G.R. No.
171993               December 12, 2011 On 15 August 1994, petitioner corporation was officially incorporated and
MARC II MARKETING, INC. and LUCILA V. JOSON, Petitioners,
vs.
ALFREDO M. JOSON, Respondent.
In this Petition for Review on Certiorari under Rule 45 of the Rules of Court,
herein petitioners Marc II Marketing, Inc. and Lucila V. Joson assailed the
Decision1 dated 20 June 2005 of the Court of Appeals in CA-G.R. SP No. 76624
for reversing and setting aside the Resolution2 of the National Labor Relations
Commission (NLRC) dated 15 October 2002, thereby affirming the Labor
Arbiter’s Decision3 dated 1 October 2001 finding herein respondent Alfredo M.
Joson’s dismissal from employment as illegal. In the questioned Decision, the
Court of Appeals upheld the Labor Arbiter’s jurisdiction over the case on the
basis that respondent was not an officer but a mere employee of petitioner Marc II
Marketing, Inc., thus, totally disregarding the latter’s allegation of intra-corporate
controversy. Nonetheless, the Court of Appeals remanded the case to the NLRC
for further proceedings to determine the proper amount of monetary awards that
should be given to respondent.
Assailed as well is the Court of Appeals Resolution4 dated 7 March 2006 denying
their Motion for Reconsideration.
Petitioner Marc II Marketing, Inc. (petitioner corporation) is a corporation duly
organized and existing under and by virtue of the laws of the Philippines. It is
primarily engaged in buying, marketing, selling and distributing in retail or
wholesale for export or import household appliances and products and other
items.5 It took over the business operations of Marc Marketing, Inc. which was
made non-operational following its incorporation and registration with the
Securities and Exchange Commission (SEC). Petitioner Lucila V. Joson (Lucila)
is the President and majority stockholder of petitioner corporation. She was also
the former President and majority stockholder of the defunct Marc Marketing, Inc.
Respondent Alfredo M. Joson (Alfredo), on the other hand, was the General
Manager, incorporator, director and stockholder of petitioner corporation.
The controversy of this case arose from the following factual milieu:
Before petitioner corporation was officially incorporated,6 respondent has already
been engaged by petitioner Lucila, in her capacity as President of Marc
Marketing, Inc., to work as the General Manager of petitioner corporation. It was
formalized through the execution of a Management Contract7 dated 16 January
1994 under the letterhead of Marc Marketing, Inc.8 as petitioner corporation is yet
to be incorporated at the time of its execution. It was explicitly provided therein
that respondent shall be entitled to 30% of its net income for his work as General
Manager. Respondent will also be granted 30% of its net profit to compensate for
the possible loss of opportunity to work overseas.9
Pending incorporation of petitioner corporation, respondent was designated as the
General Manager of Marc Marketing, Inc., which was then in the process of
winding up its business. For occupying the said position, respondent was among
its corporate officers by the express provision of Section 1, Article IV10 of its by-
laws.11
paper, otherwise, their Motion to Dismiss will be treated as their position paper
registered with the SEC. Accordingly, Marc Marketing, Inc. was made non- and the case will be considered submitted for decision.
operational. Respondent continued to discharge his duties as General Manager but
this time under petitioner corporation.
Petitioners, through counsel, moved for extension of time to submit position
paper. Despite the requested extension, petitioners still failed to submit the same.
Pursuant to Section 1, Article IV12 of petitioner corporation’s by-laws,13 its Accordingly, the case was submitted for resolution.
corporate officers are as follows: Chairman, President, one or more Vice-
President(s), Treasurer and Secretary. Its Board of Directors, however, may, from
On 1 October 2001, the Labor Arbiter rendered his Decision in favor of
time to time, appoint such other officers as it may determine to be necessary or
respondent. Its decretal portion reads as follows:
proper.
WHEREFORE, premises considered, judgment is hereby rendered declaring
Per an undated Secretary’s Certificate,14 petitioner corporation’s Board of
[respondent’s] dismissal from employment illegal. Accordingly, [petitioners] are
Directors conducted a meeting on 29 August 1994 where respondent was
hereby ordered:
appointed as one of its corporate officers with the designation or title of General
Manager to function as a managing director with other duties and responsibilities
that the Board of Directors may provide and authorized.15 1. To reinstate [respondent] to his former or equivalent position
without loss of seniority rights, benefits, and privileges;
Nevertheless, on 30 June 1997, petitioner corporation decided to stop and cease
its operations, as evidenced by an Affidavit of Non-Operation16 dated 31 August 2. Jointly and severally liable to pay [respondent’s] unpaid wages in
1998, due to poor sales collection aggravated by the inefficient management of its the amount of ₱450,000.00 per month from [26 March 1996] up to
affairs. On the same date, it formally informed respondent of the cessation of its time of dismissal in the total amount of ₱6,300,000.00;
business operation. Concomitantly, respondent was apprised of the termination of
his services as General Manager since his services as such would no longer be
3. Jointly and severally liable to pay [respondent’s] full backwages in
necessary for the winding up of its affairs.17
the amount of ₱450,000.00 per month from date of dismissal until
actual reinstatement which at the time of promulgation amounted to
Feeling aggrieved, respondent filed a Complaint for Reinstatement and Money ₱21,600,000.00;
Claim against petitioners before the Labor Arbiter which was docketed as NLRC
NCR Case No. 00-03-04102-99.
4. Jointly and severally liable to pay moral damages in the amount of
₱100,000.00 and attorney’s fees in the amount of 5% of the total
In his complaint, respondent averred that petitioner Lucila dismissed him from his monetary award.22 [Emphasis supplied.]
employment with petitioner corporation due to the feeling of hatred she harbored
towards his family. The same was rooted in the filing by petitioner Lucila’s
In the aforesaid Decision, the Labor Arbiter initially resolved petitioners’ Motion
estranged husband, who happened to be respondent’s brother, of a Petition for
to Dismiss by finding the ground of lack of jurisdiction to be without merit. The
Declaration of Nullity of their Marriage.18
Labor Arbiter elucidated that petitioners failed to adduce evidence to prove that
the present case involved an intra-corporate controversy. Also, respondent’s
For the parties’ failure to settle the case amicably, the Labor Arbiter required them money claim did not arise from his being a director or stockholder of petitioner
to submit their respective position papers. Respondent complied but petitioners corporation but from his position as being its General Manager. The Labor Arbiter
opted to file a Motion to Dismiss grounded on the Labor Arbiter’s lack of likewise held that respondent was not a corporate officer under petitioner
jurisdiction as the case involved an intra-corporate controversy, which jurisdiction corporation’s by-laws. As such, respondent’s complaint clearly arose from an
belongs to the SEC [now with the Regional Trial Court (RTC)].19 Petitioners employer-employee relationship, thus, subject to the Labor Arbiter’s jurisdiction.
similarly raised therein the ground of prescription of respondent’s monetary
claim.
The Labor Arbiter then declared respondent’s dismissal from employment as
illegal. Respondent, being a regular employee of petitioner corporation, may only
On 5 September 2000, the Labor Arbiter issued an Order20 deferring the resolution be dismissed for a valid cause and upon proper compliance with the requirements
of petitioners’ Motion to Dismiss until the final determination of the case. The of due process. The records, though, revealed that petitioners failed to present any
Labor Arbiter also reiterated his directive for petitioners to submit position paper. evidence to justify respondent’s dismissal.
Still, petitioners did not comply. Insisting that the Labor Arbiter has no
jurisdiction over the case, they instead filed an Urgent Motion to Resolve the
Aggrieved, petitioners appealed the aforesaid Labor Arbiter’s Decision to the
Motion to Dismiss and the Motion to Suspend Filing of Position Paper.
NLRC.
In an Order21 dated 15 February 2001, the Labor Arbiter denied both motions and
In its Resolution dated 15 October 2002, the NLRC ruled in favor of petitioners
declared final the Order dated 5 September 2000. The Labor Arbiter then gave
by giving credence to the Secretary’s Certificate, which evidenced petitioner
petitioners a period of five days from receipt thereof within which to file position
corporation’s Board of Directors’ meeting in which a resolution was approved
appointing respondent as its corporate officer with designation as General
Manager. Therefrom, the NLRC reversed and set aside the Labor Arbiter’s
Decision dated 1 October 2001 and dismissed respondent’s Complaint for want of
jurisdiction.23
The NLRC enunciated that the validity of respondent’s appointment and
termination from the position of General Manager was made subject to the
approval of petitioner corporation’s Board of Directors. Had respondent been an
ordinary employee, such board action would not have been required. As such, it is
clear that respondent was a corporate officer whose dismissal involved a purely
intra-corporate controversy. The NLRC went further by stating that respondent’s
claim for 30% of the net profit of the corporation can only emanate from his right
of ownership therein as stockholder, director and/or corporate officer. Dividends
or profits are paid only to stockholders or directors of a corporation and not to any
ordinary employee in the absence of any profit sharing scheme. In addition, the
question of remuneration of a person who is not a mere employee but a
stockholder and officer of a corporation is not a simple labor problem. Such
matter comes within the ambit of corporate affairs and management and is an
intra-corporate controversy in contemplation of the Corporation Code.24
When respondent’s Motion for Reconsideration was denied in another
Resolution25 dated 23 January 2003, he filed a Petition for Certiorari with the
Court of Appeals ascribing grave abuse of discretion on the part of the NLRC.
On 20 June 2005, the Court of Appeals rendered its now assailed Decision
declaring that the Labor Arbiter has jurisdiction over the present controversy. It
upheld the finding of the Labor Arbiter that respondent was a mere employee of
petitioner corporation, who has been illegally dismissed from employment
without valid cause and without due process. Nevertheless, it ordered the records
of the case remanded to the NLRC for the determination of the appropriate
amount of monetary awards to be given to respondent. The Court of Appeals,
thus, decreed:
WHEREFORE, the petition is by us PARTIALLY GRANTED. The Labor
Arbiter is DECLARED to have jurisdiction over the controversy. The records are
REMANDED to the NLRC for further proceedings to determine the appropriate
amount of monetary awards to be adjudged in favor of [respondent]. Costs against
the [petitioners] in solidum.26
Petitioners moved for its reconsideration but to no avail.27
Petitioners are now before this Court with the following assignment of errors:
THE COURT OF APPEALS ERRED AND COMMITTED GRAVE
ABUSE OF DISCRETION IN DECIDING THAT THE NLRC HAS
THE JURISDICTION IN RESOLVING A PURELY INTRA-
CORPORATE MATTER WHICH IS COGNIZABLE BY THE
SECURITIES AND EXCHANGE COMMISSION/REGIONAL
TRIAL COURT.
ASSUMING, GRATIS ARGUENDO, THAT THE NLRC HAS
JURISDICTION OVER THE CASE, STILL THE COURT OF
APPEALS SERIOUSLY ERRED IN NOT RULING THAT THERE
IS NO EMPLOYER-EMPLOYEE RELATIONSHIP BETWEEN
[RESPONDENT] ALFREDO M. JOSON AND MARC II
MARKETING, INC. [PETITIONER CORPORATION].
ASSUMING GRATIS ARGUENDO THAT THE NLRC HAS
JURISDICTION OVER THE CASE, THE COURT OF APPEALS
ERRED IN NOT RULING THAT THE LABOR ARBITER
COMMITTED GRAVE ABUSE OF DISCRETION IN AWARDING
MULTI-MILLION PESOS IN COMPENSATION AND
BACKWAGES BASED ON THE PURPORTED GROSS INCOME
OF [PETITIONER CORPORATION].
THE COURT OF APPEALS SERIOUSLY ERRED AND
COMMITTED GRAVE ABUSE OF DISCRETION IN NOT
MAKING ANY FINDINGS AND RULING THAT [PETITIONER
LUCILA] SHOULD NOT BE HELD SOLIDARILY LIABLE IN
THE ABSENCE OF EVIDENCE OF MALICE AND BAD FAITH
ON HER PART.28
Petitioners fault the Court of Appeals for having sustained the Labor Arbiter’s
finding that respondent was not a corporate officer under petitioner corporation’s
by-laws. They insist that there is no need to amend the corporate by-laws to
specify who its corporate officers are. The resolution issued by petitioner
corporation’s Board of Directors appointing respondent as General Manager,
coupled with his assumption of the said position, positively made him its
corporate officer. More so, respondent’s position, being a creation of petitioner
corporation’s Board of Directors pursuant to its by-laws, is a corporate office
sanctioned by the Corporation Code and the doctrines previously laid down by
this Court. Thus, respondent’s removal as petitioner corporation’s General
Manager involved a purely intra-corporate controversy over which the RTC has
jurisdiction.
Petitioners further contend that respondent’s claim for 30% of the net profit of
petitioner corporation was anchored on the purported Management Contract dated
16 January 1994. It should be noted, however, that said Management Contract
was executed at the time petitioner corporation was still nonexistent and had no
juridical personality yet. Such being the case, respondent cannot invoke any legal
right therefrom as it has no legal and binding effect on petitioner corporation.
Moreover, it is clear from the Articles of Incorporation of petitioner corporation
that respondent was its director and stockholder. Indubitably, respondent’s claim
for his share in the profit of petitioner corporation was based on his capacity as
such and not by virtue of any employer-employee relationship.
Petitioners further avow that even if the present case does not pose an intra-
corporate controversy, still, the Labor Arbiter’s multi-million peso awards in
favor of respondent were erroneous. The same was merely based on the latter’s
self-serving computations without any supporting documents.
Finally, petitioners maintain that petitioner Lucila cannot be held solidarily liable
with petitioner corporation. There was neither allegation nor iota of evidence
presented to show that she acted with malice and bad faith in her dealings with
respondent. Moreover, the Labor Arbiter, in his Decision, simply concluded that
petitioner Lucila was jointly and severally liable with petitioner corporation
without making any findings thereon. It was, therefore, an error for the Court of
Appeals to hold petitioner Lucila solidarily liable with petitioner corporation.
From the foregoing arguments, the initial question is which between the Labor
Arbiter or the RTC, has jurisdiction over respondent’s dismissal as General
Manager of petitioner corporation. Its resolution necessarily entails the
determination of whether respondent as General Manager of petitioner
corporation is a corporate officer or a mere employee of the latter.
While Article 217(a)229 of the Labor Code, as amended, provides that it is the
Labor Arbiter who has the original and exclusive jurisdiction over cases involving
termination or dismissal of workers when the person dismissed or terminated is a
corporate officer, the case automatically falls within the province of the RTC. The
dismissal of a corporate officer is always regarded as a corporate act and/or an
intra-corporate controversy.30
Under Section 531 of Presidential Decree No. 902-A, intra-corporate controversies
are those controversies arising out of intra-corporate or partnership relations,
between and among stockholders, members or associates; between any or all of
them and the corporation, partnership or association of which they are
stockholders, members or associates, respectively; and between such corporation,
partnership or association and the State insofar as it concerns their individual
franchise or right to exist as such entity. It also includes controversies in the
election or appointments of directors, trustees, officers or managers of such
corporations, partnerships or associations.32
Accordingly, in determining whether the SEC (now the RTC) has jurisdiction
over the controversy, the status or relationship of the parties and the nature of the
question that is the subject of their controversy must be taken into consideration.33
In Easycall Communications Phils., Inc. v. King, this Court held that in the
context of Presidential Decree No. 902-A, corporate officers are those officers of
a corporation who are given that character either by the Corporation Code or by
the corporation’s by-laws. Section 2534 of the Corporation Code specifically
enumerated who are these corporate officers, to wit: (1) president; (2) secretary;
(3) treasurer; and (4) such other officers as may be provided for in the by-laws.35
The aforesaid Section 25 of the Corporation Code, particularly the phrase "such
other officers as may be provided for in the by-laws," has been clarified and
elaborated in this Court’s recent pronouncement in Matling Industrial and
Commercial Corporation v. Coros, where it held, thus:
Conformably with Section 25, a position must be expressly mentioned in the [b]y-
[l]aws in order to be considered as a corporate office. Thus, the creation of an
office pursuant to or under a [b]y-[l]aw enabling provision is not enough to make
a position a corporate office. [In] Guerrea v. Lezama [citation omitted] the first
ruling on the matter, held that the only officers of a corporation were those given
that character either by the Corporation Code or by the [b]y-[l]aws; the rest of the
corporate officers could be considered only as employees or subordinate officials.
Thus, it was held in Easycall Communications Phils., Inc. v. King [citation
omitted]:
An "office" is created by the charter of the corporation and the officer is elected
by the directors or stockholders. On the other hand, an employee occupies no
office and generally is employed not by the action of the directors or stockholders
but by the managing officer of the corporation who also determines the
compensation to be paid to such employee.
xxxx
This interpretation is the correct application of Section 25 of the Corporation
Code, which plainly states that the corporate officers are the President, Secretary,
Treasurer and such other officers as may be provided for in the [b]y-[l]aws.
Accordingly, the corporate officers in the context of PD No. 902-A are
exclusively those who are given that character either by the Corporation Code or
by the corporation’s [b]y[l]aws.
A different interpretation can easily leave the way open for the Board of Directors
to circumvent the constitutionally guaranteed security of tenure of the employee
by the expedient inclusion in the [b]y-[l]aws of an enabling clause on the creation
of just any corporate officer position.
It is relevant to state in this connection that the SEC, the primary agency
administering the Corporation Code, adopted a similar interpretation of Section 25
of the Corporation Code in its Opinion dated November 25, 1993 [citation
omitted], to wit:
Thus, pursuant to the above provision (Section 25 of the Corporation Code),
whoever are the corporate officers enumerated in the by-laws are the exclusive
Officers of the corporation and the Board has no power to create other Offices
without amending first the corporate [b]y-laws. However, the Board may create
appointive positions other than the positions of corporate Officers, but the
persons occupying such positions are not considered as corporate officers
within the meaning of Section 25 of the Corporation Code and are not
empowered to exercise the functions of the corporate Officers, except those
functions lawfully delegated to them. Their functions and duties are to be
determined by the Board of Directors/Trustees.36 [Emphasis supplied.]
A careful perusal of petitioner corporation’s by-laws, particularly paragraph 1,
Section 1, Article IV,37 would explicitly reveal that its corporate officers are
composed only of: (1) Chairman; (2) President; (3) one or more Vice-President;
(4) Treasurer; and (5) Secretary.38 The position of General Manager was not
among those enumerated.
Paragraph 2, Section 1, Article IV of petitioner corporation’s by-laws, empowered
its Board of Directors to appoint such other officers as it may determine necessary
or proper.39 It is by virtue of this enabling provision that petitioner corporation’s
Board of Directors allegedly approved a resolution to make the position of
General Manager a corporate office, and, thereafter, appointed respondent thereto
making him one of its corporate officers. All of these acts were done without first
amending its by-laws so as to include the General Manager in its roster of
corporate officers.
With the given circumstances and in conformity with Matling Industrial and
Commercial Corporation v. Coros, this Court rules that respondent was not a
corporate officer of petitioner corporation because his position as General
Manager was not specifically mentioned in the roster of corporate officers in its
corporate by-laws. The enabling clause in petitioner corporation’s by-laws
empowering its Board of Directors to create additional officers, i.e., General
Manager, and the alleged subsequent passage of a board resolution to that effect
cannot make such position a corporate office. Matling clearly enunciated that the
board of directors has no power to create other corporate offices without first
amending the corporate by-laws so as to include therein the newly created
corporate office. Though the board of directors may create appointive positions
other than the positions of corporate officers, the persons occupying such
positions cannot be viewed as corporate officers under Section 25 of the
Corporation Code.40 In view thereof, this Court holds that unless and until
petitioner corporation’s by-laws is amended for the inclusion of General Manager
in the list of its corporate officers, such position cannot be considered as a
corporate office within the realm of Section 25 of the Corporation Code.
This Court considers that the interpretation of Section 25 of the Corporation Code
laid down in Matling safeguards the constitutionally enshrined right of every
employee to security of tenure. To allow the creation of a corporate officer
position by a simple inclusion in the corporate by-laws of an enabling clause
empowering the board of directors to do so can result in the circumvention of that
constitutionally well-protected right.41
It is also of no moment that respondent, being petitioner corporation’s General
Manager, was given the functions of a managing director by its Board of
Directors. As held in Matling, the only officers of a corporation are those given
that character either by the Corporation Code or by the corporate by-laws. It
follows then that the corporate officers enumerated in the by-laws are the
exclusive officers of the corporation while the rest could only be regarded as mere
employees or subordinate officials.42 Respondent, in this case, though occupying a
high ranking and vital position in petitioner corporation but which position was
not specifically enumerated or mentioned in the latter’s by-laws, can only be
regarded as its employee or subordinate official. Noticeably, respondent’s
compensation as petitioner corporation’s General Manager was set, fixed and
determined not by the latter’s Board of Directors but simply by its President,
petitioner Lucila. The same was not subject to the approval of petitioner
corporation’s Board of Directors. This is an indication that respondent was an
employee and not a corporate officer.
To prove that respondent was petitioner corporation’s corporate officer,
petitioners presented before the NLRC an undated Secretary’s Certificate showing
that corporation’s Board of Directors approved a resolution making respondent’s
position of General Manager a corporate office. The submission, however, of the
said undated Secretary’s Certificate will not change the fact that respondent was
an employee. The certification does not amount to an amendment of the by-laws
which is needed to make the position of General Manager a corporate office.
Moreover, as has been aptly observed by the Court of Appeals, the board
resolution mentioned in that undated Secretary’s Certificate and the latter itself
were obvious fabrications, a mere afterthought. Here we quote with conformity
the Court of Appeals findings on this matter stated in this wise:
The board resolution is an obvious fabrication. Firstly, if it had been in existence
since [29 August 1994], why did not [herein petitioners] attach it to their [M]otion
to [D]ismiss filed on [26 August 1999], when it could have been the best evidence
that [herein respondent] was a corporate officer? Secondly, why did they report
the [respondent] instead as [herein petitioner corporation’s] employee to the
Social Security System [(SSS)] on [11 October 1994] or a later date than their [29
August 1994] board resolution? Thirdly, why is there no indication that the
[respondent], the person concerned himself, and the [SEC] were furnished with
copies of said board resolution? And, lastly, why is the corporate [S]ecretary’s
[C]ertificate not notarized in keeping with the customary procedure? That is why
we called it manipulative evidence as it was a shameless sham meant to be thrown
in as a wild card to muddle up the [D]ecision of the Labor Arbiter to the end that
it be overturned as the latter had firmly pointed out that [respondent] is not a
corporate officer under [petitioner corporation’s by-laws]. Regrettably, the
[NLRC] swallowed the bait hook-line-and sinker. It failed to see through its
nature as a belatedly manufactured evidence. And even on the assumption that it
were an authentic board resolution, it did not make [respondent] a corporate
officer as the board did not first and properly create the position of a [G]eneral
[M]anager by amending its by-laws.
(2) The scope of the term "officer" in the phrase "and such other
officers as may be provided for in the by-laws["] (Sec. 25, par. 1),
would naturally depend much on the provisions of the by-laws of the
corporation. (SEC Opinion, [4 December 1991.]) If the by-laws
enumerate the officers to be elected by the board, the provision is
conclusive, and the board is without power to create new offices
without amending the by-laws. (SEC Opinion, [19 October 1971.])
(3) If, for example, the general manager of a corporation is not listed
as an officer, he is to be classified as an employee although he has
always been considered as one of the principal officers of a
corporation [citing De Leon, H. S., The Corporation Code of the
Philippines Annotated, 1993 Ed., p. 215.]43 [Emphasis supplied.]
That respondent was also a director and a stockholder of petitioner corporation
will not automatically make the case fall within the ambit of intra-corporate
controversy and be subjected to RTC’s jurisdiction. To reiterate, not all conflicts
between the stockholders and the corporation are classified as intra-corporate.
Other factors such as the status or relationship of the parties and the nature of the
question that is the subject of the controversy44 must be considered in determining
whether the dispute involves corporate matters so as to regard them as intra-
corporate controversies.45 As previously discussed, respondent was not a corporate
officer of petitioner corporation but a mere employee thereof so there was no
intra-corporate relationship between them. With regard to the subject of the
controversy or issue involved herein, i.e., respondent’s dismissal as petitioner
corporation’s General Manager, the same did not present or relate to an intra-
corporate dispute. To note, there was no evidence submitted to show that
respondent’s removal as petitioner corporation’s General Manager carried with it
his removal as its director and stockholder. Also, petitioners’ allegation that
respondent’s claim of 30% share of petitioner corporation’s net profit was by
reason of his being its director and stockholder was without basis, thus, self-
serving. Such an allegation was tantamount to a mere speculation for petitioners’
failure to substantiate the same.
In addition, it was not shown by petitioners that the position of General Manager
was offered to respondent on account of his being petitioner corporation’s director
and stockholder. Also, in contrast to NLRC’s findings, neither petitioner
corporation’s by-laws nor the Management Contract stated that respondent’s
appointment and termination from the position of General Manager was subject to
the approval of petitioner corporation’s Board of Directors. If, indeed, respondent
was a corporate officer whose termination was subject to the approval of its Board
of Directors, why is it that his termination was effected only by petitioner Lucila,
President of petitioner corporation? The records are bereft of any evidence to
show that respondent’s dismissal was done with the conformity of petitioner
corporation’s Board of Directors or that the latter had a hand on respondent’s
dismissal. No board resolution whatsoever was ever presented to that effect.
With all the foregoing, this Court is fully convinced that, indeed, respondent,
though occupying the General Manager position, was not a corporate officer of
petitioner corporation rather he was merely its employee occupying a high-
ranking position.
Accordingly, respondent’s dismissal as petitioner corporation’s General Manager
did not amount to an intra-corporate controversy. Jurisdiction therefor properly
belongs with the Labor Arbiter and not with the RTC.
Having established that respondent was not petitioner corporation’s corporate
officer but merely its employee, and that, consequently, jurisdiction belongs to the
Labor Arbiter, this Court will now determine if respondent’s dismissal from
employment is illegal.
It was not disputed that respondent worked as petitioner corporation’s General
Manager from its incorporation on 15 August 1994 until he was dismissed on 30
June 1997. The cause of his dismissal was petitioner corporation’s cessation of
business operations due to poor sales collection aggravated by the inefficient
management of its affairs.
In termination cases, the burden of proving just and valid cause for dismissing an
employee from his employment rests upon the employer. The latter's failure to
discharge that burden would necessarily result in a finding that the dismissal is
unjustified.46
Under Article 283 of the Labor Code, as amended, one of the authorized causes in
terminating the employment of an employee is the closing or cessation of
operation of the establishment or undertaking. Article 283 of the Labor Code, as
amended, reads, thus:
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 Department of Labor and Employment at least one
(1) month before the intended date thereof. x x x In case of retrenchment to
prevent losses and in cases of closures or cessation of operations of establishment
or undertaking not due to serious business losses or financial reverses, the
separation pay shall be equivalent to one (1) month pay or to 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. [Emphasis supplied.]
From the afore-quoted provision, the closure or cessation of operations of
establishment or undertaking may either be due to serious business losses or
financial reverses or otherwise. If the closure or cessation was due to serious
business losses or financial reverses, it is incumbent upon the employer to
sufficiently and convincingly prove the same. If it is otherwise, the employer can
lawfully close shop anytime as long as it was bona fide in character and not
impelled by a motive to defeat or circumvent the tenurial rights of employees and
as long as the terminated employees were paid in the amount corresponding to
their length of service.47
Accordingly, under Article 283 of the Labor Code, as amended, there are three serious business losses or financial reverses duly proved, in which case, the right
requisites for a valid cessation of business operations: (a) service of a written of affected employees to separation pay is lost for obvious reasons.51 [Emphasis
notice to the employees and to the Department of Labor and Employment (DOLE) supplied.]
at least one month before the intended date thereof; (b) the cessation of business
must be bona fide in character; and (c) payment to the employees of termination
As previously discussed, respondent’s dismissal was due to an authorized cause,
pay amounting to one month pay or at least one-half month pay for every year of
however, petitioner corporation failed to observe procedural due process in
service, whichever is higher.
effecting such dismissal. In Culili v. Eastern Telecommunications Philippines,
Inc.,52 this Court made the following pronouncements, thus:
In this case, it is obvious that petitioner corporation’s cessation of business
operations was not due to serious business losses. Mere poor sales collection,
x x x there are two aspects which characterize the concept of due process under
coupled with mismanagement of its affairs does not amount to serious business
the Labor Code: one is substantive — whether the termination of employment
losses. Nonetheless, petitioner corporation can still validly cease or close its
was based on the provision of the Labor Code or in accordance with the prevailing
business operations because such right is legally allowed, so long as it was not
jurisprudence; the other is procedural — the manner in which the dismissal was
done for the purpose of circumventing the provisions on termination of
effected.
employment embodied in the Labor Code.48 As has been stressed by this Court in
Industrial Timber Corporation v. Ababon, thus:
Section 2(d), Rule I, Book VI of the Rules Implementing the Labor Code
provides:
Just as no law forces anyone to go into business, no law can compel anybody to
continue the same. It would be stretching the intent and spirit of the law if a court
interferes with management's prerogative to close or cease its business operations (d) In all cases of termination of employment, the following standards of due
just because the business is not suffering from any loss or because of the desire to process shall be substantially observed:
provide the workers continued employment.49
xxxx
A careful perusal of the records revealed that, indeed, petitioner corporation has
stopped and ceased business operations beginning 30 June 1997. This was
For termination of employment as defined in Article 283 of the Labor Code, the
evidenced by a notarized Affidavit of Non-Operation dated 31 August 1998.
requirement of due process shall be deemed complied with upon service of a
There was also no showing that the cessation of its business operations was done
written notice to the employee and the appropriate Regional Office of the
in bad faith or to circumvent the Labor Code. Nevertheless, in doing so, petitioner
Department of Labor and Employment at least thirty days before effectivity of the
corporation failed to comply with the one-month prior written notice rule. The
termination, specifying the ground or grounds for termination.
records disclosed that respondent, being petitioner corporation’s employee, and
the DOLE were not given a written notice at least one month before petitioner
corporation ceased its business operations. Moreover, the records clearly show In Mayon Hotel & Restaurant v. Adana, [citation omitted] we observed:
that respondent’s dismissal was effected on the same date that petitioner
corporation decided to stop and cease its operation. Similarly, respondent was not
The requirement of law mandating the giving of notices was intended not only to
paid separation pay upon termination of his employment.
enable the employees to look for another employment and therefore ease the
impact of the loss of their jobs and the corresponding income, but more
As respondent’s dismissal was not due to serious business losses, respondent is importantly, to give the Department of Labor and Employment (DOLE) the
entitled to payment of separation pay equivalent to one month pay or at least one- opportunity to ascertain the verity of the alleged authorized cause of
half month pay for every year of service, whichever is higher. The rationale for termination.53 [Emphasis supplied].
this was laid down in Reahs Corporation v. National Labor Relations
Commission,50 thus:
The records of this case disclosed that there was absolutely no written notice
given by petitioner corporation to the respondent and to the DOLE prior to the
The grant of separation pay, as an incidence of termination of employment under cessation of its business operations. This is evident from the fact that petitioner
Article 283, is a statutory obligation on the part of the employer and a demandable corporation effected respondent’s dismissal on the same date that it decided to
right on the part of the employee, except only where the closure or cessation of stop and cease its business operations. The necessary consequence of such failure
operations was due to serious business losses or financial reverses and there is to comply with the one-month prior written notice rule, which constitutes a
sufficient proof of this fact or condition. In the absence of such proof of serious violation of an employee’s right to statutory due process, is the payment of
business losses or financial reverses, the employer closing his business is indemnity in the form of nominal damages.54 In Culili v. Eastern
obligated to pay his employees and workers their separation pay. Telecommunications Philippines, Inc., this Court further held:
The rule, therefore, is that in all cases of business closure or cessation of operation
or undertaking of the employer, the affected employee is entitled to separation
pay. This is consistent with the state policy of treating labor as a primary social
economic force, affording full protection to its rights as well as its welfare. The
exception is when the closure of business or cessation of operations is due to
In Serrano v. National Labor Relations Commission [citation omitted], we noted
that "a job is more than the salary that it carries." There is a psychological effect
or a stigma in immediately finding one’s self laid off from work. This is exactly
why our labor laws have provided for mandating procedural due process clauses.
Our laws, while recognizing the right of employers to terminate employees it
cannot sustain, also recognize the employee’s right to be properly informed of the
impending severance of his ties with the company he is working for. x x x.
x x x Over the years, this Court has had the opportunity to reexamine the
sanctions imposed upon employers who fail to comply with the procedural due
process requirements in terminating its employees. In Agabon v. National Labor
Relations Commission [citation omitted], this Court reverted back to the doctrine
in Wenphil Corporation v. National Labor Relations Commission [citation
omitted] and held that where the dismissal is due to a just or authorized cause, but
without observance of the due process requirements, the dismissal may be upheld
but the employer must pay an indemnity to the employee. The sanctions to be
imposed however, must be stiffer than those imposed in Wenphil to achieve a
result fair to both the employers and the employees.
In Jaka Food Processing Corporation v. Pacot [citation omitted], this Court, taking
a cue from Agabon, held that since there is a clear-cut distinction between a
dismissal due to a just cause and a dismissal due to an authorized cause, the legal
implications for employers who fail to comply with the notice requirements must
also be treated differently:
Accordingly, it is wise to hold that: (1) if the dismissal is based on a just cause
under Article 282 but the employer failed to comply with the notice requirement,
the sanction to be imposed upon him should be tempered because the dismissal
process was, in effect, initiated by an act imputable to the employee; and (2) if the
dismissal is based on an authorized cause under Article 283 but the employer
failed to comply with the notice requirement, the sanction should be stiffer
because the dismissal process was initiated by the employer's exercise of his
management prerogative.55 [Emphasis supplied.]
Thus, in addition to separation pay, respondent is also entitled to an award of
nominal damages. In conformity with this Court’s ruling in Culili v. Eastern
Telecommunications Philippines, Inc. and Shimizu Phils. Contractors, Inc. v.
Callanta, both citing Jaka Food Processing Corporation v. Pacot,56 this Court fixed
the amount of nominal damages to ₱50,000.00.
With respect to petitioners’ contention that the Management Contract executed
between respondent and petitioner Lucila has no binding effect on petitioner
corporation for having been executed way before its incorporation, this Court
finds the same meritorious.
Section 19 of the Corporation Code expressly provides:
Sec. 19. Commencement of corporate existence. - A private corporation formed
or organized under this Code commences to have corporate existence and juridical
personality and is deemed incorporated from the date the Securities and Exchange
Commission issues a certificate of incorporation under its official seal; and
thereupon the incorporators, stockholders/members and their successors shall
constitute a body politic and corporate under the name stated in the articles of
incorporation for the period of time mentioned therein, unless said period is
extended or the corporation is sooner dissolved in accordance with law. 76624 are hereby AFFIRMED with the MODIFICATION finding respondent’s
[Emphasis supplied.] dismissal from employment legal but without proper observance of due process.
Accordingly, petitioner corporation, jointly and solidarily liable with petitioner
Lucila, is hereby ordered to pay respondent the following; (1) separation pay
Logically, there is no corporation to speak of prior to an entity’s incorporation.
equivalent to one month pay or at least one-half month pay for every year of
And no contract entered into before incorporation can bind the corporation.
service, whichever is higher, to be computed from the commencement of
employment until termination; and (2) nominal damages in the amount of
As can be gleaned from the records, the Management Contract dated 16 January ₱50,000.00.
1994 was executed between respondent and petitioner Lucila months before
petitioner corporation’s incorporation on 15 August 1994. Similarly, it was done
This Court, however, finds it proper to still remand the records to the Labor
when petitioner Lucila was still the President of Marc Marketing, Inc.
Arbiter to conduct further proceedings for the sole purpose of determining the
Undeniably, it cannot have any binding and legal effect on petitioner corporation.
compensation that respondent was actually receiving during the period that he was
Also, there was no evidence presented to prove that petitioner corporation
the General Manager of petitioner corporation for the proper computation of his
adopted, ratified or confirmed the Management Contract. It is for the same reason
separation pay.
that petitioner corporation cannot be considered estopped from questioning its
binding effect now that respondent was invoking the same against it. In no way,
then, can it be enforced against petitioner corporation, much less, its provisions Costs against petitioners.
fixing respondent’s compensation as General Manager to 30% of petitioner
corporation’s net profit. Consequently, such percentage cannot be the basis for the
SO ORDERED.
computation of respondent’s separation pay. This finding, however, will not affect
the undisputed fact that respondent was, indeed, the General Manager of
petitioner corporation from its incorporation up to the time of his dismissal.
Accordingly, this Court finds it necessary to still remand the present case to the
Labor Arbiter to conduct further proceedings for the sole purpose of determining
the compensation that respondent was actually receiving during the period that he
was the General Manager of petitioner corporation, this, for the proper
computation of his separation pay.
As regards petitioner Lucila’s solidary liability, this Court affirms the same.
As a rule, corporation has a personality separate and distinct from its officers,
stockholders and members such that corporate officers are not personally liable
for their official acts unless it is shown that they have exceeded their authority.
However, this corporate veil can be pierced when the notion of the legal entity is
used as a means to perpetrate fraud, an illegal act, as a vehicle for the evasion of
an existing obligation, and to confuse legitimate issues. Under the Labor Code, for
instance, when a corporation violates a provision declared to be penal in nature,
the penalty shall be imposed upon the guilty officer or officers of the
corporation.57
Based on the prevailing circumstances in this case, petitioner Lucila, being the
President of petitioner corporation, acted in bad faith and with malice in effecting
respondent’s dismissal from employment. Although petitioner corporation has a
valid cause for dismissing respondent due to cessation of business operations,
however, the latter’s dismissal therefrom was done abruptly by its President,
petitioner Lucila. Respondent was not given the required one-month prior written
notice that petitioner corporation will already cease its business operations. As
can be gleaned from the records, respondent was dismissed outright by petitioner
Lucila on the same day that petitioner corporation decided to stop and cease its
business operations. Worse, respondent was not given separation pay considering
that petitioner corporation’s cessation of business was not due to business losses
or financial reverses.
WHEREFORE, premises considered, the Decision and Resolution dated 20 June
2005 and 7 March 2006, respectively, of the Court of Appeals in CA-G.R. SP No.
G.R. No. L-43350 December 23, 1937
CAGAYAN FISHING DEVELOPMENT CO., INC., plaintiff-appellant,
vs.
TEODORO SANDIKO, defendant-appellee.
This is an appeal from a judgment of the Court of First Instance of Manila
absolving the defendant from the plaintiff's complaint.
Manuel Tabora is the registered owner of four parcels of land situated in the
barrio of Linao, town of Aparri, Province of Cagayan, as evidenced by transfer
certificate of title No. 217 of the land records of Cagayan, a copy of which is in
evidence as Exhibit 1. To guarantee the payment of a loan in the sum of P8,000,
Manuel Tabora, on August 14, 1929, executed in favor of the Philippine National
Bank a first mortgage on the four parcels of land above-mentioned. A second
mortgage in favor of the same bank was in April of 1930 executed by Tabora over
the same lands to guarantee the payment of another loan amounting to P7,000. A
third mortgage on the same lands was executed on April 16, 1930 in favor of
Severina Buzon to whom Tabora was indebted in the sum of P2,9000. These
mortgages were registered and annotations thereof appear at the back of transfer
certificate of title No. 217.
On May 31, 1930, Tabora executed a public document entitled "Escritura de
Transpaso de Propiedad Inmueble" (Exhibit A) by virtue of which the four parcels
of land owned by him was sold to the plaintiff company, said to under process of
incorporation, in consideration of one peso (P1) subject to the mortgages in favor
of the Philippine National Bank and Severina Buzon and, to the condition that the
certificate of title to said lands shall not be transferred to the name of the plaintiff
company until the latter has fully and completely paid Tabora's indebtedness to
the Philippine National Bank.
The plaintiff company filed its article incorporation with the Bureau of Commerce
and Industry on October 22, 1930 (Exhibit 2). A year later, on October 28, 1931,
the board of directors of said company adopted a resolution (Exhibit G)
authorizing its president, Jose Ventura, to sell the four parcels of lands in question
to Teodoro Sandiko for P42,000. Exhibits B, C and D were thereafter made and
executed. Exhibit B is a deed of sale executed before a notary public by the terms
of which the plaintiff sold ceded and transferred to the defendant all its right,
titles, and interest in and to the four parcels of land described in transfer certificate
in turn obligated himself to shoulder the three mortgages hereinbefore referred to.
Exhibit C is a promisory note for P25,300. drawn by the defendant in favor of the
plaintiff, payable after one year from the date thereof. Exhibit D is a deed of
mortgage executed before a notary public in accordance with which the four
parcels of land were given a security for the payment of the promissory note,
Exhibit C. All these three instrument were dated February 15, 1932.
The defendant having failed to pay the sum stated in the promissory note,
plaintiff, on January 25, 1934, brought this action in the Court of First Instance of
Manila praying that judgment be rendered against the defendant for the sum of
P25,300, with interest at legal rate from the date of the filing of the complaint, and
the costs of the suits. After trial, the court below, on December 18, 1934, rendered
judgment absolving the defendant, with costs against the plaintiff. Plaintiff
presented a motion for new trial on January 14, 1935, which motion was denied
by the trial court on January 19 of the same year. After due exception and notice,
plaintiff has appealed to this court and makes an assignment of various errors.
In dismissing the complaint against the defendant, the court below, reached the
conclusion that Exhibit B is invalid because of vice in consent and repugnancy to
law. While we do not agree with this conclusion, we have however voted to affirm
the judgment appealed from the reasons which we shall presently state.
The transfer made by Tabora to the Cagayan fishing Development Co., Inc.,
plaintiff herein, was affected on May 31, 1930 (Exhibit A) and the actual
incorporation of said company was affected later on October 22, 1930 (Exhibit 2).
In other words, the transfer was made almost five months before the incorporation
of the company. Unquestionably, a duly organized corporation has the power to
purchase and hold such real property as the purposes for which such corporation
was formed may permit and for this purpose may enter into such contracts as may
be necessary (sec. 13, pars. 5 and 9, and sec. 14, Act No. 1459). But before a
corporation may be said to be lawfully organized, many things have to be done.
Among other things, the law requires the filing of articles of incorporation (secs. 6
et seq., Act. No. 1459). Although there is a presumption that all the requirements
of law have been complied with (sec. 334, par. 31 Code of Civil Procedure), in the
case before us it can not be denied that the plaintiff was not yet incorporated when
it entered into a contract of sale, Exhibit A. The contract itself referred to the
plaintiff as "una sociedad en vias de incorporacion." It was not even a de
facto corporation at the time. Not being in legal existence then, it did not possess
juridical capacity to enter into the contract.
Corporations are creatures of the law, and can only come into
existence in the manner prescribed by law. As has already been stated,
general law authorizing the formation of corporations are general
offers to any persons who may bring themselves within their
provisions; and if conditions precedent are prescribed in the statute, or
certain acts are required to be done, they are terms of the offer, and
must be complied with substantially before legal corporate existence
can be acquired. (14 C. J., sec. 111, p. 118.)
That a corporation should have a full and complete organization and
existence as an entity before it can enter into any kind of a contract or
transact any business, would seem to be self evident. . . . A
corporation, until organized, has no being, franchises or faculties. Nor
do those engaged in bringing it into being have any power to bind it by
contract, unless so authorized by the charter there is not a corporation
nor does it possess franchise or faculties for it or others to exercise,
until it acquires a complete existence. (Gent vs. Manufacturers and
Merchant's Mutual Insurance Company, 107 Ill., 652, 658.)
Boiled down to its naked reality, the contract here (Exhibit A) was entered into
not between Manuel Tabora and a non-existent corporation but between the
Manuel Tabora as owner of the four parcels of lands on the one hand and the same
Manuel Tabora, his wife and others, as mere promoters of a corporations on the
other hand. For reasons that are self-evident, these promoters could not have acted
as agent for a projected corporation since that which no legal existence could have
no agent. A corporation, until organized, has no life and therefore no faculties. It
is, as it were, a child in ventre sa mere. This is not saying that under no
circumstances may the acts of promoters of a corporation be ratified by the
corporation if and when subsequently organized. There are, of course, exceptions
(Fletcher Cyc. of Corps., permanent edition, 1931, vol. I, secs. 207 et seq.), but
under the peculiar facts and circumstances of the present case we decline to
extend the doctrine of ratification which would result in the commission of
injustice or fraud to the candid and unwary.(Massachusetts rule, Abbott vs.
Hapgood, 150 Mass., 248; 22 N. E. 907, 908; 5 L. R. A., 586; 15 Am. St. Rep.,
193; citing English cases; Koppel vs. Massachusetts Brick Co., 192 Mass., 223;
78 N. E., 128; Holyoke Envelope Co., vs. U. S. Envelope Co., 182 Mass., 171; 65
N. E., 54.) It should be observed that Manuel Tabora was the registered owner of
the four parcels of land, which he succeeded in mortgaging to the Philippine
National Bank so that he might have the necessary funds with which to convert
and develop them into fishery. He appeared to have met with financial reverses.
He formed a corporation composed of himself, his wife, and a few others. From
the articles of incorporation, Exhibit 2, it appears that out of the P48,700, amount
of capital stock subscribed, P45,000 was subscribed by Manuel Tabora himself
and P500 by his wife, Rufina Q. de Tabora; and out of the P43,300, amount paid
on subscription, P42,100 is made to appear as paid by Tabora and P200 by his
wife. Both Tabora and His wife were directors and the latter was treasurer as well.
In fact, to this day, the lands remain inscribed in Tabora's name. The defendant
always regarded Tabora as the owner of the lands. He dealt with Tabora directly.
Jose Ventura, president of the plaintiff corporation, intervened only to sign the
contract, Exhibit B, in behalf of the plaintiff. Even the Philippine National Bank,
mortgagee of the four parcels of land, always treated Tabora as the owner of the
same. (See Exhibits E and F.) Two civil suits (Nos. 1931 and 38641) were brought
against Tabora in the Court of First Instance of Manila and in both cases a writ of
attachment against the four parcels of land was issued. The Philippine National
Bank threatened to foreclose its mortgages. Tabora approached the defendant
Sandiko and succeeded in the making him sign Exhibits B, C, and D and in
making him, among other things, assume the payment of Tabora's indebtedness to
the Philippine National Bank. The promisory note, Exhibit C, was made payable
to the plaintiff company so that it may not attached by Tabora's creditors, two of
whom had obtained writs of attachment against the four parcels of land.
If the plaintiff corporation could not and did not acquire the four parcels of land
here involved, it follows that it did not possess any resultant right to dispose of
them by sale to the defendant, Teodoro Sandiko.
Some of the members of this court are also of the opinion that the transfer from
Manuel Tabora to the Cagayan Fishing Development Company, Inc., which
transfer is evidenced by Exhibit A, was subject to a condition precedent
(condicion suspensiva), namely, the payment of the mortgage debt of said Tabora
to the Philippine National Bank, and that this condition not having been complied
with by the Cagayan Fishing Development Company, Inc., the transfer was
ineffective. (Art. 1114, Civil Code; Wise & Co. vs. Kelly and Lim, 37 Phil., 696;
Manresa, vol. 8, p. 141.) However, having arrived at the conclusion that the
transfer by Manuel Tabora to the Cagayan Fishing Development Company, Inc.
was null because at the time it was affected the corporation was non-existent, we
deem it unnecessary to discuss this point. The decision of the lower court is
la
accordingly affirmed, with costs against the appellant. So Ordered.
G.R. No. L-48627
FERMIN Z. CARAM, JR. and ROSA O. DE CARAM, petitioners
vs.
THE HONORABLE COURT OF APPEALS and ALBERTO V.
ARELLANO, respondents.
We gave limited due course to this petition on the question of the solidary liability
of the petitioners with their co-defendants in the lower court   because of the
1
challenge to the following paragraph in the dispositive portion of the decision of
the respondent court: *
1. Defendants are hereby ordered to jointly and severally pay the
plaintiff the amount of P50,000.00 for the preparation of the project
study and his technical services that led to the organization of the
defendant corporation, plus P10,000.00 attorney's fees;  2
The petitioners claim that this order has no support in fact and law because they
had no contract whatsoever with the private respondent regarding the above-
mentioned services. Their position is that as mere subsequent investors in the
corporation that was later created, they should not be held solidarily liable with
the Filipinas Orient Airways, a separate juridical entity, and with Barretto and
Garcia, their co-defendants in the lower court,   who were the ones who requested
**
the said services from the private respondent. 3
We are not concerned here with the petitioners' co-defendants, who have not
appealed the decision of the respondent court and may, for this reason, be
presumed to have accepted the same. For purposes of resolving this case before
us, it is not necessary to determine whether it is the promoters of the proposed
corporation, or the corporation itself after its organization, that shall be
responsible for the expenses incurred in connection with such organization.
The only question we have to decide now is whether or not the petitioners
themselves are also and personally liable for such expenses and, if so, to what
extent.
The reasons for the said order are given by the respondent court in its decision in
this wise:
As to the 4th assigned error we hold that as to the remuneration due
the plaintiff for the preparation of the project study and the pre-
organizational services in the amount of P50,000.00, not only the
defendant corporation but the other defendants including defendants
Caram should be jointly and severally liable for this amount. As we
above related it was upon the request of defendants Barretto and
Garcia that plaintiff handled the preparation of the project study which
project study was presented to defendant Caram so the latter was
convinced to invest in the proposed airlines. The project study was
revised for purposes of presentation to financiers and the banks. It was
on the basis of this study that defendant corporation was actually
organized and rendered operational. Defendants Garcia and Caram,
and Barretto became members of the Board and/or officers of
defendant corporation. Thus, not only the defendant corporation but all
the other defendants who were involved in the preparatory stages of
the incorporation, who caused the preparation and/or benefited from
the project study and the technical services of plaintiff must be liable.  4
It would appear from the above justification that the petitioners were not really compromise, to accept joint liability. While it is true that it does here and there
involved in the initial steps that finally led to the incorporation of the Filipinas disclaim total liability, the thrust of the petition seems to be against the imposition
Orient Airways. Elsewhere in the decision, Barretto was described as "the moving of solidary liability only rather than against any liability at all, which is what it
spirit." The finding of the respondent court is that the project study was should have categorically argued.
undertaken by the private respondent at the request of Barretto and Garcia who,
upon its completion, presented it to the petitioners to induce them to invest in the
Categorically, the Court holds that the petitioners are not liable at all, jointly or
proposed airline. The study could have been presented to other prospective
jointly and severally, under the first paragraph of the dispositive portion of the
investors. At any rate, the airline was eventually organized on the basis of the
challenged decision. So holding, we find it unnecessary to examine at this time
project study with the petitioners as major stockholders and, together with
the rules on solidary obligations, which the parties-needlessly, as it turns out have
Barretto and Garcia, as principal officers.
belabored unto death.
The following portion of the decision in question is also worth considering:
WHEREFORE, the petition is granted. The petitioners are declared not liable
under the challenged decision, which is hereby modified accordingly. It is so
... Since defendant Barretto was the moving spirit in the pre- ordered.
organization work of defendant corporation based on his experience
and expertise, hence he was logically compensated in the amount of
P200,000.00 shares of stock not as industrial partner but more for his
technical services that brought to fruition the defendant corporation.
By the same token, We find no reason why the plaintiff should not be
similarly compensated not only for having actively participated in the
preparation of the project study for several months and its subsequent
revision but also in his having been involved in the pre-organization of
the defendant corporation, in the preparation of the franchise, in
inviting the interest of the financiers and in the training and screening
of personnel. We agree that for these special services of the plaintiff
the amount of P50,000.00 as compensation is reasonable.  5
The above finding bolsters the conclusion that the petitioners were not involved in
the initial stages of the organization of the airline, which were being directed by
Barretto as the main promoter. It was he who was putting all the pieces together,
so to speak. The petitioners were merely among the financiers whose interest was
to be invited and who were in fact persuaded, on the strength of the project study,
to invest in the proposed airline.
Significantly, there was no showing that the Filipinas Orient Airways was a
fictitious corporation and did not have a separate juridical personality, to justify
making the petitioners, as principal stockholders thereof, responsible for its
obligations. As a bona fide corporation, the Filipinas Orient Airways should alone
be liable for its corporate acts as duly authorized by its officers and directors.
In the light of these circumstances, we hold that the petitioners cannot be held
personally liable for the compensation claimed by the private respondent for the
services performed by him in the organization of the corporation. To repeat, the
petitioners did not contract such services. It was only the results of such services
that Barretto and Garcia presented to them and which persuaded them to invest in
the proposed airline. The most that can be said is that they benefited from such
services, but that surely is no justification to hold them personally liable therefor.
Otherwise, all the other stockholders of the corporation, including those who
came in later, and regardless of the amount of their share holdings, would be
equally and personally liable also with the petitioners for the claims of the private
respondent.
The petition is rather hazy and seems to be flawed by an ambiguous ambivalence.
Our impression is that it is opposed to the imposition of solidary responsibility
upon the Carams but seems to be willing, in a vague, unexpressed offer of
G.R. No. 84197 July 28, 1989
PIONEER INSURANCE & SURETY CORPORATION, petitioner,
vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY
EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M. MAGLANA and
JACOB S. LIM, respondents.
G.R. No. 84157 July 28, 1989
JACOB S. LIM, petitioner,
vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY
CORPORATION, BORDER MACHINERY and HEAVY EQUIPMENT
CO., INC,, FRANCISCO and MODESTO CERVANTES and
CONSTANCIO MAGLANA, respondents.
The subject matter of these consolidated petitions is the decision of the Court of
Appeals in CA-G.R. CV No. 66195 which modified the decision of the then Court
of First Instance of Manila in Civil Case No. 66135. The plaintiffs complaint
(petitioner in G.R. No. 84197) against all defendants (respondents in G.R. No.
84197) was dismissed but in all other respects the trial court's decision was
affirmed.
The dispositive portion of the trial court's decision reads as follows:
WHEREFORE, judgment is rendered against defendant
Jacob S. Lim requiring Lim to pay plaintiff the amount of
P311,056.02, with interest at the rate of 12% per annum
compounded monthly; plus 15% of the amount awarded to
plaintiff as attorney's fees from July 2,1966, until full
payment is made; plus P70,000.00 moral and exemplary
damages.
It is found in the records that the cross party plaintiffs
incurred additional miscellaneous expenses aside from
Pl51,000.00,,making a total of P184,878.74. Defendant
Jacob S. Lim is further required to pay cross party plaintiff,
Bormaheco, the Cervanteses one-half and Maglana the
other half, the amount of Pl84,878.74 with interest from the
filing of the cross-complaints until the amount is fully paid;
plus moral and exemplary damages in the amount of
P184,878.84 with interest from the filing of the cross-
complaints until the amount is fully paid; plus moral and
exemplary damages in the amount of P50,000.00 for each
of the two Cervanteses.
Furthermore, he is required to pay P20,000.00 to
Bormaheco and the Cervanteses, and another P20,000.00 to
Constancio B. Maglana as attorney's fees.
xxx xxx xxx
WHEREFORE, in view of all above, the complaint of their contributions to a new corporation proposed by Lim to expand his airline
plaintiff Pioneer against defendants Bormaheco, the business. They executed two (2) separate indemnity agreements (Exhibits D-1 and
Cervanteses and Constancio B. Maglana, is dismissed. D-2) in favor of Pioneer, one signed by Maglana and the other jointly signed by
Instead, plaintiff is required to indemnify the defendants Lim for SAL, Bormaheco and the Cervanteses. The indemnity agreements
Bormaheco and the Cervanteses the amount of P20,000.00 stipulated that the indemnitors principally agree and bind themselves jointly and
as attorney's fees and the amount of P4,379.21, per year severally to indemnify and hold and save harmless Pioneer from and against
from 1966 with legal rate of interest up to the time it is any/all damages, losses, costs, damages, taxes, penalties, charges and expenses of
paid. whatever kind and nature which Pioneer may incur in consequence of having
become surety upon the bond/note and to pay, reimburse and make good to
Pioneer, its successors and assigns, all sums and amounts of money which it or its
Furthermore, the plaintiff is required to pay Constancio B.
representatives should or may pay or cause to be paid or become liable to pay on
Maglana the amount of P20,000.00 as attorney's fees and
them of whatever kind and nature.
costs.
On June 10, 1965, Lim doing business under the name and style of SAL executed
No moral or exemplary damages is awarded against
in favor of Pioneer as deed of chattel mortgage as security for the latter's
plaintiff for this action was filed in good faith. The fact that
suretyship in favor of the former. It was stipulated therein that Lim transfer and
the properties of the Bormaheco and the Cervanteses were
convey to the surety the two aircrafts. The deed (Exhibit D) was duly registered
attached and that they were required to file a counterbond
with the Office of the Register of Deeds of the City of Manila and with the Civil
in order to dissolve the attachment, is not an act of bad
Aeronautics Administration pursuant to the Chattel Mortgage Law and the Civil
faith. When a man tries to protect his rights, he should not
Aeronautics Law (Republic Act No. 776), respectively.
be saddled with moral or exemplary damages. Furthermore,
the rights exercised were provided for in the Rules of
Court, and it was the court that ordered it, in the exercise of Lim defaulted on his subsequent installment payments prompting JDA to request
its discretion. payments from the surety. Pioneer paid a total sum of P298,626.12.
No damage is decided against Malayan Insurance Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel
Company, Inc., the third-party defendant, for it only mortgage before the Sheriff of Davao City. The Cervanteses and Maglana,
secured the attachment prayed for by the plaintiff Pioneer. however, filed a third party claim alleging that they are co-owners of the aircrafts,
If an insurance company would be liable for damages in
performing an act which is clearly within its power and
On July 19, 1966, Pioneer filed an action for judicial foreclosure with an
which is the reason for its being, then nobody would
application for a writ of preliminary attachment against Lim and respondents, the
engage in the insurance business. No further claim or
Cervanteses, Bormaheco and Maglana.
counter-claim for or against anybody is declared by this
Court. (Rollo - G.R. No. 24197, pp. 15-16)
In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims
against Lim alleging that they were not privies to the contracts signed by Lim and,
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline
by way of counterclaim, sought for damages for being exposed to litigation and
business as owner-operator of Southern Air Lines (SAL) a single proprietorship.
for recovery of the sums of money they advanced to Lim for the purchase of the
aircrafts in question.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim
entered into and executed a sales contract (Exhibit A) for the sale and purchase of
After trial on the merits, a decision was rendered holding Lim liable to pay
two (2) DC-3A Type aircrafts and one (1) set of necessary spare parts for the total
Pioneer but dismissed Pioneer's complaint against all other defendants.
agreed price of US $109,000.00 to be paid in installments. One DC-3 Aircraft
with Registry No. PIC-718, arrived in Manila on June 7,1965 while the other
aircraft, arrived in Manila on July 18,1965. As stated earlier, the appellate court modified the trial court's decision in that the
plaintiffs complaint against all the defendants was dismissed. In all other respects
the trial court's decision was affirmed.
On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner
in G.R. No. 84197) as surety executed and issued its Surety Bond No. 6639
(Exhibit C) in favor of JDA, in behalf of its principal, Lim, for the balance price We first resolve G.R. No. 84197.
of the aircrafts and spare parts.
Petitioner Pioneer Insurance and Surety Corporation avers that:
It appears that Border Machinery and Heavy Equipment Company, Inc.
(Bormaheco), Francisco and Modesto Cervantes (Cervanteses) and Constancio
RESPONDENT COURT OF APPEALS GRIEVOUSLY
Maglana (respondents in both petitions) contributed some funds used in the
ERRED WHEN IT DISMISSED THE APPEAL OF
purchase of the above aircrafts and spare parts. The funds were supposed to be
 PETITIONER ON THE SOLE GROUND THAT
PETITIONER HAD ALREADY COLLECTED THE
PROCEEDS OF THE REINSURANCE ON ITS BOND IN
FAVOR OF THE JDA AND THAT IT CANNOT
REPRESENT A REINSURER TO RECOVER THE
AMOUNT FROM HEREIN PRIVATE RESPONDENTS
AS DEFENDANTS IN THE TRIAL COURT. (Rollo - G.
R. No. 84197, p. 10)
The petitioner questions the following findings of the appellate court:
We find no merit in plaintiffs appeal. It is undisputed that
plaintiff Pioneer had reinsured its risk of liability under the
surety bond in favor of JDA and subsequently collected the
proceeds of such reinsurance in the sum of P295,000.00.
Defendants' alleged obligation to Pioneer amounts to
P295,000.00, hence, plaintiffs instant action for the
recovery of the amount of P298,666.28 from defendants
will no longer prosper. Plaintiff Pioneer is not the real party
in interest to institute the instant action as it does not stand
to be benefited or injured by the judgment.
Plaintiff Pioneer's contention that it is representing the
reinsurer to recover the amount from defendants, hence, it
instituted the action is utterly devoid of merit. Plaintiff did
not even present any evidence that it is the attorney-in-fact
of the reinsurance company, authorized to institute an
action for and in behalf of the latter. To qualify a person to
be a real party in interest in whose name an action must be
prosecuted, he must appear to be the present real owner of
the right sought to be enforced (Moran, Vol. I, Comments
on the Rules of Court, 1979 ed., p. 155). It has been held
that the real party in interest is the party who would be
benefited or injured by the judgment or the party entitled to
the avails of the suit (Salonga v. Warner Barnes & Co.,
Ltd., 88 Phil. 125, 131). By real party in interest is meant a
present substantial interest as distinguished from a mere
expectancy or a future, contingent, subordinate or
consequential interest (Garcia v. David, 67 Phil. 27;
Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600, 385
III, 414; Flowers v. Germans, 1 NW 2d 424; Weber v. City
of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).
Based on the foregoing premises, plaintiff Pioneer cannot
be considered as the real party in interest as it has already
been paid by the reinsurer the sum of P295,000.00 — the
bulk of defendants' alleged obligation to Pioneer.
In addition to the said proceeds of the reinsurance received
by plaintiff Pioneer from its reinsurer, the former was able
to foreclose extra-judicially one of the subject airplanes and
its spare engine, realizing the total amount of P37,050.00
from the sale of the mortgaged chattels. Adding the sum of
P37,050.00, to the proceeds of the reinsurance amounting
to P295,000.00, it is patent that plaintiff has been overpaid
in the amount of P33,383.72 considering that the total
amount it had paid to JDA totals to only P298,666.28. To
allow plaintiff Pioneer to recover from defendants the
amount in excess of P298,666.28 would be tantamount to
unjust enrichment as it has already been paid by the
reinsurance company of the amount plaintiff has paid to
JDA as surety of defendant Lim vis-a-vis defendant Lim's
liability to JDA. Well settled is the rule that no person
should unjustly enrich himself at the expense of another
(Article 22, New Civil Code). (Rollo-84197, pp. 24-25).
The petitioner contends that-(1) it is at a loss where respondent court based its
finding that petitioner was paid by its reinsurer in the aforesaid amount, as this
matter has never been raised by any of the parties herein both in their answers in
the court below and in their respective briefs with respondent court; (Rollo, p. 11)
(2) even assuming hypothetically that it was paid by its reinsurer, still none of the
respondents had any interest in the matter since the reinsurance is strictly between
the petitioner and the re-insurer pursuant to section 91 of the Insurance Code; (3)
pursuant to the indemnity agreements, the petitioner is entitled to recover from
respondents Bormaheco and Maglana; and (4) the principle of unjust enrichment
is not applicable considering that whatever amount he would recover from the co-
indemnitor will be paid to the reinsurer.
The records belie the petitioner's contention that the issue on the reinsurance
money was never raised by the parties.
A cursory reading of the trial court's lengthy decision shows that two of the issues
threshed out were:
xxx xxx xxx
1. Has Pioneer a cause of action against defendants with
respect to so much of its obligations to JDA as has been
paid with reinsurance money?
2. If the answer to the preceding question is in the negative,
has Pioneer still any claim against defendants, considering
the amount it has realized from the sale of the mortgaged
properties? (Record on Appeal, p. 359, Annex B of G.R.
No. 84157).
In resolving these issues, the trial court made the following findings:
It appearing that Pioneer reinsured its risk of liability under
the surety bond it had executed in favor of JDA, collected
the proceeds of such reinsurance in the sum of P295,000,
and paid with the said amount the bulk of its alleged
liability to JDA under the said surety bond, it is plain that
on this score it no longer has any right to collect to the
extent of the said amount.
On the question of why it is Pioneer, instead of the
reinsurance (sic), that is suing defendants for the amount
paid to it by the reinsurers, notwithstanding that the cause
of action pertains to the latter, Pioneer says: The reinsurers
opted instead that the Pioneer Insurance & Surety
Corporation shall pursue alone the case.. . . . Pioneer
Insurance & Surety Corporation is representing the
reinsurers to recover the amount.' In other words, insofar as
the amount paid to it by the reinsurers Pioneer is suing
defendants as their attorney-in-fact.
But in the first place, there is not the slightest indication in
the complaint that Pioneer is suing as attorney-in- fact of
the reinsurers for any amount. Lastly, and most important
of all, Pioneer has no right to institute and maintain in its
own name an action for the benefit of the reinsurers. It is
well-settled that an action brought by an attorney-in-fact in
his own name instead of that of the principal will not
prosper, and this is so even where the name of the principal
is disclosed in the complaint.
Section 2 of Rule 3 of the Old Rules
of Court provides that 'Every action
must be prosecuted in the name of
the real party in interest.' This
provision is mandatory. The real
party in interest is the party who
would be benefitted or injured by the
judgment or is the party entitled to
the avails of the suit.
This Court has held in various cases
that an attorney-in-fact is not a real
party in interest, that there is no law
permitting an action to be brought by
an attorney-in-fact. Arroyo v.
Granada and Gentero, 18 Phil. Rep.
484; Luchauco v. Limjuco and
Gonzalo, 19 Phil. Rep. 12; Filipinos
Industrial Corporation v. San Diego
G.R. No. L- 22347,1968, 23 SCRA
706, 710-714.
The total amount paid by Pioneer to JDA is P299,666.29.
Since Pioneer has collected P295,000.00 from the
reinsurers, the uninsured portion of what it paid to JDA is
the difference between the two amounts, or P3,666.28. This
is the amount for which Pioneer may sue defendants,
assuming that the indemnity agreement is still valid and
effective. But since the amount realized from the sale of the
mortgaged chattels are P35,000.00 for one of the airplanes
and P2,050.00 for a spare engine, or a total of P37,050.00,
Pioneer is still overpaid by P33,383.72. Therefore, Pioneer
has no more claim against defendants. (Record on Appeal,
pp. 360-363).
The payment to the petitioner made by the reinsurers was not disputed in the
appellate court. Considering this admitted payment, the only issue that cropped up
was the effect of payment made by the reinsurers to the petitioner. Therefore, the
petitioner's argument that the respondents had no interest in the reinsurance
contract as this is strictly between the petitioner as insured and the reinsuring
company pursuant to Section 91 (should be Section 98) of the Insurance Code has
no basis.
In general a reinsurer, on payment of a loss acquires the
same rights by subrogation as are acquired in similar cases
where the original insurer pays a loss (Universal Ins. Co. v.
Old Time Molasses Co. C.C.A. La., 46 F 2nd 925).
The rules of practice in actions on original insurance
policies are in general applicable to actions or contracts of
reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire Ins.
Co., 55 S.E. 330,126 GA. 380, 7 Ann. Con. 1134).
Hence the applicable law is Article 2207 of the new Civil Code, to wit:
Art. 2207. If the plaintiffs property has been insured, and he
has received indemnity from the insurance company for the
injury or loss arising out of the wrong or breach of contract
complained of, the insurance company shall be subrogated
to the rights of the insured against the wrongdoer or the
person who has violated the contract. If the amount paid by
the insurance company does not fully cover the injury or
loss, the aggrieved party shall be entitled to recover the
deficiency from the person causing the loss or injury.
Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v.
Heald Lumber Co. (101 Phil. 1031 [1957]) which we subsequently applied
in Manila Mahogany Manufacturing Corporation v. Court of Appeals (154 SCRA
650 [1987]):
Note that if a property is insured and the owner receives the
indemnity from the insurer, it is provided in said article that
the insurer is deemed subrogated to the rights of the insured
against the wrongdoer and if the amount paid by the insurer
does not fully cover the loss, then the aggrieved party is the
one entitled to recover the deficiency. Evidently, under this
legal provision, the real party in interest with regard to the
portion of the indemnity paid is the insurer and not the
insured. (Emphasis supplied).
It is clear from the records that Pioneer sued in its own name and not as an
attorney-in-fact of the reinsurer.
Accordingly, the appellate court did not commit a reversible error in dismissing
the petitioner's complaint as against the respondents for the reason that the
petitioner was not the real party in interest in the complaint and, therefore, has no
cause of action against the respondents.
Nevertheless, the petitioner argues that the appeal as regards the counter
indemnitors should not have been dismissed on the premise that the evidence on
record shows that it is entitled to recover from the counter indemnitors. It does
not, however, cite any grounds except its allegation that respondent "Maglanas
defense and evidence are certainly incredible" (p. 12, Rollo) to back up its
contention.
On the other hand, we find the trial court's findings on the matter replete with
evidence to substantiate its finding that the counter-indemnitors are not liable to
the petitioner. The trial court stated:
Apart from the foregoing proposition, the indemnity
agreement ceased to be valid and effective after the
execution of the chattel mortgage.
Testimonies of defendants Francisco Cervantes and
Modesto Cervantes.
Pioneer Insurance, knowing the value of the aircrafts and
the spare parts involved, agreed to issue the bond provided
that the same would be mortgaged to it, but this was not
possible because the planes were still in Japan and could
not be mortgaged here in the Philippines. As soon as the
aircrafts were brought to the Philippines, they would be
mortgaged to Pioneer Insurance to cover the bond, and this
indemnity agreement would be cancelled.
The following is averred under oath by Pioneer in the
original complaint:
The various conflicting claims over
the mortgaged properties have
impaired and rendered insufficient
the security under the chattel
mortgage and there is thus no other
sufficient security for the claim
sought to be enforced by this action.
This is judicial admission and aside from the chattel
mortgage there is no other security for the claim sought to
be enforced by this action, which necessarily means that the
indemnity agreement had ceased to have any force and
effect at the time this action was instituted. Sec 2, Rule 129,
Revised Rules of Court.
Prescinding from the foregoing, Pioneer, having foreclosed
the chattel mortgage on the planes and spare parts, no
longer has any further action against the defendants as
indemnitors to recover any unpaid balance of the price. The
indemnity agreement was ipso jure extinguished upon the
foreclosure of the chattel mortgage. These defendants, as
indemnitors, would be entitled to be subrogated to the right
of Pioneer should they make payments to the latter. Articles
2067 and 2080 of the New Civil Code of the Philippines.
Independently of the preceding proposition Pioneer's
election of the remedy of foreclosure precludes any further
action to recover any unpaid balance of the price.
SAL or Lim, having failed to pay the second to the eight
and last installments to JDA and Pioneer as surety having
made of the payments to JDA, the alternative remedies
open to Pioneer were as provided in Article 1484 of the
New Civil Code, known as the Recto Law.
Pioneer exercised the remedy of foreclosure of the chattel
mortgage both by extrajudicial foreclosure and the instant
suit. Such being the case, as provided by the
aforementioned provisions, Pioneer shall have no further
action against the purchaser to recover any unpaid balance
and any agreement to the contrary is void.' Cruz, et al. v.
Filipinas Investment & Finance Corp. No. L- 24772, May
27,1968, 23 SCRA 791, 795-6.
The operation of the foregoing provision cannot be escaped
from through the contention that Pioneer is not the vendor
but JDA. The reason is that Pioneer is actually exercising
the rights of JDA as vendor, having subrogated it in such
rights. Nor may the application of the provision be validly
opposed on the ground that these defendants and defendant
Maglana are not the vendee but indemnitors. Pascual, et al.
v. Universal Motors Corporation, G.R. No. L- 27862, Nov.
20,1974, 61 SCRA 124.
The restructuring of the obligations of SAL or Lim, thru the
change of their maturity dates discharged these defendants
from any liability as alleged indemnitors. The change of the
maturity dates of the obligations of Lim, or SAL extinguish
the original obligations thru novations thus discharging the
indemnitors.
The principal hereof shall be paid in
eight equal successive three months
interval installments, the first of
which shall be due and payable 25
August 1965, the remainder of which
... shall be due and payable on the
26th day x x x of each succeeding
three months and the last of which
shall be due and payable 26th May
1967.
However, at the trial of this case, Pioneer produced a
memorandum executed by SAL or Lim and JDA,
modifying the maturity dates of the obligations, as follows:
The principal hereof shall be paid in
eight equal successive three month
interval installments the first of
which shall be due and payable 4
September 1965, the remainder of
which ... shall be due and payable on
the 4th day ... of each succeeding
 months and the last of which shall be
due and payable 4th June 1967.
Not only that, Pioneer also produced eight purported
promissory notes bearing maturity dates different from that
fixed in the aforesaid memorandum; the due date of the
first installment appears as October 15, 1965, and those of
the rest of the installments, the 15th of each succeeding
three months, that of the last installment being July 15,
1967.
These restructuring of the obligations with regard to their
maturity dates, effected twice, were done without the
knowledge, much less, would have it believed that these
defendants Maglana (sic). Pioneer's official Numeriano
Carbonel would have it believed that these defendants and
defendant Maglana knew of and consented to the
modification of the obligations. But if that were so, there
would have been the corresponding documents in the form
of a written notice to as well as written conformity of these
defendants, and there are no such document. The
consequence of this was the extinguishment of the
obligations and of the surety bond secured by the indemnity
agreement which was thereby also extinguished. Applicable
by analogy are the rulings of the Supreme Court in the case
of Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563, and
the case of Asiatic Petroleum Co. v. Hizon David, 45 Phil.
532, 538.
Art. 2079. An extension granted to
the debtor by the creditor without the
consent of the guarantor extinguishes
the guaranty The mere failure on the
part of the creditor to demand
payment after the debt has become
due does not of itself constitute any
extension time referred to herein,
(New Civil Code).'
Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-
563, M.F. Stevenson & Co., Ltd., v. Climacom et al. (C.A.)
36 O.G. 1571.
Pioneer's liability as surety to JDA had already prescribed
when Pioneer paid the same. Consequently, Pioneer has no
more cause of action to recover from these defendants, as
supposed indemnitors, what it has paid to JDA. By virtue of
an express stipulation in the surety bond, the failure of JDA
to present its claim to Pioneer within ten days from default
of Lim or SAL on every installment, released Pioneer from
liability from the claim.
Therefore, Pioneer is not entitled to exact reimbursement
from these defendants thru the indemnity.
Art. 1318. Payment by a solidary
debtor shall not entitle him to
reimbursement from his co-debtors if
such payment is made after the
obligation has prescribed or became
illegal.
These defendants are entitled to recover damages and
attorney's fees from Pioneer and its surety by reason of the
filing of the instant case against them and the attachment
and garnishment of their properties. The instant action is
clearly unfounded insofar as plaintiff drags these
defendants and defendant Maglana.' (Record on Appeal, pp.
363-369, Rollo of G.R. No. 84157).
We find no cogent reason to reverse or modify these findings.
Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.
We now discuss the merits of G.R. No. 84157.
Petitioner Jacob S. Lim poses the following issues:
l. What legal rules govern the relationship among co-
investors whose agreement was to do business through the
corporate vehicle but who failed to incorporate the entity in
which they had chosen to invest? How are the losses to be
treated in situations where their contributions to the
intended 'corporation' were invested not through the
corporate form? This Petition presents these fundamental
questions which we believe were resolved erroneously by
the Court of Appeals ('CA'). (Rollo, p. 6).
These questions are premised on the petitioner's theory that as a result of the
failure of respondents Bormaheco, Spouses Cervantes, Constancio Maglana and
petitioner Lim to incorporate, a de facto partnership among them was created, and
that as a consequence of such relationship all must share in the losses and/or gains
of the venture in proportion to their contribution. The petitioner, therefore,
questions the appellate court's findings ordering him to reimburse certain amounts
given by the respondents to the petitioner as their contributions to the intended
corporation, to wit:
However, defendant Lim should be held liable to pay his
co-defendants' cross-claims in the total amount of
P184,878.74 as correctly found by the trial court, with
interest from the filing of the cross-complaints until the
amount is fully paid. Defendant Lim should pay one-half of
the said amount to Bormaheco and the Cervanteses and the
other one-half to defendant Maglana. It is established in the
records that defendant Lim had duly received the amount of
Pl51,000.00 from defendants Bormaheco and Maglana
representing the latter's participation in the ownership of
the subject airplanes and spare parts (Exhibit 58). In
addition, the cross-party plaintiffs incurred additional
expenses, hence, the total sum of P 184,878.74.
We first state the principles.
While it has been held that as between themselves the
rights of the stockholders in a defectively incorporated
association should be governed by the supposed charter and
the laws of the state relating thereto and not by the rules
governing partners (Cannon v. Brush Electric Co., 54 A.
121, 96 Md. 446, 94 Am. S.R. 584), it is ordinarily held
that persons who attempt, but fail, to form a corporation
and who carry on business under the corporate name
occupy the position of partners inter se (Lynch v.
Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A
1065). Thus, where persons associate themselves together
under articles to purchase property to carry on a business,
and their organization is so defective as to come short of
creating a corporation within the statute, they become in
legal effect partners inter se, and their rights as members of
the company to the property acquired by the company will
be recognized (Smith v. Schoodoc Pond Packing Co., 84 A.
268,109 Me. 555; Whipple v. Parker, 29 Mich. 369). So,
where certain persons associated themselves as a
corporation for the development of land for irrigation
purposes, and each conveyed land to the corporation, and
two of them contracted to pay a third the difference in the
proportionate value of the land conveyed by him, and no
stock was ever issued in the corporation, it was treated as a
trustee for the associates in an action between them for an
accounting, and its capital stock was treated as partnership
assets, sold, and the proceeds distributed among them in
proportion to the value of the property contributed by each
(Shorb v. Beaudry, 56 Cal. 446). However, such a relation
does not necessarily exist, for ordinarily persons cannot be
made to assume the relation of partners, as between
themselves, when their purpose is that no partnership shall
exist (London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442,
116 U.S. 461, 472, 29 L.Ed. 688), and it should be implied
only when necessary to do justice between the parties; thus,
one who takes no part except to subscribe for stock in a
proposed corporation which is never legally formed does
not become a partner with other subscribers who engage in
business under the name of the pretended corporation, so
as to be liable as such in an action for settlement of the
alleged partnership and contribution (Ward v. Brigham,
127 Mass. 24). A partnership relation between certain
stockholders and other stockholders, who were also
directors, will not be implied in the absence of an
agreement, so as to make the former liable to contribute for
payment of debts illegally contracted by the latter (Heald v.
Owen, 44 N.W. 210, 79 Iowa 23). (Corpus Juris Secundum,
Vol. 68, p. 464). (Italics supplied).
In the instant case, it is to be noted that the petitioner was declared non-suited for
his failure to appear during the pretrial despite notification. In his answer, the
petitioner denied having received any amount from respondents Bormaheco, the
Cervanteses and Maglana. The trial court and the appellate court, however, found
through Exhibit 58, that the petitioner received the amount of P151,000.00
representing the participation of Bormaheco and Atty. Constancio B. Maglana in
the ownership of the subject airplanes and spare parts. The record shows that
defendant Maglana gave P75,000.00 to petitioner Jacob Lim thru the Cervanteses.
It is therefore clear that the petitioner never had the intention to form a
corporation with the respondents despite his representations to them. This gives
credence to the cross-claims of the respondents to the effect that they were
induced and lured by the petitioner to make contributions to a proposed
corporation which was never formed because the petitioner reneged on their
agreement. Maglana alleged in his cross-claim:
omitted and refused to comply with them. (Record on
Appeal, pp. 341-342).
Applying therefore the principles of law earlier cited to the facts of the case,
necessarily, no de facto partnership was created among the parties which would
entitle the petitioner to a reimbursement of the supposed losses of the proposed
corporation. The record shows that the petitioner was acting on his own and not in
behalf of his other would-be incorporators in transacting the sale of the airplanes
and spare parts.
WHEREFORE, the instant petitions are DISMISSED. The questioned decision of
the Court of Appeals is AFFIRMED.

... that sometime in early 1965, Jacob Lim proposed to

SO ORDERED.
Francisco Cervantes and Maglana to expand his airline
business. Lim was to procure two DC-3's from Japan and
secure the necessary certificates of public convenience and
necessity as well as the required permits for the operation
thereof. Maglana sometime in May 1965, gave Cervantes
his share of P75,000.00 for delivery to Lim which
Cervantes did and Lim acknowledged receipt thereof.
Cervantes, likewise, delivered his share of the undertaking.
Lim in an undertaking sometime on or about August
9,1965, promised to incorporate his airline in accordance
with their agreement and proceeded to acquire the planes
on his own account. Since then up to the filing of this
answer, Lim has refused, failed and still refuses to set up
the corporation or return the money of Maglana. (Record
on Appeal, pp. 337-338).

while respondents Bormaheco and the Cervanteses alleged in their answer,

counterclaim, cross-claim and third party complaint:

Sometime in April 1965, defendant Lim lured and induced

the answering defendants to purchase two airplanes and
spare parts from Japan which the latter considered as their
lawful contribution and participation in the proposed
corporation to be known as SAL. Arrangements and
negotiations were undertaken by defendant Lim. Down
payments were advanced by defendants Bormaheco and the
Cervanteses and Constancio Maglana (Exh. E- 1). Contrary
to the agreement among the defendants, defendant Lim in
connivance with the plaintiff, signed and executed the
alleged chattel mortgage and surety bond agreement in his
personal capacity as the alleged proprietor of the SAL. The
answering defendants learned for the first time of this
trickery and misrepresentation of the other, Jacob Lim,
when the herein plaintiff chattel mortgage (sic) allegedly
executed by defendant Lim, thereby forcing them to file an
adverse claim in the form of third party claim.
Notwithstanding repeated oral demands made by
defendants Bormaheco and Cervanteses, to defendant Lim,
to surrender the possession of the two planes and their
accessories and or return the amount advanced by the
former amounting to an aggregate sum of P 178,997.14 as
evidenced by a statement of accounts, the latter ignored,
G.R. No. L-20993             September 28, 1968
RIZAL LIGHT & ICE CO., INC., petitioner,
vs.
THE MUNICIPALITY OF MORONG, RIZAL and THE PUBLIC
SERVICE COMMISSION, respondents.
----------------------------
G.R. No. L-21221             September 28, 1968
RIZAL LIGHT & ICE CO., INC., petitioner,
vs.
THE PUBLIC SERVICE COMMISSION and MORONG ELECTRIC CO.,
INC., respondents.
These two cases, being interrelated, are decided together.
Case G.R. No. L-20993 is a petition of the Rizal Light & Ice Co., Inc. to review
and set aside the orders of respondent Public Service Commission, 1 dated August
20, 1962, and February 15, 1963, in PSC Case No. 39716, cancelling and
revoking the certificate of public convenience and necessity and forfeiting the
franchise of said petitioner. In the same petition, the petitioner prayed for the
issuance of a writ of preliminary injunction ex parte suspending the effectivity of
said orders and/or enjoining respondents Commission and/or Municipality of
Morong, Rizal, from enforcing in any way the cancellation and revocation of
petitioner's franchise and certificate of public convenience during the pendency of
this appeal. By resolution of March 12, 1963, this Court denied the petition for
injunction, for lack of merit.
Case G. R. L-21221 is likewise a petition of the Rizal Light & Ice Co., Inc. to
review and set aside the decision of the Commission dated March 13, 1963 in
PSC Case No. 62-5143 granting a certificate of public convenience and necessity
to respondent Morong Electric Co., Inc. 2 to operate an electric light, heat and
power service in the municipality of Morong, Rizal. In the petition Rizal Light &
Ice Co., Inc. also prayed for the issuance of a writ of preliminary injunction ex
parte suspending the effectivity of said decision. Per resolution of this Court,
dated May 6, 1963, said petition for injunction was denied.
The facts, as they appear in the records of both cases, are as follows:
Petitioner Rizal Light & Ice Co., Inc. is a domestic corporation with business
address at Morong, Rizal. On August 15, 1949, it was granted by the Commission
a certificate of public convenience and necessity for the installation, operation and
maintenance of an electric light, heat and power service in the municipality of
Morong, Rizal.
In an order dated December 19, 1956, the Commission required the petitioner to
appear before it on February 18, 1957 to show cause why it should not be
penalized for violation of the conditions of its certificate of public convenience
and the regulations of the Commission, and for failure to comply with the
directives to raise its service voltage and maintain them within the limits
prescribed in the Revised Order No. 1 of the Commission, and to acquire and
install a kilowattmeter to indcate the load in kilowatts at any particular time of the
generating unit. 3
For failure of the petitioner to appear at the hearing on February 18, 1957, the
Commission ordered the cancellation and revocation of petitioner's certificate of
public convenience and necessity and the forfeiture of its franchise. Petitioner
moved for reconsideration of said order on the ground that its manager, Juan D.
Francisco, was not aware of said hearing. Respondent municipality opposed the
motion alleging that petitioner has not rendered efficient and satisfactory service
and has not complied with the requirements of the Commission for the
improvement of its service. The motion was set for hearing and Mr. Pedro S.
Talavera, Chief, Industrial Division of the Commission, was authorized to
conduct the hearing for the reception of the evidence of the parties. 4
Finding that the failure of the petitioner to appear at the hearing set for February
18, 1957 — the sole basis of the revocation of petitioner's certificate — was really
due to the illness of its manager, Juan D. Francisco, the Commission set aside its
order of revocation. Respondent municipality moved for reconsideration of this
order of reinstatement of the certificate, but the motion was denied.
In a petition dated June 25, 1958, filed in the same case, respondent municipality
formally asked the Commission to revoke petitioner's certificate of public
convenience and to forfeit its franchise on the ground, among other things, that it
failed to comply with the conditions of said certificate and franchise. Said petition
was set for hearing jointly with the order to show cause. The hearings had been
postponed several times.
Meanwhile, inspections had been made of petitioner's electric plant and
installations by the engineers of the Commission, as follows: April 15, 1958 by
Engineer Antonio M. Alli; September 18, 1959, July 12-13, 1960, and June 21-24,
1961, by Engineer Meliton S. Martinez. The inspection on June 21-24, 1961 was
made upon the request of the petitioner who manifested during the hearing on
December 15, 1960 that improvements have been made on its service since the
inspection on July 12-13, 1960, and that, on the basis of the inspection report to
be submitted, it would agree to the submission of the case for decision without
further hearing.
When the case was called for hearing on July 5, 1961, petitioner failed to appear.
Respondent municipality was then allowed to present its documentary evidence,
and thereafter the case was submitted for decision.
On July 7, 1961, petitioner filed a motion to reopen the case upon the ground that
it had not been furnished with a copy of the report of the June 21-24, 1961
inspection for it to reply as previously agreed. In an order dated August 25, 1961,
petitioner was granted a period of ten (10) days within which to submit its written
reply to said inspection report, on condition that should it fail to do so within the
said period the case would be considered submitted for decision. Petitioner failed
to file the reply. In consonance with the order of August 25, 1961, therefore, the
Commission proceeded to decide the case. On July 29, 1962 petitioner's electric
plant was burned.
In its decision, dated August 20, 1962, the Commission, on the basis of the
inspection reports of its aforenamed engineers, found that the petitioner had failed
to comply with the directives contained in its letters dated May 21, 1954 and
September 4, 1954, and had violated the conditions of its certificate of public
convenience as well as the rules and regulations of the Commission. The
Commission concluded that the petitioner "cannot render the efficient, adequate
and satisfactory electric service required by its certificate and that it is against
public interest to allow it to continue its operation." Accordingly, it ordered the
cancellation and revocation of petitioner's certificate of public convenience and
the forfeiture of its franchise.
On September 18, 1962, petitioner moved for reconsideration of the decision,
alleging that before its electric plant was burned on July 29, 1962, its service was
greatly improved and that it had still existing investment which the Commission
should protect. But eight days before said motion for reconsideration was filed, or
on September 10, 1962, Morong Electric, having been granted a municipal
franchise on May 6, 1962 by respondent municipality to install, operate and
maintain an electric heat, light and power service in said municipality —
approved by the Provincial Board of Rizal on August 31, 1962 — filed with the
Commission an application for a certificate of public convenience and necessity
for said service. Said application was entitled "Morong Electric Co., Inc.,
Applicant", and docketed as Case No. 62-5143.
Petitioner opposed in writing the application of Morong Electric, alleging among
other things, that it is a holder of a certificate of public convenience to operate an
electric light, heat and power service in the same municipality of Morong, Rizal,
and that the approval of said application would not promote public convenience,
but would only cause ruinous and wasteful competition. Although the opposition
is dated October 6, 1962, it was actually received by the Commission on
November 8, 1962, or twenty four days after the order of general default was
issued in open court when the application was first called for hearing on October
15, 1962. On November 12, 1962, however, the petitioner filed a motion to lift
said order of default. But before said motion could be resolved, petitioner filed
another motion, dated January 4, 1963, this time asking for the dismissal of the
application upon the ground that applicant Morong Electric had no legal
personality when it filed its application on September 10, 1962, because its
certificate of incorporation was issued by the Securities and Exchange
Commission only on October 17, 1962. This motion to dismiss was denied by the
Commission in a formal order issued on January 17, 1963 on the premise that
applicant Morong Electric was a de facto corporation. Consequently, the case was
heard on the merits and both parties presented their respective evidence. On the
basis of the evidence adduced, the Commission, in its decision dated March 13,
1963, found that there was an absence of electric service in the municipality of
Morong and that applicant Morong Electric, a Filipino-owned corporation duly
organized and existing under the laws of the Philippines, has the financial
capacity to maintain said service. These circumstances, considered together with
the denial of the motion for reconsideration filed by petitioner in Case No. 39715
on February, 15, 1963, such that as far as the Commission was concerned the
certificate of the petitioner was already declared revoked and cancelled, the
Commission approved the application of Morong Electric and ordered the
issuance in its favor of the corresponding certificate of public convenience and
necessity.1awphîl.nèt
On March 8, 1963, petitioner filed with this Court a petition to review the
decision in Case No. 39715 (now G. R. No. L-20993). Then on April 26, 1963,
petitioner also filed a petition to review the decision in Case No. 62-5143 (now G.
R. No. L-21221).
In questioning the decision of the Commission in Case No. 39715, petitioner
contends: (1) that the Commission acted without or in excess of its jurisdiction
when it delegated the hearing of the case and the reception of evidence to Mr.
Pedro S. Talavera who is not allowed by law to hear the same; (2) that the
cancellation of petitioner's certificate of public convenience was unwarranted
because no sufficient evidence was adduced against the petitioner and that
petitioner was not able to present evidence in its defense; (3) that the Commission
failed to give protection to petitioner's investment; and (4) that the Commission
erred in imposing the extreme penalty of revocation of the certificate.
In questioning the decision in Case No. 62-5143, petitioner contends: (1) that the
Commission erred in denying petitioner's motion to dismiss and proceeding with
the hearing of the application of the Morong Electric; (2) that the Commission
erred in granting Morong Electric a certificate of public convenience and
necessity since it is not financially capable to render the service; (3) that the
Commission erred when it made findings of facts that are not supported by the
evidence adduced by the parties at the trial; and (4) that the Commission erred
when it did not give to petitioner protection to its investment — a reiteration of
the third assignment of error in the other case.1awphîl.nèt
We shall now discuss the appeals in these two cases separately.
G.R. No. L-20993
1. Under the first assignment of error, petitioner contends that while Mr. Pedro S.
Talavera, who conducted the hearings of the case below, is a division chief, he is
not a lawyer. As such, under Section 32 of Commonwealth Act No. 146, as
amended, the Commission should not have delegated to him the authority to
conduct the hearings for the reception of evidence of the parties.
We find that, really, Mr. Talavera is not a lawyer. 5 Under the second paragraph of
Section 32 of Commonwealth Act No. 146, as amended, 6 the Commission can
only authorize a division chief to hear and investigate a case filed before it if he is
a lawyer. However, the petitioner is raising this question for the first time in this
appeal. The record discloses that petitioner never made any objection to the
authority of Mr. Talavera to hear the case and to receive the evidence of the
parties. On the contrary, we find that petitioner had appeared and submitted
evidence at the hearings conducted by Mr. Talavera, particularly the hearings
relative to the motion for reconsideration of the order of February 18, 1957
cancelling and revoking its certificate. We also find that, through counsel,
petitioner had entered into agreements with Mr. Talavera, as hearing officer, and
the counsel for respondent municipality, regarding procedure in order to
abbreviate the proceedings. 7 It is only after the decision in the case turned out to
be adverse to it that petitioner questioned the proceedings held before Mr.
Talavera.
This Court in several cases has ruled that objection to the delegation of authority
to hear a case filed before the Commission and to receive the evidence in
connection therewith is a procedural, not a jurisdictional point, and is waived by
failure to interpose timely the objection and the case had been decided by the
Commission. 8 Since petitioner has never raised any objection to the authority of It appears at the last hearing of this case on September 23, 1960, that an engineer
Mr. Talavera before the Commission, it should be deemed to have waived such of this Commission has been ordered to make an inspection of all electric services
procedural defect, and consonant with the precedents on the matter, petitioner's in the province of Rizal and on that date the engineer of this Commission is still
claim that the Commission acted without or in excess of jurisdiction in so undertaking that inspection and it appears that the said engineer had actually made
authorizing Mr. Talavera should be dismissed. 9 that inspection on July 12 and 13, 1960. The engineer has submitted his report on
November 18, 1960 which is attached to the records of this case.
2. Anent the second assigned error, the gist of petitioner's contention is that the
evidence — consisting of inspection reports — upon which the Commission ATTY. LUQUE (Councel for Petitioner):
based its decision is insufficient and untrustworthy in that (1) the authors of said
reports had not been put to test by way of cross-examination; (2) the reports
... (W)e respectfully state that while the report is, as I see it attached to the
constitute only one side of the picture as petitioner was not able to present
records, clear and very thorough, it was made sometime July of this year and I
evidence in its defense; (3) judicial notice was not taken of the testimony of Mr.
understand from the respondent that there is some improvement since this report
Harry B. Bernardino, former mayor of respondent municipality, in PSC Case No.
was made ... we respectfully request that an up-to-date inspection be made ... . An
625143 (the other case, G. R. No. L-21221) to the effect that the petitioner had
inspector of this Commission can be sent to the plant and considering that the
improved its service before its electric power plant was burned on July 29, 1962
engineer of this Commission, Engineer Meliton Martinez, is very acquainted to
— which testimony contradicts the inspection reports; and (4) the Commission
the points involved we pray that his report will be used by us for the reason that
acted both as prosecutor and judge — passing judgment over the very same
he is a technical man and he knows well as he has done a good job and I think our
evidence presented by it as prosecutor — a situation "not conducive to the arrival
proposition would expedite the matter. We sincerely believe that the inspection
at just and equitable decisions."
report will be the best evidence to decide this matter.
Settled is the rule that in reviewing the decision of the Public Service Commission
xxx     xxx     xxx
this Court is not required to examine the proof de novo and determine for itself
whether or not the preponderance of evidence really justifies the decision. The
only function of this Court is to determine whether or not there is evidence before ATTY. LUQUE:
the Commission upon which its decision might reasonably be based. This Court
will not substitute its discretion for that of the Commission on questions of fact
... This is a very important matter and to show the good faith of respondent in this
and will not interfere in the latter's decision unless it clearly appears that there is
case we will not even cross-examine the engineer when he makes a new report.
no evidence to support it. 10 Inasmuch as the only function of this Court in
We will agree to the findings and, your honor please, considering as we have
reviewing the decision of the Commission is to determine whether there is
manifested before that Engineer Martinez is an experienced engineer of this
sufficient evidence before the Commission upon which its decision can
Commission and the points reported by Engineer Martinez on the situation of the
reasonably be based, as it is not required to examine the proof de novo, the
plant now will prevent the necessity of having a hearing, of us bringing new
evidence that should be made the basis of this Court's determination should be
evidence and complainant bringing new evidence. ... .
only those presented in this case before the Commission. What then was the
evidence presented before the Commission and made the basis of its decision
subject of the present appeal? As stated earlier, the Commission based its decision xxx     xxx     xxx
on the inspection reports submitted by its engineers who conducted the inspection
of petitioner's electric service upon orders of the Commission. 11 Said inspection
reports specify in detail the deficiencies incurred, and violations committed, by COMMISSION (to Atty. Luque):
the petitioner resulting in the inadequacy of its service. We consider that said
reports are sufficient to serve reasonably as bases of the decision in question. It Q           Does the Commission understand from the counsel for
should be emphasized, in this connection that said reports, are not mere applicant that if the motion is granted he will submit this order to show
documentary proofs presented for the consideration of the Commission, but are cause for decision without any further hearing and the decision will be
the results of the Commission's own observations and investigations which it can based on the report of the engineer of this Commission?
rightfully take into consideration, 12 particularly in this case where the petitioner
had not presented any evidence in its defense, and speaking of petitioner's failure
to present evidence, as well as its failure to cross-examine the authors of the A           We respectfully reply in this manner that we be allowed or be
inspection reports, petitioner should not complain because it had waived not only given an opportunity just to read the report and 99%, we will agree
its right to cross-examine but also its right to present evidence. Quoted hereunder that the report will be the basis of that decision. We just want to find
are the pertinent portions of the transcripts of the proceedings where the out the contents of the report, however, we request that we be
petitioner, through counsel, manifested in clear language said waiver and its furnished with a copy of the report before the hearing so that we will
decision to abide by the last inspection report of Engineer Martinez: just make a manifestation that we will agree.
          Proceedings of December 15, 1960 COMMISSION (to Atty. Luque):
Q           In order to prevent the delay of the disposition of this case the
COMMISSION:
Commission will allow counsel for the applicant to submit his written
 reply to the report that the engineer of this Commission. Will he
submit this case without further hearing upon the receipt of that written
reply?
A           Yes, your honor.
          Proceedings of August 25, 1961
ATTY. LUQUE (Counsel for petitioner):
In order to avoid any delay in the consideration of this case we are respectfully
move (sic) that instead of our witnesses testifying under oath that we will submit a
written reply under oath together with the memorandum within fifteen (15) days
and we will furnish a copy and upon our submission of said written reply under
oath and memorandum we consider this case submitted. This suggestion is to
abbreviate the necessity of presenting witnesses here which may prolong the
resolution of this case.
ATTY. OLIVAS (Counsel for respondent municipality):
I object on the ground that there is no resolution by this Commission on the action
to reopen the case and second this case has been closed.
ATTY. LUQUE:
With regard to the testimony on the ground for opposition we respectfully submit
to this Commission our motion to submit a written reply together with a
memorandum. Also as stated to expedite the case and to avoid further hearing we
will just submit our written reply. According to our records we are furnished with
a copy of the report of July 17, 1961. We submit your honor.
xxx     xxx     xxx
COMMISSION:
To give applicant a chance to have a day in court the Commission grants the
request of applicant that it be given 10 days within which to submit a written reply
on the report of the engineer of the Commission who inspected the electric
service, in the municipality of Morong, Rizal, and after the submission of the said
written reply within 10 days from today this case will be considered submitted for
decision.
The above-quoted manifestation of counsel for the petitioner, specifically the
statement referring to the inspection report of Engineer Martinez as the "best
evidence to decide this matter," can serve as an argument against petitioner's
claim that the Commision should have taken into consideration the testimony of
Mr. Bernardino. But the primary reasons why the Commission could not have
taken judicial cognizance of said testimony are: first, it is not a proper subject of
judicial notice, as it is not a "known" fact — that is, well established and
authoritatively settled, without qualification and contention; 13 second, it was given
in a subsequent and distinct case after the petitioner's motion for reconsideration
was heard by the Commission en banc and submitted for decision, 14 and third, it
was not brought to the attention of the Commission in this case through an
appropriate pleading. 15
Regarding the contention of petitioner that the Commission had acted both as
prosecutor and judge, it should be considered that there are two matters that had to
be decided in this case, namely, the order to show cause dated December 19,
1956, and the petition or complaint by respondent municipality dated June 25,
1958. Both matters were heard jointly, and the record shows that respondent
municipality had been allowed to present its evidence to substantiate its
complaint. It can not be said, therefore, that in this case the Commission had acted
as prosecutor and judge. But even assuming, for the sake of argument, that there
was a commingling of the prosecuting and investigating functions, this exercise of
dual function is authorized by Section 17(a) of Commonwealth Act No. 146, as
amended, under which the Commission has power "to investigate, upon its own
initiative or upon complaint in writing, any matter concerning any public service
as regards matters under its jurisdiction; to, require any public service to furnish
safe, adequate, and proper service as the public interest may require and warrant;
to enforce compliance with any standard, rule, regulation, order or other
requirement of this Act or of the Commission ... ." Thus, in the case of Collector
of Internal Revenue vs. Estate of F. P. Buan, L-11438, July 31, 1958, this Court
held that the power of the Commission to cancel and revoke a certificate of public
convenience and necessity may be exercised by it even without a formal charge
filed by any interested party, with the only limitation that the holder of the
certificate should be given his day in court.
It may not be amiss to add that when prosecuting and investigating duties are
delegated by statute to an administrative body, as in the case of the Public Service
Commission, said body may take steps it believes appropriate for the proper
exercise of said duties, particularly in the manner of informing itself whether there
is probable violation of the law and/or its rules and regulations. It may initiate an
investigation, file a complaint, and then try the charge as preferred. So long as the
respondent is given a day in court, there can be no denial of due process, and
objections to said procedure cannot be sustained.
3. In its third assignment of error, petitioner invokes the "protection-of-investment
rule" enunciated by this Court in Batangas Transportation Co. vs. Orlanes 16 in
this wise:
The Government having taken over the control and supervision of all
public utilities, so long as an operator under a prior license complies
with the terms and conditions of his license and reasonable rules and
regulations for its operation and meets the reasonable demands of the
public, it is the duty of the Commission to protect rather than to
destroy his investment by the granting of the second license to another
person for the same thing over the same route of travel. The granting
of such a license does not serve its convenience or promote the
interests of the public.
The above-quoted rule, however, is not absolute, for nobody has exclusive right to
secure a franchise or a certificate of public convenience. 17 Where, as in the present
case, it has been shown by ample evidence that the petitioner, despite ample time
and opportunity given to it by the Commission, had failed to render adequate,
sufficient and satisfactory service and had violated the important conditions of its
certificate as well as the directives and the rules and regulations of the
Commission, the rule cannot apply. To apply that rule unqualifiedly is to
encourage violation or disregard of the terms and conditions of the certificate and
the Commission's directives and regulations, and would close the door to other
applicants who could establish, operate and provide adequate, efficient and
satisfactory service for the benefit and convenience of the inhabitants. It should be
emphasized that the paramount consideration should always be the public interest
and public convenience. The duty of the Commission to protect investment of a
public utility operator refers only to operators of good standing — those who
comply with the laws, rules and regulations — and not to operators who are
unconcerned with the public interest and whose investments have failed or
deteriorated because of their own fault. 18
4. The last assignment of error assails the propriety of the penalty imposed by the
Commission on the petitioner — that is, the revocation of the certificate and the
forfeiture of the franchise. Petitioner contends that the imposition of a fine would
have been sufficient, as had been done by the Commission in cases of a similar
nature.
It should be observed that Section 16(n) of Commonwealth Act No. 146, as
amended, confers upon the Commission ample power and discretion to order the
cancellation and revocation of any certificate of public convenience issued to an
operator who has violated, or has willfully and contumaciously refused to comply
with, any order, rule or regulation of the Commission or any provision of law.
What matters is that there is evidence to support the action of the Commission. In
the instant case, as shown by the evidence, the contumacious refusal of the
petitioner since 1954 to comply with the directives, rules and regulations of the
Commission, its violation of the conditions of its certificate and its incapability to
comply with its commitment as shown by its inadequate service, were the
circumstances that warranted the action of the Commission in not merely
imposing a fine but in revoking altogether petitioner's certificate. To allow
petitioner to continue its operation would be to sacrifice public interest and
convenience in favor of private interest.
A grant of a certificate of public convenience confers no property
rights but is a mere license or privilege, and such privilege is forfeited
when the grantee fails to comply with his commitments behind which
lies the paramount interest of the public, for public necessity cannot be
made to wait, nor sacrificed for private convenience. (Collector of
Internal Revenue v. Estate of F. P. Buan, et al., L-11438 and Santiago
Sambrano, et al. v. PSC, et al., L-11439 & L-11542-46, July 31, 1958)
(T)he Public Service Commission, ... has the power to specify and
define the terms and conditions upon which the public utility shall be
operated, and to make reasonable rules and regulations for its
operation and the compensation which the utility shall receive for its
services to the public, and for any failure to comply with such rules
and regulations or the violation of any of the terms and conditions for
which the license was granted, the Commission has ample power to
enforce the provisions of the license or even to revoke it, for any
failure or neglect to comply with any of its terms and provisions.
(Batangas Trans. Co. v. Orlanes, 52 Phil. 455, 460; emphasis supplied)
Presumably, the petitioner has in mind Section 21 of Commonwealth Act No.
146, as amended, which provides that a public utility operator violating or failing
to comply with the terms and conditions of any certificate, or any orders,
decisions or regulations of the Commission, shall be subject to a fine and that the
Commission is authorized and empowered to impose such fine, after due notice
and hearing. It should be noted, however, that the last sentence of said section
states that the remedy provided therein "shall not be a bar to, or affect any other
remedy provided in this Act but shall be cumulative and additional to such
remedy or remedies." In other words, the imposition of a fine may only be one of
the remedies which the Commission may resort to, in its discretion. But that
remedy is not exclusive of, or has preference over, the other remedies. And this
Court will not substitute its discretion for that of the Commission, as long as there
is evidence to support the exercise of that discretion by the Commission.
G. R. No. L-21221
Coming now to the other case, let it be stated at the outset that before any
certificate may be granted, authorizing the operation of a public service, three
requisites must be complied with, namely: (1) the applicant must be a citizen of
the Philippines or of the United States, or a corporation or co-partnership,
association or joint-stock company constituted and organized under the laws of
the Philippines, sixty per centum at least of the stock or paid-up capital of which
belongs entirely to citizens of the Philippines or of the United States; 19 (2) the
applicant must be financially capable of undertaking the proposed service and
meeting the responsibilities incident to its operation; 20 and (3) the applicant must
prove that the operation of the public service proposed and the authorization to do
business will promote the public interest in a proper and suitable manner. 21
As stated earlier, in the decision appealed from, the Commission found that
Morong Electric is a corporation duly organized and existing under the laws of the
Philippines, the stockholders of which are Filipino citizens, that it is financially
capable of operating an electric light, heat and power service, and that at the time
the decision was rendered there was absence of electric service in Morong, Rizal.
While the petitioner does not dispute the need of an electric service in Morong,
Rizal, 22 it claims, in effect, that Morong Electric should not have been granted the
certificate of public convenience and necessity because (1) it did not have a
corporate personality at the time it was granted a franchise and when it applied for
said certificate; (2) it is not financially capable of undertaking an electric service,
and (3) petitioner was rendering efficient service before its electric plant was
burned, and therefore, being a prior operator its investment should be protected
and no new party should be granted a franchise and certificate of public
convenience and necessity to operate an electric service in the same locality.
1. The bulk of petitioner's arguments assailing the personality of Morong Electric
dwells on the proposition that since a franchise is a contract, 23 at least two
competent parties are necessary to the execution thereof, and parties are not
competent except when they are in being. Hence, it is contended that until a
corporation has come into being, in this jurisdiction, by the issuance of a
certificate of incorporation by the Securities and Exchange Commission (SEC) it
cannot enter into any contract as a corporation. The certificate of incorporation of
the Morong Electric was issued by the SEC on October 17, 1962, so only from
that date, not before, did it acquire juridical personality and legal existence.
Petitioner concludes that the franchise granted to Morong Electric on May 6, 1962
when it was not yet in esse is null and void and cannot be the subject of the
Commission's consideration. On the other hand, Morong Electric argues, and to
which argument the Commission agrees, that it was a de facto corporation at the
time the franchise was granted and, as such, it was not incapacitated to enter into
any contract or to apply for and accept a franchise. Not having been incapacitated,
Morong Electric maintains that the franchise granted to it is valid and the approval
or disapproval thereof can be properly determined by the Commission.
Petitioner's contention that Morong Electric did not yet have a legal personality on
May 6, 1962 when a municipal franchise was granted to it is correct. The juridical
personality and legal existence of Morong Electric began only on October 17,
1962 when its certificate of incorporation was issued by the SEC. 24 Before that
date, or pending the issuance of said certificate of incorporation, the incorporators
cannot be considered as de facto corporation. 25 But the fact that Morong Electric
had no corporate existence on the day the franchise was granted in its name does
not render the franchise invalid, because later Morong Electric obtained its
certificate of incorporation and then accepted the franchise in accordance with the
terms and conditions thereof. This view is sustained by eminent American
authorities. Thus, McQuiuin says:
The fact that a company is not completely incorporated at the time the
grant is made to it by a municipality to use the streets does not, in most
jurisdictions, affect the validity of the grant. But such grant cannot take
effect until the corporation is organized. And in Illinois it has been
decided that the ordinance granting the franchise may be presented
before the corporation grantee is fully organized, where the
organization is completed before the passage and acceptance.
(McQuillin, Municipal Corporations, 3rd Ed., Vol. 12, Chap. 34, Sec.
34.21)
Fletcher says:
While a franchise cannot take effect until the grantee corporation is
organized, the franchise may, nevertheless, be applied for before the
company is fully organized.
A grant of a street franchise is valid although the corporation is not
created until afterwards. (Fletcher, Cyclopedia Corp. Permanent
Edition, Rev. Vol. 6-A, Sec. 2881)
And Thompson gives the reason for the rule:
(I)n the matter of the secondary franchise the authorities are numerous
in support of the proposition that an ordinance granting a privilege to a
corporation is not void because the beneficiary of the ordinance is not
fully organized at the time of the introduction of the ordinance. It is
enough that organization is complete prior to the passage and
acceptance of the ordinance. The reason is that a privilege of this
character is a mere license to the corporation until it accepts the grant
and complies with its terms and conditions. (Thompson on
Corporations, Vol. 4, 3rd Ed., Sec. 2929) 26
The incorporation of Morong Electric on October 17, 1962 and its acceptance of
the franchise as shown by its action in prosecuting the application filed with the
Commission for the approval of said franchise, not only perfected a contract
between the respondent municipality and Morong Electric but also cured the
deficiency pointed out by the petitioner in the application of Morong EIectric.
Thus, the Commission did not err in denying petitioner's motion to dismiss said
application and in proceeding to hear the same. The efficacy of the franchise,
however, arose only upon its approval by the Commission on March 13, 1963.
The reason is that —
Under Act No. 667, as amended by Act No. 1022, a municipal council
has the power to grant electric franchises, subject to the approval of the
provincial board and the President. However, under Section 16(b) of
Commonwealth Act No. 146, as amended, the Public Service
Commission is empowered "to approve, subject to constitutional
limitations any franchise or privilege granted under the provisions of
Act No. 667, as amended by Act No. 1022, by any political
subdivision of the Philippines when, in the judgment of the
Commission, such franchise or privilege will properly conserve the
public interests and the Commission shall in so approving impose such
conditions as to construction, equipment, maintenance, service, or
operation as the public interests and convenience may reasonably
require, and to issue certificates of public convenience and necessity
when such is required or provided by any law or franchise." Thus, the
efficacy of a municipal electric franchise arises, therefore, only after
the approval of the Public Service Commission. (Almendras vs.
Ramos, 90 Phil. 231) .
The conclusion herein reached regarding the validity of the franchise granted to
Morong Electric is not incompatible with the holding of this Court in Cagayan
Fishing Development Co., Inc. vs. Teodoro Sandiko 27 upon which the petitioner
leans heavily in support of its position. In said case this Court held that a
corporation should have a full and complete organization and existence as an
entity before it can enter into any kind of a contract or transact any business. It
should be pointed out, however, that this Court did not say in that case that the
rule is absolute or that under no circumstances may the acts of promoters of a
corporation be ratified or accepted by the corporation if and when subsequently
organized. Of course, there are exceptions. It will be noted that American courts
generally hold that a contract made by the promoters of a corporation on its behalf
may be adopted, accepted or ratified by the corporation when organized. 28
2. The validity of the franchise and the corporate personality of Morong Electric
to accept the same having been shown, the next question to be resolved is whether
said company has the financial qualification to operate an electric light, heat and
power service. Petitioner challenges the financial capability of Morong Electric,
by pointing out the inconsistencies in the testimony of Mr. Jose P. Ingal, president
of said company, regarding its assets and the amount of its initial investment for
the electric plant. In this connection it should be stated that on the basis of the
evidence presented on the matter, the Commission has found the Morong Electric
to be "financially qualified to install, maintain and operate the proposed electric
light, heat and power service." This is essentially a factual determination which, in
a number of cases, this Court has said it will not disturb unless patently
unsupported by evidence. An examination of the record of this case readily shows
that the testimony of Mr. Ingal and the documents he presented to establish the
financial capability of Morong Electric provide reasonable grounds for the above
finding of the Commission.
It is now a very well-settled rule in this jurisdiction that the findings
and conclusions of fact made by the Public Service Commission, after
weighing the evidence adduced by the parties in a public service case,
will not be disturbed by the Supreme Court unless those findings and
conclusions appear not to be reasonably supported by evidence. (La
Mallorca and Pampanga Bus Co. vs. Mercado, L-19120, November
29, 1965)
 For purposes of appeal, what is decisive is that said testimonial Inc. vs. Mercado, L-19120, November 29, 1965 citing Pangasinan
evidence provides reasonable support for the Public Service Trans. Co., Inc. vs. Dela Cruz, 96 Phil. 278)
Commission's findings of financial capacity on the part of applicants,
rendering such findings beyond our power to disturb. (Del Pilar Transit
For that matter, petitioner's pretension that it has a prior right to the operation of
vs. Silva, L-21547, July 15, 1966)
an electric service in Morong, Rizal, is not tenable; and its plea for protection of
its investment, as in the previous case, cannot be entertained.
It may be worthwhile to mention in this connection that per inspection report
dated January 20, 1964 29 of Mr. Meliton Martinez of the Commission, who
WHEREFORE, the two decisions of the Public Service Commission, appealed
inspected the electric service of Morong on January 15-16, 1964, Morong Electric
from, should be, as they are hereby affirmed, with costs in the two cases against
"is serving electric service to the entire area covered by its approved plan and has
petitioner Rizal Light & Ice Co., Inc. It is so ordered.
constructed its line in accordance with the plans and specifications approved by
the Commission." By reason thereof, it was recommended that the requests of
Morong Electric (1) for the withdrawal of its deposit in the amount of P1,000.00
with the Treasurer of the Philippines, and (2) for the approval of Resolution No.
160 of the Municipal Council of Morong, Rizal, exempting the operator from
making the additional P9,000.00 deposit mentioned in its petition, dated
September 16, 1963, be granted. This report removes any doubt as to the financial
capability of Morong Electric to operate and maintain an electric light, heat and
power service.

3. With the financial qualification of Morong Electric beyond doubt, the

remaining question to be resolved is whether, or not, the findings of fact of the
Commission regarding petitioner's service are supported by evidence. It is the
contention of the petitioner that the Commission made some findings of fact
prejudicial to its position but which do not find support from the evidence
presented in this case. Specifically, petitioner refers to the statements or findings
that its service had "turned from bad to worse," that it miserably failed to comply
with the oft-repeated promises to bring about the needed improvement, that its
equipment is unserviceable, and that it has no longer any plant site and, therefore,
has discredited itself. Petitioner further states that such statements are not only
devoid of evidentiary support but contrary to the testimony of its witness, Mr.
Harry Bernardino, who testified that petitioner was rendering efficient and
satisfactory service before its electric plant was burned on July 29, 1962.

On the face of the decision appealed from, it is obvious that the Commission in
describing the kind of service petitioner was rendering before its certificate was
ordered revoked and cancelled, took judicial notice of the records of the previous
case (PSC Case No. 39715) where the quality of petitioner's service had been
squarely put in issue. It will be noted that the findings of the Commission were
made notwithstanding the fact that the aforementioned testimony of Mr.
Bernardino had been emphasized and pointed out in petitioner's Memorandum to
the Commission. 30 The implication is simple: that as between the testimony of Mr.
Bernardino and the inspection reports of the engineers of the Commission, which
served as the basis of the revocation order, the Commission gave credence to the
latter. Naturally, whatever conclusion or finding of fact that the Commission
arrived at regarding the quality of petitioner's service are not borne out by the
evidence presented in this case but by evidence in the previous case. 31 In this
connection, we repeat, the conclusion, arrived at by the Commission after
weighing the conflicting evidence in the two related cases, is a conclusion of fact
which this Court will not disturb.

And it has been held time and again that where the Commission has
reached a conclusion of fact after weighing the conflicting evidence,
that conclusion must be respected, and the Supreme Court will not
interfere unless it clearly appears that there is no evidence to support
the decision of the Commission. (La Mallorca and Pampanga Bus Co.,
G.R. No. L-23606           July 29, 1968
ALHAMBRA CIGAR & CIGARETTE MANUFACTURING COMPANY,
INC., petitioner,
vs.
SECURITIES & EXCHANGE COMMISSION, respondent.
To the question — May a corporation extend its life by amendment of its articles
of incorporation effected during the three-year statutory period for liquidation
when its original term of existence had already expired? — the answer of the
Securities and Exchange Commissioner was in the negative. Offshoot is this
appeal.
That problem emerged out of the following controlling facts:
Petitioner Alhambra Cigar and Cigarette Manufacturing Company, Inc.
(hereinafter referred to simply as Alhambra) was duly incorporated under
Philippine laws on January 15, 1912. By its corporate articles it was to exist for
fifty (50) years from incorporation. Its term of existence expired on January 15,
1962. On that date, it ceased transacting business, entered into a state of
liquidation.
Thereafter, a new corporation. — Alhambra Industries, Inc. — was formed to
carry on the business of Alhambra.
On May 1, 1962, Alhambra's stockholders, by resolution named Angel S. Gamboa
trustee to take charge of its liquidation.
On June 20, 1963 — within Alhambra's three-year statutory period for liquidation
- Republic Act 3531 was enacted into law. It amended Section 18 of the
Corporation Law; it empowered domestic private corporations to extend their
corporate life beyond the period fixed by the articles of incorporation for a term
not to exceed fifty years in any one instance. Previous to Republic Act 3531, the
maximum non-extendible term of such corporations was fifty years.
On July 15, 1963, at a special meeting, Alhambra's board of directors resolved to
amend paragraph "Fourth" of its articles of incorporation to extend its corporate
life for an additional fifty years, or a total of 100 years from its incorporation.
On August 26, 1963, Alhambra's stockholders, representing more than two-thirds
of its subscribed capital stock, voted to approve the foregoing resolution. The
"Fourth" paragraph of Alhambra's articles of incorporation was thus altered to
read:
FOURTH. That the term for which said corporation is to exist is fifty
(50) years from and after the date of incorporation, and for an
additional period of fifty (50) years thereafter.
On October 28, 1963, Alhambra's articles of incorporation as so amended certified
correct by its president and secretary and a majority of its board of directors, were
filed with respondent Securities and Exchange Commission (SEC).
On November 18, 1963, SEC, however, returned said amended articles of
incorporation to Alhambra's counsel with the ruling that Republic Act 3531
"which took effect only on June 20, 1963, cannot be availed of by the said
corporation, for the reason that its term of existence had already expired when the
said law took effect in short, said law has no retroactive effect."
On December 3, 1963, Alhambra's counsel sought reconsideration of SEC's ruling
aforesaid, refiled the amended articles of incorporation.
On September 8, 1964, SEC, after a conference hearing, issued an order denying
the reconsideration sought.
Alhambra now invokes the jurisdiction of this Court to overturn the conclusion
below.1
1. Alhambra relies on Republic Act 3531, which amended Section 18 of the
Corporation Law. Well it is to take note of the old and the new statutes as they are
framed. Section 18, prior to and after its modification by Republic Act 3531,
covers the subject of amendment of the articles of incorporation of private
corporations. A provision thereof which remains unaltered is that a corporation
may amend its articles of incorporation "by a majority vote of its board of
directors or trustees and ... by the vote or written assent of the stockholders
representing at least two-thirds of the subscribed capital stock ... "
But prior to amendment by Republic Act 3531, an explicit prohibition existed in
Section 18, thus:
... Provided, however, That the life of said corporation shall not be
extended by said amendment beyond the time fixed in the original
articles: ...
This was displaced by Republic Act 3531 which enfranchises all private
corporations to extend their corporate existence. Thus incorporated into the
structure of Section 18 are the following:
... Provided, however, That should the amendment consist in extending
the corporate life, the extension shall not exceed fifty years in any one
instance: Provided, further, That the original articles, and amended
articles together shall contain all provisions required by law to be set
out in the articles of incorporation: ...
As we look in retrospect at the facts, we find these: From July 15 to October 28,
1963, when Alhambra made its attempt to extend its corporate existence, its
original term of fifty years had already expired (January 15, 1962); it was in the
midst of the three-year grace period statutorily fixed in Section 77 of the
Corporation Law, thus: .
SEC. 77. Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or whose corporate
existence for other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three years after the
time when it would have been so dissolved, for the purpose of
prosecuting and defending suits by or against it and of enabling it
gradually to settle and close its affairs, to dispose of and convey its
property and to divide its capital stock, but not for the purpose of
continuing the business for which it was established.2
Plain from the language of the provision is its meaning: continuance of a
"dissolved" corporation as a body corporate for three years has for its purpose the
final closure of its affairs, and no other; the corporation is specifically enjoined
from "continuing the business for which it was established". The liquidation of the
corporation's affairs set forth in Section 77 became necessary precisely because its
life had ended. For this reason alone, the corporate existence and juridical
personality of that corporation to do business may no longer be extended.
Worth bearing in mind, at this juncture, is the basic development of corporation
law.
The common law rule, at the beginning, was rigid and inflexible in that upon its
dissolution, a corporation became legally dead for all purposes. Statutory
authorizations had to be provided for its continuance after dissolution "for limited
and specified purposes incident to complete liquidation of its affairs".3 Thus, the
moment a corporation's right to exist as an "artificial person" ceases, its corporate
powers are terminated "just as the powers of a natural person to take part in
mundane affairs cease to exist upon his death".4 There is nothing left but to
conduct, as it were, the settlement of the estate of a deceased juridical person.
2. Republic Act 3531, amending Section 18 of the Corporation Law, is silent, it is
true, as to when such act of extension may be made. But even with a superficial
knowledge of corporate principles, it does not take much effort to reach a correct
conclusion. For, implicit in Section 77 heretofore quoted is that the privilege
given to prolong corporate life under the amendment must be exercised before the
expiry of the term fixed in the articles of incorporation.
Silence of the law on the matter is not hard to understand. Specificity is not really
necessary. The authority to prolong corporate life was inserted by Republic Act
3531 into a section of the law that deals with the power of a corporation
to amend its articles of incorporation. (For, the manner of prolongation is through
an amendment of the articles.) And it should be clearly evident that under Section
77 no corporation in a state of liquidation can act in any way, much less amend its
articles, "for the purpose of continuing the business for which it was established".
All these dilute Alhambra's position that it could revivify its corporate life simply
because when it attempted to do so, Alhambra was still in the process of
liquidation. It is surely impermissible for us to stretch the law — that merely
empowers a corporation to act in liquidation — to inject therein the power to
extend its corporate existence.
3. Not that we are alone in this view. Fletcher has written: "Since the privilege of
extension is purely statutory, all of the statutory conditions precedent must be
complied with in order that the extension may be effectuated. And, generally these
conditions must be complied with, and the steps necessary to effect the extension
must be taken, during the life of the corporation, and before the expiration of the
term of existence as original fixed by its charter or the general law, since, as a
rule, the corporation is ipso facto dissolved as soon as that time expires. So where
the extension is by amendment of the articles of incorporation, the amendment
must be adopted before that time. And, similarly, the filing and recording of a
certificate of extension after that time cannot relate back to the date of the passage
of a resolution by the stockholders in favor of the extension so as to save the life
of the corporation. The contrary is true, however, and the doctrine of relation will
apply, where the delay is due to the neglect of the officer with whom the
certificate is required to be filed, or to a wrongful refusal on his part to receive it.
And statutes in some states specifically provide that a renewal may be had within
a specified time before or after the time fixed for the termination of the corporate
existence".5
The logic of this position is well expressed in a foursquare case decided by the
Court of Appeals of Kentucky.6 There, pronouncement was made as follows:
... But section 561 (section 2147) provides that, when any corporation
expires by the terms of its articles of incorporation, it may be thereafter
continued to act for the purpose of closing up its business, but for no
other purpose. The corporate life of the Home Building Association
expired on May 3, 1905. After that date, by the mandate of the statute,
it could continue to act for the purpose of closing up its business, but
for no other purpose. The proposed amendment was not made until
January 16, 1908, or nearly three years after the corporation expired by
the terms of the articles of incorporation. When the corporate life of
the corporation was ended, there was nothing to extend. Here it was
proposed nearly three years after the corporate life of the association
had expired to revivify the dead body, and to make that relate back
some two years and eight months. In other words, the association for
two years and eight months had only existed for the purpose of
winding up its business, and, after this length of time, it was proposed
to revivify it and make it a live corporation for the two years and eight
months daring which it had not been such.
The law gives a certain length of time for the filing of records in this
court, and provides that the time may be extended by the court, but
under this provision it has uniformly been held that when the time was
expired, there is nothing to extend, and that the appeal must be
dismissed... So, when the articles of a corporation have expired, it is
too late to adopt an amendment extending the life of a corporation; for,
the corporation having expired, this is in effect to create a new
corporation ..."7
True it is, that the Alabama Supreme Court has stated in one case.  that a
8
corporation empowered by statute to renew its corporate existence may do so even
after the expiration of its corporate life, provided renewal is taken advantage of
within the extended statutory period for purposes of liquidation. That ruling,
however, is inherently weak as persuasive authority for the situation at bar for at
least two reasons: First. That case was a suit for mandamus to compel a former
corporate officer to turn over books and records that came into his possession and
control by virtue of his office. It was there held that such officer was obliged to
surrender his books and records even if the corporation had already expired. The
holding on the continued existence of the corporation was a mere dictum. Second.
Alabama's law is different. Corporations in that state were authorized not only to
extend but also to renew their corporate existence.That very case defined the word
"renew" as follows; "To make new again; to restore to freshness; to make new
spiritually; to regenerate; to begin again; to recommence; to resume; to restore to
existence, to revive; to re-establish; to recreate; to replace; to grant or obtain an
extension of Webster's New International Dict.; 34 Cyc. 1330; Carter v. Brooklyn
Life Ins. Co., 110 N.Y. 15, 21, 22, 17 N.E. 396; 54 C.J. 379. Sec".9
On this point, we again draw from Fletcher: "There is a broad distinction between
the extension of a charter and the grant of a new one. To renew a charter is to
revive a charter which has expired, or, in other words, "to give a new existence to
one which has been forfeited, or which has lost its vitality by lapse of time". To
"extend" a charter is "to increase the time for the existence of one which would
otherwise reach its limit at an earlier period".10 Nowhere in our statute — Section
18, Corporation Law, as amended by Republic Act 3531 — do we find the word
"renew" in reference to the authority given to corporations to protract their lives.
Our law limits itself to extension of corporate existence. And, as so understood,
extension may be made only before the term provided in the corporate charter
expires.
Alhambra draws attention to another case11 which declares that until the end of the
extended period for liquidation, a dissolved corporation "does not become an
extinguished entity". But this statement was obviously lifted out of context. That
case dissected the question whether or not suits can be commenced by or against a
corporation within its liquidation period. Which was answered in the affirmative.
For, the corporation still exists for the settlement of its affairs.
People, ex rel. vs. Green,12 also invoked by Alhambra, is as unavailing. There,
although the corporation amended its articles to extend its existence at a time
when it had no legal authority yet, it adopted the amended articles later on when it
had the power to extend its life and during its original term when it could amend
its articles.
The foregoing notwithstanding, Alhambra falls back on the contention that its
case is arguably within the purview of the law. It says that before cessation of its
corporate life, it could not have extended the same, for the simple reason that
Republic Act 3531 had not then become law. It must be remembered that
Republic Act 3531 took effect on June 20, 1963, while the original term of
Alhambra's existence expired before that date — on January 15, 1962. The
mischief that flows from this theory is at once apparent. It would certainly open
the gates for all defunct corporations — whose charters have expired even long
before Republic Act 3531 came into being — to resuscitate their corporate
existence.
4. Alhambra brings into argument Republic Act 1932, which amends Section 196
of the Insurance Act, now reading as follows: 
1äwphï1.ñët
SEC. 196. Any provision of law to the contrary notwithstanding, every
domestic life insurance corporation, formed for a limited period under
the provisions of its articles of incorporation, may extend its corporate
existence for a period not exceeding fifty years in any one instance by
amendment to its articles of incorporation on or before the expiration
of the term so fixed in said articles ...
To be observed is that the foregoing statute — unlike Republic Act 3531 —
expressly authorizes domestic insurance corporations to extend their corporate
existence "on or before the expiration of the term" fixed in their articles of
incorporation. Republic Act 1932 was approved on June 22, 1957, long before the
passage of Republic Act 3531 in 1963. Congress, Alhambra points out, must have
been aware of Republic Act 1932 when it passed Republic Act 3531. Since the
phrase "on or before", etc., was omitted in Republic Act 3531, which contains no
similar limitation, it follows, according to Alhambra, that it is not necessary to
extend corporate existence on or before the expiration of its original term.
That Republic Act 3531 stands mute as to when extention of corporate existence
may be made, assumes no relevance. We have already said, in the face of a
familiar precept, that a defunct corporation is bereft of any legal faculty not
otherwise expressly sanctioned by law.
Illuminating here is the explanatory note of H.B. 1774, later Republic Act 3531
— now in dispute. Its first paragraph states that "Republic Act No. 1932 allows
the automatic extension of the corporate existence of domestic life insurance
corporations upon amendment of their articles of incorporation on or before the
expiration of the terms fixed by said articles". The succeeding lines are decisive:
"This is a good law, a sane and sound one. There appears to be no valid reason
why it should not be made to apply to other private corporations.13
The situation here presented is not one where the law under consideration is
ambiguous, where courts have to put in harness extrinsic aids such as a look at
another statute to disentangle doubts. It is an elementary rule in legal
hermeneutics that where the terms of the law are clear, no statutory construction
may be permitted. Upon the basic conceptual scheme under which corporations
operate, and with Section 77 of the Corporation Law particularly in mind, we find
no vagueness in Section 18, as amended by Republic Act 3531. As we view it, by
directing attention to Republic Act 1932, Alhambra would seek to create
obscurity in the law; and, with that, ask of us a ruling that such obscurity be
explained. This, we dare say, cannot be done.
The pari materia rule of statutory construction, in fact, commands that statutes
must be harmonized with each other.14 So harmonizing, the conclusion is clear that
Section 18 of the Corporation Law, as amended by Republic Act 3531 in
reference to extensions of corporate existence, is to be read in the same light as
Republic Act 1932. Which means that domestic corporations in general, as with
domestic insurance companies, can extend corporate existence only on or before
the expiration of the term fixed in their charters.
5. Alhambra pleads for munificence in interpretation, one which brushes
technicalities aside. Bases for this posture are that Republic Act 3531 is a
remedial statute, and that extension of corporate life is beneficial to the economy.
Alhambra's stance does not induce assent. Expansive construction is possible only
when there is something to expand. At the time of the passage of Republic Act
3531, Alhambra's corporate life had already expired. It had overstepped the limits
of its limited existence. No life there is to prolong.
Besides, a new corporation — Alhambra Industries, Inc., with but slight change in
stockholdings15 — has already been established. Its purpose is to carry on, and it
actually does carry on,16 the business of the dissolved entity. The beneficial-effects
argument is off the mark.
The way the whole case shapes up then, the only possible drawbacks of Alhambra
might be that, instead of the new corporation (Alhambra Industries, Inc.) being
written off, the old one (Alhambra Cigar & Cigarette Manufacturing Company,
Inc.) has to be wound up; and that the old corporate name cannot be retained fully
in its exact form.17 What is important though is that the word Alhambra, the name
that counts [it has goodwill], remains.

FOR THE REASONS GIVEN, the ruling of the Securities and Exchange
Commission of November 18, 1963, and its order of September 8, 1964, both here
under review, are hereby affirmed.

Costs against petitioner Alhambra Cigar & Cigarette Manufacturing Company,

Inc. So ordered.