CASE DIGEST IN CORPORATION LAW (VOL.
I)
SECTION 2
1. Artificial Person
Filipinas Broadcasting Network, Inc. vs. Ago Medical and
Eduacational Central-Bicol Christian college of Medicine
DOCTRINE
A juridical person is generally not entitled to moral damages
because, unlike a natural person, it cannot experience physical
suffering or such sentiments as wounded feelings, serious
anxiety, mental anguish or moral shock. The Court of Appeals
cites Mambulao Lumber Co. v. PNB, et al. to justify the award of
moral damages. However, the Court’s statement in Mambulao
that “a corporation may have a good reputation which, if
besmirched, may also be a ground for the award of moral
damages” is an obiter dictum.
FACTS
“Exposé” is a radio documentary program hosted by Carmelo Mel
Rima and Hermogenes Jun Alegre. Exposé is aired every morning
over DZRC-AM which is owned by Filipinas Broadcasting
Network, Inc. (FBNI). Exposé is heard over Legazpi City, the
Albay municipalities and other Bicol areas.
Rima and Alegre exposed various alleged complaints from
students, teachers and parents against Ago Medical and
Educational Center-Bicol Christian College of Medicine (AMEC)
and its administrators.
Claiming that the broadcasts were defamatory, AMEC and
Angelita Ago, as Dean of AMEC’s College of Medicine, filed a
complaint for damages against FBNI, Rima and Alegre.Quoted are
portions of the allegedly libelous broadcasts:
1. If you have children taking medical course at AMEC-
BCCM, advise them to pass all subjects because if they
fail in any subject they will repeat their year level,
taking up all subjects including those they have passed
already.
2. Earlier AMEC students in Physical Therapy had
complained that the course is not recognized by DECS.
3. Students are required to take and pay for the subject
even if the subject does not have an instructor ·such
greed for money on the part of AMEC’s administration.
4. The administrators of AMEC-BCCM, AMEC Science High
School and the AMEC-Institute of Mass Communication
in their effort to minimize expenses in terms of salary
are absorbing or continues to accept “rejects”.
5. AMEC is a dumping ground, garbage, not merely of
moral and physical misfits.
The trial court rendered a Decision finding FBNI and Alegre liable
for libel except Rima. The court said “considering the degree of
damages caused by the controversial utterances, which are
not found by this court to be really very serious and
damaging, and there being no showing that indeed the
enrollment of plaintiff school dropped, defendants
Hermogenes “Jun” Alegre, Jr. and Filipinas Broadcasting Network
(owner of the radio station DZRC), are hereby jointly and
severally ordered to pay plaintiff Ago Medical and Educational
Center-Bicol Christian College of Medicine (AMEC-BCCM) the
amount of P300,000.00 moral damages, plus P30,000.00
reimbursement of attorney’s fees, and to pay the costs of suit.”
The Court of Appeals upheld the trial court’s ruling that the
questioned broadcasts are libelous per se and that FBNI, Rima
and Alegre failed to overcome the legal presumption of malice.
CA adjudged FBNI, Rima and Alegre solidarily liable to pay AMEC
moral damages, attorney’s fees and costs of suit.
ISSUE
WON AMEC is entitled to moral damages because it is a
corporation – YES
HELD
A juridical person is generally not entitled to moral damages
because, unlike a natural person, it cannot experience physical
suffering or such sentiments as wounded feelings, serious
anxiety, mental anguish or moral shock. The Court of Appeals
cites Mambulao Lumber Co. v. PNB, et al. to justify the award of
moral damages. However, the Court’s statement in Mambulao
that “a corporation may have a good reputation which, if
besmirched, may also be a ground for the award of moral
damages” is an obiter dictum.
Nevertheless, AMEC’s claim for moral damages falls under item 7
of Article 2219 of the Civil Code. This provision expressly
authorizes the recovery of moral damages in cases of libel,
slander or any other form of defamation. Article 2219(7) does
not qualify whether the plaintiff is a natural or juridical person.
Therefore, a juridical person such as a corporation can validly
complain for libel or any other form of defamation and claim for
moral damages.
Moreover, where the broadcast is libelous per se, the law implies
damages. In such a case, evidence of an honest mistake or the
want of character or reputation of the party libeled goes only in
mitigation of damages. Neither in such a case is the plaintiff
required to introduce evidence of actual damages as a condition
precedent to the recovery of some damages. In this case, the
broadcasts are libelous per se. Thus, AMEC is entitled to moral
damages.
DECISION
WHEREFORE, we DENY the instant petition. We AFFIRM the
Decision of 4 January 1999 and Resolution of 26 January 2000 of
the Court of Appeals in CA-G.R. CV No. 40151 with the
MODIFICATION that the award of moral damages is reduced from
P300,000 to P150,000 and the award of attorney’s fees is deleted.
Costs against petitioner.
 CASE DIGEST IN CORPORATION LAW (VOL. I)
2. Separate Juridical Entity
Stockholders of F. Guanzon and Sons, Inc. vs. Register of
Deeds of Manila
DOCTRINE
A corporation is a juridical person distinct from the members
composing it. Properties registered in the name of the
corporation are owned by it as an entity separate and distinct
from its members. While shares of stock constitute personal
property, they do not represent property of the corporation. The
corporation has property of its own which consists chiefly of real
estate. A share of stock only typifies an aliquot part of the
corporation’s property, or the right to share in its proceeds to
that extent when distributed according to law and equity, but its
holder is not the owner of any part of the capital of the
corporation.
FACTS
Five stockholders of the F. Guanzon and Sons, Inc. executed a
certificate of liquidation of the assets of the corporation reciting,
among other things, that by virtue of a resolution of the
stockholders, dissolving the corporation, they have distributed
among themselves in proportion to their shareholdings, as
liquidating dividends, the assets of said corporation, including
real properties located in Manila.
The certificate of liquidation, when presented to the Register of
Deeds of Manila, was denied registration on seven grounds, of
which the following were disputed by the stockholders:
“3. The number of parcels not certified to in the
acknowledgment ;
5. P430.50 Reg. fees need be paid; 
 DECISION
6. P940.45 documentary stamps need be attached to
the document; 
 7. The judgment of the Court
approving the dissolution and directing the disposition
of the assets of the corporation need be presented
(Rules of Court, Rule 104, Sec. 3).”
Deciding the consulta elevated by the stockholders, the
Commissioner of Land Registration overruled ground No. 7 and
sustained requirements Nos. 3, 5 and 6.
The stockholders appealed before the SC.They contend that the
certificate of liquidation is not a conveyance or transfer but
merely a distribution of the assets of the corporation which has
ceased to exist for having been dissolved. This is apparent in the
minutes of dissolution attached to the document. Not being a
conveyance the certificate need not contain a statement of the
number of parcel of land involved in the distribution in the
acknowledgment appearing therein. Hence the amount of
documentary stamps to be affixed thereon should only be P0.30
and not P940.45, as required by the register of deeds. Neither is it
correct to require appellants to pay the amount of P430.50 as
registration fee.
On the other hand, the Commissioner of Land said that the
certificate of liquidation in question, though it involves a
distribution of the corporation’s assets, in the last analysis
represents a transfer of said assets from the corporation to the
stockholders. Hence, in substance it is a transfer or conveyance.
ISSUE
WON the certificate merely involves a distribution of the
corporation’s assets –NO, it involves a transfer or conveyance
HELD
A corporation is a juridical person distinct from the members
composing it. Properties registered in the name of the
corporation are owned by it as an entity separate and distinct
from its members. While shares of stock constitute personal
property, they do not represent property of the corporation. The
corporation has property of its own which consists chiefly of real
estate. A share of stock only typifies an aliquot part of the
corporation’s property, or the right to share in its proceeds to
that extent when distributed according to law and equity, but its
holder is not the owner of any part of the capital of the
corporation. Nor is he entitled to the possession of any definite
portion of its property or assets. The stockholder is not a co-
owner or tenant in common of the corporate property
It is clear that the act of liquidation made by the stockholders of
the F. Guanzon and Sons, Inc. of the latter’s assets is not and
cannot be considered a partition of community property, but
rather a transfer or conveyance of the title of its assets to the
individual stockholders. Indeed, since the purpose of the
liquidation, as well as the distribution of the assets of the
corporation, is to transfer their title from the corporation to the
stockholders in proportion to their shareholdings, - and this is in
effect the purpose which they seek to obtain from the Register of
Deeds of Manila, - that transfer cannot be effected without the
corresponding deed of conveyance from the corporation to the
stockholders. It is, therefore, fair and logical to consider the
certificate of liquidation as one in the nature of a transfer or
conveyance.
WHEREFORE, we affirm the resolution appealed from, with costs
against appellants.
LAPERAL DEVELOPMENT CORP and SUNMEAMS
CONVENIENCE FOODS CORP. vs. CA
DOCTRINE:
A corporation is clothed with a personality separate and distinct
from that of the persons composing it. It may not generally be
held liable for the personal indebtedness of its stockholders or
those of the entities connected with it. Conversely, a stockholder
cannot be made to answer for any of its financial obligations even
if he should be its president.
FACTS:
In a civil case in the CFI of Quezon City, Atty. Filoteo Banzon
sought recovery of attorney's fees from Oliverio Laperal, Laperal
Development Corporation, and Imperial Development
Corporation for professional services rendered by him in various
cases. Subsequently, the case was decided on the basis of a
Compromise Agreement, a portion of which provided that Atty.
Banzon waived his money claims (inclusive of representation
fees, representation expenses, appearance feesetc) against
Laperal et al.
Four years later, Banzon filed a complaint against Oliverio
Laperal. Laperal Development Corporation. Imperial
 CASE DIGEST IN CORPORATION LAW (VOL. I)
Development Corporation, Sunbeams Convenience Foods, Inc. of the court was based was only between plaintiff Atty. Banzon
and Vicente Acsay for the annulment of the abovementioned and the defendants represented by Oliverio Laperal.
portion of the compromise agreement, collection of attorney's Petitioners Laperal Development Corporation and Sunbeams
fees for his services in the cases of Imperial Development Convenience Foods, Inc. were declared no longer liable to the
(Imperial Dev’tvsAnover), Sunbeams Convenience private respondents for attorney's fees.
Foods(Republic vs Sunbeams Convenience), and Laperal
Development (Laperal Development vs Tuazon)and recovery of
attorney’s fees and nominal damages. This case was dismissed on
the ground that the trial court had no jurisdiction to annul the
Compromise Agreement as approved by an equal and coordinate
court. It was held that the issue was cognizable by the Court of
Appeals.

On appeal, the decision was affirmed on the issue of jurisdiction.

The CA held, however, that attorney's fees were due the private
respondent in the cases of Laperal Development and Sunbeams
Convenience Foods.

ISSUE:

Should Laperal Development and Sunbeams Convenience Foods

be held liable to pay Atty. Banzon the attorney's fees for his legal
services in the aforementioned cases?

RULING:

No.

With respect to LAPERAL DEVT CORP., the Court said, after an

examination of the records, that the case of Laperal Development
was covered by the Compromise Agreement, where Atty. Banzon
waived all other claims against the defendants "in all cases in the
Philippines that he may have handled for the defendants in the
past, including whatever money claims he may have in the above-
entitled case outside of this agreement." He also undertook
therein to protect the interest of the defendants in all unfinished
appealed cases where he appeared in the past in representation
of latter, without any further remuneration or attorney's fees,
representation fees, appearance fees and expenses in connection
therewith.

With respect to the case of SUNBEAMS CONVENIENCE, the Court

noted that at the time of the execution of the Compromise
Agreement, the case of Sunbeams was still pending in the
Supreme Court. It was not, however, the subject of the
compromise agreement, because Sunbeams was not made a party
defendant in the second amended complaint in the said case,
although reference was made to it in the appelant’s (Republic) 7th
cause of action for which he (Atty. Banzon) has rendered
professional services but for which attorney's fees were being
claimed from Oliverio Laperal. Notably, there was nothing in the
record to show that Oliverio Laperal and Sunbeams Corporation
are one and the same.

A corporation is clothed with a personality separate and distinct

from that of the persons composing it. It may not generally be
held liable for the personal indebtedness of its stockholders or
those of the entities connected with it. Conversely, a stockholder
cannot be made to answer for any of its financial obligations even
if he should be its president.
In this case, there is no evidence that Sunbeams and Laperal is
one and the same person. While it is true that Laperal is a
stockholder, director and officer of Sunbeams, that status alone
does not make him answerable for the liabilities of the said
corporation. Such liabilities include Banzon's attorney's fees for
representing it in the case of Republic v. Sunbeams Convenience
Foods, Inc. The Compromise Agreement upon which the decision
 CASE DIGEST IN CORPORATION LAW (VOL. I)
3. Piercing Corporate Veil
PHILIPPINE NATIONAL BANK vs. HYDRO RESOURCES
CONTRACTORS CORPORATION;
ASSET PRIVATIZATION TRUST vs. HYDRO RESOURCES
CONTRACTORS CORPORATION;
DEVELOPMENT BANK OF THE PHILIPPINES vs. HYDRO
RESOURCES CONTRACTORS CORPORATION
DOCTRINE/S:
Principle of Limited Liability
A corporation is an artificial entity created by operation of law. It
possesses the right of succession and such powers, attributes,
and properties expressly authorized by law or incident to its
existence. It has a personality separate and distinct from that of
its stockholders and from that of other corporations to which it
may be connected. As a consequence of its status as a distinct
legal entity and as a result of a conscious policy decision to
promote capital formation, a corporation incurs its own liabilities
and is legally responsible for payment of its obligations. By virtue
of the separate juridical personality of a corporation, the
corporate debt or credit is not the debt or credit of the
stockholder. This protection from liability for shareholders is the
principle of limited liability.
Piercing the Veil of Corporate Fiction
The corporate mask may be removed or the corporate veil
pierced when the corporation is just an alter ego of a person or of
another corporation. For reasons of public policy and in the
interest ofjustice, the corporate veil will justifiably be impaled
only when it becomes a shield for fraud, illegality or inequity
committed against third persons.
Alter Ego Theory
Case law lays down a three-pronged test to determine the
application of the alter ego theory, which is also known as the
instrumentality theory, namely:
(1) Control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so that
the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own;
(2) Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a statutory
or other positive legal duty, or dishonest and unjust act in
contravention of plaintiff’s legal right; and
(3) The aforesaid control and breach of duty must have
proximately caused the injury or unjust loss complained of.
FACTS:
In 1984, petitioners DBP and PNB foreclosed on certain
mortgages made on the properties of Marinduque Mining and
Industrial Corporation (MMIC).As a result of the foreclosure, DBP
and PNB acquired substantially all the assets of MMIC and
resumed the business operations of the defunct MMIC by
organizing Nonoc Mining and Industrial Corporation(NMIC).DBP
and PNB owned 57% and 43% of the shares of NMIC,
respectively, except for five qualifying shares.As of September
1984, the members of the Board of Directors of NMIC were either
from DBP or PNB.
Subsequently, NMIC engaged the services of Hercon, Inc., for its
Mine Stripping and Road Construction Program for a total
contract price of ₱35M.After computing the payments already
made by NMIC and crediting the NMIC’s receivables from Hercon,
it was found that NMIC still has an unpaid balance of ₱8M.
Herconmade several demands on NMIC, and when these were not
heeded, a complaint for sum of money was filed in the RTC
(Makati), seeking to hold petitioners NMIC, DBP, and PNB
solidarily liable for the amount owing Hercon.
Subsequent to the filing of the complaint, Hercon, Inc. was
acquired by HYDRO RESOURCES CONTRACTORS
CORPORATION (HRCC) in a merger, which prompted the
amendment of the complaint to substitute HRCC for Hercon.
Thereafter, in 1986, President Corazon C. Aquino issued
Proclamation No. 50 creating the Asset Privatization Trust (APT)
for the expeditious disposition and privatization of certain
government corporations and/or the assets thereof. Pursuant to
the said Proclamation, DBP and PNB executed their respective
deeds of transfer in favor of the National Government assigning,
transferring and conveying certain assets and liabilities,
including their respective stakes in NMIC. In turn, the National
Government transferred the said assets and liabilities to the APT
as trustee under a Trust Agreement. Thus, the complaint was
amended to implead and include the APT as a defendant.
DBP raised the defense that HRCC had no cause of action against
it because DBP was not privy to HRCC’s contract with NMIC.
Moreover, NMIC’s juridical personality is separate from that of
DBP.PNB also invoked the separate juridical personality of NMIC.
APT raised the ff. defenses: lack of cause of action against it, lack
of privity between Hercon, Inc. and APT, and the National
Government’s preferred lien over the assets of NMIC.
RTC (MAKATI): Rendered a Decision in favor of HRCC. It pierced
the corporate veil of NMIC and held DBP and PNB solidarily liable
with NMIC. Anchoring it decision on the fact that NMIC is owned
by defendants DBP and PNB (w/ DBP owning 53% and PNB
47%), it held that NMIC is a mere adjunct, business conduit or
alter ego of both DBP and PNB, and “where it appears that the
business enterprises are owned, conducted and controlled by the
same parties, both law and equity will, when necessary to protect
the rights of third persons, disregard legal fiction that two (2)
corporations are distinct entities, and treat them as identical."
Thus, DBP and PNB are jointly and severally liable with NMIC for
the latter’s unpaid obligations to HRCC.
COURT OF APPEALS: Affirmed the piercing of the veil of the
corporate personality of NMIC and held DBP, PNB, and APT
solidarily liable with NMIC.
ISSUE/S:
Is there sufficient ground to pierce the veil of corporate fiction?
RULING:
No.
(Please see 1st two doctrines above)
A court should be careful in assessing the milieu where the
doctrine of the corporate veil may be applied. Any application of
 CASE DIGEST IN CORPORATION LAW (VOL. I)
the doctrine of piercing the corporate veil should be done with
caution. It must be certain that the corporate fiction was misused
to such an extent that injustice, fraud, or crime was committed
against another, in disregard of its rights. The wrongdoing must
be clearly and convincingly established; it cannot be presumed.
In this case, HRCC has alleged from the inception of this case that
DBP and PNB (and the APT as assignee of DBP and PNB) should
be held solidarily liable for using NMIC as alter ego. The Court,
however, said that piercing the corporate veil based on the alter
ego theory requires the concurrence of three elements: control
of the corporation by the stockholder or parent corporation,
fraud or fundamental unfairness imposed on the plaintiff, and
harm or damage caused to the plaintiff by the fraudulent or
unfair act of the corporation. The absence of any of these
elements prevents piercing the corporate veil.
None of the tests has been satisfactorily met in this case. While
ownership by one corporation of all or a great majority of stocks
of another corporation and their interlocking directorates may
serve as indicia of control, by themselves and without more,
however, these circumstances are insufficient to establish an
alter ego relationship or connection between DBP and PNB on
the one hand and NMIC on the other hand, that will justify the
puncturing of the latter’s corporate cover. Nothing in the records
shows that the corporate finances, policies and practices of NMIC
were dominated by DBP and PNB in such a way that NMIC could
be considered to have no separate mind, will or existence of its
own but a mere conduit for DBP and PNB. The evidence
establishes that HRCC knew and acted on the knowledge that it
was dealing with NMIC, not with NMIC’s stockholders. HRCC has
presented nothing to show that DBP and PNB had a hand in the
act complained of, the alleged undue disregard by NMIC of the
demands of HRCC to satisfy the unpaid claims for services
rendered by HRCC in connection with NMIC’s mine stripping and
road construction program.
In relation to the second element, to disregard the separate
juridical personality of a corporation, the wrongdoing or unjust
act in contravention of a plaintiff’s legal rights must be clearly
and convincingly established; it cannot be presumed.There being
a total absence of evidence pointing to a fraudulent, illegal or
unfair act committed against HRCC by DBP and PNB under the
guise of NMIC, there is no basis to hold that NMIC was a mere
alter ego of DBP and PNB.
As regards the third element, in the absence of both control by
DBP and PNB of NMIC and fraud or fundamental unfairness
perpetuated by DBP and PNB through the corporate cover of
NMIC, no harm could be said to have been proximately caused by
DBP and PNB on HRCC for which HRCC could hold DBP and PNB
solidarily liable with NMIC.
DISPOSITIVE PORTION:
The complaint as against Development Bank of the Philippines,
the Philippine National Bank, and the Asset Privatization Trust,
now the Privatization and Management Office, is DISMISSED for
lack of merit. The Asset Privatization Trust, now the Privatization
and Management Office, as trustee of Nonoc Mining and
Industrial Corporation, now the Philnico Processing Corporation,
is DIRECTED to ensure compliance by the Nonoc Mining and
Industrial Corporation, now the Philnico Processing Corporation,
with this Decision.
APEX Mining Company vs. U.S. Southeast Mindanao Mining
FACTS:
The case involves the “Diwalwal Gold Rush Area” (Diwalwal), a
rich tract of mineral land in Davao del Norte and Davao Oriental.
Since 1980s, it has been stormed by numerous conflicting mining
claims over it.
On March 10, 1986, Marcopper Mining Corporation
(MMC) was granted an Exploration Permit (EP 133) by
the Bureau of Mines and Geo-Sciences (BMG). A long battle
ensued between Apex and MMC with the latter seeking the
cancellation of the mining claims of Apex on the ground that such
mining claims were within a forest reservation (Agusan-Davao-
Surigao Forest Reserve) and thus the acquisition on mining rights
should have been through an application for a permit to prospect
with the Bureau of Forest Development (BFD) and not through
registration of a DOL with the BMG. When it reached the SC in
1991, the Court ruled against Apex holding that the area is a
forest reserve and thus it should have applied for a permit
to prospect with the BFD.
On February 16 1994,MMC assigned all its rights to EP 133
to Southeast Mindanao Gold Mining Corporation (SEM), a
domestic corporation which is alleged to be a 100%-owned
subsidiary of MMC. Subsequently, BMG registered SEM’s Mineral
Production Sharing Agreement (MPSA) application and the Deed
of Assignment. Several oppositions were filed. The Panel of
Arbitrators created by the DENR upheld the validity of EP 133.
During the pendency of the case, DENR AO No. 2002-18 was
issued declaring an emergency situation in the Diwalwal
Gold Rush Area and ordering the stoppage of all mining
operations therein.
ISSUES:
1) Whether the transfer or assignment of EP 133 by
MMC to SEM was validly made without violating
any of the terms and conditions set forth in
Presidential Decree No. 463 and EP 133 itself.
2) W/N the DENR Secretary has authority to issue
DAO 66 declaring 729 hectares of the areas
covered by the Agusan-Davao-Surigao Forest
Reserve as non-forest lands and open to small-
scale mining purposes.
3) Who (among petitioners Apex and Balite) has
priority right over Diwalwal?
HELD:
1) INVALID.
A. SEM IS A SEPARATE AND DISTINCT ENTITY FROM MMC
Condition number 6 of EP 133 categorically states that the permit
shall be for the exclusive use and benefit of MMC or its duly
authorized agents. While it may be true that SEM, the assignee of
EP 133, is a 100% subsidiary corporation of MMC, records are
bereft of any evidence showing that the former is the duly
authorized agent of the latter. For a contract of agency to exist, it
is essential that the principal consents that the other party, the
agent, shall act on its behalf, and the agent consents so as to act.
The elements of agency are: (1) consent, express or implied, of
the parties to establish the relationship; (2) the object is the
execution of a juridical act in relation to a third person; (3) the
agent acts as a representative and not for himself;
 (4) the agent
acts within the scope of his authority. The existence of the
 CASE DIGEST IN CORPORATION LAW (VOL. I)
elements of agency is a factual matter that needs to be
established or proven by clear, positive and convincing evidence.
The burden of provingthat agency is extant in a certain case rests
in the party who sets forth such allegation.
SEM did not claim nor submit proof that it is the designated agent
of MMC to represent the latter in its business dealings or
undertakings. SEM cannot, therefore, be considered as an agent
of MMC which can use EP 133 and benefit from it. Since SEM is
not an authorized agent of MMC, it goes without saying that the
assignment or transfer of the permit in favor of SEM is null and
void as it directly contravenes the terms and conditions of the
grant of EP 133.
Furthermore, the concept of agency is distinct from assignment.
In agency, the agent acts not on his own behalf but on behalf of
his principal.While in assignment, there is total transfer or
relinquishment of right by the assignor to the assignee.The
assignee takes the place of the assignor and is no longer bound to
the latter.
The the assignment by MMC of EP 133 in favor of SEM
involved actual transfer of all rights and obligations MMC
have under the permit in favor of SEM, thus, making SEM the
permittee. It is not a mere grant of authority to SEM, as an agent
of MMC, to use the permit. It is a total abdication of MMC’s rights
over the permit. Hence, the assignment in question did not make
SEM the authorized agent of MMC to make use and benefit from
EP 133.
The fact that SEM is a 100% subsidiary of MMC does
not automatically make it an agent of MMC.A corporation is
an artificial being created by operation of law, having the right of
succession and the powers, attributes, and properties expressly
authorized by law or incident to its existence. It is an artificial
being invested by law with a personality separate and distinct
from those of the persons composing it as well as from that of any
other legal entity to which it may be related.Resultantly, absent
any clear proof to the contrary, SEM is a separate and distinct
entity from MMC.
B. APPLICATION OF DOCTRINE OF PIERCING THE
CORPORATE VEIL UNWARRANTED
Only in cases where the corporate fiction was used as a shield for
fraud, illegality or inequity may the veil be pierced and removed.
The doctrine of piercing the corporate veil cannot therefore be
used as a vehicle to commit prohibited acts. The assignment of
the permit in favor of SEM is utilized to circumvent the condition
of non-transferability of the exploration permit. To allow SEM
toavail itself of this doctrine and to approve the validity of the
assignment is tantamount to sanctioning an illegal act which is
what the doctrine precisely seeks to forestall.
C. ASSIGNMENT MUST BEAR THE IMPRIMATUR OF THE DENR
SECRETARY
PD No. 463 (Mineral Resources Development Decree) explicitly
requires that the transfer or assignment of mining rights,
including the right to explore a mining area, must be with the
prior approval of the Secretary of DENR. SEM did not dispute the
allegation that the Deed of Assignment was made without the
prior approval of the Secretary of DENR. Absent the prior
approval of the Secretary of DENR, the assignment of EP 133,
was, therefore, without legal effect for violating the mandatory
provision of Presidential Decree No. 463.
D. EP 133 EXPIRED BY NON-RENEWAL
Although EP 133 was extended for 12 months until July 6,1994,
MMC never renewed its permit prior and after its expiration.
With the expiration of EP 133 on July 6, 1994, MMC
lost any right to the Diwalwal Gold Rush Area. SEM, on
the other hand, has not acquired any right to the said area
because the transfer of EP 133 in its favor is invalid. Hence, both
MMC and SEM have not acquired any vested rightover the area
covered by EP 133.
2) NO. The DENR Secretary has no power to convert
forest reserves into non-forest reserves. Such power is
vested with the President. The DENR Secretary may onl
y recommend to the President which forest
reservations are to be withdrawn from the coverage
thereof. Thus, DAO No. 66 isnull and void for having
been issued in excess of the DENR Secretary’s authority.
3) (Since it’s been held that neither MMC nor SEM has any
right over Diwalwal, it is thus necessary to make a
determination of the existing right of the remaining
claimants, petitioners Apex and Balite, in the dispute.)
The issue on who has priority right over Diwalwal is
deemed overtaken by the issuance of Proclamation 297
and DAO No. 2002-18, both being constitutionally-
sanctioned acts of the Executive Branch. Mining
operations in the Diwalwal Mineral
Reservation are now, therefore, within the
full control of the State through the
executive branch. Pursuant to Sec. 5 of RA 7942,
the State can either: (1) directly undertake the
exploration, development and utilization of the area or
(2) opt to award mining operations in the mineral
reservation to private entities including petitioners
Apex and Balite, if it wishes. The exercise of this
prerogative lies with the Executive Department over
which courts will not interfere.
PALAY, INC. vs. CLAVE
FACTS:
ON March 28, 1965, petitioner Palay, Inc., through its President,
Albert Onstott executed in favor of private respondent, Nazario
Dumpit, a Contract to sell a parcel of Land in Antipolo, Rizal
owned by said corporation. The sale price was P23, 300.00 with
9% interest per annum, payable with a down payment of P4,
660.00 and monthly installments of P246.42 until fully paid.
Paragraph 6 of the contract provided for automatic
extrajudicial rescission upon default in payment of any
monthly installment after the lapse of 90 days from the
expiration of the grace period of one month, without need of
notice and with forfeiture of all installments paid.
Respondent Dumpit paid the down payment and several
installments amounting to P13, 722.50. The last payment was
made on December 5, 1967 for installments up to September
1967.
On May 10, 1973, or almost six (6) years later, private
respondent wrote petitioner offering to update all his overdue
accounts with interest, and seeking its written consent to the
assignment of his rights to a certain Lourdes Dizon. In response,
petitioners informed respondent that his Contract to Sell had
long been rescinded pursuant to paragraph 6 of the contract, and
that the lot had already been resold.
A complaint was filed by the respondent with the NHA for
conveyance with an alternative prayer for refund. The NHA, in its
 CASE DIGEST IN CORPORATION LAW (VOL. I)
resolution, ordered Palay, Inc. and Alberto Onstott in his capacity
as President of the corporation, jointly and severally, to refund
immediately to respondent the amount paid with 12% interest
from the filing of complaint. Respondent Presidential Executive
Assistant Clave affirmed the NHA resolution.
ISSUES:
1) WON Palay was justified in rescinding the contract
to sell without prior notice or demand (NO)
2) Whether the doctrine of piercing the veil of
corporate fiction has application to the case/
Whether petitioner Onstott can be held solidarity
liable with petitioner Corporation for the refund of
the installment payments made by respondent
Dumpit (NO)
HELD:
1) RESCISSION OF THE CONTRACT WAS INEFFECTIVE AND
INOPERATIVE AGAINST DUMPIT FOR LACK OF NOTICE OF
RESOLUTION.
Judicial action for the rescission of a contract is not necessary
where the contract provides that it may be revoked and cancelled
for violation of any of its terms and conditions.However,the act of
a party in treating a contract as cancelled should be made known
to the other. Extrajudicial rescission has legal effect where the
other party does not oppose it. Where it is objected to, a judicial
determination of the issue is still necessary.In other words,
resolution of reciprocal contracts may be made extrajudicially
unless successfully impugned in Court.
However, the rescission made by petitioners was ineffective and
inoperative for lack of notice of cancellation to the buyer. There
was no waiver of the right to be notified since the contract is a
contract of adhesion.
As a consequence of the resolution by petitioners, rights to the lot
should be restored to private respondent or the same should be
replaced by another acceptable lot. However, considering that the
property had already been sold to a third person and there is no
evidence on record that other lots are still available, private
respondent is entitled to the refund of installments paid plus
interest at the legal rate of 12% computed from the date of the
institution of the action. 10 It would be most inequitable if
petitioners were to be allowed to retain private respondent's
payments and at the same time appropriate the proceeds of the
second sale to another.
2) THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE
FICTION HAS NO APPLICATION TO THE CASE.
It is basic that a corporation is invested by law with a personality
separate and distinct from those of the persons composing it as
wen as from that of any other legal entity to which it may be
related. As a general rule, a corporation may not be made to
answer for acts or liabilities of its stockholders or those of the
legal entities to which it may be connected and vice versa.
However, the veil of corporate fiction may be pierced:
a) when it is used as a shield to further an end subversive
of justice ; or
b) for purposes that could not have been intended by the
law that created it ; or
c) to defeat public convenience, justify wrong, protect
fraud, or defend crime. ; or
d) to perpetuate fraud or confuse legitimate issues ; or
e) to circumvent the law or perpetuate deception ; or
f) as an alter ego, adjunct or business conduit for the sole
benefit of the stockholders.
We find no badges of fraud on petitioners' part. Petitioner
Onstott was made liable because he was then the President of the
corporation and appears to be the controlling stockholder but no
sufficient proof exists on record that said petitioner used the
corporation to defraud private respondent. He cannot,
therefore, be made personally liable just because he appears
to be the controlling stockholder.
Mere ownership by a single stockholder or by another
corporation is not of itself sufficient ground for disregarding the
separate corporate personality. In this respect then, a
modification of the Resolution under review is called for.
WHEREFORE, the questioned Resolution of respondent public
official, dated May 2, 1980, is hereby modified. Petitioner Palay,
Inc. is directed to refund to respondent Nazario M. Dumpit the
amount of P13,722.50, with interest at twelve (12%) percent per
annum from November 8, 1974, the date of the filing of the
Complaint. No costs. SO ORDERED.
LIDDELL & CO., INC. vs. CIR
DOCTRINE:
It is of course accepted that the mere fact that one or
more corporations are owned and controlled by a single
stockholder is not of itself sufficient ground for disregarding
separate corporate entities. Authorities support the rule that it is
lawful to obtain a corporation charter, even with a single
substantial stockholder, to engage in a specific activity, and such
activity may co-exist with other private activities of the
stockholder. If the corporation is a substantial one, conducted
lawfully and without fraud on another, its separate identity is to
be respected.
FACTS:
Petitioner Liddell & Co. is a domestic corporation engaged in
importing and retailing Oldsmobile, Chevrolet cars and trucks,
and GMC. It established in 1946 with an authorized capital of
P100,000 divided into 1,000 shares at P100 each. Of this
authorized capital, 196 shares at P19,600 were subscribed and
paid by Frank Liddell while the other 4 shares were each in the
names of Kurz, Darras, Manzano and Serrano.
An amendment as to the purpose clause of its Articles of
Incorporation was made, limiting its business activities to
importations only and Liddell Motors, Inc. was registered with
the SEC with an authorized capital of P100,000 of which 20,000
was subscribed and paid for. The shares were divided as follows:
Irene Liddell (wife of Frank Liddell) had 19,996 shares while
Lichauco, Bromwell, Rosario and Silva had 1 share each.
Upon review of the transactions between Liddell & Co. and
Liddell Motors, Inc. the CIR determined that the latter was but an
alter ego of Liddell & Co. Thus, for sales tax purposes, the sales
made by Liddell Motors, Inc. were considered original sales of
Liddell & Co. The CIR assessed a tax deficiency plus surcharges in
the amount of P1,317,629.61.
CTA upheld the position of the CIR.
 CASE DIGEST IN CORPORATION LAW (VOL. I)
ISSUE:
WON Liddell Motors, Inc. is an alter ego of Liddell & Co.
RULING:
YES. Liddell Motors, Inc. is an alter ego of Liddell & Co. Liddell &
Co. is wholly owned by Frank Liddell. As of the time of its
organization, 98% of the capital stock belonged to Frank Liddell.
The 20% paid-up subscription with which the company began its
business was paid by him. The subsequent subscriptions to the
capital stock were made by him and paid with his own money.
As to Liddell Motors, Inc. SC is fully persuaded that Frank Liddell
also owned it. He supplied the original capital funds. It is not
proven that his wife Irene, ostensibly the sole incorporator of
Liddell Motors, Inc. had money of her own to pay for her P20,000
initial subscription. Her income in the United States in the years
1943 and 1944 and the savings therefrom could not be enough to
cover the amount of subscription, much less to operate an
expensive trade like the retail of motor vehicles. The alleged sale
of her property in Oregon might have been true, but the money
received therefrom was never shown to have been saved or
deposited so as to be still available at the time of the organization
of the Liddell Motors, Inc. The evidence at hand also shows that
Irene Liddell had scant participation in the affairs of Liddell
Motors, Inc.
There are quite a series of conspicuous circumstances that
militate against the separate and distinct personality of Liddell
Motors, Inc. from Liddell & Co.8 SC notice that the bulk of the
business of Liddell & Co. was channeled through Liddell Motors,
Inc. On the other hand, Liddell Motors, Inc. pursued no activities
except to secure cars, trucks, and spare parts from Liddell & Co.
Inc. and then sell them to the general public. These sales of
vehicles by Liddell & Co. to Liddell Motors, Inc. for the most part
were shown to have taken place on the same day that Liddell
Motors, Inc. sold such vehicles to the public. We may even say
that the cars and trucks merely touched the hands of Liddell
Motors, Inc. as a matter of formality.
During the first six months of 1949, Liddell & Co. issued ten (10)
checks payable to Frank Liddell which were deposited by Frank
Liddell in his personal account with the Philippine National Bank.
During this time also, he issued in favor of Liddell Motors, Inc. six
(6) checks drawn against his personal account with the same
bank. The checks issued by Frank Liddell to the Liddell Motors,
Inc. were significantly for the most part issued on the same day
when Liddell & Co. Inc. issued the checks for Frank Liddell9 and
for the same amounts.
It is of course accepted that the mere fact that one or more
corporations are owned and controlled by a single stockholder is
not of itself sufficient ground for disregarding separate corporate
entities. Authorities10 support the rule that it is lawful to obtain
a corporation charter, even with a single substantial stockholder,
to engage in a specific activity, and such activity may co-exist
with other private activities of the stockholder. If the corporation
is a substantial one, conducted lawfully and without fraud on
another, its separate identity is to be respected.
Accordingly, the mere fact that Liddell & Co. and Liddell Motors,
Inc. are corporations owned and controlled by Frank Liddell
directly or indirectly is not by itself sufficient to justify the
disregard of the separate corporate identity of one from the
other.
PALACIO vs. FELY TRANSPORTATION COMPANY
DOCTRINE:
We believe that this is one case where the defendant corporation
should not be heard to say that it has a personality separate and
distinct from its members when to allow it to do so would be to
sanction the use of the fiction of corporate entity as a shield to
further an end subversive of justice.
FACTS:
Carillo is the driver of AC-787 jeep owned and operated by
defendant company. While driving at Halcon Street, Quezon City
he ran over the child of petitioner due to recklessness and
negligence. He suffered a simple fracture and was hospitalized
and was continued to be treated for 5 months. Because of his
child’s injury he had to abandon his welding shop where he
derives income to support his family and was forced to sell some
of his machineries for a lower price than their value and spent
such other amounts of money for litigation.
During the prosecution of the criminal case against the driver, an
attempt was unsuccessfully made by the prosecution to prove
moral damages suffered by Palacio however the CFI still found
the driver guilty beyond reasonable doubt.
The lower court barred the judgment in the criminal case and
held that the person subsidiarily liable to pay damages is Isabel
Calingasan, the employer, and not the defendant corporation.
ISSUE:
WON defendant corporation can be held liable for damages.
RULING:
Isabelo Calingasan and defendant Fely Transportation may be
regarded as one and the same person. It is evident that Isabelo
Calingasan's main purpose in forming the corporation was to
evade his subsidiary civil liability resulting from the conviction of
his driver, Alfredo Carillo. This conclusion is borne out by the fact
that the incorporators of the Fely Transportation are Isabelo
Calingasan, his wife, his son, Dr. Calingasan, and his two
daughters. We believe that this is one case where the defendant
corporation should not be heard to say that it has a personality
separate and distinct from its members when to allow it to do so
would be to sanction the use of the fiction of corporate entity as a
shield to further an end subversive of justice. Furthermore, the
failure of the defendant corporation to prove that it has other
property than the jeep (AC-687) strengthens the conviction that
its formation was for the purpose above indicated.
And while it is true that Isabelo Calingasan is not a party in this
case, yet, is held in the case of Alonso v. Villamor, this Court can
substitute him in place of the defendant corporation as to the real
party in interest. This is so in order to avoid multiplicity of suits
and thereby save the parties unnecessary expenses and delay.
Accordingly, defendants Fely Transportation and Isabelo
Calingasan should be held subsidiarily liable for P500.00 which
Alfredo Carillo was ordered to pay in the criminal case and which
amount he could not pay on account of insolvency.
 CASE DIGEST IN CORPORATION LAW (VOL. I)
The present action is not barred by the judgment of the CFI in the
criminal case. While there seems to be some confusion on part of
the plaintiffs as to the theory on which the is based —
whether ex-delito or quasi ex-delito (culpa aquiliana) — We are
convinced, from the discussion prayer in the brief on appeal, that Arcilla vs. CA
they are insisting the subsidiary civil liability of the defendant.

Marvel Building Corporation vs. David

 CASE DIGEST IN CORPORATION LAW (VOL. I)
SECTION 6
LIRAG TEXTILE MILLS, INC. VS. SSS
DOCTRINE:
A stockholder sinks or swims with the corporation and there is
no obligation to return the value of his shares by means of
repurchase if the corporation incurs losses and financial reverses,
much less guarantee such repurchase through a surety.
FACTS:
SSS (respondent) and Lirag Textile Mills (Petitioner) entered into
a Purchased Agreement which Respondent agreed to purchase
preferred stocks of Petitioner worth P1 million subject to
conditions:
 For Petitioner to repurchase the shares of stocks at a
regular interval of one year and to pay dividends.
 Failure to redeem and pay the dividend, the entire
obligation shall become due and demandable and it
shall be liable for an amount equivalent to 12% of the
amount then outstanding as liquidated damages.
 Basilio Lirag (Basilio) as President of Lirag Textile Mills
signed the Agreement as a surety to guarantee the
redemption of the stocks, the payment of dividends and
other obligations.
Pursuant to the Agreement, Respondent paid Petitioner P500,000
on two occasions and the latter issued5,000 preferred stocks
with a par value of P100 as evidenced by Stock Certificate Nos.
128 and 139.
After sending Respondent sent demand letters, Petitioner and
Basilio still made no redemption nor made dividend payments.
Respondent filed an action for specific performance and damages
against Petitioner:
Petitioner contends that there is no obligation on their part to
redeem the stock certificates since respondent is still a preferred
stock holder of the company and such redemption is dependent
upon the financial ability of the company.
On the part of Basilio, he contends that his liability only arises
only if the company is liable and does not perform its obligations
under the Agreement.
ISSUE:
Whether or not the Purchase Agreement entered into by the
Parties is a debt instrument?
HELD:
YES, the Purchase Agreement is a debt instrument. The terms and
conditions of the Agreement show that parties intended the
repurchase of preferred shares on the respective scheduled dates
to be an absolute obligation, which does not depend on the
financial ability of the corporation.
This absolute obligation on the part of the Petitioner corporation
is made manifest by the fact that a surety was required to see to it
that the obligation is fulfilled in the event the principal debtor’s
inability to do so.
It cannot be said that SSS is a preferred stockholder. The rights
given by the Purchase Agreement to SSS are not rights enjoyed by
ordinary stockholders. Since there was a condition that failure to
repurchase the stocks on the scheduled dates renders the entire
obligation due and demandable with interest. These features
clearly show that intent of the parties to be bound therein as
debtor and creditor and not as a corporation and stockholder.
SECTION 8
Republic Planters Bank vs. Agana
DOCTRINE:
Redeemable shares, on the other hand, are shares usually
preferred, which by their terms are redeemable at a fixed date, or
at the option of either issuing corporation, or the stockholder, or
both at a certain redemption price. A redemption by the
corporation of its stock is, in a sense, a repurchase of it for
cancellation. The present Code allows redemption of shares even
if there are no unrestricted retained earnings on the books of the
corporation. This is a new provision which in effect qualifies the
general rule that the corporation cannot purchase its own shares
except out of current retained earnings. However, while
redeemable shares may be redeemed regardless of the existence
of unrestricted retained earnings, this is subject to the condition
that the corporation has, after such redemption, assets in its
books to cover debts and liabilities inclusive of capital stock.
Redemption, therefore, may not be made where the corporation
is insolvent or if such redemption will cause insolvency or
inability of the corporation to meet its debts as they mature.
FACTS:
On 18 September 1961, the Robes-Francisco Realty &
Development Corporation (RFRDC) secured a loan from the
Republic Planters Bank in the amount of P120,000.00. As part of
the proceeds of the loan, preferred shares of stocks were issued
to RFRDC through its officers then, Adalia F. Robes and one
Carlos F. Robes. In other words, instead of giving the legal tender
totaling to the full amount of the loan, which is P120,000.00, the
Bank lent such amount partially in the form of money and
partially in the form of stock certificates numbered 3204 and
3205, each for 400 shares with a par value of P10.00 per share, or
for P4,000.00 each, for a total of P8,000.00. Said stock certificates
were in the name of Adalia F. Robes and Carlos F. Robes, who
subsequently, however, endorsed his shares in favor of Adalia F.
Robes.
Said certificates of stock bear the following terms and conditions:
"The Preferred Stock shall have the following rights, preferences,
qualifications and limitations, to wit: 1. Of the right to receive a
quarterly dividend of 1%, cumulative and participating. xxx 2.
That such preferred shares may be redeemed, by the system of
drawing lots, at any time after 2 years from the date of issue at
the option of the Corporation." On 31 January 1979, RFRDC and
Robes proceeded against the Bank and filed a complaint
anchored on their alleged rights to collect dividends under the
preferred shares in question and to have the bank redeem the
same under the terms and conditions of the stock certificates.
The bank filed a Motion to Dismiss 3 private respondents'
Complaint on the following grounds: (1) that the trial court had
no jurisdiction over the subject-matter of the action; (2) that the
action was unenforceable under substantive law; and (3) that the
action was barred by the statute of limitations and/or laches. The
bank's Motion to Dismiss was denied by the trial court in an
order dated 16 March 1979. The bank then filed its Answer on 2
 CASE DIGEST IN CORPORATION LAW (VOL. I)
May 1979. Thereafter, the trial court gave the parties 10 days
from 30 July 1979 to submit their respective memoranda after
the submission of which the case would be deemed submitted for
resolution. On 7 September 1979, the trial court rendered the
decision in favor of RFRDC and Robes; ordering the bank to pay
RFRDC and Robes the face value of the stock certificates as
redemption price, plus 1% quarterly interest thereon until full
payment. The bank filed the petition for certiorari with the
Supreme Court, essentially on pure questions of law.
ISSUE:
1. Whether the bank can be compelled to redeem the preferred
shares issued to RFRDC and Robes.
2. Whether RFRDC and Robes are entitled to the payment of
certain rate of interest on the stocks as a matter of right
without necessity of a prior declaration of dividend.
HELD:
1. While the stock certificate does allow redemption, the option
to do so was clearly vested in the bank. The redemption therefore
is clearly the type known as "optional". Thus, except as otherwise
provided in the stock certificate, the redemption rests entirely
with the corporation and the stockholder is without right to
either compel or refuse the redemption of its stock. Furthermore,
the terms and conditions set forth therein use the word "may". It
is a settled doctrine in statutory construction that the word
"may" denotes discretion, and cannot be construed as having a
mandatory effect. The redemption of said shares cannot be
allowed. The Central Bank made a finding that the Bank has been
suffering from chronic reserve deficiency, and that such finding
resulted in a directive, issued on 31 January 1973 by then Gov. G.
S. Licaros of the Central Bank, to the President and Acting
Chairman of the Board of the bank prohibiting the latter from
redeeming any preferred share, on the ground that said
redemption would reduce the assets of the Bank to the prejudice
of its depositors and creditors. Redemption of preferred shares
was prohibited for a just and valid reason. The directive issued by
the Central Bank Governor was obviously meant to preserve the
status quo, and to prevent the financial ruin of a banking
institution that would have resulted in adverse repercussions,
not only to its depositors and creditors, but also to the banking
industry as a whole. The directive, in limiting the exercise of a
right granted by law to a corporate entity, may thus be
considered as an exercise of police power.
2. Both Section 16 of the Corporation Law and Section 43 of the
present Corporation Code prohibit the issuance of any stock
dividend without the approval of stockholders, representing not
less than two-thirds (2/3) of the outstanding capital stock at a
regular or special meeting duly called for the purpose. These
provisions underscore the fact that payment of dividends to a
stockholder is not a matter of right but a matter of consensus.
Furthermore, "interest bearing stocks", on which the corporation
agrees absolutely to pay interest before dividends are paid to
common stockholders, is legal only when construed as requiring
payment of interest as dividends from net earnings or surplus
only. In compelling the bank to redeem the shares and to pay the
corresponding dividends, the Trial committed grave abuse of
discretion amounting to lack or excess of jurisdiction in ignoring
both the terms and conditions specified in the stock certificate, as
well as the clear mandate of the law.
SECTION 9
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. JOHN
L. MANNING, W.D. McDONALD, E.E. SIMMONS and THE COURT
OF TAX APPEALS, Respondents.
DOCTRINE:
Treasury shares are stocks issued and fully paid for and re-
acquired by the corporation either by purchase, donation,
forfeiture or other means.
FACTS:
Mantraso had an authorized capital stock of 2.5M divided into
25,000 common shares. 24,700 of these shares are owned by
Julius Reese while the rest, at 100 each, are owned by Manning
Mcdonald’s & Simmons. A trust agreement was executed
between Reese, Mantrasco, Ross, Selph, Carrascoso & Janda
law firm, Manning, Mcdonald and Simmons. Said agreement was
entered into because of Reese’s desire that Mantrasco and
antrasoc’s subsidiaries, Mantrasco Guam and port Motors, to
continue under the management
of Manning, Mcdonald and Simmons upon Reese' death. Reese
died however the projected transfer of his shares in the name of
Mantrasco could not be immediately effected for lack of sufficient
funds to cover the initial payment on the shares.
After Mantrasco made a partial payment of Reese’s shares, the
certificate for the 24,700 shares in Reese’s name was cancelled
and a new certificate was issued in the name of Mantrasco. Also
new certificate was endorsed to the law firm of Ross, Selph,
Carrascoso and Janda, as trustees for and in behalf of Mantrasco.
a resolution was passed during a special meeting of Mantrasco
stockholders.
The entire purchase price of Reese’s interest in Mantrasco was
finally paid in full by Mantrasco. On May 4 1964, trust agreement
was terminated and the trustees delivered to Mantrasco all the
shares which they were holding in trust. BIR ordered an
examination of Mantrasco’s books the examination disclosed
that as of Dec 31, 1958 24,700 shares declared as dividends had
distributed to Manning, Mcdonald& Simmons, representing a
total book value or acquisition cost of 7,973,660 and Manning,
Mcdonald & Simmons failed to declare the said stock dividends as
part of their taxable income for the year 1958.
BIR examiners concluded that the distribution of Reese’s shares
as stock dividends was in effect a distribution of the “asset or
property of the corporation as may be gleaned from the payment
of cash for the redemption of said stock and distributing the same
as stock dividend. The CIR issued notices of assessments for
deficiency income. Manning et al opposed but the BIR still held
them liable.
The CTA absolved Manning et al for liability on the ground that
their respective 1/3 interest in Mantrasco remained the same
before and after the declaration of stock dividends and only the
number of shares held by each of them changed.
ISSUE:
WON the shared are treasury shares.
HELD:
 CASE DIGEST IN CORPORATION LAW (VOL. I)
NO. Treasury shares are stocks issued and fully paid for and re-
acquired by the corporation either by purchase, donation,
forfeiture or other means. They are therefore issued shares, but
being in the treasury they do not have the status of outstanding
shares. Consequently, although a treasury share, not having been
retired by the corporation re-acquiring it, may be re-issued or
sold again, such share, as long as it is held by the corporation as a
treasury share, participates neither in dividends, because
dividends cannot be declared by the corporation to itself, nor in
the meetings of the corporations as voting stock, for otherwise
equal distribution of voting powers among stockholders will be
effectively lost and the directors will be able to perpetuate their
control of the corporation though it still represent a paid — for
interest in the property of the corporation.
In this case, such essential features of treasury share are lacking
in the former shares of Reese. The manifest intention of the
parties to the trust agreement was, in sum and substance, to treat
the 24,700 shares of Reese as absolutely outstanding shares of
Reese’s estate until they were fully paid. Such being the true
nature of such shares, their declaration as treasury stock
dividend in 1958 was a complete nullity and plainly violative of
public policy. A stock dividend being one payable in capital stock,
cannot be declared out of outstanding corporate stock, but only
from retained earnings.
SECTION 13
ONG YONG v. TIU
DOCTRINE:
Decreasing a corporation’s authorized capital stock is an
amendment of the Articles of Incorporation. It is a decision that
only the stockholders and the directors can make, considering
that they are the contracting parties thereto.
FACTS:
In 1994, the construction of the Masagana Citimall in Pasay City
was threatened with stoppage and incompletion when its owner,
the First Landlink Asia Development Corporation (FLADC), which
was owned by the Tiu’s, encountered dire financial difficulties. It
was indebted to PNB for 190M was heavily so to prevent
foreclosure of the two lots where the mall was being built, the
Tiu’s invited the Ong’s to invest in FLADC.
Under the Pre-Subscription Agreement they entered into, the
Ong’s and the Tiu’s agreed to maintain equal shareholdings in
FLADC: the Ong’s were to subscribe to 1,000,000 shares at a par
value of P100.00 each while the Tiu’s were to subscribe to an
additional 549,800 shares at P100.00 each in addition to their
already existing subscription of 450,200 shares.
Accordingly, the Ong’s paid P100 million in cash for their
subscription to 1,000,000 shares of stock while the Tiu’s
committed to contribute to FLADC a four-storey building and two
parcels of land respectively valued at P20 million (for 200,000
shares), P30 million (for 300,000 shares) and P49.8 million (for
49,800 shares) to cover their additional 549,800 stock
subscription therein.
The Ong’s paid again with the total sum of which (P190 million)
was used to settle the P190 million mortgage indebtedness of
FLADC to PNB. The Pre-Subscription Agreement was later on
rescinded. The Tiu’s accused the Ong’s of refusing to credit to
them the FLADC shares covering their real property
contributions.
Ong’s asserted that, although the Tiu’s executed a deed of
assignment for the 1,902.30 square-meter lot in favor of FLADC,
they (the Tiu’s) refused to pay P 570,690 for capital gains tax and
documentary stamp tax. Without the payment thereof, the SEC
would not approve the valuation of the Tiu’s property
contribution. This, in turn, would make it impossible to secure a
new TCT over the property in FLADCs name.
The SEC confirmed the rescission sought by the Tiu’s. Both
parties appealed to the SEC en banc which confirmed the
rescission of the Pre-Subscription Agreement.
The CA affirmed the decision. Their MR having been denied, both
parties filed separate petitions for review before this Court.
ISSUE:
Whether or not the Tiu’s could legally rescind the Pre-
Subscription Agreement.
HELD:
 CASE DIGEST IN CORPORATION LAW (VOL. I)
NO. The real contracting parties to the subscription agreement
were FLADC and the Ong’s alone, a civil case for rescission on the
ground of breach of contract filed by the Tiu’s in their personal
capacities will not prosper. Also, rescission based on breach of
contract will still prosper since rescission will violate the Trust
Fund Doctrine and the procedures for the valid distribution of
assets and property under the Corporation Code. The rescission
of the Pre-Subscription Agreement will effectively result in the
unauthorized distribution of the capital assets and property of
the corporation, thereby violating the Trust Fund Doctrine and
the Corporation Code, since rescission of a subscription
agreement is not one of the instances when distribution of capital
assets and property of the corporation is allowed.
The Tius case for rescission cannot validly be deemed a petition
to decrease capital stock because such action never complied
with the formal requirements for decrease of capital stock under
Section 33 of the Corporation Code. Furthermore, it is an
improper judicial intrusion into the internal affairs of the
corporation to compel FLADC to file at the SEC a petition for the
issuance of a certificate of decrease of stock. Decreasing a
corporation’s authorized capital stock is an amendment of the
Articles of Incorporation. It is a decision that only the
stockholders and the directors can make, considering that they
are the contracting parties thereto.
SECTION 14
MSCI-NACUSIP Local Chapter vs. National Wages &
Productivity Commission
DOCTRINE:
Not all funds or assets received by the corporation can be
considered paid-up capital, for this term has a technical
signification in Corporation Law. Such must form part of the
authorized capital stock of the corporation, subscribed and then
actually paid up.
FACTS:
On January 11, 1990, Asturias Sugar Central, Inc. (ASCI), executed
a Memorandum of Agreement with Monomer Trading Industries,
Inc. (MTII), whereby MTII shall acquire the assets of ASCI by way
of a Deed of Assignment provided that an entirely new
organization in place of MTII shall be organized, which new
corporation shall be the assignee of the assets of ASCI. Thus, a
new corporation was organized and incorporated on February
15, 1990 under the corporate name Monomer Sugar Central, Inc.
(MSCI), the private respondent herein.
MSCI applied for exemption from the coverage of Wage Order No.
RO VI-01 issued by the Regional Tripartite Wages and
Productivity Board VI (Board) on the ground that it is a
distressed employer. MSCI submitted its audited financial
statements and income tax returns duly stamped “received” by
the BIR and the SEC.
The petitioner MSCI-NACUSIP Local Chapter (Union), in
opposition, maintained that MSCI is not distressed; that
respondent applicant has not complied with the requirements for
exemption; and that the financial statements submitted by MSCI
do not reflect the true and valid financial status of the company,
etc.
The Board denied MSCI’s application for exemption based on the
finding that the applicant’s losses of P3,400,738.00 for the period
February 15, 1990 to August 31, 1990 constitute an impairment
of only 5.25% of its paid-up capital of P64,688,528.00, cannot be
said to be sufficient to meet the required 25% loss in order to
qualify for the exemption, as provided in NWPC Guidelines No.
01, Series of 1992. An appeal was brought before the public
respondent NATIONAL WAGES AND PRODUCTIVITY
COMMISSION (Commission). The Commission reversed and set
aside the orders of the Board, and granted MSCI’s application for
exemption from Wage Order No. RO VI-01, for a period of 1 yr
from its effectivity.
Hence this Petition for Certiorari under Rule 65 by the Petitioner.
ISSUE:
What is the correct paid-up capital of MSCI for the period covered
by the application for exemption — P5 million or
P64,688,528.00? (Would it qualify MSCI as a distressed employer
and thus be entitled to exemption from compliance with Wage
Order No. RO VI-01).
RULING:
 CASE DIGEST IN CORPORATION LAW (VOL. I)
NWPC Guidelines No. 01, Series of 1992 as well as the new NWPC
Guidelines No. 01, Series of 1996, define Capital as referring to The above requirements, which are condition precedents before
paid-up capital at the end of the last full accounting period, in the the capital stock of a corporation may be increased, were not
case of corporations; or total invested capital at the beginning of observed in this case. Henceforth, the paid-up capital stock of
the period under review, in the case of partnerships and single MSCI for the period covered by the application for exemption still
proprietorships. To have a clear understanding of what paid-up stood at P5 million. The losses, therefore, amounting to
capital is, a referral to Sections 12 and 13 of the Corporation P3,400,738.00 for the period Feb 15, 1990 to Aug 31, 1990
Code would be helpful: impaired MSCI’s paid-up capital of P5M by as much as 68%. MSCI
“Sec. 12. Minimum capital stock required of stock is qualified as a distressed employer. Respondent Commission
corporations. — Stock corporations incorporated under thus acted well within its jurisdiction in granting MSCI full
this Code shall not be required to have any minimum exemption from Wage Order No. RO VI-01 as a distressed
authorized capital stock except as otherwise specifically employer.
provided for by special law, and subject to the
provisions of the following section.” WHEREFORE, the petition is DISMISSED.
“Sec. 13. Amount of capital stock to be subscribed
and paid for purposes of incorporation. — At least 25%
of the authorized capital stock as stated in the articles of
incorporation must be subscribed at the time of
incorporation, and at least 25% percent of the total
subscription must be paid upon subscription, the
balance to be payable on a date or dates fixed in the
contract of subscription without need of call, or in the
absence of a fixed date or dates, upon call for payment
by the board of directors: Provided, however, That in no
case shall the paid-up capital be less thanP5,000.00”
Paid-up capital is that portion of the authorized capital stock
which has been both subscribed and paid. In the case at bar, MSCI
was organized and incorporated on February 15, 1990 with an
authorized capital stock of P60 million, P20 million of which was
subscribed. Of theP20 million subscribed capital stock, P5 million
was paid-up.

The argument of the Board that the value of the assets of ASCI
transferred to MSCI as well as the loans or advances made by
MTII to MSCI should have been taken into consideration in
computing the paid-up capital of MSCI is unmeritorious. Not all
funds or assets received by the corporation can be considered
paid-up capital, for this term has a technical signification in
Corporation Law. Such must form part of the authorized capital
stock of the corporation, subscribed and then actually paid up.
The loans and advances of MTII to respondent MSCI cannot be
treated as investments, unless the corresponding shares of stocks
are issued. But as it turned out, such loans and advances were in
fact treated as liabilities of MSCI to MTII as shown in its 1990
audited financial statements. The treatment by the Board of these
loans as part of MSCI’s capital stock without satisfying certain
mandatory requirements is prohibited under Sec 38 of the
Corporation Code which provides:
“Power to increase or decrease capital stock; incur,
create or increase bonded indebtedness. No corporation
shall increase or decrease its capital stock or incur,
create or increase any bonded indebtedness unless
approved by a majority vote of the board of directors
and, at a stockholders’ meeting duly called for the
purpose, two-thirds (2/3) of the outstanding capital
stock shall favor the increase or diminution of the
capital stock, or the incurring, creating or increasing of
any bonded indebtedness. Written notice of the
proposed increase or diminution of the capital stock or
of the incurring, creating, or increasing of any bonded
indebtedness and of the time and place of the
stockholders’ meeting at which the proposed increase
or diminution of the capital stock or the incurring or
increasing of any bonded indebtedness is to be
considered, must be addressed to each stockholders at
his place of residence as shown on the books of the
corporation and deposited to the addressee in the post
office with postage prepaid, or served personally.”
 CASE DIGEST IN CORPORATION LAW (VOL. I)
SECTION 15
WILSON P. GAMBOA vs. FINANCE SECRETARY TEVES
DOCTRINE:
The term “capital” does not refer to both preferred and common
stocks treated as the same class of shares regardless of
differences in voting rights and privileges. Consistent with the
constitutional mandate that the “State shall develop a self-reliant
and independent national economy effectively controlled by
Filipinos,” the term "capital" means the outstanding capital stock
entitled to vote (voting stock), coupled with beneficial
ownership, both of which results to "effective control."
FACTS:
In 1928, the Philippine Long Distance Telephone Company
(PLDT) was granted a franchise to engage in the business of
telecommunications. Telecommunications is a nationalized area
of activity where a corporation engaged therein must have 60%
of its capital be owned by Filipinos as provided for by Section 11,
Article XII (National Economy and Patrimony) of the 1987
Constitution, to wit:
Section 11. No franchise, certificate, or any other form
of authorization for the operation of a public utility shall
be granted except to citizens of the Philippines or to
corporations or associations organized under the laws
of the Philippines, at least sixty per centum of whose
capital is owned by such citizens; xxx
In 1999, First Pacific, a foreign corporation, acquired 37% of
PLDT common shares. Wilson Gamboa opposed said acquisition
because at that time, 44.47% of PLDT common shares already
belong to various other foreign corporations. Hence, if First
Pacific’s share is added, foreign shares will amount to 81.47% or
more than the 40% threshold prescribed by the Constitution.
Margarito Teves, as Secretary of Finance, and the other
respondents argued that this is okay because in totality, most of
the capital stocks of PLDT is Filipino owned. It was explained that
all PLDT subscribers, pursuant to a law passed by Marcos, are
considered shareholders (they hold serial preferred shares).
Broken down, preferred shares consist of 77.85% while common
shares consist of 22.15%.
Gamboa argued that the term “capital” should only pertain to the
common shares because that is the share which is entitled to vote
and thus have effective control over the corporation.
ISSUE:
What does the term “capital” pertain to? Does the term “capital”
in Section 11, Article XII of the Constitution refer to common
shares or to the total outstanding capital stock (combined total of
common and non-voting preferred shares)?
HELD:
Gamboa is correct.
Capital only pertains to common shares. It will be absurd for
capital to pertain as inclusive of non-voting shares. This is
because a corporation consisting of 1,000,000 capital stocks, 100
of which are common shares which are foreign owned and the
rest (999,900 shares) are preferred shares which are non-voting
shares and are Filipino owned, would seem compliant to the
constitutional requirement – here 99.999% is Filipino owned. But
if scrutinized, the controlling stock – the voting stock – or that
miniscule .001% is foreign owned. That is absurd.
In this case, it is true that at least 77.85% of the capital is owned
by Filipinos (the PLDT subscribers). But these subscribers, who
hold non-voting preferred shares, have no control over the
corporation. Hence, capital should only pertain to common
shares.
Thus, to be compliant with the constitution, 60% of the common
shares of PLDT should be Filipino owned. That is not so in this
case as it appears that 81.47% of the common shares are already
foreign owned (split between First Pacific (37%) and a Japanese
corporation
Heirs of Gamboa vs Teves
DOCTRINE
Under the Corporation Code, capital stock consists of all classes
of shares issued to stockholders, that is, common shares as well
as preferred shares, which may have different rights, privileges
or restrictions as stated in the articles of incorporation.
FACTS
Movants Philippine Stock Exchange’s (PSE) President, Manuel V.
Pangilinan, Napoleon L. Nazareno, and the Securities and
Exchange Commission (SEC) contend that the term “capital” in
Section 11, Article XII of the Constitution has long been settled
and defined to refer to the total outstanding shares of stock,
whether voting or non-voting. In fact, movants claim that the SEC,
which is the administrative agency tasked to enforce the 60-40
ownership requirement in favor of Filipino citizens in the
Constitution and various statutes, has consistently adopted this
particular definition in its numerous opinions. Movants point out
that with the 28 June 2011 Decision, the Court in effect
introduced a “new” definition or “midstream redefinition” of the
term “capital” in Section 11, Article XII of the Constitution.
ISSUE
Whether the term “capital” includes both voting and non-voting
shares.
RULING
NO. The Constitution expressly declares as State policy the
development of an economy “effectively controlled” by Filipinos.
Consistent with such State policy, the Constitution explicitly
reserves the ownership and operation of public utilities to
Philippine nationals, who are defined in the Foreign Investments
Act of 1991 as Filipino citizens, or corporations or associations at
least 60 percent of whose capital with voting rights belongs to
Filipinos. The FIA’s implementing rules explain that “[f]or stocks
to be deemed owned and held by Philippine citizens or Philippine
nationals, mere legal title is not enough to meet the required
Filipino equity. Full beneficial ownership of the stocks,
coupled with appropriate voting rights is essential.” In effect,
the FIA clarifies, reiterates and confirms the interpretation that
the term “capital” in Section 11, Article XII of the 1987
 CASE DIGEST IN CORPORATION LAW (VOL. I)
Constitution refers to shares with voting rights, as well as with full
beneficial ownership. This is precisely because the right to vote in
the election of directors, coupled with full beneficial ownership of
stocks, translates to effective control of a corporation.
SECTION 17
Since the constitutional requirement of at least 60 percent
Filipino ownership applies not only to voting control of the Samahan ng Optometrists vs. Acebedo International
corporation but also to the beneficial ownership of the Corporation
corporation, it is therefore imperative that such requirement
apply uniformly and across the board to all classes of shares, DOCTRINE
regardless of nomenclature and category, comprising the capital
of a corporation. Under the Corporation Code, capital stock35 The fact that private respondent hires optometrists who practice
consists of all classes of shares issued to stockholders, that is, their profession in the course of their employment in private
common shares as well as preferred shares, which may have respondent's optical shops, does not translate into a practice of
different rights, privileges or restrictions as stated in the articles optometry by private respondent itself.
of incorporation.
FACTS

On February 22, 1991, private respondent filed an application

with the Office of the Mayor of Candon, Ilocos Sur, for the
issuance of a permit for the opening and operation of a branch of
the Acebedo Optical in that municipality.

The application was opposed by the Samahan ng Optometrists sa

Pilipinas (SOP) which contended that private respondent is a
juridical entity not qualified to practice optometry.

On March 6, 1991, private respondent filed its answer, arguing it

is not the corporation, but the optometrists employed by it, who
would be practicing optometry.

A committee was formed to address the issuance of permit for

Acebedo. The committee rendered a decision denying [private
respondent's] application for a mayor's permit to operate a
branch in Candon and ordering x xx [private respondent] to close
its establishment.

ISSUE

WHETHER OR NOT THE HONORABLE COURT OF APPEALS

ERRED IN DECLARING THAT PRIVATE RESPONDENT ACEBEDO
INTERNATIONAL CORPORATION DOES NOT VIOLATE THE
OPTOMETRY LAW (R. A. NO. 1998) WHEN IT EMPLOYS
OPTOMETRISTS TO ENGAGE IN THE PRACTICE OF OPTOMETRY
UNDER ITS NAME AND FOR ITS BEHALF

HELD

NO. The fact that private respondent hires optometrists who

practice their profession in the course of their employment in
private respondent's optical shops, does not translate into a
practice of optometry by private respondent itself. Private
respondent is a corporation created and organized for the
purpose of conducting the business of selling optical lenses or
eyeglasses, among others. The clientele of private respondent
understably, would largely be composed of persons with
defective vision and thus need the proper lenses to correct the
same and enable them to gain normal vision. The determination
of the proper lenses to sell to private respondent's clientele
entails the employment of optometrists who have been precisely
trained for that purpose. Private respondent's business is not the
determination itself of the proper lenses needed by persons with
defective vision. Private respondent's business, rather, is the
buying and importing of eyeglasses and lenses and other similar
or allied instruments from suppliers thereof and selling the same
to consumers.
 CASE DIGEST IN CORPORATION LAW (VOL. I)
It is significant to note that even under RA. No. 8050, known as
the Revised Optometry Law, we find no prohibition against the
hiring by corporations of optometrists. Hence, there is no law
that prohibits the hiring by corporations of optometrists or
considers the hiring by corporations of optometrists as a practice
by the corporation itself of the profession of optometry.
HELD:
Yes, the court had jurisdiction. Sec 20 does not apply in this case.
Under our statute it is to be noted that it is the issuance of a
certificate of incorporation by the Director of the Bureau of
Commerce and Industry which calls a corporation into being. The
immunity of collateral attack is granted to corporations ‘claiming
in good faith to be a corporation under this act.’

SECTION 20 Further, this is not a suit in which the corporation is a party. This
is a litigation between stockholders of the alleged corporation,
Hall v. Piccio for the purpose of obtaining its dissolution. Even the existence of
a de jure corporation may be terminated in a private suit for its
DOCTRINE: dissolution between stockholders, without the intervention of the
state.
It is the issuance of a certificate of incorporation by the Director
of the Bureau of Commerce and Industry, which calls a WHEREFORE, the petition is dismissed.
corporation into being.

FACTS:

On May 28, 1947, the petitioners C. Arnold Hall and Bradley P.

Hall, and the respondents Fred Brown, Emma Brown, Hipolita D.
Chapman and Ceferino S. Abella, signed and acknowledged in
Leyte, the articles of incorporation of the Far Eastern Lumber and
Commercial Co., Inc., organized to engage in a general lumber
business to carry on as general contractors, operators and
managers, etc. Attached to the articles was an affidavit of the
treasurer stating that 23,428 shares of stock had been subscribed
and fully paid with certain properties transferred to the
corporation described in a list appended thereto.

Immediately after the execution of said articles of incorporation,

the corporation proceeded to do business with the adoption of
by-laws and the election of its officers. On December 2, 1947, the
said articles of incorporation were filed in the office of the
Securities and Exchange Commission for the issuance of the
corresponding certificate of incorporation.

On March 22, 1948, pending action on the articles of

incorporation by the SEC, respondents Fred Brown, Emma
Brown, Hipolita D. Chapman and Ceferino S. Abella filed a suit
against petitioners before the Court of First Instance of Leyte
alleging among other things that the Far Eastern Lumber and
Commercial Co. was an unregistered partnership; that they
wished to have it dissolved because of bitter dissension among
the members, mismanagement and fraud by the managers and
heavy financial losses.

The defendants in the suit, namely, C. Arnold Hall and Bradley P.

Hall, filed a motion to dismiss, contesting the court’s jurisdiction
and the sufficiency of the cause of action.

After hearing the parties, the Hon. Edmundo S. Piccio ordered the
dissolution of the company; and at the request of plaintiffs,
appointed the respondent Pedro A. Capuciong as receiver of the
properties thereof, upon the filing of a P20,000 bond.

The defendants therein (petitioners herein) offered to file a

counter-bond for the discharge of the receiver, but the
respondent judge refused to accept the offer and to discharge the
receiver.

ISSUE:

Whether or not the trial court has jurisdiction over the case?
 CASE DIGEST IN CORPORATION LAW (VOL. I)
SECTION 21
Albert vs. University Publishing Company, Inc.
DOCTRINE:
One who has induced another to act upon his willful
misrepresentation that a corporation was duly organized and
existing under the law, cannot thereafter set up against his victim
the principle of corporation by estoppel
FACTS:
15 years ago, Mariano Albert entered into a contract with
University Publishing Co., Inc. through Jose M. Aruego, its
President, whereby University would pay plaintiff for the
exclusive right to publish his revised Commentaries on the
Revised Penal Code. The contract stipulated that failure to pay
one installment would render the rest of the payments
due. When University failed to pay the second installment, Albert
sued for collection and won.
However, upon execution, it was found that the records of this
Commission do not show the registration of UNIVERSITY
PUBLISHING CO., INC., either as a corporation or
partnership. Albert petitioned for a writ of execution against Jose
M. Aruego as the real defendant. University opposed, on the
ground that Aruego was not a party to the case.
ISSUE:
WON the non-registration of University Publishing Co., Inc. in the
SEC is an existing corporation with an independent juridical
personality.
HELD:
NO. On account of the non-registration it cannot be considered a
corporation, not even a corporation de facto (Hall vs. Piccio, 86
Phil. 603). It has therefore no personality separate from Jose M.
Aruego; it cannot be sued independently.
In the case at bar, Aruego represented a non-existent entity and
induced not only Albert but the court to believe in such
representation. He signed the contract as “President” of
“University Publishing Co., Inc.,” stating that this was “a
corporation duly organized and existing under the laws of the
Philippines”.
“A person acting or purporting to act on behalf of a corporation
which has no valid existence assumes such privileges and
obligations and becomes personally liable for contracts entered
into or for other acts performed as such agent.”
Aruego, acting as representative of such non-existent principal,
was the real party to the contract sued upon, and thus assumed
such privileges and obligations and became personally liable for
the contract entered into or for other acts performed as such
agent.
The Supreme Court likewise held that the doctrine of corporation
by estoppel cannot be set up against Albert since it was Aruego
who had induced him to act upon his (Aruego’s) willful
representation that University had been duly organized and was
existing under the law.
Dispositive: The order appealed from is hereby set aside.
Lozano vs. De los Santos
Jurisdiction of SEC
FACTS:
Reynaldo Lozano was the president of KAMAJDA
(KapatirangMabalacat-Angeles Jeepney Drivers’ Association,
Inc.). Antonio Anda was the president of SAMAJODA (Samahang
Angeles-MabalacatJeepney Operators’ and Drivers’ Association,
Inc.). In 1995, the two agreed to consolidate the two
corporations, thus, UMAJODA (Unified Mabalacat-Angeles
Jeepney Operators’ and Drivers Association, Inc.).
In the same year, elections for the officers of UMAJODA were
held. Lozano and Anda both ran for president. Lozano won but
Anda alleged fraud and the elections and thereafter he refused to
participate with UMAJODA. Anda continued to collect fees from
members of SAMAJODA and refused to recognize Lozano as
president of UMAJODA. Lozano then filed a complaint for
damages against Anda with the MCTC of Mabalacat (and
Magalang), Pampanga. Anda moved for the dismissal of the case
for lack of jurisdiction. The MCTC judge denied Anda’s motion. On
certiorari, Judge Eliezer De Los Santos of RTC Angeles City
reversed and ordered the dismissal of the case on the ground that
what is involved is an intra-corporate dispute which should be
under the jurisdiction of the Securities and Exchange Commission
(SEC).
ISSUE:
Whether or not the RTC Judge is correct.
HELD:
NO. The regular courts have jurisdiction over the case. The case
between Lozano and Anda is not an intra-corporate dispute.
UMAJODA is not yet incorporated. It is yet to submit its articles of
incorporation to the SEC. It is not even a dispute between
KAMAJDA or SAMAJODA. The controversy between Lozano and
Anda does not arise from intra-corporate relations but rather
from a mere conflict from their plan to merge the two
associations.
The Securities and Exchange Commission has original and
exclusive jurisdiction to hear and decide cases involving:
(a) Devices or schemes employed by or any acts of the board of
directors, business associates, its officers or partners, amounting
to fraud and misrepresentation which may be detrimental to the
interest of the public and/or of the stockholders, partners,
members of associations or organizations registered with the
Commission.
(b) Controversies arising out of intracorporate or partnership
relations, between and among stockholders, members or
associates; between any or all of them and the corporation,
partnership or association of which they are stockholders,
members, or associates, respectively; and between such
corporation, partnership or association and the state insofar as it
concerns their individual franchise or right to exist as such entity.
(c) Controversies in the election or appointment of directors,
trustees, officers or managers of such corporations, partnerships
or associations.
 CASE DIGEST IN CORPORATION LAW (VOL. I)
(d) Petitions of corporations, partnerships or associations to be
declared in the state of suspension of payments in cases where
the corporation, partnership or association possesses sufficient
property to cover all its debts but foresees the impossibility of
meeting them when they respect very fall due or in cases where
the corporation, partnership or association has no sufficient
assets to cover its liabilities, but is under the management of a
Rehabilitation Receiver or Management Committee created
pursuant to this Decree."
NOTE: Regular courts can now hear intra-corporate disputes
(expanded jurisdiction).
International express travel and tour services vs. CA
Existence of Juridical Personality
FACTS:
In 1989, International Express Travel & Tour Services, Inc.
(IETTI), offered to the Philippine Football Federation (PFF) its
travel services for the South East Asian Games. PFF, through
Henri Kahn, its president, agreed. IETTI then delivered the plane
tickets to PFF, PFF in turn made a down payment. However,
PFF was not able to complete the full payment in subsequent
installments despite repeated demands from IETTI. IETTI then
sued PFF and Kahn was impleaded as a co-defendant.
Kahn averred that he should not be impleaded because he merely
acted as an agent of PFF which he averred is a corporation with
separate and distinct personality from him. The trial court ruled
against Kahn and held him personally liable for the said
obligation (PFF was declared in default for failing to file an
answer). The trial court ruled that Kahn failed to prove that
PFF is a corporation. The Court of Appeals however reversed the
decision of the trial court. The Court of Appeals took judicial
notice of the existence of PFF as a national sports association;
that as such, PFF is empowered to enter into contracts through
its agents; that PFF is therefore liable for the contract entered
into by its agent Kahn. The CA further ruled that IETTI is in
estoppel; that it cannot now deny the corporate existence of
PFF because it had contracted and dealt with PFF in such a
manner as to recognize and in effect admit its existence.
ISSUE:
Whether or not the Court of Appeals is correct.
HELD:
NO. PFF, upon its creation, is not automatically considered a
national sports association. It must first be recognized and
accredited by the Philippine Amateur Athletic Federation and the
Department of Youth and Sports Development. This fact was
never substantiated by Kahn. As such, PFF is considered as an
unincorporated sports association. And under the law, any
person acting or purporting to act on behalf of a corporation
which has no valid existence assumes such privileges and
becomes personally liable for contract entered into or for other
acts performed as such agent. Kahn is therefore personally liable
for the contract entered into by PFF with IETTI.
There is also no merit on the finding of the CA that IETTI is in
estoppel. The application of the doctrine of corporation by
estoppel applies to a third party only when he tries to escape
liability on a contract from which he has benefited on the
irrelevant ground of defective incorporation. In the case at bar,
IETTI is not trying to escape liability from the contract but rather
is the one claiming from the contract.
Macasaet vs. Co
FACTS:
Macasaet, a retired police officer assigned at the Western Police
District in Manila, sued Abante Tonite, a daily tabloid of general
circulation; its Publisher Allen A. Macasaet; its Managing Director
Nicolas V. Quijano; its Circulation Manager Isaias Albano; its
Editors Janet Bay, Jesus R. Galang and Randy Hagos; and its
Columnist/Reporter Lily Reyes. Macasaet is claiming damages
because of an allegedly libelous article petitioners published in
the June 6, 2000 issue of Abante Tonite. The RTC issued
summons on each defendant, including Abante Tonite, at their
business address at Monica Publishing Corporation.
RTC Sheriff Raul Medina proceeded to their address to effect the
personal service of the summons on the defendants. But his
efforts to personally serve each defendant in the address were
futile because the defendants were then out of the office and
unavailable. He returned in the afternoon of that day to make a
second attempt at serving the summons, but he was informed
that petitioners were still out of the office. Consequently, the
sheriff decided to resort to substituted service of summons.
Petitioners moved for the dismissal of the complaint alleging lack
of jurisdiction over their persons because of the invalid and
ineffectual substituted service of summons. They contended that
the sheriff had made no prior attempt to serve the summons
personally on each. They further moved to drop Abante Tonite as
a defendant by virtue of its being neither a natural nor a juridical
person that could be impleaded as a party in a civil action.
ISSUE:
WON Abante Tonite may be sued
HELD:
YES. The CA categorized Abante Tonite as a corporation by
estoppel as the result of its having represented itself to the
reading public as a corporation despite its not being
incorporated. Thereby, the CA concluded that the RTC did not
gravely abuse its discretion in holding that the non-incorporation
of Abante Tonite with the Securities and Exchange Commission
was of no consequence, for, otherwise, whoever of the public who
would suffer any damage from the publication of articles in the
pages of its tabloids would be left without recourse.
People vs. Garcia
FACTS:
In 1993, Carlos Garcia, Patricio Botero, and Luisa Miraples were
accused of illegal recruitment. It was alleged that they
represented themselves as the incorporators and officers of
Ricorn Philippine International Shipping Lines, Inc.; that Ricorn is
a recruitment agency for seamen; that Garcia is the president,
Botero is the vice-president, and Miraples (now at large) is the
treasurer. It was later discovered that Ricorn was never
registered with the Securities and Exchange Commission (SEC)
 CASE DIGEST IN CORPORATION LAW (VOL. I)
and that it was never authorized to recruit by the Philippine
Overseas Employment Agency (POEA). Botero and Garcia were
convicted. Botero appealed.
In his defense, Botero averred that he was not an incorporator;
that he was merely an employee of Ricorn in charge of following
up on their documents.
ISSUE:
WON Botero is merely an employee of Ricorn
HELD:
NO. He insists he was a mere applicant of Ricorn and not a
conspirator of the other accused who defrauded the
complainants. He claims that even as a Ricorn employee, he
merely performed “minimal activities” like following-up
applicants’ passports, seaman’s book and SOLAS, and conducting
simple interviews. He denies he had a hand in the selection of
workers to be employed abroad. These submissions are at war
with the evidence on record. His co-accused Garcia introduced
him to the complainants as the vice-president of Ricorn. He used
a table with a nameplate confirming he was the vice-president of
Ricorn. He procured the passports, seaman’s books and SOLAS
for the applicants. It was from him that the complainants
inquired about the status of their applications. 26 He also
admitted he gave money to accused Garcia for Ricorn’s
incorporation. Beyond any reasonable doubt, appellant Botero
engaged in recruitment and placement activities in that he,
through Ricorn, promised the complainants employment abroad.
The evidence shows that appellant Botero was one of the
incorporators of Ricorn. For reasons that cannot be discerned
from the records, Ricorn’s incorporation was not consummated.
Even then, appellant cannot avoid his liabilities to the public as
an incorporator of Ricorn. He and his co-accused Garcia held
themselves out to the public as officers of Ricorn. They received
money from applicants who availed of their services. They are
thus estopped from claiming that they are not liable as corporate
officials of Ricorn. 31 Section 25 of the Corporation Code
provides that “(a)ll persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as
general partners for all the debts, liabilities and damages
incurred or arising as a result thereof: Provided, however, That
when any such ostensible corporation is sued on any transaction
entered by it as a corporation or on any tort committed by it as
such, it shall not be allowed to use as a defense its lack of
corporate personality.” Appellant Botero is guilty of the crime of
illegal recruitment in a large scale considering it was proven that
he, together with his cohorts, were able to defraud the six
complainant-witnesses in this case.
SECTION 23
1. Management
Trader’s Royal Bank vs. CA
DOCTRINE: Showing that a Corp substantially owns the capital
and that their directors are the same in not enough to pierce the
corporate fiction.
FACTS:
Filriters Guaranty Assurance Corporation (FGAC) is the owner of
several Central Bank Certificates of Indebtedness (CBCI). These
certificates are actually proof that FGAC has the required reserve
investment with the Central Bank to operate as an insurer and to
protect third persons from whatever liabilities FGAC may incur.
In 1979, FGAC agreed to assign said CBCI to Philippine
Underwriters Finance Corporation (PUFC). Later, PUFC sold said
CBCI to Traders Royal Bank (TRB). Said sale with TRB comes
with a right to repurchase on a date certain. However, when the
day to repurchase arrived, PUFC failed to repurchase said CBCI
hence TRB requested the Central Bank to have said CBCI be
registered in TRB’s name. Central Bank refused as it alleged that
the CBCI are not negotiable; that as such, the transfer from FGAC
to PUFC is not valid; that since it was invalid, PUFC acquired no
valid title over the CBCI; that the subsequent transfer from PUFC
to TRB is likewise invalid.
TRB then filed a petition for mandamus to compel the Central
Bank to register said CBCI in TRB’s name. TRB averred that PUFC
is the alter ego of FGAC; that PUFC owns 90% of FGAC; that the
two corporations have identical sets of directors; that payment of
said CBCI to PUFC is like a payment to FGAC hence the sale
between PUFC and TRB is valid. In short, TRB avers that that the
veil of corporate fiction, between PUFC and FGAC, should be
pierced because the two corporations allegedly used their
separate identity to defraud TRD into buying said CBCI.
ISSUE
Is Traders Royal Bank is correct?
HELD
NO. Traders Royal Bank failed to show that the corporate fiction
is used by the two corporations to defeat public convenience,
justify wrong, protect fraud or defend crime or where a
corporation is a mere alter ego or business conduit of a person.
TRB merely showed that PUFC owns 90% of FGAC and that their
directors are the same. The identity of PUFC can’t be maintained
as that of FGAC because of this mere fact; there is nothing else
which could lead the court under the circumstance to disregard
their corporate personalities. Further, TRB can’t argue that it was
defrauded into buying those certificates. In the first place, TRB as
a banking institution is not ignorant about these types of
transactions. It should know for a fact that a certificate of
indebtedness is not negotiable because the payee therein is
inscribed specifically and that the Central Bank is obliged to pay
the named payee only and no one else.
 CASE DIGEST IN CORPORATION LAW (VOL. I)
2. Ratification
Aguenza vs. Metropolitant Bank and Trust Co.
DOCTRINE:
Authority of such officers or agents is derived from the Board of
Directors or other governing body unless conferred by the
charter of the corporation.
FACTS:
On March 21, 1978, private respondent VitaliadoArrieta, VP of
Intertrade, and Lilia P. Perez, a bookkeeper in the employ of
Intertrade, obtained a P500,000.00 loan from private respondent
Metrobank. Both executed a Promisorry Note in favor of the said
bank in the amount of P500,000. In the said note, private
respondents Arrieta and Perez promised to pay said amount,
jointly and severally, in twenty five (25) equal installments of
P20,000.00 each starting on April 20, 1979with interest of
18.704% per annum, and in case of default, a further 8% per
annum.
Private respondents Arrieta and Perez defaulted in the payment
of several installments, thus, resulting in the entire obligation
becoming due and demandable. In 1979, private respondent
Metrobank instituted suit against Intertrade, Vitaliado Arrieta,
Lilia Perez and her husband, Patricio Perez, to collect not only the
unpaid principal obligation, but also interest, fees, and penalties,
exemplary damages, as well as attorney’s fees and cost of suit.
More than a year after private respondent Metrobank filed its
original complaint, it filed an Amended Complaint dated Aug 30,
1980 for the sole purpose of impleading the petitioner as liable
for the loan made by private respondents Arrieta and Perez on
March 21, 1978, notwithstanding the fact that such liability is
being claimed on account of Continuing Suretyship Agreement
dated March 14, 1997 executed by petitioner and private
respondent Arrita specifically to guarantee the credit line applied
for by and granted to, Intertrade, through petitioner and private
respondent Arrita who were speciallygiven authority by
Intertrade on February 28, 1977 to open credit lines with private
respondent Metrobank. The obligations incurred by Intertrade
under such credit lines were completely paid as evidence by
private respondent Metrobank’s debit memo in the full amount of
P 562,443.46.
RTC ruled that petitioner and Intertrade are not liable for the
Promissory note was executed by Arrieta and Lilia Perez in the
amount of P500,000 as the same was personal liability of the
latter.
CA reversed the trial court and ordered Intertrade and Marketing
Co., Inc. and K Antonie Aguenza to pay, jointly and severally, the
promissory note contracted by Arrieta and Lilia Perez.
ISSUE:
Was the promissory note dated 21 March 1978 secured and
signed by Arrieta and Lilia Perez a corporate liability of
Intertrade and Aguenza?
HELD:
NO. Arrieta and Perez were never authorized by Intertrade
through a board resolution of the board of directors of intertrade
authorizing the former to transact said loan for and in behalf of
the corporation. It is well settled rule that a corporation transacts
its business only through its officers or agaents. And the
authority of such officers or agents is derived from the BOD or
other governing body unless conferred by the charter of the
corporation. It is to be noted that the promissory note dated
March 21 197 was signed by Arrieta and Lilia Perez only with
indication as to what capacity the two signatories had in affixing
their signatures thereon. There is no record that Intertrade
through its BOD, conferred upon Arrieta and Lilia Perez the
authority to contract a loan with Metrobank and execute the
promissory note as a security therefor.
Metrobank in turn never presented a board resolution nor a
stockholder’s resolution that Arrieta and Lilia perez were
empowered by Intertrade to execute the promissory note. Being
that the promissory note was not the responsibility Intertrade, if
follows that the same was not covered by the continuing
Suretyship Agreement
MWSS vs. CA
DOCTRINE:
So settled is the precept that ratification can be made by the
corporate board either 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. Both
modes of ratification have been made in this case.
FACTS:
Sometime in 1965, petitioner MWSS (then known as NAWASA)
leased around one hundred twenty eight (128) hectares of its
land (hereafter, subject property) to respondent CHGCCI
(formerly the International Sports Development Corporation) for
twenty five (25) years and renewable for another fifteen (15)
years or until the year 2005, with the stipulation allowing the
latter to exercise a right of first refusal should the subject
property be made open for sale. The terms and conditions of
respondent CHGCCI's purchase thereof shall nonetheless be
subject to presidential approval.
Pursuant to Letter of Instruction (LOI) No. 440 issued on July 29,
1976 by then President Ferdinand E. Marcos directing petitioner
MWSS to negotiate the cancellation of the MWSS-CHGCCI lease
agreement for the disposition of the subject property, Oscar
Ilustre, then General Manager of petitioner MWSS, sometime in
November of 1980 informed respondent CHGCCI, through its
president herein respondent Pablo Roman, Jr., of its preferential
right to buy the subject property which was up for sale. Valuation
thereof was to be made by an appraisal company of petitioner
MWSS' choice, the Asian Appraisal Co., Inc. which on January 30,
1981, pegged a fair market value of P40.00 per square meter or a
total of P53,800,000.00 for the subject property.
Upon being informed that petitioner MWSS and respondent
CHGCCI had already agreed in principle on the purchase of the
subject property, President Marcos expressed his approval of the
sale as shown in his marginal note on the letter sent by
respondents Jose Roxas and Pablo Roman, Jr. dated December 20,
1982.
 CASE DIGEST IN CORPORATION LAW (VOL. I)
The Board of Trustees of petitioner MWSS thereafter passed
Resolution 36-83, approving the sale of the subject property
in favor of respondent SILHOUETTE, as assignee of
respondent CHGCCI, at the appraised value given by Asian
Appraisal Co., Inc.
ISSUE:
whether or not there is a ratification by the board in this case?
RULING:
Pertinent to this issue is the claim of petitioner MWSS that Mr.
Ilustre was never given the authority by its Board of Trustees to
enter into the "initial agreement" of December 20, 1982 and
therefore, the sale of the subject property is invalid.
Petitioner MWSS misses the point. The perceived infirmity in the
"initial agreement" can be cured by ratification. So settled is the
precept that ratification can be made by the corporate board
either 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. Both modes of
ratification have been made in this case.
There was express ratification made by the Board of petitioner
MWSS when it passed Resolution No. 36-83 approving the sale of
the subject property to respondent SILHOUETTE and authorizing
Mr. Ilustre, as General Manager, "to sign for and in behalf of the
MWSS the contract papers and other pertinent documents
relative thereto." Implied ratification by "silence or acquiescence"
is revealed from the acts of petitioner MWSS in (a) sending three
(3) demand letters for the payment of the purchase price, (b)
accepting P25 Million as downpayment, and (c) accepting a letter
of credit for the balance, as hereinbefore mentioned. It may well
be pointed out also that nowhere in petitioner MWSS' complaint
is it alleged that it returned the amounts, or any part thereof,
covering the purchase price to any of the respondents-vendees at
any point in time. This is only indicative of petitioner MWSS'
acceptance and retention of benefits flowing from the sales
transactions which is another form of implied ratification.
3. Officers
Pandico (Manila), Inc. vs. Alto Electronics Corporation
DOCTRINE:
The general rule is that, in the absence of express restrictions on
his powers, with actual or constructive notice thereof to persons
dealing with him, an officer or agent of a corporation, entrusted
with the general management and control of its business, has
implied authority to make any contact or do any other act which
is necessary or appropriate to the conduct of the ordinary course
of business of the corporation.
FACTS:
In January 1954 plaintiff Pandico, Inc. through its president and
general manager Ira Svensgaard, was advised by Crisostomo
Chavez, general manager of defendant Alto Electronics
Corporation, that the latter had a number of unused import
licenses and that if plaintiff wished it could place orders with the
said defendant for electronic appliances and spare parts. Relying
on such, the plaintiff deposited with defendant the sum of P
17986 in 3 checks. Subsequently Chavez informed plaintiff that
the goods it had ordered could not be delivered. It turned out that
the import licenses of defendant had already expired. The
present action was commenced in the CFI of Manila for the
recovery of the sum of P 17986 plus damages and attorney’s fees.
ISSUE:
Whether or not the General Manager’s actions are binding on the
corporation?
RULING:
YES, The acceptance of a purchase order for merchandise in
which defendant was dealing in the ordinary course of business
was within his authority. The proviso that he shall be under the
general control and supervision of the President and BOD does
not change the situation at all, because the said proviso,
reasonably interpreted does not mean that before general
manager may act in every individual instance involving the usual,
ordinary business of defendant, he must first obtain the consent
and approval of these officers of the corporation.
Board of LIquidatos vs. Heirs of Kalaw
DOCTRINE:
Corporations; Implied authority of corporate officer to enter into
contracts.—A corporate officer, entrusted with the general
management and control of its business, has implied authority to
make any contract or do any other act which is necessary or
appropriate to the conduct of the ordinary business of the
corporation. As such officer, he may, without any special
authority from the Board of Directors, perform all acts of an
ordinary nature, which by usage or necessity are incident to his
office, and may bind the corporation by contracts in matters
arising in the usual course of business.
Where similar acts of manager were approved by directors.—
Where similar acts have been approved by the directors as a
matter of general practice, custom, and policy, the general
manager may bind the company without formal authorization of
the board of directors. In varying language, existence of such
authority is established by proof of the course of business, the
usages and practices of the company and by the knowledge which
the board of directors has, or must be presumed to have, of acts
and doings of its subordinates in and about the affairs of the
corporation. Where the practice of the corporation has been to
allow its general manager to negotiate and execute contracts in
its copra trading activities for and in Nacoco's behalf without
prior board approval, and the board itself, by its acts and through
acquiescence, practically laid aside the by-law requirement of
prior approval, the contracts of the general manager, under the
given circumstances, are valid corporate acts.
FACTS:
The National Coconut Corporation (NACOCO, for short) was
chartered as a non-profit governmental organization on May 7,
1940 by Commonwealth Act 518 avowedly for the protection,
preservation and development of the coconut industry in the
Philippines, On August 1, 1946, NACOCO's charter was amended
[Republic Act 5] to grant that corporation the express power "to
buy, sell, barter, export, and in any other manner deal in, coconut,
copra, and dessicated coconut, as well as their by-products, and
to act as agent, broker or commission merchant of the producers,
 CASE DIGEST IN CORPORATION LAW (VOL. I)
dealers or merchants" thereof. The charter amendment was
enacted to stabilize copra prices, to serve coconut producers by
securing advantageous prices for them, to cut down to a
minimum, if not altogether eliminate, the margin of middlemen,
mostly aliens.
General manager and board chairman was Maximo M. Kalaw;
defendants Juan Bocar and Casimiro Garcia were members of the
Board; defendant Leonor Moll became director only on December
22, 1947.
NACOCO, after the passage of Republic Act 5, embarked on copra
trading activities.Amongst the scores of contracts executed by
general manager Kalaw are the disputed contracts, for the
delivery of copra.
An unhappy chain of events conspired to deter NACOCO from
fulfilling the contracts it entered into. Nature supervened. Four
devastating typhoons visited the Philippines in 1947. When it
became clear that the contracts would be unprofitable, Kalaw
submitted them to the board for approval.
Kalaw made a full disclosure of the situation and apprised the
board of the impending heavy losses. No action was first taken on
the contracts but not long thereafter, the board met again with
Kalaw, Bocar, Garcia and Moll in attendance. They unanimously
approved several contracts.
As was to be expected, NACOCO but partially performed the
contracts. The buyers threatened damage suits, some of which
were settled. But one buyer, Louis Dreyfus & Go. (Overseas) Ltd.,
did in fact sue before the Court of First Instance of Manila. All the
settlements sum up to P1,343,274.52.
In this suit, NACOCO seeks to recover the above sum of
P1,343,274.52 from general manager and board chairman
Maximo M. Kalaw, and directors Juan Bocar, Casimiro Garcia and
Leonor Moll. It charges Kalaw with negligence under Article 1902
of the old Civil Code (now Article 2176, new Civil Code); and
defendant board members, including Kalaw, with bad faith
and/or breach of trust for having approved the contracts.
By Executive Order 372, NACOCO, together with other
government-owned corporations, was abolished, and the Board
of Liquidators was entrusted with the function of settling and
closing its affairs.
ISSUES:
1.) Whether plaintiff Board of Liquidators has lost its legal
personality to continue with the suit on the premise that since
the three year period has elapsed, the Board of Liquidators may
not now continue with, and prosecute, the present case to its
conclusion.
2.) Whether the case at bar is to be taken out of the general
concept of the powers of a general manager, given the cited
provision of the NACOCO 'by-laws requiring prior directorate
approval of NACOCO contracts.
RULING:
1. No. The Board of Liquidators has NOT lost its legal personality
to continue with the suit.
The provision in Sec. 1 Executive Order 372 should be read not as
an isolated provision but in conjunction with the whole. So
reading, it will be readily observed that no time limit has been
tacked to the existence of the Board of Liquidators and its
function of closing the affairs of the various government owned
corporations, including NACOCO.
The President thought it best to do away with the boards of
directors of the defunct corporations; at the same time, however,
the President had chosen to see to it that the Board of Liquidators
step into the vacuum. And nowhere in the executive order was
there any mention of the lifespan of the Board of Liquidators.
3 methods by which corporation may wind up it its affairs:
1. Upon voluntary dissolution, "such disposition of its assets as
justice requires, and may appoint a receiver to collect such assets
and pay the debts of the corporation;
2. Under Sec. 77 of the Corporation Law, corporate existence is
terminated - "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;"
3.Under Section 78 of the Corporation Law, by virtue of which the
corporation, within the three year period just mentioned, "is
authorized and empowered to convey all of its property to
trustees for the benefit of members, stockholders, creditors, and
others interested."
The Board of Liquidators escapes from the operation thereof for
the reason that "obviously, the complete loss of plaintiff's
corporate existence after the expiration of the period of three (3)
years for the settlement of its affairs is what impelled the President
to create a Board of Liquidators, to continue the management of
such matters as may then be pending."
By Executive Order 372, the government, the sole stockholder,
abolished NACOCO, and placed its assets in the hands of the
Board of Liquidators. The Board of Liquidators thus became
the trustee on behalf of the government. It was an express trust.
The legal interest became vested in the trustee — the Board of
Liquidators. The beneficial interest remained with the sole
stockholder — the government.
The provisions of Section 78 of the Corporation Law — the third
method of winding up corporate affairs — find application.
2.) A corporate officer "intrusted with the general management
and control of its business, has implied authority to make any
contract or do any other act which is necessary or appropriate to
the conduct of the ordinary business of the corporation. As such
officer, "he may, without any special authority from the Board of
Directors perform all acts of an ordinary nature, which by usage
or necessity are incident to his office, and may bind the
corporation by contracts in matters arising in the usual course of
business.
The movement of the market requires that sales agreements be
entered into, even though the goods are not yet in the hands of
the seller. Known in business parlance as forward sales, it is
concededly the practice of the trade. Above all, NACOCO's limited
funds necessitated a quick turnover. Copra contracts then had to
be executed on short notice — at times within twenty-four hours.
To be appreciated then is the difficulty of calling a formal meeting
of the board.
Settled jurisprudence has it that where similar acts have been
approved by the directors as a matter of general practice, custom,
 CASE DIGEST IN CORPORATION LAW (VOL. I)
and policy, the general manager may bind the company without
formal authorization of the board of directors. In varying
language, existence of such authority is established, by proof
of the course of business, the usage and practices of the company
and by the knowledge which the board of directors has, or must
be presumed to have, of acts and doings of its subordinates in and
about the affairs of the corporation.
In the case at bar, the practice of the corporation has been to
allow its general manager to negotiate and execute contracts in
its copra trading activities for and in NACOCO's
behalf without prior board approval. If the by-laws were to be
literally followed, the board should give its stamp of prior
approval on all corporate contracts. But that board itself, by its
acts and through acquiescence, practically laid aside the by-law
requirement of prior approval.
Under the given circumstances, the Kalaw contracts are valid
corporate acts. Bad faith does not simply connote bad judgment
or negligence; it imports a dishonest purpose or some moral
obliquity and conscious doing of wrong; it means breach of a
known duty thru some motive or interest or ill will; it partakes of
the nature of fraud. Applying this precept to the given facts
herein, the Supreme Court find that there was no "dishonest
purpose," or "some moral obliquity," or "conscious doing of
wrong," or "breach of a known duty," or "Some motive or interest
or ill will" that "partakes of the nature of fraud."
Nor was it even intimated here that the NACOCO
directors acted for personal reasons, or to serve their own
private interests, or to pocket money at the expense of the
corporation. Obviously, the board thought that to jettison Kalaw's
contracts would contravene basic dictates of fairness. They did
not think of raising their voice in protest against past contracts
which brought in enormous profits to the corporation. By the
same token, fair dealing disagrees with the idea that similar
contracts, when unprofitable, should not merit the same
treatment. The directors are not liable.
San Miguel Brewery, Inc. vs. Lifetime Enterprise, Inc.
DOCTRINE
Under the theory of implied authority, an officer or agent of a
private corporation entrusted with the general management and
control of its business and affairs, has implied or apparent
authority to do acts or make contracts in its behalf falling within
the scope of the ordinary and usual business of the company, and
limitations and restrictions placed upon his express or implied
authority, of which persons dealing with him have neither actual
nor constructive notice, will not with him have neither actual nor
constructive notice, will not serve to restrict such powers to the
prejudice of innocent third persons.
FACTS:
Eliseo A. Arandia, Jr. (Arandia), general manager of the Lifetime
Enterprises, Inc., applied in behalf of said corporation for a credit
line in the purchase of beer products with the San Miguel
Brewery, Inc. (San Miguel), which application was approved on
the same date by the latter corporation.
The credit line is secured by a surety bond executed by Arandia,
in his capacity as general manager of Lifetime Enterprises, Inc.
(Lifetime), as principal, and The House of Insurance, Inc.(House
of Insurance), as surety, in which bond the aforesaid parties
bound themselves jointly and severally liable for credit purchases
that the principal might make with the San Miguel Brewery, Inc.
to the extent or P20, 000.00.
Arandia ordered and received beer products in the aggregate
sum of P20, 000.00.
San Miguel, thru its assistant vice-president, wrote a letter to the
Lifetime Enterprises, Inc. and The House of Insurance requesting
that the said amount be paid as it was already overdue.
Having failed to receive any reply to these demand letters, San
Miguel then sent its collector to the offices of Lifetime, but no
payment was made as Arandia was always out of the office.
San Miguel instituted an action for collection against Lifetime and
House Insurance.
Lifetime disclaimed liability asserting that Arandia acted beyond
the scope of his authority in entering into the transactions in
question.
The Court of First Instance of Manila rendered its decision in
favor of San Miguel. Only Lifetime appealed the judgment.
ISSUE:
Whether or not Eliseo A. Arandia, Jr., general manager of
appellant corporation, had the power or authority to enter into
the contracts in question for and in behalf of said corporation.
HELD:
Under the by-laws of the appellant corporation, Arandia, had no
express power or authority to enter into the contracts in
question, the power to do so being conferred pon the president.
And the record does not show either that he was authorized by
the Board of Directors or the President to execute said contracts
in behalf of the corporation. Be that as it may, the lack of express
power in the general manager is not the decisive factor that is
determinative of the binding effect of such contracts upon the
corporation.
Under the theory of implied authority, an officer or agent of a
private corporation entrusted with the general management and
control of its business and affairs, has implied or apparent
authority to do acts or make contracts in its behalf falling within
the scope of the ordinary and usual business of the company, and
limitations and restrictions placed upon his express or implied
authority, of which persons dealing with him have neither actual
nor constructive notice, will not with him have neither actual nor
constructive notice, will not serve to restrict such powers to the
prejudice of innocent third persons. However, the theory of
implied authority in a general manager of a corporation will be
sustained only where the subject matter of his act is something
that arises in the conduct of the ordinary business of the
corporation.
Consequently, contract executed by a general manager,
apparently within the course and scope of his duties and powers
and in line of the company’s business is prima facie binding on
the company, without authorization from the board of directors,
irrespective of what the express authority of such an agent may
be, and this is especially true where he has executed similar
contracts before without objection.
In the instant case, there is no showing that the corporation is
engaged in liquor or similar business. On the contrary, its very
charter would show that it has been organized, PRIMARILY, “to
carry on the business of acting as a general agent for insurance
 CASE DIGEST IN CORPORATION LAW (VOL. I)
companies doing business in the Philippines,” and secondarily,
“to engage in embroidery industry.”
The purchase of beer products in large scale can hardly be
considered as necessary to, and customary and usual, in the
performance of the duties to be discharged by the general
manager or within the scope of the business of Lifetime.
As a result, it cannot validly be argued that said transaction falls
within the implied authority of the general manager so as to be
prima facie binding upon Lifetime, especially so because it is not
even pretended that he had, previous to the transaction in issue,
entered into similar contracts with San Miguel, in which
eventuality, San Miguel could maintain that it has been misled
into believing that Arandia is clothed with authority to execute
the contract.
It being the first transaction between San Miguel and Arandia,
San Miguel could have inquired into the authority of Arandia to
bind Lifetime.
Having failed to exercise this precaution, San Miguel could not
enforce the contract against Lifetime, which from all indications,
did not derive any benefit from the transaction.
Lifetime cannot be held liable to San Miguel for the value of the
beer products purchased on credit by Arandia.
Having acted without authority from Lifetime in making the
purchase, Arandia is liable in his personal capacity; but since he
is not a party to the case, no judgment can be enforced.
San Miguel may, nevertheless, enforce the lower court’s judgment
against defendant The House of Insurance, Inc., which did not
appeal therefrom.
SECTION 29
Valle Verde Country Club, Inc. vs. Africa
LAWS RELATED:
(This case is under Sec. 29 under the Syllabus of Atty. Jimenez but
is deeply imbedded with Sec. 23 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.
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
DOCTRINE:
Pursuant to law particularly Sec. 29, the authority to fill in the
vacancy caused by Makalintal’s leaving lies with the VVCC’s
stockholders, not the remaining members of its board of
directors. To assume – as VVCC does – that the vacancy is caused
by Makalintal’s 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 Makalintal’s term had been
created long before his resignation.
FACTS
On February 27, 1996, during the Annual Stockholders’ Meeting
of petitioner Valle Verde Country Club, Inc. (VVCC), the VVCC
Board of Directors were elected including Eduardo Makalintal
(Makalintal) among others. 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
directors continued to serve in the VVCC Board in a hold-over
capacity. Later, Makalintal 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 March
6, 2001.
Respondent Africa (Africa), a member of VVCC, questioned the
election of Ramirez as members of the VVCC Board with the
Regional Trial Court (RTC), respectively. Africa claimed that a
year after Makalintal’s election as member of the VVCC Board in
1996, his [Makalintal’s] term – as well as those of the other
members of the VVCC Board – should be considered to have
 CASE DIGEST IN CORPORATION LAW (VOL. I)
already expired. Thus, according to Africa, 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. The RTC
sustained Africa’s complaint.
ISSUE:
Whether or not the remaining directors of the corporation’s
Board, still constituting a quorum, can elect another director to
fill in a vacancy caused by the resignation of a hold-over director.
RULING:
NO. When Section 23of the Corporation Code declares that “the
board of directors…shall 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 member’s election to the Board
and until his successor’s election and qualification – is not part of
the director’s 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.
Here, when remaining members of the VVCC Board elected
Ramirez to replace Makalintal, there was no more unexpired
term to speak of, as Makalintal’s one-year term had already
expired. Pursuant to law particularly Sec. 29, the authority to
fill in the vacancy caused by Makalintal’s leaving lies with
the VVCC’s stockholders, not the remaining members of its
board of directors. To assume – as VVCC does – that the
vacancy is caused by Makalintal’s 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 Makalintal’s term had been created long before
his resignation.
SECTION 31
Montelibano vs. Bacolod-Murcia Milling Company, Inc.
LAW RELATED:
Sec. 31. Liability of directors, trustees or officers. - Directors or
trustees who willfully and knowingly vote for or assent to
patently unlawful acts of the corporation or who are guilty of
gross negligence or bad faith in directing the affairs of the
corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees shall be
liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and
other persons.
When a director, trustee or officer attempts to acquire or
acquires, in violation of his duty, any interest adverse to the
corporation in respect of any matter which has been reposed in
him in confidence, as to which equity imposes a disability upon
him to deal in his own behalf, he shall be liable as a trustee for the
corporation and must account for the profits which otherwise
would have accrued to the corporation
DOCTRINE:
The resolution in question was passed in good faith by the board
of directors, it is valid and binding, and whether or not it will
cause losses or decrease the profits of the central, the court has
no authority to review them.
FACTS:
Montelibano et al. are sugar planters adhered to the Bacolod-
Murcia Milling Co., Inc’s sugar central mill under identical milling
contracts originally executed in 1919. In 1936, it was proposed to
execute amended milling contracts, increasing the planters’ share
of the manufactured sugar, besides other concessions. To this
effect, a printed Amended Milling Contract form was drawn up.
The Board of Directors of Bacolod-Murcia Milling Co., Inc.
adopted a resolution granting further concessions to the planters
over and above those contained in the printed Amended Milling
Contract on August 10, 1936.
The printed Amended Milling Contract was signed by the
Appellants on September 10, 1936, but a copy of the resolution
was not attached to the printed contract until April 17, 1937.
In 1953, the appellants initiated an action, contending that
three(3) Negros sugar centrals had already granted increased
participation to their planters, and that under paragraph 9 of
the resolution of August 20, 1936, the appellee had become
obligated to grant similar concessions to the appellants herein.
The Bacolod-Murcia Milling Co., inc., resisted the claim, urging
that the resolution in question was null and void ab initio, being
in effect a donation that was ultra vires and beyond the powers of
the corporate directors to adopt.
ISSUE:
Whether or not the act of the Board was ultra vires?
HELD:
 CASE DIGEST IN CORPORATION LAW (VOL. I)
NO. The resolution in question was passed in good faith by
the board of directors, it is valid and binding, and whether or
not it will cause losses or decrease the profits of the central,
the court has no authority to review them.
It is a well-known rule of law that questions of policy or
of management are left solely to the honest decision of officers
and directors of a corporation, and the court is without authority
to substitute its judgment of the board of directors; the board is
the business manager of the corporation, and so long as it acts in
good faith its orders are not reviewable by the courts.
It must be remembered that the controverted resolution was
adopted by appellee corporation as a supplement to, or further
amendment of, the proposed milling contract, and that it was
approved on August 20, 1936, twenty-one days prior to the
signing by appellants on September 10, of the Amended Milling
Contract itself; so that when the Milling Contract was executed,
the concessions granted by the disputed resolution had been
already incorporated into its terms.
Tramat Mercantile Inc. And David Ong vs. Hon. Court of
Appeals and Melchor De La Cuesta
DOCTRINE:
Liability of directors, trustees or officers- Directors or trustees
who wilfully and knowingly vote for or assent to patently
unlawful acts of the corporation or who are guilty of gross
negligence ot bad faith in directing the affairs of the corporation
or acquire any personal or pecuniary interest in conflict with
their duty as such directors or trustees shall be liable jointly and
severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons.
FACTS:
Melchor De La Cuesta doing business under the name and style of
"Farmers Machineriessold a Hinomoto Tractor to Tramat
corporation. David Ong (president of Tramat) paid De La Cuesta a
P33,500 check.. Tramat modified the tractor and made it into a
lawn mower and subsequently sold the same to NAWASA for
P67,000. Then NAWASA refused to pay Tramat for the tractor
saying that it had defects and that the tractor engine is
reconditioned. Tramat through David Ong subsequently caused a
stop payment of the check paid to De La Cuesta.
De La Cuesta filed an action for recovery of P33,500. Ong, in his
answer said that de la Cuesta had no cause of action; that the
questioned transaction was between plaintiff and Tramat
Mercantile, Inc., and not with Ong in his personal capacity; and
that the payment of the check was stopped because the subject
tractor had been priced as a brand new, not as a reconditioned
unit.
The trial court ruled that ordered respondent to jointly and
severally pay the plaintiff the sum of P33,500. The CA affirmed
the decision.
ISSUE:
Whether or not petitioners should be held solidarily liable.
HELD:
The court did not find any reason to reverse the findings of the
previous courts particularly in holding that the contract between
de la Cuesta and TRAMAT was one of absolute, not conditional,
sale of the tractor and that de la Cuesta did not violate any
warranty on the sale of the tractor to TRAMAT.
We sustain the trial court's finding that at the time f the purchase,
the appellants did not reveal to the appellee the true purpose for
which the tractor would be used. Granting that the appellants
informed the appellee that they would be reselling the unit to the
MWSS, an entity admittedly not engaged in farming, and that they
ordered the tractor without the power tiller, an indispensable
accessory if the tractor would be used in farming, these in
themselves would not constitute the required implied notice to
the appellee as seller.
It was, nevertheless, an error to hold David Ong jointly and
severally liable with TRAMAT to de la Cuesta under the
questioned transaction. Ong had there so acted, not in his
personal capacity, but as an officer of a corporation, TRAMAT,
with a distinct and separate personality. As such, it should only
be the corporation, not the person acting for and on its behalf,
that properly could be made liable thereon.
Personal liability of a corporate director, trustee or officer along
(although not necessarily) with the corporation may so validly
attach, as a rule, only when —
1. He assents
(a) to a patently unlawful act of the corporation, or
(b) for bad faith, or gross negligence in directing its affairs, or
(c) for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;4
2. He consents to the issuance of watered stocks or who,
having knowledge thereof, does not forthwith file with the
corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily
liable with the corporation; or
4. He is made, by a specific provision of law, to personally
answer for his corporate action.
C.H Steinberg vs. Gregorio Velasco
DOCTRINE:
Liability of directors, trustees or officers- Directors or trustees
who wilfully and knowingly vote for or assent to patently
unlawful acts of the corporation or who are guilty of gross
negligence ot bad faith in directing the affairs of the corporation
or acquire any personal or pecuniary interest in conflict with
their duty as such directors or trustees shall be liable jointly and
severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons.
FACTS:
Steinberg is the receiver of Sibuguey Trading Corp. He alleges
that [Velasco, as president, Del Castillo, as vice-president,
Navallo, as secretary-treasurer, and Manuel, as director of the
trading Company, at a meeting of the board of directors held on
July 24, 1922, approved and authorized various lawful purchases
already made of a large portion of the capital stock of the
company from its various stockholders, thereby diverting its
funds to the injury of the creditors of the corp. At the time of such
 CASE DIGEST IN CORPORATION LAW (VOL. I)
purchase, the corporation had debts amounting to P13,807.50,
most of which were unpaid at the time petition for the
dissolution of the corporation was financial condition, in
contemplation of an insolvency and dissolution. Steinberg also
alleges that Manuel approved a resolution for the payment of
P3,000 as dividends to its stockholders, which was done in bad
faith, and to the injury and fraud of its creditors since it had
accounts less in amount than the accounts receivable. Sibuguey
Trading Company Inc. argues that the distribution of dividends
was authorized by the board of directors and they constitute
surplus profit of the corp.
Plaintiff prays judgment for the sum of P3,300 from the
defendants Gregorio Velasco, Felix del Castillo, Andres L. Navallo
and Rufino Manuel, personally as members of the Board of
Directors, or for the recovery from the defendants S. R. Ganzon, of
the sum of P1,000, from the defendant Felix D. Mendaros, P2,000,
and from the defendant Dionisio Saavedra, P100, and under his
second cause of action, he prays judgment for the sum of P3,000,
with legal interest against the board of directors, and costs. The
lower court found out that Sibuguey Trading Company Inc.
authorized the purchase of, purchased and paid for, 330 shares of
the capital stock of the corporation at the agreed price of P3,300,
and that at the time the purchase was made, the corporation was
indebted in the sum of P13,807.50, and that according to its
books, it had accounts receivable in the sum of P19,126.02.
ISSUE:
Whether Sibuguey Trading Corporation can declare dividends.
RULING:
NO. The action of the board in purchasing the stock from the
corporation and in declaring the dividends on the stock was all
done at the same meeting of the board of directors. The directors
were permitted to resign so that they could sell their stock to the
corporation. The authorized capital stock was P20,000 divided
into 2,000 shares of the par value of P10 each, which only
P10,030 was subscribed and paid. Deducting the P3,300 paid for
the purchase of the stock, there would be left P7,000 of paid up
stock, from which deduct P3,000 paid in dividends, there would
be left P4,000 only. Sibuguey Trading Company Inc. acted on
assumption that it appeared from the books of the corporation
that it had accounts receivable of the face value of P19,126.02,
therefore it had a surplus over and above its debts and liabilities.
However, there is no stipulation as to the actual cash value of
those accounts, and it does appear from the stipulation that,
P12,512.47 of those accounts had but little value. The
corporation did not then have an actual bona fide surplus from
which the dividends could be paid, and that the payment of them
in full at the time would affect the financial condition of the
corporation. Because of this, the directors did not act in good
faith or that they were grossly ignorant of their duties. Creditors
of a corporation have the right to assume that so long as there are
outstanding debts and liabilities, the board of directors will not
use the assets of the corporation to purchase its own stock, and
that it will not declare dividends to stockholders when the
corporation is insolvent.
The officers acted negligently and are liable. The court cited the
following:
“Upon each of those points, the rule is well stated in Ruling Case
Law, vol. 7, p. 473, section 454 where it is said: General Duty to
Exercise Reasonable Care. — The directors of a corporation are
bound to care for its property and manage its affairs in good faith,
and for a violation of these duties resulting in waste of its assets
or injury to the property they are liable to account the same as
other trustees. Are there can be no doubt that if they do acts
clearly beyond their power, whereby loss ensues to the
corporation, or dispose of its property or pay away its money
without authority, they will be required to make good the loss
out of their private estates. This is the rule where the disposition
made of money or property of the corporation is one either not
within the lawful power of the corporation, or, if within the
authority of the particular officer or officers.
And section 458 which says: Want of Knowledge, Skill, or
Competency. — It has been said that directors are not liable for
losses resulting to the corporation from want of knowledge on
their part; or for mistake of judgment, provided they were
honest, and provided they are fairly within the scope of the
powers and discretion confided to the managing body. But the
acceptance of the office of a director of a corporation implies a
competent knowledge of the duties assumed, and directors
cannot excuse imprudence on the ground of their ignorance or
inexperience; and if they commit an error of judgment through
mere recklessness or want of ordinary prudence or skill, they
may be held liable for the consequences. Like a mandatory, to
whom he has been likened, a director is bound not only to
exercise proper care and diligence, but ordinary skill and
judgment. As he is bound to exercise ordinary skill and judgment,
he cannot set up that he did not possess them.”
CONSOLIDATED BANK & TRUST CORPORATION (Solidbank)
v. CA, F. ANTONIO M. ANDAL and ANTONIO ROXAS CHUA
DOCTRINE:
Officers who assigned the receivables of their corporation to
bank, collected payment from their debtors and did not remit the
money to the bank are liable to the bank.
FACTS:
The plaintiff filed a complaint for Recovery of a Sum of Money with
Prayer for Preliminary Attachment against the United Pacific
Leasing and Financing Corporation (UPLFC) and Antonio M.
Andal and his spouse.
The plaintiff claimed that by virtue of a "Term Loan Line" granted
to UPLFC, defendants were able to loan an aggregate amount of
20 million (although only 16 million was actually loaned) from
them. In exchange, the defendants executed in favor of
complainant Deeds of Assignment of various receivables in favor
of UPLFC to be applied to the payment of the loan; however,
despite several demands, the defendants failed to pay their
obligation.
The plaintiff alleged that defendants committed fraudulent acts
because they never informed their account debtors of the fact of
assignments of their debts to the plaintiff bank, nor remitted the
proceeds or collection of the receivables to the plaintiff bank,
appropriating the same for their own use and benefit to the
damage and prejudice of the plaintiff bank. Accordingly, this is a
ground for attachment.
RTC granted the prayer for preliminary attachment. Later on, the
other Board of Directors of UPLFC (including Antonio Roxas
Chua) and their respective wives were also impleaded in order to
bind their separate conjugal partnerships on the ground that
these had benefited from the acts complained of. Hence, the
defendants moved to dismiss the complaint and to lift the order
of attachment for (a) lack of privity of contract between them and
 CASE DIGEST IN CORPORATION LAW (VOL. I)
the plaintiff, (b) defendant corporation has a legal personality
distinct and separate from that of its
stockholders/officers/directors and (c) there is no legal basis for
the alleged solidary liability of the defendants.
The trial court dissolved the writ of attachment as to the spouses
of individual defendants but denied the motion to dismiss
because it will require presentation of evidence before it could be
resolved. On the other hand, the CA decided in favor of the
defendants principally because the complainant has no fiduciary
relationship with the individual defendants for it to pray for
preliminary attachment; hence, no allegation has been made to
that effect in the complaint. The individual defendants were
neither public officers nor were they related to Solidbank in any
manner as officers, attorneys, factors or the like.
ISSUES:
1. W/N the complaint sufficiently stated a cause of action.
2. W/N the writ of preliminary attachment was validly issued.
HELD:
1. YES. As suggested by Sutherland, the following questions may
be used as a guide to determine the sufficiency of a cause of
action: (1) Does the complaint show that the plaintiff has suffered
an injury? (2) Is it an injury which the law recognizes as a wrong
and for which it provides a remedy? (3) Is the defendant liable
for the alleged wrong done? (4) If the defendant is liable, to what
extent is he liable, and what will be the legal remedy for such
injury?
It has been hypothetically admitted that Solidbank has been
prejudiced in the amount of P16,381,889.53, which represents
the total obligation under the various promissory notes UPLFC
executed in its favor. This obligation is legally demandable.
Moreover, although it is conceded to be a corporate debt for
which the corporate officers and stockholders cannot
ordinarily be held personally liable, the complaint contained
the allegation that the officers of UPLFC had fraudulently
collected from their debtors the accounts which they had
previously assigned to Solidbank and failed to remit the same
to the latter. If this is true, then they can be held personally
liable in accordance with Sec. 31 of the Corporation Code,
which states that:
Sec. 31. Liability of directors, trustees or officers.—Directors or
trustees who wilfully and knowingly vote for or assent to patently
unlawful acts of the corporation, or who are guilty of gross
negligence or bad faith in directing the affair of the corporation or
acquire any personal or pecuniary interest or conflict with their
duty as such directors or trustees shall be liable jointly and
severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons.
2. YES. There is nothing in section 1(b) of Rule 57 of the Rules of
Court which would make a Writ of Preliminary Attachment
inapplicable in the absence of fiduciary relationship between the
complainant and the defendant.
When the embezzlement of money or property is committed by
a defendant who is a public officer, or an officer of a
corporation, or is an attorney, factor, broker or agent or clerk
of the plaintiff, it is not necessary to establish his fiduciary
capacity as this is assumed from the nature of his position.
According to Francisco in his authoritative work, it is only when
the misappropriation was committed by any other person (i.e.,
other than those mentioned above) that his fiduciary relationship
with the plaintiff will have to be established.
It is pointless therefore to insist that there is no fiduciary
relationship between Solidbank and the defendants, who are
officers not of Solidbank but of UPLFC. This argument is
immaterial. Such a relationship does not have to be shown
because it suffices that the questioned acts were committed by
the officers of UPLFC in the course of their duties and not by "any
other person in a fiduciary capacity."
WHEREFORE, the challenged orders of the respondent court dated
June 2, 1987 and July 13, 1987, are MODIFIED, and a new judgment
is entered:
(1) in G.R. No. 84659, AFFIRMING the denial of the motion to
dismiss the complaint; and
(2) in G.R. No. 84588, REVERSING the lifting of the writ of
preliminary attachment, which is hereby REINSTATED, subject to
the posting of the required bond, pending trial of the complaint on
the merits.
SO ORDERED.
COASTAL PACIFIC TRADING, INC. v. SOUTHERN ROLLING
MILLS, INC. (now known as Visayan Integrated Steel
Corporation), et al.
DOCTRINE:
Directors owe loyalty and fidelity to the corporation they serve
and to its creditors. When these directors sit on the board as
representatives of shareholders who are also major creditors,
they cannot be allowed to use their offices to secure undue
advantage for those shareholders, in fraud of other creditors who
do not have a similar representation in the board of directors.
FACTS:
Respondent, VISCO, obtained a loan from Development Bank of
the Philippines (DBP) which was secured by a duly recorded real
estate mortgage over its 3 parcels of land, including all the
machineries and equipment found there.
Later on, it also entered into a Loan Agreement with respondent
banks (referred to as Consortium) to finance its importation of
various raw materials. It then executed a second mortgage over
the same land, machineries and equipment in favor of the
respondent banks; however, this second mortgage remained
unrecorded; however, it defaulted in the performance of its
obligation which prompted the Consortium to file a Petition for
Foreclosure of Mortgage with Petition for Receivership which was
later dismissed for failure to prosecute.
Afterwards, negotiations were conducted between VISCO and
respondent banks for the conversion of the unpaid loan into
equity in the Corporation. As a result, respondent bank acquired
more than 90 percent of VISCO's equity. Notwithstanding this
conversion, it remained indebted to the Consortium.
Meanwhile, VISCO entered into a Processing Agreement with
petitioner Coastal Pacific Trading, Inc. (Pacific) to deliver 3,000
metric tons of hot rolled steel coils to VISCO which should
processed them into block iron sheets; however, VISCO was able
to process only 1,600 metric tons of those sheets.
 CASE DIGEST IN CORPORATION LAW (VOL. I)
from the filing of [the] [C]omplaint, plus attorneys fees of P50,000
To pay its first mortgage with DBP, VISCO sold 2 of its generators and x x x the costs. Respondent Consortium of Banks is further
to Filmagso that the proceeds could be utilized to pay DBP (i.e. ordered to pay petitioner exemplary damages in the amount
Filmag to pay VISCO; VISCO to pay the Consortium; Consortium of P250,000.
to pay DBP). DBP executed a Deed of Assignment of the mortgage
in favor of the Consortium. The Consortium foreclosed the SO ORDERED.
mortgage and was the highest bidder in an auction sale of
VISCO's properties. The Consortium later sold the properties in
favor of the National Steel Corporation (NSC).

Consequently, petitioner files a civil action for Annulment or

Rescission of Sale, Damages with Preliminary Injunction. Coastal
imputes bad faith on the auction of the Consortium, the latter
being able to sell the properties of VISCO despite the attachment
of the properties, placing them beyond the reach of VISCO's other
creditors.

The lower court ruled in favor of VISCO declaring the sale valid
and legal. The CA affirmed this.

ISSUE:

W/N the consortium disposed VISCO's assets in fraud of

creditors.

HELD:

YES. What the consortium did was to pay to them the proceeds
from the sale of the generator sets which, in turn, they used to
pay DBP. Due to the Deed of Assignment issued by DBP, the
respondent banks recovered what they remitted to DBP and it
allowed the consortium to acquire DBP's primary lien on the
mortgaged properties. This also allowed them as unsecured
creditors (as the mortgage was unrecorded) to foreclose on the
assets of the corporation without regard to inferior claims.

Hence, the assignment in favor of the Consortium was a

rescissible contract for having been undertaken in fraud of
creditors. Indeed, mutual restitution is required in all cases
involving rescission. But when it is no longer possible to return
the object of the contract as it is in this case since VISCO’s
properties have been sold to NSC already which is in good faith,
an indemnity for damages operates as restitution.

As directors of VISCO, the officials of the Consortium were in a

position of trust; thus, they owed it a duty of loyalty. This trust
relationship sprang from the fact that they had control and
guidance over its corporate affairs and property.Their duty
was more stringent when it became insolvent or without
sufficient assets to meet its outstanding obligations that
arose. Because they were deemed trustees of the creditors in
those instances, they should have managed the corporations
assets with strict regard for the creditors interests. When
these directors became corporate creditors in their own right,
they should not have permitted themselves to secure any
undue advantage over other creditors. In the instant case, the
Consortium miserably failed to observe its duty of fidelity
towards VISCO and its creditors.

WHEREFORE, the Petition is GRANTED. The assailed Decision of

the Court of Appeals dated September 27, 1994, and its Resolution
dated January 5, 1995, are hereby REVERSED and SET
ASIDE. Respondent Consortium of Banks is ordered
to PAY Petitioner Coastal Pacific Trading, Inc., the sum adjudged
by the Regional Trial Court of Pasig, Branch 167, in Civil Case No.
21272 entitled Coastal Pacific Trading, Felix de la Costa, and
Aurora del Banco v. Visayan Integrated Corporation, to wit:
x x x the sum of P851,316.19 with interest thereon at the legal rate
 CASE DIGEST IN CORPORATION LAW (VOL. I)
enrich himself at the expense of the corporation. There is no
showing that the stockholders ratified the "dealership
SECTION 32 agreement" or that they were fully aware of its provisions. The
contract was therefore not valid and this Court cannot allow him
Prime white Cement Corporation vs. IAC to reap the fruits of his disloyalty

Doctrine:

Section 32 substantially incorporates well-settled principles in

corporate law, and is applicable in cases filed prior the
implementation of Corporation Code. Further, it provides that 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.

FACTS:

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 whereby Alejandro Te was obligated to act as the
exclusive dealer and/or distributor of the Prime White Cement
Corporation of its cement products in the entire Mindanao area
for a term of five (5) years for P9.70 per bag. Hence, Te placed an
advertisement in a national circulating newspaper of said fact.
Further, relying from the said contract, he 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.

Te sent a letter to the corporation informing the latter that he is

already preparing the necessary letter of credit. In reply, the
Corporate Secretary informed of him of some conditions and
changes to the contract - that only 8,000 bags per month will be
delivered at the price of 13.30 per bag. Consequently, he sent a
demand to comply with the dealership agreement.

Notwithstanding that the dealership agreement between the

plaintiff and defendant was in force and subsisting, the
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.

The lower court ruled in Te’s favor because, accordingly, Falcon

and Trazo created the impression that they were duly clothed
with the authority to enter into a contract.

Hence, this appeal, the Corporation alleged that the said contract
cannot bind them because there was no prior authorization from
the Board.

ISSUE:

Whether or not the "dealership agreement" referred by the

President and Chairman of the Board of petitioner corporation is
a valid and enforceable contract?

HELD:

NO. The court does not agree with the trial court. As director,
especially 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. However, it is clear that he was guilty
of disloyalty to the corporation; he was attempting in effect, to
 CASE DIGEST IN CORPORATION LAW (VOL. I)
SECTION 33
DBP vs. CA
Doctrine:
Directors of insolvent corporation, who are creditors of the
company, cannot secure to themselves any preference or
advantage over other creditors in the payment of their claims.
The governing body of officers thereof are charged with the duty
of conducting its affairs strictly in the interest of its existing
creditors, and it would be a breach of such trust for them to
undertake to give any one of its members any advantage over any
other creditors in securing the payment of his debts in preference
to all others. The legal principle prevents directors of an
insolvent corporation from giving themselves a preference over
outside creditors.
FACTS:
Marinduque Mining obtained from the Philippine National Bank
(PNB) various loan accommodations. To secure the loans,
Marinduque Mining executed on October 9, 1978 a Deed of Real
Estate Mortgage and Chattel Mortgage in favor of PNB. The
mortgage covered all of Marinduque Minings real properties,
located at Surigao del Norte, Sipalay, Negros Occidental, and at
Antipolo, Rizal, including the improvements thereon. Further, it
executed a second Mortgage Trust Agreement in favor of PNB
and DBP covering the same properties. Due to the failure to settle
obligation, PNB and DBP instituted an extra-judicial foreclosure
proceedings over the mortgaged properties. Therafter, PNB and
DBP was declared to be the highest bidder.
Presidential Decree No. 385 (The Law on Mandatory
Foreclosure).
The doctrine of piercing the veil of corporate fiction applies only
when such corporate fiction is used to defeat public convenience,
justify wrong, protect fraud or defend crime. To disregard the
separate juridical personality of a corporation, the wrongdoing
must be clearly and convincingly established. It cannot be
presumed. In this case, the Court finds that Remington failed to
discharge its burden of proving bad faith on the part of
Marinduque Mining and its transferees in the mortgage and
foreclosure of the subject properties to justify the piercing of the
corporate veil.
There was no bad faith when DBP created new corporations
under their control because it is but practical, the creation of
these new corporations was necessary to manage and operate
the assets acquired in the foreclosure sale lest they deteriorate
from non-use and lose their value. Further, these assets cannot be
reallocated because many of these assets are heavy equipment
and it may have been impossible to move them. The same
reasons of convenience and practicality, not to mention
efficiency, justified the hiring by Nonoc Mining, Maricalum and
Island Cement of Marinduque Minings personnel to manage and
operate the properties and to maintain the continuity of the
mining operations.

Remington submits that the transfer of the properties was made

in fraud of creditors. The presence of fraud, according to
Remington, warrants the piercing of the corporate veil such that
Marinduque Mining and its transferees could be considered as
one and the same corporation. The transferees, therefore, are
also liable for the value of Marinduque Minings purchases.
Accordingly, the creation of new corporations by the DBP such as
NMIC, Maricalum and Island Cement were made in order to
fraudulently deprive other creditors. Accordingly, the fraud exists
because the newly corporations were using the real properties of
MMIC including the machineries and buildings. They also alleged
that one of the officers of DBP is also an officer of MMIC, which
said officer used its position to advance the interest of DBP and
PNB in the foreclosure proceedings.

Remington invoked the decision of the Court which provides that

it is an elementary and fundamental principle of corporation law
that a corporation is an entity separate and distinct from its
stockholders and from other corporations to which it may be
connected. However, when the notion of legal entity is used to
defeat public convenience, justify wrong, protect fraud, or defend
crime, the law will regard the corporation as an association of
persons or in case of two corporations, merge them into one.

ISSUE:

Whether or not the foreclosure proceeding was made in bad faith

HELD:

NO. PNB and DBP did not only have a right, but the duty under
said law, to foreclose upon the subject properties. The banks had
no choice but to obey the statutory command under Section 1 of
 CASE DIGEST IN CORPORATION LAW (VOL. I)
SECTION 34
STRATEGIC ALLIANCE DEVELOPMENT CORPORATION vs.
RADSTOCK SECURITIES LIMITED
DOCTRINE:
The members of the board of directors have a three-fold duty:
duty of obedience, duty of diligence, and duty of loyalty.
Accordingly, the members of the board of directors (1) shall
direct the affairs of the corporation only in accordance with the
purposes for which it was organized; (2) shall not willfully and
knowingly vote for or assent to patently unlawful acts of the
corporation or act in bad faith or with gross negligence in
directing the affairs of the corporation; and (3) shall not acquire
any personal or pecuniary interest in conflict with their duty as
such directors or trustees.
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.
Basay Mining Corp( which was subsequently renamed as CDCP
Mining), an affiliate of CDCP, obtained loans from Marubeni
Corporation of Japan (Marubeni). Thereafter, 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 and on 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. As a result, Radstock filed an action for collection
and damages against PNCC before the RTC of Mandaluyong on
January 15, 2001. The court ruled in favour of Radstock. PNCC
appealed to the CA.
However, on August 17, 2006 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.
Hence, the Court of Appeals approved the compromise
agreement on January 25, 2007.
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:
NO. The Compromise Agreement is contrary to the Constitution,
existing laws and public policy.
The PNCC Board knew that PNCC, as a government owned and
controlled corporation (GOCC), must rely exclusively on the
opinion of the OGCC. Section 1 of Memorandum Circular No. 9
dated 27 August 1998 issued by the President states:
SECTION 1. All legal matters
pertaining to government-owned or
controlled corporations, their subsidiaries,
other corporate off-springs and government
acquired asset corporations (GOCCs) shall be
exclusively referred to and handled by the
Office of the Government Corporate
Counsel (OGCC).
The PNCC Board acted in bad faith in relying on the opinion of a
private lawyer knowing that PNCC is required to rely exclusively
on the OGCCs opinion. Worse, the PNCC Board, in admitting
liability for P10.743 billion, relied on the recommendation of a
private lawyer whose opinion the PNCC Board members have not
even seen.
Also, Being a government agency, the authority to compromise a
settled claim or liability exceeding P100,000.00 involving a
government agency, as in this case where the liability amounts to
P6.185 billion, is vested not in COA but exclusively in Congress.
Congress alone has the power to compromise the P6.185 billion
purported liability of PNCC. Without congressional approval, the
Compromise Agreement between PNCC and Radstock involving
P6.185 billion is void for being contrary to Section 20(1), Chapter
IV, Subtitle B, Title I, Book V of the Administrative Code of 1987.
Furthermore, COAs audit jurisdiction extends to government
owned or controlled corporations incorporated under the
Corporation Code. Thus, the COA must apply the Government
Auditing Code in the audit and examination of the accounts of
such government owned or controlled corporations even though
incorporated under the Corporation Code. This means that
Section 20(1), Chapter IV, Subtitle B, Title I, Book V of the
Administrative Code of 1987 on the power to compromise, which
superseded Section 36 of the Government Auditing Code,
applies to the present case in determining PNCCs power to
compromise. In fact, the COA has been regularly auditing PNCC
on a post-audit basis in accordance with Section 2, Article IX-D of
the Constitution, the Government Auditing Code, and COA rules
and regulations.
 CASE DIGEST IN CORPORATION LAW (VOL. I)
entertaining its guests and attracting patronage. The
execution of a contract for the employment of
SECTION 36 vaudeville artists, may fairly be held to be included
within the powers incidental to the express powers for
GERALDINE COLEMAN, plaintiff-appellee, vs. HOTEL DE which the defendant corporation, engaged as it was in
FRANCE COMPANY, defendant-appellant the conduct, management, and operation of hotels in
and about the city of Manila, was created.
DOCTRINE:

“When a contract is not on its face necessarily beyond the scope

of the power of the corporation by which it was made, it will, in
the absence of proof to the contrary, be presumed to be valid.
Corporations are presumed to contract within their powers. The
doctrine of ultra vires, when invoked for or against a corporation,
should not be allowed to prevail where it would defeat the ends
of justice or work a legal wrong."

FACTS:

Hotel de France Company (Defendant), through its manager,

Ignacio Arnalot entered into a contract with Geraldine Coleman
(Plaintiff) on September 13, 1912, at Sydney, Australiato
entertain the patrons of its hotel at Manila for the period of three
months at a salary of £12 per month and agreeing to furnish her
board, lodging, and laundry expenses and also to pay her passage
from the Australia to Manila and return.

The Defendant later on terminated the contract based on the

following grounds:
1. That the contract in question is void under the immigration
laws in force in these Islands;
2. That the contract in question is void in that it exceeded the
corporate capacity of the defendant corporation — that is, is ultra
vires

ISSUE:

Whether or not the Defendant company is justified in terminating

the contract.

HELD:

NO.
1. The contention of appellant based on the immigration
laws of the United States in force in these Islands is
manifestly untenable in view of the express provisions
of section 2 of the United States Immigration Act of
February 20, 1907, now in force in the Philippine
Islands, which declares that:
The provisions of this law applicable to contract labor
shall not be held to exclude professional actors, artists,
lecturers, singers, ministers of any religious
denomination, professors for colleges or seminaries,
persons belonging to any recognized learned
profession, or persons employed strictly as personal or
domestic servants.
The contract was not affected by the provisions of the
statute, the right of plaintiff to enter the Philippine
Islands, notwithstanding the fact that she did so under
contract for her professional services, being clearly
included within the exceptions of the general provisions
of the law in favor of "professional actors.
2. Under the articles of incorporation of the defendant, by
virtue of which it was engaged in the operation of hotels
and week-end resorts in the city of Manila and its
environs, it was beyond its implied powers to enter into
and to execute a contract which had for its object the
giving of vaudeville entertainments for the purpose of
 CASE DIGEST IN CORPORATION LAW (VOL. I)
SECTION 42
RAMON DE LA RAMA vs. MA-AO SUGAR CENTRAL CO., INC.
DOCTRINE:
 Mere impairment of capital stock alone does not establish
insolvency, as in the case, there being other evidence as to
the corporation being a going concern with sufficient assets.
Also, the excess of liabilities over assets does not establish
insolvency, when other assets are available.
 When the investment is necessary to accomplish its purpose
or purposes as stated in it articles of incorporation, the
approval of the stockholders is not necessary.
FACTS:
 This was a representative or derivative suit commenced on
October 20, 1953, in the Court of First Instance of Manila by
four minority stockholders against the Ma-ao Sugar Central
Co., Inc. and J. Amado Araneta and three other directors of
the corporation.
 The complaint comprising the period November, 1946 to
October, 1952, stated five causes of action, to wit: (1) for
alleged illegal and ultra-vires acts consisting of self-dealing
irregular loans, and unauthorized investments; (2) for
alleged gross mismanagement; (3) for alleged forfeiture of
corporate rights warranting dissolution; (4) for alleged
damages and attorney's fees; and (5) for receivership.
 Plaintiffs-appellants contend that in 1950 the Ma-ao Sugar
Central Co., Inc., through its President, J. Amado Araneta,,
subscribed for P300,000.00 worth of capital stock of the
Philippine Fiber Processing Co. Inc., that payments on the
subscription were made on September 20, 1950, for
P150,000.00, on April 30, 1951, for P50,000.00, and on
March 6, 1952, for P100,000.00; that at the time the first two
payments were made there was no board resolution
authorizing the investment; and that it was only on
November 26, 1951, that the President of Ma-ao Sugar
Central Co., Inc., was so authorized by the Board of Directors.
 In addition, 355,000 shares of stock of the same Philippine
Fiber Processing Co., Inc., owned by Luzon Industrial,
corporation were transferred on May 31, 1952, to the
defendant Ma-ao Sugar Central Co., Inc., with a valuation of
P355,000.00 on the basis of P1.00 par value per share. Again
the "investment" was made without prior board resolution,
the authorizing resolution having been subsequentIy
approved only on June 4, 1952.
 Plaintiffs-appellants also contend that even assuming,
arguendo, that the said Board Resolutions are valid, the
transaction, is still wanting in legality, no resolution having
been approved by the affirmative vote of stockholders
holding shares in the corporation entitling them to exercise
at least two-thirds of the voting power, as required in Sec.
17-½ of the Corporation Law.
 In their answer, defendants denied "the allegations
regarding the supposed gross mismanagement, fraudulent
use and diversion of corporate funds, disregard of corporate
requirements, abuse of trust and violation of fiduciary
relationship, etc., supposed to have been discovered by
plaintiffs"
 By way of special defenses, the defendants alleged, among
other things: (1) that the complaint "is premature, improper
and unjustified"; (2) that plaintiffs did not make an "earnest,
not simulated effort" to exhaust first their remedies within
the corporation before filing their complaint; (3) that no
actual loss had been suffered by the defendant corporation
on account of the transactions questioned by plaintiffs; (4)
that the payments by the debtors of all amounts due to the
defendant corporation constituted a full, sufficient and
adequate remedy for the grievances alleged in the complaint
and (5) that the dissolution and/or receivership of the
defendant corporation would violate and impair the
obligation of existing contracts of said corporation.
 CFI: The Court dismisses the petition for dissolution but
condemns J. Amado Araneta to pay unto Ma-ao Sugar Central
Co., Inc. the amount of P46,270.00 with 8% interest from the
date of the filing of this complaint, plus the costs.
 CFI Findings:
1. Failure to hold stockholders' meetings regularly.
2. Irregularities in the keeping of the books.
3. Illegal investments in the Mabuhay Printing, P2,280,00,
and the Acoje Mining, P7,000.00.
4. Unauthorized loans to J. Amado Aranetatotalling
P132,082.00 (which, according to the defendants, had been
fully paid), in violation of the by-laws of the corporation
which prohibits any director from borrowing money from
the corporation;
5. Diversion of corporate funds of the Ma-ao Sugar Central
Co., Inc.
ISSUES:
1. WON the Ma-ao Sugar Company is insolvent.
2. WON the investment of corporate funds by the Ma-ao Sugar
Co., Inc., in another corporation (the Philippine Fiber Processing
Co., Inc.) constitutes a violation of Sec. 17-½ of the Corporation
Law.
HELD:
1. NO. Whether insolvency exists is usually a question of fact, to
be determined from an inventory of the assets and their value, as
well as a consideration of the liabilities. Mere impairment of
capital stock alone does not establish insolvency, as in the case,
there being other evidence as to the corporation being a going
concern with sufficient assets. Also, the excess of liabilities over
assets does not establish insolvency, when other assets are
available. Hence, dissolution is improper.
Relief by dissolution will be awarded in such cases only where no
other adequate remedy is available, and is not available where
the rights of the stockholders can be, or are, protected in some
other way which in this case is not applicable.
2. NO. The investment in question does not fall under the
purview of Sec. 17- ½ of the Corporation Law.
A private corporation, in order to accomplish its purpose as
stated in its articles of incorporation, and subject to the
limitations imposed by the Corporation Law, has the power to
acquire, hold, mortgage, pledge or dispose of shares, bonds,
securities, and other evidences of indebtedness of any domestic
or foreign corporation. Such an act, if done in pursuance of the
corporate purpose, does not need the approval of the
stockholders; but when the purchase of shares of another
corporation is done solely for investment and not to accomplish
the purpose of its incorporation, the vote of approval of the
stockholders is necessary.
A private corporation has the power to invest its corporate funds
in any other corporation or business, or for any purpose other
than the main purpose for which it was organized. When the
 CASE DIGEST IN CORPORATION LAW (VOL. I)
investment is necessary to accomplish its purpose or purposes as
stated in it articles of incorporation, the approval of the
stockholders is not necessary.
SECTION 45
LUNETA MOTOR COMPANY vs. A.D. SANTOS, INC., ET AL.
DOCTRINE:
FACTS:
 On December 31, 1941, to secure payment of a loan
evidenced by a promissory note executed by Nicolas
Concepcion and guaranteed by one Placido Esteban in favor
of petitioner, Concepcion executed a chattel mortgage
covering the Certificate of Public Comvenience in favor of
petitioner.
 To secure payment of a subsequent loan obtained by
Concepcion from the Rehabilitation Finance Corporation
(RFC) he constituted a second mortgage on the same
certificate. This second mortgage was approved by the
respondent Commission, subject to the mortgage lien in
favor of petitioner.
 The certificate was later sold to Francisco Benitez, Jr., who
resold it to Rodi Taxicab Company. Both sales were made
with assumption of the mortgage in favor of the RFC, and
were also approved provisionally by the Commission,
subject to petitioner's lien.
 On October 10, 1953 petitioner filed an action to foreclose
the chattel mortgage executed in its favor by Concepcion
(Civil Case No. 20853 of the Court of First Instance of
Manila) in view of the failure of the latter and his guarantor,
Placido Esteban, to pay their overdue account.
 While the above case was pending, the RFC also instituted
foreclosure proceedings on its second chattel mortgage, and
as a result of the decision in its favor therein rendered, the
certificate of public convenience was sold at public auction
in favor of Amador D. Santos for P24,010.00 on August 31,
1956. Santos immediately applied with the Commission for
the approval of the sale, and the same was approved on
January 26, 1957, subject to the mortgage lien in favor of
petitioner.
 CFI rendered judgment adjudging Concepcion indebted to
petitioner and ordered that the certificate of public
convenience subject matter of the chattel mortgage be sold
at public auction.
 On March 3, 1959, said certificate was sold at public auction
to petitioner, and six days thereafter the Sheriff of the City of
Manila issued in its favor the corresponding certificate of
sale. Thereupon petitioner filed the application mentioned
heretofore for the approval of the sale. In the meantime and
before his death, Amador D. Santos sold and transferred all
his rights and interests in the certificate of public
convenience in question in favor of the now respondent A.D.
Santos, Inc., who opposed petitioner's application.
ISSUES:
1. WON a corporation can acquire by purchase the certificate of
public convenience.
2. WON the purchase is in accordance with the purpose for which
petitioner was organized and the transaction of its lawful
business reasonably and necessarily require the purchase and
holding by it of a certificate of public convenience.
HELD:
1. YES. There is no question that a certificate of public
convenience granted to the public operator is liable to execution
(Raymundo vs. Luneta Motor Co., 58 Phil. 889) and may be
acquired by purchase.
2. NO. It has no authority at all to engage in the business of land
transportation and operate a taxicab service. That it may operate
and otherwise deal in automobiles and automobile accessories;
that it may engage in the transportation of persons by water does
not mean that it may engage in the business of land
transportation — an entirely different line of business. If it could
not thus engage in the line of business, it follows that it may not
acquire an certificate of public convenience to operate a taxicab
service, such as the one in question, because such acquisition
would be without purpose and would have no necessary
connection with petitioner's legitimate business.
Zomer Development Company, Inc. vs. International
Exchange Bank
DOCTRINE:
The plea of "ultra vires" will not be allowed to prevail, whether
interposed for or against a corporation, when it will not advance
justice but, on the contrary, will accomplish a legal wrong to the
prejudice of another who acted in good faith.
FACTS:
The Board of Directors of petitioner Zomer Development
Company approved a resolution authorizing its treasurer
(AmparoZosa) and GM(Manuel Zosa) to apply and obtain a credit
line with respondent IEB in the amount of P60million as well as
temporary excesses or permanent increases as may be approved
by IEB. The board also authorized petitioner to assign, pledge, or
mortgage its properties as security for the credit line and also
secure and guarantee the credit facilities of another IDHI Prime
Aggregates Corporation(Prime Aggregates) with IEB which
initially was P60million but was increased to P90million and
$211k.However, Prime Aggregates failed to pay its outstanding
obligation with IEB which prompted IEB to file a petition for
extra-judicial foreclosure of mortgage before the RTC of Cebu
over petitioner’s properties. Petitioner filed a complaint for
injunction before the RTC Cebu.RTC denied the petition for
injunction. On appeal, the petitioner argued that the real estate
mortgage it executed was null and void for being ultra vires as it
was not empowered to mortgage its properties as security for the
payment of obligations of third parties; and that Amparo and
Zosa were authorized to mortgage its properties to secure only a
₱60,000,000 term loan and one credit facility of Prime
Aggregates. CA affirmed the RTC.
ISSUE:
Whether injunctive relief should be issued since the acts of the
officers of petitioner were in “ultra vires” thus null and void.
HELD:
SC held that petitioner is no longer entitled to injunctive relief
since IEB had already foreclosed its properties in 2001 and is
thus moot and academic. As to the acts of the officers, the court
agrees that under its “By Laws”, they are not empowered to
 CASE DIGEST IN CORPORATION LAW (VOL. I)
mortgage its properties a security for the payment of the
obligations of third parties. However, in a SEC Opinion, third
party mortgage may be allowed: 1.when the mortgage of
corporate assets/properties shall be done in the furtherance of
the interest of the corporation and in the usual and regular
course of its business; and 2. to secure the debt of a subsidiary. In
this case, it was found that Prime Aggregates is not only a
subsidiary of petitioner but a family corporation since the
incorporators, stockholders, and officers were members of the
Zosa Family. Lastly, petitioner acquiesced, and ratified the acts is
bound by the execution of the "Real Estate Mortgage". It was only
when the mortgaged was foreclosed when petitioner questioned
the authority of its officers in executing the REM. The Court must
take heed and pay obeisance to the equity rule that if one
maintains silence when, in conscience he ought to speak, equity
will debar him from speaking when, in conscience, he ought to
remain silent. He who remains silent when he ought to speak
cannot be heard to speak when he ought to be silent. More, the
transactions between the Petitioner and the Private Respondent
over its properties are neither malum in se or malum prohibitum.
Hence, the Petitioner cannot hide behind the cloak of "ultra vires"
for a defense.
SECTION 46
CHINA BANKING CORPORATION vs. COURT OF APPEALS and
VALLEY GOLF and COUNTRY CLUB, INC.,
FACTS:
On 21 August 1974, Galicano Calapatia, Jr., a stockholder of
private respondent Valley Golf & Country Club, Inc.(VGCCI),
pledged his Stock Certificate No. 1219 to petitioner China
Banking Corporation (CBC). On 16 September 1974, petitioner
wrote VGCCI requesting that the pledge agreement be recorded
in its books. In a letter dated 27 September 1974, VGCCI replied
that the deed of pledge executed by Calapatia in petitioner's favor
was duly noted in its corporate books. On 3 August 1983,
Calapatia obtained a loan of P20,000.00 from petitioner, payment
of which was secured by the pledge agreement still existing
between Calapatia and petitioner.
Calapatia failed to pay its obligation thus prompting CBC to
extrajudicially foreclose the pledged stock. On May 1985, CBC
informed VGCCI of its foreclosure and requested that the stocks
be transferred in its name but on July 1985, VGCCI expressed its
inability to record the same due to Calapatia’s unsettled accounts
with the club. In 1989, CBC informed VGCCI that it is the new
owner of Stock Certificate No. 1219. In 1990, VGCCI replied that it
had sold Calapatia’s stock at public auction for P25,000.
Petitioner protested the sale by VGCCI and filed a case with the
RTC for nullification of the auction sale. The RTC dismissed the
case for lack of jurisdiction as it involves an intra-corporate
dispute. Petitioner filed a complaint with the SEC to nullify the
sale of VGCCI which the Hearing Officer ruled in favor of VGCCI
since it had valid reason not to transfer the share in the
delinquency.
On appeal, the SEC En Banc reversed the decision and ruled in
favor of petitioner CBC since appellant-petitioner has a prior
right over the pledged share and because of pledgor's failure to
pay the principal debt upon maturity, appellant-petitioner can
proceed with the foreclosure of the pledged share. On appeal, the
CA reversed the decision stating that SEC had no jurisdiction
since it was not an intra-corporate dispute.
ISSUES:
1. Whether the courts or the SEC has jurisdiction
2. Whether CBC or VGCCI has a better right over the shares
HELD:
1. SEC has jurisdiction since petitioner became a bona fide
stockholder of VGCCI due to the prior foreclosure sale of the
pledged stock and thus became a bona fide stockholder of
VGCCI and, therefore, the conflict that arose between
petitioner and VGCCI aptly exemplifies an intra-corporate
controversy between a corporation and its stockholder. Also,
SEC’s expertise is necessary in the correct interpretation of
the corporation’s by-laws in determining the validity of
VGCCI’s claims.
2. CBC has a better right over the shares. VGCCI cannot assail
the validity of the of the pledge agreement for lack of
consideration since it was meant to cover even future
advancements by Calapatia to which the loan was secured.
Also, the contention of VGCCI that due to Calapatia's failure
to settle his delinquent accounts, it had the right to sell the
share in question in accordance with the express provision
 CASE DIGEST IN CORPORATION LAW (VOL. I)
found in its by-laws is unmeritorious since VGCCI completely
disregarded petitioner's rights as pledgee. It even failed to
give petitioner notice of said auction sale. Such actuations of
VGCCI thus belie its claim of good faith. Lastly, in defending
its actions, VGCCI likewise maintains that petitioner is bound
by its by-laws. In order to be bound, the third party must
have acquired knowledge of the pertinent by-laws at the
time the transaction or agreement between said third party
and the shareholder was entered into, in this case, at the
time the pledge agreement was executed. VGCCI could have
easily informed petitioner of its by-laws when it sent notice
formally recognizing petitioner as pledgee of one of its
shares registered in Calapatia's name. Petitioner's belated
notice of said by-laws at the time of foreclosure will not
suffice. Thus, CBC has a better right.