GR No.

199420

August 27, 2014

PHILNICO
INDUSTRIAL
CORPORATION,
petitioner
PRIVATIZATION AND MANAGEMENT OFFICE, Respondent.

vs.

x-------------------------------------------------x
GR No. 199432
PRIVATIZATION AND MANAGEMENT OFFICE, Petitioner
PHILNICO INDUSTRIAL CORPORATION, Respondent.

vs.

Civil Law; Pledge; Pactum Commissorium; There are two elements for
pactum commissorium to exist and are present in this case: (1) that there
should be a pledge or mortgage wherein a property is pledged or
mortgaged by way of security for the payment of the principal obligation;
and (2) that there should be a stipulation for an automatic appropriation by
the creditor of the thing pledged or mortgaged in the event of nonpayment
of the principal obligation within the stipulated period.
LEONARDO- DE CASTRO, J.;
FACTS: The Privatization and Management Office (PMO) is a holder of
shares of stock of Philnico Processing Corporation (PPC). The two entities,
together with Philnico Industrial Corporation (PIC) entered into a contract
known as Amended and Restated Definitive Agreement (ARDA) which states
the terms and conditions for the sale of PMO of its shares of PPC stocks as
well as receivables to buyer PIC. As stated in the ARDA, by way of security,
the PIC shall pledge to PMO the said shares and execute a Pledge
Agreement in favor of PMO. Significantly, Sec. 8 of the said ARDA provides
that in the event of default, the title to the existing and converted shares
shall ipso facto revert to PMO without the need of demand in case such
payment default is not remedied by PIC within 90 days from the due date of
2nd installment. In accordance with the ARDA, PMO executed documents
and transferred the title, rights and interests to the shares of stock in favor
of PIC. On May 2, 1997, P
IC as pledgor and PMO as pledgee executed a
Pledge Agreement.
Three years later, PMO notified PIC that the latter had defaulted in
the payment of its obligations and demanded PIC to settle its unpaid
amortizations or else PMO would enforce the automatic reversion of the
PPC shares of stock. Thus, PIC filed before the RTC a Complaint for
Prohibition against Reversion of Shares with Prayer for Writ of Preliminary

Injunction and/ or TRO against PMO and PPC. The RTC granted the Writ of
Preliminary Injunction ruling that the ipso facto reversion is pactum
commissorium thus illegal. Upon appeal, the CA denies the presence of
pactum commissorium ruling that the ARDA is a separate and distinct
contract of sale and does not pertain to the Pledge Agreement but still
declared the ipso facto reversion as invalid as contrary to law, morals, good
customs, public order and public policy. Hence, the instant petitions.
ISSUE: Whether or not the ipso facto reversion of the PPC shares of stock
to PMO in case of default by PIC constitutes pactum commissorium.
HELD: AFFIRMATIVE. Pactum commissorium is defined as a stipulation
empowering the creditor to appropriate the thing given as guaranty for the
fulfillment of the obligation in the event the obligor fails to live up to his
undertakings, without further formality, such as foreclosure proceedings,
and a public sale. It is explicitly prohibited under Article 2088 of the Civil
Code which provides that the creditor cannot appropriate the things given
by way of pledge or mortgage, or dispose of them. Any stipulation to the
contrary is null and void.
The abovementioned elements for pactum commissorium to exist are
present in this case. By virtue of the Pledge Agreement PIC pledged its PPC
shares of stock in favor of PMO as security for the fulfillment of the formers
obligations under the ARDA dated May 10, 1996 and the Pledge Agreement
itself; and (2) There is automatic appropriation as under Section 8.02 of the
ARDA, in the event of default by PIC, title to the PPC shares of stock shall
ipso facto revert from PIC to PMO without need of demand.
In contrast to CA ruling, the ARDA and the Pledge Agreement herein,
although executed in separate written instruments, are integral to one
another. The Pledge Agreement is a way of security for PMO in lieu of the
performance of PIC of its obligations under both the ARDA and the Pledge
Agreement. It is upon the execution of the Pledge Agreement that PIC
turned over the possession of its certificates of shares of stock in PPC to
PMO. As ruled, there had already been a shift in the relations of PMO and
PIC, from mere seller and buyer, to creditor-pledgee and debtor-pledgor.
Having enjoyed the security and benefits of the Pledge Agreement, PMO
cannot now insist on applying Section 8 of the ARDA and conveniently and
arbitrarily exclude and/or ignore the Pledge Agreement so as to evade the
prohibition against pactum commissorium. Moreover, the Court focused on

the evident intention of the parties rather than the formal or written form to
determine the existence of pactum commissorium.
Hence, appreciating the ARDA and the Pledge Agreement, the Court
can only conclude that the ipso facto reversion of shares of stock is a
pactum commissorium and thus, null and void.