1
[G.R. No. 141617. August 14, 2001]
ADALIA B. FRANCISCO and MERRYLAND
DEVELOPMENT CORPORATION, petitioners,
vs. RITA C. MEJIA, as Executrix of Testate Estate of
ANDREA CORDOVA VDA. DE
GUTIERREZ, respondent.
DECISION
GONZAGA-REYES, J.:
In this petition for review by certiorari, petitioners pray for
the setting aside of the Decision of the Court of Appeals
promulgated on 13 April 1999 and its 15 December 1999
Resolution in CA-G.R. CV No. 19281.
As culled from the decisions of the lower courts and the
pleadings of the parties, the factual background of this case is as
set out herein:
Andrea Cordova Vda. de Gutierrez (Gutierrez) was the
registered owner of a parcel of land in Camarin, Caloocan City
known as Lot 861 of the Tala Estate. The land had an aggregate
area of twenty-five (25) hectares and was covered by Transfer
Certificate of Title (TCT) No. 5779 of the Registry of Deeds of
Caloocan City. The property was later subdivided into five lots
with an area of five hectares each and pursuant thereto, TCT No.
5779 was cancelled and five new transfer certificates of title were
issued in the name of Gutierrez, namely TCT No. 7123 covering
Lot 861-A, TCT No. 7124 covering Lot 861-B, TCT No. 7125
covering Lot 861-C, TCT No. 7126 covering Lot 861-D and TCT
No. 7127 covering Lot 861-E.
On 21 December 1964, Gutierrez and Cardale Financing and
Realty Corporation (Cardale) executed a Deed of Sale with
Mortgage relating to the lots covered by TCT Nos. 7124, 7125,
7126 and 7127, for the consideration of P800,000.00. Upon the
execution of the deed, Cardale paid Gutierrez P171,000.00. It was
agreed that the balance of P629,000.00 would be paid in several
installments within five years from the date of the deed, at an
interest of nine percent per annum based on the successive unpaid
principal balances. Thereafter, the titles of Gutierrez were
cancelled and in lieu thereof TCT Nos. 7531 to 7534 were issued
in favor of Cardale.
To secure payment of the balance of the purchase price,
Cardale constituted a mortgage on three of the four parcels of land
covered by TCT Nos. 7531, 7532 and 7533, encompassing fifteen
hectares of land.[1] The encumbrance was annotated upon the
certificates of title and the owners duplicate certificates. The
owners duplicates were retained by Gutierrez.
On 26 August 1968, owing to Cardales failure to settle its
mortgage obligation, Gutierrez filed a complaint for rescission of
the contract with the Quezon City Regional Trial Court (RTC),
which was docketed as Civil Case No. Q-12366. [2] On 20 October
1969, during the pendency of the rescission case, Gutierrez died
and was substituted by her executrix, respondent Rita C. Mejia
(Mejia). In 1971, plaintiffs presentation of evidence was
terminated. However, Cardale, which was represented by
petitioner Adalia B. Francisco (Francisco) in her capacity as Vice-
President and Treasurer of Cardale, lost interest in proceeding with
the presentation of its evidence and the case lapsed into inactive
status for a period of about fourteen years.
In the meantime, the mortgaged parcels of land covered by
TCT Nos. 7532 and 7533 became delinquent in the payment of
real estate taxes in the amount of P102,300.00, while the other
mortgaged property covered by TCT No. 7531 became delinquent
in the amount of P89,231.37, which culminated in their levy and
auction sale on 1 and 12 September 1983, in satisfaction of the tax
arrears. The highest bidder for the three parcels of land was
petitioner Merryland Development Corporation (Merryland),
whose President and majority stockholder is Francisco. A
memorandum based upon the certificate of sale was then made
upon the original copies of TCT Nos. 7531 to 7533.
On 13 August 1984, before the expiration of the one year
redemption period, Mejia filed a Motion for Decision with the trial
court. The hearing of said motion was deferred, however, due to a
Motion for Postponement filed by Cardale through Francisco, who
signed the motion in her capacity as officer-in-charge, claiming
that Cardale needed time to hire new counsel. However, Francisco
did not mention the tax delinquencies and sale in favor of
Merryland. Subsequently, the redemption period expired and
Merryland, acting through Francisco, filed petitions for
consolidation of title,[3] which culminated in the issuance of certain
orders[4] decreeing the cancellation of Cardales TCT Nos. 7531 to
7533 and the issuance of new transfer certificates of title free from
any encumbrance or third-party claim whatsoever in favor of
Merryland. Pursuant to such orders, the Register of Deeds of
Caloocan City issued new transfer certificates of title in the name
of Merryland which did not bear a memorandum of the mortgage
liens in favor of Gutierrez.
Thereafter, sometime in June 1985, Francisco filed in Civil
Case No. Q-12366 an undated Manifestation to the effect that the
properties subject of the mortgage and covered by TCT Nos. 7531
to 7533 had been levied upon by the local government of Caloocan
City and sold at a tax delinquency sale. Francisco further claimed
that the delinquency sale had rendered the issues in Civil Case No.
Q-12366 moot and academic. Agreeing with Francisco, the trial
court dismissed the case, explaining that since the properties
mortgaged to Cardale had been transferred to Merryland which
was not a party to the case for rescission, it would be more
appropriate for the parties to resolve their controversy in another
action.
On 14 January 1987, Mejia, in her capacity as executrix of
the Estate of Gutierrez, filed with the RTC of Quezon City a
complaint for damages with prayer for preliminary attachment
against Francisco, Merryland and the Register of Deeds of
Caloocan City. The case was docketed as Civil Case No. Q-
49766. On 15 April 1988, the trial court rendered a decision [5] in
favor of the defendants, dismissing the complaint for damages
filed by Mejia. It was held that plaintiff Mejia, as executrix of
Gutierrezs estate, failed to establish by clear and convincing
evidence her allegations that Francisco controlled Cardale and
Merryland and that she had employed fraud by intentionally
causing Cardale to default in its payment of real property taxes on
the mortgaged properties so that Merryland could purchase the
same by means of a tax delinquency sale. Moreover, according to
the trial court, the failure to recover the property subject of the
Deed of Sale with Mortgage was due to Mejias failure to actively
pursue the action for rescission (Civil Case No. 12366), allowing
the case to drag on for eighteen years. Thus, it ruled that -
xxx xxx xxx
The act of not paying or failing to pay taxes due the government
by the defendant Adalia B. Francisco, as treasurer of Cardale
Financing and Realty Corporation do not, per se, constitute
perpetration of fraud or an illegal act. It do [sic] not also constitute
an act of evasion of an existing obligation (to plaintiff) if there is
no clear showing that such an act of non-payment of taxes was
deliberately made despite its (Cardales) solvency and capability to
pay. There is no evidence showing that Cardale Financing and
Realty Corporation was financially capable of paying said taxes at
the time.
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There are times when the corporate fiction will be disregarded: (1)
where all the members or stockholders commit illegal act; (2)
where the corporation is used as dummy to commit fraud or
wrong; (3) where the corporation is an agency for a parent
corporation; and (4) where the stock of a corporation is owned by
one person. (I, Fletcher, 58, 59, 61 and 63). None of the foregoing
reasons can be applied to the incidents in this case: (1) there
appears no illegal act committed by the stockholders of defendant
Merryland Development Corporation and Cardale Financing and
Realty Corporation; (2) the incidents proven by evidence of the
plaintiff as well as that of the defendants do not show that either or
both corporations were used as dummies by defendant Adalia B.
Francisco to commit fraud or wrong. To be used as [a] dummy,
there has to be a showing that the dummy corporation is controlled
by the person using it. The evidence of plaintiff failed to prove that
defendant Adalia B. Francisco has controlling interest in either or
both corporations. On the other hand, the evidence of defendants
clearly show that defendant Francisco has no control over either of
the two corporations; (3) none of the two corporations appears to
be an agency for a parent (the other) corporation; and (4) the stock
of either of the two corporation [sic] is not owned by one person
(defendant Adalia B. Francisco). Except for defendant Adalia B.
Francisco, the incorporators and stockholders of one corporation
are different from the other.
xxx xxx xxx
The said case (Civil Case No. 12366) remained pending for almost
18 years before the then Court of First Instance, now the Regional
Trial Court. Even if the trial of the said case became protracted on
account of the retirement and/or promotion of the presiding judge,
as well as the transfer of the case from one sala to another, and as
claimed by the plaintiff that the defendant lost interest, (which
allegation is unusual, so to speak), the court believe [sic] that it
would not have taken that long to dispose [of] said case had
plaintiff not slept on her rights, and her duty and obligation to see
to it that the case is always set for hearing so that it may be
adjudicated [at] the earliest possible time. This duty pertains to
both parties, but plaintiff should have been more assertive, as it
was her obligation, similar to the obligation of plaintiff relative to
the service of summons in other cases. The fact that Cardale
Financing and Realty Corporation did not perform its obligation as
provided in the said Deed of Sale with Mortgage (Exhibit A) is
very clear. Likewise, the fact that Andrea Cordova, the contracting
party, represented by the plaintiff in this case did not also perform
her duties and/or obligation provided in the said contract is also
clear. This could have been the reason why the plaintiff in said
case (Exhibit E) slept on her rights and allowed the same to remain
pending for almost 18 years. However, and irrespective of any
other reason behind the same, the court believes that plaintiff,
indeed, is the one to blame for the failure of the testate estate of the
late Andrea Cordova Vda. de Gutierrez to recover the money or
property due it on the basis of Exhibit A.
xxx xxx xxx
xxx Had the plaintiff not slept on her rights and had it not been for
her failure to perform her commensurate duty to pursue vigorously
her case against Cardale Financing and Realty Corporation in said
Civil Case No. 12366, she could have easily known said non-
payment of realty taxes on the said properties by said Cardale
Financing and Realty Corporation, or, at least the auction sales that
followed, and from which she could have redeemed said properties
within the one year period provided by law, or, have availed of
remedies at the time to protect the interest of the testate estate of
the late Andrea Cordova Vda. de Gutierrez.
xxx xxx xxx
The dispositive portion of the trial courts decision states -
WHEREFORE, in view of all the foregoing consideration, the
court hereby renders judgment in favor of the defendants Register
of Deeds of Caloocan City, Merryland Development Corporation
and Adalia B. Francisco, and against plaintiff Rita C. Mejia, as
Executrix of the Testate Estate of Andrea Cordova Vda. De
Gutierrez, and hereby orders:
1. That this case for damages be dismissed, at the same time,
plaintiffs motion for reconsideration dated September 23,
1987 is denied;
2. Plaintiff pay the defendants Merryland Development
Corporation and the Register of Deeds the sum of
P20,000.00, and another sum of P20,000.00 to the defendant
Adalia B. Francisco, as and for attorneys fees and litigation
expenses, and pay the costs of the proceedings.
SO ORDERED.
The Court of Appeals,[6] in its decision[7] promulgated on 13
April 1999, reversed the trial court, holding that the corporate veil
of Cardale and Merryland must be pierced in order to hold
Francisco and Merryland solidarily liable since these two
corporations were used as dummies by Francisco, who employed
fraud in allowing Cardale to default on the realty taxes for the
properties mortgaged to Gutierrez so that Merryland could acquire
the same free from all liens and encumbrances in the tax
delinquency sale and, as a consequence thereof, frustrating
Gutierrezs rights as a mortgagee over the subject properties. Thus,
the Court of Appeals premised its findings of fraud on the
following circumstances
xxx xxx xxx
xxx Appellee Francisco knew that Cardale of which she was vice-
president and treasurer had an outstanding obligation to Gutierrez
for the unpaid balance of the real properties covered by TCT Nos.
7531 to 7533, which Cardale purchased from Gutierrez which
account, as of December 1988, already amounted to P4,414,271.43
(Exh. K, pp. 39-44, record); she also knew that Gutierrez had a
mortgage lien on the said properties to secure payment of the
aforesaid obligation; she likewise knew that the said mortgaged
properties were under litigation in Civil Case No. Q-12366 which
was an action filed by Gutierrez against Cardale for rescission of
the sale and/or recovery of said properties (Exh. E). Despite such
knowledge, appellee Francisco did not inform Gutierrezs Estate or
the Executrix (herein appellant) as well as the trial court that the
mortgaged properties had incurred tax delinquencies, and that
Final Notices dated July 9, 1982 had been sent by the City
Treasurer of Caloocan demanding payment of such tax arrears
within ten (10) days from receipt thereof (Exhs. J & J-1, pp. 37-38,
record). Both notices which were addressed to
Cardale Financing & Realty Corporation c/o
Merryland Development Corporation
and sent to appellee Franciscos address at 83 Katipunan Road,
White Plains, Quezon City, gave warning that if the taxes were not
paid within the aforesaid period, the properties would be sold at
public auction to satisfy the tax delinquencies.
To reiterate, notwithstanding receipt of the aforesaid notices,
appellee Francisco did not inform the Estate of Gutierrez or her
executrix about the tax delinquencies and of the impending auction
sale of the said properties. Even a modicum of good faith and fair
play should have encouraged appellee Francisco to at least advise
Gutierrezs Estate through her executrix (herein appellant) and the
trial court which was hearing the complaint for rescission and
recovery of said properties of such fact, so that the Estate of
Gutierrez, which had a real interest on the properties as mortgagee
and as plaintiff in the rescission and recovery suit, could at least
take steps to forestall the auction sale and thereby preserve the
 3
properties and protect its interests thereon. And not only did
appellee Francisco allow the auction sale to take place, but she
used her other corporation (Merryland) in participating in the
auction sale and in acquiring the very properties which her first
corporation (Cardale) had mortgaged to Gutierrez. Again, appellee
Francisco did not thereafter inform the Estate of Gutierrez or its
executrix (herein appellant) about the auction sale, thus precluding
the Estate from exercising its right of redemption. And it was only
after the expiration of the redemption period that appellee
Francisco filed a Manifestation in Civil Case No. Q-12366 (Exh. I,
p. 36, record), in which she disclosed for the first time to the trial
court and appellant that the properties subject of the case and on
which Gutierrez or her Estate had a mortgage lien, had been sold
in a tax delinquency sale. And in order to further conceal her
deceptive maneuver, appellee Francisco did not divulge in her
aforesaid Manifestation that it was her other corporation
(Merryland) that acquired the properties in the auction sale.
We are not impressed by appellees submission that no evidence
was adduced to prove that Cardale had the capacity to pay the tax
arrears and therefore she or Cardale may not be faulted for the tax
delinquency sale of the properties in question. Appellee Franciscos
bad faith or deception did not necessarily lie in Cardales or her
failure to settle the tax deliquencies in question, but in not
disclosing to Gutierrezs estate or its executrix (herein appellant)
which had a mortgage lien on said properties the tax delinquencies
and the impending auction sale of the encumbered properties.
Appellee Franciscos deception is further shown by her
concealment of the tax delinquency sale of the properties from the
estate or its executrix, thus preventing the latter from availing of
the right of redemption of said properties. That appellee Francisco
divulged the auction sale of the properties only after such
redemption period had lapsed clearly betrays her intention to keep
Gutierrezs Estate or its Executrix from availing of such right. And
as the evidence would further show, appellee Francisco had a hand
in securing for Merryland consolidation of its ownership of the
properties and in seeing to it that Merrylands torrens certificates
for the properties were free from liens and encumbrances. All
these appellee Francisco did even as she was fully aware that
Gutierrez or her estate had a valid and subsisting mortgage lien on
the said properties.
It is likewise worthy of note that early on appellee Francisco had
testified in the action for rescission of sale and recovery of
possession and ownership of the properties which Gutierrez filed
against Cardale (Civil Case No. Q-12366) in her capacity as
defendant Cardales vice-president and treasurer. But then, for no
plausible reason whatsoever, she lost interest in continuing with
the presentation of evidence for defendant Cardale. And then,
when appellant Mejia as executrix of Gutierrezs Estate filed on
August 13, 1984 a Motion for Decision in the aforesaid case,
appellee Francisco moved to defer consideration of appellants
Motion on the pretext that defendant Cardale needed time to
employ another counsel. Significantly, in her aforesaid Motion for
Postponement dated August 16, 1984 which appellee Francisco
personally signed as Officer-in-Charge of Cardale, she also did not
disclose the fact that the properties subject matter of the case had
long been sold at a tax delinquency sale and acquired by her other
corporation Merryland.
And as if what she had already accomplished were not enough
fraudulence, appellee Francisco, acting in behalf of Merryland,
caused the issuance of new transfer certificates of title in the name
of Merryland, which did not anymore bear the mortgage lien in
favor of Gutierrez. In the meantime, to further avoid payment of
the mortgage indebtedness owing to Gutierrezs estate, Cardale
corporation was dissolved.Finally, to put the properties beyond the
reach of the mortgagee, Gutierrezs estate, Merryland caused the
subdivision of such properties, which were subsequently sold on
installment basis.
In its petition for certiorari, petitioners argue that there is no
law requiring the mortgagor to inform the mortgagee of the tax
delinquencies, if any, of the mortgaged properties. Moreover,
petitioners claim that Cardales failure to pay the realty taxes, per
se, does not constitute fraud since it was not proven that Cardale
was capable of paying the taxes. Petitioners also contend that if
Mejia, as executrix of Gutierrezs estate, was not remiss in her duty
to pursue Civil Case No. 12366, she could have easily learned of
the non-payment of realty taxes on the subject properties and of
the auction sale that followed and thus, have redeemed the
properties or availed of some other remedy to conserve the estate
of Gutierrez. In addition, Mejia could have annotated a notice
of lis pendens on the titles of the mortgaged properties, but she
failed to do so. It is the stand of petitioners that respondent has not
adduced any proof that Francisco controlled both Cardale and
Merryland and that she used these two corporations to perpetuate a
fraud upon Gutierrez or her estate. Petitioners maintain that the
evidence shows that, apart form the meager share of petitioner
Francisco, the stockholdings of both corporations comprise other
shareholders, and the stockholders of either of them, aside from
petitioner Francisco, are composed of different persons. As to
Civil Case No. 12366, petitioners insist that the decision of the
trial court in that case constitutes res judicata to the instant case.[8]
It is dicta in corporation law that a corporation is a juridical
person with a separate and distinct personality from that of the
stockholders or members who compose it. [9] However, when the
legal fiction of the separate corporate personality is abused, such
as when the same is used for fraudulent or wrongful ends, the
courts have not hesitated to pierce the corporate veil. One of the
earliest formulations of this doctrine of piercing the corporate veil
was made in the American case of United States v. Milwaukee
Refrigerator Transit Co.[10] -
If any general rule can be laid down, in the present state of
authority, it is that a corporation will be looked upon as a legal
entity as a general rule, and until sufficient reason to the contrary
appears; but, 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.
Since then a good number of cases have firmly implanted
this doctrine in Philippine jurisprudence. [11] One such case
is Umali v. Court of Appeals[12] wherein the Court declared that
Under the doctrine of piercing the veil of corporate entity, when
valid grounds therefore exist, the legal fiction that a corporation is
an entity with a juridical personality separate and distinct from its
members or stockholders may be disregarded. In such cases, the
corporation will be considered as a mere association of
persons. The members or stockholders of the corporation will be
considered as the corporation, that is, liability will attach directly
to the officers and stockholders. The doctrine applies when the
corporate fiction is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, or when it is made as a
shield to confuse the legitimate issues, or where a corporation is
the mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit
or adjunct of another corporation.
With specific regard to corporate officers, the general rule is
that the officer cannot be held personally liable with the
corporation, whether civilly or otherwise, for the consequences of
his acts, if he acted for and in behalf of the corporation, within the
scope of his authority and in good faith. In such cases, the officers
acts are properly attributed to the corporation. [13] However, if it is
proven that the officer has used the corporate fiction to defraud a
third party,[14] or that he has acted negligently, maliciously or in
bad faith,[15] then the corporate veil shall be lifted and he shall be
held personally liable for the particular corporate obligation
involved.
 4
The Court, after an assiduous study of this case, is convinced
that the totality of the circumstances appertaining conduce to the
inevitable conclusion that petitioner Francisco acted in bad
faith. The events leading up to the loss by the Gutierrez estate of
its mortgage security attest to this. It has been established that
Cardale failed to comply with its obligation to pay the balance of
the purchase price for the four parcels of land it bought from
Gutierrez covered by TCT Nos. 7531 to 7534, which obligation
was secured by a mortgage upon the lands covered by TCT Nos.
7531, 7532 and 7533. This prompted Gutierrez to file an action for
rescission of the Deed of Sale with Mortgage (Civil Case No. Q-
12366), but the case dragged on for about fourteen years when
Cardale, as represented by Francisco, who was Vice-President and
Treasurer of the same,[16] lost interest in completing its presentation
of evidence.
Even before 1984 when Mejia, in her capacity as executrix
of Gutierrezs estate, filed a Motion for Decision with the trial
court, there is no question that Francisco knew that the properties
subject of the mortgage had become tax delinquent. In fact, as
treasurer of Cardale, Francisco herself was the officer charged with
the responsibility of paying the realty taxes on the corporations
properties. This was admitted by the trial court in its decision. [17] In
addition, notices dated 9 July 1982 from the City Treasurer of
Caloocan demanding payment of the tax arrears on the subject
properties and giving warning that if the realty taxes were not paid
within the given period then such properties would be sold at
public auction to satisfy the tax delinquencies were sent directly to
Franciscos address in White Plains, Quezon City. [18] Thus, as early
as 1982, Francisco could have informed the Gutierrez estate or the
trial court in Civil Case No. Q-12366 of the tax arrears and of the
notice from the City Treasurer so that the estate could have taken
the necessary steps to prevent the auction sale and to protect its
interests in the mortgaged properties, but she did no such
thing. Finally, in 1983, the properties were levied upon and sold at
public auction wherein Merryland - a corporation where Francisco
is a stockholder[19] and concurrently acts as President and
director[20] - was the highest bidder.
When Mejia filed the Motion for Decision in Civil Case No.
Q-12366,[21] the period for redeeming the properties subject of the
tax sale had not yet expired. [22] Under the Realty Property Tax
Code,[23]pursuant to which the tax levy and sale were prosecuted,
[24]
 both the delinquent taxpayer and in his absence, any person
holding a lien or claim over the property shall have the right to
redeem the property within one year from the date of registration
of the sale.[25] However, if these persons fail to redeem the property
within the time provided, then the purchaser acquires the property
free from any encumbrance or third party claim whatsoever.
[26]
 Cardale made no attempts to redeem the mortgaged property
during this time. Moreover, instead of informing Mejia or the trial
court in Q-12366 about the tax sale, the records show that
Francisco filed a Motion for Postponement [27] in behalf of Cardale
- even signing the motion in her capacity as officer-in-charge -
which worked to defer the hearing of Mejias Motion for
Decision. No mention was made by Francisco of the tax sale in the
motion for postponement. Only after the redemption period had
expired did Francisco decide to reveal what had transpired by
filing a Manifestation stating that the properties subject of the
mortgage in favor of Gutierrez had been sold at a tax delinquency
sale; however, Francisco failed to mention that it was Merryland
that acquired the properties since she was probably afraid that if
she did so the court would see behind her fraudulent scheme. In
this regard, it is also significant to note that it was Francisco
herself who filed the petitions for consolidation of title and who
helped secure for Merryland titles over the subject properties free
from any encumbrance or third-party claim whatsoever.
It is exceedingly apparent to the Court that the totality of
Francisos actions clearly betray an intention to conceal the tax
delinquencies, levy and public auction of the subject properties
from the estate of Gutierrez and the trial court in Civil Case No. Q-
12366 until after the expiration of the redemption period when the
remotest possibility for the recovery of the properties would be
extinguished.[28]Consequently, Francisco had effectively deprived
the estate of Gutierrez of its rights as mortgagee over the three
parcels of land which were sold to Cardale. If Francisco was acting
in good faith, then she should have disclosed the status of the
mortgaged properties to the trial court in Civil Case No. Q-12366 -
especially after Mejia had filed a Motion for Decision, in response
to which she filed a motion for postponement wherein she could
easily have mentioned the tax sale - since this action directly
affected such properties which were the subject of both the sale
and mortgage.
That Merryland acquired the property at the public auction
only serves to shed more light upon Franciscos fraudulent
purposes. Based on the findings of the Court of Appeals, Francisco
is the controlling stockholder and President of Merryland. [29] Thus,
aside from the instrumental role she played as an officer of
Cardale, in evading that corporations legitimate obligations to
Gutierrez, it appears that Franciscos actions were also oriented
towards securing advantages for another corporation in which she
had a substantial interest. We cannot agree, however, with the
Court of Appeals decision to hold Merryland solidarily liable with
Francisco. The only act imputable to Merryland in relation to the
mortgaged properties is that it purchased the same and this by
itself is not a fraudulent or wrongful act. No evidence has been
adduced to establish that Merryland was a mere alter ego or
business conduit of Francisco. Time and again it has been
reiterated that mere ownership by a single stockholder or by
another corporation of all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for disregarding the
separate corporate personality.[30] Neither has it been alleged or
proven that Merryland is so organized and controlled and its affairs
are so conducted as to make it merely an instrumentality, agency,
conduit or adjunct of Cardale.[31] Even assuming that the
businesses of Cardale and Merryland are interrelated, this alone is
not justification for disregarding their separate personalities, absent
any showing that Merryland was purposely used as a shield to
defraud creditors and third persons of their rights. [32] Thus,
Merrylands separate juridical personality must be upheld.
Based on a statement of account submitted by Mejia, the
Court of Appeals awarded P4,314,271.43 in favor of the estate of
Gutierrez which represents the unpaid balance of the purchase
price in the amount of P629,000.00 with an interest rate of nine
percent (9%) per annum, in accordance with the agreement of the
parties under the Deed of Sale with Mortgage, [33] as of December
1988.[34] Therefore, in addition to the amount awarded by the
appellate court, Francisco should pay the estate of Gutierrez
interest on the unpaid balance of the purchase price (in the amount
of P629,000.00) at the rate of nine percent (9%) per annum
computed from January, 1989 until fully satisfied.
Finally, contrary to petitioners assertions, we agree with the
Court of Appeals that the decision of the trial court in Civil Case
No. Q-12366 does not constitute res judicata insofar as the present
case is concerned because the decision in the first case was not a
judgment on the merits. Rather, it was merely based upon the
premise that since Cardale had been dissolved and the property
acquired by another corporation, the action for rescission would
not prosper. As a matter of fact, it was even expressly stated by the
trial court that the parties should ventilate their issues in another
action.
WHEREFORE, the 13 April 1999 Decision of the Court of
Appeals is hereby accordingly MODIFIED so as to hold ADALIA
FRANCISCO solely liable to the estate of Gutierrez for the
amount of P4,314,271.43 and for interest on the unpaid balance of
the purchase price (in the amount of P629,000.00) at the rate of
nine percent (9%) per annum computed from January, 1989 until
fully satisfied.MERRYLAND is hereby absolved from all liability.
 5

SO ORDERED.
 6
[G.R. No. 142936. April 17, 2002]
PHILIPPINE NATIONAL BANK & NATIONAL SUGAR
DEVELOPMENT CORPORATION, petitioners, vs.
ANDRADA ELECTRIC & ENGINEERING
COMPANY, respondent.
DECISION
PANGANIBAN, J.:
Basic is the rule that a corporation has a legal personality
distinct and separate from the persons and entities owning it. The
corporate veil may be lifted only if it has been used to shield fraud,
defend crime, justify a wrong, defeat public convenience, insulate
bad faith or perpetuate injustice. Thus, the mere fact that the
Philippine National Bank (PNB) acquired ownership or
management of some assets of the Pampanga Sugar Mill
(PASUMIL), which had earlier been foreclosed and purchased at
the resulting public auction by the Development Bank of the
Philippines (DBP), will not make PNB liable for the PASUMILs
contractual debts to respondent.
Statement of the Case
Before us is a Petition for Review assailing the April 17,
2000 Decision[1] of the Court of Appeals (CA) in CA-GR CV No.
57610. The decretal portion of the challenged Decision reads as
follows:
WHEREFORE, the judgment appealed from is hereby
AFFIRMED.[2]
The Facts
The factual antecedents of the case are summarized by the
Court of Appeals as follows:
In its complaint, the plaintiff [herein respondent] alleged that it is a
partnership duly organized, existing, and operating under the laws
of the Philippines, with office and principal place of business at
Nos. 794-812 Del Monte [A]venue, Quezon City, while the
defendant [herein petitioner] Philippine National Bank (herein
referred to as PNB), is a semi-government corporation duly
organized, existing and operating under the laws of the
Philippines, with office and principal place of business at Escolta
Street, Sta. Cruz, Manila; whereas, the other defendant, the
National Sugar Development Corporation (NASUDECO in brief),
is also a semi-government corporation and the sugar arm of the
PNB, with office and principal place of business at the 2 nd Floor,
Sampaguita Building, Cubao, Quezon City; and the defendant
Pampanga Sugar Mills (PASUMIL in short), is a corporation
organized, existing and operating under the 1975 laws of the
Philippines, and had its business office before 1975 at Del
Carmen, Floridablanca, Pampanga; that the plaintiff is engaged in
the business of general construction for the repairs and/or
construction of different kinds of machineries and buildings; that
on August 26, 1975, the defendant PNB acquired the assets of the
defendant PASUMIL that were earlier foreclosed by the
Development Bank of the Philippines (DBP) under LOI No. 311;
that the defendant PNB organized the defendant NASUDECO in
September, 1975, to take ownership and possession of the assets
and ultimately to nationalize and consolidate its interest in other
PNB controlled sugar mills; that prior to October 29, 1971, the
defendant PASUMIL engaged the services of plaintiff for
electrical rewinding and repair, most of which were partially paid
by the defendant PASUMIL, leaving several unpaid accounts with
the plaintiff; that finally, on October 29, 1971, the plaintiff and the
defendant PASUMIL entered into a contract for the plaintiff to
perform the following, to wit
(a) Construction of one (1) power house
building;
(b) Construction of three (3) reinforced concrete
foundation for three (3) units 350
KW diesel engine generating set[s];
(c) Construction of three (3) reinforced concrete
foundation for the 5,000 KW and
1,250 KW turbo generator sets;
(d) Complete overhauling and reconditioning
tests sum for three (3) 350 KW
diesel engine generating set[s];
(e) Installation of turbine and diesel generating
sets including transformer,
switchboard, electrical wirings and
pipe provided those stated units are
completely supplied with their
accessories;
(f) Relocating of 2,400 V transmission line,
demolition of all existing concrete
foundation and drainage canals,
excavation, and earth fillings all for
the total amount of P543,500.00 as
evidenced by a contract, [a] xerox
copy of which is hereto attached as
Annex A and made an integral part
of this complaint;
that aside from the work contract mentioned-above, the defendant
PASUMIL required the plaintiff to perform extra work, and
provide electrical equipment and spare parts, such as:
(a) Supply of electrical devices;
(b) Extra mechanical works;
(c) Extra fabrication works;
(d) Supply of materials and consumable items;
(e) Electrical shop repair;
(f) Supply of parts and related works for turbine
generator;
(g) Supply of electrical equipment for
machinery;
(h) Supply of diesel engine parts and other
related works including fabrication
of parts.
that out of the total obligation of P777,263.80, the defendant
PASUMIL had paid only P250,000.00, leaving an unpaid balance,
as of June 27, 1973, amounting to P527,263.80, as shown in the
Certification of the chief accountant of the PNB, a machine copy
of which is appended as Annex C of the complaint; that out of said
unpaid balance of P527,263.80, the defendant PASUMIL made a
partial payment to the plaintiff of P14,000.00, in broken amounts,
covering the period from January 5, 1974 up to May 23, 1974,
leaving an unpaid balance of P513,263.80; that the defendant
PASUMIL and the defendant PNB, and now the defendant
NASUDECO, failed and refused to pay the plaintiff their just,
valid and demandable obligation; that the President of the
 7
NASUDECO is also the Vice-President of the PNB, and this
official holds office at the 10 th Floor of the PNB, Escolta, Manila,
and plaintiff besought this official to pay the outstanding
obligation of the defendant PASUMIL, inasmuch as the defendant
PNB and NASUDECO now owned and possessed the assets of the
defendant PASUMIL, and these defendants all benefited from the
works, and the electrical, as well as the engineering and repairs,
performed by the plaintiff; that because of the failure and refusal
of the defendants to pay their just, valid, and demandable
obligations, plaintiff suffered actual damages in the total amount
of P513,263.80; and that in order to recover these sums, the
plaintiff was compelled to engage the professional services of
counsel, to whom the plaintiff agreed to pay a sum equivalent to
25% of the amount of the obligation due by way of attorneys
fees. Accordingly, the plaintiff prayed that judgment be rendered
against the defendants PNB, NASUDECO, and PASUMIL, jointly
and severally to wit:
(1) Sentencing the defendants to pay the plaintiffs the sum
of P513,263.80, with annual interest of 14% from the time the
obligation falls due and demandable;
(2) Condemning the defendants to pay attorneys fees amounting to
25% of the amount claim;
(3) Ordering the defendants to pay the costs of the suit.
The defendants PNB and NASUDECO filed a joint motion to
dismiss the complaint chiefly on the ground that the complaint
failed to state sufficient allegations to establish a cause of action
against both defendants, inasmuch as there is lack or want of
privity of contract between the plaintiff and the two defendants,
the PNB and NASUDECO, said defendants citing Article 1311 of
the New Civil Code, and the case law ruling in Salonga v. Warner
Barnes & Co., 88 Phil. 125; and Manila Port Service, et al. v.
Court of Appeals, et al., 20 SCRA 1214.
The motion to dismiss was by the court a quo denied in its Order
of November 27, 1980; in the same order, that court directed the
defendants to file their answer to the complaint within 15 days.
In their answer, the defendant NASUDECO reiterated the grounds
of its motion to dismiss, to wit:
That the complaint does not state a sufficient cause of action
against the defendant NASUDECO because: (a) NASUDECO is
not x x x privy to the various electrical construction jobs being
sued upon by the plaintiff under the present complaint; (b) the
taking over by NASUDECO of the assets of defendant PASUMIL
was solely for the purpose of reconditioning the sugar central of
defendant PASUMIL pursuant to martial law powers of the
President under the Constitution; (c) nothing in the LOI No. 189-A
(as well as in LOI No. 311) authorized or commanded the PNB or
its subsidiary corporation, the NASUDECO, to assume the
corporate obligations of PASUMIL as that being involved in the
present case; and, (d) all that was mentioned by the said letter of
instruction insofar as the PASUMIL liabilities [were] concerned
[was] for the PNB, or its subsidiary corporation the NASUDECO,
to make a study of, and submit [a] recommendation on the
problems concerning the same.
By way of counterclaim, the NASUDECO averred that by reason
of the filing by the plaintiff of the present suit, which it [labeled]
as unfounded or baseless, the defendant NASUDECO was
constrained to litigate and incur litigation expenses in the amount
of P50,000.00, which plaintiff should be sentenced to
pay. Accordingly, NASUDECO prayed that the complaint be
dismissed and on its counterclaim, that the plaintiff be condemned
to pay P50,000.00 in concept of attorneys fees as well as
exemplary damages.
In its answer, the defendant PNB likewise reiterated the grounds of
its motion to dismiss, namely: (1) the complaint states no cause of
action against the defendant PNB; (2) that PNB is not a party to
the contract alleged in par. 6 of the complaint and that the alleged
services rendered by the plaintiff to the defendant PASUMIL upon
which plaintiffs suit is erected, was rendered long before PNB took
possession of the assets of the defendant PASUMIL under LOI
No. 189-A; (3) that the PNB take-over of the assets of the
defendant PASUMIL under LOI 189-A was solely for the purpose
of reconditioning the sugar central so that PASUMIL may resume
its operations in time for the 1974-75 milling season, and that
nothing in the said LOI No. 189-A, as well as in LOI No. 311,
authorized or directed PNB to assume the corporate obligation/s of
PASUMIL, let alone that for which the present action is brought;
(4) that PNBs management and operation under LOI No. 311 did
not refer to any asset of PASUMIL which the PNB had to acquire
and thereafter [manage], but only to those which were foreclosed
by the DBP and were in turn redeemed by the PNB from the DBP;
(5) that conformably to LOI No. 311, on August 15, 1975, the
PNB and the Development Bank of the Philippines (DBP) entered
into a Redemption Agreement whereby DBP sold, transferred and
conveyed in favor of the PNB, by way of redemption, all its (DBP)
rights and interest in and over the foreclosed real and/or personal
properties of PASUMIL, as shown in Annex C which is made an
integral part of the answer; (6) that again, conformably with LOI
No. 311, PNB pursuant to a Deed of Assignment dated October 21,
1975, conveyed, transferred, and assigned for valuable
consideration, in favor of NASUDECO, a distinct and independent
corporation, all its (PNB) rights and interest in and under the above
Redemption Agreement. This is shown in Annex D which is also
made an integral part of the answer; [7] that as a consequence of
the said Deed of Assignment, PNB on October 21, 1975 ceased to
managed and operate the above-mentioned assets of PASUMIL,
which function was now actually transferred to NASUDECO. In
other words, so asserted PNB, the complaint as to PNB, had
become moot and academic because of the execution of the said
Deed of Assignment; [8] that moreover, LOI No. 311 did not
authorize or direct PNB to assume the corporate obligations of
PASUMIL, including the alleged obligation upon which this
present suit was brought; and [9] that, at most, what was granted to
PNB in this respect was the authority to make a study of and
submit recommendation on the problems concerning the claims of
PASUMIL creditors, under sub-par. 5 LOI No. 311.
In its counterclaim, the PNB averred that it was unnecessarily
constrained to litigate and to incur expenses in this case, hence it is
entitled to claim attorneys fees in the amount of at
least P50,000.00.Accordingly, PNB prayed that the complaint be
dismissed; and that on its counterclaim, that the plaintiff be
sentenced to pay defendant PNB the sum of P50,000.00 as
attorneys fees, aside from exemplary damages in such amount that
the court may seem just and equitable in the premises.
Summons by publication was made via the Philippines Daily
Express, a newspaper with editorial office at 371 Bonifacio Drive,
Port Area, Manila, against the defendant PASUMIL, which was
thereafter declared in default as shown in the August 7, 1981 Order
issued by the Trial Court.
After due proceedings, the Trial Court rendered judgment, the
decretal portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff
and against the defendant Corporation, Philippine National Bank
(PNB) NATIONAL SUGAR DEVELOPMENT CORPORATION
(NASUDECO) and PAMPANGA SUGAR MILLS (PASUMIL),
ordering the latter to pay jointly and severally the former the
following:
1. The sum of P513,623.80 plus interest
thereon at the rate of 14% per annum
as claimed from September 25, 1980
until fully paid;
 8
2. The sum of P102,724.76 as attorneys Issues
fees; and,
In their Memorandum, petitioners raise the following errors
3. Costs. for the Courts consideration:
SO ORDERED. I the former acted in good faith and paid adequate consideration for
Manila, Philippines, September 4, 1986. The Court of Appeals gravely erred in law in holding the
herein petitioners liable for the unpaid corporate debts of
PASUMIL, a corporation whose corporate existence has not
'
been legally extinguished or terminated, simply because of
(
petitioners[] take-over of the management and operation of
S
PASUMIL pursuant to the mandates of LOI No. 189-A, as
G
D amended by LOI No. 311.
) Piercing the Corporate
II
E
R The Court of Appeals gravely erred in law in not applying
N [to] the case at bench the ruling enunciated in Edward J. Nell
E Co. v. Pacific Farms, 15 SCRA 415.[6]
S attributes, and properties expressly authorized by law or incident to
T Succinctly put, the aforesaid errors boil down to the
O principal issue of whether PNB is liable for the unpaid debts of
PASUMIL to respondent.
S
This Courts Ruling
.
T The Petition is meritorious.
E veil will justifiably be impaled [15] only when it becomes a shield
N Main Issue:
G
C Liability for Corporate Debts
O corporate veil should be done with caution. [17] A court should be
As a general rule, questions of fact may not be raised in a
Jud petition for review under Rule 45 of the Rules of Court. [7] To this
ge[3] rule, however, there are some exceptions enumerated in Fuentes v.
Court of Appeals.[8] After a careful scrutiny of the records and the
Ruling of the Court of Appeals pleadings submitted by the parties, we find that the lower courts
misappreciated the evidence presented. [9]Overlooked by the CA
Affirming the trial court, the CA held that it was offensive to were certain relevant facts that would justify a conclusion different
the basic tenets of justice and equity for a corporation to take over from that reached in the assailed Decision. [10]
and operate the business of another corporation, while disavowing
or repudiating any responsibility, obligation or liability arising Petitioners posit that they should not be held liable for the
therefrom.[4] corporate debts of PASUMIL, because their takeover of the latters
foreclosed assets did not make them assignees. On the other hand,
Hence, this Petition.[5] respondent asserts that petitioners and PASUMIL should be
treated as one entity and, as such, jointly and severally held liable
for PASUMILs unpaid obligation.
As a rule, a corporation that purchases the assets of another
will not be liable for the debts of the selling corporation, provided
such assets, except when any of the following circumstances is
present: (1) where the purchaser expressly or impliedly agrees to
assume the debts, (2) where the transaction amounts to a
consolidation or merger of the corporations, (3) where the
purchasing corporation is merely a continuation of the selling
corporation, and (4) where the transaction is fraudulently entered
into in order to escape liability for those debts. [11]
Veil Not Warranted
A corporation is an artificial being created by operation of
law. It possesses the right of succession and such powers,
its existence.[12] It has a personality separate and distinct from the
persons composing it, as well as from any other legal entity to
which it may be related.[13] This is basic.
Equally well-settled is the principle that the corporate mask
may be removed or the corporate veil pierced when the corporation
is just an alter ego of a person or of another corporation. [14] For
reasons of public policy and in the interest of justice, the corporate
for fraud, illegality or inequity committed against third persons. [16]
Hence, any application of the doctrine of piercing the
mindful of the milieu where it is to be applied. [18] It must be certain
that the corporate fiction was misused to such an extent that
injustice, fraud, or crime was committed against another, in
disregard of its rights.[19] The wrongdoing must be clearly and
convincingly established; it cannot be presumed. [20] Otherwise, an
injustice that was never unintended may result from an erroneous
application.[21]
This Court has pierced the corporate veil to ward off a
judgment credit,[22] to avoid inclusion of corporate assets as part of
the estate of the decedent, [23] to escape liability arising from a debt,
[24]
 or to perpetuate fraud and/or confuse legitimate issues [25] either
to promote or to shield unfair objectives [26] or to cover up an
otherwise blatant violation of the prohibition against forum-
 9
shopping.[27] Only in these and similar instances may the veil be
pierced and disregarded.[28]
The question of whether a corporation is a mere alter ego is
one of fact.[29] Piercing the veil of corporate fiction may be allowed
only if the following elements concur: (1) control -- not mere stock
control, but complete domination -- not only of finances, but of
policy and business practice in respect to the transaction attacked,
must have been such that the corporate entity as to this transaction
had at the time no separate mind, will or existence of its own; (2)
such control must have been used by the defendant to commit a
fraud or a wrong to perpetuate the violation of a statutory or other
positive legal duty, or a dishonest and an unjust act in
contravention of plaintiffs legal right; and (3) the said control and
breach of duty must have proximately caused the injury or unjust
loss complained of.[30]
We believe that the absence of the foregoing elements in the
present case precludes the piercing of the corporate veil. First,
other than the fact that petitioners acquired the assets of
PASUMIL, there is no showing that their control over it warrants
the disregard of corporate personalities. [31] Second, there is no
evidence that their juridical personality was used to commit a fraud
or to do a wrong; or that the separate corporate entity was
farcically used as a mere alter ego, business conduit or
instrumentality of another entity or person. [32] Third, respondent
was not defrauded or injured when petitioners acquired the assets
of PASUMIL.[33]
Being the party that asked for the piercing of the corporate
veil, respondent had the burden of presenting clear and convincing
evidence to justify the setting aside of the separate corporate
personality rule.[34] However, it utterly failed to discharge this
burden;[35] it failed to establish by competent evidence that
petitioners separate corporate veil had been used to conceal fraud,
illegality or inequity.[36]
While we agree with respondents claim that the assets of the
National Sugar Development Corporation (NASUDECO) can be
easily traced to PASUMIL, [37] we are not convinced that the
transfer of the latters assets to petitioners was fraudulently entered
into in order to escape liability for its debt to respondent. [38]
A careful review of the records reveals that DBP foreclosed
the mortgage executed by PASUMIL and acquired the assets as the
highest bidder at the public auction conducted. [39] The bank was
justified in foreclosing the mortgage, because the PASUMIL
account had incurred arrearages of more than 20 percent of the
total outstanding obligation.[40] Thus, DBP had not only a right, but
also a duty under the law to foreclose the subject properties. [41]
Pursuant to LOI No. 189-A[42] as amended by LOI No. 311,
[43]
 PNB acquired PASUMILs assets that DBP had foreclosed and
purchased in the normal course. Petitioner bank was likewise
tasked to manage temporarily the operation of such assets either by
itself or through a subsidiary corporation.[44]
PNB, as the second mortgagee, redeemed from DBP the
foreclosed PASUMIL assets pursuant to Section 6 of Act No.
3135.[45] These assets were later conveyed to PNB for a
consideration, the terms of which were embodied in the
Redemption Agreement.[46] PNB, as successor-in-interest, stepped
into the shoes of DBP as PASUMILs creditor. [47] By way of a Deed
of Assignment,[48] PNB then transferred to NASUDECO all its
rights under the Redemption Agreement.
In Development Bank of the Philippines v. Court of Appeals,
[49]
 we had the occasion to resolve a similar issue. We ruled that
PNB, DBP and their transferees were not liable for Marinduque
Minings unpaid obligations to Remington Industrial Sales
Corporation (Remington) after the two banks had foreclosed the
assets of Marinduque Mining. We likewise held that Remington
failed to discharge its burden of proving bad faith on the part of
Marinduque Mining to justify the piercing of the corporate veil.
In the instant case, the CA erred in affirming the trial courts
lifting of the corporate mask. [50] The CA did not point to any fact
evidencing bad faith on the part of PNB and its transferee. [51]The
corporate fiction was not used to defeat public convenience, justify
a wrong, protect fraud or defend crime. [52] None of the foregoing
exceptions was shown to exist in the present case. [53] On the
contrary, the lifting of the corporate veil would result in manifest
injustice. This we cannot allow.
No Merger or  Consolidation
Respondent further claims that petitioners should be held
liable for the unpaid obligations of PASUMIL by virtue of LOI
Nos. 189-A and 311, which expressly authorized PASUMIL and
PNB to merge or consolidate. On the other hand, petitioners
contend that their takeover of the operations of PASUMIL did not
involve any corporate merger or consolidation, because the latter
had never lost its separate identity as a corporation.
A consolidation is the union of two or more existing entities
to form a new entity called the consolidated corporation. A merger,
on the other hand, is a union whereby one or more existing
corporations are absorbed by another corporation that survives and
continues the combined business.[54]
The merger, however, does not become effective upon the
mere agreement of the constituent corporations. [55] Since a merger
or consolidation involves fundamental changes in the corporation,
as well as in the rights of stockholders and creditors, there must be
an express provision of law authorizing them. [56] For a valid merger
or consolidation, the approval by the Securities and Exchange
Commission (SEC) of the articles of merger or consolidation is
required.[57] These articles must likewise be duly approved by a
majority of the respective stockholders of the constituent
corporations.[58]
In the case at bar, we hold that there is no merger or
consolidation with respect to PASUMIL and PNB. The procedure
prescribed under Title IX of the Corporation Code [59] was not
followed.
In fact, PASUMILs corporate existence, as correctly found
by the CA, had not been legally extinguished or terminated.
[60]
 Further, prior to PNBs acquisition of the foreclosed assets,
PASUMIL had previously made partial payments to respondent for
the formers obligation in the amount of P777,263.80. As of June
27, 1973, PASUMIL had paid P250,000 to respondent and, from
January 5, 1974 to May 23, 1974, another P14,000.
Neither did petitioner expressly or impliedly agree to assume
the debt of PASUMIL to respondent. [61] LOI No. 11 explicitly
provides that PNB shall study and submit recommendations on the
claims of PASUMILs creditors. [62] Clearly, the corporate
separateness between PASUMIL and PNB remains, despite
respondents insistence to the contrary.[63]
WHEREFORE, the Petition is hereby GRANTED and the
assailed Decision SET ASIDE. No pronouncement as to costs.
SO ORDERED.
 10
[G.R. No. 117963. February 11, 1999]
AZCOR MANUFACTURING INC., FILIPINAS PASO and/or
ARTURO
ZULUAGA/Owner, petitioners, vs. NATIONAL
LABOR RELATIONS COMMISSION (NLRC) AND
CANDIDO CAPULSO, respondents.
DECISION
BELLOSILLO, J.:
AZCOR MANUFACTURING, INC., Filipinas Paso and
Arturo Zuluaga instituted this petition for certiorari under Rule 65
of the Rules of Court to assail, for having been rendered with
grave abuse of discretion amounting to lack or excess of
jurisdiction, the Decision of the National Labor Relations
Commission which reversed the decision of the Labor Arbiter
dismissing the complaint of respondent Candido Capulso against
petitioners.[1]
Candido Capulso filed with the Labor Arbiter a complaint
for constructive illegal dismissal and illegal deduction of P50.00
per day for the period April to September 1989. Petitioners Azcor
Manufacturing, Inc. (AZCOR) and Arturo Zuluaga who were
respondents before the Labor Arbiter (Filipinas Paso was not yet a
party then in that case) moved to dismiss the complaint on the
ground that there was no employer-employee relationship between
AZCOR and herein respondent Capulso; that the latter became an
employee of Filipinas Paso effective 1 March 1990 but voluntarily
resigned therefrom a year after. Capulso later amended his
complaint by impleading Filipinas Paso as additional respondent
before the Labor Arbiter.
On 14 January 1992, Labor Arbiter Felipe T. Garduque II
denied the motion to dismiss holding that the allegation of lack of
employer-employee relationship between Capulso and AZCOR
was not clearly established. Thereafter, the Labor Arbiter ordered
that hearings be conducted for the presentation of evidence by both
parties.
The evidence presented by Capulso showed that he worked
for AZCOR as ceramics worker for more than two (2) years
starting from 3 April 1989 to 1 June 1991 receiving a daily wage
of P118.00 plus other benefits such as vacation and sick
leaves. From April to September 1989 the amount of P50.00 was
deducted from his salary without informing him of the reason
therefor.
In the second week of February 1991, upon his doctors
recommendation, Capulso verbally requested to go on sick leave
due to bronchial asthma. It appeared that his illness was directly
caused by his job as ceramics worker where, for lack of the
prescribed occupational safety gadgets, he inhaled and absorbed
harmful ceramic dusts. His supervisor, Ms. Emily Apolinaria,
approved his request. Later, on 1 June 1991, Capulso went back to
petitioner AZCOR to resume his work after recuperating from his
illness. He was not allowed to do so by his supervisors who
informed him that only the owner, Arturo Zuluaga, could allow
him to continue in his job. He returned five (5) times to AZCOR
but when it became apparent that he would not be reinstated, he
immediately filed the instant complaint for illegal dismissal. [2]
Capulso presented the following documentary evidence in
support of his claim: (a) His affidavit and testimony to prove that
he was terminated without just cause and without due process;
[3]
 (b) Identification card issued by AZCOR which he continued to
use even after his supposed employment by Filipinas Paso; [4] (c)
Certification of SSS premium payments; [5] (d) SSS Member
Assistance Form wherein he stated that he worked with AZCOR
from March 1989 to April 1991;[6] (e) Certification of Employee
Contribution with SSS;[7] and, (f) Payslips issued by AZCOR.[8]
On the other hand, petitioners alleged that Capulso was a
former employee of AZCOR who resigned on 28 February 1990 as
evidenced by a letter of resignation and joined Filipinas Paso on 1
March 1990 as shown by a contract of employment; in February
1991 Capulso allegedly informed his supervisor, Ms. Emilia
Apolinaria, that he intended to go on terminal leave because he
was not feeling well; on 1 March 1991 he submitted a letter of
resignation addressed to the President of Filipinas Paso, Manuel
Montilla; and, in the early part of June 1991 Capulso tried to apply
for work again with Filipinas Paso but there was no vacancy.
Petitioners submitted the following documentary
evidence: (a) Sworn Statement of Ms. Emilia Apolinaria and her
actual testimony to prove that respondent indeed resigned
voluntarily from AZCOR to transfer to Filipinas Paso, and
thereafter, from Filipinas Paso due to failing health; [9] (b) Contract
of Employment between Filipinas Paso and respondent which took
effect 1 March 1991;[10] (c) Letter of resignation of respondent
from AZCOR dated 28 February 1990, to take effect on the same
date;[11] (d) Undated letter of resignation of respondent addressed
to Filipinas Paso to take effect 1 March 1991; [12](e) BIR Form No.
W-4 filed 6 June 1990;[13] (f) Individual Income Tax Return of
respondent for 1990;[14] and, (g) BIR Form 1701-B which was an
alphabetical list of employees of Filipinas Paso for the year ending
31 December 1990.[15]
On 29 December 1992 the Labor Arbiter rendered a decision
dismissing the complaint for illegal dismissal for lack of merit, but
ordered AZCOR and/or Arturo Zuluaga to refund to Capulso the
sum of P200.00 representing the amount illegally deducted from
his salary.
On appeal by Capulso, docketed as NLRC CA No. 004476-
93 (NLRC NCR 00-09-05271-91), "Capulso v. Azcor
Manufacturing Inc., Filipinas Paso and/or Arturo
Zuluaga/owner," the NLRC modified the Labor Arbiters decision
by: (a) declaring the dismissal of Capulso as illegal for lack of just
and valid cause; (b) ordering petitioners to reinstate Capulso to his
former or equivalent position without loss of seniority rights and
without diminution of benefits; and, (c) ordering petitioners to
jointly and solidarily pay Capulso his back wages computed from
the time of his dismissal up to the date of his actual
reinstatement. The NLRC held in part -
x x x x the contract of employment (Exh. 2, p. 187, Rollo) issued
to complainant indicates that the work to be done during the period
was contracted with Filipinas Paso. The said contract was signed
by the Personnel Officer of Ascor Manufacturing Inc. Likewise,
the contract period is for six (6) months, which establishes a
presumption that the said contract could pass either as to cover the
probationary period, or job contracting, the completion of which
automatically terminates employment, whichever will work to
respondents advantage should the case be filed. However,
appellant continued working with respondent after the lapse of the
contract and until the alleged termination of employment of
appellant.
Secondly, the two resignation letters allegedly executed by
appellant are exactly worded, which only shows that the same
were prepared by respondents-appellees plus after the fact that
complainant denied having executed and signed the same.
x x x x the letter of resignation (Exh. 3, p. 188, Rollo) supposed to
have been executed by complainant-appellant shows that he
resigned from Ascor Mfg., Inc. on February 28, 1990 while
Exhibit 2, page 187, Rollo, which was the contract of Employment
issued to Candido Capulso by the personnel officer of Ascor Mfg.,
 11
Inc. shows that appellant was being hired from March 1, 1990 to
August 31, 1990 by respondent Ascor Mfg., Inc. to do jobs for
Filipinas Paso. A run-around of events and dates.
The events that transpired clearly show that there was no
interruption in the service of complainant with Ascor Mfg., Inc.
from April 13 1989 up to June 1, 1991 when complainant was
unceremoniously dismissed.
Considering that Ascor Mfg., Inc. and Filipinas Paso orchestrated
the events that appeared to be in order with the alleged execution
of resignation letters which was disputed by complainant and
confirmed spurious as explained above, likewise overwhelmingly
show the bad faith of respondents in the treatment of their
employees.
Petitioners motion for reconsideration was denied by the
NLRC through its Resolution of 14 October 1994; hence, the
instant petition. Meanwhile, during the pendency of the case
before this Court, Capulso succumbed to asthma and heart disease.
The issue to be resolved is whether the NLRC committed
grave abuse of discretion in declaring that private respondent
Capulso was illegally dismissed and in holding petitioners jointly
and solidarily liable to Capulso for back wages.
As a rule, the original and exclusive jurisdiction to review a
decision or resolution of respondent NLRC in a petition
for certiorari under Rule 65 of the Rules of Court does not include
a correction of its evaluation of the evidence but is confined to
issues of jurisdiction or grave abuse of discretion. The NLRCs
factual findings, if supported by substantial evidence, are entitled
to great respect and even finality, unless petitioner is able to show
that it simply and arbitrarily disregarded the evidence before it or
had misappreciated the evidence to such an extent as to compel a
contrary conclusion if such evidence had been properly
appreciated.[16] We find no cogent reason to disturb the findings of
the NLRC.
Petitioners insist that Capulso was not really dismissed but
he voluntarily resigned from AZCOR and Filipinas Paso, and that
there was nothing illegal or unusual in the letters of resignation he
executed.
We disagree. To constitute a resignation, it must be
unconditional and with the intent to operate as such. There must be
an intention to relinquish a portion of the term of office
accompanied by an act of relinquishment.[17] In the instant case, the
fact that Capulso signified his desire to resume his work when he
went back to petitioner AZCOR after recuperating from his illness,
and actively pursued his case for illegal dismissal before the labor
courts when he was refused admission by his employer, negated
any intention on his part to relinquish his job at AZCOR.
Moreover, a closer look at the subject resignation letters
readily reveals the following: (a) the resignation letter allegedly
tendered by Capulso to Filipinas Paso was identically worded with
that supposedly addressed by him to AZCOR; (b) both were pre-
drafted with blank spaces filled up with the purported dates of
effectivity of his resignation; and, (c) it was written in English, a
language which Capulso was not conversant with considering his
low level of education. No other plausible explanation can be
drawn from these circumstances than that the subject letters of
resignation were prepared by a person or persons other than
Capulso. And the fact that he categorically disowned the signatures
therein and denied having executed them clearly indicates that the
resignation letters were drafted without his consent and
participation.
Even assuming for the sake of argument that the signatures
were genuine, we still cannot give credence to those letters in the
absence of any showing that Capulso was aware that
what he was signing then were in fact resignation letters or that he
fully understood the contents thereof. Having introduced those
resignation letters in evidence, it was incumbent upon petitioners
to prove clearly and convincingly their genuineness and due
execution, especially considering the serious doubts on their
authenticity. Petitioners miserably failed in this respect.
The Labor Arbiter held that Capulsos repudiation of the
signatures affixed in the letters of resignation was weakened by the
fact that he filed the case only after almost four (4) months from
the date of his dismissal. But it should be noted that private
respondent still wanted his job and thus, understandably, refrained
from filing the illegal dismissal case against his employer so as not
to jeopardize his chances of continuing with his employment. True
enough, when it became apparent that he was no longer welcome
at AZCOR he immediately instituted the instant case.
In addition, an action for reinstatement by reason of illegal
dismissal is one based on an injury which may be brought within
four (4) years from the time of dismissal pursuant to Art. 1146 of
the Civil Code. Hence, Capulsos case which was filed after a
measly delay of four (4) months should not be treated with
skepticism or cynicism. By law and settled jurisprudence, he has
four (4) years to file his complaint for illegal dismissal. A delay of
merely four (4) months in instituting an illegal dismissal case is
more than sufficient compliance with the prescriptive period. It
may betray an unlettered mans lack of awareness of his rights as a
lowly worker but, certainly, he must not be penalized for his
tarrying.
In illegal dismissal cases like the present one, the onus of
proving that the dismissal of the employee was for a valid and
authorized cause rests on the employer[18] and failure to discharge
the same would mean that the dismissal is not justified and
therefore illegal.[19] Petitioners failed in this regard.
Petitioners also contend that they could not be held jointly
and severally liable to Capulso for back wages since AZCOR and
Filipinas Paso are separate and distinct corporations with different
corporate personalities; and, the mere fact that the businesses of
these corporations are interrelated and both owned and controlled
by a single stockholder are not sufficient grounds to disregard their
separate corporate entities.
We are not persuaded. The doctrine that a corporation is a
legal entity or a person in law distinct from the persons composing
it is merely a legal fiction for purposes of convenience and to
subserve the ends of justice. This fiction cannot be extended to a
point beyond its reason and policy.[20] Where, as in this case, the
corporate fiction was used as a means to perpetrate a social
injustice or as a vehicle to evade obligations or confuse the
legitimate issues, it would be discarded and the two (2)
corporations would be merged as one, the first being merely
considered as the instrumentality, agency, conduit or adjunct of the
other.[21]
In this particular case, there was much confusion as to the
identity of Capulsos employer - whether it was AZCOR or
Filipinas Paso; but, for sure, it was petitioners' own making, as
shown by the following: First, Capulso had no knowledge that he
was already working under petitioner Filipinas Paso since he
continued to retain his AZCOR Identification card; Second, his
payslips contained the name of AZCOR giving the impression that
AZCOR was paying his salary; Third, he was paid the same salary
and he performed the same kind of job, in the same work area, in
the same location, using the same tools and under the same
supervisor; Fourth, there was no gap in his employment as he
continued to work from the time he was hired up to the last day of
his work; Fifth, the casting department of AZCOR where Capulso
was working was abolished when he, together with six (6) others,
transferred to Filipinas Paso; and Sixth, the employment contract
was signed by an AZCOR personnel officer, which showed that
 12

Capulso was being hired from 1 March 1990 to 31 August 1990 by longer feasible. In lieu thereof, separation pay shall be
AZCOR to do jobs for Filipinas Paso. The employment contract awarded. With respect to the amount of back wages, it shall be
provided in part: computed from the time of private respondents illegal dismissal up
to the time of his death.
The contract is for a specific job contract only and shall be
effective for the period covered, unless sooner terminated when the WHEREFORE, the petition is DISMISSED. The NLRC
job contract is completed earlier or withdrawn by client, or when Decision of 12 September 1994 is MODIFIED. Petitioners
the employee is dismissed for just and lawful causes provided by AZCOR MANUFACTURING, INC., FILIPINAS PASO and
law and the companys rules and regulations, in which case the ARTURO ZULUAGA are ORDERED to pay, jointly and
employment contract will automatically terminate. solidarily, the heirs of private respondent Candido Capulso the
amounts representing his back wages, inclusive of allowances and
As correctly observed by the NLRC, the contract was only other benefits, and separation pay to be computed in accordance
for six (6) months, which could pass either as a probationary with law.
period or a job contracting, the completion of which automatically
terminated the employment. Observe further, however, that SO ORDERED.
respondent continued working even after the lapse of the period in
the contract - for whom it was not clear. It may be asked: Was the
six (6)-month periodprobationary in nature, in which case, after the
lapse of the period he became a regular employee of Filipinas
Paso? Or was the period job-contracting in character, in which
case, after the period he was deemed to have come back to
AZCOR?

Interestingly, petitioners likewise argue that it was grave

abuse of discretion for the NLRC to hold them solidarily liable to
Capulso when the latter himself testified that he was not even an
employee of Filipinas Paso. [22] After causing much confusion,
petitioners have the temerity to use as evidence the ignorance of
Capulso in identifying his true employer. It is evident from the
foregoing discussion that Capulso was led into believing that while
he was working with Filipinas Paso, his real employer was
AZCOR. Petitioners never dealt with him openly and in good
faith, nor was he informed of the developments within the
company, i.e., his alleged transfer to Filipinas Paso and the closure
of AZCORs manufacturing operations beginning 1 March 1990.
[23]
 Understandably, he sued AZCOR alone and was constrained to
implead Filipinas Paso as additional respondent only when it
became apparent that the latter also appeared to be his employer.

In fine, we see in the totality of the evidence a veiled attempt

by petitioners to deprive Capulso of what he had earned through
hard labor by taking advantage of his low level of education and
confusing him as to who really was his true employer - such a
callous and despicable treatment of a worker who had rendered
faithful service to their company.

However, considering that private respondent died during

the pendency of the case before this Court, reinstatement is no
 13
Claropols vs cir
160 Phil. 624
MAKASIAR, J.:
A petition for certiorari to set aside the order of respondent Court
of Industrial Relations dated May 30, 1969 directing petitioners to
pay back wages and bonuses to private respondents as well as its
resolution of July 5, 1969 denying the motion for reconsideration
of said order in Case No. 32-ULP-Iloilo entitled ''Allied Workers'
Association, et. at. versus Eduardo Claparols, et. at. al. "
It appears that on August 6, 1957. a complaint for unfair labor
practice was filed by herein private respondent Allied Workers'
Association, respondent Demetrio Garlitos and ten (10) respondent
workers against herein petitioners on account of the dismissal of
respondent workers from petitioner Claparols Steel and Nail Plant.
On September 16,1963, respondent Court rendered its decision
finding "Mr. Claparols guilty of union busting and" of having
"dismissed said complainants because of their union activities,"
and ordering respondents "(1) To cease and desist from
committing unfair labor practices against their employees and
laborers; (2) To reinstate said complainants to their former or
equivalent jobs, as soon as possible, with back wages from the date
of their dismissal up to their actual reinstatement" (p. 12, Decision;
p. 27, rec).
A motion to reconsider the above decision was filed by herein
petitioners, which respondent Court, sitting en banc, denied in a
resolution dated January 27, 1964.
On March 30, 1964, counsel for herein respondent workers
(complainants in the ULP case) filed a motion for execution of
respondent Court's September 16, 1963 decision.
On May 14, 1964, respondent Court, in its order of September 16,
1963, granted execution and directed herein petitioners.
"to reinstate the above complainants to their former or equivalent
jobs within five (5) days after receipt of a copy of this order. In
order to implement the award of back wages, the Chief of the
Examining Division or any of his assistants is hereby directed to
proceed to the office of the respondents at Matabang, Talisay,
Negros Occidental, and examine its payrolls and other pertinent
records and compute the back wages of the complainants in
accordance with the decision dated September 16, 1963, and. upon
termination, to submit his report as soon as possible for further
disposition" (p. 7, Brief for Respondents, p. 113, rec).
which was reiterated by respondent Court in a subsequent order
dated November 10,1964 (pp. 7-8, Brief for Respondents, p. 113,
rec).
On December 14, 1964, respondent workers were accompanied by
the Chief of Police of Talisay, Negros Occidental to the compound
of herein petitioner company to report for reinstatement per order
of the court. Respondent workers were, however, refused
reinstatement by company accountant Francisco Cusi for he had no
order from plant owner Eduardo Claparols nor from his lawyer
Atty. Plaridel Katalbas, to reinstate respondent workers.
Again, on December 15, 1964, respondent workers were
accompanied by a police officer to the company compound, but
then, they were again refused reinstatement by Cusi on the same
ground.
OnJanuary 15, 1965, the CIR Chief Examiner submitted his report
containing three computations, to wit:
"The first computation covers the period February 1, 1957 to
October 31,1964. The second is up to and including December 7,
1962, when the corporation stopped operations, while the third is
only up to June 30, 1957 when the Claparols Steel and Nail Plant
ceased to operate" (Annex B, Petition for Review on Certiorari, p.
14, Brief for appellees, p. 113,rec).
with the explanation that:
"6. Since the records of the Claparols Steel Corporation show that
it was established on July 1, 1957 succeeding the Claparols Steel
and Nail Plant which ceased operations on June 30, 1957, and that
the Claparols Steel Corporation stopped operations on December
7, 1962, three (3) computations are presented herein for the
consideration of this Honorable Court" (p. 2, Report of Examiner,
p. 29, rec.)
On January 23, 1965, petitioners filed an opposition alleging that
under the circumstances presently engulfing the company,
petitioner Claparols could not personally reinstate respondent
workers; that assuming the workers are entitled to back wages, the
same should only be limited to three months pursuant to the court
ruling in the case of Sta. Cecilia Sawmills vs. CIR (L-19273-74,
February 20, 1964); and that since Claparols Steel Corporation
ceased to operate on December 7, 1962, re-employment of
respondent workers cannot go beyond December 7, 1962.
A reply to petitioner's opposition was filed by respondent workers,
alleging among others, that Claparols Steel and Nail Plant and
Claparols Steel and Nail Corporation are one and the same
corporation controlled by petitioner Claparols, with the latter
corporation succeeding the former.
On November 28, 1966, after conducting a series of hearings on
the report of the examiner, respondent Court issued an order, the
dispositive portion of which reads:
WHEREFORE, the Report of the Examiner filed on January
15,1965, is hereby approved subject to the foregoing findings and
dispositions. Consequently, the Corporation Auditing Examiner is
directed to recompute the back wages of complainants Demetrio
Garlitos and Alfredo Ongsuco on the basis of F200.00 and P270.00
a month, respectively; to compute those of complainant Ignacio
Quioyo as aforesaid; to compute the deductible earnings of
complainants Ongsuco, Jorge Semillano and Garlitos, as found in
the body of this order; and to compute the bonuses of each and
every complainant, except Honorato Quioyo. Thereafter, as soon
as possible, the Examiner should submit a report in compliance
herewith of the Court's further disposition" (p. 24, Brief for
Respondents, p. 113, rec.)
On December 7, 1966, a motion for reconsideration was filed by
petitioner, assailing respondent Court's ruling that (1) the ruling in
the case of Sta. Cecilia Sawmills Inc. CIR, et. al. does not apply in
the case at bar; and (2) that bonus should be included in the
recoverable wages.
On December 14, 1966, a counter-opposition was filed by private
respondents alleging that petitioners' motion for reconsideration
was pro forma, it not making express reference to the testimony or
documentary evidence or to the provision of law alleged to be
contrary to such findings or conclusions of respondent Court.
 14

On February 8, 1967, respondent Court of Industrial Relations Then on March 21, 1968 the Chief Examiner came out with his 8. Gaudencio Quioyo   1,167.92  
dismissed petitioners' motion for reconsideration for being pro report, the disputed portion of which (regarding bonuses) reads:
forma. 9. Jorge Semillano   1,212.08  
"xxx                xxx                xxx
Whereupon, petitioners filed a petition for certiorari with this
10. Maximo Quioyo   449.41  
COURT in G.R. No. L-27272 to set aside the November 28, 1966 "4.   The yearly bonuses of the employees and laborers of
order of respondent Court, as well as its February 8, 1967 respondent corporation are given on the following basis:
resolution. Petitioners assigned therein as errors of law the very       __________  
same assignment of errors it raises in the present case, t wit:
    Total P9,107.79"  
"I  
'Basic Additional:
 
    (Pp. 30-31, Respondent's Brief, p. 113,rec).
"THE RESPONDENT COURT ERRED AND/OR ACTED WITH
"a. For every dependent 1% of monthly salary
GRAVE ABUSE OF DISCRETION, AMOUNTING TO LACK
   
OF JURISDICTION, IN HOLDING IN THE ORDER UNDER
For every dependent in elementary
REVIEW THAT BONUSES SHOULD BE PAID TO THE "b. 2% of monthly salary On April 16, 1968. petitioners filed their opposition to the report of
grade
RESPONDENT WORKERS DESPITE THE FACT THAT THE the Examiner dated March 21,1968 on grounds already rejected by
   
SAME WAS NOT ADJUDICATED IN ITS ORIGINAL respondent Court in its order dated November 28, 1966, and by the
c. "For every dependent in high school 3% of monthly salary
DECISION. Supreme Court also in its ruling in G.R. No. L-27272.
   
"II
"d. For every dependent in college 5% of monthly salary
On May 4, 1968, a rejoinder to petitioners' opposition was filed by
"THE RESPONDENT COURT ERRED AND/OR ACTED WITH private respondents, alleging among others "that the grounds of
GRAVE ABUSE OF DISCRETION, AMOUNTING TO LACK petitioners' opposition were the same grounds raised by them
OF JURISDICTION, IN NOT APPLYING THE DOCTRINE before and passed upon by respondent Court and this Honorable
LAID DOWN BY THIS HONORABLE TRIBUNAL IN THE "xxx                xxx                xxx Tribunal; that this order of November 28,1966 which passed upon
CASE OF 'SAT. CECILIA SAWMILLS, INC. VS. C.I.R., ET. these issues became final and executory on June 3,1967 from the
AL.,' G.R. No. L-19273-74, PROMULGATED ON FEBRUARY "7.   The computed x x x bonuses after deducting the earnings Honorable Supreme Court. (Order of respondent Court dated July
29, 1964" (pp. 10-11, rec.) elsewhere of Messrs. Ongsuco, Garlitos and Semillano, are as 13, 1967)." [P. 32, Brief for Respondents, p. 113, rec.].
follows:
On April 27, 1967, the Supreme Court denied petitioner's petition On July 26, 1968, private respondents filed their motion for
for certiorari (p. 77, rec. of L-27272), which was reiterated on approval of the Report of the Examiner submitted on March 21,
May 19, 1967 (p. 27, Respondent's Brief, p. 113, rec.; p. 81, rec. of 1968, alleging, among others, that petitioners, in their opposition,
 "Name xxx Bonuses xxxdid not actually dispute the data elicited by the Chief Examiner but
L-27272).
rather harped on grounds which, as already stated, had already
1. Alfredo Ongsuco   P1,620.00   been turned down by the Supreme Court.
On May 3, 1967, private respondent moved to have the workers'
back wages properly recomputed.  A motion to the same end was
2. Demetrio Garlitos   1,200.00   On October 19, 1968, herein private respondents filed their
reiterated by private respondents on June 14, 1967.
"Constancia", submitting the case for resolution of respondent
On July 13, 1967, respondent Court directed a recomputation of 3. Ignacio Quioyo   455.23   Court of Industrial Relations.
the back wages of respondent workers in accordance with its order
dated November 28, 1966. The said order in part reads: 4. Aser Abancio   461.00   On May 30,1969, respondent Court issued an order, subject of the
present appeal, the dispositive portion of which reads:
"WHEREFORE, the chief Auditing Examiner of the court or any 5. Ludovico Belopenos   752.05  
of his assistants, is hereby directed to recompute the back wages of
the workers involved in this case in accordance with the Order of 6. Salvador Doroteo   714.70  
November 28, 1966, within 20 days from receipt of a copy of this "WHEREFORE, there being no proof offered to substantiate
Order" (p. 28, Brief for Respondents, p. 113, rec.) 7. Rosendo Espinosa   1,075.40   respondent Eduardo Claparols' opposition, the Examiner's Report
 15
should be, and it is hereby, APPROVED. Consequently, pursuant
to the decision dated September 16, 1963, respondent x x x
(petitioners herein) are hereby directed to pay the respective back
wages and bonuses of the complainants (respondents herein) x x
x" (p 35, Brief for Respondents; p. 113, rec; italics supplied).
On June 7, 1969, petitioners filed a motion for reconsideration on
practically the same grounds previously raised by them.
On June 30,1969, respondents filed an opposition to petitioners'
motion for reconsideration, with the following allegations:
"1. The issues raised, namely, whether bonuses should be included
in the award for back wages had already been resolved by
respondent court in its orders dated November 28, 1966, and
December 7, 1966, and in the Resolution of the Honorable
Supreme Court in G.R. No. L- 27272 dated April 26, 1967 and
May 19, 1967, and the same is already a settled and final issue.
"2. Petitioners' motion for reconsideration is merely a rehash of
previous arguments, effete and unrejuvenated, pro forma, and
intended merely to delay the proceedings.
As correctly contended by private respondents, the present petition
is barred by Our resolutions of April 26, 1967 and May 19, 1967 in
G. R. No. L-27272 (Eduardo Claparols, et al. vs. CIR, et al.) [pp.
77-83, rec. of L-27272] dismissing said case, wherein said
petitioners invoked the applicability of the doctrine in Sta. Cecilia
Sawmills, Inc. vs. CIR, et al. (L-19273-74, Feb. 29, 1964, 10
SCRA 433) and impugned the illegality of the order of respondent
Court dated November 28, 1966 directing the computation and
payment of the bonuses were not included in the decision of
September 16, 1963, which had long become final.
The aforesaid resolution in G.R. No. L-27272 constitute the law of
the instant case, wherein herein petitioners raised again practically
the same issues invoked in the above mentioned case. The denial
of the petition in G.R. No. L-27272, suffices to warrant the denial
of the present petition; and We need not go any further.
However, without lending a sympathetic ear to the obvious desire
of herein petitioners of this Court to re-examine which would be
an exercise in futility the final ruling in G.R. No. L-27272, which
as above-stated is the law of the instant case, but solely to remind
herein petitioners, We reiterate the governing principles.
WE uniformly held that "a bonus is not demandable and
enforceable obligation, except when it is made part of the wage or
salary compensation" (Philippine Education Co. vs. CIR and the
Union of Philippine Co. Employees [NLU], 92, Phil. 381; Ansay,
et. al. vs. National Development Co., et. al., 107 Phil. 998, 999;
Italics supplied).
In Atok Big Wedge Mining Co. vs. Atok Big Wedge Mutual Benefit
Association (92 Phil. 754), this Court, thru Justice Labrador, held:
"Whether or not bonus forms part of wages depends upon the
condition or circumstance for its payment. If it is an additional
compensation WHICH THE EMPLOYER PROMISED AND A
GREED to give without any condition imposed for its payment x x
x then it is part of the wage." (Italics supplied).
In Altomonte vs. Philippine American Drug Co. (106 Phil. 137),
the Supreme Court held that an employee is not entitled to bonus
where there is no showing that it had been granted by the employer
to its employees periodically or regularly as to become part of their
wages or salaries. The clear implication is that bonus is
recoverable as part of the wage or salary where the employer
regularly or periodically gives it to employees.
American jurisprudence equally regards bonuses as part of
compensation or recoverable wages.
Thus, it was held that "x x x it follows that in determining the
regular rate of pay, a bonus which in fact constitutes PART OF AN
EMPLOYEE'S compensation, rather than a true gift or gratuity,
has to be taken into consideration." (48 Am. Jur. 2d, Labor and
Labor Relations, No. 1555, citing the cases of Triple "AAA " Co.
vs. Wirtz and Haber vs. Americana Corporation; Italics supplied).
It was further held that "x x x the regular rate includes incentive
bonuses paid to the employees in addition to the guaranteed base
rates regardless of any contract provision to the contrary and even
though such bonuses could not be determined or paid until such
time after the payday" (48 Am. Jur. 2d, Labor and Labor Relations,
No. 1555, citing the case of Walling vs. Harnischfeger Corp., 325
US 427, 89 L Ed 1711, 65 S Ct. 1246; Italics supplied).
Petitioners in the present case do not dispute that as a matter of
tradition, the company has been doling out bonuses to employees.
In fact, the company balance sheets for the years 1956 to 1962
contained bonus and pension computations which were never
repudiated or questioned by petitioners. As such, bonus for a given
year earmarked as a matter of tradition for distribution to
employees has formed part of their recoverable wages from the
company. Moreover, with greater reason, should recovery of
bonuses as part of back wages be observed in the present case
since the company, in the light of the very admission of company
accountant Francisco Cusi, distributes bonuses to its employees
even if the company has suffered losses. Specifically, petitioner
company has done this in 1962 (t.s.n., p. 149, Sept. 20, 1965).
Since bonuses are part of back wages of private respondents, the
order of May 30, 1969, directing the payment of their bonuses, did
not amend the decision of September 16, 1963 of respondent Court
directing payment of their wages, which has long become final and
executory, in the same way that the previous order of May 14,1964
granting execution of said decision of September 16, 1963 also
directed the computation of the wages to be paid to private
respondents as decreed by the decision of September 16, 1963. All
the orders of May 30s 1969, November 28, 1966 and May 14,
1964 merely implement the already final and executory decision of
September 16, 1963.
Petitioners insist that We adopt the ruling in the Sta. Cecilia
Sawmills case wherein the recoverable back wages were limited to
only three (3) months: because as in the Sta. Cecilia Sawmills
case, the Claparols Steel and Nail Plant ceased operations due to
enormous business reverses.
Respondent Court's findings that indeed the Claparols Steel and
Nail Plant, which ceased operation of June 30, 1957, v. as
SUCCEEDED by the Claparols Steel Corporation effective the
next day, July 1, 1957 up to December 7, 1962, when the latter
finally ceased to operate, were not disputed by petitioners. It is
very clear that the latter corporation was a continuation and
successor of the first entity, and its emergence was skillfully timed
to avoid the financial liability that already attached to its
predecessor, the Claparols Steel and Nail Plant. Both predecessors
and successor were owned and controlled by petitioner Eduardo
Claparols and there was no break in the succession and continuity
of the same business. This "avoiding-the-liability" scheme is very
patent, considering that 90% of the subscribed shares of stocks of
the Claparols Steel Corporation (the second corporation) was
owned by respondent (herein petitioner) Claparols himself, and all
the assets of the dissolved Claparols Steel and Nail Plant were
turned over to the emerging Claparols Steel Corporation.
It is very obvious that the second corporation seeks the protective
 16

shield of a corporate fiction whose veil in the present case could,

and should, be pierced as it was deliberately and maliciously
designed to evade its financial obligation to its employees.

It is well remembering that in Yutivo & Sons Hardware Company

vs. Court of Tax Appeals (L-13203, Jan. 28, 1961, 1 SCRA 160),
We held that 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 or
persons, or, in the case of two corporations, will merge them into
one.

In Liddel & Company, Inc. vs. Collector of Internal Revenue (L-

9687, June 30, 1961, 2 SCRA 632), this Court likewise held that
where a corporation is a dummy and serves no business purpose
and is intended only as a blind, the corporate fiction may be
ignored.

In Commissioner of Internal Revenue vs. Norton and Harrison

Company (L-17618, Aug. 31, 1964, 11 SCRA 714), We ruled that
where a corporation is merely an adjunct, business conduit or alter
ego of another corporation, the fiction of separate and distinct
corporate entities should be disregarded.

To the same uniform effect are the decisions in the cases

of Republic vs. Razon (L-17462, May 29, 1967, 20 SCRA 234)
and A.D. Santos, Inc. vs. Vasquez (L-23586, March 20, 1968,22
SCRA 1156).

WE agree with respondent Court of Industrial Relations, therefore,

that the amount of back wages recoverable by respondent workers
from petitioners should be the amount accruing up to December 7,
1962 when the Claparols Steel Corporation ceased operations.

WHEREFORE, PETITION IS HEREBY DENIED WITH

TREBLE COSTS AGAINST PETITIONERS TO BE PAID BY
THEIR COUNSEL.

Castro (Chairman), Esguerra, Muñoz _______

 17

[G.R. No. 121315. July 19, 1999] The rank and file workers of Complex were organized into a On March 13, 1992, Complex filed a notice of closure of the
union known as the Complex Electronics Employees Association, Lite-On Line with the Department of Labor and Employment
COMPLEX ELECTRONICS EMPLOYEES ASSOCIATION herein referred to as the Union. (DOLE) and the retrenchment of the ninety-seven (97) affected
(CEEA) represented by its union president CECILIA employees.[3]
TALAVERA, GEORGE ARSOLA, MARIO DIAGO On March 4, 1992, Complex received a facsimile message
AND SOCORRO BONCAYAO, petitioners, vs. THE from Lite-On Philippines Electronics Co., requiring it to lower its On March 25, 1993, the Union filed a notice of strike with
NATIONAL LABOR RELATIONS COMMISSION, price by 10%. The full text reads as follows: the National Conciliation and Mediation Board (NCMB).
COMPLEX ELECTRONICS CORPORATION,
IONICS CIRCUIT, INC., LAWRENCE QUA, This is to inform your office that Taiwan required you to reduce Two days thereafter, or on March 27, 1993, the Union
REMEDIOS DE JESUS, MANUEL GONZAGA, your assembly cost since it is higher by 50 % and no longer conducted a strike vote which resulted in a "yes" vote.
ROMY DELA ROSA, TERESITA ANDINO, competitive with that of mainland China. It is further instructed
ARMAN CABACUNGAN,GERRY GABANA, that Complex Price be patterned with that of other sources, which In the evening of April 6, 1992, the machinery, equipment
EUSEBIA MARANAN and BERNADETH is 10% lower. and materials being used for production at Complex were pulled-
GACAD, respondents. out from the company premises and transferred to the premises of
Please consider and give us your revised rates soon.[1] Ionics Circuit, Inc. (Ionics) at Cabuyao, Laguna. The following
[G.R. No. 122136 July 19, 1999] day, a total closure of company operation was effected at
Consequently, on March 9, 1992, a meeting was held Complex.
COMPLEX ELECTRONICS CORPORATION, petitioner, between Complex and the personnel of the Lite-On Production
vs. NATIONAL LABOR RELATIONS Line. Complex informed its Lite-On personnel that such request of A complaint was, thereafter, filed with the Labor Arbitration
COMMISSION, COMPLEX ELECTRONICS lowering their selling price by 10% was not feasible as they were Branch of the NLRC for unfair labor practice, illegal
EMPLOYEES ASSOCIATION (CEEA), represented already incurring losses at the present prices of their products. closure/illegal lockout, money claims for vacation leave, sick
by Union President, CECILIA Under such circumstances, Complex regretfully informed the leave, unpaid wages, 13th month pay, damages and attorney's
TALAVERA, respondents. employees that it was left with no alternative but to close down the fees. The Union alleged that the pull-out of the machinery,
operations of the Lite-On Line. The company, however, promised equipment and materials from the company premises, which
DECISION that: resulted to the sudden closure of the company was in violation of
Section 3 and 8, Rule XIII, Book V of the Labor Code of the
KAPUNAN, J.: 1) Complex will follow the law by giving the people to Philippines[4] and the existing CBA. Ionics was impleaded as a
be retrenched the necessary 1 month party defendant because the officers and management personnel of
These consolidated cases filed by Complex Electronics notice. Hence, retrenchment will not take place Complex were also holding office at Ionics with Lawrence Qua as
Employees Association (G.R. No. 121315) and Complex until after 1) month from March 09, 1992. the President of both companies.
Electronics Corporation (G.R. No. 122136) assail the Decision of
the NLRC dated March 10, 1995 which set aside the Decision of 2) The Company will try to prolong the work for as Complex, on the other hand, averred that since the time the
the Labor Arbiter dated April 30, 1993. many people as possible for as long as it can by Union filed its notice of strike, there was a significant decline in
looking for job slots for them in another line if the quantity and quality of the products in all of the production
The antecedents of the present petitions are as follows: workload so allows and if their skills are lines. The delivery schedules were not met prompting the
compatible with the line requirement. customers to lodge complaints against them. Fearful that the
machinery, equipment and materials would be rendered
Complex Electronics Corporation (Complex) was engaged in
3) The company will give the employees to be inoperative and unproductive due to the impending strike of the
the manufacture of electronic products. It was actually a
retrenched a retrenchment pay as provided for by workers, the customers ordered their pull-out and transfer to
subcontractor of electronic products where its customers gave their
law i.e. half a month for every year of service in Ionics. Thus, Complex was compelled to cease operations.
job orders, sent their own materials and consigned their equipment
to it. The customers were foreign-based companies with different accordance with Article 283 of the Labor Code of
product lines and specifications requiring the employment of Philippines.[2] Ionics contended that it was an entity separate and distinct
workers with specific skills for each product line. Thus, there was from Complex and had been in existence since July 5, 1984 or
the AMS Line for the Adaptive Micro System, Inc., the Heril Line The Union, on the other hand, pushed for a retrenchment pay eight (8) years before the labor dispute arose at Complex. Like
for Heril Co., Ltd., the Lite-On Line for the Lite-On Philippines equivalent to one (1) month salary for every year of service, which Complex, it was also engaged in the semi-conductor business
Electronics Co., etc. Complex refused. where the machinery, equipment and materials were consigned to
them by their customers. While admitting that Lawrence Qua, the
 18
President of Complex was also the President of Ionics, the latter
denied having Qua as their owner since he had no recorded
subscription of P1,200,000.00 in Ionics as claimed by the
Union. Ionics further argued that the hiring of some displaced
workers of Complex was an exercise of management
prerogatives. Likewise, the transfer of the machinery, equipment
and materials from Complex was the decision of the owners who
were common customers of Complex and Ionics.
On April 30, 1993, the Labor Arbiter rendered a decision the
dispositive portion of which reads:
WHEREFORE, all the foregoing premises being considered,
judgment is hereby rendered ordering the respondent Complex
Electronics Corporation and/or Ionics Circuit Incorporated and/or
Lawrence Qua, to reinstate the 531 above-listed employees to their
former position with all the rights, privileges and benefits
appertaining thereto, and to pay said complainants-employees the
aggregate backwages amounting P26,949,891.80 as of April 6,
1993 and to such further backwages until their actual
reinstatement. In the event reinstatement is no longer feasible for
reasons not attributable to the complainants, said respondents are
also liable to pay complainants-employees their separation pay to
be computed at the rate of one (1) month pay for every year of
service, a fraction of at least six (6) months to be considered as one
whole year.
Further, the aforenamed three (3) respondents are hereby ordered
to pay jointly and solidarily the complainants-employees an
aggregate moral damages in the amount of P1,062,000.00 and
exemplary damages in the aggregate sum of P531,000.00.
And finally, said respondents are ordered to pay attorney's fees
equivalent to ten percent (10%) of whatever has been adjudicated
herein in favor of the complainants.
The charge of slowdown strike filed by respondent Complex
against the union is hereby dismissed for lack of merit.
SO ORDERED.[5]
Separate appeals were filed by Complex, Ionics and
Lawrence Qua before the respondent NLRC which rendered the
questioned decision on March 10, 1995, the decretal portion of
which states:
WHEREFORE, premises considered, the assailed decision is
hereby ordered vacated and set aside, and a new one entered
ordering respondent Complex Electronics Corporation to pay 531
complainants equivalent to one month pay in lieu of notice and
separation pay equivalent to one month pay for every year of
service and a fraction of six months considered as one whole year.
Respondents Ionics Circuit Incorporated and Lawrence Qua are
hereby ordered excluded as parties solidarily liable with Complex
Electronics Corporation.
The award of moral damages is likewise deleted for lack of merit.
Respondent Complex, however, is hereby ordered to pay attorney's
fees equivalent to ten (10%) percent of the total amount of award
granted the complainants.
SO ORDERED.[6]
Complex, Ionics and the Union filed their motions for
reconsideration of the above decision which were denied by the
respondent NLRC in an Order dated July 11, 1995.[7]
Hence these petitions.
In G.R. No. 121315, petitioner Complex Electronics
Employees Association asseverates that the respondent NLRC
erred when it:
I motion was granted by this Court in a Resolution dated June 23,
SET ASIDE THE DECISION DATED APRIL 30, 1993 ISSUED
BY THE HON. LABOR ARBITER JOSE DE VERA.
II
EXCLUDED PRIVATE RESPONDENTS IONICS CIRCUITS,
INCORPORATED AND LAWRENCE QUA AS PARTIES
SOLIDARILY LIABLE WITH COMPLEX ELECTRONICS
CORPORATION.
III
FOUND THAT COMPLEX ELECTRONICS CORPORATION
WAS NOT GUILTY OF ILLEGAL CLOSURE AND ILLEGAL
DISMISSAL OF THE PETITIONERS.
IV
REMOVED THE AWARD FOR BACKWAGES,
REINSTATEMENT AND DAMAGES IN THE DECISION
DATED APRIL 30, 1993 ISSUED BY THE HON. LABOR
ARBITER JOSE DE VERA.[8]
On the other hand, in G.R. No. 122136, petitioner Complex
Electronics Corporation raised the following issues, to wit:
I
PUBLIC RESPONDENT NLRC ACTED IN GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OF OR IN EXCESS OF
JURISDICTION IN PROMULGATING ITS DECISION AND
ORDER DATED 10 MARCH 1995, AND 11 JULY 1995,
RESPECTIVELY, THE SAME BEING IN CONTRAVENTION
OF THE EXPRESS MANDATE OF THE LAW GOVERNING
THE PAYMENT OF ONE MONTH PAY IN LIEU OF NOTICE,
SEPARATION PAY AND ATTORNEY'S FEES.
II
THERE IS NO APPEAL, NOR ANY PLAIN, SPEEDY AND
ADEQUATE REMEDY IN THE ORDINARY COURSE OF
LAW.[9]
On December 23, 1996, the Union filed a motion for
consolidation of G.R. No. 122136 with G.R. No. 121315. [10] The
1997.[11]
On November 10, 1997, the Union presented additional
documentary evidence which consisted of a newspaper clipping in
the Manila Bulletin, dated August 18, 1997 bearing the picture of
Lawrence Qua with the following inscription:
RECERTIFICATION. The Cabuyao (Laguna) operation of Ionic
Circuits, Inc. consisting of plants 2, 3, 4 and 5 was recertified to
ISO 9002 as electronics contract manufacturer by the TUV, a
rating firm with headquarters in Munich, Germany. Lawrence Qua,
Ionics president and chief executive officer, holds the plaque of
recertification presented by Gunther Theisz (3rd from left),
regional manager of TUV Products Services Asia during
ceremonies held at Sta. Elena Golf Club. This is the first of its kind
in the country that four plants were certified at the same time. [12]
 19
The Union claimed that the said clipping showed that both
corporations, Ionics and Complex are one and the same.
In answer to this allegation, Ionics explained that the photo
which appeared at the Manila Bulletin issue of August 18, 1997
pertained only to respondent Ionics recertification of ISO
9002. There was no mention about Complex Electronics
Corporation. Ionics claimed that a mere photo is insufficient to
conclude that Ionics and Complex are one and the same. [13]
We shall first delve on the issues raised by the petitioner
Union.
The Union anchors its position on the fact that Lawrence
Qua is both the president of Complex and Ionics and that both
companies have the same set of Board of Directors. It claims that
business has not ceased at Complex but was merely transferred to
Ionics, a runaway shop. To prove that Ionics was just a runaway
shop, petitioner asserts that out of the 80,000 shares comprising
the increased capital stock of Ionics, it was Complex that owns
majority of said shares with P1,200,000.00 as its capital
subscription and P448,000.00 as its paid up investment, compared
to P800,000.00 subscription and P324,560.00 paid-up owing to the
other stockholders, combined. Thus, according to the Union, there
is a clear ground to pierce the veil of corporate fiction.
The Union further posits that there was an illegal
lockout/illegal dismissal considering that as of March 11, 1992, the
company had a gross sales of P61,967,559 from a capitalization
of P1,500,000.00. It even ranked number thirty among the top fifty
corporations in Muntinlupa. Complex, therefore, cannot claim that
it was losing in its business which necessitated its closure.
With regards to Lawrence Qua, petitioner maintains that he
should be made personally liable to the Union since he was the
principal player in the closure of the company, not to mention the
clandestine and surreptitious manner in which such closure was
carried out, without regard to their right to due process.
The Union's contentions are untenable.
A runaway shop is defined as an industrial plant moved by
its owners from one location to another to escape union labor
regulations or state laws, but the term is also used to describe a
plant removed to a new location in order to discriminate against
employees at the old plant because of their union activities. [14] It is
one wherein the employer moves its business to another location or
it temporarily closes its business for anti-union purposes. [15] A
runaway shop in this sense, is a relocation motivated by anti-
union animus rather than for business reasons. In this case,
however, Ionics was not set up merely for the purpose of
transferring the business of Complex. At the time the labor dispute
arose at Complex, Ionics was already existing as an independent
company. As earlier mentioned, it has been in existence since July
5, 1984. It cannot, therefore, be said that the temporary closure in
Complex and its subsequent transfer of business to Ionics was for
anti-union purposes. The Union failed to show that the primary
reason for the closure of the establishment was due to the union
activities of the employees.
The mere fact that one or more corporations are owned or
controlled by the same or single stockholder is not a sufficient
ground for disregarding separate corporate personalities. Thus,
in Indophil Textile Mill Workers Union vs. Calica,[16] we ruled that:
[I]n the case at bar, petitioner seeks to pierce the veil of corporate
entity of Acrylic, alleging that the creation of the corporation is a
devise to evade the application of the CBA between petitioner
Union and private respondent company. While we do not discount
the possibility of the similarities of the businesses of private
respondent and Acrylic, neither are we inclined to apply the
doctrine invoked by petitioner in granting the relief sought. The
fact that the businesses of private respondent and Acrylic are
related, that some of the employees of the private respondent are
the same persons manning and providing for auxiliary services to
the units of Acrylic, and that the physical plants, offices and
facilities are situated in the same compound, it is our considered
opinion that these facts are not sufficient to justify the piercing of
the corporate veil of Acrylic.
Likewise, in Del Rosario vs. National Labor Relations
Commission,[17] the Court stated that substantial identity of the
incorporators of two corporations does not necessarily imply that
there was fraud committed to justify piercing the veil of corporate
fiction.
In the recent case of Santos vs. National Labor Relations
Commission,[18] we also ruled that:
The basic rule is still that which can be deduced from the Courts
pronouncement in Sunio vs. National Labor Relations
Commission, thus:
xxx.. Mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a corporation
is not of itself sufficient ground for disregarding the separate
corporate personality.
Ionics may be engaged in the same business as that of
Complex, but this fact alone is not enough reason to pierce the veil
of corporate fiction of the corporation. Well-settled is the rule that
a corporation has a personality separate and distinct from that of its
officers and stockholders. This fiction of corporate entity can only
be disregarded in certain cases such as when it is used to defeat
public convenience, justify wrong, protect fraud, or defend crime.
[19]
 To disregard said separate juridical personality of a corporation,
the wrongdoing must be clearly and convincingly established. [20]
As to the additional documentary evidence which consisted
of a newspaper clipping filed by petitioner Union, we agree with
respondent Ionics that the photo/newspaper clipping itself does not
prove that Ionics and Complex are one and the same entity. The
photo/newspaper clipping merely showed that some plants of
Ionics were recertified to ISO 9002 and does not show that there is
a relation between Complex and Ionics except for the fact that
Lawrence Qua was also the president of Ionics. However, as we
have stated above, the mere fact that both of the corporations have
the same president is not in itself sufficient to pierce the veil of
corporate fiction of the two corporations.
We, likewise, disagree with the Union that there was in this
case an illegal lockout/illegal dismissal. Lockout is the temporary
refusal of employer to furnish work as a result of an industrial or
labor dispute.[21] It may be manifested by the employer's act of
excluding employees who are union members. [22] In the present
case, there was a complete cessation of the business operations at
Complex not because of the labor dispute. It should be recalled
that, before the labor dispute, Complex had already informed the
employees that they would be closing the Lite-On Line. The
employees, however, demanded for a separation pay equivalent to
one (1) month salary for every year of service which Complex
refused to give. When Complex filed a notice of closure of its Lite-
On Line, the employees filed a notice of strike which greatly
alarmed the customers of Complex and this led to the pull-out of
their equipment, machinery and materials from Complex. Thus,
without the much needed equipment, Complex was unable to
continue its business. It was left with no other choice except to
shut down the entire business. The closure, therefore, was not
motivated by the union activities of the employees, but rather by
necessity since it can no longer engage in production without the
much needed materials, equipment and machinery. We quote with
approval the findings of the respondent NLRC on this matter:
 20
At first glance after reading the decision a quo, it would seem that
the closure of respondent's operation is not justified. However, a
deeper examination of the records along with the evidence, would
show that the closure, although it was done abruptly as there was
no compliance with the 30-day prior notice requirement, said
closure was not intended to circumvent the provisions of the Labor
Code on termination of employment. The closure of operation by
Complex on April 7, 1992 was not without valid
reasons. Customers of respondent alarmed by the pending labor
dispute and the imminent strike to be foisted by the union, as
shown by their strike vote, directed respondent Complex to pull-
out its equipment, machinery and materials to other safe bonded
warehouse. Respondent being mere consignees of the equipment,
machinery and materials were without any recourse but to oblige
the customers' directive. The pull-out was effected on April 6,
1992. We can see here that Complex's action, standing alone, will
not result in illegal closure that would cause the illegal dismissal of
the complainant workers. Hence, the Labor Arbiter's conclusion
that since there were only two (2) of respondent's customers who
have expressed pull-out of business from respondent Complex
while most of the customer's have not and, therefore, it is not
justified to close operation cannot be upheld. The determination to
cease operation is a prerogative of management that is usually not
interfered with by the State as no employer can be required to
continue operating at a loss simply to maintain the workers in
employment. That would be taking of property without due
process of law which the employer has the right to
resist. (Columbia Development Corp. vs. Minister of Labor and
Employment, 146 SCRA 42)
As to the claim of petitioner Union that Complex was
gaining profit, the financial statements for the years 1990, 1991
and 1992 issued by the auditing and accounting firm Sycip, Gorres
and Velayo readily show that Complex was indeed continuously
experiencing deficit and losses. [23] Nonetheless, whether or not
Complex was incurring great losses, it is still one of the
managements prerogative to close down its business as long as it is
done in good faith. Thus, in Catatista et al., vs. NLRC and
Victorias Milling Co., Inc.[24] we ruled:
In any case, Article 283 of the Labor Code is clear that an
employer may close or cease his business operations or
undertaking even if he is not suffering from serious business losses
or financial reverses, as long as he pays his employees their
termination pay in the amount corresponding to their length of
service. It would indeed, be stretching the intent and spirit of the
law if we were to unjustly interfere in managements prerogative to
close or cease its business operations just because said business
operations or undertaking is not suffering from any loss.
Going now to the issue of personal liability of Lawrence
Qua, it is settled that in the absence of malice or bad faith, a
stockholder or an officer of a corporation cannot be made
personally liable for corporate liabilities. [25] In the present case,
while it may be true that the equipment, materials and machinery
were pulled-out of Complex and transferred to Ionics during the
night, their action was sufficiently explained by Lawrence Qua in
his Comment to the petition filed by the Union. We quote:
The fact that the pull-out of the machinery, equipment and
materials was effected during nighttime is not per se an indicia of
bad faith on the part of respondent Qua since he had no other
recourse, and the same was dictated by the prevailing mood of
unrest as the laborers were already vandalizing the equipment, bent
on picketing the company premises and threats to lock out the
company officers were being made. Such acts of respondent Qua
were, in fact, made pursuant to the demands of Complex's
customers who were already alarmed by the pending labor dispute
and imminent strike to be stage by the laborers, to have their
equipment, machinery and materials pull out of Complex. As such,
these acts were merely done pursuant to his official functions and
were not, in any way, made with evident bad faith. [26]
We perceive no intention on the part of Lawrence Qua and
the other officers of Complex to defraud the employees and the
Union. They were compelled to act upon the instructions of their
customers who were the real owners of the equipment, materials
and machinery. The prevailing labor unrest permeating within the
premises of Complex left the officers with no other choice but to
pull them out of Complex at night to prevent their
destruction. Thus, we see no reason to declare Lawrence Qua
personally liable to the Union.
Anent the award of damages, we are inclined to agree with
the NLRC that there is no basis for such award. We again quote
the respondent NLRC with favor:
By and large, we cannot hold respondents guilty of unfair labor
practice as found by the Labor Arbiter since the closure of
operation of Complex was not established by strong evidence that
the purpose of said closure was to interfere with the employees'
right to self-organization and collective bargaining. As very clearly
established, the closure was triggered by the customers' pull-out of
their equipment, machinery and materials, who were alarmed by
the pending labor dispute and the imminent strike by the union,
and as a protection to their interest pulled-out of business from
Complex who had no recourse but to cease operation to prevent
further losses. The indiscretion committed by the Union in filing
the notice of strike, which to our mind is not the proper remedy to
question the amount of benefits due the complainants who will be
retrenched at the closure of the Lite-On Line, gave a wrong signal
to customers of Complex, which consequently resulted in the loss
of employment of not only a few but to all the of the workers. It
may be worth saying that the right to strike should only be a
remedy of last resort and must not be used as a show of force
against the employer.[27]
We shall now go to the issues raised by Complex in G.R.
No. 122136.
Complex claims that the respondent NLRC erred in ordering
them to pay the Union one (1) month pay as indemnity for failure
to give notice to its employees at least thirty (30) days before such
closure since it was quite clear that the employees were notified of
the impending closure of the Lite-On Line as early as March 9,
1992. Moreover, the abrupt cessation of operations was brought
about by the sudden pull-out of the customers which rendered it
impossible for Complex to observe the required thirty (30) days
notice.
Article 283 of the Labor Code provides that:
ART. 283. Closure of establishment and reduction of personnel.--
The employer may also terminate the employment of any
employee due to the installation of labor saving devices,
redundancy, retrenchment to prevent losses or the closing or
cessation of operation of the establishment or undertaking unless
the closing is for the purpose of circumventing the provisions of
this Title, by serving a written notice on the workers and the
Ministry of Labor and Employment at least one (1) month before
the intended date thereof. x x x. (Underlining ours.)
The purpose of the notice requirement is to enable the proper
authorities to determine after hearing whether such closure is being
done in good faith, i.e., for bona fide business reasons, or whether,
to the contrary, the closure is being resorted to as a means of
evading compliance with the just obligations of the employer to
the employees affected.[28]
While the law acknowledges the management prerogative of
closing the business, it does not, however, allow the business
establishment to disregard the requirements of the law. The case
 21
of Magnolia Dairy Products v. NLRC[29] is quite emphatic about
this:
The law authorizes an employer, like the herein petitioners, to
terminate the employment of any employee due to the installation
of labor saving devices. The installation of these devices is a
management prerogative, and the courts will not interfere with its
exercise in the absence of abuse of discretion, arbitrariness, or
maliciousness on the part of management, as in this
case. Nonetheless, this did not excuse petitioner from complying
with the required written notice to the employee and to the
Department of Labor and Employment (DOLE) at least one month
before the intended date of termination. This procedure enables an
employee to contest the reality or good faith character of the
asserted ground for the termination of his services before the
DOLE.
The failure of petitioner to serve the written notice to private
respondent and to the DOLE, however, does not ipso facto make
private respondent's termination from service illegal so as to entitle
her to reinstatement and payment of backwages. If at all, her
termination from service is merely defective because it was not
tainted with bad faith or arbitrariness and was due to a valid cause.
The well settled rule is that the employer shall be sanctioned for
non-compliance with the requirements of, or for failure to observe
due process in terminating from service its employee. In Wenphil
Corp. v. NLRC, we sanctioned the employer for this failure by
ordering it to indemnify the employee the amount of
P1,000.00. Similarly, we imposed the same amount as
indemnification in Rubberworld (Phils.), Inc. v. NLRC,
and, Aurelio v. NLRC and Alhambra Industries, Inc. v.
NLRC. Subsequently, the sum of P5,000.00 was awarded to an
employee in Worldwide Papermills, Inc. v. NLRC, and P2,000.00
in Sebuguero, et al., v. NLRC, et al. Recently, the sum of
P5,000.00 was again imposed as indemnify against the
employer. We see no valid and cogent reason why petitioner
should not be likewise sanctioned for its failure to serve the
mandatory written notice. Under the attendant facts, we find the
amount of P5,000.00, to be just and reasonable.
We, therefore, find no grave abuse of discretion on the part
of the NLRC in ordering Complex to pay one (1) month salary by
way of indemnity. It must be borne in mind that what is at stake is
the means of livelihood of the workers so they are at least entitled
to be formally informed of the management decisions regarding
their employment.[30]
Complex, likewise, maintains that it is not liable for the
payment of separation pay since Article 283 of the Labor Code
awards separation pay only in cases of closure not due to serious
business reversals.In this case, the closure of Complex was
brought about by the losses being suffered by the corporation.
We disagree.
Article 283 further provides:
x x x. In case of termination due to the installation of labor saving
devices or redundancy, the worker affected thereby shall be
entitled to a separation pay equivalent to at least his one (1) month
pay or to at least one (1) month pay for every year of service,
whichever is higher. In case of retrenchment to prevent losses and
in case of cessation of operations of establishment or undertaking
not due to serious business losses or financial reverses, the
separation pay shall be equivalent to one (1) month pay or at least
one-half (1/2) month pay for every year of service, whichever is
higher. A fraction of at least six (6) months shall be considered one
(1) whole year.
It is settled that in case of closures or cessation of operation
of business establishments not due to serious business losses or
financial reverses,[31] the employees are always given separation
benefits.
In the instant case, notwithstanding the financial losses
suffered by Complex, such was, however, not the main reason for
its closure. Complex admitted in its petition that the main reason
for the cessation of the operations was the pull-out of the materials,
equipment and machinery from the premises of the corporation as
dictated by its customers. It was actually still capable of continuing
the business but opted to close down to prevent further
losses. Under the facts and circumstances of the case, we find no
grave abuse of discretion on the part of the public respondent in
awarding the employees one (1) month pay for every year of
service as termination pay.
WHEREFORE, premises considered, the assailed decision
of the NLRC is AFFIRMED.
SO ORDERED.
 22
G.R. No. 100812. June 25, 1999]
FRANCISCO MOTORS CORPORATION, petitioner, vs.
COURT OF APPEALS and SPOUSES GREGORIO
and LIBRADA MANUEL, respondents.
DECISION
QUISUMBING, J.:
This petition for review on certiorari, under Rule 45 of the
Rules of Court, seeks to annul the decision [1] of the Court of
Appeals in C.A. G.R. CV No. 10014 affirming the decision
rendered by Branch 135, Regional Trial Court of Makati, Metro
Manila. The procedural antecedents of this petition are as follows:
On January 23, 1985, petitioner filed a complaint [2] against
private respondents to recover three thousand four hundred twelve
and six centavos (P3,412.06), representing the balance of the jeep
body purchased by the Manuels from petitioner; an additional sum
of twenty thousand four hundred fifty-four and eighty centavos
(P20,454.80) representing the unpaid balance on the cost of repair
of the vehicle; and six thousand pesos (P6,000.00) for cost of suit
and attorneys fees.[3] To the original balance on the price of jeep
body were added the costs of repair. [4] In their answer, private
respondents interposed a counterclaim for unpaid legal services by
Gregorio Manuel in the amount of fifty thousand pesos (P50,000)
which was not paid by the incorporators, directors and officers of
the petitioner. The trial court decided the case on June 26, 1985, in
favor of petitioner in regard to the petitioners claim for money, but
also allowed the counter-claim of private respondents. Both parties
appealed. On April 15, 1991, the Court of Appeals sustained the
trial courts decision.[5] Hence, the present petition.
For our review in particular is the propriety of the permissive
counterclaim which private respondents filed together with their
answer to petitioners complaint for a sum of money. Private
respondent Gregorio Manuel alleged as an affirmative defense
that, while he was petitioners Assistant Legal Officer, he
represented members of the Francisco family in the intestate estate
proceedings of the late Benita Trinidad. However, even after the
termination of the proceedings, his services were not paid. Said
family members, he said, were also incorporators, directors and
officers of petitioner. Hence to counter petitioners collection suit,
he filed a permissive counterclaim for the unpaid attorneys fees. [6]
For failure of petitioner to answer the counterclaim, the trial
court declared petitioner in default on this score, and evidence ex-
parte was presented on the counterclaim. The trial court ruled in
favor of private respondents and found that Gregorio Manuel
indeed rendered legal services to the Francisco family in Special
Proceedings Number 7803- In the Matter of Intestate Estate of
Benita Trinidad. Said court also found that his legal services were
not compensated despite repeated demands, and thus ordered
petitioner to pay him the amount of fifty thousand (P50,000.00)
pesos.[7]
Dissatisfied with the trial courts order, petitioner elevated the
matter to the Court of Appeals, posing the following issues:
I.
WHETHER OR NOT THE DECISION RENDERED BY THE
LOWER COURT IS NULL AND VOID AS IT NEVER
ACQUIRED JURISDICTION OVER THE PERSON OF THE
DEFENDANT.
II.
WHETHER OR NOT PLAINTIFF-APPELLANT NOT BEING A
REAL PARTY IN THE ALLEGED PERMISSIVE
COUNTERCLAIM SHOULD BE HELD LIABLE TO THE
CLAIM OF DEFENDANT-APPELLEES.
III.
WHETHER OR NOT THERE IS FAILURE ON THE PART OF
PLAINTIFF-APPELLANT TO ANSWER THE ALLEGED
PERMISSIVE COUNTERCLAIM.[8]
Petitioner contended that the trial court did not acquire
jurisdiction over it because no summons was validly served on it
together with the copy of the answer containing the permissive
counterclaim.Further, petitioner questions the propriety of its being
made party to the case because it was not the real party in interest
but the individual members of the Francisco family concerned with
the intestate case.
In its assailed decision now before us for review, respondent
Court of Appeals held that a counterclaim must be answered in ten
(10) days, pursuant to Section 4, Rule 11, of the Rules of Court;
and nowhere does it state in the Rules that a party still needed to be
summoned anew if a counterclaim was set up against him. Failure
to serve summons, said respondent court, did not effectively
negate trial courts jurisdiction over petitioner in the matter of the
counterclaim. It likewise pointed out that there was no reason for
petitioner to be excused from answering the counterclaim. Court
records showed that its former counsel, Nicanor G. Alvarez,
received the copy of the answer with counterclaim two (2) days
prior to his withdrawal as counsel for petitioner. Moreover when
petitioners new counsel, Jose N. Aquino, entered his appearance,
three (3) days still remained within the period to file an answer to
the counterclaim. Having failed to answer, petitioner was correctly
considered in default by the trial court. [9] Even assuming that the
trial court acquired no jurisdiction over petitioner, respondent
court also said, but having filed a motion for reconsideration
seeking relief from the said order of default, petitioner
was estopped from further questioning the trial courts jurisdiction.
[10]
On the question of its liability for attorneys fees owing to
private respondent Gregorio Manuel, petitioner argued that being a
corporation, it should not be held liable therefor because these fees
were owed by the incorporators, directors and officers of the
corporation in their personal capacity as heirs of Benita
Trinidad. Petitioner stressed that the personality of the corporation,
vis--vis the individual persons who hired the services of private
respondent, is separate and distinct, [11] hence, the liability of said
individuals did not become an obligation chargeable against
petitioner.
Nevertheless, on the foregoing issue, the Court of Appeals
ruled as follows:
However, this distinct and separate personality is merely a fiction
created by law for convenience and to promote
justice. Accordingly, this separate personality of the corporation
may be disregarded, or the veil of corporate fiction pierced, in
cases where it is used as a cloak or cover for found (sic) illegality,
or to work an injustice, or where necessary to achieve equity or
when necessary for the protection of creditors. (Sulo ng Bayan,
Inc. vs. Araneta, Inc., 72 SCRA 347) Corporations are composed
of natural persons and the legal fiction of a separate corporate
personality is not a shield for the commission of injustice and
inequity. (Chemplex Philippines, Inc. vs. Pamatian, 57 SCRA 408)
In the instant case, evidence shows that the plaintiff-appellant
Francisco Motors Corporation is composed of the heirs of the late
Benita Trinidad as directors and incorporators for whom defendant
 23
Gregorio Manuel rendered legal services in the intestate estate case
of their deceased mother. Considering the aforestated principles
and circumstances established in this case, equity and justice
demands plaintiff-appellants veil of corporate identity should be
pierced and the defendant be compensated for legal services
rendered to the heirs, who are directors of the plaintiff-appellant
corporation.[12]
Now before us, petitioner assigns the following errors:
I.
THE COURT OF APPEALS ERRED IN APPLYING THE
DOCTRINE OF PIERCING THE VEIL OF CORPORATE
ENTITY.
II.
THE COURT OF APPEALS ERRED IN AFFIRMING THAT
THERE WAS JURISDICTION OVER PETITIONER WITH
RESPECT TO THE COUNTERCLAIM.[13]
Petitioner submits that respondent court should not have
resorted to piercing the veil of corporate fiction because the
transaction concerned only respondent Gregorio Manuel and the
heirs of the late Benita Trinidad. According to petitioner, there was
no cause of action by said respondent against petitioner; personal
concerns of the heirs should be distinguished from those involving
corporate affairs.Petitioner further contends that the present case
does not fall among the instances wherein the courts may look
beyond the distinct personality of a corporation. According to
petitioner, the services for which respondent Gregorio Manuel
seeks to collect fees from petitioner are personal in nature. Hence,
it avers the heirs should have been sued in their personal capacity,
and not involve the corporation.[14]
With regard to the permissive counterclaim, petitioner also
insists that there was no proper service of the answer containing
the permissive counterclaim. It claims that the counterclaim is a
separate case which can only be properly served upon the opposing
party through summons. Further petitioner states that by nature, a
permissive counterclaim is one which does not arise out of nor is
necessarily connected with the subject of the opposing partys
claim. Petitioner avers that since there was no service of summons
upon it with regard to the counterclaim, then the court did not
acquire jurisdiction over petitioner.Since a counterclaim is
considered an action independent from the answer, according to
petitioner, then in effect there should be two simultaneous actions
between the same parties: each party is at the same time both
plaintiff and defendant with respect to the other, [15] requiring in
each case separate summonses.
In their Comment, private respondents focus on the two
questions raised by petitioner. They defend the propriety of
piercing the veil of corporate fiction, but deny the necessity of
serving separate summonses on petitioner in regard to their
permissive counterclaim contained in the answer.
Private respondents maintain both trial and appellate courts
found that respondent Gregorio Manuel was employed as assistant
legal officer of petitioner corporation, and that his services were
solicited by the incorporators, directors and members to handle and
represent them in Special Proceedings No. 7803, concerning the
Intestate Estate of the late Benita Trinidad. They assert that the
members of petitioner corporation took advantage of their
positions by not compensating respondent Gregorio Manuel after
the termination of the estate proceedings despite his repeated
demands for payment of his services. They cite findings of the
appellate court that support piercing the veil of corporate identity
in this particular case. They assert that the corporate veil may be
disregarded when it is used to defeat public convenience, justify
wrong, protect fraud, and defend crime. It may also be pierced,
according to them, where the corporate entity is being used as an
alter ego, adjunct, or business conduit for the sole benefit of the
stockholders or of another corporate entity. In these instances, they
aver, the corporation should be treated merely as an association of
individual persons.[16]
Private respondents dispute petitioners claim that its right to
due process was violated when respondents counterclaim was
granted due course, although no summons was served upon
it. They claim that no provision in the Rules of Court requires
service of summons upon a defendant in a counterclaim. Private
respondents argue that when the petitioner filed its complaint
before the trial court it voluntarily submitted itself to the
jurisdiction of the court. As a consequence, the issuance of
summons on it was no longer necessary. Private respondents say
they served a copy of their answer with affirmative defenses and
counterclaim on petitioners former counsel, Nicanor G.
Alvarez. While petitioner would have the Court believe that
respondents served said copy upon Alvarez after he had withdrawn
his appearance as counsel for the petitioner, private respondents
assert that this contention is utterly baseless. Records disclose that
the answer was received two (2) days before the former counsel
for petitioner withdrew his appearance, according to private
respondents. They maintain that the present petition is but a form
of dilatory appeal, to set off petitioners obligations to the
respondents by running up more interest it could recover from
them. Private respondents therefore claim damages against
petitioner.[17]
To resolve the issues in this case, we must first determine the
propriety of piercing the veil of corporate fiction.
Basic in corporation law is the principle that a corporation
has a separate personality distinct from its stockholders and from
other corporations to which it may be connected. [18] However,
under the doctrine of piercing the veil of corporate entity, the
corporations separate juridical personality may be disregarded, for
example, when the corporate identity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime. Also,
where the corporation is a mere alter ego or business conduit of a
person, or where the corporation is so organized and controlled
and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation,
then its distinct personality may be ignored. [19] In these
circumstances, the courts will treat the corporation as a mere
aggrupation of persons and the liability will directly attach to
them. The legal fiction of a separate corporate personality in those
cited instances, for reasons of public policy and in the interest of
justice, will be justifiably set aside.
In our view, however, given the facts and circumstances of
this case, the doctrine of piercing the corporate veil has no relevant
application here. Respondent court erred in permitting the trial
courts resort to this doctrine. The rationale behind piercing a
corporations identity in a given case is to remove the barrier
between the corporation from the persons comprising it to thwart
the fraudulent and illegal schemes of those who use the corporate
personality as a shield for undertaking certain proscribed activities.
However, in the case at bar, instead of holding certain individuals
or persons responsible for an alleged corporate act, the situation
has been reversed. It is the petitioner as a corporation which is
being ordered to answer for the personal liability of certain
individual directors, officers and incorporators concerned. Hence,
it appears to us that the doctrine has been turned upside down
because of its erroneous invocation. Note that according to private
respondent Gregorio Manuel his services were solicited as counsel
for members of the Francisco family to represent them in the
intestate proceedings over Benita Trinidads estate. These estate
proceedings did not involve any business of petitioner.
Note also that he sought to collect legal fees not just from
certain Francisco family members but also from petitioner
 24
corporation on the claims that its management had requested his
services and he acceded thereto as an employee of petitioner from
whom it could be deduced he was also receiving a salary. His
move to recover unpaid legal fees through a counterclaim against
Francisco Motors Corporation, to offset the unpaid balance of the
purchase and repair of a jeep body could only result from an
obvious misapprehension that petitioners corporate assets could be
used to answer for the liabilities of its individual directors,
officers, and incorporators. Such result if permitted could easily
prejudice the corporation, its own creditors, and even other
stockholders; hence, clearly inequitous to petitioner.
Furthermore, considering the nature of the legal services
involved, whatever obligation said incorporators, directors and
officers of the corporation had incurred, it was incurred in their
personal capacity.When directors and officers of a corporation are
unable to compensate a party for a personal obligation, it is far-
fetched to allege that the corporation is perpetuating fraud or
promoting injustice, and be thereby held liable therefor by piercing
its corporate veil. While there are no hard and fast rules on
disregarding separate corporate identity, we must always be
mindful of its function and purpose. A court should be careful in
assessing the milieu where the doctrine of piercing the corporate
veil may be applied. Otherwise an injustice, although unintended,
may result from its erroneous application.
The personality of the corporation and those of its
incorporators, directors and officers in their personal capacities
ought to be kept separate in this case. The claim for legal fees
against the concerned individual incorporators, officers and
directors could not be properly directed against the corporation
without violating basic principles governing corporations.
Moreover, every action including a counterclaim must be
prosecuted or defended in the name of the real party in interest.
[20]
 It is plainly an error to lay the claim for legal fees of private
respondent Gregorio Manuel at the door of petitioner (FMC) rather
than individual members of the Francisco family.
However, with regard to the procedural issue raised by
petitioners allegation, that it needed to be summoned anew in order
for the court to acquire jurisdiction over it, we agree with
respondent courts view to the contrary. Section 4, Rule 11 of
the Rules of Court provides that a counterclaim or cross-claim
must be answered within ten (10) days from service. Nothing in
the Rules of Court says that summons should first be served on the
defendant before an answer to counterclaim must be made. The
purpose of a summons is to enable the court to acquire jurisdiction
over the person of the defendant. Although a counterclaim is
treated as an entirely distinct and independent action, the defendant
in the counterclaim, being the plaintiff in the original complaint,
has already submitted to the jurisdiction of the court. Following
Rule 9, Section 3 of the 1997 Rules of Civil Procedure,[21] if a
defendant (herein petitioner) fails to answer the counterclaim, then
upon motion of plaintiff, the defendant may be declared in
default.This is what happened to petitioner in this case, and this
Court finds no procedural error in the disposition of the appellate
court on this particular issue. Moreover, as noted by the respondent
court, when petitioner filed its motion seeking to set aside the
order of default, in effect it submitted itself to the jurisdiction of
the court. As well said by respondent court:
Further on the lack of jurisdiction as raised by plaintiff-appellant[,]
[t]he records show that upon its request, plaintiff-appellant was
granted time to file a motion for reconsideration of the disputed
decision.Plaintiff-appellant did file its motion for reconsideration
to set aside the order of default and the judgment rendered on the
counterclaim.
Thus, even if the court acquired no jurisdiction over plaintiff-
appellant on the counterclaim, as it vigorously insists, plaintiff-
appellant is considered to have submitted to the courts jurisdiction
when it filed the motion for reconsideration seeking relief from the
court. (Soriano vs. Palacio, 12 SCRA 447). A party is estopped
from assailing the jurisdiction of a court after voluntarily
submitting himself to its jurisdiction. (Tejones vs. Gironella, 159
SCRA 100). Estoppel is a bar against any claims of lack of
jurisdiction. (Balais vs. Balais, 159 SCRA 37).[22]
WHEREFORE, the petition is hereby GRANTED and the
assailed decision is hereby REVERSED insofar only as it held
Francisco Motors Corporation liable for the legal obligation owing
to private respondent Gregorio Manuel; but this decision is without
prejudice to his filing the proper suit against the concerned
members of the Francisco family in their personal capacity. No
pronouncement as to costs.
SO ORDERED.
 25

[G.R. No. 108936. October 4, 1996] labor practice.[9] On June 21, 1990, petitioners amended their
complaint to implead private respondent private respondent Well Eucliff Filipino 148 Nenita C. Filipino
SOL LAGUIO, RENE LAOLAO, ANNALIZA ENSANDO, World Toys, Inc. (Well World for brevity), a corporation also Cheng Aguirre
EDELIZA ASAS, LILIA MARAY, EVELYN engaged in the manufacture of stuffed toys for export with
UNTALAN,* ROSARIO CHICO, REYNALDO principal office located at Las Pias, Manila.
GARCIA, MERLITA DE LOS Jenn Li Chinese 25 Matheresa Filipino
SANTOS,* JOSEPHINE DERONG,* GEMMA In their complaint, petitioners basically alleged that they Wang Cadiente
TIBALAO BANTOLO, LUCY were original probationary emplyees[10] of Well World but were
ALMONTE,* CRISPINA VANQUARDIA, later laid off in 1989 for starting to organize themselves into a Yu-Sheng Chinese 25 Gliceria R. Filipino
NARCISA VENZON, NORMA union.[11] They applied with and were thereafter hired by April. On Ling Aguirre
ELEGANTE,* AMELIA MORENO,* ABNER February 2, 1990, and while under the employ of April, petitioners
PETILOS, NARCISO HILAPO, DOLORES OLAES, conducted a certification election where their union, Alyansang
MELINDA LLADOC, ERNA AZARCON, and Likha ng mga Anak ng Bayan (ALAB), won as the exclusive Chia-Sheng Chinese 25 Pacifico R. Filipino
APRIL TOY, INC. WORKERS UNION bargaining agent for the workers. Petitioners thereafter submitted a Lin Cadiente
ALAB, petitioners, vs. NATIONAL LABOR Collective Bargaining Agreement proposal which April rejected in
RELATIONS COMMISSION, WELL WORLD view of its cessation of operation. The closure, petitioners Chia-Yu- Chinese 25 Emalyn A. Filipino
TOYS, INC., APRIL TOYS, INC., YU SHENG declared, is Aprils clever ploy to defeat their right to self Yen Lin Fernandez
LING, JENN L. WANG, EUCLIFF CHENG, CHI organization.[12] Petitioners further alleged that the original
SHENG LIN, NENITA C. AGUIRRE, MA. incorporators and principal officers of April were likewise the
THERESA R. CADIENTE and GLICERIA R. original incorporators of Well World, thus both corporations MaTheresa Filipino 1 Erlinda M. Filipino
AGUIRRE, respondents. should be treated as one corporation liable for their claims.In his Cadiente Hizon
decision dated December 20, 1991, the Labor Arbiter found as
RESOLUTION valid the closure of April, and treated April and Well World as
Gliceria Filipino 1    
two distinct corporations. While the seventy-seven complainants
Aguirre
FRANCISCO, J.: were ruled to be the employees of April, the Labor Arbiter,
nevertheless, ordered Well World to give financial assistance to
its former forty-nine probationary employees who were found to     250    
Private respondent April Toy, Inc. (April for brevity) is a
have been laid off in 1989 due to business losses. April was
domestic corporation incorporated on January 6, 1989, for the
likewise ordered to pay its separated employees their separation
purpose of manufacturing, importing, exporting, buying, selling, (Petition, pp. 4-5; Rollo, pp. 5-6; Memorandum, pp. 7-8, Rollo,
pay and, together with Well World, assessed for attorneys
sub-contracting or otherwise dealing in, at wholesale and retail, 242-243.)
[1] fees. Petitioners appealed before the National Labor Relations
 stuffed toys, with principal place of business at Paraaque,
Commission (NLRC), but to no avail. Hence, this petition,
Manila. On December 20, 1989, or after almost a year of Petitioners also insist that the two corporations are being managed
supported by the Office of the Solicitor General, anchored solely
operation, April posted a memorandum[2] within its premises and by Mr. Jean Li Wang[13] and that their articles of incorporation,
on the NLRCs purported grave abuse of discretion in not
circulated a copy of the same among its employees informing them general information sheets and certificates of increase of capital
finding April and Well World as one corporation liable for their
of its dire financial condition. To avert further business stock were notarized by the same Notary Public. Additionally,
grievances.
reverses, April decided to shorten its corporate term up petitioners aver that when some of them transferred from Well
to February 28, 1990,[3] submitted a notice of dissolution to the World to April they were not given their separation pay, a factor
Securities and Exchange Commission and published the same in a To bolster their claim that April and Well World are one which presumably proves that April is a mere conduit of Well
newspaper of general circulation [4]. April also notified its and the same corporation, petitioners argue that both corporations
World. Petitioners likewise assert that their transfer from one
employees, the Department of Labor and Employment, [5] the have the same set of incorporators. Thus: corporation to another was made at the time that they were on the
Social Security System,[6] the Board of Investments,[7] the Bureau process of organizing a union. Finally, petitioners allege
of Internal Revenue,[8] and the Municipality of Paraaque of its Incorporators of Well World Incorporators of April that April and Well World were engaged in the same line of
dissolution. business, with the latter also supplying the former raw materials
Name Citizenship No. of Name Citizenship
and machineries. These circumstances, petitioners claim, make
In view of Aprils cessation of operations, petitioners who Shares their case akin to the case of La Campana Coffee Factory Inc. v.
initially composed of seventy-seven employees below filed a Kaisahan ng mga Mangagawa sa La Campana (KKM), 93 Phil.
complaint for illegal shutdown/retrenchment/dismissal and unfair 160, where the Court considered two corporations, i.e., La
 26

Campana Coffee Factory, Inc. and La Campana Gaugau Packing,
as one and the same. We are not persuaded.
A cursory examination of the composition of April and Well
Worlds incorporators and the number of shares they own hardly
supports petitioners asseveration. In fact, petitioners allegation that
both corporations were managed by a single individual, Mr. Jen Li
Weng, contradicts paragraphs 7 and 8 of their petition which state:
7. Respondents Yu-Sheng Ling, Jen Li Weng (Alias James Wang),
Eucliff Cheng and Chia Sheng Lin are the President, Managing
Director, Treasurer and Secretary respectively of respondent Well
World Toy, Inc., all of whom are holding office at 399-B Real St.,
Talon, Las Pinas, Metro Manila. x x x.
8. Respondents Nenita C. Aguirre, Ma. Theresa R. Cadiente and
Gliceria R. Aguirre are the President, Treasurer and Secretary,
respectively of respondent April Toy, Inc. all of whom are holding
office at No. 6-C Ascie Avenue, Severina Industrial Estate, Km. 16
South Superhighway Paranaque. x x x.[14]
We can not fully subscribe to the above contention of the
complainants. We do not believe that the circumstances related by
the complainants are sufficient indicia that the two corporations
are one and the same corporation although it appears that the two
of the original incorporators and stockholders of April Toy, Inc.
were incorporators and minority stockholders of Well-World Toy,
Inc. Hence it does not mean that the two (2) corporations are
adjunct and conduit. There is not express provision under the
Corporation law prohibiting stockholders or incorporators of a
corporation to be a stockholder or incorporator of another
corporation.
The fiction that a corporation was a distinct and separate
personality shall not be used as a subterfuge to commit injustice
and circumvent the law does not apply in the present case. There is
no conclusive evidence to convince us that respondent April Toy,
Inc. was established and later on closed to defeat the rights of the
workers of Well-World Toy, Inc. which would otherwise support
the charge of unfair labor practice. Hence, we find that the two (2)
corporations are separate and distinct entities. [17]
are supported by substantial evidence [19]. Judicial review by this
Court in labor cases does not go so far as to require this Court to
evaluate the sufficiency of the evidence upon which the Labor
Arbiter and respondent NLRC based their determination as our
review is limited to issues of jurisdiction or grave abuse of
discretion. In the instant suit, the findings of the Labor Arbiter was
duly affirmed by respondent NLRC, findings amply supported by
substantial evidence on record. We find no cogent reason, as none
was presented, to deviate from the same.
ACCORDINGLY, finding no grave abuse of discretion on
the part of respondent NLRC in rendering the assailed resolution,
the instant petition is hereby DISMISSED for lack of merit.
SO ORDERED.

What clearly appears therefrom is that the two corporations have
two different set of officers managing their respective affairs in
two separate offices.
It is basic that a corporation is invested by law with a
personality separate and distinct from those of the persons
composing it as well as from that of any other legal entity to which
it may be related. Mere substantial identity of the incorporators of
the two corporations does not necessarily imply fraud, [15] nor
warrant the piercing of the veil of corporation fiction. In the
absence of clear and convincing evidence that April and Well
Worlds corporate personalities were used to perpetuate fraud, or
circumvent the law said corporations were rightly treated as
distinct and separate from each other. Further, petitioners emphatic
reliance with the case of La Campana is misplaced. In La
Campana, unlike in this case, the two corporations, i.e., La
Campana Coffee Factory, Inc. and La Campana Gaugau Packing,
were not only owned by the same person, but moreover have a
single management, business office and a single payroll for both
businesses. Indeed, the workers of La Campana Gaugau Packing
were interchangeable, that is, the laborers from gaugau factory
were sometimes transferred to the coffee factory and vice-versa. [16]
and, on appeal, by public respondent NLRC, thus:
[R]elative to the closure of April Toy, it is clear from the records
that as early as December 1989 or long before a certification
election was conducted among its rank-and-file employees on
February 2, 1990, the employees were already aware that April
Toy was suffering from financial crisis. It further appearing that
April Toy continued to suffer losses as evidenced by its financial
statements ending December 31, 1989 and its balance sheet ending
March 31, 1990, the Labor Arbiter a quo correctly ruled that the
eventual closure of its business on February 27, 1990, is valid.
Anent the question of whether or not April Toy and Well- World
Toy are one and the same, with the facts and circumstances
showing that the owners of April Toy are different from those of
Well-World, the management of one being different from the
other, and the office of April Toy is situated more than ten
kilometers away from Well-World, plus the fact that the closure of
April Toy was for valid reasons, the Labor Arbiter likewise
correctly opined that the two corporations are separate and distinct
form each other, and that there is no basis for piercing the veil of
corporate fiction.[18]

We thus quote with approval the observation made by the Furthermore, the petition hinges on the factual findings of
Labor Arbiter as follows: both the Labor Arbiter and the NLRC. It should be stressed that
the factual findings of quasi-judicial agencies like the NLRC are
generally accorded not only respect but, at times, finality if such
 27
[G.R. No. 124715. January 24, 2000]
RUFINA LUY LIM petitioner, vs. COURT OF APPEALS,
AUTO TRUCK TBA CORPORATION, SPEED
DISTRIBUTING, INC., ACTIVE DISTRIBUTORS,
ALLIANCE MARKETING CORPORATION, ACTION
COMPANY, INC. respondents.
DECISION
BUENA, J.:
May a corporation, in its universality, be the proper subject of and
be included in the inventory of the estate of a deceased person?
Petitioner disputes before us through the instant petition for review
on certiorari, the decision[1] of the Court of Appeals promulgated
on 18 April 1996, in CA-GR SP No. 38617, which nullified and
set aside the orders dated 04 July 1995 [2], 12 September 1995[3] and
15 September 1995[4] of the Regional Trial Court of Quezon City,
Branch 93, sitting as a probate court.
Petitioner Rufina Luy Lim is the surviving spouse of the late
Pastor Y. Lim whose estate is the subject of probate proceedings in
Special Proceedings Q-95-23334, entitled, "In Re: Intestate Estate
of Pastor Y. Lim Rufina Luy Lim, represented by George Luy,
Petitioner".
Private respondents Auto Truck Corporation, Alliance Marketing
Corporation, Speed Distributing, Inc., Active Distributing, Inc. and
Action Company are corporations formed, organized and existing
under Philippine laws and which owned real properties covered
under the Torrens system.
On 11 June 1994, Pastor Y. Lim died intestate. Herein petitioner,
as surviving spouse and duly represented by her nephew George
Luy, filed on 17 March 1995, a joint petition [5] for the
administration of the estate of Pastor Y. Lim before the Regional
Trial Court of Quezon City.
Private respondent corporations, whose properties were included in
the inventory of the estate of Pastor Y. Lim, then filed a
motion[6] for the lifting of lis pendens and motion[7] for exclusion of
certain properties from the estate of the decedent.
In an order[8] dated 08 June 1995, the Regional Trial Court of
Quezon City, Branch 93, sitting as a probate court, granted the
private respondents twin motions, in this wise:
"Wherefore, the Register of Deeds of Quezon
City is hereby ordered to lift, expunge or
delete the annotation of lis pendens on
Transfer Certificates of Title Nos. 116716,
116717, 116718, 116719 and 5182 and it is
hereby further ordered that the properties
covered by the same titles as well as those
properties by (sic) Transfer Certificate of Title
Nos. 613494, 363123, 236236 and 263236 are
excluded from these proceedings.
SO ORDERED."
Subsequently, Rufina Luy Lim filed a verified amended
petition[9] which contained the following averments:
"3. The late Pastor Y. Lim personally owned
during his lifetime the following business
entities, to wit:
Business Entity Address:
X X X X
Alliance Marketing ,Inc. Block 3, Lot 6, Dacca
BF Homes,
Paraaque,
Metro Manila.
X X X X
Speed Distributing Inc. 910 Barrio Niog,
Aguinaldo Highway,
Bacoor, Cavite.
X X X X
Auto Truck TBA Corp. 2251 Roosevelt
Avenue,
Quezon City.
X X X X
Active Distributors, Inc. Block 3, Lot 6, Dacca
BF
Homes, Paraaque,
Metro Manila.
X X X X
Action Company 100 20th Avenue
Murphy, Quezon City
or
92-D Mc-Arthur Highway
Valenzuela Bulacan.
"3.1 Although the above business entities dealt
and engaged in business with the public as
corporations, all their capital, assets and equity
were however, personally owned by the late
Pastor Y Lim. Hence the alleged stockholders
and officers appearing in the respective articles
of incorporation of the above business entities
were mere dummies of Pastor Y. Lim, and
they were listed therein only for purposes of
registration with the Securities and Exchange
Commission.
"4. Pastor Lim, likewise, had Time, Savings
and Current Deposits with the following
banks: (a) Metrobank, Grace Park, Caloocan
City and Quezon Avenue, Quezon City
Branches and (b) First Intestate Bank
(formerly Producers Bank), Rizal Commercial
Banking Corporation and in other banks whose
identities are yet to be determined.
"5. That the following real properties, although
registered in the name of the above entities,
were actually acquired by Pastor Y. Lim
during his marriage with petitioner, to wit:
Corporation Title Location
X X X X
k. Auto Truck TCT No. 617726 Sto. Domingo
TBA Corporation Cainta, Rizal
q. Alliance Marketing TCT No. 27896 Prance,
Metro Manila
Copies of the above-mentioned Transfer
Certificate of Title and/or Tax Declarations are
hereto attached as Annexes "C" to "W".
 28
X X X X
"7. The aforementioned properties and/or real
interests left by the late Pastor Y. Lim, are all
conjugal in nature, having been acquired by
him during the existence of his marriage with
petitioner.
"8. There are other real and personal properties
owned by Pastor Y. Lim which petitioner
could not as yet identify. Petitioner, however
will submit to this Honorable Court the
identities thereof and the necessary documents
covering the same as soon as possible."
On 04 July 1995, the Regional Trial Court acting on petitioners
motion issued an order[10], thus:
"Wherefore, the order dated 08 June 1995 is
hereby set aside and the Registry of Deeds of
Quezon City is hereby directed to reinstate the
annotation of lis pendens in case said
annotation had already been deleted and/or
cancelled said TCT Nos. 116716, 116717,
116718, 116719 and 51282.
Further more (sic), said properties covered by
TCT Nos. 613494, 365123, 236256 and
236237 by virtue of the petitioner are included
in the instant petition.
SO ORDERED."
On 04 September 1995, the probate court appointed Rufina Lim as
special administrator[11] and Miguel Lim and Lawyer Donald Lee,
as co-special administrators of the estate of Pastor Y. Lim, after
which letters of administration were accordingly issued.
In an order[12] dated 12 September 1995, the probate court denied
anew private respondents motion for exclusion, in this wise:
"The issue precisely raised by the petitioner in
her petition is whether the corporations are the
mere alter egos or instrumentalities of Pastor
Lim, Otherwise (sic) stated, the issue involves
the piercing of the corporate veil, a matter that
is clearly within the jurisdiction of this
Honorable Court and not the Securities and
Exchange Commission. Thus, in the case of
Cease vs. Court of Appeals, 93 SCRA 483, the
crucial issue decided by the regular court was
whether the corporation involved therein was
the mere extension of the decedent. After
finding in the affirmative, the Court ruled that
the assets of the corporation are also assets of
the estate.
A reading of P.D. 902, the law relied upon by
oppositors, shows that the SECs exclusive (sic)
applies only to intra-corporate controversy. It
is simply a suit to settle the intestate estate of a
deceased person who, during his lifetime,
acquired several properties and put up
corporations as his instrumentalities.
SO ORDERED."
On 15 September 1995, the probate court acting on an ex
parte motion filed by petitioner, issued an order [13] the dispositive
portion of which reads:
"Wherefore, the parties and the following
banks concerned herein under enumerated are
hereby ordered to comply strictly with this
order and to produce and submit to the special
administrators , through this Honorable Court
within (5) five days from receipt of this order
their respective records of the savings/current
accounts/time deposits and other deposits in
the names of Pastor Lim and/or corporations
above-mentioned, showing all the transactions
made or done concerning savings /current
accounts from January 1994 up to their receipt
of this court order.
XXX XXX XXX
SO ORDERED."
Private respondent filed a special civil action for certiorari[14], with
an urgent prayer for a restraining order or writ of preliminary
injunction, before the Court of Appeals questioning the orders of
the Regional Trial Court, sitting as a probate court.
On 18 April 1996, the Court of Appeals, finding in favor of herein
private respondents, rendered the assailed decision [15], the decretal
portion of which declares:
"Wherefore, premises considered, the instant
special civil action for certiorari is hereby
granted, The impugned orders issued by
respondent court on July 4,1995 and
September 12, 1995 are hereby nullified and
set aside. The impugned order issued by
respondent on September 15, 1995 is nullified
insofar as petitioner corporations" bank
accounts and records are concerned.
SO ORDERED."
Through the expediency of Rule 45 of the Rules of Court, herein
petitioner Rufina Luy Lim now comes before us with a lone
assignment of error[16]:
"The respondent Court of Appeals erred in
reversing the orders of the lower court which
merely allowed the preliminary or provisional
inclusion of the private respondents as part of
the estate of the late deceased (sic) Pastor Y.
Lim with the respondent Court of Appeals
arrogating unto itself the power to repeal, to
disobey or to ignore the clear and explicit
provisions of Rules 81,83,84 and 87 of the
Rules of Court and thereby preventing the
petitioner, from performing her duty as special
administrator of the estate as expressly
provided in the said Rules."
Petitioners contentions tread on perilous grounds.
In the instant petition for review, petitioner prays that we affirm
the orders issued by the probate court which were subsequently set
aside by the Court of Appeals.
Yet, before we delve into the merits of the case, a review of the
rules on jurisdiction over probate proceedings is indeed in order.
The provisions of Republic Act 7691[17], which introduced
amendments to Batas Pambansa Blg. 129, are pertinent:
 29
"Section 1. Section 19 of Batas Pambansa
Blg. 129, otherwise known as the "Judiciary
Reorganization Act of 1980", is hereby
amended to read as follows:
Section 19. Jurisdiction in civil cases.
Regional Trial Courts shall exercise exclusive
jurisdiction:
xxx xxx xxx
(4) In all matters of probate, both testate and
intestate, where the gross value of the estate
exceeds One Hundred Thousand Pesos
(P100,000) or, in probate matters in Metro
Manila, where such gross value exceeds Two
Hundred Thousand Pesos (P200,000);
xxx xxx xxx
Section 3. Section 33 of the same law is
hereby amended to read as follows:
Section 33. Jurisdiction of
Metropolitan Trial Courts,
Municipal Trial Courts and
Municipal Circuit Trial
Courts in Civil Cases.-
Metropolitan Trial Courts,
Municipal Trial Courts and
Municipal Circuit Trial
Courts shall exercise:
1. Exclusive original
jurisdiction over civil
actions and probate
proceedings, testate and
intestate, including the
grant of provisional
remedies in proper cases,
where the value of the
personal property, estate or
amount of the demand
does not exceed One
Hundred Thousand
Pesos(P100,000) or, in
Metro Manila where such
personal property, estate or
amount of the demand
does not exceed Two
Hundred Thousand Pesos
(P200,000), exclusive of
interest, damages of
whatever kind, attorneys
fees, litigation expenses
and costs, the amount of
which must be specifically
alleged, Provided, that
interest, damages of
whatever kind, attorneys,
litigation expenses and
costs shall be included in
the determination of the
filing fees, Provided
further, that where there
are several claims or
causes of actions between
the same or different
parties, embodied in the
same complaint, the
amount of the demand
shall be the totality of the
claims in all the causes of
action, irrespective of
whether the causes of
action arose out of the
same or different
transactions;
xxx xxx xxx"
Simply put, the determination of which court exercises jurisdiction
over matters of probate depends upon the gross value of the estate
of the decedent.
As to the power and authority of the probate court, petitioner relies
heavily on the principle that a probate court may pass upon title to
certain properties, albeit provisionally, for the purpose of
determining whether a certain property should or should not be
included in the inventory.
In a litany of cases, We defined the parameters by which the court
may extend its probing arms in the determination of the question
of title in probate proceedings.
This Court, in PASTOR, JR. vs. COURT OF APPEALS,[18] held:
"X X X As a rule, the question of ownership is
an extraneous matter which the probate court
cannot resolve with finality. Thus, for the
purpose of determining whether a certain
property should or should not be included in
the inventory of estate properties, the Probate
Court may pass upon the title thereto, but such
determination is provisional, not conclusive,
and is subject to the final decision in a separate
action to resolve title."
We reiterated the rule in PEREIRA vs. COURT OF APPEALS[19]:
"X X X The function of resolving whether or
not a certain property should be included in the
inventory or list of properties to be
administered by the administrator is one
clearly within the competence of the probate
court. However, the courts determination is
only provisional in character, not conclusive,
and is subject to the final decision in a separate
action which may be instituted by the parties."
Further, in MORALES vs. CFI OF CAVITE[20] citing CUIZON
vs. RAMOLETE[21], We made an exposition on the probate courts
limited jurisdiction:
"It is a well-settled rule that a probate court or
one in charge of proceedings whether testate or
intestate cannot adjudicate or determine title to
properties claimed to be a part of the estate and
which are equally claimed to belong to outside
parties. All that the said court could do as
regards said properties is to determine whether
they should or should not be included in the
inventory or list of properties to be
administered by the administrator. If there is
no dispute, well and good; but if there is, then
the parties, the administrator and the opposing
parties have to resort to an ordinary action for
a final determination of the conflicting claims
of title because the probate court cannot do
so."
Again, in VALERA vs. INSERTO[22], We had occasion to
elucidate, through Mr. Justice Andres Narvasa[23]:
 30
"Settled is the rule that a Court of First
Instance (now Regional Trial Court), acting as
a probate court, exercises but limited
jurisdiction, and thus has no power to take
cognizance of and determine the issue of title
to property claimed by a third person adversely
to the decedent, unless the claimant and all
other parties having legal interest in the
property consent, expressly or impliedly, to the
submission of the question to the probate court
for adjudgment, or the interests of third
persons are not thereby prejudiced, the reason
for the exception being that the question of
whether or not a particular matter should be
resolved by the court in the exercise of its
general jurisdiction or of its limited
jurisdiction as a special court (e.g. probate,
land registration, etc.), is in reality not a
jurisdictional but in essence of procedural one,
involving a mode of practice which may be
waived. x x x
x x x. These considerations assume greater
cogency where, as here, the Torrens title is
not in the decedents name but in others, a
situation on which this Court has already
had occasion to rule x x x."(emphasis Ours)
Petitioner, in the present case, argues that the parcels of land
covered under the Torrens system and registered in the name of
private respondent corporations should be included in the
inventory of the estate of the decedent Pastor Y. Lim, alleging that
after all the determination by the probate court of whether these
properties should be included or not is merely provisional in
nature, thus, not conclusive and subject to a final determination in
a separate action brought for the purpose of adjudging once and for
all the issue of title.
Yet, under the peculiar circumstances, where the parcels of land
are registered in the name of private respondent corporations, the
jurisprudence pronounced in BOLISAY vs., ALCID[24] is of great
essence and finds applicability, thus:
"It does not matter that respondent-
administratrix has evidence purporting to
support her claim of ownership, for, on the
other hand, petitioners have a Torrens title in
their favor, which under the law is endowed
with incontestability until after it has been set
aside in the manner indicated in the law itself,
which, of course, does not include, bringing up
the matter as a mere incident in special
proceedings for the settlement of the estate of
deceased persons. x x x"
"x x x. In regard to such incident of inclusion
or exclusion, We hold that if a property
covered by Torrens title is involved, the
presumptive conclusiveness of such title
should be given due weight, and in the absence
of strong compelling evidence to the contrary,
the holder thereof should be considered as the
owner of the property in controversy until his
title is nullified or modified in an appropriate
ordinary action, particularly, when as in the
case at bar, possession of the property itself is
in the persons named in the title. x x x"
A perusal of the records would reveal that no strong compelling
evidence was ever presented by petitioner to bolster her bare
assertions as to the title of the deceased Pastor Y. Lim over the
properties. Even so, P.D. 1529, otherwise known as, " The
Property Registration Decree", proscribes collateral attack on
Torrens Title, hence:
"xxx xxx xxx
Section 48. Certificate not subject to collateral
attack.
- A certificate of title shall not be subject to
collateral attack. It cannot be altered, modified
or cancelled except in a direct proceeding in
accordance with law."
In CUIZON vs. RAMOLETE, where similarly as in the case at
bar, the property subject of the controversy was duly registered
under the Torrens system, We categorically stated:
"x x x Having been apprised of the fact that the
property in question was in the possession of
third parties and more important, covered by a
transfer certificate of title issued in the name of
such third parties, the respondent court should
have denied the motion of the respondent
administrator and excluded the property in
question from the inventory of the property of
the estate. It had no authority to deprive such
third persons of their possession and
ownership of the property. x x x"
Inasmuch as the real properties included in the inventory of the
estate of the late Pastor Y. Lim are in the possession of and
are registered in the name of private respondent corporations,
which under the law possess a personality separate and distinct
from their stockholders, and in the absence of any cogency to
shred the veil of corporate fiction, the presumption of
conclusiveness of said titles in favor of private respondents should
stand undisturbed.
Accordingly, the probate court was remiss in denying private
respondents motion for exclusion. While it may be true that the
Regional Trial Court, acting in a restricted capacity and exercising
limited jurisdiction as a probate court, is competent to issue orders
involving inclusion or exclusion of certain properties in the
inventory of the estate of the decedent, and to adjudge, albeit,
provisionally the question of title over properties, it is no less true
that such authority conferred upon by law and reinforced by
jurisprudence, should be exercised judiciously, with due regard
and caution to the peculiar circumstances of each individual case.
Notwithstanding that the real properties were duly registered under
the Torrens system in the name of private respondents, and as such
were to be afforded the presumptive conclusiveness of title, the
probate court obviously opted to shut its eyes to this gleamy fact
and still proceeded to issue the impugned orders.
By its denial of the motion for exclusion, the probate court in
effect acted in utter disregard of the presumption of conclusiveness
of title in favor of private respondents. Certainly, the probate court
through such brazen act transgressed the clear provisions of law
and infringed settled jurisprudence on this matter.
Moreover, petitioner urges that not only the properties of private
respondent corporations are properly part of the decedents estate
but also the private respondent corporations themselves. To rivet
such flimsy contention, petitioner cited that the late Pastor Y. Lim
during his lifetime, organized and wholly-owned the five
corporations, which are the private respondents in the instant case.
[25]
 Petitioner thus attached as Annexes "F" [26] and "G"[27] of the
petition for review affidavits executed by Teresa Lim and Lani
Wenceslao which among others, contained averments that the
incorporators of Uniwide Distributing, Inc. included on the list had
no actual participation in the organization and incorporation of the
 31

said corporation. The affiants added that the persons whose names
appeared on the articles of incorporation of Uniwide Distributing,
Inc., as incorporators thereof, are mere dummies since they have
not actually contributed any amount to the capital stock of the
corporation and have been merely asked by the late Pastor Y. Lim
to affix their respective signatures thereon.
It is settled that a corporation is clothed with personality separate
and distinct from that of the persons composing it. It may not
generally be held liable for that of the persons composing it. It may
not be held liable for the personal indebtedness of its stockholders
or those of the entities connected with it.[28]
Rudimentary is the rule that a corporation is invested by law with a
personality distinct and separate from its stockholders or members.
In the same vein, a corporation by legal fiction and convenience is
an entity shielded by a protective mantle and imbued by law with a
character alien to the persons comprising it.
Further, the test in determining the applicability of the doctrine of
piercing the veil of corporate fiction is as follows: 1) Control, not
mere majority or complete stock control, but complete domination,
not only of finances but of policy and business practice in respect
to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of
its own; (2) Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a statutory or
other positive legal duty, or dishonest and unjust act in
contravention of plaintiffs legal right; and (3) The aforesaid
control and breach of duty must proximately cause the injury or
unjust loss complained of. The absence of any of these elements
prevent "piercing the corporate veil".[32]
Mere ownership by a single stockholder or by another corporation
of all or nearly all of the capital stock of a corporation is not of
itself a sufficient reason for disregarding the fiction of separate
corporate personalities.[33]
Moreover, the adverse party is deprived of the
opportunity to cross-examine the affiants. For
this reason, affidavits are generally rejected for
being hearsay, unless the affiant themselves
are placed on the witness stand to testify
thereon."
As to the order[36] of the lower court, dated 15 September 1995, the
Court of Appeals correctly observed that the Regional Trial Court,
Branch 93 acted without jurisdiction in issuing said order; The
probate court had no authority to demand the production of bank
accounts in the name of the private respondent corporations.
WHEREFORE, in view of the foregoing disquisitions, the instant
petition is hereby DISMISSED for lack of merit and the decision
of the Court of Appeals which nullified and set aside the orders
issued by the Regional Trial Court, Branch 93, acting as a probate
court, dated 04 July 1995 and 12 September 1995 is AFFIRMED.

Nonetheless, the shield is not at all times invincible. Thus, Moreover, to disregard the separate juridical personality of a SO ORDERED.
in FIRST PHILIPPINE INTERNATIONAL BANK vs. COURT corporation, the wrong-doing must be clearly and convincingly
OF APPEALS[29], We enunciated: established. It cannot be presumed.[34]

"x x x When the fiction is urged as a means of
perpetrating a fraud or an illegal act or as a
vehicle for the evasion of an existing
obligation, the circumvention of statutes, the
achievement or perfection of a monopoly or
generally the perpetration of knavery or crime,
the veil with which the law covers and isolates
the corporation from the members or
stockholders who compose it will be lifted to
allow for its consideration merely as an
aggregation of individuals. x x x"
Piercing the veil of corporate entity requires the court to see
through the protective shroud which exempts its stockholders from
liabilities that ordinarily, they could be subject to, or distinguishes
one corporation from a seemingly separate one, were it not for the
existing corporate fiction.[30]
The corporate mask may be lifted and the corporate veil may be
pierced when a corporation is just but the alter ego of a person or
of another corporation. Where badges of fraud exist, where public
convenience is defeated; where a wrong is sought to be justified
thereby, the corporate fiction or the notion of legal entity should
come to naught.[31]
Granting arguendo that the Regional Trial Court in this case was
not merely acting in a limited capacity as a probate court,
petitioner nonetheless failed to adduce competent evidence that
would have justified the court to impale the veil of corporate
fiction. Truly, the reliance reposed by petitioner on the affidavits
executed by Teresa Lim and Lani Wenceslao is unavailing
considering that the aforementioned documents possess no
weighty probative value pursuant to the hearsay rule. Besides it is
imperative for us to stress that such affidavits are inadmissible in
evidence inasmuch as the affiants were not at all presented during
the course of the proceedings in the lower court. To put it
differently, for this Court to uphold the admissibility of said
documents would be to relegate from Our duty to apply such basic
rule of evidence in a manner consistent with the law and
jurisprudence.
Our pronouncement in PEOPLE BANK AND TRUST
COMPANY vs. LEONIDAS[35] finds pertinence:
"Affidavits are classified as hearsay evidence
since they are not generally prepared by the
affiant but by another who uses his own
language in writing the affiants statements,
which may thus be either omitted or
misunderstood by the one writing them.
 32
[G.R. No. 98310. October 24, 1996]
MATUGUINA INTEGRATED WOOD PRODUCTS,
INC., petitioner, vs. The HON. COURT OF
APPEALS, DAVAO ENTERPRISES
CORPORATION, The HON. MINISTER, (NOW
SECRETARY) of NATURAL RESOURCES AND
PHILLIP CO, respondents.
DECISION
TORRES, JR., J.:
Matuguina Integrated Wood Products Inc. (MIWPI, for
brevity) filed this action for prohibition, Damages and Injunction,
in order to prevent the respondent Minister (now Secretary) of
Natural Resources from enforcing its Order of Execution against it,
for liability arising from an alleged encroachment of the petitioner
over the timber concession of respondent DAVENCOR located in
Mati, Davao Oriental.
The Regional Trial Court, Branch 17, Davao City, ruled in
favor of the petitioner, but on appeal, was reversed by the
respondent Court of Appeals in its decision dated February 25,
1991, which found MIWPI, as an alter ego of Milagros Matuguina
and/or Matuguina Logging enterprises (MLE, to be liable to
DAVENCOR for illegal encroachment.
The following are the antecedent facts:
On June 28, 1973, the Acting Director of the Bureau of
Forest Development issued Provisional Timber License (PTL) No.
30, covering an area of 5,400 hectares to Ms. Milagros Matuguina
who was then doing business under the name of MLE, a sole
proprietorship venture. A portion, covering 1,900 hectares, of the
said area was located within the territorial boundary of Gov.
Generoso in Mati, Davao Oriental, and adjoined the timber
concession of Davao Enterprises Corporation (DAVENCOR), the
private respondent in this case.
On July 10, 1974, petitioner Matuguina Integrated Wood
Products, Inc. (MIWPI), was incorporated, having an authorized
capital stock of Ten Million Pesos (P10,000,000.00).[1] The
incorporators/stockholders of MIWPI, and their stock
subscriptions were as follows:
Name No. Of Shares Subscribed Amount of Capital
Stock Subscribed
1. Henry Wee 1,160,000 1,160,000.00
2. Ma. Milagros Matuguina 400,000 400,000.00
3. Alejandro Chua Chun 200,000 200,000.00
4. Bernadita Chua 120,000 120,000.00
5. Domingo Herrera 40,000 40,000.00
6. Manuel Hernaez 40,000 40,000.00
7. Luis Valderama 40,000 40,000.00
----------------- ------------------
2,000,000 2,000,000.00
=========== ===========
Milagros Matuguina became the majority stockholder of
MIWPI on September 24, 1974, when the latters Board of
Directors approved by Resolution the transfer of 1,000,000 shares
from Henry Wee to Milagros Matuguina, thus giving her seventy
percent (70%) stock ownership of MIWPI.
In an undated letter[2] to the Director of Forest Development
(BFD) on November 26, 1974, Milagros Matuguina requested the
Director for a change of name and transfer of management of PTL
No. 30, from a single proprietorship under her name, to that of
MIWPI.
This request was favorably endorsed on December 2,
1974[3] by the BFDs Acting Director, Jose Viado to respondent
Secretary of Natural Resources, who approved the same
on September 5, 1975.[4]
On July 17, 1975, Milagros Matuguina and petitioner
MIWPI executed a Deed of Transfer [5] transferring all of the
formers rights, interests, ownership and participation in Provincial
Timber License No. 30 to the latter for and in consideration of
148,000 shares of stocks in MIWPI.
A copy of said deed was submitted to the Director of Forest
Development and Petitioner MIWPI had since been acting as
holder and licensee of PTL No. 30.
On July 28, 1975, pending approval of the request to transfer
the PTL to MIWPI, DAVENCOR, through its Assistant General
Manager, complained to the District Forester at Mati, Davao
Oriental that Milagros Matuguina/MLE had encroached into and
was conducting logging operations in DAVENCORs timber
concession.
After investigation of DAVENCORs complaint, the
Investigating Committee which looked into DAVENCORs
complaint submitted its report to the Director, finding that MLE
had encroached on the concession area of DAVENCOR. In line
with this, the Director of Forest Development issued an
Order[6] on July 15, 1981, finding and declaring MLE to have
encroached upon, and conducted illegal logging operations within
the licensed or concession area of DAVENCOR.
MLE appealed the Order to the Ministry of Natural
Resources, which appeal was docketed as MNR CASE No.
6450. During the pendency of the appealed case with the Minister
of Natural Resources, Ma. Milagros Matuguina disposed of her
shares in petitioner MIWPI, thereby ceasing to be a stockholder of
the petitioner of March 16, 1986.[7]
On October 1, 1986, The Minister of Natural Resources,
Hon. Ernesto M. Maceda rendered his Decision,[8] affirming the
aforesaid order of the Director of Forest Development, stating
thus:
DECISION
For our Resolution is the appeal by MATUGUINA LOGGING
ENTERPRISES (MLR, for short) of the Order dated 15 July
1991 of the Director of Forest Development finding and declaring
MLE to have encroached upon, and conducted illegal logging
operations within the license or concession area of DAVAO
ENTERPRISES CORPORATION. The aforesaid Order
dispositively states:
 33
WHEREFORE, there being a clear and convincing proof that
Matuguina Conducted illegal operation within the licensed area of
DAVENCOR, above named respondent is hereby ordered to pay
to the complainant the equivalent value in pesos of 2,352.04 cubic
meters of timber based on the market price obtaining, at the
logpond of the respondent at the time of cutting, minus the cost of
production, or to restitute to the complainant equal volume of
2,352.04 cubic meters of logs owned by respondent to be taken at
respondents logpond. The respondent is hereby directed to comply
with this Order within a period of ninety (90) days from receipt of
this Order and after the lapse of the said period, no compliance has
been made by the respondent, its logging operations shall ipso
facto become automatically suspended until respondent shall have
complied as directed.
The Regional Director of Region II, Davao City is hereby
instructed to implement this Order and to submit his compliance
report within ten (10) days after the lapse of the ninety (90) days
period within which the respondent is directed to comply with this
order.
And that the dispositive portion of the said decision states;
WHEREFORE, the Order dated 15 July 1981 of the Director of
Forest Development is hereby AFFIRMED.
When the Decision of the Minister of Natural Resources
became final and executory, Philip Co and DAVENCOR requested
the respondent Minister on October 30, 1986 to issue immediately
a writ of execution against MLE and/or MIWPI. [9] The Order of
Execution[10] was issued on January 6, 1987 by the Minister
through the latters Assistant on Legal Affairs. The said Order
directed the issuance of a writ of execution, not only against MLE,
but likewise against MIWPI. The dispositive portion of the order
provides:
WHEREFORE, let a Writ of Execution be issued against
Matuguina Logging Enterprises and/or Matuguina Integrated
Wood Products, Inc. For the satisfaction of the Decision of the
Bureau of Forest Development dated 15 July 1981, and the Order
of this office dated 1 October 1986.
SO ORDERED.
Subsequently, a writ of execution[11] dated January 8,
1987 was issued in favor of the respondent DAVENCOR, which
states:
The City/Provincial Sheriff 8. That defendant Minister is doing, threatens or is about to do, or
is procuring or suffering to be done, some act which definitely is in
Davao City violation of the plaintiffs rights respecting the subject matter of the
action, and unless said act or acts are restrained or prohibited at
GREETINGS: least during the pendency of this case, said act or acts would
probably work not only injustice to plaintiff but world tend to
render the judgment of this Honorable court ineffectual;
You are hereby directed to enforce, implement and execute the
Order of Execution dated 06 June 1987 of this Office in the above-
9. That the commission or continuance of the acts complained of
entitled case against Matuguina Logging Enterprises and/or
during the present litigation would not only cause great and
Matuguina Integrated Wood Products, Inc. its officers or any
irreparable injury, but will also work injustice to the plaintiff, and
person or corporation in its behalf and conformably with the Order
would complicate, aggravate and multiply the issues in this case;
dated 15 July 1981 of the Director of Forest Development, stating
dispositively.
10. That the plaintiff is entitled to the relief demanded, and the
xxx whole or part of such relief consist in restraining the commission
or continuance of the acts complained of, or in the performance of
acts, either for a limited period or perpetually;
You are hereby requested to submit your return to this Office
within the period of sixty (60) days from your receipt hereof as to
action taken hereon. 11. That great and irreparable injury would inevitably result to the
plaintiff before the matter can be heard on notice, hence,
immediate issuance of a restraining order is necessary and proper;
SO ORDERED."
12. That the plaintiff is willing and able to file the necessary bond
On February 11, 1987, MIWPI filed the instant
executed to the defendants, in an amount to be fixed by the Court,
complaint[12] for prohibition, damages and injunction, with prayer
to the effect that the plaintiff will pay to the defendants all
for restraining order, which case was docketed as Civil Case No.
damages which they may sustain by reason of the injunction if the
18,457-87 in the Regional Trial Court Davao City, Branch
court should finally decide that the plaintiff was not entitled
17. MIWPI stated its primary cause of action, the relevant portion
thereto.
of which reads, viz.:
MIWPI, likewise alleges that in wantonly and imprudently
5. That plaintiff which has a distinct and separate personality of its
procuring the Writ of Execution against it, which DAVENCOR
own under the law, and was never a party to the case between
and Philip Co seek to enforce a 2.5 Million Peso liability of
DAVENCOR and MLE, suddenly became a party to the case after
plaintiff, the latter has been constrained to bring the present action,
the decision became final and executory with the issuance of
thereby incurring damages in the sum of P500,000.00 in concept of
Annex B hereof for reasons known to the defendants alone:
actual and compensatory damages, and P250,000.00 in attorneys
fees, which amount petitioner now seeks to recover.
6. That the issuance of Annex B hereof (the order of execution) by
the defendant Minister has been made not only without or in
The trial court issued a temporary restraining order the next
excess of his authority but that the same was issued patently
day, February 12, 1987, restraining and/or enjoining the private
without any factual or legal basis, hence, a gross violation of
respondents and the Hon. Secretary of Natural Resources from
plaintiffs constitutional rights under the due process clause;
enforcing, implementing and/or carrying into effect, the decision
of the respondent Secretary dated October 1, 1986, as well as the
7. That plaintiff, in the face of the order (Annex B) complained of, order of execution dated January 6, 1987.
there being no appeal or any plain, speedy, and adequate remedy in
the ordinary course of law, does not have any alternative but to
On February 17, 1987, private respondent filed a Motion to
ventilate the present recourse;
Dismiss[13] alleging that the trial court had no jurisdiction over the
case under Presidential Decree No. 705, to which Motion to
Dismiss, petitioner filed an Opposition [14] dated February 1987. On
 34
March 9, 1987, the trial court issued an order [15] denying private
respondents Motion to Dismiss. Hence, private respondents filed
their Answer[16] dated March 13, 1987 and an Amended Answer[17]
In the latter pleading, private respondents raised the
following special and affirmative defenses:
7. That neither Milagros Matuguina nor Matuguina Integrated
Wood Products, Inc. advised defendant Davencor of the change of
name, and transfer of management of PTL No. 30. From Milagros
Matuguina to Matuguina Integrated Wood Products, Inc., during
the pendency of MNR Case No. 6540 before the Bureau of Forest
Develoment and the Ministry of Natural Resources,
notwithstanding that the lawyer of matuguina Integrated Wood
Products, Inc., who was also a stockholder thereof, had appeared
for Milagros Matuguina in said administrative case.
8. That plaintiff has acted in bad faith and is now in estoppel from
questioning the Writ of Execution issued against Milagros
Matuguina (now Matuguina Integrated Wood Products, Inc.) to
satisfy the judgment in MNR Case No. 6540.
9. This Honorable Court has no jurisdiction over the nature and
subject matter of this action, especially because:
(a) The plaintiff has not exhausted administrative
remedies available to it before initiating this
action;
(b) In the guise of entertaining an action for damages,
this Court is being misled by the plaintiff into
deciding questions properly for the
Department of Natural Resources to decide
exclusively in the lawful exercise of its
regulatory jurisdiction;
(c) The plaintiff is now precluded and estopped from
filing this action.
10. The plaintiff has no cause of action against the defendants and
has not stated any in its complaint, especially because:
(a) Having failed to exhaust administrative remedies,
plaintiff is without a ripe cause of action that
can be pleaded before this Honorable Court;
(b) In substance, there is no justifiable question raised WHEREFORE, premises considered, the decision appealed from
under the facts and circumstances of this case. is reversed and set aside and the Order of Execution issued by the
Minister of Natural Resources dated January 6, 1987 is
Meanwhile, on June 2, 1987, the trial court issued an affirmed. Without pronouncement as to costs.
order[18] granting the petitioners prayer for the issuance of a writ of
preliminary injunction against the private respondents and the SO ORDERED.
Secretary of Natural Resources, ordering them to desist, refrain
and prevent from enforcing respondent Secretarys Decision dated In due time, petitioner filed a motion for reconsideration.
October 1, 1986 as well as the writ of execution dated January 8, [21]
 Private respondents filed their opposition[22] to the same on
1987. April 2, 1991. In a Resolution[23] dated April 12, 1991, the motion
was denied by the respondent Court.
On May 10, 1989, the trial court rendered its Decison [19] in
favor of the petitioner, disposing of the action as follows: Not content with the courts pronouncement, petitioner is
now before us on a Petition for Review on Certiorari,[24] alleging
WHEREFORE, in view of the foregoing, finding the evidence of that the respondent court acted with grave abuse of discretion in
plaintiff, Matuguina Integrated Wood Products, Inc. sufficient to rendering the questioned decision and its companion resolution,
sustain a preponderance of evidence, showing that the order of denying the motion for reconsideration.
execution dated January 6, 1987, issued by the Minister of Natural
Resources, through Alexander C. Castro, Assistant Minister for The reasons relied upon by the Petitioner in filing its petition
Legal Affairs, included therein, plaintiff Matuguina Integrated are hereby restated:
Wood Products, Inc., despite non-inclusion of plaintiff in the
decision of the then Minister of Natural Resources, dated October I
1, 1986, already final and executory before the issuance of the
order and execution, said order or execution is hereby declared
PETITIONER WAS DENIED DUE PROCESS OF
null and void and without any legal effect.
LAW WHEN IT WAS MADE LIABLE BY
RESPONDENT SECRETARY OF NATURAL
As a consequence thereof, the writ of preliminary injunction issued RESOURCES IN HIS ORDER OF EXECUTION
by this court, dated June 2, 1987 is hereby made permanent. DATED 06 JANUARY 1987 (EXHIBIT B OF
ATTACHMENT O) ISSUED IN MNR CASE NO. 6540
Moreover, as a result of the filing of this case, defendant Philip Co DESPITE THE FACT THAT PETITIONER WAS
and Davencor Corporation, are ordered to jointly and severally pay NEVER A PARTY NOR A PARTICIPANT IN THE
the amount of P100,000.00 as actual and compensatory damages, SAID CASE: IN FACT, PETITIONER NEVER HAD
along with another amount of P20,000.00 as attorneys fees and NOTICE OF THE PROCEEDINGS IN MNR CASE
costs of this action, in favor of plaintiff Matuguina Integrated NO. 6540.
Wood Products, Inc.
II
SO ORDERED.
THE FAILURE TO AFFORD PETITIONER THE
Private respondents appealed the trial courts decision on OPPORTUNITY TO BE HEARD IN THE
May 19, 1989. Their notice of appeal was approved by the trial ADMINISTRATIVE LEVEL (MNR CASE NO. 6540)
court. The appealed case was docketed with respondent Honorable COULD NOT HAVE BEEN CURED BY THE
Court of Appeals as CA-G.R. SP No. 19887. INSTITUTION OF THE ACTION FOR PROHIBITION
IN THE TRIAL COURT BECAUSE SAID COURT
On February 25, 1991, the respondent Court rendered its HAD NO JURISDICTION TO DETERMINE
Decision,[20] reversing the lower courts pronouncement. The WHETHER PETITIONER WAS GUILTY OF
dispositive portion of the decision reads: ENCROACHMENT ON PRIVATE RESPONDENT
DAVENCORS TIMBER CONCESSION;
 35

FURTHERMORE, THE QUESTION ON WHETHER
PETITIONER WAS GUILTY OF ENCROACHMENT
WAS NEVER PUT IN ISSUE IN THE CASE BEFORE
THE TRIAL COURT.
III
THE LIABILITY OF MILAGROS/MLE AS FOUND
BY RESPONDENT SECRETARY IN ITS DECISION
DATED 01 OCTOBER 1986 (EXHIBIT A OF THE
ATTACHMENT 0) CANNOT BE IMPUTED
AGAINST PETITIONER SINCE THE LATTER IS A
CORPORATION HAVING A PERSONALITY
SEPARATE AND DISTINCT FROM
MILAGROS/MLE.
IV
PETITIONER CANNOT BE MADE LIABLE TO
PRIVATE RESPONDENTS UNDER THE DEED OF
TRANSFER DATED 18 JULY 1975 (EXHIBIT 3 OF
ATTACHMENT P) AND SECTION 61 OF THE REVISED
FORESTRY CODE OF THE PHILIPPINES (P.D. 705, AS
AMENDED):
A. THE ALLEGED TRANSFER OF PTL NO. 30
FROM MILAGROS/MLE TO PETITIONER
NEVER BECAME BINDING AND
EFFECTIVE SINCE PTL NO.
REMAINED IN THE NAME OF
MILAGROS/MLE UNTIL ITS EXPIRATION
ON 30 JUNE 1977: THIS IS DUE TO THE
FACT THAT SAID TRANSFER WAS
NEVER APPROVED BY THE SECRETARY
OF NATURAL RESOURCES.
B. GRANTING ARGUENDO THAT THERE WAS
AN EFFECTIVE TRANSFER OF PTL NO.
30 FROM MILAGROS/MLE TO
PETITIONER, THE TRANSFER COULD
NOT MAKE PETITIONER LIABLE FOR
THE ALLEGED ENCROACHMENT OF
PRIVATE RESPONDENT DAVENCORS
TIMBER CONCESSION, SINCE:
1. SAID TRANSFER WAS EXECUTED
PRIOR TO THE COMMISSION OF
THE ALLEGED
ENCROACHMENT AND THE
FILING OF THE
ADMINISTRATIVE COMPLAINT
FOR ENCROACHMENT DATED
28 JULY 1975; THUS,
PETITIONER CANNOT BE MADE
LIABLE FOR OBLIGATONS OF
MILAGROS/MLE WHICH WERE
INCURRED AFTER DATE OF
THE SAID TRANSFER.
2. SAID TRANSFER COVERED ONLY
FORESTRY CHARGES AND
OTHER GOVERNMENT FEES,
AND DID NOT INCLUDE THE
PERSONAL LIABILITY OF
MILAGROS/MLE THAT AROSE
FROM THE ENCROACHMENT
OF THE TIMBER CONCESSION
OF RESPONDENT DAVENCOR.
[25]
Private Respondent DAVENCOR and the public respondent
Hon. Minister (now Secretary) of Natural Resources filed separate
Comments[26] on September 5, 1991 and June 8, 1992 respectively.
The essential issues of the present controversy boil down to
the following:
30
Was the Petitioner denied due process when it was adjudged
liable with MLE for encroaching upon the timber concession of
DAVENCOR in the respondent Minister's order of Execution?
Is the petitioner a transferee of MLE's interest, as to make it
liable for the latters illegal logging operations in DAVENCORs
timber concession, or more specifically, is it possible to pierce the
veil of MIWPIs corporate existence, making it a mere conduit or
successor of MLE?
Generally accepted is the principle that no man shall be
affected by any proceeding to which he is a stranger, and strangers
to a case are not bound by judgment rendered by the court. In the
same manner an execution can be issued only against a party and
not against one who did not have his day in court. In Lorenzo vs.
Cayetano, 78 SCRA 485 [1987], this Court held that only real
parties in interest in an action are bound by judgment therein and
by writs of execution and demolition issued pursuant thereto. [27]
Indeed a judgment cannot bind persons who are not parties
to the action.[28] It is elementary that strangers to a case are not
bound by the judgment rendered by the court and such judgment is
not available as an adjudication either against or in favor of such
other person. A decision of a court will not operate to divest the
rights of a person who has not and has never been a party to a
litigation, either as plaintiff or as defendant. Execution of a
judgment can only be issued against one who is a party to the
action, and not against one who, not being a party in the action has
not yet had his day in court.[29]
The writ of execution must conform to the judgment which
is to be executed, as it may not vary the terms of the judgment it
seeks to enforce.[30] Nor may it go beyond the terms of the
judgment which sought to be executed. Where the execution is not
in harmony with the judgment which gives it life and exceeds it, it
has pro tanto no validity. To maintain otherwise would be to
ignore the constitutional provision against depriving a person of
his property without due process of law.[31]
The writ of execution issued by the Secretary of Natural
Resources on January 8, 1987 clearly varies the term of his
Decision of October 1, 1986, inasmuch as the Writ includes the
MIWPI as party liable whereas the Decision only mentions
Milagros Matuguina/MLE.
There is no basis for the issuance of the Order of Execution
against the petitioner. The same was issued without giving the
petitioner an opportunity to defend itself and oppose the request of
DAVENCOR for the issuance of a writ of execution against it. In
fact, it does not appear that petitioner was at all furnished with a
copy of DAVENCORs letter requesting for the Execution of the
Honorable Secretarys decision against it. Petitioner was suddenly
made liable upon the order of execution by the
respondent Secretarys expedient conclusions that MLE and
MIWPI are one and the same, apparently on the basis merely of
DAVENCORs letter requesting for the Order, and without hearing
or impleading MIWPI. Until the issuance of the Order of
execution, petitioner was not included or mentioned in the
proceedings as having any participation in the encroachment in
DAVENCORs timber concession. This action of the respondent
Secretary disregards the most basic tenets of due process and
elementary fairness.
The liberal atmosphere which pervades the procedure in
administrative proceedings does not empower the presiding officer
to make conclusions of fact before hearing all the parties
concerned.[32] In Police Commission vs. Hon Judge Lood, [33] we
 36
held that the formalities usually attendant in court hearings need
not be present in an administrative investigation, provided that the
parties are heard and given the opportunity to adduce their
evidence. The right to notice and hearing is essential to due
process and its non-observance will, as a rule, invalidate the
administrative proceedings.
As observed by the appellate court, to wit:
the appellant should have filed a Motion with the Minister with
Notice to the appellee to include the latter as party liable for the
judgment in order to afford the appellee an opportunity to be heard
on its liability for the judgment rendered against Ma. Milagros
Matuguina doing business under the name Matuguina Logging
Enterprises.[34]
Continuing, the said court stated further that:
Nevertheless, the failure to comply with the procedure in order to
satisfy the requirements of due process was cured by the present
action for prohibition where the liability of appellee has been
ventilated.
We do not agree. Essentially, Prohibition is a remedy to
prevent inferior courts, corporations, boards or persons from
usurping or exercising a jurisdiction or power with which they
have not been vested by law[35] As we held in Mafinco Trading
Corporation vs. Ople, et al, [36] in a certiorari or prohibition case,
only issues affecting the jurisdiction of the tribunal, board and
offices involved may be resolved on the basis of undisputed facts.
The issue of whether or not petitioner is an alter ego of
Milagros Matuguina/MLE, is one of fact, and which should have
been threshed out in the administrative proceedings, and not in the
prohibition proceedings in the trial court, where it is precisely the
failure of the respondent Minister of Natural Resources to proceed
as mandated by law in the execution of its order which is under
scrutiny.
Assuming, arguendo, that prohibition is the proper remedy
for determining the propriety of piercing the separate personality
of petitioner with its stockholders, the evidence presented at said
trial does not warrant such action.
It is settled that a corporation is clothed with a personality
separate and distinct from that of persons composing it. It may not
generally be held liable for that of the persons composing it. It may
not 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. [37] But when the
juridical personality of the corporation is used to defeat public
convenience, justify wrong, protect fraud or defend crime, the
corporation shall be considered as a mere association of persons
(Koppel, Inc. vs. Yatco, 77 Phil 496, Palay, Inc. vs. Clave, G.R.
No. 56076, September 21, 1983, 124 SCRA 638), and its
responsible officers and/or stockholders shall be individually liable
(Namarco vs. Associated Finance Co., Inc., G.R. No. L- 20886,
April 27, 1967, 19 SCRA 962). For the same reasons, a
corporation shall be liable for the obligations of a stockholder
(Palacio vs. Fely Transportation Co., G.R. No. L-15121, August
31, 1963, 5 SCRA 1011), or a corporation and its successor-in-
interest shall be considered as one and the liability of the former
attach to the latter.[38]
But for the separate juridical personality of a corporation to
be disregarded, the wrongdoing must be clearly and convincingly
established. It cannot be presumed.[39]
In the case at bar, there is, insufficient basis for the appellate
courts ruling that MIWPI is the same as Matuguina. The trial
courts observation is enlightening.
Despite apparently opposing evidence of both parties, the Court
gathered and finds, that defendants attempt to pierce the veil of
corporate personality of plaintiff corporation, as to consider
plaintiff corporations merely an adjunct or alter ego of Maria
Milagros Matuguina Logging Enterprises, to justify defendants
claim against plaintiff corporation, suffers heavily from
insufficiency of evidence.
It is the vehement contention of defendants, to bolster its claim,
that plaintiff corporation is the alter ego of Maria Milagros
Matuguina Logging Enterprises, because when Milagros
Matuguina became the Chairman of the Board of Directors of
plaintiff corporation, she requested for the change of name and
transfer of management of PTL No. 30, from her single
proprietorship, to plaintiff corporation.
Secondly, when Milagros Matuguina executed the deed of transfer,
transferring her forest concession under PTL No, 30, together with
all the structures and improvements therein, to plaintiff
corporation, for a consideration of P14,800.00 representing
148,000 shares of stocks of plaintiff corporation actually all
existing shares of stocks of Milagros Matuguina, in plaintiff
corporation represents 77.4% therein; suffice to say that plaintiff
corporation practically became an alter ego of Milagros
Matuguina.
Defendants arguments on this peripheral aspect of corporate
existence, do not at all indicate that such a legal fiction, was
granted.
In the first place the alleged control of plaintiff corporation was
not evident in any particular corporate acts of plaintiff corporation,
wherein Maria Milagros Matuguina Logging Enterprises using
plaintiff corporation, executed acts or powers directly involving
plaintiff corporation.
Neither was there any evidence of defendants, that Maria Milagros
Matuguina Logging Enterprises, using the facilities and resources
of plaintiff corporation, involved itself in transaction using both
single proprietorship and plaintiff corporation in such particular
line of business undertakings.
As stated by this court in resolving plaintiffs prayer for issuance of
a writ of preliminary injunction, said:
There is actually, no evidence presented by defendant, showing
that sometime on March 15, 1986, to January 1987, during which
period, the subject decision of Hon. Secretary of Natural
Resources and corresponding writ of execution, Maria Milagros
Matuguina was a stockholder of plaintiff corporation in such
amount or was she an officer of plaintiff corporation in whatever
capacity.
The above circumstances is relevant and significant to assume any
such justification of including plaintiff corporation in the subject
writ of execution, otherwise as maintained by defendants, what
matters most was the control of Milagros Matuguina Logging
Enterprises of plaintiff corporation in 1974 and 1975, when the
administrative case was pending, this circumstance alone without
formally including plaintiff corporation in said case, will not create
any valid and sufficient justification for plaintiff corporation, to
have been supposedly included in the suit against defendants and
Maria Milagros Matuguina Logging Enterprises, in the
administrative case.
Yet, granting as claimed by defendants, that in 1974 or in 1975,
Maria Milagros Matuguina became the controlling stockholder of
plaintiff corporation, on account of the change of name and
transfer of management of PTL No. 30, this circumstance, we
repeat, does not of itself prove that plaintiff corporation was the
 37
alter ego of Maria Milagros Matuguina Logging Enterprise, as
enunciated in various decisions of this Court, to wit:
It is important to bear in mind that mere ownership by a single
stockholder or by another corporation of all or nearly all of the
capital stocks of the corporation, is not itself a sufficient warrant
for disregarding the fiction of separate personality. (Liddel and Co.
vs. Collector of Internal revenue, G.R. No. 9687, June 30, 1961).
It is recognized as lawful to obtain a corporation charter, even with
a single substantial stockholder, to engage in specific activity and
such activity may co-exist with other private activities of the
stockholders.
If the corporation is substantial one, conducted lawfully; without
fraud on another, its separate identity is to be respected. [40]
In this jurisdiction, it is a settled rule that conclusions and
findings of fact by trial court are entitled to great weight on appeal
and should not be disturbed unless for strong and cogent reasons
because the trial court is in a better position to examine real
evidence, as well as to observe the demeanor of the witnesses
while testifying in the case.[41]
It is likewise improper to state that the MIWPI is the privy or
the successor-in-interest of MLE, as the liability for the
encroachment over DAVENCORs timber concession is concerned,
by reason of the transfer of interest in PTL No. 30 from MLE to
MIWPI.
First at all, it does not appear indubitable that the said
transfer ever became effective, since PTL No. 30 remained in the
name of Milagros Matuguina/MLE until it expired on June 30,
1977.[42]
More importantly, even if it is deemed that there was a valid
change of name and transfer of interest in the PTL No. 30, this
only signifies a transfer of authority, from MLE to MIWPI, to
conduct logging operations in the area covered by PTL No. 30. It
does not show indubitable proof that MIWPI was a mere conduit
or successor of Milagros Matuguina/MLE, as far the latters
liability for the encroachment upon DAVENCORs concession is
concerned. This is the only conclusion which we can discern from
the language of Section 61 of P.D. 705, [43] and the letters of the
Acting Minister of Natural Resources to Milagros Matuguina/MLE
and to MIWPI, on September 16, 1975.[44] In Soriano vs. Court of
Appeals, this Court stated in clear language, that-
It is the general rule that the protective mantle of a corporations
separate and distinct personality could only be pierced and liability
attached directly to its officers and/or members stockholders, when
the same is used for fraudulent, unfair, or illegal purpose. In the
case at bar, there is no showing that the Association entered into
the transaction with the private respondent for the purpose of
defrauding the latter of his goods or the payment
thereof. xxx. Therefore, the general rule on corporate liability, not
the exception, should be applied in resolving this case. (G.R. No.
49834, June 22, 1989)
The respondents cite Section 61 of P.D. 705 to establish
MIWPIs succession to the liability of Milagros Matuguina/MLE:
SEC. 61. Transfer. Unless authorized by the Department Head, no
licensee, lessee, or permittee may transfer, exchange, sell, or
convey his license agreement, license, lease or permit, or any of
his rights or interest therein, or any of his assets used in connection
therewith.
The licensee, lessee, or permittee shall be allowed to transfer or
convey his license agreement, license, lease, or permit only if he
has not violated any forestry law, rule or regulation; has been
faithfully complying with the terms and conditions of the license
agreement, license, lease or permit; the transferee has all the
qualifications and none of the disqualifications to hold a license
agreement, license, lease or permit; there is no evidence that such
transfer or conveyance is being made for purposes of speculation;
and the transferee shall assume all the obligations of the transferor.
The transferor shall forever be barred from acquiring another
license agreement, license, lease or permit.
Even if it is mandated in the abovestated provision that the
transferee shall assume all the obligations of the transferor this
does not mean that all obligations are assumed, indiscriminately.
Invariably, it is not the letter, but the spirit of the law and
intent of the legislature that is important. When the interpretation
of a statute according to the exact and literal import of its words
would lead to absurdity, it should be construed according to the
spirit and reason, disregarding if necessary the letter of the law. [45]
In construing statutes, the terms used therein are generally to
be given their ordinary meaning, that is, such meaning which is
ascribed to them when they are commonly used, to the end that
absurdity in the law must be avoided.[46] The term obligations as
used in the final clause of the second paragraph of Section 61 of
P.D. 705 is construed to mean those obligations incurred by the
transferor in the ordinary course of business. It cannot be
construed to mean those obligations or liabilities incurred by the
transferor as a result of transgressions of the law, as these are
personal obligations of the transferor, and could not have been
included in the term obligations absent any modifying provision to
that effect.
In the September 16, 1975 letters of Acting Director of the
Bureau of Forest Development to Milagros Matuguina and MIWPI
informing them of the approval of Matuguina's request for the
change of name and transfer of management of PTL No. 30, the
following statements were made by the Acting Director:
"In view hereof, (Matuguina Integrated Wood Products, Inc.) shall
assume the responsibility of paying whatever pending liabilities
and/or accounts remaining unsettled, if any, by the former licensee,
Milagros Matuguina, with the government." (Emphasis ours)[47]
Accordingly, the letter's language implies that the
obligations which MIWPI are to assume as transferee of Milagros
Matuguina/MLE are those obligations in favor of the government
only, and not to any other entity. Thus this would include Forestry
Charges, Taxes, Fees, and similar accountabilities.
In sum, the Court makes the following pronouncements:
(a) The respondent Honorable Minister of Natural
Resources gravely abuse its discretion when it issued its
Order of Execution on January 6, 1987, including therein as
one of the parties liable the petitioner Matuguina Integrated
Wood Products, Inc., which was never a party to the assailed
proceeding resulting in the issuance of such Order and,
without affording the same an opportunity to be heard before
it was adjudged liable.
(b) The petitioner is a corporate entity separate and
distinct from Milagros Matuguina/Matuguina Logging
Enterprises, there being no clear basis for considering it as a
mere conduit or alter ego of Matuguina/MLE, and therefore,
cannot be made liable for the obligations of the same for
encroachment over the timber concession of private
respondent DAVENCOR.
IN VIEW OF THE FOREGOING, the petition is hereby
GRANTED, and the Decision dated February 25, 1991 is SET
ASIDE. The decision of the Regional Trial Court is hereby
REINSTATED, and correspondingly, Order of Execution of the
 38

respondent Secretary of Natural Resources is declared Null and

Void and without effect.

No pronouncement as to cost.

SO ORDERED.
 39
[G. R. No. 120077. October 13, 2000]
THE MANILA HOTEL CORP. AND MANILA HOTEL
INTL. LTD. petitioners, vs. NATIONAL LABOR
RELATIONS COMMISSION, ARBITER
CEFERINA J. DIOSANA AND MARCELO G.
SANTOS, respondents.
DECISION
PARDO, J.:
The case before the Court is a petition for certiorari[1] to
annul the following orders of the National Labor Relations
Commission (hereinafter referred to as NLRC) for having been
issued without or with excess jurisdiction and with grave abuse of
discretion:[2]
(1) Order of May 31, 1993.[3] Reversing and setting aside its
earlier resolution of August 28, 1992. [4] The questioned order
declared that the NLRC, not the Philippine Overseas Employment
Administration (hereinafter referred to as POEA), had jurisdiction
over private respondents complaint;
(2) Decision of December 15, 1994.[5] Directing petitioners
to jointly and severally pay private respondent twelve thousand
and six hundred dollars (US$12,600.00) representing salaries for
the unexpired portion of his contract; three thousand six hundred
dollars (US$3,600.00) as extra four months salary for the two (2)
year period of his contract, three thousand six hundred dollars
(US$3,600.00) as 14th month pay or a total of nineteen thousand
and eight hundred dollars (US$19,800.00) or its peso equivalent
and attorneys fees amounting to ten percent (10%) of the total
award; and
(3) Order of March 30, 1995.[6] Denying the motion for
reconsideration of the petitioners.
In May, 1988, private respondent Marcelo Santos
(hereinafter referred to as Santos) was an overseas worker
employed as a printer at the Mazoon Printing Press, Sultanate of
Oman. Subsequently, in June 1988, he was directly hired by the
Palace Hotel, Beijing, Peoples Republic of China and later
terminated due to retrenchment.
Petitioners are the Manila Hotel Corporation (hereinafter
referred to as MHC) and the Manila Hotel International Company,
Limited (hereinafter referred to as MHICL).
When the case was filed in 1990, MHC was still a
government-owned and controlled corporation duly organized and
existing under the laws of the Philippines.
MHICL is a corporation duly organized and existing under
the laws of Hong Kong.[7] MHC is an incorporator of MHICL,
owning 50% of its capital stock.[8]
By virtue of a management agreement[9] with the Palace
Hotel (Wang Fu Company Limited), MHICL[10] trained the
personnel and staff of the Palace Hotel at Beijing, China.
Now the facts.
During his employment with the Mazoon Printing Press in
the Sultanate of Oman, respondent Santos received a letter dated
May 2, 1988 from Mr. Gerhard R. Shmidt, General Manager,
Palace Hotel, Beijing, China. Mr. Schmidt informed respondent
Santos that he was recommended by one Nestor Buenio, a friend
of his.
Mr. Shmidt offered respondent Santos the same position as
printer, but with a higher monthly salary and increased
benefits. The position was slated to open on October 1, 1988.[11]
On May 8, 1988, respondent Santos wrote to Mr. Shmidt and
signified his acceptance of the offer.
On May 19, 1988, the Palace Hotel Manager, Mr. Hans J.
Henk mailed a ready to sign employment contract to respondent
Santos. Mr. Henk advised respondent Santos that if the contract
was acceptable, to return the same to Mr. Henk in Manila, together
with his passport and two additional pictures for his visa to China.
On May 30, 1988, respondent Santos resigned from the
Mazoon Printing Press, effective June 30, 1988, under the pretext
that he was needed at home to help with the familys piggery and
poultry business.
On June 4, 1988, respondent Santos wrote the Palace Hotel
and acknowledged Mr. Henks letter. Respondent Santos enclosed
four (4) signed copies of the employment contract (dated June 4,
1988) and notified them that he was going to arrive in Manila
during the first week of July 1988.
The employment contract of June 4, 1988 stated that his
employment would commence September 1, 1988 for a period of
two years.[12] It provided for a monthly salary of nine hundred
dollars (US$900.00) net of taxes, payable fourteen (14) times a
year.[13]
On June 30, 1988, respondent Santos was deemed resigned
from the Mazoon Printing Press.
On July 1, 1988, respondent Santos arrived in Manila.
On November 5, 1988, respondent Santos left for Beijing,
China. He started to work at the Palace Hotel. [14]
Subsequently, respondent Santos signed an amended
employment agreement with the Palace Hotel, effective November
5, 1988. In the contract, Mr. Shmidt represented the Palace
Hotel. The Vice President (Operations and Development) of
petitioner MHICL Miguel D. Cergueda signed the employment
agreement under the word noted.
From June 8 to 29, 1989, respondent Santos was in the
Philippines on vacation leave. He returned to China and reassumed
his post on July 17, 1989.
On July 22, 1989, Mr. Shmidts Executive Secretary, a
certain Joanna suggested in a handwritten note that respondent
Santos be given one (1) month notice of his release from
employment.
On August 10, 1989, the Palace Hotel informed respondent
Santos by letter signed by Mr. Shmidt that his employment at the
Palace Hotel print shop would be terminated due to business
reverses brought about by the political upheaval in China. [15] We
quote the letter:[16]
After the unfortunate happenings in China and especially Beijing
(referring to Tiannamen Square incidents), our business has been
severely affected. To reduce expenses, we will not open/operate
printshop for the time being.
 40
We sincerely regret that a decision like this has to be made, but
rest assured this does in no way reflect your past performance
which we found up to our expectations.
Should a turnaround in the business happen, we will contact you
directly and give you priority on future assignment.
On September 5, 1989, the Palace Hotel terminated the
employment of respondent Santos and paid all benefits due him,
including his plane fare back to the Philippines.
On October 3, 1989, respondent Santos was repatriated to
the Philippines.
On October 24, 1989, respondent Santos, through his lawyer,
Atty. Ednave wrote Mr. Shmidt, demanding full compensation
pursuant to the employment agreement.
On November 11, 1989, Mr. Shmidt replied, to wit:[17]
His service with the Palace Hotel, Beijing was not abruptly
terminated but we followed the one-month notice clause and Mr.
Santos received all benefits due him.
For your information, the Print Shop at the Palace Hotel is still not
operational and with a low business outlook, retrenchment in
various departments of the hotel is going on which is a normal
management practice to control costs.
When going through the latest performance ratings, please also be
advised that his performance was below average and a Chinese
National who is doing his job now shows a better approach.
In closing, when Mr. Santos received the letter of notice, he hardly
showed up for work but still enjoyed free
accommodation/laundry/meals up to the day of his departure.
On February 20, 1990, respondent Santos filed a complaint
for illegal dismissal with the Arbitration Branch, National Capital
Region, National Labor Relations Commission (NLRC). He
prayed for an award of nineteen thousand nine hundred and twenty
three dollars (US$19,923.00) as actual damages, forty thousand
pesos (P40,000.00) as exemplary damages and attorneys fees
equivalent to 20% of the damages prayed for. The complaint
named MHC, MHICL, the Palace Hotel and Mr. Shmidt as
respondents.
The Palace Hotel and Mr. Shmidt were not served with
summons and neither participated in the proceedings before the
Labor Arbiter.[18]
On June 27, 1991, Labor Arbiter Ceferina J. Diosana,
decided the case against petitioners, thus:[19]
WHEREFORE, judgment is hereby rendered:
1. directing all the respondents to pay complainant jointly and
severally;
a) $20,820 US dollars or its equivalent in Philippine currency as
unearned salaries;
b) P50,000.00 as moral damages;
c) P40,000.00 as exemplary damages; and
d) Ten (10) percent of the total award as attorneys fees.
SO ORDERED.
On July 23, 1991, petitioners appealed to the NLRC, arguing
that the POEA, not the NLRC had jurisdiction over the case.
On August 28, 1992, the NLRC promulgated a resolution,
stating:[20]
WHEREFORE, let the appealed Decision be, as it is hereby,
declared null and void for want of jurisdiction. Complainant is
hereby enjoined to file his complaint with the POEA.
SO ORDERED.
On September 18, 1992, respondent Santos moved for
reconsideration of the afore-quoted resolution. He argued that the
case was not cognizable by the POEA as he was not an overseas
contract worker.[21]
On May 31, 1993, the NLRC granted the motion and
reversed itself. The NLRC directed Labor Arbiter Emerson
Tumanon to hear the case on the question of whether private
respondent was retrenched or dismissed.[22]
On January 13, 1994, Labor Arbiter Tumanon completed the
proceedings based on the testimonial and documentary evidence
presented to and heard by him.[23]
Subsequently, Labor Arbiter Tumanon was re-assigned as
trial arbiter of the National Capital Region, Arbitration Branch,
and the case was transferred to Labor Arbiter Jose G. de Vera. [24]
On November 25, 1994, Labor Arbiter de Vera submitted his
report.[25] He found that respondent Santos was illegally dismissed
from employment and recommended that he be paid actual
damages equivalent to his salaries for the unexpired portion of his
contract.[26]
On December 15, 1994, the NLRC ruled in favor of private
respondent, to wit:[27]
WHEREFORE, finding that the report and recommendations of
Arbiter de Vera are supported by substantial evidence, judgment is
hereby rendered, directing the respondents to jointly and severally
pay complainant the following computed contractual benefits: (1)
US$12,600.00 as salaries for the un-expired portion of the parties
contract; (2) US$3,600.00 as extra four (4) months salary for the
two (2) years period (sic) of the parties contract; (3) US$3,600.00
as 14th month pay for the aforesaid two (2) years contract
stipulated by the parties or a total of US$19,800.00 or its peso
equivalent, plus (4) attorneys fees of 10% of complainants total
award.
SO ORDERED.
On February 2, 1995, petitioners filed a motion for
reconsideration arguing that Labor Arbiter de Veras
recommendation had no basis in law and in fact. [28]
On March 30, 1995, the NLRC denied the motion for
reconsideration.[29]
Hence, this petition.[30]
On October 9, 1995, petitioners filed with this Court an
urgent motion for the issuance of a temporary restraining order
and/or writ of preliminary injunction and a motion for the
annulment of the entry of judgment of the NLRC dated July 31,
1995.[31]
 41
On November 20, 1995, the Court denied petitioners urgent
motion. The Court required respondents to file their respective
comments, without giving due course to the petition.[32]
On March 8, 1996, the Solicitor General filed a
manifestation stating that after going over the petition and its
annexes, they can not defend and sustain the position taken by the
NLRC in its assailed decision and orders. The Solicitor General
prayed that he be excused from filing a comment on behalf of the
NLRC[33]
On April 30,1996, private respondent Santos filed his
comment.[34]
On June 26, 1996, the Court granted the manifestation of the
Solicitor General and required the NLRC to file its own comment
to the petition.[35]
On January 7, 1997, the NLRC filed its comment.
The petition is meritorious.
I. Forum Non-Conveniens
The NLRC was a seriously inconvenient forum.
We note that the main aspects of the case transpired in two
foreign jurisdictions and the case involves purely foreign
elements. The only link that the Philippines has with the case is
that respondent Santos is a Filipino citizen. The Palace Hotel and
MHICL are foreign corporations. Not all cases involving our
citizens can be tried here.
The employment contract.-- Respondent Santos was hired
directly by the Palace Hotel, a foreign employer, through
correspondence sent to the Sultanate of Oman, where respondent
Santos was then employed. He was hired without the intervention
of the POEA or any authorized recruitment agency of the
government.[36]
Under the rule of forum non conveniens, a Philippine court
or agency may assume jurisdiction over the case if it chooses to do
so provided: (1) that the Philippine court is one to which the
parties may conveniently resort to; (2) that the Philippine court is
in a position to make an intelligent decision as to the law and the
facts; and (3) that the Philippine court has or is likely to have
power to enforce its decision. [37] The conditions are unavailing in
the case at bar.
Not Convenient.-- We fail to see how the NLRC is a
convenient forum given that all the incidents of the case - from the
time of recruitment, to employment to dismissal occurred outside
the Philippines. The inconvenience is compounded by the fact that
the proper defendants, the Palace Hotel and MHICL
are not nationals of the Philippines. Neither are they doing
business in the Philippines. Likewise, the main witnesses, Mr.
Shmidt and Mr. Henk are non-residents of the Philippines.
No power to determine applicable law.-- Neither can an
intelligent decision be made as to the law governing the
employment contract as such was perfected in foreign soil. This
calls to fore the application of the principle of lex loci
contractus (the law of the place where the contract was made). [38]
The employment contract was not perfected in the
Philippines. Respondent Santos signified his acceptance by writing
a letter while he was in the Republic of Oman.This letter was sent
to the Palace Hotel in the Peoples Republic of China.
No power to determine the facts.-- Neither can the NLRC
determine the facts surrounding the alleged illegal dismissal as all
acts complained of took place in Beijing, Peoples Republic of
China. The NLRC was not in a position to determine whether the
Tiannamen Square incident truly adversely affected operations of
the Palace Hotel as to justify respondent Santos retrenchment.
Principle of effectiveness, no power to execute
decision.-- Even assuming that a proper decision could be reached
by the NLRC, such would not have any binding effect against the
employer, the Palace Hotel. The Palace Hotel is a corporation
incorporated under the laws of China and was not even served with
summons. Jurisdiction over its person was not acquired.
This is not to say that Philippine courts and agencies have no
power to solve controversies involving foreign employers. Neither
are we saying that we do not have power over an employment
contract executed in a foreign country. If Santos were an
overseas contract worker, a Philippine forum, specifically the
POEA, not the NLRC, would protect him.[39] He is not an
overseas contract worker a fact which he admits with conviction.
[40]
Even assuming that the NLRC was the proper forum, even
on the merits, the NLRCs decision cannot be sustained.
II. MHC Not Liable
Even if we assume two things: (1) that the NLRC had
jurisdiction over the case, and (2) that MHICL was liable for
Santos retrenchment, still MHC, as a separate and distinct juridical
entity cannot be held liable.
True, MHC is an incorporator of MHICL and owns fifty
percent (50%) of its capital stock. However, this is not enough to
pierce the veil of corporate fiction between MHICL and MHC.
Piercing the veil of corporate entity is an equitable
remedy. It is resorted to when the corporate fiction is used to
defeat public convenience, justify wrong, protect fraud or defend a
crime.[41] It is done only when a corporation is a mere alter ego or
business conduit of a person or another corporation.
In Traders Royal Bank v. Court of Appeals,[42] we held that
the mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a corporation
is not of itself a sufficient reason for disregarding the fiction of
separate corporate personalities.
The tests in determining whether the corporate veil may be
pierced are: First, the defendant must have control or complete
domination of the other corporations finances, policy and business
practices with regard to the transaction attacked. There must be
proof that the other corporation had no separate mind, will or
existence with respect the act complained of. Second, control must
be used by the defendant to commit fraud or wrong. Third, the
aforesaid control or breach of duty must be the proximate cause of
the injury or loss complained of. The absence of any of the
elements prevents the piercing of the corporate veil. [43]
It is basic that a corporation has a personality separate and
distinct from those composing it as well as from that of any other
legal entity to which it may be related. [44]Clear and convincing
evidence is needed to pierce the veil of corporate fiction. [45] In this
case, we find no evidence to show that MHICL and MHC are one
and the same entity.
III. MHICL not Liable
Respondent Santos predicates MHICLs liability on the fact
that MHICL signed his employment contract with the Palace
Hotel. This fact fails to persuade us.
 42
First, we note that the Vice President (Operations and
Development) of MHICL, Miguel D. Cergueda signed the
employment contract as a mere witness. He merely signed under
the word noted.
When one notes a contract, one is not expressing his
agreement or approval, as a party would. [46] In Sichangco v. Board
of Commissioners of Immigration,[47] the Court recognized that the
term noted means that the person so noting has merely taken
cognizance of the existence of an act or declaration, without
exercising a judicious deliberation or rendering a decision on the
matter.
Mr. Cergueda merely signed the witnessing part of the
document. The witnessing part of the document is that which, in a
deed or other formal instrument is that part which comes after the
recitals, or where there are no recitals, after the parties (emphasis
ours).[48] As opposed to a party to a contract, a witness is simply
one who, being present, personally sees or perceives a thing; a
beholder, a spectator, or eyewitness. [49] One who notes something
just makes a brief written statement [50] a memorandum or
observation.
Second, and more importantly, there was no existing
employer-employee relationship between Santos and MHICL. In
determining the existence of an employer-employee relationship,
the following elements are considered:[51]
(1) the selection and engagement of the employee;
(2) the payment of wages;
(3) the power to dismiss; and
(4) the power to control employees conduct.
MHICL did not have and did not exercise any of the
aforementioned powers. It did not select respondent Santos as an
employee for the Palace Hotel. He was referred to the Palace Hotel
by his friend, Nestor Buenio. MHICL did not engage respondent
Santos to work. The terms of employment were negotiated and
finalized through correspondence between respondent Santos, Mr.
Schmidt and Mr. Henk, who were officers and representatives of
the Palace Hotel and not MHICL. Neither did respondent Santos
adduce any proof that MHICL had the power to control his
conduct. Finally, it was the Palace Hotel, through Mr. Schmidt
and not MHICL that terminated respondent Santos services.
Neither is there evidence to suggest that MHICL was a an employer-employee relationship which can be resolved by
labor-only contractor.[52] There is no proof that MHICL supplied reference to the Labor Code, or other labor statutes, or their
respondent Santos or even referred him for employment to the collective bargaining agreements.[54]
Palace Hotel.
To determine which body has jurisdiction over the present
Likewise, there is no evidence to show that the Palace Hotel controversy, we rely on the sound judicial principle that
and MHICL are one and the same entity. The fact that the Palace jurisdiction over the subject matter is conferred by law and is
Hotel is a member of the Manila Hotel Group is not enough to determined by the allegations of the complaint irrespective of
pierce the corporate veil between MHICL and the Palace Hotel. whether the plaintiff is entitled to all or some of the claims asserted
therein.[55]
IV. Grave Abuse of Discretion
The lack of jurisdiction of the Labor Arbiter was obvious
Considering that the NLRC was forum non-conveniens and from the allegations of the complaint. His failure to dismiss the
considering further that no employer-employee relationship existed case amounts to grave abuse of discretion.[56]
between MHICL, MHC and respondent Santos, Labor Arbiter
Ceferina J. Diosana clearly had no jurisdiction over respondents V. The Fallo
claim in NLRC NCR Case No. 00-02-01058-90.
WHEREFORE, the Court hereby GRANTS the petition
Labor Arbiters have exclusive and original jurisdiction only for certiorari and ANNULS the orders and resolutions of the
over the following:[53] National Labor Relations Commission dated May 31, 1993,
December 15, 1994 and March 30, 1995 in NLRC NCR CA No.
002101-91 (NLRC NCR Case No. 00-02-01058-90).
1. Unfair labor practice cases;
No costs.
2. Termination disputes;
3. If accompanied with a claim for reinstatement, those cases that SO ORDERED.
workers may file involving wages, rates of pay, hours of work and
other terms and conditions of employment;
4. Claims for actual, moral, exemplary and other forms of damages
arising from employer-employee relations;
5. Cases arising from any violation of Article 264 of this Code,
including questions involving legality of strikes and lockouts; and
6. Except claims for Employees Compensation, Social Security,
Medicare and maternity benefits, all other claims, arising from
employer-employee relations, including those of persons in
domestic or household service, involving an amount exceeding
five thousand pesos (P5,000.00) regardless of whether
accompanied with a claim for reinstatement.
In all these cases, an employer-employee relationship is an
indispensable jurisdictional requirement.
The jurisdiction of labor arbiters and the NLRC under
Article 217 of the Labor Code is limited to disputes arising from
 43
[G.R. No. 129459. September 29, 1998]
SAN JUAN STRUCTURAL AND STEEL FABRICATORS,
INC., petitioner, vs. COURT OF APPEALS,
MOTORICH SALES CORPORATION, NENITA
LEE GRUENBERG, ACL DEVELOPMENT CORP.
and JNM REALTY AND DEVELOPMENT
CORP., respondents.
DECISION
PANGANIBAN, J.
May a corporate treasurer, by herself and without any
authorization from the board of directors, validly sell a parcel of
land owned by the corporation? May the veil of corporate fiction
be pierced on the mere ground that almost all of the shares of stock
of the corporation are owned by said treasurer and her husband?
The Case
These questions are answered in the negative by this Court
in resolving the Petition for Review on Certiorari before us,
assailing the March 18, 1997 Decision[1] of the Court of
Appeals[2] in CA GR CV No. 46801 which, in turn, modified the
July 18, 1994 Decision of the Regional Trial Court of Makati,
Metro Manila, Branch 63[3] in Civil Case No. 89-3511. The RTC
dismissed both the Complaint and the Counterclaim filed by the
parties. On the other hand, the Court of Appeals ruled:
WHEREFORE, premises considered, the appealed
decision is AFFIRMED WITH MODIFICATION
ordering defendant-appellee Nenita Lee Gruenberg to
REFUND or return to plaintiff-appellant the
downpayment of P100,000.00 which she received
from plaintiff-appellant. There is no pronouncement
as to costs.[4]
The petition also challenges the June 10, 1997 CA
Resolution denying reconsideration.[5]
The Facts
The facts as found by the Court of Appeals are as follows:
Plaintiff-appellant San Juan Structural and Steel
Fabricators, Inc.s amended complaint alleged that on
14 February 1989, plaintiff-appellant entered into an
agreement with defendant-appellee Motorich Sales
Corporation for the transfer to it of a parcel of land
identified as Lot 30, Block 1 of the Acropolis Greens
Subdivision located in the District of Murphy, Quezon
City, Metro Manila, containing an area of Four
Hundred Fourteen (414) square meters, covered by
TCT No. (362909) 2876; that as stipulated in the
Agreement of 14 February 1989, plaintiff-appellant
paid the down payment in the sum of One Hundred
Thousand (P100,000.00) Pesos, the balance to be paid
on or before March 2, 1989; that on March 1, 1989,
Mr. Andres T. Co, president of plaintiff-appellant
corporation, wrote a letter to defendant-appellee
Motorich Sales Corporation requesting for a
computation of the balance to be paid; that said letter
was coursed through defendant-appellees broker,
Linda Aduca, who wrote the computation of the
balance; that on March 2, 1989, plaintiff-appellant
was ready with the amount corresponding to the
balance, covered by Metrobank Cashiers Check No.
004223, payable to defendant-appellee Motorich Sales
Corporation; that plaintiff-appellant and defendant-
appellee Motorich Sales Corporation were supposed
to meet in the office of plaintiff-appellant but
defendant-appellees treasurer, Nenita Lee Gruenberg,
did not appear; that defendant-appellee Motorich Sales
Corporation despite repeated demands and in utter
disregard of its commitments had refused to execute
the Transfer of Rights/Deed of Assignment which is
necessary to transfer the certificate of title; that
defendant ACL Development Corp. is impleaded as a
necessary party since Transfer Certificate of Title No.
(362909) 2876 is still in the name of said defendant;
while defendant JNM Realty & Development Corp. is
likewise impleaded as a necessary party in view of the
fact that it is the transferor of right in favor of
defendant-appellee Motorich Sales Corporation; that
on April 6, 1989, defendant ACL Development
Corporation and Motorich Sales Corporation entered
into a Deed of Absolute Sale whereby the former
transferred to the latter the subject property; that by
reason of said transfer, the Registry of Deeds of
Quezon City issued a new title in the name of
Motorich Sales Corporation, represented by
defendant-appellee Nenita Lee Gruenberg and
Reynaldo L. Gruenberg, under Transfer Certificate of
Title No. 3571; that as a result of defendants-appellees
Nenita Lee Gruenberg and Motorich Sales
Corporations bad faith in refusing to execute a formal
Transfer of Rights/Deed of Assignment, plaintiff-
appellant suffered moral and nominal damages which
may be assessed against defendants-appellees in the
sum of Five Hundred Thousand (500,000.00) Pesos;
that as a result of defendants-appellees Nenita Lee
Gruenberg and Motorich Sales Corporations
unjustified and unwarranted failure to execute the
required Transfer of Rights/Deed of Assignment or
formal deed of sale in favor of plaintiff-appellant,
defendants-appellees should be assessed exemplary
damages in the sum of One Hundred Thousand
(P100,000.00) Pesos; that by reason of defendants-
appellees bad faith in refusing to execute a Transfer of
Rights/Deed of Assignment in favor of plaintiff-
appellant, the latter lost the opportunity to construct a
residential building in the sum of One Hundred
Thousand (P100,000.00) Pesos; and that as a
consequence of defendants-appellees Nenita Lee
Gruenberg and Motorich Sales Corporations bad faith
in refusing to execute a deed of sale in favor of
plaintiff-appellant, it has been constrained to obtain
the services of counsel at an agreed fee of One
Hundred Thousand (P100,000.00) Pesos plus
appearance fee for every appearance in court hearings.
In its answer, defendants-appellees Motorich Sales
Corporation and Nenita Lee Gruenberg interposed as
affirmative defense that the President and Chairman of
Motorich did not sign the agreement adverted to in
par. 3 of the amended complaint; that Mrs.
Gruenbergs signature on the agreement (ref: par. 3 of
Amended Complaint) is inadequate to bind
Motorich. The other signature, that of Mr. Reynaldo
Gruenberg, President and Chairman of Motorich, is
required; that plaintiff knew this from the very
beginning as it was presented a copy of the Transfer of
Rights (Annex B of amended complaint) at the time
the Agreement (Annex B of amended complaint) was
signed; that plaintiff-appellant itself drafted the
Agreement and insisted that Mrs. Gruenberg accept
the P100,000.00 as earnest money; that granting,
without admitting, the enforceability of the agreement,
plaintiff-appellant nonetheless failed to pay in legal
 44
tender within the stipulated period (up to March 2,
1989); that it was the understanding between Mrs.
Gruenberg and plaintiff-appellant that the Transfer of
Rights/Deed of Assignment will be signed only upon
receipt of cash payment; thus they agreed that if the
payment be in check, they will meet at a bank
designated by plaintiff-appellant where they will
encash the check and sign the Transfer of
Rights/Deed. However, plaintiff-appellant informed
Mrs. Gruenberg of the alleged availability of the
check, by phone, only after banking hours.
On the basis of the evidence, the court a quo rendered
the judgment appealed from[,] dismissing plaintiff-
appellants complaint, ruling that:
'The issue to be resolved is: whether
plaintiff had the right to compel defendants
to execute a deed of absolute sale in
accordance with the agreement of February
14, 1989; and if so, whether plaintiff is
entitled to damages.
As to the first question, there is no evidence
to show that defendant Nenita Lee
Gruenberg was indeed authorized by
defendant corporation, Motorich Sales, to
dispose of that property covered by T.C.T.
No. (362909) 2876. Since the property is
clearly owned by the corporation, Motorich
Sales, then its disposition should be
governed by the requirement laid down in
Sec. 40, of the Corporation Code of the
Philippines, to wit:
Sec. 40, Sale or other disposition
of assets. Subject to the provisions
of existing laws on illegal
combination and monopolies, a
corporation may by a majority
vote of its board of directors xxx
sell, lease, exchange, mortgage,
pledge or otherwise dispose of all
or substantially all of its property
and assets, including its goodwill
xxx when authorized by the vote
of the stockholders representing at
least two third (2/3) of the
outstanding capital stock x x x.
No such vote was obtained by defendant
Nenita Lee Gruenberg for that proposed
sale[;] neither was there evidence to show
that the supposed transaction was ratified by
the corporation. Plaintiff should have been
on the look out under these
circumstances. More so, plaintiff himself
[owns] several corporations (tsn dated
August 16, 1993, p. 3) which makes him
knowledgeable on corporation matters.
Regarding the question of damages, the
Court likewise, does not find substantial
evidence to hold defendant Nenita Lee
Gruenberg liable considering that she did
not in anyway misrepresent herself to be
authorized by the corporation to sell the
property to plaintiff (tsn dated September
27, 1991, p. 8).
In the light of the foregoing, the Court
hereby renders judgment DISMISSING the
complaint at instance for lack of merit.
Defendants counterclaim is also
DISMISSED for lack of basis. (Decision,
pp. 7-8; Rollo, pp. 34-35)
For clarity, the Agreement dated February 14, 1989 is
reproduced hereunder:
AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This Agreement, made and entered into by and between:
MOTORICH SALES CORPORATION, a corporation duly
organized and existing under and by virtue of Philippine Laws,
with principal office address at 5510 South Super Hi-way cor.
Balderama St., Pio del Pilar, Makati, Metro Manila, represented
herein by its Treasurer, NENITA LEE GRUENBERG, hereinafter
referred to as the TRANSFEROR;
- and --
SAN JUAN STRUCTURAL & STEEL FABRICATORS, a
corporation duly organized and existing under and by virtue of the
laws of the Philippines, with principal office address at Sumulong
Highway, Barrio Mambungan, Antipolo, Rizal, represented herein
by its President, ANDRES T. CO, hereinafter referred to as the
TRANSFEREE.
WITNESSETH, That:
WHEREAS, the TRANSFEROR is the owner of a parcel of land
identified as Lot 30 Block 1 of the ACROPOLIS GREENS
SUBDIVISION located at the District of Murphy, Quezon City,
Metro Manila, containing an area of FOUR HUNDRED
FOURTEEN (414) SQUARE METERS, covered by a
TRANSFER OF RIGHTS between JNM Realty & Dev. Corp. as
the Transferor and Motorich Sales Corp. as the Transferee;
NOW, THEREFORE, for and in consideration of the foregoing
premises, the parties have agreed as follows:
1. That the purchase price shall be at FIVE
THOUSAND TWO HUNDRED PESOS
(P5,200.00) per square meter; subject to the
following terms:
a. Earnest money amounting to ONE
HUNDRED THOUSAND PESOS
(P100,000.00), will be paid upon the
execution of this agreement and shall
form part of the total purchase price;
b. Balance shall be payable on or before March 2,
1989;
2. That the monthly amortization for the month
of February 1989 shall be for the account of
the Transferor; and that the monthly
amortization starting March 21, 1989 shall
be for the account of the Transferee;
The transferor warrants that he [sic] is the lawful owner of the
above-described property and that there [are] no existing liens
and/or encumbrances of whatsoever nature;
 45
In case of failure by the Transferee to pay the balance on the date
specified on 1. (b), the earnest money shall be forfeited in favor of
the Transferor.
That upon full payment of the balance, the TRANSFEROR agrees
to execute a TRANSFER OF RIGHTS/DEED OF ASSIGNMENT
in favor of the TRANSFEREE.
IN WITNESS WHEREOF, the parties have hereunto set their
hands this 14th day of February, 1989 at Greenhills, San Juan,
Metro Manila, Philippines.
MOTORICH SALES CORPORATION SAN STRUCTURAL &
TRANSFEROR STEEL FABRICATORS
TRANSFEREE
[SGD.] [SGD.]
By: NENITA LEE
GRUENBERG By: ANDRES T. CO
Treasurer President
Signed in the presence of:
[SGD.] [SGD.]
[6]
_________________________ _____________________
In its recourse before the Court of Appeals, petitioner
insisted:
1. Appellant is entitled to compel the appellees to
execute a Deed of Absolute Sale in accordance with
the Agreement of February 14, 1989,
2. Plaintiff is entitled to damages.[7]
As stated earlier, the Court of Appeals debunked petitioners
arguments and affirmed the Decision of the RTC with the
modification that Respondent Nenita Lee Gruenberg was ordered
to refund P100,000 to petitioner, the amount remitted as
downpayment or earnest money. Hence, this petition before us.[8]
The Issues
Before this Court, petitioner raises the following issues:
I. Whether or not the doctrine of piercing the
veil of corporate fiction is applicable in
the instant case
II. Whether or not the appellate court may
consider matters which the parties failed
to raise in the lower court
III. Whether or not there is a valid and
enforceable contract between the
petitioner and the respondent
corporation
IV. Whether or not the Court of Appeals erred
in holding that there is a valid
correction/substitution of answer in the
transcript of stenographic note[s]
V. Whether or not respondents are liable for
damages and attorneys fees[9]
The Court synthesized the foregoing and will thus discuss
them seriatim as follows:
1. Was there a valid contract of sale between
petitioner and Motorich?
2. May the doctrine of piercing the veil of
corporate fiction be applied to Motorich?
3. Is the alleged alteration of Gruenbergs
testimony as recorded in the transcript of
stenographic notes material to the
disposition of this case?
4. Are respondents liable for damages and
attorneys fees?
The Courts Ruling
The petition is devoid of merit.
First Issue: Validity of Agreement
Petitioner San Juan Structural and Steel Fabricators, Inc.
alleges that on February 14, 1989, it entered through its president,
Andres Co, into the disputed Agreement with Respondent
Motorich Sales Corporation, which was in turn allegedly
represented by its treasurer, Nenita Lee Gruenberg. Petitioner
insists that [w]hen Gruenberg and Co affixed their signatures on
the contract they both consented to be bound by the terms
thereof. Ergo, petitioner contends that the contract is binding on
the two corporations. We do not agree.
True, Gruenberg and Co signed on February 14, 1989, the
Agreement according to which a lot owned by Motorich Sales
Corporation was purportedly sold. Such contract, however, cannot
bind Motorich, because it never authorized or ratified such sale.
A corporation is a juridical person separate and distinct from
its stockholders or members. Accordingly, the property of the
corporation is not the property of its stockholders or members and
may not be sold by the stockholders or members without express
authorization from the corporations board of directors. [10] Section
23 of BP 68, otherwise known as the Corporation Code of the
Philippines, provides:
SEC. 23. The Board of Directors or
Trustees. -- Unless otherwise provided in this Code,
the corporate powers of all corporations formed under
this Code shall be exercised, all business conducted
and all property of such corporations controlled and
held by the board of directors or trustees to be elected
from among the holders of stocks, or where there is no
stock, from among the members of the corporation,
who shall hold office for one (1) year and until their
successors are elected and qualified.
Indubitably, a corporation may act only through its board of
directors, or, when authorized either by its bylaws or by its board
resolution, through its officers or agents in the normal course of
business. The general principles of agency govern the relation
between the corporation and its officers or agents, subject to the
articles of incorporation, bylaws, or relevant provisions of law.
[11]
 Thus, this Court has held that a corporate officer or agent may
represent and bind the corporation in transactions with third
persons to the extent that the authority to do so has been conferred
upon him, and this includes powers which have been intentionally
conferred, and also such powers as, in the usual course of the
particular business, are incidental to, or may be implied from, the
powers intentionally conferred, powers added by custom and
usage, as usually pertaining to the particular officer or agent, and
 46
such apparent powers as the corporation has caused persons
dealing with the officer or agent to believe that it has conferred. [12]
Furthermore, the Court has also recognized the rule that
persons dealing with an assumed agent, whether the assumed
agency be a general or special one, are bound at their peril, if they
would hold the principal liable, to ascertain not only the fact of
agency but also the nature and extent of authority, and in case
either is controverted, the burden of proof is upon them to
establish it (Harry Keeler v. Rodriguez, 4 Phil. 19). [13] Unless duly
authorized, a treasurer, whose powers are limited, cannot bind the
corporation in a sale of its assets.[14]
In the case at bar, Respondent Motorich categorically denies
that it ever authorized Nenita Gruenberg, its treasurer, to sell the
subject parcel of land.[15] Consequently, petitioner had the burden
of proving that Nenita Gruenberg was in fact authorized to
represent and bind Motorich in the transaction. Petitioner failed to
discharge this burden. Its offer of evidence before the trial court
contained no proof of such authority. [16] It has not shown any
provision of said respondents articles of incorporation, bylaws or
board resolution to prove that Nenita Gruenberg possessed such
power.
That Nenita Gruenberg is the treasurer of Motorich does not
free petitioner from the responsibility of ascertaining the extent of
her authority to represent the corporation. Petitioner cannot assume
that she, by virtue of her position, was authorized to sell the
property of the corporation. Selling is obviously foreign to a
corporate treasurers function, which generally has been described
as to receive and keep the funds of the corporation, and to disburse
them in accordance with the authority given him by the board or
the properly authorized officers.[17]
Neither was such real estate sale shown to be a normal
business activity of Motorich. The primary purpose of Motorich is
marketing, distribution, export and import in relation to a general
merchandising business.[18] Unmistakably, its treasurer is not
cloaked with actual or apparent authority to buy or sell real
property, an activity which falls way beyond the scope of her
general authority.
Articles 1874 and 1878 of the Civil Code of the Philippines
provides:
ART. 1874. When a sale of a piece of land or any
interest therein is through an agent, the authority of
the latter shall be in writing; otherwise, the sale shall Because Motorich had never given a written authorization to
be void. Respondent Gruenberg to sell its parcel of land, we hold that the
February 14, 1989 Agreement entered into by the latter with
ART. 1878 Special powers of attorney are necessary petitioner is void under Article 1874 of the Civil Code. Being
in the following case: inexistent and void from the beginning, said contract cannot be
ratified.[24]
x x x x x x x x x
Second Issue:
(5) To enter any contract by which the ownership of
an immovable is transmitted or acquired either Piercing the Corporate Veil Not Justified
gratuitously or for a valuable consideration;
Petitioner also argues that the veil of corporate fiction of
x x x x x x x x x. Motorich should be pierced, because the latter is a close
corporation. Since Spouses Reynaldo L. Gruenberg and Nenita R.
Gruenberg owned all or almost all or 99.866% to be accurate, of
Petitioner further contends that Respondent Motorich has
the subscribed capital stock[25] of Motorich, petitioner argues that
ratified said contract of sale because of its acceptance of benefits,
Gruenberg needed no authorization from the board to enter into the
as evidenced by the receipt issued by Respondent Gruenberg.
[19] subject contract.[26] It adds that, being solely owned by the Spouses
 Petitioner is clutching at straws.
Gruenberg, the company can be treated as a close corporation
which can be bound by the acts of its principal stockholder who
As a general rule, the acts of corporate officers within the
needs no specific authority. The Court is not persuaded.
scope of their authority are binding on the corporation. But when
these officers exceed their authority, their actions cannot bind the
corporation, unless it has ratified such acts or is estopped from First, petitioner itself concedes having raised the issue
disclaiming them.[20] belatedly,[27] not having done so during the trial, but only when it
filed its sur-rejoinder before the Court of Appeals. [28] Thus, this
Court cannot entertain said issue at this late stage of the
In this case, there is a clear absence of proof that Motorich
proceedings. It is well-settled that points of law, theories and
ever authorized Nenita Gruenberg, or made it appear to any third
arguments not brought to the attention of the trial court need not
person that she had the authority, to sell its land or to receive the
be, and ordinarily will not be, considered by a reviewing court, as
earnest money. Neither was there any proof that Motorich ratified,
they cannot be raised for the first time on appeal. [29] Allowing
expressly or impliedly, the contract. Petitioner rests its argument
petitioner to change horses in midstream, as it were, is to run
on the receipt, which, however, does not prove the fact of
roughshod over the basic principles of fair play, justice and due
ratification. The document is a hand-written one, not a corporate
process.
receipt, and it bears only Nenita Gruenbergs signature. Certainly,
this document alone does not prove that her acts were authorized
Second, even if the above-mentioned argument were to be
or ratified by Motorich.
addressed at this time, the Court still finds no reason to uphold
it. True, one of the advantages of a corporate form of business
Article 1318 of the Civil Code lists the requisites of a valid
organization is the limitation of an investors liability to the amount
and perfected contract: (1) consent of the contracting parties; (2)
of the investment.[30] This feature flows from the legal theory that a
object certain which is the subject matter of the contract;(3) cause
corporate entity is separate and distinct from its
of the obligation which is established. As found by the trial
stockholders. However, the statutorily granted privilege of a
court[21] and affirmed by the Court of Appeals, [22] there is no
corporate veil may be used only for legitimate purposes. [31] On
evidence that Gruenberg was authorized to enter into the contract
equitable considerations, the veil can be disregarded when it is
of sale, or that the said contract was ratified by Motorich. This
utilized as a shield to commit fraud, illegality or inequity; defeat
factual finding of the two courts is binding on this Court. [23] As the
public convenience; confuse legitimate issues; or serve as a mere
consent of the seller was not obtained, no contract to bind the
alter ego or business conduit of a person or an instrumentality,
obligor was perfected. Therefore, there can be no valid contract of
agency or adjunct of another corporation.[32]
sale between petitioner and Motorich.
 47
Thus, the Court has consistently ruled that [w]hen the fiction
is used as a means of perpetrating a fraud or an illegal act or as a
vehicle for the evasion of an existing obligation, the circumvention
of statutes, the achievement or perfection of a monopoly or
generally the perpetration of knavery or crime, the veil with which
the law covers and isolates the corporation from the members or
stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals. [33]
We stress that the corporate fiction should be set aside when
it becomes a shield against liability for fraud, illegality or inequity
committed on third persons. The question of piercing the veil of
corporate fiction is essentially, then, a matter of proof. In the
present case, however, the Court finds no reason to pierce the
corporate veil of Respondent Motorich. Petitioner utterly failed to
establish that said corporation was formed, or that it is operated,
for the purpose of shielding any alleged fraudulent or illegal
activities of its officers or stockholders; or that the said veil was
used to conceal fraud, illegality or inequity at the expense of third
persons, like petitioner.
Petitioner claims that Motorich is a close corporation. We
rule that it is not. Section 96 of the Corporation Code defines a
close corporation as follows:
SEC. 96. Definition and Applicability of Title. -- A
close corporation, within the meaning of this Code, is
one whose articles of incorporation provide
that: (1) All of the corporations issued stock of all
classes, exclusive of treasury shares, shall be held of
record by not more than a specified number of
persons, not exceeding twenty (20); (2) All of the
issued stock of all classes shall be subject to one or
more specified restrictions on transfer permitted by
this Title; and (3) The corporation shall not list in any
stock exchange or make any public offering of any of
its stock of any class. Notwithstanding the foregoing,
a corporation shall be deemed not a close corporation
when at least two-thirds (2/3) of its voting stock or
voting rights is owned or controlled by another
corporation which is not a close corporation within the
meaning of this Code. xxx.
The articles of incorporation[34] of Motorich Sales
Corporation does not contain any provision stating that (1) the
number of stockholders shall not exceed 20, or (2) a preemption of
shares is restricted in favor of any stockholder or of the
corporation, or (3) listing its stocks in any stock exchange or
making a public offering of such stocks is prohibited. From its
articles, it is clear that Respondent Motorich is not a close
corporation.[35] Motorich does not become one either, just because
Spouses Reynaldo and Nenita Gruenberg owned 99.866% of its
subscribed capital stock. The [m]ere ownership by a single
stockholder or by another corporation of all or nearly all of the
capital stock of a corporation is not of itself sufficient ground for
disregarding the separate corporate personalities. [36] So too, a
narrow distribution of ownership does not, by itself, make a close
corporation.
Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court
of Appeals[37] wherein the Court ruled that xxx petitioner
corporation is classified as a close corporation and, consequently, a
board resolution authorizing the sale or mortgage of the subject
property is not necessary to bind the corporation for the action of
its president.[38] But the factual milieu in Dulay is not on all fours
with the present case. In Dulay, the sale of real property was
contracted by the president of a close corporation with the
knowledge and acquiescence of its board of directors. [39] In the
present case, Motorich is not a close corporation, as previously
discussed, and the agreement was entered into by the corporate
treasurer without the knowledge of the board of directors.
The Court is not unaware that there are exceptional cases
where an action by a director, who singly is the controlling
stockholder, may be considered as a binding corporate act and a
board action as nothing more than a mere formality. [40] The
present case, however, is not one of them.
As stated by petitioner, Spouses Reynaldo and Nenita
Gruenberg own almost 99.866% of Respondent Motorich. [41] Since
Nenita is not the sole controlling stockholder of Motorich, the
aforementioned exception does not apply. Granting arguendo that
the corporate veil of Motorich is to be disregarded, the subject
parcel of land would then be treated as conjugal property of
Spouses Gruenberg, because the same was acquired during their
marriage. There being no indication that said spouses, who appear
to have been married before the effectivity of the Family Code,
have agreed to a different property regime, their property relations
would be governed by conjugal partnership of gains. [42] As a
consequence, Nenita Gruenberg could not have effected a sale of
the subject lot because [t]here is no co-ownership between the
spouses in the properties of the conjugal partnership of
gains. Hence, neither spouse can alienate in favor of another his or
her interest in the partnership or in any property belonging to it;
neither spouse can ask for a partition of the properties before the
partnership has been legally dissolved.[43]
Assuming further, for the sake of argument, that the spouses
property regime is the absolute community of property, the sale
would still be invalid. Under this regime, alienation of community
property must have the written consent of the other spouse or the
authority of the court without which the disposition or
encumbrance is void.[44] Both requirements are manifestly absent in
the instant case.
Third Issue: Challenged Portion of TSN Immaterial
Petitioner calls our attention to the following excerpt of the
transcript of stenographic notes(TSN):
Q Did you ever represent to Mr. Co that you were authorized
by the corporation to sell the property?
A Yes, sir.[45]
Petitioner claims that the answer Yes was crossed out, and,
in its place was written a No with an initial scribbled above it.
[46]
 This, however, is insufficient to prove that Nenita Gruenberg
was authorized to represent Respondent Motorich in the sale of its
immovable property. Said excerpt should be understood in the
context of her whole testimony. During her cross-examination,
Respondent Gruenberg testified:
Q So, you signed in your capacity as the treasurer?
[A] Yes, sir.
Q Even then you kn[e]w all along that you [were] not
authorized?
A Yes, sir.
Q You stated on direct examination that you did not represent
that you were authorized to sell the property?
A Yes, sir.
Q But you also did not say that you were not authorized to sell
the property, you did not tell that to Mr. Co, is that
correct?
A That was not asked of me.
Q Yes, just answer it.
 48
A I just told them that I was the treasurer of the corporation
and it [was] also the president who [was] also authorized
to sign on behalf of the corporation.
Q You did not say that you were not authorized nor did you
say that you were authorized?
A Mr. Co was very interested to purchase the property and he
offered to put up a P100,000.00 earnest money at that
time. That was our first meeting.[47]
Clearly then, Nenita Gruenberg did not testify that Motorich
had authorized her to sell its property. On the other hand, her
testimony demonstrates that the president of Petitioner
Corporation, in his great desire to buy the property, threw caution
to the wind by offering and paying the earnest money without first
verifying Gruenbergs authority to sell the lot.
Fourth Issue:
Damages and Attorneys Fees
Finally, petitioner prays for damages and attorneys fees,
alleging that [i]n an utter display of malice and bad faith,
[r]espondents attempted and succeeded in impressing on the trial
court and [the] Court of Appeals that Gruenberg did not represent
herself as authorized by Respondent Motorich despite the receipt
issued by the former specifically indicating that she was signing on
behalf of Motorich Sales Corporation. Respondent Motorich
likewise acted in bad faith when it claimed it did not authorize
Respondent Gruenberg and that the contract [was] not binding,
[insofar] as it [was] concerned, despite receipt and enjoyment of
the proceeds of Gruenbergs act. [48] Assuming that Respondent
Motorich was not a party to the alleged fraud, petitioner maintains
that Respondent Gruenberg should be held liable because she acted
fraudulently and in bad faith [in] representing herself as duly
authorized by [R]espondent [C]orporation.[49]
As already stated, we sustain the findings of both the trial
and the appellate courts that the foregoing allegations lack factual
bases. Hence, an award of damages or attorneys fees cannot be
justified. The amount paid as earnest money was not proven to
have redounded to the benefit of Respondent Motorich. Petitioner
claims that said amount was deposited to the account of
Respondent Motorich, because it was deposited with the account
of Aren Commercial c/o Motorich Sales Corporation.
[50]
 Respondent Gruenberg, however, disputes the allegations of
petitioner. She testified as follows:
Q You voluntarily accepted the P100,000.00, as a matter of
fact, that was encashed, the check was encashed.
A Yes, sir, the check was paid in my name and I deposit[ed]
it . . .
Q In your account?
A Yes, sir. [51]
In any event, Gruenberg offered to return the amount to
petitioner xxx since the sale did not push through.[52]
Moreover, we note that Andres Co is not a neophyte in the
world of corporate business. He has been the president of
Petitioner Corporation for more than ten years and has also served
as chief executive of two other corporate entities. [53] Co cannot
feign ignorance of the scope of the authority of a corporate
treasurer such as Gruenberg. Neither can he be oblivious to his
duty to ascertain the scope of Gruenbergs authorization to enter
into a contract to sell a parcel of land belonging to Motorich.
Indeed, petitioners claim of fraud and bad faith is
unsubstantiated and fails to persuade the Court. Indubitably,
petitioner appears to be the victim of its own officers negligence in
entering into a contract with and paying an unauthorized officer of
another corporation.
As correctly ruled by the Court of Appeals, however, Nenita
Gruenberg should be ordered to return to petitioner the amount she
received as earnest money, as no one shall enrich himself at the
expense of another,[54] a principle embodied in Article 2154 of the
Civil Code.[55] Although there was no binding relation between
them, petitioner paid Gruenberg on the mistaken belief that she
had the authority to sell the property of Motorich. [56] Article 2155
of the Civil Code provides that [p]ayment by reason of a mistake
in the construction or application of a difficult question of law may
come within the scope of the preceding article.
WHEREFORE, the petition is hereby DENIED and the
assailed Decision is AFFIRMED.
SO ORDERED.
 49
G.R. No. L-28694 May 13, 1981
TELEPHONE ENGINEERING & SERVICE COMPANY,
INC., petitioner,  of the Workmen's Compensation Act (Act No. 3428). 2 An
vs.
WORKMEN'S COMPENSATION COMMISSION,
PROVINCIAL SHERIFF OF RIZAL and LEONILA
SANTOS GATUS, for herself and in behalf of her minor
children, Teresita, Antonina and Reynaldo, all surnamed
GATUS, respondents.
MELENCIO-HERRERA, J.:1äwphï1.ñët
These certiorari proceedings stem from the award rendered against
petitioner Telephone Engineering and Services, Co., Inc. (TESCO)
on October 6, 1967 by the Acting Referee of Regional Office No.
4, Quezon City Sub-Regional Office, Workmen's Compensation
Section, in favor of respondent Leonila S. Gatus and her children,
dependents of the deceased employee Pacifico L. Gatus. The
principal contention is that the award was rendered without
jurisdiction as there was no employer-employee relationship
between petitioner and the deceased.
Petitioner is a domestic corporation engaged in the business of
manufacturing telephone equipment with offices at Sheridan
Street, Mandaluyong, Rizal. Its Executive Vice-President and
General Manager is Jose Luis Santiago. It has a sister company,
the Utilities Management Corporation (UMACOR), with offices in
the same location. UMACOR is also under the management of
Jose Luis Santiago.
On September 8, 1964, UMACOR employed the late Pacifica L.
Gatus as Purchasing Agent. On May 16, 1965, Pacifico L. Gatus
was detailed with petitioner company. He reported back to
UMACOR on August 1, 1965. On January 13, 1967, he contracted
illness and although he retained to work on May 10, 1967, he died
nevertheless on July 14, 1967 of "liver cirrhosis with malignant
degeneration."
On August 7, 1967, his widow, respondent Leonila S. Gatus, filed
a "Notice and Claim for Compensation" with Regional Office No.
4, Quezon City Sub-Regional Office, Workmen's Compensation
Section, alleging therein that her deceased husband was an
employee of TESCO, and that he died of liver cirrhosis. 1 On
August 9, 1967, and Office wrote petitioner transmitting the
Notice and for Compensation, and requiring it to submit an
Employer's Report of Accident or Sickness pursuant to Section 37
"Employer's Report of Accident or Sickness" was thus submitted
with UMACOR indicated as the employer of the deceased. The
Report was signed by Jose Luis Santiago. In answer to questions
Nos. 8 and 17, the employer stated that it would not controvert the
claim for compensation, and admitted that the deceased employee
contracted illness "in regular occupation." 3 On the basis of this
Report, the Acting Referee awarded death benefits in the amount
of P5,759.52 plus burial expenses of P200.00 in favor of the heirs
of Gatus in a letter-award dated October 6, 1967 4 against TESCO.
Replying on October 27, 1967, TESCO, through Jose Luis
Santiago, informed the Acting Referee that it would avail of the
15-days-notice given to it to state its non-conformity to the award
and contended that the cause of the illness contracted by Gatus was
in no way aggravated by the nature of his work. 5
On November 6, 1967, TESCO requested for an extension of ten
days within which to file a Motion for Reconsideration, 6 and on
November 15, 1967, asked for an additional extension of five
days. 7 TESCO filed its "Motion for Reconsideration and/or
Petition to Set Aside Award" on November 18, 1967, alleging as
grounds therefor, that the admission made in the "Employer's
Report of Accident or Sickness" was due to honest mistake and/or
excusable negligence on its part, and that the illness for which
compensation is sought is not an occupational disease, hence, not
compensable under the law. 8 The extension requested was denied.
The Motion for Reconsideration was likewise denied in an Order
issued by the Chief of Section of the Regional Office dated
December 28, 1967 9 predicated on two grounds: that the alleged
mistake or negligence was not excusable, and that the basis of the
award was not the theory of direct causation alone but also on that
of aggravation. On January 28, 1968, an Order of execution was
issued by the same Office.
On February 3, 1968, petitioner filed an "Urgent Motion to
Compel Referee to Elevate the Records to the Workmen's
Compensation Commission for Review." 10 Meanwhile, the
Provincial Sheriff of Rizal levied on and attached the properties of
TESCO on February 17, 1968, and scheduled the sale of the same
at public auction on February 26, 1968. On February 28, 1968, the
Commission issued an Order requiring petitioner to submit
verified or true copies of the Motion for Reconsideration and/or
Petition to Set Aside Award and Order of December 28, 1967, and
to show proof that said Motion for Reconsideration was filed
within the reglementary period, with the warning that failure to
comply would result in the dismissal of the Motion. However,
before this Order could be released, TESCO filed with this Court,
on February 22, 1968, The present petition for "Certiorari with
Preliminary Injunction" seeking to annul the award and to enjoin
the Sheriff from levying and selling its properties at public auction.
On February 29, 1968, this Court required respondents to answer
the Petition but denied Injunction. 11 TESCO'S Urgent Motion
dated April 2, 1968, for the issuance of a temporary restraining
order to enjoin the Sheriff from proceeding with the auction sale of
its properties was denied in our Resolution dated May 8, 1968.
TESCO asserts: 1äwphï1.ñët
I. That the respondent Workmen's
Compensation Commission has no jurisdiction
nor authority to render the award (Annex 'D',
Petition) against your petitioner there being no
employer-employee relationship between it
and the deceased Gatus;
II. That petitioner can never be estopped from
questioning the jurisdiction of respondent
commission especially considering that
jurisdiction is never conferred by the acts or
omission of the parties;
III. That this Honorable Court has jurisdiction
to nullify the award of respondent commission.
TESCO takes the position that the Commission has no jurisdiction
to render a valid award in this suit as there was no employer-
employee relationship between them, the deceased having been an
employee of UMACOR and not of TESCO. In support of this
contention, petitioner submitted photostat copies of the payroll of
UMACOR for the periods May 16-31, 1967 and June 1-15,
1967 12 showing the name of the deceased as one of the three
employees listed under the Purchasing Department of UMACOR.
It also presented a photostat copy of a check of UMACOR payable
to the deceased representing his salary for the period June 14 to
July 13, 1967. 13
 50

Both public and private respondents contend, on the other hand,
that TESCO is estopped from claiming lack of employer –
employee relationship.
To start with, a few basic principles should be re-stated the
existence of employer-employee relationship is the jurisdictional
foundation for recovery of compensation under the Workmen's
Compensation Law. 14 The lack of employer-employee
relationship, however, is a matter of defense that the employer
should properly raise in the proceedings below. The determination
of this relationship involves a finding of fact, which is conclusive
and binding and not subject to review by this Court. 15
Viewed in the light of these criteria, we note that it is only in this
Petition before us that petitioner denied, for the first time, the
employer-employee relationship. In fact, in its letter dated October
27, 1967 to the Acting Referee, in its request for extension of time
to file Motion for Reconsideration, in its "Motion for
Reconsideration and/or Petition to Set Aside Award," and in its
"Urgent Motion to Compel the Referee to Elevate Records to the
Commission for Review," petitioner represented and defended
itself as the employer of the deceased. Nowhere in said documents
did it allege that it was not the employer. Petitioner even admitted
that TESCO and UMACOR are sister companies operating under
one single management and housed in the same building. Although
respect for the corporate personality as such, is the general rule,
there are exceptions. In appropriate cases, the veil of corporate
fiction may be pierced as when the same is made as a shield to
confuse the legitimate issues. 16
from the award of the Referee, within fifteen days from notice, to
the Commission; a petition for reconsideration of the latter's
resolution, if adverse, to the Commission en banc; and within ten
days from receipt of an unfavorable decision by the latter, an
appeal to this Court. As petitioner had not utilized these remedies
available to it, certiorari win not he, it being prematurely filed. As
this Court ruled in the case of Manila Jockey Club, Inc. vs. Del
Rosario, 2 SCRA 462 (1961). 1äwphï1.ñët
An aggrieved party by the decision of a
Commissioner should seek a reconsideration
of the decision by the Commission en banc. If
the decision is adverse to him, he may appeal
to the Supreme Court. An appeal brought to
the Supreme Court without first resorting to
the remedy referred to is premature and may
be dismissed.
Although this rule admits of exceptions, as where public welfare
and the advancement of public policy so dictate, the broader
interests of justice so require, or where the Orders complained of
were found to be completely null and void or that the appeal was
not considered the appropriate remedy, 23 the case at bar does not
fan within any of these exceptions. WHEREFORE, this Petition is
hereby dismissed.
SO ORDERED.

While, indeed, jurisdiction cannot be conferred by acts or omission

of the parties, TESCO'S denial at this stage that it is the employer
of the deceased is obviously an afterthought, a devise to defeat the
law and evade its obligations. 17 This denial also constitutes a
change of theory on appeal which is not allowed in this
jurisdiction. 18 Moreover, issues not raised before the Workmen's
Compensation Commission cannot be raised for the first time on
appeal. 19For that matter, a factual question may not be raised for
the first time on appeal to the Supreme Court. 20

This certiorari proceeding must also be held to have been

prematurely brought. Before a petition for certiorari can be
instituted, all remedies available in the trial Court must be
exhausted first. 21 certiorari cannot be resorted to when the remedy
of appeal is present. 22 What is sought to be annulled is the award
made by the Referee. However, TESCO did not pursue the
remedies available to it under Rules 23, 24 and 25 of the Rules of
the Workmen's Compensation Commission, namely, an appeal
 51
G.R. No. 89561 September 13, 1990 they were deprived in the
sum of P26,000.00 and (ii)
BUENAFLOR C. UMALI, MAURICIA M. VDA. DE attorney's fees of
CASTILLO, VICTORIA M. CASTILLO, BERTILLA C. P15,000.00
RADA, MARIETTA C. ABAÑEZ, LEOVINA C. JALBUENA
and SANTIAGO M. RIVERA, petitioners,  b) To defendant-appellant
vs. Bormaheco: (i) expenses
COURT OF APPEALS, BORMAHECO, INC. and of litigation in the amount
PHILIPPINE MACHINERY PARTS MANUFACTURING of P5,000.00 and (ii)
CO., INC., respondents. attorney's fees of
P15,000.00.
Edmundo T. Zepeda for petitioners.
SO ORDERED.
Martin M. De Guzman for respondent BORMAHECO, Inc.
The original complaint for annulment of title filed in the court  a
quo by herein petitioners included as party defendants the
Renato J. Robles for P.M. Parts Manufacturing Co., Inc.
Philippine Machinery Parts Manufacturing Co., Inc. (PM Parts),
Insurance Corporation of the Philippines (ICP), Bormaheco, Inc.,
(Bormaheco) and Santiago M. Rivera (Rivera). A Second
Amended Complaint was filed, this time impleading Santiago M.
REGALADO, J.:
Rivera as party plaintiff.
This is a petition to review the decision of respondent Court of
During the pre-trial conference, the parties entered into the
Appeals, dated August 3, 1989, in CA-GR CV No. 15412,
following stipulation of facts:
entitled "Buenaflor M. Castillo Umali, et al. vs. Philippine
Machinery Parts Manufacturing Co., Inc., et al.,"  1 the dispositive
portion whereof provides: As between all parties: Plaintiff Buenaflor M.
Castillo is the judicial administratrix of the estate of
Felipe Castillo in Special Proceeding No. 4053,
WHEREFORE, viewed in the light of the
pending before Branch IX, CFI of Quezon (per Exhibit
entire record, the judgment appealed from
A) which intestate proceedings was instituted by
must be, as it is hereby REVERSED. In lieu
Mauricia Meer Vda. de Castillo, the previous
thereof, a judgment is hereby rendered-
administratrix of the said proceedings prior to 1970
(per exhibits A-1 and A-2) which case was filed in
1) Dismissing the complaint, with cost against Court way back in 1964;
plaintiffs;
b) The four (4) parcels of land described in
2) Ordering plaintiffs-appellees to vacate the paragraph 3 of the Complaint were originally covered
subject properties; and by TCT No. T-42104 and Tax Dec. No. 14134 with
assessed value of P3,100.00; TCT No. T 32227 and
3) Ordering plaintiffs-appellees to pay upon Tax Dec. No. 14132, with assessed value of P5,130,00;
defendants' counterclaims: TCT No. T-31762 and Tax Dec. No. 14135, with
assessed value of P6,150.00; and TCT No. T-42103
a) To defendant-appellant with Tax Dec. No. 14133, with assessed value of
PM Parts: (i) damages P3,580.00 (per Exhibits A-2 and B, B-1 to B-3 C, C-1
consisting of the value of -to C3
the fruits in the subject
parcels of land of which
c) That the above-enumerated four (4) parcels of
land were the subject of the Deed of Extra-Judicial
Partition executed by the heirs of Felipe Castillo (per
Exhibit D) and by virtue thereof the titles thereto has
(sic) been cancelled and in lieu thereof, new titles in
the name of Mauricia Meer Vda. de Castillo and of her
children, namely: Buenaflor, Bertilla, Victoria,
Marietta and Leovina, all surnamed Castillo has (sic)
been issued, namely: TCT No. T-12113 (Exhibit E );
TCT No. T-13113 (Exhibit F); TCT No. T-13116
(Exhibit G ) and TCT No. T13117 (Exhibit H )
d) That mentioned parcels of land were submitted as
guaranty in the Agreement of Counter-Guaranty with
Chattel-Real Estate Mortgage executed on 24 October
1970 between Insurance Corporation of the Philippines
and Slobec Realty Corporation represented by Santiago
Rivera (Exhibit 1);
e) That based on the Certificate of Sale issued by the
Sheriff of the Province of Quezon in favor of Insurance
Corporation of the Philippines it was able to transfer to
itself the titles over the lots in question, namely: TCT
No. T-23705 (Exhibit M), TCT No. T 23706 (Exhibit
N ), TCT No. T-23707 (Exhibit 0) and TCT No. T
23708 (Exhibit P);
f) That on 10 April 1975, the Insurance Corporation
of the Philippines sold to PM Parts the immovables in
question (per Exhibit 6 for PM Parts) and by reason
thereof, succeeded in transferring unto itself the titles
over the lots in dispute, namely: per TCT No. T-24846
(Exhibit Q ), per TCT No. T-24847 (Exhibit R ), TCT
No. T-24848 (Exhibit), TCT No. T-24849 (Exhibit T );
g) On 26 August l976, Mauricia Meer Vda. de
Castillo' genther letter to Modesto N. Cervantes stating
that she and her children refused to comply with his
demands (Exhibit V-2);
h) That from at least the months of October,
November and December 1970 and January 1971,
Modesto N. Cervantes was the Vice-President of
Bormaheco, Inc. later President thereof, and also he is
one of the Board of Directors of PM Parts; on the other
hand, Atty. Martin M. De Guzman was the legal
counsel of Bormaheco, Inc., later Executive Vice-
 52
President thereof, and who also is the legal counsel of
Insurance Corporation of the Philippines and PM Parts;
that Modesto N. Cervantes served later on as President
of PM Parts, and that Atty. de Guzman was retained by
Insurance Corporation of the Philippines specifically
for foreclosure purposes only;
i) Defendant Bormaheco, Inc. on November 25, 1970
sold to Slobec Realty and Development, Inc.,
represented by Santiago Rivera, President, one (1) unit
Caterpillar Tractor D-7 with Serial No. 281114
evidenced by a contract marked Exhibit J and Exhibit I
for Bormaheco, Inc.;
j) That the Surety Bond No. 14010 issued by co-
defendant ICP was likewise secured by an Agreement
with Counter-Guaranty with Real Estate Mortgage
executed by Slobec Realty & Development, Inc.,
Mauricia Castillo Meer, Buenaflor Castillo, Bertilla
Castillo, Victoria Castillo, Marietta Castillo and
Leovina Castillo, as mortgagors in favor of ICP which
document was executed and ratified before notary
public Alberto R. Navoa of the City of Manila on
October 24,1970;
k) That the property mortgaged consisted of four (4)
parcels of land situated in Lucena City and covered by
TCT Nos. T-13114, T13115,  appears in the notarial register of the notary public
T-13116 and T-13117 of the Register of Deeds of
Lucena City;
l) That the tractor sold by defendant Bormaheco, Inc.
to Slobec Realty & Development, Inc. was delivered to
Bormaheco, Inc. on or about October 2,1973, by Mr.
Menandro Umali for purposes of repair;
m) That in August 1976, PM Parts notified Mrs.
Mauricia Meer about its ownership and the assignment
of Mr. Petronilo Roque as caretaker of the subject
property;
n) That plaintiff and other heirs are harvest fruits of
the property (daranghita) which is worth no less than
Pl,000.00 per harvest.
As between plaintiffs and 
defendant Bormaheco, Inc
o) That on 25 November 1970, at Makati, Rizal,
Same Rivera, in representation of the Slobec Realty &
Development Corporation executed in favor of
Bormaheco, Inc., represented by its Vice-President
Modesto N. Cervantes a Chattel Mortgage concerning
one unit model CAT D7 Caterpillar Crawler Tractor as
described therein as security for the payment in favor
of the mortgagee of the amount of P180,000.00 (per
Exhibit K) that Id document was superseded by
another chattel mortgage dated January 23, 1971
(Exhibit 15);
p) On 18 December 1970, at Makati, Rizal, the
Bormaheco, Inc., represented by its Vice-President
Modesto Cervantes and Slobec Realty Corporation
represented by Santiago Rivera executed the sales
agreement concerning the sale of one (1) unit Model
CAT D7 Caterpillar Crawler Tractor as described
therein for the amount of P230,000.00 (per Exhibit J)
which document was superseded by the Sales
Agreement dated January 23,1971 (Exhibit 16);
q) Although it appears on the document entitled
Chattel Mortgage (per Exhibit K) that it was
executed on 25 November 1970, and in the
document entitled Sales Agreement (per Exhibit J)
that it was executed on 18 December 1970, it
who notarized them that those two documents were
executed on 11 December 1970. The certified xerox
copy of the notarial register of Notary Public
Guillermo Aragones issued by the Bureau of
Records Management is hereto submitted as Exhibit
BB That said chattel mortgage was superseded by
another document dated January 23, 1971;
r) That on 23 January 1971, Slobec Realty
Development Corporation, represented by Santiago
Rivera, received from Bormaheco, Inc. one (1)
tractor Caterpillar Model D-7 pursuant to Invoice
No. 33234 (Exhibits 9 and 9-A, Bormaheco, Inc.)
and delivery receipt No. 10368 (per Exhibits 10 and
10-A for Bormaheco, Inc
s) That on 28 September 1973, Atty. Martin M. de
Guzman, as counsel of Insurance Corporation of the
Philippines purchased at public auction for said
corporation the four (4) parcels of land subject of
tills case (per Exhibit L), and which document was
presented to the Register of Deeds on 1 October
1973;
t) Although it appears that the realties in issue has
(sic) been sold by Insurance Corporation of the
Philippines in favor of PM Parts on 1 0 April 1975,
Modesto N. Cervantes, formerly Vice- President and
now President of Bormaheco, Inc., sent his letter
dated 9 August 1976 to Mauricia Meer Vda. de
Castillo (Exhibit V), demanding that she and her
children should vacate the premises;
u) That the Caterpillar Crawler Tractor Model CAT
D-7 which was received by Slobec Realty
Development Corporation was actually
reconditioned and repainted. " 2
We cull the following antecedents from the decision of respondent
Court of Appeals:
Plaintiff Santiago Rivera is the nephew of
plaintiff Mauricia Meer Vda. de Castillo. The
Castillo family are the owners of a parcel of
land located in Lucena City which was given
as security for a loan from the Development
Bank of the Philippines. For their failure to
pay the amortization, foreclosure of the said
property was about to be initiated. This
problem was made known to Santiago Rivera,
who proposed to them the conversion into
subdivision of the four (4) parcels of land
adjacent to the mortgaged property to raise the
necessary fund. The Idea was accepted by the
Castillo family and to carry out the project, a
Memorandum of Agreement (Exh. U p. 127,
Record) was executed by and between Slobec
Realty and Development, Inc., represented by
its President Santiago Rivera and the Castillo
family. In this agreement, Santiago Rivera
obliged himself to pay the Castillo family the
sum of P70,000.00 immediately after the
execution of the agreement and to pay the
additional amount of P400,000.00 after the
property has been converted into a subdivision.
Rivera, armed with the agreement, Exhibit U ,
approached Mr. Modesto Cervantes, President
of defendant Bormaheco, and proposed to
 53
purchase from Bormaheco two (2) tractors
Model D-7 and D-8 Subsequently, a Sales
Agreement was executed on December
28,1970 (Exh. J, p. 22, Record).
On January 23, 1971, Bormaheco, Inc. and
Slobec Realty and Development, Inc.,
represented by its President, Santiago Rivera,
executed a Sales Agreement over one unit of
Caterpillar Tractor D-7 with Serial No.
281114, as evidenced by the contract marked
Exhibit '16'. As shown by the contract, the
price was P230,000.00 of which P50,000.00
was to constitute a down payment, and the
balance of P180,000.00 payable in eighteen
monthly installments. On the same date,
Slobec, through Rivera, executed in favor of
Bormaheco a Chattel Mortgage (Exh. K, p. 29,
Record) over the said equipment as security
for the payment of the aforesaid balance of
P180,000.00. As further security of the
aforementioned unpaid balance, Slobec
obtained from Insurance Corporation of the
Phil. a Surety Bond, with ICP (Insurance
Corporation of the Phil.) as surety and Slobec
as principal, in favor of Bormaheco, as borne
out by Exhibit '8' (p. 111, Record). The
aforesaid surety bond was in turn secured by
an Agreement of Counter-Guaranty with Real
Estate Mortgage (Exhibit I, p. 24, Record)
executed by Rivera as president of Slobec and
Mauricia Meer Vda. de Castillo, Buenaflor
Castillo Umali, Bertilla Castillo-Rada, Victoria
Castillo, Marietta Castillo and Leovina
Castillo Jalbuena, as mortgagors and Insurance
Corporation of the Philippines (ICP) as
mortgagee. In this agreement, ICP guaranteed
the obligation of Slobec with Bormaheco in
the amount of P180,000.00. In giving the
bond, ICP required that the Castillos mortgage
to them the properties in question, namely,
four parcels of land covered by TCTs in the
name of the aforementioned mortgagors,
namely TCT Nos. 13114, 13115, 13116 and
13117 all of the Register of Deeds for Lucena
City.
On the occasion of the execution on January
23, 1971, of the Sales Agreement Exhibit '16',
Slobec, represented by Rivera received from
Bormaheco the subject matter of the said Sales
Agreement, namely, the aforementioned
tractor Caterpillar Model D-7 as evidenced by
Invoice No. 33234 (Exhs. 9 and 9-A, p. 112,
Record) and Delivery Receipt No. 10368
(Exhs. 10 and 10-A, p. 113). This tractor was
known by Rivera to be a reconditioned and
repainted one [Stipulation of Facts, Pre-trial
Order, par. (u)].
Meanwhile, for violation of the terms and
conditions of the Counter-Guaranty
Agreement (Exh. 1), the properties of the
Castillos were foreclosed by ICP As the
highest bidder with a bid of P285,212.00, a
Certificate of Sale was issued by the Provincial
Sheriff of Lucena City and Transfer
Certificates of Title over the subject parcels of
land were issued by the Register of Deeds of
Lucena City in favor of ICP namely, TCT Nos.
T-23705, T 23706, T-23707 and T-23708
(Exhs. M to P, pp. 38-45). The mortgagors had
one (1) year from the date of the registration of
the certificate of sale, that is, until October 1,
1974, to redeem the property, but they failed to
do so. Consequently, ICP consolidated its
ownership over the subject parcels of land
through the requisite affidavit of consolidation
of ownership dated October 29, 1974, as
shown in Exh. '22'(p. 138, Rec.). Pursuant
thereto, a Deed of Sale of Real Estate covering
the subject properties was issued in favor of
ICP (Exh. 23, p. 139, Rec.).
On April 10, 1975, Insurance Corporation of
the Phil. ICP sold to Phil. Machinery Parts
Manufacturing Co. (PM Parts) the four (4)
parcels of land and by virtue of said
conveyance, PM Parts transferred unto itself
the titles over the lots in dispute so that said
parcels of land are now covered by TCT Nos.
T-24846, T-24847, T-24848 and T-24849
(Exhs. Q-T, pp. 46-49, Rec.).
Thereafter, PM Parts, through its President,
Mr. Modesto Cervantes, sent a letter dated
August 9,1976 addressed to plaintiff Mrs.
Mauricia Meer Castillo requesting her and her
children to vacate the subject property, who
(Mrs. Castillo) in turn sent her reply
expressing her refusal to comply with his
demands.
On September 29, 1976, the heirs of the late
Felipe Castillo, particularly plaintiff Buenaflor
M. Castillo Umali as the appointed
administratrix of the properties in question
filed an action for annulment of title before the
then Court of First Instance of Quezon and
docketed thereat as Civil Case No. 8085.
Thereafter, they filed an Amended Complaint
on January 10, 1980 (p. 444, Record). On July
20, 1983, plaintiffs filed their Second
Amended Complaint, impleading Santiago M.
Rivera as a party plaintiff (p. 706, Record).
They contended that all the aforementioned
transactions starting with the Agreement of
Counter-Guaranty with Real Estate Mortgage
(Exh. I), Certificate of Sale (Exh. L) and the
Deeds of Authority to Sell, Sale and the
Affidavit of Consolidation of Ownership
(Annexes F, G, H, I) as well as the Deed of
Sale (Annexes J, K, L and M) are void for
being entered into in fraud and without the
consent and approval of the Court of First
Instance of Quezon, (Branch IX) before whom
the administration proceedings has been
pending. Plaintiffs pray that the four (4)
parcels of land subject hereof be declared as
owned by the estate of the late Felipe Castillo
and that all Transfer Certificates of Title Nos.
13114,13115,13116,13117, 23705, 23706,
23707, 23708, 24846, 24847, 24848 and 24849
as well as those appearing as encumbrances at
the back of the certificates of title mentioned
be declared as a nullity and defendants to pay
damages and attorney's fees (pp. 71071 1,
Record).
In their amended answer, the defendants
controverted the complaint and alleged, by
way of affirmative and special defenses that
 54
the complaint did not state facts sufficient to
state a cause of action against defendants; that
plaintiffs are not entitled to the reliefs
demanded; that plaintiffs are estopped or
precluded from asserting the matters set forth
in the Complaint; that plaintiffs are guilty of
laches in not asserting their alleged right in
due time; that defendant PM Parts is an
innocent purchaser for value and relied on the
face of the title before it bought the subject
property (p. 744, Record). 3
After trial, the court a quo rendered judgment,
with the following decretal portion:
WHEREFORE, judgment is hereby rendered
in favor of the plaintiffs and against the
defendants, declaring the following
documents:
Agreement of Counter-
Guaranty with Chattel-
Real Estate Mortgage
dated October 24,1970
(Exhibit 1);
Sales Agreement dated
December 28, 1970
(Exhibit J)
Chattel Mortgage dated
November 25, 1970
(Exhibit K)
Sales Agreement dated
January 23, 1971 (Exhibit
16);
Chattel Mortgage dated
January 23, 1971 (Exhibit
17);
Certificate of Sale dated
September 28, 1973
executed by the Provincial
Sheriff of Quezon in favor
of Insurance Corporation
of the Philippines (Exhibit
L);
null and void for being fictitious, spurious and
without consideration. Consequently, Transfer
Certificates of Title Nos. T 23705, T-23706,
T23707 and T-23708 (Exhibits M, N, O and P)
issued in the name of Insurance Corporation of
the Philippines, are likewise null and void.
The sale by Insurance Corporation of the-
Philippines in favor of defendant Philippine
Machinery Parts Manufacturing Co., Inc., over
Id four (4) parcels of land and Transfer
Certificates of Title Nos. T 24846, T-24847,
T-24848 and T-24849 subsequently issued by
virtue of said sale in the name of Philippine
Machinery Parts Manufacturing Co., Inc., are
similarly declared null and void, and the
Register of Deeds of Lucena City is hereby
directed to issue, in lieu thereof, transfer
certificates of title in the names of the
plaintiffs, except Santiago Rivera.
Orders the defendants jointly and severally to
pay the plaintiffs moral damages in the sum of
P10,000.00, exemplary damages in the amount
of P5,000.00, and actual litigation expenses in
the sum of P6,500.00.
Defendants are likewise ordered to pay the
plaintiffs, jointly and severally, the sum of
P10,000.00 for and as attomey's fees. With
costs against the defendants.
SO ORDERED. 4
As earlier stated, respondent court reversed the aforequoted
decision of the trial court and rendered the judgment subject of this
petition-
Petitioners contend that respondent Court of
Appeals erred:
1. In holding and finding that the actions
entered into between petitioner Rivera with
Cervantes are all fair and regular and therefore
binding between the parties thereto;
2. In reversing the decision of the lower court,
not only based on erroneous conclusions of
facts, erroneous presumptions not supported by
the evidence on record but also, holding valid
and binding the supposed payment by ICP of
its obligation to Bormaheco, despite the fact
that the surety bond issued it had already
expired when it opted to foreclose
extrajudically the mortgage executed by the
petitioners;
3. In aside the finding of the lower court that
there was necessity to pierce the veil of
corporate existence; and
4. In reversing the decision of the lower court
of affirming the same 5
I. Petitioners aver that the transactions entered into between
Santiago M. Rivera, as President of Slobec Realty and
Development Company (Slobec) and Mode Cervantes, as Vice-
President of Bormaheco, such as the Sales Agreement, 6 Chattel
Mortgage 7 and the Agreement of Counter-Guaranty with
Chattel/Real Estate Mortgage, 8 are all fraudulent and simulated
and should, therefore, be declared nun and void. Such allegation is
premised primarily on the fact that contrary to the stipulations
agreed upon in the Sales Agreement (Exhibit J), Rivera never
made any advance payment, in the alleged amount of P50,000.00,
to Bormaheco; that the tractor was received by Rivera only on
January 23, 1971 and not in 1970 as stated in the Chattel Mortgage
(Exhibit K); and that when the Agreement of Counter-Guaranty
with Chattel/Real Estate Mortgage was executed on October 24,
1970, to secure the obligation of ICP under its surety bond, the
Sales Agreement and Chattel Mortgage had not as yet been
executed, aside from the fact that it was Bormaheco, and not
Rivera, which paid the premium for the surety bond issued by ICP
At the outset, it will be noted that petitioners submission under the
first assigned error hinges purely on questions of fact. Respondent
Court of Appeals made several findings to the effect that the
questioned documents are valid and binding upon the parties, that
there was no fraud employed by private respondents in the
execution thereof, and that, contrary to petitioners' allegation, the
evidence on record reveals that petitioners had every intention to
be bound by their undertakings in the various transactions had with
 55
private respondents. It is a general rule in this jurisdiction that
findings of fact of said appellate court are final and conclusive and,
thus, binding on this Court in the absence of sufficient and
convincing proof, inter alia, that the former acted with grave abuse
of discretion. Under the circumstances, we find no compelling
reason to deviate from this long-standing jurisprudential
pronouncement.
In addition, the alleged failure of Rivera to pay the consideration
agreed upon in the Sales Agreement, which clearly constitutes a
breach of the contract, cannot be availed of by the guilty party to
justify and support an action for the declaration of nullity of the
contract. Equity and fair play dictates that one who commits a
breach of his contract may not seek refuge under the protective
mantle of the law.
The evidence of record, on an overall calibration, does not
convince us of the validity of petitioners' contention that the
contracts entered into by the parties are either absolutely simulated
or downright fraudulent.
There is absolute simulation, which renders the contract null and
void, when the parties do not intend to be bound at all by the
same. 9 The basic characteristic of this type of simulation of
contract is the fact that the apparent contract is not really desired or
intended to either produce legal effects or in any way alter the
juridical situation of the parties. The subsequent act of Rivera in
receiving and making use of the tractor subject matter of the Sales
Agreement and Chattel Mortgage, and the simultaneous issuance
of a surety bond in favor of Bormaheco, concomitant with the
execution of the Agreement of Counter-Guaranty with
Chattel/Real Estate Mortgage, conduce to the conclusion that
petitioners had every intention to be bound by these contracts. The
occurrence of these series of transactions between petitioners and
private respondents is a strong indication that the parties actually
intended, or at least expected, to exact fulfillment of their
respective obligations from one another.
Neither will an allegation of fraud prosper in this case where
petitioners failed to show that they were induced to enter into a
contract through the insidious words and machinations of private
respondents without which the former would not have executed
such contract. To set aside a document solemnly executed and
voluntarily delivered, the proof of fraud must be clear and
convincing. 10 We are not persuaded that such quantum of proof
exists in the case at bar.
The fact that it was Bormaheco which paid the premium for the
surety bond issued by ICP does not per se affect the validity of the
bond. Petitioners themselves admit in their present petition that
Rivera executed a Deed of Sale with Right of Repurchase of his
car in favor of Bormaheco and agreed that a part of the proceeds
thereof shall be used to pay the premium for the bond. 11 In effect,
Bormaheco accepted the payment of the premium as an agent of
ICP The execution of the deed of sale with a right of repurchase in
favor of Bormaheco under such circumstances sufficiently
establishes the fact that Rivera recognized Bormaheco as an agent
of ICP Such payment to the agent of ICP is, therefore, binding on
Rivera. He is now estopped from questioning the validity of the
suretyship contract.
II. Under the doctrine of piercing the veil of corporate entity, when
valid grounds therefore exist, the legal fiction that a corporation is
an entity with a juridical personality separate and distinct from its
members or stockholders may be disregarded. In such cases, the
corporation will be considered as a mere association of persons.
The members or stockholders of the corporation will be considered
as the corporation, that is, liability will attach directly to the
officers and stockholders. 12 The doctrine applies when the
corporate fiction is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, 13 or when it is made as a
shield to confuse the legitimate issues 14 or where a corporation is
the mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit
or adjunct of another corporation. 15
In the case at bar, petitioners seek to pierce the V621 Of corporate
entity of Bormaheco, ICP and PM Parts, alleging that these
corporations employed fraud in causing the foreclosure and
subsequent sale of the real properties belonging to petitioners
While we do not discount the possibility of the existence of fraud
in the foreclosure proceeding, neither are we inclined to apply the
doctrine invoked by petitioners in granting the relief sought. It is
our considered opinion that piercing the veil of corporate entity is
not the proper remedy in order that the foreclosure proceeding may
be declared a nullity under the circumstances obtaining in the legal
case at bar.
In the first place, the legal corporate entity is disregarded only if it
is sought to hold the officers and stockholders directly liable for a
corporate debt or obligation. In the instant case, petitioners do not
seek to impose a claim against the individual members of the three
corporations involved; on the contrary, it is these corporations
which desire to enforce an alleged right against petitioners.
Assuming that petitioners were indeed defrauded by private
respondents in the foreclosure of the mortgaged properties, this
fact alone is not, under the circumstances, sufficient to justify the
piercing of the corporate fiction, since petitioners do not intend to
hold the officers and/or members of respondent corporations
personally liable therefor. Petitioners are merely seeking the
declaration of the nullity of the foreclosure sale, which relief may
be obtained without having to disregard the aforesaid corporate
fiction attaching to respondent corporations. Secondly, petitioners
failed to establish by clear and convincing evidence that private
respondents were purposely formed and operated, and thereafter
transacted with petitioners, with the sole intention of defrauding
the latter.
The mere fact, therefore, that the businesses of two or more
corporations are interrelated is not a justification for disregarding
their separate personalities, 16 absent sufficient showing that the
corporate entity was purposely used as a shield to defraud creditors
and third persons of their rights.
III. The main issue for resolution is whether there was a valid
foreclosure of the mortgaged properties by ICP Petitioners argue
that the foreclosure proceedings should be declared null and void
for two reasons, viz.: (1) no written notice was furnished by
Bormaheco to ICP anent the failure of Slobec in paying its
obligation with the former, plus the fact that no receipt was
presented to show the amount allegedly paid by ICP to
Bormaheco; and (b) at the time of the foreclosure of the mortgage,
the liability of ICP under the surety bond had already expired.
Respondent court, in finding for the validity of the foreclosure
sale, declared:
Now to the question of whether or not the
foreclosure by the ICP of the real estate
mortgage was in the exercise of a legal right,
We agree with the appellants that the
foreclosure proceedings instituted by the ICP
was in the exercise of a legal right. First, ICP
has in its favor the legal presumption that it
had indemnified Bormaheco by reason of
Slobec's default in the payment of its
obligation under the Sales Agreement,
especially because Bormaheco consented to
ICPs foreclosure of the mortgage. This
presumption is in consonance with pars. R and
Q Section 5, Rule 5, * New Rules of Court
which provides that it is disputably presumed
 56
that private transactions have been fair and
regular. likewise, it is disputably presumed
that the ordinary course of business has been
followed: Second, ICP had the right to proceed
at once to the foreclosure of the mortgage as
mandated by the provisions of Art. 2071 Civil
Code for these further reasons: Slobec, the
principal debtor, was admittedly insolvent;
Slobec's obligation becomes demandable by
reason of the expiration of the period of
payment; and its authorization to foreclose the
mortgage upon Slobec's default, which
resulted in the accrual of ICPS liability to
Bormaheco. Third, the Agreement of Counter-
Guaranty with Real Estate Mortgage (Exh. 1)
expressly grants to ICP the right to foreclose
the real estate mortgage in the event of 'non-
payment or non-liquidation of the entire
indebtedness or fraction thereof upon maturity
as stipulated in the contract'. This is a valid
and binding stipulation in the absence of
showing that it is contrary to law, morals, good
customs, public order or public policy. (Art.
1306, New Civil Code). 17
1. Petitioners asseverate that there was no notice of default issued
by Bormaheco to ICP which would have entitled Bormaheco to
demand payment from ICP under the suretyship contract.
Surety Bond No. B-1401 0 which was issued by ICP in favor of
Bormaheco, wherein ICP and Slobec undertook to guarantee the
payment of the balance of P180,000.00 payable in eighteen (18)
monthly installments on one unit of Model CAT D-7 Caterpillar
Crawler Tractor, pertinently provides in part as follows:
1. The liability of INSURANCE
CORPORATION OF THE PHILIPPINES,
under this BOND will expire Twelve (I 2)
months from date hereof. Furthermore, it is
hereby agreed and understood that the
INSURANCE CORPORATION OF THE
PHILIPPINES will not be liable for any claim
not presented in writing to the Corporation
within THIRTY (30) DAYS from the
expiration of this BOND, and that the obligee
hereby waives his right to bring claim or file
any action against Surety and after the
termination of one (1) year from the time his
cause of action accrues. 18
The surety bond was dated October 24, 1970. However,
an annotation on the upper part thereof states: "NOTE:
EFFECTIVITY DATE OF THIS BOND SHALL BE
ON JANUARY 22, 1971." 19
On the other hand, the Sales Agreement dated January 23, 1971
provides that the balance of P180,000.00 shall be payable in
eighteen (18) monthly installments. 20 The Promissory Note
executed by Slobec on even date in favor of Bormaheco further
provides that the obligation shall be payable on or before February
23, 1971 up to July 23, 1972, and that non-payment of any of the
installments when due shall make the entire obligation
immediately due and demandable. 21
It is basic that liability on a bond is contractual in nature and is
ordinarily restricted to the obligation expressly assumed therein.
We have repeatedly held that the extent of a surety's liability is
determined only by the clause of the contract of suretyship as well
as the conditions stated in the bond. It cannot be extended by
implication beyond the terms the contract. 22
Fundamental likewise is the rule that, except where required by the
provisions of the contract, a demand or notice of default is not
required to fix the surety's liability. 23 Hence, where the contract of
suretyship stipulates that notice of the principal's default be given
to the surety, generally the failure to comply with the condition
will prevent recovery from the surety. There are certain instances,
however, when failure to comply with the condition will not
extinguish the surety's liability, such as a failure to give notice of
slight defaults, which are waived by the obligee; or on mere
suspicion of possible default; or where, if a default exists, there is
excuse or provision in the suretyship contract exempting the surety
for liability therefor, or where the surety already has knowledge or
is chargeable with knowledge of the default. 24
In the case at bar, the suretyship contract expressly provides that
ICP shag not be liable for any claim not filed in writing within
thirty (30) days from the expiration of the bond. In its decision
dated May 25 1987, the court a quocategorically stated that '(n)o
evidence was presented to show that Bormaheco demanded
payment from ICP nor was there any action taken by Bormaheco
on the bond posted by ICP to guarantee the payment of plaintiffs
obligation. There is nothing in the records of the proceedings to
show that ICP indemnified Bormaheco for the failure of the
plaintiffs to pay their obligation. " 25 The failure, therefore, of
Bormaheco to notify ICP in writing about Slobec's supposed
default released ICP from liability under its surety bond.
Consequently, ICP could not validly foreclose that real estate
mortgage executed by petitioners in its favor since it never
incurred any liability under the surety bond. It cannot claim
exemption from the required written notice since its case does not
fall under any of the exceptions hereinbefore enumerated.
Furthermore, the allegation of ICP that it has paid Bormaheco is
not supported by any documentary evidence. Section 1, Rule 131
of the Rules of Court provides that the burden of evidence lies with
the party who asserts an affirmative allegation. Since ICP failed to
duly prove the fact of payment, the disputable presumption that
private transactions have been fair and regular, as erroneously
relied upon by respondent Court of Appeals, finds no application
to the case at bar.
2. The liability of a surety is measured by the terms of his contract,
and, while he is liable to the full extent thereof, such liability is
strictly limited to that assumed by its terms. 26 While ordinarily the
termination of a surety's liability is governed by the provisions of
the contract of suretyship, where the obligation of a surety is,
under the terms of the bond, to terminate at a specified time, his
obligation cannot be enlarged by an unauthorized extension
thereof. 27This is an exception to the general rule that the
obligation of the surety continues for the same period as that of the
principal debtor. 28
It is possible that the period of suretyship may be shorter than that
of the principal obligation, as where the principal debtor is
required to make payment by installments. 29 In the case at bar, the
surety bond issued by ICP was to expire on January 22, 1972,
twelve (1 2) months from its effectivity date, whereas Slobec's
installment payment was to end on July 23, 1972. Therefore, while
ICP guaranteed the payment by Slobec of the balance of
P180,000.00, such guaranty was valid only for and within twelve
(1 2) months from the date of effectivity of the surety bond, or
until January 22, 1972. Thereafter, from January 23, 1972 up to
July 23, 1972, the liability of Slobec became an unsecured
obligation. The default of Slobec during this period cannot be a
valid basis for the exercise of the right to foreclose by ICP since its
surety contract had already been terminated. Besides, the liability
of ICP was extinguished when Bormaheco failed to file a written
claim against it within thirty (30) days from the expiration of the
surety bond. Consequently, the foreclosure of the mortgage, after
the expiration of the surety bond under which ICP as surety has not
incurred any liability, should be declared null and void.
 57

3. Lastly, it has been held that where The guarantor holds property
of the principal as collateral surety for his personal indemnity, to
which he may resort only after payment by himself, until he has
paid something as such guarantor neither he nor the creditor can
resort to such collaterals. 30
The Agreement of Counter-Guaranty with Chattel/Real Estate
Mortgage states that it is being issued for and in consideration of
the obligations assumed by the Mortgagee-Surety Company under
the terms and conditions of ICP Bond No. 14010 in behalf of
Slobec Realty Development Corporation and in favor of
Bormaheco, Inc. 31 There is no doubt that said Agreement of
Counter-Guaranty is issued for the personal indemnity of ICP
Considering that the fact of payment by ICP has never been
established, it follows, pursuant to the doctrine above adverted to,
that ICP cannot foreclose on the subject properties,
IV. Private respondent PM Parts posits that it is a buyer in good
faith and, therefore, it acquired a valid title over the subject
properties. The submission is without merit and the conclusion is
specious
Corporation of the Philippines; (3) the sale by Insurance
Corporation of the Philippines in favor of Philippine Machinery
Parts Manufacturing Co., Inc. of the four (4) parcels of land
covered by the aforesaid certificates of title; and (4) Transfer
Certificates of Title Nos. T-24846, T-24847, T-24848 and T24849
subsequently issued by virtue of said sale in the name of the latter
corporation.
The Register of Deeds of Lucena City is hereby directed to cancel
Transfer Certificates of Title Nos. T-24846, T-24847, T24848 and
T-24849 in the name of Philippine Machinery Parts Manufacturing
Co., Inc. and to issue in lieu thereof the corresponding transfer
certificates of title in the name of herein petitioners, except
Santiago Rivera.
The foregoing dispositions are without prejudice to such other and
proper legal remedies as may be available to respondent
Bormaheco, Inc. against herein petitioners.
SO ORDERED.

We have stated earlier that the doctrine of piercing the veil of

corporate fiction is not applicable in this case. However, its
inapplicability has no bearing on the good faith or bad faith of
private respondent PM Parts. It must be noted that Modesto N.
Cervantes served as Vice-President of Bormaheco and, later, as
President of PM Parts. On this fact alone, it cannot be said that PM
Parts had no knowledge of the aforesaid several transactions
executed between Bormaheco and petitioners. In addition, Atty.
Martin de Guzman, who is the Executive Vice-President of
Bormaheco, was also the legal counsel of ICP and PM Parts. These
facts were admitted without qualification in the stipulation of facts
submitted by the parties before the trial court. Hence, the defense
of good faith may not be resorted to by private respondent PM
Parts which is charged with knowledge of the true relations
existing between Bormaheco, ICP and herein petitioners.
Accordingly, the transfer certificates of title issued in its name, as
well as the certificate of sale, must be declared null and void since
they cannot be considered altogether free of the taint of bad faith.

WHEREFORE, the decision of respondent Court of Appeals is

hereby REVERSED and SET ASIDE, and judgment is hereby
rendered declaring the following as null and void: (1) Certificate of
Sale, dated September 28,1973, executed by the Provincial Sheriff
of Quezon in favor of the Insurance Corporation of the
Philippines; (2) Transfer Certificates of Title Nos. T-23705, T-
23706, T-23707 and T-23708 issued in the name of the Insurance
 58
[G.R. Nos. 121662-64. July 6, 1999]
VLASON ENTERPRISES CORPORATION, petitioner, vs. C
OURT OF APPEALS and DURAPROOF SERVICE
S, represented by its GeneralManager, Cesar Urbino  to secure and repair the vessel at the agreed consideration of $1
Sr., respondents.
DECISION
PANGANIBAN, J.:
Summons to a domestic or resident corporation should be
served on officers, agents or employees, who are responsible
enough to warrant the presumption that they will transmit to the
corporation notice of the filing of the action against it. Rules on the
service of motions should be liberally construed in order to
promote the ends of substantial justice. A rigid application that
will result in the manifest injustice should be avoided. A default
judgment against several defendants cannot affect the rights of one
who was never declared in default. In any event, such judgment
cannot include an award not prayed for in the complaint, even if
proven ex parte.
The Case
These principles were used by this Court in resolving this
Petition for Review on Certiorari before us, assailing the July 19,
1993 Decision[1] and the August 15, 1995 Resolution, [2]both
promulgated by the Court of Appeals. The assailed Decision
disposed as follows:[3]
ACCORDINGLY, in view of the foregoing disquisitions, all the
three (3) consolidated petitions for certiorari are hereby
GRANTED.
THE assailed Order of respondent Judge Arsenio Gonong of the
Regional Trial Court of Manila, Branch 8, dated April 5, 1991, in
the first petition for certiorari (CA-G.R. SP No. 24669); the
assailed Order of Judge Bernardo Pardo, Executive Judge of the
Regional Trial Court of Manila, Branch 8, dated July 6, 1992, in
the second petition for certiorari (CA-G.R. SP No.28387); and
finally, the assailed order or Resolution en banc of the respondent
Court of Tax Appeals Judges Ernesto Acosta, Ramon de Veyra
and Manuel Gruba, under date of October 5, 1992, in the third
petition for certiorari (CA-G.R. SP No. 29317) are all hereby
NULLIFIED and SET ASIDE thereby giving way to
the entire decision dated February 18, 1991 of the respondent
Regional Trial Court of Manila, Branch 8, in Civil Case No. 89-
51451 which remains valid, final and executory, if not yet wholly
executed.
THE writ of preliminary injunction heretofore issued by this Court
on March 6, 1992 and reiterated on July 22, 1992 and this date
against the named respondents specified in the dispositive portion
of the judgment of the respondent Regional Trial Court of Manila,
Branch 8 in the first petition for certiorari, which
remains valid, existing and enforceable, is hereby MADE
PERMANENT without prejudice (1) to the [private respondents]
remaining unpaid obligations to the herein party-intervenor in
accordance with the Compromise Agreement or in connection with
the decision of the respondent lower court in CA-G.R. SP No.
24669 and (2) to the government, in relation to the forthcoming
decision of the respondent Court of Tax Appeals on the amount of
taxes, charges, assessments or obligations that are due, as totally
secured and fully guaranteed payment by the [private respondents]
bond, subject to the relevant rulings of the Department of Finance
and other prevailing laws and jurisprudence.
The assailed Resolution ruled:
ACCORDINGLY, in the light of the foregoing disquisitions, as
well as considering these clarifications, the three (3) motions
aforementioned are hereby DENIED.
The Facts
Poro Point Shipping Services, then acting as the local agent
of Omega Sea Transport Company of Honduras & Panama, a
Panamanian company, (hereafter referred to as Omega), requested
permission for its vessel M/V Star Ace, which had engine trouble,
to unload its cargo and to store it at the Philippine Ports Authority
(PPA) compound in San Fernando, La Union while awaiting
transhipment to Hongkong. The request was approved by the
Bureau of Customs.[4] Despite the approval, the customs personnel
boarded the vessel when it docked on January 7, 1989, on
suspicion that it was the hijacked M/V Silver Med owned by Med
Line Philippines Co., and that its cargo would be smuggled into
the country.[5] The district customs collector seized said vessel and
its cargo pursuant to Section 2301, Tariff and Customs Code. A
notice of hearing of SFLU Seizure Identification No. 3-89 was
served on its consignee, Singkong Trading Co. of Hongkong, and
its shipper, Dusit International Co., Ltd. of Thailand.
While seizure proceedings were ongoing, La Union was hit
by three typhoons, and the vessel ran aground and was
abandoned. On June 8, 1989, its authorized representative, Frank
Cadacio, entered into a salvage agreement with private respondent
million and fifty percent (50%) [of] the cargo after all expenses,
cost and taxes.[6]
Finding that no fraud was committed, the District Collector
of Customs, Aurelio M. Quiray, lifted the warrant of seizure on
July 16, 1989.[7] However, in a Second Indorsement dated
November 11, 1989, then Customs Commissioner Salvador M.
Mison declined to issue a clearance for Quirays Decision; instead,
he forfeited the vessel and its cargo in accordance with Section
2530 of the Tariff and Customs Code. [8] Accordingly, acting
District Collector of Customs John S. Sy issued a Decision
decreeing the forfeiture and the sale of the cargo in favor of the
government.[9]
To enforce its preferred salvors lien, herein Private
Respondent Duraproof Services filed with the Regional Trial Court
of Manila a Petition for Certiorari, Prohibition
and Mandamus[10] assailing the actions of Commissioner Mison
and District Collector Sy. Also impleaded as respondents were
PPA Representative Silverio Mangaoang and Med Line
Philippines, Inc.
On January 10, 1989, private respondent amended its
Petition[11] to include former District Collector Quiray; PPA Port
Manager Adolfo Ll. Amor Jr; Petitioner Vlason Enterprises as
represented by its president, Vicente Angliongto; Singkong
Trading Company as represented by Atty. Eddie Tamondong;
Banco Du Brasil; Dusit International Co., Inc.; Thai-Nan
Enterprises Ltd. and Thai-United Trading Co., Ltd. [12] In both
Petitions, private respondent plainly failed to include any
allegation pertaining to petitioner, or any prayer for relief against
it.
Summonses for the amended Petition were served on Atty.
Joseph Capuyan for Med Line Philippines: Angliongto (through
his secretary, Betty Bebero), Atty. Tamondong and Commissioner
Mison.[13] Upon motion of the private respondent, the trial court
allowed summons by publication to be served upon the alien
defendants who were not residents and had no direct
representatives in the country.[14]
 59
On January 29, 1990, private respondent moved to declare
respondents in default, but the trial court denied the motion in its
February 23, 1990 Order,[15] because Mangaoang and Amor had
jointly filed a Motion to Dismiss, while Mison and Med Line had
moved separately for an extension to file a similar motion. [16] Later
it rendered an Order dated July 2, 1990, giving due course to the
motions to dismiss filed by Mangaoang and Amor on the ground
of litis pendentia, and by the commissioner and district collector
of customs on the ground of lack of jurisdiction. [17] In another
Order, the trial court dismissed the action against Med Line
Philippines on the ground of litis pendentia.[18]
On two other occasions, private respondent again moved to
declare the following in default: petitioner, Quiray, Sy and Mison
on March 26, 1990;[19] and Banco Du Brazil, Dusit International
Co., Inc., Thai-Nan Enterprises Ltd. and Thai-United Trading Co.,
Ltd. on August 24, 1990.[20] There is no record, however, that the
trial court acted upon the motions. On September 18, 1990,
petitioner filed another Motion for leave to amend the petition,
[21]
 alleging that its counsel failed to include the following
necessary and/or indispensable parties:Omega represented by
Cadacio; and M/V Star Ace represented by Capt. Nahon Rada,
relief captain. Aside from impleading these additional respondents,
private respondent also alleged in the Second (actually, third)
Amended Petition[22] that the owners of the vessel intended to
transfer and alienate their rights and interests over the vessel and
its cargo, to the detriment of the private respondent.
The trial court granted leave to private respondent to amend
its Petition, but only to exclude the customs commissioner and the
district collector.[23] Instead, private respondent filed the Second
Amended Petition with Supplemental Petition against Singkong
Trading Company; and Omega and M/V Star Ace,[24] to which
Cadacio and Rada filed a Joint Answer.[25]
Declared in default in an Order issued by the trial court on
January 23, 1991, were the following: Singkong Trading Co.,
Commissioner Mison, M/V Star Ace and Omega.[26] Private
respondent filed, and the trial court granted, an ex parte Motion to
present evidence against the defaulting respondents. [27] Only
private respondent, Atty. Tamondong, Commissioner Mison,
Omega and M/V Star Ace appeared in the next pretrial hearing;
thus, the trial court declared the other respondents in default and
allowed private respondent to present evidence against them.
[28]
 Cesar Urbino, general manager of private respondent, testified
and adduced evidence against the other respondents, including
herein petitioner. As regards petitioner, he declared: Vlason
Enterprises represented by Atty. Sy and Vicente Angliongto thru
constant intimidation and harassment of utilizing the PPA
Management of San Fernando, La Union x x x further delayed, and
[private respondent] incurred heavy overhead expenses due to
direct and incidental expenses xxx causing irreparable damages of
about P3,000,000 worth of ship tackles, rigs, and appurtenances
including radar antennas and apparatuses, which were taken
surreptitiously by persons working for Vlason Enterprises or its
agents[.][29]
On December 29, 1990, private respondent and Rada,
representing Omega, entered into a Memorandum of Agreement
stipulating that Rada would write and notify Omega regarding the
demand for salvage fees of private respondent; and that if Rada did
not receive any instruction from his principal, he would assign the
vessel in favor of the salvor.[30]
On February 18, 1991, the trial court disposed as follows:
WHEREFORE, IN VIEW OF THE FOREGOING, based on the
allegations, prayer and evidence adduced, both testimonial and
documentary, the Court is convinced, that, indeed,
defendants/respondents are liable to [private respondent] in the
amount as prayed for in the petition for which it renders judgment
as follows:
1. Respondent M/V Star Ace, represented by Capt. Nahum Rada,
[r]elief [c]aptain of the vessel and Omega Sea Transport Company,
Inc., represented by Frank Cadacio[,] is ordered to refrain from
alienating or [transferring] the vessel M/V Star Ace to any third
parties;
2. Singkong Trading Company to pay the following:
a. Taxes due the government;
b. Salvage fees on the vessel in the amount of $1,000,000.00 based
on xxx Lloyds Standard Form of Salvage Agreement;
c. Preservation, securing and guarding fees on the vessel in the
amount of $225,000.00;
d. Maintenance fees in the amount of P2,685,000.00;
e. Salaries of the crew from August 16, 1989 to December 1989 in
the amount of $43,000.00 and unpaid salaries from January 1990
up to the present;
f. Attorneys fees in the amount of P656,000.00;
3. [Vlason] Enterprises to pay [private respondent] in the amount
of P3,000,000.00 for damages;
4. Banco [Du] Brazil to pay [private respondent] in the amount of
$300,000.00 in damages; and finally,
5. Costs of [s]uit.
Subsequently, upon the Motion of Omega, Singkong Trading
Co. and private respondent, the trial court approved a Compromise
Agreement[31] among the movants, reducing by 20 percent the
amounts adjudged. For their part, respondents-movants agreed not
to appeal the Decision.[32] On March 8, 1991, private respondent
moved for the execution of judgment, claiming that the trial court
Decision had already become final and executory. [33] The Motion
was granted[34] and a Writ of Execution was issued. [35] To satisfy
the Decision, Sheriffs Jorge Victorino, Amado Sevilla and
Dionisio Camagon were deputized on March 13, 1991 to levy and
to sell on execution the defendants vessel and personal property.
On March 14, 1991, petitioner filed, by special appearance, a
Motion for Reconsideration, on the grounds that it was allegedly
not impleaded as a defendant, served summons or declared in
default; that private respondent was not authorized to present
evidence against it in default; that the judgment in default was
fatally defective, because private respondent had not paid filing
fees for the award; and that private respondent had not prayed for
such award.[36] Private respondent opposed the Motion, arguing
that it was a mere scrap of paper due to its defective notice of
hearing.
On March 18, 1991, the Bureau of Customs also filed an ex
parte Motion to recall the execution, and to quash the notice of
levy and the sale on execution.[37] Despite this Motion, the auction
sale was conducted on March 21, 1991 by Sheriff Camagon, with
private respondent submitting the winning bid. [38] The trial court
ordered the deputy sheriffs to cease and desist from implementing
the Writ of Execution and from levying on the personal property of
the defendants.[39] Nevertheless, Sheriff Camagon issued the
corresponding Certificate of Sale on March 27, 1991.[40]
On April 12, 1991,[41] private respondent filed with the Court
of Appeals (CA) a Petition for Certiorari and Prohibition to nullify
the cease and desist orders of the trial court. [42]Respondent Court
issued on April 26, 1991 a Resolution which reads:[43]
 60
MEANWHILE, in order to preserve the status quo and so as not to
render the present petition moot and academic, a TEMPORARY
RESTRAINING ORDER is hereby ISSUED enjoining the
respondent Judge, the Honorable Arsenio M. Gonong, from
enforcing and/or implementing the Orders dated 22 March 1991
and 5 April 1991 which ordered respondent Sheriff to cease and
desist from implementing the writ of execution and the return
thereof, the quashing of the levy xxx on [the] execution [and sale]
of the properties levied upon and sold at public auction by the
Sheriff, for reason of grave abuse of discretion and in excess of
jurisdiction, until further orders from this Court.
WITHIN ten (10) days from notice hereof, respondents [petitioner
included] are also required to SHOW CAUSE why the prayer for a
writ of preliminary injunction should not be granted.
On May 8, 1991, petitioner received from Camagon a notice
to pay private respondent P3 million to satisfy the trial court
Decision. Not having any knowledge of the CA case to which it
was not impleaded, petitioner filed with the trial court a Motion to
Dismiss ex abutandi ad cautelam on the grounds that (1) the
Petition of private respondent stated no cause of action against it,
(2) the trial court had no jurisdiction over the case, and (3) litis
pendentia barred the suit.[44]
On May 10, 1991, Camagon levied on petitioners properties,
which were scheduled for auction later on May 16, 1991. Specific
descriptions of the properties are as follows:[45]
a) Motor Tugboat DEN DEN ex Emerson-I
Length: 35.67 ms. Breadth: 7.33 ms.
Depth: 3.15 ms. Gross Tons: 205.71
Net tons: 67.78 Official Number 213551
Material: Steel Class License: CWL
License No. 4424
b) Barge - FC99" ex YD-153
Length: 34.15 ms. Breadth: 15.85 m.s.
Depth: 2.77 m.s. Gross Tons: 491.70
Net Tons: 491.70 Official Number 227236
Material: Steel Class License: CWL
License No. 83-0012
c) Barge LAWIN ex Sea Lion 2
Length: 66.92 ms. Breadth: 11.28 ms.
Depth: 4.52 m.s. Gross Tons: 1,029.56
Net Tons: 1,027/43 Official Number 708069
Material: Steel Class License: Coastwise
License No. 81-0059
Petitioner also filed a special appearance before the CA. It
prayed for the lifting of the levy on its properties or, alternatively,
for a temporary restraining order against their auction until its
Motion for Reconsideration was resolved by the trial court. [46]
Acting on petitioners Motion for Reconsideration, the trial
court reversed its Decision of February 18, 1991, holding in its
May 22, 1991 Resolution as follows:[47]
xxx [T]hat xxx Motion For Reconsideration [of the petitioner] was
filed on March 14, 1991 (See: page 584, records, Vol.2)
indubitably showing that it was seasonably filed within the 15-day
time-frame. Therefore, xxx said default-judgment ha[d] not yet
become final and executory when the Writ of Execution was
issued on March 13, 1991 xxx The rules [provide] that [the
e]xecution shall issue as a matter of right upon the expiration of
the period of appeal from a judgment if no appeal has been duly
perfected (Sec. 1, R-39, RRC). That being the case, VEC has all
the right to file as it did xxx the aforementioned reconsideration
motion calling [the] attention of the Court and pointing therein its
supposed error and its correction if, indeed, any [error was]
committed. It is in this light that this Court made an in-depth
reflection and assessment of the premises or reasons raised by
[petitioner], and after a re-examination of the facts and evidence
spread on the records, it has come to the considered conclusion
that the questioned default-judgment has been improvidently
issued. By the records, the claim of [private respondent] that his
January 29, 1990 Ex-Parte Motion To Declare Defendants In
Default (pp. 174-177, records, Vol. 1) including VEC had been
granted is belied by the February 23, 1990 Order (pp. 214-215,
records, ibid) par. 2, thereof, reading to wit:
By the foregoing, for reasons stated thereunder respectively, this
Court, in the exercise of its judicious discretion, in the sense that
the rules should be liberally construed in order to promote their
object and to assist the parties, resolves to DENY petitioners
Motion to have the Commissioner of Customs AND OTHER
ENUMERATED RESPONDENTS DECLARED IN DEFAULT.
[Emphasis ours].
Not even [private respondents] November 23, 1990 Ex-Parte
Motion To Present [Evidence] Against Defaulting Defendants
(page 489, records, Vol.2) [can] be deemed as a remedy of the fact
that there never was issued an order of default against respondents
including [petitioner] VEC. Having thus established that there
[had] been no order of default against VEC as contemplated by
Sec. 1, Rule 18, in relation to Sec. 9, Rule 13, Revised Rules of
Court, there could not have been any valid default-judgment
rendered against it. The issuance of an order of default is a
condition sine qua non in order [that] a judgment by default be
clothed with validity. Further, records show that this Court never
had authorized [private respondent] to adduce evidence ex-parte
against [petitioner] VEC. In sum, the February 18, 1991 decision
by default is null and void as against [petitioner] VEC. With this
considered conclusion of nullity of said default judgment in
question, this Court feels there is no more need for it to resolve
Arguments I-A & I-B, as well as III-A & III-B, of the March 14,
1991 Motion for Reconsideration. The Court agrees, however,
with said discussions on the non-compliance [with] Sec. 2, Rule 7
(Title of Complaint) and Sec. I, Rule 8 on the requirement of
indicating in the complaint the ultimate facts on which the party
pleading relies for his claim of defense [--] which is absent in the
January 9, Amended Petition (pp. 122-141, records, Vol. I) [--] for
it merely mentioned [petitioner] VEC in par. 5 thereof and no
more. It abides, likewise, with [Argument] III-B that the Decision
in suit award[ed] amounts never asked for in instant petition as
regards VEC (Sec. 5, Rule 18, RRC). xxx.
WHEREFORE, in view of the foregoing consideration, and as
prayed for, the February 18, 1991 Judgment by Default is hereby
reconsidered and SET ASIDE.
On June 26, 1992, then Executive Judge Bernardo P.
Pardo[48] of the Regional Trial Court of Manila issued an
Order[49] annulling the Sheriffs Report/Return dated April 1, 1991,
and all proceedings taken by Camagon.
 61
The CA granted private respondents Motion to file a
Supplemental Petition impleading petitioner in CA-GR 24669.
[50]
 In view of the rampant pilferage of the cargo deposited at the
PPA compound, private respondent obtained from the appellate
court a Writ of Preliminary Injunction dated March 6, 1992. The
Writ reads:[51]
ACCORDINGLY, in view of the foregoing disquisitions, the
urgent verified motion for preliminary injunction dated February
11, 1992 is hereby GRANTED. Therefore, let a writ of preliminary
injunction forthwith issue against the respondents and all persons
or agents acting in their behalf, enjoining them not to interfere in
the transferring of the aforementioned vessel and its cargoes, or in
removing said cargoes xxx from [the] PPA compound.
On September 15, 1992, Sheriff Amado Sevilla seized
petitioners motor tugboat Den Den by virtue of the Order[52] dated
April 3, 1992, issued by the RTC of Manila, Branch 26.[53]
On August 6, 1992, the CA consolidated CA-GR SP No.
28387[54] with CA-GR SP No. 24669. [55] The Court of Tax Appeals
issued on October 5, 1992, a Resolution in CTA Case Nos. 4492,
4494 and 4500, which disposed as follows:
Confirming the order in open court on October 5, 1992, the Court
hereby RESOLVES to:
1. Order Respondent Commissioner of Customs to assign or detail
[a] sufficient number of customs police and guards aboard, and
around the vicinity of, the vessel M/V Star Ace now in anchor at
Mariveles, Bataan or elsewhere, in order to ensure its safety during
the pendency of these cases;
2. Direct him to assign personnel and/or representatives to conduct
an inventory of part of the vessels cargo now in the possession of
Mr. Cesar S. Urbino, Sr. at 197 Heroes del 96 Street, Caloocan
City, which inventory may be participated in by all the parties
interested in said cargo.
To enjoin the CTA from enforcing said Order, private
respondent filed before the Court of Appeals another Petition
for Certiorari,[56] which was later also consolidated with CA-GR
SP No. 24669.
On July 19, 1993, the CA rendered the assailed
Decision. Petitioner filed (1) a Motion for Clarification, praying
for a declaration that the trial court Decision against it was not
valid; and (2) a partial Motion for Reconsideration, seeking to set
aside the assailed Decision insofar as the latter affected it.
On July 5, 1995, the Court of Appeals issued the following
Resolution:[57]
Pending resolution of the motions for reconsideration, filed
by Vlason Enterprises Corporation and Banco [Du] Brazil, and
considering [private respondents] Motion for Entry of Judgment
with respect to respondent PPA having already been granted by
this Court as far back as June 17, 1994, pursuant to the resolution
of the Supreme Court dated December 8, 1993 in G.R. No.
111270-72 (Philippine Ports Authority vs. Court of Appeals, et al.)
informing the parties in said case that the judgment sought to be
reviewed has now become final and executory, the lower court
may now take appropriate action on the urgent ex-parte motion
for issuance of a writ of execution, filed by [private respondent] on
July 15, 1994.
On August 28, 1995, the Regional Trial Court of Manila,
Branch 26, issued a Writ of Possession which resulted in private
respondent taking possession of petitioners
barge Lawin(formerly Sea Lion 2) on September 1, 1995.[58]
Hence, this Petition.[59]
Ruling of the Respondent Court
As already adverted to, Respondent Court granted the
Petition for Certiorari of the private respondent, which was
consolidated with the latters two other Petitions. The court a
quoissued the following rulings:
1. The trial court had jurisdiction over the salvors
claim or admiralty case pursuant to Batas
Pambansa Bilang 129.
2. Since the Decision of the trial court became final
and executory, never having been disputed or
appealed to a higher court, the trial judge
committed grave abuse of discretion in recalling
the Writ of Execution and in quashing the levy and
the execution of the sale of M/V Star Ace and its
cargo.
2. Such acts constituted an alteration or a modification
of a final and executory judgment and could never
be justified under law and jurisprudence.
3. Civil Case 59-51451 dealt only with the salvors
claim without passing upon the legality or the
validity of the undated Decision of the
Commissioner of Customs in the seizure
proceeding.
4. Petitioner and his co-respondents could not invoke
the jurisdiction of a court to secure affirmative
relief against their opponent and, after failing to
obtain such relief, question the courts jurisdiction.
5. Petitioner had no recourse through any of the
following judicially accepted means to question
the final judgment:
a. a petition for relief from judgment under Rule 38,
b. a direct action to annul and enjoin the enforcement of the
questioned judgment, and
c. a collateral attack against the questioned judgment which
appears void on its face.
6. A court which has already acquired jurisdiction over
a case cannot be ousted by a coequal court;
the res in this casethe vessel and its cargowere
placed under the control of the trial court ahead of
the CTA.
7. The admiralty Decision had attained finality while
the issue of the validity of the seizure proceedings
was still under determination.
In the assailed Resolution, Respondent Court clarified that
there was no need to serve summons anew on petitioner, since it
had been served summons when the Second Amended Petition (the
third) was filed; and that petitioners Motion for Reconsideration
was defective and void, because it contained no notice of hearing
addressed to the counsel of private respondent in violation of Rule
16, Section 4 of the Rules of Court.
To this second motion, [private respondent] contends that there
was no need to serve summons anew to VEC when the second
 62
amended petition was filed impleading VEC, pursuant to the ruling
of the Supreme Court in Asiatic Travel Corp. vs. CA (164 SCRA
623); and that finally, the decision of the court a quo o[n] February
18, 1991 became final and executory, notwithstanding the timely
filing of the motion for reconsideration of VEC for the reason that
the said motion for reconsideration was defective or void, there
being no notice of hearing addressed to the counsel of
petitioner. In fact, no motion such as this instant one can be acted
upon by the Court without proof of service of the notice thereof,
pursuant to Rule 16, Section 4 of the Rules of Court.
x x x x x x x x x
Finally, we should never lose sight of the fact that the instant
petition for certiorari is proper only to correct errors of
jurisdiction committed by the lower court, or grave abuse of
discretion which is tantamount to lack of jurisdiction. Where the
error is not one of jurisdiction but an error of law or of fact which
is a mistake of judgment, appeal is the remedy (Salas vs. Castro,
216 SCRA 198). Here, respondents failed to appeal. Hence, the
decision dated February 18, 1991 of the lower court has long
become final, executory and unappealable. We do not and cannot
therefore review the instant case as if it were on appeal and direct
actions on these motions. While the proper remedy is appeal, the
action for certiorari will not be entertained.Indeed, certiorari is not
a substitute for lapsed appeal.
At any rate, the decision dated July 19, 1993 of this Court on the
main petition for certiorari is not yet final (except with respect to
respondent PPA), the Bureau of Customs having filed a petition
for certiorari and prohibition, under Rule 65 of the Rules of Court,
with the Supreme Court, necessitating prudence on Our part to
await its final verdict.[60]
Assignment of Errors
Before us, petitioner submits the following assignment of
errors on the part of Respondent Court:[61]
I The Court believes that the issues can be simplified and
The Court of Appeals committed serious error in ruling that the
entire decision of the trial court in Civil Case No. 89-51451 dated
18 February 1991 became final and executory because it was never
disputed or appealed.
A. VEC filed a motion for reconsideration of the said decision two
days before deadline, which motion was granted by the trial court.
B. The trial court correctly granted VECs motion for
reconsideration and set aside the 18 February 1991 decision xxx
against VEC, for:
1. The trial court never acquired jurisdiction over the person of
VEC as to enable it to render any judgment against it:
(i) VEC was not impleaded as a respondent in Civil Case No. 89-
51451;
(ii) Summons was not served on VEC;
2. The trial court improperly rendered judgment by default against
VEC;
(i) The trial court never issued an order of default against VEC;
(ii) The trial court never authorized ex-parte presentation of
evidence against VEC.
3. The Judgment by default was fatally defective because:
(i) No filing fee was paid by [private respondent] for the
staggering amount of damages awarded by the trial court.
(ii) The 18 February 1991 decision violates the Revised Rules of
Court, which prescribe that a judgment by default cannot decree a
relief not prayed for.
II
Since the 18 February 1991 Decision in Civil Case No. 89-51451
is void as against VEC, the recall of the writ of execution was
valid, as far as VEC is concerned.
restated as follows:
1. Has the February 18, 1991 RTC Decision become
final and executory in regard to petitioner?
2. Did the trial court acquire jurisdiction over the
petitioner?
3. Was the RTC default judgment binding on
petitioner?
4. Was the grant of damages against petitioner
procedurally proper?
5. Was private respondent entitled to a writ of
execution?
This Courts Ruling
The petition is meritorious.
First Issue: Finality of the RTC Decision
A judgment becomes final and executory by operation of
law. Its finality becomes a fact when the reglementary period to
appeal lapses, and no appeal is perfected within such period.
[62]
 The admiralty case filed by private respondent with the trial
court involved multiple defendants. This being the case, it
necessarily follows that the period of appeal of the February 18,
1991 RTC Decision depended on the date a copy of the judgment
was received by each of the defendants. Elsewise stated, each
defendant had a different period within which to appeal, depending
on the date of receipt of the Decision.[63]
Omega, Singkong Trading Co. and M/V Star Ace chose to
enter into a compromise agreement with private respondent. As to
these defendants, the trial court Decision had become final, and a
writ of execution could be issued against them. [64] Doctrinally, a
compromise agreement is immediately final and executory. [65]
Petitioner, however, is not in the same situation. Said
Decision cannot be said to have attained finality as to the
petitioner, which was not a party to the compromise. Moreover,
petitioner filed a timely Motion for Reconsideration with the trial
court, thirteen days after it received the Decision or two days
before the lapse of the reglementary period to appeal. A motion for
reconsideration tolls the running of the period to appeal. [66] Thus,
as to petitioner, the trial court Decision had not attained finality.
Exception to the Rule on Notice of Hearing
Respondent Court and private respondent argue that,
although timely filed, petitioners Motion for Reconsideration was
a mere scrap of paper, because (1) it did not contain a notice of
hearing addressed to the current counsel of private respondent,
 63
and (2) the notice of hearing addressed to and served on private
respondents deceased counsel was not sufficient. Admittedly, this
Motion contained a notice of hearing sent to Atty. Jesus C.
Concepcion who, according to private respondent, had already
died and had since been substituted by its new counsel, Atty.
Domingo Desierto. Therefore, the appellate court ruled that the
said Motion did not toll the reglementary period to appeal and that
the trial court Decision became final.
This Court disagrees. Rule 15 of the Rules of Court states:
SEC. 4. Notice.Notice of a motion shall be served by the applicant
to all parties concerned, at least three (3) days before the hearing
thereof, together with a copy of the motion, and of any affidavits
and other papers accompanying it. The court, however, for good
cause may hear a motion on shorter notice, specially on matters
which the court may dispose of on its own motion.
SEC. 5. Contents of notice.The notice shall be directed to the
parties concerned, and shall state the time and place for the hearing
of the motion. [67]
Ideally, the foregoing Rule requires the petitioner to address
and to serve on the counsel of private respondent the notice of
hearing of the Motion for Reconsideration. The case at bar,
however, is far from ideal. First, petitioner was not validly
summoned and it did not participate in the trial of the case in the
lower court; thus, it was understandable that petitioner would not
be familiar with the parties and their counsels. Second, Atty.
Desierto entered his appearance only as collaborating counsel,
[68]
 who is normally not entitled to notices even from this
Court. Third, private respondent made no manifestation on record
that Atty. Concepcion was already dead. Besides, it was Atty.
Concepcion who signed the Amended Petition, wherein petitioner
was first impleaded as respondent and served a copy
thereof. Naturally, petitioners attention was focused on this
pleading, and it was within its rights to assume that the signatory
to such pleading was the counsel for private respondent.
The Court has consistently held that a motion which does not
meet the requirements of Sections 4 and 5 of Rule 15 of the Rules
of Court is considered a worthless piece of paper, which the clerk
of court has no right to receive and the trial court has no authority
to act upon. Service of a copy of a motion containing a notice of
the time and the place of hearing of that motion is a mandatory
requirement, and the failure of movants to comply with these
requirements renders their motions fatally defective. [69] However,
there are exceptions to the strict application of this rule. These
exceptions are as follows:[70]
xxx Liberal construction of this rule has been allowed by this
Court in cases (1) where a rigid application will result in a
manifest failure or miscarriage of justice; [71] especially if a party
successfully shows that the alleged defect in the questioned final
and executory judgment is not apparent on its face or from the
recitals contained therein; (2) where the interest of substantial
justice will be served;[72] (3) where the resolution of the motion is
addressed solely to the sound and judicious discretion of the court;
[73]
 and (4) where the injustice to the adverse party is not
commensurate [to] the degree of his thoughtlessness in not
complying with the procedure prescribed.[74]
The present case falls under the first exception. Petitioner
was not informed of any cause of action or claim against it. All of
a sudden, the vessels which petitioner used in its salvaging
business were levied upon and sold in execution to satisfy a
supposed judgment against it. To allow this to happen simply
because of a lapse in fulfilling the notice requirement which, as
already said, was satisfactorily explained would be a manifest
failure or miscarriage of justice.
A notice of hearing is conceptualized as an integral
component of procedural due process intended to afford the
adverse parties a chance to be heard before a motion is resolved by
the court. Through such notice, the adverse party is permitted time
to study and answer the arguments in the motion.
Circumstances in the case at bar show that private
respondent was not denied procedural due process, and that the
very purpose of a notice of hearing had been served. On the day of
the hearing, Atty. Desierto did not object to the said Motion for
lack of notice to him; in fact, he was furnished in open court with a
copy of the motion and was granted by the trial court thirty days to
file his opposition to it. These circumstances clearly justify a
departure from the literal application of the notice of hearing rule.
[75]
 In other cases, after the trial court learns that a motion lacks
such notice, the prompt resetting of the hearing with due notice to
all the parties is held to have cured the defect. [76]
Verily, the notice requirement is not a ritual to be followed
blindly. Procedural due process is not based solely on a
mechanistic and literal application that renders any deviation
inexorably fatal. Instead, procedural rules are liberally construed to
promote their objective and to assist in obtaining a just, speedy and
inexpensive determination of any action and proceeding. [77] For the
foregoing reasons, we believe that Respondent Court committed
reversible error in holding that the Motion for Reconsideration was
a mere scrap of paper.
Second Issue: Jurisdiction Over Petitioner
Service of Summons on a Corporation
The sheriffs return shows that Angliongto who was president
of petitioner corporation, through his secretary Betty Bebero, was
served summons on January 18, 1990. [78] Petitioner claims that this
service was defective for two reasons: (1) Bebero was an employee
of Vlasons Shipping, Inc., which was an entity separate and
distinct from Petitioner Vlason Enterprises Corporation (VEC);
and (2) the return pertained to the service of summons for the
amended Petition, not for the Second Amended Petition with
Supplemental Petition, the latter pleading having superseded the
former.
A corporation may be served summons through its agents or
officers who under the Rules are designated to accept service of
process. A summons addressed to a corporation and served on the
secretary of its president binds that corporation. [79] This is based on
the rationale that service must be made on a representative so
integrated with the corporation sued, that it is safe to assume that
said representative had sufficient responsibility and discretion to
realize the importance of the legal papers served and to relay the
same to the president or other responsible officer of the
corporation being sued.[80] The secretary of the president satisfies
this criterion. This rule requires, however, that the secretary should
be an employee of the corporation sought to be summoned. Only
in this manner can there be an assurance that the secretary will
bring home to the corporation [the] notice of the filing of the
action against it.
In the present case, Bebero was the secretary of Angliongto,
who was president of both VSI and petitioner, but she was an
employee of VSI, not of petitioner. The piercing of the corporate
veil cannot be resorted to when serving summons. [81] Doctrinally, a
corporation is a legal entity distinct and separate from the members
and stockholders who compose it.However, when the corporate
fiction is used as a means of perpetrating a fraud, evading an
existing obligation, circumventing a statute, achieving or
perfecting a monopoly or, in generally perpetrating a crime, the
veil will be lifted to expose the individuals composing it. None of
the foregoing exceptions has been shown to exist in the present
case. Quite the contrary, the piercing of the corporate veil in this
 64
case will result in manifest injustice. This we cannot allow. Hence,
the corporate fiction remains.
Effect of Amendment of Pleadings on Jurisdiction
Petitioner claims that the trial court did not acquire
jurisdiction over it, because the former had not been served
summons anew for the Second Amended Petition or for the
Second Amended Petition with Supplemental Petition. In the
records, it appears that only Atty. Tamondong, counsel for
Singkong Trading, was furnished a copy of the Second Amended
Petition.[82] The corresponding sheriffs return indicates that only
Omega, M/V Star Ace and Capt. Rada were served summons and
copies of said Petition.[83]
We disagree. Although it is well-settled that an amended
pleading supersedes the original one, which is thus deemed
withdrawn and no longer considered part of the record, it does not
follow ipso facto that the service of a new summons for amended
petitions or complaints is required. Where the defendants have
already appeared before the trial court by virtue of a summons on
the original complaint, the amended complaint may be served upon
them without need of another summons, even if new causes of
action are alleged.[84] After it is acquired, a courts jurisdiction
continues until the case is finally terminated. Conversely, when
defendants have not yet appeared in court and no summons has
been validly served, new summons for the amended complaint
must be served on them. [85] It is not the change of cause of action
that gives rise to the need to serve another summons for the
amended complaint, but rather the acquisition of jurisdiction over
the persons of the defendants. If the trial court has not yet acquired
jurisdiction over them, a new service of summons for the amended
complaint is required.
In this case, the trial court obviously labored under the
erroneous impression that petitioner had already been placed under
its jurisdiction since it had been served summons through the
secretary of its president. Thus, it dispensed with the service on
petitioner of new summons for the subsequent amendments of the
Petition. We have already ruled, however, that the first service of
summons on petitioner was invalid. Therefore, the trial court never
acquired jurisdiction, and the said court should have required a
new service of summons for the amended Petitions.
Impleading a Party in the Title of the Complaint
Petitioner further claims that the trial court failed to acquire
jurisdiction to render judgment against it because (1) the title of
the three Petitions filed by private respondent never included
petitioner as a party-defendant, in violation of Rule 7; and (2) the
Petitions failed to state any allegation of ultimate facts constituting
a cause of action against petitioner.
We disagree with petitioner on the first ground. The judicial
attitude has always been favorable and liberal in allowing
amendments to pleadings. Pleadings shall be construed liberally so
as to render substantial justice to the parties and to determine
speedily and inexpensively the actual merits of the controversy
with the least regard to technicalities. [86]
The inclusion of the names of all the parties in the title of a
complaint is a formal requirement under Section 3, Rule
7. However, the rules of pleadings require courts to pierce the form
and go into the substance, and not to be misled by a false or wrong
name given to a pleading. The averments in the complaint, not the
title, are controlling. Although the general rule requires the
inclusion of the names of all the parties in the title of a complaint,
the non-inclusion of one or some of them is not fatal to the cause
of action of a plaintiff, provided there is a statement in the body of
the petition indicating that a defendant was made a party to such
action.
Private respondent claims that petitioner has always been
included in the caption of all the Petitions it filed, which included
Antonio Sy, field manager of petitioner. We checked and noted
that in the caption and the body of the Amended Petition and
Second Amended Petition with Supplemental Petition, Antonio Sy
was alleged to be representing Med Line Philippines, not
petitioner. Because it was private respondent who was responsible
for the errors, the Court cannot excuse it from compliance, for
such action will prejudice petitioner, who had no hand in the
preparation of these pleadings. In any event, we reiterate that, as a
general rule, mere failure to include the name of a party in the title
of a complaint is not fatal by itself.
Stating a Cause of Action in the Complaint
The general rule is allegata et probata -- a judgment must
conform to the pleadings and the theory of the action under which
the case was tried. [87] But a court may also rule and render
judgment on the basis of the evidence before it, even though the
relevant pleading has not been previously amended, so long as no
surprise or prejudice to the adverse party is thereby caused. [88]
In the case at bar, the liability of petitioner was based not on
any allegation in the four Petitions filed with the trial court, but on
the evidence presented ex parte by the private respondent. Since
the trial court had not validly acquired jurisdiction over the person
of petitioner, there was no way for the latter to have validly and
knowingly waived its objection to the private respondents
presentation of evidence against it.
Third Issue: Judgment By Default
The trial court Decision holding petitioner liable for damages
is basically a default judgment. In Section 18, judgment by default
is allowed under the following condition:[89]
SEC. 1. Judgment by default.If the defendant fails to answer within
the time specified in these rules, the court shall, upon motion of the
plaintiff and proof of such failure, declare the defendant in
default. Thereupon the court shall proceed to receive the plaintiffs
evidence and render judgment granting him such relief as the
complaint and the facts proven may warrant.xxxx.
Thus, it becomes crucial to determine whether petitioner was ever
declared in default, and whether the reception of evidence ex
parte against it was procedurally valid.
Petitioner Was Never Declared In Default
Petitioner insists that the trial court never declared it in
default.
We agree. The trial court denied the January 29, 1990
Motion of private respondent to declare all the defendants in
default, but it never acted on the latters subsequent Motion to
declare petitioner likewise. During the pretrial on January 23,
1993, the RTC declared in default only Atty. Eddie Tamondong, as
well as the other defendants Hon. Salvador Mison, M/V Star Ace,
Omega Sea Transport Co., Inc. of Panama and Sinkong Trading
Co., [but] despite xxx due notice to them, [they] failed to appear.
[90]
 Even private respondent cannot pinpoint which trial court order
held petitioner in default.
More important, the trial court, in its Resolution dated May
22, 1991, admitted that it never declared petitioner in default, viz.:
xxx It is in this light that this [c]ourt made an in-depth reflection
and assessment of the premises or reasons raised by [petitioner]
VEC[;] and after a re-examination of the facts and evidence spread
on the records, it has come to the considered conclusion that the
questioned default-judgment has been improvidently
 65
issued. [Based on] the records, the claim of [private respondent]
that [its] January 29, 1990 Ex-Parte Motion to Declare Defendants
In Default (pp. 174-177, records, Vol. 1) including VEC had been
granted is belied by the February 23, 1990 Order (pp. 214-215,
records, ibid) par. 2, thereof, xxx
x x x x x x x x x
Not even petitioners November 23, 1990 Ex-Parte Motion To
Present Evidence Against Defaulting Defendants (page 489,
records, Vol. 2) [can] be deemed as a remedy [for] the fact that
there never was issued an order of default against respondents
including [petitioner] VEC. Having thus established that there
ha[d] been no order of default against VEC as contemplated by
Sec. 1, Rule 18, in relation to Sec. 9, Rule 13, Revised Rules of
Court, there could not have been any valid default-judgment
rendered against it. The issuance of an order [o]f default is a
condition sine qua non in order [that] a judgment by default be
clothed with validity. Further, records show that this [c]ourt never
had authorized [private respondent] to adduce evidence ex-parte
against [Petitioner] VEC. In sum, the February 18, 1991 decision
by default is null and void as against [Petitioner] VEC. xxxx.
The aforementioned default judgment refers to the February
18, 1989 Decision, not to the Order finding petitioner in default as
contended by private respondent. Furthermore, it is a legal
impossibility to declare a party-defendant to be in default before it
was validly served summons.
Trial Court Did Not Allow Presentation of Evidence Ex Parte Against Petitioner
The Order of December 10, 1990, which allowed the
presentation of evidence ex parte against the defaulting
defendants, could not have included petitioner, because the trial
court granted private respondents motion praying for the
declaration of only the foreign defendants in default. So too,
private respondents ex parte Motion to present evidence referred to
the foreign defendants only.[91]
Furthermore, the reception of evidence ex parte against a
non-defaulting party is procedurally indefensible. Without a
declaration that petitioner is in default as required in Section 1,
Rule 18, the trial court had no authority to order the presentation of
evidence ex parte against petitioner to render judgment against it
by default. The trial judge must have thought that since it failed to
appear despite summons and was in default, it effectively waived
any objection to the presentation of evidence against it. This rule,
however, would have applied only if petitioner had submitted itself
to the jurisdiction of the trial court. The latter correctly declared, in
the Resolution just cited, that the default judgment against the
former had been improvidently rendered.
Fourth Issue: Awards Not Paid and Prayed For
Additional Filing Fees as Lien on the Judgment
Had the trial court validly acquired jurisdiction over
petitioner, nonpayment of docket fees would not have prevented it
from holding petitioner liable for damages. The Court,
in Manchester Development Corporation v. Court of Appeals,
[92]
 ruled that a court acquires jurisdiction over any case only upon
the payment of the prescribed docket fee, not upon the amendment
of the complaint or the payment of the docket fees based on the
amount sought in the amended pleading. This ruling, however, was
modified in Sun Insurance Office, Ltd. v. Asuncion,[93] which
added:
3. Where the trial court acquires jurisdiction over a claim [through]
the filing of the appropriate pleading and payment of the
prescribed filing fee but, subsequently, the judgment awards a
claim not specified in the pleading, or if specified the same has
been left for determination by the court, the additional filing fee
therefor shall constitute a lien on the judgment. It shall be the
responsibility of the Clerk of Court or his duly authorized deputy
to enforce said lien and assess and collect the additional fee.
Filing fees for damages and awards that cannot be estimated
constitute liens on the awards finally granted by the trial
court. Their nonpayment alone is not a ground for the invalidation
of the award.
Judgment by Default Cannot Grant Relief Not Prayed For
A declaration or order of default is issued as a punishment
for unnecessary delay in joining issues. In such event, defendants
lose their standing in court, they cannot expect the trial court to act
upon their pleadings, and they are not entitled to notice of the
proceeding until the final termination of the case. [94] Thus, the trial
court proceeds with the reception of the plaintiffs evidence upon
which a default judgment is rendered.
Section 1 of Rule 18 provides that after the defendant has
been declared in default, the court shall proceed to receive the
plaintiffs evidence and render judgment granting him such relief as
the complaint and the facts proven may warrant. The reliefs that
may be granted, however, are restricted by Section 5, which
provides that a judgment entered against a party in default shall not
exceed the amount or be different in kind from that prayed for.
In other words, under Section 1, a declaration of default is
not an admission of the truth or the validity of the plaintiffs claims.
[95]
 The claimant must still prove his claim and present evidence. In
this sense the law gives defaulting parties some measure of
protection because plaintiffs, despite the default of defendants, are
still required to substantiate their allegations in the complaint. The
judgment of default against defendants who have not appeared or
filed their answers does not imply a waiver of all their rights,
except their right to be heard and to present evidence in their
favor. Their failure to answer does not imply their admission of the
facts and the causes of action of the plaintiffs, because the latter
are required to adduce evidence to support their allegations.
Moreover, the trial court is not allowed by the Rules to
receive evidence that tends to show a relief not sought or specified
in the pleadings.[96] The plaintiff cannot be granted an award
greater than or different in kind from that specified in the
complaint.[97]
This case should be distinguished, however, from that of
defendants, who filed an answer but were absent during trial. In
that case, they can be held liable for an amount greater than or
different from that originally prayed for, provided that the award is
warranted by the proven facts. This rule is premised on the theory
that the adverse party failed to object to evidence relating to an
issue not raised in the pleadings.
The latter rule, however, is not applicable to the instant
case. Admittedly, private respondent presented evidence that
would have been sufficient to hold petitioner liable for
damages.However, it did not include in its amended Petitions any
prayer for damages against petitioner. Therefore, the trial court
could not have validly held the latter liable for damages even if it
were in default.
Fifth Issue: Execution of Final Judgment
Section 1 of Rule 39 provides that execution shall issue only
upon a judgment that finally disposes of the action or
proceeding. Such execution shall issue as a matter of right upon
the expiration of the period to appeal it, if no appeal has been duly
perfected.[98]
 66

In the present case, however, we have already shown that the

trial courts Decision has not become final and executory against
petitioner. In fact, the judgment does not even bind it.Obviously,
Respondent Court committed serious reversible errors when it
allowed the execution of the said judgment against petitioner.

WHEREFORE, the appeal is hereby GRANTED, and the

assailed Decision and Resolution of the Court of Appeals
are REVERSED and SET ASIDE insofar as they affect
petitioner.The levy and the sale on execution of petitioners
properties are declared NULL and VOID. Said properties are
ordered RESTORED to petitioner. No pronouncement as to cost.

SO ORDERED.
 67
G.R. No. L-2598             June 29, 1950
C. ARNOLD HALL and BRADLEY P. HALL, petitioners,  right to exercise corporate powers shall not be inquired
vs.
EDMUNDO S. PICCIO, Judge of the Court of First Instance
of Leyte, FRED BROWN, EMMA BROWN, HIPOLITA
CAPUCIONG, in his capacity as receiver of the Far Eastern
Lumber and Commercial Co., Inc.,respondents.
Claro M. Recto for petitioners.
Ramon Diokno and Jose W. Diokno for respondents.
BENGZON, J.:
This is petition to set aside all the proceedings had in civil case No.
381 of the Court of First Instance of Leyte and to enjoin the
respondent judge from further acting upon the same.
Facts: (1) 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 article of incorporation of the Far
Eastern Lumber and Commercial Co., Inc., organized to engage in
a general lumber business to carry on as general contractors,
operators and managers, etc. Attached to the article was an
affidavit of the treasurer stating that 23,428 shares of stock had
been subscribed and fully paid with certain properties transferred
to the corporation described in a list appended thereto.
(2) 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.
(3) On December 2, 1947, the said articles of incorporation were
filed in the office of the Securities and Exchange Commissioner,
for the issuance of the corresponding certificate of incorporation.
(4) On March 22, 1948, pending action on the articles of
incorporation by the aforesaid governmental office, the
respondents Fred Brown, Emma Brown, Hipolita D. Chapman and
Ceferino S. Abella filed before the Court of First Instance of Leyte
the civil case numbered 381, entitled "Fred Brown et al. vs. Arnold
C. Hall et al.", 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.
(5) 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 sufficiently of the cause of action.
(6) After hearing the parties, the Hon. Edmund S. Piccio ordered
the dissolution of the company; and at the request of plaintiffs,
appointed of the properties thereof, upon the filing of a P20,000
bond.
(7) 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.
Whereupon, the present special civil action was instituted in this
court. It is based upon two main propositions, to wit:
(a) The court had no jurisdiction in civil case No. 381 to decree the
dissolution of the company, because it being a de
facto corporation, dissolution thereof may only be ordered in a quo
warranto proceeding instituted in accordance with section 19 of
the Corporation Law.
(b) Inasmuch as respondents Fred Brown and Emma Brown had
signed the article of incorporation but only a partnership.
Discussion: The second proposition may at once be dismissed. All
the parties are informed that the Securities and Exchange
Commission has not, so far, issued the corresponding certificate of
incorporation. All of them know, or sought to know, that the
personality of a corporation begins to exist only from the moment
such certificate is issued — not before (sec. 11, Corporation Law).
The complaining associates have not represented to the others that
they were incorporated any more than the latter had made similar
representations to them. And as nobody was led to believe
anything to his prejudice and damage, the principle of estoppel
does not apply. Obviously this is not an instance requiring the
enforcement of contracts with the corporation through the rule of
estoppel.
The first proposition above stated is premised on the theory that,
inasmuch as the Far Eastern Lumber and Commercial Co., is a  de
facto corporation, section 19 of the Corporation Law applies, and
therefore the court had not jurisdiction to take cognizance of said
civil case number 381. Section 19 reads as follows:
. . . The due incorporation of any corporations claiming
in good faith to be a corporation under this Act and its
into collaterally in any private suit to which the
corporation may be a party, but such inquiry may be had
at the suit of the Insular Government on information of
the Attorney-General.
There are least two reasons why this section does not govern the
situation. Not having obtained the certificate of incorporation, the
Far Eastern Lumber and Commercial Co. — even its stockholders
— may not probably claim "in good faith" to be a corporation.
Under our statue it is to be noted (Corporation Law, sec.
11) 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 if
collateral attack is granted to corporations "claiming in
good faith to be a corporation under this act." Such a
claim is compatible with the existence of errors and
irregularities; but not with a total or substantial disregard
of the law. Unless there has been an evident attempt to
comply with the law the claim to be a corporation "under
this act" could not be made "in good faith." (Fisher on
the Philippine Law of Stock Corporations, p. 75. See
also Humphreys vs. Drew, 59 Fla., 295; 52 So., 362.)
Second, this is not a suit in which the corporation is a party. This
is a litigation between stockholders of the alleged corporation, for
the purpose of obtaining its dissolution. Even the existence of a de
jure corporation may be terminated in a private suit for its
dissolution between stockholders, without the intervention of the
state.
There might be room for argument on the right of minority
stockholders to sue for dissolution;1 but that question does not
affect the court's jurisdiction, and is a matter for decision by the
judge, subject to review on appeal. Whkch brings us to one
principal reason why this petition may not prosper, namely: the
petitioners have their remedy by appealing the order of dissolution
at the proper time.
There is a secondary issue in connection with the appointment of a
receiver. But it must be admitted that receivership is proper in
proceedings for dissolution of a company or corporation, and it
was no error to reject the counter-bond, the court having declared
the dissolution. As to the amount of the bond to be demanded of
 68

the receiver, much depends upon the discretion of the trial court,
which in this instance we do not believe has been clearly abused.

Judgment: The petition will, therefore, be dismissed, with costs.

The preliminary injunction heretofore issued will be dissolved.
 69
[G.R. No. 119002. October 19, 2000]
INTERNATIONAL EXPRESS TRAVEL & TOUR
SERVICES, INC., petitioner, vs. HON. COURT OF
APPEALS, HENRI KAHN, PHILIPPINE
FOOTBALL FEDERATION, respondents.
DECISION
KAPUNAN, J.:
On June 30 1989, petitioner International Express Travel and
Tour Services, Inc., through its managing director, wrote a letter to
the Philippine Football Federation (Federation), through its
president private respondent Henri Kahn, wherein the former
offered its services as a travel agency to the latter. [1] The offer was
accepted.
Petitioner secured the airline tickets for the trips of the
athletes and officials of the Federation to the South East Asian
Games in Kuala Lumpur as well as various other trips to the
People's Republic of China and Brisbane. The total cost of the
tickets amounted to P449,654.83. For the tickets received, the
Federation made two partial payments, both in September of 1989,
in the total amount of P176,467.50.[2]
On 4 October 1989, petitioner wrote the Federation, through
the private respondent a demand letter requesting for the amount of
P265,894.33.[3] On 30 October 1989, the Federation, through the
Project Gintong Alay, paid the amount of P31,603.00.[4]
On 27 December 1989, Henri Kahn issued a personal check
in the amount of P50,000 as partial payment for the outstanding
balance of the Federation.[5] Thereafter, no further payments were
made despite repeated demands.
This prompted petitioner to file a civil case before the
Regional Trial Court of Manila. Petitioner sued Henri Kahn in his
personal capacity and as President of the Federation and impleaded
the Federation as an alternative defendant. Petitioner sought to
hold Henri Kahn liable for the unpaid balance for the tickets
purchased by the Federation on the ground that Henri Kahn
allegedly guaranteed the said obligation.[6]
Henri Kahn filed his answer with counterclaim. While not
denying the allegation that the Federation owed the amount
P207,524.20, representing the unpaid balance for the plane tickets,
he averred that the petitioner has no cause of action against him
either in his personal capacity or in his official capacity as
president of the Federation.He maintained that he did not
guarantee payment but merely acted as an agent of the Federation
which has a separate and distinct juridical personality. [7]
On the other hand, the Federation failed to file its answer,
hence, was declared in default by the trial court. [8]
In due course, the trial court rendered judgment and ruled in
favor of the petitioner and declared Henri Kahn personally liable
for the unpaid obligation of the Federation. In arriving at the said
ruling, the trial court rationalized:
Defendant Henri Kahn would have been correct in his contentions
had it been duly established that defendant Federation is a
corporation. The trouble, however, is that neither the plaintiff nor
the defendant Henri Kahn has adduced any evidence proving the
corporate existence of the defendant Federation. In paragraph 2 of
its complaint, plaintiff asserted that "Defendant Philippine Football
Federation is a sports association xxx." This has not been denied
by defendant Henri Kahn in his Answer. Being the President of
defendant Federation, its corporate existence is within the personal
knowledge of defendant Henri Kahn. He could have easily denied
specifically the assertion of the plaintiff that it is a mere sports
association, if it were a domestic corporation. But he did not.
xxx
A voluntary unincorporated association, like defendant Federation
has no power to enter into, or to ratify, a contract. The contract
entered into by its officers or agents on behalf of such association
is not binding on, or enforceable against it. The officers or agents
are themselves personally liable.
x x x[9]
The dispositive portion of the trial court's decision reads:
WHEREFORE, judgment is rendered ordering defendant Henri
Kahn to pay the plaintiff the principal sum of P207,524.20, plus
the interest thereon at the legal rate computed from July 5, 1990,
the date the complaint was filed, until the principal obligation is
fully liquidated; and another sum of P15,000.00 for attorney's fees.
The complaint of the plaintiff against the Philippine Football
Federation and the counterclaims of the defendant Henri Kahn are
hereby dismissed.
With the costs against defendant Henri Kahn.[10]
Only Henri Kahn elevated the above decision to the Court of
Appeals. On 21 December 1994, the respondent court rendered a
decision reversing the trial court, the decretal portion of said
decision reads:
WHEREFORE, premises considered, the judgment appealed from
is hereby REVERSED and SET ASIDE and another one is
rendered dismissing the complaint against defendant Henri S.
Kahn.[11]
In finding for Henri Kahn, the Court of Appeals recognized
the juridical existence of the Federation. It rationalized that since
petitioner failed to prove that Henri Kahn guaranteed the
obligation of the Federation, he should not be held liable for the
same as said entity has a separate and distinct personality from its
officers.
Petitioner filed a motion for reconsideration and as an
alternative prayer pleaded that the Federation be held liable for the
unpaid obligation. The same was denied by the appellate court in
its resolution of 8 February 1995, where it stated that:
As to the alternative prayer for the Modification of the Decision by
expressly declaring in the dispositive portion thereof the Philippine
Football Federation (PFF) as liable for the unpaid obligation, it
should be remembered that the trial court dismissed the complaint
against the Philippine Football Federation, and the plaintiff did not
appeal from this decision. Hence, the Philippine Football
Federation is not a party to this appeal and consequently, no
judgment may be pronounced by this Court against the PFF
without violating the due process clause, let alone the fact that the
judgment dismissing the complaint against it, had already become
final by virtue of the plaintiff's failure to appeal therefrom. The
alternative prayer is therefore similarly DENIED. [12]
Petitioner now seeks recourse to this Court and alleges that
the respondent court committed the following assigned errors: [13]
A. THE HONORABLE COURT OF APPEALS
ERRED IN HOLDING THAT PETITIONER
 70

HAD DEALT WITH THE PHILIPPINE 2. To raise funds by donations, benefits, and other means for their The above powers and functions granted to national sports
FOOTBALL FEDERATION (PFF) AS A purposes. associations clearly indicate that these entities may acquire a
CORPORATE ENTITY AND IN NOT juridical personality. The power to purchase, sell, lease and
HOLDING THAT PRIVATE RESPONDENT 3. To purchase, sell, lease or otherwise encumber property both encumber property are acts which may only be done by persons,
HENRI KAHN WAS THE ONE WHO real and personal, for the accomplishment of their purpose; whether natural or artificial, with juridical capacity. However,
REPRESENTED THE PFF AS HAVING A while we agree with the appellate court that national sports
CORPORATE PERSONALITY. 4. To affiliate with international or regional sports' Associations associations may be accorded corporate status, such does not
after due consultation with the executive committee; automatically take place by the mere passage of these laws.
B. THE HONORABLE COURT OF APPEALS
ERRED IN NOT HOLDING PRIVATE xxx It is a basic postulate that before a corporation may acquire
RESPONDENT HENRI KAHN PERSONALLY juridical personality, the State must give its consent either in the
LIABLE FOR THE OBLIGATION OF THE form of a special law or a general enabling act. We cannot agree
13. To perform such other acts as may be necessary for the proper
UNINCORPORATED PFF, HAVING with the view of the appellate court and the private respondent that
accomplishment of their purposes and not inconsistent with this
NEGOTIATED WITH PETITIONER AND the Philippine Football Federation came into existence upon the
Act.
CONTRACTED THE OBLIGATION IN passage of these laws. Nowhere can it be found in R.A. 3135 or
BEHALF OF THE PFF, MADE A PARTIAL P.D. 604 any provision creating the Philippine Football
PAYMENT AND ASSURED PETITIONER OF Section 8 of P.D. 604, grants similar functions to these sports Federation. These laws merely recognized the existence of national
FULLY SETTLING THE OBLIGATION. associations: sports associations and provided the manner by which these
entities may acquire juridical personality. Section 11 of R.A. 3135
C. ASSUMING ARGUENDO THAT PRIVATE SEC. 8. Functions, Powers, and Duties of National Sports provides:
RESPONDENT KAHN IS NOT PERSONALLY Association. - The National sports associations shall have the
LIABLE, THE HONORABLE COURT OF following functions, powers, and duties: SEC. 11. National Sports' Association; organization and
APPEALS ERRED IN NOT EXPRESSLY recognition. - A National Association shall be organized for each
DECLARING IN ITS DECISION THAT THE 1. Adopt a Constitution and By-Laws for their internal individual sports in the Philippines in the manner hereinafter
PFF IS SOLELY LIABLE FOR THE organization and government which shall be submitted to the provided to constitute the Philippine Amateur Athletic Federation.
OBLIGATION. Department and any amendment thereto shall take effect upon Applications for recognition as a National Sports' Association shall
approval by the Department: Provided, however, That no team, be filed with the executive committee together with, among others,
The resolution of the case at bar hinges on the determination school, club, organization, or entity shall be admitted as a voting a copy of the constitution and by-laws and a list of the members of
of the existence of the Philippine Football Federation as a juridical member of an association unless 60 per cent of the athletes the proposed association, and a filing fee of ten pesos.
person. In the assailed decision, the appellate court recognized the composing said team, school, club, organization, or entity are
existence of the Federation. In support of this, the CA cited Filipino citizens; The Executive Committee shall give the recognition applied for if
Republic Act 3135, otherwise known as the Revised Charter of the it is satisfied that said association will promote the purposes of this
Philippine Amateur Athletic Federation, and Presidential Decree 2. Raise funds by donations, benefits, and other means for their Act and particularly section three thereof. No application shall be
No. 604 as the laws from which said Federation derives its purpose subject to the approval of the Department; held pending for more than three months after the filing thereof
existence. without any action having been taken thereon by the executive
3. Purchase, sell, lease, or otherwise encumber property, both real committee. Should the application be rejected, the reasons for such
As correctly observed by the appellate court, both R.A. 3135 and personal, for the accomplishment of their purpose; rejection shall be clearly stated in a written communication to the
and P.D. No. 604 recognized the juridical existence of national applicant. Failure to specify the reasons for the rejection shall not
sports associations. This may be gleaned from the powers and 4. Conduct local, interport, and international competitions, other affect the application which shall be considered as unacted
functions granted to these associations. Section 14 of R.A. 3135 than the Olympic and Asian Games, for the promotion of their upon: Provided, however, That until the executive committee
provides: sport; herein provided shall have been formed, applications for
recognition shall be passed upon by the duly elected members of
SEC. 14. Functions, powers and duties of Associations. - The 5. Affiliate with international or regional sports associations after the present executive committee of the Philippine Amateur
National Sports' Association shall have the following functions, due consultation with the Department; Athletic Federation. The said executive committee shall be
powers and duties: dissolved upon the organization of the executive committee herein
provided: Provided, further, That the functioning executive
xxx
committee is charged with the responsibility of seeing to it that the
1. To adopt a constitution and by-laws for their internal
organization and government; 13. Perform such other functions as may be provided by law.
 71

National Sports' Associations are formed and organized within six
months from and after the passage of this Act.
Section 7 of P.D. 604, similarly provides:
SEC. 7. National Sports Associations. - Application for
accreditation or recognition as a national sports association for
each individual sport in the Philippines shall be filed with the
Department together with, among others, a copy of the
Constitution and By-Laws and a list of the members of the
proposed association.
The Department shall give the recognition applied for if it is
satisfied that the national sports association to be organized will
promote the objectives of this Decree and has substantially
complied with the rules and regulations of the
Department: Provided, That the Department may withdraw
accreditation or recognition for violation of this Decree and such
rules and regulations formulated by it.
The Department shall supervise the national sports
association: Provided, That the latter shall have exclusive
technical control over the development and promotion of the
particular sport for which they are organized.
entered into or for other acts performed as such agent. [14] As
president of the Federation, Henri Kahn is presumed to have
known about the corporate existence or non-existence of the
Federation. We cannot subscribe to the position taken by the
appellate court that even assuming that the Federation was
defectively incorporated, the petitioner cannot deny the corporate
existence of the Federation because it had contracted and dealt
with the Federation in such a manner as to recognize and in effect
admit its existence. [15] The doctrine of corporation by estoppel is
mistakenly applied by the respondent court to the petitioner. The
application of the doctrine 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. [16] In the case
at bar, the petitioner is not trying to escape liability from the
contract but rather is the one claiming from the contract.
WHEREFORE, the decision appealed from is
REVERSED and SET ASIDE. The decision of the Regional Trial
Court of Manila, Branch 35, in Civil Case No. 90-53595 is hereby
REINSTATED.
SO ORDERED.

Clearly the above cited provisions require that before an

entity may be considered as a national sports association, such
entity must be recognized by the accrediting organization, the
Philippine Amateur Athletic Federation under R.A. 3135, and the
Department of Youth and Sports Development under P.D.
604. This fact of recognition, however, Henri Kahn failed to
substantiate. In attempting to prove the juridical existence of the
Federation, Henri Kahn attached to his motion for reconsideration
before the trial court a copy of the constitution and by-laws of the
Philippine Football Federation. Unfortunately, the same does not
prove that said Federation has indeed been recognized and
accredited by either the Philippine Amateur Athletic Federation or
the Department of Youth and Sports Development. Accordingly,
we rule that the Philippine Football Federation is not a national
sports association within the purview of the aforementioned laws
and does not have corporate existence of its own.

Thus being said, it follows that private respondent Henry

Kahn should be held liable for the unpaid obligations of the
unincorporated Philippine Football Federation. It is a settled
principal in corporation law that any person acting or purporting to
act on behalf of a corporation which has no valid existence
assumes such privileges and becomes personally liable for contract
 72
[G.R. No. 119002. October 19, 2000]
INTERNATIONAL EXPRESS TRAVEL & TOUR
SERVICES, INC., petitioner, vs. HON. COURT OF
APPEALS, HENRI KAHN, PHILIPPINE
FOOTBALL FEDERATION, respondents.
DECISION
KAPUNAN, J.:
On June 30 1989, petitioner International Express Travel and
Tour Services, Inc., through its managing director, wrote a letter to
the Philippine Football Federation (Federation), through its
president private respondent Henri Kahn, wherein the former
offered its services as a travel agency to the latter. [1] The offer was
accepted.
Petitioner secured the airline tickets for the trips of the
athletes and officials of the Federation to the South East Asian
Games in Kuala Lumpur as well as various other trips to the
People's Republic of China and Brisbane. The total cost of the
tickets amounted to P449,654.83. For the tickets received, the
Federation made two partial payments, both in September of 1989,
in the total amount of P176,467.50.[2]
On 4 October 1989, petitioner wrote the Federation, through
the private respondent a demand letter requesting for the amount of
P265,894.33.[3] On 30 October 1989, the Federation, through the
Project Gintong Alay, paid the amount of P31,603.00.[4]
On 27 December 1989, Henri Kahn issued a personal check
in the amount of P50,000 as partial payment for the outstanding
balance of the Federation.[5] Thereafter, no further payments were
made despite repeated demands.
This prompted petitioner to file a civil case before the
Regional Trial Court of Manila. Petitioner sued Henri Kahn in his
personal capacity and as President of the Federation and impleaded
the Federation as an alternative defendant. Petitioner sought to
hold Henri Kahn liable for the unpaid balance for the tickets
purchased by the Federation on the ground that Henri Kahn
allegedly guaranteed the said obligation.[6]
Henri Kahn filed his answer with counterclaim. While not
denying the allegation that the Federation owed the amount
P207,524.20, representing the unpaid balance for the plane tickets,
he averred that the petitioner has no cause of action against him
either in his personal capacity or in his official capacity as
president of the Federation.He maintained that he did not
guarantee payment but merely acted as an agent of the Federation
which has a separate and distinct juridical personality. [7]
On the other hand, the Federation failed to file its answer,
hence, was declared in default by the trial court. [8]
In due course, the trial court rendered judgment and ruled in
favor of the petitioner and declared Henri Kahn personally liable
for the unpaid obligation of the Federation. In arriving at the said
ruling, the trial court rationalized:
Defendant Henri Kahn would have been correct in his contentions
had it been duly established that defendant Federation is a
corporation. The trouble, however, is that neither the plaintiff nor
the defendant Henri Kahn has adduced any evidence proving the
corporate existence of the defendant Federation. In paragraph 2 of
its complaint, plaintiff asserted that "Defendant Philippine Football
Federation is a sports association xxx." This has not been denied
by defendant Henri Kahn in his Answer. Being the President of
defendant Federation, its corporate existence is within the personal
knowledge of defendant Henri Kahn. He could have easily denied
specifically the assertion of the plaintiff that it is a mere sports
association, if it were a domestic corporation. But he did not.
xxx
A voluntary unincorporated association, like defendant Federation
has no power to enter into, or to ratify, a contract. The contract
entered into by its officers or agents on behalf of such association
is not binding on, or enforceable against it. The officers or agents
are themselves personally liable.
x x x[9]
The dispositive portion of the trial court's decision reads:
WHEREFORE, judgment is rendered ordering defendant Henri
Kahn to pay the plaintiff the principal sum of P207,524.20, plus
the interest thereon at the legal rate computed from July 5, 1990,
the date the complaint was filed, until the principal obligation is
fully liquidated; and another sum of P15,000.00 for attorney's fees.
The complaint of the plaintiff against the Philippine Football
Federation and the counterclaims of the defendant Henri Kahn are
hereby dismissed.
With the costs against defendant Henri Kahn.[10]
Only Henri Kahn elevated the above decision to the Court of
Appeals. On 21 December 1994, the respondent court rendered a
decision reversing the trial court, the decretal portion of said
decision reads:
WHEREFORE, premises considered, the judgment appealed from
is hereby REVERSED and SET ASIDE and another one is
rendered dismissing the complaint against defendant Henri S.
Kahn.[11]
In finding for Henri Kahn, the Court of Appeals recognized
the juridical existence of the Federation. It rationalized that since
petitioner failed to prove that Henri Kahn guaranteed the
obligation of the Federation, he should not be held liable for the
same as said entity has a separate and distinct personality from its
officers.
Petitioner filed a motion for reconsideration and as an
alternative prayer pleaded that the Federation be held liable for the
unpaid obligation. The same was denied by the appellate court in
its resolution of 8 February 1995, where it stated that:
As to the alternative prayer for the Modification of the Decision by
expressly declaring in the dispositive portion thereof the Philippine
Football Federation (PFF) as liable for the unpaid obligation, it
should be remembered that the trial court dismissed the complaint
against the Philippine Football Federation, and the plaintiff did not
appeal from this decision. Hence, the Philippine Football
Federation is not a party to this appeal and consequently, no
judgment may be pronounced by this Court against the PFF
without violating the due process clause, let alone the fact that the
judgment dismissing the complaint against it, had already become
final by virtue of the plaintiff's failure to appeal therefrom. The
alternative prayer is therefore similarly DENIED. [12]
Petitioner now seeks recourse to this Court and alleges that
the respondent court committed the following assigned errors: [13]
A. THE HONORABLE COURT OF APPEALS
ERRED IN HOLDING THAT PETITIONER
 73

HAD DEALT WITH THE PHILIPPINE 2. To raise funds by donations, benefits, and other means for their The above powers and functions granted to national sports
FOOTBALL FEDERATION (PFF) AS A purposes. associations clearly indicate that these entities may acquire a
CORPORATE ENTITY AND IN NOT juridical personality. The power to purchase, sell, lease and
HOLDING THAT PRIVATE RESPONDENT 3. To purchase, sell, lease or otherwise encumber property both encumber property are acts which may only be done by persons,
HENRI KAHN WAS THE ONE WHO real and personal, for the accomplishment of their purpose; whether natural or artificial, with juridical capacity. However,
REPRESENTED THE PFF AS HAVING A while we agree with the appellate court that national sports
CORPORATE PERSONALITY. 4. To affiliate with international or regional sports' Associations associations may be accorded corporate status, such does not
after due consultation with the executive committee; automatically take place by the mere passage of these laws.
B. THE HONORABLE COURT OF APPEALS
ERRED IN NOT HOLDING PRIVATE xxx It is a basic postulate that before a corporation may acquire
RESPONDENT HENRI KAHN PERSONALLY juridical personality, the State must give its consent either in the
LIABLE FOR THE OBLIGATION OF THE form of a special law or a general enabling act. We cannot agree
13. To perform such other acts as may be necessary for the proper
UNINCORPORATED PFF, HAVING with the view of the appellate court and the private respondent that
accomplishment of their purposes and not inconsistent with this
NEGOTIATED WITH PETITIONER AND the Philippine Football Federation came into existence upon the
Act.
CONTRACTED THE OBLIGATION IN passage of these laws. Nowhere can it be found in R.A. 3135 or
BEHALF OF THE PFF, MADE A PARTIAL P.D. 604 any provision creating the Philippine Football
PAYMENT AND ASSURED PETITIONER OF Section 8 of P.D. 604, grants similar functions to these sports Federation. These laws merely recognized the existence of national
FULLY SETTLING THE OBLIGATION. associations: sports associations and provided the manner by which these
entities may acquire juridical personality. Section 11 of R.A. 3135
C. ASSUMING ARGUENDO THAT PRIVATE SEC. 8. Functions, Powers, and Duties of National Sports provides:
RESPONDENT KAHN IS NOT PERSONALLY Association. - The National sports associations shall have the
LIABLE, THE HONORABLE COURT OF following functions, powers, and duties: SEC. 11. National Sports' Association; organization and
APPEALS ERRED IN NOT EXPRESSLY recognition. - A National Association shall be organized for each
DECLARING IN ITS DECISION THAT THE 1. Adopt a Constitution and By-Laws for their internal individual sports in the Philippines in the manner hereinafter
PFF IS SOLELY LIABLE FOR THE organization and government which shall be submitted to the provided to constitute the Philippine Amateur Athletic Federation.
OBLIGATION. Department and any amendment thereto shall take effect upon Applications for recognition as a National Sports' Association shall
approval by the Department: Provided, however, That no team, be filed with the executive committee together with, among others,
The resolution of the case at bar hinges on the determination school, club, organization, or entity shall be admitted as a voting a copy of the constitution and by-laws and a list of the members of
of the existence of the Philippine Football Federation as a juridical member of an association unless 60 per cent of the athletes the proposed association, and a filing fee of ten pesos.
person. In the assailed decision, the appellate court recognized the composing said team, school, club, organization, or entity are
existence of the Federation. In support of this, the CA cited Filipino citizens; The Executive Committee shall give the recognition applied for if
Republic Act 3135, otherwise known as the Revised Charter of the it is satisfied that said association will promote the purposes of this
Philippine Amateur Athletic Federation, and Presidential Decree 2. Raise funds by donations, benefits, and other means for their Act and particularly section three thereof. No application shall be
No. 604 as the laws from which said Federation derives its purpose subject to the approval of the Department; held pending for more than three months after the filing thereof
existence. without any action having been taken thereon by the executive
3. Purchase, sell, lease, or otherwise encumber property, both real committee. Should the application be rejected, the reasons for such
As correctly observed by the appellate court, both R.A. 3135 and personal, for the accomplishment of their purpose; rejection shall be clearly stated in a written communication to the
and P.D. No. 604 recognized the juridical existence of national applicant. Failure to specify the reasons for the rejection shall not
sports associations. This may be gleaned from the powers and 4. Conduct local, interport, and international competitions, other affect the application which shall be considered as unacted
functions granted to these associations. Section 14 of R.A. 3135 than the Olympic and Asian Games, for the promotion of their upon: Provided, however, That until the executive committee
provides: sport; herein provided shall have been formed, applications for
recognition shall be passed upon by the duly elected members of
SEC. 14. Functions, powers and duties of Associations. - The 5. Affiliate with international or regional sports associations after the present executive committee of the Philippine Amateur
National Sports' Association shall have the following functions, due consultation with the Department; Athletic Federation. The said executive committee shall be
powers and duties: dissolved upon the organization of the executive committee herein
provided: Provided, further, That the functioning executive
xxx
committee is charged with the responsibility of seeing to it that the
1. To adopt a constitution and by-laws for their internal
organization and government; 13. Perform such other functions as may be provided by law.
 74

National Sports' Associations are formed and organized within six
months from and after the passage of this Act.
Section 7 of P.D. 604, similarly provides:
SEC. 7. National Sports Associations. - Application for
accreditation or recognition as a national sports association for
each individual sport in the Philippines shall be filed with the
Department together with, among others, a copy of the
Constitution and By-Laws and a list of the members of the
proposed association.
The Department shall give the recognition applied for if it is
satisfied that the national sports association to be organized will
promote the objectives of this Decree and has substantially
complied with the rules and regulations of the
Department: Provided, That the Department may withdraw
accreditation or recognition for violation of this Decree and such
rules and regulations formulated by it.
The Department shall supervise the national sports
association: Provided, That the latter shall have exclusive
technical control over the development and promotion of the
particular sport for which they are organized.
entered into or for other acts performed as such agent. [14] As
president of the Federation, Henri Kahn is presumed to have
known about the corporate existence or non-existence of the
Federation. We cannot subscribe to the position taken by the
appellate court that even assuming that the Federation was
defectively incorporated, the petitioner cannot deny the corporate
existence of the Federation because it had contracted and dealt
with the Federation in such a manner as to recognize and in effect
admit its existence. [15] The doctrine of corporation by estoppel is
mistakenly applied by the respondent court to the petitioner. The
application of the doctrine 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. [16] In the case
at bar, the petitioner is not trying to escape liability from the
contract but rather is the one claiming from the contract.
WHEREFORE, the decision appealed from is
REVERSED and SET ASIDE. The decision of the Regional Trial
Court of Manila, Branch 35, in Civil Case No. 90-53595 is hereby
REINSTATED.
SO ORDERED.

Clearly the above cited provisions require that before an

entity may be considered as a national sports association, such
entity must be recognized by the accrediting organization, the
Philippine Amateur Athletic Federation under R.A. 3135, and the
Department of Youth and Sports Development under P.D.
604. This fact of recognition, however, Henri Kahn failed to
substantiate. In attempting to prove the juridical existence of the
Federation, Henri Kahn attached to his motion for reconsideration
before the trial court a copy of the constitution and by-laws of the
Philippine Football Federation. Unfortunately, the same does not
prove that said Federation has indeed been recognized and
accredited by either the Philippine Amateur Athletic Federation or
the Department of Youth and Sports Development. Accordingly,
we rule that the Philippine Football Federation is not a national
sports association within the purview of the aforementioned laws
and does not have corporate existence of its own.

Thus being said, it follows that private respondent Henry

Kahn should be held liable for the unpaid obligations of the
unincorporated Philippine Football Federation. It is a settled
principal in corporation law that any person acting or purporting to
act on behalf of a corporation which has no valid existence
assumes such privileges and becomes personally liable for contract
 75
EN BANC
[G.R. No. L-9300. April 18, 1958.]
MARIANO A. ALBERT, Plaintiff-Appellee, v. UNIVERSITY
PUBLISHING CO., INC., Defendant-Appellant.  LIQUIDATED DAMAGES. — In reciprocal obligations, where
Antonio M. Molina for Appellee.  upon him, the injured party could choose between requiring
Pedro C. Mendiola, Borgonio E. Cruz and Jose M. Aruego
for Appellant.
SYLLABUS
1. OBLIGATIONS AND CONTRACTS; RECIPROCAL
OBLIGATIONS; BREACH OF CONTRACT; CASE AT BAR.
— For the exclusive right to publish a manuscript containing
commentaries on "The Revised Penal Code of the Philippines,"
written by the appellee, the appellant corporation agreed to pay to
the appellee P30,000 payable in 8 quarterly installments. The
parties stipulated that should the appellant fail to pay any of the
installment due, the rest shall be deemed due and payable whether
there is judicial or extrajudicial demand. For his part, appellee
obligated himself to deliver to the appellant the said manuscript
not later than December 31, 1948. Appellee claims that appellant
corporation breached the contract when it failed to pay the full
amount of the installment for the first quarter. On the other hand,
appellant contends that the appellee failed to deliver to it the
manuscript on the date stipulated in the contract and for that reason
it was no longer under obligation to pay the unpaid balance of the
installments. Held: The first point to consider is whether appellee
had performed his part of the contract. The evidence shows that on
16 December 1948 appellee wrote a letter advising the appellant
corporation that the manuscript subject of the contract was then at
its disposal, ready to go to the printer should the appellant desire to
publish it. Although the appellant’s President denied having
received the letter, yet the trial court found that such letter was
written and delivered to the appellant, a finding supported by a
preponderance of evidence. This constitutes delivery of the
manuscript for delivery does not mean physical or material
delivery thereof. But while the delay in the payment of the first
quarterly installment may not amount to a breach of contract to
justify the enforcement of the stipulation set forth in the contract
because appellee accepted payment which completed and paid the
full amount of the installment due, it appearing that appellant made July 15, 1948;
no further payment on the installments due, the stipulation in the
contract has to be enforced.  2. That the PARTY OF THE FIRST PART hereby grants to the
PARTY OF THE SECOND PART the exclusive right to publish
2. ID.; ID.; ID.; REMEDIES OF INJURED PARTY; or cause to be published the said manuscript within a period of 5
years from the execution of this document, provided that the total
one of the obligors failed to comply with what was incumbent number of copies to be printed within said period shall not be more
than 4,000 copies;
specific performance of the obligation or its resolution with
indemnity for losses and payment of interest. In the case at bar, the 4. That the PARTY OF THE SECOND PART hereby agrees to
aforesaid stipulation in the contract may be considered as pay to the PARTY OF THE FIRST PART, for the exclusive right
liquidated damage to be paid in case of breach of the contract. to publish the manuscript, object of this contract, for a period of 5
years counted from the date of execution of this document; for the
liquidated balance due him as his share in the sales of the reprinted
DECISION copies of the first edition of this book as per contract between both
parties dated May 21, 1946; and for his liquidated share in the
sales of another 1,500 reprinted copies in 1948 of said book, now
PADILLA, J.: in the press: the total amount of (P30,000 payable in 8 quarters at
the rate of P3,750 a quarter, the first quarter to begin from July 15,
1948. It is also agreed that should the PARTY OF THE SECOND
This is an appeal from a judgment rendered by the Court of First
PART fail to pay to the PARTY OF THE FIRST PART any one of
Instance of Manila, ordering the defendant corporation to pay to
the eight installments referred to when due, the rest of the
the Administrator of the estate of the late Mariano A. Albert, who
installments shall be deemed due and payable, whether there is
died during the pendency of the case, the sum of P23,000, interest
judicial or extrajudicial demand made by the PARTY OF THE
thereon from the date of the filing of the complaint, and costs, and
FIRST PART. In this event, the PARTY OF THE FIRST PART
dismissing the defendant’s counterclaim, certified to this Court by
shall take charge of the publication of this book, and in case it has
the Court of Appeals for the reason that the total amount sought to
already been published, will take over the sale and distribution of
be recovered by the defendant corporation exceeds P50,000. 
the printed book, without any right on the part of the PARTY OF
THE SECOND PART to participate in its proceeds:chanrob1es
On 19 July 1948 the plaintiff and the defendant corporation
virtual 1aw library
entered into a contract whereby, for and in consideration of the
exclusive right to publish or cause to be published a manuscript
7. That the PARTY OF THE FIRST PART obligates himself to
containing commentaries on" ‘The Revised Penal Code of the
deliver to the PARTY OF THE SECOND PART the manuscript in
Philippines,’ as amended until July 15, 1948," written by the
its final form not later than December 31, 1948; provided,
plaintiff, for a period of five years from the date of execution of
however, that the PARTY OF THE SECOND PART shall have no
the contract; of the liquidated balance due the plaintiff as his share
right to make any change in the manuscript as prepared by the
in the sale of the reprinted copies of the book as stipulated in a
PARTY OF THE FIRST PART who, if the circumstances do
contract executed on 21 May 1946 by and between him and the
permit, must stamp his approval in the printer’s final proof. 
defendant corporation (Exhibit 1); and of the liquidated share of
the plaintiff in the sale of 1,500 reprinted copies of the book, the
In the event of the impossibility for the PARTY OF THE FIRST
defendant corporation undertook to pay the plaintiff the sum of
PART to deliver the manuscript complete by December 31, 1948,
P30,000 in eight quarterly installments of P3,750 each, beginning
the PARTY OF THE SECOND PART shall no longer be under
15 July 1948 (Exhibit A). The most important stipulations of the
obligation to pay the installments remaining payable by virtue of
contract are the following:chanrob1es virtual 1aw library
the provisions of the contract, unless the PARTY OF THE
SECOND PART undertakes to complete the same by inserting the
1. That the PARTY OF THE FIRST PART is the author and sole
latest decisions of the Supreme Court as digested and/or
proprietor of a manuscript which is his revised commentaries of
commented upon by the PARTY OF THE FIRST PART. 
"The Revised Penal Code of the Philippines" as amended, until
 76
The defendant corporation paid P1,000 to the plaintiff on 31 July
1948 (Exhibits B and 2); P1,000 on 10 September 1948 (Exhibit 2-
A); P2,000 on 10 November 1948 (Exhibits C, C-1 and 2-B);
P2,000 on 29 November 1948 (Exhibit 3); and P1,000 on 24
December 1948 (Exhibit 3-A), or a total of P7,000. The defendant
corporation made no other or further payment to the plaintiff on
account of the contract.  not sufficient to outweigh and overcome the evidence showing that
The evidence for the plaintiff shows that on 16 December 1948 he
wrote a letter advising the defendant corporation that "The
manuscript of my Commentaries on the Revised Penal Code,
subject matter of our Contract executed on the 19th of July this
year, is now at your disposal." (Exhibit D.)  1948 the first installment due, because it had paid only P1,000 on
The plaintiff claims that the defendant corporation breached the
contract when it failed to pay the full amount of the installment for
the first quarter on or before 15 October 1948, the last day within
which to pay it. The defendant corporation contends that the
plaintiff failed to deliver to it the manuscript in its final form not
later than 31 December 1948 as stipulated in paragraph 7 of the
contract (Exhibit A).  which completed and paid the full amount of the first installment
The first point then to determine is whether the plaintiff had
performed his part of the contract as stipulated in paragraph 7 of
the aforesaid contract.  sum of P250 in excess of the amount paid for the first quarterly
Upon plaintiff’s demand and defendant’s failure to produce and
exhibit the original of the letter dated 16 December 1948 already
referred to, the plaintiff read in evidence the contents of a copy of
said letter (Exhibit D). Concepcion K. de Vera, the stenographer
who took down by shorthand the dictation of the plaintiff,
identified it as the carbon copy of the original and testified that the
original was sent to the defendant corporation. On cross-
examination she exhibited and read to the Court the notes from
which she typed the original letter. The President of the defendant
corporation denies having received not only the original of the
letter dated 16 December 1948 but also the original of a letter
dated 27 April 1949 (Exhibit E) written by the plaintiff to the
defendant corporation. In the last letter reference to the preceding
letter of 16 December 1948 (Exhibit D) was made and a demand
for payment of the installments due and unpaid was also made.
The defendant corporation admits, however, the receipt of the
original of the letters dated 15 August 1949 (Exhibit F) and 6 June
1949 (Exhibit G). In the first letter (Exhibit F) the plaintiff
reminded the defendant corporation of its promise to settle the
installment due on 15 April and 15 July and the balance of the
installment due and unpaid of 15 December (January); and in the
second (Exhibit G) the plaintiff reminded the defendant of its due
and unpaid installments and stated that, in view of the apparent
inability of the defendant corporation to fulfill its part of the
contract, he would consider the contract rescinded and would
publish the revised edition next month (July) at his expense. The
defendant corporation has not answered these two letters.  resolution with indemnity for losses and payment of interested. 1
The mere denial by the President of the defendant corporation is
the plaintiff advised the defendant corporation that the manuscript
of the commentaries on the Revised Penal Code, subject matter of
the contract executed on 19 July 1948, was ready for delivery to,
and at the disposal of, the defendant corporation for publication.
The defendant corporation failed to pay on or before 15 October
31 July 1948 and another P1,000 on 10 September 1948. When the
defendant corporation paid P2,000 on 10 November 1948, it was
after the last day fixed for the payment of the first installment. But
that delay in the payment of the first quarterly installment may not
amount to a breach to justify the enforcement of the stipulation set
forth in paragraph 4 of the contract (Exhibit A) because the
plaintiff accepted the payment of P2,000 on 10 November 1948,
due and left a balance of P250 to be credited to the second
installment due on 15 January 1949. On this last mentioned date
the total amount paid by the defendant corporation, including the
installment, was P3,250 or P500 short of the total amount due on
such date corresponding to the second quarterly installment. As the
defendant corporation has made no further payment, the stipulation
in paragraph 4 of the contract has to be enforced.  written by the plaintiff to Jose M. Aruego, President of the
The defendant corporation argues that the fact that the
mimeographed copies of plaintiff’s book or commentaries on the
Revised Penal Code published by the PHILAW Publishing
Company does not contain cases decided by the Supreme Court up
to 1948 is proof that contrary to plaintiff’s claim the manuscript
which the plaintiff bound himself to write and finish on or before
31 December 1948 was not ready for publication on 16 or 31
December 1948. There is no evidence, however, that the
mimeographed copies of the book published and sold in November
1949 by the plaintiff or the PHILAW Publication Company were
the same as that offered for delivery by the plaintiff to the
defendant corporation on 16 December 1948. Besides, there is no
stipulation in the contract that the commentaries would include
cases decided by the Supreme Court up to 1948. Nowhere in the
contract may such stipulation be found.  that in the absence of evidence to show the amount that should
The action brought by the plaintiff is not for recission of a
contract, under which theory or belief both parties seem to have
proceeded and labored, but for a resolution of reciprocal
obligations because one of the obligors failed to comply with that
which was incumbent upon him. The injured party could choose
between requiring specific performance of the obligation or its
The stipulation in paragraph 4 of the contract (Exhibit A) may be
considered as liquidated damages to be paid in case of breach of
the contract. 2 The defendant corporation has not paid the share of
the plaintiff in the proceeds of the sale of the first 1,000 copies of
the book printed and sold by the defendant corporation as agreed
upon in the contract entered into by and between the parties on 21
May 1946 (Exhibit A). In the original and amended answers of the
defendant corporation it is alleged that said copies remained
unsold, but on the witness stand Jose M. Aruego, President of the
defendant corporation, admitted that 800 copies thereof had been
sold. There is also a share due the plaintiff in the sale of 1,500
reprinted copies of the book. But how much that share amounts to,
the evidence does not throw any light, in like manner that there is
no evidence to show how much is due the plaintiff as his share in
the sale of 800 copies of the book. 
The counterclaim of the defendant was correctly dismissed by the
trial court, because it found that the one who had breached the
contract is the defendant corporation. Such being the case, the
defendant corporation cannot claim any damage against the
plaintiff. Aside from that, it is difficult to believe that from 1946 to
the time when the contract of 16 July 1948 was signed, the
defendant corporation could not and had not disposed of the 1,000
copies of the book. Such is the import of the letter of 18 June 1948
defendant corporation (Exhibit H). It is also difficult to believe that
not a single copy of the 1,500 copies of the book subsequently
reprinted was sold, because of the publication and sale by the
PHILAW Publishing Company of the mimeographed copies of the
book. From 1948 to November 1949 when the mimeographed
copies of the book were sold, there was sufficient time for the sale
and disposition of the 1,500 reprinted copies of the book. There is
no evidence that long before November 1949 there had been an
announcement or publication that copies of commentaries on the
Revised Penal Code by the plaintiff would be mimeographed and
ready for distribution and sale. 
Although the defendant corporation breached the contract, as
found by the trial court, and there is no reason which may find
support in the evidence for disturbing such finding, yet we believe
accrue to the plaintiff as his share in the proceeds of the sale of
1,000 copies of the book and of 1,500 copies of the reprinted book
that were in press when the contract of 19 July 1948 was entered
into, and the amount of profits that the plaintiff would derive from
 77

the sale of the books to be printed, as agreed upon in the contract

of 19 July 1948, the amount of liquidated damages is rather
excessive, because even if the books were sold at P40, P35 or P30,
as hinted by Jose M. Aruego, the president of the defendant
corporation, in his testimony, the cost of paper, printing, binding,
advertising, sales promotion and other incidental disbursements
should be deducted from the gross proceeds. For that reason and in
accordance with the provisions of article 2227 of the new Civil
Code, the reasonable amount of liquidated damages that must be
awarded to the plaintiff as a result of the breach by the defendant
corporation of the contract is equitably reduced to P15,000. 

With this modification as to the amount of liquidated damages, the

judgment appealed from is affirmed, with costs against
the Appellant. 

Paras, C.J., Montemayor, Reyes, A., Bautista Angelo, Concepcion,

Reyes, J. B. L., Endencia and Felix, JJ., concur.

RESOLUTI
 78
[G.R. No. 117188. August 7, 1997]
LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH)
ASSOCIATION, INC., petitioner, vs. HON. COURT
OF APPEALS, HOME INSURANCEAND
GUARANTY CORPORATION, EMDEN
ENCARNACION and HORATIO
AYCARDO, respondents.
DECISION
ROMERO, J.:
May the failure of a corporation to file its by-laws within one
month from the date of its incorporation, as mandated by Section
46 of the Corporation Code, result in its automatic dissolution?
This is the issue raised in this petition for review
on certiorari of the Decision[1] of the Court of Appeals affirming
the decision of the Home Insurance and Guaranty Corporation
(HIGC). This quasi-judicial body recognized Loyola Grand Villas
Homeowners Association (LGVHA) as the sole homeowners
association in Loyola Grand Villas, a duly registered subdivision
in Quezon City and Marikina City that was owned and developed
by Solid Homes, Inc. It revoked the certificates of registration
issued to Loyola Grand Villas Homeowners (North) Association
Incorporated (the North Association for brevity) and Loyola Grand
Villas Homeowners (South) Association Incorporated (the South
Association).
LGVHAI was organized on February 8, 1983 as the
association of homeowners and residents of the Loyola Grand
Villas. It was registered with the Home Financing Corporation, the
predecessor of herein respondent HIGC, as the sole homeowners
organization in the said subdivision under Certificate of
Registration No. 04-197. It was organized by the developer of the
subdivision and its first president was Victorio V. Soliven, himself
the owner of the developer. For unknown reasons, however,
LGVHAI did not file its corporate by-laws.
Sometime in 1988, the officers of the LGVHAI tried to
register its by-laws. They failed to do so. [2] To the officers
consternation, they discovered that there were two other
organizations within the subdivision the North Association and the
South Association. According to private respondents, a non-
resident and Soliven himself, respectively headed these
associations. They also discovered that these associations had five
(5) registered homeowners each who were also the incorporators,
directors and officers thereof. None of the members of the
LGVHAI was listed as member of the North Association while
three (3) members of LGVHAI were listed as members of the
South Association.[3] The North Association was registered with
the HIGC on February 13, 1989 under Certificate of Registration
No. 04-1160 covering Phases West II, East III, West III and East
IV. It submitted its by-laws on December 20, 1988.
In July, 1989, when Soliven inquired about the status of
LGVHAI, Atty. Joaquin A. Bautista, the head of the legal
department of the HIGC, informed him that LGVHAI had been
automatically dissolved for two reasons. First, it did not submit its
by-laws within the period required by the Corporation Code and,
second, there was non-user of corporate charter because HIGC had
not received any report on the associations activities. Apparently,
this information resulted in the registration of the South
Association with the HIGC on July 27, 1989 covering Phases West
I, East I and East 11. It filed its by-laws on July 26, 1989.
These developments prompted the officers of the LGVHAI
to lodge a complaint with the HIGC. They questioned the
revocation of LGVHAIs certificate of registration without due
notice and hearing and concomitantly prayed for the cancellation
of the certificates of registration of the North and South
Associations by reason of the earlier issuance of a certificate of
registration in favor of LGVHAI.
On January 26, 1993, after due notice and hearing, private
respondents obtained a favorable ruling from HIGC Hearing
Officer Danilo C. Javier who disposed of HIGC Case No. RRM-5-
89 as follows:
WHEREFORE, judgment is hereby rendered recognizing the
Loyola Grand Villas Homeowners Association, Inc., under
Certificate of Registration No. 04-197 as the duly registered and
existing homeowners association for Loyola Grand Villas
homeowners, and declaring the Certificates of Registration of
Loyola Grand Villas Homeowners (North) Association, Inc. and
Loyola Grand Villas Homeowners (South) Association, Inc. as
hereby revoked or cancelled; that the receivership be terminated
and the Receiver is hereby ordered to render an accounting and
turn-over to Loyola Grand Villas Homeowners Association, Inc.,
all assets and records of the Association now under his custody
and possession.
The South Association appealed to the Appeals Board of the
HIGC. In its Resolution of September 8, 1993, the
Board[4] dismissed the appeal for lack of merit.
Rebuffed, the South Association in turn appealed to the
Court of Appeals, raising two issues. First, whether or not
LGVHAIs failure to file its by-laws within the period prescribed
by Section 46 of the Corporation Code resulted in the automatic
dissolution of LGVHAI. Second, whether or not two homeowners
associations may be authorized by the HIGC in one sprawling
subdivision. However, in the Decision of August 23, 1994 being
assailed here, the Court of Appeals affirmed the Resolution of the
HIGC Appeals Board.
In resolving the first issue, the Court of Appeals held that
under the Corporation Code, a private corporation commences to
have corporate existence and juridical personality from the date the
Securities and Exchange Commission (SEC) issues a certificate of
incorporation under its official seal. The requirement for the filing
of by-laws under Section 46 of the Corporation Code within one
month from official notice of the issuance of the certificate of
incorporation presupposes that it is already incorporated, although
it may file its by-laws with its articles of incorporation. Elucidating
on the effect of a delayed filing of by-laws, the Court of Appeals
said:
We also find nothing in the provisions cited by the petitioner, i.e.,
Sections 46 and 22, Corporation Code, or in any other provision of
the Code and other laws which provide or at least imply that
failure to file the by-laws results in an automatic dissolution of the
corporation. While Section 46, in prescribing that by-laws must be
adopted within the period prescribed therein, may be interpreted as
a mandatory provision, particularly because of the use of the word
must, its meaning cannot be stretched to support the argument that
automatic dissolution results from non-compliance.
We realize that Section 46 or other provisions of the Corporation
Code are silent on the result of the failure to adopt and file the by-
laws within the required period. Thus, Section 46 and other related
provisions of the Corporation Code are to be construed with
Section 6 (1) of P.D. 902-A. This section empowers the SEC to
suspend or revoke certificates of registration on the grounds listed
therein. Among the grounds stated is the failure to file by-laws (see
also II Campos: The Corporation Code, 1990 ed., pp. 124-125).
Such suspension or revocation, the same section provides, should
be made upon proper notice and hearing. Although P.D. 902-A
refers to the SEC, the same principles and procedures apply to the
 79
public respondent HIGC as it exercises its power to revoke or
suspend the certificates of registration or homeowners
associations. (Section 2 [a], E.O. 535, series 1979, transferred the
powers and authorities of the SEC over homeowners associations
to the HIGC.)
We also do not agree with the petitioners interpretation that
Section 46, Corporation Code prevails over Section 6, P.D. 902-A
and that the latter is invalid because it contravenes the
former.There is no basis for such interpretation considering that
these two provisions are not inconsistent with each other. They are,
in fact, complementary to each other so that one cannot be
considered as invalidating the other.
The Court of Appeals added that, as there was no showing
that the registration of LGVHAI had been validly revoked, it
continued to be the duly registered homeowners association in the
Loyola Grand Villas. More importantly, the South Association did
not dispute the fact that LGVHAI had been organized and that,
thereafter, it transacted business within the period prescribed by
law.
On the second issue, the Court of Appeals reiterated its
previous ruling[5] that the HIGC has the authority to order the
holding of a referendum to determine which of two contending
associations should represent the entire community, village or
subdivision.
Undaunted, the South Association filed the instant petition
for review on certiorari. It elevates as sole issue for resolution the
first issue it had raised before the Court of Appeals, i.e., whether or
not the LGVHAIs failure to file its by-laws within the period
prescribed by Section 46 of the Corporation Code had the effect of
automatically dissolving the said corporation.
Petitioner contends that, since Section 46 uses the word must
with respect to the filing of by-laws, noncompliance therewith
would result in self-extinction either due to non-occurrence of a
suspensive condition or the occurrence of a resolutory condition
under the hypothesis that (by) the issuance of the certificate of
registration alone the corporate personality is deemed already
formed. It asserts that the Corporation Code provides for a
gradation of violations of requirements. Hence, Section 22
mandates that the corporation must be formally organized and
should commence transactions within two years from date of
incorporation. Otherwise, the corporation would be deemed
dissolved. On the other hand, if the corporation commences
operations but becomes continuously inoperative for five years,
then it may be suspended or its corporate franchise revoked.
Petitioner concedes that Section 46 and the other provisions
of the Corporation Code do not provide for sanctions for non-filing
of the by-laws. However, it insists that no sanction need be
provided because the mandatory nature of the provision is so clear
that there can be no doubt about its being an essential attribute of
corporate birth.To petitioner, its submission is buttressed by the
facts that the period for compliance is spelled out distinctly; that
the certification of the SEC/HIGC must show that the by-laws are
not inconsistent with the Code, and that a copy of the by-laws has
to be attached to the articles of incorporation. Moreover, no
sanction is provided for because in the first place, no corporate
identity has been completed. Petitioner asserts that non-provision
for remedy or sanction is itself the tacit proclamation that non-
compliance is fatal and no corporate existence had yet evolved,
and therefore, there was no need to proclaim its demise. [6] In a bid
to convince the Court of its arguments, petitioner stresses that:
x x x the word MUST is used in Sec. 46 in its universal literal
meaning and corollary human implication its compulsion is
integrated in its very essence MUST is always enforceable by the
inevitable consequence that is, OR ELSE. The use of the
word MUST in Sec. 46 is no exception it means file the by-laws
within one month after notice of issuance of certificate of
registration OR ELSE. The OR ELSE, though not specified, is
inextricably a part of MUST. Do this or if you do not you are
Kaput. The importance of the by-laws to corporate existence
compels such meaning for as decreed the by-laws is `the
government of the corporation. Indeed, how can the corporation do
any lawful act as such without by-laws. Surely, no law is intended
to create chaos.[7]
etitioner asserts that P.D. No. 902-A cannot exceed the scope
and power of the Corporation Code which itself does
not provide sanctions for non-filing of by-laws. For the
petitioner, it is not proper to assess the true meaning of Sec. 46 x x
x on an unauthorized provision on such matter contained in the
said decree.
In their comment on the petition, private respondents counter
that the requirement of adoption of by-laws is not mandatory. They
point to P.D. No. 902-A as having resolved the issue of whether
said requirement is mandatory or merely directory. Citing Chung
Ka Bio v. Intermediate Appellate Court, [8] private
respondents contend thatSection 6(I) of that decree provides that
non-filing of by-laws is only a ground for suspension or revocation
of the certificate of registration of corporations and, therefore, it
may not result in automatic dissolution of the
corporation. Moreover, the adoption and filing of by-laws is a
condition subsequent which does not affect the corporate
personality of a corporation like the LGVHAI. This is so because
Section 9 of the Corporation Code provides that the corporate
existence and juridical personality of a corporation begins from the
date the SEC issues a certificate of incorporation under its official
seal. Consequently, even if the by-laws have not yet been filed, a
corporation may be considered a de facto corporation. To
emphasize the fact the LGVHAI was registered as the sole
homeowners association in the Loyola Grand Villas, private
respondents point out that membership in the LGVHAI was an
unconditional restriction in the deeds of sale signed by lot buyers.
In its reply to private respondents comment on the petition,
petitioner reiterates its argument that the word must in Section 46
of the Corporation Code is mandatory. It adds that, before the
ruling in Chung Ka Bio v. Intermediate Appellate Court could be
applied to this case, this Court must first resolve the issue of
whether or not the provisions of P.D. No. 902-A prescribing the
rules and regulations to implement the Corporation Code can rise
above and change the substantive provisions of the Code.
The pertinent provision of the Corporation Code that is the
focal point of controversy in this case states:
Sec. 46. Adoption of by-laws. Every corporation formed under this
Code, must within one (1) month after receipt of official notice of
the issuance of its certificate of incorporation by the Securities and
Exchange Commission, adopt a code of by-laws for its government
not inconsistent with this Code. For the adoption of by-laws by the
corporation, the affirmative vote of the stockholders representing
at least a majority of the outstanding capital stock, or of at least a
majority of the members, in the case of non-stock corporations,
shall be necessary. The by-laws shall be signed by the stockholders
or members voting for them and shall be kept in the principal
office of the corporation, subject to the stockholders or members
voting for them and shall be kept in the principal office of the
corporation, subject to inspection of the stockholders or members
during office hours; and a copy thereof, shall be filed with the
Securities and Exchange Commission which shall be attached to
the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-
laws may be adopted and filed prior to incorporation; in such case,
such by-laws shall be approved and signed by all the incorporators
 80
and submitted to the Securities and Exchange Commission, MR. FUENTEBELLA. It being mandatory,
together with the articles of incorporation. Mr. Speaker, what would be the effect of the
failure of the corporation to file these by-laws
In all cases, by-laws shall be effective only upon the issuance by within one month?
the Securities and Exchange Commission of a certification that the
by-laws are not inconsistent with this Code. MR. MENDOZA. There is a provision in
the latter part of the Code which identifies and
The Securities and Exchange Commission shall not accept for describes the consequences of violations of any
filing the by-laws or any amendment thereto of any bank, banking provision of this Code. One such consequence is
institution, building and loan association, trust company, insurance the dissolution of the corporation for its inability,
company, public utility, educational institution or other special or perhaps, incurring certain penalties.
corporations governed by special laws, unless accompanied by a
certificate of the appropriate government agency to the effect that MR. FUENTEBELLA. But it will not
such by-laws or amendments are in accordance with law. automatically amount to a dissolution of the
corporation by merely failing to file the by-laws
As correctly postulated by the petitioner, interpretation of within one month. Supposing the corporation
this provision of law begins with the determination of the meaning was late, say, five days, what would be the
and import of the word must in this section.Ordinarily, the word mandatory penalty?
must connotes an imperative act or operates to impose a duty
which may be enforced.[9] It is synonymous with ought which MR. MENDOZA. I do not think it will
connotes compulsion or mandatoriness.[10] However, the word must necessarily result in the automatic or ipso
in a statute, like shall, is not always imperative. It may be facto dissolution of the corporation. Perhaps, as
consistent with an exercise of discretion. In this jurisdiction, the in the case, as you suggested, in the case of El
tendency has been to interpret shall as the context or a reasonable Hogar Filipino where a quo warranto action is
construction of the statute in which it is used demands or requires. brought, one takes into account the gravity of the
[11]
 This is equally true as regards the word must. Thus, if the violation committed. If the by-laws were late the
language of a statute considered as a whole and with due regard to filing of the by-laws were late by, perhaps, a day
its nature and object reveals that the legislature intended to use the or two, I would suppose that might be a tolerable
words shall and must to be directory, they should be given that delay, but if they are delayed over a period of
meaning.[12] months as is happening now because of the
absence of a clear requirement that by-laws must
In this respect, the following portions of the deliberations of be completed within a specified period of time,
the Batasang Pambansa No. 68 are illuminating: the corporation must suffer certain
consequences.[13]
MR. FUENTEBELLA. Thank you, Mr.
Speaker. This exchange of views demonstrates clearly that automatic
corporate dissolution for failure to file the by-laws on time was
never the intention of the legislature.Moreover, even without
On page 34, referring to the adoption of by-
resorting to the records of deliberations of the Batasang Pambansa,
laws, are we made to understand here, Mr.
the law itself provides the answer to the issue propounded by
Speaker, that by-laws must immediately be filed
petitioner.
within one month after the issuance? In other
words, would this be mandatory or directory in
Taken as a whole and under the principle that the best
character?
interpreter of a statute is the statute itself (optima statuli
interpretatix est ipsum statutum),[14] Section 46 aforequoted
MR. MENDOZA. This is mandatory.
reveals the legislative intent to attach a directory, and not
mandatory, meaning for the word must in the first sentence
thereof. Note should be taken of the second paragraph of the law
which allows the filing of the by-laws even prior to
incorporation. This provision in the same section of the Code rules
out mandatory compliance with the requirement of filing the by-
laws within one (1) month after receipt of official notice of the
issuance of its certificate of incorporation by the Securities and
Exchange Commission. It necessarily follows that failure to file
the by-laws within that period does not imply the demise of the
corporation. By-laws may be necessary for the government of the
corporation but these are subordinate to the articles of
incorporation as well as to the Corporation Code and related
statutes.[15] There are in fact cases where by-laws are unnecessary
to corporate existence or to the valid exercise of corporate powers,
thus:
In the absence of charter or statutory provisions to the contrary,
by-laws are not necessary either to the existence of a corporation
or to the valid exercise of the powers conferred upon it, certainly
in all cases where the charter sufficiently provides for the
government of the body; and even where the governing statute in
express terms confers upon the corporation the power to adopt by-
laws, the failure to exercise the power will be ascribed to mere
nonaction which will not render void any acts of the corporation
which would otherwise be valid.[16] (Italics supplied.)
As Fletcher aptly puts it:
It has been said that the by-laws of a corporation are the rule of its
life, and that until by-laws have been adopted the corporation may
not be able to act for the purposes of its creation, and that the first
and most important duty of the members is to adopt them. This
would seem to follow as a matter of principle from the office and
functions of by-laws. Viewed in this light, the adoption of by-laws
is a matter of practical, if not one of legal, necessity. Moreover, the
peculiar circumstances attending the formation of a corporation
may impose the obligation to adopt certain by-laws, as in the case
of a close corporation organized for specific purposes. And the
statute or general laws from which the corporation derives its
corporate existence may expressly require it to make and adopt by-
laws and specify to some extent what they shall contain and the
manner of their adoption. The mere fact, however, of the
existence of power in the corporation to adopt by-laws does not
ordinarily and of necessity make the exercise of such power
essential to its corporate life, or to the validity of any of its acts.[17]
Although the Corporation Code requires the filing of by-
laws, it does not expressly provide for the consequences of the
non-filing of the same within the period provided for in Section
46. However, such omission has been rectified by Presidential
 81
Decree No. 902-A, the pertinent provisions on the jurisdiction of
the SEC of which state:
SEC. 6. In order to effectively exercise such jurisdiction, the
Commission shall possess the following powers:
xxx xxx xxx xxx
(l) To suspend, or revoke, after proper notice and hearing, the
franchise or certificate of registration of
corporations, partnerships or associations, upon any of the
grounds provided by law, including the following:
xxx xxx xxx xxx
5. Failure to file by-laws within the required period;
xxx xxx xxx xxx
In the exercise of the foregoing authority and jurisdiction of the
Commissions or by a Commissioner or by such other bodies,
boards, committees and/or any officer as may be created or
designated by the Commission for the purpose. The decision,
ruling or order of any such Commissioner, bodies, boards,
committees and/or officer may be appealed to the Commission
sitting en banc within thirty (30) days after receipt by the appellant
of notice of such decision, ruling or order. The Commission shall
promulgate rules of procedures to govern the proceedings,
hearings and appeals of cases falling within its jurisdiction.
The aggrieved party may appeal the order, decision or ruling of the
Commission sitting en banc to the Supreme Court by petition for
review in accordance with the pertinent provisions of the Rules of
Court.
Even under the foregoing express grant of power and
authority, there can be no automatic corporate dissolution simply
because the incorporators failed to abide by the required filing of
by-laws embodied in Section 46 of the Corporation Code. There is
no outright demise of corporate existence. Proper notice and
hearing are cardinal components of due process in any democratic
institution, agency or society. In other words, the incorporators
must be given the chance to explain their neglect or omission and
remedy the same.
That the failure to file by-laws is not provided for by the
Corporation Code but in another law is of no moment. P.D. No.
902-A, which took effect immediately after its promulgation on
March 11, 1976, is very much apposite to the Code. Accordingly,
the provisions abovequoted supply the law governing the situation
in the case at bar, inasmuch as the Corporation Code and P.D. No.
902-A are statutes in pari materia. Interpretare et concordare
legibus est optimus interpretandi. Every statute must be so
construed and harmonized with other statutes as to form a uniform
system of jurisprudence.[18]
As the rules and regulations or private laws enacted by the
corporation to regulate, govern and control its own actions, affairs
and concerns and its stockholders or members and directors and
officers with relation thereto and among themselves in their
relation to it,[19] by-laws are indispensable to corporations in this
jurisdiction. These may not be essential to corporate birth but
certainly, these are required by law for an orderly governance and
management of corporations. Nonetheless, failure to file them
within the period required by law by no means tolls the automatic
dissolution of a corporation.
In this regard, private respondents are correct in relying on
the pronouncements of this Court in Chung Ka Bio v.
Intermediate Appellate Court,[20] as follows:
x x x. Moreover, failure to file the by-laws does not automatically
operate to dissolve a corporation but is now considered only a
ground for such dissolution.
Section 19 of the Corporation Law, part of which is now Section
22 of the Corporation Code, provided that the powers of the
corporation would cease if it did not formally organize and
commence the transaction of its business or the continuation of its
works within two years from date of its incorporation. Section 20,
which has been reproduced with some modifications in Section 46
of the Corporation Code, expressly declared that every corporation
formed under this Act, must within one month after the filing of
the articles of incorporation with the Securities and Exchange
Commission, adopt a code of by-laws. Whether this provision
should be given mandatory or only directory effect remained a
controversial question until it became academic with the adoption
of PD 902-A. Under this decree, it is now clear that the failure to
file by-laws within the required period is only a ground for
suspension or revocation of the certificate of registration of
corporations.
Non-filing of the by-laws will not result in automatic dissolution
of the corporation. Under Section 6(I) of PD 902-A, the SEC is
empowered to suspend or revoke, after proper notice and hearing,
the franchise or certificate of registration of a corporation on the
ground inter alia of failure to file by-laws within the required
period. It is clear from this provision that there must first of all be
a hearing to determine the existence of the ground, and secondly,
assuming such finding, the penalty is not necessarily revocation
but may be only suspension of the charter. In fact, under the rules
and regulations of the SEC, failure to file the by-laws on time may
be penalized merely with the imposition of an administrative fine
without affecting the corporate existence of the erring firm.
It should be stressed in this connection that substantial compliance
with conditions subsequent will suffice to perfect corporate
personality. Organization and commencement of transaction of
corporate business are but conditions subsequent and not
prerequisites for acquisition of corporate personality. The adoption
and filing of by-laws is also a condition subsequent. Under Section
19 of the Corporation Code, a corporation commences its
corporate existence and juridical personality and is deemed
incorporated from the date the Securities and Exchange
Commission issues certificate of incorporation under its official
seal. This may be done even before the filing of the by-laws, which
under Section 46 of the Corporation Code, must be adopted within
one month after receipt of official notice of the issuance of its
certificate of incorporation.[21]
That the corporation involved herein is under the supervision
of the HIGC does not alter the result of this case. The HIGC has
taken over the specialized functions of the former Home Financing
Corporation by virtue of Executive Order No. 90 dated December
17, 1986.[22] With respect to homeowners associations, the HIGC
shall exercise all the powers, authorities and responsibilities that
are vested on the Securities and Exchange Commission x x x, the
provision of Act 1459, as amended by P.D. 902-A, to the contrary
notwithstanding.[23]
WHEREFORE, the instant petition for review
on certiorari is hereby DENIED and the questioned Decision of
the Court of Appeals AFFIRMED. This Decision is immediately
executory. Costs against petitioner.
SO ORDERED.