CORPORATE CONTRACT LAW petitioners instituted an action in the Court of First Instance of Cavite to recover
the sums of money paid. The respondent contends that the resolution does not
1. PRE-INCORPORATION CONTRACTS
a. Who are promoters?
"Promoter" is a person who, acting alone or with others, takes
initiative in founding and organizing the business or enterprise
of the issuer and receives consideration therefor.
b. Nature of Pre-Incorporation Agreement.
Section 60. Subscription contract. Any contract for the
acquisition of unissued stock in an existing corporation or a
corporation still to be formed shall be deemed a subscription
within the meaning of this Title, notwithstanding the fact that
the parties refer to it as a purchase or some other contract. (n)
Section 61. Pre-incorporation subscription. A subscription for
shares of stock of a corporation still to be formed shall be
irrevocable for a period of at least six (6) months from the date
of subscription, unless all of the other subscribers consent to
the revocation, or unless the incorporation of said corporation
fails to materialize within said period or within a longer period
as may be stipulated in the contract of subscription: Provided,
That no pre-incorporation subscription may be revoked after
the submission of the articles of incorporation to the Securities
and Exchange Commission. (n)
BAYLA v SILANG
Facts: The case is about recovery by petitioners of a certain sum of
money which they had paid severally to respondent corporation on account of
shares of stock they individually agreed to take and pay for a certain specified
terms and conditions. Respondent, Silang Traffic Co., Inc., entered into an
agreement for the sale on installment of its shares of stock with various
individuals, including the petitioners Sofrio Bayla. After the latter had paid
several installments for the purchase price of said shares of stock, the petitioners
defaulted in the payment of the subsequent installments. Thus, the board of
directors passed a resolution authorizing for the refund of the amounts paid and
the reversion of the shares of stock to the corporation. Despite the said board
resolution, the amounts paid by petitioners were not returned to them since the
board resolution was revoked and cancelled by a subsequent resolution. Thus,
apply to petitioners as at the time the resolution was passed, the shares had
already automatically been reverted back to the corporation, and that the
resolution was no longer effective as it was cancelled by a subsequent resolution
passed by the Board. The Court of First Instance declared that the shares of stock
had already been forfeited and absolved the respondent from the complaint.
Issues: Whether or not, the failure to pay any installment of the
purchase price of the shares of stock would result in its automatic forfeiture in
favor of the corporation.
Held: The contract herein involved is one of sale and not of subscription
as it is an independent agreement between the individual purchaser, which is the
petitioners, and respondent corporation to buy the shares of stock at a
stipulated price. It does not involve a mutual agreement of the subscribers to
take and pay for the stock of the corporation. Whether a particular contract is a
purchase or a subscription of shares of stock is a matter of construction and
depends upon its terms and the intention of the parties. It has been held that a
subscription to stock in an existing corporation is, as between the subscriber and
the corporation, simply a contract of purchase and sale.
As to forfeiture, the contract did not expressly provide that the failure of
the purchaser to pay any installment would give rise to the forfeiture and
cancellation without the necessity of any demand from the seller. However,
being a contract of sale, it may be rescinded by mutual agreement of the parties.
In the subsequent board resolution, it was stated that the contracts were
rescinded for the good of the corporation and in order to terminate a pending
civil case involving the validity of such sales of the shares. To such rescission,
petitioners apparently agreed, as shown by their demand for the refund of the
amount they had already paid to the corporation. Moreover, provisions in the
contract regarding interest on deferred payments would not have been inserted
if it had been the intention of the parties to provide for automatic forfeiture and
cancelation of the contract. The Civil code states that persons obliged to deliver
or do something are not in default until the moment the creditor demands of
them judicially or extra judicially the fulfillment of their obligation, unless (1) the
obligation or the law expressly provides that demand shall not be necessary in
order that default may arise, (2) by reason of the nature and circumstances of
the obligation it shall appear that the designation of the time at which that thing
was to be delivered or the service rendered was the principal inducement to the
creation of the obligation.
c. Theories on Liabilities for Promoters Contract
- Cagayan Fishing vs. Sandiko
- Rizal Light vs. PSC
- Caram Jr. vs. CA
Cagayan Fishing Development
vs Sandiko
Facts: Manuel Tabora owns 4 parcels of land. Tabora took out a loan
from PNB and Severina Buzon secured by the 4 lands. Later, Tabora executed a
public document by virtue of which the 4 parcels of land he owned was sold to
Cagayan Fishing, while still under incorporation. Cagayan Fishing filed its articles
of incorporation with the Bureau of Commerce and Industry in 1930. In 1931, the
board of directors of said company adopted a resolution authorizing its
president, Jose Ventura, to sell the 4 parcels of lands in question to Teodoro
Sandiko. The corresponding deed of sales, promissory notes, and mortgage
deeds were executed. However, Sandiko failed to pay the sum causing Cagayan
Fishing to file suit.
Issue: Whether or not Cagayan Fishing legally acquired the lands despite
the sale being executed before Cagayan Fishing was incorporated.
Held: Cagayan Fishing didnt legally acquire the lands.
The transfer from Cagayan Fishing to Tabora was made on May 1930 and
the actual incorporation of said company was affected later on October 1930.
Unquestionably, a duly organized corporation has the power to purchase and
hold real property and for this purpose may enter into such contracts as may be
necessary. But before a corporation may be lawfully organized, many things have
to be done. Among other things, the law requires the filing of articles of
incorporation. Although there is a presumption that all the requirements of law
have been complied with, here it cant be denied that Cagayan Fishing wasnt yet
incorporated when it entered into a contract of sale. Not being in legal existence
then, it didnt possess juridical capacity to enter into the contract.
The contract here was entered into not between Tabora and a non-
existent corporation but between the Tabora as owner of the 4 parcels of lands
on the one hand and the same Tabora, his wife and others, as mere promoters of
a corporations on the other hand. A corporation, until organized, has no life and
therefore no faculties. This isnt saying that under no circumstances may the
corporation ratify the acts of promoters of a corporation if and when
subsequently organized. There are, of course, exceptions but under the peculiar
facts and circumstances of the present case we decline to extend the doctrine of
ratification that would result in the commission of injustice or fraud to the candid
and unwary.
It should be observed that Tabora was the registered owner of the 4
parcels of land, which he succeeded in mortgaging to the Philippine National
Bank. He later formed a corporation composed of himself, his wife, and a few
others. Both Tabora and His wife were directors and the latter was treasurer as
well. In fact, to this day, the lands remain inscribed in Tabora's name. Sandiko
always regarded Tabora as the owner of the lands. He dealt with Tabora directly.
Jose Ventura, president of Cagayan Fishing, intervened only to sign the contract
in the corporations behalf. Even PNB always treated Tabora as the owner of the
same. When PNB threatened to foreclose its mortgage ,Tabora approached the
defendant Sandiko and succeeded in making the latter, among other things,
assume the payment of Tabora's indebtedness to PNB. The promissory note was
made payable to Cagayan Fishing so that it may not attached by Tabora's
creditors.
If Cagayan Fishing didnt acquire the 4 parcels of land here involved, it
follows that it did not possess any resultant right to dispose of them by sale to
the defendant, Teodoro Sandiko.
RIZAL LIGHT & ICE CO., INC.
vs.
THE MUNICIPALITY OF MORONG, RIZAL and THE PUBLIC SERVICE COMMISSION
G.R. No. L-20993.September 28, 1968
FACTS:The bulk of petitioner's arguments assailing the personality of
Morong Electric dwells on the proposition that since a franchise is a contract, 23
at least two competent parties are necessary to the execution thereof, and
parties are not competent except when they are in being. Hence, it is contended
that until a corporation has come into being, in this jurisdiction, by the issuance
of a certificate of incorporation by the Securities and Exchange Commission
(SEC) it cannot enter into any contract as a corporation.
The certificate of incorporation of the Morong Electric was issued by the
SEC on October 17, 1962, so only from that date, not before, did it acquire
juridical personality and legal existence. Petitioner concludes that the franchise
granted to Morong Electric on May 6, 1962 when it was not yet in esse is null and
void and cannot be the subject of the Commission's consideration. On the other
hand, Morong Electric argues, and to which argument the Commission agrees,
that it was a de facto corporation at the time the franchise was granted and, as
such, it was not incapacitated to enter into any contract or to apply for and
accept a franchise. Not having been incapacitated, Morong Electric maintains
that the franchise granted to it is valid and the approval or disapproval thereof
can be properly determined by the Commission.
ISSUE: Whether the lack or corporate existence on the part of Morong
rendered the franchise valid.
RULING: YES. The incorporation of (Morong) and its acceptance of the
franchise as shown by this action in prosecuting the application filed with the
Commission for approval of said franchise, not only perfected a contract
between the municipality and Morong but also cured the deficiency pointed out
by the petition. The fact that Morong did not have a corporate existence on the
day the franchise was granted does not render the franchise invalid, as Morong
later obtained its certificate of incorporation and accepted the franchise.
The two decisions of the Public Service Commission, appealed from,
should be, as they are hereby affirmed, with costs in the two cases against
petitioner Rizal Light & Ice Co., Inc.
FERMIN Z. CARAM, JR. and ROSA O. DE CARAM
vs.
THE HONORABLE COURT OF APPEALS and ALBERTO V. ARELLANO
G.R. No. L-48627. June 30, 1987
FACTS:The petitioners claim that this order has no support in fact and
law because they had no contract whatsoever with the private respondent
regarding the above-mentioned services. Their position is that as mere
subsequent investors in the corporation that was later created, they should not
be held solidarily liable with the Filipinas Orient Airways, a separate juridical
entity, and with Barretto and Garcia, their co-defendants in the lower court, **
who were the ones who requested the said services from the private
respondent.
ISSUE: Whether or not the petitioners should be held liable.
RULING: NO. The petitioners were not involved in the initial stages of
the organization of the airline. They were merely among the financiers whose
interest was to be invited and who were in fact persuaded, on the strength of
the project study, to invest in the proposed airline.
There was no showing that the Airline was a fictitious corporation and
did not have a separate juridical personality to justify making the petitioners, as
principal stockholders thereof, responsible for its obligations. As a bona fide
corporation, the Airline should alone be liable for its corporate acts as duly
authorized by its officers and directors. Granting that the petitioners benefited
from the services rendered, such is no justification to hold them personally liable
therefor. Otherwise, all the other stockholders of the corporation, including
those who came in late, and regardless of the amount of their shareholdings,
would be equally and personally liable also with the petitioner for the claims of
the private respondent.
Petitioners cannot be held personally liable for the compensation
claimed by the private respondent for the services performed by him in the
organization of the corporation. To repeat, the petitioners did not contract such
services. It was only the results of such services that Barretto and Garcia
presented to them and which persuaded them to invest in the proposed airline.
The most that can be said is that they benefited from such services, but that
surely is no justification to hold them personally liable therefor.
A promoter could not have acted as agent for a corporation that had no
legal existence. A corporation, until organized, has no life therefore no faculties.
The corporation had no juridical personality to enter into a contract.
2. DE FACTO CORPORATION
a. Section 20. De facto corporations. The due incorporation of any
corporation claiming in good faith to be a corporation under this Code,
and its right to exercise corporate powers, shall not be inquired into
collaterally in any private suit to which such corporation may be a party.
Such inquiry may be made by the Solicitor General in a quo warranto
proceeding.
b. Elements
- Hall v. Piccio
HALL VS. PICCIO
FACTS: In 1947, the petitioners and the respondents signed and
acknowledged in Leyte, the article of incorporation of the Far Eastern Lumber
and Commercial Co., Inc., organized to engage in a general lumber business to
carry on as general contractors, operators and managers, etc. Attached to the
article was an affidavit of the treasurer stating that 23,428 shares of stock had
been subscribed and fully paid with certain properties transferred to the
corporation described in a list appended thereto.
Immediately after the execution of said articles of incorporation, the
corporation proceeded to do business with the adoption of by-laws and the
election of its officers.
In 1947, the said articles of incorporation were filed in the office of the
SEC for the issuance of the corresponding certificate of incorporation.
Thereafter, pending action on the articles of incorporation by the SEC, the
respondents filed before the Court of First Instance of Leyte a civil case, alleging
among other things that the Far Eastern Lumber and Commercial Co. was an
unregistered partnership; that they wished to have it dissolved because of bitter
dissension among the members, mismanagement and fraud by the managers
and heavy financial losses. The petitioners alleged that the court had no
jurisdiction over the civil case decree the dissolution of the company, because it
being a de facto corporation, dissolution thereof may only be ordered in a quo
warranto proceeding instituted in accordance with section 19 of the Corporation
Law.
ISSUES: Whether or not the Far Eastern Lumber and Commercial Co.,
Inc. is a de facto corporation.
RULING: NO. Inasmuch as the Far Eastern Lumber and Commercial Co.,
is a de facto corporation, section 19 of the Corporation Law applies, and
therefore the court had not jurisdiction to take cognizance of said civil case.
 There are least two reasons why this section does not govern the
situation. (1) First, not having obtained the certificate of incorporation, the Far
Eastern Lumber and Commercial Co. even its stockholders may not
probably claim "in good faith" to be a corporation.
Under our statue it is to be noted that it is the issuance of a certificate of
incorporation by the Director of the Bureau of Commerce and Industry (now
SEC) which calls a corporation into being. The immunity if collateral attack is
granted to corporations "claiming in good faith to be a corporation under this
act." Such a claim is compatible with the existence of errors and irregularities;
but not with a total or substantial disregard of the law. Unless there has been an
evident attempt to comply with the law the claim to be a corporation "under this
act" could not be made "in good faith."
(2) Second, this is not a suit in which the corporation is a party. This is a
litigation between stockholders of the alleged corporation, for the purpose of
obtaining its dissolution. Even the existence of a de jure corporation may be
terminated in a private suit for its dissolution between stockholders, without the
intervention of the state.
3. CORPORATION BY ESTOPPEL.
-Section 21 of Corporation code
- Salvatierra vs. Garlitos
- Albert vs. UPC
Section 21. Corporation by estoppel. All persons who assume to act as a
corporation knowing it to be without authority to do so shall be liable as
general partners for all debts, liabilities and damages incurred or arising
as a result thereof: Provided, however, That when any such ostensible
corporation is sued on any transaction entered by it as a corporation or
on any tort committed by it as such, it shall not be allowed to use as a
defense its lack of corporate personality.
On who assumes an obligation to an ostensible corporation as
such, cannot resist performance thereof on the ground that there was in
fact no corporation.
SALVATIERRA VS. GARLITOS
FACTS: Manuela T. Vda. de Salvatierra appeared to be the owner of a
parcel of land located at Maghobas, Poblacion, Burauen, Teyte. On March 7,
1954, said landholder entered into a contract of lease with the Philippine Fibers
Producers Co., Inc., allegedly a corporation "duly organized and existing under
the laws of the Philippines, domiciled at Burauen, Leyte, Philippines, and with
business address therein, represented in this instance by Mr. Segundino Q.
Refuerzo, the President". For failure of the corporation to comply with the terms
and conditions agreed upon with Manuela, plaintiff Alanuela T. Vda, de
Salvatierra filed with the CFI of Leyte a complaint against the Philippine Fibers
Producers Co., Inc., and Segundino Q. Refuerzo, for accounting, rescission and
damages. The lower Court rendered judgment in favor of plaintiff. No appeal
therefrom having been perfected within the reglementary period, the Court,
upon motion of plaintiff, issued a writ of execution, in virtue of which the
Provincial Sheriff of Leyte caused the attachment of 3 parcels of land registered
in the name of Segundino Refuerzo. Defendant filed a motion claiming that the
decision rendered in said Civil Case was null and void with respect to him, there
being no allegation in the complaint pointing to his personal liability for while it
was stated therein that he was a signatory to the lease contract, he did so in his
capacity as president of the corporation and thus prayed that an order be issued
limiting such liability to defendant Corporation. The Court a quo then granted the
same and ordered the Provincial Sheriff of Leyte to release all properties
belonging to the movant that might have already been attached. As plaintiff's
petition for relief from said order was denied, hence this instant action of
Manuela asserting that the trial Judge in issuing the order complained of acted
with grave abuse of discretion and prayed that same be declared a nullity. She
contended that her failure to specify defendant's personal liability was due to
the fact that all the time she was under the impression that the Philippine Fibers
Producers Co., Inc., represented by Refuerzo was a duly registered corporation
as appearing in the contract, but a subsequent inquiry from the SEC yielded
otherwise.
ISSUE: Whether or not Segundino Q. Refuerzo in his capacity as
president of the corporation shall be personally liable for the contract of lease
entered into.
RULING: While as a general rule a person who has contracted or dealt
with an association in such a way as to recognize its existence as a corporate
body is estopped from denying the same in an action arising out of such
transaction or dealing, yet this doctrine may not be held to be applicable where
fraud takes a part in the said transaction. In the instant case, on plaintiff's charge
that she was unaware of the fact that the Philippine Fibers Producers Co., Inc.,
had no juridical personality, defendant Refuerzo gave no confirmation or denial
and the circumstances surrounding the execution of the contract lead to the
inescapable conclusion that plaintiff Manuela T. Vda. de Salvatierra was really
made to believe that such corporation was duly organized in accordance with
law.
There can be no question that a corporation with registered has a
juridical personality separate and distinct from its component members or
stockholders and officers such that a corporation cannot be held liable for the
personal indebtedness of a stockholder even if he should be its president and
conversely, a stockholder or member cannot be held personally liable for any
financial obligation be, the corporation in excess of his unpaid subscription. But
this rule is understood to refer merely to registered corporations and cannot be
made applicable to the liability of members of an unincorporated association.
The reason behind this doctrine is obvious-since an organization which before
the law is non-existent has no personality and would be incompetent to act and
appropriate for itself the powers and attribute of a corporation as provided by
law; it cannot create agents or confer authority on another to act in its behalf;
thus, those who act or purport to act as its representatives or agents do so
without authority and at their own risk. And as it is an elementary principle of law
that a person who acts as an agent without authority or without a principal is
himself regarded as the principal, possessed of all the rights and subject to all the
liabilities of a principal, a person acting or purporting to act on behalf of a
corporation which has no valid existence assumes such privileges and obligations
and comes personally liable for contracts entered into or for other acts
performed as such, agent. Considering that defendant Refuerzo, as president of
the unregistered corporation Philippine Fibers Producers Co., Inc., was the
moving spirit behind the consummation of the lease agreement by acting as its
representative, his liability cannot be limited or restricted that imposed upon
corporate shareholders. In acting on behalf of a corporation which he knew to be
unregistered, he assumed the risk of reaping the consequential damages or
resultant rights, if any, arising out of such transaction.
MARIANO A. ALBERT
vs.
UNIVERSITY PUBLISHING CO., INC.
G.R. No. L-19118, January 30, 1965
FACTS:In the original case, the court had awarded P P15,000.00 in favor
of the petitioner for damages arising out of a breach of contract. Such breach of
contract arose when the publishing company failed to pay the petitioner the
agreed amount for latter to have the exclusive right to publish his revised
Commentaries on the Revised Penal Code and for his share in previous sales of
the book's first edition. The order became final and executory. A writ of
execution was issued against the company, however the petitioner petitioned
for a writ of execution against Jose M. Aruego, as the real defendantstating,
plaintiff's counsel and the Sheriff of Manila discovered that there is no such
entity as University Publishing Co., Inc. and no such entity is registered with the
SEC.
This case asks the court whether or not the judgment may be executed
against Jose M. Aruego, supposed President of University Publishing Co., Inc., as
the real defendant.
ISSUE:Whether or not the judgment may be executed against Jose M.
Aruego, supposed President of University Publishing Co., Inc., as the real
defendant.
RULING: NO. The Court ruled that the doctrine of corporation by estoppel
was not applicable. Although the rule is that a person acting or purporting to act
on behalf of a corporation which has no valid existence assumes such privileges
and obligations and becomes personally liable for contracts entered into or for
other acts performed as such agent, in this case, Aruego was not named as a
defendant. Since he was not named, he could not be served and be made liable
for the claim because to do so would violate his right to due process. He was not
given the chance to defend himself and be heard during trial.
a. Nature of the Doctrine
- International Express Travel vs. CA
- Lim Tong Lim vs. Phil. Fishing Gears
INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES
vs.
HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINE FOOTBALL FEDERATION
G.R. No. 119002. October 19, 2000
FACTS: Petitioner International Express Travel and Tour Services, Inc.,
through its managing director, wrote a letter to the Philippine Football
Federation (Federation), through its president private respondent Henri Kahn,
wherein the former offered its services as a travel agency to the latter, which
was accepted. Petitioner secured the airline tickets for the trips of the athletes
and officials of the Federation which amounted to P449,654.83. For failure to pay
the unpaid amount after demands, the petitioner filed a collection case against
Henri Kahn in his personal capacity and as President of the Federation and
impleaded the Federation as an alternative defendant. Kahn denied liability and
averred that it merely acted as the agent of the Federation and did not guaranty
the payment of the purchased tickets. The trial court ruled against Kahn.
ISSUE: Whether or not Kahn is personally liable.
RULING: YES. Kahn avers that he should not be made personally liable
because it should be the Federation, as a corporation having juridical existence,
which must be held liable. He merely acted as an agent of the latter.
The Court was not persuaded. It ruled that under R.A. 3135, and the
Department of Youth and Sports Development under P.D. 604, for a Federation
to acquire juridical existence it is a requirement that the federation must be
recognized by the accrediting organization, the Philippine Amateur Athletic
Federation. And Kahn failed to prove that such requirement was complied with
by the Federation. It is a settled principal in corporation law that any person
acting or purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and becomes personally liable for contract
entered into or for other acts performed as such agent. As president of the
Federation, Henri Kahn is presumed to have known about the corporate
existence or non-existence of the Federation.
 LIM TONG LIM
vs.
PHILIPPINE FISHING GEAR INDUSTRIES, INC.
1999 Nov 3, G.R. No. 136448
FACTS: On behalf of "Ocean Quest Fishing Corporation," Antonio Chua
and Peter Yao entered into a Contract for the purchase of fishing nets of various
sizes from the Philippine Fishing Gear Industries, Inc. They claimed that they
were engaged in a business venture with Petitioner Lim Tong Lim, who however
was not a signatory to the agreement. They, however, failed to pay; hence,
private respondent filed a collection suit against Chua, Yao and Petitioner Lim
Tong Lim with a prayer for a writ of preliminary attachment. The suit was
brought against the three in their capacities as general partners, on the
allegation that "Ocean Quest Fishing Corporation" was a nonexistent
corporation
Yao and Chua admitted liability while Lim filed his answer. Trial court
rendered decision ruling that Philippine Fishing Gear Industries was entitled to
the Writ of Attachment and that Chua, Yao and Lim, as general partners, were
jointly liable to pay respondent.
ISSUE: Whether or not Lim should be made jointly liable with Yao and
Chua.
RULING: YES.Lim asserts that he should not be made liable because
there was no partnership existing between them.
The court ruled that there exist a partnership between them. It is clear
that Chua, Yao and Lim had decided to engage in a fishing business, which they
started by buying boats worth P3.35 million, financed by a loan secured from
Jesus Lim who was petitioner's brother. In their Compromise Agreement, they
subsequently revealed their intention to pay the loan with the proceeds of the
sale of the boats, and to divide equally among them the excess or loss. These
boats, the purchase and the repair of which were financed with borrowed
money, fell under the term "common fund" under Article 1767. The contribution
to such fund need not be cash or fixed assets; it could be an intangible like credit
or industry. That the parties agreed that any loss or profit from the sale and
operation of the boats would be divided equally among them also shows that
they had indeed formed a partnership.
Moreover, it is clear that the partnership extended not only to the
purchase of the boat, but also to that of the nets and the floats. The fishing nets
and the floats, both essential to fishing, were obviously acquired in furtherance
of their business. It would have been inconceivable for Lim to involve himself so
much in buying the boat but not in the acquisition of the aforesaid equipment,
without which the business could not have proceeded.
b. Two Levels: (i) with fraud and (ii) without fraud.
4. TRUST FUND DOCTRINE.
a. Commercial/Common Law Premise: Equity vs. Debts
(Article 2236 Civil Code)
Article 2236. The debtor is liable with all his property, present and future, for the
fulfillment of his obligations, subject to the exemptions provided by law.
b. Nature of the Doctrine
- Boman vs. CA
BOMAN ENVIRONMENTAL DEVELOPMENT CORPORATION
vs.
HON. COURT OF APPEALS and NILCAR Y. FAJILAN
G.R. No. 77860. November 22, 1988
FACTS: On May 7, 1984, respondent Nilcar Y. Fajilan offered in writing to
resign as President and Member of the Board of Directors of petitioner, Boman
Environmental Development Corporation (BEDECO), and to sell to the company
all his shares, rights, and interests therein for P 300,000 plus the transfer to him
of the company's Isuzu pick-up truck which he had been using.
At a meeting of the Board of Directors of BEDECO, Fajilan's resignation
as president was accepted and new officers were elected. Fajilan's offer to sell
his shares back to the corporation was approved, the Board promising to pay for
them on a staggered basis from July 15, 1984 to December 15, 1984.
A promissory note was signed by BEDECO'S new president, Alfredo
Pangilinan, in the presence of two directors, committing BEDECO to pay him
P300,000 over a six-month period from July 15, 1984 to December 15, 1984.
However, BEDECO paid only P50,000 on July 15, 1984 and another P50,000 on
August 31, 1984 and defaulted in paying the balance of P200,000. On April 30,
1985, Fajilan filed a complaint in the Regional Trial Court of Makati for collection
of that balance from BEDECO.
ISSUES: Whether or not Petitioner Corporation can acquire its own
shares.
RULING: YES. The provisions of the Corporation Code should be deemed
written into the agreement between the corporation and the stockholders even
if there is no express reference to them in the promissory note. The principle is
well settled that an existing law enters into and forms part of a valid contract
without need for the parties' expressly making reference to it.
The requirement of unrestricted retained earnings to cover the shares is
based on the trust fund doctrine which means that the capital stock, property
and other assets of a corporation are regarded as equity in trust for the payment
of corporate creditors. The reason is that creditors of a corporation are preferred
over the stockholders in the distribution of corporate assets. There can be no
distribution of assets among the stockholders without first paying corporate
creditors. Hence, any disposition of corporate funds to the prejudice of creditors
is null and void.
c. To Purchase Own Shares
- Phil Trust vs. Rivera
PHILIPPINE TRUST COMPANY, vs .MARCIANO RIVERA
G.R. No. L-19761 January 29, 1923
Facts: Cooperativa Naval Filipina was duly incorporated with a capital of
P100,000, divided into 100 shares at a par value of P100 each. Among its
incorporators was Marciano Rivera, who subscribed for 450 shares, representing
a value of P45,000. The company however became insolvent. Philippine Trust
became its assignee in bankruptcy. PhilTrust sought to recover of the stock
subscription of Rivera, which admittedly, has never been paid. Rivera contends
that he never paid because the stockholders of Naval issued a resolution shortly
after the companys incorporation, stating that the capital shall be reduced by
50%. As a result, Rivera contends that the subscribers were released from the
obligation to pay any unpaid balance of their subscription in excess of 50% of
their subscriptions. Rivera further contends that the subscriptions of the
subscribers were 50% cancelled, and certificates of shares of stock were issued
for the said remaining 50% of the subscriptions.
Issue: Whether such reduction of the capital stock is valid.
Held: No. SC held that the said resolution is without effect for being:
1. An attempted withdrawal of so much capital from the fund which
the companys creditors were entitled ultimately to rely, and
2. For having been effected without compliance with the statutory
requirements of 17 of the Corporation Law regarding reduction of capital stock,
and
3. For failure to file a certificate with the Bureau of Commerce and
Industry, showing such reduction.
Thus, stockholder is still liable for the unpaid balance of his subscription.
Ratio: Subscriptions to the capital of a corporation constitute a fund to
which creditors have a right to look for satisfaction of their claims and that the
assignee in insolvency can maintain an action upon any unpaid stock subscription
in order to realize assets for the payment of its debts. A corporation has no
power to release an original subscriber to its capital stock from the obligation
of paying for his shares, w/o a valuable consideration for such release; and as
against creditors a reduction of the capital stock can take place only in the
manner and under the conditions prescribed by the statute or the charter or the
AOI. Moreoever, strict compliance with statutory regulations is necessary.
Note: that for reasons 2 and 3, Campos says that 17 has been replaced by 38,
and now, even if all the requirements are complied with, if creditors are
prejudiced by such reduction, it is most unlikely that the SEC will approve it.
d. Release from Subscription
- Steinberg vs. Velasco
C. H. STEINBERG, as Receiver of the Sibuguey Trading Company, Incorporated
vs.
GREGORIO VELASCO, ET AL.
G.R. No. L-30460. March 12, 1929
FACTS:Plaintiff is the receiver of the Sibuguey Trading Company, a
domestic corporation. The defendants are residents of the Philippine Islands. It is
alleged that the defendants, Gregorio Velasco, as president, Felix del Castillo, as
vice-president, Andres L. Navallo, as secretary-treasurer, and Rufino Manuel, as
director of Trading Company, at a meeting of the board of directors, approved
and authorized various lawful purchases already made of a large portion of the
capital stock of the company from its various stockholders with total amount of
the capital stock unlawfully purchased was P3,300. At the time of such purchase,
the corporation had accounts payable amounting to P13,807.50, most of which
were unpaid at the time petition for the dissolution of the corporation was its
financial condition, in contemplation of an insolvency and dissolution. That on
September 11, 1923, when the petition was filed for its dissolution upon the
ground that it was insolvent, its accounts payable amounted to P9,241.19, and its
accounts receivable P12,512.47, or an apparent asset of P3,271.28 over and above
its liabilities.
ISSUE: Whether or not the Corporation acted in bad faith in acquiring its
own shares of stocks.
RULING: YES. There is no stipulation or finding of facts as to what was
the actual cash value of its accounts receivable. Neither is there any stipulation
that those accounts or any part of them ever have been or will be collected, and
it does appear that after his appointment on February 28, 1924, the receiver
made a diligent effort to collect them, and that he was unable to do so, and it
also appears from the minutes of the board of directors that the president and
manager "recommended that P3,000 out of the surplus account to be set
aside for dividends payable, and that payments be made in installments so as not
to effect the financial condition of the corporation."
It is very apparent that on June 24, 1922, the board of directors acted on
assumption that, because it appeared from the books of the corporation that it
had accounts receivable of the face value of P19,126.02, therefore it had a surplus
over and above its debts and liabilities. Thus, in the purchase of its own stock to
the amount of P3,300 and in declaring the dividends to the amount of P3,000,
the real assets of the corporation were diminished P6,300. The corporation did
not then have an actual bona fide surplus from which the dividends could be
paid, and that the payment of them in full at the time would "affect the financial
condition of the corporation."
Creditors of a corporation have the right to assume so long as there are
outstanding debts and liabilities, the board of directors will not use the assets of
the corporation to purchase its own stock, and that it will not declare dividends
to stockholders when the corporation is insolvent.
e. Rescission of Subscription Agreement
- Ong yong vs tiu (2002)
- Ong yong vs tiu (2003)
ONG YONG, et al., petitioner
vs.
TIU, et al., respondent
G.R. No. 144476 8 April 2003
FACTS: In 1994, the construction of the Masagana Citimall in Pasay City
was threatened with stoppage and incompletion when its owner, the First
Landlink Asia Development Corporation (FLADC), which was owned by David S.
Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and
Lourdes C. Tiu (the Tius), encountered dire financial difficulties. It was heavily
indebted to the Philippine National Bank (PNB) for P190 million. To stave off
foreclosure of the mortgage on the two lots where the mall was being built, the
Tius invited Ong Yong, Juanita Tan Ong, Wilson T. Ong, Anna L. Ong, William T.
Ong and Julia Ong Alonzo (the Ongs), to invest in FLADC. Under the Pre-
Subscription Agreement they entered into, the Ongs and the Tius agreed to
maintain equal shareholdings in FLADC: the Ongs were to subscribe to 1,000,000
shares at a par value of P100.00 each while the Tius were to subscribe to an
additional 549,800 shares at P100.00 each in addition to their already existing
subscription of 450,200 shares. Furthermore, they agreed that the Tius were
entitled to nominate the Vice-President and the Treasurer plus 5 directors while
the Ongs were entitled to nominate the President, the Secretary and 6 directors
(including the chairman) to the board of directors of FLADC. Moreover, the Ongs
were given the right to manage and operate the mall. Accordingly, the Ongs paid
P100 million in cash for their subscription to 1,000,000 shares of stock while the
Tius committed to contribute to FLADC a four-storey building and two parcels of
land respectively valued at P20 million (for 200,000 shares), P30 million (for
300,000 shares) and P49.8 million (for 49,800 shares) to cover their additional
549,800 stock subscription therein. The Ongs paid in another P70 million 3 to
FLADC and P20 million to the Tius over and above their P100 million investment,
the total sum of which (P190 million) was used to settle the P190 million
mortgage indebtedness of FLADC to PNB. The business harmony between the
Ongs and the Tius in FLADC, however, was shortlived because the Tius, on 23
February 1996, rescinded the Pre-Subscription Agreement. The Tius accused the
Ongs of (1) refusing to credit to them the FLADC shares covering their real
property contributions; (2) preventing David S. Tiu and Cely Y. Tiu from assuming
the positions of and performing their duties as Vice-President and Treasurer,
respectively, and (3) refusing to give them the office spaces agreed upon. The
controversy finally came to a head when the case was commenced by the Tius on
27 February 1996 at the Securities and Exchange Commission (SEC), seeking
confirmation of their rescission of the Pre-Subscription Agreement.
ISSUE: 1. Whether or not the rescission of Pre-Subscription Agreement
would result in unauthorized liquidation.
2. Whether or not the pre-Subscription Agreement executed by
the Ongs is actually a subscription contract.
RULING: 1. YES. The rescission of the Pre-Subscription Agreement will
effectively result in the unauthorized distribution of the capital assets and
property of the corporation, thereby violating the Trust Fund Doctrine and the
Corporation Code, since rescission of a subscription agreement is not one of the
instances when distribution of capital assets and property of the corporation is
allowed. Rescission will, in the final analysis, result in the premature liquidation
of the corporation without the benefit of prior dissolution in accordance with
Sections 117, 118, 119 and 120 of the Corporation Code.
2. YES. FLADC was originally incorporated with an authorized capital
stock of 500,000 shares with the Tius owning 450,200 shares representing the
paid-up capital. When the Tius invited the Ongs to invest in FLADC as
stockholders, an increase of the authorized capital stock became necessary to
give each group equal (50-50) shareholdings as agreed upon in the Pre-
Subscription Agreement. The authorized capital stock was thus increased from
500,000 shares to 2,000,000 shares with a par value of P100 each, with the Ongs
subscribing to 1,000,000 shares and the Tius to 549,800 more shares in addition
to their 450,200 shares to complete 1,000,000 shares. Thus, the subject matter of
the contract was the 1,000,000 unissued shares of FLADC stock allocated to the
Ongs. Since these were unissued shares, the parties' Pre-Subscription Agreement
was in fact a subscription contract as defined under Section 60, Title VII of the
Corporation Code. A subscription contract necessarily involves the corporation
as one of the contracting parties since the subject matter of the transaction is
property owned by the corporation its shares of stock. Thus, the subscription
contract (denominated by the parties as a Pre-Subscription Agreement) whereby
the Ongs invested P100 million for 1,000,000 shares of stock was, from the
viewpoint of the law, one between the Ongs and FLADC, not between the Ongs
and the Tius.
 ARTICLES OF INCORPORATION
1. Nature of Charter.
- Govt of the Phil. Vs. Manila Railroad
THE GOVERNMENT OF THE PHILIPPINE ISLANDS, petitioner,
vs.
THE MANILA RAILROAD COMPANY and JOSE PAEZ as Manager of said
Company, respondents
Facts: The government of the Philippines entered into a contract with
the manila rail road company under a special charter act no. 1510. The
government of the Philippines is now demanding from the defendant that it
should provide and equip its telegraph poles with crosspieces to carry six
telegraph wires of the Government. This claim is based on the provisions of
section 84 of act No. 1459. Act No. 1459 is the General Corporation Law and was
adopted by the United States Philippine Commission on March 1, 1906. (Vol. 5,
Pub. Laws, pp. 224-268.) Section 84 of the said Act provides:
The railroad corporation shall establish along the whole length of the
road a telegraph line for the use of the railroad. The posts of this line
may be used for Government wires and shall be of sufficient length and
strength and equipped with sufficient crosspiece to carry the number of
wires which the Government may consider necessary for the public
service. The establishment, protection, and maintenance of the wires
and stations necessary for the public service shall be at the cost of the
Government. (Vol. 5, P. L., p. 247.)
The defense of the defendant is that it is not bound by the provisions of the
corporation code because it has a charter of his own Act. No 1510. Under that act
the government is entitled to place on the poles of the company four wires only.
Issue: Whether or not the provisions of the corporation law apply
between the parties.
Ruling: Inasmuch as Act No. 1510 is the charter of Manila Railroad
Company and constitute a contract between it and the Governmemnt, it would
seem that the company is governd by its contract and not by the provisions of
any general law upon questions covered by said contract. From a reading of the
said charter or contract it would be seen that there is no indication that the
Government intended to impose upon said company any other conditions as
obligations not expressly found in said charter or contract. If that is true, then
certainly the Government cannot impose upon said company any conditions or
obligations found in any general law, which does not expressly modify said
contract.
Section 84 of the Corporation Law (Act No. 1459) was intended to apply
to all railways in the Philippine Islands which did not have a special charter
contract. Act No. 1510 applies only to the Manila Railroad Company, one of the
respondents, and being a special charter of said company, its adoption had the
effect of superseding the provisions of the general Corporation Law which are
applicable to railraods in general. The special charter (Act No. 1510) had the
effect of superseding the general Corporation Law upon all matters covered by
said special charter. Said Act, inasmuch as it contained a special provision relating
to the erection of telegraph and telephone poles, and the number of wires which
the Government might place thereon, superseded the general law upon that
question.
Act No. 1510 of the United States Philippine Commission (vol. 5, P. L., pp.
350-358), and that under the provisions of said Act No. 1510 the Government is
entitled to place on the poles of the company four wires only.
2. Procedure and Documentary Requirement
- Section 14 and 15
a. As to number and residency of incorporators
- Section 10
Section 10. Number and qualifications of incorporators. Any
number of natural persons not less than five (5) but not more
than fifteen (15), all of legal age and a majority of whom are
residents of the Philippines, may form a private corporation for
any lawful purpose or purposes. Each of the incorporators of s
stock corporation must own or be a subscriber to at least one
(1) share of the capital stock of the corporation.
b. Corporate Name
- Section 18
- Redline Transit vs. Rural Transit
- Philippine Insurance vs. Hartigan
- Universal Mills vs. Universal Textiles
- Ang Kaanib vs. Iglesia ng Dios
- Lyceum of the Phil. Vs CA
*doctrine of secondary meaning
Section 18. Corporate name. No corporate name may be allowed by the
Securities and Exchange Commission if the proposed name is identical or
deceptively or confusingly similar to that of any existing corporation or to any
other name already protected by law or is patently deceptive, confusing or
contrary to existing laws. When a change in the corporate name is approved, the
Commission shall issue an amended certificate of incorporation under the
amended name.
Red Line Transportation Co. vs. Rural Transit Co.
GR No. 41570 | Sept. 6, 1934
Facts:
On June 4, 1932, Rural Transit filed an application for certification of a new
service between Tuguegarao and Ilagan with the Public Company Service
Commission (PSC), since the present service is not sufficient
Rural Transit further stated that it is a holder of a certificate of public
convenience to operate a passenger bus service between Manila and
Tuguegarao
Red Line opposed said application, arguing that they already hold a
certificate of public convenience for Tuguegarao and Ilagan, and is rendering
adequate service. They also argued that granting Rural Transits application
would constitute a ruinous competition over said route
On Dec. 21, 1932, Public Service Commission approved Rural Transits
application, with the condition that "all the other terms and conditions of the
various certificates of public convenience of the herein applicant and herein
incorporated are made a part hereof."
A motion for rehearing and reconsideration was filed by Red Line since
Rural Transit has a pending application before the Court of First Instance for
voluntary dissolution of the corporation
A motion for postponement was filed by Rural Transit as verified by M.
Olsen who swears "that he was the secretary of the Rural Transit Company, Ltd
During the hearing before the Public Service Commission, the petition for
dissolution and the CFIs decision decreeing the dissolution of Rural Transit were
admitted without objection
At the trial of this case before the Public Service Commission an issue was
raised as to who was the real party in interest making the application, whether
the Rural Transit Company, Ltd., as appeared on the face of the application, or
the Bachrach Motor Company, Inc., using name of the Rural Transit Company,
Ltd., as a trade name
However, PSC granted Rural Transits application for certificate of public
convenience and ordered that a certificate be issued on its name
PSC relied on a Resolution in case No. 23217, authorizing Bachrach Motor to
continue using Rural Transits name as its tradename in all its applications and
petitions to be filed before the PSC. Said resolution was given a retroactive effect
as of the date of filing of the application or April 30, 1930
Issue: Can the Public Service Commission authorize a corporation to assume the
name of another corporation as a trade name?
Ruling: NO
The Rural Transit Company, Ltd., and the Bachrach Motor Co., Inc., are
Philippine corporations and the very law of their creation and continued
existence requires each to adopt and certify a distinctive name
The incorporators "constitute a body politic and corporate under the name
stated in the certificate."
A corporation has the power "of succession by its corporate name." It is
essential to its existence and cannot change its name except in the manner
provided by the statute. By that name alone is it authorized to transact business.
The law gives a corporation no express or implied authority to assume
another name that is unappropriated: still less that of another corporation, which
is expressly set apart for it and protected by the law. If any corporation could
assume at pleasure as an unregistered trade name the name of another
corporation, this practice would result in confusion and open the door to frauds
and evasions and difficulties of administration and supervision.
In this case, the order of the commission authorizing the Bachrach Motor Co.,
Incorporated, to assume the name of the Rural Transit Co., Ltd. likewise
incorporated, as its trade name being void. Accepting the order of December 21,
1932, at its face as granting a certificate of public convenience to the applicant
Rural Transit Co., Ltd., the said order last mentioned is set aside and vacated on
the ground that the Rural Transit Company, Ltd., is not the real party in interest
and its application was fictitious.
 Philippine First Co. vs Hartigan
Facts: Philippine First was originally organized as an insurance
corporation under the name of 'The Yek Tong Lin Fire and Marine Insurance Co.,
Ltd.' as reflected in the articles of incorporation. Later, the articles were
amended changing the corporations name to 'Philippine First Insurance Co.,
Inc.'. The complaint alleges that Philippine First signed as co-maker together with
Hartigan a promissory note for P5,000.00 in favor of the China Banking
Corporation. Philippine First agreed as co-maker after entering into an indemnity
agreement with Hartigan and 3rd persons in its favor. At the time, Philippine First
was still named The Yek... China Banking Corporation then delivered to Hartigan
the sum that Hartigan failed to pay in full. Philippine First paid China Bank and
now claims reimbursement from Hartigan. However, Hartigan claims he isnt
liable to indemnify Philippine First because he contracted with The Yek... and
not Philippine First.
Issue: Whether or not a Philippine corporation can change its name but
still retain its original personality and individuality as such.
Held: Can still retain its original personality and individuality.
Under the Corporation Law, the first thing required to be stated in the Articles of
Incorporation of any corporation is its name, but it is only one among many
matters equally if not more important, that must be stated therein. Importantly,
theres no prohibition therein against the change of name.
The general rule as to corporations is that each corporation shall have a
name by which it is to sue and be sued and do all legal acts. The name of a
corporation in this respect designates the corporation in the same manner as the
name of an individual designates the person. Since an individual has the right to
change his name under certain conditions, there is no compelling reason why a
corporation may not enjoy the same right.
Further, whats contrary to public policy is the use by one corporation of
the name of another corporation as its trade name. Such act gives rise to
confusion, fraud, and evasion. Also, the change of name of a corporation doesnt
result in its dissolution.
Lastly, the approval by the stockholders of the amendment of its articles
of incorporation changing the name "The Yek Tong Lin Fire & Marine Insurance
Co., Ltd." to "Philippine First Insurance Co., Inc." didnt automatically change the
name of said corporation on that date. To be effective, the articles as amended
should be approved by the proper officers within the corporation and filed with
the SEC. It is only from the time of such filing that such name change becomes
effective.
Philippine First rightly acted in its old name when it entered into the
indemnity agreement with Hartigan; for only after filing the amended articles of
incorporation with the SEC did Philippine First legally acquire its new name; and it
was perfectly right for it to file the present case in its new name.
UNIVERSAL MILLS CORPORATION
vs.
UNIVERSAL TEXTILE MILLS, INC.
G.R. No. L-28351, July 28, 1977
FACTS: Universal Textile Mills, Inc. was organized on December 29, 1953,
as a textile manufacturing firm for which it was issued a certificate of registration
on January 8, 1954. The Universal Mills Corporation, on the other hand, was
registered with the Commission on October 27, 1954, under its original name,
Universal Hosiery Mills Corporation, having as its primary purposes the
"manufacture and production of hosieries and wearing apparel of all kinds." On
May 24, 1963, it filed an amendment to its articles of incorporation changing its
name to Universal Mills Corporation, its present name, for which it was issued
the certificate of approval on June 10, 1963.
The immediate cause of this complaint was the occurrence of a fire
which gutted petitioners spinning mills in Pasig, Rizal. Universal Textile Mills,
Inc. alleged that as a result of this fire and because of the similarity of petitioner's
name to that of the former, the news items appearing in the various
metropolitan newspapers carrying reports on the fire created uncertainty and
confusion among its bankers, friends, stockholders and customers prompting
respondent to make announcements, clarifying the real Identity of the
corporation whose property was burned.
The Commission then issued an order enjoining Universal Mills
Corporation from using its present corporate name because it is confusingly and
deceptively similar with Universal Textile Mills, Inc.
ISSUE: Whether or not the order of the SEC is proper.
RULING: YES. The corporate names in question are not Identical, but
they are indisputably so similar that even under the test of "reasonable care and
observation as the public generally are capable of using and may be expected to
exercise" invoked by appellant. The Supreme Court ruled that confusion will
usually arise, considering that under the second amendment of its articles of
incorporation on August 14, 1964, appellant included among its primary purposes
the "manufacturing, dyeing, finishing and selling of fabrics of all kinds" in which
respondent had been engaged for more than a decade ahead of petitioner.
And since respondent is not claiming damages in this proceeding, it is, of
course, immaterial whether or not appellant has acted in good faith, but the SC
cannot perceive why of all names, petitioner had to choose a name already being
used by another firm engaged in practically the same business for more than a
decade enjoying well-earned patronage and goodwill, when there are so many
other appropriate names it could possibly adopt without arousing any suspicion
as to its motive and, more importantly, any degree of confusion in the mind of
the public which could mislead even its own customers, existing or prospective.

ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS, HSK SA BANSANG
PILIPINAS INC.
vs.
IGLESIA NG DIOS KAY CRISTO JESUS, HALIGI AT SUHAY NG KATOTOHANAN
GR 137592, 12 DECEMBER 2001
FACTS: The Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng
Katotohanan (IDCJ-HSK; Church of God in Christ Jesus, the Pillar and Ground of
Truth), is a non-stock religious society or corporation registered in 1936.
Sometime in 1976, one Eliseo Soriano and several other members of said
corporation disassociated themselves from the latter and succeeded in
registering on 30 March 1977 a new non-stock religious society or corporation,
named Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan (IDKJ-
HSK). On 16 July 1979, IDCJ-HSK filed with the SEC a petition to compel IDKJ-HSK
to change its corporate name.
The SEC rendered judgment in favor of IDCJ-HSK, ordering IDKJ-HSK to
change its corporate name to another name that is not similar or identical to any
name already used by a corporation, partnership or association registered with
the Commission.
ISSUE: Whether the corporate names of AK[IDKH-HSK]BP and IDCH-HSK
are confusingly similar.
RULING: YES. The additional words "Ang Mga Kaanib " and "Sa Bansang
Pilipinas, Inc." in AK[IDKH-HSK]BP's name are merely descriptive of and also
referring to the members, or kaanib, of IDCH-HSK who are likewise residing in
the Philippines. These words can hardly serve as an effective differentiating
medium necessary to avoid confusion or difficulty in distinguishing AK[IDKH-
HSK]BP from IDCH-HSK. This is especially so, since both AK[IDKH-HSK]BP and
IDCH-HSK are using the same acronym H.S.K.; not to mention the fact that
both are espousing religious beliefs and operating in the same place.
Parenthetically, it is well to mention that the acronym H.S.K. used by AK[IDKH-
HSK]BP stands for "Haligi at Saligan ng Katotohanan." Then, too, the records
reveal that in holding out their corporate name to the public, AK[IDKH-HSK]BP
highlights the dominant words "IGLESIA NG DIOS KAY KRISTO HESUS, HALIGI AT
SALIGAN NG KATOTOHANAN," which is strikingly similar to IDCH-HSK's
corporate name, thus making it even more evident that the additional words
"Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc.", are merely descriptive of and
pertaining to the members of IDCH-HSK. Significantly, the only difference
between the corporate names of AK[IDKH-HSK]BP and IDCH-HSK are the words
SALIGAN and SUHAY. These words are synonymous both mean ground,
foundation or support. Hence, the Court ruled that the corporate names
Universal are indisputably so similar that even under the test of "reasonable care
and observation" confusion may arise.
The wholesale appropriation by AK[IDKH-HSK]BP of IDCH-HSK's
corporate name cannot find justification under the generic word rule. A contrary
ruling would encourage other corporations to adopt verbatim and register an
existing and protected corporate name, to the detriment of the public. The fact
that there are other non-stock religious societies or corporations using the
names Church of the Living God, Inc., Church of God Jesus Christ the Son of God
the Head, Church of God in Christ & By the Holy Spirit, and other similar names, is
of no consequence. It does not authorize the use by AK[IDKH-HSK]BP of the
essential and distinguishing feature of IDCH-HSK's registered and protected
corporate name.
LYCEUM OF THE PHILIPPINES, INC.
vs.
COURT OF APPEALS, ET AL.
G.R. No. 101897 March 5, 1993
FACTS:Lyceum of the Philippines is an educational institution duly
registered with the Securities and Exchange Commission. Petitioner instituted
proceedings before the SEC to compel the private respondents, which are also
educational institutions, to delete the word "Lyceum" from their corporate
names and permanently to enjoin them from using "Lyceum" as part of their
respective names. The SEC hearing officer rendered a decision sustaining
petitioner's claim to an exclusive right to use the word "Lyceum." The hearing
officer relied upon the SEC ruling in the Lyceum of Baguio, Inc. case and held that
the word "Lyceum" was capable of appropriation and that petitioner had
acquired an enforceable exclusive right to the use of that word.
On appeal, however, by private respondents the SEC En Banc did not
consider the word "Lyceum" to have become so identified with petitioner as to
render use thereof by other institutions as productive of confusion about the
identity of the schools concerned in the mind of the general public. Unlike its
hearing officer, the SEC En Banc held that the attaching of geographical names
to the word "Lyceum" served sufficiently to distinguish the schools from one
another, especially in view of the fact that the campuses of petitioner and those
of the private respondents were physically quite remote from each other.
ISSUE: Whether or not the word Lyceum has not acquired a secondary
meaning.
RULING: NO. The Articles of Incorporation of a corporation must, among
other things, set out the name of the corporation. The policy underlying the
prohibition in Section 18 against the registration of a corporate name which is
"identical or deceptively or confusingly similar" to that of any existing
corporation or which is "patently deceptive" or "patently confusing" or
"contrary to existing laws," is the avoidance of fraud upon the public which
would have occasion to deal with the entity concerned, the evasion of legal
obligations and duties, and the reduction of difficulties of administration and
supervision over corporations.
"Under the doctrine of secondary meaning, a word or phrase originally
incapable of exclusive appropriation with reference to an article in the market,
because geographical or otherwise descriptive might nevertheless have been
used so long and so exclusively by one producer with reference to this article
that, in that trade and to that group of the purchasing public, the word or phrase
has come to mean that the article was his produce. The appellant failed to satisfy
the requisites. No evidence was ever presented in the hearing before the
Commission which sufficiently proved that the word 'Lyceum' has indeed
acquired secondary meaning in favor of the appellant.