G.R. No.

108734

May 29, 1996

CONCEPT BUILDERS, INC., petitioner, vs.THE NATIONAL LABOR RELATIONS

COMMISSION, (First Division); and Norberto Marabe; Rodolfo Raquel, Cristobal
Riego, Manuel Gillego, Palcronio Giducos, Pedro Aboigar, Norberto Comendador,
Rogelio Salut, Emilio Garcia, Jr., Mariano Rio, Paulina Basea, Alfredo Albera,
Paquito Salut, Domingo Guarino, Romeo Galve, Dominador Sabina, Felipe Radiana,
Gavino Sualibio, Moreno Escares, Ferdinand Torres, Felipe Basilan, and Ruben
Robalos, respondents.
HERMOSISIMA, JR., J.:p
The corporate mask may be lifted and the corporate veil may be pierced when a
corporation is just but the alter ego of a person or of another corporation. Where badges of
fraud exist; where public convenience is defeated; where a wrong is sought to be justified
thereby, the corporate fiction or the notion of legal entity should come to naught. The law
in these instances will regard the corporation as a mere association of persons and, in case
of two corporations, merge them into one.
Thus, where a sister corporation is used as a shield to evade a corporation's subsidiary
liability for damages, the corporation may not be heard to say that it has a personality
separate and distinct from the other corporation. The piercing of the corporate veil comes
into play.
This special civil action ostensibly raises the question of whether the National Labor
Relations Commission committed grave abuse of discretion when it issued a "break-open
order" to the sheriff to be enforced against personal property found in the premises of
petitioner's sister company.
Petitioner Concept Builders, Inc., a domestic corporation, with principal office at 355
Maysan Road, Valenzuela, Metro Manila, is engaged in the construction business. Private
respondents were employed by said company as laborers, carpenters and riggers.
On November, 1981, private respondents were served individual written notices of
termination of employment by petitioner, effective on November 30, 1981. It was stated in
the individual notices that their contracts of employment had expired and the project in
which they were hired had been completed.
Public respondent found it to be, the fact, however, that at the time of the termination of
private respondent's employment, the project in which they were hired had not yet been
finished and completed. Petitioner had to engage the services of sub-contractors whose
workers performed the functions of private respondents.

Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice
and non-payment of their legal holiday pay, overtime pay and thirteenth-month pay against
petitioner.
On December 19, 1984, the Labor Arbiter rendered judgment 1 ordering petitioner to
reinstate private respondents and to pay them back wages equivalent to one year or three
hundred working days.
On November 27, 1985, the National Labor Relations Commission (NLRC) dismissed the
motion for reconsideration filed by petitioner on the ground that the said decision had
already become final and executory. 2
On October 16, 1986, the NLRC Research and Information Department made the finding
that private respondents' back wages amounted to P199,800.00. 3
On October 29, 1986, the Labor Arbiter issued a writ of execution directing the sheriff to
execute the Decision, dated December 19, 1984. The writ was partially satisfied through
garnishment of sums from petitioner's debtor, the Metropolitan Waterworks and Sewerage
Authority, in the amount of P81,385.34. Said amount was turned over to the cashier of the
NLRC.
On February 1, 1989, an Alias Writ of Execution was issued by the Labor Arbiter directing
the sheriff to collect from herein petitioner the sum of P117,414.76, representing the
balance of the judgment award, and to reinstate private respondents to their former
positions.
On July 13, 1989, the sheriff issued a report stating that he tried to serve the alias writ of
execution on petitioner through the security guard on duty but the service was refused on
the ground that petitioner no longer occupied the premises.
On September 26, 1986, upon motion of private respondents, the Labor Arbiter issued a
second alias writ of execution.
The said writ had not been enforced by the special sheriff because, as stated in his
progress report, dated November 2, 1989:
1. All the employees inside petitioner's premises at 355 Maysan Road, Valenzuela, Metro
Manila, claimed that they were employees of Hydro Pipes Philippines, Inc. (HPPI) and not
by respondent;
2. Levy was made upon personal properties he found in the premises;
3. Security guards with high-powered guns prevented him from removing the properties he
had levied upon. 4

The said special sheriff recommended that a "break-open order" be issued to enable him to
enter petitioner's premises so that he could proceed with the public auction sale of the
aforesaid personal properties on November 7, 1989.

Elisa C. Lim Member

On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim with the Labor
Arbiter alleging that the properties sought to be levied upon by the sheriff were owned by
Hydro (Phils.), Inc. (HPPI) of which he is the Vice-President.

Virgilio O. Casino Member

On November 23, 1989, private respondents filed a "Motion for Issuance of a Break-Open
Order," alleging that HPPI and petitioner corporation were owned by the same
incorporator/stockholders. They also alleged that petitioner temporarily suspended its
business operations in order to evade its legal obligations to them and that private
respondents were willing to post an indemnity bond to answer for any damages which
petitioner and HPPI may suffer because of the issuance of the break-open order.
In support of their claim against HPPI, private respondents presented duly certified copies
of the General Informations Sheet, dated May 15, 1987, submitted by petitioner to the
Securities Exchange Commission (SEC) and the General Information Sheet, dated May 25,
1987, submitted by HPPI to the Securities and Exchange Commission.
The General Information Sheet submitted by the petitioner revealed the following:
1. Breakdown of Subscribed Capital
Name of Stockholder Amount Subscribed
HPPI P 6,999,500.00
Antonio W. Lim 2,900,000.00
Dennis S. Cuyegkeng 300.00
Elisa C. Lim 100,000.00
Teodulo R. Dino 100.00
Virgilio O. Casino 100.00
2. Board of Directors
Antonio W. Lim Chairman
Dennis S. Cuyegkeng Member

Teodulo R. Dino Member

3. Corporate Officers
Antonio W. Lim President
Dennis S. Cuyegkeng Assistant to the President
Elisa O. Lim Treasurer
Virgilio O. Casino Corporate Secretary
4. Principal Office
355 Maysan Road
Valenzuela, Metro Manila. 5
On the other hand, the General Information Sheet of HPPI revealed the following:
1. Breakdown of Subscribed Capital
Name of Stockholder Amount Subscribed
Antonio W. Lim P 400,000.00
Elisa C. Lim 57,700.00
AWL Trading 455,000.00
Dennis S. Cuyegkeng 40,100.00
Teodulo R. Dino 100.00
Virgilio O. Casino 100.00
2. Board of Directors
Antonio W. Lim Chairman

Elisa C. Lim Member

Dennis S. Cuyegkeng Member
Virgilio O. Casino Member
Teodulo R. Dino Member
3. Corporate Officers
Antonio W. Lim President
Dennis S. Cuyegkeng Assistant to the President
Elisa C. Lim Treasurer
Virgilio O. Casino Corporate Secretary
4. Principal Office
355 Maysan Road, Valenzuela, Metro Manila. 6
On February 1, 1990, HPPI filed an Opposition to private respondents' motion for issuance
of a break-open order, contending that HPPI is a corporation which is separate and distinct
from petitioner. HPPI also alleged that the two corporations are engaged in two different
kinds of businesses, i.e., HPPI is a manufacturing firm while petitioner was then engaged in
construction.
On March 2, 1990, the Labor Arbiter issued an Order which denied private respondents'
motion for break-open order.
Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC set aside the
order of the Labor Arbiter, issued a break-open order and directed private respondents to
file a bond. Thereafter, it directed the sheriff to proceed with the auction sale of the
properties already levied upon. It dismissed the third-party claim for lack of merit.
Petitioner moved for reconsideration but the motion was denied by the NLRC in a
Resolution, dated December 3, 1992.
Hence, the resort to the present petition.
Petitioner alleges that the NLRC committed grave abuse of discretion when it ordered the
execution of its decision despite a third-party claim on the levied property. Petitioner

further contends, that the doctrine of piercing the corporate veil should not have been
applied, in this case, in the absence of any showing that it created HPPI in order to evade
its liability to private respondents. It also contends that HPPI is engaged in the
manufacture and sale of steel, concrete and iron pipes, a business which is distinct and
separate from petitioner's construction business. Hence, it is of no consequence that
petitioner and HPPI shared the same premises, the same President and the same set of
officers and subscribers. 7
We find petitioner's contention to be unmeritorious.
It is a fundamental principle of corporation law that a corporation is an entity separate and
distinct from its stockholders and from other corporations to which it may be connected. 8
But, this separate and distinct personality of a corporation is merely a fiction created by law
for convenience and to promote justice. 9 So, when the notion of separate juridical
personality is used to defeat public convenience, justify wrong, protect fraud or defend
crime, or is used as a device to defeat the labor laws, 10 this separate personality of the
corporation may be disregarded or the veil of corporate fiction pierced. 11 This is true
likewise when the corporation is merely an adjunct, a business conduit or an alter ego of
another corporation. 12
The conditions under which the juridical entity may be disregarded vary according to the
peculiar facts and circumstances of each case. No hard and fast rule can be accurately laid
down, but certainly, there are some probative factors of identity that will justify the
application of the doctrine of piercing the corporate veil, to wit:
1. Stock ownership by one or common ownership of both corporations.
2. Identity of directors and officers.
3. The manner of keeping corporate books and records.
4. Methods of conducting the business. 13
The SEC en banc explained the "instrumentality rule" which the courts have applied in
disregarding the separate juridical personality of corporations as follows:
Where one corporation is so organized and controlled and its affairs are
conducted so that it is, in fact, a mere instrumentality or adjunct of the
other, the fiction of the corporate entity of the "instrumentality" may be
disregarded. The control necessary to invoke the rule is not majority or
even complete stock control but such domination of instances, policies and
practices that the controlled corporation has, so to speak, no separate
mind, will or existence of its own, and is but a conduit for its principal. It
must be kept in mind that the control must be shown to have been

exercised at the time the acts complained of took place. Moreover, the
control and breach of duty must proximately cause the injury or unjust loss
for which the complaint is made.
The test in determining the applicability of the doctrine of piercing the veil of corporate
fiction is as follows:
1. Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal duty
or dishonest and unjust act in contravention of plaintiff's legal rights; and
3. The aforesaid control and breach of duty must proximately cause the
injury or unjust loss complained of.
The absence of any one of these elements prevents "piercing the corporate
veil." In applying the "instrumentality" or "alter ego" doctrine, the courts
are concerned with reality and not form, with how the corporation operated
and the individual defendant's relationship to that operation. 14
Thus the question of whether a corporation is a mere alter ego, a mere sheet or paper
corporation, a sham or a subterfuge is purely one of fact. 15
In this case, the NLRC noted that, while petitioner claimed that it ceased its business
operations on April 29, 1986, it filed an Information Sheet with the Securities and
Exchange Commission on May 15, 1987, stating that its office address is at 355 Maysan
Road, Valenzuela, Metro Manila. On the other hand, HPPI, the third-party claimant,
submitted on the same day, a similar information sheet stating that its office address is at
355 Maysan Road, Valenzuela, Metro Manila.
Furthermore, the NLRC stated that:
Both information sheets were filed by the same Virgilio O. Casio as the
corporate secretary of both corporations. It would also not be amiss to note
that both corporations had the same president, the same board of
directors, the same corporate officers, and substantially the same
subscribers.
From the foregoing, it appears that, among other things, the respondent
(herein petitioner) and the third-party claimant shared the same address

and/or premises. Under this circumstances, (sic) it cannot be said that the
property levied upon by the sheriff were not of respondents. 16
Clearly, petitioner ceased its business operations in order to evade the payment to private
respondents of back wages and to bar their reinstatement to their former positions. HPPI is
obviously a business conduit of petitioner corporation and its emergence was skillfully
orchestrated to avoid the financial liability that already attached to petitioner corporation.
The facts in this case are analogous to Claparols v. Court of Industrial Relations, 17 where
we had the occasion to rule:
Respondent court's findings that indeed the Claparols Steel and Nail Plant,
which ceased operation of June 30, 1957, was SUCCEEDED by the Claparols
Steel Corporation effective the next day, July 1, 1957, up to December 7,
1962, when the latter finally ceased to operate, were not disputed by
petitioner. It is very clear that the latter corporation was a continuation and
successor of the first entity . . . . Both predecessors and successor were
owned and controlled by petitioner Eduardo Claparols and there was no
break in the succession and continuity of the same business. This
"avoiding-the-liability" scheme is very patent, considering that 90% of the
subscribed shares of stock of the Claparols Steel Corporation (the second
corporation) was owned by respondent . . . Claparols himself, and all the
assets of the dissolved Claparols Steel and Nail plant were turned over to
the emerging Claparols Steel Corporation.
It is very obvious that the second corporation seeks the protective shield of
a corporate fiction whose veil in the present case could, and should, be
pierced as it was deliberately and maliciously designed to evade its financial
obligation to its employees.
In view of the failure of the sheriff, in the case at bar, to effect a levy upon the property
subject of the execution, private respondents had no other recourse but to apply for a
break-open order after the third-party claim of HPPI was dismissed for lack of merit by the
NLRC. This is in consonance with Section 3, Rule VII of the NLRC Manual of Execution of
Judgment which provides that:
Should the losing party, his agent or representative, refuse or prohibit the
Sheriff or his representative entry to the place where the property subject
of execution is located or kept, the judgment creditor may apply to the
Commission or Labor Arbiter concerned for a break-open order.
Furthermore, our perusal of the records shows that the twin requirements of due notice
and hearing were complied with. Petitioner and the third-party claimant were given the
opportunity to submit evidence in support of their claim.

Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the breakopen order issued by the Labor Arbiter.
Finally, we do not find any reason to disturb the rule that factual findings of quasi-judicial
agencies supported by substantial evidence are binding on this Court and are entitled to
great respect, in the absence of showing of grave abuse of a discretion. 18
WHEREFORE, the petition is DISMISSED and the assailed resolutions of the NLRC, dated
April 23, 1992 and December 3, 1992, are AFFIRMED.

The assailed CA decision affirmed the March 12, 2007 3 and June 7, 20074 Orders of the
Regional Trial Court (RTC) of Manila, Branch 21, in Civil Case No. 99-93173, entitled Romeo
M. Morales, doing business under the name and style RM Morales Trophies and Plaques v.
Kukan, Inc. In the said orders, the RTC disregarded the separate corporate identities of
Kukan, Inc. and Kukan International Corporation and declared them to be one and the
same entity. Accordingly, the RTC held Kukan International Corporation, albeit not
impleaded in the underlying complaint of Romeo M. Morales, liable for the judgment award
decreed in a Decision dated November 28, 2002 5 in favor of Morales and against Kukan,
Inc.
The Facts

SO ORDERED.

Sometime in March 1998, Kukan, Inc. conducted a bidding for the supply and installation of
signages in a building being constructed in Makati City. Morales tendered the winning bid
and was awarded the PhP 5 million contract. Some of the items in the project award were
later excluded resulting in the corresponding reduction of the contract price to PhP
3,388,502. Despite his compliance with his contractual undertakings, Morales was only paid
the amount of PhP 1,976,371.07, leaving a balance of PhP 1,412,130.93, which Kukan, Inc.
refused to pay despite demands. Shortchanged, Morales filed a Complaint6 with the RTC
against Kukan, Inc. for a sum of money, the case docketed as Civil Case No. 99-93173 and
eventually raffled to Branch 17 of the court.
Following the joinder of issues after Kukan, Inc. filed an answer with counterclaim, trial
ensued. However, starting November 2000, Kukan, Inc. no longer appeared and
participated in the proceedings before the trial court, prompting the RTC to declare Kukan,
Inc. in default and paving the way for Morales to present his evidence ex parte.
G.R. No. 182729

September 29, 2010

KUKAN INTERNATIONAL CORPORATION, Petitioner, vs. HON. AMOR REYES, in her

capacity as Presiding Judge of the Regional Trial Court of Manila, Branch 21, and
ROMEO M. MORALES, doing business under the name and style "RM Morales
Trophies and Plaques," Respondents.
DECISION
VELASCO, JR., J.:
The Case
This Petition for Review on Certiorari under Rule 45 seeks to nullify and reverse the January
23, 2008 Decision1 and the April 16, 2008 Resolution2 rendered by the Court of Appeals
(CA) in CA-G.R. SP No. 100152.

On November 28, 2002, the RTC rendered a Decision finding for Morales and against
Kukan, Inc., disposing as follows:
WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure, and
by preponderance of evidence, judgment is hereby rendered in favor of the plaintiff,
ordering Kukan, Inc.:
1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN
HUNDRED TWENTY FOUR PESOS (P1,201,724.00) with legal interest at 12% per
annum from February 17, 1999 until full payment;
2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;
3. to pay the sum of TWENTY THOUSAND PESOS, (P20,000.00) as reasonable
attorneys fees; and

4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX
CENTAVOS (P7,960.06) as litigation expenses.

3. Kukan International Corp. and Michael Chan are jointly and severally liable to
pay the amount awarded to plaintiff pursuant to the decision of November [28],
2002 which has long been final and executory.

For lack of factual foundation, the counterclaim is DISMISSED.

SO ORDERED.
IT IS SO ORDERED.

After the above decision became final and executory, Morales moved for and secured a writ
of execution8 against Kukan, Inc. The sheriff then levied upon various personal properties
found at what was supposed to be Kukan, Inc.s office at Unit 2205, 88 Corporate Center,
Salcedo Village, Makati City. Alleging that it owned the properties thus levied and that it
was a different corporation from Kukan, Inc., Kukan International Corporation (KIC) filed an
Affidavit of Third-Party Claim. Notably, KIC was incorporated in August 2000, or shortly
after Kukan, Inc. had stopped participating in Civil Case No. 99-93173.

From the above order, KIC moved but was denied reconsideration in another Order dated
June 7, 2007.
KIC went to the CA on a petition for certiorari to nullify the aforesaid March 12 and June 7,
2007 RTC Orders.
On January 23, 2008, the CA rendered the assailed decision, the dispositive portion of
which states:

In reaction to the third party claim, Morales interposed an Omnibus Motion dated April 30,
2003. In it, Morales prayed, applying the principle of piercing the veil of corporate fiction,
that an order be issued for the satisfaction of the judgment debt of Kukan, Inc. with the
properties under the name or in the possession of KIC, it being alleged that both
corporations are but one and the same entity. KIC opposed Morales motion. By Order of
May 29, 20039 as reiterated in a subsequent order, the court denied the omnibus motion.

WHEREFORE, premises considered, the petition is hereby DENIED and the assailed Orders
dated March 12, 2007 and June 7, 2007 of the court a quo are both AFFIRMED. No costs.

In a bid to establish the link between KIC and Kukan, Inc., and thus determine the true
relationship between the two, Morales filed a Motion for Examination of Judgment Debtors
dated May 4, 2005. In this motion Morales sought that subponae be issued against the
primary stockholders of Kukan, Inc., among them Michael Chan, a.k.a. Chan Kai Kit. This
too was denied by the trial court in an Order dated May 24, 2005. 10

Hence, the instant petition for review, with the following issues KIC raises for the Courts
consideration:

Morales then sought the inhibition of the presiding judge, Eduardo B. Peralta, Jr., who
eventually granted the motion. The case was re-raffled to Branch 21, presided by public
respondent Judge Amor Reyes.
Before the Manila RTC, Branch 21, Morales filed a Motion to Pierce the Veil of Corporate
Fiction to declare KIC as having no existence separate from Kukan, Inc. This time around,
the RTC, by Order dated March 12, 2007, granted the motion, the dispositive portion of
which reads:
WHEREFORE, premises considered, the motion is hereby GRANTED. The Court hereby
declares as follows:
1. defendant Kukan, Inc. and newly created Kukan International Corp. as one and
the same corporation;
2. the levy made on the properties of Kukan International Corp. is hereby valid;

SO ORDERED.11
The CA later denied KICs motion for reconsideration in the assailed resolution.

1. There is no legal basis for the [CA] to resolve and declare that petitioners
Constitutional Right to Due Process was not violated by the public respondent in
rendering the Orders dated March 12, 2007 and June 7, 2007 and in declaring
petitioner to be liable for the judgment obligations of the corporation "Kukan, Inc."
to private respondent as petitioner is a stranger to the case and was never made
a party in the case before the trial court nor was it ever served a summons and a
copy of the complaint.
2. There is no legal basis for the [CA] to resolve and declare that the Orders dated
March 12, 2007 and June 7, 2007 rendered by public respondent declaring the
petitioner liable to the judgment obligations of the corporation "Kukan, Inc." to
private respondent are valid as said orders of the public respondent modify and/or
amend the trial courts final and executory decision rendered on November 28,
2002.
3. There is no legal basis for the [CA] to resolve and declare that the Orders dated
March 12, 2007 and June 7, 2007 rendered by public respondent declaring the
petitioner [KIC] and the corporation "Kukan, Inc." as one and the same, and,
therefore, the Veil of Corporate Fiction between them be pierced as the procedure

undertaken by public respondent which the [CA] upheld is not sanctioned by the
Rules of Court and/or established jurisprudence enunciated by this Honorable
Supreme Court.12
In gist, the issues to be resolved boil down to the question of, first, whether the trial court
can, after the judgment against Kukan, Inc. has attained finality, execute it against the
property of KIC; second, whether the trial court acquired jurisdiction over KIC; and third,
whether the trial and appellate courts correctly applied, under the premises, the principle of
piercing the veil of corporate fiction.
The Ruling of the Court
The petition is meritorious.
First Issue: Against Whom Can a Final and
Executory Judgment Be Executed
The preliminary question that must be answered is whether or not the trial court can, after
adjudging Kukan, Inc. liable for a sum of money in a final and executory judgment, execute
such judgment debt against the property of KIC.
The poser must be answered in the negative.
In Carpio v. Doroja,13 the Court ruled that the deciding court has supervisory control over
the execution of its judgment:
A case in which an execution has been issued is regarded as still pending so that all
proceedings on the execution are proceedings in the suit. There is no question that the
court which rendered the judgment has a general supervisory control over its process of
execution, and this power carries with it the right to determine every question of fact and
law which may be involved in the execution.
We reiterated the above holding in Javier v. Court of Appeals 14 in this wise: "The said
branch has a general supervisory control over its processes in the execution of its judgment
with a right to determine every question of fact and law which may be involved in the
execution."
The courts supervisory control does not, however, extend as to authorize the alteration or
amendment of a final and executory decision, save for certain recognized exceptions,
among which is the correction of clerical errors. Else, the court violates the principle of
finality of judgment and its immutability, concepts which the Court, in Tan v. Timbal, 15
defined:
As we held in Industrial Management International Development Corporation vs. NLRC:

It is an elementary principle of procedure that the resolution of the court in a given issue as
embodied in the dispositive part of a decision or order is the controlling factor as to
settlement of rights of the parties. Once a decision or order becomes final and executory, it
is removed from the power or jurisdiction of the court which rendered it to further alter or
amend it. It thereby becomes immutable and unalterable and any amendment or alteration
which substantially affects a final and executory judgment is null and void for lack of
jurisdiction, including the entire proceedings held for that purpose. An order of execution
which varies the tenor of the judgment or exceeds the terms thereof is a nullity. (Emphasis
supplied.)
Republic v. Tango16 expounded on the same principle and its exceptions:
Deeply ingrained in our jurisprudence is the principle that a decision that has acquired
finality becomes immutable and unalterable. As such, it may no longer be modified
in any respect even if the modification is meant to correct erroneous conclusions of fact or
law and whether it will be made by the court that rendered it or by the highest court of the
land. x x x
The doctrine of finality of judgment is grounded on the fundamental principle of public
policy and sound practice that, at the risk of occasional error, the judgment of courts and
the award of quasi-judicial agencies must become final on some definite date fixed by law.
The only exceptions to the general rule are the correction of clerical errors, the so-called
nunc pro tunc entries which cause no prejudice to any party, void judgments, and
whenever circumstances transpire after the finality of the decision which render its
execution unjust and inequitable. None of the exceptions obtains here to merit the review
sought. (Emphasis added.)
So, did the RTC, in breach of the doctrine of immutability and inalterability of judgment,
order the execution of its final decision in a manner as would amount to its prohibited
alteration or modification?
We repair to the dispositive portion of the final and executory RTC decision. Pertinently, it
provides:
WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure, and
by preponderance of evidence, judgment is hereby rendered in favor of the plaintiff,
ordering Kukan, Inc.:
1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN
HUNDRED TWENTY FOUR PESOS (P1,201,724.00) with legal interest at 12% per
annum from February 17, 1999 until full payment;
2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;

3. to pay the sum of TWENTY THOUSAND PESOS (P20,000.00) as reasonable

attorneys fees; and
4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX
CENTAVOS (P7,960.06) as litigation expenses.
x x x x (Emphasis supplied.)
As may be noted, the above decision, in unequivocal terms, directed Kukan, Inc. to pay the
aforementioned awards to Morales. Thus, making KIC, thru the medium of a writ of
execution, answerable for the above judgment liability is a clear case of altering a decision,
an instance of granting relief not contemplated in the decision sought to be executed. And
the change does not fall under any of the recognized exceptions to the doctrine of finality
and immutability of judgment. It is a settled rule that a writ of execution must conform to
the fallo of the judgment; as an inevitable corollary, a writ beyond the terms of the
judgment is a nullity.17
Thus, on this ground alone, the instant petition can already be granted. Nonetheless, an
examination of the other issues raised by KIC would be proper.
Second Issue: Propriety of the RTC
Assuming Jurisdiction over KIC
The next issue turns on the validity of the execution the trial court authorized against KIC
and its property, given that it was neither made a party nor impleaded in Civil Case No. 9993173, let alone served with summons. In other words, did the trial court acquire
jurisdiction over KIC?
In the assailed decision, the appellate court deemed KIC to have voluntarily submitted itself
to the jurisdiction of the trial court owing to its filing of four (4) pleadings adverted to
earlier, namely: (a) the Affidavit of Third-Party Claim;18 (b) the Comment and Opposition to
Plaintiffs Omnibus Motion;19 (c) the Motion for Reconsideration of the RTC Order dated
March 12, 2007;20 and (d) the Motion for Leave to Admit Reply.21 The CA, citing Section 20,
Rule 14 of the Rules of Court, stated that "the procedural rule on service of summons can
be waived by voluntary submission to the courts jurisdiction through any form of
appearance by the party or its counsel."22
We cannot give imprimatur to the appellate courts appreciation of the thrust of Sec. 20,
Rule 14 of the Rules in concluding that the trial court acquired jurisdiction over KIC.
Orion Security Corporation v. Kalfam Enterprises, Inc. 23 explains how courts acquire
jurisdiction over the parties in a civil case:

Courts acquire jurisdiction over the plaintiffs upon the filing of the complaint. On the other
hand, jurisdiction over the defendants in a civil case is acquired either through the service
of summons upon them or through their voluntary appearance in court and their
submission to its authority. (Emphasis supplied.)
In the fairly recent Palma v. Galvez,24 the Court reiterated its holding in Orion Security
Corporation, stating: "[I]n civil cases, the trial court acquires jurisdiction over the person of
the defendant either by the service of summons or by the latters voluntary appearance
and submission to the authority of the former."
The courts jurisdiction over a party-defendant resulting from his voluntary submission to
its authority is provided under Sec. 20, Rule 14 of the Rules, which states:
Section 20. Voluntary appearance. The defendants voluntary appearance in the actions
shall be equivalent to service of summons. The inclusion in a motion to dismiss of other
grounds aside from lack of jurisdiction over the person of the defendant shall not be
deemed a voluntary appearance.
To be sure, the CAs ruling that any form of appearance by the party or its counsel is
deemed as voluntary appearance finds support in the kindred Republic v. Ker & Co., Ltd. 25
and De Midgely v. Ferandos.26
Republic and De Midgely, however, have already been modified if not altogether
superseded27 by La Naval Drug Corporation v. Court of Appeals,28 wherein the Court
essentially ruled and elucidated on the current view in our jurisdiction, to wit: "[A] special
appearance before the courtchallenging its jurisdiction over the person through a motion
to dismiss even if the movant invokes other groundsis not tantamount to estoppel or a
waiver by the movant of his objection to jurisdiction over his person; and such is not
constitutive of a voluntary submission to the jurisdiction of the court." 29
In the instant case, KIC was not made a party-defendant in Civil Case No. 99-93173. Even
if it is conceded that it raised affirmative defenses through its aforementioned pleadings,
KIC never abandoned its challenge, however implicit, to the RTCs jurisdiction over its
person. The challenge was subsumed in KICs primary assertion that it was not the same
entity as Kukan, Inc. Pertinently, in its Comment and Opposition to Plaintiffs Omnibus
Motion dated May 20, 2003, KIC entered its "special but not voluntary appearance"
alleging therein that it was a different entity and has a separate legal personality from
Kukan, Inc. And KIC would consistently reiterate this assertion in all its pleadings, thus
effectively resisting all along the RTCs jurisdiction of its person. It cannot be
overemphasized that KIC could not file before the RTC a motion to dismiss and its
attachments in Civil Case No. 99-93173, precisely because KIC was neither impleaded nor
served with summons. Consequently, KIC could only assert and claim through its affidavits,
comments, and motions filed by special appearance before the RTC that it is separate and
distinct from Kukan, Inc.

Following La Naval Drug Corporation,30 KIC cannot be deemed to have waived its objection
to the courts lack of jurisdiction over its person. It would defy logic to say that KIC
unequivocally submitted itself to the jurisdiction of the RTC when it strongly asserted that it
and Kukan, Inc. are different entities. In the scheme of things obtaining, KIC had no other
option but to insist on its separate identity and plead for relief consistent with that position.
Third Issue: Piercing the
Veil of Corporate Fiction
The third and main issue in this case is whether or not the trial and appellate courts
correctly applied the principle of piercing the veil of corporate entitycalled also as
disregarding the fiction of a separate juridical personality of a corporationto support a
conclusion that Kukan, Inc. and KIC are but one and the same corporation with respect to
the contract award referred to at the outset. This principle finds its context on the postulate
that a corporation is an artificial being invested with a personality separate and distinct
from those of the stockholders and from other corporations to which it may be connected
or related.31
In Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations
Commission,32 the Court revisited the subject principle of piercing the veil of corporate
fiction and wrote:
Under the doctrine of "piercing the veil of corporate fiction," the court looks at the
corporation as a mere collection of individuals or an aggregation of persons undertaking
business as a group, disregarding the separate juridical personality of the corporation
unifying the group. Another formulation of this doctrine is that when two business
enterprises are owned, conducted and controlled by the same parties, both law and equity
will, when necessary to protect the rights of third parties, disregard the legal fiction that
two corporations are distinct entities and treat them as identical or as one and the same.

alter ego or business conduit of a person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an instrumentality, agency,
conduit or adjunct of another corporation.
To disregard the separate juridical personality of a corporation, the wrongdoing must be
established clearly and convincingly. It cannot be presumed. 33 (Emphasis supplied.)
Now, as before the appellate court, petitioner KIC maintains that the RTC violated its right
to due process when, in the execution of its November 28, 2002 Decision, the court
authorized the issuance of the writ against KIC for Kukan, Inc.s judgment debt, albeit KIC
has never been a party to the underlying suit. As a counterpoint, Morales argues that KICs
specific concern on due process and on the validity of the writ to execute the RTCs
November 28, 2002 Decision would be mooted if it were established that KIC and Kukan,
Inc. are indeed one and the same corporation.
Morales contention is untenable.
The principle of piercing the veil of corporate fiction, and the resulting treatment of two
related corporations as one and the same juridical person with respect to a given
transaction, is basically applied only to determine established liability; 34 it is not available to
confer on the court a jurisdiction it has not acquired, in the first place, over a party not
impleaded in a case. Elsewise put, a corporation not impleaded in a suit cannot be subject
to the courts process of piercing the veil of its corporate fiction. In that situation, the court
has not acquired jurisdiction over the corporation and, hence, any proceedings taken
against that corporation and its property would infringe on its right to due process. Aguedo
Agbayani, a recognized authority on Commercial Law, stated as much:
23. Piercing the veil of corporate entity applies to determination of liability not of
jurisdiction. x x x

Whether the separate personality of the corporation should be pierced hinges on

obtaining facts appropriately pleaded or proved. However, any piercing of the
corporate veil has to be done with caution, albeit the Court will not hesitate to disregard
the corporate veil when it is misused or when necessary in the interest of justice. x x x
(Emphasis supplied.)

This is so because the doctrine of piercing the veil of corporate fiction comes to play only
during the trial of the case after the court has already acquired jurisdiction over the
corporation. Hence, before this doctrine can be applied, based on the evidence presented,
it is imperative that the court must first have jurisdiction over the corporation. 35 x x x
(Emphasis supplied.)

The same principle was the subject and discussed in Rivera v. United Laboratories, Inc.:

The implication of the above comment is twofold: (1) the court must first acquire
jurisdiction over the corporation or corporations involved before its or their separate
personalities are disregarded; and (2) the doctrine of piercing the veil of corporate entity
can only be raised during a full-blown trial over a cause of action duly commenced involving
parties duly brought under the authority of the court by way of service of summons or what
passes as such service.

While a corporation may exist for any lawful purpose, the law will regard it as an
association of persons or, in case of two corporations, merge them into one, when its
corporate legal entity is used as a cloak for fraud or illegality. This is the doctrine of
piercing the veil of corporate fiction. The doctrine applies only when such corporate fiction
is used to defeat public convenience, justify wrong, protect fraud, or defend crime, or when
it is made as a shield to confuse the legitimate issues, or where a corporation is the mere

The issue of jurisdiction or the lack of it over KIC has already been discussed. Anent the
matter of the time and manner of raising the principle in question, it is undisputed that no
full-blown trial involving KIC was had when the RTC disregarded the corporate veil of KIC.
The reason for this actuality is simple and undisputed: KIC was not impleaded in Civil Case
No. 99-93173 and that the RTC did not acquire jurisdiction over it. It was dragged to the
case after it reacted to the improper execution of its properties and veritably hauled to
court, not thru the usual process of service of summons, but by mere motion of a party
with whom it has no privity of contract and after the decision in the main case had already
become final and executory. As to the propriety of a plea for the application of the principle
by mere motion, the following excerpts are instructive:
Generally, a motion is appropriate only in the absence of remedies by regular pleadings,
and is not available to settle important questions of law, or to dispose of the merits of the
case. A motion is usually a proceeding incidental to an action, but it may be a wholly
distinct or independent proceeding. A motion in this sense is not within this discussion even
though the relief demanded is denominated an "order."
A motion generally relates to procedure and is often resorted to in order to correct errors
which have crept in along the line of the principal actions progress. Generally, where there
is a procedural defect in a proceeding and no method under statute or rule of court by
which it may be called to the attention of the court, a motion is an appropriate remedy. In
many jurisdictions, the motion has replaced the common-law pleas testing the sufficiency
of the pleadings, and various common-law writs, such as writ of error coram nobis and
audita querela. In some cases, a motion may be one of several remedies available. For
example, in some jurisdictions, a motion to vacate an order is a remedy alternative to an
appeal therefrom.
Statutes governing motions are given a liberal construction. 36 (Emphasis supplied.)
The bottom line issue of whether Morales can proceed against KIC for the judgment debt of
Kukan, Inc.assuming hypothetically that he can, applying the piercing the corporate veil
principleresolves itself into the question of whether a mere motion is the appropriate
vehicle for such purpose.
Verily, Morales espouses the application of the principle of piercing the corporate veil to
hold KIC liable on theory that Kukan, Inc. was out to defraud him through the use of the
separate and distinct personality of another corporation, KIC. In net effect, Morales
adverted motion to pierce the veil of corporate fiction dated January 3, 2007 stated a new
cause of action, i.e., for the liability of judgment debtor Kukan, Inc. to be borne by KIC on
the alleged identity of the two corporations. This new cause of action should be properly
ventilated in another complaint and subsequent trial where the doctrine of piercing the
corporate veil can, if appropriate, be applied, based on the evidence adduced. Establishing
the claim of Morales and the corresponding liability of KIC for Kukan Inc.s indebtedness
could hardly be the subject, under the premises, of a mere motion interposed after the

principal action against Kukan, Inc. alone had peremptorily been terminated. After all, a
complaint is one where the plaintiff alleges causes of action.
In any event, the principle of piercing the veil of corporate fiction finds no application to the
instant case.
As a general rule, courts should be wary of lifting the corporate veil between corporations,
however related. Philippine National Bank v. Andrada Electric Engineering Company 37
explains why:
A corporation is an artificial being created by operation of law. x x x It has a personality
separate and distinct from the persons composing it, as well as from any other legal entity
to which it may be related. This is basic.
Equally well-settled is the principle that the corporate mask may be removed or the
corporate veil pierced when the corporation is just an alter ego of a person or of another
corporation. For reasons of public policy and in the interest of justice, the corporate veil will
justifiably be impaled only when it becomes a shield for fraud, illegality or inequity
committed against third persons.
Hence, any application of the doctrine of piercing the corporate veil should be done with
caution. A court should be mindful of the milieu where it is to be applied. It must be certain
that the corporate fiction was misused to such an extent that injustice, fraud, or crime was
committed against another, in disregard of its rights. The wrongdoing must be clearly and
convincingly established; it cannot be presumed. Otherwise, an injustice that was never
unintended may result from an erroneous application.
This Court has pierced the corporate veil to ward off a judgment credit, to avoid inclusion of
corporate assets as part of the estate of the decedent, to escape liability arising from a
debt, or to perpetuate fraud and/or confuse legitimate issues either to promote or to shield
unfair objectives or to cover up an otherwise blatant violation of the prohibition against
forum-shopping. Only in these and similar instances may the veil be pierced and
disregarded. (Emphasis supplied.)
In fine, to justify the piercing of the veil of corporate fiction, it must be shown by clear and
convincing proof that the separate and distinct personality of the corporation was
purposefully employed to evade a legitimate and binding commitment and perpetuate a
fraud or like wrongdoings. To be sure, the Court has, on numerous occasions, 38 applied the
principle where a corporation is dissolved and its assets are transferred to another to avoid
a financial liability of the first corporation with the result that the second corporation should
be considered a continuation and successor of the first entity.
In those instances when the Court pierced the veil of corporate fiction of two corporations,
there was a confluence of the following factors:

1. A first corporation is dissolved;

2. The assets of the first corporation is transferred to a second corporation to avoid
a financial liability of the first corporation; and
3. Both corporations are owned and controlled by the same persons such that the
second corporation should be considered as a continuation and successor of the
first corporation.
In the instant case, however, the second and third factors are conspicuously absent. There
is, therefore, no compelling justification for disregarding the fiction of corporate entity
separating Kukan, Inc. from KIC. In applying the principle, both the RTC and the CA
miserably failed to identify the presence of the abovementioned factors. Consider:
The RTC disregarded the separate corporate personalities of Kukan, Inc. and KIC based on
the following premises and arguments:
While it is true that a corporation has a separate and distinct personality from its
stockholder, director and officers, the law expressly provides for an exception. When
Michael Chan, the Managing Director of defendant Kukan, Inc. (majority stockholder of the
newly formed corporation [KIC]) confirmed the award to plaintiff to supply and install
interior signages in the Enterprise Center he (Michael Chan, Managing Director of
defendant Kukan, Inc.) knew that there was no sufficient corporate funds to pay its
obligation/account, thus implying bad faith on his part and fraud in contracting the
obligation. Michael Chan neither returned the interior signages nor tendered payment to
the plaintiff. This circumstance may warrant the piercing of the veil of corporation fiction.
Having been guilty of bad faith in the management of corporate matters the corporate
trustee, director or officer may be held personally liable. x x x
Since fraud is a state of mind, it need not be proved by direct evidence but may be inferred
from the circumstances of the case. x x x [A]nd the circumstances are: the signature of
Michael Chan, Managing Director of Kukan, Inc. appearing in the confirmation of the award
sent to the plaintiff; signature of Chan Kai Kit, a British National appearing in the Articles of
Incorporation and signature of Michael Chan also a British National appearing in the Articles
of Incorporation [of] Kukan International Corp. give the impression that they are one and
the same person, that Michael Chan and Chan Kai Kit are both majority stockholders of
Kukan International Corp. and Kukan, Inc. holding 40% of the stocks; that Kukan
International Corp. is practically doing the same kind of business as that of Kukan, Inc. 39
(Emphasis supplied.)
As is apparent from its disquisition, the RTC brushed aside the separate corporate existence
of Kukan, Inc. and KIC on the main argument that Michael Chan owns 40% of the common
shares of both corporations, obviously oblivious that overlapping stock ownership is a
common business phenomenon. It must be remembered, however, that KICs properties

were the ones seized upon levy on execution and not that of Kukan, Inc. or of Michael Chan
for that matter. Mere ownership by a single stockholder or by another corporation of a
substantial block of shares of a corporation does not, standing alone, provide sufficient
justification for disregarding the separate corporate personality.40 For this ground to hold
sway in this case, there must be proof that Chan had control or complete dominion of
Kukan and KICs finances, policies, and business practices; he used such control to commit
fraud; and the control was the proximate cause of the financial loss complained of by
Morales. The absence of any of the elements prevents the piercing of the corporate veil. 41
And indeed, the records do not show the presence of these elements.
On the other hand, the CA held:
In the present case, the facts disclose that Kukan, Inc. entered into a contractual obligation
x x x worth more than three million pesos although it had only Php5,000.00 paid-up
capital; [KIC] was incorporated shortly before Kukan, Inc. suddenly ceased to appear and
participate in the trial; [KICs] purpose is related and somewhat akin to that of Kukan, Inc.;
and in [KIC] Michael Chan, a.k.a., Chan Kai Kit, holds forty percent of the outstanding
stocks, while he formerly held the same amount of stocks in Kukan Inc. These would lead
to the inescapable conclusion that Kukan, Inc. committed fraudulent representation by
awarding to the private respondent the contract with full knowledge that it was not in a
position to comply with the obligation it had assumed because of inadequate paid-up
capital. It bears stressing that shareholders should in good faith put at the risk of the
business, unencumbered capital reasonably adequate for its prospective liabilities. The
capital should not be illusory or trifling compared with the business to be done and the risk
of loss.
Further, it is clear that [KIC] is a continuation and successor of Kukan, Inc. Michael Chan,
a.k.a. Chan Kai Kit has the largest block of shares in both business enterprises. The
emergence of the former was cleverly timed with the hasty withdrawal of the latter during
the trial to avoid the financial liability that was eventually suffered by the latter. The two
companies have a related business purpose. Considering these circumstances, the obvious
conclusion is that the creation of Kukan International Corporation served as a device to
evade the obligation incurred by Kukan, Inc. and yet profit from the goodwill attained by
the name "Kukan" by continuing to engage in the same line of business with the same list
of clients.42 (Emphasis supplied.)
Evidently, the CA found the meager paid-up capitalization of Kukan, Inc. and the similarity
of the business activities in which both corporations are engaged as a jumping board to its
conclusion that the creation of KIC "served as a device to evade the obligation incurred by
Kukan, Inc." The appellate court, however, left a gaping hole by failing to demonstrate that
Kukan, Inc. and its stockholders defrauded Morales. In fine, there is no showing that the
incorporation, and the separate and distinct personality, of KIC was used to defeat Morales
right to recover from Kukan, Inc. Judging from the records, no serious attempt was made

to levy on the properties of Kukan, Inc. Morales could not, thus, validly argue that Kukan,
Inc. tried to avoid liability or had no property against which to proceed.
Morales further contends that Kukan, Inc.s closure is evidenced by its failure to file its
2001 General Information Sheet (GIS) with the Securities and Exchange Commission.
However, such fact does not necessarily mean that Kukan, Inc. had altogether ceased
operations, as Morales would have this Court believe, for it is stated on the face of the GIS
that it is only upon a failure to file the corporate GIS for five (5) consecutive years that
non-operation shall be presumed.
The fact that Kukan, Inc. entered into a PhP 3.3 million contract when it only had a paid-up
capital of PhP 5,000 is not an indication of the intent on the part of its management to
defraud creditors. Paid-up capital is merely seed money to start a corporation or a business
entity. As in this case, it merely represented the capitalization upon incorporation in 1997
of Kukan, Inc. Paid-up capitalization of PhP 5,000 is not and should not be taken as a
reflection of the firms capacity to meet its recurrent and long-term obligations. It must be
borne in mind that the equity portion cannot be equated to the viability of a business
concern, for the best test is the working capital which consists of the liquid assets of a
given business relating to the nature of the business concern.lawphil
Neither should the level of paid-up capital of Kukan, Inc. upon its incorporation be viewed
as a badge of fraud, for it is in compliance with Sec. 13 of the Corporation Code, 43 which
only requires a minimum paid-up capital of PhP 5,000.1avvphi1
The suggestion that KIC is but a continuation and successor of Kukan, Inc., owned and
controlled as they are by the same stockholders, stands without factual basis. It is true that
Michael Chan, a.k.a. Chan Kai Kit, owns 40% of the outstanding capital stock of both
corporations. But such circumstance, standing alone, is insufficient to establish identity.
There must be at least a substantial identity of stockholders for both corporations in order
to consider this factor to be constitutive of corporate identity.
It would not avail Morales any to rely44 on General Credit Corporation v. Alsons
Development and Investment Corporation.45 General Credit Corporation is factually not on
all fours with the instant case. There, the common stockholders of the corporations
represented 90% of the outstanding capital stock of the companies, unlike here where
Michael Chan merely represents 40% of the outstanding capital stock of both KIC and
Kukan, Inc., not even a majority of it. In that case, moreover, evidence was adduced to
support the finding that the funds of the second corporation came from the first. Finally,
there was proof in General Credit Corporation of complete control, such that one
corporation was a mere dummy or alter ego of the other, which is absent in the instant
case.
Evidently, the aforementioned case relied upon by Morales cannot justify the application of
the principle of piercing the veil of corporate fiction to the instant case. As shown by the

records, the name Michael Chan, the similarity of business activities engaged in, and
incidentally the word "Kukan" appearing in the corporate names provide the nexus between
Kukan, Inc. and KIC. As illustrated, these circumstances are insufficient to establish the
identity of KIC as the alter ego or successor of Kukan, Inc.
It bears reiterating that piercing the veil of corporate fiction is frowned upon. Accordingly,
those who seek to pierce the veil must clearly establish that the separate and distinct
personalities of the corporations are set up to justify a wrong, protect fraud, or perpetrate
a deception. In the concrete and on the assumption that the RTC has validly acquired
jurisdiction over the party concerned, Morales ought to have proved by convincing evidence
that Kukan, Inc. was collapsed and thereafter KIC purposely formed and operated to
defraud him. Morales has not to us discharged his burden.
WHEREFORE, the petition is hereby GRANTED. The CAs January 23, 2008 Decision and
April 16, 2008 Resolution in CA-G.R. SP No. 100152 are hereby REVERSED and SET ASIDE.
The levy placed upon the personal properties of Kukan International Corporation is hereby
ordered lifted and the personal properties ordered returned to Kukan International
Corporation. The RTC of Manila, Branch 21 is hereby directed to execute the RTC Decision
dated November 28, 2002 against Kukan, Inc. with reasonable dispatch.
No costs.
SO ORDERED.

G.R. No. 142435

April 30, 2003

ESTELITA BURGOS LIPAT and ALFREDO LIPAT, petitioners, vs. PACIFIC BANKING
CORPORATION, REGISTER OF DEEDS, RTC EX-OFFICIO SHERIFF OF QUEZON CITY
and the Heirs of EUGENIO D. TRINIDAD, respondents.
QUISUMBING, J.:
This petition for review on certiorari seeks the reversal of the Decision 1 dated October 21,
1999 of the Court of Appeals in CA-G.R. CV No. 41536 which dismissed herein petitioners'
appeal from the Decision2 dated February 10, 1993 of the Regional Trial Court (RTC) of
Quezon City, Branch 84, in Civil Case No. Q-89-4152. The trial court had dismissed
petitioners' complaint for annulment of real estate mortgage and the extra-judicial
foreclosure thereof. Likewise brought for our review is the Resolution 3 dated February 23,
2000 of the Court of Appeals which denied petitioners' motion for reconsideration.
The facts, as culled from records, are as follows:
Petitioners, the spouses Alfredo Lipat and Estelita Burgos Lipat, owned "Bela's Export
Trading" (BET), a single proprietorship with principal office at No. 814 Aurora Boulevard,
Cubao, Quezon City. BET was engaged in the manufacture of garments for domestic and
foreign consumption. The Lipats also owned the "Mystical Fashions" in the United States,
which sells goods imported from the Philippines through BET. Mrs. Lipat designated her
daughter, Teresita B. Lipat, to manage BET in the Philippines while she was managing
"Mystical Fashions" in the United States.
In order to facilitate the convenient operation of BET, Estelita Lipat executed on December
14, 1978, a special power of attorney appointing Teresita Lipat as her attorney-in-fact to
obtain loans and other credit accommodations from respondent Pacific Banking Corporation
(Pacific Bank). She likewise authorized Teresita to execute mortgage contracts on
properties owned or co-owned by her as security for the obligations to be extended by
Pacific Bank including any extension or renewal thereof.
Sometime in April 1979, Teresita, by virtue of the special power of attorney, was able to
secure for and in behalf of her mother, Mrs. Lipat and BET, a loan from Pacific Bank
amounting to P583,854.00 to buy fabrics to be manufactured by BET and exported to
"Mystical Fashions" in the United States. As security therefor, the Lipat spouses, as
represented by Teresita, executed a Real Estate Mortgage over their property located at No.
814 Aurora Blvd., Cubao, Quezon City. Said property was likewise made to secure "other
additional or new loans, discounting lines, overdrafts and credit accommodations, of
whatever amount, which the Mortgagor and/or Debtor may subsequently obtain from the
Mortgagee as well as any renewal or extension by the Mortgagor and/or Debtor of the
whole or part of said original, additional or new loans, discounting lines, overdrafts and
other credit accommodations, including interest and expenses or other obligations of the

Mortgagor and/or Debtor owing to the Mortgagee, whether directly, or indirectly, principal
or secondary, as appears in the accounts, books and records of the Mortgagee." 4
On September 5, 1979, BET was incorporated into a family corporation named Bela's
Export Corporation (BEC) in order to facilitate the management of the business. BEC was
engaged in the business of manufacturing and exportation of all kinds of garments of
whatever kind and description5 and utilized the same machineries and equipment
previously used by BET. Its incorporators and directors included the Lipat spouses who
owned a combined 300 shares out of the 420 shares subscribed, Teresita Lipat who owned
20 shares, and other close relatives and friends of the Lipats. 6 Estelita Lipat was named
president of BEC, while Teresita became the vice-president and general manager.
Eventually, the loan was later restructured in the name of BEC and subsequent loans were
obtained by BEC with the corresponding promissory notes duly executed by Teresita on
behalf of the corporation. A letter of credit was also opened by Pacific Bank in favor of A. O.
Knitting Manufacturing Co., Inc., upon the request of BEC after BEC executed the
corresponding trust receipt therefor. Export bills were also executed in favor of Pacific Bank
for additional finances. These transactions were all secured by the real estate mortgage
over the Lipats' property.
The promissory notes, export bills, and trust receipt eventually became due and
demandable. Unfortunately, BEC defaulted in its payments. After receipt of Pacific Bank's
demand letters, Estelita Lipat went to the office of the bank's liquidator and asked for
additional time to enable her to personally settle BEC's obligations. The bank acceded to
her request but Estelita failed to fulfill her promise.
Consequently, the real estate mortgage was foreclosed and after compliance with the
requirements of the law the mortgaged property was sold at public auction. On January 31,
1989, a certificate of sale was issued to respondent Eugenio D. Trinidad as the highest
bidder.
On November 28, 1989, the spouses Lipat filed before the Quezon City RTC a complaint for
annulment of the real estate mortgage, extrajudicial foreclosure and the certificate of sale
issued over the property against Pacific Bank and Eugenio D. Trinidad. The complaint,
which was docketed as Civil Case No. Q-89-4152, alleged, among others, that the
promissory notes, trust receipt, and export bills were all ultra vires acts of Teresita as they
were executed without the requisite board resolution of the Board of Directors of BEC. The
Lipats also averred that assuming said acts were valid and binding on BEC, the same were
the corporation's sole obligation, it having a personality distinct and separate from spouses
Lipat. It was likewise pointed out that Teresita's authority to secure a loan from Pacific
Bank was specifically limited to Mrs. Lipat's sole use and benefit and that the real estate
mortgage was executed to secure the Lipats' and BET's P583,854.00 loan only.

In their respective answers, Pacific Bank and Trinidad alleged in common that petitioners
Lipat cannot evade payments of the value of the promissory notes, trust receipt, and
export bills with their property because they and the BEC are one and the same, the latter
being a family corporation. Respondent Trinidad further claimed that he was a buyer in
good faith and for value and that petitioners are estopped from denying BEC's existence
after holding themselves out as a corporation.

notes, trust receipt, and export bills as the mortgage contract equally applies to additional
or new loans, discounting lines, overdrafts, and credit accommodations which petitioners
subsequently obtained from Pacific Bank.

After trial on the merits, the RTC dismissed the complaint, thus:

Hence, this petition, with petitioners submitting that the court a quo erred

WHEREFORE, this Court holds that in view of the facts contained in the record, the
complaint filed in this case must be, as is hereby, dismissed. Plaintiffs however has
five (5) months and seventeen (17) days reckoned from the finality of this decision
within which to exercise their right of redemption. The writ of injunction issued is
automatically dissolved if no redemption is effected within that period.
The counterclaims and cross-claim are likewise dismissed for lack of legal and
factual basis.
No costs.

The Lipats then moved for reconsideration, but this was denied by the appellate court in its
Resolution of February 23, 2000.10

1) . . . IN HOLDING THAT THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE

FICTION APPLIES IN THIS CASE.
2) . . . IN HOLDING THAT PETITIONERS' PROPERTY CAN BE HELD LIABLE UNDER
THE REAL ESTATE MORTGAGE NOT ONLY FOR THE AMOUNT OF P583,854.00 BUT
ALSO FOR THE FULL VALUE OF PROMISSORY NOTES, TRUST RECEIPTS AND
EXPORT BILLS OF BELA'S EXPORT CORPORATION.
3) . . . IN HOLDING THAT "THE IMPOSITION OF 15% ATTORNEY'S FEES IN THE
EXTRA-JUDICIAL FORECLOSURE IS BEYOND THIS COURT'S JURISDICTION FOR IT
IS BEING RAISED FOR THE FIRST TIME IN THIS APPEAL."

IT IS SO ORDERED.7
The trial court ruled that there was convincing and conclusive evidence proving that BEC
was a family corporation of the Lipats. As such, it was a mere extension of petitioners'
personality and business and a mere alter ego or business conduit of the Lipats established
for their own benefit. Hence, to allow petitioners to invoke the theory of separate corporate
personality would sanction its use as a shield to further an end subversive of justice. 8 Thus,
the trial court pierced the veil of corporate fiction and held that Bela's Export Corporation
and petitioners (Lipats) are one and the same. Pacific Bank had transacted business with
both BET and BEC on the supposition that both are one and the same. Hence, the Lipats
were estopped from disclaiming any obligations on the theory of separate personality of
corporations, which is contrary to principles of reason and good faith.
The Lipats timely appealed the RTC decision to the Court of Appeals in CA-G.R. CV No.
41536. Said appeal, however, was dismissed by the appellate court for lack of merit. The
Court of Appeals found that there was ample evidence on record to support the application
of the doctrine of piercing the veil of corporate fiction. In affirming the findings of the RTC,
the appellate court noted that Mrs. Lipat had full control over the activities of the
corporation and used the same to further her business interests. 9 In fact, she had benefited
from the loans obtained by the corporation to finance her business. It also found
unnecessary a board resolution authorizing Teresita Lipat to secure loans from Pacific Bank
on behalf of BEC because the corporation's by-laws allowed such conduct even without a
board resolution. Finally, the Court of Appeals ruled that the mortgage property was not
only liable for the original loan of P583,854.00 but likewise for the value of the promissory

4) . . . IN HOLDING PETITIONER ALFREDO LIPAT LIABLE TO PAY THE DISPUTED

PROMISSORY NOTES, THE DOLLAR ACCOMMODATIONS AND TRUST RECEIPTS
DESPITE THE EVIDENT FACT THAT THEY WERE NOT SIGNED BY HIM AND
THEREFORE ARE NOT VALID OR ARE NOT BINDING TO HIM.
5) . . . IN DENYING PETITIONERS' MOTION FOR RECONSIDERATION AND IN
HOLDING THAT SAID MOTION FOR RECONSIDERATION IS "AN UNAUTHORIZED
MOTION, A MERE SCRAP OF PAPER WHICH CAN NEITHER BIND NOR BE OF ANY
CONSEQUENCE TO APPELLANTS."11
In sum, the following are the relevant issues for our resolution:
1. Whether or not the doctrine of piercing the veil of corporate fiction is applicable in this
case;
2. Whether or not petitioners' property under the real estate mortgage is liable not only for
the amount of P583,854.00 but also for the value of the promissory notes, trust receipt,
and export bills subsequently incurred by BEC; and
3. Whether or not petitioners are liable to pay the 15% attorney's fees stipulated in the
deed of real estate mortgage.

On the first issue, petitioners contend that both the appellate and trial courts erred in
holding them liable for the obligations incurred by BEC through the application of the
doctrine of piercing the veil of corporate fiction absent any clear showing of fraud on their
part.
Respondents counter that there is clear and convincing evidence to show fraud on part of
petitioners given the findings of the trial court, as affirmed by the Court of Appeals, that
BEC was organized as a business conduit for the benefit of petitioners.
Petitioners' contentions fail to persuade this Court. A careful reading of the judgment of the
RTC and the resolution of the appellate court show that in finding petitioners' mortgaged
property liable for the obligations of BEC, both courts below relied upon the alter ego
doctrine or instrumentality rule, rather than fraud in piercing the veil of corporate fiction.
When the corporation is the mere alter ego or business conduit of a person, the separate
personality of the corporation may be disregarded.12 This is commonly referred to as the
"instrumentality rule" or the alter ego doctrine, which the courts have applied in
disregarding the separate juridical personality of corporations. As held in one case,
Where one corporation is so organized and controlled and its affairs are conducted
so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the
corporate entity of the 'instrumentality' may be disregarded. The control necessary
to invoke the rule is not majority or even complete stock control but such
domination of finances, policies and practices that the controlled corporation has,
so to speak, no separate mind, will or existence of its own, and is but a conduit for
its principal. x x x .13
We find that the evidence on record demolishes, rather than buttresses, petitioners'
contention that BET and BEC are separate business entities. Note that Estelita Lipat
admitted that she and her husband, Alfredo, were the owners of BET 14 and were two of the
incorporators and majority stockholders of BEC. 15 It is also undisputed that Estelita Lipat
executed a special power of attorney in favor of her daughter, Teresita, to obtain loans and
credit lines from Pacific Bank on her behalf.16 Incidentally, Teresita was designated as
executive-vice president and general manager of both BET and BEC, respectively.17 We note
further that: (1) Estelita and Alfredo Lipat are the owners and majority shareholders of BET
and BEC, respectively;18 (2) both firms were managed by their daughter, Teresita; 19 (3)
both firms were engaged in the garment business, supplying products to "Mystical
Fashion," a U.S. firm established by Estelita Lipat; (4) both firms held office in the same
building owned by the Lipats;20 (5) BEC is a family corporation with the Lipats as its
majority stockholders; (6) the business operations of the BEC were so merged with those
of Mrs. Lipat such that they were practically indistinguishable; (7) the corporate funds were
held by Estelita Lipat and the corporation itself had no visible assets; (8) the board of
directors of BEC was composed of the Burgos and Lipat family members; 21 (9) Estelita had
full control over the activities of and decided business matters of the corporation; 22 and
that (10) Estelita Lipat had benefited from the loans secured from Pacific Bank to finance

her business abroad23 and from the export bills secured by BEC for the account of "Mystical
Fashion."24 It could not have been coincidental that BET and BEC are so intertwined with
each other in terms of ownership, business purpose, and management. Apparently, BET
and BEC are one and the same and the latter is a conduit of and merely succeeded the
former. Petitioners' attempt to isolate themselves from and hide behind the corporate
personality of BEC so as to evade their liabilities to Pacific Bank is precisely what the
classical doctrine of piercing the veil of corporate entity seeks to prevent and remedy. In
our view, BEC is a mere continuation and successor of BET, and petitioners cannot evade
their obligations in the mortgage contract secured under the name of BEC on the pretext
that it was signed for the benefit and under the name of BET. We are thus constrained to
rule that the Court of Appeals did not err when it applied the instrumentality doctrine in
piercing the corporate veil of BEC.
On the second issue, petitioners contend that their mortgaged property should not be made
liable for the subsequent credit lines and loans incurred by BEC because, first, it was not
covered by the mortgage contract of BET which only covered the loan of P583,854.00 and
which allegedly had already been paid; and, second, it was secured by Teresita Lipat
without any authorization or board resolution of BEC.
We find petitioners' contention untenable. As found by the Court of Appeals, the mortgaged
property is not limited to answer for the loan of P583,854.00. Thus:
Finally, the extent to which the Lipats' property can be held liable under the real
estate mortgage is not limited to P583,854.00. It can be held liable for the value of
the promissory notes, trust receipt and export bills as well. For the mortgage was
executed not only for the purpose of securing the Bela's Export Trading's original
loan of P583,854.00, but also for "other additional or new loans, discounting lines,
overdrafts and credit accommodations, of whatever amount, which the Mortgagor
and/or Debtor may subsequently obtain from the mortgagee as well as any renewal
or extension by the Mortgagor and/or Debtor of the whole or part of said original,
additional or new loans, discounting lines, overdrafts and other credit
accommodations, including interest and expenses or other obligations of the
Mortgagor and/or Debtor owing to the Mortgagee, whether directly, or indirectly
principal or secondary, as appears in the accounts, books and records of the
mortgagee.25
As a general rule, findings of fact of the Court of Appeals are final and conclusive, and
cannot be reviewed on appeal by the Supreme Court, provided they are borne out by the
record or based on substantial evidence.26 As noted earlier, BEC merely succeeded BET as
petitioners' alter ego; hence, petitioners' mortgaged property must be held liable for the
subsequent loans and credit lines of BEC.
Further, petitioners' contention that the original loan had already been paid, hence, the
mortgaged property should not be made liable to the loans of BEC, is unsupported by any

substantial evidence other than Estelita Lipat's self-serving testimony. Two disputable
presumptions under the rules on evidence weigh against petitioners, namely: (a) that a
person takes ordinary care of his concerns; 27 and (b) that things have happened according
to the ordinary course of nature and the ordinary habits of life. 28 Here, if the original loan
had indeed been paid, then logically, petitioners would have asked from Pacific Bank for the
required documents evidencing receipt and payment of the loans and, as owners of the
mortgaged property, would have immediately asked for the cancellation of the mortgage in
the ordinary course of things. However, the records are bereft of any evidence contradicting
or overcoming said disputable presumptions.
Petitioners contend further that the mortgaged property should not bind the loans and
credit lines obtained by BEC as they were secured without any proper authorization or
board resolution. They also blame the bank for its laxity and complacency in not requiring a
board resolution as a requisite for approving the loans.
Such contentions deserve scant consideration.
Firstly, it could not have been possible for BEC to release a board resolution since per
admissions by both petitioner Estelita Lipat and Alice Burgos, petitioners' rebuttal witness,
no business or stockholder's meetings were conducted nor were there election of officers
held since its incorporation. In fact, not a single board resolution was passed by the
corporate board29 and it was Estelita Lipat and/or Teresita Lipat who decided business
matters.30
Secondly, the principle of estoppel precludes petitioners from denying the validity of the
transactions entered into by Teresita Lipat with Pacific Bank, who in good faith, relied on
the authority of the former as manager to act on behalf of petitioner Estelita Lipat and both
BET and BEC. While the power and responsibility to decide whether the corporation should
enter into a contract that will bind the corporation is lodged in its board of directors,
subject to the articles of incorporation, by-laws, or relevant provisions of law, yet, just as a
natural person may authorize another to do certain acts for and on his behalf, the board of
directors may validly delegate some of its functions and powers to officers, committees, or
agents. The authority of such individuals to bind the corporation is generally derived from
law, corporate by-laws, or authorization from the board, either expressly or impliedly by
habit, custom, or acquiescence in the general course of business. 31 Apparent authority, is
derived not merely from practice. Its existence may be ascertained through (1) the general
manner in which the corporation holds out an officer or agent as having the power to act
or, in other words, the apparent authority to act in general, with which it clothes him; or
(2) the acquiescence in his acts of a particular nature, with actual or constructive
knowledge thereof, whether within or beyond the scope of his ordinary powers. 32
In this case, Teresita Lipat had dealt with Pacific Bank on the mortgage contract by virtue
of a special power of attorney executed by Estelita Lipat. Recall that Teresita Lipat acted as
the manager of both BEC and BET and had been deciding business matters in the absence

of Estelita Lipat. Further, the export bills secured by BEC were for the benefit of "Mystical
Fashion" owned by Estelita Lipat.33 Hence, Pacific Bank cannot be faulted for relying on the
same authority granted to Teresita Lipat by Estelita Lipat by virtue of a special power of
attorney. It is a familiar doctrine that if a corporation knowingly permits one of its officers
or any other agent to act within the scope of an apparent authority, it holds him out to the
public as possessing the power to do those acts; thus, the corporation will, as against
anyone who has in good faith dealt with it through such agent, be estopped from denying
the agent's authority.34
We find no necessity to extensively deal with the liability of Alfredo Lipat for the subsequent
credit lines of BEC. Suffice it to state that Alfredo Lipat never disputed the validity of the
real estate mortgage of the original loan; hence, he cannot now dispute the subsequent
loans obtained using the same mortgage contract since it is, by its very terms, a continuing
mortgage contract.
On the third and final issue, petitioners assail the decision of the Court of Appeals for not
taking cognizance of the issue on attorney's fees on the ground that it was raised for the
first time on appeal. We find the conclusion of the Court of Appeals to be in accord with
settled jurisprudence. Basic is the rule that matters not raised in the complaint cannot be
raised for the first time on appeal.35 A close perusal of the complaint yields no allegations
disputing the attorney's fees imposed under the real estate mortgage and petitioners
cannot now allege that they have impliedly disputed the same when they sought the
annulment of the contract.
In sum, we find no reversible error of law committed by the Court of Appeals in rendering
the decision and resolution herein assailed by petitioners.
WHEREFORE, the petition is DENIED. The Decision dated October 21, 1999 and the
Resolution dated February 23, 2000 of the Court of Appeals in CA-G.R. CV No. 41536 are
AFFIRMED. Costs against petitioners.
SO ORDERED.

G.R. No. 170689

March 17, 2009

PANTRANCO EMPLOYEES ASSOCIATION (PEA-PTGWO) and PANTRANCO

RETRENCHED EMPLOYEES ASSOCIATION (PANREA), Petitioners, vs. NATIONAL

LABOR RELATIONS COMMISSION (NLRC), PANTRANCO NORTH EXPRESS, INC.

(PNEI), PHILIPPINE NATIONAL BANK (PNB), PHILIPPINE NATIONAL BANKMANAGEMENT AND DEVELOPMENT CORPORATION (PNB-MADECOR), and MEGA
PRIME REALTY AND HOLDINGS CORPORATION (MEGA PRIME), Respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 170705

March 17, 2009

PHILIPPINE NATIONAL BANK, Petitioner, vs. PANTRANCO EMPLOYEES

ASSOCIATION, INC. (PEA-PTGWO), PANTRANCO RETRENCHED EMPLOYEES
ASSOCIATION (PANREA) AND PANTRANCO ASSOCIATION OF CONCERNED
EMPLOYEES (PACE), ET AL., PHILIPPINE NATIONAL BANK-MANAGEMENT
DEVELOPMENT CORPORATION (PNB-MADECOR), and MEGA PRIME REALTY
HOLDINGS, INC., Respondents.
DECISION
NACHURA, J.:
Before us are two consolidated petitions assailing the Court of Appeals (CA) Decision 1 dated
June 3, 2005 and its Resolution2 dated December 7, 2005 in CA-G.R. SP No. 80599.
In G.R. No. 170689, the Pantranco Employees Association (PEA) and Pantranco Retrenched
Employees Association (PANREA) pray that the CA decision be set aside and a new one be
entered, declaring the Philippine National Bank (PNB) and PNB Management and
Development Corporation (PNB-Madecor) jointly and solidarily liable for the
P722,727,150.22 National Labor Relations Commission (NLRC) judgment in favor of the
Pantranco North Express, Inc. (PNEI) employees;3 while in G.R. No. 170705, PNB prays
that the auction sale of the Pantranco properties be declared null and void. 4
The facts of the case, as found by the CA,5 and established in Republic of the Phils. v.
NLRC,6 Pantranco North Express, Inc. v. NLRC,7 and PNB MADECOR v. Uy,8 follow:
The Gonzales family owned two corporations, namely, the PNEI and Macris Realty
Corporation (Macris). PNEI provided transportation services to the public, and had its bus
terminal at the corner of Quezon and Roosevelt Avenues in Quezon City. The terminal stood
on four valuable pieces of real estate (known as Pantranco properties) registered under the
name of Macris.9 The Gonzales family later incurred huge financial losses despite attempts
of rehabilitation and loan infusion. In March 1975, their creditors took over the
management of PNEI and Macris. By 1978, full ownership was transferred to one of their
creditors, the National Investment Development Corporation (NIDC), a subsidiary of the
PNB.

Macris was later renamed as the National Realty Development Corporation (Naredeco) and
eventually merged with the National Warehousing Corporation (Nawaco) to form the new
PNB subsidiary, the PNB-Madecor.
In 1985, NIDC sold PNEI to North Express Transport, Inc. (NETI), a company owned by
Gregorio Araneta III. In 1986, PNEI was among the several companies placed under
sequestration by the Presidential Commission on Good Government (PCGG) shortly after
the historic events in EDSA. In January 1988, PCGG lifted the sequestration order to pave
the way for the sale of PNEI back to the private sector through the Asset Privatization Trust
(APT). APT thus took over the management of PNEI.
In 1992, PNEI applied with the Securities and Exchange Commission (SEC) for suspension
of payments. A management committee was thereafter created which recommended to the
SEC the sale of the company through privatization. As a cost-saving measure, the
committee likewise suggested the retrenchment of several PNEI employees. Eventually,
PNEI ceased its operation. Along with the cessation of business came the various labor
claims commenced by the former employees of PNEI where the latter obtained favorable
decisions.
On July 5, 2002, the Labor Arbiter issued the Sixth Alias Writ of Execution 10 commanding
the NLRC Sheriffs to levy on the assets of PNEI in order to satisfy the P722,727,150.22 due
its former employees, as full and final satisfaction of the judgment awards in the labor
cases. The sheriffs were likewise instructed to proceed against PNB, PNB-Madecor and
Mega Prime.11 In implementing the writ, the sheriffs levied upon the four valuable pieces of
real estate located at the corner of Quezon and Roosevelt Avenues, on which the former
Pantranco Bus Terminal stood. These properties were covered by Transfer Certificate of Title
(TCT) Nos. 87881-87884, registered under the name of PNB-Madecor.12 Subsequently,
Notice of Sale of the foregoing real properties was published in the newspaper and the sale
was set on July 31, 2002. Having been notified of the auction sale, motions to quash the
writ were separately filed by PNB-Madecor and Mega Prime, and PNB. They likewise filed
their Third-Party Claims.13 PNB-Madecor anchored its motion on its right as the registered
owner of the Pantranco properties, and Mega Prime as the successor-in-interest. For its
part, PNB sought the nullification of the writ on the ground that it was not a party to the
labor case.14 In its Third-Party Claim, PNB alleged that PNB-Madecor was indebted to the
former and that the Pantranco properties
would answer for such debt. As such, the scheduled auction sale of the aforesaid properties
was not legally in order.15
On September 10, 2002, the Labor Arbiter declared that the subject Pantranco properties
were owned by PNB-Madecor. It being a corporation with a distinct and separate
personality, its assets could not answer for the liabilities of PNEI. Considering, however,
that PNB-Madecor executed a promissory note in favor of PNEI for P7,884,000.00, the writ
of execution to the extent of the said amount was concerned was considered valid. 16

PNBs third-party claim to nullify the writ on the ground that it has an interest in the
Pantranco properties being a creditor of PNB-Madecor, on the other hand, was denied
because it only had an inchoate interest in the properties. 17
The dispositive portion of the Labor Arbiters September 10, 2002 Resolution is quoted
hereunder:
WHEREFORE, the Third Party Claim of PNB Madecor and/or Mega Prime Holdings, Inc. is
hereby GRANTED and concomitantly the levies made by the sheriffs of the NLRC on the
properties of PNB Madecor should be as it (sic) is hereby LIFTED subject to the payment by
PNB Madecor to the complainants the amount of P7,884,000.00.
The Motion to Quash and Third Party Claim of PNB is hereby DENIED.
The Motion to Quash of PNB Madecor and Mega Prime Holdings, Inc. is hereby PARTIALLY
GRANTED insofar as the amount of the writ exceeds P7,884,000.00.
The Motion for Recomputation and Examination of Judgment Awards is hereby DENIED for
want of merit.
The Motion to Expunge from the Records claimants/complainants Opposition dated August
3, 2002 is hereby DENIED for lack of merit.
SO ORDERED.18
On appeal to the NLRC, the same was denied and the Labor Arbiters disposition was
affirmed.19 Specifically, the NLRC concluded as follows:
(1) PNB-Madecor and Mega Prime contended that it would be impossible for them
to comply with the requirement of the labor arbiter to pay to the PNEI employees
the amount of P7.8 million as a condition to the lifting of the levy on the properties,
since the credit was already garnished by Gerardo Uy and other creditors of PNEI.
The NLRC found no evidence that Uy had satisfied his judgment from the
promissory note, and opined that even if the credit was in custodia legis, the claim
of the PNEI employees should enjoy preference under the Labor Code.
(2) The PNEI employees contested the finding that PNB-Madecor was indebted to
the PNEI for only P7.8 million without considering the accrual of interest. But the
NLRC said that there was no evidence that demand was made as a basis for
reckoning interest.
(3) The PNEI employees further argued that the labor arbiter may not properly
conclude from a decision of Judge Demetrio Macapagal Jr. of the RTC of Quezon
City that PNB-Madecor was the owner of the properties as his decision was

reconsidered by the next presiding judge, nor from a decision of the Supreme Court
that PNEI was a mere lessee of the properties, the fact being that the transfer of
the properties to PNB-Madecor was done to avoid satisfaction of the claims of the
employees with the NLRC and that as a result of a civil case filed by Mega Prime,
the subsequent sale of the properties by PNB to Mega Prime was rescinded. The
NLRC pointed out that while the Macapagal decision was set aside by Judge
Bruselas and hence, his findings could not be invoked by the labor arbiter, the titles
of PNB-Madecor are conclusive and there is no evidence that PNEI had ever been
an owner. The Supreme Court had observed in its decision that PNEI owed back
rentals of P8.7 million to PNB-Madecor.
(4) The PNEI employees faulted the labor arbiter for not finding that PNEI, PNB,
PNB-Madecor and Mega Prime were all jointly and severally liable for their claims.
The NLRC underscored the fact that PNEI and Macris were subsidiaries of NIDC and
had passed through and were under the Asset Privatization Trust (APT) when the
labor claims accrued. The labor arbiter was correct in not granting PNBs third-party
claim because at the time the causes of action accrued, the PNEI was managed by
a management committee appointed by the PNB as the new owner of PNRI (sic)
and Macris through a deed of assignment or transfer of ownership. The NLRC says
at length that the same is not true with PNB-Madecor which is now the registered
owner of the properties.20
The parties separate motions for reconsideration were likewise denied. 21 Thereafter, the
matter was elevated to the CA by PANREA, PEA-PTGWO and the Pantranco Association of
Concerned Employees. The latter group, however, later withdrew its petition. The former
employees petition was docketed as CA-G.R. SP No. 80599.
PNB-Madecor and Mega Prime likewise filed their separate petition before the CA which was
docketed as CA-G.R. SP No. 80737, but the same was dismissed. 22
In view of the P7,884,000.00 debt of PNB-Madecor to PNEI, on June 23, 2004, an auction
sale was conducted over the Pantranco properties to satisfy the claim of the PNEI
employees, wherein CPAR Realty was adjudged as the highest bidder.23
On June 3, 2005, the CA rendered the assailed decision affirming the NLRC resolutions.
The appellate court pointed out that PNB, PNB-Madecor and Mega Prime are corporations
with personalities separate and distinct from PNEI. As such, there being no cogent reason
to pierce the veil of corporate fiction, the separate personalities of the above corporations
should be maintained. The CA added that the Pantranco properties were never owned by
PNEI; rather, their titles were registered under the name of PNB-Madecor. If PNB and PNBMadecor could not answer for the liabilities of PNEI, with more reason should Mega Prime
not be held liable being a mere successor-in-interest of PNB-Madecor.

Unsatisfied, PEA-PTGWO and PANREA filed their motion for reconsideration; 24 while PNB
filed its Partial Motion for Reconsideration.25 PNB pointed out that PNB-Madecor was made
to answer for P7,884,000.00 to the PNEI employees by virtue of the promissory note it
(PNB-Madecor) earlier executed in favor of PNEI. PNB, however, questioned the June 23,
2004 auction sale as the P7.8 million debt had already been satisfied pursuant to this
Courts decision in PNB MADECOR v. Uy.26

the subject properties were not owned by PNEI, hence, the execution sale thereof was not
validly effected.33

Both motions were denied by the appellate court. 27

Stripped of the non-essentials, the sole issue for resolution raised by the former PNEI
employees is whether they can attach the properties (specifically the Pantranco properties)
of PNB, PNB-Madecor and Mega Prime to satisfy their unpaid labor claims against PNEI.

In two separate petitions, PNB and the former PNEI employees come up to this Court
assailing the CA decision and resolution. The former PNEI employees raise the lone error,
thus:
The Honorable Court of Appeals palpably departed from the established rules and
jurisprudence in ruling that private respondents Pantranco North Express, Inc. (PNEI),
Philippine National Bank (PNB), Philippine National Bank Management and Development
Corporation (PNB-MADECOR), Mega Prime Realty and Holdings, Inc. (Mega Prime) are not
jointly and severally answerable to the P722,727,150.22 Million NLRC money judgment
awards in favor of the 4,000 individual members of the Petitioners. 28
They claim that PNB, through PNB-Madecor, directly benefited from the operation of PNEI
and had complete control over the funds of PNEI. Hence, they are solidarily answerable
with PNEI for the unpaid money claims of the employees. 29 Citing A.C. Ransom Labor
Union-CCLU v. NLRC,30 the employees insist that where the employer corporation ceases to
exist and is no longer able to satisfy the judgment awards in favor of its employees, the
owner of the employer corporation should be made jointly and severally liable. 31 They
added that malice or bad faith need not be proven to make the owners liable.
On the other hand, PNB anchors its petition on this sole assignment of error, viz.:
THE AUCTION SALE OF THE PROPERTY COVERED BY TCT NO. 87884 INTENDED TO
PARTIALLY SATISFY THE CLAIMS OF FORMER WORKERS OF PNEI IN THE AMOUNT OF
P7,884,000.00 (THE AMOUNT OF PNB-MADECORS PROMISSORY NOTE IN FAVOR OF PNEI)
IS NOT IN ORDER AS THE SAID PROPERTY IS NOT OWNED BY PNEI. FURTHER, THE SAID
PROMISSORY NOTE HAD ALREADY BEEN GARNISHED IN FAVOR OF GERARDO C. UY WHICH
LED TO THREE (3) PROPERTIES UNDER THE NAME OF PNB-MADECOR, NAMELY TCT NOS.
87881, 87882 AND 87883, BEING LEVIED AND SOLD ON EXECUTION IN THE "PNBMADECOR VS. UY" CASE (363 SCRA 128 [2001]) AND "GERARDO C. UY VS. PNEI" (CIVIL
CASE NO. 95-72685, RTC MANILA, BRANCH 38).32
PNB insists that the Pantranco properties could no longer be levied upon because the
promissory note for which the Labor Arbiter held PNB-Madecor liable to PNEI, and in turn to
the latters former employees, had already been satisfied in favor of Gerardo C. Uy. It
added that the properties were in fact awarded to the highest bidder. Besides, says PNB,

Both petitions must fail.

G.R. No. 170689

We answer in the negative.

First, the subject property is not owned by the judgment debtor, that is, PNEI. Nowhere in
the records was it shown that PNEI owned the Pantranco properties. Petitioners, in fact,
never alleged in any of their pleadings the fact of such ownership. What was established,
instead, in PNB MADECOR v. Uy34 and PNB v. Mega Prime Realty and Holdings
Corporation/Mega Prime Realty and Holdings Corporation v. PNB 35 was that the properties
were owned by Macris, the predecessor of PNB-Madecor. Hence, they cannot be pursued
against by the creditors of PNEI.
We would like to stress the settled rule that the power of the court in executing judgments
extends only to properties unquestionably belonging to the judgment debtor alone. 36 To be
sure, one mans goods shall not be sold for another mans debts. 37 A sheriff is not
authorized to attach or levy on property not belonging to the judgment debtor, and even
incurs liability if he wrongfully levies upon the property of a third person. 38
Second, PNB, PNB-Madecor and Mega Prime are corporations with personalities separate
and distinct from that of PNEI. PNB is sought to be held liable because it acquired PNEI
through NIDC at the time when PNEI was suffering financial reverses. PNB-Madecor is
being made to answer for petitioners labor claims as the owner of the subject Pantranco
properties and as a subsidiary of PNB. Mega Prime is also included for having acquired
PNBs shares over PNB-Madecor.
The general rule is that a corporation has a personality separate and distinct from those of
its stockholders and other corporations to which it may be connected. 39 This is a fiction
created by law for convenience and to prevent injustice. 40 Obviously, PNB, PNB-Madecor,
Mega Prime, and PNEI are corporations with their own personalities. The "separate
personalities" of the first three corporations had been recognized by this Court in PNB v.
Mega Prime Realty and Holdings Corporation/Mega Prime Realty and Holdings Corporation
v. PNB41 where we stated that PNB was only a stockholder of PNB-Madecor which later sold
its shares to Mega Prime; and that PNB-Madecor was the owner of the Pantranco
properties. Moreover, these corporations are registered as separate entities and, absent
any valid reason, we maintain their separate identities and we cannot treat them as one.

Neither can we merge the personality of PNEI with PNB simply because the latter acquired
the former. Settled is the rule that where one corporation sells or otherwise transfers all its
assets to another corporation for value, the latter is not, by that fact alone, liable for the
debts and liabilities of the transferor.42
Lastly, while we recognize that there are peculiar circumstances or valid grounds that may
exist to warrant the piercing of the corporate veil, 43 none applies in the present case
whether between PNB and PNEI; or PNB and PNB-Madecor.

corporation on the strength of the definition of an employer in Article 212(c) (now Article
212[e]) of the Labor Code. Under the said provision, employer includes any person acting
in the interest of an employer, directly or indirectly, but does not include any labor
organization or any of its officers or agents except when acting as employer. It was clarified
in Carag and McLeod that Article 212(e) of the Labor Code, by itself, does not make a
corporate officer personally liable for the debts of the corporation. It added that the
governing law on personal liability of directors or officers for debts of the corporation is still
Section 3152 of the Corporation Code.

Under the doctrine of "piercing the veil of corporate fiction," the court looks at the
corporation as a mere collection of individuals or an aggregation of persons undertaking
business as a group, disregarding the separate juridical personality of the corporation
unifying the group.44 Another formulation of this doctrine is that when two business
enterprises are owned, conducted and controlled by the same parties, both law and equity
will, when necessary to protect the rights of third parties, disregard the legal fiction that
two corporations are distinct entities and treat them as identical or as one and the same. 45

More importantly, as aptly observed by this Court in AC Ransom, it appears that Ransom,
foreseeing the possibility or probability of payment of backwages to its employees,
organized Rosario to replace Ransom, with the latter to be eventually phased out if the
strikers win their case. The execution could not be implemented against Ransom because of
the disposition posthaste of its leviable assets evidently in order to evade its just and due
obligations.53 Hence, the Court sustained the piercing of the corporate veil and made the
officers of Ransom personally liable for the debts of the latter.

Whether the separate personality of the corporation should be pierced hinges on obtaining
facts appropriately pleaded or proved. However, any piercing of the corporate veil has to be
done with caution, albeit the Court will not hesitate to disregard the corporate veil when it
is misused or when necessary in the interest of justice. After all, the concept of corporate
entity was not meant to promote unfair objectives.46

Clearly, what can be inferred from the earlier cases is that the doctrine of piercing the
corporate veil applies only in three (3) basic areas, namely: 1) defeat of public convenience
as when the corporate fiction is used as a vehicle for the evasion of an existing obligation;
2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or
defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a
mere alter ego or business conduit of a person, or where the corporation is so organized
and controlled and its affairs are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation. 54 In the absence of malice, bad faith, or
a specific provision of law making a corporate officer liable, such corporate officer cannot
be made personally liable for corporate liabilities.55

As between PNB and PNEI, petitioners want us to disregard their separate personalities,
and insist that because the company, PNEI, has already ceased operations and there is no
other way by which the judgment in favor of the employees can be satisfied, corporate
officers can be held jointly and severally liable with the company. Petitioners rely on the
pronouncement of this Court in A.C. Ransom Labor Union-CCLU v. NLRC 47 and subsequent
cases.48
This reliance fails to persuade. We find the aforesaid decisions inapplicable to the instant
case.
For one, in the said cases, the persons made liable after the companys cessation of
operations were the officers and agents of the corporation. The rationale is that, since the
corporation is an artificial person, it must have an officer who can be presumed to be the
employer, being the person acting in the interest of the employer. The corporation, only in
the technical sense, is the employer.49 In the instant case, what is being made liable is
another corporation (PNB) which acquired the debtor corporation (PNEI).
Moreover, in the recent cases Carag v. National Labor Relations Commission and McLeod
v. National Labor Relations Commission,51 the Court explained the doctrine laid down in AC
Ransom relative to the personal liability of the officers and agents of the employer for the
debts of the latter. In AC Ransom, the Court imputed liability to the officers of the
50

Applying the foregoing doctrine to the instant case, we quote with approval the CA
disposition in this wise:
It would not be enough, then, for the petitioners in this case, the PNEI employees, to rest
on their laurels with evidence that PNB was the owner of PNEI. Apart from proving
ownership, it is necessary to show facts that will justify us to pierce the veil of corporate
fiction and hold PNB liable for the debts of PNEI. The burden undoubtedly falls on the
petitioners to prove their affirmative allegations. In line with the basic jurisprudential
principles we have explored, they must show that PNB was using PNEI as a mere adjunct or
instrumentality or has exploited or misused the corporate privilege of PNEI.
We do not see how the burden has been met. Lacking proof of a nexus apart from mere
ownership, the petitioners have not provided us with the legal basis to reach the assets of
corporations separate and distinct from PNEI.56

Assuming, for the sake of argument, that PNB may be held liable for the debts of PNEI,
petitioners still cannot proceed against the Pantranco properties, the same being owned by
PNB-Madecor, notwithstanding the fact that PNB-Madecor was a subsidiary of PNB. The
general rule remains that PNB-Madecor has a personality separate and distinct from PNB.
The mere fact that a corporation owns all of the stocks of another corporation, taken alone,
is not sufficient to justify their being treated as one entity. If used to perform legitimate
functions, a subsidiarys separate existence shall be respected, and the liability of the
parent corporation as well as the subsidiary will be confined to those arising in their
respective businesses.57
In PNB v. Ritratto Group, Inc.,58 we outlined the circumstances which are useful in the
determination of whether a subsidiary is but a mere instrumentality of the parentcorporation, to wit:
1. The parent corporation owns all or most of the capital stock of the subsidiary;
2. The parent and subsidiary corporations have common directors or officers;
3. The parent corporation finances the subsidiary;
4. The parent corporation subscribes to all the capital stock of the subsidiary or
otherwise causes its incorporation;
5. The subsidiary has grossly inadequate capital;
6. The parent corporation pays the salaries and other expenses or losses of the
subsidiary;
7. The subsidiary has substantially no business except with the parent corporation
or no assets except those conveyed to or by the parent corporation;
8. In the papers of the parent corporation or in the statements of its officers, the
subsidiary is described as a department or division of the parent corporation, or its
business or financial responsibility is referred to as the parent corporations own;
9. The parent corporation uses the property of the subsidiary as its own;
10. The directors or executives of the subsidiary do not act independently in the
interest of the subsidiary, but take their orders from the parent corporation;
11. The formal legal requirements of the subsidiary are not observed.

None of the foregoing circumstances is present in the instant case. Thus, piercing of PNBMadecors corporate veil is not warranted. Being a mere successor-in-interest of PNBMadecor, with more reason should no liability attach to Mega Prime.
G.R. No. 170705
In its petition before this Court, PNB seeks the annulment of the June 23, 2004 execution
sale of the Pantranco properties on the ground that the judgment debtor (PNEI) never
owned said lots. It likewise contends that the levy and the eventual sale on execution of
the subject properties was null and void as the promissory note on which PNB-Madecor was
made liable had already been satisfied.
It has been repeatedly stated that the Pantranco properties which were the subject of
execution sale were owned by Macris and later, the PNB-Madecor. They were never owned
by PNEI or PNB. Following our earlier discussion on the separate personalities of the
different corporations involved in the instant case, the only entity which has the right and
interest to question the execution sale and the eventual right to annul the same, if any, is
PNB-Madecor or its successor-in-interest. Settled is the rule that proceedings in court must
be instituted by the real party 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. 59 "Interest" within the meaning of
the rule means material interest, an interest in issue and to be affected by the decree, as
distinguished from mere interest in the question involved, or a mere incidental interest. 60
The interest of the party must also be personal and not one based on a desire to vindicate
the constitutional right of some third and unrelated party.61 Real interest, on the other
hand, means a present substantial interest, as distinguished from a mere expectancy or a
future, contingent, subordinate, or consequential interest. 62
Specifically, in proceedings to set aside an execution sale, the real party in interest is the
person who has an interest either in the property sold or the proceeds thereof. Conversely,
one who is not interested or is not injured by the execution sale cannot question its
validity.63
In justifying its claim against the Pantranco properties, PNB alleges that Mega Prime, the
buyer of its entire stockholdings in PNB-Madecor was indebted to it (PNB). Considering that
said indebtedness remains unpaid, PNB insists that it has an interest over PNB-Madecor
and Mega Primes assets.
Again, the contention is bereft of merit. While PNB has an apparent interest in Mega
Primes assets being the creditor of the latter for a substantial amount, its interest remains
inchoate and has not yet ripened into a present substantial interest, which would give it the
standing to maintain an action involving the subject properties. As aptly observed by the
Labor Arbiter, PNB only has an inchoate right to the properties of Mega Prime in case the

latter would not be able to pay its indebtedness. This is especially true in the instant case,
as the debt being claimed by PNB is secured by the accessory contract of pledge of the
entire stockholdings of Mega Prime to PNB-Madecor.64

MEL V. VELARDE, petitioner, vs. LOPEZ, INC., respondent.

The Court further notes that the Pantranco properties (or a portion thereof ) were sold on
execution to satisfy the unpaid obligation of PNB-Madecor to PNEI. PNB-Madecor was thus
made liable to the former PNEI employees as the judgment debtor of PNEI. It has long
been established in PNB-Madecor v. Uy and other similar cases that PNB-Madecor had an
unpaid obligation to PNEI amounting to more or less P7 million which could be validly
pursued by the creditors of the latter. Again, this strengthens the proper parties right to
question the validity of the execution sale, definitely not PNB.

CARPIO-MORALES, J.:

Besides, the issue of whether PNB has a substantial interest over the Pantranco properties
has already been laid to rest by the Labor Arbiter.65 It is noteworthy that in its Resolution
dated September 10, 2002, the Labor Arbiter denied PNBs Third-Party Claim primarily
because PNB only has an inchoate right over the Pantranco properties. 66 Such conclusion
was later affirmed by the NLRC in its Resolution dated June 30, 2003. 67 Notwithstanding
said conclusion, PNB did not elevate the matter to the CA via a petition for review. Hence it
is presumed to be satisfied with the adjudication therein. 68 That decision of the NLRC has
become final as against PNB and can no longer be reviewed, much less reversed, by this
Court.69 This is in accord with the doctrine that a party who has not appealed cannot obtain
from the appellate court any affirmative relief other than the ones granted in the appealed
decision.70

On January 6, 1997, Eugenio Lopez Jr., then President of respondent Lopez, Inc., as
LENDER, and petitioner Mel Velarde, then General Manager of Sky Vision Corporation (Sky
Vision), a subsidiary of respondent, as BORROWER, forged a notarized loan agreement
covering the amount of ten million (P10,000,000.00) pesos. The agreement expressly
provided for, among other things, the manner of payment and the circumstances
constituting default which would give the lender the right to declare the loan together with
accrued interest immediately due and payable.3

WHEREFORE, premises considered, the petitions are hereby DENIED for lack of merit.
SO ORDERED.

DECISION

This petition for review on certiorari under Rule 45 of the Rules of Court, which seeks to
review the decision1 and resolution2 of the Court of Appeals, raises the issue of whether the
defendant in a complaint for collection of sum of money can raise a counterclaim for
retirement benefits, unpaid salaries and incentives, and other benefits arising from services
rendered by him in a subsidiary of the plaintiff corporation.

Sec. 6 of the agreement detailed what constituted an "event of default" as follows:

Section 6
Each of the following events and occurrences shall constitute an Event of Default
("Event of Default") under this Agreement:
a) the BORROWER fails to make payment when due and payable of any
amount he is obligated to pay under this Agreement;
b) the BORROWER fails to mortgage in favor of the LENDER real property
sufficient to cover the amount of the LOAN.4
As petitioner failed to pay the installments as they became due, respondent, apparently in
answer to a proposal of petitioner respecting the settlement of the loan, advised him by
letter dated July 15, 1998 that he may use his retirement benefits in Sky Vision in partial
settlement of his loan after he settles his accountabilities to the latter and gives his written
instructions to it (Sky Vision).5
Petitioner protested the computation indicated in the July 15, 1998 letter, he asserting that
the imputed unliquidated advances from Sky Vision had already been properly liquidated. 6

G.R. No. 153886

January 14, 2004

On August 18, 1998, respondent filed a complaint for collection of sum of money with
damages at the Regional Trial Court (RTC) of Pasig City against petitioner, alleging that

petitioner violated the above-quoted Section 6 of the loan agreement as he failed to put up
the needed collateral for the loan and pay the installments as they became due, and that
despite his receipt of letters of demand dated December 1, 1997 7 and January 13, 1998,8
he refused to pay.

respondent is not the real party-in-interest on the counterclaim and that there was failure
to show the presence of any of the circumstances to justify the application of the principle
of "piercing the veil of corporate fiction." The Orders of the trial court were thus set aside
and the counterclaims of petitioner were accordingly dismissed. 13

In his answer, petitioner alleged that the loan agreement did not reflect his true agreement
with respondent, it being merely a "cover document" to evidence the reward to him of ten
million pesos (P10,000,000.00) for his loyalty and excellent performance as General
Manager of Sky Vision and that the payment, if any was expected, was in the form of
continued service; and that it was when he was compelled by respondent to retire that the
form of payment agreed upon was rendered impossible, prompting the late Eugenio Lopez,
Jr. to agree that his retirement benefits from Sky Vision would instead be applied to the
loan.9

The Court of Appeals having denied petitioners motion for reconsideration, the instant
Petition for Review was filed which assigns the following errors:

By way of compulsory counterclaim, petitioner claimed that he was entitled to retirement

benefits from Sky Vision in the amount of P98,280,000.00, unpaid salaries in the amount of
P2,740,000.00, unpaid incentives in the amount of P500,000, unpaid share from the "net
income of Plaintiff corporation," equity in his service vehicle in the amount of P1,500,000,
reasonable return on the stock ownership plan for services rendered as General Manager,
and moral damages and attorneys fees.10
Petitioner thus prayed for the dismissal of the complaint and the award of the following
sums of money in the form of compulsory counterclaims:
1. P103,020,000.00, PLUS the value of Defendants stock options and unpaid share
from the net income with Plaintiff corporation (to be computed) as actual damages;

I.
THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE RTC BRANCH 155
ALLEGEDLY ACTED WITH GRAVE ABUSE OF DISCRETION IN ISSUING THE ORDERS DATED
JANUARY 3, 2000 AND OCTOBER 9, 2000 CONSIDERING THAT THE GROUNDS RAISED BY
RESPONDENT LOPEZ, INC. IN ITS PETITION FOR CERTIORARI INVOLVED MERE ERRORS OF
JUDGMENT AND NOT ERRORS OF JURISDICTION.
II.
THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT RESPONDENT LOPEZ, INC. IS
NOT THE REAL PARTY-IN-INTEREST AS PARTY-DEFENDANT ON THE COUNTERCLAIMS OF
PETITIONER VELARDE CONSIDERING THAT THE FILING OF RESPONDENT LOPEZ, INC.S
MANIFESTATION AND MOTION TO DISMISS COUNTERCLAIM HAD THE EFFECT OF
HYPOTHETICALLY ADMITTING THE TRUTH OF THE MATERIAL AVERMENTS OF THE ANSWER,
WHICH MATERIAL AVERMENTS SUFFICIENTLY ALLEGED THAT RESPONDENT LOPEZ, INC.
COMMITTED ACTS WHICH SHOW THAT ITS SUBSIDIARY, SKY VISION, WAS A MERE
BUSINESS CONDUIT OR ALTER EGO OF THE FORMER, THUS, JUSTIFYING THE PIERCING
OF THE VEIL OF CORPORATE FICTION.

2. P15,000,000.00, as moral damages; and

III.
3. P1,500,000.00, as attorneys fees plus appearance fees and the costs of suit. 11
Respondent filed a manifestation and a motion to dismiss the counterclaim for want of
jurisdiction, which drew petitioner to assert in his comment and opposition thereto that the
veil of corporate fiction must be pierced to hold respondent liable for his counterclaims.
By Order of January 3, 2000, Branch 155 of the RTC of Pasig denied respondents motion to
dismiss the counterclaim on the following premises: A counterclaim being essentially a
complaint, the principle that a motion to dismiss hypothetically admits the allegations of
the complaint is applicable; the counterclaim is compulsory, hence, within its jurisdiction;
and there is identity of interest between respondent and Sky Vision to merit the piercing of
the veil of corporate fiction.12
Respondents motion for reconsideration of the trial courts Order of January 3, 2000 having
been denied, it filed a Petition for Certiorari at the Court of Appeals which held that

THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE COUNTERCLAIMS OF

PETITIONER VELARDE ARE NOT COMPULSORY.14
While petitioner correctly invokes the ruling in Atienza v. Court of Appeals15 to postulate
that not every denial of a motion to dismiss can be corrected by certiorari under Rule 65
and that, as a general rule, the remedy from such denial is to appeal in due course after a
decision has been rendered on the merits, there are exceptions thereto, as when the court
in denying the motion to dismiss acted without or in excess of jurisdiction or with patent
grave abuse of discretion,16 or when the assailed interlocutory order is patently erroneous
and the remedy of appeal would not afford adequate and expeditious relief,17 or when the
ground for the motion to dismiss is improper venue, 18 res judicata,19 or lack of jurisdiction20
as in the case at bar.

Early on, it bears noting, when the case was still with the trial court, respondent filed a
motion to dismiss the counterclaims to assail its jurisdiction, respondent asserting that the
counterclaims, being money claims arising from a labor relationship, are within the
exclusive competence of the National Labor Relations Commission. 21 On the other hand,
petitioner alleged that due to the tortuous manner he was coerced into retirement, it is the
Regional Trial Courts (RTCs) and not the National Labor Relations Commission which has
exclusive jurisdiction over his counterclaims.
In determining which has jurisdiction over a case, the averments of the
complaint/counterclaim, taken as a whole, are considered. 22 In his counterclaim, petitioner
alleged that:
xxx
29. It was only on July 15, 1998 that Lopez, Inc. submitted a computation of the
retirement benefit due to the Defendant. (Copy attached as ANNEX 4). Immediately
after receiving this computation, Defendant immediately informed Plaintiff of the
erroneous figure used as salary in the computation of benefits. This was done in a
telephone conversation with a certain Atty. Amina Amado of Lopez, Inc.
29.1 The Defendant also informed her that the so called "unliquidated advances
amounting to P422,922.87 since 1995" had all been properly liquidated as reflected
in all the reports of the company. The Defendant reminded Atty. Amado of unpaid
incentives and salaries for 1997.
29.2 Defendant likewise informed Plaintiff that the one month for every year of
service as a basis for the computation of the Defendants retirement benefit is
erroneous. This computation is even less than what the rank and file employees
get. That CEOs, COOs and senior executives of the level of ABS-CBN, Sky Vision,
Benpres, Meralco and other Lopez companies had and have received a lot more
than the regular rank and file employees. All these retired executives and records
can be summoned for verification.
29.3 The circumstances of the retirement of the Defendant are not those for a
simple and ordinary rank and file employee. Mr. Lopez, III admitted that he and the
Defendant have had problems which accumulated through time and that they chose
to part ways in a manner that was dignified for both of them. Treating the
Defendant as a rank and file employee is hardly dignified not just to the Defendant
but also to the Lopezes whose existing executives serving them will draw lessons
from the Defendants experience.
29.4 These circumstances hardly reflect a simple retirement. The Defendant, who
is known in the local and international media community, is hardly considered a
rank and file employee. Defendant was a stockholder of the Corporation and a

duly-elected member of the Board of Directors. Certain government officials can

attest to the sensitivity of issues and matters the Defendant had represented for
the Lopezes that are hardly issues handled by a simple rank and file employee.
Respectable individuals in government and industry are willing to testify to this
regard.x x x23 (Underscoring and italics supplied).
At the heart of petitioners counterclaim is his alleged forced retirement which is also the
basis of his claim for, among other things, unpaid salaries, unpaid incentives, reasonable
return on the stock ownership plan, and other benefits from a subsidiary company of the
respondent.
Section 5(c) of P.D. 902-A (as amended by R.A. 8799, the Securities Regulation Code)
applies to a corporate officers dismissal. For a corporate officers dismissal is always a
corporate act and/or an intra-corporate controversy and that its nature is not altered by the
reason or wisdom which the Board of Directors may have in taking such action. 24
With regard to petitioners claim for unpaid salaries, unpaid share in net income,
reasonable return on the stock ownership plan and other benefits for services rendered to
Sky Vision, jurisdiction thereon pertains to the Securities Exchange Commission even if the
complaint by a corporate officer includes money claims since such claims are actually part
of the prerequisite of his position and, therefore, interlinked with his relations with the
corporation.25 The question of remuneration involving a person who is not a mere employee
but a stockholder and officer of the corporation is not a simple labor problem but a matter
that comes within the area of corporate affairs and management, and is in fact a corporate
controversy in contemplation of the Corporation Code. 26
While petitioners counterclaims were filed on December 1, 1998, the second challenged
order of the trial court denying respondents motion for reconsideration of the denial of its
motion to dismiss was issued on October 9, 2000 at which time P.D. 902-A had been
amended by R.A. 8799 (approved on July 19, 2000) which mandated the transfer of
jurisdiction over intra-corporate controversies, subject of the counterclaims, to RTCs.
But even if the subject matter of the counterclaims is now cognizable by RTCs, the filing
thereof against respondent is improper, it not being the real party-in-interest, for it is
petitioners employer Sky Vision, respondents subsidiary.
It cannot be gainsaid that a subsidiary has an independent and separate juridical
personality, distinct from that of its parent company, hence, any claim or suit against the
latter does not bind the former and vice versa.
Petitioner argues nevertheless that jurisdiction over the subsidiary is justified by piercing
the veil of corporate fiction. Piercing the veil of corporate fiction is warranted, however, only
in cases when the separate legal entity is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, such that in the case of two corporations, the law will

regard the corporations as merged into one.27 The rationale behind piercing a corporations
identity is to remove the barrier between the corporation from the persons comprising it to
thwart the fraudulent and illegal schemes of those who use the corporate personality as a
shield for undertaking certain proscribed activities. 28
In applying the doctrine of piercing the veil of corporate fiction, the following requisites
must be established: (1) control, not merely majority or complete stock control; (2) such
control must have been used by the defendant to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty, or dishonest acts in contravention of
plaintiffs legal rights; and (3) the aforesaid control and breach of duty must proximately
cause the injury or unjust loss complained of.29
Nowhere, however, in the pleadings and other records of the case can it be gathered that
respondent has complete control over Sky Vision, not only of finances but of policy and
business practice in respect to the transaction attacked, so that Sky Vision had at the time
of the transaction no separate mind, will or existence of its own. The existence of
interlocking directors, corporate officers and shareholders is not enough justification to
pierce the veil of corporate fiction in the absence of fraud or other public policy
considerations.
This Court is thus not convinced that the real party-in-interest with regard to the
counterclaim for damages arising from the alleged tortuous manner by which petitioner
was forced to retire as General Manager of Sky Vision is respondent.
Petitioner muddles the issues by arguing that respondent fraudulently took advantage of
the control over the matter of compensation and benefits of an employee of Sky Vision to
deceive petitioner into signing the loan agreement on the misleading assurance that it was
merely for the purpose of documenting the reward to him of ten million pesos. This
argument does not persuade. Petitioner, being a lawyer, is presumed to know the legal and
binding effects of loan agreements.

benefits to the partial payment of your loan, you will need to give Sky/Central
written instructions on the same in the soonest possible time.
As you will see in the attached computation, the amount of P4,077,077.13 will be
applied to the payment of your loan to retroact on January 1, 1998. The amount of
P422,922.87, representing unliquidated advances made by Sky/Central to you (see
attached listing), has been deducted from your retirement pay of P4.5 million.
Should you be able to liquidate the advances as requested by Sky/Central, the said
amount will be applied to the partial payment of your loan and we shall adjust the
amount of principal and interest due from you accordingly. After the application of
the amount of P4,077,077.13 to the partial payment of your loan, the amount of
P7,585,912.86 will be immediately due and demandable. The amount of
P7,585,912.86 represents the outstanding principal and interest due as of July 15,
1998.
Without the application of your retirement benefits to the partial payment of your
loan, the amount of P11,850,000.00 is due as of July 15, 1998. We reiterate our
demand for full payment of your outstanding obligation immediately. (Underscoring
supplied)
As for the trial courts ruling that the agreement to set-off is an amendment of the loan
agreement resulting to an identity of interest between respondent and Sky Vision and,
therefore, sufficient to pierce the veil of corporate fiction, it is untenable. The abovequoted
letter is clear that, to effect a set-off, it is a condition sine qua non that the approval
thereof by "Sky/Central" must be obtained, and that petitioner liquidate his advances from
Sky Vision. These conditions hardly manifest that respondent possessed that degree of
control over Sky Vision as to make the latter its mere instrumentality, agency or adjunct.
WHEREFORE, the instant petition for review on certiorari is hereby DENIED.SO ORDERED.
G.R. No. 146667

It bears emphasis that Sky Visions involvement in the transaction subject of the case
sprang only after a proposal was apparently proffered by petitioner that his retirement
benefits from Sky Vision be used in partial payment of his loan from respondent as
gathered from the July 15, 1998 letter30 of Rommel Duran, Vice-President and General
Manager of respondent, to petitioner reading:

JOHN F. McLEOD, Petitioner, vs. NATIONAL LABOR RELATIONS COMMISSION (First

Division), FILIPINAS SYNTHETIC FIBER CORPORATION (FILSYN), FAR EASTERN
TEXTILE MILLS, INC., STA. ROSA TEXTILES, INC., (PEGGY MILLS, INC.), PATRICIO
L. LIM, and ERIC HU, Respondents.

Dear Mr. Velarde:

As requested, we have made computations on the outstanding amount of your loan
with Lopez, Inc. should your retirement benefits from Sky Vision
Corporation/Central CATV, Inc. ""Sky/Central") be applied to the partial payment of
your loan. Please note that in order to effect the application of your retirement

January 23, 2007

DECISION
CARPIO, J.:
The Case

This is a petition for review1 to set aside the Decision2 dated 15 June 2000 and the
Resolution3 dated 27 December 2000 of the Court of Appeals in CA-G.R. SP No. 55130. The
Court of Appeals affirmed with modification the 29 December 1998 Decision 4 of the
National Labor Relations Commission (NLRC) in NLRC NCR 02-00949-95.

Patricio Lim requesting for his retirement and other benefits; that in the last quarter of
1994 respondents offered complainant compromise settlement of only P300,000.00 which
complainant rejected; that again complainant wrote a letter (Annex "F") reiterating his
demand for full payment of all benefits and to no avail, hence this complaint; and that he is
entitled to all his money claims pursuant to law.

The Facts
The facts, as summarized by the Labor Arbiter and adopted by the NLRC and the Court of
Appeals, are as follows:
On February 2, 1995, John F. McLeod filed a complaint for retirement benefits, vacation and
sick leave benefits, non-payment of unused airline tickets, holiday pay, underpayment of
salary and 13th month pay, moral and exemplary damages, attorneys fees plus interest
against Filipinas Synthetic Corporation (Filsyn), Far Eastern Textile Mills, Inc., Sta. Rosa
Textiles, Inc., Patricio Lim and Eric Hu.
In his Position Paper, complainant alleged that he is an expert in textile manufacturing
process; that as early as 1956 he was hired as the Assistant Spinning Manager of Universal
Textiles, Inc. (UTEX); that he was promoted to Senior Manager and worked for UTEX till
1980 under its President, respondent Patricio Lim; that in 1978 Patricio Lim formed Peggy
Mills, Inc. with respondent Filsyn having controlling interest; that complainant was
absorbed by Peggy Mills as its Vice President and Plant Manager of the plant at Sta. Rosa,
Laguna; that at the time of his retirement complainant was receiving P60,000.00 monthly
with vacation and sick leave benefits; 13th month pay, holiday pay and two round trip
business class tickets on a Manila-London-Manila itinerary every three years which is
convertible to cas[h] if unused; that in January 1986, respondents failed to pay vacation
and leave credits and requested complainant to wait as it was short of funds but the same
remain unpaid at present; that complainant is entitled to such benefit as per CBA provision
(Annex "A"); that respondents likewise failed to pay complainants holiday pay up to the
present; that complainant is entitled to such benefits as per CBA provision (Annex "B");
that in 1989 the plant union staged a strike and in 1993 was found guilty of staging an
illegal strike; that from 1989 to 1992 complainant was entitled to 4 round trip business
class plane tickets on a Manila-London-Manila itinerary but this benefit not (sic) its
monetary equivalent was not given; that on August 1990 the respondents reduced
complainants monthly salary of P60,000.00 by P9,900.00 till November 1993 or a period of
39 months; that in 1991 Filsyn sold Peggy Mills, Inc. to Far Eastern Textile Mills, Inc. as per
agreement (Annex "D") and this was renamed as Sta. Rosa Textile with Patricio Lim as
Chairman and President; that complainant worked for Sta. Rosa until November 30 that
from time to time the owners of Far Eastern consulted with complainant on technical
aspects of reoperation of the plant as per correspondence (Annexes "D-1" and "D-2"); that
when complainant reached and applied retirement age at the end of 1993, he was only
given a reduced 13th month pay of P44,183.63, leaving a balance of P15,816.87; that
thereafter the owners of Far Eastern Textiles decided for cessation of operations of Sta.
Rosa Textiles; that on two occasions, complainant wrote letters (Annexes "E-1" to "E-2") to

On the other hand, respondents in their Position Paper alleged that complainant was the
former Vice-President and Plant Manager of Peggy Mills, Inc.; that he was hired in June
1980 and Peggy Mills closed operations due to irreversible losses at the end of July 1992
but the corporation still exists at present; that its assets were acquired by Sta. Rosa Textile
Corporation which was established in April 1992 but still remains non-operational at
present; that complainant was hired as consultant by Sta. Rosa Textile in November 1992
but he resigned on November 30, 1993; that Filsyn and Far Eastern Textiles are separate
legal entities and have no employer relationship with complainant; that respondent Patricio
Lim is the President and Board Chairman of Sta. Rosa Textile Corporation; that respondent
Eric Hu is a Taiwanese and is Director of Sta. Rosa Textiles, Inc.; that complainant has no
cause of action against Filsyn, Far Eastern Textile Ltd., Sta. Rosa Textile Corporation and
Eric Hu; that Sta. Rosa only acquired the assets and not the liabilities of Peggy Mills, Inc.;
that Patricio Lim was only impleaded as Board Chairman of Sta. Rosa Textile and not as
private individual; that while complainant was Vice President and Plant Manager of Peggy
Mills, the union staged a strike up to July 1992 resulting in closure of operations due to
irreversible losses as per Notice (Annex "1"); that complainant was relied upon to settle the
labor problem but due to his lack of attention and absence the strike continued resulting in
closure of the company; and losses to Sta. Rosa which acquired its assets as per their
financial statements (Annexes "2" and "3"); that the attendance records of complainant
from April 1992 to November 1993 (Annexes "4" and "5") show that he was either absent
or worked at most two hours a day; that Sta. Rosa and Peggy Mills are interposing
counterclaims for damages in the total amount of P36,757.00 against complainant; that
complainants monthly salary at Peggy Mills was P50,495.00 and not P60,000.00; that
Peggy Mills, does not have a retirement program; that whatever amount complainant is
entitled should be offset with the counterclaims; that complainant worked only for 12 years
from 1980 to 1992; that complainant was only hired as a consultant and not an employee
by Sta. Rosa Textile; that complainants attendance record of absence and two hours daily
work during the period of the strike wipes out any vacation/sick leave he may have
accumulated; that there is no basis for complainants claim of two (2) business class airline
tickets; that complainants pay already included the holiday pay; that he is entitled to
holiday pay as consultant by Sta. Rosa; that he has waived this benefit in his 12 years of
work with Peggy Mills; that he is not entitled to 13th month pay as consultant; and that he
is not entitled to moral and exemplary damages and attorneys fees.
In his Reply, complainant alleged that all respondents being one and the same entities are
solidarily liable for all salaries and benefits and complainant is entitled to; that all
respondents have the same address at 12/F B.A. Lepanto Building, Makati City; that their
counsel holds office in the same address; that all respondents have the same offices and
key personnel such as Patricio Lim and Eric Hu; that respondents Position Paper is verified

by Marialen C. Corpuz who knows all the corporate officers of all respondents; that the veil
of corporate fiction may be pierced if it is used as a shield to perpetuate fraud and confuse
legitimate issues; that complainant never accepted the change in his position from VicePresident and Plant Manger to consultant and it is incumbent upon respondents to prove
that he was only a consultant; that the Deed of Dation in Payment with Lease (Annex "C")
proves that Sta. Rosa took over the assets of Peggy Mills as early as June 15, 1992 and not
1995 as alleged by respondents; that complainant never resigned from his job but applied
for retirement as per letters (Annexes "E-1", "E-2" and "F"); that documents "G", "H" and
"I" show that Eric Hu is a top official of Peggy Mills that the closure of Peggy Mills cannot be
the fault of complainant; that the strike was staged on the issue of CBA negotiations which
is not part of the usual duties and responsibilities as Plant Manager; that complainant is a
British national and is prohibited by law in engaging in union activities; that as per
Resolution (Annex "3") of the NLRC in the proper case, complainant testified in favor of
management; that the alleged attendance record of complainant was lifted from the
logbook of a security agency and is hearsay evidence; that in the other attendance record
it shows that complainant was reporting daily and even on Saturdays; that his limited
hours was due to the strike and cessation of operations; that as plant manager complainant
was on call 24 hours a day; that respondents must pay complainant the unpaid portion of
his salaries and his retirement benefits that cash voucher No. 17015 (Annex "K") shows
that complainant drew the monthly salary of P60,000.00 which was reduced to P50,495.00
in August 1990 and therefore without the consent of complainant; that complainant was
assured that he will be paid the deduction as soon as the company improved its financial
standing but this assurance was never fulfilled; that Patricio Lim promised complainant his
retirement pay as per the latters letters (Annexes "E-1", "E-2" and "F"); that the law itself
provides for retirement benefits; that Patricio Lim by way of Memorandum (Annex "M")
approved vacation and sick leave benefits of 22 days per year effective 1986; that Peggy
Mills required monthly paid employees to sign an acknowledgement that their monthly
compensation includes holiday pay; that complainant was not made to sign this
undertaking precisely because he is entitled to holiday pay over and above his monthly
pay; that the company paid for complainants two (2) round trip tickets to London in 1983
and 1986 as reflected in the complainants passport (Annex "N"); that respondents claim
that complainant is not entitled to 13th month pay but paid in 1993 and all the past 13
years; that complainant is entitled to moral and exemplary damages and attorneys fees;
that all doubts must be resolved in favor of complainant; and that complainant reserved
the right to file perjury cases against those concerned.
In their Reply, respondents alleged that except for Peggy Mills, the other respondents are
not proper persons in interest due to the lack of employer-employee relationship between
them and complainant; that undersigned counsel does not represent Peggy Mills, Inc.
In a separate Position Paper, respondent Peggy Mills alleged that complainant was hired on
February 10, 1991 as per Board Minutes (Annex "A"); that on August 19, 1987, the
workers staged an illegal strike causing cessation of operations on July 21, 1992; that
respondent filed a Notice of Closure with the DOLE (Annex "B"); that all employees were
given separation pay except for complainant whose task was extended to December 31,

1992 to wind up the affairs of the company as per vouchers (Annexes "C" and "C-1"); that
respondent offered complainant his retirement benefits under RA 7641 but complainant
refused; that the regular salaries of complainant from closure up to December 31, 1992
have offset whatever vacation and sick leaves he accumulated; that his claim for unused
plane tickets from 1989 to 1992 has no policy basis, the companys formula of employees
monthly rate x 314 days over 12 months already included holiday pay; that complainants
unpaid portion of the 13th month pay in 1993 has no basis because he was only an
employee up to December 31, 1992; that the 13th month pay was based on his last salary;
and that complainant is not entitled to damages.5
On 3 April 1998, the Labor Arbiter rendered his decision with the following dispositive
portion:
WHEREFORE, premises considered, We hold all respondents as jointly and solidarily liable
for complainants money claims as adjudicated above and computed below as follows:
Retirement Benefits (one month salary for every year of service)
6/80 - 11/30/93 = 14 years
P60,000 x 14.0 mos. P840,000.00
Vacation and Sick Leave (3 yrs.)
P2,000.00 x 22 days x 3 yrs. 132,000.00
Underpayment of Salaries (3 yrs.)
P60,000 - P50,495 = P9,505
P 9,505 x 36.0 mos. ... 342,180.00
Holiday Pay (3 yrs.)
P2,000 x 30 days . 60,000.00
Underpayment of 13th month pay (1993) ... 15,816.87
Moral Damages .. 3,000,000.00
Exemplary Damages .. 1,000,000.00
10% Attorneys Fees . 138,999.68

TOTAL P5,528,996.55

4. attorneys fees equivalent to 10% of the total award.

Unused Airline Tickets (3 yrs.)

No costs is awarded.

(To be converted in Peso upon payment)

SO ORDERED.10

$2,450.00 x 3.0 [yrs.].. $7,350.00

The Court of Appeals rejected McLeods theory that all respondent corporations are the
same corporate entity which should be held solidarily liable for the payment of his
monetary claims.

SO ORDERED.6
Filipinas Synthetic Fiber Corporation (Filsyn), Far Eastern Textile Mills, Inc. (FETMI), Sta.
Rosa Textiles, Inc. (SRTI), Patricio L. Lim (Patricio), and Eric Hu appealed to the NLRC. The
NLRC rendered its decision on 29 December 1998, thus:
WHEREFORE, the Decision dated 3 April 1998 is hereby REVERSED and SET ASIDE and a
new one is entered ORDERING respondent Peggy Mills, Inc. to pay complainant his
retirement pay equivalent to 22.5 days for every year of service for his twelve (12) years of
service from 1980 to 1992 based on a salary rate of P50,495.00 a month.
All other claims are DISMISSED for lack of merit.
SO ORDERED.7
John F. McLeod (McLeod) filed a motion for reconsideration which the NLRC denied in its
Resolution of 30 June 1999.8 McLeod thus filed a petition for certiorari before the Court of
Appeals assailing the decision and resolution of the NLRC. 9
The Ruling of the Court of Appeals
On 15 June 2000, the Court of Appeals rendered judgment as follows:
WHEREFORE, the decision dated December 29, 1998 of the NLRC is hereby AFFIRMED with
the MODIFICATION that respondent Patricio Lim is jointly and solidarily liable with Peggy
Mills, Inc., to pay the following amounts to petitioner John F. McLeod:
1. retirement pay equivalent to 22.5 days for every year of service for his twelve
(12) years of service from 1980 to 1992 based on a salary rate of P50,495, a
month;
2. moral damages in the amount of one hundred thousand (P100,000.00) Pesos;
3. exemplary damages in the amount of fifty thousand (P50,000.00) Pesos; and

The Court of Appeals ruled that the fact that (1) all respondent corporations have the same
address; (2) all were represented by the same counsel, Atty. Isidro S. Escano; (3) Atty.
Escano holds office at respondent corporations address; and (4) all respondent
corporations have common officers and key personnel, would not justify the application of
the doctrine of piercing the veil of corporate fiction.
The Court of Appeals held that there should be clear and convincing evidence that SRTI,
FETMI, and Filsyn were being used as alter ego, adjunct or business conduit for the sole
benefit of Peggy Mills, Inc. (PMI), otherwise, said corporations should be treated as distinct
and separate from each other.
The Court of Appeals pointed out that the Articles of Incorporation of PMI show that it has
six incorporators, namely, Patricio, Jose Yulo, Jr., Carlos Palanca, Jr., Cesar R. Concio, Jr., E.
A. Picasso, and Walter Euyang. On the other hand, the Articles of Incorporation of Filsyn
show that it has 10 incorporators, namely, Jesus Y. Yujuico, Carlos Palanca, Jr., Patricio, Ang
Beng Uh, Ramon A. Yulo, Honorio Poblador, Jr., Cipriano Azada, Manuel Tomacruz, Ismael
Maningas, and Benigno Zialcita, Jr.
The Court of Appeals pointed out that PMI and Filsyn have only two interlocking
incorporators and directors, namely, Patricio and Carlos Palanca, Jr.
Reiterating the ruling of this Court in Laguio v. NLRC,11 the Court of Appeals held that mere
substantial identity of the incorporators of two corporations does not necessarily imply
fraud, nor warrant the piercing of the veil of corporate fiction.
The Court of Appeals also pointed out that when SRTI and PMI executed the Dation in
Payment with Lease, it was clear that SRTI did not assume the liabilities PMI incurred
before the execution of the contract.
The Court of Appeals held that McLeod failed to substantiate his claim that all respondent
corporations should be treated as one corporate
entity. The Court of Appeals thus upheld the NLRCs finding that no employer-employee
relationship existed between McLeod and respondent corporations except PMI.

The Court of Appeals ruled that Eric Hu, as an officer of PMI, should be exonerated from
any liability, there being no proof of malice or bad faith on his part. The Court of Appeals,
however, ruled that McLeod was entitled to recover from PMI and Patricio, the companys
Chairman and President.
The Court of Appeals pointed out that Patricio deliberately and maliciously evaded PMIs
financial obligation to McLeod. The Court of Appeals stated that, on several occasions,
despite his approval, Patricio refused and ignored to pay McLeods retirement benefits. The
Court of Appeals stated that the delay lasted for one year prompting McLeod to initiate
legal action. The Court of Appeals stated that although PMI offered to pay McLeod his
retirement benefits, this offer for P300,000 was still below the "floor limits" provided by
law. The Court of Appeals held that an employee could demand payment of retirement
benefits as a matter of right.
The Court of Appeals stated that considering that PMI was no longer in operation, its
"officer should be held liable for acting on behalf of the corporation."
The Court of Appeals also ruled that since PMI did not have a retirement program providing
for retirement benefits of its employees, Article 287 of the Labor Code must be followed.
The Court of Appeals thus upheld the NLRCs finding that McLeod was entitled to retirement
pay equivalent to 22.5 days for every year of service from 1980 to 1992 based on a salary
rate of P50,495 a month.
The Court of Appeals held that McLeod was not entitled to payment of vacation, sick leave
and holiday pay because as Vice President and Plant Manager, McLeod is a managerial
employee who, under Article 82 of the Labor Code, is not entitled to these benefits.
The Court of Appeals stated that for McLeod to be entitled to payment of service incentive
leave and holidays, there must be an agreement to that effect between him and his
employer.
Moreover, the Court of Appeals rejected McLeods argument that since PMI paid for his two
round-trip tickets Manila-London in 1983 and 1986, he was also "entitled to unused airline
tickets." The Court of Appeals stated that the fact that PMI granted McLeod "free transport
to and from Manila and London for the year 1983 and 1986 does not ipso facto characterize
it as regular that would establish a prevailing company policy."
The Court of Appeals also denied McLeods claims for underpayment of salaries and his
13th month pay for the year 1994. The Court of Appeals upheld the NLRCs ruling that it
could be deduced from McLeods own narration of facts that he agreed to the reduction of
his compensation from P60,000 to P50,495 in August 1990 to November 1993.
The Court of Appeals found the award of moral damages for P50,000 in order because of
the "stubborn refusal" of PMI and Patricio to respect McLeods valid claims.

The Court of Appeals also ruled that attorneys fees equivalent to 10% of the total award
should be given to McLeod under Article 2208, paragraph 2 of the Civil Code. 12
Hence, this petition.
The Issues
McLeod submits the following issues for our consideration:
1. Whether the challenged Decision and Resolution of the 14th Division of the Court
of Appeals promulgated on 15 June 2000 and 27 December 2000, respectively, in
CA-G.R. SP No. 55130 are in accord with law and jurisprudence;
2. Whether an employer-employee relationship exists between the private
respondents and the petitioner for purposes of determining employer liability to the
petitioner;
3. Whether the private respondents may avoid their financial obligations to the
petitioner by invoking the veil of corporate fiction;
4. Whether petitioner is entitled to the relief he seeks against the private
respondents;
5. Whether the ruling of [this] Court in Special Police and Watchman Association
(PLUM) Federation v. National Labor Relations Commission cited by the Office of the
Solicitor General is applicable to the case of petitioner; and
6. Whether the appeal taken by the private respondents from the Decision of the
labor arbiter meets the mandatory requirements recited in the Labor Code of the
Philippines, as amended.13
The Courts Ruling
The petition must fail.
McLeod asserts that the Court of Appeals should not have upheld the NLRCs findings that
he was a managerial employee of PMI from 20 June 1980 to 31 December 1992, and then
a consultant of SRTI up to 30 November 1993. McLeod asserts that if only for this "brazen
assumption," the Court of Appeals should not have sustained the NLRCs ruling that his
cause of action was only against PMI.
These assertions do not deserve serious consideration.

Records disclose that McLeod was an employee only of PMI. 14 PMI hired McLeod as its
acting Vice President and General Manager on 20 June 1980. 15 PMI confirmed McLeods
appointment as Vice President/Plant Manager in the Special Meeting of its Board of
Directors on 10 February 1981.16 McLeod himself testified during the hearing before the
Labor Arbiter that his "regular employment" was with PMI. 17
When PMIs rank-and-file employees staged a strike on 19 August 1989 to July 1992, PMI
incurred serious business losses.18 This prompted PMI to stop permanently plant operations
and to send a notice of closure to the Department of Labor and Employment on 21 July
1992.19

program thereby causing APT to completely discharge and cancel the mortgage in the
Assets and to release the titles of the Assets back to PMI;
WHEREAS, PMI obtained cash advances from SRTC in the total amount of TWO HUNDRED
TEN MILLION PESOS (P210,000,000.00) (the "Advances") to enable PMI to consummate
the DDBO with APT, with SRTC subrogating APT as PMIs creditor thereby;
WHEREAS, in payment to SRTC for PMIs liability, PMI has agreed to transfer all its rights,
title and interests in the Assets by way of a dation in payment to SRTC, provided that
simultaneous with the dation in payment, SRTC shall grant unto PMI the right to lease the
Assets under terms and conditions stated hereunder;

PMI informed its employees, including McLeod, of the closure. 20 PMI paid its employees,
including managerial employees, except McLeod, their unpaid wages, sick leave, vacation
leave, prorated 13th month pay, and separation pay. Under the compromise agreement
between PMI and its employees, the employer-employee relationship between them ended
on 25 November 1992.21

NOW THEREFORE, for and in consideration of the foregoing premises, and of the terms and
conditions hereinafter set forth, the parties hereby agree as follows:

Records also disclose that PMI extended McLeods service up to 31 December 1992 "to wind
up some affairs" of the company.22 McLeod testified on cross-examination that he received
his last salary from PMI in December 1992.23

1. CESSION. In consideration of the amount of TWO HUNDRED TEN MILLION PESOS

(P210,000,000.00), PMI hereby cedes, conveys and transfers to SRTC all of its rights, title
and interest in and to the Assets by way of a dation in payment. 25 (Emphasis supplied)

It is thus clear that McLeod was a managerial employee of PMI from 20 June 1980 to 31
December 1992.
However, McLeod claims that after FETMI purchased PMI in January 1993, he "continued to
work at the same plant with the same responsibilities" until 30 November 1993. McLeod
claims that FETMI merely renamed PMI as SRTI. McLeod asserts that it was for this reason
that when he reached the retirement age in 1993, he asked all the respondents for the
payment of his benefits.24

As a rule, a corporation that purchases the assets of another will not be liable for the debts
of the selling corporation, provided the former acted in good faith and paid adequate
consideration for such assets, except when any of the following circumstances is present:
(1) where the purchaser expressly or impliedly agrees to assume the debts, (2) where the
transaction amounts to a consolidation or merger of the corporations, (3) where the
purchasing corporation is merely a continuation of the selling corporation, and (4) where
the selling corporation fraudulently enters into the transaction to escape liability for those
debts.26

These assertions deserve scant consideration.

None of the foregoing exceptions is present in this case.

What took place between PMI and SRTI was dation in payment with lease. Pertinent
portions of the contract that PMI and SRTI executed on 15 June 1992 read:

Here, PMI transferred its assets to SRTI to settle its obligation to SRTI in the sum of
P210,000,000. We are not convinced that PMI fraudulently transferred these assets to
escape its liability for any of its debts. PMI had already paid its employees, except McLeod,
their money claims.

WHEREAS, PMI is indebted to the Development Bank of the Philippines ("DBP") and as
security for such debts (the "Obligations") has mortgaged its real properties covered by
TCT Nos. T-38647, T-37136, and T-37135, together with all machineries and improvements
found thereat, a complete listing of which is hereto attached as Annex "A" (the "Assets");
WHEREAS, by virtue of an inter-governmental agency arrangement, DBP transferred the
Obligations, including the Assets, to the Asset Privatization Trust ("APT") and the latter has
received payment for the Obligations from PMI, under APTs Direct Debt Buy-Out ("DDBO")

xxxx

There was also no merger or consolidation of PMI and SRTI.

Consolidation is the union of two or more existing corporations to form a new corporation
called the consolidated corporation. It is a combination by agreement between two or more
corporations by which their rights, franchises, and property are united and become those of
a single, new corporation, composed generally, although not necessarily, of the
stockholders of the original corporations.

Merger, on the other hand, is a union whereby one corporation absorbs one or more
existing corporations, and the absorbing corporation survives and continues the combined
business.

Do you have any employment contract with Far Eastern Textile?

The parties to a merger or consolidation are called constituent corporations. In

consolidation, all the constituents are dissolved and absorbed by the new consolidated
enterprise. In merger, all constituents, except the surviving corporation, are dissolved. In
both cases, however, there is no liquidation of the assets of the dissolved corporations, and
the surviving or consolidated corporation acquires all their properties, rights and franchises
and their stockholders usually become its stockholders.

It is my belief up the present time.

The surviving or consolidated corporation assumes automatically the liabilities of the

dissolved corporations, regardless of whether the creditors have consented or not to such
merger or consolidation.27
In the present case, there is no showing that the subject dation in payment involved any
corporate merger or consolidation. Neither is there any showing of those indicative factors
that SRTI is a mere instrumentality of PMI.
Moreover, SRTI did not expressly or impliedly agree to assume any of PMIs debts. Pertinent
portions of the subject Deed of Dation in Payment with Lease provide, thus:
2. WARRANTIES AND REPRESENTATIONS. PMI hereby warrants and represents the
following:
xxxx
(e) PMI shall warrant that it will hold SRTC or its assigns, free and harmless from any
liability for claims of PMIs creditors, laborers, and workers and for physical injury or injury
to property arising from PMIs custody, possession, care, repairs, maintenance, use or
operation of the Assets except ordinary wear and tear; 28 (Emphasis supplied)

WITNESS:

ATTY. AVECILLA:
May I request that the witness be allowed to go through his Annexes, Your Honor.
ATTY. ESCANO:
Yes, but I want a precise answer to that question. If he has an employment contract with
Far Eastern Textile?
WITNESS:
Can I answer it this way, sir? There is not a valid contract but I was under the impression
taking into consideration that the closeness that I had at Far Eastern Textile is enough
during that period of time of the development of Peggy Mills to reorganize a staff. I was
under the basic impression that they might still retain my status as Vice President and
Plant Manager of the company.
ATTY. ESCANO:
But the answer is still, there is no employment contract in your possession appointing you
in any capacity by Far Eastern?
WITNESS:
There was no written contract, sir.

Also, McLeod did not present any evidence to show the alleged renaming of "Peggy Mills,
Inc." to "Sta. Rosa Textiles, Inc."
Hence, it is not correct for McLeod to treat PMI and SRTI as the same entity.
Respondent corporations assert that SRTI hired McLeod as consultant after PMI stopped
operations.29 On the other hand, McLeod asserts that he was respondent corporations
employee from 1980 to 30 November 1993.30 However, McLeod failed to present any proof
of employer-employee relationship between him and Filsyn, SRTI, or FETMI. McLeod
testified, thus:
ATTY. ESCANO:

xxxx
ATTY. ESCANO:
So, there is proof that you were in fact really employed by Peggy Mills?
WITNESS:
Yes, sir.
ATTY. ESCANO:

Of course, my interest now is to whether or not there is a similar document to present that
you were employed by the other respondents like Filsyn Corporation?

A Not a direct contract but I was taken in and I told to take over this from Mr. Eric Hu.
Automatically, it confirms that Mr. Eric Hu, in other words, was under the control of Mr.
Patricio Lim at that period of time.

WITNESS:
Q No documents to show, Mr. McLeod?
I have no document, sir.
A No. No documents, sir.32
ATTY. ESCANO:
McLeod could have presented evidence to support his allegation of employer-employee
relationship between him and any of Filsyn, SRTI, and FETMI, but he did not. Appointment
letters or employment contracts, payrolls, organization charts, SSS registration, personnel
list, as well as testimony of co-employees, may serve as evidence of employee status. 33

What about Far Eastern Textile Mills?

WITNESS:

It is a basic rule in evidence that parties must prove their affirmative allegations. While
technical rules are not strictly followed in the NLRC, this does not mean that the rules on
proving allegations are entirely ignored. Bare allegations are not enough. They must be
supported by substantial evidence at the very least.34

I have no document, sir.

ATTY. ESCANO:
And Sta. Rosa Textile Mills?

However, McLeod claims that "for purposes of determining employer liability, all private
respondents are one and the same employer" because: (1) they have the same address;
(2) they are all engaged in the same business; and (3) they have interlocking directors and
officers.35

WITNESS:
There is no document, sir.31
xxxx
ATTY. ESCANO:
Q Yes. Let me be more specific, Mr. McLeod. Do you have a contract of employment from
Far Eastern Textiles, Inc.?
A No, sir.
Q What about Sta. Rosa Textile Mills, do you have an employment contract from this
company?
A No, sir.

This assertion is untenable.

A corporation is an artificial being invested by law with a personality separate and distinct
from that of its stockholders and from that of other corporations to which it may be
connected.36
While a corporation may exist for any lawful purpose, the law will regard it as an
association of persons or, in case of two corporations, merge them into one, when its
corporate legal entity is used as a cloak for fraud or illegality. This is the doctrine of
piercing the veil of corporate fiction. The doctrine applies only when such corporate fiction
is used to defeat public convenience, justify wrong, protect fraud, or defend crime, 37 or
when it is made as a shield to confuse the legitimate issues, or where a corporation is the
mere alter ego or business conduit of a person, or where the corporation is so organized
and controlled and its affairs are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation. 38

xxxx
Q And what about respondent Eric Hu. Have you had any contract of employment from Mr.
Eric Hu?

To disregard the separate juridical personality of a corporation, the wrongdoing must be

established clearly and convincingly. It cannot be presumed. 39
Here, we do not find any of the evils sought to be prevented by the doctrine of piercing the
corporate veil.

Respondent corporations may be engaged in the same business as that of PMI, but this fact
alone is not enough reason to pierce the veil of corporate fiction. 40

At any rate, the existence of interlocking incorporators, directors, and officers is not enough
justification to pierce the veil of corporate fiction, in the absence of fraud or other public
policy considerations.53

In Indophil Textile Mill Workers Union v. Calica,41 the Court ruled, thus:
In the case at bar, petitioner seeks to pierce the veil of corporate entity of Acrylic, alleging
that the creation of the corporation is a devise to evade the application of the CBA between
petitioner Union and private respondent Company. While we do not discount the possibility
of the similarities of the businesses of private respondent and Acrylic, neither are we
inclined to apply the doctrine invoked by petitioner in granting the relief sought. The fact
that the businesses of private respondent and Acrylic are related, that some of the
employees of the private respondent are the same persons manning and providing for
auxiliary services to the units of Acrylic, and that the physical plants, offices and facilities
are situated in the same compound, it is our considered opinion that these facts are not
sufficient to justify the piercing of the corporate veil of Acrylic. 42 (Emphasis supplied)
Also, the fact that SRTI and PMI shared the same address, i.e., 11/F BA-Lepanto Bldg.,
Paseo de Roxas, Makati City,43 can be explained by the two companies stipulation in their
Deed of Dation in Payment with Lease that "simultaneous with the dation in payment, SRTC
shall grant unto PMI the right to lease the Assets under terms and conditions stated
hereunder."44
As for the addresses of Filsyn and FETMI, Filsyn held office at 12th Floor, BA-Lepanto Bldg.,
Paseo de Roxas, Makati City,45 while FETMI held office at 18F, Tun Nan Commercial Building,
333 Tun Hwa South Road, Sec. 2, Taipei, Taiwan, R.O.C.46 Hence, they did not have the
same address as that of PMI.
That respondent corporations have interlocking incorporators, directors, and officers is of
no moment.
The only interlocking incorporators of PMI and Filsyn were Patricio and Carlos Palanca, Jr.47
While Patricio was Director and Board Chairman of Filsyn, SRTI, and PMI, 48 he was never an
officer of FETMI.
Eric Hu, on the other hand, was Director of Filsyn and SRTI. 49 He was never an officer of
PMI.
Marialen C. Corpuz, Filsyns Finance Officer,50 testified on cross-examination that (1) among
all of Filsyns officers, only she was the one involved in the management of PMI; (2) only
she and Patricio were the common officers between Filsyn and PMI; and (3) Filsyn and PMI
are "two separate companies."51
Apolinario L. Posio, PMIs Chief Accountant, testified that "SRTI is a different corporation
from PMI."52

In Del Rosario v. NLRC,54 the Court ruled that substantial identity of the incorporators of
corporations does not necessarily imply fraud.
In light of the foregoing, and there being no proof of employer-employee relationship
between McLeod and respondent corporations and Eric Hu, McLeods cause of action is only
against his former employer, PMI.
On Patricios personal liability, it is settled that in the absence of malice, bad faith, or
specific provision of law, a stockholder or an officer of a corporation cannot be made
personally liable for corporate liabilities.55
To reiterate, a corporation is a juridical entity with legal personality separate and distinct
from those acting for and in its behalf and, in general, from the people comprising it. The
rule is that obligations incurred by the corporation, acting through its directors, officers,
and employees, are its sole liabilities.56
Personal liability of corporate directors, trustees or officers attaches only when (1) they
assent to a patently unlawful act of the corporation, or when they are guilty of bad faith or
gross negligence in directing its affairs, or when there is a conflict of interest resulting in
damages to the corporation, its stockholders or other persons; (2) they consent to the
issuance of watered down stocks or when, having knowledge of such issuance, do not
forthwith file with the corporate secretary their written objection; (3) they agree to hold
themselves personally and solidarily liable with the corporation; or (4) they are made by
specific provision of law personally answerable for their corporate action. 57
Considering that McLeod failed to prove any of the foregoing exceptions in the present
case, McLeod cannot hold Patricio solidarily liable with PMI.
The records are bereft of any evidence that Patricio acted with malice or bad faith. Bad
faith is a question of fact and is evidentiary. Bad faith does not connote bad judgment or
negligence. It imports a dishonest purpose or some moral obliquity and conscious
wrongdoing. It means breach of a known duty through some ill motive or interest. It
partakes of the nature of fraud.58
In the present case, there is nothing substantial on record to show that Patricio acted in
bad faith in terminating McLeods services to warrant Patricios personal liability. PMI had no
other choice but to stop plant operations. The work stoppage therefore was by necessity.
The company could no longer continue with its plant operations because of the serious
business losses that it had suffered. The mere fact that Patricio was president and director

of PMI is not a ground to conclude that he should be held solidarily liable with PMI for
McLeods money claims.

or bad faith on the part of Patricio, does not obtain in the present case. In Santos v.
NLRC,61 the Court held, thus:

The ruling in A.C. Ransom Labor Union-CCLU v. NLRC, 59 which the Court of Appeals cited,
does not apply to this case. We quote pertinent portions of the ruling, thus:

It is true, there were various cases when corporate officers were themselves held by the
Court to be personally accountable for the payment of wages and money claims to its
employees. In A.C. Ransom Labor Union-CCLU vs. NLRC, for instance, the Court ruled
that under the Minimum Wage Law, the responsible officer of an employer corporation
could be held personally liable for nonpayment of backwages for "(i)f the policy of the law
were otherwise, the corporation employer (would) have devious ways for evading payment
of backwages." In the absence of a clear identification of the officer directly responsible for
failure to pay the backwages, the Court considered the President of the corporation as such
officer. The case was cited in Chua vs. NLRC in holding personally liable the vice-president
of the company, being the highest and most ranking official of the corporation next to the
President who was dismissed for the latters claim for unpaid wages.

(a) Article 265 of the Labor Code, in part, expressly provides:

"Any worker whose employment has been terminated as a consequence of an unlawful
lockout shall be entitled to reinstatement with full backwages."
Article 273 of the Code provides that:
"Any person violating any of the provisions of Article 265 of this Code shall be punished by
a fine of not exceeding five hundred pesos and/or imprisonment for not less than one (1)
day nor more than six (6) months."
(b) How can the foregoing provisions be implemented when the employer is a corporation?
The answer is found in Article 212 (c) of the Labor Code which provides:
"(c) Employer includes any person acting in the interest of an employer, directly or
indirectly. The term shall not include any labor organization or any of its officers or agents
except when acting as employer.".
The foregoing was culled from Section 2 of RA 602, the Minimum Wage Law. Since
RANSOM is an artificial person, it must have an officer who can be presumed to be the
employer, being the "person acting in the interest of (the) employer" RANSOM. The
corporation, only in the technical sense, is the employer.
The responsible officer of an employer corporation can be held personally, not to say even
criminally, liable for non-payment of back wages. That is the policy of the law.
xxxx
(c) If the policy of the law were otherwise, the corporation employer can have devious
ways for evading payment of back wages. In the instant case, it would appear that
RANSOM, in 1969, foreseeing the possibility or probability of payment of back
wages to the 22 strikers, organized ROSARIO to replace RANSOM, with the latter
to be eventually phased out if the 22 strikers win their case. RANSOM actually
ceased operations on May 1, 1973, after the December 19, 1972 Decision of the Court of
Industrial Relations was promulgated against RANSOM.60 (Emphasis supplied)
Clearly, in A.C. Ransom, RANSOM, through its President, organized ROSARIO to evade
payment of backwages to the 22 strikers. This situation, or anything similar showing malice

A review of the above exceptional cases would readily disclose the attendance of facts and
circumstances that could rightly sanction personal liability on the part of the company
officer. In A.C. Ransom, the corporate entity was a family corporation and execution
against it could not be implemented because of the disposition posthaste of its leviable
assets evidently in order to evade its just and due obligations. The doctrine of "piercing the
veil of corporate fiction" was thus clearly appropriate. Chua likewise involved another
family corporation, and this time the conflict was between two brothers occupying the
highest ranking positions in the company. There were incontrovertible facts which pointed
to extreme personal animosity that resulted, evidently in bad faith, in the easing out from
the company of one of the brothers by the other.
The basic rule is still that which can be deduced from the Courts pronouncement in Sunio
vs. National Labor Relations Commission; thus:
We come now to the personal liability of petitioner, Sunio, who was made jointly and
severally responsible with petitioner company and CIPI for the payment of the backwages
of private respondents. This is reversible error. The Assistant Regional Directors Decision
failed to disclose the reason why he was made personally liable. Respondents, however,
alleged as grounds thereof, his being the owner of one-half () interest of said corporation,
and his alleged arbitrary dismissal of private respondents.
Petitioner Sunio was impleaded in the Complaint in his capacity as General Manager of
petitioner corporation. There appears to be no evidence on record that he acted maliciously
or in bad faith in terminating the services of private respondents. His act, therefore, was
within the scope of his authority and was a corporate act.
It is basic that a corporation is invested by law with a personality separate and distinct
from those of the persons composing it as well as from that of any other legal entity to
which it may be related. Mere ownership by a single stockholder or by another corporation

of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for
disregarding the separate corporate personality. Petitioner Sunio, therefore, should not
have been made personally answerable for the payment of private respondents back
salaries.62 (Emphasis supplied)

As used herein, "managerial employees" refer to those whose primary duty consists of the
management of the establishment in which they are employed or of a department or
subdivision thereof, and to other officers or members of the managerial staff. (Emphasis
supplied)

Thus, the rule is still that the doctrine of piercing the corporate veil applies only when the
corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or
defend crime. In the absence of malice, bad faith, or a specific provision of law making a
corporate officer liable, such corporate officer cannot be made personally liable for
corporate liabilities. Neither Article 212(c) nor Article 273 (now 272) of the Labor Code
expressly makes any corporate officer personally liable for the debts of the corporation. As
this Court ruled in H.L. Carlos Construction, Inc. v. Marina Properties Corporation:63

As Vice President/Plant Manager, McLeod is a managerial employee who is excluded from

the coverage of Title I, Book Three of the Labor Code. McLeod is entitled to payment of
vacation leave and sick leave only if he and PMI had agreed on it. The payment of vacation
leave and sick leave depends on the policy of the employer or the agreement between the
employer and employee.65 In the present case, there is no showing that McLeod and PMI
had an agreement concerning payment of these benefits.

We concur with the CA that these two respondents are not liable. Section 31 of the
Corporation Code (Batas Pambansa Blg. 68) provides:
"Section 31. Liability of directors, trustees or officers. - Directors or trustees who willfully
and knowingly vote for or assent to patently unlawful acts of the corporation or who are
guilty of gross negligence or bad faith ... shall be liable jointly and severally for all damages
resulting therefrom suffered by the corporation, its stockholders and other persons."
The personal liability of corporate officers validly attaches only when (a) they assent to a
patently unlawful act of the corporation; or (b) they are guilty of bad faith or gross
negligence in directing its affairs; or (c) they incur conflict of interest, resulting in damages
to the corporation, its stockholders or other persons.
The records are bereft of any evidence that Typoco acted in bad faith with gross or
inexcusable negligence, or that he acted outside the scope of his authority as company
president. The unilateral termination of the Contract during the existence of the TRO was
indeed contemptible for which MPC should have merely been cited for contempt of court
at the most and a preliminary injunction would have then stopped work by the second
contractor. Besides, there is no showing that the unilateral termination of the Contract was
null and void.64

McLeods assertion of underpayment of his 13th month pay in December 1993 is

unavailing.66 As already stated, PMI stopped plant operations in 1992. McLeod himself
testified that he received his last salary from PMI in December 1992. After the termination
of the employer-employee relationship between McLeod and PMI, SRTI hired McLeod as
consultant and not as employee. Since McLeod was no longer an employee, he was not
entitled to the 13th month pay.67 Besides, there is no evidence on record that McLeod
indeed received his alleged "reduced 13th month pay of P44,183.63" in December 1993.68
Also unavailing is McLeods claim that he was entitled to the "unpaid monetary equivalent
of unused plane tickets for the period covering 1989 to 1992 in the amount of
P279,300.00."69 PMI has no company policy granting its officers and employees expenses
for trips abroad.70 That at one time PMI reimbursed McLeod for his and his wifes plane
tickets in a vacation to London71 could not be deemed as an established practice
considering that it happened only once. To be considered a "regular practice," the giving of
the benefits should have been done over a long period, and must be shown to have been
consistent and deliberate.72
In American Wire and Cable Daily Rated Employees Union v. American Wire and Cable Co.,
Inc.,73 the Court held that for a bonus to be enforceable, the employer must have promised
it, and the parties must have expressly agreed upon it, or it must have had a fixed amount
and had been a long and regular practice on the part of the employer.

McLeod is not entitled to payment of vacation leave and sick leave as well as to holiday
pay. Article 82, Title I, Book Three of the Labor Code, on Working Conditions and Rest
Periods, provides:

In the present case, there is no showing that PMI ever promised McLeod that it would
continue to grant him the benefit in question. Neither is there any proof that PMI and
McLeod had expressly agreed upon the giving of that benefit.

Coverage. The provisions of this title shall apply to employees in all establishments and
undertakings whether for profit or not, but not to government employees, managerial
employees, field personnel, members of the family of the employer who are dependent on
him for support, domestic helpers, persons in the personal service of another, and workers
who are paid by results as determined by the Secretary of Labor in appropriate regulations.

McLeods reliance on Annex M74 can hardly carry the day for him. Annex M, which is
McLeods letter addressed to "Philip Lim, VP Administration," merely contains McLeods
proposals for the grant of some benefits to supervisory and confidential employees.
Contrary to McLeods allegation, Patricio did not sign the letter. Hence, the letter does not
embody any agreement between McLeod and the management that would entitle McLeod
to his money claims.

Neither can McLeods assertions find support in Annex U. 75 Annex U is the Agreement which
McLeod and Universal Textile Mills, Inc. executed in 1959. The Agreement merely contains
the renewal of the service agreement which the parties signed in 1956.

Q In other words, Mr. Witness, you mean to tell us that Mr. McLeod continuously received
the reduced amount of P50,000.00 by signing the voucher and receiving the amount in
question?

McLeod cannot successfully pretend that his monthly salary of P60,000 was reduced
without his consent.

A Yes, sir.

McLeod testified that in 1990, Philip Lim explained to him why his salary would have to be
reduced. McLeod said that Philip told him that "they were short in finances; that it would be
repaid."76 Were McLeod not amenable to that reduction in salary, he could have
immediately resigned from his work in PMI.
McLeod knew that PMI was then suffering from serious business losses. In fact, McLeod
testified that PMI was not able to operate from August 1989 to 1992 because of the strike.
Even before 1989, as Vice President of PMI, McLeod was aware that the company had
incurred "huge loans from DBP."77 As it happened, McLeod continued to work with PMI. We
find it pertinent to quote some portions of Apolinario Posios testimony, to wit:
Q You also stated that before the period of the strike as shown by annex "K" of the reply
filed by the complainant which was I think a voucher, the salary of Mr. McLeod was roughly
P60,000.00 a month?
A Yes, sir.
Q And as shown by their annex "L" to their reply, that this was reduced to roughly
P50,000.00 a month?
A Yes, sir.
Q You stated that this was indeed upon the instruction by the Vice-President of Peggy Mills
at that time and that was Mr. Philip Lim, would you not?
A Yes, sir.
Q Of your own personal knowledge, can you say if this was, in fact, by agreement between
Mr. Philip Lim or any other officers of Peggy Mills and Mr. McLeod?
A If I recall it correctly, I assume it was an agreement, verbal agreement with, between Mr.
Philip Lim and Mr. McLeod, because the voucher that we prepared was actually
acknowledged by Mr. McLeod, the reduced amount was acknowledged by Mr. McLeod thru
the voucher that we prepared.

Q As far as you remember, Mr. Posio, was there any complaint by Mr. McLeod because of
this reduced amount of his salary at that time?
A I dont have any personal knowledge of any complaint, sir.
Q At least, that is in so far as you were concerned, he said nothing when he signed the
voucher in question?
A Yes, sir.
Q Now, you also stated that the reason for what appears to be an agreement between
Peggy Mills and Mr. McLeod in so far as the reduction of his salary from P60,000.00 to
P50,000.00 a month was because he would have a reduced number of working days in
view of the strike at Peggy Mills, is that right?
A Yes, sir.
Q And that this was so because on account of the strike, there was no work to be done in
the company?
A Yes, sir.78
xxxx
Q Now, you also stated if you remember during the first time that you testified that in the
beginning, the monthly salary of the complainant was P60,000.00, is that correct?
A Yes, sir.
Q And because of the long period of the strike, when there was no work to be done, by
agreement with the complainant, his monthly salary was adjusted to only P50,495 because
he would not have to report for work on Saturday. Do you remember having made that
explanation?
A Yes, sir.

Q You also stated that the complainant continuously received his monthly salary in the
adjusted amount of P50,495.00 monthly signing the necessary vouchers or pay slips for
that without complaining, is that not right, Mr. Posio?

x x x According to your own statement in your Position Paper and I am referring to page 8,
your unpaid retirement benefit for fourteen (14) years of service at P60,000.00 per year is
P840,000.00, is that correct?

A Yes, sir.79

WITNESS:

Since the last salary that McLeod received from PMI was P50,495, that amount should be
the basis in computing his retirement benefits. McLeod must be credited only with his
service to PMI as it had a juridical personality separate and distinct from that of the other
respondent corporations.

That is correct, sir.

ATTY. ESCANO:
And this amount is correct P840,000.00, according to your Position Paper?

Since PMI has no retirement plan,80 we apply Section 5, Rule II of the Rules Implementing
the New Retirement Law which provides:
5.1 In the absence of an applicable agreement or retirement plan, an employee who retires
pursuant to the Act shall be entitled to retirement pay equivalent to at least one-half (1/2)
month salary for every year of service, a fraction of at least six (6) months being
considered as one whole year.
5.2 Components of One-half (1/2) Month Salary. For the purpose of determining the
minimum retirement pay due an employee under this Rule, the term "one-half month
salary" shall include all of the following:
(a) Fifteen (15) days salary of the employee based on his latest salary rate. x x x
With McLeod having worked with PMI for 12 years, from 1980 to 1992, he is entitled to a
retirement pay equivalent to month salary for every year of service based on his latest
salary rate of P50,495 a month.
There is no basis for the award of moral damages.
Moral damages are recoverable only if the defendant has acted fraudulently or in bad faith,
or is guilty of gross negligence amounting to bad faith, or in wanton disregard of his
contractual obligations. The breach must be wanton, reckless, malicious, or in bad faith,
oppressive or abusive.81 From the records of the case, the Court finds no ultimate facts to
support a conclusion of bad faith on the part of PMI.
Records disclose that PMI had long offered to pay McLeod his money claims. In their
Comment, respondents assert that they offered to pay McLeod the sum of P840,000, as
"separation benefits, and not P300,000, if only to buy peace and to forestall any complaint"
that McLeod may initiate before the NLRC. McLeod admitted at the hearing before the
Labor Arbiter that PMI has made this offer
ATTY. ESCANO:

WITNESS:
That is correct, sir.
ATTY. ESCANO:
The question I want to ask is, are you aware that this amount was offered to you sometime
last year through your own lawyer, my good friend, Atty. Avecilla, who is right here with
us?
WITNESS:
I was aware, sir.
ATTY. ESCANO:
So this was offered to you, is that correct?
WITNESS:
I was told that a fixed sum of P840,000.00 was offered.
ATTY. ESCANO:
And , of course, the reason, if I may assume, that you declined this offer was that,
according to you, there are other claims which you would like to raise against the
Respondents which, by your impression, they were not willing to pay in addition to this
particular amount?
WITNESS:

Yes, sir.
ATTY. ESCANO:
The question now is, if the same amount is offered to you by way of retirement which is
exactly what you stated in your own Position Paper, would you accept it or not?
WITNESS:
Not on the concept without all the basic benefits due me, I will refuse. 82
xxxx
ATTY. ROXAS:
Q You mentioned in the cross-examination of Atty. Escano that you were offered the
separation pay in 1994, is that correct, Mr. Witness?
WITNESS:
A I was offered a settlement of P300,000.00 for complete settlement and that was I think
in January or February 1994, sir.
ATTY. ESCANO:

A During that period in time, while the petition in this case was ongoing, we already filed a
case at that period of time, sir. There was a discussion. To the best of my knowledge, they
are willing to settle for P840,000.00 and based on what the Attorney told me, I refused to
accept because I believe that my position was not in anyway due to a compromise situation
to the benefits I am entitled to.83
Hence, the awards for exemplary damages and attorneys fees are not proper in the
present case.84
That respondent corporations, in their appeal to the NLRC, did not serve a copy of their
memorandum of appeal upon PMI is of no moment. Section 3(a), Rule VI of the NLRC New
Rules of Procedure provides:
Requisites for Perfection of Appeal. (a) The appeal shall be filed within the reglementary
period as provided in Section 1 of this Rule; shall be under oath with proof of payment of
the required appeal fee and the posting of a cash or surety bond as provided in Section 5 of
this Rule; shall be accompanied by a memorandum of appeal x x x and proof of service on
the other party of such appeal. (Emphasis supplied)
The "other party" mentioned in the Rule obviously refers to the adverse party, in this case,
McLeod. Besides, Section 3, Rule VI of the Rules which requires, among others, proof of
service of the memorandum of appeal on the other party, is merely a rundown of the
contents of the required memorandum of appeal to be submitted by the appellant. These
are not jurisdictional requirements.85

What did you say, Atty. Escano?

WHEREFORE, we DENY the petition and AFFIRM the Decision of the Court of Appeals in CAG.R. SP No. 55130, with the following MODIFICATIONS: (a) the retirement pay of John F.
McLeod should be computed at month salary for every year of service for 12 years based
on his salary rate of P50,495 a month; (b) Patricio L. Lim is absolved from personal
liability; and (c) the awards for moral and exemplary damages and attorneys fees are
deleted. No pronouncement as to costs.

ATTY. ESCANO:

SO ORDERED.

No. What was mentioned was the amount of P840,000.00.

WITNESS:

The amount that I mentioned was P840,000.00 corresponding to the . . . . . . .

WITNESS:
May I ask that the question be clarified, your Honor?
ATTY. ROXAS:
Q You mentioned that you were offered for the settlement of your claims in 1994 for
P840,000.00, is that right, Mr. Witness?

G.R. No. 170284

March 16, 2007

BENITO ARATEA and PONCIANA CANONIGO, Petitioners, vs. ESMERALDO P. SUICO

and COURT OF APPEALS, Cebu City, Respondents.
DECISION
GARCIA, J.:
This petition for review on certiorari under Rule 45 of the Rules of Court seeks the reversal
and setting aside of the decision1 dated 5 May 2005 of the Court of Appeals (CA)-Cebu City,
as reiterated in its resolution2 of 23 September 2005, in CA-G.R. CV No. 60174 which
affirmed an earlier decision of the Regional Trial Court (RTC) of Cebu City, Branch 24, in an
action for a sum of money and damages thereat instituted by the herein private respondent
Esmeraldo P. Suico (Suico) against, among others, the herein petitioners Benito Aratea
(Aratea) and Ponciana Canonigo (Canonigo).
The facts:
Petitioners Aratea and Canonigo are the controlling stockholders of Samar Mining
Development Corporation (SAMDECO), a domestic corporation engaged in mining
operations in San Isidro, Wright, Western Samar. On the other hand, private respondent
Suico is a businessman engaged in export and general merchandise.
Sometime in 1989, Suico entered into a Memorandum of Agreement (MOA) with SAMDECO.
Armed with the proper board resolution, Aratea and Canonigo signed the MOA as the duly
authorized representatives of the corporation. Under the MOA, Suico would extend loans
and cash advances to SAMDECO in exchange for the grant of the exclusive right to market
fifty percent (50%) of the total coal extracted by SAMDECO from its mining sites in San
Isidro, Wright, Western Samar.
Suico was enticed into the aforementioned financing scheme because Aratea and Canonigo
assured him that the money he would lend to SAMDECO would easily be paid with five
percent (5%) monthly interest as the coals in said sites is easier to gather because it is
excavated from open-pit mines. Aratea and Canonigo also promised to Suico that the loan
the latter would extend to SAMDECO could easily be paid from the profits of his fifty
percent (50%) share of the coal produced. Also reserved in favor of Suico was the right of
first priority to operate the mining facilities in the event SAMDECO becomes incapable of
coping with the work demands. By way of further incentive, Suico was actually appointed
SAMDECOs Vice-President for Administration.
Pursuant to the same MOA, Suico started releasing loans and cash advances to SAMDECO,
still through Aratea and Suico. SAMDECO started operations in its mining sites to gather
the coal. As agreed in the MOA, fifty percent (50%) of the coals produced were offered by
Suico to different buyers. However, SAMDECO, again through Aratea and Canonigo,
prevented the full implementation of the marketing arrangement by not accepting the
prices offered by Suicos coal buyers even though such prices were competitive and fair
enough, giving no other explanation for such refusal other than saying that the price was
too low. Aratea and Canonigo did not also set any criterion or standard with which any

price offer would be measured against. Because he failed to close any sale of his 50%
share of the coal-produce and gain profits therefrom, Suico could not realize payment of
the loans and advances he extended to SAMDECO.
SAMDECO, on the other hand, successfully disposed of its 50% share of the coal-produce.
Even with said coal sales, however, SAMDECO absolutely made no payment of its loan
obligations to Suico, despite demands.
Aratea and Canonigo eventually sold the mining rights and passed on the operations of
SAMDECO to Southeast Pacific Marketing, Inc. (SPMI). They also sold their shares in
SAMDECO to SPMIs President, Arturo E. Dy without notice to, or consent of Suico, in
violation of the MOA.
Hence, in the RTC of Cebu City, Suico filed a complaint for a Sum of Money and Damages
against SAMDECO, Aratea, Canonigo, and Seiko Philippines, Inc. (SEIKO, which was later
substituted by SPMI and Arturo E. Dy). The complaint was docketed as Civil Case No. CEB10618 and raffled to Branch 24 of the court.
On 5 January 1998, the trial court came out with its decision rendering judgment for Suico
as follows:
WHEREFORE, finding that the plaintiff has meritorious cause of action against the
defendants, this Court hereby orders all the defendants SAMDECO, SPMI, Dy, SEIKO,
Benito Aratea, Ponciana Canonigo to solidarily pay the plaintiff the principal obligation of
P3.5 million plus 5% interest per month reckoned from March 1989 until fully paid; while
defendants Aratea & Canonigo should solidarily pay plaintiff the balance on the principal
amounting to P978,440.00 plus 5% interest per month reckoned from March 1989 until
fully paid. In addition all defendants are hereby ordered solidarily to pay plaintiff
P2,000,000.00 million (sic) as moral damages, P500,000.00 as exemplary damages,
P250,000.00 as attorneys fees, and P100,000.00 as litigation expenses. All counterclaims
and cross-claims are hereby dismissed.
SO ORDERED.
On 9 February 1998, SAMDECO, SPMI, Dy, and SEIKO filed their common notice of appeal,
while Aratea and Canonigo filed theirs on 16 February 1998. All appeals were docketed in
CA-Cebu City as CA-G.R. CV No. 60174.
After review of the records of the case, CA-Cebu City, in its decision of 5 May 2005,
dismissed the appeal and affirmed the appealed decision of the trial court, to wit::
WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by us
DISMISSING the appeal filed in this case and AFFIRMING the decision dated January 5,
1998 of the RTC of Cebu City, Branch 24 in Civil Case No. CEB-10618.
SO ORDERED.

Petitioners Aratea and Canonigo filed their common motion for reconsideration but the
same was denied by the appellate court in its resolution of 23 September
2005.1vvphi1.nt

and members may be disregarded if it is used as a means to perpetuate fraud or an illegal

act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes,
or to confuse legitimate issues.

Hence, this recourse by the two on the following assigned errors:

SAMDECO must generally be treated as separate and distinct entity from petitioners Aratea
and Canonigo unless there are facts and circumstances that would justify the Court to
pierce the veil of corporate fiction and treat them as one and the same. From the facts, as
found by the trial court and reechoed by the appellate court, the Court has no reason to
doubt that Suico was very well aware that he was dealing with SAMDECO and that Aratea
and Canonigo were mere authorized representatives acting for and in behalf of the
corporation. In fact, Suico took note that Aratea and Canonigo were duly authorized by the
corresponding board resolution. There were no indications whatsoever that Suico was
misled to believe that the loans and cash advances were initially intended for the personal
benefit of Aratea and/or Canonigo, and that the corporation was only used thereafter for
the purpose of hiding behind the veil of corporate fiction to evade personal liability. The
evidence sufficiently established that all loans and cash advances were used for the mining
operations of SAMDECO, and there were neither allegations nor proofs to the contrary.
Absent any proof of fraud or double dealing, therefore, the doctrine on piercing the veil of
corporate entity would not apply.

THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ERROR IN FINDING AGAINST

THE DEFENDANTS-APPELLANTS BENITO ARATEA AND PONCIANA CANONIGO AND
CONDEMNING THEM TO PAY JOINTLY AND SEVERALLY THE LOANS, CASH ADVANCES AND
CAPITAL INFUSION MADE BY PLAINTIFF TO DEFENDANT-APPELLANT SAMDECO.
THE COURT OF APPEALS OVERLOOKED AND MISINTERPRETED SOME FACTS OR
CIRCUMSTANCES AND COMMITTED SOME MISAPPREHENSION OF THE FACTS AND THE
APPLICABLE LAW/S WHICH HAD ADVERSELY AFFECTED THE RESULT OF THE CASE.
We DENY.
The Court notes that petitioners Aratea and Canonigo do not assail the decisions of the two
courts below insofar as their co-defendants in the court of origin, namely: SAMDECO;
SPMI; Dy; and SEIKO, were held liable to Suico. As it were, petitioners take exception from
both decisions only, insofar as they are held personally and solidarily liable with their codefendants. They strongly assert that "the records of this case clearly show that the loans,
cash advances and capital infusion made by xxx Suico to SAMDECO are the sole and
exclusive liability and/or responsibility of SAMDECO and/or its transferee/s." 3 Relying
heavily on the allegations in Suicos complaint in Civil Case No. CEB-10618, whereunder
they were referred to as mere representatives/agents of SAMDECO, petitioners seek to be
declared free from any liability which their co-defendants in the suit may be adjudged liable
for.
We must first stress that petitioners personal and solidary liability depends on whether the
Court finds SAMDECOs monetary obligations on account of the loans and cash advances
made to it by Suico are due and demandable as borne by the evidence.
After carefully and thoroughly reviewing the records of the proceedings before the trial
court, we find no cogent reason to depart from the factual findings of both the trial and
appellate courts holding all defendants liable for said loans and cash advances.
However, in determining whether SAMDECOs stockholders and/or representatives
(petitioners Aratea and Canonigo) may be held solidarily liable with SAMDECOs obligations,
the Court must determine whether, upon the same facts found by the two courts below,
there is basis to pierce the veil of corporate fiction and hold SAMDECOs stockholders
and/or officers personally and solidarily liable with the corporation.

Considering that the veil of corporate fiction cannot be pierced in this case but the evidence
indisputably established that Suico released loans and cash advances in favor of SAMDECO,
which loans and cash advances remain unpaid to the present, to Suicos damage and
prejudice, may Aratea and Canonigo, as SAMDECOs controlling stockholders and/or
representatives, be nonetheless held personally and solidarily liable with SAMDECO and its
successors-in-interest for obligations the corporation incurred under the facts herein
obtaining?
We rule in the affirmative.
In MAM Realty Development Corporation v. NLRC,5 the Court stated:
A corporation is a juridical entity with legal personality separate and distinct from those
acting for and in its behalf and, in general, from the people comprising it. The general rule
is that obligations incurred by the corporation, acting through its directors, officers and
employees, are its sole liabilities. There are times, however, when solidary liabilities may be
incurred but only when exceptional circumstances warrant such as in the following cases:
1. When directors and trustees or, in appropriate cases, the officers of a
corporation:
(a) vote for or assent to patently unlawful acts of the corporation;

Prudential Bank v. Alviar4 stated:

(b) act in bad faith or with gross negligence in directing the corporate
affairs;

Well-settled is the rule that a corporation has a personality separate and distinct from that
of its officers and stockholders. Officers of a corporation are not personally liable for their
acts as such officers unless it is shown that they have exceeded their authority. However,
the legal fiction that a corporation has a personality separate and distinct from stockholders

(c) are guilty of conflict of interest to the prejudice of the corporation, its
stockholders or members, and other persons;6

2. When a director or officer has consented to the issuance of watered stocks or

who, having knowledge thereof, did not forthwith file with the corporate secretary
his written objection thereto;7
3. When a director, trustee or officer has contractually agreed or stipulated to hold
himself personally and solidarily liable with the corporation; 8 or
4. When a director, trustee or officer is made, by specific provision of law,
personally liable for his corporate action.9
In labor cases, particularly, corporate directors and officers are solidarily liable with the
corporation for the termination of employment of corporate employees done with malice or
in bad faith. (Emphasis supplied.)
Petitioners Aratea and Canonigo, despite having separate and distinct personalities from
SAMDECO may be held personally liable for the loans and advances made by Suico to
SAMDECO which they represent on account of their bad faith in carrying out the business of
the corporation. In the words of the trial court:
As evidenced by the transcripts of the direct examination of [respondent Suico] (TSN,
Arnejo, 10 August 1995, pp. 20-21), [petitioners] Canonigo, Aratea and SAMDECO
prevented the full implementation of the marketing agreement concerning the coal
produced from the mining site, specifically called the Arizona project, by not agreeing to
the price of the coal offered by the buyers procured by [Suico] even though the prices
offered were competitive and fair enough. [Petitioners] Canonigo, Aratea and SAMDECO
made no explanation as to why they did not accept the offered price save to say that they
were low. They also did not set any criterion or standard against which any offered price
would be measured. By not acquiescing in to the proffered price, [respondent] Suico was
not able to obtain his share of 50% of the profits from the sale of the coal produced by the
mining site.

Petitioners Aratea and Canonigo acted in bad faith when they, as officers of SAMDECO,
unreasonably prevented Suico from selling his part of the coal-produce of the mining site,
in gross violation of their MOA. This resulted in Suico not being unable to realize profits
from his 50% share of the coal-produce, from which Suico could obtain part of the payment
for the loans and advances he made in favor of SAMDECO. Moreover, petitioners also acted
in bad faith when they sold, transferred and assigned their proprietary rights over the
mining area in favor of SPMI and Dy, thereby causing SAMDECO to grossly violate its MOA
with Suico. Suico suffered grave injustice because he was prevented from acquiring the
opportunity to obtain payment of his loans and cash advances, while petitioners Aratea and
Canonigo profited from the sale of their shareholdings in SAMDECO in favor of SPMI and
Dy. These facts duly established Aratea and Canonigos personal liability as
officers/stockholders of SAMDECO and their solidary liability with SAMDECO for its
obligations in favor of Suico for the loans and cash advances received by the corporation.
WHEREFORE, the instant petition is DENIED and the assailed CA decision and resolution are
AFFIRMED in toto.
Costs against petitioners.
SO ORDERED.

1awphi1.nt
On the other hand, the [petitioners] were able to sell coal produced in the mining site in
question. Hence, this undoubtedly exhibits their bad faith, malice and wanton disregard of
the [respondents] rights in not complying with their part of the covenant. While the
[petitioners] were able to market their share of the coal, they precluded the [respondent]
from marketing his. xxx.
Moreover, notwithstanding the unequivocal language of Title 4, paragraph 1, [petitioners]
Canonigo and Aratea further violated the [respondents] rights when they without informing
[respondent] sold their shares of SAMDECO to defendants Dy and SPMI thereby vesting on
the latter the right to operate SAMDECOs coal mining area as evidence by the
Memorandum of Agreement labeled Exhibits "B". Title 4, paragraph 1 of Exhibit "A"
expressly states that [respondent] Suico had the right of first priority in acquiring the coal
area of SAMDECO. The most prudent action for [petitioners] would have been to first offer
to sell SAMDECO to [respondent] as what was stipulated under the contract prior to
entering into an agreement with defendants SPMI and Dy. xxx. (Words in brackets
supplied.)

G.R. No. 167530

March 13, 2013

PHILIPPINE NATIONAL BANK, Petitioner, vs. HYDRO RESOURCES CONTRACTORS

CORPORATION, Respondent.

computing the payments already made by NMIC under the program and crediting the
NMICs receivables from

x-----------------------x

Hercon, Inc., the latter found that NMIC still has an unpaid balance of P8,370,934.74.10
Hercon, Inc. made several demands on NMIC, including a letter of final demand dated
August 12, 1986, and when these were not heeded, a complaint for sum of money was
filed in the RTC of Makati, Branch 136 seeking to hold petitioners NMIC, DBP, and PNB
solidarily liable for the amount owing Hercon, Inc. 11 The case was docketed as Civil Case
No. 15375.

G.R. No. 167561

ASSET PRIVATIZATION TRUST, Petitioner, vs. HYDRO RESOURCES CONTRACTORS
CORPORATION, Respondent.
x-----------------------x
G.R. No. 167603
DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner, vs. HYDRO RESOURCES
CONTRACTORS CORPORATION, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
These petitions for review on certiorari1 assail the Decision 2 dated November 30, 2004 and
the Resolution3 dated March 22, 2005 of the Court of Appeals in CA-G.R. CV No. 57553.
The said Decision affirmed the Decision4 dated November 6, 1995 of the Regional Trial
Court (RTC) of Makati City, Branch 62, granting a judgment award of P8,370,934.74, plus
legal interest, in favor of respondent Hydro Resources Contractors Corporation (HRCC) with
the modification that the Privatization and Management Office (PMO), successor of
petitioner Asset Privatization Trust (APT), 5 has been held solidarily liable with Nonoc Mining
and Industrial Corporation (NMIC)6 and petitioners Philippine National Bank (PNB) and
Development Bank of the Philippines (DBP), while the Resolution denied reconsideration
separately prayed for by PNB, DBP, and APT.
Sometime in 1984, petitioners DBP and PNB foreclosed on certain mortgages made on the
properties of Marinduque Mining and Industrial Corporation (MMIC). As a result of the
foreclosure, DBP and PNB acquired substantially all the assets of MMIC and resumed the
business operations of the defunct MMIC by organizing NMIC. 7 DBP and PNB owned 57%
and 43% of the shares of NMIC, respectively, except for five qualifying shares. 8 As of
September 1984, the members of the Board of Directors of NMIC, namely, Jose Tengco, Jr.,
Rolando Zosa, Ruben Ancheta, Geraldo Agulto, and Faustino Agbada, were either from DBP
or PNB.9
Subsequently, NMIC engaged the services of Hercon, Inc., for NMICs Mine Stripping and
Road Construction Program in 1985 for a total contract price of P35,770,120. After

Subsequent to the filing of the complaint, Hercon, Inc. was acquired by HRCC in a merger.
This prompted the amendment of the complaint to substitute HRCC for Hercon, Inc. 12
Thereafter, on December 8, 1986, then President Corazon C. Aquino issued Proclamation
No. 50 creating the APT for the expeditious disposition and privatization of certain
government corporations and/or the assets thereof. Pursuant to the said Proclamation, on
February 27, 1987, DBP and PNB executed their respective deeds of transfer in favor of the
National Government assigning, transferring and conveying certain assets and liabilities,
including their respective stakes in NMIC.13 In turn and on even date, the National
Government transferred the said assets and liabilities to the APT as trustee under a Trust
Agreement.14 Thus, the complaint was amended for the second time to implead and include
the APT as a defendant.
In its answer,15 NMIC claimed that HRCC had no cause of action. It also asserted that its
contract with HRCC was entered into by its then President without any authority. Moreover,
the said contract allegedly failed to comply with laws, rules and regulations concerning
government contracts. NMIC further claimed that the contract amount was manifestly
excessive and grossly disadvantageous to the government. NMIC made counterclaims for
the amounts already paid to Hercon, Inc. and attorneys fees, as well as payment for
equipment rental for four trucks, replacement of parts and other services, and damage to
some of NMICs properties.16
For its part, DBPs answer17 raised the defense that HRCC had no cause of action against it
because DBP was not privy to HRCCs contract with NMIC. Moreover, NMICs juridical
personality is separate from that of DBP. DBP further interposed a counterclaim for
attorneys fees.18
PNBs answer19 also invoked lack of cause of action against it. It also raised estoppel on
HRCCs part and laches as defenses, claiming that the inclusion of PNB in the complaint was
the first time a demand for payment was made on it by HRCC. PNB also invoked the
separate juridical personality of NMIC and made counterclaims for moral damages and
attorneys fees.20

APT set up the following defenses in its answer21: lack of cause of action against it, lack of
privity between Hercon, Inc. and APT, and the National Governments preferred lien over
the assets of NMIC.22

The complaint against APT is hereby dismissed. However, APT, as trustee of NONOC
MINING AND INDUSTRIAL CORPORATION is directed to ensure compliance with this
Decision.24

After trial, the RTC of Makati rendered a Decision dated November 6, 1995 in favor of
HRCC. It pierced the corporate veil of NMIC and held DBP and PNB solidarily liable with
NMIC:

DBP and PNB filed their respective appeals in the Court of Appeals. Both insisted that it was
wrong for the RTC to pierce the veil of NMICs corporate personality and hold DBP and PNB
solidarily liable with NMIC.25

On the issue of whether or not there is sufficient ground to pierce the veil of corporate
fiction, this Court likewise finds for the plaintiff.

The Court of Appeals rendered the Decision dated November 30, 2004, affirmed the
piercing of the veil of the corporate personality of NMIC and held DBP, PNB, and APT
solidarily liable with NMIC. In particular, the Court of Appeals made the following findings:

From the documentary evidence adduced by the plaintiff, some of which were even adopted
by defendants and DBP and PNB as their own evidence (Exhibits "I", "I-1", "I-2", "I-3", "I4", "I-5", "I5-A", "I-5-B", "I-5-C", "I-5-D" and submarkings, inclusive), it had been
established that except for five (5) qualifying shares, NMIC is owned by defendants DBP
and PNB, with the former owning 57% thereof, and the latter 43%. As of September 24,
1984, all the members of NMICs Board of Directors, namely, Messrs. Jose Tengco, Jr.,
Rolando M. Zosa, Ruben Ancheta, Geraldo Agulto, and Faustino Agbada are either from DBP
or PNB (Exhibits "I-5", "I-5-C", "I-5-D").
The business of NMIC was then also being conducted and controlled by both DBP and PNB.
In fact, it was Rolando M. Zosa, then Governor of DBP, who was signing and entering into
contracts with third persons, on behalf of NMIC.
In this jurisdiction, it is well-settled that "where it appears that the business enterprises are
owned, conducted and controlled by the same parties, both law and equity will, when
necessary to protect the rights of third persons, disregard legal fiction that two (2)
corporations are distinct entities, and treat them as identical." (Phil. Veterans Investment
Development Corp. vs. CA, 181 SCRA 669).

In the case before Us, it is indubitable that [NMIC] was owned by appellants DBP and PNB
to the extent of 57% and 43% respectively; that said two (2) appellants are the only
stockholders, with the qualifying stockholders of five (5) consisting of its own officers and
included in its charter merely to comply with the requirement of the law as to number of
incorporators; and that the directorates of DBP, PNB and [NMIC] are interlocked.
xxxx
We find it therefore correct for the lower court to have ruled that:
"From all indications, it appears that NMIC is a mere adjunct, business conduit or alter ego
of both DBP and PNB. Thus, the DBP and PNB are jointly and severally liable with NMIC for
the latters unpaid obligation to plaintiff."26 (Citation omitted.)
The Court of Appeals then concluded that, "in keeping with the concept of justice and fair
play," the corporate veil of NMIC should be pierced, ratiocinating:

From all indications, it appears that NMIC is a mere adjunct, business conduit or alter ego
of both DBP and PNB. Thus, the DBP and PNB are jointly and severally liable with NMIC for
the latters unpaid obligations to plaintiff.23

For to treat NMIC as a separate legal entity from DBP and PNB for the purpose of securing
beneficial contracts, and then using such separate entity to evade the payment of a just
debt, would be the height of injustice and iniquity. Surely that could not have been the
intendment of the law with respect to corporations. x x x. 27

Having found DBP and PNB solidarily liable with NMIC, the dispositive portion of the
Decision of the trial court reads:

The dispositive portion of the Decision of the Court of Appeals reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the plaintiff
HYDRO RESOURCES CONTRACTORS CORPORATION and against the defendants NONOC
MINING AND INDUSTRIAL CORPORATION, DEVELOPMENT BANK OF THE PHILIPPINES and
PHILIPPINE NATIONAL BANK, ordering the aforenamed defendants, to pay the plaintiff
jointly and severally, the sum of P8,370,934.74 plus legal interest thereon from date of
demand, and attorneys fees equivalent to 25% of the judgment award.

WHEREFORE, premises considered, the Decision appealed from is hereby MODIFIED. The
judgment in favor of appellee Hydro Resources Contractors Corporation in the amount of
P8,370,934.74 with legal interest from date of demand is hereby AFFIRMED, but the
dismissal of the case as against Assets Privatization Trust is REVERSED, and its successor
the Privatization and Management Office is INCLUDED as one of those jointly and severally
liable for such indebtedness. The award of attorneys fees is DELETED.
All other claims and counter-claims are hereby DISMISSED.

Costs against appellants.28

The respective motions for reconsideration of DBP, PNB, and APT were denied. 29

interest of the said banks with respect to the assets and liabilities of NMIC. 35 As trustee of
the Republic of the Philippines, the APT also assumed the responsibility of the Republic
pursuant to the following provision of Section 2.02 of the respective deeds of transfer
executed by DBP and PNB in favor of the Republic:

Hence, these consolidated petitions.30

SECTION 2. TRANSFER OF BANKS LIABILITIES
All three petitioners assert that NMIC is a corporate entity with a juridical personality
separate and distinct from both PNB and DBP. They insist that the majority ownership by
DBP and PNB of NMIC is not a sufficient ground for disregarding the separate corporate
personality of NMIC because NMIC was not a mere adjunct, business conduit or alter ego of
DBP and PNB. According to them, the application of the doctrine of piercing the corporate
veil is unwarranted as nothing in the records would show that the ownership and control of
the shareholdings of NMIC by DBP and PNB were used to commit fraud, illegality or
injustice. In the absence of evidence that the stock control by DBP and PNB over NMIC was
used to commit some fraud or a wrong and that said control was the proximate cause of
the injury sustained by HRCC, resort to the doctrine of "piercing the veil of corporate
entity" is misplaced.31
DBP and PNB further argue that, assuming they may be held solidarily liable with NMIC to
pay NMICs exclusive and separate corporate indebtedness to HRCC, such liability of the
two banks was transferred to and assumed by the National Government through the APT,
now the PMO, under the respective deeds of transfer both dated February 27, 1997
executed by DBP and PNB pursuant to Proclamation No. 50 dated December 8, 1986 and
Administrative Order No. 14 dated February 3, 1987.32
For its part, the APT contends that, in the absence of an unqualified assumption by the
National Government of all liabilities incurred by NMIC, the National Government through
the APT could not be held liable for NMICs contractual liability. The APT asserts that HRCC
had not sufficiently shown that the APT is the successor-in-interest of all the liabilities of
NMIC, or of DBP and PNB as transferors, and that the adjudged liability is included among
the liabilities assigned and transferred by DBP and PNB in favor of the National
Government.33
HRCC counters that both the RTC and the CA correctly applied the doctrine of "piercing the
veil of corporate fiction." It claims that NMIC was the alter ego of DBP and PNB which
owned, conducted and controlled the business of NMIC as shown by the following
circumstances: NMIC was owned by DBP and PNB, the officers of DBP and PNB were also
the officers of NMIC, and DBP and PNB financed the operations of NMIC. HRCC further
argues that a parent corporation may be held liable for the contracts or obligations of its
subsidiary corporation where the latter is a mere agency, instrumentality or adjunct of the
parent corporation.34
Moreover, HRCC asserts that the APT was properly held solidarily liable with DBP, PNB, and
NMIC because the APT assumed the obligations of DBP and PNB as the successor-in-

xxxx
2.02 With respect to the Banks liabilities which are contingent and those liabilities where
the Banks creditors consent to the transfer thereof is not obtained, said liabilities shall
remain in the books of the BANK with the GOVERNMENT funding the payment thereof.36
After a careful review of the case, this Court finds the petitions impressed with merit.
A corporation is an artificial entity created by operation of law. It possesses the right of
succession and such powers, attributes, and properties expressly authorized by law or
incident to its existence.37 It has a personality separate and distinct from that of its
stockholders and from that of other corporations to which it may be connected. 38 As a
consequence of its status as a distinct legal entity and as a result of a conscious policy
decision to promote capital formation,39 a corporation incurs its own liabilities and is legally
responsible for payment of its obligations.40 In other words, by virtue of the separate
juridical personality of a corporation, the corporate debt or credit is not the debt or credit of
the stockholder.41 This protection from liability for shareholders is the principle of limited
liability.42
Equally well-settled is the principle that the corporate mask may be removed or the
corporate veil pierced when the corporation is just an alter ego of a person or of another
corporation. For reasons of public policy and in the interest of justice, the corporate veil will
justifiably be impaled only when it becomes a shield for fraud, illegality or inequity
committed against third persons.43
However, the rule is that a court should be careful in assessing the milieu where the
doctrine of the corporate veil may be applied. Otherwise an injustice, although unintended,
may result from its erroneous application.44 Thus, cutting through the corporate cover
requires an approach characterized by due care and caution:
Hence, any application of the doctrine of piercing the corporate veil should be done with
caution. A court should be mindful of the milieu where it is to be applied. It must be certain
that the corporate fiction was misused to such an extent that injustice, fraud, or crime was
committed against another, in disregard of its rights. The wrongdoing must be clearly and
convincingly established; it cannot be presumed. x x x. 45 (Emphases supplied; citations
omitted.)

Sarona v. National Labor Relations Commission46 has defined the scope of application of the
doctrine of piercing the corporate veil:
The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1)
defeat of public convenience as when the corporate fiction is used as a vehicle for the
evasion of an existing obligation; 2) fraud cases or when the corporate entity is used to
justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation
is merely a farce since it is a mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another corporation. (Citation
omitted.)
Here, HRCC has alleged from the inception of this case that DBP and PNB (and the APT as
assignee of DBP and PNB) should be held solidarily liable for using NMIC as alter ego. 47 The
RTC sustained the allegation of HRCC and pierced the corporate veil of NMIC pursuant to
the alter ego theory when it concluded that NMIC "is a mere adjunct, business conduit or
alter ego of both DBP and PNB."48 The Court of Appeals upheld such conclusion of the trial
court.49 In other words, both the trial and appellate courts relied on the alter ego theory
when they disregarded the separate corporate personality of NMIC.
In this connection, case law lays down a three-pronged test to determine the application of
the alter ego theory, which is also known as the instrumentality theory, namely:
(1) Control, not mere majority or complete stock control, but complete domination,
not only of finances but of policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own;
(2) Such control must have been used by the defendant to commit fraud or wrong,
to perpetuate the violation of a statutory or other positive legal duty, or dishonest
and unjust act in contravention of plaintiffs legal right; and
(3) The aforesaid control and breach of duty must have proximately caused the
injury or unjust loss complained of.50 (Emphases omitted.)
The first prong is the "instrumentality" or "control" test. This test requires that the
subsidiary be completely under the control and domination of the parent. 51 It examines the
parent corporations relationship with the subsidiary.52 It inquires whether a subsidiary
corporation is so organized and controlled and its affairs are so conducted as to make it a
mere instrumentality or agent of the parent corporation such that its separate existence as
a distinct corporate entity will be ignored.53 It seeks to establish whether the subsidiary
corporation has no autonomy and the parent corporation, though acting through the
subsidiary in form and appearance, "is operating the business directly for itself." 54

The second prong is the "fraud" test. This test requires that the parent corporations
conduct in using the subsidiary corporation be unjust, fraudulent or wrongful. 55 It examines
the relationship of the plaintiff to the corporation. 56 It recognizes that piercing is
appropriate only if the parent corporation uses the subsidiary in a way that harms the
plaintiff creditor.57 As such, it requires a showing of "an element of injustice or fundamental
unfairness."58
The third prong is the "harm" test. This test requires the plaintiff to show that the
defendants control, exerted in a fraudulent, illegal or otherwise unfair manner toward it,
caused the harm suffered.59 A causal connection between the fraudulent conduct committed
through the instrumentality of the subsidiary and the injury suffered or the damage
incurred by the plaintiff should be established. The plaintiff must prove that, unless the
corporate veil is pierced, it will have been treated unjustly by the defendants exercise of
control and improper use of the corporate form and, thereby, suffer damages. 60
To summarize, piercing the corporate veil based on the alter ego theory requires the
concurrence of three elements: control of the corporation by the stockholder or parent
corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or damage
caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of any
of these elements prevents piercing the corporate veil. 61
This Court finds that none of the tests has been satisfactorily met in this case.
In applying the alter ego doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendants relationship to that
operation.62 With respect to the control element, it refers not to paper or formal control by
majority or even complete stock control but actual control which amounts to "such
domination of finances, policies and practices that the controlled corporation has, so to
speak, no separate mind, will or existence of its own, and is but a conduit for its
principal."63 In addition, the control must be shown to have been exercised at the time the
acts complained of took place.64
Both the RTC and the Court of Appeals applied the alter ego theory and penetrated the
corporate cover of NMIC based on two factors: (1) the ownership by DBP and PNB of
effectively all the stocks of NMIC, and (2) the alleged interlocking directorates of DBP, PNB
and NMIC.65 Unfortunately, the conclusion of the trial and appellate courts that the DBP and
PNB fit the alter ego theory with respect to NMICs transaction with HRCC on the premise of
complete stock ownership and interlocking directorates involved a quantum leap in logic
and law exposing a gap in reason and fact.
While ownership by one corporation of all or a great majority of stocks of another
corporation and their interlocking directorates may serve as indicia of control, by
themselves and without more, however, these circumstances are insufficient to establish an
alter ego relationship or connection between DBP and PNB on the one hand and NMIC on

the other hand, that will justify the puncturing of the latters corporate cover. This Court
has declared that "mere ownership by a single stockholder or by another corporation of all
or nearly all of the capital stock of a corporation is not of itself sufficient ground for
disregarding the separate corporate personality." 66 This Court has likewise ruled that the
"existence of interlocking directors, corporate officers and shareholders is not enough
justification to pierce the veil of corporate fiction in the absence of fraud or other public
policy considerations."67

that NMIC, DBP, and PNB had interlocking directors as it only indicates that, of the five
members of NMICs board of directors, four were nominees of either DBP or PNB and only
one was a nominee of both DBP and PNB.75 Only two members of the board of directors of
NMIC, Jose Tengco, Jr. and Rolando Zosa, were established to be members of the board of
governors of DBP and none was proved to be a member of the board of directors of PNB. 76
No director of NMIC was shown to be also sitting simultaneously in the board of
governors/directors of both DBP and PNB.

True, the findings of fact of the Court of Appeals are conclusive and cannot be reviewed on
appeal to this Court, provided they are borne out of the record or are based on substantial
evidence.68 It is equally true that the question of whether one corporation is merely an alter
ego of another is purely one of fact. So is the question of whether a corporation is a paper
company, a sham or subterfuge or whether the requisite quantum of evidence has been
adduced warranting the piercing of the veil of corporate personality.69 Nevertheless, it has
been held in Sarona v. National Labor Relations Commission70 that this Court has the power
to resolve a question of fact, such as whether a corporation is a mere alter ego of another
entity or whether the corporate fiction was invoked for fraudulent or malevolent ends, if the
findings in the assailed decision are either not supported by the evidence on record or
based on a misapprehension of facts.

In reaching its conclusion of an alter ego relationship between DBP and PNB on the one
hand and NMIC on the other hand, the Court of Appeals invoked Sibagat Timber
Corporation v. Garcia,77 which it described as "a case under a similar factual milieu." 78
However, in Sibagat Timber Corporation, this Court took care to enumerate the
circumstances which led to the piercing of the corporate veil of Sibagat Timber Corporation
for being the alter ego of Del Rosario & Sons Logging Enterprises, Inc. Those circumstances
were as follows: holding office in the same building, practical identity of the officers and
directors of the two corporations and assumption of management and control of Sibagat
Timber Corporation by the directors/officers of Del Rosario & Sons Logging Enterprises, Inc.

In this case, nothing in the records shows that the corporate finances, policies and
practices of NMIC were dominated by DBP and PNB in such a way that NMIC could be
considered to have no separate mind, will or existence of its own but a mere conduit for
DBP and PNB. On the contrary, the evidence establishes that HRCC knew and acted on the
knowledge that it was dealing with NMIC, not with NMICs stockholders. The letter proposal
of Hercon, Inc., HRCCs predecessor-in-interest, regarding the contract for NMICs mine
stripping and road construction program was addressed to and accepted by NMIC. 71 The
various billing reports, progress reports, statements of accounts and communications of
Hercon, Inc./HRCC regarding NMICs mine stripping and road construction program in 1985
concerned NMIC and NMICs officers, without any indication of or reference to the control
exercised by DBP and/or PNB over NMICs affairs, policies and practices. 72
HRCC has presented nothing to show that DBP and PNB had a hand in the act complained
of, the alleged undue disregard by NMIC of the demands of HRCC to satisfy the unpaid
claims for services rendered by HRCC in connection with NMICs mine stripping and road
construction program in 1985. On the contrary, the overall picture painted by the evidence
offered by HRCC is one where HRCC was dealing with NMIC as a distinct juridical person
acting through its own corporate officers.73
Moreover, the finding that the respective boards of directors of NMIC, DBP, and PNB were
interlocking has no basis. HRCCs Exhibit "I-5," 74 the initial General Information Sheet
submitted by NMIC to the Securities and Exchange Commission, relied upon by the trial
court and the Court of Appeals may have proven that DBP and PNB owned the stocks of
NMIC to the extent of 57% and 43%, respectively. However, nothing in it supports a finding

Here, DBP and PNB maintain an address different from that of NMIC. 79 As already
discussed, there was insufficient proof of interlocking directorates. There was not even an
allegation of similarity of corporate officers. Instead of evidence that DBP and PNB assumed
and controlled the management of NMIC, HRCCs evidence shows that NMIC operated as a
distinct entity endowed with its own legal personality. Thus, what obtains in this case is a
factual backdrop different from, not similar to, Sibagat Timber Corporation.
In relation to the second element, to disregard the separate juridical personality of a
corporation, the wrongdoing or unjust act in contravention of a plaintiffs legal rights must
be clearly and convincingly established; it cannot be presumed. Without a demonstration
that any of the evils sought to be prevented by the doctrine is present, it does not apply.80
In this case, the Court of Appeals declared:
We are not saying that PNB and DBP are guilty of fraud in forming NMIC, nor are we
implying that NMIC was used to conceal fraud. x x x. 81
Such a declaration clearly negates the possibility that DBP and PNB exercised control over
NMIC which DBP and PNB used "to commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and unjust act in contravention of
plaintiffs legal rights." It is a recognition that, even assuming that DBP and PNB exercised
control over NMIC, there is no evidence that the juridical personality of NMIC was used by
DBP and PNB to commit a fraud or to do a wrong against HRCC.
There being a total absence of evidence pointing to a fraudulent, illegal or unfair act
committed against HRCC by DBP and PNB under the guise of NMIC, there is no basis to

hold that NMIC was a mere alter ego of DBP and PNB. As this Court ruled in Ramoso v.
Court of Appeals82:

Processing Corporation, is DIRECTED to ensure compliance by the Nonoc Mining and

Industrial Corporation, now the Philnico Processing Corporation, with this Decision.

As a general rule, a corporation will be looked upon as a legal entity, unless and until
sufficient reason to the contrary appears. When the notion of legal entity is used to defeat
public convenience, justify wrong, protect fraud, or defend crime, the law will regard the
corporation as an association of persons. Also, the corporate entity may be disregarded in
the interest of justice in such cases as fraud that may work inequities among members of
the corporation internally, involving no rights of the public or third persons. In both
instances, there must have been fraud, and proof of it. For the separate juridical
personality of a corporation to be disregarded, the wrongdoing must be clearly and
convincingly established. It cannot be presumed.

SO ORDERED.

As regards the third element, in the absence of both control by DBP and PNB of NMIC and
fraud or fundamental unfairness perpetuated by DBP and PNB through the corporate cover
of NMIC, no harm could be said to have been proximately caused by DBP and PNB on HRCC
for which HRCC could hold DBP and PNB solidarily liable with NMIC.1wphi1
Considering that, under the deeds of transfer executed by DBP and PNB, the liability of the
APT as transferee of the rights, titles and interests of DBP and PNB in NMIC will attach only
if DBP and PNB are held liable, the APT incurs no liability for the judgment indebtedness of
NMIC. Even HRCC recognizes that "as assignee of DBP and PNB 's loan receivables," the
APT simply "stepped into the shoes of DBP and PNB with respect to the latter's rights and
obligations" in NMIC.83 As such assignee, therefore, the APT incurs no liability with respect
to NMIC other than whatever liabilities may be imputable to its assignors, DBP and PNB.
Even under Section 2.02 of the respective deeds of transfer executed by DBP and PNB
which HRCC invokes, the APT cannot be held liable. The contingent liability for which the
National Government, through the APT, may be held liable under the said provision refers
to contingent liabilities of DBP and PNB. Since DBP and PNB may not be held solidarily
liable with NMIC, no contingent liability may be imputed to the APT as well. Only NMIC as a
distinct and separate legal entity is liable to pay its corporate obligation to HRCC in the
amount of P8,370,934.74, with legal interest thereon from date of demand.
As trustee of the. assets of NMIC, however, the APT should ensure compliance by NMIC of
the judgment against it. The APT itself acknowledges this. 84
WHEREFORE, the petitions are hereby GRANTED.
The complaint as against Development Bank of the Philippines, the Philippine National
Bank, and the Asset Privatization Trust, now the Privatization and Management Office, is
DISMISSED for lack of merit. The Asset Privatization Trust, now the Privatization and
Management Office, as trustee of Nonoc Mining and Industrial Corporation, now the Philnico

G.R. No. 176579

October 9, 2012

HEIRS OF WILSON P. GAMBOA,* Petitioners, vs. FINANCE SECRETARYMARGARITO

B. TEVES, FINANCE UNDERSECRETARYJOHN P. SEVILLA, AND COMMISSIONER
RICARDO ABCEDE OF THE PRESIDENTIAL COMMISSION ON GOOD
GOVERNMENT(PCGG) IN THEIR CAPACITIES AS CHAIR AND MEMBERS,
RESPECTIVELY, OF THE PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI SALIM
OF FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS DIRECTOR OF METRO PACIFIC
ASSET HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN OF PHILIPPINE
LONG DISTANCE TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS MANAGING
DIRECTOR OF FIRST PACIFIC CO., LTD., PRESIDENT NAPOLEON L. NAZARENO OF
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, CHAIR FE BARIN OF THE
SECURITIES AND EXCHANGE COMMISSION, and PRESIDENT FRANCIS LIM OF THE
PHILIPPINE STOCK EXCHANGE, Respondents.
PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioner-in-Intervention.
RESOLUTION
CARPIO, J.:
This resolves the motions for reconsideration of the 28 June 2011 Decision filed by (1) the
Philippine Stock Exchange's (PSE) President, 1 (2) Manuel V. Pangilinan (Pangilinan),2 (3)
Napoleon L. Nazareno (Nazareno ),3 and ( 4) the Securities and Exchange Commission
(SEC)4 (collectively, movants ).
The Office of the Solicitor General (OSG) initially filed a motion for reconsideration on
behalfofthe SEC,5 assailing the 28 June 2011 Decision. However, it subsequently filed a
Consolidated Comment on behalf of the State,6 declaring expressly that it agrees with the
Court's definition of the term "capital" in Section 11, Article XII of the Constitution. During
the Oral Arguments on 26 June 2012, the OSG reiterated its position consistent with the
Court's 28 June 2011 Decision.
We deny the motions for reconsideration.
I.
Far-reaching implications of the legal issue justify
treatment of petition for declaratory relief as one for mandamus.
As we emphatically stated in the 28 June 2011 Decision, the interpretation of the term
"capital" in Section 11, Article XII of the Constitution has far-reaching implications to the
national economy. In fact, a resolution of this issue will determine whether Filipinos are
masters, or second-class citizens, in their own country. What is at stake here is whether

Filipinos or foreigners will have effective control of the Philippine national economy.
Indeed, if ever there is a legal issue that has far-reaching implications to the entire nation,
and to future generations of Filipinos, it is the threshold legal issue presented in this case.
Contrary to Pangilinans narrow view, the serious economic consequences resulting in the
interpretation of the term "capital" in Section 11, Article XII of the Constitution
undoubtedly demand an immediate adjudication of this issue. Simply put, the farreaching implications of this issue justify the treatment of the petition as one for
mandamus.7
In Luzon Stevedoring Corp. v. Anti-Dummy Board,8 the Court deemed it wise and expedient
to resolve the case although the petition for declaratory relief could be outrightly dismissed
for being procedurally defective. There, appellant admittedly had already committed a
breach of the Public Service Act in relation to the Anti-Dummy Law since it had been
employing non- American aliens long before the decision in a prior similar case. However,
the main issue in Luzon Stevedoring was of transcendental importance, involving the
exercise or enjoyment of rights, franchises, privileges, properties and businesses which
only Filipinos and qualified corporations could exercise or enjoy under the Constitution and
the statutes. Moreover, the same issue could be raised by appellant in an appropriate
action. Thus, in Luzon Stevedoring the Court deemed it necessary to finally dispose of the
case for the guidance of all concerned, despite the apparent procedural flaw in the petition.
The circumstances surrounding the present case, such as the supposed procedural defect of
the petition and the pivotal legal issue involved, resemble those in Luzon Stevedoring.
Consequently, in the interest of substantial justice and faithful adherence to the
Constitution, we opted to resolve this case for the guidance of the public and all concerned
parties.
II.
No change of any long-standing rule;
thus, no redefinition of the term "capital."
Movants contend that the term "capital" in Section 11, Article XII of the Constitution has
long been settled and defined to refer to the total outstanding shares of stock, whether
voting or non-voting. In fact, movants claim that the SEC, which is the administrative
agency tasked to enforce the 60-40 ownership requirement in favor of Filipino citizens in
the Constitution and various statutes, has consistently adopted this particular definition in
its numerous opinions. Movants point out that with the 28 June 2011 Decision, the Court in
effect introduced a "new" definition or "midstream redefinition" 9 of the term "capital" in
Section 11, Article XII of the Constitution.
This is egregious error.
For more than 75 years since the 1935 Constitution, the Court has not interpreted or
defined the term "capital" found in various economic provisions of the 1935, 1973 and
1987 Constitutions. There has never been a judicial precedent interpreting the term
"capital" in the 1935, 1973 and 1987 Constitutions, until now. Hence, it is patently wrong
and utterly baseless to claim that the Court in defining the term "capital" in its 28 June
2011 Decision modified, reversed, or set aside the purported long-standing definition of the

term "capital," which supposedly refers to the total outstanding shares of stock, whether
voting or non-voting. To repeat, until the present case there has never been a Court ruling
categorically defining the term "capital" found in the various economic provisions of the
1935, 1973 and 1987 Philippine Constitutions.
The opinions of the SEC, as well as of the Department of Justice (DOJ), on the definition of
the term "capital" as referring to both voting and non-voting shares (combined total of
common and preferred shares) are, in the first place, conflicting and inconsistent. There is
no basis whatsoever to the claim that the SEC and the DOJ have consistently and uniformly
adopted a definition of the term "capital" contrary to the definition that this Court adopted
in its 28 June 2011 Decision.
In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the scope of the term "capital" in
Section 9, Article XIV of the 1973 Constitution was raised, that is, whether the term
"capital" includes "both preferred and common stocks." The issue was raised in relation to a
stock-swap transaction between a Filipino and a Japanese corporation, both stockholders of
a domestic corporation that owned lands in the Philippines. Then Minister of Justice Estelito
P. Mendoza ruled that the resulting ownership structure of the corporation would be
unconstitutional because 60% of the voting stock would be owned by Japanese while
Filipinos would own only 40% of the voting stock, although when the non-voting stock is
added, Filipinos would own 60% of the combined voting and non-voting stock. This
ownership structure is remarkably similar to the current ownership structure of
PLDT. Minister Mendoza ruled:
xxxx
Thus, the Filipino group still owns sixty (60%) of the entire subscribed capital stock
(common and preferred) while the Japanese investors control sixty percent (60%) of the
common (voting) shares.
It is your position that x x x since Section 9, Article XIV of the Constitution uses
the word "capital," which is construed "to include both preferred and common
shares" and "that where the law does not distinguish, the courts shall not
distinguish."
xxxx
In light of the foregoing jurisprudence, it is my opinion that the stock-swap
transaction in question may not be constitutionally upheld. While it may be ordinary
corporate practice to classify corporate shares into common voting shares and preferred
non-voting shares, any arrangement which attempts to defeat the constitutional purpose
should be eschewed. Thus, the resultant equity arrangement which would place
ownership of 60%11 of the common (voting) shares in the Japanese group, while
retaining 60% of the total percentage of common and preferred shares in Filipino
hands would amount to circumvention of the principle of control by Philippine
stockholders that is implicit in the 60% Philippine nationality requirement in the
Constitution. (Emphasis supplied)

In short, Minister Mendoza categorically rejected the theory that the term "capital" in
Section 9, Article XIV of the 1973 Constitution includes "both preferred and common
stocks" treated as the same class of shares regardless of differences in voting rights and
privileges. Minister Mendoza stressed that the 60-40 ownership requirement in favor of
Filipino citizens in the Constitution is not complied with unless the corporation "satisfies
the criterion of beneficial ownership" and that in applying the same "the primordial
consideration is situs of control."

SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act with
transparency and shall have the powers and functions provided by this Code, Presidential
Decree No. 902-A, the Corporation Code, the Investment Houses Law, the Financing
Company Act and other existing laws. Pursuant thereto the Commission shall have, among
others, the following powers and functions:

On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to Castillo
Laman Tan Pantaleon & San Jose, then SEC General Counsel Vernette G. Umali-Paco
applied the Voting Control Test, that is, using only the voting stock to determine whether
a corporation is a Philippine national. The Opinion states:

(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue
opinions and provide guidance on and supervise compliance with such rules,
regulations and orders;

Applying the foregoing, particularly the Control Test, MLRC is deemed as a Philippine
national because: (1) sixty percent (60%) of its outstanding capital stock entitled to
vote is owned by a Philippine national, the Trustee; and (2) at least sixty percent (60%) of
the ERF will accrue to the benefit of Philippine nationals. Still pursuant to the Control
Test, MLRCs investment in 60% of BFDCs outstanding capital stock entitled to
vote shall be deemed as of Philippine nationality, thereby qualifying BFDC to own
private land.
Further, under, and for purposes of, the FIA, MLRC and BFDC are both Philippine nationals,
considering that: (1) sixty percent (60%) of their respective outstanding capital stock
entitled to vote is owned by a Philippine national (i.e., by the Trustee, in the case of
MLRC; and by MLRC, in the case of BFDC); and (2) at least 60% of their respective board
of directors are Filipino citizens. (Boldfacing and italicization supplied)
Clearly, these DOJ and SEC opinions are compatible with the Courts interpretation of the
60-40 ownership requirement in favor of Filipino citizens mandated by the Constitution for
certain economic activities. At the same time, these opinions highlight the conflicting,
contradictory, and inconsistent positions taken by the DOJ and the SEC on the definition of
the term "capital" found in the economic provisions of the Constitution.
The opinions issued by SEC legal officers do not have the force and effect of SEC rules and
regulations because only the SEC en banc can adopt rules and regulations. As expressly
provided in Section 4.6 of the Securities Regulation Code, 12 the SEC cannot delegate to any
of its individual Commissioner or staff the power to adopt any rule or regulation. Further,
under Section 5.1 of the same Code, it is the SEC as a collegial body, and not any
of its legal officers, that is empowered to issue opinions and approve rules and
regulations. Thus:
4.6. The Commission may, for purposes of efficiency, delegate any of its functions to any
department or office of the Commission, an individual Commissioner or staff member of the
Commission except its review or appellate authority and its power to adopt, alter and
supplement any rule or regulation.
The Commission may review upon its own initiative or upon the petition of any interested
party any action of any department or office, individual Commissioner, or staff member of
the Commission.

xxxx

x x x x (Emphasis supplied)
Thus, the act of the individual Commissioners or legal officers of the SEC in issuing opinions
that have the effect of SEC rules or regulations is ultra vires. Under Sections 4.6 and 5.1(g)
of the Code, only the SEC en banc can "issue opinions" that have the force and effect of
rules or regulations. Section 4.6 of the Code bars the SEC en banc from delegating to any
individual Commissioner or staff the power to adopt rules or regulations. In short, any
opinion of individual Commissioners or SEC legal officers does not constitute a
rule or regulation of the SEC.
The SEC admits during the Oral Arguments that only the SEC en banc, and not any of its
individual commissioners or legal staff, is empowered to issue opinions which have the
same binding effect as SEC rules and regulations, thus:
JUSTICE CARPIO:
So, under the law, it is the Commission En Banc that can issue an
SEC Opinion, correct?
COMMISSIONER GAITE:13
Thats correct, Your Honor.
JUSTICE CARPIO:
Can the Commission En Banc delegate this function to an SEC officer?
COMMISSIONER GAITE:
Yes, Your Honor, we have delegated it to the General Counsel.
JUSTICE CARPIO:

It can be delegated. What cannot be delegated by the Commission En Banc

to a commissioner or an individual employee of the Commission?
COMMISSIONER GAITE:
Novel opinions that [have] to be decided by the En Banc...
JUSTICE CARPIO:
What cannot be delegated, among others, is the power to adopt or amend
rules and regulations, correct?
COMMISSIONER GAITE:
Thats correct, Your Honor.
JUSTICE CARPIO:
So, you combine the two (2), the SEC officer, if delegated that
power, can issue an opinion but that opinion does not constitute a
rule or regulation, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
So, all of these opinions that you mentioned they are not rules and
regulations, correct?
COMMISSIONER GAITE:
They are not rules and regulations.
JUSTICE CARPIO:
If they are not rules and regulations, they apply only to that particular
situation and will not constitute a precedent, correct?
COMMISSIONER GAITE:
Yes, Your Honor.14 (Emphasis supplied)
Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue
rules and opinions on behalf of the SEC, has adopted even the Grandfather Rule in

determining compliance with the 60-40 ownership requirement in favor of Filipino citizens
mandated by the Constitution for certain economic activities. This prevailing SEC ruling,
which the SEC correctly adopted to thwart any circumvention of the required Filipino
"ownership and control," is laid down in the 25 March 2010 SEC en banc ruling in
Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al.,15 to wit:
The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation
of our natural resources. Necessarily, therefore, the Rule interpreting the
constitutional provision should not diminish that right through the legal fiction of
corporate ownership and control. But the constitutional provision, as interpreted and
practiced via the 1967 SEC Rules, has favored foreigners contrary to the command of the
Constitution. Hence, the Grandfather Rule must be applied to accurately determine
the actual participation, both direct and indirect, of foreigners in a corporation
engaged in a nationalized activity or business.
Compliance with the constitutional limitation(s) on engaging in nationalized activities must
be determined by ascertaining if 60% of the investing corporations outstanding capital
stock is owned by "Filipino citizens", or as interpreted, by natural or individual Filipino
citizens. If such investing corporation is in turn owned to some extent by another investing
corporation, the same process must be observed. One must not stop until the citizenships
of the individual or natural stockholders of layer after layer of investing corporations have
been established, the very essence of the Grandfather Rule.
Lastly, it was the intent of the framers of the 1987 Constitution to adopt the
Grandfather Rule. In one of the discussions on what is now Article XII of the present
Constitution, the framers made the following exchange:
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and
foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.
MR. VILLEGAS. That is right.
MR. NOLLEDO. In teaching law, we are always faced with the question: Where do we base
the equity requirement, is it on the authorized capital stock, on the subscribed capital
stock, or on the paid-up capital stock of a corporation? Will the Committee please
enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the members of the team from the
UP Law Center who provided us a draft. The phrase that is contained here which we
adopted from the UP draft is 60 percent of voting stock.
MR. NOLLEDO. That must be based on the subscribed capital stock, because unless
declared delinquent, unpaid capital stock shall be entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you. With respect to an investment by one corporation in another
corporation, say, a corporation with 60-40 percent equity invests in another corporation

which is permitted by the Corporation Code, does the Committee adopt the grandfather
rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes. (Boldfacing and underscoring supplied; italicization in the original)
This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40 ownership
requirement in favor of Filipino citizens in the Constitution to engage in certain economic
activities applies not only to voting control of the corporation, but also to the beneficial
ownership of the corporation. Thus, in our 28 June 2011 Decision we stated:
Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital
stock, coupled with 60 percent of the voting rights, is required. The legal and
beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands
of Filipino nationals in accordance with the constitutional mandate. Otherwise, the
corporation is "considered as non-Philippine national[s]." (Emphasis supplied)
Both the Voting Control Test and the Beneficial Ownership Test must be applied to
determine whether a corporation is a "Philippine national."
The interpretation by legal officers of the SEC of the term "capital," embodied in various
opinions which respondents relied upon, is merely preliminary and an opinion only of such
officers. To repeat, any such opinion does not constitute an SEC rule or regulation. In fact,
many of these opinions contain a disclaimer which expressly states: "x x x the foregoing
opinion is based solely on facts disclosed in your query and relevant only to the particular
issue raised therein and shall not be used in the nature of a standing rule binding
upon the Commission in other cases whether of similar or dissimilar
circumstances."16 Thus, the opinions clearly make a caveat that they do not constitute
binding precedents on any one, not even on the SEC itself.
Likewise, the opinions of the SEC en banc, as well as of the DOJ, interpreting the law are
neither conclusive nor controlling and thus, do not bind the Court. It is hornbook doctrine
that any interpretation of the law that administrative or quasi-judicial agencies make is
only preliminary, never conclusive on the Court. The power to make a final interpretation of
the law, in this case the term "capital" in Section 11, Article XII of the 1987 Constitution,
lies with this Court, not with any other government entity.
In his motion for reconsideration, the PSE President cites the cases of National
Telecommunications Commission v. Court of Appeals 17 and Philippine Long Distance
Telephone Company v. National Telecommunications Commission 18 in arguing that the
Court has already defined the term "capital" in Section 11, Article XII of the 1987
Constitution.19
The PSE President is grossly mistaken. In both cases of National Telecommunications v.
Court of Appeals20 and Philippine Long Distance Telephone Company v. National

Telecommunications Commission,21 the Court did not define the term "capital" as found in
Section 11, Article XII of the 1987 Constitution. In fact, these two cases never
mentioned, discussed or cited Section 11, Article XII of the Constitution or any of
its economic provisions, and thus cannot serve as precedent in the interpretation
of Section 11, Article XII of the Constitution. These two cases dealt solely with the
determination of the correct regulatory fees under Section 40(e) and (f) of the Public
Service Act, to wit:
(e) For annual reimbursement of the expenses incurred by the Commission in the
supervision of other public services and/or in the regulation or fixing of their rates, twenty
centavos for each one hundred pesos or fraction thereof, of the capital stock subscribed
or paid, or if no shares have been issued, of the capital invested, or of the property and
equipment whichever is higher.
(f) For the issue or increase of capital stock, twenty centavos for each one hundred pesos
or fraction thereof, of the increased capital. (Emphasis supplied)
The Courts interpretation in these two cases of the terms "capital stock subscribed or
paid," "capital stock" and "capital" does not pertain to, and cannot control, the definition of
the term "capital" as used in Section 11, Article XII of the Constitution, or any of the
economic provisions of the Constitution where the term "capital" is found. The definition of
the term "capital" found in the Constitution must not be taken out of context. A careful
reading of these two cases reveals that the terms "capital stock subscribed or paid,"
"capital stock" and "capital" were defined solely to determine the basis for computing the
supervision and regulation fees under Section 40(e) and (f) of the Public Service Act.
III.
Filipinization of Public Utilities
The Preamble of the 1987 Constitution, as the prologue of the supreme law of the land,
embodies the ideals that the Constitution intends to achieve. 22 The Preamble reads:
We, the sovereign Filipino people, imploring the aid of Almighty God, in order to build a just
and humane society, and establish a Government that shall embody our ideals and
aspirations, promote the common good, conserve and develop our patrimony, and
secure to ourselves and our posterity, the blessings of independence and democracy under
the rule of law and a regime of truth, justice, freedom, love, equality, and peace, do ordain
and promulgate this Constitution. (Emphasis supplied)
Consistent with these ideals, Section 19, Article II of the 1987 Constitution declares as
State policy the development of a national economy "effectively controlled" by Filipinos:
Section 19. The State shall develop a self-reliant and independent national economy
effectively controlled by Filipinos.
Fortifying the State policy of a Filipino-controlled economy, the Constitution decrees:
Section 10. The Congress shall, upon recommendation of the economic and planning
agency, when the national interest dictates, reserve to citizens of the Philippines or to

corporations or associations at least sixty per centum of whose capital is owned by such
citizens, or such higher percentage as Congress may prescribe, certain areas of
investments. The Congress shall enact measures that will encourage the formation and
operation of enterprises whose capital is wholly owned by Filipinos.
In the grant of rights, privileges, and concessions covering the national economy and
patrimony, the State shall give preference to qualified Filipinos.
The State shall regulate and exercise authority over foreign investments within its national
jurisdiction and in accordance with its national goals and priorities. 23
Under Section 10, Article XII of the 1987 Constitution, Congress may "reserve to citizens of
the Philippines or to corporations or associations at least sixty per centum of whose capital
is owned by such citizens, or such higher percentage as Congress may prescribe, certain
areas of investments." Thus, in numerous laws Congress has reserved certain areas of
investments to Filipino citizens or to corporations at least sixty percent of the "capital" of
which is owned by Filipino citizens. Some of these laws are: (1) Regulation of Award of
Government Contracts or R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No.
3850; (3) Magna Carta for Micro, Small and Medium Enterprises or R.A. No. 6977; (4)
Philippine Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping
Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009
or R.A. No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521.
With respect to public utilities, the 1987 Constitution specifically ordains:
Section 11. No franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to citizens of the Philippines
or to corporations or associations organized under the laws of the Philippines, at
least sixty per centum of whose capital is owned by such citizens; nor shall such
franchise, certificate, or authorization be exclusive in character or for a longer period than
fifty years. Neither shall any such franchise or right be granted except under the condition
that it shall be subject to amendment, alteration, or repeal by the Congress when the
common good so requires. The State shall encourage equity participation in public utilities
by the general public. The participation of foreign investors in the governing body of any
public utility enterprise shall be limited to their proportionate share in its capital, and all the
executive and managing officers of such corporation or association must be citizens of the
Philippines. (Emphasis supplied)
This provision, which mandates the Filipinization of public utilities, requires that any form of
authorization for the operation of public utilities shall be granted only to "citizens of the
Philippines or to corporations or associations organized under the laws of the Philippines at
least sixty per centum of whose capital is owned by such citizens." "The provision is [an
express] recognition of the sensitive and vital position of public utilities both in
the national economy and for national security."24
The 1987 Constitution reserves the ownership and operation of public utilities exclusively to
(1) Filipino citizens, or (2) corporations or associations at least 60 percent of whose
"capital" is owned by Filipino citizens. Hence, in the case of individuals, only Filipino citizens
can validly own and operate a public utility. In the case of corporations or associations, at

least 60 percent of their "capital" must be owned by Filipino citizens. In other words,
under Section 11, Article XII of the 1987 Constitution, to own and operate a
public utility a corporations capital must at least be 60 percent owned by
Philippine nationals.
IV.
Definition of "Philippine National"
Pursuant to the express mandate of Section 11, Article XII of the 1987 Constitution,
Congress enacted Republic Act No. 7042 or the Foreign Investments Act of 1991 (FIA), as
amended, which defined a "Philippine national" as follows:
SEC. 3. Definitions. - As used in this Act:
a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least sixty percent (60%)
of the capital stock outstanding and entitled to vote is owned and held by citizens
of the Philippines; or a corporation organized abroad and registered as doing business in
the Philippines under the Corporation Code of which one hundred percent (100%) of the
capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of
funds for pension or other employee retirement or separation benefits, where the trustee is
a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit
of Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders
own stocks in a Securities and Exchange Commission (SEC) registered enterprise, at least
sixty percent (60%) of the capital stock outstanding and entitled to vote of each of both
corporations must be owned and held by citizens of the Philippines and at least sixty
percent (60%) of the members of the Board of Directors of each of both corporations must
be citizens of the Philippines, in order that the corporation, shall be considered a "Philippine
national." (Boldfacing, italicization and underscoring supplied)
Thus, the FIA clearly and unequivocally defines a "Philippine national" as a Philippine
citizen, or a domestic corporation at least "60% of the capital stock outstanding and
entitled to vote" is owned by Philippine citizens.
The definition of a "Philippine national" in the FIA reiterated the meaning of such term as
provided in its predecessor statute, Executive Order No. 226 or the Omnibus Investments
Code of 1987,25 which was issued by then President Corazon C. Aquino. Article 15 of this
Code states:
Article 15. "Philippine national" shall mean a citizen of the Philippines or a diplomatic
partnership or association wholly-owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least sixty per cent (60%)
of the capital stock outstanding and entitled to vote is owned and held by citizens
of the Philippines; or a trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine national and at least sixty per cent
(60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where a
corporation and its non-Filipino stockholders own stock in a registered enterprise, at least
sixty per cent (60%) of the capital stock outstanding and entitled to vote of both

corporations must be owned and held by the citizens of the Philippines and at least sixty
per cent (60%) of the members of the Board of Directors of both corporations must be
citizens of the Philippines in order that the corporation shall be considered a Philippine
national. (Boldfacing, italicization and underscoring supplied)
Under Article 48(3)26 of the Omnibus Investments Code of 1987, "no corporation x x x
which is not a Philippine national x x x shall do business
x x x in the Philippines x x x without first securing from the Board of Investments a written
certificate to the effect that such business or economic activity x x x would not conflict with
the Constitution or laws of the Philippines." 27 Thus, a "non-Philippine national" cannot own
and operate a reserved economic activity like a public utility. This means, of course, that
only a "Philippine national" can own and operate a public utility.
In turn, the definition of a "Philippine national" under Article 15 of the Omnibus
Investments Code of 1987 was a reiteration of the meaning of such term as provided in
Article 14 of the Omnibus Investments Code of 1981,28 to wit:
Article 14. "Philippine national" shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least sixty per cent (60%)
of the capital stock outstanding and entitled to vote is owned and held by citizens
of the Philippines; or a trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine national and at least sixty per cent
(60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where a
corporation and its non-Filipino stockholders own stock in a registered enterprise, at least
sixty per cent (60%) of the capital stock outstanding and entitled to vote of both
corporations must be owned and held by the citizens of the Philippines and at least sixty
per cent (60%) of the members of the Board of Directors of both corporations must be
citizens of the Philippines in order that the corporation shall be considered a Philippine
national. (Boldfacing, italicization and underscoring supplied)
Under Article 69(3) of the Omnibus Investments Code of 1981, "no corporation x x x which
is not a Philippine national x x x shall do business x x x in the Philippines x x x without
first securing a written certificate from the Board of Investments to the effect that such
business or economic activity x x x would not conflict with the Constitution or laws of the
Philippines."29 Thus, a "non-Philippine national" cannot own and operate a reserved
economic activity like a public utility. Again, this means that only a "Philippine national" can
own and operate a public utility.
Prior to the Omnibus Investments Code of 1981, Republic Act No. 5186 30 or the Investment
Incentives Act, which took effect on 16 September 1967, contained a similar definition of a
"Philippine national," to wit:
(f) "Philippine National" shall mean a citizen of the Philippines; or a partnership or
association wholly owned by citizens of the Philippines; or a corporation organized
under the laws of the Philippines of which at least sixty per cent of the capital
stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a trustee of funds for pension or other employee retirement or separation

benefits, where the trustee is a Philippine National and at least sixty per cent of the fund
will accrue to the benefit of Philippine Nationals: Provided, That where a corporation and its
non-Filipino stockholders own stock in a registered enterprise, at least sixty per cent of the
capital stock outstanding and entitled to vote of both corporations must be owned and held
by the citizens of the Philippines and at least sixty per cent of the members of the Board of
Directors of both corporations must be citizens of the Philippines in order that the
corporation shall be considered a Philippine National. (Boldfacing, italicization and
underscoring supplied)
Under Section 3 of Republic Act No. 5455 or the Foreign Business Regulations Act, which
took effect on 30 September 1968, if the investment in a domestic enterprise by nonPhilippine nationals exceeds 30% of its outstanding capital stock, such enterprise must
obtain prior approval from the Board of Investments before accepting such investment.
Such approval shall not be granted if the investment "would conflict with existing
constitutional provisions and laws regulating the degree of required ownership by Philippine
nationals in the enterprise."31 A "non-Philippine national" cannot own and operate a
reserved economic activity like a public utility. Again, this means that only a "Philippine
national" can own and operate a public utility.
The FIA, like all its predecessor statutes, clearly defines a "Philippine national" as a
Filipino citizen, or a domestic corporation "at least sixty percent (60%) of the
capital stock outstanding and entitled to vote" is owned by Filipino citizens. A
domestic corporation is a "Philippine national" only if at least 60% of its voting stock is
owned by Filipino citizens. This definition of a "Philippine national" is crucial in the present
case because the FIA reiterates and clarifies Section 11, Article XII of the 1987
Constitution, which limits the ownership and operation of public utilities to Filipino citizens
or to corporations or associations at least 60% Filipino-owned.
The FIA is the basic law governing foreign investments in the Philippines, irrespective of the
nature of business and area of investment. The FIA spells out the procedures by which nonPhilippine nationals can invest in the Philippines. Among the key features of this law is the
concept of a negative list or the Foreign Investments Negative List. 32 Section 8 of the law
states:
SEC. 8. List of Investment Areas Reserved to Philippine Nationals [Foreign
Investment Negative List]. - The Foreign Investment Negative List shall have two 2
component lists: A and B:
a. List A shall enumerate the areas of activities reserved to Philippine nationals by
mandate of the Constitution and specific laws.
b. List B shall contain the areas of activities and enterprises regulated pursuant to law:
1. which are defense-related activities, requiring prior clearance and authorization from the
Department of National Defense [DND] to engage in such activity, such as the
manufacture, repair, storage and/or distribution of firearms, ammunition, lethal weapons,
military ordinance, explosives, pyrotechnics and similar materials; unless such
manufacturing or repair activity is specifically authorized, with a substantial export
component, to a non-Philippine national by the Secretary of National Defense; or

2. which have implications on public health and morals, such as the manufacture and
distribution of dangerous drugs; all forms of gambling; nightclubs, bars, beer houses,
dance halls, sauna and steam bathhouses and massage clinics. (Boldfacing, underscoring
and italicization supplied)

JUSTICE CARPIO:

Section 8 of the FIA enumerates the investment areas "reserved to Philippine nationals."
Foreign Investment Negative List A consists of "areas of activities reserved to
Philippine nationals by mandate of the Constitution and specific laws," where
foreign equity participation in any enterprise shall be limited to the maximum
percentage expressly prescribed by the Constitution and other specific laws. In
short, to own and operate a public utility in the Philippines one must be a
"Philippine national" as defined in the FIA. The FIA is abundant notice to foreign
investors to what extent they can invest in public utilities in the Philippines.

COMMISSIONER GAITE:

To repeat, among the areas of investment covered by the Foreign Investment Negative List
A is the ownership and operation of public utilities, which the Constitution expressly
reserves to Filipino citizens and to corporations at least 60% owned by Filipino citizens. In
other words, Negative List A of the FIA reserves the ownership and operation of
public utilities only to "Philippine nationals," defined in Section 3(a) of the FIA as
"(1) a citizen of the Philippines; x x x or (3) a corporation organized under the laws of
the Philippines of which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines;
or (4) a corporation organized abroad and registered as doing business in the Philippines
under the Corporation Code of which one hundred percent (100%) of the capital stock
outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for
pension or other employee retirement or separation benefits, where the trustee is a
Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of
Philippine nationals."
Clearly, from the effectivity of the Investment Incentives Act of 1967 to the adoption of the
Omnibus Investments Code of 1981, to the enactment of the Omnibus Investments Code of
1987, and to the passage of the present Foreign Investments Act of 1991, or for more
than four decades, the statutory definition of the term "Philippine national" has
been uniform and consistent: it means a Filipino citizen, or a domestic corporation
at least 60% of the voting stock is owned by Filipinos. Likewise, these same
statutes have uniformly and consistently required that only "Philippine nationals"
could own and operate public utilities in the Philippines. The following exchange
during the Oral Arguments is revealing:
JUSTICE CARPIO:
Counsel, I have some questions. You are aware of the Foreign Investments
Act of 1991, x x x? And the FIA of 1991 took effect in 1991, correct? Thats
over twenty (20) years ago, correct?
COMMISSIONER GAITE:
Correct, Your Honor.

And Section 8 of the Foreign Investments Act of 1991 states that []only
Philippine nationals can own and operate public utilities[], correct?

Yes, Your Honor.

JUSTICE CARPIO:
And the same Foreign Investments Act of 1991 defines a "Philippine
national" either as a citizen of the Philippines, or if it is a corporation at
least sixty percent (60%) of the voting stock is owned by citizens of the
Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And, you are also aware that under the predecessor law of the Foreign
Investments Act of 1991, the Omnibus Investments Act of 1987, the same
provisions apply: x x x only Philippine nationals can own and operate a
public utility and the Philippine national, if it is a corporation, x x x sixty
percent (60%) of the capital stock of that corporation must be owned by
citizens of the Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And even prior to the Omnibus Investments Act of 1987, under the
Omnibus Investments Act of 1981, the same rules apply: x x x only a
Philippine national can own and operate a public utility and a Philippine
national, if it is a corporation, sixty percent (60%) of its x x x voting stock,
must be owned by citizens of the Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:

And even prior to that, under [the]1967 Investments Incentives Act and
the Foreign Company Act of 1968, the same rules applied, correct?
COMMISSIONER GAITE:

4. Opinion of 7 December 1993, addressed to Roco Bunag Kapunan Migallos &

Jardeleza;
5. SEC Opinion No. 49-04, addressed to Romulo Mabanta Buenaventura Sayoc & De
Los Angeles;

Correct, Your Honor.

6. SEC-OGC Opinion No. 17-07, addressed to Mr. Reynaldo G. David; and
JUSTICE CARPIO:
So, for the last four (4) decades, x x x, the law has been very
consistent only a Philippine national can own and operate a public
utility, and a Philippine national, if it is a corporation, x x x at least
sixty percent (60%) of the voting stock must be owned by citizens
of the Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.33 (Emphasis supplied)
Government agencies like the SEC cannot simply ignore Sections 3(a) and 8 of the FIA
which categorically prescribe that certain economic activities, like the ownership and
operation of public utilities, are reserved to corporations "at least sixty percent (60%) of
the capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines." Foreign Investment Negative List A refers to "activities reserved to Philippine
nationals by mandate of the Constitution and specific laws." The FIA is the basic statute
regulating foreign investments in the Philippines. Government agencies tasked with
regulating or monitoring foreign investments, as well as counsels of foreign investors,
should start with the FIA in determining to what extent a particular foreign investment is
allowed in the Philippines. Foreign investors and their counsels who ignore the FIA do so at
their own peril. Foreign investors and their counsels who rely on opinions of SEC legal
officers that obviously contradict the FIA do so also at their own peril.
Occasional opinions of SEC legal officers that obviously contradict the FIA should
immediately raise a red flag. There are already numerous opinions of SEC legal officers that
cite the definition of a "Philippine national" in Section 3(a) of the FIA in determining
whether a particular corporation is qualified to own and operate a nationalized or partially
nationalized business in the Philippines. This shows that SEC legal officers are not only
aware of, but also rely on and invoke, the provisions of the FIA in ascertaining the eligibility
of a corporation to engage in partially nationalized industries. The following are some of
such opinions:
1. Opinion of 23 March 1993, addressed to Mr. Francis F. How;
2. Opinion of 14 April 1993, addressed to Director Angeles T. Wong of the Philippine
Overseas Employment Administration;
3. Opinion of 23 November 1993, addressed to Messrs. Dominador Almeda and
Renato S. Calma;

7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby Rose J. Yusi and Rudyard
S. Arbolado.
The SEC legal officers occasional but blatant disregard of the definition of the term
"Philippine national" in the FIA signifies their lack of integrity and competence in resolving
issues on the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article
XII of the Constitution.
The PSE President argues that the term "Philippine national" defined in the FIA should be
limited and interpreted to refer to corporations seeking to avail of tax and fiscal incentives
under investment incentives laws and cannot be equated with the term "capital" in Section
11, Article XII of the 1987 Constitution. Pangilinan similarly contends that the FIA and its
predecessor statutes do not apply to "companies which have not registered and obtained
special incentives under the schemes established by those laws."
Both are desperately grasping at straws. The FIA does not grant tax or fiscal incentives to
any enterprise. Tax and fiscal incentives to investments are granted separately under the
Omnibus Investments Code of 1987, not under the FIA. In fact, the FIA expressly repealed
Articles 44 to 56 of Book II of the Omnibus Investments Code of 1987, which articles
previously regulated foreign investments in nationalized or partially nationalized industries.
The FIA is the applicable law regulating foreign investments in nationalized or partially
nationalized industries. There is nothing in the FIA, or even in the Omnibus Investments
Code of 1987 or its predecessor statutes, that states, expressly or impliedly, that the FIA or
its predecessor statutes do not apply to enterprises not availing of tax and fiscal incentives
under the Code. The FIA and its predecessor statutes apply to investments in all domestic
enterprises, whether or not such enterprises enjoy tax and fiscal incentives under the
Omnibus Investments Code of 1987 or its predecessor statutes. The reason is quite
obvious mere non-availment of tax and fiscal incentives by a non-Philippine
national cannot exempt it from Section 11, Article XII of the Constitution
regulating foreign investments in public utilities. In fact, the Board of Investments
Primer on Investment Policies in the Philippines,34 which is given out to foreign
investors, provides:
PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES
Investors who do not seek incentives and/or whose chosen activities do not qualify for
incentives, (i.e., the activity is not listed in the IPP, and they are not exporting at least 70%
of their production) may go ahead and make the investments without seeking incentives.
They only have to be guided by the Foreign Investments Negative List (FINL).

The FINL clearly defines investment areas requiring at least 60% Filipino ownership. All
other areas outside of this list are fully open to foreign investors. (Emphasis supplied)
V.
Right to elect directors, coupled with beneficial ownership,
translates to effective control.
The 28 June 2011 Decision declares that the 60 percent Filipino ownership required by the
Constitution to engage in certain economic activities applies not only to voting control of
the corporation, but also to the beneficial ownership of the corporation. To repeat, we
held:
Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital
stock, coupled with 60 percent of the voting rights, is required. The legal and
beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands
of Filipino nationals in accordance with the constitutional mandate. Otherwise, the
corporation is "considered as non-Philippine national[s]." (Emphasis supplied)
This is consistent with Section 3 of the FIA which provides that where 100% of the capital
stock is held by "a trustee of funds for pension or other employee retirement or separation
benefits," the trustee is a Philippine national if "at least sixty percent (60%) of the fund will
accrue to the benefit of Philippine nationals." Likewise, Section 1(b) of the Implementing
Rules of the FIA provides that "for stocks to be deemed owned and held by Philippine
citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino
equity. Full beneficial ownership of the stocks, coupled with appropriate voting
rights, is essential."
Since the constitutional requirement of at least 60 percent Filipino ownership applies not
only to voting control of the corporation but also to the beneficial ownership of the
corporation, it is therefore imperative that such requirement apply uniformly and across the
board to all classes of shares, regardless of nomenclature and category, comprising the
capital of a corporation. Under the Corporation Code, capital stock 35 consists of all classes
of shares issued to stockholders, that is, common shares as well as preferred shares, which
may have different rights, privileges or restrictions as stated in the articles of
incorporation.36
The Corporation Code allows denial of the right to vote to preferred and redeemable
shares, but disallows denial of the right to vote in specific corporate matters. Thus,
common shares have the right to vote in the election of directors, while preferred shares
may be denied such right. Nonetheless, preferred shares, even if denied the right to vote in
the election of directors, are entitled to vote on the following corporate matters: (1)
amendment of articles of incorporation; (2) increase and decrease of capital stock; (3)
incurring, creating or increasing bonded indebtedness; (4) sale, lease, mortgage or other
disposition of substantially all corporate assets; (5) investment of funds in another business
or corporation or for a purpose other than the primary purpose for which the corporation
was organized; (6) adoption, amendment and repeal of by-laws; (7) merger and
consolidation; and (8) dissolution of corporation. 37

Since a specific class of shares may have rights and privileges or restrictions different from
the rest of the shares in a corporation, the 60-40 ownership requirement in favor of Filipino
citizens in Section 11, Article XII of the Constitution must apply not only to shares with
voting rights but also to shares without voting rights. Preferred shares, denied the right to
vote in the election of directors, are anyway still entitled to vote on the eight specific
corporate matters mentioned above. Thus, if a corporation, engaged in a partially
nationalized industry, issues a mixture of common and preferred non-voting
shares, at least 60 percent of the common shares and at least 60 percent of the
preferred non-voting shares must be owned by Filipinos. Of course, if a corporation
issues only a single class of shares, at least 60 percent of such shares must necessarily be
owned by Filipinos. In short, the 60-40 ownership requirement in favor of Filipino
citizens must apply separately to each class of shares, whether common,
preferred non-voting, preferred voting or any other class of shares. This uniform
application of the 60-40 ownership requirement in favor of Filipino citizens clearly breathes
life to the constitutional command that the ownership and operation of public utilities shall
be reserved exclusively to corporations at least 60 percent of whose capital is Filipinoowned. Applying uniformly the 60-40 ownership requirement in favor of Filipino citizens to
each class of shares, regardless of differences in voting rights, privileges and restrictions,
guarantees effective Filipino control of public utilities, as mandated by the Constitution.
Moreover, such uniform application to each class of shares insures that the "controlling
interest" in public utilities always lies in the hands of Filipino citizens. This addresses and
extinguishes Pangilinans worry that foreigners, owning most of the non-voting shares, will
exercise greater control over fundamental corporate matters requiring two-thirds or
majority vote of all shareholders.
VI.
Intent of the framers of the Constitution
While Justice Velasco quoted in his Dissenting Opinion 38 a portion of the deliberations of the
Constitutional Commission to support his claim that the term "capital" refers to the total
outstanding shares of stock, whether voting or non-voting, the following excerpts of the
deliberations reveal otherwise. It is clear from the following exchange that the term
"capital" refers to controlling interest of a corporation, thus:
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and
foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in Section 15.
MR. VILLEGAS. That is right.
MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do we base
the equity requirement, is it on the authorized capital stock, on the subscribed capital
stock, or on the paid-up capital stock of a corporation"? Will the Committee please
enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the members of the team from the
UP Law Center who provided us a draft. The phrase that is contained here which we
adopted from the UP draft is "60 percent of voting stock."

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless
declared delinquent, unpaid capital stock shall be entitled to vote.

MR. BENGZON. In the case of stock corporations, it is assumed. 40 (Boldfacing and

underscoring supplied)

MR. VILLEGAS. That is right.

Thus, 60 percent of the "capital" assumes, or should result in, a "controlling interest" in
the corporation.

MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation
with 60-40 percent equity invests in another corporation which is permitted by the
Corporation Code, does the Committee adopt the grandfather rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes.39
xxxx
MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.
MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting
stock or controlling interest."
MR. AZCUNA. Hence, without the Davide amendment, the committee report would read:
"corporations or associations at least sixty percent of whose CAPITAL is owned by such
citizens."
MR. VILLEGAS. Yes.
MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the
capital to be owned by citizens.
MR. VILLEGAS. That is right.
MR. AZCUNA. But the control can be with the foreigners even if they are the
minority. Let us say 40 percent of the capital is owned by them, but it is the
voting capital, whereas, the Filipinos own the nonvoting shares. So we can have a
situation where the corporation is controlled by foreigners despite being the
minority because they have the voting capital. That is the anomaly that would
result here.
MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the
1973 and 1935 Constitutions is that according to Commissioner Rodrigo, there are
associations that do not have stocks. That is why we say "CAPITAL."
MR. AZCUNA. We should not eliminate the phrase "controlling interest."

The use of the term "capital" was intended to replace the word "stock" because
associations without stocks can operate public utilities as long as they meet the 60-40
ownership requirement in favor of Filipino citizens prescribed in Section 11, Article XII of
the Constitution. However, this did not change the intent of the framers of the Constitution
to reserve exclusively to Philippine nationals the "controlling interest" in public utilities.
During the drafting of the 1935 Constitution, economic protectionism was "the battle-cry of
the nationalists in the Convention."41 The same battle-cry resulted in the nationalization of
the public utilities.42 This is also the same intent of the framers of the 1987 Constitution
who adopted the exact formulation embodied in the 1935 and 1973 Constitutions on
foreign equity limitations in partially nationalized industries.
The OSG, in its own behalf and as counsel for the State, 43 agrees fully with the Courts
interpretation of the term "capital." In its Consolidated Comment, the OSG explains that
the deletion of the phrase "controlling interest" and replacement of the word "stock" with
the term "capital" were intended specifically to extend the scope of the entities qualified to
operate public utilities to include associations without stocks. The framers omission of the
phrase "controlling interest" did not mean the inclusion of all shares of stock, whether
voting or non-voting. The OSG reiterated essentially the Courts declaration that the
Constitution reserved exclusively to Philippine nationals the ownership and operation of
public utilities consistent with the States policy to "develop a self-reliant and independent
national economy effectively controlled by Filipinos."
As we held in our 28 June 2011 Decision, to construe broadly the term "capital" as the total
outstanding capital stock, treated as a single class regardless of the actual classification of
shares, grossly contravenes the intent and letter of the Constitution that the "State shall
develop a self-reliant and independent national economy effectively controlled by
Filipinos." We illustrated the glaring anomaly which would result in defining the term
"capital" as the total outstanding capital stock of a corporation, treated as a single class of
shares regardless of the actual classification of shares, to wit:
Let us assume that a corporation has 100 common shares owned by foreigners and
1,000,000 non-voting preferred shares owned by Filipinos, with both classes of share
having a par value of one peso (P 1.00) per share. Under the broad definition of the term
"capital," such corporation would be considered compliant with the 40 percent
constitutional limit on foreign equity of public utilities since the overwhelming majority, or
more than 99.999 percent, of the total outstanding capital stock is Filipino owned. This is
obviously absurd.
In the example given, only the foreigners holding the common shares have voting rights in
the election of directors, even if they hold only 100 shares. The foreigners, with a
minuscule equity of less than 0.001 percent, exercise control over the public utility. On the
other hand, the Filipinos, holding more than 99.999 percent of the equity, cannot vote in

the election of directors and hence, have no control over the public utility. This starkly
circumvents the intent of the framers of the Constitution, as well as the clear language of
the Constitution, to place the control of public utilities in the hands of Filipinos. x x x
Further, even if foreigners who own more than forty percent of the voting shares elect an
all-Filipino board of directors, this situation does not guarantee Filipino control and does not
in any way cure the violation of the Constitution. The independence of the Filipino board
members so elected by such foreign shareholders is highly doubtful. As the OSG pointed
out, quoting Justice George Sutherlands words in Humphreys Executor v. US,44 "x x x it is
quite evident that one who holds his office only during the pleasure of another cannot be
depended upon to maintain an attitude of independence against the latters will." Allowing
foreign shareholders to elect a controlling majority of the board, even if all the directors are
Filipinos, grossly circumvents the letter and intent of the Constitution and defeats the very
purpose of our nationalization laws.
VII.
Last sentence of Section 11, Article XII of the Constitution
The last sentence of Section 11, Article XII of the 1987 Constitution reads:
The participation of foreign investors in the governing body of any public utility enterprise
shall be limited to their proportionate share in its capital, and all the executive and
managing officers of such corporation or association must be citizens of the Philippines.
During the Oral Arguments, the OSG emphasized that there was never a question on the
intent of the framers of the Constitution to limit foreign ownership, and assure majority
Filipino ownership and control of public utilities. The OSG argued, "while the delegates
disagreed as to the percentage threshold to adopt, x x x the records show they clearly
understood that Filipino control of the public utility corporation can only be and is obtained
only through the election of a majority of the members of the board."
Indeed, the only point of contention during the deliberations of the Constitutional
Commission on 23 August 1986 was the extent of majority Filipino control of public utilities.
This is evident from the following exchange:
THE PRESIDENT. Commissioner Jamir is recognized.
MR. JAMIR. Madam President, my proposed amendment on lines 20 and 21 is to delete the
phrase "two thirds of whose voting stock or controlling interest," and instead substitute the
words "SIXTY PERCENT OF WHOSE CAPITAL" so that the sentence will read: "No franchise,
certificate, or any other form of authorization for the operation of a public utility shall be
granted except to citizens of the Philippines or to corporations or associations organized
under the laws of the Philippines at least SIXTY PERCENT OF WHOSE CAPITAL is owned by
such citizens."
xxxx
THE PRESIDENT: Will Commissioner Jamir first explain?

MR. JAMIR. Yes, in this Article on National Economy and Patrimony, there were two
previous sections in which we fixed the Filipino equity to 60 percent as against 40 percent
for foreigners. It is only in this Section 15 with respect to public utilities that the committee
proposal was increased to two-thirds. I think it would be better to harmonize this provision
by providing that even in the case of public utilities, the minimum equity for Filipino citizens
should be 60 percent.
MR. ROMULO. Madam President.
THE PRESIDENT. Commissioner Romulo is recognized.
MR. ROMULO. My reason for supporting the amendment is based on the discussions I have
had with representatives of the Filipino majority owners of the international record carriers,
and the subsequent memoranda they submitted to me. x x x
Their second point is that under the Corporation Code, the management and control of a
corporation is vested in the board of directors, not in the officers but in the board of
directors. The officers are only agents of the board. And they believe that with 60 percent
of the equity, the Filipino majority stockholders undeniably control the board. Only on
important corporate acts can the 40-percent foreign equity exercise a veto, x x x.
x x x x45
MS. ROSARIO BRAID. Madam President.
THE PRESIDENT. Commissioner Rosario Braid is recognized.
MS. ROSARIO BRAID. Yes, in the interest of equal time, may I also read from a
memorandum by the spokesman of the Philippine Chamber of Communications on why
they would like to maintain the present equity, I am referring to the 66 2/3. They would
prefer to have a 75-25 ratio but would settle for 66 2/3. x x x
xxxx
THE PRESIDENT. Just to clarify, would Commissioner Rosario Braid support the proposal of
two-thirds rather than the 60 percent?
MS. ROSARIO BRAID. I have added a clause that will put management in the hands of
Filipino citizens.
x x x x46
While they had differing views on the percentage of Filipino ownership of capital, it is clear
that the framers of the Constitution intended public utilities to be majority Filipino-owned
and controlled. To ensure that Filipinos control public utilities, the framers of the
Constitution approved, as additional safeguard, the inclusion of the last sentence of Section
11, Article XII of the Constitution commanding that "[t]he participation of foreign investors
in the governing body of any public utility enterprise shall be limited to their proportionate

share in its capital, and all the executive and managing officers of such corporation or
association must be citizens of the Philippines." In other words, the last sentence of Section
11, Article XII of the Constitution mandates that (1) the participation of foreign investors in
the governing body of the corporation or association shall be limited to their proportionate
share in the capital of such entity; and (2) all officers of the corporation or association must
be Filipino citizens.
Commissioner Rosario Braid proposed the inclusion of the phrase requiring the managing
officers of the corporation or association to be Filipino citizens specifically to prevent
management contracts, which were designed primarily to circumvent the Filipinization of
public utilities, and to assure Filipino control of public utilities, thus:
MS. ROSARIO BRAID. x x x They also like to suggest that we amend this provision by
adding a phrase which states: "THE MANAGEMENT BODY OF EVERY CORPORATION OR
ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY CITIZENS OF THE PHILIPPINES." I
have with me their position paper.

MS. ROSARIO BRAID. Madam President, I propose a new section to read: THE
MANAGEMENT BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN ALL CASES BE
CONTROLLED BY CITIZENS OF THE PHILIPPINES."
This will prevent management contracts and assure control by Filipino citizens.
Will the committee assure us that this amendment will insure that past activities such as
management contracts will no longer be possible under this amendment?
xxxx
FR. BERNAS. Madam President.
THE PRESIDENT. Commissioner Bernas is recognized.
FR. BERNAS. Will the committee accept a reformulation of the first part?

THE PRESIDENT. The Commissioner may proceed.

MR. BENGZON. Let us hear it.

MS. ROSARIO BRAID. The three major international record carriers in the Philippines, which
Commissioner Romulo mentioned Philippine Global Communications, Eastern
Telecommunications, Globe Mackay Cable are 40-percent owned by foreign multinational
companies and 60-percent owned by their respective Filipino partners. All three, however,
also have management contracts with these foreign companies Philcom with RCA, ETPI
with Cable and Wireless PLC, and GMCR with ITT. Up to the present time, the general
managers of these carriers are foreigners. While the foreigners in these common carriers
are only minority owners, the foreign multinationals are the ones managing and controlling
their operations by virtue of their management contracts and by virtue of their strength in
the governing bodies of these carriers.47

FR. BERNAS. The reformulation will be essentially the formula of the 1973 Constitution
which reads: "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF
ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE
IN THE CAPITAL THEREOF AND..."

xxxx
MR. OPLE. I think a number of us have agreed to ask Commissioner Rosario Braid to
propose an amendment with respect to the operating management of public utilities, and in
this amendment, we are associated with Fr. Bernas, Commissioners Nieva and Rodrigo.
Commissioner Rosario Braid will state this amendment now.

MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS
AND ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."
MR. BENGZON. Will Commissioner Bernas read the whole thing again?
FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF
ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE
IN THE CAPITAL THEREOF..." I do not have the rest of the copy.
MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH
CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES." Is that
correct?

Thank you.

MR. VILLEGAS. Yes.

MS. ROSARIO BRAID. Madam President.

MR. BENGZON. Madam President, I think that was said in a more elegant language. We
accept the amendment. Is that all right with Commissioner Rosario Braid?

THE PRESIDENT. This is still on Section 15.

MS. ROSARIO BRAID. Yes.
MR. VILLEGAS. Yes, Madam President.
xxxx

MS. ROSARIO BRAID. Yes.

xxxx
MR. DE LOS REYES. The governing body refers to the board of directors and trustees.

MR. VILLEGAS. That is right.

MR. BENGZON. Yes, the governing body refers to the board of directors.
MR. REGALADO. It is accepted.

The last sentence of Section 11, Article XII of the 1987 Constitution, particularly the
provision on the limited participation of foreign investors in the governing body of public
utilities, is a reiteration of the last sentence of Section 5, Article XIV of the 1973
Constitution,49 signifying its importance in reserving ownership and control of public utilities
to Filipino citizens.
VIII.
The undisputed facts

MR. RAMA. The body is now ready to vote, Madam President.

VOTING
xxxx
The results show 29 votes in favor and none against; so the proposed amendment is
approved.
xxxx
THE PRESIDENT. All right. Can we proceed now to vote on Section 15?
MR. RAMA. Yes, Madam President.
THE PRESIDENT. Will the chairman of the committee please read Section 15?
MR. VILLEGAS. The entire Section 15, as amended, reads: "No franchise, certificate, or any
other form of authorization for the operation of a public utility shall be granted except to
citizens of the Philippines or to corporations or associations organized under the laws of the
Philippines at least 60 PERCENT OF WHOSE CAPITAL is owned by such citizens." May I
request Commissioner Bengzon to please continue reading.
MR. BENGZON. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY
OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE
SHARE IN THE CAPITAL THEREOF AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF
SUCH CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."
MR. VILLEGAS. "NOR SHALL SUCH FRANCHISE, CERTIFICATE OR AUTHORIZATION BE
EXCLUSIVE IN CHARACTER OR FOR A PERIOD LONGER THAN TWENTY-FIVE YEARS
RENEWABLE FOR NOT MORE THAN TWENTY-FIVE YEARS. Neither shall any such franchise
or right be granted except under the condition that it shall be subject to amendment,
alteration, or repeal by Congress when the common good so requires. The State shall
encourage equity participation in public utilities by the general public."
VOTING
xxxx
The results show 29 votes in favor and 4 against; Section 15, as amended, is approved. 48
(Emphasis supplied)

There is no dispute, and respondents do not claim the contrary, that (1) foreigners own
64.27% of the common shares of PLDT, which class of shares exercises the sole right to
vote in the election of directors, and thus foreigners control PLDT; (2) Filipinos own only
35.73% of PLDTs common shares, constituting a minority of the voting stock, and thus
Filipinos do not control PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no
voting rights; (4) preferred shares earn only 1/70 of the dividends that common shares
earn;50 (5) preferred shares have twice the par value of common shares; and (6) preferred
shares constitute 77.85% of the authorized capital stock of PLDT and common shares only
22.15%.
Despite the foregoing facts, the Court did not decide, and in fact refrained from ruling on
the question of whether PLDT violated the 60-40 ownership requirement in favor of Filipino
citizens in Section 11, Article XII of the 1987 Constitution. Such question indisputably calls
for a presentation and determination of evidence through a hearing, which is generally
outside the province of the Courts jurisdiction, but well within the SECs statutory powers.
Thus, for obvious reasons, the Court limited its decision on the purely legal and threshold
issue on the definition of the term "capital" in Section 11, Article XII of the Constitution and
directed the SEC to apply such definition in determining the exact percentage of foreign
ownership in PLDT.
IX.
PLDT is not an indispensable party;
SEC is impleaded in this case.
In his petition, Gamboa prays, among others:
xxxx
5. For the Honorable Court to issue a declaratory relief that ownership of common or voting
shares is the sole basis in determining foreign equity in a public utility and that any other
government rulings, opinions, and regulations inconsistent with this declaratory relief be
declared unconstitutional and a violation of the intent and spirit of the 1987 Constitution;
6. For the Honorable Court to declare null and void all sales of common stocks to foreigners
in excess of 40 percent of the total subscribed common shareholdings; and
7. For the Honorable Court to direct the Securities and Exchange Commission and
Philippine Stock Exchange to require PLDT to make a public disclosure of all of its
foreign shareholdings and their actual and real beneficial owners.

Other relief(s) just and equitable are likewise prayed for. (Emphasis supplied)
As can be gleaned from his prayer, Gamboa clearly asks this Court to compel the SEC to
perform its statutory duty to investigate whether "the required percentage of ownership of
the capital stock to be owned by citizens of the Philippines has been complied with [by
PLDT] as required by x x x the Constitution."51 Such plea clearly negates SECs argument
that it was not impleaded.
Granting that only the SEC Chairman was impleaded in this case, the Court has ample
powers to order the SECs compliance with its directive contained in the 28 June 2011
Decision in view of the far-reaching implications of this case. In Domingo v. Scheer,52 the
Court dispensed with the amendment of the pleadings to implead the Bureau of Customs
considering (1) the unique backdrop of the case; (2) the utmost need to avoid further
delays; and (3) the issue of public interest involved. The Court held:
The Court may be curing the defect in this case by adding the BOC as party-petitioner. The
petition should not be dismissed because the second action would only be a repetition of
the first. In Salvador, et al., v. Court of Appeals, et al., we held that this Court has full
powers, apart from that power and authority which is inherent, to amend the processes,
pleadings, proceedings and decisions by substituting as party-plaintiff the real party-ininterest. The Court has the power to avoid delay in the disposition of this case, to
order its amendment as to implead the BOC as party-respondent. Indeed, it may
no longer be necessary to do so taking into account the unique backdrop in this
case, involving as it does an issue of public interest. After all, the Office of the
Solicitor General has represented the petitioner in the instant proceedings, as well as in the
appellate court, and maintained the validity of the deportation order and of the BOCs
Omnibus Resolution. It cannot, thus, be claimed by the State that the BOC was not
afforded its day in court, simply because only the petitioner, the Chairperson of the BOC,
was the respondent in the CA, and the petitioner in the instant recourse. In Alonso v.
Villamor, we had the occasion to state:
There is nothing sacred about processes or pleadings, their forms or contents.
Their sole purpose is to facilitate the application of justice to the rival claims of
contending parties. They were created, not to hinder and delay, but to facilitate and
promote, the administration of justice. They do not constitute the thing itself, which courts
are always striving to secure to litigants. They are designed as the means best adapted to
obtain that thing. In other words, they are a means to an end. When they lose the
character of the one and become the other, the administration of justice is at fault and
courts are correspondingly remiss in the performance of their obvious duty.53 (Emphasis
supplied)
In any event, the SEC has expressly manifested54 that it will abide by the Courts
decision and defer to the Courts definition of the term "capital" in Section 11,
Article XII of the Constitution. Further, the SEC entered its special appearance in
this case and argued during the Oral Arguments, indicating its submission to the
Courts jurisdiction. It is clear, therefore, that there exists no legal impediment
against the proper and immediate implementation of the Courts directive to the
SEC.

PLDT is an indispensable party only insofar as the other issues, particularly the factual
questions, are concerned. In other words, PLDT must be impleaded in order to fully resolve
the issues on (1) whether the sale of 111,415 PTIC shares to First Pacific violates the
constitutional limit on foreign ownership of PLDT; (2) whether the sale of common shares
to foreigners exceeded the 40 percent limit on foreign equity in PLDT; and (3) whether the
total percentage of the PLDT common shares with voting rights complies with the 60-40
ownership requirement in favor of Filipino citizens under the Constitution for the ownership
and operation of PLDT. These issues indisputably call for an examination of the parties
respective evidence, and thus are clearly within the jurisdiction of the SEC. In short, PLDT
must be impleaded, and must necessarily be heard, in the proceedings before the SEC
where the factual issues will be thoroughly threshed out and resolved.
Notably, the foregoing issues were left untouched by the Court. The Court did not
rule on the factual issues raised by Gamboa, except the single and purely legal issue on the
definition of the term "capital" in Section 11, Article XII of the Constitution. The Court
confined the resolution of the instant case to this threshold legal issue in deference to the
fact-finding power of the SEC.
Needless to state, the Court can validly, properly, and fully dispose of the fundamental legal
issue in this case even without the participation of PLDT since defining the term "capital" in
Section 11, Article XII of the Constitution does not, in any way, depend on whether PLDT
was impleaded. Simply put, PLDT is not indispensable for a complete resolution of the
purely legal question in this case.55 In fact, the Court, by treating the petition as one for
mandamus,56 merely directed the SEC to apply the Courts definition of the term "capital" in
Section 11, Article XII of the Constitution in determining whether PLDT committed any
violation of the said constitutional provision. The dispositive portion of the Courts
ruling is addressed not to PLDT but solely to the SEC, which is the administrative
agency tasked to enforce the 60-40 ownership requirement in favor of Filipino
citizens in Section 11, Article XII of the Constitution.
Since the Court limited its resolution on the purely legal issue on the definition of the term
"capital" in Section 11, Article XII of the 1987 Constitution, and directed the SEC to
investigate any violation by PLDT of the 60-40 ownership requirement in favor of Filipino
citizens under the Constitution,57 there is no deprivation of PLDTs property or denial of
PLDTs right to due process, contrary to Pangilinan and Nazarenos misimpression. Due
process will be afforded to PLDT when it presents proof to the SEC that it complies, as it
claims here, with Section 11, Article XII of the Constitution.
X.
Foreign Investments in the Philippines
Movants fear that the 28 June 2011 Decision would spell disaster to our economy, as it may
result in a sudden flight of existing foreign investors to "friendlier" countries and
simultaneously deterring new foreign investors to our country. In particular, the PSE claims
that the 28 June 2011 Decision may result in the following: (1) loss of more than P 630
billion in foreign investments in PSE-listed shares; (2) massive decrease in foreign trading
transactions; (3) lower PSE Composite Index; and (4) local investors not investing in PSElisted shares.58

Dr. Bernardo M. Villegas, one of the amici curiae in the Oral Arguments, shared movants
apprehension. Without providing specific details, he pointed out the depressing state of the
Philippine economy compared to our neighboring countries which boast of growing
economies. Further, Dr. Villegas explained that the solution to our economic woes is for the
government to "take-over" strategic industries, such as the public utilities sector, thus:
JUSTICE CARPIO:
I would like also to get from you Dr. Villegas if you have additional information on whether
this high FDI59 countries in East Asia have allowed foreigners x x x control [of] their public
utilities, so that we can compare apples with apples.
DR. VILLEGAS:
Correct, but let me just make a comment. When these neighbors of ours find an industry
strategic, their solution is not to "Filipinize" or "Vietnamize" or "Singaporize." Their
solution is to make sure that those industries are in the hands of state
enterprises. So, in these countries, nationalization means the government takes
over. And because their governments are competent and honest enough to the
public, that is the solution. x x x 60 (Emphasis supplied)
If government ownership of public utilities is the solution, then foreign investments in our
public utilities serve no purpose. Obviously, there can never be foreign investments in
public utilities if, as Dr. Villegas claims, the "solution is to make sure that those industries
are in the hands of state enterprises." Dr. Villegass argument that foreign investments in
telecommunication companies like PLDT are badly needed to save our ailing economy
contradicts his own theory that the solution is for government to take over these
companies. Dr. Villegas is barking up the wrong tree since State ownership of public utilities
and foreign investments in such industries are diametrically opposed concepts, which
cannot possibly be reconciled.
In any event, the experience of our neighboring countries cannot be used as argument to
decide the present case differently for two reasons. First, the governments of our
neighboring countries have, as claimed by Dr. Villegas, taken over ownership and control of
their strategic public utilities like the telecommunications industry. Second, our Constitution
has specific provisions limiting foreign ownership in public utilities which the Court is sworn
to uphold regardless of the experience of our neighboring countries.
In our jurisdiction, the Constitution expressly reserves the ownership and operation of
public utilities to Filipino citizens, or corporations or associations at least 60 percent of
whose capital belongs to Filipinos. Following Dr. Villegass claim, the Philippines appears to
be more liberal in allowing foreign investors to own 40 percent of public utilities, unlike in
other Asian countries whose governments own and operate such industries.
XI.
Prospective Application of Sanctions

In its Motion for Partial Reconsideration, the SEC sought to clarify the reckoning period of
the application and imposition of appropriate sanctions against PLDT if found violating
Section 11, Article XII of the Constitution.1avvphi1
As discussed, the Court has directed the SEC to investigate and determine whether PLDT
violated Section 11, Article XII of the Constitution. Thus, there is no dispute that it is only
after the SEC has determined PLDTs violation, if any exists at the time of the
commencement of the administrative case or investigation, that the SEC may impose the
statutory sanctions against PLDT. In other words, once the 28 June 2011 Decision becomes
final, the SEC shall impose the appropriate sanctions only if it finds after due hearing that,
at the start of the administrative case or investigation, there is an existing violation of
Section 11, Article XII of the Constitution. Under prevailing jurisprudence, public utilities
that fail to comply with the nationality requirement under Section 11, Article XII and the
FIA can cure their deficiencies prior to the start of the administrative case or
investigation.61
XII.
Final Word
The Constitution expressly declares as State policy the development of an economy
"effectively controlled" by Filipinos. Consistent with such State policy, the Constitution
explicitly reserves the ownership and operation of public utilities to Philippine nationals,
who are defined in the Foreign Investments Act of 1991 as Filipino citizens, or corporations
or associations at least 60 percent of whose capital with voting rights belongs to
Filipinos. The FIAs implementing rules explain that "[f]or stocks to be deemed owned and
held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the
required Filipino equity. Full beneficial ownership of the stocks, coupled with
appropriate voting rights is essential." In effect, the FIA clarifies, reiterates and
confirms the interpretation that the term "capital" in Section 11, Article XII of the 1987
Constitution refers to shares with voting rights, as well as with full beneficial
ownership. This is precisely because the right to vote in the election of directors, coupled
with full beneficial ownership of stocks, translates to effective control of a corporation.
Any other construction of the term "capital" in Section 11, Article XII of the Constitution
contravenes the letter and intent of the Constitution. Any other meaning of the term
"capital" openly invites alien domination of economic activities reserved exclusively to
Philippine nationals. Therefore, respondents interpretation will ultimately result in handing
over effective control of our national economy to foreigners in patent violation of the
Constitution, making Filipinos second-class citizens in their own country.
Filipinos have only to remind themselves of how this country was exploited under the Parity
Amendment, which gave Americans the same rights as Filipinos in the exploitation of
natural resources, and in the ownership and control of public utilities, in the Philippines. To
do this the 1935 Constitution, which contained the same 60 percent Filipino ownership and
control requirement as the present 1987 Constitution, had to be amended to give
Americans parity rights with Filipinos. There was bitter opposition to the Parity
Amendment62 and many Filipinos eagerly awaited its expiration. In late 1968, PLDT was one
of the American-controlled public utilities that became Filipino-controlled when the
controlling American stockholders divested in anticipation of the expiration of the Parity
Amendment on 3 July 1974.63 No economic suicide happened when control of public utilities

and mining corporations passed to Filipinos hands upon expiration of the Parity
Amendment.
Movants interpretation of the term "capital" would bring us back to the same evils
spawned by the Parity Amendment, effectively giving foreigners parity rights with
Filipinos, but this time even without any amendment to the present Constitution.
Worse, movants interpretation opens up our national economy to effective control not
only by Americans but also by all foreigners, be they Indonesians, Malaysians or
Chinese, even in the absence of reciprocal treaty arrangements. At least the Parity
Amendment, as implemented by the Laurel-Langley Agreement, gave the capital-starved
Filipinos theoretical parity the same rights as Americans to exploit natural resources, and
to own and control public utilities, in the United States of America. Here, movants
interpretation would effectively mean a unilateral opening up of our national economy to
all foreigners, without any reciprocal arrangements. That would mean that
Indonesians, Malaysians and Chinese nationals could effectively control our mining
companies and public utilities while Filipinos, even if they have the capital, could not control
similar corporations in these countries.
The 1935, 1973 and 1987 Constitutions have the same 60 percent Filipino ownership and
control requirement for public utilities like PLOT. Any deviation from this requirement
necessitates an amendment to the Constitution as exemplified by the Parity Amendment.
This Court has no power to amend the Constitution for its power and duty is only to
faithfully apply and interpret the Constitution.
WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further
pleadings shall be entertained.
SO ORDERED.

G.R. No. 137592

December 12, 2001

ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS, H.S.K. SA BANSANG
PILIPINAS, INC., petitioner, vs. IGLESIA NG DIOS KAY CRISTO JESUS, HALIGI AT
SUHAY NG KATOTOHANAN, respondent.
YNARES-SANTIAGO, J.:
This is a petition for review assailing the Decision dated October 7, 1997 1 and the
Resolution dated February 16, 19992 of the Court of Appeals in CA-G.R. SP No. 40933,
which affirmed the Decision of the Securities and Exchange and Commission (SEC) in SECAC No. 539.3
Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan (Church of
God in Christ Jesus, the Pillar and Ground of Truth), 4 is a non-stock religious society or
corporation registered in 1936. Sometime in 1976, one Eliseo Soriano and several other
members of respondent corporation disassociated themselves from the latter and
succeeded in registering on March 30, 1977 a new non-stock religious society or
corporation, named Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan.
On July 16, 1979, respondent corporation filed with the SEC a petition to compel the
Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan to change its corporate
name, which petition was docketed as SEC Case No. 1774. On May 4, 1988, the SEC
rendered judgment in favor of respondent, ordering the Iglesia ng Dios Kay Kristo Hesus,
Haligi at Saligan ng Katotohanan to change its corporate name to another name that is not
similar or identical to any name already used by a corporation, partnership or association
registered with the Commission.5 No appeal was taken from said decision.
It appears that during the pendency of SEC Case No. 1774, Soriano, et al., caused the
registration on April 25, 1980 of petitioner corporation, Ang Mga Kaanib sa Iglesia ng Dios
Kay Kristo Hesus, H.S.K, sa Bansang Pilipinas. The acronym "H.S.K." stands for Haligi at
Saligan ng Katotohanan.6
On March 2, 1994, respondent corporation filed before the SEC a petition, docketed as SEC
Case No. 03-94-4704, praying that petitioner be compelled to change its corporate name
and be barred from using the same or similar name on the ground that the same causes
confusion among their members as well as the public.

Petitioner filed a motion to dismiss on the ground of lack of cause of action. The motion to
dismiss was denied. Thereafter, for failure to file an answer, petitioner was declared in
default and respondent was allowed to present its evidence ex parte.
On November 20, 1995, the SEC rendered a decision ordering petitioner to change its
corporate name. The dispositive portion thereof reads:
PREMISES CONSIDERED, judgment is hereby rendered in favor of the petitioner
(respondent herein).
Respondent Mga Kaanib sa Iglesia ng Dios Kay Kristo Jesus (sic), H.S.K. sa
Bansang Pilipinas (petitioner herein) is hereby MANDATED to change its corporate
name to another not deceptively similar or identical to the same already used by
the Petitioner, any corporation, association, and/or partnership presently registered
with the Commission.
Let a copy of this Decision be furnished the Records Division and the Corporate and
Legal Department [CLD] of this Commission for their records, reference and/or for
whatever requisite action, if any, to be undertaken at their end.
SO ORDERED.7
Petitioner appealed to the SEC En Banc, where its appeal was docketed as SEC-AC No. 539.
In a decision dated March 4, 1996, the SEC En Banc affirmed the above decision, upon a
finding that petitioner's corporate name was identical or confusingly or deceptively similar
to that of respondent's corporate name.8
Petitioner filed a petition for review with the Court of Appeals. On October 7, 1997, the
Court of Appeals rendered the assailed decision affirming the decision of the SEC En Banc.
Petitioner's motion for reconsideration was denied by the Court of Appeals on February 16,
1992.
Hence, the instant petition for review, raising the following assignment of errors:
I
THE HONORABLE COURT OF APPEALS ERRED IN CONCLUDING THAT PETITIONER HAS NOT
BEEN DEPRIVED OF ITS RIGHT TO PROCEDURAL DUE PROCESS, THE HONORABLE COURT
OF APPEALS DISREGARDED THE JURISPRUDENCE APPLICABLE TO THE CASE AT BAR AND
INSTEAD RELIED ON TOTALLY INAPPLICABLE JURISPRUDENCE.
II

THE HONORABLE COURT OF APPEALS ERRED IN ITS INTERPRETATION OF THE CIVIL CODE
PROVISIONS ON EXTINCTIVE PRESCRIPTION, THEREBY RESULTING IN ITS FAILURE TO
FIND THAT THE RESPONDENT'S RIGHT OF ACTION TO INSTITUTE THE SEC CASE HAS
SINCE PRESCRIBED PRIOR TO ITS INSTITUTION.
III
THE HONORABLE COURT OF APPEALS FAILED TO CONSIDER AND PROPERLY APPLY THE
EXCEPTIONS ESTABLISHED BY JURISPRUDENCE IN THE APPLICATION OF SECTION 18 OF
THE CORPORATION CODE TO THE INSTANT CASE.
IV
THE HONORABLE COURT OF APPEALS FAILED TO PROPERLY APPRECIATE THE SCOPE OF
THE CONSTITUTIONAL GUARANTEE ON RELIGIOUS FREEDOM, THEREBY FAILING TO APPLY
THE SAME TO PROTECT PETITIONER'S RIGHTS.9
Invoking the case of Legarda v. Court of Appeals,10 petitioner insists that the decision of the
Court of Appeals and the SEC should be set aside because the negligence of its former
counsel of record, Atty. Joaquin Garaygay, in failing to file an answer after its motion to
dismiss was denied by the SEC, deprived them of their day in court.
The contention is without merit. As a general rule, the negligence of counsel binds the
client. This is based on the rule that any act performed by a lawyer within the scope of his
general or implied authority is regarded as an act of his client. 11 An exception to the
foregoing is where the reckless or gross negligence of the counsel deprives the client of due
process of law. 12 Said exception, however, does not obtain in the present case.
In Legarda v. Court of Appeals, the effort of the counsel in defending his client's cause
consisted in filing a motion for extension of time to file answer before the trial court. When
his client was declared in default, the counsel did nothing and allowed the judgment by
default to become final and executory. Upon the insistence of his client, the counsel filed a
petition to annul the judgment with the Court of Appeals, which denied the petition, and
again the counsel allowed the denial to become final and executory. This Court found the
counsel grossly negligent and consequently declared as null and void the decision adverse
to his client.
The factual antecedents of the case at bar are different. Atty. Garaygay filed before the SEC
a motion to dismiss on the ground of lack of cause of action. When his client was declared
in default for failure to file an answer, Atty. Garaygay moved for reconsideration and lifting
of the order of default.13 After judgment by default was rendered against petitioner
corporation, Atty. Garaygay filed a motion for extension of time to appeal/motion for
reconsideration, and thereafter a motion to set aside the decision. 14

Evidently, Atty. Garaygay was only guilty of simple negligence. Although he failed to file an
answer that led to the rendition of a judgment by default against petitioner, his efforts were
palpably real, albeit bereft of zeal.15

mention the fact that both are espousing religious beliefs and operating in the same place.
Parenthetically, it is well to mention that the acronym H.S.K. used by petitioner stands for
"Haligi at Saligan ng Katotohanan."20

Likewise, the issue of prescription, which petitioner raised for the first time on appeal to the
Court of Appeals, is untenable. Its failure to raise prescription before the SEC can only be
construed as a waiver of that defense.16 At any rate, the SEC has the authority to deregister at all times and under all circumstances corporate names which in its estimation
are likely to spawn confusion. It is the duty of the SEC to prevent confusion in the use of
corporate names not only for the protection of the corporations involved but more so for
the protection of the public.17

Then, too, the records reveal that in holding out their corporate name to the public,
petitioner highlights the dominant words "IGLESIA NG DIOS KAY KRISTO HESUS, HALIGI
AT SALIGAN NG KATOTOHANAN," which is strikingly similar to respondent's corporate
name, thus making it even more evident that the additional words "Ang Mga Kaanib" and
"Sa Bansang Pilipinas, Inc.", are merely descriptive of and pertaining to the members of
respondent corporation.21

Section 18 of the Corporation Code provides:

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 or is contrary to existing laws.
When a change in the corporate name is approved, the Commission shall issue an
amended certificate of incorporation under the amended name.
Corollary thereto, the pertinent portion of the SEC Guidelines on Corporate Names states:
(d) If the proposed name contains a word similar to 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 name of the company already registered;
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 nonprofit
organization, if misleading or likely to injure in the exercise of its corporate functions,
regardless of intent, may be prevented by the corporation having a prior right, by a suit for
injunction against the new corporation to prevent the use of the name. 18
Petitioner claims that it complied with the aforecited SEC guideline by adding not only two
but eight words to their registered name, to wit: "Ang Mga Kaanib" and "Sa Bansang
Pilipinas, Inc.," which, petitioner argues, effectively distinguished it from respondent
corporation.
The additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc." in petitioner's
name are, as correctly observed by the SEC, merely descriptive of and also referring to the
members, or kaanib, of respondent who are likewise residing in the Philippines. These
words can hardly serve as an effective differentiating medium necessary to avoid confusion
or difficulty in distinguishing petitioner from respondent. This is especially so, since both
petitioner and respondent corporations are using the same acronym H.S.K.; 19 not to

Significantly, the only difference between the corporate names of petitioner and respondent
are the words SALIGAN and SUHAY. These words are synonymous both mean ground,
foundation or support. Hence, this case is on all fours with Universal Mills Corporation v.
Universal Textile Mills, Inc.,22 where the Court ruled that the corporate names Universal
Mills Corporation and Universal Textile Mills, Inc., are undisputably so similar that even
under the test of "reasonable care and observation" confusion may arise.
Furthermore, the wholesale appropriation by petitioner of respondent's corporate name
cannot find justification under the generic word rule. We agree with the Court of Appeals'
conclusion that a contrary ruling would encourage other corporations to adopt verbatim and
register an existing and protected corporate name, to the detriment of the public.
The fact that there are other non-stock religious societies or corporations using the names
Church of the Living God, Inc., Church of God Jesus Christ the Son of God the Head,
Church of God in Christ & By the Holy Spirit, and other similar names, is of no
consequence. It does not authorize the use by petitioner of the essential and distinguishing
feature of respondent's registered and protected corporate name. 23
We need not belabor the fourth issue raised by petitioner. Certainly, ordering petitioner to
change its corporate name is not a violation of its constitutionally guaranteed right to
religious freedom. In so doing, the SEC merely compelled petitioner to abide by one of the
SEC guidelines in the approval of partnership and corporate names, namely its undertaking
to manifest 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.
WHEREFORE, in view of all the foregoing, the instant petition for review is DENIED. The
appealed decision of the Court of Appeals is AFFIRMED in toto.
SO ORDERED.

Petitioner IRCP on the other hand, was incorporated on August 23, 1979 originally under
the name "Synclaire Manufacturing Corporation". It amended its Articles of Incorporation
on August 23, 1985 to change its corporate name to "Industrial Refractories Corp. of the
Philippines". It is engaged in the business of manufacturing all kinds of ceramics and other
products, except paints and zincs.
Both companies are the only local suppliers of monolithic gunning mix. 1
Discovering that petitioner was using such corporate name, respondent RCP filed on April
14, 1988 with the Securities and Exchange Commission (SEC) a petition to compel
petitioner to change its corporate name on the ground that its corporate name is
confusingly similar with that of petitioners such that the public may be confused or
deceived into believing that they are one and the same corporation. 2
The SEC decided in favor of respondent RCP and rendered judgment on July 23, 1993 with
the following dispositive portion:

G.R. No. 122174

October 3, 2002

INDUSTRIAL REFRACTORIES CORPORATION OF THE PHILIPPINES, petitioner, vs.

COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and
REFRACTORIES CORPORATION OF THE PHILIPPINES, respondents.
AUSTRIA-MARTINEZ, J.:
Filed before us is a petition for review on certiorari under Rule 45 of the Rules of Court
assailing the Decision of the Court of Appeals in CA-G.R. SP No. 35056, denying due course
and dismissing the petition filed by Industrial Refractories Corp. of the Philippines (IRCP).
Respondent Refractories Corporation of the Philippines (RCP) is a corporation duly
organized on October 13, 1976 for the purpose of engaging in the business of
manufacturing, producing, selling, exporting and otherwise dealing in any and all refractory
bricks, its by-products and derivatives. On June 22, 1977, it registered its corporate and
business name with the Bureau of Domestic Trade.

"WHEREFORE, judgment is hereby rendered in favor of the petitioner and against the
respondent declaring the latters corporate name Industrial Refractories Corporation of the
Philippines as deceptively and confusingly similar to that of petitioners corporate name
Refractories Corporation of the Philippines. Accordingly, respondent is hereby directed to
amend its Articles of Incorporation by deleting the name Refractories Corporation of the
Philippines in its corporate name within thirty (30) days from finality of this Decision.
Likewise, respondent is hereby ordered to pay the petitioner the sum of P50,000.00 as
attorneys fees."3
Petitioner appealed to the SEC En Banc, arguing that it does not have any jurisdiction over
the case, and that respondent RCP has no right to the exclusive use of its corporate name
as it is composed of generic or common words.4
In its Decision dated July 23, 1993, the SEC En Banc modified the appealed decision in that
petitioner was ordered to delete or drop from its corporate name only the word
"Refractories".5
Petitioner IRCP elevated the decision of the SEC En Banc through a petition for review on
certiorari to the Court of Appeals which then rendered the herein assailed decision. The
appellate court upheld the jurisdiction of the SEC over the case and ruled that the
corporate names of petitioner IRCP and respondent RCP are confusingly or deceptively
similar, and that respondent RCP has established its prior right to use the word
"Refractories" as its corporate name.6 The appellate court also found that the petition was
filed beyond the reglementary period.7
Hence, herein petition which we must deny.

Petitioner contends that the petition before the Court of Appeals was timely filed. It must
be noted that at the time the SEC En Banc rendered its decision on May 10, 1994, the
governing rule on appeals from quasi-judicial agencies like the SEC was Supreme Court
Circular No. 1-91. As provided therein, the remedy should have been a petition for review
filed before the Court of Appeals within fifteen (15) days from notice, raising questions of
fact, of law, or mixed questions of fact and law.8 A motion for reconsideration suspends the
running of the period.9
In the case at bench, there is a discrepancy between the dates provided by petitioner and
respondent. Petitioner alleges the following dates of receipt and filing: 10
June 10, 1994 Receipt of SECs Decision dated May 10, 1994
June 20, 1994 Filing of Motion for Reconsideration
September 1, 1994 Receipt of SECs Order dated August 3, 1994 denying
petitioners motion for reconsideration
September 2, 1994 Filing of Motion for extension of time
September 6, 1994 Filing of Petition
Respondent RCP, however, asserts that the foregoing dates are incorrect as the
certifications issued by the SEC show that petitioner received the SECs Decision dated May
10, 1994 on June 9, 1994, filed the motion for reconsideration via registered mail on June
25, 1994, and received the Order dated August 3, 1994 on August 15, 1994. 11 Thus, the
petition was filed twenty-one (21) days beyond the reglementary period provided in
Supreme Court Circular No. 1-91. 12
If reckoned from the dates supplied by petitioner, then the petition was timely filed. On the
other hand, if reckoned from the dates provided by respondent RCP, then it was filed way
beyond the reglementary period. On this score, we agree with the appellate courts finding
that petitioner failed to rebut respondent RCPs allegations of material dates of receipt and
filing.13 In addition, the certifications were executed by the SEC officials based on their
official records14 which enjoy the presumption of regularity.15 As such, these are prima facie
evidence of the facts stated therein.16 And based on such dates, there is no question that
the petition was filed with the Court of Appeals beyond the fifteen (15) day period. On this
ground alone, the instant petition should be denied as the SEC En Bancs decision had
already attained finality and the SECs findings of fact, when supported by substantial
evidence, is final.17
Nevertheless, to set the matters at rest, we shall delve into the other issues posed by
petitioner.

Petitioners arguments, substantially, are as follows: (1) jurisdiction is vested with the
regular courts as the present case is not one of the instances provided in P.D. 902-A; (2)
respondent RCP is not entitled to use the generic name "refractories"; (3) there is no
confusing similarity between their corporate names; and (4) there is no basis for the award
of attorneys fees.18
Petitioners argument on the SECs jurisdiction over the case is utterly myopic. The
jurisdiction of the SEC is not merely confined to the adjudicative functions provided in
Section 5 of P.D. 902-A, as amended.19 By express mandate, it has absolute jurisdiction,
supervision and control over all corporations.20 It also exercises regulatory and
administrative powers to implement and enforce the Corporation Code, 21 one of which is
Section 18, which provides:
"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 or contrary to existing laws. When a change in the
corporate name is approved, the Commission shall issue an amended certificate of
incorporation under the amended name."
It is the SECs duty to prevent confusion in the use of corporate names not only for the
protection of the corporations involved but more so for the protection of the public, and it
has authority to de-register at all times and under all circumstances corporate names which
in its estimation are likely to generate confusion. 22 Clearly therefore, the present case falls
within the ambit of the SECs regulatory powers. 23
Likewise untenable is petitioners argument that there is no confusing or deceptive
similarity between petitioner and respondent RCPs corporate names. Section 18 of the
Corporation Code expressly prohibits the use of a corporate name which is "identical or
deceptively or confusingly similar to that of any existing corporation or to any other name
already protected by law or is patently deceptive, confusing or contrary to existing laws".
The policy behind the foregoing prohibition is to avoid fraud upon the public that will 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 corporation. 24
Pursuant thereto, the Revised Guidelines in the Approval of Corporate and Partnership
Names25 specifically requires that: (1) a corporate name shall not be identical, misleading
or confusingly similar to one already registered by another corporation with the
Commission;26 and (2) if the proposed name is similar to the name of a registered firm, the
proposed name must contain at least one distinctive word different from the name of the
company already registered.27
As held in Philips Export B.V. vs. Court of Appeals,28 to fall within the prohibition of the
law, two requisites must be proven, to wit:

(1) that the complainant corporation acquired a prior right over the use of such corporate
name;
and
(2) the proposed name is either: (a) identical, or (b) deceptively or confusingly similar to
that of any existing corporation or to any other name already protected by law; or (c)
patently deceptive, confusing or contrary to existing law.
As regards the first requisite, it has been held that the right to the exclusive use of a
corporate name with freedom from infringement by similarity is determined by priority of
adoption.29 In this case, respondent RCP was incorporated on October 13, 1976 and since
then has been using the corporate name "Refractories Corp. of the Philippines". Meanwhile,
petitioner was incorporated on August 23, 1979 originally under the name "Synclaire
Manufacturing Corporation". It only started using the name "Industrial Refractories Corp. of
the Philippines" when it amended its Articles of Incorporation on August 23, 1985, or nine
(9) years after respondent RCP started using its name. Thus, being the prior registrant,
respondent RCP has acquired the right to use the word "Refractories" as part of its
corporate name.
Anent the second requisite, 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 and the Court must look to the record as well as the names
themselves.30 Petitioners corporate name is "Industrial Refractories Corp. of the Phils.",
while respondents is "Refractories Corp. of the Phils." Obviously, both names contain the
identical words "Refractories", "Corporation" and "Philippines". The only word that
distinguishes petitioner from respondent RCP is the word "Industrial" which merely
identifies a corporations general field of activities or operations. We need not linger on
these two corporate names to conclude that they are patently similar that even with
reasonable care and observation, confusion might arise. 31 It must be noted that both cater
to the same clientele, i.e. the steel industry. In fact, the SEC found that there were
instances when different steel companies were actually confused between the two,
especially since they also have similar product packaging. 32 Such findings are accorded not
only great respect but even finality, and are binding upon this Court, unless it is shown that
it had arbitrarily disregarded or misapprehended evidence before it to such an extent as to
compel a contrary conclusion had such evidence been properly appreciated. 33 And even
without such proof of actual confusion between the two corporate names, it suffices that
confusion is probable or likely to occur.34
Refractory materials are described as follows:

"Refractories are structural materials used at high temperatures to [sic] industrial furnaces.
They are supplied mainly in the form of brick of standard sizes and of special shapes.
Refractories also include refractory cements, bonding mortars, plastic firebrick, castables,
ramming mixtures, and other bulk materials such as dead-burned grain magneside, chrome
or ground ganister and special clay."35
While the word "refractories" is a generic term, its usage is not widespread and is limited
merely to the industry/trade in which it is used, and its continuous use by respondent RCP
for a considerable period has made the term so closely identified with it. 36 Moreover, as
held in the case of Ang Kaanib sa Iglesia ng Dios kay Kristo Hesus, H.S.K. sa
Bansang Pilipinas, Inc. vs. Iglesia ng Dios kay Cristo Jesus, Haligi at Suhay ng
Katotohanan, petitioners appropriation of respondent's corporate name cannot find
justification under the generic word rule. 37 A contrary ruling would encourage other
corporations to adopt verbatim and register an existing and protected corporate name, to
the detriment of the public.38
Finally, we find the award of P50,000.00 as attorney's fees to be fair and reasonable.
Article 2208 of the Civil Code allows the award of such fees when its claimant is
compelled to litigate with third persons or to incur expenses to protect its just and valid
claim. In this case, despite its undertaking to change its corporate name in case another
firm has acquired a prior right to use such name, 39 it refused to do so, thus compelling
respondent to undergo litigation and incur expenses to protect its corporate name.
WHEREFORE, the instant petition for review on certiorari is hereby DENIED for lack of
merit.
Costs against petitioner.
SO ORDERED.

Petitioners' exclusive right to use the same considering that both parties engage in the
same business.

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.
MELENCIO-HERRERA, J.:
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. R1641 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,
PEBV, and the previous registration of Petitioners Philips Electrical and Philips Industrial
with the SEC.
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

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.
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 toto during
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 1 swept 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 Converse are 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 non-competing 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 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:
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. 39-40, 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.

SEVENTH DAY ADVENTIST CONFERENCE CHURCH OF SOUTHERN PHILIPPINES,

INC., and/or represented by MANASSEH C. ARRANGUEZ, BRIGIDO P. GULAY,
FRANCISCO M. LUCENARA, DIONICES O. TIPGOS, LORESTO C. MURILLON, ISRAEL
C. NINAL, GEORGE G. SOMOSOT, JESSIE T. ORBISO, LORETO PAEL and JOEL
BACUBAS, petitioners, vs. NORTHEASTERN MINDANAO MISSION OF SEVENTH DAY
ADVENTIST, INC., and/or represented by JOSUE A. LAYON, WENDELL M.
SERRANO, FLORANTE P. TY and JETHRO CALAHAT and/or SEVENTH DAY
ADVENTIST CHURCH [OF] NORTHEASTERN MINDANAO MISSION, * Respondents.
DECISION
CORONA, J.:
This petition for review on certiorari assails the Court of Appeals (CA) decision 1 and
resolution2 in CA-G.R. CV No. 41966 affirming, with modification, the decision of the
Regional Trial Court (RTC) of Bayugan, Agusan del Sur, Branch 7 in Civil Case No. 63.
This case involves a 1,069 sq. m. lot covered by Transfer Certificate of Title (TCT) No. 4468
in Bayugan, Agusan del Sur originally owned by Felix Cosio and his wife, Felisa Cuysona.
On April 21, 1959, the spouses Cosio donated the land to the South Philippine Union
Mission of Seventh Day Adventist Church of Bayugan Esperanza, Agusan (SPUM-SDA
Bayugan).3 Part of the deed of donation read:

No costs.
SO ORDERED.

KNOW ALL MEN BY THESE PRESENTS:

That we Felix Cosio[,] 49 years of age[,] and Felisa Cuysona[,] 40 years of age, [h]usband
and wife, both are citizen[s] of the Philippines, and resident[s] with post office address in
the Barrio of Bayugan, Municipality of Esperanza, Province of Agusan, Philippines, do
hereby grant, convey and forever quit claim by way of Donation or gift unto the South
Philippine [Union] Mission of Seventh Day Adventist Church of Bayugan, Esperanza,
Agusan, all the rights, title, interest, claim and demand both at law and as well in
possession as in expectancy of in and to all the place of land and portion situated in the
Barrio of Bayugan, Municipality of Esperanza, Province of Agusan, Philippines, more
particularly and bounded as follows, to wit:
1. a parcel of land for Church Site purposes only.
2. situated [in Barrio Bayugan, Esperanza].
3. Area: 30 meters wide and 30 meters length or 900 square meters.
G.R. No. 150416

July 21, 2006

4. Lot No. 822-Pls-225. Homestead Application No. V-36704, Title No. P-285.

5. Bounded Areas

We agree with the appellate court that the alleged donation to petitioners was void.

North by National High Way; East by Bricio Gerona; South by Serapio Abijaron and West by
Feliz Cosio xxx. 4

Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in

favor of another person who accepts it. The donation could not have been made in favor of
an entity yet inexistent at the time it was made. Nor could it have been accepted as there
was yet no one to accept it.

The donation was allegedly accepted by one Liberato Rayos, an elder of the Seventh Day
Adventist Church, on behalf of the donee.
Twenty-one years later, however, on February 28, 1980, the same parcel of land was sold
by the spouses Cosio to the Seventh Day Adventist Church of Northeastern Mindanao
Mission (SDA-NEMM).5 TCT No. 4468 was thereafter issued in the name of SDA-NEMM. 6
Claiming to be the alleged donees successors-in-interest, petitioners asserted ownership
over the property. This was opposed by respondents who argued that at the time of the
donation, SPUM-SDA Bayugan could not legally be a donee

The deed of donation was not in favor of any informal group of SDA members but a
supposed SPUM-SDA Bayugan (the local church) which, at the time, had neither juridical
personality nor capacity to accept such gift.
Declaring themselves a de facto corporation, petitioners allege that they should benefit
from the donation.
But there are stringent requirements before one can qualify as a de facto corporation:

because, not having been incorporated yet, it had no juridical personality. Neither were
petitioners members of the local church then, hence, the donation could not have been
made particularly to them.

(a) the existence of a valid law under which it may be incorporated;

On September 28, 1987, petitioners filed a case, docketed as Civil Case No. 63 (a suit for
cancellation of title, quieting of ownership and possession, declaratory relief and
reconveyance with prayer for preliminary injunction and damages), in the RTC of Bayugan,
Agusan del Sur. After trial, the trial court rendered a decision 7 on November 20, 1992
upholding the sale in favor of respondents.

(c) assumption of corporate powers.10

On appeal, the CA affirmed the RTC decision but deleted the award of moral damages and
attorneys fees.8 Petitioners motion for reconsideration was likewise denied. Thus, this
petition.

The filing of articles of incorporation and the issuance of the certificate of incorporation are
essential for the existence of a de facto corporation.12 We have held that an organization
not registered with the Securities and Exchange Commission (SEC) cannot be considered a
corporation in any concept, not even as a corporation de facto.13 Petitioners themselves
admitted that at the time of the donation, they were not registered with the SEC, nor did
they even attempt to organize14 to comply with legal requirements.

The issue in this petition is simple: should SDA-NEMMs ownership of the lot covered by
TCT No. 4468 be upheld?9 We answer in the affirmative.
The controversy between petitioners and respondents involves two supposed transfers of
the lot previously owned by the spouses Cosio: (1) a donation to petitioners alleged
predecessors-in-interest in 1959 and (2) a sale to respondents in 1980.
Donation is undeniably one of the modes of acquiring ownership of real property. Likewise,
ownership of a property may be transferred by tradition as a consequence of a sale.
Petitioners contend that the appellate court should not have ruled on the validity of the
donation since it was not among the issues raised on appeal. This is not correct because an
appeal generally opens the entire case for review.

(b) an attempt in good faith to incorporate; and

While there existed the old Corporation Law (Act 1459), 11 a law under which SPUM-SDA
Bayugan could have been organized, there is no proof that there was an attempt to
incorporate at that time.

Corporate existence begins only from the moment a certificate of incorporation is issued.
No such certificate was ever issued to petitioners or their supposed predecessor-in-interest
at the time of the donation. Petitioners obviously could not have claimed succession to an
entity that never came to exist. Neither could the principle of separate juridical personality
apply since there was never any corporation15 to speak of. And, as already stated, some of
the representatives of petitioner Seventh Day Adventist Conference Church of Southern
Philippines, Inc. were not even members of the local church then, thus, they could not even
claim that the donation was particularly for them.16
"The de facto doctrine thus effects a compromise between two conflicting public interest[s]
the one opposed to an unauthorized assumption of corporate privileges; the other in

favor of doing justice to the parties and of establishing a general assurance of security in
business dealing with corporations." 17

Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a
contract, unless there has been fraud, mistake or undue influence.

Generally, the doctrine exists to protect the public dealing with supposed corporate entities,
not to favor the defective or non-existent corporation. 18

No evidence [of fraud, mistake or undue influence] was adduced by [petitioners].

xxx

In view of the foregoing, petitioners arguments anchored on their supposed de facto status
hold no water. We are convinced that there was no donation to petitioners or their
supposed predecessor-in-interest.
On the other hand, there is sufficient basis to affirm the title of SDA-NEMM. The factual
findings of the trial court in this regard were not convincingly disputed. This Court is not a
trier of facts. Only questions of law are the proper subject of a petition for review on
certiorari.19
Sustaining the validity of respondents title as well as their right of ownership over the
property, the trial court stated:
[W]hen Felix Cosio was shown the Absolute Deed of Sale during the hearing xxx he
acknowledged that the same was his xxx but that it was not his intention to sell the
controverted property because he had previously donated the same lot to the South
Philippine Union Mission of SDA Church of Bayugan-Esperanza. Cosio avouched that had it
been his intendment to sell, he would not have disposed of it for a mere P2,000.00 in two
installments but for P50,000.00 or P60,000.00. According to him, the P2,000.00 was not a
consideration of the sale but only a form of help extended.
A thorough analysis and perusal, nonetheless, of the Deed of Absolute Sale
disclosed that it has the essential requisites of contracts pursuant to xxx Article
1318 of the Civil Code, except that the consideration of P2,000.00 is somewhat
insufficient for a [1,069-square meter] land. Would then this inadequacy of the
consideration render the contract invalid?
Article 1355 of the Civil Code provides:

Well-entrenched is the rule that a Certificate of Title is generally a conclusive

evidence of [ownership] of the land. There is that strong and solid presumption that
titles were legally issued and that they are valid. It is irrevocable and indefeasible and the
duty of the Court is to see to it that the title is maintained and respected unless challenged
in a direct proceeding. xxx The title shall be received as evidence in all the Courts and shall
be conclusive as to all matters contained therein.
[This action was instituted almost seven years after the certificate of title in respondents
name was issued in 1980.]20
According to Art. 1477 of the Civil Code, the ownership of the thing sold shall be
transferred to the vendee upon the actual or constructive delivery thereof. On this, the
noted author Arturo Tolentino had this to say:
The execution of [a] public instrument xxx transfers the ownership from the vendor to the
vendee who may thereafter exercise the rights of an owner over the same 21
Here, transfer of ownership from the spouses Cosio to SDA-NEMM was made upon
constructive delivery of the property on February 28, 1980 when the sale was made
through a public instrument.22 TCT No. 4468 was thereafter issued and it remains in the
name of SDA-NEMM.
WHEREFORE, the petition is hereby DENIED.
Costs against petitioners.
SO ORDERED.