|1

EN BANC perform all things which may tend in any way to alleviate the suffering
of animals and promote their welfare.[3]

PHILIPPINE SOCIETY FOR
THE PREVENTION OF
CRUELTY TO ANIMALS,
Petitioners,
- versus -
COMMISSION ON AUDIT,
DIR. RODULFO J. ARIESGA
(in his official capacity as Director
of the Commission on Audit), MS.
MERLE M. VALENTIN and MS.
SUSAN GUARDIAN (in their
official
capacities as Team Leader and
Team
Member, respectively, of the audit
Team of the Commission on
Audit),
Respondents.
x-------------------------------------------------
----------x
DECISION
G.R. No. 169752 At the time of the enactment of Act No. 1285, the original Corporation
Law, Act No. 1459, was not yet in existence. Act No. 1285 antedated
both the Corporation Law and the constitution of the Securities and
Members: Exchange Commission. Important to note is that the nature of the
petitioner as a corporate entity is distinguished from
PUNO, C.J. the sociedad anonimasunder the Spanish Code of Commerce.
QUISUMBING,
YNARES-SANTIAGO, For the purpose of enhancing its powers in promoting animal welfare
SANDOVAL- and enforcing laws for the protection of animals, the petitioner was
GUTIERREZ, initially imbued under its charter with the power to apprehend violators
CARPIO, of animal welfare laws. In addition, the petitioner was to share one-half
AUSTRIA-MARTINEZ, (1/2) of the fines imposed and collected through its efforts for violations
CORONA, of the laws related thereto. As originally worded, Sections 4 and 5 of
CARPIO-MORALES, Act No. 1285 provide:
AZCUNA,
TINGA, SEC. 4. The said society is authorized
CHICO-NAZARIO, to appoint not to exceed five agents in the City of
GARCIA, Manila, and not to exceed two in each of the
VELASCO, JR., provinces of the Philippine Islands who shall have
NACHURA, and all the power and authority of a police officer to
REYES, JJ. make arrests for violation of the laws enacted for
the prevention of cruelty to animals and the
protection of animals, and to serve any process in
connection with the execution of such laws; and in
addition thereto, all the police force of the
Philippine Islands, wherever organized, shall, as
occasion requires, assist said society, its
members or agents, in the enforcement of all such
laws.
Promulgated:
SEC. 5. One-half of all the fines
imposed and collected through the efforts of said
society, its members or its agents, for violations of
September 25, 2007 the laws enacted for the prevention of cruelty to
animals and for their protection, shall belong to
said society and shall be used to promote its
objects.

AUSTRIA-MARTINEZ, J.: (emphasis supplied)

Before the Court is a special civil action for Certiorari and Prohibition
under Rule 65 of the Rules of Court, in relation to Section 2 of Rule 64,
filed by the petitioner assailing Office Order No. 2005-021[1] dated
September 14, 2005 issued by the respondents which constituted the
audit team, as well as its September 23, 2005 Letter[2] informing the
petitioner that respondents audit team shall conduct an audit survey
on the petitioner for a detailed audit of its accounts, operations, and
financial transactions. No temporary restraining order was issued.
The petitioner was incorporated as a juridical entity over one hundred
years ago by virtue of Act No. 1285, enacted on January 19, 1905, by
the Philippine Commission. The petitioner, at the time it was created,
was composed of animal aficionados and animal propagandists. The
objects of the petitioner, as stated in Section 2 of its charter, shall be
to enforce laws relating to cruelty inflicted upon animals or the
protection of animals in the Philippine Islands, and generally, to do and
Subsequently, however, the power to make arrests as well as the
privilege to retain a portion of the fines collected for violation of animal-
related laws were recalled by virtue of Commonwealth Act (C.A.) No.
148,[4] which reads, in its entirety, thus:
Be it enacted by the National Assembly of
the Philippines:
Section 1. Section four of Act Numbered Twelve
hundred and eighty-five as amended by Act
Numbered Thirty five hundred and forty-eight, is
hereby further amended so as to read as follows:
Sec. 4. The said society is
authorized to appoint not to
exceed ten agents in the City
of Manila, and not to exceed

one in each municipality of the
Philippines who shall have the
authority to denounce to
regular peace officers any
violation of the laws enacted
for the prevention of cruelty to
animals and the protection of
animals and to cooperate with
said peace officers in the
prosecution of transgressors
of such laws.
Sec. 2. The full amount of the fines collected for
violation of the laws against cruelty to animals and
for the protection of animals, shall accrue to the
general fund of the Municipality where the offense
was committed.
Sec. 3. This Act shall take effect upon its approval.
Approved, November 8, 1936. (Emphasis
supplied)
Immediately thereafter, then President Manuel L. Quezon issued
Executive Order (E.O.) No. 63 dated November 12, 1936, portions of
which provide:
Whereas, during the first regular session of the
National Assembly, Commonwealth Act
Numbered One Hundred Forty Eight was enacted
depriving the agents of the Society for the
Prevention of Cruelty to Animals of their power to
arrest persons who have violated the laws
prohibiting cruelty to animals thereby correcting a
serious defect in one of the laws existing in our
statute books.
xxxx
Whereas, the cruel treatment of animals is an
offense against the State, penalized under our
statutes, which the Government is duty bound to
enforce;
Now, therefore, I, Manuel L. Quezon, President of
the Philippines, pursuant to the authority conferred
upon me by the Constitution, hereby decree,
order, and direct the Commissioner of Public
Safety, the Provost Marshal General as head of
the Constabulary Division of the Philippine Army,
every Mayor of a chartered city, and every
municipal president to detail and organize special
members of the police force, local, national, and
the Constabulary to watch, capture, and prosecute
offenders against the laws enacted to prevent
cruelty to animals. (Emphasis supplied)
On December 1, 2003, an audit team from respondent Commission on
Audit (COA) visited the office of the petitioner to conduct an audit
|2
survey pursuant to COA Office Order No. 2003-051 dated November
18, 2003[5] addressed to the petitioner. The petitioner demurred on the
ground that it was a private entity not under the jurisdiction of COA,
citing Section 2(1) of Article IX of the Constitution which specifies the
general jurisdiction of the COA, viz:
Section 1. General Jurisdiction. 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 officers that have been
granted fiscal autonomy under the 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 explained thus:
a. Although the petitioner was created by special
legislation, this necessarily came about because in
January 1905 there was as yet neither a Corporation
Law or any other general law under which it may be
organized and incorporated, nor a Securities and
Exchange Commission which would have passed upon
its organization and incorporation.
b. That Executive Order No. 63, issued during the
Commonwealth period, effectively deprived the
petitioner of its power to make arrests, and that the
petitioner lost its operational funding, underscore the
fact that it exercises no governmental function. In fine,
the government itself, by its overt acts, confirmed
petitioners status as a private juridical entity.
The COA General Counsel issued a Memorandum[6] dated May 6,
2004, asserting that the petitioner was subject to its audit authority. In
a letter dated May 17, 2004,[7]respondent COA informed the petitioner
of the result of the evaluation, furnishing it with a copy of said
Memorandum dated May 6, 2004 of the General Counsel.

Petitioner thereafter filed with the respondent COA a Request for Re-
evaluation dated May 19, 2004,[8] insisting that it was a private
domestic corporation.
Acting on the said request, the General Counsel of respondent COA,
in a Memorandum dated July 13, 2004,[9] affirmed her earlier opinion
that the petitioner was a government entity that was subject to the audit
jurisdiction of respondent COA. In a letter dated September 14, 2004,
the respondent COA informed the petitioner of the result of the re-
evaluation, maintaining its position that the petitioner was subject to its
audit jurisdiction, and requested an initial conference with the
respondents.
In a Memorandum dated September 16, 2004, Director Delfin Aguilar
reported to COA Assistant Commissioner Juanito Espino, Corporate
Government Sector, that the audit survey was not conducted due to
the refusal of the petitioner because the latter maintained that it was a
private corporation.
Petitioner received on September 27, 2005 the subject COA Office
Order 2005-021 dated September 14, 2005 and the COA Letter
dated September 23, 2005.
Hence, herein Petition on the following grounds:
A.
RESPONDENT COMMISSION ON AUDIT
COMMITTED GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OR EXCESS OF
JURISDICTION WHEN IT RULED THAT
PETITIONER IS SUBJECT TO ITS AUDIT
AUTHORITY.
B.
PETITIONER IS ENTITLED TO THE RELIEF
SOUGHT, THERE BEING NO APPEAL, NOR
ANY PLAIN, SPEEDY AND ADEQUATE
REMEDY IN THE ORDINARY COURSE OF LAW
AVAILABLE TO IT.[10]
The essential question before this Court is whether the petitioner
qualifies as a government agency that may be subject to audit by
respondent COA.
Petitioner argues: first, even though it was created by special
legislation in 1905 as there was no general law then existing under
which it may be organized or incorporated, it exercises no
governmental functions because these have been revoked by C.A. No.
148 and E.O. No. 63; second, nowhere in its charter is it indicated that
it is a public corporation, unlike, for instance, C.A. No. 111 which
created the Boy Scouts of the Philippines, defined its powers and
purposes, and specifically stated that it was An Act to Create a Public
Corporation in which, even as amended by Presidential Decree No.
460, the law still adverted to the Boy Scouts of the Philippines as a
public corporation, all of which are not obtaining in the charter of the
petitioner; third, if it were a government body, there would have been
no need for the State to grant it tax exemptions under Republic Act No.
1178, and the fact that it was so exempted strengthens its position that
it is a private institution; fourth, the employees of the petitioner are
|3
registered and covered by the Social Security System at the latters
initiative and not through the Government Service Insurance System,
which should have been the case had the employees been considered
government employees; fifth, the petitioner does not receive any form
of financial assistance from the government, since C.A. No. 148,
amending Section 5 of Act No. 1285, states that the full amount of the
fines, collected for violation of the laws against cruelty to animals and
for the protection of animals, shall accrue to the general fund of the
Municipality where the offense was committed; sixth, C.A. No. 148
effectively deprived the petitioner of its powers to make arrests and
serve processes as these functions were placed in the hands of the
police force; seventh, no government appointee or representative sits
on the board of trustees of the petitioner; eighth, a reading of the
provisions of its charter (Act No. 1285) fails to show that any act or
decision of the petitioner is subject to the approval of or control by any
government agency, except to the extent that it is governed by the law
on private corporations in general; and finally, ninth, the Committee on
Animal Welfare, under the Animal Welfare Act of 1998, includes
members from both the private and the public sectors.
The respondents contend that since the petitioner is a body politic
created by virtue of a special legislation and endowed with a
governmental purpose, then, indubitably, the COA may audit the
financial activities of the latter. Respondents in effect divide their
contentions into six strains: first, the test to determine whether an
entity is a government corporation lies in the manner of its creation,
and, since the petitioner was created by virtue of a special charter, it
is thus a government corporation subject to respondents auditing
power; second, the petitioner exercises sovereign powers, that is, it is
tasked to enforce the laws for the protection and welfare of animals
which ultimately redound to the public good and welfare, and,
therefore, it is deemed to be a government instrumentality as defined
under the Administrative Code of 1987, the purpose of which is
connected with the administration of government, as purportedly
affirmed by American jurisprudence; third, by virtue of Section
23,[11] Title II, Book III of the same Code, the Office of the President
exercises supervision or control over the petitioner; fourth, under the
same Code, the requirement under its special charter for the petitioner
to render a report to the Civil Governor, whose functions have been
inherited by the Office of the President, clearly reflects the nature of
the petitioner as a government instrumentality; fifth, despite the
passage of the Corporation Code, the law creating the petitioner had
not been abolished, nor had it been re-incorporated under any general
corporation law; and finally, sixth, Republic Act No. 8485, otherwise
known as the Animal Welfare Act of 1998, designates the petitioner as
a member of its Committee on Animal Welfare which is attached to the
Department of Agriculture.
In view of the phrase One-half of all the fines imposed and collected
through the efforts of said society, the Court, in a Resolution dated
January 30, 2007, required the Office of the Solicitor General (OSG)
and the parties to comment on: a) petitioner's authority to impose fines
and the validity of the provisions of Act No. 1285 and Commonwealth
Act No. 148 considering that there are no standard measures provided
for in the aforecited laws as to the manner of implementation, the
specific violations of the law, the person/s authorized to impose fine
and in what amount; and, b) the effect of the 1935 and 1987
Constitutions on whether petitioner continues to exist or should
organize as a private corporation under the Corporation
Code, B.P. Blg. 68 as amended.

Petitioner and the OSG filed their respective Comments. Respondents
filed a Manifestation stating that since they were being represented by
the OSG which filed its Comment, they opted to dispense with the filing
of a separate one and adopt for the purpose that of the OSG.
The petitioner avers that it does not have the authority to impose fines
for violation of animal welfare laws; it only enjoyed the privilege of
sharing in the fines imposed and collected from its efforts in the
enforcement of animal welfare laws; such privilege, however, was
subsequently abolished by C.A. No. 148; that it continues to exist as a
private corporation since it was created by the Philippine Commission
before the effectivity of the Corporation law, Act No. 1459; and the
1935 and 1987 Constitutions.
The OSG submits that Act No. 1285 and its amendatory laws did not
give petitioner the authority to impose fines for violation of
laws[12] relating to the prevention of cruelty to animals and the
protection of animals; that even prior to the amendment of Act No.
1285, petitioner was only entitled to share in the fines imposed; C.A.
No. 148 abolished that privilege to share in the fines collected; that
petitioner is a public corporation and has continued to exist since Act
No. 1285; petitioner was not repealed by the 1935 and 1987
Constitutions which contain transitory provisions maintaining all laws
issued not inconsistent therewith until amended, modified or repealed.
The petition is impressed with merit.
The arguments of the parties, interlaced as they are, can be disposed
of in five points.
First, the Court agrees with the petitioner that the charter test cannot
be applied.
Essentially, the charter test as it stands today provides:
[T]he test to determine whether a corporation is
government owned or controlled, or private in
nature is simple. Is it created by its own charter for
the exercise of a public function, or by
incorporation under the general corporation law?
Those with special charters are government
corporations subject to its provisions, and its
employees are under the jurisdiction of the Civil
Service Commission, and are compulsory
members of the Government Service Insurance
System. xxx (Emphasis supplied)[13]
The petitioner is correct in stating that the charter test is predicated, at
best, on the legal regime established by the 1935 Constitution, Section
7, Article XIII, which states:
Sec. 7. The National Assembly shall not, except
by general law, provide for the formation,
organization, or regulation of private corporations,
unless such corporations are owned or controlled
by the Government or any subdivision or
instrumentality thereof.[14]
|4
The foregoing proscription has been carried over to the 1973 and the
1987 Constitutions. Section 16 of Article XII of the present 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.
Section 16 is essentially a re-enactment of Section 7 of Article XVI of
the 1935 Constitution and Section 4 of Article XIV of the 1973
Constitution.
During the formulation of the 1935 Constitution, the Committee on
Franchises recommended the foregoing proscription to prevent the
pressure of special interests upon the lawmaking body in the creation
of corporations or in the regulation of the same. To permit the
lawmaking body by special law to provide for the organization,
formation, or regulation of private corporations would be in effect to
offer to it the temptation in many cases to favor certain groups, to the
prejudice of others or to the prejudice of the interests of the country.[15]
And since the underpinnings of the charter test had been introduced
by the 1935 Constitution and not earlier, it follows that the test cannot
apply to the petitioner, which was incorporated by virtue of Act No.
1285, enacted on January 19, 1905. Settled is the rule that laws in
general have no retroactive effect, unless the contrary is
provided.[16] All statutes are to be construed as having only a
prospective operation, unless the purpose and intention of the
legislature to give them a retrospective effect is expressly declared or
is necessarily implied from the language used. In case of doubt, the
doubt must be resolved against the retrospective effect.[17]
There are a few exceptions. Statutes can be given retroactive effect in
the following cases: (1) when the law itself so expressly provides; (2)
in case of remedial statutes; (3) in case of curative statutes; (4) in case
of laws interpreting others; and (5) in case of laws creating new
rights.[18] None of the exceptions is present in the instant case.
The general principle of prospectivity of the law likewise applies to Act
No. 1459, otherwise known as the Corporation Law, which had been
enacted by virtue of the plenary powers of the Philippine Commission
on March 1, 1906, a little over a year after January 19, 1905, the time
the petitioner emerged as a juridical entity. Even the Corporation Law
respects the rights and powers of juridical entities organized
beforehand, viz:
SEC. 75. Any corporation
or sociedad anonima formed, organized, and
existing under the
laws of the Philippine Islands and lawfully transac
ting business in the Philippine Islands on the date
of the passage of this Act, shall be subject to the
provisions hereof so far as such
provisions may be applicable and shall
be entitled at its option either to continue business
as such corporation or to reform and organize

under and by virtue of the provisions of this Act,
transferring all corporate interests to the new
corporation which, if a stock corporation, is
authorized to issue its shares of stock at par to the
stockholders or members of the old corporation
according to their interests. (Emphasis supplied).
As pointed out by the OSG, both the 1935 and 1987 Constitutions
contain transitory provisions maintaining all laws issued not
inconsistent therewith until amended, modified or repealed.[19]
In a legal regime where the charter test doctrine cannot be applied, the
mere fact that a corporation has been created by virtue of a special
law does not necessarily qualify it as a public corporation.
What then is the nature of the petitioner as a corporate entity? What
legal regime governs its rights, powers, and duties?
As stated, at the time the petitioner was formed, the applicable law was
the Philippine Bill of 1902, and, emphatically, as also stated above, no
proscription similar to the charter test can be found therein.
The textual foundation of the charter test, which placed a limitation on
the power of the legislature, first appeared in the 1935
Constitution. However, the petitioner was incorporated in 1905 by
virtue of Act No. 1258, a law antedating the Corporation Law (Act No.
1459) by a year, and the 1935 Constitution, by thirty years. There
being neither a general law on the formation and organization of
private corporations nor a restriction on the legislature to create private
corporations by direct legislation, the Philippine Commission at that
moment in history was well within its powers in 1905 to constitute the
petitioner as a private juridical entity.
Time and again the Court must caution even the most brilliant scholars
of the law and all constitutional historians on the danger of imposing
legal concepts of a later date on facts of an earlier date.[20]
The amendments introduced by C.A. No. 148 made it clear that the
petitioner was a private corporation and not an agency of the
government. This was evident in Executive Order No. 63, issued by
then President of the Philippines Manuel L. Quezon, declaring that the
revocation of the powers of the petitioner to appoint agents with
powers of arrest corrected a serious defect in one of the laws existing
in the statute books.
As a curative statute, and based on the doctrines so far discussed,
C.A. No. 148 has to be given retroactive effect, thereby freeing all
doubt as to which class of corporations the petitioner belongs, that is,
it is a quasi-public corporation, a kind of private domestic corporation,
which the Court will further elaborate on under the fourth point.
Second, a reading of petitioners charter shows that it is not subject to
control or supervision by any agency of the State, unlike government-
owned and -controlled corporations.No government representative sits
on the board of trustees of the petitioner. Like all private corporations,
the successors of its members are determined voluntarily and solely
by the petitioner in accordance with its by-laws, and may exercise
those powers generally accorded to private corporations, such as the
powers to hold property, to sue and be sued, to use a common seal,
and so forth. It may adopt by-laws for its internal operations: the
petitioner shall be managed or operated by its officers in accordance
|5
with its by-laws in force. The pertinent provisions of the charter
provide:
Section 1. Anna L. Ide, Kate S. Wright,
John L. Chamberlain, William F. Tucker, Mary S.
Fergusson, Amasa S. Crossfield, Spencer Cosby,
Sealy B. Rossiter, Richard P. Strong, Jose
Robles Lahesa, Josefina R. de Luzuriaga, and
such other persons as may be associated with
them in conformity with this act, and their
successors, are hereby constituted and created a
body politic and corporate at law, under the name
and style of The Philippines Society for the
Prevention of Cruelty to Animals.
As incorporated by this Act, said society
shall have the power to add to its organization
such and as many members as it desires, to
provide for and choose such officers as it may
deem advisable, and in such manner as it may
wish, and to remove members as it shall provide.
It shall have the right to sue and be
sued, to use a common seal, to
receive legacies and donations, to conduct social
enterprises for the purpose of obtaining funds, to
levy dues upon itsmembers and provide for their
collection to hold real and personal estate such as
may be necessary for the accomplishment of the
purposes of the society, and to adopt such by-laws
for its government as may not be inconsistent with
law or this charter.
xxxx
Sec. 3. The said society shall be
operated under the direction of its officers, in
accordance with its by-laws in force, and this
charter.
xxxx
Sec. 6. The principal office of the society
shall be kept in the city of Manila, and the society
shall have full power to locate and establish
branch offices of the society wherever it may deem
advisable in the Philippine Islands, such branch
offices to be under the supervision and control of
the principal office.
Third. The employees of the petitioner are registered and covered by
the Social Security System at the latters initiative, and not through the
Government Service Insurance System, which should be the case if
the employees are considered government employees. This is another
indication of petitioners nature as a private entity. Section 1 of
Republic Act No. 1161, as amended by Republic Act No. 8282,
otherwise known as the Social Security Act of 1997, defines the
employer:

Employer Any person, natural or
juridical, domestic or foreign, who carries on in the
Philippines any trade, business, industry,
undertaking or activity of any kind and uses the
services of another person who is under his orders
as regards the employment, except the
Government and any of its political subdivisions,
branches or instrumentalities, including
corporations owned or controlled by the
Government: Provided, That a self-employed
person shall be both employee and employer at
the same time. (Emphasis supplied)
Fourth. The respondents contend that the petitioner is a body politic
because its primary purpose is to secure the protection and welfare of
animals which, in turn, redounds to the public good.
This argument, is, at best, specious. The fact that a certain juridical
entity is impressed with public interest does not, by that circumstance
alone, make the entity a public corporation, inasmuch as a corporation
may be private although its charter contains provisions of a public
character, incorporated solely for the public good. This class of
corporations may be considered quasi-public corporations, which are
private corporations that render public service, supply public
wants,[21] or pursue other eleemosynary objectives. While purposely
organized for the gain or benefit of its members, they are required by
law to discharge functions for the public benefit. Examples of these
corporations are utility,[22] railroad, warehouse, telegraph, telephone,
water supply corporations and transportation companies.[23] It must be
stressed that a quasi-public corporation is a species of private
corporations, but the qualifying factor is the type of service the former
renders to the public: if it performs a public service, then it becomes a
quasi-public corporation.[24]
Authorities are of the view that the purpose alone of the corporation
cannot be taken as a safe guide, for the fact is that almost all
corporations are nowadays created to promote the interest, good, or
convenience of the public. A bank, for example, is a private
corporation; yet, it is created for a public benefit. Private schools and
universities are likewise private corporations; and yet, they are
rendering public service. Private hospitals and wards are charged with
heavy social responsibilities. More so with all common carriers. On the
other hand, there may exist a public corporation even if it is endowed
with gifts or donations from private individuals.
The true criterion, therefore, to determine whether a corporation is
public or private is found in the totality of the relation of the corporation
to the State. If the corporation is created by the State as the latters
own agency or instrumentality to help it in carrying out its governmental
functions, then that corporation is considered public; otherwise, it is
private. Applying the above test, provinces, chartered cities,
and barangays can best exemplify public corporations. They are
created by the State as its own device and agency for the
accomplishment of parts of its own public works.[25]
It is clear that the amendments introduced by C.A. No. 148 revoked
the powers of the petitioner to arrest offenders of animal welfare laws
and the power to serve processes in connection therewith.
|6
Fifth. The respondents argue that since the charter of the petitioner
requires the latter to render periodic reports to the Civil Governor,
whose functions have been inherited by the President, the petitioner
is, therefore, a government instrumentality.
This contention is inconclusive. By virtue of the fiction that all
corporations owe their very existence and powers to the State, the
reportorial requirement is applicable to all corporations of whatever
nature, whether they are public, quasi-public, or private corporationsas
creatures of the State, there is a reserved right in the legislature to
investigate the activities of a corporation to determine whether it acted
within its powers. In other words, the reportorial requirement is the
principal means by which the State may see to it that its creature acted
according to the powers and functions conferred upon it. These
principles were extensively discussed in Bataan Shipyard &
Engineering Co., Inc. v. Presidential Commission on Good
Government.[26] Here, the Court, in holding that the subject corporation
could not invoke the right against self-incrimination whenever the State
demanded the production of its corporate books and papers,
extensively discussed the purpose of reportorial requirements, viz:
x x x The corporation is a creature of the state. It
is presumed to be incorporated for the benefit of
the public. It received certain special privileges
and franchises, and holds them subject to the laws
of the state and the limitations of its charter. Its
powers are limited by law. It can make no contract
not authorized by its charter. Its rights to act as a
corporation are only preserved to it so long as it
obeys the laws of its creation. There is a reserve[d]
right in the legislature to investigate its contracts
and find out whether it has exceeded its powers. It
would be a strange anomaly to hold that a state,
having chartered a corporation to make use of
certain franchises, could not, in the exercise of
sovereignty, inquire how these franchises had
been employed, and whether they had been
abused, and demand the production of the
corporate books and papers for that purpose. The
defense amounts to this, that an officer of the
corporation which is charged with a criminal
violation of the statute may plead the criminality of
such corporation as a refusal to produce its books.
To state this proposition is to answer it. While an
individual may lawfully refuse to answer
incriminating questions unless protected by an
immunity statute, it does not follow that a
corporation vested with special privileges and
franchises may refuse to show its hand when
charged with an abuse of such privileges.
(Wilson v. United States, 55 Law Ed., 771, 780.)[27]
WHEREFORE, the petition is GRANTED. Petitioner is DECLARED a
private domestic corporation subject to the jurisdiction of the Securities
and Exchange Commission. The respondents are ENJOINED from
investigating, examining and auditing the petitioner's fiscal and
financial affairs.
SO ORDERED.

[G.R. No. 126204. November 20, 2001]
NATIONAL POWER CORPORATION, petitioner, vs. PHILIPP
BROTHERS OCEANIC, INC., respondent.
DECISION
SANDOVAL-GUTIERREZ, J.:
Where a person merely uses a right pertaining to him, without bad
faith or intent to injure, the fact that damages are thereby suffered by
another will not make him liable.[1]
This principle finds useful application to the present case.
Before us is a petition for review of the Decision[2] dated August 27,
1996 of the Court of Appeals affirming in toto the Decision[3] dated
January 16, 1992 of the Regional Trial Court, Branch 57, Makati City.
The facts are:
On May 14, 1987, the National Power Corporation (NAPOCOR)
issued invitations to bid for the supply and delivery of 120,000 metric
tons of imported coal for its Batangas Coal-Fired Thermal Power
Plant in Calaca, Batangas. The Philipp Brothers Oceanic, Inc.
(PHIBRO) prequalified and was allowed to participate as one of the
bidders. After the public bidding was conducted, PHIBROs bid was
accepted. NAPOCORs acceptance was conveyed in a letter dated
July 8, 1987, which was received by PHIBRO on July 15, 1987.
The Bidding Terms and Specifications[4] provide for the manner of
shipment of coals, thus:
SECTION V
SHIPMENT
The winning TENDERER who then becomes the SELLER shall
arrange and provide gearless bulk carrier for the shipment of coal to
arrive at discharging port on or before thirty (30) calendar days
after receipt of the Letter of Credit by the SELLER or its
nominee as per Section XIV hereof to meet the vessel arrival
schedules at Calaca, Batangas, Philippines as follows:
60,000 +/ - 10 % July 20, 1987
60,000 +/ - 10% September 4, 1987[5]
On July 10, 1987, PHIBRO sent word to NAPOCOR that industrial
disputes might soon plague Australia, the shipments point of origin,
which could seriously hamper PHIBROs ability to supply the needed
coal.[6] From July 23 to July 31, 1987, PHIBRO again apprised
NAPOCOR of the situation in Australia, particularly informing the
latter that the ship owners therein are not willing to load cargo unless
a strike-free clause is incorporated in the charter party or the contract
of carriage.[7] In order to hasten the transfer of coal, PHIBRO
proposed to NAPOCOR that they equally share the burden of a
strike-free clause. NAPOCOR refused.
On August 6, 1987, PHIBRO received from NAPOCOR a confirmed
and workable letter of credit. Instead of delivering the coal on or
before the thirtieth day after receipt of the Letter of Credit, as agreed
upon by the parties in the July contract, PHIBRO effected its first
shipment only on November 17, 1987.
|7
Consequently, in October 1987, NAPOCOR once more advertised for
the delivery of coal to its Calaca thermal plant. PHIBRO participated
anew in this subsequent bidding. On November 24, 1987,
NAPOCOR disapproved PHIBROs application for pre-qualification to
bid for not meeting the minimum requirements.[8] Upon further inquiry,
PHIBRO found that the real reason for the disapproval was its
purported failure to satisfy NAPOCORs demand for damages due to
the delay in the delivery of the first coal shipment.
This prompted PHIBRO to file an action for damages with application
for injunction against NAPOCOR with the Regional Trial Court,
Branch 57, Makati City.[9] In its complaint, PHIBRO alleged that
NAPOCORs act of disqualifying it in the October 1987 bidding and in
all subsequent biddings was tainted with malice and bad faith.
PHIBRO prayed for actual, moral and exemplary damages and
attorneys fees.
In its answer, NAPOCOR averred that the strikes in Australia could
not be invoked as reason for the delay in the delivery of coal because
PHIBRO itself admitted that as of July 28, 1987 those strikes had
already ceased. And, even assuming that the strikes were still
ongoing, PHIBRO should have shouldered the burden of a strike-free
clause because their contract was C and F Calaca, Batangas,
Philippines, meaning, the cost and freight from the point of origin
until the point of destination would be for the account of
PHIBRO. Furthermore, NAPOCOR claimed that due to PHIBROs
failure to deliver the coal on time, it was compelled to purchase coal
from ASEA at a higher price. NAPOCOR claimed for actual damages
in the amount of P12,436,185.73, representing the increase in the
price of coal, and a claim of P500,000.00 as litigation expenses.[10]
Thereafter, trial on the merits ensued.
On January 16, 1992, the trial court rendered a decision in favor of
PHIBRO, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff
Philipp Brothers Oceanic Inc. (PHIBRO) and against the defendant
National Power Corporation (NAPOCOR) ordering the said defendant
NAPOCOR:
1. To reinstate Philipp Brothers Oceanic, Inc. (PHIBRO) in the
defendant National Power Corporations list of accredited bidders and
allow PHIBRO to participate in any and all future tenders of National
Power Corporation for the supply and delivery of imported steam
coal;
2 To pay Philipp Brothers Oceanic, Inc. (PHIBRO);
a. The peso equivalent at the time of payment of $864,000 as actual
damages;
b. The peso equivalent at the time of payment of $100,000 as moral
damages;
c. The peso equivalent at the time of payment of $ 50,000 as
exemplary damages;
d. The peso equivalent at the time of payment of $73,231.91 as
reimbursement for expenses, cost of litigation and attorneys fees;
3. To pay the costs of suit;

4. The counterclaims of defendant NAPOCOR are dismissed for lack
of merit.
SO ORDERED.[11]
Unsatisfied, NAPOCOR, through the Solicitor General, elevated the
case to the Court of Appeals. On August 27, 1996, the Court of
Appeals rendered a Decision affirming in toto the Decision of the
Regional Trial Court. It ratiocinated that:
There is ample evidence to show that although PHIBROs delivery of
the shipment of coal was delayed, the delay was in fact caused by a)
Napocors own delay in opening a workable letter of credit; and b) the
strikes which plaqued the Australian coal industry from the first week
of July to the third week of September 1987. Strikes are included in
the definition of force majeure in Section XVII of the Bidding Terms
and Specifications, (supra), so Phibro is not liable for any delay
caused thereby.
Phibro was informed of the acceptance of its bid on July 8,
1987. Delivery of coal was to be effected thirty (30) days from
Napocors opening of a confirmed and workable letter of credit.
Napocor was only able to do so on August 6, 1987.
By that time, Australias coal industry was in the middle of a seething
controversy and unrest, occasioned by strikes, overtime bans, mine
stoppages. The origin, the scope and the effects of this industrial
unrest are lucidly described in the uncontroverted testimony of James
Archibald, an employee of Phibro and member of the Export
Committee of the Australian Coal Association during the time these
events transpired.
xxxxxx
The records also attest that Phibro periodically informed Napocor of
these developments as early as July 1, 1987, even before the bid
was approved. Yet, Napocor did not forthwith open the letter of credit
in order to avoid delay which might be caused by the strikes and their
after-effects.
Strikes are undoubtedly included in the force majeure clause of the
Bidding Terms and Specifications (supra). The renowned civilist,
Prof. Arturo Tolentino, defines force majeure as an event which takes
place by accident and could not have been foreseen. (Civil Code of
the Philippines, Volume IV, Obligations and Constracts, 126, [1991])
He further states:
Fortuitous events may be produced by two general causes: (1) by
Nature, such as earthquakes, storms, floods, epidemics, fires, etc.,
and (2) by the act of man, such as an armed invasion, attack by
bandits, governmental prohibitions, robbery, etc.
Tolentino adds that the term generally applies, broadly speaking, to
natural accidents. In order that acts of man such as a strike, may
constitute fortuitous event, it is necessary that they have the force of
an imposition which the debtor could not have resisted. He cites a
parallel example in the case of Philippine National Bank v. Court of
Appeals, 94 SCRA 357 (1979), wherein the Supreme Court said that
the outbreak of war which prevents performance exempts a party
from liability.
Hence, by law and by stipulation of the parties, the strikes which took
place in Australia from the first week of July to the third week of
|8
September, 1987, exempted Phibro from the effects of delay of the
delivery of the shipment of coal.[12]
Twice thwarted, NAPOCOR comes to us via a petition for review
ascribing to the Court of Appeals the following errors:
I
Respondent Court of Appeals gravely and seriously erred in
concluding and so holding that PHIBROs delay in the delivery of
imported coal was due to NAPOCORs alleged delay in opening a
letter of credit and to force majeure, and not to PHIBROs own
deliberate acts and faults.[13]
II
Respondent Court of Appeals gravely and seriously erred in
concluding and so holding that NAPOCOR acted maliciously
and unjustifiably in disqualifying PHIBRO from participating in
the December 8, 1987 and future biddings for the supply of
imported coal despite the existence of valid grounds therefor
such as serious impairment of its track record.[14]
III
Respondent Court of Appeals gravely and seriously erred in
concluding and so holding that PHIBRO was entitled to
injunctive relief, to actual or compensatory, moral and
exemplary damages, attorneys fees and litigation expenses
despite the clear absence of legal and factual bases for such
award.[15]
IV
Respondent Court of Appeals gravely and seriously erred in
absolving PHIBRO from any liability for damages to NAPOCOR
for its unjustified and deliberate refusal and/or failure to deliver
the contracted imported coal within the stipulated period. [16]
V
Respondent Court of Appeals gravely and seriously erred in
dismissing NAPOCORs counterclaims for damages and
litigation expenses.[17]
It is axiomatic that only questions of law, not questions of fact, may
be raised before this Court in a petition for review under Rule 45 of
the Rules of Court.[18] The findings of facts of the Court of Appeals
are conclusive and binding on this Court[19] and they carry even more
weight when the said court affirms the factual findings of the trial
court.[20] Stated differently, the findings of the Court of Appeals, by
itself, which are supported by substantial evidence, are almost
beyond the power of review by this Court.[21]
With the foregoing settled jurisprudence, we find it pointless to delve
lengthily on the factual issues raised by petitioner. The existence of
strikes in Australia having been duly established in the lower courts,
we are left only with the burden of determining whether or not
NAPOCOR acted wrongfully or with bad faith in disqualifying
PHIBRO from participating in the subsequent public bidding.
Let us consider the case in its proper perspective.

The Court of Appeals is justified in sustaining the Regional Trial
Courts decision exonerating PHIBRO from any liability for damages
to NAPOCOR as it was clearly established from the evidence,
testimonial and documentary, that what prevented PHIBRO from
complying with its obligation under the July 1987 contract was the
industrial disputes which besieged Australia during that time. Extant
in our Civil Code is the rule that no person shall be responsible for
those events which could not be foreseeen, or which, though
foreseen, were inevitable.[22] This means that when an obligor is
unable to fulfill his obligation because of a fortuitous event or
force majeure, he cannot be held liable for damages for non-
performance.[23]
In addition to the above legal precept, it is worthy to note that
PHIBRO and NAPOCOR explicitly agreed in Section XVII of the
Bidding Terms and Specifications[24] that neither seller (PHIBRO) nor
buyer (NAPOCOR) shall be liable for any delay in or failure of the
performance of its obligations, other than the payment of money due,
if any such delay or failure is due to Force Majeure. Specifically,
theydefined force majeure as any disabling cause beyond the control
of and without fault or negligence of the party, which causes may
include but are not restricted to Acts of God or of the public enemy;
acts of the Government in either its sovereign or contractual capacity;
governmental restrictions; strikes, fires, floods, wars, typhoons,
storms, epidemics and quarantine restrictions.
The law is clear and so is the contract between NAPOCOR and
PHIBRO. Therefore, we have no reason to rule otherwise.
However, proceeding from the premise that PHIBRO was prevented
by force majeure from complying with its obligation, does it
necessarily follow that NAPOCOR acted unjustly, capriciously, and
unfairly in disapproving PHIBROs application for pre-qualification to
bid?
First, it must be stressed that NAPOCOR was not bound under any
contract to approve PHIBROs pre-qualification requirements. In fact,
NAPOCOR had expressly reserved its right to reject bids. The
Instruction to Bidders found in the Post-Qualification Documents/
Specifications for the Supply and Delivery of Coal for the Batangas
Coal-Fired Thermal Power Plant I at Calaca, Batangas
Philippines,[25] is explicit, thus:
IB-17 RESERVATION OF NAPOCOR TO REJECT BIDS
NAPOCOR reserves the right to reject any or all bids, to waive any
minor informality in the bids received. The right is also reserved to
reject the bids of any bidder who has previously failed to
properly perform or complete on time any and all contracts for
delivery of coal or any supply undertaken by a
bidder.[26] (Emphasis supplied)
This Court has held that where the right to reject is so reserved, the
lowest bid or any bid for that matter may be rejected on a mere
technicality.[27] And where the government as advertiser, availing
itself of that right, makes its choice in rejecting any or all bids, the
losing bidder has no cause to complain nor right to dispute that
choice unless an unfairness or injustice is shown. Accordingly, a
bidder has no ground of action to compel the Government to
award the contract in his favor, nor to compel it to accept his
bid. Even the lowest bid or any bid may be rejected.[28] In Celeste v.
Court of Appeals,[29]we had the occasion to rule:
|9
Moreover, paragraph 15 of the Instructions to Bidders states that
the Government hereby reserves the right to reject any or all
bids submitted. In the case of A.C. Esguerra and Sons v. Aytona, 4
SCRA 1245, 1249 (1962), we held:
x x x [I]n the invitation to bid, there is a condition imposed upon the
bidders to the effect that the bidders shall be subject to the right of
the government to reject any and all bids subject to its
discretion. Here the government has made its choice, and unless
an unfairness or injustice is shown, the losing bidders have no
cause to complain, nor right to dispute that choice.
Since there is no evidence to prove bad faith and arbitrariness
on the part of the petitioners in evaluating the bids, we rule that
the private respondents are not entitled to damages
representing lost profits. (Emphasis supplied)
Verily, a reservation of the government of its right to reject any bid,
generally vests in the authorities a wide discretion as to who is the
best and most advantageous bidder. The exercise of such discretion
involves inquiry, investigation, comparison, deliberation and decision,
which are quasi-judicial functions, and when honestly exercised, may
not be reviewed by the court.[30] In Bureau Veritas v. Office of the
President,[31] we decreed:
The discretion to accept or reject a bid and award contracts is
vested in the Government agencies entrusted with that
function. The discretion given to the authorities on this matter is
of such wide latitude that the Courts will not interfere therewith,
unless it is apparent that it is used as a shield to a fraudulent
award. (Jalandoni v. NARRA, 108 Phil. 486 [1960]). x x x. The
exercise of this discretion is a policy decision that necessitates prior
inquiry, investigation, comparison, evaluation, and deliberation. This
task can best be discharged by the Government agencies concerned,
not by the Courts. The role of the Courts is to ascertain whether a
branch or instrumentality of the Government has transgresses its
constitutional boundaries. But the Courts will not interfere with
executive or legislative discretion exercised within those
boundaries. Otherwise, it strays into the realm of policy decision-
making. x x x. (Emphasis supplied)
Owing to the discretionary character of the right involved in this case,
the propriety of NAPOCORs act should therefore be judged on the
basis of the general principles regulating human relations, the
forefront provision of which is Article 19 of the Civil Code which
provides that every person must, in the exercise of his rights and in
the performance of his duties, act with justice, give everyone his due,
and observe honesty and good faith.[32] Accordingly, a person will be
protected only when he acts in the legitimate exercise of his right,
that is, when he acts with prudence and in good faith; but not when
he acts with negligence or abuse.[33]
Did NAPOCOR abuse its right or act unjustly in disqualifying PHIBRO
from the public bidding?
We rule in the negative.
In practice, courts, in the sound exercise of their discretion, will have
to determine under all the facts and circumstances when the exercise
of a right is unjust, or when there has been an abuse of right.[34]
We went over the record of the case with painstaking solicitude and
we are convinced that NAPOCORs act of disapproving PHIBRO's

application for pre-qualification to bid was without any intent to injure
or a purposive motive to perpetrate damage. Apparently, NAPOCOR
acted on the strong conviction that PHIBRO had a seriously-impaired
track record. NAPOCOR cannot be faulted from believing so.At this
juncture, it is worth mentioning that at the time NAPOCOR issued its
subsequent Invitation to Bid, i.e., October 1987, PHIBRO had not yet
delivered the first shipment of coal under the July 1987 contract,
which was due on or before September 5, 1987. Naturally,
NAPOCOR is justified in entertaining doubts on PHIBROs
qualification or capability to assume an obligation under a new
contract.
Moreover, PHIBROs actuation in 1987 raised doubts as to the real
situation of the coal industry in Australia. It appears from the records
that when NAPOCOR was constrained to consider an offer from
another coal supplier (ASEA) at a price of US$33.44 per metric ton,
PHIBRO unexpectedly offered the immediate delivery of 60,000
metric tons of Ulan steam coal at US$31.00 per metric ton for arrival
at Calaca, Batangas on September 20-21, 1987.[35] Of course,
NAPOCOR had reason to ponder-- how come PHIBRO could
assure the immediate delivery of 60,000 metric tons of coal from
the same source to arrive at Calaca not later than September
20/21, 1987 but it could not deliver the coal it had undertaken
under its contract?
Significantly, one characteristic of a fortuitous event, in a legal sense,
and consequently in relations to contracts, is that the concurrence
must be such as to render it impossible for the debtor to fulfill his
obligation in a normal manner.[36] Faced with the above
circumstance, NAPOCOR is justified in assuming that, may be, there
was really no fortuitous event or force majeure which could render it
impossible for PHIBRO to effect the delivery of
coal. Correspondingly, it is also justified in treating PHIBROs failure
to deliver a serious impairment of its track record. That the trial court,
thereafter, found PHIBROs unexpected offer actually a result of its
desire to minimize losses on the part of NAPOCOR is
inconsequential. In determining the existence of good faith, the
yardstick is the frame of mind of the actor at the time he committed
the act, disregarding actualities or facts outside his knowledge. We
cannot fault NAPOCOR if it mistook PHIBROs unexpected offer a
mere attempt on the latters part to undercut ASEA or an indication of
PHIBROs inconsistency. The circumstances warrant such
contemplation.
That NAPOCOR believed all along that PHIBROs failure to deliver on
time was unfounded is manifest from its letters[37] reminding PHIBRO
that it was bound to deliver the coal within 30 days from its
(PHIBROs) receipt of the Letter of Credit, otherwise it would be
constrained to take legal action. The same honest belief can be
deduced from NAPOCORs Board Resolution, thus:
On the legal aspect, Management stressed that failure of PBO to
deliver under the contract makes them liable for damages,
considering that the reasons invoked were not valid. The
measure of the damages will be limited to actual and
compensatory damages. However, it was reported that Philipp
Brothers advised they would like to have continuous business
relation with NPC so they are willing to sit down or even proposed
that the case be submitted to the Department of Justice as to avoid a
court action or arbitration.
| 10
xxxxxx
On the technical-economic aspect, Management claims that if PBO
delivers in November 1987 and January 1988, there are some
advantages. If PBO reacts to any legal action and fails to deliver, the
options are: one, to use 100% Semirara and second, to go into
urgent coal order. The first option will result in a 75 MW derating and
oil will be needed as supplement. We will stand to lose around P30
M. On the other hand, if NPC goes into an urgent coal order, there
will be an additional expense of $786,000 or P16.11 M, considering
the price of the latest purchase with ASEA. On both points,
reliability is decreased.[38]
The very purpose of requiring a bidder to furnish the awarding
authority its pre-qualification documents is to ensure that only those
responsible and qualified bidders could bid and be awarded with
government contracts. It bears stressing that the award of a contract
is measured not solely by the smallest amount of bid for its
performance, but also by the responsibility of the
bidder. Consequently, the integrity, honesty, and trustworthiness of
the bidder is to be considered. An awarding official is justified in
considering a bidder not qualified or not responsible if he has
previously defrauded the public in such contracts or if, on the
evidence before him, the official bona fide believes the bidder has
committed such fraud, despite the fact that there is yet no judicial
determination to that effect.[39] Otherwise stated, if the awarding
body bona fide believes that a bidder has seriously impaired its track
record because of a particular conduct, it is justified in disqualifying
the bidder. This policy is necessary to protect the interest of the
awarding body against irresponsible bidders.
Thus, one who acted pursuant to the sincere belief that another
willfully committed an act prejudicial to the interest of the government
cannot be considered to have acted in bad faith. Bad faith has always
been a question of intention. It is that corrupt motive that operates in
the mind. As understood in law, it contemplates a state of mind
affirmatively operating with furtive design or with some motive of self-
interest or ill-will or for ulterior purpose.[40] While confined in the realm
of thought, its presence may be ascertained through the partys
actuation or through circumstantial evidence.[41] The circumstances
under which NAPOCOR disapproved PHIBRO's pre-qualification to
bid do not show an intention to cause damage to the latter. The
measure it adopted was one of self-protection.Consequently, we
cannot penalize NAPOCOR for the course of action it
took. NAPOCOR cannot be made liable for actual, moral and
exemplary damages.
Corollarily, in awarding to PHIBRO actual damages in the amount
of $864,000, the Regional Trial Court computed what could have
been the profits of PHIBRO had NAPOCOR allowed it to participate
in the subsequent public bidding. It ruled that PHIBRO would have
won the tenders for the supply of about 960,000 metric tons out of at
least 1,200,000 metric tons from the public bidding of December
1987 to 1990. We quote the trial courts ruling, thus:
x x x. PHIBRO was unjustly excluded from participating in at least
five (5) tenders beginning December 1987 to 1990, for the supply
and delivery of imported coal with a total volume of about 1,200,000
metric tons valued at no less than US$32 Million. (Exhs. AA, AA-1, to
AA-2). The price of imported coal for delivery in 1988 was quoted in
June 1988 by bidders at US$ 41.35 to US $ 43.95 per metric ton

(Exh. JJ); in September 1988 at US$41.50 to US$49.50 per metric
ton (Exh. J-1); in November 1988 at US$ 39.00 to US$ 48.50 per
metric ton (Exh. J-2) and for the 1989 deliveries, at US$ 44.35 to
US$ 47.35 per metric ton (Exh. J-3) and US$38.00 to US$48.25 per
metric ton in September 1990 (Exh. JJ-6 and JJ-7). PHIBRO would
have won the tenders for the supply and delivery of about 960,000
metric tons of coal out of at least 1,200,000 metric tons awarded
during said period based on its proven track record of 80%. The
Court, therefore finds that as a result of its disqualification,
PHIBRO suffered damages equivalent to its standard 3% margin
in 960,000 metric tons of coal at the most conservative price of
US$ 30.000 per metric ton, or the total of US$ 864,000 which
PHIBRO would have earned had it been allowed to participate in
biddings in which it was disqualified and in subsequent tenders
for supply and delivery of imported coal.
We find this to be erroneous.
Basic is the rule that to recover actual damages, the amount of loss
must not only be capable of proof but must actually be proven with
reasonable degree of certainty, premised upon competent proof or
best evidence obtainable of the actual amount thereof.[42] A court
cannot merely rely on speculations, conjectures, or guesswork as to
the fact and amount of damages. Thus, while indemnification for
damages shall comprehend not only the value of the loss suffered,
but also that of the profits which the obligee failed to obtain,[43] it is
imperative that the basis of the alleged unearned profits is not too
speculative and conjectural as to show the actual damages which
may be suffered on a future period.
In Pantranco North Express, Inc. v. Court of Appeals,[44] this Court
denied the plaintiffs claim for actual damages which was premised on
a contract he was about to negotiate on the ground that there was
still the requisite public bidding to be complied with, thus:
As to the alleged contract he was about to negotiate with Minister
Hipolito, there is no showing that the same has been awarded to
him. If Tandoc was about to negotiate a contract with Minister
Hipolito, there was no assurance that the former would get it or that
the latter would award the contract to him since there was the
requisite public bidding. The claimed loss of profit arising out of
that alleged contract which was still to be negotiated is a mere
expectancy. Tandocs claim that he could have earned P2 million
in profits is highly speculative and no concrete evidence was
presented to prove the same. The only unearned income to which
Tandoc is entitled to from the evidence presented is that for the one-
month period, during which his business was interrupted, which
is P6,125.00, considering that his annual net income was P73,
500.00.
In Lufthansa German Airlines v. Court of Appeals,[45] this Court
likewise disallowed the trial court's award of actual damages for
unrealized profits in the amount of US$75,000.00 for being highly
speculative. It was held that the realization of profits by respondent x
x x was not a certainty, but depended on a number of factors,
foremost of which was his ability to invite investors and to win the
bid.This Court went further saying that actual or compensatory
damages cannot be presumed, but must be duly proved, and proved
with reasonable degree of certainty.
And in National Power Corporation v. Court of Appeals,[46] the Court,
in denying the bidders claim for unrealized commissions, ruled that
| 11
even if NAPOCOR does not deny its (bidder's) claims for unrealized
commissions, and that these claims have been transmuted into
judicial admissions, these admissions cannot prevail over the rules
and regulations governing the bidding for NAPOCOR contracts,
which necessarily and inherently include the reservation by the
NAPOCOR of its right to reject any or all bids.
The award of moral damages is likewise improper. To reiterate,
NAPOCOR did not act in bad faith. Moreover, moral damages are
not, as a general rule, granted to a corporation.[47] While it is true that
besmirched reputation is included in moral damages, it cannot cause
mental anguish to a corporation, unlike in the case of a natural
person, for a corporation has no reputation in the sense that an
individual has, and besides, it is inherently impossible for a
corporation to suffer mental anguish.[48] In LBC Express, Inc. v. Court
of Appeals,[49] we ruled:
Moral damages are granted in recompense for physical suffering,
mental anguish, fright, serious anxiety, besmirched reputation,
wounded feelings, moral shock, social humiliation, and similar
injury. A corporation, being an artificial person and having existence
only in legal contemplation, has no feelings, no emotions, no senses;
therefore, it cannot experience physical suffering and mental
anguish. Mental suffering can be experienced only by one having a
nervous system and it flows from real ills, sorrows, and griefs of life
all of which cannot be suffered by respondent bank as an artificial
person.
Neither can we award exemplary damages under Article 2234 of the
Civil Code. Before the court may consider the question of whether or
not exemplary damages should be awarded, the plaintiff must show
that he is entitled to moral, temperate, or compensatory damages.
NAPOCOR, in this petition, likewise contests the judgment of the
lower courts awarding PHIBRO the amount of $73,231.91 as
reimbursement for expenses, cost of litigation and attorneys fees.
We agree with NAPOCOR.
This Court has laid down the rule that in the absence of stipulation, a
winning party may be awarded attorney's fees only in case plaintiff's
action or defendant's stand is so untenable as to amount to gross
and evident bad faith.[50] This cannot be said of the case at bar.
NAPOCOR is justified in resisting PHIBROs claim for damages. As a
matter of fact, we partially grant the prayer of NAPOCOR as we find
that it did not act in bad faith in disapproving PHIBRO's pre-
qualification to bid.
Trial courts must be reminded that attorney's fees may not be
awarded to a party simply because the judgment is favorable to him,
for it may amount to imposing a premium on the right to redress
grievances in court. We adopt the same policy with respect to the
expenses of litigation. A winning party may be entitled to expenses of
litigation only where he, by reason of plaintiff's clearly unjustifiable
claims or defendant's unreasonable refusal to his demands, was
compelled to incur said expenditures. Evidently, the facts of this case
do not warrant the granting of such litigation expenses to PHIBRO.
At this point, we believe that, in the interest of fairness, NAPOCOR
should give PHIBRO another opportunity to participate in future
public bidding. As earlier mentioned, the delay on its part was due to
a fortuitous event.
 | 12

But before we dispose of this case, we take this occasion to remind

PHIBRO of the indispensability of coal to a coal-fired thermal
plant. With households and businesses being entirely dependent on
the electricity supplied by NAPOCOR, the delivery of coal cannot be
venturesome. Indeed, public interest demands that one who offers to
deliver coal at an appointed time must give a reasonable assurance
that it can carry through. With the deleterious possible consequences
that may result from failure to deliver the needed coal, we believe
there is greater strain of commitment in this kind of obligation.
WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV
No. 126204 dated August 27, 1996 is hereby MODIFIED. The award,
in favor of PHIBRO, of actual, moral and exemplary damages,
reimbursement for expenses, cost of litigation and attorneys fees,
and costs of suit, is DELETED.
SO ORDERED.
 | 13

G HOLDINGS, INC., G.R. No. 160236

Petitioner, MMC was incorporated by the Development Bank of the Philippines
(DBP) and the Philippine National Bank (PNB) on October 19, 1984,
Present: on account of their foreclosure of Marinduque Mining and Industrial
Corporations assets. MMC started its commercial operations in
August 1985. Later, DBP and PNB transferred it to the National
- versus - CARPIO MORALES, J.,* Government for disposition or privatization because it had become a
non-performing asset.[5]
CHICO-NAZARIO,**
Acting Chairperson,
On October 2, 1992, pursuant to a Purchase and Sale
NATIONAL MINES AND NACHURA, Agreement[6] executed between GHI and Asset Privatization Trust
(APT), the former bought ninety percent (90%) of MMCs shares and
ALLIED WORKERS UNION PERALTA, and
financial claims.[7] These financial claims were converted into three
Local 103 (NAMAWU); SHERIFFS ABAD,***JJ Promissory Notes[8] issued by MMC in favor of GHI totaling P500M
and secured by mortgages over MMCs properties. The notes, which
RICHARD H. APROSTA and were similarly worded except for their amounts, read as follows:
ALBERTO MUNOZ, all acting
Sheriffs; DEPARTMENT OF PROMISSORY NOTE
LABOR AND EMPLOYMENT,
Region VI, Bacolod District Promulgated: AMOUNT - Php114,715,360.00 [Php186,550,560.00 in the second
Office, Bacolod City,
note, and Php248,734,080.00 in the
Respondents.
October 16, 2009 third note.]

x------------------------------------------------------------------------------------x MAKATI, METRO MANILA, PHILIPPINES, October 2, 1992

For Value Received, MARICALUM MINING CORPORATION (MMC)

with postal address at 4th Floor, Manila Memorial Park Bldg., 2283
DECISION Pasong Tamo Extension, Makati, Metro Manila, Philippines, hereby
promises to pay G HOLDINGS, INC., at its office at Phimco
Compound, F. Manalo Street, Punta, Sta. Ana, Manila, the amount of
NACHURA, J.: PESOS ONE HUNDRED FOURTEEN MILLION, SEVEN HUNDRED
FIFTEEN THOUSAND AND THREE HUNDRED SIXTY
(Php114,715,360.00) [PESOS ONE HUNDRED EIGHTY SIX
Before this Court is a petition for review on certiorari under Rule 45 of MILLION FIVE HUNDRED FIFTY THOUSAND FIFE HUNDRED
the Rules of Court assailing the October 14, 2003 Decision[1] of the AND SIXTY (Php186,550,560.00) in the second note, and PESOS
Court of Appeals (CA) in CA-G.R. SP No. 75322. TWO HUNDRED FORTY EIGHT MILLION, SEVEN HUNDRED
THIRTY FOUR THOUSAND AND EIGHTY (Php248,734,080.00) in
the third note], PHILIPPINE CURRENCY, on or before October 2,
2002. Interest shall accrue on the amount of this Note at a rate per
annum equal to the interest of 90-day Treasury Bills prevailing on the
The Facts Friday preceding the maturity date of every calendar quarter.

The petitioner, G Holdings, Inc. (GHI), is a domestic corporation
primarily engaged in the business of owning and holding shares of
stock of different companies.[2] It was registered with the Securities
and Exchange Commission on August 3, 1992. Private respondent,
National Mines and Allied Workers Union Local 103 (NAMAWU), was
the exclusive bargaining agent of the rank and file employees of
Maricalum Mining Corporation (MMC),[3] an entity operating a copper
mine and mill complex at Sipalay, Negros Occidental.[4]
As collateral security, MMC hereby establishes and constitutes in
favor of G HOLDINGS, INC., its successors and/or assigns:
1. A mortgage over certain parcels of land, more
particularly listed and described in the Sheriffs Certificate of Sale
dated September 7, 1984 issued by the Ex-Officio Provincial Sheriff

of Negros Occidental, Rolando V. Ramirez, with office at Bacolod
City following the auction sale conducted pursuant to the provisions
of Act 3135, a copy of which certificate of sale is hereto attached as
Annex A and made an integral part hereof;
2. A chattel mortgage over assets and personal properties
more particularly listed and described in the Sheriffs Certificate of
Sale dated September 7, 1984 issued by the Ex-Officio Provincial
Sheriff of Negros Occidental, Rolando V. Ramirez, with office at
Bacolod City following the auction conducted pursuant to the
provisions of Act 1508, a copy of which Certificate of Sale is hereto
attached as Annex B and made an integral part hereof.
3. Mortgages over assets listed in APT Specific Catalogue
GC-031 for MMC, a copy of which Catalogue is hereby made an
integral part hereof by way of reference, as well as assets presently
in use by MMC but which are not listed or included in paragraphs 1
and 2 above and shall include all assets that may hereinafter be
acquired by MMC.
MARICALUM MINING CORPORATION
(Maker)
x x x x[9]
Upon the signing of the Purchase and Sale Agreement and upon the
full satisfaction of the stipulated down payment, GHI immediately
took physical possession of the mine site and its facilities, and took
full control of the management and operation of MMC.[10]
Almost four years thereafter, or on August 23, 1996, a labor dispute
(refusal to bargain collectively and unfair labor practice) arose
between MMC and NAMAWU, with the latter eventually filing with the
National Conciliation and Mediation Board of Bacolod City a notice of
strike.[11] Then Labor Secretary, now Associate Justice of this Court,
Leonardo A. Quisumbing, later assumed jurisdiction over the dispute
and ruled in favor of NAMAWU. In his July 30, 1997 Order in OS-AJ-
10-96-014 (Quisumbing Order), Secretary Quisumbing declared that
the lay-off (of workers) implemented on May 7, 1996 and October 7,
1996 was illegal and that MMC committed unfair labor practice. He
then ordered the reinstatement of the laid-off workers, with payment
of full backwages and benefits, and directed the execution of a new
collective bargaining agreement (CBA) incorporating the terms and
conditions of the previous CBA providing for an annual increase in
the workers daily wage.[12] In two separate cases─G.R. Nos. 133519
and 138996─filed with this Court, we sustained the validity of the
| 14
Quisumbing Order, which became final and executory on January 26,
2000.[13]
On May 11, 2001, then Acting Department of Labor and
Employment (DOLE) Secretary, now also an Associate Justice of this
Court, Arturo D. Brion, on motion of NAMAWU, directed the issuance
of a partial writ of execution (Brion Writ), and ordered the DOLE
sheriffs to proceed to the MMC premises for the execution of the
same.[14]Much later, in 2006, this Court, in G.R. Nos. 157696-97,
entitled Maricalum Mining Corporation v. Brion and
NAMAWU,[15] affirmed the propriety of the issuance of the Brion Writ.
The Brion Writ was not fully satisfied because MMCs resident
manager resisted its enforcement.[16] On motion of NAMAWU, then
DOLE Secretary Patricia A. Sto. Tomas ordered the issuance of the
July 18, 2002 Alias Writ of Execution and Break-Open Order (Sto.
Tomas Writ).[17] On October 11, 2002, the respondent acting sheriffs,
the members of the union, and several armed men implemented the
Sto. Tomas Writ, and levied on the properties of MMC located at its
compound in Sipalay, Negros Occidental.[18]
On October 14, 2002, GHI filed with the Regional Trial Court (RTC)
of Kabankalan City, Negros Occidental, Special Civil Action (SCA)
No. 1127 for Contempt with Prayer for the Issuance of a Temporary
Restraining Order (TRO) and Writ of Preliminary Injunction and to
Nullify the Sheriffs Levy on Properties.[19] GHI contended that the
levied properties were the subject of a Deed of Real Estate and
Chattel Mortgage, dated September 5, 1996[20] executed by MMC in
favor of GHI to secure the aforesaid P550M promissory notes; that
this deed was registered on February 24, 2000;[21] and that the
mortgaged properties were already extrajudicially foreclosed in July
2001 and sold to GHI as the highest bidder on December 3, 2001, as
evidenced by the Certificate of Sale dated December 4, 2001.[22]
The trial court issued ex parte a TRO effective for 72 hours, and set
the hearing on the application for a writ of injunction.[23] On October
17, 2002, the trial court ordered the issuance of a Writ of Injunction
(issued on October 18, 2002)[24] enjoining the DOLE sheriffs from
further enforcing the Sto. Tomas Writ and from conducting any public
sale of the levied-on properties, subject to GHIs posting of a P5M
bond.[25]
Resolving, among others, NAMAWUs separate motions for the
reconsideration of the injunction order and for the dismissal of the
case, the RTC issued its December 4, 2002 Omnibus Order,[26] the
dispositive portion of which reads:
WHEREFORE, premises considered, respondent NAMAWU Local
103s Motion for Reconsideration dated October 23, 2002 for the
reconsideration of the Order of this Court directing the issuance of
Writ of Injunction prayed for by petitioner and the Order dated
 | 15

October 18, 2002 approving petitioners Injunction Bond in the

amount of P5,000,000.00 is hereby DENIED.
Respondents Motion to Dismiss as embodied in its Opposition to
Extension of Temporary Restraining Order and Issuance of Writ of
Preliminary Injunction with Motion to Dismiss and Suspend Period to
File Answer dated October 15, 2002 is likewise DENIED.
Petitioners Urgent Motion for the return of the levied firearms is
GRANTED. Pursuant thereto, respondent sheriffs are ordered to
return the levied firearms and handguns to the petitioner provided the
latter puts [up] a bond in the amount of P332,200.00.
WHEREFORE, in view of the foregoing considerations, the petition is
GRANTED. The October 17, 2002 and the December 4, 2002 Order
of the RTC, Branch 61 of Kabankalan City, Negros Occidental are
hereby ANNULLED and SET ASIDE for having been issued in
excess or without authority. The Writ of Preliminary Injunction issued
by the said court is lifted, and the DOLE Sheriff is directed to
immediately enforce the Writ of Execution issued by the Department
of Labor and Employment in the case In re: Labor Dispute in
Maricalum Mining Corporation docketed as OS-AJ-10-96-01 (NCMB-
RB6-08-96).[32]

The Issues

Respondents lawyer, Atty. Jose Lapak, is strictly warned not to resort

again to disrespectful and contemptuous language in his pleadings,
otherwise, the same shall be dealt with accordingly.
Dissatisfied, GHI elevated the case to this Court via the instant
petition for review on certiorari, raising the following issues:
SO ORDERED.[27]
I
Aggrieved, NAMAWU filed with the CA a petition for certiorari under
Rule 65, assailing the October 17, 18 and December 4, 2002 orders
of the RTC.[28] WHETHER OR NOT GHI IS A PARTY TO THE LABOR DISPUTE
BETWEEN NAMAWU AND MMC.

After due proceedings, on October 14, 2003, the appellate court

rendered a Decision setting aside the RTC issuances and directing
the immediate execution of the Sto. Tomas Writ. The CA ruled,
among others, that the circumstances surrounding the execution of
the September 5, 1996 Deed of Real Estate and Chattel Mortgage
yielded the conclusion that the deed was sham, fictitious and
fraudulent; that it was executed two weeks after the labor dispute
arose in 1996, but surprisingly, it was registered only on February 24,
2000, immediately after the Court affirmed with finality the
Quisumbing Order. The CA also found that the certificates of title to
MMCs real properties did not contain any annotation of a mortgage
lien, and, suspiciously, GHI did not intervene in the long drawn-out
labor proceedings to protect its right as a mortgagee of virtually all
the properties of MMC.[29]
II
WHETHER OR NOT, ASSUMING ARGUENDO THAT THE
PERTINENT DECISION OR ORDER IN THE SAID LABOR
DISPUTE BETWEEN MMC AND NAMAWU MAY BE ENFORCED
AGAINST GHI, THERE IS ALREADY A FINAL DEETERMINATION
BY THE SUPREME COURT OF THE RIGHTS OF THE PARTIES IN
SAID LABOR DISPUTE CONSIDERING THE PENDENCY OF G.R.
NOS. 157696-97.

The CA further ruled that the subsequent foreclosure of the mortgage

III
was irregular, effected precisely to prevent the satisfaction of the
judgment against MMC. It noted that the foreclosure proceedings
were initiated in July 2001, shortly after the issuance of the Brion
Writ; and, more importantly, the basis for the extrajudicial foreclosure WHETHER OR NOT GHI IS THE ABSOLUTE OWNER OF THE
was not the failure of MMC to pay the mortgage debt, but its failure to PROPERTIES UNLAWFULLY GARNISHED BY RESPONDENTS
satisfy any money judgment against it rendered by a court or tribunal SHERIFFS.
of competent jurisdiction, in favor of any person, firm or entity, without
any legal ground or reason.[30] Further, the CA pierced the veil of
corporate fiction of the two corporations.[31] The dispositive portion of
the appellate courts decision reads:

IV
WHETHER OR NOT THE HONORABLE HENRY D. ARLES
CORRECTLY ISSUED A WRIT OF INJUNCTION AGAINST THE
UNLAWFUL EXECUTIOIN ON GHIS PROPERTIES.
V
WHETHER OR NOT THE VALIDITY OF THE DEED OF REAL AND
CHATTEL MORTGAGE OVER THE SUBJECT PROPERTIES
BETWEEN MMC AND GHI MAY BE COLLATERALLY ATTACKED.
VI
WHETHER OR NOT, ASSUMING ARGUENDO THAT THE
VALIDITY OF THE SAID REAL AND CHATTEL MORTGAGE MAY
BE COLLATERALLY ATTACKED, THE SAID MORTGAGE IS
SHAM, FICTITIOUS AND FRAUDULENT.
VII
WHETHER OR NOT GHI IS A DISTINCT AND SEPARATE
CORPORATE ENTITY FROM MMC.
VIII
WHETHER OR NOT GHI CAN BE PREVENTED THROUGH THE
ISSUANCE OF A RESTRAINING ORDER OR INJUNCTION FROM
TAKING POSSESSION OR BE DISPOSSESSED OF ASSETS
PURCHASED BY IT FROM APT.[33]
Stripped of non-essentials, the core issue is whether, given the
factual circumstances obtaining, the RTC properly issued the writ of
injunction to prevent the enforcement of the Sto. Tomas Writ. The
resolution of this principal issue, however, will necessitate a ruling on
the following key and interrelated questions:
| 16
1. Whether the mortgage of the MMCs properties to GHI was a
sham;
2. Whether there was an effective levy by the DOLE upon the
MMCs real and personal properties; and
3. Whether it was proper for the CA to pierce the veil of corporate
fiction between MMC and GHI.
Our Ruling
Before we delve into an extended discussion of the foregoing issues,
it is essential to take judicial cognizance of cases intimately linked to
the present controversy which had earlier been elevated to and
decided by this Court.
Judicial Notice.
Judicial notice must be taken by this Court of its Decision
in Maricalum Mining Corporation v. Hon. Arturo D. Brion and
NAMAWU,[34] in which we upheld the right of herein private
respondent, NAMAWU, to its labor claims. Upon the same principle
of judicial notice, we acknowledge our Decision in Republic of
the Philippines, through its trustee, the Asset Privatization Trust v. G
Holdings, Inc.,[35] in which GHI was recognized as the rightful
purchaser of the shares of stocks of MMC, and thus, entitled to the
delivery of the company notes accompanying the said
purchase. These company notes, consisting of three (3) Promissory
Notes, were part of the documents executed in 1992 in the
privatization sale of MMC by the Asset Privatization Trust (APT) to
GHI. Each of these notes uniformly contains stipulations establishing
and constituting in favor of GHI mortgages over MMCs real and
personal properties. The stipulations were subsequently formalized in
a separate document denominated Deed of Real Estate and Chattel
Mortgage on September 5, 1996. Thereafter, the Deed was
registered on February 4, 2000.[36]
We find both decisions critically relevant to the instant dispute. In
fact, they should have guided the courts below in the disposition of
the controversy at their respective levels. To repeat, these decisions
respectively confirm the right of NAMAWU to its labor claims[37] and
affirm the right of GHI to its financial and mortgage claims over the
real and personal properties of MMC, as will be explained below. The
assailed CA decision apparently failed to consider the impact of
these two decisions on the case at bar. Thus, we find it timely to
reiterate that: courts have also taken judicial notice of previous cases
to determine whether or not the case pending is a moot one or

whether or not a previous ruling is applicable to the case under
consideration.[38]
However, the CA correctly assessed that the authority of the lower
court to issue the challenged writ of injunction depends on the validity
of the third partys (GHIs) claim of ownership over the property
subject of the writ of execution issued by the labor
department. Accordingly, the main inquiry addressed by the CA
decision was whether GHI could be treated as a third party or a
stranger to the labor dispute, whose properties were beyond the
reach of the Writ of Execution dated December 18, 2001.[39]
In this light, all the more does it become imperative to take judicial
notice of the two cases aforesaid, as they provide the necessary
perspective to determine whether GHI is such a party with a valid
ownership claim over the properties subject of the writ of
execution. In Juaban v. Espina,[40] we held that in some instances,
courts have also taken judicial notice of proceedings in other cases
that are closely connected to the matter in controversy. These cases
may be so closely interwoven, or so clearly interdependent, as to
invoke a rule of judicial notice. The two cases that we have taken
judicial notice of are of such character, and our review of the instant
case cannot stray from the findings and conclusions therein.
Having recognized these crucial Court rulings, situating the facts in
proper perspective, we now proceed to resolve the questions
identified above.
The mortgage
was not a sham.
Republic etc., v. G Holdings, Inc. acknowledged the existence of the
Purchase and Sale Agreement between the APT and the GHI, and
recounts the facts attendant to that transaction, as follows:
The series of negotiations between the petitioner Republic of
the Philippines, through the APT as its trustee, and G Holdings
culminated in the execution of a purchase and sale agreement on
October 2, 1992. Under the agreement, the Republic undertook to
sell and deliver 90% of the entire issued and outstanding shares of
MMC, as well as its company notes, to G Holdings in consideration
of the purchase price of P673,161,280. It also provided for a down
payment of P98,704,000 with the balance divided into four tranches
payable in installment over a period of ten years.[41]
The company notes mentioned therein were actually the very same
three (3) Promissory Notes amounting to P550M, issued by MMC in
favor of GHI. As already adverted to above, these notes uniformly
| 17
contained stipulations establishing and constituting mortgages over
MMCs real and personal properties.
It may be remembered that APT acquired the MMC from the PNB
and the DBP. Then, in compliance with its mandate to privatize
government assets, APT sold the aforesaid MMC shares and notes
to GHI. To repeat, this Court has recognized this Purchase and Sale
Agreement in Republic, etc., v. G Holdings, Inc.
The participation of the Government, through APT, in this transaction
is significant. Because the Government had actively negotiated and,
eventually, executed the agreement, then the transaction is imbued
with an aura of official authority, giving rise to the presumption of
regularity in its execution. This presumption would cover all related
transactional acts and documents needed to consummate the
privatization sale, inclusive of the Promissory Notes. It is obvious,
then, that the Government, through APT, consented to the
establishment and constitution of the mortgages on the assets of
MMC in favor of GHI, as provided in the notes. Accordingly, the notes
(and the stipulations therein) enjoy the benefit of the same
presumption of regularity accorded to government actions. Given the
Government consent thereto, and clothed with the presumption of
regularity, the mortgages cannot be characterized as sham, fictitious
or fraudulent.
Indeed, as mentioned above, the three (3) Promissory Notes,
executed on October 2, 1992, established and constituted in favor of
GHI the following mortgages:
1. A mortgage over certain parcels of land, more particularly listed
and described in the Sheriffs Certificate of Sale dated September 7,
1984 issued by the Ex-Officio Provincial Sheriff of Negros Occidental,
Rolando V. Ramirez, with office at Bacolod City following the auction
sale conducted pursuant to the provisions of Act 3135, a copy of
which certificate of sale is hereto attached as Annex A and made an
integral part hereof;
2. A chattel mortgage over assets and personal properties
more particularly listed and described in the Sheriffs Certificate of
Sale dated September 7, 1984 issued by the Ex-Officio Provincial
Sheriff of Negros Occidental, Rolando V. Ramirez, with office at
Bacolod City following the auction conducted pursuant to the
provision of Act 1508, a copy of which Certificate of Sale is hereto
attached as Annex B and made an integral part hereof.
3. Mortgages over assets listed in APT Specific catalogue GC-031 for
MMC, a copy of which Catalogue is hereby made an integral part
hereof by way of reference, as well as assets presently in use by
MMC but which are not listed or included in paragraphs 1 and 2

above and shall include all assets that may hereinafter be acquired
by MMC.[42]
It is difficult to conceive that these mortgages, already existing in
1992, almost four (4) years before NAMAWU filed its notice of strike,
were a fictitious arrangement intended to defraud NAMAWU. After
all, they were agreed upon long before the seeds of the labor dispute
germinated.
While it is true that the Deed of Real Estate and Chattel Mortgage
was executed only on September 5, 1996, it is beyond cavil that this
formal document of mortgage was merely a derivative of the original
mortgage stipulations contained in the Promissory Notes of October
2, 1992. The execution of this Deed in 1996 does not detract from,
but instead reinforces, the manifest intention of the parties to
establish and constitute the mortgages on MMCs real and personal
properties.
Apparently, the move to execute a formal document denominated as
the Deed of Real Estate and Chattel Mortgage came about after the
decision of the RTC of Manila in Civil Case No. 95-76132 became
final in mid-1996. This conclusion surfaces when we consider the
genesis of Civil Case No. 95-76132 and subsequent incidents
thereto, as narrated in Republic, etc. v. G Holdings, Inc., viz:
Subsequently, a disagreement on the matter of when installment
payments should commence arose between the parties. The
Republic claimed that it should be on the seventh month from the
signing of the agreement while G Holdings insisted that it should
begin seven months after the fulfillment of the closing conditions.
Unable to settle the issue, G Holdings filed a complaint for specific
performance and damages with the Regional Trial Court of Manila,
Branch 49, against the Republic to compel it to close the sale in
accordance with the purchase and sale agreement. The complaint
was docketed as Civil Case No. 95-76132.
During the pre-trial, the respective counsels of the parties manifested
that the issue involved in the case was one of law and submitted the
case for decision. On June 11, 1996, the trial court rendered its
decision. It ruled in favor of G Holdings and held:
In line with the foregoing, this Court having been convinced that the
Purchase and Sale Agreement is indeed subject to the final closing
conditions prescribed by Stipulation No. 5.02 and conformably to
Rule 39, Section 10 of the Rules of Court, accordingly orders that
the Asset Privatization Trust execute the corresponding
Document of Transfer of the subject shares and financial notes
and cause the actual delivery of subject shares and notes to G
Holdings, Inc., within a period of thirty (30) days from receipt of
| 18
this Decision, and after G Holdings Inc., shall have paid in full the
entire balance, at its present value of P241,702,122.86, computed
pursuant to the prepayment provisions of the Agreement. Plaintiff
shall pay the balance simultaneously with the delivery of the Deed of
Transfer and actual delivery of the shares and notes.
SO ORDERED.
The Solicitor General filed a notice of appeal on behalf of the
Republic on June 28, 1996. Contrary to the rules of procedure,
however, the notice of appeal was filed with the Court of Appeals
(CA), not with the trial court which rendered the judgment appealed
from.
No other judicial remedy was resorted to until July 2, 1999 when the
Republic, through the APT, filed a petition for annulment of judgment
with the CA. It claimed that the decision should be annulled on the
ground of abuse of discretion amounting to lack of jurisdiction on the
part of the trial court. x x x
Finding that the grounds necessary for the annulment of judgment
were inexistent, the appellate court dismissed the petition. x x x x[43]
With the RTC decision having become final owing to the failure of the
Republic to perfect an appeal, it may have become necessary to
execute the Deed of Real Estate and Chattel Mortgage on
September 5, 1996, in order to enforce the trial courts decision of
June 11, 1996. This appears to be the most plausible explanation for
the execution of the Deed of Real Estate and Chattel Mortgage only
in September 1996. Even as the parties had already validly
constituted the mortgages in 1992, as explicitly provided in the
Promissory Notes, a specific deed of mortgage in a separate
document may have been deemed necessary for registration
purposes. Obviously, this explanation is more logical and more
sensible than the strained conjecture that the mortgage was
executed on September 5, 1996 only for the purpose of defrauding
NAMAWU.
It is undeniable that the Deed of Real Estate and Chattel Mortgage
was formally documented two weeks after NAMAWU filed its notice
of strike against MMC on August 23, 1996. However, this fact alone
cannot give rise to an adverse inference for two reasons. First, as
discussed above, the mortgages had already been established and
constituted as early as October 2, 1992 in the Promissory Notes,
showing the clear intent of the parties to impose a lien upon MMCs
properties. Second, the mere filing of a notice of strike by NAMAWU
did not, as yet, vest in NAMAWU any definitive right that could be
prejudiced by the execution of the mortgage deed.

The fact that MMCs obligation to GHI is not reflected in the formers
financial statements─a circumstance made capital of by NAMAWU in
order to cast doubt on the validity of the mortgage deed─is of no
moment. By itself, it does not provide a sufficient basis to invalidate
this public document. To say otherwise, and to invalidate the
mortgage deed on this pretext, would furnish MMC a convenient
excuse to absolve itself of its mortgage obligations by adopting the
simple strategy of not including the obligations in its financial
statements. It would ignore our ruling in Republic, etc. v. G Holdings,
Inc., which obliged APT to deliver the MMC shares and financial
notes to GHI. Besides, the failure of the mortgagor to record in its
financial statements its loan obligations is surely not an essential
element for the validity of mortgage agreements, nor will it
independently affect the right of the mortgagee to foreclose.
Contrary to the CA decision, Tanongon v. Samson[44] is not on all
fours with the instant case. There are material differences between
the two cases. At issue in Tanongon was a third-party claim arising
from a Deed of Absolute Sale executed between Olizon and
Tanongon on July 29, 1997, after the NLRC decision became final
and executory on April 29, 1997. In the case at bar, what is involved
is a loan with mortgage agreement executed on October 2, 1992,
well ahead of the unions notice of strike on August 23, 1996. No
presumption of regularity inheres in the deed of sale
in Tanongon, while the participation of APT in this case clothes the
transaction in 1992 with such a presumption that has not been
successfully rebutted. In Tanongon, the conduct of a full-blown trial
led to the finding─duly supported by evidence─that the voluntary
sale of the assets of the judgment debtor was made in bad
faith. Here, no trial was held, owing to the motion to dismiss filed by
NAMAWU, and the CA failed to consider the factual findings made by
this Court in Republic, etc. v. G Holdings, Inc. Furthermore,
in Tanongon, the claimant did not exercise his option to file a
separate action in court, thus allowing the NLRC Sheriff to levy on
execution and to determine the rights of third-party claimants.[45] In
this case, a separate action was filed in the regular courts by GHI,
the third-party claimant. Finally, the questioned transaction
in Tanongon was a plain, voluntary transfer in the form of a sale
executed by the judgment debtor in favor of a dubious third-party,
resulting in the inability of the judgment creditor to satisfy the
judgment. On the other hand, this case involves an involuntary
transfer (foreclosure of mortgage) arising from a loan obligation that
well-existed long before the commencement of the labor claims of the
private respondent.
Three other circumstances have been put forward by the CA to
support its conclusion that the mortgage contract is a sham. First, the
CA considered it highly suspect that the Deed of Real Estate and
Chattel Mortgage was registered only on February 4, 2000, three
years after its execution, and almost one month after the Supreme
Court rendered its decision in the labor dispute.[46] Equally
suspicious, as far as the CA is concerned, is the fact that the
mortgages were foreclosed on July 31, 2001, after the DOLE had
already issued a Partial Writ of Execution on May 9, 2001.[47] To the
appellate court, the timing of the registration of the mortgage deed
| 19
was too coincidental, while the date of the foreclosure signified that it
was effected precisely to prevent the satisfaction of the judgment
awards.[48] Furthermore, the CA found that the mortgage deed itself
was executed without any consideration, because at the time of its
execution, all the assets of MMC had already been transferred to
GHI.[49]
These circumstances provided the CA with sufficient justification to
apply Article 1387 of the Civil Code on presumed fraudulent
transactions, and to declare that the mortgage deed was void for
being simulated and fictitious.[50]
We do not agree. We find this Courts ruling in MR Holdings, Ltd. v.
Sheriff Bajar[51] pertinent and instructive:
Article 1387 of the Civil Code of the Philippines provides:
Art. 1387. All contracts by virtue of which the debtor alienates
property by gratuitous title are presumed to have been entered into in
fraud of creditors, when the donor did not reserve sufficient property
to pay all debts contracted before the donation.
Alienations by onerous title are also presumed fraudulent when made
by persons against whom some judgment has been rendered in any
instance or some writ of attachment has been issued. The decision or
attachment need not refer to the property alienated, and need not
have been obtained by the party seeking rescission.
In addition to these presumptions, the design to defraud creditors
may be proved in any other manner recognized by law and of
evidence.
This article presumes the existence of fraud made by a debtor. Thus,
in the absence of satisfactory evidence to the contrary, an alienation
of a property will be held fraudulent if it is made after a judgment has
been rendered against the debtor making the alienation. This
presumption of fraud is not conclusive and may be rebutted by
satisfactory and convincing evidence. All that is necessary is to
establish affirmatively that the conveyance is made in good faith
and for a sufficient and valuable consideration.
The Assignment Agreement and the Deed of Assignment were
executed for valuable considerations. Patent from the Assignment
Agreement is the fact that petitioner assumed the payment of
US$18,453,450.12 to ADB in satisfaction of Marcoppers remaining
debt as of March 20, 1997. Solidbank cannot deny this fact
considering that a substantial portion of the said payment, in the sum
of US$13,886,791.06, was remitted in favor of the Bank of Nova
Scotia, its major stockholder.

The facts of the case so far show that the assignment contracts were
executed in good faith. The execution of the Assignment Agreement
on March 20, 1997 and the Deed of Assignment on December
8,1997 is not the alpha of this case. While the execution of these
assignment contracts almost coincided with the rendition on
May 7, 1997 of the Partial Judgment in Civil Case No. 96-80083
by the Manila RTC, however, there was no intention on the part of
petitioner to defeat Solidbanks claim. It bears reiterating that as early
as November 4, 1992, Placer Dome had already bound itself under a
Support and Standby Credit Agreement to provide Marcopper with
cash flow support for the payment to ADB of its obligations. When
Marcopper ceased operations on account of disastrous mine tailings
spill into the Boac River and ADB pressed for payment of the loan,
Placer Dome agreed to have its subsidiary, herein petitioner, pay
ADB the amount of US$18,453,450.12.
Thereupon, ADB and Marcopper executed, respectively, in favor of
petitioner an Assignment Agreement and a Deed of
Assignment. Obviously, the assignment contracts were
connected with transactions that happened long before the
rendition in 1997 of the Partial Judgment in Civil Case No. 96-
80083 by the Manila RTC. Those contracts cannot be viewed in
isolation. If we may add, it is highly inconceivable that ADB, a
reputable international financial organization, will connive with
Marcopper to feign or simulate a contract in 1992 just to defraud
Solidbank for its claim four years thereafter. And it is equally
incredible for petitioner to be paying the huge sum of
US$18,453,450.12 to ADB only for the purpose of defrauding
Solidbank of the sum of P52,970,756.89.
It is said that the test as to whether or not a conveyance is fraudulent
is ― does it prejudice the rights of creditors? We cannot see how
Solidbanks right was prejudiced by the assignment contracts
considering that substantially all of Marcoppers properties were
already covered by the registered Deed of Real Estate and
Chattel Mortgage executed by Marcopper in favor of ADB as
early as November 11, 1992. As such, Solidbank cannot assert a
better right than ADB, the latter being a preferred creditor. It is
basic that mortgaged properties answer primarily for the
mortgaged credit, not for the judgment credit of the mortgagors
unsecured creditor. Considering that petitioner assumed
Marcoppers debt to ADB, it follows that Solidbanks right as judgment
creditor over the subject properties must give way to that of the
former.[52]
From this ruling in MR Holdings, we can draw parallel
conclusions. The execution of the subsequent Deed of Real Estate
and Chattel Mortgage on September 5, 1996 was simply the formal
documentation of what had already been agreed in the seminal
transaction (the Purchase and Sale Agreement) between APT and
GHI. It should not be viewed in isolation, apart from the original
agreement of October 2, 1992. And it cannot be denied that this
original agreement was supported by an adequate consideration. The
APT was even ordered by the court to deliver the shares and
financial notes of MMC in exchange for the payments that GHI had
made.
| 20
It was also about this time, in 1996, that NAMAWU filed a notice of
strike to protest non-payment of its rightful labor claims.[53] But, as
already mentioned, the outcome of that labor dispute was yet
unascertainable at that time, and NAMAWU could only have hoped
for, or speculated about, a favorable ruling. To paraphrase MR
Holdings, we cannot see how NAMAWUs right was prejudiced by the
Deed of Real Estate and Chattel Mortgage, or by its delayed
registration, when substantially all of the properties of MMC were
already mortgaged to GHI as early as October 2, 1992. Given this
reality, the Court of Appeals had no basis to conclude that this Deed
of Real Estate and Chattel Mortgage, by reason of its late
registration, was a simulated or fictitious contract.
The importance of registration and its binding effect is stated in
Section 51 of the Property Registration Decree or Presidential
Decree (P.D.) No. 1529,[54] which reads:
SECTION 51. Conveyance and other dealings by registered
owner.An owner of registered land may convey, mortgage, lease,
charge or otherwise deal with the same in accordance with existing
laws. He may use such forms, deeds, mortgages, leases or other
voluntary instrument as are sufficient in law. But no deed, mortgage,
lease or other voluntary instrument, except a will purporting to convey
or effect registered land, shall take effect as a conveyance or bind
the land, but shall operate only as a contract between the parties and
as evidence of authority to the Registry of Deeds to make
registration.
The act of registration shall be the operative act to convey or affect
the land insofar as third persons are concerned, and in all cases
under this Decree, the registration shall be made in the Office of the
Register of Deeds for the province or the city where the land lies. [55]
Under the Torrens system, registration is the operative act which
gives validity to the transfer or creates a lien upon the land. Further,
entrenched in our jurisdiction is the doctrine that registration in a
public registry creates constructive notice to the whole
world.[56] Thus, Section 51 of Act No. 496, as amended by Section 52
of P.D. No. 1529, provides:
SECTION 52. Constructive notice upon registration.Every
conveyance, mortgage, lease, lien, attachment, order, judgment,
instrument or entry affecting registered land shall, if registered, filed
or entered in the Office of the Register of Deeds for the province or
city where the land to which it relates lies, be constructive notice to all
persons from the time of such registering, filing or entering.
But, there is nothing in Act No. 496, as amended by P.D. No. 1529,
that imposes a period within which to register annotations of
conveyance, mortgage, lease, lien, attachment, order, judgment,

instrument or entry affecting registered land. If liens were not so
registered, then it shall operate only as a contract between the
parties and as evidence of authority to the Registry of Deeds to make
registration. If registered, it shall be the operative act to convey or
affect the land insofar as third persons are concerned. The mere
lapse of time from the execution of the mortgage document to the
moment of its registration does not affect the rights of a mortgagee.
Neither will the circumstance of GHIs foreclosure of MMCs properties
on July 31, 2001, or after the DOLE had already issued a Partial Writ
of Execution on May 9, 2001 against MMC, support the conclusion of
the CA that GHIs act of foreclosing on MMCs properties was effected
to prevent satisfaction of the judgment award. GHIs mortgage rights,
constituted in 1992, antedated the Partial Writ of Execution by nearly
ten (10) years. GHIs resort to foreclosure was a legitimate
enforcement of a right to liquidate a bona fide debt. It was a
reasonable option open to a mortgagee which, not being a party to
the labor dispute between NAMAWU and MMC, stood to suffer a loss
if it did not avail itself of the remedy of foreclosure.
The well-settled rule is that a mortgage lien is inseparable from the
property mortgaged.[57] While it is true that GHIs foreclosure of MMCs
mortgaged properties may have had the effect to prevent satisfaction
of the judgment award against the specific mortgaged property that
first answers for a mortgage obligation ahead of any subsequent
creditors, that same foreclosure does not necessarily translate to
having been effected to prevent satisfaction of the judgment
award against MMC.
Likewise, we note the narration of subsequent facts contained in the
Comment of the Office of the Solicitor General. Therein, it is alleged
that after the Partial Writ of Execution was issued on May 9, 2001, a
motion for reconsideration was filed by MMC; that the denial of the
motion was appealed to the CA; that when the appeal was dismissed
by the CA on January 24, 2002, it eventually became the subject of a
review petition before this Court, docketed as G.R. No. 157696; and
that G.R. No. 157696 was decided by this Court only on February 9,
2006.
This chronology of subsequent events shows that February 9, 2006
would have been the earliest date for the unimpeded enforcement of
the Partial Writ of Execution, as it was only then that this Court
resolved the issue. This happened four and a half years after July 31,
2001, the date when GHI foreclosed on the mortgaged
properties. Thus, it is not accurate to say that the foreclosure made
on July 31, 2001 was effected [only] to prevent satisfaction of the
judgment award.
We also observe the error in the CAs finding that the 1996 Deed of
Real Estate and Chattel Mortgage was not supported by any
consideration since at the time the deed was executed, all the real
| 21
and personal property of MMC had already been transferred in the
hands of G Holdings.[58] It should be remembered that the Purchase
and Sale Agreement between GHI and APT involved large amounts
(P550M) and even spawned a subsequent court action (Civil Case
No. 95-76132, RTC of Manila). Yet, nowhere in the Agreement or in
the RTC decision is there any mention of real and personal
properties of MMC being included in the sale to GHI in 1992. These
properties simply served as mortgaged collateral for the 1992
Promissory Notes.[59] The Purchase and Sale Agreement and the
Promissory Notes themselves are the best evidence that there was
ample consideration for the mortgage.
Thus, we must reject the conclusion of the CA that the Deed of Real
Estate and Chattel Mortgage executed in 1996 was a simulated
transaction.
On the issue of whether there
had been an effective levy upon
the properties of GHI.
The well-settled principle is that the rights of a mortgage creditor over
the mortgaged properties are superior to those of a subsequent
attaching creditor. In Cabral v. Evangelista,[60] this Court declared
that:
Defendants-appellants purchase of the mortgaged chattels at the
public sheriff's sale and the delivery of the chattels to them with a
certificate of sale did not give them a superior right to the chattels as
against plaintiffs-mortgagees. Rule 39, Section 22 of the old Rules of
Court (now Rule 39, Section 25 of the Revised Rules), cited by
appellants precisely provides that the sale conveys to the purchaser
all the right which the debtor had in such property on the day the
execution or attachment was levied. It has long been settled by this
Court that The right of those who so acquire said properties should
not and can not be superior to that of the creditor who has in his favor
an instrument of mortgage executed with the formalities of the law, in
good faith, and without the least indication of fraud. This is all the
more true in the present case, because, when the plaintiff purchased
the automobile in question on August 22, 1933, he knew, or at least,
it is presumed that he knew, by the mere fact that the instrument of
mortgage, Exhibit 2, was registered in the office of the register of
deeds of Manila, that said automobile was subject to a mortgage lien.
In purchasing it, with full knowledge that such circumstances existed,
it should be presumed that he did so, very much willing to respect the
lien existing thereon, since he should not have expected that with the
purchase, he would acquire a better right than that which the vendor
then had. In another case between two mortgagees, we held that As
between the first and second mortgagees, therefore, the second
mortgagee has at most only the right to redeem, and even when the
second mortgagee goes through the formality of an extrajudicial

foreclosure, the purchaser acquires no more than the right of
redemption from the first mortgagee. The superiority of the
mortgagee's lien over that of a subsequent judgment creditor is now
expressly provided in Rule 39, Section 16 of the Revised Rules of
Court, which states with regard to the effect of levy on execution as
to third persons that The levy on execution shall create a lien in favor
of the judgment creditor over the right, title and interest of the
judgment debtor in such property at the time of the levy, subject to
liens or encumbrances then existing.
Even in the matter of possession, mortgagees over chattel have
superior, preferential and paramount rights thereto, and the
mortgagor has mere rights of redemption.[61]
Similar rules apply to cases of mortgaged real properties that are
registered. Since the properties were already mortgaged to GHI, the
only interest remaining in the mortgagor was its right to redeem said
properties from the mortgage. The right of redemption was the only
leviable or attachable property right of the mortgagor in the
mortgaged real properties. We have held that
The main issue in this case is the nature of the lien of a judgment
creditor, like the petitioner, who has levied an attachment on the
judgment debtor's (CMI) real properties which had been mortgaged
to a consortium of banks and were subsequently sold to a third party,
Top Rate.
xxxx
The sheriff's levy on CMI's properties, under the writ of attachment
obtained by the petitioner, was actually a levy on the interest only of
the judgment debtor CMI on those properties. Since the properties
were already mortgaged to the consortium of banks, the only interest
remaining in the mortgagor CMI was its right to redeem said
properties from the mortgage. The right of redemption was the only
leviable or attachable property right of CMI in the mortgaged real
properties. The sheriff could not have attached the properties
themselves, for they had already been conveyed to the consortium of
banks by mortgage (defined as a conditional sale), so his levy must
be understood to have attached only the mortgagor's remaining
interest in the mortgaged property the right to redeem it from the
mortgage.[62]
xxxx
There appears in the record a factual contradiction relating to
whether the foreclosure by GHI on July 13, 2001[63] over some of the
contested properties came ahead of the levy thereon, or the
reverse. NAMAWU claims that the levy on two trucks was effected on
| 22
June 22, 2001,[64] which GHI disputes as a misstatement because the
levy was attempted on July 18, 2002, and not 2001[65] What is
undisputed though is that the mortgage of GHI was registered on
February 4, 2000,[66] well ahead of any levy by NAMAWU. Prior
registration of a lien creates a preference, as the act of registration is
the operative act that conveys and affects the land,[67] even against
subsequent judgment creditors, such as respondent herein. Its
registration of the mortgage was not intended to defraud NAMAWU
of its judgment claims, since even the courts were already judicially
aware of its existence since 1992. Thus, at that moment in time, with
the registration of the mortgage, either NAMAWU had no properties
of MMC to attach because the same had been previously foreclosed
by GHI as mortgagee thereof; or by virtue of the DOLEs levy to
enforce NAMAWUs claims, the latters rights are subject to the notice
of the foreclosure on the subject properties by a prior mortgagees
right. GHIs mortgage right had already been registered by then, and
it is basic that mortgaged properties answer primarily for the
mortgaged credit, not for the judgment credit of the mortgagors
unsecured creditor.[68]
On the issue of piercing the
veil of corporate fiction.
The CA found that:
Ordinarily, the interlocking of directors and officers in two different
corporations is not a conclusive indication that the corporations are
one and the same for purposes of applying the doctrine of piercing
the veil of corporate fiction. However, when the legal fiction of the
separate corporate personality is abused, such as when the same is
used for fraudulent or wrongful ends, the courts have not hesitated to
pierce the corporate veil (Francisco vs. Mejia, 362 SCRA 738). In the
case at bar, the Deed of Real Estate and Chattel Mortgage was
entered into between MMC and G Holdings for the purpose of
evading the satisfaction of the legitimate claims of the petitioner
against MMC. The notion of separate personality is clearly being
utilized by the two corporations to perpetuate the violation of a
positive legal duty arising from a final judgment to the prejudice of the
petitioners right.[69]
Settled jurisprudence[70] has it that
(A) corporation, upon coming into existence, is invested by law with a
personality separate and distinct from those persons composing it as
well as from any other legal entity to which it may be related. By this
attribute, a stockholder may not, generally, be made to answer for
acts or liabilities of the said corporation, 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. For this
reason, it may not be used or invoked for ends subversive to the

policy and purpose behind its creation or which could not have been
intended by law to which it owes its being. This is particularly
true when the fiction is used to defeat public convenience,
justify wrong, protect fraud, defend crime, confuse legitimate
legal or judicial issues, perpetrate deception or otherwise
circumvent the law. 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. In all these cases, the notion of corporate entity will be
pierced or disregarded with reference to the particular transaction
involved.
Given this jurisprudential principle and the factual circumstances
obtaining in this case, we now ask: Was the CA correct in piercing
the veil of corporate identity of GHI and MMC?
In our disquisition above, we have shown that the CAs finding that
there was a simulated mortgage between GHI and MMC to justify a
wrong or protect a fraud has struggled vainly to find a foothold when
confronted with the ruling of this Court in Republic v. G Holdings, Inc.
The negotiations between the GHI and the Government--through
APT, dating back to 1992--culminating in the Purchase and Sale
Agreement, cannot be depicted as a contrived transaction. In fact, in
the said Republic, etc., v. G Holdings, Inc., this Court adjudged that
GHI was entitled to its rightful claims─ not just to the shares of MMC
itself, or just to the financial notes that already contained the
mortgage clauses over MMCs disputed assets, but also to the
delivery of those instruments. Certainly, we cannot impute to this
Courts findings on the case any badge of fraud. Thus, we reject the
CAs conclusion that it was right to pierce the veil of corporate fiction,
because the foregoing circumstances belie such an
inference. Furthermore, we cannot ascribe to the Government, or the
APT in particular, any undue motive to participate in a transaction
designed to perpetrate fraud.Accordingly, we consider the CA
interpretation unwarranted.
We also cannot agree that the presumption of fraud in Article 1387 of
the Civil Code relative to property conveyances, when there was
already a judgment rendered or a writ of attachment issued,
authorizes piercing the veil of corporate identity in this case. We find
that Article 1387 finds less application to an involuntary alienation
such as the foreclosure of mortgage made before any final judgment
of a court. We thus hold that when the alienation is involuntary, and
the foreclosure is not fraudulent because the mortgage deed has
been previously executed in accordance with formalities of law, and
the foreclosure is resorted to in order to liquidate a bona fide debt, it
is not the alienation by onerous title contemplated in Article 1387 of
the Civil Code wherein fraud is presumed.
| 23
Since the factual antecedents of this case do not warrant a finding
that the mortgage and loan agreements between MMC and GHI were
simulated, then their separate personalities must be recognized. To
pierce the veil of corporate fiction would require that their
personalities as creditor and debtor be conjoined, resulting in a
merger of the personalities of the creditor (GHI) and the debtor
(MMC) in one person, such that the debt of one to the other is
thereby extinguished. But the debt embodied in the 1992 Financial
Notes has been established, and even made subject of court
litigation (Civil Case No. 95-76132, RTC Manila). This can only mean
that GHI and MMC have separate corporate personalities.
Neither was MMC used merely as an alter ego, adjunct, or business
conduit for the sole benefit of GHI, to justify piercing the formers veil
of corporate fiction so that the latter could be held liable to claims of
third-party judgment creditors, like NAMAWU. In this regard, we
find American jurisprudence persuasive. In a decision by the
Supreme Court of New York[71] bearing upon similar facts, the Court
denied piercing the veil of corporate fiction to favor a judgment
creditor who sued the parent corporation of the debtor, alleging
fraudulent corporate asset-shifting effected after a prior final
judgment. Under a factual background largely resembling this case at
bar, viz:
In this action, plaintiffs seek to recover the balance due under
judgments they obtained against Lake George Ventures Inc.
(hereinafter LGV), a subsidiary of defendant that was formed to
develop the Top O the World resort community overlooking Lake
George, by piercing the corporate veil or upon the theory that LGV's
transfer of certain assets constituted fraudulent transfers under the
Debtor and Creditor Law. We previously upheld Supreme Court's
denial of defendant's motion for summary judgment dismissing the
complaint (252 A.D.2d 609, 675 N.Y.S.2d 234) and the matter
proceeded to a nonjury trial. Supreme Court thereafter rendered
judgment in favor of defendant upon its findings that, although
defendant dominated LGV, it did not use that domination to commit a
fraud or wrong on plaintiffs. Plaintiffs appealed.
The trial evidence showed that LGV was incorporated in November
1985. Defendant's principal, Francesco Galesi, initially held 90% of
the stock and all of the stock was ultimately transferred to
defendant. Initial project funding was provided through a $2.5 million
loan from Chemical Bank, secured by defendant's guarantee of
repayment of the loan and completion of the project. The loan
proceeds were utilized to purchase the real property upon which the
project was to be established. Chemical Bank thereafter loaned an
additional $3.5 million to LGV, again guaranteed by defendant, and
the two loans were consolidated into a first mortgage loan of $6
million. In 1989, the loan was modified by splitting the loan into a $1.9
term note on which defendant was primary obligor and a $4.1 million

project note on which LGV was the obligor and defendant was a
guarantor.
Due to LGV's lack of success in marketing the project's
townhouses and in order to protect itself from the exercise of
Chemical Bank's enforcement remedies, defendant was forced to
make monthly installments of principal and interest on LGV's behalf.
Ultimately, defendant purchased the project note from Chemical
Bank for $3.1 million, paid the $1.5 million balance on the term note
and took an assignment of the first mortgage on the project's realty.
After LGV failed to make payments on the indebtedness over the
course of the succeeding two years, defendant brought an action
to foreclose its mortgage. Ultimately, defendant obtained a judgment
of foreclosure and sale in the amount of $6,070,246.50. Defendant
bid in the property at the foreclosure sale and thereafter obtained a
deficiency judgment in the amount of $3,070,246.50.
Following the foreclosure sale, LGV transferred to defendant all of
the shares of Top of the World Water Company, a separate entity
that had been organized to construct and operate the water supply
and delivery system for the project, in exchange for a $950,000
reduction in the deficiency judgment.
the U.S. Supreme Court of New York held
Based on the foregoing, and accepting that defendant exercised
complete domination and control over LGV, we are at a loss as to
how plaintiffs perceive themselves to have been inequitably affected
by defendant's foreclosure action against LGV, by LGV's divestiture
of the water company stock or the sports complex property, or by
defendant's transfer to LGV of a third party's uncollectible note,
accomplished solely for tax purposes. It is undisputed that LGV
was, and for some period of time had been, unable to meet its
obligations and, at the time of the foreclosure sale, liens against
its property exceeded the value of its assets by several million
dollars, even including the water company and sports complex
at the values plaintiffs would assign to them. In fact, even if
plaintiffs' analysis were utilized to eliminate the entire $3 million
deficiency judgment, the fact remains that
subordinate mortgages totaling nearly an additional $2 million
have priority over plaintiffs' judgments.
As properly concluded by Supreme Court, absent a finding of any
inequitable consequence to plaintiffs, both causes of action
pleaded in the amended complaint must fail. Fundamentally, a
party seeking to pierce the corporate veil must show complete
domination and control of the subsidiary by the parent and also
that such domination was used to commit a fraud or wrong
| 24
against the plaintiff that resulted in the plaintiff's injury ( 252
A.D.2d 609, 610, 675 N.Y.S.2d 234, supra; see, Matter of Morris v.
New York State Dept. of Taxation & Fin., 82 N.Y.2d 135, 141, 603
N.Y.S.2d 807, 623 N.E.2d 1157). Notably, [e]vidence of
domination alone does not suffice without an additional
showing that it led to inequity, fraud or malfeasance (TNS
Holdings v. MKI Sec. Corp., 92 N.Y.2d 335, 339, 680 N.Y.S.2d 891,
703 N.E.2d 749).
xxxx
In reaching that conclusion, we specifically reject a number of
plaintiffs' assertions, including the entirely erroneous claims that our
determination on the prior appeal (252 A.D.2d 609, 675 N.Y.S.2d
234, supra) set forth a roadmap for the proof required at trial and
mandated a verdict in favor of plaintiffs upon their production of
evidence that supported the decision's listed facts. To the contrary,
our decision was predicated upon the existence of such evidence,
absent which we would have granted summary judgment in favor of
defendant. We are equally unpersuaded by plaintiffs' continued
reliance upon defendant's December 1991 unilateral conversion of its
intercompany loans with LGV from debt to equity, which constituted
nothing more than a bookkeeping transaction and had no apparent
effect on LGV's obligations to defendant or defendant's right
to foreclose on its mortgage.[72]
This doctrine is good law under Philippine jurisdiction.
In Concept Builders, Inc. v. National Labor Relations
Commission,[73] we laid down the test in determining the applicability
of the doctrine of piercing the veil of corporate fiction, to wit:
1. Control, not mere majority or complete 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.
xxxx

Time and again, we have reiterated that mere ownership by a single
stockholder or by another corporation of all or nearly all of the capital
stock of a corporation is not, by itself, a sufficient ground for
disregarding a separate corporate personality.[74] It is basic that a
corporation has a personality separate and distinct from that
composing it as well as from that of any other legal entity to which it
may be related. Clear and convincing evidence is needed to pierce
the veil of corporate fiction.[75]
In this case, the mere interlocking of directors and officers does not
warrant piercing the separate corporate personalities of MMC and
GHI. Not only must there be a showing that there was majority or
complete 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. The mortgage deed
transaction attacked as a basis for piercing the corporate veil was a
transaction that was an offshoot, a derivative, of the mortgages
earlier constituted in the Promissory Notes dated October 2,
1992. But these Promissory Notes with mortgage were executed by
GHI with APT in the name of MMC, in a full privatization process. It
appears that if there was any control or domination exercised over
MMC, it was APT, not GHI, that wielded it. Neither can we conclude
that the constitution of the loan nearly four (4) years prior to
NAMAWUs notice of strike could have been the proximate cause of
the injury of NAMAWU for having been deprived of MMCs corporate
assets.
On the propriety of injunction
to prevent execution by the
NLRC on the properties
of third-party claimants
It is settled that a Regional Trial Court can validly issue a Temporary
Restraining Order (TRO) and, later, a writ of preliminary injunction to
prevent enforcement of a writ of execution issued by a labor tribunal
on the basis of a third-partys claim of ownership over the properties
levied upon.[76] While, as a rule, no temporary or permanent
injunction or restraining order in any case involving or growing out of
a labor dispute shall be issued by any court--where the writ of
execution issued by a labor tribunal is sought to be enforced upon
the property of a stranger to the labor dispute, even upon a
mere prima facie showing of ownership of such claimant--a separate
action for injunctive relief against such levy may be maintained in
court, since said action neither involves nor grows out of a labor
dispute insofar as the third party is
concerned.[77] Instructively, National Mines and Allied
Workers Union v. Vera[78]
| 25
Petitioners' reliance on the provision of Art. 254 of the New Labor
Code (herein earlier quoted) which prohibits injunctions or restraining
orders in any case involving or growing out of a 'labor dispute' is not
well-taken. This has no application to the case at bar. Civil Case No.
2749 is one which neither "involves" nor "grows out" of a labor
dispute. What 'involves' or 'grows out' of a labor dispute is the NLRC
case between petitioners and the judgment debtor, Philippine Iron
Mines. The private respondents are not parties to the said NLRC
case. Civil Case No. 2749 does not put in issue either the fact or
validity of the proceeding in theNLRC case nor the decision therein
rendered, much less the writ of execution issued thereunder. It does
not seek to enjoin the execution of the decision against the properties
of the judgment debtor. What is sought to be tried in Civil Case No.
2749 is whether the NLRC's decision and writ of execution, above
mentioned, shall be permitted to be satisfied against properties of
private respondents, and not of the judgment debtor named in the
NLRC decision and writ of execution. Such a recourse is allowed
under the provisions of Section 17, Rule 39 of the Rules of Court.
To sustain petitioners' theory will inevitably lead to disastrous
consequences and lend judicial imprimatur to deprivation of property
without due process of law. Simply because a writ of execution was
issued by the NLRC does not authorize the sheriff implementing the
same to levy on anybody's property. To deny the victim of the
wrongful levy, the recourse such as that availed of by the herein
private respondents, under the pretext that no court of general
jurisdiction can interfere with the writ of execution issued in a labor
dispute, will be sanctioning a greater evil than that sought to be
avoided by the Labor Code provision in question. Certainly, that
could not have been the intendment of the law creating the NLRC.
For well-settled is the rule that the power of a court to execute its
judgment extends only over properties unquestionably belonging to
the judgment debtor.
Likewise, since the third-party claimant is not one of the parties to the
action, he cannot, strictly speaking, appeal from the order denying his
claim, but he should file a separate reivindicatory action against the
execution creditor or the purchaser of the property after the sale at
public auction, or a complaint for damages against the bond filed by
the judgment creditor in favor of the sheriff.[79]
A separate civil action for recovery of ownership of the property
would not constitute interference with the powers or processes of the
labor tribunal which rendered the judgment to execute upon the
levied properties. The property levied upon being that of a stranger is
not subject to levy. Thus, a separate action for recovery, upon a
claim and prima facie showing of ownership by the petitioner, cannot
be considered as interference.[80]
Upon the findings and conclusions we have reached above,
petitioner is situated squarely as such third-party claimant. The
questioned restraining order of the lower court, as well as the order
 | 26

granting preliminary injunction, does not constitute interference with

the powers or processes of the labor department. The registration of
the mortgage document operated as notice to all on the matter of the
mortgagees prior claims. Official proceedings relative to the
foreclosure of the subject properties constituted a prima
facie showing of ownership of such claimant to support the issuance
of injunctive reliefs.
From our discussion above, we now rule that the trial court, in issuing
the questioned orders, did not commit grave abuse of discretion,
because its issuance was amply supported by factual and legal
bases.

As correctly held by the lower court:
The subject incidents for TRO and/or Writ of Injunction were
summarily heard and in resolving the same, the Court believes, that
the petitioner has a clear and unmistakable right over the levied
properties. The existence of the subject Deed of Real Estate and
Chattel Mortgage, the fact that petitioner initiated a foreclosure of
said properties before the Clerk of Court and Ex-Officio Sheriff, RTC
Branch 61, Kabankalan City on July 13, 2001, the fact that said Ex-
Officio Sheriff and the Clerk of Court issue a Notice of Foreclosure,
Possession and Control over said mortgaged properties on July 19,
2001 and the fact that a Sheriffs Certificate of Sale was issued on
December 3, 2001 are the basis of its conclusion. Unless said
mortgage contract is annulled or declared null and void, the
presumption of regularity of transaction must be considered and said
document must be looked [upon] as valid.
We are not unmindful, however, of the fact that the labor claims of
NAMAWU, acknowledged by this Court in Maricalum, still awaits final
execution. As success fades from NAMAWUs efforts to execute on
the properties of MMC, which were validly foreclosed by GHI, we see
that NAMAWU always had, and may still have, ample supplemental
remedies found in Rule 39 of the Rules of Court in order to protect its
rights against MMC. These include the examination of the judgment
obligor when judgment is unsatisfied,[82] the examination of the
obligors of judgment obligors,[83] or even the resort to receivership.[84]
While, theoretically, this case is not ended by this decision, since the
lower court is still to try the case filed with it and decide it on the
merits, the matter of whether the mortgage and foreclosure of the
assets that are the subject of said foreclosure is ended herein, for the
third and final time. So also is the consequential issue of the separate
and distinct personalities of GHI and MMC. Having resolved these
principal issues with certainty, we
find no more need to remand the case to the lower court, only for the

Notably, the Office of the Solicitor General also aptly observed that
when the respondent maintained that the Deed of Real Estate and
Chattel mortgage was entered into in fraud of creditors, it thereby
admitted that the mortgage was not void, but merely rescissible
under Article 1381(3) of the Civil Code; and, therefore, an
independent action is needed to rescind the contract of
mortgage.[81] We, however, hold that such an independent action
cannot now be maintained, because the mortgage has been
previously recognized to exist, with a valid consideration, in Republic,
etc., v. G Holdings, Inc.
purpose of resolving again the matter of whether GHI owns the
properties that were the subject of the latters foreclosure.
WHEREFORE, the Petition is GRANTED. The Decision of the Court
of Appeals dated October 14, 2003 is SET ASIDE. The Omnibus
Order dated December 4, 2002 of the Regional Trial Court, Branch
61 of Kabankalan City, Negros Occidental is AFFIRMED. No costs.
SO ORDERED.

A final word

The Court notes that the case filed with the lower court involves a
principal action for injunction to prohibit execution over properties
belonging to a third party not impleaded in the legal dispute between
NAMAWU and MMC. We have observed, however, that the lower
court and the CA failed to take judicial notice of, or to consider, our
Decisions in Republic, etc., v. G Holdings, Inc., and Maricalum
Mining Corporation v. Brion and NAMAWU, in which we respectively
recognized the entitlement of GHI to the shares and the company
notes of MMC (under the Purchase and Sale Agreement), and the
rights of NAMAWU to its labor claims. At this stage, therefore, neither
the lower court nor the CA, nor even this Court, can depart from our
findings in those two cases because of the doctrine of stare decisis.

[G.R. No. 123893. November 22, 2001]
LUISITO PADILLA and PHOENIX-OMEGA DEVELOPMENT AND
MANAGEMENT CORPORATION, petitioners, vs. THE
HONORABLE COURT OF APPEALS and SUSANA REALTY,
INC., respondents.
DECISION
QUISUMBING, J.:
This petition for review seeks the reversal of the Court of Appeals
decision[1] in CA-G.R. SP No. 36685, refusing to set aside (1) the
order dated November 29, 1994 of the Regional Trial Court of Pasay
City, Branch 113, which authorized the issuance of an alias writ of
execution in connection with Civil Case No. 7302 filed before said
court; and (2) the order dated February 10, 1995, which denied
petitioners motion for reconsideration of the order of November 29,
1994, regarding the annulment of the alias writ of execution and
cancellation of the notice of levy and sale dated December 16, 1994,
issued pursuant to the implementation of said alias writ.
The antecedent facts, as summarized by the Court of Appeals, are as
follows:
On June 27, 1983, Susana Realty, Inc. (SRI), by a deed of absolute
sale, sold to the Light Rail Transit Authority (LRTA) several parcels of
land located in Taft Avenue Extension, San Rafael District, Pasay
City. Under paragraph 7 of the deed of sale, SRI reserved to itself the
right of first refusal to develop and/or improve the property sold
should the LRTA decide to lease and/or assign to any person the
right to develop and/or improve the property.
On November 28, 1986, the LRTA and Phoenix Omega Development
and Management Corporation (Phoenix Omega) entered into a
Commercial Stall Concession Contract authorizing the latter to
construct and develop commercial stalls on a 90 sq. m. portion of the
property bought from SRI. SRI opposed the agreement as having
violated the deed of sale it entered with LRTA. A tripartite agreement
was later concluded by the parties, however, whereby SRI agreed to
honor the terms of the concession contract and to lease to Phoenix
Omega its (SRIs) property (remaining property) adjacent to the 90 sq.
m. portion subject of the concession contract.
A contract was thus entered into on July 28, 1988 between Phoenix
Omega and SRI with LRTA whereby Phoenix Omega undertook to
construct commercial stalls on the 90-sq. m. property in accordance
with plans and specifications prepared by the latter, the construction
to begin, however, only upon SRIs approval of such plans and
specifications. Also on July 28, 1988, Phoenix Omega, by a deed of
assignment, assigned its right and interests over the remaining
property unto its sister company, PKA Development and
Management Corporation (PKA). Signatories to the deed of
assignment were Eduardo Gatchalian in his capacity as President of
Phoenix Omega, and Luisito B. Padilla (Padilla), one of the
petitioners herein, in his capacity as President and General Manager
of PKA. The development of the remaining property having been
assigned to PKA, it entered into a contract of lease with SRI likewise
on July 28, 1988.
In the meantime, SRI sold part of its remaining property to a third
party. An amended contract of lease was thus forged in January
1989 among SRI, PKA and Phoenix Omega, whereby the parties
| 27
agreed to substitute the already sold portion of SRIs remaining
property with 2 parcels of land also belonging to SRI. In this
amended contract of lease, PKA was again represented by Padilla in
his capacity as its President and General Manager. And Phoenix
Omega, which was not a party to the July 28, 1988 lease contract
sought to be amended but which was a party, to the amended
contract, was also represented by Padilla as Chairman of the Board
of Directors of Phoenix Omega.
PKAs building permit was later revoked due to certain violations of
the National Building Code (BP 344).
On August 24, 1989, PKA was allowed by the (Department) of Public
Works and Highway(s) to resume construction on the leased
premises subject to PKAs correction of the defects in the construction
to conform to BP 344.
As SRIs approval of PKAs amended plans in the construction was
required, PKA transmitted the same to SRI which withheld approval
thereof pending PKAs correction of the defects in the construction.
Repeated requests for approval of its amended plans not having
been heeded by SRI, PKA filed at the court a quo the action at bar for
rescission of contract of lease against SRI, alleging that SRIs refusal
to approve the plans without any justifiable reason deprived it of the
use of the commercial stalls, thereby incurring losses.
SRI, upon the other hand, claimed that it was PKA which violated the
terms of their contract, alleging that PKA failed to complete within six
months the construction of the commercial stalls during which period
it was not paying any rentals and that PKA undertook the
construction without first having its plans approved.[2] (Underscoring
in the original.)
On January 7, 1991, the RTC rendered its decision, as follows:
WHEREFORE, judgment is hereby rendered:
1. Declaring the rescission and termination of the Contract of Lease,
as amended, and the passing in ownership of all the improvements
now existing on the premises, and ordering plaintiff to surrender
possession of the leased premises to the defendant.
2. Ordering plaintiff to pay to the defendant the following sums of
money:
(a) P1,750,000.00 as of April 30, 1990, plus monthly rental of
P200,000 per month starting in May, 1990, until plaintiff shall turn
over possession of the premises to the defendant, with interest at 1%
per month until fully paid;
(b) Moral damages in the amount of P100,000.00;
(c) Exemplary damages in the amount of P100,000.00; and
(d) Attorneys fees in the amount of P150,000.00; and
(e) The cost of suit.[3]
PKA appealed the RTC decision to the Court of Appeals. On October
2, 1992, the CA affirmed the RTC decision, decreeing as follows:
WHEREFORE, with MODIFICATIONS that the award of P100,000.00
for moral damages and P100,000.00 for exemplary damages is

DELETED from the judgment appealed from, the rest thereof not
inconsistent herewith is AFFIRMED. No costs.[4]
PKAs motion for reconsideration was denied by the CA in a
resolution dated March 15, 1993. PKA then filed before this Court a
petition for review on certiorari, which we denied in a resolution dated
September 27, 1993. We likewise denied PKAs motion for
reconsideration in a resolution dated January 17, 1994.
A writ of execution was issued in due course by the RTC, which
reads as follows:
NOW THEREFORE, you are hereby commanded to cause the
execution of the aforesaid decision, ordering the plaintiff and all
persons claiming under it to surrender possession of the premises to
the defendant, and that of the goods and chattels of the plaintiff you
cause to be made the sum of P1,750,000.00 plus monthly rental of
P200,000.00 starting in May, 1990 until plaintiff shall turn over
possession of the premises to defendant with interest of 1% per
month until fully paid, and the further sum of P150,000.00 as
attorneys fees, and the cost of suit, together with your lawful fees for
service of this execution all in Philippine currency, and that you
tender the same to defendant Susana Realty, Inc. aside from your
own fees on this execution and to likewise return this writ to this
Court within sixty (60) days from receipt hereof with your proceedings
endorsed thereon.
But if sufficient personal property of the plaintiff cannot be found
whereof to satisfy the amount of said judgment, you are hereby
directed to levy the real property of the said plaintiff and to sell the
same or so much thereof in the manner provided for by law for the
satisfaction of the said judgment.[5]
Possession of the subject properties was subsequently restored to
SRI, but the monetary award was left unsatisfied. Thus, on
November 14, 1994, SRI filed a motion for issuance of an alias writ
against herein petitioners, based on the trial courts observation that
PKA and Phoenix-Omega are one and the same entity. This was
granted by the RTC in an order[6] dated November 29, 1994, which
reads:
WHEREFORE, as prayed for by the defendant-judgment creditor
Susana Realty, Inc., let an alias writ of execution issue against the
properties, both real and personal, of PKA Development and
Management Corporation, of Phoenix-Omega Development
Corporation, and of Luisito B. Padilla, for the enforcement of the
decision dated January 7, 1991, promulgated by this Court, the same
be implemented by deputy sheriff Edilberto A. Santiago.
(Underscoring by petitioners.)
The RTC issued an alias writ on the same day pursuant to the above
order:
NOW THEREFORE, you are hereby commanded to cause the
execution of the aforesaid decision and that of the goods and chattels
of the plaintiff, PKA Development and Management Corporation,
Phoenix-Omega, caused to be made the sum of P1,750,000.00 plus
monthly rentals of P200,000.00 starting in May, 1990 with interest of
1% per month, until fully paid, and the further sum of P150,000.00 as
attorneys fees; P100,000.00 moral damages and the cost of suit,
together with your lawful fees for service of this execution all in
Philippine currency, and that you tender the same to the defendant
| 28
SUSANA REALTY, INC., aside from your own fees on this execution
and to likewise return this writ to this Court within 60 days from
receipt hereof with your proceeding indorsed thereon.
But if sufficient personal properties of the plaintiff cannot be found
whereof to satisfy the amount of said judgment, you are directed to
levy the real property of the plaintiff, PKA Development and
Management Corporation, Phoenix-Omega Development and
Management Corporation and Luisito B. Padilla and to sell the same
or so much thereof in the manner provided for by law for the
satisfaction of the said judgment.[7]
Alleging that the writ of execution cannot be enforced against them,
herein petitioners filed with the RTC on December 15, 1994, an
omnibus motion for the reconsideration of the order of November 29,
1994, and for annulment of the alias writ of the same date and
cancellation of the notice of levy and sale dated December 16,
1994. Petitioners assailed these orders as confiscatory, since they
were never parties to the case filed by PKA against SRI, and they
were unable to present evidence on their behalf. The motion was
denied on February 10, 1995.
Subsequently, on March 8, 1995, petitioners filed with the Court of
Appeals a petition for certiorari and prohibition under Rule 65 of the
Rules of Court. This petition was also denied; so was petitioners
motion for reconsideration of said denial.
The Court of Appeals agreed with the RTCs finding that there is
evidence on record to support the RTCs conclusion that PKA and
Phoenix-Omega are one and the same, or that the former is a mere
conduit of the latter. It pointed out that petitioner Padilla is both
president and general manager of PKA and at the same time
chairman of the board of directors and controlling stockholder of
Phoenix-Omega.PKA and Phoenix-Omega also shared officers,
laborers, and offices.
While aware that the dispositive portion of the RTC decision holds
only PKA liable to SRI, the Court of Appeals pointed out that the
intent of the RTC was clearly to hold PKA, Phoenix-Omega, and
Padilla liable, as shown in the body of the RTC decision. The rule
that the dispositive portion of a decision is the subject of execution
only applies where the disposition is clear and unequivocal,
according to the CA, unlike in this case where there is uncertainty
and ambiguity. The body of the decision may be consulted to
construe the judgment in this case.
On the claim that Phoenix-Omega and Padilla were not parties to the
case, the CA ruled that
a person not so impleaded to an action is deemed to be a party to a
suit when he has the right to control the proceedings, to make
defense, to adduce and cross examine witnesses, and to appeal from
a decision (67 C.J.S. 887 cited in Albert v. University Publishing Co.,
13 SCRA 84). That petitioner Padilla is in reality the one who had and
duly exercised these rights is glaringly borne by the records.[8]
Hence, this petition for review, in which petitioners allege that the CA
erred:
I. IN RENDERING THE DECISION AND RESOLUTION IN
QUESTION IN DEFIANCE OF LAW AND JURISPRUDENCE BY
SUSTAINING THE TRIAL COURTS ORDER AND WRIT BOTH
DATED NOVEMBER 29, 1994 FINDING PETITIONERS JOINTLY

AND SEVERALLY LIABLE WITH PKA, THEREBY AUTHORIZING
THE EXECUTION OF THE DECISION AGAINST THEIR
PROPERTIES, DESPITE THE ADMITTED FACT THAT --
A. PETITIONERS WERE NEVER IMPLEADED AS PARTIES IN THE
CASE BEFORE THE TRIAL COURT (CIVIL CASE NO. 7302),
THEREBY CONFIRMING THE OPPRESSIVE AND
CONFISCATORY NATURE OF THE ORDER AND WRIT
(ANNEXES N AND O);
B. PETITIONERS COULD NOT AND DID NOT HAVE ANY
OPPORTUNITY TO ADDUCE EVIDENCE TO REFUTE THE
CAUSES OF ACTIONS ALLEGED IN RESPONDENT SRIS
COMPLAINT BEFORE THE TRIAL COURT (CIVIL CASE NO. 7302)
THUS VIOLATING THEIR RIGHT TO DUE PROCESS OF LAW.
II. IN CONCLUSIONS REACHED IN THE DECISION AND
RESOLUTION IN QUESTION BY AFFIRMING THE ORDER AND
WRIT AS ISSUED BY THE TRIAL COURT IN CIVIL CASE NO. 7302
WHICH EXPANDED THE SCOPE OF THE WRIT HOLDING
PETITIONERS SOLIDARILY LIABLE WITH PKA
NOTWITHSTANDING THAT THIS FINDING WAS NOT
CONTAINED IN THE DISPOSITIVE PORTION OF THE DECISION,
IN DEFIANCE OF LAW AND JURISPRUDENCE ON THE MATTER.
III. IN APPLYING THE DOCTRINE OF PIERCING THE VEIL OF
CORPORATE FICTION TO THE CASE AT BAR DESPITE THE
FACT THAT THE GROUNDS FOR ITS APPLICATION UNDER
CASE LAW HAVE NOT BEEN SHOWN, THEREBY ABROGATING
PRONOUNCEMENTS OF THIS HONORABLE COURT IN
NUMEROUS DECISIONS ON THE SUBJECT.
IV. IN AFFIRMING THE ORDER AND WRIT OF THE TRIAL COURT
NOTWITHSTANDING THE ABSENCE OF ANY MISTAKE,
OMISSION OR AMBIGUITY IN THE JANUARY 9, 1991 DECISION
IN THE MAIN CASE AS WOULD HAVE JUSTIFIED ITS
MODIFICATION PURSUANT TO EXTANT JURISPRUDENCE ON
THE MATTER.[9]
Petitioners stress that the RTC, the CA, and this Court, in the main
case (Civil Case No. 7302), did not find them solidarily liable with
PKA, and rightly so since PKA and Phoenix-Omega are two different
entities. Phoenix-Omegas only participation in the properties subject
of the main case was as the construction company that would
develop the properties on behalf of PKA. Phoenix-Omega was
involved in the amended lease agreement between SRI and PKA
only to the extent that it had to apply the terms of the tripartite
agreement (among LRTA, SRI, and Phoenix-Omega) to the
development of the LRTA-owned property situated in front of the lots
leased to PKA by SRI.[10] Petitioners argue that the amended lease
contract was, in reality, only between SRI and PKA.
Petitioners protest the piercing of the veil of corporate fiction between
themselves and PKA. They contend, citing Filmerco Commercial Co.,
Inc. v. IAC, No. L-70661, 149 SCRA 193 (1987), that the court must
first acquire jurisdiction over the corporation attempting to misuse the
corporate vehicle to shield the commission of a fraud.
Petitioners contend that the finding by the trial court as regards the
single personality of PKA and Phoenix-Omega was made only to
refute PKAs claim that it was not liable for constructions made by
Phoenix-Omega outside the leased areas.
| 29
On the other hand, private respondent argues that there is no error in
the issuance of the alias writ of execution against the properties of
petitioners since the trial court, the CA, and this Court had all ruled
that petitioners and PKA are in reality one and the same entity. This
is the reason why, when the first writ of execution was returned
unsatisfied, SRI moved for the issuance of an alias writ of execution
not only against the properties of PKA but those of petitioners as
well. There is no violation of petitioners right to due process since
petitioner Padilla actively participated in the proceedings before the
RTC as the responsible officer of both PKA and Phoenix-Omega.
Private respondent also contends that the CA ruled on the necessity
of construing the dispositive portion of the judgment along with its
text, which petitioners allegedly accepted by not discussing the issue
in their pleadings.
To our mind, the main issue for our consideration is whether or not
the trial court had jurisdiction over petitioners, to justify the issuance
of an alias writ of execution against their properties.
A court acquires jurisdiction over a person through either a valid
service of summons or the persons voluntary appearance in
court.[11] A court must necessarily have jurisdiction over a party for
the latter to be bound by a court decision.
Generally accepted is the principle that no man shall be affected by
any proceeding to which he is a stranger, and strangers to a case are
not bound by judgment rendered by the court. xxx[12]
In the present case, we note that the trial court never acquired
jurisdiction over petitioners through any of the modes mentioned
above. Neither of the petitioners was even impleaded as a party to
the case.[13]
Without the trial court having acquired jurisdiction over petitioners,
the latter could not be bound by the decision of the court. Execution
can only be issued against a party and not against one who was not
accorded his day in court.[14] To levy upon their properties to satisfy a
judgment in a case in which they were not even parties is not only
inappropriate; it most certainly is deprivation of property without due
process of law.[15] This we cannot allow.
The courts a quo ruled that petitioner Padilla, in particular, had his
day in court. As general manager of PKA, he actively participated in
the case in the trial court. He ha(d) the right to control the
proceedings, to make defense, to adduce and cross examine
witnesses, and to appeal from a decision.[16] Therefore, Padilla and
Phoenix-Omega, of which Padilla is chairman of the board, could not
now argue that they did not have the opportunity to present their case
in court, according to private respondent.
To begin with, it is clear that Padilla participated in the proceedings
below as general manager of PKA and not in any other capacity. The
fact that at the same time he was the chairman of the board of
Phoenix-Omega cannot, by any stretch of reasoning, equate to
participation by Phoenix-Omega in the same proceedings. We again
stress that Phoenix-Omega was not a party to the case and so could
not have taken part therein.
Private respondent, however, insists that the trial court had pierced
the veil of corporate fiction protecting petitioners, and this justifies
execution against their properties.
 | 30

The general rule is that a corporation is clothed with a personality

separate and distinct from the persons composing it. It may not be
held liable for the obligations of the persons composing it, and neither
can its stockholders be held liable for its obligations.[17]
This veil of corporate fiction may only be disregarded in cases where
the corporate vehicle is being used to defeat public convenience,
justify wrong, protect fraud, or defend crime.[18] PKA and Phoenix-
Omega are admittedly sister companies, and may be sharing
personnel and resources, but we find in the present case no
allegation, much less positive proof, that their separate corporate
personalities are being used to defeat public convenience, justify
wrong, protect fraud, or defend crime. For the separate juridical
personality of a corporation to be disregarded, the wrongdoing must
be clearly and convincingly established. It cannot be
presumed.[19] We find no reason to justify piercing the corporate veil
in this instance.
We understand private respondents frustration at not being able to
have the monetary award in their favor satisfied. But given the
circumstances of this case, public respondent cannot order the
seizure of petitioners properties without violating their constitutionally
enshrined right to due process, merely to compensate private
respondent.
WHEREFORE, the instant petition is GRANTED. The assailed
decision and resolution of the Court of Appeals in CA-G.R. SP No.
36685 are SET ASIDE, and the order of the trial court dated
November 29, 1994 and the alias writ of execution issued on the
same date in connection with Civil Case No. 7302, are declared
NULL and VOID.
Costs against private respondent.
SO ORDERED.

[G.R. No. 136448. November 3, 1999]
LIM TONG LIM, petitioner, vs. PHILIPPINE FISHING GEAR
INDUSTRIES, INC., respondent.
DECISION
PANGANIBAN, J.:
A partnership may be deemed to exist among parties who agree to
borrow money to pursue a business and to divide the profits or losses
that may arise therefrom, even if it is shown that they have not
contributed any capital of their own to a "common fund." Their
contribution may be in the form of credit or industry, not necessarily
cash or fixed assets. Being partners, they are all liable for debts
incurred by or on behalf of the partnership. The liability for a contract
entered into on behalf of an unincorporated association or ostensible
corporation may lie in a person who may not have directly transacted
on its behalf, but reaped benefits from that contract.
The Case
In the Petition for Review on Certiorari before us, Lim Tong Lim
assails the November 26, 1998 Decision of the Court of Appeals in
CA-GR CV 41477,[1] which disposed as follows:
WHEREFORE, [there being] no reversible error in the appealed
decision, the same is hereby affirmed.[2]
The decretal portion of the Quezon City Regional Trial Court (RTC)
ruling, which was affirmed by the CA, reads as follows:
WHEREFORE, the Court rules:
1. That plaintiff is entitled to the writ of preliminary attachment issued
by this Court on September 20, 1990;
2. That defendants are jointly liable to plaintiff for the following
amounts, subject to the modifications as hereinafter made by reason
of the special and unique facts and circumstances and the
proceedings that transpired during the trial of this case;
a. P532,045.00 representing [the] unpaid purchase price of the
fishing nets covered by the Agreement plus P68,000.00 representing
the unpaid price of the floats not covered by said Agreement;
b. 12% interest per annum counted from date of plaintiffs invoices
and computed on their respective amounts as follows:
i. Accrued interest of P73,221.00 on Invoice No. 14407
for P385,377.80 dated February 9, 1990;
ii. Accrued interest of P27,904.02 on Invoice No. 14413
for P146,868.00 dated February 13, 1990;
iii. Accrued interest of P12,920.00 on Invoice No. 14426
for P68,000.00 dated February 19, 1990;
c. P50,000.00 as and for attorneys fees, plus P8,500.00
representing P500.00 per appearance in court;
d. P65,000.00 representing P5,000.00 monthly rental for storage
charges on the nets counted from September 20, 1990 (date of
attachment) to September 12, 1991 (date of auction sale);
e. Cost of suit.
| 31
With respect to the joint liability of defendants for the principal
obligation or for the unpaid price of nets and floats in the amount
of P532,045.00 and P68,000.00, respectively, or for the total amount
of P600,045.00, this Court noted that these items were attached to
guarantee any judgment that may be rendered in favor of the plaintiff
but, upon agreement of the parties, and, to avoid further deterioration
of the nets during the pendency of this case, it was ordered sold at
public auction for not less than P900,000.00 for which the plaintiff
was the sole and winning bidder. The proceeds of the sale paid for by
plaintiff was deposited in court. In effect, the amount of P900,000.00
replaced the attached property as a guaranty for any judgment that
plaintiff may be able to secure in this case with the ownership and
possession of the nets and floats awarded and delivered by the
sheriff to plaintiff as the highest bidder in the public auction sale. It
has also been noted that ownership of the nets [was] retained by the
plaintiff until full payment [was] made as stipulated in the invoices;
hence, in effect, the plaintiff attached its own properties. It [was] for
this reason also that this Court earlier ordered the attachment bond
filed by plaintiff to guaranty damages to defendants to be cancelled
and for the P900,000.00 cash bidded and paid for by plaintiff to serve
as its bond in favor of defendants.
From the foregoing, it would appear therefore that whatever judgment
the plaintiff may be entitled to in this case will have to be satisfied
from the amount of P900,000.00 as this amount replaced the
attached nets and floats. Considering, however, that the total
judgment obligation as computed above would amount to
only P840,216.92, it would be inequitable, unfair and unjust to award
the excess to the defendants who are not entitled to damages and
who did not put up a single centavo to raise the amount
of P900,000.00 aside from the fact that they are not the owners of the
nets and floats. For this reason, the defendants are hereby relieved
from any and all liabilities arising from the monetary judgment
obligation enumerated above and for plaintiff to retain possession
and ownership of the nets and floats and for the reimbursement of
the P900,000.00 deposited by it with the Clerk of Court.
SO ORDERED. [3]
The Facts
On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and
Peter Yao entered into a Contract dated February 7, 1990, for the
purchase of fishing nets of various sizes from the Philippine Fishing
Gear Industries, Inc. (herein respondent). They claimed that they
were engaged in a business venture with Petitioner Lim Tong Lim,
who however was not a signatory to the agreement. The total price of
the nets amounted to P532,045. Four hundred pieces of floats
worth P68,000 were also sold to the Corporation.[4]
The buyers, however, failed to pay for the fishing nets and the floats;
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 as shown by a
Certification from the Securities and Exchange Commission.[5] On
September 20, 1990, the lower court issued a Writ of Preliminary
Attachment, which the sheriff enforced by attaching the fishing nets
on board F/B Lourdes which was then docked at the Fisheries Port,
Navotas, Metro Manila.

Instead of answering the Complaint, Chua filed a Manifestation
admitting his liability and requesting a reasonable time within which
to pay. He also turned over to respondent some of the nets which
were in his possession. Peter Yao filed an Answer, after which he
was deemed to have waived his right to cross-examine witnesses
and to present evidence on his behalf, because of his failure to
appear in subsequent hearings. Lim Tong Lim, on the other hand,
filed an Answer with Counterclaim and Crossclaim and moved for the
lifting of the Writ of Attachment.[6] The trial court maintained the Writ,
and upon motion of private respondent, ordered the sale of the
fishing nets at a public auction. Philippine Fishing Gear Industries
won the bidding and deposited with the said court the sales proceeds
of P900,000.[7]
On November 18, 1992, the trial court rendered its 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.[8]
The trial court ruled that a partnership among Lim, Chua and Yao
existed based (1) on the testimonies of the witnesses presented and
(2) on a Compromise Agreement executed by the three[9] in Civil
Case No. 1492-MN which Chua and Yao had brought against Lim in
the RTC of Malabon, Branch 72, for (a) a declaration of nullity of
commercial documents; (b) a reformation of contracts; (c) a
declaration of ownership of fishing boats; (d) an injunction and (e)
damages.[10] The Compromise Agreement provided:
a) That the parties plaintiffs & Lim Tong Lim agree to have the four
(4) vessels sold in the amount of P5,750,000.00 including the fishing
net. This P5,750,000.00 shall be applied as full payment
for P3,250,000.00 in favor of JL Holdings Corporation and/or Lim
Tong Lim;
b) If the four (4) vessel[s] and the fishing net will be sold at a higher
price than P5,750,000.00 whatever will be the excess will be divided
into 3: 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao;
c) If the proceeds of the sale the vessels will be less
than P5,750,000.00 whatever the deficiency shall be shouldered and
paid to JL Holding Corporation by 1/3 Lim Tong Lim; 1/3 Antonio
Chua; 1/3 Peter Yao.[11]
The trial court noted that the Compromise Agreement was silent as to
the nature of their obligations, but that joint liability could be
presumed from the equal distribution of the profit and loss.[12]
Lim appealed to the Court of Appeals (CA) which, as already stated,
affirmed the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that petitioner was a partner of
Chua and Yao in a fishing business and may thus be held liable as a
such for the fishing nets and floats purchased by and for the use of
the partnership. The appellate court ruled:
The evidence establishes that all the defendants including herein
appellant Lim Tong Lim undertook a partnership for a specific
undertaking, that is for commercial fishing x x x. Obviously, the
ultimate undertaking of the defendants was to divide the profits
among themselves which is what a partnership essentially is x x x. By
a contract of partnership, two or more persons bind themselves to
| 32
contribute money, property or industry to a common fund with the
intention of dividing the profits among themselves (Article 1767, New
Civil Code).[13]
Hence, petitioner brought this recourse before this Court.[14]
The Issues
In his Petition and Memorandum, Lim asks this Court to reverse the
assailed Decision on the following grounds:
I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A
COMPROMISE AGREEMENT THAT CHUA, YAO AND
PETITIONER LIM ENTERED INTO IN A SEPARATE CASE, THAT A
PARTNERSHIP AGREEMENT EXISTED AMONG THEM.
II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE
WAS ACTING FOR OCEAN QUEST FISHING CORPORATION
WHEN HE BOUGHT THE NETS FROM PHILIPPINE FISHING, THE
COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING LIABILITY
TO PETITIONER LIM AS WELL.
III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE
AND ATTACHMENT OF PETITIONER LIMS GOODS.
In determining whether petitioner may be held liable for the fishing
nets and floats purchased from respondent, the Court must resolve
this key issue: whether by their acts, Lim, Chua and Yao could be
deemed to have entered into a partnership.
This Courts Ruling
The Petition is devoid of merit.
First and Second Issues: Existence of a Partnership and Petitioner's Liability
In arguing that he should not be held liable for the equipment
purchased from respondent, petitioner controverts the CA finding that
a partnership existed between him, Peter Yao and Antonio Chua. He
asserts that the CA based its finding on the Compromise Agreement
alone. Furthermore, he disclaims any direct participation in the
purchase of the nets, alleging that the negotiations were conducted
by Chua and Yao only, and that he has not even met the
representatives of the respondent company. Petitioner further argues
that he was a lessor, not a partner, of Chua and Yao, for the
"Contract of Lease" dated February 1, 1990, showed that he had
merely leased to the two the main asset of the purported partnership
-- the fishing boat F/B Lourdes. The lease was for six months, with a
monthly rental of P37,500 plus 25 percent of the gross catch of the
boat.
We are not persuaded by the arguments of petitioner. The facts as
found by the two lower courts clearly showed that there existed a
partnership among Chua, Yao and him, pursuant to Article 1767 of
the Civil Code which provides:
Article 1767 - By the contract of partnership, two or more persons
bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among
themselves.
Specifically, both lower courts ruled that a partnership among the
three existed based on the following factual findings:[15]

(1) That Petitioner Lim Tong Lim requested Peter Yao who was
engaged in commercial fishing to join him, while Antonio Chua was
already Yaos partner;
(2) That after convening for a few times, Lim Chua, and Yao verbally
agreed to acquire two fishing boats, the FB Lourdes and the FB
Nelson for the sum of P3.35 million;
(3) That they borrowed P3.25 million from Jesus Lim, brother of
Petitioner Lim Tong Lim, to finance the venture.
(4) That they bought the boats from CMF Fishing Corporation, which
executed a Deed of Sale over these two (2) boats in favor of
Petitioner Lim Tong Lim only to serve as security for the loan
extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing , re-
equipping, repairing, dry docking and other expenses for the boats
would be shouldered by Chua and Yao;
(6) That because of the unavailability of funds, Jesus Lim again
extended a loan to the partnership in the amount of P1 million
secured by a check, because of which, Yao and Chua entrusted the
ownership papers of two other boats, Chuas FB Lady Anne Mel and
Yaos FB Tracy to Lim Tong Lim.
(7) That in pursuance of the business agreement, Peter Yao and
Antonio Chua bought nets from Respondent Philippine Fishing Gear,
in behalf of "Ocean Quest Fishing Corporation," their purported
business name.
(8) That subsequently, Civil Case No. 1492-MN was filed in the
Malabon RTC, Branch 72 by Antonio Chua and Peter Yao against
Lim Tong Lim for (a) declaration of nullity of commercial documents;
(b) reformation of contracts; (c) declaration of ownership of fishing
boats; (4) injunction; and (e) damages.
(9) That the case was amicably settled through a Compromise
Agreement executed between the parties-litigants the terms of which
are already enumerated above.
From the factual findings of both lower courts, 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 petitioners 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.
| 33
Given the preceding facts, it is clear that there was, among petitioner,
Chua and Yao, a partnership engaged in the fishing business. They
purchased the boats, which constituted the main assets of the
partnership, and they agreed that the proceeds from the sales and
operations thereof would be divided among them.
We stress that under Rule 45, a petition for review like the present
case should involve only questions of law. Thus, the foregoing factual
findings of the RTC and the CA are binding on this Court, absent any
cogent proof that the present action is embraced by one of the
exceptions to the rule.[16] In assailing the factual findings of the two
lower courts, petitioner effectively goes beyond the bounds of a
petition for review under Rule 45.
Compromise Agreement Not the Sole Basis of Partnership
Petitioner argues that the appellate courts sole basis for assuming
the existence of a partnership was the Compromise Agreement. He
also claims that the settlement was entered into only to end the
dispute among them, but not to adjudicate their preexisting rights and
obligations. His arguments are baseless. The Agreement was but an
embodiment of the relationship extant among the parties prior to its
execution.
A proper adjudication of claimants rights mandates that courts must
review and thoroughly appraise all relevant facts. Both lower courts
have done so and have found, correctly, a preexisting partnership
among the parties. In implying that the lower courts have decided on
the basis of one piece of document alone, petitioner fails to
appreciate that the CA and the RTC delved into the history of the
document and explored all the possible consequential combinations
in harmony with law, logic and fairness. Verily, the two lower courts
factual findings mentioned above nullified petitioners argument that
the existence of a partnership was based only on the Compromise
Agreement.
Petitioner Was a Partner, Not a Lessor
We are not convinced by petitioners argument that he was merely the
lessor of the boats to Chua and Yao, not a partner in the fishing
venture. His argument allegedly finds support in the Contract of
Lease and the registration papers showing that he was the owner of
the boats, including F/B Lourdes where the nets were found.
His allegation defies logic. In effect, he would like this Court to
believe that he consented to the sale of his own boats to pay a debt
of Chua and Yao, with the excess of the proceeds to be divided
among the three of them. No lessor would do what petitioner
did. Indeed, his consent to the sale proved that there was a
preexisting partnership among all three.
Verily, as found by the lower courts, petitioner entered into a
business agreement with Chua and Yao, in which debts were
undertaken in order to finance the acquisition and the upgrading of
the vessels which would be used in their fishing business. The sale of
the boats, as well as the division among the three of the balance
remaining after the payment of their loans, proves beyond cavil
that F/B Lourdes, though registered in his name, was not his own
property but an asset of the partnership. It is not uncommon to
register the properties acquired from a loan in the name of the person
the lender trusts, who in this case is the petitioner himself. After all,
he is the brother of the creditor, Jesus Lim.

We stress that it is unreasonable indeed, it is absurd -- for petitioner
to sell his property to pay a debt he did not incur, if the relationship
among the three of them was merely that of lessor-lessee, instead of
partners.
Corporation by Estoppel
Petitioner argues that under the doctrine of corporation by estoppel,
liability can be imputed only to Chua and Yao, and not to him. Again,
we disagree.
Section 21 of the Corporation Code of the Philippines provides:
Sec. 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.
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.
Thus, even if the ostensible corporate entity is proven to be legally
nonexistent, a party may be estopped from denying its corporate
existence. The reason behind this doctrine is obvious - an
unincorporated association has no personality and would be
incompetent to act and appropriate for itself the power and attributes
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 right 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 becomes personally
liable for contracts entered into or for other acts performed as such
agent.[17]
The doctrine of corporation by estoppel may apply to the alleged
corporation and to a third party. In the first instance, an
unincorporated association, which represented itself to be a
corporation, will be estopped from denying its corporate capacity in a
suit against it by a third person who relied in good faith on such
representation. It cannot allege lack of personality to be sued to
evade its responsibility for a contract it entered into and by virtue of
which it received advantages and benefits.
On the other hand, a third party who, knowing an association to be
unincorporated, nonetheless treated it as a corporation and received
benefits from it, may be barred from denying its corporate existence
in a suit brought against the alleged corporation. In such case, all
those who benefited from the transaction made by the ostensible
corporation, despite knowledge of its legal defects, may be held liable
for contracts they impliedly assented to or took advantage of.
There is no dispute that the respondent, Philippine Fishing Gear
Industries, is entitled to be paid for the nets it sold. The only question
here is whether petitioner should be held jointly[18] liable with Chua
and Yao. Petitioner contests such liability, insisting that only those
| 34
who dealt in the name of the ostensible corporation should be held
liable. Since his name does not appear on any of the contracts and
since he never directly transacted with the respondent corporation,
ergo, he cannot be held liable.
Unquestionably, petitioner benefited from the use of the nets found
inside F/B Lourdes, the boat which has earlier been proven to be an
asset of the partnership. He in fact questions the attachment of the
nets, because the Writ has effectively stopped his use of the fishing
vessel.
It is difficult to disagree with the RTC and the CA that Lim, Chua and
Yao decided to form a corporation. Although it was never legally
formed for unknown reasons, this fact alone does not preclude the
liabilities of the three as contracting parties in representation of
it. Clearly, under the law on estoppel, those acting on behalf of a
corporation and those benefited by it, knowing it to be without valid
existence, are held liable as general partners.
Technically, it is true that petitioner did not directly act on behalf of
the corporation. However, having reaped the benefits of the contract
entered into by persons with whom he previously had an existing
relationship, he is deemed to be part of said association and is
covered by the scope of the doctrine of corporation by estoppel. We
reiterate the ruling of the Court in Alonso v. Villamor:[19]
A litigation is not a game of technicalities in which one, more deeply
schooled and skilled in the subtle art of movement and position ,
entraps and destroys the other. It is, rather, a contest in which each
contending party fully and fairly lays before the court the facts in
issue and then, brushing aside as wholly trivial and indecisive all
imperfections of form and technicalities of procedure, asks that
justice be done upon the merits. Lawsuits, unlike duels, are not to be
won by a rapiers thrust. Technicality, when it deserts its proper office
as an aid to justice and becomes its great hindrance and chief
enemy, deserves scant consideration from courts. There should be
no vested rights in technicalities.
Third Issue: Validity of Attachment
Finally, petitioner claims that the Writ of Attachment was improperly
issued against the nets. We agree with the Court of Appeals that this
issue is now moot and academic. As previously discussed, F/B
Lourdes was an asset of the partnership and that it was placed in the
name of petitioner, only to assure payment of the debt he and his
partners owed. The nets and the floats were specifically
manufactured and tailor-made according to their own design, and
were bought and used in the fishing venture they agreed
upon. Hence, the issuance of the Writ to assure the payment of the
price stipulated in the invoices is proper. Besides, by specific
agreement, ownership of the nets remained with Respondent
Philippine Fishing Gear, until full payment thereof.
WHEREFORE, the Petition is DENIED and the assailed
Decision AFFIRMED. Costs against petitioner.
SO ORDERED.

[G.R. No. 122174. October 3, 2002]
INDUSTRIAL REFRACTORIES CORPORATION OF THE
PHILIPPINES, petitioner, vs. COURT OF APPEALS, SECURITIES
AND EXCHANGE COMMISSION and REFRACTORIES
CORPORATION OF THE PHILIPPINES, respondents.
DECISION
AUSTRIA-MARTINEZ, J.:
Filed before us is a petition for review on certiorari under Rule 45 of
the Rules of Court assailing the Decision of the Court of Appeals in
CA-G.R. SP No. 35056, denying due course and dismissing the
petition filed by Industrial Refractories Corp. of the Philippines
(IRCP).
Respondent Refractories Corporation of the Philippines (RCP) is a
corporation duly organized on October 13, 1976 for the purpose of
engaging in the business of manufacturing, producing, selling,
exporting and otherwise dealing in any and all refractory bricks, its
by-products and derivatives. On June 22, 1977, it registered its
corporate and business name with the Bureau of Domestic Trade.
Petitioner IRCP on the other hand, was incorporated on August 23,
1979 originally under the name Synclaire Manufacturing
Corporation. It amended its Articles of Incorporation on August 23,
1985 to change its corporate name to Industrial Refractories Corp. of
the Philippines. It is engaged in the business of manufacturing all
kinds of ceramics and other products, except paints and zincs.
Both companies are the only local suppliers of monolithic gunning
mix.[1]
Discovering that petitioner was using such corporate name,
respondent RCP filed on April 14, 1988 with the Securities and
Exchange Commission (SEC) a petition to compel petitioner to
change its corporate name on the ground that its corporate name is
confusingly similar with that of petitioners such that the public may be
confused or deceived into believing that they are one and the same
corporation.[2]
The SEC decided in favor of respondent RCP and rendered
judgment on July 23, 1993 with the following dispositive portion:
WHEREFORE, judgment is hereby rendered in favor of the petitioner
and against the respondent declaring the latters corporate name
Industrial Refractories Corporation of the Philippines as deceptively
and confusingly similar to that of petitioners corporate name
Refractories Corporation of the Philippines. Accordingly, respondent
is hereby directed to amend its Articles of Incorporation by deleting
the name Refractories Corporation of the Philippines in its corporate
name within thirty (30) days from finality of this Decision. Likewise,
respondent is hereby ordered to pay the petitioner the sum of
P50,000.00 as attorneys fees.[3]
Petitioner appealed to the SEC En Banc, arguing that it does not
have any jurisdiction over the case, and that respondent RCP has no
right to the exclusive use of its corporate name as it is composed of
generic or common words.[4]
| 35
In its Decision dated July 23, 1993, the SEC En Banc modified the
appealed decision in that petitioner was ordered to delete or drop
from its corporate name only the word Refractories.[5]
Petitioner IRCP elevated the decision of the SEC En Banc through a
petition for review on certiorari to the Court of Appeals which then
rendered the herein assailed decision. The appellate court upheld the
jurisdiction of the SEC over the case and ruled that the corporate
names of petitioner IRCP and respondent RCP are confusingly or
deceptively similar, and that respondent RCP has established its
prior right to use the word Refractories as its corporate name.[6] The
appellate court also found that the petition was filed beyond the
reglementary period.[7]
Hence, herein petition which we must deny.
Petitioner contends that the petition before the Court of Appeals was
timely filed. It must be noted that at the time the SEC En
Banc rendered its decision on May 10, 1994, the governing rule on
appeals from quasi-judicial agencies like the SEC was Supreme
Court Circular No. 1-91. As provided therein, the remedy should
have been a petition for review filed before the Court of Appeals
within fifteen (15) days from notice, raising questions of fact, of law,
or mixed questions of fact and law.[8] A motion for reconsideration
suspends the running of the period.[9]
In the case at bench, there is a discrepancy between the dates
provided by petitioner and respondent. Petitioner alleges the
following dates of receipt and filing:[10]
June 10, 1994 Receipt of SECs Decision dated May 10, 1994
June 20, 1994 Filing of Motion for Reconsideration
September 1, 1994 Receipt of SECs Order dated August 3, 1994
denying petitioners motion for reconsideration
September 2, 1994 Filing of Motion for extension of time
September 6, 1994 Filing of Petition
Respondent RCP, however, asserts that the foregoing dates are
incorrect as the certifications issued by the SEC show that petitioner
received the SECs Decision dated May 10, 1994 on June 9, 1994,
filed the motion for reconsideration via registered mail on June 25,
1994, and received the Order dated August 3, 1994 on August 15,
1994.[11] Thus, the petition was filed twenty-one (21) days beyond the
reglementary period provided in Supreme Court Circular No. 1-91.[12]
If reckoned from the dates supplied by petitioner, then the petition
was timely filed. On the other hand, if reckoned from the dates
provided by respondent RCP, then it was filed way beyond the
reglementary period. On this score, we agree with the appellate
courts finding that petitioner failed to rebut respondent RCPs
allegations of material dates of receipt and filing.[13]In addition, the
certifications were executed by the SEC officials based on their
official records[14] which enjoy the presumption of regularity.[15] As
such, these are prima facie evidence of the facts stated
therein.[16] And based on such dates, there is no question that the
petition was filed with the Court of Appeals beyond the fifteen (15)
day period. On this ground alone, the instant petition should be
denied as the SEC En Bancs decision had already attained finality

and the SECs findings of fact, when supported by substantial
evidence, is final.[17]
Nevertheless, to set the matters at rest, we shall delve into the other
issues posed by petitioner.
Petitioners arguments, substantially, are as follows: (1) jurisdiction is
vested with the regular courts as the present case is not one of the
instances provided in P.D. 902-A; (2) respondent RCP is not entitled
to use the generic name refractories; (3) there is no confusing
similarity between their corporate names; and (4) there is no basis for
the award of attorneys fees.[18]
Petitioners argument on the SECs jurisdiction over the case is utterly
myopic. The jurisdiction of the SEC is not merely confined to the
adjudicative functions provided in Section 5 of P.D. 902-A, as
amended.[19] By express mandate, it has absolute jurisdiction,
supervision and control over all corporations.[20] It also exercises
regulatory and administrative powers to implement and enforce the
Corporation Code,[21] one of which is Section 18, which provides:
SEC. 18. Corporate name. -- No corporate name may be allowed by
the Securities and Exchange Commission if the proposed name is
identical or deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law or is
patently deceptive, confusing or contrary to existing laws. When a
change in the corporate name is approved, the Commission shall
issue an amended certificate of incorporation under the amended
name.
It is the SECs duty to prevent confusion in the use of corporate
names not only for the protection of the corporations involved but
more so for the protection of the public, and it has authority to de-
register at all times and under all circumstances corporate names
which in its estimation are likely to generate confusion.[22] Clearly
therefore, the present case falls within the ambit of the SECs
regulatory powers.[23]
Likewise untenable is petitioners argument that there is no confusing
or deceptive similarity between petitioner and respondent RCPs
corporate names. Section 18 of the Corporation Code expressly
prohibits the use of a corporate name which is identical or
deceptively or confusingly similar to that of any existing corporation
or to any other name already protected by law or is patently
deceptive, confusing or contrary to existing laws. The policy behind
the foregoing prohibition is to avoid fraud upon the public that will
have occasion to deal with the entity concerned, the evasion of legal
obligations and duties, and the reduction of difficulties of
administration and supervision over corporation.[24]
Pursuant thereto, the Revised Guidelines in the Approval of
Corporate and Partnership Names[25] specifically requires that: (1) a
corporate name shall not be identical, misleading or confusingly
similar to one already registered by another corporation with the
Commission;[26] and (2) if the proposed name is similar to the name
of a registered firm, the proposed name must contain at least one
distinctive word different from the name of the company already
registered.[27]
As held in Philips Export B.V. vs. Court of Appeals,[28] to fall within
the prohibition of the law, two requisites must be proven, to wit:
| 36
(1) that the complainant corporation acquired a prior right over the
use of such corporate name;
and
(2) the proposed name is either: (a) identical, or (b) deceptively or
confusingly similar to that of any existing corporation or to any other
name already protected by law; or (c) patently deceptive, confusing
or contrary to existing law.
As regards the first requisite, it has been held that the right to the
exclusive use of a corporate name with freedom from infringement by
similarity is determined by priority of adoption.[29] In this case,
respondent RCP was incorporated on October 13, 1976 and since
then has been using the corporate name Refractories Corp. of the
Philippines. Meanwhile, petitioner was incorporated on August 23,
1979 originally under the name Synclaire Manufacturing
Corporation. It only started using the name Industrial Refractories
Corp. of the Philippines when it amended its Articles of Incorporation
on August 23, 1985, or nine (9) years after respondent RCP started
using its name. Thus, being the prior registrant, respondent RCP has
acquired the right to use the word Refractories as part of its corporate
name.
Anent the second requisite, in determining the existence of confusing
similarity in corporate names, the test is whether the similarity is such
as to mislead a person using ordinary care and discrimination and
the Court must look to the record as well as the names
themselves.[30] Petitioners corporate name is Industrial Refractories
Corp. of the Phils., while respondents is Refractories Corp. of the
Phils. Obviously, both names contain the identical words
Refractories, Corporation and Philippines. The only word that
distinguishes petitioner from respondent RCP is the word Industrial
which merely identifies a corporations general field of activities or
operations. We need not linger on these two corporate names to
conclude that they are patently similar that even with reasonable care
and observation, confusion might arise.[31] It must be noted that both
cater to the same clientele, i.e. the steel industry. In fact, the SEC
found that there were instances when different steel companies were
actually confused between the two, especially since they also have
similar product packaging.[32] Such findings are accorded not only
great respect but even finality, and are binding upon this Court,
unless it is shown that it had arbitrarily disregarded or
misapprehended evidence before it to such an extent as to compel a
contrary conclusion had such evidence been properly
appreciated. [33] And even without such proof of actual confusion
between the two corporate names, it suffices that confusion is
probable or likely to occur.[34]
Refractory materials are described as follows:
Refractories are structural materials used at high temperatures to
[sic] industrial furnaces. They are supplied mainly in the form of brick
of standard sizes and of special shapes. Refractories also include
refractory cements, bonding mortars, plastic firebrick, castables,
ramming mixtures, and other bulk materials such as dead-burned
grain magneside, chrome or ground ganister and special clay. [35]
While the word refractories is a generic term, its usage is not
widespread and is limited merely to the industry/trade in which it is
 | 37

used, and its continuous use by respondent RCP for a considerable

period has made the term so closely identified with it. [36] Moreover,
as held in the case of Ang Kaanib sa Iglesia ng Dios kay Kristo
Hesus, H.S.K. sa Bansang Pilipinas, Inc. vs. Iglesia ng Dios kay
Cristo Jesus, Haligi at Suhay ng Katotohanan, petitioners
appropriation of respondent's corporate name cannot find justification
under the generic word rule. [37] A contrary ruling would encourage
other corporations to adopt verbatim and register an existing and
protected corporate name, to the detriment of the public.[38]
Finally, we find the award of P50,000.00 as attorney's fees to be fair
and reasonable. Article 2208 of the Civil Code allows the award of
such fees when its claimant is compelled to litigate with third persons
or to incur expenses to protect its just and valid claim. In this case,
despite its undertaking to change its corporate name in case another
firm has acquired a prior right to use such name,[39] it refused to do
so, thus compelling respondent to undergo litigation and incur
expenses to protect its corporate name.
WHEREFORE, the instant petition for review on certiorari is
hereby DENIED for lack of merit.
Costs against petitioner.
SO ORDERED.

GLORIA V. GOMEZ, Petitioner, -versus- PNOC DEVELOPMENT
AND MANAGEMENT CORPORATION (PDMC) (formerly known
as FILOIL DEVELOPMENT AND MANAGEMENT CORPORATION
[FDMC]), Respondent.
G.R. No. 174044 November 27, 2009
DECISION
ABAD, J.:
This case is about what distinguishes a regular company manager
performing important executive tasks from a corporate officer whose
election and functions are governed by the companys by-laws.
The Facts and the Case
Petitioner Gloria V. Gomez used to work as Manager of the Legal
Department of Petron Corporation, then a government-owned
corporation. With Petrons privatization, she availed of the companys
early retirement program and left that organization on April 30,
1994. On the following day, May 1, 1994, however, Filoil Refinery
Corporation (Filoil), also a government-owned corporation, appointed
her its corporate secretary and legal counsel,[1] with the same
managerial rank, compensation, and benefits that she used to enjoy
at Petron.
But Filoil was later on also identified for privatization. To facilitate its
conversion, the Filoil board of directors created a five-member task
force headed by petitioner Gomez who had been designated
administrator.[2] While documenting Filoils assets, she found several
properties which were not in the books of the
corporation. Consequently, she advised the board to suspend the
privatization until all assets have been accounted for.
With the privatization temporarily shelved, Filoil underwent
reorganization and was renamed Filoil Development Management
Corporation (FDMC), which later became the respondent PNOC
Development Management Corporation (PDMC). When this
happened, Gomezs task force was abolished and its members,
including Gomez, were given termination notices on March 5,
1996.[3] The matter was then reported to the Department of Labor
and Employment on March 7, 1996.[4]
Meantime, petitioner Gomez continued to serve as corporate
secretary of respondent PDMC. On September 23, 1996 its president
re-hired her as administrator and legal counsel of the company. [5] In
| 38
accordance with company guidelines, it credited her the years she
served with the Filoil task force. On May 24, 1998, the next president
of PDMC extended her term as administrator beyond her retirement
age,[6] pursuant to his authority under the PDMC Approvals
Manual.[7] She was supposed to serve beyond retirement from
August 11, 1998 to August 11, 2004. Meantime, a new board of
directors for PDMC took over the company.
On March 29, 1999 the new board of directors of respondent PDMC
removed petitioner Gomez as corporate secretary. Further, at the
boards meeting on October 21, 1999 the board questioned her
continued employment as administrator. In answer, she presented
the former presidents May 24, 1998 letter that extended her
term. Dissatisfied with this, the board sought the advice of its legal
department, which expressed the view that Gomezs term extension
was an ultra vires act of the former president. It reasoned that, since
her position was functionally that of a vice-president or general
manager, her term could be extended under the companys by-laws
only with the approval of the board. The legal department held that
her de facto tenure could be legally put to an end.[8]
Sought for comment, the Office of the Government Corporate
Counsel (OGCC) held the view that while respondent PDMCs board
did not approve the creation of the position of administrator that
Gomez held, such action should be deemed ratified since the board
had been aware of it since 1994. But the OGCC ventured that the
extension of her term beyond retirement age should have been made
with the boards approval.[9]
Petitioner Gomez for her part conceded that as corporate secretary,
she served only as a corporate officer. But, when they named her
administrator, she became a regular managerial
employee. Consequently, the respondent PDMCs board did not have
to approve either her appointment as such or the extension of her
term in 1998.
Pending resolution of the issue, the respondent PDMCs board
withheld petitioner Gomezs wages from November 16 to 30, 1999,
prompting her to file a complaint for non-payment of wages,
damages, and attorneys fees with the Labor Arbiter on December 8,
1999.[10] She later amended her complaint to include other money
claims.[11]
In a special meeting held on December 29, 1999 the respondent
PDMCs board resolved to terminate petitioner Gomezs services
retroactive on August 11, 1998, her retirement date.[12] On January 5,
2000 the board informed petitioner of its decision.[13] Thus, she
further amended her complaint to include illegal dismissal.[14]
Respondent PDMC moved to have petitioner Gomezs complaint
dismissed on ground of lack of jurisdiction. The Labor Arbiter granted

the motion[15] upon a finding that Gomez was a corporate officer and
that her case involved an intra-corporate dispute that fell under the
jurisdiction of the Securities and Exchange Commission (SEC)
pursuant to Presidential Decree (P.D.) 902-A.[16] On motion for
reconsideration, the National Labor Relations Commission (NLRC)
Third Division set aside the Labor Arbiters order and remanded the
case to the arbitration branch for further proceedings.[17] The Third
Division held that Gomez was a regular employee, not a corporate
officer; hence, her complaint came under the jurisdiction of the Labor
Arbiter.
Upon elevation of the matter to the Court of Appeals (CA) in CA-G.R.
SP 88819, however, the latter rendered a decision on May 19,
2006,[18] reversing the NLRC decision. The CA held that since
Gomezs appointment as administrator required the approval of the
board of directors, she was clearly a corporate officer. Thus, her
complaint is within the jurisdiction of the Regional Trial Court (RTC)
under P.D. 902-A, as amended by Republic Act (R.A.) 8799.[19] With
the denial of her motion for reconsideration,[20]Gomez filed this
petition for review on certiorari under Rule 45.
The Issue Presented
The key issue in this case is whether or not petitioner Gomez was, in
her capacity as administrator of respondent PDMC, an ordinary
employee whose complaint for illegal dismissal and non-payment of
wages and benefits is within the jurisdiction of the NLRC.
The Courts Ruling
Ordinary company employees are generally employed not by action
of the directors and stockholders but by that of the managing officer
of the corporation who also determines the compensation to be paid
such employees.[21] Corporate officers, on the other hand, are elected
or appointed[22] by the directors or stockholders, and are those who
are given that character either by the Corporation Code or by the
corporations by-laws.[23]
Here, it was the PDMC president who appointed petitioner Gomez
administrator, not its board of directors or the stockholders. The
president alone also determined her compensation
package. Moreover, the administrator was not among the corporate
officers mentioned in the PDMC by-laws. The corporate officers
proper were the chairman, president, executive vice-president, vice-
president, general manager, treasurer, and secretary.[24]
Respondent PDMC claims, however, that since its board had under
its by-laws the power to create additional corporate offices, it may be
deemed to have simply ratified its presidents creation of the
corporate position of administrator.[25] But creating an additional
| 39
corporate office was definitely not respondent PDMCs intent based
on its several actions concerning the position of administrator.
Respondent PDMC never told Gomez that she was a corporate
officer until the tail-end of her service after the board found legal
justification for getting rid of her by consulting its legal department
and the OGCC which supplied an answer that the board obviously
wanted. Indeed, the PDMC president first hired her as administrator
in May 1994 and then as administrator/legal counsel in September
1996 without a board approval. The president even extended her
term in May 1998 also without such approval. The companys mindset
from the beginning, therefore, was that she was not a corporate
officer.
Respondent PDMC of course claims that as administrator petitioner
Gomez performed functions that were similar to those of its vice-
president or its general manager, corporate positions that were
mentioned in the companys by-laws. It points out that Gomez was
third in the line of command, next only to the
chairman and president,[26] and had been empowered to make major
decisions and manage the affairs of the company.
But the relationship of a person to a corporation, whether as officer or
agent or employee, is not determined by the nature of the services he
performs but by the incidents of his relationship with the corporation
as they actually exist.[27] Here, respondent PDMC hired petitioner
Gomez as an ordinary employee without board approval as was
proper for a corporate officer. When the company got her the first
time, it agreed to have her retain the managerial rank that she held
with Petron. Her appointment paper said that she would be entitled to
all the rights, privileges, and benefits that regular PDMC employees
enjoyed.[28] This is in sharp contrast to what the former PDMC
presidents appointment paper stated: he was elected to the position
and his compensation depended on the will of the board of
directors.[29]
What is more, respondent PDMC enrolled petitioner Gomez with the
Social Security System, the Medicare, and the Pag-Ibig Fund. It even
issued certifications dated October 10, 2008,[30] stating that Gomez
was a permanent employee and that the company had remitted
combined contributions during her tenure. The company also made
her a member of the PDMCs savings and provident plan[31] and its
retirement plan.[32] It grouped her with the managers covered by the
companys group hospitalization insurance.[33] Likewise, she
underwent regular employee performance appraisals,[34] purchased
stocks through the employee stock option plan,[35] and was entitled to
vacation and emergency leaves.[36] PDMC even withheld taxes on
her salary and declared her as an employee in the official Bureau of
Internal Revenue forms.[37] These are all indicia of an employer-
employee relationship which respondent PDMC failed to refute.
Estoppel, an equitable principle rooted on natural justice, prevents a
person from rejecting his previous acts and representations to the
 | 40

prejudice of others who have relied on them.[38] This principle of law

applies to corporations as well. The PDMC in this case is estopped
from claiming that despite all the appearances of regular employment
that it weaved around petitioner Gomezs position it must have
technically hired her only as a corporate officer. The board and its
officers made her stay on and work with the company for years under
the belief that she held a regular managerial position.

That petitioner Gomez served concurrently as corporate secretary for

a time is immaterial. A corporation is not prohibited from hiring a
corporate officer to perform services under circumstances which will
make him an employee.[39] Indeed, it is possible for one to have a
dual role of officer and employee. In Elleccion Vda. De Lecciones v.
National Labor Relations Commission,[40] the Court upheld NLRC
jurisdiction over a complaint filed by one who served both as
corporate secretary and administrator, finding that the money claims
were made as an employee and not as a corporate officer.

WHEREFORE, the Court GRANTS the

petition, REVERSES and SETS ASIDE the decision dated May 19,
2006 and the resolution dated August 15, 2006 of the Court of
Appeals in CA-G.R. SP 88819, and REINSTATES the resolution
dated November 22, 2002 of the National Labor Relations
Commissions Third Division in NLRC NCR 30-12-00856-99. Let the
records of this case be REMANDED to the arbitration branch of
origin for the conduct of further proceedings.

SO ORDERED.

[G.R. No. 109491. February 28, 2001]
ATRIUM MANAGEMENT CORPORATION, petitioner, vs. COURT
OF APPEALS, E.T. HENRY AND CO., LOURDES VICTORIA M. DE
LEON, RAFAEL DE LEON, JR., AND HI-CEMENT
CORPORATION, respondents.
[G.R. No. 121794. February 28, 2001]
LOURDES M. DE LEON, petitioner, vs. COURT OF APPEALS,
ATRIUM MANAGEMENT CORPORATION, AND HI-CEMENT
CORPORATION, respondents.
DECISION
PARDO, J.:
What is before the Court are separate appeals from the decision of
the Court of Appeals,[1] ruling that Hi-Cement Corporation is not liable
for four checks amounting to P2 million issued to E.T. Henry and Co.
and discounted to Atrium Management Corporation.
On January 3, 1983, Atrium Management Corporation filed with the
Regional Trial Court, Manila an action for collection of the proceeds
of four postdated checks in the total amount of P2 million. Hi-Cement
Corporation through its corporate signatories, petitioner Lourdes M.
de Leon,[2] treasurer, and the late Antonio de las Alas, Chairman,
issued checks in favor of E.T. Henry and Co. Inc., as payee. E.T.
Henry and Co., Inc., in turn, endorsed the four checks to petitioner
Atrium Management Corporation for valuable consideration. Upon
presentment for payment, the drawee bank dishonored all four
checks for the common reason payment stopped. Atrium, thus,
instituted this action after its demand for payment of the value of the
checks was denied.[3]
After due proceedings, on July 20, 1989, the trial court rendered a
decision ordering Lourdes M. de Leon, her husband Rafael de Leon,
E.T. Henry and Co., Inc. and Hi-Cement Corporation to pay petitioner
Atrium, jointly and severally, the amount of P2 million corresponding
to the value of the four checks, plus interest and attorneys fees.[4]
On appeal to the Court of Appeals, on March 17, 1993, the Court of
Appeals promulgated its decision modifying the decision of the trial
court, absolving Hi-Cement Corporation from liability and dismissing
the complaint as against it. The appellate court ruled that: (1)
Lourdes M. de Leon was not authorized to issue the subject checks
in favor of E.T. Henry, Inc.; (2) The issuance of the subject checks by
Lourdes M. de Leon and the late Antonio de las Alas constituted ultra
vires acts; and (3) The subject checks were not issued for valuable
consideration.[5]
At the trial, Atrium presented as its witness Carlos C. Syquia who
testified that in February 1981, Enrique Tan of E.T. Henry
approached Atrium for financial assistance, offering to discount four
RCBC checks in the total amount of P2 million, issued by Hi-Cement
in favor of E.T. Henry. Atrium agreed to discount the checks,
provided it be allowed to confirm with Hi-Cement the fact that the
checks represented payment for petroleum products which E.T.
Henry delivered to Hi-Cement. Carlos C. Syquia identified two letters,
dated February 6, 1981 and February 9, 1981 issued by Hi-Cement
through Lourdes M. de Leon, as treasurer, confirming the issuance of
the four checks in favor of E.T. Henry in payment for petroleum
products.[6]
| 41
Respondent Hi-Cement presented as witness Ms. Erlinda Yap who
testified that she was once a secretary to the treasurer of Hi-Cement,
Lourdes M. de Leon, and as such she was familiar with the four
RCBC checks as the postdated checks issued by Hi-Cement to E.T.
Henry upon instructions of Ms. de Leon. She testified that E.T. Henry
offered to give Hi-Cement a loan which the subject checks would
secure as collateral.[7]
On July 20, 1989, the Regional Trial Court, Manila, Branch 09
rendered a decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing considerations, and plaintiff
having proved its cause of action by preponderance of evidence,
judgment is hereby rendered ordering all the defendants except
defendant Antonio de las Alas to pay plaintiff jointly and severally the
amount of TWO MILLION (P2,000,000.00) PESOS with the legal rate
of interest from the filling of the complaint until fully paid, plus the
sum of TWENTY THOUSAND (P20,000.00) PESOS as and for
attorneys fees and the cost of suit.
All other claims are, for lack of merit dismissed.
SO ORDERED.[8]
In due time, both Lourdes M. de Leon and Hi-Cement appealed to
the Court of Appeals.[9]
Lourdes M. de Leon submitted that the trial court erred in ruling that
she was solidarilly liable with Hi-Cement for the amount of the
check. Also, that the trial court erred in ruling that Atrium was an
ordinary holder, not a holder in due course of the rediscounted
checks.[10]
Hi-Cement on its part submitted that the trial court erred in ruling that
even if Hi-Cement did not authorize the issuance of the checks, it
could still be held liable for the checks. And assuming that the checks
were issued with its authorization, the same was without any
consideration, which is a defense against a holder in due course and
that the liability shall be borne alone by E.T. Henry.[11]
On March 17, 1993, the Court of Appeals promulgated its decision
modifying the ruling of the trial court, the dispositive portion of which
reads:
Judgement is hereby rendered:
(1) dismissing the plaintiffs complaint as against defendants Hi-
Cement Corporation and Antonio De las Alas;
(2) ordering the defendants E.T. Henry and Co., Inc. and Lourdes M.
de Leon, jointly and severally to pay the plaintiff the sum of TWO
MILLION PESOS (P2,000,000.00) with interest at the legal rate from
the filling of the complaint until fully paid, plus P20,000.00 for
attorneys fees.
(3) Ordering the plaintiff and defendants E.T. Henry and Co., Inc. and
Lourdes M. de Leon, jointly and severally to pay defendant Hi-
Cement Corporation, the sum of P20,000.00 as and for attorneys
fees.
With cost in this instance against the appellee Atrium Management
Corporation and appellant Lourdes Victoria M. de Leon.
So ordered.[12]

Hence, the recourse to this Court.[13]
The issues raised are the following:
In G. R. No. 109491 (Atrium, petitioner):
1. Whether the issuance of the questioned checks was an ultra
vires act;
2. Whether Atrium was not a holder in due course and for value; and
3. Whether the Court of Appeals erred in dismissing the case against
Hi-Cement and ordering it to pay P20,000.00 as attorneys fees.[14]
In G. R. No. 121794 (de Leon, petitioner):
1. Whether the Court of Appeals erred in holding petitioner personally
liable for the Hi-Cement checks issued to E.T. Henry;
2. Whether the Court of Appeals erred in ruling that Atrium is a holder
in due course;
3. Whether the Court of Appeals erred in ruling that petitioner
Lourdes M. de Leon as signatory of the checks was personally liable
for the value of the checks, which were declared to be issued without
consideration;
4. Whether the Court of Appeals erred in ordering petitioner to pay
Hi-Cement attorneys fees and costs.[15]
We affirm the decision of the Court of Appeals.
We first resolve the issue of whether the issuance of the checks was
an ultra vires act. The record reveals that Hi-Cement Corporation
issued the four (4) checks to extend financial assistance to E.T.
Henry, not as payment of the balance of the P30 million pesos cost of
hydro oil delivered by E.T. Henry to Hi-Cement. Why else would
petitioner de Leon ask for counterpart checks from E.T. Henry if the
checks were in payment for hydro oil delivered by E.T. Henry to Hi-
Cement?
Hi-Cement, however, maintains that the checks were not issued for
consideration and that Lourdes and E.T. Henry engaged in a kiting
operation to raise funds for E.T. Henry, who admittedly was in need
of financial assistance. The Court finds that there was no sufficient
evidence to show that such is the case. Lourdes M. de Leon is the
treasurer of the corporation and is authorized to sign checks for the
corporation. At the time of the issuance of the checks, there were
sufficient funds in the bank to cover payment of the amount of P2
million pesos.
It is, however, our view that there is basis to rule that the act of
issuing the checks was well within the ambit of a valid corporate act,
for it was for securing a loan to finance the activities of the
corporation, hence, not an ultra vires act.
An ultra vires act is one committed outside the object for which a
corporation is created as defined by the law of its organization and
therefore beyond the power conferred upon it by law[16] The term ultra
vires is distinguished from an illegal act for the former is merely
voidable which may be enforced by performance, ratification, or
estoppel, while the latter is void and cannot be validated.[17]
| 42
The next question to determine is whether Lourdes M. de Leon and
Antonio de las Alas were personally liable for the checks issued as
corporate officers and authorized signatories of the check.
"Personal liability of a corporate director, trustee or officer along
(although not necessarily) with the corporation may so validly attach,
as a rule, only when:
1. He assents (a) to a patently unlawful act of the corporation, or (b)
for bad faith or gross negligence in directing its affairs, or (c) for
conflict of interest, resulting in damages to the corporation, its
stockholders or other persons;
2. He consents to the issuance of watered down stocks or who,
having knowledge thereof, does not forthwith file with the corporate
secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the
corporation; or
4. He is made, by a specific provision of law, to personally answer for
his corporate action.[18]
In the case at bar, Lourdes M. de Leon and Antonio de las Alas as
treasurer and Chairman of Hi-Cement were authorized to issue the
checks. However, Ms. de Leon was negligent when she signed the
confirmation letter requested by Mr. Yap of Atrium and Mr. Henry of
E.T. Henry for the rediscounting of the crossed checks issued in
favor of E.T. Henry. She was aware that the checks were strictly
endorsed for deposit only to the payees account and not to be further
negotiated. What is more, the confirmation letter contained a clause
that was not true, that is, that the checks issued to E.T. Henry were in
payment of Hydro oil bought by Hi-Cement from E.T. Henry. Her
negligence resulted in damage to the corporation. Hence, Ms. de
Leon may be held personally liable therefor.
The next issue is whether or not petitioner Atrium was a holder of the
checks in due course. The Negotiable Instruments Law, Section 52
defines a holder in due course, thus:
A holder in due course is a holder who has taken the instrument
under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and
without notice that it had been previously dishonored, if such was the
fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any
infirmity in the instrument or defect in the title of the person
negotiating it.
In the instant case, the checks were crossed checks and specifically
indorsed for deposit to payees account only. From the beginning,
Atrium was aware of the fact that the checks were all for deposit only
to payees account, meaning E.T. Henry. Clearly, then, Atrium could
not be considered a holder in due course.
However, it does not follow as a legal proposition that simply
because petitioner Atrium was not a holder in due course for having
taken the instruments in question with notice that the same was for
 | 43

deposit only to the account of payee E.T. Henry that it was altogether
precluded from recovering on the instrument. The Negotiable
Instruments Law does not provide that a holder not in due course can
not recover on the instrument.[19]
The disadvantage of Atrium in not being a holder in due course is
that the negotiable instrument is subject to defenses as if it were non-
negotiable.[20] One such defense is absence or failure of
consideration.[21] We need not rule on the other issues raised, as they
merely follow as a consequence of the foregoing resolutions.
WHEREFORE, the petitions are hereby DENIED. The decision and
resolution of the Court of Appeals in CA-G. R. CV No. 26686, are
hereby AFFIRMED in toto.
No costs.
SO ORDERED.

[G.R. No. 51765. March 3, 1997]
REPUBLIC PLANTERS BANK, petitioner, vs. HON. ENRIQUE A.
AGANA, SR., as Presiding Judge, Court of First Instance of
Rizal, Branch XXVIII, Pasay City, ROBES-FRANCISCO REALTY &
DEVELOPMENT CORPORATION and ADALIA F.
ROBES, respondents.
DECISION
HERMOSISIMA, JR., J.:
This is a petition for certiorari seeking the annulment of the
Decision[1] of the then Court of First Instance of Rizal[2] for having
been rendered in grave abuse of discretion. Private respondents
Robes-Francisco Realty and Development Corporation (hereafter,
"the Corporation") and Adalia F. Robes filed in the court a quo, an
action for specific performance to compel petitioner to redeem 800
preferred shares of stock with a face value of P8,000.00 and to pay
1% quarterly interest thereon as quarterly dividend owing them under
the terms and conditions of the certificates of stock.
The court a quo rendered judgment in favor of private respondents;
hence, this instant petition.
Herein parties debate only legal issues, no issues of fact having been
raised by them in the court a quo. For ready reference, however, the
following narration of pertinent transactions and events is in order:
On September 18, 1961, private respondent Corporation secured a
loan from petitioner in the amount of P120,000.00. As part of the
proceeds of the loan, preferred shares of stocks were issued to
private respondent Corporation, through its officers then, private
respondent Adalia F. Robes and one Carlos F. Robes. In other
words, instead of giving the legal tender totaling to the full amount of
the loan, which is P120,000.00, petitioner lent such amount partially
in the form of money and partially in the form of stock certificates
numbered 3204 and 3205, each for 400 shares with a par value
of P10.00 per share, or for P4,000.00 each, for a total of P8,000.00.
Said stock certificates were in the name of private respondent Adalia
F. Robes and Carlos F. Robes, who subsequently, however,
endorsed his shares in favor of Adalia F. Robes.
Said certificates of stock bear the following terms and conditions:
"The Preferred Stock shall have the following rights, preferences,
qualifications and limitations, to wit:
1. Of the right to receive a quarterly dividend of One Per Centum
(1%), cumulative and participating.
xxx
2. That such preferred shares may be redeemed, by the system of
drawing lots, at any time after two (2) years from the date of issue at
the option of the Corporation. x x x."
On January 31, 1979, private respondents proceeded against
petitioner and filed a Complaint anchored on private respondents'
alleged rights to collect dividends under the preferred shares in
question and to have petitioner redeem the same under the terms
and conditions of the stock certificates. Private respondents attached
to their complaint, a letter-demand dated January 5, 1979 which,
significantly, was not formally offered in evidence.
| 44
Petitioner filed a Motion to Dismiss[3] private respondents' Complaint
on the following grounds: (1) that the trial court had no jurisdiction
over the subject-matter of the action; (2) that the action was
unenforceable under substantive law; and (3) that the action was
barred by the statute of limitations and/or laches.
Petitioner's Motion to Dismiss was denied by the trial court in an
Order dated March 16, 1979.[4] Petitioner then filed its Answer on
May 2, 1979.[5] Thereafter, the trial court gave the parties ten (10)
days from July 30, 1979 to submit their respective memoranda after
the submission of which the case would be deemed submitted for
resolution.[6]
On September 7, 1979, the trial court rendered the herein assailed
decision in favor of private respondents. In ordering petitioner to pay
private respondents the face value of the stock certificates as
redemption price, plus 1% quarterly interest thereon until full
payment, the trial court ruled:
"There being no issue of fact raised by either of the parties who filed
their respective memoranda delineating their respective contentions,
a judgment on the pleadings, conformably with an earlier order of the
Court, appears to be in order.
From a further perusal of the pleadings, it appears that the provision
of the stock certificates in question to the effect that the plaintiffs shall
have the right to receive a quarterly dividend of One Per Centum
(1%), cumulative and participating, clearly and unequivocably [sic]
indicates that the same are 'interest bearing stocks' which are stocks
issued by a corporation under an agreement to pay a certain rate of
interest thereon (5 Thompson, Sec. 3439). As such, plaintiffs become
entitled to the payment thereof as a matter of right without necessity
of a prior declaration of dividend.
On the question of the redemption by the defendant of said preferred
shares of stock, the very wordings of the terms and conditions in said
stock certificates clearly allows the same.
To allow the herein defendant not to redeem said preferred shares of
stock and/or pay the interest due thereon despite the clear import of
said provisions by the mere invocation of alleged Central Bank
Circulars prohibiting the same is tantamount to an impairment of the
obligation of contracts enshrined in no less than the fundamental law
itself.
Moreover, the herein defendant is considered in estoppel from taking
shelter behind a General Banking Act provision to the effect that it
cannot buy its own shares of stocks considering that the very terms
and conditions in said stock certificates allowing their redemption are
its own handiwork.
As to the claim by the defendant that plaintiffs' cause of action is
barred by prescription, suffice it to state that the running of the
prescriptive period was considered interrupted by the written
extrajudicial demands made by the plaintiffs from the defendant."[7]
Aggrieved by the decision of the trial court, petitioner elevated the
case before us essentially on pure questions of law. Petitioner's
statement of the issues that it submits for us to adjudicate upon, is as
follows:
"A. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE
OF DISCRETION AMOUNTING TO LACK OR EXCESS OF

JURISDICTION IN ORDERING PETITIONER TO PAY
RESPONDENT ADALIA F. ROBES THE AMOUNT OF P8,213.69 AS
INTERESTS FROM 1961 To 1979 ON HER PREFERRED SHARES.
B. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE
OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION IN ORDERING PETITIONER TO REDEEM
RESPONDENT ADALIA F. ROBES' PREFERRED SHARES
FOR P8,000.00
C. RESPONDENT JUDGE COMMITTED A GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION IN DISREGARDING THE ORDER OF THE
CENTRAL BANK TO PETITIONER TO DESIST FROM REDEEMING
ITS PREFERRED SHARES AND FROM PAYING DIVIDENDS
THEREON x x x.
D. THE TRIAL COURT ERRED IN NOT HOLDING
THAT THE COMPLAINT DOES NOT STATE A CAUSE OF ACTION.
E. THE TRIAL COURT ERRED IN NOT HOLDING
THAT THE CLAIM OF RESPONDENT ADALIA F. ROBES IS
BARRED BY PRESCRIPTION OR LACHES."[8]
The petition is meritorious.
Before passing upon the merits of this petition, it may be pertinent to
provide an overview on the nature of preferred shares and the
redemption thereof, considering that these issues lie at the heart of
the dispute.
A preferred share of stock, on one hand, is one which entitles the
holder thereof to certain preferences over the holders of common
stock. The preferences are designed to induce persons to subscribe
for shares of a corporation.[9] Preferred shares take a multiplicity of
forms. The most common forms may be classified into two: (1)
preferred shares as to assets; and (2) preferred shares as to
dividends. The former is a share which gives the holder thereof
preference in the distribution of the assets of the corporation in case
of liquidation;[10] the latter is a share the holder of which is entitled to
receive dividends on said share to the extent agreed upon before any
dividends at all are paid to the holders of common stock.[11] There is
no guaranty, however, that the share will receive any dividends.
Under the old Corporation Law in force at the time the contract
between the petitioner and the private respondents was entered into,
it was provided that "no corporation shall make or declare any
dividend except from the surplus profits arising from its business, or
distribute its capital stock or property other than actual profits among
its members or stockholders until after the payment of its debts and
the termination of its existence by limitation or lawful
dissolution."[12] Similarly, the present Corporation Code[13] provides
that the board of directors of a stock corporation may declare
dividends only out of unrestricted retained earnings.[14] The Code, in
Section 43, adopting the change made in accounting terminology,
substituted the phrase unrestricted retained earnings," which may be
a more precise term, in place of "surplus profits arising from its
business" in the former law. Thus, the declaration of dividends is
dependent upon the availability of surplus profit or unrestricted
retained earnings, as the case may be. Preferences granted to
preferred stockholders, moreover, do not give them a lien upon the
property of the corporation nor make them creditors of the
corporation, the right of the former being always subordinate to the
| 45
latter. Dividends are thus payable only when there are profits earned
by the corporation and as a general rule, even if there are existing
profits, the board of directors has the discretion to determine whether
or not dividends are to be declared.[15] Shareholders, both common
and preferred, are considered risk takers who invest capital in the
business and who can look only to what is left after corporate debts
and liabilities are fully paid.[16]
Redeemable shares, on the other hand, are shares usually preferred,
which by their terms are redeemable at a fixed date, or at the option
of either issuing corporation, or the stockholder, or both at a certain
redemption price.[17] A redemption by the corporation of its stock is, in
a sense, a repurchase of it for cancellation.[18] The present Code
allows redemption of shares even if there are no unrestricted retained
earnings on the books of the corporation. This is a new provision
which in effect qualifies the general rule that the corporation cannot
purchase its own shares except out of current retained
earnings.[19] However, while redeemable shares may be redeemed
regardless of the existence of unrestricted retained earnings, this is
subject to the condition that the corporation has, after such
redemption, assets in its books to cover debts and liabilities inclusive
of capital stock. Redemption, therefore, may not be made where the
corporation is insolvent or if such redemption will cause insolvency or
inability of the corporation to meet its debts as they mature.[20]
We come now to the merits of the case. The petitioner argues that it
cannot be compelled to redeem the preferred shares issued to the
private respondent. We agree. Respondent judge, in ruling that
petitioner must redeem the shares in question, stated that:
"On the question of the redemption by the defendant of said
preferred shares of stock, the very wordings of the terms and
conditions in said stock certificates clearly allows the same."[21]
What respondent Judge failed to recognize was that while the stock
certificate does allow redemption, the option to do so was clearly
vested in the petitioner bank. The redemption therefore is clearly the
type known as "optional". Thus, except as otherwise provided in the
stock certificate, the redemption rests entirely with the corporation
and the stockholder is without right to either compel or refuse the
redemption of its stock.[22] Furthermore, the terms and conditions set
forth therein use the word "may". It is a settled doctrine in statutory
construction that the word "may" denotes discretion, and cannot be
construed as having a mandatory effect. We fail to see how
respondent judge can ignore what, in his words, are the "very
wordings of the terms and conditions in said stock certificates" and
construe what is clearly a mere option to be his legal basis for
compelling the petitioner to redeem the shares in question.
The redemption of said shares cannot be allowed. As pointed out by
the petitioner, the Central Bank made a finding that said petitioner
has been suffering from chronic reserve deficiency,[23] and that such
finding resulted in a directive, issued on January 31, 1973 by then
Gov. G. S. Licaros of the Central Bank, to the President and Acting
Chairman of the Board of the petitioner bank prohibiting the latter
from redeeming any preferred share, on the ground that said
redemption would reduce the assets of the Bank to the prejudice of
its depositors and creditors.[24] Redemption of preferred shares was
prohibited for a just and valid reason. The directive issued by the
Central Bank Governor was obviously meant to preserve the
status quo, and to prevent the financial ruin of a banking institution
 | 46

that would have resulted in adverse repercussions, not only to its of issue, private respondents should have taken it upon themselves,
depositors and creditors, but also to the banking industry as a whole. after the lapse of the said period, to inquire from the petitioner the
The directive, in limiting the exercise of a right granted by law to a reason why the said shares have not been redeemed. As it is, not
corporate entity, may thus be considered as an exercise of police only two years had lapsed, as agreed upon, but an additional sixteen
power. The respondent judge insists that the directive constitutes an years passed before the private respondents saw it fit to demand
impairment of the obligation of contracts. It has, however, been their right. The petitioner, at the time it issued said preferred shares
settled that the Constitutional guaranty of non-impairment of to the private respondents in 1961, could not have known that it
obligations of contract is limited by the exercise of the police power of would be suffering from chronic reserve deficiency twelve years later.
the state, the reason being that public welfare is superior to private Had the private respondents been vigilant in asserting their rights, the
rights.[25] redemption could have been effected at a time when the petitioner
bank was not suffering from any financial crisis.
The respondent judge also stated that since the stock certificate
granted the private respondents the right to receive a quarterly WHEREFORE, the instant petition, being impressed with merit, is
dividend of one Per Centum (1%), cumulative and participating, it hereby GRANTED. The challenged decision of respondent judge is
"clearly and unequivocably (sic) indicates that the same are 'interest set aside and the complaint against the petitioner is dismissed.
bearing stocks' or stocks issued by a corporation under an
agreement to pay a certain rate of interest thereon. As such, plaintiffs Costs against the private respondents.
(private respondents herein) become entitled to the payment thereof SO ORDERED.
as a matter of right without necessity of a prior declaration of
dividend."[26] There is no legal basis for this observation. Both Sec. 16
of the Corporation Law and Sec. 43 of the present Corporation Code
prohibit the issuance of any stock dividend without the approval of
stockholders, representing not less than two-thirds (2/3) of the
outstanding capital stock at a regular or special meeting duly called
for the purpose. These provisions underscore the fact that payment
of dividends to a stockholder is not a matter of right but a matter of
consensus. Furthermore, "interest bearing stocks", on which the
corporation agrees absolutely to pay interest before dividends are
paid to common stockholders, is legal only when construed as
requiring payment of interest as dividends from net earnings or
surplus only.[27] Clearly, the respondent judge, in compelling the
petitioner to redeem the shares in question and to pay the
corresponding dividends, committed grave abuse of discretion
amounting to lack or excess of jurisdiction in ignoring both the terms
and conditions specified in the stock certificate, as well as the clear
mandate of the law.
Anent the issue of prescription, this Court so holds that the claim of
private respondent is already barred by prescription as well as
laches. Art. 1144 of the New Civil Code provides that a right of action
that is founded upon a written contract prescribes in ten (10) years.
The letter-demand made by the private respondents to the petitioner
was made only on January 5, 1979, or almost eighteen years after
receipt of the written contract in the form of the stock certificate. As
noted earlier, this letter-demand, significantly, was not formally
offered in evidence, nor were any other evidence of demand
presented. Therefore, we conclude that the only time the private
respondents saw it fit to assert their rights, if any, to the preferred
shares of stock, was after the lapse of almost eighteen years. The
same clearly indicates that the right of the private respondents to any
relief under the law has already prescribed. Moreover, the claim of
the private respondents is also barred by laches. Laches has been
defined as the failure or neglect, for an unreasonable length of time,
to do that which by exercising due diligence could or should have
been done earlier; it is negligence or omission to assert a right within
a reasonable time, warranting a presumption that the party entitled to
assert it either has abandoned it or declined to assert it.[28]
Considering that the terms and conditions set forth in the stock
certificate clearly indicate that redemption of the preferred shares
may be made at any time after the lapse of two years from the date

G.R. No. 114787 June 2, 1995
MAM REALTY DEVELOPMENT CORPORATION and MANUEL
CENTENO, petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION and CELSO B.
BALBASTRO respondents.
VITUG, J.:
A prime focus in the instant petition is the question of when to hold a
director or officer of a corporation solidarily obligated with the latter
for a corporate liability.
The case originated from a complaint filed with the Labor Arbiter by
private respondent Celso B. Balbastro against herein petitioners,
MAM Realty Development Corporation ("MAM") and its Vice
President Manuel P. Centeno, for wage differentials, "ECOLA,"
overtime pay, incentive leave pay, 13th month pay (for the years
1988 and 1989), holiday pay and rest day pay. Balbastro alleged that
he was employed by MAM as a pump operator in 1982 and had since
performed such work at its Rancho Estate, Marikina, Metro Manila.
He earned a basic monthly salary of P1,590.00 for seven days of
work a week that started from 6:00 a.m. to up until 6:00 p.m. daily.
MAM countered that Balbastro had previously been employed by
Francisco Cacho and Co., Inc., the developer of Rancho Estates.
Sometime in May 1982, his services were contracted by MAM for the
operation of the Rancho Estates' water pump. He was engaged,
however, not as an employee, but as a service contractor, at an
agreed fee of P1,590.00 a month. Similar arrangements were
likewise entered into by MAM with one Rodolfo Mercado and with a
security guard of Rancho Estates III Homeowners' Association.
Under the agreement, Balbastro was merely made to open and close
on a daily basis the water supply system of the different phases of
the subdivision in accordance with its water rationing scheme. He
worked for only a maximum period of three hours a day, and he
made use of his free time by offering plumbing services to the
residents of the subdivision. He was not at all subject to the control or
supervision of MAM for, in fact, his work could so also be done either
by Mercado or by the security guard. On 23 May 1990, prior to the
filing of the complaint, MAM executed a Deed of Transfer,1 effective
01 July 1990, in favor of the Rancho Estates Phase III Homeowners
Association, Inc., conveying to the latter all its rights and interests
over the water system in the subdivision.
In a decision, dated 23 December 1991, the Labor Arbiter dismissed
the complaint for lack of merit.
On appeal to it, respondent National Labor Relations Commission
("NLRC") rendered judgment (a) setting aside the questioned
decision of the Labor Arbiter and (b) referring the case, pursuant to
Article 218(c) of the Labor Code, to Arbiter Cristeta D. Tamayo for
further hearing and submission of a report within 20 days from receipt
of the Order.2On 21 March 1994, respondent Commissioner, after
considering the report of Labor Arbiter Tamayo, ordered:
WHEREFORE, the respondents are hereby directed to pay jointly
and severally complainant the sum of P86,641.05 as above-
computed. 3
| 47
The instant petition asseverates that respondent NLRC gravely
abused its discretion, amounting to lack or excess of jurisdiction, (1)
in finding that an employer-employee relationship existed between
petitioners and private respondent and (2) in holding petitioners
jointly and severally liable for the money claims awarded to private
respondent.
Once again, the matter of ascertaining the existence of an employer-
employee relationship is raised. Repeatedly, we have said that this
factual issue is determined by:
(a) the selection and engagement of the employee;
(b) the payment of wages;
(c) the power of dismissal; and
(d) the employer's power to control the employee with respect to the
result of the work to be done and to the means and methods by
which the work is to be accomplished.
We see no grave abuse of discretion on the part of NLRC in finding a
full satisfaction, in the case at bench, of the criteria to establish that
employer-employee relationship. The power of control, the most
important feature of that relationship and, here, a point of
controversy, refers merely to the existence of the power and not to
the actual exercise thereof. It is not essential for the employer
to actually supervise the performance of duties of the employee; it is
enough that the former has a right to wield the power.4 It is hard to
accede to the contention of petitioners that private respondent should
be considered totally free from such control merely because the work
could equally and easily be done either by Mercado or by the
subdivision's security guard. Not without any significance is that
private respondent's employment with MAM has been registered by
petitioners with the Social Security System.5
It would seem that the money claims awarded to private respondent
were computed from 06 March 1988 to 06 March 1991,6 the latter
being the date of the filing of the complaint. The NLRC might have
missed the transfer by MAM of the water system to the Homeowners
Association on 01 July 1990, a matter that would appear not to be in
dispute. Accordingly, the period for the computation of the money
claims should only be for the period from 06 March 1988 to 01 July
1990 (when petitioner corporation could be deemed to have ceased
from the activity for which private respondent was employed), and
petitioner corporation should, instead, be made liable for the
employee's separation pay equivalent to one-half (1/2) month pay for
every year of
service. 7 While the transfer was allegedly due to MAM's financial
constraints, unfortunately for petitioner corporation, however, it failed
to sufficiently establish that its business losses or financial reverses
were serious enough that possibly can warrant an exemption under
the law.8
We agree with petitioners, however, that the NLRC erred in holding
Centeno jointly and severally liable with MAM. A corporation, being a
juridical entity, may act only through its directors, officers and
employees. Obligations incurred by them, acting as such corporate
agents, are not theirs but the direct accountabilities of the corporation
they represent. True, solidary liabilities may at times be incurred but
only when exceptional circumstances warrant such as, generally, in
the following cases:9
 | 48

1. When directors and trustees or, in appropriate cases, the officers

of a corporation —
(a) vote for or assent to patently unlawful acts of the corporation;
(b) act in bad faith or with gross negligence in directing the corporate
affairs;
(c) are guilty of conflict of interest to the prejudice of the corporation,
its stockholders or members, and other persons. 10
2. When a director or officer has consented to the issuance
of watered stocks or who, having knowledge thereof, did not forthwith
file with the corporate secretary his written objection thereto. 11
3. When a director, trustee or officer has contractually agreed or
stipulated to hold himself personally and solidarily liable with the
Corporation. 12
4 When a director, trustee or officer is made, by specific provision of
law, personally liable for his corporate action.13
In labor cases, for instance, the Court has held corporate directors
and officers solidarily liable with the corporation for the termination of
employment of employees done with malice or in bad faith.14
In the case at Bench, there is nothing substantial on record that can
justify, prescinding from the foregoing, petitioner Centeno's solidary
liability with the corporation.
An extra note. Private respondent avers that the questioned decision,
having already become final and executory, could no longer be
reviewed by this Court. The petition before us has been filed under
Rule 65 of the Rules of Court, there being no appeal, or any other
plain, speedy and adequate remedy in the ordinary course of law
from decisions of the National Labor Relations Commission; it is a
relief that is open so long as it is availed of within a reasonable time.
WHEREFORE, the order of 21 March 1994 is MODIFIED. The case
is REMANDED to the NLRC for a re-computation of private
respondent's monetary awards, which, conformably with this opinion,
shall be paid solely by petitioner MAM Realty Development
Corporation. No special pronouncement on costs.
SO ORDERED.

[G.R. No. 144476. April 8, 2003]
ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L.
ONG, WILLIAM T. ONG, WILLIE T. ONG, and JULIE ONG
ALONZO, petitioners, vs. DAVID S. TIU, CELY Y. TIU, MOLY YU
GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU, LOURDES
C. TIU, INTRALAND RESOURCES DEVELOPMENT CORP.,
MASAGANA TELAMART, INC., REGISTER OF DEEDS OF PASAY
CITY, and the SECURITIES AND EXCHANGE
COMMISSION, respondents.
[G.R. No. 144629. April 8, 2003]
DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D.
TERENCE Y. TIU, JOHN YU, LOURDES C. TIU, and INTRALAND
RESOURCES DEVELOPMENT CORP., petitioners, vs. ONG
YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG,
WILLIAM T. ONG, WILLIE T. ONG, and JULIA ONG
ALONZO, respondents.
RESOLUTION
CORONA, J.:
Before us are the (1) motion for reconsideration, dated March 15,
2002, of petitioner movants Ong Yong, Juanita Tan Ong, Wilson
Ong, Anna Ong, William Ong, Willie Ong and Julia Ong Alonzo (the
Ongs); (2) motion for partial reconsideration, dated March 15, 2002,
of petitioner movant Willie Ong seeking a reversal of this Courts
Decision,[1] dated February 1, 2002, in G.R. Nos. 144476 and 144629
affirming with modification the decision[2] of the Court of Appeals,
dated October 5, 1999, which in turn upheld, likewise with
modification, the decision of the SEC en banc, dated September 11,
1998; and (3) motion for issuance of writ of execution of petitioners
David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence
Y. Tiu, John Yu and Lourdes C. Tiu (the Tius) of our February 1,
2002 Decision.
A brief recapitulation of the facts shows that:
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 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 five directors
while the Ongs were entitled to nominate the President, the Secretary
and six 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
| 49
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 February 23, 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.
According to the Tius, the agreement was for David S. Tiu and Cely
S. Tiu to assume the positions and perform the duties of Vice-
President and Treasurer, respectively, but the Ongs prevented them
from doing so. Furthermore, the Ongs refused to provide them the
space for their executive offices as Vice-President and
Treasurer. Finally, and most serious of all, the Ongs refused to give
them the shares corresponding to their property contributions of a
four-story building, a 1,902.30 square-meter lot and a 151 square-
meter lot. Hence, they felt they were justified in setting aside their
Pre-Subscription Agreement with the Ongs who allegedly refused to
comply with their undertakings.
In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had
in fact assumed the positions of Vice-President and Treasurer of
FLADC but that it was they who refused to comply with the corporate
duties assigned to them. It was the contention of the Ongs that they
wanted the Tius to sign the checks of the corporation and undertake
their management duties but that the Tius shied away from helping
them manage the corporation. On the issue of office space, the Ongs
pointed out that the Tius did in fact already have existing executive
offices in the mall since they owned it 100% before the Ongs came
in. What the Tius really wanted were new offices which were anyway
subsequently provided to them. On the most important issue of their
alleged failure to credit the Tius with the FLADC shares
commensurate to the Tius property contributions, the Ongs asserted
that, although the Tius executed a deed of assignment for the
1,902.30 square-meter lot in favor of FLADC, they (the Tius) refused
to pay P 570,690 for capital gains tax and documentary stamp
tax. Without the payment thereof, the SEC would not approve the
valuation of the Tius property contribution (as opposed to cash
contribution). This, in turn, would make it impossible to secure a new
Transfer Certificate of Title (TCT) over the property in FLADCs
name. In any event, it was easy for the Tius to simply pay the said
transfer taxes and, after the new TCT was issued in FLADCs name,
they could then be given the corresponding shares of stocks. On the
151 square-meter property, the Tius never executed a deed of
assignment in favor of FLADC. The Tius initially claimed that they
could not as yet surrender the TCT because it was still being
reconstituted by the Lichaucos from whom the Tius bought it. The
Ongs later on discovered that FLADC had in reality owned the
property all along, even before their Pre-Subscription Agreement was
executed in 1994. This meant that the 151 square-meter property

was at that time already the corporate property of FLADC for which
the Tius were not entitled to the issuance of new shares of stock.
The controversy finally came to a head when this case was
commenced[4] by the Tius on February 27, 1996 at the Securities and
Exchange Commission (SEC), seeking confirmation of their
rescission of the Pre-Subscription Agreement. After hearing, the
SEC, through then Hearing Officer Rolando G. Andaya, Jr., issued a
decision on May 19, 1997 confirming the rescission sought by the
Tius, as follows:
WHEREFORE, judgment is hereby rendered confirming the
rescission of the Pre-Subscription Agreement, and consequently
ordering:
(a) The cancellation of the 1,000,000 shares subscription of the
individual defendants in FLADC;
(b) FLADC to pay the amount of P170,000,000.00 to the individual
defendants representing the return of their contribution for 1,000,000
shares of FLADC;
( c) The plaintiffs to submit with (sic) the Securities and Exchange
Commission amended articles of incorporation of FLADC to conform
with this decision;
(d) The defendants to surrender to the plaintiffs TCT Nos. 132493,
132494, 134066 (formerly 15587), 135325 and 134204 and any other
title or deed in the name of FLADC, failing in which said titles are
declared void;
(e) The Register of Deeds to issue new certificates of titles in favor of
the plaintiffs and to cancel the annotation of the Pre-Subscription
Agreement dated 15 August 1994 on TCT No. 134066 (formerly
15587);
(f) The individual defendants, individually and collectively, their
agents and representatives, to desist from exercising or performing
any and all acts pertaining to stockholder, director or officer of
FLADC or in any manner intervene in the management and affairs of
FLADC;
(g) The individual defendants, jointly and severally, to return to
FLADC interest payment in the amount of P8,866,669.00 and all
interest payments as well as any payments on principal received
from the P70,000,000.00 inexistent loan, plus the legal rate of
interest thereon from the date of their receipt of such payment until
fully paid;
(h) The plaintiff David Tiu to pay individual defendants the sum of
P20,000,000.00 representing his loan from said defendants plus legal
interest from the date of receipt of such amount.
SO ORDERED.[5]
On motion of both parties, the above decision was partially
reconsidered but only insofar as the Ongs P70 million was declared
not as a premium on capital stock but an advance (loan) by the Ongs
to FLADC and that the imposition of interest on it was correct.[6]
Both parties appealed[7] to the SEC en banc which rendered a
decision on September 11, 1998, affirming the May 19, 1997 decision
of the Hearing Officer. The SEC en banc confirmed the rescission of
the Pre-Subscription Agreement but reverted to classifying the P70
| 50
million paid by the Ongs as premium on capital and not as a loan or
advance to FLADC, hence, not entitled to earn interest.[8]
On appeal, the Court of Appeals (CA) rendered a decision on
October 5, 1999, thus:
WHEREFORE, the Order dated September 11, 1998 issued by the
Securities and Exchange Commission En Banc in SEC AC CASE
NOS. 598 and 601 confirming the rescission of the Pre-Subscription
Agreement dated August 15, 1994 is hereby AFFIRMED, subject to
the following MODIFICATIONS:
1. The Ong and Tiu Groups are ordered to liquidate First Landlink
Asia Development Corporation in accordance with the following cash
and property contributions of the parties therein.
(a) Ong Group P100,000,000.00 cash contribution for one (1) million
shares in First Landlink Asia Development Corporation at a par value
of P100.00 per share;
(b) Tiu Group:
1) P45,020,000.00 original cash contribution for 450,200 shares in
First Landlink Asia Development Corporation at a par value of
P100.00 per share;
2) A four-storey building described in Transfer Certificate of Title No.
15587 in the name of Intraland Resources and Development
Corporation valued at P20,000,000.00 for 200,000 shares in First
Landlink Asia Development Corporation at a par value of P100.00
per share;
3) A 1,902.30 square-meter parcel of land covered by Transfer
Certificate of Title No. 15587 in the name of Masagana Telamart, Inc.
valued at P30,000,000.00 for 300,000 shares in First Landlink Asia
Development Corporation at a par value of P100.00 per share.
2) Whatever remains of the assets of the First Landlink Asia
Development Corporation and the management thereof is (sic)
hereby ordered transferred to the Tiu Group.
3) First Landlink Asia Development Corporation is hereby ordered to
pay the amount of P70,000,000.00 that was advanced to it by the
Ong Group upon the finality of this decision. Should the former incur
in delay in the payment thereof, it shall pay the legal interest thereon
pursuant to Article 2209 of the New Civil Code.
4) The Tius are hereby ordered to pay the amount of P20,000,000.00
loaned them by the Ongs upon the finality of this decision. Should the
former incur in delay in the payment thereof, it shall pay the legal
interest thereon pursuant to Article 2209 of the New Civil Code.
SO ORDERED.[9]
An interesting sidelight of the CA decision was its description of the
rescission made by the Tius as the height of ingratitude and as
pulling a fast one on the Ongs. The CA moreover found the Tius
guilty of withholding FLADC funds from the Ongs and diverting
corporate income to their own MATTERCO account.[10] These were
findings later on affirmed in our own February 1, 2002 Decision which
is the subject of the instant motion for reconsideration.[11]
But there was also a strange aspect of the CA decision. The CA
concluded that both the Ongs and the Tius were in pari delicto (which

would not have legally entitled them to rescission) but, for practical
considerations, that is, their inability to work together, it was best to
separate the two groups by rescinding the Pre-Subscription
Agreement, returning the original investment of the Ongs and
awarding practically everything else to the Tius.
Their motions for reconsideration having been denied, both parties
filed separate petitions for review before this Court.
In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et
al., the Ongs argued that the Tius may not properly avail of rescission
under Article 1191 of the Civil Code considering that the Pre-
Subscription Agreement did not provide for reciprocity of obligations;
that the rights over the subject matter of the rescission (capital assets
and properties) had been acquired by a third party (FLADC); that
they did not commit a substantial and fundamental breach of their
agreement since they did not prevent the Tius from assuming the
positions of Vice-President and Treasurer of FLADC, and that the
failure to credit the 300,000 shares corresponding to the 1,902.30
square-meter property covered by TCT No. 134066 (formerly 15587)
was due to the refusal of the Tius to pay the required transfer taxes
to secure the approval of the SEC for the property contribution and,
thereafter, the issuance of title in FLADCs name. They also argued
that the liquidation of FLADC may not legally be ordered by the
appellate court even for so called practical considerations or even to
prevent further squabbles and numerous litigations, since the same
are not valid grounds under the Corporation Code. Moreover, the
Ongs bewailed the failure of the CA to grant interest on their P70
million and P20 million advances to FLADC and David S. Tiu,
respectively, and to award costs and damages.
In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et
al., the Tius, on the other hand, contended that the rescission should
have been limited to the restitution of the parties respective
investments and not the liquidation of FLADC based on the
erroneous perception by the court that: the Masagana Citimall was
threatened with incompletion since FLADC was in financial
distress; that the Tius invited the Ongs to invest in FLADC to settle
its P190 million loan from PNB; that they violated the Pre-
Subscription Agreement when it was the Lichaucos and not the Tius
who executed the deed of assignment over the 151 square-meter
property commensurate to 49,800 shares in FLADC thereby failing to
pay the price for the said shares;that they did not turn over to the
Ongs the entire amount of FLADC funds; that they were diverting
rentals from lease contracts due to FLADC to their own MATTERCO
account; that the P70 million paid by the Ongs was an advance and
not a premium on capital; and that, by rescinding the Pre-
Subscription Agreement, they wanted to wrestle away the
management of the mall and prevent the Ongs from enjoying the
profits of their P190 million investment in FLADC.
On February 1, 2002, this Court promulgated its Decision (the subject
of the instant motions), affirming the assailed decision of the Court of
Appeals but with the following modifications:
1. the P20 million loan extended by the Ongs to the Tius shall earn
interest at twelve percent (12%) per annum to be computed from the
time of judicial demand which is from April 23, 1996;
2. the P70 million advanced by the Ongs to the FLADC shall earn
interest at ten percent (10%) per annum to be computed from the
date of the FLADC Board Resolution which is June 19, 1996; and
| 51
3. the Tius shall be credited with 49,800 shares in FLADC for their
property contribution, specifically, the 151 sq. m. parcel of land.
This Court affirmed the fact that both the Ongs and the Tius violated
their respective obligations under the Pre-Subscription
Agreement. The Ongs prevented the Tius from assuming the
positions of Vice-President and Treasurer of the corporation. On the
other hand, the Decision established that the Tius failed to turn over
FLADC funds to the Ongs and that the Tius diverted rentals due to
FLADC to their MATTERCO account. Consequently, it held that
rescission was not possible since both parties were in pari
delicto. However, this Court agreed with the Court of Appeals that the
remedy of specific performance, as espoused by the Ongs, was not
practical and sound either and would only lead to further squabbles
and numerous litigations between the parties.
On March 15, 2002, the Tius filed before this Court a Motion for
Issuance of a Writ of Execution on the grounds that: (a) the SEC
order had become executory as early as September 11, 1998
pursuant to Sections 1 and 12, Rule 43 of the Rules of Court; (b) any
further delay would be injurious to the rights of the Tius since the
case had been pending for more than six years; and (c) the SEC no
longer had quasi-judicial jurisdiction under RA 8799 (Securities
Regulation Code). The Ongs filed their opposition, contending that
the Decision dated February 1, 2002 was not yet final and
executory; that no good reason existed to issue a warrant of
execution; and that, pursuant to Section 5.2 of RA 8799, the SEC
retained jurisdiction over pending cases involving intra-corporate
disputes already submitted for final resolution upon the effectivity of
the said law.
Aside from their opposition to the Tius Motion for Issuance of Writ of
Execution, the Ongs filed their own Motion for Reconsideration;
Alternatively, Motion for Modification (of the February 1, 2002
Decision) on March 15, 2002, raising two main points: (a) that
specific performance and not rescission was the proper remedy
under the premises; and (b) that, assuming rescission to be proper,
the subject decision of this Court should be modified to entitle
movants to their proportionate share in the mall.
On their first point (specific performance and not rescission was the
proper remedy), movants Ong argue that their alleged breach of the
Pre-Subscription Agreement was, at most, casual which did not
justify the rescission of the contract. They stress that providing
appropriate offices for David S. Tiu and Cely Y. Tiu as Vice-President
and Treasurer, respectively, had no bearing on their obligations
under the Pre-Subscription Agreement since the said obligation (to
provide executive offices) pertained to FLADC itself. Such obligation
arose from the relations between the said officers and the corporation
and not any of the individual parties such as the Ongs. Likewise, the
alleged failure of the Ongs to credit shares of stock in favor of the
Tius for their property contributions also pertained to the corporation
and not to the Ongs. Just the same, it could not be done in view of
the Tius refusal to pay the necessary transfer taxes which in turn
resulted in the inability to secure SEC approval for the property
contributions and the issuance of a new TCT in the name of FLADC.
Besides, according to the Ongs, the principal objective of both parties
in entering into the Pre-Subscription Agreement in 1994 was to raise
the P190 million desperately needed for the payment of FLADCs loan
to PNB. Hence, in this light, the alleged failure to provide office space

for the two corporate officers was no more than an inconsequential
infringement. For rescission to be justified, the law requires that the
breach of contract should be so substantial or fundamental as to
defeat the primary objective of the parties in making the
agreement. At any rate, the Ongs claim that it was the Tius who were
guilty of fundamental violations in failing to remit funds due to FLADC
and diverting the same to their MATTERCO account.
The Ongs also allege that, in view of the findings of the Court that
both parties were guilty of violating the Pre-Subscription Agreement,
neither of them could resort to rescission under the principle of pari
delicto. In addition, since the cash and other contributions now
sought to be returned already belong to FLADC, an innocent third
party, said remedy may no longer be availed of under the law.
On their second point (assuming rescission to be proper, the Ongs
should be given their proportionate share of the mall), movants Ong
vehemently take exception to the second item in the dispositive
portion of the questioned Decision insofar as it decreed that whatever
remains of the assets of FLADC and the management thereof (after
liquidation) shall be transferred to the Tius. They point out that the
mall itself, which would have been foreclosed by PNB if not for their
timely investment of P190 million in 1994 and which is now worth
about P1 billion mainly because of their efforts, should be included in
any partition and distribution. They (the Ongs) should not merely be
given interest on their capital investments. The said portion of our
Decision, according to them, amounted to the unjust enrichment of
the Tius and ran contrary to our own pronouncement that the act of
the Tius in unilaterally rescinding the agreement was the height of
ingratitude and an attempt to pull a fast one as it would prevent the
Ongs from enjoying the fruits of their P190 million investment in
FLADC. It also contravenes this Courts assurance in the questioned
Decision that the Ongs and Tius will have a bountiful return of their
respective investments derived from the profits of the corporation.
Willie Ong filed a separate Motion for Partial Reconsideration dated
March 8, 2002, pointing out that there was no violation of the Pre-
Subscription Agreement on the part of the Ongs;that, after more than
seven years since the mall began its operations, rescission had
become not only impractical but would also adversely affect the rights
of innocent parties; and that it would be highly inequitable and unfair
to simply return the P100 million investment of the Ongs and give the
remaining assets now amounting to about P1 billion to the Tius.
The Tius, in their opposition to the Ongs motion for reconsideration,
counter that the arguments therein are a mere re-hash of the
contentions in the Ongs petition for review and previous motion for
reconsideration of the Court of Appeals decision. The Tius compare
the arguments in said pleadings to prove that the Ongs do not raise
new issues, and, based on well-settled jurisprudence,[12] the Ongs
present motion is therefore pro-forma and did not prevent the
Decision of this Court from attaining finality.
On January 29, 2003, the Special Second Division of this Court held
oral arguments on the respective positions of the parties. On
February 27, 2003, Dr. Willie Ong and the rest of the movants Ong
filed their respective memoranda. On February 28, 2003, the Tius
submitted their memorandum.
We grant the Ongs motions for reconsideration.
| 52
This is not the first time that this Court has reversed itself on a motion
for reconsideration. In Philippine Consumers Foundation, Inc. vs.
National Telecommunications Commission,[13]this Court, through then
Chief Justice Felix V. Makasiar, said that its members may and do
change their minds, after a re-study of the facts and the law,
illuminated by a mutual exchange of views.[14] After a thorough re-
examination of the case, we find that our Decision of February 1,
2002 overlooked certain aspects which, if not corrected, will cause
extreme and irreparable damage and prejudice to the Ongs, FLADC
and its creditors.
The procedural rule on pro-forma motions pointed out by the Tius
should not be blindly applied to meritorious motions for
reconsideration. As long as the same adequately raises a valid
ground[15] (i.e., the decision or final order is contrary to law), this
Court has to evaluate the merits of the arguments to prevent an
unjust decision from attaining finality. In Security Bank and Trust
Company vs. Cuenca,[16] we ruled that a motion for reconsideration is
not pro-forma for the reason alone that it reiterates the arguments
earlier passed upon and rejected by the appellate court. We
explained there that a movant may raise the same arguments, if only
to convince this Court that its ruling was erroneous. Moreover, the
rule (that a motion is pro-forma if it only repeats the arguments in the
previous pleadings) will not apply if said arguments were not squarely
passed upon and answered in the decision sought to be
reconsidered. In the case at bar, no ruling was made on some of the
petitioner Ongs arguments. For instance, no clear ruling was made
on why an order distributing corporate assets and property to the
stockholders would not violate the statutory preconditions for
corporate dissolution or decrease of authorized capital stock. Thus, it
would serve the ends of justice to entertain the subject motion for
reconsideration since some important issues therein, although mere
repetitions, were not considered or clearly resolved by this Court.
Going now to the merits, we resolve whether the Tius could legally
rescind the Pre-Subscription Agreement. We rule that they could not.
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:
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 (Italics supplied).
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. Otherwise stated, the Tius did not contract in their personal
capacities with the Ongs since they were not selling any of their own
shares to them. It was FLADC that did.
Considering therefore that the real contracting parties to the
subscription agreement were FLADC and the Ongs alone, a civil
case for rescission on the ground of breach of contract filed by the
Tius in their personal capacities will not prosper. Assuming it had
valid reasons to do so, only FLADC (and certainly not the Tius) had
the legal personality to file suit rescinding the subscription agreement
with the Ongs inasmuch as it was the real party in interest
therein. Article 1311 of the Civil Code provides that contracts take
effect only between the parties, their assigns and heirs Therefore, a
party who has not taken part in the transaction cannot sue or be sued
for performance or for cancellation thereof, unless he shows that he
has a real interest affected thereby. [17]
In their February 28, 2003 Memorandum, the Tius claim that there
are two contracts embodied in the Pre-Subscription Agreement: a
shareholders agreement between the Tius and the Ongs defining and
governing their relationship and a subscription contract between the
Tius, the Ongs and FLADC regarding the subscription of the parties
to the corporation. They point out that these two component parts
form one whole agreement and that their terms and conditions are
intrinsically related and dependent on each other. Thus, the breach of
the shareholders agreement, which was allegedly the consideration
for the subscription contract, was also a breach of the latter.
Aside from the fact that this is an entirely new angle never raised in
any of their previous pleadings until after the oral arguments on
January 29, 2003, we find this argument too strained for comfort. It is
obviously intended to remedy and cover up the Tius lack of legal
personality to rescind an agreement in which they were personally
not parties-in-interest. Assuming arguendo that there were two sub-
agreements embodied in the Pre-Subscription Agreement, this Court
fails to see how the shareholders agreement between the Ongs and
Tius can, within the bounds of reason, be interpreted as the
consideration of the subscription contract between FLADC and the
Ongs. There was nothing in the Pre-Subscription Agreement even
remotely suggesting such alleged interdependence. Be that as it
may, however, the Tius are nevertheless not the proper parties to
raise this point because they were not parties to the subscription
contract between FLADC and the Ongs. Thus, they are not in a
position to claim that the shareholders agreement between them and
the Ongs was what induced FLADC and the Ongs to enter into the
subscription contract. It is the Ongs alone who can say that. Though
FLADC was represented by the Tius in the subscription contract,
FLADC had a separate juridical personality from the Tius. The case
before us does not warrant piercing the veil of corporate fiction since
there is no proof that the corporation is being used as a cloak or
cover for fraud or illegality, or to work injustice. [18]
The Tius also argue that, since the Ongs represent FLADC as its
management, breach by the Ongs is breach by FLADC. This must
also fail because such an argument disregards the separate juridical
personality of FLADC.
| 53
The Tius allege that they were prevented from participating in the
management of the corporation. There is evidence that the Ongs did
prevent the rightfully elected Treasurer, Cely Tiu, from exercising her
function as such. The records show that the President, Wilson Ong,
supervised the collection and receipt of rentals in the Masagana
Citimall;[19] that he ordered the same to be deposited in the
bank;[20] and that he held on to the cash and properties of the
corporation.[21] Section 25 of the Corporation Code prohibits the
President from acting concurrently as Treasurer of the corporation.
The rationale behind the provision is to ensure the effective
monitoring of each officers separate functions.
However, although the Tius were adversely affected by the Ongs
unwillingness to let them assume their positions, rescission due to
breach of contract is definitely the wrong remedy for their personal
grievances. The Corporation Code, SEC rules and even the Rules
of Court provide for appropriate and adequate intra-corporate
remedies, other than rescission, in situations like
this. Rescission is certainly not one of them, specially if the party
asking for it has no legal personality to do so and the requirements of
the law therefor have not been met.A contrary doctrine will tread on
extremely dangerous ground because it will allow just any
stockholder, for just about any real or imagined offense, to demand
rescission of his subscription and call for the distribution of some part
of the corporate assets to him without complying with the
requirements of the Corporation Code.
Hence, the Tius, in their personal capacities, cannot seek the
ultimate and extraordinary remedy of rescission of the subject
agreement based on a less than substantial breach of subscription
contract. Not only are they not parties to the subscription contract
between the Ongs and FLADC; they also have other available and
effective remedies under the law.
All this notwithstanding, granting but not conceding that the Tius
possess the legal standing to sue for rescission based on breach of
contract, said action will nevertheless still not prosper since
rescission will violate the Trust Fund Doctrine and the procedures for
the valid distribution of assets and property under the Corporation
Code.
The Trust Fund Doctrine, first enunciated by this Court in the 1923
case of Philippine Trust Co. vs. Rivera,[22] provides that subscriptions
to the capital stock of a corporation constitute a fund to which the
creditors have a right to look for the satisfaction of their
claims.[23] This doctrine is the underlying principle in the procedure for
the distribution of capital assets, embodied in the Corporation Code,
which allows the distribution of corporate capital only in three
instances: (1) amendment of the Articles of Incorporation to reduce
the authorized capital stock,[24] (2) purchase of redeemable shares by
the corporation, regardless of the existence of unrestricted retained
earnings,[25] and (3) dissolution and eventual liquidation of the
corporation. Furthermore, the doctrine is articulated in Section 41 on
the power of a corporation to acquire its own shares[26] and in Section
122 on the prohibition against the distribution of corporate assets and
property unless the stringent requirements therefor are complied
with.[27]
The distribution of corporate assets and property cannot be made to
depend on the whims and caprices of the stockholders, officers or
directors of the corporation, or even, for that matter, on the earnest

desire of the court a quo to prevent further squabbles and future
litigations unless the indispensable conditions and procedures for the
protection of corporate creditors are followed. Otherwise, the
corporate peace laudably hoped for by the court will remain nothing
but a dream because this time, it will be the creditors turn to engage
in squabbles and litigations should the court order an unlawful
distribution in blatant disregard of the Trust Fund Doctrine.
In the instant case, 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.
Contrary to the Tius allegation, 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.[28] The Tius maintain that
rescinding the subscription contract is not synonymous to corporate
liquidation because all rescission will entail would be the simple
restoration of the status quo ante and a return to the two groups of
their cash and property contributions. We wish it were that
simple. Very noticeable is the fact that the Tius do not explain why
rescission in the instant case will not effectively result in liquidation.
The Tius merely refer in cavalier fashion to the end-result of
rescission (which incidentally is 100% favorable to them) but turn a
blind eye to its unfair, inequitable and disastrous effect on the
corporation, its creditors and the Ongs.
In their Memorandum dated February 28, 2003, the Tius claim that
rescission of the agreement will not result in an unauthorized
liquidation of the corporation because their case is actually a petition
to decrease capital stock pursuant to Section 38 of the Corporation
Code. Section 122 of the law provides that (e)xcept by decrease of
capital stock, no corporation shall distribute any of its assets or
property except upon lawful dissolution and after payment of all its
debts and liabilities. The Tius claim that their case for rescission,
being a petition to decrease capital stock, does not violate the
liquidation procedures under our laws. All that needs to be done,
according to them, is for this Court to order (1) FLADC to file with the
SEC a petition to issue a certificate of decrease of capital stock and
(2) the SEC to approve said decrease. This new argument has no
merit.
The Tius case for rescission cannot validly be deemed a petition to
decrease capital stock because such action never complied with the
formal requirements for decrease of capital stock under Section 33 of
the Corporation Code. No majority vote of the board of directors was
ever taken. Neither was there any stockholders meeting at which the
approval of stockholders owning at least two-thirds of the outstanding
capital stock was secured. There was no revised treasurers affidavit
and no proof that said decrease will not prejudice the creditors rights.
On the contrary, all their pleadings contained were alleged acts of
violations by the Ongs to justify an order of rescission.
Furthermore, it is an improper judicial intrusion into the internal affairs
of the corporation to compel FLADC to file at the SEC a petition for
the issuance of a certificate of decrease of stock. Decreasing a
corporations authorized capital stock is an amendment of the Articles
of Incorporation. It is a decision that only the stockholders and the
| 54
directors can make, considering that they are the contracting parties
thereto. In this case, the Tius are actually not just asking for a review
of the legality and fairness of a corporate decision. They want this
Court to make a corporate decision for FLADC. We decline to
intervene and order corporate structural changes not voluntarily
agreed upon by its stockholders and directors.
Truth to tell, a judicial order to decrease capital stock without the
assent of FLADCs directors and stockholders is a violation of the
business judgment rule which states that:
xxx xxx xxx (C)ontracts intra vires entered into by the board of
directors are binding upon the corporation and courts will not interfere
unless such contracts are so unconscionable and oppressive as to
amount to wanton destruction to the rights of the minority, as when
plaintiffs aver that the defendants (members of the board), have
concluded a transaction among themselves as will result in serious
injury to the plaintiffs stockholders.[29]
The reason behind the rule is aptly explained by Dean Cesar L.
Villanueva, an esteemed author in corporate law, thus:
Courts and other tribunals are wont to override the business
judgment of the board mainly because, courts are not in the business
of business, and the laissez faire rule or the free enterprise system
prevailing in our social and economic set-up dictates that it is better
for the State and its organs to leave business to the businessmen;
especially so, when courts are ill-equipped to make business
decisions. More importantly, the social contract in the corporate
family to decide the course of the corporate business has been
vested in the board and not with courts.[30]
Apparently, the Tius do not realize the illegal consequences of
seeking rescission and control of the corporation to the exclusion of
the Ongs. Such an act infringes on the law on reduction of capital
stock. Ordering the return and distribution of the Ongs capital
contribution without dissolving the corporation or decreasing its
authorized capital stock is not only against the law but is also
prejudicial to corporate creditors who enjoy absolute priority of
payment over and above any individual stockholder thereof.
Stripped to its barest essentials, the issue of rescission in this case is
not difficult to understand. If rescission is denied, will injustice be
inflicted on any of the parties? The answer is no because the
financial interests of both the Tius and the Ongs will remain intact
and safe within FLADC. On the other hand, if rescission is granted,
will any of the parties suffer an injustice?Definitely yes because the
Ongs will find themselves out in the streets with nothing but the
money they had in 1994 while the Tius will not only enjoy a windfall
estimated to be anywhere from P450 million to P900 million[31] but will
also take over an extremely profitable business without much effort at
all.
Another very important point follows. The Court of Appeals and, later
on, our Decision dated February 1, 2002, stated that both groups
were in pari delicto, meaning, that both the Tius and the Ongs
committed breaches of the Pre-Subscription Agreement. This may be
true to a certain extent but, judging from the comparative gravity of
the acts separately committed by each group, we find that the Ongs
acts were relatively tame vis--vis those committed by the Tius in not
surrendering FLADC funds to the corporation and diverting corporate
income to their own MATTERCO account. The Ongs were right in not
 | 55

issuing to the Tius the shares corresponding to the four-story building Costs against the petitioner Tius.
and the 1,902.30 square-meter lot because no title for it could be
issued in FLADCs name, owing to the Tius refusal to pay the transfer SO ORDERED.
taxes. And as far as the 151 square-meter lot was concerned, why
should FLADC issue additional shares to the Tius for property
already owned by the corporation and which, in the final analysis,
was already factored into the shareholdings of the Tius before the
Ongs came in?
We are appalled by the attempt by the Tius, in the words of the Court
of Appeals, to pull a fast one on the Ongs because that was where
the problem precisely started. It is clear that, when the finances of
FLADC improved considerably after the equity infusion of the Ongs,
the Tius started planning to take over the corporation again and
exclude the Ongs from it. It appears that the Tius refusal to pay
transfer taxes might not have really been at all unintentional because,
by failing to pay that relatively small amount which they could easily
afford, the Tius should have expected that they were not going to be
given the corresponding shares. It was, from every angle, the perfect
excuse for blackballing the Ongs. In other words, the Tius created a
problem then used that same problem as their pretext for showing
their partners the door. In the process, they stood to be rewarded
with a bonanza of anywhere between P450 million to P900 million in
assets (from an investment of only P45 million which was nearly
foreclosed by PNB), to the extreme and irreparable damage of the
Ongs, FLADC and its creditors.
After all is said and done, no one can close his eyes to the fact that
the Masagana Citimall would not be what it has become today were it
not for the timely infusion of P190 million by the Ongs in 1994. There
are no ifs or buts about it.
Without the Ongs, the Tius would have lost everything they originally
invested in said mall. If only for this and the fact that this Resolution
can truly pave the way for both groups to enjoy the fruits of their
investments assuming good faith and honest intentions we cannot
allow the rescission of the subject subscription agreement. The Ongs
shortcomings were far from serious and certainly less than
substantial; they were in fact remediable and correctable under the
law. It would be totally against all rules of justice, fairness and equity
to deprive the Ongs of their interests on petty and tenuous grounds.
WHEREFORE, the motion for reconsideration, dated March 15,
2002, of petitioners Ong Yong, Juanita Tan Ong, Wilson Ong, Anna
Ong, William Ong, Willie Ong and Julie Ong Alonzo and the motion
for partial reconsideration, dated March 15, 2002, of petitioner Willie
Ong are hereby GRANTED. The Petition for Confirmation of the
Rescission of the Pre-Subscription Agreement docketed as SEC
Case No. 02-96-5269 is hereby DISMISSED for lack of merit. The
unilateral rescission by the Tius of the subject Pre-Subscription
Agreement, dated August 15, 1994, is hereby declared as null and
void.
The motion for the issuance of a writ of execution, dated March 15,
2002, of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen
See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu is hereby
DENIED for being moot.
Accordingly, the Decision of this Court, dated February 1, 2002,
affirming with modification the decision of the Court of Appeals, dated
October 5, 1999, and the SEC en banc, dated September 11, 1998,
is hereby REVERSED.

[G.R. No. 104102. August 7, 1996]
CENTRAL TEXTILE MILLS, INC., petitioner, vs. NATIONAL
WAGES AND PRODUCTIVITY COMMISSION, REGIONAL
TRIPARTITE WAGES AND PRODUCTIVITY BOARD - NATIONAL
CAPITAL REGION, and UNITED CMC TEXTILE WORKERS
UNION, respondents.
DECISION
ROMERO, J.:
On December 20, 1990, respondent Regional Tripartite Wages and
Productivity Board - National Capital Region (the Board) issued
Wage Order No. NCR-02 (WO No. NCR-02), which took effect on
January 9, 1991. Said wage order mandated a P12.00 increase in
the minimum daily wage of all employees and workers in the private
sector in the NCR, but exempted from its application distressed
employers whose capital has been impaired by at least twenty-five
percent (25%) in the preceding year.
The Guidelines on Exemption from Compliance With the Prescribed
Wage/Cost of Living Allowance Increase Granted by the Regional
Tripartite Wage and Productivity Boards, issued on February 25,
1991, defined capital as the paid-up capital at the end of the last full
accounting period (in case of corporations). Under said guidelines,
(a)n applicant firm may be granted exemption from payment of the
prescribed increase in wage/cost-of-living allowance for a period not
to exceed one (1) year from effectivity of the Order x x x when
accumulated losses at the end of the period under review have
impaired by at least 25 percent the paid-up capital at the end of the
last full accounting period preceding the application.
By virtue of these provisions, petitioner filed on April 11, 1991 its
application for exemption from compliance with WO No. NCR-02 due
to financial losses.
In an order dated October 22, 1991, the Boards Vice-Chairman,
Ernesto Gorospe, disapproved petitioners application for exemption
after concluding from the documents submitted that petitioner
sustained an impairment of only 22.41%.
On February 4, 1992, petitioners motion for reconsideration was
dismissed by the Board for lack of merit. The Board, except for Vice-
Chairman Gorospe who took no part in resolving the said motion for
reconsideration, opined that according to the audited financial
statements submitted by petitioner to them, to the Securities and
Exchange Commission and to the Bureau of Internal Revenue,
petitioner had a total paid-up capital of P305,767,900.00 as of
December 31, 1990, which amount should be the basis for
determining the capital impairment of petitioner, instead of the
authorized capital stock of P128,000,000.00 which it insists should be
the basis of computation.
The Board also noted that petitioner did not file with the SEC the
August 15, 1990 resolution of its Board of Directors, concurred in by
its stockholders representing at least two-thirds of its outstanding
capital stock, approving an increase in petitioners authorized capital
stock from P128,000,000.00 to P640,000,000.00. Neither did it file
any petition to amend its Articles of Incorporation brought about by
such increase in its capitalization.
| 56
Petitioner maintains in the instant action that its authorized capital
stock, not its unauthorized paid-up capital, should be used in arriving
at its capital impairment for 1990. Citing two SEC Opinions dated
August 10, 1971, and July 28, 1978, interpreting Section 38 of the
Corporation Code, it claims that the capital stock of a corporation
stand(s) increased or decreased only from and after approval and the
issuance of the certificate of filing of increase of capital stock.
We agree.
The guidelines on exemption specifically refer to paid-up capital, not
authorized capital stock, as the basis of capital impairment for
exemption from WO. No. NCR-02. The records reveal, however, that
petitioner included in its total paid-up capital payments on advance
subscriptions, although the proposed increase in its capitalization had
not yet been approved by, let alone presented for the approval of, the
SEC. As observed by the Board in its order of February 4, 1992, the
aforementioned (r)esolution (of August 15, 1990) has not been filed
by the corporation with the SEC, nor was a petition to amend its
Articles of Incorporation by reason of the increase in its capitalization
filed by the same.
It is undisputed that petitioner incurred a net loss of P68,844,222.49
in 1990, and its authorized capital stock as of that time stood
at P128,000,000.00.[1] On August 15, 1990, a Board resolution
increasing the capital stock of the corporation was affirmed by the
requisite number of stockholders. Although no petition to that effect
was ever submitted to the SEC for its approval, petitioner already
started receiving subscriptions and payments on the proposed
increase, which it allegedly held conditionally, that is, pending
approval of the same by the SEC.In its Memorandum, however,
petitioner admitted, without giving any reason therefor, that it indeed
received subscriptions and payments to the said proposed increase
in capital stock, even in the absence of SEC approval of the increase
as required by the Corporation Code.[2] Thus, by the end of 1990, the
corporation had a subscribed capital stock of P482,748,900.00 and,
after deducting P176,981,000.00 in subscriptions receivables, a total
paid-up capital of P305,767,900.00.[3] P177,767,900.00 of this sum
constituted the unauthorized increase in its subscribed capital stock,
which are actually payments on future issues of shares.
These payments cannot as yet be deemed part of petitioners paid-up
capital, technically speaking, because its capital stock has not yet
been legally increased. Thus, its authorized capital stock in the year
when exemption from WO No. NCR-02 was sought stood at
P128,000,000.00, which was impaired by losses of nearly 50%. Such
payments constitute deposits on future subscriptions, money which
the corporation will hold in trust for the subscribers until it files a
petition to increase its capitalization and a certificate of filing of
increase of capital stock is approved and issued by the SEC. [4] As a
trust fund, this money is still withdrawable by any of the subscribers
at any time before the issuance of the corresponding shares of stock,
unless there is a pre-subscription agreement to the contrary, which
apparently is not present in the instant case. Consequently, if a
certificate of increase has not yet been issued by the SEC, the
subscribers to the unauthorized issuance are not to be deemed as
stockholders possessed of such legal rights as the rights to vote and
dividends.[5]
The Court observes that the subject wage order exempts from its
coverage employers whose capital has been impaired by at least
 | 57

25% because if impairment is less than this percentage, the

employer can still absorb the wage increase. In the case at hand,
petitioners capital held answerable for the additional wages would
include funds it only holds in trust, which to reiterate may not be
deemed par of its paid-up capital, the losses of which shall be the
basis of the 25% referred to above. To include such funds in the
paid-up capital would be prejudicial to the corporation as an employer
considering that the records clearly show that it is entitled to
exemption, even as the anomaly was brought about by an auditing
error.
Another issue, raised late in the proceedings by respondents, is the
alleged non-exhaustion of administrative remedies by
petitioner. They claim that the questioned order of the Board should
have first been appealed to the National Wages and Productivity
Commission (the Commission), as provided for under Section 9 of
the Revised Guidelines on Exemption From Compliance With the
Prescribed Wage/Cost of Living Allowance Increases Granted by the
Regional Tripartite Wages and Productivity Boards.
Petitioner explained that at the time it filed the instant petition
for certiorari on March 6, 1992, the procedure governing applications
for exemption from compliance with wage orders was the original
guidelines, which took effect on February 25, 1991. Under Section 6
of said guidelines, the denial by the Board of a request for
reconsideration shall be final and immediately executory. Appeal to
the Commission as an optional remedy[6] was only made available
after the issuance of the revised guidelines on September 25,
1992. Hence, petitioner cannot be faulted for not having first
appealed the questioned orders. It must be added that since no
order, resolution or decision of the Commission is being assailed in
this petition, it should be dropped as party respondent, as prayed for
in its manifestation and motion dated June 22, 1992.[7]
In order to avoid any similar controversy, petitioner is reminded to
adopt a more systematic and precise accounting procedure keeping
in mind the various principles and nuances surrounding corporate
practice.
WHEREFORE, the petition is hereby GRANTED. The assailed
orders of the Regional Tripartite Wages and Productivity Board
National Capital Region, dated October 22, 1991 and February 4,
1992, are ANNULLED and SET ASIDE. Said Board is also hereby
mandated to issue another order granting the application of petitioner
Central Textile Mills, Inc. for exemption from Wage Order No. NCR-
02 for the year ending December 31, 1990. No pronouncement as to
cost.
SO ORDERED.

[G.R. No. 126006. January 29, 2004]
LAPULAPU FOUNDATION, INC. and ELIAS Q. TAN, petitioners,
vs. COURT OF APPEALS (Seventeenth Division) and ALLIED
BANKING CORP., respondents
DECISION
CALLEJO, SR., J.:
Before the Court is the petition for review on certiorari filed by the
Lapulapu Foundation, Inc. and Elias Q. Tan seeking to reverse and
set aside the Decision[1] dated June 26, 1996 of the Court of Appeals
(CA) in CA-G.R. CV No. 37162 ordering the petitioners, jointly and
solidarily, to pay the respondent Allied Banking Corporation the
amount of P493,566.61 plus interests and other charges. Likewise,
sought to be reversed and set aside is the appellate courts
Resolution dated August 19, 1996 denying the petitioners motion for
reconsideration.
The case stemmed from the following facts:
Sometime in 1977, petitioner Elias Q. Tan, then President of the co-
petitioner Lapulapu Foundation, Inc., obtained four loans from the
respondent Allied Banking Corporation covered by four promissory
notes in the amounts of P100,000 each. The details of the
promissory notes are as follows:
P/N No. Date of P/N Maturity Date Amount as of 1/23/79
BD No. 504 Nov. 7, 1977 Feb. 5, 1978 P123,377.76
BD No. 621 Nov. 28, 1977 Mar. 28, 1978 P123,411.10
BD No. 716 Dec. 12, 1977 Apr. 11, 1978 P122,322.21
BD No. 839 Jan. 5, 1978 May 5, 1978 P120,455.54[2]
As of January 23, 1979, the entire obligation amounted
to P493,566.61 and despite demands made on them by the
respondent Bank, the petitioners failed to pay the same. The
respondent Bank was constrained to file with the Regional Trial Court
of Cebu City, Branch 15, a complaint seeking payment by the
petitioners, jointly and solidarily, of the sum of P493,566.61
representing their loan obligation, exclusive of interests, penalty
charges, attorneys fees and costs.
In its answer to the complaint, the petitioner Foundation denied
incurring indebtedness from the respondent Bank alleging that the
loans were obtained by petitioner Tan in his personal capacity, for his
own use and benefit and on the strength of the personal information
he furnished the respondent Bank. The petitioner Foundation
maintained that it never authorized petitioner Tan to co-sign in his
capacity as its President any promissory note and that the
respondent Bank fully knew that the loans contracted were made in
petitioner Tans personal capacity and for his own use and that the
petitioner Foundation never benefited, directly or indirectly,
therefrom. The petitioner Foundation then interposed a cross-claim
against petitioner Tan alleging that he, having exceeded his authority,
should be solely liable for said loans, and a counterclaim against the
respondent Bank for damages and attorneys fees.
For his part, petitioner Tan admitted that he contracted the loans from
the respondent Bank in his personal capacity. The parties, however,
| 58
agreed that the loans were to be paid from the proceeds of petitioner
Tans shares of common stocks in the Lapulapu Industries
Corporation, a real estate firm. The loans were covered by
promissory notes which were automatically renewable (rolled-over)
every year at an amount including unpaid interests, until such time as
petitioner Tan was able to pay the same from the proceeds of his
aforesaid shares.
According to petitioner Tan, the respondent Banks employee
required him to affix two signatures on every promissory note,
assuring him that the loan documents would be filled out in
accordance with their agreement. However, after he signed and
delivered the loan documents to the respondent Bank, these were
filled out in a manner not in accord with their agreement, such that
the petitioner Foundation was included as party thereto. Further, prior
to its filing of the complaint, the respondent Bank made no demand
on him.
After due trial, the court a quo rendered judgment the dispositive
portion of which reads:
WHEREFORE, in view of the foregoing evidences [sic], arguments
and considerations, this court hereby finds the preponderance of
evidence in favor of the plaintiff and hereby renders judgment as
follows:
1. Requiring the defendants Elias Q. Tan and Lapulapu Foundation,
Inc. [the petitioners herein] to pay jointly and solidarily to the plaintiff
Allied Banking Corporation [the respondent herein] the amount
of P493,566.61 as principal obligation for the four promissory notes,
including all other charges included in the same, with interest at 14%
per annum, computed from January 24, 1979, until the same are fully
paid, plus 2% service charges and 1% monthly penalty charges.
2. Requiring the defendants Elias Q. Tan and Lapulapu Foundation,
Inc., to pay jointly and solidarily, attorneys fees in the equivalent
amount of 25% of the total amount due from the defendants on the
promissory notes, including all charges;
3. Requiring the defendants Elias Q. Tan and Lapulapu Foundation,
Inc., to pay jointly and solidarily litigation expenses of P1,000.00 plus
costs of the suit.[3]
On appeal, the CA affirmed with modification the judgment of the
court a quo by deleting the award of attorneys fees in favor of the
respondent Bank for being without basis.
The appellate court disbelieved petitioner Tans claim that the loans
were his personal loans as the promissory notes evidencing them
showed upon their faces that these were obligations of the petitioner
Foundation, as contracted by petitioner Tan himself in his official and
personal character. Applying the parol evidence rule, the CA likewise
rejected petitioner Tans assertion that there was an unwritten
agreement between him and the respondent Bank that he would pay
the loans from the proceeds of his shares of stocks in the Lapulapu
Industries Corp.
Further, the CA found that demand had been made by the
respondent Bank on the petitioners prior to the filing of the
complaint a quo. It noted that the two letters of demand dated
January 3, 1979[4] and January 30, 1979[5] asking settlement of the
obligation were sent by the respondent Bank. These were received

by the petitioners as shown by the registry return cards[6] presented
during trial in the court a quo.
Finally, like the court a quo, the CA applied the doctrine of piercing
the veil of corporate entity in holding the petitioners jointly and
solidarily liable. The evidence showed that petitioner Tan had
represented himself as the President of the petitioner Foundation,
opened savings and current accounts in its behalf, and signed the
loan documents for and in behalf of the latter. The CA, likewise,
found that the petitioner Foundation had allowed petitioner Tan to act
as though he had the authority to contract the loans in its behalf. On
the other hand, petitioner Tan could not escape liability as he had
used the petitioner Foundation for his benefit.
Aggrieved, the petitioners now come to the Court alleging that:
I. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING
THAT THE LOANS SUBJECT MATTER OF THE INSTANT
PETITION ARE ALREADY DUE AND DEMANDABLE DESPITE
ABSENCE OF PRIOR DEMAND.
II. THE COURT OF APPEALS GRAVELY ERRED IN APPLYING
THE PAROL EVIDENCE RULE AND THE DOCTRINE OF
PIERCING THE VEIL OF CORPORATE ENTITY AS BASIS FOR
ADJUDGING JOINT AND SOLIDARY LIABILITY ON THE PART OF
PETITIONERS ELIAS Q. TAN AND LAPULAPU FOUNDATION,
INC.[7]
The petitioners assail the appellate courts finding that the loans had
become due and demandable in view of the two demand letters sent
to them by the respondent Bank. The petitioners insist that there was
no prior demand as they vigorously deny receiving those letters.
According to petitioner Tan, the signatures on the registry return
cards were not his.
The petitioners denial of receipt of the demand letters was rightfully
given scant consideration by the CA as it held:
Exhibits R and S are two letters of demand, respectively dated
January 3, 1979 and January 30, 1979, asking settlement of the
obligations covered by the promissory notes. The first letter was
written by Ben Tio Peng Seng, Vice-President of the bank, and
addressed to Lapulapu Foundation, Inc., attention of Mr. Elias Q.
Tan, President, while the second was a final demand written by the
appellees counsel, addressed to both defendants-appellants, and
giving them five (5) days from receipt within which to settle or judicial
action would be instituted against them. Both letters were duly
received by the defendants, as shown by the registry return cards,
marked as Exhibits R-2 and S-1, respectively. The allegation of Tan
that he does not know who signed the said registry return receipts
merits scant consideration, for there is no showing that the addresses
thereon were wrong. Hence, the disputable presumption that a letter
duly directed and mailed was received in the regular course of mail
(per par. V, Section 3, Rule 131 of the Revised Rules on Evidence)
still holds.[8]
There is no dispute that the promissory notes had already matured.
However, the petitioners insist that the loans had not become due
and demandable as they deny receipt of the respondent Banks
demand letters. When presented the registry return cards during the
trial, petitioner Tan claimed that he did not recognize the signatures
thereon. The petitioners allegation and denial are self-serving. They
| 59
cannot prevail over the registry return cards which constitute
documentary evidence and which enjoy the presumption that, absent
clear and convincing evidence to the contrary, these were regularly
issued by the postal officials in the performance of their official duty
and that they acted in good faith.[9] Further, as the CA correctly
opined, mails are presumed to have been properly delivered and
received by the addressee in the regular course of the mail.[10] As the
CA noted, there is no showing that the addresses on the registry
return cards were wrong. It is the petitioners burden to overcome the
presumptions by sufficient evidence, and other than their barefaced
denial, the petitioners failed to support their claim that they did not
receive the demand letters; therefore, no prior demand was made on
them by the respondent Bank.
Having established that the loans had become due and demandable,
the Court shall now resolve the issue of whether the CA correctly
held the petitioners jointly and solidarily liable therefor.
In disclaiming any liability for the loans, the petitioner Foundation
maintains that these were contracted by petitioner Tan in his
personal capacity and that it did not benefit therefrom. On the other
hand, while admitting that the loans were his personal obligation,
petitioner Tan avers that he had an unwritten agreement with the
respondent Bank that these loans would be renewed on a year-to-
year basis and paid from the proceeds of his shares of stock in the
Lapulapu Industries Corp.
These contentions are untenable.
The Court particularly finds as incredulous petitioner Tans allegation
that he was made to sign blank loan documents and that the phrase
IN MY OFFICIAL/PERSONAL CAPACITY was superimposed by the
respondent Banks employee despite petitioner Tans protestation.
The Court is hard pressed to believe that a businessman of petitioner
Tans stature could have been so careless as to sign blank loan
documents.
In contrast, as found by the CA, the promissory notes[11] clearly
showed upon their faces that they are the obligation of the petitioner
Foundation, as contracted by petitioner Tan in his official and
personal capacity.[12] Moreover, the application for credit
accommodation,[13] the signature cards of the two accounts in the
name of petitioner Foundation,[14] as well as New Current Account
Record,[15] all accompanying the promissory notes, were signed by
petitioner Tan for and in the name of the petitioner
Foundation.[16] These documentary evidence unequivocally and
categorically establish that the loans were solidarily contracted by the
petitioner Foundation and petitioner Tan.
As a corollary, the parol evidence rule likewise constrains this Court
to reject petitioner Tans claim regarding the purported unwritten
agreement between him and the respondent Bank on the payment of
the obligation. Section 9, Rule 130 of the of the Revised Rules of
Court provides that [w]hen the terms of an agreement have been
reduced to writing, it is to be considered as containing all the terms
agreed upon and there can be, between the parties and their
successors-in-interest, no evidence of such terms other than the
contents of the written agreement.[17]
In this case, the promissory notes are the law between the petitioners
and the respondent Bank. These promissory notes contained
maturity dates as follows: February 5, 1978, March 28, 1978, April
 | 60

11, 1978 and May 5, 1978, respectively. That these notes were to be SO ORDERED.
paid on these dates is clear and explicit. Nowhere was it stated
therein that they would be renewed on a year-to-year basis or rolled-
over annually until paid from the proceeds of petitioner Tans shares
in the Lapulapu Industries Corp. Accordingly, this purported unwritten
agreement could not be made to vary or contradict the terms and
conditions in the promissory notes.
Evidence of a prior or contemporaneous verbal agreement is
generally not admissible to vary, contradict or defeat the operation of
a valid contract.[18] While parol evidence is admissible to explain the
meaning of written contracts, it cannot serve the purpose of
incorporating into the contract additional contemporaneous
conditions which are not mentioned at all in writing, unless there has
been fraud or mistake.[19] No such allegation had been made by the
petitioners in this case.
Finally, the appellate court did not err in holding the petitioners jointly
and solidarily liable as it applied the doctrine of piercing the veil of
corporate entity. The petitioner Foundation asserts that it has a
personality separate and distinct from that of its President, petitioner
Tan, and that it cannot be held solidarily liable for the loans of the
latter.
The Court agrees with the CA that the petitioners cannot hide behind
the corporate veil under the following circumstances:
The evidence shows that Tan has been representing himself as the
President of Lapulapu Foundation, Inc. He opened a savings account
and a current account in the names of the corporation, and signed
the application form as well as the necessary specimen signature
cards (Exhibits A, B and C) twice, for himself and for the
foundation. He submitted a notarized Secretarys Certificate (Exhibit
G) from the corporation, attesting that he has been authorized, inter
alia, to sign for and in behalf of the Lapulapu Foundation any and all
checks, drafts or other orders with respect to the bank; to transact
business with the Bank, negotiate loans, agreements, obligations,
promissory notes and other commercial documents; and to initially
obtain a loan for P100,000.00 from any bank (Exhibits G-1 and G-2).
Under these circumstances, the defendant corporation is liable for
the transactions entered into by Tan on its behalf.[20]
Per its Secretarys Certificate, the petitioner Foundation had given its
President, petitioner Tan, ostensible and apparent authority to inter
alia deal with the respondent Bank. Accordingly, the petitioner
Foundation is estopped from questioning petitioner Tans authority to
obtain the subject loans from the respondent Bank. It is a familiar
doctrine that if a corporation knowingly permits one of its officers, or
any other agent, to act within the scope of an apparent authority, it
holds him out to the public as possessing the power to do those acts;
and thus, the corporation will, as against anyone who has in good
faith dealt with it through such agent, be estopped from denying the
agents authority.[21]
In fine, there is no cogent reason to deviate from the CAs ruling that
the petitioners are jointly and solidarily liable for the loans contracted
with the respondent Bank.
WHEREFORE, premises considered, the petition is DENIED and the
Decision dated June 26, 1996 and Resolution dated August 19, 1996
of the Court of Appeals in CA-G.R. CV No. 37162 are AFFIRMED in
toto.
 | 61

THIRD DIVISION the private respondents' separation pay, medical allowance,

attorney's fees and the penalty for failure to file notice of closure.
[G.R. NO. 161134 : March 3, 2008] Thus, in an Order dated June 10, 1999, the LA awarded an additional
MANDAUE DINGHOW DIMSUM HOUSE, CO., INC. and/or HENRY amount of P104,377.00 as separation pay to the other private
UYTENGSU, Petitioners, v. NATIONAL LABOR RELATIONS respondents.
COMMISSION-FOURTH DIVISION, FELIX PACALDO, IMELDA Private respondents appealed to the National Labor Relations
MONTELLANO, LUZVIMINDA CUENCA, ANAMAY Commission (NLRC).14 On October 24, 2000, the NLRC rendered its
DELARMENTE, REMA RAMOS, PEDRO DAYAGMIL, SERINA Decision, the dispositive portion of which reads:
CASQUEJO, RICKY NANO, ERWIN LIMATOG, LELIA ROSALES,
RANULFO GENERAL, NESTOR CAMIA and ANESIA WHEREFORE, premises considered, the decision of Labor Arbiter
BLANCA, Respondents. Dominador A. Almirante dated 10 June 1999 and his Order dated 22
July 1999 are MODIFIED, to wit:
DECISION
Ordering respondent Mandaue Dinghow Dimsum House Co., Inc. to
NACHURA, J.: pay the complainants their separation pay in the aggregate amount of
Before this Court is a Petition1 for Review on Certiorari under Rule 45 Two Hundred Thirty-Six Thousand Five Hundred Forty-Six and
of the Rules of Civil Procedure, seeking the reversal of the Court of 86/100 (P236,546.86), broken down as follows:
Appeals (CA) Resolution2 dated July 22, 2003 and Resolution3 dated
1. Blanca, Anesia - P20,933.35
October 30, 2003.
Petitioner Henry Uytengsu4 (Uytengsu) was the President and the 2. Camia, Nestor - 20,933.35
former General Manager of the Mandaue Dinghow Dimsum House
Co., Inc. (Mandaue Dinghow), a duly organized corporation which 3. Casquejo, Sesina - 20,933.35
used to engage in the restaurant business. Mandaue Dinghow used
to operate the Mandaue Dinghow Dimsum House (the restaurant) 4. Cuenca, Luzviminda - 20,933.35
which was located along A.C. Cortes Avenue, Mandaue City.
5. Dayagnil, Pedro - 12,560.01
In the course of this restaurant business, private respondents Felix
Pacaldo, Imelda Montellano, Luzviminda Cuenca, Anamay
6. Delarmente, Anamae - 14,653.35
Delarmente,5Rema Ramos, Pedro Dayagmil,6 Serina
Casquejo,7 Ricky Nano, Erwin Limatog, Leila Rosales, Ranulfo
General, Nestor Camia and Anesia Blanca (private respondents) 7. General, Ranulfo - 8,373.34
were employed, on various dates, by Mandaue Dinghow as food
handlers, waiters, helpers and checkers among others, all with a 8. Limatog., Erwin - 20,933.35
daily wage of P160.00.
9. Montellano, Imelda - 20,933.35
However, due to business losses, the establishment of numerous
malls in Cebu City, the gradual dwindling of the number of 10. Nano, Ricky - 12,560.01
customers, the rising cost of operations, the great increase in rentals
and the lack of a viable alternative location, the restaurant closed 11. Pacaldo, Felix - 20,933.35
down. On August 31, 1998, private respondents were terminated
from the service as a result of this closure. The restaurant filed a 12. Ramos, Rema - 20,933.35
Notice of Retrenchment with the Department of Labor and
Employment (DOLE) on September 8, 1998.8Consequently, private
13. Rosales, Lilia - 20,933.35
respondents filed a case for Illegal Dismissal before the Labor Arbiter
(LA) against Mandaue Dinghow and/or Uytengsu, praying for the
Total - P236,546.86
payment of separation pay, medical allowance, penalty for failure to
notify the DOLE and attorney's fees.9
SO ORDERED.
In his Decision10 dated June 10, 1999, the LA absolved Uytengsu
On February 9, 2001, the NLRC issued an Entry of
from any liability, holding that the latter did not act in bad faith and in
Judgment15 certifying that the aforementioned decision had become
excess of his authority. Nevertheless, the LA found Mandaue
final and executory on December 4, 2000. On May 28, 2001, a Writ
Dinghow liable, ordering the same to pay private respondents their
of Execution16 was issued by the LA. However, in their
respective separation pay in the total amount
Manifestation17 dated October 28, 2001, private respondents averred
of P122,720.00.11 Private respondents filed their Motion for
that the said writ could not be executed, as Mandaue Dinghow could
Reconsideration12 claiming, among others, that Mandaue Dinghow
no longer be found and had transferred elsewhere; that both
was only made to pay without including Uytengsu; that some13of
Mandaue Dinghow and Uytengsu were impleaded as respondents,
them were not awarded separation pay in the said decision; and that
although in the NLRC decision, Uytengsu's name was omitted; that
Mandaue Dinghow and Uytengsu deliberately intended to dismiss the
clearly, Uytengsu is the President and majority stockholder of
private respondents. Private respondents prayed that Mandaue
Mandaue Dinghow; and that it would be a mockery of justice if,
Dinghow and Uytengsu be ordered, jointly and severally, to pay all

despite the finality of the NLRC decision, the same could not be
executed on a mere technicality. Invoking the doctrine of piercing the
veil of corporate fiction, private respondents moved that the LA, in the
exercise of his equity jurisdiction, issue an alias writ of execution
directing the Sheriff to execute the judgment against Mandaue
Dinghow and Uytengsu. Thereafter, pertinent pleadings were filed by
both parties.18
Thus, on February 18, 2002, the LA issued an Order decreeing that a
writ of execution be issued against the properties of the
officers/stockholders of Mandaue Dinghow. On April 16, 2002, an
Alias Writ of Execution was issued. On April 24, 2002, Mandaue
Dinghow and Uytengsu filed a Motion to Quash the Writ of Execution.
On May 14, 2002, the Sheriff submitted his Report manifesting that
the said Alias Writ was served on Mandaue Dinghow and Uytengsu,
and Notices of Garnishment were served on the banks. Thus,
Uytengsu's bank deposits were frozen. On May 20, 2002, the LA
denied Uytengsu's Motion to Quash the Writ of Execution. Uytengsu
filed a Motion for Reconsideration and/or Appeal19 from the said
Order before the NLRC. In its Decision20 dated March 12, 2003, the
NLRC denied the said appeal, holding that Uytengsu is jointly and
severally liable with Mandaue Dinghow on the ground that he is the
President/Chairman of Mandaue Dinghow and that the latter is no
longer existing.
Aggrieved, Uytengsu went to the CA via a
petition21 for certiorari under Rule 65 of the Rules of Civil Procedure
without filing any motion for reconsideration assailing the NLRC
Decision.
In its Resolution dated July 22, 2003, the CA dismissed the said
petition for certiorari on the following grounds: (1) the petition failed to
indicate the full names of all private respondents and their respective
complete addresses; (2) the certificate of non-forum shopping
attached to the petition was merely signed by Uytengsu without
attaching the appropriate board resolution or secretary's certificate
showing his authority to file the said petition in behalf of Mandaue
Dinghow; and (3) Mandaue Dinghow and Uytengsu failed to file a
motion for reconsideration of the NLRC decision before going to the
CA on certiorari, without justifying the reasons for such failure.
On August 25, 2003, Uytengsu filed his Motion for
Reconsideration22claiming that the petition's failure to indicate the full
names of all private respondents and their respective addresses was
not intentional but due merely to inadvertence. Moreover, the petition
indicated the complete address of said respondents' counsel; hence,
it substantially complied with the rules. Uytengsu also manifested that
he is the lone petitioner before the CA and that the petition did not
include Mandaue Dinghow anymore as the decision against the latter
had long become final and executory. Thus, Uytengsu submitted that
there was no need for any board resolution or secretary's certificate
authorizing him to file the said petition. Finally, Uytengsu claimed that
direct resort to certiorari was justified because despite the finality of
the decision holding Mandaue Dinghow solely liable and the Writ of
Execution issued against the same, the Labor Arbiter in excess of his
authority issued an Alias Writ of Execution making Uytengsu liable for
the private respondents' claims, as a result of which Uytengsu's bank
accounts in different banks were garnished. Uytengsu prayed that
technicalities be waived in order to serve the ends of justice.
| 62
In a Resolution dated October 30, 2003, the CA denied the motion for
reconsideration. Although the CA found that the certificate of forum
shopping attached to the petition was sufficient and that Uytengsu
indicated all the names of private respondents, it held that Uytengsu
still failed to indicate the respective complete addresses of the private
respondents and to justify the non-filing of the required motion for
reconsideration assailing the NLRC decision before resorting
to certiorari.
Hence, this Petition based on the following grounds:
I.
THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF
DISCRETION AND SERIOUS ERROR IN DISMISSING THE
PETITION FOR CERTIORARI PURELY ON TECHNICAL
GROUNDS AND IN NOT GIVING DUE COURSE TO THE SAME.
II.
THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF
DISCRETION AND SERIOUS ERROR IN DISMISSING THE
PETITION FOR CERTIORARI WITHOUT DELVING INTO THE
MERITS BECAUSE THE PUBLIC RESPONDENT HAS DECIDED A
QUESTION OF SUBSTANCE CONTRARY TO LAW AND/OR
BINDING PRECEDENTS.
In addition to the arguments he proffered on his non-filing of a motion
for reconsideration, Uytengsu posited that a corporation has a
separate legal personality from its corporate officers, therefore, the
latter are not personally liable for money claims against it unless said
officers acted with evident malice and bad faith; that the LA in his
Decision dated June 10, 1999, absolved Uytengsu from any liability
for want of bad faith and excess in authority; that private respondents
did not question such particular finding, hence, the same attained
finality; that they belatedly invoked the doctrine of piercing the veil of
corporate fiction;23 that it is clear from the NLRC decision dated
October 24, 2000, which is already final, that it is Mandaue Dinghow
alone which is liable for the payment of private respondents'
separation pay; and that a decision which is final and executory can
no longer be changed, altered or modified, particularly in this case in
which the alteration or modification is material and substantial.24
On the other hand, private respondents argued that the CA did not
err in dismissing the Petition for Certiorari for being substantially
infirm, as Uytengsu failed to reasonably justify the non-filing of the
required motion for reconsideration and to indicate in full the
complete addresses of the private respondents for the CA to acquire
jurisdiction over them; that the instant petition raises questions of fact
and law in disregard of the rules; and that the NLRC did not commit
any reversible error when it held that Uytengsu is jointly and severally
liable as President and majority stockholder of Mandaue Dinghow in
order to protect laborers and serve the ends of substantial justice.25
In fine, there are three issues which require resolution in this case:
1) Whether the non-filing of the motion for reconsideration before
resorting to certiorari is justified;
2) Whether the Alias Writ of Execution was validly issued despite the
finality of the NLRC Decision dated October 24, 2000;
andcralawlibrary

3) Whether the Doctrine of Piercing the Veil of Corporate Fiction was
properly invoked.
The first issue we resolve in the affirmative.
Section 1, Rule 65 of the Rules of Civil Procedure clearly states that
in order to avail oneself of the special civil action for certiorari, one
must be left with no appeal, or any plain, speedy, and adequate
remedy in the ordinary course of law, to wit:
SECTION 1. Petition for certiorari. - When any tribunal, board or
officer exercising judicial or quasi-judicial functions has acted without
or in excess of its or his jurisdiction, or with grave abuse of discretion
amounting to lack or excess of jurisdiction, and there is no appeal,
nor any plain, speedy, and adequate remedy in the ordinary course
of law, a person
aggrieved thereby may file a verified petition in the proper court,
alleging the facts with certainty and praying that judgment be
rendered annulling or modifying the proceedings of such tribunal,
board or officer, and granting such incidental reliefs as law and
justice may require.
A motion for reconsideration of an assailed decision is deemed a
plain and adequate remedy expressly available under the law. The
well-established rule is that a motion for reconsideration is an
indispensable condition before an aggrieved party can resort to the
special civil action for certiorari under Rule 65 of the 1997 Rules of
Civil Procedure, as amended. The purpose of such rule is to afford
the erring court or agency an opportunity to rectify the error/s it may
have committed without the intervention of a higher court. The
requisite motion is not only an expeditious remedy of an aggrieved
party but it also obviates an improvident and unnecessary recourse
to appellate proceedings.26 Failure to file a motion for reconsideration
with the NLRC before availing oneself of the special civil action
for certiorari is a fatal infirmity. However, this rule is subject to certain
recognized exceptions, to wit:
a) where the order is a patent nullity, as where the court a
quo has no jurisdiction;
b) where the questions raised in the certiorari proceedings have been
duly raised and passed upon by the lower court, or are the same as
those raised and passed upon in the lower court;
c) where there is an urgent necessity for the resolution of the
question and any further delay would prejudice the interests of the
Government or of the petitioner or the subject matter of the petition is
perishable;
d) where, under the circumstances, a motion for reconsideration
would be useless;
e) where petitioner was deprived of due process and there is extreme
urgency for relief;
f) where, in a criminal case, relief from an order of arrest is urgent
and the granting of such relief by the trial court is improbable;
g) where the proceedings in the lower court are a nullity for lack of
due process;
h) where the proceeding was ex parte or in which the petitioner had
no opportunity to object; and,
| 63
i) where the issue raised is one purely of law or where public interest
is involved.27
The instant case falls squarely within the first of the enumerated
exceptions because the NLRC decision dated March 12, 2003 is a
patent nullity considering that the LA and the NLRC were devoid of
any jurisdiction to alter or modify the NLRC Decision dated October
24, 2000, which already attained finality.
Correlatively, we answer the second issue in the negative.
The Order and the Alias Writ of Execution issued by the LA are null
and void for lack of jurisdiction and for altering the tenor of the NLRC
decision dated October 24, 2000 which directed Mandaue Dinghow
alone to pay the private respondents' separation pay. The private
respondents did not assail this ruling. Thus, the same became final
and executory. Even granting that the NLRC committed a mistake in
failing to indicate in the dispositive portion that Uytengsu was
solidarily liable with Mandaue Dinghow, the correction - which is
substantial - can no longer be allowed in this case because the
judgment has already become final and executory. Our ruling
in Industrial Management International Development Corporation v.
National Labor Relations Commission28 is instructive:
It is an elementary principle of procedure that the resolution of the
court in a given issue as embodied in the dispositive part of a
decision or order is the controlling factor as to settlement of rights of
the parties. Once a decision or order becomes final and executory, it
is removed from the power or jurisdiction of the court which rendered
it to further alter or amend it. It thereby becomes immutable and
unalterable and any amendment or alteration which substantially
affects a final and executory judgment is null and void for lack of
jurisdiction, including the entire proceedings held for that purpose. An
order of execution which varies the tenor of the judgment or
exceeds the terms thereof is a nullity.
Lastly, on the third issue, we rule in the negative.
It must be emphasized 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.29Because of this, the doctrine of piercing the veil of
corporate fiction must be exercised with caution.
In Malayang Samahan ng mga Manggagawa sa M. Greenfield v.
Ramos,30this Court reiterated the rule that corporate directors and
officers are solidarily liable with the corporation for the termination of
employees done with malice or bad faith. It has been held that bad
faith does not connote bad judgment or negligence; it imports a
dishonest purpose or some moral obliquity and conscious doing of
wrong; it means breach of a known duty through some motive or
interest or ill will; it partakes of the nature of fraud. In this case, it is
worth mentioning that the LA in his Decision dated June 10, 1999,
expressly absolved Uytengsu from any liability, holding that the latter
did not act in bad faith and in excess of his authority. Such finding
was not assailed by the private respondents nor did the NLRC in its
Decision dated October 24, 2000 overrule the same. The liability of
Uytengsu was never discussed in the said NLRC decision which, to
the detriment of the private respondents, had lapsed into finality.
WHEREFORE, the Petition is GRANTED. The Court of Appeals
Resolutions dated July 22, 2003 and October 30, 2003 are
 | 64

hereby REVERSED and SET ASIDE. The Order of Executive Labor

Arbiter Reynoso A. Belarmino, dated February 18, 2002,
is ANNULLED and the Alias Writ of Execution is QUASHED.
Nonetheless, the Labor Arbiter is hereby DIRECTED to implement
the final and executory Decision of the National Labor Relations
Commission, dated October 24, 2000, against all the assets of
Mandaue Dinghow Dimsum House Co., Inc. with utmost dispatch.
SO ORDERED.

[G.R. No. 142936. April 17, 2002]
PHILIPPINE NATIONAL BANK & NATIONAL SUGAR
DEVELOPMENT CORPORATION, petitioners, vs. ANDRADA
ELECTRIC & ENGINEERING COMPANY, respondent.
DECISION
PANGANIBAN, J.:
Basic is the rule that a corporation has a legal personality distinct and
separate from the persons and entities owning it. The corporate veil
may be lifted only if it has been used to shield fraud, defend crime,
justify a wrong, defeat public convenience, insulate bad faith or
perpetuate injustice. Thus, the mere fact that the Philippine National
Bank (PNB) acquired ownership or management of some assets of
the Pampanga Sugar Mill (PASUMIL), which had earlier been
foreclosed and purchased at the resulting public auction by the
Development Bank of the Philippines (DBP), will not make PNB liable
for the PASUMILs contractual debts to respondent.
Statement of the Case
Before us is a Petition for Review assailing the April 17, 2000
Decision[1] of the Court of Appeals (CA) in CA-GR CV No.
57610. The decretal portion of the challenged Decision reads as
follows:
WHEREFORE, the judgment appealed from is hereby AFFIRMED. [2]
The Facts
The factual antecedents of the case are summarized by the Court of
Appeals as follows:
In its complaint, the plaintiff [herein respondent] alleged that it is a
partnership duly organized, existing, and operating under the laws of
the Philippines, with office and principal place of business at Nos.
794-812 Del Monte [A]venue, Quezon City, while the defendant
[herein petitioner] Philippine National Bank (herein referred to as
PNB), is a semi-government corporation duly organized, existing and
operating under the laws of the Philippines, with office and principal
place of business at Escolta Street, Sta. Cruz, Manila; whereas, the
other defendant, the National Sugar Development Corporation
(NASUDECO in brief), is also a semi-government corporation and the
sugar arm of the PNB, with office and principal place of business at
the 2nd Floor, Sampaguita Building, Cubao, Quezon City; and the
defendant Pampanga Sugar Mills (PASUMIL in short), is a
corporation organized, existing and operating under the 1975 laws of
the Philippines, and had its business office before 1975 at Del
Carmen, Floridablanca, Pampanga; that the plaintiff is engaged in the
business of general construction for the repairs and/or construction of
different kinds of machineries and buildings; that on August 26, 1975,
the defendant PNB acquired the assets of the defendant PASUMIL
that were earlier foreclosed by the Development Bank of the
Philippines (DBP) under LOI No. 311; that the defendant PNB
organized the defendant NASUDECO in September, 1975, to take
ownership and possession of the assets and ultimately to nationalize
and consolidate its interest in other PNB controlled sugar mills; that
prior to October 29, 1971, the defendant PASUMIL engaged the
services of plaintiff for electrical rewinding and repair, most of which
were partially paid by the defendant PASUMIL, leaving several
unpaid accounts with the plaintiff; that finally, on October 29, 1971,
| 65
the plaintiff and the defendant PASUMIL entered into a contract for
the plaintiff to perform the following, to wit
(a) Construction of one (1) power house building;
(b) Construction of three (3) reinforced concrete foundation for three
(3) units 350 KW diesel engine generating set[s];
(c) Construction of three (3) reinforced concrete foundation for the
5,000 KW and 1,250 KW turbo generator sets;
(d) Complete overhauling and reconditioning tests sum for three (3)
350 KW diesel engine generating set[s];
(e) Installation of turbine and diesel generating sets including
transformer, switchboard, electrical wirings and pipe provided those
stated units are completely supplied with their accessories;
(f) Relocating of 2,400 V transmission line, demolition of all existing
concrete foundation and drainage canals, excavation, and earth
fillings all for the total amount of P543,500.00 as evidenced by a
contract, [a] xerox copy of which is hereto attached as Annex A and
made an integral part of this complaint;
that aside from the work contract mentioned-above, the defendant
PASUMIL required the plaintiff to perform extra work, and provide
electrical equipment and spare parts, such as:
(a) Supply of electrical devices;
(b) Extra mechanical works;
(c) Extra fabrication works;
(d) Supply of materials and consumable items;
(e) Electrical shop repair;
(f) Supply of parts and related works for turbine generator;
(g) Supply of electrical equipment for machinery;
(h) Supply of diesel engine parts and other related works including
fabrication of parts.
that out of the total obligation of P777,263.80, the defendant
PASUMIL had paid only P250,000.00, leaving an unpaid balance, as
of June 27, 1973, amounting to P527,263.80, as shown in the
Certification of the chief accountant of the PNB, a machine copy of
which is appended as Annex C of the complaint; that out of said
unpaid balance of P527,263.80, the defendant PASUMIL made a
partial payment to the plaintiff of P14,000.00, in broken amounts,
covering the period from January 5, 1974 up to May 23, 1974,
leaving an unpaid balance of P513,263.80; that the defendant
PASUMIL and the defendant PNB, and now the defendant
NASUDECO, failed and refused to pay the plaintiff their just, valid
and demandable obligation; that the President of the NASUDECO is
also the Vice-President of the PNB, and this official holds office at the
10th Floor of the PNB, Escolta, Manila, and plaintiff besought this
official to pay the outstanding obligation of the defendant PASUMIL,
inasmuch as the defendant PNB and NASUDECO now owned and
possessed the assets of the defendant PASUMIL, and these
defendants all benefited from the works, and the electrical, as well as
the engineering and repairs, performed by the plaintiff; that because
of the failure and refusal of the defendants to pay their just, valid, and

demandable obligations, plaintiff suffered actual damages in the total
amount of P513,263.80; and that in order to recover these sums, the
plaintiff was compelled to engage the professional services of
counsel, to whom the plaintiff agreed to pay a sum equivalent to 25%
of the amount of the obligation due by way of attorneys
fees. Accordingly, the plaintiff prayed that judgment be rendered
against the defendants PNB, NASUDECO, and PASUMIL, jointly and
severally to wit:
(1) Sentencing the defendants to pay the plaintiffs the sum
of P513,263.80, with annual interest of 14% from the time the
obligation falls due and demandable;
(2) Condemning the defendants to pay attorneys fees amounting to
25% of the amount claim;
(3) Ordering the defendants to pay the costs of the suit.
The defendants PNB and NASUDECO filed a joint motion to dismiss
the complaint chiefly on the ground that the complaint failed to state
sufficient allegations to establish a cause of action against both
defendants, inasmuch as there is lack or want of privity of contract
between the plaintiff and the two defendants, the PNB and
NASUDECO, said defendants citing Article 1311 of the New Civil
Code, and the case law ruling in Salonga v. Warner Barnes & Co., 88
Phil. 125; and Manila Port Service, et al. v. Court of Appeals, et al.,
20 SCRA 1214.
The motion to dismiss was by the court a quo denied in its Order of
November 27, 1980; in the same order, that court directed the
defendants to file their answer to the complaint within 15 days.
In their answer, the defendant NASUDECO reiterated the grounds of
its motion to dismiss, to wit:
That the complaint does not state a sufficient cause of action against
the defendant NASUDECO because: (a) NASUDECO is not x x x
privy to the various electrical construction jobs being sued upon by
the plaintiff under the present complaint; (b) the taking over by
NASUDECO of the assets of defendant PASUMIL was solely for the
purpose of reconditioning the sugar central of defendant PASUMIL
pursuant to martial law powers of the President under the
Constitution; (c) nothing in the LOI No. 189-A (as well as in LOI No.
311) authorized or commanded the PNB or its subsidiary corporation,
the NASUDECO, to assume the corporate obligations of PASUMIL
as that being involved in the present case; and, (d) all that was
mentioned by the said letter of instruction insofar as the PASUMIL
liabilities [were] concerned [was] for the PNB, or its subsidiary
corporation the NASUDECO, to make a study of, and submit [a]
recommendation on the problems concerning the same.
By way of counterclaim, the NASUDECO averred that by reason of
the filing by the plaintiff of the present suit, which it [labeled] as
unfounded or baseless, the defendant NASUDECO was constrained
to litigate and incur litigation expenses in the amount of P50,000.00,
which plaintiff should be sentenced to pay. Accordingly, NASUDECO
prayed that the complaint be dismissed and on its counterclaim, that
the plaintiff be condemned to pay P50,000.00 in concept of attorneys
fees as well as exemplary damages.
In its answer, the defendant PNB likewise reiterated the grounds of
its motion to dismiss, namely: (1) the complaint states no cause of
action against the defendant PNB; (2) that PNB is not a party to the
| 66
contract alleged in par. 6 of the complaint and that the alleged
services rendered by the plaintiff to the defendant PASUMIL upon
which plaintiffs suit is erected, was rendered long before PNB took
possession of the assets of the defendant PASUMIL under LOI No.
189-A; (3) that the PNB take-over of the assets of the defendant
PASUMIL under LOI 189-A was solely for the purpose of
reconditioning the sugar central so that PASUMIL may resume its
operations in time for the 1974-75 milling season, and that nothing in
the said LOI No. 189-A, as well as in LOI No. 311, authorized or
directed PNB to assume the corporate obligation/s of PASUMIL, let
alone that for which the present action is brought; (4) that PNBs
management and operation under LOI No. 311 did not refer to any
asset of PASUMIL which the PNB had to acquire and thereafter
[manage], but only to those which were foreclosed by the DBP and
were in turn redeemed by the PNB from the DBP; (5) that
conformably to LOI No. 311, on August 15, 1975, the PNB and the
Development Bank of the Philippines (DBP) entered into a
Redemption Agreement whereby DBP sold, transferred and
conveyed in favor of the PNB, by way of redemption, all its (DBP)
rights and interest in and over the foreclosed real and/or personal
properties of PASUMIL, as shown in Annex C which is made an
integral part of the answer; (6) that again, conformably with LOI No.
311, PNB pursuant to a Deed of Assignment dated October 21, 1975,
conveyed, transferred, and assigned for valuable consideration, in
favor of NASUDECO, a distinct and independent corporation, all its
(PNB) rights and interest in and under the above Redemption
Agreement. This is shown in Annex D which is also made an integral
part of the answer; [7] that as a consequence of the said Deed of
Assignment, PNB on October 21, 1975 ceased to managed and
operate the above-mentioned assets of PASUMIL, which function
was now actually transferred to NASUDECO. In other words, so
asserted PNB, the complaint as to PNB, had become moot and
academic because of the execution of the said Deed of Assignment;
[8] that moreover, LOI No. 311 did not authorize or direct PNB to
assume the corporate obligations of PASUMIL, including the alleged
obligation upon which this present suit was brought; and [9] that, at
most, what was granted to PNB in this respect was the authority to
make a study of and submit recommendation on the problems
concerning the claims of PASUMIL creditors, under sub-par. 5 LOI
No. 311.
In its counterclaim, the PNB averred that it was unnecessarily
constrained to litigate and to incur expenses in this case, hence it is
entitled to claim attorneys fees in the amount of at
least P50,000.00.Accordingly, PNB prayed that the complaint be
dismissed; and that on its counterclaim, that the plaintiff be
sentenced to pay defendant PNB the sum of P50,000.00 as attorneys
fees, aside from exemplary damages in such amount that the court
may seem just and equitable in the premises.
Summons by publication was made via the Philippines Daily Express,
a newspaper with editorial office at 371 Bonifacio Drive, Port Area,
Manila, against the defendant PASUMIL, which was thereafter
declared in default as shown in the August 7, 1981 Order issued by
the Trial Court.
After due proceedings, the Trial Court rendered judgment, the
decretal portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and
against the defendant Corporation, Philippine National Bank (PNB)

NATIONAL SUGAR DEVELOPMENT CORPORATION
(NASUDECO) and PAMPANGA SUGAR MILLS (PASUMIL),
ordering the latter to pay jointly and severally the former the
following:
1. The sum of P513,623.80 plus interest thereon at the rate of 14%
per annum as claimed from September 25, 1980 until fully paid;
2. The sum of P102,724.76 as attorneys fees; and,
3. Costs.
SO ORDERED.
Manila, Philippines, September 4, 1986.
'(SGD) ERNESTO S. TENGCO
Judge[3]
Ruling of the Court of Appeals
Affirming the trial court, the CA held that it was offensive to the basic
tenets of justice and equity for a corporation to take over and operate
the business of another corporation, while disavowing or repudiating
any responsibility, obligation or liability arising therefrom.[4]
Hence, this Petition.[5]
Issues
In their Memorandum, petitioners raise the following errors for the
Courts consideration:
I
The Court of Appeals gravely erred in law in holding the herein
petitioners liable for the unpaid corporate debts of PASUMIL, a
corporation whose corporate existence has not been legally
extinguished or terminated, simply because of petitioners[] take-over
of the management and operation of PASUMIL pursuant to the
mandates of LOI No. 189-A, as amended by LOI No. 311.
II
The Court of Appeals gravely erred in law in not applying [to] the
case at bench the ruling enunciated in Edward J. Nell Co. v. Pacific
Farms, 15 SCRA 415.[6]
Succinctly put, the aforesaid errors boil down to the principal issue of
whether PNB is liable for the unpaid debts of PASUMIL to
respondent.
This Courts Ruling
The Petition is meritorious.
Main Issue:
Liability for Corporate Debts
As a general rule, questions of fact may not be raised in a petition for
review under Rule 45 of the Rules of Court.[7] To this rule, however,
there are some exceptions enumerated in Fuentes v. Court of
Appeals.[8] After a careful scrutiny of the records and the pleadings
submitted by the parties, we find that the lower courts misappreciated
| 67
the evidence presented.[9]Overlooked by the CA were certain relevant
facts that would justify a conclusion different from that reached in the
assailed Decision.[10]
Petitioners posit that they should not be held liable for the corporate
debts of PASUMIL, because their takeover of the latters foreclosed
assets did not make them assignees. On the other hand, respondent
asserts that petitioners and PASUMIL should be treated as one entity
and, as such, jointly and severally held liable for PASUMILs unpaid
obligation.
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 transaction
is fraudulently entered into in order to escape liability for those
debts.[11]
Piercing the Corporate
Veil Not Warranted
A corporation is an artificial being created by operation of law. It
possesses the right of succession and such powers, attributes, and
properties expressly authorized by law or incident to its
existence.[12] It has a personality separate and distinct from the
persons composing it, as well as from any other legal entity to which
it may be related.[13] This is basic.
Equally well-settled is the principle that the corporate mask may be
removed or the corporate veil pierced when the corporation is just an
alter ego of a person or of another corporation.[14] For reasons of
public policy and in the interest of justice, the corporate veil will
justifiably be impaled[15] only when it becomes a shield for fraud,
illegality or inequity committed against third persons.[16]
Hence, any application of the doctrine of piercing the corporate veil
should be done with caution.[17] A court should be mindful of the
milieu where it is to be applied.[18] It must be certain that the
corporate fiction was misused to such an extent that injustice, fraud,
or crime was committed against another, in disregard of its
rights.[19] The wrongdoing must be clearly and convincingly
established; it cannot be presumed.[20] Otherwise, an injustice that
was never unintended may result from an erroneous application.[21]
This Court has pierced the corporate veil to ward off a judgment
credit,[22] to avoid inclusion of corporate assets as part of the estate
of the decedent,[23] to escape liability arising from a debt,[24] or to
perpetuate fraud and/or confuse legitimate issues[25] either to
promote or to shield unfair objectives[26] or to cover up an otherwise
blatant violation of the prohibition against forum-shopping.[27] Only in
these and similar instances may the veil be pierced and
disregarded.[28]
The question of whether a corporation is a mere alter ego is one of
fact.[29] Piercing the veil of corporate fiction may be allowed only if the
following elements concur: (1) control -- not mere stock control, but
complete domination -- not only of finances, but of policy and
business practice in respect to the transaction attacked, must have

been such 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 a fraud or a wrong
to perpetuate the violation of a statutory or other positive legal duty,
or a dishonest and an unjust act in contravention of plaintiffs legal
right; and (3) the said control and breach of duty must have
proximately caused the injury or unjust loss complained of. [30]
We believe that the absence of the foregoing elements in the present
case precludes the piercing of the corporate veil. First, other than the
fact that petitioners acquired the assets of PASUMIL, there is no
showing that their control over it warrants the disregard of corporate
personalities.[31] Second, there is no evidence that their juridical
personality was used to commit a fraud or to do a wrong; or that the
separate corporate entity was farcically used as a mere alter ego,
business conduit or instrumentality of another entity or
person.[32] Third, respondent was not defrauded or injured when
petitioners acquired the assets of PASUMIL.[33]
Being the party that asked for the piercing of the corporate veil,
respondent had the burden of presenting clear and convincing
evidence to justify the setting aside of the separate corporate
personality rule.[34] However, it utterly failed to discharge this
burden;[35] it failed to establish by competent evidence that petitioners
separate corporate veil had been used to conceal fraud, illegality or
inequity.[36]
While we agree with respondents claim that the assets of the
National Sugar Development Corporation (NASUDECO) can be
easily traced to PASUMIL,[37] we are not convinced that the transfer
of the latters assets to petitioners was fraudulently entered into in
order to escape liability for its debt to respondent.[38]
A careful review of the records reveals that DBP foreclosed the
mortgage executed by PASUMIL and acquired the assets as the
highest bidder at the public auction conducted.[39] The bank was
justified in foreclosing the mortgage, because the PASUMIL account
had incurred arrearages of more than 20 percent of the total
outstanding obligation.[40] Thus, DBP had not only a right, but also a
duty under the law to foreclose the subject properties.[41]
Pursuant to LOI No. 189-A[42] as amended by LOI No. 311,[43] PNB
acquired PASUMILs assets that DBP had foreclosed and purchased
in the normal course. Petitioner bank was likewise tasked to manage
temporarily the operation of such assets either by itself or through a
subsidiary corporation.[44]
PNB, as the second mortgagee, redeemed from DBP the foreclosed
PASUMIL assets pursuant to Section 6 of Act No. 3135. [45] These
assets were later conveyed to PNB for a consideration, the terms of
which were embodied in the Redemption Agreement.[46] PNB, as
successor-in-interest, stepped into the shoes of DBP as PASUMILs
creditor.[47] By way of a Deed of Assignment,[48] PNB then transferred
to NASUDECO all its rights under the Redemption Agreement.
In Development Bank of the Philippines v. Court of Appeals,[49] we
had the occasion to resolve a similar issue. We ruled that PNB, DBP
and their transferees were not liable for Marinduque Minings unpaid
obligations to Remington Industrial Sales Corporation (Remington)
after the two banks had foreclosed the assets of Marinduque
Mining. We likewise held that Remington failed to discharge its
| 68
burden of proving bad faith on the part of Marinduque Mining to
justify the piercing of the corporate veil.
In the instant case, the CA erred in affirming the trial courts lifting of
the corporate mask.[50] The CA did not point to any fact evidencing
bad faith on the part of PNB and its transferee.[51]The corporate
fiction was not used to defeat public convenience, justify a wrong,
protect fraud or defend crime.[52] None of the foregoing exceptions
was shown to exist in the present case.[53] On the contrary, the lifting
of the corporate veil would result in manifest injustice. This we cannot
allow.
No Merger or Consolidation
Respondent further claims that petitioners should be held liable for
the unpaid obligations of PASUMIL by virtue of LOI Nos. 189-A and
311, which expressly authorized PASUMIL and PNB to merge or
consolidate. On the other hand, petitioners contend that their
takeover of the operations of PASUMIL did not involve any corporate
merger or consolidation, because the latter had never lost its
separate identity as a corporation.
A consolidation is the union of two or more existing entities to form a
new entity called the consolidated corporation. A merger, on the
other hand, is a union whereby one or more existing corporations are
absorbed by another corporation that survives and continues the
combined business.[54]
The merger, however, does not become effective upon the mere
agreement of the constituent corporations.[55] Since a merger or
consolidation involves fundamental changes in the corporation, as
well as in the rights of stockholders and creditors, there must be an
express provision of law authorizing them.[56] For a valid merger or
consolidation, the approval by the Securities and Exchange
Commission (SEC) of the articles of merger or consolidation is
required.[57] These articles must likewise be duly approved by a
majority of the respective stockholders of the constituent
corporations.[58]
In the case at bar, we hold that there is no merger or consolidation
with respect to PASUMIL and PNB. The procedure prescribed under
Title IX of the Corporation Code[59] was not followed.
In fact, PASUMILs corporate existence, as correctly found by the CA,
had not been legally extinguished or terminated.[60] Further, prior to
PNBs acquisition of the foreclosed assets, PASUMIL had previously
made partial payments to respondent for the formers obligation in the
amount of P777,263.80. As of June 27, 1973, PASUMIL had
paid P250,000 to respondent and, from January 5, 1974 to May 23,
1974, another P14,000.
Neither did petitioner expressly or impliedly agree to assume the debt
of PASUMIL to respondent.[61] LOI No. 11 explicitly provides that
PNB shall study and submit recommendations on the claims of
PASUMILs creditors.[62] Clearly, the corporate separateness between
PASUMIL and PNB remains, despite respondents insistence to the
contrary.[63]
WHEREFORE, the Petition is hereby GRANTED and the assailed
Decision SET ASIDE. No pronouncement as to costs.
SO ORDERED.

[G.R. No. 102223. August 22, 1996]
COMMUNICATION MATERIALS AND DESIGN, INC., ASPAC
MULTI-TRADE, INC., (formerly ASPAC-ITEC PHILIPPINES, INC.)
and FRANCISCO S.AGUIRRE, petitioners, vs. THE COURT OF
APPEALS, ITEC INTERNATIONAL, INC., and ITEC,
INC., respondents.
DECISION
TORRES, JR., J.:
Business Corporations, according to Lord Coke, have no souls. They
do business peddling goods, wares or even services across national
boundaries in soulless forms in quest for profits albeit at times,
unwelcomed in these strange lands venturing into uncertain markets
and, the risk of dealing with wily competitors.
This is one of the issues in the case at bar.
Contested in this petition for review on Certiorari is the Decision of
the Court of Appeals on June 7, 1991, sustaining the RTC Order
dated February 22, 1991, denying the petitioners Motion to Dismiss,
and directing the issuance of a writ of preliminary injunction, and its
companion Resolution of October 9, 1991, denying the petitioners
Motion for Reconsideration.
Petitioners COMMUNICATION MATERIALS AND DESIGN, INC.,
(CMDI, for brevity) and ASPAC MULTI-TRADE INC., (ASPAC, for
brevity) are both domestic corporations, while petitioner Francisco S.
Aguirre is their President and majority stockholder. Private
Respondents ITEC, INC. and/or ITEC, INTERNATIONAL, INC.
(ITEC, for brevity) are corporations duly organized and existing under
the laws of the State of Alabama, United States of America. There is
no dispute that ITEC is a foreign corporation not licensed to do
business in the Philippines.
On August 14, 1987, ITEC entered into a contract with petitioner
ASPAC referred to as Representative Agreement.[1] Pursuant to the
contract, ITEC engaged ASPAC as its exclusive representative in the
Philippines for the sale of ITECs products, in consideration of which,
ASPAC was paid a stipulated commission. The agreement was
signed by G.A. Clark and Francisco S. Aguirre, presidents of ITEC
and ASPAC respectively, for and in behalf of their companies.[2] The
said agreement was initially for a term of twenty-four months. After
the lapse of the agreed period, the agreement was renewed for
another twenty-four months.
Through a License Agreement[3] entered into by the same parties on
November 10, 1988, ASPAC was able to incorporate and use the
name ITEC in its own name. Thus, ASPAC Multi-Trade, Inc. became
legally and publicly known as ASPAC-ITEC (Philippines).
By virtue of said contracts, ASPAC sold electronic products, exported
by ITEC, to their sole customer, the Philippine Long Distance
Telephone Company, (PLDT, for brevity).
To facilitate their transactions, ASPAC, dealing under its new
appellation, and PLDT executed a document entitled PLDT-
ASPAC/ITEC PROTOCOL[4] which defined the project details for the
supply of ITECs Interface Equipment in connection with the Fifth
Expansion Program of PLDT.
| 69
One year into the second term of the parties Representative
Agreement, ITEC decided to terminate the same, because petitioner
ASPAC allegedly violated its contractual commitment as stipulated in
their agreements.[5]
ITEC charges the petitioners and another Philippine Corporation,
DIGITAL BASE COMMUNICATIONS, INC. (DIGITAL, for brevity), the
President of which is likewise petitioner Aguirre, of using knowledge
and information of ITECs products specifications to develop their own
line of equipment and product support, which are similar, if not
identical to ITECs own, and offering them to ITECs former customer.
On January 31, 1991, the complaint[6] in Civil Case No. 91-294, was
filed with the Regional Trial Court of Makati, Branch 134 by ITEC,
INC. Plaintiff sought to enjoin, first, preliminarily and then, after trial,
permanently; (1) defendants DIGITAL, CMDI, and Francisco Aguirre
and their agents and business associates, to cease and desist from
selling or attempting to sell to PLDT and to any other party, products
which have been copied or manufactured in like manner, similar or
identical to the products, wares and equipment of plaintiff, and (2)
defendant ASPAC, to cease and desist from using in its corporate
name, letter heads, envelopes, sign boards and business dealings,
plaintiffs trademark, internationally known as ITEC; and the recovery
from defendants in solidum, damages of at least P500,000.00,
attorneys fees and litigation expenses.
In due time, defendants filed a motion to dismiss[7] the complaint on
the following grounds: (1) That plaintiff has no legal capacity to sue
as it is a foreign corporation doing business in the Philippines without
the required BOI authority and SEC license, and (2) that plaintiff is
simply engaged in forum shopping which justifies the application
against it of the principle of forum non conveniens.
On February 8, 1991, the complaint was amended by virtue of which
ITEC INTERNATIONAL, INC. was substituted as plaintiff instead of
ITEC, INC.[8]
In their Supplemental Motion to Dismiss,[9] defendants took note of
the amendment of the complaint and asked the court to consider in
toto their motion to dismiss and their supplemental motion as their
answer to the amended complaint.
After conducting hearings on the prayer for preliminary injunction, the
court a quo on February 22, 1991, issued its Order:[10] (1) denying the
motion to dismiss for being devoid of legal merit with a rejection of
both grounds relied upon by the defendants in their motion to
dismiss, and (2) directing the issuance of a writ of preliminary
injunction on the same day.
From the foregoing order, petitioners elevated the case to the
respondent Court of Appeals on a Petition for Certiorari and
Prohibition[11] under Rule 65 of the Revised Rules of Court, assailing
and seeking the nullification and the setting aside of the Order and
the Writ of Preliminary Injunction issued by the Regional Trial Court.
The respondent appellate court stated, thus:
We find no reason whether in law or from the facts of record, to
disagree with the (lower courts) ruling. We therefore are unable to
find in respondent Judges issuance of said writ the grave abuse of
discretion ascribed thereto by the petitioners.

In fine, We find that the petition prima facie does not show
that Certiorari lies in the present case and therefore, the petition does
not deserve to be given due course.
WHEREFORE, the present petition should be, as it is hereby, denied
due course and accordingly, is hereby dismissed. Costs against the
petitioners.
SO ORDERED."[12]
Petitioners filed a motion for reconsideration[13] on June 7, 1991,
which was likewise denied by the respondent court.
WHEREFORE, the present motion for reconsideration should be, as
it is hereby, denied for lack of merit. For the same reason, the motion
to have the motion for reconsideration set for oral argument likewise
should be and is hereby denied.
SO ORDERED."[14]
Petitioners are now before us via Petition for Review
on Certiorari[15] under Rule 45 of the Revised Rules of Court.
It is the petitioners submission that private respondents are foreign
corporations actually doing business in the Philippines without the
requisite authority and license from the Board of Investments and the
Securities and Exchange Commission, and thus, disqualified from
instituting the present action in our courts. It is their contention that
the provisions of the Representative Agreement, petitioner ASPAC
executed with private respondent ITEC, are similarly highly restrictive
in nature as those found in the agreements which confronted the
Court in the case of Top-Weld Manufacturing, Inc. vs. ECED S.A. et
al.,[16] as to reduce petitioner ASPAC to a mere conduit or extension
of private respondents in the Philippines.
In that case, we ruled that respondent foreign corporations are doing
business in the Philippines because when the respondents entered
into the disputed contracts with the petitioner, they were carrying out
the purposes for which they were created, i.e., to manufacture and
market welding products and equipment. The terms and conditions of
the contracts as well as the respondents conduct indicate that they
established within our country a continuous business, and not merely
one of a temporary character. The respondents could be exempted
from the requirements of Republic Act 5455 if the petitioner is an
independent entity which buys and distributes products not only of
the petitioner, but also of other manufacturers or transacts business
in its name and for its account and not in the name or for the account
of the foreign principal. A reading of the agreements between the
petitioner and the respondents shows that they are highly restrictive
in nature, thus making the petitioner a mere conduit or extension of
the respondents.
It is alleged that certain provisions of the Representative Agreement
executed by the parties are similar to those found in the License
Agreement of the parties in the Top-Weld case which were
considered as highly restrictive by this Court. The provisions in point
are:
2.0 Terms and Conditions of Sales.
2.1 Sale of ITEC products shall be at the purchase price set by ITEC
from time to time. Unless otherwise expressly agreed to in writing by
ITEC the purchase price is net to ITEC and does not include any
| 70
transportation charges, import charges or taxes into or within the
Territory. All orders from customers are subject to formal acceptance
by ITEC at its Huntsville, Alabama U.S.A. facility.
xxx xxx xxx
3.0 Duties of Representative
3.1. REPRESENTATIVE SHALL:
3.1.1. Not represent or offer for sale within the Territory any product
which competes with an existing ITEC product or any product which
ITEC has under active development.
3.1.2. Actively solicit all potential customers within the Territory in a
systematic and businesslike manner.
3.1.3. Inform ITEC of all request for proposals, requests for bids,
invitations to bid and the like within the Territory.
3.1.4. Attain the Annual Sales Goal for the Territory established by
ITEC. The Sales Goals for the first 24 months is set forth on
Attachment two (2) hereto. The Sales Goal for additional twelve
month periods, if any, shall be sent to the Sales Agent by ITEC at the
beginning of each period. These Sales Goals shall be incorporated
into this Agreement and made a part hereof.
xxx xxx xxx
6.0. Representative as Independent Contractor
xxx xxx xxx
6.2. When acting under this Agreement REPRESENTATIVE is
authorized to solicit sales within the Territory on ITECs behalf but is
authorized to bind ITEC only in its capacity as Representative and no
other, and then only to specific customers and on terms and
conditions expressly authorized by ITEC in writing. [17]
Aside from the abovestated provisions, petitioners point out the
following matters of record, which allegedly witness to the
respondents' activities within the Philippines in pursuit of their
business dealings:
a. While petitioner ASPAC was the authorized exclusive
representative for three (3) years, it solicited from and closed several
sales for and on behalf of private respondents as to their products
only and no other, to PLDT, worth no less than US $15 Million (p. 20,
tsn, Feb. 18, 1991);
b. Contract No. 1 (Exhibit for Petitioners) which covered these sales
and identified by private respondents sole witness, Mr. Clarence
Long, is not in the name of petitioner ASPAC as such representative,
but in the name of private respondent ITEC, INC. (p. 20, tsn, Feb. 18,
1991);
c. The document denominated as PLDT-ASPAC/ITEC PROTOCOL
(Annex C of the original and amended complaints) which defined the
responsibilities of the parties thereto as to the supply, installation and
maintenance of the ITEC equipment sold under said Contract No. 1
is, as its very title indicates, in the names jointly of the petitioner
ASPAC and private respondents;
d. To evidence receipt of the purchase price of US $15 Million,
private respondent ITEC, Inc. issued in its letter head, a Confirmation

of payment dated November 13, 1989 and its Invoice dated
November 22, 1989 (Annexes 1 and 2 of the Motion to Dismiss and
marked as Exhibits 2 and 3 for the petitioners), both of which were
identified by private respondents sole witness, Mr. Clarence Long
(pp. 25-27, tsn, Feb. 18, 1991).[18]
Petitioners contend that the above acts or activities belie the
supposed independence of petitioner ASPAC from private
respondents. The unrebutted evidence on record below for the
petitioners likewise reveal the continuous character of doing business
in the Philippines by private respondents based on the standards laid
down by this Court in Wang Laboratories, Inc. vs. Hon. Rafael T.
Mendoza, et al.[19] and again in TOP-WELD. (supra) It thus appears
that as the respondent Court of Appeals and the trial courts failure to
give credence on the grounds relied upon in support of their Motion
to Dismiss that petitioners ascribe grave abuse of discretion
amounting to an excess of jurisdiction of said courts.
Petitioners likewise argue that since private respondents have no
capacity to bring suit here, the Philippines is not the most convenient
forum because the trial court is devoid of any power to enforce its
orders issued or decisions rendered in a case that could not have
been commenced to begin with, such that in insisting to assume and
exercise jurisdiction over the case below, the trial court had gravely
abused its discretion and even actually exceeded its jurisdiction.
As against petitioners insistence that private respondent is doing
business in the Philippines, the latter maintains that it is not.
We can discern from a reading of Section 1 (f) (1) and 1 (f) (2) of the
Rules and Regulations Implementing the Omnibus Investments Code
of 1987, the following:
(1) A foreign firm is deemed not engaged in business in the
Philippines if it transacts business through middlemen, acting in their
own names, such as indebtors, commercial bookers or commercial
merchants.
(2) A foreign corporation is deemed not doing business if its
representative domiciled in the Philippines has an independent status
in that it transacts business in its name and for its account.[20]
Private respondent argues that a scrutiny of its Representative
Agreement with the Petitioners will show that although ASPAC was
named as representative of ITEC., ASPAC actually acted in its own
name and for its own account. The following provisions are
particularly mentioned:
3.1.7.1. In the event that REPRESENTATIVE imports directly from
ITEC, REPRESENTATIVE will pay for its own account; all customs
duties and import fees imposed on any ITEC products; all import
expediting or handling charges and expenses imposed on ITEC
products; and any stamp tax fees imposed on ITEC.
xxx xxx xxx
4.1. As complete consideration and payment for acting as
representative under this Agreement, REPRESENTATIVE shall
receive a sales commission equivalent to a percentum of the FOB
value of all ITEC equipment sold to customers within the territory as a
direct result of REPRESENTATIVEs sales efforts. [21]
| 71
More importantly, private respondents charge ASPAC of admitting its
independence from ITEC by entering and ascribing to provision No. 6
of the Representative Agreement.
6.0. Representative as Independent Contractor
6.1. When performing any of its duties under this Agreement,
REPRESENTATIVE shall act as an independent contractor and not
as an employee, worker, laborer, partner, joint venturer of ITEC as
these terms are defined by the laws, regulations, decrees or the like
of any jurisdiction, including the jurisdiction of the United States, the
state of Alabama and the Territory.[22]
Although it admits that the Representative Agreement contains
provisions which both support and belie the independence of
ASPAC, private respondents echoes the respondent courts finding
that the lower court did not commit grave abuse of discretion nor
acted in excess of jurisdiction when it found that the ground relied
upon by the petitioners in their motion to dismiss does not appear to
be indubitable.[23]
The issues before us now are whether or not private respondent
ITEC is an unlicensed corporation doing business in the Philippines,
and if it is, whether or not this fact bars it from invoking the injunctive
authority of our courts.
Considering the above, it is necessary to state what is meant by
doing business in the Philippines. Section 133 of the Corporation
Code, provides that No foreign corporation, transacting business in
the Philippines without a license, or its successors or assigns, shall
be permitted to maintain or intervene in any action, suit or proceeding
in any court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine
Courts or administrative tribunals on any valid cause of action
recognized under Philippine laws.[24]
Generally, a foreign corporation has no legal existence within the
state in which it is foreign. This proceeds from the principle that
juridical existence of a corporation is confined within the territory of
the state under whose laws it was incorporated and organized, and it
has no legal status beyond such territory. Such foreign corporation
may be excluded by any other state from doing business within its
limits, or conditions may be imposed on the exercise of such
privileges.[25] Before a foreign corporation can transact business in
this country, it must first obtain a license to transact business in the
Philippines, and a certificate from the appropriate government
agency. If it transacts business in the Philippines without such a
license, it shall not be permitted to maintain or intervene in any
action, suit, or proceeding in any court or administrative agency of
the Philippines, but it may be sued on any valid cause of action
recognized under Philippine laws.[26]
In a long line of decisions, this Court has not altogether prohibited a
foreign corporation not licensed to do business in the Philippines
from suing or maintaining an action in Philippine Courts. What it
seeks to prevent is a foreign corporation doing business in the
Philippines without a license from gaining access to Philippine
Courts.[27]
The purpose of the law in requiring that foreign corporations doing
business in the Philippines be licensed to do so and that they appoint
an agent for service of process is to subject the foreign corporation

doing business in the Philippines to the jurisdiction of its courts. The
object is not to prevent the foreign corporation from performing single
acts, but to prevent it from acquiring a domicile for the purpose of
business without taking steps necessary to render it amenable to suit
in the local courts.[28] The implication of the law is that it was never
the purpose of the legislature to exclude a foreign corporation which
happens to obtain an isolated order for business from the Philippines,
and thus, in effect, to permit persons to avoid their contracts made
with such foreign corporations.[29]
There is no exact rule or governing principle as to what constitutes
doing or engaging or transacting business. Indeed, such case must
be judged in the light of its peculiar circumstances, upon its peculiar
facts and upon the language of the statute applicable. The true test,
however, seems to be whether the foreign corporation is continuing
the body or substance of the business or enterprise for which it was
organized.[30]
Article 44 of the Omnibus Investments Code of 1987 defines the
phrase to include:
soliciting orders, purchases, service contracts, opening offices,
whether called liaison offices or branches; appointing representatives
or distributors who are domiciled in the Philippines or who in any
calendar year stay in the Philippines for a period or periods totaling
one hundred eighty (180) days or more; participating in the
management, supervision or control of any domestic business firm,
entity or corporation in the Philippines, and any other act or acts that
imply a continuity or commercial dealings or arrangements and
contemplate to that extent the performance of acts or works, or the
exercise of some of the functions normally incident to, and in
progressive prosecution of, commercial gain or of the purpose and
object of the business organization.
Thus, a foreign corporation with a settling agent in the Philippines
which issued twelve marine policies covering different shipments to
the Philippines[31]and a foreign corporation which had been collecting
premiums on outstanding policies[32] were regarded as doing
business here.
The same rule was observed relating to a foreign corporation with an
exclusive distributing agent in the Philippines, and which has been
selling its products here since 1929,[33] and a foreign corporation
engaged in the business of manufacturing and selling computers
worldwide, and had installed at least 26 different products in several
corporations in the Philippines, and allowed its registered logo and
trademark to be used and made it known that there exists a
designated distributor in the Philippines.[34]
In Georg Grotjahn GMBH and Co. vs. Isnani,[35] it was held that the
uninterrupted performance by a foreign corporation of acts pursuant
to its primary purposes and functions as a regional area
headquarters for its home office, qualifies such corporation as one
doing business in the country.
These foregoing instances should be distinguished from a single or
isolated transaction or occasional, incidental, or casual transactions,
which do not come within the meaning of the law,[36] for in such case,
the foreign corporation is deemed not engaged in business in the
Philippines.
| 72
Where a single act or transaction, however, is not merely incidental
or casual but indicates the foreign corporations intention to do other
business in the Philippines, said single act or transaction constitutes
doing or engaging in or transacting business in the Philippines. [37]
In determining whether a corporation does business in the
Philippines or not, aside from their activities within the forum,
reference may be made to the contractual agreements entered into
by it with other entities in the country. Thus, in the Top-Weld case
(supra), the foreign corporations LICENSE AND TECHNICAL
AGREEMENT and DISTRIBUTOR AGREEMENT with their local
contacts were made the basis of their being regarded by this Tribunal
as corporations doing business in the country. Likewise, in Merill
Lynch Futures, Inc. vs. Court of Appeals,etc.[38] the FUTURES
CONTRACT entered into by the petitioner foreign corporation
weighed heavily in the courts ruling.
With the abovestated precedents in mind, we are persuaded to
conclude that private respondent had been engaged in or doing
business in the Philippines for some time now. This is the inevitable
result after a scrutiny of the different contracts and agreements
entered into by ITEC with its various business contacts in the
country, particularly ASPAC and Telephone Equipment Sales and
Services, Inc. (TESSI, for brevity). The latter is a local electronics firm
engaged by ITEC to be its local technical representative, and to
create a service center for ITEC products sold locally. Its
arrangements, with these entities indicate convincingly ITECs
purpose to bring about the situation among its customers and the
general public that they are dealing directly with ITEC, and that ITEC
is actively engaging in business in the country.
In its Master Service Agreement[39] with TESSI, private respondents
required its local technical representative to provide the employees of
the technical and service center with ITEC identification cards and
business cards, and to correspond only on ITEC, Inc.,
letterhead. TESSI personnel are instructed to answer the telephone
with ITEC Technical Assistance Center., such telephone being listed
in the telephone book under the heading of ITEC Technical
Assistance Center, and all calls being recorded and forwarded to
ITEC on a weekly basis.
What is more, TESSI was obliged to provide ITEC with a monthly
report detailing the failure and repair of ITEC products, and to
requisition monthly the materials and components needed to replace
stock consumed in the warranty repairs of the prior month.
A perusal of the agreements between petitioner ASPAC and the
respondents shows that there are provisions which are highly
restrictive in nature, such as to reduce petitioner ASPAC to a mere
extension or instrument of the private respondent.
The No Competing Product provision of the Representative
Agreement between ITEC and ASPAC provides: The Representative
shall not represent or offer for sale within the Territory any product
which competes with an existing ITEC product or any product which
ITEC has under active development. Likewise pertinent is the
following provision: When acting under this Agreement,
REPRESENTATIVE is authorized to solicit sales within the Territory
on ITECs behalf but is authorized to bind ITEC only in its capacity as
Representative and no other, and then only to specific customers and
on terms and conditions expressly authorized by ITEC in writing.

When ITEC entered into the disputed contracts with ASPAC and
TESSI, they were carrying out the purposes for which it was created,
i.e., to market electronics and communications products. The terms
and conditions of the contracts as well as ITECs conduct indicate that
they established within our country a continuous business, and not
merely one of a temporary character.[40]
Notwithstanding such finding that ITEC is doing business in the
country, petitioner is nonetheless estopped from raising this fact to
bar ITEC from instituting this injunction case against it.
A foreign corporation doing business in the Philippines may sue in
Philippine Courts although not authorized to do business here
against a Philippine citizen or entity who had contracted with and
benefited by said corporation.[41] To put it in another way, a party is
estopped to challenge the personality of a corporation after having
acknowledged the same by entering into a contract with it. And the
doctrine of estoppel to deny corporate existence applies to a foreign
as well as to domestic corporations.[42] One who has dealt with a
corporation of foreign origin as a corporate entity is estopped to deny
its corporate existence and capacity. The principle will be applied to
prevent a person contracting with a foreign corporation from later
taking advantage of its noncompliance with the statutes chiefly in
cases where such person has received the benefits of the contract.[43]
The rule is deeply rooted in the time-honored axiom of Commodum
ex injuria sua non habere debet - no person ought to derive any
advantage of his own wrong. This is as it should be for as mandated
by law, every person must in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due,
and observe honesty and good faith.[44]
Concededly, corporations act through agents like directors and
officers. Corporate dealings must be characterized by utmost good
faith and fairness. Corporations cannot just feign ignorance of the
legal rules as in most cases, they are manned by sophisticated
officers with tried management skills and legal experts with practiced
eye on legal problems. Each party to a corporate transaction is
expected to act with utmost candor and fairness and, thereby allow a
reasonable proportion between benefits and expected burdens. This
is a norm which should be observed where one or the other is a
foreign entity venturing in a global market.
As observed by this Court in TOP-WELD (supra), viz:
The parties are charged with knowledge of the existing law at the
time they enter into a contract and at the time it is to become
operative. (Twiehaus v. Rosner, 245 SW 2d 107; Hall v. Bucher, 227
SW 2d 98). Moreover, a person is presumed to be more
knowledgeable about his own state law than his alien or foreign
contemporary. In this case, the record shows that, at least, petitioner
had actual knowledge of the applicability of R.A. No. 5455 at the time
the contract was executed and at all times thereafter. This conclusion
is compelled by the fact that the same statute is now being
propounded by the petitioner to bolster its claim. We, therefore
sustain the appellate courts view that it was incumbent upon TOP-
WELD to know whether or not IRTI and ECED were properly
authorized to engage in business in the Philippines when they
entered into the licensing and distributorship agreements. The very
purpose of the law was circumvented and evaded when the petitioner
entered into said agreements despite the prohibition of R.A. No.
5455. The parties in this case being equally guilty of violating R.A.
| 73
No. 5455, they are in pari delicto, in which case it follows as a
consequence that petitioner is not entitled to the relief prayed for in
this case.
The doctrine of lack of capacity to sue based on the failure to acquire
a local license is based on considerations of sound public policy. The
license requirement was imposed to subject the foreign corporation
doing business in the Philippines to the jurisdiction of its courts. It
was never intended to favor domestic corporations who enter into
solitary transactions with unwary foreign firms and then repudiate
their obligations simply because the latter are not licensed to do
business in this country.[45]
In Antam Consolidated Inc. vs. Court of Appeals, et al.[46] we
expressed our chagrin over this commonly used scheme of defaulting
local companies which are being sued by unlicensed foreign
companies not engaged in business in the Philippines to invoke the
lack of capacity to sue of such foreign companies. Obviously, the
same ploy is resorted to by ASPAC to prevent the injunctive action
filed by ITEC to enjoin petitioner from using knowledge possibly
acquired in violation of fiduciary arrangements between the parties.
By entering into the Representative Agreement with ITEC, Petitioner
is charged with knowledge that ITEC was not licensed to engage in
business activities in the country, and is thus estopped from raising in
defense such incapacity of ITEC, having chosen to ignore or even
presumptively take advantage of the same.
In Top-Weld, we ruled that a foreign corporation may be exempted
from the license requirement in order to institute an action in our
courts if its representative in the country maintained an independent
status during the existence of the disputed contract. Petitioner is
deemed to have acceded to such independent character when it
entered into the Representative Agreement with ITEC, particularly,
provision 6.2 (supra).
Petitioners insistence on the dismissal of this action due to the
application, or non application, of the private international law rule of
forum non conveniens defies well-settled rules of fair play. According
to petitioner, the Philippine Court has no venue to apply its discretion
whether to give cognizance or not to the present action, because it
has not acquired jurisdiction over the person of the plaintiff in the
case, the latter allegedly having no personality to sue before
Philippine Courts. This argument is misplaced because the court has
already acquired jurisdiction over the plaintiff in the suit, by virtue of
his filing the original complaint. And as we have already observed,
petitioner are not at liberty to question plaintiffs standing to sue,
having already acceded to the same by virtue of its entry into the
Representative Agreement referred to earlier.
Thus, having acquired jurisdiction, it is now for the Philippine Court,
based on the facts of the case, whether to give due course to the suit
or dismiss it, on the principle of forum non conveniens.[47] Hence, the
Philippine Court may refuse to assume jurisdiction in spite of its
having acquired jurisdiction. Conversely, the court may assume
jurisdiction over the case if it chooses to do so; provided, that the
following requisites are met: 1) That the Philippine Court is one to
which the parties may conveniently resort to; 2) That the Philippine
Court is in a position to make an intelligent decision as to the law and
the facts; and, 3) That the Philippine Court has or is likely to have
power to enforce its decision.[48]
 | 74

The aforesaid requirements having been met, and in view of the

courts disposition to give due course to the questioned action, the
matter of the present forum not being the most convenient as a
ground for the suits dismissal, deserves scant consideration.
IN VIEW OF THE FOREGOING PREMISES, the instant Petition is
hereby DISMISSED. The decision of the Court of Appeals dated
June 7, 1991, upholding the RTC Order dated February 22, 1991,
denying the petitioners Motion to Dismiss, and ordering the issuance
of the Writ of Preliminary Injunction is hereby affirmed in toto.
SO ORDERED.

[G.R. No. 154618. April 14, 2004]
AGILENT TECHNOLOGIES SINGAPORE (PTE) LTD., petitioner,
vs. INTEGRATED SILICON TECHNOLOGY PHILIPPINES
CORPORATION, TEOH KIANG HONG, TEOH KIANG SENG,
ANTHONY CHOO, JOANNE KATE M. DELA CRUZ, JEAN KAY M.
DELA CRUZ and ROLANDO T. NACILLA, respondents.
DECISION
YNARES-SANTIAGO, J.:
This petition for review assails the Decision dated August 12, 2002 of
the Court of Appeals in CA-G.R. SP No. 66574, which dismissed Civil
Case No. 3123-2001-C and annulled and set aside the Order
dated September 4, 2001 issued by the Regional Trial Court
of Calamba, Laguna, Branch 92.
Petitioner Agilent Technologies Singapore (Pte.), Ltd. (Agilent) is a
foreign corporation, which, by its own admission, is not licensed to do
business in the Philippines.[1] Respondent Integrated Silicon
Technology Philippines Corporation (Integrated Silicon) is a private
domestic corporation, 100% foreign owned, which is engaged in the
business of manufacturing and assembling electronics
components.[2] Respondents Teoh Kiang
Hong, Teoh Kiang Seng and Anthony Choo, Malaysian nationals, are
current members of Integrated Silicons board of directors, while
Joanne Kate M. dela Cruz, Jean Kay M. dela Cruz, and Rolando
T. Nacilla are its former members.[3]
The juridical relation among the various parties in this case can be
traced to a 5-year Value Added Assembly Services Agreement
(VAASA), entered into on April 2, 1996 between Integrated Silicon
and the Hewlett-Packard Singapore (Pte.)
Ltd., Singapore Components Operation (HP-Singapore).[4] Under the
terms of the VAASA, Integrated Silicon was to locally manufacture
and assemble fiber optics for export to HP-Singapore. HP-Singapore,
for its part, was to consign raw materials to Integrated Silicon;
transport machinery to the plant of Integrated Silicon; and pay
Integrated Silicon the purchase price of the finished
products.[5] The VAASA had a five-year term, beginning on April 2,
1996, with a provision for annual renewal by mutual written
consent.[6] On September 19, 1999, with the consent of Integrated
Silicon,[7] HP-Singapore assigned all its rights and obligations in
the VAASA to Agilent.[8]
On May 25, 2001, Integrated Silicon filed a complaint for Specific
Performance and Damages against Agilent and its officers
Tan Bian Ee, Lim Chin Hong, Tey Boon Teck and Francis Khor,
docketed as Civil Case No. 3110-01-C. It alleged
that Agilent breached the parties oral agreement to extend
the VAASA. Integrated Silicon thus prayed that defendant be ordered
to execute a written extension of the VAASA for a period of five years
as earlier assured and promised; to comply with the
extended VAASA; and to pay actual, moral, exemplary damages and
attorneys fees.[9]
On June 1, 2001, summons and a copy of the complaint were served
on Atty. Ramon Quisumbing, who returned these processes on the
claim that he was not the registered agent of Agilent. Later, he
entered a special appearance to assail the courts jurisdiction over the
person of Agilent.
| 75
On July 2, 2001, Agilent filed a separate complaint against Integrated
Silicon, Teoh Kang Seng, Teoh Kiang Gong, Anthony Choo, Joanne
Kate M. dela Cruz, Jean Kay M. dela Cruz and Rolando
T. Nacilla,[10] for Specific Performance, Recovery of Possession, and
Sum of Money with Replevin, Preliminary Mandatory Injunction, and
Damages, before the Regional Trial Court, Calamba, Laguna, Branch
92, docketed as Civil Case No. 3123-2001-C. Agilent prayed that a
writ of replevin or, in the alternative, a writ of preliminary mandatory
injunction, be issued ordering defendants to immediately return and
deliver to plaintiff its equipment, machineries and the materials to be
used for fiber-optic components which were left in the plant of
Integrated Silicon. It further prayed that defendants be ordered to pay
actual and exemplary damages and attorneys fees.[11]
Respondents filed a Motion to Dismiss in Civil Case No. 3123-2001-
C,[12] on the grounds of lack of Agilents legal capacity to
sue;[13] litis pendentia;[14] forum shopping;[15] and failure to state a
cause of action.[16]
On September 4, 2001, the trial court denied the Motion to Dismiss
and granted petitioner Agilents application for a writ of replevin.[17]
Without filing a motion for reconsideration, respondents filed a
petition for certiorari with the Court of Appeals.[18]
In the meantime, upon motion filed by respondents, Judge Antonio
S. Pozas of Branch 92 voluntarily inhibited himself in Civil Case No.
3123-2001-C. The case was re-raffled and assigned to Branch 35,
the same branch where Civil Case No. 3110-2001-C is pending.
On August 12, 2002, the Court of Appeals granted respondents
petition for certiorari, set aside the assailed Order of the trial court
dated September 4, 2001, and ordered the dismissal of Civil Case
No. 3123-2001-C.
Hence, the instant petition raising the following errors:
I.
THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN
NOT DISMISSING RESPONDENTS PETITION FOR CERTIORARI
FOR RESPONDENTS FAILURE TO FILE A MOTION FOR
RECONSIDERATION BEFORE RESORTING TO THE REMEDY OF
CERTIORARI.
II.
THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN
ANNULLING AND SETTING ASIDE THE TRIAL COURTS ORDER
DATED 4 SEPTEMBER 2001 AND ORDERING THE DISMISSAL
OF CIVIL CASE NO. 3123-2001-C BELOW ON THE GROUND
OF LITIS PENDENTIA, ON ACCOUNT OF THE PENDENCY OF
CIVIL CASE NO. 3110-2001-C.
III.
THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN
ANNULLING AND SETTING ASIDE THE TRIAL COURTS ORDER
DATED 4 SEPTEMBER 2001 AND ORDERING THE DISMISSAL
OF CIVIL CASE NO. 3123-2001-C BELOW ON THE GROUND OF
FORUM SHOPPING, ON ACCOUNT OF THE PENDENCY OF CIVIL
CASE NO. 3110-2001-C.
IV.

THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN
ORDERING THE DISMISSAL OF CIVIL CASE NO. 323-2001-C
BELOW INSTEAD OF ORDERING IT CONSOLIDATED WITH CIVIL
CASE NO. 3110-2001-C.[19]
The two primary issues raised in this petition: (1) whether or not the
Court of Appeals committed reversible error in giving due course to
respondents petition, notwithstanding the failure to file a Motion for
Reconsideration of the September 4, 2001 Order; and (2) whether or
not the Court of Appeals committed reversible error in dismissing
Civil Case No. 3123-2001-C.
We find merit in the petition.
The Court of Appeals, citing the case
of Malayang Manggagawa sa ESSO v. ESSO Standard Eastern,
Inc.,[20] held that the lower court had no jurisdiction over Civil Case
No. 3123-2001-C because of the pendency of Civil Case No. 3110-
2001-C and, therefore, a motion for reconsideration was not
necessary before resort to a petition for certiorari. This was error.
Jurisdiction is fixed by law. Batas Pambansa Blg. 129 vests
jurisdiction over the subject matter of Civil Case No. 3123-2001-C in
the RTC.[21]
The Court of Appeals ruling that the assailed Order issued by the
RTC of Calamba, Branch 92, was a nullity for lack of jurisdiction due
to litis pendentia and forum shopping, has no legal
basis. The pendency of another action does not strip a court of the
jurisdiction granted by law.
The Court of Appeals further ruled that a Motion for Reconsideration
was not necessary in view of the urgent necessity in this case. We
are not convinced. In the case of Bache and Co. (Phils.), Inc. v.
Ruiz,[22] relied on by the Court of Appeals, it was held that time is of
the essence in view of the tax assessments sought to be enforced by
respondent officers of the Bureau of Internal Revenue against
petitioner corporation, on account of which immediate and more
direct action becomes necessary. Tax assessments in that case were
based on documents seized by virtue of an illegal search, and the
deprivation of the right to due process tainted the entire proceedings
with illegality. Hence, the urgent necessity of preventing the
enforcement of the tax assessments was patent. Respondents, on
the other hand, cite the case of Geronimo v. Commission on
Elections,[23] where the urgent necessity of resolving a disqualification
case for a position in local government warranted the expeditious
resort to certiorari. In the case at bar, there is no analogously urgent
circumstance which would necessitate the relaxation of the rule on a
Motion for Reconsideration.
Indeed, none of the exceptions for dispensing with a Motion for
Reconsideration is present here. None of the following cases cited by
respondents serves as adequate basis for their procedural lapse.
In Vigan Electric Light Co., Inc. v. Public Service Commission,[24] the
questioned order was null and void for failure of respondent tribunal
to comply with due process requirements;
in Matanguihan v. Tengco,[25] the questioned order was a patent
nullity for failure to acquire jurisdiction over the defendants, which
fact the records plainly disclosed; and in National Electrification
Administration v. Court of Appeals,[26] the questioned orders were
void for vagueness. No such patent nullity is evident in the Order
| 76
issued by the trial court in this case.Finally, while urgency may be a
ground for dispensing with a Motion for Reconsideration, in the case
of Vivo v. Cloribel,[27] cited by respondents, the slow progress of the
case would have rendered the issues moot had a motion for
reconsideration been availed of. We find no such urgent
circumstance in the case at bar.
Respondents, therefore, availed of a premature remedy when they
immediately raised the matter to the Court of Appeals on certiorari;
and the appellate court committed reversible error when it took
cognizance of respondents petition instead of dismissing the same
outright.
We come now to the substantive issues of the petition.
Litis pendentia is a Latin term which literally means a pending suit. It
is variously referred to in some decisions
as lis pendens and auter action pendant. While it is normally
connected with the control which the court has on a property involved
in a suit during the continuance proceedings, it is more interposed as
a ground for the dismissal of a civil action pending in court.
Litis pendentia as a ground for the dismissal of a civil action refers to
that situation wherein another action is pending between the same
parties for the same cause of action, such that the second action
becomes unnecessary and vexatious. For litis pendentia to be
invoked, the concurrence of the following requisites is necessary:
(a) identity of parties or at least such as represent the same interest
in both actions;
(b) identity of rights asserted and reliefs prayed for, the reliefs being
founded on the same facts; and
(c) the identity in the two cases should be such that the judgment that
may be rendered in one would, regardless of which party is
successful, amount to res judicata in the other.[28]
The Court of Appeals correctly appreciated the identity of parties in
Civil Cases No. 3123-2001-C and 3110-2001-C. Well-settled is the
rule that lis pendens requires only substantial, and not absolute,
identity of parties.[29] There is substantial identity of parties when
there is a community of interest between a party in the first case and
a party in the second case, even if the latter was not impleaded in the
first case.[30] The parties in these cases are vying over the interests of
the two opposing corporations; the individuals are only
incidentally impleaded, being the natural persons purportedly
accused of violating these corporations rights.
Likewise, the fact that the positions of the parties are reversed, i.e.,
the plaintiffs in the first case are the defendants in the second case or
vice versa, does not negate the identity of parties for purposes of
determining whether the case is dismissible on the ground
of litis pendentia.[31]
The identity of parties notwithstanding, litis pendentia does not obtain
in this case because of the absence of the second and third
requisites. The rights asserted in each of the cases involved are
separate and distinct; there are two subjects of controversy
presented for adjudication; and two causes of action are clearly
involved. The fact that respondents instituted a prior action for
Specific Performance and Damages is not a ground for defeating the
petitioners action for Specific Performance, Recovery of Possession,

and Sum of Money with Replevin, Preliminary Mandatory Injunction,
and Damages.
In Civil Case No. 3110-2001-C filed by respondents, the issue is
whether or not there was a breach of an oral promise to renew of
the VAASA. The issue in Civil Case No. 3123-2001-C, filed by
petitioner, is whether petitioner has the right to take possession of the
subject properties. Petitioners right of possession is founded on the
ownership of the subject goods, which ownership is not disputed and
is not contingent on the extension or non-extension of
the VAASA. Hence, the replevin suit can validly be tried even while
the prior suit is being litigated in the Regional Trial Court.
Possession of the subject properties is not an issue in Civil Case No.
3110-2001-C. The reliefs sought by respondent Integrated Silicon
therein are as follows: (1) execution of a written extension or renewal
of the VAASA; (2) compliance with the extended VAASA; and (3)
payment of overdue accounts, damages, and attorneys
fees. The reliefs sought by petitioner Agilentin Civil Case No. 3123-
2001-C, on the other hand, are as follows: (1) issuance of a Writ
of Replevin or Writ of Preliminary Mandatory Injunction; (2) recovery
of possession of the subject properties; (3) damages and attorneys
fees.
Concededly, some items or pieces of evidence may be admissible in
both actions. It cannot be said, however, that exactly the same
evidence will support the decisions in both, since the legally
significant and controlling facts in each case are entirely different.
Although the VAASA figures prominently in both suits, Civil Case No.
3110-2001-C is premised on a purported breach of an oral obligation
to extend the VAASA, and damages arising out of Agilents alleged
failure to comply with such purported extension. Civil Case No. 3123-
2001-C, on the other hand, is premised on a breach of
the VAASA itself, and damages arising to Agilent out of that
purported breach.
It necessarily follows that the third requisite for litis pendentia is also
absent. The following are the elements of res judicata:
(a) The former judgment must be final;
(b) The court which rendered judgment must have jurisdiction over
the parties and the subject matter;
(c) It must be a judgment on the merits; and
(d) There must be between the first and second actions identity of
parties, subject matter, and cause of action.[32]
In this case, any judgment rendered in one of the actions will not
amount to res judicata in the other action. There being different
causes of action, the decision in one case will not
constitute res judicata as to the other.
Of course, a decision in one case may, to a certain extent, affect the
other case. This, however, is not the test to determine the identity of
the causes of action. Whatever difficulties or inconvenience may be
entailed if both causes of action are pursued on separate remedies,
the proper solution is not the dismissal order of the Court of Appeals.
The possible consolidation of said cases, as well as stipulations and
appropriate modes of discovery, may well be considered by the court
below to subserve not only procedural expedience but, more
important, the ends of justice.[33]
| 77
We now proceed to the issue of forum shopping.
The test for determining whether a party violated the rule against
forum-shopping was laid down in the case of Buan v.
Lopez.[34] Forum shopping exists where the elements
of litispendentia are present, or where a final judgment in one case
will amount to res judicata in the final other. There being
no litis pendentia in this case, a judgment in the said case will not
amount to res judicata in Civil Case No. 3110-2001-C, and
respondents contention on forum shopping must likewise fail.
We are not unmindful of the afflictive consequences that may be
suffered by both petitioner and respondents if replevin is granted by
the trial court in Civil Case No. 3123-2001-C. If respondent Integrated
Silicon eventually wins Civil Case No. 3110-2001-C, and
the VAASAs terms are extended, petitioner corporation will have to
comply with its obligations thereunder, which would include the
consignment of properties similar to those it may recover by way
of replevin in Civil Case No. 3123-2001-C. However, petitioner will
also suffer an injustice if denied the remedy of replevin, resort to
which is not only allowed but encouraged by law.
Respondents argue that since Agilent is an unlicensed foreign
corporation doing business in the Philippines, it lacks the legal
capacity to file suit.[35] The assailed acts of petitioner Agilent,
purportedly in the nature of doing business in the Philippines, are the
following: (1) mere entering into the VAASA, which is a service
contract;[36] (2) appointment of a full-time representative in Integrated
Silicon, to oversee and supervise the production
of Agilents products;[37] (3) the appointment by Agilent of six full-time
staff members, who were permanently stationed at Integrated
Silicons facilities in order to inspect the finished goods
for Agilent;[38] and (4) Agilents participation in the management,
supervision and control of Integrated Silicon,[39] including instructing
Integrated Silicon to hire more employees to meet Agilents increasing
production needs,[40] regularly performing quality audit, evaluation
and supervision of Integrated Silicons employees,[41] regularly
performing inventory audit of raw materials to be used by Integrated
Silicon, which was also required to provide weekly inventory updates
to Agilent,[42] and providing and dictating Integrated Silicon on the
daily production schedule, volume and models of the products to
manufacture and ship for Agilent.[43]
A foreign corporation without a license is not ipso facto incapacitated
from bringing an action in Philippine courts. A license is necessary
only if a foreign corporation is transacting or doing business in the
country. The Corporation Code provides:
Sec. 133. Doing business without a license. No foreign corporation
transacting business in the Philippines without a license, or its
successors or assigns, shall be permitted to maintain or intervene in
any action, suit or proceeding in any court or administrative agency of
the Philippines; but such corporation may be sued or proceeded
against before Philippine courts or administrative tribunals on any
valid cause of action recognized under Philippine laws.
The aforementioned provision prevents an unlicensed foreign
corporation doing business in the Philippines from accessing our
courts.
In a number of cases, however, we have held that an unlicensed
foreign corporation doing business in the Philippines may bring suit in

Philippine courts against a Philippine citizen or entity who had
contracted with and benefited from said corporation.[44] Such a suit is
premised on the doctrine of estoppel. A party is estopped from
challenging the personality of a corporation after having
acknowledged the same by entering into a contract with it. This
doctrine of estoppel to deny corporate existence and capacity applies
to foreign as well as domestic corporations.[45] The application of this
principle prevents a person contracting with a foreign corporation
from later taking advantage of its noncompliance with the statutes
chiefly in cases where such person has received the benefits of the
contract.[46]
The principles regarding the right of a foreign corporation to bring suit
in Philippine courts may thus be condensed in four statements: (1) if
a foreign corporation does business in the Philippines without a
license, it cannot sue before the Philippine courts;[47] (2) if a foreign
corporation is not doing business in the Philippines, it needs no
license to sue before Philippine courts on an isolated transaction or
on a cause of action entirely independent of any business
transaction[48]; (3) if a foreign corporation does business in the
Philippines without a license, a Philippine citizen or entity which has
contracted with said corporation may be estopped from challenging
the foreign corporations corporate personality in a suit brought before
Philippine courts;[49] and (4) if a foreign corporation does business in
the Philippines with the required license, it can sue before Philippine
courts on any transaction.
The challenge to Agilents legal capacity to file suit hinges on whether
or not it is doing business in the Philippines. However, there is no
definitive rule on what constitutes doing, engaging in, or transacting
business in the Philippines, as this Court observed in the case
of Mentholatum v. Mangaliman.[50] The Corporation Code itself is
silent as to what acts constitute doing or transacting business in
the Philippines.
Jurisprudence has it, however, that the term implies a continuity of
commercial dealings and arrangements, and contemplates, to that
extent, the performance of acts or works or the exercise of some of
the functions normally incident to or in progressive prosecution of the
purpose and subject of its organization.[51]
In Mentholatum,[52] this Court discoursed on the two general tests to
determine whether or not a foreign corporation can be considered as
doing business in the Philippines. The first of these is
the substance test, thus:[53]
The true test [for doing business], however, seems to be whether the
foreign corporation is continuing the body of the business or
enterprise for which it was organized or whether it has substantially
retired from it and turned it over to another.
The second test is the continuity test, expressed thus:[54]
The term [doing business] implies a continuity of commercial dealings
and arrangements, and contemplates, to that extent, the performance
of acts or works or the exercise of some of the functions normally
incident to, and in the progressive prosecution of, the purpose and
object of its organization.
Although each case must be judged in light of its attendant
circumstances, jurisprudence has evolved several guiding principles
for the application of these tests. For instance, considering that it
| 78
transacted with its Philippine counterpart for seven years, engaging
in futures contracts, this Court concluded that the foreign corporation
in Merrill Lynch Futures, Inc. v. Court of Appeals and Spouses
Lara,[55] was doing business in the Philippines. In Commissioner of
Internal Revenue v. Japan Airlines (JAL),[56] the Court held that JAL
was doing business in the Philippines, i.e., its commercial dealings in
the country were continuous despite the fact that no JAL aircraft
landed in the country as it sold tickets in the Philippines through a
general sales agent, and opened a promotions office here as well.
In General Corp. of the Phils. v. Union Insurance Society of Canton
and Firemans Fund Insurance,[57] a foreign insurance corporation
was held to be doing business in the Philippines, as it appointed a
settling agent here, and issued 12 marine insurance policies. We
held that these transactions were not isolated or casual, but
manifested the continuity of the foreign corporations conduct and its
intent to establish a continuous business in the country. In Eriks PTE
Ltd. v. Court of Appeals and Enriquez,[58] the foreign corporation sold
its products to a Filipino buyer who ordered the goods 16 times within
an eight-month period. Accordingly, this Court ruled that the
corporation was doing business in the Philippines, as there was a
clear intention on its part to continue the body of its business here,
despite the relatively short span of time involved. Communication
Materials and Design, Inc., et al. v. Court of Appeals, ITEC, et
al.[59] and Top-Weld Manufacturing v. ECED, IRTI, et al.[60] both
involved the License and Technical Agreement and Distributor
Agreement of foreign corporations with their respective local
counterparts that were the primary bases for the Courts ruling that
the foreign corporations were doing business in the Philippines.[61] In
particular, the Court cited the highly restrictive nature of certain
provisions in the agreements involved, such that, as stated
in Communication Materials, the Philippine entity is reduced to a
mere extension or instrument of the foreign corporation. For example,
in Communication Materials, the Court deemed the No Competing
Product provision of the Representative Agreement therein
restrictive.[62]
The case law definition has evolved into a statutory definition, having
been adopted with some qualifications in various pieces of
legislation. The Foreign Investments Act of 1991 (the FIA; Republic
Act No. 7042, as amended), defines doing business as follows:
Sec. 3, par. (d). The phrase doing business shall include soliciting
orders, service contracts, opening offices, whether called liaison
offices or branches; appointing representatives or distributors
domiciled in the Philippines or who in any calendar year stay in the
country for a period or periods totaling one hundred eighty (180) days
or more; participating in the management, supervision or control of
any domestic business, firm, entity, or corporation in the Philippines;
and any other act or acts that imply a continuity of commercial
dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the
functions normally incident to, and in the progressive prosecution of,
commercial gain or of the purpose and object of the business
organization.
An analysis of the relevant case law, in conjunction with Section 1 of
the Implementing Rules and Regulations of the FIA (as amended by
Republic Act No. 8179), would demonstrate that the acts enumerated
in the VAASA do not constitute doing business in the Philippines.
 | 79

Section 1 of the Implementing Rules and Regulations of the FIA (as of Calamba, Laguna, Branch 92, in Civil Case No. 3123-2001-C, is
amended by Republic Act No. 8179) provides that the following REINSTATED. Agilents application for a Writ of Replevin is
shall not be deemed doing business: GRANTED.
(1) Mere investment as a shareholder by a foreign entity in domestic No pronouncement as to costs.
corporations duly registered to do business, and/or the exercise of
rights as such investor; SO ORDERED.

(2) Having a nominee director or officer to represent its interest in

such corporation;
(3) Appointing a representative or distributor domiciled in
the Philippines which transacts business in the representatives or
distributors own name and account;
(4) The publication of a general advertisement through any print or
broadcast media;
(5) Maintaining a stock of goods in the Philippines solely for the
purpose of having the same processed by another entity in
the Philippines;
(6) Consignment by a foreign entity of equipment with a local
company to be used in the processing of products for export;
(7) Collecting information in the Philippines; and
(8) Performing services auxiliary to an existing isolated contract of
sale which are not on a continuing basis, such as installing in the
Philippines machinery it has manufactured or exported to the
Philippines, servicing the same, training domestic workers to operate
it, and similar incidental services.
By and large, to constitute doing business, the activity to be
undertaken in the Philippines is one that is for profit-making.[63]
By the clear terms of the VAASA, Agilents activities in the Philippines
were confined to (1) maintaining a stock of goods in the Philippines
solely for the purpose of having the same processed by Integrated
Silicon; and (2) consignment of equipment with Integrated Silicon to
be used in the processing of products for export. As such, we hold
that, based on the evidence presented thus far, Agilent cannot be
deemed to be doing business in the Philippines. Respondents
contention that Agilent lacks the legal capacity to file suit is therefore
devoid of merit. As a foreign corporation not doing business in
the Philippines, it needed no license before it can sue before our
courts.
Finally, as to Agilents purported failure to state a cause of action
against the individual respondents, we likewise rule in favor of
petitioner. A Motion to Dismiss hypothetically admits all the
allegations in the Complaint, which plainly alleges that these
individual respondents had committed or permitted the commission of
acts prejudicial to Agilent. Whether or not these individuals had
divested themselves of their interests in Integrated Silicon, or are no
longer members of Integrated Silicons Board of Directors, is a matter
of defense best threshed out during trial.
WHEREFORE, PREMISES CONSIDERED, the petition is
GRANTED. The Decision of the Court of Appeals in CA-G.R. SP No.
66574 dated August 12, 2002, which dismissed Civil Case No. 3123-
2001-C, is REVERSED and SET ASIDE. The Order
dated September 4, 2001 issued by the Regional Trial Court

[G.R. No. 147724. June 8, 2004]
LORENZO SHIPPING CORP., petitioner, vs. CHUBB and SONS,
Inc., GEARBULK, Ltd. and PHILIPPINE TRANSMARINE
CARRIERS, INC., respondents.
DECISION
PUNO, J.:
On appeal is the Court of Appeals August 14, 2000 Decision[1] in CA-
G.R. CV No. 61334 and March 28, 2001 Resolution[2] affirming the
March 19, 1998 Decision[3] of the Regional Trial Court of Manila
which found petitioner liable to pay respondent Chubb and Sons, Inc.
attorney's fees and costs of suit.
Petitioner Lorenzo Shipping Corporation (Lorenzo Shipping, for
short), a domestic corporation engaged in coastwise shipping, was
the carrier of 581 bundles of black steel pipes, the subject shipment,
from Manila to Davao City. From Davao City, respondent Gearbulk,
Ltd., a foreign corporation licensed as a common carrier under the
laws of Norway and doing business in the Philippines through its
agent, respondent Philippine Transmarine Carriers, Inc.
(Transmarine Carriers, for short), a domestic corporation, carried the
goods on board its vessel M/V San Mateo Victory to the United
States, for the account of Sumitomo Corporation. The latter, the
consignee, is a foreign corporation organized under the laws of
the United States of America. It insured the shipment with respondent
Chubb and Sons, Inc., a foreign corporation organized and licensed
to engage in insurance business under the laws of the United States
of America.
The facts are as follows:
On November 21, 1987, Mayer Steel Pipe Corporation of Binondo,
Manila, loaded 581 bundles of ERW black steel pipes worth
US$137,912.84[4] on board the vessel M/V Lorcon IV, owned by
petitioner Lorenzo Shipping, for shipment to Davao City. Petitioner
Lorenzo Shipping issued a clean bill of lading designated as Bill of
Lading No. T-3[5] for the account of the consignee, Sumitomo
Corporation of San Francisco, California, USA, which in turn, insured
the goods with respondent Chubb and Sons, Inc.[6]
The M/V Lorcon IV arrived at
the Sasa Wharf in Davao City on December 2, 1987. Respondent
Transmarine Carriers received the subject shipment which was
discharged on December 4, 1987, evidenced by Delivery Cargo
Receipt No. 115090.[7] It discovered seawater in the hatch of M/V
Lorcon IV, and found the steel pipes submerged in it. The consignee
Sumitomo then hired the services of R.J. Del Pan Surveyors to
inspect the shipment prior to and subsequent to discharge. Del Pans
Survey Report[8] dated December 4, 1987 showed that the subject
shipment was no longer in good condition, as in fact, the pipes were
found with rust formation on top and/or at the sides. Moreover, the
surveyor noted that the cargo hold of the M/V Lorcon IV was flooded
with seawater, and the tank top was rusty, thinning, and with several
holes at different places. The rusty condition of the cargo was noted
on the mates receipts and the checker of M/V Lorcon IV signed
his conforme thereon.[9]
After the survey, respondent Gearbulk loaded the shipment on board
its vessel M/V San Mateo Victory, for carriage to the United States. It
issued Bills of Lading Nos. DAV/OAK 1 to 7,[10] covering 364 bundles
| 80
of steel pipes to be discharged at Oakland, U.S.A., and Bills of
Lading Nos. DAV/SEA 1 to 6,[11] covering 217 bundles of steel pipes
to be discharged at Vancouver,Washington, U.S.A. All bills of lading
were marked ALL UNITS HEAVILY RUSTED.
While the cargo was in transit from Davao City to the U.S.A.,
consignee Sumitomo sent a letter[12] of intent dated December 7,
1987, to petitioner Lorenzo Shipping, which the latter received
on December 9, 1987. Sumitomo informed petitioner Lorenzo
Shipping that it will be filing a claim based on the damaged cargo
once such damage had been ascertained. The letter reads:
Please be advised that the merchandise herein below noted has
been landed in bad order ex-Manila voyage No. 87-19 under B/L No.
T-3 which arrived at the port of Davao City on December 2, 1987.
The extent of the loss and/or damage has not yet been determined
but apparently all bundles are corroded. We reserve the right to claim
as soon as the amount of claim is determined and the necessary
supporting documents are available.
Please find herewith a copy of the survey report which we had
arranged for after unloading of our cargo from your vessel in Davao.
We trust that you shall make everything in order.
On January 17, 1988, M/V San Mateo Victory arrived
at Oakland, California, U.S.A., where it unloaded 364 bundles of the
subject steel pipes. It then sailed
to Vancouver, Washingtonon January 23, 1988 where it unloaded the
remaining 217 bundles. Toplis and Harding, Inc. of San
Franciso, California, surveyed the steel pipes, and also discovered
the latter heavily rusted. When the steel pipes were tested with a
silver nitrate solution, Toplis and Harding found that they had come in
contact with salt water. The survey report,[13] dated January 28,
1988states:
xxx
We entered the hold for a close examination of the pipe, which
revealed moderate to heavy amounts of patchy and streaked dark
red/orange rust on all lifts which were visible. Samples of the
shipment were tested with a solution of silver nitrate revealing both
positive and occasional negative chloride reactions, indicating pipe
had come in contact with salt water. In addition, all tension applied
metal straps were very heavily rusted, and also exhibited chloride
reactions on testing with silver nitrate.
xxx
It should be noted that subject bills of lading bore the following
remarks as to conditions of goods: ALL UNITS HEAVILY
RUSTED. Attached herein is a copy of a survey report issued by Del
Pan Surveyors of Davao City, Philippines dated, December 4,
1987 at Davao City, Philippines, which describes conditions of the
cargo as sighted aboard the vessel LORCON IV, prior to and
subsequent to discharge at Davao City. Evidently, the
aforementioned rust damages were apparently sustained while the
shipment was in the custody of the vessel LORCON IV, prior to being
laden on board the vessel SAN MATEO VICTORY in Davao.
Due to its heavily rusted condition, the consignee Sumitomo rejected
the damaged steel pipes and declared them unfit for the purpose

they were intended.[14] It then filed a marine insurance claim with
respondent Chubb and Sons, Inc. which the latter settled in the
amount of US$104,151.00.[15]
On December 2, 1988, respondent Chubb and Sons, Inc. filed a
complaint[16] for collection of a sum of money, docketed as Civil Case
No. 88-47096, against respondents Lorenzo Shipping, Gearbulk, and
Transmarine. Respondent Chubb and Sons, Inc. alleged that it is not
doing business in the Philippines, and that it is suing under an
isolated transaction.
On February 21, 1989, respondents Gearbulk and Transmarine filed
their answer[17] with counterclaim and cross-claim against petitioner
Lorenzo Shipping denying liability on the following grounds: (a)
respondent Chubb and Sons, Inc. has no capacity to sue before
Philippine courts; (b) the action should be dismissed on the ground
of forum non conveniens; (c) damage to the steel pipes was due to
the inherent nature of the goods or to the insufficiency of packing
thereof; (d) damage to the steel pipes was not due to their fault or
negligence; and, (e) the law of the country of destination, U.S.A.,
governs the contract of carriage.
Petitioner Lorenzo Shipping filed its answer with counterclaim
on February 28, 1989, and amended it on May 24, 1989. It denied
liability, alleging, among others: (a) that rust easily forms on steel by
mere exposure to air, moisture and other marine elements; (b) that it
made a disclaimer in the bill of lading; (c) that the goods were
improperly packed; and, (d) prescription, laches, and extinguishment
of obligations and actions had set in.
The Regional Trial Court ruled in favor of the respondent Chubb and
Sons, Inc., finding that: (1) respondent Chubb and Sons, Inc. has the
right to institute this action; and, (2) petitioner Lorenzo Shipping was
negligent in the performance of its obligations as a carrier. The
dispositive portion of its Decision states:
WHEREFORE, the judgment is hereby rendered ordering Defendant
Lorenzo Shipping Corporation to pay the plaintiff the sum of
US$104,151.00 or its equivalent in Philippine peso at the current rate
of exchange with interest thereon at the legal rate from the date of
the institution of this case until fully paid, the attorneys fees in the
sum of P50,000.00, plus the costs of the suit, and dismissing the
plaintiffs complaint against defendants Gearbulk, Ltd. and Philippine
Transmarine Carriers, Inc., for lack of merit, and the two defendants
counterclaim, there being no showing that the plaintiff had filed this
case against said defendants in bad faith, as well as the two
defendants cross-claim against Defendant Lorenzo Shipping
Corporation, for lack of factual basis.[18]
Petitioner Lorenzo Shipping appealed to the Court of Appeals
insisting that: (a) respondent Chubb and Sons does not have
capacity to sue before Philippine courts; and, (b) petitioner Lorenzo
Shipping was not negligent in the performance of its obligations as
carrier of the goods. The appellate court denied the petition and
affirmed the decision of the trial court.
The Court of Appeals likewise denied petitioner Lorenzo Shippings
Motion for Reconsideration[19] dated September 3, 2000, in a
Resolution[20] promulgated on March 28, 2001.
Hence, this petition. Petitioner Lorenzo Shipping submits the
following issues for resolution:
| 81
(1) Whether or not the prohibition provided under Art. 133 of the
Corporation Code applies to respondent Chubb, it being a mere
subrogee or assignee of the rights of Sumitomo Corporation, likewise
a foreign corporation admittedly doing business in the Philippines
without a license;
(2) Whether or not Sumitomo, Chubbs predecessor-in-interest, validly
made a claim for damages against Lorenzo Shipping within the
period prescribed by the Code of Commerce;
(3) Whether or not a delivery cargo receipt without a notation on it of
damages or defects in the shipment, which created a prima facie
presumption that the carrier received the shipment in good condition,
has been overcome by convincing evidence;
(4) Assuming that Lorenzo Shipping was guilty of some lapses in
transporting the steel pipes, whether or not Gearbulk and
Transmarine, as common carriers, are to share liability for their
separate negligence in handling the cargo.[21]
In brief, we resolve the following issues:
(1) whether respondent Chubb and Sons has capacity to sue before
the Philippine courts; and,
(2) whether petitioner Lorenzo Shipping is negligent in carrying the
subject cargo.
Petitioner argues that respondent Chubb and Sons is a foreign
corporation not licensed to do business in the Philippines, and is not
suing on an isolated transaction. It contends that because the
respondent Chubb and Sons is an insurance company, it was merely
subrogated to the rights of its insured, the consignee Sumitomo, after
paying the latters policy claim.Sumitomo, however, is a foreign
corporation doing business in the Philippines without a license and
does not have capacity to sue before Philippine courts. Since
Sumitomo does not have capacity to sue, petitioner then concludes
that, neither the subrogee-respondent Chubb and Sons could sue
before Philippine courts.
We disagree with petitioner.
In the first place, petitioner failed to raise the defense that Sumitomo
is a foreign corporation doing business in the Philippines without a
license. It is therefore estopped from litigating the issue on appeal
especially because it involves a question of fact which this Court
cannot resolve. Secondly, assuming arguendo that Sumitomo cannot
sue in the Philippines, it does not follow that respondent, as
subrogee, has also no capacity to sue in our jurisdiction.
Subrogation is the substitution of one person in the place of another
with reference to a lawful claim or right, so that he who is substituted
succeeds to the rights of the other in relation to a debt or claim,
including its remedies or securities.[22] The principle covers the
situation under which an insurer that has paid a loss under an
insurance policy is entitled to all the rights and remedies belonging to
the insured against a third party with respect to any loss covered by
the policy.[23] It contemplates full substitution such that it places the
party subrogated in the shoes of the creditor, and he may use all
means which the creditor could employ to enforce payment.[24]
The rights to which the subrogee succeeds are the same as, but not
greater than, those of the person for whom he is substituted he

cannot acquire any claim, security, or remedy the subrogor did not
have.[25] In other words, a subrogee cannot succeed to a right not
possessed by the subrogor.[26] A subrogee in effect steps into the
shoes of the insured and can recover only if insured likewise could
have recovered.
However, when the insurer succeeds to the rights of the insured, he
does so only in relation to the debt. The person substituted (the
insurer) will succeed to all the rights of the creditor (the insured),
having reference to the debt due the latter.[27] In the instant case, the
rights inherited by the insurer, respondent Chubb and Sons, pertain
only to the payment it made to the insured Sumitomo as stipulated in
the insurance contract between them, and which amount it now
seeks to recover from petitioner Lorenzo Shipping which caused the
loss sustained by the insured Sumitomo. The capacity to sue of
respondent Chubb and Sons could not perchance belong to the
group of rights, remedies or securities pertaining to the
payment respondent insurer made for the loss which was sustained
by the insured Sumitomo and covered by the contract of
insurance. Capacity to sue is a right personal to its holder. It is
conferred by law and not by the parties. Lack of legal capacity to sue
means that the plaintiff is not in the exercise of his civil rights, or does
not have the necessary qualification to appear in the case, or does
not have the character or representation he claims. It refers to a
plaintiffs general disability to sue, such as on account of minority,
insanity, incompetence, lack of juridical personality, or any other
disqualifications of a party.[28] Respondent Chubb and Sons who was
plaintiff in the trial court does not possess any of these
disabilities. On the contrary, respondent Chubb and Sons has
satisfactorily proven its capacity to sue, after having shown that it is
not doing business in the Philippines, but is suing only under an
isolated transaction, i.e., under the one (1) marine insurance policy
issued in favor of the consignee Sumitomo covering the damaged
steel pipes.
The law on corporations is clear in depriving foreign corporations
which are doing business in the Philippines without a license from
bringing or maintaining actions before, or intervening in Philippine
courts. Art. 133 of the Corporation Code states:
Doing business without a license. No foreign corporation transacting
business in the Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene in any action, suit
or proceeding in any court or administrative agency of the
Philippines; but such corporation may be sued or proceeded against
before Philippine courts or administrative tribunals on any valid cause
of action recognized under Philippine laws.
The law does not prohibit foreign corporations from performing single
acts of business. A foreign corporation needs no license to sue
before Philippine courts on an isolated transaction.[29] As held by this
Court in the case of Marshall-Wells Company vs. Elser &
Company:[30]
The object of the statute (Secs. 68 and 69, Corporation Law) was not
to prevent the foreign corporation from performing single acts, but to
prevent it from acquiring a domicile for the purpose of business
without taking the steps necessary to render it amenable to suit in the
local courts . . . the implication of the law (being) that it was never the
purpose of the legislature to exclude a foreign corporation which
| 82
happens to obtain an isolated order for business for the Philippines,
from seeking redress in the Philippine courts.
Likewise, this Court ruled in Universal Shipping Lines, Inc. vs.
Intermediate Appellate Court[31] that:
. . . The private respondent may sue in the Philippine courts upon the
marine insurance policies issued by it abroad to cover international-
bound cargoes shipped by a Philippine carrier, even if it has no
license to do business in this country, for it is not the lack of the
prescribed license (to do business in the Philippines) but doing
business without such license, which bars a foreign corporation from
access to our courts.
We reject the claim of petitioner Lorenzo Shipping that respondent
Chubb and Sons is not suing under an isolated transaction because
the steel pipes, subject of this case, are covered by two (2) bills of
lading; hence, two transactions. The stubborn fact remains that these
two (2) bills of lading spawned from the single marine insurance
policy that respondent Chubb and Sons issued in favor of the
consignee Sumitomo, covering the damaged steel pipes. The
execution of the policy is a single act, an isolated transaction. This
Court has not construed the term isolated transaction to literally
mean one or a mere single act. In Eriks Pte. Ltd. vs. Court of
Appeals, this Court held that:[32]
. . . What is determinative of "doing business" is not really the number
or the quantity of the transactions, but more importantly, the intention
of an entity to continue the body of its business in the country. The
number and quantity are merely evidence of such intention. The
phrase "isolated transaction" has a definite and fixed meaning, i.e. a
transaction or series of transactions set apart from the common
business of a foreign enterprise in the sense that there is no intention
to engage in a progressive pursuit of the purpose and object of the
business organization. Whether a foreign corporation is "doing
business" does not necessarily depend upon the frequency of its
transactions, but more upon the nature and character of the
transactions. [Emphasis supplied.]
In the case of Gonzales vs. Raquiza, et al.,[33] three contracts,
hence three transactions were challenged as void on the ground that
the three American corporations which are parties to the contracts
are not licensed to do business in the Philippines. This Court held
that one single or isolated business transaction does not
constitute doing business within the meaning of the law. Transactions
which are occasional, incidental, and casual not of a character to
indicate a purpose to engage in business do not constitute the doing
or engaging in business as contemplated by law. Where the three
transactions indicate no intent by the foreign corporation to engage in
a continuity of transactions, they do not constitute doing business in
the Philippines.
Furthermore, respondent insurer Chubb and Sons, by virtue of the
right of subrogation provided for in the policy of insurance,[34] is the
real party in interest in the action for damages before the court a
quo against the carrier Lorenzo Shipping to recover for the loss
sustained by its insured. Rule 3, Section 2 of the 1997 Rules of Civil
Procedure defines a real party in interest as one who is entitled to the
avails of any judgment rendered in a suit, or who stands to be
benefited or injured by it. Where an insurance company as subrogee
pays the insured of the entire loss it suffered, the insurer-subrogee is
the only real party in interest and must sue in its own name [35] to

enforce its right of subrogation against the third party which caused
the loss. This is because the insurer in such case having fully
compensated its insured, which payment covers the loss in full, is
subrogated to the insureds claims arising from such loss. The
subrogated insurer becomes the owner of the claim and, thus entitled
to the entire fruits of the action.[36] It then, thus possesses the right to
enforce the claim and the significant interest in the litigation.[37] In the
case at bar, it is clear that respondent insurer was suing on its own
behalf in order to enforce its right of subrogation.
On the second issue, we affirm the findings of the lower courts that
petitioner Lorenzo Shipping was negligent in its care and custody of
the consignees goods.
The steel pipes, subject of this case, were in good condition when
they were loaded at the port of origin (Manila) on board petitioner
Lorenzo Shippings M/V Lorcon IV en route to DavaoCity. Petitioner
Lorenzo Shipping issued clean bills of lading covering the subject
shipment. A bill of lading, aside from being a contract[38] and a
receipt,[39] is also a symbol[40] of the goods covered by it. A bill of
lading which has no notation of any defect or damage in the goods is
called a clean bill of lading.[41] A clean bill of lading constitutes prima
facie evidence of the receipt by the carrier of the goods as therein
described.[42]
The case law teaches us that mere proof of delivery of goods in good
order to a carrier and the subsequent arrival in damaged condition at
the place of destination raises a prima facie case against the
carrier.[43] In the case at bar, M/V Lorcon IV of petitioner Lorenzo
Shipping received the steel pipes in good order and condition,
evidenced by the clean bills of lading it issued. When the cargo was
unloaded from petitioner Lorenzo Shippings vessel at
the Sasa Wharf in Davao City, the steel pipes were rusted all
over. M/V San Mateo Victory of respondent Gearbulk, Ltd, which
received the cargo, issued Bills of Lading Nos. DAV/OAK 1 to 7 and
Nos. DAV/SEA 1 to 6 covering the entire shipment, all of which were
marked ALL UNITS HEAVILY RUSTED. R.J. Del Pan Surveyors
found that the cargo hold of the M/V Lorcon IV was flooded with
seawater, and the tank top was rusty, thinning and perforated,
thereby exposing the cargo to sea water. There can be no other
conclusion than that the cargo was damaged while on board the
vessel of petitioner Lorenzo Shipping, and that the damage was due
to the latters negligence. In the case at bar, not only did the legal
presumption of negligence attach to petitioner Lorenzo Shipping
upon the occurrence of damage to the cargo.[44] More so, the
negligence of petitioner was sufficiently established. Petitioner
Lorenzo Shipping failed to keep its vessel in seaworthy
condition. R.J. Del Pan Surveyors found the tank top of M/V Lorcon
IV to be rusty, thinning, and with several holes at different
places. Witness Captain Pablo Fernan, Operations Manager of
respondent Transmarine Carriers, likewise observed the presence of
holes at the deck of M/V Lorcon IV.[45] The unpatched holes allowed
seawater, reaching up to three (3) inches deep, to enter the flooring
of the hatch of the vessel where the steel pipes were stowed,
submerging the latter in sea water.[46] The contact with sea water
caused the steel pipes to rust. The silver nitrate test, which Toplis
and Harding employed, further verified this
conclusion.[47] Significantly, petitioner Lorenzo Shipping did not even
attempt to present any contrary evidence. Neither did it offer any
proof to establish any of the causes that would exempt it from liability
| 83
for such damage.[48] It merely alleged that the: (1) packaging of the
goods was defective; and (2) claim for damages has prescribed.
To be sure, there is evidence that the goods were packed in a
superior condition. John M. Graff, marine surveyor of Toplis and
Harding, examined the condition of the cargo on board the vessel
San Mateo Victory. He testified that the shipment had superior
packing because the ends were covered with plastic, woven
plastic. Whereas typically they would not go to that bother
... Typically, they come in with no plastic on the ends. They might just
be banded, no plastic on the ends ...[49]
On the issue of prescription of respondent Chubb and Sons claim for
damages, we rule that it has not yet prescribed at the time it was
made.
Art. 366 of the Code of Commerce states:
Within the twenty-four hours following the receipt of the merchandise,
the claim against the carrier for damage or average, which may be
found therein upon the opening of the packages, may be made,
provided that the indications of the damage or average which gives
rise to the claim cannot be ascertained from the outside part of such
package, in which case the claim shall be admitted only at the time of
the receipt.
After the periods mentioned have elapsed, or transportation charges
have been paid, no claim shall be admitted against the carrier with
regard to the condition in which the goods transported were
delivered.
A somewhat similar provision is embodied in the Bill of Lading No. T-
3 which reads:[50]
NOTE: No claim for damage or loss shall be honored twenty-four (24)
hours after delivery.
(Ref. Art. 366 C Com.)
The twenty-four-hour period prescribed by Art. 366 of the Code of
Commerce within which claims must be presented does not begin to
run until the consignee has received such possession of the
merchandise that he may exercise over it the ordinary control
pertinent to ownership.[51] In other words, there must be delivery of
the cargo by the carrier to the consignee at the place of
destination.[52] In the case at bar, consignee Sumitomo has not
received possession of the cargo, and has not physically inspected
the same at the time the shipment was discharged from M/V Lorcon
IV in Davao City. Petitioner Lorenzo Shipping failed to establish that
an authorized agent of the consignee Sumitomo received the cargo
at Sasa Wharf in Davao City. Respondent Transmarine Carriers as
agent of respondent Gearbulk, Ltd., which carried the goods
from Davao City to the United States, and the principal, respondent
Gearbulk, Ltd. itself, are not the authorized agents as contemplated
by law. What is clear from the evidence is that the consignee
received and took possession of the entire shipment only when the
latter reached the United States shore. Only then was delivery made
and completed. And only then did the 24-hour prescriptive period
start to run.
Finally, we find no merit to the contention of respondents Gearbulk
and Transmarine that American law governs the contract of carriage
because the U.S.A. is the country of destination.Petitioner Lorenzo
 | 84

Shipping, through its M/V Lorcon IV, carried the goods

from Manila to Davao City. Thus, as against petitioner Lorenzo
Shipping, the place of destination is Davao City.Hence, Philippine law
applies.
IN VIEW THEREOF, the petition is DENIED. The Decision of the
Court of Appeals in CA-G.R. CV No. 61334 dated August 14,
2000 and its Resolution dated March 28, 2001 are hereby
AFFIRMED. Costs against petitioner.
SO ORDERED.

[G.R. No. 129459. September 29, 1998]
SAN JUAN STRUCTURAL AND STEEL FABRICATORS,
INC., petitioner, vs. COURT OF APPEALS, MOTORICH SALES
CORPORATION, NENITA LEE GRUENBERG, ACL
DEVELOPMENT CORP. and JNM REALTY AND DEVELOPMENT
CORP., respondents.
DECISION
PANGANIBAN, J.
May a corporate treasurer, by herself and without any authorization
from the board of directors, validly sell a parcel of land owned by the
corporation? May the veil of corporate fiction be pierced on the mere
ground that almost all of the shares of stock of the corporation are
owned by said treasurer and her husband?
The Case
These questions are answered in the negative by this Court in
resolving the Petition for Review on Certiorari before us, assailing the
March 18, 1997 Decision[1] of the Court of Appeals[2] in CA GR CV
No. 46801 which, in turn, modified the July 18, 1994 Decision of the
Regional Trial Court of Makati, Metro Manila, Branch 63[3] in Civil
Case No. 89-3511. The RTC dismissed both the Complaint and the
Counterclaim filed by the parties. On the other hand, the Court of
Appeals ruled:
WHEREFORE, premises considered, the appealed decision is
AFFIRMED WITH MODIFICATION ordering defendant-appellee
Nenita Lee Gruenberg to REFUND or return to plaintiff-appellant the
downpayment of P100,000.00 which she received from plaintiff-
appellant. There is no pronouncement as to costs.[4]
The petition also challenges the June 10, 1997 CA Resolution
denying reconsideration.[5]
The Facts
The facts as found by the Court of Appeals are as follows:
Plaintiff-appellant San Juan Structural and Steel Fabricators, Inc.s
amended complaint alleged that on 14 February 1989, plaintiff-
appellant entered into an agreement with defendant-appellee
Motorich Sales Corporation for the transfer to it of a parcel of land
identified as Lot 30, Block 1 of the Acropolis Greens Subdivision
located in the District of Murphy, Quezon City, Metro Manila,
containing an area of Four Hundred Fourteen (414) square meters,
covered by TCT No. (362909) 2876; that as stipulated in the
Agreement of 14 February 1989, plaintiff-appellant paid the down
payment in the sum of One Hundred Thousand (P100,000.00)
Pesos, the balance to be paid on or before March 2, 1989; that on
March 1, 1989, Mr. Andres T. Co, president of plaintiff-appellant
corporation, wrote a letter to defendant-appellee Motorich Sales
Corporation requesting for a computation of the balance to be paid;
that said letter was coursed through defendant-appellees broker,
Linda Aduca, who wrote the computation of the balance; that on
March 2, 1989, plaintiff-appellant was ready with the amount
corresponding to the balance, covered by Metrobank Cashiers Check
No. 004223, payable to defendant-appellee Motorich Sales
Corporation; that plaintiff-appellant and defendant-appellee Motorich
Sales Corporation were supposed to meet in the office of plaintiff-
| 85
appellant but defendant-appellees treasurer, Nenita Lee Gruenberg,
did not appear; that defendant-appellee Motorich Sales Corporation
despite repeated demands and in utter disregard of its commitments
had refused to execute the Transfer of Rights/Deed of Assignment
which is necessary to transfer the certificate of title; that defendant
ACL Development Corp. is impleaded as a necessary party since
Transfer Certificate of Title No. (362909) 2876 is still in the name of
said defendant; while defendant JNM Realty & Development Corp. is
likewise impleaded as a necessary party in view of the fact that it is
the transferor of right in favor of defendant-appellee Motorich Sales
Corporation; that on April 6, 1989, defendant ACL Development
Corporation and Motorich Sales Corporation entered into a Deed of
Absolute Sale whereby the former transferred to the latter the subject
property; that by reason of said transfer, the Registry of Deeds of
Quezon City issued a new title in the name of Motorich Sales
Corporation, represented by defendant-appellee Nenita Lee
Gruenberg and Reynaldo L. Gruenberg, under Transfer Certificate of
Title No. 3571; that as a result of defendants-appellees Nenita Lee
Gruenberg and Motorich Sales Corporations bad faith in refusing to
execute a formal Transfer of Rights/Deed of Assignment, plaintiff-
appellant suffered moral and nominal damages which may be
assessed against defendants-appellees in the sum of Five Hundred
Thousand (500,000.00) Pesos; that as a result of defendants-
appellees Nenita Lee Gruenberg and Motorich Sales Corporations
unjustified and unwarranted failure to execute the required Transfer
of Rights/Deed of Assignment or formal deed of sale in favor of
plaintiff-appellant, defendants-appellees should be assessed
exemplary damages in the sum of One Hundred Thousand
(P100,000.00) Pesos; that by reason of defendants-appellees bad
faith in refusing to execute a Transfer of Rights/Deed of Assignment
in favor of plaintiff-appellant, the latter lost the opportunity to
construct a residential building in the sum of One Hundred Thousand
(P100,000.00) Pesos; and that as a consequence of defendants-
appellees Nenita Lee Gruenberg and Motorich Sales Corporations
bad faith in refusing to execute a deed of sale in favor of plaintiff-
appellant, it has been constrained to obtain the services of counsel at
an agreed fee of One Hundred Thousand (P100,000.00) Pesos plus
appearance fee for every appearance in court hearings.
In its answer, defendants-appellees Motorich Sales Corporation and
Nenita Lee Gruenberg interposed as affirmative defense that the
President and Chairman of Motorich did not sign the agreement
adverted to in par. 3 of the amended complaint; that Mrs. Gruenbergs
signature on the agreement (ref: par. 3 of Amended Complaint) is
inadequate to bind Motorich. The other signature, that of Mr.
Reynaldo Gruenberg, President and Chairman of Motorich, is
required; that plaintiff knew this from the very beginning as it was
presented a copy of the Transfer of Rights (Annex B of amended
complaint) at the time the Agreement (Annex B of amended
complaint) was signed; that plaintiff-appellant itself drafted the
Agreement and insisted that Mrs. Gruenberg accept the P100,000.00
as earnest money; that granting, without admitting, the enforceability
of the agreement, plaintiff-appellant nonetheless failed to pay in legal
tender within the stipulated period (up to March 2, 1989); that it was
the understanding between Mrs. Gruenberg and plaintiff-appellant
that the Transfer of Rights/Deed of Assignment will be signed only
upon receipt of cash payment; thus they agreed that if the payment
be in check, they will meet at a bank designated by plaintiff-appellant
where they will encash the check and sign the Transfer of
Rights/Deed. However, plaintiff-appellant informed Mrs. Gruenberg of

the alleged availability of the check, by phone, only after banking
hours.
On the basis of the evidence, the court a quo rendered the judgment
appealed from[,] dismissing plaintiff-appellants complaint, ruling that:
'The issue to be resolved is: whether plaintiff had the right to compel
defendants to execute a deed of absolute sale in accordance with the
agreement of February 14, 1989; and if so, whether plaintiff is entitled
to damages.
As to the first question, there is no evidence to show that defendant
Nenita Lee Gruenberg was indeed authorized by defendant
corporation, Motorich Sales, to dispose of that property covered by
T.C.T. No. (362909) 2876. Since the property is clearly owned by the
corporation, Motorich Sales, then its disposition should be governed
by the requirement laid down in Sec. 40, of the Corporation Code of
the Philippines, to wit:
Sec. 40, Sale or other disposition of assets. Subject to the provisions
of existing laws on illegal combination and monopolies, a corporation
may by a majority vote of its board of directors xxx sell, lease,
exchange, mortgage, pledge or otherwise dispose of all or
substantially all of its property and assets, including its goodwill xxx
when authorized by the vote of the stockholders representing at least
two third (2/3) of the outstanding capital stock x x x.
No such vote was obtained by defendant Nenita Lee Gruenberg for
that proposed sale[;] neither was there evidence to show that the
supposed transaction was ratified by the corporation.Plaintiff should
have been on the look out under these circumstances. More so,
plaintiff himself [owns] several corporations (tsn dated August 16,
1993, p. 3) which makes him knowledgeable on corporation matters.
Regarding the question of damages, the Court likewise, does not find
substantial evidence to hold defendant Nenita Lee Gruenberg liable
considering that she did not in anyway misrepresent herself to be
authorized by the corporation to sell the property to plaintiff (tsn dated
September 27, 1991, p. 8).
In the light of the foregoing, the Court hereby renders judgment
DISMISSING the complaint at instance for lack of merit.
Defendants counterclaim is also DISMISSED for lack of
basis. (Decision, pp. 7-8; Rollo, pp. 34-35)
For clarity, the Agreement dated February 14, 1989 is reproduced
hereunder:
AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This Agreement, made and entered into by and between:
MOTORICH SALES CORPORATION, a corporation duly organized
and existing under and by virtue of Philippine Laws, with principal
office address at 5510 South Super Hi-way cor. Balderama St., Pio
del Pilar, Makati, Metro Manila, represented herein by its Treasurer,
NENITA LEE GRUENBERG, hereinafter referred to as the
TRANSFEROR;
- and --
| 86
SAN JUAN STRUCTURAL & STEEL FABRICATORS, a corporation
duly organized and existing under and by virtue of the laws of the
Philippines, with principal office address at Sumulong Highway,
Barrio Mambungan, Antipolo, Rizal, represented herein by its
President, ANDRES T. CO, hereinafter referred to as the
TRANSFEREE.
WITNESSETH, That:
WHEREAS, the TRANSFEROR is the owner of a parcel of land
identified as Lot 30 Block 1 of the ACROPOLIS GREENS
SUBDIVISION located at the District of Murphy, Quezon City, Metro
Manila, containing an area of FOUR HUNDRED FOURTEEN (414)
SQUARE METERS, covered by a TRANSFER OF RIGHTS between
JNM Realty & Dev. Corp. as the Transferor and Motorich Sales Corp.
as the Transferee;
NOW, THEREFORE, for and in consideration of the foregoing
premises, the parties have agreed as follows:
1. That the purchase price shall be at FIVE THOUSAND TWO
HUNDRED PESOS (P5,200.00) per square meter; subject to the
following terms:
a. Earnest money amounting to ONE HUNDRED THOUSAND
PESOS (P100,000.00), will be paid upon the execution of this
agreement and shall form part of the total purchase price;
b. Balance shall be payable on or before March 2, 1989;
2. That the monthly amortization for the month of February 1989 shall
be for the account of the Transferor; and that the monthly
amortization starting March 21, 1989 shall be for the account of the
Transferee;
The transferor warrants that he [sic] is the lawful owner of the above-
described property and that there [are] no existing liens and/or
encumbrances of whatsoever nature;
In case of failure by the Transferee to pay the balance on the date
specified on 1. (b), the earnest money shall be forfeited in favor of the
Transferor.
That upon full payment of the balance, the TRANSFEROR agrees to
execute a TRANSFER OF RIGHTS/DEED OF ASSIGNMENT in
favor of the TRANSFEREE.
IN WITNESS WHEREOF, the parties have hereunto set their hands
this 14th day of February, 1989 at Greenhills, San Juan, Metro
Manila, Philippines.
MOTORICH SALES CORPORATION SAN STRUCTURAL &
TRANSFEROR STEEL FABRICATORS
TRANSFEREE
[SGD.] [SGD.]
By: NENITA LEE GRUENBERG By: ANDRES T. CO
Treasurer President
Signed in the presence of:
[SGD.] [SGD.]

_________________________ _____________________[6]
In its recourse before the Court of Appeals, petitioner insisted:
1. Appellant is entitled to compel the appellees to execute a Deed of
Absolute Sale in accordance with the Agreement of February 14,
1989,
2. Plaintiff is entitled to damages.[7]
As stated earlier, the Court of Appeals debunked petitioners
arguments and affirmed the Decision of the RTC with the
modification that Respondent Nenita Lee Gruenberg was ordered to
refund P100,000 to petitioner, the amount remitted as downpayment
or earnest money. Hence, this petition before us.[8]
The Issues
Before this Court, petitioner raises the following issues:
I. Whether or not the doctrine of piercing the veil of corporate fiction
is applicable in the instant case
II. Whether or not the appellate court may consider matters which the
parties failed to raise in the lower court
III. Whether or not there is a valid and enforceable contract between
the petitioner and the respondent corporation
IV. Whether or not the Court of Appeals erred in holding that there is
a valid correction/substitution of answer in the transcript of
stenographic note[s]
V. Whether or not respondents are liable for damages and attorneys
fees[9]
The Court synthesized the foregoing and will thus discuss
them seriatim as follows:
1. Was there a valid contract of sale between petitioner and
Motorich?
2. May the doctrine of piercing the veil of corporate fiction be applied
to Motorich?
3. Is the alleged alteration of Gruenbergs testimony as recorded in
the transcript of stenographic notes material to the disposition of this
case?
4. Are respondents liable for damages and attorneys fees?
The Courts Ruling
The petition is devoid of merit.
First Issue: Validity of Agreement
Petitioner San Juan Structural and Steel Fabricators, Inc. alleges that
on February 14, 1989, it entered through its president, Andres Co,
into the disputed Agreement with Respondent Motorich Sales
Corporation, which was in turn allegedly represented by its treasurer,
Nenita Lee Gruenberg. Petitioner insists that [w]hen Gruenberg and
Co affixed their signatures on the contract they both consented to be
bound by the terms thereof. Ergo, petitioner contends that the
contract is binding on the two corporations. We do not agree.
| 87
True, Gruenberg and Co signed on February 14, 1989, the
Agreement according to which a lot owned by Motorich Sales
Corporation was purportedly sold. Such contract, however, cannot
bind Motorich, because it never authorized or ratified such sale.
A corporation is a juridical person separate and distinct from its
stockholders or members. Accordingly, the property of the
corporation is not the property of its stockholders or members and
may not be sold by the stockholders or members without express
authorization from the corporations board of directors.[10] Section 23
of BP 68, otherwise known as the Corporation Code of the
Philippines, provides:
SEC. 23. The Board of Directors or Trustees. -- Unless otherwise
provided in this Code, the corporate powers of all corporations
formed under this Code shall be exercised, all business conducted
and all property of such corporations controlled and held by the board
of directors or trustees to be elected from among the holders of
stocks, or where there is no stock, from among the members of the
corporation, who shall hold office for one (1) year and until their
successors are elected and qualified.
Indubitably, a corporation may act only through its board of directors,
or, when authorized either by its bylaws or by its board resolution,
through its officers or agents in the normal course of business.The
general principles of agency govern the relation between the
corporation and its officers or agents, subject to the articles of
incorporation, bylaws, or relevant provisions of law.[11] Thus, this
Court has held that a corporate officer or agent may represent and
bind the corporation in transactions with third persons to the extent
that the authority to do so has been conferred upon him, and this
includes powers which have been intentionally conferred, and also
such powers as, in the usual course of the particular business, are
incidental to, or may be implied from, the powers intentionally
conferred, powers added by custom and usage, as usually pertaining
to the particular officer or agent, and such apparent powers as the
corporation has caused persons dealing with the officer or agent to
believe that it has conferred.[12]
Furthermore, the Court has also recognized the rule that persons
dealing with an assumed agent, whether the assumed agency be a
general or special one, are bound at their peril, if they would hold the
principal liable, to ascertain not only the fact of agency but also the
nature and extent of authority, and in case either is controverted, the
burden of proof is upon them to establish it (Harry Keeler v.
Rodriguez, 4 Phil. 19).[13] Unless duly authorized, a treasurer, whose
powers are limited, cannot bind the corporation in a sale of its
assets.[14]
In the case at bar, Respondent Motorich categorically denies that it
ever authorized Nenita Gruenberg, its treasurer, to sell the subject
parcel of land.[15] Consequently, petitioner had the burden of proving
that Nenita Gruenberg was in fact authorized to represent and bind
Motorich in the transaction. Petitioner failed to discharge this
burden. Its offer of evidence before the trial court contained no proof
of such authority.[16] It has not shown any provision of said
respondents articles of incorporation, bylaws or board resolution to
prove that Nenita Gruenberg possessed such power.
That Nenita Gruenberg is the treasurer of Motorich does not free
petitioner from the responsibility of ascertaining the extent of her
authority to represent the corporation. Petitioner cannot assume that

she, by virtue of her position, was authorized to sell the property of
the corporation. Selling is obviously foreign to a corporate treasurers
function, which generally has been described as to receive and keep
the funds of the corporation, and to disburse them in accordance with
the authority given him by the board or the properly authorized
officers.[17]
Neither was such real estate sale shown to be a normal business
activity of Motorich. The primary purpose of Motorich is marketing,
distribution, export and import in relation to a general merchandising
business.[18] Unmistakably, its treasurer is not cloaked with actual or
apparent authority to buy or sell real property, an activity which falls
way beyond the scope of her general authority.
Articles 1874 and 1878 of the Civil Code of the Philippines provides:
ART. 1874. When a sale of a piece of land or any interest therein is
through an agent, the authority of the latter shall be in writing;
otherwise, the sale shall be void.
ART. 1878 Special powers of attorney are necessary in the following
case:
xxxxxxxxx
(5) To enter any contract by which the ownership of an immovable is
transmitted or acquired either gratuitously or for a valuable
consideration;
x x x x x x x x x.
Petitioner further contends that Respondent Motorich has ratified said
contract of sale because of its acceptance of benefits, as evidenced
by the receipt issued by Respondent Gruenberg.[19] Petitioner is
clutching at straws.
As a general rule, the acts of corporate officers within the scope of
their authority are binding on the corporation. But when these officers
exceed their authority, their actions cannot bind the corporation,
unless it has ratified such acts or is estopped from disclaiming
them.[20]
In this case, there is a clear absence of proof that Motorich ever
authorized Nenita Gruenberg, or made it appear to any third person
that she had the authority, to sell its land or to receive the earnest
money. Neither was there any proof that Motorich ratified, expressly
or impliedly, the contract. Petitioner rests its argument on the receipt,
which, however, does not prove the fact of ratification. The document
is a hand-written one, not a corporate receipt, and it bears only
Nenita Gruenbergs signature. Certainly, this document alone does
not prove that her acts were authorized or ratified by Motorich.
Article 1318 of the Civil Code lists the requisites of a valid and
perfected contract: (1) consent of the contracting parties; (2) object
certain which is the subject matter of the contract; (3) cause of the
obligation which is established. As found by the trial court[21] and
affirmed by the Court of Appeals,[22] there is no evidence that
Gruenberg was authorized to enter into the contract of sale, or that
the said contract was ratified by Motorich. This factual finding of the
two courts is binding on this Court.[23] As the consent of the seller
was not obtained, no contract to bind the obligor was
perfected. Therefore, there can be no valid contract of sale between
petitioner and Motorich.
| 88
Because Motorich had never given a written authorization to
Respondent Gruenberg to sell its parcel of land, we hold that the
February 14, 1989 Agreement entered into by the latter with
petitioner is void under Article 1874 of the Civil Code. Being
inexistent and void from the beginning, said contract cannot be
ratified.[24]
Second Issue:
Piercing the Corporate Veil Not Justified
Petitioner also argues that the veil of corporate fiction of Motorich
should be pierced, because the latter is a close corporation. Since
Spouses Reynaldo L. Gruenberg and Nenita R. Gruenberg owned all
or almost all or 99.866% to be accurate, of the subscribed capital
stock[25] of Motorich, petitioner argues that Gruenberg needed no
authorization from the board to enter into the subject contract.[26] It
adds that, being solely owned by the Spouses Gruenberg, the
company can be treated as a close corporation which can be bound
by the acts of its principal stockholder who needs no specific
authority. The Court is not persuaded.
First, petitioner itself concedes having raised the issue
belatedly,[27] not having done so during the trial, but only when it filed
its sur-rejoinder before the Court of Appeals.[28] Thus, this Court
cannot entertain said issue at this late stage of the proceedings. It is
well-settled that points of law, theories and arguments not brought to
the attention of the trial court need not be, and ordinarily will not be,
considered by a reviewing court, as they cannot be raised for the first
time on appeal.[29] Allowing petitioner to change horses in midstream,
as it were, is to run roughshod over the basic principles of fair play,
justice and due process.
Second, even if the above-mentioned argument were to be
addressed at this time, the Court still finds no reason to uphold
it. True, one of the advantages of a corporate form of business
organization is the limitation of an investors liability to the amount of
the investment.[30] This feature flows from the legal theory that a
corporate entity is separate and distinct from its
stockholders. However, the statutorily granted privilege of a corporate
veil may be used only for legitimate purposes.[31] On equitable
considerations, the veil can be disregarded when it is utilized as a
shield to commit fraud, illegality or inequity; defeat public
convenience; confuse legitimate issues; or serve as a mere alter ego
or business conduit of a person or an instrumentality, agency or
adjunct of another corporation.[32]
Thus, the Court has consistently ruled that [w]hen the fiction is used
as a means of perpetrating a fraud or an illegal act or as a vehicle for
the evasion of an existing obligation, the circumvention of statutes,
the achievement or perfection of a monopoly or generally the
perpetration of knavery or crime, the veil with which the law covers
and isolates the corporation from the members or stockholders who
compose it will be lifted to allow for its consideration merely as an
aggregation of individuals.[33]
We stress that the corporate fiction should be set aside when it
becomes a shield against liability for fraud, illegality or inequity
committed on third persons. The question of piercing the veil of
corporate fiction is essentially, then, a matter of proof. In the present
case, however, the Court finds no reason to pierce the corporate veil
of Respondent Motorich. Petitioner utterly failed to establish that said

corporation was formed, or that it is operated, for the purpose of
shielding any alleged fraudulent or illegal activities of its officers or
stockholders; or that the said veil was used to conceal fraud, illegality
or inequity at the expense of third persons, like petitioner.
Petitioner claims that Motorich is a close corporation. We rule that it
is not. Section 96 of the Corporation Code defines a close
corporation as follows:
SEC. 96. Definition and Applicability of Title. -- A close corporation,
within the meaning of this Code, is one whose articles of
incorporation provide that: (1) All of the corporations issued stock of
all classes, exclusive of treasury shares, shall be held of record by
not more than a specified number of persons, not exceeding twenty
(20); (2) All of the issued stock of all classes shall be subject to one
or more specified restrictions on transfer permitted by this Title; and
(3) The corporation shall not list in any stock exchange or make any
public offering of any of its stock of any class.Notwithstanding the
foregoing, a corporation shall be deemed not a close corporation
when at least two-thirds (2/3) of its voting stock or voting rights is
owned or controlled by another corporation which is not a close
corporation within the meaning of this Code. xxx.
The articles of incorporation[34] of Motorich Sales Corporation does
not contain any provision stating that (1) the number of stockholders
shall not exceed 20, or (2) a preemption of shares is restricted in
favor of any stockholder or of the corporation, or (3) listing its stocks
in any stock exchange or making a public offering of such stocks is
prohibited. From its articles, it is clear that Respondent Motorich is
not a close corporation.[35] Motorich does not become one either, just
because Spouses Reynaldo and Nenita Gruenberg owned 99.866%
of its subscribed capital stock. The [m]ere 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 personalities.[36] So too, a narrow distribution
of ownership does not, by itself, make a close corporation.
Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of
Appeals[37] wherein the Court ruled that xxx petitioner corporation is
classified as a close corporation and, consequently, a board
resolution authorizing the sale or mortgage of the subject property is
not necessary to bind the corporation for the action of its
president.[38] But the factual milieu in Dulay is not on all fours with the
present case. In Dulay, the sale of real property was contracted by
the president of a close corporation with the knowledge and
acquiescence of its board of directors.[39] In the present case,
Motorich is not a close corporation, as previously discussed, and the
agreement was entered into by the corporate treasurer without the
knowledge of the board of directors.
The Court is not unaware that there are exceptional cases where an
action by a director, who singly is the controlling stockholder, may be
considered as a binding corporate act and a board action as nothing
more than a mere formality.[40] The present case, however, is not one
of them.
As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg
own almost 99.866% of Respondent Motorich.[41] Since Nenita is not
the sole controlling stockholder of Motorich, the aforementioned
exception does not apply. Granting arguendo that the corporate veil
of Motorich is to be disregarded, the subject parcel of land would
then be treated as conjugal property of Spouses Gruenberg, because
| 89
the same was acquired during their marriage. There being no
indication that said spouses, who appear to have been married
before the effectivity of the Family Code, have agreed to a different
property regime, their property relations would be governed by
conjugal partnership of gains.[42] As a consequence, Nenita
Gruenberg could not have effected a sale of the subject lot because
[t]here is no co-ownership between the spouses in the properties of
the conjugal partnership of gains. Hence, neither spouse can alienate
in favor of another his or her interest in the partnership or in any
property belonging to it; neither spouse can ask for a partition of the
properties before the partnership has been legally dissolved.[43]
Assuming further, for the sake of argument, that the spouses
property regime is the absolute community of property, the sale
would still be invalid. Under this regime, alienation of community
property must have the written consent of the other spouse or the
authority of the court without which the disposition or encumbrance
is void.[44] Both requirements are manifestly absent in the instant
case.
Third Issue: Challenged Portion of TSN Immaterial
Petitioner calls our attention to the following excerpt of the transcript
of stenographic notes(TSN):
Q Did you ever represent to Mr. Co that you were authorized by the
corporation to sell the property?
A Yes, sir.[45]
Petitioner claims that the answer Yes was crossed out, and, in its
place was written a No with an initial scribbled above it.[46] This,
however, is insufficient to prove that Nenita Gruenberg was
authorized to represent Respondent Motorich in the sale of its
immovable property. Said excerpt should be understood in the
context of her whole testimony. During her cross-examination,
Respondent Gruenberg testified:
Q So, you signed in your capacity as the treasurer?
[A] Yes, sir.
Q Even then you kn[e]w all along that you [were] not authorized?
A Yes, sir.
Q You stated on direct examination that you did not represent that
you were authorized to sell the property?
A Yes, sir.
Q But you also did not say that you were not authorized to sell the
property, you did not tell that to Mr. Co, is that correct?
A That was not asked of me.
Q Yes, just answer it.
A I just told them that I was the treasurer of the corporation and it
[was] also the president who [was] also authorized to sign on behalf
of the corporation.
Q You did not say that you were not authorized nor did you say that
you were authorized?
 | 90

A Mr. Co was very interested to purchase the property and he offered Indeed, petitioners claim of fraud and bad faith is unsubstantiated
to put up a P100,000.00 earnest money at that time. That was our and fails to persuade the Court. Indubitably, petitioner appears to be
first meeting.[47] the victim of its own officers negligence in entering into a contract
with and paying an unauthorized officer of another corporation.
Clearly then, Nenita Gruenberg did not testify that Motorich had
authorized her to sell its property. On the other hand, her testimony As correctly ruled by the Court of Appeals, however, Nenita
demonstrates that the president of Petitioner Corporation, in his great Gruenberg should be ordered to return to petitioner the amount she
desire to buy the property, threw caution to the wind by offering and received as earnest money, as no one shall enrich himself at the
paying the earnest money without first verifying Gruenbergs authority expense of another,[54] a principle embodied in Article 2154 of the
to sell the lot. Civil Code.[55] Although there was no binding relation between them,
petitioner paid Gruenberg on the mistaken belief that she had the
Fourth Issue: authority to sell the property of Motorich.[56] Article 2155 of the Civil
Damages and Attorneys Fees Code provides that [p]ayment by reason of a mistake in the
construction or application of a difficult question of law may come
Finally, petitioner prays for damages and attorneys fees, alleging that within the scope of the preceding article.
[i]n an utter display of malice and bad faith, [r]espondents attempted
and succeeded in impressing on the trial court and [the] Court of WHEREFORE, the petition is hereby DENIED and the assailed
Appeals that Gruenberg did not represent herself as authorized by Decision is AFFIRMED.
Respondent Motorich despite the receipt issued by the former SO ORDERED.
specifically indicating that she was signing on behalf of Motorich
Sales Corporation. Respondent Motorich likewise acted in bad faith
when it claimed it did not authorize Respondent Gruenberg and that
the contract [was] not binding, [insofar] as it [was] concerned, despite
receipt and enjoyment of the proceeds of Gruenbergs
act.[48] Assuming that Respondent Motorich was not a party to the
alleged fraud, petitioner maintains that Respondent Gruenberg
should be held liable because she acted fraudulently and in bad faith
[in] representing herself as duly authorized by [R]espondent
[C]orporation.[49]
As already stated, we sustain the findings of both the trial and the
appellate courts that the foregoing allegations lack factual
bases. Hence, an award of damages or attorneys fees cannot be
justified. The amount paid as earnest money was not proven to have
redounded to the benefit of Respondent Motorich. Petitioner claims
that said amount was deposited to the account of Respondent
Motorich, because it was deposited with the account of Aren
Commercial c/o Motorich Sales Corporation.[50] Respondent
Gruenberg, however, disputes the allegations of petitioner. She
testified as follows:
Q You voluntarily accepted the P100,000.00, as a matter of fact, that
was encashed, the check was encashed.
A Yes, sir, the check was paid in my name and I deposit[ed] it . . .
Q In your account?
A Yes, sir. [51]
In any event, Gruenberg offered to return the amount to petitioner xxx
since the sale did not push through.[52]
Moreover, we note that Andres Co is not a neophyte in the world of
corporate business. He has been the president of Petitioner
Corporation for more than ten years and has also served as chief
executive of two other corporate entities.[53] Co cannot feign
ignorance of the scope of the authority of a corporate treasurer such
as Gruenberg. Neither can he be oblivious to his duty to ascertain the
scope of Gruenbergs authorization to enter into a contract to sell a
parcel of land belonging to Motorich.

IGLESIA EVANGELICA METODISTA EN LAS ISLAS FILIPINAS
(IEMELIF) (Corporation Sole), INC., REV. NESTOR PINEDA, REV.
ROBERTO BACANI, BENJAMIN BORLONGAN, JR., DANILO
SAUR, RICHARD PONTI, ALFREDO MATABANG and all the
other members of the IEMELIF TONDO CONGREGATION of the
IEMELIF CORPORATION SOLE, Petitioners, -versus- BISHOP
NATHANAEL LAZARO, REVERENDS HONORIO RIVERA,
DANIEL MADUCDOC, FERDINAND MERCADO, ARCADIO
CABILDO, DOMINGO GONZALES, ARTURO LAPUZ, ADORABLE
MANGALINDAN, DANIEL VICTORIA and DAKILA CRUZ, and LAY
LEADER LINGKOD MADUCDOC and CESAR DOMINGO, acting
individually and as members of the Supreme Consistory of
Elders and those claiming under the Corporation Aggregate,
Respondents.
G.R. No. 184088 July 6, 2010
DECISION
ABAD, J.:
The present dispute resolves the issue of whether or not a
corporation may change its character as a corporation sole into a
corporation aggregate by mere amendment of its articles of
incorporation without first going through the process of dissolution.
The Facts and the Case
In 1909, Bishop Nicolas Zamora established the petitioner Iglesia
Evangelica Metodista En Las Islas Filipinas, Inc. (IEMELIF) as a
corporation sole with Bishop Zamora acting as its General
Superintendent. Thirty-nine years later in 1948, the IEMELIF enacted
and registered a by-laws that established a Supreme Consistory of
Elders (the Consistory), made up of church ministers, who were to
serve for four years. The by-laws empowered the Consistory to elect
a General Superintendent, a General Secretary, a General
Evangelist, and a Treasurer General who would manage the affairs
of the organization. For all intents and purposes, the Consistory
served as the IEMELIFs board of directors.
Apparently, although the IEMELIF remained a corporation sole on
paper (with all corporate powers theoretically lodged in the hands of
one member, the General Superintendent), it had always acted like a
corporation aggregate. The Consistory exercised IEMELIFs decision-
making powers without ever being challenged. Subsequently, during
its 1973 General Conference, the general membership voted to put
things right by changing IEMELIFs organizational structure from a
corporation sole to a corporation aggregate. On May 7, 1973 the
Securities and Exchange Commission (SEC) approved the vote. For
some reasons, however, the corporate papers of the IEMELIF
remained unaltered as a corporation sole.
Only in 2001, about 28 years later, did the issue reemerge. In answer
to a query from the IEMELIF, the SEC replied on April 3, 2001 that,
although the SEC Commissioner did not in 1948 object to the
conversion of the IEMELIF into a corporation aggregate, that
conversion was not properly carried out and documented. The SEC
said that the IEMELIF needed to amend its articles of incorporation
for that purpose.[1]
| 91
Acting on this advice, the Consistory resolved to convert the IEMELIF
to a corporation aggregate. Respondent Bishop Nathanael Lazaro, its
General Superintendent, instructed all their congregations to take up
the matter with their respective members for
resolution. Subsequently, the general membership approved the
conversion, prompting the IEMELIF to file amended articles of
incorporation with the SEC. Bishop Lazaro filed an affidavit-
certification in support of the conversion.[2]
Petitioners Reverend Nestor Pineda, et al., which belonged to a
faction that did not support the conversion, filed a civil case
for Enforcement of Property Rights of Corporation Sole, Declaration
of Nullity of Amended Articles of Incorporation from Corporation Sole
to Corporation Aggregate with Application for Preliminary Injunction
and/or Temporary Restraining Order in IEMELIFs name against
respondent members of its Consistory before the Regional Trial
Court (RTC) of Manila.[3] Petitioners claim that a complete shift from
IEMELIFs status as a corporation sole to a corporation aggregate
required, not just an amendment of the IEMELIFs articles of
incorporation, but a complete dissolution of the existing corporation
sole followed by a re-incorporation.
Unimpressed, the RTC dismissed the action in its October 19, 2005
decision.[4] It held that, while the Corporation Code on Religious
Corporations (Chapter II, Title XIII) has no provision governing the
amendment of the articles of incorporation of a corporation sole, its
Section 109 provides that religious corporations shall be governed
additionally by the provisions on non-stock corporations insofar as
they may be applicable. The RTC thus held that Section 16 of the
Code[5] that governed amendments of the articles of incorporation of
non-stock corporations applied to corporations sole as well. What
IEMELIF needed to authorize the amendment was merely the vote or
written assent of at least two-thirds of the IEMELIF membership.
Petitioners Pineda, et al. appealed the RTC decision to the Court of
Appeals (CA).[6] On October 31, 2007 the CA rendered a
decision,[7] affirming that of the RTC.Petitioners moved for
reconsideration, but the CA denied it by its resolution of August 1,
2008,[8] hence, the present petition for review before this Court.
The Issue Presented
The only issue presented in this case is whether or not the CA erred
in affirming the RTC ruling that a corporation sole may be converted
into a corporation aggregate by mere amendment of its articles of
incorporation.
The Courts Ruling
Petitioners Pineda, et al. insist that, since the Corporation Code does
not have any provision that allows a corporation sole to convert into a
corporation aggregate by mere amendment of its articles of
incorporation, the conversion can take place only by first dissolving
IEMELIF, the corporation sole, and afterwards by creating a new
corporation in its place.
Religious corporations are governed by Sections 109 through 116 of
the Corporation Code. In a 2009 case involving IEMELIF, the Court
 | 92

distinguished a corporation sole from a corporation
aggregate.[9] Citing Section 110 of the Corporation Code, the Court
said that a corporation sole is one formed by the chief archbishop,
bishop, priest, minister, rabbi or other presiding elder of a religious
denomination, sect, or church, for the purpose of administering or
managing, as trustee, the affairs, properties and temporalities of
such religious denomination, sect or church. A corporation aggregate
formed for the same purpose, on the other hand, consists of two or
more persons.
True, the Corporation Code provides no specific mechanism for
amending the articles of incorporation of a corporation sole. But, as
the RTC correctly held, Section 109 of the Corporation Code allows
the application to religious corporations of the general provisions
governing non-stock corporations.
For non-stock corporations, the power to amend its articles of
incorporation lies in its members. The code requires two-thirds of
their votes for the approval of such an amendment. So how will this
requirement apply to a corporation sole that has technically but one
member (the head of the religious organization) who holds in his
hands its broad corporate powers over the properties, rights, and
interests of his religious organization?
corporation are patently unconstitutional, illegal, immoral, or contrary
to government rules and regulations, or if the required percentage of
ownership is not complied with. These impediments do not appear in
the case of IEMELIF.
Besides, as the CA noted, the IEMELIF worked out the amendment
of its articles of incorporation upon the initiative and advice of the
SEC. The latters interpretation and application of the Corporation
Code is entitled to respect and recognition, barring any divergence
from applicable laws. Considering its experience and specialized
capabilities in the area of corporation law, the SECs prior action on
the IEMELIF issue should be accorded great weight.
WHEREFORE, the Court DENIES the petition
and AFFIRMS the October 31, 2007 decision and August 1,
2008 resolution of the Court of Appeals in CA-G.R. SP 92640.
SO ORDERED.

Although a non-stock corporation has a personality that is distinct

from those of its members who established it, its articles of
incorporation cannot be amended solely through the action of its
board of trustees. The amendment needs the concurrence of at least
two-thirds of its membership. If such approval mechanism is made to
operate in a corporation sole, its one member in whom all the powers
of the corporation technically belongs, needs to get the concurrence
of two-thirds of its membership. The one member, here the General
Superintendent, is but a trustee, according to Section 110 of the
Corporation Code, of its membership.

There is no point to dissolving the corporation sole of one member to

enable the corporation aggregate to emerge from it. Whether it is a
non-stock corporation or a corporation sole, the corporate being
remains distinct from its members, whatever be their number. The
increase in the number of its corporate membership does not change
the complexion of its corporate responsibility to third parties. The one
member, with the concurrence of two-thirds of the membership of the
organization for whom he acts as trustee, can self-will the
amendment. He can, with membership concurrence, increase the
technical number of the members of the corporation from sole or one
to the greater number authorized by its amended articles.

Here, the evidence shows that the IEMELIFs General

Superintendent, respondent Bishop Lazaro, who embodied the
corporation sole, had obtained, not only the approval of the
Consistory that drew up corporate policies, but also that of the
required two-thirds vote of its membership.

The amendment of the articles of incorporation, as correctly put by

the CA, requires merely that a) the amendment is not contrary to any
provision or requirement under the Corporation Code, and that b) it is
for a legitimate purpose. Section 17 of the Corporation
Code[10] provides that amendment shall be disapproved if, among
others, the prescribed form of the articles of incorporation or
amendment to it is not observed, or if the purpose or purposes of the

EN BANC
G.R. No. 164641 December 20, 2007
BANK OF THE PHILIPPINE ISLANDS, as successor of Far East
Bank and Trust Company, petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, REHABILITATION
HOLDINGS, INC., VELASCO, JR., ASB DEVELOPMENT
CORPORATION, ASB LAND, INC., ASB FINANCE, INC., MAKATI
HOPE CHRISTIAN SCHOOL, INC., BEL-AIR HOLDINGS CORP.,
WINCHESTER TRADING, INC., VYL DEVELOPMENT CORP.,
GERRICK HOLDINGS CORP., NEIGHBORHOOD HOLDINGS,
INC., and THE COURT OF APPEALS,respondents.
DECISION
TINGA, J.:
For resolution is a petition seeking to nullify the 30 January 2004
Decision1 of the Court of Appeals in CA-G.R. SP No.
773092 upholding the Securities and Exchange Commission’s (SEC)
approval of the rehabilitation of the ASB Group of Companies (ASB
Group) in SEC En Banc Case No. EB-726.3
The antecedent facts are as follows:
The Bank of the Philippine Islands (BPI), through its predecessor-in-
interest, Far East Bank and Trust Company (FEBTC), extended
credit accommodations to the ASB Group4 with an outstanding
aggregate principal amount of P86,800,000.00, secured by a real
estate mortgage over two (2) properties located in Greenhills, San
Juan.5 On 2 May 2000, the ASB Group filed a petition for
rehabilitation and suspension of payments before the SEC, docketed
as SEC Case No. 05-00-6609.6 Thereafter, on 18 August 2000, the
interim receiver submitted its Proposed Rehabilitation Plan
(Rehabilitation Plan)7 for the ASB Group. The Rehabilitation Plan
provides, among others, a dacion en pago by the ASB Group to BPI
of one of the properties mortgaged to the latter at the ASB Group as
selling value of P84,000,000.00 against the total amount of the ASB
Group’s exposure to the bank. In turn, ASB Group would require the
release of the other property mortgaged to BPI, to be thereafter
placed in the asset pool. Specifically, the pertinent portion of the plan
reads:
"x x x ASB plans to invoke a dacion en pago for its #35 Eisenhower
property at ASB’s selling value of P84 million against the total
amount of the ASB’s exposure to the bank. In return, ASB requests
the release of the #27 Annapolis property which will be placed in the
ASB creditors’ asset pool." 8
The dacion would constitute full payment of the entire obligation due
to BPI because the balance was then to be considered waived, as
per the Rehabilitation Plan.9
BPI opposed the Rehabilitation Plan and moved for the dismissal of
the ASB Group’s petition for rehabilitation.10However, on 26 April
2001, the SEC hearing panel issued an order11 approving ASB
Group’s proposed rehabilitation plan and appointed Mr. Fortunato
Cruz as rehabilitation receiver.
BPI filed a petition for review12 of the 26 April 2001 order before the
SEC en banc, imputing grave abuse of discretion on the part of the
| 93
hearing panel. It argued that the Order constituted an arbitrary
violation of BPI’s freedom and right to contract since the
Rehabilitation Plan compelled BPI to enter into a dacion en
pago agreement with the ASB Group.13 The SEC en banc denied the
petition.14
BPI then filed a petition for review15 before the Court of Appeals (CA),
claiming that the SEC en banc erred in affirming the approval of the
Rehabilitation Plan despite being violative of BPI’s contractual rights.
BPI contended that the terms of the Rehabilitation Plan would impair
its freedom to contract, and alleged that the dacion en pagowas a
mode of payment beneficial to the ASB Group only.16
The CA dismissed the petition for lack of merit. It held that
considering that the dacion en pago transaction could proceed only
proceed upon the mutual agreement of the parties, BPI’s assertion
that it is being coerced could not be sustained. At no point would the
Rehabilitation Plan compel secured creditors such as BPI to agree to
a settlement agreement against their will, the CA added. Moreover,
BPI could refuse to accept any arrangement contemplated by the
receiver and just assert its preferred right in the liquidation and
distribution of the assets of the ASB Group.17BPI filed a motion for
reconsideration, but the same was denied for lack of merit.18
Before this Court, BPI asserts that the CA erred in ruling that the
approval by the SEC of the ASB Group’s Rehabilitation Plan did not
violate BPI’s rights as a creditor.19 It maintains its position that
the dacion en pago is a form of coercion or compulsion, and violative
of the rights of secured creditors.20 It asserts that in order for the
Rehabilitation Plan to be feasible and legally tenable, it must reflect
the express and free consent of the parties; i.e,that the conditions
should not be imposed but agreed upon by the parties. By approving
the Rehabilitation Plan, the SEC hearing panel totally disregarded the
efficacy of the mortgage agreements between the parties, and
sanctioned a mode of payment which is solely for the unilateral
benefit of the ASB Group.21 This is so because in the event that the
secured creditors such as itself would not agree to dacion en pago,
the ASB Group’s obligations would be settled at the selling prices of
the mortgaged properties to be dictated by the ASB
Group,22 rendering BPI’s status as a preferred creditor illusory.23
BPI further claims that despite its rejection of the Rehabilitation Plan,
no effort was made to resolve the impasse on the valuation of the
mortgaged properties. With no repayment scheme for secured
creditors not accepting the Rehabilitation Plan, the same has become
discriminatory.24 Moreover, any interference on the rights of the
secured creditors must not be so indefinite and open-ended as to
effectively deprive secured creditors of their right to their
security,25 BPI adds.
In its Comment,26 the SEC, through the Office of the Solicitor
General, claims that the terms and conditions of the Rehabilitation
Plan do not violate BPI’s right as a creditor because the dacion en
pago transaction contemplated in the plan can only proceed upon
mutual agreement of the parties. Moreover, being a secured creditor,
BPI enjoys preference over unsecured creditors, thus there is no
reason for BPI to fear the non-payment of the loan, or the inability to
assert its preferred right over the mortgaged property.27
On the other hand, private respondents maintain that the non-
impairment clause of the Constitution relied on by BPI is a limit on the
exercise of legislative power and not of judicial or quasi-judicial
 | 94

power. The SEC’s approval of the Rehabilitation Plan was an of payment where the debtor offers another thing to the creditor who
exercise of adjudicatory power by an administrative agency and thus accepts it as equivalent of payment of an outstanding debt.37 The
the non-impairment clause does not apply.28 In addition, they stress undertaking really partakes in a sense of the nature of sale, that is,
that there is no coercion or compulsion that would be employed the creditor is really buying the thing or property of the debtor, the
under the Rehabilitation Plan. If dacion en pago fails to materialize, payment for which is to be charged against the debtor’s debt. As
the Rehabilitation Plan contemplates to settle the obligations to such, the essential elements of a contract of sale, namely; consent,
secured creditors with mortgaged properties at selling object certain, and cause or consideration must be present.38 Being a
prices.29 Finally, they claim that BPI failed to submit any valuation of form of contract, the dacion en pago agreement cannot be perfected
the mortgage properties to substantiate its objection to the without the consent of the parties involved.
Rehabilitation Plan, making its objection thereto totally
unreasonable.30 We find no element of compulsion in the dacion en pago provision of
the Rehabilitation Plan. It was not the only solution presented by the
The petition must be denied. ASB to pay its creditors. In fact, it was stated in the Rehabilitation
Plan that:
The very same issues confronted the Court in the case
of Metropolitan Bank & Trust Company v. ASB Holdings, et al.31 In x x x. If the dacion en pago herein contemplated does not materialize
this case, Metropolitan Bank & Trust Company (MBTC) refused to for failure of the secured creditors to agree thereto, the rehabilitation
enter into a dacion en pago arrangement contained in ASB’s plan contemplates to settle the obligations (without interest, penalties
proposed Rehabilitation Plan.32 MBTC argued, among others, that and other related charges accruing after the date of the initial
the forced transfer of properties and the diminution of its right to suspension order) to secured creditors with mortgaged properties at
enforce its lien on the mortgaged properties violate its constitutional ASB selling prices for the general interest of the employees,
right against impairment of contracts and right to due process. The creditors, unit buyers, government, general public and the
Court ruled that there is no impairment of contracts because the economy.39
approval of the Rehabilitation Plan and the appointment of a
rehabilitation receiver merely suspends the action for claims against Thus, if BPI does not find the dacion en pago modality acceptable,
the ASB Group, and MBTC may still enforce its preference when the the ASB Group can propose to settle its debts at such amount as is
assets of the ASB Group will be liquidated. But if the rehabilitation is equivalent to the selling price of the mortgaged properties. If BPI still
found to be no longer feasible, then the claims against the distressed refuses this option, it can assert its rights in the liquidation and
corporation would have to be settled eventually and the secured distribution of the ASB Group’s assets. It will not lose its status as a
creditors shall enjoy preference over the unsecured ones. Moreover, secured creditor, retaining its preference over unsecured creditors
the Court stated that there is no compulsion to enter into a dacion en when the assets of the corporation are finally liquidated.40
pago agreement, nor to waive the interests, penalties and related WHEREFORE, in view of the foregoing, the petition is DENIED and
charges, since these are merely proposals to creditors such as the Decision dated 30 January 2004 of the Court of Appeals in CA-
MBTC, such that in the event the secured creditors refuse the dacion, G.R. SP No. 77309 is AFFIRMED. Costs against petitioner.
the Rehabilitation Plan proposes to settle the obligations to secured
creditors with mortgaged properties at selling prices. SO ORDERED.
Rehabilitation proceedings in our jurisdiction, much like the
bankruptcy laws of the United States, have equitable and
rehabilitative purposes. On the one hand, they attempt to provide for
the efficient and equitable distribution of an insolvent debtor’s
remaining assets to its creditors; and on the other, to provide debtors
with a "fresh start" by relieving them of the weight of their outstanding
debts and permitting them to reorganize their affairs.33 The rationale
of P.D. No. 902-A, as amended, is to "effect a feasible and viable
rehabilitation,"34 by preserving a foundering business as going
concern, because the assets of a business are often more valuable
when so maintained than they would be when liquidated.35
The Court reiterates that the SEC’s approval of the Rehabilitation
Plan did not impair BPI’s right to contract.1âwphi1 As correctly
contended by private respondents, the non-impairment clause is a
limit on the exercise of legislative power and not of judicial or quasi-
judicial power.36 The SEC, through the hearing panel that heard the
petition for approval of the Rehabilitation Plan, was acting as a quasi-
judicial body and thus, its order approving the plan cannot constitute
an impairment of the right and the freedom to contract.
Besides, the mere fact that the Rehabilitation Plan proposes a dacion
en pago approach does not render it defective on the ground of
impairment of the right to contract. Dacion en pago is a special mode

G.R. No. L-39050 February 24, 1981
CARLOS GELANO and GUILLERMINA MENDOZA DE
GELANO, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and INSULAR
SAWMILL, INC., respondents.
DE CASTRO, J.:
Private respondent Insular Sawmill, Inc. is a corporation organized on
September 17, 1945 with a corporate life of fifty (50) years, or up to
September 17, 1995, with the primary purpose of carrying on a
general lumber and sawmill business. To carry on this business,
private respondent leased the paraphernal property of petitioner-wife
Guillermina M. Gelano at the corner of Canonigo and Otis, Paco,
Manila for P1,200.00 a month. It was while private respondent was
leasing the aforesaid property that its officers and directors had come
to know petitioner-husband Carlos Gelano who received from the
corporation cash advances on account of rentals to be paid by the
corporation on the land.
Between November 19, 1947 to December 26, 1950 petitioner Carlos
Gelano obtained from private respondent cash advances of
P25,950.00. The said sum was taken and received by petitioner
Carlos Gelano on the agreement that private respondent could
deduct the same from the monthly rentals of the leased premises
until said cash advances are fully paid. Out of the aforementioned
cash advances in the total sum of P25,950.00, petitioner Carlos
Gelano was able to pay only P5,950.00 thereby leaving an unpaid
balance of P20,000.00 which he refused to pay despite repeated
demands by private respondent. Petitioner Guillermina M. Gelano
refused to pay on the ground that said amount was for the personal
account of her husband asked for by, and given to him, without her
knowledge and consent and did not benefit the family.
On various occasions from May 4, 1948 to September 11, 1949
petitioners husband and wife also made credit purchases of lumber
materials from private respondent with a total price of P1,120.46 in
connection with the repair and improvement of petitioners' residence.
On November 9, 1949 partial payment was made by petitioners in the
amount of P91.00 and in view of the cash discount in favor of
petitioners in the amount of P83.00, the amount due private
respondent on account of credit purchases of lumber materials is
P946.46 which petitioners failed to pay.
On July 14, 1952, in order to accommodate and help petitioners
renew previous loans obtained by them from the China Banking
Corporation, private respondent, through Joseph Tan Yoc Su,
executed a joint and several promissory note with Carlos Gelano in
favor of said bank in the amount of P8,000.00 payable in sixty (60)
days. For failure of Carlos Gelano to pay the promissory note upon
maturity, the bank collected from the respondent corporation the
amount of P9,106.00 including interests, by debiting it from the
corporation's current account with the bank. Petitioner Carlos Gelano
was able to pay private respondent the amount of P5,000.00 but the
balance of P4,106.00 remained unsettled. Guillermina M. Gelano
refused to pay on the ground that she had no knowledge about the
accommodation made by the corporation in favor of her husband.
| 95
On May 29, 1959 the corporation, thru Atty. German Lee, filed a
complaint for collection against herein petitioners before the Court of
First Instance of Manila. Trial was held and when the case was at the
stage of submitting memorandum, Atty. Lee retired from active law
practice and Atty. Eduardo F. Elizalde took over and prepared the
memorandum.
In the meantime, private respondent amended its Articles of
Incorporation to shorten its term of existence up to December 31,
1960 only. The amended Articles of Incorporation was filed with, and
approved by the Securities and Exchange Commission, but the trial
court was not notified of the amendment shortening the corporate
existence and no substitution of party was ever made. On November
20, 1964 and almost four (4) years after the dissolution of the
corporation, the trial court rendered a decision in favor of private
respondent the dispositive portion of which reads as follows:
WHEREFORE, judgment is rendered, ordering:
1. Defendant Carlos Gelano to pay plaintiff the sum of:
(a) P19,650.00 with interest thereon at the legal rate from the date of
the filing of the complaint on May 29, 1959, until said sum is fully
paid;
(b) P4,106.00, with interest thereon at the legal rate from the date of
the filing of the complaint until said sum is fully paid;
2. Defendants Carlos Gelano and Guillermina Mendoza to pay jointly
and severally the sum of:
(a) P946.46, with interest thereon, at the agreed rate of 12% per
annum from October 6, 1946, until said sum is fully paid;
(b) P550.00, with interest thereon at the legal rate from the date of
the filing of the complaint until the said sum is fully paid;
(c) Costs of the suit; and
3. Defendant Carlos Gelano to pay the plaintiff the sum of P2,000.00
attorney's fees.
The Countered of defendants are dismissed.
SO ORDERED. 1
Both parties appealed to the Court of Appeals, private respondent
also appealing because it insisted that both Carlos Gelano and
Guillermina Gelano should be held liable for the substantial portion of
the claim.
On August 23, 1973, the Court of Appeals rendered a decision
modifying the judgment of the trial court by holding petitioner spouses
jointly and severally liable on private respondent's claim and
increasing the award of P4,106.00. The dispositive portion of the
decision reads as follows:
WHEREFORE, modified in the sense that the amount of P4,160.00
under paragraph 1 (b) is raised to P8,160.00 and the clarification that
the conjugal partnership of the spouses is jointly and severally liable
for the obligations adjudged against defendant Carlos Gelano, the
judgment appealed from is affirmed in all other respects. 2
After petitioners received a copy of the decision on August 24, 1973,
they came to know that the Insular Sawmill Inc. was dissolved way

back on December 31, 1960. Hence, petitioners filed a motion to
dismiss the case and/or reconsideration of the decision of the Court
of Appeals on grounds that the case was prosecuted even after
dissolution of private respondent as a corporation and that a defunct
corporation cannot maintain any suit for or against it without first
complying with the requirements of the winding up of the affairs of the
corporation and the assignment of its property rights within the
required period.
Incidentally, after receipt of petitioners' motion to dismiss and/or
reconsideration or on October 28, 1973, private respondent thru its
former directors filed a Petition for Receivership before the Court of
First Instance of Manila, docketed as Special Proceedings No.
92303, 3 which petition is still pending before said court.
On November 5, 1973, private respondent filed comment on the
motion to dismiss and or reconsideration and after the parties have
filed reply and rejoinder, the Court of Appeals on July 5, 1974 issued
a resolution 4 denying the aforesaid motion.
Hence, the present petition for review, petitioners assigning the
following errors:
I AUTHORIZED COUNSEL TO NOTIFY THE TRIAL COURT OF ITS
THE "RESPONDENT COURT" ERRED IN DENYING PETlTIONERS
MOTION TO DISMISS THIS CASE DESPITE THE CLEAR FINDING
THAT "RESPONDENT" HAD ALREADY CEASED TO EXIST AS A
CORPORATION SINCE DECEMBER 31, 1960 YET.
II
THE "RESPONDENT COURT" ERRED IN NOT HOLDING THAT
ACTIONS PENDING FOR OR AGAINST A DEFUNCT
CORPORATION ARE DEEMED ABATED.
III
THE "RESPONDENT COURT" ERRED IN HOLDING INSTEAD
THAT EVEN IF THERE WAS NO COMPLIANCE WITH SECTIONS
77 AND 78 OF THE CORPORATION LAW FOR THE WINDING UP
OF THE AFFAIRS OF THE CORPORATION BY THE
CONVEYANCE OF CORPORATE PROPERTY AND PROPERTY
RIGHTS TO AN ASSIGNEE, OR TRUSTEE OR THE
APPOINTMENT OF A RECEIVER WITHIN THREE YEARS FROM
THE DISSOLUTION OF SUCH CORPORATION, ANY LITIGATION
FILED BY OR AGAINST THE DISSOLVED CORPORATION,
INSTITUTED WITHIN THREE YEARS AFTER SUCH
DISSOLUTION BUT WHICH COULD NOT BE TERMINATED
WITHIN SAID PERIOD, MAY STILL BE CONTINUED AS IT IS NOT
DEEMED ABATED.
IV
THE "RESPONDENT COURT" ERRED IN THE APPLICATION TO
THIS CASE OF ITS RULING IN PASAY CREDIT AND FINANCE
CORPORATION, VERSUS LAZARO, ET AL., 46 O.G. (11) 5528,
AND IN OVERLOOKING THE DISTINCTION LAID DOWN BY THIS
HONORABLE COURT IN NUMEROUS DECIDED CASES THAT
ONLY CASES FILED IN THE NAME OF ASSIGNEES, TRUSTEES
OR RECEIVERS (FOR A DEFUNCT CORPORATION), AI)POINTED
WITHIN THREE YEARS FROM ITS DISSOLUTION, MAY BE
| 96
PROSECUTED BEYOND THE SAID THREE YEAR PERIOD, AND
THAT, ALL OTHERS ARE DEEMED ABATED.
V
THE "RESPONDENT COURT" ERRED IN HOLDING THAT WITH
THE FILING OF SPECIAL PROCEEDINGS NO. 92303 IN THE
COURT OF FIRST INSTANCE OF MANILA BY FORMER
DIRECTORS OF "PRIVATE RESPONDENT" ON OCTOBER
23,1973, OR, THIRTEEN YEARS AFTER ITS DISSOLUTION, A
LEGAL, PERSONALITY WILL BE APPOINTED TO REPRESENT
THE CORPORATION.
VI
THE "RESPONDENT COURT" ERRED IN PRACTICALLY RULING
THAT THE THREE-YEAR PERIOD PROVIDED FOR BY THE
CORPORATION LAW WITHIN WHICH ASSIGNEES, TRUSTEES
FOR RECEIVERS MAY BE APPOINTED MAY BE EXTENDED.
VII
THE "RESPONDENT COURT" ERRED IN NOT HOLDING THAT
THE FAILURE OF "PRIVATE RESPONDENT" OR ITS
DISSOLUTION OR OF ITS "CIVIL DEATH" MAY BE CONSIDERED
AS AN ABANDONMENT OF ITS CAUSE OF ACTION AMOUNTING
TO A FAILURE TO PROSECUTE AND RESULTING IN THE
ABATEMENT OF THE SUIT.
VIII
THE "RESPONDENT COURT" ERRED IN RECOGNIZING THE
PERSONALITY OF COUNSEL APPEARING FOR PRIVATE
RESPONDENT' DESPITE HIS ADMISSION THAT HE DOES NOT
KNOW THE "PRIVATE RESPONDENT" NOR HAS HE MET ANY OF
ITS DIRECTORS AND OFFICERS.
IX
THE "RESPONDENT COURT" ERRED IN AFFIRMING THE
DECISION OF THE TRIAL COURT HOLDING IN FAVOR OF
"PRIVATE RESPONDENT".
X
THE "RESPONDENT COURT" ERRED IN MODIFYING THE TRIAL
COURT'S DECISION AND HOLDING EVEN THE CONJUGAL
PARTNERSHIP OF PETITIONERS JOINTLY AND SEVERALLY
LIABLE FOR THE OBLIGATION ADJUDGED AGAINST
PETITIONER-HUSBAND, CARLOS GELANO.
The main issue raised by petitioner is whether a corporation, whose
corporate life had ceased by the expiration of its term of existence,
could still continue prosecuting and defending suits after its
dissolution and beyond the period of three years provided for under
Act No. 1459, otherwise known as the Corporation law, to wind up its
affairs, without having undertaken any step to transfer its assets to a
trustee or assignee.
The complaint in this case was filed on May 29, 1959 when private
respondent Insular Sawmill, Inc. was still existing. While the case
was being tried, the stockholders amended its Articles of
Incorporation by shortening the term of its existence from December

31, 1995 to December 31, 1960, which was approved by the
Securities and Exchange Commission.
In American corporate law, upon which our Corporation Law was
patterned, it is well settled that, unless the statutes otherwise provide,
all pending suits and actions by and against a corporation are abated
by a dissolution of the corporation. 5 Section 77 of the Corporation
Law provides that the corporation shall "be continued as a body
corporate for three (3) years after the time when it would have been
... dissolved, for the purpose of prosecuting and defending suits By or
against it ...," so that, thereafter, it shall no longer enjoy corporate
existence for such purpose. For this reason, Section 78 of the same
law authorizes the corporation, "at any time during said three years ...
to convey all of its property to trustees for the benefit of members,
Stockholders, creditors and other interested," evidently for the
purpose, among others, of enabling said trustees to prosecute and
defend suits by or against the corporation begun before the
expiration of said period. 6 Commenting on said sections, Justice
Fisher said:
It is to be noted that the time during which the corporation, through its
own officers, may conduct the liquidation of its assets and sue and be
sued as a corporation is limited to three years from the time the
period of dissolution commences; but that there is no time limited
within which the trustees must complete a liquidation placed in their
hands. It is provided only (Corp. Law, Sec. 78) that the conveyance
to the trustees must be made within the three-year period. It may be
found impossible to complete the work of liquidation within the three-
year period or to reduce disputed claims to judgment. The authorities
are to the effect that suits by or against a corporation abate when it
ceased to be an entity capable of suing or being sued (7 R.C.L.
Corps., Par. 750); but trustees to whom the corporate assets have
been conveyed pursuant to the authority of Section 78 may sue and
be sued as such in all matters connected with the liquidation. By the
terms of the statute the effect of the conveyance is to make the
trustees the legal owners of the property conveyed, subject to the
beneficial interest therein of creditors and stockholders. 7
When Insular Sawmill, Inc. was dissolved on December 31, 1960,
under Section 77 of the Corporation Law, it stin has the right until
December 31, 1963 to prosecute in its name the present case. After
the expiration of said period, the corporation ceased to exist for all
purposes and it can no longer sue or be sued. 8
However, a corporation that has a pending action and which cannot
be terminated within the three-year period after its dissolution is
authorized under Section 78 to convey all its property to trustees to
enable it to prosecute and defend suits by or against the corporation
beyond the Three-year period although private respondent (did not
appoint any trustee, yet the counsel who prosecuted and defended
the interest of the corporation in the instant case and who in fact
appeared in behalf of the corporation may be considered a trustee of
the corporation at least with respect to the matter in litigation only.
Said counsel had been handling the case when the same was
pending before the trial court until it was appealed before the Court of
Appeals and finally to this Court. We therefore hold that there was a
substantial compliance with Section 78 of the Corporation Law and
as such, private respondent Insular Sawmill, Inc. could still continue
prosecuting the present case even beyond the period of three (3)
years from the time of its dissolution.
| 97
From the above quoted commentary of Justice Fisher, the trustee
may commence a suit which can proceed to final judgment even
beyond the three-year period. No reason can be conceived why a
suit already commenced By the corporation itself during its existence,
not by a mere trustee who, by fiction, merely continues the legal
personality of the dissolved corporation should not be accorded
similar treatment allowed — to proceed to final judgment and
execution thereof.
The word "trustee" as sued in the corporation statute must be
understood in its general concept which could include the counsel to
whom was entrusted in the instant case, the prosecution of the suit
filed by the corporation. The purpose in the transfer of the assets of
the corporation to a trustee upon its dissolution is more for the
protection of its creditor and stockholders. Debtors like the petitioners
herein may not take advantage of the failure of the corporation to
transfer its assets to a trustee, assuming it has any to transfer which
petitioner has failed to show, in the first place. To sustain petitioners'
contention would be to allow them to enrich themselves at the
expense of another, which all enlightened legal systems condemn.
The observation of the Court of Appeals on the issue now before Us
that:
Under Section 77 of the Corporation Law, when the corporate
existence is terminated in any legal manner, the corporation shall
nevertheless continue as a body corporate for three (3) years after
the time when it would have been dissolved, for the purpose of
prosecuting and defending suits by or against it. According to
authorities, the corporation "becomes incapable of making contracts
or receiving a grant. It does not, however, cease to be a body
corporate for all purposes." In the case of Pasay Credit and Finance
Corp. vs. Isidro Lazaro and others, 46 OG (11) 5528, this Court held
that "a corporation may continue a pending 'litigation even after the
lapse of the 3-year period granted by Section 77 of Act 1459 to
corporation subsequent to their dissolution to continue its corporate
existence for the purpose of winding up their affairs and settling all
the claims by and against same." We note that the plaintiff Insular
Sawmill, Inc. ceased as a corporation on December 30, 1960 but the
case at bar was instituted on May 29, 1959, during the time when the
corporation was still very much alive. Accordingly, it is our view that
"any litigation filed by or against it instituted within the period, but
which could not be terminated, must necessarily prolong that period
until the final termination of said litigation as otherwise corporations in
liquidation would lose what should justly belong to them or would be
exempt from the payment of just obligations through a mere
technicality, something that courts should prevent" (Philippine
Commercial Laws by Martin, 1962 Ed., Vol. 2, p. 1716).
merits the approval of this Court.
The last two assigned errors refer to the disposition of the main case.
Petitioners contend that the obligations contracted by petitioner
Carlos Gelano from November 19, 1947 until August 18, 1950
(before the effectivity of the New Civil Code) and from December 26,
1950 until July 14, 1952 (during the effectivity of the New Civil Code)
were his personal obligations, hence, petitioners should not be held
jointly and severally liable. As regards the said issues, suffice it to
say that with the findings of the Court of Appeals that the obligation
contracted by petitioner-husband Carlos Gelano redounded to the
benefit of the family, the inevitable conclusion is that the conjugal
 | 98

property is liable for his debt pursuant to paragraph 1, Article 1408,

Civil Code of 1889 9 which provision incidentally can still be found in
paragraph 1, Article 161 of the New Civil Code. 10 Only the conjugal
partnership is liable, not joint and several as erroneously described
by the Court of Appeals, the conjugal partnership being only a single
entity.
WHEREFORE, with the modification that only the conjugal
partnership is liable, the appealed decision is hereby affirmed in all
other respects. Without pronouncement as to costs.
SO ORDERED.

[G.R. No. 102965. January 21, 1999]
JAMES REBURIANO and URBANO REBURIANO, petitioners,
vs. HONORABLE COURT OF APPEALS, and PEPSI COLA
BOTTLING COMPANY OF THE PHILIPPINES, INC., respondents.
DECISION
MENDOZA, J.:
In Civil Case No. Q-35598, entitled Pepsi Cola Bottling Company of
the Philippines, Inc. v. Urbano (Ben) Reburiano and James
Reburiano, the Regional Trial Court, Branch 103 rendered on June 1,
1987 a decision, the dispositive portion of which reads:
ACCORDINGLY, judgment is hereby rendered in favor of plaintiff
Pepsi Cola Bottling Co. of the Philippines, Inc.
1. Ordering the defendants Urbano (Ben) Reburiano and James
Reburiano to pay jointly and severally the plaintiff the sum
of P55,000.00, less whatever empties (cases and bottles) may be
returned by said defendants valued at the rate of P55.00 per empty
case with bottles.
2. Costs against the defendants in case of execution.
SO ORDERED.
Private respondent Pepsi Cola Bottling Company of the Philippines,
Inc. appealed to the Court of Appeals seeking the modification of the
portion of the decision, which stated the value of the cases with
empty bottles as P55.00 per case, and obtained a favorable
decision. On June 26, 1990, judgment was rendered as follows:
WHEREFORE, the decision appealed from is SET ASIDE and
another one is rendered, ordering the defendant-appellees to pay
jointly and severally the plaintiff-appellant the sum of P55,000.00 with
interest at the legal rate from January 1982. With costs against
defendants-appellees.
After the case had been remanded to it and the judgment had
become final and executory, the trial court issued on February 5,
1991 a writ of execution.
It appears that prior to the promulgation of the decision of the trial
court, private respondent amended its articles of incorporation to
shorten its term of existence to July 8, 1983. The amended articles of
incorporation was approved by the Securities and Exchange
Commission on March 2, 1984. The trial court was not notified of this
fact.
On February 13, 1991, petitioners moved to quash the writ of
execution alleging -
3. That when the trial of this case was conducted, when the decision
was rendered by this Honorable Court, when the said decision was
appealed to the Court of Appeals, and when the Court of Appeals
rendered its decision, the private respondent was no longer in
existence and had no more juridical personality and so, as such, it no
longer had the capacity to sue and be sued;
4. That after the [private respondent], as a corporation, lost its
existence and juridical personality, Atty. Romualdo M. Jubay had no
| 99
more client in this case and so his appearance in this case was no
longer possible and tenable;
5. That in view of the foregoing premises, therefore, the decision
rendered by this Honorable Court and by the Honorable Court of
Appeals are patent nullity, for lack of jurisdiction and lack of capacity
to sue and be sued on the part of the [private respondent];
6. That the above-stated change in the situation of parties, whereby
the [private respondent] ceased to exist since 8 July 1983, renders
the execution of the decision inequitable or impossible.[1]
Private respondent opposed petitioners motion. It argued that the
jurisdiction of the court as well as the respective parties capacity to
sue had already been established during the initial stages of the
case; and that when the complaint was filed in 1982, private
respondent was still an existing corporation so that the mere fact that
it was dissolved at the time the case was yet to be resolved did not
warrant the dismissal of the case or oust the trial court of its
jurisdiction. Private respondent further claimed that its dissolution
was effected in order to transfer its assets to a new firm of almost the
same name and was thus only for convenience.[2]
On February 28, 1991, the trial court issued an order[3] denying
petitioners motion to quash. Petitioners then filed a notice of appeal,
but private respondent moved to dismiss the appeal on the ground
that the trial courts order of February 28, 1991 denying petitioners
motion to quash writ of execution was not appealable.[4] The trial
court, however, denied private respondents motion and allowed
petitioners to pursue their appeal.
In its resolution[5] of September 3, 1991, the appellate court
dismissed petitioners appeal. Petitioners moved for a
reconsideration, but their motion was denied by the appellate court in
its resolution, dated November 26, 1991.
Hence, this petition for review on certiorari. Petitioners pray that the
resolutions, dated September 3, 1991 and November 26, 1991, of the
Court of Appeals be set aside and that a new decision be rendered
declaring the order of the trial court denying the motion to quash to
be appealable and ordering the Court of Appeals to give due course
to the appeal.[6]
On the other hand, private respondent argues that petitioners knew
that it had ceased to exist during the course of the trial of the case
but did not act upon this information until the judgment was about to
be enforced against them; hence, the filing of a Motion to Quash and
the present petition are mere dilatory tactics resorted to by
petitioners. Private respondent likewise cites the ruling of this Court
in Gelano v. Court of Appeals[7] that the counsel of a dissolved
corporation is deemed a trustee of the same for purposes of
continuing such action or actions as may be pending at the time of
the dissolution to counter petitioners contention that private
respondent lost its capacity to sue and be sued long before the trial
court rendered judgment and hence execution of such judgment
could not be complied with as the judgment creditor has ceased to
exist.[8]
First. The question is whether the order of the trial court denying
petitioners Motion to Quash Writ of Execution is appealable. As a
general rule, no appeal lies from such an order, otherwise litigation

will become interminable. There are exceptions, but this case does
not fall within any of such exceptions.
In Limpin, Jr. v. Intermediate Appellate Court, this Court held:[9]
Certain, it is, . . . that execution of final and executory judgments may
no longer be contested and prevented, and no appeal should lie
therefrom; otherwise, cases would be interminable, and there would
be negation of the overmastering need to end litigations.
There may, to be sure, be instances when an error may be
committed in the course of execution proceedings prejudicial to the
rights of a party. These instances, rare though they may be, do call
for correction by a superior court, as where -
1) the writ of execution varies the judgment;
2) there has been a change in the situation of the parties making
execution inequitable or unjust;
3) execution is sought to be enforced against property exempt from
execution;
4) it appears that the controversy has never been submitted to the
judgment of the court;
5) the terms of the judgment are not clear enough and there remains
room for interpretation thereof; or,
6) it appears that the writ of execution has been improvidently issued,
or that it is defective in substance, or is issued against the wrong
party, or that the judgment debt has been paid or otherwise satisfied,
or the writ was issued without authority;
In these exceptional circumstances, considerations of justice and
equity dictate that there be some mode available to the party
aggrieved of elevating the question to a higher court. That mode of
elevation may be either by appeal (writ of error or certiorari) or by a
special civil action of certiorari, prohibition, or mandamus.
In this case, petitioners anchored their Motion to Quash on the claim
that there was a change in the situation of the parties. However, a
perusal of the cases which have recognized such a ground as an
exception to the general rule shows that the change contemplated by
such exception is one which occurred subsequent to the judgment of
the trial court. Here, the change in the status of private respondent
took place in 1983, when it was dissolved, during the pendency of its
case in the trial court. The change occurred prior to the rendition of
judgment by the trial court.
It is true that private respondent did not inform the trial court of the
approval of the amended articles of incorporation which shortened its
term of existence. However, it is incredible that petitioners did not
know about the dissolution of private respondent considering the time
it took the trial court to decide the case and the fact that petitioner
Urbano Reburiano was a former employee of private respondent.As
private respondent says,[10] since petitioner Reburiano was a former
sales manager of the company, it could be reasonably presumed that
petitioners knew of the changes occurring in respondent
company.Clearly, the present case does not fall under the exception
relied upon by petitioners and, the Court of Appeals correctly denied
due course to the appeal. As has been noted, there are in fact cases
which hold that while parties are given a remedy from a denial of a
| 100
motion to quash or recall writ of execution, it is equally settled that
the writ will not be recalled by reason of any defense which could
have been made at the time of the trial of the case.[11]
Second. The Court of Appeals also held that in any event petitioners
cannot raise the question of capacity of a dissolved corporation to
maintain or defend actions previously filed by or against it because
the matter had not been raised by petitioners before the trial court nor
in their appeal from the decision of the said court. The appellate court
stated:
It appears that said motion to quash writ of execution is anchored on
the ground that plaintiff-appellee Pepsi Bottling Company of the
Philippines had been dissolved as a corporation in 1983, after the
filing of this case before the lower court, hence, it had lost its capacity
to sue. However, this was never raised as an issue before the lower
court and the Court of Appeals when the same was elevated on
appeal. The decision of this Court, through its Fourth Division, dated
June 26, 1990, in CA-G.R. CV No. 16070 which, in effect, modified
the appealed decision, consequently did not touch on the issue of
lack of capacity to sue, and has since become final and executory on
July 16, 1990, and has been remanded to the court a quo for
execution. It is readily apparent that the same can no longer be made
the basis for this appeal regarding the denial of the motion to quash
writ of execution. It should have been made in the earlier appeal as
the same was already obtaining at that time.[12]
We agree with this ruling. Rules of fair play, justice, and due process
dictate that parties cannot raise for the first time on appeal from a
denial of a Motion to Quash a Writ of Execution issues which they
could have raised but never did during the trial and even on appeal
from the decision of the trial court.[13]
Third. In any event, if the question of private respondents capacity to
sue can be raised for the first time in this case, we think petitioners
are in error in contending that a dissolved and non-existing
corporation could no longer be represented by a lawyer and
concomitantly a lawyer could not appear as counsel for a non-
existing judicial person.[14]
Section 122 of the Corporation Code provides in part:
122. Corporate Liquidation. - Every Corporation whose charter
expires by its own limitation or is annulled by forfeiture or otherwise,
or whose corporate existence for other purposes is terminated in any
other manner, shall nevertheless be continued as a body corporate
for three (3) years after the time when it would have been so
dissolved, for the purpose of prosecuting and defending suits by or
against it and enabling it to settle and close its affairs, to dispose of
and convey its property and to distribute its assets, but not for the
purpose of continuing the business for which it was established.
At any time during said three (3) years, said corporation is authorized
and empowered to convey all of its property to trustees for the benefit
of stockholders, members, creditors, and other persons in
interest.From and after any such conveyance by the corporation of its
property in trust for the benefit of its stockholders, members, creditors
and others in interests, all interests which the corporation had in the
property terminates, the legal interest vests in the trustees, and the
beneficial interest in the stockholders, members, creditors or other
persons in interest.

Petitioners argue that while private respondent Pepsi Cola Bottling
Company of the Philippines, Inc. undertook a voluntary dissolution on
July 3, 1983 and the process of liquidation for three (3) years
thereafter, there is no showing that a trustee or receiver was ever
appointed. They contend that 122 of the Corporation Code does not
authorize a corporation, after the three-year liquidation period, to
continue actions instituted by it within said period of three years.
Petitioners cite the case of National Abaca and Other Fibers
Corporation v. Pore[15] wherein this Court stated:
It is generally held, that where a statute continues the existence of a
corporation for a certain period after its dissolution for the purpose of
prosecuting and defending suits, etc., the corporation becomes
defunct upon the expiration of such period, at least in the absence of
a provision to the contrary, so that no action can afterwards be
brought by or against it, and must be dismissed. Actions pending by
or against the corporation when the period allowed by the statute
expires, ordinarily abate.[16]
This ruling, however, has been modified by subsequent
cases. In Board of Liquidators v. Kalaw,[17] this Court stated:
. . .The legal interest became vested in the trustee the Board of
Liquidators. The beneficial interest remained with the sole
stockholder the government. At no time had the government
withdrawn the property, or the authority to continue the present suit,
from the Board of Liquidators. If for this reason alone, we cannot stay
the hand of the Board of Liquidators from prosecuting this case to its
final conclusion. The provision of Section 78 (now Section 122) of the
Corporation Law the third method of winding up corporate
affairs finds application.[18]
Indeed, in Gelano vs. Court of Appeals,[19] a case having
substantially similar facts as the instant case, this Court held:
However, a corporation that has a pending action and which cannot
be terminated within the three-year period after its dissolution is
authorized under Sec. 78 [now 122] of the Corporation Law to convey
all its property to trustees to enable it to prosecute and defend suits
by or against the corporation beyond the three-year period. Although
private respondent did not appoint any trustee, yet the counsel who
prosecuted and defended the interest of the corporation in the instant
case and who in fact appeared in behalf of the corporation may be
considered a trustee of the corporation at least with respect to the
matter in litigation only. Said counsel had been handling the case
when the same was pending before the trial court until it was
appealed before the Court of Appeals and finally to this Court. We
therefore hold that there was substantial compliance with Sec. 78
[now 122] of the Corporation Law and such private respondent
Insular Sawmill, Inc. could still continue prosecuting the present case
even beyond the period of three (3) years from the time of
dissolution.
...[T]he trustee may commence a suit which can proceed to final
judgment even beyond the three-year period. No reason can be
conceived why a suit already commenced by the corporation itself
during its existence, not by a mere trustee who, by fiction, merely
continues the legal personality of the dissolved corporation should
not be accorded similar treatment allowed to proceed to final
judgment and execution thereof.[20]
| 101
In the Gelano case, the counsel of the dissolved corporation was
considered a trustee. In the later case of Clemente v. Court of
Appeals,[21] we held that the board of directors may be permitted to
complete the corporate liquidation by continuing as trustees by legal
implication. For, indeed, as early as 1939, in the case of Sumera v.
Valencia,[22] this Court held:
It is to be noted that the time during which the corporation, through its
own officers, may conduct the liquidation of its assets and sue and be
sued as a corporation is limited to three years from the time the
period of dissolution commences; but there is no time limit within
which the trustees must complete a liquidation placed in their
hands. It is provided only (Corp. Law, Sec. 78 [now Sec. 122]) that
the conveyance to the trustees must be made within the three-year
period. It may be found impossible to complete the work of liquidation
within the three-year period or to reduce disputed claims to
judgment.The authorities are to the effect that suits by or against a
corporation abate when it ceased to be an entity capable of suing or
being sued (7 R.C.L., Corps., par. 750); but trustees to whom the
corporate assets have been conveyed pursuant to the authority of
Sec. 78 [now Sec. 122] may sue and be sued as such in all matters
connected with the liquidation. . . .[23]
Furthermore, the Corporation Law provides:
145. Amendment or repeal. - No right or remedy in favor of or against
any corporation, its stockholders, members, directors, trustees, or
officers, nor any liability incurred by any such corporation,
stockholders, members, directors, trustees, or officers, shall be
removed or impaired either by the subsequent dissolution of said
corporation or by any subsequent amendment or repeal of this Code
or of any part thereof.
This provision safeguards the rights of a corporation which is
dissolved pending litigation.
There is, therefore, no reason why the suit filed by private respondent
should not be allowed to proceed to execution. It is conceded by
petitioners that the judgment against them and in favor of private
respondent in C.A. G.R. No. 16070 had become final and
executory. The only reason for their refusal to execute the same is
that there is no existing corporation to which they are indebted. Such
argument is fallacious. As previously mentioned, the law specifically
allows a trustee to manage the affairs of the corporation in
liquidation. Consequently, any supervening fact, such as the
dissolution of the corporation, repeal of a law, or any other fact of
similar nature would not serve as an effective bar to the enforcement
of such right.
WHEREFORE, the resolutions, dated September 3, 1991 and
November 26, 1991, of the Court of Appeals are AFFIRMED.
SO ORDERED.