal, necessity. Moreover, the peculiar
circumstances attending the formation of a corporation may
impose the obligation to adopt certain by-laws, as in the case
of a close corporation organized for specific purposes. And the
statute or general laws from which the corporation derives its
corporate existence may expressly require it to make and
adopt by-laws and specify to some extent what they shall
contain and the manner of their adoption. The mere fact,
however, of the existence of power in the corporation
to adopt by-laws does not ordinarily and of necessity
make the exercise of such power essential to its
corporate life, or to the validity of any of its acts. [17]
Although the Corporation Code requires the filing of bylaws, it does not expressly provide for the consequences of
the non-filing of the same within the period provided for in
Section 46. However, such omission has been rectified by
Presidential Decree No. 902-A, the pertinent provisions on the
jurisdiction of the SEC of which state:

75
SEC. 6. In order to effectively exercise such jurisdiction, the
Commission shall possess the following powers:
xxx xxx xxx xxx
(l) To suspend, or revoke, after proper notice and
hearing, the franchise or certificate of registration of
corporations, partnerships or associations, upon any of the
grounds provided by law, including the following:
xxx xxx xxx xxx
5. Failure to file by-laws within the required period;
xxx xxx xxx xxx
In the exercise of the foregoing authority and jurisdiction of
the Commissions or by a Commissioner or by such other
bodies, boards, committees and/or any officer as may be
created or designated by the Commission for the purpose. The
decision, ruling or order of any such Commissioner, bodies,
boards, committees and/or officer may be appealed to the
Commission sitting en banc within thirty (30) days after
receipt by the appellant of notice of such decision, ruling or
order. The Commission shall promulgate rules of procedures
to govern the proceedings, hearings and appeals of cases
falling within its jurisdiction.
The aggrieved party may appeal the order, decision or ruling
of the Commission sitting en banc to the Supreme Court by
petition for review in accordance with the pertinent provisions
of the Rules of Court.
Even under the foregoing express grant of power and
authority,
there
can
be
no automatic
corporate
dissolution simply because the incorporators failed to abide
by the required filing of by-laws embodied in Section 46 of the
Corporation Code. There is no outright demise of corporate
existence. Proper notice and hearing are cardinal components
of due process in any democratic institution, agency or
society. In other words, the incorporators must be given the
chance to explain their neglect or omission and remedy the
same.
That the failure to file by-laws is not provided for by the
Corporation Code but in another law is of no moment. P.D. No.
902-A, which took effect immediately after its promulgation on
March 11, 1976, is very much apposite to the
Code. Accordingly, the provisions abovequoted supply the law
governing the situation in the case at bar, inasmuch as the
Corporation Code and P.D. No. 902-A are statutes in pari
materia. Interpretare
et
concordare
legibus
est
optimus interpretandi. Every statute must be so construed
and harmonized with other statutes as to form a uniform
system of jurisprudence.[18]
As the rules and regulations or private laws enacted by
the corporation to regulate, govern and control its own
actions, affairs and concerns and its stockholders or members
and directors and officers with relation thereto and among
themselves in their relation to it, [19] by-laws are indispensable
to corporations in this jurisdiction. These may not be essential
to corporate birth but certainly, these are required by law for
an orderly governance and management of corporations.
Nonetheless, failure to file them within the period required by
law by no means tolls the automatic dissolution of a
corporation.

Section 19 of the Corporation Law, part of which is now

Section 22 of the Corporation Code, provided that the powers
of the corporation would cease if it did not formally organize
and commence the transaction of its business or the
continuation of its works within two years from date of its
incorporation. Section 20, which has been reproduced with
some modifications in Section 46 of the Corporation Code,
expressly declared that every corporation formed under this
Act, must within one month after the filing of the articles of
incorporation with the Securities and Exchange Commission,
adopt a code of by-laws. Whether this provision should be
given mandatory or only directory effect remained a
controversial question until it became academic with the
adoption of PD 902-A. Under this decree, it is now clear that
the failure to file by-laws within the required period is only a
ground for suspension or revocation of the certificate of
registration of corporations.
Non-filing of the by-laws will not result in automatic
dissolution of the corporation. Under Section 6(I) of PD 902-A,
the SEC is empowered to suspend or revoke, after proper
notice and hearing, the franchise or certificate of registration
of a corporation on the ground inter alia of failure to file bylaws within the required period. It is clear from this provision
that there must first of all be a hearing to determine the
existence of the ground, and secondly, assuming such finding,
the penalty is not necessarily revocation but may be only
suspension of the charter. In fact, under the rules and
regulations of the SEC, failure to file the by-laws on time may
be penalized merely with the imposition of an administrative
fine without affecting the corporate existence of the erring
firm.
It should be stressed in this connection that substantial
compliance with conditions subsequent will suffice to perfect
corporate personality. Organization and commencement of
transaction of corporate business are but conditions
subsequent and not prerequisites for acquisition of corporate
personality. The adoption and filing of by-laws is also a
condition subsequent. Under Section 19 of the Corporation
Code, a corporation commences its corporate existence and
juridical personality and is deemed incorporated from the date
the Securities and Exchange Commission issues certificate of
incorporation under its official seal. This may be done even
before the filing of the by-laws, which under Section 46 of the
Corporation Code, must be adopted within one month after
receipt of official notice of the issuance of its certificate of
incorporation.[21]
That the corporation involved herein is under the
supervision of the HIGC does not alter the result of this
case. The HIGC has taken over the specialized functions of the
former Home Financing Corporation by virtue of Executive
Order No. 90 dated December 17, 1986. [22] With respect to
homeowners associations, the HIGC shall exercise all the
powers, authorities and responsibilities that are vested on the
Securities and Exchange Commission x x x, the provision of
Act 1459, as amended by P.D. 902-A, to the contrary
notwithstanding.[23]
WHEREFORE,
the
instant
petition
for
review
on certiorari is hereby DENIED and the questioned Decision of
the Court of Appeals AFFIRMED. This Decision is immediately
executory. Costs against petitioner.
SO ORDERED.

FIRST DIVISION

In this regard, private respondents are correct in relying

on the pronouncements of this Court in Chung Ka Bio v.
Intermediate Appellate Court,[20] as follows:

[G.R. No. 117604. March 26, 1997]

x x x. Moreover, failure to file the by-laws does not

automatically operate to dissolve a corporation but is now
considered only a ground for such dissolution.

CHINA BANKING CORPORATION, petitioner, vs. COURT

OF APPEALS, and VALLEY GOLF and COUNTRY
CLUB, INC., respondents.

76
DECISION

Through a petition for review on certiorari under Rule 45

of the Revised Rules of Court, petitioner China Banking
Corporation seeks the reversal of the decision of the Court of
Appeals dated 15 August 1994 nullifying the Securities and
Exchange Commission's order and resolution dated 4 June
1993 and 7 December 1993, respectively, for lack of
jurisdiction. Similarly impugned is the Court of Appeals'
resolution dated 4 September 1994 which denied petitioner's
motion for reconsideration.
The case unfolds thus:
On 21 August 1974, Galicano Calapatia, Jr. (Calapatia, for
brevity) a stockholder of private respondent Valley Golf &
Country Club, Inc. (VGCCI, for brevity), pledged his Stock
Certificate No. 1219 to petitioner China Banking Corporation
(CBC, for brevity).[1]
On 16 September 1974, petitioner wrote VGCCI
requesting that the aforementioned pledge agreement be
recorded in its books.[2]
In a letter dated 27 September 1974, VGCCI replied that
the deed of pledge executed by Calapatia in petitioner's favor
was duly noted in its corporate books.[3]
On 3 August 1983, Calapatia obtained a loan of
P20,000.00 from petitioner, payment of which was secured by
the aforestated pledge agreement still existing between
Calapatia and petitioner.[4]
Due to Calapatia's failure to pay his obligation,
petitioner, on 12 April 1985, filed a petition for extrajudicial
foreclosure before Notary Public Antonio T. de Vera of Manila,
requesting the latter to conduct a public auction sale of the
pledged stock.[5]
On 14 May 1985, petitioner informed VGCCI of the
above-mentioned foreclosure proceedings and requested that
the pledged stock be transferred to its (petitioner's) name and
the same be recorded in the corporate books. However, on 15
July 1985, VGCCI wrote petitioner expressing its inability to
accede to petitioner's request in view of Calapatia's unsettled
accounts with the club.[6]
Despite the foregoing, Notary Public de Vera held a
public auction on 17 September 1985 and petitioner emerged
as the highest bidder at P20,000.00 for the pledged stock.
Consequently, petitioner was issued the corresponding
certificate of sale.[7]

On 5 May 1989, petitioner advised VGCCI that it is the

new owner of Calapatia's Stock Certificate No. 1219 by virtue
of being the highest bidder in the 17 September 1985 auction
and requested that a new certificate of stock be issued in its
name.[12]
On 2 March 1990, VGCCI replied that "for reason of
delinquency" Calapatia's stock was sold at the public auction
held on 10 December 1986 for P25,000.00.[13]
On 9 March 1990, petitioner protested the sale by VGCCI
of the subject share of stock and thereafter filed a case with
the Regional Trial Court of Makati for the nullification of the 10
December 1986 auction and for the issuance of a new stock
certificate in its name.[14]
On 18 June 1990, the Regional Trial Court of Makati
dismissed the complaint for lack of jurisdiction over the
subject matter on the theory that it involves an intracorporate dispute and on 27 August 1990 denied petitioner's
motion for reconsideration.
On 20 September 1990, petitioner filed a complaint with
the Securities and Exchange Commission (SEC) for the
nullification of the sale of Calapatia's stock by VGCCI; the
cancellation of any new stock certificate issued pursuant
thereto; for the issuance of a new certificate in petitioner's
name; and for damages, attorney's fees and costs of litigation.
On 3 January 1992, SEC Hearing Officer Manuel P. Perea
rendered a decision in favor of VGCCI, stating in the main that
"(c)onsidering that the said share is delinquent, (VGCCI) had
valid reason not to transfer the share in the name of the
petitioner in the books of (VGCCI) until liquidation of
delinquency."[15] Consequently, the case was dismissed.[16]
On 14 April 1992, Hearing Officer
petitioner's motion for reconsideration.[17]

Perea

denied

Petitioner appealed to the SEC en banc and on 4 June

1993, the Commission issued an order reversing the decision
of its hearing officer. It declared thus:
The Commission en banc believes that appellant-petitioner
has a prior right over the pledged share and because of
pledgor's failure to pay the principal debt upon maturity,
appellant-petitioner can proceed with the foreclosure of the
pledged share.
WHEREFORE, premises considered, the Orders of January 3,
1992 and April 14, 1992 are hereby SET ASIDE. The auction
sale conducted by appellee-respondent Club on December 10,
1986 is declared NULL and VOID. Finally, appellee-respondent
Club is ordered to issue another membership certificate in the
name of appellant-petitioner bank.
SO ORDERED.[18]

On 21 November 1985, VGCCI sent Calapatia a notice

demanding full payment of his overdue account in the amount
of P18,783.24.[8] Said notice was followed by a demand letter
dated 12 December 1985 for the same amount [9] and another
notice dated 22 November 1986 for P23,483.24.[10]

VGCCI sought reconsideration of the abovecited order.

However, the SEC denied the same in its resolution dated 7
December 1993.[19]

On 4 December 1986, VGCCI caused to be published in

the newspaper Daily Express a notice of auction sale of a
number of its stock certificates, to be held on 10 December
1986 at 10:00 a.m. Included therein was Calapatia's own
share of stock (Stock Certificate No. 1219).

The sudden turn of events sent VGCCI to seek redress

from the Court of Appeals. On 15 August 1994, the Court of
Appeals rendered its decision nullifying and setting aside the
orders of the SEC and its hearing officer on ground of lack of
jurisdiction over the subject matter and, consequently,
dismissed petitioner's original complaint. The Court of Appeals
declared that the controversy between CBC and VGCCI is not
intra-corporate. It ruled as follows:

Through a letter dated 15 December 1986, VGCCI

informed Calapatia of the termination of his membership due
to the sale of his share of stock in the 10 December 1986
auction.[11]

In order that the respondent Commission can take cognizance

of a case, the controversy must pertain to any of the following
relationships: (a) between the corporation, partnership or
association and the public; (b) between the corporation,

77
partnership or association and its stockholders, partners,
members, or officers; (c) between the corporation, partnership
or association and the state in so far as its franchise, permit or
license to operate is concerned, and (d) among the
stockholders, partners or associates themselves (Union Glass
and Container Corporation vs. SEC, November 28, 1983, 126
SCRA 31). The establishment of any of the relationship
mentioned will not necessarily always confer jurisdiction over
the dispute on the Securities and Exchange Commission to
the exclusion of the regular courts. The statement made in
Philex Mining Corp. vs. Reyes, 118 SCRA 602, that the rule
admits of no exceptions or distinctions is not that absolute.
The better policy in determining which body has jurisdiction
over a case would be to consider not only the status or
relationship of the parties but also the nature of the question
that is the subject of their controversy (Viray vs. Court of
Appeals, November 9, 1990, 191 SCRA 308, 322-323).
Indeed, the controversy between petitioner and respondent
bank which involves ownership of the stock that used to
belong to Calapatia, Jr. is not within the competence of
respondent Commission to decide. It is not any of those
mentioned in the aforecited case.
WHEREFORE, the decision dated June 4, 1993, and order
dated December 7, 1993 of respondent Securities and
Exchange Commission (Annexes Y and BB, petition) and of its
hearing officer dated January 3, 1992 and April 14, 1992
(Annexes S and W, petition) are all nullified and set aside for
lack of jurisdiction over the subject matter of the case.
Accordingly, the complaint of respondent China Banking
Corporation
(Annex
Q,
petition)
is DISMISSED.
No
pronouncement as to costs in this instance.
SO ORDERED.[20]
Petitioner moved for reconsideration but the same was
denied by the Court of Appeals in its resolution dated 5
October 1994.[21]
Hence, this petition wherein the following issues were
raised:
II
ISSUES
WHETHER OR NOT RESPONDENT COURT OF APPEALS (Former
Eighth Division) GRAVELY ERRED WHEN:
1. IT NULLIFIED AND SET ASIDE THE DECISION
DATED JUNE 04, 1993 AND ORDER DATED
DECEMBER 07, 1993 OF THE SECURITIES AND
EXCHANGE COMMISSION EN BANC, AND WHEN
IT DISMISSED THE COMPLAINT OF PETITIONER
AGAINST RESPONDENT VALLEY GOLF ALL FOR
LACK OF JURISDICTION OVER THE SUBJECT
MATTER OF THE CASE;
2. IT FAILED TO AFFIRM THE DECISION OF THE
SECURITIES AND EXCHANGE COMMISSION EN
BANC DATED JUNE 04, 1993 DESPITE
PREPONDERANT EVIDENCE SHOWING THAT
PETITIONER IS THE LAWFUL OWNER OF
MEMBERSHIP CERTIFICATE NO. 1219 FOR ONE
SHARE OF RESPONDENT VALLEY GOLF.
The petition is granted.
The basic issue we must first hurdle is which body has
jurisdiction over the controversy, the regular courts or the
SEC.
P.D. No. 902-A conferred upon the SEC the following
pertinent powers:

SECTION 3. The Commission shall have absolute jurisdiction,

supervision and control over all corporations, partnerships or
associations, who are the grantees of primary franchises
and/or a license or permit issued by the government to
operate in the Philippines, and in the exercise of its authority,
it shall have the power to enlist the aid and support of and to
deputize any and all enforcement agencies of the
government, civil or military as well as any private institution,
corporation, firm, association or person.
xxx
SECTION 5. In addition to the regulatory and adjudicative
functions of the Securities and Exchange Commission over
corporations, partnerships and other forms of associations
registered with it as expressly granted under existing laws
and decrees, it shall have original and exclusive jurisdiction to
hear and decide cases involving:
a) Devices or schemes employed by or any acts of the board
of directors, business associates, its officers or partners,
amounting to fraud and misrepresentation which may be
detrimental to the interest of the public and/or of the
stockholders, partners, members of associations or
organizations registered with the Commission.
b) Controversies arising out of intra-corporate or partnership
relations, between and among stockholders, members, or
associates; between any or all of them and the corporation,
partnership or association of which they are stockholders,
members or associates, respectively; and between such
corporation, partnership or association and the State insofar
as it concerns their individual franchise or right to exist as
such entity;
c) Controversies in the election or appointment of directors,
trustees, officers, or managers of such corporations,
partnerships or associations.
d) Petitions of corporations, partnerships or associations to be
declared in the state of suspension of payments in cases
where the corporation, partnership or association possesses
property to cover all of 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 Committee created pursuant to this Decree.
The aforecited law was expounded upon in Viray v.
CA[22] and in the recent cases of Mainland Construction Co.,
Inc. v. Movilla[23] and Bernardo v. CA,[24] thus:
. . . The better policy in determining which body has
jurisdiction over a case would be to consider not only the
status or relationship of the parties but also the nature of the
question that is the subject of their controversy.
Applying the foregoing principles in the case at bar, to
ascertain which tribunal has jurisdiction we have to determine
therefore whether or not petitioner is a stockholder of VGCCI
and whether or not the nature of the controversy between
petitioner and private respondent corporation is intracorporate.
As to the first query, there is no question that the
purchase of the subject share or membership certificate at
public auction by petitioner (and the issuance to it of the
corresponding Certificate of Sale) transferred ownership of the
same to the latter and thus entitled petitioner to have the said
share registered in its name as a member of VGCCI. It is
readily observed that VGCCI did not assail the transfer directly
and has in fact, in its letter of 27 September 1974, expressly
recognized the pledge agreement executed by the original
owner, Calapatia, in favor of petitioner and has even noted
said agreement in its corporate books. [25] In addition,

78
Calapatia, the original owner of the subject share, has not
contested the said transfer.
By virtue of the afore-mentioned sale, petitioner became
a bona fide stockholder of VGCCI and, therefore, the conflict
that arose between petitioner and VGCCI aptly exemplies an
intra-corporate controversy between a corporation and its
stockholder under Sec. 5(b) of P.D. 902-A.
An important consideration, moreover, is the nature of
the controversy between petitioner and private respondent
corporation. VGCCI claims a prior right over the subject share
anchored mainly on 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/her/its share sold to
satisfy the claims of the Club . . ." [26] It is pursuant to this
provision that VGCCI also sold the subject share at public
auction, of which it was the highest bidder. VGCCI caps its
argument by asserting that its corporate by-laws should
prevail. The bone of contention, thus, is the proper
interpretation and application of VGCCI's aforequoted by-laws,
a subject which irrefutably calls for the special competence of
the SEC.
We reiterate herein the sound policy enunciated by the Court
in Abejo v. De la Cruz:[27]
6. In the fifties, the Court taking cognizance of the move to
vest jurisdiction in administrative commissions and boards the
power to resolve specialized disputes in the field of labor (as
in corporations, public transportation and public utilities) ruled
that Congress in requiring the Industrial Court's intervention in
the resolution of labor-management controversies likely to
cause strikes or lockouts meant such jurisdiction to be
exclusive, although it did not so expressly state in the law. The
Court held that under the "sense-making and expeditious
doctrine of primary jurisdiction . . . the courts cannot or will
not determine a controversy involving a question which is
within the jurisdiction of an administrative tribunal, where the
question demands the exercise of sound administrative
discretion requiring the special knowledge, experience, and
services of the administrative tribunal to determine technical
and intricate matters of fact, and a uniformity of ruling is
essential to comply with the purposes of the regulatory
statute administered."
In this era of clogged court dockets, the need for specialized
administrative boards or commissions with the special
knowledge, experience and capability to hear and determine
promptly disputes on technical matters or essentially factual
matters, subject to judicial review in case of grave abuse of
discretion, has become well nigh indispensable. Thus, in 1984,
the Court noted that "between the power lodged in an
administrative body and a court, the unmistakable trend has
been to refer it to the former. 'Increasingly, this Court has
been committed to the view that unless the law speaks clearly
and unequivocably, the choice should fall on [an
administrative agency.]'" The Court in the earlier case of Ebon
v. De Guzman, noted that the lawmaking authority, in
restoring to the labor arbiters and the NLRC their jurisdiction
to award all kinds of damages in labor cases, as against the
previous P.D. amendment splitting their jurisdiction with the
regular courts, "evidently,. . . had second thoughts about
depriving the Labor Arbiters and the NLRC of the jurisdiction
to award damages in labor cases because that setup would
mean duplicity of suits, splitting the cause of action and
possible conflicting findings and conclusions by two tribunals
on one and the same claim."
In this case, the need for the SEC's technical expertise cannot
be over-emphasized involving as it does the meticulous
analysis and correct interpretation of a corporation's by-laws
as well as the applicable provisions of the Corporation Code in
order to determine the validity of VGCCI's claims. The SEC,
therefore, took proper cognizance of the instant case.

VGCCI further contends that petitioner is estopped from

denying its earlier position, in the first complaint it filed with
the RTC of Makati (Civil Case No. 90-1112) that there is no
intra-corporate relations between itself and VGCCI.
VGCCI's contention lacks merit.
In Zamora v. Court of Appeals,[28] this Court, through Mr.
Justice Isagani A. Cruz, declared that:
It follows that as a rule the filing of a complaint with one court
which has no jurisdiction over it does not prevent the plaintiff
from filing the same complaint later with the competent court.
The plaintiff is not estopped from doing so simply because it
made a mistake before in the choice of the proper forum . . .
We remind VGCCI that in the same proceedings before
the RTC of Makati, it categorically stated (in its motion to
dismiss) that the case between itself and petitioner is intracorporate and insisted that it is the SEC and not the regular
courts which has jurisdiction. This is precisely the reason why
the said court dismissed petitioner's complaint and led to
petitioner's recourse to the SEC.
Having resolved the issue on jurisdiction, instead of
remanding the whole case to the Court of Appeals, this Court
likewise deems it procedurally sound to proceed and rule on
its merits in the same proceedings.
It must be underscored that petitioner did not confine
the instant petition for review on certiorari on the issue of
jurisdiction. In its assignment of errors, petitioner specifically
raised questions on the merits of the case. In turn, in its
responsive pleadings, private respondent duly answered and
countered all the issues raised by petitioner.
Applicable to this case is the principle succinctly
enunciated in the case of Heirs of Crisanta GabrielAlmoradie v.
Court
of
Appeals,[29] citing
Escudero v.
Dulay[30] and The Roman Catholic Archbishop of Manila v.
Court of Appeals:[31]
In the interest of the public and for the expeditious
administration of justice the issue on infringement shall be
resolved by the court considering that this case has dragged
on for years and has gone from one forum to another.
It is a rule of procedure for the Supreme Court to strive to
settle the entire controversy in a single proceeding leaving no
root or branch to bear the seeds of future litigation. No useful
purpose will be served if a case or the determination of an
issue in a case is remanded to the trial court only to have its
decision raised again to the Court of Appeals and from there
to the Supreme Court.
We have laid down the rule that the remand of the case or of
an issue to the lower court for further reception of evidence is
not necessary where the Court is in position to resolve the
dispute based on the records before it and particularly where
the ends of justice would not be subserved by the remand
thereof. Moreover, the Supreme Court is clothed with ample
authority to review matters, even those not raised on appeal if
it finds that their consideration is necessary in arriving at a
just disposition of the case.
In the recent case of China Banking Corp., et al. v. Court
of Appeals, et al.,[32] this Court, through Mr. Justice Ricardo J.
Francisco, ruled in this wise:
At the outset, the Court's attention is drawn to the fact that
that since the filing of this suit before the trial court, none of
the substantial issues have been resolved. To avoid and gloss
over the issues raised by the parties, as what the trial court
and respondent Court of Appeals did, would unduly prolong
this litigation involving a rather simple case of foreclosure of

79
mortgage. Undoubtedly, this will run counter to the avowed
purpose of the rules, i.e., to assist the parties in obtaining just,
speedy and inexpensive determination of every action or
proceeding. The Court, therefore, feels that the central issues
of the case, albeit unresolved by the courts below, should now
be settled specially as they involved pure questions of law.
Furthermore, the pleadings of the respective parties on file
have amply ventilated their various positions and arguments
on the matter necessitating prompt adjudication.
In the case at bar, since we already have the records of
the case (from the proceedings before the SEC) sufficient to
enable us to render a sound judgment and since only
questions of law were raised (the proper jurisdiction for
Supreme Court review), we can, therefore, unerringly take
cognizance of and rule on the merits of the case.
The procedural niceties settled, we proceed to the
merits.
VGCCI assails the validity of the pledge agreement
executed by Calapatia in petitioner's favor. It contends that
the same was null and void for lack of consideration because
the pledge agreement was entered into on 21 August
1974[33] but the loan or promissory note which it secured was
obtained by Calapatia much later or only on 3 August 1983.[34]
VGCCI's contention is unmeritorious.
A careful perusal of the pledge agreement will readily
reveal that the contracting parties explicitly stipulated therein
that the said pledge will also stand as security for any future
advancements (or renewals thereof) that Calapatia (the
pledgor) may procure from petitioner:
xxx
This pledge is given as security for the prompt payment when
due of all loans, overdrafts, promissory notes, drafts, bills or
exchange, discounts, and all other obligations of every kind
which have heretofore been contracted, or which may
hereafter be contracted, by the PLEDGOR(S) and/or
DEBTOR(S) or any one of them, in favor of the PLEDGEE,
including discounts of Chinese drafts, bills of exchange,
promissory notes, etc., without any further endorsement by
the PLEDGOR(S) and/or Debtor(s) up to the sum of TWENTY
THOUSAND (P20,000.00) PESOS, together with the accrued
interest thereon, as hereinafter provided, plus the costs,
losses, damages and expenses (including attorney's fees)
which PLEDGEE may incur in connection with the collection
thereof.[35] (Emphasis ours.)
The validity of the pledge agreement between petitioner
and Calapatia cannot thus be held suspect by VGCCI. As
candidly explained by petitioner, the promissory note of 3
August 1983 in the amount of P20,000.00 was but a renewal
of the first promissory note covered by the same pledge
agreement.
VGCCI likewise insists that due to Calapatia's failure to
settle his delinquent accounts, it had the right to sell the
share in question in accordance with the express provision
found in its by-laws.
Private respondent's insistence comes to naught. It is
significant to note that VGCCI began sending notices of
delinquency to Calapatia after it was informed by petitioner
(through its letter dated 14 May 1985) of the foreclosure
proceedings initiated against Calapatia's pledged share,
although Calapatia has been delinquent in paying his monthly
dues to the club since 1975. Stranger still, petitioner, whom
VGCCI had officially recognized as the pledgee of Calapatia's
share, was neither informed nor furnished copies of these
letters of overdue accounts until VGCCI itself sold the pledged
share at another public auction. By doing so, VGCCI
completely disregarded petitioner's rights as pledgee. It even

failed to give petitioner notice of said auction sale. Such

actuations of VGCCI thus belie its claim of good faith.
In defending its actions, VGCCI likewise maintains that
petitioner is bound by its by-laws. It argues in this wise:
The general rule really is that third persons are not bound by
the by-laws of a corporation since they are not privy thereto
(Fleischer v. Botica Nolasco, 47 Phil. 584). The exception to
this is when third persons have actual or constructive
knowledge of the same. In the case at bar, petitioner had
actual knowledge of the by-laws of private respondent when
petitioner foreclosed the pledge made by Calapatia and when
petitioner purchased the share foreclosed on September 17,
1985. This is proven by the fact that prior thereto, i.e., on May
14, 1985 petitioner even quoted a portion of private
respondent's by-laws which is material to the issue herein in a
letter it wrote to private respondent. Because of this actual
knowledge of such by-laws then the same bound the
petitioner as of the time when petitioner purchased the share.
Since the by-laws was already binding upon petitioner when
the latter purchased the share of Calapatia on September 17,
1985 then the petitioner purchased the said share subject to
the right of the private respondent to sell the said share for
reasons of delinquency and the right of private respondent to
have a first lien on said shares as these rights are provided for
in the by-laws very very clearly.[36]
VGCCI misunderstood the import of our ruling in
Fleischer v. Botica Nolasco Co.:[37]
And moreover, the by-law now in question cannot have any
effect on the appellee. He had no knowledge of such by-law
when the shares were assigned to him. He obtained them in
good faith and for a valuable consideration. He was not a
privy to the contract created by said by-law between the
shareholder Manuel Gonzales and the Botica Nolasco, Inc.
Said by-law cannot operate to defeat his rights as a purchaser.
"An unauthorized by-law forbidding a shareholder to sell his
shares without first offering them to the corporation for a
period of thirty days is not binding upon an assignee of the
stock as a personal contract, although his assignor knew of
the by-law and took part in its adoption." (10 Cyc., 579;
Ireland vs. Globe Milling Co., 21 R.I., 9.)
"When no restriction is placed by public law on the transfer of
corporate stock, a purchaser is not affected by any
contractual restriction of which he had no notice."
(Brinkerhoff-Farris Trust & Savings Co. vs. Home Lumber Co.,
118 Mo., 447.)
"The assignment of shares of stock in a corporation by one
who has assented to an unauthorized by-law has only the
effect of a contract by, and enforceable against, the assignor;
the assignee is not bound by such by-law by virtue of the
assignment alone." (Ireland vs. Globe Milling Co., 21 R.I., 9.)
"A by-law of a corporation which provides that transfers of
stock shall not be valid unless approved by the board of
directors, while it may be enforced as a reasonable regulation
for the protection of the corporation against worthless
stockholders, cannot be made available to defeat the rights of
third persons." (Farmers' and Merchants' Bank of Lineville vs.
Wasson, 48 Iowa, 336.) (Underscoring ours.)
In order to be bound, the third party must have acquired
knowledge of the pertinent by-laws at the time the transaction
or agreement between said third party and the shareholder
was entered into, in this case, at the time the pledge
agreement was executed. VGCCI 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. Petitioner's belated notice of
said by-laws at the time of foreclosure will not suffice. The
ruling of the SEC en banc is particularly instructive:

80
By-laws signifies the rules and regulations or private laws
enacted by the corporation to regulate, govern and control its
own actions, affairs and concerns and its stockholders or
members and directors and officers with relation thereto and
among themselves in their relation to it. In other words, bylaws are the relatively permanent and continuing rules of
action adopted by the corporation for its own government and
that of the individuals composing it and having the direction,
management and control of its affairs, in whole or in part, in
the management and control of its affairs and activities. (9
Fletcher 4166. 1982 Ed.)
The purpose of a by-law is to regulate the conduct and define
the duties of the members towards the corporation and
among themselves. They are self-imposed and, although
adopted pursuant to statutory authority, have no status as
public law. (Ibid.)
Therefore, it is the generally accepted rule that third persons
are not bound by by-laws, except when they have knowledge
of the provisions either actually or constructively. In the case
of Fleisher v. Botica Nolasco, 47 Phil. 584, the Supreme Court
held that the by-law restricting the transfer of shares cannot
have any effect on the the transferee of the shares in question
as he "had no knowledge of such by-law when the shares
were assigned to him. He obtained them in good faith and for
a valuable consideration. He was not a privy to the contract
created by the by-law between the shareholder x x x and the
Botica Nolasco, Inc. Said by-law cannot operate to defeat his
right as a purchaser." (Underscoring supplied.)
By analogy of the above-cited case, the Commission en
banc is of the opinion that said case is applicable to the
present controversy. Appellant-petitioner bank as a third party
can not be bound by appellee-respondent's by-laws. It must
be recalled that when appellee-respondent communicated to
appellant-petitioner bank that the pledge agreement was duly
noted in the club's books there was no mention of the
shareholder-pledgor's unpaid accounts. The transcript of
stenographic notes of the June 25, 1991 Hearing reveals that
the pledgor became delinquent only in 1975. Thus, appellantpetitioner was in good faith when the pledge agreement was
contracted.
The Commission en banc also believes that for the exception
to the general accepted rule that third persons are not bound
by by-laws to be applicable and binding upon the pledgee,
knowledge of the provisions of the VGCCI By-laws must be
acquired at the time the pledge agreement was contracted.
Knowledge of said provisions, either actual or constructive, at
the time of foreclosure will not affect pledgee's right over the
pledged share. Art. 2087 of the Civil Code provides that it is
also of the essence of these contracts that when the principal
obligation becomes due, the things in which the pledge or
mortgage consists maybe alienated for the payment to the
creditor.
In a letter dated March 10, 1976 addressed to Valley Golf
Club, Inc., the Commission issued an opinion to the effect
that:
According to the weight of authority, the pledgee's right is
entitled to full protection without surrender of the certificate,
their cancellation, and the issuance to him of new ones, and
when done, the pledgee will be fully protected against a
subsequent purchaser who would be charged with
constructive notice that the certificate is covered by the
pledge. (12-A Fletcher 502)
The pledgee is entitled to retain possession of the stock until
the pledgor pays or tenders to him the amount due on the
debt secured. In other words, the pledgee has the right to
resort to its collateral for the payment of the debts. (Ibid, 502)
To cancel the pledged certificate outright and the issuance of
new certificate to a third person who purchased the same

certificate covered by the pledge, will certainly defeat the

right of the pledgee to resort to its collateral for the payment
of the debt. The pledgor or his representative or registered
stockholders has no right to require a return of the pledged
stock until the debt for which it was given as security is paid
and satisfied, regardless of the length of time which have
elapsed since debt was created. (12-A Fletcher 409)
A bona fide pledgee takes free from any latent or secret
equities or liens in favor either of the corporation or of third
persons, if he has no notice thereof, but not otherwise. He
also takes it free of liens or claims that may subsequently
arise in favor of the corporation if it has notice of the pledge,
although no demand for a transfer of the stock to the pledgee
on the corporate books has been made. (12-A Fletcher 5634,
1982 ed., citing Snyder v. Eagle Fruit Co., 75 F2d739)[38]
Similarly, VGCCI's contention that petitioner is dutybound to know its by-laws because of Art. 2099 of the Civil
Code which stipulates that the creditor must take care of the
thing pledged with the diligence of a good father of a family,
fails to convince. The case of Cruz & Serrano v. Chua A. H .
Lee,[39] is clearly not applicable:
In applying this provision to the situation before us it must be
borne in mind that the ordinary pawn ticket is a document by
virtue of which the property in the thing pledged passes from
hand to hand by mere delivery of the ticket; and the contract
of the pledge is, therefore, absolvable to bearer. It results that
one who takes a pawn ticket in pledge acquires domination
over the pledge; and it is the holder who must renew the
pledge, if it is to be kept alive.
It is quite obvious from the aforequoted
membership share is quite different in character
ticket and to reiterate, petitioner was never
Calapatia' s unpaid accounts and the restrictive
VGCCI's by-laws.

case that a
from a pawn
informed of
provisions in

Finally, Sec. 63 of the Corporation Code which provides

that "no shares of stock against which the corporation holds
any unpaid claim shall be transferable in the books of the
corporation" cannot be utilized by VGCCI. The term "unpaid
claim" refers to "any unpaid claim arising from unpaid
subscription, and not to any indebtedness which a subscriber
or stockholder may owe the corporation arising from any
other transaction."[40] In the case at bar, the subscription for
the share in question has been fully paid as evidenced by the
issuance of Membership Certificate No. 1219. [41] What
Calapatia owed the corporation were merely the monthly
dues. Hence, the aforequoted provision does not apply.
WHEREFORE, premises considered, the assailed
decision of the Court of Appeals is REVERSED and the order
of the SEC en banc dated 4 June 1993 is hereby AFFIRMED.
SO ORDERED.

SECOND DIVISION
[G.R. No. 108905. October 23, 1997]
GRACE CHRISTIAN HIGH SCHOOL, petitioner, vs. THE
COURT OF APPEALS, GRACE VILLAGE
ASSOCIATION, INC., ALEJANDRO G. BELTRAN,
and ERNESTO L. GO, respondents.
DECISION
The question for decision in this case is the right of
petitioners representative to sit in the board of directors of
respondent Grace Village Association, Inc. as a permanent
member thereof. For fifteen years from 1975 until 1989

81
petitioners representative had been recognized as a
permanent director of the association. But on February 13,
1990, petitioner received notice from the associations
committee on election that the latter was reexamining
(actually, reconsidering) the right of petitioners representative
to continue as an unelected member of the board. As the
board denied petitioners 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 Court of Appeals, which in
turn upheld the decision of the HIGCs appeals board. Hence
this petition for review based on the following contentions:
1. The Petitioner herein has already acquired a vested right to
a permanent seat in the Board of Directors of Grace Village
Association;
2. The amended By-laws 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 Board of Directors
of the Association without the benefit of election is allowed
under the law.[1]
Briefly stated, the facts are as follows:
Petitioner Grace Christian High School is an educational
institution offering preparatory, kindergarten and secondary
courses at the Grace Village in Quezon City.Private respondent
Grace Village Association, Inc., on the other hand, is an
organization of lot and/or building owners, lessees and
residents at Grace Village, while private respondents
Alejandro G. Beltran and Ernesto L. Go were its president and
chairman of the committee on election, respectively, in 1990,
when this suit was brought.
As adopted in 1968, the by-laws of the association
provided in Article IV, as follows:
The annual meeting of the members of the Association shall
be held on the first Sunday of January in each calendar year at
the principal office of the Association at 2:00 P.M. where they
shall elect by plurality vote and by secret balloting, the Board
of Directors, composed of eleven (11) members to serve for
one (1) year until their successors are duly elected and have
qualified.[2]
It appears, that on December 20, 1975, a committee of
the board of directors prepared a draft of an amendment to
the by-laws, reading as follows:[3]

directors of the association. On February 13, 1990, the

associations committee on election in a letter informed James
Tan, principal of the school, that it was the sentiment that all
directors should be elected by members of the association
because to make a person or entity a permanent Director
would deprive the right of voters to vote for fifteen (15)
members of the Board, and it is undemocratic for a person or
entity to hold office in perpetuity.[4] For this reason, Tan was
told that 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 of election by following the
procedure in previous elections, claiming that the notice
issued for the 1990 elections ran counter to the practice in
previous years and was in violation of the by-laws (of 1975)
and unlawfully deprive[d] Grace Christian High School of its
vested right [to] a permanent seat in the board. [5]
As the association denied its request, the school brought
suit for mandamus in the Home Insurance and Guaranty
Corporation to compel the board of directors of the
association to recognize its right to a permanent seat in the
board. Petitioner based its claim on the following portion of
the proposed amendment which, it contended, had become
part of the by-laws of the association as Article VI, paragraph
2, thereof:
The Charter and Associate Members shall elect the Directors
of the Association. The candidates receiving the first fourteen
(14) highest number of votes shall be declared and
proclaimed elected until their successors are elected and
qualified. GRACE CHRISTIAN HIGH SCHOOL representative is a
permanent Director of the ASSOCIATION.
It appears that the opinion of the Securities and
Exchange Commission on the validity of this provision was
sought by the association and that in reply to the query, the
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).
Private respondent association cited the SEC opinion in
its answer. Additionally, the association contended that the
basis of the petition for mandamus was merely a proposed bylaws which has not yet been approved by competent authority
nor registered with the SEC or HIGC. It argued that the by-laws
which was registered with the SEC on January 16, 1969 should
be the prevailing by-laws of the association and not the
proposed amended by-laws.[6]

VI. ANNUAL MEETING

The Annual Meeting of the members of the Association shall
be held on the second Thursday of January of each
year. Each Charter or Associate Member of the Association is
entitled to vote. He shall be entitled to as many votes as he
has
acquired
thru
his
monthly
membership fees
only computed on a ratio of TEN (P10.00) PESOS for one vote.
The Charter and Associate Members shall elect the Directors
of the Association. The candidates receiving the first fourteen
(14) highest number of votes shall be declared and
proclaimed elected until their successors are elected and
qualified. GRACE CHRISTIAN HIGH SCHOOL representative is a
permanent Director of the ASSOCIATION.
This draft was never presented to the general
membership for approval. Nevertheless, from 1975, after it
was presumably submitted to the board, up to 1990,
petitioner was given a permanent seat in the board of

In reply, petitioner maintained that the amended by-laws

is valid and binding and that the association was estopped
from questioning the by-laws.[7]
A preliminary conference was held on March 29, 1990
but nothing substantial was agreed upon. The parties merely
agreed that the board of directors of the association should
meet on April 17, 1990 and April 24, 1990 for the purpose of
discussing the amendment of the by-laws and a possible
amicable settlement of the case.A meeting was held on April
17,
1990,
but
the
parties
failed
to
reach
an
agreement. Instead, the board adopted a resolution declaring
the 1975 provision null and void for lack of approval by
members of the association and the 1968 by-laws to be
effective.
On June 20, 1990, the hearing officer of the HIGC
rendered a decision dismissing petitioners action. The hearing
officer held that the amended by-laws, upon which petitioner

82
based its claim, [was] merely a proposed by-laws which,
although implemented in the past, had not yet been ratified
by the members of the association nor approved by
competent authority; that, on the contrary, in the meeting
held on April 17, 1990, the directors of the association
declared the proposed by-law dated December 20, 1975
prepared by the committee on by-laws . . . null and void and
the by-laws of December 17, 1968 as the prevailing by-laws
under which the association is to operate until such time that
the proposed amendments to the by-laws are approved and
ratified by a majority of the members of the association and
duly filed and approved by the pertinent government
agency. The hearing officer rejected petitioners contention
that it had acquired a vested right to a permanent seat in the
board of directors. He held that past practice in election of
directors could not give rise to a vested right and that
departure from such practice was justified because it deprived
members of association of their right to elect or to be voted in
office, not to say that allowing the automatic inclusion of a
member representative of petitioner as permanent director
[was] contrary to law and the registered by-laws of
respondent association.[8]
The appeals board of the HIGC affirmed the decision of
the hearing officer in its resolution dated September 13, 1990.
It cited the opinion of the SEC based on 92 of the Corporation
Code which reads:
92. Election and term of trustees. - Unless otherwise provided
in the articles of incorporation or the by-laws, the board of
trustees of non-stock corporations, which may be more than
fifteen (15) in number as may be fixed in their articles of
incorporation or by-laws, shall, as soon as organized, so
classify themselves that the term of office of one-third (1/3) of
the number shall expire every year; and subsequent elections
of trustees comprising one-third (1/3) of the board of trustees
shall be held annually and trustees so elected shall have a
term of three (3) years.Trustees thereafter elected to fill
vacancies occurring before the expiration of a particular term
shall hold office only for the unexpired period.
The HIGC appeals board denied claims that the school [was]
being deprived of its right to be a member of the Board of
Directors of respondent association, because the fact was that
it may nominate as many representatives to the Associations
Board as it may deem appropriate. It said that what is merely
being upheld is the act of the incumbent directors of the
Board of correcting a long standing practice which is not
anchored upon any legal basis.[9]
Petitioner appealed to the Court of Appeals but
petitioner again lost as the appellate court on February 9,
1993, affirmed the decision of the HIGC. The Court of Appeals
held that there was no valid amendment of the associations
by-laws because of failure to comply with the requirement of
its existing by-laws, prescribing the affirmative vote of the
majority of the members of the association at a regular or
special meeting called for the adoption of amendment to the
by-laws. Article XIX of the by-laws provides:[10]
The members of the Association by an affirmative vote of the
majority at any regular or special meeting called for the
purpose, may alter, amend, change or adopt any new by-laws.
This provision of the by-laws actually implements 22 of
the Corporation Law (Act No. 1459) which provides:
22. The owners of a majority of the subscribed capital stock,
or a majority of the members if there be no capital stock,
may, at a regular or special meeting duly called for the
purpose, amend or repeal any by-law or adopt new bylaws. The owners of two-thirds of the subscribed capital stock,
or two-thirds of the members if there be no capital stock, may
delegate to the board of directors the power to amend or
repeal any by-law or to adopt new by-laws: Provided,
however, That any power delegated to the board of directors
to amend or repeal any by-law or adopt new by-laws shall be

considered as revoked whenever a majority of the

stockholders or of the members of the corporation shall so
vote at a regular or special meeting. And provided, further,
That the Director of the Bureau of Commerce and Industry
shall not hereafter file an amendment to the by-laws of any
bank, banking institution or building and loan association,
unless accompanied by certificate of the Bank Commissioner
to the effect that such amendments are in accordance with
law.
The proposed amendment to the by-laws was never
approved by the majority of the members of the association
as required by these provisions of the law and by-laws. But
petitioner contends that the members of the committee which
prepared the proposed amendment were duly authorized to
do so and that because the members of the association
thereafter implemented the provision for fifteen years, the
proposed amendment for all intents and purposes should be
considered to have been ratified by them. Petitioner contends:
[11]

Considering, therefore, that the agents or committee were

duly authorized to draft the amended by-laws and the acts
done by the agents were in accordance with such authority,
the acts of the agents from the very beginning were lawful
and binding on the homeowners (the principals) per
se without need of any ratification or adoption. The more has
the amended by-laws become binding on the homeowners
when the homeowners followed and implemented the
provisions of the amended by-laws. This is not merely
tantamount to tacit ratification of the acts done by duly
authorized agents but express approval and confirmation of
what the agents did pursuant to the authority granted to
them.
Corollarily, petitioner claims that it has acquired a vested
right to a permanent seat in the board. Says petitioner:
The right of the petitioner to an automatic membership in the
board of the Association was granted by the members of the
Association themselves and this grant has been implemented
by members of the board themselves all through the
years. Outside the present membership of the board, not a
single member of the Association has registered any desire to
remove the right of herein petitioner to an automatic
membership in the board. If there is anybody who has the
right to take away such right of the petitioner, it would be the
individual members of the Association through a referendum
and not the present board some of the members of which are
motivated by personal interest.
Petitioner disputes the ruling that the provision in question,
giving petitioners representative a permanent seat in the
board of the association, is contrary to law. Petitioner claims
that that is not so because there is really no provision of law
prohibiting unelected members of boards of directors of
corporations. Referring to 92 of the present Corporation Code,
petitioner says:
It is clear that the above provision of the Corporation Code
only provides for the manner of election of the members of
the board of trustees of non-stock corporations which may be
more than fifteen in number and which manner of election is
even subject to what is provided in the articles of
incorporation or by-laws of the association thus showing that
the above provisions [are] not even mandatory.
Even a careful perusal of the above provision of the
Corporation Code would not show that it prohibits a non-stock
corporation or association from granting one of its members a
permanent seat in its board of directors or trustees. If there is
no such legal prohibition then it is allowable provided it is so
provided in the Articles of Incorporation or in the by-laws as in
the instant case.
....

83
If fact, the truth is that this is allowed and is being practiced
by some corporations duly organized and existing under the
laws of the Philippines.
One example is the Pius XII Catholic Center, Inc. Under the bylaws of this corporation, that whoever is the Archbishop of
Manila is considered a member of the board of trustees
without benefit of election. And not only that. He also
automatically sits as the Chairman of the Board of Trustees,
again without need of any election.
Another concrete example is the Cardinal Santos Memorial
Hospital, Inc. It is also provided in the by-laws of this
corporation that whoever is the Archbishop of Manila is
considered a member of the board of trustees year after year
without benefit of any election and he also sits automatically
as the Chairman of the Board of Trustees.
It is actually 28 and 29 of the Corporation Law not 92 of
the present law or 29 of the former one which require
members of the boards of directors of corporations to be
elected. These provisions read:
28. Unless otherwise provided in this Act, the corporate
powers of all corporations formed under this Act shall be
exercised, all business conducted and all property of such
corporations controlled and held by a board of not less than
five nor more than eleven directors to be elected from among
the holders of stock or, where there is no stock, from the
members of the corporation: Provided, however, That in
corporations, other than banks, in which the United States has
or may have a vested interest, pursuant to the powers
granted or delegated by the Trading with the Enemy Act, as
amended, and similar Acts of Congress of the United States
relating to the same subject, or by Executive Order No. 9095
of the President of the United States, as heretofore or
hereafter amended, or both, the directors need not be elected
from among the holders of the stock, or, where there is no
stock from the members of the corporation. (emphasis added)
29. At the meeting for the adoption of the original by-laws, or
at such subsequent meeting as may be then 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 anonstock corporation, and if no provision is
made in the by-laws 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 by-laws, 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 corporation 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 three weeks immediately preceding the election in at least
three public places, in the place where the principal office of
the corporation is established or located. (Emphasis added)
The present Corporation Code (B.P. Blg. 68), which took
effect on May 1, 1980,[12] similarly provides:
23. The Board of Directors or Trustees. - Unless otherwise
provided in this Code, the corporate powers of all corporations
formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled
and held by the board of directors or trustees to be
elected from among the holders of stocks, or where there is
no stock, from among the members of the corporation, who
shall hold office for one (1) year and until their successors are
elected and qualified. (Emphasis added)

These provisions of the former and present corporation

law leave no room for doubt as to their meaning: the board of
directors of corporations 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, i.e., 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. 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 for fifteen years it has not been questioned or
challenged but, on the contrary, appears to have been
implemented by the members of the association 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. For that matter the members of the
association may have formally adopted the provision in
question, but their action would be of no avail because no
provision of the by-laws can be adopted if it is contrary to law.
[13]

It is probable that, in allowing petitioners representative

to sit on the board, the members of the association were not
aware that this was contrary to law. It should be noted that
they did not actually implement the provision in question
except perhaps insofar as it increased the number of directors
from 11 to 15, but certainly not the allowance of petitioners
representative as an unelected member of the board of
directors. It is more accurate to say that the members merely
tolerated petitioners 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. Even less tenable is petitioners claim that its right is
coterminus with the existence of the association. [14]
Finally, petitioner questions the authority of the SEC to
render an opinion on the validity of the provision in
question. It contends that jurisdiction over this case is
exclusively vested in the HIGC.
But this case was not decided by the SEC but by the
HIGC. The HIGC merely cited as authority for its ruling the
opinion of the SEC chairman. The HIGC could have cited any
other authority for the view that under the law members of
the board of directors of a corporation must be elected and it
would be none the worse for doing so.
WHEREFORE, the decision of the Court of Appeals is
AFFIRMED.
SO ORDERED.

SECOND DIVISION
[G.R. No. 23241. March 14, 1925. ]
HENRY FLEISCHER, Plaintiff-Appellee, v. BOTICA
NOLASCO CO., INC., Defendant-Appellant.
SYLLABUS
1.
CORPORATIONS;
CORPORATE
STOCK;
RIGHT
OF
CORPORATIONS TO IMPOSE A LIMITATION ON TRANSFERS OF
STOCK. A stock corporation in adopting by-laws governing
the transfer of shares of stock should take into consideration
the specific provisions of the Corporation Law. The by-laws of
corporations should be made to harmonize with the provisions

84
of the Corporation Law. By-laws must not be inconsistent with
the provisions of the Corporation Law. By-laws of a corporation
are valid if they are reasonable and calculated to carry into
effect the objects of the corporations provided they are not
contradictory to the general policy of the laws of the land.
Under a statute authorizing by-laws for the transfer of stock of
a corporation, it can do more than prescribe a general mode
of transfer on the corporate books and cannot justify an
unreasonable restriction upon the right to sell. The shares of
stock of a corporation are personal property and the holder
thereof may transfer the same without unreasonable
restrictions.
2. ID.; TRANSFER OF SHARES OF STOCK. The power to
enact by-laws restraining the sale and transfer of stock must
be found in the governing statute or charter. Restrictions upon
the traffic in stock must have their source in legislative
enactments, as the corporation itself cannot create such
impediments. By-laws of a corporations are intended merely
for the protection of the corporation, and prescribe regulations
and not restrictions; they are always subject to the charter of
the corporation. The corporation, in the absence of such a
power, cannot ordinarily inquire into or pass upon the legality
of the transaction by which its stock passes from one person
to another, nor can it question the consideration upon which a
sale is based. A by-law of a corporation cannot take away or
abridge the substantial rights of stockholders. Courts will
carefully scrutinize any attempt in the on a part of a
corporation to impose restrictions or limitations upon the right
of stockholders to sell and assign their stock. Restrictions
cannot be imposed upon a stockholder by a by-law without
statutory or charter authority. The owner of a corporate stock
has the same uncontrollable right to sell or alienate, which
attaches to the ownership of any other species of property.
DECISION
This action was commenced in the Court of First Instance of
the Province of Oriental Negros on the 14th day of August,
1923, against the board of directors of the Botica Nolasco,
Inc., a corporation duly organized and existing under the laws
of the Philippine Islands. the plaintiff prayed that said board of
directors be ordered to register in the books of the corporation
five shares of its stock in the name of Henry Fleischer, the
plaintiff, and to pay him the sum of P500 for damages
sustained by him resulting from the refusal of said body to
register the share of stock in question. the defendant filed the
demurrer on the ground that the facts alleged in the
complaint did not constitute sufficient cause of action, and
that the action was not brought against the proper party,
which was the Botica Nolasco, Inc. the demurrer was
sustained, and the plaintiff was granted five days to amend
his complaint.
On November 15, 1923, the 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;
that the said shares were fully paid; and that the defendant
refused to register said shares in his name in the books of the
corporation in spite of repeated demands to that effect made
by him upon said corporation, which refusal caused him
damages amounting to P500. 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 Gonzales, and to indemnity
him in the sum of P500 as damages, and to pay the costs. The
defendant again filed a demurrer in the ground that the
amended complaint did not state facts sufficient to constitute
a cause of action, and that said amended complaint was
ambiguous, unintelligence, uncertain, which demurrer was
overruled by the court.
The defendant answered the amended complaint denying
generally and specifically each and every one of the material
allegations thereof, and, as a special defense, alleged that the
defendant, pursuant to article 12 of its by-laws, had
preferential right to buy from the plaintiff said shares at the
par value of P100 a share, plus P90 as dividends
corresponding to the year 1922, and that said offer was
refused by the plaintiff. The defendant prayed for a judgment
absolving it from all liability under the complaint and directing
the plaintiff to deliver to the defendant the five shares of
stock in question, and to pay damages in the sum of P500,
and the costs.
Upon the issued presented by the pleadings above stated, the
cause was brought in for trial, at the conclusion of which, and
on August 21, 1924, the Honorable N. Capistrano, judge, held
that, in his opinion, article 12 of the by-laws of the corporation

which gives it preferential right to buy its shares from retiring

stockholders, is in conflict with Act No. 1459 (Corporation
Law), especially with section 34 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 of 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.
The defendant appealed from said judgment, and now makes
several assignments of error, all of which, in substance, raise
the question 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).
There is no controversy as to the facts of the present case.
They are simple and may be stated as follows:
That Manuel Gonzalez was the original owner of the five
shares of stock in question, No. 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 provided in the back
thereof, together with other credits, in consideration of a large
sum of money owed by Gonzalez to Fleischer (Exhibit A, B, B1, B-2, B-3, B-4); that on March 13, 1923, Dr. Eduardo Miciano,
who was the secretary-treasurer of said corporation, offered to
buy from Henry Fleischer, on behalf of the corporation, said
shares of stock, at their par value of P100 a share, for P500;
that by virtue of article 12 of the by-laws of Botica Nolasco,
Inc., said corporation had the preferential right to buy from
Manuel Gonzalez said shares (Exhibit 2); that the plaintiff
refused to sell them to the defendant; that the plaintiff
requested Doctor Miciano to register said shares in his name;
that Doctor Miciano refused to do so, saying that it would be
in contravention of the by-laws of the corporation.
It also appears from the record that on the 13th day of March,
1923, two days after the assignment of th shares to the
plaintiff, Manuel Gonzalez made a written statement to the
Botica Nolasco, Inc., requesting that the five shares of stock
sold by him to Henry Fleischer be not transferred to
Fleischers name. He also acknowledged in said written
statement the preferential right of the corporation to buy said
five shares (Exhibit 3). On June 14, 1923, Gonzalez wrote a
letter to the Botica Nolasco, withdrawing and cancelling his
written statement On March 14, 1923 (Exhibit C), to which
letter the Botica Nolasco , in June 15, 1923, replied, declaring
that his written statement was in conformity with the by-laws
of the corporation that his letter of June 14th was of no effect,
and that the shares in question had been registered in the
name of the Botica Nolasco, Inc., (Exhibit X).
As indicated above, the important question raised in this
appeal is whether or not article of the by-laws of the Botica
Nolasco, Inc., is in conflict with the provisions of the
Corporation Law (Act No. 1459). Appellant invoked said article
as its ground for denying the request of th plaintiff that the
shares in question be registered in his(plaintiffs) name, and
for claiming that it (Botica Nolasco, Inc.) had the preferential
right to buy said shares from Gonzalez. Appellant now
contends that article 12 of the said by-laws is in conformity
with the provisions of Act No. 1459. Said article is as follows:
"ART. 12. Las acciones de la Corporacion peden ser
transferidas a otra person, pero para que estas transferencias
tengan validez legal, deben constar en los registros de la
Corporacion con el debido endoso del accionista a cuyo
nombre se ha expedido la accion o acciones que se tranfieran,
o un documento de transferencia. Entendiendose que, ningun
accionista transferira accion alguna a otra rero. En igualdad
de condiciones, la sociedad tendra el derecho de adquirir par
si la accion o acciones que se traten de transferir." (Exhibit
2.)
The above-quoted article constitutes a by-law or regulation
adopted by the Botica Nolasco, Inc., governing the transfer of
shares of stock of said corporation. The latter part of said
article creates in favor of the Botica Nolasco, a preferential
right to buy, under the same conditions, the share or shares of
stock of a retiring shareholder. Has said corporation any
power, under the Corporation Law (Act No. 1459), to adopt
such by-laws?
The particular provisions of the Corporation Law referring to
transfer of shares of stock are as follows:

85
"Sec 13. Every corporation has the power:
x

"(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, of its corporate
affairs, etc.
x

"Sec 35. The capital stock corporations shall be divided into

shares for which certificate signed by the president or the
vice-president, countersigned by the secretary or clerk and
sealed of the corporation, shall be issued in accordance with
the by-laws. Share of stock so issued are personal property
and may be transferred by delivery of the certificate indorsed
by the owner or his attorney in fact or other person legally
authorized to make transfer. No transfer, however, shall be
valid, except as between the parties, until the transfer is
entered and noted upon the books of the corporation so as to
show the names of the parties to the transaction, the date of
the transfer, the number of the certificate, and the number of
shares transferred.
"No share of stock against which the corporation holds any
unpaid claim shall be transferable on the books of the
corporation.
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 in the
subject of transfer of stock. The law on this subject is found in
section 35 of Act No. 1459 above quoted. Said section 35
specifically provides that the shares of stock "are personal
property and may be transferred by delivery of the certificate
indorsed by the owner, etc. Said section 35 defines the
nature, character and transferability of shares 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. The holder
of shares, as owner of personal property, is at liberty, under
said section, to dispose of them in favor of whomsoever he
pleases, without any other limitation in this respect, than the
general provisions of law. Therefore, a stock corporation in
adopting a by-law governing transfer of shares of stock should
take into consideration the specific provisions of section 35 of
Act No. 1459, and said by-law should be made to harmonize
with said provisions. It should not be inconsistent therewith.
The by-law now in question was adopted under the power
conferred upon the corporation by section 13, paragraph 7,
above quoted; but in adopting said by-law the corporation has
transcended the limits fixed by law in the same section, and
has not taken into consideration the provisions of section 35
of
Act
No.
1459.
As general rule, the ly-laws of a corporation are valid if they
are reasonable and calculated to carry into effect the objects
of the corporation, and are not contradictory to the general
policy of the laws of the land. (Supreme Commandery of the
Knights of the Golden Rule v. Ainswoth, 71 Ala., 436; 46 Am.
Rep., 332.)
On the other hand, it is equally well settled that by-laws of a
corporation must be reasonable and for a corporate purpose,
and always within the charter limits. They must always be
strictly subordinate to the constitution and the general laws of
the land. They must infringe the policy of the state, nor be
hostile to public welfare. (46 Am. Rep., 332.) They must not
disturb vested rights or impair the obligation of a contract,
take away or abridge the substantial rights of stockholder or
member, affect rights of property or create obligations
unknown to the law. (Peoples Home Savings Bank v. Superior
Court, 104 Cal., Co., 649; 43 Am. St. Rep., 147; Ireland v.
Globe Milling Co., 79 Am. St. Rep., 769.)
The validity of the by-law of a corporation is purely a question
of law. (South Florida Railroad Co. v. Rhodes, 25 Fla., 40.)
"The power to enact by-laws restraining the sale and transfer
of stock must be found in the governing statute or the charter.
Restrictions upon the traffic in stock must have their source in
legislative enactment, as the corporation itself cannot create
such impediments. By-laws are intended merely for the
protection of the corporation, and prescribed regulation and
not restriction; they are always subject to the charter of the

corporation. The corporation, in the absence of such a power,

cannot ordinarily inquire into or pass upon the legality of the
transaction by which its stock passes from one person to
another, nor can it question the consideration upon which a
sale is based. A by-law cannot take away or abridge the
substantial rights of stockholder. Under a statute authorizing
by-laws for the transfer of stock, a corporation can do no more
than prescribe a general mode of transfer on the corporate
books and cannot justify an unreasonable restriction upon the
right of sale." (4 Thompson on Corporations, Sec. 4137, p.
674.)
"The right of unrestrained transfer of shares inheres in the
very nature of a corporation, and courts will carefully
scrutinize any attempt to impose restrictions or limitations
upon the right of stockholders to sell and assign their stock.
The right to impose any restraint in this respect must be
conferred upon the corporation either by the governing
statute or by the articles of the corporation. It cannot be done
by a by-law without statutory or charter authority." (4
Thompson on Corporations, sec. 4334, pp. 818, 819.)
"The jus disponendi, being an incident of the ownership of
property, the general rule (subject to exceptions hereafter
pointed out and discussed) is that every owner of corporate
shares has the same uncontrollable right to alien them which
attaches to the ownership of any other species of property. A
shareholder is under no obligation to refrain from selling his
shares at the sacrifice of his personal interest, in order to
secure the welfare of the corporation, or to enable another
shareholder to make gains and profits." (10 Cyc., p. 577.)
"It follows from the foregoing that a corporation has no power
to prevent or to restrain transfers of its shares, unless such
power is expressly conferred in its charter or governing
statute. This conclusion follows from the further consideration
that by-laws or other regulations restraining such transfers,
unless derived from authority expressly granted by the
legislature, would be regarded as impositions in restraint of
trade." (10 Cyc., p. 578.)
The foregoing authorities go farther than the stand we are
taking on this question. They hold the power of a corporation
to enact by-laws restraining the sale and transfer of shares,
should not only be in harmony with the law or charter of the
corporation, but such power should be expressly granted in
said law or charter.
The only restraint imposed by the Corporation Law upon
transfer of shares is found in section 35 of Act No. 1459,
quoted above, as follows: "No transfer, however, shall be
valid, except as between the parties, until the transfer is
entered and noted upon the books of the corporation, the to
show the names of the parties to the transaction, the date of
transfer, the number of the certificate, and the number of
shares transferred." This restriction is necessary in order that
the officers of the corporation may know who are the
stockholders, which is essential in conducting elections of
officers, in calling meetings of stockholders, and for other
purposes. But any restriction of the nature of that imposed in
the by-law now in question, is ultra vires, violative of the
property rights of shareholders, and in restraint of trade.
And moreover, the by-law now in question cannot have any
effect on the appellee. He had no knowledge of such by-law
when the shares were assigned to him. He obtained them in
good faith and for a valuable consideration. He was not a
privy to the contract created by said by-law between the
shareholder Manuel Gonzalez and the Botica Nolasco, Inc.
Said by-law cannot operate to defeat his rights as a
purchaser.
"An unauthorized by-law forbidding a shareholder to sell his
shares without first offering them to the corporation for a
period of thirty days is not binding upon an assignee of the
stock as a personal contract, although his assignor knew of
the by-law and took part in its adoption." (10 Cyc., 579;
Ireland v. Globe Milling Co., 21 R. I., 9.)
"When no restriction is placed by public law on the transfer of
corporate stock, a purchaser is not affected by any
contractual restriction of which he had no notice."
(Brinkerhoff-Farris Trust & Savings Co. v. Home Lumber Co.,
118 Mo., 447.)
"The assignment of shares of stock in a corporation by one
who has assented to an unauthorized by-law has only the
effect of a contract by, and enforceable against, that assignor;
the assignee is not bound by such by-law by virtue of the
assignment alone." (Ireland v. Globe Milling Co., 21 R.I., 9.)

86
"A by-law of a corporation which provides that transfers of
stock shall not be valid unless approved by the board of
directors, while it may be enforced as a reasonable regulation
for the protection of the corporation against worthless
stockholders, cannot be made available to defeat the rights of
third persons." (Farmers & Merchants Bank of Lineville v.
Wasson, 48 Iowa, 336.)
Counsel for defendant incidentally argues in his brief, that the
plaintiff does not have any right of action against the
defendant corporation, but against the president and
secretary thereof, inasmuch as the signing and registration of
shares is incumbent upon said officers pursuant to section 35
of the Corporation Law. This contention cannot be sustained
now. The question should have been raised in the lower court.
It is too late to raise it now in this appeal. Besides, as stated
above, the corporation was made defendant in this action
upon the demurrer of the attorney of the original defendant in
the lower court, who contended that the Botica Nolasco, Inc.,
should be made the party defendant in this action.
Accordingly, upon order of the court, the complaint was
amended and the said corporation was made the party
defendant .
Whenever the corporation refuses to transfer and register
stock in case like the present, mandamus will lie to compel
the officers of the corporation to transfer said stock upon the
books of the corporation. (26 Cyc., 347; Hager v. Bryan, 19
Phil., 138.)
In view of all the foregoing, we are of the opinion, and so hold,
that the decision of the lower court is in accordance with law
and should be and is hereby affirmed, with costs. So ordered.

SECOND DIVISION
[G.R. No. 121466. August 15, 1997]
PMI COLLEGES, petitioner, vs. THE NATIONAL LABOR
RELATIONS COMMISSION and ALEJANDRO
GALVAN, respondents.
DECISION
Subject of the instant petition for certiorari under Rule
65 of the Rules of Court is the resolution [1] of public
respondent National Labor Relations Commission [2] rendered
on August 4, 1995, affirming in toto the December 7, 1994
decision[3] of Labor Arbiter Pablo C. Espiritu declaring
petitioner PMI Colleges liable to pay private respondent
Alejandro
Galvan P405,000.00
in
unpaid
wages
and P40,532.00 as attorneys fees.
A chronicle of the pertinent events on record leading to
the filing of the instant petition is as follows:
On July 7, 1991, petitioner, an educational institution
offering courses on basic seamans training and other marinerelated courses, hired private respondent as contractual
instructor with an agreement that the latter shall be paid at
an hourly rate of P30.00 to P50.00, depending on the
description of load subjects and on the schedule for teaching
the same. Pursuant to this engagement, private respondent
then organized classes in marine engineering.
Initially, private respondent and other instructors were
compensated for services rendered during the first three
periods of the abovementioned contract. However, for reasons
unknown to private respondent, he stopped receiving
payment for the succeeding rendition of services. This claim
of non-payment was embodied in a letter dated March 3,
1992, written by petitioners Acting Director, Casimiro A.
Aguinaldo, addressed to its President, Atty. Santiago Pastor,
calling attention to and appealing for the early approval and
release of the salaries of its instructors including that of
private respondent. It appeared further in said letter that the
salary of private respondent corresponding to the shipyard
and plant visits and the ongoing on-the-job training of Class
41 on board MV Sweet Glory of Sweet Lines, Inc. was not yet

included. This request of the Acting Director apparently went

unheeded. Repeated demands having likewise failed, private
respondent was soon constrained to file a complaint [4] before
the National Capital Region Arbitration Branch on September
14, 1993 seeking payment for salaries earned from the
following: (1) basic seaman course Classes 41 and 42 for the
period covering October 1991 to September 1992; (2)
shipyard and plant visits and on-the-job training of Classes 41
and 42 for the period covering October 1991 to September
1992 on board M/V Sweet Glory vessel; and (3) as Acting
Director of Seaman Training Course for 3-1/2 months.
In support of the abovementioned claims, private
respondent submitted documentary evidence which were
annexed to his complaint, such as the detailed load and
schedule of classes with number of class hours and rate per
hour (Annex A); PMI Colleges Basic Seaman Training Course
(Annex B); the aforementioned letter-request for payment of
salaries by the Acting Director of PMI Colleges (Annex C);
unpaid load of private respondent (Annex D); and vouchers
prepared by the accounting department of petitioner but
whose amounts indicated therein were actually never paid to
private respondent (Exhibit E).
Private respondents claims, as expected, were resisted
by petitioner. It alleged that classes in the courses offered
which complainant claimed to have remained unpaid were not
held or conducted in the school premises of PMI
Colleges. Only private respondent, it was argued, knew
whether classes were indeed conducted. In the same vein,
petitioner maintained that it exercised no appropriate and
proper supervision of the said classes which activities
allegedly violated certain rules and regulations of the
Department
of
Education,
Culture
and
Sports
(DECS). Furthermore, the claims, according to petitioner, were
all exaggerated and that, at any rate, private respondent
abandoned his work at the time he should have commenced
the same.
In reply, private respondent belied petitioners allegations
contending, among others, that he conducted lectures within
the premises of petitioners rented space located at 5th Floor,
Manufacturers Bldg., Sta. Cruz, Manila; that his students duly
enrolled with the Registrars Office of petitioner; that shipyard
and plant visits were conducted at Fort San Felipe, Cavite
Naval Base; that petitioner was fully aware of said shipyard
and plant visits because it even wrote a letter for that
purpose; and that basic seaman courses 41 and 42 were
sanctioned by the DECS as shown by the records of the
Registrars Office.
Later in the proceedings below, petitioner manifested
that Mr. Tomas G. Cloma, Jr., a member of the petitioners
Board of Trustees wrote a letter[5] to the Chairman of the
Board on May 23, 1994, clarifying the case of private
respondent and stating therein, inter alia, that under
petitioners by-laws only the Chairman is authorized to sign
any contract and that private respondent, in any event, failed
to submit documents on the alleged shipyard and plant visits
in Cavite Naval Base.
Attempts at amicable settlement having failed, the
parties were required to submit their respective position
papers. Thereafter, on June 16, 1994, the Labor Arbiter issued
an order declaring the case submitted for decision on the
basis of the position papers which the parties filed. Petitioner,
however, vigorously opposed this order insisting that there
should be a formal trial on the merits in view of the important
factual issues raised. In another order dated July 22, 1994, the
Labor Arbiter impliedly denied petitioners opposition,
reiterating that the case was already submitted for
decision. Hence, a decision was subsequently rendered by the
Labor Arbiter on December 7, 1994 finding for the private
respondent. On appeal, the NLRC affirmed the same in toto in
its decision of August 4, 1995.

87
Aggrieved, petitioner now pleads for the Court to resolve
the following issues in its favor, to wit:
I. Whether the money claims of private
representing salaries/wages as
instructor for class instruction,
training and shipboard and plant
valid legal and factual bases;

respondent
contractual
on-the-job
visits have

II. Whether claims for salaries/wages for services

relative to on-the-job training and shipboard
and plant visits by instructors, assuming the
same were really conducted, have valid
bases;
III. Whether the petitioner was denied its right to
procedural due process; and
IV. Whether the NLRC findings in its questioned
resolution have sound legal and factual
support.
We see no compelling reason to grant petitioners plea;
the same must, therefore, be dismissed.
At once, a mere perusal of the issues raised by petitioner
already invites dismissal for demonstrated ignorance and
disregard of settled rules on certiorari. Except perhaps for the
third issue, the rest glaringly call for a re-examination,
evaluation and appreciation of the weight and sufficiency of
factual evidence presented before the Labor Arbiter. This, of
course, the Court cannot do in the exercise of
its certiorari jurisdiction without transgressing the well-defined
limits thereof. The corrective power of the Court in this regard
is confined only to jurisdictional issues and a determination of
whether there is such grave abuse of discretion amounting to
lack or excess of jurisdiction on the part of a tribunal or
agency. So unyielding and consistent are the decisional rules
thereon that it is indeed surprising why petitioners counsel
failed to accord them the observance they deserve.
Thus, in San Miguel Foods, Inc. Cebu B-Meg Feed
Plant v. Hon. Bienvenido Laguesma,[6] we were emphatic in
declaring that:
This Court is definitely not the proper venue to consider this
matter for it is not a trier of facts. x x x Certiorari is a remedy
narrow in its scope and inflexible in character. It is not a
general utility tool in the legal workshop. Factual issues are
not a proper subject for certiorari, as the power of the
Supreme Court to review labor cases is limited to the issue of
jurisdiction and grave abuse of discretion. x x x (Emphasis
supplied).
Of the same tenor was our disquisition in Ilocos Sur
Electric Cooperative, Inc. v. NLRC[7] where we made plain that:
In certiorari proceedings under Rule 65 of the Rules of Court,
judicial review by this Court does not go so far as to evaluate
the sufficiency of evidence upon which the Labor Arbiter and
the NLRC based their determinations, the inquiry being limited
essentially to whether or not said public respondents had
acted without or in excess of its jurisdiction or with grave
abuse of discretion. (Emphasis supplied).
To be sure, this does not mean that the Court would
disregard altogether the evidence presented. We merely
declare that the extent of review of evidence we ordinarily
provide in other cases is different when it is a special civil
action of certiorari. The latter commands us to merely
determine whether there is basis established on record to
support the findings of a tribunal and such findings meet the
required quantum of proof, which in this instance, is
substantial evidence. Our deference to the expertise acquired
by quasi-judicial agencies and the limited scope granted to us

in the exercise of certiorari jurisdiction restrain us from going

so far as to probe into the correctness of a tribunals
evaluation of evidence, unless there is palpable mistake and
complete disregard thereof in which case certiorari would be
proper. In plain terms, in certiorari proceedings, we are
concerned with mere errors of jurisdiction and not errors of
judgment. Thus:
The rule is settled that the original and exclusive jurisdiction
of this Court to review a decision of respondent NLRC (or
Executive Labor Arbiter as in this case) in a petition for
certiorari under Rule 65 does not normally include an inquiry
into the correctness of its evaluation of the evidence. Errors of
judgment, as distinguished from errors of jurisdiction, are not
within the province of a special civil action for certiorari, which
is merely confined to issues of jurisdiction or grave abuse of
discretion. It is thus incumbent upon petitioner to
satisfactorily establish that respondent Commission or
executive labor arbiter acted capriciously and whimsically in
total disregard of evidence material to or even decisive of the
controversy, in order that the extraordinary writ of certiorari
will lie. By grave abuse of discretion is meant such capricious
and whimsical exercise of judgment as is equivalent to lack of
jurisdiction, and it must be shown that the discretion was
exercised arbitrarily or despotically. For certiorari to lie there
must be capricious, arbitrary and whimsical exercise of power,
the very antithesis of the judicial prerogative in accordance
with centuries of both civil law and common law traditions.[8]
The Court entertains no doubt that the foregoing
doctrines apply with equal force in the case at bar.
In any event, granting that we may have to delve into
the facts and evidence of the parties, we still find no puissant
justification for us to adjudge both the Labor Arbiters and
NLRCs appreciation of such evidence as indicative of any
grave abuse of discretion.
First. Petitioner places so much emphasis on its
argument that private respondent did not produce a copy of
the contract pursuant to which he rendered services. This
argument is, of course, puerile. The absence of such copy
does not in any manner negate the existence of a contract of
employment since (C)ontracts shall be obligatory, in whatever
form they have been entered into, provided all the essential
requisites for their validity are present.[9] The only exception
to this rule is when the law requires that a contract be in some
form in order that it may be valid or enforceable, or that a
contract be proved in a certain way. However, there is no
requirement under the law that the contract of employment of
the kind entered into by petitioner with private respondent
should be in any particular form. While it may have been
desirable for private respondent to have produced a copy of
his contract if one really exists, but the absence thereof, in
any case, does not militate against his claims inasmuch as:
No particular form of evidence is required to prove the
existence
of
an
employer-employee
relationship. Any
competent and relevant evidence to prove the relationship
may be admitted.For, if only documentary evidence would be
required to show that relationship, no scheming employer
would ever be brought before the bar of justice, as no
employer would wish to come out with any trace of the
illegality he has authored considering that it should take much
weightier proof to invalidate a written instrument. x x x [10]
At any rate, the vouchers prepared by petitioners own
accounting department and the letter-request of its Acting
Director asking for payment of private respondents services
suffice to support a reasonable conclusion that private
respondent was employed with petitioner. How else could one
explain the fact that private respondent was supposed to be
paid the amounts mentioned in those documents if he were
not employed? Petitioners evidence is wanting in this respect
while private respondent affirmatively stated that the same
arose out of his employment with petitioner. As between the
two, the latter is weightier inasmuch as we accord affirmative

88
testimony greater value than a negative one. For the
foregoing reasons, we find it difficult to agree with petitioners
assertion that the absence of a copy of the alleged contract
should nullify private respondents claims.
Neither can we concede that such contract would be
invalid just because the signatory thereon was not the
Chairman of the Board which allegedly violated petitioners bylaws. Since by-laws operate merely as internal rules among
the stockholders, they cannot affect or prejudice third
persons who deal with the corporation, unless they have
knowledge of the same.[11] No proof appears on record that
private respondent ever knew anything about the provisions
of said by-laws. In fact, petitioner itself merely asserts the
same without even bothering to attach a copy or excerpt
thereof to show that there is such a provision. How can it now
expect the Labor Arbiter and the NLRC to believe it? That this
allegation has never been denied by private respondent does
not necessarily signify admission of its existence because
technicalities of law and procedure and the rules obtaining in
the courts of law do not strictly apply to proceedings of this
nature.
Second. Petitioner bewails the fact that both the Labor
Arbiter and the NLRC accorded due weight to the documents
prepared by private respondent since they are said to be selfserving. Self-serving evidence is not to be literally taken as
evidence that serves ones selfish interest. [12] The fact alone
that most of the documents submitted in evidence by private
respondent were prepared by him does not make them selfserving since they have been offered in the proceedings
before the Labor Arbiter and that ample opportunity was
given
to
petitioner
to
rebut
their
veracity
and
authenticity. Petitioner, however, opted to merely deny them
which denial, ironically, is actually what is considered selfserving
evidence[13] and,
therefore,
deserves
scant
consideration. In any event, any denial made by petitioner
cannot stand against the affirmative and fairly detailed
manner by which private respondent supported his claims,
such as the places where he conducted his classes, on-the-job
training and shipyard and plant visits; the rate he applied and
the duration of said rendition of services; the fact that he was
indeed engaged as a contractual instructor by petitioner; and
that part of his services was not yet remunerated. These
evidence, to reiterate, have never been effectively refuted by
petitioner.
Third. As regards the amounts demanded by private
respondent, we can only rely upon the evidence presented
which, in this case, consists of the computation of private
respondent as well as the findings of both the Labor Arbiter
and the NLRC. Petitioner, it must be stressed, presented no
satisfactory proof to the contrary. Absent such proof, we are
constrained to rely upon private respondents otherwise
straightforward explanation of his claims.
Fourth. The absence of a formal hearing or trial before
the Labor Arbiter is no cause for petitioner to impute grave
abuse of discretion. Whether to conduct one or not depends
on the sole discretion of the Labor Arbiter, taking into account
the position papers and supporting documents submitted by
the parties on every issue presented. If the Labor Arbiter, in
his judgment, is confident that he can rely on the documents
before him, he cannot be faulted for not conducting a formal
trial anymore, unless it would appear that, in view of the
particular circumstances of a case, the documents, without
more, are really insufficient.
As applied to the instant case, we can understand why
the Labor Arbiter has opted not to proceed to trial,
considering that private respondent, through annexes to his
position paper, has adequately established that, first of all, he
was an employee of petitioner; second, the nature and
character of his services, and finally, the amounts due him in
consideration of his services. Petitioner, it should be
reiterated, failed to controvert them. Actually, it offered only
four documents later in the course of the proceedings. It has

only itself to blame if it did not attach its supporting evidence

with its position paper. It cannot now insist that there be a
trial to give it an opportunity to ventilate what it should have
done earlier. Section 3, Rule V of the New Rules of Procedure
of the NLRC is very clear on the matter:
Section 3. x x x
These verified position papers x x x shall be accompanied
by all supporting documents including the affidavits of their
respective witnesses which shall take the place of the latters
direct testimony. The parties shall thereafter not be allowed to
allege facts, or present evidence to prove facts, not referred
to and any cause or causes of action not included in the
complaint or position papers, affidavits and other documents.
x x x (Emphasis supplied).
Thus, given the mandate of said rule, petitioner should
have foreseen that the Labor Arbiter, in view of the nonlitigious nature of the proceedings before it, might not
proceed at all to trial. Petitioner cannot now be heard to
complain of lack of due process. The following is apropos:
The petitioners should not have assumed that after they
submitted their position papers, the Labor Arbiter would call
for a formal trial or hearing. The holding of a trial is
discretionary on the Labor Arbiter, it is not a matter of right of
the parties, especially in this case, where the private
respondents had already presented their documentary
evidence.
xxx
The petitioners did ask in their position paper for a hearing to
thresh out some factual matters pertinent to their
case. However, they had no right or reason to assume that
their request would be granted. The petitioners should have
attached to their position paper all the documents that would
prove their claim in case it was decided that no hearing
should be conducted or was necessary. In fact, the rules
require that position papers shall be accompanied by all
supporting documents, including affidavits of witnesses in lieu
of their direct testimony.[14]
It must be noted that adequate opportunity was given to
petitioner in the presentation of its evidence, such as when
the Labor Arbiter granted petitioners Manifestation and
Motion[15] dated July 22, 1994 allowing it to submit four more
documents. This opportunity notwithstanding, petitioner still
failed to fully proffer all its evidence which might help the
Labor Arbiter in resolving the issues. What it desired instead,
as stated in its petition,[16] was to require presentation of
witnesses buttressed by relevant documents in support
thereof. But this is precisely the opportunity given to
petitioner when the Labor Arbiter granted its Motion and
Manifestation. It should have presented the documents it was
proposing to submit. The affidavits of its witnesses would
have sufficed in lieu of their direct testimony [17] to clarify what
it perceives to be complex factual issues. We rule that the
Labor Arbiter and the NLRC were not remiss in their duty to
afford petitioner due process. The essence of due process is
merely that a party be afforded a reasonable opportunity to
be heard and to submit any evidence he may have in support
of his defense.[18]
WHEREFORE, in view of the foregoing, the instant
petition is hereby DISMISSED for lack of merit while the
resolution of the National Labor Relations Commission dated
August 4, 1995 is hereby AFFIRMED.
SO ORDERED.

EN BANC

89
[G.R. No. 141735. June 8, 2005]
SAPPARI K. SAWADJAAN, petitioner, vs. THE
HONORABLE COURT OF APPEALS, THE CIVIL
SERVICE COMMISSION and AL-AMANAH
INVESTMENT BANK OF THE
PHILIPPINES, respondents.

submit himself to the jurisdiction of the Committee because of

its alleged partiality. For his failure to appear before the
hearing set on 17 September 1993, after the hearing of 13
September 1993 was postponed due to the Manifestation of
even date filed by petitioner, the Investigating Committee
declared petitioner in default and the prosecution was allowed
to present its evidence ex parte.

DECISION

On 08 December 1993, the Investigating Committee rendered

a decision, the pertinent portions of which reads as follows:

This is a petition for certiorari under Rule 65 of the Rules

of Court of the Decision [1] of the Court of Appeals of 30 March
1999 affirming Resolutions No. 94-4483 and No. 95-2754 of
the Civil Service Commission (CSC) dated 11 August 1994 and
11 April 1995, respectively, which in turn affirmed Resolution
No. 2309 of the Board of Directors of the Al-Amanah Islamic
Investment Bank of the Philippines (AIIBP) dated 13 December
1993, finding petitioner guilty of Dishonesty in the
Performance of Official Duties and/or Conduct Prejudicial to
the Best Interest of the Service and dismissing him from the
service, and its Resolution[2] of 15 December 1999 dismissing
petitioners Motion for Reconsideration.

In view of respondent SAWADJAANS abject failure to perform

his duties and assigned tasks as appraiser/inspector, which
resulted to the prejudice and substantial damage to the Bank,
respondent should be held liable therefore. At this juncture,
however, the Investigating Committee is of the considered
opinion that he could not be held liable for the administrative
offense of dishonesty considering the fact that no evidence
was adduced to show that he profited or benefited from being
remiss in the performance of his duties. The record is bereft of
any evidence which would show that he received any amount
in consideration for his non-performance of his official duties.

The records show that petitioner Sappari K. Sawadjaan

was among the first employees of the Philippine Amanah Bank
(PAB) when it was created by virtue of Presidential Decree No.
264 on 02 August 1973. He rose through the ranks, working
his way up from his initial designation as security guard, to
settling clerk, bookkeeper, credit investigator, project analyst,
appraiser/ inspector, and eventually, loans analyst.[3]
In
February
1988,
while
still
designated
as
appraiser/investigator, Sawadjaan was assigned to inspect the
properties offered as collaterals by Compressed Air
Machineries and Equipment Corporation (CAMEC) for a credit
line of Five Million Pesos (P5,000,000.00). The properties
consisted of two parcels of land covered by Transfer
Certificates of Title (TCTs) No. N-130671 and No. C-52576. On
the basis of his Inspection and Appraisal Report, [4] the PAB
granted the loan application. When the loan matured on 17
May 1989, CAMEC requested an extension of 180 days, but
was granted only 120 days to repay the loan.[5]
In the meantime, Sawadjaan was promoted to Loans
Analyst I on 01 July 1989.[6]
In January 1990, Congress passed Republic Act 6848
creating the AIIBP and repealing P.D. No. 264 (which created
the PAB). All assets, liabilities and capital accounts of the PAB
were transferred to the AIIBP, [7] and the existing personnel of
the PAB were to continue to discharge their functions unless
discharged.[8] In the ensuing reorganization, Sawadjaan was
among the personnel retained by the AIIBP.
When CAMEC failed to pay despite the given extension,
the bank, now referred to as the AIIBP, discovered that TCT
No. N-130671 was spurious, the property described therein
non-existent, and that the property covered by TCT No. C52576 had a prior existing mortgage in favor of one Divina
Pablico.
On 08 June 1993, the Board of Directors of the AIIBP
created an Investigating Committee to look into the CAMEC
transaction, which had cost the bank Six Million Pesos
(P6,000,000.00) in losses.[9] The subsequent events, as found
and decided upon by the Court of Appeals,[10] are as follows:
On 18 June 1993, petitioner received a memorandum from
Islamic Bank [AIIBP] Chairman Roberto F. De Ocampo charging
him with Dishonesty in the Performance of Official Duties
and/or Conduct Prejudicial to the Best Interest of the Service
and preventively suspending him.
In his memorandum dated 8 September 1993, petitioner
informed the Investigating Committee that he could not

This notwithstanding, respondent cannot escape liability. As

adverted to earlier, his failure to perform his official duties
resulted to the prejudice and substantial damage to the
Islamic Bank for which he should be held liable for the
administrative offense of CONDUCT PREJUDICIAL TO THE BEST
INTEREST OF THE SERVICE.
Premises
considered,
the
Investigating
Committee
recommends that respondent SAPPARI SAWADJAAN be meted
the penalty of SIX (6) MONTHS and ONE (1) DAY SUSPENSION
from office in accordance with the Civil Service Commissions
Memorandum Circular No. 30, Series of 1989.
On 13 December 1993, the Board of Directors of the Islamic
Bank [AIIBP] adopted Resolution No. 2309 finding petitioner
guilty of Dishonesty in the Performance of Official Duties
and/or Conduct Prejudicial to the Best Interest of the Service
and imposing the penalty of Dismissal from the Service.
On reconsideration, the Board of Directors of the Islamic Bank
[AIIBP] adopted the Resolution No. 2332 on 20 February 1994
reducing the penalty imposed on petitioner from dismissal to
suspension for a period of six (6) months and one (1) day.
On 29 March 1994, petitioner filed a notice of appeal to the
Merit System Protection Board (MSPB).
On 11 August 1994, the CSC adopted Resolution No. 94-4483
dismissing the appeal for lack of merit and affirming
Resolution No. 2309 dated 13 December 1993 of the Board of
Directors of Islamic Bank.
On 11 April 1995, the CSC adopted Resolution No. 95-2574
denying petitioners Motion for Reconsideration.
On 16 June 1995, the instant petition was filed with the
Honorable Supreme Court on the following assignment of
errors:
I. Public respondent Al-Amanah Islamic Investment
Bank of the Philippines has committed a grave abuse of
discretion amounting to excess or lack of jurisdiction when it
initiated and conducted administrative investigation without a
validly promulgated rules of procedure in the adjudication of
administrative cases at the Islamic Bank.
II. Public respondent Civil Service Commission has
committed a grave abuse of discretion amounting to lack of
jurisdiction when it prematurely and falsely assumed
jurisdiction of the case not appealed to it, but to the Merit
System Protection Board.

90
III. Both the Islamic Bank and the Civil Service
Commission erred in finding petitioner Sawadjaan of having
deliberately reporting false information and therefore guilty of
Dishonesty and Conduct Prejudicial to the Best Interest of the
Service and penalized with dismissal from the service.

Decisions in administrative cases involving officials and

employees of the civil service appealable to the Commission
pursuant to Section 47 of Book V of the Code (i.e.,
Administrative Code of 1987) including personnel actions such
as contested appointments shall now be appealed directly to
the Commission and not to the MSPB.

On 04 July 1995, the Honorable Supreme Court En

Banc referred this petition to this Honorable Court pursuant to
Revised Administrative Circular No. 1-95, which took effect on
01 June 1995.

In Rubenecia v. Civil Service Commission, 244 SCRA 640, 651,

it was categorically held:

We do not find merit [in] the petition.

. . . The functions of the MSPB relating to the determination of

administrative disciplinary cases were, in other words, reallocated to the Commission itself.

Anent the first assignment of error, a reading of the records

would reveal that petitioner raises for the first time the
alleged failure of the Islamic Bank [AIIBP] to promulgate rules
of procedure governing the adjudication and disposition of
administrative cases involving its personnel. It is a rule that
issues not properly brought and ventilated below may not be
raised for the first time on appeal, save in exceptional
circumstances (Casolita, Sr. v. Court of Appeals, 275 SCRA
257) none of which, however, obtain in this case.
Granting arguendo that the issue is of such exceptional
character that the Court may take cognizance of the same,
still, it must fail. Section 26 of Republic Act No. 6848 (1990)
provides:
Section 26. Powers of the Board. The Board of Directors shall
have the broadest powers to manage the Islamic Bank, x x x
The Board shall adopt policy guidelines necessary to carry out
effectively the provisions of this Charter as well as internal
rules and regulations necessary for the conduct of its Islamic
banking business and all matters related to personnel
organization, office functions and salary administration.
(Italics ours)
On the other hand, Item No. 2 of Executive Order No. 26
(1992) entitled Prescribing Procedure and Sanctions to Ensure
Speedy Disposition of Administrative Cases directs, all
administrative agencies to adopt and include in their
respective Rules of Procedure provisions designed to
abbreviate administrative proceedings.
The above two (2) provisions relied upon by petitioner does
not require the Islamic Bank [AIIBP] to promulgate rules of
procedure before administrative discipline may be imposed
upon its employees. The internal rules of procedures ordained
to be adopted by the Board refers to that necessary for the
conduct of its Islamic banking business and all matters related
to personnel organization, office functions and salary
administration. On the contrary, Section 26 of RA 6848 gives
the Board of Directors of the Islamic Bank the broadest
powers to manage the Islamic Bank. This grant of broad
powers would be an idle ceremony if it would be powerless to
discipline its employees.
The second assignment of error must likewise fail. The issue is
raised for the first time via this petition for certiorari.
Petitioner submitted himself to the jurisdiction of the CSC.
Although he could have raised the alleged lack of jurisdiction
in his Motion for Reconsideration of Resolution No. 94-4483 of
the CSC, he did not do so. By filing the Motion for
Reconsideration, he is estopped from denying the CSCs
jurisdiction over him, as it is settled rule that a party who asks
for an affirmative relief cannot later on impugn the action of
the tribunal as without jurisdiction after an adverse result was
meted to him. Although jurisdiction over the subject matter of
a case may be objected to at any stage of the proceedings
even on appeal, this particular rule, however, means that
jurisdictional issues in a case can be raised only during the
proceedings in said case and during the appeal of said case
(Aragon v. Court of Appeals, 270 SCRA 603). The case at bar is
a petition [for] certiorari and not an appeal.
But even on the merits the argument must falter. Item No. 1
of CSC Resolution No. 93-2387 dated 29 June 1993, provides:

Be that as it may, (i)t is hornbook doctrine that in order `(t)o

ascertain whether a court (in this case, administrative agency)
has jurisdiction or not, the provisions of the law should be
inquired into. Furthermore, `the jurisdiction of the court must
appear clearly from the statute law or it will not be held to
exist.(Azarcon v. Sandiganbayan, 268 SCRA 747, 757) From
the provision of law abovecited, the Civil Service Commission
clearly has jurisdiction over the Administrative Case against
petitioner.
Anent the third assignment of error, we likewise do not find
merit in petitioners proposition that he should not be liable, as
in the first place, he was not qualified to perform the functions
of appraiser/investigator because he lacked the necessary
training and expertise, and therefore, should not have been
found dishonest by the Board of Directors of Islamic Bank
[AIIBP] and the CSC. Petitioner himself admits that the
position of appraiser/inspector is one of the most serious
[and] sensitive job in the banking operations. He should have
been aware that accepting such a designation, he is obliged
to perform the task at hand by the exercise of more than
ordinary prudence. As appraiser/investigator, he is expected,
among others, to check the authenticity of the documents
presented by the borrower by comparing them with the
originals on file with the proper government office. He should
have made it sure that the technical descriptions in the
location plan on file with the Bureau of Lands of Marikina, jibe
with that indicated in the TCT of the collateral offered by
CAMEC, and that the mortgage in favor of the Islamic Bank
was duly annotated at the back of the copy of the TCT kept by
the Register of Deeds of Marikina. This, petitioner failed to do,
for which he must be held liable. That he did not profit from
his false report is of no moment. Neither the fact that it was
not deliberate or willful, detracts from the nature of the act as
dishonest. What is apparent is he stated something to be a
fact, when he really was not sure that it was so.
WHEREFORE, above premises considered, the instant Petition
is DISMISSED, and the assailed Resolutions of the Civil Service
Commission are hereby AFFIRMED.
On 24 March 1999, Sawadjaans counsel notified the
court a quo of his change of address,[11] but apparently
neglected to notify his client of this fact. Thus, on 23 July
1999, Sawadjaan, by himself, filed a Motion for New Trial [12] in
the Court of Appeals based on the following grounds: fraud,
accident, mistake or excusable negligence and newly
discovered evidence. He claimed that he had recently
discovered that at the time his employment was terminated,
the AIIBP had not yet adopted its corporate by-laws. He
attached a Certification[13] by the Securities and Exchange
Commission (SEC) that it was only on 27 May 1992 that the
AIIBP submitted its draft by-laws to the SEC, and that its
registration was being held in abeyance pending certain
corrections being made thereon. Sawadjaan argued that since
the AIIBP failed to file its by-laws within 60 days from the
passage of Rep. Act No. 6848, as required by Sec. 51 of the
said law, the bank and its stockholders had already forfeited
its franchise or charter, including its license to exist and
operate as a corporation,[14] and thus no longer have the legal
standing and personality to initiate an administrative case.

91
Sawadjaans counsel subsequently adopted his motion,
but requested that it be treated as a motion for
reconsideration.[15] This motion was denied by the court a
quo in its Resolution of 15 December 1999.[16]

court rendering the judgment is its lack of jurisdiction over the

subject matter, or the exercise of power in excess thereof, or
grave abuse of discretion in the findings of fact or of law set
out in the decision.[36]

Still disheartened, Sawadjaan filed the present petition

for certiorari under Rule 65 of the Rules of Court challenging
the above Decision and Resolution of the Court of Appeals on
the ground that the court a quo erred: i) in ignoring the facts
and evidences that the alleged Islamic Bank has no valid bylaws; ii) in ignoring the facts and evidences that the Islamic
Bank lost its juridical personality as a corporation on 16 April
1990; iii) in ignoring the facts and evidences that the alleged
Islamic Bank and its alleged Board of Directors have no
jurisdiction to act in the manner they did in the absence of a
valid by-laws; iv) in not correcting the acts of the Civil Service
Commission who erroneously rendered the assailed
Resolutions No. 94-4483 and No. 95-2754 as a result of fraud,
falsification and/or misrepresentations committed by Farouk A.
Carpizo and his group, including Roberto F. de Ocampo; v) in
affirming an unconscionably harsh and/or excessive penalty;
and vi) in failing to consider newly discovered evidence and
reverse its decision accordingly.

The records show that petitioners counsel received the

Resolution of the Court of Appeals denying his motion for
reconsideration on 27 December 1999. The fifteen day
reglamentary period to appeal under Rule 45 of the Rules of
Court therefore lapsed on 11 January 2000. On 23 February
2000, over a month after receipt of the resolution denying his
motion for reconsideration, the petitioner filed his petition
for certiorari under Rule 65.

Subsequently, petitioner Sawadjaan filed an Exparte Urgent Motion for Additional Extension of Time to File a
Reply (to the Comments of Respondent Al-Amanah Investment
Bank
of
the
Philippines),[17] Reply
(to
Respondents
Consolidated Comment,)[18] and Reply (to the Alleged
Comments of Respondent Al-Amanah Islamic Bank of the
Philippines).[19] On 13 October 2000, he informed this Court
that he had terminated his lawyers services, and, by himself,
prepared and filed the following: 1) Motion for New Trial; [20] 2)
Motion to Declare Respondents in Default and/or Having
Waived their Rights to Interpose Objection to Petitioners
Motion for New Trial;[21] 3) Ex-ParteUrgent Motions to Punish
Attorneys Amado D. Valdez, Elpidio J. Vega, Alda G. Reyes,
Dominador R. Isidoro, Jr., and Odilon A. Diaz for Being in
Contempt of Court & to Inhibit them from Appearing in this
Case Until they Can Present Valid Evidence of Legal Authority;
[22]
4) Opposition/Reply (to Respondent AIIBPs Alleged
Comment);[23] 5)Ex-Parte Urgent Motion to Punish Atty.
Reynaldo A. Pineda for Contempt of Court and the Issuance of
a
Commitment
Order/Warrant
for
His
Arrest; [24] 6)
Reply/Opposition (To the Formal Notice of Withdrawal of
Undersigned Counsel as Legal Counsel for the Respondent
Islamic Bank with Opposition to Petitioners Motion to Punish
Undersigned Counsel for Contempt of Court for the Issuance
of a Warrant of Arrest); [25] 7) Memorandum for Petitioner;[26] 8)
Opposition to SolGens Motion for Clarification with Motion for
Default and/or Waiver of Respondents to File their
Memorandum;[27] 9) Motion for Contempt of Court and
Inhibition/Disqualification with Opposition to OGCCs Motion for
Extension of Time to File Memorandum;[28] 10) Motion for
Enforcement (In Defense of the Rule of Law); [29] 11) Motion
and Opposition (Motion to Punish OGCCs Attorneys Amado D.
Valdez, Efren B. Gonzales, Alda G. Reyes, Odilon A. Diaz and
Dominador R. Isidoro, Jr., for Contempt of Court and the
Issuance of a Warrant for their Arrest; and Opposition to their
Alleged Manifestation and Motion Dated February 5, 2002);
[30]
12) Motion for Reconsideration of Item (a) of Resolution
dated 5 February 2002 with Supplemental Motion for
Contempt of Court;[31] 13) Motion for Reconsideration of
Portion of Resolution Dated 12 March 2002; [32] 14) Ex-Parte
Urgent Motion for Extension of Time to File Reply
Memorandum (To: CSC and AIIBPs Memorandum);[33] 15) Reply
Memorandum (To: CSCs Memorandum) With Ex-Parte Urgent
Motion for Additional Extension of time to File Reply
Memorandum (To: AIIBPs Memorandum);[34] and 16) Reply
Memorandum (To: OGCCs Memorandum for Respondent
AIIBP).[35]
Petitioners efforts are unavailing, and we deny his
petition for its procedural and substantive flaws.
The general rule is that the remedy to obtain reversal or
modification of the judgment on the merits is appeal. This is
true even if the error, or one of the errors, ascribed to the

It is settled that a special civil action for certiorari will

not lie as a substitute for the lost remedy of appeal, [37] and
though there are instances[38] where the extraordinary remedy
of certiorari may be resorted to despite the availability of an
appeal,[39] we find no special reasons for making out an
exception in this case.
Even if we were to overlook this fact in the broader
interests of justice and treat this as a special civil action
for certiorari under Rule 65,[40] the petition would nevertheless
be dismissed for failure of the petitioner to show grave abuse
of discretion. Petitioners recurrent argument, tenuous at its
very best, is premised on the fact that since respondent AIIBP
failed to file its by-laws within the designated 60 days from
the effectivity of Rep. Act No. 6848, all proceedings initiated
by AIIBP and all actions resulting therefrom are a patent
nullity. Or, in his words, the AIIBP and its officers and Board of
Directors,
. . . [H]ave no legal authority nor jurisdiction to manage much
less operate the Islamic Bank, file administrative charges and
investigate petitioner in the manner they did and allegedly
passed Board Resolution No. 2309 on December 13, 1993
which is null and void for lack of an (sic) authorized and valid
by-laws. The CIVIL SERVICE COMMISSION was therefore
affirming, erroneously, a null and void Resolution No. 2309
dated December 13, 1993 of the Board of Directors of AlAmanah Islamic Investment Bank of the Philippines in CSC
Resolution No. 94-4483 dated August 11, 1994. A motion for
reconsideration thereof was denied by the CSC in its
Resolution No. 95-2754 dated April 11, 1995. Both
acts/resolutions of the CSC are erroneous, resulting from
fraud, falsifications and misrepresentations of the alleged
Chairman and CEO Roberto F. de Ocampo and the alleged
Director Farouk A. Carpizo and his group at the alleged Islamic
Bank.[41]
Nowhere in petitioners voluminous pleadings is there a
showing that the court a quo committed grave abuse of
discretion amounting to lack or excess of jurisdiction
reversible by a petition for certiorari. Petitioner already raised
the question of AIIBPs corporate existence and lack of
jurisdiction in his Motion for New Trial/Motion for
Reconsideration of 27 May 1997 and was denied by the Court
of Appeals. Despite the volume of pleadings he has submitted
thus far, he has added nothing substantial to his arguments.
The AIIBP was created by Rep. Act No. 6848. It has a
main office where it conducts business, has shareholders,
corporate officers, a board of directors, assets, and personnel.
It is, in fact, here represented by the Office of the Government
Corporate Counsel, the principal law office of governmentowned corporations, one of which is respondent bank. [42] At
the very least, by its failure to submit its by-laws on time, the
AIIBP may be considered a de facto corporation[43] whose right
to exercise corporate powers may not be inquired into
collaterally in any private suit to which such corporations may
be a party.[44]
Moreover, a corporation which has failed to file its bylaws within the prescribed period does not ipso facto lose its
powers as such. The SEC Rules on Suspension/Revocation of
the Certificate of Registration of Corporations, [45] details the

92
procedures and remedies that may be availed of before an
order of revocation can be issued. There is no showing that
such a procedure has been initiated in this case.
In any case, petitioners argument is irrelevant because
this case is not a corporate controversy, but a labor dispute;
and it is an employers basic right to freely select or discharge
its employees, if only as a measure of self-protection against
acts inimical to its interest.[46] Regardless of whether AIIBP is a
corporation, a partnership, a sole proprietorship, or a sarisari store, it is an undisputed fact that AIIBP is the petitioners
employer. AIIBP chose to retain his services during its
reorganization, controlled the means and methods by which
his work was to be performed, paid his wages, and,
eventually, terminated his services.[47]
And though he has had ample opportunity to do so, the
petitioner has not alleged that he is anything other than an
employee of AIIBP. He has neither claimed, nor shown, that he
is a stockholder or an officer of the corporation. Having
accepted employment from AIIBP, and rendered his services
to the said bank, received his salary, and accepted the
promotion given him, it is now too late in the day for
petitioner to question its existence and its power to terminate
his services. 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.[48]
Even if we were to consider the facts behind petitioner
Sawadjaans dismissal from service, we would be hard pressed
to find error in the decision of the AIIBP.
As appraiser/investigator, the petitioner was expected to
conduct an ocular inspection of the properties offered by
CAMEC as collaterals and check the copies of the certificates
of title against those on file with the Registry of Deeds. Not
only did he fail to conduct these routine checks, but he also
deliberately misrepresented in his appraisal report that after
reviewing the documents and conducting a site inspection, he
found the CAMEC loan application to be in order. Despite the
number of pleadings he has filed, he has failed to offer an
alternative explanation for his actions.
When he was informed of the charges against him and
directed to appear and present his side on the matter, the
petitioner sent instead a memorandum questioning the
fairness and impartiality of the members of the investigating
committee and refusing to recognize their jurisdiction over
him. Nevertheless, the investigating committee rescheduled
the hearing to give the petitioner another chance, but he still
refused to appear before it.

Banks policy of not accepting encumbered properties as

collateral.
Respondent SAWADJAANs reprehensible act is further
aggravated when he failed to check and verify from the
Registry of Deeds of Marikina the authenticity of the property
located at Mayamot, Antipolo, Rizal covered by TCT No. N130671 and which is one of the properties offered as collateral
by CAMEC for its P5 Million loan in 1988. If he only visited and
verified with the Register of Deeds of Marikina the
authenticity of TCT No. N-130671 he could have easily
discovered that TCT No. N-130671 is fake and the property
described therein non-existent.
...
This notwithstanding, respondent cannot escape liability. As
adverted to earlier, his failure to perform his official duties
resulted to the prejudice and substantial damage to the
ISLAMIC BANK for which he should be held liable for the
administrative offense of CONDUCT PREJUDICIAL TO THE BEST
INTEREST OF THE SERVICE.[49]
From the foregoing, we find that the CSC and the court a
quo committed no grave abuse of discretion when they
sustained Sawadjaans dismissal from service. Grave abuse of
discretion implies such capricious and whimsical exercise of
judgment as equivalent to lack of jurisdiction, or, in other
words, where the power is exercised in an arbitrary or
despotic manner by reason of passion or personal hostility,
and it 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 or to act at all in contemplation of law. [50] The
records show that the respondents did none of these; they
acted in accordance with the law.
WHEREFORE, the petition is DISMISSED. The Decision
of the Court of Appeals of 30 March 1999 affirming
Resolutions No. 94-4483 and No. 95-2754 of the Civil Service
Commission, and its Resolution of 15 December 1999 are
hereby AFFIRMED. Costs against the petitioner.
SO ORDERED.

For the Barba v. Liceo de Cagayan, see PDF.

Corporate Powers and Authority

Thereafter, witnesses were presented, and a decision

was rendered finding him guilty of dishonesty and dismissing
him from service. He sought a reconsideration of this decision
and the same committee whose impartiality he questioned
reduced their recommended penalty to suspension for six
months and one day. The board of directors, however, opted
to dismiss him from service.

[G.R. No. 143377. February 20, 2001]

On appeal to the CSC, the Commission found that

Sawadjaans failure to perform his official duties greatly
prejudiced the AIIBP, for which he should be held accountable.
It held that:

SHIPSIDE INCORPORATED, petitioner, vs. THE HON.

COURT OF APPEALS [Special Former Twelfth
Division],
HON. REGIONAL
TRIAL
COURT,
BRANCH 26 (San Fernando City, La Union) &
The
REPUBLIC
OF
THE
PHILIPPINES, respondents.

. . . (I)t is crystal clear that respondent SAPPARI SAWADJAAN

was remiss in the performance of his duties as
appraiser/inspector. Had respondent performed his duties as
appraiser/inspector, he could have easily noticed that the
property located at Balintawak, Caloocan City covered by TCT
No. C-52576 and which is one of the properties offered as
collateral by CAMEC is encumbered to Divina Pablico. Had
respondent reflected such fact in his appraisal/inspection
report on said property the ISLAMIC BANK would not have
approved CAMECs loan of P500,000.00 in 1987 and CAMECs
P5 Million loan in 1988, respondent knowing fully well the

DECISION
Before the Court is a petition for certiorari filed by
Shipside Incorporated under Rule 65 of the 1997 Rules on Civil
Procedure against the resolutions of the Court of Appeals
promulgated on November 4, 1999 and May 23, 2000, which
respectively, dismissed a petition for certiorari and prohibition
and thereafter denied a motion for reconsideration.
The antecedent facts are undisputed:

93
On October 29, 1958, Original Certificate of Title No. 0381 was issued in favor of Rafael Galvez, over four parcels of
land Lot 1 with 6,571 square meters; Lot 2, with 16,777
square meters; Lot 3 with 1,583 square meters; and Lot 4,
with 508 square meters.
On April 11, 1960, Lots No. 1 and 4 were conveyed by
Rafael Galvez in favor of Filipina Mamaril, Cleopatra Llana,
Regina Bustos, and Erlinda Balatbat in a deed of sale which
was inscribed as Entry No. 9115 OCT No. 0-381 on August 10,
1960. Consequently, Transfer Certificate No. T-4304 was
issued in favor of the buyers covering Lots No. 1 and 4.
Lot No. 1 is described as:
A parcel of land (Lot 1, Plan PSU-159621, L. R. Case No. N-361;
L. R. C. Record No. N-14012, situated in the Barrio of Poro,
Municipality of San Fernando, Province of La Union, bounded
on the NE, by the Foreshore; on the SE, by Public Land and
property of the Benguet Consolidated Mining Company; on the
SW, by properties of Rafael Galvez (US Military Reservation
Camp Wallace) and Policarpio Munar; and on the NW, by an
old Barrio Road. Beginning at a point marked 1 on plan, being
S. 74 deg. 11W. , 2670. 36 from B. L. L. M. 1, San Fernando,
thence
S. 66 deg. 19E., 134.95 m. to point 2; S. 14 deg. 57W., 11.79
m. to point 3;
S. 12 deg. 45W., 27.00 m. to point 4; S. 12 deg. 45W, 6.90 m.
to point 5;
N. 69 deg., 32W., 106.00 m. to point 6; N. 52 deg., 21W., 36.
85 m. to point 7;
N. 21 deg. 31E., 42. 01 m. to the point of beginning;
containing an area of SIX THOUSAND FIVE HUNDRED AND
SEVENTY-ONE (6,571) SQUARE METERS, more or less. All
points referred to are indicated on the plan; and marked on
the ground; bearings true, date of survey, February 421,
1957.
Lot No. 4 has the following technical description:
A parcel of land (Lot 4, Plan PSU-159621, L. R. Case No.N-361
L. R. C. Record No.N-14012), situated in the Barrio of Poro,
Municipality of San Fernando, La Union. Bounded on the SE by
the property of the Benguet Consolidated Mining Company; on
the S. by property of Pelagia Carino; and on the NW by the
property of Rafael Galvez (US Military Reservation, Camp
Wallace). Beginning at a point marked 1 on plan, being S. deg.
24W. 2591. 69 m. from B. L. L. M. 1, San Fernando, thence S.
12 deg. 45W., 73. 03 m. to point 2; N. 79 deg. 59W., 13.92 m.
to point 3; N. 23 deg. 26E. , 75.00 m. to the point of
beginning; containing an area of FIVE HUNDED AND EIGHT
(508) SQUARE METERS, more or less. All points referred to are
indicated in the plan and marked on the ground; bearings
true, date of survey, February 4-21, 1957.
On August 16, 1960, Mamaril, et al. sold Lots No. 1 and 4
to Lepanto Consolidated Mining Company. The deed of sale
covering the aforesaid property was inscribed as Entry No.
9173 on TCT No. T-4304. Subsequently, Transfer Certificate
No. T-4314 was issued in the name of Lepanto Consolidated
Mining Company as owner of Lots No. 1 and 4.
On February 1, 1963, unknown to Lepanto Consolidated
Mining Company, the Court of First Instance of La Union,
Second Judicial District, issued an Order in Land Registration
Case No. N-361 (LRC Record No. N-14012) entitled Rafael
Galvez, Applicant, Eliza Bustos, et al., Parties-In-Interest;
Republic of the Philippines, Movant declaring OCT No. 0-381 of
the Registry of Deeds for the Province of La Union issued in
the name of Rafael Galvez, null and void, and ordered the
cancellation thereof.

The Order pertinently provided:

Accordingly, with the foregoing, and without prejudice on the
rights of incidental parties concerned herein to institute their
respective appropriate actions compatible with whatever
cause they may have, it is hereby declared and this court so
holds that both proceedings in Land Registration Case No. N361 and Original Certificate No. 0-381 of the Registry of Deeds
for the province of La Union issued in virtue thereof and
registered in the name of Rafael Galvez, are null and void; the
Register of Deeds for the Province of La Union is hereby
ordered to cancel the said original certificate and / or such
other certificates of title issued subsequent thereto having
reference to the same parcels of land; without pronouncement
as to costs.
On October 28, 1963, Lepanto Consolidated Mining
Company sold to herein petitioner Lots No. 1 and 4, with the
deed being entered in TCT NO. 4314 as entry No.
12381. Transfer Certificate of Title No. T-5710 was thus issued
in favor of the petitioner which starting since then exercised
proprietary rights over Lots No. 1 and 4.
In the meantime, Rafael Galvez filed his motion for
reconsideration against the order issued by the trial court
declaring OCT No. 0-381 null and void. The motion was denied
on January 25, 1965. On appeal, the Court of Appeals ruled in
favor of the Republic of the Philippines in a Resolution
promulgated on August 14, 1973 in CA-G. R. No. 36061-R.
Thereafter, the Court of Appeals issued an Entry of
Judgment, certifying that its decision dated August 14, 1973
became final and executory on October 23, 1973.
On April 22, 1974, the trial court in L. R. C. Case No. N361 issued a writ of execution of the judgment which was
served on the Register of Deeds, San Fernando, La Union on
April 29, 1974.
Twenty four long years thereafter, on January 14, 1999,
the Office of the Solicitor General received a letter dated
January 11, 1999 from Mr. Victor G. Floresca, Vice-President,
John Hay Poro Point Development Corporation, stating that the
aforementioned orders and decision of the trial court in L. R.
C. No. N-361 have not been executed by the Register of
Deeds, San Fernando, La Union despite receipt of the writ of
execution.
On April 21, 1999, the Office of the Solicitor General filed
a complaint for revival of judgment and cancellation of titles
before the Regional Trial Court of the First Judicial Region
(Branch 26, San Fernando, La Union) docketed therein as Civil
Case No. 6346 entitled, Republic of the Philippines, Plaintiff,
versus Heirs of Rafael Galvez, represented by Teresita Tan,
Reynaldo Mamaril, Elisa Bustos, Erlinda Balatbat, Regina
Bustos, Shipside Incorporated and the Register of Deeds of La
Union, Defendants.
The evidence shows that the impleaded defendants
(except the Register of Deeds of the province of La Union) are
the successors-in-interest of Rafael Galvez (not Reynaldo
Galvez as alleged by the Solicitor General) over the property
covered by OCT No. 0-381, namely: (a) Shipside Inc. which is
presently the registered owner in fee simple of Lots No. 1 and
4 covered by TCT No. T-5710, with a total area of 7,079 square
meters; (b) Elisa Bustos, Jesusito Galvez, and Teresita Tan who
are the registered owners of Lot No. 2 of OCT No. 0-381;and
(c) Elisa Bustos, Filipina Mamaril, Regina Bustos and Erlinda
Balatbat who are the registered owners of Lot No. 3 of OCT
No. 0-381, now covered by TCT No. T-4916, with an area of
1,583 square meters.
In its complaint in Civil Case No. 6346, the Solicitor
General argued that since the trial court in LRC Case No. 361
had ruled and declared OCT No. 0-381 to be null and void,
which ruling was subsequently affirmed by the Court of

94
Appeals, the defendants-successors-in-interest of Rafael
Galvez have no valid title over the property covered by OCT
No. 0-381, and the subsequent Torrens titles issued in their
names should be consequently cancelled.
On July 22, 1999, petitioner Shipside, Inc. filed its Motion
to Dismiss, based on the following grounds: (1) the complaint
stated no cause of action because only final and executory
judgments may be subject of an action for revival of
judgment; (2) the plaintiff is not the real party-in-interest
because the real property covered by the Torrens titles sought
to be cancelled, allegedly part of Camp Wallace (Wallace Air
Station), were under the ownership and administration of the
Bases Conversion Development Authority (BCDA) under
Republic Act No. 7227; (3) plaintiffs cause of action is barred
by prescription; (4) twenty-five years having lapsed since the
issuance of the writ of execution, no action for revival of
judgment may be instituted because under Paragraph 3 of
Article 1144 of the Civil Code, such action may be brought
only within ten (10) years from the time the judgment had
been rendered.
An opposition to the motion to dismiss was filed by the
Solicitor General on August 23, 1999, alleging among others,
that: (1) the real party-in-interest is the Republic of the
Philippines;and (2) prescription does not run against the State.
On August 31, 1999, the trial court denied petitioners
motion to dismiss and on October 14, 1999, its motion for
reconsideration was likewise turned down.
On October 21, 1999, petitioner instituted a petition
for certiorari and prohibition with the Court of Appeals,
docketed therein as CA-G.R. SP No. 55535, on the ground that
the orders of the trial court denying its motion to dismiss and
its subsequent motion for reconsideration were issued in
excess of jurisdiction.
On November 4, 1999, the Court of Appeals dismissed
the petition in CA-G.R. SP No. 55535 on the ground that the
verification and certification in the petition, under the
signature of Lorenzo Balbin, Jr., was made without authority,
there being no proof therein that Balbin was authorized to
institute the petition for and in behalf and of petitioner.
On May 23, 2000, the Court of Appeals denied
petitioners motion for reconsideration on the grounds that: (1)
a complaint filed on behalf of a corporation can be made only
if authorized by its Board of Directors, and in the absence
thereof, the petition cannot prosper and be granted due
course;and (2) petitioner was unable to show that it had
substantially complied with the rule requiring proof of
authority to institute an action or proceeding.
Hence, the instant petition.
In support of its petition, Shipside, Inc. asseverates that:
1. The Honorable Court of Appeals gravely abused
its discretion in dismissing the petition when it
made a conclusive legal presumption that Mr.
Balbin had no authority to sign the petition
despite the clarity of laws, jurisprudence and
Secretarys certificate to the contrary;
2. The Honorable Court of Appeals abused its
discretion when it dismissed the petition, in
effect affirming the grave abuse of discretion
committed by the lower court when it refused to
dismiss the 1999 Complaint for Revival of a
1973 judgment, in violation of clear laws and
jurisprudence.

Petitioner likewise adopted the arguments it raised in the

petition and comment/reply it filed with the Court of Appeals,
attached to its petition as Exhibit L and N, respectively.
In his Comment, the Solicitor General moved for the
dismissal of the instant petition based on the following
considerations: (1) Lorenzo Balbin, who signed for and in
behalf of petitioner in the verification and certification of nonforum shopping portion of the petition, failed to show proof of
his authorization to institute the petition for certiorari and
prohibition with the Court of Appeals, thus the latter court
acted correctly in dismissing the same; (2) the real party-ininterest in the case at bar being the Republic of the
Philippines, its claims are imprescriptible.
In order to preserve the rights of herein parties, the
Court issued a temporary restraining order on June 26, 2000
enjoining the trial court from conducting further proceedings
in Civil Case No. 6346.
The issues posited in this case are: (1) whether or not an
authorization from petitioners Board of Directors is still
required in order for its resident manager to institute or
commence a legal action for and in behalf of the corporation;
and (2) whether or not the Republic of the Philippines can
maintain the action for revival of judgment herein.
We find for petitioner.
Anent the first issue:
The Court of Appeals dismissed the petition
for certiorari on the ground that Lorenzo Balbin, the resident
manager for petitioner, who was the signatory in the
verification and certification on non-forum shopping, failed to
show proof that he was authorized by petitioners board of
directors to file such a petition.
A corporation, such as petitioner, has no power except
those expressly conferred on it by the Corporation Code and
those that are implied or incidental to its existence. In turn, a
corporation exercises said powers through its board of
directors and / or its duly authorized officers and agents. Thus,
it has been observed that the power of a corporation to sue
and be sued in any court is lodged with the board of directors
that exercises its corporate powers (Premium Marble
Resources, Inc. v. CA, 264 SCRA 11 [1996]). In turn, physical
acts of the corporation, like the signing of documents, can be
performed only by natural persons duly authorized for the
purpose by corporate by-laws or by a specific act of the board
of directors.
It is undisputed that on October 21, 1999, the time
petitioners Resident Manager Balbin filed the petition, there
was no proof attached thereto that Balbin was authorized to
sign the verification and non-forum shopping certification
therein, as a consequence of which the petition was dismissed
by the Court of Appeals. However, subsequent to such
dismissal, petitioner filed a motion for reconsideration,
attaching to said motion a certificate issued by its board
secretary stating that on October 11, 1999, or ten days prior
to the filing of the petition, Balbin had been authorized by
petitioners board of directors to file said petition.
The Court has consistently held that the requirement
regarding verification of a pleading is formal, not jurisdictional
(Uy v. LandBank, G.R. No. 136100, July 24, 2000). Such
requirement is simply a condition affecting the form of the
pleading, non-compliance with which does not necessarily
render the pleading fatally defective. Verification is simply
intended to secure an assurance that the allegations in the
pleading are true and correct and not the product of the
imagination or a matter of speculation, and that the pleading
is filed in good faith. The court may order the correction of the
pleading if verification is lacking or act on the pleading
although it is not verified, if the attending circumstances are

95
such that strict compliance with the rules may be dispensed
with in order that the ends of justice may thereby be served.
On the other hand, the lack of certification against forum
shopping is generally not curable by the submission thereof
after the filing of the petition. Section 5, Rule 45 of the 1997
Rules of Civil Procedure provides that the failure of the
petitioner to submit the required documents that should
accompany the petition, including the certification against
forum shopping, shall be sufficient ground for the dismissal
thereof. The same rule applies to certifications against forum
shopping signed by a person on behalf of a corporation which
are unaccompanied by proof that said signatory is authorized
to file a petition on behalf of the corporation.
In certain exceptional circumstances, however, the Court
has allowed the belated filing of the certification. In Loyola
v. Court of Appeals, et. al. (245 SCRA 477 [1995]), the Court
considered the filing of the certification one day after the filing
of an election protest as substantial compliance with the
requirement. In Roadway Express, Inc. v. Court of Appeals, et.
al. (264 SCRA 696 [1996]), the Court allowed the filing of the
certification 14 days before the dismissal of the petition. In Uy
v. LandBank, supra, the Court had dismissed Uys petition for
lack of verification and certification against non-forum
shopping.However, it subsequently reinstated the petition
after Uy submitted a motion to admit certification and nonforum shopping certification. In all these cases, there were
special circumstances or compelling reasons that justified the
relaxation of the rule requiring verification and certification on
non-forum shopping.
In the instant case, the merits of petitioners case should
be considered special circumstances or compelling reasons
that justify tempering the requirement in regard to the
certificate
of
non-forum
shopping. Moreover,
in Loyola, Roadway,
and Uy,
the
Court
excused noncompliance with the requirement as to the certificate of nonforum shopping. With more reason should we allow the instant
petition since petitioner herein did submit a certification on
non-forum shopping, failing only to show proof that the
signatory was authorized to do so. That petitioner
subsequently submitted a secretarys certificate attesting that
Balbin was authorized to file an action on behalf of petitioner
likewise mitigates this oversight.
It must also be kept in mind that while the requirement
of the certificate of non-forum shopping is mandatory,
nonetheless the requirements must not be interpreted too
literally and thus defeat the objective of preventing the
undesirable practice of forum-shopping (Bernardo v. NLRC,
255 SCRA 108 [1996]). Lastly, technical rules of procedure
should be used to promote, not frustrate justice. While the
swift unclogging of court dockets is a laudable objective, the
granting of substantial justice is an even more urgent ideal.
Now to the second issue:
The action instituted by the Solicitor General in the trial
court is one for revival of judgment which is governed by
Article 1144(3) of the Civil Code and Section 6, Rule 39 of the
1997 Rules on Civil Procedure. Article 1144(3) provides that
an action upon a judgment must be brought within 10 years
from the time the right of action accrues." On the other hand,
Section 6, Rule 39 provides that a final and executory
judgment or order may be executed on motion within five (5)
years from the date of its entry, but that after the lapse of
such time, and before it is barred by the statute of limitations,
a judgment may be enforced by action. Taking these two
provisions into consideration, it is plain that an action for
revival of judgment must be brought within ten years from the
time said judgment becomes final.
From the records of this case, it is clear that the
judgment sought to be revived became final on October 23,
1973. On the other hand, the action for revival of judgment
was instituted only in 1999, or more than twenty-five (25)

years after the judgment had become final. Hence, the action
is barred by extinctive prescription considering that such an
action can be instituted only within ten (10) years from the
time the cause of action accrues.
The Solicitor General, nonetheless, argues that the
States cause of action in the cancellation of the land title
issued to petitioners predecessor-in-interest is imprescriptible
because it is included in Camp Wallace, which belongs to the
government.
The argument is misleading.
While it is true that prescription does not run against the
State, the same may not be invoked by the government in this
case since it is no longer interested in the subject
matter. While Camp Wallace may have belonged to the
government at the time Rafael Galvezs title was ordered
cancelled in Land Registration Case No. N-361, the same no
longer holds true today.
Republic Act No. 7227, otherwise known as the Bases
Conversion and Development Act of 1992, created the Bases
Conversion and Development Authority. Section 4 pertinently
provides:
Section 4. Purposes of the Conversion Authority. The
Conversion Authority shall have the following purposes:
(a) To own, hold and/or administer the military
reservations of John Hay Air Station, Wallace Air
Station, ODonnell Transmitter Station, San
Miguel Naval Communications Station, Mt. Sta.
Rita Station (Hermosa, Bataan) and those
portions of Metro Manila military camps which
may be transferred to it by the President;
Section 2 of Proclamation No. 216, issued on July 27,
1993, also provides:
Section 2. Transfer of Wallace Air Station Areas to the Bases
Conversion and Development Authority. All areas covered by
the Wallace Air Station as embraced and defined by the 1947
Military Bases Agreement between the Philippines and the
United States of America, as amended, excluding those
covered by Presidential Proclamations and some 25-hectare
area for the radar and communication station of the Philippine
Air Force, are hereby transferred to the Bases Conversion
Development Authority
With the transfer of Camp Wallace to the BCDA, the
government no longer has a right or interest to
protect. Consequently, the Republic is not a real party in
interest and it may not institute the instant action. Nor may it
raise the defense of imprescriptibility, the same being
applicable only in cases where the government is a party in
interest. Under Section 2 of Rule 3 of the 1997 Rules of Civil
Procedure, every action must be prosecuted or defended in
the name of the real party in interest. To qualify a person to
be a real party in interest in whose name an action must be
prosecuted, he must appear to be the present real owner of
the right sought to enforced (Pioneer Insurance v. CA, 175
SCRA 668 [1989]). A real party in interest is the party who
stands to be benefited or injured by the judgment in the suit,
or the party entitled to the avails of the suit. And by real
interest is meant a present substantial interest, as
distinguished from a mere expectancy, or a future,
contingent, subordinate or consequential interest (Ibonilla v.
Province of Cebu, 210 SCRA 526 [1992]). Being the owner of
the areas covered by Camp Wallace, it is the Bases
Conversion and Development Authority, not the Government,
which stands to be benefited if the land covered by TCT No. T5710 issued in the name of petitioner is cancelled.
Nonetheless, it has been posited that the transfer of
military reservations and their extensions to the BCDA is

96
basically for the purpose of accelerating the sound and
balanced conversion of these military reservations into
alternative productive uses and to enhance the benefits to be
derived from such property as a measure of promoting the
economic and social development, particularly of Central
Luzon and, in general, the countrys goal for enhancement
(Section 2, Republic Act No. 7227). It is contended that the
transfer of these military reservations to the Conversion
Authority does not amount to an abdication on the part of the
Republic of its interests, but simply a recognition of the need
to create a body corporate which will act as its agent for the
realization of its program. It is consequently asserted that the
Republic remains to be the real party in interest and the
Conversion Authority merely its agent.

It can be said that in suing for the recovery of the rentals, the
Republic of the Philippines, acted as principal of the Philippine
Ports Authority, directly exercising the commission it had
earlier conferred on the latter as its agent. We may presume
that, by doing so, the Republic of the Philippines did not
intend to retain the said rentals for its own use, considering
that by its voluntary act it had transferred the land in question
to the Philippine Ports Authority effective July 11, 1974. The
Republic of the Philippines had simply sought to assist, not
supplant, the Philippine Ports Authority, whose title to the
disputed property it continues to recognize. We may expect
then that the said rentals, once collected by the Republic of
the Philippines, shall be turned over by it to the Philippine
Ports Authority conformably to the purposes of P. D. No. 857.

We, however, must not lose sight of the fact that the
BCDA is an entity invested with a personality separate and
distinct from the government. Section 3 of Republic Act No.
7227 reads:

E. B. Marcha is, however, not on all fours with the case

at bar. In the former, the Court considered the Republic a
proper party to sue since the claims of the Republic and the
Philippine Ports Authority against the petitioner therein were
the same. To dismiss the complaint in E. B. Marcha would
have brought needless delay in the settlement of the matter
since the PPA would have to refile the case on the same claim
already litigated upon. Such is not the case here since to allow
the government to sue herein enables it to raise the issue of
imprescriptibility, a claim which is not available to the
BCDA. The rule that prescription does not run against the
State does not apply to corporations or artificial bodies
created by the State for special purposes, it being said that
when the title of the Republic has been divested, its grantees,
although artificial bodies of its own creation, are in the same
category as ordinary persons (Kingston v. LeHigh Valley Coal
Co., 241 Pa 469). By raising the claim of imprescriptibility, a
claim which cannot be raised by the BCDA, the Government
not only assists the BCDA, as it did in E. B. Marcha, it even
supplants the latter, a course of action proscribed by said
case.

Section 3. Creation of the Bases Conversion and Development

Authority. There is hereby created a body corporate to be
known as the Conversion Authority which shall have the
attribute of perpetual succession and shall be vested with the
powers of a corporation.
It may not be amiss to state at this point that the
functions of government have been classified into
governmental
or
constituent
and
proprietary
or
ministrant. While
public
benefit
and
public
welfare,
particularly, the promotion of the economic and social
development of Central Luzon, may be attributable to the
operation of the BCDA, yet it is certain that the functions
performed by the BCDA are basically proprietary in
nature. The promotion of economic and social development of
Central Luzon, in particular, and the countrys goal for
enhancement, in general, do not make the BCDA equivalent to
the Government. Other corporations have been created by
government to act as its agents for the realization of its
programs, the SSS, GSIS, NAWASA and the NIA, to count a
few, and yet, the Court has ruled that these entities, although
performing functions aimed at promoting public interest and
public welfare, are not government-function corporations
invested with governmental attributes. It may thus be said
that the BCDA is not a mere agency of the Government but a
corporate body performing proprietary functions.
Moreover, Section 5 of Republic Act No. 7227 provides:
Section 5. Powers of the Conversion Authority. To carry out its
objectives under this Act, the Conversion Authority is hereby
vested with the following powers:
(a) To succeed in its corporate name, to sue and be
sued in such corporate name and to adopt, alter
and use a corporate seal which shall be
judicially noticed;
Having the capacity to sue or be sued, it should thus be
the BCDA which may file an action to cancel petitioners title,
not the Republic, the former being the real party in
interest. One having no right or interest to protect cannot
invoke the jurisdiction of the court as a party plaintiff in an
action (Ralla v. Ralla, 199 SCRA 495 [1991]). A suit may be
dismissed if the plaintiff or the defendant is not a real party in
interest. If the suit is not brought in the name of the real party
in interest, a motion to dismiss may be filed, as was done by
petitioner in this case, on the ground that the complaint states
no cause of action (Tanpingco v. IAC, 207 SCRA 652 [1992]).
However, E. B. Marcha Transport Co. , Inc. v. IAC (147
SCRA 276 [1987]) is cited as authority that the Republic is the
proper party to sue for the recovery of possession of property
which at the time of the institution of the suit was no longer
held by the national government but by the Philippine Ports
Authority. In E. B. Marcha, the Court ruled:

Moreover, to recognize the Government as a proper

party to sue in this case would set a bad precedent as it would
allow the Republic to prosecute, on behalf of governmentowned or controlled corporations, causes of action which have
already prescribed, on the pretext that the Government is the
real party in interest against whom prescription does not run,
said corporations having been created merely as agents for
the realization of government programs.
Parenthetically, petitioner was not a party to the original
suit for cancellation of title commenced by the Republic
twenty-seven years for which it is now being made to answer,
nay, being made to suffer financial losses.
It should also be noted that petitioner is unquestionably
a buyer in good faith and for value, having acquired the
property in 1963, or 5 years after the issuance of the original
certificate of title, as a third transferee. If only not to do
violence and to give some measure of respect to the Torrens
System, petitioner must be afforded some measure of
protection.
One more point.
Since the portion in dispute now forms part of the
property owned and administered by the Bases Conversion
and Development Authority, it is alienable and registerable
real property.
We find it unnecessary to rule on the other matters
raised by the herein parties.
WHEREFORE, the petition is hereby granted and the
orders dated August 31, 1999 and October 4, 1999 of the
Regional Trial Court of the First National Judicial Region
(Branch 26, San Fernando, La Union) in Civil Case No. 6346
entitled Republic of the Philippines, Plaintiff, versus Heirs of
Rafael Galvez, et. al., Defendants as well as the resolutions
promulgated on November 4, 1999 and May 23, 2000 by the

97
Court of Appeals (Twelfth Division) in CA-G. R. SP No. 55535
entitled Shipside, Inc., Petitioner versus Hon. Alfredo Cajigal,
as Judge, RTC, San Fernando, La Union, Branch 26, and the
Republic of the Philippines, Respondents are hereby reversed
and set aside. The complaint in Civil Case No. 6346, Regional
Trial Court, Branch 26, San Fernando City, La Union entitled
Republic of the Philippines, Plaintiff, versus Heirs of Rafael
Galvez, et al." is ordered dismissed, without prejudice to the
filing of an appropriate action by the Bases Development and
Conversion Authority.
SO ORDERED.

SEPARATE OPINION

to retain the said rentals for its own use, considering that by
its voluntary act it had transferred the land in question to the
Philippine Ports authority effective July 11, 1974. The Republic
of the Philippines had simply sought to assist, not supplant,
the Philippine Ports Authority, whose title to the disputed
property it continues to recognize. We may expect then that
the said rentals, once collected by the Republic of the
Philippines, shall be turned over by it to the Philippine Ports
Authority conformably to the purposes of P. D. No. 857."
There would seem to be no cogent reason for ignoring
that rationale specially when taken in light of the fact that the
original suit for cancellation of title of petitioners predecessorin-interest was commenced by the Republic itself, and it was
only in 1992 that the subject military camp was transferred to
the Conversion Authority.

VITUG, J.:
I find no doctrinal difficulty in adhering to the
draft ponencia written by our esteemed Chairman. Mr. Justice
JARM, insofar as it declares that an action for revival of
judgment is barred by extinctive prescription, if not brought
within ten (10) years from the time the right of action accrues,
pursuant to Article 1144(3) of the New Civil Code. It appears
that the judgment in the instant case has become final on 23
October 1973 or well more than two decades prior to the
action for its revival instituted only in 1999.
With due respect, however, I still am unable to subscribe
to the idea that prescription may not be invoked by the
government in this case upon the thesis that the transfer of
Camp Wallace to the Bases Conversion Development
authority renders the Republic with no right or interest to
protect and thus unqualified under the rules of procedure to
be the real party-in-interest. While it is true that Republic Act
7227, otherwise known as the Bases Conversion and
Development Act of 1992, authorizes the transfer of the
military reservations and their extensions to the conversion
Authority, the same, however, is basically for the purpose of
accelerating the sound and balanced conversion of these
military reservations into alternative productive uses and to
enhance the benefits to be derived from such property as a
measure of promoting the economic and social development,
particularly, of Central Luzon and, in general, the countrys
goal for enhancement.[1] The transfer of these military
reservations to the Conversion Authority does not amount to
an abdication on the part of the Republic of its interests but
simply a recognition of the need to create a body corporate
which will act as its agent for the realization of its program
specified in the Act. It ought to follow that the Republic
remains to be the real party-in-interest and the Conversion
authority being merely its agent.
In E. B. Marcha Transport Co. , Inc. vs. Intermediate
Appellate Court,[2] the Court succinctly resolved the issue of
whether or not the Republic of the Philippines would be a
proper party to sue for the recovery of possession of property
which at time of the institution of the suit was no longer being
held by the national government but by the Philippine Ports
Authority. The Court ruled:
More importantly, as we see it, dismissing the complaint on
the ground that the Republic of the Philippines is not the
proper party would result in needless delay in the settlement
of this matter and also in derogation of the policy against
multiplicity of suits. Such a decision would require the
Philippine Ports Authority to refile the very same complaint
already proved by the Republic of the Philippines and bring
back the parties as it were to square one.
It can be said that in suing for the recovery of the rentals, the
Republic of the Philippines, acted as principal of the Philippine
Ports Authority, directly exercising the commission it had
earlier conferred on the latter as its agent. We may presume
that, by doing so, the republic of the Philippines did not intend

FIRST DIVISION
[G.R. No. 152542. July 8, 2004]
MONFORT HERMANOS AGRICULTURAL DEVELOPMENT
CORPORATION,
as
represented
by
MA.
ANTONIA
M.
SALVATIERRA,petitioner,
vs.
ANTONIO B. MONFORT III, MA. LUISA MONFORT
ASCALON, ILDEFONSO B. MONFORT, ALFREDO
B. MONFORT, CARLOS M. RODRIGUEZ, EMILY
FRANCISCA
R.
DOLIQUEZ,
ENCARNACION
CECILIA
R.
PAYLADO,
JOSE
MARTIN
M.
RODRIGUEZ
and
COURT
OF
APPEALS, respondents.

[G.R. No. 155472. July 8, 2004]

ANTONIO B. MONFORT III, MA. LUISA MONFORT
ASCALON, ILDEFONSO B. MONFORT, ALFREDO
B. MONFORT, CARLOS M. RODRIGUEZ, EMILY
FRANCISCA
R.
DOLIQUEZ,
ENCARNACION
CECILIA
R.
PAYLADO,
JOSE
MARTIN
M.
RODRIGUEZ, petitioners, vs. HON. COURT OF
APPEALS, MONFORT HERMANOS AGRICULTURAL
DEVELOPMENT CORPORATION, as represented
by MA. ANTONIA M. SALVATIERRA, and RAMON
H. MONFORT, respondents.
DECISION
Before the Court are consolidated petitions for review of
the decisions of the Court of Appeals in the complaints for
forcible entry and replevin filed by Monfort Hermanos
Agricultural Development Corporation (Corporation) and
Ramon H. Monfort against the children, nephews, and nieces
of its original incorporators (collectively known as the group of
Antonio Monfort III).
The petition in G.R. No. 152542, assails the October 5,
2001 Decision[1] of the Special Tenth Division of the Court of
Appeals in CA-G.R. SP No. 53652, which ruled that Ma. Antonia
M. Salvatierra has no legal capacity to represent the
Corporation in the forcible entry case docketed as Civil Case
No. 534-C, before the Municipal TrialCourt of Cadiz City. On the
other hand, the petition in G.R. No. 155472, seeks to set aside
the June 7, 2002 Decision[2] rendered by the Special Former
Thirteenth Division of the Court of Appeals in CA-G.R. SP No.
49251, where it refused to address, on jurisdictional
considerations, the issue of Ma. Antonia M. Salvatierras
capacity to file a complaint for replevin on behalf of the
Corporation in Civil Case No. 506-C before the Regional Trial
Court of Cadiz City, Branch 60.

98
Monfort
Hermanos
Agricultural
Development
Corporation, a domestic private corporation, is the registered
owner of a farm, fishpond and sugar cane plantation known as
Haciendas San Antonio II, Marapara, Pinanoag and Tinampaan, all situated in Cadiz City. [3] It also owns one unit of motor
vehicle and two units of tractors. [4] The same allowed Ramon
H. Monfort, its Executive Vice President, to breed and maintain
fighting cocks in his personal capacity at Hacienda San
Antonio.[5]

RTC and dismissed the complaint for forcible entry for lack of
capacity of Ma. Antonia M. Salvatierra to represent the
Corporation.[15] The motion for reconsideration filed by the
latter was denied by the appellate court.[16]

In 1997, the group of Antonio Monfort III, through force

and intimidation, allegedly took possession of the 4
Haciendas, the produce thereon and the motor vehicle and
tractors, as well as the fighting cocks of Ramon H. Monfort.

The focal issue in these consolidated petitions is whether

or not Ma. Antonia M. Salvatierra has the legal capacity to sue
on behalf of the Corporation.

In G.R. No. 155472:

On April 10, 1997, the Corporation, represented by its
President, Ma. Antonia M. Salvatierra, and Ramon H. Monfort,
in his personal capacity, filed against the group of Antonio
Monfort III, a complaint [6] for delivery of motor vehicle, tractors
and 378 fighting cocks, with prayer for injunction and
damages, docketed as Civil Case No. 506-C, before the
Regional Trial Court of Negros Occidental, Branch 60.

Unfazed, the Corporation filed a petition for review with

this Court, docketed as G.R. No. 152542 which was
consolidated with G.R. No. 155472 per Resolution
datedJanuary 21, 2004.[17]

The group of Antonio Monfort III claims that the March

31, 1997 Board Resolution authorizing Ma. Antonia M.
Salvatierra and/or Ramon H. Monfort to represent the
Corporation is void because the purported Members of the
Board who passed the same were not validly elected officers
of the Corporation.

The group of Antonio Monfort III filed a motion to dismiss

contending, inter alia, that Ma. Antonia M. Salvatierra has no
capacity to sue on behalf of the Corporation because
the March 31, 1997 Board Resolution[7] authorizing Ma.
Antonia M. Salvatierra and/or Ramon H. Monfort to represent
the Corporation is void as the purported Members of the
Board who passed the same were not validly elected officers
of the Corporation.

A corporation has no power except those expressly

conferred on it by the Corporation Code and those that are
implied or incidental to its existence. In turn, a corporation
exercises said powers through its board of directors and/or its
duly authorized officers and agents. Thus, it has been
observed that the power of a corporation to sue and be sued
in any court is lodged with the board of directors that
exercises its corporate powers. In turn, physical acts of the
corporation, like the signing of documents, can be performed
only by natural persons duly authorized for the purpose by
corporate by-laws or by a specific act of the board of
directors.[18]

On May 4, 1998, the trial court denied the motion to

dismiss.[8] The group of Antonio Monfort III filed a petition for
certiorari with the Court of Appeals but the same was
dismissed on June 7, 2002.[9] The Special Former Thirteenth
Division of the appellate court did not resolve the validity of
the March 31, 1997 Board Resolution and the election of the
officers who signed it, ratiocinating that the determination of
said question is within the competence of the trial court.

Corollary thereto, corporations are required under

Section 26 of the Corporation Code to submit to the SEC
within thirty (30) days after the election the names,
nationalities and residences of the elected directors, trustees
and officers of the Corporation. In order to keep stockholders
and the public transacting business with domestic
corporations properly informed of their organizational
operational status, the SEC issued the following rules:

The motion for reconsideration filed by the group of

Antonio Monfort III was denied. [10] Hence, they instituted a
petition for review with this Court, docketed as G.R. No.
155472.

xxxxxxxxx

In G.R. No. 152542:

On April 21, 1997, Ma. Antonia M. Salvatierra filed on
behalf of the Corporation a complaint for forcible entry,
preliminary mandatory injunction with temporary restraining
order and damages against the group of Antonio Monfort III,
before the Municipal Trial Court (MTC) of Cadiz City.[11] It
contended that the latter through force and intimidation,
unlawfully took possession of the 4 Haciendas and deprived
the Corporation of the produce thereon.
In their answer,[12] the group of Antonio Monfort III
alleged that they are possessing and controlling the
Haciendas and harvesting the produce therein on behalf of
the corporation and not for themselves. They likewise raised
the affirmative defense of lack of legal capacity of Ma. Antonia
M. Salvatierra to sue on behalf of the Corporation.
On February 18, 1998, the MTC of Cadiz City rendered a
decision dismissing the complaint. [13] On appeal, the Regional
Trial Court of Negros Occidental, Branch 60, reversed the
Decision of the MTCC and remanded the case for further
proceedings.[14]
Aggrieved, the group of Antonio Monfort III filed a
petition for review with the Court of Appeals. On October 5,
2001, the Special Tenth Division set aside the judgment of the

2. A General Information Sheet shall be filed with this

Commission within thirty (30) days following the date of the
annual stockholders meeting. No extension of said period
shall be allowed, except for very justifiable reasons stated in
writing by the President, Secretary, Treasurer or other officers,
upon which the Commission may grant an extension for not
more than ten (10) days.
2.A. Should a director, trustee or officer die, resign or in any
manner, cease to hold office, the corporation shall report such
fact to the Commission with fifteen (15) days after such death,
resignation or cessation of office.
3. If for any justifiable reason, the annual meeting has to be
postponed, the company should notify the Commission in
writing of such postponement.
The General Information Sheet shall state, among
others, the names of the elected directors and officers,
together with their corresponding position
title (Emphasis supplied)
In the instant case, the six signatories to the March 31,
1997 Board Resolution authorizing Ma. Antonia M. Salvatierra
and/or Ramon H. Monfort to represent the Corporation, were:
Ma. Antonia M. Salvatierra, President; Ramon H. Monfort,
Executive Vice President; Directors Paul M. Monfort, Yvete M.
Benedicto and Jaqueline M. Yusay; and Ester S. Monfort,
Secretary.[19] However, the names of the last four (4)
signatories to the said Board Resolution do not appear in the

99
1996 General Information Sheet submitted by the Corporation
with the SEC. Under said General Information Sheet the
composition of the Board is as follows:

petitioner failed to show proof that this election was reported

to the SEC. In fact, the last entry in their General Information
Sheet with the SEC, as of 1986 appears to be the set of
officers elected in March 1981.

1. Ma. Antonia M. Salvatierra (Chairman);

2. Ramon H. Monfort (Member);
3. Antonio H. Monfort, Jr., (Member);
4. Joaquin H. Monfort (Member);
5. Francisco H. Monfort (Member) and
6. Jesus Antonio H. Monfort (Member).[20]
There is thus a doubt as to whether Paul M. Monfort, Yvete M.
Benedicto, Jaqueline M. Yusay and Ester S. Monfort, were
indeed duly elected Members of the Board legally constituted
to bring suit in behalf of the Corporation.[21]
In Premium Marble Resources, Inc. v. Court of Appeals,
the Court was confronted with the similar issue of capacity
to sue of the officers of the corporation who filed a complaint
for damages. In the said case, we sustained the dismissal of
the complaint because it was not established that the
Members of the Board who authorized the filing of the
complaint were the lawfully elected officers of the
corporation. Thus
[22]

The only issue in this case is whether or not the filing of the
case for damages against private respondent was authorized
by a duly constituted Board of Directors of the petitioner
corporation.
Petitioner, through the first set of officers, viz., Mario Zavalla,
Oscar Gan, Lionel Pengson, Jose Ma. Silva, Aderito Yujuico and
Rodolfo Millare, presented the Minutes of the meeting of its
Board of Directors held on April 1, 1982, as proof that the
filing of the case against private respondent was authorized
by the Board. On the other hand, the second set of
officers, viz., Saturnino G. Belen, Jr., Alberto C. Nograles and
Jose L.R. Reyes, presented a Resolution dated July 30, 1986, to
show that Premium did not authorize the filing in its behalf of
any suit against the private respondent International
Corporate Bank.
Later on, petitioner submitted its Articles of Incorporation
dated November 6, 1979 with the following as Directors: Mario
C. Zavalla, Pedro C. Celso, Oscar B. Gan, Lionel Pengson, and
Jose Ma. Silva.
However, it appears from the general information sheet and
the Certification issued by the SEC on August 19, 1986 that as
of March 4, 1981, the officers and members of the board of
directors of the Premium Marble Resources, Inc. were:
Alberto C. Nograles President/Director
Fernando D. Hilario Vice
President/Director
Augusto I. Galace Treasurer
Jose L.R. Reyes Secretary/Director
Pido E. Aguilar Director
Saturnino G. Belen, Jr. Chairman of the Board.
While the Minutes of the Meeting of the Board on April 1, 1982
states that the newly elected officers for the year 1982 were
Oscar Gan, Mario Zavalla, Aderito Yujuico and Rodolfo Millare,

We agree with the finding of public respondent Court of

Appeals, that in the absence of any board resolution from its
board of directors the [sic] authority to act for and in behalf of
the corporation, the present action must necessarily fail. 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. Thus, the issue of authority and the invalidity of
plaintiff-appellants subscription which is still pending, is a
matter that is also addressed, considering the premises, to
the sound judgment of the Securities & Exchange
Commission.
By the express mandate of the Corporation Code (Section 26),
all corporations duly organized pursuant thereto are required
to submit within the period therein stated (30 days) to the
Securities and Exchange Commission the names, nationalities
and residences of the directors, trustees and officers elected.
Sec. 26 of the Corporation Code provides, thus:
Sec. 26. Report of election of directors, trustees and officers.
Within thirty (30) days after the election of the directors,
trustees and officers of the corporation, the secretary, or any
other officer of the corporation, shall submit to the Securities
and Exchange Commission, the names, nationalities and
residences of the directors, trustees and officers elected. xxx
Evidently, the objective sought to be achieved by Section 26
is to give the public information, under sanction of oath of
responsible officers, of the nature of business, financial
condition and operational status of the company together with
information on its key officers or managers so that those
dealing with it and those who intend to do business with it
may know or have the means of knowing facts concerning the
corporations financial resources and business responsibility.
The claim, therefore, of petitioners as represented by Atty.
Dumadag, that Zaballa, et al., are the incumbent officers of
Premium has not been fully substantiated. In the absence of
an authority from the board of directors, no person, not even
the officers of the corporation, can validly bind the
corporation.
In the case at bar, the fact that four of the six Members
of the Board listed in the 1996 General Information
Sheet[23] are already dead[24] at the time the March 31, 1997
Board Resolution was issued, does not automatically make the
four signatories (i.e., Paul M. Monfort, Yvete M. Benedicto,
Jaqueline M. Yusay and Ester S. Monfort) to the said Board
Resolution (whose name do not appear in the 1996 General
Information Sheet) as among the incumbent Members of the
Board. This is because it was not established that they were
duly elected to replace the said deceased Board Members.
To correct the alleged error in the General Information
Sheet, the retained accountant of the Corporation informed
the SEC in its November 11, 1998 letter that the non-inclusion
of the lawfully elected directors in the 1996 General
Information Sheet was attributable to its oversight and not the
fault of the Corporation.[25] This belated attempt, however, did
not erase the doubt as to whether an election was indeed
held. As previously stated, 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. The
alleged election of the directors and officers who signed the
March 31, 1997 Board Resolution was held on October 16,
1996, but the SEC was informed thereof more than two years

100
later, or onNovember 11, 1998. The 4 Directors appearing in
the 1996 General Information Sheet died between the years
1984 1987,[26] but the records do not show if such demise was
reported to the SEC.
What further militates against the purported election of
those who signed the March 31, 1997 Board Resolution was
the belated submission of the alleged Minutes of the October
16, 1996 meeting where the questioned officers were
elected. The issue of legal capacity of Ma. Antonia M.
Salvatierra was raised before the lower court by the group of
Antonio Monfort III as early as 1997, but the Minutes of said
October 16, 1996 meeting was presented by the Corporation
only in its September 29, 1999Comment before the Court of
Appeals.[27] Moreover, the Corporation failed to prove that the
same October 16, 1996 Minutes was submitted to the SEC. In
fact, the 1997General Information Sheet[28] submitted by the
Corporation does not reflect the names of the 4 Directors
claimed to be elected on October 16, 1996.
Considering the foregoing, we find that Ma. Antonia M.
Salvatierra failed to prove that four of those who authorized
her to represent the Corporation were the lawfully elected
Members of the Board of the Corporation. As such, they
cannot confer valid authority for her to sue on behalf of the
corporation.
The Court notes that the complaint in Civil Case No. 506C, for replevin before the Regional Trial Court of Negros
Occidental, Branch 60, has 2 causes of action, i.e., unlawful
detention of the Corporations motor vehicle and tractors, and
the unlawful detention of the of 387 fighting cocks of Ramon
H. Monfort. 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 corporations cause of action for delivery
of motor vehicle and tractors. In view, however, of the demise
of Ramon on June 25, 1999,[29] substitution by his heirs is
proper.
WHEREFORE, in view of all the foregoing, the petition in
G.R. No. 152542 is DENIED. The October 5, 2001 Decision of
the Special Tenth Division of the Court of Appeals in CA-G.R.
SP No. 53652, which set aside the August 14, 1998 Decision of
the Regional Trial Court of Negros Occidental, Branch 60 in
Civil Case No. 822, isAFFIRMED.
In G.R. No. 155472, the petition is GRANTED and the
June 7, 2002 Decision rendered by the Special Former
Thirteenth Division of the Court of Appeals in CA-G.R. SP No.
49251, dismissing the petition filed by the group of Antonio
Monfort III, is REVERSED and SET ASIDE.
The complaint for forcible entry docketed as Civil Case
No.
822
before
the Municipal Trial Court of Cadiz City is DISMISSED. In
Civil
Case No. 506-C with the Regional Trial Court of Negros
Occidental, Branch 60, the action for delivery of personal
property filed by Monfort Hermanos Agricultural Development
Corporation is likewise DISMISSED. With respect to the action
filed by Ramon H. Monfort for the delivery of 387 fighting
cocks, the Regional Trial Court of Negros Occidental, Branch
60, is ordered to effect the corresponding substitution of
parties.
No costs.
SO ORDERED.

G.R. No. 166862

December 20, 2006

MANILA METAL CONTAINER CORPORATION, petitioner,

REYNALDO C. TOLENTINO, intervenor,
vs.
PHILIPPINE NATIONAL BANK, respondent,
DMCI-PROJECT DEVELOPERS, INC., intervenor
DECISION
Before us is a petition for review on certiorari of the
Decision1 of the Court of Appeals (CA) in CA-G.R. No. 46153
which affirmed the decision2 of the Regional Trial Court (RTC),
Branch 71, Pasig City, in Civil Case No. 58551, and its
Resolution3 denying the motion for reconsideration filed by
petitioner Manila Metal Container Corporation (MMCC).
The Antecedents
Petitioner was the owner of a 8,015 square meter parcel of
land located in Mandaluyong (now a City), Metro Manila. The
property was covered by Transfer Certificate of Title (TCT) No.
332098 of the Registry of Deeds of Rizal. To secure
a P900,000.00 loan it had obtained from respondent Philippine
National Bank (PNB), petitioner executed a real estate
mortgage over the lot. Respondent PNB later granted
petitioner a new credit accommodation of P1,000,000.00; and,
on November 16, 1973, petitioner executed an
Amendment4 of Real Estate Mortgage over its property. On
March 31, 1981, petitioner secured another loan
of P653,000.00 from respondent PNB, payable in quarterly
installments of P32,650.00, plus interests and other charges. 5
On August 5, 1982, respondent PNB filed a petition for
extrajudicial foreclosure of the real estate mortgage and
sought to have the property sold at public auction
for P911,532.21, petitioner's outstanding obligation to
respondent PNB as of June 30, 1982,6 plus interests and
attorney's fees.
After due notice and publication, the property was sold at
public auction on September 28, 1982 where respondent PNB
was declared the winning bidder for P1,000,000.00. The
Certificate of Sale7 issued in its favor was registered with the
Office of the Register of Deeds of Rizal, and was annotated at
the dorsal portion of the title on February 17, 1983. Thus, the
period to redeem the property was to expire on February 17,
1984.
Petitioner sent a letter dated August 25, 1983 to respondent
PNB, requesting that it be granted an extension of time to
redeem/repurchase the property.8 In its reply dated August 30,
1983, respondent PNB informed petitioner that the request
had been referred to its Pasay City Branch for appropriate
action and recommendation.9
In a letter10 dated February 10, 1984, petitioner reiterated its
request for a one year extension from February 17, 1984
within which to redeem/repurchase the property on
installment basis. It reiterated its request to repurchase the
property on installment.11 Meanwhile, some PNB Pasay City
Branch personnel informed petitioner that as a matter of
policy, the bank does not accept "partial redemption." 12
Since petitioner failed to redeem the property, the Register of
Deeds cancelled TCT No. 32098 on June 1, 1984, and issued a
new title in favor of respondent PNB.13 Petitioner's offers had
not yet been acted upon by respondent PNB.
Meanwhile, the Special Assets Management Department
(SAMD) had prepared a statement of account, and as of June
25, 1984 petitioner's obligation amounted to P1,574,560.47.
This included the bid price of P1,056,924.50, interest,
advances of insurance premiums, advances on realty taxes,
registration expenses, miscellaneous expenses and
publication cost.14 When apprised of the statement of account,
petitioner remitted P725,000.00 to respondent PNB as
"deposit to repurchase," and Official Receipt No. 978191 was
issued to it.15

**Reyes v RCPI ECUI**

FIRST DIVISION

In the meantime, the SAMD recommended to the

management of respondent PNB that petitioner be allowed to
repurchase the property for P1,574,560.00. In a letter dated
November 14, 1984, the PNB management informed
petitioner that it was rejecting the offer and the

101
recommendation of the SAMD. It was suggested that
petitioner purchase the property for P2,660,000.00, its
minimum market value. Respondent PNB gave petitioner until
December 15, 1984 to act on the proposal; otherwise,
its P725,000.00 deposit would be returned and the property
would be sold to other interested buyers.16
Petitioner, however, did not agree to respondent PNB's
proposal. Instead, it wrote another letter dated December 12,
1984 requesting for a reconsideration. Respondent PNB
replied in a letter dated December 28, 1984, wherein it
reiterated its proposal that petitioner purchase the property
for P2,660,000.00. PNB again informed petitioner that it would
return the deposit should petitioner desire to withdraw its
offer to purchase the property.17 On February 25, 1985,
petitioner, through counsel, requested that PNB reconsider its
letter dated December 28, 1984. Petitioner declared that it
had already agreed to the SAMD's offer to purchase the
property for P1,574,560.47, and that was why it had
paid P725,000.00. Petitioner warned respondent PNB that it
would seek judicial recourse should PNB insist on the
position.18
On June 4, 1985, respondent PNB informed petitioner that the
PNB Board of Directors had accepted petitioner's offer to
purchase the property, but for P1,931,389.53 in cash less
the P725,000.00 already deposited with it.19 On page two of
the letter was a space above the typewritten name of
petitioner's President, Pablo Gabriel, where he was to affix his
signature. However, Pablo Gabriel did not conform to the
letter but merely indicated therein that he had received
it.20 Petitioner did not respond, so PNB requested petitioner in
a letter dated June 30, 1988 to submit an amended offer to
repurchase.
Petitioner rejected respondent's proposal in a letter dated July
14, 1988. It maintained that respondent PNB had agreed to
sell the property for P1,574,560.47, and that since
its P725,000.00 downpayment had been accepted,
respondent PNB was proscribed from increasing the purchase
price of the property.21 Petitioner averred that it had a net
balance payable in the amount of P643,452.34. Respondent
PNB, however, rejected petitioner's offer to pay the balance
of P643,452.34 in a letter dated August 1, 1989.22
On August 28, 1989, petitioner filed a complaint against
respondent PNB for "Annulment of Mortgage and Mortgage
Foreclosure, Delivery of Title, or Specific Performance with
Damages." To support its cause of action for specific
performance, it alleged the following:
34. As early as June 25, 1984, PNB had accepted the
down payment from Manila Metal in the substantial
amount of P725,000.00 for the
redemption/repurchase price of P1,574,560.47 as
approved by its SMAD and considering the reliance
made by Manila Metal and the long time that has
elapsed, the approval of the higher management of
the Bank to confirm the agreement of its SMAD is
clearly a potestative condition which cannot legally
prejudice Manila Metal which has acted and relied on
the approval of SMAD. The Bank cannot take
advantage of a condition which is entirely dependent
upon its own will after accepting and benefiting from
the substantial payment made by Manila Metal.
35. PNB approved the repurchase price
of P1,574,560.47 for which it accepted P725,000.00
from Manila Metal. PNB cannot take advantage of its
own delay and long inaction in demanding a higher
amount based on unilateral computation of interest
rate without the consent of Manila Metal.
Petitioner later filed an amended complaint and supported its
claim for damages with the following arguments:
36. That in order to protect itself against the wrongful
and malicious acts of the defendant Bank, plaintiff is
constrained to engage the services of counsel at an
agreed fee of P50,000.00 and to incur litigation
expenses of at least P30,000.00, which the
defendant PNB should be condemned to pay the
plaintiff Manila Metal.
37. That by reason of the wrongful and malicious
actuations of defendant PNB, plaintiff Manila Metal

suffered besmirched reputation for which defendant

PNB is liable for moral damages of at
least P50,000.00.
38. That for the wrongful and malicious act of
defendant PNB which are highly reprehensible,
exemplary damages should be awarded in favor of
the plaintiff by way of example or correction for the
public good of at least P30,000.00.23
Petitioner prayed that, after due proceedings, judgment be
rendered in its favor, thus:
a) Declaring the Amended Real Estate Mortgage
(Annex "A") null and void and without any legal force
and effect.
b) Declaring defendant's acts of extra-judicially
foreclosing the mortgage over plaintiff's property and
setting it for auction sale null and void.
c) Ordering the defendant Register of Deeds to
cancel the new title issued in the name of PNB (TCT
NO. 43792) covering the property described in
paragraph 4 of the Complaint, to reinstate TCT
No. 37025 in the name of Manila Metal and to cancel
the annotation of the mortgage in question at the
back of the TCT No.37025 described in paragraph 4
of this Complaint.
d) Ordering the defendant PNB to return and/or
deliver physical possession of the TCT
No. 37025 described in paragraph 4 of this Complaint
to the plaintiff Manila Metal.
e) Ordering the defendant PNB to pay the plaintiff
Manila Metal's actual damages, moral and exemplary
damages in the aggregate amount of not less
than P80,000.00 as may be warranted by the
evidence and fixed by this Honorable Court in the
exercise of its sound discretion, and attorney's fees
of P50,000.00 and litigation expenses of at
least P30,000.00 as may be proved during the trial,
and costs of suit.
Plaintiff likewise prays for such further reliefs which
may be deemed just and equitable in the premises.24
In its Answer to the complaint, respondent PNB averred, as a
special and affirmative defense, that it had acquired
ownership over the property after the period to redeem had
elapsed. It claimed that no contract of sale was perfected
between it and petitioner after the period to redeem the
property had expired.
During pre-trial, the parties agreed to submit the case for
decision, based on their stipulation of facts.25 The parties
agreed to limit the issues to the following:
1. Whether or not the June 4, 1985 letter of the
defendant approving/accepting plaintiff's offer to
purchase the property is still valid and legally
enforceable.
2. Whether or not the plaintiff has waived its right to
purchase the property when it failed to conform with
the conditions set forth by the defendant in its letter
dated June 4, 1985.
3. Whether or not there is a perfected contract of
sale between the parties.26
While the case was pending, respondent PNB demanded, on
September 20, 1989, that petitioner vacate the property
within 15 days from notice,27 but petitioners refused to do so.
On March 18, 1993, petitioner offered to repurchase the
property for P3,500,000.00.28 The offer was however rejected
by respondent PNB, in a letter dated April 13, 1993. According
to it, the prevailing market value of the property was
approximately P30,000,000.00, and as a matter of policy, it
could not sell the property for less than its market value.29 On
June 21, 1993, petitioner offered to purchase the property

102
for P4,250,000.00 in cash.30 The offer was again rejected by
respondent PNB on September 13, 1993.31
On May 31, 1994, the trial court rendered judgment
dismissing the amended complaint and respondent PNB's
counterclaim. It ordered respondent PNB to refund
the P725,000.00 deposit petitioner had made.32 The trial court
ruled that there was no perfected contract of sale between
the parties; hence, petitioner had no cause of action for
specific performance against respondent. The trial court
declared that respondent had rejected petitioner's offer to
repurchase the property. Petitioner, in turn, rejected the terms
and conditions contained in the June 4, 1985 letter of the
SAMD. While petitioner had offered to repurchase the property
per its letter of July 14, 1988, the amount ofP643,422.34 was
way below the P1,206,389.53 which respondent PNB had
demanded. It further declared that theP725,000.00 remitted
by petitioner to respondent PNB on June 4, 1985 was a
"deposit," and not a downpayment or earnest money.
On appeal to the CA, petitioner made the following
allegations:
I
THE LOWER COURT ERRED IN RULING THAT
DEFENDANT-APPELLEE'S LETTER DATED 4 JUNE 1985
APPROVING/ACCEPTING PLAINTIFF-APPELLANT'S
OFFER TO PURCHASE THE SUBJECT PROPERTY IS NOT
VALID AND ENFORCEABLE.
II
THE LOWER COURT ERRED IN RULING THAT THERE
WAS NO PERFECTED CONTRACT OF SALE BETWEEN
PLAINTIFF-APPELLANT AND DEFENDANT-APPELLEE.
III
THE LOWER COURT ERRED IN RULING THAT
PLAINTIFF-APPELLLANT WAIVED ITS RIGHT TO
PURCHASE THE SUBJECT PROPERTY WHEN IT FAILED
TO CONFORM WITH CONDITIONS SET FORTH BY
DEFENDANT-APPELLEE IN ITS LETTER DATED 4 JUNE
1985.
IV
THE LOWER COURT ERRED IN DISREGARDING THE
FACT THAT IT WAS THE DEFENDANT-APPELLEE WHICH
RENDERED IT DIFFICULT IF NOT IMPOSSIBLE FOR
PLAINTIFF-APPELLANT TO COMPLETE THE BALANCE
OF THEIR PURCHASE PRICE.
V
THE LOWER COURT ERRED IN DISREGARDING THE
FACT THAT THERE WAS NO VALID RESCISSION OR
CANCELLATION OF SUBJECT CONTRACT OF
REPURCHASE.
VI
THE LOWER COURT ERRED IN DECLARING THAT
PLAINTIFF FAILED AND REFUSED TO SUBMIT THE
AMENDED REPURCHASE OFFER.
VII
THE LOWER COURT ERRED IN DISMISSING THE
AMENDED COMPLAINT OF PLAINTIFF-APPELLANT.
VIII
THE LOWER COURT ERRED IN NOT AWARDING
PLAINTIFF-APPELLANT ACTUAL, MORAL AND
EXEMPLARY DAMAGES, ATTOTRNEY'S FEES AND
LITIGATION EXPENSES.33
Meanwhile, on June 17, 1993, petitioner's Board of Directors
approved Resolution No. 3-004, where it waived, assigned and
transferred its rights over the property covered by TCT No.
33099 and TCT No. 37025 in favor of Bayani Gabriel, one of its
Directors.34 Thereafter, Bayani Gabriel executed a Deed of
Assignment over 51% of the ownership and management of
the property in favor of Reynaldo Tolentino, who later moved
for leave to intervene as plaintiff-appellant. On July 14, 1993,
the CA issued a resolution granting the motion,35 and likewise
granted the motion of Reynaldo Tolentino substituting
petitioner MMCC, as plaintiff-appellant, and his motion to
withdraw as intervenor.36

to the counter-offer; and the negotiations did not prosper.

Moreover, petitioner did not pay the balance of the purchase
price within the sixty-day period set in the June 4, 1985 letter
of respondent PNB. Consequently, there was no perfected
contract of sale, and as such, there was no contract to
rescind.
According to the appellate court, the claim for damages and
the counterclaim were correctly dismissed by the court a quo
for no evidence was presented to support it. Respondent
PNB's letter dated June 30, 1988 cannot revive the failed
negotiations between the parties. Respondent PNB merely
asked petitioner to submit an amended offer to repurchase.
While petitioner reiterated its request for a lower selling price
and that the balance of the repurchase be reduced, however,
respondent rejected the proposal in a letter dated August 1,
1989.
Petitioner filed a motion for reconsideration, which the CA
likewise denied.
Thus, petitioner filed the instant petition for review
on certiorari, alleging that:
I. THE COURT OF APPEALS ERRED ON A QUESTION OF
LAW WHEN IT RULED THAT THERE IS NO PERFECTED
CONTRACT OF SALE BETWEEN THE PETITIONER AND
RESPONDENT.
II. THE COURT OF APPEALS ERRED ON A QUESTION
OF LAW WHEN IT RULED THAT THE AMOUNT OF
PHP725,000.00 PAID BY THE PETITIONER IS NOT AN
EARNEST MONEY.
III. THE COURT OF APPEALS ERRED ON A QUESTION
OF LAW WHEN IT RULED THAT THE FAILURE OF THE
PETITIONER-APPELLANT TO SIGNIFY ITS CONFORMITY
TO THE TERMS CONTAINED IN PNB'S JUNE 4, 1985
LETTER MEANS THAT THERE WAS NO VALID AND
LEGALLY ENFORCEABLE CONTRACT OF SALE
BETWEEN THE PARTIES.
IV. THE COURT OF APPEALS ERRED ON A QUESTION
OF LAW THAT NON-PAYMENT OF THE PETITIONERAPPELLANT OF THE BALANCE OF THE OFFERED PRICE
IN THE LETTER OF PNB DATED JUNE 4, 1985, WITHIN
SIXTY (60) DAYS FROM NOTICE OF APPROVAL
CONSTITUTES NO VALID AND LEGALLY ENFORCEABLE
CONTRACT OF SALE BETWEEN THE PARTIES.
V. THE COURT OF APPEALS SERIOUSLY ERRED WHEN
IT HELD THAT THE LETTERS OF PETITIONERAPPELLANT DATED MARCH 18, 1993 AND JUNE 21,
1993, OFFERING TO BUY THE SUBJECT PROPERTY AT
DIFFERENT AMOUNT WERE PROOF THAT THERE IS NO
PERFECTED CONTRACT OF SALE.38
The threshold issue is whether or not petitioner and
respondent PNB had entered into a perfected contract for
petitioner to repurchase the property from respondent.

The CA rendered judgment on May 11, 2000 affirming the

decision of the RTC.37 It declared that petitioner obviously
never agreed to the selling price proposed by respondent PNB
(P1,931,389.53) since petitioner had kept on insisting that the
selling price should be lowered to P1,574,560.47. Clearly
therefore, there was no meeting of the minds between the
parties as to the price or consideration of the sale.

Petitioner maintains that it had accepted respondent's offer

made through the SAMD, to sell the property
forP1,574,560.00. When the acceptance was made in its letter
dated June 25, 1984; it then deposited P725,000.00 with the
SAMD as partial payment, evidenced by Receipt No. 978194
which respondent had issued. Petitioner avers that the
SAMD's acceptance of the deposit amounted to an acceptance
of its offer to repurchase. Moreover, as gleaned from the letter
of SAMD dated June 4, 1985, the PNB Board of Directors had
approved petitioner's offer to purchase the property. It claims
that this was the suspensive condition, the fulfillment of which
gave rise to the contract. Respondent could no longer
unilaterally withdraw its offer to sell the property
for P1,574,560.47, since the acceptance of the offer resulted
in a perfected contract of sale; it was obliged to remit to
respondent the balance of the original purchase price
of P1,574,560.47, while respondent was obliged to transfer
ownership and deliver the property to petitioner, conformably
with Article 1159 of the New Civil Code.

The CA ratiocinated that petitioner's original offer to purchase

the subject property had not been accepted by respondent
PNB. In fact, it made a counter-offer through its June 4, 1985
letter specifically on the selling price; petitioner did not agree

Petitioner posits that respondent was proscribed from

increasing the interest rate after it had accepted respondent's
offer to sell the property for P1,574,560.00. Consequently,
respondent could no longer validly make a counter-offer

103
of P1,931,789.88 for the purchase of the property. It likewise
maintains that, although theP725,000.00 was considered as
"deposit for the repurchase of the property" in the receipt
issued by the SAMD, the amount constitutes earnest money
as contemplated in Article 1482 of the New Civil Code.
Petitioner cites the rulings of this Court in Villonco v.
Bormaheco39 and Topacio v. Court of Appeals.40
Petitioner avers that its failure to append its conformity to the
June 4, 1984 letter of respondent and its failure to pay the
balance of the price as fixed by respondent within the 60-day
period from notice was to protest respondent's breach of its
obligation to petitioner. It did not amount to a rejection of
respondent's offer to sell the property since respondent was
merely seeking to enforce its right to pay the balance
of P1,570,564.47. In any event, respondent had the option
either to accept the balance of the offered price or to cause
the rescission of the contract.
Petitioner's letters dated March 18, 1993 and June 21, 1993 to
respondent during the pendency of the case in the RTC were
merely to compromise the pending lawsuit, they did not
constitute separate offers to repurchase the property. Such
offer to compromise should not be taken against it, in
accordance with Section 27, Rule 130 of the Revised Rules of
Court.
For its part, respondent contends that the parties never
graduated from the "negotiation stage" as they could not
agree on the amount of the repurchase price of the property.
All that transpired was an exchange of proposals and counterproposals, nothing more. It insists that a definite agreement
on the amount and manner of payment of the price are
essential elements in the formation of a binding and
enforceable contract of sale. There was no such agreement in
this case. Primarily, the concept of "suspensive condition"
signifies a future and uncertain event upon the fulfillment of
which the obligation becomes effective. It clearly presupposes
the existence of a valid and binding agreement, the effectivity
of which is subordinated to its fulfillment. Since there is no
perfected contract in the first place, there is no basis for the
application of the principles governing "suspensive
conditions."
According to respondent, the Statement of Account prepared
by SAMD as of June 25, 1984 cannot be classified as a
counter-offer; it is simply a recital of its total monetary claims
against petitioner. Moreover, the amount stated therein could
not likewise be considered as the counter-offer since as
admitted by petitioner, it was only recommendation which
was subject to approval of the PNB Board of Directors.
Neither can the receipt by the SAMD of P725,000.00 be
regarded as evidence of a perfected sale contract. As gleaned
from the parties' Stipulation of Facts during the proceedings in
the court a quo, the amount is merely an acknowledgment of
the receipt of P725,000.00 as deposit to repurchase the
property. The deposit of P725,000.00 was accepted by
respondent on the condition that the purchase price would
still be approved by its Board of Directors. Respondent
maintains that its acceptance of the amount was qualified by
that condition, thus not absolute. Pending such approval, it
cannot be legally claimed that respondent is already bound by
any contract of sale with petitioner.
According to respondent, petitioner knew that the SAMD has
no capacity to bind respondent and that its authority is limited
to administering, managing and preserving the properties and
other special assets of PNB. The SAMD does not have the
power to sell, encumber, dispose of, or otherwise alienate the
assets, since the power to do so must emanate from its Board
of Directors. The SAMD was not authorized by respondent's
Board to enter into contracts of sale with third persons
involving corporate assets. There is absolutely nothing on
record that respondent authorized the SAMD, or made it
appear to petitioner that it represented itself as having such
authority.
Respondent reiterates that SAMD had informed petitioner that
its offer to repurchase had been approved by the Board
subject to the condition, among others, "that the selling price
shall be the total bank's claim as of documentation date x x x
payable in cash (P725,000.00 already deposited)
within 60 days from notice of approval." A new Statement of
Account was attached therein indicating the total bank's claim
to be P1,931,389.53 less deposit of P725,000.00,

or P1,206,389.00. Furthermore, while respondent's Board of

Directors accepted petitioner's offer to repurchase the
property, the acceptance was qualified, in that it required a
higher sale price and subject to specified terms and conditions
enumerated therein. This qualified acceptance was in effect a
counter-offer, necessitating petitioner's acceptance in return.
The Ruling of the Court
The ruling of the appellate court that there was no perfected
contract of sale between the parties on June 4, 1985 is
correct.
A contract is a meeting of minds between two persons
whereby one binds himself, with respect to the other, to give
something or to render some service.41 Under Article 1318 of
the New Civil Code, there is no contract unless the following
requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the
contract;
(3) Cause of the obligation which is established.
Contracts are perfected by mere consent which is manifested
by the meeting of the offer and the acceptance upon the thing
and the cause which are to constitute the contract. 42 Once
perfected, they bind other contracting parties and the
obligations arising therefrom have the form of law between
the parties and should be complied with in good faith. The
parties are bound not only to the fulfillment of what has been
expressly stipulated but also to the consequences which,
according to their nature, may be in keeping with good faith,
usage and law.43
By the contract of sale, one of the contracting parties
obligates himself to transfer the ownership of and deliver a
determinate thing, and the other to pay therefor a price
certain in money or its equivalent.44 The absence of any of the
essential elements will negate the existence of a perfected
contract of sale. As the Court ruled in Boston Bank of the
Philippines v. Manalo:45
A definite agreement as to the price is an essential
element of a binding agreement to sell personal or
real property because it seriously affects the rights
and obligations of the parties. Price is an essential
element in the formation of a binding and
enforceable contract of sale. The fixing of the price
can never be left to the decision of one of the
contracting parties. But a price fixed by one of the
contracting parties, if accepted by the other, gives
rise to a perfected sale.46
A contract of sale is consensual in nature and is perfected
upon mere meeting of the minds. When there is merely an
offer by one party without acceptance of the other, there is no
contract.47 When the contract of sale is not perfected, it
cannot, as an independent source of obligation, serve as a
binding juridical relation between the parties.48
In San Miguel Properties Philippines, Inc. v. Huang,49 the Court
ruled that the stages of a contract of sale are as follows: (1)
negotiation, covering the period from the time the prospective
contracting parties indicate interest in the contract to the time
the contract is perfected; (2) perfection, which takes place
upon the concurrence of the essential elements of the sale
which are the meeting of the minds of the parties as to the
object of the contract and upon the price; and
(3) consummation, which begins when the parties perform
their respective undertakings under the contract of sale,
culminating in the extinguishment thereof.
A negotiation is formally initiated by an offer, which, however,
must be certain.50 At any time prior to the perfection of the
contract, either negotiating party may stop the negotiation. At
this stage, the offer may be withdrawn; the withdrawal is
effective immediately after its manifestation. To convert the
offer into a contract, the acceptance must be absolute and
must not qualify the terms of the offer; it must be plain,
unequivocal, unconditional and without variance of any sort
from the proposal. In Adelfa Properties, Inc. v. Court of
Appeals,51 the Court ruled that:

104
x x x The rule is that except where a formal
acceptance is so required, although the acceptance
must be affirmatively and clearly made and must be
evidenced by some acts or conduct communicated to
the offeror, it may be shown by acts, conduct, or
words of the accepting party that clearly manifest a
present intention or determination to accept the offer
to buy or sell. Thus, acceptance may be shown by
the acts, conduct, or words of a party recognizing the
existence of the contract of sale.52
A qualified acceptance or one that involves a new proposal
constitutes a counter-offer and a rejection of the original offer.
A counter-offer is considered in law, a rejection of the original
offer and an attempt to end the negotiation between the
parties on a different basis.53 Consequently, when something
is desired which is not exactly what is proposed in the offer,
such acceptance is not sufficient to guarantee consent
because any modification or variation from the terms of the
offer annuls the offer.54 The acceptance must be identical in all
respects with that of the offer so as to produce consent or
meeting of the minds.
In this case, petitioner had until February 17, 1984 within
which to redeem the property. However, since it lacked the
resources, it requested for more time to redeem/repurchase
the property under such terms and conditions agreed upon by
the parties.55 The request, which was made through a letter
dated August 25, 1983, was referred to the respondent's main
branch for appropriate action.56 Before respondent could act
on the request, petitioner again wrote respondent as follows:
1. Upon approval of our request, we will pay your
goodselves ONE HUNDRED & FIFTY THOUSAND
PESOS (P150,000.00);
2. Within six months from date of approval of our
request, we will pay another FOUR HUNDRED FIFTY
THOUSAND PESOS (P450,000.00); and
3. The remaining balance together with the interest
and other expenses that will be incurred will be paid
within the last six months of the one year grave
period requested for.57
When the petitioner was told that respondent did not allow
"partial redemption,"58 it sent a letter to respondent's
President reiterating its offer to purchase the property. 59 There
was no response to petitioner's letters dated February 10 and
15, 1984.
The statement of account prepared by the SAMD stating that
the net claim of respondent as of June 25, 1984
wasP1,574,560.47 cannot be considered an unqualified
acceptance to petitioner's offer to purchase the property. The
statement is but a computation of the amount which
petitioner was obliged to pay in case respondent would later
agree to sell the property, including interests, advances on
insurance premium, advances on realty taxes, publication
cost, registration expenses and miscellaneous expenses.
There is no evidence that the SAMD was authorized by
respondent's Board of Directors to accept petitioner's offer
and sell the property for P1,574,560.47. Any acceptance by
the SAMD of petitioner's offer would not bind respondent. As
this Court ruled in AF Realty Development, Inc. vs. Diesehuan
Freight Services, Inc.:60
Section 23 of the Corporation Code expressly
provides that the corporate powers of all
corporations shall be exercised by the board of
directors. Just as a natural person may authorize
another to do certain acts in his behalf, so may the
board of directors of a corporation validly delegate
some of its functions to individual officers or agents
appointed by it. Thus, contracts or acts of a
corporation must be made either by the board of
directors or by a corporate agent duly authorized by
the board. 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 held not binding on the
corporation.

Thus, a corporation can only execute 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.61
It appears that the SAMD had prepared a recommendation for
respondent to accept petitioner's offer to repurchase the
property even beyond the one-year period; it recommended
that petitioner be allowed to redeem the property and
pay P1,574,560.00 as the purchase price. Respondent later
approved the recommendation that the property be sold to
petitioner. But instead of the P1,574,560.47 recommended by
the SAMD and to which petitioner had previously conformed,
respondent set the purchase price at P2,660,000.00. In fine,
respondent's acceptance of petitioner's offer was qualified,
hence can be at most considered as a counter-offer. If
petitioner had accepted this counter-offer, a perfected
contract of sale would have arisen; as it turns out, however,
petitioner merely sought to have the counter-offer
reconsidered. This request for reconsideration would later be
rejected by respondent.
We do not agree with petitioner's contention that
the P725,000.00 it had remitted to respondent was "earnest
money" which could be considered as proof of the perfection
of a contract of sale under Article 1482 of the New Civil Code.
The provision reads:
ART. 1482. Whenever earnest money is given in a
contract of sale, it shall be considered as part of the
price and as proof of the perfection of the contract.
This contention is likewise negated by the stipulation of facts
which the parties entered into in the trial court:
8. On June 8, 1984, the Special Assets Management
Department (SAMD) of PNB prepared an updated
Statement of Account showing MMCC's total liability
to PNB as of June 25, 1984 to be P1,574,560.47 and
recommended this amount as the repurchase price of
the subject property.
9. On June 25, 1984, MMCC paid P725,000.00 to PNB
as deposit to repurchase the property. The deposit
of P725,000 was accepted by PNB on the
condition that the purchase price is still
subject to the approval of the PNB Board.62
Thus, the P725,000.00 was merely a deposit to be applied as
part of the purchase price of the property, in the event that
respondent would approve the recommendation of SAMD for
respondent to accept petitioner's offer to purchase the
property for P1,574,560.47. Unless and until the respondent
accepted the offer on these terms, no perfected contract of
sale would arise. Absent proof of the concurrence of all the
essential elements of a contract of sale, the giving of earnest
money cannot establish the existence of a perfected contract
of sale.63
It appears that, per its letter to petitioner dated June 4, 1985,
the respondent had decided to accept the offer to purchase
the property for P1,931,389.53. However, this amounted to an
amendment of respondent's qualified acceptance, or an
amended counter-offer, because while the respondent
lowered the purchase price, it still declared that its
acceptance was subject to the following terms and conditions:
1. That the selling price shall be the total Bank's
claim as of documentation date (pls. see attached
statement of account as of 5-31-85), payable in cash
(P725,000.00 already deposited) within sixty (60)
days from notice of approval;
2. The Bank sells only whatever rights, interests and
participation it may have in the property and you are
charged with full knowledge of the nature and extent
of said rights, interests and participation and waive
your right to warranty against eviction.
3. All taxes and other government imposts due or to
become due on the property, as well as expenses
including costs of documents and science stamps,
transfer fees, etc., to be incurred in connection with
the execution and registration of all covering
documents shall be borne by you;

105
4. That you shall undertake at your own expense and
account the ejectment of the occupants of the
property subject of the sale, if there are any;
5. That upon your failure to pay the balance of the
purchase price within sixty (60) days from receipt of
advice accepting your offer, your deposit shall be
forfeited and the Bank is thenceforth authorized to
sell the property to other interested parties.
6. That the sale shall be subject to such other terms
and conditions that the Legal Department may
impose to protect the interest of the Bank. 64
It appears that although respondent requested petitioner to
conform to its amended counter-offer, petitioner refused and
instead requested respondent to reconsider its amended
counter-offer. Petitioner's request was ultimately rejected and
respondent offered to refund its P725,000.00 deposit.
In sum, then, there was no perfected contract of sale between
petitioner and respondent over the subject property.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED.
The assailed decision is AFFIRMED. Costs against petitioner
Manila Metal Container Corporation.
SO ORDERED.

SECOND DIVISION
[G.R. No. 122452. January 29, 2001.]
TAM WING TAK, Petitioner, v. HON. RAMON P.
MAKASIAR (in his Capacity as Presiding Judge of the
Regional Trial Court of Manila, Branch 35) and ZENON
DE GUIA (in his capacity as Chief State
Prosecutor), Respondents.
DECISION

This is a petition for review on certiorari of the decision of the

Regional Trial Court of Manila, Branch 35, dated September
14, 1995, which dismissed herein petitioners special civil
action for mandamus and sustained the Letter-Order of
respondent Chief State Prosecutor. The latter dismissed
petitioners appeal from the resolution of the City Prosecutor
of Quezon City, which, in turn, dismissed petitioners
complaint against Vic Ang Siong for violation of the Bouncing
Checks Law or B.P. Blg. 22.
The factual background of this case is as follows:
On November 11, 1992, Petitioner, in his capacity as director
of Concord-World Properties, Inc., (Concord for brevity), a
domestic corporation, filed an affidavit-complaint with the
Quezon City Prosecutors Office, charging Vic Ang Siong with
violation of B.P. Blg. 22. Docketed by the prosecutor as I.S. No.
93-15886, the complaint alleged that a check for the amount
of P83,550,000.00, issued by Vic Ang Siong in favor of
Concord, was dishonored when presented for encashment.
Vic Ang Siong sought the dismissal of the case on two
grounds: First, that petitioner had no authority to file the case
on behalf of Concord, the payee of the dishonored check,
since the firms board of directors had not empowered him to
act on its behalf. Second, he and Concord had already agreed
to amicably settle the issue after he made a partial payment
of P19,000,000.00 on the dishonored check.
On March 23, 1994, the City Prosecutor dismissed I.S. No. 9315886 on the following grounds: (1) that petitioner lacked the
requisite authority to initiate the criminal complaint for and on
Concords behalf; and (2) that Concord and Vic Ang Siong had
already agreed upon the payment of the latters balance on
the dishonored check.
A copy of the City Prosecutors resolution was sent by
registered mail to petitioner in the address he indicated in his
complaint-affidavit. Notwithstanding that petitioner was
represented by counsel, the latter was not furnished a copy of
the resolution.

On June 27, 1994, petitioners counsel was able to secure a

copy of the resolution dismissing I.S. No. 93-15886. Counting
his 15-day appeal period from said date, petitioner moved for
reconsideration on July 7, 1994.
On October 21, 1994, the City Prosecutor denied petitioners
motion for reconsideration. Petitioners counsel received a
copy of the denial order on November 3, 1994.
On November 7, 1994, petitioners lawyer filed a motion to
extend the period to appeal by an additional 15 days counted
from November 3, 1994 with the Chief State Prosecutor. He
manifested that it would take time to communicate with
petitioner who is a Hong Kong resident and enable the latter
to verify the appeal as procedurally required.
On November 8, 1994, petitioner appealed the dismissal of his
complaint by the City Prosecutor to the Chief State Prosecutor.
The appeal was signed by petitioners attorney only and was
not verified by petitioner until November 23, 1994.
On December 8, 1994, the Chief State Prosecutor dismissed
the appeal for having been filed out of time. Petitioners
lawyer received a copy of the letter-resolution dismissing the
appeal on January 20, 1995.
On January 30, 1995, petitioner moved for reconsideration.
On March 9, 1995, respondent Chief State Prosecutor denied
the motion for reconsideration.
Petitioner then filed Civil Case No. 95-74394 for mandamus
with the Regional Trial Court of Quezon City to compel the
Chief State Prosecutor to file or cause the filing of an
information charging Vic Ang Siong with violation of B.P. Blg.
22.
On September 14, 1995, the trial court disposed of the action
as follows:
WHEREFORE, for utter lack of merit, the petition for
mandamus of petitioner is DENIED and DISMISSED.
SO ORDERED. 1
Petitioner moved for reconsideration, but the trial court
denied this motion in its order dated October 24, 1995.
Hence, the instant petition.
Before this Court, petitioner claims respondent judge
committed grave errors of law in sustaining respondent Chief
State Prosecutor whose action flagrantly contravenes: (1) the
established rule on service of pleadings and orders upon
parties represented by counsel; (b) the basic principle that
except in private crimes, any competent person may initiate a
criminal case; and (3) the B.P. Blg. 22 requirement that
arrangement for full payment of a bounced check must be
made by the drawer with the drawee within five (5) banking
days from notification of the checks dishonor. 2
We find pertinent for our resolution the following issues:
(1) Was there valid service of the City Prosecutors resolution
upon petitioner?
(2) Will mandamus lie to compel the City Prosecutor to file the
necessary information in court?
In upholding respondent Chief State Prosecutor, the court a
quo held:
It is a generally accepted principle in the service of orders,
resolutions, processes and other papers to serve them on the
party or his counsel, either in his office, if known, or else in
the residence, also if known. As the party or his counsel is not
expected to be present at all times in his office or residence,
service is allowed to be made with a person in charge of the
office, or with a person of sufficient discretion to receive the
same in the residence.
In the case under consideration, it is not disputed that the
controverted Resolution dismissing the complaint of the
petitioner against Vic Ang Siong was served on the former by
registered mail and was actually delivered by the postmaster
on April 9, 1994 at said petitioners given address in the
record at No. 5 Kayumanggi Street, West Triangle, Quezon
City. The registered mail was in fact received by S. Ferraro.
The service then was complete and the period for filing a
motion for reconsideration or appeal began to toll from that

106
date. It expired on April 24, 1994. Considering that his motion
for reconsideration was filed only on July 7, 1994, the same
was filed beyond the prescribed period, thereby precluding
further appeal to the Office of the Respondent. 3
Petitioner, before us, submits that there is no such "generally
accepted practice" which gives a tribunal the option of serving
pleadings, orders, resolutions, and other papers to either the
opposing party himself or his counsel. Petitioner insists that
the fundamental rule in this jurisdiction is that it a party
appears by counsel, then service can only be validly made
upon counsel and service upon the party himself becomes
invalid and without effect. Petitioner relies upon Rule 13,
Section 2 of the Rules of Court 4 and our ruling in J.M. Javier
Logging Corp. v. Mardo, 24 SCRA 776 (1968) to support his
stand. In the J.M. Javier case, we held:
[W]here a party appears by attorney, notice to the former is
not a notice in law, unless service upon the party himself is
ordered by the court. . . 5
The Solicitor General, for respondents, contends that the
applicable rule on service in the present case is Section 2 of
the Department of Justice (DOJ) Order No. 223, 6 which allows
service to be made upon either party or his counsel.
Respondents argue that while a preliminary investigation has
been considered as partaking of the nature of a judicial
proceeding, 7 nonetheless, it is not a court proceeding and
hence, falls outside of the ambit of the Rules of Court.
We agree with petitioner that there is no "generally accepted
practice" in the service of orders, resolutions, and processes,
which allows service upon either the litigant or his lawyer. As
a rule, notice or service made upon a party who is
represented by counsel is a nullity. 8 However, said rule
admits of exceptions, as when the court or tribunal orders
service upon the party 9 or when the technical defect is
waived. 10
To resolve the issue on validity of service, we must make a
determination as to which is the applicable rule the rule on
service in the Rules of Court, as petitioner insists or the rule
on service in DOJ Order No. 223?
The Rules of Court were promulgated by this Court pursuant
to Section 13, Article VII of the 1935 Constitution 11 (now
Section 5 [5], Article VIII of the Constitution) 12 to govern
"pleadings, practice and procedure in all courts of the
Philippines." The purpose of the Rules is clear and does not
need any interpretation. The Rules were meant to govern
court (stress supplied) procedures and pleadings. As correctly
pointed out by the Solicitor General, a preliminary
investigation, notwithstanding its judicial nature, is not a court
proceeding. The holding of a preliminary investigation is a
function of the Executive Department and not of the Judiciary.
13 Thus, the rule on service provided for in the Rules of Court
cannot be made to apply to the service of resolutions by
public prosecutors, especially as the agency concerned, in this
case, the Department of Justice, has its own procedural rules
governing said service.
A plain reading of Section 2 of DOJ Order No. 223 clearly
shows that in preliminary investigation, service can be made
upon the party himself or through his counsel. It must be
assumed that when the Justice Department crafted the said
section, it was done with knowledge of the pertinent rule in
the Rules of Court and of jurisprudence interpreting it. The
DOJ could have just adopted the rule on service provided for
in the Rules of Court, but did not. Instead, it opted to word
Section 2 of DOJ Order No. 223 in such a way as to leave no
doubt that in preliminary investigations, service of resolutions
of public prosecutors could be made upon either the party or
his counsel.
Moreover, the Constitution provides that "Rules of procedure
of special courts and quasi judicial bodies shall remain
effective unless disapproved by the Supreme Court." 14 There
is naught in the records to show that we have disapproved
and nullified Section 2 of DOJ Order No. 223 and since its
validity is not an issue in the instant case, we shall refrain
from ruling upon its validity.
We hold that there was valid service upon petitioner pursuant
to Section 2 of DOJ Order No. 223.
On the issue of whether mandamus will lie. In general,
mandamus may be resorted to only where ones right is
founded clearly in law and not when it is doubtful. 15 The
exception is to be found in criminal cases where mandamus is
available to compel the performance by the public prosecutor
of an ostensibly discretionary function, where by reason of

grave abuse of discretion on his part, he willfully refuses to

perform a duty mandated by law. 16 Thus, mandamus may
issue to compel a prosecutor to file an information when he
refused to do so in spite of the prima facie evidence of guilt.
17
Petitioner takes the stance that it was grave abuse for
discretion on the part of respondent Chief State Prosecutor to
sustain the dismissal of I.S. No. 93-15886 on the grounds that:
(1) Vic Ang Siongs obligation which gave rise to the bounced
check had already been extinguished by partial payment and
agreement to amicably settle balance, and (2) petitioner had
no standing to file the criminal complaint since he was neither
the payee nor holder of the bad check. Petitioner opines that
neither ground justifies dismissal of his complaint.
Petitioners stand is unavailing. Respondent Chief State
Prosecutor in refusing to order the filing of an information for
violation of B.P. Blg. 22 against Vic Ang Siong did not act
without or in excess of jurisdiction or with grave abuse of
discretion.
First, with respect to the agreement between Concord and
Victor Ang Siong to amicably settle their difference, we find
this resort to an alternative dispute settlement mechanism as
not contrary to law, public policy, or public order. Efforts of
parties to solve their disputes outside of the courts are looked
on with favor, in view of the clogged dockets of the judiciary.
Second, it is not disputed in the instant case that 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 18 read in relation
to Section 23, 19 it is clear that where a corporation is an
injured party, its power to sue is lodged with its board of
directors or trustees. 20 Note that petitioner failed to show
any proof that he was authorized or deputized or granted
specific powers by Concords board of director to sue Victor
Ang Siong for and on behalf of the firm. Clearly, petitioner as
a minority stockholder and member of the board of directors
had no such power or authority to sue on Concords behalf.
Nor can we uphold his act as a derivative suit. For a derivative
suit to prosper, 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. 21 There is no
showing that petitioner has complied with the foregoing
requisites. It is obvious that petitioner has not shown any
clear legal right which would warrant the overturning of the
decision of public respondents to dismiss the complaint
against Vic Ang Siong. A public prosecutor, by the nature of
his office, is under no compulsion to file a criminal information
where no clear legal justification has been shown, and no
sufficient evidence of guilt nor prima facie case has been
presented by the petitioner. 22 No reversible error may be
attributed to the court a quo when it dismissed petitioners
special civil action for mandamus.
WHEREFORE, the instant petition is DISMISSED for lack of
merit. Costs against petitioner.
SO ORDERED.
SECOND DIVISION
[G.R. NO. 150959 : August 4, 2006]
UNITED PARAGON MINING
CORPORATION, Petitioner, v. COURT OF APPEALS, former
12th DIVISION, ATTY. MURLY P. MENDEZ and
CESARIO1 F. ERMITA, Respondents.
DECISION
Assailed and sought to be set aside in this Petition for Review
under Rule 45 of the Rules of Court is the Decision2 dated July
24, 2001 of the Court of Appeals (CA), as reiterated in its
Resolution3 of November 7, 2001, dismissing the petition
for certiorari with prayer for a temporary restraining order and
preliminary injunction thereat filed by the herein petitioner in
CA-G.R. SP No. 44450, entitled United Paragon Mining
Corporation, represented by Feliciano M. Daniel v. Atty. Murly

107
P. Mendez, in his capacity as Accredited Voluntary Arbitrator,
Region V, and Cesario F. Ermita.

sulat na ito ay siya ang magpapatunay na ayos kaming

dalawa at walang problema sa isa't isa."

The facts:

This admission, that comes no less from the supposed accuser

of [Cesario], clearly establishes the fact that whatever may
have happened between them on New Year's eve was
something that neither of them willfully and voluntarily did.
Since it has been established that the supposed scuffle
between [Cesario] and Romero was "hindi sinasadya," then it
would necessarily follow that there could not have been a
willful and voluntary assault by [Cesario] upon Romero. This
situation is further rendered more puzzling by the fact that the
suspected assailant was himself the bearer of the tell-tale
marks of injury.

Prior to the instant controversy, private respondent Cesario F.

Ermita (Cesario, for brevity) was a regular employee working
as a foreman of petitioner United Paragon Mining Corporation
(UPMC, hereafter).
On January 18, 1996, Cesario received a termination letter
bearing date January 16, 1996 and signed by UPMC's
Personnel Superintendent, Feliciano M. Daniel, informing
Cesario that his employment as foreman is terminated
effective thirty days after his receipt of the letter. As stated in
the letter, the termination was on account of Cesario's
violation of company rules against infliction of bodily injuries
on a co-employee, it being alleged therein that Cesario
inflicted bodily injuries on a co-employee, a certain Jerry
Romero, as well as for unlawfully possessing a deadly weapon,
a bolo, again in violation of company rules.
As a result of the termination, the matter was brought to the
grievance machinery as mandated under the Collective
Bargaining Agreement existing at that time between UPMC
and the United Paragon Supervisors Union. Having failed to
reach a settlement thereat, the parties agreed to submit the
dispute to voluntary arbitration. Accordingly, the complaint for
illegal dismissal was referred to Voluntary Arbitrator Atty.
Murly P. Mendez of the National Conciliation and Mediation
Board, Regional Branch No. V, Legaspi City, whereat the same
was docketed as VA Case No.RB5-657-04-002-96.
On February 28, 1997, Voluntary Arbitrator Mendez rendered a
decision4 in Cesario's favor, stating that although the
procedural requirements in the termination of an employee
had been complied with, the termination of Cesario was
unjustified because it was arrived at through gross
misapprehension of facts. Explains the Voluntary Arbitrator:
An analysis of the tenor of the termination letter would seem
to indicate that Ceasario Ermita was separated from service
simply because his explanation was not acceptable to the
company. Stated more bluntly, Ermita was terminated not
because there was a definite finding of fact relative to his
supposed culpability, but because his answer did not find
favor with management.
xxx
The evidence on record partakes of the uncorroborated
statement of Jerry Romero claiming that he was assaulted by
[Cesario]. This claim has been disputed and is denied by
[Cesario] in the statement executed by him on January 2,
1996 as well as in his written explanation (Annex 6,
Respondent's Position Paper).
On this point, it can be argued that since this is a case of
one's word against another, the best that could be said of
management's evidence is that it has achieved a level at an
equi-poise with that of the Constitution. The spirit of prevailing
jurisprudence as well as a liberal interpretation of the new
Constitutional provision on labor, would mandate that where a
doubt exists, the same should be resolved in favor of labor.
The position of [Cesario] appears to have been strengthened
by the document jointly signed by [him] and Jerry Romero, the
supposed victim of the assault charged.
This amicable settlement would serve to negate the charge of
physical injury against [Cesario] as a basis for termination, it
appearing that even [his] supposed victim, Jerry Romero, who
has been made to appear as a complainant in the proceedings
which resulted in the termination letter, has admitted in this
amicable settlement (Annex A, Complainant's Position Paper)
that "hindi naming sinasadya yon at itong ginawa naming

xxx
It has been established to the satisfaction of this Arbitrator
that the bolo seen that night was used to chop wood to be
burnt in the bonfire. This statement by people who happened
to be unbiased and disinterested remains uncontested and
undisputed.
Further, the preponderance of evidence shows that it was not
[Cesario] who used said bolo, but his son.
xxx
On these points, it is the finding of this Arbitrator, and it is so
ruled, that Ceasario Ermita was unjustifiably
terminated.5 (Words in brackets supplied).
On the basis of the above, the Voluntary Arbitrator, in his
aforementioned decision of February 28, 1997, ordered
Cesario's reinstatement, to wit:
WHEREFORE, judgment is hereby issued ordering respondent
United Paragon Mining Corporation to immediately reinstate
Ceasario F. Ermita to his former position prior to the
termination without loss of seniority nor interruption of
service, and to pay said Ceasario F. Ermita his back wages,
including such other fringe benefits as he would have been
entitled to, from the date of his termination effective February
17, 1996 up to the time of actual reinstatement. Attorney's
fees are hereby granted equivalent to 10 per cent of such
monetary award as the complainant is entitled to.
For lack of merit, all other claims for damages are hereby
dismissed.
SO ORDERED.
In time, UPMC moved for a reconsideration of the decision
insofar as it ordered Cesario's reinstatement which UPMC
sought to avert by offering separation pay instead. UPMC cites
the following against the decreed reinstatement: 1) Cesario's
position has already been filled up; and 2) reinstatement is no
longer appropriate in view of the supposed strained relations
between Cesario and UPMC.
In his Order6 of April 22, 1997, the Voluntary Arbitrator denied
the desired reconsideration stressing that UPMC's
management misapprehended the facts when it caused
Cesario's termination, which cannot support the claim of the
existence of strained relations between him and the
corporation.
Unsatisfied, UPMC, thru its Personnel Superintendent Feliciano
M. Daniel, elevated the case to the CA on a Petition
for Certiorari with Prayer for Temporary Restraining Order and
Injunction, thereat docketed as CA-G.R. SP No. 44450,
asserting that the Voluntary Arbitrator committed grave abuse
of discretion, erroneous interpretation of the law and denial of
substantial justice.

108
In the herein assailed Decision7 dated July 24, 2001, the CA,
without going into the merits of the petition, dismissed the
same on the following grounds:
1) The petition for certiorari was not the proper remedy in
order to seek review or nullify decisions or final orders issued
by the Labor Arbiter;
2) The verification in the petition is ineffective and insufficient
because it was merely signed by the company's Personnel
Superintendent without alleging or showing that he is
authorized for the said purpose and that the verification was
based on knowledge and information;
3) The petitioner's ground of grave abuse of discretion,
erroneous interpretation of the law and denial of justice are
actually dwelling on the appreciation of facts, which cannot be
entertained in a petition for certiorari .
With its motion for reconsideration having been denied by the
CA in its Resolution of November 7, 2001,8 petitioner UPMC is
now with this Court via the present recourse, submitting for
our consideration the following questions:
I
WHETHER OR NOT THE COURT OF APPEALS ERRED IN
DISMISSING THE PETITION AFTER FINDING THAT THE PROPER
REMEDY SHOULD HAVE BEEN A PETITION FOR REVIEW ON
CERTIORARI AND NOT A PETITION FOR CERTIORARI;
II
WHETHER OR NOT THE PUBLIC RESPONDENT COURT OF
APPEALS ERRED IN DISMISSING THE PETITION AFTER FINDING
THAT THE VERIFICATION PORTION OF THE PETITION WAS
INEFFECTIVE AND INSUFFICIENT IN THE ABSENCE OF
ALLEGATION OR SHOWING THAT FELICIANO DANIEL, AS
PERSONNEL SUPERINTENDENT WAS DULY AUTHORIZED TO
FILE THE PETITION;
III
WHETHER OR NOT THE PUBLIC RESPONDENT COURT OF
APPEALS ERRED IN DISMISSING THE PETITION AFTER FINDING
THAT THE PETITION LACKS MERIT BECAUSE IT DWELLED ON
THE APPRECIATION OF FACTS WHICH IS NOT PROPER IN
PETITION FOR CERTIORARI.
The recourse must have to be DENIED, no reversible error
having been committed by the CA in its challenged decision.
We start with the basic concept that a corporation, like
petitioner UPMC, has no power except those expressly
conferred on it by the Corporation Code and those that are
implied or incidental to its existence. In turn, a corporation
exercises said powers through its board of directors and/or its
duly authorized officers and agents. It has thus been observed
that the power of a corporation to sue and be sued in any
court is lodged with its board of directors that exercises its
corporate powers. In turn, physical acts of the corporation,
like the signing of documents, can be performed only by
natural persons duly authorized for the purpose by the
corporate by-laws or by a specific act of the board of
directors.9
It is petitioner's posture that there is no necessity for a board
resolution authorizing its Personnel Superintendent to file in
its behalf the certiorari petition in CA-G.R. SP No. 44450
because said petition arose out of the labor dispute filed
against it and its Personnel Superintendent, Feliciano M.
Daniel. It is argued that in Cesario's complaint for illegal
dismissal, Daniel was made a co-respondent of the
corporation. Upon this premise, UPMC argues that Daniel has
all the right to answer the complaint and to appeal an

unfavorable judgment therein, which he actually did, in his

capacity as the corporation's Personnel Superintendent and as
its representative. Plodding on, petitioner contends that were
the CA to insist that Daniel could not represent the
corporation, it follows that the proceedings before the
Voluntary Arbitrator could only be binding as against Daniel
because the company then could not have been duly
represented in said proceedings.
Throughout the proceedings before the Voluntary Arbitrator,
that is, from the filing of the position papers up to the filing of
the motion for reconsideration, UPMC was duly represented by
its counsel, Atty. Archimedes O. Yanto. True it is that Cesario's
complaint for illegal dismissal was filed against the
corporation and Daniel. It appears obvious to us, however,
that Daniel was merely a nominal party in that proceedings,
as in fact he was impleaded thereat in his capacity as UPMC's
Personnel Superintendent who signed the termination letter.
For sure, Cesario's complaint contains no allegation
whatsoever for specific claim or charge against Daniel in
whatever capacity. As it is, Daniel was not in anyway affected
by the outcome of the illegal dismissal case because only the
corporation was made liable therein to Cesario. Being not a
real party-in-interest, Daniel has no right to file the petition in
CA-G.R. SP No. 44450 in behalf of the corporation without any
authority from its board of directors. It is basic in law that a
corporation has a legal personality entirely separate and
distinct from that of its officers and the latter cannot act for
and on its behalf without being so authorized by its governing
board.
In Premium Marble Resources, Inc. v. Court of Appeals, 10 we
made it clear that in the absence of an authority from the
board of directors, no person, not even the officers of the
corporation, can validly bind the latter:
We agree with the finding of public respondent Court of
Appeals, that "in the absence of any board resolution from its
board of directors the [sic] authority to act for and in behalf of
the corporation, the present action must necessary fail. 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. Thus, the issue of authority and the invalidity of
plaintiff-appellant's subscription which is still pending, is a
matter that is also addressed, considering the premises, to
the sound judgment of the Securities and Exchange
Commission."
Given the reality that the petition in CA-G.R. SP No. 44450 was
filed by Daniel in behalf of and in representation of petitioner
UPMC without an enabling resolution of the latter's board of
directors, that petition was fatally defective, inclusive of the
verification and the certification of non-forum shopping
executed by Daniel himself.
True, ample jurisprudence exists to the effect that subsequent
and substantial compliance of a petitioner may call for the
relaxation of the rules of procedure in the interest of
justice.11But to merit the Court's liberal consideration,
petitioner must show reasonable cause justifying noncompliance with the rules and must convince the Court that
the outright dismissal of the petition would defeat the
administration of justice.12 Here, petitioner has not adequately
explained its failure to have the certification against forum
shopping signed by its duly authorized officer. Instead, it
merely persisted in its thesis that it was not necessary to
show proof that its Personnel Superintendent was duly
authorized to file that petition and to sign the verification
thereof and the certification against forumshopping despite
the absence of the necessary board authorization, thereby
repeating in the process its basic submission that CA-G.R. SP
No. 44450 is merely a continuation of the proceedings before
the Voluntary Arbitrator and that its Personnel Superintendent
was impleaded as one of the respondents in Cesario's
complaint for illegal dismissal.

109
With the view we take of this case, we deem it unnecessary to
address petitioner's other grievances.
WHEREFORE, the instant petition is DENIED and the assailed
CA decision and resolution are AFFIRMED.
Costs against petitioner.
SO ORDERED.

shares of stock in Winchester, Inc. to respondent Joseph, as

well as Yu Kay Guan,9 Siao So Lan, and John S. Yu.10 Petitioner
Anthony remained as trustee for respondent Joseph of the 200
shares of stock in Winchester, Inc., still in petitioner Anthony's
name.
Respondents then alleged that on 30 June 1985, Winchester,
Inc. bought from its incorporators, excluding petitioner
Anthony, their accumulated 8,500 shares in the
corporation.11Subsequently, on 7 November 1995, Winchester,
Inc. sold the same 8,500 shares to other persons, who
included respondents Nancy, Jerald, and Jill; and petitioners
Rosita and Jason.12

THIRD DIVISION
[G.R. NO. 177549 : June 18, 2009]
ANTHONY S. YU, ROSITA G. YU and JASON G.
YU, Petitioners, v. JOSEPH S. YUKAYGUAN, NANCY L.
YUKAYGUAN, JERALD NERWIN L. YUKAYGUAN, and JILL
NESLIE L. YUKAYGUAN, [on their own behalf and on
behalf of] WINCHESTER INDUSTRIAL SUPPLY,
INC., Respondents.
DECISION
Before Us is a Petition for Review on Certiorari1 under Rule 45
of the Rules of Court, which seeks to reverse and set aside the
Resolutions dated 18 July 20062 and 19 April 20073 of the
Court of Appeals in CA-G.R. SP No. 00185. Upon herein
respondents' motion, the Court of Appeals rendered the
assailed Resolution dated 18 July 2006, reconsidering its
Decision4 dated 15 February 2006; and remanding the case to
the Regional Trial Court (RTC) of Cebu City, Branch 11, for
necessary proceedings, in effect, reversing the
Decision5 dated 10 November 2004 of the RTC which
dismissed respondents' Complaint in SRC Case No. 022-CEB.
Herein petitioners' Motion for Reconsideration of the
Resolution dated 18 July 2006 was denied by the appellate
court in the other assailed Resolution dated 19 April 2007.
Herein petitioners are members of the Yu Family, particularly,
the father, Anthony S. Yu (Anthony); the wife, Rosita G. Yu
(Rosita); and their son, Jason G. Yu (Jason).
Herein respondents composed the Yukayguan Family, namely,
the father, Joseph S. Yukayguan (Joseph); the wife, Nancy L.
Yukayguan (Nancy); and their children Jerald Nerwin L.
Yukayguan (Jerald) and Jill Neslie Yukayguan (Jill).
Petitioner Anthony is the older half-brother of respondent
Joseph.
Petitioners and the respondents were all stockholders of
Winchester Industrial Supply, Inc. (Winchester, Inc.), a
domestic corporation engaged in the operation of a general
hardware and industrial supply and equipment business.
On 15 October 2002, respondents filed against petitioners a
verified Complaint for Accounting, Inspection of Corporate
Books and Damages through Embezzlement and Falsification
of Corporate Records and Accounts6 before the RTC of Cebu.
The said Complaint was filed by respondents, in their own
behalf and as a derivative suit on behalf of Winchester, Inc.,
and was docketed as SRC Case No. 022-CEB. The factual
background of the Complaint was stated in the attached
Affidavit executed by respondent Joseph.
According to respondents,7 Winchester, Inc. was established
and incorporated on 12 September 1977, with petitioner
Anthony as one of the incorporators, holding 1,000 shares of
stock worth P100,000.00.8 Petitioner Anthony paid for the said
shares of stock with respondent Joseph's money, thus, making
the former a mere trustee of the shares for the latter. On 14
November 1984, petitioner Anthony ceded 800 of his 1,000

Respondents further averred that although respondent Joseph

appeared as the Secretary and Treasurer in the corporate
records of Winchester, Inc., petitioners actually controlled and
ran the said corporation as if it were their own family
business. Petitioner Rosita handled the money market
placements of the corporation to the exclusion of respondent
Joseph, the designated Treasurer of Winchester, Inc.
Petitioners were also misappropriating the funds and
properties of Winchester, Inc. by understating the sales,
charging their personal and family expenses to the said
corporation, and withdrawing stocks for their personal use
without paying for the same. Respondents attached to the
Complaint various receipts13 to prove the personal and family
expenses charged by petitioners to Winchester, Inc.
Respondents, therefore, prayed that respondent Joseph be
declared the owner of the 200 shares of stock in petitioner
Anthony's name. Respondents also prayed that petitioners be
ordered to: (1) deposit the corporate books and records of
Winchester, Inc. with the Branch Clerk of Court of the RTC for
respondents' inspection; (2) render an accounting of all the
funds of Winchester, Inc. which petitioners misappropriated;
(3) reimburse the personal and family expenses which
petitioners charged to Winchester, Inc., as well as the
properties of the corporation which petitioners withheld
without payment; and (4) pay respondents' attorney's fees
and litigation expenses. In the meantime, respondents sought
the appointment of a Management Committee and the
freezing of all corporate funds by the trial court.
On 13 November 2002, petitioners filed an Answer with
Compulsory Counterclaim,14 attached to which was petitioner
Anthony's Affidavit.15 Petitioners vehemently denied the
allegation that petitioner Anthony was a mere trustee for
respondent Joseph of the 1,000 shares of stock in Winchester,
Inc. in petitioner Anthony's name. For the incorporation of
Winchester, Inc., petitioner Anthony contributed P25,000.00
paid-up capital, representing 25% of the total par value of the
1,000 shares he subscribed to, the said amount being paid out
of petitioner Anthony's personal savings and petitioners
Anthony and Rosita's conjugal funds. Winchester, Inc. was
being co-managed by petitioners and respondents, and the
attached receipts, allegedly evidencing petitioners' use of
corporate funds for personal and family expenses, were in fact
signed and approved by respondent Joseph.
By way of special and affirmative defenses, petitioners
contended in their Answer with Compulsory Counterclaim that
respondents had no cause of action against them.
Respondents' Complaint was purely intended for harassment.
It should be dismissed under Section 1(j), Rule 1616 of the
Rules of Court for failure to comply with conditions precedent
before its filing. First, there was no allegation in respondents'
Complaint that earnest efforts were exerted to settle the
dispute between the parties. Second, since respondents'
Complaint purportedly constituted a derivative suit, it
noticeably failed to allege that respondents exerted effort to
exhaust all available remedies in the Articles of Incorporation
and By-Laws of Winchester, Inc., as well as in the Corporation
Code. And third, given that respondents' Complaint was also
for inspection of corporate books, it lacked the allegation that
respondents made a previous demand upon petitioners to
inspect the corporate books but petitioners refused. Prayed

110
for by petitioners, in addition to the dismissal of respondents'
Complaint, was payment of moral and exemplary damages,
attorney's fees, litigation expenses, and cost of suit.

(signed)
SILVESTRE A. MAAMO, JR.
Acting Presiding Judge

On 30 October 2002, the hearing on the application for the

appointment of a Management Committee was commenced.
Respondent Joseph submitted therein, as his direct testimony,
the same Affidavit that he executed, which was attached to
the respondents' Complaint. On 4 November 2002,
respondent Joseph was cross-examined by the counsel for
petitioners. Thereafter, the continuation of the hearing was
set for 29 November 2002, in order for petitioners to adduce
evidence in support of their opposition to the application for
the appointment of a Management Committee. 17

Petitioners and respondents duly filed their respective

Memoranda,24 discussing the arguments already set forth in
the pleadings they had previously submitted to the RTC.
Respondents, though, attached to their Memorandum a
Supplemental Affidavit25 of respondent Joseph, containing
assertions that refuted the allegations in petitioner Anthony's
Affidavit, which was earlier submitted with petitioners' Answer
with Compulsory Counterclaim. Respondents also appended to
their Memorandum additional documentary
evidence,26 consisting of original and duplicate cash invoices
and cash disbursement receipts issued by Winchester, Inc., to
further substantiate their claim that petitioners were
understating sales and charging their personal expenses to
the corporate funds.

During the hearing on 29 November 2002, the parties

manifested before the RTC that there was an ongoing
mediation between them, and so the hearing on the
appointment of a Management Committee was reset to
another date.
In amicable settlement of their dispute, the petitioners and
respondents agreed to a division of the stocks in trade,18 the
real properties, and the other assets of Winchester, Inc. In
partial implementation of the afore-mentioned amicable
settlement, the stocks in trade and real properties in the
name of Winchester, Inc. were equally distributed among
petitioners and respondents. As a result, the stockholders and
members of the Board of Directors of Winchester, Inc. passed,
on 4 January 2003, a unanimous Resolution19 dissolving the
corporation as of said date.
On 22 February 2004, respondents filed their pre-trial brief.20
On 25 June 2004, petitioners filed a Manifestation21 informing
the RTC of the existence of their amicable settlement with
respondents. Respondents, however, made their own
manifestation before the RTC that they were repudiating said
settlement, in view of the failure of the parties thereto to
divide the remaining assets of Winchester, Inc. Consequently,
respondents moved to have SRC Case No. 022-CEB set for
pre-trial.
On 23 August 2004, petitioners filed their pre-trial brief.22
On 26 August 2004, instead of holding a formal pre-trial
conference and resuming the hearing on the application for
the appointment of a Management Committee, petitioners
and respondents agreed that the RTC may already render a
judgment based on the pleadings. In accordance with the
agreement of the parties, the RTC issued, on even date, an
Order23which stated:
ORDER
During the pre-trial conference held on August 26, 2004,
counsels of the parties manifested, agreed and suggested
that a judgment may be rendered by the Court in this case
based on the pleadings, affidavits, and other evidences on
record, or to be submitted by them, pursuant to the provision
of Rule 4, Section 4 of the Rule on Intra-Corporate
Controversies. The suggestion of counsels was approved by
the Court.
Accordingly, the Court hereby orders the counsels of the
parties to file simultaneously their respective memoranda
within a non-extendible period of twenty (20) days from notice
hereof. Thereafter, the instant case will be deemed submitted
for resolution.
xxx
Cebu City, August 26, 2004.

The RTC subsequently promulgated its Decision on 10

November 2004 dismissing SRC Case No. 022-CEB. The
dispositive portion of said Decision reads:
WHEREFORE, in view of the foregoing premises and for lack of
merit, this Court hereby renders judgment in this case
DISMISSING the complaint filed by the [herein respondents].
The Court also hereby dismisses the [herein petitioners']
counterclaim because it has not been indubitably shown that
the filing by the [respondents] of the latter's complaint was
done in bad faith and with malice.27
The RTC declared that respondents failed to show that they
had complied with the essential requisites for filing a
derivative suit as set forth in Rule 8 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies:
(1) He was a stockholder or member at the time the acts or
transactions subject of the action occurred and at the time the
action was filed;
(2) He exerted all reasonable efforts, and alleges the same
with particularity in the complaint, to exhaust all remedies
available under the articles of incorporation, by-laws, laws or
rules governing the corporation or partnership to obtain the
relief he desires;
(3) No appraisal rights are available for the act or acts
complained of; and
(4) The suit is not a nuisance or harassment suit.
As to respondents' prayer for the inspection of corporate
books and records, the RTC adjudged that they had likewise
failed to comply with the requisites entitling them to the
same. Section 2, Rule 7 of the Interim Rules of Procedure
Governing Intra-Corporate Controversies requires that the
complaint for inspection of corporate books or records must
state that:
(1) The case is for the enforcement of plaintiff's right of
inspection of corporate orders or records and/or to be
furnished with financial statements under Sections 74 and 75
of the Corporation Code of the Philippines;
(2) A demand for inspection and copying of books and records
and/or to be furnished with financial statements made by the
plaintiff upon defendant;
(3) The refusal of defendant to grant the demands of the
plaintiff and the reasons given for such refusals, if any; and
(4) The reasons why the refusal of defendant to grant the
demands of the plaintiff is unjustified and illegal, stating the
law and jurisprudence in support thereof.

111
The RTC further noted that respondent Joseph was the
corporate secretary of Winchester, Inc. and, as such, he was
supposed to be the custodian of the corporate books and
records; therefore, a court order for respondents' inspection of
the same was no longer necessary. The RTC similarly denied
respondents' demand for accounting as it was clear that
Winchester, Inc. had been engaging the services of an audit
firm. Respondent Joseph himself described the audit firm as
competent and independent, and believed that the audited
financial statements the said audit firm prepared were true,
faithful, and correct.
Finding the claims of the parties for damages against each
other to be unsubstantiated, the RTC thereby dismissed the
same.
Respondents challenged the foregoing RTC Decision before
the Court of Appeals via a Petition for Review under Rule 43 of
the Rules of Court, docketed as CA-G.R. SP No. 00185.
On 15 February 2006, the Court of Appeals rendered its
Decision, affirming the 10 December 2004 Decision of the
RTC. Said the appellate court:
After a careful and judicious scrutiny of the extant records of
the case, together with the applicable laws and jurisprudence,
WE see no reason or justification for granting the present
appeal.
xxx
x x x [T]his Court sees that the instant petition would still fail
taking into consideration all the pleadings and evidence of the
parties except the supplemental affidavit of [herein
respondent] Joseph and its corresponding annexes appended
in [respondents'] memorandum before the Court a quo. The
Court a quo have (sic) outrightly dismissed the complaint for
its failure to comply with the mandatory provisions of the
Interim Rules of Procedure for Intra-Corporate Controversies
particularly Rule 2, Section 4(3), Rule 8, Section [1(2)] and
Rule 7, Section 2 thereof, which reads as follows:
RULE 2
COMMENCEMENT OF ACTION AND PLEADINGS
Sec. 4. Complaint. - The complaint shall state or contain:
xxx
(3) the law, rule, or regulation relied upon, violated, or sought
to be enforced;
xxx
RULE 8
DERIVATIVE SUITS
Sec. 1.Derivative action. - x x x
xxx
(2) He exerted all reasonable efforts, and alleges the same
with particularity in the complaint, to exhaust all remedies
available under the articles of incorporation, by-laws, laws or
rules governing the corporation or partnership to obtain the
relief he desires.
xxx
RULE 7
INSPECTION OF CORPORATE BOOKS AND RECORDS

Sec. 2. Complaint - In addition to the requirements in section

4, Rule 2 of these Rules, the complaint must state the
following:
(1) The case is set (sic) for the enforcement of plaintiff's right
of inspection of corporate orders or records and/or to be
furnished with financial statements under Section 74 and 75
of the Corporation Code of the Philippines;
(2) A demand for inspection and copying of books [and/or] to
be furnished with financial statements made by the plaintiffs
upon defendant;
(3) The refusal of the defendant to grant the demands of the
plaintiff and the reasons given for such refusal, if any;
andcralawlibrary
(4) The reasons why the refusal of defendant to grant the
demands of the plaintiff is unjustified and illegal, stating the
law and jurisprudence in support thereof.
xxx
A perusal of the extant record shows that [herein
respondents] have not complied with the above quoted
provisions. [Respondents] should be mindful that in filing their
complaint which, as admitted by them, is a derivative suit,
should have first exhausted all available remedies under its
(sic) Articles of Incorporation, or its by-laws, or any laws or
rules governing the corporation. The contention of
[respondent Joseph] that he had indeed made several talks to
(sic) his brother [herein petitioner Anthony] to settle their
differences is not tantamount to exhaustion of remedies. What
the law requires is to bring the grievance to the Board of
Directors or Stockholders for the latter to take the opportunity
to settle whatever problem in its regular meeting or special
meeting called for that purpose which [respondents] failed to
do. x x x The requirements laid down by the Interim Rules of
Procedure for Intra-Corporate Controversies are mandatory
which cannot be dispensed with by any stockholder of a
corporation before filing a derivative suit.28 (Emphasis ours.)
The Court of Appeals likewise sustained the refusal by the RTC
to consider respondent Joseph's Supplemental Affidavit and
other additional evidence, which respondents belatedly
submitted with their Memorandum to the said trial court. The
appellate court ratiocinated that:
With regard to the claim of [herein respondents] that the
supplemental affidavit of [respondent] Joseph and its annexes
appended to their memorandum should have been taken into
consideration by the Court a quo to support the reliefs prayed
[for] in their complaint. (sic) This Court rules that said
supplemental affidavit and its annexes is (sic) inadmissible.
A second hard look of (sic) the extant records show that
during the pre-trial conference conducted on August 26, 2004,
the parties through their respective counsels had come up
with an agreement that the lower court would render
judgment based on the pleadings and evidence submitted.
This agreement is in accordance with Rule 4, Sec. 4 of the
Interim Rules of Procedure for Intra-Corporate Controversies
which explicitly states:
SECTION. 4. Judgment before pre-trial. - If, after submission of
the pre-trial briefs, the court determines that, upon
consideration of the pleadings, the affidavits and other
evidence submitted by the parties, a judgment may be
rendered, the court may order the parties to file
simultaneously their respective memoranda within a nonextendible period of twenty (20) days from receipt of the
order. Thereafter, the court shall render judgment, either full
or otherwise, not later than ninety (90) days from the
expiration of the period to file the memoranda.

112
xxx
Clearly, the supplemental affidavit and its appended
documents which were submitted only upon the filing of the
memorandum for the [respondents] were not submitted in the
pre-trial briefs for the stipulation of the parties during the pretrial, hence, it cannot be accepted pursuant to Rule 2, Sec. 8
of the same rules which reads as follows:
SEC. 8.Affidavits, documentary and other evidence. Affidavits shall be based on personal knowledge, shall set
forth such facts as would be admissible in evidence, and shall
show affirmatively that the affiant is competent to testify on
the matters stated therein. The affidavits shall be in question
and answer form, and shall comply with the rules on
admissibility of evidence.
Affidavits of witnesses as well as documentary and other
evidence shall be attached to the appropriate pleading;
Provided, however, that affidavits, documentary and other
evidence not so submitted may be attached to the pre-trial
brief required under these Rules. Affidavits and other evidence
not so submitted shall not be admitted in evidence, except in
the following cases:
(1) Testimony of unwilling, hostile, or adverse party witnesses.
A witness is presumed prima facie hostile if he fails or refuses
to execute an affidavit after a written request therefor;
(2) If the failure to submit the evidence is for meritorious and
compelling reasons; and
(3) Newly discovered evidence.
In case of (2) and (3) above, the affidavit and evidence must
be submitted not later than five (5) days prior to its
introduction in evidence.
There is no showing in the case at bench that the
supplemental affidavit and its annexes falls (sic) within one of
the exceptions of the above quoted proviso, hence,
inadmissible.
It must be noted that in the case at bench, like any other civil
cases, "the party making an allegation in a civil case has the
burden of proving it by preponderance of evidence."
Differently stated, upon the plaintiff in [a] civil case, the
burden of proof never parts. That is, appellants must adduce
evidence that has greater weight or is more convincing that
(sic) which is offered to oppose it. In the case at bar, no one
should be blamed for the dismissal of the complaint but the
[respondents] themselves for their lackadaisical attitude in
setting forth and appending their defences belatedly. To admit
them would be a denial of due process for the opposite party
which this Court cannot allow.29
Ultimately, the Court of Appeals decreed:
WHEREFORE, judgment is hereby rendered DISMISSING the
instant petition and the assailed Decision of the Regional Trial
Court (RTC), 7th Judicial Region, Branch II, Cebu City, dated
November 10, 2004, in SRC Case No. 022-CEB is AFFIRMED in
toto. Cost against the [herein respondents]. 30
Unperturbed, respondents filed before the Court of Appeals,
on 23 February 2006, a Motion for Reconsideration and Motion
to Set for Oral Arguments the Motion for
Reconsideration,31invoking the following grounds:
(1) The [herein respondents] have sufficiently exhausted all
remedies before filing the present action; and
(2) [The] Honorable Court erred in holding that the
supplemental affidavit and its annexes is (sic) inadmissible
because the rules and the lower court expressly allowed the

submission of the same in its order dated August 26, 2004 x x

x.32
In a Resolution33 dated 8 March 2006, the Court of Appeals
granted respondents' Motion to Set for Oral Arguments the
Motion for Reconsideration.
On 4 April 2006, the Court of Appeals issued a
Resolution34 setting forth the events that transpired during the
oral arguments, which took place on 30 March 2006. Counsels
for the parties manifested before the appellate court that they
were submitting respondents' Motion for Reconsideration for
resolution. Justice Magpale, however, still called on the parties
to talk about the possible settlement of the case considering
their familial relationship. Independent of the resolution of
respondents' Motion for Reconsideration, the parties were
agreeable to pursue a settlement for the dissolution of the
corporation, which they had actually already started.
In a Resolution35 dated 11 April 2006, the Court of Appeals
ordered the parties to submit, within 10 days from notice,
their intended amicable settlement, since the same would
undeniably affect the resolution of respondents' pending
Motion for Reconsideration. If the said period should lapse
without the parties submitting an amicable settlement, then
they were directed by the appellate court to file within 10
days thereafter their position papers instead.
On 5 May 2006, respondents submitted to the Court of
Appeals their Position Paper,36 stating that the parties did not
reach an amicable settlement. Respondents informed the
appellate court that prior to the filing with the Securities and
Exchange Commission (SEC) of a petition for dissolution of
Winchester, Inc., the parties already divided the stocks in
trade and the real assets of the corporation among
themselves. Respondents posited, though, that the aforementioned distribution of the assets of Winchester, Inc.
among the parties was null and void, as it violated the last
paragraph of Section 122 of the Corporation Code, which
provides that, "[e]xcept by a decrease of capital stock and as
otherwise allowed by the Corporation Code, no corporation
shall distribute any of its assets or property except upon
lawful dissolution and after payment of all its debts and
liabilities." At the same time, however, respondents brought
to the attention of the Court of Appeals that the parties did
eventually file with the SEC a petition for dissolution of
Winchester, Inc., which the SEC approved. 37
Respondents no longer discussed in their Position Paper the
grounds they previously invoked in their Motion for
Reconsideration of the Court of Appeals Decision dated 15
February 2006, affirming in toto the RTC Decision dated 10
November 2004. They instead argued that the RTC Decision in
question was null and void as it did not clearly state the facts
and the law on which it was based. Respondents sought the
remand of the case to the RTC for further proceedings on their
derivative suit and completion of the dissolution of
Winchester, Inc., including the legalization of the prior partial
distribution among the parties of the assets of said
corporation.
Petitioners filed their Position Paper38 on 23 May 2006,
wherein they accused respondents of attempting to
incorporate extraneous matters into the latter's Motion for
Reconsideration. Petitioners pointed out that the issue before
the Court of Appeals was not the dissolution and division of
assets of Winchester, Inc., thus, a remand of the case to the
RTC was not necessary.
On 18 July 2006, the Court of Appeals rendered the assailed
Resolution, granting respondents' Motion for Reconsideration.
The Court of Appeals reasoned in this wise:
After a second look and appreciation of the facts of the case,
vis - -vis the issues raised by the [herein respondents']
motion for reconsideration and in view of the formal

113
dissolution of the corporation which leaves unresolved up to
the present the settlement of the properties and assets which
are now in danger of dissipation due to the unending
litigation, this Court finds the need to remand the instant case
to the lower court (commercial court) as the proper forum for
the adjudication, disposition, conveyance and distribution of
said properties and assets between and amongst its
stockholders as final settlement pursuant to Sec. 122 of the
Corporation Code after payment of all its debts and liabilities
as provided for under the same proviso. This is in accord with
the pronouncement of the Supreme Court in the case of
Clemente et. al. v. Court of Appeals, et. al. where the high
court ruled and which WE quote, viz:
"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 threeyear 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 x x x 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) xxx 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 representation 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."
In the absence of a trustee or board of director in the case at
bar for purposes above mentioned, the lower court under
Republic Act No. [8799] (otherwise known as the Securities
and Exchange Commission) as implemented by A.M. No. 00-810-SC (Transfer of Cases from the Securities and Exchange
Commission to the Regional Trial Courts) which took effect on
October 1, 2001, is the proper forum for working out the final
settlement of the corporate concern.39
Hence, the Court of Appeals ruled:
WHEREFORE, premises considered, the motion for
reconsideration is GRANTED. The order dated February 15,
2006 is hereby SET ASIDE and the instant case is REMANDED
to the lower court to take the necessary proceedings in
resolving with deliberate dispatch any and all corporate
concerns towards final settlement.40
Petitioners filed a Motion for Reconsideration41 of the
foregoing Resolution, but it was denied by the Court of
Appeals in its other assailed Resolution dated 19 April 2007.
In the Petition at bar, petitioners raise the following issues:
I.
WHETHER OR NOT THE ASSAILED RESOLUTIONS[,] WHICH
VIOLATED THE CONSTITUTION OF THE PHILIPPINES,
JURISPRUDENCE AND THE LAW[,] ARE NULL AND VOID[.]
II.
WHETHER OR NOT THE ASSAILED RESOLUTIONS WAS (sic)
ISSUED WITHOUT JURISDICTION[.]
III.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS

SERIOUSLY ERRED IN REMANDING THIS CASE TO THE LOWER
COURT FOR THE REASON CITED IN THE ASSAILED
RESOLUTIONS, AND WITHOUT RESOLVING THE GROUNDS FOR
THE [RESPONDENTS'] MOTION FOR RECONSIDERATION. (sic)
INASMUCH AS [THE] REASON CITED WAS A NON-ISSUE IN THE
CASE.
IV.
WHETHER OR NOT REMANDING THIS CASE TO THE REGIONAL
TRIAL COURT VIOLATES THE SUMMARY PROCEDURE FOR
INTRA-CORPORATE CASES.42
The crux of petitioners' contention is that the Court of Appeals
committed grievous error in reconsidering its Decision dated
15 February 2006 on the basis of extraneous matters, which
had not been previously raised in respondents' Complaint
before the RTC, or in their Petition for Review and Motion for
Reconsideration before the appellate court; i.e., the
adjudication, disposition, conveyance, and distribution of the
properties and assets of Winchester, Inc. among its
stockholders, allegedly pursuant to the amicable settlement of
the parties. The fact that the parties were able to agree before
the Court of Appeals to submit for resolution respondents'
Motion for Reconsideration of the 15 February 2006 Decision
of the same court, independently of any intended settlement
between the parties as regards the dissolution of the
corporation and distribution of its assets, only proves the
distinction and independence of these matters from one
another. Petitioners also contend that the assailed Resolution
dated 18 July 2006 of the Court of Appeals, granting
respondents' Motion for Reconsideration, failed to clearly and
distinctly state the facts and the law on which it was based.
Remanding the case to the RTC, petitioners maintain, will
violate the very essence of the summary nature of the Interim
Rules of Procedure Governing Intra-Corporate Controversies,
as this will just entail delay, protract litigation, and revert the
case to square one.
The Court finds the instant Petition meritorious.
To recapitulate, the case at bar was initiated before the RTC by
respondents as a derivative suit, on their own behalf and on
behalf of Winchester, Inc., primarily in order to compel
petitioners to account for and reimburse to the said
corporation the corporate assets and funds which the latter
allegedly misappropriated for their personal benefit. During
the pendency of the proceedings before the court a quo, the
parties were able to reach an amicable settlement wherein
they agreed to divide the assets of Winchester, Inc. among
themselves. This amicable settlement was already partially
implemented by the parties, when respondents repudiated the
same, for which reason the RTC proceeded with the case on
its merits. On 10 November 2004, the RTC promulgated its
Decision dismissing respondents' Complaint for failure to
comply with essential pre-requisites before they could avail
themselves of the remedies under the Interim Rules of
Procedure Governing Intra-Corporate Controversies; and for
inadequate substantiation of respondents' allegations in said
Complaint after consideration of the pleadings and evidence
on record.
In its Decision dated 15 February 2006, the Court of Appeals
affirmed, on appeal, the findings of the RTC that respondents
did not abide by the requirements for a derivative suit, nor
were they able to prove their case by a preponderance of
evidence. Respondents filed a Motion for Reconsideration of
said judgment of the appellate court, insisting that they were
able to meet all the conditions for filing a derivative suit.
Pending resolution of respondents' Motion for Reconsideration,
the Court of Appeals urged the parties to again strive to reach
an amicable settlement of their dispute, but the parties were
unable to do so. The parties were not able to submit to the
appellate court, within the given period, any amicable
settlement; and filed, instead, their Position Papers. This
effectively meant that the parties opted to submit

114
respondents' Motion for Reconsideration of the 15 February
2006 Decision of the Court of Appeals, and petitioners'
opposition to the same, for resolution by the appellate court
on the merits.

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.

It was at this point that the case took an unexpected turn.

Following the voluntary or involuntary dissolution of a

corporation, liquidation is the process of settling the affairs of
said corporation, which consists of adjusting the debts and
claims, that is, of collecting all that is due the corporation, the
settlement and adjustment of claims against it and the
payment of its just debts.44 More particularly, it entails the
following:

In accordance with respondents' allegation in their Position

Paper that the parties subsequently filed with the SEC, and
the SEC already approved, a petition for dissolution of
Winchester, Inc., the Court of Appeals remanded the case to
the RTC so that all the corporate concerns between the parties
regarding Winchester, Inc. could be resolved towards final
settlement.
In one stroke, with the use of sweeping language, which
utterly lacked support, the Court of Appeals converted the
derivative suit between the parties into liquidation
proceedings.
The general rule is that where a corporation is an injured
party, its power to sue is lodged with its board of directors or
trustees. Nonetheless, an individual stockholder is permitted
to institute a derivative suit on behalf of the corporation
wherein he holds stocks in order to protect or vindicate
corporate rights, whenever the officials of the corporation
refuse to sue, or are the ones to be sued, or hold the control
of the corporation. In such actions, the suing stockholder is
regarded as a nominal party, with the corporation as the real
party in interest. A derivative action is a suit by a shareholder
to enforce a corporate cause of action. The corporation is a
necessary party to the suit. And the relief which is granted is a
judgment against a third person in favor of the corporation.
Similarly, if a corporation has a defense to an action against it
and is not asserting it, a stockholder may intervene and
defend on behalf of the corporation.43 By virtue of Republic Act
No. 8799, otherwise known as the Securities Regulation Code,
jurisdiction over intra-corporate disputes, including derivative
suits, is now vested in the Regional Trial Courts designated by
this Court pursuant to A.M. No. 00-11-03-SC promulgated on
21 November 2000.
In contrast, liquidation is a necessary consequence of the
dissolution of a corporation. It is specifically governed by
Section 122 of the Corporation Code, which reads:
SEC. 122.Corporate liquidation. - Every corporation whose
charter expires by its own limitation or is annulled by
forfeiture or otherwise, or whose corporate existence for other
purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three (3)
years after the time when it would have been so dissolved, for
the purpose of prosecuting and defending suits by or against
it and enabling it to settle and close its affairs, to dispose of
and convey its property and to 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, said 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. From and 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.
Upon winding up of the corporate affairs, any asset
distributable to any creditor or stockholder or member who is
unknown or cannot be found shall be escheated to the city or
municipality where such assets are located.

Winding up the affairs of the corporation means the collection

of all assets, the payment of all its creditors, and the
distribution of the remaining assets, if any among the
stockholders thereof in accordance with their contracts, or if
there be no special contract, on the basis of their respective
interests. The manner of liquidation or winding up may be
provided for in the corporate by-laws and this would prevail
unless it is inconsistent with law.45
It may be undertaken by the corporation itself, through its
Board of Directors; or by trustees to whom all corporate
assets are conveyed for liquidation; or by a receiver appointed
by the SEC upon its decree dissolving the corporation. 46
Glaringly, a derivative suit is fundamentally distinct and
independent from liquidation proceedings. They are neither
part of each other nor the necessary consequence of the
other. There is totally no justification for the Court of Appeals
to convert what was supposedly a derivative suit instituted by
respondents, on their own behalf and on behalf of Winchester,
Inc. against petitioners, to a proceeding for the liquidation of
Winchester, Inc.
While it may be true that the parties earlier reached an
amicable settlement, in which they agreed to already
distribute the assets of Winchester, Inc., and in effect liquidate
said corporation, it must be pointed out that respondents
themselves repudiated said amicable settlement before the
RTC, even after the same had been partially implemented;
and moved that their case be set for pre-trial. Attempts to
again amicably settle the dispute between the parties before
the Court of Appeals were unsuccessful.
Moreover, the decree of the Court of Appeals to remand the
case to the RTC for the "final settlement of corporate
concerns" was solely grounded on respondents' allegation in
its Position Paper that the parties had already filed before the
SEC, and the SEC approved, the petition to dissolve
Winchester, Inc. The Court notes, however, that there is
absolute lack of evidence on record to prove said allegation.
Respondents failed to submit copies of such petition for
dissolution of Winchester, Inc. and the SEC Certification
approving the same. It is a basic rule in evidence that each
party must prove his affirmative allegation. Since it was
respondents who alleged the voluntary dissolution of
Winchester, Inc., respondents must, therefore, prove it.47This
respondents failed to do.
Even assuming arguendo that the parties did submit a petition
for the dissolution of Winchester, Inc. and the same was
approved by the SEC, the Court of Appeals was still without
jurisdiction to order the final settlement by the RTC of the
remaining corporate concerns. It must be remembered that
the Complaint filed by respondents before the RTC essentially
prayed for the accounting and reimbursement by petitioners
of the corporate funds and assets which they purportedly
misappropriated for their personal use; surrender by the
petitioners of the corporate books for the inspection of
respondents; and payment by petitioners to respondents of
damages. There was nothing in respondents' Complaint which
sought the dissolution and liquidation of Winchester, Inc.
Hence, the supposed dissolution of Winchester, Inc. could not
have resulted in the conversion of respondents' derivative suit
to a proceeding for the liquidation of said corporation, but

115
only in the dismissal of the derivative suit based on either
compromise agreement or mootness of the issues.
Clearly, in issuing its assailed Resolutions dated 18 July 2006
and 19 April 2007, the Court of Appeals already went beyond
the issues raised in respondents' Motion for Reconsideration.
Instead of focusing on whether it erred in affirming, in its 15
February 2006 Decision, the dismissal by the RTC of
respondents' Complaint due to respondents' failure to comply
with the requirements for a derivative suit and submit
evidence to support their allegations, the Court of Appeals
unduly concentrated on respondents' unsubstantiated
allegation that Winchester, Inc. was already dissolved and
speciously ordered the remand of the case to the RTC for
proceedings so vitally different from that originally instituted
by respondents.
Despite the foregoing, the Court still deems it appropriate to
already look into the merits of respondents' Motion for
Reconsideration of the 15 February 2006 Decision of the Court
of Appeals, for the sake of finally putting an end to the case at
bar.
In their said Motion for Reconsideration, respondents argued
that: (1) they had sufficiently exhausted all remedies before
filing the derivative suit; and (2) respondent Joseph's
Supplemental Affidavit and its annexes should have been
taken into consideration, since the submission thereof was
allowed by the rules of procedure, as well as by the RTC in its
Order dated 26 August 2004.
As regards the first ground of sufficient exhaustion by
respondents of all remedies before filing a derivative suit, the
Court subscribes to the ruling to the contrary of the Court of
Appeals in its Decision dated 16 February
2006.rbl r l l lbrr
The Court has recognized that a stockholder's right to institute
a derivative suit is not based on any express provision of the
Corporation Code, or even the Securities Regulation Code, but
is impliedly recognized when the said laws make corporate
directors or officers liable for damages suffered by the
corporation and its stockholders for violation of their fiduciary
duties. Hence, a stockholder may sue for mismanagement,
waste or dissipation of corporate assets because of a special
injury to him for which he is otherwise without redress. In
effect, the suit is an action for specific performance of an
obligation owed by the corporation to the stockholders to
assist its rights of action when the corporation has been put in
default by the wrongful refusal of the directors or
management to make suitable measures for its protection.
The basis of a stockholder's suit is always one in equity.
However, it cannot prosper without first complying with the
legal requisites for its institution.48
Section 1, Rule 8 of the Interim Rules of Procedure Governing
Intra-Corporate Controversies lays down the following
requirements which a stockholder must comply with in filing a
derivative suit:
Sec. 1.Derivative action. - A stockholder or member may bring
an action in the name of a corporation or association, as the
case may be, provided, that:
(1) He was a stockholder or member at the time the acts or
transactions subject of the action occurred and at the time the
action was filed;
(2) He exerted all reasonable efforts, and alleges the same
with particularity in the complaint, to exhaust all remedies
available under the articles of incorporation, by-laws, laws or
rules governing the corporation or partnership to obtain the
relief he desires;
(3) No appraisal rights are available for the act or acts
complained of; and

(4) The suit is not a nuisance or harassment suit.

A perusal of respondents' Complaint before the RTC would
reveal that the same did not allege with particularity that
respondents exerted all reasonable efforts to exhaust all
remedies available under the articles of incorporation, bylaws, laws or rules governing Winchester, Inc. to obtain the
relief they desire.
Respondents assert that their compliance with said
requirement was contained in respondent Joseph's Affidavit,
which was attached to respondents' Complaint. Respondent
Joseph averred in his Affidavit that he tried for a number of
times to talk to petitioner Anthony to settle their differences,
but the latter would not listen. Respondents additionally
claimed that taking further remedies within the corporation
would have been idle ceremony, considering that Winchester,
Inc. was a family corporation and it was impossible to expect
petitioners to take action against themselves who were the
ones accused of wrongdoing.
The Court is not persuaded.
The wordings of Section 1, Rule 8 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies are simple
and do not leave room for statutory construction. The second
paragraph thereof requires that the stockholder filing a
derivative suit should have exerted all reasonable efforts to
exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the corporation
or partnership to obtain the relief he desires; and to allege
such fact with particularity in the complaint. The obvious
intent behind the rule is to make the derivative suit the final
recourse of the stockholder, after all other remedies to obtain
the relief sought had failed.
The allegation of respondent Joseph in his Affidavit of his
repeated attempts to talk to petitioner Anthony regarding
their dispute hardly constitutes "all reasonable efforts to
exhaust all remedies available." Respondents did not refer to
or mention at all any other remedy under the articles of
incorporation or by-laws of Winchester, Inc., available for
dispute resolution among stockholders, which respondents
unsuccessfully availed themselves of. And the Court is not
prepared to conclude that the articles of incorporation and bylaws of Winchester, Inc. absolutely failed to provide for such
remedies.
Neither can this Court accept the reasons proffered by
respondents to excuse themselves from complying with the
second requirement under Section 1, Rule 8 of the Interim
Rules of Procedure Governing Intra-Corporate Controversies.
They are flimsy and insufficient, compared to the seriousness
of respondents' accusations of fraud, misappropriation, and
falsification of corporate records against the petitioners. The
fact that Winchester, Inc. is a family corporation should not in
any way exempt respondents from complying with the clear
requirements and formalities of the rules for filing a derivative
suit. There is nothing in the pertinent laws or rules supporting
the distinction between, and the difference in the
requirements for, family corporations vis - -vis other types of
corporations, in the institution by a stockholder of a derivative
suit.
The Court further notes that, with respect to the third and
fourth requirements of Section 1, Rule 8 of the Interim Rules
of Procedure Governing Intra-Corporate Controversies, the
respondents' Complaint failed to allege, explicitly or
otherwise, the fact that there were no appraisal rights
available for the acts of petitioners complained of, as well as a
categorical statement that the suit was not a nuisance or a
harassment suit.
As to respondents' second ground in their Motion for
Reconsideration, the Court agrees with the ruling of the Court
of Appeals, in its 15 February 2006 Decision, that respondent

116
Joseph's Supplemental Affidavit and additional evidence were
inadmissible since they were only appended by respondents
to their Memorandum before the RTC. Section 8, Rule 2 of the
Interim Rules of Procedure Governing Intra-Corporate
Controversies is crystal clear that:
Sec. 8.Affidavits, documentary and other evidence. - Affidavits
shall be based on personal knowledge, shall set forth such
facts as would be admissible in evidence, and shall show
affirmatively that the affiant is competent to testify on the
matters stated therein. The affidavits shall be in question and
answer form, and shall comply with the rules on admissibility
of evidence.
Affidavits of witnesses as well as documentary and other
evidence shall be attached to the appropriate pleading,
Provided, however, that affidavits, documentary and other
evidence not so submitted may be attached to the pre-trial
brief required under these Rules. Affidavits and other evidence
not so submitted shall not be admitted in evidence, except in
the following cases:
(1) Testimony of unwilling, hostile, or adverse party witnesses.
A witness is presumed prima facie hostile if he fails or refuses
to execute an affidavit after a written request therefor;
(2) If the failure to submit the evidence is for meritorious and
compelling reasons; andcralawlibrary
(3) Newly discovered evidence.
In case of (2) and (3) above, the affidavit and evidence must
be submitted not later than five (5) days prior to its
introduction in evidence. (Emphasis ours.)
According to the afore-quoted provision, the parties should
attach the affidavits of witnesses and other documentary
evidence to the appropriate pleading, which generally should
mean the complaint for the plaintiff and the answer for the
respondent. Affidavits and documentary evidence not so
submitted must already be attached to the respective pre-trial
briefs of the parties. That the parties should have already
identified and submitted to the trial court the affidavits of
their witnesses and documentary evidence by the time of pretrial is strengthened by the fact that Section 1, Rule 4 of the
Interim Rules of Procedure Governing Intra-Corporate
Controversies require that the following matters should
already be set forth in the parties' pre-trial briefs:
Section 1. Pre-trial conference, mandatory nature. - Within
five (5) days after the period for availment of, and compliance
with, the modes of discovery prescribed in Rule 3 hereof,
whichever comes later, the court shall issue and serve an
order immediately setting the case for pre-trial conference,
and directing the parties to submit their respective pre-trial
briefs. The parties shall file with the court and furnish each
other copies of their respective pre-trial brief in such manner
as to ensure its receipt by the court and the other party at
least five (5) days before the date set for the pre-trial.
The parties shall set forth in their pre-trial briefs, among other
matters, the following:
xxx
(4) Documents not specifically denied under oath by either or
both parties;
xxx
(7) Names of witnesses to be presented and the summary of
their testimony as contained in their affidavits supporting
their positions on each of the issues;

(8) All other pieces of evidence, whether documentary or

otherwise and their respective purposes.
Also, according to Section 2, Rule 4 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies,49 it is the
duty of the court to ensure during the pre-trial conference that
the parties consider in detail, among other things, objections
to the admissibility of testimonial, documentary, and other
evidence, as well as objections to the form or substance of
any affidavit, or part thereof.
Obviously, affidavits of witnesses and other documentary
evidence are required to be attached to a party's pre-trial
brief, at the very last instance, so that the opposite party is
given the opportunity to object to the form and substance, or
the admissibility thereof. This is, of course, to prevent unfair
surprises and/or to avoid the granting of any undue
advantage to the other party to the case.
True, the parties in the present case agreed to submit the
case for judgment by the RTC, even before pre-trial, in
accordance with Section 4, Rule 4 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies:
Sec. 4.Judgment before pre-trial. - If after submission of the
pre-trial briefs, the court determines that, upon consideration
of the pleadings, the affidavits and other evidence submitted
by the parties, a judgment may be rendered, the court may
order the parties to file simultaneously their respective
memoranda within a non-extendible period of twenty (20)
days from receipt of the order. Thereafter, the court shall
render judgment, either full or otherwise, not later than ninety
(90) days from the expiration of the period to file the
memoranda.
Even then, the afore-quoted provision still requires, before the
court makes a determination that it can render judgment
before pre-trial, that the parties had submitted their pre-trial
briefs and the court took into consideration the pleadings,
affidavits and other evidence submitted by the parties. Hence,
cases wherein the court can render judgment prior to pre-trial,
do not depart from or constitute an exception to the requisite
that affidavits of witnesses and documentary evidence should
be submitted, at the latest, with the parties' pre-trial briefs.
Taking further into account that under Section 4, Rule 4 of the
Interim Rules of Procedure Governing Intra-Corporate
Controversies parties are required to file their memoranda
simultaneously, the same would mean that a party would no
longer have any opportunity to dispute or rebut any new
affidavit or evidence attached by the other party to its
memorandum. To violate the above-quoted provision would,
thus, irrefragably run afoul the former party's constitutional
right to due process.
In the instant case, therefore, respondent Joseph's
Supplemental Affidavit and the additional documentary
evidence, appended by respondents only to their
Memorandum submitted to the RTC, were correctly adjudged
as inadmissible by the Court of Appeals in its 15 February
2006 Decision for having been belatedly submitted.
Respondents neither alleged nor proved that the documents
in question fall under any of the three exceptions to the
requirement that affidavits and documentary evidence should
be attached to the appropriate pleading or pre-trial brief of
the party, which is particularly recognized under Section 8,
Rule 2 of the Interim Rules of Procedure Governing IntraCorporate Controversies.
WHEREFORE, premises considered, the Petition for Review
under Rule 45 of the Rules of Court is hereby GRANTED. The
assailed Resolutions dated 18 July 2006 and 19 April 2007 of
the Court of Appeals in CA-G.R. SP No. 00185 are hereby
REVERSED AND SET ASIDE. The Decision dated 15 February
2006 of the Court of Appeals is hereby AFFIRMED. No costs.
SO ORDERED.

117
SECOND DIVISION
[G.R. NO. 143088 - January 24, 2006]
PHILIPPINE AIRLINES, INC., MANOLO AQUINO, JORGE
MA. CUI, JR. and PATRICIA CHIONG, Petitioners, v. FLIGHT
ATTENDANTS AND STEWARDS ASSOCIATION OF THE
PHILIPPINES (FASAP) and LEONARDO
BHAGWANI, Respondents.
DECISION
This Petition for Review on Certiorari under Rule 45 of the
Rules of Court presents a recurring question regarding the
Court's requirement of a certification of non-forum shopping.
Petitioners Philippine Airlines, Inc. (PAL) and Manolo Aquino,
Jorge Ma. Cui, Jr. and Patricia Chiong, in their capacity as
Executive Vice-President Administration and Services,
Manager International Cabin Crew and Assistant VicePresident Cabin Services, respectively, are before the Court
seeking the reversal of the resolution of the Court of Appeals
in C.A. G.R. No. SP-56850, dated January 31, 2000, dismissing
their appeal and the resolution of May 11, 2000, denying the
motion for reconsideration.
The facts on the conflict between PAL and respondents Flight
Attendants and Stewards Association of the Philippines
(FASAP) and Leonardo Bhagwani are not necessary for the
Court's resolution of the petition. It is enough to state that on
May 14, 1997 FASAP and Leonardo Bhagwani filed a complaint
for unfair labor practice, illegal suspension and illegal
dismissal against petitioners before the Labor Arbiter of the
National Labor Relations Commission (NLRC). The Labor
Arbiter rendered a decision holding that PAL committed unfair
labor practice and illegal dismissal of Bhagwani and,
consequently, ordered the payment of damages. The NLRC
later modified the decision by setting aside the finding that
PAL was guilty of unfair labor practice, but affirming the rest of
the decision.
What is relevant to the case is the subsequent appeal to the
Court of Appeals. When petitioners filed a petition
for certiorari against the decision with the Court of Appeals, it
was accompanied by a Certification of Non-Forum Shopping
executed by Cesar R. Lamberte and Susan Del Carmen, VicePresident Human Resources and Assistant Vice-President
Cabin Services of PAL, respectively, who are not parties to the
case. The certification, however, was without proof that the
two affiants had authority to sign in behalf of petitioners. As a
result, the Court of Appeals dismissed the case for failure to
show the authority of affiants to sign for PAL and for failure of
the other petitioners to join in the execution of the
certification. A motion for reconsideration was filed with a
Secretary's Certificate attached evidencing that affiants Cesar
R. Lamberte and Susan Del Carmen have been authorized by
Board Resolution No. 00-02-03 to initiate and/or cause to be
filed on behalf of PAL petitions and pleadings in all laborrelated cases. As to the other petitioners, it was argued that
they are mere nominal parties so that their failure to execute
the certification does not justify dismissal of the petition.
Despite this submission, the Court of Appeals denied the
motion for reconsideration. Hence, the case is now before this
Court.

petitioner is a corporation, the certification should be

executed by a natural person. Furthermore, not just any
person can be called upon to execute the certification,
although such a person may have personal knowledge of the
facts to be attested to.2
This Court has explained that a corporation has no power
except those conferred on it by the Corporation Code and
those that are implied or incidental to its existence. The
exercise of these powers is done through the board of
directors and/or duly authorized officers and agents. Given
these corporate features, the power of a corporation to sue in
any court is generally lodged with the board of directors. The
board, in turn, can delegate the physical acts needed to sue,
which may be performed only by natural persons, to its
attorneys-in-fact by a board resolution, if not already
authorized under the corporate by-laws.3
Thus, only individuals vested with authority by a valid board
resolution may sign the certificate of non-forum shopping in
behalf of a corporation. In addition, the Court has required
that proof of said authority must be attached. Failure to
provide a certificate of non-forum shopping is sufficient
ground to dismiss the petition. Likewise, the petition is subject
to dismissal if a certification was submitted unaccompanied
by proof of the signatory's authority.4
The petition filed with the Court of Appeals had a certification
of non-forum shopping executed by Cesar R. Lamberte and
Susan Del Carmen. The certification, however, was without
proof of authority to sign. When a motion for reconsideration
was filed, a Secretary's Certificate was submitted as proof that
the board of directors of PAL had authorized the two to
execute the certificate. Nonetheless, the Court finds that this
belated submission is an insufficient compliance with the
certification requirement.
This Court has allowed the reinstatement of petitions that
were dismissed due to lack of proof of authority to sign the
certification upon its subsequent submission, saying that this
amounted to
substantial compliance. The rationale was that the
signatories, at the time of execution of the certification, were
in fact authorized to sign, although proof of their authority
was lacking.5
This is not what happened in this case. A perusal of the
Secretary's Certificate submitted reveals that the authority to
cause the filing of the petition was granted on February 15,
2000.6The petition, on the other hand, was filed on January
24, 2000 and was dismissed by the Court of Appeals on
January 31, 2000. This means that at the time the certification
was signed, Cesar R. Lamberte and Susan Del Carmen were
not duly authorized by the Board of Directors of PAL and,
consequently, their signing and attestations were not in
representation of PAL. This effectively translates to a petition
that was filed without a certification at all as none was issued
by PAL, the principal party to the case.
The required certification of non-forum shopping must be valid
at the time of filing of the petition. An invalid certificate
cannot be remedied by the subsequent submission of a
Secretary's Certificate that vests authority only after the
petition had been filed.
WHEREFORE, the petition is DENIED. No costs.

The petition is without merit.

SO ORDERED.
The necessity for a certification of non-forum shopping in
filing petitions for certiorari is found in Rule 65, Section 1, in
relation to Rule 46, Section 3 of the Rules of Court. These
provisions require it to be executed by the corresponding
petitioner or petitioners. As no distinction is made as to which
party must execute the certificate, this requirement is made
to apply to both natural and juridical entities.1 When the

FIRST DIVISION
[G.R. NO. 156905 : September 5, 2007]

118
ATHENA COMPUTERS, INC. and JOSELITO R.
JIMENEZ, Petitioners, v. WESNU A. REYES, Respondent.
DECISION
For our resolution is the instant Petition for Review
on Certiorari seeking the reversal of the Resolutions dated
September 5, 20021 and January 13, 20032 of the Court of
Appeals in CA-G.R. SP No. 72284.
On September 1, 1996, Athena Computers, Inc. (Athena),
petitioner, hired Wesnu A. Reyes, respondent, as a computer
technician. In less than a year, he was promoted as manager
of Athena's engineering and technical department. Under his
direct supervision were computer technicians. He had full
access to all Athena's computer equipment and those
entrusted to him by it's clients.
In January 1998, Athena conducted an inventory of its
computer equipment. Allegedly, respondent committed
certain anomalies and admitted misappropriating payments
for several computers and the burning of records to conceal
his misappropriation. A computer monitor entrusted to
respondent for repair as well as parts of LX 300 printers were
missing.
Athena's board of directors terminated respondent's services.
However, Joselito R. Jimenez, also a petitioner, convinced the
board to defer its decision to give respondent another chance
to rectify his inefficiencies. It is at this point that respondent
indicated his desire to resign on the ground that the pressures
of his work have affected his health and that he intends to
seek employment abroad. Thereupon, he and Jimenez agreed
to discuss the phase-out and turn-over procedure of
respondent's accountabilities on July 28, 1998.
The phase-out and turn-over did not materialize since
respondent did not report for work anymore despite numerous
pager messages sent to him by Athena. On August 1, 1998,
Jimenez issued a memorandum placing respondent under
preventive suspension for fifteen (15) days and directing him
to submit a written explanation on his absence without leave.
On August 16, 1998, Jimenez issued another memorandum
terminating respondent's employment.
For his part, respondent claimed that he did an excellent job
while he was employed in Athena. In fact, three (3) months
after his probationary period of employment, he was given a
salary increase. Jimenez commended him for his performance
and attitude. On July 24, 1998, he verbally asked permission
from Jimenez to go on leave starting July 29, 1998 in order to
apply for a job abroad. But on July 31, 1998, Jimenez
announced to all Athena's internet subscribers that
respondent was placed under preventive suspension due to
his absence without leave and warned the public to refrain
from making any transaction with him since it will not be
honored by Athena.
On August 5, 1998, respondent filed with the Labor Arbiter a
complaint for illegal suspension, harassment, non-payment of
salaries and damages, backwages, and attorney's fees. Later,
he filed an amended complaint3 to include the charge of
illegal dismissal.
On September 30, 1999, the Labor Arbiter promulgated a
Decision dismissing respondent's complaint, thus:
WHEREFORE PREMISES CONSIDERED, judgment is hereby
rendered DISMISSING the case for lack of merit but ordering
the respondent to pay the complainant his unpaid salary for
the period from July 15 to 27, 1998.
SO ORDERED.4

On appeal, the National Labor Relations Commission (NLRC)

promulgated its Decision dated May 10, 2002 reversing the
Labor Arbiter's judgment and declaring that the preventive
suspension and dismissal from employment of respondent are
illegal. The dispositive portion of the NLRC Decision reads:
WHEREFORE, premises considered, complainant's appeal is
GRANTED. The Labor Arbiter's Decision is REVERSED. It is
hereby declared that complainant's preventive suspension
and dismissal from employment are illegal. Respondents are
ordered to jointly and severally pay complainant the amount
of P292,500.00 as backwages and separation pay, plus ten
percent (10%) thereof as attorney's fees. The Labor Arbiter's
Decision ordering Respondents to pay complainant his unpaid
salary for the period covering July 15 to 27, 1998 is hereby
AFFIRMED.
SO ORDERED.5
Both petitioners seasonably filed with the Court of Appeals a
petition for certiorari alleging that in reversing the Decision of
the Labor Arbiter, the NLRC committed grave abuse of
discretion. In a Resolution6 dated September 5, 2002, the
appellate court dismissed the petition, thus:
After a careful examination of the instant petition
for certiorari, it reveals that the Verification of the petition and
Certification of non-forum shopping were executed and signed
by Joselito R. Jimenez without authority to act for and in behalf
of his co petitioner (Digital Microwave Corp. v. Court of
Appeals, 328 SCRA 287) in violation of Sections 4 and 5, Rule
7 of the 1997 Rules of Civil Procedure. Moreover, the copies of
pertinent pleadings are not attached to the petition in
violations of Section 1, par. 2, Rule 65 Rules of Civil Procedure.
WHEREFORE, the instant petition for certiorari is
herby DENIED DUE COURSE AND DISMISSED for being
insufficient in form and substance.
SO ORDERED.
Petitioners filed a motion for reconsideration but it was
subsequently denied by the appellate court in its
Resolution7 dated January 13, 2003.
Hence, the instant petition.
The issue for our resolution is whether the appellate court
erred in dismissing the petition due to defective verification
and certification on non-forum shopping and for petitioners'
failure to attach to the same petition pertinent pleadings as
required by Section 1, Rule 65 of the 1997 Rules of Civil
Procedure, as amended.
The petition is without merit.
Certiorari, being an extraordinary remedy, the party who
seeks to avail of the same must strictly observe the rules laid
down by law.8
Section 1, Rule 65 of the same Rules provides:
SECTION 1. Petition for certiorari. - When any tribunal, board
or officer exercising judicial or quasi-judicial functions has
acted without or in excess of its or his jurisdiction, or with
grave abuse of discretion amounting to lack or excess of
jurisdiction, and there is no appeal, or any plain, speedy, and
adequate remedy in the ordinary course of law, a person
aggrieved thereby may file a verified petition in the proper
court, alleging the facts with certainty and praying that
judgment be rendered annulling or modifying the proceedings
of such tribunal, board or officer, and granting such incidental
reliefs as law and justice may require.

119
The petition shall be accompanied by a certified true copy of
the judgment, order or resolution subject thereof, copies of all
pleadings and documents relevant and pertinent thereto, and
a sworn certification of non-forum shopping as provided in the
third paragraph of Section 3, Rule 46.
Section 3, Rule 46, likewise provides:
SECTION 3. Contents and filing of petition; effect of noncompliance with requirements. - The petition shall contain the
full names and actual addresses of all the petitioners and
respondents, a concise statement of the matters involved, the
factual background of the case, and the grounds relied upon
for the relief prayed for.
In actions filed under Rule 65, the petition shall further
indicate the material dates showing when notice of the
judgment or final order or resolution subject thereof was
received, when a motion for new trial or reconsideration, if
any, was filed and when notice of the denial thereof was
received.
It shall be filed in seven (7) clearly legible copies together
with proof of service thereof on the respondent with the
original copy intended for the court indicated as such by the
petitioner, and shall be accompanied by a clearly legible
duplicate original or certified true copy of the judgment,
order, resolution, or ruling subject thereof, such material
portions of the record as are referred to therein, and other
documents relevant or pertinent thereto. The certification
shall be accomplished by the proper clerk of court or his duly
authorized representative, or by the proper officer of the
court, tribunal, agency or office involved or by his duly
authorized representative. The other requisite number of
copies of the petition shall be accompanied by clearly legible
plain copies of all documents attached to the original.
The petitioner shall also submit together with the petition a
sworn certification that he has not theretofore commenced
any other action involving the same issues in the Supreme
Court, the Court of Appeals or different divisions thereof, or
any other tribunal or agency; if there is such other action or
proceeding, he must state the status of the same; and if he
should thereafter learn that a similar action or proceeding has
been filed or is pending before the Supreme Court, the Court
of Appeals, or different divisions thereof, or any other tribunal
or agency, he undertakes to promptly inform the aforesaid
courts and other tribunal or agency thereof within five (5)
days therefrom.
The petitioner shall pay the corresponding docket and other
lawful fees to the clerk of court and deposit the amount
of P500.00 for costs at the time of the filing of the petition.

the allegations therein are true and correct of his knowledge

and belief. Consequently, the verification should have been
signed not only by Jimenez but also by Athena's duly
authorized representative.
In Docena v. Lapesura,10 we ruled that the certificate of nonforum shopping should be signed by all the petitioners or
plaintiffs in a case, and that the signing by only one of them is
insufficient. The attestation on non-forum shopping
requires personal knowledge by the party executing the
same,11 and the lone signing petitioner cannot be presumed to
have personal knowledge of the filing or non-filing by his copetitioners of any action or claim the same as similar to the
current petition.
The certification against forum shopping in CA-G.R. SP No.
72284 is fatally defective, not having been duly signed by
both petitioners and thus warrants the dismissal of the
petition forcertiorari . We have consistently held that the
certification against forum shopping must be signed by the
principal parties.12 With respect to a corporation, the
certification against forum shopping may be signed for and on
its behalf, by a specifically authorized lawyer who has
personal knowledge of the facts required to be disclosed in
such document.13
While the Rules of Court may be relaxed for persuasive and
weighty reasons to relieve a litigant from an injustice
commensurate with his failure to comply with the prescribed
procedures, nevertheless they must be faithfully followed. 14 In
the instant case, petitioners have not shown any reason which
justifies relaxation of the Rules. We have held that procedural
rules are not to be belittled or dismissed simply because their
non-observance may have prejudiced a party's substantive
rights. Like all rules, they are required to be followed except
for the most persuasive of reasons when they may be
relaxed.15 Not one of these persuasive reasons is present here.
In fine, we hold that the Court of Appeals did not err in
dismissing the Petition for Certiorariin view of the procedural
lapses committed by petitioners.
WHEREFORE, we DENY the petition. The assailed twin
Resolutions of the Court of Appeals in CA-G.R. SP No. 72284
are AFFIRMED. Costs against petitioners.
SO ORDERED.

SECOND DIVISION
[G.R. NO. 173834 : April 24, 2009]

The failure of the petitioner to comply with any of the

foregoing requirements shall be sufficient ground for
the dismissal of the petition.
The acceptance of a Petition for Certiorari as well as the grant
of due course thereto is, in general, addressed to the sound
discretion of the court. Although the court has absolute
discretion to reject and dismiss a petition for certiorari, it does
so only (1) when the petition fails to demonstrate grave abuse
of discretion by any court, agency, or branch of the
government; or (2) when there are procedural errors, like
violations of the Rules of Court or Supreme Court
Circulars.9 Clearly, petitioners in their petition before the Court
of Appeals committed procedural errors.
The verification of the petition and certification on non-forum
shopping before the Court of Appeals were signed only by
Jimenez. There is no showing that he was authorized to sign
the same by Athena, his co-petitioner.
Section 4, Rule 7 of the Rules states that a pleading is verified
by an affidavit that the affiant has read the pleading and that

ISABELITA CUNANAN, CAROLYN CUNANAN and

CARMENCITA F. NEMOTO, Petitioners, v. JUMPING JAP
TRADING CORPORATION, represented by REUBEN M.
PROTACIO, Respondent.
DECISION
This is a Petition for Review on Certiorari 1 under Rule 45 of
the 7 April 2006 decision of the Court of Appeals2 and the 28
July 2006 resolution3 of the same court denying petitioners'
motion for reconsideration.
The pertinent facts as culled from the records follow.
Petitioner Carmencita Fradejas Nemoto (Carmencita) is the
registered owner of a 618 square meter-lot, with the house
and improvements thereon, located at No. 167 Pili Drive,
Ayala Alabang Village, Muntinlupa City and covered by
Transfer Certificate of Title (TCT) No. 2132464 . She acquired
the property by virtue of a deed of sale executed in her favor
by Metropolitan Land Corporation (MLC).

120
On 22 March 2001, respondent Jumping Jap Trading
Corporation (respondent), represented by its President,
Rueben Protacio (Protacio), filed Civil Case No. 01-098 with the
Regional Trial Court (RTC) of Muntinlupa City seeking the
annulment of both the deed of sale and TCT No. 213246, as
well as the reconveyance of the property. Respondent
anchored the complaint on its alleged superior right over the
property by virtue of the execution of a previous deed of
conditional sale by MLC in its favor and its having
paid P18,300,000.00 by itself using corporate funds
and P5,000,000.00 by Protacio, or a total of P23,300,000.00
which was more than the P12,600,000.00 that the spouses
Nemoto had paid on the purchase price ofP35,900,000.00. It
was allegedly agreed that Nobuyasu Nemoto (Nobuyasu), who
is one of respondent's stockholders and also a friend of
Protacio, would pay the remaining installment
ofP12,600,000.00 and reimburse the amount already paid by
respondent and Protacio while the title, to be placed in the
name of the minor daughter of spouses Nemoto, Sakura
Nemoto, would be in respondent's possession. However, MLC
did not deliver the title to the property to respondent despite
repeated oral demands. Respondent later discovered that a
deed of absolute sale was executed between MLC and
Carmencita with a stated consideration of P12,500,000.00 and
that TCT No. 213246 was issued in the name of Carmencita.5
Despite several demands and assurances in a span of more
than three years, the spouses Nemoto still failed to pay the
purchase price advanced by respondent and Protacio
amounting toP23,400,000.00.
On 19 April 2001, respondent caused the annotation of a
notice of lis pendens involving Civil Case No. 01-098 on TCT
No. 213246. Despite the notice of lis pendens, Carmencita
executed a deed of real estate mortgage6 dated 20 July 2001
over the property in favor of petitioners Isabelita and Carolyn
Cunanan (the Cunanans) as security for the payment of a P10
million loan plus interest, as well as all subsequent loans and
obligations. She also executed a promissory note dated 22
July 2001,7 undertaking to pay on or before 22 December
2001 the P10 million loan with interest of 3% per month.
In an Order dated 18 July 2001, the RTC dismissed the case
and ordered the cancellation of the notice of lis
pendens.8 Subsequently, on 23 July 2001, the RTC issued an
amended order9specifically ordering the Register of Deeds of
Muntinlupa City to immediately cancel the notice of lis
pendens on TCT No. 213246.10 Within the
same day, the Register of Deeds cancelled the notice of lis
pendens and, immediately thereafter, annotated the deed of
real estate mortgage.11
The RTC subsequently granted respondent's motion for
reconsideration of the amended order of dismissal in its order
dated 24 October 2001.12 Thereafter, the Register of Deeds of
Muntinlupa City re-annotated the notice of lis pendens on 12
December 2001.13
Ultimately, the RTC decided Civil Case No. 01-098 in favor of
respondent in a Decision14 dated 26 February 2002.
In the meantime, the Cunanans effected the extra-judicial
foreclosure of the mortgage on the property on 17 July
2002.15 This prompted respondent to file on 12 August 2002
before the RTC of Muntinlupa City Civil Case No. 0218916 seeking the nullification of mortgage deed and the
extra-judicial foreclosure proceedings, as well as the
cancellation of the mortgage deed annotation on TCT No.
213246. In the complaint in that case, from which the present
case stemmed, respondent as plaintiff, averred that the
mortgage deed was executed fraudulently and deceitfully to
deprive respondent of its right over the property and that the
Cunanans are mortgagees in bad faith since Civil Case No. 01098 was still pending when the deed of real estate mortgage
was executed in their favor.17

On 16 April 2004, the RTC rendered its decision18 in favor of

respondent. It found that the execution of the real estate
mortgage was done in bad faith for Civil Case No. 01-098 was
still pending as the dismissal thereof was not yet final and
executory and the notice of lis pendens was not yet cancelled
by the Register of Deeds. In fact, a timely motion for
reconsideration of the order dismissing the complaint and
canceling the notice of lis pendens was filed and granted.
On appeal, the Court of Appeals affirmed the decision of the
trial court per its decision19 of 7 April 2006. It found that the
notice of lis pendens was subsisting at the time the contract
of real estate mortgage was executed between the Cunanans
and Carmencita. And even when the notice of lis pendens was
cancelled on 23 July 2001, the Cunanans were aware that the
proceedings in Civil Case No. 01-098 was not yet terminated,
as in fact, the notice was subsequently re-annotated after the
RTC had granted respondent's motion for reconsideration.
Moreover, the Court of Appeals held that at the time of the
extra-judicial foreclosure sale of the property the notice of lis
pendens had been reinstated by the RTC and this tainted the
Cunanans' status as purchasers at the foreclosure sale with
bad faith.
Now, petitioners are before this Court.
Prefatorily, the Court agrees with the appellate court in
affirming the trial court ruling that Protacio is authorized to
institute the complaint against the petitioners. The
certification issued by the majority of the directors clearly
indicates that he is authorized to demand and collect the
corporation's claims over the Ayala Alabang property and the
institution of actions in court.20 The authority granted to
Protacio is broad enough to enable him to take any legal
action necessary to protect respondent's interest in the
disputed property. This Court has also held that the power to
institute actions necessarily includes the power to execute the
verification and certification against forum
shopping21 required in initiatory pleadings, such as the
complaint in Civil Case No. 02-189.
The sole remaining issue is whether or not the Cunanans are
bound by the notice of lis pendens which was ordered
cancelled by the RTC.
A notice of lis pendens22 is an announcement to the whole
world that a particular real property is in litigation, serving as
a warning that one who acquires an interest over said
property does so at his own risk, or that he gambles on the
result of the litigation over the said property.23 The filing of a
notice of lis pendens charges all strangers with a notice of the
particular litigation referred to therein and, therefore, any
right they may thereafter acquire on the property is subject to
the eventuality of the suit.24 Such announcement is founded
upon public policy and necessity, the purpose of which is to
keep the properties in litigation within the power of the court
until the litigation is terminated and to prevent the defeat of
the judgment or decree by subsequent alienation. 25
Under Section 77 of Presidential Decree (P.D.) No. 1529,26 a
notice of lis pendens shall be deemed cancelled only upon the
registration of a certificate of the clerk of court in which the
action or proceeding was pending stating the manner of
disposal thereof if there was a final judgment in favor of the
defendant or the action was disposed of terminating finally all
rights of the plaintiff over the property in litigation.
Given the antecedent facts in the present case, the Court
should deny the petition.
There is no question that the Register of Deeds cancelled the
notice of lis pendens annotated on TCT No. 213246 only on 23
July 2001 while the Cunanans and Carmencita executed the
deed of real estate mortgage three days before, or on 20 July
2001. The Cunanans are bound by the notice of lis
pendens because on the date they executed the mortgage

121
deed with Carmencita the annotation was still subsisting and
had not yet been cancelled. The Order dated 18 July 2001
dismissing the complaint and directing the cancellation of the
notice of lis pendens did not improve the situations of the
Cunanans simply because said Order was not registered at all
and therefore did not preclude the notice of lis pendens from
continuing in effect.
Neither did the issuance and registration of the amended
Order dated 23 July 2001, although it even commanded the
Register of Deeds to cancel the notice of lis pendens apart
from containing the same directives as those in the 18 July
2001 Order. The simple reason this time is the fact that the
last order was issued after the execution of the mortgage
deed. As the mortgage had already been executed and
therefore deemed valid and effective between the parties as
of the date of its execution, the Cunanans had taken a gamble
on the result of the litigation referred to in the notice of lis
pendens when they accepted the properties as security.
The result in the present case would still be the same even if
the parties executed the mortgage deed after the Register of
Deeds had cancelled the notice of lis pendens. It is true that
one who deals with property registered under the Torrens
system need not go beyond the same, but only has to rely on
the face of the title. He is charged with notice only of such
burdens and claims as are annotated on the title. However,
this principle does not apply when the party has actual
knowledge of facts and circumstances that would impel a
reasonably cautious man to make such inquiry or when the
purchaser or mortgagee has knowledge of a defect or the lack
of title in his vendor or mortgagor or of sufficient facts to
induce a reasonably prudent man to inquire into the status of
the title of the property in litigation. One who falls within the
exception can neither be denominated an innocent purchaser
or mortgagee for value nor a purchaser or mortgagee in good
faith.27 In the present case, the fact that the orders dismissing
the case and directing the cancellation of the notice of lis
pendens was not yet final and executory should have impelled
the Cunanans to be wary of further developments, as in fact
plaintiff filed a motion for reconsideration and the RTC granted
the same. In short, the Cunanans' knowledge of the existence
of a pending litigation involving the disputed property makes
them mortgagees in bad faith. Hence, respondent could still
recover the property from the Cunanans.
Petitioners mistakenly rely on the Court's holding in Po Lam v.
Court of Appeals.28 The case involves a dispute over two
parcels of lands with notice of lis pendens annotated on the
titles. The trial court declared the predecessor-in-interest of
the petitioner spouses Po Lam as owners of the properties and
ordered the cancellation of the notice of lis pendens on both
titles. The Register of Deeds was only able to cancel the
annotation on one of the titles. During the pendency of the
appeal to the Court of Appeals, the two properties were sold
to the petitioners. It was only after four years that the
petitioners had the notice of lis pendens on the title of the
other property cancelled. New certificates of titles were issued
to petitioners. In declaring that the spouses Po Lam are not
purchasers in bad faith, we ruled, thus:
A possessor in good faith has been defined as "one who is
unaware that there exists a flaw which invalidates his
acquisition of the thing (See Article 526, Civil Code). Good
faith consists in the possessor's belief that the person from
whom he received the

thing was the owner of the same and could convey his title
(Pio v. CA, 198 SCRA 434 [1991]). In this case, while
petitioners bought Lot No. 2581 from LAHCO while a
notice of lis pendens was still annotated thereon, there
was also existing a court order canceling the same.
Hence, petitioners cannot be considered as being
"aware of a flaw which invalidates their acquisition of
the thing" since the alleged flaw, the notice of lis
pendens, was already being ordered cancelled at the
time of the purchase. On this ground alone, petitioners
can already be considered buyers in good
faith. (Emphasis ours.)
More importantly, however, the notice of lis pendens inscribed
on TCT No. 2581 was cancelled on May 20, 1974, pursuant to
the order of the trial court in Civil Case No. 2953. Felix Lim
did not move for the reinstatement of the cancelled
notices of lis pendens. What is the effect of this
cancellation? To follow the prior ruling of the Court in the
instant case, the cancellation of the notice of lis
pendens would have no effect. Regardless of the cancellation
of the notice of lis pendens, the Po Lam spouses are still
considered as having notice of a possible defect in the title of
LAHCO, making them purchasers in bad faith.29 (Emphasis
ours.)rbl r l l lbrr
In the Po Lam case, the Register of Deeds only cancelled the
notice of lis pendens on one of the titles that were in dispute.
It was almost a year passed when the trial court's order was
annotated on the title of the other property. The spouses Po
Lam purchased both properties at the same time several
months after the trial court declared their predecessor-ininterest as owner of the properties and ordered the
cancellation of the notice of lis pendens. There was no finding
that the spouses Po Lam were aware of any pending litigation
over the property for no motion for reconsideration or motion
for reinstatement of the notice of lis pendens was filed with
the trial court. The Court had no choice but to give effect to
the trial court's order and considered the petitioners as buyers
in good faith.
In the present case, the mortgage deed was executed even
before the Register of Deeds had the chance to cancel the
annotated
notice of lis pendens on the title of the disputed property.
Moreover, the RTC's orders had not even attained finality
when the mortgage deed was executed. The respondent in
fact filed on 2 August 2001 a motion for reconsideration of the
trial court's order and sought the reinstatement of the
cancelled notice of lis pendens. On 24 October 2001, the trial
court reconsidered its previous ruling and ordered the
reinstatement of the notice of lis pendens.
WHEREFORE, the Court AFFIRMS the decision of the Court
of Appeals in CA-G.R. CV No. 82588. Cost against petitioners.
SO ORDERED.

FIRST DIVISION
[G.R. No. 127624. November 18, 2003.]
BPI LEASING CORPORATION, Petitioner, v. THE
HONORABLE COURT OF APPEALS, COURT OF TAX
APPEAL AND COMMISSIONER OF INTERNAL
REVENUE, Respondents.
DECISION

The present petition for review on certiorari assails the

decision 1 of the Court of Appeals in CA-G.R. SP No. 38223
and its subsequent resolution 2 denying the motion for
reconsideration. The assailed decision and resolution affirmed

122
the decision of the Court of Tax Appeals (CTA) which denied
petitioner BPI Leasing Corporations (BLC) claim for tax refund
in CTA Case No. 4252.
The facts are not disputed.
BLC is a corporation engaged in the business of leasing
properties. 3 For the calendar year 1986, BLC paid the
Commissioner of Internal Revenue (CIR) a total of
P1,139,041.49 representing 4% "contractors percentage tax"
then imposed by Section 205 of the National Internal Revenue
Code (NIRC), based on its gross rentals from equipment
leasing for the said year amounting to P27,783,725.42. 4
On November 10, 1986, the CIR issued Revenue Regulation
19-86. Section 6.2 thereof provided that finance and leasing
companies registered under Republic Act 5980 shall be
subject to gross receipt tax of 5%-3%-1% on actual income
earned. This means that companies registered under Republic
Act 5980, such as BLC, are not liable for "contractors
percentage tax" under Section 205 but are, instead, subject to
"gross receipts tax" under Section 260 (now Section 122) of
the NIRC. Since BLC had earlier paid the aforementioned
"contractors percentage tax," it re-computed its tax liabilities
under the "gross receipts tax" and arrived at the amount of
P361,924.44.
On April 11, 1988, BLC filed a claim for a refund with the CIR
for the amount of P777,117.05, representing the difference
between the P1,139,041.49 it had paid as "contractors
percentage tax" and P361,924.44 it should have paid for
"gross receipts tax." 5 Four days later, to stop the running of
the prescriptive period for refunds, petitioner filed a petition
for review with the CTA. 6
In a decision dated May 13, 1994, 7 the CTA dismissed the
petition and denied BLCs claim of refund. The CTA held that
Revenue Regulation 19-86, as amended, may only be applied
prospectively such that it only covers all leases written on or
after January 1, 1987, as stated under Section 7 of said
revenue regulation:
Section 7. Effectivity These regulations shall take effect on
January 1, 1987 and shall be applicable to all leases written on
or after the said date.
The CTA ruled that, since BLCs rental income was all received
prior to 1986, it follows that this was derived from lease
transactions prior to January 1, 1987, and hence, not covered
by the revenue regulation.
A motion for reconsideration of the CTAs decision was filed,
but was denied in a resolution dated July 26, 1995. 8 BLC then
appealed the case to the Court of Appeals, which issued the
aforementioned assailed decision and resolution. 9 Hence, the
present petition.
In seeking to reverse the denial of its claim for tax refund, BLC
submits that the Court of Appeals and the CTA erred in not
ruling that Revenue Regulation 19-86 may be applied
retroactively so as to allow BLCs claim for a refund of
P777,117.05.
Respondents, on the other hand, maintain that the provision
on the date of effectivity of Revenue Regulation 19-86 is clear
and unequivocal, leaving no room for interpretation on its
prospective application. In addition, respondents argue that
the petition should be dismissed on the ground that the
Verification/Certification of Non-Forum Shopping was signed
by the counsel of record and not by BLC, through a duly
authorized representative, in violation of Supreme Court
Circular 28-91.
In a resolution dated March 29, 2000, 10 the petition was
given due course and the Court required the parties to file
their respective Memoranda. Upon submission of the
Memoranda, the issues in this case were delineated, as
follows: 11
WHETHER THE INSTANT PETITION FOR REVIEW ON
CERTIORARI SUBSTANTIALLY COMPLIES WITH SUPREME COURT
CIRCULAR 28-91.
WHETHER REVENUE REGULATION 19-86, AS AMENDED, IS
LEGISLATIVE OR INTERPRETATIVE IN NATURE.
WHETHER REVENUE REGULATION 19-86, AS AMENDED, IS
PROSPECTIVE OR RETROACTIVE IN ITS APPLICATION.
WHETHER PETITIONER, AS FOUND BY THE COURT OF
APPEALS, FAILED TO MEET THE QUANTUM OF EVIDENCE

REQUIRED IN REFUND CASES.

WHETHER PETITIONER, AS FOUND BY THE COURT OF
APPEALS, IS ESTOPPED FROM CLAIMING ITS PRESENT
REFUND.chanrob1es virtua1 1aw library
As to the first issue, the Court agrees with respondents
contention that the petition should be dismissed outright for
failure to comply with Supreme Court Circular 28-91, now
incorporated as Section 2 of Rule 42 of the Rules of Court. The
records plainly show, and this has not been denied by BLC,
that the certification was executed by counsel who has not
been shown to have specific authority to sign the same for
BLC.
In BA Savings Bank v. Sia, 12 it was held that the certificate of
non-forum shopping may be signed, for and on behalf of a
corporation, by a specifically authorized lawyer who has
personal knowledge of the facts required to be disclosed in
such document. This ruling, however, does not mean that any
lawyer, acting on behalf of the corporation he is representing,
may routinely sign a certification of non-forum shopping. The
Court emphasizes that the lawyer must be "specifically
authorized" in order validly to sign the certification.
Corporations have no powers except those expressly
conferred upon them by the Corporation Code and those that
are implied by or are incidental to its existence. These powers
are exercised through their board of directors and/or duly
authorized officers and agents. Hence, physical acts, like the
signing of documents, can be performed only by natural
persons duly authorized for the purpose by corporate bylaws
or by specific act of the board of directors. 13
The records are bereft of the authority of BLCs counsel to
institute the present petition and to sign the certification of
non-forum shopping. While said counsel may be the counsel
of record for BLC, the representation does not vest upon him
the authority to execute the certification on behalf of his
client. There must be a resolution issued by the board of
directors that specifically authorizes him to institute the
petition and execute the certification, for it is only then that
his actions can be legally binding upon BLC.
BLC however insists that there was substantial compliance
with SC Circular No. 28-91 because the
verification/certification was issued by a counsel who had full
personal knowledge that no other petition or action has been
filed or is pending before any other tribunal. According to BLC,
said counsels law firm has handled this case from the very
beginning and could very well attest and/or certify to the
absence of an instituted or pending case involving the same
or similar issues.
The argument of substantial compliance deserves no merit,
given the Courts ruling in Mendigorin v. Cabantog: 14
. . . The CA held that there was substantial compliance with
the Rules of Court, citing Dimagiba v. Montalvo, Jr. [ 202 S CRA
641 ] to the effect that a lawyer who assumes responsibility
for a clients cause has the duty to know the entire history of
the case, especially if any litigation is commenced. This view,
however, no longer holds authoritative value in the light of
Digital Microwave Corporation v. CA [328 SCRA 286], where it
was held that the reason the certification against forum
shopping is required to be accomplished by petitioner himself
is that only the petitioner himself has actual knowledge of
whether or not he has initiated similar actions or proceedings
in other courts or tribunals. Even counsel of record may be
unaware of such fact. To our mind, this view is more in accord
with the intent and purpose of Revised Circular No. 28-91.
Clearly, therefore, the present petition lacks the proper
certification as strictly required by jurisprudence and the
Rules of Court.
Even if the Court were to ignore the aforesaid procedural
infirmity, a perusal of the arguments raised in the petition,
indicates that a resolution on the merits would nevertheless
yield the same outcome.
BLC attempts to convince the Court that Revenue Regulation
19-86 is legislative rather than interpretative in character and
hence, should retroact to the date of effectivity of the law it
seeks to interpret.
Administrative issuances may be distinguished according to
their nature and substance: legislative and interpretative. A
legislative rule is in the matter of subordinate legislation,
designed to implement a primary legislation by providing the
details thereof. An interpretative rule, on the other hand, is

123
designed to provide guidelines to the law which the
administrative agency is in charge of enforcing. 15
The Court finds the questioned revenue regulation to be
legislative in nature. Section 1 of Revenue Regulation 19-86
plainly states that it was promulgated pursuant to Section 277
of the NIRC. Section 277 (now Section 244) is an express grant
of authority to the Secretary of Finance to promulgate all
needful rules and regulations for the effective enforcement of
the provisions of the NIRC. In Paper Industries Corporation of
the Philippines v. Court of Appeals, 16 the Court recognized
that the application of Section 277 calls for none other than
the exercise of quasi-legislative or rule-making authority.
Verily, it cannot be disputed that Revenue Regulation 19-86
was issued pursuant to the rule-making power of the
Secretary of Finance, thus making it legislative, and not
interpretative as alleged by BLC.

ASEAN PACIFIC PLANNERS, APP CONSTRUCTION AND

DEVELOPMENT CORPORATION* AND CESAR
GOCO, Petitioners, v. CITY OF URDANETA, CEFERINO J.
CAPALAD, WALDO C. DEL CASTILLO, NORBERTO M. DEL
PRADO, JESUS A. ORDONO AND AQUILINO
MAGUISA,**, Respondents.
DECISION
The instant petition seeks to set aside the Resolutions 1 dated
April 15, 2003 and February 4, 2004 of the Court of Appeals in
CA-G.R. SP No. 76170.

BLC further posits that, assuming the revenue regulation is

legislative in nature, it is invalid for want of due process as no
prior notice, publication and public hearing attended the
issuance thereof. To support its view, BLC cited CIR v. Fortune
Tobacco, Et Al., 17 wherein the Court nullified a revenue
memorandum circular which reclassified certain cigarettes
and subjected them to a higher tax rate, holding it invalid for
lack of notice, publication and public hearing.

This case stemmed from a Complaint2 for annulment of

contracts with prayer for preliminary prohibitory injunction
and temporary restraining order filed by respondent Waldo C.
Del Castillo, in his capacity as taxpayer, against respondents
City of Urdaneta and Ceferino J. Capalad doing business under
the name JJEFWA Builders, and petitioners Asean Pacific
Planners (APP) represented by Ronilo G. Goco and Asean
Pacific Planners Construction and Development Corporation
(APPCDC) represented by Cesar D. Goco.

The doctrine enunciated in Fortune Tobacco, and reiterated in

CIR v. Michel J. Lhuillier Pawnshop, Inc., 18 is that when an
administrative rule goes beyond merely providing for the
means that can facilitate or render less cumbersome the
implementation of the law and substantially increases the
burden of those governed, it behooves the agency to accord
at least to those directly affected a chance to be heard and,
thereafter, to be duly informed, before the issuance is given
the force and effect of law. In Lhuillier and Fortune Tobacco,
the Court invalidated the revenue memoranda concerned
because the same increased the tax liabilities of the affected
taxpayers without affording them due process. In this case,
Revenue Regulation 19-86 would be beneficial to the
taxpayers as they are subjected to lesser taxes. Petitioner, in
fact, is invoking Revenue Regulation 19-86 as the very basis
of its claim for refund. If it were invalid, then petitioner all the
more has no right to a refund.

Del Castillo alleged that then Urdaneta City Mayor Rodolfo E.

Parayno entered into five contracts for the preliminary design,
construction and management of a four-storey twin cinema
commercial center and hotel involving a massive expenditure
of public funds amounting to P250 million, funded by a loan
from the Philippine National Bank (PNB). For minimal work, the
contractor was allegedly paid P95 million. Del Castillo also
claimed that all the contracts are void because the object is
outside the commerce of men. The object is a piece of land
belonging to the public domain and which remains devoted to
a public purpose as a public elementary school. Additionally,
he claimed that the contracts, from the feasibility study to
management and lease of the future building, are also void
because they were all awarded solely to the Goco family.

After upholding the validity of Revenue Regulation 19-86, the

Court now resolves whether its application should be
prospective or retroactive.
The principle is well entrenched that statutes, including
administrative rules and regulations, operate prospectively
only, unless the legislative intent to the contrary is manifest
by express terms or by necessary implication. 19 In the
present case, there is no indication that the revenue
regulation may operate retroactively. Furthermore, there is an
express provision stating that it "shall take effect on January
1, 1987," and that it "shall be applicable to all leases written
on or after the said date." Being clear on its prospective
application, it must be given its literal meaning and applied
without further interpretation. 20 Thus, BLC is not in a position
to invoke the provisions of Revenue Regulation 19-86 for lease
rentals it received prior to January 1, 1987.
It is also apt to add that tax refunds are in the nature of tax
exemptions. As such, these are regarded as in derogation of
sovereign authority and are to be strictly construed against
the person or entity claiming the exemption. The burden of
proof is upon him who claims the exemption and he must be
able to justify his claim by the clearest grant under
Constitutional or statutory law, and he cannot be permitted to
rely upon vague implications. 21 Nothing that BLC has raised
justifies a tax refund.
It is not necessary to rule on the remaining issues,
WHEREFORE, the petition for review is hereby DENIED, and
the assailed decision and resolution of the Court of Appeals
are AFFIRMED. No pronouncement as to costs.
SO ORDERED.

SECOND DIVISION

In their Answer,3 APP and APPCDC claimed that the contracts

are valid. Urdaneta City Mayor Amadeo R. Perez, Jr., who filed
the city's Answer,4 joined in the defense and asserted that the
contracts were properly executed by then Mayor Parayno with
prior authority from the Sangguniang Panlungsod. Mayor
Perez also stated that Del Castillo has no legal capacity to sue
and that the complaint states no cause of action. For
respondent Ceferino J. Capalad, Atty. Oscar C. Sahagun filed
an Answer5 with compulsory counterclaim and motion to
dismiss on the ground that Del Castillo has no legal standing
to sue.
Respondents Norberto M. Del Prado, Jesus A. Ordono and
Aquilino Maguisa became parties to the case when they jointly
filed, also in their capacity as taxpayers, a Complaint-inIntervention6 adopting the allegations of Del Castillo.
After pre-trial, the Lazaro Law Firm entered its appearance as
counsel for Urdaneta City and filed an Omnibus Motion 7 with
prayer to (1) withdraw Urdaneta City's Answer; (2) drop
Urdaneta City as defendant and be joined as plaintiff; (3)
admit Urdaneta City's complaint; and (4) conduct a new pretrial. Urdaneta City allegedly wanted to rectify its position and
claimed that inadequate legal representation caused its
inability to file the necessary pleadings in representation of its
interests.
In its Order8 dated September 11, 2002, the Regional Trial
Court (RTC) of Urdaneta City, Pangasinan, Branch 45,
admitted the entry of appearance of the Lazaro Law Firm and
granted the withdrawal of appearance of the City Prosecutor.
It also granted the prayer to drop the city as defendant and
admitted its complaint for consolidation with Del Castillo's
complaint, and directed the defendants to answer the city's
complaint.

[G.R. NO. 162525 : September 23, 2008]

In its February 14, 2003 Order,9 the RTC denied
reconsideration of the September 11, 2002 Order. It also

124
granted Capalad's motion to expunge all pleadings filed by
Atty. Sahagun in his behalf. Capalad was dropped as
defendant, and his complaint filed by Atty. Jorito C. Peralta
was admitted and consolidated with the complaints of Del
Castillo and Urdaneta City. The RTC also directed APP and
APPCDC to answer Capalad's complaint.
Aggrieved, APP and APPCDC filed a petition
for certiorari before the Court of Appeals. In its April 15, 2003
Resolution, the Court of Appeals dismissed the petition on the
following grounds: (1) defective verification and certification
of non-forum shopping, (2) failure of the petitioners to submit
certified true copies of the RTC's assailed orders as mere
photocopies were submitted, and (3) lack of written
explanation why service of the petition to adverse parties was
not personal.10 The Court of Appeals also denied APP and
APPCDC's motion for reconsideration in its February 4, 2004
Resolution.11
Hence, this petition, which we treat as one for review
on certiorari under Rule 45, the proper remedy to assail the
resolutions of the Court of Appeals.12
Petitioners argue that:
I.
THE APPELLATE COURT PALPABLY ERRED AND GRAVELY
ABUSED ITS JUDICIAL PREROGATIVES BY SUMMARILY
DISMISSING THE PETITION ON THE BASIS OF PROCEDURAL
TECHNICALITIES DESPITE SUBSTANTIAL COMPLIANCE
[THEREWITH]'
II.
THE TRIAL COURT PALPABLY ERRED AND GRAVELY ABUSED ITS
JUDICIAL PREROGATIVES BY CAPRICIOUSLY
(a.) Entertaining the taxpayers' suits of private respondents
del Castillo, del Prado, Ordono and Maguisa despite their clear
lack of legal standing to file the same.
(b.) Allowing the entry of appearance of a private law firm to
represent the City of Urdaneta despite the clear statutory and
jurisprudential prohibitions thereto.
(c.) Allowing Ceferino J. Capalad and the City of Urdaneta to
switch sides, by permitting the withdrawal of their respective
answers and admitting their complaints as well as allowing
the appearance of Atty. Jorito C. Peralta to represent Capalad
although Atty. Oscar C. Sahagun, his counsel of record, had
not withdrawn from the case, in gross violation of well settled
rules and case law on the matter.13
We first resolve whether the Court of Appeals erred in denying
reconsideration of its April 15, 2003 Resolution despite APP
and APPCDC's subsequent compliance.
Petitioners argue that the Court of Appeals should not have
dismissed the petition on mere technicalities since they have
attached the proper documents in their motion for
reconsideration and substantially complied with the rules.
Respondent Urdaneta City maintains that the Court of Appeals
correctly dismissed the petition because Cesar Goco had no
proof he was authorized to sign the certification of non-forum
shopping in behalf of APPCDC.
Indeed, Cesar Goco had no proof of his authority to sign the
verification and certification of non-forum shopping of the
petition for certiorari filed with the Court of Appeals.14 Thus,
the Court of Appeals is allowed by the rules the discretion to
dismiss the petition since only individuals vested with
authority by a valid board resolution may sign the certificate
of non-forum shopping in behalf of a corporation. Proof of said

authority must be attached; otherwise, the petition is subject

to dismissal.15
However, it must be pointed out that in several cases, 16 this
Court had considered as substantial compliance with the
procedural requirements the submission in the motion for
reconsideration of the authority to sign the verification and
certification, as in this case. The Court notes that the
attachments in the motion for reconsideration show that
on March 5, 2003, the Board of Directors of APPCDC
authorized Cesar Goco to institute the petition before the
Court of Appeals.17 On March 22, 2003, Ronilo Goco doing
business under the name APP, also appointed his father,
Cesar Goco, as his attorney-in-fact to file the petition.18 When
the petition was filed on March 26, 200319 before the Court of
Appeals, Cesar Goco was duly authorized to sign the
verification and certification except that the proof of his
authority was not submitted together with the petition.
Similarly, petitioners submitted in the motion for
reconsideration certified true copies of the assailed RTC orders
and we may also consider the same as substantial
compliance.20Petitioners also included in the motion for
reconsideration their explanation21 that copies of the petition
were personally served on the Lazaro Law Firm and mailed to
the RTC and Atty. Peralta because of distance. The affidavit of
service22 supported the explanation. Considering the
substantial issues involved, it was thus error for the appellate
court to deny reinstatement of the petition.
Having discussed the procedural issues, we shall now proceed
to address the substantive issues raised by petitioners, rather
than remand this case to the Court of Appeals. In our view,
the issue, simply put, is: Did the RTC err and commit grave
abuse of discretion in (a) entertaining the taxpayers' suits; (b)
allowing a private law firm to represent Urdaneta City; (c)
allowing respondents Capalad and Urdaneta City to switch
from being defendants to becoming complainants; and (d)
allowing Capalad's change of attorneys?cralawred
On the first point at issue, petitioners argue that a taxpayer
may only sue where the act complained of directly involves
illegal disbursement of public funds derived from taxation.
The allegation of respondents Del Castillo, Del Prado, Ordono
and Maguisa that the construction of the project is funded by
the PNB loan contradicts the claim regarding illegal
disbursement since the funds are not directly derived from
taxation.
Respondents Del Castillo, Del Prado, Ordono and Maguisa
counter that their personality to sue was not raised by
petitioners APP and APPCDC in their Answer and that this
issue was not even discussed in the RTC's assailed orders.
Petitioners' contentions lack merit. The RTC properly allowed
the taxpayers' suits. In Public Interest Center, Inc. v.
Roxas,23 we held:
In the case of taxpayers' suits, the party suing as a taxpayer
must prove that he has sufficient interest in preventing the
illegal expenditure of money raised by taxation. Thus,
taxpayers have been allowed to sue where there is a claim
that public funds are illegally disbursed or that public money
is being deflected to any improper purpose, or that public
funds are wasted through the enforcement of an invalid or
unconstitutional law.
xxx
Petitioners' allegations in their Amended Complaint that the
loan contracts entered into by the Republic and NPC are
serviced or paid through a disbursement of public funds are
not disputed by respondents, hence, they are invested with
personality to institute the same.24

125
Here, the allegation of taxpayers Del Castillo, Del Prado,
Ordono and Maguisa that P95 million of the P250 million PNB
loan had already been paid for minimal work is sufficient
allegation of overpayment, of illegal disbursement, that
invests them with personality to sue. Petitioners do not
dispute the allegation as they merely insist, albeit
erroneously, that public funds are not involved. Under Article
195325 of the Civil Code, the city acquired ownership of the
money loaned from PNB, making the money public fund. The
city will have to pay the loan by revenues raised from local
taxation or by its internal revenue allotment.

with the municipal attorney and prosecutor has not even been
allowed.39

In addition, APP and APPCDC's lack of objection in their

Answer on the personality to sue of the four complainants
constitutes waiver to raise the objection under Section 1, Rule
9 of the Rules of Court.26

On the third point, petitioners claim that Urdaneta City is

estopped to reverse admissions in its Answer that the
contracts are valid and, in its pre-trial brief, that the execution
of the contracts was in good faith.

On the second point, petitioners contend that only the City

Prosecutor can represent Urdaneta City and that law and
jurisprudence prohibit the appearance of the Lazaro Law Firm
as the city's counsel.

We disagree. The court may allow amendment of pleadings.

The Lazaro Law Firm, as the city's counsel, counters that the
city was inutile defending its cause before the RTC for lack of
needed legal advice. The city has no legal officer and both
City Prosecutor and Provincial Legal Officer are busy. Practical
considerations also dictate that the city and Mayor Perez must
have the same counsel since he faces related criminal cases.
Citing Mancenido v. Court of Appeals,27 the law firm states
that hiring private counsel is proper where rigid adherence to
the law on representation would deprive a party of his right to
redress a valid grievance.28
We cannot agree with the Lazaro Law Firm. Its appearance as
Urdaneta City's counsel is against the law as it provides
expressly who should represent it. The City Prosecutor should
continue to represent the city.
Section 481(a)29 of the Local Government Code (LGC) of
199130 mandates the appointment of a city legal officer. Under
Section 481(b)(3)(i)31 of the LGC, the city legal officer is
supposed to represent the city in all civil actions, as in this
case, and special proceedings wherein the city or any of its
officials is a party. In Ramos v. Court of Appeals,32 we cited
that under Section 1933 of Republic Act No. 5185,34 city
governments may already create the position of city legal
officer to whom the function of the city fiscal (now prosecutor)
as legal adviser and officer for civil cases of the city shall be
transferred.35 In the case of Urdaneta City, however, the
position of city legal officer is still vacant, although its
charter36 was enacted way back in 1998.
Because of such vacancy, the City Prosecutor's appearance as
counsel of Urdaneta City is proper. The City Prosecutor
remains as the city's legal adviser and officer for civil cases, a
function that could not yet be transferred to the city legal
officer. Under the circumstances, the RTC should not have
allowed the entry of appearance of the Lazaro Law Firm vice
the City Prosecutor. Notably, the city's Answer was sworn to
before the City Prosecutor by Mayor Perez. The City Prosecutor
prepared the city's pre-trial brief and represented the city in
the pre-trial conference. No question was raised against the
City Prosecutor's actions until the Lazaro Law Firm entered its
appearance and claimed that the city lacked adequate legal
representation.
Moreover, the appearance of the Lazaro Law Firm as counsel
for Urdaneta City is against the law. Section 481(b)(3)(i) of the
LGC provides when a special legal officer may be employed,
that is, in actions or proceedings where a component city or
municipality is a party adverse to the provincial government.
But this case is not between Urdaneta City and the Province of
Pangasinan. And we have consistently held that a local
government unit cannot be represented by private
counsel37 as only public officers may act for and in behalf of
public entities and public funds should not be spent to hire
private lawyers.38 Pro bono representation in collaboration

Neither is the law firm's appearance justified under the

instances listed in Mancenido when local government officials
can be represented by private counsel, such as when a claim
for damages could result in personal liability. No such claim
against said officials was made in this case. Note that before it
joined the complainants, the city was the one sued, not its
officials. That the firm represents Mayor Perez in criminal
cases, suits in his personal capacity,40 is of no moment.

Section 5,41 Rule 10 of the Rules of Court pertinently provides

that if evidence is objected to at the trial on the ground that it
is not within the issues raised by the pleadings, the court may
allow the pleadings to be amended and shall do so with
liberality if the presentation of the merits of the action and the
ends of substantial justice will be subserved thereby.
Objections need not even arise in this case since the Pre-trial
Order42 dated April 1, 2002 already defined as an issue
whether the contracts are valid. Thus, what is needed is
presentation of the parties' evidence on the issue. Any
evidence of the city for or against the validity of the contracts
will be relevant and admissible. Note also that under Section
5, Rule 10, necessary amendments to pleadings may be made
to cause them to conform to the evidence.
In addition, despite Urdaneta City's judicial admissions, the
trial court is still given leeway to consider other evidence to
be presented for said admissions may not necessarily prevail
over documentary evidence,43 e.g., the contracts assailed. A
party's testimony in open court may also override admissions
in the Answer.44
As regards the RTC's order admitting Capalad's complaint and
dropping him as defendant, we find the same in order.
Capalad insists that Atty. Sahagun has no authority to
represent him. Atty. Sahagun claims otherwise. We note,
however, that Atty. Sahagun represents petitioners who claim
that the contracts are valid. On the other hand, Capalad filed
a complaint for annulment of the contracts. Certainly, Atty.
Sahagun cannot represent totally conflicting interests. Thus,
we should expunge all pleadings filed by Atty. Sahagun in
behalf of Capalad.
Relatedly, we affirm the order of the RTC in allowing Capalad's
change of attorneys, if we can properly call it as such,
considering Capalad's claim that Atty. Sahagun was never his
attorney.
Before we close, notice is taken of the offensive language
used by Attys. Oscar C. Sahagun and Antonio B. Escalante in
their pleadings before us and the Court of Appeals. They
unfairly called the Court of Appeals a "court of
technicalities"45 for validly dismissing their defectively
prepared petition. They also accused the Court of Appeals of
protecting, in their view, "an incompetent judge."46 In
explaining the "concededly strong language," Atty. Sahagun
further indicted himself. He said that the Court of Appeals'
dismissal of the case shows its "impatience and readiness to
punish petitioners for a perceived slight on its dignity" and
such dismissal "smacks of retaliation and does not augur for
the cold neutrality and impartiality demanded of the appellate
court."47
Accordingly, we impose upon Attys. Oscar C. Sahagun and
Antonio B. Escalante a fine of P2,00048 each payable to this
Court within ten days from notice and we remind them that
they should observe and maintain the respect due to the

126
Court of Appeals and judicial officers;49 abstain from offensive
language before the courts;50 and not attribute to a Judge
motives not supported by the record.51 Similar acts in the
future will be dealt with more severely.
WHEREFORE, we (1) GRANT the petition; (2) SET ASIDE the
Resolutions dated April 15, 2003 and February 4, 2004 of the
Court of Appeals in CA-G.R. SP No. 76170; (3) DENY the entry
of appearance of the Lazaro Law Firm in Civil Case No. U-7388
and EXPUNGE all pleadings it filed as counsel of Urdaneta
City; (4) ORDER the City Prosecutor to represent Urdaneta
City in Civil Case No. U-7388; (5) AFFIRM the RTC in
admitting the complaint of Capalad; and (6) PROHIBIT Atty.
Oscar C. Sahagun from representing Capalad and EXPUNGE all
pleadings that he filed in behalf of Capalad.
Let the records of Civil Case No. U-7388 be remanded to the
trial court for further proceedings.
Finally, we IMPOSE a fine of P2,000 each on Attys. Oscar C.
Sahagun and Antonio B. Escalante for their use of offensive
language, payable to this Court within ten (10) days from
receipt of this Decision.

During the hearing of the application for a preliminary

injunction, it was established that the lots covered by TCT
Nos. 42996 and 42997 were owned by Bibiana Guerra de
Azarcon (one of the herein private respondents) and her late
husband Inocentes Azarcon. They obtained a loan from the
Philippine National Bank (PNB). As collateral, they mortgaged
these two (2) lots with the bank. But they could not pay their
loan. Asuncion Calceta, a close friend of private respondent
Donalita Alonzo, told Bibiana that she is willing to pay their
loan if she (Bibiana) would mortgage the lots to her. Private
respondents agreed.
Asuncion Calceta then made an initial payment
of P273,000.00 to the PNB. In turn, the bank extended the
redemption period to allow Asuncion to apply with the DBP a
loan ofP3,500,000.00 to be paid to the PNB.
Upon Asuncion's persistence, private respondents executed a
simulated deed of sale of their lots in her favor to enable her
to mortgage the same with the DBP. Thus, TCT Nos. 42996
and 42997 were issued in her name by the Register of Deeds
of Tagbilaran City.
Asuncion then mortgaged the two (2) lots with the DBP. When
the proceeds of the loan were released, she paid the
PNB P900,000.00 representing the unpaid balance of
respondents' loan.

SO ORDERED.

THIRD DIVISION

However, Asuncion failed to pay her loan with the DBP,

prompting the bank to foreclose the mortgage covering the
two (2) lots.

[G.R. NO. 147217 : October 7, 2004]

DEVELOPMENT BANK OF THE PHILIPPINES and NILO C.
GALORPORT, Petitioners, v. THE COURT OF APPEALS
(Former First Division), HON. ACHILLES L. MELICOR (as
Presiding Judge, Regional Trial Court, Branch 4,
Tagbilaran City), BIBIANA GUREA VDA. DE AZARCON,
HEIRS OF INOCENTES AZARCON, namely, PERLA ROO,
INOCENTES AZARCON, JR., LORENZITA CALAMBA, ELSA
ANGALOT, MANUELA B. TUASON, DARIETTA AZARCON
and DONALITA A. ALONSO (For Herself and as AttorneyIn-Fact of her Co-heirs), Respondents.
DECISION
Assailed in this Petition for Review on Certiorari is the
Resolution of the Court of Appeals dated September
26, 2000 in CA-G.R. SP No. 60838 dismissing the
petition for certiorari filed by the Development Bank of
the Philippines (DBP) and Atty. Nilo Galorport (DBP
deputized special sheriff1), herein petitioners. The
ground for the dismissal is that the certification
against forum shopping was signed only by Atty.
Demosthenes Demecillo, DBP Branch Manager at
Tagbilaran City, the bank's representative. Atty.
Galorport, DBP's co-petitioner did not sign the same.
Also assailed in the instant petition is the subsequent
Resolution of the Court of Appeals dated January 29, 2001
denying petitioners' motion for reconsideration of the previous
Resolution as there is no proof that DBP Branch Manager Atty.
Demosthenes Demecillo, who alone signed the certification
against forum shopping, is the duly authorized representative
of the bank.
Records show that on February 11, 2000, the above-named
private respondents filed with the Regional Trial Court (RTC) of
Tagbilaran City Civil Case No. 6464 for annulment of contract
and Transfer Certificates of Title (TCT) Nos. 42996 and 42997
with prayer for the issuance of a temporary restraining order
(TRO) and preliminary injunction. Impleaded as defendants
are the DBP, represented by Atty. Demosthenes Demecillo,
DBP Branch Manager at Tagbilaran City, and Atty. Nilo
Galorport, DBP deputized special sheriff.

After hearing private respondents' application for preliminary

injunction, the RTC, on June 9, 2000, issued an Order enjoining
the DBP and Atty. Nilo Galorport, the bank's deputized special
sheriff, from proceeding with the auction sale of the lots
pending the final determination of Civil Case No. 6464.
The DBP and Atty. Galorport filed a motion for reconsideration
but was denied by the RTC. Hence, they filed with the Court of
Appeals a petition for certiorari alleging that in granting the
injunctive relief in favor of private respondents, the RTC acted
with grave abuse of discretion. As stated in the outset, the
Appellate Court issued a Resolution on September 26, 2000
dismissing the petition for certiorari for failure of one of the
petitioners, Atty. Nilo Galorport (DBP's deputized special
sheriff), to sign the certification against forum shopping.
Subsequently, acting on petitioners' motion for
reconsideration, the Appellate Court likewise denied the same
in a Resolution dated January 29, 2001, holding that Atty.
Demosthenes Demecillo, Branch Manager of the DBP at
Tagbilaran City, failed to show that he is the bank's authorized
representative to file the petition for certiorari .
The issue for our resolution is:
Whether the Court of Appeals acted with grave abuse of
discretion in issuing the assailed twin Resolutions dismissing
petitioners' petition for certiorari .
It bears reiterating that the petitioners before the Court of
Appeals were the DBP, represented by Atty. Demosthenes
Demecillo, the bank's Branch Manager at Tagbilaran City, and
Atty. Nilo Galorport, DBP's deputized special sheriff. The
certification against forum shopping was signed by Atty.
Demosthenes Demecillo only. According to private
respondents, Atty. Demecillo was not authorized by the DBP to
represent it in filing with the Court of Appeals the petition
for certiorari . Hence, Atty. Demecillo's signature appearing on
the certification against forum shopping has no legal
significance at all. It cannot bind DBP.
Petitioners explained in their motion for reconsideration that
in the verification of the petition for certiorari in CA-G.R. SP
No. 60838, Atty. Demecillo stated under oath that he is the
DBP's incumbent Branch Head and its duly authorized officer.

127
They submitted a copy of Resolution No. 0192 dated April 5,
2000 passed by the DBP Board of Governors. This Resolution
authorizes Branch Heads of the DBP to sign the verification
and certification against forum shopping of all initiatory
pleadings of the bank.

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.

What petitioners failed to explain, however, is their failure to

attach a certified true copy of Resolution No. 0912 to their
petition for certiorari in CA-G.R. SP No. 60838. Their omission
is fatal to their case. Courts are not, after all, expected to take
judicial notice of corporate board resolutions or a corporate
officer's authority to represent a corporation. To be sure,
petitioners' failure to submit proof that Atty. Demecillo has
been authorized by the DBP to file the petition is a "sufficient
ground for the dismissal thereof." 2

During trial, Bukal Enterprises presented five witnesses,

namely, Aviles, De Castro, Antonio Moreno, Jocelyn Napa and
Antonio Ancheta.
Aviles testified that De Castro authorized him to negotiate on
behalf of Bukal Enterprises for the purchase of the Property.
According to Aviles, he met with the Spouses Firme on 23
January 1995 and he presented them with a draft deed of sale
4 ("First Draft") dated February 1995. The First Draft of the
deed of sale provides:
DEED OF ABSOLUTE SALE

On the part of Atty. Galorport, he admits that he did not sign

the certification against forum shopping in CA-G.R. SP No.
60838, contending that the signature of Atty. Demecillo,
representing the DBP, is sufficient since he (Atty. Galorport)
and the DBP are being sued jointly, they having a common
interest in the lots under litigation. His contention lacks merit.
DBP is being sued as a mortgagee, while he is impleaded as
the bank's deputized special sheriff who conducted the extrajudicial foreclosure of the mortgage. Surely, their interests are
not the same. He should have signed the certification. In
Docena v. Lapesura,3 we ruled that the certification against
forum shopping should be signed by all the petitioners in a
case, and that the signing by only one of them is insufficient.
In sum, we find that the certification against forum shopping
in CA-G.R. SP No. 60838 is fatally defective, not having been
duly signed by both petitioners. This procedural flaw warrants
the dismissal of the petition for certiorari . We have
consistently held that the certification against forum shopping
must be signed by the principal parties.4 With respect to a
corporation, the certification against forum shopping may be
signed for and on its behalf, by a specifically authorized
lawyer who has personal knowledge of the facts required to
be disclosed in such document.5
We, therefore, hold that in rendering the assailed twin
Resolutions in CA-G.R. SP No. 60838, respondent Court of
Appeals did not gravely abuse its discretion.
WHEREFORE, the instant petition is DENIED. Costs against
petitioners.

KNOW ALL MEN BY THESE PRESENTS:

This DEED OF ABSOLUTE SALE made and executed by and
between the Spouses CONSTANTE FIRME and AZUCENA E.
FIRME, both of legal age, Filipino citizens and with postal
address at No. 1450 Union, Paco, City of Manila, hereinafter
called the VENDOR, and
BUKAL ENTERPRISES and DEVELOPMENT CORPORATION, a
corporation duly organized and registered in accordance with
Philippine Laws, with business address at Dahlia Avenue,
Fairview Park, Quezon City, herein represented by its
PRESIDENT, MRS. ZENAIDA A. DE CASTRO, hereinafter called
the VENDEE.
WITNESSETH:
That the VENDOR is the absolute and registered owner of a
certain parcel of land located at Fairview Park, Quezon City,
and more particularly described as follows:
A parcel of land (Lot 4, Block 33 of the consolidationsubdivision plan (LRC) Pcs-8124, Sheet No. I, being a portion
of the consolidation of Lots 41-B-2-A and 41-B-2-C, Psd-1136
and Lot (LRC) Pcs-2665, (LRC) GLRO) Record No. 1037),
situated in Quezon City, Island of Luzon.Bounded on the NE.,
points 2 to 5 by Road Lot 24, of the consolidation-subdivision
plan. Beginning at a point marked "1" on plan, being S. 67
deg. 23W., 9288.80 m. from BLLM I, Mp of Montalban, Rizal;
thence N. 85 deg. 35E., 17.39 m. to point 2; thence S. 54
deg. 22E., 4.00 m. to point 3; thence S. 14 deg. 21E., 17.87
m. to point 4; thence 3 deg. 56E., 17.92 m. to point 5; thence
N. 85 deg. 12 W., 23.38 m. to point 6; thence N. 4 deg. 55W.,
34.35 m. to the point of beginning; containing an area of
EIGHT HUNDRED AND SIX (806) SQUARE METERS, more or
less.
VENDORS title thereto being evidenced by Transfer
Certificate of Title No. 264243 issued by the Register of Deeds
of Quezon City;

SO ORDERED.

FIRST DIVISION
[G.R. No. 146608. October 23, 2003.]
SPOUSES CONSTANTE FIRME AND AZUCENA E.
FIRME, Petitioners, v. BUKAL ENTERPRISES AND
DEVELOPMENT CORPORATION, Respondent.
DECISION
The Case
This is a petition for review on certiorari of the Decision 1
dated 3 January 2001 of the Court of Appeals in CA-G.R. CV
No. 60747. The Court of Appeals reversed the Decision 2 of
the Regional Trial Court, Branch 223, Quezon City ("trial
court"), which held that there was no perfected contract of
sale since there was no consent on the part of the seller.
The Facts
Petitioner Spouses Constante and Azucena Firme ("Spouses
Firme") are the registered owners of a parcel of land 3
("Property") located on Dahlia Avenue, Fairview Park, Quezon
City. Renato de Castro ("De Castro"), the vice president of
Bukal Enterprises and Development Corporation ("Bukal
Enterprises") authorized his friend, Teodoro Aviles ("Aviles"), a
broker, to negotiate with the Spouses Firme for the purchase
of the Property.
On 28 March 1995, Bukal Enterprises filed a complaint for

That the VENDOR, for and in consideration of the sum of

THREE MILLION TWO HUNDRED TWENTY FOUR THOUSAND
PESOS (P3,224,000.00) Philippine Currency, to them in hand
paid and receipt whereof is hereby acknowledged, do hereby
SELL, TRANSFER and CONVEY unto the said VENDEE, its
assigns, transferees and successors in interest the above
described property, free from all liens and encumbrances
whatsoever;
It is hereby mutually agreed that the VENDEE shall bear all
the expenses for the capital gains tax, documentary stamps,
documentation, notarization, removal and relocation of the
squatters, registration, transfer tax and other fees as may be
required by law;
That the VENDOR shall pay the real estate tax for the current
year and back real estate taxes, charges and penalties if there
are any.
IN WITNESS WHEREOF, we have hereunto affixed our
signatures this _____ day of February, 1995, at Quezon City,
Philippines.
CONSTANTE FIRME BUKAL ENTERPRISES AND
DEVELOPMENT CORP.
BY:
AZUCENA E. FIRME ZENAIDA A. DE CASTRO

128
CONTRACT OF SALE

VENDOR President

KNOW ALL MEN BY THESE PRESENTS:

x

The Spouses Firme rejected this First Draft because of several

objectionable conditions, including the payment of capital
gains and other government taxes by the seller and the
relocation of the squatters at the sellers expense. During
their second meeting, Aviles presented to the Spouses Firme
another draft deed of sale 5 ("Second Draft") dated March
1995. The Spouses Firme allegedly accepted the Second Draft
in view of the deletion of the objectionable conditions
contained in the First Draft. According to Aviles, the Spouses
Firme were willing to sell the Property at P4,000 per square
meter. They then agreed that payment would be made at the
Far East Bank and Trust Company ("FEBTC"), Padre Faura
Branch, Manila. However, the scheduled payment had to be
postponed due to problems in the transfer of funds. The
Spouses Firme later informed Aviles that they were no longer
interested in selling the Property. 6
De Castro testified that he authorized Aviles to negotiate for
Bukal Enterprises the purchase of the Property owned by the
Spouses Firme. The Property was located beside the Dahlia
Commercial Complex owned by Bukal Enterprises. Aviles
informed him that the Spouses Firme agreed to sell the
Property at P4,000 per square meter, payable in cash for a
lump sum of P3,224,000. Furthermore, Bukal Enterprises
agreed to pay the taxes due and to undertake the relocation
of the squatters on the Property. For this purpose, Bukal
Enterprises applied for a loan of P4,500,000 which FEBTC
granted. Bukal Enterprises then relocated the four families
squatting on the Property at a cost of P60,000 per family. After
the squatters vacated the Property, Bukal Enterprises fenced
the area, covered it with filling materials, and constructed
posts and riprap. Bukal Enterprises spent approximately
P300,000 for these improvements. In a letter 7 dated 7 March
1995, Bukal Enterprises offered to pay the purchase price of
P3,224,000 to the Spouses Firme upon execution of the
transfer documents and delivery of the owners duplicate copy
of TCT No. 264243. The Spouses Firme did not accept this
offer but instead sent Bukal Enterprises a letter demanding
that its workers vacate the Property. Bukal Enterprises then
filed a complaint for specific performance and damages. 8
Antonio Moreno, one of the alleged squatters on the Property,
testified that he constructed his house on the Property
sometime in 1982. On 26 February 1995, he was summoned
together with the other squatters to a meeting with Aviles
regarding their relocation. They agreed to relocate provided
they would be given financial assistance of P60,000 per
family. Thus, on 6 March 1995, the squatter families were
each paid P60,000 in the presence of De Castro and Aviles.
Thereafter, they voluntarily demolished their houses and
vacated the Property. 9
Jocelyn Mapa, the manager of FEBTC, Padre Faura Branch,
testified that Bukal Enterprises has been their client since
1994. According to her, Bukal Enterprises applied for a loan of
P4,500,000 on the third week of February 1995 allegedly to
buy a lot in Fairview. FEBTC approved the loan on the last
week of February and released the proceeds on the first week
of March. 10
Antonio Ancheta ("Ancheta"), barangay captain of Barangay
Fairview, testified that he was present when one of the
officers of Bukal Enterprises, a certain Renato, paid each of
the four squatter families around P60,000 to P100,000.
Ancheta informed Dr. Constante Firme that he told the
squatters to leave considering that they already received
payment for their relocation. According to Ancheta, Dr.
Constante Firme must have misunderstood him and thought
that the squatters left through Anchetas own efforts. 11
On the other hand, Dr. Constante Firme ("Dr. Firme") was the
sole witness for the defendant spouses.
Dr. Firme testified that on 30 January 1995, he and his wife
met with Aviles at the Aristocrat Restaurant in Quezon City.
Aviles arranged the meeting with the Spouses Firme involving
their Property in Fairview. Aviles offered to buy the Property at
P2,500 per square meter. The Spouses Firme did not accept
the offer because they were reserving the Property for their
children. On 6 February 1995, the Spouses Firme met again
with Aviles upon the latters insistence. Aviles showed the
Spouses Firme a copy of a draft deed of sale 12 ("Third Draft")
which Aviles prepared. The Third Draft of the deed of sale
provides:

This AGREEMENT, executed this ___ day of February, 1995, by

and between the Spouses CONSTANTE FIRME and AZUCENA E.
FIRME, both of legal age, Filipino citizen and with postal
address at __________, Quezon City, hereinafter referred to as
the VENDORS, and BUKAL ENTERPRISES and DEVELOPMENT
CORPORATION, a corporation duly organized and registered in
accordance with Philippine Laws, with postal address at
Fairview Park, Quezon City, herein represented by its President
and Chief Executive Officer, hereinafter referred to as the
VENDEE.
WITNESSETH:
That for and in consideration of the sum of THREE MILLION
TWO HUNDRED TWENTY FOUR THOUSAND PESOS
(P3,224,000.00), Philippine Currency, payable in the form
hereinafter expressed, agreed to sell to the VENDEE and the
VENDEE has agreed to buy from the VENDORS, a parcel of
land situated at Dahlia Avenue corner Rolex Street, Fairview
Park, Quezon City, containing an area of 806 Square Meters
more or less, of which the VENDORS are the absolute
registered owners in accordance with the Land Registration
Act, as evidenced by Transfer Certificate of Title No. 264243
issued by the Register of Deeds of Quezon City, more
particularly described and bounded as follows:
(DESCRIPTION AND BOUNDARIES OF PROPERTY)
THE FURTHER TERMS AND CONDITIONS OF THE CONTRACT
ARE AS FOLLOWS:
1. The VENDEE agrees to pay the VENDORS upon execution of
this Contract the sum of ONE MILLION PESOS (P1,000,000.00),
Philippine Currency, as downpayment and agrees to pay the
balance of TWO MILLION TWO HUNDRED TWENTY FOUR
THOUSAND PESOS (P2,224,000.00) at the post office address
of the VENDORS in Quezon City, or such other place or Office
as the VENDORS may designate within a period of sixty (60)
days counted from the date of this Contract;
2. The VENDORS have hereunto authorized the VENDEE to
mortgage the property and submit this Contract, together
with a certified true copy of the TCT, Tax Declaration, Tax
Clearance and Vicinity/Lot Plan, with their Lending Bank. The
proceeds of the VENDEES Loan shall directly be paid and
remitted by the Bank to the VENDORS;
3. The said parcel of land shall remain in the name of the
VENDORS until the Lending Bank of the VENDEE shall have
issued a Letter Guaranty Payment in favor of the VENDORS, at
which time the VENDORS agree to execute a Deed of Absolute
Sale in favor of the VENDEE and cause the issuance of the
Certificate of Title in the name of the latter. The Capital Gains
Tax and Documentary Stamps shall be charged from the
VENDORS in accordance with law;
4. The payment of the balance of P2,224,000.00 by the
VENDEE to the VENDORS shall be within a period of sixty (60)
days effective from the date of this Contract. After the lapse of
60 days and the loan has not yet been released due to
fortuitous events the VENDEE shall pay an interest of the
balance a monthly interest based on existing bank rate until
said fortuitous event is no longer present;
5. The VENDEE shall remove and relocate the Squatters,
however, such actual, reasonable and necessary expenses
shall be charged to the VENDORS upon presentation of
receipts and documents to support the act;
6. The VENDEE shall be allowed for all legal purposes to take
possession of the parcel of land after the execution of this
Contract and payment of the downpayment;
7. The VENDEE shall shoulder all expenses like the
documentation, registration, transfer tax and relocation of the
property.
IN WITNESS WHEREOF, we have hereunto affixed our
signatures this ____ day of February, 1995, at Quezon City,
Philippines.
CONSTANTE E. FIRME BUKAL ENTERPRISES DEV. CORP.
VENDOR VENDEE
AZUCENA E. FIRME BY:

129
VENDOR
President & Chief Executive Officer
x

The Spouses Firme did not accept the Third Draft because
they found its provisions one-sided. The Spouses Firme
particularly opposed the provision on the delivery of the
Propertys title to Bukal Enterprises for the latter to obtain a
loan from the bank and use the proceeds to pay for the
Property. The Spouses Firme repeatedly told Aviles that the
Property was not for sale when Aviles called on 2 and 4 March
1995 regarding the Property. On 6 March 1995, the Spouses
Firme visited their Property and discovered that there was a
hollow block fence on one side, concrete posts on another
side and bunkers occupied by workers of a certain Florante de
Castro. On 11 March 1995, Spouses Firme visited the Property
again with a surveyor. Dr. Firme talked with Ancheta who told
him that the squatters had voluntarily demolished their
shanties. The Spouses Firme sent a letter 13 dated 20 March
1995 to Bukal Enterprises demanding removal of the bunkers
and vacation by the occupants of the Property. On 22 March
1995, the Spouses Firme received a letter 14 dated 7 March
1995 from Bukal Enterprises demanding that they sell the
Property. 15

authorizing Aviles to act on behalf of Bukal Enterprises in the

purchase of the Property was cured by ratification. Bukal
Enterprises ratified the purchase when it filed the complaint
for the enforcement of the sale.
The Court of Appeals also held there was a perfected contract
of sale. The appellate court ruled that the Spouses Firme
revealed their intent to sell the Property when they met with
Aviles twice. The Spouses Firme rejected the First Draft
because they considered the terms unacceptable. When
Aviles presented the Second Draft without the objectionable
provisions, the Spouses Firme no longer had any cause for
refusing to sell the Property. On the other hand, the acts of
Bukal Enterprises in fencing the Property, constructing posts,
relocating the squatters and obtaining a loan to purchase the
Property are circumstances supporting their claim that there
was a perfected contract of sale.
The Spouses Firme allowed Bukal Enterprises to exercise acts
of ownership over the Property when the latter introduced
improvements on the Property and evicted the squatters.
These acts constitute partial performance of the contract of
sale that takes the oral contract out of the scope of the
Statute of Frauds.
The Issues

On 7 August 1998, the trial court rendered judgment against

Bukal Enterprises as follows:

The Spouses Firme raise the following issues:

WHEREFORE, in the light of the foregoing premises, the

above-entitled case [is] hereby DISMISSED and plaintiff BUKAL
ENTERPRISES DEVELOPMENT CORPORATION is hereby ordered
to pay the defendants Spouses Constante and Azucena Firme:

1. WHETHER THE COURT OF APPEALS ERRED IN FINDING THAT

THERE WAS A PERFECTED CONTRACT OF SALE BETWEEN
PETITIONERS AND RESPONDENT DESPITE THE ADDUCED
EVIDENCE PATENTLY TO THE CONTRARY;

1. the sum of Three Hundred Thirty Five Thousand Nine

Hundred Sixty Four and 90/100 (P335,964.90) as and by way
of actual and compensatory damages;

2. WHETHER THE COURT OF APPEALS ERRED IN NOT FINDING

THAT THE ALLEGED CONTRACT OF SALE IS ENFORCEABLE
DESPITE THE FACT THAT THE SAME IS COVERED BY THE
STATUTE OF FRAUDS;

2. the sum of Five Hundred Thousand Pesos (P500,000.00) as

and by way of moral damages;
3. the sum of One Hundred Thousand Pesos (P100,000.00) as
and by way of attorneys fees; and
4. the costs of the suit.
SO ORDERED. 16

3. WHETHER THE COURT OF APPEALS ERRED IN

DISREGARDING THE FACT THAT IT WAS NOT LEGALLY AND
FACTUALLY POSSIBLE FOR RESPONDENT TO PERFECT A
CONTRACT OF SALE; AND
4. THE COURT OF APPEALS ERRED IN RULING THAT THE
AWARD BY THE TRIAL COURT OF MORAL AND COMPENSATORY
DAMAGES TO PETITIONERS IS IMPROPER. 18

Bukal Enterprises appealed to the Court of Appeals, which

reversed and set aside the decision of the trial court. The
dispositive portion of the decision reads:

The Ruling of the Court

WHEREFORE, premises considered, the Decision, dated

August 7, 1998, is hereby REVERSED and SET ASIDE. The
complaint is granted and the appellees are directed to
henceforth execute the Deed of Absolute Sale transferring the
ownership of the subject property to the appellant
immediately upon receipt of the purchase price of
P3,224,000.00 and to perform all such acts necessary and
proper to effect the transfer of the property covered by TCT
No. 264243 to appellant. Appellant is directed to deliver the
payment of the purchase price of the property within sixty
days from the finality of this judgment. Costs against
appellees.
SO ORDERED.17

The fundamental question for resolution is whether there was

a perfected contract of sale between the Spouses Firme and
Bukal Enterprises. This requires a review of the factual and
legal issues of this case. As a rule, only questions of law are
appealable to this Court under Rule 45 19 of the Rules of Civil
Procedure. The findings of fact by the Court of Appeals are
generally conclusive and binding on the parties and are not
reviewable by this Court. 20 However, when the factual
findings of the Court of Appeals are contrary to those of the
trial court or when the inference made is manifestly mistaken,
this Court has the authority to review the findings of fact. 21
Likewise, this Court may review findings of fact when the
judgment of the Court of Appeals is premised on a
misapprehension of facts. 22 This is the situation in this case.

Hence, the instant petition.

Whether there was a perfected contract of sale

The Ruling of the Trial Court

We agree with the finding of the trial court that there was no
perfected contract of sale. Clearly, the Court of Appeals
misapprehended the facts of the case in ruling otherwise.

The trial court held there was no perfected contract of sale.

Bukal Enterprises failed to establish that the Spouses Firme
gave their consent to the sale of the Property. The parties did
not go beyond the negotiation stage and there was no
evidence of meeting of the minds between the parties.
Furthermore, Aviles had no valid authority to bind Bukal
Enterprises in the sale transaction. Under Sections 23 and 36
(No. 7) of the Corporation Code, the corporate power to
purchase a specific property is exercised by the Board of
Directors of the corporation. Without an authorization from the
Board of Directors, Aviles could not validly finalize the
purchase of the Property on behalf of Bukal Enterprises. There
is no basis to apply the Statute of Frauds since there was no
perfected contract of sale.

The petition is meritorious.

The Ruling of the Court of Appeals

First, the records indubitably show that there was no consent

on the part of the Spouses Firme. Aviles did not present any
draft deed of sale during his first meeting with the Spouses
Firme on 30 January 1995. 23 Dr. Firme was consistent in his
testimony that he and his wife rejected the provisions of the
Third Draft presented by Aviles during their second meeting
on 6 February 1995. The Spouses Firme found the terms and
conditions unacceptable and told Aviles that they would not
sell the property. 24 Aviles showed them only one draft deed
of sale (Third Draft) during their second and last meeting on 6
February 1995. 25 When shown a copy of the First Draft, Dr.
Firme testified that it was not the deed of sale shown to them
by Aviles during their second meeting 26 and that the Third
Draft was completely different from the First Draft. 27

The Court of Appeals held that the lack of a board resolution

On the other hand, Aviles gave conflicting testimony as to

130
what transpired during the two meetings with the Spouses
Firme. In his direct examination, Aviles testified that during his
first meeting with the Spouses Firme on 23 January 1995, he
showed them the First Draft which the Spouses Firme rejected.
28 On their second meeting, Aviles showed the Spouses Firme
the Second Draft, which the Spouses Firme allegedly approved
because the objectionable conditions contained in the First
Draft were already deleted. However, a perusal of the First
Draft and the Second Draft would show that both deeds of
sale contain exactly the same provisions. The only difference
is that the date of the First Draft is February 1995 while that of
the Second Draft is March 1995.
When Aviles testified again as rebuttal witness, his testimony
became more confusing. Aviles testified that during his first
meeting with the Spouses Firme on 30 January 1995, he
showed them the Third Draft, which was not acceptable to the
latter. 29 However, upon further questioning by his counsel,
Aviles concurred with Dr. Firmes testimony that he presented
the Third Draft (Exh. "5" ; Exh. "L") to the Spouses Firme only
during their second meeting. He also stated that he prepared
and presented to the Spouses Firme the First Draft (Exh. "C")
and the Second Draft (Exh. "C-1") during their first or second
meeting. He testified:
ATTY. MARQUEDA:
Q: On page 11 of the tsn dated August 5, 1997 a question was
posed "How did you find this draft the Contract of Sale which
was presented to you by Mr. Aviles on the second meeting?"
The answer is "On the first meeting(sic), we find it totally
unacceptable, sir." 30 What can you say on this? Before that,
Mr. Witness, what is this Contract of Sale that you presented
to Mr. Aviles on the second meeting? Is this different from the
Contract of Sale that was marked as Exhibit "5-L" ?
Q: May I see the document Exhibit 5-L? 31
INTERPRETER:
Witness going over the record.
ATTY. MARQUEDA:
Q: Is that the same document that was presented by you to
Mr. Firme on the second meeting or there is a different
contract?
A: This is the same document draft of the document that I
submitted to them during our second meeting. That was
February. This was the draft.
Q: What about Exhibit C and C-1 [which] were identified by
you. When was this presented to Dr. Firme?
A: This is the same.
Q: Exhibit C and C-1?

x 806 sq.m. = P3,224,000) for the Property. Hence, Aviles

could not have presented any of these draft deeds of sale to
the Spouses Firme during their first meeting.
Considering the glaring inconsistencies in Aviles testimony, it
was proper for the trial court to give more credence to the
testimony of Dr. Firme.
Even after the two meetings with Aviles, the Spouses Firme
were firm in their decision not to sell the Property. Aviles
called the Spouses Firme twice after their last meeting. The
Spouses Firme informed Aviles that they were not selling the
Property. 38 Aviles himself admitted this during his testimony,
thus:
Q. Now, the next question which states: "But did you not have
any occasion to talk to him after that second meeting?" and
the answer of Dr. Firme is "He called up a month after, thats
March 2, 1995." What can you say on this?
A. I called him to inform him that the loan was already
transferred from Makati to Padre Faura Branch of the Far East
Bank, so I scheduled already the payment of their property.
Q. When?
A. On March 4, 1995.
Q. And then the next question which also states: "What did
you talked (sic) about over the telephone?" The answer of Dr.
Firme was "When I found out that he was calling, I told him
that the property is not for sale." What can you say on this?
A. He mentioned that they are no longer interested to sell
their property, perhaps they would like a higher price of the
property. They did not mention to me. I do not know what was
their reason.
Q. The next question "So, what happened next?" The answer
is "He called up two days later, March 4 and my wife
answered the telephone and told him that the property is not
for sale, sir." What can you say on this?
A. That is true. That is what Mrs. Firme told me during our
conversation on the telephone that they are no longer
interested to sell the property for obvious reason.
Q. When was that?
A. March 4, 1995, your honor. 39 (Emphasis supplied)
Significantly, De Castro also admitted that he was aware of
the Spouses Firmes refusal to sell the Property. 40
The confusing testimony of Aviles taken together with De
Castros admission that he was aware of the Spouses Firmes
refusal to sell the Property reinforces Dr. Firmes testimony
that he and his wife never consented to sell the Property.

A: Yes because I prepared two documents during our meeting.

One already with notarial, the one without notarial page and
the other one with notarial page already, so I prepared two
documents but with the same contents both were dated
February of 1995. 32

Consent is one of the essential elements of a valid contract.

The Civil Code provides:

Q: So, you are referring now to Exhibit C and C-1 for the
plaintiff?

1. Consent of the contracting parties;

A: C-1 is already in the final form because we agreed already

as to the date of the payment, so I prepared already another
document which is dated March 1995. 33 (Emphasis supplied)
In his cross-examination, Aviles again changed his testimony.
According to him, he presented the Third Draft to the Spouses
Firme during their first meeting. 34 However, when he went
over the records, he again changed his answer and stated
that he presented the Third Draft during their second meeting.
35
In his re-direct examination, Aviles gave another version of
what he presented to the Spouses Firme during the two
meetings. According to him, he presented the Third Draft
during the first meeting. On their second meeting, he
presented the First and the Second Drafts to the Spouses
Firme. 36
Furthermore, Aviles admitted that the first proposal of Bukal
Enterprises was at P2,500 per square meter for the Property.
37 But the First, Second and Third Drafts of the deed of sale
prepared by Aviles all indicated a purchase price of P4,000 per
square meter or a lump sum of P3,224,000 (P4,000 per sq.m.

Art. 1318. There is no contract unless the following requisites

concur:

2. Object certain which is the subject matter of the contract;

3. Cause of the obligation which is established.
The absence of any of these essential elements will negate
the existence of a perfected contract of sale. 41 Thus, where
there is want of consent, the contract is non-existent. 42 As
held in Salonga, Et. Al. v. Farrales, Et. Al.: 43
It is elementary that consent is an essential element for the
existence of a contract, and where it is wanting, the contract
is non-existent. The essence of consent is the conformity of
the parties on the terms of the contract, the acceptance by
one of the offer made by the other. The contract to sell is a
bilateral contract. Where there is merely an offer by one
party, without the acceptance of the other, there is no
consent. (Emphasis supplied)
In this case, the Spouses Firme flatly rejected the offer of
Aviles to buy the Property on behalf of Bukal Enterprises.
There was therefore no concurrence of the offer and the
acceptance on the subject matter, consideration and terms of
payment as would result in a perfected contract of sale. 44
Under Article 1475 of the Civil Code, the contract of sale is

131
perfected at the moment there is a meeting of minds on the
thing which is the object of the contract and on the price.
Another piece of evidence which supports the contention of
the Spouses Firme that they did not consent to the contract of
sale is the fact they never signed any deed of sale. If the
Spouses Firme were already agreeable to the offer of Bukal
Enterprises as embodied in the Second Draft, then the
Spouses Firme could have simply affixed their signatures on
the deed of sale, but they did not.
Even the existence of a signed document purporting to be a
contract of sale does not preclude a finding that the contract
is invalid when the evidence shows that there was no meeting
of the minds between the seller and buyer. 45 In this case,
what were offered in evidence were mere unsigned deeds of
sale which have no probative value. 46 Bukal Enterprises
failed to show the existence of a perfected contract of sale by
competent proof.
Second, 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. Aviles testified that his friend,
De Castro, had asked him to negotiate with the Spouses Firme
to buy the Property. 47 De Castro, as Bukal Enterprises vice
president, testified that he authorized Aviles to buy the
Property. 48 However, there is no Board Resolution authorizing
Aviles to negotiate and purchase the Property on behalf of
Bukal Enterprises. 49
It is the board of directors or trustees which exercises almost
all the corporate powers in a corporation. Thus, the
Corporation 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. . . .
SEC. 36.Corporate powers and capacity. Every corporation
incorporated under this Code has the power and capacity:
x

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.
x

Under these provisions, 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. 50 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. 51 As held in AF Realty &
Development, Inc. v. Dieselman Freight Services, Co.: 52
Section 23 of the Corporation Code expressly provides that
the corporate powers of all corporations shall be exercised by
the board of directors. Just as a natural person may authorize
another to do certain acts in his behalf, so may the board of
directors of a corporation validly delegate some of its
functions to individual officers or agents appointed by it. Thus,
contracts or acts of a corporation must be made either by the
board of directors or by a corporate agent duly authorized by
the board. 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 held not binding on the corporation. (Emphasis
supplied)
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. 53 Considering all
these circumstances, it is highly improbable for Aviles to
finalize any contract of sale with the Spouses Firme.
Furthermore, the Court notes that in the Complaint filed by
Bukal Enterprises with the trial court, Aviles signed 54 the
verification and certification of non-forum shopping. 55 The
verification and certification of non-forum shopping was not
accompanied by proof that Bukal Enterprises authorized Aviles
to file the complaint on behalf of Bukal Enterprises.
The power of a corporation to sue and be sued is exercised by
the board of directors. "The physical acts of the corporation,
like the signing of documents, can be performed only by
natural persons duly authorized for the purpose by corporate
by-laws or by a specific act of the board of directors." 56
The purpose of verification is to secure an assurance that the
allegations in the pleading are true and correct and that it is
filed in good faith. 57 True, this requirement is procedural and
not jurisdictional. However, the trial court should have ordered
the correction of the complaint since Aviles was neither an
officer of Bukal Enterprises nor authorized by its Board of
Directors to act on behalf of Bukal Enterprises.
Whether the Statute of Frauds is applicable
The Court of Appeals held that partial performance of the
contract of sale takes the oral contract out of the scope of the
Statute of Frauds. This conclusion arose from the appellate
courts erroneous finding that there was a perfected contract
of sale. The records show that there was no perfected contract
of sale. There is therefore no basis for the application of the
Statute of Frauds. The application of the Statute of Frauds
presupposes the existence of a perfected contract. 58 Article
1403 of the Civil Code provides:
Art. 1403. The following contracts are unenforceable, unless
they are ratified:
(1) Those entered into in the name of another person by one
who has been given no authority or legal representation, or
who has acted beyond his powers;
(2) Those that do not comply with the Statute of Frauds as set
forth in this number. In the following cases an agreement
hereafter made shall be unenforceable by action, unless the
same, or some note or memorandum thereof, be in writing
and subscribed by the party charged or by his agent;
evidence, therefore, of the agreement cannot be received
without the writing, or a secondary evidence of its contents:
x

(e) An agreement for the leasing for a longer period than one
year, or for the sale of real property or of an interest therein;
x

Whether Bukal Enterprises is a builder in good faith

Bukal Enterprises is not a builder in good faith. The Spouses
Firme did not accept Aviles offer to purchase the Property.
Aviles testified that when he called the Spouses Firme on 2
March 1995, Dr. Firme informed him that they were no longer
interested in selling the Property. On 4 March 1995, Aviles
called again and this time Mrs. Firme told him that they were
not selling the Property. Aviles informed De Castro of the
refusal of the Spouses Firme to sell the Property. However,
Bukal Enterprises still proceeded in relocating the squatters
and constructing improvements on the Property. De Castro
testified:
ATTY. EJERCITO:
Q: The truth of the matter, Mr. Witness, is that the post was
constructed sometime late 1994. Is that not correct?
A: No, sir. It is not true.
Q: When was it constructed?
A: That March.
Q: When in March?

132
A: 1995.

WITNESS:

Bukal Enterprises is obviously a builder in bad faith. No deed

of sale has been executed in this case. Despite the refusal of
the Spouses Firme to sell the Property, Bukal Enterprises still
proceeded to introduce improvements on the Property. Bukal
Enterprises introduced improvements on the Property without
the knowledge and consent of the Spouses Firme. When the
Spouses Firme learned about the unauthorized constructions
made by Bukal Enterprises on the Property, they advised the
latter to desist from further acts of trespass on their Property.
60

A: March 6 and 7 because there were four (4) squatters.

The Civil Code provides:

ATTY. EJERCITO:

Art. 449. He who builds, plants or sows in bad faith on the

land of another, loses what is built, planted or sown without
right of indemnity.

Q: When in March 1995?

A: From the period of March 2, 1995 or two (2) weeks after the
removal of the squatters.
Q: When were the squatters removed?

Q: When did you find out that the Spouses Firme did not want
to sell the same?
A: First week of March 1995.
Q: In your Complaint you said you find out on March 3, 1995.
Is that not correct?
A: I cannot exactly remember, sir.
ATTY. MARQUEDA:
In the Complaint it does not state March 3. Maybe counsel
was thinking of this Paragraph 6 which states, "When the
property was rid of the squatters on March 2, 1995 for the
documentation and payment of the sale, . . ." .
ATTY. EJERCITO:
Q: So, you found out on March 2, 1995 that the defendants
were no longer interested in selling to you the property. Is that
correct?
A: Yes, sir, because Mr. Aviles relayed it to me.
Q: Mr. Aviles relayed to you that the Spouses Firme were no
longer interested in selling to you the property in March 2,
1995. Is that correct?
A: Yes, sir. Mr. Aviles told me.
Q: In so many words, Mr. Witness, you learned that the
Spouses Firme were no longer interested in selling the
property before you spent allegedly all the sum of money for
the relocation of squatters for all this construction that you
are telling this Court now?

Art. 450. The owner of the land on which anything has been
built, planted or sown in bad faith may demand the demolition
of the work, or that the planting or sowing be removed, in
order to replace things in their former condition at the
expense of the person who built, planted or sowed; or he may
compel the builder or planter to pay the price of the land, and
the owner the proper rent.
Under these provisions the Spouses Firme have the following
options: (1) to appropriate what Bukal Enterprises has built
without any obligation to pay indemnity; (2) to ask Bukal
Enterprises to remove what it has built; or (3) to compel Bukal
Enterprises to pay the value of the land. 61 Since the Spouses
Firme are undoubtedly not selling the Property to Bukal
Enterprises, they may exercise any of the first two options.
They may appropriate what has been built without paying
indemnity or they may ask Bukal Enterprises to remove what
it has built at Bukal Enterprises own expense.
Bukal Enterprises is not entitled to reimbursement for the
expenses incurred in relocating the squatters. Bukal
Enterprises spent for the relocation of the squatters even after
learning that the Spouses Firme were no longer interested in
selling the Property. De Castro testified that even though the
Spouses Firme did not require them to remove the squatters,
they chose to spend for the relocation of the squatters since
they were interested in purchasing the Property. 62
Whether the Spouses Firme are entitled to compensatory and
moral damages

ATTY. EJERCITO:

The Court agrees with the Court of Appeals to delete the

award for compensatory and moral damages. In awarding
actual damages, the trial court took into account the traveling
expenses incurred by the Spouses Firme who are already
residing in the United States. However, the trial court failed to
consider the testimony of Dr. Firme that they normally travel
to the Philippines more than once a year to visit their children.
63 Thus, the expenses for the roundtrip tickets dated 19961997 could not be attributed solely for the attendance of
hearings in the case.

Q: You mean to say that you did not believe Mr. Aviles when
he told you that the Spouses Firme were no longer selling the
property?

Nevertheless, an award of nominal damages of P30,000 is

warranted since Bukal Enterprises violated the property rights
of the Spouses Firme. 64 The Civil Code provides:

A: No, sir.

Art. 2221. Nominal damages are adjudicated in order that a

right of the plaintiff, which has been violated or invaded by
the defendant, may be vindicated or recognized, and not for
the purpose of indemnifying the plaintiff for any loss suffered
by him.

WITNESS:
A: The refusal to sell is not yet formal and the lawyer sent a
letter tendering full payment of the purchase price.

Q: Was there anything formal when you say the Spouses Firme
agreed to sell the property?
A: None, sir.
Q: And yet that time you believe Mr. Aviles when he verbally
told you that the Sps. Firme agreed to sell the property? At
what point of the transaction with the Spouses Firme were you
advised by your lawyer?
WITNESS:
A: At the time when they refused to sell the lot.
ATTY. EJERCITO:
Q: Was that before the squatters were relocated allegedly by
Bukal Enterprises?
A: Yes, sir.
Q: In fact, it was the lawyer who advised you to relocate the
squatters. Is it not true?
A: No, sir. 59 (Emphasis supplied)

Art. 2222. The court may award nominal damages in every

obligation arising from any source enumerated in article 1157,
or in every case where any property right has been invaded.
The award of damages is also in accordance with Article 451
of the Civil Code which states that the landowner is entitled to
damages from the builder in bad faith. 65
WHEREFORE, we SET ASIDE the Decision of the Court of
Appeals and RENDER a new one:
1. Declaring that there was no perfected contract of sale;
2. Ordering Bukal Enterprises to pay the Spouses Firme
P30,000 as nominal damages.
SO ORDERED.

133
EN BANC
[G.R. No. L-15092. May 18, 1962. ]
ALFREDO MONTELIBANO, ET AL., Plaintiffs-Appellants,
v. BACOLOD-MURCIA MILLING CO., INC., DefendantAppellee.
SYLLABUS
1. SUGAR CENTRALS; MILLING CONTRACTS; CONCESSIONS
GIVEN BY CENTRAL TO PLANTERS, IF RETRACTED, WILL
CONSTITUTE FRAUD; CASE AT BAR. Since there is no
rational explanation for the companys asserting to the further
concessions asked by the planters before the contracts were
signed, except as further inducement for the planters to agree
to the extension of the contract period, to allow the company
now to retract such concessions would be to sanction a fraud
upon he planters who relied on such additional stipulation.
2. CONTRACTS; NOVATION; MODIFICATION BEFORE A BARGAIN
NOT NOVATION IN LAW. There can be no novation unless
two distinct and successive binding contracts take place, with
the later one designed to replace the preceding convention.
Modifications introduced before a bargain becomes obligatory
can in no sense constitute novation in law.
3. ID.; ASSENT AND CONCURRENCE OF PARTIES NECESSARY
TO PERFECT A CONTRACT; SETTING DOWN OF TERMS NOT
IMPORTANT EXCEPT IN CERTAIN CASES. Except in the case
of statutory forms or solemn agreements, it is the assent and
concurrence of the parties, and not the setting down of its
terms, that constitute a binding contract.
4. CORPORATIONS; EXERCISE OF CHARTER POWERS; TESTS
TO BE APPLIED. "It is a question, therefore, in each case, of
the logical relation of the act as to the corporate purpose
expressed in the charter. If that act is one which is lawful in
itself, and not otherwise prohibited, is done for the purpose of
serving corporate ends, and is reasonably tributary to the
promotion of those ends, in a substantial, and not in a remote
and fanciful, sense, it may fairly be considered within charter
powers. The test to be applied is whether the act in question
is in direct and immediate furtherance of the corporations
business, fairly incident to the express powers and reasonably
necessary to their exercise. If so, the corporation has the
power to do it; otherwise, not." (Fletcher Cyc. corp., Vol. 6,
Rev. Ed. 1950, pp. 266-268)
5. ID.; ID.; QUESTION ON PROBABLE LOSSES OR DECREASE IN
PROFITS NOT REVIEWABLE BY COURTS. Whether or not a
valid and binding resolution passed by the board of directors,
will cause losses or decrease the profits of the corporation,
may not be reviewed by the courts.
DECISION
Appeal on points of law from a judgment of the Court of First
Instance of Occidental Negros, in its Civil Case No. 2603,
dismissing plaintiffs complaint that sought to compel the
defendant Milling Company to increase plaintiffs share in the
sugar produced from their cane, from 60% to 62.33 %,
starting from the 1951-1952 crop year.
It is undisputed that plaintiffs-appellants, Alfredo Montelibano,
Alejandro Montelibano, and the limited co-partnership
Gonzaga and Company, had been and are sugar planters
adhered to the defendant- appellees sugar central mill under
identical milling contracts. Originally executed in 1919, said
contracts were stipulated to be in force for 30 years starting
with the 1920-21 crop, and provided that the resulting product
should be divided in the ratio of 45% for the mill and 55% for
the planters. Sometime in 1936, it was proposed to execute
amended milling contracts, increasing the planters share to
60% of the manufactured sugar and resulting molasses,
besides other concessions, but extending the operation of the
milling contract from the original 30 years to 45 years. To this
effect, a printed Amended Milling Contract form was drawn
up. On August 20, 1936, the Board of Directors of the appellee
Bacolod Murcia Milling Co., Inc., adopted a resolution (Acta No.
11, Acuerdo No. 1) granting further concessions to the
planters over and above those contained in the printed
Amended Milling Contract. The bone of contention is
paragraph 9 of this resolution, that reads as follows:
"ACTA NO. 11
SESION DE LA JUNTA DIRECTIVA
AGOSTO 20, 1936

Acuerdo No. 1 Previa mocion debidamente secundada, la

Junta en consideracin a una peticion de los plantadores
hecha por un comit nombrado por los mismos, acuerda
enmendar el contrato de molienda enmendado mediante las
siguientes:"
x

"9.a Que si durante la vigencia de este contrato de Molienda

Enmendado, las centrales azucareras, de Negros Occidental,
cuya produccin anual de azucar centrifugado sea mas de una
tercera parte de la produccin total anual de todas las
centrales azucareras de Negros Occidental, concedieren a sus
plantadores mejores condiciones que las estipuladas en el
presente contrato, entonces esas mejores condiciones se
concederan y por el presente se entenderan concedidas a los
plantadores que hayan otorgado este Contrato de Molienda
Enmendado."
Appellants signed and executed the printed Amended Milling
Contract on September 10, 1936; but a copy of the resolution
of August 20, 1936, signed by the Centrals General Manager,
was not attached to the printed contract until April 17, 1937;
with the notation
"Las enmiendas arriba transcritas forman parte del contrato
de molienda enmendado, otorgado por y la Bacolod Murcia
Milling Co., Inc."
In 1953, the appellants initiated the present action,
contending that three Negros sugar centrals (La Carlota,
Binalbagan-Isabela and San Carlos), with a total annual
production exceeding one-third of the production of all the
sugar central mills in the province, had already granted
increased participation (of 62.5%) to their planters, and that
under paragraph 9 of the resolution of August 20, 1936,
heretofore quoted, the appellee had become obligated to
grant similar concessions to the plaintiffs (appellants herein).
The appellee 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.
After trial, the court below rendered judgment upholding the
stand of the defendant milling company, and dismissed the
complaint. Thereupon, plaintiffs duly appealed to this Court.
We agree with appellants that the appealed decisions can not
stand. It must be remembered that the controverted
resolution was adopted by appellee corporation as a
supplement to, or further amendment of, the proposed milling
contract, and that it was approved on August 20, 1936,
twenty-one days prior to the signing by appellants on
September 10, of the Amended Milling Contract itself; so that
when the amended milling contract was executed, the
concessions granted by the disputed resolution had been
already incorporated into its terms. No reason appears of
record why, in the face of such concessions, the appellants
should reject them or consider them as separate and apart
from the main amended milling contract, specially taking into
account that appellant Alfredo Montelibano was, at the time,
the President of the Planters Association (Exhibit 4, p. 11) that
had agitated for the concessions embodied in the resolution of
August 20, 1936. That the resolution formed an integral part
of the amended milling contract, signed on September 10,
and not a separate bargain, is further shown by the fact that a
copy of the resolution was simply attached to the printed
contract without special negotiations or agreement between
the parties.
It follows from the foregoing that the terms embodied in the
resolution of August 20, 1936 were supported by the same
causa or consideration underlying the main amended milling
contract; i.e., the promises and obligations undertaken
thereunder by the planters, and, particularly, the extension of
its operative period for an additional 15 years over and
beyond the 30 years stipulated in the original contract. Hence,
the conclusion of the court below that the resolution
constituted gratuitous concessions not supported by any
consideration is legally untenable.
All disquisition concerning donations and the lack of power of
the directors of the respondent sugar milling company to
make a gift to the planters would be relevant if the resolution
in question had embodied a separate agreement after the

134
appellants had already bound themselves to the terms of the
printed milling contract. But this was not the case. 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, on September 10,
1936. 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. So that by September 10, 1936, defendant
corporation already understood that the printed terms were
not controlling, save as modified by its resolution of August
20, 1936; and we are satisfied that such was also the
understanding of appellants herein, and that the minds of the
parties met upon that basis. Otherwise there would have been
no consent or" meeting of the minds", and no binding contract
at all. But the conduct of the parties indicates that they
assumed, and they do not now deny, that the signing of the
contract on September 10, 1962 did give rise to a binding
agreement. That agreement had to exist on the basis of the
printed terms as modified by the resolution of August 20,
1936, or not at all. Since there is no rational explanation for
the Companys assenting to the further concessions asked by
the planters before the contracts were signed, except as
further inducement for the planters to agree to the extension
of the contract period, to allow the company now to retract
such concessions would be to sanction a fraud upon the
planters who relied on such additional stipulations.
The same considerations apply to the "void novation" theory
of appellees. There can be no novation unless two distinct and
successive binding contracts take place, with the later one
designed to replace the preceding convention. Modifications
introduced before a bargain become obligatory and can in no
sense constitute novation in law.
Stress is placed on the fact that the text of the Resolution of
August 20, 1936 was not attached to the printed contract until
April 17, 1937. But, except in the case of statutory forms or
solemn agreements (and it is not claimed that this is one), it is
the assent and concurrence (the "meeting of the minds") of
the parties, and not the setting down of its terms, that
constitute a binding contract. And the fact that the addendum
is only signed by the General Manager of the milling company
emphasizes that the addition was made solely in order that
the memorial of the terms of the agreement should be full and
complete.
Much is made of the circumstance that the report submitted
by the Board of Directors of the appellee company in
November 19, 1936 (Exhibit 4) only made mention of the 90
per cent, the planters having agreed to the 60-40 sharing of
the sugar set forth in the printed "amended milling contract",
and did not make any reference at all to the terms of the
resolution of August 20, 1936. But a reading of this report
shows that it was not intended to inventory all the details of
the amended contract; numerous provisions of the printed
terms are also glossed over. The Directors of the appellee
Milling Company had no reason at the time to call attention to
the provisions of the resolution in question, since it contained
mostly modifications in detail of the printed terms, and the
only major change was paragraph 9 heretofore quoted; but
when the report was made, that paragraph was not yet in
effect, since it was conditioned on other centrals granting
better concessions to their planters, and that did not happen
until after 1950. There was no reason in 1936 to emphasize a
concession that was not yet, and might never be, in effective
operation.
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. The rule is
that
"It is a question, therefore, in each case, of the logical relation
of the act to the corporate purpose expressed in the charter. If
that act is one which is lawful in itself, and not otherwise
prohibited, is done for the purpose of serving corporate ends,
and is reasonably tributary to the promotion of those ends, in
a substantial, and not in a remote and fanciful, sense, it may
fairly be considered within charter powers. The test to be
applied is whether the act in question is in direct and
immediate furtherance of the corporations business, fairly
incident to the express powers and reasonably necessary to
their exercise. If so, the corporation has the power to do it;
otherwise, not."(Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950, pp.
266-268)
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.
"They hold such office charged with the duty to act for the
corporation according to their best judgment, and in so doing
they cannot be controlled in the reasonable exercise and
performance of such duty. Whether the business of a
corporation should be operated at a loss during depression, or
close down at a smaller loss, is a purely business and
economic problem to be determined by the directors of the
corporation and not by the court. It is a well-known rule of law
that questions of policy or of management are left solely to
the honest decision of officers and directors of a corporation,
and the court is without authority to substitute its judgment of
the board of directors; the board is the business manager of
the corporation, and so long as it acts in good faith its orders
are not reviewable by the courts." (Fletcher on Corporations,
Vol. 2, p. 390)
And it appearing undisputed in this appeal that sugar centrals
of La Carlota, Hawaiian Philippines, San Carlos and Binalbagan
(which produce over one-third of the entire annual sugar
production in Occidental Negros) have granted progressively
increasing participations to their adhered planters, at an
average rate of
62.333% for the 1951-52 crop year;
64.2% for the 1952-53;
64.3% for the 1953-54;
64.5% for the 1954-55; and
63.5% for the 1955-1956,
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.
WHEREFORE, the decision under appeal is reversed and set
aside; and judgment is decreed sentencing defendantappellee to pay plaintiffs-appellants the differential or
increase of participation in the milled sugar in accordance
with paragraph 9 of the appellees Resolution of August 20,
1936, over and in addition to the 60% expressed in the
printed Amended Milling Contract, or the value thereof when
due, as follows:
0.333% to appellants Montelibano for the 1951-1952 crop
year, said appellants having received an additional 2%
corresponding to said year in October, 1953;
2.333% to appellant Gonzaga & Co., for the 1951-1952 crop
year; and to all appellants thereafter
4.2% for the 1952-1953 crop year;
4.3% for the 1953-1954 crop year;
4.5% for the 1954-1955 crop year;
3.5% for the 1955-1956 crop year;
with interest at the legal rate on the value of such differential
during the time they were withheld; and the right is reserved
to plaintiffs-appellants to sue for such additional increases as
they may be entitled to for the crop years subsequent to
those herein adjudged.
Costs against appellee, Bacolod-Murcia Milling Co.

THIRD DIVISION
[G.R. NO. 150711 : August 10, 2006]
CALTEX (PHILIPPINES), INC., Petitioner, v. PNOC
SHIPPING AND TRANSPORT CORPORATION, Respondent.
DECISION
The Case
Before the Court is a Petition for Review 1 assailing the 31 May
2001 Decision2 and 9 November 2001 Resolution3 of the Court

135
of Appeals in CA-G.R. CV No. 46097. The Court of Appeals
reversed the 1 June 1994 Decision4 of the Regional Trial Court
of Manila, Branch 51 ("trial court"), and dismissed the
complaint filed by Caltex (Philippines), Inc. ("Caltex") against
PNOC Shipping and Transport Corporation (PSTC).

WHEREFORE, in view of the foregoing, judgment is hereby

rendered in favor of the plaintiff, ordering defendant to pay
plaintiff the sums due the latter in the decision rendered by
the Court of Appeals in CA-G.R. No. 62613, CALTEX v.
LUSTEVECO, or to pay plaintiff (Exhibit "C"):

The Antecedent Facts

(a) P126,771.22 under the first cause of action, with legal

interest from the date of the promulgation of the decision on
November 12, 1985 until fully paid;

On 6 July 1979, PSTC and Luzon Stevedoring Corporation

("LUSTEVECO") entered into an Agreement of Assumption of
Obligations ("Agreement"). The Agreement provides that PSTC
shall assume all the obligations of LUSTEVECO with respect to
the claims enumerated in Annexes "A" and "B" ("Annexes") of
the Agreement. The Agreement also provides that PSTC shall
control the conduct of any litigation pending or which may be
filed with respect to the claims in the Annexes. The
Agreement further provides that LUSTEVECO shall deliver to
PSTC all papers and records of the claims in the Annexes.
Finally, the Agreement provides that LUSTEVECO appoints and
constitutes PSTC as its attorney-in-fact to demand and receive
any claim out of the countersuits and counterclaims arising
from the claims in the Annexes.
Among the actions enumerated in the Annexes is Caltex
(Phils.), Inc. v. Luzon Stevedoring Corporation docketed as ACG.R. CV No. 62613 which at that time was pending before the
then Intermediate Appellate Court (IAC). The case was an
appeal from the Decision by the then Court of First Instance of
Manila (CFI) directing LUSTEVECO to pay Caltex P103,659.44
with legal interest from the filing of the action until full
payment. In its 12 November 1985 Decision, 5 the IAC affirmed
with modification the Decision of the CFI. The dispositive
portion of the Decision reads:
WHEREFORE, the decision appealed from is hereby MODIFIED
and judgment is rendered ordering the defendant
[LUSTEVECO] to pay plaintiff [Caltex]:
(a) P126,771.22 under the first cause of action, with legal
interest until fully paid;
(b) P103,659.44 under the second cause of action with legal
interest until fully paid;
(c) 10% of the sums due as and for attorney's fees;
(d) costs of the suit.
SO ORDERED.6
The Decision of the IAC became final and executory.
The Regional Trial Court of Manila, Branch 12, issued a writ of
execution in favor of Caltex. However, the judgment was not
satisfied because of the prior foreclosure of LUSTEVECO's
properties. The Manila Bank Intramuros Branch and the
Traders Royal Bank Aduana Branch did not respond to the
notices of garnishment.

(b) P103,659.44 under the second cause of action with legal

interest from the date of the promulgation of the decision on
November 12, 1985 until fully paid;
(c) 10% of the sums due as and for attorney's fees; and
(d) Costs of suit.
SO ORDERED.7
PSTC appealed the trial court's Decision.
The Ruling of the Court of Appeals
In its 31 May 2001 Decision, the Court of Appeals found the
appeal meritorious. The Court of Appeals ruled that Caltex has
no personality to sue PSTC. The Court of Appeals held that
non-compliance with the Agreement could only be questioned
by the signatories to the contract, namely, LUSTEVECO and
PSTC. The Court of Appeals stated that LUSTEVECO and PSTC
are the only parties who can file an action to enforce the
Agreement. The Court of Appeals considered fatal the
omission of LUSTEVECO, the real party in interest, as a party
defendant in the case. The Court of Appeals further ruled that
Caltex is not a beneficiary of a stipulation pour autrui because
there is no stipulation in the Agreement which clearly and
deliberately favors Caltex.
The dispositive portion of the Decision of the Court of Appeals
reads:
WHEREFORE, premises considered, the appealed Decision
dated June 1, 1994, rendered by the Regional Trial Court of
Manila, Branch 51, is hereby REVERSED and SET ASIDE and a
new one entered DISMISSING the complaint filed by appellee
[Caltex], against appellant [PSTC], for want of cause of action.
SO ORDERED.8
Caltex filed a motion for reconsideration of the 31 May 2001
Decision. In a Resolution promulgated on 9 November 2001,
the Court of Appeals denied the motion for lack of merit.
Hence, this petition before this Court.
The Issues
The issues in this case are:

Caltex subsequently learned of the Agreement between PSTC

and LUSTEVECO. Caltex sent successive demands to PSTC
asking for the satisfaction of the judgment rendered by the
CFI. PSTC requested for the copy of the records of AC-G.R. CV
No. 62613. Later, PSTC informed Caltex that it was not a party
to AC-G.R. CV No. 62613 and thus, PSTC would not pay
LUSTEVECO's judgment debt. PSTC advised Caltex to demand
satisfaction of the judgment directly from LUSTEVECO.
Caltex continued to send several demand letters to PSTC. On
5 February 1992, Caltex filed a complaint for sum of money
against PSTC. The case was docketed as Civil Case No. 9159512.
On 1 June 1994, the trial court rendered its Decision, the
dispositive portion of which reads:

1. Whether PSTC is bound by the Agreement when it assumed

all the obligations of LUSTEVECO; and
2. Whether Caltex is a real party in interest to file an action to
recover from PSTC the judgment debt against LUSTEVECO.
The Ruling of this Court
The petition is meritorious.
Caltex May Recover from PSTC Under the Terms of the
Agreement

136
Caltex may recover the judgment debt from PSTC not because
of a stipulation in Caltex's favor but because the Agreement
provides that PSTC shall assume all the obligations of
LUSTEVECO.
In this case, LUSTEVECO transferred, conveyed and assigned
to PSTC all of LUSTEVECO's business, properties and assets
pertaining to its tanker and bulk business "together with all
the obligations relating to the said business, properties and
assets." The Agreement, reproduced here in full, provides:
AGREEMENT OF ASSUMPTION
OF OBLIGATIONS
KNOW ALL MEN BY THESE PRESENTS:
This Agreement of Assumption of Obligations made and
executed this 6th day of July 1979, in the City of Manila, by
and between:
LUZON STEVEDORING CORPORATION, a corporation duly
organized and existing under and by virtue of Philippine Laws,
with offices at Tacoma and Second Streets, Port Area, Manila,
represented by GERONIMO Z. VELASCO, in his capacity as
Chairman of the Board, hereinafter referred to as ASSIGNOR,
- and PNOC SHIPPING AND TRANSPORT CORPORATION, a
corporation duly organized and existing under and by virtue of
Philippine Laws, with offices at Makati Avenue, Makati, Metro
Manila, represented by MARIO V. TIAOQUI, in his capacity as
Vice-President, hereinafter referred to as ASSIGNEE,
WITNESSETH : T h a t WHEREAS, on April 1, 1979, ASSIGNOR, for valuable
consideration, executed an Agreement of Transfer with
ASSIGNEE whereby ASSIGNOR transferred, conveyed and
assigned unto ASSIGNEE all of ASSIGNOR's business,
properties and assets appertaining to its tanker and
bulk all (sic) departments, together with all the
obligations relating to said business, properties and
assets;
WHEREAS, relative to the conduct, operation and
management of the business, properties and assets
transferred, conveyed and assigned by ASSIGNOR to
ASSIGNEE certain actions and claims particularly described in
Annex "A" consisting of four (4) pages and Annex "B",
consisting of one (1) page, attached hereto and made integral
parts hereof, have been filed, either with ASSIGNOR or with
appropriate courts and administrative tribunals.
WHEREAS, under the terms and conditions hereinafter
mentioned, ASSIGNEE agree[s] to assume the obligations
incident and relative to the actions and claims enumerated
and described in Annexes "A" and "B" hereof.
NOW, THEREFORE, for and in consideration of the foregoing
premises, the parties hereto have agreed as follows:
1. ASSIGNEE shall assume, as it hereby assumes all the
obligations of ASSIGNOR in respect to the actions and
claims and described in Annexes "A" and "B";
2. ASSIGNEE shall have complete control in the conduct of any
and all litigations now pending or may be filed with respect to
the actions and claims enumerated and described in Annexes
"A" and "B";
3. ASSIGNOR shall deliver and convey unto ASSIGNEE all
papers, documents, files and any other records appertaining

to the actions and claims enumerated and described in

Annexes "A" and "B";
4. ASSIGNOR hereby constitutes and appoints ASSIGNEE, its
successors and assigns, the true and lawful attorney of
ASSIGNOR, with full power of substitution, for it and in its
name, place and stead or otherwise, but on behalf and for the
benefit of ASSIGNEE, its successors and assigns, to demand
and receive any and all claim[s] out of countersuits or
counterclaims arising from the actions and claims enumerated
and described in Annexes "A" and "B".9 (Emphasis
supplied)cralawlibrary
When PSTC assumed all the properties, business and assets of
LUSTEVECO pertaining to LUSTEVECO's tanker and bulk
business, PSTC also assumed all of LUSTEVECO's obligations
pertaining to such business. The assumption of obligations
was stipulated not only in the Agreement of Assumption of
Obligations but also in the Agreement of Transfer. The
Agreement specifically mentions the case between
LUSTEVECO and Caltex, docketed as AC-G.R. CV No.
62613, then pending before the IAC. The Agreement
provides that PSTC may demand and receive any claim out of
counter-suits or counterclaims arising from the actions
enumerated in the Annexes.
PSTC is bound by the Agreement. PSTC cannot accept the
benefits without assuming the obligations under the same
Agreement. PSTC cannot repudiate its commitment to assume
the obligations after taking over the assets for that will
amount to defrauding the creditors of LUSTEVECO. It will also
result in failure of consideration since the assumption of
obligations is part of the consideration for the transfer of the
assets from LUSTEVECO to PSTC. Failure of consideration will
revert the assets to LUSTEVECO for the benefit of the creditors
of LUSTEVECO. Thus, PSTC cannot escape from its undertaking
to assume the obligations of LUSTEVECO as stated in the
Agreement.
Disposition of Assets should not Prejudice Creditors
Even without the Agreement, PSTC is still liable to Caltex.
The disposition of all or substantially all of the assets of a
corporation is allowed under Section 40 of Batas
Pambansa Blg. 68, otherwise known as The Corporation Code
of the Philippines ("Corporation Code"). Section 40 provides:
SEC. 40. Sale or other disposition of assets. Subject to the
provisions of existing laws on illegal combinations and
monopolies, a corporation may, by a majority vote of its board
of directors, or trustees, sell, lease, exchange, mortgage,
pledge or otherwise dispose of all or substantially all of its
property and assets, including its goodwill, upon such terms
and conditions and for such consideration, which may be
money, stocks, bonds or other instruments for the payment of
money or other property or consideration, as its board of
directors or trustees may deem expedient, when authorized
by the vote of the stockholders representing at least twothirds (2/3) of the outstanding capital stock; or in case of nonstock corporation, by the vote of at least two-thirds (2/3) of
the members, in a stockholders' or members' meeting duly
called for the purpose. Written notice of the proposed action
and of the time and place of the meeting shall be addressed
to each stockholder or member at his place of residence as
shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served
personally: Provided, That any dissenting stockholder may
exercise his appraisal right under the conditions provided in
this Code.
A sale or other disposition shall be deemed to cover
substantially all the corporate property and assets, if thereby
the corporation would be rendered incapable of continuing the
business or accomplishing the purposes for which it was
incorporated.

137
xxx
While the Corporation Code allows the transfer of all or
substantially all the properties and assets of a corporation,
the transfer should not prejudice the creditors of the assignor.
The only way the transfer can proceed without prejudice to
the creditors is to hold the assignee liable for the obligations
of the assignor. The acquisition by the assignee of all or
substantially all of the assets of the assignor necessarily
includes the assumption of the assignor's liabilities,10 unless
the creditors who did not consent to the transfer choose to
rescind the transfer on the ground of fraud.11 To allow an
assignor to transfer all its business, properties and assets
without the consent of its creditors and without requiring the
assignee to assume the assignor's obligations will defraud the
creditors. The assignment will place the assignor's assets
beyond the reach of its creditors.
Here, Caltex could not enforce the judgment debt against
LUSTEVECO. The writ of execution could not be satisfied
because LUSTEVECO's remaining properties had been
foreclosed by lienholders. In addition, all of LUSTEVECO's
business, properties and assets pertaining to its tanker and
bulk business had been assigned to PSTC without the
knowledge of its creditors. Caltex now has no other means of
enforcing the judgment debt except against PSTC.
If PSTC refuses to honor its written commitment to assume
the obligations of LUSTEVECO, there will be fraud on the
creditors of LUSTEVECO. PSTC agreed to take over, and in fact
took over, all the assets of LUSTEVECO upon its express
written commitment to pay all obligations of LUSTEVECO
pertaining to those assets, including specifically the claim of
Caltex. LUSTEVECO no longer informed its creditors of the
transfer of all of its assets presumably because PSTC
committed to pay all such creditors. Such transfer, leaving the
claims of creditors unenforceable against the debtor, is
fraudulent and rescissible.12 To allow PSTC now to welsh on its
commitment is to sanction a fraud on LUSTEVECO's
creditors.13
In Oria v. McMicking, the Court enumerated the badges of
fraud as follows:
1. The fact that the consideration of the conveyance is
fictitious or is inadequate.
2. A transfer made by a debtor after suit has been
begun and while it is pending against him.
3. A sale upon credit by an insolvent debtor.
4. Evidence of large indebtedness or complete insolvency.
5. The transfer of all or nearly all of his property by a
debtor, especially when he is insolvent or greatly
embarrassed financially.
6. The fact that the transfer is made between father and son,
when there are present other of the above circumstances.
7. The failure of the vendee to take exclusive possession of all
the property.14 (Emphasis supplied)cralawlibrary
In Pepsi-Cola Bottling Co. v. NLRC,15 which involved the
illegal dismissal of the employees of Pepsi-Cola Distributors of
the Philippines (PCD), the Court has ruled that Pepsi-Cola
Products Philippines, Inc. (PCPPI) which acquired the franchise
of PCD is liable for the reinstatement of PCD's employees. The
Court rejected PCPPI's argument that it is a company separate
and distinct from PCD. The Court ruled that the complaint was
filed when PCD was still in existence. Further, there was no
evidence that PCPPI, as the new entity or purchasing
company, was free from any liabilities incurred by PCD.

In this case, PSTC was aware of the pendency of the case

between Caltex and LUSTEVECO. PSTC assumed LUSTEVECO's
obligations, including specifically any obligation that might
arise from Caltex's suit against LUSTEVECO. The Agreement
transferred the unencumbered assets of LUSTEVECO to PSTC,
making any money judgment in favor of Caltex unenforceable
against LUSTEVECO. To allow PSTC to renege on its obligation
under the Agreement will allow PSTC to defraud Caltex. This
militates against the statutory policy of protecting creditors
from fraudulent contracts.
Article 1313 of the Civil Code provides that "[c]reditors are
protected in cases of contracts intended to defraud them."
Further, Article 1381 of the Civil Code provides that contracts
entered into in fraud of creditors may be rescinded when the
creditors cannot in any manner collect the claims due
them.16 Article 1381 applies to contracts where the
creditors are not parties, for such contracts are usually
made without their knowledge. Thus, a creditor who is not
a party to a contract can sue to rescind the contract to
prevent fraud upon him. Or, the same creditor can instead
choose to enforce the contract if a specific provision in the
contract allows him to collect his claim, and thus protect him
from fraud.
If PSTC does not assume the obligations of LUSTEVECO as
PSTC had committed under the Agreement, the creditors of
LUSTEVECO could no longer collect the debts of LUSTEVECO.
The assignment becomes a fraud on the part of PSTC,
because PSTC would then have inveigled LUSTEVECO to
transfer the assets on the promise to pay LUSTEVECO's
creditors. However, after taking over the assets, PSTC would
now turn around and renege on its promise.
The Agreement, under Article 1291 of the Civil Code,17 is also
a novation of LUSTEVECO's obligations by substituting the
person of the debtor. Under Article 1293 of the Civil Code, a
novation which consists in substituting a new debtor in place
of the original debtor cannot be made without the consent of
the creditor.18 Here, since the Agreement novated the debt
without the knowledge and consent of Caltex, the Agreement
cannot prejudice Caltex. Thus, the assets that LUSTEVECO
transferred to PSTC in consideration, among others, of the
novation, or the value of such assets, remain even in the
hands of PSTC subject to execution to satisfy the judgment
claim of Caltex.
Caltex is a Real Party in Interest
Section 2, Rule 3 of the 1997 Rules of Civil Procedure
provides:
SEC. 2. Parties in interest. A real party in interest is the
party who stands to be benefited or injured by the judgment
in the suit, or the party entitled to the avails of the suit.
Unless otherwise authorized by law or these Rules, every
action must be prosecuted or defended in the name of the
real party in interest.
Ordinarily, one who is not a privy to a contract may not bring
an action to enforce it. However, this case falls under the
exception. In Oco v. Limbaring, we ruled:
The parties to a contract are the real parties in interest in an
action upon it, as consistently held by the Court. Only the
contracting parties are bound by the stipulation in the
contract; they are the ones who would benefit from and could
violate it. Thus, one who is not a party to a contract, and for
whose benefit it was not expressly made, cannot maintain an
action on it. One cannot do so, even if the contract performed
by the contracting parties would incidentally inure to one's
benefit.
As an exception, parties who have not taken part in a
contract may show that they have a real interest affected by
its performance or annulment. In other words, those who

138
are not principally or subsidiarily obligated in a
contract, in which they had no intervention, may show
their detriment that could result from it. x x
x19 (Emphasis supplied)cralawlibrary
Caltex may enforce its cause of action against PSTC because
PSTC expressly assumed all the obligations of LUSVETECO
pertaining to its tanker and bulk business and specifically,
those relating to AC-G.R. CV No. 62613. While Caltex is not a
party to the Agreement, it has a real interest in the
performance of PSTC's obligations under the Agreement
because the non-performance of PSTC's obligations will
defraud Caltex.
Even if PSTC did not expressly assume to pay the creditors of
LUSTEVECO, PSTC would still be liable to Caltex up to the
value of the assets transferred. The transfer of all or
substantially all of the unencumbered assets of LUSTEVECO to
PSTC cannot work to defraud the creditors of LUSTEVECO. A

creditor has a real interest to go after any person to whom the

debtor fraudulently transferred its assets.
WHEREFORE, we REVERSE and SET ASIDE the 31 May
2001 Decision and 9 November 2001 Resolution of the Court
of Appeals in CA-G.R. CV No. 46097. We AFFIRM the 1 June
1994 Decision of the Regional Trial Court of Manila, Branch 51,
in Civil Case No. 91-59512. Costs against respondent.
SO ORDERED.