Piercing the Corporate Veil:

Test in Determining Applicability

G.R. No. 98185 December 11, 1992
SIBAGAT TIMBER CORPORATION, petitioner, vs.
ADOLFO B. GARCIA, USIPHIL, INC. and STRONGHOLD INSURANCE CO., INC., respondents.
On August 30, 1988, respondent Sheriff Garcia, levied on the following personal properties ( Machineries)of Del Rosario
& Sons, which he scheduled for sale at public auction on September 7, 1988 at 10:00 o'clock in the morning. He also
levied on a logging truck and tonner, which he scheduled for auction on Sept. 8.
On the same date that the levy was made by the sheriff, Sibagat, through Mariano Rana, filed a third-party claim alleging
that it is the lawful owner of the levied machinery and equipment, by virtue of deeds of sale executed in its favor by Del
Rosario & Sons Logging.
An indemnity bond was posted by the judgment creditor, USIPHIL, Inc., to indemnify the respondent sheriff against the
claim of the third-party claimant. Sibagat filed in the Regional Trial Court of Butuan City, a petition for "Certiorari,
Prohibition and Injunction with Restraining Order & Writ of Preliminary Injunction and Damages.A temporary
restraining order was issued on September 6, 1988 by the Executive Judge of that court.
On the day of auction the court employees who were deputized to serve the restraining order arrived at the place where
the auction sale was to be held. However, they were told by Sheriff Garcia that the auction sale was finished at 10:30 A.M.
yet, and that a certificate of sale for each of the personal properties to be auctioned on that day had already been issued
to USIPHIL, INC., the judgment creditor, as the only bidder and purchaser.
After the hearing on the application for preliminary injunction was held on September 15, 1988, the parties were
directed to submit simultaneous memoranda. Thereafter the case was deemed submitted for resolution. In the meantime,
respondent USIPHIL, INC., filed a formal motion to dismiss the petition which the trial court granted on February 28,
1990.
On March 9, 1990, the petitioner appealed the order of dismissal to the Court of Appeals (CA G.R. No. 20799). On
February 15, 1991, the Court of Appeals dismissed the appeal.
Petitioner's motion for reconsideration was denied by the Court of Appeals. Hence, this petition for review under Rule 45
of the Rules of Court.
The main issue raised by the petitioner is the supposed error of the CA in piercing the veil of corporate entity
and in holding that the 3
rd
party claimant, Sibagat Corporation, is not a separate and distinct entity from the
judgment debtor, Del Rosario & Sons Logging Enterprises, Inc.
As pointed out by the Court of Appeals in its decision:
Gleaned from the records of this case, Mariano Rana, the third-party claimant for and in behalf of
petitioner testified, among others:
a. That he is the office manager of Sibagat Timber Corporation;
b. That he is the administrative manager of Del Rosario and Sons Logging Enterprises, Inc. in a
concurrent capacity;
c. That the officers of the Sibagat Timber are: Mr. Policarpio C. Del Rosario, President and General
Manager; Miss Conchita C. Del Rosario, Vice-President and General Manager; and the Directors are:
Policarpio Del Rosario, Jr., Cristina Del Rosario, Mrs. Jasmin Del Rosario, and Vicente C. Cel Rosario
(pp. 61-63, id.).
d. On the part of Del Rosario and Sons Logging Enterprises, Inc., the officers of the company are: Mr.
Policarpio C. Cel Rosario, President; Miss Conchita Del Rosario, Vice-President/General
Manager/Director and Treasurer; Mrs. Jasmin A. Del Rosario, Querubin Del Rosario, and Cristeta Del
Rosario, respectively. (p. 29, Rollo.)
The circumstances that: (1) petitioner and Del Rosario & Sons Logging Enterprises, Inc. hold office in the same building;
(2) the officers and directors of both corporations are practically the same; and (3) the Del Rosarios assumed
management and control of Sibagat and have been acting for and managing its business (p. 30, Rollo), bolster the
conclusion that petitioner is an alter ego of the Del Rosario & Sons Logging Enterprises, Inc.
The rule is that the veil of corporate fiction may be pierced when made as a shield to perpetrate fraud and/or confuse
legitimate issues (Jacinto vs. CA, 198 SCRA 211). The theory of corporate entity was not meant to promote unfair
objectives or otherwise, to shield them (Villanueva vs. Adre, 172 SCRA 876). Likewise, where it appears that two business
enterprises are owned, conducted, and controlled by the same parties, both law and equity will, when necessary to
protect the rights of third persons, disregard the legal fiction that two corporations are distinct entities, and treat them as
identical (Phil. Veterans Investment Development Corp. vs. CA, 181 SCRA 669).
That allegation has no merit. The issue raised in that case was "whether or not an action for prohibition will prosper as a
remedy for acts already accomplished." It was a procedural question, not the ownership of the properties subject of the
execution.
Assuming arguendo that this Court in G.R. No. 84497 held that petitioner is the owner of the properties levied under
execution, that circumstance will not be a legal obstacle to the piercing of the corporate fiction. As found by both the trial
and appellate courts, petitioner is just a conduit, if not an adjunct of Del Rosario & Sons Logging Enterprises, Inc. In
such a case, the real ownership becomes unimportant and may be disregard for the two entities may/can be treated as
only one agency or instrumentality.
The corporate entity is disregarded where a corporation is the mere alter ego, or business conduit of a person or
where the corporation is so organized and controlled and its affairs are so conducted, as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation. ( Agbayani, Commercial Laws of the Philippines,
Vol. 3, 1984 Ed.)
WHEREFORE, the petition for review is DENIED and the decision of the Court of Appeals is AFFIRMED.
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G.R. No. 89804 October 23, 1992
CALVIN S. ARCILLA, petitioner, vs.CA and EMILIO RODULFO, respondents.
This petition is a belated attempt to avoid the adverse amended decision of public respondent, promulgated on 31 May
1989 in C.A.-G.R. No. 11389,
1
on the ground that Arcilla is not personally liable for the amount adjudged since the same
constitutes a corporate liability which nevertheless cannot even bind or be enforced against the corporation because it is
not a party in the collection suit filed before the trial court.
Rodulfo filed with the RTC of Catanduanes a complaint for a sum of money against Arcilla. That from late 1981 up to early
1983, Arcilla, taking advantage of his close friendship with Rodulfo, succeeded in securing on credit from the plaintiff,
various items, cash and checks which he encashed, in the total amount of P93,358.51, which Rodulfo willingly extended
because of the representations of Arcilla that he was a successful financial consultant of local and international
businessmen;
That Arcilla's indebtedness is shown and described in thirty (30) "vales" signed by him or by persons authorized by him,
all of which documents are in the possession of the plaintiff for being unredeemed or unpaid.
That commencing with the summer months of 1983 up to the time immediately before the filing of this complaint, the
Rodulfo had made numerous demands for payment but Arcilla acted in gross and evident bad faith in refusing to pay.
In his Answer, Arcilla does not deny having had business transactions with the private respondent but alleges that the
professional relationship began only in August of 1982 when he "was looking for a "pro-forma" invoice to support his
loan with the Kilusang Kabuhayan at Kaunlaran (KKK for short) under the Ministry of Human Settlement. He explicitly
admits that "his loan was in the same of his family corporation, CSAR Marine Resources, Inc.;"however, the "vales", more
specifically Annexes "A" to "DD" of the complaint, "were liquidated in the bank loan releases." It is thus clear that his
main defense is payment; he did not interpose any other affirmative defense.
In his Pre-Trial Brief, Arcilla reiterated the earlier claim that his first business dealing with Rondulfo was in August of
1982. This time, however, he alleges that "as President of CSAR Marine Resources, Inc., he requested for a pro-
forma Invoice for said corporation to support the loan application with the Kilusang Kabuhayan at Kaunlaran (KKK for
short), with the Ministry of Human Settlement.
Trial Court Ruling: Arcilla admitted the genuineness and due execution of the vales but alleged paying P56,098.00 thru
PNB Virac Branch, per Cash Voucher dated September 28, 1982, and then P42,363.75 also thru PNB Virac Branch, per
PNB check No. 628861K dated December 16, 1982.
It ruled that since Cash Voucher is dated 28 September 1982 and the "vales, with the exception of Exhibits "K" in the
amount of P1,730.00 and "Q" in the amount of P10,765.00, were issued after said date, it could not have been in payment
of the "vales" other than that evidenced by Exhibits "K" and "Q"
Considering, however, that the "vales" remained in the possession of the private respondent, they are presumed to
remain unpaid, the court therefore ordered Arcilla to pay private respondent:
(a) the total amount of P92,358.43 covered by the "vales", plus interest thereon at the rate of twelve (12%) per cent per
annum from June 4, 1985 when the complaint was filed, attorneys fees and cost of suit.
CA affirmed the trial court's decision. Arcilla filed a motion to reconsider the aforesaid decision, alleging that the evidence
showing payment of the "vales" is "uncontroverted", hence the presumption that they were not paid simply because they
remain in the possession of the creditor cannot arise;
(b) the alleged non-payment of the "vales" could have been further explained if was given opportunity to present sur-
rebuttal witness and documentary evidence; besides, he has newly discovered evidence invoked in a prayer for a new
trial that was nevertheless denied by the lower court which consists of a letter, dated 7 February 1983, signed by
Rafael Rodulfo, General Manager of the private respondent and addressed to Brig. Gen. Clemente Racela, then KKK
General Action Officer, categorically stating that "the account of CSAR Marine Resources, Inc. c/o Atty. Calvin Arcilla" is
only P23,639.33; and
(c) the evidence presented by both parties disclosure that "the subject account are all in the name of CSAR MARINE
RESOURCES, INC., a corporation separate and distinct from the appellant.
Reacting to this motion, private respondent, in a Manifestation, informed the CA, that in the interest of justice and fair
play, he interposes no objection to the alternative prayer for a new trial. Hearing was thereafter conducted to receive the
petitioner's so-called newly discovered evidence consisting of the abovementioned letter of Rafael Rodulfo, dated 7
February 1983, to General Clemente A. Racela, wherein Racela, as GM of Rodulfo's Universal Enterprises, informed the
latter that CSAR Marine Resources, Inc. c/o Atty. Calvin Arcilla has an outstanding obligation of TWENTY THREE
THOUSAND SIX PESOS to Universal Enterprises as a result of various purchases of construction materials.


CA promulgated an Amended Decision, where it reconsidered and ordered Arcilla to pay plaintiff-appellee in his capacity
as President of CSAR, the outstanding balance of P23,639.33 to Universal, plus interest at 12% per annum from June 4,
1985 when the complaint was filed; attorney's fees of P1,000.00, P200.00 per court appearance of counsel and 25% of
the amount awarded; plus the costs of the suit.
On 4 January 1989, Arcilla filed a Motion For Clarificatory Judgment
20
alleging therein that:
It is very clear from the findings of this Honorable Court contained in the amended decision promulgated on May 31,
1989 that defendant Arcilla never had any personal business transaction (sic) in the plaintiff; that CSAR Marine
Resources, Inc. has an outstanding balance out of the KKK loan transaction; and that CSAR Marine is not a party in this
case;
It is rather confusing that he is ordered to pay in his capacity as President of CSAR the said amount when the corporation
was not impleaded.
He then prays that an order be issued clarifying the liability of defendant-appellant in his personal capacity as
regards the amount of P23,639.33, if any, otherwise, the case be dismissed against him.

CA denied the motion on these grounds: (a) the veil of corporate fiction should be pierced in this case; (b) since petitioner
did not raise the issue of separate corporate identity in the pleadings in the trial court or in his Brief, he cannot raise it for
the first time in a Motion for Clarificatory Judgment; in his answer to paragraphs 3 and 4 of the complaint, he admits that
it was he and not his corporation who transacted business with the private respondent; and (c) the "vales" refer not only
to construction materials for which the loan to CSAR Marine was supposed to be used, but also to consumables such as
salt, rice, food seasoning, cigarettes, coffee, etc.; this indicates that the petitioner himself did not seriously treat the
corporate affairs of CSAR as separate and distinct from his own.

Not satisfied with the Resolution, petitioner filed this petition. He alleges therein that CA:
ERRED IN HOLDING CSAR AS LIABLE TO THE PRIVATE RESPONDENT IN THE AMOUNT WITHOUT BEING IMPLEADED
AS A PARTY IN THE CASE IN VIOLATION OF LAW AND THE APPLICABLE DECISIONS OF THE SUPREME COURT; and IN
NOT DISMISSING THE CASE AGAINST THE PETITIONER.
On the contrary, the pleadings lead Us to the inescapable conclusion that the petitioner, who is himself a lawyer, is
merely taking advantage of the use of the innocuous phrase "in his capacity as President" found in the
dispositive portion of the challenged Amended Decision making the same a sanctuary for a defense which he,
as hereinafter discussed, had long since abandoned or waived either deliberately or through his obliviscence. His
sole purpose, of course, is to avoid complying with the liability adjudged against him by the CA; such avoidance is
premiered on the so-called newly discovered evidence offered after the public respondent had bent over backwards to
grant him a new trial despite the availability of such evidence during pendency of the proceedings before the trial court.
It is to be noted that he failed to assign as error in his Brief the denial by the said court of his motion for new trial on the
basis thereof.
The grant of affirmative relief based on the first assigned error would really redound to the benefit of an entirety which
was not made a party in the main case and which did not seek to intervene therein. Therefore, it has no personality to
seek as review of the CAs Amended Decision under Rule 45. Only the original parties to the main case may do
so. Moreover, by no stretch of even the most fertile imagination may one be able to conclude that the challenged
Amended Decision directed the company to pay the amounts adjudge. By its clear and unequivocal language, it is the
petitioner who was declared liable therefor and consequently made to pay. That he was ordered to do so as President
would not free him from the responsibility of paying the due amount simply because according to him, he had ceased to
be corporate president. Such conclusion stems from the fact that the public respondent, in resolving his motion for
clarificatory judgment, pierced the veil of corporate fictional and cast aside the contention that both he and the
corporation have separate and distinct personalities. In short, even if We are to assume arguendo that the obligation was
incurred in the name of the corporation, the petitioner would still be personally liable therefor because for all legal
intents and purposes, he and the corporation are one and the same. Csar Marine Resources, Inc. is nothing more than his
business conduit and alter ego. The fiction of a separate juridical personality conferred upon such corporation by law
should be disregarded. Significantly, petitioner does not seriously challenge the public respondent's application of the
doctrine which permits the piercing of the corporate veil and the disregarding of the fiction of a separate juridical
personality; this is because he knows only too well that from the very beginning, he merely used the corporation for his
personal purposes.
In his answer to the complaint, petitioner volunteered the information that the pro-forma invoice which he obtained from
the private respondent and which became the source of the obligations reflected in the "vales" was to support his loan in
the name of his family corporation, CSAR Marine Resources, Inc. That it was indeed his loan is further borne out by his
allegations therein part.
WHEREFORE, for utter lack of merit, the instant petition is DENIED with costs against petitioner.
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+G.R. No. L-33172 October 18, 1979
ERNESTO CEASE, CECILIA CEASE, MARION CEASE, TERESA CEASE-LACEBAL and the F.L. CEASE PLANTATION CO.,
INC. as Trustee of properties of the defunct TIAONG MILLING & PLANTATION CO.,petitioners,
vs.
HONORABLE COURT OF APPEALS, (Special Seventh Division), HON. MANOLO L. MADDELA, Presiding Judge, CFI
Quezon, BENJAMIN CEASE and FLORENCE CEASE, respondents.
Facts:
Sometime in June 1908, Forrest L. Cease, with 5 other American citizens organized the Tiaong Milling and Plantation
Company, and acquired various properties. He eventually brought out all his other incorporators together with his
children namely: Ernest, Cecilia, Teresita, Benjamin, Florence and one Bonifacia Tirante also considered a member of the
family. The companys charter lapsed in June 1958. On 13 August 1959, F.Cease died, and an extrajudicial partition of his
shares, among the children, was disposed of on 19 October 1959.
Benjamin and Florence wanted an actual division while the other children wanted reincorporation. So the others
incorporated themselves into the F.L. Cease Plantation Company and registered it with the SEC on 9 December, 1959;
apparently in view of that, Benjamin and Florence for their part initiated for the settlement of the estate of Forest L.
Cease on 21 April, 1960 and one month afterwards on 19 May 1960 they filed a case against Ernesto, Teresita and Cecilia
Cease together with Bonifacia Tirante asking that Tiaong Milling be declared Identical to F.L. Cease and that its properties
be divided among his children as his intestate heirs.
Ernesto and Bonifacio set to have the properties placed under receivership. They were not able to succeed because
defendants filed a bond to remain as they have remained in possession. During the pendency of Civil Case No. 6326,
apparently on the eve of the expiry of the three (3) year period provided by the law for the liquidation of corporations,
the board of liquidators of Tiaong Milling executed an assignment and conveyance of properties and trust agreement in
favor of F.L. Cease Plantation Co. Inc. as trustee of the Tiaong Milling and Plantation Co. so that upon motion of the
plaintiffs, the trial Judge ordered that this alleged trustee be also included as party defendant; now this being the
situation. CFI Quezon Ruling:
1) The assets or properties of the defunct Tiaong Milling now appearing under the name of F.L. Cease Plantation
Company as Trustee, is the estate also of the deceased Forrest L. Cease and ordered divided, share and share alike, among
his six children the plaintiffs and the defendants in accordance with Rule 69, Rules of Court;
2) The Resolution to Sell and the Transfer and Conveyance with Trust Agreement is hereby set aside as improper and
illegal for the purposes and effect that it was intended and, therefore, null and void;
3) That F.L. Cease Plantation Company is removed as 'Trustee for interest against the estate and essential to the
protection of plaintiffs' rights and is hereby ordered to deliver and convey all the properties and assets of the defunct
Tiaong Milling now under its name, custody and control to whomsoever be appointed as Receiver - disqualifying and of
the parties herein - the latter to act accordingly upon proper assumption of office; and
4) Special Proceedings No. 3893 for administration is terminated and dismissed; the instant case to proceed but on issues
of damages only and for such action inherently essential for partition.
Upon receipt, defendants there filled a notice of appeal together with an appeal bond and a record on appeal but the
plaintiffs moved to dismiss the appeal on the ground that the judgment was in fact interlocutory and not appealable. This
position was sustained by the trial judge ruling that the appeal interposed by plaintiffs is hereby dismissed as premature.
Defendants brought the matter first to SC on mandamus to compel the appeal and certiorari and prohibition to annul the
order on the ground that the decision was "patently erroneous" but the Supreme Court remanded the case to the CA. CA
dismissed the petition so far as the mandamus was concerned taking the view that the decision sought to be appealed
was interlocutory and not appealable but on motion for reconsideration of petitioners and since there was possible merit
so far as its prayer for certiorari and prohibition was concerned, by resolution of the Court, the petition was permitted to
go ahead in that capacity; and it is the position of petitioners that the decision of 27 December, 1969 as well as the order
of 27 April, 1970 suffered of certain fatal defects, which respondents deny and on their part raise the preliminary point
that this Court of Appeals has no authority to give relief to petitioners because not in aid of its appellate jurisdiction, and
that the questions presented cannot be raised for the first time before this Court of Appeals;
CA dismissed the petition with costs against petitioners, hence the present petition to this Court on the following
assignment of errors:
THE COURT OF APPEALS ERRED -
I. IN SANCTIONING THE WRONGFUL EXERCISE OF JURISDICTION BEYOND THE LIMITS OF AUTHORITY CONFERRED BY
LAW UPON THE LOWER COURT, WHEN IT PROCEEDED TO HEAR, ADJUDGE AND ADJUDICATE -
(a) Special Proceedings No. 3893 for the settlement of the Estate of Forrest L. Cease, simultaneously and concurrently
with the Civil Case No. 6326, wherein the lower Court ordered Partition under Rule 69, Rules of Court.
THE ISSUE OF LEGAL OWNERSHIP OF THE PROPERTIES COMMONLY INVOLVED IN BOTH ACTIONS HAVING BEEN
RAISED AT THE OUTSET BY THE TIAONG MILLING AND PLANTATION COMPANY, AS THE REGISTERED OWNER OF
SUCH PROPERTIES UNDER ACT 496.
II. IN AFFIRMING - UNSUPPORTED BY ANY EVIDENCE WHATSOEVER NOR CITATION OF ANY LAW TO JUSTIFY - THE
UNWARRANTED CONCLUSION THAT SUBJECT PROPERTIES, FOUND BY THE LOWER COURT AND THE COURT OF
APPEALS AS ACTUALLY REGISTERED IN THE NAME OF PETITIONER CORPORATION AND/OR ITS PREDECESSOR IN
INTEREST, THE TIAONG MILLING AND PLANTATION COMPANY, DURING ALL THE 50 YEARS OF ITS CORPORATE
EXISTENCE "ARE ALSO PROPERTIES OF THE ESTATE OF FOREST L. CEASE."
III. IN AFFIRMING THE ARBITRARY CONCLUSION OF THE LOWER COURT THAT ITS DECISION OF DECEMBER 27,1969
IS AN "INTERLUCUTORY DECISION." IN DISMISSED NG THE PETITION FOR WRIT OF MANDAMUS, AND IN AFFIRMING
THE MANIFESTLY UNJUST JUDGMENT RENDERED WHICH CONTRADICTS THE FINDINGS OF ULTIMATE FACTS
THEREIN CONTAINED.
During the period that ensued after the filing in this Court of the respective briefs and the subsequent submission of the
case for decision, some incidents had transpired, the summary of which may be stated as follows:
1. Separate from this present appeal, petitioners filed a petition for certiorari and prohibition in this Court, docketed as
G.R. No. L-35629 (Ernesto Cease, et al. vs. Hon. Manolo L. Maddela, et al.) which challenged the order of respondent judge
dated September 27, 1972 appointing his Branch Clerk of Court, Mr. Eleno M. Joyas, as receiver of the properties subject
of the appealed civil case, which order, petitioners saw as a virtual execution of the lower court's judgment (p. 92, rollo).
In Our resolution of November 13, 1972, issued in G.R. No. L-35629, the petition was denied since respondent judge
merely appointed an auxilliary receiver for the preservation of the properties as well as for the protection of the interests
of all parties in Civil Case No. 6326; but at the same time, We expressed Our displeasure in the appointment of the branch
clerk of court or any other court personnel for that matter as receiver. (p. 102, rollo).
2. Meanwhile, sensing that the appointed receiver was making some attempts to take possession of the properties,
petitioners filed in this present appeal an urgent petition to restrain proceedings in the lower court. We resolved the
petition on January 29, 1975 by issuing a corresponding temporary restraining order enjoining the court a quo from
implementing its decision of December 27, 1969, more particularly, the taking over by a receiver of the properties
subject of the litigation, and private respondents Benjamin and Florence Cease from proceeding or taking any action on
the matter until further orders from this Court (pp. 99-100, rollo). Private respondents filed a motion for reconsideration
of Our resolution of January 29, 1975. After weighing the arguments of the parties and taking note of Our resolution in
G.R. No. L-35629 which upheld the appointment of a receiver, We issued another resolution dated April 11, 1975 lifting
effective immediately Our previous temporary restraining order which enforced the earlier resolution of January 29,
1975 (pp. 140-141, rollo).
3. On February 6, 1976, private respondents filed an urgent petition to restrain proceedings below in view of the
precipitate replacement of the court appointed receiver Mayor Francisco Escueta (vice Mr. Eleno M. Joyas) and the
appointment of Mr. Guillermo Lagrosa on the eve of respondent Judge Maddela's retirement (p. 166, rollo). The urgent
petition was denied in Our resolution of February 18, 1976 (p. 176, rollo).
4. Several attempts at a compromise agreement failed to materialize. A Tentative Compromise Agreement dated July 30,
1975 was presented to the Court on August 6, 1976 for the signature of the parties, but respondents "unceremoniously"
repudiated the same by leaving the courtroom without the permission of the court (Court of First Instance of Quezon,
Branch 11) as a result of which respondents and their counsel were cited for contempt (p. 195, 197, rollo) that
respondents' reason for the repudiation appears to be petitioners' failure to render an audited account of their
administration covering the period from May 31, 1961 up to January 29, 1974, plus the inclusion of a provision on waiver
and relinquishment by respondents of whatever rights that may have accrued to their favor by virtue of the lower court's
decision and the affirmative decision of the appellate court.
We go now to the alleged errors committed by the respondent Court of Appeals.
As can be gleaned from petitioners' brief and the petition itself, two contentions underlie the first assigned error. First,
petitioners argue that there was an irregular and arbitrarte termination and dismissal of the special proceedings for
judicial administration simultaneously ordered in the lower courts decision in Civil Case No. 6326 adjudicating the
partition of the estate, without categorically, reasoning the opposition to the petition for administration Second, that the
issue of ownership had been raised in the lower court when Tiaong Milling asserted title over the properties registered in
its corporate name adverse to Forrest L. Cease or his estate, and that the said issue was erroneously disposed of by the
trial court in the partition proceedings when it concluded that the assets or properties of the defunct company is also the
estate of the deceased proprietor.
The propriety of the dismissal and termination of the special proceedings for judicial administration must be affirmed in
spite of its rendition in another related case in view of the established jurisprudence which favors partition when judicial
administration become, unnecessary. As observed by the Court of Appeals, the dismissal at first glance is wrong, for the
reason that what was actually heard was Civil Case No. 6326. The technical consistency, however, it is far less importance
than the reason behind the doctrinal rule against placing an estate under administration. Judicial rulings consistently
hold the view that where partition is possible, either judicial or extrajudicial, the estate should not be burdened with an
administration proceeding without good and compelling reason. When the estate has no creditors or pending obligations
to be paid, the beneficiaries in interest are not bound to submit the property to judicial administration which is always
long and costly, or to apply for the appointment of an administrator by the court, especially when judicial administration
is unnecessary and superfluous. Thus -
When a person dies without leaving pending obligations to be paid, his heirs, whether of age or not, are bound to submit
the property to a judicial administration, which is always long and costly, or to apply for the appointment of an
administrator by the court. It has been uniformly held that in such case the judicial administration and the appointment
of an administrator are superfluous and unnecessary proceedings.
SC Ruling:
We find no indication of any indebtedness of the estate. No creditor has come up to charge the estate within the two-year
period after the death of Forrest L. Cease, hence, the presumption under Section 1, Rule 74 that the estate is free from
creditors must apply.
Neither has the status of the parties as legal heirs, much less that of respondents, been raised as an issue. Besides, extant
in the records is the stipulation of the parties to submit the pleadings and contents of the administration proceedings for
the cognizance of the trial judge in adjudicating the civil case for partition. As respondents observe, the parties in both
cases are the same, so are the properties involved; that actual division is the primary objective in both actions; the theory
and defense of the respective parties are likewise common; and that both cases have been assigned to the same
respondent judge.
We feel that the unifying effect of the foregoing circumstances invites the wholesome exception to the structures of
procedural rule, thus allowing, instead, room for judicial flexibility. Respondent judge's dismissal of the administration
proceedings then, is a judicious move, appreciable in today's need for effective and speedy administration of justice.
There being ample reason to support the dismissal of the special proceedings in this appealed case, We cannot see in the
records any compelling reason why it may not be dismissed just the same even if considered in a separate action. This is
inevitably certain especially when the subject property has already been found appropriate for partition, thus reducing
the petition for administration to a mere unnecessary solicitation.
The second point raised by petitioners in their first assigned error is equally untenable. In effect, petitioners argue that
the action for partition should not have prospered in view of the repudiation of the co-ownership by Tiaong Milling and
Plantation Company when, as early in the trial court, it already asserted ownership and corporate title over the
properties adverse to the right of ownership of Forrest L. Cease or his estate. We are not unmindful of the doctrine relied
upon by petitioners in Rodriguez vs. Ravilan, 17 Phil. 63 wherein this Court held that in an action for partition, it is
assumed that the parties by whom it is prosecuted are all co-owners or co-proprietors of the property to be divided, and
that the question of common ownership is not to be argued, not the fact as to whether the intended parties are or are not
the owners of the property in question, but only as to how and in what manner and proportion the said property of
common ownership shall be distributed among the interested parties by order of the Court. Consistent with this dictum,
it has been field that if any party to a suit for partition denies thepro-indiviso character of the estate whose partition is
sought, and claims instead, exclusive title thereto the action becomes one for recovery of property cognizable in the
courts of ordinary jurisdiction.
2

Petitioners' argument has only theoretical persuasion, to say the least, rather apparent than real. It must be
remembered that when Tiaong Milling adduced its defense and raised the issue of ownership, its corporate
existence already terminated through the expiration of its charter. It is clear in Section 77 of Act No. 1459
(Corporation Law) that upon the expiration of the charter period, the corporation ceases to exist and is dissolved ipso
facto except for purposes connected with the winding up and liquidation. The provision allows a three year, period from
expiration of the charter within which the entity gradually settles and closes its affairs, disposes and convey its property
and to divide its capital stock, but not for the purpose of continuing the business for which it was established. At this
terminal stage of its existence, Tiaong Milling may no longer persist to maintain adverse title and ownership of the
corporate assets as against the prospective distributees when at this time it merely holds the property in trust, its
assertion of ownership is not only a legal contradiction, but more so, to allow it to maintain adverse interest would
certainly thwart the very purpose of liquidation and the final distribute loll of the assets to the proper, parties.
We agree with the CA in its reasoning that substance is more important than form when it sustained the dismissal of
Special Proceedings No. 3893, thus -
a) As to the dismissal of Special Proceedings No. 3893, of course, at first glance, this was wrong, for the reason that the
case trial had been heard was Civil Case No. 6326; but what should not be overlooked either is that respondent Judge was
the same Judge that had before him in his own sala, and the parties to the present case had themselves asked respondent
Judge to take judicial notice of the same and its contents. It is not difficult to see that when respondent Judge in par. 4 of
the dispositive part of his decision complained of, ordered that the Special Proceedings for administration is terminated
and dismissed; the instant case to proceed but on issues of damages only and for such action inherently essential or
partition.
In truth and in fact, His Honor was issuing that order also within Civil Case No. 632 but in connection with Special
Proceedings No. 389:3: for substance is more important than form, the contending parties in both proceedings being
exactly the same, but not only this, let it not be forgotten that when His Honor dismissed Special Proceedings No. 3893,
that dismissal precisely was a dismissal that petitioners herein had themselves sought and solicited from him. r This
Court must find difficulty in reconciling petitioners' attack with the fact that it was they themselves that had insisted on
that dismissal; on the principle that not he who is favored but he who is hurt by a judicial order is he only who should be
heard to complain and especially since extraordinary legal remedies are remedies in extremities granted to parties ' who
have been the victims not merely of errors but of grave wrongs.
2
nd
Error: Petitioners argue that no evidence has been found to support the conclusion that the registered properties of
Tiaong Milling are also properties of the estate of Forrest L. Cease; that on the contrary, said properties are registered
under Act No. 496 in the name of Tiaong Milling as lawful owner and possessor for the last 50 years of its corporate
existence.
We do not agree. In reposing ownership to the estate of Forrest L. Cease, the trial court indeed found strong support, one
that is based on a well-entrenched principle of law. In sustaining respondents' theory of "merger of Forrest L. Cease and
The Tiaong Milling as one personality", or that "the company is only the business conduit and alter ego of the deceased
Forrest L. Cease and the registered properties of Tiaong Milling are actually properties of Forrest L. Cease and should be
divided equally, share and share alike among his six children. The trial court did aptly apply the familiar exception to the
general rule by disregarding the legal fiction of distinct and separate corporate personality and regarding the corporation
and the individual member one and the same. In shredding the fictitious corporate veil, the trial judge narrated the
undisputed factual premise.
While the records showed that originally its incorporators were aliens, friends or third-parties in relation of one to
another, in the course of its existence, it developed into a close family corporation. The Board of Directors and
stockholders belong to one family the head of which Forrest L. Cease always retained the majority stocks and hence the
control and management of its affairs. Definitely, only the members of his family benefited from the Corporation.
A rich store of jurisprudence has established the rule known as the doctrine of disregarding or piercing the veil of
corporate fiction. Generally, a corporation is invested by law with a personality separate and distinct from that of the
persons composing it as well as from that of any other legal entity to which it may be related. By virtue of this attribute, a
corporation may not, generally, be made to answer for acts or liabilities of its stockholders or those of the legal entities to
which it may be connected, and vice versa. This separate and distinct personality is, however, merely fiction created by
law for convenience and to promote the ends of justice. For this reason, it may not be used or invoked for ends
subversive of the policy and purpose behind its creation,or which could not have been intended by law to which it owes
its being. This is particularly true where the fiction is used to defeat public convenience, justify wrong, protect fraud,
defend crime, confuse legitimate legal or judicial issues, perpetrate deception or otherwise circumvent the law. This is
likewise true where the corporate entity is being used as an alter ego, adjunct, or business conduit for the sole benefit of
the stockholders or of another corporate entity.
In any of these cases, the notion of corporate entity will be pierced or disregarded, and the corporation will be treated
merely as an association of persons or, where there are two corporations, they will be merged as one, the one being
merely regarded as part or the instrumentality of the otter (Koppel [Phil.] Inc. vs. Yatco, 77 Phil. 496, Yutivo Sons
Hardware Company vs. Court of Tax Appeals, supra).
So must the case at bar add to this jurisprudence. An indubitable deduction from the findings of the trial court cannot but
lead to the conclusion that the business of the corporation is largely, if not wholly, the personal venture of Forrest L.
Cease. There is not even a shadow of a showing that his children were subscribers or purchasers of the stocks they own.
Their participation as nominal shareholders emanated solely from Forrest L. Cease's gratuitous dole out of his own
shares to the benefit of his children and ultimately his family.
Were we to sustain the theory of petitioners that the trial court acted in excess of jurisdiction or abuse of discretion
amounting to lack of jurisdiction in deciding Civil Case No. 6326 as a case for partition when the defendant therein,
Tiaong Milling and Plantation Company, Inc. as registered owner asserted ownership of the assets and properties
involved in the litigation, which theory must necessarily be based on the assumption that said assets and properties of
Tiaong Milling and Plantation Company, Inc. now appearing under the name of F. L. Cease Plantation Company as Trustee
are distinct and separate from the estate of Forrest L. Cease to which petitioners and respondents as legal heirs of said
Forrest L. Cease are equally entitled share and share alike, then that legal fiction of separate corporate personality shall
have been used to delay and ultimately deprive and defraud the respondents of their successional rights to the estate of
their deceased father. For Tiaong Milling and Plantation Company shall have been able to extend its corporate existence
beyond the period of its charter which lapsed in June, 1958 under the guise and cover of F. L, Cease Plantation Company,
Inc. as Trustee which would be against the law, and as Trustee shall have been able to use the assets and properties for
the benefit of the petitioners, to the great prejudice and defraudation. of private respondents. Hence, it becomes
necessary and imperative to pierce that corporate veil.
Under the third assigned error, petitioners claim that the decision of the lower court in the partition case is not
interlocutory but rather final for it consists of final and determinative dispositions of the contentions of the parties. We
find no merit in petitioners' stand.
Under the 1961 pronouncement and ruling of the Supreme Court, the lower court's dismissal of petitioners' proposed
appeal from its judgment as affirmed by the Court of Appeals on the ground of prematurity in that the judgment was not
final but interlocutory was in order. As was said in said case:
It is true that in Africa vs. Africa, and other cases it was held - contrary to the rule laid down in Ron vs. Mojica, 8 Phil.
328; Rodriguez vs. Ravilan, 17 Phil. 63 - that in a partition case where defendant relies on the defense of exclusive
ownership, the action becomes one for title and the decision or order directing partition is final, but the ruling to this
effect has been expressly reversed in the Fuentebella case which, in our opinion, expresses the correct view, considering
that a decision or order directing partition is not final because it leaves something more to be done in the trial court for
the complete disposition of the case, namely, the appointment of commissioners, the proceedings to be had before them,
the submission of their report which, according to law, must be set for hearing. In fact, it is only after said hearing that the
court may render a final judgment finally disposing of the action (Rule 71, section 7, Rules of Court).
It should be noted, however, that the said ruling in Zaldarriaga as based on Fuentebella vs. Carrascoso, XIV Lawyers
Journal 305 (May 27, 1942), has been expressly abandoned by the Court in Miranda vs. Court of Appeals, 71 SCRA 295;
331-333 (June 18, 1976) wherein Mr. Justice Teehankee, speaking for the Court, laid down the following doctrine:
The Court, however, deems it proper for the guidance of the bench and bar to now declare as is clearly indicated from the
compelling reasons and considerations hereinabove stated:
- that the Court considers the better rule to be that stated in H. E. Heacock Co. vs. American Trading Co., to wit, that where
the primary purpose of a case is to ascertain and determine who between plaintiff and defendant is the true owner and
entitled to the exclusive use of the disputed property, "the judgment . . . rendered by the lower court [is] a judgment on
the merits as to those questions, and [that] the order of the court for an accounting was based upon, and is incidental to
the judgment on the merits. That is to say, that the judgment . . . [is] a final judgment ... that in this kind of a case an
accounting is a mere incident to the judgment; that an appeal lies from the rendition of the judgment as rendered ... "(as is
widely held by a great number of judges and members of the bar, as shown by the cases so decided and filed and still
pending with the Court) for the fundamental reasons therein stated that "this is more in harmony with the administration
of justice and the spirit and intent of the [Rules]. If on appeal the judgment of the lower court is affirmed, it would not in
the least work an injustice to any of the legal rights of [appellee]. On the other hand, if for any reason this court should
reverse the judgment of the lower court, the accounting would be a waste of time and money, and might work a material
injury to the [appellant]; and
- that accordingly, the contrary ruling in Fuentebella vs. Carrascoso which expressly reversed the Heacock case and a line
of similar decisions and ruled that such a decision for recovery of property with accounting "is not final but merely
interlocutory and therefore not appealable" and subsequent cases adhering to the same must be now in turn abandoned
and set aside.
Fuentebella adopted instead the opposite line of conflicting decisions mostly in partition proceedings and exemplified
by Ron vs. Mojica 8 Phil. 928 (under the old Code of Civil Procedure) that an order for partition of real property is not
final and appealable until after the actual partition of the property as reported by the court appointed commissioners and
approved by the court in its judgmentaccepting the report. lt must be especially noted that such rule governing partitions
is now so expressly provided and spelled out in Rule 69 of the Rules of Court, with special reference to Sections 1, 2, 3, 6,
7 and 11, to wit, that there must first be a preliminary order for partition of the real estate and where the parties-co-
owners cannot agree, the court appointed commissioners make a plan of actual partition which must first be passed upon
and accepted by the trial court and embodied in a judgment to be rendered by it (sections 6 and 11). In partition cases, it
must be further borne in mind that Rule 69, section 1 refers to "a person having the right to compel the partition of real
estate," so that the general rule of partition that an appeal will not lie until the partition or distribution proceedings are
terminated will not apply where appellant claims exclusive ownership of the whole property and denies the adverse
party's right to any partition, as was the ruling inVillanueva vs. Capistrano and Africa vs .Africa, supra, Fuentebellas
express rehearsal of these cases must likewise be deemed now also abandoned in view of the Court's expressed
preference for the rationale of the Heacock case.
The Court's considered opinion is that imperative considerations of public policy and of sound practice in
the courts and adherence to the constitutional mandate of simplified, just, speedy and inexpensive
determination of every action call for considering such judgments for recovery of property
with accounting as final judgments which are duly appealable (and would therefore become final and
executory if not appealed within the reglementary period) with the accounting as a mere incident of the
judgment to be rendered during the course of the appeal as provided in Rule 39, section 4 or to be
implemented at the execution stage upon final affirmance on appeal of the judgment (as in Court of
Industrial Relations unfair labor practice cases ordering the reinstatement of the worker with
accounting, computation and payment of his backwages less earnings elsewhere during his layoff) and
that the only reason given in Fuentebelia for the contrary ruling, viz, "the general harm that would
follow from throwing the door open to multiplicity of appeals in a single case" of lesser import and
consequence. (Emphasis copied).
The Miranda ruling has since then been applied as the new rule by a unanimous Court in Valdez vs. Bagasao, 82 SCRA 22
(March 8, 1978).
If there were a valid genuine claim of Exclusive ownership of the inherited properties on the part of petitioners to
respondents' action for partition, then under the Miranda ruling, petitioners would be sustained, for as expressly held
therein " the general rule of partition that an appeal will not lie until the partition or distribution proceedings are
terminated will not apply where appellant claims exclusive ownership of the whole property and denies the adverse
party's right to any partition."
But this question has now been rendered moot and academic for the very issue of exclusive ownership claimed by
petitioners to deny and defeat respondents' right to partition - which is the very core of their rejected appeal - has been
squarely resolved herein against them, as if the appeal had been given due course. The Court has herein expressly
sustained the trial court's findings, as affirmed by the Court of Appeals, that the assets or properties of the defunct
company constitute the estate of the deceased proprietor (supra at page 7) and the defunct company's assertion of
ownership of the properties is a legal contradiction and would but thwart the liquidation and final distribution and
partition of the properties among the parties hereof as children of their deceased father Forrest L. Cease. There is
therefore no further hindrance to effect the partition of the properties among the parties in implementation of the
appealed judgment.
One last consideration. Parties are brothers and sisters, legal heirs of their deceased father, Forrest L. Cease. By all rights
in law and jurisprudence, each is entitled to share and share alike in the estate, which the trial court correctly ordained
and sustained by the appellate court.WHEREFORE, IN VIEW OF THE FOREGOING, the judgment appealed from is hereby
AFFIRMED with costs against the petitioners.
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
G.R. No. 80863 April 27, 1989
ANTONIO M. VILLANUEVA and FULGENCIO B. LAVAREZ, petitioners,
vs.
HONORABLE ABEDNEGO O. ADRE, Presiding Judge, Regional Trial Court, Branch 22, 11th Judicial Region, and
LUCIO VELAYO, respondents.
FACTS:
The central question in the petition at bar is whether or not the regular courts may stay an execution decreed by the
labor arbiters and what the consequences are of such a recourse to the courts.
The case began from a complaint, dated January 6, 1977, for recovery of unpaid 13 month pay filed by the Sarangani
Marine and General Workers Union-ALU with the Department of Labor against the South Cotabato Integrated Port
Services, Inc. (SCIPSI), a Philippine corporation. Later, thirty-seven SCIPSI employees, non-union members apparently,
filed their own complaint. The labor arbiter consolidated the twin complaints and after hearing, ordered a dismissal on
December 29, 1977. On appeal, however, the National Labor Relations Commission, on June 9, 1981, reversed and
accordingly, ordered the private respondents, SCIPSI and its president and general, Lucio Velayo, to pay the thirteenth-
month pays demanded. The private respondents' motion for reconsideration was denied, and the decision has since
attained finality.
Thereafter, the parties, on orders of the labor arbiter, were made to appear before a corporate auditing examiner to
determine the private respondents' exact liability. On October 24, 1986, the corporate auditing examiner submitted an
accounting and found the private respondents liable in the total sum of Pl,134,000.00. Thereupon, the private
respondents interposed an objection and prayed for a revision. It appears, however, that the private respondents never
pursued their exceptions.
1

On January 16,1987, the union moved for execution and pursuant thereto, the labor arbiter issued a writ of execution. As
a result, the sheriff levied on two parcels of land, both registered in Lucio Velayo's name, with an area of 400 and 979
square meters.
On February 14, 1987, both SCIPSI and Velayo petitioned this Court
2
on certiorari with injunction on the ground,
fundamentally that the Department of Labor's examiner erred in her determination of the private respondents pecuniary
liabilities.
On February 16,1987, Velayo alone filed a petition with the respondent court (Special Case No. 227) on a cause of action
based on an alleged irregular execution, on the ground that he "was never a party to the labor case"
3
and that "a
corporation (that is, SCIPSI has a separate and distinct personality from this incorporators, stockholders and officers."
4

On February 17, 1987, the respondent court issued a temporary restraining order enjoining execution of the judgment in
the aforementioned labor cases. On March 5, 1987, the petitioner moved for dismissal for lack of jurisdiction and litis
pendentia.
On the strength of this Court's decision in National Mines Allied Workers Union v. Vera,
5
the trial judge denied the motion
to dismiss. Reconsideration having been likewise denied, the union as well as the labor arbiter (Antonio Villanueva) and
the sheriff (Fulgencio Lavarez) themselves, on October 22, 1987, instituted these certiorari proceedings.
6

Meanwhile, on April 27,1988, the parties (in G.R. Nos. 7730001) submitted a Compromise Agreement whereby the
private respondents agreed to pay, in installments, the reduced sum of P637,400.00 to the workers. On May 11, 1988, we
issued a Resolution approving the Compromise Agreement, and considering the cases (G.R. Nos. 77300-01) closed and
terminated.
7

At the same time, we issued (in this petition) a Resolution requiring the private respondents and/or counsel, Atty. Oscar
Dinipol, to show cause why they should not be held in contempt for forum-shopping. On December 9,1988, Atty. Dinopol
filed a manifestation praying for dismissal "not because it has become moot and academic in view of the compromise
agreement executed by the parties in G.R. Nos. 77300-01 (but because) the subject or cause of action (thereof) is totally
different from the cause of action in the above-entitled case."
8

On whether or not this case has become moot and academic in view of the compromise reached in G.R. Nos. 77300-01,
the Court rules in the affirmative. It should be noted that the instant petition has been brought as a result of the execution
of the judgment rendered below, and since the parties, by virtue of the compromise, have spelled out the manner by
which payment shall be made, execution by means of levy, the question confronting the court herein, may no longer be
carried out. Nevertheless, because of the ethical implications of the acts of the private respondents, the Court is
constrained to render its judgment if only to forestall future similar acts and for the guidance of the bench and the bar.
We likewise render judgment notwithstanding Atty. Oscar Dinopol's pending prayer for extension of time to file his
comment to our show cause Resolution of November 7, 1988. We consider his manifestation, dated November 29,1988,
urging us not to dismiss this case for having become moot and academic but because the petition lacks merit as his
comment. We do so for one because it has been the position of the private respondents that Special Case No. 227 and G.R.
Nos. 77300-01 could stand together and for another, because of the compelling need to dispose of labor cases with
utmost dispatch. We take this as his defense to that show-cause Resolution. Parenthetically, we find him mistaken for
supposing that our Resolution is based on the simultaneous commencement of Special Case No. 227 and G.R. Nos. 77300-
01. This is not the act that forced suspicions on our part of efforts by the private respondents to "shop for a friendly
forum". Rather, it is the institution of Special Case No. 227, despite the pendency of the labor proceedings below, that led
us to those suspicions. G.R. Nos. 77300-01, on the other hand, were brought primarily on the question of the exact
amount SCIPSI is liable to pay. It is on its face, a legitimate ground for certiorari, and for this reason we accepted the
parties compromise reached there, instead of dismissing it.
There is forum-shopping whenever, as a result of an adverse opinion in one forum, a party seeks a favorable opinion
(other than by appeal or certiorari) in another. The principle applies not only with respect to suits filed in the courts but
also in connection with litigations commenced in the courts while an administrative proceeding is pending, as in this
case, in order to defeat administrative processes and in anticipation of an unfavorable administrative ruling and a
favorable court ruling. This is specially so, as in this case, where the court in which the second suit was brought, has no
jurisdiction.
Accordingly, the respondent court must be held to be in error assuming jurisdiction over Special Case No. 227. It is well-
established that the courts cannot enjoin execution of judgment rendered by the National Labor Relations Commission.
9

The respondent Lucio Velayo's reliance upon National Mines and Allied Workers Union v. Vera
10
is not well-taken. In that
case, the properties involved belonged to third persons, a development that provided a civil dimension to the labor case,
and a development that gave the courts the jurisdiction. In the case at bar, however, Velayo cannot be said to be a
stranger to the proceedings for a number of reasons. First, and as pointed out by the Solicitor General, and as the records
will amply show, he, Velayo, was a party to the proceedings below where he took part actively in defense of his case. We
quote:
It is not true that Lucio Velayo was not a party in the labor cases. The caption of the labor cases shows he was a
respondent. The records of the labor cases show that he participated in the proceedings therein, without raising the issue
that he was not a party nor the employer of the complainants. Thus, the Motion for Reconsideration dated August 7, 1981
attached to the Petition as Annex B was filed by both SCIPS and Lucio Velayo. SCIPS and Velayo discussed the merits of
the cases in said motion and there was nary a mention of the allegation of Velayo now that he not not a party in the cases
nor an employer of the complainants. Likewise, the Exception and/or Opposition to Report of Examiner dated November
13, 1986, attached to the Petition as Annex F, was also filed by both SCIPS and Velayo and, like the Motion for
Reconsideration aforementioned, it does not mention anything about Velayo not being a party and not being an employer
of complainants.
11

Certainly, he cannot now be heard to say that he was no party to the controversy.
The fact that he was never mentioned in the pleadings before the petitioner-labor arbiter is of no moment.The fact is that
he himself had questioned the findings of the corporate auditor (in G.R. Nos. 77300-01) and this is enough evidence that
he admits personal liability, although he does not agree with the amount supposedly due from him. His remonstrances
came too late in the day.
But other than estoppel, the law itself stands as a formidable obstacle to Velayo's claims. In A.C. Ransom Labor Union-
CCLU v. NLRC
12
we held that in case of corporations. It is the president who responds personally for violation of the labor
pay laws. We quote Article 273 of the Code provides that:
Any person violating any of the provisions of Article 265 of this Code shall be punished by a fine of not exceeding five
hundred pesos and/or imprisonment for not less than one (1) day nor more than six (6) months.
(b) How can the foregoing provisions be implemented when the employer is a corporation? The answer is found in
Article 212 (c) of the Labor Code which provides:
(c) 'Employer' of the Labor Code which provides: which 'Employer' includes any person acting in the interest of an
employer, directly or indirectly. The term shall not include any labor organization or any of its officers or agents except
when acting as employer.
The foregoing was culled from Section 2 of RA 602, the Minimum Wage Law. Since RANSOM is an artificial person, it must
have an officer who can be presumed to be the employer, being "the person acting in the interest of (the) employer"
RANSOM. The corporation, only in the technical sense, is the employer.
The responsible officer of an employer corporation can be held personally, not to say even criminally, liable for non-
payment of back wages. That is the policy of the law. In the Minimum Wage Law, Section 15(b) provided:
(b) If any violation of this Act is committed by a corporation, trust, partnership or association, the manager or in his
default, the person acting as such when the violation took place, shall be responsible. In the case of a government
corporation, the managing head shall be made responsible, except when shown that the violation was due to an act or
commission of some other person, over whom he has no control, in which case the latter shall be held responsible.
In PD 525, where a corporation fails to pay the emergency allowance therein provided, the prescribed penalty shall be
imposed upon the guilty officer or officers of the corporation.
Accordingly, Velayo cannot be excused from payment of SCIPSI's liability by mere reason of SCIPSI's separate corporate
existence. The theory of corporate entity, in the first place, was not meant to promote unfair objectives or otherwise, to
shield them. This Court has not hesitated in penetrating the veil of corporate fiction when it would defeat the ends
envisaged by law,
14
not to mention the clear decree of the Labor Code.
And if Velayo truly had a valid objection (to the levy on his properties), he could have raised it at the earliest hour, and in
the course of the labor proceedings themselves. But, as we earlier indicated, he raised nary a finger there, and he cannot
raise it now, much less in a separate proceeding. He is not only estopped, litis pendencia is a bar to such a separate
action.

While the instant case has been rendered moot and academic by reason of the out-of-court settlement between
the parties, that development will not absolve Velayo and/or his counsel, Atty. Oscar Dinopol
16
from charges of forum-
shopping. In Buan v. Lopez, Jr., supra, we declared that forum- shopping is an act of malpractice that constitutes contempt
of court.
In this connection, we reject Atty. Dinopol's pretense that no Identity exists between Special Case No. 227 and the labor
case that had precipitated it. The fact remains that in Special Case No. 227, he assails the execution of the judgment of the
National Labor Relations Commission, the same relief he could have asked for in the very labor proceeding. The fact that
he likewise prayed for damages therein will not alter the essence of the petition- to stay execution-and in which the claim
for damages is but an incidental relief.
Clearly, both Velayo and Atty. Dinopol must account for forum-shopping.
WHEREFORE, judgment is rendered: (1) DISMISSING the petition for having become moot and academic; (2) ORDERING
the respondent judge to dismiss Special Case No. 227; (3) DECLARING the respondent, Lucio Velayo and Atty. Oscar
Dinopol IN CONTEMPT and ORDERING them to pay a fine of Pl,000.00 each within five (5) days from notice; and (4)
SUSPENDING Atty. Oscar Dinopol, for a period of three (3) months effective from notice, from the practice of law. Let a
copy of this Decision be entered in his record.
INCORPORATION AND ORGANIZATION
COMMENCEMENT
1. Who Are Promoters?
Promoter is a person who, acting alone or with others, takes initiative in founding and organizing the business or
enterprise of the issuer and receives consideration therefor.(Sec. 3.10, Securities Regulation Code [R.A. 8799])
2, Liability of Promoters: 3 possible situations intended by the promoter and the other party in pre-incorp.contracts:
a. Promoter takes a continuing OFFER on behalf of the corp, which if accepted by the corp.becomes a contract.
Promoter does not assume any personal liability, whether or not the offer is accepted by the corp.
b. Promoter makes a contract at the time binding himself with the UNDERSTANDING that if the corp., once
formed, accepts or adopts the contract, the promoter will be relieved of all responsibilities.
c. Promoter binds himself PERSONALLY & assumes the responsibility of looking to the proposed corp. for
reimbursement.
*In the absence of any express or implied agreement to the contrary, the 3rd situation will be presumed and the
promoter will be considered personally liable for the contracts. Thus, the corp.s adoption or ratification of the
contract will not release the promoter from personal liability unless a novation was intended. (Wells vs. Fay &
Egan Co., 143 Ga. 732, 87 S.E 873, 1915)
Exception:Quaker v Hill case. In this case, Quaker looked to the uincorporated entity when making the contract.
Thus, the promoter was not liable.
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
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.
FACTS:
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as owner-operator of Southern
Air Lines (SAL) a single proprietorship.
Japan Domestic Airlines (JDA) and Lim entered into and executed a sales contract for the sale and purchase of two (2) DC-
3A Type aircrafts and one (1) set of necessary spare parts for the total agreed price of US $109,000.00 to be paid in
installment. 1st aircraft arrived in Manila on June 7,1965 while the other aircraft, arrived in Manila on July 18.
On May 22, 1965, Pioneer, as surety executed and issued its Surety Bond in favor of JDA, in behalf of its principal, Lim, for
the balance price of the aircrafts and spare parts.
It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and Modesto Cervantes
(Cervanteses) and Constancio Maglana (respondents in both petitions) contributed some funds used in the purchase of
the above aircrafts and spare parts. The funds were supposed to be their contributions to a new corporation proposed by
Lim to expand his airline business. They executed two 2 separate indemnity agreements in favor of Pioneer, one signed
by Maglana and the other jointly signed by Lim for SAL, Bormaheco and the Cervanteses. The indemnity agreements
stipulated that the indemnitors principally agree and bind themselves jointly and severally to indemnify and hold and
save harmless Pioneer from and against any/all damages, losses, costs, damages, taxes, penalties, charges and expenses
of 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
representatives should or may pay or cause to be paid or become liable to pay on them of whatever kind and nature.
On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of Pioneer as deed of chattel
mortgage as security for the latter's suretyship in favor of the former. It was stipulated there that Lim transfer and
convey to the Pioneer the two aircrafts. The deed was duly registered with the Office of the Register of Deeds of the City
of Manila and with the CAA.
Lim defaulted on his subsequent installment payments prompting JDA to request payments from the surety. Pioneer paid
a total sum of P298,626.12.
Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage before the Sheriff of Davao City.
The Cervanteses and Maglana, however, filed a third party claim alleging that they are co-owners of the aircrafts,
Pioneer filed an action for judicial foreclosure with an application for a writ of preliminary attachment against Lim and
respondents, the Cervanteses, Bormaheco and Maglana.
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, by way of counterclaim, sought for damages for being exposed to litigation
and for recovery of the sums of money they advanced to Lim for the purchase of the aircrafts in question.
After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed Pioneer's complaint
against all other defendants.
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.
We first resolve G.R. No. 84197.
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.
Adding the sum of P37,050.00, to the proceeds of the reinsurance amounting to P295,000.00, it is patent that Pioneer
Surety 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.
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.
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.
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 P151,000.00 from
defendants Bormaheco and Maglana representing the latter's participation in the ownership of the subject airplanes and
spare parts. In addition, the cross-party plaintiffs incurred additional expenses, hence, the total sum of P 184,878.74.
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, 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. 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).
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.
In the instant case, it is to be noted that the petitioner was declared non-suited for his failure to appear during the pre-
trial despite notification. In his answer, the Lim denied having received any amount from respondents Bormaheco, the
Cervanteses and Maglana. The trial court and the appellate court, however, found that the petitioner received the amount
of P151,000 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
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 Lim 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.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
2. Number and Qualifications of Incorporators
a. Residency Requirements
CASE:
G.R. No. 161026 October 24, 2005
HYATT ELEVATORS AND ESCALATORS CORPORATION, Petitioner,
vs.
GOLDSTAR ELEVATORS, PHILS., INC.,
*
Respondent.
Well established in our jurisprudence is the rule that the residence of a corporation is the place where its principal office
is located, as stated in its Articles of Incorporation.
FACTS:
The relevant facts of the case are summarized by the CA in this wise:
Respondent GOLDSTAR is a domestic corporation primarily engaged in the business of marketing, distributing, selling,
importing, installing, and maintaining elevators and escalators, with address at 6th Floor, Jacinta II Building, 64 EDSA,
Guadalupe, Makati City.
Petitioner HYATT is a domestic corporation similarly engaged in the business of selling, installing and
maintaining/servicing elevators, escalators and parking equipment, with address at the 6th Floor, Dao I Condominium,
Salcedo St., Legaspi Village, Makati, as stated in its Articles of Incorporation.
On February 23, 1999, HYATT filed a Complaint for unfair trade practices and damages under Articles 19, 20 and 21 of
the Civil Code of the Philippines against LG Industrial Systems Co. Ltd. (LGISC) and LG International Corporation (LGIC),
alleging among others, that:
In 1988, it was appointed by LGIC and LGISC as the exclusive distributor of LG elevators and escalators in the Philippines
under a Distributorship Agreement; LGISC, in the latter part of 1996, made a proposal to change the exclusive
distributorship agency to that of a JV partnership; while it looked forward to a healthy and fruitful negotiation for a joint
venture, however, the various meetings it had with LGISC and LGIC, through the latters representatives, were conducted
in utmost bad faith and with malevolent intentions; in the middle of the negotiations, in order to put pressures upon it,
LGISC and LGIC terminated the Exclusive Distributorship Agreement and as a consequence, [HYATT]
suffered P120,000,000.00 as actual damages, representing loss of earnings and business opportunities, P20,000,000.00
as damages for its reputation and goodwill, P1,000,000.00 as and by way of exemplary damages, and P500,000.00 as and
by way of attorneys fees.
LGISC and LGIC filed an MTD raising the following grounds: (1) lack of jurisdiction over the persons of defendants,
summons not having been served on its resident agent; (2) improper venue; and (3) failure to state a cause of action. The
[trial] court denied the said motion in an Order dated January 7, 2000. They also filed an Answer with Compulsory
Counterclaim ex abundante cautela. Thereafter, they filed a Motion for Reconsideration and to Expunge Complaint which
was denied
HYATT filed a motion for leave of court to amend the complaint, alleging that subsequent to the filing of the complaint, it
learned that LGISC transferred all its organization, assets and goodwill, as a consequence of a JV agreement with Otis
Elevator Company of the USA, to LG OTIS. Thus, LGISC was to be substituted or changed to LG OTIS, its successor-in-
interest. Likewise, the motion averred that GOLDSTAR was being utilized by LG OTIS and LGIC in perpetrating their
unlawful and unjustified acts against HYATT. Consequently, in order to afford complete relief, GOLDSTAR was to be
additionally impleaded as a party-defendant. Hence, in the Amended Complaint, HYATT impleaded GOLDSTAR as a party-
defendant, and all references to LGISC were correspondingly replaced with LG OTIS.
LG OTIS (LGISC) and LGIC filed their opposition to HYATTs motion to amend the complaint, arguing that: (1) the
inclusion of GOLDSTAR as party-defendant would lead to a change in the theory of the case since the latter took no part
in the negotiations which led to the alleged unfair trade practices subject of the case; and (b) HYATTs move to amend the
complaint at that time was dilatory, considering that HYATT was aware of the existence of GOLDSTAR for almost two
years before it sought its inclusion as party-defendant.
The Trial Court admitted the Amended Complaint. LG OTIS (LGISC) and LGIC filed a motion for reconsideration thereto
but were denied.
GOLDSTAR filed a Motion to Dismiss the amended complaint, raising the following grounds: (1) the venue was
improperly laid, as neither HYATT nor defendants reside in Mandaluyong City, where the original case was filed; and (2)
failure to state a cause of action against [respondent], since the amended complaint fails to allege with certainty what
specific ultimate acts Goldstar performed in violation of Hyatts rights. The [trial] court denied the motion to dismiss.
Upon perusal of the factual and legal arguments raised by the movants-defendants, the court finds that these are
substantially the same issues posed by the then defendant LG Industrial System Co. particularly the matter dealing [with]
the issues of improper venue, failure to state cause of action as well as this courts lack of jurisdiction. Under the
circumstances obtaining, the court resolves to rule that the complaint sufficiently states a cause of action and that the
venue is properly laid. It is significant to note that in the amended complaint, the same allegations are adopted as in the
original complaint with respect to the Goldstar Philippines to enable this court to adjudicate a complete determination or
settlement of the claim subject of the action it appearing preliminarily as sufficiently alleged in the plaintiffs pleading
that said Goldstar Elevator Philippines Inc., is being managed and operated by the same Korean officers of defendants LG-
OTIS Elevator Company and LG International Corporation.
Ruling of the Court of Appeals:
The CA ruled that the trial court had committed palpable error amounting to grave abuse of discretion when the latter
denied respondents Motion to Dismiss. The appellate court held that the venue was clearly improper, because none of
the litigants "resided" in Mandaluyong City, where the case was filed.
According to the appellate court, since Makati was the principal place of business of both respondent and petitioner, as
stated in the latters Articles of Incorporation, that place was controlling for purposes of determining the proper venue.
The fact that petitioner had abandoned its principal office in Makati years prior to the filing of the original case did not
affect the venue where personal actions could be commenced and tried.
Issue: "WON the CA, in reversing the ruling of the RTC, erred as a matter of law and jurisprudence, as well as committed
grave abuse of discretion, in holding that in the light of the peculiar facts of this case, venue was improper
This Courts Ruling
The Petition has no merit.
Sole Issue:
Venue
The resolution of this case rests upon a proper understanding of Section 2 of Rule 4 of the 1997 Revised Rules of Court:
"Sec. 2. Venue of personal actions. All other actions may be commenced and tried where the plaintiff or any of the
principal plaintiff resides, or where the defendant or any of the principal defendant resides, or in the case of a non-
resident defendant where he may be found, at the election of the plaintiff."
Since both parties to this case are corporations, there is a need to clarify the meaning of "residence." The law recognizes
two types of persons: (1) natural and (2) juridical. Corporations come under the latter in accordance with Article 44(3) of
the Civil Code.
A corporation, however, has no residence in the same sense in which this term is applied to a natural person. This is
precisely the reason why the Court in Young Auto Supply Company v. Court of Appeals

ruled that "for practical purposes, a
corporation is in a metaphysical sense a resident of the place where its principal office is located as stated in the articles
of incorporation.Even before this ruling, it has already been established that the residence of a corporation is the place
where its principal office is established.
For purposes of venue, the term "residence" is synonymous with "domicile.
"Art. 51,NCC: When the law creating or recognizing them, or any other provision does not fix the domicile of juridical
persons, the same shall be understood to be the place where their legal representation is established or where they
exercise their principal functions."
It now becomes apparent that the residence or domicile of a juridical person is fixed by "the law creating or recognizing"
it. Under Section 14(3) of the Corporation Code, the place where the principal office of the corporation is to be located is
one of the required contents of the articles of incorporation, which shall be filed with the SEC.
In the present case, there is no question as to the residence of respondent. What needs to be examined is that of
petitioner. Admittedly, the HYATTs principal place of business is Makati, as indicated in its Articles of Incorporation.
Since the principal place of business of a corporation determines its residence or domicile, then the place indicated in
petitioners articles of incorporation becomes controlling in determining the venue for this case.
HYATT argues that the Rules of Court do not provide that when the plaintiff is a corporation, the complaint should be
filed in the location of its principal office as indicated in its articles of incorporation. Jurisprudence has, however, settled
that the place where the principal office of a corporation is located, as stated in the articles, indeed establishes
its residence. This ruling is important in determining the venue of an action by or against a corporation, as in the
present case.
Without merit is the argument of petitioner that the locality stated in its Articles of Incorporation does not conclusively
indicate that its principal office is still in the same place. We agree with the appellate court in its observation that the
requirement to state in the articles the place where the principal office of the corporation is to be located "is not a
meaningless requirement. That proviso would be rendered nugatory if corporations were to be allowed to simply
disregard what is expressly stated in their Articles of Incorporation."
20

Inconclusive are the bare allegations of HYATT that it had closed its Makati office and relocated to Mandaluyong City, and
that GOLDSTAR was well aware of those circumstances. Assuming arguendo that they transacted business with each
other in the Mandaluyong office of petitioner, the fact remains that, in law, the latters residence was still the place
indicated in its Articles of Incorporation. Further unacceptable is its faulty reasoning that the ground for the CAs
dismissal of its Complaint was its failure to amend its Articles of Incorporation so as to reflect its actual and present
principal office. The appellate court was clear enough in its ruling that the Complaint was dismissed because the venue
had been improperly laid, not because of the failure of petitioner to amend the latters Articles of Incorporation.
Indeed, it is a legal truism that the rules on the venue of personal actions are fixed for the convenience of the plaintiffs
and their witnesses. Equally settled, however, is the principle that choosing the venue of an action is not left to a
plaintiffs caprice; the matter is regulated by the Rules of Court.
21
Allowing petitioners arguments may lead precisely to
what this Court was trying to avoid in Young Auto Supply Company v. CA:
22
the creation of confusion and untold
inconveniences to party litigants. Thus enunciated the CA:
"x x x. To insist that the proper venue is the actual principal office and not that stated in its Articles of Incorporation
would indeed create confusion and work untold inconvenience. Enterprising litigants may, out of some ulterior motives,
easily circumvent the rules on venue by the simple expedient of closing old offices and opening new ones in another place
that they may find well to suit their needs."
23

We find it necessary to remind party litigants, especially corporations, that "the rules on venue, like the other procedural
rules, are designed to insure a just and orderly administration of justice or the impartial and even-handed determination
of every action and proceeding. Obviously, this objective will not be attained if the plaintiff is given unrestricted freedom
to choose the court where he may file his complaint or petition.
"The choice of venue should not be left to the plaintiffs whim or caprice. He may be impelled by some ulterior motivation
in choosing to file a case in a particular court even if not allowed by the rules on venue."
24

WHEREFORE, the Petition is hereby DENIED, and the assailed Decision and Resolution AFFIRMED.
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
3. Corporate Name- Limitations on Use of Corporate Name:
a. A corporation may change its name by the amendment of its articles of incorporation, but the same is not
effective until approved by the SEC. Philippine First Insurance Co. v. Hartigan, 34 SCRA 252 (1970)
b. A change in the corporate name does not make a new corporation, and whether affected by special act or
under a general law, has no effect on the identity of the corporation, or on its property, rights, or liabilities.
Republic Planters Bank v. CA, 216 SCRA 738 (1992).
c. Similarity in corporate names between two corporations would cause confusion to the public especially
when the purposes stated in their charter are also the same type of business. Universal Mills Corp. v.
Universal Textile Mills Inc., 78 SCRA 62 [1977]).
d. A corporation has not right to intervene in a suit using a name other than its registered name; if a
corporation legally and truly wants to intervene, it should have used its corporate name as the law requires
and not another name which it had not registered. Laureano Investment and Development Corporation v.
Court of Appeals, 272 SCRA 253 (1997).
e. There would be no denial of due process when a corporation is sued and judgment is rendered against it
under its unregistered trade name, holding that a corporation may be sued under the name by which it
makes itself known to its workers. Pison-Arceo Agricultural Development Corp. v. NLRC, 279 SCRA 312 (1997)

4. Corporate Term
Case: G.R. No. L-23606 July 29, 1968
ALHAMBRA CIGAR & CIGARETTE MANUFACTURING COMPANY, INC., vs. SEC
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:
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, term of existence expired on January 15, 1962. On that date, it ceased transacting
business, entered into a state of liquidation. 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 as 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. Before its enactment, the maximum non-extendible term of such corporations was fifty years.
At a special meeting, Alhambra's board of directors resolved to amend its articles of incorporation to extend its corporate
life for an additional fifty years, or a total of 100 years from its incorporation. Its stockholders, representing more than
2/3 of its subscribed capital stock, voted to approve the foregoing resolution to add:
and for an additional period of fifty (50) years thereafter.
The AOI as so amended certified correct by its president and secretary and a majority of its board of directors, were filed
with SEC.
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." Alhambra's
counsel sought reconsideration of SEC's ruling and re-filed the amended articles of incorporation. But after a conference
hearing, SEC denied the reconsideration sought.
Alhambra now invokes the jurisdiction of this Court to overturn the conclusion below.
1

1. Alhambra relies on RA 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, 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.
The 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.
But RA 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.
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 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

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 case
11
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.
Alhambra brings into argument Republic Act 1932, which amends Section 196 of the Insurance Act, now reading as
follows: 1wph1.t
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 extension 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 stockholdings
15
has already been
established. Its purpose is to carry on, and it actually does carry on,the business of the dissolved entity. The beneficial-
effects argument is off the mark.
The way the whole case shapes up then, the only possible drawbacks of Alhambra might be that, instead of the new
corporation (Alhambra Industries, Inc.) being written off, the old one (Alhambra Cigar & Cigarette Manufacturing
Company, Inc.) has to be wound up; and that the old corporate name cannot be retained fully in its exact form.
17
What is
important though is that the word Alhambra, the name that counts [it has goodwill], remains.
FOR THE REASONS GIVEN, the ruling of the Securities and Exchange Commission of November 18, 1963, and its order of
September 8, 1964, both here under review, are hereby affirmed.
Costs against petitioner Alhambra Cigar & Cigarette Manufacturing Company, Inc. So ordered.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++G.R.
No. 148830. April 13, 2005
NATIONAL HOUSING AUTHORITY, Petitioners,
vs.
COURT OF APPEALS, BULACAN GARDEN CORPORATION and MANILA SEEDLING BANK FOUNDATION,
INC., Respondents.
Facts:
On 24 October 1968, Proclamation No. 481 issued by then President Ferdinand Marcos set aside a 120-hectare portion of
land in Quezon City owned by the NHA
4
as reserved property for the site of the National Government Center ("NGC"). On
19 September 1977, President Marcos issued Proclamation No. 1670, which removed a seven-hectare portion from the
coverage of the NGC. Proclamation No. 1670 gave MSBF usufructuary rights over this segregated portion, as follows:
Pursuant to the powers vested in me by the Constitution and the laws of the Philippines, I, FERDINAND E. MARCOS,
President of the Republic of the Philippines, do hereby exclude from the operation of Proclamation No. 481, dated
October 24, 1968, which established the National Government Center Site, certain parcels of land embraced therein and
reserving the same for the Manila Seedling Bank Foundation, Inc., for use in its operation and projects, subject to private
rights if any there be, and to future survey, under the administration of the Foundation.
This parcel of land, which shall embrace 7 hectares, shall be determined by the future survey based on the technical
descriptions found in Proclamation No. 481, and most particularly on the original survey of the area, dated July 1910 to
June 1911, and on the subdivision survey dated April 19-25, 1968. (Emphasis added)
MSBF occupied the area granted by Proclamation No. 1670. Over the years, MSBFs occupancy exceeded the seven-
hectare area subject to its usufructuary rights. By 1987, MSBF occupied approximately 16 hectares. By then the land
occupied by MSBF was bounded by Epifanio de los Santos Avenue ("EDSA") to the west, Agham Road to the east, Quezon
Avenue to the south and a creek to the north.
On 18 August 1987, MSBF leased a portion of the area it occupied to BGC and other stallholders. BGC leased the portion
facing EDSA, which occupies 4,590 square meters of the 16-hectare area.
President Corazon Aquino issued Memorandum Order No. 127 ("MO 127") which revoked the reserved status of
"the 50 hectares, more or less, remaining out of the 120 hectares of the NHA property reserved as site of the
National Government Center." MO 127 also authorized the NHA to commercialize the area and to sell it to the
public.
On 15 August 1988, acting on the power granted under MO 127, the NHA gave BGC ten days to vacate its occupied area.
Any structure left behind after the expiration of the ten-day period will be demolished by NHA.
BGC then filed a complaint for injunction on 21 April 1988 before the trial court. On 26 May 1988, BGC amended its
complaint to include MSBF as its co-plaintiff.
The Trial Courts Ruling
The trial court agreed with BGC and MSBF that Proclamation No. 1670 gave MSBF the right to conduct the survey, which
would establish the seven-hectare area covered by MSBFs usufructuary rights. However, the trial court held that MSBF
failed to act seasonably on this right to conduct the survey. The trial court ruled that the previous surveys conducted by
MSBF covered 16 hectares, and were thus inappropriate to determine the seven-hectare area. The trial court concluded
that to allow MSBF to determine the seven-hectare area now would be grossly unfair to the grantor of the usufruct.
On 8 March 1994, the trial court dismissed BGCs complaint for injunction. Thus:
Premises considered, the complaint praying to enjoin the National Housing Authority from carrying out the demolition of
the plaintiffs structure, improvements and facilities in the premises in question is hereby DISMISSED, but the suggestion
for the Court to rule that Memorandum Order 127 has repealed Proclamation No. 1670 is DENIED. No costs.
The NHA demolished BGCs facilities soon thereafter.
CA:
Initially, the appellate court agreed with the trial court that Proclamation No. 1670 granted MSBF the right to determine
the location of the seven-hectare area covered by its usufructuary rights. However, the appellate court ruled that MSBF
did in fact assert this right by conducting two surveys and erecting its main structures in the area of its choice. But
reversed the trial courts ruling and enjoined the NHA from demolishing the structures, facilities and improvements of
the plaintiff-appellant BGC at its leased premises located in Quezon City which premises were covered by Proclamation
No. 1670, during the existence of the contract of lease it (Bulacan Garden) had entered with the plaintiff-appellant Manila
Seedling Bank Foundation, Inc.
The NHA filed a motion for reconsideration, which was denied by the appellate court on 25 June 2001.
Hence, this petition.
The Issues
a. WHETHER THE PETITION IS NOW MOOT BECAUSE OF THE DEMOLITION OF THE STRUCTURES OF BGC; and
b. WHETHER THE PREMISES LEASED BY BGC FROM MSBF IS WITHIN THE SEVEN-HECTARE AREA THAT
PROCLAMATION NO. 1670 GRANTED TO MSBF BY WAY OF USUFRUCT.
The Ruling:
We remand this petition to the trial court for a joint survey to determine finally the metes and bounds of the seven-
hectare area subject to MSBFs usufructuary rights.
Whether the Petition is Moot because of the Demolition of BGCs Facilities
BGC claims that the issue is now moot due to NHAs demolition of BGCs facilities after the trial court dismissed BGCs
complaint for injunction. BGC argues that there is nothing more to enjoin and that there are no longer any rights left for
adjudication.
We disagree.
BGC may have lost interest in this case due to the demolition of its premises, but its co-plaintiff, MSBF, has not. The
issue for resolution has a direct effect on MSBFs usufructuary rights. There is yet the central question of the
exact location of the seven-hectare area granted by Proclamation No. 1670 to MSBF. This issue is squarely raised
in this petition. There is a need to settle this issue to forestall future disputes and to put this 20-year litigation to
rest.
On the Location of the Seven-Hectare Area Granted by Proc. No. 1670 to MSBF as Usufructuary
Rule 45 of the 1997 Rules of Civil Procedure limits the jurisdiction of this Court to the review of errors of law. Absent any
of the established grounds for exception, this Court will not disturb findings of fact of lower courts. Though the matter
raised in this petition is factual, it deserves resolution because the findings of the trial court and the appellate court
conflict on several points.
The entire area bounded by Agham Road to the east, EDSA to the west, Quezon Avenue to the south and by a creek to the
north measures approximately 16 hectares. Proclamation No. 1670 gave MSBF a usufruct over only a seven-hectare area.
The BGCs leased portion is located along EDSA.
A usufruct may be constituted for a specified term and under such conditions as the parties may deem convenient subject
to the legal provisions on usufruct.
9
A usufructuary may lease the object held in usufruct.
10
Thus, the NHA may not evict
BGC if the 4,590 square meter portion MSBF leased to BGC is within the seven-hectare area held in usufruct by MSBF. The
owner of the property must respect the lease entered into by the usufructuary so long as the usufruct exists.
11
However,
the NHA has the right to evict BGC if BGC occupied a portion outside of the seven-hectare area covered by MSBFs
usufructuary rights.
MSBFs survey shows that BGCs stall is within the seven-hectare area. On the other hand, NHAs survey shows otherwise.
The entire controversy revolves on the question of whose land survey should prevail.
MSBFs survey plots the location of the seven-hectare portion by starting its measurement from Quezon Avenue going
northward along EDSA up until the creek, which serves as the northern boundary of the land in question. Mr. Ben Malto
("Malto"), surveyor for MSBF, based his survey method on the fact that MSBFs main facilities are located within this area.
On the other hand, NHAs survey determines the seven-hectare portion by starting its measurement from Quezon Avenue
going towards Agham Road. Mr. Rogelio Inobaya ("Inobaya"), surveyor for NHA, based his survey method on the fact that
he saw MSBFs gate fronting Agham Road.
BGC presented the testimony of Mr. Lucito M. Bertol ("Bertol"), General Manager of MSBF. Bertol presented a map,which
detailed the area presently occupied by MSBF. The map had a yellow-shaded portion, which was supposed to indicate the
seven-hectare area. It was clear from both the map and Bertols testimony that MSBF knew that it had occupied an area in
excess of the seven-hectare area granted by Proclamation No. 1670.Upon cross-examination, Bertol admitted that he
personally did not know the exact boundaries of the seven-hectare area.Bertol also admitted that MSBF prepared the
map without consulting NHA, the owner of the property.
BGC also presented the testimony of Malto, a registered forester and the Assistant Vice-President of Planning, Research
and Marketing of MSBF. Malto testified that he conducted the land survey, which was used to construct the map
presented by Bertol.
16
Bertol clarified that he authorized two surveys, one in 1984 when he first joined MSBF, and the
other in 1986.
17
In both instances, Mr. Malto testified that he was asked to survey a total of 16 hectares, not just seven
hectares. Malto testified that he conducted the second survey in 1986 on the instruction of MSBFs general manager.
According to Malto, it was only in the second survey that he was told to determine the seven-hectare portion. Malto
further clarified that he based the technical descriptions of both surveys on a previously existing survey of the property.
18

The NHA presented the testimony of Inobaya, a geodetic engineer employed by the NHA. Inobaya testified that as part of
the NHAs Survey Division, his duties included conducting surveys of properties administered by the NHA.
19
Inobaya
conducted his survey in May 1988 to determine whether BGC was occupying an area outside the seven-hectare area
MSBF held in usufruct.
20
Inobaya surveyed the area occupied by MSBF following the same technical descriptions used by
Malto. Inobaya also came to the same conclusion that the area occupied by MSBF, as indicated by the boundaries in the
technical descriptions, covered a total of 16 hectares. He further testified that the seven-hectare portion in the map
presented by BGC,
21
which was constructed by Malto, does not tally with the boundaries BGC and MSBF indicated in their
complaint.
Article 565 of the Civil Code states:
The rights and obligations of the usufructuary shall be those provided in the title constituting the usufruct; in default of
such title, or in case it is deficient, the provisions contained in the two following Chapters shall be observed.
In the present case, Proclamation No. 1670 is the title constituting the usufruct. Proclamation No. 1670 categorically
states that the seven-hectare area shall be determined "by future survey under the administration of the Foundation
subject to private rights if there be any." The appellate court and the trial court agree that MSBF has the latitude to
determine the location of its seven-hectare usufruct portion within the 16-hectare area. The appellate court and the trial
court disagree, however, whether MSBF seasonably exercised this right.
It is clear that MSBF conducted at least two surveys. Although both surveys covered a total of 16 hectares, the second
survey specifically indicated a seven-hectare area shaded in yellow. MSBF made the first survey in 1984 and the second
in 1986, way before the present controversy started. MSBF conducted the two surveys before the lease to BGC. The trial
court ruled that MSBF did not act seasonably in exercising its right to conduct the survey. Confronted with evidence that
MSBF did in fact conduct two surveys, the trial court dismissed the two surveys as self-serving. This is clearly an error on
the part of the trial court. Proclamation No. 1670 authorized MSBF to determine the location of the seven-hectare area.
This authority, coupled with the fact that Proclamation No. 1670 did not state the location of the seven-hectare area,
leaves no room for doubt that Proclamation No. 1670 left it to MSBF to choose the location of the seven-hectare area
under its usufruct.
More evidence supports MSBFs stand on the location of the seven-hectare area. The main structures of MSBF are found
in the area indicated by MSBFs survey. These structures are the main office, the three green houses, the warehouse and
the composting area. On the other hand, the NHAs delineation of the seven-hectare area would cover only the four
hardening bays and the display area. It is easy to distinguish between these two groups of structures. The first group
covers buildings and facilities that MSBF needs for its operations. MSBF built these structures before the present
controversy started. The second group covers facilities less essential to MSBFs existence. This distinction is decisive as to
which survey should prevail. It is clear that the MSBF intended to use the yellow-shaded area primarily because it erected
its main structures there.
Inobaya testified that his main consideration in using Agham Road as the starting point for his survey was the presence of
a gate there. The location of the gate is not a sufficient basis to determine the starting point. MSBFs right as a
usufructuary as granted by Proclamation No. 1670 should rest on something more substantial than where MSBF chose to
place a gate.
To prefer the NHAs survey to MSBFs survey will strip MSBF of most of its main facilities. Only the main building of MSBF
will remain with MSBF since the main building is near the corner of EDSA and Quezon Avenue. The rest of MSBFs main
facilities will be outside the seven-hectare area.
On the other hand, this Court cannot countenance MSBFs act of exceeding the seven-hectare portion granted to it by
Proclamation No. 1670. A usufruct is not simply about rights and privileges. A usufructuary has the duty to protect the
owners interests. One such duty is found in Article 601 of the Civil Code which states:
ART. 601. The usufructuary shall be obliged to notify the owner of any act of a third person, of which he may have
knowledge, that may be prejudicial to the rights of ownership, and he shall be liable should he not do so, for damages, as
if they had been caused through his own fault.
A usufruct gives a right to enjoy the property of another with the obligation of preserving its form and substance, unless
the title constituting it or the law otherwise provides.
22
This controversy would not have arisen had MSBF respected the
limit of the beneficial use given to it. MSBFs encroachment of its benefactors property gave birth to the confusion
that attended this case. To put this matter entirely to rest, it is not enough to remind the NHA to respect MSBFs
choice of the location of its seven-hectare area. MSBF, for its part, must vacate the area that is not part of its
usufruct. MSBFs rights begin and end within the seven-hectare portion of its usufruct. This Court agrees with the trial
court that MSBF has abused the privilege given it under Proclamation No. 1670. The direct corollary of enforcing MSBFs
rights within the seven-hectare area is the negation of any of MSBFs acts beyond it.
The seven-hectare portion of MSBF is no longer easily determinable considering the varied structures erected within and
surrounding the area. Both parties advance different reasons why their own surveys should be preferred. At this point,
the determination of the seven-hectare portion cannot be made to rely on a choice between the NHAs and MSBFs
survey. There is a need for a new survey, one conducted jointly by the NHA and MSBF, to remove all doubts on the exact
location of the seven-hectare area and thus avoid future controversies. This new survey should consider existing
structures of MSBF. It should as much as possible include all of the facilities of MSBF within the seven-hectare portion
without sacrificing contiguity.
A final point. Article 605 of the Civil Code states:
ART. 605. Usufruct cannot be constituted in favor of a town, corporation, or association for more than fifty years.
If it has been constituted, and before the expiration of such period the town is abandoned, or the corporation or
association is dissolved, the usufruct shall be extinguished by reason thereof. (Emphasis added)
The law clearly limits any usufruct constituted in favor of a corporation or association to 50 years. A usufruct is
meant only as a lifetime grant. Unlike a natural person, a corporation or associations lifetime may be extended
indefinitely. The usufruct would then be perpetual. This is especially invidious in cases where the usufruct given to a
corporation or association covers public land. Proclamation No. 1670 was issued 19 September 1977, or 28 years ago.
Hence, under Article 605, the usufruct in favor of MSBF has 22 years left.
MO 127 released approximately 50 hectares of the NHA property as reserved site for the National Government Center.
However, MO 127 does not affect MSBFs seven-hectare area since under Proclamation No. 1670, MSBFs seven-hectare
area was already "exclude[d] from the operation of Proclamation No. 481, dated October 24, 1968, which established the
National Government Center Site."
WHEREFORE, the Decision of the Court of Appeals dated 30 March 2001 and its Resolution dated 25 June 2001 in CA-
G.R. CV No. 48382 are SET ASIDE. This case is REMANDED to Branch 87 of the Regional Trial Court of Quezon City, which
shall order a joint survey by the National Housing Authority and Manila Seedling Bank Foundation, Inc. to determine the
metes and bounds of the seven-hectare portion of Manila Seedling Bank Foundation, Inc. under Proclamation No. 1670.
The seven-hectare portion shall be contiguous and shall include as much as possible all existing major improvements of
Manila Seedling Bank Foundation, Inc. The parties shall submit the joint survey to the Regional Trial Court for its
approval within sixty days from the date ordering the joint survey.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++5.
Minimum Capital Stock and Subscription Requirements
G.R. No. 152685 December 4, 2007
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, petitioner,
vs.
NATIONAL TELECOMMUNICATIONS COMMISSION, JOSEPH A.SANTIAGO, in his capacity as NTC Commissioner, and
EDGARDO CABARRIOS, in his capacity as Chief, CCAD, respondents.
R E S O L U T I O N
VELASCO, JR., J.:
Before us is a Petition for Review on Certiorari
1
under Rule 45 of the Rules of Court. It assails the February 12, 2001
Decision
2
of the Court of Appeals (CA) in CA-G.R. SP No. 61033, which dismissed petitioners special civil action for
certiorari and prohibition, and the March 21, 2002 Resolution
3
of the CA denying petitioners motion for reconsideration.
The petition raises the sole issue on whether the appellate court erred in holding that the assessments of the National
Telecommunications Commission (NTC) were contrary to our Decision in G.R. No. 127937 entitled NTC v. Honorable
Court of Appeals.
4

This case pertains to Section 40 (e)
5
of the Public Service Act
6
(PSA), as amended on March 15, 1984, pursuant to BP 325,
which authorized the NTC to collect from public telecommunications companies Supervision and Regulation Fees (SRF)
of 0.50 for every 100 or a fraction of the capital and stock subscribed or paid for of a stock corporation, partnership or
single proprietorship of the capital invested, or of the property and equipment, whichever is higher.
Under Section 40 (e) of the PSA, the NTC sent SRF assessments to petitioner Philippine Long Distance Telephone
Company (PLDT) starting sometime in 1988. The SRF assessments were based on the market value of the outstanding
capital stock, including stock dividends, of PLDT. PLDT protested the assessments contending that the SRF ought to be
based on the par value of its outstanding capital stock. Its protest was denied by the NTC and likewise, its motion for
reconsideration.
PLDT appealed before the CA. The CA modified the disposition of the NTC by holding that the SRF should be assessed at
par value of the outstanding capital stock of PLDT, excluding stock dividends.
With the denial of the NTCs partial reconsideration of the CA Decision, the issue of the basis for the assessment of the
SRF was brought before this Court under G.R. No. 127937 wherein we ruled that the SRF should be based neither on the
par value nor the market value of the outstanding capital stock but on the value of the stocks subscribed or paid
including the premiums paid therefor, that is, the amount that the corporation receives, inclusive of the
premiums if any, in consideration of the original issuance of the shares. We added that in the case of stock
dividends, it is the amount that the corporation transfers from its surplus profit account to its capital account, that is, the
amount the stock dividends represent is equivalent to the value paid for its original issuance.
PLDT wanted our July 28, 1999 Decision in G.R. No. 127937 clarified. It posited that the SRF should be based on the par
value in consonance with our holding in Philippine Long Distance Telephone Company v. Public Service Commission, and
that the premiums on issued shares should not be included in the valuation of the outstanding capital stock.
Through our Resolution in G.R. No. 127937, we elucidated that our July 28, 1999 decision was not in conflict with our
ruling in Philippine Long Distance Telephone Company since we never enunciated in the said case that the phrase "capital
stock subscribed or paid" must be determined at par value. We reiterated that the term "capital stock subscribed or paid"
is the amount that the corporation receives, inclusive of the premiums, if any, in consideration of the original issuance of
the shares.
Thereafter, to comply with our disposition in G.R. No. 127937, for the reassessment of the SRF based on the value of the
stocks subscribed or paid including the premiums paid for the stocks, if any, the NTC sent the assailed assessments of
February 10, 2000

and September 5, 2000 to PLDT which included the value of stock dividends issued by PLDT. The
assailed assessments were based on the schedule of capital stock submitted by PLDT.
PLDT now contends that our disposition in G.R. No. 127937 excluded stock dividends from the SRF coverage, while the
NTC asserts the contrary. Also, PLDT questions the assessments for violating our disposition in G.R. No. 127937 since
these assessments were identical to the previous assessments from 1988 which were questioned by PLDT in G.R. No.
127937 for being based on the market value of its outstanding capital stock.
PLDT wrote a letter protesting the assailed February 10 assessment which was not acted upon by the NTC. Instead, the
NTC sent a second assailed assessment on September 5. Thus, in an attempt to clarify and resolve this issue, PLDT filed a
Motion for Clarification of Enforcement of the Decision in G.R. No. 127937 which this Court simply noted for the case had
already become final and executory.
Thus, on October 2, 2000, PLDT instituted the special civil action for certiorari and prohibition docketed as CA-G.R. SP No.
61033
10
before the CA. To maintain the status quo and to defer the enforcement of the assailed assessments and
subsequent assessments, on October 3, 2000, the CA issued a Temporary Restraining Order. On December 4, 2000, a writ
of preliminary injunction was granted.
Subsequently, on February 12, 2001, the CA rendered the assailed Decision dismissing the petition. The dispositive
portion reads:
WHEREFORE, the petition is DISMISSED for lack of merit, and the writ of preliminary injunction heretofore
issued is DISSOLVED.
11

PLDTs motion for reconsideration was denied by the CAs Special Division of Five on March 21, 2002.
Hence, the instant petition for review, raising the core issue:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE DISPUTED NTC ASSESSMENTS WERE NOT CONTRARY
TO THE PURISIMA DECISION.
12

Ruling: The petition is bereft of merit.
Court did not exclude from the coverage of the SRF the capital stocks issued as stock dividends.
PLDTs Contention: that the Ruling clearly delineates between capital subscribed and stock dividends so the latter are not
included in the concept of capital stock subscribed because subscribers or shareholders do not pay for their
subscriptions as no amount is received by the corporation in consideration of such issuances since these are effected as
mere book entries, that is, the transfer from the retained earnings account to the capital or stock account.
To bolster its position, PLDT repeatedly used the phrase "actual payments" received by a corporation as a consideration
for issuances of shares which do not apply to stock dividends.
Crucial in point is our disquisition in G.R. No. 127937 (NTC v. Court of Appeals,) which we quote:
The term "capital" and other terms used to describe the capital structure of a corporation are of universal acceptance and
their usages have long been established in jurisprudence. Briefly, capital refers to the value of the property or assets of a
corporation. The capital subscribed is the total amount of the capital that persons (subscribers or shareholders)
have agreed to take and pay for, which need not necessarily by, and can be more than, the par value of the shares. In
fine, it is the amount that the corporation receives, inclusive of the premiums if any, in consideration of the original
issuance of the shares. In the case of stock dividends, it is the amount that the corporation transfers from its surplus
profit account to its capital account. It is the same amount that can be loosely termed as the "trust fund" of the
corporation. The "Trust Fund" doctrine considers this subscribed capital as a trust fund for the payment of the debts of
the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the
subscribed capital may be returned or released to the stockholder (except in the redemption of redeemable shares)
without violating this principle. Thus, dividends must never impair the subscribed capital; subscription commitments
cannot be condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as the
considerations therefor.
13
(Emphasis supplied.)
Two concepts can be gleaned from the above. First, what constitutes capital stock that is subject to the SRF. Second, such
capital stock is equated to the "trust fund" of a corporation held in trust as security for satisfaction to creditors in case of
corporate liquidation.
The first asks if stock dividends are part of the outstanding capital stocks of a corporation insofar as it is subject to the
SRF. YES they are.
The first issue we have to tackle is, are all the stock dividends that are part of the outstanding capital stock of PLDT
subject to the SRF? Yes, they are.
PLDTs contention, that stock dividends are not similarly situated as the subscribed capital stock because the subscribers
or shareholders do not pay for their issuances as no amount was received by the corporation in consideration of such
issuances since these are effected as a mere book entry, is erroneous.
Dividends, regardless of the form these are declared, that is, cash, property or stocks, are valued at the amount of the
declared dividend taken from the unrestricted retained earnings of a corporation. Thus, the value of the declaration in
the case of a stock dividend is the actual value of the original issuance of said stocks. In G.R. No. 127937 we said that "in
the case of stock dividends, it is the amount that the corporation transfers from its surplus profit account to its capital
account" or "it is the amount that the corporation receives in consideration of the original issuance of the shares." It is
"the distribution of current or accumulated earnings to the shareholders of a corporation pro rata based on the number
of shares owned.
Such distribution in whatever form is valued at the declared amount or monetary equivalent.
It cannot be said that no consideration is involved in the issuance of stock dividends. In fact, the declaration of stock
dividends is akin to a forced purchase of stocks. By declaring stock dividends, a corporation ploughs back a portion or its
entire unrestricted retained earnings either to its working capital or for capital asset acquisition or investments. It is
simplistic to say that the corporation did not receive any actual payment for these. When the dividend is distributed, it
ceases to be a property of the corporation as the entire or portion of its unrestricted retained earnings is distributed pro
rata to corporate shareholders.
When stock dividends are distributed, the amount declared ceases to belong to the corporation but is distributed among
the shareholders. Consequently, the unrestricted retained earnings of the corporation are diminished by the amount of
the declared dividend while the stockholders equity is increased. Furthermore, the actual payment is the cash value from
the unrestricted retained earnings that each shareholder foregoes for additional stocks/shares which he would
otherwise receive as required by the Corporation Code to be given to the stockholders subject to the availability and
conditioned on a certain level of retained earnings.
Also, where the unrestricted retained earnings of a corporation are more than 100% of the paid-in capital stock, the
corporate Board of Directors is mandated to declare dividends which the shareholders will receive in cash unless
otherwise declared as property or stock dividends, which in the latter case the stockholders are forced to forego cash in
lieu of property or stocks.
In essence, therefore, the stockholders by receiving stock dividends are forced to exchange the monetary value of their
dividend for capital stock, and the monetary value they forego is considered the actual payment for the original issuance
of the stocks given as dividends. Therefore, stock dividends acquired by shareholders for the monetary value they forego
are under the coverage of the SRF and the basis for the latter is such monetary value as declared by the board of
directors.
On the second issue, do the assailed NTC assessments violate the ruling in G.R. No. 127937? PLDT contends that these did
since the assessments are identical to the previous assessments from 1988 which were questioned by PLDT in the
seminal G.R. No. 127937 for being based on the market value of its outstanding capital stock.
A cursory review of the assessments made by the NTC prior to our July 28, 1999 Decision in G.R. No. 127937 and the
assailed assessments of February 10, 2000 and September 5, 2000 does show that the assessments are substantially
identical. In our July 28, 1999 Decision in G.R. No. 127937, we noted, and similarly true in the petition before us, that,
"The actual capital paid or the amount of capital stock paid and for which PLDT received actual payments were not
disclosed or extant in the records before the Court."
16

Hence, as before, we cannot factually determine whether the assailed assessments substantially followed our Decision in
G.R. No. 127937. It is apparent that the assessments are identical and that the NTC in the earlier case asserted that the
SRF be based on the market value of the capital stock, yet it assessed it to PLDT. However, a closer look at the assailed
assessments of February 13, 2000 and September 5, 2000 would show that the NTC based its assessment on the schedule
of capital stock submitted by PLDT. PLDT did not dispute this; it only disputed the level of assessment which was the
same as before.
Now, where should the NTC base its assessment? It is incumbent upon PLDT to furnish the NTC the actual payment made
on the subscription of its capital stock in order for the NTC to assess the proper SRF. Logically, the NTC would base its
SRF assessment of PLDT from PLDT data.
PLDT should not bewail that the assailed assessments are substantially the same assessments it protested in G.R. No.
127937. After all, it had not shown the actual figures of the amount of premiums and subscriptions it had
received for the original issuances of its capital stock. While indeed it submitted a table of the comparative
assessments made by the NTC to this Court, PLDT has not furnished the NTC nor this Court the correct figures of
the actual payments made for its capital stock.
We are not unaware that in accounting practice, the journal entries for transactions are recorded in historical value or
cost. Thus, the purchase of properties or assets is recorded at acquisition cost. The same is true with liabilities and equity
transactions where the actual loan and the amount paid for the subscription are recorded at the actual payment,
including the premiums paid for the subscription of capital stock.
Moreover, it is common practice that the values of the accounts recorded at historical value or cost are not increased or
decreased due to market forces. In the case of properties, the appreciation in values is generally not recorded as income
nor is the increase in the corresponding asset because the increase or decrease is not yet realized until the property is
actually sold. The same is true with the capital account. The market value may be much higher than the actual payment of
the par value and premium of capital stock. Still, the books of account will not reflect such increase; and vice-versa, any
decrease of the value of stocks is likewise not reflected in the books of account.
Thus, given the general practice that book entries of the premiums and subscriptions for capital stock are the actual value
for the original issuance of stocks, then the NTC was correct to follow the schedule of capital stocks submitted by PLDT.
Moreover, the "Trust Fund" doctrine, the second concept this Court elucidated in G.R. No. 127937 and quoted above,
bolsters the correctness of the assessments made by the NTC. As a fund in trust for creditors in case of liquidation, the
actual value of the subscriptions and the value of stock dividends distributed may not be decreased or increased by the
fluctuating market value of the stocks. Thus, absent any showing by PLDT of the actual payment it received for the
original issuance of its capital stock, the assessments made by the NTC, based on the schedule of outstanding capital
stock of PLDT recorded at historical value payments made, is deemed correct.
Anent stock dividends, the value transferred from the unrestricted retained earnings of PLDT to the capital stock account
pursuant to the issuance of stock dividends is the proper basis for the assessment of the SRF, which the NTC correctly
assessed.
WHEREFORE, we DENY the petition for lack of merit, and AFFIRM the February 12, 2001 Decision and March 21, 2002
Resolution.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

G.R. No. 131394 March 28, 2005
JESUS V. LANUZA, MAGADYA REYES, BAYANI REYES and ARIEL REYES, Petitioner,
vs.
COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION, DOLORES ONRUBIA, ELENITA NOLASCO, JUAN O.
NOLASCO III, ESTATE OF FAUSTINA M. ONRUBIA, PHILIPPINE MERCHANT MARINE SCHOOL, INC., Respondents.
Presented in the case at bar is the apparently straight-forward but complicated question: What should be the basis of
quorum for a stockholders meetingthe outstanding capital stock as indicated in the articles of incorporation or that
contained in the companys stock and transfer book?
FACTS:
In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was incorporated, 700 founders shares and 76 common
shares as its initial capital stock subscription reflected in the articles of incorporation. However, private respondents and
their predecessors who were in control of PMMSI registered the companys stock and transfer book for the first time in
1978, recording 33 common shares as the only issued and outstanding shares of PMMSI. Sometime in 1979, a special
stockholders meeting was called and held on the basis of what was considered as a quorum of twenty-seven 27 common
shares, representing more than two-thirds (2/3) of the common shares issued and outstanding.
In 1982, the heirs of one of the original incorporators, Juan Acayan, filed a petition with the SEC for the registration of
their property rights over one hundred 120 founders shares and 12 common shares owned by their father. The SEC
hearing officer held that the heirs of Acayan were entitled to the claimed shares and called for a special stockholders
meeting to elect a new set of officers. The SEC En Banc affirmed the decision. As a result, the shares of Acayan were
recorded in the stock and transfer book.
May 1992: A special stockholders meeting was held to elect a new set of directors. Private respondents filed a petition
with the SEC questioning the validity of the May 1992 stockholders meeting, alleging that the quorum for the said
meeting should not be based on the 165 issued and outstanding shares as per the stock and transfer book, but on the
initial subscribed capital stock of seven hundred seventy-six 776 shares, as reflected in the 1952 Articles of
Incorporation. The petition was dismissed.
Appeal was made to the SEC En Banc, which granted said appeal, holding that the shares of the deceased incorporators
should be duly represented by their respective administrators or heirs concerned. The SEC directed the parties to call for
a stockholders meeting on the basis of the stockholdings reflected in the AOI for the purpose of electing a new set of
officers for the corporation.
Petitioners, who are PMMSI stockholders, filed a PFR with the Court of Appeals. Rebecca Acayan, Jayne O. Abuid, Willie O.
Abuid and Renato Cervantes, stockholders and directors of PMMSI, earlier filed another petition for review of the same
SEC En Bancs orders. The petitions were thereafter consolidated.
The consolidated petitions essentially raised the following issues:
(a) whether the basis the outstanding capital stock and accordingly also for determining the quorum at stockholders
meetings it should be the 1978 stock and transfer book or if it should be the 1952 articles of incorporation; and
(b) Whether the CA gravely erred in applying the Espejo Decision to the benefit of respondents ("Espejo Decision" is the
decision of the SEC en banc in SEC Case No. 2289 which ordered the recording of the shares of Jose Acayan in the stock
and transfer book).
CA Decision: Held that for purposes of transacting business, the quorum should be based on the outstanding capital stock
as found in the AOI.
As to the second issue, CA held that the ruling in the Acayan case would ipso facto benefit the private respondents, since
to require a separate judicial declaration to recognize the shares of the original incorporators would entail unnecessary
delay and expense. Besides, the Court of Appeals added, the incorporators have already proved their stockholdings
through the provisions of the articles of incorporation.
In the instant petition, petitioners claim that the 1992 stockholders meeting was valid and legal. They submit that
reliance on the 1952 articles of incorporation for determining the quorum negates the existence and validity of the stock
and transfer book which private respondents themselves prepared. In addition, they posit that private respondents
cannot avail of the benefits secured by the heirs of Acayan, as private respondents must show and prove entitlement to
the founders and common shares in a separate and independent action/proceeding.
In private respondents Memorandum, they point out that the instant petition raises the same facts and issues as those
raised in G.R. No. 131315 which was denied by the First Division of this Court on 18 January 1999 for failure to show that
the Court of Appeals committed any reversible error. They add that as a logical consequence, the instant petition should
be dismissed on the ground of res judicata. Furthermore, private respondents claim that in view of the applicability of the
rule on res judicata, petitioners counsel should be cited for contempt for violating the rule against forum-shopping.
For their part, petitioners claim that the principle of res judicata does not apply to the instant case. They argue that the
instant petition is separate and distinct from G.R. No. 131315, there being no identity of parties, and more importantly,
the parties in the two petitions have their own distinct rights and interests in relation to the subject matter in litigation.
For the same reasons, they claim that counsel for petitioners cannot be found guilty of forum-shopping.
In their Manifestation and Motion, private respondents moved for the dismissal of the instant petition in view of the
dismissal of G.R. No. 131315. Attached to the said manifestation is a copy of the Entry of Judgment
16
issued by the First
Division dated 01 December 1999.
The petition must be denied, not on res judicata, but on the ground that like the petition in G.R. No. 131315 it fails to
impute reversible error to the challenged Court of Appeals Decision.
Res judicata does not apply in the case at bar.
There is no dispute as to the identity of subject matter since the crucial point in both cases is the propriety of including
the still unproven shares of respondents for purposes of determining the quorum. Petitioners, however, deny that there
is identity of parties and causes of actions between the two petitions.
The test often used in determining whether causes of action are identical is to ascertain whether the same facts or
evidence would support and establish the former and present causes of action.
20
More significantly, there is identity of
causes of action when the judgment sought will be inconsistent with the prior judgment.
In both petitions, petitioners assert that the Court of Appeals Decision effectively negates the existence and validity of the
stock and transfer book, as well as automatically grants private respondents shares of stocks which they do not own, or
the ownership of which remains to be unproved. Petitioners in the two petitions rely on the entries in the stock and
transfer book as the proper basis for computing the quorum, and consequently determine the degree of control one has
over the company. Essentially, the affirmance of the SEC Order had the effect of diminishing their control and interests in
the company, as it allowed the participation of the individual private respondents in the election of officers of the
corporation.
Absolute identity of parties is not a condition sine qua non for res judicata to applya shared identity of interest is
sufficient to invoke the coverage of the principle.
22
However, there is no identity of parties between the two cases. The
parties in the two petitions have their own rights and interests in relation to the subject matter in litigation. As stated by
petitioners in their Reply to Respondents Memorandum,
23
there are no two separate actions filed, but rather, two separate
petitions for review on certiorari filed by two distinct parties with the Court and represented by their own counsels,
arising from an adverse consolidated decision promulgated by the Court of Appeals in one action or proceeding.
24
As
such, res judicata is not present in the instant case.
Likewise, there is no basis for declaring petitioners or their counsel guilty of violating the rules against forum-shopping.
In the Verification/Certification portion of the petition, petitioners clearly stated that there was then a pending motion for
reconsideration of the 18 August 1997 Decision of the Court of Appeals in the consolidated cases filed by the Abuids, as
well as a motion for clarification. Moreover, the records indicate that petitioners filed their Manifestation dated 20
January 1998, informing the Court of their receipt of the petition in G.R. No. 131315 in compliance with their duty to
inform the Court of the pendency of another similar petition. The Court finds that petitioners substantially complied with
the rules against forum-shopping.
The Decision of the Court of Appeals must be upheld.
The petition in this case involves the same facts and substantially the same issues and arguments as those in G.R. No.
131315 which the First Division has long denied with finality. The First Division found the petition before it inadequate
in failing to raise any reversible error on the part of the Court of Appeals. We reach a similar conclusion as regards the
present petition.
ISSUE: Whether it is the companys stock and transfer book, or its 1952 Articles of Incorporation, which determines
stockholders shareholdings, and provides the basis for computing the quorum.
We agree with the Court of Appeals.
The AOI has been described as one that defines the charter of the corporation and the contractual relationships between
the State and the corporation, the stockholders and the State, and between the corporation and its stockholders. When
PMMSI was incorporated, the prevailing law was Act No. 1459, otherwise known as "The Corporation Law." Section 6
thereof states:
Sec.6: Five or more persons, not exceeding fifteen, a majority of whom are residents of the Philippines, may form a
private corporation for any lawful purpose or purposes by filing with the Securities and Exchange Commission articles of
incorporation duly executed and acknowledged before a notary public, setting forth:
.(7) If it be a stock corporation, the amount of its capital stock, in lawful money of the Philippines, and the number of
shares into which it is divided, and if such stock be in whole or in part without par value then such fact shall be
stated; Provided, however, That as to stock without par value the articles of incorporation need only state the number of
shares into which said capital stock is divided.
(8) If it be a stock corporation, the amount of capital stock or number of shares of no-par stock actually subscribed, the
amount or number of shares of no-par stock subscribed by each and the sum paid by each on his subscription
A review of PMMSIs articles of incorporation shows that the corporation complied with the requirements laid down by
Act No. 1459. It provides in part:
7. That the capital stock of the said corporation is NINETY THOUSAND PESOS (P90,000.00) divided into two
classes, namely:
FOUNDERS STOCK - 1,000 shares at P20 par value- P 20,000.00
COMMON STOCK- 700 shares at P 100 par value P 70,000.00
TOTAL ---------------------1,700 shares----------------------------P 90,000.00
8. That the amount of the entire capital stock which has been actually subscribed is TWENTY ONE THOUSAND
SIX HUNDRED PESOS (P21,600.00) and the following persons have subscribed for the number of shares and
amount of capital stock set out after their respective names:
SUBSCRIBER SUBSCRIBED AMOUNT
SUBSCRIBED
No. of Shares Par Value
Crispulo J. Onrubia 120 Founders P 2,400.00
Juan H. Acayan 120 " 2, 400.00
Martin P. Sagarbarria 100 " 2, 000.00
Mauricio G. Gallaga 50 " 1, 000.00
Luis Renteria 50 " 1, 000.00
Faustina M. de Onrubia 140 " 2, 800.00
Mrs. Ramon Araneta 40 " 800.00
Carlos M. Onrubia 80 " 1,600.00
700 P 14,000.00

SUBSCRIBER SUBSCRIBED
No. of Shares
AMOUNT
SUBSCRIBED
Par Value
Crispulo J. Onrubia 12 Common P 1,200.00
Juan H. Acayan 12 " 1,200.00
Martin P. Sagarbarria 8 " 800.00
Mauricio G. Gallaga 8 " 800.00
Luis Renteria 8 " 800.00
Faustina M. de Onrubia 12 " 1,200.00
Mrs. Ramon Araneta 8 " 800.00
Carlos M. Onrubia 8 " 800.00
76 P7,600.00
30

The contents of the articles of incorporation are binding, not only on the corporation, but also on its shareholders. In the
instant case, the articles of incorporation indicate that at the time of incorporation, the incorporators
were bona fide stockholders of seven hundred (700) founders shares and seventy-six (76) common shares. Hence, at that
time, the corporation had 776 issued and outstanding shares.
On the other hand, a stock and transfer book is the book which records the names and addresses of all stockholders
arranged alphabetically, the installments paid and unpaid on all stock for which subscription has been made, and the date
of payment thereof; a statement of every alienation, sale or transfer of stock made, the date thereof and by and to whom
made; and such other entries as may be prescribed by law. A stock and transfer book is necessary as a measure of
precaution, expediency and convenience since it provides the only certain and accurate method of establishing the
various corporate acts and transactions and of showing the ownership of stock and like matters. However, a stock and
transfer book, like other corporate books and records, is not in any sense a public record, and thus is not exclusive
evidence of the matters and things which ordinarily are or should be written therein.
33
In fact, it is generally held that the
records and minutes of a corporation are not conclusive even against the corporation but are prima facie evidence
only,
34
and may be impeached or even contradicted by other competent evidence.
35
Thus, parol evidence may be
admitted to supply omissions in the records or explain ambiguities, or to contradict such records.
36

In 1980, Batas Pambansa Blg. 68, otherwise known as "The Corporation Code of the Philippines" supplanted Act No.
1459. BP Blg. 68 provides:
Sec. 24. Election of directors or trustees.At all elections of directors or trustees, there must be present, either
in person or by representative authorized to act by written proxy, the owners of a majority of the outstanding
capital stock, or if there be no capital stock, a majority of the members entitled to vote. . . .
Sec. 52. Quorum in meetings.- Unless otherwise provided for in this Code or in the by-laws, a quorum shall
consist of the stockholders representing a majority of the outstanding capital stock or majority of the members
in the case of non-stock corporation.
Outstanding capital stock, on the other hand, is defined by the Code as:
Sec. 137. Outstanding capital stock defined. The term "outstanding capital stock" as used in this code, means
the total shares of stock issued to subscribers or stockholders whether or not fully or partially paid (as
long as there is binding subscription agreement) except treasury shares.
Thus, quorum is based on the totality of the shares which have been subscribed and issued, whether it be
founders shares or common shares.
37
In the instant case, two figures are being pitted against each other those
contained in the articles of incorporation, and those listed in the stock and transfer book.
To base the computation of quorum solely on the obviously deficient, if not inaccurate stock and transfer book, and
completely disregarding the issued and outstanding shares as indicated in the articles of incorporation would work
injustice to the owners and/or successors in interest of the said shares. This case is one instance where resort to
documents other than the stock and transfer books is necessary. The stock and transfer book of PMMSI cannot be used as
the sole basis for determining the quorum as it does not reflect the totality of shares which have been subscribed, more
so when the articles of incorporation show a significantly larger amount of shares issued and outstanding as compared to
that listed in the stock and transfer book
This is precisely the reason why the Stock and Transfer Book was not given probative value. Did the shares, which were
not recorded in the Stock and Transfer Book, but were recorded in the Articles of Incorporation just vanish into thin air?
As shown above, at the time the corporation was set-up, there were already seven hundred seventy-six (776) issued and
outstanding shares as reflected in the articles of incorporation. No proof was adduced as to any transaction effected on
these shares from the time PMMSI was incorporated up to the time the instant petition was filed, except for the thirty-
three (33) shares which were recorded in the stock and transfer book in 1978, and the additional one hundred thirty-two
(132) in 1982. But obviously, the shares so ordered recorded in the stock and transfer book are among the shares
reflected in the articles of incorporation as the shares subscribed to by the incorporators named therein.
One who is actually a stockholder cannot be denied his right to vote by the corporation merely because the corporate
officers failed to keep its records accurately.
40
A corporations records are not the only evidence of the ownership of stock
in a corporation.
41
In an American case,
42
persons claiming shareholders status in a professional corporation were listed
as stockholders in the amendment to the articles of incorporation. On that basis, they were in all respects treated as
shareholders. In fact, the acts and conduct of the parties may even constitute sufficient evidence of ones status as a
shareholder or member.
43
In the instant case, no less than the articles of incorporation declare the incorporators to have
in their name the founders and several common shares. Thus, to disregard the contents of the articles of incorporation
would be to pretend that the basic document which legally triggered the creation of the corporation does not exist and
accordingly to allow great injustice to be caused to the incorporators and their heirs.
Petitioners argue that the Court of Appeals "gravely erred in applying the Espejo decision to the benefit of respondents."
The Court believes that the more precise statement of the issue is whether in its assailed Decision, the Court of Appeals
can declare private respondents as the heirs of the incorporators, and consequently register the founders shares in their
name. However, this issue as recast is not actually determinative of the present controversy as explained below.
Petitioners claim that the Decision of the Court of Appeals unilaterally divested them of their shares in PMMSI as
recorded in the stock and transfer book and instantly created inexistent shares in favor of private respondents. We do
not agree.
The assailed Decision merely declared that a separate judicial declaration to recognize the shares of the original
incorporators would entail unnecessary delay and expense on the part of the litigants, considering that the incorporators
had already proved ownership of such shares as shown in the articles of incorporation.
44
There was no declaration of
who the individual owners of these shares were on the date of the promulgation of the Decision. As properly stated by the
SEC in its Order dated 20 June 1996, to which the appellate courts Decision should be related, "if at all, the ownership of
these shares should only be subjected to the proper judicial (probate) or extrajudicial proceedings in order to determine
the respective shares of the legal heirs of the deceased incorporators."
45

WHEREFORE, the petition is DENIED and the assailed Decision is AFFIRMED.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
G.R. No. 117188 August 7, 1997
LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION, INC., petitioner,
vs.
HON. COURT OF APPEALS, HOME INSURANCE AND GUARANTY CORPORATION, EMDEN ENCARNACION and
HORATIO AYCARDO, respondents.

ROMERO, J.:
May the failure of a corporation to file its by-laws within one month from the date of its incorporation, as mandated by
Section 46 of the Corporation Code, result in its automatic dissolution?
This is the issue raised in this petition for review on certiorari of the Decision
1
of the Court of Appeals affirming the
decision of the Home Insurance and Guaranty Corporation (HIGC). This quasi-judicial body recognized Loyola Grand
Villas Homeowners Association (LGVHA) as the sole homeowners' association in Loyola Grand Villas, a duly registered
subdivision in Quezon City and Marikina City that was owned and developed by Solid Homes, Inc. It revoked the
certificates of registration issued to Loyola Grand Villas homeowners (North) Association Incorporated (the North
Association for brevity) and Loyola Grand Villas Homeowners (South) Association Incorporated (the South Association).
LGVHAI was organized on February 8, 1983 as the association of homeowners and residents of the Loyola Grand Villas. It
was registered with the Home Financing Corporation, the predecessor of herein respondent HIGC, as the sole
homeowners' organization in the said subdivision under Certificate of Registration No. 04-197. It was organized by the
developer of the subdivision and its first president was Victorio V. Soliven, himself the owner of the developer. For
unknown reasons, however, LGVHAI did not file its corporate by-laws.
Sometime in 1988, the officers of the LGVHAI tried to register its by-laws. They failed to do so.To the officers'
consternation, they discovered that there were two other organizations within the subdivision the North
Association and the South Association. According to private respondents, a non-resident and Soliven himself,
respectively headed these associations. They also discovered that these associations had five (5) registered homeowners
each who were also the incorporators, directors and officers thereof. None of the members of the LGVHAI was listed as
member of the North Association while three (3) members of LGVHAI were listed as members of the South
Association.
3
The North Association was registered with the HIGC on February 13, 1989 under Certificate of Registration
No. 04-1160 covering Phases West II, East III, West III and East IV. It submitted its by-laws on December 20, 1988.
In July, 1989, when Soliven inquired about the status of LGVHAI, Atty. Joaquin A. Bautista, the head of the legal
department of the HIGC, informed him that LGVHAI had been automatically dissolved for two reasons. First, it did not
submit its by-laws within the period required by the Corporation Code and, second, there was non-user of corporate
charter because HIGC had not received any report on the association's activities. Apparently, this information resulted in
the registration of the South Association with the HIGC on July 27, 1989 covering Phases West I, East I and East II. It filed
its by-laws on July 26, 1989.
These developments prompted the officers of the LGVHAI to lodge a complaint with the HIGC. They questioned the
revocation of LGVHAI's certificate of registration without due notice and hearing and concomitantly prayed for the
cancellation of the certificates of registration of the North and South Associations by reason of the earlier issuance of a
certificate of registration in favor of LGVHAI.
On January 26, 1993, after due notice and hearing, private respondents obtained a favourable ruling from HIGC Hearing
Officer Javier who disposed of HIGC Case:
-Recognizing the Loyola Grand Villas Homeowners Association, Inc., (LGVHAI)as the duly registered and existing
homeowners association for Loyola Grand Villas homeowners
-Declaring the Registration of Loyola Grand Villas Homeowners (North) Association, Inc. and Loyola Grand Villas
Homeowners (South) Association, Inc. as hereby revoked or cancelled;
-That the receivership be terminated and the Receiver is hereby ordered to render an accounting and turn-over to Loyola
Grand Villas Homeowners Association, Inc., all assets and records of the Association now under his custody and
possession.
The South Association appealed to the Appeals Board of the HIGC. But the Board dismissed it for lack of merit.
It appealed to the Court of Appeals, raising two issues. First, whether or not LGVHAI's failure to file its by-laws within the
period prescribed by Section 46 of the Corporation Code resulted in the automatic dissolution of LGVHAI; Second,
whether or not two homeowners' associations may be authorized by the HIGC in one "sprawling subdivision." The Court
of Appeals affirmed the Resolution of the HIGC Appeals Board.
Court of Appeals held that under the Corporation Code, a private corporation commences to have corporate existence
and juridical personality from the date the Securities and Exchange Commission (SEC) issues a certificate of
incorporation under its official seal. The requirement for the filing of by-laws under Section 46 of the Corporation Code
within one month from official notice of the issuance of the certificate of incorporation presupposes that it is already
incorporated, although it may file its by-laws with its articles of incorporation. Elucidating on the effect of a delayed filing
of by-laws, the Court of Appeals said:
We also find nothing in the provisions cited by the petitioner, i.e., Section 46 and 22, Corporation Code, or in any other
provision of the Code and other laws which provide or at least imply that failure to file the by-laws results in an
automatic dissolution of the corporation. While Section 46, in prescribing that by-laws must be adopted within the period
prescribed therein, may be interpreted as a mandatory provision, particularly because of the use of the word "must," its
meaning cannot be stretched to support the argument that automatic dissolution results from non-compliance.
We realize that Section 46 or other provisions of the Corporation Code are silent on the result of the failure to adopt and
file the by-laws within the required period. Thus, Section 46 and other related provisions of the Corporation Code
are to be construed with Section 6 (1) of P.D. 902-A. This section empowers the SEC to suspend or revoke
certificates of registration on the grounds listed therein. Among the grounds stated is the failure to file by-laws
(see also II Campos: The Corporation Code, 1990 ed., pp. 124-125). Such suspension or revocation, the same
section provides, should be made upon proper notice and hearing. Although P.D. 902-A refers to the SEC, the same
principles and procedures apply to the public respondent HIGC as it exercises its power to revoke or suspend the
certificates of registration or homeowners association. (Section 2 [a], E.O. 535, series 1979, transferred the powers and
authorities of the SEC over homeowners associations to the HIGC.)
CA also did not agree with the petitioner's interpretation that Section 46, Corporation Code prevails over Section 6, P.D.
902-A and that the latter is invalid because it contravenes the former. There is no basis for such interpretation
considering that these two provisions are not inconsistent with each other. They are, in fact, complementary to each
other so that one cannot be considered as invalidating the other.
The Court of Appeals added that, as there was no showing that the registration of LGVHAI had been validly
revoked, it continued to be the duly registered homeowners' association in the Loyola Grand Villas. More
importantly, the South Association did not dispute the fact that LGVHAI had been organized and that, thereafter, it
transacted business within the period prescribed by law.
On the second issue, the Court of Appeals reiterated its previous ruling
5
that the HIGC has the authority to order the
holding of a referendum to determine which of two contending associations should represent the entire community,
village or subdivision.
Undaunted, the South Association filed the instant petition for review on certiorari. It elevates as sole issue for resolution
the first issue it had raised before the Court of Appeals, i.e., whether or not the LGVHAI's failure to file its by-laws within
the period prescribed by Section 46 of the Corporation Code had the effect of automatically dissolving the said
corporation.
Petitioner contends: Since Section 46 uses the word "must" with respect to the filing of by-laws, noncompliance
therewith would result in "self-extinction" either due to non-occurrence of a suspensive condition or the occurrence of a
resolutory condition "under the hypothesis that (by) the issuance of the certificate of registration alone the corporate
personality is deemed already formed."
It asserts that the Corporation Code provides for a "gradation of violations of requirements." Hence, Section 22 mandates
that the corporation must be formally organized and should commence transaction within two years from date of
incorporation. Otherwise, the corporation would be deemed dissolved. On the other hand, if the corporation commences
operations but becomes continuously inoperative for five years, then it may be suspended or its corporate franchise
revoked. It concedes that Section 46 and the other provisions of the Corporation Code do not provide for sanctions for
non-filing of the by-laws. However, it insists that no sanction need be provided "because the mandatory nature of the
provision is so clear that there can be no doubt about its being an essential attribute of corporate birth." To petitioner, its
submission is buttressed by the facts that the period for compliance is "spelled out distinctly;" that the certification of the
SEC/HIGC must show that the by-laws are not inconsistent with the Code, and that a copy of the by-laws "has to be
attached to the articles of incorporation." Moreover, no sanction is provided for because "in the first place, no corporate
identity has been completed." Petitioner asserts that "non-provision for remedy or sanction is itself the tacit
proclamation that non-compliance is fatal and no corporate existence had yet evolved," and therefore, there was "no
need to proclaim its demise."
6
In a bid to convince the Court of its arguments, petitioner stresses that:
The word MUST is used in Sec. 46 in its universal literal meaning and corollary human implication its compulsion is
integrated in its very essence MUST is always enforceable by the inevitable consequence that is, "OR ELSE". The use
of the word MUST in Sec. 46 is no exception it means file the by-laws within one month after notice of issuance of
certificate of registration OR ELSE. The OR ELSE, though not specified, is inextricably a part of MUST . Do this or if you do
not you are "Kaput". The importance of the by-laws to corporate existence compels such meaning for as decreed the by-
laws is "the government" of the corporation. Indeed, how can the corporation do any lawful act as such without by-laws.
Surely, no law is indeed to create chaos.
7

Petitioner asserts that P.D. No. 902-A cannot exceed the scope and power of the Corporation Code which itself does not
provide sanctions for non-filing of by-laws. For the petitioner, it is "not proper to assess the true meaning of Sec. 46 . . . on
an unauthorized provision on such matter contained in the said decree."
In their comment on the petition, private respondents counter that the requirement of adoption of by-laws is not
mandatory. They point to P.D. No. 902-A as having resolved the issue of whether said requirement is mandatory or
merely directory. Citing Chung Ka Bio v. Intermediate Appellate Court,
8
private respondents contend that Section 6(I) of
that decree provides that non-filing of by-laws is only a ground for suspension or revocation of the certificate of
registration of corporations and, therefore, it may not result in automatic dissolution of the corporation. Moreover, the
adoption and filing of by-laws is a condition subsequent which does not affect the corporate personality of a corporation
like the LGVHAI. This is so because Section 9 of the Corporation Code provides that the corporate existence and juridical
personality of a corporation begins from the date the SEC issues a certificate of incorporation under its official seal.
Consequently, even if the by-laws have not yet been filed, a corporation may be considered a de facto corporation. To
emphasize the fact the LGVHAI was registered as the sole homeowners' association in the Loyola Grand Villas, private
respondents point out that membership in the LGVHAI was an "unconditional restriction in the deeds of sale signed by
lot buyers."
In its reply to private respondents' comment on the petition, petitioner reiterates its argument that the word " must" in
Section 46 of the Corporation Code is mandatory. It adds that, before the ruling in Chung Ka Bio v. Intermediate Appellate
Court could be applied to this case, this Court must first resolve the issue of whether or not the provisions of P.D. No. 902-
A prescribing the rules and regulations to implement the Corporation Code can "rise above and change" the substantive
provisions of the Code.
The pertinent provision of the Corporation Code that is the focal point of controversy in this case states:
Sec. 46. Adoption of by-laws. Every corporation formed under this Code, must within one (1) month after receipt of
official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code
of by-laws for its government not inconsistent with this Code. For the adoption of by-laws by the corporation, the
affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a
majority of the members, in the case of non-stock corporations, shall be necessary. The by-laws shall be signed by the
stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the
stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to inspection
of the stockholders or members during office hours; and a copy thereof, shall be filed with the Securities and Exchange
Commission which shall be attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to incorporation; in
such case, such by-laws shall be approved and signed by all the incorporators and submitted to the Securities and
Exchange Commission, together with the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a
certification that the by-laws are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment thereto of any bank,
banking institution, building and loan association, trust company, insurance company, public utility, educational
institution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate
government agency to the effect that such by-laws or amendments are in accordance with law.
As correctly postulated by the petitioner, interpretation of this provision of law begins with the determination of the
meaning and import of the word "must" in this section Ordinarily, the word "must" connotes an imperative act or
operates to impose a duty which may be enforced.
9
It is synonymous with "ought" which connotes compulsion or
mandatoriness. However, the word "must" in a statute, like "shall," is not always imperative. It may be consistent with an
exercise of discretion. In this jurisdiction, the tendency has been to interpret "shall" as the context or a reasonable
construction of the statute in which it is used demands or requires.
11
This is equally true as regards the word "must."
Thus, if the languages of a statute considered as a whole and with due regard to its nature and object reveals that the
legislature intended to use the words "shall" and "must" to be directory, they should be given that meaning.
12

MR. FUENTEBELLA. But it will not automatically amount to a dissolution of the corporation by merely failing to file the
by-laws within one month. Supposing the corporation was late, say, five days, what would be the mandatory penalty?
MR. MENDOZA. I do not think it will necessarily result in the automatic or ipso facto dissolution of the corporation.
Perhaps, as in the case, as you suggested, in the case of El Hogar Filipino where a quo warranto action is brought, one
takes into account the gravity of the violation committed. If the by-laws were late the filing of the by-laws were late by,
perhaps, a day or two, I would suppose that might be a tolerable delay, but if they are delayed over a period of months
as is happening now because of the absence of a clear requirement that by-laws must be completed within a specified
period of time, the corporation must suffer certain consequences.
13

This exchange of views demonstrates clearly that automatic corporate dissolution for failure to file the by-laws on time
was never the intention of the legislature. Moreover, even without resorting to the records of deliberations of the
Batasang Pambansa, the law itself provides the answer to the issue propounded by petitioner.
In the absence of charter or statutory provisions to the contrary, by-laws are not necessary either to the existence of a
corporation or to the valid exercise of the powers conferred upon it, certainly in all cases where the charter sufficiently
provides for the government of the body; and even where the governing statute in express terms confers upon the
corporation the power to adopt by-laws, the failure to exercise the power will be ascribed to mere non-action which will not
render void any acts of the corporation which would otherwise be valid.
16
(Emphasis supplied.)
As Fletcher aptly puts it:
It has been said that the by-laws of a corporation are the rule of its life, and that until by-laws have been adopted
the corporation may not be able to act for the purposes of its creation, and that the first and most important duty
of the members is to adopt them. This would seem to follow as a matter of principle from the office and functions
of by-laws. Viewed in this light, the adoption of by-laws is a matter of practical, if not one of legal, necessity.
Moreover, the peculiar circumstances attending the formation of a corporation may impose the obligation to
adopt certain by-laws, as in the case of a close corporation organized for specific purposes. And the statute or
general laws from which the corporation derives its corporate existence may expressly require it to make and
adopt by-laws and specify to some extent what they shall contain and the manner of their adoption. The mere
fact, however, of the existence of power in the corporation to adopt by-laws does not ordinarily and of necessity
make the exercise of such power essential to its corporate life, or to the validity of any of its acts.
Although the Corporation Code requires the filing of by-laws, it does not expressly provide for the consequences
of the non-filing of the same within the period provided for in Section 46. However, such omission has been
rectified by Presidential Decree No. 902-A, the pertinent provisions on the jurisdiction of the SEC
Even under the foregoing express grant of power and authority, there can be no automatic corporate dissolution simply
because the incorporators failed to abide by the required filing of by-laws embodied in Section 46 of the Corporation
Code. There is no outright "demise" of corporate existence. Proper notice and hearing are cardinal components of due
process in any democratic institution, agency or society. In other words, the incorporators must be given the chance to
explain their neglect or omission and remedy the same.
That the failure to file by-laws is not provided for by the Corporation Code but in another law is of no moment. P.D. No.
902-A, which took effect immediately after its promulgation on March 11, 1976, is very much apposite to the Code.
Accordingly, the provisions abovequoted supply the law governing the situation in the case at bar, inasmuch as the
Corporation Code and P.D. No. 902-A are statutes in pari materia. Interpretare et concordare legibus est optimus
interpretandi. Every statute must be so construed and harmonized with other statutes as to form a uniform system of
jurisprudence.
18

As the "rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions,
affairs and concerns and its stockholders or members and directors and officers with relation thereto and among
themselves in their relation to it,"
19
by-laws are indispensable to corporations in this jurisdiction. These may not be
essential to corporate birth but certainly, these are required by law for an orderly governance and management of
corporations. Nonetheless, failure to file them within the period required by law by no means tolls the automatic
dissolution of a corporation.
In this regard, private respondents are correct in relying on the pronouncements of this Court in Chung Ka Bio
v.Intermediate Appellate Court,
20
as follows:
. . . . Moreover, failure to file the by-laws does not automatically operate to dissolve a corporation but is now
considered only a ground for such dissolution.
Section 19 of the Corporation Law, part of which is now Section 22 of the Corporation Code, provided that the
powers of the corporation would cease if it did not formally organize and commence the transaction of its
business or the continuation of its works within two years from date of its incorporation. Section 20, which has
been reproduced with some modifications in Section 46 of the Corporation Code, expressly declared that "every
corporation formed under this Act, must within one month after the filing of the articles of incorporation with
the Securities and Exchange Commission, adopt a code of by-laws." Whether this provision should be given
mandatory or only directory effect remained a controversial question until it became academic with the
adoption of PD 902-A. Under this decree, it is now clear that the failure to file by-laws within the required period
is only a ground for suspension or revocation of the certificate of registration of corporations.
Non-filing of the by-laws will not result in automatic dissolution of the corporation. Under Section 6(I) of PD
902-A, the SEC is empowered to "suspend or revoke, after proper notice and hearing, the franchise or certificate
of registration of a corporation" on the ground inter alia of "failure to file by-laws within the required period." It
is clear from this provision that there must first of all be a hearing to determine the existence of the ground, and
secondly, assuming such finding, the penalty is not necessarily revocation but may be only suspension of the
charter. In fact, under the rules and regulations of the SEC, failure to file the by-laws on time may be penalized
merely with the imposition of an administrative fine without affecting the corporate existence of the erring firm.
That the corporation involved herein is under the supervision of the HIGC does not alter the result of this case. The HIGC
has taken over the specialized functions of the former Home Financing Corporation by virtue of Executive Order No. 90
dated December 17, 1989.
22
With respect to homeowners associations, the HIGC shall "exercise all the powers,
authorities and responsibilities that are vested on the Securities and Exchange Commission . . . , the provision of Act 1459,
as amended by P.D. 902-A, to the contrary notwithstanding."
23

WHEREFORE, the instant petition for review on certiorari is hereby DENIED and the questioned Decision of the Court of
Appeals AFFIRMED.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
G.R. No. 117604 March 26, 1997
CHINA BANKING CORPORATION, petitioner,
vs.
COURT OF APPEALS, and VALLEY GOLF and COUNTRY CLUB, INC., respondents.

KAPUNAN, J.:
Through a petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner China Banking
Corporation seeks the reversal of the decision of the Court of Appeals dated 15 August 1994 nullifying the Securities and
Exchange Commission's order and resolution dated 4 June 1993 and 7 December 1993, respectively, for lack of
jurisdiction. Similarly impugned is the Court of Appeals' resolution dated 4 September 1994 which denied petitioner's
motion for reconsideration.
FACTS: On 21 August 1974, Calapatia, a stockholder of Valley Golf & Country Club, Inc. (VGCCI, for brevity), pledged his
Stock Certificate No. 1219 to petitioner China Bank.

CBC wrote VGCCI requesting that the aforementioned pledge
agreement be recorded in its books.

VGCCI replied that the deed of pledge executed by Calapatia in petitioner's favor was
duly noted in its corporate books.

Calapatia obtained a loan of P20,000.00 from CBC, payment of which was secured by
the afore-stated pledge agreement still existing between Calapatia and the bank.


Due to Calapatia's failure to pay his obligation, so the bank filed a petition for extrajudicial foreclosure before Notary
Public Antonio T. de Vera of Manila, requesting the latter to conduct a public auction sale of the pledged stock. CBC
informed VGCCI of the foreclosure proceedings and requested that the pledged stock be transferred to its name and the
same be recorded in the corporate books. However, on 15 July 1985, VGCCI wrote petitioner expressing its inability to
accede to petitioner's request in view of Calapatia's unsettled accounts with the club.


Despite the foregoing, Notary Public de Vera held a public auction and CBC emerged as the highest bidder at P20K for the
pledged stock. Consequently, CBC was issued the corresponding certificate of sale.
7

On 21 November 1985, VGCCI sent Calapatia a notice demanding full payment of his overdue account in the amount of
P18,783.24. Said notice was followed by a demand letter dated 12 December 1985 for the same amount
9
and another
notice dated 22 November 1986 for P23,483.24. It eventually sold the stock in auction and terminated Calapatias
membership in the club due to the sale.
CBC advised VGCCI that it is the new owner of Calapatia's Stock Certificate No. 1219 by virtue of being the highest bidder
in the 17 September 1985 auction and requested that a new certificate of stock be issued in its name. VGCCI replied that
"for reason of delinquency" Calapatia's stock was sold at the public auction held on 10 December 1986 for
P25,000.00. The bank protested the sale by VGCCI of the subject share of stock and thereafter filed a case with the
Regional Trial Court of Makati for the nullification of the 10 December 1986 auction and for the issuance of a new stock
certificate in its name.
14

The RTC dismissed the complaint for lack of jurisdiction over the subject matter on the theory that it involves an intra-
corporate dispute and on 27 August 1990 denied petitioner's motion for reconsideration.
CBC filed a complaint with the Securities and Exchange Commission (SEC) for the nullification of the sale of Calapatia's
stock by VGCCI; the cancellation of any new stock certificate issued pursuant thereto; for the issuance of a new certificate
in petitioner's name; and for damages, attorney's fees and costs of litigation.
SEC Hearing Officer Manuel P. Perea rendered a decision in favor of VGCCI, stating in the main that "(c)onsidering that
the said share is delinquent, (VGCCI) had valid reason not to transfer the share in the name of the petitioner in the books
of (VGCCI) until liquidation of delinquency."
15
Consequently, the case was dismissed. He also denied petitioner's motion
for reconsideration.
17

Petitioner appealed to the SEC en banc and on 4 June 1993, the Commission issued an order reversing the decision of its
hearing officer. It declared thus:
The Commission en banc believes that appellant-petitioner has a prior right over the pledged share and because of
pledgor's failure to pay the principal debt upon maturity, appellant-petitioner can proceed with the foreclosure of the
pledged share.
VGCCI sought reconsideration of the above-cited order. However, the SEC denied the same in its resolution.
CA Ruling: Nullified and set aside the orders of the SEC and its hearing officer on ground of lack of jurisdiction over the
subject matter and, consequently, dismissed CBC's original complaint. The Court of Appeals declared that the controversy
between CBC and VGCCI is not intra-corporate. It ruled as follows:
In order that the respondent Commission can take cognizance of a case, the controversy must pertain to any of the
following relationships: (a) between the corporation, partnership or association and the public; (b) between the
corporation, partnership or association and its stockholders, partners, members, or officers; (c) between the corporation,
partnership or association and the state in so far as its franchise, permit or license to operate is concerned, and (d)
among the stockholders, partners or associates themselves (Union Glass and Container Corporation vs. SEC, November
28, 1983, 126 SCRA 31). The establishment of any of the relationship mentioned will not necessarily always confer
jurisdiction over the dispute on the Securities and Exchange Commission to the exclusion of the regular courts. The
statement made in Philex Mining Corp. vs. Reyes, 118 SCRA 602, that the rule admits of no exceptions or distinctions is not
that absolute. The better policy in determining which body has jurisdiction over a case would be to consider not only the
status or relationship of the parties but also the nature of the question that is the subject of their controversy (Viray vs.
Court of Appeals, November 9, 1990, 191 SCRA 308, 322-323).
Indeed, the controversy between petitioner and respondent bank which involves ownership of the stock that used to
belong to Calapatia, Jr. is not within the competence of respondent Commission to decide. It is not any of those mentioned
in the aforecited case.
Petitioner moved for reconsideration but the same was denied by the Court of Appeals in its resolution dated 5 October
1994.
21

ISSUE/S: WON CA GRAVELY ERRED WHEN:
1. IT NULLIFIED AND SET ASIDE THE DECISION DATED JUNE 04, 1993 AND ORDER DATED DECEMBER 07, 1993 OF
THE SECURITIES AND EXCHANGE COMMISSION EN BANC, AND WHEN IT DISMISSED THE COMPLAINT OF PETITIONER
AGAINST RESPONDENT VALLEY GOLF ALL FOR LACK OF JURISDICTION OVER THE SUBJECT MATTER OF THE CASE;
2. IT FAILED TO AFFIRM THE DECISION OF THE SECURITIES AND EXCHANGE COMMISSION EN BANC DATED JUNE 04,
1993 DESPITE PREPONDERANT EVIDENCE SHOWING THAT PETITIONER IS THE LAWFUL OWNER OF MEMBERSHIP
CERTIFICATE NO. 1219 FOR ONE SHARE OF RESPONDENT VALLEY GOLF.
The petition is granted.
The basic issue we must first hurdle is which body has jurisdiction over the controversy, the regular courts or the SEC.
P. D. No. 902-A conferred upon the SEC the following pertinent powers:
Sec. 3. The Commission shall have absolute jurisdiction, supervision and control over all corporations, partnerships or
associations, who are the grantees of primary franchises and/or a license or permit issued by the government to operate
in the Philippines, and in the exercise of its authority, it shall have the power to enlist the aid and support of and to
deputize any and all enforcement agencies of the government, civil or military as well as any private institution,
corporation, firm, association or person.
Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over
corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws
and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving:
a) Devices or schemes employed by or any acts of the board of directors, business associates, its officers or partners,
amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the
stockholders, partners, members of associations or organizations registered with the Commission.
b) Controversies arising out of 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;
c) Controversies in the election or appointment of directors, trustees, officers, or managers of such corporations,
partnerships or associations.
d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases
where the corporation, partnership or association possesses property to cover all of its debts but foresees the
impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or
association has no sufficient assets to cover its liabilities, but is under the Management Committee created pursuant to
this Decree.
The aforecited law was expounded upon in Viray v. CA
22
and in the recent cases of Mainland Construction
Co., Inc. v.Movilla
23
and Bernardo v. CA,
24
thus: The better policy in determining which body has jurisdiction over a case
would be to consider not only the status or relationship of the parties but also the nature of the question that is the
subject of their controversy.
Applying the foregoing principles in the case at bar, to ascertain which tribunal has jurisdiction we have to determine
therefore whether or not petitioner is a stockholder of VGCCI and whether or not the nature of the controversy between
petitioner and private respondent corporation is intra-corporate.
As to the first query, there is no question that the purchase of the subject share or membership certificate at public
auction by petitioner (and the issuance to it of the corresponding Certificate of Sale) transferred ownership of the same
to the latter and thus entitled petitioner to have the said share registered in its name as a member of VGCCI. It is readily
observed that VGCCI did not assail the transfer directly and has in fact, in its letter of 27 September 1974,
expressly recognized the pledge agreement executed by the original owner, Calapatia, in favor of petitioner and
has even noted said agreement in its corporate books.
25
In addition, Calapatia, the original owner of the subject
share, has not contested the said transfer.
By virtue of the afore-mentioned sale, petitioner became a bona fide stockholder of VGCCI and, therefore, the conflict that
arose between petitioner and VGCCI aptly exemplifies an intra-corporate controversy between a corporation and its
stockholder under Sec. 5(b) of P.D. 902-A.
An important consideration, moreover, is the nature of the controversy between CBC and VGCI. VGCCI claims a prior right
over the subject share anchored mainly on Sec. 3, Art VIII of its by-laws which provides that "after a member shall have
been posted as delinquent, the Board may order his/her/its share sold to satisfy the claims of the Club. . ." It is pursuant
to this provision that VGCCI also sold the subject share at public auction, of which it was the highest bidder. VGCCI caps
its argument by asserting that its corporate by-laws should prevail. The bone of contention, thus, is the proper
interpretation and application of VGCCI's afore-quoted by-laws, a subject which irrefutably calls for the special
competence of the SEC.
In this case, the need for the SEC's technical expertise cannot be over-emphasized involving as it does the meticulous
analysis and correct interpretation of a corporation's by-laws as well as the applicable provisions of the Corporation
Code in order to determine the validity of VGCCI's claims. The SEC, therefore, took proper cognizance of the instant case.
VGCCI further contends that petitioner is estopped from denying its earlier position, in the first complaint it filed with the
RTC of Makati (Civil Case No. 90-1112) that there is no intra-corporate relations between itself and VGCCI.
VGCCI's contention lacks merit.
In Zamora v. Court of Appeals,
28
this Court, through Mr. Justice Isagani A. Cruz, declared that:
It follows that as a rule the filing of a complaint with one court which has no jurisdiction over it does not prevent the
plaintiff from filing the same complaint later with the competent court. The plaintiff is not estopped from doing so simply
because it made a mistake before in the choice of the proper forum. . . .
We remind VGCCI that in the same proceedings before the RTC of Makati, it categorically stated (in its motion to dismiss)
that the case between itself and petitioner is intra-corporate and insisted that it is the SEC and not the regular courts
which has jurisdiction. This is precisely the reason why the said court dismissed petitioner's complaint and led to
petitioner's recourse to the SEC.
Having resolved the issue on jurisdiction, instead of remanding the whole case to the Court of Appeals, this Court likewise
deems it procedurally sound to proceed and rule on its merits in the same proceedings.
It must be underscored that petitioner did not confine the instant petition for review on certiorari on the issue of
jurisdiction. In its assignment of errors, petitioner specifically raised questions on the merits of the case. In turn, in its
responsive pleadings, private respondent duly answered and countered all the issues raised by petitioner.
In the case at bar, since we already have the records of the case (from the proceedings before the SEC) sufficient to enable
us to render a sound judgment and since only questions of law were raised (the proper jurisdiction for Supreme Court
review), we can, therefore, unerringly take cognizance of and rule on the merits of the case.
The procedural niceties settled, we proceed to the merits.
VGCCI assails the validity of the pledge agreement executed by Calapatia in petitioner's favor. It contends that the same
was null and void for lack of consideration because the pledge agreement was entered into on 21 August
1974
33
but the loan or promissory note which it secured was obtained by Calapatia much later or only on 3 August
1983.
34

VGCCI's contention is unmeritorious. A careful perusal of the pledge agreement will readily reveal that the contracting
parties explicitly stipulated therein that the said pledge will also stand as security for any future advancements (or
renewals thereof) that Calapatia (the pledgor) may procure from petitioner:
The validity of the pledge agreement between petitioner and Calapatia cannot thus be held suspect by VGCCI. As candidly
explained by CBC, the promissory note of 3 August 1983 in the amount of P20K was but a renewal of the first promissory
note covered by the same pledge agreement.
VGCCI likewise insists that due to Calapatia's failure to settle his delinquent accounts, it had the right to sell the share in
question in accordance with the express provision found in its by-laws.
Private respondent's insistence comes to naught. It is significant to note that VGCCI began sending notices of delinquency
to Calapatia after it was informed by petitioner (through its letter dated 14 May 1985) of the foreclosure proceedings
initiated against Calapatia's pledged share, although Calapatia has been delinquent in paying his monthly dues to the club
since 1975. Stranger still, petitioner, whom VGCCI had officially recognized as the pledgee of Calapatia's share, was
neither informed nor furnished copies of these letters of overdue accounts until VGCCI itself sold the pledged share at
another public auction. By doing so, VGCCI completely disregarded petitioner's rights as pledgee. It even failed to give
petitioner notice of said auction sale. Such actuations of VGCCI thus belie its claim of good faith.
In defending its actions, VGCCI likewise maintains that petitioner is bound by its by-laws. It argues in this wise:
The general rule really is that third persons are not bound by the by-laws of a corporation since they are not privy
thereto (Fleischer v. Botica Nolasco, 47 Phil. 584). The exception to this is when third persons have actual or constructive
knowledge of the same. In the case at bar, petitioner had actual knowledge of the by-laws of private respondent when
petitioner foreclosed the pledge made by Calapatia and when petitioner purchased the share foreclosed on September
17, 1985. This is proven by the fact that prior thereto, i.e., on May 14, 1985 petitioner even quoted a portion of private
respondent's by-laws which is material to the issue herein in a letter it wrote to private respondent. Because of this
actual knowledge of such by-laws then the same bound the petitioner as of the time when petitioner purchased the share.
Since the by-laws was already binding upon petitioner when the latter purchased the share of Calapatia on September 17,
1985 then the petitioner purchased the said share subject to the right of the private respondent to sell the said share for
reasons of delinquency and the right of private respondent to have a first lien on said shares as these rights are provided
for in the by-laws very very clearly.
36

VGCCI misunderstood the import of our ruling in Fleischer v. Botica Nolasco Co.:
37

And moreover, the by-law now in question cannot have any effect on the appellee. He had no knowledge of such by-law when
the shares were assigned to him. He obtained them in good faith and for a valuable consideration. He was not a privy to
the contract created by said by-law between the shareholder Manuel Gonzales and the Botica Nolasco, Inc. Said by-law
cannot operate to defeat his rights as a purchaser.
An unauthorized by-law forbidding a shareholder to sell his shares without first offering them to the corporation for a
period of thirty days is not binding upon an assignee of the stock as a personal contract, although his assignor knew of
the by-law and took part in its adoption. (10 Cyc., 579; Ireland vs. Globe Milling Co., 21 R.I., 9.)
When no restriction is placed by public law on the transfer of corporate stock, a purchaser is not affected by any
contractual restriction of which he had no notice. (Brinkerhoff-Farris Trust & Savings Co. vs. Home Lumber Co., 118 Mo.,
447.)
In order to be bound, the third party must have acquired knowledge of the pertinent by-laws at the time the transaction
or agreement between said third party and the shareholder was entered into, in this case, at the time the pledge
agreement was executed. VGCCI could have easily informed petitioner of its by-laws when it sent notice formally
recognizing petitioner as pledgee of one of its shares registered in Calapatia's name. Petitioner's belated notice of said by-
laws at the time of foreclosure will not suffice. The ruling of the SEC en banc is particularly instructive:
By-laws signifies the rules and regulations or private laws enacted by the corporation to regulate, govern and control its
own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and
among themselves in their relation to it. In other words, by-laws are the relatively permanent and continuing rules of
action adopted by the corporation for its own government and that of the individuals composing it and having the
direction, management and control of its affairs, in whole or in part, in the management and control of its affairs and
activities. (9 Fletcher 4166, 1982 Ed.)
The purpose of a by-law is to regulate the conduct and define the duties of the members towards the corporation and
among themselves. They are self-imposed and, although adopted pursuant to statutory authority, have no status as public
law. (Ibid.)
Therefore, it is the generally accepted rule that third persons are not bound by by-laws, except when they have
knowledge of the provisions either actually or constructively. In the case of Fleisher v.Botica Nolasco, 47 Phil. 584, the
Supreme Court held that the by-law restricting the transfer of shares cannot have any effect on the transferee of the
shares in question as he "had no knowledge of such by-law when the shares were assigned to him. He obtained them in
good faith and for a valuable consideration. He was not a privy to the contract created by the by-law between the
shareholder . . .and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his right as a purchaser. (Emphasis
supplied.)
By analogy of the above-cited case, the Commission en banc is of the opinion that said case is applicable to the present
controversy. Appellant-petitioner bank as a third party cannot be bound by Valley Golf's by-laws. It must be recalled that
when appellee-respondent communicated to appellant-petitioner bank that the pledge agreement was duly noted in the
club's books there was no mention of the shareholder-pledgor's unpaid accounts. The transcript of stenographic notes of
the June 25, 1991 Hearing reveals that the pledgor became delinquent only in 1975. Thus, appellant-petitioner was in
good faith when the pledge agreement was contracted.
The Commission en banc also believes that for the exception to the general accepted rule that third persons are not
bound by by-laws to be applicable and binding upon the pledgee, knowledge of the provisions of the VGCI By-laws must
be acquired at the time the pledge agreement was contracted. Knowledge of said provisions, either actual or constructive,
at the time of foreclosure will not affect pledgee's right over the pledged share. Art. 2087 of the Civil Code provides that it
is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or
mortgage consists maybe alienated for the payment to the creditor.
In a letter dated March 10, 1976 addressed to Valley Golf Club, Inc., the Commission issued an opinion to the effect that:
According to the weight of authority, the pledgee's right is entitled to full protection without surrender of the certificate,
their cancellation, and the issuance to him of new ones, and when done, the pledgee will be fully protected against a
subsequent purchaser who would be charged with constructive notice that the certificate is covered by the pledge. (12-A
Fletcher 502)
The pledgee is entitled to retain possession of the stock until the pledgor pays or tenders to him the amount due on the
debt secured. In other words, the pledgee has the right to resort to its collateral for the payment of the debts. (Ibid, 502)
To cancel the pledged certificate outright and the issuance of new certificate to a third person who purchased the same
certificate covered by the pledge, will certainly defeat the right of the pledgee to resort to its collateral for the payment of
the debt. The pledgor or his representative or registered stockholders has no right to require a return of the pledged
stock until the debt for which it was given as security is paid and satisfied, regardless of the length of time which have
elapsed since debt was created. (12-A Fletcher 409)
A bona fide pledgee takes free from any latent or secret equities or liens in favor either of the corporation or of third
persons, if he has no notice thereof, but not otherwise. He also takes it free of liens or claims that may subsequently arise
in favor of the corporation if it has notice of the pledge, although no demand for a transfer of the stock to the pledgee on
the corporate books has been made. (12-A Fletcher 5634, 1982 ed., citing Snyder v. Eagle Fruit Co., 75 F2d739)
38

Similarly, VGCCI's contention that petitioner is duty-bound to know its by-laws because of Art. 2099 of the Civil Code
which stipulates that the creditor must take care of the thing pledged with the diligence of a good father of a family, fails
to convince.
Finally, Sec. 63 of the Corporation Code which provides that "no shares of stock against which the corporation holds any
unpaid claim shall be transferable in the books of the corporation" cannot be utilized by VGCCI. The term "unpaid claim"
refers to "any unpaid claim arising from unpaid subscription, and not to any indebtedness which a subscriber or
stockholder may owe the corporation arising from any other transaction."
40
In the case at bar, the subscription for the
share in question has been fully paid as evidenced by the issuance of Membership Certificate No. 1219.
41
What Calapatia
owed the corporation were merely the monthly dues. Hence, the aforequoted provision does not apply.
WHEREFORE, premises considered, the assailed decision of the Court of Appeals is REVERSED and the order of the
SEC en banc dated 4 June 1993 is hereby AFFIRMED.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
F. CORPORATE POWERS
1. General Powers, Theory of General Capacity
2. Specific Powers, Theory of Specific Capacity
Case:
G.R. No. L-15092 May 18, 1962
ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants, vs.BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.
FACTS: Alfredo Montelibano, Alejandro Montelibano, and the Limited co-partnership Gonzaga and Company, had been
and are sugar planters adhered to the BMs sugar central mill under identical milling contracts. Originally executed in
1919, said contracts were stipulated to be in force for 30 years starting with the 1920-21 crop, and provided that the
resulting product should be divided in the ratio of 45% for the mill and 55% for the planters.
Sometime in 1936, it was proposed to execute amended milling contracts, increasing the planters' share to 60% of the
manufactured sugar and resulting molasses, besides other concessions, but extending the operation of the milling
contract from the original 30 years to 45 years. To this effect, a printed Amended Milling Contract form was drawn up. On
August 20, 1936, the Board of Directors of Bacolod-Murcia Milling adopted a resolution granting further concessions to
the planters over and above those contained in the printed Amended Milling Contract. The bone of contention is
paragraph 9 of this resolution that reads as follows:
Appellants signed and executed the printed Amended Milling Contract on September 10, 1936, but a copy of the
resolution of August 10, 1936, signed by the Central's General Manager, was not attached to the printed contract until
April 17, 1937; with the notation
Las enmiendas arriba transcritas forman parte del contrato de molienda enmendado, otorgado por y la Bacolod-
Murcia Milling Co., Inc.
In 1953, the appellants initiated the present action, contending that three Negros sugar centrals (La Carlota, Binalbagan-
Isabela and San Carlos), with a total annual production exceeding one-third of the production of all the sugar central mills
in the province, had already granted increased participation (of 62.5%) to their planters, and that under paragraph 9 of
the resolution of August 20, 1936, heretofore quoted, the appellee had become obligated to grant similar concessions to
them. Bacolod-Murcia Milling resisted the claim, and defended by urging that the stipulations contained in the resolution
were made without consideration; that the resolution in question was, therefore, null and void ab initio, being in effect a
donation that was ultra vires and beyond the powers of the corporate directors to adopt.
After trial, the court below rendered judgment upholding the stand of the Milling company, and dismissed the complaint.
Thereupon, plaintiffs duly appealed to this Court.
We agree with appellants that the appealed decisions cannot stand. It must be remembered that the controverted
resolution was adopted by Bacolod Murcia as a supplement to, or further amendment of, the proposed milling contract,
and that it was approved on August 20, 1936, 21 days prior to the signing by appellants on September 10, of the
Amended Milling Contract itself; so that when the Milling Contract was executed, the concessions granted by the disputed
resolution had been already incorporated into its terms. No reason appears of record why, in the face of such
concessions, the appellants should reject them or consider them as separate and apart from the main amended milling
contract, specially taking into account that appellant Alfredo Montelibano was, at the time, the President of the Planters
Association that had agitated for the concessions embodied in the resolution of August 20, 1936. That the resolution
formed an integral part of the amended milling contract, signed on September 10, and not a separate bargain, is further
shown by the fact that a copy of the resolution was simply attached to the printed contract without special negotiations
or agreement between the parties.
It follows from the foregoing that the terms embodied in the resolution of August 20, 1936 were supported by the
same consideration underlying the main amended milling contract; i.e., the promises and obligations undertaken
thereunder by the planters, and, particularly, the extension of its operative period for an additional 15 years over and
beyond the 30 years stipulated in the original contract. Hence, the conclusion of the court below that the resolution
constituted gratuitous concessions not supported by any consideration is legally untenable.
All disquisition concerning donations and the lack of power of the directors of the respondent sugar milling company to
make a gift to the planters would be relevant if the resolution in question had embodied a separate agreement after the
appellants had already bound themselves to the terms of the printed milling contract. But this was not the case. When the
resolution was adopted and the additional concessions were made by the company, the appellants were not yet obligated
by the terms of the printed contract, since they admittedly did not sign it until twenty-one days later. Before that date, the
printed form was no more than a proposal that either party could modify at its pleasure, and the appellee actually
modified it by adopting the resolution in question. So that by September 10, 1936 defendant corporation already
understood that the printed terms were not controlling, save as modified by its resolution of August 20, 1936; and we are
satisfied that such was also the understanding of appellants herein, and that the minds of the parties met upon that basis.
Otherwise there would have been no consent or "meeting of the minds", and no binding contract at all. But the conduct of
the parties indicates that they assumed, and they do not now deny, that the signing of the contract on September 10,
1936, did give rise to a binding agreement. That agreement had to exist on the basis of the printed terms as modified by
the resolution of August 20, 1936, or not at all. Since there is no rational explanation for the company's assenting to the
further concessions asked by the planters before the contracts were signed, except as further inducement for the planters
to agree to the extension of the contract period, to allow the company now to retract such concessions would be to
sanction a fraud upon the planters who relied on such additional stipulations.
The same considerations apply to the "void innovation" theory of appellees. There can be no novation unless two distinct
and successive binding contracts take place, with the later designed to replace the preceding convention. Modifications
introduced before a bargain becomes obligatory can in no sense constitute novation in law.
Stress is placed on the fact that the text of the Resolution of August 20, 1936 was not attached to the printed contract
until April 17, 1937. But, except in the case of statutory forms or solemn agreements (and it is not claimed that this is
one), it is the assent and concurrence (the "meeting of the minds") of the parties, and not the setting down of its terms,
that constitutes a binding contract. And the fact that the addendum is only signed by the General Manager of the milling
company emphasizes that the addition was made solely in order that the memorial of the terms of the agreement should
be full and complete.
Much is made of the circumstance that the report submitted by the Board of Directors of the appellee company in
November 19, 1936, only made mention of 90%, the planters having agreed to the 60-40 sharing of the sugar set forth in
the printed "amended milling contracts", and did not make any reference at all to the terms of the resolution of August
20, 1936. But a reading of this report shows that it was not intended to inventory all the details of the amended contract;
numerous provisions of the printed terms are also glossed over. The Directors of the appellee Milling Company had no
reason at the time to call attention to the provisions of the resolution in question, since it contained mostly modifications
in detail of the printed terms, and the only major change was paragraph 9 heretofore quoted; but when the report was
made, that paragraph was not yet in effect, since it was conditioned on other centrals granting better concessions to their
planters, and that did not happen until after 1950. There was no reason in 1936 to emphasize a concession that was not
yet, and might never be, in effective operation.
There can be no doubt that the directors of the appellee company had authority to modify the proposed terms of the
Amended Milling Contract for the purpose of making its terms more acceptable to the other contracting parties. The rule
is that
It is a question, therefore, in each case of the logical relation of the act to the corporate purpose expressed in the
charter. If that act is one which is lawful in itself and not otherwise prohibited, is done for the purpose of serving
corporate ends, and is reasonably tributary to the promotion of those ends, in a substantial, and not in a remote
and fanciful sense, it may fairly be considered within charter powers. The test to be applied is whether the act
in question is in direct and immediate furtherance of the corporation's business, fairly incident to the
express powers and reasonably necessary to their exercise. If so, then the corporation has the power to do
it; otherwise, not. (Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950, pp. 266-268)
As the resolution in question was passed in good faith by the board of directors, it is valid and binding, and whether or
not it will cause losses or decrease the profits of the central, the court has no authority to review them.
They hold such office charged with the duty to act for the corporation according to their best judgment, and in so doing
they cannot be controlled in the reasonable exercise and performance of such duty. Whether the business of a
corporation should be operated at a loss during depression, or close down at a smaller loss, is a purely business and
economic problem to be determined by the directors of the corporation and not by the court. It is a well-known rule of
law that questions of policy or of management are left solely to the honest decision of officers and directors of a
corporation, and the court is without authority to substitute its judgment of the board of directors; the board is the
business manager of the corporation, and so long as it acts in good faith its orders are not reviewable by the courts.
(Fletcher on Corporations, Vol. 2, p. 390).
And it appearing undisputed in this appeal that sugar centrals of La Carlota, Hawaiian Philippines, San Carlos and
Binalbagan (which produce over one-third of the entire annual sugar production in Occidental Negros) have granted
progressively increasing participations to their adhered planter at an average rate of
62.333% for the 1951-52 crop year;
64.2% for 1952-53;
64.3% for 1953-54;
64.5% for 1954-55; and
63.5% for 1955-56,
Then appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of August 20, 1936, duty bound to
grant similar increases to plaintiffs-appellants herein.
WHEREFORE, the decision under appeal is reversed and set aside; and judgment is decreed sentencing the defendant-
appellee to pay plaintiffs-appellants the differential or increase of participation in the milled sugar in accordance with
paragraph 9 of the appellee Resolution of August 20, 1936, over and in addition to the 60% expressed in the printed
Amended Milling Contract, or the value thereof when due, as follows:
0,333% to appellants Montelibano for the 1951-1952 crop year, said appellants having received an additional 2%
corresponding to said year in October, 1953;
2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year; and to all appellants thereafter
4.2% for the 1952-1953 crop year;
4.3% for the 1953-1954 crop year;
4.5% for the 1954-1955 crop year;
3.5% for the 1955-1956 crop year;
With interest at the legal rate on the value of such differential during the time they were withheld; and the right is
reserved to plaintiffs-appellants to sue for such additional increases as they may be entitled to for the crop years
subsequent to those herein adjudged.
Costs against appellee, Bacolod-Murcia Milling Co.
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++
Power to Extend or Shorten Corporate Term
Power to Increase or Decrease Capital Stock to Incur, Create, Increase Bonded Indebtedness (Bar 2001)
Power to Deny Pre-Emptive Rights
Power to Sell or Dispose of Corporate Assets
CASE: G.R. No. 111448 January 16, 2002
AF REALTY & DEVELOPMENT, INC. and ZENAIDA R. RANULLO vs.
DIESELMAN FREIGHT SERVICES, CO., MANUEL C. CRUZ, JR. and MIDAS DEVELOPMENT CORPORATION
FACTS:
Dieselman, DC and is a registered owner of a parcel of commercial lot consisting of 2,094 square meters, located at 104 E.
Rodriguez Avenue, Barrio Ugong, Pasig City, Metro Manila.
On May 10, 1988, Manuel C. Cruz, Jr., a member of the board of directors of Dieselman, issued a letter denominated as
"Authority To Sell Real Estate" to Cristeta N. Polintan, a real estate broker of the CNP Real Estate Brokerage. Cruz, Jr.
authorized Polintan "to look for a buyer/buyers and negotiate the sale" of the lot at P3,000.00 per square meter, or a total
of P6,282,000.00. Cruz, Jr. has no written authority from Dieselman to sell the lot.
In turn, Cristeta Polintan, through a letter
3
dated May 19, 1988, authorized Felicisima ("Mimi") Noble

to sell the same lot.
Felicisima Noble then offered for sale the property to AF Realty at P2,500.00 per square meter. Zenaida Ranullo, board
member and VP of AF Realty, accepted the offer and issued a check in the amount of P300,000.00 payable to the order of
Dieselman. Polintan received the check and signed an "Acknowledgement Receiptindicating that the amount of
P300,000.00 represents the partial payment of the property but refundable within two weeks should AF Realty
disapprove Ranullo's action on the matter.
On June 29, 1988, AF Realty confirmed its intention to buy the lot. Hence, Ranullo asked Polintan for the board resolution
of Dieselman authorizing the sale of the property. However, Polintan could only give Ranullo the original copy of TCT No.
39849, the tax declaration and tax receipt for the lot, and a photocopy of the Articles of Incorporation of Dieselman.
On August 2, 1988, Manuel F. Cruz, Sr., president of Dieselman, acknowledged receipt of the said P300,000.00 as "earnest
money" but required AF Realty to finalize the sale at P4,000.00 per square meter.AF Realty replied that it has paid an
initial down payment of P300,000.00 and is willing to pay the balance.
However, on August 13, 1988, Cruz, Sr. terminated the offer and demanded from AF Realty the return of the title of the lot
earlier delivered by Polintan.
Claiming that there was a perfected contract of sale between them, AF Realty filed with the Regional Trial Court, Branch
160, Pasig City a complaint for specific performance (Civil Case No. 56278) against Dieselman and Cruz, Jr. The complaint
prays that Dieselman be ordered to execute and deliver a final deed of sale in favor of AF Realty.In its amended
complaint,
12
AF Realty asked for payment of P1,500,000.00 as compensatory damages; P400,000.00 as attorney's fees;
and P500,000.00 as exemplary damages.
Dieselman alleged that there was no meeting of the minds between the parties in the sale of the property and that it did
not authorize any person to enter into such transaction on its behalf.
Meanwhile, Dieselman and Midas Development Corporation (Midas) executed a Deed of Absolute Sale of the same
property. The agreed price was P2,800.00 per square meter. Midas delivered to Dieselman P500,000.00 as down
payment and deposited the balance of P5,300,000.00 in escrow account with the PCIBank.
Constrained to protect its interest in the property, Midas filed on April 3, 1989 a Motion for Leave to Intervene in the said
case. Midas alleged that it has purchased the property and took possession thereof, hence Dieselman cannot be
compelled to sell and convey it to AF Realty. The trial court granted Midas' motion.
After trial, the lower court rendered the challenged Decision holding that the acts of Cruz, Jr. bound Dieselman in the sale
of the lot to AF Realty. Consequently, the perfected contract of sale between Dieselman and AF Realty bars Midas'
intervention. The trial court also held that Midas acted in bad faith when it initially paid Dieselman P500,000.00 even
without seeing the latter's title to the property. Moreover, the notarial report of the sale was not submitted to the Clerk of
Court of the Quezon City RTC and the balance of P5,300,000.00 purportedly deposited in escrow by Midas with a bank
was not established.
Dissatisfied, all the parties appealed to the Court of Appeals.
AF Realty alleged that the trial court erred in not holding Dieselman liable for moral, compensatory and exemplary
damages, and in dismissing its counterclaim against Midas.
Dieselman and Midas claimed that the trial court erred in finding that a contract of sale between Dieselman and AF Realty
was perfected. Midas further averred that there was no bad faith on its part when it purchased the lot from Dieselman.
Court of Appeals reversed the judgment of the trial court holding that since Cruz, Jr. was not authorized in writing by
Dieselman to sell the subject property to AF Realty, the sale was not perfected; and that the Deed of Absolute Sale
between Dieselman and Midas is valid, there being no bad faith on the part of the latter. The Court of Appeals then
declared Dieselman and Cruz, Jr. jointly and severally liable to AF Realty for P100,000.00 as moral damages; P100,000.00
as exemplary damages; and P100,000.00 as attorney's fees.
Upon MR filed by parties, Court of Appeals promulgated an Amending Decision, the dispositive portion of which reads:
"WHEREFORE, The Decision promulgated on October 10, 1992, is hereby AMENDED in the sense that only defendant Mr.
Manuel Cruz, Jr. should be made liable to pay the plaintiffs the damages and attorney's fees awarded therein, plus the
amount of P300,000.00 unless, in the case of the said P300,000.00, the same is still deposited with the Court which
should be restituted to plaintiffs.
AF Realty now comes to this Court via the instant petition alleging that the Court of Appeals committed errors of law.
The focal issue for consideration by this Court is who between petitioner AF Realty and respondent Midas has a
right over the subject lot.
The Court of Appeals, in reversing the judgment of the trial court, made the following ratiocination:
"From the foregoing scenario, the fact that the board of directors of Dieselman never authorized, verbally and in writing,
Cruz, Jr. to sell the property in question or to look for buyers and negotiate the sale of the subject property is undeniable.
It should be noted that Cruz, Jr. could not confer on Polintan any authority which he himself did not have. Nemo dat quod
non habet. In the same manner, Felicisima Noble could not have possessed authority broader in scope, being a mere
extension of Polintan's purported authority, for it is a legal truism in our jurisdiction that a spring cannot rise higher than
its source. Succinctly stated, the alleged sale of the subject property was effected through persons who were absolutely
without any authority whatsoever from Dieselman.
"The argument that Dieselman ratified the contract by accepting the P300,000.00 as partial payment of the purchase
price of the subject property is equally untenable. The sale of land through an agent without any written authority is void.
"On the contrary, anent the sale of the subject property by Dieselman to intervenor Midas, the records bear out that
Midas purchased the same from Dieselman on 30 July 1988. The notice of lis pendens was subsequently annotated on the
title of the property by plaintiffs on 15 August 1988. However, this subsequent annotation of the notice of lis
pendens certainly operated prospectively and did not retroact to make the previous sale of the property to Midas
a conveyance in bad faith. A subsequently registered notice of lis pendens surely is not proof of bad faith. It must
therefore be borne in mind that the 30 July 1988 deed of sale between Midas and Dieselman is a document duly certified
by notary public under his hand and seal. x x x. Such a deed of sale being public document acknowledged before a notary
public is admissible as to the date and fact of its execution without further proof of its due execution and delivery (Bael
vs. Intermediate Appellate Court, 169 SCRA617; Joson vs. Baltazar, 194 SCRA 114) and to prove the defects and lack of
consent in the execution thereof, the evidence must be strong and not merely preponderant x x x."
18

We agree with the Court of Appeals.
Section 23 of the Corporation Code expressly provides that the corporate powers of all corporations shall be exercised by
the board of directors. Just as a natural person may authorize another to do certain acts in his behalf, so may the board of
directors of a corporation validly delegate some of its functions to individual officers or agents appointed by it.Thus,
contracts or acts of a corporation must be made either by the board of directors or by a corporate agent duly authorized
by the board. Absent such valid delegation/authorization, the rule is that the declarations of an individual director
relating to the affairs of the corporation, but not in the course of, or connected with, the performance of authorized duties
of such director, are held not binding on the corporation.
21

It is undisputed that respondent Cruz, Jr. has no written authority from the board of directors of respondent Dieselman to
sell or to negotiate the sale of the lot, much less to appoint other persons for the same purpose. Respondent Cruz, Jr.'s
lack of such authority precludes him from conferring any authority to Polintan involving the subject realty. Necessarily,
neither could Polintan authorize Felicisima Noble. Clearly, the collective acts of respondent Cruz, Jr., Polintan and Noble
cannot bind Dieselman in the purported contract of sale.
Petitioner AF Realty maintains that the sale of land by an unauthorized agent may be ratified where, as here, there is
acceptance of the benefits involved. In this case the receipt by respondent Cruz, Jr. from AF Realty of the P300,000.00 as
partial payment of the lot effectively binds respondent Dieselman.
22

We are not persuaded.
Involved in this case is a sale of land through an agent. Thus, the law on agency under the Civil Code takes precedence.
This is well stressed in Yao Ka Sin Trading vs. Court of Appeals:
23

"Since a corporation, such as the private respondent, can act only through its officers and agents, all acts within the
powers of said corporation may be performed by agents of its selection; and, except so far as limitations or
restrictions may be imposed by special charter, by-law, or statutory provisions, the same general principles of law
which govern the relation of agency for a natural person govern the officer or agent of a corporation, of whatever
status or rank, in respect to his power to act for the corporation; and agents when once appointed, or members
acting in their stead, are subject to the same rules, liabilities, and incapacities as are agents of individuals and
private persons."
Pertinently, Article 1874 of the same Code provides:
When a sale of piece of land or any interest therein is through an agent, the authority of the latter shall be in
writing; otherwise, the sale shall be void."
Considering that respondent Cruz, Jr., Cristeta Polintan and Felicisima Ranullo were not authorized by respondent
Dieselman to sell its lot, the supposed contract is void. Being a void contract, it is not susceptible of ratification by clear
mandate of Article 1409 of the Civil Code, thus:
"The following contracts are inexistent and void from the very beginning:
x x x
(7) Those expressly prohibited or declared void by law.
"These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived."
Upon the other hand, the validity of the sale of the subject lot to respondent Midas is unquestionable. As aptly noted by
the Court of Appeals,
24
the sale was authorized by a board resolution of respondent Dieselman dated May 27, 1988.
The Court of Appeals awarded attorney's fees and moral and exemplary damages in favor of petitioner AF Realty and
against respondent Cruz, Jr. The award was made by reason of a breach of contract imputable to respondent Cruz, Jr. for
having acted in bad faith. We are not persuaded. It bears stressing that petitioner Zenaida Ranullo, board member and
vice-president of petitioner AF Realty who accepted the offer to sell the property, admitted in her testimony
25
that a
board resolution from respondent Dieselman authorizing the sale is necessary to bind the latter in the transaction; and
that respondent Cruz, Jr. has no such written authority. In fact, despite demand, such written authority was not presented
to her. This notwithstanding, petitioner Ranullo tendered a partial payment for the unauthorized transaction. Clearly,
respondent Cruz, Jr. should not be held liable for damages and attorney's fees.
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals are hereby AFFIRMED with
MODIFICATION in the sense that the award of damages and attorney's fees is deleted. Respondent Dieselman is ordered
to return to petitioner AF Realty its partial payment of P300,000.00. Costs against petitioners.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Power to Acquire Own Shares
Power to Invest Corp Funds in Another Corporation or Business ( Bar 1995, 1999)
Power to Declare Dividends
Power to Enter into Management Contract
Ultra-Vires Acts (Bar 2002)
o Applicability of Ultra-Vires Doctrine
o Consequences of Ultra-Vires Acts
How Exercised ( Bar 2002)
o By Shareholders ( Bar 1998)
o By BOD ( Bar 1996)
CASE:
G.R. No. 111008 November 7, 1994
TRAMAT MERCANTILE, INC. AND DAVID ONG vs. HON. COURT OF APPEALS AND MELCHOR DE LA CUESTA
FACTS: On 09 April 1984, Melchor de la Cuesta, doing business under the name and style of "Farmers Machineries," sold
to Tramat Mercantile, Inc. ("Tramat"), one (1) unit HINOMOTO TRACTOR. In payment, David Ong, Tramat's president
and manager, issued a check for P33,500.00 (apparently replacing an earlier postdated check for P33,080.00). Tramat, in
turn, sold the tractor, together with an attached lawn mower fabricated by it, to the Metropolitan Waterworks and
Sewerage System ("NAWASA") for P67,000.00. David Ong caused a "stop payment" of the check when NAWASA refused
to pay the tractor and lawn mower after discovering that, aside from some stated defects of the attached lawn mower, the
engine was a reconditioned unit.
De la Cuesta filed an action for the recovery of P33,500.00, as well as attorney's fees of P10,000.00, and the costs of suit.
Ong, in his answer, averred, among other things, that de la Cuesta had no cause of action; that the questioned transaction
was between plaintiff and Tramat Mercantile, and not with Ong in his personal capacity; and that the payment of the
check was stopped because the subject tractor had been priced as a brand new, not as a reconditioned unit.
The trial court rendered a decision, the dispositive portions of which read:
Ordering the Ong and TRAMAT, jointly and severally, to pay the plaintiff the sum of P33,500.00 with legal interest
thereon at the rate of 12% per annum from July 7, 1984 until fully paid; and to pay the plaintiff the sum of P10,000.00 as
attorney's fees, and the costs of this suit.
On appeal, the Court of Appeals affirmed the decision of the trial court. Defendant-appellants' motion for reconsideration
was denied.
ISSUE:
If the perfection of the sale was dependent upon acceptance by the MWSS of the subject tractor why did the appellants
issue a check in payment of the item to the appellee?
And long after MWSS had complained about the defective tractor engine, and after the appellee had failed to remedy the
defect, why did the appellants still draw and deliver a replacement check to the appellee for the increased amount of
P33,500?

These payments argue against the claim now made by the defendants that the sale was conditional.
According to Dela Cuesta, the additional amount covered the cost of replacing the oil gasket of the tractor engine when it
was repaired in Soledad Cac's gasoline station in Quezon City. The appellants, on the other hand, claims the amount
represented the freight charges for transporting the tractor from Cauayan, Isabela to Metro Manila.
The appellants should have explained why they failed to include the freight charges in the first check. The tractor was
transported from Isabela to Metro Manila as early as April 1984, and the first check was drawn at about the same time.
The freight charges cannot be said to have been incurred when the tractor engine was delivered back to the supplier for
repairs. The appellants admitted that the engine was not brought back to Isabela. The repairs were done at Soledad Cac's
gasoline station in Quezon City.
Anent the first assigned error, We sustain the trial court's finding that at the time of the purchase, Ong and TRAMAT did
not reveal to Dela Cuesta the true purpose for which the tractor would be used. Granting that the appellants informed
him that they would be reselling the unit to the MWSS, an entity admittedly not engaged in farming, and that they
ordered the tractor without the power tiller, an indispensable accessory if the tractor would be used in farming, these in
themselves would not constitute the required implied notice to the appellee as seller.
In regard to the second assigned error, We do not agree that the appellee should have been held liable for the tractor's
alleged hidden defects.
It has to be noted in this regard that, to satisfy the requirements of the MWSS, the appellants borrowed a lawn mower
from the MWSS so they could fabricate one such mower. The appellants' witness stated that the kind of mid-mounted
lawn mower was being manufactured by their competitor, Alpha Machinery, which had by then stopped supplying the
same. There is no showing that the appellants had had any previous experience in the fabrication of this lawn mower. In
fact, as aforesaid, they had to borrow one from the MWSS which they could copy. Although they made a copy with the
same specifications and design, there was no assurance that the copy would function as well as with the model.
Although the trial court discussed it in a different light, We view the matter in the same way the trial court did that the
lawn mower as fabricated by the appellants was the root of the parties' problems.
Having had no previous experience in the manufacture of lawn mowers of the same type as that in litigation, and in a
possibly patent-infringing effort to undercut their competition, the appellants gathered enough daring to do the
fabrication themselves. But the product might have proved too much for the subject tractor to power, and the tractor's
engine was strained beyond its limits, causing it to overheat and damage its gaskets.
No wonder, then, it was a gasket Soledad Gas had to replace, at a cost chargeable to TRAMAT and Ong. No wonder,
furthermore, the appellants' witness declared that even after the replacement of that one gasket, the engine still leaked
oil after being torture-tested. The integrity of the other engine gaskets might have been impaired, too. Such was the
burden placed on the engine. The engine malfunctioned not necessarily because the engine, as alleged by the appellants,
had been a reconditioned, and not a brand new, one. It malfunctioned because it was made to do what it simply could not.
It was, nevertheless, an error to hold David Ong jointly and severally liable with TRAMAT to de la Cuesta under the
questioned transaction. Ong had there so acted, not in his personal capacity, but as an officer of TRAMAT, with a distinct
and separate personality. As such, it should only be the corporation, not the person acting for and on its behalf that
properly could be made liable thereon.

Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation
may so validly attach, as a rule, only when
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith, or gross negligence in
directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or
other persons;
2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file
with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by a specific provision of law, to personally answer for his corporate action.
In the case at bench, there is no indication that petitioner David Ong could be held personally accountable under any of
the abovementioned cases.
WHEREFORE, the petition is given DUE COURSE and the decision of the trial court, affirmed by the appellate court, is
MODIFIED insofar as it holds petitioner David Ong jointly and severally liable with Tramat Mercantile, Inc., which portion
of the questioned judgment is SET ASIDE. In all other respects, the decision appealed from is AFFIRMED. No costs.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
A.C. No. 5804 July 1, 2003
BENEDICTO HORNILLA and ATTY. FEDERICO D. RICAFORT, complainants,
vs. ATTY. ERNESTO S. SALUNAT, respondent.
FACTS:
On November 21, 1997, Benedicto Hornilla and Federico D. Ricafort filed an administrative complaint1 with the
Integrated Bar of the Philippines (IBP) Commission on Bar Discipline, against respondent Atty. Ernesto S. Salunat for
illegal and unethical practice and conflict of interest. They alleged that respondent is a member of the ASSA Law and
Associates, which was the retained counsel of the Philippine Public School Teachers Association (PPSTA). Respondents
brother, Aurelio S. Salunat, was a member of the PPSTA Board which approved respondents engagement as retained
counsel of PPSTA.
Complainants, who are members of the PPSTA, filed an intra-corporate case against its members of the Board of
Directors for the terms 1992-1995 and 1995-1997 before the Securities and Exchange Commission, which was docketed
as SEC Case No. 05-97-5657, and a complaint before the Office of the Ombudsman, docketed as OMB Case No. 0-97-0695,
for unlawful spending and the undervalued sale of real property of the PPSTA. Respondent entered his appearance as
counsel for the PPSTA Board members in the said cases. Complainants contend that respondent was guilty of conflict of
interest because he was engaged by the PPSTA, of which complainants were members, and was being paid out of its
corporate funds where complainants have contributed. Despite being told by PPSTA members of the said conflict of
interest, respondent refused to withdraw his appearance in the said cases.
Moreover, complainants aver that respondent violated Rule 15.062 of the Code of Professional Responsibility when he
appeared at the meeting of the PPSTA Board and assured its members that he will win the PPSTA cases.
In his Answer,3 respondent stressed that he entered his appearance as counsel for the PPSTA Board Members for and in
behalf of the ASSA Law and Associates. As a partner in the said law firm, he only filed a "Manifestation of Extreme
Urgency" in OMB Case No. 0-97-0695.4 On the other hand, SEC Case No. 05-97-5657 was handled by another partner of
the firm, Atty. Agustin V. Agustin. Respondent claims that it was complainant Atty. Ricafort who instigated, orchestrated
and indiscriminately filed the said cases against members of the PPSTA and its Board.
Respondent pointed out that his relationship to Aurelio S. Salunat was immaterial; and that when he entered into the
retainer contract with the PPSTA Board, he did so, not in his individual capacity, but in representation of the ASSA Law
Firm. He denied that he ensured the victory of the PPSTA Board in the case he was handling. He merely assured the Board
that the truth will come out and that the case before the Ombudsman will be dismissed for lack of jurisdiction,
considering that respondents therein are not public officials, but private employees. Anent the SEC case, respondent
alleged that the same was being handled by the law firm of Atty. Eduardo de Mesa, and not ASSA.
By way of Special and Affirmative Defenses, respondent averred that complainant Atty. Ricafort was himself guilty of
gross violation of his oath of office amounting to gross misconduct, malpractice and unethical conduct for filing trumped-
up charges against him and Atty. De Mesa. Thus, he prayed that the complaint against him be dismissed and, instead,
complainant Ricafort be disciplined or disbarred.
The complainant was docketed as CBD Case No. 97-531 and referred to the IBP Commission on Bar Discipline. After
investigation, Commissioner Lydia A. Navarro recommended that respondent be suspended from the practice of law for
six (6) months. The Board of Governors thereafter adopted Resolution No. XV-3003-230 dated June 29, 2002, approving
the report and recommendation of the Investigating Commissioner.
Respondent filed with this Court a Motion for Reconsideration of the above Resolution of the IBP Board of Governors.
The pertinent rule of the Code of Professional Responsibility provides:
RULE 15.03. A lawyer shall not represent conflicting interests except by written consent of all concerned given after a
full disclosure of the facts.
There is conflict of interest when a lawyer represents inconsistent interests of two or more opposing parties. The test is
"whether or not in behalf of one client, it is the lawyers duty to fight for an issue or claim, but it is his duty to oppose it
for the other client. In brief, if he argues for one client, this argument will be opposed by him when he argues for the
other client." This rule covers not only cases in which confidential communications have been confided, but also those in
which no confidence has been bestowed or will be used.6 Also, there is conflict of interests if the acceptance of the new
retainer will require the attorney to perform an act which will injuriously affect his first client in any matter in which he
represents him and also whether he will be called upon in his new relation to use against his first client any knowledge
acquired through their connection.7 Another test of the inconsistency of interests is whether the acceptance of a new
relation will prevent an attorney from the full discharge of his duty of undivided fidelity and loyalty to his client or invite
suspicion of unfaithfulness or double dealing in the performance thereof.
In this jurisdiction, a corporations board of directors is understood to be that body which (1) exercises all powers
provided for under the Corporation Code; (2) conducts all business of the corporation; and (3) controls and holds all
property of the corporation.9 Its members have been characterized as trustees or directors clothed with a fiduciary
character.10 It is clearly separate and distinct from the corporate entity itself.
Where corporate directors have committed a breach of trust either by their frauds, ultra vires acts, or
negligence, and the corporation is unable or unwilling to institute suit to remedy the wrong, a stockholder may
sue on behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of
the wrong done directly to the corporation and indirectly to the stockholders. This is what is known as a
derivative suit, and settled is the doctrine that in a derivative suit, the corporation is the real party in interest
while the stockholder filing suit for the corporations behalf is only nominal party. The corporation should be
included as a party in the suit.
Having thus laid a suitable foundation of the basic legal principles pertaining to derivative suits, we come now to the
threshold question: can a lawyer engaged by a corporation defend members of the board of the same corporation in a
derivative suit? On this issue, the following disquisition is enlightening:
The possibility for conflict of interest here is universally recognized. Although early cases found joint representation
permissible where no conflict of interest was obvious, the emerging rule is against dual representation in all derivative
actions. Outside counsel must thus be retained to represent one of the defendants. The cases and ethics opinions differ on
whether there must be separate representation from the outset or merely from the time the corporation seeks to take an
active role. Furthermore, this restriction on dual representation should not be waivable by consent in the usual way; the
corporation should be presumptively incapable of giving valid consent.
In other jurisdictions, the prevailing rule is that a situation wherein a lawyer represents both the corporation and its
assailed directors unavoidably gives rise to a conflict of interest. The interest of the corporate client is paramount and
should not be influenced by any interest of the individual corporate officials.14 The rulings in these cases have
persuasive effect upon us. After due deliberation on the wisdom of this doctrine, we are sufficiently convinced that a
lawyer engaged as counsel for a corporation cannot represent members of the same corporations board of directors in a
derivative suit brought against them. To do so would be tantamount to representing conflicting interests, which is
prohibited by the Code of Professional Responsibility.
In the case at bar, the records show that SEC Case No. 05-97-5657, entitled "Philippine Public School Teachers Assn., Inc.,
et al. v. 1992-1995 Board of Directors of the Philippine Public School Teachers Assn. (PPSTA), et al.," was filed by the
PPSTA against its own Board of Directors. Respondent admits that the ASSA Law Firm, of which he is the Managing
Partner, was the retained counsel of PPSTA. Yet, he appeared as counsel of record for the respondent Board of Directors
in the said case. Clearly, respondent was guilty of conflict of interest when he represented the parties against whom his
other client, the PPSTA, filed suit.
In his Answer, respondent argues that he only represented the Board of Directors in OMB Case No. 0-97-0695. In the said
case, he filed a Manifestation of Extreme Urgency wherein he prayed for the dismissal of the complaint against his clients,
the individual Board Members. By filing the said pleading, he necessarily entered his appearance therein.15 Again, this
constituted conflict of interests, considering that the complaint in the Ombudsman, albeit in the name of the individual
members of the PPSTA, was brought in behalf of and to protect the interest of the corporation.
Therefore, respondent is guilty of representing conflicting interests. Considering however, that this is his first offense, we
find the penalty of suspension, recommended in IBP Resolution No. XV-2002-230 dated June 29, 2002, to be too harsh.
Instead, we resolve to admonish respondent to observe a higher degree of fidelity in the practice of his profession.
ACCORDINGLY, respondent Atty. Ernesto Salunat is found GUILTY of representing conflicting interests and is
ADMONISHED to observe a higher degree of fidelity in the practice of his profession. He is further WARNED that a
repetition of the same or similar acts will be dealt with more severely.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

CASE:
G.R. No. 151969 September 4, 2009
VALLE VERDE COUNTRY CLUB, INC., ERNESTO VILLALUNA, RAY GAMBOA, AMADO M. SANTIAGO, JR., FORTUNATO
DEE, AUGUSTO SUNICO, VICTOR SALTA, FRANCISCO ORTIGAS III, ERIC ROXAS, in their capacities as members of
the Board of Directors of Valle Verde Country Club, Inc., and JOSE RAMIREZ, Petitioners, vs. VICTOR AFRICA,
Respondent.
In this petition for review on certiorari, the parties raise a legal question on corporate governance: Can the members of
a corporations board of directors elect another director to fill in a vacancy caused by the resignation of a hold-
over director?
THE FACTS:
On February 27, 1996, during the Annual Stockholders Meeting of petitioner Valle Verde Country Club, Inc. (VVCC), the
following were elected as members of the VVCC Board of Directors: Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan),
Eduardo Makalintal (Makalintal), Francisco Ortigas III, Victor Salta, Amado M. Santiago, Jr., Fortunato Dee, Augusto
Sunico, and Ray Gamboa.2 In the years 1997, 1998, 1999, 2000, and 2001, however, the requisite quorum for the holding
of the stockholders meeting could not be obtained. Consequently, the above-named directors continued to serve in the
VVCC Board in a hold-over capacity.
On September 1, 1998, Dinglasan resigned from his position as member of the VVCC Board. In a meeting held on October
6, 1998, the remaining directors, still constituting a quorum of VVCCs nine-member board, elected Eric Roxas (Roxas) to
fill in the vacancy created by the resignation of Dinglasan.

A year later, or on November 10, 1998, Makalintal also resigned as member of the VVCC Board. He was replaced by Jose
Ramirez (Ramirez), who was elected by the remaining members of the VVCC Board on March 6, 2001.
Respondent Africa (Africa), a member of VVCC, questioned the election of Roxas and Ramirez as members of the VVCC
Board with the Securities and Exchange Commission (SEC) and the Regional Trial Court (RTC), respectively. The SEC case
questioning the validity of Roxas appointment was docketed as SEC Case No. 01-99-6177. The RTC case questioning the
validity of Ramirez appointment was docketed as Civil Case No. 68726.
In his nullification complaint3 before the RTC, Africa alleged that the election of Roxas was contrary to Section 29, in
relation to Section 23, of the Corporation Code of the Philippines (Corporation Code). These provisions read:
Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of all
corporations formed under this Code shall be exercised, all business conducted and all property of such corporations
controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there
is no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are
elected and qualified.
x x x x
Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board of directors or trustees other
than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority
of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the
stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall
be elected only for the unexpired term of his predecessor in office. xxx.
Africa claimed that a year after Makalintals election as member of the VVCC Board in 1996, his [Makalintals] term as
well as those of the other members of the VVCC Board should be considered to have already expired. Thus, according to
Africa, the resulting vacancy should have been filled by the stockholders in a regular or special meeting called for that
purpose, and not by the remaining members of the VVCC Board, as was done in this case.

Africa additionally contends that for the members to exercise the authority to fill in vacancies in the board of directors,
Section 29 requires, among others, that there should be an unexpired term during which the successor-member shall
serve. Since Makalintals term had already expired with the lapse of the one-year term provided in Section 23, there is no
more "unexpired term" during which Ramirez could serve.
Through a partial decision4 promulgated on January 23, 2002, the RTC ruled in favor of Africa and declared the election
of Ramirez, as Makalintals replacement, to the VVCC Board as null and void.
Incidentally, the SEC issued a similar ruling on June 3, 2003, nullifying the election of Roxas as member of the VVCC
Board, vice hold-over director Dinglasan. While VVCC manifested its intent to appeal from the SECs ruling, no petition
was actually filed with the Court of Appeals; thus, the appellate court considered the case closed and terminated and the
SECs ruling final and executory.5
THE PETITION
VVCC now appeals to the Court to assail the RTCs January 23, 2002 partial decision for being contrary to law and
jurisprudence. VVCC made a direct resort to the Court via a petition for review on certiorari, claiming that the sole issue
in the present case involves a purely legal question.
As framed by VVCC, the issue for resolution is whether the remaining directors of the corporations Board, still
constituting a quorum, can elect another director to fill in a vacancy caused by the resignation of a hold-over director.
Citing law and jurisprudence, VVCC posits that the power to fill in a vacancy created by the resignation of a hold-over
director is expressly granted to the remaining members of the corporations board of directors.
Under the above-quoted Section 29 of the Corporation Code, a vacancy occurring in the board of directors caused by the
expiration of a members term shall be filled by the corporations stockholders. Correlating Section 29 with Section 23 of
the same law, VVCC alleges that a members term shall be for one year and until his successor is elected and qualified;
otherwise stated, a members term expires only when his successor to the Board is elected and qualified. Thus, "until
such time as [a successor is] elected or qualified in an annual election where a quorum is present," VVCC contends that
"the term of [a member] of the board of directors has yet not expired."

As the vacancy in this case was caused by Makalintals resignation, not by the expiration of his term, VVCC insists that the
board rightfully appointed Ramirez to fill in the vacancy.
In support of its arguments, VVCC cites the Courts ruling in the 1927 El Hogar case which states:
Owing to the failure of a quorum at most of the general meetings since the respondent has been in existence, it has been
the practice of the directors to fill in vacancies in the directorate by choosing suitable persons from among the
stockholders. This custom finds its sanction in Article 71 of the By-Laws, which reads as follows:
Art. 71. The directors shall elect from among the shareholders members to fill the vacancies that may occur in the board
of directors until the election at the general meeting.
Upon failure of a quorum at any annual meeting the directorate naturally holds over and continues to function until
another directorate is chosen and qualified. Unless the law or the charter of a corporation expressly provides that an
office shall become vacant at the expiration of the term of office for which the officer was elected, the general rule is to
allow the officer to hold over until his successor is duly qualified. Mere failure of a corporation to elect officers does not
terminate the terms of existing officers nor dissolve the corporation. The doctrine above stated finds expression in article
66 of the by-laws of the respondent which declares in so many words that directors shall hold office "for the term of one
year or until their successors shall have been elected and taken possession of their offices."
It results that the practice of the directorate of filling vacancies by the action of the directors themselves is valid. Nor can
any exception be taken to the personality of the individuals chosen by the directors to fill vacancies in the body.
[Emphasis supplied.]
Africa, in opposing VVCCs contentions, raises the same arguments that he did before the trial court.
RULING:
We are not persuaded by VVCCs arguments and, thus, find its petition unmeritorious.
To repeat, the issue for the Court to resolve is whether the remaining directors of a corporations Board, still constituting
a quorum, can elect another director to fill in a vacancy caused by the resignation of a hold-over director. The resolution
of this legal issue is significantly hinged on the determination of what constitutes a directors term of office.
The holdover period is not part of the term of office of a member of the board of directors
The word "term" has acquired a definite meaning in jurisprudence. In several cases, we have defined "term" as the time
during which the officer may claim to hold the office as of right, and fixes the interval after which the several incumbents
shall succeed one another.7 The term of office is not affected by the holdover.8 The term is fixed by statute and it does
not change simply because the office may have become vacant, nor because the incumbent holds over in office beyond
the end of the term due to the fact that a successor has not been elected and has failed to qualify.
Term is distinguished from tenure in that an officers "tenure" represents the term during which the incumbent actually
holds office. The tenure may be shorter (or, in case of holdover, longer) than the term for reasons within or beyond the
power of the incumbent.
Based on the above discussion, when Section 239 of the Corporation Code declares that "the board of directorsshall
hold office for one (1) year until their successors are elected and qualified," we construe the provision to mean that the
term of the members of the board of directors shall be only for one year; their term expires one year after election to the
office. The holdover period that time from the lapse of one year from a members election to the Board and until his
successors election and qualification is not part of the directors original term of office, nor is it a new term; the
holdover period, however, constitutes part of his tenure. Corollary, when an incumbent member of the board of directors
continues to serve in a holdover capacity, it implies that the office has a fixed term, which has expired, and the incumbent
is holding the succeeding term.
After the lapse of one year from his election as member of the VVCC Board in 1996, Makalintals term of office is deemed
to have already expired. That he continued to serve in the VVCC Board in a holdover capacity cannot be considered as
extending his term. To be precise, Makalintals term of office began in 1996 and expired in 1997, but, by virtue of the
holdover doctrine in Section 23 of the Corporation Code, he continued to hold office until his resignation on November
10, 1998. This holdover period, however, is not to be considered as part of his term, which, as declared, had already
expired.
With the expiration of Makalintals term of office, a vacancy resulted which, by the terms of Section 2911 of the
Corporation Code, must be filled by the stockholders of VVCC in a regular or special meeting called for the purpose. To
assume as VVCC does that the vacancy is caused by Makalintals resignation in 1998, not by the expiration of his term
in 1997, is both illogical and unreasonable. His resignation as a holdover director did not change the nature of the
vacancy; the vacancy due to the expiration of Makalintals term had been created long before his resignation.
The powers of the corporations board of directors emanate from its stockholders.
VVCCs construction of Section 29 of the Corporation Code on the authority to fill up vacancies in the board of directors,
in relation to Section 23 thereof, effectively weakens the stockholders power to participate in the corporate governance
by electing their representatives to the board of directors. The board of directors is the directing and controlling body of
the corporation. It is a creation of the stockholders and derives its power to control and direct the affairs of the
corporation from them. The board of directors, in drawing to themselves the powers of the corporation, occupies a
position of trusteeship in relation to the stockholders, in the sense that the board should exercise not only care and
diligence, but utmost good faith in the management of corporate affairs.
The underlying policy of the Corporation Code is that the business and affairs of a corporation must be governed by a
board of directors whose members have stood for election, and who have actually been elected by the stockholders, on
an annual basis. Only in that way can the directors' continued accountability to shareholders, and the legitimacy of their
decisions that bind the corporation's stockholders, be assured. The shareholder vote is critical to the theory that
legitimizes the exercise of power by the directors or officers over properties that they do not own.
This theory of delegated power of the board of directors similarly explains why, under Section 29 of the Corporation
Code, in cases where the vacancy in the corporations board of directors is caused not by the expiration of a members
term, the successor "so elected to fill in a vacancy shall be elected only for the unexpired term of the his predecessor in
office." The law has authorized the remaining members of the board to fill in a vacancy only in specified instances, so as
not to retard or impair the corporations operations; yet, in recognition of the stockholders right to elect the members of
the board, it limited the period during which the successor shall serve only to the "unexpired term of his predecessor in
office."
While the Court in El Hogar approved of the practice of the directors to fill vacancies in the directorate, we point out that
this ruling was made before the present Corporation Code was enacted14 and before its Section 29 limited the instances
when the remaining directors can fill in vacancies in the board, i.e., when the remaining directors still constitute a
quorum and when the vacancy is caused for reasons other than by removal by the stockholders or by expiration of the
term.1avvphi1
It also bears noting that the vacancy referred to in Section 29 contemplates a vacancy occurring within the directors
term of office. When a vacancy is created by the expiration of a term, logically, there is no more unexpired term to speak
of. Hence, Section 29 declares that it shall be the corporations stockholders who shall possess the authority to fill in a
vacancy caused by the expiration of a members term.
As correctly pointed out by the RTC, when remaining members of the VVCC Board elected Ramirez to replace Makalintal,
there was no more unexpired term to speak of, as Makalintals one-year term had already expired. Pursuant to law, the
authority to fill in the vacancy caused by Makalintals leaving lies with the VVCCs stockholders, not the remaining
members of its board of directors.
WHEREFORE, we DENY the petitioners petition for review on certiorari, and AFFIRM the partial decision of the Regional
Trial Court, Branch 152, Manila, promulgated on January 23, 2002, in Civil Case No. 68726. Costs against the petitioners.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
CASE:

G.R. No. 128690 January 21, 1999
ABS-CBN BROADCASTING CORPORATION, petitioner,
vs.
HONORABLE COURT OF APPEALS, REPUBLIC BROADCASTING CORP, VIVA PRODUCTION, INC., and
VICENTE DEL ROSARIO, respondents.

DAVIDE, JR., CJ .:
In this petition for review on certiorari, petitioner ABS-CBN Broadcasting Corp. (hereafter ABS-CBN) seeks to
reverse and set aside the decision
1
of 31 October 1996 and the resolution
2
of 10 March 1997 of the Court of
Appeals in CA-G.R. CV No. 44125. The former affirmed with modification the decision
3
of 28 April 1993 of the
Regional Trial Court (RTC) of Quezon City, Branch 80, in Civil Case No. Q-92-12309. The latter denied the motion to
reconsider the decision of 31 October 1996.
The antecedents, as found by the RTC and adopted by the Court of Appeals, are as follows:
In 1990, ABS-CBN and Viva executed a Film Exhibition Agreement (Exh. "A") whereby Viva gave
ABS-CBN an exclusive right to exhibit some Viva films. Sometime in December 1991, in accordance
with paragraph 2.4 [sic] of said agreement stating that .
1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) Viva films for TV
telecast under such terms as may be agreed upon by the parties hereto, provided, however, that
such right shall be exercised by ABS-CBN from the actual offer in writing.
Viva, through defendant Del Rosario, offered ABS-CBN, through its vice-president Charo Santos-
Concio, a list of three(3) film packages (36 title) from which ABS-CBN may exercise its right of first
refusal under the afore-said agreement (Exhs. "1" par, 2, "2," "2-A'' and "2-B"-Viva). ABS-CBN,
however through Mrs. Concio, "can tick off only ten (10) titles" (from the list) "we can purchase" (Exh.
"3" - Viva) and therefore did not accept said list (TSN, June 8, 1992, pp. 9-10). The titles ticked off by
Mrs. Concio are not the subject of the case at bar except the film ''Maging Sino Ka Man."
For further enlightenment, this rejection letter dated January 06, 1992 (Exh "3" - Viva) is hereby
quoted:
6 January 1992
Dear Vic,
This is not a very formal business letter I am writing to you as I would like to express my difficulty in
recommending the purchase of the three film packages you are offering ABS-CBN.
From among the three packages I can only tick off 10 titles we can purchase. Please see attached. I
hope you will understand my position. Most of the action pictures in the list do not have big action
stars in the cast. They are not for primetime. In line with this I wish to mention that I have not
scheduled for telecast several action pictures in out very first contract because of the cheap
production value of these movies as well as the lack of big action stars. As a film producer, I am sure
you understand what I am trying to say as Viva produces only big action pictures.
In fact, I would like to request two (2) additional runs for these movies as I can only schedule them in
our non-primetime slots. We have to cover the amount that was paid for these movies because as
you very well know that non-primetime advertising rates are very low. These are the unaired titles in
the first contract.
1. Kontra Persa [sic].
2. Raider Platoon.
3. Underground guerillas
4. Tiger Command
5. Boy de Sabog
6. Lady Commando
7. Batang Matadero
8. Rebelyon
I hope you will consider this request of mine.
The other dramatic films have been offered to us before and have been rejected because of the
ruling of MTRCB to have them aired at 9:00 p.m. due to their very adult themes.
As for the 10 titles I have choosen [sic] from the 3 packages please consider including all the other
Viva movies produced last year. I have quite an attractive offer to make.
Thanking you and with my warmest regards.
(Signed)
Charo Santos-
Concio
On February 27, 1992, defendant Del Rosario approached ABS-CBN's Ms. Concio, with a list
consisting of 52 original movie titles (i.e. not yet aired on television) including the 14 titles subject of
the present case, as well as 104 re-runs (previously aired on television) from which ABS-CBN may
choose another 52 titles, as a total of 156 titles, proposing to sell to ABS-CBN airing rights over this
package of 52 originals and 52 re-runs for P60,000,000.00 of which P30,000,000.00 will be in cash
and P30,000,000.00 worth of television spots (Exh. "4" to "4-C" Viva; "9" -Viva).
On April 2, 1992, defendant Del Rosario and ABS-CBN general manager, Eugenio Lopez III, met at
the Tamarind Grill Restaurant in Quezon City to discuss the package proposal of Viva. What
transpired in that lunch meeting is the subject of conflicting versions. Mr. Lopez testified that he and
Mr. Del Rosario allegedly agreed that ABS-CRN was granted exclusive film rights to fourteen (14)
films for a total consideration of P36 million; that he allegedly put this agreement as to the price and
number of films in a "napkin'' and signed it and gave it to Mr. Del Rosario (Exh. D; TSN, pp. 24-26,
77-78, June 8, 1992). On the other hand, Del Rosario denied having made any agreement with
Lopez regarding the 14 Viva films; denied the existence of a napkin in which Lopez wrote something;
and insisted that what he and Lopez discussed at the lunch meeting was Viva's film package offer of
104 films (52 originals and 52 re-runs) for a total price of P60 million. Mr. Lopez promising [sic]to
make a counter proposal which came in the form of a proposal contract Annex "C" of the complaint
(Exh. "1"- Viva; Exh. "C" - ABS-CBN).
On April 06, 1992, Del Rosario and Mr. Graciano Gozon of RBS Senior vice-president for Finance
discussed the terms and conditions of Viva's offer to sell the 104 films, after the rejection of the same
package by ABS-CBN.
On April 07, 1992, defendant Del Rosario received through his secretary, a handwritten note from
Ms. Concio, (Exh. "5" - Viva), which reads: "Here's the draft of the contract. I hope you find
everything in order," to which was attached a draft exhibition agreement (Exh. "C''- ABS-CBN; Exh.
"9" - Viva, p. 3) a counter-proposal covering 53 films, 52 of which came from the list sent by
defendant Del Rosario and one film was added by Ms. Concio, for a consideration of P35 million.
Exhibit "C" provides that ABS-CBN is granted films right to 53 films and contains a right of first
refusal to "1992 Viva Films." The said counter proposal was however rejected by Viva's Board of
Directors [in the] evening of the same day, April 7, 1992, as Viva would not sell anything less than
the package of 104 films for P60 million pesos (Exh. "9" - Viva), and such rejection was relayed to
Ms. Concio.
On April 29, 1992, after the rejection of ABS-CBN and following several negotiations and meetings
defendant Del Rosario and Viva's President Teresita Cruz, in consideration of P60 million, signed a
letter of agreement dated April 24, 1992. granting RBS the exclusive right to air 104 Viva-produced
and/or acquired films (Exh. "7-A" - RBS; Exh. "4" - RBS) including the fourteen (14) films subject of
the present case.
4

On 27 May 1992, ABS-CBN filed before the RTC a complaint for specific performance with a prayer for a writ of
preliminary injunction and/or temporary restraining order against private respondents Republic Broadcasting
Corporation
5
(hereafter RBS ), Viva Production (hereafter VIVA), and Vicente Del Rosario. The complaint was
docketed as Civil Case No. Q-92-12309.
On 27 May 1992, RTC issued a temporary restraining order
6
enjoining private respondents from proceeding with the
airing, broadcasting, and televising of the fourteen VIVA films subject of the controversy, starting with the film Maging
Sino Ka Man, which was scheduled to be shown on private respondents RBS' channel 7 at seven o'clock in the
evening of said date.
On 17 June 1992, after appropriate proceedings, the RTC issued an
order
7
directing the issuance of a writ of preliminary injunction upon ABS-CBN's posting of P35 million bond. ABS-
CBN moved for the reduction of the bond,
8
while private respondents moved for reconsideration of the order and
offered to put up a counterbound.
9

In the meantime, private respondents filed separate answers with counterclaim.
10
RBS also set up a cross-claim
against VIVA..
On 3 August 1992, the RTC issued an order
11
dissolving the writ of preliminary injunction upon the posting by RBS
of a P30 million counterbond to answer for whatever damages ABS-CBN might suffer by virtue of such dissolution.
However, it reduced petitioner's injunction bond to P15 million as a condition precedent for the reinstatement of the
writ of preliminary injunction should private respondents be unable to post a counterbond.
At the pre-trial
12
on 6 August 1992, the parties, upon suggestion of the court, agreed to explore the possibility of an
amicable settlement. In the meantime, RBS prayed for and was granted reasonable time within which to put up a
P30 million counterbond in the event that no settlement would be reached.
As the parties failed to enter into an amicable settlement RBS posted on 1 October 1992 a counterbond, which the
RTC approved in its Order of 15 October 1992.
13

On 19 October 1992, ABS-CBN filed a motion for reconsideration
14
of the 3 August and 15 October 1992 Orders,
which RBS opposed.
15

On 29 October 1992, the RTC conducted a pre-trial.
16

Pending resolution of its motion for reconsideration, ABS-CBN filed with the Court of Appeals a petition
17
challenging
the RTC's Orders of 3 August and 15 October 1992 and praying for the issuance of a writ of preliminary injunction to
enjoin the RTC from enforcing said orders. The case was docketed as CA-G.R. SP No. 29300.
On 3 November 1992, the Court of Appeals issued a temporary restraining order
18
to enjoin the airing, broadcasting,
and televising of any or all of the films involved in the controversy.
On 18 December 1992, the Court of Appeals promulgated a decision
19
dismissing the petition in CA -G.R. No.
29300 for being premature. ABS-CBN challenged the dismissal in a petition for review filed with this Court on 19
January 1993, which was docketed as G.R. No. 108363.
In the meantime the RTC received the evidence for the parties in Civil Case No. Q-192-1209. Thereafter, on 28 April
1993, it rendered a decision
20
in favor of RBS and VIVA and against ABS-CBN disposing as follows:
WHEREFORE, under cool reflection and prescinding from the foregoing, judgments is rendered in
favor of defendants and against the plaintiff.
(1) The complaint is hereby dismissed;
(2) Plaintiff ABS-CBN is ordered to pay defendant RBS the following:
a) P107,727.00, the amount of premium paid by RBS to the surety
which issued defendant RBS's bond to lift the injunction;
b) P191,843.00 for the amount of print advertisement for "Maging
Sino Ka Man" in various newspapers;
c) Attorney's fees in the amount of P1 million;
d) P5 million as and by way of moral damages;
e) P5 million as and by way of exemplary damages;
(3) For defendant VIVA, plaintiff ABS-CBN is ordered to pay P212,000.00 by way of
reasonable attorney's fees.
(4) The cross-claim of defendant RBS against defendant VIVA is dismissed.
(5) Plaintiff to pay the costs.
According to the RTC, there was no meeting of minds on the price and terms of the offer. The alleged agreement
between Lopez III and Del Rosario was subject to the approval of the VIVA Board of Directors, and said agreement
was disapproved during the meeting of the Board on 7 April 1992. Hence, there was no basis for ABS-CBN's
demand that VIVA signed the 1992 Film Exhibition Agreement. Furthermore, the right of first refusal under the 1990
Film Exhibition Agreement had previously been exercised per Ms. Concio's letter to Del Rosario ticking off ten titles
acceptable to them, which would have made the 1992 agreement an entirely new contract.
On 21 June 1993, this Court denied
21
ABS-CBN's petition for review in G.R. No. 108363, as no reversible error was
committed by the Court of Appeals in its challenged decision and the case had "become moot and academic in view
of the dismissal of the main action by the court a quo in its decision" of 28 April 1993.
Aggrieved by the RTC's decision, ABS-CBN appealed to the Court of Appeals claiming that there was a perfected
contract between ABS-CBN and VIVA granting ABS-CBN the exclusive right to exhibit the subject films. Private
respondents VIVA and Del Rosario also appealed seeking moral and exemplary damages and additional attorney's
fees.
In its decision of 31 October 1996, the Court of Appeals agreed with the RTC that the contract between ABS-CBN
and VIVA had not been perfected, absent the approval by the VIVA Board of Directors of whatever Del Rosario, it's
agent, might have agreed with Lopez III. The appellate court did not even believe ABS-CBN's evidence that Lopez III
actually wrote down such an agreement on a "napkin," as the same was never produced in court. It likewise rejected
ABS-CBN's insistence on its right of first refusal and ratiocinated as follows:
As regards the matter of right of first refusal, it may be true that a Film Exhibition Agreement was
entered into between Appellant ABS-CBN and appellant VIVA under Exhibit "A" in 1990, and that
parag. 1.4 thereof provides:
1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) VIVA
films for TV telecast under such terms as may be agreed upon by the parties hereto,
provided, however, that such right shall be exercised by ABS-CBN within a period of
fifteen (15) days from the actual offer in writing (Records, p. 14).
[H]owever, it is very clear that said right of first refusal in favor of ABS-CBN shall still be subject to
such terms as may be agreed upon by the parties thereto, and that the said right shall be exercised
by ABS-CBN within fifteen (15) days from the actual offer in writing.
Said parag. 1.4 of the agreement Exhibit "A" on the right of first refusal did not fix the price of the film
right to the twenty-four (24) films, nor did it specify the terms thereof. The same are still left to be
agreed upon by the parties.
In the instant case, ABS-CBN's letter of rejection Exhibit 3 (Records, p. 89) stated that it can only tick
off ten (10) films, and the draft contract Exhibit "C" accepted only fourteen (14) films, while parag.
1.4 of Exhibit "A'' speaks of the next twenty-four (24) films.
The offer of V1VA was sometime in December 1991 (Exhibits 2, 2-A. 2-B; Records, pp. 86-88;
Decision, p. 11, Records, p. 1150), when the first list of VIVA films was sent by Mr. Del Rosario to
ABS-CBN. The Vice President of ABS-CBN, Ms. Charo Santos-Concio, sent a letter dated January
6, 1992 (Exhibit 3, Records, p. 89) where ABS-CBN exercised its right of refusal by rejecting the
offer of VIVA.. As aptly observed by the trial court, with the said letter of Mrs. Concio of January 6,
1992, ABS-CBN had lost its right of first refusal. And even if We reckon the fifteen (15) day period
from February 27, 1992 (Exhibit 4 to 4-C) when another list was sent to ABS-CBN after the letter of
Mrs. Concio, still the fifteen (15) day period within which ABS-CBN shall exercise its right of first
refusal has already expired.
22

Accordingly, respondent court sustained the award of actual damages consisting in the cost of print advertisements
and the premium payments for the counterbond, there being adequate proof of the pecuniary loss which RBS had
suffered as a result of the filing of the complaint by ABS-CBN. As to the award of moral damages, the Court of
Appeals found reasonable basis therefor, holding that RBS's reputation was debased by the filing of the complaint in
Civil Case No. Q-92-12309 and by the non-showing of the film "Maging Sino Ka Man." Respondent court also held
that exemplary damages were correctly imposed by way of example or correction for the public good in view of the
filing of the complaint despite petitioner's knowledge that the contract with VIVA had not been perfected, It also
upheld the award of attorney's fees, reasoning that with ABS-CBN's act of instituting Civil Case No, Q-92-1209, RBS
was "unnecessarily forced to litigate." The appellate court, however, reduced the awards of moral damages to P2
million, exemplary damages to P2 million, and attorney's fees to P500, 000.00.
On the other hand, respondent Court of Appeals denied VIVA and Del Rosario's appeal because it was "RBS and
not VIVA which was actually prejudiced when the complaint was filed by ABS-CBN."
Its motion for reconsideration having been denied, ABS-CBN filed the petition in this case, contending that the Court
of Appeals gravely erred in
I
. . . RULING THAT THERE WAS NO PERFECTED CONTRACT BETWEEN PETITIONER AND
PRIVATE RESPONDENT VIVA NOTWITHSTANDING PREPONDERANCE OF EVIDENCE
ADDUCED BY PETITIONER TO THE CONTRARY.
II
. . . IN AWARDING ACTUAL AND COMPENSATORY DAMAGES IN FAVOR OF PRIVATE
RESPONDENT RBS.
III
. . . IN AWARDING MORAL AND EXEMPLARY DAMAGES IN FAVOR OF PRIVATE
RESPONDENT RBS.
IV
. . . IN AWARDING ATTORNEY'S FEES IN FAVOR OF RBS.
ABS-CBN claims that it had yet to fully exercise its right of first refusal over twenty-four titles under the 1990 Film
Exhibition Agreement, as it had chosen only ten titles from the first list. It insists that we give credence to Lopez's
testimony that he and Del Rosario met at the Tamarind Grill Restaurant, discussed the terms and conditions of the
second list (the 1992 Film Exhibition Agreement) and upon agreement thereon, wrote the same on a paper napkin. It
also asserts that the contract has already been effective, as the elements thereof, namely, consent, object, and
consideration were established. It then concludes that the Court of Appeals' pronouncements were not supported by
law and jurisprudence, as per our decision of 1 December 1995 in Limketkai Sons Milling, Inc. v. Court of
Appeals,
23
which cited Toyota Shaw, Inc. v. Court of Appeals,
24
Ang Yu Asuncion v. Court of
Appeals,
25
and Villonco Realty Company v. Bormaheco. Inc.
26

Anent the actual damages awarded to RBS, ABS-CBN disavows liability therefor. RBS spent for the premium on the
counterbond of its own volition in order to negate the injunction issued by the trial court after the parties had
ventilated their respective positions during the hearings for the purpose. The filing of the counterbond was an option
available to RBS, but it can hardly be argued that ABS-CBN compelled RBS to incur such expense. Besides, RBS
had another available option, i.e., move for the dissolution or the injunction; or if it was determined to put up a
counterbond, it could have presented a cash bond. Furthermore under Article 2203 of the Civil Code, the party
suffering loss or injury is also required to exercise the diligence of a good father of a family to minimize the damages
resulting from the act or omission. As regards the cost of print advertisements, RBS had not convincingly established
that this was a loss attributable to the non showing "Maging Sino Ka Man"; on the contrary, it was brought out during
trial that with or without the case or the injunction, RBS would have spent such an amount to generate interest in the
film.
ABS-CBN further contends that there was no clear basis for the awards of moral and exemplary damages. The
controversy involving ABS-CBN and RBS did not in any way originate from business transaction between them. The
claims for such damages did not arise from any contractual dealings or from specific acts committed by ABS-CBN
against RBS that may be characterized as wanton, fraudulent, or reckless; they arose by virtue only of the filing of
the complaint, An award of moral and exemplary damages is not warranted where the record is bereft of any proof
that a party acted maliciously or in bad faith in filing an action.
27
In any case, free resort to courts for redress of
wrongs is a matter of public policy. The law recognizes the right of every one to sue for that which he honestly
believes to be his right without fear of standing trial for damages where by lack of sufficient evidence, legal
technicalities, or a different interpretation of the laws on the matter, the case would lose ground.
28
One who makes
use of his own legal right does no injury.
29
If damage results front the filing of the complaint, it is damnum absque
injuria.
30
Besides, moral damages are generally not awarded in favor of a juridical person, unless it enjoys a good
reputation that was debased by the offending party resulting in social humiliation.
31

As regards the award of attorney's fees, ABS-CBN maintains that the same had no factual, legal, or equitable
justification. In sustaining the trial court's award, the Court of Appeals acted in clear disregard of the doctrines laid
down in Buan v. Camaganacan
32
that the text of the decision should state the reason why attorney's fees are being
awarded; otherwise, the award should be disallowed. Besides, no bad faith has been imputed on, much less proved
as having been committed by, ABS-CBN. It has been held that "where no sufficient showing of bad faith would be
reflected in a party' s persistence in a case other than an erroneous conviction of the righteousness of his cause,
attorney's fees shall not be recovered as cost."
33

On the other hand, RBS asserts that there was no perfected contract between ABS-CBN and VIVA absent any
meeting of minds between them regarding the object and consideration of the alleged contract. It affirms that the
ABS-CBN's claim of a right of first refusal was correctly rejected by the trial court. RBS insist the premium it had paid
for the counterbond constituted a pecuniary loss upon which it may recover. It was obliged to put up the
counterbound due to the injunction procured by ABS-CBN. Since the trial court found that ABS-CBN had no cause of
action or valid claim against RBS and, therefore not entitled to the writ of injunction, RBS could recover from ABS-
CBN the premium paid on the counterbond. Contrary to the claim of ABS-CBN, the cash bond would prove to be
more expensive, as the loss would be equivalent to the cost of money RBS would forego in case the P30 million
came from its funds or was borrowed from banks.
RBS likewise asserts that it was entitled to the cost of advertisements for the cancelled showing of the film "Maging
Sino Ka Man" because the print advertisements were put out to announce the showing on a particular day and hour
on Channel 7, i.e., in its entirety at one time, not a series to be shown on a periodic basis. Hence, the print
advertisement were good and relevant for the particular date showing, and since the film could not be shown on that
particular date and hour because of the injunction, the expenses for the advertisements had gone to waste.
As regards moral and exemplary damages, RBS asserts that ABS-CBN filed the case and secured injunctions purely
for the purpose of harassing and prejudicing RBS. Pursuant then to Article 19 and 21 of the Civil Code, ABS-CBN
must be held liable for such damages. Citing Tolentino,
34
damages may be awarded in cases of abuse of rights even
if the act done is not illicit and there is abuse of rights were plaintiff institutes and action purely for the purpose of
harassing or prejudicing the defendant.
In support of its stand that a juridical entity can recover moral and exemplary damages, private respondents
RBScited People v. Manero,
35
where it was stated that such entity may recover moral and exemplary damages if it
has a good reputation that is debased resulting in social humiliation. it then ratiocinates; thus:
There can be no doubt that RBS' reputation has been debased by ABS-CBN's acts in this case.
When RBS was not able to fulfill its commitment to the viewing public to show the film "Maging Sino
Ka Man" on the scheduled dates and times (and on two occasions that RBS advertised), it suffered
serious embarrassment and social humiliation. When the showing was canceled, late viewers called
up RBS' offices and subjected RBS to verbal abuse ("Announce kayo nang announce, hindi ninyo
naman ilalabas," "nanloloko yata kayo") (Exh. 3-RBS, par. 3). This alone was not something RBS
brought upon itself. it was exactly what ABS-CBN had planned to happen.
The amount of moral and exemplary damages cannot be said to be excessive. Two reasons justify
the amount of the award.
The first is that the humiliation suffered by RBS is national extent. RBS operations as a broadcasting
company is [sic] nationwide. Its clientele, like that of ABS-CBN, consists of those who own and
watch television. It is not an exaggeration to state, and it is a matter of judicial notice that almost
every other person in the country watches television. The humiliation suffered by RBS is multiplied
by the number of televiewers who had anticipated the showing of the film "Maging Sino Ka Man" on
May 28 and November 3, 1992 but did not see it owing to the cancellation. Added to this are the
advertisers who had placed commercial spots for the telecast and to whom RBS had a commitment
in consideration of the placement to show the film in the dates and times specified.
The second is that it is a competitor that caused RBS to suffer the humiliation. The humiliation and
injury are far greater in degree when caused by an entity whose ultimate business objective is to lure
customers (viewers in this case) away from the competition.
36

For their part, VIVA and Vicente del Rosario contend that the findings of fact of the trial court and the Court of
Appeals do not support ABS-CBN's claim that there was a perfected contract. Such factual findings can no longer be
disturbed in this petition for review under Rule 45, as only questions of law can be raised, not questions of fact. On
the issue of damages and attorneys fees, they adopted the arguments of RBS.
The key issues for our consideration are (1) whether there was a perfected contract between VIVA and ABS-CBN,
and (2) whether RBS is entitled to damages and attorney's fees. It may be noted that the award of attorney's fees of
P212,000 in favor of VIVA is not assigned as another error.
I.
The first issue should be resolved against ABS-CBN. A contract is a meeting of minds between two persons whereby
one binds himself to give something or to render some service to another
37
for a consideration. there is no contract
unless the following requisites concur: (1) consent of the contracting parties; (2) object certain which is the subject of
the contract; and (3) cause of the obligation, which is established.
38
A contract undergoes three stages:
(a) preparation, conception, or generation, which is the period of negotiation and bargaining, ending
at the moment of agreement of the parties;
(b) perfection or birth of the contract, which is the moment when the parties come to agree on the
terms of the contract; and
(c) consummation or death, which is the fulfillment or performance of the terms agreed upon in the
contract.
39

Contracts that are consensual in nature are perfected upon mere meeting of the minds, Once there is concurrence
between the offer and the acceptance upon the subject matter, consideration, and terms of payment a contract is
produced. The offer must be certain. To convert the offer into a contract, the acceptance must be absolute and must
not qualify the terms of the offer; it must be plain, unequivocal, unconditional, and without variance of any sort from
the proposal. A qualified acceptance, or one that involves a new proposal, constitutes a counter-offer and is a
rejection of the original offer. Consequently, when something is desired which is not exactly what is proposed in the
offer, such acceptance is not sufficient to generate consent because any modification or variation from the terms of
the offer annuls the offer.
40

When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at the Tamarind Grill on 2 April 1992 to discuss the
package of films, said package of 104 VIVA films was VIVA's offer to ABS-CBN to enter into a new Film Exhibition
Agreement. But ABS-CBN, sent, through Ms. Concio, a counter-proposal in the form of a draft contract proposing
exhibition of 53 films for a consideration of P35 million. This counter-proposal could be nothing less than the counter-
offer of Mr. Lopez during his conference with Del Rosario at Tamarind Grill Restaurant. Clearly, there was no
acceptance of VIVA's offer, for it was met by a counter-offer which substantially varied the terms of the offer.
ABS-CBN's reliance in Limketkai Sons Milling, Inc. v. Court of
Appeals
41
and Villonco Realty Company v. Bormaheco, Inc.,
42
is misplaced. In these cases, it was held that an
acceptance may contain a request for certain changes in the terms of the offer and yet be a binding acceptance as
long as "it is clear that the meaning of the acceptance is positively and unequivocally to accept the offer, whether
such request is granted or not." This ruling was, however, reversed in the resolution of 29 March 1996,
43
which ruled
that the acceptance of all offer must be unqualified and absolute, i.e., it "must be identical in all respects with that of
the offer so as to produce consent or meeting of the minds."
On the other hand, in Villonco, cited in Limketkai, the alleged changes in the revised counter-offer were not material
but merely clarificatory of what had previously been agreed upon. It cited the statement in Stuart v.Franklin Life
Insurance Co.
44
that "a vendor's change in a phrase of the offer to purchase, which change does not essentially
change the terms of the offer, does not amount to a rejection of the offer and the tender of a counter-
offer."
45
However, when any of the elements of the contract is modified upon acceptance, such alteration amounts to
a counter-offer.
In the case at bar, ABS-CBN made no unqualified acceptance of VIVA's offer. Hence, they underwent a period of
bargaining. ABS-CBN then formalized its counter-proposals or counter-offer in a draft contract, VIVA through its
Board of Directors, rejected such counter-offer, Even if it be conceded arguendo that Del Rosario had accepted the
counter-offer, the acceptance did not bind VIVA, as there was no proof whatsoever that Del Rosario had the specific
authority to do so.
Under Corporation Code,
46
unless otherwise provided by said Code, corporate powers, such as the power; to enter
into contracts; are exercised by the Board of Directors. However, the Board may delegate such powers to either an
executive committee or officials or contracted managers. The delegation, except for the executive committee, must
be for specific purposes,
47
Delegation to officers makes the latter agents of the corporation; accordingly, the general
rules of agency as to the bindings effects of their acts would
apply.
48
For such officers to be deemed fully clothed by the corporation to exercise a power of the Board, the latter
must specially authorize them to do so. That Del Rosario did not have the authority to accept ABS-CBN's counter-
offer was best evidenced by his submission of the draft contract to VIVA's Board of Directors for the latter's approval.
In any event, there was between Del Rosario and Lopez III no meeting of minds. The following findings of the trial
court are instructive:
A number of considerations militate against ABS-CBN's claim that a contract was perfected at that
lunch meeting on April 02, 1992 at the Tamarind Grill.
FIRST, Mr. Lopez claimed that what was agreed upon at the Tamarind Grill referred to the price and
the number of films, which he wrote on a napkin. However, Exhibit "C" contains numerous provisions
which, were not discussed at the Tamarind Grill, if Lopez testimony was to be believed nor could
they have been physically written on a napkin. There was even doubt as to whether it was a paper
napkin or a cloth napkin. In short what were written in Exhibit "C'' were not discussed, and therefore
could not have been agreed upon, by the parties. How then could this court compel the parties to
sign Exhibit "C" when the provisions thereof were not previously agreed upon?
SECOND, Mr. Lopez claimed that what was agreed upon as the subject matter of the contract was
14 films. The complaint in fact prays for delivery of 14 films. But Exhibit "C" mentions 53 films as its
subject matter. Which is which If Exhibits "C" reflected the true intent of the parties, then ABS-CBN's
claim for 14 films in its complaint is false or if what it alleged in the complaint is true, then Exhibit "C"
did not reflect what was agreed upon by the parties. This underscores the fact that there was no
meeting of the minds as to the subject matter of the contracts, so as to preclude perfection thereof.
For settled is the rule that there can be no contract where there is no object which is its subject
matter (Art. 1318, NCC).
THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit testimony (Exh. "D") states:
We were able to reach an agreement. VIVA gave us the exclusive license to show
these fourteen (14) films, and we agreed to pay Viva the amount of P16,050,000.00
as well as grant Viva commercial slots worth P19,950,000.00. We had already
earmarked this P16, 050,000.00.
which gives a total consideration of P36 million (P19,950,000.00 plus P16,050,000.00. equals
P36,000,000.00).
On cross-examination Mr. Lopez testified:
Q. What was written in this napkin?
A. The total price, the breakdown the known Viva movies, the 7 blockbuster movies
and the other 7 Viva movies because the price was broken down accordingly. The
none [sic] Viva and the seven other Viva movies and the sharing between the cash
portion and the concerned spot portion in the total amount of P35 million pesos.
Now, which is which? P36 million or P35 million? This weakens ABS-CBN's claim.
FOURTH. Mrs. Concio, testifying for ABS-CBN stated that she transmitted Exhibit "C" to Mr. Del
Rosario with a handwritten note, describing said Exhibit "C" as a "draft." (Exh. "5" - Viva; tsn pp. 23-
24 June 08, 1992). The said draft has a well defined meaning.
Since Exhibit "C" is only a draft, or a tentative, provisional or preparatory writing prepared for
discussion, the terms and conditions thereof could not have been previously agreed upon by ABS-
CBN and Viva Exhibit "C'' could not therefore legally bind Viva, not having agreed thereto. In fact,
Ms. Concio admitted that the terms and conditions embodied in Exhibit "C" were prepared by ABS-
CBN's lawyers and there was no discussion on said terms and conditions. . . .
As the parties had not yet discussed the proposed terms and conditions in Exhibit "C," and there
was no evidence whatsoever that Viva agreed to the terms and conditions thereof, said document
cannot be a binding contract. The fact that Viva refused to sign Exhibit "C" reveals only two [sic] well
that it did not agree on its terms and conditions, and this court has no authority to compel Viva to
agree thereto.
FIFTH. Mr. Lopez understand [sic] that what he and Mr. Del Rosario agreed upon at the Tamarind
Grill was only provisional, in the sense that it was subject to approval by the Board of Directors of
Viva. He testified:
Q. Now, Mr. Witness, and after that Tamarind meeting ... the second meeting
wherein you claimed that you have the meeting of the minds between you and Mr.
Vic del Rosario, what happened?
A. Vic Del Rosario was supposed to call us up and tell us specifically the result of
the discussion with the Board of Directors.
Q. And you are referring to the so-called agreement which you wrote in [sic] a piece
of paper?
A. Yes, sir.
Q. So, he was going to forward that to the board of Directors for approval?
A. Yes, sir. (Tsn, pp. 42-43, June 8, 1992)
Q. Did Mr. Del Rosario tell you that he will submit it to his Board for approval?
A. Yes, sir. (Tsn, p. 69, June 8, 1992).
The above testimony of Mr. Lopez shows beyond doubt that he knew Mr. Del Rosario had no
authority to bind Viva to a contract with ABS-CBN until and unless its Board of Directors approved it.
The complaint, in fact, alleges that Mr. Del Rosario "is the Executive Producer of defendant Viva"
which "is a corporation." (par. 2, complaint). As a mere agent of Viva, Del Rosario could not bind
Viva unless what he did is ratified by its Board of Directors. (Vicente vs. Geraldez, 52 SCRA
210; Arnold vs. Willets and Paterson, 44 Phil. 634). As a mere agent, recognized as such by plaintiff,
Del Rosario could not be held liable jointly and severally with Viva and his inclusion as party
defendant has no legal basis. (Salonga vs. Warner Barner [sic] , COLTA , 88 Phil. 125; Salmon vs.
Tan, 36 Phil. 556).
The testimony of Mr. Lopez and the allegations in the complaint are clear admissions that what was
supposed to have been agreed upon at the Tamarind Grill between Mr. Lopez and Del Rosario was
not a binding agreement. It is as it should be because corporate power to enter into a contract is
lodged in the Board of Directors. (Sec. 23, Corporation Code). Without such board approval by the
Viva board, whatever agreement Lopez and Del Rosario arrived at could not ripen into a valid
contract binding upon Viva (Yao Ka Sin Trading vs. Court of Appeals, 209 SCRA 763). The evidence
adduced shows that the Board of Directors of Viva rejected Exhibit "C" and insisted that the film
package for 140 films be maintained (Exh. "7-1" - Viva ).
49

The contention that ABS-CBN had yet to fully exercise its right of first refusal over twenty-four films under the 1990
Film Exhibition Agreement and that the meeting between Lopez and Del Rosario was a continuation of said previous
contract is untenable. As observed by the trial court, ABS-CBN right of first refusal had already been exercised when
Ms. Concio wrote to VIVA ticking off ten films, Thus:
[T]he subsequent negotiation with ABS-CBN two (2) months after this letter was sent, was for an
entirely different package. Ms. Concio herself admitted on cross-examination to having used or
exercised the right of first refusal. She stated that the list was not acceptable and was indeed not
accepted by ABS-CBN, (TSN, June 8, 1992, pp. 8-10). Even Mr. Lopez himself admitted that the
right of the first refusal may have been already exercised by Ms. Concio (as she had). (TSN, June 8,
1992, pp. 71-75). Del Rosario himself knew and understand [sic] that ABS-CBN has lost its rights of
the first refusal when his list of 36 titles were rejected (Tsn, June 9, 1992, pp. 10-11)
50

II
However, we find for ABS-CBN on the issue of damages. We shall first take up actual damages. Chapter 2, Title
XVIII, Book IV of the Civil Code is the specific law on actual or compensatory damages. Except as provided by law or
by stipulation, one is entitled to compensation for actual damages only for such pecuniary loss suffered by him as he
has duly proved.
51
The indemnification shall comprehend not only the value of the loss suffered, but also that of the
profits that the obligee failed to obtain.
52
In contracts and quasi-contracts the damages which may be awarded are
dependent on whether the obligor acted with good faith or otherwise, It case of good faith, the damages recoverable
are those which are the natural and probable consequences of the breach of the obligation and which the parties
have foreseen or could have reasonably foreseen at the time of the constitution of the obligation. If the obligor acted
with fraud, bad faith, malice, or wanton attitude, he shall be responsible for all damages which may be reasonably
attributed to the non-performance of the obligation.
53
In crimes and quasi-delicts, the defendant shall be liable for all
damages which are the natural and probable consequences of the act or omission complained of, whether or not
such damages has been foreseen or could have reasonably been foreseen by the defendant.
54

Actual damages may likewise be recovered for loss or impairment of earning capacity in cases of temporary or
permanent personal injury, or for injury to the plaintiff's business standing or commercial credit.
55

The claim of RBS for actual damages did not arise from contract, quasi-contract, delict, or quasi-delict. It arose from
the fact of filing of the complaint despite ABS-CBN's alleged knowledge of lack of cause of action. Thus paragraph
12 of RBS's Answer with Counterclaim and Cross-claim under the heading COUNTERCLAIM specifically alleges:
12. ABS-CBN filed the complaint knowing fully well that it has no cause of action RBS. As a result
thereof, RBS suffered actual damages in the amount of P6,621,195.32.
56

Needless to state the award of actual damages cannot be comprehended under the above law on actual damages.
RBS could only probably take refuge under Articles 19, 20, and 21 of the Civil Code, which read as follows:
Art. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith.
Art. 20. Every person who, contrary to law, wilfully or negligently causes damage to another, shall
indemnify the latter for tile same.
Art. 21. Any person who wilfully causes loss or injury to another in a manner that is contrary to
morals, good customs or public policy shall compensate the latter for the damage.
It may further be observed that in cases where a writ of preliminary injunction is issued, the damages which the
defendant may suffer by reason of the writ are recoverable from the injunctive bond.
57
In this case, ABS-CBN had
not yet filed the required bond; as a matter of fact, it asked for reduction of the bond and even went to the Court of
Appeals to challenge the order on the matter, Clearly then, it was not necessary for RBS to file a counterbond.
Hence, ABS-CBN cannot be held responsible for the premium RBS paid for the counterbond.
Neither could ABS-CBN be liable for the print advertisements for "Maging Sino Ka Man" for lack of sufficient legal
basis. The RTC issued a temporary restraining order and later, a writ of preliminary injunction on the basis of its
determination that there existed sufficient ground for the issuance thereof. Notably, the RTC did not dissolve the
injunction on the ground of lack of legal and factual basis, but because of the plea of RBS that it be allowed to put up
a counterbond.
As regards attorney's fees, the law is clear that in the absence of stipulation, attorney's fees may be recovered as
actual or compensatory damages under any of the circumstances provided for in Article 2208 of the Civil Code.
58

The general rule is that attorney's fees cannot be recovered as part of damages because of the policy that no
premium should be placed on the right to litigate.
59
They are not to be awarded every time a party wins a suit. The
power of the court to award attorney's fees under Article 2208 demands factual, legal, and equitable
justification.
60
Even when claimant is compelled to litigate with third persons or to incur expenses to protect his
rights, still attorney's fees may not be awarded where no sufficient showing of bad faith could be reflected in a party's
persistence in a case other than erroneous conviction of the righteousness of his cause.
61

As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book IV of the Civil Code. Article 2217 thereof
defines what are included in moral damages, while Article 2219 enumerates the cases where they may be
recovered, Article 2220 provides that moral damages may be recovered in breaches of contract where the defendant
acted fraudulently or in bad faith. RBS's claim for moral damages could possibly fall only under item (10) of Article
2219, thereof which reads:
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.
Moral damages are in the category of an award designed to compensate the claimant for actual injury suffered. and
not to impose a penalty on the wrongdoer.
62
The award is not meant to enrich the complainant at the expense of the
defendant, but to enable the injured party to obtain means, diversion, or amusements that will serve to obviate then
moral suffering he has undergone. It is aimed at the restoration, within the limits of the possible, of the spiritual status
quo ante, and should be proportionate to the suffering inflicted.
63
Trial courts must then guard against the award of
exorbitant damages; they should exercise balanced restrained and measured objectivity to avoid suspicion that it
was due to passion, prejudice, or corruption on the part of the trial court.
64

The award of moral damages cannot be granted in favor of a corporation because, being an artificial person and
having existence only in legal contemplation, it has no feelings, no emotions, no senses, It cannot, therefore,
experience physical suffering and mental anguish, which call be experienced only by one having a nervous
system.
65
The statement in People v. Manero
66
and Mambulao Lumber Co. v. PNB
67
that a corporation may
recover moral damages if it "has a good reputation that is debased, resulting in social humiliation" is an obiter dictum.
On this score alone the award for damages must be set aside, since RBS is a corporation.
The basic law on exemplary damages is Section 5, Chapter 3, Title XVIII, Book IV of the Civil Code. These are
imposed by way of example or correction for the public good, in addition to moral, temperate, liquidated or
compensatory damages.
68
They are recoverable in criminal cases as part of the civil liability when the crime was
committed with one or more aggravating circumstances;
69
in quasi-contracts, if the defendant acted with gross
negligence;
70
and in contracts and quasi-contracts, if the defendant acted in a wanton, fraudulent, reckless,
oppressive, or malevolent manner.
71

It may be reiterated that the claim of RBS against ABS-CBN is not based on contract, quasi-contract, delict, or quasi-
delict, Hence, the claims for moral and exemplary damages can only be based on Articles 19, 20, and 21 of the Civil
Code.
The elements of abuse of right under Article 19 are the following: (1) the existence of a legal right or duty, (2) which
is exercised in bad faith, and (3) for the sole intent of prejudicing or injuring another. Article 20 speaks of the general
sanction for all other provisions of law which do not especially provide for their own sanction; while Article 21 deals
with acts contra bonus mores, and has the following elements; (1) there is an act which is legal, (2) but which is
contrary to morals, good custom, public order, or public policy, and (3) and it is done with intent to injure.
72

Verily then, malice or bad faith is at the core of Articles 19, 20, and 21. Malice or bad faith implies a conscious and
intentional design to do a wrongful act for a dishonest purpose or moral obliquity.
73
Such must be substantiated by
evidence.
74

There is no adequate proof that ABS-CBN was inspired by malice or bad faith. It was honestly convinced of the
merits of its cause after it had undergone serious negotiations culminating in its formal submission of a draft contract.
Settled is the rule that the adverse result of an action does not per se make the action wrongful and subject the actor
to damages, for the law could not have meant to impose a penalty on the right to litigate. If damages result from a
person's exercise of a right, it is damnum absque injuria.
75

WHEREFORE, the instant petition is GRANTED. The challenged decision of the Court of Appeals in CA-G.R. CV
No, 44125 is hereby REVERSED except as to unappealed award of attorney's fees in favor of VIVA Productions,
Inc.1wphi1.nt
No pronouncement as to costs.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
By the Officers:
G.R. No. 129459 September 29, 1998
SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC., petitioner,
vs.
COURT OF APPEALS, MOTORICH SALES CORPORATION, NENITA LEE GRUENBERG, ACL DEVELOPMENT
CORP. and JNM REALTY AND DEVELOPMENT CORP., respondents.

PANGANIBAN, J .:
May corporate treasurer, by herself and without any authorization from he board of directors, validly sell a parcel of
land owned by the corporation?. May the veil of corporate fiction be pierced on the mere ground that almost all of the
shares of stock of the corporation are owned by said treasurer and her husband?
The Case
These questions are answered in the negative by this Court in resolving the Petition for Review on Certioraribefore
us, assailing the March 18, 1997 Decision
1
of the Court of Appeals
2
in CA GR CV No. 46801 which, in turn,
modified the July 18, 1994 Decision of the Regional Trial Court of Makati, Metro Manila, Branch 63
3
in Civil Case No.
89-3511. The RTC dismissed both the Complaint and the Counterclaim filed by the parties. On the other hand, the
Court of Appeals ruled:
WHEREFORE, premises considered, the appealed decision is AFFIRMED WITH MODIFICATION
ordering defendant-appellee Nenita Lee Gruenberg to REFUND or return to plaintiff-appellant the
downpayment of P100,000.00 which she received from plaintiff-appellant. There is no
pronouncement as to costs.
4

The petition also challenges the June 10, 1997 CA Resolution denying reconsideration.
5

The Facts
The facts as found by the Court of Appeals are as follows:
Plaintiff-appellant San Juan Structural and Steel Fabricators, Inc.'s amended complaint alleged that
on 14 February 1989, plaintiff-appellant entered into an agreement with defendant-appellee Motorich
Sales Corporation for the transfer to it of a parcel of land identified as Lot 30, Block 1 of the
Acropolis Greens Subdivision located in the District of Murphy, Quezon City. Metro Manila,
containing an area of Four Hundred Fourteen (414) square meters, covered by TCT No. (362909)
2876: that as stipulated in the Agreement of 14 February 1989, plaintiff-appellant paid the
downpayment in the sum of One Hundred Thousand (P100,000.00) Pesos, the balance to be paid
on or before March 2, 1989; that on March 1, 1989. Mr. Andres T. Co, president of plaintiff-appellant
corporation, wrote a letter to defendant-appellee Motorich Sales Corporation requesting for a
computation of the balance to be paid: that said letter was coursed through defendant-appellee's
broker. Linda Aduca, who wrote the computation of the balance: that on March 2, 1989, plaintiff-
appellant was ready with the amount corresponding to the balance, covered by Metrobank Cashier's
Check No. 004223, payable to defendant-appellee Motorich Sales Corporation; that plaintiff-
appellant and defendant-appellee Motorich Sales Corporation were supposed to meet in the office of
plaintiff-appellant but defendant-appellee's treasurer, Nenita Lee Gruenberg, did not appear; that
defendant-appellee Motorich Sales Corporation despite repeated demands and in utter disregard of
its commitments had refused to execute the Transfer of Rights/Deed of Assignment which is
necessary to transfer the certificate of title; that defendant ACL Development Corp. is impleaded as
a necessary party since Transfer Certificate of Title No. (362909) 2876 is still in the name of said
defendant; while defendant JNM Realty & Development Corp. is likewise impleaded as a necessary
party in view of the fact that it is the transferor of right in favor of defendant-appellee Motorich Sales
Corporation: that on April 6, 1989, defendant ACL Development Corporation and Motorich Sales
Corporation entered into a Deed of Absolute Sale whereby the former transferred to the latter the
subject property; that by reason of said transfer, the Registry of Deeds of Quezon City issued a new
title in the name of Motorich Sales Corporation, represented by defendant-appellee Nenita Lee
Gruenberg and Reynaldo L. Gruenberg, under Transfer Certificate of Title No. 3571; that as a result
of defendants-appellees Nenita Lee Gruenberg and Motorich Sales Corporation's bad faith in
refusing to execute a formal Transfer of Rights/Deed of Assignment, plaintiff-appellant suffered
moral and nominal damages which may be assessed against defendants-appellees in the sum of
Five Hundred Thousand (500,000.00) Pesos; that as a result of defendants-appellees Nenita Lee
Gruenberg and Motorich Sales Corporation's unjustified and unwarranted failure to execute the
required Transfer of Rights/Deed of Assignment or formal deed of sale in favor of plaintiff-appellant,
defendants-appellees should be assessed exemplary damages in the sum of One Hundred
Thousand (P100,000.00) Pesos; that by reason of defendants-appellees' bad faith in refusing to
execute a Transfer of Rights/Deed of Assignment in favor of plaintiff-appellant, the latter lost the
opportunity to construct a residential building in the sum of One Hundred Thousand (P100,000.00)
Pesos; and that as a consequence of defendants-appellees Nenita Lee Gruenberg and Motorich
Sales Corporation's bad faith in refusing to execute a deed of sale in favor of plaintiff-appellant, it
has been constrained to obtain the services of counsel at an agreed fee of One Hundred Thousand
(P100,000.00) Pesos plus appearance fee for every appearance in court hearings.
In its answer, defendants-appellees Motorich Sales Corporation and Nenita Lee Gruenberg
interposed as affirmative defense that the President and Chairman of Motorich did not sign the
agreement adverted to in par. 3 of the amended complaint; that Mrs. Gruenberg's signature on the
agreement (ref: par. 3 of Amended Complaint) is inadequate to bind Motorich. The other signature,
that of Mr. Reynaldo Gruenberg, President and Chairman of Motorich, is required: that plaintiff knew
this from the very beginning as it was presented a copy of the Transfer of Rights (Annex B of
amended complaint) at the time the Agreement (Annex B of amended complaint) was signed; that
plaintiff-appellant itself drafted the Agreement and insisted that Mrs. Gruenberg accept the
P100,000.00 as earnest money; that granting, without admitting, the enforceability of the agreement,
plaintiff-appellant nonetheless failed to pay in legal tender within the stipulated period (up to March
2, 1989); that it was the understanding between Mrs. Gruenberg and plaintiff-appellant that the
Transfer of Rights/Deed of Assignment will be signed only upon receipt of cash payment; thus they
agreed that if the payment be in check, they will meet at a bank designated by plaintiff-appellant
where they will encash the check and sign the Transfer of Rights/Deed. However, plaintiff-appellant
informed Mrs. Gruenberg of the alleged availability of the check, by phone, only after banking hours.
On the basis of the evidence, the court a quo rendered the judgment appealed from[,] dismissing
plaintiff-appellant's complaint, ruling that:
The issue to be resolved is: whether plaintiff had the right to compel defendants to
execute a deed of absolute sale in accordance with the agreement of February 14,
1989: and if so, whether plaintiff is entitled to damage.
As to the first question, there is no evidence to show that defendant Nenita Lee
Gruenberg was indeed authorized by defendant corporation. Motorich Sales, to
dispose of that property covered by T.C.T. No. (362909) 2876. Since the property is
clearly owned by the corporation. Motorich Sales, then its disposition should be
governed by the requirement laid down in Sec. 40. of the Corporation Code of the
Philippines, to wit:
Sec. 40, Sale or other disposition of assets. Subject to the
provisions of existing laws on illegal combination and monopolies, a
corporation may by a majority vote of its board of directors . . . sell,
lease, exchange, mortgage, pledge or otherwise dispose of all or
substantially all of its property and assets including its goodwill . . .
when authorized by the vote of the stockholders representing at
least two third (2/3) of the outstanding capital stock . . .
No such vote was obtained by defendant Nenita Lee Gruenberg for that proposed
sale[;] neither was there evidence to show that the supposed transaction was
ratified by the corporation. Plaintiff should have been on the look out under these
circumstances. More so, plaintiff himself [owns] several corporations (tsn dated
August 16, 1993, p. 3) which makes him knowledgeable on corporation matters.
Regarding the question of damages, the Court likewise, does not find substantial
evidence to hold defendant Nenita Lee Gruenberg liable considering that she did not
in anyway misrepresent herself to be authorized by the corporation to sell the
property to plaintiff (tsn dated September 27, 1991, p. 8).
In the light of the foregoing, the Court hereby renders judgment DISMISSING the
complaint at instance for lack of merit.
"Defendants" counterclaim is also DISMISSED for lack of basis. (Decision, pp. 7-
8; Rollo, pp. 34-35)
For clarity, the Agreement dated February 14, 1989 is reproduced hereunder:
AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This Agreement, made and entered into by and between:
MOTORICH SALES CORPORATION, a corporation duly organized and existing
under and by virtue of Philippine Laws, with principal office address at 5510 South
Super Hi-way cor. Balderama St., Pio del Pilar. Makati, Metro Manila, represented
herein by its Treasurer, NENITA LEE GRUENBERG, hereinafter referred to as the
TRANSFEROR;
and
SAN JUAN STRUCTURAL & STEEL FABRICATORS, a corporation duly organized
and existing under and by virtue of the laws of the Philippines, with principal office
address at Sumulong Highway, Barrio Mambungan, Antipolo, Rizal, represented
herein by its President, ANDRES T. CO, hereinafter referred to as the
TRANSFEREE.
WITNESSETH, That:
WHEREAS, the TRANSFEROR is the owner of a parcel of land identified as Lot 30 Block 1 of the
ACROPOLIS GREENS SUBDIVISION located at the District of Murphy, Quezon City, Metro Manila,
containing an area of FOUR HUNDRED FOURTEEN (414) SQUARE METERS, covered by a
TRANSFER OF RIGHTS between JNM Realty & Dev. Corp. as the Transferor and Motorich Sales
Corp. as the Transferee;
NOW, THEREFORE, for and in consideration of the foregoing premises, the parties have agreed as
follows:
1. That the purchase price shall be at FIVE THOUSAND TWO HUNDRED PESOS
(P5,200.00) per square meter; subject to the following terms:
a. Earnest money amounting to ONE HUNDRED THOUSAND
PESOS (P100,000.00), will be paid upon the execution of this
agreement and shall form part of the total purchase price;
b. Balance shall be payable on or before March 2, 1989;
2. That the monthly amortization for the month of February 1989 shall be for the
account of the Transferor; and that the monthly amortization starting March 21, 1989
shall be for the account of the Transferee;
The transferor warrants that he [sic] is the lawful owner of the above-described property and that
there [are] no existing liens and/or encumbrances of whatsoever nature;
In case of failure by the Transferee to pay the balance on the date specified on 1, (b), the earnest
money shall be forfeited in favor of the Transferor.
That upon full payment of the balance, the TRANSFEROR agrees to execute a TRANSFER OF
RIGHTS/DEED OF ASSIGNMENT in favor of the TRANSFEREE.
IN WITNESS WHEREOF, the parties have hereunto set their hands this 14th day of February, 1989
at Greenhills, San Juan, Metro Manila, Philippines.
MOTORICH SALES CORPORATION SAN JUAN STRUCTURAL & STEEL FABRICATORS
TRANSFEROR TRANSFEREE
[SGD.] [SGD.]
By. NENITA LEE GRUENBERG By: ANDRES T. CO
Treasurer President
Signed In the presence of:
[SGD.] [SGD.]

6

In its recourse before the Court of Appeals, petitioner insisted:
1. Appellant is entitled to compel the appellees to execute a Deed of Absolute Sale
in accordance with the Agreement of February 14, 1989,
2. Plaintiff is entitled to damages.
7

As stated earlier, the Court of Appeals debunked petitioner's arguments and affirmed the Decision of the RTC with
the modification that Respondent Nenita Lee Gruenberg was ordered to refund P100,000 to petitioner, the amount
remitted as "downpayment" or "earnest money." Hence, this petition before us.
8

The Issues
Before this Court, petitioner raises the following issues:
I. Whether or not the doctrine of piercing the veil of corporate fiction is applicable in
the instant case
II. Whether or not the appellate court may consider matters which the parties failed
to raise in the lower court
III. Whether or not there is a valid and enforceable contract between the petitioner
and the respondent corporation
IV. Whether or not the Court of Appeals erred in holding that there is a valid
correction/substitution of answer in the transcript of stenographic note[s].
V. Whether or not respondents are liable for damages and attorney's fees
9

The Court synthesized the foregoing and will thus discuss them seriatim as follows:
1. Was there a valid contract of sale between petitioner and Motorich?
2. May the doctrine of piercing the veil of corporate fiction be applied to Motorich?
3. Is the alleged alteration of Gruenberg's testimony as recorded in the transcript of
stenographic notes material to the disposition of this case?
4. Are respondents liable for damages and attorney's fees?
The Court's Ruling
The petition is devoid of merit.
First Issue: Validity of Agreement
Petitioner San Juan Structural and Steel Fabricators, Inc. alleges that on February 14, 1989, it entered through its
president, Andres Co, into the disputed Agreement with Respondent Motorich Sales Corporation, which was in turn
allegedly represented by its treasurer, Nenita Lee Gruenberg. Petitioner insists that "[w]hen Gruenberg and Co
affixed their signatures on the contract they both consented to be bound by the terms thereof." Ergo, petitioner
contends that the contract is binding on the two corporations. We do not agree.
True, Gruenberg and Co signed on February 14, 1989, the Agreement, according to which a lot owned by Motorich
Sales Corporation was purportedly sold. Such contract, however, cannot bind Motorich, because it never authorized
or ratified such sale.
A corporation is a juridical person separate and distinct from its stockholders or members. Accordingly, the property
of the corporation is not the property of its stockholders or members and may not be sold by the stockholders or
members without express authorization from the corporation's board of directors.
10
Section 23 of BP 68, otherwise
known as the Corporation Code of the Philippines, provides;
Sec. 23. The Board of Directors or Trustees. Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors or
trustees to be elected from among the holders of stocks, or where there is no stock, from among the
members of the corporation, who shall hold office for one (1) year and until their successors are
elected and qualified.
Indubitably, a corporation may act only through its board of directors or, when authorized either by its bylaws or by its
board resolution, through its officers or agents in the normal course of business. The general principles of agency
govern the relation between the corporation and its officers or agents, subject to the articles of incorporation, bylaws,
or relevant provisions of law.
11
Thus, this Court has held that "a corporate officer or agent may represent and bind
the corporation in transactions with third persons to the extent that the authority to do so has been conferred upon
him, and this includes powers which have been intentionally conferred, and also such powers as, in the usual course
of the particular business, are incidental to, or may be implied from, the powers intentionally conferred, powers
added by custom and usage, as usually pertaining to the particular officer or agent, and such apparent powers as the
corporation has caused persons dealing with the officer or agent to believe that it has conferred."
12

Furthermore, the Court has also recognized the rule that "persons dealing with an assumed agent, whether the
assumed agency be a general or special one bound at their peril, if they would hold the principal liable, to ascertain
not only the fact of agency but also the nature and extent of authority, and in case either is controverted, the burden
of proof is upon them to establish it (Harry Keeler v. Rodriguez, 4 Phil. 19)."
13
Unless duly authorized, a treasurer,
whose powers are limited, cannot bind the corporation in a sale of its assets.
14

In the case at bar, Respondent Motorich categorically denies that it ever authorized Nenita Gruenberg, its treasurer,
to sell the subject parcel of land.
15
Consequently, petitioner had the burden of proving that Nenita Gruenberg was in
fact authorized to represent and bind Motorich in the transaction. Petitioner failed to discharge this burden. Its offer of
evidence before the trial court contained no proof of such authority.
16
It has not shown any provision of said
respondent's articles of incorporation, bylaws or board resolution to prove that Nenita Gruenberg possessed such
power.
That Nenita Gruenberg is the treasurer of Motorich does not free petitioner from the responsibility of ascertaining the
extent of her authority to represent the corporation. Petitioner cannot assume that she, by virtue of her position, was
authorized to sell the property of the corporation. Selling is obviously foreign to a corporate treasurer's function,
which generally has been described as "to receive and keep the funds of the corporation, and to disburse them in
accordance with the authority given him by the board or the properly authorized officers."
17

Neither was such real estate sale shown to be a normal business activity of Motorich. The primary purpose of
Motorich is marketing, distribution, export and import in relation to a general merchandising
business.
18
Unmistakably, its treasurer is not cloaked with actual or apparent authority to buy or sell real property, an
activity which falls way beyond the scope of her general authority.
Art. 1874 and 1878 of the Civil Code of the Philippines provides:
Art. 1874. When a sale of a piece of land or any interest therein is through an agent, the authority of
the latter shall be in writing: otherwise, the sale shall be void.
Art. 1878. Special powers of attorney are necessary in the following case:
xxx xxx xxx
(5) To enter any contract by which the ownership of an immovable is transmitted or acquired either
gratuitously or for a valuable consideration;
xxx xxx xxx.
Petitioner further contends that Respondent Motorich has ratified said contract of sale because of its "acceptance of
benefits," as evidenced by the receipt issued by Respondent Gruenberg.
19
Petitioner is clutching at straws.
As a general rule, the acts of corporate officers within the scope of their authority are binding on the corporation. But
when these officers exceed their authority, their actions "cannot bind the corporation, unless it has ratified such acts
or is estopped from disclaiming them."
20

In this case, there is a clear absence of proof that Motorich ever authorized Nenita Gruenberg, or made it appear to
any third person that she had the authority, to sell its land or to receive the earnest money. Neither was there any
proof that Motorich ratified, expressly or impliedly, the contract. Petitioner rests its argument on the receipt which,
however, does not prove the fact of ratification. The document is a hand-written one, not a corporate receipt, and it
bears only Nenita Gruenberg's signature. Certainly, this document alone does not prove that her acts were
authorized or ratified by Motorich.
Art. 1318 of the Civil Code lists the requisites of a valid and perfected contract: "(1) consent of the contracting
parties; (2) object certain which is the subject matter of the contract; (3) cause of the obligation which is established."
As found by the trial court
21
and affirmed by the Court of Appeals,
22
there is no evidence that Gruenberg was
authorized to enter into the contract of sale, or that the said contract was ratified by Motorich. This factual finding of
the two courts is binding on this Court.
23
As the consent of the seller was not obtained, no contract to bind the
obligor was perfected. Therefore, there can be no valid contract of sale between petitioner and Motorich.
Because Motorich had never given a written authorization to Respondent Gruenberg to sell its parcel of land, we
hold that the February 14, 1989 Agreement entered into by the latter with petitioner is void under Article 1874 of the
Civil Code. Being inexistent and void from the beginning, said contract cannot be ratified.
24

Second Issue:
Piercing the Corporate Veil Not Justified
Petitioner also argues that the veil of corporate fiction of Motorich should be pierced, because the latter is a close
corporation. Since "Spouses Reynaldo L. Gruenberg and Nenita R. Gruenberg owned all or almost all or 99.866% to
be accurate, of the subscribed capital stock"
25
of Motorich, petitioner argues that Gruenberg needed no
authorization from the board to enter into the subject contract.
26
It adds that, being solely owned by the Spouses
Gruenberg, the company can treated as a close corporation which can be bound by the acts of its principal
stockholder who needs no specific authority. The Court is not persuaded.
First, petitioner itself concedes having raised the issue belatedly,
27
not having done so during the trial, but only when
it filed its sur-rejoinder before the Court of Appeals.
28
Thus, this Court cannot entertain said issue at this late stage of
the proceedings. It is well-settled the points of law, theories and arguments not brought to the attention of the trial
court need not be, and ordinarily will not be, considered by a reviewing court, as they cannot be raised for the first
time on appeal.
29
Allowing petitioner to change horses in midstream, as it were, is to run roughshod over the basic
principles of fair play, justice and due process.
Second, even if the above mentioned argument were to be addressed at this time, the Court still finds no reason to
uphold it. True, one of the advantages of a corporate form of business organization is the limitation of an investor's
liability to the amount of the investment.
30
This feature flows from the legal theory that a corporate entity is separate
and distinct from its stockholders. However, the statutorily granted privilege of a corporate veil may be used only for
legitimate purposes.
31
On equitable considerations, the veil can be disregarded when it is utilized as a shield to
commit fraud, illegality or inequity; defeat public convenience; confuse legitimate issues; or serve as a mere alter ego
or business conduit of a person or an instrumentality, agency or adjunct of another corporation.
32

Thus, the Court has consistently ruled that "[w]hen the fiction is used as a means of perpetrating a fraud or an illegal
act or as vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or
perfection of a monopoly or generally the perpetration of knavery or crime, the veil with which the law covers and
isolates the corporation from the members or stockholders who compose it will be lifted to allow for its consideration
merely as an aggregation of individuals."
33

We stress that the corporate fiction should be set aside when it becomes a shield against liability for fraud, illegality
or inequity committed on third persons. The question of piercing the veil of corporate fiction is essentially, then, a
matter of proof. In the present case, however, the Court finds no reason to pierce the corporate veil of Respondent
Motorich. Petitioner utterly failed to establish that said corporation was formed, or that it is operated, for the purpose
of shielding any alleged fraudulent or illegal activities of its officers or stockholders; or that the said veil was used to
conceal fraud, illegality or inequity at the expense of third persons like petitioner.
Petitioner claims that Motorich is a close corporation. We rule that it is not. Section 96 of the Corporation Code
defines a close corporation as follows:
Sec. 96. Definition and Applicability of Title. A close corporation, within the meaning of this Code,
is one whose articles of incorporation provide that: (1) All of the corporation's issued stock of all
classes, exclusive of treasury shares, shall be held of record by not more than a specified number of
persons, not exceeding twenty (20); (2) All of the issued stock of all classes shall be subject to one
or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list
in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding
the foregoing, a corporation shall be deemed not a close corporation when at least two-thirds (2/3) of
its voting stock or voting rights is owned or controlled by another corporation which is not a close
corporation within the meaning of this Code. . . . .
The articles of incorporation
34
of Motorich Sales Corporation does not contain any provision stating that (1) the
number of stockholders shall not exceed 20, or (2) a preemption of shares is restricted in favor of any stockholder or
of the corporation, or (3) listing its stocks in any stock exchange or making a public offering of such stocks is
prohibited. From its articles, it is clear that Respondent Motorich is not a close corporation.
35
Motorich does not
become one either, just because Spouses Reynaldo and Nenita Gruenberg owned 99.866% of its subscribed capital
stock. The "[m]ere ownership by a single stockholder or by another corporation of all or capital stock of a corporation
is not of itself sufficient ground for disregarding the separate corporate personalities."
36
So, too, a narrow distribution
of ownership does not, by itself, make a close corporation.
Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of Appeals
37
wherein the Court ruled that ". . . petitioner
corporation is classified as a close corporation and, consequently, a board resolution authorizing the sale or
mortgage of the subject property is not necessary to bind the corporation for the action of its president."
38
But the
factual milieu in Dulay is not on all fours with the present case. In Dulay, the sale of real property was contracted by
the president of a close corporation with the knowledge and acquiescence of its board of directors.
39
In the present
case, Motorich is not a close corporation, as previously discussed, and the agreement was entered into by the
corporate treasurer without the knowledge of the board of directors.
The Court is not unaware that there are exceptional cases where "an action by a director, who singly is the
controlling stockholder, may be considered as a binding corporate act and a board action as nothing more than a
mere formality."
40
The present case, however, is not one of them.
As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg own "almost 99.866%" of Respondent
Motorich.
41
Since Nenita is not the sole controlling stockholder of Motorich, the aforementioned exception does not
apply. Grantingarguendo that the corporate veil of Motorich is to be disregarded, the subject parcel of land would
then be treated as conjugal property of Spouses Gruenberg, because the same was acquired during their marriage.
There being no indication that said spouses, who appear to have been married before the effectivity of the Family
Code, have agreed to a different property regime, their property relations would be governed by conjugal partnership
of gains.
42
As a consequence, Nenita Gruenberg could not have effected a sale of the subject lot because "[t]here is
no co-ownership between the spouses in the properties of the conjugal partnership of gains. Hence, neither spouse
can alienate in favor of another his or interest in the partnership or in any property belonging to it; neither spouse can
ask for a partition of the properties before the partnership has been legally dissolved."
43

Assuming further, for the sake of argument, that the spouses' property regime is the absolute community of property,
the sale would still be invalid. Under this regime, "alienation of community property must have the written consent of
the other spouse or he authority of the court without which the disposition or encumbrance is void."
44
Both
requirements are manifestly absent in the instant case.
Third Issue: Challenged Portion of TSN Immaterial
Petitioner calls our attention to the following excerpt of the transcript of stenographic notes (TSN):
Q Did you ever represent to Mr. Co that you were authorized by the corporation to
sell the property?
A Yes, sir.
45

Petitioner claims that the answer "Yes" was crossed out, and, in its place was written a "No" with an initial scribbled
above it.
46
This, however, is insufficient to prove that Nenita Gruenberg was authorized to represent Respondent
Motorich in the sale of its immovable property. Said excerpt be understood in the context of her whole testimony.
During her cross-examination. Respondent Gruenberg testified:
Q So, you signed in your capacity as the treasurer?
[A] Yes, sir.
Q Even then you kn[e]w all along that you [were] not authorized?
A Yes, sir.
Q You stated on direct examination that you did not represent that you were
authorized to sell the property?
A Yes, sir.
Q But you also did not say that you were not authorized to sell the property, you did
not tell that to Mr. Co, is that correct?
A That was not asked of me.
Q Yes, just answer it.
A I just told them that I was the treasurer of the corporation and it [was] also the
president who [was] also authorized to sign on behalf of the corporation.
Q You did not say that you were not authorized nor did you say that you were
authorized?
A Mr. Co was very interested to purchase the property and he offered to put up a
P100,000.00 earnest money at that time. That was our first meeting. 47
Clearly then, Nenita Gruenberg did not testify that Motorich had authorized her to sell its property. On the other hand,
her testimony demonstrates that the president of Petitioner Corporation, in his great desire to buy the property, threw
caution to the wind by offering and paying the earnest money without first verifying Gruenberg's authority to sell the
lot.
Fourth Issue:
Damages and Attorney's Fees
Finally, petitioner prays for damages and attorney's fees, alleging that "[i]n an utter display of malice and bad faith,
respondents attempted and succeeded in impressing on the trial court and [the] Court of Appeals that Gruenberg did
not represent herself as authorized by Respondent Motorich despite the receipt issued by the former specifically
indicating that she was signing on behalf of Motorich Sales Corporation. Respondent Motorich likewise acted in bad
faith when it claimed it did not authorize Respondent Gruenberg and that the contract [was] not binding, [insofar] as it
[was] concerned, despite receipt and enjoyment of the proceeds of Gruenberg's act."
48
Assuming that Respondent
Motorich was not a party to the alleged fraud, petitioner maintains that Respondent Gruenberg should be held liable
because she "acted fraudulently and in bad faith [in] representing herself as duly authorized by [R]espondent
[C]orporation."
49

As already stated, we sustain the findings of both the trial and the appellate courts that the foregoing allegations lack
factual bases. Hence, an award of damages or attorney's fees cannot be justified. The amount paid as "earnest
money" was not proven to have redounded to the benefit of Respondent Motorich. Petitioner claims that said amount
was deposited to the account of Respondent Motorich, because "it was deposited with the account of Aren
Commercial c/o Motorich Sales Corporation."
50
Respondent Gruenberg, however, disputes the allegations of
petitioner. She testified as follows:
Q You voluntarily accepted the P100,000.00, as a matter of fact, that was encashed,
the check was encashed.
A Yes. sir, the check was paid in my name and I deposit[ed] it.
Q In your account?
A Yes, sir.
51

In any event, Gruenberg offered to return the amount to petitioner ". . . since the sale did not push
through."
52

Moreover, we note that Andres Co is not a neophyte in the world of corporate business. He has been the president
of Petitioner Corporation for more than ten years and has also served as chief executive of two other corporate
entities.
53
Co cannot feign ignorance of the scope of the authority of a corporate treasurer such as Gruenberg.
Neither can he be oblivious to his duty to ascertain the scope of Gruenberg's authorization to enter into a contract to
sell a parcel of land belonging to Motorich.
Indeed, petitioner's claim of fraud and bad faith is unsubstantiated and fails to persuade the Court. Indubitably,
petitioner appears to be the victim of its own officer's negligence in entering into a contract with and paying an
unauthorized officer of another corporation.
As correctly ruled by the Court of Appeals, however, Nenita Gruenberg should be ordered to return to petitioner the
amount she received as earnest money, as "no one shall enrich himself at the expense of another."
54
a principle
embodied in Article 2154 of Civil Code.
55
Although there was no binding relation between them, petitioner paid
Gruenberg on the mistaken belief that she had the authority to sell the property of Motorich.
56
Article 2155 of Civil
Code provides that "[p]ayment by reason of a mi G.R. No. 108576 January 20, 1999
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE COURT OF APPEALS, COURT OF TAX APPEALS and A. SORIANO CORP., respondents.

MARTINEZ, J .:
Petitioner Commissioner of Internal Revenue (CIR) seeks the reversal of the decision of the Court of Appeals
(CA)
1
which affirmed the ruling of the Court of Tax Appeals (CTA)
2
that private respondent A. Soriano Corporation's
(hereinafter ANSCOR) redemption and exchange of the stocks of its foreign stockholders cannot be considered as
"essentially equivalent to a distribution of taxable dividends" under, Section 83(b) of the 1939 Internal Revenue Act.
3

The undisputed facts are as follows:
Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the United States, formed the corporation "A.
Soriano Y Cia", predecessor of ANSCOR, with a P1,000,000.00 capitalization divided into 10,000 common shares at
a par value of P100/share. ANSCOR is wholly owned and controlled by the family of Don Andres, who are all non-
resident aliens.
4
In 1937, Don Andres subscribed to 4,963 shares of the 5,000 shares originally issued.
5

On September 12, 1945, ANSCOR's authorized capital stock was increased to P2,500,000.00 divided into 25,000
common shares with the same par value of the additional 15,000 shares, only 10,000 was issued which were all
subscribed by Don Andres, after the other stockholders waived in favor of the former their pre-emptive rights to
subscribe to the new issues.
6
This increased his subscription to 14,963 common shares.
7
A month later,
8
Don
Andres transferred 1,250 shares each to his two sons, Jose and Andres, Jr., as their initial investments in
ANSCOR.
9
Both sons are foreigners.
10

By 1947, ANSCOR declared stock dividends. Other stock dividend declarations were made between 1949 and
December 20, 1963.
11
On December 30, 1964 Don Andres died. As of that date, the records revealed that he has a
total shareholdings of 185,154 shares
12
50,495 of which are original issues and the balance of 134.659 shares as
stock dividend declarations.
13
Correspondingly, one-half of that shareholdings or 92,577
14
shares were transferred
to his wife, Doa Carmen Soriano, as her conjugal share. The other half formed part of his estate.
15

A day after Don Andres died, ANSCOR increased its capital stock to P20M
16
and in 1966 further increased it to
P30M.
17
In the same year (December 1966), stock dividends worth 46,290 and 46,287 shares were respectively
received by the Don Andres estate
18
and Doa Carmen from ANSCOR. Hence, increasing their accumulated
shareholdings to 138,867 and 138,864
19
common shares each.
20

On December 28, 1967, Doa Carmen requested a ruling from the United States Internal Revenue Service (IRS),
inquiring if an exchange of common with preferred shares may be considered as a tax avoidance scheme
21
under
Section 367 of the 1954 U.S. Revenue Act.
22
By January 2, 1968, ANSCOR reclassified its existing 300,000
common shares into 150,000 common and 150,000 preferred shares.
23

In a letter-reply dated February 1968, the IRS opined that the exchange is only a recapitalization scheme and not tax
avoidance.
24
Consequently,
25
on March 31, 1968 Doa Carmen exchanged her whole 138,864 common shares for
138,860 of the newly reclassified preferred shares. The estate of Don Andres in turn, exchanged 11,140 of its
common shares, for the remaining 11,140 preferred shares, thus reducing its (the estate) common shares to
127,727.
26

On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares from the Don
Andres' estate. By November 1968, the Board further increased ANSCOR's capital stock to P75M divided into
150,000 preferred shares and 600,000 common shares.
27
About a year later, ANSCOR again redeemed 80,000
common shares from the Don Andres' estate,
28
further reducing the latter's common shareholdings to 19,727. As
stated in the Board Resolutions, ANSCOR's business purpose for both redemptions of stocks is to partially retire said
stocks as treasury shares in order to reduce the company's foreign exchange remittances in case cash dividends are
declared.
29

In 1973, after examining ANSCOR's books of account and records, Revenue examiners issued a report proposing
that ANSCOR be assessed for deficiency withholding tax-at-source, pursuant to Sections 53 and 54 of the 1939
Revenue Code,
30
for the year 1968 and the second quarter of 1969 based on the transactions of exchange 31 and
redemption of stocks.
31
The Bureau of Internal Revenue (BIR) made the corresponding assessments despite the
claim of ANSCOR that it availed of the tax amnesty under Presidential Decree
(P.D.) 23
32
which were amended by P.D.'s 67 and 157.
33
However, petitioner ruled that the invoked decrees do not
cover Sections 53 and 54 in relation to Article 83(b) of the 1939 Revenue Act under which ANSCOR was
assessed.
34
ANSCOR's subsequent protest on the assessments was denied in 1983 by petitioner.
35

Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax assessments on the redemptions
and exchange of stocks. In its decision, the Tax Court reversed petitioner's ruling, after finding sufficient evidence to
overcome the prima facie correctness of the questioned assessments.
36
In a petition for review the CA as
mentioned, affirmed the ruling of the CTA.
37
Hence, this petition.
The bone of contention is the interpretation and application of Section 83(b) of the 1939 Revenue Act
38
which
provides:
Sec. 83. Distribution of dividends or assets by corporations.
(b) Stock dividends A stock dividend representing the transfer of surplus to capital account shall
not be subject to tax. However, if a corporation cancels or redeems stock issued as a
dividend at such time and in such manner as to make the distribution and cancellation or
redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the
amount so distributed in redemption or cancellation of the stock shall be considered as taxable
income to the extent it represents a distribution of earnings or profits accumulated after March first,
nineteen hundred and thirteen. (Emphasis supplied)
Specifically, the issue is whether ANSCOR's redemption of stocks from its stockholder as well as the
exchange of common with preferred shares can be considered as "essentially equivalent to the distribution
of taxable dividend" making the proceeds thereof taxable under the provisions of the above-quoted law.
Petitioner contends that the exchange transaction a tantamount to "cancellation" under Section 83(b) making the
proceeds thereof taxable. It also argues that the Section applies to stock dividends which is the bulk of stocks that
ANSCOR redeemed. Further, petitioner claims that under the "net effect test," the estate of Don Andres gained from
the redemption. Accordingly, it was the duty of ANSCOR to withhold the tax-at-source arising from the two
transactions, pursuant to Section 53 and 54 of the 1939 Revenue Act.
39

ANSCOR, however, avers that it has no duty to withhold any tax either from the Don Andres estate or from Doa
Carmen based on the two transactions, because the same were done for legitimate business purposes which are (a)
to reduce its foreign exchange remittances in the event the company would declare cash dividends,
40
and to (b)
subsequently "filipinized" ownership of ANSCOR, as allegedly, envisioned by Don Andres.
41
It likewise invoked the
amnesty provisions of P.D. 67.
We must emphasize that the application of Sec. 83(b) depends on the special factual circumstances of each
case.
42
The findings of facts of a special court (CTA) exercising particular expertise on the subject of tax, generally
binds this Court,
43
considering that it is substantially similar to the findings of the CA which is the final arbiter of
questions of facts.
44
The issue in this case does not only deal with facts but whether the law applies to a particular
set of facts. Moreover, this Court is not necessarily bound by the lower courts' conclusions of law drawn from such
facts.
45

AMNESTY:
We will deal first with the issue of tax amnesty. Section 1 of P.D. 67
46
provides:
1. In all cases of voluntary disclosures of previously untaxed income and/or wealth such as earnings,
receipts, gifts, bequests or any other acquisitions from any source whatsoever which are taxable
under the National Internal Revenue Code, as amended, realized here or abroad by any taxpayer,
natural or judicial; the collection of all internal revenue taxes including the increments or penalties or
account of non-payment as well as all civil, criminal or administrative liabilities arising from or
incident to such disclosures under the National Internal Revenue Code, the Revised Penal Code, the
Anti-Graft and Corrupt Practices Act, the Revised Administrative Code, the Civil Service laws and
regulations, laws and regulations on Immigration and Deportation, or any other applicable law or
proclamation, are hereby condoned and, in lieu thereof, a tax of ten (10%) per centum on such
previously untaxed income or wealth, is hereby imposed, subject to the following conditions:
(conditions omitted) [Emphasis supplied].
The decree condones "the collection of all internal revenue taxes including the increments or penalties or
account of non-payment as well as all civil, criminal or administrative liable arising from or incident to"
(voluntary) disclosures under the NIRC of previously untaxed income and/or wealth "realized here or abroad
by any taxpayer, natural or juridical."
May the withholding agent, in such capacity, be deemed a taxpayer for it to avail of the amnesty? An income
taxpayer covers all persons who derive taxable income.
47
ANSCOR was assessed by petitioner for deficiency
withholding tax under Section 53 and 54 of the 1939 Code. As such, it is being held liable in its capacity as a
withholding agent and not its personality as a taxpayer.
In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no more
than an agent of the government for the collection of the tax
48
in order to ensure its payments;
49
the payer is the
taxpayer he is the person subject to tax impose by law;
50
and the payee is the taxing authority.
51
In other words,
the withholding agent is merely a tax collector, not a taxpayer. Under the withholding system, however, the agent-
payor becomes a payee by fiction of law. His (agent) liability is direct and independent from the taxpayer,
52
because
the income tax is still impose on and due from the latter. The agent is not liable for the tax as no wealth flowed into
him he earned no income. The Tax Code only makes the agent personally liable for the tax
53
arising from the
breach of its legal duty to withhold as distinguish from its duty to pay tax since:
the government's cause of action against the withholding is not for the collection of income tax, but
for the enforcement of the withholding provision of Section 53 of the Tax Code, compliance with
which is imposed on the withholding agent and not upon the taxpayer.
54

Not being a taxpayer, a withholding agent, like ANSCOR in this transaction is not protected by the amnesty
under the decree.
Codal provisions on withholding tax are mandatory and must be complied with by the withholding agent.
55
The
taxpayer should not answer for the non-performance by the withholding agent of its legal duty to withhold unless
there is collusion or bad faith. The former could not be deemed to have evaded the tax had the withholding agent
performed its duty. This could be the situation for which the amnesty decree was intended. Thus, to curtail tax
evasion and give tax evaders a chance to reform,
56
it was deemed administratively feasible to grant tax amnesty in
certain instances. In addition, a "tax amnesty, much like a tax exemption, is never favored nor presumed in law and if
granted by a statute, the term of the amnesty like that of a tax exemption must be construed strictly against the
taxpayer and liberally in favor of the taxing authority.
57
The rule on strictissimi juris equally applies.
58
So that, any
doubt in the application of an amnesty law/decree should be resolved in favor of the taxing authority.
Furthermore, ANSCOR's claim of amnesty cannot prosper. The implementing rules of P.D. 370
which expanded amnesty on previously untaxed income under P.D. 23 is very explicit, to wit:
Sec. 4. Cases not covered by amnesty. The following cases are not covered by the amnesty
subject of these regulations:
xxx xxx xxx
(2) Tax liabilities with or without assessments, on withholding tax at source provided under Section
53 and 54 of the National Internal Revenue Code, as amended;
59

ANSCOR was assessed under Sections 53 and 54 of the 1939 Tax Code. Thus, by specific provision of law,
it is not covered by the amnesty.
TAX ON STOCK DIVIDENDS
General Rule
Sec. 83(b) of the 1939 NIRC was taken from the Section 115(g)(1) of the U.S. Revenue Code of 1928.
60
It laid down
the general rule known as the proportionate test
61
wherein stock dividends once issued form part of the capital and,
thus, subject to income tax.
62
Specifically, the general rule states that:
A stock dividend representing the transfer of surplus to capital account shall not be subject to tax.
Having been derived from a foreign law, resort to the jurisprudence of its origin may shed light. Under the US
Revenue Code, this provision originally referred to "stock dividends" only, without any exception. Stock dividends,
strictly speaking, represent capital and do not constitute income to its
recipient.
63
So that the mere issuance thereof is not yet subject to income tax
64
as they are nothing but an
"enrichment through increase in value of capital
investment."
65
As capital, the stock dividends postpone the realization of profits because the "fund represented by
the new stock has been transferred from surplus to capital and no longer available for actual distribution."
66
Income
in tax law is "an amount of money coming to a person within a specified time, whether as payment for services,
interest, or profit from investment."
67
It means cash or its equivalent.
68
It is gain derived and severed from
capital,
69
from labor or from both combined
70
so that to tax a stock dividend would be to tax a capital increase
rather than the income.
71
In a loose sense, stock dividends issued by the corporation, are considered unrealized
gain, and cannot be subjected to income tax until that gain has been realized. Before the realization, stock dividends
are nothing but a representation of an interest in the corporate properties.
72
As capital, it is not yet subject to income
tax. It should be noted that capital and income are different. Capital is wealth or fund; whereas income is profit or
gain or the flow of wealth.
73
The determining factor for the imposition of income tax is whether any gain or profit was
derived from a transaction.
74

The Exception
However, if a corporation cancels or redeems stock issued as a dividend at such time and in such
manner as to make the distribution and cancellation or redemption, in whole or in part, essentially
equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or
cancellation of the stock shall be considered as taxable income to the extent it represents a
distribution of earnings or profits accumulated after March first, nineteen hundred and thirteen.
(Emphasis supplied).
In a response to the ruling of the American Supreme Court in the case of Eisner v. Macomber
75
(that pro rata stock
dividends are not taxable income), the exempting clause above quoted was added because provision corporation
found a loophole in the original provision. They resorted to devious means to circumvent the law and evade the tax.
Corporate earnings would be distributed under the guise of its initial capitalization by declaring the stock dividends
previously issued and later redeem said dividends by paying cash to the stockholder. This process of issuance-
redemption amounts to a distribution of taxable cash dividends which was lust delayed so as to escape the tax. It
becomes a convenient technical strategy to avoid the effects of taxation.
Thus, to plug the loophole the exempting clause was added. It provides that the redemption or cancellation of
stock dividends, depending on the "time" and "manner" it was made, is essentially equivalent to a distribution of
taxable dividends," making the proceeds thereof "taxable income" "to the extent it represents profits". The exception
was designed to prevent the issuance and cancellation or redemption of stock dividends, which is fundamentally not
taxable, from being made use of as a device for the actual distribution of cash dividends, which is taxable.
76
Thus,
the provision had the obvious purpose of preventing a corporation from avoiding dividend tax
treatment by distributing earnings to its shareholders in two transactions a pro rata stock dividend
followed by a pro rata redemption that would have the same economic consequences as a simple
dividend.
77

Although redemption and cancellation are generally considered capital transactions, as such. they are not
subject to tax. However, it does not necessarily mean that a shareholder may not realize a taxable gain from
such transactions.
78
Simply put, depending on the circumstances, the proceeds of redemption of stock
dividends are essentially distribution of cash dividends, which when paid becomes the absolute property of
the stockholder. Thereafter, the latter becomes the exclusive owner thereof and can exercise the freedom of
choice.
79
Having realized gain from that redemption, the income earner cannot escape income tax.
80

As qualified by the phrase "such time and in such manner," the exception was not intended to characterize as
taxable dividend every distribution of earnings arising from the redemption of stock dividend.
81
So that, whether the
amount distributed in the redemption should be treated as the equivalent of a "taxable dividend" is a question of
fact,
82
which is determinable on "the basis of the particular facts of the transaction in question.
83
No decisive test
can be used to determine the application of the exemption under Section 83(b). The use of the words "such manner"
and "essentially equivalent" negative any idea that a weighted formula can resolve a crucial issue Should the
distribution be treated as taxable dividend.
84
On this aspect, American courts developed certain recognized criteria,
which includes the following:
85

1) the presence or absence of real business purpose,
2) the amount of earnings and profits available for the declaration of a regular
dividends and the corporation's past record with respect to the declaration of
dividends,
3) the effect of the distribution, as compared with the declaration of regular dividend,
4) the lapse of time between issuance and redemption,
86

5) the presence of a substantial surplus
87
and a generous supply of cash which
invites suspicion as does a meager policy in relation both to current earnings and
accumulated surplus,
88

REDEMPTION AND CANCELLATION
For the exempting clause of Section, 83(b) to apply, it is indispensable that: (a) there is redemption or
cancellation; (b) the transaction involves stock dividends and (c) the "time and manner" of the transaction
makes it "essentially equivalent to a distribution of taxable dividends." Of these, the most important is the
third.
Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock
89
in exchange for
property, whether or not the acquired stock is cancelled, retired or held in the treasury.
90
Essentially, the corporation
gets back some of its stock, distributes cash or property to the shareholder in payment for the stock, and continues in
business as before. The redemption of stock dividends previously issued is used as a veil for the constructive
distribution of cash dividends. In the instant case, there is no dispute that ANSCOR redeemed shares of stocks from
a stockholder (Don Andres) twice (28,000 and 80,000 common shares). But where did the shares redeemed come
from? If its source is the original capital subscriptions upon establishment of the corporation or from initial capital
investment in an existing enterprise, its redemption to the concurrent value of acquisition may not invite the
application of Sec. 83(b) under the 1939 Tax Code, as it is not income but a mere return of capital. On the contrary, if
the redeemed shares are from stock dividend declarations other than as initial capital investment, the proceeds of
the redemption is additional wealth, for it is not merely a return of capital but a gain thereon.
It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable dividends. Here, it is
undisputed that at the time of the last redemption, the original common shares owned by the estate were only
25,247.5
91
This means that from the total of 108,000 shares redeemed from the estate, the balance of 82,752.5
(108,000 less 25,247.5) must have come from stock dividends. Besides, in the absence of evidence to the contrary,
the Tax Code presumes that every distribution of corporate property, in whole or in part, is made out of corporate
profits
92
such as stock dividends. The capital cannot be distributed in the form of redemption of stock dividends
without violating the trust fund doctrine wherein the capital stock, property and other assets of the corporation are
regarded as equity in trust for the payment of the corporate creditors.
93
Once capital, it is always capital.
94
That
doctrine was intended for the protection of corporate creditors.
95

With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to 3 years earlier. The time
alone that lapsed from the issuance to the redemption is not a sufficient indicator to determine taxability. It is a must
to consider the factual circumstances as to the manner of both the issuance and the redemption. The "time" element
is a factor to show a device to evade tax and the scheme of cancelling or redeeming the same shares is a method
usually adopted to accomplish the end sought.
96
Was this transaction used as a "continuing plan," "device" or
"artifice" to evade payment of tax? It is necessary to determine the "net effect" of the transaction between the
shareholder-income taxpayer and the acquiring (redeeming) corporation.
97
The "net effect" test is not evidence or
testimony to be considered; it is rather an inference to be drawn or a conclusion to be reached.
98
It is also important
to know whether the issuance of stock dividends was dictated by legitimate business reasons, the presence of which
might negate a tax evasion plan.
99

The issuance of stock dividends and its subsequent redemption must be separate, distinct, and not related, for the
redemption to be considered a legitimate tax scheme.
100
Redemption cannot be used as a cloak to distribute
corporate earnings.
101
Otherwise, the apparent intention to avoid tax becomes doubtful as the intention to evade
becomes manifest. It has been ruled that:
[A]n operation with no business or corporate purpose is a mere devise which put on the form of a
corporate reorganization as a disguise for concealing its real character, and the sole object and
accomplishment of which was the consummation of a preconceived plan, not to reorganize a
business or any part of a business, but to transfer a parcel of corporate shares to a stockholder.
102

Depending on each case, the exempting provision of Sec. 83(b) of the 1939 Code may not be applicable if the
redeemed shares were issued with bona fide business purpose,
103
which is judged after each and every step of the
transaction have been considered and the whole transaction does not amount to a tax evasion scheme.
ANSCOR invoked two reasons to justify the redemptions (1) the alleged "filipinization" program and (2) the
reduction of foreign exchange remittances in case cash dividends are declared. The Court is not concerned with the
wisdom of these purposes but on their relevance to the whole transaction which can be inferred from the outcome
thereof. Again, it is the "net effect rather than the motives and plans of the taxpayer or his corporation"
104
that is the
fundamental guide in administering Sec. 83(b). This tax provision is aimed at the result.
105
It also applies even if at
the time of the issuance of the stock dividend, there was no intention to redeem it as a means of distributing profit or
avoiding tax on dividends.
106
The existence of legitimate business purposes in support of the redemption of stock
dividends is immaterial in income taxation. It has no relevance in determining "dividend equivalence".
107
Such
purposes may be material only upon the issuance of the stock dividends. The test of taxability under the exempting
clause, when it provides "such time and manner" as would make the redemption "essentially equivalent to the
distribution of a taxable dividend", is whether the redemption resulted into a flow of wealth. If no wealth is realized
from the redemption, there may not be a dividend equivalence treatment. In the metaphor of Eisner v. Macomber,
income is not deemed "realize" until the fruit has fallen or been plucked from the tree.
The three elements in the imposition of income tax are: (1) there must be gain or and profit, (2) that the gain or profit
is realized or received, actually or constructively,
108
and (3) it is not exempted by law or treaty from income tax. Any
business purpose as to why or how the income was earned by the taxpayer is not a requirement. Income tax is
assessed on income received from any property, activity or service that produces the income because the Tax Code
stands as an indifferent neutral party on the matter of where income comes
from.
109

As stated above, the test of taxability under the exempting clause of Section 83(b) is, whether income was realized
through the redemption of stock dividends. The redemption converts into money the stock dividends which become a
realized profit or gain and consequently, the stockholder's separate property.
110
Profits derived from the capital
invested cannot escape income tax. As realized income, the proceeds of the redeemed stock dividends can be
reached by income taxation regardless of the existence of any business purpose for the redemption. Otherwise, to
rule that the said proceeds are exempt from income tax when the redemption is supported by legitimate business
reasons would defeat the very purpose of imposing tax on income. Such argument would open the door for income
earners not to pay tax so long as the person from whom the income was derived has legitimate business reasons. In
other words, the payment of tax under the exempting clause of Section 83(b) would be made to depend not on the
income of the taxpayer, but on the business purposes of a third party (the corporation herein) from whom the income
was earned. This is absurd, illogical and impractical considering that the Bureau of Internal Revenue (BIR) would be
pestered with instances in determining the legitimacy of business reasons that every income earner may interposed.
It is not administratively feasible and cannot therefore be allowed.
The ruling in the American cases cited and relied upon by ANSCOR that "the redeemed shares are the equivalent of
dividend only if the shares were not issued for genuine business purposes",
111
or the "redeemed shares have
been issued by a corporation bona fide"
112
bears no relevance in determining the non-taxability of the proceeds of
redemption ANSCOR, relying heavily and applying said cases, argued that so long as the redemption is supported
by valid corporate purposes the proceeds are not subject to tax.
113
The adoption by the courts below
114
of such
argument is misleading if not misplaced. A review of the cited American cases shows that the presence or absence
of "genuine business purposes" may be material with respect to the issuance or declaration of stock dividends but
not on its subsequent redemption. The issuance and the redemption of stocks are two different transactions.
Although the existence of legitimate corporate purposes may justify a corporation's acquisition of its own shares
under Section 41 of the Corporation Code,
115
such purposes cannot excuse the stockholder from the effects of
taxation arising from the redemption. If the issuance of stock dividends is part of a tax evasion plan and thus, without
legitimate business reasons, the redemption becomes suspicious which exempting clause. The substance of the
whole transaction, not its form, usually controls the tax consequences.
116

The two purposes invoked by ANSCOR, under the facts of this case are no excuse for its tax liability. First, the
alleged "filipinization" plan cannot be considered legitimate as it was not implemented until the BIR started making
assessments on the proceeds of the redemption. Such corporate plan was not stated in nor supported by any Board
Resolution but a mere afterthought interposed by the counsel of ANSCOR. Being a separate entity, the corporation
can act only through its Board of Directors.
117
The Board Resolutions authorizing the redemptions state only one
purpose reduction of foreign exchange remittances in case cash dividends are declared. Not even this purpose
can be given credence. Records show that despite the existence of enormous corporate profits no cash dividend
was ever declared by ANSCOR from 1945 until the BIR started making assessments in the early 1970's. Although a
corporation under certain exceptions, has the prerogative when to issue dividends, yet when no cash dividends was
issued for about three decades, this circumstance negates the legitimacy of ANSCOR's alleged purposes. Moreover,
to issue stock dividends is to increase the shareholdings of ANSCOR's foreign stockholders contrary to its
"filipinization" plan. This would also increase rather than reduce their need for foreign exchange remittances in case
of cash dividend declaration, considering that ANSCOR is a family corporation where the majority shares at the time
of redemptions were held by Don Andres' foreign heirs.
Secondly, assuming arguendo, that those business purposes are legitimate, the same cannot be a valid excuse for
the imposition of tax. Otherwise, the taxpayer's liability to pay income tax would be made to depend upon a third
person who did not earn the income being taxed. Furthermore, even if the said purposes support the redemption and
justify the issuance of stock dividends, the same has no bearing whatsoever on the imposition of the tax herein
assessed because the proceeds of the redemption are deemed taxable dividends since it was shown that income
was generated therefrom.
Thirdly, ANSCOR argued that to treat as "taxable dividend" the proceeds of the redeemed stock dividends would be
to impose on such stock an undisclosed lien and would be extremely unfair to intervening purchase, i.e. those who
buys the stock dividends after their issuance.
118
Such argument, however, bears no relevance in this case as no
intervening buyer is involved. And even if there is an intervening buyer, it is necessary to look into the factual milieu
of the case if income was realized from the transaction. Again, we reiterate that the dividend equivalence test
depends on such "time and manner" of the transaction and its net effect. The undisclosed lien
119
may be unfair to a
subsequent stock buyer who has no capital interest in the company. But the unfairness may not be true to an original
subscriber like Don Andres, who holds stock dividends as gains from his investments. The subsequent buyer who
buys stock dividends is investing capital. It just so happen that what he bought is stock dividends. The effect of its
(stock dividends) redemption from that subsequent buyer is merely to return his capital subscription, which is income
if redeemed from the original subscriber.
After considering the manner and the circumstances by which the issuance and redemption of stock dividends were
made, there is no other conclusion but that the proceeds thereof are essentially considered equivalent to a
distribution of taxable dividends. As "taxable dividend" under Section 83(b), it is part of the "entire income" subject to
tax under Section 22 in relation to Section 21
120
of the 1939 Code. Moreover, under Section 29(a) of said Code,
dividends are included in "gross income". As income, it is subject to income tax which is required to be withheld at
source. The 1997 Tax Code may have altered the situation but it does not change this disposition.
EXCHANGE OF COMMON WITH PREFERRED SHARES
121

Exchange is an act of taking or giving one thing for another involving
122
reciprocal transfer
123
and is generally
considered as a taxable transaction. The exchange of common stocks with preferred stocks, or preferred for
common or a combination of either for both, may not produce a recognized gain or loss, so long as the provisions of
Section 83(b) is not applicable. This is true in a trade between two (2) persons as well as a trade between a
stockholder and a corporation. In general, this trade must be parts of merger, transfer to controlled corporation,
corporate acquisitions or corporate reorganizations. No taxable gain or loss may be recognized on exchange of
property, stock or securities related to reorganizations.
124

Both the Tax Court and the Court of Appeals found that ANSCOR reclassified its shares into common and preferred,
and that parts of the common shares of the Don Andres estate and all of Doa Carmen's shares were exchanged for
the whole 150.000 preferred shares. Thereafter, both the Don Andres estate and Doa Carmen remained as
corporate subscribers except that their subscriptions now include preferred shares. There was no change in their
proportional interest after the exchange. There was no cash flow. Both stocks had the same par value. Under the
facts herein, any difference in their market value would be immaterial at the time of exchange because no income is
yet realized it was a mere corporate paper transaction. It would have been different, if the exchange transaction
resulted into a flow of wealth, in which case income tax may be imposed.
125

Reclassification of shares does not always bring any substantial alteration in the subscriber's proportional interest.
But the exchange is different there would be a shifting of the balance of stock features, like priority in dividend
declarations or absence of voting rights. Yet neither the reclassification nor exchange per se, yields realize income
for tax purposes. A common stock represents the residual ownership interest in the corporation. It is a basic class of
stock ordinarily and usually issued without extraordinary rights or privileges and entitles the shareholder to apro
rata division of profits.
126
Preferred stocks are those which entitle the shareholder to some priority on dividends and
asset distribution.
127

Both shares are part of the corporation's capital stock. Both stockholders are no different from ordinary investors who
take on the same investment risks. Preferred and common shareholders participate in the same venture, willing to
share in the profits and losses of the enterprise.
128
Moreover, under the doctrine of equality of shares all stocks
issued by the corporation are presumed equal with the same privileges and liabilities, provided that the Articles of
Incorporation is silent on such differences.
129

In this case, the exchange of shares, without more, produces no realized income to the subscriber. There is only a
modification of the subscriber's rights and privileges which is not a flow of wealth for tax purposes. The issue of
taxable dividend may arise only once a subscriber disposes of his entire interest and not when there is still
maintenance of proprietary interest.
130

WHEREFORE, premises considered, the decision of the Court of Appeals is MODIFIED in that ANSCOR's
redemption of 82,752.5 stock dividends is herein considered as essentially equivalent to a distribution of taxable
dividends for which it is LIABLE for the withholding tax-at-source. The decision is AFFIRMED in all other respects.
SO ORDERED.
stake in the construction or application of a difficult question of law may come within the scope of the preceding
article."
WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED.
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Trust Fund Doctrine:
G.R. No. 108576 January 20, 1999
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE COURT OF APPEALS, COURT OF TAX APPEALS and A. SORIANO CORP., respondents.

MARTINEZ, J .:
Petitioner Commissioner of Internal Revenue (CIR) seeks the reversal of the decision of the Court of Appeals
(CA)
1
which affirmed the ruling of the Court of Tax Appeals (CTA)
2
that private
respondent A. Soriano Corporation's (hereinafter ANSCOR) redemption and exchange
of the stocks of its foreign stockholders cannot be considered as "essentially
equivalent to a distribution of taxable dividends" under, Section 83(b) of the 1939
Internal Revenue Act.
3

The undisputed facts are as follows:
Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the United States, formed the
corporation "A. Soriano Y Cia", predecessor of ANSCOR, with a P1,000,000.00 capitalization divided into
10,000 common shares at a par value of P100/share. ANSCOR is wholly owned and controlled by the family of
Don Andres, who are all non-resident aliens.
4
In 1937, Don Andres subscribed to 4,963 shares
of the 5,000 shares originally issued.
5

On September 12, 1945, ANSCOR's authorized capital stock was increased to P2,500,000.00 divided into
25,000 common shares with the same par value of the additional 15,000 shares, only 10,000 was issued which
were all subscribed by Don Andres, after the other stockholders waived in favor of the former their pre-emptive
rights to subscribe to the new issues.
6
This increased his subscription to 14,963 common
shares.
7
A month later,
8
Don Andres transferred 1,250 shares each to his two sons,
Jose and Andres, Jr., as their initial investments in ANSCOR.
9
Both sons are
foreigners.
10

By 1947, ANSCOR declared stock dividends. Other stock dividend declarations were made between 1949 and
December 20, 1963.
11
On December 30, 1964 Don Andres died. As of that date, the
records revealed that he has a total shareholdings of 185,154 shares
12
50,495 of
which are original issues and the balance of 134.659 shares as stock dividend
declarations.
13
Correspondingly, one-half of that shareholdings or 92,577
14
shares were transferred to his wife,
Doa Carmen Soriano, as her conjugal share. The other half formed part of his
estate.
15

A day after Don Andres died, ANSCOR increased its capital stock to P20M
16
and in 1966 further
increased it to P30M.
17
In the same year (December 1966), stock dividends worth
46,290 and 46,287 shares were respectively received by the Don Andres estate
18
and
Doa Carmen from ANSCOR. Hence, increasing their accumulated shareholdings to
138,867 and 138,864
19
common shares each.
20

On December 28, 1967, Doa Carmen requested a ruling from the United States Internal Revenue Service
(IRS), inquiring if an exchange of common with preferred shares may be considered as a tax avoidance
scheme
21
under Section 367 of the 1954 U.S. Revenue Act.
22
By January 2, 1968,
ANSCOR reclassified its existing 300,000 common shares into 150,000 common and
150,000 preferred shares.
23

In a letter-reply dated February 1968, the IRS opined that the exchange is only a recapitalization scheme and
not tax avoidance.
24
Consequently,
25
on March 31, 1968 Doa Carmen exchanged her whole 138,864
common shares for 138,860 of the newly reclassified preferred shares. The estate of Don Andres in turn, exchanged
11,140 of its common shares, for the remaining 11,140 preferred shares, thus reducing its (the estate) common
shares to 127,727.
26

On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares from the Don
Andres' estate. By November 1968, the Board further increased ANSCOR's capital stock to P75M divided into
150,000 preferred shares and 600,000 common shares.
27
About a year later, ANSCOR again
redeemed 80,000 common shares from the Don Andres' estate,
28
further reducing the
latter's common shareholdings to 19,727. As stated in the Board Resolutions,
ANSCOR's business purpose for both redemptions of stocks is to partially retire said
stocks as treasury shares in order to reduce the company's foreign exchange
remittances in case cash dividends are declared.
29

In 1973, after examining ANSCOR's books of account and records, Revenue examiners issued a report
proposing that ANSCOR be assessed for deficiency withholding tax-at-source, pursuant to Sections 53 and 54
of the 1939 Revenue Code,
30
for the year 1968 and the second quarter of 1969 based on the transactions of exchange 31 and redemption of
stocks.
31
The Bureau of Internal Revenue (BIR) made the corresponding assessments
despite the claim of ANSCOR that it availed of the tax amnesty under Presidential
Decree
(P.D.) 23
32
which were amended by P.D.'s 67 and 157.
33
However, petitioner ruled that the invoked decrees do
not cover Sections 53 and 54 in relation to Article 83(b) of the 1939 Revenue Act under which ANSCOR was
assessed.
34
ANSCOR's subsequent protest on the assessments was denied in 1983 by
petitioner.
35

Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax assessments on the
redemptions and exchange of stocks. In its decision, the Tax Court reversed petitioner's ruling, after finding
sufficient evidence to overcome the prima facie correctness of the questioned assessments.
36
In a petition
for review the CA as mentioned, affirmed the ruling of the CTA.
37
Hence, this petition.
The bone of contention is the interpretation and application of Section 83(b) of the 1939 Revenue
Act
38
which provides:
Sec. 83. Distribution of dividends or assets by corporations.
(b) Stock dividends A stock dividend representing the transfer of surplus to capital account
shall not be subject to tax. However, if a corporation cancels or redeems stock issued as a
dividend at such time and in such manner as to make the distribution and cancellation or
redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend,
the amount so distributed in redemption or cancellation of the stock shall be considered
as taxable income to the extent it represents a distribution of earnings or profits accumulated
after March first, nineteen hundred and thirteen. (Emphasis supplied)
Specifically, the issue is whether ANSCOR's redemption of stocks from its stockholder as well as the
exchange of common with preferred shares can be considered as "essentially equivalent to the
distribution of taxable dividend" making the proceeds thereof taxable under the provisions of the above-
quoted law.
Petitioner contends that the exchange transaction a tantamount to "cancellation" under Section 83(b) making
the proceeds thereof taxable. It also argues that the Section applies to stock dividends which is the bulk of
stocks that ANSCOR redeemed. Further, petitioner claims that under the "net effect test," the estate of Don
Andres gained from the redemption. Accordingly, it was the duty of ANSCOR to withhold the tax-at-source
arising from the two transactions, pursuant to Section 53 and 54 of the 1939 Revenue Act.
39

ANSCOR, however, avers that it has no duty to withhold any tax either from the Don Andres estate or from
Doa Carmen based on the two transactions, because the same were done for legitimate business purposes
which are (a) to reduce its foreign exchange remittances in the event the company would declare cash
dividends,
40
and to (b) subsequently "filipinized" ownership of ANSCOR, as allegedly,
envisioned by Don Andres.
41
It likewise invoked the amnesty provisions of P.D. 67.
We must emphasize that the application of Sec. 83(b) depends on the special factual circumstances of each
case.
42
The findings of facts of a special court (CTA) exercising particular expertise on
the subject of tax, generally binds this Court,
43
considering that it is substantially similar to the findings of the CA which
is the final arbiter of questions of facts.
44
The issue in this case does not only deal with facts but
whether the law applies to a particular set of facts. Moreover, this Court is not
necessarily bound by the lower courts' conclusions of law drawn from such facts.
45

AMNESTY:
We will deal first with the issue of tax amnesty. Section 1 of P.D. 67
46
provides:
1. In all cases of voluntary disclosures of previously untaxed income and/or wealth such as
earnings, receipts, gifts, bequests or any other acquisitions from any source whatsoever which
are taxable under the National Internal Revenue Code, as amended, realized here or abroad by
any taxpayer, natural or judicial; the collection of all internal revenue taxes including the
increments or penalties or account of non-payment as well as all civil, criminal or administrative
liabilities arising from or incident to such disclosures under the National Internal Revenue Code,
the Revised Penal Code, the Anti-Graft and Corrupt Practices Act, the Revised Administrative
Code, the Civil Service laws and regulations, laws and regulations on Immigration and
Deportation, or any other applicable law or proclamation, are hereby condoned and, in lieu
thereof, a tax of ten (10%) per centum on such previously untaxed income or wealth, is hereby
imposed, subject to the following conditions: (conditions omitted) [Emphasis supplied].
The decree condones "the collection of all internal revenue taxes including the increments or penalties
or account of non-payment as well as all civil, criminal or administrative liable arising from or incident
to" (voluntary) disclosures under the NIRC of previously untaxed income and/or wealth "realized here or
abroad by any taxpayer, natural or juridical."
May the withholding agent, in such capacity, be deemed a taxpayer for it to avail of the amnesty? An income
taxpayer covers all persons who derive taxable income.
47
ANSCOR was assessed by petitioner for
deficiency withholding tax under Section 53 and 54 of the 1939 Code. As such, it is
being held liable in its capacity as a withholding agent and not its personality as a
taxpayer.
In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no
more than an agent of the government for the collection of the tax
48
in order to ensure its
payments;
49
the payer is the taxpayer he is the person subject to tax impose by
law;
50
and the payee is the taxing authority.
51
In other words, the withholding agent is
merely a tax collector, not a taxpayer. Under the withholding system, however, the
agent-payor becomes a payee by fiction of law. His (agent) liability is direct and
independent from the taxpayer,
52
because the income tax is still impose on and due from the latter. The
agent is not liable for the tax as no wealth flowed into him he earned no income. The Tax Code only makes the
agent personally liable for the tax
53
arising from the breach of its legal duty to withhold as
distinguish from its duty to pay tax since:
the government's cause of action against the withholding is not for the collection of income tax,
but for the enforcement of the withholding provision of Section 53 of the Tax Code, compliance
with which is imposed on the withholding agent and not upon the taxpayer.
54

Not being a taxpayer, a withholding agent, like ANSCOR in this transaction is not protected by the
amnesty under the decree.
Codal provisions on withholding tax are mandatory and must be complied with by the withholding
agent.
55
The taxpayer should not answer for the non-performance by the withholding
agent of its legal duty to withhold unless there is collusion or bad faith. The former
could not be deemed to have evaded the tax had the withholding agent performed its
duty. This could be the situation for which the amnesty decree was intended. Thus, to
curtail tax evasion and give tax evaders a chance to reform,
56
it was deemed
administratively feasible to grant tax amnesty in certain instances. In addition, a "tax
amnesty, much like a tax exemption, is never favored nor presumed in law and if
granted by a statute, the term of the amnesty like that of a tax exemption must be
construed strictly against the taxpayer and liberally in favor of the taxing authority.
57
The
rule on strictissimi juris equally applies.
58
So that, any doubt in the application of an amnesty
law/decree should be resolved in favor of the taxing authority.
Furthermore, ANSCOR's claim of amnesty cannot prosper. The implementing rules of P.D. 370
which expanded amnesty on previously untaxed income under P.D. 23 is very explicit, to wit:
Sec. 4. Cases not covered by amnesty. The following cases are not covered by the amnesty
subject of these regulations:
xxx xxx xxx
(2) Tax liabilities with or without assessments, on withholding tax at source provided under
Section 53 and 54 of the National Internal Revenue Code, as amended;
59

ANSCOR was assessed under Sections 53 and 54 of the 1939 Tax Code. Thus, by specific provision of
law, it is not covered by the amnesty.
TAX ON STOCK DIVIDENDS
General Rule
Sec. 83(b) of the 1939 NIRC was taken from the Section 115(g)(1) of the U.S. Revenue Code of 1928.
60
It
laid down the general rule known as the proportionate test
61
wherein stock
dividends once issued form part of the capital and, thus, subject
to income tax.
62
Specifically, the general rule states that:
A stock dividend representing the transfer of surplus to capital account shall not be subject to
tax.
Having been derived from a foreign law, resort to the jurisprudence of its origin may shed light. Under the US
Revenue Code, this provision originally referred to "stock dividends" only, without any exception. Stock
dividends, strictly speaking, represent capital and do not constitute income to its
recipient.
63
So that the mere issuance thereof is not yet subject to income tax
64
as they
are nothing but an "enrichment through increase in value of capital
investment."
65
As capital, the stock dividends postpone the realization of profits
because the "fund represented by the new stock has been transferred from surplus to
capital and no longer available for actual distribution."
66
Income in tax law is "an
amount of money coming to a person within a specified time, whether as payment for
services, interest, or profit from investment."
67
It means cash or its equivalent.
68
It is gain
derived and severed from capital,
69
from labor or from both combined
70
so that
to tax a stock dividend would be to tax a capital increase rather than the income.
71
In
a loose sense, stock dividends issued by the corporation, are considered unrealized
gain, and cannot be subjected to income tax until that gain has been realized. Before
the realization, stock dividends are nothing but a representation of an interest in the
corporate properties.
72
As capital, it is not yet subject to income tax. It should be noted
that capital and income are different. Capital is wealth or fund; whereas income is
profit or gain or the flow of wealth.
73
The determining factor for the imposition of
income tax is whether any gain or profit was derived from a transaction.
74

The Exception
However, if a corporation cancels or redeems stock issued as a dividend at such time and in
such manner as to make the distribution and cancellation or redemption, in whole or in part,
essentially equivalent to the distribution of a taxable dividend, the amount so distributed in
redemption or cancellation of the stock shall be considered as taxable income to the extent it
represents a distribution of earnings or profits accumulated after March first, nineteen hundred
and thirteen. (Emphasis supplied).
In a response to the ruling of the American Supreme Court in the case of Eisner v. Macomber
75
(that pro
rata stock dividends are not taxable income), the exempting clause above quoted was added because provision
corporation found a loophole in the original provision. They resorted to devious means to circumvent the law and
evade the tax. Corporate earnings would be distributed under the guise of its initial capitalization by declaring the
stock dividends previously issued and later redeem said dividends by paying cash to the stockholder. This process of
issuance-redemption amounts to a distribution of taxable cash dividends which was lust delayed so as to escape the
tax. It becomes a convenient technical strategy to avoid the effects of taxation.
Thus, to plug the loophole the exempting clause was added. It provides that the redemption or cancellation
of stock dividends, depending on the "time" and "manner" it was made, is essentially equivalent to a distribution
of taxable dividends," making the proceeds thereof "taxable income" "to the extent it represents profits". The
exception was designed to prevent the issuance and cancellation or redemption of stock dividends, which is
fundamentally not taxable, from being made use of as a device for the actual distribution of cash dividends,
which is taxable.
76
Thus,
the provision had the obvious purpose of preventing a corporation from avoiding dividend tax
treatment by distributing earnings to its shareholders in two transactions a pro rata stock
dividend followed by a pro rata redemption that would have the same economic
consequences as a simple dividend.
77

Although redemption and cancellation are generally considered capital transactions, as such. they are
not subject to tax. However, it does not necessarily mean that a shareholder may not realize a taxable
gain from such transactions.
78
Simply put, depending on the circumstances, the
proceeds of redemption of stock dividends are essentially distribution of cash
dividends, which when paid becomes the absolute property of the stockholder.
Thereafter, the latter becomes the exclusive owner thereof and can exercise the
freedom of choice.
79
Having realized gain from that redemption, the income
earner cannot escape income tax.
80

As qualified by the phrase "such time and in such manner," the exception was not intended to characterize as
taxable dividend every distribution of earnings arising from the redemption of stock dividend.
81
So that,
whether the amount distributed in the redemption should be treated as the equivalent
of a "taxable dividend" is a question of fact,
82
which is determinable on "the basis of
the particular facts of the transaction in question.
83
No decisive test can be used to
determine the application of the exemption under Section 83(b). The use of the words
"such manner" and "essentially equivalent" negative any idea that a weighted formula
can resolve a crucial issue Should the distribution be treated as taxable
dividend.
84
On this aspect, American courts developed certain recognized criteria,
which includes the following:
85

1) the presence or absence of real business purpose,
2) the amount of earnings and profits available for the declaration of a regular
dividends and the corporation's past record with respect to the declaration of
dividends,
3) the effect of the distribution, as compared with the declaration of regular
dividend,
4) the lapse of time between issuance and redemption,
86

5) the presence of a substantial surplus
87
and a generous supply of cash which
invites suspicion as does a meager policy in relation both to current earnings and accumulated surplus,
88

REDEMPTION AND CANCELLATION
For the exempting clause of Section, 83(b) to apply, it is indispensable that: (a) there is redemption or
cancellation; (b) the transaction involves stock dividends and (c) the "time and manner" of the
transaction makes it "essentially equivalent to a distribution of taxable dividends." Of these, the most
important is the third.
Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock
89
in exchange
for property, whether or not the acquired stock is cancelled, retired or held in the
treasury.
90
Essentially, the corporation gets back some of its stock, distributes cash or
property to the shareholder in payment for the stock, and continues in business as
before. The redemption of stock dividends previously issued is used as a veil for the
constructive distribution of cash dividends. In the instant case, there is no dispute that
ANSCOR redeemed shares of stocks from a stockholder (Don Andres) twice (28,000
and 80,000 common shares). But where did the shares redeemed come from? If its
source is the original capital subscriptions upon establishment of the corporation or
from initial capital investment in an existing enterprise, its redemption to the concurrent
value of acquisition may not invite the application of Sec. 83(b) under the 1939 Tax
Code, as it is not income but a mere return of capital. On the contrary, if the redeemed
shares are from stock dividend declarations other than as initial capital investment, the
proceeds of the redemption is additional wealth, for it is not merely a return of capital
but a gain thereon.
It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable dividends. Here,
it is undisputed that at the time of the last redemption, the original common shares owned by the estate were
only 25,247.5
91
This means that from the total of 108,000 shares redeemed from the
estate, the balance of 82,752.5 (108,000 less 25,247.5) must have come from stock
dividends. Besides, in the absence of evidence to the contrary, the Tax Code
presumes that every distribution of corporate property, in whole or in part, is made out
of corporate profits
92
such as stock dividends. The capital cannot be distributed in the
form of redemption of stock dividends without violating the trust fund doctrine
wherein the capital stock, property and other assets of the corporation are regarded as
equity in trust for the payment of the corporate creditors.
93
Once capital, it is always
capital.
94
That doctrine was intended for the protection of corporate creditors.
95

With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to 3 years earlier. The
time alone that lapsed from the issuance to the redemption is not a sufficient indicator to determine taxability. It
is a must to consider the factual circumstances as to the manner of both the issuance and the redemption. The
"time" element is a factor to show a device to evade tax and the scheme of cancelling or redeeming the same
shares is a method usually adopted to accomplish the end sought.
96
Was this transaction used as a
"continuing plan," "device" or "artifice" to evade payment of tax? It is necessary to
determine the "net effect" of the transaction between the shareholder-income taxpayer
and the acquiring (redeeming) corporation.
97
The "net effect" test is not evidence or
testimony to be considered; it is rather an inference to be drawn or a conclusion to be
reached.
98
It is also important to know whether the issuance of stock dividends was
dictated by legitimate business reasons, the presence of which might negate a tax
evasion plan.
99

The issuance of stock dividends and its subsequent redemption must be separate, distinct, and not related, for
the redemption to be considered a legitimate tax scheme.
100
Redemption cannot be used as a
cloak to distribute corporate earnings.
101
Otherwise, the apparent intention to avoid
tax becomes doubtful as the intention to evade becomes manifest. It has been ruled
that:
[A]n operation with no business or corporate purpose is a mere devise which put on the form
of a corporate reorganization as a disguise for concealing its real character, and the sole object
and accomplishment of which was the consummation of a preconceived plan, not to reorganize
a business or any part of a business, but to transfer a parcel of corporate shares to a
stockholder.
102

Depending on each case, the exempting provision of Sec. 83(b) of the 1939 Code may not be applicable if the
redeemed shares were issued with bona fide business purpose,
103
which is judged after each and
every step of the transaction have been considered and the whole transaction does
not amount to a tax evasion scheme.
ANSCOR invoked two reasons to justify the redemptions (1) the alleged "filipinization" program and (2) the
reduction of foreign exchange remittances in case cash dividends are declared. The Court is not concerned
with the wisdom of these purposes but on their relevance to the whole transaction which can be inferred from
the outcome thereof. Again, it is the "net effect rather than the motives and plans of the taxpayer or his
corporation"
104
that is the fundamental guide in administering Sec. 83(b). This tax
provision is aimed at the result.
105
It also applies even if at the time of the issuance of
the stock dividend, there was no intention to redeem it as a means of distributing profit
or avoiding tax on dividends.
106
The existence of legitimate business purposes in
support of the redemption of stock dividends is immaterial in income taxation. It has no
relevance in determining "dividend equivalence".
107
Such purposes may be material
only upon the issuance of the stock dividends. The test of taxability under the
exempting clause, when it provides "such time and manner" as would make the
redemption "essentially equivalent to the distribution of a taxable dividend", is whether
the redemption resulted into a flow of wealth. If no wealth is realized from the
redemption, there may not be a dividend equivalence treatment. In the metaphor
of Eisner v. Macomber, income is not deemed "realize" until the fruit has fallen or been
plucked from the tree.
The three elements in the imposition of income tax are: (1) there must be gain or and profit, (2) that the gain or
profit is realized or received, actually or constructively,
108
and (3) it is not exempted by law or
treaty from income tax. Any business purpose as to why or how the income was
earned by the taxpayer is not a requirement. Income tax is assessed on income
received from any property, activity or service that produces the income because the
Tax Code stands as an indifferent neutral party on the matter of where income comes
from.
As stated above, the test of taxability under the exempting clause of Section 83(b) is, whether income was
realized through the redemption of stock dividends. The redemption converts into money the stock dividends
which become a realized profit or gain and consequently, the stockholder's separate property.
110
Profits
derived from the capital invested cannot escape income tax. As realized income, the
proceeds of the redeemed stock dividends can be reached by income taxation
regardless of the existence of any business purpose for the redemption. Otherwise, to
rule that the said proceeds are exempt from income tax when the redemption is
supported by legitimate business reasons would defeat the very purpose of imposing
tax on income. Such argument would open the door for income earners not to pay tax
so long as the person from whom the income was derived has legitimate business
reasons. In other words, the payment of tax under the exempting clause of Section
83(b) would be made to depend not on the income of the taxpayer, but on the
business purposes of a third party (the corporation herein) from whom the income was
earned. This is absurd, illogical and impractical considering that the Bureau of Internal
Revenue (BIR) would be pestered with instances in determining the legitimacy of
business reasons that every income earner may interposed. It is not administratively
feasible and cannot therefore be allowed.
The ruling in the American cases cited and relied upon by ANSCOR that "the redeemed shares are the
equivalent of dividend only if the shares were not issued for genuine business purposes",
111
or the
"redeemed shares have been issued by a corporation bona fide"
112
bears no
relevance in determining the non-taxability of the proceeds of redemption ANSCOR,
relying heavily and applying said cases, argued that so long as the redemption is
supported by valid corporate purposes the proceeds are not subject to tax.
113
The
adoption by the courts below
114
of such argument is misleading if not misplaced. A
review of the cited American cases shows that the presence or absence of "genuine
business purposes" may be material with respect to the issuance or declaration of
stock dividends but not on its subsequent redemption. The issuance and the
redemption of stocks are two different transactions. Although the existence of
legitimate corporate purposes may justify a corporation's acquisition of its own shares
under Section 41 of the Corporation Code,
115
such purposes cannot excuse the
stockholder from the effects of taxation arising from the redemption. If the issuance of
stock dividends is part of a tax evasion plan and thus, without legitimate business
reasons, the redemption becomes suspicious which exempting clause. The substance
of the whole transaction, not its form, usually controls the tax consequences.
116

The two purposes invoked by ANSCOR, under the facts of this case are no excuse for its tax liability. First, the
alleged "filipinization" plan cannot be considered legitimate as it was not implemented until the BIR started
making assessments on the proceeds of the redemption. Such corporate plan was not stated in nor supported
by any Board Resolution but a mere afterthought interposed by the counsel of ANSCOR. Being a separate
entity, the corporation can act only through its Board of Directors.
117
The Board Resolutions
authorizing the redemptions state only one purpose reduction of foreign exchange
remittances in case cash dividends are declared. Not even this purpose can be given
credence. Records show that despite the existence of enormous corporate profits no
cash dividend was ever declared by ANSCOR from 1945 until the BIR started making
assessments in the early 1970's. Although a corporation under certain exceptions, has
the prerogative when to issue dividends, yet when no cash dividends was issued for
about three decades, this circumstance negates the legitimacy of ANSCOR's alleged
purposes. Moreover, to issue stock dividends is to increase the shareholdings of
ANSCOR's foreign stockholders contrary to its "filipinization" plan. This would also
increase rather than reduce their need for foreign exchange remittances in case of
cash dividend declaration, considering that ANSCOR is a family corporation where the
majority shares at the time of redemptions were held by Don Andres' foreign heirs.
Secondly, assuming arguendo, that those business purposes are legitimate, the same cannot be a valid excuse
for the imposition of tax. Otherwise, the taxpayer's liability to pay income tax would be made to depend upon a
third person who did not earn the income being taxed. Furthermore, even if the said purposes support the
redemption and justify the issuance of stock dividends, the same has no bearing whatsoever on the imposition
of the tax herein assessed because the proceeds of the redemption are deemed taxable dividends since it was
shown that income was generated therefrom.
Thirdly, ANSCOR argued that to treat as "taxable dividend" the proceeds of the redeemed stock dividends
would be to impose on such stock an undisclosed lien and would be extremely unfair to intervening
purchase, i.e. those who buys the stock dividends after their issuance.
118
Such argument, however, bears no relevance in
this case as no intervening buyer is involved. And even if there is an intervening buyer, it is necessary to look into the factual milieu of the case if income
was realized from the transaction. Again, we reiterate that the dividend equivalence test depends on such "time and manner" of the transaction and its net
effect. The undisclosed lien
119
may be unfair to a subsequent stock buyer who has no capital
interest in the company. But the unfairness may not be true to an original subscriber
like Don Andres, who holds stock dividends as gains from his investments. The
subsequent buyer who buys stock dividends is investing capital. It just so happen that
what he bought is stock dividends. The effect of its (stock dividends) redemption from
that subsequent buyer is merely to return his capital subscription, which is income if
redeemed from the original subscriber.
After considering the manner and the circumstances by which the issuance and redemption of stock dividends
were made, there is no other conclusion but that the proceeds thereof are essentially considered equivalent to
a distribution of taxable dividends. As "taxable dividend" under Section 83(b), it is part of the "entire income"
subject to tax under Section 22 in relation to Section 21
120
of the 1939 Code. Moreover, under
Section 29(a) of said Code, dividends are included in "gross income". As income, it is
subject to income tax which is required to be withheld at source. The 1997 Tax Code
may have altered the situation but it does not change this disposition.
EXCHANGE OF COMMON WITH PREFERRED SHARES
121

Exchange is an act of taking or giving one thing for another involving
122
reciprocal transfer
123
and is
generally considered as a taxable transaction. The exchange of common stocks with
preferred stocks, or preferred for common or a combination of either for both, may not
produce a recognized gain or loss, so long as the provisions of Section 83(b) is not
applicable. This is true in a trade between two (2) persons as well as a trade between
a stockholder and a corporation. In general, this trade must be parts of merger,
transfer to controlled corporation, corporate acquisitions or corporate reorganizations.
No taxable gain or loss may be recognized on exchange of property, stock or
securities related to reorganizations.
124

Both the Tax Court and the Court of Appeals found that ANSCOR reclassified its shares into common and
preferred, and that parts of the common shares of the Don Andres estate and all of Doa Carmen's shares
were exchanged for the whole 150.000 preferred shares. Thereafter, both the Don Andres estate and Doa
Carmen remained as corporate subscribers except that their subscriptions now include preferred shares. There
was no change in their proportional interest after the exchange. There was no cash flow. Both stocks had the
same par value. Under the facts herein, any difference in their market value would be immaterial at the time of
exchange because no income is yet realized it was a mere corporate paper transaction. It would have been
different, if the exchange transaction resulted into a flow of wealth, in which case income tax may be
imposed.
125

Reclassification of shares does not always bring any substantial alteration in the subscriber's proportional
interest. But the exchange is different there would be a shifting of the balance of stock features, like priority
in dividend declarations or absence of voting rights. Yet neither the reclassification nor exchange per se, yields
realize income for tax purposes. A common stock represents the residual ownership interest in the corporation.
It is a basic class of stock ordinarily and usually issued without extraordinary rights or privileges and entitles the
shareholder to apro rata division of profits.
126
Preferred stocks are those which entitle the
shareholder to some priority on dividends and asset distribution.
127

Both shares are part of the corporation's capital stock. Both stockholders are no different from ordinary
investors who take on the same investment risks. Preferred and common shareholders participate in the same
venture, willing to share in the profits and losses of the enterprise.
128
Moreover, under the doctrine of
equality of shares all stocks issued by the corporation are presumed equal with the
same privileges and liabilities, provided that the Articles of Incorporation is silent on
such differences.
129

In this case, the exchange of shares, without more, produces no realized income to the subscriber. There is
only a modification of the subscriber's rights and privileges which is not a flow of wealth for tax purposes.
The issue of taxable dividend may arise only once a subscriber disposes of his entire interest and not when
there is still maintenance of proprietary interest.
130

WHEREFORE, premises considered, the decision of the Court of Appeals is MODIFIED in that ANSCOR's
redemption of 82,752.5 stock dividends is herein considered as essentially equivalent to a distribution of
taxable dividends for which it is LIABLE for the withholding tax-at-source. The decision is AFFIRMED in all
other respects.
SO ORDERED.
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Case:
G.R. No. 77860 November 22, 1988
BOMAN ENVIRONMENTAL DEVELOPMENT CORPORATION, petitioners,
vs.
HON. COURT OF APPEALS and NILCAR Y. FAJILAN, respondents.
Lim, Duran & Associates for petitioner.
Renato J. Dilag for private respondent.

GRIO-AQUINO, J .:
The only issue in this case is whether or not a suit brought by a withdrawing stockholder against the
corporation to enforce payment of the balance due on the consideration (evidenced by a corporate promissory
note) for the surrender of his shares of stock and interests in the corporation, involves an intra-corporate
dispute. The resolution of that issue will determine whether the Securities and Exchange Commission (SEC) or
a regular court has jurisdiction over the action.
On May 7, 1984, respondent Nilcar Y. Fajilan offered in writing to resign as President and Member of the Board
of Directors of petitioner, Boman Environmental Development Corporation (BEDECO), and to sell to the
company all his shares, rights, and interests therein for P 300,000 plus the transfer to him of the company's
Isuzu pick-up truck which he had been using. The letter-offer (Exh. A-1) reads as follows:
07 May 1984
THE BOARD OF DIRECTORS,
BOMAN ENVIRONMENTAL DEVELOPMENT
CORPORATION
2nd Floor, AGS Building,
466 EDSA, Makati,
Metro Manila
Gentlemen:
With deepest regrets, I am tendering my resignation as member of the Board of Directors and
President of the Company effective as soon as my shares and interests thereto are sold and
fully paid.
It is really painful to leave the Company which we painstakingly labored and nortured for years
to attain its success today, however, family interests and other considerations dictate me
otherwise.
Thank you for your interest of buying my shares and other interests on the Company. It is really
my intention to divest myself of these investments and sell them all for PESOS: THREE
HUNDRED THOUSAND (P 300,000) payable in cash in addition to the Isuzu pick up I am
presently using for and in behalf of the Company.
Thank you.
NILCAR Y. FAJILAN
Director/President (p. 239, Rollo.)
At a meeting of the Board of Directors of BEDECO on June 14, 1984, Fajilan's resignation as president was
accepted and new officers were elected. Fajilan's offer to sell his shares back to the corporation was approved,
the Board promising to pay for them on a staggered basis from July 15, 1984 to December 15, 1984 (Annex
B).<re||an1w>The resolution of the Board was communicated to Fajilan in the following letter-agreement dated June 25,
1984 to which he affixed his conformity (Annex C):
Ju
ne
25
,
19
84
Mr. Nilcar Y. Fajilan
No. 159 Aramismis Street
Project 7, Quezon City
Dear Mr. Fajilan:
Please be informed that after due deliberation the Board of Directors has accepted your offer to
sellyour share and interest in the company at the price of P300,000.00, inclusive of your unpaid
salary from February 1984 to May 31, 1984, loan principal, interest on loan, profit sharing and
share on book value of the corporation as at May 31, 1984. Payment of the P300,000.00 shall
be as follows:
July 15, 1984
P
100,000.00
September 15,
1984
P
75,000.00
October 15, 1984 P
62,500.00
December 15,
1984
P
62,500.00
P
300,000.00.
To assure you of payment of the above amount on respective due dates, the company will
execute the necessary promissory note.
In addition to the above, the Ford Courier Pick-up will belong to you subject to your assumption
of the outstanding obligation thereof with Fil-Invest. It is understood that upon your full payment
of the pick-up, arrangement will be made and negotiated with Fil-Invest regarding the transfer of
the ownership of the vehicle to your name.
If the above meets your requirements, kindly signify your conformity/approval by signing below.
Very truly yours,
(SGD) JAMES C.
PERALTA
Corporate
Secretary
CONFORME:
(SGD) NILCAR Y. FAJILAN
Noted:
(SGD) ALFREDO S. PANGILINAN (SGD) MAXIMO R. REBALDO (SGD) BENEDICTO M.
EMPAYNADO
SUBSCRIBED AND SWORN TO before me, this 3rd day of July, 1984, Alfredo S. Pangilinan
exhibiting to me his Residence Certificate No. 1696224 issued at Makati, Metro Manila on
January 24, 1984, in his capacity as President of Boman Environmental Development
Corporation with Corporate Residence Certificate No. 207911 issued at Makati, Metro Manila
on March 26, 1984.
(SGD) ERNESTO
B. DURAN
NOTARY PUBLIC
Until December
31, 1984
PTR No. 8582861
Issued
on January 24,
1984 at
Makati, Metro
Manila
Doc. No. 392
Page No. 80
Book No. X
Series of 1984. (p. 245, Rollo.)
A promissory note dated July 3, 1984, was signed by BEDECO'S new president, Alfredo Pangilinan, in the
presence of two directors, committing BEDECO to pay him P300,000 over a six-month period from July 15,
1984 to December 15, 1984. The promissory note (Exh. D) provided as follows:
PROMISSORY NOTE
M
ak
ati
,
M
etr
o
M
an
ila
Jul
y
3,
19
84
FOR VALUE RECEIVED, BOMAN ENVIRONMENTAL DEVELOPMENT CORPORATION, a
domestic corporation duly registered with the Securities and Exchange Commission, with office
at Rm. 608, Metro Bank Bldg., Ayala Blvd., Makati, Metro Manila, promise to pay NILCAR Y.
FAJILAN of 17 Aramismis St., Project 7, Quezon City, the sum of PESOS: THREE HUNDRED
THOUSAND (P300,000.00), Philippine Currency payable as follows:
P100,000.00
July 15,
1984
75,000.00 Sept.
15,
1984
62,500.00 October
15,
1984
62,500.00 Dec.
15,
1984
P300,000.00
BOMAN ENVIRONMENTAL
DEVELOPMENT
CORPORATION
By:
(SGD) ALFREDO S.
PANGILINAN
President
Signed in the presence of:
(SGD) MAXIMO R. REBALDO
(SGD) BENEDICTO M. EMPAYNADO
(Annex D, p. 247, Rollo.)
However, BEDECO paid only P50,000 on July 15, 1984 and another P50,000 on August 31, 1984 and
defaulted in paying the balance of P200,000.
On April 30, 1985, Fajilan filed a complaint in the Regional Trial Court of Makati for collection of that balance
from BEDECO.
In an order dated September 9, 1985, the trial court, through Judge Ansberto Paredes, dismissed the complaint
for lack of jurisdiction. It ruled that the controversy arose out of intracorporate relations, hence, the Securities
and Exchange Commission has original and exclusive jurisdiction to hear and decide it.
His motion for reconsideration of that order having been denied, Fajilan filed a "Petition for Certiorari, and
mandamus with Preliminary Attachment" in the Intermediate Appellate Court.
In a decision dated March 2, 1987, the Court of Appeals set aside Judge Paredes' order of dismissal and
directed him to take cognizance of the case. BEDECO's motion for reconsideration was denied in a resolution
dated March 24, 1987 of the Court of Appeals.
In its decision, the Appellate Court characterized the case as a suit for collection of a sum of money as Fajilan
"was merely suing on the balance of the promissory note" (p. 4, Decision; p. 196, Rollo) which BEDECO failed
and refused to pay in full. More particularly, the Court of Appeals held:
While it is true that the circumstances which led to the execution of the promissory note by the
Board of Directors of respondent corporation was an intra- corporate matter, there arose no
controversy as to the sale of petitioner's interests and rights as well as his shares as Member of
the Board of Directors and President of respondent corporation. The intra-corporate matter of
the resignation of petitioner as Member of the Board of Directors and President of respondent
corporation has long been settled without issue.
The Board of Directors of respondent corporation has likewise long settled the sale by petitioner
of all his shares, rights and interests in favor of the corporation. No controversy arose out of this
transaction. The jurisdiction of the Securities and Exchange Commission therefore need not be
invoked on this matter. (p. 196, Rollo.)
The petition is impressed with merit.
Section 5(b) of P.D. No. 902-A, as amended, grants the SEC original and exclusive jurisdiction to hear and
decide cases involving
b) 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;
... (Emphasis supplied.)
This case involves an intra-corporate controversy because the parties are a stockholder and the corporation.
As correctly observed by the trial court, the perfection of the agreement to sell Fajilan's participation and
interests in BEDECO and the execution of the promissory note for payment of the price of the sale did not
remove the dispute from the coverage of Section 5(b) of P.D. No. 902, as amended, for both the said
agreement (Annex C) and the promissory note (Annex D) arose from intra-corporate relations. Indeed, all the
signatories of both documents were stockholders of the corporation at the time of signing the same. It was an
intra-corporate transaction, hence, this suit is an intra-corporate controversy.
Fajilan's offer to resign as president and director "effective as soon as my shares and interests thereto (sic) are
sold and fully paid" (Annex A-1, p. 239, Rollo) implied that he would remain a stockholder until his shares and
interests were fully paid for, for one cannot be a director or president of a corporation unless he is also a
stockholder thereof. The fact that he was replaced as president of the corporation did not necessaryily mean
that he ceased to be a stockholder considering how the corporation failed to complete payment of the
consideration for the purchase of his shares of stock and interests in the goodwill of the business. There has
been no actual transfer of his shares to the corporation. In the books of the corporation he is still a stockholder.
Fajilan's suit against the corporation to enforce the latter's promissory note or compel the corporation to pay for
his shareholdings is cognizable by the SEC alone which shall determine whether such payment will not
constitute a distribution of corporate assets to a stockholder in preference over creditors of the corporation. The
SEC has exclusive supervision, control and regulatory jurisdiction to investigate whether the corporation has
unrestricted retained earnings to cover the payment for the shares, and whether the purchase is for a legitimate
corporate purpose as provided in Sections 41 and 122 of the Corporation Code, which reads as follows:
SEC. 41. Power to acquire own shares.A stock corporation shall have the power to purchase
or acquire its own shares for a legitimate corporate purpose or purposes, including but not
limited to the following cases: Provided, That the corporation has unrestricted retained earnings
in its books to cover the shares to be purchased or acquired;
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale;
and
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the
provisions of this Code,
Sec. 12. Corporate liquidation. ...
xxx xxx xxx
Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall
distribute any of its assets or property except upon lawful dissolution and after payment of all its
debts and liabilities, (77a, 89a, 16a).
These provisions of the Corporation Code should be deemed written into the agreement between the
corporation and the stockholders even if there is no express reference to them in the promissory note. The
principle is well settled that an existing law enters into and forms part of a valid contract without need for the
parties' expressly making reference to it (Lakas ng Manggagawang Makabayan vs. Abiera, 36 SCRA 437).
The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine which
means that the capital stock, property and other assets of a corporation are regarded as equity in trust for the
payment of corporate creditors. The reason is that creditors of a corporation are preferred over the
stockholders in the distribution of corporate assets. There can be no distribution of assets among the
stockholders without first paying corporate creditors. Hence, any disposition of corporate funds to the prejudice
of creditors is null and void. "Creditors of a corporation have the right to assume that so long as there are
outstanding debts and liabilities, the board of directors will not use the assets of the corporation to purchase its
own stock ..."(Steinberg vs. Velasco, 52 Phil. 953.)
WHEREFORE, the petition for certiorari is granted. The decision of the Court of Appeals is reversed and set
aside. The order of the trial court dismissing the complaint for lack of jurisdiction is hereby reinstated. No costs.
SO ORDERED.
Narvasa, Cruz, Gancayco and Medialdea, JJ., concur.
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Case:
G.R. No. L-30460 March 12, 1929
C. H. STEINBERG, as Receiver of the Sibuguey Trading Company, Incorporated, plaintiff-appellant,
vs.
GREGORIO VELASCO, ET AL., defendants-appellees.
Frank H. Young for appellant.
Pablo Lorenzo and Delfin Joven for appellees.
STATEMENT
Plaintiff is the receiver of the Sibuguey Trading Company, a domestic corporation. The defendants are
residents of the Philippine Islands.
It is alleged that the defendants, Gregorio Velasco, as president, Felix del Castillo, as vice-president, Andres L.
Navallo, as secretary-treasurer, and Rufino Manuel, as director of Trading Company, at a meeting of the board
of directors held on July 24, 1922, approved and authorized various lawful purchases already made of a large
portion of the capital stock of the company from its various stockholders, thereby diverting its funds to the
injury, damage and in fraud of the creditors of the corporation. That pursuant to such resolution and on March
31, 1922, the corporation purchased from the defendant S. R. Ganzon 100 shares of its capital stock of the par
value of P10, and on June 29, 1922, it purchased from the defendant Felix D. Mendaros 100 shares of the par
value of P10, and on July 16, 1922, it purchased from the defendant Felix D. Mendaros 100 shares of the par
value of P10, each, and on April 5, 1922, it purchased from the defendant Dionisio Saavedra 10 shares of the
same par value, and on June 29, 1922, it purchased from the defendant Valentin Matias 20 shares of like
value. That the total amount of the capital stock unlawfully purchased was P3,300. That at the time of such
purchase, the corporation had accounts payable amounting to P13,807.50, most of which were unpaid at the
time petition for the dissolution of the corporation was financial condition, in contemplation of an insolvency and
dissolution.
As a second cause of action, plaintiff alleges that on July 24, 1922, the officers and directors of the corporation
approved a resolution for the payment of P3,000 as dividends to its stockholders, which was wrongfully done
and in bad faith, and to the injury and fraud of its creditors. That at the time the petition for the dissolution of the
corporation was presented it had accounts payable in the sum of P9,241.19, "and practically worthless
accounts receivable."
Plaintiff prays judgment for the sum of P3,300 from the defendants Gregorio Velasco, Felix del Castillo, Andres
L. Navallo and Rufino Manuel, personally as members of the Board of Directors, or for the recovery from the
defendants S. R. Ganzon, of the sum of P1,000, from the defendant Felix D. Mendaros, P2,000, and from the
defendant Dionisio Saavedra, P100, and under his second cause of action, he prays judgment for the sum of
P3,000, with legal interest against the board of directors, and costs.
For answer the defendants Felix del Castillo, Rufino Manuel, S. R. Ganzon, Dionisio Saavedra and Valentin
Matias made a general and specific denial.
In his amended answer, the defendant Gregorio Velasco admits paragraphs, 1, 2 and 3 of each cause of action
of the complaint, and that the shares mentioned in paragraph 4 of the first cause of action were purchased, but
alleges that they were purchased by virtue of a resolution of the board of directors of the corporation "when the
business of the company was going on very well." That the defendant is one of the principal shareholders, and
that about the same time, he purchase other shares for his own account, because he thought they would bring
profits. As to the second cause of action, he admits that the dividends described in paragraph 4 of the
complaint were distributed, but alleges that such distribution was authorized by the board of directors, "and that
the amount represented by said dividends really constitutes a surplus profit of the corporation," and as
counterclaim, he asks for judgment against the receiver for P12,512.47 for and on account of his negligence in
failing to collect the accounts.
Although duly served, the defendant Mendaros did not appear or answer. The defendant Navallo was not
served, and the case against him was dismissed.
April 30, 1928, the case was tried and submitted on a stipulation of facts, based upon which the lower court
dismissed plaintiff's complaint, and rendered judgment for the defendants, with costs against the plaintiff, and
absolved him from the cross-complaint of the defendant Velasco, and on appeal, the plaintiff assigns the
following errors:
1. In holding that the Sibuguey Trading Company, Incorporated, could legally purchase its own stock.
2. In holding that the Board of Directors of the said Corporation could legally declared a dividend of
P3,000, July 24, 1922.
JOHNS, J .:
It is stipulated that on July 24, 1922, the directors of the corporation approved the purchase of stocks as
follows:
One hundred shares from S. R. Ganzon for P1,000;
One hundred shares from Felix D. Mendaros at the same price; which purchase was made on June 29, 1922;
another
One hundred shares from Felix D. Mendaros at the same price on July 16, 1922;
Ten shares from Dionisio Saavedra at the same price on June 29, 1922.
That during such times, the defendant Gregorio Velasco purchased 13 shares for the corporation for P130;
Felix del Castillo 42 shares for P420; Andres Navallo 15 shares for P150; and the defendant Mendaros
10 shares for P100. That during the time these various purchases were made, the total amount of subscribed
and paid up capital stock of the corporation was P10,030, out of the authorized capital stock 2,000 shares of
the par value of P10 each.
Paragraph 4 of the stipulation also recites:
Be it also admitted as a fact that the time of the said purchases there was a surplus profit of the
corporation above-named of P3,314.72.
Paragraph 5 is as follows:
That at the time of the repeatedly mentioned various purchases of the said capital stock were made,
the said corporation had Accounts Payable in the total amount of P13,807.50 as shown by the
statement of the corporation, dated June 30, 1922, and the Accounts Receivable in the sum of
P19,126.02 according to the books, and that the intention of the Board of Directors was to resell the
stocks purchased by the corporations at a sum above par for each stock, this expectation being justified
by the then satisfactory and sound financial condition of the business of the corporation.
It is also stipulated that on September 11, 1923, when the petition for the dissolution of the corporation was
presented to the court, according to a statement made June 30, 1923, it has accounts payable aggregating
P9,41.19, and accounts receivable for P12,512.47.
Paragraph 7 of the stipulation recites:
That the same defendants, mentioned in paragraph 2 of this stipulation of facts and in the same
capacity, on the same date of July 24, 1922, and at the said meeting of the said Board of Directors,
approved and authorized by resolution the payment of dividends to its stockholders, in the sum of three
thousand pesos (P3,000), Philippine currency, which payments were made at different dates, between
September 30, 1922, and May 12, 1923, both dates inclusive, at a time when the corporation had
accounts less in amount than the accounts receivable, which resolution was based upon the balance
sheet made as June 30, 1922, said balance sheet showing that the corporation had a surplus of
P1,069.41, and a profit on the same date of P2,656.08, or a total surplus amount of P3,725.49, and a
reserve fund of P2,889.23 for bad and doubtful accounts and depreciation of equipment, thereby
leaving a balance of P3,314.72 of net surplus profit after paying this dividend.
It is also stipulated at a meeting of the board of directors held on July 24, 1922, as follows:
6. The president and manager submitted to the Board of Directors his statement and balance sheet for
the first semester ending June 30, 1922 and recommended that P3,000 out of the surplus account
be set aside for dividends payable, and that payments be made in installments so as not to effect the
financial condition of the corporation. That stockholders having outstanding account with the
corporation should settle first their accounts before payments of their dividends could be made. Mr.
Castillo moved that the statement and balance sheet be approved as submitted, and also the
recommendations of the president. Seconded by Mr. Manuel. Approved.
Paragraph 8 of the stipulation is as follows:
That according to the balance sheet of the corporation, dated June 30, 1923, it had accounts receivable
in the sum of P12,512.47, due from various contractor and laborers of the National Coal Company, and
also employees of the herein corporation, which the herein receiver, after his appointment on February
28, 1924, although he made due efforts by personally visiting the location of the corporation, and of
National Coal Company, at its offices, at Malangas, Mindanao, and by writing numerous letters of
demand to the debtors of the corporation, in order to collect these accounts receivable, he was unable
to do so as most of them were without goods or property, and he could not file any suit against them
that might have any property, for the reason that he had no funds on hand with which to pay the filing
and sheriff fees to Malangas, and other places of their residences.
From all of which, it appears that on June 30, 1922, the board of directors of the corporation authorized the
purchase of, purchased and paid for, 330 shares of the capital stock of the corporation at the agreed price of
P3,300, and that at the time the purchase was made, the corporation was indebted in the sum of P13,807.50,
and that according to its books, it had accounts receivable in the sum of P19,126.02. That on September 11,
1923, when the petition was filed for its dissolution upon the ground that it was insolvent, its accounts payable
amounted to P9,241.19, and its accounts receivable P12,512.47, or an apparent asset of P3,271.28 over and
above its liabilities. But it will be noted that there is no stipulation or finding of facts as to what was the actual
cash value of its accounts receivable. Neither is there any stipulation that those accounts or any part of them
ever have been or will be collected, and it does appear that after his appointment on February 28, 1924, the
receiver made a diligent effort to collect them, and that he was unable to do so, and it also appears from the
minutes of the board of directors that the president and manager "recommended that P3,000 out of the
surplus account to be set aside for dividends payable, and that payments be made in installments so as not to
effect the financial condition of the corporation."
If in truth and in fact the corporation had an actual bona fide surplus of P3,000 over and above all of its debt
and liabilities, the payment of the P3,000 in dividends would not in the least impair the financial condition of the
corporation or prejudice the interests of its creditors.
It is very apparent that on June 24, 1922, the board of directors acted on assumption that, because it appeared
from the books of the corporation that it had accounts receivable of the face value of P19,126.02, therefore it
had a surplus over and above its debts and liabilities. But as stated there is no stipulation as to the actual cash
value of those accounts, and it does appear from the stipulation that on February 28, 1924, P12,512.47 of
those accounts had but little, if any, value, and it must be conceded that, in the purchase of its own stock to the
amount of P3,300 and in declaring the dividends to the amount of P3,000, the real assets of the corporation
were diminished P6,300. It also appears from paragraph 4 of the stipulation that the corporation had a "surplus
profit" of P3,314.72 only. It is further stipulated that the dividends should "be made in installments so as not to
effect financial condition of the corporation." In other words, that the corporation did not then have an
actual bona fidesurplus from which the dividends could be paid, and that the payment of them in full at the time
would "affect the financial condition of the corporation."
It is, indeed, peculiar that the action of the board in purchasing the stock from the corporation and in declaring
the dividends on the stock was all done at the same meeting of the board of directors, and it appears in those
minutes that the both Ganzon and Mendaros were formerly directors and resigned before the board approved
the purchase and declared the dividends, and that out of the whole 330 shares purchased, Ganzon, sold 100
and Mendaros 200, or a total of 300 shares out of the 330, which were purchased by the corporation, and for
which it paid P3,300. In other words, that the directors were permitted to resign so that they could sell their
stock to the corporation. As stated, the authorized capital stock was P20,000 divided into 2,000 shares of the
par value of P10 each, which only P10,030 was subscribed and paid. Deducting the P3,300 paid for the
purchase of the stock, there would be left P7,000 of paid up stock, from which deduct P3,000 paid in dividends,
there would be left P4,000 only. In this situation and upon this state of facts, it is very apparent that the
directors did not act in good faith or that they were grossly ignorant of their duties.
Upon each of those points, the rule is well stated in Ruling Case Law, vol. 7, p. 473, section 454 where it is
said:
General Duty to Exercise Reasonable Care. The directors of a corporation are bound to care for its
property and manage its affairs in good faith, and for a violation of these duties resulting in waste of its
assets or injury to the property they are liable to account the same as other trustees. Are there can be
no doubt that if they do acts clearly beyond their power, whereby loss ensues to the corporation, or
dispose of its property or pay away its money without authority, they will be required to make good the
loss out of their private estates. This is the rule where the disposition made of money or property of the
corporation is one either not within the lawful power of the corporation, or, if within the authority of the
particular officer or officers.
And section 458 which says:
Want of Knowledge, Skill, or Competency. It has been said that directors are not liable for losses
resulting to the corporation from want of knowledge on their part; or for mistake of judgment, provided
they were honest, and provided they are fairly within the scope of the powers and discretion confided to
the managing body. But the acceptance of the office of a director of a corporation implies a competent
knowledge of the duties assumed, and directors cannot excuse imprudence on the ground of their
ignorance or inexperience; and if they commit an error of judgment through mere recklessness or want
of ordinary prudence or skill, they may be held liable for the consequences. Like a mandatory, to whom
he has been likened, a director is bound not only to exercise proper care and diligence, but ordinary
skill and judgment. As he is bound to exercise ordinary skill and judgment, he cannot set up that he did
not possess them.
Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities,
the board of directors will not use the assets of the corporation to purchase its own stock, and that it will not
declare dividends to stockholders when the corporation is insolvent.
The amount involved in this case is not large, but the legal principles are important, and we have given them
the consideration which they deserve.
The judgment of the lower court is reversed, and (a), as to the first cause of action, one will be entered for the
plaintiff and against the defendant S. R. Ganzon for the sum of P1,000, with legal interest from the 10th of
February, 1926, and against the defendant Felix D. Medaros for P2,000, with like interests, and against the
defendant Dionisio Saavedra for P100, with like interest, and against each of them for costs, each on their
primary liability as purchasers of stock, and (b) against the defendants Gregorio Velasco, Felix del Castillo and
Rufino Manuel, personally, as members of the board of directors of the Sibuguey Trading Company,
Incorporated, as secondarily liable for the whole amount of such stock sold and purchased as above stated,
and on the second cause of action, judgment will be entered (c) for the plaintiff and jointly and severally against
the defendants Gregorio Velasco, Felix del Castillo and Rufino Manuel, personally, as members of the board of
directors of the Sibuguey Trading Company, Incorporated, for P3,000, with interest thereon from February 10,
1926, at the rate of 6 per cent per annum, and costs. So ordered.
Johnson, Street, Malcolm, Ostrand, Romualdez and Villa-Real, JJ., concur.