G.R. No.

L-23145

November 29, 1968

TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased.

RENATO D. TAYAG, ancillary administrator-appellee,

Consolidated, Inc., (2) orders said certificates cancelled, and

(3) directs said corporation to issue new certificates in lieu
thereof, the same to be delivered by said corporation to
either the incumbent ancillary administrator or to the
Probate Division of this Court."1

vs.
BENGUET CONSOLIDATED, INC., oppositor-appellant.

Cirilo F. Asperillo, Jr., for ancillary administrator-appellee.

Ross, Salcedo, Del Rosario, Bito and Misa for oppositorappellant.

From such an order, an appeal was taken to this Court not

by the domiciliary administrator, the County Trust Company
of New York, but by the Philippine corporation, the Benguet
Consolidated, Inc. The appeal cannot possibly prosper. The
challenged order represents a response and expresses a
policy, to paraphrase Frankfurter, arising out of a specific
problem, addressed to the attainment of specific ends by
the use of specific remedies, with full and ample support
from legal doctrines of weight and significance.

FERNANDO, J.:

Confronted by an obstinate and adamant refusal of the

domiciliary administrator, the County Trust Company of New
York, United States of America, of the estate of the deceased
Idonah Slade Perkins, who died in New York City on March
27, 1960, to surrender to the ancillary administrator in the
Philippines the stock certificates owned by her in a
Philippine corporation, Benguet Consolidated, Inc., to satisfy
the legitimate claims of local creditors, the lower court, then
presided by the Honorable Arsenio Santos, now retired,
issued on May 18, 1964, an order of this tenor: "After
considering the motion of the ancillary administrator, dated
February 11, 1964, as well as the opposition filed by the
Benguet Consolidated, Inc., the Court hereby (1) considers
as lost for all purposes in connection with the administration
and liquidation of the Philippine estate of Idonah Slade
Perkins the stock certificates covering the 33,002 shares of
stock standing in her name in the books of the Benguet

The facts will explain why. As set forth in the brief of

appellant Benguet Consolidated, Inc., Idonah Slade Perkins,
who died on March 27, 1960 in New York City, left among
others, two stock certificates covering 33,002 shares of
appellant, the certificates being in the possession of the
County Trust Company of New York, which as noted, is the
domiciliary administrator of the estate of the deceased.2
Then came this portion of the appellant's brief: "On August
12, 1960, Prospero Sanidad instituted ancillary
administration proceedings in the Court of First Instance of
Manila; Lazaro A. Marquez was appointed ancillary
administrator, and on January 22, 1963, he was substituted
by the appellee Renato D. Tayag. A dispute arose between
the domiciary administrator in New York and the ancillary
administrator in the Philippines as to which of them was
entitled to the possession of the stock certificates in
question. On January 27, 1964, the Court of First Instance of
Manila ordered the domiciliary administrator, County Trust

Company, to "produce and deposit" them with the ancillary

administrator or with the Clerk of Court. The domiciliary
administrator did not comply with the order, and on
February 11, 1964, the ancillary administrator petitioned the
court to "issue an order declaring the certificate or
certificates of stocks covering the 33,002 shares issued in
the name of Idonah Slade Perkins by Benguet Consolidated,
Inc., be declared [or] considered as lost."3

It is to be noted further that appellant Benguet

Consolidated, Inc. admits that "it is immaterial" as far as it is
concerned as to "who is entitled to the possession of the
stock certificates in question; appellant opposed the petition
of the ancillary administrator because the said stock
certificates are in existence, they are today in the
possession of the domiciliary administrator, the County Trust
Company, in New York, U.S.A...."4

It is its view, therefore, that under the circumstances, the

stock certificates cannot be declared or considered as lost.
Moreover, it would allege that there was a failure to observe
certain requirements of its by-laws before new stock
certificates could be issued. Hence, its appeal.

As was made clear at the outset of this opinion, the appeal

lacks merit. The challenged order constitutes an emphatic
affirmation of judicial authority sought to be emasculated by
the wilful conduct of the domiciliary administrator in
refusing to accord obedience to a court decree. How, then,
can this order be stigmatized as illegal?

As is true of many problems confronting the judiciary, such a

response was called for by the realities of the situation.
What cannot be ignored is that conduct bordering on wilful
defiance, if it had not actually reached it, cannot without
undue loss of judicial prestige, be condoned or tolerated. For
the law is not so lacking in flexibility and resourcefulness as
to preclude such a solution, the more so as deeper reflection
would make clear its being buttressed by indisputable
principles and supported by the strongest policy
considerations.

It can truly be said then that the result arrived at upheld and
vindicated the honor of the judiciary no less than that of the
country. Through this challenged order, there is thus
dispelled the atmosphere of contingent frustration brought
about by the persistence of the domiciliary administrator to
hold on to the stock certificates after it had, as admitted,
voluntarily submitted itself to the jurisdiction of the lower
court by entering its appearance through counsel on June
27, 1963, and filing a petition for relief from a previous order
of March 15, 1963.

Thus did the lower court, in the order now on appeal, impart
vitality and effectiveness to what was decreed. For without
it, what it had been decided would be set at naught and
nullified. Unless such a blatant disregard by the domiciliary
administrator, with residence abroad, of what was
previously ordained by a court order could be thus
remedied, it would have entailed, insofar as this matter was
concerned, not a partial but a well-nigh complete paralysis
of judicial authority.

1.
Appellant Benguet Consolidated, Inc. did not dispute
the power of the appellee ancillary administrator to gain
control and possession of all assets of the decedent within
the jurisdiction of the Philippines. Nor could it. Such a power
is inherent in his duty to settle her estate and satisfy the
claims of local creditors.5 As Justice Tuason speaking for this
Court made clear, it is a "general rule universally
recognized" that administration, whether principal or
ancillary, certainly "extends to the assets of a decedent
found within the state or country where it was granted," the
corollary being "that an administrator appointed in one state
or country has no power over property in another state or
country."6

It is to be noted that the scope of the power of the ancillary

administrator was, in an earlier case, set forth by Justice
Malcolm. Thus: "It is often necessary to have more than one
administration of an estate. When a person dies intestate
owning property in the country of his domicile as well as in a
foreign country, administration is had in both countries. That
which is granted in the jurisdiction of decedent's last
domicile is termed the principal administration, while any
other administration is termed the ancillary administration.
The reason for the latter is because a grant of
administration does not ex proprio vigore have any effect
beyond the limits of the country in which it is granted.
Hence, an administrator appointed in a foreign state has no
authority in the [Philippines]. The ancillary administration is
proper, whenever a person dies, leaving in a country other
than that of his last domicile, property to be administered in
the nature of assets of the deceased liable for his individual
debts or to be distributed among his heirs."7

It would follow then that the authority of the probate court

to require that ancillary administrator's right to "the stock
certificates covering the 33,002 shares ... standing in her
name in the books of [appellant] Benguet Consolidated,
Inc...." be respected is equally beyond question. For
appellant is a Philippine corporation owing full allegiance
and subject to the unrestricted jurisdiction of local courts. Its
shares of stock cannot therefore be considered in any wise
as immune from lawful court orders.

Our holding in Wells Fargo Bank and Union v. Collector of

Internal Revenue8 finds application. "In the instant case, the
actual situs of the shares of stock is in the Philippines, the
corporation being domiciled [here]." To the force of the
above undeniable proposition, not even appellant is
insensible. It does not dispute it. Nor could it successfully do
so even if it were so minded.

2.
In the face of such incontrovertible doctrines that
argue in a rather conclusive fashion for the legality of the
challenged order, how does appellant, Benguet
Consolidated, Inc. propose to carry the extremely heavy
burden of persuasion of precisely demonstrating the
contrary? It would assign as the basic error allegedly
committed by the lower court its "considering as lost the
stock certificates covering 33,002 shares of Benguet
belonging to the deceased Idonah Slade Perkins, ..."9 More
specifically, appellant would stress that the "lower court
could not "consider as lost" the stock certificates in question
when, as a matter of fact, his Honor the trial Judge knew,
and does know, and it is admitted by the appellee, that the
said stock certificates are in existence and are today in the
possession of the domiciliary administrator in New York."10

There may be an element of fiction in the above view of the

lower court. That certainly does not suffice to call for the
reversal of the appealed order. Since there is a refusal,
persistently adhered to by the domiciliary administrator in
New York, to deliver the shares of stocks of appellant
corporation owned by the decedent to the ancillary
administrator in the Philippines, there was nothing
unreasonable or arbitrary in considering them as lost and
requiring the appellant to issue new certificates in lieu
thereof. Thereby, the task incumbent under the law on the
ancillary administrator could be discharged and his
responsibility fulfilled.

Any other view would result in the compliance to a valid

judicial order being made to depend on the uncontrolled
discretion of the party or entity, in this case domiciled
abroad, which thus far has shown the utmost persistence in
refusing to yield obedience. Certainly, appellant would not
be heard to contend in all seriousness that a judicial decree
could be treated as a mere scrap of paper, the court issuing
it being powerless to remedy its flagrant disregard.

them have persisted even to the present, that eminent

jurist, noting "the quasi contract, the adopted child, the
constructive trust, all of flourishing vitality, to attest the
empire of "as if" today."13 He likewise noted "a class of
fictions of another order, the fiction which is a working tool
of thought, but which at times hides itself from view till
reflection and analysis have brought it to the light."14

What cannot be disputed, therefore, is the at times

indispensable role that fictions as such played in the law.
There should be then on the part of the appellant a further
refinement in the catholicity of its condemnation of such
judicial technique. If ever an occasion did call for the
employment of a legal fiction to put an end to the
anomalous situation of a valid judicial order being
disregarded with apparent impunity, this is it. What is thus
most obvious is that this particular alleged error does not
carry persuasion.

It may be admitted of course that such alleged loss as found

by the lower court did not correspond exactly with the facts.
To be more blunt, the quality of truth may be lacking in such
a conclusion arrived at. It is to be remembered however,
again to borrow from Frankfurter, "that fictions which the
law may rely upon in the pursuit of legitimate ends have
played an important part in its development."11

3.
Appellant Benguet Consolidated, Inc. would seek to
bolster the above contention by its invoking one of the
provisions of its by-laws which would set forth the procedure
to be followed in case of a lost, stolen or destroyed stock
certificate; it would stress that in the event of a contest or
the pendency of an action regarding ownership of such
certificate or certificates of stock allegedly lost, stolen or
destroyed, the issuance of a new certificate or certificates
would await the "final decision by [a] court regarding the
ownership [thereof]."15

Speaking of the common law in its earlier period, Cardozo

could state fictions "were devices to advance the ends of
justice, [even if] clumsy and at times offensive."12 Some of

Such reliance is misplaced. In the first place, there is no

such occasion to apply such by-law. It is admitted that the
foreign domiciliary administrator did not appeal from the

order now in question. Moreover, there is likewise the

express admission of appellant that as far as it is concerned,
"it is immaterial ... who is entitled to the possession of the
stock certificates ..." Even if such were not the case, it would
be a legal absurdity to impart to such a provision
conclusiveness and finality. Assuming that a contrariety
exists between the above by-law and the command of a
court decree, the latter is to be followed.

It is understandable, as Cardozo pointed out, that the

Constitution overrides a statute, to which, however, the
judiciary must yield deference, when appropriately invoked
and deemed applicable. It would be most highly unorthodox,
however, if a corporate by-law would be accorded such a
high estate in the jural order that a court must not only take
note of it but yield to its alleged controlling force.

The fear of appellant of a contingent liability with which it

could be saddled unless the appealed order be set aside for
its inconsistency with one of its by-laws does not impress us.
Its obedience to a lawful court order certainly constitutes a
valid defense, assuming that such apprehension of a
possible court action against it could possibly materialize.
Thus far, nothing in the circumstances as they have
developed gives substance to such a fear. Gossamer
possibilities of a future prejudice to appellant do not suffice
to nullify the lawful exercise of judicial authority.

4.
What is more the view adopted by appellant Benguet
Consolidated, Inc. is fraught with implications at war with
the basic postulates of corporate theory.

We start with the undeniable premise that, "a corporation is

an artificial being created by operation of law...."16 It owes
its life to the state, its birth being purely dependent on its
will. As Berle so aptly stated: "Classically, a corporation was
conceived as an artificial person, owing its existence
through creation by a sovereign power."17 As a matter of
fact, the statutory language employed owes much to Chief
Justice Marshall, who in the Dartmouth College decision
defined a corporation precisely as "an artificial being,
invisible, intangible, and existing only in contemplation of
law."18

The well-known authority Fletcher could summarize the

matter thus: "A corporation is not in fact and in reality a
person, but the law treats it as though it were a person by
process of fiction, or by regarding it as an artificial person
distinct and separate from its individual stockholders.... It
owes its existence to law. It is an artificial person created by
law for certain specific purposes, the extent of whose
existence, powers and liberties is fixed by its charter."19
Dean Pound's terse summary, a juristic person, resulting
from an association of human beings granted legal
personality by the state, puts the matter neatly.20

There is thus a rejection of Gierke's genossenchaft theory,

the basic theme of which to quote from Friedmann, "is the
reality of the group as a social and legal entity, independent
of state recognition and concession."21 A corporation as
known to Philippine jurisprudence is a creature without any
existence until it has received the imprimatur of the state
according to law. It is logically inconceivable therefore that it
will have rights and privileges of a higher priority than that
of its creator. More than that, it cannot legitimately refuse to

yield obedience to acts of its state organs, certainly not

excluding the judiciary, whenever called upon to do so.

As a matter of fact, a corporation once it comes into being,

following American law still of persuasive authority in our
jurisdiction, comes more often within the ken of the judiciary
than the other two coordinate branches. It institutes the
appropriate court action to enforce its right. Correlatively, it
is not immune from judicial control in those instances, where
a duty under the law as ascertained in an appropriate legal
proceeding is cast upon it.

To assert that it can choose which court order to follow and

which to disregard is to confer upon it not autonomy which
may be conceded but license which cannot be tolerated. It is
to argue that it may, when so minded, overrule the state,
the source of its very existence; it is to contend that what
any of its governmental organs may lawfully require could
be ignored at will. So extravagant a claim cannot possibly
merit approval.

5.
One last point. In Viloria v. Administrator of Veterans
Affairs,22 it was shown that in a guardianship proceedings
then pending in a lower court, the United States Veterans
Administration filed a motion for the refund of a certain sum
of money paid to the minor under guardianship, alleging
that the lower court had previously granted its petition to
consider the deceased father as not entitled to guerilla
benefits according to a determination arrived at by its main
office in the United States. The motion was denied. In
seeking a reconsideration of such order, the Administrator
relied on an American federal statute making his decisions
"final and conclusive on all questions of law or fact"

precluding any other American official to examine the

matter anew, "except a judge or judges of the United States
court."23 Reconsideration was denied, and the
Administrator appealed.

In an opinion by Justice J.B.L. Reyes, we sustained the lower

court. Thus: "We are of the opinion that the appeal should
be rejected. The provisions of the U.S. Code, invoked by the
appellant, make the decisions of the U.S. Veterans'
Administrator final and conclusive when made on claims
property submitted to him for resolution; but they are not
applicable to the present case, where the Administrator is
not acting as a judge but as a litigant. There is a great
difference between actions against the Administrator (which
must be filed strictly in accordance with the conditions that
are imposed by the Veterans' Act, including the exclusive
review by United States courts), and those actions where
the Veterans' Administrator seeks a remedy from our courts
and submits to their jurisdiction by filing actions therein. Our
attention has not been called to any law or treaty that would
make the findings of the Veterans' Administrator, in actions
where he is a party, conclusive on our courts. That, in effect,
would deprive our tribunals of judicial discretion and render
them mere subordinate instrumentalities of the Veterans'
Administrator."

It is bad enough as the Viloria decision made patent for our

judiciary to accept as final and conclusive, determinations
made by foreign governmental agencies. It is infinitely
worse if through the absence of any coercive power by our
courts over juridical persons within our jurisdiction, the force
and effectivity of their orders could be made to depend on
the whim or caprice of alien entities. It is difficult to imagine

of a situation more offensive to the dignity of the bench or

the honor of the country.

Yet that would be the effect, even if unintended, of the

proposition to which appellant Benguet Consolidated seems
to be firmly committed as shown by its failure to accept the
validity of the order complained of; it seeks its reversal.
Certainly we must at all pains see to it that it does not
succeed. The deplorable consequences attendant on
appellant prevailing attest to the necessity of negative
response from us. That is what appellant will get.

That is all then that this case presents. It is obvious why the
appeal cannot succeed. It is always easy to conjure extreme
and even oppressive possibilities. That is not decisive. It
does not settle the issue. What carries weight and
conviction is the result arrived at, the just solution obtained,
grounded in the soundest of legal doctrines and
distinguished by its correspondence with what a sense of
realism requires. For through the appealed order, the
imperative requirement of justice according to law is
satisfied and national dignity and honor maintained.

WHEREFORE, the appealed order of the Honorable Arsenio

Santos, the Judge of the Court of First Instance, dated May
18, 1964, is affirmed. With costs against oppositor-appelant
Benguet Consolidated, Inc

G.R. No. 120138

September 5, 1997

MANUEL A. TORRES, JR., (Deceased), GRACIANO J. TOBIAS,

RODOLFO L. JOCSON, JR., MELVIN S. JURISPRUDENCIA,
AUGUSTUS CESAR AZURA and EDGARDO D. PABALAN,
petitioners,
vs.
COURT OF APPEALS, SECURITIES AND EXCHANGE
COMMISSION, TORMIL REALTY & DEVELOPMENT
CORPORATION, ANTONIO P. TORRES, JR., MA. CRISTINA T.
CARLOS, MA. LUISA T. MORALES and DANTE D. MORALES,
respondents.

KAPUNAN, J.:

Antonio P. Torres, Jr.

In this petition for review on certiorari under Rule 45 of the

Revised Rules of Court, petitioners seek to annul the
decision of the Court of Appeals in CA-G.R. SP. No. 31748
dated 23 May 1994 and its subsequent resolution dated 10
May 1995 denying petitioners' motion for reconsideration.

The present case involves two separate but interrelated

conflicts. The facts leading to the first controversy are as
follows:

The late Manuel A. Torres, Jr. (Judge Torres for brevity) was
the majority stockholder of Tormil Realty & Development
Corporation while private respondents who are the children
of Judge Torres' deceased brother Antonio A. Torres,
constituted the minority stockholders. In particular, their
respective shareholdings and positions in the corporation
were as follows:

Name of Stockholder Number of Percentage

Position(s)

Shares

Manuel A. Torres, Jr.

100,120

Milagros P. Torres

33,430 19.10 Dir./Treasurer

Josefina P. Torres

8,290 4.73

Ma. Cristina T. Carlos 8,290 4.73

57.21 Dir./Pres./Chair

Dir./Ass. Cor-Sec.
Dir./Cor-Sec.

8,290 4.73

Director

Ma. Jacinta P. Torres 8,290 4.73

Director

Ma. Luisa T. Morales 7,790 4.45

Director

Dante D. Morales

Director 1

500

.28

In 1984, Judge Torres, in order to make substantial savings

in taxes, adopted an "estate planning" scheme under which
he assigned to Tormil Realty & Development Corporation
(Tormil for brevity) various real properties he owned and his
shares of stock in other corporations in exchange for
225,972 Tormil Realty shares. Hence, on various dates in July
and August of 1984, ten (10) deeds of assignment were
executed by the late Judge Torres:

ASSIGNMENT DATE PROPERTY ASSIGNED LOCATION

SHARES TO BE
ISSUED

1.

July 13, 1984 TCT 81834

TCT 144240

2.

13,252

Quezon City

July 13, 1984 TCT 77008

TCT 65689

Manila 78,493

TCT 109200

Manila

3.

Quezon City

July 13, 1984 TCT 374079

Manila

Makati 8,307

4.

July 24, 1984 TCT 41527

TCT 41528

Pasay 9,855

TCT 41529

Pasay

entered in the corporation's books of account and financial

records.

Pasay

5.

Aug. 06, 1984 El Hogar Filipino Stocks

2,000

6.

Aug. 06, 1984 Manila Jockey Club Stocks

48,737

7.

Aug. 07, 1984 San Miguel Corp. Stocks

50,283

8.

Aug. 07, 1984 China banking Corp. Stocks 6,300

9.

Aug. 20, 1984 Ayala Corp. Stocks

7,468

10.

Aug. 29, 1984 Ayala Fund Stocks

1,322

225,972 2

Consequently, the aforelisted properties were duly recorded

in the inventory of assets of Tormil Realty and the revenues
generated by the said properties were correspondingly

Likewise, all the assigned parcels of land were duly

registered with the respective Register of Deeds in the name
of Tormil Realty, except for the ones located in Makati and
Pasay City.

At the time of the assignments and exchange, however, only

225,000 Tormil Realty shares remained unsubscribed, all of
which were duly issued to and received by Judge Torres (as
evidenced by stock certificates Nos. 17, 18, 19, 20, 21, 22,
23, 24 & 25). 3

Due to the insufficient number of shares of stock issued to

Judge Torres and the alleged refusal of private respondents
to approve the needed increase in the corporation's
authorized capital stock (to cover the shortage of 972
shares due to Judge Torres under the "estate planning"
scheme), on 11 September 1986, Judge Torres revoked the
two (2) deeds of assignment covering the properties in
Makati and Pasay City. 4

Noting the disappearance of the Makati and Pasay City

properties from the corporation's inventory of assets and
financial records private respondents, on 31 March 1987,
were constrained to file a complaint with the Securities and
Exchange Commission (SEC) docketed as SEC Case No.
3153 to compel Judge Torres to deliver to Tormil corporation
the two (2) deeds of assignment covering the
aforementioned Makati and Pasay City properties which he
had unilaterally revoked and to cause the registration of the

corresponding titles in the name of Tormil. Private

respondents alleged that following the disappearance of the
properties from the corporation's inventory of assets, they
found that on October 24, 1986, Judge Torres, together with
Edgardo Pabalan and Graciano Tobias, then General
Manager and legal counsel, respectively, of Tormil, formed
and organized a corporation named "Torres-Pabalan Realty
and Development Corporation" and that as part of Judge
Torres' contribution to the new corporation, he executed in
its favor a Deed of Assignment conveying the same Makati
and Pasay City properties he had earlier transferred to
Tormil.

The second controversy involving the same parties

concerned the election of the 1987 corporate board of
directors.

The 1987 annual stockholders meeting and election of

directors of Tormil corporation was scheduled on 25 March
1987 in compliance with the provisions of its by-laws.

Pursuant thereto, Judge Torres assigned from his own shares,

one (l) share each to petitioners Tobias, Jocson,
Jurisprudencia, Azura and Pabalan. These assigned shares
were in the nature of "qualifying shares," for the sole
purpose of meeting the legal requirement to be able to elect
them (Tobias and company) to the Board of Directors as
Torres' nominees.

The assigned shares were covered by corresponding Tormil

Stock Certificates Nos. 030, 029, 028, 027, 026 and at the
back of each certificate the following inscription is found:

The present certificate and/or the one share it represents,

conformably to the purpose and intention of the Deed of
Assignment dated March 6, 1987, is not held by me under
any claim of ownership and I acknowledge that I hold the
same merely as trustee of Judge Manuel A. Torres, Jr. and for
the sole purpose of qualifying me as Director;

(Signature of Assignee) 5

The reason behind the aforestated action was to remedy the

"inequitable lopsided set-up obtaining in the corporation,
where, notwithstanding his controlling interest in the
corporation, the late Judge held only a single seat in the
nine-member Board of Directors and was, therefore, at the
mercy of the minority, a combination of any two (2) of whom
would suffice to overrule the majority stockholder in the
Board's decision making functions." 6

On 25 March 1987, the annual stockholders meeting was

held as scheduled. What transpired therein was ably
narrated by Attys. Benito Cataran and Bayani De los Reyes,
the official representatives dispatched by the SEC to
observe the proceedings (upon request of the late Judge
Torres) in their report dated 27 March 1987:

xxx

xxx

xxx

The undersigned arrived at 1:55 p.m. in the place of the

meeting, a residential bungalow in Urdaneta Village, Makati,

10

Metro Manila. Upon arrival, Josefina Torres introduced us to

the stockholders namely: Milagros Torres, Antonio Torres, Jr.,
Ma. Luisa Morales, Ma. Cristina Carlos and Ma. Jacinta Torres.
Antonio Torres, Jr. questioned our authority and personality
to appear in the meeting claiming subject corporation is a
family and private firm. We explained that our appearance
there was merely in response to the request of Manuel
Torres, Jr. and that SEC has jurisdiction over all registered
corporations. Manuel Torres, Jr., a septuagenarian, argued
that as holder of the major and controlling shares, he
approved of our attendance in the meeting.

At about 2:30 p.m., a group composed of Edgardo Pabalan,

Atty. Graciano Tobias, Atty. Rodolfo Jocson, Jr., Atty. Melvin
Jurisprudencia, and Atty. Augustus Cesar Azura arrived. Atty.
Azura told the body that they came as counsels of Manuel
Torres, Jr. and as stockholders having assigned qualifying
shares by Manuel Torres, Jr.

The stockholders' meeting started at 2:45 p.m. with Mr.

Pabalan presiding after verbally authorized by Manuel
Torres, Jr., the President and Chairman of the Board. The
secretary when asked about the quorum, said that there was
more than a quorum. Mr. Pabalan distributed copies of the
president's report and the financial statements. Antonio
Torres, Jr. requested time to study the said reports and
brought out the question of auditing the finances of the
corporation which he claimed was approved previously by
the board. Heated arguments ensued which also touched on
family matters. Antonio Torres, Jr. moved for the suspension
of the meeting but Manuel Torres, Jr. voted for the
continuation of the proceedings.

Mr. Pabalan suggested that the opinion of the SEC

representatives be asked on the propriety of suspending the
meeting but Antonio Torres, Jr. objected reasoning out that
we were just observers.

When the Chairman called for the election of directors, the

Secretary refused to write down the names of nominees
prompting Atty. Azura to initiate the appointment of Atty.
Jocson, Jr. as Acting Secretary.

Antonio Torres, Jr. nominated the present members of the

Board. At this juncture, Milagros Torres cried out and told the
group of Manuel Torres, Jr. to leave the house.

Manuel Torres, Jr., together with his lawyers-stockholders

went to the residence of Ma. Jacinta Torres in San Miguel
Village, Makati, Metro Manila. The undersigned joined them
since the group with Manuel Torres, Jr. the one who
requested for S.E.C. observers, represented the majority of
the outstanding capital stock and still constituted a quorum.

At the resumption of the meeting, the following were

nominated and elected as directors for the year 1987-1988:

1.

Manuel Torres, Jr.

2.

Ma. Jacinta Torres

11

3.

Edgardo Pabalan

4.

Graciano Tobias

5.

Rodolfo Jocson, Jr.

6.

Melvin Jurisprudencia

7.

Augustus Cesar Azura

8.

Josefina Torres

9.

Dante Morales

After the election, it was resolved that after the meeting, the
new board of directors shall convene for the election of
officers.

xxx

xxx

xxx 7

Consequently, on 10 April 1987, private respondents

instituted a complaint with the SEC (SEC Case No. 3161)
praying in the main, that the election of petitioners to the
Board of Directors be annulled.

Private respondents alleged that the petitioners-nominees

were not legitimate stockholders of Tormil because the
assignment of shares to them violated the minority
stockholders' right of pre-emption as provided in the
corporation's articles and by-laws.

Upon motion of petitioners, SEC Cases Nos. 3153 and 3161

were consolidated for joint hearing and adjudication.

On 6 March 1991, the Panel of Hearing Officers of the SEC

rendered a decision in favor of private respondents. The
dispositive portion thereof states, thus:

WHEREFORE, premises considered, judgment is hereby

rendered as follows:

1.
Ordering and directing the respondents, particularly
respondent Manuel A. Torres, Jr., to turn over and deliver to
TORMIL through its Corporate Secretary, Ma. Cristina T.
Carlos: (a) the originals of the Deeds of Assignment dated
July 13 and 24, 1984 together with the owner's duplicates of
Transfer Certificates of Title Nos. 374079 of the Registry of
Deeds for Makati, and 41527, 41528 and 41529 of the
Registry of Deeds for Pasay City and/or to cause the formal
registration and transfer of title in and over such real
properties in favor of TORMIL with the proper government
agency; (b) all corporate books of account, records and
papers as may be necessary for the conduct of a
comprehensive audit examination, and to allow the
examination and inspection of such accounting books,
papers and records by any or all of the corporate directors,

12

officers and stockholders and/or their duly authorized

representatives or auditors;

2.
Declaring as permanent and final the writ of
preliminary injunction issued by the Hearing Panel on
February 13, 1989;

3.
Declaring as null and void the election and
appointment of respondents to the Board of Directors and
executive positions of TORMIL held on March 25, 1987, and
all their acts and resolutions made for and in behalf of
TORMIL by authority of and pursuant to such invalid
appointment & election held on March 25, 1987;

4.
Ordering the respondents jointly and severally, to
pay the complainants the sum of ONE HUNDRED THOUSAND
PESOS (P100,000.00) as and by way of attorney's fees. 8

Petitioners promptly appealed to the SEC en banc (docketed

as SEC-AC No. 339). Thereafter, on 3 April 1991, during the
pendency of said appeal, petitioner Manuel A. Torres, Jr.
died. However, notice thereof was brought to the attention
of the SEC not by petitioners' counsel but by private
respondents in a Manifestation dated 24 April 1991. 9

On 8 June 1993, petitioners filed a Motion to Suspend

Proceedings on grounds that no administrator or legal
representative of the late Judge Torres' estate has yet been
appointed by the Regional Trial Court of Makati where Sp.
Proc. No. M-1768 ("In Matter of the Issuance of the Last Will

and Testament of Manuel A Torres, Jr.") was pending. Two

similar motions for suspension were filed by petitioners on
28 June 1993 and 9 July 1993.

On 19 July 1993, the SEC en banc issued an Order denying

petitioners' aforecited motions on the following ground:

Before the filing of these motions, the Commission en banc

had already completed all proceedings and had likewise
ruled on the merits of the appealed cases. Viewed in this
light, we thus feel that there is nothing left to be done
except to deny these motions to suspend proceedings. 10

On the same date, the SEC en banc rendered a decision, the

dispositive portion of which reads, thus:

WHEREFORE, premises considered, the appealed decision of

the hearing panel is hereby affirmed and all motions
pending before us incident to this appealed case are
necessarily DISMISSED.

SO ORDERED. 11

Undaunted, on 10 August 1993, petitioners proceeded to

plead its cause to the Court of Appeals by way of a petition
for review (docketed as CA-G.R. SP No. 31748).

13

On 23 May 1994, the Court of Appeals rendered a decision,

the dispositive portion of which states:

WHEREFORE, the petition for review is DISMISSED and the

appealed decision is accordingly affirmed.

SO ORDERED. 12

From the said decision, petitioners filed a motion for

reconsideration which was denied in a resolution issued by
the Court of Appeals dated 10 May 1995. 13

Insisting on their cause, petitioners filed the present petition

for review alleging that the Court of Appeals committed the
following errors in its decision:

(1)

WHEN IT RENDERED THE MAY 23, 1994 DECISION, WHICH IS

A FULL LENGTH DECISION, WITHOUT THE EVIDENCE AND
THE ORIGINAL RECORD OF S.E.C. AC NO. 339 BEING
PROPERLY BROUGHT BEFORE IT FOR REVIEW AND REEXAMINATION, AN OMISSION RESULTING IN A CLEAR
TRANSGRESSION OR CURTAILMENT OF THE RIGHTS OF THE
HEREIN PETITIONERS TO PROCEDURAL DUE PROCESS;

(2)

WHEN IT SANCTIONED THE JULY 19, 1993 DECISION OF THE

RESPONDENT S.E.C., WHICH IS VOID FOR HAVING BEEN
RENDERED WITHOUT THE PROPER SUBSTITUTION OF THE
DECEASED PRINCIPAL PARTY-RESPONDENT IN S.E.C.-AC NO.
339 AND CONSEQUENTLY, FOR WANT OF JURISDICTION
OVER THE SAID DECEASED'S TESTATE ESTATE, AND
MOREOVER, WHEN IT SOUGHT TO JUSTIFY THE NONSUBSTITUTION BY ITS APPLICATION OF THE CIVIL LAW
CONCEPT OF NEGOTIORUM GESTIO;

(3)

WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE

EVIDENCE AND THE ORIGINAL RECORD OF S.E.C. AC NO.
339 NOT HAVING ACTUALLY BEEN RE-EXAMINED, THAT
S.E.C. CASE NO. 3153 INVOLVED A SITUATION WHERE
PERFORMANCE WAS IMPOSSIBLE (AS CONTEMPLATED
UNDER ARTICLE 1191 OF THE CIVIL CODE) AND WAS NOT A
MERE CASE OF LESION OR INADEQUACY OF CAUSE (UNDER
ARTICLE 1355 OF THE CIVIL CODE) AS SO ERRONEOUSLY
CHARACTERIZED BY THE RESPONDENT S.E.C.; and,

(4)

WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE

EVIDENCE AND THE ORIGINAL RECORD OF S.E.C. AC NO.
339 NOT HAVING ACTUALLY BEEN EXAMINED, THAT THE
RECORDING BY THE LATE JUDGE MANUEL A. TORRES, JR. OF
THE QUESTIONED ASSIGNMENT OF QUALIFYING SHARES TO
HIS NOMINEES, WAS AFFIRMED IN THE STOCK AND

14

TRANSFER BOOK BY AN ACTING CORPORATE SECRETARY

AND MOREOVER, THAT ACTUAL NOTICE OF SAID
ASSIGNMENT WAS TIMELY MADE TO THE OTHER
STOCKHOLDERS. 14

of the court commission, board, office or agency concerned

when supported by substantial evidence shall be final.

xxx

xxx

xxx

We shall resolve the issues in seriatim.

Petitioners insist that the failure to transmit the original

records to the Court of Appeals deprived them of procedural
due process. Without the evidence and the original records
of the proceedings before the SEC, the Court of Appeals,
petitioners adamantly state, could not have possibly made a
proper appreciation and correct determination of the issues,
particularly the factual issues, they had raised on appeal.
Petitioners also assert that since the Court of Appeals
allegedly gave due course to their petition, the original
records should have been forwarded to said court.

Petitioners anchor their argument on Secs. 8 and 11 of SC

Circular 1-91 (dated 27 February 1991) which provides that:

8.
WHEN PETITION GIVEN DUE COURSE. The Court of
Appeals shall give due course to the petition only when it
shows prima facie that the court, commission, board, office
or agency concerned has committed errors of fact or law
that would warrant reversal or modification of the order,
ruling or decision sought to be reviewed. The findings of fact

11.
TRANSMITTAL OF RECORD. Within fifteen (15) days
from notice that the petition has been given due course, the
court, commission, board, office or agency concerned shall
transmit to the Court of Appeals the original or a certified
copy of the entire record of the proceeding under review.
The record to be transmitted may be abridged by
agreement of all parties to the proceeding. The Court of
Appeals may require or permit subsequent correction or
addition to the record.

Petitioners contend that the Court of Appeals had given due

course to their petition as allegedly indicated by the
following acts:

a)
it granted the restraining order applied for by the
herein petitioners, and after hearing, also the writ of
preliminary injunction sought by them; under the original SC
Circular No. 1-91, a petition for review may be given due
course at the onset (paragraph 8) upon a mere prima facie
finding of errors of fact or law having been committed, and
such prima facie finding is but consistent with the grant of
the extra-ordinary writ of preliminary injunction;

b)
it required the parties to submit "simultaneous
memoranda" in its resolution dated October 15, 1993 (this is

15

in addition to the comment required to be filed by the

respondents) and furthermore declared in the same
resolution that the petition will be decided "on the merits,"
instead of outrightly dismissing the same;

c)
it rendered a full length decision, wherein: (aa) it
expressly declared the respondent S.E.C. as having erred in
denying the pertinent motions to suspend proceedings; (bb)
it declared the supposed error as having become a nonissue when the respondent C.A. "proceeded to hear (the)
appeal"; (cc) it formulated and applied its own theory of
negotiorum gestio in justifying the non-substitution of the
deceased principal party in S.E.C. AC No. 339 and
moreover, its theory of di minimis non curat lex (this,
without first determining the true extent of and the correct
legal characterization of the so-called "shortage" of Tormil
shares;
and, (dd) it expressly affirmed the assailed decision of
respondent S.E.C. 15

Petitioners' contention is unmeritorious.

There is nothing on record to show that the Court of Appeals

gave due course to the petition. The fact alone that the
Court of Appeals issued a restraining order and a writ of
preliminary injunction and required the parties to submit
their respective memoranda does not indicate that the
petition was given due course. The office of an injunction is
merely to preserve the status quo pending the disposition of
the case. The court can require the submission of
memoranda in support of the respective claims and
positions of the parties without necessarily giving due

course to the petition. The matter of whether or not to give

due course to a petition lies in the discretion of the court.

It is worthy to mention that SC Circular No. 1-91 has been

replaced by Revised Administrative Circular No. 1-95 (which
took effect on 1 June 1995) wherein the procedure for
appeals from quasi-judicial agencies to the Court of Appeals
was clarified thus:

10.
Due course. If upon the filing of the comment or
such other pleadings or documents as may be required or
allowed by the Court of Appeals or upon the expiration of
the period for the filing thereof, and on the bases of the
petition or the record the Court of Appeals finds prima facie
that the court or agency concerned has committed errors of
fact or law that would warrant reversal or modification of the
award, judgment, final order or resolution sought to be
reviewed, it may give due course to the petition; otherwise,
it shall dismiss the same. The findings of fact of the court or
agency concerned, when supported by substantial evidence,
shall be binding on the Court of Appeals.

11.
Transmittal of record. Within fifteen (15) days from
notice that the petition has been given due course, the
Court of Appeals may require the court or agency concerned
to transmit the original or a legible certified true copy of the
entire record of the proceeding under review. The record to
be transmitted may be abridged by agreement of all parties
to the proceeding. The Court of Appeals may require or
permit subsequent correction of or addition to the record.
(Emphasis ours.)

16

The aforecited circular now formalizes the correct practice

and clearly states that in resolving appeals from quasi
judicial agencies, it is within the discretion of the Court of
Appeals to have the original records of the proceedings
under review be transmitted to it. In this connection
petitioners' claim that the Court of Appeals could not have
decided the case on the merits without the records being
brought before it is patently lame. Indubitably, the Court of
Appeals decided the case on the basis of the uncontroverted
facts and admissions contained in the pleadings, that is, the
petition, comment, reply, rejoinder, memoranda, etc. filed
by the parties.

procuring such appointment, if defrayed by the opposing

party, may be recovered as costs. The heirs of the deceased
may be allowed to be substituted for the deceased, without
requiring the appointment of an executor or administrator
and the court may appoint guardian ad litem for the minor
heirs.

Petitioners insist that the SEC en banc should have granted

the motions to suspend they filed based as they were on the
ground that the Regional Trial Court of Makati, where the
probate of the late Judge Torres' will was pending, had yet to
appoint an administrator or legal representative of his
estate.

II

Petitioners contend that the decisions of the SEC and the

Court of Appeals are null and void for being rendered
without the necessary substitution of parties (for the
deceased petitioner Manuel A. Torres, Jr.) as mandated by
Sec. 17, Rule 3 of the Revised Rules of Court, which provides
as follows:

Sec. 17.
Death of party. After a party dies and the
claim is not thereby extinguished, the court shall order,
upon proper notice, the legal representative of the deceased
to appear and to be substituted for the deceased, within a
period of thirty (30) days, or within such time as may be
granted. If the legal representative fails to appear within
said time, the court may order the opposing party to procure
the appointment of a legal representative of the deceased
within a time to be specified by the court, and the
representative shall immediately appear for and on behalf of
the interest of the deceased. The court charges involved in

We are not unaware of the principle underlying the

aforequoted provision:

It has been held that when a party dies in an action that

survives, and no order is issued by the Court for the
appearance of the legal representative or of the heirs of the
deceased to be substituted for the deceased, and as a
matter of fact no such substitution has ever been effected,
the trial held by the court without such legal representative
or heirs, and the judgment rendered after such trial, are null
and void because the court acquired no jurisdiction over the
persons of the legal representative or of the heirs upon
whom the trial and the judgment are not binding. 16

As early as 8 April 1988, Judge Torres instituted Special

Proceedings No. M-1768 before the Regional Trial Court of
Makati for the ante-mortem probate of his holographic will
which he had executed on 31 October 1986. Testifying in the

17

said proceedings, Judge Torres confirmed his appointment of

petitioner Edgardo D. Pabalan as the sole executor of his will
and administrator of his estate. The proceedings, however,
were opposed by the same parties, herein private
respondents Antonio P. Torres, Jr., Ma. Luisa T. Morales and
Ma. Cristina T. Carlos, 17 who are nephew and nieces of
Judge Torres, being the children of his late brother Antonio A.
Torres.

It can readily be observed therefore that the parties

involved in the present controversy are virtually the same
parties fighting over the representation of the late Judge
Torres' estate. It should be recalled that the purpose behind
the rule on substitution of parties is the protection of the
right of every party to due process. It is to ensure that the
deceased party would continue to be properly represented
in the suit through the duly appointed legal representative
of his estate. In the present case, this purpose has been
substantially fulfilled (despite the lack of formal substitution)
in view of the peculiar fact that both proceedings involve
practically the same parties. Both parties have been fiercely
fighting in the probate proceedings of Judge Torres'
holographic will for appointment as legal representative of
his estate. Since both parties claim interests over the estate,
the rights of the estate were expected to be fully protected
in the proceedings before the SEC en banc and the Court of
Appeals. In either case, whoever shall be appointed legal
representative of Judge Torres' estate (petitioner Pabalan or
private respondents) would no longer be a stranger to the
present case, the said parties having voluntarily submitted
to the jurisdiction of the SEC and the Court of Appeals and
having thoroughly participated in the proceedings.

The foregoing rationate finds support in the recent case of

Vda. de Salazar v. CA, 18 wherein the Court expounded
thus:

The need for substitution of heirs is based on the right to

due process accruing to every party in any proceeding. The
rationale underlying this requirement in case a party dies
during the pendency of proceedings of a nature not
extinguished by such death, is that . . . the exercise of
judicial power to hear and determine a cause implicitly
presupposes in the trial court, amongst other essentials,
jurisdiction over the persons of the parties. That jurisdiction
was inevitably impaired upon the death of the protestee
pending the proceedings below such that unless and until a
legal representative is for him duly named and within the
jurisdiction of the trial court, no adjudication in the cause
could have been accorded any validity or binding effect
upon any party, in representation of the deceased, without
trenching upon the fundamental right to a day in court
which is the very essence of the constitutionally enshrined
guarantee of due process.

We are not unaware of several cases where we have ruled

that a party having died in an action that survives, the trial
held by the court without appearance of the deceased's
legal representative or substitution of heirs and the
judgment rendered after such trial, are null and void
because the court acquired no jurisdiction over the persons
of the legal representatives or of the heirs upon whom the
trial and the judgment would be binding. This general rule
notwithstanding, in denying petitioner's motion for
reconsideration, the Court of Appeals correctly ruled that
formal substitution of heirs is not necessary when the heirs
themselves voluntarily appeared, participated in the case

18

and presented evidence in defense of deceased defendant.

Attending the case at bench, after all, are these particular
circumstances which negate petitioner's belated and
seemingly ostensible claim of violation of her rights to due
process. We should not lose sight of the principle underlying
the general rule that formal substitution of heirs must be
effectuated for them to be bound by a subsequent
judgment. Such had been the general rule established not
because the rule on substitution of heirs and that on
appointment of a legal representative are jurisdictional
requirements per se but because non-compliance therewith
results in the undeniable violation of the right to due
process of those who, though not duly notified of the
proceedings, are substantially affected by the decision
rendered therein . . . .

when the probate court will decide the issue, which may still
be appealed to the higher courts.

It is appropriate to mention here that when Judge Torres died

on April 3, 1991, the SEC en banc had already fully heard
the parties and what remained was the evaluation of the
evidence and rendition of the judgment.

Finally, we agree with petitioners' contention that the

principle of negotiorum gestio 20 does not apply in the
present case. Said principle explicitly covers abandoned or
neglected property or business.

Further, petitioners filed their motions to suspend

proceedings only after more than two (2) years from the
death of Judge Torres. Petitioners' counsel was even remiss
in his duty under Sec. 16, Rule 3 of the Revised Rules of
Court. 19 Instead, it was private respondents who informed
the SEC of Judge Torres' death through a manifestation
dated 24 April 1991.

III

For the SEC en banc to have suspended the proceedings to

await the appointment of the legal representative by the
estate was impractical and would have caused undue delay
in the proceedings and a denial of justice. There is no telling

In any case, there has been no final disposition of the

properties of the late Judge Torres before the SEC. On the
contrary, the decision of the SEC en banc as affirmed by the
Court of Appeals served to protect and preserve his estate.
Consequently, the rule that when a party dies, he should be
substituted by his legal representative to protect the
interests of his estate in observance of due process was not
violated in this case in view of its peculiar situation where
the estate was fully protected by the presence of the parties
who claim interests therein either as directors, stockholders
or heirs.

Petitioners find legal basis for Judge Torres' act of revoking

the assignment of his properties in Makati and Pasay City to
Tormil corporation by relying on Art. 1191 of the Civil Code
which provides that:

Art. 1191.
The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.

19

The injured party may choose between the fulfillment and

the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even
after he has chosen fulfillment, if the latter should become
impossible.

The court shall decree the rescission claimed, unless there

be just cause authorizing the fixing of a period.

A comparison of the number of shares that respondent

Torres received from TORMIL by virtue of the "deeds of
assignment" and the stock certificates issued by the latter
to the former readily shows that TORMIL had substantially
performed what was expected of it. In fact, the first two
issuances were in satisfaction to the properties being
revoked by respondent Torres. Hence, the shortage of 972
shares would never be a valid ground for the revocation of
the deeds covering Pasay and Quezon City properties.

In Universal Food Corp. vs. CA, the Supreme Court held:

This is understood to be without prejudice to the rights of
third persons who have acquired the thing, in accordance
with articles 1385 and 1388 and the Mortgage Law.

Petitioners' contentions cannot be sustained. We see no

justifiable reason to disturb the findings of SEC, as affirmed
by the Court of Appeals:

We sustain the ruling of respondent SEC in the decision

appealed from (Rollo, pp. 45-46) that

. . . the shortage of 972 shares would not be valid ground for

respondent Torres to unilaterally revoke the deeds of
assignment he had executed on July 13, 1984 and July 24,
1984 wherein he voluntarily assigned to TORMIL real
properties covered by TCT No. 374079 (Makati) and TCT No.
41527, 41528 and 41529 (Pasay) respectively.

The general rule is that rescission of a contract will not be

permitted for a slight or carnal breach, but only for such
substantial and fundamental breach as would defeat the
very object of the parties in making the agreement.

The shortage of 972 shares definitely is not substantial and

fundamental breach as would defeat the very object of the
parties in entering into contract. Art. 1355 of the Civil Code
also provides: "Except in cases specified by law, lesion or
inadequacy of cause shall not invalidate a contract, unless
there has been fraud, mistake or undue influences." There
being no fraud, mistake or undue influence exerted on
respondent Torres by TORMIL and the latter having already
issued to the former of its 225,000 unissued shares, the
most logical course of action is to declare as null and void
the deed of revocation executed by respondent Torres.
(Rollo, pp. 45-46.) 21

The aforequoted Civil Code provision does not apply in this

particular situation for the obvious reason that a specific

20

number of shares of stock (as evidenced by stock

certificates) had already been issued to the late Judge Torres
in exchange for his Makati and Pasay City properties. The
records thus disclose:

DATE OF
PROPERTY
ORDER OF
ASSIGNMENT ASSIGNED
COMPLIANCE*

1.

NO. OF SHARES

July 13, 1984 TCT 77008

Manila)

TCT 102200

Manila)

Manila Jockey Club Stocks

7.

August 7, 1984
50,238 8th

San Miguel Corp. Stocks

8.

August 7, 1984
6,300 6th

China Banking Corp. Stocks

9.

August 20, 1984

9th

Ayala Corp. Stocks

7,468.2)

10.

August 29, 1984

Ayala Fund Stocks

1,322.1)

Quezon City) 13,252 3rd

Quezon City)

TCT 65689

August 6, 1984
48,737 5th

TO BE ISSUED

July 13, 1984 TCT 81834

TCT 144240

2.

LOCATION

6.

Manila)

78,493 2nd

TOTAL 225,972.3

3.

July 13, 1984 TCT 374079

Makati 8,307 1st

4.

July 24, 1984 TCT 41527

Pasay

TCT 41528

Pasay) 9,855 4th

TCT 41529

Pasay)

5.

August 6, 1984
2,000 7th

El Hogar Filipino Stocks

*Order of stock certificate issuances by TORMIL to

respondent Torres relative to the Deeds of Assignment he
executed sometime in July and August, 1984. 22 (Emphasis
ours.)

Moreover, we agree with the contention of the Solicitor

General that the shortage of shares should not have
affected the assignment of the Makati and Pasay City
properties which were executed in 13 and 24 July 1984 and

21

the consideration for which have been duly paid or fulfilled

but should have been applied logically to the last
assignment of property Judge Torres' Ayala Fund shares
which was executed on 29 August 1984. 23

then reigned between the deceased Judge and his relatives

are to be taken into account;

xxx

xxx

xxx

IV

Petitioners insist that the assignment of "qualifying shares"

to the nominees of the late Judge Torres (herein petitioners)
does not partake of the real nature of a transfer or
conveyance of shares of stock as would call for the
"imposition of stringent requirements (with respect to the)
recording of the transfer of said shares." Anyway, petitioners
add, there was substantial compliance with the abovestated requirement since said assignments were entered by
the late Judge Torres himself in the corporation's stock and
transfer book on 6 March 1987, prior to the 25 March 1987
annual stockholders meeting and which entries were
confirmed on 8 March 1987 by petitioner Azura who was
appointed Assistant Corporate Secretary by Judge Torres.

Petitioners further argue that:

10.10. Certainly, there is no legal or just basis for the

respondent S.E.C. to penalize the late Judge Torres by
invalidating the questioned entries in the stock and transfer
book, simply because he initially made those entries (they
were later affirmed by an acting corporate secretary) and
because the stock and transfer book was in his possession
instead of the elected corporate secretary, if the background
facts herein-before narrated and the serious animosities that

10.12. Indeed it was a practice in the corporate respondent,

a family corporation with only a measly number of
stockholders, for the late judge to have personal custody of
corporate records; as president, chairman and majority
stockholder, he had the prerogative of designating an acting
corporate secretary or to himself make the needed entries,
in instances where the regular secretary, who is a mere
subordinate, is unavailable or intentionally defaults, which
was the situation that obtained immediately prior to the
1987 annual stockholders meeting of Tormil, as the late
Judge Torres had so indicated in the stock and transfer book
in the form of the entries now in question;

10.13. Surely, it would have been futile nay foolish for him
to have insisted under those circumstances, for the regular
secretary, who was then part of a group ranged against him,
to make the entries of the assignments in favor of his
nominees; 24

Petitioners' contentions lack merit.

It is precisely the brewing family discord between Judge

Torres and private respondents his nephew and nieces
that should have placed Judge Torres on his guard. He
should have been more careful in ensuring that his actions

22

(particularly the assignment of qualifying shares to his

nominees) comply with the requirements of the law.
Petitioners cannot use the flimsy excuse that it would have
been a vain attempt to force the incumbent corporate
secretary to register the aforestated assignments in the
stock and transfer book because the latter belonged to the
opposite faction. It is the corporate secretary's duty and
obligation to register valid transfers of stocks and if said
corporate officer refuses to comply, the transferorstockholder may rightfully bring suit to compel performance.
25 In other words, there are remedies within the law that
petitioners could have availed of, instead of taking the law
in their own hands, as the cliche goes.

Thus, we agree with the ruling of the SEC en banc as

affirmed by the Court of Appeals:

We likewise sustain respondent SEC when it ruled,

interpreting Section 74 of the Corporation Code, as follows
(Rollo, p. 45):

In the absence of (any) provision to the contrary, the

corporate secretary is the custodian of corporate records.
Corollarily, he keeps the stock and transfer book and makes
proper and necessary entries therein.

Contrary to the generally accepted corporate practice, the

stock and transfer book of TORMIL was not kept by Ms.
Maria Cristina T. Carlos, the corporate secretary but by
respondent Torres, the President and Chairman of the Board
of Directors of TORMIL. In contravention to the above cited
provision, the stock and transfer book was not kept at the

principal office of the corporation either but at the place of

respondent Torres.

These being the obtaining circumstances, any entries made

in the stock and transfer book on March 8, 1987 by
respondent Torres of an alleged transfer of nominal shares
to Pabalan and Co. cannot therefore be given any valid
effect. Where the entries made are not valid, Pabalan and
Co. cannot therefore be considered stockholders of record of
TORMIL. Because they are not stockholders, they cannot
therefore be elected as directors of TORMIL. To rule
otherwise would not only encourage violation of clear
mandate of Sec. 74 of the Corporation Code that stock and
transfer book shall be kept in the principal office of the
corporation but would likewise open the flood gates of
confusion in the corporation as to who has the proper
custody of the stock and transfer book and who are the real
stockholders of records of a certain corporation as any
holder of the stock and transfer book, though not the
corporate secretary, at pleasure would make entries therein.

The fact that respondent Torres holds 81.28% of the

outstanding capital stock of TORMIL is of no moment and is
not a license for him to arrogate unto himself a duty lodged
to (sic) the corporate secretary. 26

All corporations, big or small, must abide by the provisions

of the Corporation Code. Being a simple family corporation
is not an exemption. Such corporations cannot have rules
and practices other than those established by law.

23

WHEREFORE, premises considered, the petition for review

on certiorari is hereby DENIED.

Petitioner Philippine Stock Exchange, Inc. is the issue in the

case at bar.

SO ORDERED.

In this Petition for Review on Certiorari, petitioner assails the

resolution of the respondent Court of Appeals, dated June
27, 1996, which affirmed the decision of the Securities and
Exchange Commission ordering the petitioner Philippine
Stock Exchange, Inc. to allow the private respondent Puerto
Azul Land, Inc. to be listed in its stock market, thus paving
the way for the public offering of PALI's shares.

G.R. No. 125469

October 27, 1997

PHILIPPINE STOCK EXCHANGE, INC., petitioner,

vs.
THE HONORABLE COURT OF APPEALS, SECURITIES AND
EXCHANGE COMMISSION and PUERTO AZUL LAND, INC.,
respondents.

TORRES, JR., J.:

The Securities and Exchange Commission is the government

agency, under the direct general supervision of the Office of
the President, 1 with the immense task of enforcing the
Revised Securities Act, and all other duties assigned to it by
pertinent laws. Among its inumerable functions, and one of
the most important, is the supervision of all corporations,
partnerships or associations, who are grantees of primary
franchise and/or a license or permit issued by the
government to operate in the Philippines. 2 Just how far this
regulatory authority extends, particularly, with regard to the

The facts of the case are undisputed, and are hereby

restated in sum.

The Puerto Azul Land, Inc. (PALI), a domestic real estate

corporation, had sought to offer its shares to the public in
order to raise funds allegedly to develop its properties and
pay its loans with several banking institutions. In January,
1995, PALI was issued a Permit to Sell its shares to the
public by the Securities and Exchange Commission (SEC). To
facilitate the trading of its shares among investors, PALI
sought to course the trading of its shares through the
Philippine Stock Exchange, Inc. (PSE), for which purpose it
filed with the said stock exchange an application to list its
shares, with supporting documents attached.

On February 8, 1996, the Listing Committee of the PSE,

upon a perusal of PALI's application, recommended to the
PSE's Board of Governors the approval of PALI's listing
application.

24

On February 14, 1996, before it could act upon PALI's

application, the Board of Governors of the PSE received a
letter from the heirs of Ferdinand E. Marcos, claiming that
the late President Marcos was the legal and beneficial owner
of certain properties forming part of the Puerto Azul Beach
Hotel and Resort Complex which PALI claims to be among its
assets and that the Ternate Development Corporation, which
is among the stockholders of PALI, likewise appears to have
been held and continue to be held in trust by one Rebecco
Panlilio for then President Marcos and now, effectively for his
estate, and requested PALI's application to be deferred. PALI
was requested to comment upon the said letter.

PALI's answer stated that the properties forming part of the

Puerto Azul Beach Hotel and Resort Complex were not
claimed by PALI as its assets. On the contrary, the resort is
actually owned by Fantasia Filipina Resort, Inc. and the
Puerto Azul Country Club, entities distinct from PALI.
Furthermore, the Ternate Development Corporation owns
only 1.20% of PALI. The Marcoses responded that their claim
is not confined to the facilities forming part of the Puerto
Azul Hotel and Resort Complex, thereby implying that they
are also asserting legal and beneficial ownership of other
properties titled under the name of PALI.

On February 20, 1996, the PSE wrote Chairman Magtanggol

Gunigundo of the Presidential Commission on Good
Government (PCGG) requesting for comments on the letters
of the PALI and the Marcoses. On March 4, 1996, the PSE
was informed that the Marcoses received a Temporary
Restraining Order on the same date, enjoining the Marcoses
from, among others, "further impeding, obstructing,
delaying or interfering in any manner by or any means with
the consideration, processing and approval by the PSE of the

initial public offering of PALI." The TRO was issued by Judge

Martin S. Villarama, Executive Judge of the RTC of Pasig City
in Civil Case No. 65561, pending in Branch 69 thereof.

In its regular meeting held on March 27, 1996, the Board of

Governors of the PSE reached its decision to reject PALI's
application, citing the existence of serious claims, issues
and circumstances surrounding PALI's ownership over its
assets that adversely affect the suitability of listing PALI's
shares in the stock exchange.

On April 11, 1996, PALI wrote a letter to the SEC addressed

to the then Acting Chairman, Perfecto R. Yasay, Jr., bringing
to the SEC's attention the action taken by the PSE in the
application of PALI for the listing of its shares with the PSE,
and requesting that the SEC, in the exercise of its
supervisory and regulatory powers over stock exchanges
under Section 6(j) of P.D. No. 902-A, review the PSE's action
on PALI's listing application and institute such measures as
are just and proper under the circumstances.

On the same date, or on April 11, 1996, the SEC wrote to the
PSE, attaching thereto the letter of PALI and directing the
PSE to file its comments thereto within five days from its
receipt and for its authorized representative to appear for an
"inquiry" on the matter. On April 22, 1996, the PSE
submitted a letter to the SEC containing its comments to the
April 11, 1996 letter of PALI.

On April 24, 1996, the SEC rendered its Order, reversing the
PSE's decision. The dispositive portion of the said order
reads:

25

WHEREFORE, premises considered, and invoking the

Commissioner's authority and jurisdiction under Section 3 of
the Revised Securities Act, in conjunction with Section 3, 6(j)
and 6(m) of Presidential Decree No. 902-A, the decision of
the Board of Governors of the Philippine Stock Exchange
denying the listing of shares of Puerto Azul Land, Inc., is
hereby set aside, and the PSE is hereby ordered to
immediately cause the listing of the PALI shares in the
Exchange, without prejudice to its authority to require PALI
to disclose such other material information it deems
necessary for the protection of the investigating public.

This Order shall take effect immediately.

SO ORDERED.

PSE filed a motion for reconsideration of the said order on

April 29, 1996, which was, however denied by the
Commission in its May 9, 1996 Order which states:

WHEREFORE, premises considered, the Commission finds no

compelling reason to reconsider its order dated April 24,
1996, and in the light of recent developments on the
adverse claim against the PALI properties, PSE should
require PALI to submit full disclosure of material facts and
information to protect the investing public. In this regard,
PALI is hereby ordered to amend its registration statements
filed with the Commission to incorporate the full disclosure
of these material facts and information.

Dissatisfied with this ruling, the PSE filed with the Court of
Appeals on May 17, 1996 a Petition for Review (with
Application for Writ of Preliminary Injunction and Temporary
Restraining Order), assailing the above mentioned orders of
the SEC, submitting the following as errors of the SEC:

I.
SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE
OF DISCRETION IN ISSUING THE ASSAILED ORDERS
WITHOUT POWER, JURISDICTION, OR AUTHORITY; SEC HAS
NO POWER TO ORDER THE LISTING AND SALE OF SHARES
OF PALI WHOSE ASSETS ARE SEQUESTERED AND TO REVIEW
AND SUBSTITUTE DECISIONS OF PSE ON LISTING
APPLICATIONS;

II.
SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE
OF DISCRETION IN FINDING THAT PSE ACTED IN AN
ARBITRARY AND ABUSIVE MANNER IN DISAPPROVING PALI'S
LISTING APPLICATION;

III.
THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND
VOID FOR ALLOWING FURTHER DISPOSITION OF PROPERTIES
IN CUSTODIA LEGIS AND WHICH FORM PART OF
NAVAL/MILITARY RESERVATION; AND

IV.
THE FULL DISCLOSURE OF THE SEC WAS NOT
PROPERLY PROMULGATED AND ITS IMPLEMENTATION AND
APPLICATION IN THIS CASE VIOLATES THE DUE PROCESS
CLAUSE OF THE CONSTITUTION.

26

On June 4, 1996, PALI filed its Comment to the Petition for

Review and subsequently, a Comment and Motion to
Dismiss. On June 10, 1996, PSE fled its Reply to Comment
and Opposition to Motion to Dismiss.

On June 27, 1996, the Court of Appeals promulgated its

Resolution dismissing the PSE's Petition for Review. Hence,
this Petition by the PSE.

The appellate court had ruled that the SEC had both
jurisdiction and authority to look into the decision of the
petitioner PSE, pursuant to Section 3 3 of the Revised
Securities Act in relation to Section 6(j) and 6(m) 4 of P.D.
No. 902-A, and Section 38(b) 5 of the Revised Securities Act,
and for the purpose of ensuring fair administration of the
exchange. Both as a corporation and as a stock exchange,
the petitioner is subject to public respondent's jurisdiction,
regulation and control. Accepting the argument that the
public respondent has the authority merely to supervise or
regulate, would amount to serious consequences,
considering that the petitioner is a stock exchange whose
business is impressed with public interest. Abuse is not
remote if the public respondent is left without any system of
control. If the securities act vested the public respondent
with jurisdiction and control over all corporations; the power
to authorize the establishment of stock exchanges; the right
to supervise and regulate the same; and the power to alter
and supplement rules of the exchange in the listing or
delisting of securities, then the law certainly granted to the
public respondent the plenary authority over the petitioner;
and the power of review necessarily comes within its
authority.

All in all, the court held that PALI complied with all the
requirements for public listing, affirming the SEC's ruling to
the effect that:

. . . the Philippine Stock Exchange has acted in an arbitrary

and abusive manner in disapproving the application of PALI
for listing of its shares in the face of the following
considerations:

1.
PALI has clearly and admittedly complied with the
Listing Rules and full disclosure requirements of the
Exchange;

2.
In applying its clear and reasonable standards on the
suitability for listing of shares, PSE has failed to justify why it
acted differently on the application of PALI, as compared to
the IPOs of other companies similarly situated that were
allowed listing in the Exchange;

3.
It appears that the claims and issues on the title to
PALI's properties were even less serious than the claims
against the assets of the other companies in that, the
assertions of the Marcoses that they are owners of the
disputed properties were not substantiated enough to
overcome the strength of a title to properties issued under
the Torrens System as evidence of ownership thereof;

4.
No action has been filed in any court of competent
jurisdiction seeking to nullify PALI's ownership over the
disputed properties, neither has the government instituted

27

recovery proceedings against these properties. Yet the

import of PSE's decision in denying PALI's application is that
it would be PALI, not the Marcoses, that must go to court to
prove the legality of its ownership on these properties
before its shares can be listed.

In addition, the argument that the PALI properties belong to

the Military/Naval Reservation does not inspire belief. The
point is, the PALI properties are now titled. A property losses
its public character the moment it is covered by a title. As a
matter of fact, the titles have long been settled by a final
judgment; and the final decree having been registered, they
can no longer be re-opened considering that the one year
period has already passed. Lastly, the determination of what
standard to apply in allowing PALI's application for listing,
whether the discretion method or the system of public
disclosure adhered to by the SEC, should be addressed to
the Securities Commission, it being the government agency
that exercises both supervisory and regulatory authority
over all corporations.

On August 15, 19961 the PSE, after it was granted an

extension, filed the instant Petition for Review on Certiorari,
taking exception to the rulings of the SEC and the Court of
Appeals. Respondent PALI filed its Comment to the petition
on October 17, 1996. On the same date, the PCGG filed a
Motion for Leave to file a Petition for Intervention. This was
followed up by the PCGG's Petition for Intervention on
October 21, 1996. A supplemental Comment was filed by
PALI on October 25, 1997. The Office of the Solicitor
General, representing the SEC and the Court of Appeals,
likewise filed its Comment on December 26, 1996. In answer
to the PCGG's motion for leave to file petition for
intervention, PALI filed its Comment thereto on January 17,

1997, whereas the PSE filed its own Comment on January

20, 1997.

On February 25, 1996, the PSE filed its Consolidated Reply

to the comments of respondent PALI (October 17, 1996) and
the Solicitor General (December 26, 1996). On May 16,
1997, PALI filed its Rejoinder to the said consolidated reply
of PSE.

PSE submits that the Court of Appeals erred in ruling that

the SEC had authority to order the PSE to list the shares of
PALI in the stock exchange. Under presidential decree No.
902-A, the powers of the SEC over stock exchanges are
more limited as compared to its authority over ordinary
corporations. In connection with this, the powers of the SEC
over stock exchanges under the Revised Securities Act are
specifically enumerated, and these do not include the power
to reverse the decisions of the stock exchange. Authorities
are in abundance even in the United States, from which the
country's security policies are patterned, to the effect of
giving the Securities Commission less control over stock
exchanges, which in turn are given more lee-way in making
the decision whether or not to allow corporations to offer
their stock to the public through the stock exchange. This is
in accord with the "business judgment rule" whereby the
SEC and the courts are barred from intruding into business
judgments of corporations, when the same are made in
good faith. the said rule precludes the reversal of the
decision of the PSE to deny PALI's listing application, absent
a showing of bad faith on the part of the PSE. Under the
listing rules of the PSE, to which PALI had previously agreed
to comply, the PSE retains the discretion to accept or reject
applications for listing. Thus, even if an issuer has complied
with the PSE listing rules and requirements, PSE retains the

28

discretion to accept or reject the issuer's listing application if

the PSE determines that the listing shall not serve the
interests of the investing public.

Moreover, PSE argues that the SEC has no jurisdiction over

sequestered corporations, nor with corporations whose
properties are under sequestration. A reading of Republic of
the Philippines vs. Sadiganbayan, G.R. No. 105205, 240
SCRA 376, would reveal that the properties of PALI, which
were derived from the Ternate Development Corporation
(TDC) and the Monte del Sol Development Corporation
(MSDC). are under sequestration by the PCGG, and subject
of forfeiture proceedings in the Sandiganbayan. This ruling
of the Court is the "law of the case" between the Republic
and TDC and MSDC. It categorically declares that the assets
of these corporations were sequestered by the PCGG on
March 10, 1986 and April 4, 1988.

It is, likewise, intimated that the Court of Appeals' sanction

that PALI's ownership over its properties can no longer be
questioned, since certificates of title have been issued to
PALI and more than one year has since lapsed, is erroneous
and ignores well settled jurisprudence on land titles. That a
certificate of title issued under the Torrens System is a
conclusive evidence of ownership is not an absolute rule and
admits certain exceptions. It is fundamental that forest
lands or military reservations are non-alienable. Thus, when
a title covers a forest reserve or a government reservation,
such title is void.

PSE, likewise, assails the SEC's and the Court of Appeals

reliance on the alleged policy of "full disclosure" to uphold
the listing of PALI's shares with the PSE, in the absence of a

clear mandate for the effectivity of such policy. As it is, the

case records reveal the truth that PALI did not comply with
the listing rules and disclosure requirements. In fact, PALI's
documents supporting its application contained
misrepresentations and misleading statements, and
concealed material information. The matter of sequestration
of PALI's properties and the fact that the same form part of
military/naval/forest reservations were not reflected in PALI's
application.

It is undeniable that the petitioner PSE is not an ordinary

corporation, in that although it is clothed with the markings
of a corporate entity, it functions as the primary channel
through which the vessels of capital trade ply. The PSE's
relevance to the continued operation and filtration of the
securities transactions in the country gives it a distinct color
of importance such that government intervention in its
affairs becomes justified, if not necessarily. Indeed, as the
only operational stock exchange in the country today, the
PSE enjoys a monopoly of securities transactions, and as
such, it yields an immense influence upon the country's
economy.

Due to this special nature of stock exchanges, the country's

lawmakers has seen it wise to give special treatment to the
administration and regulation of stock exchanges. 6

These provisions, read together with the general grant of

jurisdiction, and right of supervision and control over all
corporations under Sec. 3 of P.D. 902-A, give the SEC the
special mandate to be vigilant in the supervision of the
affairs of stock exchanges so that the interests of the
investing public may be fully safeguard.

29

Section 3 of Presidential Decree 902-A, standing alone, is

enough authority to uphold the SEC's challenged control
authority over the petitioner PSE even as it provides that
"the Commission shall have absolute jurisdiction,
supervision, and control over all corporations, partnerships
or associations, who are the grantees of primary franchises
and/or a license or permit issued by the government to
operate in the Philippines. . ." The SEC's regulatory authority
over private corporations encompasses a wide margin of
areas, touching nearly all of a corporation's concerns. This
authority springs from the fact that a corporation owes its
existence to the concession of its corporate franchise from
the state.

The SEC's power to look into the subject ruling of the PSE,
therefore, may be implied from or be considered as
necessary or incidental to the carrying out of the SEC's
express power to insure fair dealing in securities traded
upon a stock exchange or to ensure the fair administration
of such exchange. 7 It is, likewise, observed that the
principal function of the SEC is the supervision and control
over corporations, partnerships and associations with the
end in view that investment in these entities may be
encouraged and protected, and their activities for the
promotion of economic development. 8

Thus, it was in the alleged exercise of this authority that the

SEC reversed the decision of the PSE to deny the application
for listing in the stock exchange of the private respondent
PALI. The SEC's action was affirmed by the Court of Appeals.

We affirm that the SEC is the entity with the primary say as
to whether or not securities, including shares of stock of a
corporation, may be traded or not in the stock exchange.
This is in line with the SEC's mission to ensure proper
compliance with the laws, such as the Revised Securities Act
and to regulate the sale and disposition of securities in the
country. 9 As the appellate court explains:

Paramount policy also supports the authority of the public

respondent to review petitioner's denial of the listing. Being
a stock exchange, the petitioner performs a function that is
vital to the national economy, as the business is affected
with public interest. As a matter of fact, it has often been
said that the economy moves on the basis of the rise and
fall of stocks being traded. By its economic power, the
petitioner certainly can dictate which and how many users
are allowed to sell securities thru the facilities of a stock
exchange, if allowed to interpret its own rules liberally as it
may please. Petitioner can either allow or deny the entry to
the market of securities. To repeat, the monopoly, unless
accompanied by control, becomes subject to abuse; hence,
considering public interest, then it should be subject to
government regulation.

The role of the SEC in our national economy cannot be

minimized. The legislature, through the Revised Securities
Act, Presidential Decree No. 902-A, and other pertinent laws,
has entrusted to it the serious responsibility of enforcing all
laws affecting corporations and other forms of associations
not otherwise vested in some other government office. 10

This is not to say, however, that the PSE's management

prerogatives are under the absolute control of the SEC. The

30

PSE is, alter all, a corporation authorized by its corporate

franchise to engage in its proposed and duly approved
business. One of the PSE's main concerns, as such, is still
the generation of profit for its stockholders. Moreover, the
PSE has all the rights pertaining to corporations, including
the right to sue and be sued, to hold property in its own
name, to enter (or not to enter) into contracts with third
persons, and to perform all other legal acts within its
allocated express or implied powers.

A corporation is but an association of individuals, allowed to

transact under an assumed corporate name, and with a
distinct legal personality. In organizing itself as a collective
body, it waives no constitutional immunities and perquisites
appropriate to such a body. 11 As to its corporate and
management decisions, therefore, the state will generally
not interfere with the same. Questions of policy and of
management are left to the honest decision of the officers
and directors of a corporation, and the courts are without
authority to substitute their judgment for the judgment of
the board of directors. The board is the business manager of
the corporation, and so long as it acts in good faith, its
orders are not reviewable by the courts. 12

Thus, notwithstanding the regulatory power of the SEC over

the PSE, and the resultant authority to reverse the PSE's
decision in matters of application for listing in the market,
the SEC may exercise such power only if the PSE's judgment
is attended by bad faith. In Board of Liquidators vs. Kalaw,
13 it was held that bad faith does not simply connote bad
judgment or negligence. It imports a dishonest purpose or
some moral obliquity and conscious doing of wrong. It
means a breach of a known duty through some motive or
interest of ill will, partaking of the nature of fraud.

In reaching its decision to deny the application for listing of

PALI, the PSE considered important facts, which, in the
general scheme, brings to serious question the qualification
of PALI to sell its shares to the public through the stock
exchange. During the time for receiving objections to the
application, the PSE heard from the representative of the
late President Ferdinand E. Marcos and his family who claim
the properties of the private respondent to be part of the
Marcos estate. In time, the PCGG confirmed this claim. In
fact, an order of sequestration has been issued covering the
properties of PALI, and suit for reconveyance to the state
has been filed in the Sandiganbayan Court. How the
properties were effectively transferred, despite the
sequestration order, from the TDC and MSDC to Rebecco
Panlilio, and to the private respondent PALI, in only a short
span of time, are not yet explained to the Court, but it is
clear that such circumstances give rise to serious doubt as
to the integrity of PALI as a stock issuer. The petitioner was
in the right when it refused application of PALI, for a contrary
ruling was not to the best interest of the general public. The
purpose of the Revised Securities Act, after all, is to give
adequate and effective protection to the investing public
against fraudulent representations, or false promises, and
the imposition of worthless ventures. 14

It is to be observed that the U.S. Securities Act emphasized

its avowed protection to acts detrimental to legitimate
business, thus:

The Securities Act, often referred to as the "truth in

securities" Act, was designed not only to provide investors
with adequate information upon which to base their
decisions to buy and sell securities, but also to protect

31

legitimate business seeking to obtain capital through honest

presentation against competition from crooked promoters
and to prevent fraud in the sale of securities. (Tenth Annual
Report, U.S. Securities & Exchange Commission, p. 14).

As has been pointed out, the effects of such an act are

chiefly (1) prevention of excesses and fraudulent
transactions, merely by requirement of that their details be
revealed; (2) placing the market during the early stages of
the offering of a security a body of information, which
operating indirectly through investment services and expert
investors, will tend to produce a more accurate appraisal of
a security, . . . Thus, the Commission may refuse to permit a
registration statement to become effective if it appears on
its face to be incomplete or inaccurate in any material
respect, and empower the Commission to issue a stop order
suspending the effectiveness of any registration statement
which is found to include any untrue statement of a material
fact or to omit to state any material fact required to be
stated therein or necessary to make the statements therein
not misleading. (Idem).

Also, as the primary market for securities, the PSE has

established its name and goodwill, and it has the right to
protect such goodwill by maintaining a reasonable standard
of propriety in the entities who choose to transact through
its facilities. It was reasonable for the PSE, therefore, to
exercise its judgment in the manner it deems appropriate
for its business identity, as long as no rights are trampled
upon, and public welfare is safeguarded.

In this connection, it is proper to observe that the concept of

government absolutism is a thing of the past, and should
remain so.

The observation that the title of PALI over its properties is

absolute and can no longer be assailed is of no moment. At
this juncture, there is the claim that the properties were
owned by TDC and MSDC and were transferred in violation
of sequestration orders, to Rebecco Panlilio and later on to
PALI, besides the claim of the Marcoses that such properties
belong to the Marcos estate, and were held only in trust by
Rebecco Panlilio. It is also alleged by the petitioner that
these properties belong to naval and forest reserves, and
therefore beyond private dominion. If any of these claims is
established to be true, the certificates of title over the
subject properties now held by PALI map be disregarded, as
it is an established rule that a registration of a certificate of
title does not confer ownership over the properties
described therein to the person named as owner. The
inscription in the registry, to be effective, must be made in
good faith. The defense of indefeasibility of a Torrens Title
does not extend to a transferee who takes the certificate of
title with notice of a flaw.

In any case, for the purpose of determining whether PSE

acted correctly in refusing the application of PALI, the true
ownership of the properties of PALI need not be determined
as an absolute fact. What is material is that the uncertainty
of the properties' ownership and alienability exists, and this
puts to question the qualification of PALI's public offering. In
sum, the Court finds that the SEC had acted arbitrarily in
arrogating unto itself the discretion of approving the
application for listing in the PSE of the private respondent
PALI, since this is a matter addressed to the sound discretion

32

of the PSE, a corporation entity, whose business judgments

are respected in the absence of bad faith.

The question as to what policy is, or should be relied upon in

approving the registration and sale of securities in the SEC
is not for the Court to determine, but is left to the sound
discretion of the Securities and Exchange Commission. In
mandating the SEC to administer the Revised Securities Act,
and in performing its other functions under pertinent laws,
the Revised Securities Act, under Section 3 thereof, gives
the SEC the power to promulgate such rules and regulations
as it may consider appropriate in the public interest for the
enforcement of the said laws. The second paragraph of
Section 4 of the said law, on the other hand, provides that
no security, unless exempt by law, shall be issued,
endorsed, sold, transferred or in any other manner
conveyed to the public, unless registered in accordance with
the rules and regulations that shall be promulgated in the
public interest and for the protection of investors by the
Commission. Presidential Decree No. 902-A, on the other
hand, provides that the SEC, as regulatory agency, has
supervision and control over all corporations and over the
securities market as a whole, and as such, is given ample
authority in determining appropriate policies. Pursuant to
this regulatory authority, the SEC has manifested that it has
adopted the policy of "full material disclosure" where all
companies, listed or applying for listing, are required to
divulge truthfully and accurately, all material information
about themselves and the securities they sell, for the
protection of the investing public, and under pain of
administrative, criminal and civil sanctions. In connection
with this, a fact is deemed material if it tends to induce or
otherwise effect the sale or purchase of its securities. 15
While the employment of this policy is recognized and
sanctioned by the laws, nonetheless, the Revised Securities
Act sets substantial and procedural standards which a

proposed issuer of securities must satisfy. 16 Pertinently,

Section 9 of the Revised Securities Act sets forth the
possible Grounds for the Rejection of the registration of a
security:

The Commission may reject a registration statement and

refuse to issue a permit to sell the securities included in
such registration statement if it finds that

(1)
The registration statement is on its face incomplete
or inaccurate in any material respect or includes any untrue
statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the
statements therein not misleading; or

(2)

The issuer or registrant

(i)

is not solvent or not in sound financial condition;

(ii)
has violated or has not complied with the provisions
of this Act, or the rules promulgated pursuant thereto, or
any order of the Commission;

(iii)
has failed to comply with any of the applicable
requirements and conditions that the Commission may, in
the public interest and for the protection of investors,
impose before the security can be registered;

33

(iv)
has been engaged or is engaged or is about to
engage in fraudulent transaction;

(v)

is in any way dishonest or is not of good repute; or

(vi)
does not conduct its business in accordance with law
or is engaged in a business that is illegal or contrary to
government rules and regulations.

(3)
The enterprise or the business of the issuer is not
shown to be sound or to be based on sound business
principles;

(4)
An officer, member of the board of directors, or
principal stockholder of the issuer is disqualified to be such
officer, director or principal stockholder; or

(5)
The issuer or registrant has not shown to the
satisfaction of the Commission that the sale of its security
would not work to the prejudice of the public interest or as a
fraud upon the purchasers or investors. (Emphasis Ours)

A reading of the foregoing grounds reveals the intention of

the lawmakers to make the registration and issuance of
securities dependent, to a certain extent, on the merits of
the securities themselves, and of the issuer, to be
determined by the Securities and Exchange Commission.
This measure was meant to protect the interests of the
investing public against fraudulent and worthless securities,

and the SEC is mandated by law to safeguard these

interests, following the policies and rules therefore provided.
The absolute reliance on the full disclosure method in the
registration of securities is, therefore, untenable. As it is, the
Court finds that the private respondent PALI, on at least two
points (nos. 1 and 5) has failed to support the propriety of
the issue of its shares with unfailing clarity, thereby lending
support to the conclusion that the PSE acted correctly in
refusing the listing of PALI in its stock exchange. This does
not discount the effectivity of whatever method the SEC, in
the exercise of its vested authority, chooses in setting the
standard for public offerings of corporations wishing to do
so. However, the SEC must recognize and implement the
mandate of the law, particularly the Revised Securities Act,
the provisions of which cannot be amended or supplanted
by mere administrative issuance.

In resume, the Court finds that the PSE has acted with
justified circumspection, discounting, therefore, any
imputation of arbitrariness and whimsical animation on its
part. Its action in refusing to allow the listing of PALI in the
stock exchange is justified by the law and by the
circumstances attendant to this case.

ACCORDINGLY, in view of the foregoing considerations, the

Court hereby GRANTS the Petition for Review on Certiorari.
The Decisions of the Court of Appeals and the Securities and
Exchange Commission dated July 27, 1996 and April 24,
1996 respectively, are hereby REVERSED and SET ASIDE,
and a new Judgment is hereby ENTERED, affirming the
decision of the Philippine Stock Exchange to deny the
application for listing of the private respondent Puerto Azul
Land, Inc.

34

SO ORDERED.

Regalado and Puno, JJ., concur.

Felicianos request for COA to cease all audit services, and

to stop charging auditing fees, to Leyte Metropolitan Water
District (LMWD). The COA also denied petitioners request
for COA to refund all auditing fees previously paid by LMWD.

Antecedent Facts

[G.R. No. 147402. January 14, 2004]

ENGR. RANULFO C. FELICIANO, in his capacity as General

Manager of the Leyte Metropolitan Water District (LMWD),
Tacloban City, petitioner, vs. COMMISSION ON AUDIT,
Chairman CELSO D. GANGAN, Commissioners RAUL C.
FLORES and EMMANUEL M. DALMAN, and Regional Director
of COA Region VIII, respondents.
DECISION

A Special Audit Team from COA Regional Office No. VIII

audited the accounts of LMWD. Subsequently, LMWD
received a letter from COA dated 19 July 1999 requesting
payment of auditing fees. As General Manager of LMWD,
petitioner sent a reply dated 12 October 1999 informing
COAs Regional Director that the water district could not pay
the auditing fees. Petitioner cited as basis for his action
Sections 6 and 20 of Presidential Decree 198 (PD 198)[2],
as well as Section 18 of Republic Act No. 6758 (RA 6758).
The Regional Director referred petitioners reply to the COA
Chairman on 18 October 1999.

On 19 October 1999, petitioner wrote COA through the

Regional Director asking for refund of all auditing fees LMWD
previously paid to COA.

CARPIO, J.:

The Case

This is a petition for certiorari[1] to annul the Commission

on Audits (COA) Resolution dated 3 January 2000 and the
Decision dated 30 January 2001 denying the Motion for
Reconsideration. The COA denied petitioner Ranulfo C.

On 16 March 2000, petitioner received COA Chairman Celso

D. Gangans Resolution dated 3 January 2000 denying his
requests. Petitioner filed a motion for reconsideration on 31
March 2000, which COA denied on 30 January 2001.

On 13 March 2001, petitioner filed this instant petition.

Attached to the petition were resolutions of the Visayas

35

Association of Water Districts (VAWD) and the Philippine

Association of Water Districts (PAWD) supporting the
petition.

The Ruling of the Commission on Audit

The COA ruled that this Court has already settled COAs
audit jurisdiction over local water districts in Davao City
Water District v. Civil Service Commission and Commission
on Audit,[3] as follows:

The above-quoted provision [referring to Section 3(b) PD

198] definitely sets to naught petitioners contention that
they are private corporations. It is clear therefrom that the
power to appoint the members who will comprise the
members of the Board of Directors belong to the local
executives of the local subdivision unit where such districts
are located. In contrast, the members of the Board of
Directors or the trustees of a private corporation are elected
from among members or stockholders thereof. It would not
be amiss at this point to emphasize that a private
corporation is created for the private purpose, benefit, aim
and end of its members or stockholders. Necessarily, said
members or stockholders should be given a free hand to
choose who will compose the governing body of their
corporation. But this is not the case here and this clearly
indicates that petitioners are not private corporations.

The COA also denied petitioners request for COA to stop

charging auditing fees as well as petitioners request for
COA to refund all auditing fees already paid.

The Issues

Petitioner contends that COA committed grave abuse of

discretion amounting to lack or excess of jurisdiction by
auditing LMWD and requiring it to pay auditing fees.
Petitioner raises the following issues for resolution:

1.
Whether a Local Water District (LWD) created under
PD 198, as amended, is a government-owned or controlled
corporation subject to the audit jurisdiction of COA;

2.
Whether Section 20 of PD 198, as amended, prohibits
COAs certified public accountants from auditing local water
districts; and

3.
Whether Section 18 of RA 6758 prohibits the COA
from charging government-owned and controlled
corporations auditing fees.

The Ruling of the Court

The petition lacks merit.

The Constitution and existing laws[4] mandate COA to audit

all government agencies, including government-owned and
controlled corporations (GOCCs) with original charters. An

36

LWD is a GOCC with an original charter. Section 2(1), Article

IX-D of the Constitution provides for COAs audit jurisdiction,
as follows:

Whether LWDs are Private or Government-Owned

SECTION 2. (1) The Commission on Audit shall have the

power, authority and duty to examine, audit, and settle all
accounts pertaining to the revenue and receipts of, and
expenditures or uses of funds and property, owned or held
in trust by, or pertaining to, the Government, or any of its
subdivisions, agencies, or instrumentalities, including
government-owned and controlled corporations with original
charters, and on a post-audit basis: (a) constitutional bodies,
commissions and offices that have been granted fiscal
autonomy under this Constitution; (b) autonomous state
colleges and universities; (c) other government-owned or
controlled corporations and their subsidiaries; and (d) such
non-governmental entities receiving subsidy or equity,
directly or indirectly, from or through the government, which
are required by law or the granting institution to submit to
such audit as a condition of subsidy or equity. However,
where the internal control system of the audited agencies is
inadequate, the Commission may adopt such measures,
including temporary or special pre-audit, as are necessary
and appropriate to correct the deficiencies. It shall keep the
general accounts of the Government and, for such period as
may be provided by law, preserve the vouchers and other
supporting papers pertaining thereto. (Emphasis supplied)

Petitioner seeks to revive a well-settled issue. Petitioner

asks for a re-examination of a doctrine backed by a long line
of cases culminating in Davao City Water District v. Civil
Service Commission[5] and just recently reiterated in De
Jesus v. Commission on Audit.[6] Petitioner maintains that
LWDs are not government-owned and controlled
corporations with original charters. Petitioner even argues
that LWDs are private corporations. Petitioner asks the
Court to consider certain interpretations of the applicable
laws, which would give a new perspective to the issue of
the true character of water districts.[7]

The COAs audit jurisdiction extends not only to government

agencies or instrumentalities, but also to governmentowned and controlled corporations with original charters as
well as other government-owned or controlled
corporations without original charters.

and Controlled Corporations with Original Charters

Petitioner theorizes that what PD 198 created was the Local

Waters Utilities Administration (LWUA) and not the LWDs.
Petitioner claims that LWDs are created pursuant to and
not created directly by PD 198. Thus, petitioner concludes
that PD 198 is not an original charter that would place
LWDs within the audit jurisdiction of COA as defined in
Section 2(1), Article IX-D of the Constitution. Petitioner
elaborates that PD 198 does not create LWDs since it does
not expressly direct the creation of such entities, but only
provides for their formation on an optional or voluntary
basis.[8] Petitioner adds that the operative act that creates
an LWD is the approval of the Sanggunian Resolution as
specified in PD 198.

Petitioners contention deserves scant consideration.

37

We begin by explaining the general framework under the

fundamental law. The Constitution recognizes two classes of
corporations. The first refers to private corporations created
under a general law. The second refers to governmentowned or controlled corporations created by special
charters. Section 16, Article XII of the Constitution
provides:

Sec. 16. The Congress shall not, except by general law,

provide for the formation, organization, or regulation of
private corporations. Government-owned or controlled
corporations may be created or established by special
charters in the interest of the common good and subject to
the test of economic viability.

The Constitution emphatically prohibits the creation of

private corporations except by a general law applicable to
all citizens.[9] The purpose of this constitutional provision is
to ban private corporations created by special charters,
which historically gave certain individuals, families or groups
special privileges denied to other citizens.[10]

In short, Congress cannot enact a law creating a private

corporation with a special charter. Such legislation would be
unconstitutional. Private corporations may exist only under
a general law. If the corporation is private, it must
necessarily exist under a general law. Stated differently,
only corporations created under a general law can qualify as
private corporations. Under existing laws, that general law
is the Corporation Code,[11] except that the Cooperative
Code governs the incorporation of cooperatives.[12]

The Constitution authorizes Congress to create governmentowned or controlled corporations through special charters.
Since private corporations cannot have special charters, it
follows that Congress can create corporations with special
charters only if such corporations are government-owned or
controlled.

Obviously, LWDs are not private corporations because they

are not created under the Corporation Code. LWDs are not
registered with the Securities and Exchange Commission.
Section 14 of the Corporation Code states that [A]ll
corporations organized under this code shall file with the
Securities and Exchange Commission articles of
incorporation x x x. LWDs have no articles of incorporation,
no incorporators and no stockholders or members. There
are no stockholders or members to elect the board directors
of LWDs as in the case of all corporations registered with the
Securities and Exchange Commission. The local mayor or
the provincial governor appoints the directors of LWDs for a
fixed term of office. This Court has ruled that LWDs are not
created under the Corporation Code, thus:

From the foregoing pronouncement, it is clear that what has

been excluded from the coverage of the CSC are those
corporations created pursuant to the Corporation Code.
Significantly, petitioners are not created under the said
code, but on the contrary, they were created pursuant to a
special law and are governed primarily by its provision.[13]
(Emphasis supplied)

LWDs exist by virtue of PD 198, which constitutes their

special charter. Since under the Constitution only
government-owned or controlled corporations may have

38

special charters, LWDs can validly exist only if they are

government-owned or controlled. To claim that LWDs are
private corporations with a special charter is to admit that
their existence is constitutionally infirm.

Unlike private corporations, which derive their legal

existence and power from the Corporation Code, LWDs
derive their legal existence and power from PD 198.
Sections 6 and 25 of PD 198[14] provide:

Section 6.
Formation of District. This Act is the source
of authorization and power to form and maintain a district.
For purposes of this Act, a district shall be considered as a
quasi-public corporation performing public service and
supplying public wants. As such, a district shall exercise the
powers, rights and privileges given to private corporations
under existing laws, in addition to the powers granted in,
and subject to such restrictions imposed, under this Act.

(a)
The name of the local water district, which shall
include the name of the city, municipality, or province, or
region thereof, served by said system, followed by the words
Water District.

(b)
A description of the boundary of the district. In
the case of a city or municipality, such boundary may
include all lands within the city or municipality. A district
may include one or more municipalities, cities or provinces,
or portions thereof.

(c)
A statement completely transferring any and all
waterworks and/or sewerage facilities managed, operated
by or under the control of such city, municipality or province
to such district upon the filing of resolution forming the
district.

(d)
A statement identifying the purpose for which the
district is formed, which shall include those purposes
outlined in Section 5 above.

(e)
The names of the initial directors of the district
with the date of expiration of term of office for each.

(f)
A statement that the district may only be
dissolved on the grounds and under the conditions set forth
in Section 44 of this Title.

(g)
A statement acknowledging the powers, rights and
obligations as set forth in Section 36 of this Title.

Nothing in the resolution of formation shall state or infer

that the local legislative body has the power to dissolve,
alter or affect the district beyond that specifically provided
for in this Act.

If two or more cities, municipalities or provinces, or any

combination thereof, desire to form a single district, a
similar resolution shall be adopted in each city, municipality
and province.

39

xxx

Sec. 25. Authorization. The district may exercise all the

powers which are expressly granted by this Title or which
are necessarily implied from or incidental to the powers and
purposes herein stated. For the purpose of carrying out the
objectives of this Act, a district is hereby granted the power
of eminent domain, the exercise thereof shall, however, be
subject to review by the Administration. (Emphasis
supplied)

Clearly, LWDs exist as corporations only by virtue of PD 198,

which expressly confers on LWDs corporate powers. Section
6 of PD 198 provides that LWDs shall exercise the powers,
rights and privileges given to private corporations under
existing laws. Without PD 198, LWDs would have no
corporate powers. Thus, PD 198 constitutes the special
enabling charter of LWDs. The ineluctable conclusion is that
LWDs are government-owned and controlled corporations
with a special charter.

The phrase government-owned and controlled corporations

with original charters means GOCCs created under special
laws and not under the general incorporation law. There is
no difference between the term original charters and
special charters. The Court clarified this in National
Service Corporation v. NLRC[15] by citing the deliberations
in the Constitutional Commission, as follows:

THE PRESIDING OFFICER (Mr. Trenas). The session is

resumed.

Commissioner Romulo is recognized.

MR. ROMULO.
Mr. Presiding Officer, I am amending my
original proposed amendment to now read as follows:
including government-owned or controlled corporations
WITH ORIGINAL CHARTERS. The purpose of this
amendment is to indicate that government corporations
such as the GSIS and SSS, which have original charters, fall
within the ambit of the civil service. However, corporations
which are subsidiaries of these chartered agencies such as
the Philippine Airlines, Manila Hotel and Hyatt are excluded
from the coverage of the civil service.

THE PRESIDING OFFICER (Mr. Trenas). What does the

Committee say?

MR. FOZ.
Just one question, Mr. Presiding Officer. By the
term original charters, what exactly do we mean?

MR. ROMULO.
We mean that they were created by law,
by an act of Congress, or by special law.

MR. FOZ.

And not under the general corporation law.

MR. ROMULO.

That is correct. Mr. Presiding Officer.

40

MR. FOZ.
With that understanding and clarification, the
Committee accepts the amendment.

MR. NATIVIDAD.
Mr. Presiding Officer, so those created by
the general corporation law are out.

MR. ROMULO.

incorporation statute the Corporation Code. In NASECO,

the company involved had been organized under the
general incorporation statute and was a subsidiary of the
National Investment Development Corporation (NIDC) which
in turn was a subsidiary of the Philippine National Bank, a
bank chartered by a special statute. Thus, governmentowned or controlled corporations like NASECO are
effectively, excluded from the scope of the Civil Service.
(Emphasis supplied)

That is correct. (Emphasis supplied)

Again, in Davao City Water District v. Civil Service

Commission,[16] the Court reiterated the meaning of the
phrase government-owned and controlled corporations with
original charters in this wise:

By government-owned or controlled corporation with

original charter, We mean government owned or controlled
corporation created by a special law and not under the
Corporation Code of the Philippines. Thus, in the case of
Lumanta v. NLRC (G.R. No. 82819, February 8, 1989, 170
SCRA 79, 82), We held:

The Court, in National Service Corporation (NASECO) v.

National Labor Relations Commission, G.R. No. 69870,
promulgated on 29 November 1988, quoting extensively
from the deliberations of the 1986 Constitutional
Commission in respect of the intent and meaning of the new
phrase with original charter, in effect held that
government-owned and controlled corporations with original
charter refer to corporations chartered by special law as
distinguished from corporations organized under our general

Petitioners contention that the Sangguniang Bayan

resolution creates the LWDs assumes that the Sangguniang
Bayan has the power to create corporations. This is a
patently baseless assumption. The Local Government
Code[17] does not vest in the Sangguniang Bayan the
power to create corporations.[18] What the Local
Government Code empowers the Sangguniang Bayan to do
is to provide for the establishment of a waterworks system
subject to existing laws. Thus, Section 447(5)(vii) of the
Local Government Code provides:

SECTION 447.
Powers, Duties, Functions and
Compensation. (a) The sangguniang bayan, as the
legislative body of the municipality, shall enact ordinances,
approve resolutions and appropriate funds for the general
welfare of the municipality and its inhabitants pursuant to
Section 16 of this Code and in the proper exercise of the
corporate powers of the municipality as provided for under
Section 22 of this Code, and shall:

xxx

41

(vii)
Subject to existing laws, provide for the
establishment, operation, maintenance, and repair of an
efficient waterworks system to supply water for the
inhabitants; regulate the construction, maintenance, repair
and use of hydrants, pumps, cisterns and reservoirs; protect
the purity and quantity of the water supply of the
municipality and, for this purpose, extend the coverage of
appropriate ordinances over all territory within the drainage
area of said water supply and within one hundred (100)
meters of the reservoir, conduit, canal, aqueduct, pumping
station, or watershed used in connection with the water
service; and regulate the consumption, use or wastage of
water;

x x x. (Emphasis supplied)

The Sangguniang Bayan may establish a waterworks system

only in accordance with the provisions of PD 198. The
Sangguniang Bayan has no power to create a corporate
entity that will operate its waterworks system. However,
the Sangguniang Bayan may avail of existing enabling laws,
like PD 198, to form and incorporate a water district.
Besides, even assuming for the sake of argument that the
Sangguniang Bayan has the power to create corporations,
the LWDs would remain government-owned or controlled
corporations subject to COAs audit jurisdiction. The
resolution of the Sangguniang Bayan would constitute an
LWDs special charter, making the LWD a governmentowned and controlled corporation with an original charter.
In any event, the Court has already ruled in Baguio Water
District v. Trajano[19] that the Sangguniang Bayan
resolution is not the special charter of LWDs, thus:

While it is true that a resolution of a local sanggunian is still

necessary for the final creation of a district, this Court is of
the opinion that said resolution cannot be considered as its
charter, the same being intended only to implement the
provisions of said decree.

Petitioner further contends that a law must create directly

and explicitly a GOCC in order that it may have an original
charter. In short, petitioner argues that one special law
cannot serve as enabling law for several GOCCs but only for
one GOCC. Section 16, Article XII of the Constitution
mandates that Congress shall not, except by general
law,[20] provide for the creation of private corporations.
Thus, the Constitution prohibits one special law to create
one private corporation, requiring instead a general law to
create private corporations. In contrast, the same Section
16 states that Government-owned or controlled
corporations may be created or established by special
charters. Thus, the Constitution permits Congress to create
a GOCC with a special charter. There is, however, no
prohibition on Congress to create several GOCCs of the
same class under one special enabling charter.

The rationale behind the prohibition on private corporations

having special charters does not apply to GOCCs. There is
no danger of creating special privileges to certain
individuals, families or groups if there is one special law
creating each GOCC. Certainly, such danger will not exist
whether one special law creates one GOCC, or one special
enabling law creates several GOCCs. Thus, Congress may
create GOCCs either by special charters specific to each
GOCC, or by one special enabling charter applicable to a
class of GOCCs, like PD 198 which applies only to LWDs.

42

Petitioner also contends that LWDs are private corporations

because Section 6 of PD 198[21] declares that LWDs shall
be considered quasi-public in nature. Petitioners rationale
is that only private corporations may be deemed quasipublic and not public corporations. Put differently,
petitioner rationalizes that a public corporation cannot be
deemed quasi-public because such corporation is already
public. Petitioner concludes that the term quasi-public
can only apply to private corporations. Petitioners
argument is inconsequential.

Petitioner forgets that the constitutional criterion on the

exercise of COAs audit jurisdiction depends on the
governments ownership or control of a corporation. The
nature of the corporation, whether it is private, quasi-public,
or public is immaterial.

The Constitution vests in the COA audit jurisdiction over

government-owned and controlled corporations with
original charters, as well as government-owned or
controlled corporations without original charters. GOCCs
with original charters are subject to COA pre-audit, while
GOCCs without original charters are subject to COA postaudit. GOCCs without original charters refer to corporations
created under the Corporation Code but are owned or
controlled by the government. The nature or purpose of the
corporation is not material in determining COAs audit
jurisdiction. Neither is the manner of creation of a
corporation, whether under a general or special law.

Philippine Veterans Bank,[22] the Court even ruled that the

criterion of ownership and control is more important than
the issue of original charter, thus:

This point is important because the Constitution provides in

its Article IX-B, Section 2(1) that the Civil Service embraces
all branches, subdivisions, instrumentalities, and agencies of
the Government, including government-owned or controlled
corporations with original charters. As the Bank is not
owned or controlled by the Government although it does
have an original charter in the form of R.A. No. 3518,[23] it
clearly does not fall under the Civil Service and should be
regarded as an ordinary commercial corporation. Section 28
of the said law so provides. The consequence is that the
relations of the Bank with its employees should be governed
by the labor laws, under which in fact they have already
been paid some of their claims. (Emphasis supplied)

Certainly, the government owns and controls LWDs. The

government organizes LWDs in accordance with a specific
law, PD 198. There is no private party involved as co-owner
in the creation of an LWD. Just prior to the creation of LWDs,
the national or local government owns and controls all their
assets. The government controls LWDs because under PD
198 the municipal or city mayor, or the provincial governor,
appoints all the board directors of an LWD for a fixed term of
six years.[24] The board directors of LWDs are not coowners of the LWDs. LWDs have no private stockholders or
members. The board directors and other personnel of LWDs
are government employees subject to civil service laws[25]
and anti-graft laws.[26]

The determining factor of COAs audit jurisdiction is

government ownership or control of the corporation. In
Philippine Veterans Bank Employees Union-NUBE v.

43

While Section 8 of PD 198 states that [N]o public official

shall serve as director of an LWD, it only means that the
appointees to the board of directors of LWDs shall come
from the private sector. Once such private sector
representatives assume office as directors, they become
public officials governed by the civil service law and antigraft laws. Otherwise, Section 8 of PD 198 would
contravene Section 2(1), Article IX-B of the Constitution
declaring that the civil service includes government-owned
or controlled corporations with original charters.

If LWDs are neither GOCCs with original charters nor GOCCs

without original charters, then they would fall under the
term agencies or instrumentalities of the government and
thus still subject to COAs audit jurisdiction. However, the
stark and undeniable fact is that the government owns
LWDs. Section 45[27] of PD 198 recognizes government
ownership of LWDs when Section 45 states that the board of
directors may dissolve an LWD only on the condition that
another public entity has acquired the assets of the district
and has assumed all obligations and liabilities attached
thereto. The implication is clear that an LWD is a public
and not a private entity.

Petitioner does not allege that some entity other than the
government owns or controls LWDs. Instead, petitioner
advances the theory that the Water Districts owner is the
District itself.[28] Assuming for the sake of argument that
an LWD is self-owned,[29] as petitioner describes an LWD,
the government in any event controls all LWDs. First,
government officials appoint all LWD directors to a fixed
term of office. Second, any per diem of LWD directors in
excess of P50 is subject to the approval of the Local Water
Utilities Administration, and directors can receive no other

compensation for their services to the LWD.[30] Third, the

Local Water Utilities Administration can require LWDs to
merge or consolidate their facilities or operations.[31] This
element of government control subjects LWDs to COAs
audit jurisdiction.

Petitioner argues that upon the enactment of PD 198, LWDs

became private entities through the transfer of ownership of
water facilities from local government units to their
respective water districts as mandated by PD 198.
Petitioner is grasping at straws. Privatization involves the
transfer of government assets to a private entity. Petitioner
concedes that the owner of the assets transferred under
Section 6 (c) of PD 198 is no other than the LWD itself.[32]
The transfer of assets mandated by PD 198 is a transfer of
the water systems facilities managed, operated by or under
the control of such city, municipality or province to such
(water) district.[33] In short, the transfer is from one
government entity to another government entity. PD 198 is
bereft of any indication that the transfer is to privatize the
operation and control of water systems.

Finally, petitioner claims that even on the assumption that

the government owns and controls LWDs, Section 20 of PD
198 prevents COA from auditing LWDs. [34] Section 20 of PD
198 provides:

Sec. 20.
System of Business Administration. The
Board shall, as soon as practicable, prescribe and define by
resolution a system of business administration and
accounting for the district, which shall be patterned upon
and conform to the standards established by the
Administration. Auditing shall be performed by a certified

44

public accountant not in the government service. The

Administration may, however, conduct annual audits of the
fiscal operations of the district to be performed by an
auditor retained by the Administration. Expenses incurred in
connection therewith shall be borne equally by the water
district concerned and the Administration.[35] (Emphasis
supplied)

Petitioner argues that PD 198 expressly prohibits COA

auditors, or any government auditor for that matter, from
auditing LWDs. Petitioner asserts that this is the import of
the second sentence of Section 20 of PD 198 when it states
that [A]uditing shall be performed by a certified public
accountant not in the government service.[36]

PD 198 cannot prevail over the Constitution. No amount of

clever legislation can exclude GOCCs like LWDs from COAs
audit jurisdiction. Section 3, Article IX-C of the Constitution
outlaws any scheme or devise to escape COAs audit
jurisdiction, thus:

Sec. 3.
No law shall be passed exempting any entity of
the Government or its subsidiary in any guise whatever, or
any investment of public funds, from the jurisdiction of the
Commission on Audit. (Emphasis supplied)

The framers of the Constitution added Section 3, Article IX-D

of the Constitution precisely to annul provisions of
Presidential Decrees, like that of Section 20 of PD 198, that
exempt GOCCs from COA audit. The following exchange in
the deliberations of the Constitutional Commission
elucidates this intent of the framers:

MR. OPLE: I propose to add a new section on line 9, page 2

of the amended committee report which reads: NO LAW
SHALL BE PASSED EXEMPTING ANY ENTITY OF THE
GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE WHATEVER,
OR ANY INVESTMENTS OF PUBLIC FUNDS, FROM THE
JURISDICTION OF THE COMMISSION ON AUDIT.

May I explain my reasons on record.

We know that a number of entities of the government took

advantage of the absence of a legislature in the past to
obtain presidential decrees exempting themselves from the
jurisdiction of the Commission on Audit, one notable
example of which is the Philippine National Oil Company
which is really an empty shell. It is a holding corporation by
itself, and strictly on its own account. Its funds were not
very impressive in quantity but underneath that shell there
were billions of pesos in a multiplicity of companies. The
PNOC the empty shell under a presidential decree was
covered by the jurisdiction of the Commission on Audit, but
the billions of pesos invested in different corporations
underneath it were exempted from the coverage of the
Commission on Audit.

Another example is the United Coconut Planters Bank. The

Commission on Audit has determined that the coconut levy
is a form of taxation; and that, therefore, these funds
attributed to the shares of 1,400,000 coconut farmers are, in
effect, public funds. And that was, I think, the basis of the
PCGG in undertaking that last major sequestration of up to
94 percent of all the shares in the United Coconut Planters

45

Bank. The charter of the UCPB, through a presidential

decree, exempted it from the jurisdiction of the Commission
on Audit, it being a private organization.

So these are the fetuses of future abuse that we are slaying

right here with this additional section.

May I repeat the amendment, Madam President: NO LAW

SHALL BE PASSED EXEMPTING ANY ENTITY OF THE
GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE WHATEVER,
OR ANY INVESTMENTS OF PUBLIC FUNDS, FROM THE
JURISDICTION OF THE COMMISSION ON AUDIT.

THE PRESIDENT: May we know the position of the

Committee on the proposed amendment of Commissioner
Ople?

MR. JAMIR: If the honorable Commissioner will change the

number of the section to 4, we will accept the amendment.

MR. OPLE: Gladly, Madam President. Thank you.

MR. DE CASTRO: Madam President, point of inquiry on the

new amendment.

MR. DE CASTRO: Thank you. May I just ask a few questions

of Commissioner Ople.

Is that not included in Section 2 (1) where it states: (c)

government-owned or controlled corporations and their
subsidiaries? So that if these government-owned and
controlled corporations and their subsidiaries are subjected
to the audit of the COA, any law exempting certain
government corporations or subsidiaries will be already
unconstitutional.

So I believe, Madam President, that the proposed

amendment is unnecessary.

MR. MONSOD:
Madam President, since this has been
accepted, we would like to reply to the point raised by
Commissioner de Castro.

THE PRESIDENT: Commissioner Monsod will please proceed.

MR. MONSOD:
I think the Commissioner is trying to avoid
the situation that happened in the past, because the same
provision was in the 1973 Constitution and yet somehow a
law or a decree was passed where certain institutions were
exempted from audit. We are just reaffirming, emphasizing,
the role of the Commission on Audit so that this problem will
never arise in the future.[37]

THE PRESIDENT: Commissioner de Castro is recognized.

46

There is an irreconcilable conflict between the second

sentence of Section 20 of PD 198 prohibiting COA auditors
from auditing LWDs and Sections 2(1) and 3, Article IX-D of
the Constitution vesting in COA the power to audit all
GOCCs. We rule that the second sentence of Section 20 of
PD 198 is unconstitutional since it violates Sections 2(1) and
3, Article IX-D of the Constitution.

On the Legality of COAs

institutions or local government units for services rendered

by its officials and employees as part of their regular
functions for purposes of paying additional compensation to
said officials and employees. (Emphasis supplied)

Claiming that Section 18 is absolute and leaves no

doubt,[39] petitioner asks COA to discontinue its practice of
charging auditing fees to LWDs since such practice allegedly
violates the law.

Practice of Charging Auditing Fees

Petitioners claim has no basis.
Petitioner claims that the auditing fees COA charges LWDs
for audit services violate the prohibition in Section 18 of RA
6758,[38] which states:

Sec. 18. Additional Compensation of Commission on Audit

Personnel and of other Agencies. In order to preserve the
independence and integrity of the Commission on Audit
(COA), its officials and employees are prohibited from
receiving salaries, honoraria, bonuses, allowances or other
emoluments from any government entity, local government
unit, government-owned or controlled corporations, and
government financial institutions, except those
compensation paid directly by COA out of its appropriations
and contributions.

Government entities, including government-owned or

controlled corporations including financial institutions and
local government units are hereby prohibited from assessing
or billing other government entities, including governmentowned or controlled corporations including financial

Section 18 of RA 6758 prohibits COA personnel from

receiving any kind of compensation from any government
entity except compensation paid directly by COA out of its
appropriations and contributions. Thus, RA 6758 itself
recognizes an exception to the statutory ban on COA
personnel receiving compensation from GOCCs. In Tejada v.
Domingo,[40] the Court declared:

There can be no question that Section 18 of Republic Act No.

6758 is designed to strengthen further the policy x x x to
preserve the independence and integrity of the COA, by
explicitly PROHIBITING: (1) COA officials and employees
from receiving salaries, honoraria, bonuses, allowances or
other emoluments from any government entity, local
government unit, GOCCs and government financial
institutions, except such compensation paid directly by the
COA out of its appropriations and contributions, and (2)
government entities, including GOCCs, government financial
institutions and local government units from assessing or
billing other government entities, GOCCs, government

47

financial institutions or local government units for services

rendered by the latters officials and employees as part of
their regular functions for purposes of paying additional
compensation to said officials and employees.

and other operating expenses, depreciation on capital and

equipment and out-of-pocket expenses. In respect to the
allowances and fringe benefits granted by the GOCCs to the
COA personnel assigned to the formers auditing units, the
same shall be directly defrayed by COA from its own
appropriations x x x. [41]

xxx

The first aspect of the strategy is directed to the COA itself,

while the second aspect is addressed directly against the
GOCCs and government financial institutions. Under the
first, COA personnel assigned to auditing units of GOCCs or
government financial institutions can receive only such
salaries, allowances or fringe benefits paid directly by the
COA out of its appropriations and contributions. The
contributions referred to are the cost of audit services
earlier mentioned which cannot include the extra
emoluments or benefits now claimed by petitioners. The
COA is further barred from assessing or billing GOCCs and
government financial institutions for services rendered by its
personnel as part of their regular audit functions for
purposes of paying additional compensation to such
personnel. x x x. (Emphasis supplied)

In Tejada, the Court explained the meaning of the word

contributions in Section 18 of RA 6758, which allows COA
to charge GOCCs the cost of its audit services:

COA may charge GOCCs actual audit cost but GOCCs must
pay the same directly to COA and not to COA auditors.
Petitioner has not alleged that COA charges LWDs auditing
fees in excess of COAs actual audit cost. Neither has
petitioner alleged that the auditing fees are paid by LWDs
directly to individual COA auditors. Thus, petitioners
contention must fail.

WHEREFORE, the Resolution of the Commission on Audit

dated 3 January 2000 and the Decision dated 30 January
2001 denying petitioners Motion for Reconsideration are
AFFIRMED. The second sentence of Section 20 of
Presidential Decree No. 198 is declared VOID for being
inconsistent with Sections 2 (1) and 3, Article IX-D of the
Constitution. No costs.

SO ORDERED.

x x x the contributions from the GOCCs are limited to the

cost of audit services which are based on the actual cost of
the audit function in the corporation concerned plus a
reasonable rate to cover overhead expenses. The actual
audit cost shall include personnel services, maintenance

48

THE COLLECTOR OF INTERNAL REVENUE, defendantappellant.

Attorney-General Villa-Real for appellant.

Perfecto J. Salas Rodriguez for appellee.

JOHNSON, J.:

This action was brought in the Court of First Instance of the

City of Manila on the 17th day of July, 1923, for the purpose
of recovering the sum of P12,044.68, alleged to have been
paid under protest by the plaintiff company to the
defendant, as specific tax on 24,089.3 tons of coal. Said
company is a corporation created by Act No. 2705 of the
Philippine Legislature for the purpose of developing the coal
industry in the Philippine Islands and is actually engaged in
coal mining on reserved lands belonging to the Government.
It claimed exemption from taxes under the provision of
sections 14 and 15 of Act No. 2719, and prayed for a
judgment ordering the defendant to refund to the plaintiff
said sum of P12,044.68, with legal interest from the date of
the presentation of the complaint, and costs against the
defendant.
G.R. No. L-22619

December 2, 1924

NATIONAL COAL COMPANY, plaintiff-appellee,

vs.

The defendant answered denying generally and specifically

all the material allegations of the complaint, except the
legal existence and personality of the plaintiff. As a special
defense, the defendant alleged (a) that the sum of

49

P12,044.68 was paid by the plaintiff without protests, and

(b) that said sum was due and owing from the plaintiff to the
Government of the Philippine Islands under the provisions of
section 1496 of the Administrative Code and prayed that the
complaint be dismissed, with costs against the plaintiff.

Upon the issue thus presented, the case was brought on for
trial. After a consideration of the evidence adduced by both
parties, the Honorable Pedro Conception, judge, held that
the words "lands owned by any person, etc.," in section 15
of Act No. 2719 should be understood to mean "lands held in
lease or usufruct," in harmony with the other provision of
said Act; that the coal lands possessed by the plaintiff,
belonging to the Government, fell within the provisions of
section 15 of Act No. 2719; and that a tax of P0.04 per ton
of 1,016 kilos on each ton of coal extracted therefrom, as
provided in said section, was the only tax which should be
collected from the plaintiff; and sentenced the defendant to
refund to the plaintiff the sum of P11,081.11 which is the
difference between the amount collected under section
1496 of the Administrative Code and the amount which
should have been collected under the provisions of said
section 15 of Act No. 2719. From that sentence the
defendant appealed, and now makes the following
assignments of error:

I.
The court below erred in holding that section 15 of
Act No. 2719 does not refer to coal lands owned by persons
and corporations.

II.
The court below erred in holding that the plaintiff was
not subject to the tax prescribed in section 1496 of the
Administrative Code.

The question confronting us in this appeal is whether the

plaintiff is subject to the taxes under section 15 of Act No.
2719, or to the specific taxes under section 1496 of the
Administrative Code.

The plaintiff corporation was created on the 10th day of

March, 1917, by Act No. 2705, for the purpose of developing
the coal industry in the Philippine Island, in harmony with
the general plan of the Government to encourage the
development of the natural resources of the country, and to
provided facilities therefor. By said Act, the company was
granted the general powers of a corporation "and such other
powers as may be necessary to enable it to prosecute the
business of developing coal deposits in the Philippine Island
and of mining, extracting, transporting and selling the coal
contained in said deposits." (Sec. 2, Act No. 2705.) By the
same law (Act No. 2705) the Government of the Philippine
Islands is made the majority stockholder, evidently in order
to insure proper government supervision and control, and
thus to place the Government in a position to render all
possible encouragement, assistance and help in the
prosecution and furtherance of the company's business.

On May 14, 1917, two months after the passage of Act No.
2705, creating the National Coal Company, the Philippine
Legislature passed Act No. 2719 "to provide for the leasing
and development of coal lands in the Philippine Islands." On
October 18, 1917, upon petition of the National Coal
Company, the Governor-General, by Proclamation No. 39,
withdrew "from settlement, entry, sale or other disposition,
all coal-bearing public lands within the Province of
Zamboanga, Department of Mindanao and Sulu, and the
Island of Polillo, Province of Tayabas." Almost immediately

50

after the issuance of said proclamation the National Coal

Company took possession of the coal lands within the said
reservation, with an area of about 400 hectares, without any
further formality, contract or lease. Of the 30,000 shares of
stock issued by the company, the Government of the
Philippine Islands is the owner of 29,809 shares, that is, of
99 1/3 per centum of the whole capital stock.

If we understand the theory of the plaintiff-appellee, it is,

that it claims to be the owner of the land from which it has
mined the coal in question and is therefore subject to the
provisions of section 15 of Act No. 2719 and not to the
provisions of the section 1496 of the Administrative Code.
That contention of the plaintiff leads us to an examination of
the evidence upon the question of the ownership of the land
from which the coal in question was mined. Was the plaintiff
the owner of the land from which the coal in question was
mined? If the evidence shows the affirmative, then the
judgment should be affirmed. If the evidence shows that the
land does not belong to the plaintiff, then the judgment
should be reversed, unless the plaintiff's rights fall under
section 3 of said Act.

The only witness presented by the plaintiff upon the

question of the ownership of the land in question was Mr.
Dalmacio Costas, who stated that he was a member of the
board of directors of the plaintiff corporation; that the
plaintiff corporation took possession of the land in question
by virtue of the proclamation of the Governor-General,
known as Proclamation No. 39 of the year 1917; that no
document had been issued in favor of the plaintiff
corporation; that said corporation had received no
permission from the Secretary of Agriculture and Natural
Resources; that it took possession of said lands covering an

area of about 400 hectares, from which the coal in question

was mined, solely, by virtue of said proclamation (Exhibit B,
No. 39).

Said proclamation (Exhibit B) was issued by Francis Burton

Harrison, then Governor-General, on the 18th day of
October, 1917, and provided: "Pursuant to the provision of
section 71 of Act No. 926, I hereby withdraw from
settlement, entry, sale, or other disposition, all coal-bearing
public lands within the Province of Zamboanga, Department
of Mindanao and Sulu, and the Island of Polillo, Province of
Tayabas." It will be noted that said proclamation only
provided that all coal-bearing public lands within said
province and island should be withdrawn from settlement,
entry, sale, or other disposition. There is nothing in said
proclamation which authorizes the plaintiff or any other
person to enter upon said reversations and to mine coal,
and no provision of law has been called to our attention, by
virtue of which the plaintiff was entitled to enter upon any of
the lands so reserved by said proclamation without first
obtaining permission therefor.

The plaintiff is a private corporation. The mere fact that the

Government happens to the majority stockholder does not
make it a public corporation. Act No. 2705, as amended by
Act No. 2822, makes it subject to all of the provisions of the
Corporation Law, in so far as they are not inconsistent with
said Act (No. 2705). No provisions of Act No. 2705 are found
to be inconsistent with the provisions of the Corporation
Law. As a private corporation, it has no greater rights,
powers or privileges than any other corporation which might
be organized for the same purpose under the Corporation
Law, and certainly it was not the intention of the Legislature
to give it a preference or right or privilege over other

51

legitimate private corporations in the mining of coal. While it

is true that said proclamation No. 39 withdrew "from
settlement, entry, sale, or other disposition of coal-bearing
public lands within the Province of Zamboanga . . . and the
Island of Polillo," it made no provision for the occupation and
operation by the plaintiff, to the exclusion of other persons
or corporations who might, under proper permission, enter
upon the operate coal mines.

On the 14th day of May, 1917, and before the issuance of

said proclamation, the Legislature of the Philippine Island in
"an Act for the leasing and development of coal lands in the
Philippine Islands" (Act No. 2719), made liberal provision.
Section 1 of said Act provides: "Coal-bearing lands of the
public domain in the Philippine Island shall not be disposed
of in any manner except as provided in this Act," thereby
giving a clear indication that no "coal-bearing lands of the
public domain" had been disposed of by virtue of said
proclamation.

Neither is there any provision in Act No. 2705 creating the

National Coal Company, nor in the amendments thereof
found in Act No. 2822, which authorizes the National Coal
Company to enter upon any of the reserved coal lands
without first having obtained permission from the Secretary
of Agriculture and Natural Resources.lawphi1.net

The following propositions are fully sustained by the facts

and the law:

(1)
The National Coal Company is an ordinary private
corporation organized under Act No. 2705, and has no

greater powers nor privileges than the ordinary private

corporation, except those mentioned, perhaps, in section 10
of Act No. 2719, and they do not change the situation here.

(2)
It mined on public lands between the month of July,
1920, and the months of March, 1922, 24,089.3 tons of coal.

(3)
Upon demand of the Collector of Internal Revenue it
paid a tax of P0.50 a ton, as taxes under the provisions of
article 1946 of the Administrative Code on the 15th day of
December, 1922.

(4)
It is admitted that it is neither the owner nor the
lessee of the lands upon which said coal was mined.

(5)
The proclamation of Francis Burton Harrison,
Governor-General, of the 18th day of October, 1917, by
authority of section 1 of Act No. 926, withdrawing from
settlement, entry, sale, or other dispositon all coal-bearing
public lands within the Province of Zamboanga and the
Island of Polillo, was not a reservation for the benefit of the
National Coal Company, but for any person or corporation of
the Philippine Islands or of the United States.

(6)
That the National Coal Company entered upon said
land and mined said coal, so far as the record shows,
without any lease or other authority from either the
Secretary of Agriculture and Natural Resources or any
person having the power to grant a leave or authority.

52

From all of the foregoing facts we find that the issue is well
defined between the plaintiff and the defendant. The
plaintiff contends that it was liable only to pay the internal
revenue and other fees and taxes provided for under section
15 of Act No. 2719; while the defendant contends, under the
facts of record, the plaintiff is obliged to pay the internal
revenue duty provided for in section 1496 of the
Administrative Code. That being the issue, an examination
of the provisions of Act No. 2719 becomes necessary.

An examination of said Act (No. 2719) discloses the

following facts important for consideration here:

First. All "coal-bearing lands of the public domain in the

Philippine Islands shall not be disposed of in any manner
except as provided in this Act." Second. Provisions for
leasing by the Secretary of Agriculture and Natural
Resources of "unreserved, unappropriated coal-bearing
public lands," and the obligation to the Government which
shall be imposed by said Secretary upon the
lessee.lawphi1.net

Third. The internal revenue duty and tax which must be paid
upon coal-bearing lands owned by any person, firm,
association or corporation.

To repeat, it will be noted, first, that Act No. 2719 provides

an internal revenue duty and tax upon unreserved,
unappropriated coal-bearing public lands which may be
leased by the Secretary of Agriculture and Natural
Resources; and, second, that said Act (No. 2719) provides an
internal revenue duty and tax imposed upon any person,

firm, association or corporation, who may be the owner of

"coal-bearing lands." A reading of said Act clearly shows that
the tax imposed thereby is imposed upon two classes of
persons only lessees and owners.

The lower court had some trouble in determining what was

the correct interpretation of section 15 of said Act, by reason
of what he believed to be some difference in the
interpretation of the language used in Spanish and English.
While there is some ground for confusion in the use of the
language in Spanish and English, we are persuaded,
considering all the provisions of said Act, that said section
15 has reference only to persons, firms, associations or
corporations which had already, prior to the existence of
said Act, become the owners of coal lands. Section 15
cannot certainty refer to "holders or lessees of coal lands'
for the reason that practically all of the other provisions of
said Act has reference to lessees or holders. If section 15
means that the persons, firms, associations, or corporation
mentioned therein are holders or lessees of coal lands only,
it is difficult to understand why the internal revenue duty
and tax in said section was made different from the
obligations mentioned in section 3 of said Act, imposed
upon lessees or holders.

From all of the foregoing, it seems to be made plain that the

plaintiff is neither a lessee nor an owner of coal-bearing
lands, and is, therefore, not subject to any other provisions
of Act No. 2719. But, is the plaintiff subject to the provisions
of section 1496 of the Administrative Code?

Section 1496 of the Administrative Code provides that "on

all coal and coke there shall be collected, per metric ton,

53

fifty centavos." Said section (1496) is a part of article, 6

which provides for specific taxes. Said article provides for a
specific internal revenue tax upon all things manufactured
or produced in the Philippine Islands for domestic sale or
consumption, and upon things imported from the United
States or foreign countries. It having been demonstrated
that the plaintiff has produced coal in the Philippine Islands
and is not a lessee or owner of the land from which the coal
was produced, we are clearly of the opinion, and so hold,
that it is subject to pay the internal revenue tax under the
provisions of section 1496 of the Administrative Code, and is
not subject to the payment of the internal revenue tax under
section 15 of Act No. 2719, nor to any other provisions of
said Act.

Therefore, the judgment appealed from is hereby revoked,

and the defendant is hereby relieved from all responsibility
under the complaint. And, without any finding as to costs, it
is so ordered.

G.R. No. 72807

September 9, 1991

54

MARILAO WATER CONSUMERS ASSOCIATION, INC.,

petitioners,
vs.
INTERMEDIATE APPELLATE COURT, MUNICIPALITY OF
MARILAO, BULACAN, SANGGUNIANG BAYAN, MARILAO,
BULACAN, and MARILAO WATER DISTRICT, respondents.

Magtanggol C. Gunigundo for petitioner.

Prospero A. Crescini for Marilao Water District.

Under PD 198, water districts may be created by the

different local legislative bodies by the passage of a
resolution to this effect, subject to the terms of the decree.
The primary function of these water districts is to sell water
to residents within their territory, under such schedules of
rates and charges as may be determined by their boards. 3
They shall manage, administer, operate and maintain all
watersheds within their territorial boundaries, safeguard and
protect the use of the waters therein, supervise and control
structures within their service areas, and prohibit any
person from selling or otherwise disposing of water for
public purposes within their service areas where district
facilities are available to provide such service. 4

The decree specifies the terms under which water districts

may be formed and operate. It prescribes, particularly
NARVASA, J.:p

Involved in this appeal is the determination of which triburial

has jurisdiction over the dissolution of a water district
organized and operating as a quasi-public corporation under
the provisions of Presidential Decree No. 198, as amended;
1 the Regional Trial Court, or the Securities & Exchange
Commission.

PD 198 authorizes the formation, lays down the powers and

functions, and governs the operation of water districts
throughout the country; it is "the source of authorization and
power to form and maintain a (water) district." Once formed,
it says, a district is subject to its provisions and is not under
the jurisdiction of any political subdivision. 2

a) the name by which a water district shad be known, which

shall be contained in the enabling resolution, and shall
include the name of the city, municipality, or province, or
region thereof, served by said system, followed by the
words, 'Water District;' 5

b) the number and qualifications of the members of the

boards of directors, with the date of expiration of term of
office for each; 6 the manner of their selection and initial
appointment by the head of the local political subdivision; 7
their terms of office (which shall be in staggered periods of
two, four and six years); 8 the manner of filling up vacancies
in the board; 9 the compensation and liabilities of members
of the board. 10 The resolution shall contain a "statement

55

that the district may only be dissolved on the grounds and

under the conditions set forth in Section 44" of the law, but
nothing in the resolution of formation, the decree adds,
"shall state or infer that the local legislative body has the
power to dissolve, alter or affect the district beyond that
specifically provided for in this Act." 11

The juridical entities thus created and organized under PD

198 are considered quasi-public corporations, performing
public services and supplying public wants. They are
authorized not only to "exercise all the powers which are
expressly granted" by said decree, and those "which are
necessarily implied from or incidental to" said powers, but
also "the power of eminent domain, the exercise .. (of
which) shall however be subject to review by the
Administration" (LWUA). In addition to the powers granted
in, and subject to such restrictions imposed under, the Act,
they may also exercise the powers, rights and privileges
given to private corporations under existing laws. 12

The decree also established a government corporation

attached to the Office of the President, known as the Local
Water Utilities Administration (LWUA) 13 to function
primarily as "a specialized lending institution for the
promotion development and financing of local water
utilities." It has the following specific powers and duties; 14

(1)
prescribe minimum standards and regulations in
order to assure acceptable standards of construction
materials and supplies, maintenance, operation, personnel
training, accounting and fiscal practices for local water
utilities;

(2)
furnish technical assistance and personnel training
programs for local water utilities;

(3)

monitor and evaluate local water standards; and

(4)
effect systems integration, joint investment and
operations, district annexation and deannexation whenever
economically warranted.

It was pursuant to the foregoing rules and norms that the

Marilao Water District was formed by Resolution of the
Sangguniang Bayan of the Municipality of Marilao dated
September 18, 1982, which resolution was thereafter
forwarded to the LWUA and "duly filed" by it on October 4,
1982 after ascertaining that it conformed to the
requirements of the law. 15

The claim was thereafter made that the creation of the

Marilao Water District in the manner aforestated was
defective and illegal. The claim was made by a non-stock,
non-profit corporation known as the Marilao Water
Consumers Association, Inc., in a petition dated December
12, 1983 filed with the Regional Trial Court at Malolos,
Bulacan. Impleaded as respondents were the Marilao Water
District, as well as the Municipality of Marilao, Bulacan; its
Sangguniang Bayan; and Mayor Nicanor V. GUILLERMO. The
petition prayed for the dissolution of the water district on
the basis chiefly of the following allegations, to wit:

56

1)
there had been no real, but only a "farcical" public
hearing prior to the creation of the Water District;

outstanding obligations to Meralco, by way of exception to

the restraining order.

2)
not only was the waterworks system turned over to
the Water District without compensation. but a subsidy was
illegally authorized for it;

On January 13, 1984 the Marilao Water District filed its

Answer with Compulsory Counterclaim, denying the material
allegations of the petition and asserting as affirmative
defenses (a) the Court's lack of jurisdiction of the subject
matter, and (b) the failure of the petition to state a cause of
action. The answer alleged that the matter of the water
district's dissolution fell under the original and exclusive
jurisdiction of the Securities & Exchange Commission (SEC);
and the matter of the propriety of water rates, within the
primary administrative jurisdiction of the LWUA and the
quasi-judicial jurisdiction of the National Water Resources
Council. On the same date, Marilao Water District filed a
motion for admission of its third-party complaint against the
officers and directors of the petitioner corporation, it being
claimed that they had instigated the filing of the petition
simply because one of them was a political adversary of the
respondent Mayor.

3)
the Water District was being run with "negligence,
apathy, indifference and mismanagement," and was not
providing adequate and efficient service to the community,
but this notwithstanding, the consumers were being billed in
full and threatened with disconnection for failure to pay bills
on time; in fact, one of the consumers who complained had
his water service cut off;

4)
the consumers were consequently "forced to
organize themselves into a corporation last October 3,
1983 ... for the purpose of demanding adequate and
sufficient supply of water and efficient management of the
waterworks in Marilao, Bulacan. 16

Acting on the complaint, particularly on the application for

temporary restraining order and preliminary injunction set
out therein, the Trial Court issued an Order on December 22,
1983 setting the application for preliminary hearing,
requiring the respondents to answer the petition and
restraining them until further orders from collecting any
water bill, disconnecting any water service, transferring any
property of the waterworks, or disbursing any amount in
favor of any person. The order was modified on January 6,
1984 to allow the respondents to pay the district's

The other respondents also filed their answer through the

Provincial Fiscal of Bulacan, setting up the same affirmative
defense of lack of jurisdiction on the part of the Trial Court;
and failure of the petition to state a cause of action since it
admitted that it was by resolution of the Marilao
Sangguniang Bayan that the Marilao Water District was
constituted.

The petitioner the Marilao Consumers Association filed a

reply, and an answer to the counterclaim, on January 26,
1984. It averred that since the Marilao Water District had not
been organized under the Corporation Code, the SEC had no

57

jurisdiction over a proceeding for its dissolution; and that

under Section 45 of PD 198, the proceeding to determine if
the dissolution of the water district is for the best interest of
the people, is within the competence of a regular court of
justice, and neither the LWUA nor the National Water
Resources Council is competent to take cognizance of the
matter of dissolution of the water district and recovery of its
waterworks system, or the exorbitant rates imposed by it.
The Consumers Association also opposed admission of the
third-party complaint on the ground that its individual
officers are not personally amenable to suit for acts of the
corporation, 17 which has a personality distinct from theirs.

The Trial Court found for the respondents. It dismissed the

Consumers Association's suit by Order handed down on June
8, 1984 which pertinently reads as follows:

After a consideration of the arguments raised by the herein

parties, the Court is more inclined to take the position of the
respondents that the Securities and Exchange Commission
has the exclusive and original jurisdiction over this case.

WHEREFORE, the instant petition, the third-party complaint,

and the compulsory counterclaim filed herein are hereby
DISMISSED, for lack of jurisdiction.

Its motion for reconsideration having been denied, by Order

dated September 20, 1984, the Consumers Association filed
with this Court a petition for review on certiorari, which was
docketed as G.R. No. 68742. The case was however referred
to the Intermediate Appellate Court by this Court's Second

Division, in a Resolution dated November 19, 1984, where it

was docketed as AC-G.R. S.P. No. 04862.

But there in the Intermediate Appellate Court, the

Consumers Association's cause also met with failure. The
Appellate Court, in its Decision promulgated on September
10, 1985, ruled that its cause could not prosper because

1)
it had availed of the wrong remedy, i.e., the special
civil action of certiorari; the Order of June 8, 1984 being a
final order in the sense that it "left nothing else to be done
in the case the proper remedy was appeal under Rule 41 of
the Rules of Court and not a certiorari suit under Rule 65;
and

2)
even if the certiorari action be treated as an appeal,
it was 14 unerringly clear that the controversy ... falls within
the competence of the SEC in virtue of P.D. 902-A 18 Which
provides that said agency "shall have original and exclusive
jurisdiction to hear and decide cases involving:

a)

xxx

xxx

xxx

b) Controversies arising out of intra-corporate or partnership

relations, between and among stockholders, members or
associates; between any or all of them and the corporation,
partnership or association of which they are stockholders,
members or associates, respectively; and between such
corporation, partnership or association and the state insofar

58

as it concerns their individual franchise or right to exist as

such entity ...

The Appellate Court subsequently denied the petitioner's

motion for reconsideration, by Resolution dated November
4, 1985. Hence, the petition for review on certiorari at bar,
in which reversal of the Appellate Tribunal's decision is
sought, the petitioner insisting that the remedy resorted to
by it was correct but misunderstood by the I.A.C. and that
the law does indeed vest exclusive jurisdiction over the
subject matter of the case in the Regional Trial Court, not
the Securities and Exchange Commission.

Turning first to the adjective issue, it is quite evident that

the Order of the Trial Court of June 8, 1984, dismissing the
action of the Consumers Association, is really a final order; it
finally disposed of the proceeding and left nothing more to
be done by the Court on the merits. Now, the firmly settled
principle is that the remedy against such a final order is the
ordinary remedy of an appeal, either solely on questions of
law in which case the appeal may be taken only to the
Supreme Court or questions of fact and law in which
event the appeal should be brought to the Court of Appeals.
The extraordinary remedy of a special civil action of
certiorari or prohibition is not the appropriate recourse
because precisely, one of the conditions for availing of it is
that there should be "no appeal, nor any plain, speedy and
adequate remedy in the ordinary course of law. 19 A resort
to the latter instead of the former would ordinarily be fatal,
unless it should appear in a given case that appeal would
otherwise be an inefficacious or inadequate remedy. 20

In holding that Marilao Water District had resorted to the

wrong remedy against the Trial Court's order dismissing its
suit, i.e., the special civil action of certiorari, instead of an
appeal, the Intermediate Appellate Court quite overlooked
the fact, not seriously disputed by the Marilao Water District
and its co-respondents, that the former had in fact availed
of the remedy of appeal by certiorari under Rule 45 of the
Rules of Court, as required by paragraph 25 of the Interim
Rules & Guidelines of this Court, implementing Batas
Pambansa Bilang 129; that before doing so, it had first
asked for and been granted an extension of thirty (30) days
within which to file a petition for review on certiorari; but
that subsequently, by Resolution of this Court's Second
Division dated November 19, 1984, the case was referred to
the Intermediate Appellate Court, evidently because it was
felt that certain factual issues had yet to be determined. In
any case, all things considered, the Court is not prepared to
have the case at bar finally determined on this procedural
issue.

The juridical entities known as water districts created by PD

198, although considered as quasi-public corporations and
authorized to exercise the powers, rights and privileges
given to private corporations under existing laws 21 are
entirely distinct from corporations organized under the
Corporation Code, PD 902-A, as amended. The Corporation
Code has nothing whatever to do with their formation and
organization, all the terms and conditions for their
organization and operation being particularly spelled out in
PD 198. The resolutions creating them, their charters, in
other words, are filed not with the Securities and Exchange
Commission but with the LWUA. It is these resolutions qua
charters, and not articles of incorporation drawn up under
the Corporation Code, which set forth the name of the water
districts, the number of their directors, the manner of their
selection and replacement, their powers, etc. The SEC which

59

is charged with enforcement of the Corporation Code as

regards corporations, partnerships and associations formed
or operating under its provisions, has no power of
supervision or control over the activities of water districts.
More particularly, the SEC has no power of oversight over
such activities of water districts as selling water, fuling the
rates and charges therefor 22 or the management,
administration, operation and maintenance of watersheds
within their territorial boundaries, or the safeguarding and
protection of the use of the waters therein, or the
supervision and control of structures within the service
areas of the district, and the prohibition of any person from
selling or otherwise disposing of water for public purposes
within their service areas where district facilities are
available to provide such service. 23 That function of
supervision or control over water districts is entrusted to the
Local Water Utilities Administration. 24 Consequently, as
regards the activities of water districts just mentioned, the
SEC obviously can have no claim to any expertise.

The "Provincial Water Utilities Act of 1973" has a specific

provision governing dissolution of water districts created
thereunder This is Section 45 of PD 198 25 reading as
follows:

SEC. 45. Dissolution. A district may be dissolved by

resolution of its board of directors filed in the manner of
filing the resolution forming the district: Provided, however,
That prior to the adoption of any such resolution: (1) another
public entity has acquired the assets of the district and has
assumed all obligations and liabilities attached thereto; (2)
all bondholders and other creditors have been notified and
they consent to said transfer and dissolution; and (3) a court

of competent jurisdiction has found that said transfer and

dissolution are in the best interest of the public.

Under this provision, it is the LWUA which is the

administrative body involved in the voluntary dissolution of
a water district; it is with it that the resolution of dissolution
is filed, not the Securities and Exchange Commission. And
this provision is evidently quite distinct and different from
those on dissolution of corporations "formed or organized
under the provisions of xx (the Corporation) Code" set out in
Sections 117 to 121, inclusive, of said Code, under which
dissolution may be voluntary (by vote of the stockholders or
members), generally effected by the filing of the
corresponding resolution with the Securities and Exchange
Commission, or involuntary, commenced by the filing of a
verified complaint also with the SEC.

All these argue against conceding jurisdiction in the

Securities and Exchange Commission over proceedings for
the dissolution of water districts. For although described as
quasipublic corporations, and granted the same powers as
private corporations, water districts are not really
corporations. They have no incorporators, stockholders or
members, who have the right to vote for directors, or amend
the articles of incorporation or by-laws, or pass resolutions,
or otherwise perform such other acts as are authorized to
stockholders or members of corporations by the Corporation
Code. In a word, there can be no such thing as a relation of
corporation and stockholders or members in a water district
for the simple reason that in the latter there are no
stockholders or members. Between the water district and
those who are recipients of its water services there exists
not the relationship of corporation-and-stockholder, but that
of a service agency and users or customers. There can

60

therefore be no such thing in a water district as "intracorporate or partnership relations, between and among
stockholders, members or associates (or) between any or all
of them and the corporation, partnership or association of
which they are stockholders, members or associates,
respectively," within the contemplation of Section 5 of the
Corporation Code so as to bring controversies involving
them within the competence and cognizance of the SEC.

There can be even less debate about the fact that the SEC
has no jurisdiction over the co-respondents of the Marilao
Water District the Municipality of Marilao, its Sangguniang
Bayan and its Mayor who are accused of a "conspiracy"
with the water district in respect of the anomalies described
in the Consumer Associations' petition. 26

The controversy, therefore, between the Consumers

Association, on the one hand, and Marilao District and its corespondents, on the other, is not within the jurisdiction of
the SEC.

In their answer with counterclaim in the proceedings a quo,

the respondents advocated the theory that the case falls
within the jurisdiction of the LWUA and/or the National Water
Resources Council.

The LWUA does not appear to have any adjudicatory

functions. It is, as already pointed out, "primarily a
specialized lending institution for the promotion,
development and financing of local water utilities, 27 with
power to prescribe minimum standards and regulations
regarding maintenance, operation, personnel training,

accounting and fiscal practices for local water utilities, to

furnish technical assistance and personnel training
programs therefor; monitor and evaluate local water
standards; and effect systems integration, joint investment
and operations, district annexation and deannexation
whenever economically warranted. 28 The LWUA has quasijudicial power only as regards rates or charges fixed by
water districts, which it may review to establish compliance
with the provisions of PD 198, without prejudice to appeal
being taken therefrom by a water concessionaire to the
National Water Resources Council whose decision thereon
shall be appealable to the Office of the President. 29 The
rates or charges established by respondent Marilao Water
District do not appear to be at issue in the controversy at
bar.

The National Water Resources Council, on the other hand, is

conferred "original jurisdiction over all disputes relating to
appropriation, utilization, exploitation, development, control,
conservation and protection of waters within the meaning
and context of the provisions of ..." (the Code by which said
Council was created, Presidential Decree No. 1067,
otherwise known as the Water Code of the Philippines); 30
and its decision on water rights controversies may be
appealed to the Court of First Instance of the province where
the subject matter of the controversy is situated. 31 It also
has authority to review questions of annexations and
deannexations (addition to or exclusion from the district of
territory). Again it does not appear that the case at bar is a
water rights controversy or one involving annexation or
deannexation.

What essentially is sought by the Consumers Association is

the dissolution of the Marilao Water District, on the ground

61

that its formation was illegal and invalid; the waterworks

system had been turned over to it without compensation
and a subsidy illegally authorized for it; and the Water
District was being run with "negligence, apathy, indifference
and mismanagement," and was not providing adequate and
efficient service to the community. 32

Now, as already above stated, the dissolution of a water

district is governed by Section 45 of PD 198, as amended,
stating that it "may be dissolved by resolution of its board of
directors filed in the manner of filing the resolution forming
the district," subject to enumerated pre-requisites. 33 The
procedure for dissolution thus consists of the following
steps:

1)
the initiation by the board of directors of the water
district motu proprio or at the relation of an interested party,
of proceedings for the dissolution of the water district,
including:

a) the ascertainment by said board that

1)
another public entity has acquired the assets of the
district and has assumed all obligations and liabilities
attached thereto; and

2)
all bondholders and other creditors have been
notified and consent to said transfer and dissolution;

b) the commencement by the water district in a court of

competent jurisdiction of a proceeding to obtain a
declaration that "said transfer and dissolution are in the best
interest of the public;

2)
after compliance with the foregoing requisites, the
adoption by the board of directors of the water district of a
resolution dissolving the water district and its submission to
the Sangguniang Bayan concerned for approval;

3)
submission of the resolution of the Sangguniang
Bayan dissolving the water district to the head of the local
government concerned for approval, and ultimately to the
LWUA for final approval and filing.

The Consumer Association's action therefore is, in fine, in

the nature of a mandamus suit, seeking to compel the board
of directors of the Marilao Water District, and its alleged coconspirators, the Sangguniang Bayan and the Mayor of
Marilao to go through the process above described for the
dissolution of the water district. In this sense, and indeed,
taking account of the nature of the proceedings for
dissolution just described, it seems plain that the case does
not fall within the limited jurisdiction of the SEC., but within
the general jurisdiction of Regional Trial Courts.

WHEREFORE, the Decision of the Intermediate Appellate

Court of September 10, 1985 affirming that of the
Regional Trial Court of June 8, 1984 is REVERSED and SET
ASIDE, and the case is remanded to the Regional Trial Court
for further proceedings and adjudication in accordance with
law. No costs.

62

SO ORDERED.

Cruz and Medialdea, JJ., concur.

Grio-Aquino, J., took no part.

[G.R. No. 141735. June 8, 2005]

SAPPARI K. SAWADJAAN, petitioner, vs. THE HONORABLE

COURT OF APPEALS, THE CIVIL SERVICE COMMISSION and
AL-AMANAH INVESTMENT BANK OF THE PHILIPPINES,
respondents.
DECISION
CHICO-NAZARIO, J.:

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

Court of the Decision[1] of the Court of Appeals of 30 March
1999 affirming Resolutions No. 94-4483 and No. 95-2754 of
the Civil Service Commission (CSC) dated 11 August 1994
and 11 April 1995, respectively, which in turn affirmed
Resolution No. 2309 of the Board of Directors of the Al-

63

Amanah Islamic Investment Bank of the Philippines (AIIBP)

dated 13 December 1993, finding petitioner guilty of
Dishonesty in the Performance of Official Duties and/or
Conduct Prejudicial to the Best Interest of the Service and
dismissing him from the service, and its Resolution[2] of 15
December 1999 dismissing petitioners Motion for
Reconsideration.

The records show that petitioner Sappari K. Sawadjaan was

among the first employees of the Philippine Amanah Bank
(PAB) when it was created by virtue of Presidential Decree
No. 264 on 02 August 1973. He rose through the ranks,
working his way up from his initial designation as security
guard, to settling clerk, bookkeeper, credit investigator,
project analyst, appraiser/ inspector, and eventually, loans
analyst.[3]

In February 1988, while still designated as

appraiser/investigator, Sawadjaan was assigned to inspect
the properties offered as collaterals by Compressed Air
Machineries and Equipment Corporation (CAMEC) for a
credit line of Five Million Pesos (P5,000,000.00). The
properties consisted of two parcels of land covered by
Transfer Certificates of Title (TCTs) No. N-130671 and No. C52576. On the basis of his Inspection and Appraisal Report,
[4] the PAB granted the loan application. When the loan
matured on 17 May 1989, CAMEC requested an extension of
180 days, but was granted only 120 days to repay the loan.
[5]

In the meantime, Sawadjaan was promoted to Loans Analyst

I on 01 July 1989.[6]

In January 1990, Congress passed Republic Act 6848

creating the AIIBP and repealing P.D. No. 264 (which created
the PAB). All assets, liabilities and capital accounts of the
PAB were transferred to the AIIBP,[7] and the existing
personnel of the PAB were to continue to discharge their
functions unless discharged.[8] In the ensuing
reorganization, Sawadjaan was among the personnel
retained by the AIIBP.

When CAMEC failed to pay despite the given extension, the

bank, now referred to as the AIIBP, discovered that TCT No.
N-130671 was spurious, the property described therein nonexistent, and that the property covered by TCT No. C-52576
had a prior existing mortgage in favor of one Divina Pablico.

On 08 June 1993, the Board of Directors of the AIIBP created

an Investigating Committee to look into the CAMEC
transaction, which had cost the bank Six Million Pesos
(P6,000,000.00) in losses.[9] The subsequent events, as
found and decided upon by the Court of Appeals,[10] are as
follows:

On 18 June 1993, petitioner received a memorandum from

Islamic Bank [AIIBP] Chairman Roberto F. De Ocampo
charging him with Dishonesty in the Performance of Official
Duties and/or Conduct Prejudicial to the Best Interest of the
Service and preventively suspending him.

In his memorandum dated 8 September 1993, petitioner

informed the Investigating Committee that he could not

64

submit himself to the jurisdiction of the Committee because

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

On 08 December 1993, the Investigating Committee

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

In view of respondent SAWADJAANS abject failure to

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

This notwithstanding, respondent cannot escape liability. As

adverted to earlier, his failure to perform his official duties
resulted to the prejudice and substantial damage to the
Islamic Bank for which he should be held liable for the
administrative offense of CONDUCT PREJUDICIAL TO THE
BEST INTEREST OF THE SERVICE.

Premises considered, the Investigating Committee

recommends that respondent SAPPARI SAWADJAAN be
meted the penalty of SIX (6) MONTHS and ONE (1) DAY
SUSPENSION from office in accordance with the Civil Service
Commissions Memorandum Circular No. 30, Series of 1989.

On 13 December 1993, the Board of Directors of the Islamic

Bank [AIIBP] adopted Resolution No. 2309 finding petitioner
guilty of Dishonesty in the Performance of Official Duties
and/or Conduct Prejudicial to the Best Interest of the Service
and imposing the penalty of Dismissal from the Service.

On reconsideration, the Board of Directors of the Islamic

Bank [AIIBP] adopted the Resolution No. 2332 on 20
February 1994 reducing the penalty imposed on petitioner
from dismissal to suspension for a period of six (6) months
and one (1) day.

On 29 March 1994, petitioner filed a notice of appeal to the

Merit System Protection Board (MSPB).

On 11 August 1994, the CSC adopted Resolution No. 944483 dismissing the appeal for lack of merit and affirming
Resolution No. 2309 dated 13 December 1993 of the Board
of Directors of Islamic Bank.

On 11 April 1995, the CSC adopted Resolution No. 95-2574

denying petitioners Motion for Reconsideration.

65

On 16 June 1995, the instant petition was filed with the

Honorable Supreme Court on the following assignment of
errors:

I.
Public respondent Al-Amanah Islamic Investment
Bank of the Philippines has committed a grave abuse of
discretion amounting to excess or lack of jurisdiction when it
initiated and conducted administrative investigation without
a validly promulgated rules of procedure in the adjudication
of administrative cases at the Islamic Bank.

II.
Public respondent Civil Service Commission has
committed a grave abuse of discretion amounting to lack of
jurisdiction when it prematurely and falsely assumed
jurisdiction of the case not appealed to it, but to the Merit
System Protection Board.

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

On 04 July 1995, the Honorable Supreme Court En Banc

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

We do not find merit [in] the petition.

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

would reveal that petitioner raises for the first time the
alleged failure of the Islamic Bank [AIIBP] to promulgate
rules of procedure governing the adjudication and
disposition of administrative cases involving its personnel.
It is a rule that issues not properly brought and ventilated
below may not be raised for the first time on appeal, save in
exceptional circumstances (Casolita, Sr. v. Court of Appeals,
275 SCRA 257) none of which, however, obtain in this case.
Granting arguendo that the issue is of such exceptional
character that the Court may take cognizance of the same,
still, it must fail. Section 26 of Republic Act No. 6848 (1990)
provides:

Section 26. Powers of the Board. The Board of Directors

shall have the broadest powers to manage the Islamic Bank,
x x x The Board shall adopt policy guidelines necessary to
carry out effectively the provisions of this Charter as well as
internal rules and regulations necessary for the conduct of
its Islamic banking business and all matters related to
personnel organization, office functions and salary
administration. (Italics ours)

On the other hand, Item No. 2 of Executive Order No. 26

(1992) entitled Prescribing Procedure and Sanctions to
Ensure Speedy Disposition of Administrative Cases directs,
all administrative agencies to adopt and include in their
respective Rules of Procedure provisions designed to
abbreviate administrative proceedings.

The above two (2) provisions relied upon by petitioner does

not require the Islamic Bank [AIIBP] to promulgate rules of
procedure before administrative discipline may be imposed

66

upon its employees. The internal rules of procedures

ordained to be adopted by the Board refers to that
necessary for the conduct of its Islamic banking business
and all matters related to personnel organization, office
functions and salary administration. On the contrary,
Section 26 of RA 6848 gives the Board of Directors of the
Islamic Bank the broadest powers to manage the Islamic
Bank. This grant of broad powers would be an idle
ceremony if it would be powerless to discipline its
employees.

Decisions in administrative cases involving officials and

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

The second assignment of error must likewise fail. The issue

is raised for the first time via this petition for certiorari.
Petitioner submitted himself to the jurisdiction of the CSC.
Although he could have raised the alleged lack of
jurisdiction in his Motion for Reconsideration of Resolution
No. 94-4483 of the CSC, he did not do so. By filing the
Motion for Reconsideration, he is estopped from denying the
CSCs jurisdiction over him, as it is settled rule that a party
who asks for an affirmative relief cannot later on impugn the
action of the tribunal as without jurisdiction after an adverse
result was meted to him. Although jurisdiction over the
subject matter of a case may be objected to at any stage of
the proceedings even on appeal, this particular rule,
however, means that jurisdictional issues in a case can be
raised only during the proceedings in said case and during
the appeal of said case (Aragon v. Court of Appeals, 270
SCRA 603). The case at bar is a petition [for] certiorari and
not an appeal.

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

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

But even on the merits the argument must falter. Item No. 1
of CSC Resolution No. 93-2387 dated 29 June 1993,
provides:

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

651, it was categorically held:

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

`(t)o ascertain whether a court (in this case, administrative
agency) has jurisdiction or not, the provisions of the law
should be inquired into. Furthermore, `the jurisdiction of
the court must appear clearly from the statute law or it will
not be held to exist.(Azarcon v. Sandiganbayan, 268 SCRA
747, 757) From the provision of law abovecited, the Civil
Service Commission clearly has jurisdiction over the
Administrative Case against petitioner.

Anent the third assignment of error, we likewise do not find

merit in petitioners proposition that he should not be liable,
as in the first place, he was not qualified to perform the
functions of appraiser/investigator because he lacked the
necessary training and expertise, and therefore, should not
have been found dishonest by the Board of Directors of
Islamic Bank [AIIBP] and the CSC. Petitioner himself admits
that the position of appraiser/inspector is one of the most

67

serious [and] sensitive job in the banking operations. He

should have been aware that accepting such a designation,
he is obliged to perform the task at hand by the exercise of
more than ordinary prudence. As appraiser/investigator, he
is expected, among others, to check the authenticity of the
documents presented by the borrower by comparing them
with the originals on file with the proper government office.
He should have made it sure that the technical descriptions
in the location plan on file with the Bureau of Lands of
Marikina, jibe with that indicated in the TCT of the collateral
offered by CAMEC, and that the mortgage in favor of the
Islamic Bank was duly annotated at the back of the copy of
the TCT kept by the Register of Deeds of Marikina. This,
petitioner failed to do, for which he must be held liable.
That he did not profit from his false report is of no moment.
Neither the fact that it was not deliberate or willful, detracts
from the nature of the act as dishonest. What is apparent is
he stated something to be a fact, when he really was not
sure that it was so.

WHEREFORE, above premises considered, the instant

Petition is DISMISSED, and the assailed Resolutions of the
Civil Service Commission are hereby AFFIRMED.

On 24 March 1999, Sawadjaans counsel notified the court a

quo of his change of address,[11] but apparently neglected
to notify his client of this fact. Thus, on 23 July 1999,
Sawadjaan, by himself, filed a Motion for New Trial[12] in the
Court of Appeals based on the following grounds: fraud,
accident, mistake or excusable negligence and newly
discovered evidence. He claimed that he had recently
discovered that at the time his employment was terminated,
the AIIBP had not yet adopted its corporate by-laws. He
attached a Certification[13] by the Securities and Exchange

Commission (SEC) that it was only on 27 May 1992 that the

AIIBP submitted its draft by-laws to the SEC, and that its
registration was being held in abeyance pending certain
corrections being made thereon. Sawadjaan argued that
since the AIIBP failed to file its by-laws within 60 days from
the passage of Rep. Act No. 6848, as required by Sec. 51 of
the said law, the bank and its stockholders had already
forfeited its franchise or charter, including its license to exist
and operate as a corporation,[14] and thus no longer have
the legal standing and personality to initiate an
administrative case.

Sawadjaans counsel subsequently adopted his motion, but

requested that it be treated as a motion for reconsideration.
[15] This motion was denied by the court a quo in its
Resolution of 15 December 1999.[16]

Still disheartened, Sawadjaan filed the present petition for

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

68

excessive penalty; and vi) in failing to consider newly

discovered evidence and reverse its decision accordingly.

Subsequently, petitioner Sawadjaan filed an Ex-parte

Urgent Motion for Additional Extension of Time to File a
Reply (to the Comments of Respondent Al-Amanah
Investment Bank of the Philippines),[17] Reply (to
Respondents Consolidated Comment,)[18] and Reply (to the
Alleged Comments of Respondent Al-Amanah Islamic Bank
of the Philippines).[19] On 13 October 2000, he informed
this Court that he had terminated his lawyers services, and,
by himself, prepared and filed the following: 1) Motion for
New Trial;[20] 2) Motion to Declare Respondents in Default
and/or Having Waived their Rights to Interpose Objection to
Petitioners Motion for New Trial;[21] 3) Ex-Parte Urgent
Motions to Punish Attorneys Amado D. Valdez, Elpidio J.
Vega, Alda G. Reyes, Dominador R. Isidoro, Jr., and Odilon A.
Diaz for Being in Contempt of Court & to Inhibit them from
Appearing in this Case Until they Can Present Valid Evidence
of Legal Authority;[22] 4) Opposition/Reply (to Respondent
AIIBPs Alleged Comment);[23] 5) Ex-Parte Urgent Motion to
Punish Atty. Reynaldo A. Pineda for Contempt of Court and
the Issuance of a Commitment Order/Warrant for His Arrest;
[24] 6) Reply/Opposition (To the Formal Notice of Withdrawal
of Undersigned Counsel as Legal Counsel for the
Respondent Islamic Bank with Opposition to Petitioners
Motion to Punish Undersigned Counsel for Contempt of Court
for the Issuance of a Warrant of Arrest);[25] 7) Memorandum
for Petitioner;[26] 8) Opposition to SolGens Motion for
Clarification with Motion for Default and/or Waiver of
Respondents to File their Memorandum;[27] 9) Motion for
Contempt of Court and Inhibition/Disqualification with
Opposition to OGCCs Motion for Extension of Time to File
Memorandum;[28] 10) Motion for Enforcement (In Defense
of the Rule of Law);[29] 11) Motion and Opposition (Motion
to Punish OGCCs Attorneys Amado D. Valdez, Efren B.

Gonzales, Alda G. Reyes, Odilon A. Diaz and Dominador R.

Isidoro, Jr., for Contempt of Court and the Issuance of a
Warrant for their Arrest; and Opposition to their Alleged
Manifestation and Motion Dated February 5, 2002);[30]
12) Motion for Reconsideration of Item (a) of Resolution
dated 5 February 2002 with Supplemental Motion for
Contempt of Court;[31] 13) Motion for Reconsideration of
Portion of Resolution Dated 12 March 2002;[32] 14) Ex-Parte
Urgent Motion for Extension of Time to File Reply
Memorandum (To: CSC and AIIBPs Memorandum);[33] 15)
Reply Memorandum (To: CSCs Memorandum) With Ex-Parte
Urgent Motion for Additional Extension of time to File Reply
Memorandum (To: AIIBPs Memorandum);[34] and 16) Reply
Memorandum (To: OGCCs Memorandum for Respondent
AIIBP).[35]

Petitioners efforts are unavailing, and we deny his petition

for its procedural and substantive flaws.

The general rule is that the remedy to obtain reversal or

modification of the judgment on the merits is appeal. This is
true even if the error, or one of the errors, ascribed to the
court rendering the judgment is its lack of jurisdiction over
the subject matter, or the exercise of power in excess
thereof, or grave abuse of discretion in the findings of fact
or of law set out in the decision.[36]

The records show that petitioners counsel received the

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

69

his motion for reconsideration, the petitioner filed his

petition for certiorari under Rule 65.

It is settled that a special civil action for certiorari will not lie
as a substitute for the lost remedy of appeal,[37] and
though there are instances[38] where the extraordinary
remedy of certiorari may be resorted to despite the
availability of an appeal,[39] we find no special reasons for
making out an exception in this case.

Even if we were to overlook this fact in the broader interests

of justice and treat this as a special civil action for certiorari
under Rule 65,[40] the petition would nevertheless be
dismissed for failure of the petitioner to show grave abuse of
discretion. Petitioners recurrent argument, tenuous at its
very best, is premised on the fact that since respondent
AIIBP failed to file its by-laws within the designated 60 days
from the effectivity of Rep. Act No. 6848, all proceedings
initiated by AIIBP and all actions resulting therefrom are a
patent nullity. Or, in his words, the AIIBP and its officers and
Board of Directors,

. . . [H]ave no legal authority nor jurisdiction to manage

much less operate the Islamic Bank, file administrative
charges and investigate petitioner in the manner they did
and allegedly passed Board Resolution No. 2309 on
December 13, 1993 which is null and void for lack of an (sic)
authorized and valid by-laws. The CIVIL SERVICE
COMMISSION was therefore affirming, erroneously, a null
and void Resolution No. 2309 dated December 13, 1993 of
the Board of Directors of Al-Amanah Islamic Investment
Bank of the Philippines in CSC Resolution No. 94-4483
dated August 11, 1994. A motion for reconsideration

thereof was denied by the CSC in its Resolution No. 95-2754

dated April 11, 1995. Both acts/resolutions of the CSC are
erroneous, resulting from fraud, falsifications and
misrepresentations of the alleged Chairman and CEO
Roberto F. de Ocampo and the alleged Director Farouk A.
Carpizo and his group at the alleged Islamic Bank.[41]

Nowhere in petitioners voluminous pleadings is there a

showing that the court a quo committed grave abuse of
discretion amounting to lack or excess of jurisdiction
reversible by a petition for certiorari. Petitioner already
raised the question of AIIBPs corporate existence and lack
of jurisdiction in his Motion for New Trial/Motion for
Reconsideration of 27 May 1997 and was denied by the
Court of Appeals. Despite the volume of pleadings he has
submitted thus far, he has added nothing substantial to his
arguments.

The AIIBP was created by Rep. Act No. 6848. It has a main
office where it conducts business, has shareholders,
corporate officers, a board of directors, assets, and
personnel. It is, in fact, here represented by the Office of
the Government Corporate Counsel, the principal law office
of government-owned corporations, one of which is
respondent bank.[42] At the very least, by its failure to
submit its by-laws on time, the AIIBP may be considered a
de facto corporation[43] whose right to exercise corporate
powers may not be inquired into collaterally in any private
suit to which such corporations may be a party.[44]

Moreover, a corporation which has failed to file its by-laws

within the prescribed period does not ipso facto lose its
powers as such. The SEC Rules on Suspension/Revocation of

70

the Certificate of Registration of Corporations,[45] details

the procedures and remedies that may be availed of before
an order of revocation can be issued. There is no showing
that such a procedure has been initiated in this case.

In any case, petitioners argument is irrelevant because this

case is not a corporate controversy, but a labor dispute; and
it is an employers basic right to freely select or discharge
its employees, if only as a measure of self-protection against
acts inimical to its interest.[46] Regardless of whether AIIBP
is a corporation, a partnership, a sole proprietorship, or a
sari-sari store, it is an undisputed fact that AIIBP is the
petitioners employer. AIIBP chose to retain his services
during its reorganization, controlled the means and methods
by which his work was to be performed, paid his wages, and,
eventually, terminated his services.[47]

And though he has had ample opportunity to do so, the

petitioner has not alleged that he is anything other than an
employee of AIIBP. He has neither claimed, nor shown, that
he is a stockholder or an officer of the corporation. Having
accepted employment from AIIBP, and rendered his services
to the said bank, received his salary, and accepted the
promotion given him, it is now too late in the day for
petitioner to question its existence and its power to
terminate his services. One who assumes an obligation to
an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no
corporation.[48]

Even if we were to consider the facts behind petitioner

Sawadjaans dismissal from service, we would be hard
pressed to find error in the decision of the AIIBP.

As appraiser/investigator, the petitioner was expected to

conduct an ocular inspection of the properties offered by
CAMEC as collaterals and check the copies of the certificates
of title against those on file with the Registry of Deeds. Not
only did he fail to conduct these routine checks, but he also
deliberately misrepresented in his appraisal report that after
reviewing the documents and conducting a site inspection,
he found the CAMEC loan application to be in order. Despite
the number of pleadings he has filed, he has failed to offer
an alternative explanation for his actions.

When he was informed of the charges against him and

directed to appear and present his side on the matter, the
petitioner sent instead a memorandum questioning the
fairness and impartiality of the members of the investigating
committee and refusing to recognize their jurisdiction over
him. Nevertheless, the investigating committee
rescheduled the hearing to give the petitioner another
chance, but he still refused to appear before it.

Thereafter, witnesses were presented, and a decision was

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

On appeal to the CSC, the Commission found that

Sawadjaans failure to perform his official duties greatly

71

prejudiced the AIIBP, for which he should be held

accountable. It held that:

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

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

Respondent SAWADJAANs reprehensible act is further

aggravated when he failed to check and verify from the
Registry of Deeds of Marikina the authenticity of the
property located at Mayamot, Antipolo, Rizal covered by TCT
No. N-130671 and which is one of the properties offered as
collateral by CAMEC for its P5 Million loan in 1988. If he only
visited and verified with the Register of Deeds of Marikina
the authenticity of TCT No. N-130671 he could have easily
discovered that TCT No. N-130671 is fake and the property
described therein non-existent.

resulted to the prejudice and substantial damage to the

ISLAMIC BANK for which he should be held liable for the
administrative offense of CONDUCT PREJUDICIAL TO THE
BEST INTEREST OF THE SERVICE.[49]

From the foregoing, we find that the CSC and the court a
quo committed no grave abuse of discretion when they
sustained Sawadjaans dismissal from service. Grave abuse
of discretion implies such capricious and whimsical exercise
of judgment as equivalent to lack of jurisdiction, or, in other
words, where the power is exercised in an arbitrary or
despotic manner by reason of passion or personal hostility,
and it must be so patent and gross as to amount to an
evasion of positive duty or to a virtual refusal to perform the
duty enjoined or to act at all in contemplation of law.[50]
The records show that the respondents did none of these;
they acted in accordance with the law.

WHEREFORE, the petition is DISMISSED. The Decision of the

Court of Appeals of 30 March 1999 affirming Resolutions No.
94-4483 and No. 95-2754 of the Civil Service Commission,
and its Resolution of 15 December 1999 are hereby
AFFIRMED. Costs against the petitioner.

SO ORDERED.

...

This notwithstanding, respondent cannot escape liability. As

adverted to earlier, his failure to perform his official duties

72

WILSON P. GAMBOA,

Petitioner,

G.R. No. 176579

Present:

- versus -

FINANCE SECRETARY MARGARITO B. TEVES, FINANCE

UNDERSECRETARY JOHN 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,

73

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 EXCHANGE COMMISSION, and
PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK
EXCHANGE,

Respondents.

BERSAMIN,

DEL CASTILLO,

ABAD,

VILLARAMA, JR.,

PEREZ,

CORONA, C.J.,

CARPIO,

MENDOZA, and

SERENO, JJ.

VELASCO, JR.,

LEONARDO-DE CASTRO,

BRION,

PERALTA,

74

PABLITO V. SANIDAD and

ARNO V. SANIDAD,

Petitioners-in-Intervention.

Promulgated:

June 28, 2011

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

75

DECISION
The Antecedents

CARPIO, J.:

The Case

This is an original petition for prohibition, injunction,

declaratory relief and declaration of nullity of the sale of
shares of stock of Philippine Telecommunications Investment
Corporation (PTIC) by the government of the Republic of the
Philippines to Metro Pacific Assets Holdings, Inc. (MPAH), an
affiliate of First Pacific Company Limited (First Pacific).

The facts, according to petitioner Wilson P. Gamboa, a

stockholder of Philippine Long Distance Telephone Company
(PLDT), are as follows:1

On 28 November 1928, the Philippine Legislature enacted

Act No. 3436 which granted PLDT a franchise and the right
to engage in telecommunications business. In 1969, General
Telephone and Electronics Corporation (GTE), an American
company and a major PLDT stockholder, sold 26 percent of
the outstanding common shares of PLDT to PTIC. In 1977,
Prime Holdings, Inc. (PHI) was incorporated by several
persons, including Roland Gapud and Jose Campos, Jr.
Subsequently, PHI became the owner of 111,415 shares of
stock of PTIC by virtue of three Deeds of Assignment
executed by PTIC stockholders Ramon Cojuangco and Luis
Tirso Rivilla. In 1986, the 111,415 shares of stock of PTIC
held by PHI were sequestered by the Presidential
Commission on Good Government (PCGG). The 111,415 PTIC
shares, which represent about 46.125 percent of the
outstanding capital stock of PTIC, were later declared by this
Court to be owned by the Republic of the Philippines.2

76

In 1999, First Pacific, a Bermuda-registered, Hong Kongbased investment firm, acquired the remaining 54 percent
of the outstanding capital stock of PTIC. On 20 November
2006, the Inter-Agency Privatization Council (IPC) of the
Philippine Government announced that it would sell the
111,415 PTIC shares, or 46.125 percent of the outstanding
capital stock of PTIC, through a public bidding to be
conducted on 4 December 2006. Subsequently, the public
bidding was reset to 8 December 2006, and only two
bidders, Parallax Venture Fund XXVII (Parallax) and Pan-Asia
Presidio Capital, submitted their bids. Parallax won with a
bid of P25.6 billion or US$510 million.

Thereafter, First Pacific announced that it would exercise its

right of first refusal as a PTIC stockholder and buy the
111,415 PTIC shares by matching the bid price of Parallax.
However, First Pacific failed to do so by the 1 February 2007
deadline set by IPC and instead, yielded its right to PTIC
itself which was then given by IPC until 2 March 2007 to buy
the PTIC shares. On 14 February 2007, First Pacific, through
its subsidiary, MPAH, entered into a Conditional Sale and
Purchase Agreement of the 111,415 PTIC shares, or 46.125
percent of the outstanding capital stock of PTIC, with the
Philippine Government for the price of P25,217,556,000 or
US$510,580,189. The sale was completed on 28 February
2007.

Since PTIC is a stockholder of PLDT, the sale by the

Philippine Government of 46.125 percent of PTIC shares is
actually an indirect sale of 12 million shares or about 6.3
percent of the outstanding common shares of PLDT. With the
sale, First Pacifics common shareholdings in PLDT increased
from 30.7 percent to 37 percent, thereby increasing the
common shareholdings of foreigners in PLDT to about 81.47
percent. This violates Section 11, Article XII of the 1987
Philippine Constitution which limits foreign ownership of the
capital of a public utility to not more than 40 percent.3

On the other hand, public respondents Finance Secretary

Margarito B. Teves, Undersecretary John P. Sevilla, and PCGG
Commissioner Ricardo Abcede allege the following relevant
facts:

On 9 November 1967, PTIC was incorporated and had since

engaged in the business of investment holdings. PTIC held
26,034,263 PLDT common shares, or 13.847 percent of the
total PLDT outstanding common shares. PHI, on the other
hand, was incorporated in 1977, and became the owner of
111,415 PTIC shares or 46.125 percent of the outstanding
capital stock of PTIC by virtue of three Deeds of Assignment
executed by Ramon Cojuangco and Luis Tirso Rivilla. In

77

1986, the 111,415 PTIC shares held by PHI were

sequestered by the PCGG, and subsequently declared by
this Court as part of the ill-gotten wealth of former President
Ferdinand Marcos. The sequestered PTIC shares were
reconveyed to the Republic of the Philippines in accordance
with this Courts decision4 which became final and
executory on 8 August 2006.

The Philippine Government decided to sell the 111,415 PTIC

shares, which represent 6.4 percent of the outstanding
common shares of stock of PLDT, and designated the InterAgency Privatization Council (IPC), composed of the
Department of Finance and the PCGG, as the disposing
entity. An invitation to bid was published in seven different
newspapers from 13 to 24 November 2006. On 20
November 2006, a pre-bid conference was held, and the
original deadline for bidding scheduled on 4 December 2006
was reset to 8 December 2006. The extension was published
in nine different newspapers.

During the 8 December 2006 bidding, Parallax Capital

Management LP emerged as the highest bidder with a bid of
P25,217,556,000. The government notified First Pacific, the
majority owner of PTIC shares, of the bidding results and
gave First Pacific until 1 February 2007 to exercise its right
of first refusal in accordance with PTICs Articles of
Incorporation. First Pacific announced its intention to match
Parallaxs bid.

On 31 January 2007, the House of Representatives (HR)

Committee on Good Government conducted a public hearing
on the particulars of the then impending sale of the 111,415
PTIC shares. Respondents Teves and Sevilla were among
those who attended the public hearing. The HR Committee
Report No. 2270 concluded that: (a) the auction of the
governments 111,415 PTIC shares bore due diligence,
transparency and conformity with existing legal procedures;
and (b) First Pacifics intended acquisition of the
governments 111,415 PTIC shares resulting in First Pacifics
100% ownership of PTIC will not violate the 40 percent
constitutional limit on foreign ownership of a public utility
since PTIC holds only 13.847 percent of the total
outstanding common shares of PLDT.5 On 28 February 2007,
First Pacific completed the acquisition of the 111,415 shares
of stock of PTIC.

Respondent Manuel V. Pangilinan admits the following facts:

(a) the IPC conducted a public bidding for the sale of
111,415 PTIC shares or 46 percent of the outstanding capital
stock of PTIC (the remaining 54 percent of PTIC shares was
already owned by First Pacific and its affiliates); (b) Parallax
offered the highest bid amounting to P25,217,556,000; (c)
pursuant to the right of first refusal in favor of PTIC and its
shareholders granted in PTICs Articles of Incorporation,
MPAH, a First Pacific affiliate, exercised its right of first
refusal by matching the highest bid offered for PTIC shares
on 13 February 2007; and (d) on 28 February 2007, the sale
was consummated when MPAH paid IPC P25,217,556,000
and the government delivered the certificates for the

78

111,415 PTIC shares. Respondent Pangilinan denies the

other allegations of facts of petitioner.

On 28 February 2007, petitioner filed the instant petition for

prohibition, injunction, declaratory relief, and declaration of
nullity of sale of the 111,415 PTIC shares. Petitioner claims,
among others, that the sale of the 111,415 PTIC shares
would result in an increase in First Pacifics common
shareholdings in PLDT from 30.7 percent to 37 percent, and
this, combined with Japanese NTT DoCoMos common
shareholdings in PLDT, would result to a total foreign
common shareholdings in PLDT of 51.56 percent which is
over the 40 percent constitutional limit.6 Petitioner asserts:

If and when the sale is completed, First Pacifics equity in

PLDT will go up from 30.7 percent to 37.0 percent of its
common or voting- stockholdings, x x x. Hence, the
consummation of the sale will put the two largest foreign
investors in PLDT First Pacific and Japans NTT DoCoMo,
which is the worlds largest wireless telecommunications
firm, owning 51.56 percent of PLDT common equity. x x x
With the completion of the sale, data culled from the official
website of the New York Stock Exchange (www.nyse.com)
showed that those foreign entities, which own at least five
percent of common equity, will collectively own 81.47
percent of PLDTs common equity. x x x

x x x as the annual disclosure reports, also referred to as

Form 20-K reports x x x which PLDT submitted to the New
York Stock Exchange for the period 2003-2005, revealed
that First Pacific and several other foreign entities breached
the constitutional limit of 40 percent ownership as early as
2003. x x x7

Petitioner raises the following issues: (1) whether the

consummation of the then impending sale of 111,415 PTIC
shares to First Pacific violates the constitutional limit on
foreign ownership of a public utility; (2) whether public
respondents committed grave abuse of discretion in
allowing the sale of the 111,415 PTIC shares to First Pacific;
and (3) whether the sale of common shares to foreigners in
excess of 40 percent of the entire subscribed common
capital stock violates the constitutional limit on foreign
ownership of a public utility.8

On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad

filed a Motion for Leave to Intervene and Admit Attached
Petition-in-Intervention. In the Resolution of 28 August 2007,
the Court granted the motion and noted the Petition-inIntervention.

79

Petitioners-in-intervention join petitioner Wilson Gamboa x

x x in seeking, among others, to enjoin and/or nullify the
sale by respondents of the 111,415 PTIC shares to First
Pacific or assignee. Petitioners-in-intervention claim that, as
PLDT subscribers, they have a stake in the outcome of the
controversy x x x where the Philippine Government is
completing the sale of government owned assets in [PLDT],
unquestionably a public utility, in violation of the nationality
restrictions of the Philippine Constitution.

(combined total of common and non-voting preferred

shares) of PLDT, a public utility.

The Ruling of the Court

The petition is partly meritorious.

The Issue

Petition for declaratory relief treated as petition for

mandamus

This Court is not a trier of facts. Factual questions such as

those raised by petitioner,9 which indisputably demand a
thorough examination of the evidence of the parties, are
generally beyond this Courts jurisdiction. Adhering to this
well-settled principle, the Court shall confine the resolution
of the instant controversy solely on the threshold and purely
legal issue of whether the term capital in Section 11,
Article XII of the Constitution refers to the total common
shares only or to the total outstanding capital stock

At the outset, petitioner is faced with a procedural barrier.

Among the remedies petitioner seeks, only the petition for
prohibition is within the original jurisdiction of this court,
which however is not exclusive but is concurrent with the
Regional Trial Court and the Court of Appeals. The actions
for declaratory relief,10 injunction, and annulment of sale
are not embraced within the original jurisdiction of the

80

Supreme Court. On this ground alone, the petition could

have been dismissed outright.

While direct resort to this Court may be justified in a petition

for prohibition,11 the Court shall nevertheless refrain from
discussing the grounds in support of the petition for
prohibition since on 28 February 2007, the questioned sale
was consummated when MPAH paid IPC P25,217,556,000
and the government delivered the certificates for the
111,415 PTIC shares.

However, since the threshold and purely legal issue on the

definition of the term capital in Section 11, Article XII of
the Constitution has far-reaching implications to the national
economy, the Court treats the petition for declaratory relief
as one for mandamus.12

In Salvacion v. Central Bank of the Philippines,13 the Court

treated the petition for declaratory relief as one for
mandamus considering the grave injustice that would result
in the interpretation of a banking law. In that case, which
involved the crime of rape committed by a foreign tourist
against a Filipino minor and the execution of the final

judgment in the civil case for damages on the tourists dollar

deposit with a local bank, the Court declared Section 113 of
Central Bank Circular No. 960, exempting foreign currency
deposits from attachment, garnishment or any other order
or process of any court, inapplicable due to the peculiar
circumstances of the case. The Court held that injustice
would result especially to a citizen aggrieved by a foreign
guest like accused x x x that would negate Article 10 of
the Civil Code which provides that in case of doubt in the
interpretation or application of laws, it is presumed that the
lawmaking body intended right and justice to prevail. The
Court therefore required respondents Central Bank of the
Philippines, the local bank, and the accused to comply with
the writ of execution issued in the civil case for damages
and to release the dollar deposit of the accused to satisfy
the judgment.

In Alliance of Government Workers v. Minister of Labor,14

the Court similarly brushed aside the procedural infirmity of
the petition for declaratory relief and treated the same as
one for mandamus. In Alliance, the issue was whether the
government unlawfully excluded petitioners, who were
government employees, from the enjoyment of rights to
which they were entitled under the law. Specifically, the
question was: Are the branches, agencies, subdivisions, and
instrumentalities of the Government, including government
owned or controlled corporations included among the four
employers under Presidential Decree No. 851 which are
required to pay their employees x x x a thirteenth (13th)
month pay x x x ? The Constitutional principle involved
therein affected all government employees, clearly justifying
a relaxation of the technical rules of procedure, and

81

certainly requiring the interpretation of the assailed

presidential decree.

In short, it is well-settled that this Court may treat a petition

for declaratory relief as one for mandamus if the issue
involved has far-reaching implications. As this Court held in
Salvacion:

The Court has no original and exclusive jurisdiction over a

petition for declaratory relief. However, exceptions to this
rule have been recognized. Thus, where the petition has farreaching implications and raises questions that should be
resolved, it may be treated as one for mandamus.15
(Emphasis supplied)

In the present case, petitioner seeks primarily the

interpretation of the term capital in Section 11, Article XII
of the Constitution. He prays that this Court declare that the
term capital refers to common shares only, and that such
shares constitute the sole basis in determining foreign

equity in a public utility. Petitioner further asks this Court to

declare any ruling inconsistent with such interpretation
unconstitutional.

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 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 threshhold legal
issue presented in this case.

The Court first encountered the issue on the definition of the

term capital in Section 11, Article XII of the Constitution in
the case of Fernandez v. Cojuangco, docketed as G.R. No.
157360.16 That case involved the same public utility (PLDT)
and substantially the same private respondents. Despite the
importance and novelty of the constitutional issue raised
therein and despite the fact that the petition involved a
purely legal question, the Court declined to resolve the case
on the merits, and instead denied the same for disregarding
the hierarchy of courts.17 There, petitioner Fernandez
assailed on a pure question of law the Regional Trial Courts
Decision of 21 February 2003 via a petition for review under

82

Rule 45. The Courts Resolution, denying the petition,

became final on 21 December 2004.

The instant petition therefore presents the Court with

another opportunity to finally settle this purely legal issue
which is of transcendental importance to the national
economy and a fundamental requirement to a faithful
adherence to our Constitution. The Court must forthwith
seize such opportunity, not only for the benefit of the
litigants, but more significantly for the benefit of the entire
Filipino people, to ensure, in the words of the Constitution,
a self-reliant and independent national economy effectively
controlled by Filipinos.18 Besides, in the light of vague and
confusing positions taken by government agencies on this
purely legal issue, present and future foreign investors in
this country deserve, as a matter of basic fairness, a
categorical ruling from this Court on the extent of their
participation in the capital of public utilities and other
nationalized businesses.

Despite its far-reaching implications to the national

economy, this purely legal issue has remained unresolved
for over 75 years since the 1935 Constitution. There is no
reason for this Court to evade this ever recurring
fundamental issue and delay again defining the term
capital, which appears not only in Section 11, Article XII of
the Constitution, but also in Section 2, Article XII on coproduction and joint venture agreements for the
development of our natural resources,19 in Section 7, Article
XII on ownership of private lands,20 in Section 10, Article XII
on the reservation of certain investments to Filipino

citizens,21 in Section 4(2), Article XIV on the ownership of

educational institutions,22 and in Section 11(2), Article XVI
on the ownership of advertising companies.23

Petitioner has locus standi

There is no dispute that petitioner is a stockholder of PLDT.

As such, he has the right to question the subject sale, which
he claims to violate the nationality requirement prescribed
in Section 11, Article XII of the Constitution. If the sale
indeed violates the Constitution, then there is a possibility
that PLDTs franchise could be revoked, a dire consequence
directly affecting petitioners interest as a stockholder.

More importantly, there is no question that the instant

petition raises matters of transcendental importance to the
public. The fundamental and threshold legal issue in this
case, involving the national economy and the economic
welfare of the Filipino people, far outweighs any perceived

83

impediment in the legal personality of the petitioner to bring

this action.

In Chavez v. PCGG,24 the Court upheld the right of a citizen

to bring a suit on matters of transcendental importance to
the public, thus:

In Taada v. Tuvera, the Court asserted that when the issue

concerns a public right and the object of mandamus is to
obtain the enforcement of a public duty, the people are
regarded as the real parties in interest; and because it is
sufficient that petitioner is a citizen and as such is interested
in the execution of the laws, he need not show that he has
any legal or special interest in the result of the action. In the
aforesaid case, the petitioners sought to enforce their right
to be informed on matters of public concern, a right then
recognized in Section 6, Article IV of the 1973 Constitution,
in connection with the rule that laws in order to be valid and
enforceable must be published in the Official Gazette or
otherwise effectively promulgated. In ruling for the
petitioners legal standing, the Court declared that the right
they sought to be enforced is a public right recognized by
no less than the fundamental law of the land.

Legaspi v. Civil Service Commission, while reiterating

Taada, further declared that when a mandamus

proceeding involves the assertion of a public right, the

requirement of personal interest is satisfied by the mere fact
that petitioner is a citizen and, therefore, part of the general
public which possesses the right.

Further, in Albano v. Reyes, we said that while expenditure

of public funds may not have been involved under the
questioned contract for the development, management and
operation of the Manila International Container Terminal,
public interest [was] definitely involved considering the
important role [of the subject contract] . . . in the economic
development of the country and the magnitude of the
financial consideration involved. We concluded that, as a
consequence, the disclosure provision in the Constitution
would constitute sufficient authority for upholding the
petitioners standing. (Emphasis supplied)

Clearly, since the instant petition, brought by a citizen,

involves matters of transcendental public importance, the
petitioner has the requisite locus standi.

Definition of the Term Capital in

Section 11, Article XII of the 1987 Constitution

84

Section 11, Article XII (National Economy and Patrimony) of

the 1987 Constitution mandates the Filipinization of public
utilities, to wit:

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)

The above provision substantially reiterates Section 5,

Article XIV of the 1973 Constitution, thus:

Section 5. 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 the capital of which
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 National Assembly when the public interest 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 the
capital thereof. (Emphasis supplied)

85

The foregoing provision in the 1973 Constitution reproduced

Section 8, Article XIV of the 1935 Constitution, viz:

Section 8. 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 other entities organized under the laws of
the Philippines sixty per centum of the capital of which is
owned by citizens of the Philippines, nor shall such
franchise, certificate, or authorization be exclusive in
character or for a longer period than fifty years. No franchise
or right shall be granted to any individual, firm, or
corporation, except under the condition that it shall be
subject to amendment, alteration, or repeal by the Congress
when the public interest so requires. (Emphasis supplied)

the spirit of nationalism which gripped the 1935

Constitutional Convention.25 The 1987 Constitution
provides for the Filipinization of public utilities by requiring
that any form of authorization for the operation of public
utilities should 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.26 The evident purpose of the citizenship
requirement is to prevent aliens from assuming control of
public utilities, which may be inimical to the national
interest.27 This specific provision explicitly reserves to
Filipino citizens control of public utilities, pursuant to an
overriding economic goal of the 1987 Constitution: to
conserve and develop our patrimony28 and ensure a selfreliant and independent national economy effectively
controlled by Filipinos.29

Any citizen or juridical entity desiring to operate a public

utility must therefore meet the minimum nationality
requirement prescribed in Section 11, Article XII of the
Constitution. Hence, for a corporation to be granted
authority to operate a public utility, at least 60 percent of its
capital must be owned by Filipino citizens.

Father Joaquin G. Bernas, S.J., a leading member of the 1986

Constitutional Commission, reminds us that the Filipinization
provision in the 1987 Constitution is one of the products of

86

The crux of the controversy is the definition of the term

capital. Does the term capital in Section 11, Article XII of
the Constitution refer to common shares or to the total
outstanding capital stock (combined total of common and
non-voting preferred shares)?

Petitioner submits that the 40 percent foreign equity

limitation in domestic public utilities refers only to common
shares because such shares are entitled to vote and it is
through voting that control over a corporation is exercised.
Petitioner posits that the term capital in Section 11, Article
XII of the Constitution refers to the ownership of common
capital stock subscribed and outstanding, which class of
shares alone, under the corporate set-up of PLDT, can vote
and elect members of the board of directors. It is
undisputed that PLDTs non-voting preferred shares are held
mostly by Filipino citizens.30 This arose from Presidential
Decree No. 217,31 issued on 16 June 1973 by then President
Ferdinand Marcos, requiring every applicant of a PLDT
telephone line to subscribe to non-voting preferred shares to
pay for the investment cost of installing the telephone
line.32

Petitioners-in-intervention basically reiterate petitioners

arguments and adopt petitioners definition of the term
capital.33 Petitioners-in-intervention allege that the
approximate foreign ownership of common capital stock of
PLDT x x x already amounts to at least 63.54% of the total

outstanding common stock, which means that foreigners

exercise significant control over PLDT, patently violating the
40 percent foreign equity limitation in public utilities
prescribed by the Constitution.

Respondents, on the other hand, do not offer any definition

of the term capital in Section 11, Article XII of the
Constitution. More importantly, private respondents
Nazareno and Pangilinan of PLDT do not dispute that more
than 40 percent of the common shares of PLDT are held by
foreigners.

In particular, respondent Nazarenos Memorandum,

consisting of 73 pages, harps mainly on the procedural
infirmities of the petition and the supposed violation of the
due process rights of the affected foreign common
shareholders. Respondent Nazareno does not deny
petitioners allegation of foreigners dominating the common
shareholdings of PLDT. Nazareno stressed mainly that the
petition seeks to divest foreign common shareholders
purportedly exceeding 40% of the total common
shareholdings in PLDT of their ownership over their shares.
Thus, the foreign natural and juridical PLDT shareholders
must be impleaded in this suit so that they can be heard.34
Essentially, Nazareno invokes denial of due process on
behalf of the foreign common shareholders.

87

While Nazareno does not introduce any definition of the

term capital, he states that among the factual assertions
that need to be established to counter petitioners
allegations is the uniform interpretation by government
agencies (such as the SEC), institutions and corporations
(such as the Philippine National Oil Company-Energy
Development Corporation or PNOC-EDC) of including both
preferred shares and common shares in controlling
interest in view of testing compliance with the 40%
constitutional limitation on foreign ownership in public
utilities.35

Similarly, respondent Manuel V. Pangilinan does not define

the term capital in Section 11, Article XII of the
Constitution. Neither does he refute petitioners claim of
foreigners holding more than 40 percent of PLDTs common
shares. Instead, respondent Pangilinan focuses on the
procedural flaws of the petition and the alleged violation of
the due process rights of foreigners. Respondent Pangilinan
emphasizes in his Memorandum (1) the absence of this
Courts jurisdiction over the petition; (2) petitioners lack of
standing; (3) mootness of the petition; (4) non-availability of
declaratory relief; and (5) the denial of due process rights.
Moreover, respondent Pangilinan alleges that the issue
should be whether owners of shares in PLDT as well as
owners of shares in companies holding shares in PLDT may
be required to relinquish their shares in PLDT and in those
companies without any law requiring them to surrender their
shares and also without notice and trial.

Respondent Pangilinan further asserts that Section 11,

[Article XII of the Constitution] imposes no nationality
requirement on the shareholders of the utility company as a
condition for keeping their shares in the utility company.
According to him, Section 11 does not authorize taking one
persons property (the shareholders stock in the utility
company) on the basis of another partys alleged failure to
satisfy a requirement that is a condition only for that other
partys retention of another piece of property (the utility
company being at least 60% Filipino-owned to keep its
franchise).36

The OSG, representing public respondents Secretary

Margarito Teves, Undersecretary John P. Sevilla,
Commissioner Ricardo Abcede, and Chairman Fe Barin, is
likewise silent on the definition of the term capital. In its
Memorandum37 dated 24 September 2007, the OSG also
limits its discussion on the supposed procedural defects of
the petition, i.e. lack of standing, lack of jurisdiction, noninclusion of interested parties, and lack of basis for
injunction. The OSG does not present any definition or
interpretation of the term capital in Section 11, Article XII
of the Constitution. The OSG contends that the petition
actually partakes of a collateral attack on PLDTs franchise
as a public utility, which in effect requires a full-blown trial
where all the parties in interest are given their day in
court.38

88

Respondent Francisco Ed Lim, impleaded as President and

Chief Executive Officer of the Philippine Stock Exchange
(PSE), does not also define the term capital and seeks the
dismissal of the petition on the following grounds: (1) failure
to state a cause of action against Lim; (2) the PSE allegedly
implemented its rules and required all listed companies,
including PLDT, to make proper and timely disclosures; and
(3) the reliefs prayed for in the petition would adversely
impact the stock market.

In the earlier case of Fernandez v. Cojuangco, petitioner

Fernandez who claimed to be a stockholder of record of
PLDT, contended that the term capital in the 1987
Constitution refers to shares entitled to vote or the common
shares. Fernandez explained thus:

The forty percent (40%) foreign equity limitation in public

utilities prescribed by the Constitution refers to ownership of
shares of stock entitled to vote, i.e., common shares,
considering that it is through voting that control is being
exercised. x x x

Obviously, the intent of the framers of the Constitution in

imposing limitations and restrictions on fully nationalized
and partially nationalized activities is for Filipino nationals to
be always in control of the corporation undertaking said
activities. Otherwise, if the Trial Courts ruling upholding
respondents arguments were to be given credence, it would
be possible for the ownership structure of a public utility
corporation to be divided into one percent (1%) common
stocks and ninety-nine percent (99%) preferred stocks.
Following the Trial Courts ruling adopting respondents
arguments, the common shares can be owned entirely by
foreigners thus creating an absurd situation wherein
foreigners, who are supposed to be minority shareholders,
control the public utility corporation.

xxxx

Thus, the 40% foreign ownership limitation should be

interpreted to apply to both the beneficial ownership and
the controlling interest.

89

xxxx

Clearly, therefore, the forty percent (40%) foreign equity

limitation in public utilities prescribed by the Constitution
refers to ownership of shares of stock entitled to vote, i.e.,
common shares. Furthermore, ownership of record of shares
will not suffice but it must be shown that the legal and
beneficial ownership rests in the hands of Filipino citizens.
Consequently, in the case of petitioner PLDT, since it is
already admitted that the voting interests of foreigners
which would gain entry to petitioner PLDT by the acquisition
of SMART shares through the Questioned Transactions is
equivalent to 82.99%, and the nominee arrangements
between the foreign principals and the Filipino owners is
likewise admitted, there is, therefore, a violation of Section
11, Article XII of the Constitution.

Parenthetically, the Opinions dated February 15, 1988 and

April 14, 1987 cited by the Trial Court to support the
proposition that the meaning of the word capital as used
in Section 11, Article XII of the Constitution allegedly refers
to the sum total of the shares subscribed and paid-in by the
shareholder and it allegedly is immaterial how the stock is
classified, whether as common or preferred, cannot stand in
the face of a clear legislative policy as stated in the FIA
which took effect in 1991 or way after said opinions were
rendered, and as clarified by the above-quoted
Amendments. In this regard, suffice it to state that as
between the law and an opinion rendered by an

administrative agency, the law indubitably prevails.

Moreover, said Opinions are merely advisory and cannot
prevail over the clear intent of the framers of the
Constitution.

In the same vein, the SECs construction of Section 11,

Article XII of the Constitution is at best merely advisory for it
is the courts that finally determine what a law means.39

On the other hand, respondents therein, Antonio O.

Cojuangco, Manuel V. Pangilinan, Carlos A. Arellano, Helen Y.
Dee, Magdangal B. Elma, Mariles Cacho-Romulo, Fr.
Bienvenido F. Nebres, Ray C. Espinosa, Napoleon L.
Nazareno, Albert F. Del Rosario, and Orlando B. Vea, argued
that the term capital in Section 11, Article XII of the
Constitution includes preferred shares since the Constitution
does not distinguish among classes of stock, thus:

90

16. The Constitution applies its foreign ownership limitation

on the corporations capital, without distinction as to
classes of shares. x x x

In this connection, the Corporation Code which was

already in force at the time the present (1987) Constitution
was drafted defined outstanding capital stock as follows:

Section 137. Outstanding capital stock defined. The term

outstanding capital stock, as used in this Code, means the
total shares of stock issued under binding subscription
agreements to subscribers or stockholders, whether or not
fully or partially paid, except treasury shares.

Section 137 of the Corporation Code also does not

distinguish between common and preferred shares, nor
exclude either class of shares, in determining the
outstanding capital stock (the capital) of a corporation.
Consequently, petitioners suggestion to reckon PLDTs
foreign equity only on the basis of PLDTs outstanding
common shares is without legal basis. The language of the
Constitution should be understood in the sense it has in
common use.

xxxx

17. But even assuming that resort to the proceedings of the

Constitutional Commission is necessary, there is nothing in
the Record of the Constitutional Commission (Vol. III) which
petitioner misleadingly cited in the Petition x x x which
supports petitioners view that only common shares should
form the basis for computing a public utilitys foreign equity.

xxxx

18. In addition, the SEC the government agency primarily

responsible for implementing the Corporation Code, and
which also has the responsibility of ensuring compliance
with the Constitutions foreign equity restrictions as regards
nationalized activities x x x has categorically ruled that
both common and preferred shares are properly considered
in determining outstanding capital stock and the nationality
composition thereof.40

91

We agree with petitioner and petitioners-in-intervention. The

term capital in Section 11, Article XII of the Constitution
refers only to shares of stock entitled to vote in the election
of directors, and thus in the present case only to common
shares,41 and not to the total outstanding capital stock
comprising both common and non-voting preferred shares.

The Corporation Code of the Philippines42 classifies shares

as common or preferred, thus:

Sec. 6. Classification of shares. - The shares of stock of stock

corporations may be divided into classes or series of shares,
or both, any of which classes or series of shares may have
such rights, privileges or restrictions as may be stated in the
articles of incorporation: Provided, That no share may be
deprived of voting rights except those classified and issued
as preferred or redeemable shares, unless otherwise
provided in this Code: Provided, further, That there shall
always be a class or series of shares which have complete
voting rights. Any or all of the shares or series of shares may
have a par value or have no par value as may be provided
for in the articles of incorporation: Provided, however, That
banks, trust companies, insurance companies, public
utilities, and building and loan associations shall not be
permitted to issue no-par value shares of stock.

Preferred shares of stock issued by any corporation may be

given preference in the distribution of the assets of the
corporation in case of liquidation and in the distribution of
dividends, or such other preferences as may be stated in the
articles of incorporation which are not violative of the
provisions of this Code: Provided, That preferred shares of
stock may be issued only with a stated par value. The Board
of Directors, where authorized in the articles of
incorporation, may fix the terms and conditions of preferred
shares of stock or any series thereof: Provided, That such
terms and conditions shall be effective upon the filing of a
certificate thereof with the Securities and Exchange
Commission.

Shares of capital stock issued without par value shall be

deemed fully paid and non-assessable and the holder of
such shares shall not be liable to the corporation or to its
creditors in respect thereto: Provided; That shares without
par value may not be issued for a consideration less than
the value of five (P5.00) pesos per share: Provided, further,
That the entire consideration received by the corporation for
its no-par value shares shall be treated as capital and shall
not be available for distribution as dividends.

A corporation may, furthermore, classify its shares for the

purpose of insuring compliance with constitutional or legal
requirements.

Except as otherwise provided in the articles of incorporation

and stated in the certificate of stock, each share shall be
equal in all respects to every other share.

92

Where the articles of incorporation provide for non-voting

shares in the cases allowed by this Code, the holders of such
shares shall nevertheless be entitled to vote on the following
matters:

Except as provided in the immediately preceding paragraph,

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

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other

disposition of all or substantially all of the corporate
property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another

corporation or other corporations;

7. Investment of corporate funds in another corporation or

business in accordance with this Code; and

Indisputably, one of the rights of a stockholder is the right to

participate in the control or management of the
corporation.43 This is exercised through his vote in the
election of directors because it is the board of directors that
controls or manages the corporation.44 In the absence of
provisions in the articles of incorporation denying voting
rights to preferred shares, preferred shares have the same
voting rights as common shares. However, preferred
shareholders are often excluded from any control, that is,
deprived of the right to vote in the election of directors and
on other matters, on the theory that the preferred
shareholders are merely investors in the corporation for
income in the same manner as bondholders.45 In fact,
under the Corporation Code only preferred or redeemable
shares can be deprived of the right to vote.46 Common
shares cannot be deprived of the right to vote in any
corporate meeting, and any provision in the articles of
incorporation restricting the right of common shareholders
to vote is invalid.47

8. Dissolution of the corporation.

93

Considering that common shares have voting rights which

translate to control, as opposed to preferred shares which
usually have no voting rights, the term capital in Section
11, Article XII of the Constitution refers only to common
shares. However, if the preferred shares also have the right
to vote in the election of directors, then the term capital
shall include such preferred shares because the right to
participate in the control or management of the corporation
is exercised through the right to vote in the election of
directors. In short, the term capital in Section 11, Article
XII of the Constitution refers only to shares of stock that can
vote in the election of directors.

MR. VILLEGAS. That is right.

This interpretation is consistent with the intent of the

framers of the Constitution to place in the hands of Filipino
citizens the control and management of public utilities. As
revealed in the deliberations of the Constitutional
Commission, capital refers to the voting stock or
controlling interest of a corporation, to wit:

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. In Sections 3, 9 and 15, the Committee

stated local or Filipino equity and foreign equity; namely, 6040 in Section 3, 60-40 in Section 9 and 2/3-1/3 in Section 15.

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. 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.

94

MR. VILLEGAS. Yes.48

MR. NOLLEDO. Thank you.

xxxx

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. 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. VILLEGAS. Yes, that is the understanding of the
Committee.

MR. NOLLEDO. Therefore, we need additional Filipino

capital?

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.

95

MR. AZCUNA. So if the Davide amendment is lost, we are

stuck with 60 percent of the capital to be owned by citizens.

MR. AZCUNA. We should not eliminate the phrase

controlling interest.

MR. VILLEGAS. That is right.

MR. BENGZON. In the case of stock corporations, it is

assumed.49 (Emphasis supplied)

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.

Thus, 60 percent of the capital assumes, or should result

in, controlling interest in the corporation. Reinforcing this
interpretation of the term capital, as referring to
controlling interest or shares entitled to vote, is the
definition of a Philippine national in the Foreign
Investments Act of 1991,50 to wit:

SEC. 3. Definitions. - As used in this Act:

96

In explaining the definition of a Philippine national, the

Implementing Rules and Regulations of the Foreign
Investments Act of 1991 provide:

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 nonFilipino 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. (Emphasis supplied)

b. Philippine national shall mean a citizen of the

Philippines or a domestic partnership or association wholly
owned by the 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 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 the Philippine
nationals; Provided, that where a corporation 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 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
corporation must be citizens of the Philippines, in order that
the corporation shall be considered a Philippine national.
The control test shall be applied for this purpose.

Compliance with the required Filipino ownership of a

corporation shall be determined on the basis of outstanding

97

capital stock whether fully paid or not, but only such stocks
which are generally entitled to vote are considered.

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. Thus, stocks, the voting rights of which have been
assigned or transferred to aliens cannot be considered held
by Philippine citizens or Philippine nationals.

Individuals or juridical entities not meeting the

aforementioned qualifications are considered as nonPhilippine nationals. (Emphasis supplied)

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].

Under Section 10, Article XII of the 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

98

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. Hence, the term capital in Section 11,
Article XII of the Constitution is also used in the same
context in numerous laws reserving certain areas of
investments to Filipino citizens.

To construe broadly the term capital as the total

outstanding capital stock, including both common and nonvoting preferred shares, grossly contravenes the intent and
letter of the Constitution that the State shall develop a selfreliant and independent national economy effectively
controlled by Filipinos. A broad definition unjustifiably
disregards who owns the all-important voting stock, which
necessarily equates to control of the public utility.

We shall illustrate the glaring anomaly in giving a broad

definition to the term capital. 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 (P1.00) 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. It also renders illusory the
State policy of an independent national economy effectively
controlled by Filipinos.

The example given is not theoretical but can be found in the

real world, and in fact exists in the present case.

Holders of PLDT preferred shares are explicitly denied of the

right to vote in the election of directors. PLDTs Articles of
Incorporation expressly state that the holders of Serial
Preferred Stock shall not be entitled to vote at any meeting
of the stockholders for the election of directors or for any
other purpose or otherwise participate in any action taken

99

by the corporation or its stockholders, or to receive notice of

any meeting of stockholders.51

On the other hand, holders of common shares are granted

the exclusive right to vote in the election of directors.
PLDTs Articles of Incorporation52 state that each holder of
Common Capital Stock shall have one vote in respect of
each share of such stock held by him on all matters voted
upon by the stockholders, and the holders of Common
Capital Stock shall have the exclusive right to vote for the
election of directors and for all other purposes.53

In short, only holders of common shares can vote in the

election of directors, meaning only common shareholders
exercise control over PLDT. Conversely, holders of preferred
shares, who have no voting rights in the election of
directors, do not have any control over PLDT. In fact, under
PLDTs Articles of Incorporation, holders of common shares
have voting rights for all purposes, while holders of
preferred shares have no voting right for any purpose
whatsoever.

It must be stressed, and respondents do not dispute, that

foreigners hold a majority of the common shares of PLDT. In
fact, based on PLDTs 2010 General Information Sheet
(GIS),54 which is a document required to be submitted
annually to the Securities and Exchange Commission,55
foreigners hold 120,046,690 common shares of PLDT
whereas Filipinos hold only 66,750,622 common shares.56 In
other words, foreigners hold 64.27% of the total number of
PLDTs common shares, while Filipinos hold only 35.73%.
Since holding a majority of the common shares equates to
control, it is clear that foreigners exercise control over PLDT.
Such amount of control unmistakably exceeds the allowable
40 percent limit on foreign ownership of public utilities
expressly mandated in Section 11, Article XII of the
Constitution.

Moreover, the Dividend Declarations of PLDT for 2009,57 as

submitted to the SEC, shows that per share the SIP58
preferred shares earn a pittance in dividends compared to
the common shares. PLDT declared dividends for the
common shares at P70.00 per share, while the declared
dividends for the preferred shares amounted to a measly
P1.00 per share.59 So the preferred shares not only cannot
vote in the election of directors, they also have very little
and obviously negligible dividend earning capacity
compared to common shares.

100

As shown in PLDTs 2010 GIS,60 as submitted to the SEC,

the par value of PLDT common shares is P5.00 per share,
whereas the par value of preferred shares is P10.00 per
share. In other words, preferred shares have twice the par
value of common shares but cannot elect directors and have
only 1/70 of the dividends of common shares. Moreover,
99.44% of the preferred shares are owned by Filipinos while
foreigners own only a minuscule 0.56% of the preferred
shares.61 Worse, preferred shares constitute 77.85% of the
authorized capital stock of PLDT while common shares
constitute only 22.15%.62 This undeniably shows that
beneficial interest in PLDT is not with the non-voting
preferred shares but with the common shares, blatantly
violating the constitutional requirement of 60 percent
Filipino control and Filipino beneficial ownership in a public
utility.

The legal and beneficial ownership of 60 percent of the

outstanding capital stock must rest in the hands of Filipinos
in accordance with the constitutional mandate. Full
beneficial ownership of 60 percent of the outstanding capital
stock, coupled with 60 percent of the voting rights, is
constitutionally required for the States grant of authority to
operate a public utility. The undisputed fact that the PLDT
preferred shares, 99.44% owned by Filipinos, are non-voting
and earn only 1/70 of the dividends that PLDT common
shares earn, grossly violates the constitutional requirement
of 60 percent Filipino control and Filipino beneficial
ownership of a public utility.

In short, Filipinos hold less than 60 percent of the voting

stock, and earn less than 60 percent of the dividends, of
PLDT. This directly contravenes the express command in
Section 11, Article XII of the Constitution that [n]o
franchise, certificate, or any other form of authorization for
the operation of a public utility shall be granted except to x
x x corporations x x x organized under the laws of the
Philippines, at least sixty per centum of whose capital is
owned by such citizens x x x.

To repeat, (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 exercise control
over PLDT; (2) Filipinos own only 35.73% of PLDTs common
shares, constituting a minority of the voting stock, and thus
do not exercise control over 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;63 (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%. This kind of ownership
and control of a public utility is a mockery of the
Constitution.

Incidentally, the fact that PLDT common shares with a par

value of P5.00 have a current stock market value of
P2,328.00 per share,64 while PLDT preferred shares with a

101

par value of P10.00 per share have a current stock market

value ranging from only P10.92 to P11.06 per share,65 is a
glaring confirmation by the market that control and
beneficial ownership of PLDT rest with the common shares,
not with the preferred shares.

Indisputably, construing the term capital in Section 11,

Article XII of the Constitution to include both voting and nonvoting shares will result in the abject surrender of our
telecommunications industry to foreigners, amounting to a
clear abdication of the States constitutional duty to limit
control of public utilities to Filipino citizens. Such an
interpretation certainly runs counter to the constitutional
provision reserving certain areas of investment to Filipino
citizens, such as the exploitation of natural resources as well
as the ownership of land, educational institutions and
advertising businesses. The Court should never open to
foreign control what the Constitution has expressly reserved
to Filipinos for that would be a betrayal of the Constitution
and of the national interest. The Court must perform its
solemn duty to defend and uphold the intent and letter of
the Constitution to ensure, in the words of the Constitution,
a self-reliant and independent national economy effectively
controlled by Filipinos.

natural resources and ownership of land, educational

institutions and advertising business, is self-executing. There
is no need for legislation to implement these self-executing
provisions of the Constitution. The rationale why these
constitutional provisions are self-executing was explained in
Manila Prince Hotel v. GSIS,66 thus:

x x x Hence, unless it is expressly provided that a legislative

act is necessary to enforce a constitutional mandate, the
presumption now is that all provisions of the constitution are
self-executing. If the constitutional provisions are treated as
requiring legislation instead of self-executing, the legislature
would have the power to ignore and practically nullify the
mandate of the fundamental law. This can be cataclysmic.
That is why the prevailing view is, as it has always been,
that

. . . in case of doubt, the Constitution should be considered

self-executing rather than non-self-executing. . . . Unless the
contrary is clearly intended, the provisions of the
Constitution should be considered self-executing, as a
contrary rule would give the legislature discretion to
determine when, or whether, they shall be effective. These
provisions would be subordinated to the will of the
lawmaking body, which could make them entirely
meaningless by simply refusing to pass the needed
implementing statute. (Emphasis supplied)

Section 11, Article XII of the Constitution, like other

provisions of the Constitution expressly reserving to Filipinos
specific areas of investment, such as the development of

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Thus, we have treated as self-executing the provisions in the

Bill of Rights on arrests, searches and seizures, the rights of
a person under custodial investigation, the rights of an
accused, and the privilege against self-incrimination. It is
recognized that legislation is unnecessary to enable courts
to effectuate constitutional provisions guaranteeing the
fundamental rights of life, liberty and the protection of
property. The same treatment is accorded to constitutional
provisions forbidding the taking or damaging of property for
public use without just compensation. (Emphasis supplied)
In Manila Prince Hotel, even the Dissenting Opinion of then
Associate Justice Reynato S. Puno, later Chief Justice, agreed
that constitutional provisions are presumed to be selfexecuting. Justice Puno stated:

Courts as a rule consider the provisions of the Constitution

as self-executing, rather than as requiring future legislation
for their enforcement. The reason is not difficult to discern.
For if they are not treated as self-executing, the mandate of
the fundamental law ratified by the sovereign people can be
easily ignored and nullified by Congress. Suffused with
wisdom of the ages is the unyielding rule that legislative
actions may give breath to constitutional rights but
congressional inaction should not suffocate them.

Thus, in numerous cases,67 this Court, even in the absence

of implementing legislation, applied directly the provisions
of the 1935, 1973 and 1987 Constitutions limiting land
ownership to Filipinos. In Soriano v. Ong Hoo,68 this Court
ruled:

x x x As the Constitution is silent as to the effects or

consequences of a sale by a citizen of his land to an alien,

103

and as both the citizen and the alien have violated the law,
none of them should have a recourse against the other, and
it should only be the State that should be allowed to
intervene and determine what is to be done with the
property subject of the violation. We have said that what the
State should do or could do in such matters is a matter of
public policy, entirely beyond the scope of judicial authority.
(Dinglasan, et al. vs. Lee Bun Ting, et al., 6 G. R. No. L-5996,
June 27, 1956.) While the legislature has not definitely
decided what policy should be followed in cases of violations
against the constitutional prohibition, courts of justice
cannot go beyond by declaring the disposition to be null and
void as violative of the Constitution. x x x (Emphasis
supplied)

determine who will effectively control the national economy,

Filipinos or foreigners. This Court cannot allow such an
absurd interpretation of the Constitution.

To treat Section 11, Article XII of the Constitution as not selfexecuting would mean that since the 1935 Constitution, or
over the last 75 years, not one of the constitutional
provisions expressly reserving specific areas of investments
to corporations, at least 60 percent of the capital of which
is owned by Filipinos, was enforceable. In short, the framers
of the 1935, 1973 and 1987 Constitutions miserably failed to
effectively reserve to Filipinos specific areas of investment,
like the operation by corporations of public utilities, the
exploitation by corporations of mineral resources, the
ownership by corporations of real estate, and the ownership
of educational institutions. All the legislatures that convened
since 1935 also miserably failed to enact legislations to
implement these vital constitutional provisions that

Under Section 17(4)70 of the Corporation Code, the SEC has

the regulatory function to reject or disapprove the Articles of
Incorporation of any corporation where the required
percentage of ownership of the capital stock to be owned by
citizens of the Philippines has not been complied with as
required by existing laws or the Constitution. Thus, the SEC
is the government agency tasked with the statutory duty to
enforce the nationality requirement prescribed in Section
11, Article XII of the Constitution on the ownership of public
utilities. This Court, in a petition for declaratory relief that is
treated as a petition for mandamus as in the present case,
can direct the SEC to perform its statutory duty under the
law, a duty that the SEC has apparently unlawfully

This Court has held that the SEC has both regulatory and
adjudicative functions.69 Under its regulatory functions,
the SEC can be compelled by mandamus to perform its
statutory duty when it unlawfully neglects to perform the
same. Under its adjudicative or quasi-judicial functions, the
SEC can be also be compelled by mandamus to hear and
decide a possible violation of any law it administers or
enforces when it is mandated by law to investigate such
violation.

104

neglected to do based on the 2010 GIS that respondent

PLDT submitted to the SEC.

Under Section 5(m) of the Securities Regulation Code,71 the

SEC is vested with the power and function to suspend or
revoke, after proper notice and hearing, the franchise or
certificate of registration of corporations, partnerships or
associations, upon any of the grounds provided by law. The
SEC is mandated under Section 5(d) of the same Code with
the power and function to investigate x x x the activities
of persons to ensure compliance with the laws and
regulations that SEC administers or enforces. The GIS that
all corporations are required to submit to SEC annually
should put the SEC on guard against violations of the
nationality requirement prescribed in the Constitution and
existing laws. This Court can compel the SEC, in a petition
for declaratory relief that is treated as a petition for
mandamus as in the present case, to hear and decide a
possible violation of Section 11, Article XII of the
Constitution in view of the ownership structure of PLDTs
voting shares, as admitted by respondents and as stated in
PLDTs 2010 GIS that PLDT submitted to SEC.

capital in determining the extent of allowable foreign

ownership in respondent Philippine Long Distance Telephone
Company, and if there is a violation of Section 11, Article XII
of the Constitution, to impose the appropriate sanctions
under the law.

SO ORDERED.

WHEREFORE, we PARTLY GRANT the petition and rule that

the term capital in Section 11, Article XII of the 1987
Constitution refers only to shares of stock entitled to vote in
the election of directors, and thus in the present case only
to common shares, and not to the total outstanding capital
stock (common and non-voting preferred shares).
Respondent Chairperson of the Securities and Exchange
Commission is DIRECTED to apply this definition of the term

105

G.R. No. L-33172

October 18, 1979

ERNESTO CEASE, CECILIA CEASE, MARION CEASE, TERESA

CEASE-LACEBAL and the F.L. CEASE PLANTATION CO., INC. as
Trustee of properties of the defunct TIAONG MILLING &
PLANTATION CO., petitioners,
vs.
HONORABLE COURT OF APPEALS, (Special Seventh Division),
HON. MANOLO L. MADDELA, Presiding Judge, Court of First
Instance of Quezon, BENJAMIN CEASE and FLORENCE CEASE,
respondents.

GUERRERO, J:

Appeal by certiorari from the decision of the Court of

Appeals in CA-G.R. No. 45474, entitled "Ernesto Cease, et al.
vs. Hon. Manolo L. Maddela, Judge of the Court of First
Instance of Quezon, et al." 1 which dismissed the petition for
certiorari, mandamus, and prohibition instituted by the
petitioners against the respondent judge and the private
respondents.

The antecedents of the case, as found by the appellate

court, are as follows:

IT RESULTING: That the antecedents are not difficult to

understand; sometime in June 1908, one Forrest L. Cease
common predecessor in interest of the parties together with
five (5) other American citizens organized the Tiaong Milling
and Plantation Company and in the course of its corporate
existence the company acquired various properties but at
the same time all the other original incorporators were
bought out by Forrest L. Cease together with his children
namely Ernest, Cecilia, Teresita, Benjamin, Florence and one
Bonifacia Tirante also considered a member of the family;
the charter of the company lapsed in June 1958; but
whether there were steps to liquidate it, the record is silent;
on 13 August 1959, Forrest L. Cease died and by
extrajudicial partition of his shares, among the children, this
was disposed of on 19 October 1959; it was here where the
trouble among them came to arise because it would appear
that Benjamin and Florence wanted an actual division while
the other children wanted reincorporation; and proceeding
on that, these other children Ernesto, Teresita and Cecilia
and aforementioned other stockholder Bonifacia Tirante
proceeded to incorporate themselves into the F.L. Cease
Plantation Company and registered it with the Securities and
Exchange Commission on 9 December, 1959; apparently in
view of that, Benjamin and Florence for their part initiated a
Special Proceeding No. 3893 of the Court of First Instance of
Tayabas for the settlement of the estate of Forest L. Cease
on 21 April, 1960 and one month afterwards on 19 May
1960 they filed Civil Case No. 6326 against Ernesto, Teresita
and Cecilia Cease together with Bonifacia Tirante asking
that the Tiaong Milling and Plantation Corporation be
declared Identical to F.L. Cease and that its properties be
divided among his children as his intestate heirs; this Civil
Case was resisted by aforestated defendants and
notwithstanding efforts of the plaintiffs to have the
properties placed under receivership, they were not able to
succeed because defendants filed a bond to remain as they
have remained in possession; after that and already, during

106

the pendency of Civil Case No. 6326 specifically on 21 May,

1961 apparently on the eve of the expiry of the three (3)
year period provided by the law for the liquidation of
corporations, the board of liquidators of Tiaong Milling
executed an assignment and conveyance of properties and
trust agreement in favor of F.L. Cease Plantation Co. Inc. as
trustee of the Tiaong Milling and Plantation Co. so Chat upon
motion of the plaintiffs trial Judge ordered that this alleged
trustee be also included as party defendant; now this being
the situation, it will be remembered that there were thus
two (2) proceedings pending in the Court of First Instance of
Quezon namely Civil Case No. 6326 and Special Proceeding
No. 3893 but both of these were assigned to the Honorable
Respondent Judge Manolo L. Maddela p. 43 and the case
was finally heard and submitted upon stipulation of facts pp,
34-110, rollo; and trial Judge by decision dated 27 December
1969 held for the plaintiffs Benjamin and Florence, the
decision containing the following dispositive part:

VIEWED IN THE LIGHT OF ALL THE FOREGOING, judgment is

hereby rendered in favor of plaintiffs and against the
defendants declaring that:

hereby set aside as improper and illegal for the purposes

and effect that it was intended and, therefore, null and void;

3)
That F.L. Cease Plantation Company is removed as
'Trustee for interest against the estate and essential to the
protection of plaintiffs' rights and is hereby ordered to
deliver and convey all the properties and assets of the
defunct Tiaong Milling now under its name, custody and
control to whomsoever be appointed as Receiver disqualifying and of the parties herein - the latter to act
accordingly upon proper assumption of office; and

4)
Special Proceedings No. 3893 for administration is
terminated and dismissed; the instant case to proceed but
on issues of damages only and for such action inherently
essential for partition.

SO ORDERED.

Lucena City, December 27, 1969., pp. 122-a-123, rollo.

1)
The assets or properties of the defunct Tiaong Milling
and Plantation Company now appearing under the name of
F.L. Cease Plantation Company as Trustee, is the estate also
of the deceased Forrest L. Cease and ordered divided, share
and share alike, among his six children the plaintiffs and the
defendants in accordance with Rule 69, Rules of Court;

2)
The Resolution to Sell dated October 12, 1959 and
the Transfer and Conveyance with Trust Agreement is

upon receipt of that, defendants there filled a notice of

appeal p. 129, rollo together with an appeal bond and a
record on appeal but the plaintiffs moved to dismiss the
appeal on the ground that the judgment was in fact
interlocutory and not appealable p. 168 rollo and this
position of defendants was sustained by trial Judge, His
Honor ruling that

107

IN VIEW OF THE FOREGOING, the appeal interposed by

plaintiffs is hereby dismissed as premature and the Record
on Appeal is necessarily disapproved as improper at this
stage of the proceedings.

SO ORDERED.

Lucena City, April 27, 1970.

and so it was said defendants brought the matter first to the

Supreme Court, on mandamus on 20 May, 1970 to compel
the appeal and certiorari and prohibition to annul the order
of 27 April, 1970 on the ground that the decision was
"patently erroneous" p. 16, rollo; but the Supreme Court
remanded the case to this Court of Appeals by resolution of
27 May 1970, p. 173, and this Court of Appeals on 1 July
1970 p. 175 dismissed the petition so far as the mandamus
was concerned taking the view that the decision sought to
be appealed dated 27 December, 1969 was interlocutory
and not appealable but on motion for reconsideration of
petitioners and since there was possible merit so far as its
prayer for certiorari and prohibition was concerned, by
resolution of the Court on 19 August, 1970, p. 232, the
petition was permitted to go ahead in that capacity; and it is
the position of petitioners that the decision of 27 December,
1969 as well as the order of 27 April, 1970 suffered of
certain fatal defects, which respondents deny and on their
part raise the preliminary point that this Court of Appeals
has no authority to give relief to petitioners because not

in aid of its appellate jurisdiction,

and that the questions presented cannot be raised for the

first time before this Court of Appeals;

Respondent Court of Appeals in its decision promulgated

December 9, 1970 dismissed the petition with costs against
petitioners, hence the present petition to this Court on the
following assignment of errors:

THE COURT OF APPEALS ERRED -

I.
IN SANCTIONING THE WRONGFUL EXERCISE OF
JURISDICTION BEYOND THE LIMITS OF AUTHORITY
CONFERRED BY LAW UPON THE LOWER COURT, WHEN IT
PROCEEDED TO HEAR, ADJUDGE AND ADJUDICATE -

(a)
Special Proceedings No. 3893 for the settlement of
the Estate of Forrest L. Cease, simultaneously and
concurrently with -

(b)
Civil Case No. 6326, wherein the lower Court ordered
Partition under Rule 69, Rules of Court -

THE ISSUE OF LEGAL OWNERSHIP OF THE PROPERTIES

COMMONLY INVOLVED IN BOTH ACTIONS HAVING BEEN
RAISED AT THE OUTSET BY THE TIAONG MILLING AND
PLANTATION COMPANY, AS THE REGISTERED OWNER OF
SUCH PROPERTIES UNDER ACT 496.

108

II.
IN AFFIRMING - UNSUPPORTED BY ANY EVIDENCE
WHATSOEVER NOR CITATION OF ANY LAW TO JUSTIFY - THE
UNWARRANTED CONCLUSION THAT SUBJECT PROPERTIES,
FOUND BY THE LOWER COURT AND THE COURT OF APPEALS
AS ACTUALLY REGISTERED IN THE NAME OF PETITIONER
CORPORATION AND/OR ITS PREDECESSOR IN INTEREST, THE
TIAONG MILLING AND PLANTATION COMPANY, DURING ALL
THE 50 YEARS OF ITS CORPORATE EXISTENCE "ARE ALSO
PROPERTIES OF THE ESTATE OF FOREST L. CEASE."

III.
IN AFFIRMING THE ARBITRARY CONCLUSION OF THE
LOWER COURT THAT ITS DECISION OF DECEMBER 27,1969
IS AN "INTERLUCUTORY DECISION." IN DISMISSED NG THE
PETITION FOR WRIT OF MANDAMUS, AND IN AFFIRMING THE
MANIFESTLY UNJUST JUDGMENT RENDERED WHICH
CONTRADICTS THE FINDINGS OF ULTIMATE FACTS THEREIN
CONTAINED.

During the period that ensued after the filing in this Court of
the respective briefs and the subsequent submission of the
case for decision, some incidents had transpired, the
summary of which may be stated as follows:

1.
Separate from this present appeal, petitioners filed a
petition for certiorari and prohibition in this Court, docketed
as G.R. No. L-35629 (Ernesto Cease, et al. vs. Hon. Manolo L.
Maddela, et al.) which challenged the order of respondent
judge dated September 27, 1972 appointing his Branch
Clerk of Court, Mr. Eleno M. Joyas, as receiver of the
properties subject of the appealed civil case, which order,
petitioners saw as a virtual execution of the lower court's

judgment (p. 92, rollo). In Our resolution of November 13,

1972, issued in G.R. No. L-35629, the petition was denied
since respondent judge merely appointed an auxilliary
receiver for the preservation of the properties as well as for
the protection of the interests of all parties in Civil Case No.
6326; but at the same time, We expressed Our displeasure
in the appointment of the branch clerk of court or any other
court personnel for that matter as receiver. (p. 102, rollo).

2.
Meanwhile, sensing that the appointed receiver was
making some attempts to take possession of the properties,
petitioners filed in this present appeal an urgent petition to
restrain proceedings in the lower court. We resolved the
petition on January 29, 1975 by issuing a corresponding
temporary restraining order enjoining the court a quo from
implementing its decision of December 27, 1969, more
particularly, the taking over by a receiver of the properties
subject of the litigation, and private respondents Benjamin
and Florence Cease from proceeding or taking any action on
the matter until further orders from this Court (pp. 99-100,
rollo). Private respondents filed a motion for reconsideration
of Our resolution of January 29, 1975. After weighing the
arguments of the parties and taking note of Our resolution in
G.R. No. L-35629 which upheld the appointment of a
receiver, We issued another resolution dated April 11, 1975
lifting effective immediately Our previous temporary
restraining order which enforced the earlier resolution of
January 29, 1975 (pp. 140-141, rollo).

3.
On February 6, 1976, private respondents filed an
urgent petition to restrain proceedings below in view of the
precipitate replacement of the court appointed receiver
Mayor Francisco Escueta (vice Mr. Eleno M. Joyas) and the
appointment of Mr. Guillermo Lagrosa on the eve of

109

respondent Judge Maddela's retirement (p. 166, rollo). The

urgent petition was denied in Our resolution of February 18,
1976 (p. 176, rollo).

4.
Several attempts at a compromise agreement failed
to materialize. A Tentative Compromise Agreement dated
July 30, 1975 was presented to the Court on August 6, 1976
for the signature of the parties, but respondents
"unceremoniously" repudiated the same by leaving the
courtroom without the permission of the court (Court of First
Instance of Quezon, Branch 11) as a result of which
respondents and their counsel were cited for contempt (p.
195, 197, rollo) that respondents' reason for the repudiation
appears to be petitioners' failure to render an audited
account of their administration covering the period from
May 31, 1961 up to January 29, 1974, plus the inclusion of a
provision on waiver and relinquishment by respondents of
whatever rights that may have accrued to their favor by
virtue of the lower court's decision and the affirmative
decision of the appellate court.

We go now to the alleged errors committed by the

respondent Court of Appeals.

As can be gleaned from petitioners' brief and the petition

itself, two contentions underlie the first assigned error. First,
petitioners argue that there was an irregular and arbitrarte
termination and dismissal of the special proceedings for
judicial administration simultaneously ordered in the lower
court . s decision in Civil Case No. 6326 adjudicating the
partition of the estate, without categorically, reasoning the
opposition to the petition for administration Second, that the
issue of ownership had been raised in the lower court when

Tiaong Milling asserted title over the properties registered in

its corporate name adverse to Forrest L. Cease or his estate,
and that the said issue was erroneously disposed of by the
trial court in the partition proceedings when it concluded
that the assets or properties of the defunct company is also
the estate of the deceased proprietor.

The propriety of the dismissal and termination of the special

proceedings for judicial administration must be affirmed in
spite of its rendition in another related case in view of the
established jurisprudence which favors partition when
judicial administration become, unnecessary. As observed
by the Court of Appeals, the dismissal at first glance is
wrong, for the reason that what was actually heard was Civil
Case No. 6326. The technical consistency, however, it is far
less importance than the reason behind the doctrinal rule
against placing an estate under administration. Judicial
rulings consistently hold the view that where partition is
possible, either judicial or extrajudicial, the estate should
not be burdened with an administration proceeding without
good and compelling reason. When the estate has no
creditors or pending obligations to be paid, the beneficiaries
in interest are not bound to submit the property to judicial
administration which is always long and costly, or to apply
for the appointment of an administrator by the court,
especially when judicial administration is unnecessary and
superfluous. Thus -

When a person dies without leaving pending obligations to

be paid, his heirs, whether of age or not, are bound to
submit the property to a judicial administration, which is
always long and costly, or to apply for the appointment of
an administrator by the court. It has been uniformly held
that in such case the judicial administration and the

110

appointment of an administrator are superfluous and

unnecessary proceedings (Ilustre vs. Alaras Frondosa, 17
Phil., 321; Malahacan vs. Ignacio, 19 Phil, 434; Bondad vs.
Bondad, 34 Phil., 232; Baldemor vs. Malangyaon, 34 Phil.,
367; Fule vs. Fule, 46 Phil., 317). Syllabus, Intestate estate
of the deceased Luz Garcia. Pablo G. Utulo vs. Leona Pasion
Viuda de Garcia, 66 Phil. 302.

Where the estate has no debts, recourse may be had to an

administration proceeding only if the heirs have good
reasons for not resorting to an action for partition. Where
partition is possible, either in or out of court, the estate
should not be burdened with an administration proceeding
without good and compelling reasons. (Intestate Estate of
Mercado vs. Magtibay, 96 Phil. 383)

In the records of this case, We find no indication of any

indebtedness of the estate. No creditor has come up to
charge the estate within the two-year period after the death
of Forrest L. Cease, hence, the presumption under Section 1,
Rule 74 that the estate is free from creditors must apply.
Neither has the status of the parties as legal heirs, much
less that of respondents, been raised as an issue. Besides,
extant in the records is the stipulation of the parties to
submit the pleadings and contents of the administration
proceedings for the cognizance of the trial judge in
adjudicating the civil case for partition (Respondents' Brief,
p, 20, rollo). As respondents observe, the parties in both
cases are the same, so are the properties involved; that
actual division is the primary objective in both actions; the
theory and defense of the respective parties are likewise
common; and that both cases have been assigned to the
same respondent judge. We feel that the unifying effect of
the foregoing circumstances invites the wholesome

exception to the structures of procedural rule, thus allowing,

instead, room for judicial flexibility. Respondent judge's
dismissal of the administration proceedings then, is a
judicious move, appreciable in today's need for effective and
speedy administration of justice. There being ample reason
to support the dismissal of the special proceedings in this
appealed case, We cannot see in the records any compelling
reason why it may not be dismissed just the same even if
considered in a separate action. This is inevitably certain
specially when the subject property has already been found
appropriate for partition, thus reducing the petition for
administration to a mere unnecessary solicitation.

The second point raised by petitioners in their first assigned

error is equally untenable. In effect, petitioners argue that
the action for partition should not have prospered in view of
the repudiation of the co-ownership by Tiaong Milling and
Plantation Company when, as early in the trial court, it
already asserted ownership and corporate title over the
properties adverse to the right of ownership of Forrest L.
Cease or his estate. We are not unmindful of the doctrine
relied upon by petitioners in Rodriguez vs. Ravilan, 17 Phil.
63 wherein this Court held that in an action for partition, it is
assumed that the parties by whom it is prosecuted are all
co-owners or co-proprietors of the property to be divided,
and that the question of common ownership is not to be
argued, not the fact as to whether the intended parties are
or are not the owners of the property in question, but only
as to how and in what manner and proportion the said
property of common ownership shall be distributed among
the interested parties by order of the Court. Consistent with
this dictum, it has been field that if any party to a suit for
partition denies the pro-indiviso character of the estate
whose partition is sought, and claims instead, exclusive title
thereto the action becomes one for recovery of property
cognizable in the courts of ordinary jurisdiction. 2

111

Petitioners' argument has only theoretical persuasion, to say

the least, rather apparent than real. It must be remembered
that when Tiaong Milling adduced its defense and raised the
issue of ownership, its corporate existence already
terminated through the expiration of its charter. It is clear in
Section 77 of Act No. 1459 (Corporation Law) that upon the
expiration of the charter period, the corporation ceases to
exist and is dissolved ipso facto except for purposes
connected with the winding up and liquidation. The provision
allows a three year, period from expiration of the charter
within which the entity gradually settles and closes its
affairs, disposes and convey its property and to divide its
capital stock, but not for the purpose of continuing the
business for which it was established. At this terminal stage
of its existence, Tiaong Milling may no longer persist to
maintain adverse title and ownership of the corporate assets
as against the prospective distributees when at this time it
merely holds the property in trust, its assertion of ownership
is not only a legal contradiction, but more so, to allow it to
maintain adverse interest would certainly thwart the very
purpose of liquidation and the final distribute loll of the
assets to the proper, parties.

We agree with the Court of Appeals in its reasoning that

substance is more important than form when it sustained
the dismissal of Special Proceedings No. 3893, thus -

a)
As to the dismissal of Special Proceedings No. 3893,
of course, at first glance, this was wrong, for the reason that
the case trial had been heard was Civil Case No. 6326; but
what should not be overlooked either is Chat respondent
Judge was the same Judge that had before him in his own
sala, said Special Proceedings No. 3893, p. 43 rollo, and the

parties to the present Civil Case No. 6326 had themselves

asked respondent Judge to take judicial notice of the same
and its contents page 34, rollo; it is not difficult to see that
when respondent Judge in par. 4 of the dispositive part of his
decision complained of, ordered that,

4)
Special Proceedings No. 3893 for administration is
terminated and dismissed; the instant case to proceed but
on issues of damages only and for such action inherently
essential or partition. p. 123, rollo,

in truth and in fact, His Honor was issuing that order also
within Civil Case No. 632 but in connection with Special
Proceedings No. 389:3: for substance is more important
Chan form, the contending par ties in both proceedings
being exactly the same, but not only this, let it not be
forgotten that when His Honor dismissed Special
Proceedings No. 3893, that dismissal precisely was a
dismissal that petitioners herein had themselves sought and
solicited from respondent Judge as petitioners themselves
are in their present petition pp. 5-6, rollo; this Court must
find difficulty in reconciling petitioners' attack with the fact
that it was they themselves that had insisted on that
dismissal; on the principle that not he who is favored but he
who is hurt by a judicial order is he only who should be
heard to complain and especially since extraordinary legal
remedies are remedies in extermies granted to parties ' who
have been the victims not merely of errors but of grave
wrongs, and it cannot be seen how one who got what he had
asked could be heard to claim that he had been the victim
of a wrong, petitioners should not now complain of an order
they had themselves asked in order to attack such an order
afterwards; if at all, perhaps, third parties, creditors, the
Bureau of Internal Revenue, might have been prejudiced,

112

and could have had the personality to attack that dismissal

of Special Proceedings No. 3893, but not petitioners herein,
and it is not now for this Court of Appeals to protect said
third persons who have not come to the Court below or
sought to intervene herein;

On the second assigned error, petitioners argue that no

evidence has been found to support the conclusion that the
registered properties of Tiaong Milling are also properties of
the estate of Forrest L. Cease; that on the contrary, said
properties are registered under Act No. 496 in the name of
Tiaong Milling as lawful owner and possessor for the last 50
years of its corporate existence.

We do not agree. In reposing ownership to the estate of

Forrest L. Cease, the trial court indeed found strong support,
one that is based on a well-entrenched principle of law. In
sustaining respondents' theory of "merger of Forrest L.
Cease and The Tiaong Milling as one personality", or that
"the company is only the business conduit and alter ego of
the deceased Forrest L. Cease and the registered properties
of Tiaong Milling are actually properties of Forrest L. Cease
and should be divided equally, share and share alike among
his six children, ... ", the trial court did aptly apply the
familiar exception to the general rule by disregarding the
legal fiction of distinct and separate corporate personality
and regarding the corporation and the individual member
one and the same. In shredding the fictitious corporate veil,
the trial judge narrated the undisputed factual premise,
thus:

another, in the course of its existence, it developed into a

close family corporation. The Board of Directors and
stockholders belong to one family the head of which Forrest
L. Cease always retained the majority stocks and hence the
control and management of its affairs. In fact, during the
reconstruction of its records in 1947 before the Security and
Exchange Commission only 9 nominal shares out of 300
appears in the name of his 3 eldest children then and
another person close to them. It is likewise noteworthy to
observe that as his children increase or perhaps become of
age, he continued distributing his shares among them
adding Florence, Teresa and Marion until at the time of his
death only 190 were left to his name. Definitely, only the
members of his family benefited from the Corporation.

The accounts of the corporation and therefore its operation,

as well as that of the family appears to be indistinguishable
and apparently joined together. As admitted by the
defendants (Manifestation of Compliance with Order of
March 7, 1963 [Exhibit "21"] the corporation 'never' had any
account with any banking institution or if any account was
carried in a bank on its behalf, it was in the name of Mr.
Forrest L. Cease. In brief, the operation of the Corporation is
merged with those of the majority stockholders, the latter
using the former as his instrumentality and for the exclusive
benefits of all his family. From the foregoing indication,
therefore, there is truth in plaintiff's allegation that the
corporation is only a business conduit of his father and an
extension of his personality, they are one and the same
thing. Thus, the assets of the corporation are also the estate
of Forrest L. Cease, the father of the parties herein who are
all legitimate children of full blood.

While the records showed that originally its incorporators

were aliens, friends or third-parties in relation of one to

113

A rich store of jurisprudence has established the rule known

as the doctrine of disregarding or piercing the veil of
corporate fiction. Generally, a corporation is invested by law
with a personality separate and distinct from that of the
persons composing it as well as from that of any other legal
entity to which it may be related. By virtue of this attribute,
a corporation may not, generally, be made to answer for
acts or liabilities of its stockholders or those of the legal
entities to which it may be connected, and vice versa. This
separate and distinct personality is, however, merely a
fiction created by law for convenience and to promote the
ends of justice (Laguna Transportation Company vs. Social
Security System, L-14606, April 28, 1960; La Campana
Coffee Factory, Inc. vs. Kaisahan ng mga Manggagawa sa La
Campana, L-5677, May 25, 1953). For this reason, it may not
be used or invoked for ends subversive of the policy and
purpose behind its creation (Emiliano Cano Enterprises, Inc.
vs. CIR, L-20502, Feb. 26, 1965) or which could not have
been intended by law to which it owes its being McConnel
vs. Court of Appeals, L- 10510, March 17, 1961, 1 SCRA
722). This is particularly true where the fiction is used to
defeat public convenience, justify wrong, protect fraud,
defend crime (Yutivo Sons Hardware Company vs. Court of
Tax Appeals, L-13203, Jan. 28, 1961, 1 SCRA 160), confuse
legitimate legal or judicial issues (R. F. Sugay & Co. vs.
Reyes, L-20451, Dec. 28, 1964), perpetrate deception or
otherwise circumvent the law (Gregorio Araneta, Inc. vs.
reason de Paterno, L-2886, Aug. 22, 1952, 49 O.G. 721). This
is likewise true where the corporate entity is being used as
an alter ego, adjunct, or business conduit for the sole
benefit of the stockholders or of another corporate entity
(McConnel vs. Court of Appeals, supra; Commissioner of
Internal Revenue vs. Norton Harrison Co., L-7618, Aug. 31,
1964).

In any of these cases, the notion of corporate entity will be

pierced or disregarded, and the corporation will be treated
merely as an association of persons or, where there are two
corporations, they will be merged as one, the one being
merely regarded as part or the instrumentality of the otter
(Koppel [Phil.] Inc. vs. Yatco, 77 Phil. 496, Yutivo Sons
Hardware Company vs. Court of Tax Appeals, supra).

So must the case at bar add to this jurisprudence. An

indubitable deduction from the findings of the trial court
cannot but lead to the conclusion that the business of the
corporation is largely, if not wholly, the personal venture of
Forrest L. Cease. There is not even a shadow of a showing
that his children were subscribers or purchasers of the
stocks they own. Their participation as nominal shareholders
emanated solely from Forrest L. Cease's gratuitous dole out
of his own shares to the benefit of his children and
ultimately his family.

Were we sustain the theory of petitioners that the trial court

acted in excess of jurisdiction or abuse of discretion
amounting to lack of jurisdiction in deciding Civil Case No.
6326 as a case for partition when the defendant therein,
Tiaong Milling and Plantation Company, Inc. as registered
owner asserted ownership of the assets and properties
involved in the litigation, which theory must necessarily be
based on the assumption that said assets and properties of
Tiaong Milling and Plantation Company, Inc. now appearing
under the name of F. L. Cease Plantation Company as
Trustee are distinct and separate from the estate of Forrest
L. Cease to which petitioners and respondents as legal heirs
of said Forrest L. Cease are equally entitled share and share
alike, then that legal fiction of separate corporate
personality shall have been used to delay and ultimately

114

deprive and defraud the respondents of their successional

rights to the estate of their deceased father. For Tiaong
Milling and Plantation Company shall have been able to
extend its corporate existence beyond the period of its
charter which lapsed in June, 1958 under the guise and
cover of F. L, Cease Plantation Company, Inc. as Trustee
which would be against the law, and as Trustee shall have
been able to use the assets and properties for the benefit of
the petitioners, to the great prejudice and defraudation. of
private respondents. Hence, it becomes necessary and
imperative to pierce that corporate veil.

ruling to this effect has been expressly reversed in the

Fuentebella case which, in our opinion, expresses the
correct view, considering that a decision or order directing
partition is not final because it leaves something more to be
done in the trial court for the complete disposition of the
case, namely, the appointment of commissioners, the
proceedings to be had before them, the submission of their
report which, according to law, must be set for hearing. In
fact, it is only after said hearing that the court may render a
final judgment finally disposing of the action (Rule 71,
section 7, Rules of Court). (1 SCRA at page 1193).

Under the third assigned error, petitioners claim that the

decision of the lower court in the partition case is not
interlocutory but rather final for it consists of final and
determinative dispositions of the contentions of the parties.
We find no merit in petitioners' stand.

It should be noted, however, that the said ruling in

Zaldarriaga as based on Fuentebella vs. Carrascoso, XIV
Lawyers Journal 305 (May 27, 1942), has been expressly
abandoned by the Court in Miranda vs. Court of Appeals, 71
SCRA 295; 331-333 (June 18, 1976) wherein Mr. Justice
Teehankee, speaking for the Court, laid down the following
doctrine:

Under the 1961 pronouncement and ruling of the Supreme

Court in Vda. de Zaldarriaga vs. Enriquez, 1 SCRA 1188 (and
the sequel case of Vda. de Zaldarriaga vs. Zaldarriaga, 2
SCRA 356), the lower court's dismissal of petitioners'
proposed appeal from its December 27, 1969 judgment as
affirmed by the Court of Appeals on the ground of
prematurity in that the judgment was not final but
interlocutory was in order. As was said in said case:

It is true that in Africa vs. Africa, 42 Phil. 934 and other

cases it was held - contrary to the rule laid down in Ron vs.
Mojica, 8 Phil. 328; Rodriguez vs. Ravilan, 17 Phil. 63 - that
in a partition case where defendant relies on the defense of
exclusive ownership, the action becomes one for title and
the decision or order directing partition is final, but the

The Court, however, deems it proper for the guidance of the

bench and bar to now declare as is clearly indicated from
the compelling reasons and considerations hereinabove
stated:

- that the Court considers the better rule to be that stated in

H. E. Heacock Co. vs. American Trading Co., to wit, that
where the primary purpose of a case is to ascertain and
determine who between plaintiff and defendant is the true
owner and entitled to the exclusive use of the disputed
property, "the judgment . . . rendered by the lower court [is]
a judgment on the merits as to those questions, and [that]
the order of the court for an accounting was based upon,

115

and is incidental to the judgment on the merits. That is to

say, that the judgment . . . [is] a final judgment ... that in
this kind of a case an accounting is a mere incident to the
judgment; that an appeal lies from the rendition of the
judgment as rendered ... "(as is widely held by a great
number of judges and members of the bar, as shown by the
cases so decided and filed and still pending with the Court)
for the fundamental reasons therein stated that "this is more
in harmony with the administration of justice and the spirit
and intent of the [Rules]. If on appeal the judgment of the
lower court is affirmed, it would not in the least work an
injustice to any of the legal rights of [appellee]. On the other
hand, if for any reason this court should reverse the
judgment of the lower court, the accounting would be a
waste of time and money, and might work a material injury
to the [appellant]; and

- that accordingly, the contrary ruling in Fuentebella vs.

Carrascoso which expressly reversed the Heacock case and
a line of similar decisions and ruled that such a decision for
recovery of property with accounting "is not final but merely
interlocutory and therefore not appealable" and subsequent
cases adhering to the same must be now in turn abandoned
and set aside.

Fuentebella adopted instead the opposite line of conflicting

decisions mostly in partition proceedings and exemplified by
Ron vs. Mojica 8 Phil. 928 (under the old Code of Civil
Procedure) that an order for partition of real property is not
final and appealable until after the actual partition of the
property as reported by the court appointed commissioners
and approved by the court in its judgment accepting the
report. lt must be especially noted that such rule governing
partitions is now so expressly provided and spelled out in

Rule 69 of the Rules of Court, with special reference to

Sections 1, 2, 3, 6, 7 and 11, to wit, that there must first be
a preliminar, order for partition of the real estate (section 2)
and where the parties-co-owners cannot agree, the court
appointed commissioners make a plan of actual partition
which must first be passed upon and accepted by the trial
court and embodied in a judgment to be rendered by it
(sections 6 and 11). In partition cases, it must be further
borne in mind that Rule 69, section 1 refers to "a person
having the right to compel the partition of real estate," so
that the general rule of partition that an appeal will not lie
until the partition or distribution proceedings are terminated
will not apply where appellant claims exclusive ownership of
the whole property and denies the adverse party's right to
any partition, as was the ruling in Villanueva vs. Capistrano
and Africa vs .Africa, supra, Fuentebellas express rehearsal
of these cases must likewise be deemed now also
abandoned in view of the Court's expressed preference for
the rationale of the Heacock case.

The Court's considered opinion is that imperative

considerations of public policy and of sound practice in the
courts and adherence to the constitutional mandate of
simplified, just, speedy and inexpensive determination of
every action call for considering such judgments for
recovery of property with accounting as final judgments
which are duly appealable (and would therefore become
final and executory if not appealed within the reglementary
period) with the accounting as a mere incident of the
judgment to be rendered during the course of the appeal as
provided in Rule 39, section 4 or to be implemented at the
execution stage upon final affirmance on appeal of the
judgment (as in Court of Industrial Relations unfair labor
practice cases ordering the reinstatement of the worker with
accounting, computation and payment of his backwages
less earnings elsewhere during his layoff) and that the only

116

reason given in Fuentebelia for the contrary ruling, viz, "the

general harm that would follow from throwing the door open
to multiplicity of appeals in a single case" of lesser import
and consequence. (Emphasis copied).

The miranda ruling has since then been applied as the new
rule by a unanimous Court in Valdez vs. Bagasao, 82 SCRA
22 (March 8, 1978).

If there were a valid genuine claim of Exclusive ownership of

the inherited properties on the part of petitioners to
respondents' action for partition, then under the Miranda
ruling, petitioners would be sustained, for as expressly held
therein " the general rule of partition that an appeal will not
lie until the partition or distribution proceedings are
terminated will not apply where appellant claims exclusive
ownership of the whole property and denies the adverse
party's right to any partition."

But this question has now been rendered moot and

academic for the very issue of exclusive ownership claimed
by petitioners to deny and defeat respondents' right to
partition - which is the very core of their rejected appeal has been squarely resolved herein against them, as if the
appeal had been given due course. The Court has herein
expressly sustained the trial court's findings, as affirmed by
the Court of Appeals, that the assets or properties of the
defunct company constitute the estate of the deceased
proprietor (supra at page 7) and the defunct company's
assertion of ownership of the properties is a legal
contradiction and would but thwart the liquidation and final
distribution and partition of the properties among the
parties hereof as children of their deceased father Forrest L.

Cease. There is therefore no further hindrance to effect the

partition of the properties among the parties in
implementation of the appealed judgment.

One last consideration. Parties are brothers and sisters, legal

heirs of their deceased father, Forrest L. Cease. By all rights
in law and jurisprudence, each is entitled to share and share
alike in the estate, which the trial court correctly ordained
and sustained by the appellate court. Almost 20 years have
lapsed since the filing of Special Proceedings No. 3893 for
the administration of the Estate of Forrest L. Cease and Civil
Case No. 6326 for liquidation and partition of the assets of
the defunct Tiaong Milling and Plantation Co., Inc. A
succession of receivers were appointed by the court to take,
keep in possession, preserve and manage properties of the
corporation which at one time showed an income of
P386,152.90 and expenses of P308,405.01 for the period
covering January 1, 1960 to August 31, 1967 as per
Summary of Operations of Commissioner for Finance
appointed by the Court (Brief for Respondents, p. 38). In the
meantime, ejectment cases were filed by and against the
heirs in connection with the properties involved, aggravating
the already strained relations of the parties. A prudent and
practical realization of these circumstances ought and must
constrain the parties to give each one his due in law and
with fairness and dispatch that their basic rights be enjoyed.
And by remanding this case to the court a quo for the actual
partition of the properties, the substantial rights of everyone
of the heirs have not been impaired, for in fact, they have
been preserved and maintained.

WHEREFORE, IN VIEW OF THE FOREGOING, the judgment

appealed from is hereby AFFIRMED with costs against the
petitioners.

117

NORTON and HARRISON COMPANY, respondent.

Office of the Solicitor General for petitioner.

Pio Joven for respondent.

PAREDES, J.:

This is an appeal interposed by the Commissioner of Internal

Revenue against the following judgment of the Court of Tax
Appeals:

IN VIEW OF THE FOREGOING, we find no legal basis to

support the assessment in question against petitioner. If at
all, the assessment should have been directed against
JACKBILT, the manufacturer. Accordingly, the decision
appealed from is reversed, and the surety bond filed to
guarantee payment of said assessment is ordered cancelled.
No pronouncement as to costs.

G.R. No. L-17618

August 31, 1964

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

Norton and Harrison is a corporation organized in 1911, (1)

to buy and sell at wholesale and retail, all kinds of goods,
wares, and merchandise; (2) to act as agents of
manufacturers in the United States and foreign countries;
and (3) to carry on and conduct a general wholesale and
retail mercantile establishment in the Philippines. Jackbilt is,
likewise, a corporation organized on February 16, 1948
primarily for the purpose of making, producing and
manufacturing concrete blocks. Under date of July 27, 1948.
Norton and Jackbilt entered into an agreement whereby
Norton was made the sole and exclusive distributor of

118

concrete blocks manufactured by Jackbilt. Pursuant to this

agreement, whenever an order for concrete blocks was
received by the Norton & Harrison Co. from a customer, the
order was transmitted to Jackbilt which delivered the
merchandise direct to the customer. Payment for the goods
is, however, made to Norton, which in turn pays Jackbilt the
amount charged the customer less a certain amount, as its
compensation or profit. To exemplify the sales procedures
adopted by the Norton and Jackbilt, the following may be
cited. In the case of the sale of 420 pieces of concrete
blocks to the American Builders on April 1, 1952, the
purchaser paid to Norton the sum of P189.00 the purchase
price. Out of this amount Norton paid Jackbilt P168.00, the
difference obviously being its compensation. As per records
of Jackbilt, the transaction was considered a sale to Norton.
It was under this procedure that the sale of concrete blocks
manufactured by Jackbilt was conducted until May 1, 1953,
when the agency agreement was terminated and a
management agreement between the parties was entered
into. The management agreement provided that Norton
would sell concrete blocks for Jackbilt, for a fixed monthly
fee of P2,000.00, which was later increased to P5,000.00.

During the existence of the distribution or agency

agreement, or on June 10, 1949, Norton & Harrison acquired
by purchase all the outstanding shares of stock of Jackbilt.
Apparently, due to this transaction, the Commissioner of
Internal Revenue, after conducting an investigation,
assessed the respondent Norton & Harrison for deficiency
sales tax and surcharges in the amount of P32,662.90,
making as basis thereof the sales of Norton to the Public. In
other words, the Commissioner considered the sale of
Norton to the public as the original sale and not the
transaction from Jackbilt. The period covered by the
assessment was from July 1, 1949 to May 31, 1953. As

Norton and Harrison did not conform with the assessment,

the matter was brought to the Court of Tax Appeals.

The Commissioner of Internal Revenue contends that since

Jackbilt was owned and controlled by Norton & Harrison, the
corporate personality of the former (Jackbilt) should be
disregarded for sales tax purposes, and the sale of Jackbilt
blocks by petitioner to the public must be considered as the
original sales from which the sales tax should be computed.
The Norton & Harrison Company contended otherwise
that is, the transaction subject to tax is the sale from Jackbilt
to Norton.

Wherefore, the parties respectfully pray that the foregoing

stipulation of facts be admitted and approved by this
Honorable Court, without prejudice to the parties adducing
other evidence to prove their case not covered by this
stipulation of facts. 1wph1.t

The majority of the Tax Court, in relieving Norton & Harrison

of liability under the assessment, made the following
observations:

The law applicable to the case is Section 186 of the National

Internal Revenue Code which imposes a percentage tax of
7% on every original sale of goods, wares or merchandise,
such tax to be based on the gross selling price of such
goods, wares or merchandise. The term "original sale" has
been defined as the first sale by every manufacturer,
producer or importer. (Sec. 5, Com. Act No. 503.)
Subsequent sales by persons other than the manufacturer,
producer or importer are not subject to the sales tax.

119

xxx
If JACKBILT actually sold concrete blocks manufactured by it
to petitioner under the distributorship or agency agreement
of July 27, 1948, such sales constituted the original sales
which are taxable under Section 186 of the Revenue Code,
while the sales made to the public by petitioner are
subsequent sales which are not taxable. But it appears to us
that there was no such sale by JACKBILT to petitioner.
Petitioner merely acted as agent for JACKBILT in the
marketing of its products. This is shown by the fact that
petitioner merely accepted orders from the public for the
purchase of JACKBILT blocks. The purchase orders were
transmitted to JACKBILT which delivered the blocks to the
purchaser directly. There was no instance in which the
blocks ordered by the purchasers were delivered to the
petitioner. Petitioner never purchased concrete blocks from
JACKBILT so that it never acquired ownership of such
concrete blocks. This being so, petitioner could not have
sold JACKBILT blocks for its own account. It did so merely as
agent of JACKBILT. The distributorship agreement of July 27,
1948, is denominated by the parties themselves as an
"agency for marketing" JACKBILT products. ... .

xxx

xxx

xxx

Therefore, the taxable selling price of JACKBILT blocks under

the aforesaid agreement is the price charged to the public
and not the amount billed by JACKBILT to petitioner. The
deficiency sales tax should have been assessed against
JACKBILT and not against petitioner which merely acted as
the former's agent.

xxx

xxx

Presiding Judge Nable of the same Court expressed a partial

dissent, stating:

Upon the aforestated circumstances, which disclose Norton's

control over and direction of Jackbilt's affairs, the corporate
personality of Jackbilt should be disregarded, and the
transactions between these two corporations relative to the
concrete blocks should be ignored in determining the
percentage tax for which Norton is liable. Consequently, the
percentage tax should be computed on the basis of the
sales of Jackbilt blocks to the public.

The majority opinion is now before Us on appeal by the

Commissioner of Internal Revenue, on four (4) assigned
errors, all of which pose the following propositions: (1)
whether the acquisition of all the stocks of the Jackbilt by
the Norton & Harrison Co., merged the two corporations into
a single corporation; (2) whether the basis of the
computation of the deficiency sales tax should be the sale of
the blocks to the public and not to Norton.

It has been settled that the ownership of all the stocks of a

corporation by another corporation does not necessarily
breed an identity of corporate interest between the two
companies and be considered as a sufficient ground for
disregarding the distinct personalities (Liddell & Co., Inc. v.
Coll. of Int. Rev. L-9687, June 30, 1961). However, in the
case at bar, we find sufficient grounds to support the theory
that the separate identities of the two companies should be
disregarded. Among these circumstances, which we find not

120

successfully refuted by appellee Norton are: (a) Norton and

Harrison owned all the outstanding stocks of Jackbilt; of the
15,000 authorized shares of Jackbilt on March 31, 1958,
14,993 shares belonged to Norton and Harrison and one
each to seven others; (b) Norton constituted Jackbilt's board
of directors in such a way as to enable it to actually direct
and manage the other's affairs by making the same officers
of the board for both companies. For instance, James E.
Norton is the President, Treasurer, Director and Stockholder
of Norton. He also occupies the same positions in Jackbilt
corporation, the only change being, in the Jackbilt, he is
merely a nominal stockholder. The same is true with Mr.
Jordan, F. M. Domingo, Mr. Mantaring, Gilbert Golden and
Gerardo Garcia, while they are merely employees of the
North they are Directors and nominal stockholders of the
Jackbilt (c) Norton financed the operations of the Jackbilt,
and this is shown by the fact that the loans obtained from
the RFC and Bank of America were used in the expansion
program of Jackbilt, to pay advances for the purchase of
equipment, materials rations and salaries of employees of
Jackbilt and other sundry expenses. There was no limit to
the advances given to Jackbilt so much so that as of May 31,
1956, the unpaid advances amounted to P757,652.45, which
were not paid in cash by Jackbilt, but was offset by shares of
stock issued to Norton, the absolute and sole owner of
Jackbilt; (d) Norton treats Jackbilt employees as its own.
Evidence shows that Norton paid the salaries of Jackbilt
employees and gave the same privileges as Norton
employees, an indication that Jackbilt employees were also
Norton's employees. Furthermore service rendered in any
one of the two companies were taken into account for
purposes of promotion; (e) Compensation given to board
members of Jackbilt, indicate that Jackbilt is merely a
department of Norton. The income tax return of Norton for
1954 shows that as President and Treasurer of Norton and
Jackbilt, he received from Norton P56,929.95, but received
from Jackbilt the measly amount of P150.00, a circumstance

which points out that remuneration of purported officials of

Jackbilt are deemed included in the salaries they received
from Norton. The same is true in the case of Eduardo Garcia,
an employee of Norton but a member of the Board of
Jackbilt. His Income tax return for 1956 reveals that he
received from Norton in salaries and bonuses P4,220.00, but
received from Jackbilt, by way of entertainment,
representation, travelling and transportation allowances
P3,000.00. However, in the withholding statement (Exh. 28A), it was shown that the total of P4,200.00 and P3,000.00
(P7,220.00) was received by Garcia from Norton, thus
portraying the oneness of the two companies. The Income
Tax Returns of Albert Golden and Dioscoro Ramos both
employees of Norton but board members of Jackbilt, also
disclose the game method of payment of compensation and
allowances. The offices of Norton and Jackbilt are located in
the same compound. Payments were effected by Norton of
accounts for Jackbilt and vice versa. Payments were also
made to Norton of accounts due or payable to Jackbilt and
vice versa.

Norton and Harrison, while not denying the presence of the

set up stated above, tried to explain that the control over
the affairs of Jackbilt was not made in order to evade
payment of taxes; that the loans obtained by it which were
given to Jackbilt, were necessary for the expansion of its
business in the manufacture of concrete blocks, which would
ultimately benefit both corporations; that the transactions
and practices just mentioned, are not unusual and
extraordinary, but pursued in the regular course of business
and trade; that there could be no confusion in the present
set up of the two corporations, because they have separate
Boards, their cash assets are entirely and strictly separate;
cashiers and official receipts and bank accounts are distinct
and different; they have separate income tax returns,
separate balance sheets and profit and loss statements.

121

These explanations notwithstanding an over-all appraisal of

the circumstances presented by the facts of the case, yields
to the conclusion that the Jackbilt is merely an adjunct,
business conduit or alter ego, of Norton and Harrison and
that the fiction of corporate entities, separate and distinct
from each, should be disregarded. This is a case where the
doctrine of piercing the veil of corporate fiction, should be
made to apply. In the case of Liddell & Co. Inc. v. Coll. of Int.
Rev., supra, it was held:

There are quite a series of conspicuous circumstances that

militates against the separate and distinct personality of
Liddell Motors Inc., from Liddell & Co. We notice that the
bulk of the business of Liddell & Co. was channel Red
through Liddell Motors, Inc. On the other hand, Liddell
Motors Inc. pursued no activities except to secure cars,
trucks, and spare parts from Liddell & Co., Inc. and then sell
them to the general public. These sales of vehicles by
Liddell & Co, to Liddell Motors. Inc. for the most part were
shown to have taken place on the same day that Liddell
Motors, Inc. sold such vehicles to the public. We may even
say that the cars and trucks merely touched the hands of
Liddell Motors, Inc. as a matter of formality.

xxx

xxx

xxx

Accordingly, the mere fact that Liddell & Co. and Liddell
Motors, Inc. are corporations owned and controlled by Frank
Liddell directly or indirectly is not by itself sufficient to justify
the disregard of the separate corporate identity of one from
the other. There is however, in this instant case, a peculiar
sequence of the organization and activities of Liddell Motors,
Inc.

As opined in the case of Gregory v. Helvering "the legal right

of a tax payer to decrease the amount of what otherwise
would be his taxes, or altogether avoid them, by means
which the law permits, cannot be doubted". But as held in
another case, "where a corporation is a dummy, is unreal or
a sham and serves no business purpose and is intended only
as a blind, the corporate form may be ignored for the law
cannot countenance a form that is bald and a mischievous
fictions".

... a taxpayer may gain advantage of doing business thru a

corporation if he pleases, but the revenue officers in proper
cases, may disregard the separate corporate entity where it
serves but as a shield for tax evasion and treat the person
who actually may take benefits of the transactions as the
person accordingly taxable.

... to allow a taxpayer to deny tax liability on the ground that

the sales were made through another and distinct
corporation when it is proved that the latter is virtually
owned by the former or that they are practically one and the
same is to sanction a circumvention of our tax laws. (and
cases cited therein.)

In the case of Yutivo Sons Hardware Co. v. Court of Tax

Appeals, L-13203, Jan. 28, 1961, this Court made a similar
ruling where the circumstances of unity of corporate
identities have been shown and which are identical to those
obtaining in the case under consideration. Therein, this
Court said:

122

We are, however, inclined to agree with the court below that

SM was actually owned and controlled by petitioner as to
make it a mere subsidiary or branch of the latter created for
the purpose of selling the vehicles at retail (here concrete
blocks) ... .

Internal Revenue, plus 25% surcharge thereon. Costs

against appellee Norton & Harrison.

It may not be amiss to state in this connection, the

advantages to Norton in maintaining a semblance of
separate entities. If the income of Norton should be
considered separate from the income of Jackbilt, then each
would declare such earning separately for income tax
purposes and thus pay lesser income tax. The combined
taxable Norton-Jackbilt income would subject Norton to a
higher tax. Based upon the 1954-1955 income tax return of
Norton and Jackbilt (Exhs. 7 & 8), and assuming that both of
them are operating on the same fiscal basis and their
returns are accurate, we would have the following result:
Jackbilt declared a taxable net income of P161,202.31 in
which the income tax due was computed at P37,137.00
(Exh. 8); whereas Norton declared as taxable, a net income
of P120,101.59, on which the income tax due was computed
at P25,628.00. The total of these liabilities is P50,764.84. On
the other hand, if the net taxable earnings of both
corporations are combined, during the same taxable year,
the tax due on their total which is P281,303.90 would be
P70,764.00. So that, even on the question of income tax
alone, it would be to the advantages of Norton that the
corporations should be regarded as separate entities.

WHEREFORE, the decision appealed from should be as it is

hereby reversed and another entered making the appellee
Norton & Harrison liable for the deficiency sales taxes
assessed against it by the appellant Commissioner of

G.R. No. 146667

January 23, 2007

123

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.

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 Decision4 of the National Labor Relations
Commission (NLRC) in NLRC NCR 02-00949-95.

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, nonpayment 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 ManilaLondon-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

124

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 "E2") to 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.

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

125

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 Vice-President 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.

126

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 "C1"); 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

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

On 3 April 1998, the Labor Arbiter rendered his decision with
the following dispositive portion:
Holiday Pay (3 yrs.)
WHEREFORE, premises considered, We hold all respondents
as jointly and solidarily liable for complainants money
claims as adjudicated above and computed below as
follows:

P2,000 x 30 days . 60,000.00

Underpayment of 13th month pay (1993) ... 15,816.87

127

Moral Damages .. 3,000,000.00

service for his twelve (12) years of service from 1980 to

1992 based on a salary rate of P50,495.00 a month.

Exemplary Damages .. 1,000,000.00

All other claims are DISMISSED for lack of merit.
10% Attorneys Fees . 138,999.68
SO ORDERED.7
TOTAL P5,528,996.55

Unused Airline Tickets (3 yrs.)

(To be converted in Peso upon payment)

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

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:

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

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;

128

2. moral damages in the amount of one hundred thousand

(P100,000.00) Pesos;

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.

3. exemplary damages in the amount of fifty thousand

(P50,000.00) Pesos; and

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

No costs is awarded.

SO ORDERED.10

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.

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 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 there should be clear and

convincing evidence that SRTI, FETMI, and Filsyn were being

129

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 ManilaLondon 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

130

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

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

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;

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.

131

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

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

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

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

These assertions deserve scant consideration.

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:

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") program thereby

132

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;

xxxx

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:

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)

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

None of the foregoing exceptions is present in this case.

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.

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.

133

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.

2. WARRANTIES AND REPRESENTATIONS. PMI hereby

warrants and represents the following:

xxxx
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.

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:

(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)

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:

134

Do you have any employment contract with Far Eastern

Textile?

WITNESS:

It is my belief up the present time.

ATTY. AVECILLA:

May I request that the witness be allowed to go through his

Annexes, Your Honor.

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.

xxxx
ATTY. ESCANO:
ATTY. ESCANO:
Yes, but I want a precise answer to that question. If he has
an employment contract with Far Eastern Textile?

So, there is proof that you were in fact really employed by

Peggy Mills?

WITNESS:
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.

Yes, sir.

ATTY. ESCANO:

135

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?

xxxx

WITNESS:

ATTY. ESCANO:

I have no document, sir.

Q Yes. Let me be more specific, Mr. McLeod. Do you have a

contract of employment from Far Eastern Textiles, Inc.?

ATTY. ESCANO:

What about Far Eastern Textile Mills?

A No, sir.

Q What about Sta. Rosa Textile Mills, do you have an

employment contract from this company?

WITNESS:
A No, sir.
I have no document, sir.
xxxx
ATTY. ESCANO:

And Sta. Rosa Textile Mills?

WITNESS:

There is no document, sir.31

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

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.

136

Q No documents to show, Mr. McLeod?

stockholders and from that of other corporations to which it

may be connected.36

A No. No documents, sir.32

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

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

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

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

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.

This assertion is untenable.

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

A corporation is an artificial being invested by law with a

personality separate and distinct from that of its

In Indophil Textile Mill Workers Union v. Calica,41 the Court

ruled, thus:

137

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

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 Del Rosario v. NLRC,54 the Court ruled that substantial

identity of the incorporators of corporations does not
necessarily imply fraud.

138

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.

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:

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

provides:

139

"Any worker whose employment has been terminated as a

consequence of an unlawful lockout shall be entitled to
reinstatement with full backwages."

The responsible officer of an employer corporation can be

held personally, not to say even criminally, liable for nonpayment of back wages. That is the policy of the law.

Article 273 of the Code provides that:

xxxx

"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."

(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)

(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.

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

140

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 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)

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

141

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

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

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:

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.

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)

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

142

showing that McLeod and PMI had an agreement concerning

payment of these benefits.

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 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.

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.

McLeod cannot successfully pretend that his monthly salary

of P60,000 was reduced without his consent.

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.

143

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.

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?

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 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?

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.

A Yes, sir.

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 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?

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.

A Yes, sir.

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?

144

A I dont have any personal knowledge of any complaint, sir.

A Yes, 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?

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?

A Yes, sir.79

xxxx

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.

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?

Since PMI has no retirement plan,80 we apply Section 5,

Rule II of the Rules Implementing the New Retirement Law
which provides:

A Yes, sir.78

145

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.

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:

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?

WITNESS:

That is correct, sir.

There is no basis for the award of moral damages.
ATTY. ESCANO:
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.

And this amount is correct P840,000.00, according to your

Position Paper?

WITNESS:

146

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?

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.
WITNESS:
ATTY. ESCANO:
I was aware, 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?

So this was offered to you, is that correct?

WITNESS:

WITNESS:

Not on the concept without all the basic benefits due me, I
will refuse.82

I was told that a fixed sum of P840,000.00 was offered.

ATTY. ESCANO:

xxxx

ATTY. ROXAS:

147

Q You mentioned in the cross-examination of Atty. Escano

that you were offered the separation pay in 1994, is that
correct, Mr. Witness?

May I ask that the question be clarified, your Honor?

ATTY. ROXAS:
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:

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

WITNESS:

Q You mentioned that you were offered for the settlement of

your claims in 1994 for P840,000.00, is that right, Mr.
Witness?

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

What did you say, Atty. Escano?

ATTY. ESCANO:

The amount that I mentioned was P840,000.00

corresponding to the . . . . . . .

WITNESS:

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

148

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

WHEREFORE, we DENY the petition and AFFIRM the Decision

of the Court of Appeals in CA-G.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.

G.R. No. L-61549

May 27, 1985

SO ORDERED.

FRANCISCO DE ASIS & CO., INC., FRANCISCO DE ASIS and

LEOCADIO DE ASIS, petitioners,

ANTONIO T. CARPIO

vs.

Associate Justice

THE COURT OF APPEALS, and MERCEDES PRIETO DELGADO,

respondents.

Cruz, Durian, Agabin, Atienza & Alday for petitioners.

149

Efren C. Carag for private respondent.

RELOVA, J:

In this petition for review on certiorari, petitioners seek to

reverse and/or modify the decision, dated July 30, 1981, of
respondent Court of Appeals affirming the decision of the
trial court, as well as the resolution, dated August 20, 1982,
denying the motion for reconsideration.

The facts of the case as aptly synthesized and adopted in

toto by the respondent appellate court are as follows:

Defendant Francisco de Asis & Co., Inc. was organized

sometime in 1967 with Francisco de Asis as its president and
Leocadio de Asis as one of the members of the Board of
Directors, As a stock brokerage company, it did business in
the Makati Stock Exchange wherein one becomes a member
upon the execution of an undertaking by at least 2 members
of its Board of Directors who own 95% of the stocks to
answer solidarily for the corporation liabilities of the
member company. Leocadio de Asis and Francisco de Asis
who owned 95% of the outstanding capital stock of the
Francisco de Asis & Co., Inc. executed a joint and several
undertaking on July 25, 1967 wherein they jointly and
severally warrant the equitable payment of all valid and
legitimate corporate liabilities of Francisco de Asis & Co.,

Inc. in connection with its membership in the Makati Stock

Exchange (Exhibits A, A-1, and A-2).

Sometime in June, 1970 the defendant company thru its

president Francisco de Asis approached Mrs. Mercedes P.
Delgado for assistance to secure a loan in the amount of
P200,000.00 from the Resource & Finance Corporation.
Since Francisco de Asis was a good friend and his father
Leocadio de Asis was solvent and answerable in a joint and
solidarily undertaking of the company, she agreed to raise
the amount of P200,000.00 as requested. She was able to
secure P100,000.00 from the Resource and Finance
Corporation for which she executed a promissory note
(Exhibit F) and the amount of P100,000.00 from her brother
Benito Prieto, Jr. With this amount, she deposited it in the
Bank of Asia, Makati Branch in favor of Francisco de Asis &
Co., Inc. under current account of 2-001, in accordance with
the instructions of its President Francisco de Asis (Exhibit B).
Thereafter, on or about August, 1973 Francisco de Asis
informed her that he had P100,000.00 to be made as partial
payment of their loan and suggested that she invest it by
buying shares of Philex Mining. To this suggestion, she
agreed. Unfortunately, this supposed partial payment which
was to be invested in shares of Philex was not carried out
because Francisco de Asis & Co., Inc. was suspended by the
Makati Stock Exchange from trading, As a result, there was a
rush of claims against the company resulting in its collapse.
She Called up Mr. Asis to settle the loan and she was
assured of settlement as Mr. Leocadio de Asis is solvent and
answerable for the debts of the company. Mr. de Asis even
sent her a cable assuring her that the loan would be settled
(Exhibits C and C-1). This loan she extended to Francisco de
Asis & Co., Inc. remained unpaid. On the other hand, she
had been paying on her own the loan with the Resource &
Finance Corp. as well as with her brother Benito Prieto, Jr.
She is married but separated from her husband.

150

On the part of the defendants only Leocadio de Asis

testified. His testimony substantially established that he is a
lawyer and had fully understood the effects and
circumstances of executing the joint and several
undertaking, Exhibit A, which was made in accomodation to
his son Francisco de Asis. He was a nominal stockholder of
the Francisco de Asis & Co., Inc. of which 97% of the
subscribed capital belong to his son Francisco while the
remaining 3% was subscribed by him This joint and several
undertaking, Exhibit A, was to answer for obligation in favor
of the Makati Stock Exchange in connection with the
operation of said exchange and not in favor of any other
party (Exhibit I). He was compelled to execute this joint and
several undertaking which in his opinion is null and void
especially considering that a nominal stock member like
himself wig be held liable because no license will be issued
unless this condition is first satisfied. He was an original
Director of the defendant corporation and at one time
chairman of the board for a short period. He ceased to be an
officer of this corporation sometime in 1970. He had no
direct participation in the management of the corporation to
attend the board meetings. The corporation had never pass
any resolution authorizing Francisco de Asis to secure a loan
of P200,000.00 from Mercedes P. Delgado. As a matter of
fact, he had no knowledge of this transaction except when
the instant suit was filed. (pp. 34-37, Record on Appeal).
(pages 30-32, Rollo).

Petitioners raised the same assignments of errors presented

and passed upon by the appellate court that the latter erred
(1) in declaring that the obligation sued upon was corporate
loan of Francisco de Asis and Co., Inc. and not a personal
loan of Francisco de Asis with the private respondent; and
(2) in holding petitioner Leocadio de Asis liable, jointly and

severally, with petitioners Francisco de Asis and Francisco de

Asis & Co., Inc. under the "Joint and Several Undertakings."

WE do not agree.

The records are negative of any evidence which would show

that the corporate nature of the transaction alleged in
paragraphs 4 and 8 of the complaint which read:

4.
Sometime in June of 1970, defendant, Francisco de
Asis approached plaintiff, who was a good friend, and
informed her that he was in need of P200,000.00 because
the stock brokerage firm bearing his name, defendant
Francisco de Asis and Co., Inc. was encountering cash flow
problems;

8.
On July 2, 1970, plaintiff deposited the P200,000.00
to the bank account of defendant corporation at the Bank of
Asia, Makati Branch (pages 32-33, Rollo).

have been denied and proved to be false. Thus, We are in

affirmance of the findings of respondent appellate court that

The necessity and urgency for the loan of P200,000.00 was

not to meet the personal need of Francisco de Asis as there
is no showing that he was in financial difficulties but to
resolve the cash flow problems of Francisco de Asis and Co.,
Inc. for which plaintiff-appellee deposited the amount of

151

P200,000.00 on July 2, 1970 in the current account of

defendant corporation at the Makati Branch of the Bank of
Asia. Neither would the absence of the usual documents,
i.e., promissory notes and/or real estate or chattel
mortgages, negate the existence of the loan. Considering
the relationship between the parties, being very good
friends, plaintiff-appellee dispensed with the customary
documentation in her desire to bail out a friend from the
difficulties that his corporation is facing, 97% of the capital
stock of which he owned. But the loan of P200,000.00 is not
totally without any document. The deposit slip (Exhibit "B")
of the Bank of Asia showing the deposit of P200,000.00 on
July 2, 1970, in Current Account No. 2-0017 of defendant
corporation indicates the receipt of said amount. And the
record is bereft of any evidence disclosing that said funds
were used other than for corporate purposes.

If the transaction contemplated by the parties herein is that

of a personal loan to Francisco de Asis, then plaintiff could
have simply written out a check in the latter's name or
deposited the amount of the loan in his personal account.
(page 33, Rollo).

The claim of the corporation that it had not authorized

Francisco de Asis to obtain loan for the company from the
private respondent is belied by the fact that upon deposit of
the sum of P200,000.00 in its current account, it had
retained and disbursed the said amount. And, assuming that
it had not really authorized Francisco de Asis to borrow
money from private respondent, the company is still obliged
to return the same under Article 2154 of the Civil Code
which provides:

If something is received when there is no right to demand it,

and it was unduly delivered through mistake, the obligation
to return it arises.

Relative to the argument that Francisco and Leocadio de

Asis' liability under their "Joint and Several Undertaking" is
limited to the obligation of the corporation in connection
with its membership at the Makati Stock Exchange, their
liability is spelled out by Exhibit "A" as follows:

NOW, THEREFORE, for and in consideration of the foregoing

premises, the Owners hereby jointly and severally warrant
the equitable payment of all valid and legitimate corporate
liabilities of the Francisco de Asis & Co., Inc. in connection
with its membership at the Makati Stock Exchange Exhibit
"A" (page 33, Rollo).

The execution of the foregoing instrument is a requirement

for membership in the Makati Stock Exchange. Subdivision
2, Section 1 of Article XIII of the Constitution of the Makati
Stock Exchange clearly states:

that stockholders owning at least 95% of the outstanding

capital stock of the applicant corporation shall execute a
public instrument making themselves jointly and severally
liable without limitation for all the transactions and dealings
of said corporation and a copy of said document shall be
filed with the Commission provided, however, that if the
95% outstanding capital stock is owned by only one person
another stockholder shall be required to execute with him
the said public instrument or guaranty. (page 34, Rollo),
(Emphasis supplied).

152

And, as pointed out by respondent appellate court,

"Leocadio and Francisco de Asis knowingly and voluntarily
executed and signed the Joint and Several Undertaking,
Exhibit "A" ". More so, in the case of Leocadio de Asis who is
a lawyer and, therefore, knew the legal import and farreaching consequences of the document he signed.

ACCORDINGLY, for lack of merit, the petition is hereby

DISMISSED.

SO ORDERED.

Gutierrez, Jr., De la Fuente and Alampay, JJ., concur.

Teehankee (Chairman), J., took no part.

Plana J., is on leave.

153

154

SECOND DIVISION
[G.R. No. 131673. September 10, 2004]

RUBEN MARTINEZ,* substituted by his heirs, MENA

CONSTANTINO MARTINEZ, WILFRIDO C. MARTINEZ, EMMA M.
NAVA, and EDNA M. SAKHRANI, petitioners, vs. COURT OF
APPEALS and BPI INTERNATIONAL FINANCE, respondents.

Cintas Largas, Ltd. (CLL) was also a foreign corporation,

established in Hongkong, with a paid-up capital of
HK$10,000. The registered shareholders of the CLL in
Hongkong were the Overseas Nominee, Ltd. and Shares
Nominee, Ltd., which were mainly nominee shareholders. In
Hongkong, the nominee shareholder of CLL was Baker &
McKenzie Nominees, Ltd., a leading solicitor firm. However,
beneficially, the company was equally owned by Messrs.
Ramon Siy, Ricardo Lopa, Wilfrido C. Martinez, and Miguel J.
Lacson.[4] The registered office address of CLL in Hongkong
was 22/F, Princes Building, also the office address of Price
Waterhouse & Co., a large accounting firm in Hongkong.

DECISION
CALLEJO, SR., J.:

Before us is a petition for review on certiorari of the

Decision[1] of the Court of Appeals, in CA-G.R. CV No.
43985, modifying the Decision[2] of the Regional Trial Court
of Kalookan City, Branch 122, in Civil Case No. C-10811.

The bulk of the business of the CLL was the importation of

molasses from the Philippines, principally from the Mar
Tierra Corporation, and the resale thereof in the
international market.[5] However, Mar Tierra Corporation
also sold molasses to its customers.[6] Wilfrido C. Martinez
was the president of Mar Tierra Corporation, while its
executive vice-president was Blamar Gonzales. The
business operations of both the CLL and Mar Tierra
Corporation were run by Wilfrido Martinez and Gonzales.

The antecedents are as follows:

Respondent BPI International Finance[3] is a foreign

corporation not doing business in the Philippines, with office
address at the Bank of America Tower, 12 Harcourt Road,
Central Hongkong. It was a deposit-taking company
organized and existing under and by virtue of the laws of
Hongkong, and was also engaged in investment banking
operations therein.

About 42% of the capital stock of Mar Tierra Corporation was

owned by RJL Martinez Fishing Corporation (RJL), the leading
tuna fishing outfit in the Philippines. Petitioner Ruben
Martinez was the president of RJL and a member of the
board of directors thereof. The majority stockholders of RJL
were Ruben Martinez and his brothers, Jose and Luis
Martinez. Sixty-eight (68) percent of the total assets of
Ruben Martinez were in the RJL.

155

In 1979, respondent BPI International Finance (then AIFL)

granted CLL a letter of credit in the amount of
US$3,000,000. Wilfrido Martinez signed the letter
agreement with the respondent for the CLL. The respondent
and the CLL had made the following arrangements:

Cintas Largas, Ltd. will purchase molasses from the

Philippines, mainly from Mar Tierra Corporation, and then
sell the molasses to foreign countries. Both the purchase of
the molasses from the Philippines and the subsequent sale
thereof to foreign customers were effected by means of
Letters of Credit. A Letter of Credit would be opened by
Cintas Largas, Ltd. in favour of Mar Tierra Corporation or any
other seller in the Philippines. Upon the sale of the
molasses to foreign buyers, a Letter of Credit would then be
opened by such buyers, in favour of Cintas Largas, Ltd. The
Letters of Credit were effected through the Letter of Credit
Facility of Cintas Largas, Ltd. in plaintiff. The profits of
Cintas Largas, Ltd. from these transactions were then
deposited in either the deposit account of Cintas Largas,
Ltd. with plaintiff or the Money Market Placement Account
Nos. 063 and 084, depending upon the instructions of
Wilfrido C. Martinez and Blamar C. Gonzales, principally.[7]

On January 24, 1979, the CLL opened a money market

placement with the respondent bearing MMP No. 063, with
an initial placement of US$390,000.[8] The CLL also opened
and maintained a foreign currency account and a deposit
account with the respondent. The authorized signatory in
both accounts of CLL was Wilfrido C. Martinez. Some
instructions also came from Gonzales, to be confirmed by
Wilfrido Martinez.[9] On March 21, 1980, petitioner Ruben
Martinez and/or his son Wilfrido C. Martinez and/or Miguel J.
Lacson affixed their signatures on the two signature cards

furnished by the respondent which became MMP No. 063

and MMP No. 084. On the face of the cards, the signatories
became joint account holders of the said money market
placements.[10]

On March 25, 1980, the CLL opened a money market

placement account with the respondent bearing MMP No.
084 with an initial placement of US$68,768.60, transferred
from MMP No. 063.[11] At times, funds in MMP Nos. 063 and
084 were transferred to the CLLs deposit account, and vice
versa.

On May 19, 1980, the CLL, through Wilfrido Martinez, and

the respondent, through Senen L. Matoto and Michael Sung,
Senior Manager of the Money Management Division of the
respondent, executed a letter-agreement in which the
existing back-to-back credit facility granted to the CLL way
back in 1979 was extended up to July 1980, and increased
to US$5,000,000. The credit facility was to be secured as
follows:

SECURITY: (i)
Back-to-Back L/C to be secured by an
L/C issued, by a bank acceptable to AFHK, in favor of Cintas
Largas.
(ii)
AFHK L/C issued prior to receipt of Backing L/C to
be secured by a 10% margin by way of a hold out on cash
deposit with AFHK with interest at LIBOR. The Backing L/C,
however, shall be opened not later than 120 days after the
issuance of AFHKs L/C.
(iii)
JSS of Messrs. Ramon Siy, Wilfrido C. Martinez,
Ricardo Lopa and Miguel J. Lacson for both of the above
cases.

156

DOCUMENTATION: Standard AFHK L/C documentation.[12]

The facility was designed to finance the purchases of

molasses made by the CLL from the Philippines for reexport.[13]

In compliance with the letter-agreement, Wilfrido C.

Martinez, Miguel J. Lacson, Ricardo Lopa, and Ramon Siy
executed a continuing suretyship agreement in which they
bound and obliged themselves, jointly and severally, with
the CLL to pay the latters obligation under the said credit
facility.[14]

As of September 26, 1980, the balance of the deposit

account of the CLL with the respondent was
US$1,025,052.06.[15] On the other hand, the balance of the
money placement in MMP No. 063, as of September 25,
1980 was US$312,708.43,[16] while the balance of the
money market placement in MMP No. 084 as of September
8, 1980 stood at US$768,258.24.[17]

On October 10, 1980, Blamar Gonzales, acting for Mar Tierra

Corporation, sent to the respondent a telex confirming his
telephone conversation with Michael Sung/Bing Matoto
requesting the respondent to transfer US$340,000 to
Account No. FCD SA 18402-7, registered in the name of Mar
Tierra Corporation, Philippine Banking Corporation, Union
Cement Building, Port Area, Manila, as payee, with the
following specific instructions: (a) there should be no
mention of Wilfrido Martinez or Mar Tierra Corporation; (b)

the telex instruction should be signed only by Wilfrido

Martinez and sent only through the telex machine of Mar
Tierra Corporation; and, (c) the final confirmation of the
transfer should be made by telephone call.[18] Gonzales
requested the respondent, in the same telex, to confirm its
total available account so that instructions on the transfer of
the funds to FCD SA 18402-7 could be formalized.[19]

On October 13, 1980, Sung sent a telex to Gonzales

informing the latter of the balances of the MMP Nos. 063
and 084 and in the CLL account deposit, with the
corresponding maturity dates thereof, thus:

1. DETAIL OF PLACEMENT IN VARIOUS A/C.

MMP 063

VALUE DATE
MATURITY DATE
MATURITY VALUE

25/9/80
28/11/80
USD306,043.48 USD 312,708.43

DATE

AMOUNT

12-1/4

MMP 084

25/09/80
28/11/80
USD751,883.88 USD 768,258.24

12-1/4

157

-------------------------

COMPUTATION: PESO 10,930,000.00

USD1080,966.67
============

7.89

(EXCHANGE RATE)

1.20

(120 PCT)

-------------------1,662,357.00

CINTAS LARGAS

=============

VALUE DATE
MATURITY DATE
MATURITY VALUE

15/9/80
46,131.26

25/9/80
USD500,000.00

1 DAY CALL

1 DAY CALL

DATE

AMOUNT

10-7/8 USD

11-1/4

(RATE ADJ: TO 12-1/4 VALUE 7/10/80)

26/9/80
31/10/80
USD420,831.45 USD 425,843.44

12-1/4

2. ACCORDING TO AIDC, O/S OF PESO LOAN IS

10,930,000.00, AND THE HOLDOUT REQUIRED IS 120 PCT

3. ACCORDINGLY, THE FUND AVAILABLE IS APPROX.

USD340,000.00. PLS REVERT.[20]

Sung informed Gonzales that the account available was

approximately US$340,000, considering the CLL deposit
account and the money market placements.[21] On October
14, 1980, the respondent received a telex from Wilfrido C.
Martinez requesting that the transfer of US$340,000 from
the deposit account of the CLL or any deposit available be
effected by telegraphic transfer as soon as possible to their
account, payee FCD SA 18402-7, Philippine Banking
Corporation, Port Area, Manila.[22] On October 21, 1980,
Wilfrido Martinez wrote the respondent confirming his
request for the transfer of US$340,000 to their account,
FCD SA 18402-7, with the Philippine Banking Corporation,
through Wells Fargo Bank of New York, Philippine Banking
Corporation Account No. FCDU SA No. 003-019205.[23]

The respondent complied with the request of the CLL,

through Wilfrido Martinez and Gonzales, and remitted
US$340,000 as instructed.[24] However, instead of

158

deducting the amount from the funds in the CLL foreign

currency or deposit accounts and/or MMP Nos. 063 and 084,
the respondent merely posted the US$340,000 as an
account receivable of the CLL since, at that time, the money
market placements had not yet matured.[25] When the
money market placements matured, however, the
respondent did not collect the US$340,000 therefrom.
Instead, the respondent allowed the CLL and/or Wilfrido C.
Martinez to withdraw, up to July 3, 1981, the bulk of the CLL
deposit account and MMP Nos. 084 and 063;[26] hence, it
failed to secure reimbursement for the US$340,000 from the
said deposit account and/or money market placements.

In the meantime, problems ensued in the reconciliation of

the transactions involving the funds of the CLL, including the
MMP Nos. 063 and 084 with the respondent, as well as the
receivables of Mar Tierra Corporation. There was also a
need to audit the said funds. Sometime in July 1982,
conferences were held between the executive committee of
Mar Tierra Corporation and some of its officers, including
Miguel J. Lacson, where the means to reduce the
administrative expenses and accountants fees, and the
possibility of placing the CLL on an inactive status were
discussed.[27] The respondent pressured the CLL, Wilfrido
Martinez, and Gonzales to pay the US$340,000 it remitted to
Account No. FCD SA 18402-7.[28] Eventually, Wilfrido C.
Martinez and Blamar Gonzales engaged the services of the
auditing firm, the Jacinto, Belano, Castro & Co., to review the
flow of the CLLs funds and the receivables of Mar Tierra
Corporation.

On August 16, 1982, the CLL, through its certified public

accountant, wrote the respondent requesting the latter to
furnish its accountant with a copy of the financial report

prepared by its auditors.[29] An audit was, thereafter,

conducted by the Jacinto, Belano, Castro & Co., certified
public accountants of the CLL and Mar Tierra Corporation.
Based on their report, the auditors found that the CLL owed
the respondent US$340,000.[30]

In the meantime, the respondent demanded from the CLL,

Wilfrido Martinez, Lacson, Gonzales, and petitioner Ruben
Martinez, the payment of the US$340,000 remitted by it to
FCD SA 18402-7, per instructions of Gonzales and Wilfrido
Martinez. No remittance was made to the respondent.
Petitioner Ruben Martinez denied knowledge of any such
remittance, as well as any liability for the amount thereof.

On June 17, 1983, the respondent filed a complaint against

the CLL, Wilfrido Martinez, Lacson, Gonzales, and petitioner
Ruben Martinez, with the RTC of Kaloocan City for the
collection of the principal amount of US$340,000, with a
plea for a writ of preliminary attachment. Two alternative
causes of action against the defendants were alleged
therein, viz:

FIRST ALTERNATIVE CAUSE OF ACTION

2.1
The allegations contained in the foregoing paragraphs
are repleaded herein by reference.

2.2
The remittance by plaintiff of the sum of
US$340,000.00 as previously explained in the foregoing
paragraphs was made upon the express instructions of

159

defendants GONZALES and WILFRIDO C. MARTINEZ acting

for and in behalf of the defendant CINTAS, defendants
GONZALES and WILFRIDO C. MARTINEZ being the duly
authorized representatives of defendant CINTAS to transact
any and all of its business with plaintiff.

2.8
Defendant CINTAS, being a mere alter ego or business
conduit for the foregoing defendants, has no corporate
personality distinct and separate from that of its beneficial
shareholders and, likewise, has no substantial assets in its
own name.

2.3
The remittance of US$340,000.00 was made under an
agreement for plaintiff to advance the said amount and for
defendants GONZALES, WILFRIDO C. MARTINEZ and CINTAS
to repay plaintiff all such monies so advanced to said
defendants or to their order.

2.9
The remittance of US$340,000.00 as referred to
previously, although made upon the instructions of
defendants GONZALES, WILFRIDO C. MARTINEZ and CINTAS,
was in fact a remittance made for the benefit of the
beneficial shareholders of defendant CINTAS.

2.4
In making said remittance, plaintiff acted as the agent
of the foregoing defendants in meeting the latters liability
to the recipient/s of the amount so remitted.

2.10 Any and all obligations of defendant CINTAS are the

obligations of its beneficial shareholders since the former is
being used by the latter as an alter ego or business conduit
for their sole benefit and/or to defeat public convenience.

2.5
The remittance of US$340,000.00 which remains
unsettled to date is a just, binding and lawful obligation of
the defendants GONZALES, WILFRIDO C. MARTINEZ and
CINTAS.

SECOND ALTERNATIVE CAUSE OF ACTION

3.1
The allegations contained in the foregoing paragraphs
are incorporated herein by reference.
2.6
Defendant CINTAS is a reinvoicing or paper company
with nominee shareholders in Hongkong. The real and
beneficial shareholders of the foregoing defendants are the
defendants LACSON and WILFRIDO C. MARTINEZ.

2.7
Defendant CINTAS is being used by the foregoing
defendants as an alter ego or business conduit for their sole
benefit and/or to defeat public convenience.

3.2
Defendants RUBEN MARTINEZ, WILFRIDO C.
MARTINEZ and LACSON are joint account holders of Money
Market Placement Account Nos. 063 and 084 (hereinafter
referred to as MMP 063 and 084 for brevity) opened and
maintained by said defendants with the plaintiff.

160

3.3
Said money market placement accounts, although
nominally opened and maintained by said defendants, were
in reality for the account and benefit of all the defendants.

3.4
Defendant CINTAS likewise opened and maintained a
deposit account with plaintiff.

3.5
Defendants W.C. Martinez and Gonzales upon giving
instructions to plaintiff to remit the amount of
US$340,000.00 as previously discussed also instructed
plaintiff to reimburse itself from available funds in MMP
Account Nos. 063 and 084 and the defendant CINTAS
deposit account.

3.6
Due to excusable mistake, plaintiff was unable to
obtain reimbursement for the remittance it made from MMP
Account Nos. 063, 084 and from the deposit account of
defendant CINTAS.

3.7
As a consequence of said mistake, plaintiff delivered
to the foregoing defendants and/or to third parties upon
orders of the defendants substantially all the funds in MMP
Account Nos. 063, 084 and the deposit account of defendant
CINTAS.

3.8
The amount of US$340,000.00 delivered by plaintiff to
the foregoing defendants constituted an overpayment
and/or erroneous payment as defendants had no right to
demand the same; further, said amount having been unduly
delivered by mistake, the foregoing defendants were obliged
to return it.

3.9
Since the foregoing defendants had no legal right to
the overpayment or erroneous payment of US$340,000.00
they, therefore, hold said money in trust for the plaintiff.

3.10 Despite numerous demands to the defendants

WILFRIDO C. MARTINEZ, RUBEN MARTINEZ, LACSON and
CINTAS for restitution of the funds erroneously paid or
overpaid to said defendants, they have failed and continue
to fail to make any restitution.[31]

The respondent prayed therein that, after due proceedings,

judgment be rendered in its favor, viz:

ON THE
FIRST ALTERNATIVE CAUSE OF ACTION

4.1
Ordering defendants GONZALES, WILFRIDO C.
MARTINEZ and CINTAS, jointly and severally, liable to pay
plaintiff the amount of US$340,000.00 with interests thereon
from February 20, 1982 until fully paid.

161

4.2
Declaring that defendant CINTAS is a mere alter ego
or business conduit of defendants LACSON and WILFRIDO C.
MARTINEZ; hence, the foregoing defendants are, jointly and
severally, liable to pay plaintiff the amount of
US$340,000.00 with interests thereon.

5.4
Ordering defendants to be, jointly and severally, liable
to plaintiff for actual damages in an amount to be proved at
the trial.

4.3
Ordering the foregoing defendants to be, jointly and
severally, liable for the amount of P100,000.00 as and for
attorneys fees; and

5.5
A writ of preliminary attachment be issued against the
properties of the defendants WILFRIDO C. MARTINEZ, RUBEN
MARTINEZ, LACSON and CINTAS as a security for the
satisfaction of any judgment that may be recovered.

4.4
Ordering the foregoing defendants to be, jointly and
severally, liable to plaintiff for actual damages in an amount
to be proved at the trial. Or -

Plaintiff further prays for such other relief as may be

deemed just and equitable in the premises.[32]

ON THE

In his answer to the complaint, petitioner Ruben Martinez

interposed the following special and affirmative defenses:

SECOND ALTERNATIVE CAUSE OF ACTION

5.1
Declaring that plaintiff made an erroneous payment in
the amount of US$340,000.00 to defendants LACSON,
WILFRIDO C. MARTINEZ, RUBEN MARTINEZ and CINTAS.

BY WAY OF SPECIAL AND AFFIRMATIVE DEFENSES, answering

defendant respectfully states:

5.2
Declaring the foregoing defendants to be, jointly and
severally, liable to reimburse plaintiff the amount of
US$340,000.00 with interest thereon from February 20,
1982 until fully paid.

2.
Defendant is not the holder, owner, depositor, trustee
and has no interest whatsoever in the account in Philippine
Banking Corporation (FCD SA 18402-7) where the plaintiff
remitted the amount sought to be recovered. Hence, he did
not benefit directly or indirectly from the said remittance;

5.3
Ordering defendants to be, jointly and severally, liable
for the amount of P100,000.00 as and for attorneys fees;
and

162

3.
Defendant did not participate in any manner
whatsoever in the remittance of funds from the plaintiff to
the alleged FCD Account in the Philippine Banking
Corporation;

4.
Defendant has not received nor benefited from the
alleged remittance, payment, overpayment or
erroneous payment allegedly made by plaintiff; hence,
insofar as he is concerned, there is nothing to return to or to
hold in trust for the plaintiff;

5.
Plaintiffs alleged remittance of the amount by mere
telex or telephone instruction was highly irregular and
questionable considering that the undertaking was that no
remittance or transfer could be done without the prior
signature of the authorized signatories;

6.
The alleged telex instructions to the plaintiff was for it
to confirm the amounts that are free and available which it
did;

7.
Plaintiff is guilty of estoppel or laches by making it
appear that the funds so remitted are free and available
and by not acting within reasonable time to correct the
alleged mistake;

8.
The alleged remittance, overpayment and
erroneous payment was manipulated by plaintiffs own
employees, officers or representatives without connivance
or collusion on the part of the answering defendant; hence,

plaintiff has only itself to blame for the same; likewise, its
recourse is not against answering defendant;

9.
Plaintiffs Complaint is defective in that it has failed to
state the facts constituting the mistake regarding its
failure to obtain reimbursement from MMP 063 and 084;

10.
Plaintiff is guilty of gross negligence and it only has
itself to blame for its alleged loss;

11.
Sometime on or about 1980, defendant was made to
sign blank forms concerning opening of money market
placements and perhaps, this is how he became a joint
account holder of MMP 063 and 084; defendant at that
time did not realize the import or significance of his act;
afterwards, defendant did not do any act or omission by
which he could be implicated in this case;

12.
Assuming that defendant is a joint account holder of
said MMP 063 and 084, plaintiff has failed to plead
defendants obligations, if any, by being said joint account
holder; likewise, the Complaint fails to attach the
corresponding documents showing defendants being a
joint account holder.[33]

The CLL was declared in default for its failure to file an

answer to the complaint.

163

After trial, the RTC rendered its decision, the dispositive

portion of which reads as follows:

PREMISES CONSIDERED, judgment is hereby rendered as

follows:

1.
Ordering all the defendants, jointly and severally, to
pay plaintiff the amount of US$340,000.00 or its equivalent
in Philippine currency measured at the Central Bank
prevailing rate of exchange in October 1980 and with legal
interest thereon computed from the filing of plaintiffs
complaint on June 17, 1983 until fully paid;

2.
Declaring that defendant Cintas Largas Ltd. is a mere
business conduit and alter ego of the individual defendants,
thereby holding the individual defendants, jointly and
severally, liable to pay plaintiff the aforesaid amount of
US$340,000.00 or its equivalent in Philippine Currency
measured at the Central Bank prevailing rate of exchange in
October 1980, with interest thereon as above-stated;

3.
Ordering all defendants to, jointly and severally, pay
unto plaintiff the amount of P50,000.00 as and for attorneys
fees, plus costs.

All counterclaims and cross-claims are dismissed for lack of

merit.

The trial court ruled that the CLL was a mere paper
company with nominee shareholders in Hongkong. It ruled
that the principle of piercing the veil of corporate entity was
applicable in this case, and held the defendants liable,
jointly and severally, for the claim of the respondent, on its
finding that the defendants merely used the CLL as their
business conduit. The trial court declared that the majority
shareholder of Mar Tierra Corporation was the RJL, controlled
by petitioner Ruben Martinez and his brothers, Jose and Luis
Martinez, as majority shareholders thereof. Moreover,
petitioner Ruben Martinez was a joint account holder of MMP
Nos. 063 and 084. The trial court, likewise, found that the
auditors of Mar Tierra Corporation and the CLL confirmed
that the defendants owed US$340,000. The trial court
concluded that the respondent had established its causes of
action against Wilfrido Martinez, Lacson, Gonzales, and
petitioner Ruben Martinez; hence, held all of them liable for
the claim of the respondent.

The decision was appealed to the CA. On June 27, 1997, the
CA rendered its decision, the dispositive portion of which
reads:

WHEREFORE, the decision of the Court a quo dated

December [19], 1991 is hereby MODIFIED, by exonerating
appellant Blamar Gonzales from any liability to appellee and
the complaint against him is DISMISSED. The decision
appealed from is AFFIRMED in all other respect.

SO ORDERED.[35]
SO ORDERED.[34]

164

The appellate court exonerated Gonzales of any liability,

reasoning that he was not a stockholder of the CLL nor of
Mar Tierra Corporation, but was a mere employee of the
latter corporation.[36] Petitioner Ruben Martinez sought a
reconsideration of the decision of the CA, to no avail.[37]

The paramount issue posed for resolution is whether or not

the petitioner is obliged to reimburse to the respondent the
principal amount of US$340,000.

II

The petitioner asserts that the trial and appellate courts

erred when they held him liable for the reimbursement of
US$340,000 to the respondent. He contends that he is not
in actuality a stockholder of Mar Tierra Corporation, nor a
stockholder of the CLL. He was not involved in any way in
the operations of the said corporations. He added that while
he may have signed the signature cards of MMP Nos. 063
and 084 in blank, he never had any involvement in the
management and disposition of the said accounts, nor of
any deposits in or withdrawals from either or both accounts.
He was not aware of any transactions between the
respondent, Wilfrido Martinez, and Gonzales, with reference
to the remittance of the US$340,000 to FCD SA 18402-7; nor
did he oblige himself to pay the said amount to the
respondent. According to the petitioner, there is no
evidence that he had benefited from any of the following:
(a) the remittance by the respondent of the US$340,000 to
Account No. FCD SA 18402-7 owned by Mar Tierra
Corporation; (b) the money market placements in MMP Nos.
063 and 084, or, (c) from any deposits in or withdrawals
from the said account and money market placements.

RESPONDENT COURT OF APPEALS ERRED IN NOT GRANTING

THE COUNTER-CLAIM OF PETITIONER RUBEN MARTINEZ
CONSIDERING THE EVIDENCE ON RECORD THAT PROVES
THE SAME.[38]

On the other hand, the appellate court found the petitioner

and his co-defendants, jointly and severally, liable to the
respondent for the payment of the US$340,000 based on
the following findings of the trial court:

Dissatisfied with the decision and resolution of the appellate

court, the petitioner, filed the petition at bar, on the
following grounds:

RESPONDENT COURT OF APPEALS ERRED IN FINDING THAT

HEREIN PETITIONER RUBEN MARTINEZ IS LIABLE TO
RESPONDENT BPI INTERNATIONAL FINANCE FOR
REIMBURSEMENT OF THE US$340,000.00 REMITTED BY SAID
RESPONDENT BPI INTERNATIONAL FINANCE TO FCD SA
ACCOUNT NO. 18402-7 AT THE PHILIPPINE BANKING
CORPORATION, PORT AREA BRANCH.

The Court finds that defendant Cintas Largas (Ltd.) with

capitalization of $10,000.00 divided into 1,000 shares at

165

HK$10 per share, is a mere paper company with nominee

shareholders in Hongkong, namely: Overseas Nominees Ltd.
and Shares Nominees Ltd., with defendants Wilfrido and
Miguel J. Lacson as the sole directors (Exh. A). Since the
said shareholders are mere nominee companies, it would
appear that the said defendants Wilfrido and Miguel J.
Lacson who are the sole directors are the real and beneficial
shareholders (t.s.n., 9-1-87, p. 5). Further, defendant Cintas
Largas Ltd. has no real office in Hongkong as it is merely
being accommodated by Price Waterhouse, a large
accounting office in Hongkong (t.s.n., 9-1-87, pp. 7-8).

Defendant Cintas Largas Ltd., being a mere alter ego or

business conduit for the individual defendants with no
corporate personality distinct and separate from that of its
beneficial shareholders and with no substantial assets in its
own name, it is safe to conclude that the remittance of
US$340,000.00 was, in fact, a remittance made for the
benefit of the individual defendants. Plaintiff was supposed
to deduct the US$340,000.00 remitted to the foreign
currency deposit account from Cintas Largas (Ltd.) funds or
from money market placement account Nos. 063 and 084 as
well as Cintas Largas Ltd. deposit account (Exh. FF-24).

Defendant Miguel J. Lacson is a business partner in

purchasing molasses for Mar Tierra Corporation. Mar Tierra
Corporation was selling molasses to Cintas Largas Ltd. which
were purchased by Miguel Lacson and Wilfrido C. Martinez
(t.s.n., 12-19-88, pp. 23-24). The majority owner of Mar
Tierra Corporation is RJL Martinez Fishing Corporation which
is owned by brothers Ruben Martinez, Jose Martinez and Luis
Martinez (t.s.n., 12-19-88, pp. 24-25; t.s.n., 6-20-88, pp. 1112). The FCD SA-18402-7 account at Philippine Banking
Corporation, Port Area Branch, where the US$340,000.00
was remitted by the plaintiff is the account of Mar Tierra
Corporation, and with the interlapping connection of the
defendants to each other, these could be the reason why
the funds of Cintas Largas Ltd. were being co-mingled and
controlled by defendants more particularly defendants
Blamar Gonzales and Wilfrido C. Martinez (Exhs. D, E, F, G,
H, I, J, L, M, N, O, P, R, S, and T).

On the basis of the evidence, the Court finds and so holds

that the cause of action of the plaintiff against the
defendants has been established.[39]

We do not agree with the trial court and appellate court.

Defendant Cintas Largas Ltd. was established only for

financing (t.s.n., 12-19-88, pp. 25-26) and the active owners
of Cintas are defendants Miguel Lacson and Wilfrido C.
Martinez (t.s.n., 12-19-88, p. 22). Mar Tierra Corporation of
which defendant Wilfrido Martinez is the President and one
of its owners and defendant Blamar Gonzales as the Vice
President, sells molasses to defendant Cintas Largas Ltd.

We note that the question of whether or not a corporation is

merely an alter ego is purely one of fact.[40] So is the
question of whether or not a corporation is a paper company
or a sham or subterfuge or whether the respondent adduced
the requisite quantum of evidence warranting the piercing of
the veil of corporate entity of the CLL.[41] The Court is not a
trier of facts. Hence, the factual findings of the trial court,
as affirmed by the appellate court, are generally conclusive
upon this Court.[42] However, the rule is subject to the

166

following exceptions: (a) where the conclusion is a finding

grounded entirely on speculation, surmise and conjectures;
(b) where the information made is manifestly mistaken; (c)
where there is grave abuse of discretion; (d) where the
judgment is based on a misapplication of facts, and the
findings of facts of the trial court and the appellate court are
contradicted by the evidence on record; and (e) when
certain material facts and circumstances had been
overlooked by the trial court which, if taken into account,
would alter the result of the case.

We have reviewed the records and find that some

substantial factual findings of the trial court and the
appellate court and, consequently, their conclusions based
on the said findings, are not supported by the evidence on
record.

The general rule is that a corporation is clothed with a

personality separate and distinct from the persons
composing it. Such corporation may not be held liable for
the obligation of the persons composing it; and neither can
its stockholders be held liable for such obligation.[43] A
corporation has a separate personality distinct from its
stockholders and from other corporation to which it may be
connected.[44] This separate and distinct personality of a
corporation is a fiction created by law for convenience and
to prevent injustice.[45]

defeat public convenience, justify wrong, protect fraud or

defend crime; or used as a shield to confuse the legitimate
issues; or when the corporation is merely an adjunct, a
business conduit or an alter ego of another corporation 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;[47] or when the corporation is used as a cloak
or cover for fraud or illegality, or to work injustice, or where
necessary to achieve equity or for the protection of the
creditors.[48] In such cases where valid grounds exist for
piercing the veil of corporate entity, the corporation will be
considered as a mere association of persons.[49] The
liability will directly attach to them.[50]

However, mere ownership by a single stockholder or by

another corporation of all or nearly all of the capital stocks
of a corporation is not by itself a sufficient ground to
disregard the separate corporate personality. The
substantial identity of the incorporators of two or more
corporations does not warrantly imply that there was fraud
so as to justify the piercing of the writ of corporate fiction.
[51] To disregard the said separate juridical personality of a
corporation, the wrongdoing must be proven clearly and
convincingly.[52]

The test in determining the application of the

instrumentality or alter ego doctrine is as follows:

Nevertheless, being a mere fiction of law, peculiar situations

or valid grounds can exist to warrant, albeit sparingly, the
disregard of its independent being and the piercing of the
corporate veil.[46] Thus, the veil of separate corporate
personality may be lifted when such personality is used to

167

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 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 defendants
relationship to that operation.[53]

In this case, the respondent failed to adduce the quantum of

evidence necessary to prove any valid ground for the
piercing of the veil of corporate entity of Mar Tierra
Corporation, or of RJL for that matter, and render the
petitioner liable for the respondents claim, jointly and
severally, with Wilfrido Martinez and Lacson. The mere fact
that the majority stockholder of Mar Tierra Corporation is
the RJL, and that the petitioner, along with Jose and Luis
Martinez, owned about 42% of the capital stock of RJL, do
not constitute sufficient evidence that the latter corporation,
and/or the petitioner and his brothers, had complete

domination of Mar Tierra Corporation. It does not

automatically follow that the said corporation was used by
the petitioner for the purpose of committing fraud or wrong,
or to perpetrate an injustice on the respondent. There is no
evidence on record that the petitioner had any involvement
in the purchases of molasses by Wilfrido Martinez, Gonzales
and Lacson, and the subsequent sale thereof to the CLL,
through Mar Tierra Corporation. On the contrary, the
evidence on record shows that the CLL purchased molasses
from Mar Tierra Corporation and paid for the same through
the credit facility granted by the respondent to the CLL. The
CLL, thereafter, made remittances to Mar Tierra Corporation
from its deposit account and MMP Nos. 063 and 084 with the
respondent. The close business relationship of the two
corporations does not warrant a finding that Mar Tierra
Corporation was but a conduit of the CLL.

Likewise, the respondent failed to adduce preponderant

evidence to prove that the Mar Tierra Corporation and the
RJL were so organized and controlled, its affairs so
conducted as to make the latter corporation merely an
instrumentality, agency, conduit or adjunct of the former or
of Wilfrido Martinez, Gonzales, and Lacson for that matter,
or that such corporations were organized to defraud their
creditors, including the respondent. The mere fact,
therefore, that the businesses of two or more corporations
are interrelated is not a justification for disregarding their
separate personalities, absent sufficient showing that the
corporate entity was purposely used as a shield to defraud
creditors and third persons of their rights.[54]

Also, the mere fact that part of the proceeds of the sale of
molasses made by Mar Tierra Corporation to the CLL may
have been used by the latter as deposits in its deposit

168

account with the respondent or in the money market

placements in MMP Nos. 063 and 084, or that the funds of
Mar Tierra Corporation and the CLL with the respondent
were mingled, and their disposition controlled by Wilfrido
Martinez, does not constitute preponderant evidence that
the petitioner, Wilfrido Martinez and Lacson used the Mar
Tierra Corporation and the RJL to defraud the respondent.
The respondent treated the CLL and Mar Tierra Corporation
as separate entities and considered them as one and the
same entity only when Wilfrido C. Martinez and/or Blamar
Gonzales failed to pay the US$340,000 remitted by the
respondent to FCD SA 18402-7. This being the case, there is
no factual and legal basis to hold the petitioner liable to the
respondent for the said amount.

Contrary to the ruling of the trial court and the appellate

court, the auditors of the CLL and the Mar Tierra
Corporation, in their report, did not find the petitioner liable
for the respondents claim in their report. The auditors, in
fact, found the CLL alone liable for the said amount.[55]
Even a cursory reading of the report will show that the name
of the petitioner was not mentioned therein.

The respondent failed to adduce evidence that the

petitioner had any involvement in the transactions between
the CLL, through Wilfrido Martinez and Gonzales, and the
respondent, with reference to the remittance of the
US$340,000 to FCD SA 18402-7. In fact, the said
transaction was so confidential that Gonzales even
suggested to the respondent that the name of Wilfrido
Martinez or Mar Tierra Corporation be not made of record,
and to authorize only Wilfrido Martinez to sign the telex
instruction:

OCT. 10, 1980

TO:

AYALA FINANCE

ATTN:

MICHAEL SUNG/BING MATOTO

FR:

B. GONZALES

RE:

TRANSFER OF FUNDS

THIS IS TO CONFRM OUR TELEPHONE CONVERSATION THAT

WE WLD LIKE TO SUGGEST THE FF PROCEDURES FOR FUND
TRANSFER.

1. TLX INSTRUCTION THAT FUNDS BE TRANSFERRED TO

OUR FCD ACCT BY TELEGRAPHIC TRANSFER.
2. WE WILL ONLY USE ONE ACCT W/C IS FCD SA 18402-7 OF
PHILBANKING CORPORATION, PORT AREA BRANCH, UNION
CEMENT BLDG, BONIFACIO DRIVE, PORT AREA, METRO
MANILA, PHILS.
3. PAYEE SHLD BE FCD SA 18402-7 AND NO MENTION OF
W.C. MARTINEZ OR MAR TIERRA CORP. TLX INSTRUCTION
SHLD BE SIGNED BY W.C. MARTINEZ AND WILL BE SENT
ONLY THRU TLX MACHINE OF MAR TIERRA CORP.
4. FINAL CONFIRMATION OF THE TRANSFER BY TELEPHONE
CALL.

PLS CONFRM TODAY TOTAL AMT. THAT IS FREE AND

AVAILABLE SO WE CAN FORMALIZE INSTRUCTION OF
TRANSFER IF THE ABOVE PROCEDURE IS APPROVED BY YOU.
PLS CONFRM ALSO LIST OF CORRESPONDENT BANK IN HK.

169

IN CASE OF WELLS FARGO HK, WE WLD LIKE TO SUGGEST

THE FF PROCEDURE:

1. WELLS FARGO HK WIL SEND A TLX TO MANILA

INSTRUCTING PHIL BANKING CORP TO CREDIT FCD SA
18402-7.

2. REIMBURSEMENT INSTRUCTION, AT THE SAME TIME

WELLS FARGO HK WIL REQUEST WELLS FARGO NEW YORK
TO CREDIT FCDU NO. 003-019205 FOR THE ACCT OF PHIL
BANKING CORP.[56]

Even the respondent admitted, in its complaint, that the

CLL, Gonzales, and Wilfrido Martinez, bound and obliged
themselves to repay the US$340,000, viz:

2.2
The remittance by plaintiff of the sum of
US$340,000.00 as previously explained in the foregoing
paragraphs was made upon the express instructions of
defendants GONZALES and WILFRIDO C. MARTINEZ acting
for and in behalf of the defendant CINTAS, defendants
GONZALES and WILFRIDO C. MARTINEZ being the duly
authorized representatives of defendant CINTAS to transact
any and all of its business with plaintiff.

2.3
The remittance of US$340,000.00 was made under an
agreement for plaintiff to advance the said amount and for
defendants GONZALES, WILFRIDO C. MARTINEZ and CINTAS
to repay plaintiff all such monies so advanced to said
defendants or to their order.

2.4
In making said remittance, plaintiff acted as the agent
of the foregoing defendants in meeting the latters liability
to the recipient/s of the amount so remitted.

2.5
The remittance of US$340,000.00 which remains
unsettled to date is a just, binding and lawful obligation of
the defendants GONZALES, WILFRIDO C. MARTINEZ and
CINTAS.

2.6
Defendant CINTAS is a reinvoicing or paper company
with nominee shareholders in Hongkong. The real and
beneficial shareholders of the foregoing defendants are the
defendants LACSON, and WILFRIDO C. MARTINEZ.

2.7
Defendant CINTAS is being used by the foregoing
defendants as an alter ego or business conduit for their sole
benefit and/or to defeat public convenience.

2.8
Defendant CINTAS, being a mere alter ego or business
conduit for the foregoing defendants, has no corporate
personality distinct and separate from that of its beneficial
shareholders and likewise has no substantial assets in its
own name.

2.9
The remittance of US$340,000.00 as referred to
previously, although made upon the instructions of
defendants GONZALES, WILFRIDO C. MARTINEZ and CINTAS,
was in fact a remittance made for the benefit of the
beneficial shareholders of defendant CINTAS.[57]

170

The admissions made by the respondent in its complaint are

judicial admissions which cannot be contradicted unless
there is a showing that it was made through palpable
mistake or that no such admission was made.[58]

The respondent impleaded the petitioner only in its second

alternative cause of action, on its allegation that the latter
was a joint account holder of MMP Nos. 063 and 084, simply
because he signed the signature cards with Wilfrido
Martinez and/or Lacson in blank. The trial court found the
submission of the respondent duly established, based on
Wilfrido Martinezs answer to the complaint, and held the
petitioner liable for the said amount based on the signature
cards in this language:

Defendants Ruben Martinez, Wilfrido C. Martinez and Miguel

Lacson are joint account holders of the money market
placement account Nos. 063 and 084 (par. 17 page 4
Answer of defendant Wilfrido C. Martinez; par. 2, page 5,
Amended Answer of defendant Lacson; t.s.n., 4-18-88, p. 7).
[59]

The appellate court affirmed the ruling of the trial court

without making any specific reference to the aforequoted
ruling of the trial court.[60]

We do not agree. The judicial admissions made by Wilfrido

Martinez in his answer to the complaint are not binding on
the petitioner.[61] The evidence on record shows that the
petitioner affixed his signatures on the signature cards

merely upon the request of his son, Wilfrido Martinez. The

signature cards were printed forms of the respondent with
the names of the signatories and the supposed account
holders typewritten thereon and, except for the account
number, were similarly worded, viz:

SIGNATURE CARD

Account Name: Mr. Ruben Martinez and/or

Number: MMP-063

Account

Mr. Wilfrido C. Martinez

and/or Mr. Miguel J. Lacson

I.D. Card/Passport
No.:________________________________________

Residence Address:
__________________________________________
_____________________________________Tel.___________________
Office
Address:_______________________________________________
_____________________________________Tel. ___________________
Number of signature required to withdraw
funds:_____________________
Confirmation/Correspondence to be mailed to: _____Office
_____Residence

171

_____Others:___________
_______________________
Other
Instructions:______________________________________________
_____________________________________________________________
_____________________________________________________________

By merely affixing his signatures on the signature cards, the

petitioner did not necessarily become a joint and solidary
creditor of the respondent over the said placements.
Neither did the petitioner bind himself to pay to the
respondent the US$340,000 which was borrowed by the CLL
and/or Wilfrido Martinez, and later remitted to FCD SA
18402-7.

Specimen of signature:
1.
Sgd.
(Wilfrido Martinez)
SIGNATURE
NAME
2.
Sgd.
(Miguel J. Lacson)
SIGNATURE
NAME[62]

(Ruben Martinez) 3.
NAME

SIGNATURE

(Ruben Martinez) 4.
NAME

Sgd.

Sgd.

SIGNATURE

The respondent failed to adduce any evidence, testimonial

or documentary, including the relevant laws[63] of
Hongkong where the placements were made to hold the
petitioner liable for the respondents claims. Other than the
signature cards, the respondent failed to adduce a shred of
evidence to prove (a) the terms and conditions of the money
market placements of the CLL in MMP Nos. 063 and 084;
and, (b) the rights and obligations of the petitioner, Wilfrido
Martinez and Lacson, over the money market placements.
In light of the evidence on record, the CLL and/or Wilfrido
Martinez never surrendered their ownership over the funds
in favor of the petitioner when the latter co-signed the
signature cards. The CLL and/or Wilfrido Martinez retained
complete control and dominion over the funds.

The respondent has no one but itself to blame for its failure
to deduct the US$340,000 from the foreign currency and
deposit accounts and money market placements of the CLL.
The evidence on record shows that the respondent was
supposed to deduct the said amount from the money
market placements of the CLL in MMP Nos. 063 and 084, but
failed to do so. The respondent remitted the amount from
its own funds and, by its negligence, merely posted the
amount in the account of the CLL. Worse, the respondent
allowed the CLL and Wilfrido Martinez to withdraw the
entirety of the deposits in the said accounts, without first
deducting the US$340,000. By the time the respondent
realized its mistakes, the funds in the said accounts had
already been withdrawn solely by the CLL and/or Wilfrido
Martinez. This was the testimony of Michael Sung, the
witness for the respondent.

Q: Do you know whether this US$340,000 was really

transferred to Foreign Currency Deposit Account No. 184027 of the Philippine Banking Corporation in Manila?

A:

Yes.

172

Q: Pursuant to the procedure for fund transfer as contained

in Exhs. B, C, D and E, after having made such remittance of
US$340,000.00, what was plaintiff supposed to do, if any, in
order to get reimbursement for such transfer?

A: Plaintiff was supposed to deduct the US$340,000.00

remitted to the foreign currency deposit account from the
Cintas Largas funds or from Money Market Placement
Account Nos. 063 and 084 as well as the Cintas Largas, Ltd.
deposit account.

Q: Do you know if plaintiff was able to obtain

reimbursement of the US$340,000 remitted to the Philippine
Banking Corporation in Manila?

a single centavo from or was personally benefited by the

funds in MMP Nos. 063 and 084. The testimonial and
documentary evidence of the respondent clearly shows that
the CLL and/or Wilfrido Martinez used and disposed of the
said funds without the knowledge, involvement, and consent
of the petitioner. Furthermore, the documentary evidence of
the respondent shows the following:

MMP 063
Statement of Accounts (Deposit)

Value Date

Funds In
A: No, because instead of deducting the remittance of
US$340,000 from the funds in the money market placement
accounts and/or the Cintas Largas Deposit Account, we
posted the US$340,000 remittance as an account receivable
of Cintas Largas, Ltd. since at that time the money market
placement deposits have not yet matured. Subsequently,
we failed to charge the deposit and MMP accounts when
they matured and Cintas Largas, Ltd. and/or Wilfrido C.
Martinez had already withdrawn the bulk of the funds
contained in Money Market Placement Account No. 063 and
the Cintas Largas, Ltd. Deposit Account thus, we were
unable to obtain reimbursement therefrom.[64]

It cannot even be argued that if the petitioner would not be

adjudged liable for the respondents claim, he would thereby
be enriching himself at the expense of the respondent.
There is no evidence on record that the petitioner withdrew

Funds Out

Remarks

173

28/11/80

"

"

6,664.95

21/01/81

Interests earned

119,478.51

29/12/80

Purchase HK$632,041.33 @5.29 & transferred to its

statement A/C

4,779.66
13/02/81

2,321.99
"

"

21/01/81
Interests earned
4,024.83
"

174

100,015.00
100,000.00
Transfer to Cintas Largas A/C Receivable.
Purchase HK$525,000.00 @5.25 cheque made payable to
Grand Solid Enterprises Co., Ltd.

17/02/81

55.07

Interests earned

5,713.74

Transfer to A/C Receivable (MMP-063)

18/03/81

1,317.27
____________

"

"

____________

175

Value Date

Funds In
US$443,975.85
Funds Out
US$443,975.85[65]
Remarks

===========

============

28/11/80

16,374.36
MMP 084
Statement of Accounts (Deposit)

176

Interests earned
Transfer to A/C of Cintas Largas
01/12/80
09/12/80
488.16
1,290.56

"

"
Interests earned

04/12/80
"
1,089.06

200,000.00
"

"
Transfer to Cintas Largas A/R.

"
18/12/80

1,545.42
US$250,000.00

177

Interests earned

20,470.74

Transfer to A/C of Grand Solid

09/03/81

321.91

200,000.00

T/T to Chase Manhattan NY for Credit A/C Allied Capital F/O

Frank Chan B/O Grand Solid.
Interests earned
02/03/81
"
4,608.27

60,000.00
Interests earned
Transfer to A/C of Trinisia Ltd.
"
20/03/81

178

"
213.40

30.00
Interests earned
Cable Charges
"

____________
45,286.26
_____________
T/T to Nitto Trading & Josho Ind. Co., Ltd., Japan.

"

US$777,815.02
2,028.02
US$777,815.02[66]
Transfer to A/C Receivable (MMP-084)

179

===========

============

31/10/80

5,011.99

CINTAS LARGAS
Statement of Accounts (Deposit)
Interests earned
Value Date
17/11/80
Funds In
8,067.70
Funds Out

Remarks

180

"

"
Purchase HK$1,789,200.00 @5.112, Cheque made payable
to Grand Solid.

"

26/11/80

3,264.34

350,000.00

Transfer to A/C of Grand Solid

09/11/80

3,062.23

Interests earned

"

Interests earned

"

300,000.00

Purchase HK$1,535,100.00 @5.117, Cheque made payable

to Grand Solid

21/01/81

350,000.00

181

1,299.80

129,529.26
Interests earned
Transfer to Grand Solids A/C Receivable
"
02/04/81
81,415.00
143,000.00

Remittance from C. Itoh & Co., NY

Transfer from CLs Statement A/C
02/03/81
10/04/81
2,445.49
456.81

Interests earned
Interests earned
"

182

"

"

"

"

50,000.00

Purchase HK$267,150.00 @5.343, Cheque made payable to

Grand Solid.

US$ 50,000.00

13/04/81

Purchase HK$268,850.00 @5.377, cheque made payable to

Grand Solid.

US$ 40.89

28/04/81

132.04

Interests earned

21/04/81

311.66

Interests earned

"

183

40,000.00

46,472.00

Purchase HK$214,480.00 @5.362, cheque made payable to

Grand Solid.

"

52,692.00

Remittance from C. Itoh & Co., NY Re. Pacific Geory.

26/05/81

28.40

Remittance from Dai Ichi Kangyo Bank NY. REF. KOMEIMARU

19/05/81

178,465.18

Interests earned

04/06/81

1,242.80

Transfer from CLs A/C Receivable

"

22/05/81

"

"

184

T/T to Security Pacific Natl Bank LA for A/C of Twentieth

Century Fox Intl Corp.

50,000.00

"

Purchase HK$275,750.00 @5.515, Cheque made payable to

Grand Solid
15.00
11/06/81
Cable Charge
2,252.36
"

Interests earned
31.65
"
Purchase HK$175.00 @5.53 for payment of Business
Registration Fee.

66,400.00

25/06/81

1,192.24

185

"

Interests earned
45,800.00
"
T/T to Josho Ind. Co. Ltd., Japan

"
60,000.00

Purchase HK$331,500.00 @5.525, cheque made payable to

Grand Solid.

"

15.00

Cable Charge

03/07/81
22,656.88

165.47

T/T to Daiwa Bank, Los Angeles for A/C of OAC Equipment

Corp.
Interests earned

186

"

Interests earned

07/07/81

14.83

11,870.00

T/T to Bank of Tokyo, Kobe Branch for A/C of Furuno Electric

Co. Ref.: Mar Tierra Takashiro Maru, Eatelite Nav. and Radar.
"

"

"
"

15.00
16,000.00
Cable Charge

06/07/81

17.60

T/T to Dai Ichi Kangyo Bank, Shimizu Branch for A/C of

Takashiro Maru.

"

187

11.91
15.00

Cable Charge
Interests earned
15/09/81
"
US$ 482.29

237.43
Interests earned

"

Purchase HK$1,421.50 for cheque payment to Price

Waterhouse & Co.

08/01/82

US$ 1,250.00

70,360.00

Reimbursement of expenses paid to Price Waterhouse & Co.

17/09/81

Remittance from C. Itoh & Co., NY

188

19/01/82

Purchase HK$295,100.00, cheque made payable to Grand

Solid.

268.74
"

Interests earned
5,952.38
"
Transfer to A/C of Trinisia Ltd.

3,064.81
_____________
Transfer to CLs Margin A/C
_____________
"

TOTAL :
50,000.00
US$1,756,387.32

189

US$1,732,103.25

US$1,756,387.32

US$1,756,387.32[67]

24,284.07

============

Outstanding deposits

=============

_____________

Clearly from the foregoing, the withdrawals from the deposit

and foreign currency accounts and MMP Nos. 063 and 084 of
the CLL, after the respondent remitted the US$340,000,
were for the account of the CLL and/or Wilfrido Martinez,
and not of the petitioner.

_____________

IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED.

The Decision of the Court of Appeals is REVERSED AND SET
ASIDE. The complaint of the respondent against the
petitioner in Civil Case No. C-10811 is DISMISSED. No costs.

190

SO ORDERED.

Puno, (Chairman), and Tinga, JJ., concur.

Austria-Martinez, J., on official leave.
Chico-Nazario, J., on leave.

191