G.R. No.

6217 December 26, 1911

CHARLES W. MEAD, plaintiff-appellant,
vs.
E. C. McCULLOUGH, ET AL., and THE PHILIPPINE ENGINEERING AND
CONSTRUCTION COMPANY, defendant-appellants.
Haussermann, Cohn & Fisher and A. D. Gibbs for plaintiff.
James J. Peterson and O'Brien & DeWitt for defendant McCullough.

TRENT, J.:
This action was originally brought by Charles W. Mead against Edwin C. McCullough, Thomas L.
Hartigan, Frank E. Green, and Frederick H. Hilbert. Mead has died since the commencement of the
action and the case is now going forward in the name of his administrator as plaintiff.
The complaint contains three causes of action, which are substantially as follows: The first, for salary;
the second, for profits; and the third, for the value of the personal effects alleged to have been left Mead
and sold by the defendants.
A joint and several judgment was rendered by default against each and all of the defendants for the sum
of $3,450.61 gold. The defendant McCullough alone having made application to have this judgment set
aside, the court granted this motion, vacating the judgment as to him only, the judgment as to the other
three defendants remaining undisturbed.1awphi1.net
At the new trial, which took place some two or three years later and after the death of Mead, the
judgment was rendered upon merits, dismissing the case as to the first and second causes of action and
for the sum of $1,200 gold in the plaintiff's favor on the third cause of action. From this judgment both
parties appealed and have presented separate bills of exceptions. No appeal was taken by the defendant
McCullough from the ruling of the court denying a recovery on his cross complaint.
On March 15, 1902, the plaintiff (Mead will be referred to as the plaintiff in this opinion unless it is
otherwise stated) and the defendant organized the "Philippine Engineering and Construction
Company," the incorporators being the only stockholders and also the directors of said company, with
general ordinary powers. Each of the stockholders paid into the company $2,000 mexican currency in
cash, with the exception of Mead, who turned over to the company personal property in lieu of cash.
Shortly after the organization, the directors held a meeting and elected the plaintiff as general manager.
The plaintiff held this position with the company for nine months, when he resigned to accept the
position of engineer of the Canton and Shanghai Railway Company. Under the organization the
company began business about April 1, 102.itc-alf
The contract and work undertaken by the company during the management of Mead were the wrecking
contract with the Navy Department at Cavite for the raising of the Spanish ships sunk by Admiral
Dewey; the contract for the construction of certain warehouses for the quartermaster department; the
construction of a wharf at Fort McKinley for the Government; The supervision of the construction of
the Pacific Oriental Trading Company's warehouse; and some other odd jobs not specifically set out in
the record.
Shortly after the plaintiff left the Philippine Islands for China, the other directors, the defendants in this
case, held a meeting on December 24, 1903, for the purpose of discussing the condition of the company
at that time and determining what course to pursue. They did on that date enter into the following
contract with the defendant McCullough, to wit:1awphil.net
 For value received, this contract and all the rights and interests of the Philippine Engineering
and construction Company in the same are hereby assigned to E. C. McCullough of Manila, P. I.
(Sgd.) E. C. McCULLOUGH,
President, Philippine Engineering and
Construction Company.
(Sgd.) F. E. GREEN, Treasurer.
(Sgd.) THOMAS L. HARTIGAN, Secretary.
The contract reffered to in the foregoing document was known as the wrecking contract with the naval
authorities.
On the 28th of the same month, McCullough executed and signed the following instrumental:
For value received, and having the above assignment from my associates in the Philippine
Engineering and Construction Company, I hereby transfer my right, title, and interest in the
within contract, with the exception of one sixth, which I hereby retain, to R. W. Brown, H. D. C.
Jones, John T. Macleod, and T. H. Twentyman.
The assignees of the wrecking contract, including McCullough, formed was not known as the "Manila
Salvage Association." This association paid to McCullough $15,000 Mexican Currency cash for the
assignment of said contract. In addition to this payment, McCullough retained a one-sixth interest in
the new company or association.
The plaintiff insists that he was received as general manager of the first company a salary which was
not to be less than $3,500 gold (which amount he was receiving as city engineer at the time of the
corporation of the company), plus 20 per cent of the net profits which might be derived from the
business; while McCullough contends that the plaintiff was to receive only his necessary expenses
unless the company made a profit, when he could receive $3,500 per year and 20 per cent of the profits.
The contract entered into between the board of directors and the plaintiffs as to the latter's salary was a
verbal one. The plaintiff testified that this contract was unconditional and that his salary, which was
fixed at $3,500 gold, was not dependent upon the success of the company, but that his share of the
profits was to necessarily depend upon the net income. On the other hand, McCullough, Green and
Hilbert testify that the salary of the plaintiff was to be determined according to whether or not the
company was successful in its operations; that if the company made gains, he was to receive $3,5000
gold, and a percentage, but that if the company did not make any profits, he was to receive only his
necessary living expenses.
It is strongly urged that the plaintiff would not have accepted the management of the company upon
such conditions, as he was receiving from the city of Manila a salary of $3,500 gold. This argument is
not only answered by the positive and direct testimony of three of the defendants, but also by the
circumstances under which this company was organized and principal object, which was the raising of
the Spanish ships. The plaintiff put no money into the organization, the defendants put but little: just
sufficient to get the work of raising the wrecks under way. This venture was a risky one. All the
members of the company realized that they were undertaking a most difficult and expensive project. If
they were successful, handsome profits would be realized; while if they were unsuccessful, all the
expenses for the hiring of machinery, launches, and labor would be a total loss. The plaintiff was in
complete charge and control of this work and was to receive, according to the great preponderance of
the evidence, in case the company made no profits, sufficient amount to cover his expenses, which
included his room, board, transportation, etc. The defendants were to furnish money out of their own
private funds to meet these expenses, as the original $8,000 Mexican currency was soon exhausted in
the work thus undertaken. So the contract entered into between the directors and the plaintiff as to the
latter's salary was a contingent one.
It is admitted that the plaintiff received $1.500 gold for his services, and whether he is entitled to
receive an additional amount depends upon the result of the second cause of action.
The second cause of action is more difficult to determine. On this point counsel for the plaintiff has
filed a very able and exhaustive brief, dealing principally with the facts.
It is urged that the net profits accruing to the company after the completion of all the contracts (except
the salvage contract) made before the plaintiff resigned as manager and up to the time the salvage
contract was transferred to McCullough and from him to the new company, amounted to $5,628.37
gold. This conclusion is reached, according to the memorandum of counsel for the plaintiff which
appears on pages 38 and 39 of the record, in the following manner:

Profits from the construction of warehouses for $6,962.54

the Government
Profits from the construction of the wall at Fort 500.00
McKinley
Profits from the inspection of the construction of 1,000.00
the P. O. T. warehouse
Profits obtained from the projects (according to 1,000.00
Mead's calculations)

Total 9,462.54
In this same memorandum, the expense for the operation of the company during Mead's management,
consisting of rents, the hire of one muchacho, the publication of various notices, the salary of an
engineer for four months, and plaintiff's salary for nine months, amounts to $3,834.17 gold. This
amount, deducted from the sum total of profits, leaves $5,628.37 gold.
Counsel for the plaintiff, in order to show conclusively as they assert that the company, after paying all
expenses and indebtedness, had a considerable balance to its credit, calls attention to Exhibit K. This
balance reads as follows:
Abstract copy of ledger No. 3, folios 276-277. Philippine Engineering and Construction
Company.
Then follow the debits and credits, with a balance in favor of the company of $10,728.44 Mexican
currency. This account purports to cover the period from July 1, 1902, to April 1, 1903. Ledger No. 3,
above mentioned, is that the defendant McCullough and not one of the books of the company.
It was this exhibit that the lower court based its conclusion when it found that on January 25, 1903,
after making the transfer of the salvage contract to McCullough, the company was in debt $2,278.30
gold. The balance of $10,728.44 Mexican currency deducted from the $16,439.40 Mexican currency
(McCullough's losses in the Manila Salvage Association) leaves $2,278.30 United States currency at
the then existing rate of exchange. In Exhibit K, McCullough charged himself with the $15,000
Mexican currency which he received from his associates in the new company, but did not credit himself
with the $16,439.40 Mexican currency, losses in said company, for the reason that on April 1, 1903,
said losses had not occurred. It must be borne in mind that Exhibit K is an abstract from a ledger.
The defendant McCullough, in order to show in detail his transactions with the old company, presented
Exhibits 1 and 2. These accounts read as follows:
Detailed account of the receipts and disbursements of E. C. McCullough and the Philippine
Engineering and Construction Company.
Then follow the debits ad credits. These two accounts cover the period from March 5 1902, to June 9,
1905. According to Exhibit No. 1, the old company was indebted to McCullough in the sum of
$14,918.75 Mexican currency, and according to Exhibit No. 2 he indebtedness amounted to $6,358.15
Mexican currency. The debits and credits in these two exhibits are exactly the me with the following
exceptions; I Exhibit No. 1, McCullough credits himself with the $10,000 Mexican currency (the
amount borrowed from the bank and deposited with the admiral as a guarantee for the faithful
performance of the salvage contract); while in Exhibit No. 2 he credits himself with this $10,000 and at
he same time charges himself with this amount. In the same exhibit (No. 2) he credits himself with
$16,439.40 Mexican currency, his losses in the new company, received from said company. Eliminating
entirely from these two exhibits the $10,000 Mexican currency, the $15,000 Mexican currency, and the
$16,39.40 Mexican currency, the balance shown in McCullough's favor is exactly the same in both
exhibits. This balance amounts to $4,918.75 Mexian currency.
According to McCullough's accounts in Exhibits 1 and 2 the profits derived from the construction of
the Government warehouse amounted to $4,005.02 gold, while the plaintiff contends that these profits
amounted to $6,962.54 gold. The plaintiff, during his management of the old company, made a contract
with the Government for the construction of these are house and commenced work. After he resigned
and left for China, McCullough took charge of and completed the said warehouse. McCullough gives a
complete, detailed statements of express for the completion of this work, showing the dates, to whom
paid, and for what purpose. He also gives the various amounts he received from the Government with
the amounts of the receipt of the same. On the first examination, McCullough testified that the total
amount received from the Government for the construction of these warehouse was $1,123 gold. The
case was suspended for the purpose of examination the records of the Auditor and the quater master, to
determine the exact amount paid for this work. As a result of this examination, the vouchers show an
additional amount of about $5,000 gold, paid in checks. These checks show that the same were
endorsed by the plaintiff and collected by him from the Hongkong and Shanghai Banking Corporation.
This money was not handled by McCullough and as it was collected by the plaintiff, it must be
presumed, in the absence of proof, that it was disbursed by him. McCullough did not charge himself
with the $2,5000 gold, alleged to have been profits from the construction of the wall at Fort McKinley,
the inspection of the construction of the P. O. T. warehouse, and other projects. This work was done
under the management of the plaintiff and it is not shown that the profits from these contracts ever
reached the ands of McCullough. McCullough was not the treasurer of the company at that time. The
other items which the plaintiff insist that McCullough had no right to credit himself with are the
following:

Date To whom paid. Amount (Mex. currency).

Jan. 30, 1903 Green $2,000.00
Feb. 2, 1903 McCullough 1,300.00
Feb. 2, 1903 Green 1,027.92
Feb. 19, 1905 P. O. T. Co. note 2,236.80
May 23, 1905 Hilbert 1,856.02
June 9, 1905 Hartigan 1,225.00
McCullough says that these amounts represents cash borrowed from the evidence parties to carry on
the operations of the old company while it was trying to raise the sunken vessels. There is no proof to
the contrary, and McCullough's testimony on this point is strongly corroborated by the fact that the
work done by the company in attempting to raise theses vessels was it first undertaking. The company
had made no profits while tat work was going on under the management of the plaintiff, but its
expenses greatly exceeded that of the original $8,000 Mexican currency. It was necessary to borrow
money to continue that work. These amounts, having been borrowed, were outstanding debts when
McCullough took charge for the purpose of completing the warehouses and winding up the business of
the old company. These amounts do not represent payments or refunds of the original capital.
McCullough did not credit himself with any amount for his services for supervising the completion of
the warehouses, nor for liquidating or winding up the company's affairs. We think that the amount of
$4,918.75 Mexican currency, balance in McCullough's favor up to this point, represents a fair,
equitable, and just settlement.
So far we have referred to the Philippine Engineering and Construction Company as the "company,"
without any attempt to define its legal status.
The plaintiff and defendants organized this company with a capital stock of $100,000 Mexican
currency, each paying in on the organization $2,000 Mexican currency. The remainder, $9,000,
according to the articles of agreement, were to be offered to the public in shares of $100 Mexican
currency, each. The names of all the organizers appear in the articles of agreement, which articles were
duly inscribed in the commercial register. The purpose for which this organization was affected were to
engage in general engineering and construction work, and operating under the name of the "Philippine
Engineering and Construction Company." during its active existence, it engaged in the business of
attempting to rise the sunken Spanish fleet, constructing under contract warehouses and a wharf for the
United States Government, supervising the construction of a warehouse for a private firm, and some
assay work. It was, therefore, an industrial civil partnership, as distinguished from a commercial one; a
civil partnership in the mercantile form, an anonymous partnership legally constituted in the city of
Manila.
The articles of agreement appeared in a public document and were duly inscribed in the commercial
register. To the extent of this inscription the corporation partook of the form of a mercantile one and as
such must e governed by articles 151 to 174 of the Code of Commerce, in so far as these provisions are
not in conflict with the Civil Code (art. 1670, Civil Code); but the direct and principal law applicable is
the Civil Code. Those provisions of the Code of Commerce are applicable subsidiary.
This partnership or stock company (sociedad anonima) upon the execution of the public instrument in
which is articles of agreement appear, and the contribution of funds and personal property, became a
juridicial person — an artificial being, invisible, intangible and existing only in contemplation of law
— with the power to hold, buy, and ell property, and to use and be sued — a corporation — not a
general copartnership nor a limited copartnership. (Arts. 37, 38,1656 of the Civil Code; Compania
Agricola de Ultimar vs. Reyes et al., 4 Phil. Rep., 2; and Chief Justice Marshall's definition of a
corporation, 17 U. S., 518.)
The inscribing of its articles of agreement in the commercial register was not necessary to make it a
juridicial person — a corporation. Such inscription only operated to show that it partook of the form of
a commercial corporation. (Compania Agricola de Ultimar vs. Reyes et al., supra.)
Did a majority of the stockholders, who were at the same time a majority of the directors of this
corporation, have the power under the law and its articles of agreement, to sell or transfer to one of its
members the assets of said corporation?
In the first article of the statutes of incorporation it is stated tat by virtue of a public document the
organizers, whose names are given in full, agreed to form a sociedad anonima. Article II provides that
the organizers should be the directors an administrators until the second general meeting, and until their
successors were duly elected and installed. The third provides that the sociedad should run for ninety-
nine years from the date of the execution of its articles of agreement. Article IV sets forth the object or
purpose of the organization. Article V makes the capital $100,000 Mexican currency, divided into one
thousand shares at $100 Mexican currency each. Article VI provides that each shareholder should be
considered as a coowner in the assets of the company and entitled to participate in the profits in
proportion to the amount of his stock. Article VII fixed the time of holding general meetings and the
manner of calling special meetings of the stockholders. Article VIII provides that the board of directors
shall be elected annually. Article IX provides for the filing of vacancies in the board of directors.
Article X provides that "the board of directors shall elect the officers of the sociedad and have under is
charge the administration of the said sociedad." Article XI: "In all the questions with reference to the
administration of the affairs of the sociedad, it shall be necessary to secure the unanimous vote of the
board of directors, and at least three of said board must be provides that all of the stock, except that
which was divided among the organizers should remain in the treasury subject to the disposition of the
board of directors. Article XIII reads: "In all the meetings of the stockholders, a majority vote of the
stockholders present shall be necessary to determine any question discussed." The fourteenth articles
authorizes the board of directors to adopt such rules and regulations for the government of the sociedad
as it should deem proper, which were not in conflict with its statutes.
When the sale or transfer heretofore mentioned took place, there were present four directors, all of
whom gave their consent to that sale or transfer. The plaintiff was then about and his express consent to
make this transfer or sale was not obtained. He was, before leaving, one of the directors in this
corporation, and although he had resigned as manager, he had not resigned as a director. He accepted
the position of engineer of the Canton and Shanghai Railway Company, knowing that his duties as such
engineer would require his whole time and attention and prevent his returning to the Philippine Islands
for at least a year or more. The new position which he accepted in China was incompatible with his
position as director in the Philippine Engineering and Construction Company, a corporation whose
sphere of operations was limited to the Philippine Islands. These facts are sufficient to constitute an
abandoning or vacating of hid position as director in said corporation. (10 Cyc., 741.) Consequently,
the transfer or sale of the corporation's assets to one of its members was made by the unanimous
consent of all the directors in the corporation at that time.
There were only five stockholders in this corporation at any time, four of whom were the directors who
made the sale, and the other the plaintiff, who was absent in China when the said sale took place. The
sale was, therefore, made by the unanimous consent of four-fifths of all the stockholders. Under the
articles of incorporation, the stockholders and directors had general ordinary powers. There is nothing
in said articles which expressly prohibits the sale or transfer of the corporate property to one of the
stockholders of said corporation.
Is there anything in the law which prohibits such a sale or transfer? To determine this question, it is
necessary to examine, first, the provisions of the Civil Code, and second, those provisions (art. 151 to
174) of the Code o ] Commerce.
Articles 1700 to 1708 of the Civil Code deal with the manner of dissolving a corporation. There is
nothing in these articles which expressly or impliedly prohibits the sale of corporate property to one of
its members, nor a dissolution of a corporation in this manner. Neither is there anything in articles 151
to 174 of the Code of Commerce which prohibits the dissolution of a corporation by such sale or
transfer.
The articles of incorporation must include:
 xxx xxx xxx
The submission to the vote of the majority of the meeting of members, duly called and held, of
such matters as may properly be brought before the same. (No. 10, art. 151, Code of
Commerce.)
Article XIII of the corporation's statutes expressly provides that "in all the meetings of the
stockholders, a majority vote of the stockholders present shall be necessary to determine any question
discussed."
The sale or transfer to one of its members was a matter which a majority of the stockholders could very
properly consider. But it i said that if the acts and resolutions of a majority of the stockholders in a
corporation are binding in every case upon the minority, the minority would be completely wiped out
and their rights would be wholly at the mercy of the abuses of the majority.
Generally speaking, the voice of a majority of the stockholders is the law of the corporation, but there
are exceptions to this rule. There must necessarily be a limit upon the power of the majority. Without
such a limit the will of the majority would be absolute and irresistible and might easily degenerate into
an arbitrary tyranny. The reason for these limitations is that in every contract of partnership (and a
corporation can be something fundamental and unalterable which is beyond the power of the majority
of the stockholders, and which constitutes the rule controlling their actions. this rule which must be
observed is to be found in the essential compacts of such partnership, which gave served as a basis
upon which the members have united, and without which it is not probable that they would have
entered not the corporation. Notwithstanding these limitations upon the power of the majority of the
stockholders, their (the majority's) resolutions, when passed in good faith and for a just cause, deserve
careful consideration and are generally binding upon the minority.
Eixala, in his work entitled "Instituciones del Derecho Mercantil de España," speaking of sociedades
anonimas, says:
The resolutions of the boards passed by a majority vote are valid . . . and authority for passing
such resolutions is unlimited, provided that the original contract is not broken by them, the
partnership funds not devoted to foreign purposes, or the partnerships transformed, or changes
made which are against public policy or which infringe upon the rights of third persons.
The supreme court of Spain, in its decision dated June 30, 1888, said:
In order to be valid and binding upon dissenting members, it s an indispensable requisite that
resolutions passed by a general meeting of stockholders conform absolutely to the contracts and
conditions of the articles of the association, which are to be strictly construed.
That resolutions passed within certain limitations by a majority of the stockholders of a corporation are
binding upon the minority, is therefore recognized by the Spanish authorities.
Power of private corporation to alienate property. — This power of absolute alienability of
corporate property applies especially to private corporations that are established solely for the
purpose of trade or manufacturing and in which he public has no direct interest. While this
power is spoken of as belonging to the corporation it must be observed that the authorities point
out that the trustees or directors of a corporation do not possess the power to dispose of the
corporate property so as to virtually end the existence of the corporation and prevent it from
carrying on the business for which it was incorporated. (Thompson on Corporation, second
edition, sec. 2416, and cases cited thereunder.)
Power to dispose of all property. — Where there are no creditors, and no stockholder objects, a
corporation, as against all other persons but the state, may sell and dispose of all its property.
The state in its sovereign capacity may question the power of the corporation to do so, but with
these exceptions such as a sale is void. A rule of general application is that a corporation of a
purely private business character, one which owes no special duty to the public, and is not given
the right of eminent domain, where exigencies of its business require it or when the
circumstances are such that it can no longer continue the business with profit, may sell and
dispose of all its property, pay its debts, divide the remaining assets and wind up the affairs of
the corporation. (Id., sec. 2417.)
When directors or officers may dispose of all the property. — It is within the dominion of the
managing officers and agents of the corporation to dispose of all the corporate property under
certain circumstances; and this may be done without reference to the assent or authority of the
stockholders. This disposition of the property may be temporarily by lease, or permanently by
absolute conveyance. But it can only be done in the course of the corporate business and for the
furtherance of the purposes of the incorporation. The board of directors possess this power
when the corporation becomes involved and by reason of its embarrassed or insolvent condition
is unable either to pay its debts or to secure capital and funds for the further prosecution of its
enterprise, and especially where creditors are pressing their claims and demands and are
threatening to or have instituted actions to enforce their claims. This power of the directors to
alienate the property is conceded where it is regarded as of imperative necessity. (If., sec. 2418,
and case cited.)
When majority stockholder may dispose of all corporate property. — Another rule that permits
a majority of the stockholders to dispose of all the corporate property and wind up the business,
is where the corporation has became insolvent, and the disposition of the property is necessary
to pay the debt; or where from any cause the business is a failure, and the best interest of the
corporation and all the stockholders require it, then the majority have clearly the power to
dispose of all the property even as against the protests of a minority. It would be a harsh rule
that could permit one stockholder, or any minority of the stockholders, to hold the majority to
their investment where the continuation of the business would be at a loss and where there was
no prospect or hope that the enterprise could be made profitable. The rule as stated by some
courts is that the majority stockholders may dispose of the property when just cause exists; and
this just cause is usually defined to be the unprofitableness of the business and where its
continuation would be ruinous to the corporation and against the interest of stockholders. (Id.,
sec. 2424, and cases cited.)
Nothing is better settled in the law of corporations than the doctrine that a corporation has the
same capacity and power as a natural person to dispose of the convey its property, real or
personal, provided it does not do so for a purpose which is foreign to the objects for which it
was created, and provided, further, it violates no charter or statutory restriction, on rule of law
based upon public policy. . . .This power need not be expressly conferred upon a corporation by
its charter. It is implied as an incident to its ownership of property, unless there is some clear
restriction in this charter or in some statute. (Clark and Marshall's Private Corporations, sec.
152, and cases cited.)
A purely private business corporation, like a manufacturing or trading company, which is not
given the right of eminent domain, and which owes no special duties to the public, may
certainly sell and convey absolutely the whole of its property, when the exigencies of its
business require it to do so, or when the circumstances are such that it can no longer profitably
continue its business, provided the transaction is not in fraud of the rights of creditors, or in
violation of charter or statutory restrictions. And, by the weight of authority, this may be done a
majority of the stockholders against the dissent of the minority. (Id., sec. 160, and cases cited.)
The above citations are taken from the works of the most eminent writers on corporation law. The
citation of cases in support of the rules herein announced are too numerous to insert.
From these authorities it appears to be well settled, first, that a private corporation, which owes no
special duty to the public and which has not been given the right of eminent domain, has the absolute
right and power as against the whole world except the state, to sell and dispose of all of its property;
second, that the board of directors, has the power, without referrence to the assent or authority of the
stockholders, when the corporation is in failing circumstances or insolvent or when it can no longer
continue the business with profit, and when it is regarded as an imperative necessity; third, that a
majority of the stockholders or directors, even against the protest of the minority, have this power
where, from any cause, the business is a failure and the best interest of the corporation and all the
stockholders require it.
May officer or directors of the corporation purchase the corporate property? The authorities are not
uniform on this question, but on the general proposition whether a director or an officer may deal with
the corporation, we think the weight of authority is that he may. (Merrick vs. Peru Coal Co., 61 Ill.,
472; Harts et al. vs. Brown et al., 77 Ill., 226; Twin-Lick Oil Company vs. Marbury, 91 U.S., 587;
Whitwell vs, Warner, 20 Vt., 425; Smith vs. Lansing, 22 N.Y., 520; City of St. Loius vs. Alexander, 23
Mo., 483; Beach et al vs. Miller, 130 Ill., 162.)
While a corporation remains solvent, we can see no reason why a director or officer, by the authority of
a majority of the stockholders or board of managers, may not deal with the corporation, loan it money
or buy property from it, in like manner as a stranger. So long as a purely private corporation remains
solvent, its directors are agents or trustees for the stockholders. They owe no duties or obligations to
others. But the moment such a corporation becomes insolvent, its directors are trustees of all the
creditors, whether they are members of the corporation or not, and must manage its property and assets
with strict regard to their interest; and if they are themselves creditors while the insolvent corporation is
under their management, they will not be permitted to secure to themselves by purchasing the corporate
property or otherwise any personal advantage over the other creditors. Nevertheless, a director or
officer may in good faith and for an adequate consideration purchase from a majority of the directors or
stockholders the property even of an insolvent corporation, and a sale thus made to him is valid and
binding upon the minority. (Beach et al. vs. Miller, supra; Twin-Lick Oil Company vs. Marbury, supra;
Drury vs. Cross, 7 Wall., 299; Curran vs. State of Arkansas, 15 How., 304; Richards vs. New
Hamphshire Insurance Company, 43 N. H., 263; Morawetz on Corporations (first edition), sec. 579;
Haywood vs. Lincoln Lumber Company et al., 64 Wis., 639; Port vs. Russels, 36 Ind., 60; Lippincott
vs. Shaw Carriage Company, 21 Fed. Rep., 577.)
In the case of the Twin-Lick Oil Company vs. Marbury, supra, the complaint was a corporation
organized under the laws of West Virginia, engaged in the business of raising and selling petroleum. It
became very much embarrased and a note was given secured by a deed of trust, conveying all the
property rights, and franchise of the corporation to William Thomas to secure the payment of said note,
with the usual power of sale in default of payment. The property was sold under the deed of trust; was
bought in by defendant's agent for his benefit, and conveyed to him the same year. The defendant was
at the time of these transactions a stockholder and director in the company. At the time the defendant's
money became due there was no apparent possibility of the corporation's paying it at any time. The
corporation was then insolvent. The property was sold by the trustee and bough in by the defendant at a
fair and open sale and at a reasonable price. The sale and purchase was the only mode left to the
defendant to make his money. The court said:
That a director of a joint-stock corporation occupies one of those fiduciary relations where his
dealings with the subject-matter of his trust or agency, and with the beneficiary or party whose
interest is confided to his care, is viewed with jealousy by the courts, and may be set aside on
 slight grounds, is a doctrine founded on the soundest morality, and which has received the
clearest recognition in this court and others. (Koehler vs. Iron., 2 Black, 715; Drury vs. Cross, 7
Wall., 299; R.R. Co. vs. Magnay, 25 Beav., 586; Cumberland Co vs. Sherman, 30 Barb., 553;
Hoffman S. Coal Co. vs. Cumberland Co., 16 Md., 456.) The general doctrine, however, in
regard to contracts of this class, is, not that they are absolutely void, but that they are voidable at
the election of the party whose interest has been so represented by the party claiming under it.
We say, this is the general rule; for there may be cases where such contracts would be void ab
initio; as when an agent to sell buys of himself, and by his power of attorney conveys to himself
that which he was authorized to sell. but even here, acts which amount t a ratification by the
principal may validate the sale.
The present case is not one of that class. While it is true that the defendant, a s a director of the
corporation, was bound by all those rules of conscientious fairness which courts of equity have
imposed as the guides for dealing in such cases, it can not be maintained that any rule forbids
one director among several from loaning money to the corporation when the money is needed,
and the transaction is open, and otherwise free from blame. No adjudged case has gone so far as
this. Such a doctrine, while it would afford little protection to the corporation against actual
fraud or oppression, would deprive it of the air of those most interested in giving aid
judiciously, and best qualified to judge of the necessity of that aid, and of the extent to which it
may safely be given.
There are in such a transaction three distinct parties whose interest is affected by it; namely, the
lender, the corporation, and the stockholders of the corporation.
The directors are the officers or agents of the corporation, and represent the interests of the
abstract legal entity, and of those who own the shares of its stock. One of the objects of creating
a corporation by law is to enable it to make contracts; and these contracts may be made with its
stockholders as well as with others. In some classes of corporations, as in mutual insurance
companies, the main object of the act of the incorporation is to enable the company to make
contracts which its stockholders, or with persons who become stockholders by the very act of
making the contract of insurance. It is very true, that as a stockholder, in making a contract of
any kind with the corporation of which he is a member, is in some sense dealing with a creature
of which he is a part, and holds a common interest with the other stockholders, who, with him,
constitute the whole of that artificial entity, he is properly held to a larger measure of candor and
good faith than if he were not a stockholder. So, when the lender is a director, charged, with
others, with the control and management of the affairs of the corporation, representing in this
regard the aggregated interest of all the stockholders, his obligation, if he becomes a party to a
contract with the company, to candor and fair dealing, is increased in the precise degree that his
representative character has given him power and control derived from the confidence reposed
in him by the stockholders who appointed him their agent. If he should be a sole director, or one
of a smaller number vested with certain powers, this obligation would be still stronger, and his
acts subject to more severe scrutiny, and their validity determined by more rigid principles of
morality, and freedom from motives of selfishness. All this falls far short, however, of holding
that no such contract can be made which will be valid; . . . .
In the case of Hancock vs. Holbrook et al. (40 La. Ann., 53), the court said:
As a strictly legal question, the right of a board of directors of a corporation to apply it property
to the payment of its debts, and the right of the majority of stockholders present at a meeting
called for the purpose to ratify such action and to dissolve the corporation, can not be
questioned.
 But were such action is taken at the instance, and through the influence of the president of the
corporation, and were the debt to which the property is applied is one for which he is himself
primarily liable, and specially where he subsequently acquires, in his personal right, the proerty
thus disposed of, such circumstances undoubtedly subject his acts to severe scrutiny, and oblige
him to establish that he acted with the utmost candor and fair-dealing for the interest of the
corporation, and without taint of selfish motive.
The sale or transfer of the corporate property in the case at bar was made by three directors who were at
the same time a majority of stockholders. If a majority of the stockholders have a clear and a better
right to sell the corporate property than a majority of the directors, then it can be said that a majority of
the stockholders made this sale or transfer to the defendant McCullough.
What were the circumstances under which said sale was made? The corporation had been going from
bad to worse. The work of trying to raise the sunken Spanish fleet had been for several months
abandoned. The corporation under the management of the plaintiff had entirely failed in this
undertaking. It had broken its contract with the naval authorities and the $10,000 Mexican currency
deposited had been confiscated. It had no money. It was considerably in debt. It was a losing concern
and a financial failure. To continue its operation meant more losses. Success was impossible. The
corporation was civilly dead and had passed into the limbo of utter insolvency. The majority of the
stockholders or directors sold the assets of this corporation, thereby relieving themselves and the
plaintiff of all responsibility. This was only the wise and sensible thing for them to do. They acted in
perfectly good faith and for the best interests of all the stockholders. "It would be a harsh rule that
would permit one stockholder, or any minority of stockholders to hold a majority to their investment
where a continuation of the business would be at a loss and where there was no prospect or hope that
the enterprise would be profitable."
The above sets forth the condition of this insolvent corporation when the defendant McCullough
proposed to the majority of stockholders to take over the assets and assume all responsibility for the
payment of the debts and the completion of the warehouses which had been undertaken. The assets
consisted of office furniture of a value of less than P400, the uncompleted contract for the construction
of the Government warehouses, and the wrecking contract. The liabilities amounted to at least
$19,645.74 Mexican currency. $9,645.74 Mexican currency of this amount represented borrowed
money, and $10,000 Mexican currency was the deposit with the naval authorities which had been
confiscated and which was due the bank. McCullough's profits on the warehouse contract amounted to
almost enough to the pay the amounts which the corporation had borrowed from its members. The
wrecking contract which had been broken was of no value to the corporation for the reason that the
naval authorities absolutely refused to have anything further to do with the Philippine Engineering and
Construction Company. They the naval authorities) had declined to consider the petition of the
corporation for an extension in which to raise the Spanish fleet, and had also refused to reconsider their
action in confiscating the deposit. They did agree, however, that if the defendant McCullough would
organize a new association, that they would give the new concern an extension of time and would
reconsider the question of forfeiture of the amount deposited. Under these circumstances and
conditions, McCullough organized the Manila Salvage Company, sold five-sixth of this wrecking
contract to the new company for $15,000 Mexican currency and retained one-sixth as his share of the
stock in the new concern. The Manila Salvage company paid to the bank the $10,000 Mexican currency
which had been borrowed to deposit with the naval authorities, and began operations. All of the
$10,000 Mexican currency so deposited was refund to the new company except P2,000. The new
association failed and McCullough, by reason of this failure, lost over $16,000 Mexican currency.
These facts show that McCullough acted in good faith in purchasing the old corporation's assets, and
that he certainly paid for the same a valuable consideration.
But cancel for the plaintiff say: "The board of directors possessed only ordinary powers of
administration (Article X of the Articles of incorporation), which in no manner empowered it either to
transfer or to authorize the transfer of the assets of the company to McCullough (art. 1773, Civil Code;
decisions of the supreme court of Spain of April 2, 1862, and July 8, 1903)."
Article X of the articles of incorporation above referred to provides that the board of directors shall
elect the officers of the corporation and "have under its charge the administration of the said
corporation." Articles XI reads: "In all the questions with reference to the administration of the affairs
of the corporation, it shall be necessary to secure the unanimous vote of the board of directors, and at
least three of said board must be present in order to constitute a legal meeting." It will be noted that
article X statute a legal meeting." It will be noted that Article X placed the administration of the affairs
of the corporation in the hands of the board of directors. If Article XI had been omitted, it is clear that
under the rules which govern business of that character, and in view of the fact that before the plaintiff
left this country and abandoned his office as director, there were only five directors in the corporation,
then three would have been sufficient to constitute a quorum and could perform all the duties and
exercise all the powers conferred upon the board under this article. It would not have been necessary to
obtain the consent of all three of such members which constituted the quorum in order that a solution
affecting the administration of the corporation should be binding, as two votes — a majority of the
quorum — would have been sufficient for this purpose. (Buell vs. Buckingham & Co., 16 Iowa, 284; 2
Kent. Com., 293; Cahill vs. Kalamazoo Mutual Insurance Company, 2 Doug. (Mich.), 124; Sargent vs.
Webster, 13 Met., 497; In re Insurance Company, 22 Wend., 591; Ex parte Wilcox, 7 Cow., 402; id.,
527, note a.)
It might appear on first examination that the organizers of this corporation when they asserted the first
part of Article XI intended that no resolution affecting the administration of the affairs should be
binding upon the corporation unless the unanimous consent of the entire board was first obtained; but
the reading of the last part of this same article shows clearly that the said organizers had no such
intention, for they said: "At least three of said board must be present in order to constitute a legal
meeting." Now, if three constitute a legal meeting, three were sufficient to transact business, three
constituted the quorum, and, under the above-cited authorities, two of the three would be sufficient to
pass binding resolutions relating to the administration of the corporation.
If the clause "have under in charge and administer the affairs of the corporation" refers to the ordinary
business transactions of the corporation and does not include the power to sell the corporate property
and to dissolve the corporation when it becomes insolvent — a change we admit organic and
fundamental — then the majority of the stockholders in whom the ultimate and controlling power lies
must surely have the power to do so.
Article 1713 of the Civil Code reads:
An agency stated in general terms only includes acts of administration.
In order to compromise, alienate, mortgage, or execute any other act of strict ownership an
express commission is required.
This article appears in title 9, chapter 1 of the Civil Code, which deals with the character, form, and
kind of agency. Now, were the positions of Hilbert, Green, Hartigan, and McCullough that the agents
within the meaning of the article above quoted when the assets of the corporation were transferred or
sold to McCullough? If so, it would appear from said article that in order to make the sale valid, an
express commission would be required. This provision of law is based upon the broad principles of
sound reason and public policy. There is a manifest impropriety in allowing the same person to act as
the agent of the seller and to become himself the buyer. In such cases, there arises so often a conflict
between duty and interest. "The wise policy of the law put the sting of a disability into the temptation,
as a defensive weapon against the strength of the danger which lies in the situation."
Hilbert, Green, and Hartigan were not only all creditors at the time the sale or transfer of the assets of
the insolvent corporation was made, but they were also directors and stockholders. In addition to being
a creditor, McCullough sustained the corporation the double relation of a stockholder and president.
The plaintiff was only a stockholder. He would have been a creditor to the extent of his unpaid salary if
the corporation had been a profitable instead of a losing concern.
But as we have said when the sale or transfer under consideration took place, there were three directors
present, and all voted in favor of making this sale. It was not necessary for the president, McCullough,
to vote. There was a quorum without him: a quorum of the directors, and at the same time a majority of
the stockholders.
A corporation is essential a partnership, except in form. "The directors are the trustees or managing
partners, and the stockholders are the cestui que trust and have a joint interest in all the property and
effects of the corporation." (Per Walworth, Ch., in Robinson vs. Smith, 3 Paige, 222, 232; 5 idem, 607;
Slee vs. Bloom, 19 Johns., 479; Hoyt vs. Thompson, 1 Seld., 320.)
The Philippine Engineering and Construction Company was an artificial person, owning its property
and necessarily acting by its agents; and these agents were the directors. McCullough was then an agent
or a trustee, and the stockholders the principal. Or say (as corporation was insolvent) that he was an
agent or trustee and the creditors were the beneficiaries. This being the true relation, then the rules of
the law (art. 1713 of the Civil Code) applicable to sales and purchases by agents and trustees would not
apply to the purchase in question for the reason that there was a quorum without McCullough, and for
the further reason that an officer or director of a corporation, being an agent of an artificial person and
having a joint interest in the corporate property, is not such an agent as that treated of in article 1713 of
the Civil Code.
Again, McCullough did not represent the corporation in this transaction. It was represented by a
quorum of the board of directors, who were at the same time a majority of the stockholders. Ordinarily,
McCullough's duties as president were to preside at the meetings, rule on questions of order, vote in
case of a tie, etc. He could not have voted in this transaction because there was no tie.
The acts of Hilbert, Green, Hartigan, and McCullough in this transaction, in view of the relations which
they bore to the corporation, are subject to the most severe scrutiny. They are obliged to establish that
they acted with the utmost candor and fair dealing for the interest of the corporation, and without taint
motives. We have subjected their conduct to this test, and, under the evidence, we believe it has safely
emerged from the ordeal.
Transaction which only accomplish justice, which are done in good faith and operate legal
injury to no one, lack the characteristics of fraud and are not to be upset because the relations of
the parties give rise to suspicions which are fully cleared away. (Hancock vs. Holbrook, supra.)
We therefore conclude that the sale or transfer made by the quorum of the board of directors — a
majority of the stockholders — is valid and binding upon the majority-the plaintiff. This conclusion is
not in violation of the articles of incorporation of the Philippine Engineering and Construction
Company. Nor do we here announce a doctrine contrary to that announced by the supreme court of
Spain in its decisions dated April 2, 1862, and July 8, 1903.
As to the third cause of action, it is insisted: First, that the court erred in holding the defendant
McCullough responsible for the personal effects of the plaintiff; and second, that the court erred in
finding that the effects left by the plaintiff were worth P2,400.
As we have said, the plaintiff was the manager of the Philippine Engineering Company from April 1,
1902, up to January 1, 1903. Sometimes during the previous month of December he resigned to accept
a position in China, but did not leave Manila until about January 20. He remained in Manila about
twenty days after he severed his connection with the company. He lived in rooms in the same building
which was rented by the company and were the company had its offices. When he started for China he
left his personal effects in those rooms, having turned the same over to one Paulsen. Testifying on this
point the plaintiff said:
Q. To whom did you turn over these personal effects on leaving here? — A. To Mr. Paulsen.
Q. Have you demanded payment of this sum [referring to the value of his personal effects]? —
A. On leaving for China I gave Mr. Haussermann power of attorney to represent me in this case
and demand payment.
Q. Please state whether or not you have an inventory of these effects. — A. I had an inventory
which was in my possession but it was lost when the company took all of the books and carried
them away from the office.
Q. Can you give a list or a partial list of your effect? — A. I remember some of the items. There
was a complete bedroom set, two marble tables, one glass bookcase, chairs, all of the household
effects I used when I was living in the Botanical Garden as city engineer, one theodolite, which
I bought after commencing work with the company.
Q. How much do you estimate to be the total reasonable value of these effects? — A. The total
would not be less than $1,200 gold.
Counsel for the plaintiff, on page 56 of their brief, say:
Mr. McCullough, in his testimony (pp. 39 and 40) admits full knowledge of and participation in
the removal and sale of the effects and states that he took the proceeds and considered them part
of the assets of the company. He further admits that Mr. Haussermann made a demand for the
proceeds of Mr. Mead's personal effects (p. 44).
McCullough's testimony, referred by the counsel, is as follows:
Q. At the time Mr. Mead left for China, in the building where the office was and in the office,
there were left some of the personal effects of Mr. Mead. What do you know about these effects,
a list of which is Exhibit B? — A. Nothing appearing in this Exhibit B was never delivered to
the Philippine Engineering and Construction Company, according to my list.
Q. Do you know what became of these effects? — A. No, sir. I have no idea. I never saw them. I
never heard these effects talked about. I only heard something said about certain effects which
Mr. Mead had in his living room.
Q. Do you know what became of the bed of Mr. Mead? — A. I know there were effects, such as
a bed, washstand, chairs, table, and other things, which are used in a living room, and that they
were in Mr. Mead's room. These effects were sent to the warehouse of the Pacific Oriental
Trading Company, together with the office furniture. We had to vacate the building where the
offices were and we had to take out everything therein. These things were deposited in the
warehouse of the Pacific Oriental Trading Company and were finally sold by that company and
the money turned over to me.
Q. How much? — A. P49.97.
Q. What did you do with this money? — A. I took it and considered it part of the assets of the
company. All of the other effects of the office were sold at the same time and brought P347.16.
Q. Did Mr. Mead leave anyone in charge of his effects when he left Manila? — A. I think he left
 Paulsen in charge, but Paulsen did not take these effects, so when we vacated the office we had
to move them.
Q. Did Paulsen continue occupying the living room where these effects were and did he use
these effects? — A. I do not know because I was in the office for three months before we
vacated.
Q. Don't you know that it is a fact that Mr. Haussermann, as representative of Mr. Mead,
demanded of you and the company the payment of the salary which was due Mr. Mead and the
value of his personal effects? — A. Yes, sir.
As to the value of these personal effects, Hartigan, testifying as witness for the defendant, said:
I think the personal effects were sold for P50. His personal effects consisted of ordinary articles,
such as a person would use who had to be going from one place to another all the time, as Mr.
Mead. I know that all those effects were sold for less than P100, if I am not mistaken.
The foregoing is the material testimony with reference to the defendant McCullough's responsibility
and the value of the personal effects of the plaintiff.
McCullough was a member of the company and was responsible as such for the rents where the offices
were located. The company had no further use for the building after the plaintiff resigned. The vacating
of the building was the proper thing to do. The office furniture was removed and stored in a place
where it cost nothing for rents. When Hilbert, member of the company, went to the office to remove the
company's office furniture, he found no one in charge of the plaintiff's personal effects. He took them
and stored them in the same place and later sold them, together with the office furniture, and turned the
entire amount over to defendant McCullough.
Paulsen, in whose charge Mead left his effects, apparently took no interest in caring for them. Was the
company to leave Mead's personal effects in that building and take the chances of having to continue to
pay rents, solely on account of the plaintiff's property remaining there? The company had reason to
believe that it would have to continue paying these rents, as they had rented the building and authorized
the plaintiff to occupy rooms therein.
The plaintiff knew when he left for China that he would be away a long time. He had accepted a
position of importance, and which he knew would require his personal attention. He did not gather up
his personal effects, but left them in the room in charge of Paulsen. Paulsen took no interest in caring
for them, but apparently left these effects to take care of them selves. The plaintiff did not even carry
with him an inventory of these effects, but attempted on the trial to give a list of them and did give a
partial list of the things he left in his room; but it is not shown that all this things were there when
Herbert removed the office furniture and some of the plaintiff's effects. The fact that the plaintiff
remained in Manila some twenty days after resigning and never cared for his own effects but left them
in the possession of an irresponsible person, shows extreme negligence on his part. He exhibited a
reckless indifference to the consequences of leaving his effects in the lease premises. The law imposes
on every person the duty of using ordinary care against injury or damages. What constitutes ordinary
care depends upon the circumstances of each particular case and the danger reasonably to be
apprehended.
McCullough did not have anything personally to do with these effects at any time. He only accepted the
money which Herbert turned over to him. He, personally, did not contribute in any way whatsoever to
the loss of the property, neither did he as a member of the corporation do so.
The plaintiff gave an estimate of the value of the effects which he left in his rooms and placed this
value at P2,400. He did not give a complete list of the effects so left, neither did he give the value of a
single item separately. The plaintiff's testimony is so indefinite and uncertain that i t is impossible to
determine with any degree of certainty just what these personal effects consisted of and their values,
especially when we take into consideration the significant fact that these effects were abondoned by
Paulsen. On the other hand, w have before us the positive testimony of Hilbert as to the amount
received for the plaintiff's personal effects, the testimony of Hartigan that the same were sold for less
than P100, and the testimony of McCullough as to the amount turned over to him by Herbert.
So we conclude that the great preponderance of evidence as to the value of these effects is in the favor
of the contention of the defendant. Their value therefore be fixed at P49.97.
For these reasons the judgment appealed from as to the first and second causes of action is hereby
affirmed. Judgment appealed from as to the third cause of action is reduced to P49.97, without costs.

[G.R. No. 121434. June 2, 1997]

ELENA F. UICHICO, SAMUEL FLORO, VICTORIA F. BASILIO, petitioners, vs. NATIONAL
LABOR RELATIONS COMMISSION, LUZVIMINDA SANTOS, SHIRLEY PORRAS, CARMEN
ELIZARDE, ET. AL., respondents.
DECISION
HERMOSISIMA, JR., J.:
Sought to be reversed in this special civil action for certiorari and prohibition are the Resolutions of
public respondent National Labor Relations Commission (NLRC, for brevity), dated September 30,
1993, December 7, 1995, and May 24, 1995, holding petitioners herein liable for the illegal dismissal
of private respondents and ordering them to pay the latter separation pay plus backwages.
Private respondents were employed by Crispa, Inc. for many years in the latter's garments factory
located in Pasig Boulevard, Pasig City. Sometime in September, 1991, private respondents' services
were terminated on the ground of retrenchment due to alleged serious business losses suffered by
Crispa, Inc. in the years immediately preceding 1990. Thereafter, respondent employees, on November,
1991, filed before the NLRC, National Capital Region, Manila, three (3) separate complaints for illegal
dismissal and diminution of compensation against Crispa, Inc., Valeriano Floro , and the petitioners.
Valeriano Floro was a major stockholder, incorporator and Director of Crispa, Inc., while the
petitioners were high ranking officers and directors of the company. Said complaints were consolidated
in order to expedite the proceedings. The case was assigned to Labor Arbiter Raul Aquino.
On July 20, 1992, after due hearing, Labor Arbiter Aquino rendered a decision dismissing the
complaints for illegal dismissal but at the same time ordering Crispa, Inc., Floro and the petitioners to
pay respondent employees separation pays equivalent to seventeen (17) days for every year of service,
viz:
"WHEREFORE, premises considered, the instant complaint for illegal dismissal is hereby
DISMISSED for lack of merit. However, as discussed in this decision, respondents is (sic) hereby
directed to pay the separation pay of the complainants equivalent to seventeen (17) days for every year
of service and computed as follows:
xxxxxxxxx
All other claims are hereby dismissed for lack of merit. Respondent is hereby ordered to pay 10%
attorney's fees based on the award.
SO ORDERED."[1]
Dissatisfied, private respondents appealed before the public respondent NLRC. In a Resolution dated
September 30, 1993, the Second Division of the NLRC found Crispa, Inc., Valeriano Floro, together
with the petitioners liable for illegal dismissal and modified the award of separation pay in the amount
of one (1) month for every year of service instead of seventeen (17) days, to wit:
"WHEREFORE, the assailed Decision is hereby Affirmed with Modification in so far as the award of
separation pay is concerned to the effect that respondents are ordered to pay complainants one month
for every year of service, instead of 17 days.
All other rulings are hereby AFFIRMED."[2]
Petitioners filed a Motion for Reconsideration on November 12, 1993 but the same was denied by the
NLRC in a Resolution dated December 7, 1993, thus:
"After due consideration of the Motion for Reconsideration filed by respondents on November 12,
1995, from the Resolution of September 30, 1993, the Commission (Second Division) RESOLVED to
deny the same for lack of merit."[3]
On August 8, 1994, private respondents sought a clarification of public respondent NLRC's Resolution
dated September 30, 1993 insofar as the computation of separation pay by the Examination and
computation division was concerned as well as the failure of the Resolution to award them full
backwages despite the finding of illegal dismissal.
On April 21, 1995, the NLRC, treating the Motion to Clarity Judgment as an Appeal, granted the same
in this wise:
"ACCORDINGLY, in view of the foregoing, the complainants-appelles Motion to Clarify Judgment is
partially GRANTED and Mr. Ricardo Atienza, Acting Chief of the Examination and computation
Division is hereby directed to include in the computation, six months backwages as provided for in the
September 30, 1993 Resolution of the Division, which was however omitted in the dispositive portion
thereof.
SO ORDERED."[4]
Petitioners filed a Motion for Reconsideration of the April 21, 1995 Resolution, which was denied in
another Resolution[5] dated May 24, 1995.
Hence, this petition.
We shall dismiss the petition. The law recognizes the right of every business entity to reduce its work
force if the same is made necessary by compelling economic factors which would endanger its
existence or stability. In spite of overwhelming support granted by the social justice provisions of our
Constitution in favor of labor, the fundamental law itself guarantees, even during the process of tilting
the scales of social justice towards workers and employees, "the right of enterprises to reasonable
returns of investment and to expansion and growth."[6] To hold otherwise would not only be oppressive
and inhuman,[7] but also counter-productive and ultimately subversive of the nation's thrust towards a
resurgence in our economy which would ultimately benefit the majority of our people. Where
appropriate and where conditions are in accord with law and jurisprudence, the Court has authorized
valid reductions in the work force to forestall business losses,[8] the hemorrhaging of capital, or even to
recognize an obvious reduction in the volume of business which has rendered certain employees
redundant.[9] Thus, Article 283 of the Labor Code, which covers retrenchment, reads as follows:
"Art. 283. Closure of establishment and reduction of personnel. - The employer may also terminate the
employment of any employee due to the installation of labor saving devices, redundancy, retrenchment
to prevent losses or the closing or cessation of operation of the establishment or undertaking unless the
closing is for the purpose of circumventing the provisions of this Title, by serving a written notice on
the worker and the Ministry of Labor and Employment at least one (1) month before the intended date
thereof. In case of termination due to the installation of labor saving devices or redundancy, the worker
affected thereby shall be entitled to a separation pay equivalent to at least his one (1) month pay or to at
least one (1) month pay for every year of service, whichever is higher. In case of retrenchment to
prevent losses and in cases of closures or cessation of operations of establishment or undertaking not
due to serious business losses or financial reverses, the separation pay shall be equivalent to one (1)
month pay or at least one-half (1/2) month pay for every year of service, whichever is higher. A fraction
of at least six (6) months shall be considered as one (1) whole year."
Retrenchment, or "lay-off" in layman's parlance, is the termination of employment initiated by the
employer through no fault of the employee's and without prejudice to the latter, resorted to by the
management during periods of business recession, industrial depression, or seasonal fluctuations, or
during lulls occasioned by lack of orders, shortage of materials, conversion of a plant for a new
production program or the introduction of new methods or more efficient machinery, or of automation.
[10] Simply put, it is an act of employer of dismissing employees because of losses in the operation of a
business, lack of work, and considerable reduction on the volume of his business, a right consistently
recognized and affirmed by this court.[11] Nevertheless, while it is true that retrenchment is a
management prerogative, it is still subject to faithful compliance with the substantive and procedural
requirements laid down by law and jurisprudence. And since retrenchment strikes at the very core of an
individual's employment, which may be the only lifeline on which he and his family depend for
survival,[12] the burden clearly falls upon the employer to prove economic or business losses with
appropriate supporting evidence.[13] Any claim of actual or potential business losses must satisfy certain
established standards before any reduction of personnel becomes legal, viz:
"1. The losses expected and sought to be avoided must be substantial and not merely de minimis in
extent;
2. The substantial losses apprehended must be reasonably imminent, as such imminence can be
perceived objectively and in good faith by the employer;
3. The retrenchment must be reasonably necessary and likely to effectively prevent the expected losses.
4. The alleged losses. If already realized, and the expected imminent losses sought to be forestalled,
must be proved by sufficient and convincing evidence."[14]
In sustaining the company's submission that it suffered serious business losses in 1991, thus
necessitating the retrenchment of respondent employees, the Labor Arbiter found:
"On the ground invoke by respondent for closing its business, i.e., serious losses and financial straits,
responded submitted Financial Report wherein it incurred a net loss of Forty(sic) Three Million Four
Hundred Eighteen Thousand Two Hundred Seventy Two and Ninety eight Centavos(P43,418,272.98)
in 1991. Thus, based on all the foregoing, we are constrained that respondent was, indeed, suffering
from financial reverses that would justify its decision to close down its business. Hence, under Section
9 (b) Book VI, Rule III of Omnibus Rules implementing the Labor Code, it provides:
'Section 9. (b) Where the termination of employment is due to retrenchment to prevent losses and in
case of closure or cessation of operations of establishment or undertaking not due to serious business
losses or financial reverses, or where the employee suffers from a disease and his continued
employment is prohibited by law or is prejudicial to his health or the health of his co-employees, the
employee shall be entitled to termination pay equivalent to at least one-half month pay for every year
of service, a fraction of at least six months being considered as one whole year."'[15]
The NLRC, in its September 30, 1993 Resolution, however, reversed the foregoing findings of the
Labor Arbiter and adjudged Crispa, Inc. as well as the petitioners liable for illegal dismissal. The
NLRC ruled, thus:
"We observed that the basis of the Labor Arbiter in sustaining the argument of financial reverses is the
Statement of Profit and Losses submitted by the respondent (Supra.). The same however, does not bear
the signature of a certified public accountant or audited by an independent auditor. Briefly stated, it
has no evidentiary value. As such the allege financial losses which cause the temporary closure of
respondent CRISPA, Inc. has not been sufficiently established. In the case of Lopez Sugar Corp. vs.
FFW, 189 SCRA 179, the Supreme Court held that 'alleged losses if already realized and the expected
losses sought to be forestalled must be proved by sufficient and commencing (sic) evidence.
Consequently, there being no financial reverses for (sic) men (sic) the termination of herein
complainants from their employment is perforce illegal."[16]
We are more in accord with the aforequoted observations made by the NLRC. It is true that
administrative and quasi-judicial bodies like the NLRC are not bound by the technical rules of
procedure in the adjudication of cases.[17] However, this procedural rule should not be construed as a
license to disregard certain fundamental evidentiary rules. While the rules of evidence prevailing in the
courts of law or equity are not controlling in proceedings before the NLRC, the evidence presented
before it must at least have a modicum of admissibility for it to be given some probative value.[18] The
Statement of Profit and Losses submitted by Crispa, Inc. to prove its alleged losses, without the
accompanying signature of a certified public accountant or audited by an independent auditor, are
nothing but self-serving documents which ought to be treated as a mere scrap of paper devoid of any
probative value. For sure, this is not the kind of sufficient and convincing evidence necessary to
discharge the burden of proof required of petitioners to establish the alleged losses suffered by Crispa,
Inc. in the years immediately preceding 1990 that would justify the retrenchment of respondent
employees. In fact, petitioners, as directors and officers of Crispa, Inc., already concede, albeit quite
belatedly, in its Reply to Comment of Public Respondent,[19] the finding of public respondent NLRC
that petitioners utterly failed to establish the alleged financial losses borne by Crispa, Inc.,[20] thus
making the company guilty of illegal dismissal against the private respondents. According to
petitioners, what they are actually assailing is the decision of the NLRC holding them solidarily liable
with the company for the payment of separation pay and backwages to the private respondents. It is the
contention of the petitioners that the award of backwages and separation pay is a corporate obligation
and must therefore be assumed by Crispa, Inc. alone.
We do not agree. A corporation is a juridical entity with legal personality separate and distinct from
those acting for and in its behalf and, in general, from the people comprising it. The general rule is that
obligations incurred by the corporation, acting through its directors, officers and employees, are its sole
liabilities.[21] There are times, however, when solidary liabilities may be incurred but only when
exceptional circumstances warrant such as in the following cases:
1. When directors and trustees or, in appropriate cases, the officers of a corporation: (a) vote for or
assent to patently unlawful acts of the corporation; (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;
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;
3. When a director, trustee or officer has contractually agreed or stipulated to hold himself personally
and solidarily liable with the corporation; or
4. When a director, trustee or officer is made, by specific provision of law, personally liable for his
corporate action.[22]
In labor cases, particularly, corporate directors and officers are solidarily liable with the corporation for
the termination of employment of corporate employees done with malice or in bad faith.[23] In this case,
it is undisputed that petitioners have a direct hand in the illegal dismissal of respondent employees.
They were the ones, who as high-ranking officers and directors of Crispa, Inc., signed the Board
Resolution retrenching the private respondents on the feigned ground of serious business losses that
had no basis apart from an unsigned and unaudited Profit and Loss Statement which, to repeat, had no
evidentiary value whatsoever. This is indicative of bad faith on the part of petitioners for which they
can be held jointly and severally liable with Crispa, Inc. for all the money claims of the illegally
terminated respondent employees in this case.
WHEREFORE, finding no grave abuse of discretion on the part of the public respondent NLRC, the
instant petition is hereby DISMISSED.
Costs against petitioners.
SO ORDERED.

G.R. No. L-68555 March 19, 1993

PRIME WHITE CEMENT CORPORATION, petitioner,

vs.
HONORABLE INTERMEDIATE APPELLATE COURT and ALEJANDRO TE, respondents.

De Jesus & Associates for petitioner.

Padlan, Sutton, Mendoza & Associates for private respondent.

CAMPOS, JR., J.:

Before Us is a Petition for Review on Certiorari filed by petitioner Prime White Cement Corporation seeking the reversal of the decision * of the then Intermediate
Appellate Court, the dispositive portion of which reads as follows:

WHEREFORE, in view of the foregoing, the judgment appealed from is hereby affirmed in toto.1

The facts, as found by the trial court and as adopted by the respondent Court are hereby quoted, to wit:

On or about the 16th day of July, 1969, plaintiff and defendant corporation thru its President, Mr. Zosimo Falcon and Justo C. Trazo, as
Chairman of the Board, entered into a dealership agreement (Exhibit A) whereby said plaintiff was obligated to act as the exclusive dealer
and/or distributor of the said defendant corporation of its cement products in the entire Mindanao area for a term of five (5) years and
proving (sic) among others that:

a. The corporation shall, commencing September, 1970, sell to and supply the plaintiff, as dealer with 20,000 bags
(94 lbs/bag) of white cement per month;

b. The plaintiff shall pay the defendant corporation P9.70, Philippine Currency, per bag of white cement, FOB
Davao and Cagayan de Oro ports;

c. The plaintiff shall, every time the defendant corporation is ready to deliver the good, open with any bank or
banking institution a confirmed, unconditional, and irrevocable letter of credit in favor of the corporation and that
upon certification by the boat captain on the bill of lading that the goods have been loaded on board the vessel
bound for Davao the said bank or banking institution shall release the corresponding amount as payment of the
goods so shipped.

Right after the plaintiff entered into the aforesaid dealership agreement, he placed an advertisement in a national, circulating newspaper
the fact of his being the exclusive dealer of the defendant corporation's white cement products in Mindanao area, more particularly, in the
Manila Chronicle dated August 16, 1969 (Exhibits R and R-1) and was even congratulated by his business associates, so much so, he
was asked by some of his businessmen friends and close associates if they can be his
sub-dealer in the Mindanao area.

Relying heavily on the dealership agreement, plaintiff sometime in the months of September, October, and December, 1969, entered into a
written agreement with several hardware stores dealing in buying and selling white cement in the Cities of Davao and Cagayan de Oro
which would thus enable him to sell his allocation of 20,000 bags regular supply of the said commodity, by September, 1970 (Exhibits O,
O-1, O-2, P, P-1, P-2, Q, Q-1 and Q-2). After the plaintiff was assured by his supposed buyer that his allocation of 20,000 bags of white
cement can be disposed of, he informed the defendant corporation in his letter dated August 18, 1970 that he is making the necessary
preparation for the opening of the requisite letter of credit to cover the price of the due initial delivery for the month of September, 1970
(Exhibit B), looking forward to the defendant corporation's duty to comply with the dealership agreement. In reply to the aforesaid letter of
the plaintiff, the defendant corporation thru its corporate secretary, replied that the board of directors of the said defendant decided to
impose the following conditions:

a. Delivery of white cement shall commence at the end of November, 1970;

b. Only 8,000 bags of white cement per month for only a period of three (3) months will be delivered;

c. The price of white cement was priced at P13.30 per bag;

 d. The price of white cement is subject to readjustment unilaterally on the part of the defendant;

e. The place of delivery of white cement shall be Austurias (sic);

f. The letter of credit may be opened only with the Prudential Bank, Makati Branch;

g. Payment of white cement shall be made in advance and which payment shall be used by the defendant as
guaranty in the opening of a foreign letter of credit to cover costs and expenses in the procurement of materials in
the manufacture of white cement. (Exhibit C).

xxx xxx xxx

Several demands to comply with the dealership agreement (Exhibits D, E, G, I, R, L, and N) were made by the plaintiff to the defendant,
however, defendant refused to comply with the same, and plaintiff by force of circumstances was constrained to cancel his agreement for
the supply of white cement with third parties, which were concluded in anticipation of, and pursuant to the said dealership agreement.

Notwithstanding that the dealership agreement between the plaintiff and defendant was in force and subsisting, the defendant corporation,
in violation of, and with evident intention not to be bound by the terms and conditions thereof, entered into an exclusive dealership
agreement with a certain Napoleon Co for the marketing of white cement in Mindanao (Exhibit T) hence, this suit. (Plaintiff's Record on
Appeal, pp. 86-90).2

After trial, the trial court adjudged the corporation liable to Alejandro Te in the amount of P3,302,400.00 as actual damages, P100,000.00 as moral damages, and
P10,000.00 as and for attorney's fees and costs. The appellate court affirmed the said decision mainly on the following basis, and We quote:

There is no dispute that when Zosimo R. Falcon and Justo B. Trazo signed the dealership agreement Exhibit "A", they were the President
and Chairman of the Board, respectively, of defendant-appellant corporation. Neither is the genuineness of the said agreement contested.
As a matter of fact, it appears on the face of the contract itself that both officers were duly authorized to enter into the said agreement and
signed the same for and in behalf of the corporation. When they, therefore, entered into the said transaction they created the impression
that they were duly clothed with the authority to do so. It cannot now be said that the disputed agreement which possesses all the
essential requisites of a valid contract was never intended to bind the corporation as this avoidance is barred by the principle of estoppel. 3

In this petition for review, petitioner Prime White Cement Corporation made the following assignment of errors. 4

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT ARE UNPRECEDENTED DEPARTURES FROM
THE CODIFIED PRINCIPLE THAT CORPORATE OFFICERS COULD ENTER INTO CONTRACTS IN BEHALF OF THE CORPORATION
ONLY WITH PRIOR APPROVAL OF THE BOARD OF DIRECTORS.

II

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT ARE CONTRARY TO THE ESTABLISHED
JURISPRUDENCE, PRINCIPLE AND RULE ON FIDUCIARY DUTY OF DIRECTORS AND OFFICERS OF THE CORPORATION.

III

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT DISREGARDED THE PRINCIPLE AND
JURISPRUDENCE, PRINCIPLE AND RULE ON UNENFORCEABLE CONTRACTS AS PROVIDED IN ARTICLE 1317 OF THE NEW
CIVIL CODE.

IV

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE COURT DISREGARDED THE PRINCIPLE AND
JURISPRUDENCE AS TO WHEN AWARD OF ACTUAL AND MORAL DAMAGES IS PROPER.

IN NOT AWARDING PETITIONER'S CAUSE OF ACTION AS STATED IN ITS ANSWER WITH SPECIAL AND AFFIRMATIVE DEFENSES
WITH COUNTERCLAIM THE INTERMEDIATE APPELLATE COURT HAS CLEARLY DEPARTED FROM THE ACCEPTED USUAL,
COURSE OF JUDICIAL PROCEEDINGS.

There is only one legal issue to be resolved by this Court: whether or not the "dealership agreement" referred by the President and Chairman of the Board of
petitioner corporation is a valid and enforceable contract. We do not agree with the conclusion of the respondent Court that it is.

Under the Corporation Law, which was then in force at the time this case arose, 5 as well as under the present Corporation Code, all corporate powers shall be
exercised by the Board of Directors, except as otherwise provided by law.6 Although it cannot completely abdicate its power and responsibility to act for the
juridical entity, the Board may expressly delegate specific powers to its President or any of its officers. In the absence of such express delegation, a contract
entered into by its President, on behalf of the corporation, may still bind the corporation if the board should ratify the same expressly or impliedly. Implied
ratification may take various forms — like silence or acquiescence; by acts showing approval or adoption of the contract; or by acceptance and retention of
benefits flowing therefrom.7 Furthermore, even in the absence of express or implied authority by ratification, the President as such may, as a general rule, bind
the corporation by a contract in the ordinary course of business, provided the same is reasonable under the circumstances. 8 These rules are basic, but are all
general and thus quite flexible. They apply where the President or other officer, purportedly acting for the corporation, is dealing with a third person, i. e., a
person outside the corporation.

The situation is quite different where a director or officer is dealing with his own corporation. In the instant case respondent Te was not an ordinary stockholder;
he was a member of the Board of Directors and Auditor of the corporation as well. He was what is often referred to as a "self-dealing" director.

A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation.9 In case his interests conflict with those of the
corporation, he cannot sacrifice the latter to his own advantage and benefit. As corporate managers, directors are committed to seek the maximum amount of
profits for the corporation. This trust relationship "is not a matter of statutory or technical law. It springs from the fact that directors have the control and guidance
of corporate affairs and property and hence of the property interests of the stockholders." 10 In the case of Gokongwei v. Securities and Exchange Commission,
this Court quoted with favor from Pepper v. Litton,11 thus:

. . . He cannot by the intervention of a corporate entity violate the ancient precept against serving two masters. . . . He cannot utilize his
inside information and his strategic position for his own preferment. He cannot violate rules of fair play by doing indirectly through the
corporation what he could not do directly. He cannot use his power for his personal advantage and to the detriment of the stockholders
and creditors no matter how absolute in terms that power may be and no matter how meticulous he is to satisfy technical requirements.
For that power is at all times subject to the equitable limitation that it may not be exercised for the aggrandizement, preference, or
advantage of the fiduciary to the exclusion or detriment of the cestuis. . . . .
On the other hand, a director's contract with his corporation is not in all instances void or voidable. If the contract is fair and reasonable under the circumstances,
it may be ratified by the stockholders provided a full disclosure of his adverse interest is made. Section 32 of the Corporation Code provides, thus:

Sec. 32. Dealings of directors, trustees or officers with the corporation. — A contract of the corporation with one or more of its directors or
trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present:

1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a
quorum for such meeting;

2. That the vote of such director or trustee was not necessary for the approval of the contract;

3. That the contract is fair and reasonable under the circumstances; and

4. That in the case of an officer, the contract with the officer has been previously authorized by the Board of Directors.

Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee,
such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of
two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or
trustees involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the circumstances.

Although the old Corporation Law which governs the instant case did not contain a similar provision, yet the cited provision substantially incorporates well-settled
principles in corporate law. 12

Granting arguendo that the "dealership agreement" involved here would be valid and enforceable if entered into with a person other than a director or officer of
the corporation, the fact that the other party to the contract was a Director and Auditor of the petitioner corporation changes the whole situation. First of all, We
believe that the contract was neither fair nor reasonable. The "dealership agreement" entered into in July, 1969, was to sell and supply to respondent Te 20,000
bags of white cement per month, for five years starting September, 1970, at the fixed price of P9.70 per bag. Respondent Te is a businessman himself and must
have known, or at least must be presumed to know, that at that time, prices of commodities in general, and white cement in particular, were not stable and were
expected to rise. At the time of the contract, petitioner corporation had not even commenced the manufacture of white cement, the reason why delivery was not
to begin until 14 months later. He must have known that within that period of six years, there would be a considerable rise in the price of white cement. In fact,
respondent Te's own Memorandum shows that in September, 1970, the price per bag was P14.50, and by the middle of 1975, it was already P37.50 per bag.
Despite this, no provision was made in the "dealership agreement" to allow for an increase in price mutually acceptable to the parties. Instead, the price was
pegged at P9.70 per bag for the whole five years of the contract. Fairness on his part as a director of the corporation from whom he was to buy the cement,
would require such a provision. In fact, this unfairness in the contract is also a basis which renders a contract entered into by the President, without authority
from the Board of Directors, void or voidable, although it may have been in the ordinary course of business. We believe that the fixed price of P9.70 per bag for a
period of five years was not fair and reasonable. Respondent Te, himself, when he subsequently entered into contracts to resell the cement to his "new dealers"
Henry Wee 13 and Gaudencio Galang 14 stipulated as follows:

The price of white cement shall be mutually determined by us but in no case shall the same be less than P14.00 per bag (94 lbs).

The contract with Henry Wee was on September 15, 1969, and that with Gaudencio Galang, on October 13, 1967. A similar contract with Prudencio Lim was
made on December 29, 1969. 15 All of these contracts were entered into soon after his "dealership agreement" with petitioner corporation, and in each one of
them he protected himself from any increase in the market price of white cement. Yet, except for the contract with Henry Wee, the contracts were for only two
years from October, 1970. Why did he not protect the corporation in the same manner when he entered into the "dealership agreement"? For that matter, why did
the President and the Chairman of the Board not do so either? As director, specially since he was the other party in interest, respondent Te's bounden duty was
to act in such manner as not to unduly prejudice the corporation. In the light of the circumstances of this case, it is to Us quite clear that he was guilty of disloyalty
to the corporation; he was attempting in effect, to enrich himself at the expense of the corporation. There is no showing that the stockholders ratified the
"dealership agreement" or that they were fully aware of its provisions. The contract was therefore not valid and this Court cannot allow him to reap the fruits of his
disloyalty.

As a result of this action which has been proven to be without legal basis, petitioner corporation's reputation and goodwill have been prejudiced. However, there
can be no award for moral damages under Article 2217 and succeeding articles on Section 1 of Chapter 3 of Title XVIII of the Civil Code in favor of a corporation.

In view of the foregoing, the Decision and Resolution of the Intermediate Appellate Court dated March 30, 1984 and August 6, 1984, respectively, are hereby
SET ASIDE. Private respondent Alejandro Te is hereby ordered to pay petitioner corporation the sum of P20,000.00 for attorney's fees, plus the cost of suit and
expenses of litigation.

SO ORDERED.

VALLE VERDE COUNTRY CLUB, G.R. No. 151969

INC., ERNESTO VILLALUNA,
RAY GAMBOA, AMADO M. , JR.,
FORTUNATO DEE, AUGUSTO
SUNICO, VICTOR SALTA, Present:
FRANCISCO ORTIGAS III, ERIC
ROXAS, in their capacities as QUISUMBING, J., Chairperson,
members of the Board of Directors of CARPIO-MORALES,
Valle Verde Country Club, Inc., and BRION,
JOSE RAMIREZ, DEL CASTILLO, and
ABAD, JJ.
 Petitioners,

- versus - Promulgated:

VICTOR ,
September 4, 2009
Respondent.

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

DECISION
BRION, J.:
In this petition for review on certiorari,[1] the parties raise a legal question on corporate
governance: Can the members of a corporations board of directors elect another director
to fill in a vacancy caused by the resignation of a hold-over director?

THE FACTUAL ANTECEDENTS

On February 27, 1996, during the Annual Stockholders Meeting of petitioner Valle
Verde Country Club, Inc. (VVCC), the following were elected as members of the VVCC
Board of Directors: Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan), Eduardo
Makalintal (Makalintal), Francisco Ortigas III, Victor Salta, Amado M. Santiago, Jr.,
Fortunato Dee, Augusto Sunico, and Ray Gamboa.[2] In the years 1997, 1998, 1999,
2000, and 2001, however, the requisite quorum for the holding of the stockholders
meeting could not be obtained. Consequently, the above-named directors continued to
serve in the VVCC Board in a hold-over capacity.
On , Dinglasan resigned from his position as member of the VVCC Board. In a meeting
held on , the remaining directors, still constituting a quorum of VVCCs nine-member
board, elected Eric Roxas (Roxas) to fill in the vacancy created by the resignation of
Dinglasan.
A year later, or on , Makalintal also resigned as member of the VVCC Board. He was
replaced by Jose Ramirez (Ramirez), who was elected by the remaining members of the
VVCC Board on .
Respondent (Africa), a member of VVCC, questioned the election of Roxas and Ramirez
as members of the VVCC Board with the Securities and Exchange Commission (SEC)
and the Regional Trial Court (RTC), respectively. The SEC case questioning the validity
of Roxas appointment was docketed as SEC Case No. 01-99-6177. The RTC case
questioning the validity of Ramirez appointment was docketed as Civil Case No. 68726.
In his nullification complaint[3] before the RTC, alleged that the election of Roxas was
contrary to Section 29, in relation to Section 23, of the Corporation Code of the
(Corporation Code). These provisions read:
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 until their successors are elected and qualified.
xxxx
Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board of
directors or trustees other than by removal by the stockholders or members or by expiration of term,
may be filled by the vote of at least a majority of the remaining directors or trustees, if still
constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or
special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be
elected only for the unexpired term of his predecessor in office. xxx. [Emphasis supplied.]
Africa claimed that a year after Makalintals election as member of the VVCC Board in
1996, his [Makalintals] term as well as those of the other members of the VVCC Board
should be considered to have already expired. Thus, according to , the resulting vacancy
should have been filled by the stockholders in a regular or special meeting called for that
purpose, and not by the remaining members of the VVCC Board, as was done in this
case.
Africa additionally contends that for the members to exercise the authority to fill in
vacancies in the board of directors, Section 29 requires, among others, that there should
be an unexpired term during which the successor-member shall serve. Since Makalintals
term had already expired with the lapse of the one-year term provided in Section 23,
there is no more unexpired term during which Ramirez could serve.
Through a partial decision[4] promulgated on , the RTC ruled in favor of and declared
the election of Ramirez, as Makalintals replacement, to the VVCC Board as null and
void.
Incidentally, the SEC issued a similar ruling on , nullifying the election of Roxas as
member of the VVCC Board, vice hold-over director Dinglasan. While VVCC
manifested its intent to appeal from the SECs ruling, no petition was actually filed with
the Court of Appeals; thus, the appellate court considered the case closed and terminated
and the SECs ruling final and executory.[5]
THE PETITION
VVCC now appeals to the Court to assail the RTCs partial decision for being contrary to
law and jurisprudence. VVCC made a direct resort to the Court via a petition for review
on certiorari, claiming that the sole issue in the present case involves a purely legal
question.
As framed by VVCC, the issue for resolution is whether the remaining directors of the
corporations Board, still constituting a quorum, can elect another director to fill in a
vacancy caused by the resignation of a hold-over director.
Citing law and jurisprudence, VVCC posits that the power to fill in a vacancy created by
the resignation of a hold-over director is expressly granted to the remaining members of
the corporations board of directors.
Under the above-quoted Section 29 of the Corporation Code, a vacancy occurring in the
board of directors caused by the expiration of a members term shall be filled by the
corporations stockholders. Correlating Section 29 with Section 23 of the same law,
VVCC alleges that a members term shall be for one year and until his successor is
elected and qualified; otherwise stated, a members term expires only when his
successor to the Board is elected and qualified. Thus, until such time as [a successor is]
elected or qualified in an annual election where a quorum is present, VVCC contends
that the term of [a member] of the board of directors has yet not expired.
As the vacancy in this case was caused by Makalintals resignation, not by the expiration
of his term, VVCC insists that the board rightfully appointed Ramirez to fill in the
vacancy.
In support of its arguments, VVCC cites the Courts ruling in the 1927 El Hogar[6] case
which states:
Owing to the failure of a quorum at most of the general meetings since the respondent has been
in existence, it has been the practice of the directors to fill in vacancies in the directorate by
choosing suitable persons from among the stockholders. This custom finds its sanction in Article 71
of the By-Laws, which reads as follows:
Art. 71. The directors shall elect from among the shareholders members
to fill the vacancies that may occur in the board of directors until the
election at the general meeting.
xxxx
Upon failure of a quorum at any annual meeting the directorate naturally holds over and continues to
function until another directorate is chosen and qualified. Unless the law or the charter of a corporation
expressly provides that an office shall become vacant at the expiration of the term of office for which
the officer was elected, the general rule is to allow the officer to hold over until his successor is duly
qualified. Mere failure of a corporation to elect officers does not terminate the terms of existing officers
nor dissolve the corporation. The doctrine above stated finds expression in article 66 of the by-laws of
the respondent which declares in so many words that directors shall hold office "for the term of one
year or until their successors shall have been elected and taken possession of their offices." xxx.

It results that the practice of the directorate of filling vacancies by the action of the directors
themselves is valid. Nor can any exception be taken to the personality of the individuals chosen by the
directors to fill vacancies in the body. [Emphasis supplied.]
, in opposing VVCCs contentions, raises the same arguments that he did before the trial
court.

THE COURTS RULING

We are not persuaded by VVCCs arguments and, thus, find its petition
unmeritorious.
To repeat, the issue for the Court to resolve is whether the remaining directors of a
corporations Board, still constituting a quorum, can elect another director to fill in a
vacancy caused by the resignation of a hold-over director. The resolution of this legal
issue is significantly hinged on the determination of what constitutes a directors term of
office.
The holdover period is not part of the term of
office of a member of the board of directors
The word term has acquired a definite meaning in jurisprudence. In several cases, we
have defined term as the time during which the officer may claim to hold the office
as of right, and fixes the interval after which the several incumbents shall succeed one
another.[7] The term of office is not affected by the holdover.[8] The term is fixed by
statute and it does not change simply because the office may have become vacant, nor
because the incumbent holds over in office beyond the end of the term due to the fact
that a successor has not been elected and has failed to qualify.
Term is distinguished from tenure in that an officers tenure represents the term during
which the incumbent actually holds office. The tenure may be shorter (or, in case of
holdover, longer) than the term for reasons within or beyond the power of the
incumbent.

Based on the above discussion, when Section 23[9] of the Corporation Code declares
that the board of directorsshall hold office for one (1) year until their successors are
elected and qualified, we construe the provision to mean that the term of the members
of the board of directors shall be only for one year; their term expires one year after
election to the office. The holdover period that time from the lapse of one year from a
members election to the Board and until his successors election and qualification is not
part of the directors original term of office, nor is it a new term; the holdover period,
however, constitutes part of his tenure. Corollary, when an incumbent member of the
board of directors continues to serve in a holdover capacity, it implies that the office has
a fixed term, which has expired, and the incumbent is holding the succeeding term.[10]
After the lapse of one year from his election as member of the VVCC Board in 1996,
Makalintals term of office is deemed to have already expired. That he continued to serve
in the VVCC Board in a holdover capacity cannot be considered as extending his term.
To be precise, Makalintals term of office began in 1996 and expired in 1997, but, by
virtue of the holdover doctrine in Section 23 of the Corporation Code, he continued to
hold office until his resignation on . This holdover period, however, is not to be
considered as part of his term, which, as declared, had already expired.
With the expiration of Makalintals term of office, a vacancy resulted which, by the terms
of Section 29[11] of the Corporation Code, must be filled by the stockholders of VVCC
in a regular or special meeting called for the purpose. To assume as VVCC does that the
vacancy is caused by Makalintals resignation in 1998, not by the expiration of his term
in 1997, is both illogical and unreasonable. His resignation as a holdover director did not
change the nature of the vacancy; the vacancy due to the expiration of Makalintals term
had been created long before his resignation.
The powers of the corporations board of
directors emanate from its stockholders
VVCCs construction of Section 29 of the Corporation Code on the authority to fill up
vacancies in the board of directors, in relation to Section 23 thereof, effectively weakens
the stockholders power to participate in the corporate governance by electing their
representatives to the board of directors. The board of directors is the directing and
controlling body of the corporation. It is a creation of the stockholders and derives its
power to control and direct the affairs of the corporation from them. The board of
directors, in drawing to themselves the powers of the corporation, occupies a position of
trusteeship in relation to the stockholders, in the sense that the board should exercise not
only care and diligence, but utmost good faith in the management of corporate affairs.
[12]
The underlying policy of the Corporation Code is that the business and affairs of a
corporation must be governed by a board of directors whose members have stood for
election, and who have actually been elected by the stockholders, on an annual basis.
Only in that way can the directors' continued accountability to shareholders, and the
legitimacy of their decisions that bind the corporation's stockholders, be assured. The
shareholder vote is critical to the theory that legitimizes the exercise of power by the
directors or officers over properties that they do not own.[13]
This theory of delegated power of the board of directors similarly explains why, under
Section 29 of the Corporation Code, in cases where the vacancy in the corporations
board of directors is caused not by the expiration of a members term, the successor so
elected to fill in a vacancy shall be elected only for the unexpired term of the his
predecessor in office. The law has authorized the remaining members of the board to fill
in a vacancy only in specified instances, so as not to retard or impair the corporations
operations; yet, in recognition of the stockholders right to elect the members of the
board, it limited the period during which the successor shall serve only to the unexpired
term of his predecessor in office.
While the Court in El Hogar approved of the practice of the directors to fill vacancies in
the directorate, we point out that this ruling was made before the present Corporation
Code was enacted[14] and before its Section 29 limited the instances when the remaining
directors can fill in vacancies in the board, i.e., when the remaining directors still
constitute a quorum and when the vacancy is caused for reasons other than by removal
by the stockholders or by expiration of the term.
It also bears noting that the vacancy referred to in Section 29 contemplates a vacancy
occurring within the directors term of office. When a vacancy is created by the
expiration of a term, logically, there is no more unexpired term to speak of. Hence,
Section 29 declares that it shall be the corporations stockholders who shall possess the
authority to fill in a vacancy caused by the expiration of a members term.
As correctly pointed out by the RTC, when remaining members of the VVCC Board
elected Ramirez to replace Makalintal, there was no more unexpired term to speak of, as
Makalintals one-year term had already expired. Pursuant to law, the authority to fill in
the vacancy caused by Makalintals leaving lies with the VVCCs stockholders, not the
remaining members of its board of directors.
WHEREFORE, we DENY the petitioners petition for review on certiorari, and
AFFIRM the partial decision of the Regional Trial Court, Branch 152, , promulgated on
, in Civil Case No. 68726. Costs against the petitioners.
SO ORDERED.

G.R. No. L-26555 November 16, 1926

BALDOMERO ROXAS, ENRIQUE ECHAUS and ROMAN J. LACSON, petitioners,
vs.
Honorable MARIANO DE LA ROSA, Auxiliary Judge of First Instance of Occidental Negros,
AGUSTIN CORUNA, MAURO LEDESMA and BINALBAGAN ESTATE, INC., respondents.
Roman J. Lacson, for petitioners.
The respondent judge in his own behalf.
The respondent corporation in its own behalf.
R. Nolan and Feria and La O for the respondents Coruna and Ledesma.

STREET, J.:
This is an original petition for the writ of certiorari whereby the petitioners, Baldomeo Roxas, Enrique
Echaus, and Roman J. Lacson, seek to procure the abrogation of an order of the respondent judge
granting a preliminary injunction in an action in the Court of First Instance of Occidental Negros,
instituted by Agustin Coruna and Mauro Ledesma against the petitioners and the Binalbagan Estate,
Inc. The cause is now before us upon the issues made by the answers filed by the respondents.
It appears that the Binalbagan Estate, Inc., is a corporation having its principal plant in Occidental
Negros where it is engaged in the manufacture of raw sugar from canes grown upon farms accessible to
its central. In July, 1924, the possessors of a majority of the shares of the Binalbagan Estate, Inc.,
formed a voting trust composed of three members, namely, Salvador Laguna, Segunda Monteblanco,
and Arthur F. Fisher, as trustee. By the document constituting this voting trust the trustees were
authorized to represent and vote the shares pertaining to their constituents, and to this end the
shareholders undertook to assign their shares to the trustees on the books of the company. The total
number of outstanding shares of the corporation is somewhat over 5,500, while the number of shares
controlled by the voting trust is less than 3,000.
On February 1, 1926, the general annual meeting of the shareholders of the Binalbagan Estate, Inc.,
took place, at which Mr. J. P. Heilbronn appeared as representative of the voting trust, his authority
being recognized by the holders of all the other shares present at this meeting. Upon said occasion
Heilbronn, by virtue of controlling the majority of the shares, was able to nominate and elect a board of
directors to his own liking, without opposition from the minority. After the board of directors had been
thus elected and had qualified, they chose a set of officers constituting of Jose M. Yusay, president,
Timoteo Unson, vice-president, Jose G. Montalvo, secretary-treasurer, and H. W. Corp and Agustin
Coruna, as members. Said officials immediately entered upon the discharged of their duties and have
continued in possession of their respective offices until the present time.
Since the creation of the voting trust there have been a number of vacancies caused by resignation or
the absence of members from the Philippine Islands, with the result that various substitutions have been
made in the personnel of the voting trust. At the present time the petitioners Roxas, Echaus, and Lacson
presumably constitute its membership. We say presumably, because in the present proceedings an issue
of fact is made by the respondents upon the point whether the three individuals named have been
regularly substituted for their several predecessors. In the view we take of the case it is not necessary to
determine this issue; and we shall assume provisionally that the three petitioners are the lawful
components of the voting trust.
Although the present officers of the Binalbagan Estate, Inc., were elected by the representative of the
voting trust, the present trustee are apparently desirous of ousting said officers, without awaiting the
termination of their official terms at the expiration of one year from the date of their election. In other
to effect this purpose the petitioners in their character as members of the voting trust, on August 2,
1926, caused the secretary of the Binalbagan Estate, Inc., to issue to the shareholders a notice calling
for a special general meeting of shareholders to be held at 10 a. m., on August 16, 1926, "for the
election of the board of directors, for the amendment of the By-Laws, and for any other business that
can be dealt with in said meeting."
Within a few days after said notice was issued Agustin Coruña, as member of the existing board, and
Mauro Ledesma, as a simple shareholder of the corporation, instituted a civil action (No. 3840) in the
Court of First Instance of Occidental Negros against the trustees and the Binalbagan Estate, Inc., for the
purpose of enjoining the meeting completed in the notice above-mentioned.
In response to a proper for a preliminary injunction, in connection with said action, the respondent
judge issued the restraining order, or preliminary injunction, which gave rise to the present petition for
the writ of certiorari. In the dispositive part of said order the Binalbagan Estate, Inc., its lawyers,
agents, representatives, and all others who may be assisting or corroborating with them, are restrained
from holding the general shareholders' meeting called for the date mentioned and from electing new
directors for the company in substitution of the present incumbents, said injunction to be effective until
further order of the court. it is now asserted here by the petitioners that the making of this order was
beyond the legitimate powers of the respondent judge, and it is accordingly prayed that said order be
set aside.
We are of the opinion that this contention is untenable and that the respondent judge acted within his
legitimate powers in making the order against which relief is sought. In order to expose the true
inwardness of the situation before us it is necessary to take not of the fact that under the law the
directors of a corporation can only be removed from office by a vote of the stockholders representing at
least two-thirds of the subscribed capital stock entitled to vote (Act No. 1459, sec. 34); while vacancies
in the board, when they exist, can be filled by mere majority vote, (Act No. 1459, sec. 25). Moreover,
the law requires that when action is to be taken at a special meeting to remove the directors, such
purpose shall be indicated in the call (Act No. 1459, sec. 34).
Now, upon examining into the number of shares controlled by the voting trust, it will be seen that,
while the trust controls a majority of the stock, it does not have a clear two-thirds majority. It was
therefore impolitic for the petitioners, in forcing the call for the meeting of August 16, to come out
frankly and say in the notice that one of the purpose of the meeting was to removed the directors of the
corporation from office. Instead, the call was limited to the election of the board of directors, it being
the evident intention of the voting trust to elect a new board as if the directorate had been then vacant.
But the complaint in civil No. 3840 directly asserts that the members of the present directorate were
regularly elected at the general annual meeting held in February, 1926; and if that assertion be true, the
proposal to elect, another directorate, as per the call of August 2, if carried into effect, would result in
the election of a rival set of directors, who would probably need the assistance of judgment of court in
an independent action of quo warranto to get them installed into office, even supposing that their title
to the office could be maintained. That the trial judge had jurisdiction to forestall that step and enjoin
the contemplated election is a matter about which there cannot be the slightest doubt. The law
contemplates and intends that there will be one of directors at a time and that new directors shall be
elected only as vacancies occur in the directorate by death, resignation, removal, or otherwise.
lawphil.net
It is instituted that there was some irregularity or another in the election of the present directorate. We
see nothing upon which this suggestion can be safely planted; And at any rate the present board of
directors are de facto incumbents of the office whose acts will be valid until they shall be lawfully
removed from the office or cease from the discharge of their functions. In this case it is not necessary
for us to agitate ourselves over the question whether the respondent judge properly exercised his
judicial discretion in granting the order complained of. If suffices to know that in making the order he
was acting within the limits of his judicial powers.
It will be noted that the order in question enjoins the defendants from holding the meeting called for
August 16; and said order must not be understood as constituting any obstacle for the holding of the
regular meeting at the time appointed in the by-laws of the corporation.
For the reasons stated the petition will be denied, and it is so ordered, with costs.

G.R. No. 99032 March 26, 1997

RICARDO A. LLAMADO, petitioner,

vs.
COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents.

TORRES, JR., J.:

Before us is a petition to review the decision1 of the Court of Appeals which affirmed the decision of the Regional Trial Court of Manila in Criminal Case No. 85-
38653 convicting petitioner of Violation of Batas Pambansa Blg. 22, otherwise known as the Bouncing Checks Law, and sentencing him to suffer imprisonment of
one (1) year of prision correccional and to pay a fine of P200,000.00 with subsidiary imprisonment in case of insolvency, and to reimburse Leon Gaw the amount
of P186,500.00 plus the costs of suit.

The facts of the case, as found by the Court of Appeals, are as follows:

Accused-appellant, Ricardo Llamado, together with Jacinto Pascual, was charged with violation of Batas Pambansa Blg. 22 and pleaded
"not guilty" of the crime charged.

Accused Jacinto Pascual remained at large. Thus trial on the merits was conducted against accused-appellant, Ricardo Llamado, only.

Accused Ricardo Llamado and his co-accused Jacinto Pascual were the Treasurer and President, respectively, of the Pan Asia Finance
Corporation.

As found by the trial court, private complainant, Leon Gaw, delivered to accused the amount of P180,000.00, with the assurance of Aida
 Tan, the secretary of the accused in the corporation, that it will be repaid on 4 November 1983, plus interests thereon at 12% plus a share
in the profits of the corporation, if any.

Upon delivery of the money, accused Ricardo Llamado took it and placed it inside a deposit box. Accused Jacinto Pascual and Ricardo
Llamado signed Philippine Trust Company Check No. 047809, postdated 4 November 1983, in the amount of P186,500.00 in the
presence of private complainant.

The aforesaid check was issued in payment of the cash money delivered to the accused by private complainant, plus interests thereon for
sixty (60) days in the amount of P6,500.00.

On 4 November 1983, private complainant deposited the check in his current account with the Equitable Banking Corporation which later
informed the complainant that said check was dishonored by the drawee bank because payment was stopped, and that the check was
drawn against insufficient funds. Private complainant was also notified by the Equitable Banking Corporation that his current account was
debited for the amount of P186,500.00 because of the dishonor of the said check.

Private complainant returned to Aida Tan to inform her of the dishonor of the check. Aida Tan received the check from private complainant
with the assurance that she will have said check changed with cash. However, upon his return to Aida Tan, the latter informed him that she
had nothing to do with the check.

Thereupon, private complainant went to accused Ricardo Llamado on 11 November 1983 to inform him of the dishonor of the check.
Accused offered in writing to pay private complainant a portion of the amount equivalent to 10% thereof on 14 or 15 November 1983, and
the balance to be rolled over for a period of ninety (90) days. This offer was accepted by private complainant.

Accused, however, failed to remit to private complainant the aforesaid 10% on or before 15 November 1983 and to roll over the balance of
the money.

Private complainant then demanded from the accused the payment of P186,500.00 but accused failed to pay and instead, accused
offered to return to private complainant only 30% of his money which was refused by the latter. Thus, the filing of the complaint for
violation of Batas Pambansa No. 22 against the accused.2

On the other hand, petitioner's version of the relevant facts, is as follows:

It was the practice in the corporation for petitioner to sign blank checks and leave them with Pascual so that Pascual could make
disbursements and enter into transactions even in the absence of petitioner.

One of the checks which petitioner signed in blank and gave to Pascual is the check in question, Exhibit "A."

The check was later issued to private complainant, filled up with the amount P186,500.00 and date November 4, 1983.

The check was dishonored on November 7, 1983 when private complainant presented it for payment because its payment had been
stopped (Exhibits A-6 and A-7). However, there were also no sufficient funds in the account to cover the amount of the check.

Private complainant went to see Aida Tan, the "Secretary" of Pan-Asia Finance Corporation, about the dishonor of the check because "she
was the one who handled [sic] the check and gave it to me." He returned the check to Aida Tan who gave him a receipt for it (Exhibit C),
and promised "to return the cash money." However, she did not do so. Instead, she returned the check to private complainant (pp. 9-11,
tsn, January 6, 1986; p. 9, tsn, January 6, 1986).

On November 11, 1983, private complainant entered into an agreement (Exhibit H) with petitioner whereby Pan-Asia Finance Corporation
would pay private complainant 10% of the P186,500.00 by November 14, or 15, and the balance will be rolled over for 90 days (pp. 1-4,
tsn, June 30, 1986). Private respondent was not however paid as agreed upon.

In late 1985, petitioner was charged with violation of BP 22 under the following Information: . . .3

After trial on the merits, the trial court rendered judgment convicting the accused of violation of Batas Pambansa No. 22, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered finding the Accused Ricardo A. Llamado guilty of Violation of Batas Pambansa No. 22 and
hereby sentences him to suffer imprisonment for a period of one (1) year of prision correccional and to pay a fine of P200,000.00, with
subsidiary imprisonment in case of insolvency. The Accused is likewise condemned to reimburse Leon Gaw the aforesaid amount of
P186,500.00 plus the costs of suit.

SO ORDERED.

On appeal, the Court of Appeals affirmed the trial court's decision.

In this petition, petitioner alleges that:

1. respondent Court of Appeals erred because it convicted petitioner of the charge of violation of Batas Pambansa Blg. 22 although the
check was only a contingent payment for investment which had not been proven to be successful, thus the check was not issued "to apply
on account or for value" within the contemplation of the batas;

2. respondent Court of Appeals erred because it convicted petitioner of the charge for merely signing the check in question without being
actually involved in the transaction for which the check was issued, in disregard of the pronouncement of this Court in Dingle vs. IAC, 148
SCRA 595;

3. respondent Court of Appeals erred because it refused to apply the "novation theory" recognized by this Court in Ong v. Court of
Appeals, 124 SCRA 578, and Guingona, Jr. v. City Fiscal of Manila, 128 SCRA 577, despite admission by private complainant that before
the charge was filed in court or even the prosecutor he had entered into a new agreement with petitioner supplanting the check in
question;

4. respondent Court of Appeals erred because it held petitioner personally liable for the amount of the check in question, although it was a
check of the Pan Asia Finance Corporation and he signed the same in his capacity as Treasurer of the corporation.

The petition is without merit.

For clarity, petitioner's second allegation shall be discussed first. Petitioner argues that respondent court erred in disregarding the pronouncement in Dingle vs.
IAC, 4 that "absent knowledge by the maker or drawer of the issuance of a check much less of the transaction and the fact of dishonor, the accused should be
acquitted."

The respondent court did not err. In Dingle vs. IAC, the petitioner was acquitted because: 1.) from the testimony of the sole prosecution witness, it was
established that he dealt exclusively with petitioner's co-signatory; 2.) nowhere in the prosecution witness' testimony was the name of petitioner ever mentioned
in connection with the transaction and the issuance of the check; and, 3.) the prosecution witness therein categorically stated that it was Nestor Dingle,
petitioner's co-signatory who received his two letters of demand. These lent credence to the testimony of petitioner that she signed the questioned checks in
blank together with her husband without any knowledge of its issuance, much less of the transaction and the fact of dishonor. Moreover, while Paz Dingle and
her husband Nestor Dingle owned the business, the business was managed by Nestor, petitioner Paz's co-signatory.

The above circumstances in Dingle vs. IAC do not obtain in the case at bar. Here, the private complainant testified that upon delivery of the money, petitioner
took it and placed it inside a deposit box; that Jacinto Pascual and petitioner Ricardo Llamado signed the questioned check, postdated November 4, 1983, in the
amount of P186,500.00 in the presence of private complainant; notice of the fact of dishonor of the check was made on petitioner, who offered in writing 5 to pay
private complainant a portion of the amount equivalent to 10% thereof on 14 or 15 November 1983, and the balance to be rolled over for a period of 90 days.

Petitioner denies knowledge of the issuance of the check without sufficient funds and involvement in the transaction with private complainant. However,
knowledge involves a state of mind difficult to establish. Thus, the statute itself creates a prima facie presumption, i.e., that the drawer had knowledge of the
insufficiency of his funds in or credit with the bank at the time of the issuance and on the check's presentment for payment. 6 Petitioner failed to rebut the
presumption by paying the amount of the check within five (5) banking days from notice of the dishonor. 7 His claim that he signed the check in blank which
allegedly is common business practice, is hardly a defense. If as he claims, he signed the check in blank, he made himself prone to being charged with violation
of BP 22. It became incumbent upon him to prove his defenses. As Treasurer of the corporation who signed the check in his capacity as an officer of the
corporation, lack of involvement in the negotiation for the transaction is not a defense.

Petitioner alleges that the respondent court erred when it convicted petitioner of violation of BP 22 when the check was only a contingent payment for investment
which had not been proven to be successful, thus the check was not issued "to apply on account or for value" within the contemplation of the batas. This
contention is untenable.

The check was issued for an actual valuable consideration of P180,000.00, which private complainant handed to Aida Tan, a secretary in petitioner's office. In
fact, petitioner admits that private complainant made an investment in said amount with Pan-Asia Finance Corporation. Petitioner contends that the money which
private complainant gave the corporation was intended for investment which they agreed will be returned to private complainant with interests, only if the project
became successful. But then, if this were true, the check need not have been issued because a receipt and their written agreement would have sufficed.

True, it is common practice in commercial transactions to require debtors to issue checks on which creditors must rely as guarantee of payment, or as evidence
of indebtedness, if not a mode of payment. But to determine the reason for which checks are issued, or the terms and conditions for their issuance, will greatly
erode the faith the public reposes in the stability and commercial value of checks as currency substitutes, and bring about havoc in trade and in banking
communities.8 So, what the law punishes is the issuance of a bouncing check and not the purpose for which it was issued nor the terms and conditions relating
to its issuance. The mere act of issuing a worthless check is malum prohibitum. 9

With regard to petitioner's third allegation, the "novation theory" recognized by this Court in certain cases, does not apply in the case at bar. While private
complainant agreed to petitioner's offer to pay him 10% of the amount of the check on November 14 or 15, 1983 and the balance to be rolled over for 90 days,
this turned out to be only an empty promise which effectively delayed private complainant's filing of a case for Violation of BP 22 against petitioner and his co-
accused. As admitted by petitioner in his Memorandum, private complainant was never paid as agreed upon.

Petitioner's argument that he should not be held personally liable for the amount of the check because it was a check of the Pan Asia Finance Corporation and
he signed the same in his capacity as Treasurer of the corporation, is also untenable. The third paragraph of Section 1 of BP Blg. 22 states:

Where the check is drawn by a corporation, company or entity, the person or persons who actually signed the check in behalf of such drawer shall be liable under
this Act.

IN VIEW WHEREOF, the petition is hereby DENIED and the decision of respondent court AFFIRMED in toto.

SO ORDERED.

G.R. No. 76801 August 11, 1995

LOPEZ REALTY, INC., AND ASUNCION LOPEZ GONZALES, petitioners,

vs.
FLORENTINA FONTECHA, ET AL., AND THE NATIONAL LABOR RELATIONS COMMISSION, respondents.

PUNO, J.:

The controversy at bench arose from a complaint filed by private respondents,1 namely, Florentina Fontecha, Mila Refuerzo, Marcial Mamaril, Perfecto Bautista,
Edward Mamaril, Marissa Pascual and Allan Pimentel, against their employer Lopez Realty Incorporated (petitioner) and its majority stockholder, Asuncion Lopez
Gonzales, for alleged non-payment of their gratuity pay and other benefits.2 The case was docketed as NLRC-NCR Case No. 2-2176-82.

Lopez Realty, Inc., is a corporation engaged in real estate business, while petitioner Asuncion Lopez Gonzales is one of its majority shareholders. Her interest in
the company vis-a-vis the other shareholders is as follows:

1 Asuncion Lopez Gonzales 7831 shares

2 Teresita Lopez Marquez 7830 shares

3 Arturo F. Lopez 7830 shares

4 Rosendo de Leon 4 shares

5 Benjamin Bernardino 1 share

 6 Leo Rivera 1 share

Except for Arturo F. Lopez, the rest of the shareholders also sit as members of the Board of Directors.

As found by the Labor arbiter.3 sometime in 1978, Arturo Lopez submitted a proposal relative to the distribution of certain assets of petitioner
corporation among its three (3) main shareholders. The proposal had three (3) aspects, viz: (1) the sale of assets of the company to pay for its
obligations; (2) the transfer of certain assets of the company to its three (3) main shareholders, while some other assets shall remain with the
company; and (3) the reduction of employees with provision for their gratuity pay. The proposal was deliberated upon and approved in a special
meeting of the board of directors held on April 17, 1978.

It appears that petitioner corporation approved two (2) resolutions providing for the gratuity pay of its employees, viz: (a) Resolution No. 6, Series of
1980, passed by the stockholders in a special meeting held on September 8, 1980, resolving to set aside, twice a year, a certain sum of money for the
gratuity pay of its retiring employees and to create a Gratuity Fund for the said contingency; and (b) Resolution No. 10, Series of 1980, setting aside
the amount of P157,750.00 as Gratuity Fund covering the period from 1950 up to 1980.

Meanwhile, on July 28, 1981, board member and majority stockholder Teresita Lopez Marquez died.

On August 17, 1981, except for Asuncion Lopez Gonzales who was then abroad, the remaining members of the Board of Directors, namely: Rosendo
de Leon, Benjamin Bernardino, and Leo Rivera, convened a special meeting and passed a resolution which reads:

Resolved, as it is hereby resolved that the gratuity (pay) of the employees be given as follows:

(a) Those who will be laid off be given the full amount of gratuity;

(b) Those who will be retained will receive 25% of their gratuity (pay) due on September 1, 1981, and another 25% on January 1, 1982,
and 50% to be retained by the office in the meantime. (emphasis supplied)

Private respondents were the retained employees of petitioner corporation. In a letter, dated August 31, 1981, private respondents requested for the
full payment of their gratuity pay. Their request was granted in a special meeting held on September 1, 1981. The relevant, portion of the minutes of
the said board meeting reads:

In view of the request of the employees contained in the letter dated August 31, 1981, it was also decided that, all those remaining
employees will receive another 25% (of their gratuity) on or before October 15, 1981 and another 25% on or before the end of November,
1981 of their respective gratuity.

At that, time, however, petitioner Asuncion Lopez Gonzales was still abroad. Allegedly, while she was still out of the country, she sent a cablegram to
the corporation, objecting to certain matters taken up by the board in her absence, such as the sale of some of the assets of the corporation. Upon
her return, she flied a derivative suit with the Securities and Exchange Commission (SEC) against majority shareholder Arturo F. Lopez.

Notwithstanding the "corporate squabble" between petitioner Asuncion Lopez Gonzales and Arturo Lopez, the first two (2) installments of the gratuity
pay of private respondents Florentina Fontecha, Mila Refuerzo, Marcial Mamaril and Perfecto Bautista were paid by petitioner corporation.

Also, petitioner corporation had prepared the cash vouchers and checks for the third installments of gratuity pay of said private respondents
(Florentina Fontecha, Mila Refuerzo, Marcial Mamaril and Perfecto Bautista). For some reason, said vouchers were cancelled by petitioner Asuncion
Lopez Gonzales.

Likewise, the first, second and third installments of gratuity pay of the rest of private respondents, particularly, Edward Mamaril, Marissa Pascual and
Allan Pimentel, were prepared but cancelled by petitioner Asuncion Lopez Gonzales. Despite private respondents' repeated demands for their gratuity
pay, corporation refused to pay the same.4

On July 23, 1984, Labor Arbiter Raymundo R. Valenzuela rendered judgment in favor of private respondents.5

Petitioners appealed the adverse ruling of the Labor arbiter to public respondent National Labor Relations Commission. The appeal focused on the
alleged non-ratification and non-approval of the assailed August 17, 1981 and September 1, 1981 Board Resolutions during the Annual Stockholders'
Meeting held on March 1, 1982. Petitioners further insisted that the payment of the gratuity to some of the private respondents was a mere "mistake"
on the part of petitioner corporation since, pursuant to Resolution No. 6, dated September 8, 1980, and Resolution No. 10, dated October 6, 1980,
said gratuity pay should be given only upon the employees' retirement.

On November 20, 1985, public respondent, through its Second Division, dismissed the appeal for lack of merit, the pertinent portion of which states:6

We cannot agree with the contention of respondents (petitioners') that the Labor Arbiter a quo committed abuse of discretion in his
decision.

Respondents' (petitioners') contention that, the two (2) resolutions dated 17 August 1981 and 1 September 1981 . . . which were not
approved in the annual stockholders meeting had no force and effect, deserves scant consideration. The records show that the
stockholders did not revoke nor nullify these resolutions granting gratuities to complainants.

On record, it appears that the said resolutions arose from the legitimate creation of the Board of Directors who steered the corporate
affairs of the corporation. . . .

Respondents' (petitioners') allegation that the three (3) complainants, Mila E. Refuerzo, Marissa S. Pascual and Edward Mamaril, who had
resigned after filing the complaint on February 8, 1982, were precluded to (sic) receive gratuity because the said resolutions referred to
only retiring employee could not be given credence. A reading of Resolutions dated 17 August 1981 and 1 September 1981 disclosed that
there were periods mentioned for the payment of complainants' gratuities. This disproves respondents' argument allowing gratuities upon
retirement of employees. Additionally, the proposed distribution of assets (Exh. C-1) filed by Mr. Arturo F. Lopez also made mention of
gratuity pay, " . . . (wherein) an employee who desires to resign from the LRI will be given the gratuity pay he or she earned ." (Emphasis
supplied) Let us be reminded, too, that the complainants' resignation was not voluntary but it was pressurized ( sic) due to "power struggle"
which was evident between Arturo Lopez and Asuncion Gonzales.

The respondents' (petitioners') contention of a mistake to have been committed in granting the first two (2) installments of gratuities to
complainants Perfecto Bautista, Florentina Fontecha, Marcial Mamaril and Mila Refuerzo, (has) no legal leg to stand on. The record is
bereft of any evidence that the Board of Directors had passed a resolution nor is there any minutes of whatever nature proving mistakes in
the award of damages (sic).
 With regard to the award of service incentive leave and others, the Commission finds no cogent reason to disturb the appealed decision.

We affirm.

WHEREFORE, let the appealed decision be, as it is hereby, AFFIRMED and let the instant appeal (be) dismissed for lack of merit.

SO ORDERED.

Petitioners reconsidered.7 In their motion for reconsideration, petitioners assailed the validity of the board resolutions passed on August 17, 1981 and
September 1, 1981, respectively, and claimed, for the first time, that petitioner Asuncion Lopez Gonzales was not notified of the special board
meetings held on said dates. The motion for reconsideration was denied by the Second Division on July 24, 1986.

On September 4, 1986, petitioners filed another motion for reconsideration. Again, the motion was denied by public respondent in a Minute
Resolution dated November 19, 1986.8

Hence, the petition. As prayed for, we issued a Temporary Restraining Order,9 enjoining public respondent from enforcing or executing the
Resolution, dated November 20, 1986 (sic), in NLRC-NCR-2-2176-82. 10

The sole issue is whether or not public respondent acted with grave abuse of discretion in holding that private respondents are entitled to receive their
gratuity pay under the assailed board resolutions dated August 17, 1951 and September 1, 1981.

Petitioners contend that the board resolutions passed on August 17, 1981 and September 1, 1981, granting gratuity pay to their retained employees,
are ultra vires on the ground that petitioner Asuncion Lopez Gonzales was not duly notified of the said special meetings. They aver, further, that said
board resolutions were not ratified by the stockholders of the corporation pursuant to Section 28 1/2 of the Corporation Law (Section 40 of the
Corporation Code). They also insist that the gratuity pay must be given only to the retiring employees, to the exclusion of the retained employees or
those who voluntarily resigned from their posts.

At the outset, we note that petitioners allegation on lack of notice to petitioner Asuncion Lopez Gonzales was raised for the first time in the in their
motion for reconsideration filed before public respondent National Labor Relations Commission, or after said public respondent had affirmed the
decision of the labor arbiter. To stress, in their appeal before the NLRC, petitioners never raised the issue of lack of notice to Asuncion Lopez
Gonzales. The appeal dealt with (a) the failure of the stockholders to ratify the assailed resolutions and (b) the alleged "mistake" committed by
petitioner corporation in giving the gratuity pay to some of its employees who are yet to retire from employment.

In their comment, 11 private respondents maintain that the new ground of lack of notice was not raised before the labor arbiter, hence, petitioners are
barred from raising the same on appeal. Private respondents claim, further, that such failure on the part of petitioners, had deprived them the
opportunity to present evidence that, in a subsequent special board meeting held on September 29, 1981, the subject resolution dated September 1,
1981, was unanimously approved by the board of directors of petitioner corporation, including petitioner Asuncion Lopez Gonzales. 12

Indeed, it would be offensive to the basic rules of fair play and justice to allow petitioners to raise questions which have not been passed upon by the
labor arbiter and the public respondent NLRC. It is well settled that questions not raised in the lower courts cannot, be raised for the first time on
appeal.13 Hence, petitioners may not invoke any other ground, other than those it specified at the labor arbiter level, to impugn the validity of the
subject resolutions.

We now come to petitioners' argument that the resolutions passed by the board of directors during the special meetings on August 1, 1981, and
September 1, 1981, were ultra vires for lack of notice.

The general rule is that a corporation, through its board of directors, should act in the manner and within the formalities, if any, prescribed by its
charter or by the general law. 14 Thus, directors must act as a body in a meeting called pursuant to the law or the corporation's by-laws, otherwise,
any action taken therein may be questioned by any objecting director or shareholder. 15

Be that as it may, jurisprudence 16 tells us that an action of the board of directors during a meeting, which was illegal for lack of notice, may be
ratified either expressly, by the action of the directors in subsequent legal meeting, or impliedly, by the corporation's subsequent course of conduct.
Thus, in one case, 17 it was held:

. . . In 2 Fletcher, Cyclopedia of the Law of Private Corporations (Perm. Ed.) sec. 429, at page 290, it is stated:

Thus, acts of directors at a meeting which was illegal because of want of notice may be ratified by the directors at a
subsequent legal meeting, or by the corporations course of conduct
...

Fletcher, supra, further states in sec. 762, at page 1073-1074:

Ratification by directors may be by an express resolution or vote to that effect, or it may be implied from adoption of
the act, acceptance or acquiescence. Ratification may be effected by a resolution or vote of the board of directors
expressly ratifying previous acts either of corporate officers or agents; but it is not necessary, ordinarily, to show a
meeting and formal action by the board of directors in order to establish a ratification.

In American Casualty Co., v. Dakota Tractor and Equipment Co., 234 F. Supp. 606, 611 (D.N.D. 1964), the court stated:

Moreover, the unauthorized acts of an officer of a corporation may be ratified by the corporation by conduct
implying approval and adoption of the act in question. Such ratification may be express or may be inferred from
silence and inaction.

In the case at bench, it was established that petitioner corporation did not issue any resolution revoking nor nullifying the board resolutions granting
gratuity pay to private respondents. Instead, they paid the gratuity pay, particularly, the first two (2) installments thereof, of private respondents
Florentina Fontecha, Mila Refuerzo, Marcial Mamaril and Perfecto Bautista.

Despite the alleged lack of notice to petitioner Asuncion Lopez Gonzales at that time the assailed resolutions were passed, we can glean from the
records that she was aware of the corporation's obligation under the said resolutions. More importantly, she acquiesced thereto. As pointed out by
private respondents, petitioner Asuncion Lopez Gonzales affixed her signature on Cash Voucher Nos. 81-10-510 and 81-10-506, both dated October
15, 1981, evidencing the 2nd installment of the gratuity pay of private respondents Mila Refuerzo and Florentina Fontecha. 18

We hold, therefore, that the conduct of petitioners after the passage of resolutions dated August, 17, 1951 and September 1, 1981, had estopped
them from assailing the validity of said board resolutions.

Assuming, arguendo, that there was no notice given to Asuncion Lopez Gonzalez during the special meetings held on August 17, 1981 and
September 1, 1981, it is erroneous to state that the resolutions passed by the board during the said meetings were ultra vires. In legal parlance, "ultra
vires" act refers to one which is not within the corporate powers conferred by the Corporation Code or articles of incorporation or not necessary or
incidental in the exercise of the powers so conferred. 19
 The assailed resolutions before us cover a subject which concerns the benefit and welfare of the company's employees. To stress, providing gratuity
pay for its employees is one of the express powers of the corporation under the Corporation Code, hence, petitioners cannot invoke the doctrine of
ultra vires to avoid any liability arising from the issuance the subject resolutions. 20

We reject petitioners' allegation that private respondents, namely, Mila Refuerzo, Marissa Pascual and Edward Mamaril who resigned from petitioner
corporation after the filing of the case, are precluded from receiving their gratuity pay. Pursuant to board resolutions dated August 17, 1981 and
September 1, 1981, respectively, petitioner corporation obliged itself to give the gratuity pay of its retained employees in four (4) installments: on
September 1, 1981; October 15, 1981; November, 1981; and January 1, 1982. Hence, at the time the aforenamed private respondents tendered their
resignation, the aforementioned private respondents were already entitled to receive their gratuity pay.

Petitioners try to convince us that the subject resolutions had no force and effect in view of the non-approval thereof during the Annual Stockholders'
Meeting held on March 1, 1982. To strengthen their position, petitioners cite section 28 1/2 of the Corporation Law (Section 40 of the Corporation
Code). We are not persuaded.

The cited provision is not applicable to the case at bench as it refers to the sale, lease, exchange or disposition of all or substantially all of the
corporation's assets, including its goodwill. In such a case, the action taken by the board of directors requires the authorization of the stockholders on
record.

It will be observed that, except far Arturo Lopez, the stockholders of petitioner corporation also sit as members of the board of directors. Under the
circumstances in field, it will be illogical and superfluous to require the stockholders' approval of the subject resolutions. Thus, even without the
stockholders' approval of the subject resolutions, petitioners are still liable to pay private respondents' gratuity pay.

IN VIEW WHEREOF, the instant petition is DISMISSED for lack of merit and the temporary restraining order we issued on February 9, 1987 is
LIFTED. Accordingly, the assailed resolution of the National Labor Relations Commission in NLRC-NCR-2176-82 is AFFIRMED. This decision is
immediately executory. Costs against petitioners.

SO ORDERED.

G.R. No. L-21644 October 2, 1924

PUA CASIM & CO., plaintiff-appelle,
vs.
W. NEUMARK & CO., defendant-appellant.
Hartigan & Welch for appellant.
Recto & Cardenas for appellee.

OSTRAND, J.:
This action is brought to recover the sum of P15,000 with interest and costs. It is alleged in the
complaint that on or about January 20, 1922, the defendant corporation represented by its president and
principal stockholder, W. Neumark, borrowed from the plaintiff the sum of P15,000 which was
delivered to the said defendant by means of a check drawn in favor of the defendant against the
plaintiff's account in the China Banking Corporation, which check was deposited with the Bank of the
Philippine Islands and the amount of it credited to the defendant on its current account.
The defendant's answer is a general denial together with a special defense to the effect that W. Neumark
had never been authorized by the defendant corporation to borrow money for its account from the
plaintiff to the amount of P15,000 and that said defendant has never received nor made use of the sum
alleged to have been so borrowed.
The court below rendered a judgment in favor of the plaintiff for the sum of P15,000 with legal interest
from October 30, 1922, and with the costs. From this judgment the defendant appeals to this court.
The appellants presents two assignments of errors, viz.:
(1) That the court erred in holding the defendant responsible for the payment of the money borrowed
by Neumark, and (2) that the court erred in giving the plaintiff judgment for P15,000 with interest and
costs.
The first assignment of error cannot be sustained. The evidence shows that Neumark was the principal
stockholder, the president and the general business manager of the defendant corporation. On behalf of
the corporation he solicited a loan from the plaintiff and, as alleged in the complaint, was given the
plaintiff's check in favor of the corporation for the sum of P15,000, which check was endorsed by him
in his capacity as president of the corporation and deposited to the corporation's account. It may be true
that a large part of the amount so deposited was diverted by Neumark to his own use, but that does not
alter the fact that the money was borrowed for the corporation and was placed in its possession. 1awph!
l.net
It is conceded that Neumark was not expressly authorized by the board of directors to borrow the
money in question and the general rule is that a business manager or other officer of a corporation has
no implied power to borrow money on its behalf. But much depends upon the circumstances of each
particular case and the rule stated is subject to important exceptions. Thus, where a general business
manager of a corporation is clothed with apparent authority to borrow and the amount borrowed does
not exceed the ordinary requirements of the business, it has often been held that the authority is implied
and that the corporation is bound. (G. V. B. Mining Co. vs. First National Bank of Hailey, 95 Fed., 23;
Matson vs. Alley, 141 Ill., 284; Topeka Primary Association University of Builders vs. Martin, 39 Kan.,
750; Africa vs. Duluth News Tribune Co., 82 Minn., 283; Rosemond vs. Northwestern Autographic
Register Co., 62 Minn., 374; Helena National Bank vs. Rocky Mountain, Telegraph Co., 20 Mont., 379;
Fensterer vs. Pressure Lighting Co., 149 N. Y. S., 49; Clark vs. Freeport Clays etc., Co., 52 Pa. Super.,
1.)
In the present case there are ample indications in the record that the corporation was in need of funds to
carry on its business and it does not appear that the amount borrowed was disproportionate to the
volume of the business. As president, general manager and principal stock holder Neumark appeared,
in a sense, to be almost the whole corporation and was clothed with apparent authority to do everything
necessary for the conduct of its business. In these circumstances he must held to have been impliedly
authorized to borrow the money her in question.
The second assignment of error is well taken; the plaintiff admits that he has received P5,000 from the
corporation on account of the loan.
The judgment appealed from is therefore modified by reducing the amount of the recovery to the sum
of P10,000, with interest at the legal rate from October 30, 1922, and with the costs. So ordered.

G.R. No. L-18287 March 30, 1963

TRINIDAD J. FRANCISCO, plaintiff-appellee,
vs.
GOVERNMENT SERVICE INSURANCE SYSTEM, defendant-appellant.
-----------------------------
G.R. No. L-18155 March 30, 1963
TRINIDAD J. FRANCISCO, plaintiff-appellant,
vs.
GOVERNMENT SERVICE INSURANCE SYSTEM, defendant-appellee.
Vicente J. Francisco for plaintiff-appellee.
The Government Corporate Counsel for defendant-appellant.
REYES, J.B.L., J.:
Appeal by the Government Service Insurance System from the decision of the Court of First Instance
of Rizal (Hon. Angel H. Mojica, presiding), in its Civil Case No. 2088-P, entitled "Trinidad J.
Francisco, plaintiff, vs. Government Service Insurance System, defendant", the dispositive part of
which reads as follows:
WHEREFORE, judgment is hereby rendered: (a) Declaring null and void the consolidation in
the name of the defendant, Government Service Insurance System, of the title of the VIC-MARI
Compound; said title shall be restored to the plaintiff; and all payments made by the plaintiff,
after her offer had been accepted by the defendant, must be credited as amortizations on her
loan; and (b) Ordering the defendant to abide by the terms of the contract created by plaintiff's
offer and it's unconditional acceptance, with costs against the defendant.
The plaintiff, Trinidad J. Francisco, likewise appealed separately (L-18155), because the trial court did
not award the P535,000.00 damages and attorney's fees she claimed. Both appeals are, therefore, jointly
treated in this decision.
The following facts are admitted by the parties: On 10 October 1956, the plaintiff, Trinidad J.
Francisco, in consideration of a loan in the amount of P400,000.00, out of which the sum of
P336,100.00 was released to her, mortgaged in favor of the defendant, Government Service Insurance
System (hereinafter referred to as the System) a parcel of land containing an area of 18,232 square
meters, with twenty-one (21) bungalows, known as Vic-Mari Compound, located at Baesa, Quezon
City, payable within ten (10) years in monthly installments of P3,902.41, and with interest of 7% per
annum compounded monthly.
On 6 January 1959, the System extrajudicially foreclosed the mortgage on the ground that up to that
date the plaintiff-mortgagor was in arrears on her monthly installments in the amount of P52,000.00.
Payments made by the plaintiff at the time of foreclosure amounted to P130,000.00. The System itself
was the buyer of the property in the foreclosure sale.
On 20 February 1959, the plaintiff's father, Atty. Vicente J. Francisco, sent a letter to the general
manager of the defendant corporation, Mr. Rodolfo P. Andal, the material portion of which recited as
follows:
Yesterday, I was finally able to collect what the Government owed me and I now
propose to pay said amount of P30,000 to the GSIS if it would agree that after such
payment the foreclosure of my daughter's mortgage would be set aside. I am aware
that the amount of P30,000 which I offer to pay will not cover the total arrearage of
P52,000 but as regards the balance, I propose this arrangement: for the GSIS to take
over the administration of the mortgaged property and to collect the monthly
installments, amounting to about P5,000, due on the unpaid purchase price of more
than 31 lots and houses therein and the monthly installments collected shall be
applied to the payment of Miss Francisco's arrearage until the same is fully covered.
It is requested, however, that from the amount of the monthly installments collected,
the sum of P350.00 be deducted for necessary expenses, such as to pay the security
guard, the street-caretaker, the Meralco Bill for the street lights and sundry items.

It will be noted that the collectible income each month from the mortgaged property,
which as I said consists of installments amounting to about P5,000, is more than
enough to cover the monthly amortization on Miss Francisco's loan. Indeed, had she
not encountered difficulties, due to unforeseen circumstances, in collecting the said
installments, she could have paid the amortizations as they fell due and there would
have been really no need for the GSIS to resort to foreclosure.
 The proposed administration by the GSIS of the mortgaged property will continue
even after Miss Francisco's account shall have been kept up to date. However, once
the arrears shall have been paid, whatever amount of the monthly installments
collected in excess of the amortization due on the loan will be turned over to Miss
Francisco.

I make the foregoing proposal to show Francisco's sincere desire to work out any
fair arrangement for the settlement of her obligation. I trust that the GSIS, under the
broadminded policies of your administration, would give it serious consideration.

Sincerely,.

s/ Vicente J. Francisco
t/ VICENTE J. FRANCISCO

On the same date, 20 February 1959, Atty. Francisco received the following
telegram:.

VICENTE FRANCISCO
SAMANILLO BLDG. ESCOLTA.

GSIS BOARD APPROVED YOUR REQUEST RE REDEMPTION OF

FORECLOSED PROPERTY OF YOUR DAUGHTER

ANDAL"

On 28 February 1959, Atty. Francisco remitted to the System, through Andal, a check for P30,000.00,
with an accompanying letter, which reads:
I am sending you herewith BPI Check No. B-299484 for Thirty Thousand Pesos (P30,000.00) in
accordance with my letter of February 20th and your reply thereto of the same date, which
reads:
GSIS BOARD APPROVED YOUR REQUEST RE REDEMPTION OF FORECLOSED
PROPERTY OF YOUR DAUGHTER
xxx xxx xxx
The defendant received the amount of P30,000.00, and issued therefor its official receipt No. 1209874,
dated 4 March 1959. It did not, however, take over the administration of the compound. In the
meantime, the plaintiff received the monthly payments of some of the occupants thereat; then on 4
March 1960, she remitted, through her father, the amount of P44,121.29, representing the total monthly
installments that she received from the occupants for the period from March to December 1959 and
January to February 1960, minus expenses and real estate taxes. The defendant also received this
amount, and issued the corresponding official receipt.
Remittances, all accompanied by letters, corresponding to the months of March, April, May, and June,
1960 and totalling P24,604.81 were also sent by the plaintiff to the defendant from time to time, all of
which were received and duly receipted for.
Then the System sent three (3) letters, one dated 29 January 1960, which was signed by its assistant
general manager, and the other two letters, dated 19 and 26 February 1960, respectively, which were
signed by Andal, asking the plaintiff for a proposal for the payment of her indebtedness, since
according to the System the one-year period for redemption had expired.
In reply, Atty. Francisco sent a letter, dated 11 March 1960, protesting against the System's request for
proposal of payment and inviting its attention to the concluded contract generated by his offer of 20
February 1959, and its acceptance by telegram of the same date, the compliance of the terms of the
offer already commenced by the plaintiff, and the misapplication by the System of the remittances she
had made, and requesting the proper corrections.
By letter, dated 31 May 1960, the defendant countered the preceding protest that, by all means, the
plaintiff should pay attorney's fees of P35,644.14, publication expenses, filing fee of P301.00, and
surcharge of P23.64 for the foreclosure work done; that the telegram should be disregarded in view of
its failure to express the contents of the board resolution due to the error of its minor employees in
couching the correct wording of the telegram. A copy of the excerpts of the resolution of the Board of
Directors (No. 380, February 20, 1959) was attached to the letter, showing the approval of Francisco's
offer —
... subject to the condition that Mr. Vicente J. Francisco shall pay all expenses incurred by the
GSIS in the foreclosure of the mortgage.
Inasmuch as, according to the defendant, the remittances previously made by Atty. Francisco were
allegedly not sufficient to pay off her daughter's arrears, including attorney's fees incurred by the
defendant in foreclosing the mortgage, and the one-year period for redemption has expired, said
defendant, on 5 July 1960, consolidated the title to the compound in its name, and gave notice thereof
to the plaintiff on 26 July 1960 and to each occupant of the compound.
Hence, the plaintiff instituted the present suit, for specific performance and damages. The defendant
answered, pleading that the binding acceptance of Francisco's offer was the resolution of the Board,
and that Andal's telegram, being erroneous, should be disregarded. After trial, the court below found
that the offer of Atty. Francisco, dated 20 February 1959, made on behalf of his daughter, had been
unqualifiedly accepted, and was binding, and rendered judgment as noted at the start of this opinion.
The defendant-appellant corporation assigns six (6) errors allegedly committed by the lower court, all
of which, however, are resolvable on the single issue as to whether or not the telegram generated a
contract that is valid and binding upon the parties.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and
approved by this Honorable Court, without prejudice to the parties adducing other evidence to prove
their case not covered by this stipulation of facts. 1äwphï1.ñët
We find no reason for altering the conclusion reached by the court below that the offer of compromise
made by plaintiff in the letter, Exhibit "A", had been validly accepted, and was binding on the
defendant. The terms of the offer were clear, and over the signature of defendant's general manager,
Rodolfo Andal, plaintiff was informed telegraphically that her proposal had been accepted. There was
nothing in the telegram that hinted at any anomaly, or gave ground to suspect its veracity, and the
plaintiff, therefore, can not be blamed for relying upon it. There is no denying that the telegram was
within Andal's apparent authority, but the defense is that he did not sign it, but that it was sent by the
Board Secretary in his name and without his knowledge. Assuming this to be true, how was appellee to
know it? Corporate transactions would speedily come to a standstill were every person dealing with a
corporation held duty-bound to disbelieve every act of its responsible officers, no matter how regular
they should appear on their face. This Court has observed in Ramirez vs. Orientalist Co., 38 Phil. 634,
654-655, that —
In passing upon the liability of a corporation in cases of this kind it is always well to keep in
 mind the situation as it presents itself to the third party with whom the contract is made.
Naturally he can have little or no information as to what occurs in corporate meetings; and he
must necessarily rely upon the external manifestations of corporate consent. The integrity of
commercial transactions can only be maintained by holding the corporation strictly to the
liability fixed upon it by its agents in accordance with law; and we would be sorry to announce
a doctrine which would permit the property of a man in the city of Paris to be whisked out of his
hands and carried into a remote quarter of the earth without recourse against the corporation
whose name and authority had been used in the manner disclosed in this case. As already
observed, it is familiar doctrine that if a corporation knowingly permits one of its officers, or
any other agent, to do acts within the scope of an apparent authority, and thus holds him out to
the public as possessing power to do those acts, the corporation will, as against any one who has
in good faith dealt with the corporation through such agent, be estopped from denying his
authority; and where it is said "if the corporation permits" this means the same as "if the thing is
permitted by the directing power of the corporation."
It has also been decided that —
A very large part of the business of the country is carried on by corporations. It certainly is not
the practice of persons dealing with officers or agents who assume to act for such entities to
insist on being shown the resolution of the board of directors authorizing the particular officer
or agent to transact the particular business which he assumes to conduct. A person who knows
that the officer or agent of the corporation habitually transacts certain kinds of business for such
corporation under circumstances which necessarily show knowledge on the part of those
charged with the conduct of the corporate business assumes, as he has the right to assume, that
such agent or officer is acting within the scope of his authority. (Curtis Land & Loan Co. vs.
Interior Land Co., 137 Wis. 341, 118 N.W. 853, 129 Am. St. Rep. 1068; as cited in 2 Fletcher's
Encyclopedia, Priv. Corp. 263, perm. Ed.)
Indeed, it is well-settled that —
If a private corporation intentionally or negligently clothes its officers or agents with apparent
power to perform acts for it, the corporation will be estopped to deny that such apparent
authority is real, as to innocent third persons dealing in good faith with such officers or agents.
(2 Fletcher's Encyclopedia, Priv. Corp. 255, Perm. Ed.)
Hence, even if it were the board secretary who sent the telegram, the corporation could not evade the
binding effect produced by the telegram..
The defendant-appellant does not disown the telegram, and even asserts that it came from its offices, as
may be gleaned from the letter, dated 31 May 1960, to Atty. Francisco, and signed "R. P. Andal, general
manager by Leovigildo Monasterial, legal counsel", wherein these phrases occur: "the telegram sent ...
by this office" and "the telegram we sent your" (emphasis supplied), but it alleges mistake in couching
the correct wording. This alleged mistake cannot be taken seriously, because while the telegram is
dated 20 February 1959, the defendant informed Atty. Francisco of the alleged mistake only on 31 May
1960, and all the while it accepted the various other remittances, starting on 28 February 1959, sent by
the plaintiff to it in compliance with her performance of her part of the new contract.
The inequity of permitting the System to deny its acceptance become more patent when account is
taken of the fact that in remitting the payment of P30,000 advanced by her father, plaintiff's letter to
Mr. Andal quoted verbatim the telegram of acceptance. This was in itself notice to the corporation of
the terms of the allegedly unauthorized telegram, for as Ballentine says:
Knowledge of facts acquired or possessed by an officer or agent of a corporation in the course
 of his employment, and in relation to matters within the scope of his authority, is notice to the
corporation, whether he communicates such knowledge or not. (Ballentine, Law on
Corporations, section 112.)
since a corporation cannot see, or know, anything except through its officers.
Yet, notwithstanding this notice, the defendant System pocketed the amount, and kept silent about the
telegram not being in accordance with the true facts, as it now alleges. This silence, taken together with
the unconditional acceptance of three other subsequent remittances from plaintiff, constitutes in itself a
binding ratification of the original agreement (Civil Code, Art. 1393).
ART. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit
ratification if, with knowledge of the reason which renders the contract voidable and such
reason having ceased, the person who has a right to invoke it should execute an act which
necessarily implies an intention to waive his right.
Nowhere else do the circumstances call more insistently for the application of the equitable maxim that
between two innocent parties, the one who made it possible for the wrong to be done should be the one
to bear the resulting loss..
The defendant's assertion that the telegram came from it but that it was incorrectly worded renders
unnecessary to resolve the other point on controversy as to whether the said telegram constitutes an
actionable document..
Since the terms offered by the plaintiff in the letter of 20 February 1959 (Exhibit "A") provided for the
setting aside of the foreclosure effected by the defendant System, the acceptance of the offer left the
account of plaintiff in the same condition as if no foreclosure had taken place. It follows, as the lower
court has correctly held, that the right of the System to collect attorneys' fees equivalent to 10% of the
due (P35,694.14) and the expenses and charges of P3,300.00 may no longer be enforced, since by the
express terms of the mortgage contract, these sums were collectible only "in the event of foreclosure."
The court a quo also called attention to the unconscionability of defendant's charging the attorney's
fees, totalling over P35,000.00; and this point appears well-taken, considering that the foreclosure was
merely extra-judicial, and the attorneys' work was limited to requiring the sheriff to effectuate the
foreclosure. However, in view of the parties' agreement to set the same aside, with the consequential
elimination of such incidental charges, the matter of unreasonableness of the counsel fees need not be
labored further.
Turning now to the plaintiff's separate appeal (Case G.R. No. L-18155): Her prayer for an award of
actual or compensatory damages for P83,333.33 is predicated on her alleged unrealized profits due to
her inability to sell the compound for the price of P750,000.00 offered by one Vicente Alunan, which
sale was allegedly blocked because the System consolidated the title to the property in its name.
Plaintiff reckons the amount of P83,333.33 by placing the actual value of the property at P666,666.67,
a figure arrived at by assuming that the System's loan of P400,000.00 constitutes 60% of the actual
value of the security. The court a quo correctly refused to award such actual or compensatory damages
because it could not determine with reasonable certainty the difference between the offered price and
the actual value of the property, for lack of competent evidence. Without proof we cannot assume, or
take judicial notice, as suggested by the plaintiff, that the practice of lending institutions in the country
is to give out as loan 60% of the actual value of the collateral. Nor should we lose sight of the fact that
the price offered by Alunan was payable in installments covering five years, so that it may not actually
represent true market values.
Nor was there error in the appealed decision in denying moral damages, not only on account of the
plaintiff's failure to take the witness stand and testify to her social humiliation, wounded feelings,
anxiety, etc., as the decision holds, but primarily because a breach of contract like that of defendant, not
being malicious or fraudulent, does not warrant the award of moral damages under Article 2220 of the
Civil Code (Ventanilla vs. Centeno, L-14333, 28 Jan. 1961; Fores vs. Miranda, L-12163, 4 March
1959).
There is no basis for awarding exemplary damages either, because this species of damages is only
allowed in addition to moral, temperate, liquidated, or compensatory damages, none of which have
been allowed in this case, for reasons herein before discussed (Art. 2234, Civil Code; Velayo vs. Shell
Co. of P.I., L-7817, Res. July 30, 1957; Singson, et al. vs. Aragon and Lorza, L-5164, Jan. 27, 1953, 49
O.G. No. 2, 515).
As to attorneys' fees, we agree with the trial court's stand that in view of the absence of gross and
evident bad faith in defendant's refusal to satisfy the plaintiff's claim, and there being none of the other
grounds enumerated in Article 2208 of the Civil Code, such absence precludes a recovery. The award
of attorneys' fees is essentially discretionary in the trial court, and no abuse of discretion has been
shown.
FOR THE FOREGOING REASONS, the appealed decision is hereby affirmed, with costs against the
defendant Government Service Insurance System, in G.R. No.L-18287.

G.R. No. L-23606 July 29, 1968

ALHAMBRA CIGAR & CIGARETTE MANUFACTURING COMPANY, INC., petitioner,
vs.
SECURITIES & EXCHANGE COMMISSION, respondent.
Gamboa and Gamboa for petitioner.
Office of the Solicitor General for respondent.
SANCHEZ, J.:
To the question — May a corporation extend its life by amendment of its articles of incorporation
effected during the three-year statutory period for liquidation when its original term of existence had
already expired? — the answer of the Securities and Exchange Commissioner was in the negative.
Offshoot is this appeal.
That problem emerged out of the following controlling facts:
Petitioner Alhambra Cigar and Cigarette Manufacturing Company, Inc. (hereinafter referred to simply
as Alhambra) was duly incorporated under Philippine laws on January 15, 1912. By its corporate
articles it was to exist for fifty (50) years from incorporation. Its term of existence expired on January
15, 1962. On that date, it ceased transacting business, entered into a state of liquidation.
Thereafter, a new corporation. — Alhambra Industries, Inc. — was formed to carry on the business of
Alhambra.
On May 1, 1962, Alhambra's stockholders, by resolution named Angel S. Gamboa trustee to take
charge of its liquidation.
On June 20, 1963 — within Alhambra's three-year statutory period for liquidation - Republic Act 3531
was enacted into law. It amended Section 18 of the Corporation Law; it empowered domestic private
corporations to extend their corporate life beyond the period fixed by the articles of incorporation for a
term not to exceed fifty years in any one instance. Previous to Republic Act 3531, the maximum non-
extendible term of such corporations was fifty years.
On July 15, 1963, at a special meeting, Alhambra's board of directors resolved to amend paragraph
"Fourth" of its articles of incorporation to extend its corporate life for an additional fifty years, or a
total of 100 years from its incorporation.
On August 26, 1963, Alhambra's stockholders, representing more than two-thirds of its subscribed
capital stock, voted to approve the foregoing resolution. The "Fourth" paragraph of Alhambra's articles
of incorporation was thus altered to read:
FOURTH. That the term for which said corporation is to exist is fifty (50) years from and after
the date of incorporation, and for an additional period of fifty (50) years thereafter.
On October 28, 1963, Alhambra's articles of incorporation as so amended certified
correct by its president and secretary and a majority of its board of directors, were filed
with respondent Securities and Exchange Commission (SEC).
On November 18, 1963, SEC, however, returned said amended articles of incorporation
to Alhambra's counsel with the ruling that Republic Act 3531 "which took effect only on
June 20, 1963, cannot be availed of by the said corporation, for the reason that its term
of existence had already expired when the said law took effect in short, said law has no
retroactive effect."
On December 3, 1963, Alhambra's counsel sought reconsideration of SEC's ruling
aforesaid, refiled the amended articles of incorporation.
On September 8, 1964, SEC, after a conference hearing, issued an order denying the
reconsideration sought.
Alhambra now invokes the jurisdiction of this Court to overturn the conclusion below.1
1. Alhambra relies on Republic Act 3531, which amended Section 18 of the Corporation
Law. Well it is to take note of the old and the new statutes as they are framed. Section
18, prior to and after its modification by Republic Act 3531, covers the subject of
amendment of the articles of incorporation of private corporations. A provision thereof
which remains unaltered is that a corporation may amend its articles of incorporation
"by a majority vote of its board of directors or trustees and ... by the vote or written
assent of the stockholders representing at least two-thirds of the subscribed capital
stock ... "
But prior to amendment by Republic Act 3531, an explicit prohibition existed in Section
18, thus:
... Provided, however, That the life of said corporation shall not be extended by
said amendment beyond the time fixed in the original articles: ...
This was displaced by Republic Act 3531 which enfranchises all private corporations to
extend their corporate existence. Thus incorporated into the structure of Section 18 are
the following:
... Provided, however, That should the amendment consist in extending the
corporate life, the extension shall not exceed fifty years in any one instance:
 Provided, further, That the original articles, and amended articles together shall
contain all provisions required by law to be set out in the articles of incorporation:
...
As we look in retrospect at the facts, we find these: From July 15 to October 28, 1963,
when Alhambra made its attempt to extend its corporate existence, its original term of
fifty years had already expired (January 15, 1962); it was in the midst of the three-year
grace period statutorily fixed in Section 77 of the Corporation Law, thus: .
SEC. 77. 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 years after the time when it would have been so
dissolved, for the purpose of prosecuting and defending suits by or against it and
of enabling it gradually to settle and close its affairs, to dispose of and convey its
property and to divide its capital stock, but not for the purpose of continuing the
business for which it was established.2
Plain from the language of the provision is its meaning: continuance of a "dissolved"
corporation as a body corporate for three years has for its purpose the final closure of its
affairs, and no other; the corporation is specifically enjoined from "continuing the
business for which it was established". The liquidation of the corporation's affairs set
forth in Section 77 became necessary precisely because its life had ended. For this
reason alone, the corporate existence and juridical personality of that corporation to do
business may no longer be extended.
Worth bearing in mind, at this juncture, is the basic development of corporation law.
The common law rule, at the beginning, was rigid and inflexible in that upon its
dissolution, a corporation became legally dead for all purposes. Statutory authorizations
had to be provided for its continuance after dissolution "for limited and specified
purposes incident to complete liquidation of its affairs". 3 Thus, the moment a
corporation's right to exist as an "artificial person" ceases, its corporate powers are
terminated "just as the powers of a natural person to take part in mundane affairs cease
to exist upon his death".4 There is nothing left but to conduct, as it were, the settlement
of the estate of a deceased juridical person.
2. Republic Act 3531, amending Section 18 of the Corporation Law, is silent, it is true,
as to when such act of extension may be made. But even with a superficial knowledge of
corporate principles, it does not take much effort to reach a correct conclusion. For,
implicit in Section 77 heretofore quoted is that the privilege given to prolong corporate
life under the amendment must be exercised before the expiry of the term fixed in the
articles of incorporation.
Silence of the law on the matter is not hard to understand. Specificity is not really
necessary. The authority to prolong corporate life was inserted by Republic Act 3531
into a section of the law that deals with the power of a corporation to amend its articles
of incorporation. (For, the manner of prolongation is through an amendment of the
articles.) And it should be clearly evident that under Section 77 no corporation in a state
of liquidation can act in any way, much less amend its articles, "for the purpose of
continuing the business for which it was established".
All these dilute Alhambra's position that it could revivify its corporate life simply
because when it attempted to do so, Alhambra was still in the process of liquidation. It is
surely impermissible for us to stretch the law — that merely empowers a corporation to
act in liquidation — to inject therein the power to extend its corporate existence.
3. Not that we are alone in this view. Fletcher has written: "Since the privilege of
extension is purely statutory, all of the statutory conditions precedent must be complied
with in order that the extension may be effectuated. And, generally these conditions
must be complied with, and the steps necessary to effect the extension must be taken,
during the life of the corporation, and before the expiration of the term of existence as
original fixed by its charter or the general law, since, as a rule, the corporation is ipso
facto dissolved as soon as that time expires. So where the extension is by amendment of
the articles of incorporation, the amendment must be adopted before that time. And,
similarly, the filing and recording of a certificate of extension after that time cannot
relate back to the date of the passage of a resolution by the stockholders in favor of the
extension so as to save the life of the corporation. The contrary is true, however, and the
doctrine of relation will apply, where the delay is due to the neglect of the officer with
whom the certificate is required to be filed, or to a wrongful refusal on his part to receive
it. And statutes in some states specifically provide that a renewal may be had within a
specified time before or after the time fixed for the termination of the corporate
existence".5
The logic of this position is well expressed in a foursquare case decided by the Court of
Appeals of Kentucky.6 There, pronouncement was made as follows:
... But section 561 (section 2147) provides that, when any corporation expires by
the terms of its articles of incorporation, it may be thereafter continued to act for
the purpose of closing up its business, but for no other purpose. The corporate life
of the Home Building Association expired on May 3, 1905. After that date, by the
mandate of the statute, it could continue to act for the purpose of closing up its
business, but for no other purpose. The proposed amendment was not made until
January 16, 1908, or nearly three years after the corporation expired by the terms
of the articles of incorporation. When the corporate life of the corporation was
ended, there was nothing to extend. Here it was proposed nearly three years after
the corporate life of the association had expired to revivify the dead body, and to
make that relate back some two years and eight months. In other words, the
association for two years and eight months had only existed for the purpose of
winding up its business, and, after this length of time, it was proposed to revivify
 it and make it a live corporation for the two years and eight months daring which
it had not been such.
The law gives a certain length of time for the filing of records in this court, and
provides that the time may be extended by the court, but under this provision it
has uniformly been held that when the time was expired, there is nothing to
extend, and that the appeal must be dismissed... So, when the articles of a
corporation have expired, it is too late to adopt an amendment extending the life
of a corporation; for, the corporation having expired, this is in effect to create a
new corporation ..."7
True it is, that the Alabama Supreme Court has stated in one case. 8 that a corporation
empowered by statute to renew its corporate existence may do so even after the
expiration of its corporate life, provided renewal is taken advantage of within the
extended statutory period for purposes of liquidation. That ruling, however, is inherently
weak as persuasive authority for the situation at bar for at least two reasons: First. That
case was a suit for mandamus to compel a former corporate officer to turn over books
and records that came into his possession and control by virtue of his office. It was there
held that such officer was obliged to surrender his books and records even if the
corporation had already expired. The holding on the continued existence of the
corporation was a mere dictum. Second. Alabama's law is different. Corporations in that
state were authorized not only to extend but also to renew their corporate existence.That
very case defined the word "renew" as follows; "To make new again; to restore to
freshness; to make new spiritually; to regenerate; to begin again; to recommence; to
resume; to restore to existence, to revive; to re-establish; to recreate; to replace; to grant
or obtain an extension of Webster's New International Dict.; 34 Cyc. 1330; Carter v.
Brooklyn Life Ins. Co., 110 N.Y. 15, 21, 22, 17 N.E. 396; 54 C.J. 379. Sec".9
On this point, we again draw from Fletcher: "There is a broad distinction between the
extension of a charter and the grant of a new one. To renew a charter is to revive a
charter which has expired, or, in other words, "to give a new existence to one which has
been forfeited, or which has lost its vitality by lapse of time". To "extend" a charter is "to
increase the time for the existence of one which would otherwise reach its limit at an
earlier period".10 Nowhere in our statute — Section 18, Corporation Law, as amended
by Republic Act 3531 — do we find the word "renew" in reference to the authority
given to corporations to protract their lives. Our law limits itself to extension of
corporate existence. And, as so understood, extension may be made only before the term
provided in the corporate charter expires.
Alhambra draws attention to another case11 which declares that until the end of the
extended period for liquidation, a dissolved corporation "does not become an
extinguished entity". But this statement was obviously lifted out of context. That case
dissected the question whether or not suits can be commenced by or against a
corporation within its liquidation period. Which was answered in the affirmative. For,
the corporation still exists for the settlement of its affairs.
People, ex rel. vs. Green,12 also invoked by Alhambra, is as unavailing. There, although
the corporation amended its articles to extend its existence at a time when it had no legal
authority yet, it adopted the amended articles later on when it had the power to extend its
life and during its original term when it could amend its articles.
The foregoing notwithstanding, Alhambra falls back on the contention that its case is
arguably within the purview of the law. It says that before cessation of its corporate life,
it could not have extended the same, for the simple reason that Republic Act 3531 had
not then become law. It must be remembered that Republic Act 3531 took effect on June
20, 1963, while the original term of Alhambra's existence expired before that date — on
January 15, 1962. The mischief that flows from this theory is at once apparent. It would
certainly open the gates for all defunct corporations — whose charters have expired
even long before Republic Act 3531 came into being — to resuscitate their corporate
existence.
4. Alhambra brings into argument Republic Act 1932, which amends Section 196 of the
Insurance Act, now reading as follows: 1äwphï1.ñët
SEC. 196. Any provision of law to the contrary notwithstanding, every domestic
life insurance corporation, formed for a limited period under the provisions of its
articles of incorporation, may extend its corporate existence for a period not
exceeding fifty years in any one instance by amendment to its articles of
incorporation on or before the expiration of the term so fixed in said articles ...
To be observed is that the foregoing statute — unlike Republic Act 3531 — expressly
authorizes domestic insurance corporations to extend their corporate existence "on or
before the expiration of the term" fixed in their articles of incorporation. Republic Act
1932 was approved on June 22, 1957, long before the passage of Republic Act 3531 in
1963. Congress, Alhambra points out, must have been aware of Republic Act 1932 when
it passed Republic Act 3531. Since the phrase "on or before", etc., was omitted in
Republic Act 3531, which contains no similar limitation, it follows, according to
Alhambra, that it is not necessary to extend corporate existence on or before the
expiration of its original term.
That Republic Act 3531 stands mute as to when extention of corporate existence may be
made, assumes no relevance. We have already said, in the face of a familiar precept, that
a defunct corporation is bereft of any legal faculty not otherwise expressly sanctioned by
law.
Illuminating here is the explanatory note of H.B. 1774, later Republic Act 3531 — now
in dispute. Its first paragraph states that "Republic Act No. 1932 allows the automatic
extension of the corporate existence of domestic life insurance corporations upon
amendment of their articles of incorporation on or before the expiration of the terms
fixed by said articles". The succeeding lines are decisive: "This is a good law, a sane and
sound one. There appears to be no valid reason why it should not be made to apply to
other private corporations.13
The situation here presented is not one where the law under consideration is ambiguous,
where courts have to put in harness extrinsic aids such as a look at another statute to
disentangle doubts. It is an elementary rule in legal hermeneutics that where the terms of
the law are clear, no statutory construction may be permitted. Upon the basic conceptual
scheme under which corporations operate, and with Section 77 of the Corporation Law
particularly in mind, we find no vagueness in Section 18, as amended by Republic Act
3531. As we view it, by directing attention to Republic Act 1932, Alhambra would seek
to create obscurity in the law; and, with that, ask of us a ruling that such obscurity be
explained. This, we dare say, cannot be done.
The pari materia rule of statutory construction, in fact, commands that statutes must be
harmonized with each other.14 So harmonizing, the conclusion is clear that Section 18 of
the Corporation Law, as amended by Republic Act 3531 in reference to extensions of
corporate existence, is to be read in the same light as Republic Act 1932. Which means
that domestic corporations in general, as with domestic insurance companies, can extend
corporate existence only on or before the expiration of the term fixed in their charters.
5. Alhambra pleads for munificence in interpretation, one which brushes technicalities
aside. Bases for this posture are that Republic Act 3531 is a remedial statute, and that
extension of corporate life is beneficial to the economy.
Alhambra's stance does not induce assent. Expansive construction is possible only when
there is something to expand. At the time of the passage of Republic Act 3531,
Alhambra's corporate life had already expired. It had overstepped the limits of its limited
existence. No life there is to prolong.
Besides, a new corporation — Alhambra Industries, Inc., with but slight change in
stockholdings15 — has already been established. Its purpose is to carry on, and it
actually does carry on,16 the business of the dissolved entity. The beneficial-effects
argument is off the mark.
The way the whole case shapes up then, the only possible drawbacks of Alhambra might
be that, instead of the new corporation (Alhambra Industries, Inc.) being written off, the
old one (Alhambra Cigar & Cigarette Manufacturing Company, Inc.) has to be wound
up; and that the old corporate name cannot be retained fully in its exact form. 17 What is
important though is that the word Alhambra, the name that counts [it has goodwill],
remains.
FOR THE REASONS GIVEN, the ruling of the Securities and Exchange Commission
of November 18, 1963, and its order of September 8, 1964, both here under review, are
hereby affirmed.
Costs against petitioner Alhambra Cigar & Cigarette Manufacturing Company, Inc. So
ordered.

G.R. No. 41570 September 6, 1934

RED LINE TRANSPORTATION CO., petitioner-appellant,
vs.
RURAL TRANSIT CO., LTD., respondent-appellee.
L. D. Lockwood for appellant.
Ohnick and Opisso for appellee.
BUTTE, J.:
This case is before us on a petition for review of an order of the Public Service Commission entered
December 21, 1932, granting to the Rural Transit Company, Ltd., a certificate of public convenience to
operate a transportation service between Ilagan in the Province of Isabela and Tuguegarao in the
Province of Cagayan, and additional trips in its existing express service between Manila Tuguegarao.
On June 4, 1932, the Rural Transit Company, Ltd., a Philippine corporation, filed with the Public
Company Service Commission an application in which it is stated in substance that it is the holder of a
certificate or public convenience to operate a passenger bus service between Manila and Tuguegarao;
that it is the only operator of direct service between said points and the present authorized schedule of
only one trip daily is not sufficient; that it will be also to the public convenience to grant the applicant a
certificate for a new service between Tuguegarao and Ilagan.
On July 22, 1932, the appellant, Red Line Transportation Company, filed an opposition to the said
application alleging in substance that as to the service between Tuguegarao and Ilagan, the oppositor
already holds a certificate of public convenience and is rendering adequate and satisfactory service; that
the granting of the application of the Rural Transit Company, Ltd., would not serve public convenience
but would constitute a ruinous competition for the oppositor over said route.
After testimony was taken, the commission, on December 21, 1932, approved the application of the
Rural Transit Company, Ltd., and ordered that the certificate of public convenience applied for be
"issued to the applicant Rural Transit Company, Ltd.," with the condition, among others, that "all the
other terms and conditions of the various certificates of public convenience of the herein applicant and
herein incorporated are made a part hereof."
On January 14, 1933, the oppositor Red Line Transportation Company filed a motion for rehearing and
reconsideration in which it called the commission's attention to the fact that there was pending in the
Court of First Instance of Manila case N. 42343, an application for the voluntary dissolution of the
corporation, Rural Transit Company, Ltd. Said motion for reconsideration was set down for hearing on
March 24, 1933. On March 23, 1933, the Rural Transit Company, Ltd., the applicant, filed a motion for
postponement. This motion was verified by M. Olsen who swears "that he was the secretary of the
Rural Transit Company, Ltd., in the above entitled case." Upon the hearing of the motion for
reconsideration, the commission admitted without objection the following documents filed in said case
No. 42343 in the Court of First Instance of Manila for the dissolution of the Rural Transit Company,
Ltd. the petition for dissolution dated July 6, 1932, the decision of the said Court of First Instance of
Manila, dated February 28, 1933, decreeing the dissolution of the Rural Transit Company, Ltd.
At the trial of this case before the Public Service Commission an issue was raised as to who was the
real party in interest making the application, whether the Rural Transit Company, Ltd., as appeared on
the face of the application, or the Bachrach Motor Company, Inc., using name of the Rural Transit
Company, Ltd., as a trade name. The evidence given by the applicant's secretary, Olsen, is certainly
very dubious and confusing, as may be seen from the following:
Q. Will you please answer the question whether it is the Bachrach Motor Company
operating under the trade name of the Rural Transit Company, Limited, or whether it is the
Rural Transit Company, Limited in its own name this application was filed?
A. The Bachrach Motor Company is the principal stockholder.
Q. Please answer the question.
ESPELETA. Objecion porque la pregunta ya ha sido contestada.
JUEZ. Puede contestar.
A. I do not know what the legal construction or relationship existing between the two.
JUDGE. I do not know what is in your mind by not telling the real applicant in this case?
A. It is the Rural Transit Company, Ltd.
JUDGE. As an entity by itself and not by the Bachrach Motor Company?
A. I do not know. I have not given that phase of the matter much thought, as in previous
occassion had not necessitated.
JUDGE. In filing this application, you filed it for the operator on that line? Is it not!
A. Yes, sir.
JUDGE. Who is that operator?
A. The Rural Transit Company, Ltd.
JUDGE. By itself, or as a commercial name of the Bachrach Motor Company?
A. I cannot say.
ESPELETA. The Rural Transit Company, Ltd., is a corporation duly established in accordance
with the laws of the Philippine Islands.
JUDGE. According to the records of this commission the Bachrach Motor Company is the
owner of the certificates and the Rural Transit Company, Ltd., is operating without any
certificate.
JUDGE. If you filed this application for the Rural Transit Company, Ltd., and afterwards it is
found out that the Rural Transit Company, Ltd., is not an operator, everything will be turned
down.
JUDGE. My question was, when you filed this application you evidently made it for the
operator?
A. Yes, sir.
JUDGE. Who was that operator you had in mind?
A. According to the status of the ownership of the certificates of the former Rural Transit
Company, the operator was the operator authorized in case No. 23217 to whom all of the assets
of the former Rural Transit Company were sold.
 JUDGE. Bachrach Motor Company?
A. All actions have been prosecuted in the name of the Rural Transit Company, Ltd.
JUDGE. You mean the Bachrach Motor Company, Inc., doing business under the name of the
Rural Transit Company, Ltd.?
A. Yes, sir.
LOCKWOOD. I move that this case be dismissed, your Honor, on the ground that this
application was made in the name of one party but the real owner is another party.
ESPELETA. We object to that petition.
JUDGE. I will have that in mind when I decide the case. If I agree with you everything would
be finished.
The Bachrach Motor Company, Inc., entered no appearance and ostensibly took no part in the hearing
of the application of the Rural Transit Company, Ltd. It may be a matter of some surprise that the
commission did not on its own motion order the amendment of the application by substituting the
Bachrach Motor Company, Inc., as the applicant. However, the hearing proceeded on the application as
filed and the decision of December 2, 1932, was rendered in favor of the Rural Transit Company, Ltd.,
and the certificate ordered to be issued in its name, in the face of the evidence that the said corporation
was not the real party in interest. In its said decision, the commission undertook to meet the objection
by referring to its resolution of November 26, 1932, entered in another case. This resolution in case No.
23217 concludes as follows:
Premises considered we hereby authorize the Bachrach Motor Co., Inc., to continue using the
name of "Rural Transit Co., Ltd.," as its trade name in all the applications, motions or other
petitions to be filed in this commission in connection with said business and that this authority
is given retroactive effect as of the date, of filing of the application in this case, to wit, April 29,
1930.
We know of no law that empowers the Public Service Commission or any court in this jurisdiction to
authorize one corporation to assume the name of another corporation as a trade name. Both the Rural
Transit Company, Ltd., and the Bachrach Motor Co., Inc., are Philippine corporations and the very law
of their creation and continued existence requires each to adopt and certify a distinctive name. The
incorporators "constitute a body politic and corporate under the name stated in the certificate." (Section
11, Act No. 1459, as amended.) A corporation has the power "of succession by its corporate name."
(Section 13, ibid.) The name of a corporation is therefore essential to its existence. It cannot change its
name except in the manner provided by the statute. By that name alone is it authorized to transact
business. The law gives a corporation no express or implied authority to assume another name that is
unappropriated: still less that of another corporation, which is expressly set apart for it and protected by
the law. If any corporation could assume at pleasure as an unregistered trade name the name of another
corporation, this practice would result in confusion and open the door to frauds and evasions and
difficulties of administration and supervision. The policy of the law expressed in our corporation statute
and the Code of Commerce is clearly against such a practice. (Cf. Scarsdale Pub. Co. Colonial Press vs.
Carter, 116 New York Supplement, 731; Svenska Nat. F. i. C. vs. Swedish Nat. Assn., 205 Illinois
[Appellate Courts], 428, 434.)
The order of the commission of November 26, 1932, authorizing the Bachrach Motor Co.,
Incorporated, to assume the name of the Rural Transit Co., Ltd. likewise in corporated, as its trade
name being void, and accepting the order of December 21, 1932, at its face as granting a certificate of
public convenience to the applicant Rural Transit Co., Ltd., the said order last mentioned is set aside
and vacated on the ground that the Rural Transit Company, Ltd., is not the real party in interest and its
application was fictitious.
In view of the dissolution of the Rural Transit Company, Ltd. by judicial decree of February 28, 1933,
we do not see how we can assess costs against said respondent, Rural Transit Company, Ltd.

G.R. No. L-28351 July 28, 1977

UNIVERSAL MILLS CORPORATION, petitioner,
vs.
UNIVERSAL TEXTILE MILLS, INC., respondent.
Emigdio G. Tanjuatco for petitioner.
Picazo, Santayana, Reyes, Tayao & Alfonso for respondent.

BARREDO, J.:
Appeal from the order of the Securities and Exchange Commission in S.E.C. Case No. 1079,
entitled In the Matter of the Universal Textile Mills, Inc. vs. Universal Mills Corporation, a
petition to have appellant change its corporate name on the ground that such name is
"confusingly and deceptively similar" to that of appellee, which petition the Commission
granted.
According to the order, "the Universal Textile Mills, Inc. was organ on December 29, 1953, as
a textile manufacturing firm for which it was issued a certificate of registration on January 8,
1954. The Universal Mills Corporation, on the other hand, was registered in this Commission
on October 27, 1954, under its original name, Universal Hosiery Mills Corporation, having as
its primary purpose the "manufacture and production of hosieries and wearing apparel of all
kinds." On May 24, 1963, it filed an amendment to its articles of incorporation changing its
name to Universal Mills Corporation, its present name, for which this Commission issued the
certificate of approval on June 10, 1963.
The immediate cause of this present complaint, however, was the occurrence of a fire which
gutted respondent's spinning mills in Pasig, Rizal. Petitioner alleged that as a result of this fire
and because of the similarity of respondent's name to that of herein complainant, the news
items appearing in the various metropolitan newspapers carrying reports on the fire created
uncertainty and confusion among its bankers, friends, stockholders and customers prompting
petitioner to make announcements, clarifying the real Identity of the corporation whose
property was burned. Petitioner presented documentary and testimonial evidence in support
of this allegation.
On the other hand, respondent's position is that the names of the two
corporations are not similar and even if there be some similarity, it is not
confusing or deceptive; that the only reason that respondent changed its name
was because it expanded its business to include the manufacture of fabrics of all
kinds; and that the word 'textile' in petitioner's name is dominant and prominent
enough to distinguish the two. It further argues that petitioner failed to present
evidence of confusion or deception in the ordinary course of business; that the
only supposed confusion proved by complainant arose out of an extraordinary
 occurrence — a disastrous fire. (pp. 16-&17, Record.)
Upon these premises, the Commission held:
From the facts proved and the jurisprudence on the matter, it appears necessary
under the circumstances to enjoin the respondent Universal Mills Corporation
from further using its present corporate name. Judging from what has already
happened, confusion is not only apparent, but possible. It does not matter that
the instance of confusion between the two corporate names was occasioned
only by a fire or an extraordinary occurrence. It is precisely the duty of this
Commission to prevent such confusion at all times and under all circumstances
not only for the purpose of protecting the corporations involved but more so for
the protection of the public.
In today's modern business life where people go by tradenames and corporate
images, the corporate name becomes the more important. This Commission
cannot close its eyes to the fact that usually it is the sound of all the other words
composing the names of business corporations that sticks to the mind of those
who deal with them. The word "textile" in Universal Textile Mills, Inc.' can not
possibly assure the exclusion of all other entities with similar names from the
mind of the public especially so, if the business they are engaged in are the
same, like in the instant case.
This Commission further takes cognizance of the fact that when respondent filed
the amendment changing its name to Universal Mills Corporation, it
correspondingly filed a written undertaking dated June 5, 1963 and signed by its
President, Mr. Mariano Cokiat, promising to change its name in the event that
there is another person, firm or entity who has obtained a prior right to the use of
such name or one similar to it. That promise is still binding upon the corporation
and its responsible officers. (pp. 17-18, Record.)
It is obvious that the matter at issue is within the competence of the Securities and Exchange
Commission to resolve in the first instance in the exercise of the jurisdiction it used to possess
under Commonwealth Act 287 as amended by Republic Act 1055 to administer the
application and enforcement of all laws affecting domestic corporations and associations,
reserving to the courts only conflicts of judicial nature, and, of course, the Supreme Court's
authority to review the Commissions actuations in appropriate instances involving possible
denial of due process and grave abuse of discretion. Thus, in the case at bar, there being no
claim of denial of any constitutional right, all that We are called upon to determine is whether
or not the order of the Commission enjoining petitioner to its corporate name constitutes, in
the light of the circumstances found by the Commission, a grave abuse of discretion.
We believe it is not. Indeed, it cannot be said that the impugned order is arbitrary and
capricious. Clearly, it has rational basis. The corporate names in question are not Identical,
but they are indisputably so similar that even under the test of "reasonable care and
observation as the public generally are capable of using and may be expected to exercise"
invoked by appellant, We are apprehensive confusion will usually arise, considering that
under the second amendment of its articles of incorporation on August 14, 1964, appellant
included among its primary purposes the "manufacturing, dyeing, finishing and selling of
fabrics of all kinds" in which respondent had been engaged for more than a decade ahead of
petitioner. Factually, the Commission found existence of such confusion, and there is
evidence to support its conclusion. Since respondent is not claiming damages in this
proceeding, it is, of course, immaterial whether or not appellant has acted in good faith, but
We cannot perceive why of all names, it had to choose a name already being used by another
firm engaged in practically the same business for more than a decade enjoying well earned
patronage and goodwill, when there are so many other appropriate names it could possibly
adopt without arousing any suspicion as to its motive and, more importantly, any degree of
confusion in the mind of the public which could mislead even its own customers, existing or
prospective. Premises considered, there is no warrant for our interference.
As this is purely a case of injunction, and considering the time that has elapsed since the
facts complained of took place, this decision should not be deemed as foreclosing any further
remedy which appellee may have for the protection of its interests.
WHEREFORE, with the reservation already mentioned, the appealed decision is affirmed.
Costs against petitioners.

G.R. No. 101897. March 5, 1993.

LYCEUM OF THE PHILIPPINES, INC., petitioner, vs. COURT OF APPEALS, LYCEUM OF
APARRI, LYCEUM OF CABAGAN, LYCEUM OF CAMALANIUGAN, INC., LYCEUM OF
LALLO, INC., LYCEUM OF TUAO, INC., BUHI LYCEUM, CENTRAL LYCEUM OF
CATANDUANES, LYCEUM OF SOUTHERN PHILIPPINES, LYCEUM OF EASTERN
MINDANAO, INC. and WESTERN PANGASINAN LYCEUM, INC., respondents.
Quisumbing, Torres & Evangelista Law Offices and Ambrosio Padilla for petitioner.
Antonio M. Nuyles and Purungan, Chato, Chato, Tarriela & Tan Law Offices for respondents.
Froilan Siobal for Western Pangasinan Lyceum.
SYLLABUS
1. CORPORATION LAW; CORPORATE NAMES; REGISTRATION OF PROPOSED NAME
WHICH IS IDENTICAL OR CONFUSINGLY SIMILAR TO THAT OF ANY EXISTING
CORPORATION, PROHIBITED; CONFUSION AND DECEPTION EFFECTIVELY PRECLUDED
BY THE APPENDING OF GEOGRAPHIC NAMES TO THE WORD "LYCEUM". — The Articles of
Incorporation of a corporation must, among other things, set out the name of the corporation. Section
18 of the Corporation Code establishes a restrictive rule insofar as corporate names are concerned:
"Section 18. Corporate name. — No corporate name may be allowed by the Securities an 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." The policy underlying the
prohibition in Section 18 against the registration of a corporate name which is "identical or deceptively
or confusingly similar" to that of any existing corporation or which is "patently deceptive" or "patently
confusing" or "contrary to existing laws," is the avoidance of fraud upon the public which would have
occasion to deal with the entity concerned, the evasion of legal obligations and duties, and the
reduction of difficulties of administration and supervision over corporations. We do not consider that
the corporate names of private respondent institutions are "identical with, or deceptively or confusingly
similar" to that of the petitioner institution. True enough, the corporate names of private respondent
entities all carry the word "Lyceum" but confusion and deception are effectively precluded by the
appending of geographic names to the word "Lyceum." Thus, we do not believe that the "Lyceum of
Aparri" can be mistaken by the general public for the Lyceum of the Philippines, or that the "Lyceum
of Camalaniugan" would be confused with the Lyceum of the Philippines.
2. ID.; ID.; DOCTRINE OF SECONDARY MEANING; USE OF WORD "LYCEUM," NOT
ATTENDED WITH EXCLUSIVITY. — It is claimed, however, by petitioner that the word "Lyceum"
has acquired a secondary meaning in relation to petitioner with the result that word, although originally
a generic, has become appropriable by petitioner to the exclusion of other institutions like private
respondents herein. The doctrine of secondary meaning originated in the field of trademark law. Its
application has, however, been extended to corporate names sine the right to use a corporate name to
the exclusion of others is based upon the same principle which underlies the right to use a particular
trademark or tradename. In Philippine Nut Industry, Inc. v. Standard Brands, Inc., the doctrine of
secondary meaning was elaborated in the following terms: " . . . a word or phrase originally incapable
of exclusive appropriation with reference to an article on the market, because geographically or
otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer
with reference to his article that, in that trade and to that branch of the purchasing public, the word or
phrase has come to mean that the article was his product." The question which arises, therefore, is
whether or not the use by petitioner of "Lyceum" in its corporate name has been for such length of time
and with such exclusivity as to have become associated or identified with the petitioner institution in
the mind of the general public (or at least that portion of the general public which has to do with
schools). The Court of Appeals recognized this issue and answered it in the negative: "Under the
doctrine of secondary meaning, a word or phrase originally incapable of exclusive appropriation with
reference to an article in the market, because geographical or otherwise descriptive might nevertheless
have been used so long and so exclusively by one producer with reference to this article that, in that
trade and to that group of the purchasing public, the word or phrase has come to mean that the article
was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This circumstance has been referred to as
the distinctiveness into which the name or phrase has evolved through the substantial and exclusive use
of the same for a considerable period of time. . . . No evidence was ever presented in the hearing before
the Commission which sufficiently proved that the word 'Lyceum' has indeed acquired secondary
meaning in favor of the appellant. If there was any of this kind, the same tend to prove only that the
appellant had been using the disputed word for a long period of time. . . . In other words, while the
appellant may have proved that it had been using the word 'Lyceum' for a long period of time, this fact
alone did not amount to mean that the said word had acquired secondary meaning in its favor because
the appellant failed to prove that it had been using the same word all by itself to the exclusion of others.
More so, there was no evidence presented to prove that confusion will surely arise if the same word
were to be used by other educational institutions. Consequently, the allegations of the appellant in its
first two assigned errors must necessarily fail." We agree with the Court of Appeals. The number alone
of the private respondents in the case at bar suggests strongly that petitioner's use of the word
"Lyceum" has not been attended with the exclusivity essential for applicability of the doctrine of
secondary meaning. Petitioner's use of the word "Lyceum" was not exclusive but was in truth shared
with the Western Pangasinan Lyceum and a little later with other private respondent institutions which
registered with the SEC using "Lyceum" as part of their corporation names. There may well be other
schools using Lyceum or Liceo in their names, but not registered with the SEC because they have not
adopted the corporate form of organization.
3. ID.; ID.; MUST BE EVALUATED IN THEIR ENTIRETY TO DETERMINE WHETHER THEY
ARE CONFUSINGLY OR DECEPTIVELY SIMILAR TO ANOTHER CORPORATE ENTITY'S
NAME. — petitioner institution is not entitled to a legally enforceable exclusive right to use the word
"Lyceum" in its corporate name and that other institutions may use "Lyceum" as part of their corporate
names. To determine whether a given corporate name is "identical" or "confusingly or deceptively
similar" with another entity's corporate name, it is not enough to ascertain the presence of "Lyceum" or
"Liceo" in both names. One must evaluate corporate names in their entirety and when the name of
petitioner is juxtaposed with the names of private respondents, they are not reasonably regarded as
"identical" or "confusingly or deceptively similar" with each other.
DECISION
FELICIANO, J p:
Petitioner is an educational institution duly registered with the Securities and Exchange Commission
("SEC"). When it first registered with the SEC on 21 September 1950, it used the corporate name
Lyceum of the Philippines, Inc. and has used that name ever since.
On 24 February 1984, petitioner instituted proceedings before the SEC to compel the private
respondents, which are also educational institutions, to delete the word "Lyceum" from their corporate
names and permanently to enjoin them from using "Lyceum" as part of their respective names.
Some of the private respondents actively participated in the proceedings before the SEC. These are the
following, the dates of their original SEC registration being set out below opposite their respective
names:
Western Pangasinan Lyceum — 27 October 1950
Lyceum of Cabagan — 31 October 1962
Lyceum of Lallo, Inc. — 26 March 1972
Lyceum of Aparri — 28 March 1972
Lyceum of Tuao, Inc. — 28 March 1972
Lyceum of Camalaniugan — 28 March 1972
The following private respondents were declared in default for failure to file an answer despite service
of summons:
Buhi Lyceum;
Central Lyceum of Catanduanes;
Lyceum of Eastern Mindanao, Inc.; and
Lyceum of Southern Philippines
Petitioner's original complaint before the SEC had included three (3) other entities:
1. The Lyceum of Malacanay;
2. The Lyceum of Marbel; and
3. The Lyceum of Araullo
The complaint was later withdrawn insofar as concerned the Lyceum of Malacanay and the Lyceum of
Marbel, for failure to serve summons upon these two (2) entities. The case against the Liceum of
Araullo was dismissed when that school motu proprio change its corporate name to "Pamantasan ng
Araullo."
The background of the case at bar needs some recounting. Petitioner had sometime before commenced
in the SEC a proceeding (SEC-Case No. 1241) against the Lyceum of Baguio, Inc. to require it to
change its corporate name and to adopt another name not "similar [to] or identical" with that of
petitioner. In an Order dated 20 April 1977, Associate Commissioner Julio Sulit held that the corporate
name of petitioner and that of the Lyceum of Baguio, Inc. were substantially identical because of the
presence of a "dominant" word, i.e., "Lyceum," the name of the geographical location of the campus
being the only word which distinguished one from the other corporate name. The SEC also noted that
petitioner had registered as a corporation ahead of the Lyceum of Baguio, Inc. in point of time, 1 and
ordered the latter to change its name to another name "not similar or identical [with]" the names of
previously registered entities.
The Lyceum of Baguio, Inc. assailed the Order of the SEC before the Supreme Court in a case docketed
as G.R. No. L-46595. In a Minute Resolution dated 14 September 1977, the Court denied the Petition
for Review for lack of merit. Entry of judgment in that case was made on 21 October 1977. 2
Armed with the Resolution of this Court in G.R. No. L-46595, petitioner then wrote all the educational
institutions it could find using the word "Lyceum" as part of their corporate name, and advised them to
discontinue such use of "Lyceum." When, with the passage of time, it became clear that this recourse
had failed, petitioner instituted before the SEC SEC-Case No. 2579 to enforce what petitioner claims as
its proprietary right to the word "Lyceum." The SEC hearing officer rendered a decision sustaining
petitioner's claim to an exclusive right to use the word "Lyceum." The hearing officer relied upon the
SEC ruling in the Lyceum of Baguio, Inc. case (SEC-Case No. 1241) and held that the word "Lyceum"
was capable of appropriation and that petitioner had acquired an enforceable exclusive right to the use
of that word.
On appeal, however, by private respondents to the SEC En Banc, the decision of the hearing officer
was reversed and set aside. The SEC En Banc did not consider the word "Lyceum" to have become so
identified with petitioner as to render use thereof by other institutions as productive of confusion about
the identity of the schools concerned in the mind of the general public. Unlike its hearing officer, the
SEC En Banc held that the attaching of geographical names to the word "Lyceum" served sufficiently
to distinguish the schools from one another, especially in view of the fact that the campuses of
petitioner and those of the private respondents were physically quite remote from each other. 3
Petitioner then went on appeal to the Court of Appeals. In its Decision dated 28 June 1991, however,
the Court of Appeals affirmed the questioned Orders of the SEC En Banc. 4 Petitioner filed a motion
for reconsideration, without success.
Before this Court, petitioner asserts that the Court of Appeals committed the following errors:
1. The Court of Appeals erred in holding that the Resolution of the Supreme Court in G.R. No. L-46595
did not constitute stare decisis as to apply to this case and in not holding that said Resolution bound
subsequent determinations on the right to exclusive use of the word Lyceum.
2. The Court of Appeals erred in holding that respondent Western Pangasinan Lyceum, Inc. was
incorporated earlier than petitioner.
3. The Court of Appeals erred in holding that the word Lyceum has not acquired a secondary meaning
in favor of petitioner.
4. The Court of Appeals erred in holding that Lyceum as a generic word cannot be appropriated by the
petitioner to the exclusion of others. 5
We will consider all the foregoing ascribed errors, though not necessarily seriatim. We begin by noting
that the Resolution of the Court in G.R. No. L-46595 does not, of course, constitute res adjudicata in
respect of the case at bar, since there is no identity of parties. Neither is stare decisis pertinent, if only
because the SEC En Banc itself has re-examined Associate Commissioner Sulit's ruling in the Lyceum
of Baguio case. The Minute Resolution of the Court in G.R. No. L-46595 was not a reasoned adoption
of the Sulit ruling.
The Articles of Incorporation of a corporation must, among other things, set out the name of the
corporation. 6 Section 18 of the Corporation Code establishes a restrictive rule insofar as corporate
names are concerned:
"SECTION 18. Corporate name. — No corporate name may be allowed by the Securities an 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." (Emphasis supplied)
The policy underlying the prohibition in Section 18 against the registration of a corporate name which
is "identical or deceptively or confusingly similar" to that of any existing corporation or which is
"patently deceptive" or "patently confusing" or "contrary to existing laws," is the avoidance of fraud
upon the public which would have occasion to deal with the entity concerned, the evasion of legal
obligations and duties, and the reduction of difficulties of administration and supervision over
corporations. 7
We do not consider that the corporate names of private respondent institutions are "identical with, or
deceptively or confusingly similar" to that of the petitioner institution. True enough, the corporate
names of private respondent entities all carry the word "Lyceum" but confusion and deception are
effectively precluded by the appending of geographic names to the word "Lyceum." Thus, we do not
believe that the "Lyceum of Aparri" can be mistaken by the general public for the Lyceum of the
Philippines, or that the "Lyceum of Camalaniugan" would be confused with the Lyceum of the
Philippines.
Etymologically, the word "Lyceum" is the Latin word for the Greek lykeion which in turn referred to a
locality on the river Ilissius in ancient Athens "comprising an enclosure dedicated to Apollo and
adorned with fountains and buildings erected by Pisistratus, Pericles and Lycurgus frequented by the
youth for exercise and by the philosopher Aristotle and his followers for teaching." 8 In time, the word
"Lyceum" became associated with schools and other institutions providing public lectures and concerts
and public discussions. Thus today, the word "Lyceum" generally refers to a school or an institution of
learning. While the Latin word "lyceum" has been incorporated into the English language, the word is
also found in Spanish (liceo) and in French (lycee). As the Court of Appeals noted in its Decision,
Roman Catholic schools frequently use the term; e.g., "Liceo de Manila," "Liceo de Baleno" (in
Baleno, Masbate), "Liceo de Masbate," "Liceo de Albay." 9 "Lyceum" is in fact as generic in character
as the word "university." In the name of the petitioner, "Lyceum" appears to be a substitute for
"university;" in other places, however, "Lyceum," or "Liceo" or "Lycee" frequently denotes a secondary
school or a college. It may be (though this is a question of fact which we need not resolve) that the use
of the word "Lyceum" may not yet be as widespread as the use of "university," but it is clear that a not
inconsiderable number of educational institutions have adopted "Lyceum" or "Liceo" as part of their
corporate names. Since "Lyceum" or "Liceo" denotes a school or institution of learning, it is not
unnatural to use this word to designate an entity which is organized and operating as an educational
institution.
It is claimed, however, by petitioner that the word "Lyceum" has acquired a secondary meaning in
relation to petitioner with the result that that word, although originally a generic, has become
appropriable by petitioner to the exclusion of other institutions like private respondents herein.
The doctrine of secondary meaning originated in the field of trademark law. Its application has,
however, been extended to corporate names sine the right to use a corporate name to the exclusion of
others is based upon the same principle which underlies the right to use a particular trademark or
tradename. 10 In Philippine Nut Industry, Inc. v. Standard Brands, Inc., 11 the doctrine of secondary
meaning was elaborated in the following terms:
" . . . a word or phrase originally incapable of exclusive appropriation with reference to an article on the
market, because geographically or otherwise descriptive, might nevertheless have been used so long
and so exclusively by one producer with reference to his article that, in that trade and to that branch of
the purchasing public, the word or phrase has come to mean that the article was his product." 12
The question which arises, therefore, is whether or not the use by petitioner of "Lyceum" in its
corporate name has been for such length of time and with such exclusivity as to have become
associated or identified with the petitioner institution in the mind of the general public (or at least that
portion of the general public which has to do with schools). The Court of Appeals recognized this issue
and answered it in the negative:
"Under the doctrine of secondary meaning, a word or phrase originally incapable of exclusive
appropriation with reference to an article in the market, because geographical or otherwise descriptive
might nevertheless have been used so long and so exclusively by one producer with reference to this
article that, in that trade and to that group of the purchasing public, the word or phrase has come to
mean that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This circumstance
has been referred to as the distinctiveness into which the name or phrase has evolved through the
substantial and exclusive use of the same for a considerable period of time. Consequently, the same
doctrine or principle cannot be made to apply where the evidence did not prove that the business (of the
plaintiff) has continued for so long a time that it has become of consequence and acquired a good will
of considerable value such that its articles and produce have acquired a well-known reputation, and
confusion will result by the use of the disputed name (by the defendant) (Ang Si Heng vs. Wellington
Department Store, Inc., 92 Phil. 448).
With the foregoing as a yardstick, [we] believe the appellant failed to satisfy the aforementioned
requisites. No evidence was ever presented in the hearing before the Commission which sufficiently
proved that the word 'Lyceum' has indeed acquired secondary meaning in favor of the appellant. If
there was any of this kind, the same tend to prove only that the appellant had been using the disputed
word for a long period of time. Nevertheless, its (appellant) exclusive use of the word (Lyceum) was
never established or proven as in fact the evidence tend to convey that the cross-claimant was already
using the word 'Lyceum' seventeen (17) years prior to the date the appellant started using the same
word in its corporate name. Furthermore, educational institutions of the Roman Catholic Church had
been using the same or similar word like 'Liceo de Manila,' 'Liceo de Baleno' (in Baleno, Masbate),
'Liceo de Masbate,' 'Liceo de Albay' long before appellant started using the word 'Lyceum'. The
appellant also failed to prove that the word 'Lyceum' has become so identified with its educational
institution that confusion will surely arise in the minds of the public if the same word were to be used
by other educational institutions.
In other words, while the appellant may have proved that it had been using the word 'Lyceum' for a
long period of time, this fact alone did not amount to mean that the said word had acquired secondary
meaning in its favor because the appellant failed to prove that it had been using the same word all by
itself to the exclusion of others. More so, there was no evidence presented to prove that confusion will
surely arise if the same word were to be used by other educational institutions. Consequently, the
allegations of the appellant in its first two assigned errors must necessarily fail." 13 (Underscoring
partly in the original and partly supplied)
We agree with the Court of Appeals. The number alone of the private respondents in the case at bar
suggests strongly that petitioner's use of the word "Lyceum" has not been attended with the exclusivity
essential for applicability of the doctrine of secondary meaning. It may be noted also that at least one of
the private respondents, i.e., the Western Pangasinan Lyceum, Inc., used the term "Lyceum" seventeen
(17) years before the petitioner registered its own corporate name with the SEC and began using the
word "Lyceum." It follows that if any institution had acquired an exclusive right to the word "Lyceum,"
that institution would have been the Western Pangasinan Lyceum, Inc. rather than the petitioner
institution.
In this connection, petitioner argues that because the Western Pangasinan Lyceum, Inc. failed to
reconstruct its records before the SEC in accordance with the provisions of R.A. No. 62, which records
had been destroyed during World War II, Western Pangasinan Lyceum should be deemed to have lost
all rights it may have acquired by virtue of its past registration. It might be noted that the Western
Pangasinan Lyceum, Inc. registered with the SEC soon after petitioner had filed its own registration on
21 September 1950. Whether or not Western Pangasinan Lyceum, Inc. must be deemed to have lost its
rights under its original 1933 registration, appears to us to be quite secondary in importance; we refer to
this earlier registration simply to underscore the fact that petitioner's use of the word "Lyceum" was
neither the first use of that term in the Philippines nor an exclusive use thereof. Petitioner's use of the
word "Lyceum" was not exclusive but was in truth shared with the Western Pangasinan Lyceum and a
little later with other private respondent institutions which registered with the SEC using "Lyceum" as
part of their corporation names. There may well be other schools using Lyceum or Liceo in their
names, but not registered with the SEC because they have not adopted the corporate form of
organization.
We conclude and so hold that petitioner institution is not entitled to a legally enforceable exclusive
right to use the word "Lyceum" in its corporate name and that other institutions may use "Lyceum" as
part of their corporate names. To determine whether a given corporate name is "identical" or
"confusingly or deceptively similar" with another entity's corporate name, it is not enough to ascertain
the presence of "Lyceum" or "Liceo" in both names. One must evaluate corporate names in their
entirety and when the name of petitioner is juxtaposed with the names of private respondents, they are
not reasonably regarded as "identical" or "confusingly or deceptively similar" with each other.
WHEREFORE, the petitioner having failed to show any reversible error on the part of the public
respondent Court of Appeals, the Petition for Review is DENIED for lack of merit, and the Decision of
the Court of Appeals dated 28 June 1991 is hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED.

G.R. No. 96161 February 21, 1992

PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC., petitioners,
vs.
COURT OF APPEALS, SECURITIES & EXCHANGE COMMISSION and STANDARD PHILIPS CORPORATION, respondents.

Emeterio V. Soliven & Associates for petitioners.

Narciso A. Manantan for private respondent.

MELENCIO-HERRERA, J.:

Petitioners challenge the Decision of the Court of Appeals, dated 31 July 1990, in CA-GR Sp. No. 20067, upholding the Order of the Securities and Exchange
Commission, dated 2 January 1990, in SEC-AC No. 202, dismissing petitioners' prayer for the cancellation or removal of the word "PHILIPS" from private
respondent's corporate name.

Petitioner Philips Export B.V. (PEBV), a foreign corporation organized under the laws of the Netherlands, although not engaged in business here, is the
registered owner of the trademarks PHILIPS and PHILIPS SHIELD EMBLEM under Certificates of Registration Nos. R-1641 and R-1674, respectively issued by
the Philippine Patents Office (presently known as the Bureau of Patents, Trademarks and Technology Transfer). Petitioners Philips Electrical Lamps, Inc. (Philips
Electrical, for brevity) and Philips Industrial Developments, Inc. (Philips Industrial, for short), authorized users of the trademarks PHILIPS and PHILIPS SHIELD
EMBLEM, were incorporated on 29 August 1956 and 25 May 1956, respectively. All petitioner corporations belong to the PHILIPS Group of Companies.

Respondent Standard Philips Corporation (Standard Philips), on the other hand, was issued a Certificate of Registration by respondent Commission on 19 May
1982.

On 24 September 1984, Petitioners filed a letter complaint with the Securities & Exchange Commission (SEC) asking for the cancellation of the word "PHILIPS"
from Private Respondent's corporate name in view of the prior registration with the Bureau of Patents of the trademark "PHILIPS" and the logo "PHILIPS SHIELD
EMBLEM" in the name of Petitioner, PEBV, and the previous registration of Petitioners Philips Electrical and Philips Industrial with the SEC.

As a result of Private Respondent's refusal to amend its Articles of Incorporation, Petitioners filed with the SEC, on 6 February 1985, a Petition (SEC Case No.
2743) praying for the issuance of a Writ of Preliminary Injunction, alleging, among others, that Private Respondent's use of the word PHILIPS amounts to an
infringement and clear violation of Petitioners' exclusive right to use the same considering that both parties engage in the same business.

In its Answer, dated 7 March 1985, Private Respondent countered that Petitioner PEBV has no legal capacity to sue; that its use of its corporate name is not at
all similar to Petitioners' trademark PHILIPS when considered in its entirety; and that its products consisting of chain rollers, belts, bearings and cutting saw are
grossly different from Petitioners' electrical products.

After conducting hearings with respect to the prayer for Injunction; the SEC Hearing Officer, on 27 September 1985, ruled against the issuance of such Writ.

On 30 January 1987, the same Hearing Officer dismissed the Petition for lack of merit. In so ruling, the latter declared that inasmuch as the SEC found no
sufficient ground for the granting of injunctive relief on the basis of the testimonial and documentary evidence presented, it cannot order the removal or
cancellation of the word "PHILIPS" from Private Respondent's corporate name on the basis of the same evidence adopted in toto during trial on the merits.
Besides, Section 18 of the Corporation Code (infra) is applicable only when the corporate names in question are identical. Here, there is no confusing similarity
between Petitioners' and Private Respondent's corporate names as those of the Petitioners contain at least two words different from that of the Respondent.
Petitioners' Motion for Reconsideration was likewise denied on 17 June 1987.

On appeal, the SEC en banc affirmed the dismissal declaring that the corporate names of Petitioners and Private Respondent hardly breed confusion inasmuch
as each contains at least two different words and, therefore, rules out any possibility of confusing one for the other.

On 30 January 1990, Petitioners sought an extension of time to file a Petition for Review on Certiorari before this Court, which Petition was later referred to the
Court of Appeals in a Resolution dated 12 February 1990.

In deciding to dismiss the petition on 31 July 1990, the Court of

Appeals1 swept aside Petitioners' claim that following the ruling in Converse Rubber Corporation v. Universal Converse Rubber Products, Inc., et al, (G. R. No.
L-27906, January 8, 1987, 147 SCRA 154), the word PHILIPS cannot be used as part of Private Respondent's corporate name as the same constitutes a
dominant part of Petitioners' corporate names. In so holding, the Appellate Court observed that the Converse case is not four-square with the present case
inasmuch as the contending parties in Converse are engaged in a similar business, that is, the manufacture of rubber shoes. Upholding the SEC, the Appellate
Court concluded that "private respondents' products consisting of chain rollers, belts, bearings and cutting saw are unrelated and non-competing with petitioners'
products i.e. electrical lamps such that consumers would not in any probability mistake one as the source or origin of the product of the other."

The Appellate Court denied Petitioners' Motion for Reconsideration on 20 November 1990, hence, this Petition which was given due course on 22 April 1991,
after which the parties were required to submit their memoranda, the latest of which was received on 2 July 1991. In December 1991, the SEC was also required
to elevate its records for the perusal of this Court, the same not having been apparently before respondent Court of Appeals.

We find basis for petitioners' plea.

As early as Western Equipment and Supply Co. v. Reyes, 51 Phil. 115 (1927), the Court declared that a corporation's right to use its corporate and trade name is
a property right, a right in rem, which it may assert and protect against the world in the same manner as it may protect its tangible property, real or personal,
against trespass or conversion. It is regarded, to a certain extent, as a property right and one which cannot be impaired or defeated by subsequent appropriation
by another corporation in the same field (Red Line Transportation Co. vs. Rural Transit Co., September 8, 1934, 20 Phil 549).

A name is peculiarly important as necessary to the very existence of a corporation (American Steel Foundries vs. Robertson, 269 US 372, 70 L ed 317, 46 S Ct
160; Lauman vs. Lebanon Valley R. Co., 30 Pa 42; First National Bank vs. Huntington Distilling Co. 40 W Va 530, 23 SE 792). Its name is one of its attributes, an
element of its existence, and essential to its identity (6 Fletcher [Perm Ed], pp. 3-4). The general rule as to corporations is that each corporation must have a
name by which it is to sue and be sued and do all legal acts. The name of a corporation in this respect designates the corporation in the same manner as the
name of an individual designates the person (Cincinnati Cooperage Co. vs. Bate. 96 Ky 356, 26 SW 538; Newport Mechanics Mfg. Co. vs. Starbird. 10 NH 123);
and the right to use its corporate name is as much a part of the corporate franchise as any other privilege granted (Federal Secur. Co. vs. Federal Secur. Corp.,
129 Or 375, 276 P 1100, 66 ALR 934; Paulino vs. Portuguese Beneficial Association, 18 RI 165, 26 A 36).

A corporation acquires its name by choice and need not select a name identical with or similar to one already appropriated by a senior corporation while an
individual's name is thrust upon him (See Standard Oil Co. of New Mexico, Inc. v. Standard Oil Co. of California, 56 F 2d 973, 977). A corporation can no more
use a corporate name in violation of the rights of others than an individual can use his name legally acquired so as to mislead the public and injure another
(Armington vs. Palmer, 21 RI 109. 42 A 308).

Our own Corporation Code, in its Section 18, expressly provides that:

No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or
confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or
contrary to existing law. Where a change in a corporate name is approved, the commission shall issue an amended certificate of
incorporation under the amended name. (Emphasis supplied)

The statutory prohibition cannot be any clearer. To come within its scope, two requisites must be proven, namely:

(1) that the complainant corporation acquired a prior right over the use of such corporate name; and

(2) the proposed name is either:

(a) identical; or

(b) deceptively or confusingly similar

to that of any existing corporation or to any other name already protected by law; or

(c) patently deceptive, confusing or contrary to existing law.

The right to the exclusive use of a corporate name with freedom from infringement by similarity is determined by priority of adoption (1 Thompson, p. 80 citing
Munn v. Americana Co., 82 N. Eq. 63, 88 Atl. 30; San Francisco Oyster House v. Mihich, 75 Wash. 274, 134 Pac. 921). In this regard, there is no doubt with
respect to Petitioners' prior adoption of' the name ''PHILIPS" as part of its corporate name. Petitioners Philips Electrical and Philips Industrial were incorporated
on 29 August 1956 and 25 May 1956, respectively, while Respondent Standard Philips was issued a Certificate of Registration on 12 April 1982, twenty-six (26)
years later (Rollo, p. 16). Petitioner PEBV has also used the trademark "PHILIPS" on electrical lamps of all types and their accessories since 30 September
1922, as evidenced by Certificate of Registration No. 1651.

The second requisite no less exists in this case. In determining the existence of confusing similarity in corporate names, the test is whether the similarity is such
as to mislead a person, using ordinary care and discrimination. In so doing, the Court must look to the record as well as the names themselves (Ohio Nat. Life
Ins. Co. v. Ohio Life Ins. Co., 210 NE 2d 298). While the corporate names of Petitioners and Private Respondent are not identical, a reading of Petitioner's
corporate names, to wit: PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC., inevitably leads one to
conclude that "PHILIPS" is, indeed, the dominant word in that all the companies affiliated or associated with the principal corporation, PEBV, are known in the
Philippines and abroad as the PHILIPS Group of Companies.

Respondents maintain, however, that Petitioners did not present an iota of proof of actual confusion or deception of the public much less a single purchaser of
their product who has been deceived or confused or showed any likelihood of confusion. It is settled, however, that proof of actual confusion need not be shown.
It suffices that confusion is probably or likely to occur (6 Fletcher [Perm Ed], pp. 107-108, enumerating a long line of cases).

It may be that Private Respondent's products also consist of chain rollers, belts, bearing and the like, while petitioners deal principally with electrical products. It
is significant to note, however, that even the Director of Patents had denied Private Respondent's application for registration of the trademarks "Standard Philips
& Device" for chain, rollers, belts, bearings and cutting saw. That office held that PEBV, "had shipped to its subsidiaries in the Philippines equipment, machines
and their parts which fall under international class where "chains, rollers, belts, bearings and cutting saw," the goods in connection with which Respondent is
seeking to register 'STANDARD PHILIPS' . . . also belong" ( Inter Partes Case No. 2010, June 17, 1988, SEC Rollo).

Furthermore, the records show that among Private Respondent's primary purposes in its Articles of Incorporation (Annex D, Petition p. 37, Rollo) are the
following:

To buy, sell, barter, trade, manufacture, import, export, or otherwise acquire, dispose of, and deal in and deal with any kind of goods,
wares, and merchandise such as but not limited to plastics, carbon products, office stationery and supplies, hardware parts, electrical
wiring devices, electrical component parts, and/or complement of industrial, agricultural or commercial machineries, constructive supplies,
electrical supplies and other merchandise which are or may become articles of commerce except food, drugs and cosmetics and to carry
on such business as manufacturer, distributor, dealer, indentor, factor, manufacturer's representative capacity for domestic or foreign
companies. (emphasis ours)

For its part, Philips Electrical also includes, among its primary purposes, the following:

To develop manufacture and deal in electrical products, including electronic, mechanical and other similar products . . . (p. 30, Record of
SEC Case No. 2743)

Given Private Respondent's aforesaid underlined primary purpose, nothing could prevent it from dealing in the same line of business of electrical devices,
products or supplies which fall under its primary purposes. Besides, there is showing that Private Respondent not only manufactured and sold ballasts for
fluorescent lamps with their corporate name printed thereon but also advertised the same as, among others, Standard Philips (TSN, before the SEC, pp. 14, 17,
25, 26, 37-42, June 14, 1985; pp. 16-19, July 25, 1985). As aptly pointed out by Petitioners, [p]rivate respondent's choice of "PHILIPS" as part of its corporate
name [STANDARD PHILIPS CORPORATION] . . . tends to show said respondent's intention to ride on the popularity and established goodwill of said petitioner's
business throughout the world" (Rollo, p. 137). The subsequent appropriator of the name or one confusingly similar thereto usually seeks an unfair advantage, a
free ride of another's goodwill (American Gold Star Mothers, Inc. v. National Gold Star Mothers, Inc., et al, 89 App DC 269, 191 F 2d 488).

In allowing Private Respondent the continued use of its corporate name, the SEC maintains that the corporate names of Petitioners PHILIPS ELECTRICAL
LAMPS. INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC. contain at least two words different from that of the corporate name of respondent STANDARD
PHILIPS CORPORATION, which words will readily identify Private Respondent from Petitioners and vice-versa.

True, under the Guidelines in the Approval of Corporate and Partnership Names formulated by the SEC, the proposed name "should not be similar to one already
used by another corporation or partnership. If the proposed name contains a word already used as part of the firm name or style of a registered company; the
proposed name must contain two other words different from the company already registered " (Emphasis ours). It is then pointed out that Petitioners Philips
Electrical and Philips Industrial have two words different from that of Private Respondent's name.

What is lost sight of, however, is that PHILIPS is a trademark or trade name which was registered as far back as 1922. Petitioners, therefore, have the exclusive
right to its use which must be free from any infringement by similarity. A corporation has an exclusive right to the use of its name, which may be protected by
injunction upon a principle similar to that upon which persons are protected in the use of trademarks and tradenames (18 C.J.S. 574). Such principle proceeds
upon the theory that it is a fraud on the corporation which has acquired a right to that name and perhaps carried on its business thereunder, that another should
attempt to use the same name, or the same name with a slight variation in such a way as to induce persons to deal with it in the belief that they are dealing with
the corporation which has given a reputation to the name (6 Fletcher [Perm Ed], pp. 39-40, citing Borden Ice Cream Co. v. Borden's Condensed Milk Co., 210 F
510). Notably, too, Private Respondent's name actually contains only a single word, that is, "STANDARD", different from that of Petitioners inasmuch as the
inclusion of the term "Corporation" or "Corp." merely serves the Purpose of distinguishing the corporation from partnerships and other business organizations.

The fact that there are other companies engaged in other lines of business using the word "PHILIPS" as part of their corporate names is no defense and does
not warrant the use by Private Respondent of such word which constitutes an essential feature of Petitioners' corporate name previously adopted and registered
and-having acquired the status of a well-known mark in the Philippines and internationally as well (Bureau of Patents Decision No. 88-35 [TM], June 17, 1988,
SEC Records).

In support of its application for the registration of its Articles of Incorporation with the SEC, Private Respondent had submitted an undertaking "manifesting its
willingness to change its corporate name in the event another person, firm or entity has acquired a prior right to the use of the said firm name or one deceptively
or confusingly similar to it." Private respondent must now be held to its undertaking.

As a general rule, parties organizing a corporation must choose a name at their peril; and the use of a name similar to one adopted by
another corporation, whether a business or a nonbusiness or non-profit organization if misleading and likely to injure it in the exercise in its
corporate functions, regardless of intent, may be prevented by the corporation having the prior right, by a suit for injunction against the
new corporation to prevent the use of the name (American Gold Star Mothers, Inc. v. National Gold Star Mothers, Inc., 89 App DC 269,
191 F 2d 488, 27 ALR 2d 948).

WHEREFORE, the Decision of the Court of Appeals dated 31 July 1990, and its Resolution dated 20 November 1990, are SET ASIDE and a new one entered
ENJOINING private respondent from using "PHILIPS" as a feature of its corporate name, and ORDERING the Securities and Exchange Commission to amend
private respondent's Articles of Incorporation by deleting the word PHILIPS from the corporate name of private respondent.

No costs.

SO ORDERED.

STRADEC vs. Radstock; G.R. No. 178158 and 180428; December 4, 2009; Natural
Resources; Land Ownership; Public funds; Appropriation
Facts

Construction Development Corporation of the Philippines (CDCP) was incorporated in 1966. It was
granted a franchise to construct, operate and maintain toll facilities in the North and South Luzon
Tollways and Metro Manila Expressway.

CDCP Mining Corporation (CDCP Mining), an affiliate of CDCP, obtained loans from Marubeni
Corporation of Japan (Marubeni). A CDCP official issued letters of guarantee for the loans although
there was no CDCP Board Resolution authorizing the issuance of such letters of guarantee. CDCP
Mining secured the Marubeni loans when CDCP and CDCP Mining were still privately owned and
managed.

In 1983, CDCP’s name was changed to Philippine National Construction Corporation (PNCC) in order
to reflect that the Government already owned 90.3% of PNCC and only 9.70% is under private
ownership. Meanwhile, the Marubeni loans to CDCP Mining remained unpaid.

On 20 October 2000 and 22 November 2000, the PNCC Board of Directors (PNCC Board) passed
Board Resolutions admitting PNCC’s liability to Marubeni. Previously, for two decades the PNCC
Board consistently refused to admit any liability for the Marubeni loans.

In January 2001, Marubeni assigned its entire credit to Radstock Securities Limited (Radstock), a
foreign corporation. Radstock immediately sent a notice and demand letter to PNCC.

PNCC and Radstock entered into a Compromise Agreement. Under this agreement, PNCC shall pay
Radstock the reduced amount of P6,185,000,000.00 in full settlement of PNCC’s guarantee of CDCP
Mining’s debt allegedly totaling P17,040,843,968.00 (judgment debt as of 31 July 2006). To satisfy its
reduced obligation, PNCC undertakes to (1) "assign to a third party assignee to be designated by
Radstock all its rights and interests" to the listed real properties of PNCC; (2) issue to Radstock or its
assignee common shares of the capital stock of PNCC issued at par value which shall comprise 20% of
the outstanding capital stock of PNCC; and (3) assign to Radstock or its assignee 50% of PNCC’s 6%
share, for the next 27 years, in the gross toll revenues of the Manila North Tollways Corporation.

Strategic Alliance Development Corporation (STRADEC) moved for reconsideration. STRADEC

alleged that it has a claim against PNCC as a bidder of the National Government’s shares, receivables,
securities and interests in PNCC.

Issue

Whether or not the Compromise Agreement between PNCC and Radstock is valid in relation to the
Constitution, existing laws, and public policy

Held

The Compromise Agreement is contrary to the Constitution, existing laws and public policy.

PNCC’s toll fees are public funds. PNCC cannot use public funds like toll fees that indisputably form
part of the General Fund, to pay a private debt of CDCP Mining to Radstock. Such payment cannot
qualify as expenditure for a public purpose. The toll fees are merely held in trust by PNCC for the
National Government, which is the owner of the toll fees. Considering that there is no appropriation
law passed by Congress for the compromise amount, the Compromise Agreement is void for being
contrary to law, specifically Section 29(1), Article VI of the Constitution. And since the payment
pertains to CDCP Mining’s private debt to Radstock, the Compromise Agreement is also void for being
contrary to the fundamental public policy that government funds or property shall be spent or used
solely for public purposes.

Radstock is not qualified to own land in the Philippines. Consequently, Radstock is also disqualified to
own the rights to ownership of lands in the Philippines. Radstock cannot own the rights to ownership of
any land in the Philippines because Radstock cannot lawfully own the land itself. Otherwise, there will
be a blatant circumvention of the Constitution, which prohibits a foreign private corporation from
owning land in the Philippines. In addition, Radstock cannot transfer the rights to ownership of land in
the Philippines if it cannot own the land itself. It is basic that an assignor or seller cannot assign or sell
something he does not own at the time the ownership, or the rights to the ownership, are to be
transferred to the assignee or buyer. The third party assignee under the Compromise Agreement who
will be designated by Radstock can only acquire rights duplicating those which its assignor is entitled
by law to exercise. Thus, the assignee can acquire ownership of the land only if its assignor owns the
land. Clearly, the assignment by PNCC of the real properties to a nominee to be designated by
Radstock is a circumvention of the Constitutional prohibition against a private foreign corporation
owning lands in the Philippines. The said circumvention renders the Compromise Agreement void.